Sunrise Senior Living 10K/A 2007 Annual report (amended)

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

Form 10-K/A

(Amendment No. 1)

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

For the fiscal year ended December 31, 2007

Commission File Number 1-16499

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


Delaware		54-1746596

(State or other jurisdiction incorporation or organization)		(I.R.S. Employer Identification No.)

7902 Westpark Drive McLean, VA		22102

(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code:(703) 273-7500

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Each Exchange on Which Registered

Common stock, $.01 par value per share		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

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

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. o

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


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

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

The aggregate market value of the Registrant’s Common Stock held by non-affiliates based upon the closing price of $39.99 per share on the New York Stock Exchange on June 29, 2007 was $1,784 million. Solely for the purposes of this calculation, all directors and executive officers of the registrant are considered to be affiliates.

The number of shares of Registrant’s Common Stock outstanding was 50,973,087 at July 11, 2008.

DOCUMENTS INCORPORATED BY REFERENCE

None

Explanatory Note

On July 31, 2008, Sunrise Senior Living, Inc. (the “Company”) filed its Annual Report onForm 10-K for the fiscal year ended December 31, 2007 (the “OriginalForm 10-K”). At the time of filing of the OriginalForm 10-K, the Company indicated that (a) it was not then in a position to include in the OriginalForm 10-K the separate financial statements of three ventures (Sunrise Aston Gardens Venture, LLC, PS Germany Investment (Jersey) LP and Sunrise IV Senior Living Holdings, LLC) that the SEC staff requested be included pursuant toRule 3-09 ofRegulation S-X and (b) it intended to file such financial statements by amendment as soon as they became available.

This Amendment No. 1 onForm 10-K/A is being filed to amend Item 8 of the OriginalForm 10-K to provide the separateRule 3-09 financial statements for PS Germany Investment (Jersey) LP as well as to amend Item 15(a)(1), which contains a listing of the financial statements included as part of the 2007Form 10-K, to include a reference to the financial statements for this venture. In addition, the Company is also amending (a) Item 8 to include unaudited 2007 financial statements for the Sunrise First Assisted Living Holdings, LLC, Sunrise Second Assisted Living Holdings, LLC and Metropolitan Senior Housing, LLC ventures and (b) Item 15(a)(3) and the Exhibit Index to include as exhibits new certifications by its Principal Executive Officer and Principal Financial Officer, as required byRule 12b-15 under the Securities Exchange Act of 1934, as amended. The Company intends to file a further amendment to the OriginalForm 10-K to file the remainingRule 3-09 financial statements for Sunrise Aston Gardens Venture, LLC and Sunrise IV Senior Living Holdings, LLC.

In addition, Items 7 and 8 are being amended for the restatement of the 2007 Consolidated Statement of Cash Flows. The 2007 Consolidated Statement of Cash Flows has been restated primarily to reflect proper classification of transactions with unconsolidated communities, assumption of debt related to sales transactions and the classification of gain resulting from sales transactions. The effect of the restatement on the Consolidated Statement of Cash Flows was to decrease net cash provided by operating activities from $235.0 million to $128.5 million, to increase net cash used in investing activities from $235.5 million to $248.5 million and to increase net cash provided by financing activities from $56.7 million to $176.3 million.

We also have revised the disclosure in Items 7 and 8 regarding how the Company accounts for its investment in unconsolidated communities to clarify that all distributions of proceeds from venture refinancings received by the Company, which are not refundable by agreement or by law, are first recorded as a reduction of the Company’s investment.

There are no other changes to the OriginalForm 10-K other than those outlined above. This Amendment does not reflect events occurring after the filing of the OriginalForm 10-K, nor does it modify or update disclosures therein in any way other than as outlined above.

Pursuant toRule 12b-15 under the Securities Exchange Act of 1934, as amended, the complete text of each Item, as amended, is presented below.


Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read together with the information contained in our consolidated financial statements, including the related notes, and other financial information appearing elsewhere herein.

Overview

Our long-range strategic objective is to grow our senior living business through a management services business model that is built on long-term management contracts. Our four primary growth drivers consist of: (1) generating revenue growth from our existing operating portfolio of owned and managed communities; (2) adding additional communities through new construction, primarily with venture partners; (3) generating profitable growth through the delivery of hospice and other ancillary services; and (4) maximizing our return on our equity investment in unconsolidated ventures and other invested capital.

We earn income primarily in the following ways:


	•	management fees for operating communities, which can also include incentive management fees;

	•	resident fees for communities that we own;

	•	development and pre-opening fees related to the development of new Sunrise communities;

	•	our share of income and losses for those communities in which we have an ownership interest;

	•	recapitalizations and sales of communities by ventures in which we have an equity interest; and

	•	fees for hospice services.

At December 31, 2007, we operated 439 communities, including 402 communities in the United States, 12 communities in Canada, 17 communities in the United Kingdom and eight communities in Germany, with a total resident capacity of approximately 54,000. We owned or had an ownership interest in 261 of these communities and 178 are managed for third parties. In addition, at December 31, 2007, we provided pre-opening management and professional services to 44 communities under construction, of which 32 communities are in the United States, three communities are in Canada, eight communities are in the United Kingdom, and one community is in Germany, with a combined capacity for approximately 5,600 residents. During 2007, we opened 22 new communities with a combined resident capacity of approximately 2,600 residents, which were developed by us.

Management of Communities

We manage and operate communities that are wholly owned by us, communities that are owned by unconsolidated ventures in which we have a minority ownership interest and communities that are wholly owned by third parties. For the communities that we manage for unconsolidated ventures and third parties, we typically are paid a base management fee of approximately five to eight percent of the community’s revenue. In addition, in certain management contracts, we have the opportunity to earn incentive management fees based on monthly or yearly operating or cash flow results. See “Liquidity and Capital Resources” for a description of debt guarantees, operating deficit guarantees and credit support arrangements provided to certain of our unconsolidated ventures or third-party owners. For the communities that we operate that are wholly owned, we receive resident and ancillary fees.

Development of Communities

In order to grow the operating portfolio that we manage, we also develop senior living communities. We typically develop senior living communities in partnership with others. We also develop wholly owned senior living communities for ourselves, which we expect to sell to ventures or third-party owners before construction is completed. We believe we have maintained a disciplined approach to site selection and refinement of our operating model, first introduced more than 20 years ago, and are constantly searching for ways to improve our communities.

We enter into development ventures in order to reduce our initial capital requirements, while enabling us to enter into long-term management agreements that are intended to provide us with a continuing stream of revenue.

When development is undertaken in partnership with others, our venture partners provide significant cash equity investments, and we take a minority interest in such ventures. Additionally, non-recourse third-party construction debt is obtained to provide the majority of funds necessary to complete development. In addition to third-party debt, we may provide financing necessary to complete the construction for these development ventures. At December 31, 2007 and June 30, 2008, there were 30 and 25 communities, respectively, under construction held in unconsolidated ventures. See “Liquidity and Capital Resources” for a description of guarantees provided to certain of our development ventures.

We receive fees from our development ventures for services related to site selection, zoning, design and construction oversight. These fees are recognized in “Gain on the sale and development of real estate and equity interests” in our consolidated statements of income for communities where we owned the land prior to sale to a venture or third party, and in “Professional fees from development, marketing and other” when we do not initially own the land. Services provided for employee selection, licensing, training and marketing efforts are recognized as operating revenue and are included in “Professional fees from development, marketing and other” in the consolidated statements of income. See “Liquidity and Capital Resources” for a description of development completion guarantees provided to certain of our development ventures. We also receive fees from our venturesand/or venture partners as compensation for either brokering the sale of venture assets or the sale of the majority partner’s equity interest in a venture.

From time to time we also develop wholly owned senior living communities. At December 31, 2007, we had seven wholly owned communities under construction with a resident capacity of approximately 690 residents. At June 30, 2008, we had six wholly owned communities under construction with a resident capacity of approximately 571 residents. We expect most of these communities to be sold to a venture or third party before construction is completed or, in some cases, upon receipt of a certificate of occupancy. We provide funding for the construction, not otherwise financed by construction loans, and capitalize the development costs associated with construction prior to the contribution of the development community to a venture or third-party owner. For communities that remain wholly owned, we often recognize operating losses during the initial one to two years prior to the community achieving stabilization.

Senior Living Condominium Developments

We began to develop senior living condominium projects in 2004. By the first quarter of 2008, we had discontinued or suspended the development of all but one of our condominium development projects. See Item 1, “Business — Significant 2007 Developments — Senior Living Condominium Developments”.

Special Independent Committee Inquiry and Accounting Review

The following is a summary of the results of the Special Independent Committee inquiry. For a full description of the adjustments made to restate the 2005 and prior financial statements, refer to our 2006Form 10-K.

In December 2006, our Board of Directors established a Special Independent Committee to review certain allegations made by the Service Employees International Union (“SEIU”) that questioned the timing of certain stock option grants to our directors and officers over a period of time, and stock sales by certain directors in the months prior to the May 2006 announcement of our Accounting Review. In March 2007, our Board of Directors expanded the scope of the Special Independent Committee’s mandate to include the review of facts and circumstances relating to the historical accounting treatment of certain categories of transactions in the restatement, and to develop recommendations regarding any remedial measures, including those pertaining to internal controls and processes over financial reporting, that it may determine to be warranted. The Special Independent Committee deemed it necessary to understand the underlying causes for the pending restatement in order to evaluate the SEIU’s allegations related to stock sales by certain directors in the months prior to our announcement of the Accounting Review.

On September 28, 2007, we disclosed that the Special Independent Committee had concluded the fact-finding portion of its inquiry with respect to three issues. The first involved the timing of certain stock option grants. The second involved the facts and circumstances with respect to two significant categories of errors in the pending restatement relating to real estate accounting for the effect of preferences provided to the buyer in a partial sale,

certain of our guarantees and commitments on the timing of sale accounting and recognition of income upon sale of real estate, and accounting for allocation of profits and losses in those ventures in which our partners received a preference on cash flow. The third involved whether directors and executive officers traded in our common stock when in possession of non-public knowledge of possible accounting errors related to these real estate transactions prior to our May 2006 announcement of our Accounting Review. With respect to these three issues, the Special Independent Committee found:


	•	no evidence of backdating or other intentional misconduct with respect to the grants on the 38 grant dates examined, including those specifically questioned by the SEIU, or the possible errors identified by the Special Independent Committee in the accounting for stock options;

	•	no evidence of an intention to reach an inappropriate accounting result with respect to the two categories of real estate accounting errors reviewed, no knowledge that these accounting errors were incorrect at the time they were made, and no evidence that information was concealed from review by the external auditors at the time the accounting judgments were made; and

	•	no evidence that any director or officer who traded in the months prior to the announcement of the Accounting Review had material non-public information relating to either of these two categories of real estate accounting errors.

The Special Independent Committee identified a number of accounting issues under GAAP in connection with certain of the option grants reviewed. As a result of the Special Independent Committee’s findings, we concluded that unintentional errors were made in connection with the accounting for a September 1998 repricing and certain other stock option grants. These errors were corrected as part of the restatement of our historical consolidated financial statements.

In September 28, 2007, we also disclosed that the investigation of the Special Independent Committee was continuing with respect to certain other categories of restatement items and issues, primarily related to certain accruals and reserves. In the course of reviewing the accounting that led to the restatement, the Special Independent Committee identified instances of potential inappropriate accounting with respect to certain provisions intoand/or releases from certain judgmental accruals and reserves. Management was also made aware through questions from an employee of possible instances of inappropriate accounting with respect to one judgmental reserve. Management reviewed this information with the Special Independent Committee which then reviewed the judgmental reserve in question as part of its inquiry. Both of these events led to the Special Independent Committee’s decision to investigate the other categories of restatement items and issues, which was not complete on September 28, 2007. However, in order to provide information to the marketplace on the Special Independent Committee’s findings as promptly as possible, the Special Independent Committee made the decision to complete the fact finding related to the SEIU’s allegations and make the September 28, 2007 disclosure to report the results of that fact finding while continuing its inquiry with respect to certain judgmental accruals and reserves.

On December 20, 2007, we announced the completion of the fact-finding portion of the Special Independent Committee inquiry with respect to the last issue being reviewed by it. The Special Independent Committee identified instances of inappropriate accounting with respect to certain provisions intoand/or releases from the following three judgmental accruals and reserves in certain quarters during the period of time from the third quarter of 2003 through the fourth quarter of 2005: (1) the reserve for health and dental insurance claims associated with our self-insurance program (“health and dental reserve”); (2) the corporate bonus accrual; and (3) the reserve for abandoned projects. The accounting for these reserves involves judgments and estimates. The Special Committee determined that in some instances the judgments were not supportable under GAAP and the provisions into and releases from the reserves were not made on a consistent basis, and therefore, involved inappropriate accounting. The Special Independent Committee did not reach any conclusions with respect to the underlying reason or reasons for any specific instance of inappropriate accounting. The Special Independent Committee also did not specifically quantify each instance of inappropriate accounting that it had identified. As disclosed in Item 9A of our 2006Form 10-K, our management identified several material weaknesses in our internal control over financial reporting that our management believed contributed to the accounting errors, including those related to accruals and reserves, that were corrected as part of the restatement. These included, among others: a lack of sufficient personnel with an appropriate level of accounting knowledge, experience and training to support the size and complexity of our

organizational structure and financial reporting requirements; a failure to set the appropriate tone around accounting and control consciousness; a lack of appropriate oversight of accounting, financial reporting and internal control matters; insufficient analysis and documentation of the application of GAAP to real estate and other transactions; a lack of written procedures for identifying and appropriately applying GAAP to the various categories of items that were corrected in the restatement; a lack of written procedures for monitoring and adjusting balances related to certain accruals and reserves; a lack of effective accounting reviews for routine and non-routine transactions and accounts; and an inability to close our books in a timely and accurate manner.

Before the Special Independent Committee completed its fact-finding, we had determined to restate two of the accruals and reserves — the health and dental reserve and the reserve for abandoned projects — due to accounting errors unrelated to the inappropriate accounting subsequently identified by the Special Independent Committee. Once the Special Independent Committee had identified certain instances of inappropriate accounting, and had completed its investigation, it reviewed its findings with our new financial management team. Our new financial management team was then charged with reviewing, in detail, all of the affected accounts and with quantifying and recording all the necessary adjustments to properly restate the accounts. During this process, our new financial management team did not specifically identify or categorize the adjustments between “inappropriate accounting” and other required adjustments within the identified categories. As a result of our Accounting Review, we recorded “total adjustments” (in which there was no distinct accounting impact from any instances of “inappropriate accounting” because any such impact was already subsumed within the previously required adjustments (for example, required changes in methodology)) to the health and dental reserve, the corporate bonus accrual and the reserve for abandoned projects, which are reflected in the restated financial statements. The total adjustment to the health and dental reserve and the corporate bonus accrual are reflected in the “Other Adjustments” restatement category in our 2006Form 10-K. The total adjustments for the reserve for abandoned project costs, which was eliminated in its entirety in the restatement, is included in the “Accounting for Costs of Real Estate Projects” restatement category in our 2006Form 10-K.

For information regarding remedial issues recommended by the Special Independent Committee and adopted by the Board of Directors, please refer to Item 9A in thisForm 10-K.

Significant Developments

See Item 1, “Business” for a discussion of significant developments in 2007 and 2008.

Restatement Related to Statement of Cash Flows Classifications and Accounting for Lease Payments and Non-Refundable Entrance Fees for Two Continuing Care Retirement Communities

As described in Note 3 to our consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data” of thisForm 10-K, the 2007 consolidated statement of cash flows has been restated primarily to reflect the proper classification of transactions with unconsolidated communities, assumption of debt related to sales transactions and the classification of gain resulting from sales transactions. The effect of the restatement on the Consolidated Statement of Cash Flows was to decrease net cash provided by operating activities from $235.0 million to $128.5 million, to increase net cash used in investing activities from $235.5 million to $248.5 million and to increase net cash provided by financing activities from $56.7 million to $176.3 million. We also have in our 2007 financial statements corrected how we account for lease payments and non-refundable entrance fees for two continuing care retirement communities. The effect of the restatement was to decrease retained earnings at January 1, 2005 by approximately $7.5 million and to reduce 2005 and 2006 net income by approximately $4.0 million and $5.1 million, respectively. We have restated our financial statements to correct these errors in accordance with SFAS No. 154,Accounting Changes and Error Corrections.

Results of Operations

We currently classify our consolidated operating revenues as follows:


	•	management fees related to services provided to operating and pre-opened communities for unconsolidated ventures and third-party owners;

	•	professional fees from development, marketing and other services;


	•	resident fees for consolidated communities;

	•	hospice and other ancillary fees; and

	•	reimbursed contract service revenue related to unconsolidated ventures and third party owners.

Operating expenses are classified into the following categories:


	•	development and venture expense for site selection, zoning, community design, construction management and financing incurred for development communities;

	•	community expense for our consolidated communities, which includes labor, food, marketing and other direct community expense;

	•	hospice and other ancillary expense;

	•	lease expense for certain consolidated communities;

	•	general and administrative expense related to headquarters and regional staff expenses and other administrative costs;

	•	loss on financial guarantees and other contracts;

	•	provision for doubtful accounts;

	•	impairment of communities;

	•	impairment of goodwill and intangible assets;

	•	depreciation and amortization;

	•	write-off of abandoned projects;

	•	write-off of unamortized contract costs; and

	•	reimbursed contract service expense related to unconsolidated ventures and third-party owners.

Since 1997, we have entered into various real estate transactions, the most significant of which involved either (i) the sale of a partial interest in a development venture in which we retained an interest and entered into a management contract or (ii) the sale of mature senior living properties or a partial interest in such properties to a third party where we simultaneously entered into a management contract. In most cases, we retained some form of continuing involvement, including providing preferences to the buyer of the real estate, an obligation to complete the development, operating deficit funding obligations, support obligations or, in some instances, options or obligations to reacquire the property or the buyer’s interest in the property. We account for these transactions in accordance with FASB Statement No. 66,Accounting for Sales of Real Estate(“SFAS 66”).

Our results of operations for each of the three years in the period ended December 31 were as follows:


										Percent Change
	Year Ended December 31,									2007 vs.			2006 vs.
(In thousands, except per share amounts)	2007			2006			2005			2006			2005
				(Restated)			(Restated)

Operating revenue:
Management fees	$	127,830		$	117,228		$	104,823			9.0	%		11.8	%
Buyout fees		1,626			134,730			83,036			(98.8	)%		62.3	%
Professional fees from development, marketing and other		38,855			28,553			24,920			36.1	%		14.6	%
Resident fees for consolidated communities		402,396			381,709			341,610			5.4	%		11.7	%
Hospice and other ancillary services		125,796			76,882			44,641			63.6	%		72.2	%
Reimbursed contract services		956,047			911,979			911,992			4.8	%		—

Total operating revenue		1,652,550			1,651,081			1,511,022			0.1	%		9.3	%

Operating expenses:
Development and venture expense		79,203			69,145			41,064			14.5	%		68.4	%
Community expense for consolidated communities		290,203			276,833			251,058			4.8	%		10.3	%
Hospice and other ancillary services expense		134,634			74,767			45,051			80.1	%		66.0	%
Community lease expense		68,994			61,991			57,946			11.3	%		7.0	%
General and administrative		187,325			131,473			106,601			42.5	%		23.3	%
Accounting Restatement and Special Independent Committee inquiry, SEC investigation and pending stockholder litigation		51,707			2,600			—			1888.7	%		N/A
Loss on financial guarantees and other contracts		22,005			89,676			—			(75.5	)%		N/A
Provision for doubtful accounts		9,564			14,632			1,675			(34.6	)%		773.6	%
Impairment of owned communities		7,641			15,730			2,472			(51.4	)%		536.3	%
Impairment of goodwill and intangible assets		56,729			—			—			N/A			N/A
Write-off of abandoned development projects		28,430			1,329			902			2039.2	%		47.3	%
Depreciation and amortization		55,280			48,648			42,981			13.6	%		13.2	%
Write-off of unamortized contract costs		—			25,359			14,609			(100.0	)%		73.6	%
Reimbursed contract services		956,047			911,979			911,992			4.8	%		0.0	%

Total operating expenses		1,947,762			1,724,162			1,476,351			13.0	%		16.8	%
(Loss) income from operations		(295,212	)		(73,081	)		34,671			304.0	%		(310.8	)%
Other non-operating income (expense):
Interest income		9,894			9,577			6,231			3.3	%		53.7	%
Interest expense		(6,647	)		(6,204	)		(11,882	)		7.1	%		(47.8	)%
(Loss) gain on investments		—			(5,610	)		2,036			(100.0	)%		(375.5	)%
Other (expense) income		(6,089	)		6,706			3,105			(190.8	)%		116.0	%

Total other non-operating income (expense)		(2,842	)		4,469			(510	)		(163.6	)%		(976.3	)%
Gain on the sale and development of real estate and equity interests		105,081			51,347			81,723			104.6	%		(37.2	)%
Sunrise’s share of earnings and return on investment in unconsolidated communities		108,947			43,702			13,472			149.3	%		224.4	%
Gain (loss) from investments accounted for under the profit sharing method		22			(857	)		(857	)		(102.6	)%		0.0	%
Minority interests		4,470			6,916			6,721			(35.4	)%		2.9	%

(Loss) income before provision for income taxes		(79,534	)		32,496			135,220			(344.8	)%		(76.0	)%
Benefit from (provision for) income taxes		9,259			(17,212	)		(52,156	)		(153.8	)%		(67.0	)%

Net (loss) income	$	(70,275	)	$	15,284		$	83,064			(559.8	)%		(81.6	)%

Basic net (loss) income per share	$	(1.41	)	$	0.31		$	2.00			(554.8	)%		(84.5	)%
Diluted net (loss) income per share		(1.41	)		0.30			1.74			(570.0	)%		(82.8	)%

The following table summarizes our portfolio of operating communities at December 31, 2007, 2006 and 2005:


							Percent Change
	As of December 31,						2007 vs.			2006 vs.
	2007		2006		2005		2006			2005

Total communities
Consolidated		63		62		59		1.6	%		5.1	%
Unconsolidated		198		180		153		10.0	%		17.6	%
Managed		178		180		186		(1.1	)%		(3.2	)%

Total		439		422		398		4.0	%		6.0	%

Resident capacity		53,917		52,170		50,673		3.3	%		3.0	%

In 2007, we continued to capitalize on our brand and management services experience by entering into new management and professional services contracts internationally and domestically. The number of communities managed for unconsolidated ventures and third-party owners increased from 360 at December 31, 2006 to 376 at December 31, 2007, or 4%. In 2007, we increased the number of consolidated communities from 62 to 63.

The number of communities managed for unconsolidated ventures and third-party owners increased from 339 in 2005 to 360 in 2006, or 6%. In 2006, we increased the number of consolidated communities from 59 to 62 due to the acquisition of three CCRCs, the opening of one community that was later sold to a venture, the disposition of two acquired communities and the acquisition of our non-operating community in New Orleans, Louisiana, that was damaged during Hurricane Katrina, which was previously owned by an unconsolidated venture. Additionally, 24 management contracts were terminated. In September 2006, we acquired Trinity as the first step in our strategy to offer hospice services to our residents and their families.

We had a net loss of $(70.3) million in 2007, or $(1.41) per share (diluted). Net income was $15.3 million in 2006, or $0.30 per share (diluted) and $83.1 million, or $1.74 per share (diluted) in 2005. Large and unusual items included in net (loss)/income for the three years included the following:


(In millions)	2007			2006			2005

Buyout of Five Star management contracts	$	—		$	135		$	83
Write-off of intangible assets associated with buyout of Five-Star management contracts		—			(25	)		(15	)
Loss on guarantees related to our Germany venture		(16	)		(50	)		—
Loss on guarantees related to The Fountains venture		—			(22	)		—
Impairment of Trinity goodwill and intangible assets		(57	)		—			—
Accounting Restatement, Special Independent Committee inquiry, SEC investigation and pending stockholder litigation		(52	)		(3	)		—
Loss on guarantees related to the condominium project		(6	)		(17	)		—
Write-off of other condominium projects		(21	)		—			—
Write-down of Aston Gardens and other equity investments		(25	)		—			—

Net impact on (loss) income from operations		(177	)		18			68
Real estate gains from prior years recognized in the current period		85			35			81
Venture recapitalizations		57			48			17

Net impact on (loss) income before benefit from (provision for) income taxes	$	(35	)	$	101		$	166

Operating Revenue

Management fees

2007 Compared to 2006

Management fees revenue was $127.8 million in 2007 compared to $117.2 million in 2006, an increase of $10.6 million, or 9.0%. This increase was primarily comprised of:


	•	$7.2 million from fees associated with existing North American communities primarily due to increases in rates;

	•	$3.1 million of incremental revenues from existing international communities;

	•	$3.8 million of incremental revenues from 31 new communities managed in 2007 for unconsolidated ventures and third parties;

	•	$5.1 million in incremental incentive management fees; and

	•	$6.6 million decrease due to contract terminations.

2006 Compared to 2005

Management fees revenue was $117.2 million in 2006 compared to $104.8 million in 2005, an increase of $12.4 million, or 11.8%. This increase was primarily comprised of:


	•	$6.9 million of incremental revenues in 2006 from 31 management contracts obtained in 2005 from the Greystone and The Fountains acquisitions that were included for a full year in 2006;

	•	$7.7 million from increased fees associated with existing communities due to increases in rates and occupancy;

	•	$4.8 million of incremental revenues from 36 new communities managed in 2006 for unconsolidated ventures and third parties that were included for a full year in 2006;

	•	$5.1 million of incremental revenues from international communities;

	•	$2.3 million decrease in guarantee amortization due to the expirations of guarantees in 2006; and

	•	$9.7 million decrease due to contract terminations in 2005.

Buyout fees

In 2007, two management contracts were bought out for a fee of $1.6 million. In 2006, Five Star Quality Care, Inc. (“Five Star”) bought out 18 contracts for a total buyout fee of $134.7 million. In 2005, Five Star bought out 12 contracts for a total buyout fee of $83.0 million.

Professional fees from development, marketing and other

Professional fees from development, marketing and other were as follows:


(In millions)	2007		2006		2005

North America	$	8.2	$	4.5	$	2.9
International		18.9		12.5		14.8
Greystone		11.8		11.6		7.2

	$	38.9	$	28.6	$	24.9

2007 Compared to 2006

Professional fees from development, marketing and other revenue was $38.9 million in 2007 compared to $28.6 million in 2006, an increase of $10.3 million, or 36.1% due primarily to the following:


	•	$5.2 million in fees paid to us by our ventures or venture partners as compensation for either brokering the sale of venture assets or the sale of the majority partner’s equity interest in a venture;

	•	$3.2 million in North American and international development fees from 23 communities under development in 2007 compared to 17 communities under development in 2006; and

	•	$2.6 million of fees generated by a Greystone seed capital venture. These fees are earned when the initial development services are successful and permanent financing for the project is obtained.

2006 Compared to 2005

Professional fees from development, marketing and other revenue was $28.6 million in 2006 compared to $24.9 million in 2005, an increase of $3.7 million, or 14.6% primarily due to $2.8 million of fees paid to us by our ventures or venture partners as compensation for either brokering the sale of venture assets or the sale of the majority partner’s equity interest in a venture.

Resident fees for consolidated communities

2007 Compared to 2006

Resident fees for consolidated communities were $402.4 million in 2007 compared to $381.7 million in 2006, an increase of $20.7 million, or 5.4%. This increase was primarily comprised of:


	•	$17.3 million from existing communities due to an increase in the average daily rate and fees for other services; and

	•	$3.4 million from the acquisition of one community.

2006 Compared to 2005

Resident fees for consolidated communities were $381.7 million in 2006 compared to $341.6 million in 2005, an increase of $40.1 million, or 11.7%. This increase was primarily comprised of:


	•	$37.6 million from existing consolidated communities of which $34.2 million is due to increases in rate and $4.3 million is due to increases in occupancy;

	•	$4.1 million from the acquisition of three consolidated communities; and

	•	$1.3 million decrease from the disposition of two consolidated communities in 2006.

Hospice and other ancillary services

In the UK and Germany, our wholly-owned subsidiaries provide resident care services to residents of communities owned by joint ventures. Revenues were $13.6 million, $4.8 million and $0.6 million in 2007, 2006 and 2005, respectively. In 2007, there was an average of 12 care companies operating the first half of the year and an average of 16 care companies operating the second half of the year. In 2006, there was an average of eight care companies operating during the year and in 2005 there were three care companies operating during the year.

North American operations include revenues for hospice care from our Trinity acquisition; private duty home health services provided by our At Home venture, and providing resident care services to residents of communities owned by joint ventures or third party owners managed by Sunrise. We provide care services in states we operate in where the care services providers are licensed separately from the room and board provider. Revenues were $112.2 million, $72.1 million and $44.0 million in 2007, 2006 and 2005, respectively. In 2007, the $40.1 million increase was primarily driven by the full year of operation for Trinity, partially offset by the June 2007 disposition of Sunrise At Home. In 2006, the $28.1 million increase was primarily due to Trinity acquired in September 2006 and

the full year results of resident care revenues from care providers acquired with the Fountains acquisition in 2005. The majority of hospice services are paid for through Medicare, with payments subject to specific limitations.

Reimbursed contract services

Reimbursed contract services were $956.0 million in 2007 and $912.0 million in both 2006 and 2005. The increase of 4.8% in 2007 was due primarily to a 4.4% increase in the number of communities managed, from 360 to 376. There was no change in 2006 to 2005 primarily due to the fact that, while the number of managed communities declined due to the Five Star contract buyouts; this decline was offset by acquisitions and new community openings.

Operating Expenses

Development and venture expense

2007 Compared to 2006

Development and venture expense was $79.2 million in 2007 as compared to $69.1 million in 2006. The increase in development and venture expense of $10.1 million, or 14.5%, was primarily comprised of $8.9 million in salaries and benefits due primarily to an increase in the number of communities under development from 39 at December 31, 2006 to 44 at December 31, 2007 and an increase in the number of employees in the North American development organization, from 162 at December 31, 2006 to 221 at December 31, 2007.

2006 Compared to 2005

Development and venture expense was $69.1 million in 2006 as compared to $41.1 million in 2005. The increase in development and venture expense of $28.1 million, or 68.4%, was primarily comprised of:


	•	$13.0 million from activity of Greystone that was included for a full year in 2006;

	•	$10.0 million from North American development. There were 29 North American communities under development in 2006 compared to 28 in 2005; and

	•	$3.0 million from European development. The increase was primarily due to continuing development in the United Kingdom and the weakening of the U.S. dollar against the British pound and Euro from 2005 to 2006.

Community expense for consolidated communities

2007 Compared to 2006

Community expense for consolidated communities was $290.2 million in 2007 as compared to $276.8 million in 2006. The increase in community and ancillary expense of $13.4 million, or 4.8%, was primarily comprised of:


	•	$11.4 million increase from existing communities resulting primarily from increased labor costs; and

	•	$2.0 million increase from the acquisition of one community.

2006 Compared to 2005

Community expense for consolidated communities was $276.8 million in 2006 as compared to $251.1 million in 2005. The increase in community and ancillary expense of $25.7 million, or 10.3%, was primarily comprised of:


	•	$22.8 million from existing communities resulting primarily from increased labor costs;

	•	$4.0 million from the acquisition of three communities;

	•	$1.0 million decrease from the closing of two communities in 2005.

Hospice and other ancillary services

In the UK and Germany, our wholly-owned subsidiaries provide resident care services to residents of communities owned by joint ventures. Expenses (primarily labor and related costs) were $15.3 million, $6.0 million and $1.1 million in 2007, 2006 and 2005, respectively. In 2007, there was an average of 12 care companies operating

the first half of the year and an average of 16 care companies operating the second half of the year. In 2006, there was an average of eight care companies operating during the year and in 2005 there were three care companies operating during the year.

North American costs include labor, variable patient costs, and administrative costs to provide these services for hospice, private duty home health services and assistance with activities of daily living. Expenses were $119.3 million, $68.8 million and $44.0 million in 2007, 2006 and 2005, respectively. The increase in 2007 was driven by the full year results of Trinity and higher care services costs due to increased volume, partially offset by the reduction in Sunrise At Home due to the disposition. The increase in costs in 2006 was driven by the Trinity acquisition in September and higher care service costs due to increased volume.

Community lease expense

2007 Compared to 2006

Community lease expense was $69.0 million in 2007 as compared to $62.0 million in 2006. The increase in community lease expense of $7.0 million, or 11.3%, was primarily a result of new international communities and increases in contingent rent. Contingent rent was $8.2 million in 2007 as compared to $6.5 million in 2006.

2006 Compared to 2005

Community lease expense was $62.0 million in 2006 as compared to $57.9 million in 2005. The increase in community lease expense of $4.1 million, or 7.0%, was primarily a result of increases in contingent rent. Contingent rent was $6.5 million in 2006 as compared to $4.8 million in 2005.

General and administrative

2007 Compared to 2006

General and administrative expense was $187.3 million in 2007 as compared to $131.5 million in 2006. The increase in general and administrative expense of $55.8 million, or 42.5%, was primarily comprised of:


	•	$29.2 million increase in bonus expense primarily relating to gains at one of our ventures. During 2007, our first UK venture in which we have a 20% equity interest sold seven communities to a venture in which we have a 10% interest. Primarily as a result of the gains on these asset sales recorded in the ventures, we recorded equity in earnings in 2007 of approximately $75.5 million. When our UK and Germany ventures were formed, we established a bonus pool in respect to each venture for the benefit of employees and others responsible for the success of these ventures. At that time, we agreed with our partner that after certain return thresholds were met, we would each reduce our percentage interests in venture distributions with such excess to be used to fund these bonus pools. During 2007, we recorded bonus expense of $27.8 million in respect of the bonus pool relating to the UK venture. These bonus amounts are funded from capital events and the cash is retained by us in restricted cash accounts. As of December 31, 2007, approximately $18.0 million of this amount was included in restricted cash. Under this bonus arrangement, no bonuses are payable until we receive distributions at least equal to certain capital contributions and loans made by us to the UK and Germany ventures. We currently expect this bonus distribution limitation will be satisfied in late 2008, at which time bonus payments would become payable. See Item 1, “Business — Significant 2007 Developments — Ventures”.

	•	$8.9 million increase in legal expense related to the Trinity OIG investigation, our exploration of strategic alternatives and the settlement of litigation;

	•	$2.6 million increase related to costs associated with potential acquisitions that we decided not to pursue;

	•	$9.0 million increase related to the implementation of outsourcing of our payroll processing function to ADP; and

	•	$5.7 million increase in salaries, employee benefits and travel costs as the result of additional employees to support 17 additional communities in 2007.

2006 Compared to 2005

General and administrative expense was $131.5 million in 2006 as compared to $106.6 million in 2005. The increase in general and administrative expense of $24.9 million, or 23.3%, was primarily comprised of:


	•	$9.0 million in salaries, employee benefits, travel and related costs associated with additional employees to support the increased number of communities we manage;

	•	$5.0 million loss for possible damages related to the Trinity OIG investigation andqui tamaction;

	•	$5.1 million of expense to support new communities in Canada, the UK and Germany; and

	•	$1.8 million in transition costs for the terminated Five Star contracts.

Accounting Restatement, Special Independent Committee Inquiry, SEC investigation and pending stockholder litigation

During 2007, we incurred legal and accounting fees of approximately $51.7 million related to the Accounting Review, the Special Independent Committee inquiry, the SEC investigation and responding to various shareholder actions compared to approximately $2.6 million in 2006.

Loss on financial guarantees and other contracts

Loss on financial guarantees and other contracts was $22.0 million in 2007. We recorded an additional $16.0 million loss related to operating deficit shortfalls in Germany discussed below due to changes in expected cash flows due to slower than projected lease up and an additional $6.0 million loss related to construction cost overrun guarantees on a condominium project discussed below.

Loss on financial guarantees and other contracts in 2006 includes a $50.0 million loss related to funding of operating deficit shortfalls in Germany and $22.4 million related to income support guarantees. Also in 2006, we recorded a $17.2 million loss related to construction cost overrun guarantees on a condominium project. There were no losses on financial guarantees in 2005. See Item 1, “Business — Significant 2007 Developments”.

Provision for doubtful accounts

2007 Compared to 2006

Provision for doubtful accounts was $9.6 million in 2007 as compared to $14.6 million in 2006. The decrease of $5.0 million is primarily due to the write-off of $8.0 million of a receivable in 2006 resulting from prior fundings under a guarantee which were deemed to be uncollectible partially offset by 2007 write-offs of operating advances to four ventures.

2006 Compared to 2005

Provision for doubtful accounts was $14.6 million in 2006 as compared to $1.7 million in 2005. The increase of $12.9 million is primarily due to $8.0 million write-off of a receivable in 2006 resulting from prior fundings under a guarantee which were previously deemed to be collectible.

Impairment of owned communities

Impairment losses of owned communities were $7.6 million in 2007, $15.7 million in 2006 and $2.5 million in 2005 related to communities whose carrying amounts are not fully recoverable. These owned communities were primarily small senior living communities acquired between 1996 and 2006.

Impairment of goodwill and intangible assets

Impairment of goodwill and intangible assets was $56.7 million in 2007 related to the write-down of Trinity goodwill and other Trinity intangibles. See Item 1, “Business — Significant 2007 Developments — Trinity Hospice”.

Write-off of abandoned projects

The write-off of abandoned projects was $28.4 million in 2007 and $1.3 million in 2006. The increase primarily relates to the $21.0 million write-off of capitalized development costs for four senior living condominium projects due to adverse economic conditions.

Depreciation and amortization

Depreciation and amortization expense by segment was as follows:


(In thousands)	2007		2006		2005

North America	$	47,843	$	44,115	$	40,791
Greystone		4,068		3,462		1,992
International (including Canada)		886		240		198
Hospice		2,483		831		—

	$	55,280	$	48,648	$	42,981

Depreciation expense was $33.9 million, $27.1 million and $20.4 million in 2007, 2006 and 2005, respectively, excluding depreciation expense related to properties subject to the deposit method, financing method and profit-sharing method of accounting. See note 7 to consolidated financial statements.

2007 Compared to 2006

Depreciation and amortization expense was $55.3 million in 2007 as compared to $48.6 million in 2006. The increase in depreciation and amortization expense of $6.7 million, or 13.6%, was primarily comprised of $5.8 million from fixed assets placed in service and the acceleration of certain asset lives, $4.0 million increase in amortization due to an acceleration of certain management contract lives and $1.3 million from a full year of amortization expense as the result of the Trinity acquisition in 2006. The increases were partially offset by a $4.5 million decrease related to the sales of communities.

2006 Compared to 2005

Depreciation and amortization expense was $48.6 million in 2006 as compared to $43.0 million in 2005. The increase in depreciation and amortization expense of $5.6 million, or 13.2%, was primarily comprised of $6.7 million from fixed assets and software placed in service.

Write-off of unamortized contract costs

Write-off of unamortized contract costs was $25.4 million in 2006 and $14.6 million in 2005. These costs relate to the buyout of Five Star management contracts.

Other Non-operating Income (Expense)

2007 Compared to 2006

Interest income remained consistent between years as average cash balances remained relatively unchanged from 2006 to 2007. Included in interest income is $3.5 million and $2.1 million in 2007 and 2006, respectively, from our insurance captive. Interest income from the insurance captive does not affect our net income but rather reduces premiums paid by our communities, and therefore, is offset by reductions in community expense for consolidated communities and reimbursed contract services. Interest expense increased $0.4 million in 2007 as compared to 2006 due to an increase of $4.1 million related to mortgages and other debt and $0.3 million increase in loan amortization partially offset by an increase of $4.0 million in capitalized interest due to increased development activity. Other income (expense) decreased from income of $6.7 million in 2006 to a loss of $6.1 million in 2007 due primarily to a $1.5 million performance termination cure payment made in 2007 and $1.7 million in foreign exchange losses as a result of the weakening U.S. dollar against the British pound and the Euro in 2007. 2006 had income of $5.0 million related to the settlement of the MSLS acquisition and $1.9 million of income earned from collection of afully-reserved receivable.

2006 Compared to 2005

Interest income increased $3.3 million in 2006 as compared to 2005. Interest expense decreased $5.7 million in 2006 compared to 2005 as a result of lower outstanding debt resulting from the redemption of our 5.25% convertible subordinated notes in 2006 and decreased borrowings from Sunrise REIT, which was partially offset by increased borrowings under our Bank Credit Facility and higher mortgages and notes payable.

During 2006, we had a $5.6 million loss on investments as compared to a gain on investments of $2.0 million in 2005. In 2006, we wrote down a $5.6 million note receivable due to non-collectability. In 2005, we realized a gain of $2.0 million on the sale of our investment in Sunrise REIT debentures.

Other income increased approximately $3.6 million in 2006 from 2005 primarily as a result of $5.0 million of other income recorded in conjunction with our purchase of MSLS, which was partially offset by foreign exchange losses.

Gain on the Sale and Development of Real Estate and Equity Interests

Gain on the sale and development of real estate and equity interests fluctuates depending on the timing of dispositions of communities and the satisfaction of certain operating contingencies and guarantees. Gains in 2007, 2006 and 2005 are as follows (in millions):


	December 31,
	2007		2006		2005

Properties accounted for under basis of performance of services	$	3.6	$	1.8	$	0.6
Properties accounted for previously under financing method		32.8		—		—
Properties accounted for previously under deposit method		52.4		35.3		81.3
Land sales		5.7		5.4		(0.2	)
Sales of equity interests and other sales		10.6		8.8		—

Total gains on sale	$	105.1	$	51.3	$	81.7

During 2007, 2006 and 2005, we recognized pre-tax gains of approximately $85.2 million, $35.3 million and $81.3 million, respectively, related to previous sales of real estate from 2002 through 2004 where sale accounting was not initially achieved due to guarantees and other forms of continuing involvement. The gain was recognized in the year those guarantees were released.

Sunrise’s Share of Earnings and Return on Investment in Unconsolidated Communities


	December 31,
(In millions)	2007			2006			2005

Sunrise’s share of earnings (losses) in unconsolidated communities	$	60.7		$	(12.0	)	$	(13.1	)
Return on investment in unconsolidated communities		72.7			55.7			26.5
Impairment of equity investments		(24.5	)		—			—

	$	108.9		$	43.7		$	13.4

During 2007, our share of earnings in unconsolidated communities increased significantly primarily related to one venture in the UK During 2007, our UK venture in which we have a 20% equity interest sold seven communities to a different UK venture in which we have a 10% interest. As a result of the gains on these asset sales recorded in the ventures, we recorded earnings in unconsolidated communities of approximately $75.5 million.

Excluding this gain, Sunrise’s share of losses in unconsolidated communities, which is primarily the result of pre-opening expenses and operating losses during the initiallease-up period, remained consistent between years.

contractual obligation or implied obligation to support the venture including in our role as general partner. Any remaining distribution is recorded in income.

In 2007, our return on investment in unconsolidated communities was primarily the result of three venture recapitalizations. In one transaction, the majority owner of a venture sold their majority interest to a new third party, the debt was refinanced, and the total cash we received and the gain recognized was $53.0 million. In another transaction, in conjunction with a sale by us of a 15% equity interest which gain is recorded in “Gain on the sale and development of real estate and equity interests” and the sale of the majority equity owner’s interest to a new third party, the debt was refinanced, and we received total proceeds of $4.1 million relating to our retained 20% equity interest in the venture, which we recorded as a return on investment in unconsolidated communities.

In 2006, our return on investment in unconsolidated communities was primarily the result of three venture recapitalizations. In one transaction, the majority owner of two ventures sold their majority interests to a new third party, the debt was refinanced, and the total recorded return on investment to us from this combined transaction was approximately $21.6 million. In another transaction, the majority owner of a venture sold its majority interest to a new third party, the debt was refinanced, and the total return on investment to us was $26.1 million.

In 2005, we recorded $22.4 million of return on investment from the recapitalization of four ventures for 18 communities.

In 2007, we wrote-off equity investments in four unconsolidated ventures. The majority of the charge related to our investment in Aston Gardens, a venture which acquired six senior living communities in Florida in September 2006. In 2007 and into 2008, the operating results of the Aston Garden communities suffered due to adverse economic conditions in Florida for independent living communities including a decline in the real estate market. These operating results are insufficient to achieve compliance with the debt covenants for the mortgage debt for the properties. In July 2008, the venture received notice of default from the lender of $170.0 million of debt obtained by the venture at the time of the acquisition in September 2006. Later in July 2008, we received notice from our equity partner alleging a default under our management agreement as a result of receiving the notice from the lender. This debt is non-recourse to us. Based on our assessment, we have determined that our investment is impaired and as a result, we recorded a pre-tax impairment charge of approximately $21.6 million in the fourth quarter of 2007. See Item 1, “Business — Significant 2007 Developments — Aston Gardens”.

Benefit from (Provision for) Income Taxes

Our effective tax rate was (11.6)%, 53.0% and 38.6% in 2007, 2006 and 2005, respectively. The effective rate in 2007 was impacted by the write-off of goodwill related to Trinity for which there was no tax basis and revisions to the valuation allowance for federal tax assets. See note 15 to the consolidated financial statements for detailed reconciliations of the statutory tax rate to the effective tax rate.

Realization of net deferred tax assets of $137.3 million and $124.5 million at December 31, 2007 and 2006, respectively, is primarily dependent on our ability to generate sufficient taxable income in future periods.

Liquidity and Capital Resources

Overview

We had $138.2 million and $82.0 million of unrestricted cash and cash equivalents at December 31, 2007 and 2006, respectively.

To date, we have financed our operations primarily with cash generated from operations and both short-term and long-term borrowings. At June 30, 2008, we had 31 communities under construction in North America and Europe and seven communities which we were developing through our Greystone subsidiary on behalf of third parties. We estimate that it will cost approximately $0.7 billion to complete the 31 communities we had in North America and Europe under construction as of June 30, 2008. 28 of these communities are either in ventures or committed to ventures and it is expected that the remaining three communities will be put into ventures before the end of 2008. Sunrise’s remaining equity commitments for these projects as of June 30, 2008 is estimated to be as much as $7.0 million. We estimate that existing construction loan financing commitments and existing credit

facilities, together with cash generated from operations, will be sufficient to fund communities under construction as of June 30, 2008.

As of June 30, 2008, we had entered into contracts to purchase or lease 86 additional development sites, for a total contracted purchase price of approximately $410 million. Generally, our land purchase commitments are terminable by Sunrise and a substantial portion of our $18.0 million in land deposits is refundable.

Our previously disclosed development plan for 2008 included a development pipeline of 3,200 to 3,400 units. Based on the current capital market conditions and our focus on our strategic plan, this number will decrease by up to 50 percent with many starts deferred until 2009.

We do not have firm commitments to cover our full 2008 development plan, and no assurance can be made that we will be able to obtain this financing. We do not intend to begin construction on new projects without a capital partner and without committed debt financing. We are regularly in negotiations with lenders and venture partners to secure the financing required to fund development activities.

Additional financing resources will be required to complete the development and construction of these communities and to refinance existing indebtedness. Based on current market conditions related to construction debt financing we may be constrained in our ability to begin construction on all units in our revised 2008 plan and, accordingly, we may be required to defer some projects from 2008 to 2009. We are regularly in negotiations with lenders and venture partners to secure the financing required to fund development activities. We do not have firm commitments to cover our full 2008 development plan, and no assurance can be made that we will be able to obtain this financing. We do not intend to begin construction on new projects without a capital partner and without committed debt financing.

Long-Term Debt and Bank Credit Facility

At December 31, 2007, we had $253.9 million of outstanding debt with a weighted average interest rate of 6.75%. Of the outstanding debt we had $9.1 million of fixed-rate debt with a weighted average interest rate of 7.28% and $244.8 million of variable rate debt with a weighted average interest rate of 6.73%. At December 31, 2007, we had $222.5 million of debt that was classified as a current liability, although only $3.5 million of that debt is due in 2008. We consider borrowings under the Bank Credit Facility (see below) to be short-term as we intend to repay all borrowings within one year. In addition we are obligated to provide annual audited financial statements and quarterly unaudited financial statements to various financial institutions that have made construction loans or provided permanent financing to entities directly or indirectly owned by us. In all such instances, the construction loans or permanent financing provided by financial institutions is secured by a mortgage or deed of trust on the financed community. The failure to provide our annual audited and quarterly unaudited financial statements in accordance with the obligations of the relevant credit facilities or ancillary documents could be an event of default under such documents, and could allow the financial institutions who have extended credit pursuant to such documents to seek remedies including possible repayment of the loan. $117.6 million of these loans have been classified as current liabilities as of December 31, 2007.

On December 2, 2005, we entered into a $250.0 million secured Bank Credit Facility, which has since been reduced to $160.0 million as described below (the “Bank Credit Facility”), with a syndicate of banks. The Bank Credit Facility replaced our former credit facility. The Bank Credit Facility provides for both cash borrowings and letters of credit. It has an initial term of four years and matures on December 2, 2009 unless extended for an additional one-year period upon satisfaction of certain conditions. The Bank Credit Facility is secured by a pledge of all of the common and preferred stock issued by Sunrise Senior Living Management, Inc., Sunrise Senior Living Investments, Inc., Sunrise Senior Living Services, Inc. and Sunrise Development, Inc., each of which is our wholly-owned subsidiary, (together with us, the “Loan Parties”), and all future cash and non-cash proceeds arising therefrom and accounts and contract rights, general intangibles and notes, notes receivable and similar instruments owned or acquired by the Loan Parties, as well as proceeds (cash and non-cash) and products thereof. Prior to the amendments described below, interest on cash borrowings in non-US dollars accrued at the rate of the Banking Federation of the European Union for the Euro plus 1.70% to 2.25%. Letters of credit fees are equal to 1.50% to 2.00% at the maximum available to be drawn on the letters of credit. We pay commitment fees of 0.25% on the unused balance of the Bank Credit Facility. Borrowings are used for general corporate purposes including

investments, acquisitions and the refinancing of existing debt. We had an outstanding balance of $100.0 million in borrowing and $71.8 million of outstanding letters of credit under the Bank Credit Facility at December 31, 2007. The letters of credit issued under the Bank Credit Facility expire within one year of issuance. Our available borrowing capacity on the Bank Credit Facility at December 31, 2007 was $78.3 million. Our available borrowing capacity on the Bank Credit Facility at June 30, 2008 was $58.7 million.

During 2006 and 2007, as a result of the delay in completing our Accounting Review, we entered into several amendments to our Bank Credit Facility extending the time period for furnishing quarterly and audited annual financial information to the lenders. In connection with these amendments, the interest rate applicable to the outstanding balance under the Bank Credit Facility was also increased effective July 1, 2007 from LIBOR plus 2.25% to LIBOR plus 2.50%.

On January 31, February 19, March 13, and July 23, 2008, we entered into further amendments to the Bank Credit Facility. These amendments, among other things:


	•	modified to August 20, 2008 the delivery date for the unaudited financial statements for the quarter ended March 31, 2008;

	•	modified to September 10, 2008 the delivery date for the unaudited financial statements for the quarter ending June 30, 2008;

	•	temporarily (in February 2008) and then permanently (in July 2008) reduced the maximum principal amount available under the Bank Credit Facility to $160.0 million; and

	•	waived compliance with financial covenants in the Bank Credit Facility for the year ended December 31, 2007 and for the fiscal quarters ended March 31, 2008 and June 30, 2008, and waived compliance with the leverage ratio and fixed charge coverage ratio covenants for the fiscal quarter ending September 30, 2008.

In addition, pursuant to the July 2008 amendment, until such time as we have delivered evidence satisfactory to the administrative agent that we have timely filed ourForm 10-K for the fiscal year ending December 31, 2008 and that we are in compliance with all financial covenants in the Bank Credit Facility, including the leverage ratio and fixed charge coverage ratio, for the fiscal year ending December 31, 2008, and provided we are not then otherwise in default under the Bank Credit Facility:


	•	we must maintain liquidity of not less than $50.0 million, composed of availability under the Bank Credit Facility plus up to not more than $50.0 million in unrestricted cash and cash equivalents (tested as of the end of each calendar month), and any unrestricted cash and cash equivalents in excess of $50.0 million must be used to pay down the outstanding borrowings under the Bank Credit Facility;

	•	we are generally prohibited from declaring or making directly or indirectly any payment in the form of a stock repurchase or payment of a cash dividend or from incurring any obligation to do so; and

	•	the borrowing rate in US dollars, which was increased effective as of February 1, 2008, will remain LIBOR plus 2.75% or the Base Rate (the higher of the Federal Funds Rate plus 0.50% and Prime) plus 1.25% (through the end of the then-current interest period).

From and after the July 2008 amendment, we will continue to owe and pay fees on the unused amount available under the Bank Credit Facility on the new outstanding maximum amount of $160.0 million. Prior to the July 2008 amendment, fees on the unused amount were based on a $250.0 million outstanding maximum amount.

On February 20, 2008, Sunrise Senior Living Insurance, Inc., our wholly owned insurance captive directly issued $43.3 million of letters of credit that had been issued under the Bank Credit Facility. As of June 30, 2008, we had outstanding borrowings of $75.0 million, outstanding letters of credit of $26.3 million and borrowing availability of approximately $58.7 million under the Bank Credit Facility. Taking into account the new liquidity covenants included in the July 2008 amendment to the Bank Credit Facility described above, we believe this availability, including unrestricted cash balances of approximately $75.0 million at June 30, 2008, will be sufficient to support our operations over the next twelve months.

Our Bank Credit Facility contains various other financial covenants and other restrictions, including provisions that: (1) require us to meet certain financial tests (for example, our Bank Credit Facility requires that we not exceed certain leverage ratios), maintain certain fixed charge coverage ratios and have a consolidated net worth of at least $450.0 million as adjusted each quarter and to meet other financial ratios and maintain a specified minimum liquidity and use excess cash and cash equivalents to pay down outstanding borrowings; (2) require consent for changes in control; and (3) restrict our ability and our subsidiaries’ ability to borrow additional funds, dispose of all or substantially all assets, or engage in mergers or other business combinations in which Sunrise is not the surviving entity, without lender consent.

At December 31, 2007, we were not in compliance with the following financial covenants in the Bank Credit Facility: leverage ratio (the ratio of consolidated EBITDA to total funded indebtedness of 4.25 as defined in the Bank Credit Facility) and fixed charge coverage ratio (the ratio of consolidated EBITDAR to fixed charges of 1.75 as defined in the Bank Credit Facility). Non-compliance was largely due to additional charges related to losses on financial guarantees which were identified during the 2007 audit that was completed in July 2008. Additionally, as these covenants are based on a rolling, four quarter test, we do not expect to be in compliance with these covenants for the first three quarters of 2008. These covenants were waived on July 23, 2008 through the quarter ending September 30, 2008.

In the event that we are unable to furnish the lenders with all of the financial information required to be furnished under the amended Bank Credit Facility by the specified dates and are not in compliance with the financial covenants in the Bank Credit Facility, including the leverage ratio and fixed charge coverage ratio, for the quarter ending December 31, 2008, or fail to comply with the new liquidity covenants included in the July 2008 amendment, the lenders under the Bank Credit Facility could, among other things, agree to a further extension of the delivery dates for the financial information or the covenant compliance requirements, exercise their rights to accelerate the payment of all amounts then outstanding under the Bank Credit Facility and require us to replace or provide cash collateral for the outstanding letters of credit, or pursue further modification with respect to the Bank Credit Facility.

In connection with the March 13, 2008 amendment, the Loan Parties executed and delivered a security agreement to the administrative agent for the benefit of the lenders under the Bank Credit Facility. Pursuant to the security agreement, among other things, the Loan Parties granted to the administrative agent, for the benefit of the lenders, a security interest in all accounts and contract rights general intangibles and notes, notes receivable and similar instruments owned or acquired by the Loan Parties, as well as proceeds (cash and non-cash) and products thereof, as security for the payment of obligations under the Bank Credit Facility arrangements.

We paid the lenders an aggregate fee of approximately $0.9 million and $1.9 million for entering into the amendments during 2007 and 2008, respectively.

Mortgage Financing

On May 7, 2008, 16 of our wholly-owned subsidiaries (the “Borrowers”) incurred mortgage indebtedness in the aggregate principal amount of approximately $106.7 million from Capmark Bank (“Lender”) as lender and servicer pursuant to 16 separate cross-collateralized, cross-defaulted mortgage loans (collectively, the “mortgage loans”). Shortly after the closing, the Lender assigned the mortgage loans to Fannie Mae. The mortgage loans bear interest at a variable rate equal to the “Discount” (which is the difference between the loan amount and the price at which Fannie Mae is able to sell its three-month rolling discount mortgage backed securities) plus 2.27% per annum, require monthly principal payments based on a30-year amortization schedule (using an interest rate of 5.92%) and mature on June 1, 2013.

In connection with the mortgage loans, we entered into interest rate protection agreements that provide for payments to us in the event the LIBOR rate exceeds 5.6145%, pursuant to an interest rate cap purchased on May 7, 2008, by each Borrower from SMBC Derivative Products Limited. The LIBOR rate approximates, but is not exactly equal to the “Discount” rate that is used in determining the interest rate on the mortgage loans; consequently, in the event the “Discount” rate exceeds the LIBOR rate, payments under the interest rate cap may not afford the Borrowers complete interest rate protection. The Borrowers purchased the rate cap for an initial period of three years for a cost of $0.3 million (including fees) and have placed in escrow the amount of $0.7 million to

purchase additional interest rate caps to cover years four and five of the mortgage loans which amount will be returned to us in the event the mortgage loans are prepaid prior to the end of the third loan year.

Each mortgage loan is secured by a senior housing facility owned by the applicable Borrower (which facility also secures the other 15 mortgage loans as well), as well as the interest rate cap described above. In addition, our management agreement with respect to each of the facilities is subordinate to the mortgage loan encumbering such facility. In connection with the mortgage loans, we received net proceeds of approximately $103.1 million (after payment of lender fees, third party costs, escrows and other amounts), $53.0 million of which was used to pay down amounts outstanding under our Bank Credit Facility. See Note 24 to our Consolidated Financial Statements included in Item 8 of thisForm 10-K for additional information.

Guarantees

In conjunction with our development ventures, we have provided project completion guarantees to venture lenders and the venture itself, operating deficit guarantees to the venture lenders whereby after depletion of established reserves we guarantee the payment of the lender’s monthly principal and interest during the term of the guarantee and guarantees to the venture to fund operating shortfalls. In conjunction with the sale of certain operating communities to third parties we have guaranteed a set level of net operating income or guaranteed a certain return to the buyer. As these guarantees prevent us from either being able to account for the transaction as a sale or to recognize profit from that sale transaction, the provisions of FASB Interpretation No. 45 (“FIN 45”),Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, do not apply to these guarantees.

In conjunction with the formation of new ventures that do not involve the sale of real estate, the acquisition of equity interests in existing ventures, and the acquisition of management contracts, we have provided operating deficit guarantees to venture lendersand/or the venture itself as described above, guarantees of debt repayment to venture lenders in the event that the venture does not perform under the debt agreements, and guarantees of a set level of net operating income to venture partners. The terms of the operating deficit guarantees and debt repayment guarantees match the term of the underlying venture debt and generally range from three to seven years. The terms of the guarantees of a set level of net operating income range from 18 months to seven years. Fundings under the operating deficit guarantees and debt repayment guarantees are generally recoverable either out of future cash flows of the venture or upon proceeds from the sale of communities. Fundings under the guarantees of a set level of net operating income are generally not recoverable.

The maximum potential amount of future fundings for outstanding guarantees subject to the provisions of FIN 45, the carrying amount of the liability for expected future fundings at December 31, 2007, and fundings during 2007 are as follows (in thousands):


			FIN 45		FAS 5		Total
			Liability		Liability		Liability
			for Future		for Future		for Future
	Maximum Potential		Fundings at		Fundings at		Fundings at		Fundings
	Amount of Future		December 31,		December 31,		December 31,		during
Guarantee Type	Fundings		2007		2007		2007		2007

Debt repayment	$	16,832	$	785	$	—	$	785	$	—
Operating deficit		Uncapped		1,371		42,023		43,394		—
Income support		Uncapped		960		16,525		17,485		5,829
Other				—		4,150		4,150		—

Total			$	3,116	$	62,698	$	65,814	$	5,829

Generally, the financing obtained by our ventures is non-recourse to the venture members, with the exception of the debt repayment guarantees discussed above. However, we have entered into guarantees with the lenders with respect to acts which we believe are in our control, such as fraud, that create exceptions to the non-recourse nature of the debt. If such acts were to occur, the full amount of the venture debt could become recourse to us. The combined amount of venture debt underlying these guarantees is approximately $3.0 billion at December 31, 2007. We have not funded under these guarantees, and do not expect to fund under such guarantees in the future.

Below is a discussion of the significant guarantees that have impacted our income statement, financial position or cash flows or are reasonably expected to impact our profitability, financial position or cash flows in the future.

Senior Living Condominium Developments

We began to develop senior living condominium projects in 2004. In 2006, we sold a majority interest in one condominium and assisted living venture to third parties. In conjunction with the development agreement for this project, we agreed to be responsible for actual project costs in excess of budgeted project costs of more than $10.0 million (subject to certain limited exceptions). Project overruns to be paid by us are projected to be approximately $48.0 million. Of this amount, $10.0 million is recoverable as a loan from the venture. $14.7 million relates to proceeds from the sale of real estate, development fees and pre-opening fees. During 2006, we recorded a loss of approximately $17.2 million due to this commitment. During 2007, we recorded an additional loss of approximately $6.0 million due to increases in the budgeted projected costs. Through June 30, 2008, we have paid approximately $47.0 million in cost overruns. See Item 1, “Business — Significant 2007 Developments — Senior Living Condominium Developments”.

The Fountains

In the third quarter of 2005, we acquired a 20% interest in a venture and entered into management agreements for the 16 communities owned by the venture. In conjunction with this transaction, we guaranteed to fund shortfalls between actual net operating income and a specified level of net operating income up to $7.0 million per year through July 2010. We paid $12.0 million to the venture to enter into the management agreements, which was recorded as an intangible asset and is being amortized over the life of the management agreements. The $12.0 million was placed into a reserve account, and the first $12.0 million of shortfalls were to be funded from this reserve account. In late 2006 and 2007, we determined that shortfalls will exceed the amount held in the reserve account. As a result, we recorded a pre-tax charge of $22.4 million in the fourth quarter of 2006. We are continuing to receive management fees, which we estimate to be approximately $9.0 million in 2008, with respect to these communities. See Item 1, “Business — Significant 2007 Developments — The Fountains”.

Germany Venture

At December 31, 2007 and June 30, 2008, we provided pre-opening and management services to eight and nine communities, respectively, in Germany. In connection with the development of these communities, we provided operating deficit guarantees to cover cash shortfalls until the communities reach stabilization. These communities have not performed as well as originally expected. In 2006, we recorded a pre-tax charge of $50.0 million as we did not expect full repayment of the loans from the funding. In 2007, we recorded an additional $16.0 million pre-tax charge based on changes in expected future cash flows. Our estimates underlying the pre-tax charge include certain assumptions as tolease-up of the communities. To the extent that such lease-up is slower than our projections, we could incur significant additional pre-tax charges in subsequent periods as we would be required to fund additional amounts under the operating deficit guarantees. Through June 30, 2008, we have funded $37.0 million under these guarantees and other loans. We expect to fund an additional $62.0 million through 2012, the date at which we estimate no further funding will be required. See Item 1, “Business — Significant 2007 Developments — Germany Venture.”

Other Guarantees

We guarantee the $25.0 million senior component of public project finance bonds issued by the Camden County Investment Authority. The proceeds of the bond issuance were used to acquire and renovate a CCRC located in New Jersey for which we manage the community pursuant to a management agreement. This venture is consolidated as a VIE. See Note 8 to our Consolidated Financial Statements. As indicated in Note 8, we provide operating deficit guarantees for non-consolidated VIEs.

Contractual Obligations

Our current contractual obligations include long-term debt, operating leases for our corporate and regional offices, operating leases for our communities, and building and land lease commitments. In addition, we have commitments to fund ventures in which we are a partner. See Note 18 to our Consolidated Financial Statements for a discussion of our commitments.

Principal maturities of long-term debt, equity investments in unconsolidated entities and future minimum lease payments at December 31, 2007 are as follows (in thousands):


	Payments due by period
									More
			Less Than						Than
Contractual Obligations	Total		1 Year		1-3 Years		4-5 Years		5 Years

Long-term debt	$	153,888	$	122,541	$	3,203	$	2,474	$	25,670
Bank Credit Facility		100,000		100,000		—		—		—
Equity investments in unconsolidated entities		61,123		22,105		38,792		226		—
Operating leases		727,773		68,532		143,997		138,272		376,972

Total	$	1,042,784	$	313,178	$	185,992	$	140,972	$	402,642

At December 31, 2007, we had entered into contracts to purchase 101 development sites, for a total contracted purchase price of approximately $400.0 million, and had also entered into contracts to lease six development sites for lease periods ranging from five to 80 years. Generally, our land purchase commitments are terminable if we are unable to obtain zoning approval. At June 30, 2008, there were $18.0 million in deposits related to 86 land purchases with a total contracted purchase price of approximately $410.0 million.

We consider borrowings under the Bank Credit Facility to be short-term as we intend to repay all borrowings within one year. In addition, we are obligated to provide annual audited financial statements and quarterly unaudited financial statements to various financial institutions that have made construction loans or provided permanent financing (a) to subsidiaries directly or indirectly owned by us that own our consolidated portfolio of senior living communities and (b) to venture entities that own senior living communities managed by us and in which we hold a minority equity interest, pursuant to the terms of the credit facilities with respect to the loans to such entities or pursuant to documents ancillary to such credit facilities (e.g., operating deficit guarantees, etc.). In some cases, we are also subject to financial covenants that are the same as the leverage ratio and fixed charge coverage ratio covenants in our Bank Credit Facility. In all such instances, the construction loans or permanent financing provided by financial institutions is secured by a mortgage or deed of trust on the financed community. The failure to provide quarterly unaudited financial statements or to comply with financial covenants in accordance with the obligations of the relevant credit facilities or ancillary documents could be an event of default under such documents, and could allow the financial institutions who have extended credit pursuant to such documents to seek the remedies provided for in such documents. In the instances in which we have guaranteed the repayment of the principal amount of the credit extended by these financial institutions, we could be required to repay the loan. All of these loans ($117.6 million) have been classified as current liabilities as of December 31, 2007.

Cash Flows

Our primary sources of cash from operating activities are from management fees, professional fees, from monthly fees and other billings from services provided to residents of our consolidated communities and distributions of operating earnings from unconsolidated ventures. The primary uses of cash for our ongoing operations include the payment of community operating and ancillary expenses for our consolidated and managed communities. Changes in operating assets and liabilities such as accounts receivable, prepaids and other current assets, and accounts payable and accrued expenses will fluctuate based on the timing of payment to vendors. Reimbursement for these costs from our managed communities will vary as some costs are pre-funded, such as payroll, while others are reimbursed after they are incurred. Therefore, there will not always be a correlation between increases and decreases of accounts payable and receivables for our managed communities.

In 2007, 2006 and 2005, we billed and collected $28.2 million, $21.6 million and $14.4 million, respectively, of Greystone development fees, of which $26.4 million, $15.1 million and $13.0 million, respectively, was deferred and will be recognized when the contract is completed. Included in the $74.4 million of deferred gains on the sale of real estate and deferred revenues at December 31, 2007 is $54.5 million related to Greystone and $19.9 million of cash received related to our real estate transactions for Sunrise development properties that are accounted for in accordance with SFAS No. 66,Accounting for Sales of Real Estate.

Net cash provided by operating activities was $128.5 million and $117.5 million in 2007 and 2006, respectively. In 2007, cash flows provided by operations was primarily due to distributions from equity method investments from venture recapitalizations which offset the loss from operations. In 2006, cash flows provided by operations was positively influenced by a significant increase in self-insurance liabilities, which were offset by a significant increase in due from unconsolidated communities. We have placed emphasis on improved management of amounts due from unconsolidated communities and expect to see reductions in this working capital item in future periods.

Net cash provided by operating activities was $117.5 million and $190.0 million in 2006 and 2005, respectively. In 2006, cash flows provided by operations was positively influenced by a significant increase in self-insurance liabilities, which were offset by a significant increase in due from unconsolidated communities. We have placed emphasis on improved management of amounts due from unconsolidated communities and expect to see reductions in this working capital item in future periods. In 2005, cash flows provided by operations were significantly influenced by an increase in accounts payable and accrued expenses.

Net cash used in investing activities was $248.5 million and $258.9 million in 2007 and 2006, respectively. In 2007, we increased our capital expenditures to $245.5 million, primarily related to spending on the development of senior living communities. This use of cash was partially offset by $60.4 million of proceeds from sales of communities to ventures. We also made $29.3 million of contributions to ventures that are developing senior living communities. Finally we acquired one community, Connecticut Ave., for $50.0 million. In 2006, we acquired Trinity, a 25% interest in Aston Gardens and the Raiser portfolio. We made significant contributions to ventures that were building unconsolidated senior living communities and made significant investments in consolidated communities while receiving distributions from unconsolidated communities of $72.6 million.

Net cash used in investing activities was $258.9 million and $168.5 million in 2006 and 2005, respectively. In 2006, we acquired Trinity, a 25% interest in Aston Gardens and the Raiser portfolio. We made significant contributions to ventures that were building unconsolidated senior living communities and made significant investments in consolidated communities while receiving distributions from unconsolidated communities of $72.6 million. In 2005, we acquired Greystone and The Fountains using cash of $46.5 million and $29.0 million, respectively, acquired property for $134.3 million and contributed $64.1 million to unconsolidated senior living communities. These uses of cash in 2005 were partially offset by $56.2 million from the disposition of property and $9.3 million of distributions received from unconsolidated senior living communities.

Net cash provided by financing activities was $176.3 million and $78.3 million in 2007 and 2006, respectively. Activities included additional borrowings in 2007 and 2006 of $243.6 million and $154.1 million, respectively, offset by debt repayments in 2007 and 2006 of $66.1 million and $90.8 million, respectively. The additional borrowings under our Bank Credit Facility were used to fund our operations and continued development of senior living communities.

Net cash provided by financing activities was $78.3 million and $34.0 million in 2006 and 2005, respectively. Activities included additional borrowings of $154.1 million and $149.5 million, offset by debt repayments of $90.8 million and $137.3 million in 2006 and 2005, respectively. The additional borrowings under our Bank Credit Facility were used to fund our continued development of senior living communities and refinance existing debt. We repurchased approximately $8.7 million of our common stock and received proceeds of $29.1 million from the exercise of stock options in 2005.

Stock Repurchase Programs

In July 2002, our Board of Directors authorized the repurchase of outstanding shares of our common stock up to an aggregate purchase price of $50.0 million over the subsequent 12 months. In May 2003, our Board of Directors expanded the repurchase program to an aggregate purchase price of $150.0 million to repurchase outstanding shares of common stockand/or our outstanding 5.25% convertible subordinated notes due 2009. In March 2004, our Board of Directors authorized the additional repurchase of outstanding shares of our common stockand/or our outstanding convertible subordinated notes up to an aggregate purchase price of $50.0 million. At December 31, 2005, each of these preceding authorizations had expired to the extent not utilized. In November 2005, our Board of Directors approved a new repurchase plan that provided for the repurchase of up to $50.0 million of our common stockand/or the outstanding convertible subordinated notes. This plan extended through December 31, 2007 and was not renewed. There were no share repurchases in 2007 or 2006. In 2005, 347,980 shares were repurchased at an average price of $25.03.

Market Risk

We are exposed to market risk from changes in interest rates primarily through variable rate debt. The fair market value estimates for debt securities are based on discounting future cash flows utilizing current rates offered to us for debt of the same type and remaining maturity. The following table details by category the principal amount, the average interest rate and the estimated fair market value of our debt (in thousands):


Maturity Date	Fixed Rate			Variable Rate
Through December 31,	Debt			Debt

2008	$	4,074		$	218,467
2009		1,147			880
2010		159			1,015
2011		171			1,040
2012		183			1,080
Thereafter		3,347			22,325

Total Carrying Value	$	9,081		$	244,807

Average Interest Rate		7.3	%		6.7	%

Estimated Fair Market Value	$	9,207		$	244,807

Notes receivable as of December 31, 2007 consist of the following two notes (dollars in thousands):


	Interest Rate			2007

Note V with international venture		4.37	%	$	592
Promissory Note XIV		Euribor + 4.25	%		8,837

				$	9,429

Estimated fair market value				$	9,336

Note V is fixed rate instruments and Promissory Note XIV is a floating rate instrument.

In addition, we also are exposed to currency risk. At December 31, 2007, we had net U.S. dollar equivalent assets/(liabilities) of $9.9 million, $34.4 million and $(70.3) million in Canadian dollars, British pounds and Euros, respectively.

Critical Accounting Estimates

We consider an accounting estimate to be critical if: 1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and 2) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates than we

reasonably could have used in the current period, would have a material impact on our financial condition or results of operations.

Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors. In addition, there are other items within our financial statements that require estimation, but are not deemed critical as defined above. Changes in estimates used in these and other items could have a material impact on our financial statements.

Impairment of Goodwill, Intangible Assets, Long-Lived Assets and Investments in Ventures

Nature of Estimates Required — Goodwill. Goodwill is not amortized, but is subject to periodic assessments of impairment. We test goodwill for impairment annually during the fourth quarter, or when changes in circumstances indicate that the carrying value may not be recoverable. Recoverability of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying value of the reporting unit exceeds its fair value, the second step of the process involves a comparison of the implied fair value of goodwill (based on a purchase price allocation methodology) with its carrying value. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. Restoration of a previously-recognized goodwill impairment loss is not allowed.

Nature of Estimates Required — Intangibles and Long-Lived Assets. Intangibles and long-lived asset groups are tested for recoverability when changes in circumstances indicate the carrying value may not be recoverable. Events that trigger a test for recoverability include material adverse changes in the projected revenues and expenses, significant underperformance relative to historical or projected future operating results, and significant negative industry or economic trends. A test for recoverability also is performed when management has committed to a plan to sell or otherwise dispose of an asset group and the plan is expected to be completed within a year. Recoverability of an asset group is evaluated by comparing its carrying value to the future net undiscounted cash flows expected to be generated by the asset group. If the comparison indicates that the carrying value of an asset group is not recoverable, an impairment loss is recognized. The impairment loss is measured by the amount by which the carrying amount of the asset group exceeds the estimated fair value. When an impairment loss is recognized for assets to be held and used, the adjusted carrying amount of those assets is depreciated over its remaining useful life. Restoration of a previously-recognized long-lived asset impairment loss is not allowed.

Assumptions and Approach Used. We estimate the fair value of a reporting unit, intangible asset, or asset group based on market prices (i.e., the amount for which the reporting unit, intangible asset or asset group could be bought by or sold to a third party), when available. When market prices are not available, we estimate the fair value using the income approachand/or the market approach. The income approach uses cash flow projections. Inherent in our development of cash flow projections are assumptions and estimates derived from a review of our operating results, approved business plans, expected growth rates, cost of capital, and tax rates. We also make certain assumptions about future economic conditions, interest rates, and other market data. Many of the factors used in assessing fair value are outside the control of management, and these assumptions and estimates can change in future periods.

Changes in assumptions or estimates could materially affect the determination of fair value of a reporting unit, intangible asset or asset group and therefore could affect the amount of potential impairment of the asset. The following key assumptions to our income approach include:


	•	Business Projections— We make assumptions regarding the levels of revenue from communities and services. We also make assumptions about our cost levels (e.g., capacity utilization, labor costs, etc.). Finally, we make assumptions about the amount of cash flows that we will receive upon a future sale of the communities using estimated cap rates. These assumptions are key inputs for developing our cash flow projections. These projections are derived using our internal business plans and budgets;

	•	Growth Rate— A growth rate is used to calculate the terminal value of the business, and is added to budgeted earnings before interest, taxes, depreciation and amortization. The growth rate is the expected rate at which earnings are projected to grow beyond the planning period;


	•	Economic Projections— Assumptions regarding general economic conditions are included in and affect our assumptions regarding pricing estimates for our communities and services. These macro-economic assumptions include, but are not limited to, industry projections, inflation, interest rates, price of labor, and foreign currency exchange rates; and

	•	Discount Rates— When measuring a possible impairment, future cash flows are discounted at a rate that is consistent with a weighted average cost of capital for a potential market participant. The weighted average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt holders of a business enterprise.

The market approach is one of the other primary methods used for estimating fair value of a reporting unit, asset, or asset group. This assumption relies on the market value (market capitalization) of companies that are engaged in the same or similar line of business.

As a result of our current projections regarding the daily census and projected revenue for Trinity, we recorded an expense of $56.7 million related to the impairment of Trinity goodwill and intangible assets in 2007. See Item 1, “Business — Significant 2007 Developments — Trinity Hospice”.

In addition, in 2007, 2006, and 2005, we recorded impairment expense of $7.6 million, $15.7 million, and $2.5 million related to two, four, and one communities, respectively, and in 2007, we wrote-off $35.7 million of investments in ventures.

Nature of Estimates Required — Investments in Ventures. We hold a minority equity interest in ventures established to develop or acquire and own senior living communities. Those ventures are generally limited liability companies or limited partnerships. The equity interest in these ventures generally ranges from 10% to 50%.

Our investments in ventures accounted for using the equity and cost methods of accounting are impaired when it is determined that there is “other than a temporary” decline in the fair value as compared to the carrying value of the venture or for equity method investments when individual long-lived assets inside the venture meet the criteria specified above. A commitment to a plan to sell some or all of the assets in a venture would cause a recoverability evaluation for the individual long-lived assets in the venture and possibly the venture itself. Our evaluation of the investment in the venture would be triggered when circumstances indicate that the carrying value may not be recoverable due to loan compliance causes, significant under performance relative to historical or projected future operating performance and significant industry or economic trends.

Assumptions and Approach Used. The assumptions and approach for the evaluation of the individual long-lived assets inside the venture are described above. Our approach for evaluation of an investment in a venture would be based on market prices, when available, or an estimate of the fair value using the market approach. The assumptions and risks related are identical to the disclosure for goodwill, intangible assets and long-lived assets described above.

Loss Reserves for Self-Insured Programs

Nature of Estimates Required. We utilize large deductible blanket insurance programs in order to contain costs for certain lines of insurance risks including workers’ compensation and employers’ liability risks, automobile liability risk, employment practices liability risk and general and professional liability risks (“Self-Insured Risks”). The design and purpose of a large deductible insurance program is to reduce the overall premium and claims costs by internally financing lower cost claims that are more predictable from year to year, while buying insurance only for higher-cost, less predictable claims.

We have self-insured a portion of the Self-Insured Risks through a wholly owned captive insurance subsidiary, Sunrise Senior Living Insurance, Inc. (“SSLII”). SSLII issues policies of insurance to and receives premiums from Sunrise Senior Living, Inc. that are reimbursed through expense allocation to each operated community and us. SSLII pays the costs for each claim above a deductible up to a per claim limit. Third-party insurers are responsible for claim costs above this limit. These third-party insurers carry an A.M. Best rating of A-/VII or better.

We also offer our employees an option to participate in self-insured health and dental plans. The cost of our employee health and dental benefits, net of employee contributions, is shared by us and the communities based on

the respective number of participants working directly either at our corporate headquarters or at the communities. Funds collected are used to pay the actual program costs which include estimated annual claims, third-party administrative fees, network provider fees, communication costs, and other related administrative costs incurred by us. We have aggregate protection which caps the potential liability for both individual and total claims during a plan year. Claims are paid as they are submitted to the plan administrator.

Assumptions and Approach Used for Self-Insured Risks. We record outstanding losses and expenses for the Self-Insured Risks and for our health and dental plans based on the recommendations of an independent actuary and management’s judgment. We believe that the allowance for outstanding losses and expenses is appropriate to cover the ultimate cost of losses incurred at December 31, 2007, but the allowance may ultimately be settled for a greater or lesser amount. Any subsequent changes in estimates are recorded in the period in which they are determined. While a single value is recorded on Sunrise’s balance sheet, loss reserves are based on estimates of future contingent events and as such contain inherent uncertainty. A quantification of this uncertainty would reflect a range of reasonable favorable and unfavorable scenarios. Sunrise’s annual estimated cost for Self-Insured Risks is determined using management judgment including actuarial analyses at various confidence levels. The confidence level is the likelihood that the recorded expense will exceed the ultimate incurred cost.

Sensitivity Analysis for Self-Insured Risks. The recorded liability for Self-Insured Risks was approximately $142.2 million at December 31, 2007. This liability would be approximately $130.1 million if it were based on the “expected value” assuming a 50% confidence level.

We share any revisions to prior estimates with the communities participating in the insurance programs based on their proportionate share of any changes in estimates. Accordingly, the impact of changes in estimates on Sunrise’s income from operations would be much less sensitive than the difference above.

Assumptions and Approach Used for Health and Dental Plans. For our self-insured health and dental plans, we record a liability for outstanding claims and claims that have been incurred but not yet reported. This liability is based on the historical claim reporting lag and payment trends of health insurance claims and is based on the recommendations of an independent actuary. The variability in the liability for unpaid claims including incurred but not yet reported claims is much less significant than the self-insured risks discussed above because the claims are more predictable as they generally are known within 90 days and the high and the low end of the range of estimated cost of individual claims is much closer than the workers’ compensation and employers’ liability risks, automobile liability risk, employment practices liability risk and general and professional liability risks discussed above.

Sensitivity Analysis for Self-Insured Health and Dental Plan Costs. The liability for self-insured incurred but not yet reported claims for the self-insured health and dental plan is included in “Accrued expenses” in the consolidated balance sheets and was $9.9 million and $9.7 million at December 31, 2007 and 2006, respectively. We believe that the liability for outstanding losses and expenses is appropriate to cover the ultimate cost of losses incurred at December 31, 2007, but actual claims may differ. The difference between the recorded liability forself-insured incurred but not yet reported claims for the health and dental plan is $0.5 million higher than the expected value (the liability computed using a 50% confidence level). We record any subsequent changes in estimates in the period in which they are determined and will share with the communities participating in the insurance programs based on their proportionate share of any changes in estimates.

Variable Interest Entities

Nature of Estimates Required. We hold a minority equity interest in ventures established to develop or acquire and own senior living communities. Those ventures are generally limited liability companies or limited partnerships. Our equity interest in these ventures generally ranges from 10% to 50%.

We review all of our ventures to determine if they are variable interest entities (“VIEs”). If a venture meets the requirements and is a VIE, we must then determine if we are the primary beneficiary of the VIE. Estimates are required for the computation and probability of estimated cash flows, expected losses and expected residual returns of the VIE to determine if we are the primary beneficiary of the VIE and therefore required to consolidate the venture.

Assumptions. In determining whether we are the primary beneficiary of a VIE, we must make assumptions regarding cash flows of the entity, expected loss levels and expected residual return levels. The probability of various cash flow possibilities is determined from business plans, budgets and entity history if available. These cash flows are discounted at the risk-free interest rate. Computations are then made based on the estimated cash flows of the expected losses and residual returns to determine if the entity is a variable interest entity, and, if so, to determine the primary beneficiary. Changes in estimated cash flows and the probability factors could change the determination of the primary beneficiary and whether there is a requirement to consolidate a VIE.

Valuation of Deferred Tax Assets

Nature of Estimates Required. Deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences that exist between the financial statement carrying value of assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards on a taxing jurisdiction basis. We measure deferred tax assets and liabilities using enacted tax rates that will apply in the years in which we expect the temporary differences to be recovered or paid.

SFAS No. 109,Accounting for Income Taxes(“SFAS No. 109”),requires a reduction of the carrying amounts of deferred tax assets by recording a valuation allowance if, based on the available evidence, it is more likely than not (defined by SFAS No. 109 as a likelihood of more than 50 percent) such assets will not be realized. The valuation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in our financial statements or tax returns and future profitability. Our accounting for deferred tax consequences represents our best estimate of those future events. Changes in our current estimates, due to unanticipated events or otherwise, could have a material impact on our financial condition and results of operations.

Assumptions and Approach Used. In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. If, based on the weight of available evidence, it is more likely than not the deferred tax assets will not be realized, we record a valuation allowance. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. As such, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses. SFAS No. 109 states that a cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed against deferred tax assets.

This assessment, which is completed on a taxing jurisdiction basis, takes into account a number of types of evidence, including the following:


	•	Nature, frequency, and severity of current and cumulative financial reporting losses— A pattern of objectively measured recent financial reporting losses is a source of negative evidence. In certain circumstances, historical information may not be as relevant due to changed circumstances;

	•	Sources of future taxable income — Future reversals of existing temporary differences are verifiable positive evidence. Projections of future taxable income exclusive of reversing temporary differences are a source of positive evidence only when the projections are combined with a history of recent profits and can be reasonably estimated; and

	•	Tax planning strategies — If necessary and available, tax planning strategies would be implemented to accelerate taxable amounts to utilize expiring carryforwards. These strategies would be a source of additional positive evidence and, depending on their nature, could be heavily weighted.

See Note 15 of the Notes to the Consolidated Financial Statements for more information regarding deferred tax assets.

A return to profitability in certain of our operations would result in a reversal of a portion of the valuation allowance relating to realized deferred tax assets, but we may not change our judgment of the need for a full valuation allowance on our remaining deferred tax assets. In that case, it is likely that we would reverse some or all of the remaining deferred tax asset valuation allowance. However, since we have heavily weighted recent financial

reporting losses and given no weight to subjectively determined projections of future taxable income exclusive of reversing temporary differences, we have concluded as of December 31, 2007 and 2006 that it is more likely than not certain deferred tax assets will not be realized (in whole or in part), and accordingly, we have recorded a full valuation allowance against the net deferred tax assets.

At December 31, 2007 and 2006, our deferred tax assets, net of the valuation allowances of $12.4 million and $13.1 million, respectively, were $137.3 million and $124.5 million, respectively. These net deferred tax assets related to operations where we believed it was more likely than not that these net deferred tax assets would be realized through future taxable earnings. Accordingly, no valuation allowance has been established on our remaining net deferred tax assets. We will continue to assess the need for a valuation allowance in the future. Changes in our current estimates, due to unanticipated events or otherwise, could have a material impact on our financial condition and results of operations.

Liability for Possible Tax Contingencies

Liabilities for tax contingencies are recognized based on the requirements of FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN 48 is an interpretation of FASB Statement No. 109 regarding the calculation and disclosure of reserves for uncertain tax positions. FIN 48 requires us to analyze the technical merits of our tax positions and determine the likelihood that these positions will be sustained if they were ever examined by the taxing authorities. If we determine that it is unlikely that our tax positions will be sustained, a corresponding liability is created and the tax benefit of such position is reduced for financial reporting purposes.

Evaluation and Nature of Estimates Required. The evaluation of a tax position in accordance with FIN 48 is a two-step process. The first step in the evaluation process is recognition. The enterprise determines whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the enterprise should presume that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information.

The second step in the evaluation process is measurement. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which:

(a) the threshold is met (for example, by virtue of another taxpayer’s favorable court decision);

(b) the position is “effectively settled” by virtue of the closing of an examination where the likelihood of the taxing authority reopening the examination of that position is remote; or

Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met.

Interest and Penalties. FIN 48 requires us to accrue interest and penalties that, under relevant tax law, we would incur if the uncertain tax positions ultimately were not sustained. Accordingly, under FIN 48, interest would start to accrue for financial statement purposes in the period in which it would begin accruing under relevant tax law, and the amount of interest expense to be recognized would be computed by applying the applicable statutory rate of interest to the difference between the tax position recognized in accordance with FIN 48 and the amount previously taken or expected to be taken in a tax return. Penalties would be accrued in the first period in which the position was taken on a tax return that would give rise to the penalty.

Assumptions. In determining whether a tax benefit can be recorded, we must make assessments of a position’s sustainability and the likelihood of ultimate settlement with a taxing authority. Changes in our assessments would cause a change in our recorded position and changes could be significant. As of December 31, 2007, we had a recorded liability for possible losses on uncertain tax positions of $14.6 million.

Accounting for Financial Guarantees

When we enter into guarantees in connection with the sale of real estate, we may be prevented from initially either accounting for the transaction as a sale of an asset or recognizing in earnings the profit from the sale transaction. For guarantees that are not entered into in conjunction with the sale of real estate, we recognize at the inception of a guarantee or the date of modification, a liability for the fair value of the obligation undertaken in issuing a guarantee which require us to make various assumptions to determine the fair value. On a quarterly basis, we review and evaluate the estimated liability based upon operating results and the terms of the guarantee. If it is probable that we will be required to fund additional amounts than previously estimated, a loss is recorded for that contingent loss. Fundings that are recoverable as a loan from a venture are considered in the determination of the contingent loss recorded. Loan amounts are evaluated for impairment at inception and then quarterly.

In 2006, we recorded a loss of $50.0 million for our expected loss on the operating deficit guarantees we have for our German communities and a loss of $22.0 million for our expected loss on a guarantee of a specified level of net operating income to the Fountains venture. Due to continued deteriorating operating performance of our communities in Germany in 2007 we revised our estimated liability for operating deficit guarantees and as a result, we recorded additional expense of $16.0 million. Because our loss on the operating deficit guarantees for our German communities is based on projections spanning numerous years it is highly susceptible to future adverse change and such changes could have a material impact on our financial condition and results of operations.

Assumptions and Approach Used. For the German operating deficit guarantees, we calculated the estimated loss on financial guarantees based on projected operating losses and an assumed sale of the community after the operations have stabilized. The assumed sale value uses estimated cap rates. For the Fountains guarantee of net operating income, we calculated the estimated loss based on projected cash flows during the remaining term of the guarantee. Inherent in our development of cash flow projections are assumptions and estimates derived from a review of our operating results, approved business plans, expected growth rates, cost of capital, and tax rates. We also make certain assumptions about future economic conditions, interest rates, and other market data. Many of the factors used in assessing fair value are outside the control of management, and these assumptions and estimates can change in future periods.

Changes in assumptions or estimates could materially affect the determination of fair value of an asset. The following key assumptions to our income approach include:


	•	Business Projections — We make assumptions regarding the levels of revenue from communities and services. We also make assumptions about our cost levels (e.g., capacity utilization, labor costs, etc.). Finally, we make assumptions about the amount of cash flows that we will receive upon a future sale of the communities using estimated cap rates. These assumptions are key inputs for developing our cash flow projections. These projections are derived using our internal business plans and budgets;

	•	Growth Rate — A growth rate is used to calculate the terminal value of the business, and is added to budgeted earnings before interest, taxes, depreciation and amortization. The growth rate is the expected rate at which earnings are projected to grow beyond the planning period;

	•	Economic Projections — Assumptions regarding general economic conditions are included in and affect our assumptions regarding pricing estimates for our communities and services. These macro-economic assumptions include, but are not limited to, industry projections, inflation, interest rates, price of labor, and foreign currency exchange rates; and

	•	Discount Rates — When measuring a possible loss, future cash flows are discounted at a rate that is consistent with a weighted average cost of capital for a potential market participant. The weighted average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt holders of a business enterprise.

In 2006, we recorded a loss of $17.2 million for our expected loss due to the completion guarantee for our condominium project under construction. Due to continued deterioration of the condominium project in 2007, we revised our estimated liability for the completion guarantee and as a result, we recorded additional expense of

$6.0 million. Accordingly, changes in our current estimates, due to unanticipated events or otherwise, could have a material impact on our financial condition and results of operations.

Assumptions and Approach Used in Calculating our Loss on Completion Guarantees. The computation of our expected loss on our completion guarantee involves the use of various estimating techniques to determine total estimated project costs at completion. Contract estimates involve various assumptions and projections relative to the outcome of future events over a period of time including the nature and complexity of the work to be performed, the cost and availability of materials and the impact of delays. These estimates are based on our best judgment. A significant change in one or more of these estimates could affect the ultimate cost of our condominium development project. We review our contract estimates at least quarterly to assess revisions in contract values and estimated costs at completion. We have recorded our best estimate of our loss but it is reasonably possible that our possible loss could exceed amounts recorded.

Litigation

Litigation is subject to uncertainties and the outcome of individual litigated matters is not predictable with assurance. Various legal actions, claims and proceedings are pending against us, some for specific matters describe in Note 18 to the financial statements and others arising in the ordinary course of business. We have established loss provisions for matters in which losses are probable and can be reasonably estimated. In other instances, we are not able to make a reasonable estimate of any liability because of uncertainties related to the outcomeand/or the amount or range of losses. At December 31, 2007, we have recorded an accrual of $6.0 million for our estimated exposure to loss related to the Trinity OIG Investigation andqui tamaction discussed in Note 18 to the Consolidated Financial Statements. We have not recorded any loss related to our possible exposure to shareholder litigation as a potential loss is not probable or estimable. Changes in our current estimates, due to unanticipated events or otherwise, could have a material impact on our financial condition and results of operations.

Impact of Changes in Accounting Standards

In July 2006, the FASB issued FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes(“FIN 48”). FIN 48 is an interpretation of FASB Statement No. 109,Accounting for Income Taxes, and it seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We adopted FIN 48 as of January 1, 2007, and applied its provisions to all tax positions upon initial adoption. Only tax positions that meet a “more likely than not” threshold at the effective date may be recognized or continue to be recognized. There was no adjustment to our recorded tax liability as a result of adopting FIN 48.

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements (“SFAS 157”). This standard defines fair value, establishes a methodology for measuring fair value and expands the required disclosure for fair value measurements. SFAS 157 is effective for Sunrise as of January 1, 2009. Provisions of SFAS 157 are required to be applied prospectively as of the beginning of the first fiscal year in which SFAS 157 is applied. We are evaluating the impact that SFAS 157 will have on its financial statements.

In November 2006, the Emerging Issues Task Force of FASB (“EITF”) reached a consensus on EITF IssueNo. 06-8,“Applicability of the Assessment of a Buyer’s Continuing Investment under FASB Statement No. 66, Accounting for Sales of Real Estate, for Sales of Condominiums”(“EITF 06-8”).EITF 06-8 requires condominium sales to meet the continuing investment criterion in SFAS No. 66 in order for profit to be recognized under the percentage of completion method.EITF 06-8 was effective for us at January 1, 2007. We are currently developing one condominium project for an unconsolidated venture. The venture has appliedEITF 06-8.

period. SFAS 159 does not affect any existing pronouncements that require assets and liabilities to be carried at fair value, nor does it eliminate any existing disclosure requirements. This standard is effective for Sunrise as of January 1, 2008. We have not chosen to measure any financial instruments at fair value.

In December 2007, the FASB issued SFAS No. 141 (revised 2007),Business Combinations(“SFAS 141R”). SFAS 141R requires most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at “full fair value”. The standard is effective for us as of January 1, 2009, and earlier adoption is prohibited.

On December 4, 2007, the FASB issued SFAS No. 160,Non-controlling Interests in Consolidated Financial Statements — an Amendment of ARB No. 51 (“SFAS No. 160”). SFAS No. 160 establishes new accounting and reporting standards for a non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a non-controlling interest (minority interest) as equity in the consolidated financial statements separate from the parent’s equity. The amount of net income attributable to the non-controlling interest will be included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the non-controlling equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its non-controlling interest. SFAS No. 160 is effective for us as of January 1, 2009. We are currently evaluating the impact that SFAS No. 160 will have on our financial statements.

Impact of Inflation

Management fees from communities operated by us for third parties and resident and ancillary fees from owned senior living communities are significant sources of our revenue. These revenues are affected by daily resident fee rates and community occupancy rates. The rates charged for the delivery of senior living services are highly dependent upon local market conditions and the competitive environment in which the communities operate. In addition, employee compensation expense is the principal cost element of community operations. Employee compensation, including salary and benefit increases and the hiring of additional staff to support our growth initiatives, have previously had a negative impact on operating margins and may again do so in the foreseeable future.

Substantially all of our resident agreements are for terms of one year, but are terminable by the resident at any time upon 30 days notice, and allow, at the time of renewal, for adjustments in the daily fees payable, and thus may enable us to seek increases in daily fees due to inflation or other factors. Any increase would be subject to market and competitive conditions and could result in a decrease in occupancy of our communities. We believe, however, that the short-term nature of our resident agreements generally serves to reduce the risk to us of the adverse effect of inflation. There can be no assurance that resident and ancillary fees will increase or that costs will not increase due to inflation or other causes.


	Page

Item 8. Financial Statements and Supplementary Data

Sunrise Senior Living, Inc.
Report of Independent Registered Public Accounting Firm		35
Consolidated Balance Sheets		36
Consolidated Statements of Income		37
Consolidated Statements of Changes in Stockholders’ Equity		38
Consolidated Statements of Cash Flows		39
Notes to Consolidated Financial Statements		40
PS UK Investment (Jersey) LP
Report of Independent Auditors		95
Consolidated Income Statement		96
Consolidated Balance Sheet		97
Consolidated Statement of Changes in Partners Capital		98
Consolidated Statement of Cash Flows		99
Notes to Consolidated Financial Statements		100
AL US Development Venture, LLC
Independent Auditors’ Report		121
Consolidated Balance Sheets		122
Consolidated Statements of Operations		123
Consolidated Statements of Changes in Members’ Capital (Deficit)		124
Consolidated Statements of Cash Flows		125
Notes to Consolidated Financial Statements		126
Sunrise First Assisted Living Holdings, LLC
Independent Auditors’ Report		132
Consolidated Balance Sheets		133
Consolidated Statements of Operations		134
Consolidated Statements of Changes in Members’ (Deficit) Capital		135
Consolidated Statements of Cash Flows		136
Notes to Consolidated Financial Statements		137
Sunrise Second Assisted Living Holdings, LLC
Independent Auditors’ Report		142
Consolidated Balance Sheets		143
Consolidated Statements of Operations		144
Consolidated Statements of Changes in Members’ (Deficit) Capital		145
Consolidated Statements of Cash Flows		146
Notes to Consolidated Financial Statements		147
Metropolitan Senior Housing, LLC
Report of Independent Auditors		152
Consolidated Balance Sheets		153
Consolidated Statements of Operations		154
Consolidated Statements of Changes in Members’ (Deficit) Capital		155
Consolidated Statements of Cash Flows		156
Notes to Consolidated Financial Statements		157
PS Germany Investment (Jersey) LP
Report of Independent Auditors		164
Consolidated Income Statement		165
Consolidated Balance Sheet		166
Consolidated Statement of Changes in Partners’ Capital		167
Consolidated Statement of Cash Flows		168
Notes to Consolidated Financial Statements		169
Sunrise Aston Gardens Venture, LLC*
Sunrise IV Senior Living Holdings*


*		To be filed by amendment as soon as these financial statements become available. See Item 1B, “Unresolved Staff Comments”.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Stockholders and Board of Directors
Sunrise Senior Living, Inc.

We have audited the accompanying consolidated balance sheets of Sunrise Senior Living, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sunrise Senior Living, Inc. as of December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 3 to the accompanying consolidated financial statements, the Company has restated its financial statements for the years ended December 31, 2006 and 2005 and has restated its statement of cash flows for the year ended December 31, 2007.

As discussed in Note 2 to the accompanying consolidated financial statements, the Company adopted Financial Accounting Standards Board Interpretation No. 48,Accounting for Uncertainty in Income Taxesand EITF Issue No. 06-8,Applicability of the Assessment of a Buyer’s Continuing Investment under FASB Statement No. 66, Accounting for Sales of Real Estate for Sales of Condominiums,effective January 1, 2007.

Also as discussed in Note 2 to the accompanying consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123(R),Share-Based Payment,effective January 1, 2006.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Sunrise Senior Living, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 30, 2008 expressed an adverse opinion thereon.

/s/ Ernst & Young LLP

McLean, Virginia
July 30, 2008, except for Paragraph 1
of Note 3, as to which the date is
October 15, 2008

SUNRISE SENIOR LIVING, INC.

CONSOLIDATED BALANCE SHEETS


	December 31,
(In thousands, except per share and share amounts)	2007		2006
			(Restated)

ASSETS
Current Assets:
Cash and cash equivalents	$	138,212	$	81,990
Accounts receivable, net		76,909		75,055
Notes receivable		—		4,174
Income taxes receivable		63,624		30,873
Due from unconsolidated communities, net		61,854		80,729
Deferred income taxes, net		33,567		29,998
Restricted cash		61,999		34,293
Prepaid insurance		23,720		5,485
Prepaid expenses and other current assets		70,079		19,401

Total current assets		529,964		361,998
Property and equipment, net		656,211		609,385
Property and equipment subject to a sales contract, net		—		193,158
Property and equipment subject to financing, net		58,871		62,520
Notes receivable		9,429		17,631
Due from unconsolidated communities		19,555		24,959
Intangible assets, net		83,769		103,771
Goodwill		169,736		218,015
Investments in unconsolidated communities		97,173		104,272
Restricted cash		165,386		143,760
Other assets, net		8,503		8,832

Total assets	$	1,798,597	$	1,848,301

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current maturities of long-term debt	$	122,541	$	91,923
Outstanding draws on bank credit facility		100,000		50,000
Accounts payable and accrued expenses		275,362		216,087
Due to unconsolidated communities		37,344		5,792
Deferred revenue		9,285		8,703
Entrance fees		34,512		38,098
Self-insurance liabilities		67,267		41,379

Total current liabilities		646,311		451,982
Long-term debt, less current maturities		31,347		48,682
Deposits related to properties subject to a sales contract		—		240,367
Liabilities related to properties accounted for under the financing method		54,317		66,283
Investment accounted for under the profit-sharing method		51,377		29,148
Guarantee liabilities		65,814		75,805
Self-insurance liabilities		74,971		72,993
Deferred gains on the sale of real estate and deferred revenues		74,367		51,958
Deferred income tax liabilities		82,605		78,632
Other long-term liabilities, net		133,717		85,228

Total liabilities		1,214,826		1,201,078

Minority interests		10,208		16,515
Stockholders’ Equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding		—		—
Common stock, $0.01 par value, 120,000,000 shares authorized, 50,556,925 and 50,572,092 shares issued and outstanding, net of 103,696 and 27,197 treasury shares, at December 31, 2007 and 2006, respectively		506		506
Additional paid-in capital		452,640		445,275
Retained earnings		112,123		182,398
Accumulated other comprehensive income		8,294		2,529

Total stockholders’ equity		573,563		630,708

Commitments and contingencies
Total liabilities and stockholders’ equity	$	1,798,597	$	1,848,301

See accompanying notes.

SUNRISE SENIOR LIVING, INC.

CONSOLIDATED STATEMENTS OF INCOME


	Year Ended December 31,
(In thousands, except per share amounts)	2007			2006			2005
				(Restated)			(Restated)

Operating revenue:
Management fees	$	127,830		$	117,228		$	104,823
Buyout fees		1,626			134,730			83,036
Professional fees from development, marketing and other		38,855			28,553			24,920
Resident fees for consolidated communities		402,396			381,709			341,610
Hospice and other ancillary services		125,796			76,882			44,641
Reimbursed contract services		956,047			911,979			911,992

Total operating revenues		1,652,550			1,651,081			1,511,022
Operating expenses:
Development and venture expense		79,203			69,145			41,064
Community expense for consolidated communities		290,203			276,833			251,058
Hospice and other ancillary services expense		134,634			74,767			45,051
Community lease expense		68,994			61,991			57,946
General and administrative		187,325			131,473			106,601
Accounting Restatement and Special Independent Committee Inquiry		51,707			2,600			—
Loss on financial guarantees and other contracts		22,005			89,676			—
Provision for doubtful accounts		9,564			14,632			1,675
Impairment of owned communities		7,641			15,730			2,472
Impairment of goodwill and intangible assets		56,729			—			—
Depreciation and amortization		55,280			48,648			42,981
Write-off of abandoned development projects		28,430			1,329			902
Write-off of unamortized contract costs		—			25,359			14,609
Reimbursed contract services		956,047			911,979			911,992

Total operating expenses		1,947,762			1,724,162			1,476,351

(Loss) income from operations		(295,212	)		(73,081	)		34,671
Other non-operating income (expense):
Interest income		9,894			9,577			6,231
Interest expense		(6,647	)		(6,204	)		(11,882	)
(Loss) gain on investments		—			(5,610	)		2,036
Other (expense) income		(6,089	)		6,706			3,105

Total other non-operating (expense) income		(2,842	)		4,469			(510	)
Gain on the sale and development of real estate and equity interests		105,081			51,347			81,723
Sunrise’s share of earnings and return on investment in unconsolidated communities		108,947			43,702			13,472
Gain (loss) from investments accounted for under the profit-sharing method		22			(857	)		(857	)
Minority interests		4,470			6,916			6,721

(Loss) income before provision for income taxes		(79,534	)		32,496			135,220
Benefit from (provision for) income taxes		9,259			(17,212	)		(52,156	)

Net (loss) income	$	(70,275	)	$	15,284		$	83,064

Earnings per share data:
Basic net (loss) income per common share	$	(1.41	)	$	0.31		$	2.00
Diluted net (loss) income per common share		(1.41	)		0.30			1.74

See accompanying notes.

SUNRISE SENIOR LIVING, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


																Accumulated
	Shares of			Common			Additional									Other
	Common			Stock			Paid-in			Retained			Deferred			Comprehensive
(In thousands)	Stock			Amount			Capital			Earnings			Compensation			Income (Loss)			Total

Balance at January 1, 2005 (As previously stated)		41,138		$	412		$	279,116		$	91,545		$	(4,535	)	$	3,165		$	369,703
Effect of restatement											(7,495	)								(7,495	)

Balance at January 1, 2005 (Restated)		41,138			412			279,116			84,050			(4,535	)		3,165			362,208
Net income (Restated)		—			—			—			83,064			—			—			83,064
Foreign currency translation loss, net of tax		—			—			—			—			—			(3,231	)		(3,231	)
Sunrise’s share of investee’s other comprehensive loss		—			—			—			—			—			(503	)		(503	)

Total comprehensive income (Restated)		—			—			—			—			—			—			79,330

Issuance of common stock to employees		2,248			22			31,307			—			—			—			31,329
Repurchase of common stock		(348	)		(3	)		(8,709	)		—			—			—			(8,712	)
Conversion of convertible debt		3			—			55			—			—			—			55
Issuance of restricted stock		412			4			10,995			—			(10,997	)		—			2
Amortization of restricted stock		—			—			—			—			3,209			—			3,209
Tax effect of stock-based compensation		—			—			13,443			—			—			—			13,443

Balance at December 31, 2005 (Restated)		43,453			435			326,207			167,114			(12,323	)		(569	)		480,864
Net income (Restated)		—			—			—			15,284			—			—			15,284
Foreign currency translation income, net of tax		—			—			—			—			—			2,205			2,205
Sunrise’s share of investee’s other comprehensive income		—			—			—			—			—			893			893

Total comprehensive income (Restated)		—			—			—			—			—			—			18,382

Issuance of common stock to employees		374			3			5,161			—			—			—			5,164
Conversion of convertible debt		6,700			67			117,917			—			—			—			117,984
Issuance of restricted stock		45			1			532			—			—			—			533
Forfeiture of restricted stock		—			—			(5	)		—			—			—			(5	)
Adoption of SFAS 123R		—			—			(12,323	)		—			12,323			—			—
Stock-based compensation expense		—			—			5,846			—			—			—			5,846
Tax effect of stock-based compensation		—			—			1,940			—			—			—			1,940

Balance at December 31, 2006 (Restated)		50,572			506			445,275			182,398			—			2,529			630,708
Net loss		—			—			—			(70,275	)		—			—			(70,275	)
Foreign currency translation income, net of tax		—			—			—			—			—			5,865			5,865
Sunrise’s share of investee’s other comprehensive income		—			—			—			—			—			(100	)		(100	)

Total comprehensive loss		—			—			—			—			—			—			(64,510	)

Issuance of restricted stock		88			1			—			—			—			—			1
Forfeiture or surrender of restricted stock		(103	)		(1	)		(1,818	)		—			—			—			(1,819	)
Stock-based compensation expense		—			—			7,020			—			—			—			7,020
Tax effect of stock-based compensation		—			—			2,163			—			—			—			2,163

Balance at December 31, 2007		50,557		$	506		$	452,640		$	112,123		$	—		$	8,294		$	573,563

See accompanying notes.

SUNRISE SENIOR LIVING, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Year Ended December 31,
	2007			2006			2005
(In thousands)	(Restated)			(Restated)			(Restated)

Operating activities
Net (loss) income	$	(70,275	)	$	15,284		$	83,064
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Gain on sale and development of real estate and equity interests		(105,081	)		(51,347	)		(81,723	)
(Gain) loss from investments accounted for under the profit-sharing method		(22	)		857			857
Gain from application of financing method		—			(1,155	)		(528	)
Gain on sale of investment in Sunrise REIT debentures		—			—			(2,036	)
Loss on sale of investments		—			5,610			—
Impairment of goodwill and other intangible assets		56,729			—			—
Write-off of abandoned development projects		28,430			1,329			902
Provision for doubtful accounts		9,564			14,632			1,675
Provision for deferred income taxes		733			(3,853	)		29,357
Impairment of long-lived assets		7,641			15,730			2,472
Loss on financial guarantees and other contracts		22,005			89,676			—
Sunrise’s share of earnings and return on investment in unconsolidated communities		(108,947	)		(11,997	)		(13,073	)
Distributions of earnings from unconsolidated communities		168,322			66,381			26,545
Minority interest in income/loss of controlled entities		(4,470	)		(6,916	)		(6,721	)
Depreciation and amortization		55,280			48,648			42,981
Write-off of unamortized contract costs		—			25,359			14,609
Amortization of financing costs		1,051			1,404			1,483
Stock-based compensation		7,020			6,463			5,465
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable		(12,388	)		(23,242	)		3,850
Due from unconsolidated communities		28,111			(83,451	)		(6,279	)
Prepaid expenses and other current assets		(60,282	)		(4,041	)		(3,425	)
Captive insurance restricted cash		(32,930	)		(48,840	)		(28,130	)
Other assets		(35,666	)		6,694			(6,189	)
Increase (decrease) in:
Accounts payable, accrued expenses and other liabilities		140,589			22,204			68,820
Entrance fees		(3,586	)		913			1,095
Self-insurance liabilities		12,866			30,186			21,885
Guarantee liabilities		(5,829	)		—			—
Deferred revenue and gains on the sale of real estate		29,621			983			33,034

Net cash provided by operating activities		128,486			117,511			189,990

Investing activities
Capital expenditures		(245,523	)		(188,655	)		(132,857	)
Acquisitions of business assets		(49,917	)		(103,491	)		(75,532	)
Dispositions of property		60,387			83,290			56,246
Cash obtained in acquisition of Greystone		—			—			10,922
Change in restricted cash		(21,792	)		(11,428	)		(15,701	)
Purchases of short-term investments		(448,900	)		(172,575	)		(62,825	)
Proceeds from short-term investments		448,900			172,575			77,725
Increase in investments and notes receivable		(183,314	)		(343,286	)		(158,697	)
Proceeds from investments and notes receivable		220,312			376,061			187,042
Investments in unconsolidated communities		(29,297	)		(77,371	)		(64,080	)
Distributions of capital from unconsolidated communities		601			5,954			9,273

Net cash used in investing activities		(248,543	)		(258,926	)		(168,484	)

Financing activities
Net proceeds from exercised options		—			4			29,065
Additional borrowings of long-term debt		243,564			154,140			149,539
Repayment of long-term debt		(66,105	)		(90,781	)		(137,296	)
Contribution from minority interests		—			15,669			5,000
Distributions to minority interests		(1,180	)		(630	)		(1,021	)
Financing costs paid		—			(75	)		(2,622	)
Repurchases of common stock		—			—			(8,712	)

Net cash provided by financing activities		176,279			78,327			33,953

Net increase (decrease) in cash and cash equivalents		56,222			(63,088	)		55,459
Cash and cash equivalents at beginning of year		81,990			145,078			89,619

Cash and cash equivalents at end of year	$	138,212		$	81,990		$	145,078

See accompanying notes.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements


1.	Organization and Presentation

Organization

We are a provider of senior living services in the United States, Canada, the United Kingdom and Germany. We were incorporated in Delaware on December 14, 1994.

At December 31, 2007, we operated 439 communities, including 402 communities in the United States, 12 communities in Canada, 17 communities in the United Kingdom and eight communities in Germany, with a total resident capacity of approximately 54,000. Our communities offer a full range of personalized senior living services, from independent living, to assisted living, to care for individuals with Alzheimer’s and other forms of memory loss, to nursing, rehabilitative care and hospice services. We develop senior living communities for ourself, for unconsolidated ventures in which we retain an ownership interest and for third parties.

Basis of Presentation

The consolidated financial statements which are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) include our wholly owned and controlled subsidiaries. Variable interest entities (“VIEs”) in which we have an interest have been consolidated when we have been identified as the primary beneficiary. Commencing with our adoption ofEITF 04-5,Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights (“EITF 04-5”), entities in which we hold the managing member or general partner interest are consolidated unless the other members or partners have either (1) the substantive ability to dissolve the entity or otherwise remove us as managing member or general partner without cause or (2) substantive participating rights, which provide the other partner or member with the ability to effectively participate in the significant decisions that would be expected to be made in the ordinary course of business.EITF 04-5 was effective June 29, 2005 for new or modified limited partnership arrangements and effective January 1, 2006 for existing limited partnership arrangements. There are no previously unconsolidated entities that required consolidation as a result of adoption ofEITF 04-5. Investments in ventures in which we have the ability to exercise significant influence but do not have control over are accounted for using the equity method. All intercompany transactions and balances have been eliminated in consolidation.


2.	Significant Accounting Policies

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

Cash and Cash Equivalents

We consider cash and cash equivalents to include currency on hand, demand deposits, and all highly liquid investments with a maturity of three months or less at the date of purchase.

Restricted Cash

We utilize large deductible blanket insurance programs in order to contain costs for certain lines of insurance risks including workers’ compensation and employers’ liability risks, automobile liability risk, employment practices liability risk and general and professional liability risks (“Self-Insured Risks”). We have self-insured a portion of the Self-Insured Risks through our wholly owned captive insurance subsidiary, Sunrise Senior Living Insurance, Inc. (the “Sunrise Captive”). The Sunrise Captive issues policies of insurance to and receives premiums from us that are reimbursed through expense allocations to each operated community and us. The Sunrise Captive pays the costs for each claim above a deductible up to a per claim limit. Cash held by Sunrise Captive of $128.2 million and $95.3 million at December 31, 2007 and 2006, respectively, is available to pay claims. The

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

earnings from the investment of the cash of Sunrise Captive are used to reduce future costs of and pay the liabilities of Sunrise Captive. Interest income in Sunrise Captive was $3.5 million, $2.1 million and $0.6 million for 2007, 2006 and 2005, respectively. Restricted cash also includes escrow accounts related to other insurance programs, land deposits, a bonus program and other items.

Allowance for Doubtful Accounts

We provide an allowance for doubtful accounts on our outstanding receivables based on an analysis of collectibility, including our collection history and generally do not require collateral to support outstanding balances.

Notes Receivable

We on occasion may provide financing to unconsolidated ventures at negotiated interest rates. These loans are included in “Notes receivable” in the consolidated balance sheets. The collectibility of these notes is monitored based on the current performance of the ventures, the budgets and projections for future performance. If circumstances were to suggest that any amounts with respect to these notes would be uncollectible, we would establish a reserve to record the notes at their net realizable value. Generally we do not require collateral to support outstanding balances.

Due from Unconsolidated Communities

Due from unconsolidated communities represents amounts due from unconsolidated ventures for development and management costs, including development fees, operating costs such as payroll and insurance costs, and management fees. Development costs are reimbursed when third-party financing is obtained by the venture. Operating costs are generally reimbursed within thirty days.

Property and Equipment

Property and equipment is recorded at cost. Depreciation is computed using the straight-line method over the lesser of the estimated useful lives of the related assets or the remaining lease term. Repairs and maintenance are charged to expense as incurred.

In conjunction with the acquisition of land and the development and construction of communities, preacquisition costs are expensed as incurred until we determine that the costs are directly identifiable with a specific property. The costs would then be capitalized if the property was already acquired or the acquisition of the property is probable. Upon acquisition of the land, we commence capitalization of all direct and indirect project costs clearly associated with the development and construction of the community. We expense indirect costs as incurred that are not clearly related to projects. We charge direct costs to the projects to which they relate. If a project is abandoned, we expense any costs previously capitalized. We capitalize the cost of the corporate development department based on the time employees devote to each project. We capitalize interest as described in “Capitalization of Interest Related to Development Projects” and other carrying costs to the project and the capitalization period continues until the asset is ready for its intended use or is abandoned.

We capitalize the cost of tangible assets used throughout the selling process and other direct costs, provided that their recovery is reasonably expected from future sales.

We review the carrying amounts of long-lived assets for impairment when indicators of impairment are identified. If the carrying amount of the long-lived asset (group) exceeds the undiscounted expected cash flows that are directly associated with the use and eventual disposition of the asset (group) we record an impairment charge to the extent the carrying amount of the asset exceeds the fair value of the assets. We determine the fair value of long-lived assets based upon valuation techniques that include prices for similar assets (group).

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

Real Estate Sales

We account for sales of real estate in accordance with FASB Statement No. 66,Accounting for Sales of Real Estate(“SFAS 66”). For sales transactions meeting the requirements of SFAS 66 for full accrual profit recognition, the related assets and liabilities are removed from the balance sheet and the gain or loss is recorded in the period the transaction closes. For sales transactions that do not meet the criteria for full accrual profit recognition, we account for the transactions in accordance with the methods specified in SFAS 66. For sales transactions that do not contain continuing involvement following the sale or if the continuing involvement with the property is contractually limited by the terms of the sales contract, profit is recognized at the time of sale. This profit is then reduced by the maximum exposure to loss related to the contractually limited continuing involvement. Sales to ventures in which we have an equity interest are accounted for in accordance with the partial sale accounting provisions as set forth in SFAS 66.

For sales transactions that do not meet the full accrual sale criteria as set forth in SFAS 66, we evaluate the nature of the continuing involvement and account for the transaction under an alternate method of accounting rather than full accrual sale, based on the nature and extent of the continuing involvement. Some transactions may have numerous forms of continuing involvement. In those cases, we determine which method is most appropriate based on the substance of the transaction.

Venture agreements may contain provisions which provide us with an option or obligation to repurchase the property from the venture at a fixed price that is higher than the sales price. In these instances, the financing method of accounting is followed. Under the financing method of accounting, we record the proceeds received from the buyer as a financing obligation and continue to keep the property and related accounts recorded on our books. The results of operations of the property, net of expenses other than depreciation (net operating income), is reflected as “interest expense” on the financing obligation. Because the transaction includes an option or obligation to repurchase the asset at a higher price, interest is recorded to accrete the liability to the repurchase price. Depreciation expense continues to be recorded as a period expense. All cash paid or received by us is recorded as an adjustment to the financing obligation. If the repurchase option or obligation expires and all other criteria for profit recognition under the full accrual method have been met, a sale is recorded and gain is recognized. The assets are recorded in “Property and equipment subject to financing, net” in the consolidated balance sheets, and the liabilities are recorded in “Liabilities related to properties accounted for under the financing method” in the consolidated balance sheets.

In transactions accounted for as partial sales, we determine if the buyer of the majority equity interest in the venture was provided a preference as to cash flows in either an operating or a capital waterfall. If a cash flow preference has been provided, profit, including our development fee, is only recognizable to the extent that proceeds from the sale of the majority equity interest exceed costs related to the entire property.

We also may provide a guarantee to support the operations of the properties. If the guarantees are for an extended period of time, we apply the profit-sharing method and the property remains on the books, net of any cash proceeds received from the buyer. If support is required for a limited period of time, sale accounting is achieved and profit on the sale may begin to be recognized on the basis of performance of the services required when there is reasonable assurance that future operating revenues will cover operating expenses and debt service.

Under the profit-sharing method, the property portion of our net investment is amortized over the life of the property. Results of operations of the communities before depreciation, interest and fees paid to us is recorded as “Loss from investments accounted for under the profit-sharing method” in the consolidated statements of income. The net income from operations as adjusted is added to the investment account and losses are reflected as a reduction of the net investment. Distributions of operating cash flows to other venture partners are reflected as an additional expense. All cash paid or received by us is recorded as an adjustment to the net investment. The net investment is reflected in “Investments accounted for under the profit-sharing method” in the consolidated balance sheets.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

We provided a guaranteed return on investment to certain buyers of properties. When the guarantee was for an extended period of time, SFAS 66 precludes sale accounting and we applied the profit-sharing method. When the guarantee was for a limited period of time, the deposit method was applied until operations of the property covered all operating expenses, debt service, and contractual payments, at which time profit was recognized under the performance of services method.

Under the deposit method, we did not recognize any profit, and continued to report in our financial statements the property and related debt even if the debt had been assumed by the buyer, and disclosed that those items are subject to a sales contract. We continued to record depreciation expense. All cash paid or received by us was recorded as an adjustment to the deposit. When the transaction qualified for profit recognition under the full accrual method, the application of the deposit method was discontinued and the gain was recognized. The assets were recorded in “Property and equipment, subject to a sales contract, net” and the liabilities were recorded in “Deposits related to properties subject to a sales contract” in the consolidated balance sheets. At December 31, 2007, we no longer have any sales transactions accounted for under the deposit method.

Capitalization of Interest Related to Development Projects

Interest is capitalized on real estate under development, including investments in ventures in accordance with SFAS No. 34,Capitalization of Interest Cost, (“SFAS 34”) and in accordance with FASB Statement No. 58,Capitalization of Interest Cost in Financial Statements That Include Investments Accounted for by the Equity Method(“SFAS 58”). Under SFAS 34 the capitalization period commences when development begins and continues until the asset is ready for its intended use or the enterprise suspends substantially all activities related to the acquisition of the asset. Under SFAS 58, we capitalize interest on our investment in ventures for which the equity therein is utilized to construct buildings and cease capitalizing interest on our equity investment when the first property in the portfolio commences operations. The amount of interest capitalized is based on the stated interest rates, including amortization of deferred financing costs. The calculation includes interest costs that theoretically could have been avoided, based on specific borrowings to the extent there are specific borrowings. When project specific borrowings do not exist or are less than the amount of qualifying assets, the calculation for such excess uses a weighted average of all other debt outstanding.

Goodwill and Intangible Assets

We capitalize costs incurred to acquire management, development and other contracts. In determining the allocation of the purchase price to net tangible and intangible assets acquired, we make estimates of the fair value of the tangible and intangible assets using information obtained as a result of pre-acquisition due diligence, marketing, leasing activities and independent appraisals.

Intangible assets are valued using expected discounted cash flows and are amortized using the straight-line method over the remaining contract term, generally ranging from one to 30 years. The carrying amounts of intangible assets are reviewed for impairment when indicators of impairment are identified. If the carrying amount of the asset (group) exceeds the undiscounted expected cash flows that are directly associated with the use and eventual disposition of the asset (group), an impairment charge is recognized to the extent the carrying amount of the asset exceeds the fair value.

Goodwill represents the costs of business acquisitions in excess of the fair value of identifiable net assets acquired. We evaluate the fair value of goodwill to assess potential impairment on an annual basis, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. We evaluate the fair value of goodwill at the reporting unit level and make the determination based upon future cash flow projections. We record an impairment loss for goodwill when the carrying value of the goodwill is less than the estimated fair value.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

Investments in Unconsolidated Communities

We hold a minority equity interest in ventures established to develop or acquire and own senior living communities. Those ventures are generally limited liability companies or limited partnerships. Our equity interest in these ventures generally ranges from 10% to 50%.

In accordance with FASB Interpretation No. 46(R),Consolidation of Variable Interest Entities(“FIN 46R”), we review all of our ventures to determine if they are variable interest entities (“VIEs”). If a venture is a VIE, it is consolidated by the primary beneficiary, which is the variable interest holder that absorbs the majority of the venture’s expected losses, receives a majority of the venture’s expected residual returns, or both. At December 31, 2007, we consolidated seven VIEs where we are the primary beneficiary.

In accordance withEITF 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights,the general partner or managing member of a venture consolidates the venture unless the limited partners or other members have either (1) the substantive ability to dissolve the venture or otherwise remove the general partner or managing member without cause or (2) substantive participating rights in significant decisions of the venture, including authorizing operating and capital decisions of the venture, including budgets, in the ordinary course of business. We have reviewed all ventures that are not VIEs where we are the general partner or managing member and have determined that in all cases the limited partners or other members have substantive participating rights such as those set forth above and, therefore, no ventures are consolidated underEITF 04-5.

For ventures not consolidated, we apply the equity method of accounting in accordance with APB Opinion No. 18,The Equity Method of Accounting for Investments in Common Stock, and Statement of PositionNo. 78-9,Accounting for Investments in Real Estate Ventures,(“SOP 78-9”). Equity method investments are initially recorded at cost and subsequently are adjusted for our share of the venture’s earnings or losses and cash distributions. In accordance withSOP 78-9, the allocation of profit and losses should be analyzed to determine how an increase or decrease in net assets of the venture (determined in conformity with GAAP) will affect cash payments to the investor over the life of the venture and on its liquidation. Because certain venture agreements contain preferences with regard to cash flows from operations, capital eventsand/or liquidation, we reflect our share of profits and losses by determining the difference between our “claim on the investee’s book value” at the end and the beginning of the period. This claim is calculated as the amount that we would receive (or be obligated to pay) if the investee were to liquidate all of its assets at recorded amounts determined in accordance with GAAP and distribute the resulting cash to creditors and investors in accordance with their respective priorities. This method is commonly referred to as the hypothetical liquidation at book value method.

Our reported share of earnings is adjusted for the impact, if any, of basis differences between our carrying value of the equity investment and our share of the venture’s underlying assets. We generally do not have future requirements to contribute additional capital over and above the original capital commitments, and in accordance with APB 18, we discontinue applying the equity method of accounting when our investment is reduced to zero barring an expectation of an imminent return to profitability. If the venture subsequently reports net income, the equity method of accounting is resumed only after our share of that net income equals the share of net losses not recognized during the period the equity method was suspended.

When the majority equity partner in one of our ventures sells its equity interest to a third party, the venture frequently refinances its senior debt and distributes the net proceeds to the equity partners. All distributions received by us, which are not refundable either by agreement, or by law, are first recorded as a reduction of our investment. Next, we record a liability for any contractual or implied future financial support to the venture including obligations in our role as a general partner. Any remaining distributions are recorded as “Sunrise’s share of earnings and return on investment in unconsolidated communities” in the consolidated statements of income.

We evaluate realization of our investment in ventures accounted for using the equity method if circumstances indicate that our investment is other than temporarily impaired.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

Deferred Financing Costs

Costs incurred in connection with obtaining permanent financing for our consolidated communities are deferred and amortized over the term of the financing using the effective interest method. Deferred financing costs are included in “Other assets” in the consolidated balance sheets.

Loss Reserves For Certain Self-Insured Programs

We offer a variety of insurance programs to the communities we operate. These programs include property insurance, general and professional liability insurance, excess/umbrella liability insurance, crime insurance, automobile liability and physical damage insurance, workers’ compensation and employers’ liability insurance and employment practices liability insurance (the “Insurance Program”). Substantially all of the communities we operate participate in the Insurance Program are charged their proportionate share of the cost of the Insurance Program.

We utilize large deductible blanket insurance programs in order to contain costs for certain of the lines of insurance risks in the Insurance Program including workers’ compensation and employers’ liability risks, automobile liability risk, employment practices liability risk and general and professional liability risks (“Self-Insured Risks”). The design and purpose of a large deductible insurance program is to reduce overall premium and claim costs by internally financing lower cost claims that are more predictable from year to year, while buying insurance only for higher-cost, less predictable claims.

We have self-insured a portion of the Self-Insured Risks through the Sunrise Captive. The Sunrise Captive issues policies of insurance to and receives premiums from us that are reimbursed through expense allocation to each operated community. The Sunrise Captive pays the costs for each claim above a deductible up to a per claim limit. Third-party insurers are responsible for claim costs above this limit. These third-party insurers carry an A.M. Best rating of A-/VII or better.

We record outstanding losses and expenses for all Self-Insured Risks and for claims under insurance policies based on management’s best estimate of the ultimate liability after considering all available information, including expected future cash flows and actuarial analyses. We believe that the allowance for outstanding losses and expenses is appropriate to cover the ultimate cost of losses incurred at December 31, 2007, but the allowance may ultimately be settled for a greater or lesser amount. Any subsequent changes in estimates are recorded in the period in which they are determined and will be shared with the communities participating in the insurance programs based on the proportionate share of any changes.

Employee Health and Dental Benefits

We offer employees an option to participate in our self-insured health and dental plan. The cost of our employee health and dental benefits, net of employee contributions, is shared between us and the communities based on the respective number of participants working either at our corporate headquarters or at the communities. Funds collected are used to pay the actual program costs including estimated annual claims, third-party administrative fees, network provider fees, communication costs, and other related administrative costs incurred by us. Although claims under this plan are self-insured, we have aggregate protection which caps the potential liability for both individual and total claims during a plan year. Claims are paid as they are submitted to the plan administrator. We also record a liability for outstanding claims and claims that have been incurred but not yet reported. This liability is based on the historical claim reporting lag and payment trends of health insurance claims. We believe that the liability for outstanding losses and expenses is adequate to cover the ultimate cost of losses incurred at December 31, 2007, but actual claims may differ. Any subsequent changes in estimates are recorded in the period in which they are determined and will be shared with the communities participating in the program based on their proportionate share of any changes.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

Continuing Care Agreements

We lease communities under operating leases and own communities that provide life care services under various types of entrance fee agreements with residents (“Entrance Fee Communities” or “Continuing Care Retirement Communities”). Residents of Entrance Fee Communities are required to sign a continuing care agreement with us. The care agreement stipulates, among other things, the amount of all entrance and monthly fees, the type of residential unit being provided, and our obligation to provide both health care and non-health care services. In addition, the care agreement provides us with the right to increase future monthly fees. The care agreement is terminated upon the receipt of a written termination notice from the resident or the death of the resident. Refundable entrance fees are returned to the resident or the resident’s estate depending on the form of the agreement either upon reoccupancy or termination of the care agreement.

When the present value of estimated costs to be incurred under care agreements exceeds the present value of estimated revenues, the present value of such excess costs is accrued. The calculation assumes a future increase in the monthly revenue commensurate with the monthly costs. The calculation currently results in an expected positive net present value cash flow and, as such, no liability was recorded as of December 31, 2007. A liability of $1.3 million was recorded at December 31, 2006.

Refundable entrance fees are primarily non-interest bearing and, depending on the type of plan, can range from between 30% to 100% of the total entrance fee less any additional occupant entrance fees. As these obligations are considered security deposits, interest is not imputed on these obligations. Deferred entrance fees were $34.5 million and $38.1 million at December 31, 2007 and 2006, respectively.

Non-refundable portions of entrance fees are deferred and recognized as revenue using the straight-line method over the actuarially determined expected term of each resident’s contract.

Accounting for Guarantees

Guarantees entered into in connection with the sale of real estate often prevent us from either accounting for the transaction as a sale of an asset or recognizing in earnings the profit from the sale transaction. Guarantees not entered into in connection with the sale of real estate are considered financial instruments. For guarantees considered financial instruments we recognize at the inception of a guarantee or the date of modification, a liability for the fair value of the obligation undertaken in issuing a guarantee. On a quarterly basis, we evaluate the estimated liability based on the operating results and the terms of the guarantee. If it is probable that we will be required to fund additional amounts than previously estimated a loss is recorded. Fundings that are recoverable as a loan from a venture are considered in the determination of the contingent loss recorded. Loan amounts are evaluated for impairment at inception and then quarterly.

Asset Retirement Obligations

In accordance with FASB Interpretation No. 47,Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB Statement No. 143, Asset Retirement Obligations(“FIN 47”) we record a liability for a conditional asset retirement obligation if the fair value of the obligation can be reasonably estimated.

Certain of our operating real estate assets contain asbestos. The asbestos is appropriately contained, in accordance with current environmental regulations, and we have no current plans to remove the asbestos. When, and if, these properties are demolished, certain environmental regulations are in place which specify the manner in which the asbestos must be handled and disposed of. Because the obligation to remove the asbestos has an indeterminable settlement date, we are not able to reasonably estimate the fair value of this asset retirement obligation. Asbestos has also been found at some of our development sites where old buildings are scheduled to be demolished and replaced with new Sunrise facilities. As of December 31, 2007 and 2006 our estimates for asbestos removal costs for these sites were insignificant.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

In addition, certain of our long-term ground leases include clauses that may require us to dispose of the leasehold improvements constructed on the premises at the end of the lease term. These costs, however, are not estimable due to the range of potential settlement dates and variability among properties. Further, the present value of the expected costs is insignificant as the remaining term of each of the leases is fifty years or more.

Income Taxes

Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. We record the current year amounts payable or refundable, as well as the consequences of events that give rise to deferred tax assets and liabilities based on differences in how these events are treated for tax purposes. We base our estimate of deferred tax assets and liabilities on current tax laws and rates and, in certain cases, business plans and other expectations about future outcomes. We provide a valuation allowance against the net deferred tax assets when it is more likely than not that sufficient taxable income will not be generated to utilize the net deferred tax assets.

Revenue Recognition

“Management fees” is comprised of fees from management contracts for operating communities owned by unconsolidated ventures and third parties, which consist of base management fees and incentive management fees. The management fees are generally between five and eight percent of a managed community’s total operating revenue. Fees are recognized in the month they are earned in accordance with the terms of the management contract.

“Buyout fees” is comprised of fees primarily related to the buyout of management contracts.

“Professional fees from development, marketing and other” is comprised of fees received for services provided prior to the opening of an unconsolidated community. Our development fees related to building design and construction oversight are recognized using the percentage-of-completion method and the portion related to marketing services is recognized on a straight-line basis over the estimated period the services are provided. The cost-to-cost method is used to measure the extent of progress toward completion for purposes of calculating the percentage of completion portion of the revenues. Greystone Communities, Inc.’s (“Greystone”) development contracts are multiple element arrangements. Since there is not sufficient objective and reliable evidence of the fair value of undelivered elements at each billing milestone, we defer revenue recognition until the completion of the development contract. Deferred development revenue for these Greystone contracts were $54.6 million and $28.1 million at December 31, 2007 and 2006, respectively, and is included in “Deferred gains on the sale of real estate and deferred revenues” in the balance sheet.

We form ventures, along with third-party partners, to invest in the pre-finance stage of certain Greystone development projects. When the initial development services are successful and permanent financing for the project is obtained, the ventures are repaid the initial invested capital plus fees generally between 50% and 75% of their investment. We consolidated these ventures that are formed to invest in the project as we control them. No revenue is recognized until the permanent financing is in place.

“Resident fees from consolidated communities” are recognized monthly as services are provided. Agreements with residents are generally for a term of one year and are cancelable by residents with thirty days notice.

“Hospice and other ancillary services” is comprised of fees for providing palliative end of life care and support services for terminally ill patients and their families, fees for providing care services to residents of certain communities owned by ventures and fees for providing private duty home health assisted living services. Hospice revenues are highly dependent on payments from Medicare, paid primarily on a per diem basis, from the Medicare programs. Because we generally receive fixed payments for our hospice care services based on the level of care provided to our hospice patients, we are at risk for the cost of services provided to our hospice patients. Reductions or changes in Medicare funding could significantly affect our results of our hospice operations. Reductions in

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

amounts paid by government programs for the services or changes in methods or regulations governing payments could cause our net hospice revenue and profits to materially decline.

“Reimbursed contract services” is comprised of reimbursements for expenses incurred by us, as the primary obligor, on behalf of communities operated by us under long-term management agreements. Revenue is recognized when we incur the related costs. If we are not the primary obligor, certain costs, such as interest expense, real estate taxes, depreciation, ground lease expense, bad debt expense and cost incurred under local area contracts, are not included. The related costs are included in “Reimbursed contract services” expense.

We considered the indicators inEITF 99-19,Reporting Revenue Gross as a Principal versus Net as an Agent,in making our determination that revenues should be reported gross versus net. Specifically, we are the primary obligor for certain expenses incurred at the communities, including payroll costs, insurance and items such as food and medical supplies purchased under national contracts entered into by us. We, as manager, are responsible for setting prices paid for the items underlying the reimbursed expenses, including setting pay-scales for our employees. We select the supplier of goods and services to the communities for the national contracts that we enter into on behalf of the communities. We are responsible for the scope, quality and extent of the items for which we are reimbursed. Based on these indicators, we have determined that it is appropriate to record revenues gross versus net.

Stock-Based Compensation

On January 1, 2006, we adopted the provisions of SFAS No. 123(R),Share-Based Payments(“SFAS 123(R)”) to record compensation expense for our employee stock options, restricted stock awards, and employee stock purchase plan. This statement is a revision of SFAS No. 123,Accounting for Stock-Based Compensation(“SFAS 123”) and supersedes Accounting Principles Board Opinion No. 25 (“APB 25”),Accounting for Stock Issued to Employees,and its related implementation guidance. Prior to the adoption of SFAS 123(R), we followed the intrinsic value method in accordance with APB 25, in accounting for its stock options and other equity instruments.

SFAS 123(R) requires that all share-based payments to employees be recognized in the consolidated statements of income based on their grant date fair values with the expense being recognized over the requisite service period. We use the Black-Scholes model to determine the fair value of our awards at the time of grant.

Foreign Currency Translation

Our reporting currency is the U.S. dollar. Certain of our subsidiaries’ functional currencies are the local currency of the respective country. In accordance with SFAS No. 52,Foreign Currency Translation,balance sheets prepared in their functional currencies are translated to the reporting currency at exchange rates in effect at the end of the accounting period except for stockholders’ equity accounts and intercompany accounts with consolidated subsidiaries that are considered to be of a long-term nature, which are translated at rates in effect when these balances were originally recorded. Revenue and expense accounts are translated at a weighted average of exchange rates during the period. The cumulative effect of the translation is included in “Accumulated other comprehensive (loss) income” in the consolidated balance sheets.

Advertising Costs

We expense advertising as incurred. Total advertising expense for the years ended December 31, 2007, 2006 and 2005 was $4.2 million, $3.3 million, and $3.6 million, respectively.

Legal Contingencies

We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. We record an accrual for loss contingencies when a loss is probable and the amount of the loss can be

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

reasonably estimated. We review these accruals quarterly and make revisions based on changes in facts and circumstances.

Reclassifications

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

New Accounting Standards

We adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48,Accounting for Uncertainty in Income Taxes(“FIN 48”), effective January 1, 2007. FIN 48 is an interpretation of FASB Statement No. 109,Accounting for Income Taxes,and it seeks to reduce diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position that an entity takes or expects to take in a tax return. Additionally, FIN 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Under FIN 48, an entity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. There was no adjustment to our recorded tax liability as a result of adopting FIN 48.

In November 2006, the Emerging Issues Task Force of FASB (“EITF”) reached a consensus on EITF IssueNo. 06-8,Applicability of the Assessment of a Buyer’s Continuing Investment under FASB Statement No. 66, Accounting for Sales of Real Estate, for Sales of Condominiums(“EITF 06-8”).EITF 06-8 requires condominium sales to meet the continuing investment criterion in SFAS No. 66 in order for profit to be recognized under the percentage of completion method.EITF 06-8 was effective for us at January 1, 2007. We are currently developing one condominium project for an unconsolidated venture. The venture has appliedEITF 06-8 for sales.

Future Adoption of Accounting Standards

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements (“SFAS 157”). This standard defines fair value, establishes a methodology for measuring fair value and expands the required disclosure for fair value measurements. SFAS 157 is effective for us as of January 1, 2009. Provisions of SFAS 157 are required to be applied prospectively as of the beginning of the first fiscal year in which SFAS 157 is applied. We are evaluating the impact that SFAS 157 will have on our financial statements.

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Liabilities(“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The irrevocable election of the fair value option is made on an instrument by instrument basis, and applied to the entire instrument, and not just a portion of it. The changes in fair value of each item elected to be measured at fair value are recognized in earnings each reporting period. SFAS 159 does not affect any existing pronouncements that require assets and liabilities to be carried at fair value, nor does it eliminate any existing disclosure requirements. This standard is effective for us as of January 1, 2008. We have not chosen to measure any financial instruments at fair value.

In December 2007, the FASB issued SFAS No. 141 (revised 2007),Business Combinations(“SFAS 141R”). SFAS 141R requires most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in business combinations to be recorded at “full fair value.” The standard is effective for us as of January 1, 2009, and earlier adoption is prohibited. All of our future acquisitions will be impacted by this standard.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

non-controlling interest will be included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation, are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the non-controlling equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its non-controlling interest. SFAS No. 160 is effective as of January 1, 2009. We are currently evaluating the impact that SFAS No. 160 will have on our financial statements.


3.	Restatement Related to Statement of Cash Flows Classifications and Accounting for Lease Payments and Non-Refundable Entrance Fees for Two Continuing Care Retirement Communities

2007 Statement of Cash Flows

The 2007 Consolidated Statement of Cash Flows has been restated primarily to reflect proper classification of transactions with unconsolidated communities, assumption of debt related to sales transactions and the classification of gain resulting from sales transactions. The effect of the restatement on the 2007 Consolidated Statement of Cash Flows was to decrease net cash provided by operating activities from $235.0 million to $128.5 million, to increase net cash used in investing activities from $235.5 million to $248.5 million and to increase net cash provided by financing activities from $56.7 million to $176.3 million. In 2007, $119.1 million of debt was assumed by third parties as part of sales transactions. Cash flows for the year ended December 31, 2007 as previously reported and as restated are reflected in the following table (for restated line items only):

2007 Consolidated Statement of Cash Flows


(In thousands)	As Reported			As Restated

Gain on sale and development of real estate and equity interests	$	(61,635	)	$	(105,081	)
(Increase) decrease in:
Accounts receivable		(16,536	)		(12,388	)
Due from unconsolidated senior living communities		102,996			28,111
Prepaid expenses and other current assets		(55,443	)		(60,282	)
Other assets		(1,177	)		(35,666	)
Increase (decrease) in:
Accounts payable and accrued expenses		78,576			140,589
Self-insurance liabilities		27,866			12,866
Guarantee liabilities		(5,806	)		(5,829	)
Net cash provided by operating activities		235,007			128,486
Capital expenditures		(240,309	)		(245,523	)
Dispositions of property		171,338			60,387
Change in restricted cash		(20,579	)		(21,792	)
Increase in investments and notes receivable		(181,451	)		(183,314	)
Proceeds from investments and notes receivable		136,744			220,312
Investments in unconsolidated communities		(51,940	)		(29,297	)
Net cash used in investing activities		(235,513	)		(248,543	)
Additional borrowings of long-term debt		229,688			243,564
Repayment of long-term debt		(170,860	)		(66,105	)
Contribution from minority interests		3,210			—
Distributions to minority interest		(5,310	)		(1,180	)
Net cash provided by financing activities		56,728			176,279

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

Accounting for Lease Payments and Non-Refundable Entrance Fees

We lease six CCRCs under operating leases and provide life care services under various types of entrance fee agreements with residents. Upon admission to a community, the resident signs a continuing care agreement with us. The care agreement stipulates, among other things, the amount of all entrance and monthly fees, the type of residential unit being provided, and our obligation to provide both health care and non-health care services. In addition, the care agreement provides us with the right to increase future monthly fees. The care agreement is terminated upon the receipt of a written termination notice from the resident or the death of the resident. The refundable portion of the entrance fee is returned to the resident or the resident’s estate depending on the form of the agreement either upon reoccupancy or termination of the care agreement. The obligation to repay is acknowledged through the provisions of a Lifecare Bond. The non-refundable portion of the entrance fee is deferred and recognized as revenue using the straight-line method over the actuarially determined expected term of each resident’s contract. For one of these communities, the entrance fees are fully refundable and two communities do not have entrance fees. For the remaining three communities, residents choose between various entrance fee packages where the non-refundable component ranges from 10% to 100% of the total entrance fee (the larger the non-refundable portion, the lower the total payment).

For two CCRCs that were previously owned by MSLS, the sale of the CCRCs by MSLS to a third party resulted in a bifurcation of real estate ownership and operations, and separated the entrance fee repayment obligation from us, as the third party lessor became the primary obligor of the Lifecare Bonds. We collect the entrance fees from the resident under a continuing care agreement. In accordance with our lease, we sell and issue the Lifecare Bonds to residents on behalf of the lessor and remit all entrance fees to the lessor. In accordance with the terms of these two leases, we receive a rent credit against the amount of minimum rent due each accounting period equal to the amount of non-refundable fees collected by us from residents and remitted to the lessor.

Historically, we reported rent expense net of the amount of rent credit we received from the landlord for the non-refundable fees. We also did not consider the entrance fees to be compensation for the services we were providing to the resident and therefore did not record them as deferred revenue on our balance sheet.

Upon further review, we have now determined that we are the primary obligor to the resident for life care services and for providing a unit for the resident to occupy when we enter into the continuing care agreement with the resident. We enter into leases to be able to fulfill our obligation to provide a unit for the resident. For the non-refundable component of the entrance fee we have determined we should defer the fee and amortize it into income as we provide services to the resident over the expected term of the continuing care agreement. As there is a legal assignment of the obligation to repay the Lifecare bond to the lessor, we are not required to record the liability on our books and, therefore, no accounting adjustment was required for this item.

In regard to the calculation of rent expense, all payments to the lessor both for minimum rent (which in accordance with the lease is a fixed amount, with a scheduled 3% annual increase, less a rent credit equal to the amount of non-refundable entrance fees) and the non-refundable entrance fees are considered rent expense.

The effect of the restatement was to decrease retained earnings at January 1, 2005 by approximately $7.5 million, to reducepre-tax income in 2005 and 2006 by approximately $6.6 million and $8.3 million, respectively, and to reduce 2005 and 2006 net income by approximately $4.0 million and $5.1 million, respectively. The restatement resulted in an increase to resident fees for consolidated communities of approximately $1.6 million in 2005 and $2.7 million in 2006, and an increase to community lease expense of approximately $8.2 million in 2005 and $11.0 million in 2006. We have restated the prior-period financial statements to correct these errors in accordance with SFAS No. 154,Accounting Changes and Error Corrections.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)


4.	Allowance for Doubtful Accounts

Allowance for doubtful accounts consists of the following (in thousands):


	Accounts
	Receivable			Other Assets		Total

Balance January 1, 2005 (restated)	$	1,888		$	—	$	1,888
Provision for doubtful accounts		1,675			—		1,675
Write-offs		(1,065	)		—		(1,065	)

Balance December 31, 2005 (restated)		2,498			—		2,498
Provision for doubtful accounts		6,632			8,000		14,632
Write-offs		(1,626	)		—		(1,626	)

Balance December 31, 2006 (restated)		7,504			8,000		15,504
Provision for doubtful accounts		7,644			1,920		9,564
Write-offs		(4,708	)		—		(4,708	)

Balance December 31, 2007	$	10,440		$	9,920	$	20,360


5.	Property and Equipment

Property and equipment consists of the following (in thousands):


	December 31,
	Asset Lives		2007			2006

Land and land improvements		15 years	$	77,709		$	76,456
Building and building improvements		40 years		337,310			330,431
Furniture and equipment		3-10 years		148,829			122,479

				563,848			529,366
Less: Accumulated depreciation				(157,744	)		(125,315	)

				406,104			404,051
Construction in progress				250,107			205,334

Property and equipment, net			$	656,211		$	609,385

Depreciation expense for communities was $33.9 million, $27.1 million, and $20.4 million in 2007, 2006, and 2005, respectively, excluding depreciation expense related to properties subject to the deposit method, financing method and profit-sharing method of accounting. See Note 7.

During 2007, we recorded an impairment charge of $7.6 million related to two communities acquired in 1999 and 2006. During 2006, we recorded an impairment charge of $15.7 million related to seven small senior living communities which were acquired between 1996 and 1999.

In 2007, we decided to discontinue development of four senior living condominium projects due to adverse economic conditions and as a result, we recorded pre-tax charges totaling approximately $21.0 million in 2007 to write-off capitalized development costs for these projects. In the first quarter of 2008, we suspended the development of the remaining three condominium projects and as a result, we expect to record pre-tax charges totaling approximately $22.0 million in the first quarter of 2008.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)


6.	Acquisitions

Sunrise Connecticut Avenue Assisted Living, LLC

In August 2007, we purchased a 90% interest in Sunrise Connecticut Avenue Assisted Living, LLC, a venture in which we previously owned a 10% interest, for approximately $28.9 million and approximately $1.0 million in transaction costs. Approximately $19.9 million of existing debt was paid off at closing and we entered into new debt of $40.0 million. As a result of the acquisition, Sunrise Connecticut Avenue Assisted Living, LLC is our wholly owned subsidiary and the financial results are consolidated as of the acquisition date in August 2007.

The purchase price was allocated to the assets acquired, including intangible assets and liabilities assumed, based on their estimated fair values. The purchase price values that were assigned as follows (in millions):


Net working capital	$	0.6
Property and equipment		40.3
Other assets		0.1
Land		8.8
Less: Debt of venture assumed		(19.9	)

Total purchase price (including transaction costs)	$	29.9

Sunrise Connecticut Avenue Assisted Living, LLC does not meet the definition of a significant subsidiary and therefore historical and pro forma information is not disclosed.

Raiser Portfolio

In August 2006, we acquired the long term management contracts of two San Francisco Bay Area CCRCs and the ownership of one community. The two managed communities are condominiums owned by the residents. The three communities have a combined capacity of more than 200 residents.

The purchase price was allocated to the assets acquired, including intangible assets and liabilities assumed, based on their estimated fair values. The purchase price values were assigned as follows (in millions):


Net working capital	$	0.9
Land, property and equipment		17.0
Entrance fee liability and future service obligations		(11.5	)
Management contracts and other assets		21.0

Total purchase price (including transaction costs)	$	27.4

The weighted-average amortization period for the management contracts is 30 years. Raiser does not meet the definition of a significant subsidiary and therefore historical and pro forma information is not disclosed.

Trinity Hospice, Inc.

In September 2006, we acquired Trinity Hospice, Inc. (“Trinity”), a large provider of hospice services in the United States. Trinity currently operates 20 hospice programs across the United States.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

The purchase price was allocated to the assets acquired, including intangible assets consisting primarily of trade-name, referral network and non-compete agreements, and liabilities assumed, based on their estimated fair values. The purchase price values were assigned as follows (in millions):


Net working capital	$	3.7
Property and equipment		1.5
Intangible assets		9.7
Goodwill		59.3
Other assets		0.4

Total purchase price (including transaction costs)	$	74.6

The weighted-average amortization period for the intangible assets is five years. Trinity does not meet the definition of a significant subsidiary and therefore historical and pro forma information is not disclosed.

As of December 31, 2006, Trinity’s average daily census was approximately 1,500. As of December 31, 2007, Trinity’s average daily census was approximately 1,300. This decline in census from 2006 to 2007 was partially the result of the closing of certain operating locations in non-core Sunrise markets and Trinity’s focus on remediation efforts. As a result of a review of the goodwill and intangible assets related to Trinity, we recorded an impairment loss of approximately $56.7 million in 2007.

2005 Acquisitions

In May 2005, we acquired Greystone for a total purchase price of approximately $49.0 million with a potential acquisition cost of $54.0 million subject to various adjustments set forth in the acquisition agreement. Performance milestones were reached in 2006 and 2007, with $2.5 million expected to be paid in 2008.

In July 2005 we contributed approximately $25.8 million in cash in exchange for a 20% interest in an unconsolidated venture formed to purchase assets from The Fountains, an Arizona based owner and operator of senior living communities.


7.	Sales of Real Estate

Total gains (losses) on sale recognized are as follows (in millions):


	December 31,
	2007		2006		2005

Properties accounted for under basis of performance of services	$	3.6	$	1.8	$	0.6
Properties accounted for previously under financing method		32.8		—		—
Properties accounted for previously under deposit method		52.4		35.3		81.3
Land sales		5.7		5.4		(0.2	)
Sales of equity interests and other sales		10.6		8.8		—

Total gains on the sale and development of real estate and equity interests	$	105.1	$	51.3	$	81.7

Basis of Performance of Services

During the years ended December 31, 2007, 2006 and 2005, we sold majority membership interests in entities owning partially developed land or sold partially developed land to ventures with three, nine and seven underlying communities, respectively, for $86.2 million, $182.5 million and $98.0 million, net of transaction costs, respectively. In connection with the transactions, we provided guarantees to support the operations of the underlying communities for a limited period of time. In addition, we operate the communities under long-term management

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

agreements upon opening. Due to our continuing involvement, all gains on the sale and fees received after the sale are initially deferred. Any fundings under the cost overrun guarantees and the operating deficit guarantees are recorded as a reduction of the deferred gain. Gains and development fees are recognized on the basis of performance of the services required. Deferred gains of $1.7 million, $7.7 million and $8.3 million were recorded in 2007, 2006 and 2005, respectively. Gains of $3.6 million, $1.8 million and $0.6 million were recognized in 2007, 2006 and 2005, respectively.

Financing Method

In 2004, we sold majority membership interests in two entities which owned partially developed land to two separate ventures. In conjunction with these two sales, we had an option to repurchase the communities from the venture at an amount that was higher than the sales price. At the date of sale, it was likely that we would repurchase the properties, and as a result the financing method of accounting has been applied.

In March 2007, the two separate ventures were recapitalized and merged into one new venture. Per the terms of the transaction, we no longer had an option to repurchase the communities. Thus, there were no longer any forms of continuing involvement that would preclude sale accounting and a gain on sale of $32.8 million was recognized in 2007. No gains were recognized in 2006 or 2005.

Relevant details are as follows (in thousands):


	December 31,
	2007		2006			2005

Property and equipment subject to financing, net	$	—	$	62,520		$	64,174
Liabilities relating to properties subject to the financing method		—		(66,283	)		(64,208	)
Depreciation expense		505		1,959			363
Development fees received, net of costs		—		—			1,335
Management fees received		230		981			93

In December 2007, we sold a majority membership interest in an entity which owned an operating community. In conjunction with the sale, the buyer had the option to put its interests and shares back to us if certain conditions were not met by June 2008. If the conditions were met prior to June 2008, the buyer’s put option would be extinguished. As of December 31, 2007, the conditions were not met. Due to the existence of the put option that allows the buyer to compel us to repurchase the property, we applied the financing method of accounting. The total property and equipment subject to financing, net, was $58.9 million and the liability relating to properties subject to the financing method was $54.3 million at December 31, 2007.

In February 2008, the required conditions were met, the buyer’s put option was extinguished and sale accounting was achieved. In connection with the sale, we also provided a guarantee to support the operations of the property for a limited period of time. Due to this continuing involvement, the gain on sale will be initially deferred and then recognized using the basis of performance of services method.

Deposit method

We accounted for the sale of an operating community in 2004 under the deposit method of accounting as we guaranteed to make monthly payments to the buyer equal to the amount by which a net operating income target exceeded actual net operating income for the community. The guarantee expired on the earlier of (a) the end of any consecutive twelve month period during which the property achieved its net operating income target, or (b) October 31, 2006. We recorded a gain of $4.0 million upon expiration of the guarantee on October 31, 2006. No gains were recognized in 2005 and 2004.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

Relevant details are as follows (in thousands):


	December 31,
	2007			2006		2005

Property subject to sales contract, net	$	—		$	—	$	10,142
Deposits related to properties subject to a sales contract		—			—		(13,843	)
Depreciation expense		—			296		331
Development fees received, net of costs		—			—		—
Management fees received		—	��		198		192

During 2003, we sold a portfolio of 13 operating communities and five communities under development for approximately $158.9 million in cash, after transaction costs, which was approximately $21.5 million in excess of our capitalized costs. In connection with the transaction, we agreed to provide support to the buyer if the cash flows from the communities were below a stated target. The guarantee expired at the end of the 18th full calendar month from the date on which all permits and licenses necessary for the admittance of residents had been obtained for the last development property. The last permits were obtained in January 2006 and the guarantee expired in July 2007. We recorded a gain of $52.5 million upon the expiration of the guarantee.

Relevant details are as follows (in thousands):


	December 31,
	2007		2006			2005

Properties subject to sales contract, net	$	—	$	193,158		$	197,781
Deposits related to properties subject to a sales contract		—		(240,367	)		(236,692	)
Depreciation expense		4,876		8,257			7,168
Development fees received, net of costs		—		20			1,412
Management fees received		2,331		3,738			3,023

During 2003, we sold three portfolios with a combined 28 operating communities. In connection with the sale, we were obligated to fund any net operating income shortfall as compared to a stated benchmark for a period of 12 to 24 months following the date of sale. In 2004, we sold a portfolio of five operating communities. In connection with the sale, we guaranteed a stated level of net operating income for an18-month period following the date of sale. These guarantees, in accordance with SFAS 66, require the application of the deposit method of accounting. We recorded pre-tax gains of approximately $0, $28.3 million and $80.9 million in 2007, 2006 and 2005, respectively, as these guarantees expired.

Relevant details are as follows (in thousands):


	December 31,
	2007		2006		2005

Properties subject to sales contract, net	$	—	$	—	$	47,308
Deposits related to properties subject to a sales contract		—		—		(74,247	)
Depreciation expense		—		848		6,644
Development fees received, net of costs		—		—		—
Management fees received		—		617		4,548

In addition, during 2007, 2006 and 2005, Sunrise recognized losses or gains on sales of $(0.1) million, $3.0 million and $0.4 million, respectively, related to communities that were sold in 2002, but the gain had been deferred.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

Land Sales

During 2007, 2006 and 2005, we sold three, two and one pieces of undeveloped land, respectively. There were no forms of continuing involvement that precluded sale accounting or gain recognition. We recognized gains or losses of $5.7 million, $5.4 million and $(0.2) million, respectively, related to these land sales.

Sales of Equity Interests

During 2007 and 2006, we sold our equity interest in four and two ventures, respectively, whose underlying asset is real estate. In accordance with EITFNo. 98-8,Accounting for Transfers of Investments That Are in Substance Real Estate(“EITF 98-8”), the sale of an investment in the form of a financial asset that is in substance real estate should be accounted for in accordance with SFAS 66. For all of the transactions, we did not provide any forms of continuing involvement that would preclude sale accounting or gain recognition. We recognized gains on sale of $10.6 million and $8.8 million in 2007 and 2006, respectively, related to these sales.

Gain (Loss) from Investments Accounted for Under the Profit-Sharing Method, net

We currently apply the profit-sharing method to the following transactions as we provided guarantees to support the operations of the properties for an extended period of time:

(1) during 2006, the sale of two entities related to a partially developed condominium project;

(2) during 2004, the sale of a majority membership interest in one venture with two underlying properties; and

(3) during 2004, the sale of three partially developed communities

Relevant details are as follows (in thousands):


	Year Ended December 31,
	2007			2006			2005

Revenue	$	23,791		$	19,902		$	11,077
Expenses		(17,450	)		(16,528	)		(10,310	)

Income from operations before depreciation		6,341			3,374			767
Depreciation expense		—			—			1,964
Distributions to other investors		(6,319	)		(4,231	)		(3,588	)

Income (loss) from investments accounted for under the profit-sharing method	$	22		$	(857	)	$	(857	)

Investments accounted for under the profit-sharing method, net	$	(51,377	)	$	(29,148	)	$	(5,106	)
Amortization expense on investments accounted for under the profit-sharing method	$	1,800		$	1,800		$	—

Condominium Sales

We began to develop senior living condominium projects in 2004. In 2006, we sold a majority interest in one condominium and assisted living venture to third parties. In conjunction with the development agreement for this project, we agreed to be responsible for actual project costs in excess of budgeted project costs of more than $10.0 million (subject to certain limited exceptions). Project overruns to be paid by us are projected to be approximately $48.0 million. Of this amount, $10.0 million is recoverable as a loan from the venture and $14.7 million relates to proceeds from the sale of real estate, development fees and pre-opening fees. During 2006, we recorded a loss of approximately $17.2 million due to this commitment. During 2007, we recorded an additional loss of approximately $6.0 million due to increases in the budgeted projected costs. Through June 30, 2008, we have paid approximately $47.0 million in cost overruns.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)


8.	Variable Interest Entities

At December 31, 2007, we held a management agreement with one entity and an equity interest in eight ventures that are considered VIEs, for a total of nine VIEs. We are the primary beneficiary of and, therefore, consolidate seven of these VIEs. We are not considered the primary beneficiary of the remaining two VIEs and, therefore, account for these investments under the equity or cost method of accounting.

Consolidated VIEs


	•	The entity that we have a management agreement with is a continuing care retirement community located in the U.S. comprised of 254 continuing care retirement community apartments, 32 assisted living units, 27 Alzheimer care apartments and 60 skilled nursing beds. We have included $20.1 million and $21.4 million, respectively, of net property and equipment related to this entity in our 2007 and 2006 consolidated balance sheets and $24.6 million and $25.2 million, respectively, of debt. We guaranteed in 2007 and 2006 $23.2 million and $23.8 million, respectively, of this debt. We included $1.5 million, $1.5 million and $1.1 million, respectively, of depreciation and amortization expense related to this entity in our 2007, 2006 and 2005 consolidated statements of income.

	•	Six of the seven consolidated VIEs are investment partnerships formed with third-party partners to invest capital in the pre-finance stage of certain Greystone projects. When the initial development services are successful and permanent financing for the project is obtained, the partners are repaid their initial invested capital plus fees generally between 50% and 75% of their investment. Greystone, which was acquired by us in May 2005, is a developer and manager of CCRCs. We have included $9.0 million and $13.8 million of cash related to these ventures in our 2007 and 2006 consolidated balance sheets, respectively. At December 31, 2006, six Greystone VIEs were consolidated. During 2007, two of these six ventures were no longer considered VIEs and were deconsolidated. Two new Greystone investment partnerships were formed to invest seed capital in 2007 and at December 31, 2007, six Greystone VIEs were consolidated.

Unconsolidated VIEs


	•	Sunrise At Home Senior Living Services, Inc. (“Sunrise At Home”) was a venture between Sunrise and two third parties. The venture offered home health services by highly trained staff members in customers’ homes and had annual revenue of approximately $19.0 million in 2006. In June 2007, Sunrise At Home was merged with Alliance Care and we received a preferred equity interest in Alliance Care. Alliance Care provides services to seniors, including physician house calls and mobile diagnostics, home care and private duty services through 24 local offices located in seven states. Additionally, Alliance Care operates over 125 Healthy Lifestyle Centers providing therapeutic rehabilitation and wellness programs in senior living facilities. As a result of the merger, we are no longer the primary beneficiary and deconsolidated Sunrise At Home as of the merger date. At December 31, 2007, Alliance Care has total assets of $41.2 million, total liabilities of $38.1 million, and annual revenue of $84.3 million.

	•	In July 2007, we formed a venture with a partner to purchase six communities from our first UK venture. The new venture also entered into a firm commitment to purchase 11 additional communities from the venture which are currently under development in the UK. At December 31, 2007, this venture has total assets of $562.7 million, total liabilities of $472.0 million, and annual revenue of $17.0 million.

Our book equity investment in these non-consolidated VIEs was $5.5 million at December 31, 2007, and that amount is our maximum exposure to loss.

At December 31, 2006, six ventures with Sunrise REIT were VIEs. In April 2007, Ventas acquired Sunrise REIT. After the acquisition, these ventures were no longer considered VIEs.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)


9.	Buyout of Management Contracts

During 2006, Five Star bought out 18 management contracts for which we were the manager. We recognized $131.1 million in buyout fees and an additional $3.6 million for management fees which would have been earned during the transition period. We also wrote-off the related remaining $25.4 million unamortized management contract intangible asset.

During 2005, Five Star bought out 12 management contracts for which we were the manager. We recognized $83.0 million in buyout fees. We also wrote-off the related remaining $14.6 million unamortized management contract intangible asset. Five Star’s right to buyout these contracts was unconditional regardless of performance.


10.	Notes Receivable

Notes receivable (including accrued interest) consist of the following (in thousands):


				December 31,
	Interest Rate(1)			2007		2006

Note V with international venture		4.37	%	$	592	$	1,030
Promissory Note XIV		Euribor + 4.25	%		8,837		4,834
Promissory Note XIII		7.50	%		—		11,767
Note VI, revolving credit agreement		10.00	%		—		4,174

					9,429		21,805
Current maturities					—		(4,174	)

				$	9,429	$	17,631


(1)		Interest rate at December 31, 2007

All the notes are with affiliated ventures with the exception of Promissory Note XIII.

In 2002, we jointly formed a venture (“International LLC III”) in which we have a 20% ownership interest. In May 2002, we agreed to loan funds to International LLC III (“Note V”) to partially finance the initial development and construction of communities in the United Kingdom and Germany. Outstanding principal and interest are due as senior living communities are sold by the venture. A portion of the note was repaid in 2007.

In December 2005, we agreed to loan International LLC III up to 10 million Euros ($14.719 million at December 31, 2007) (“Promissory Note XIV”) on a revolving basis to fund operating deficits of thelease-up communities in Germany. The loan is unsecured and subordinated to the senior lenders of the German communities. Outstanding principal and interest payments are due on the earlier of December 31, 2010 or the termination of senior financing, with one two-year renewal at the option of International LLC III. As of December 31, 2007, the full 10 million Euros has been funded. We currently do not expect to receive repayment of 3.996 million Euros ($5.882 million). The carrying value above has been reduced by this estimated uncollectible amount of $5.882 million.

In May 2004, we accepted a promissory note of $10.0 million (“Promissory Note XIII”). We had an option to purchase an alternate property (land) from the borrower, and if we chose to purchase this land, the purchase price of the alternate property would be credited against the principal balance of this note, under the terms of the note agreement. Outstanding principal and interest were due on June 1, 2006. During 2006, the maturity date on the promissory note was extended until May 15, 2008. The land was purchased during 2007 and the note was repaid. This note was collateralized by the underlying land.

In 2002, we jointly formed a venture (“LLC VI”) in which we have a 20% ownership interest. The purpose of LLC VI is to develop, construct and own senior living communities. We agreed to loan LLC VI up to $20.0 million

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

(“Note VI”) through a revolving credit agreement to partially finance the initial development and construction of 15 communities. Note VI is secured by the communities and is subordinated to other lenders of LLC VI. LLC VI borrowed an additional $10.4 million against the credit agreement and we received payments of $9.2 million for principal. The note was repaid as part of a recapitalization in 2007.

We recorded interest income on these notes of $0.3 million, $1.5 million and $3.1 million in 2007, 2006 and 2005, respectively.


11.	Intangible Assets and Goodwill

Intangible assets consist of the following (in thousands):


	Estimated		December 31,
	Useful Life		2007		2006

Management contracts less accumulated amortization of $23,084 and $13,242		1-30 years	$	76,909	$	88,581
Leaseholds less accumulated amortization of $3,577 and $3,162		10-29 years		4,307		4,721
Other intangibles less accumulated amortization of $628 and $1,173		1-40 years		2,553		10,469

			$	83,769	$	103,771

Amortization was $14.2 million, $8.8 million and $6.1 million in 2007, 2006 and 2005, respectively. In addition, in 2006 and 2005, we wrote-off $25.4 million and $14.6 million, respectively, representing the unamortized intangible asset for management contracts that were bought out (see Note 9) and other intangible assets. Amortization is expected to be approximately $11.0 million, $10.3 million, $6.7 million, $3.1 million and $2.9 million in 2008, 2009, 2010, 2011 and 2012, respectively.

Goodwill was $169.7 million and $218.0 million at December 31, 2007 and 2006, respectively. In 2006, we initially recorded goodwill of $59.3 million related to the acquisition of Trinity (see Note 6). We recorded goodwill of $31.5 million in 2005 and increased goodwill by $2.5 million and $5.0 million in 2007 and 2006, respectively, to reflect the earn-out related to the acquisition of Greystone. In 2007, we recorded an impairment charge of $56.7 million related to our Trinity goodwill and related intangible assets.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)


12.	Investments in Unconsolidated Communities

The following are our investments in unconsolidated communities as of December 31, 2007:


	Sunrise
Venture	Ownership

Karrington of Findlay Ltd.		50.00	%
MorSun Tenant LP		50.00	%
Sunrise/Inova McLean Assisted Living, LLC		40.00	%
AU-HCU Holdings, LLC(1)		30.00	%
RCU Holdings, LLC(1)		30.00	%
SunVest, LLC(1)		30.00	%
AL One Investments, LLC		25.36	%
Metropolitan Senior Housing, LLC		25.00	%
Sunrise at Gardner Park, LP		25.00	%
Sunrise Floral Vale Senior Living, LP		25.00	%
Cheswick & Cranberry, LLC		25.00	%
BG Loan Acquisition LP		25.00	%
Sunrise Aston Gardens Venture, LLC		25.00	%
Master MorSun, LP		20.00	%
Master MetSun, LP		20.00	%
Master MetSun Two, LP		20.00	%
Master MetSun Three, LP		20.00	%
Sunrise First Assisted Living Holdings, LLC		20.00	%
Sunrise Second Assisted Living Holdings, LLC		20.00	%
Sunrise Beach Cities Assisted Living, LP		20.00	%
AL U.S. Development Venture, LLC		20.00	%
Sunrise HBLR, LLC		20.00	%
Sunrise IV Senior Living Holdings, LLC		20.00	%
COPSUN Clayton MO, LLC		20.00	%
Sunrise of Aurora, LP		20.00	%
Sunrise of Erin Mills, LP		20.00	%
Sunrise of North York, LP(2)		20.00	%
PS Germany Investment (Jersey) LP		20.00	%
PS UK Investment (Jersey) LP		20.00	%
PS UK Investment II (Jersey) LP		20.00	%
Sunrise First Euro Properties LP		20.00	%
Master CNL Sun Dev I, LLC		20.00	%
Sunrise Bloomfield Senior Living, LLC		20.00	%
Sunrise Hillcrest Senior Living, LLC		20.00	%
Sunrise New Seasons Venture, LLC		20.00	%
Sunrise Rocklin Senior Living, LLC		20.00	%
Sunrise Sandy Senior Living, LLC		20.00	%
Sunrise Scottsdale Senior Living, LLC		20.00	%
Sunrise Staten Island SL LLC		20.00	%
Sunrise US UPREIT, LLC		15.40	%
SunKap Coral Gables, LLC		15.00	%
SunKap Boca Raton, LLC		15.00	%
Santa Monica AL, LLC		15.00	%
Sunrise Third Senior Living Holdings, LLC		10.00	%
Cortland House, LP		10.00	%
AEW/Sunrise Senior Housing Portfolio, LLC		10.00	%
Dawn Limited Partnership		10.00	%


(1)		Properties related to investments are accounted for under the profit-sharing method of accounting. See Note 7.

(2)		Properties related to investments are accounted for under the financing method of accounting. See Note 7.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

Included in “Due from unconsolidated communities” are net receivables and advances from unconsolidated ventures of $81.4 million and $105.7 million at December 31, 2007 and 2006, respectively. Net receivables from these ventures relate primarily to development and management activities.

Summary financial information for unconsolidated ventures accounted for by the equity method is as follows (in thousands):


	December 31,
	2007			2006			2005

Assets, principally property and equipment	$	5,183,922		$	4,370,376		$	3,283,725
Long-term debt		4,075,993			2,971,318			2,076,734
Liabilities, excluding long-term debt		549,628			583,008			409,986
Equity		558,301			816,050			797,005
Revenue		1,021,112			846,479			625,371
Net income (loss)		(15,487	)		(56,968	)		24,051

Accounting policies used by the unconsolidated ventures are the same as those used by us.

Total management fees and reimbursed contract services from related unconsolidated ventures was $509.1 million, $390.3 million and $321.2 million in 2007, 2006 and 2005, respectively.

Our share of earnings and return on investment in unconsolidated communities consists of the following (in thousands):


	December 31,
	2007			2006			2005

Sunrise’s share of earnings (losses) in unconsolidated communities	$	60,700		$	(11,997	)	$	(13,073	)
Return on investment in unconsolidated communities		72,710			55,699			26,545
Impairment of equity investments		(24,463	)		—			—

	$	108,947		$	43,702		$	13,472

Our investment in unconsolidated communities was less than our portion of the underlying equity in the venture by $81.5 million and $62.3 million as of December 31, 2007 and 2006, respectively.

Return on Investment in Unconsolidated Communities

Sunrise’s return on investment in unconsolidated communities primarily represents cash distributions from ventures arising from a refinancing of debt within ventures. We first record all equity distributions, which are not refundable either by agreement, or by law, as a reduction of our investment. Next, we record a liability if there is a contractual obligation or implied obligation to support the venture, including in our role as general partner. Any remaining distribution is recorded in income.

In 2007, our return on investment in unconsolidated communities was primarily the result of three venture recapitalizations. In one transaction, the majority owner of a venture sold their majority interest to a new third party, the debt was refinanced and the total cash we received and the gain recognized was $53.0 million. In another transaction, in conjunction with a sale by us of a 15% equity interest, which gain is recorded in “Gain on the sale and development of real estate and equity interests,” and the sale of the majority equity owner’s interest to a new third party, the debt was refinanced and we received total proceeds of $4.1 million relating to our retained 20% equity interest in two ventures, which we recorded as a return on investment in unconsolidated communities.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

In 2006, our return on investment in unconsolidated communities was primarily the result of three venture recapitalizations. In one transaction, the majority owner of two ventures sold their majority interests to a new third party, the debt was refinanced and the total recorded return on investment to us from this combined transaction was approximately $21.6 million. In another transaction, the majority owner of a venture sold its majority interest to a new third party, the debt was refinanced and the total return on investment to us was $26.1 million.

In 2005, we recorded $22.4 million of return on investment from the recapitalization of four ventures for 18 communities.

Transactions

In January 2007, we entered into a venture to develop assisted living communities in the United Kingdom (the “UK”) over the next four years, with us serving as the developer and then as the manager of the communities. This is our second venture in the UK. We own 20% of the venture. Property development will be funded through contributions of up to approximately $200.0 million by the partners, based upon their pro rata percentage, with the balance funded by loans provided by third-party lenders, giving the venture a total potential investment capacity of approximately $1.0 billion.

During 2007, we entered into two development ventures to develop and build senior living communities in the United States during 2007 and 2008, with us serving as the developer and then as the manager of the communities. We own 20% of the ventures. Property development will be funded through contributions of up to approximately $208.0 million by the partners, based upon their pro rata percentage, with the balance funded by loans provided by third party lenders, giving the ventures a total potential investment capacity of approximately $788.0 million. We will develop and manage the communities.

During 2007, our first UK venture in which we have a 20% equity interest sold seven communities to a venture in which we have a 10% interest. Primarily as a result of the gains on these asset sales recorded in the ventures, we recorded equity in earnings in 2007 of approximately $75.5 million. When our UK and Germany ventures were formed, we established a bonus pool in respect to each venture for the benefit of employees and others responsible for the success of these ventures. At that time, we agreed with our partner that after certain return thresholds were met, we would each reduce our percentage interests in venture distributions with such excess to be used to fund these bonus pools. During 2007, we recorded bonus expense of $27.8 million in respect of the bonus pool relating to the UK venture. These bonus amounts are funded from capital events and the cash is retained by us in restricted cash accounts. As of December 31, 2007, approximately $18.0 million of this amount was included in restricted cash. Under this bonus arrangement, no bonuses are payable until we receive distributions at least equal to certain capital contributions and loans made by us to the UK and Germany ventures. We currently expect this bonus distribution limitation will be satisfied in late 2008, at which time bonus payments would become payable.

In October 2000, we formed Sunrise At Home, a venture offering home health assisted living services in several East Coast markets and Chicago. In June 2007, Sunrise At Home was merged into AllianceCare. AllianceCare provides services to seniors, including physician house calls and mobile diagnostics, home care and private duty services through 24 local offices located in seven states. Additionally, AllianceCare operates more than 125 Healthy Lifestyle Centers providing therapeutic rehabilitation and wellness programs in senior living facilities. In the merger, Sunrise received approximately an 8% preferred ownership interest in AllianceCare and Tiffany Tomasso, our chief operating officer, was appointed to the Board of Directors. Our investment in AllianceCare is accounted for under the cost method.

During December 2007, we decided to withdraw from ventures that owned two pieces of undeveloped land in Florida. We wrote off our remaining investment balance of approximately $1.1 million in the two projects.

In December 2007, we contributed $4.4 million for a 20% interest in an unconsolidated venture with COP Investment Group (Conrad Properties). The venture purchased an existing building for approximately $22.0 million and will renovate the building into a senior independent living facility.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

In September 2006, a venture acquired six senior living communities with a capacity for approximately 2,000 residents in Florida, operated under the Aston Gardens brand name for $450.0 million. The aggregate purchase price for the transaction was $450.0 million (which included approximately $134.0 million of debt assumption), plus $10.0 million in transaction costs for the total of $460.0 million. Our venture partner funded 75% of the equity (approximately $117.0 million) for this transaction and we funded the remaining 25% of the equity (approximately $39.0 million) with the balance of the purchase price (approximately $170.0 million) paid through financing obtained by the joint venture. We funded our $39.0 million portion of the acquisition through our existing cash balances and Bank Credit Facility. We also received an initial 20 year contract to manage these properties. In 2007 and into 2008, the operating results of the Aston Garden communities suffered due to adverse economic conditions in Florida for independent living communities including a decline in the real estate market. These operating results are insufficient to achieve compliance with the debt covenants for the mortgage debt for the properties. In July 2008, the venture received notice of default from the lender of $170.0 million of debt obtained by the venture at the time of the acquisition in September 2006. Later in July 2008, we received notice from our equity partner alleging a default under our management agreement as a result of receiving the notice from the lender. This debt is non-recourse to us. Based on our assessment, we have determined that our investment is impaired and as a result, we recorded a pre-tax impairment charge of approximately $21.6 million in the fourth quarter of 2007.

In June 2006, a new unconsolidated venture in which we held a 20% ownership interest acquired three communities and their management contracts from a third party. The total purchase price was $34.3 million, of which we contributed $3.8 million. During 2007, due to deteriorating performance for two of the three communities, an impairment charge of $8.9 million was recorded in the venture under SFAS No. 144, and we recorded our proportionate share of the loss, $1.8 million. In addition, we wrote-off our receivables due from the venture of approximately $1.9 million.


13.	Bank Credit Facility

On December 2, 2005, we entered into a $250.0 million secured Bank Credit Facility, which has since been reduced to $160.0 million as described below (the “Bank Credit Facility”), with a syndicate of banks. The Bank Credit Facility replaced our former credit facility. The Bank Credit Facility provides for both cash borrowings and letters of credit. It has an initial term of four years and matures on December 2, 2009, unless extended for an additional one-year period upon satisfaction of certain conditions. The Bank Credit Facility is secured by a pledge of all of the common and preferred stock issued by Sunrise Senior Living Management, Inc., Sunrise Senior Living Investments, Inc., Sunrise Senior Living Services, Inc. and Sunrise Development, Inc., each of which is our wholly-owned subsidiary, (together with us, the “Loan Parties”), and all future cash and non-cash proceeds arising therefrom and accounts and contract rights, general intangibles and notes, notes receivable and similar instruments owned or acquired by the Loan Parties, as well as proceeds (cash and non-cash) and products thereof.

Prior to the amendments described below, cash borrowings in US dollars initially accrued interest at LIBOR plus 1.70% to 2.25% plus a fee to participating lenders subject to certain European banking regulations or the Base Rate (the higher of the Federal Funds Rate plus 0.50% and Prime) plus 0.00% to 0.75%. The Bank Credit Facility also permits cash borrowings and letters of credit in currencies other than US dollars. Prior to the amendments described below, interest on cash borrowings in non-US currencies accrue at the rate of the Banking Federation of the European Union for the Euro plus 1.70% to 2.25%. Letters of credit fees are equal to 1.50% to 2.00% of the maximum available to be drawn on the letters of credit. We pay commitment fees of 0.25% on the unused balance of the Bank Credit Facility. Borrowings are used for general corporate purposes including investments, acquisitions and the refinancing of existing debt. There were $71.7 million of outstanding letters of credit and $100.0 million outstanding under the Bank Credit Facility at December 31, 2007. The letters of credit issued under the Bank Credit Facility expire within one year of issuance.

Borrowings under the Bank Credit Facility are considered short-term debt in our consolidated financial statements.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

During 2006 and 2007, we entered into several amendments to our Bank Credit Facility extending the time period for furnishing quarterly and audited annual financial information to the lenders. In connection with these amendments, the interest rate applicable to the outstanding balance under the Bank Credit Facility was also increased effective July 1, 2007 from LIBOR plus 2.25% to LIBOR plus 2.50%.

On January 31, February 19, March 13, and July 23, 2008, we entered into further amendments to the Bank Credit Facility. These amendments, among other things:


	•	modified to August 20, 2008 the delivery date for the unaudited financial statements for the quarter ended March 31, 2008;

	•	modified to September 10, 2008 the delivery date for the unaudited financial statements for the quarter ending June 30, 2008;

	•	temporarily (in February 2008) and then permanently (in July 2008) reduced the maximum principal amount available under the Bank Credit Facility to $160.0 million; and

	•	waived compliance with financial covenants in the Bank Credit Facility for the year ended December 31, 2007 and for the fiscal quarters ended March 31, 2008 and June 30, 2008, and waived compliance with the leverage ratio and fixed charge coverage ratio covenants for the fiscal quarter ending September 30, 2008.


	•	we must maintain liquidity of not less than $50.0 million, composed of availability under the Bank Credit Facility plus up to not more than $50.0 million in unrestricted cash and cash equivalents (tested as of the end of each calendar month), and any unrestricted cash and cash equivalents in excess of $50.0 million must be used to pay down the outstanding borrowings under the Bank Credit Facility;

	•	we are generally prohibited from declaring or making directly or indirectly any payment in the form of a stock repurchase or payment of a cash dividend or from incurring any obligation to do so; and

	•	the borrowing rate in US dollars, which was increased effective as of February 1, 2008, will remain LIBOR plus 2.75% or the Base Rate (the higher of the Federal Funds Rate plus 0.50% and Prime) plus 1.25% (through the end of the then-current interest period).

From and after the July 2008 amendment, we will continue to owe and pay fees on the unused amount available under the Bank Credit Facility as if the maximum outstanding amount was $160.0 million. Prior to the July 2008 amendment, fees on the unused amount were based on a $250.0 million outstanding maximum amount.

We paid the lenders an aggregate fee of approximately $0.9 million and $1.9 million for entering into amendments during 2007 and 2008, respectively.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

similar instruments owned or acquired by the Loan Parties, as well as proceeds (cash and non-cash) and products thereof, as security for the payment of obligations under the Bank Credit Facility arrangements.

Our Bank Credit Facility contains various other financial covenants and other restrictions, including provisions that: (1) require us to meet certain financial tests (for example, our Bank Credit Facility requires that we not exceed certain leverage ratios), maintain certain fixed charge coverage ratios, have a consolidated net worth of at least $450.0 million as adjusted each quarter and to meet other financial ratios, maintain a specified minimum liquidity and use excess cash and cash equivalents to pay down outstanding borrowings; (2) require consent for changes in control; and (3) restrict our ability and our subsidiaries’ ability to borrow additional funds, dispose of all or substantially all assets, or engage in mergers or other business combinations in which Sunrise is not the surviving entity, without lender consent.

In the event that we are unable to furnish the lenders with all of the financial information required to be furnished under the amended Bank Credit Facility by the specified dates and are not in compliance with the financial covenants in the Bank Credit Facility, including the leverage ratio and fixed charge coverage ratio, for the quarter ending December 31, 2008, or fail to comply with the new liquidity covenants included in the July 2008 amendment, the lenders under the Bank Credit Facility could, among other things, agree to a further extension of the delivery dates for the financial information or the covenant compliance requirements, exercise their rights to accelerate the payment of all amounts then outstanding under the Bank Credit Facility and require us to replace or provide cash collateral for the outstanding letters of credit or pursue further modification with respect to the Bank Credit Facility.


14.	Long-Term Debt

Long-term debt consists of the following (in thousands):


	December 31,
	2007			2006

Outstanding draws on Bank Credit Facility	$	100,000		$	50,000
Borrowings from Sunrise REIT		—			35,112
Mortgages, notes payable and other		153,888			105,493

		253,888			190,605
Current maturities		(222,541	)		(141,923	)

	$	31,347		$	48,682

Borrowings from Sunrise REIT

At December 31, 2006, there was $35.1 million of borrowings from Sunrise REIT outstanding. The borrowings were not collateralized and were related to communities we were developing for Sunrise REIT. All amounts were repaid in 2007.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

Other Mortgage and Notes Payable

At December 31, 2007 and 2006, there was $153.9 million and $105.5 million, respectively, of outstanding mortgages and notes payable. Of the amount of mortgages and notes payable outstanding at December 31, 2007, $121.2 million relates to 17 existing communities and communities under development that are collateralized by the assets of the respective community. Payments of interest and some principal payments are made monthly. Interest rates range from 3.4% to 8.5% with maturities ranging from less than one year to 19 years.

Of the amount of mortgages and notes payable outstanding at December 31, 2006, $45.6 million was owed to third parties for five of the communities we developed for Sunrise REIT. Interest was paid monthly for three of the development communities at a rate of LIBOR plus 2.25% (7.57% at December 31, 2006) and for one of the properties at a rate of LIBOR plus 2.35% (7.67% at December 31, 2006). Interest was paid for a Canadian development property loan at a rate of Canadian Prime plus 1.05 (7.00% at December 31, 2006). All amounts were repaid in 2007.

At December 31, 2006, $26.7 million of the remaining other mortgages and notes payable relate to six additional communities that are collateralized by the assets of the respective community. Payments of principal and interest are made monthly. Interest rates ranged from 4.78% to 8.50% with remaining maturities ranging from less than one year to 20 years.

At December 31, 2007 and December 31, 2006, we consolidated debt of $24.6 million and $25.2 million, respectively, related to an entity that we consolidate as it is a VIE and we are the primary beneficiary.

In November 2001, we entered into a $60.0 million revolving credit facility, expandable to $100.0 million. This credit facility was to mature in November 2006, was subject to a five-year extension, accrues interest at LIBOR plus 1.20% (5.8% at December 31, 2007) and is collateralized by senior living communities. The credit facility may be converted to a fixed rate facility at any time during the term. We pay commitment fees of 0.13% on the unused portion. In September 2003, we reduced the credit facility to $16.0 million. During 2006, the maturity date was extended to November 2011 based upon the terms of the credit facility. At December 31, 2007 and 2006, $8.1 million was outstanding and two communities were collateral for the credit facility.

At December 31, 2007 and 2006, the net book value of properties pledged as collateral for mortgages payable was $266.8 million and $191.6 million, respectively.

Principal maturities of long-term debt at December 31, 2007 are as follows (in thousands):


2008	$	222,541
2009		2,027
2010		1,174
2011		1,211
2012		1,263
Thereafter		25,672

	$	253,888

Interest paid totaled $14.1 million, $13.9 million and $13.3 million in 2007, 2006 and 2005, respectively. Interest capitalized was $9.3 million, $5.4 million and $5.6 million in 2007, 2006 and 2005, respectively.

We are obligated to provide annual audited financial statements and quarterly unaudited financial statements to various financial institutions that have made construction loans or provided permanent financing to entities directly or indirectly owned by us. In addition, some of these loans have financial covenant requirements that are similar to the Bank Credit Facility. In all such instances, the construction loans or permanent financing provided by financial institutions is secured by a mortgage or deed of trust on the financed community. The failure to provide our annual audited and quarterly unaudited financial statements or comply with financial covenants in accordance with the obligations of the relevant credit facilities or ancillary documents could be an event of default under such

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

documents, and could allow the financial institutions who have extended credit pursuant to such documents to seek remedies, including possible repayment of the loan. These loans total $117.6 million and $49.2 million at December 31, 2007 and 2006, respectively, and are classified as current liabilities as of those dates.


15.	Income Taxes

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount recognized for income tax purposes. The significant components of our deferred tax assets and liabilities are as follows (in thousands):


	December 31,
	2007			2006

Deferred tax assets:
Sunrise operating loss carryforwards — federal	$	1,910		$	1,910
Sunrise operating loss carryforwards — state		7,903			4,476
Sunrise operating loss carryforwards — foreign		5,650			2,515
Sunrise At Home loss carryforwards — federal and state		—			5,891
Sunrise At Home deferred tax assets, net		—			1,302
Financial guarantees		25,893			38,719
Accrued health insurance		14,872			17,159
Self-insurance liabilities		6,989			8,826
Stock-based compensation		7,636			7,518
Deferred development fees		29,258			5,923
Allowance for doubtful accounts		6,178			6,441
Tax credits		6,729			6,277
Accrued expenses and reserves		20,593			8,560
Entrance fees		14,228			10,661
Other		1,898			11,401

Gross deferred tax assets		149,737			137,579
Sunrise valuation allowances		(6,165	)		(3,800	)
Foreign deferred tax valuation allowance		(6,243	)		(2,071	)
Sunrise At Home valuation allowance		—			(7,193	)

Net deferred tax assets		137,329			124,515

Deferred tax liabilities:
Investments in ventures		(96,333	)		(80,093	)
Basis difference in property and equipment and intangibles		(74,826	)		(84,599	)
Prepaid expenses		(8,133	)		(5,932	)
Other		(7,075	)		(2,525	)

Total deferred tax liabilities		(186,367	)		(173,149	)

Net deferred tax liabilities	$	(49,038	)	$	(48,634	)

During 2006, the deferred tax assets and liabilities included assets and liabilities from Sunrise At Home, which was a consolidated VIE. In 2007, Sunrise At Home was merged into AllianceCare. As a result of the merger, we are no longer the primary beneficiary of Sunrise At Home and we deconsolidated Sunrise At Home as of the merger date.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

During 2006, we completed the acquisition of the stock of Trinity. In connection with this acquisition, we recorded a net deferred tax liability of approximately $0.6 million related to Trinity’s acquisition date temporary differences. During 2007, as a result of a review of the goodwill related to Trinity, we recorded an impairment loss of approximately $56.7 million. Approximately one-half of the impairment charge relates to non-deductible goodwill and results in a non-deductible loss that negatively impacts the 2007 tax rate.

During 2007 and 2006, we provided income taxes for unremitted earnings of our Canadian foreign subsidiaries that are not considered permanently reinvested. During 2007, we also provide for income taxes for unremitted earnings of our United Kingdom foreign subsidiaries that are not considered permanently reinvested. As of December 31, 2007, we have deferred tax assets that are fully reserved with respect to our German subsidiaries.

At December 31, 2007 and 2006, we had a total valuation allowance against deferred tax assets of $12.4 million and $13.1 million, respectively. In 2006, we have provided a full valuation allowance against the net deferred tax assets of Sunrise At Home because it was more likely than not that sufficient taxable income will not be generated to utilize the net deferred tax assets. As of December 31, 2007 and 2006, we have a valuation allowance of $1.3 million in both years against our foreign tax credits, which we do not view as more likely than not to be utilized to offset future U.S. taxable income. As of December 31, 2007 and 2006, we provided a valuation allowance relating to our German net deferred tax assets of $6.2 million and $2.1 million, respectively, because it is more likely than not that sufficient future German taxable income will not be generated to utilize the excess of the net operating loss carryforward over the future German taxable temporary differences. At December 31, 2007 and 2006, we established a valuation allowance of $4.0 million and $1.4 million, respectively, primarily relating to state net operating losses that are no longer viewed to be more likely than not to be utilized against future state taxable income prior to expiration.

At December 31, 2007, we have U.S. federal net operating losses of $77.4 million, which we will elect to carryback to 2006. At December 31, 2006, we had U.S. federal net operating loss carryforwards of $5.4 million from our Trinity acquisition, which are subject to a limitation as to annual use under Internal Revenue Code section 382 and which expire in tax years from 2024 through 2025. At December 31, 2007 and 2006, we had state net operating loss carryforwards valued at $8.2 million and $4.1 million respectively which are expected to expire from 2010 through 2023. At December 31, 2007 and 2006, we had German net operating loss carryforwards to offset future foreign taxable income of $13.0 million and $5.5 million respectively, which have an unlimited carryforward period to offset future taxable income in Germany. At December 31, 2006, Sunrise At Home had net operating loss carryforwards for U.S. federal income tax purposes of approximately $16.9 million which expire at various dates through 2026.

At December 31, 2007 and 2006, we had Alternative Minimum Tax credits of $4.9 million and $4.9 million, respectively, which carryforward indefinitely and can be offset against future regular U.S. tax. At December 31, 2007 and 2006, we had $1.3 million and $1.3 million, respectively, of foreign tax credit carryforward as of each

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

reporting date which expire in 2013. The major components of the provision for income taxes attributable to continuing operations are as follows (in thousands):


	Years Ended December 31,
	2007			2006			2005

Current:
Federal	$	(14,904	)	$	15,837		$	15,140
State		2,814			5,202			5,563
Foreign		2,098			26			2,096

Total current expense		(9,992	)		21,065			22,799
Deferred:
Federal		121			(4,178	)		27,236
State		(614	)		553			(337	)
Foreign		1,226			(228	)		2,458

Total deferred expense (benefit)		733			(3,853	)		29,357

Total tax (benefit) expense	$	(9,259	)	$	17,212		$	52,156

Current taxes payable for 2007, 2006 and 2005 have been reduced by approximately $2.2 million, $1.9 million, and $13.4 million, respectively, reflecting the tax benefit to us of employee stock options exercised during the year. The tax benefit for these option exercises has been recognized as an increase to additional paid-in capital.

The differences between the amount that would have resulted from applying the domestic federal statutory tax rate (35%) to pre-tax income from continuing operations and the reported income tax expense from continuing operations recorded for each year are as follows:


	Years Ended December 31,
(In thousands)	2007			2006			2005

(Loss) income before tax benefit (expense) taxed in the U.S.	$	(78,816	)	$	38,535		$	125,095
(Loss) income before tax benefit (expense) taxed in foreign jurisdictions		(718	)		(6,039	)		10,125

Total (loss) income before tax benefit (expense)	$	(79,534	)	$	32,496		$	135,220

Tax at US federal statutory rate		(35.0	)%		35.0	%		35.0	%
State taxes, net		(4.3	)%		4.2	%		3.9	%
Work opportunity credits		(0.6	)%		(1.3	)%		(1.2	)%
Change in valuation allowance		8.4	%		11.1	%		1.0	%
Tax exempt interest		(2.2	)%		(4.5	)%		(0.1	)%
Tax contingencies		2.3	%		4.4	%		(1.0	)%
Write-off of non-deductible goodwill		12.1	%		0.0	%		0.0	%
Foreign rate differential		(0.8	)%		0.0	%		0.0	%
U.S. tax related to foreign earnings		4.3	%		0.0	%		0.0	%
Other		4.2	%		4.1	%		1.0	%

		(11.6	)%		53.0	%		38.6	%

In September 2006, the FASB issued FASB Interpretation 48,Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109, Accounting for Income Taxes(“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

position taken or expected to be taken in a tax return. FIN 48 requires that we recognized in our financial statements the impact of a tax position if that position is more likely than not to be sustained on audit based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure.

We adopted the provisions of FIN 48 on January 1, 2007. There was no adjustment to our recorded tax liability as a result of adopting FIN 48. The total unrecognized tax benefits as of December 31, 2007 was $27.6 million. Included in the balance were $14.6 million of tax positions that, if recognized, would favorably impact the effective tax rate. We are under audit by the IRS for the 2006 tax year and it is possible that the amount of the liability for unrecognized tax-benefits could change during the next twelve month period. We file income tax returns, including returns for our subsidiaries, with federal, state, local and foreign jurisdictions. We have no other income tax return examinations by U.S., state, local or foreign jurisdictions, with the exception of Canada.


(In thousands)

Unrecognized tax benefit at beginning of year (January 1, 2007)	$	25,147
Change attributable to tax positions taken during a prior period		—
Change attributable to tax positions taken during a current period		2,643
Decrease attributable to settlements with taxing authorities		—
Decrease attributable to lapse in statute of limitations		(234	)

Unrecognized tax benefit at end of year (December 31, 2007)	$	27,556

In accordance with our accounting policy, we recognize interest and penalties related to unrecognized tax benefits as a component of tax expense. This policy did not change as a result of the adoption of FIN 48. Our consolidated statement of income for the year ended December 31, 2007 and our consolidated balance sheet as of that date include interest and penalties of $1.1 million and $3.5 million, respectively.


16.	Stockholders’ Equity

Stock Option Plans

In December 2004, the Financial Accounting Standards Board issued FASB Statement No. 123 (revised 2004),Share-Based Payment(“SFAS 123(R)”). SFAS 123(R) supersedes APB 25 and amends FASB Statement No. 95,Statement of Cash Flows. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized as expense based on their fair values. Pro forma disclosure is no longer an alternative. We adopted SFAS 123(R) on January 1, 2006, using the modified prospective method and, accordingly, the financial statements for prior periods do not reflect any restated amounts related to adoption. In accordance with SFAS 123(R), we are required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption.

The adoption of SFAS 123(R) resulted in the recognition of incremental share-based compensation costs of $3.6 million, before tax, a reduction in net income of $1.8 million (net of tax benefits of $1.8 million) and a reduction in basic net income per share of $0.04 and diluted net income per share of $0.03 in 2006. Additionally, the adoption of SFAS 123(R) resulted in a decrease of $3.6 million in reported cash flows from operating activities and an increase of $3.6 million in reported cash flows from investing activities related to the presentation of excess tax benefits from share-based awards for the year ended December 31, 2006.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

The following table illustrates the effect on net income and earnings per share as if we had applied fair value recognition provisions of SFAS 123(R) to share-based employee compensation in 2005. We have included the impact of measured but unrecognized compensation costs and excess tax benefits credited to additional paid-in capital in the calculation of diluted pro forma shares.


	Twelve Months Ended
	Dec. 31,
(In thousands, except per share data)	2005
	(Restated)

Net income	$	83,064
Add: Compensation expense included in net income, net of tax		3,331
Less: Total share-based employee compensation expense determined under fair-value method for all awards, net of tax		(9,359	)

Pro forma net income	$	77,036
Basic net income per share:
As reported	$	2.00
Pro forma	$	1.86
Diluted net income per share:
As reported	$	1.74
Pro forma	$	1.62

Stock Options

We have stock option plans providing for the grant of incentive and nonqualified stock options to employees, directors, consultants and advisors. At December 31, 2007, these plans provided for the grant of options to purchase up to 19,797,820 shares of common stock. Under the terms of the plans, the option exercise price and vesting provisions of the options are fixed when the option is granted. The options typically expire ten years from the date of grant and generally vest over a four-year period. The option exercise price is not less than the fair market value of a share of common stock on the date the option is granted.

In 1996, our Board of Directors approved a plan which provided for the potential grant of options to any director who is not an officer or employee of us or any of our subsidiaries (the “Directors’ Plan”). Under the terms of the Directors’ Plan, the option exercise price was not less than the fair market value of a share of common stock on the date the option was granted. The period for exercising an option began upon grant and generally ended ten years from the date the option was granted. All options granted under the Directors’ Plan were non-incentive stock options. There were 40,000 options outstanding under the plan at December 31, 2007. Our directors may be considered employees under the provisions of SFAS 123(R).

The fair value of stock options is estimated as of the date of grant using a Black-Scholes option valuation model that uses the assumptions noted in the following table. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term (estimated period of time outstanding) is estimated using the historical exercise behavior of employees and directors. Expected volatility is based on historical volatility for a period equal to the stock option’s expected term, ending on the day of grant, and calculated on a monthly basis. Compensation expense is recognized using the straight-line method for options with graded vesting.


	2007	2006	2005

Risk free interest rate	3.6%	4.8% - 5.2%	4.3% - 4.5%
Expected dividend yield	—	—	—
Expected term (years)	1.0	5.1 - 9.1	3.9 - 5.6
Expected volatility	25.5%	56.1% - 60.7%	32.3% - 62.0%

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

A summary of our stock option activity and related information for the year ended December 31, 2007 is presented below (share amounts are shown in thousands):


				Weighted		Remaining
				Average		Contractual
	Shares			Exercise Price		Term

Outstanding — beginning of year		3,767		$	14.96
Granted		—			—
Exercised		—			—
Forfeited		(33	)		16.27
Expired		(180	)		20.91

Outstanding — end of year		3,554			14.64		3.6

Vested and expected to vest — end of year		3,535			14.64		3.6

Exercisable — end of year		3,502			14.56		3.5

The weighted average grant date fair value of options granted was $23.28 and $12.44 per share in 2006 and 2005, respectively. No options were granted or exercised in 2007. The total intrinsic value of options exercised was $9.4 million and $33.0 million for 2006 and 2005, respectively. The fair value of shares vested was $1.3 million, $5.2 million and $13.1 million for 2007, 2006 and 2005, respectively. Unrecognized compensation expense related to the unvested portion of our stock options was approximately $0.3 million as of December 31, 2007, and is expected to be recognized over a weighted-average remaining term of approximately 1.1 years.

In 2007, the Compensation Committee of our Board of Directors extended the exercise period of stock options that were set to expire unexercised due to the inability of the optionees to exercise the options because we were not current in our SEC filings. The Compensation Committee set the new expiration date as 30 days after we become a current filer with the SEC. As a result of this modification, we recognized $2.4 million of stock-based compensation expense.

We generally issue shares for the exercise of stock options from authorized but unissued shares.

Restricted Stock

We have restricted stock plans providing for the grant of restricted stock to employees and directors. These grants vest over one to ten years and some vesting may be accelerated if certain performance criteria are met. Compensation expense is recognized using the straight-line method for restricted stock with graded vesting.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

A summary of our restricted stock activity and related information for the years ended December 31, 2007, 2006, and 2005 is presented below (share amounts are shown in thousands):


				Weighted Average
				Grant Date
	Shares			Fair Value

Nonvested, January 1, 2005		531		$	13.18
Granted		412			26.67
Vested		(101	)		13.12
Canceled		—			—

Nonvested, December 31, 2005		842			19.79
Granted		45			35.75
Vested		(37	)		24.48
Canceled		(16	)		25.22

Nonvested, December 31, 2006		834			20.34
Granted		88			33.87
Vested		(288	)		14.01
Canceled		(108	)		27.38

Nonvested, December 31, 2007		526			24.64

The total fair value of restricted shares vested was $14.01 per share and $24.48 per share for 2007 and 2006, respectively. Unrecognized compensation expense related to the unvested portion of our restricted stock was approximately $8.0 million as of December 31, 2007, and is expected to be recognized over a weighted-average remaining term of approximately 3.6 years.

Under the provisions of SFAS 123(R), the recognition of deferred compensation (a contra-equity account representing the amount of unrecognized restricted stock expense that is reduced as expense is recognized) at the date restricted stock is granted is no longer required. Therefore, we eliminated the amount in “Deferred compensation-restricted stock” against “Additional paid-in capital” in our December 31, 2006 consolidated balance sheet.

Restricted stock shares are generally issued from existing shares.

Restricted Stock Units

In addition to equity awards under our equity award plans, to encourage greater stock ownership, we have a Bonus Deferral Program for certain executive officers. The Bonus Deferral Program provides that these executive officers may elect to receive all or a portion of their annual bonus payments, if any, in the form of fully-vested, but deferred, restricted stock units in lieu of cash (such restricted stock units are referred to as “base units”). In addition, at the time of the deferral election, each executive officer must also elect a vesting period of from two to four years and, based on the vesting period chosen, will receive additional restricted stock units equal to 20% to 40% of the deferral bonus amount (such additional restricted stock units are referred to as “supplemental units”). The supplemental units, but not the base units, are subject to the vesting period chosen by the executive and will vest in full upon conclusion of the period (assuming continued employment by the executive). Delivery of the shares of our common stock represented by both the base units and supplemental units is made to the executive officer upon the conclusion of the vesting period applicable to the supplemental units, or the first day of the next open window period under the Company’s insider trading program, if the trading window is closed on the vesting date, or, if so elected by the executive at retirement (as defined in the Bonus Deferral Program), thus further providing a

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

retention incentive to the named executive officers electing to participate in the program. Compensation expense is recognized using the straight-line method for restricted stock units with graded vesting.

Repurchase of Outstanding Shares

The Board of Directors previously approved repurchase programs that expired in May 2005 providing for the repurchase of an aggregate of $200.0 million of our common stockand/or the outstanding 5.25% convertible subordinated notes that were due 2009. In November 2005, Sunrise’s Board of Directors approved a new repurchase program that provides for the repurchase of up to $50.0 million of Sunrise’s common stock. This program extended through December 31, 2007. There were no share repurchases under this program in 2007 or 2006. In 2005, 347,980 shares were repurchased at an average price of $25.03.

Stockholder Rights Agreement

We have a Stockholders Rights Agreement (“Rights Agreement”). All shares of common stock issued by us between the effective date of adoption of the Rights Agreement (April 24, 1996) and the Distribution Date (as defined below) have rights attached to them. The Rights Agreement was renewed in April 2006 and the rights expire on April 24, 2016. The Rights Agreement replaced our prior rights plan, dated as of April 25, 1996, which expired by its terms on April 24, 2006. Each right, when exercisable, entitles the holder to purchase one one-thousandth of a share of Series D Junior Participating Preferred Stock at a price of $170.00 per one one-thousand of a share (the “Purchase Price”). Until a right is exercised, the holder thereof will have no rights as a stockholder with respect to this right.

The rights initially attach to the common stock. The rights will separate from the common stock and a distribution of rights certificates will occur (a “Distribution Date”) upon the earlier of (1) ten days following a public announcement that a person or group (an “Acquiring Person”) has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the outstanding shares of common stock (the “Stock Acquisition Date”) or (2) ten business days (or such later date as the Board of Directors may determine) following the commencement of, or the first public announcement of the intention to commence, a tender offer or exchange offer, the consummation of which would result in the beneficial ownership by a person of 20% or more of the outstanding shares of common stock.

In general, if a person becomes the beneficial owner of 20% or more of the then outstanding shares of common stock, each holder of a right will, after the end of the redemption period referred to below, have the right to exercise the right by purchasing for an amount equal to the Purchase Price common stock (or in certain circumstances, cash, property or other securities of us) having a value equal to two times the Purchase Price. All rights that are or were beneficially owned by the Acquiring Person will be null and void. If at any time following the Stock Acquisition Date (1) we are acquired in a merger or other business combination transaction, or (2) 50% or more of our assets or earning power is sold or transferred, each holder of a right shall have the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the Purchase Price. Our Board of Directors generally may redeem the rights in whole, but not in part, at a price of $.005 per right (payable in cash, common stock or other consideration deemed appropriate by our Board of Directors) at any time until ten days after a Stock Acquisition Date. In general, at any time after a person becomes an Acquiring Person, the Board of Directors may exchange the rights, in whole or in part, at an exchange ratio of one share of common stock for each outstanding right.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)


17.	Net (Loss) Income Per Common Share

The following table summarizes the computation of basic and diluted net (loss) income per common share amounts presented in the accompanying consolidated statements of income (in thousands, except per share amounts):


	Years Ended December 31,
	2007			2006		2005
				(Restated)		(Restated)

Numerator for basic net (loss) income per share:
Net (loss) income	$	(70,275	)	$	15,284	$	83,064

Numerator for diluted net (loss) income per share:
Net (loss) income	$	(70,275	)	$	15,284	$	83,064
Assumed conversion of convertible notes, net of tax		—			—		4,376

Diluted net (loss) income	$	(70,275	)	$	15,284	$	87,440

Denominator:
Denominator for basic net (loss) income per common share — weighted average shares		49,851			48,947		41,456
Effect of dilutive securities:
Employee stock options and restricted stock		—			1,775		2,234
Convertible notes		—			—		6,695

Denominator for diluted net (loss) income per common share — weighted average shares plus assumed conversions		49,851			50,722		50,385

Basic net (loss) income per common share	$	(1.41	)	$	0.31	$	2.00

Diluted net (loss) income per common share		(1.41	)		0.30		1.74

Options are included under the treasury stock method to the extent they are dilutive. Shares issuable upon exercise of stock options after applying the treasury stock method of 1,367,157, 133,500 and 524,500 for 2007, 2006 and 2005, respectively, have been excluded from the computation because the effect of their inclusion would be anti-dilutive. The impact of the convertible notes has been excluded for 2006 because the effect would be anti-dilutive.


18.	Commitments and Contingencies

Leases for Office Space

Rent expense for office space for 2007, 2006, and 2005 was $8.4 million, $6.9 million, and $5.8 million, respectively. We lease our corporate offices, regional offices and development offices under various leases. In 1998, we entered into an agreement to lease new office space for our corporate headquarters, which expires in September 2013. The lease had an initial annual base rent of $1.2 million. In September 2003, we entered into an agreement to lease additional office space for our corporate headquarters. The new lease commenced in September 2003 and expires in September 2013. The lease has an initial annual base rent of $3.0 million. The base rent for both of these leases escalates approximately 2.5% per year in accordance with the base rent schedules.

In connection with the acquisition of Greystone in May 2005, we assumed a ten year operating lease that expires in 2013 with the option to extend for seven years. The lease was amended in 2006 to expand the leased space. Based on this agreement, the current annual base rent of $1.1 million will increase to $1.2 million by 2008

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

and then decrease in 2009 through the remainder of the lease term. Both the initial agreements and 2006 amendment provided for lease incentives for leasehold improvements for a total of $0.9 million. These assets are included in “Property and equipment, net” in the consolidated balance sheet and are being amortized over the lease term. The incentives were recorded as deferred rent and are being amortized as a reduction to lease expense over the lease term.

Leases for Operating Communities

We have also entered into operating leases, as the lessee, for four communities. Two communities commenced operations in 1997 and two communities commenced operations in 1998. In connection with the acquisition of Karrington Health, Inc. in May 1999, we assumed six operating leases for six senior living communities and a ground lease. The operating lease terms vary from 15 to 20 years, with two ten-year extension options. We also have two other ground leases related to two communities in operation. Lease terms range from 15 to 99 years and are subject to annual increases based on the consumer price indexand/or stated increases in the lease.

In connection with the acquisition of Marriott Senior Living Services, Inc. (“MSLS”) in March 2003, we assumed 14 operating leases and renegotiated an existing operating lease agreement for another MSLS community in June 2003. We also entered into two new leases with a landlord who acquired two continuing care retirement communities from MSLS at the same date. Fifteen of the leases expire in 2013, while the remaining two leases expire in 2018. The leases had initial terms of 20 years, and contain one or more renewal options, generally for five to 15 years. The leases provide for minimum rentals and additional rentals based on the operations of the leased community. Rent expense for operating communities subject to operating leases was $69.0 million, $62.0 million and $57.9 million for 2007, 2006 and 2005, respectively, including contingent rent expense of $8.2 million, $6.5 million, and $4.8 million for 2007, 2006, and 2005, respectively.

Future minimum lease payments under office, equipment, ground and other operating leases at December 31, 2007 are as follows (in thousands):


2008	$	68,532
2009		71,811
2010		72,185
2011		69,430
2012		68,843
Thereafter		376,972

	$	727,773

Letters of Credit

In addition to the letters of credit discussed in Note 13 related to our Bank Credit Facility and the Sunrise Captive, we have letters of credit outstanding of $1.9 million and $1.6 million as of December 31, 2007 and 2006, respectively. These letters of credit primarily relate to our insurance programs.

Land Purchase Commitments

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

Guarantees

As discussed in Note 7, in conjunction with our development ventures, we have provided project completion guarantees to venture lenders and the venture itself, operating deficit guarantees to the venture lenders whereby after depletion of established reserves we guarantee the payment of the lender’s monthly principal and interest during the term of the guarantee and guarantees to the venture to fund operating shortfalls. In conjunction with the sale of certain operating communities to third parties we have guaranteed a set level of net operating income or guaranteed a certain return to the buyer. As guarantees entered into in conjunction with the sale of real estate prevent us from either being able to account for the transaction as a sale or to recognize profit from that sale transaction, the provisions of FASB Interpretation No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others(“FIN 45”), do not apply to these guarantees.

In conjunction with the formation of new ventures that do not involve the sale of real estate, the acquisition of equity interests in existing ventures, and the acquisition of management contracts, we have provided operating deficit guarantees to venture lendersand/or the venture itself as described above, guarantees of debt repayment to venture lenders in the event that the venture does not perform under the debt agreements and guarantees of a set level of net operating income to venture partners. The terms of the operating deficit guarantees and debt repayment guarantees match the term of the underlying venture debt and generally range from three to seven years. The terms of the guarantees of a set level of net operating income range from 18 months to seven years. Fundings under the operating deficit guarantees and debt repayment guarantees are generally recoverable either out of future cash flows of the venture or upon proceeds from the sale of communities. Fundings under the guarantees of a set level of net operating income are generally not recoverable.


			FIN 45		FAS 5		Total
			Liability		Liability		Liability
			for Future		for Future		for Future
	Maximum Potential		Fundings at		Fundings at		Fundings at		Fundings
	Amount of Future		December 31,		December 31,		December 31,		during
Guarantee Type	Fundings		2007		2007		2007		2007

Debt repayment	$	16,832	$	785	$	—	$	785	$	—
Operating deficit		Uncapped		1,371		42,023		43,394		5,829
Income support		Uncapped		960		16,525		17,485		—
Other				—		4,150		4,150		—

Total			$	3,116	$	62,698	$	65,814	$	5,829

Generally, the financing obtained by our ventures is non-recourse to the venture members, with the exception of the debt repayment guarantees discussed above. However, we have entered into guarantees with the lenders with respect to acts which we believe are in our control, such as fraud, that create exceptions to the non-recourse nature of debt. If such acts were to occur, the full amount of the venture debt could become recourse to us. The combined amount of venture debt underlying these guarantees is approximately $3.0 billion at December 31, 2007. We have not funded under these guarantees, and do not expect to fund under such guarantees in the future.

To the extent that a third party fails to satisfy this obligation with respect to two continuing care retirement communities managed by the Company, we would be required to repay this obligation, the majority of which is expected to be refinanced with proceeds from the issuance of entrance fees as new residents enter the communities. At December 31, 2007, the remaining liability under this obligation is $56.6 million.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

The Fountains

Germany Venture

At December 31, 2007 and June 30, 2008, we provided pre-opening and management services to eight and nine communities, respectively, in Germany. In connection with the development of these communities, we provided operating deficit guarantees to cover cash shortfalls until the communities reach stabilization. These communities have not performed as well as originally expected. In 2006, we recorded a pre-tax charge of $50.0 million as we did not expect full repayment of the loans from the funding. In 2007, we recorded an additional $16.0 million pre-tax charge based on changes in expected future cash flows. Our estimates underlying the pre-tax charge include certain assumptions as tolease-up of the communities. To the extent that suchlease-up is slower than our projections, we could incur significant additional pre-tax charges in subsequent periods as we would be required to fund additional amounts under the operating deficit guarantees. Through June 30, 2008, we have funded $37.0 million under these guarantees and other loans. We expect to fund an additional $62.0 million through 2012, the date at which we estimate no further funding will be required.

Legal Proceedings

Trinity OIG Investigation andQui Tam Action

As previously disclosed, on September 14, 2006, we acquired all of the outstanding stock of Trinity. As a result of this transaction, Trinity became an indirect, wholly owned subsidiary of the Company. On January 3, 2007, Trinity received a subpoena from the Phoenix field office of the Office of the Inspector General of the Department of Health and Human Services (“OIG”) requesting certain information regarding Trinity’s operations in three locations for the period January 1, 2000 through June 30, 2006, a period that was prior to the Company’s acquisition of Trinity. The Company was advised that the subpoena was issued in connection with an investigation being conducted by the Commercial Litigation Branch of the U.S. Department of Justice and the civil division of the U.S. Attorney’s office in Arizona. The subpoena indicates that the OIG is investigating possible improper Medicare billing under the Federal False Claims Act (“FCA”). In addition to recovery of any Medicare reimbursements previously paid for false claims, an entity found to have submitted false claims under the FCA may be subject to treble damages plus a fine of between $5,500 and $11,000 for each false claim submitted. Trinity has complied with the subpoena and continues to supplement its responses as requested.

On September 11, 2007, Trinity and the Company were served with a complaint filed on September 5, 2007 in the United States District Court for the District of Arizona. That filing amended a complaint filed under seal on November 21, 2005 by four former employees of Trinity under thequi tam provisions of the FCA. Thequi tamprovisions authorize persons (“relators”) claiming to have evidence that false claims may have been submitted to the United States to file suit on behalf of the United States against the party alleged to have submitted such false claims.Qui tamsuits remain under seal for a period of at least 60 days to enable the government to investigate the allegations and to decide whether to intervene and litigate the lawsuit, or, alternatively, to decline to intervene, in which case thequi tamplaintiff, or “relator,” may proceed to litigate the case on behalf of the United States.Qui tamrelators are entitled to 15% to 30% of the recovery obtained for the United States by trial or settlement of the claims

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

they file on its behalf. On June 6, 2007, the Department of Justice and the U.S. Attorney for Arizona filed a Notice with the Court advising of its decision not to intervene in the case, indicating that its investigation was still ongoing. This action followed previous applications by the U.S. Government for extensions of time to decide whether to intervene. As a result, on July 10, 2007, the Court ordered the complaint unsealed and the litigation to proceed. The matter is therefore currently being litigated by the four individual relators. However, under the FCA, the U.S. Government could still intervene in the future. The amended complaint alleges that during periods prior to the acquisition by the Company, Trinity engaged in certain actions intended to obtain Medicare reimbursement for services rendered to beneficiaries whose medical conditions were not of a type rendering them eligible for hospice reimbursement and violated the FCA by submitting claims to Medicare as if the services were covered services. The relators alleged in their amended complaint that the total loss sustained by the United States is probably in the $75 million to $100 million range. On July 3, 2008, the amended complaint was revised in the form of a second amended complaint which replaced the loss sustained range of $75 to $100 million with an alleged loss by the United States of at least $100 million. The original complaint named KRG Capital, LLC (an affiliate of former stockholders of Trinity) and Trinity Hospice LLC (a subsidiary of Trinity) as defendants. The amended complaint names Sunrise Senior Living, Inc., KRG Capital, LLC and Trinity as defendants. The lawsuit is styledUnited States ex rel. Joyce Roberts, et al., v. KRG Capital, LLC, et al., CV05 3758 PHX-MEA (D. Ariz.).

On February 13, 2008, Trinity received a subpoena from the Los Angeles regional office of the OIG requesting information regarding Trinity’s operations in 19 locations for the period between December 1, 1998 through February 12, 2008. This subpoena relates to the ongoing investigation being conducted by the Commercial Litigation Branch of the U.S. Department of Justice and the civil division of the U.S. Attorney’s Office in Arizona, as discussed above. Trinity is in the process of complying with the subpoena.

In 2006, the Company recorded a loss of $5.0 million for possible fines, penalties and damages related to this matter. In 2007, the Company recorded an additional loss of $1.0 million.

IRS Audit

The Internal Revenue Service is auditing our federal income tax return for the years ended December 31, 2006 and 2005 and our federal employment tax returns for 2004, 2005 and 2006. In July 2008, the IRS completed the field work with respect to their audit of our federal income tax return for the year ended December 31, 2005. We will make a payment of approximately $0.2 million for additional taxes plus interest.

SEC Investigation

We previously announced on December 11, 2006 that we had received a request from the SEC for information about insider stock sales, timing of stock option grants and matters relating to our historical accounting practices that had been raised in media reports in the latter part of November 2006 following receipt of a letter by us from the Service Employees International Union. On May 25, 2007, we were advised by the staff of the SEC that it has commenced a formal investigation. We have fully cooperated, and intend to continue to fully cooperate, with the SEC.

Putative Class Action Litigation

Two putative securities class actions, styledUnited Food & Commercial Workers Union Local 880-Retail Food Employers Joint Pension Fund, et al. v. Sunrise Senior Living, Inc., et al., Case No. 1:07CV00102, andFirst New York Securities, L.L.C. v. Sunrise Senior Living, Inc., et al., Case No. 1:07CV000294, were filed in the U.S. District Court for the District of Columbia on January 16, 2007 and February 8, 2007, respectively. Both complaints alleged securities law violations by Sunrise and certain of its current or former officers and directors based on allegedly improper accounting practices and stock option backdating, violations of generally accepted accounting principles, false and misleading corporate disclosures, and insider trading of Sunrise stock. Both sought to certify a class for the period August 4, 2005 through June 15, 2006, and both requested damages and equitable

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

relief, including an accounting and disgorgement. Pursuant to procedures provided by statute, two other parties, the Miami General Employees’ & Sanitation Employees’ Retirement Trust and the Oklahoma Firefighters Pension and Retirement System, appeared and jointly moved for consolidation of the two securities cases and appointment as the lead plaintiffs, which the Court ultimately approved. The cases were consolidated on July 31, 2007. Thereafter, a stipulation was submitted pursuant to which the new putative class plaintiffs filed their consolidated amended complaint (under the captionIn re Sunrise Senior Living, Inc. Securities Litigation, CaseNo. 07-CV-00102-RBW) on June 6, 2008. The complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, andRule 10b-5 promulgated thereunder, and names as defendants the Company, Paul J. Klaassen, Teresa M. Klaassen, Thomas B. Newell, Tiffany L. Tomasso, Larry E. Hulse, Carl G. Adams, Barron Anschutz, and Kenneth J. Abod. The defendants’ responses will be filed on August 11, 2008. We intend to move to dismiss the complaint at that time and anticipate that the individual defendants will do so as well.

Putative Shareholder Derivative Litigation

On January 19, 2007, the first of three putative shareholder derivative complaints was filed in the U.S. District Court for the District of Columbia against certain of our current and former directors and officers, and naming us as a nominal defendant. The three cases are captioned:Brockton Contributory Retirement System v. Paul J. Klaassen, et al., Case No. 1:07CV00143 (USDC);Catherine Molner v. Paul J. Klaassen, et al., Case No. 1:07CV00227 (USDC) (filed1/31/2007);Robert Anderson v. Paul J. Klaassen, et al., Case No. 1:07CV00286 (USDC) (filed2/5/2007). Counsel for the plaintiffs subsequently agreed among themselves to the appointment of lead plaintiffs and lead counsel. On June 29, 2007, the lead plaintiffs filed a Consolidated Shareholder Derivative Complaint, again naming us as a nominal defendant, and naming as individual defendants Paul J. Klaassen, Teresa M. Klaassen, Ronald V. Aprahamian, Craig R. Callen, Thomas J. Donohue, J. Douglas Holladay, William G. Little, David G. Bradley, Peter A. Klisares, Scott F. Meadow, Robert R. Slager, Thomas B. Newell, Tiffany L. Tomasso, John F. Gaul, Bradley G. Rush, Carl Adams, David W. Faeder, Larry E. Hulse, Timothy S. Smick, Brian C. Swinton and Christian B. A. Slavin. The complaint alleges violations of federal securities laws and breaches of fiduciary duty by the individual defendants, arising out of the same matters as are raised in the purported class action litigation described above. The plaintiffs seek damages and equitable relief on behalf of Sunrise. We and the individual defendants filed separate motions to dismiss the consolidated complaint. On the date that their oppositions to those motions were due, the plaintiffs instead attempted to file, over the defendants’ objections, an amended consolidated complaint that does not substantially alter the nature of their claims. The amended consolidated complaint was eventually accepted by the Court and deemed to have been filed on March 28, 2008. We and the individual defendants filed preliminary motions in response to the amended consolidated complaint on June 16, 2008. The plaintiffs also have filed a motion to lift the stay on discovery in this derivative suit. The motion has been briefed and is pending.

On March 6, 2007, a putative shareholder derivative complaint was filed in the Court of Chancery in the State of Delaware against Paul J. Klaassen, Teresa M. Klaassen, Ronald V. Aprahamian, Craig R. Callen, Thomas J. Donohue, J. Douglas Holladay, David G. Bradley, Robert R. Slager, Thomas B. Newell, Tiffany L. Tomasso, Carl Adams, David W. Faeder, Larry E. Hulse, Timothy S. Smick, Brian C. Swinton and Christian B. A. Slavin, and naming us as a nominal defendant. The case is captionedPeter V. Young, et al. v. Paul J. Klaassen, et al., CaseNo. 2770-N (CCNCC). The complaint alleges breaches of fiduciary duty by the individual defendants arising out of the grant of certain stock options that are the subject of the purported class action and shareholder derivative litigation described above. The plaintiffs seek damages and equitable relief on behalf of Sunrise. We and the individual defendants separately filed motions to dismiss this complaint on June 6, 2007 and June 13, 2007. The plaintiffs amended their original complaint on September 17, 2007. On November 2, 2007, we and the individual defendants moved to dismiss the amended complaint. In connection with the motions to dismiss, and at plaintiffs’ request, the Chancery Court issued an order on April 25, 2008 directing us to produce a limited set of documents relating to the Special Independent Committee’s findings with respect to historic stock options grants. We produced

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

those documents to the plaintiffs on May 16, 2008. The defendants’ motions to dismiss have been briefed and are pending.

In addition, two putative shareholder derivative suits were filed in August and September 2006, which were subsequently dismissed. The cases were filed in the Circuit Court for Fairfax County, Virginia, captionedNicholas Von Guggenberg v. Paul J. Klaassen, et al., Case No. CL 200610174 (FCCC) (filed8/11/2006); andCatherine Molner v. Paul J. Klaassen, et al., Case No. CL 200611244 (FCCC) (filed9/6/2006). The complaints were very similar (and filed by the same attorneys), naming certain of our current and former directors and officers as individual defendants, and naming us as a nominal defendant. The complaints both alleged breaches of fiduciary duty by the individual defendants, arising out of the grant of certain stock options that are the subject of the purported class action and shareholder derivative litigation described above. TheVon Guggenberg suit was dismissed pursuant to preliminary motions filed by Sunrise (the plaintiff subsequently filed a petition for appeal with the Supreme Court of Virginia, which was denied, thus concluding the case). TheMolner suit was dismissed when the plaintiff filed an uncontested notice of non-suit (permitted by right under Virginia law), after the Company had filed preliminary motions making the same arguments that resulted in the dismissal of theVon Guggenberg suit. As described above, the plaintiff inMolner later refiled suit in the U.S. District Court for the District of Columbia.

Resolved Litigation

Pursuant to an agreement reached between the parties in May 2008, the Company settled with no admission of fault by either party the previously disclosed litigation filed by Bradley B. Rush, the Company’s former chief financial officer, in connection with the termination of his employment. As previously disclosed, on April 23, 2007, Mr. Rush was suspended with pay. The action was taken by the board of directors following a briefing of the independent directors by WilmerHale, independent counsel to the Special Independent Committee. The Board concluded, among other things, that certain actions taken by Mr. Rush were not consistent with the document retention directives issued by the Company. These actions consisted of Mr. Rush’s deletion of all active electronic files in his user account on one of his Company-issued laptops. Mr. Rush’s employment thereafter was terminated for cause on May 2, 2007. Mr. Rush’s lawsuit asserted that his termination was part of an alleged campaign of retaliation against him for purportedly uncovering and seeking to address accounting irregularities, and it contended that his termination was not for “cause” under the Company’s Long Term Incentive Cash Bonus Plan and the terms of prior awards made to him of certain stock options and shares of restricted stock, to which he claimed entitlement notwithstanding his termination. Mr. Rush asserted five breach of contract claims involving a bonus, restricted stock and stock options. Mr. Rush also asserted a claim for defamation arising out of comments attributed to us concerning the circumstances of his earlier suspension of employment.

Other Pending Lawsuits and Claims

In addition to the lawsuits and litigation matters described above, we are involved in various lawsuits and claims arising in the normal course of business. In the opinion of management, although the outcomes of these other suits and claims are uncertain, in the aggregate they are not expected to have a material adverse effect on our business, financial condition, and results of operations.


19.	Related-Party Transactions

Sunrise Senior Living Real Estate Investment Trust

In December 2004, we closed the initial public offering of Sunrise REIT, an independent entity we established in Canada. Sunrise REIT was formed to acquire, own and invest in income producing senior living communities in Canada and the United States.

Concurrent with the closing of its initial public offering, Sunrise REIT issued C$25.0 million (U.S. $20.8 million at December 31, 2004) principal amount of subordinated convertible debentures to us, convertible at the rate of

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

C$11.00 per unit. We held a minority interest in one of Sunrise REIT’s subsidiaries and held the convertible debentures until November 2005, but did not own any common shares of Sunrise REIT. We entered into a30-year strategic alliance agreement that gave us the right of first opportunity to manage all Sunrise REIT communities and Sunrise REIT had a right of first offer to consider all development and acquisition opportunities sourced by us in Canada. Pursuant to this right of first offer, we and Sunrise REIT entered into fixed price acquisition agreements with respect to seven development communities at December 31, 2005. In addition, we had the right to appoint two of the eight trustees that oversaw the governance, investment guidelines, and operating policies of Sunrise REIT.

The proceeds from the offering and placement of the debentures were used by Sunrise REIT to acquire interests in 23 senior living communities from us and our ventures, eight of which are in Canada and 15 of which are in the United States. Three of these communities were acquired directly from us for an aggregate purchase price of approximately $40.0 million and 20 were acquired from ventures in which we participated for an aggregate purchase price of approximately $373.0 million. With respect to the three Sunrise consolidated communities, we realized “Gain on sale and development of real estate and equity interests” of $2.2 million in 2004, and deferred gain of $4.1 million, which was recognized in the fourth quarter of 2006. We contributed our interest in the 15 U.S. communities to an affiliate of Sunrise REIT in exchange for a 15% ownership interest in that entity. Sunrise REIT also acquired an 80% interest in a one of our communities that was inlease-up in Canada for a purchase price of approximately $12.0 million, with us retaining a 20% interest. We also recognized $2.1 million of “Professional fees from development, marketing and other” revenue in 2004 for securing debt on behalf of Sunrise REIT. We had seven wholly owned communities under construction at December 31, 2005, of which two were sold to Sunrise REIT in 2006, and five wholly owned communities under construction at December 31, 2006, which were to be sold to Sunrise REIT in 2007.

In April 2007, Ventas, Inc., a large healthcare REIT, acquired Sunrise REIT, the owner of 77 Sunrise communities. We have an ownership interest in 56 of these communities. The management contracts for these communities did not change.

We recognized the following in our consolidated statements of operations related to Sunrise REIT only for the period for which they were a related party (in thousands):


	Years Ended December 31,
	2007		2006		2005

Management fees	$	5,518	$	16,448	$	11,443
Reimbursed contract services		77,277		130,455		70,525
Gain on sale and development of real estate		8,854		43,223		575
Interest income received from Sunrise REIT convertible debentures		—		—		1,028
Interest incurred on borrowings from Sunrise REIT		414		3,312		2,611
Sunrise’s share of earnings and return on investment in unconsolidated communities		180		4,326		718

Sunrise Senior Living Foundation

Sunrise Senior Living Foundation (“SSLF”) is an independent, not-for-profit organization whose purpose is to operate schools and day care facilities, provide low and moderate income assisted living housing and own and operate a corporate conference center. Paul and Teresa Klaassen, our Chief Executive Officer and director and Chief Cultural Officer and director, respectively, are the primary contributors to, and serve on the board of directors and serve as officers of, SSLF. One or both of them also serve as directors and as officers of various SSLF subsidiaries. Certain other of our employees also serve as directorsand/or officers of SSLF and its subsidiaries. Since November 2006, the Klaassens’ daughter has been the Director of SSLF. She was previously employed by SSLF from June 2005 to July 2006. Since October 2007, the Klaassens’son-in-law has also been employed by SSLF. For

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

many years, we provided administrative services to SSLF, including payroll administration and accounts payable processing. We also provided an accountant who was engaged full-time in providing accounting services to SSLF, including the schools. SSLF paid Sunrise $49,000 in 2006 and $84,000 in 2005 for the provision of these services. We estimate that the aggregate cost of providing these services to SSLF totaled approximately $52,000 and $81,000 for 2006 and 2005, respectively. In August 2006, SSLF hired an outside accounting firm to provide the accounting and administrative services previously provided by us. As a result, we no longer provide any significant administrative services to SSLF. Beginning January 2007, one of our employees became the full-time director of the schools operated by a subsidiary of SSLF, while continuing to provide certain services to us. Through October 2007, we continued to pay the salary and benefits of this former employee. In March 2008, SSLF reimbursed us approximately $68,000, representing the portion of the individual’s salary and benefits attributable to serving as the director of the schools.

Prior to April 2005, we managed the corporate conference center owned by SSLF (the “Conference Facility”) and leased the employees who worked at the Conference Facility under an informal arrangement. Effective April 2005, we entered into a contract with the SSLF subsidiary that currently owns the property to manage the Conference Facility. Under the contract, we receive a discount when renting the Conference Facility for management, staff or corporate events, at an amount to be agreed upon, and priority scheduling for use of the Conference Facility, and are to be paid monthly a property management fee of 1% of gross revenues for the immediately preceding month, which we estimate to be our cost of managing this property. The costs of any of our employees working on the property are also to be paid, in addition to the 1% property management fee. In addition, we agreed, if Conference Facility expenses exceed gross receipts, determined monthly, to make non-interest bearing loans in an amount needed to pay Conference Facility expenses, up to a total amount of $75,000 per12-month period. Any such loan is required to be repaid to the extent gross receipts exceed Conference Facility expenses in any subsequent months. There were no loans made by us under this contract provision in 2006 or 2007. Either party may terminate the management agreement upon 60 days’ notice. Salary and benefits for our employees who manage the Conference Facility, which are reimbursed by SSLF, totaled approximately $0.3 million in both 2007 and 2006 and $0.2 million in 2005. In 2007 and 2006, we earned $6,000 in management fees. We rent the conference center for management, staff and corporate events and paid approximately $0.1 million in 2007, $0.2 million in 2006 and $0.3 million in 2005 to SSLF. The Trinity Forum, a faith-based leadership forum of which Mr. Klaassen is the past chairman and is currently a trustee, operates a leadership academy on a portion of the site on which the Conference Facility is located. The Trinity Forum does not pay rent for this space, but leadership academy fellows who reside on the property provide volunteer services at the Conference Facility.

SSLF’s stand-alone day care center, which provides day care services for our employees and non-Sunrise employees, is located in the same building complex as our corporate headquarters. The day care center subleases space from us under a sublease that commenced in April 2004 and expires September 30, 2013. The sublease payments, which equal the payments we are required to make under our lease with our landlord for this space, are required to be paid monthly and are subject to increase as provided in the sublease. SSLF paid Sunrise approximately $90,000, $88,000 and $86,000 in sublease payments in 2007, 2006 and 2005, respectively, under the April 2004 sublease. In January 2007, we leased additional space from our landlord and in February 2007 we and the day care center modified the terms of the day care center’s sublease to include this additional space. Rent for the additional space, payable beginning July 19, 2007, is $8,272 per month (subject to increase as provided in the sublease), which equals the payments we are required to make under our lease with our landlord for this additional space. Rent for the additional space for the period July 19, 2007 to December 2007 totaling approximately $45,000 was paid in December 2007.

A subsidiary of SSLF formed a limited liability company (“LLC”) in 2001 to develop and construct an assisted living community and an adult day care center for low to moderate-income seniors on property owned by Fairfax County, Virginia. In 2004, the LLC agreed to construct the project for a fixed fee price of $11.2 million to be paid by Fairfax County, Virginia upon completion of the project ($11.6 million, as adjusted plus approximately $0.3 million under a Pre-Opening Services and Management Agreement). In 2004, the LLC, we and Fairfax County entered into

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

an agreement pursuant to which we agreed to develop and manage the project for a fee of up to $0.2 million. In addition, we and Fairfax County entered into a Pre-Opening Services and Management Agreement for the management of the project upon opening. In February 2005, the SSLF subsidiary assigned its membership interests in the LLC to us and transferred additional development costs of approximately $0.9 million to us. These development costs, along with development costs of $0.9 million funded by us in 2004, are to be repaid to us as part of the fixed fee price to be received from Fairfax County upon completion of the community. Total construction costs for the project were $11.3 million. We have received $10.1 million through December 31, 2007 and are pursuing from Fairfax County the remaining $1.8 million outstanding, as well as the $0.3 million due under the Pre-Opening Services and Management Agreement.

At December 31, 2004, we had outstanding receivables from SSLF and its affiliates of $3.4 million for operating expenses and development expenses related to the Fairfax County project. SSLF was not charged interest on these outstanding receivables. At December 31, 2004, we had outstanding payables to SSLF of $1.2 million relating to advances by a subsidiary of SSLF to a venture of ours prior to 2002, which subsidiary previously had provided assisted living services at certain of our venture facilities located in Illinois. We were not charged interest on these outstanding payables. These net receivables (receivables less payables) due to us at December 31, 2004, as adjusted to give effect to our acquisition of the Fairfax County project subsequent to year-end, totaling approximately $0.5 million, were paid in full by SSLF in April 2005. In addition, during the latter part of 2005 and in 2006, we made non-interest bearing advances of working capital to SSLF totaling approximately $0.6 million and $0.2 million, respectively. These amounts were repaid by SSLF in October/November 2005 and August 2006, respectively. In addition, in August 2006, SSLF paid us approximately $52,000, representing net working capital advances made to SSLF in prior years. In 2005, we made a separate $10,000 advance which was repaid in July 2005.

Fairfax Community Ground Lease

We lease the real property on which our Fairfax, Virginia community is located from Paul and Teresa Klaassen pursuant to a99-year ground lease entered into in June 1986, as amended in August 2003. Rent expense under this lease is approximately $0.2 million annually.

Corporate Use of Residence

In June 1994, the Klaassens transferred to us property which included a residence and a Sunrise community in connection with a financing transaction. In connection with the transfer of the property, we agreed to lease back the residence to the Klaassens under a99-year ground lease. The rent was $1.00 per month. Under the lease, the Klaassens were responsible for repairs, real estate taxes, utilities and property insurance for the residence. For approximately the past 12 years, the Klaassens have permitted the residence to be used by us for business purposes, including holding meetings and housing out of town employees. In connection with its use of the residence, we have paid the real estate taxes, utilities and insurance for the property and other expenses associated with the business use of the property, including property maintenance and management services. We paid expenses totaling approximately $0.1 million annually. For several years ending August/September 2006, the Klaassens’ son lived at the guest house on the property. In December 2007, the Klaassens terminated their99-year ground lease for no consideration.

Purchase of Condominium Unit

In January 2006, Mr. Klaassen entered into a purchase agreement with a joint venture in which we own a 30% equity interest and with which we have entered into a management services agreement. Pursuant to the purchase agreement, Mr. Klaassen has agreed to purchase for his parents a residential condominium unit at the Fox Hill condominium project that the joint venture is currently developing. The purchase price of the condominium is approximately $1.4 million. In June 2007, the purchase agreement was modified to reflect certain custom amenities upgrades to the unit for an aggregate price of approximately $0.1 million.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

Service Evaluators Incorporated

Service Evaluators Incorporated (“SEI”) is a for-profit company which provides independent sales and marketing analysis, commonly called “mystery shopping” services, for the restaurant, real estate and senior living industries in the United States, Canada and United Kingdom. Janine I. K. Connell and her husband, Duncan S. D. Connell, are the owners and President and Executive Vice President of SEI, respectively. Ms. Connell and Mr. Connell are the sister andbrother-in-law of Mr. Klaassen and Ms. Connell is thesister-in-law of Ms. Klaassen.

For approximately 13 years, we have contracted with SEI to provide mystery shopping services for us. These services have includedon-site visits at Sunrise communities,on-site visits to direct area competitors of Sunrise communities, telephonic inquiries, narrative reports of theon-site visits, direct comparison analysis and telephone calls. In 2005, we paid SEI approximately $0.7 million for approximately 380 communities. We paid approximately $0.7 million to SEI in 2006 for approximately 415 communities and approximately $0.5 million in 2007 for approximately 435 communities. The SEI contract is terminable upon 12 months’ notice. In August 2007, we gave SEI written notice of the termination of SEI’s contract, effective August 2008. Through August 2008, we expect to pay SEI approximately $0.4 million under SEI’s contract.

Greystone Earnout Payments

In May 2005, we acquired Greystone. Greystone’s founder, Michael B. Lanahan, was appointed chairman of our Greystone subsidiary in connection with the acquisition and he currently serves as one of our executive officers. Pursuant to the terms of the Purchase Agreement, we paid $45.0 million in cash, plus approximately $1.0 million in transaction costs, to acquire all of the outstanding securities of Greystone. We also agreed to pay up to an additional $7.5 million in purchase price if Greystone met certain performance milestones in 2005, 2006 and 2007. The first earnout payment was $5.0 million based on 2005 and 2006 results and was paid in April 2007. Mr. Lanahan’s share of such earnout payment as a former owner of Greystone was approximately $1.5 million. The remaining $2.5 million earnout is based on Greystone’s 2007 results, and was paid in April 2008. Mr. Lanahan’s share of that payment was approximately $0.3 million.

Unconsolidated Ventures

Prior to 2005, we entered into five unconsolidated ventures with a third party that provided equity to develop communities in the United States, United Kingdom and Canada. One of our then incumbent directors, Craig Callen, was a managing director of Credit Suisse First Boston LLC (“CSFB”) through April 2004. CSFB, through funds sponsored by an affiliate or subsidiary, had from time to time invested in the ventures. We recognized $1.5 million in management and professional services revenue in 2005 from these ventures. Neither we nor CSFB have an ownership interest in any of these five ventures at December 31, 2006 or since.

Mr. Callen held, through participation in a diversified portfolio of CSFB related investments, a 1.1375% membership interest in one of the joint ventures. In connection with the formation of Sunrise REIT in December 2004, all of the interests in this venture were acquired by us and immediately contributed to Sunrise REIT. Mr. Callen’s interest was repurchased as part of this transaction for approximately $0.1 million. Mr. Callen resigned as a director in May 2008.

Aetna Healthcare

Mr. Callen served as senior vice president, strategic planning and business development at Aetna, Inc. from May 2004 through November 9, 2007 and as one of our directors until his resignation on May 22, 2008. Aetna Healthcare, a subsidiary of Aetna, Inc., is Sunrise’s health plan administrator, dental plan administrator, health benefit stop-loss insurance carrier and long-term care insurance provider. Sunrise had selected Aetna as its health plan administrator prior to Mr. Callen joining Aetna. The payments made by Sunrise to Aetna Healthcare totaled $8.0 million, $9.0 million and $9.3 million for 2007, 2006 and 2005, respectively.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

Purchase of Aircraft Interest by Mr. Klaassen

In July 2008, Mr. Klaassen purchased from us one of the four fractional interests in private aircrafts owned by us. The purchase price for such interest was approximately $0.3 million, which represents the current market value of the interest as furnished to us by independent appraisers. The purchase of the fractional interest was approved by the Audit Committee of our Board of Directors.


20.	Employee Benefit Plans

401k Plan

We have a 401(k) Plan (“the Plan”) covering all eligible employees. Under the Plan, eligible employees may make pre-tax contributions up to 100% of the IRS limits. The Plan provides an employer match dependent upon compensation levels and years of service. The Plan does not provide for discretionary matching contributions. Matching contributions were $1.6 million, $2.5 million and $1.4 million in 2007, 2006 and 2005, respectively.

Sunrise Executive Deferred Compensation Plans

We have an executive deferred compensation plan (“the Executive Plan”) for employees who meet certain eligibility criteria. Under the Plan, eligible employees may make pre-tax contributions in amounts up to 25% of base compensation and 100% of bonuses. We may make discretionary matching contributions to the Executive Plan. Employees vest in the matching employer contributions, and interest earned on such contributions, at a date determined by the Benefit Plan Committee. Matching contributions were $0.4 million, $0.3 million and $0.4 million in 2007, 2006 and 2005, respectively.

Greystone adopted an executive deferred compensation plan on January 1, 2007 for employees of Greystone who meet certain eligibility criteria. Employees may make pre-tax contributions up to 25% of base salary. Greystone may make discretionary matching contributions. Employees vest in the employer matching contributions and interest on the match date determined by the administrator. Greystone’s matching contribution was $0.2 million in 2007.

Chief Executive Officer Deferred Compensation Plan

Pursuant to Mr. Klaassen’s employment agreement, we are required to make contributions of $150,000 per year for 12 years, beginning on September 12, 2000 into a non-qualified deferred compensation account. At the end of the12-year period, any net gains accrued or realized from the investment of the amounts contributed by us are payable to Mr. Klaassen and we will receive any remaining amounts. At December 31, 2007, we have contributed an aggregate of $0.9 million into this plan, leaving an aggregate amount of $0.9 million to be contributed. We made contributions for 2006 and 2007 in the second quarter of 2008 to bring the plan up to date.


21.	Fair Value of Financial Instruments

The following disclosures of estimated fair value were determined by management using available market information and valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts we could realize on disposition of the financial instruments. The use of different market assumptions or estimation methodologies could have an effect on the estimated fair value amounts.

Cash equivalents, accounts receivable, accounts payable and accrued expenses, equity investments and other current assets and liabilities are carried at amounts which reasonably approximate their fair values.

Fixed rate notes receivable with an aggregate carrying value of $0.6 million and $21.8 million have an estimated aggregate fair value of $0.5 million and $21.7 million at December 31, 2007 and 2006, respectively.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

Fixed rate debt with an aggregate carrying value of $9.1 million and $55.9 million has an estimated aggregate fair value of $9.2 million and $53.7 million at December 31, 2007 and 2006, respectively. Interest rates currently available to us for issuance of debt with similar terms and remaining maturities are used to estimate the fair value of fixed rate debt. The estimated fair value of variable rate debt approximates its carrying value of $244.8 million and $134.8 million at December 31, 2007 and 2006, respectively.

Disclosure about fair value of financial instruments is based on pertinent information available to management at December 31, 2007 and 2006. Although management is not aware of any factors that would significantly affect the reasonable fair value amounts, these amounts have not been comprehensively revalued for purposes of these financial statements and current estimates of fair value may differ from the amounts presented herein.


22.	Information about Sunrise’s Segments

We have four operating segments for which operating results are regularly reviewed by key decision makers; domestic operations, international operations (including Canada), Greystone and Trinity. We acquired Trinity in September 2006, as discussed in Note 6. The domestic, Greystone and international segments develop, acquire, dispose and manage senior living communities. Hospice care provides palliative care and support services to terminally ill patients and their families.

Segment results are as follows (in thousands):


	For the Year Ended and as of December 31, 2007
	Domestic			Greystone			International		Trinity			Total

Operating revenues	$	1,491,373		$	16,471		$	77,555	$	67,151		$	1,652,550
Interest income		8,144			208			1,162		380			9,894
Interest expense		5,521			—			1,123		3			6,647
Sunrise’s share of earnings and return on investment in unconsolidated communities		31,812			1,600			75,535		—			108,947
Depreciation and amortization		47,843			4,068			886		2,483			55,280
(Loss) income before taxes		(13,433	)		(19,693	)		23,984		(70,392	)		(79,534	)
Investments in unconsolidated communities		80,423			—			16,750		—			97,173
Goodwill		121,828			39,025			—		8,883			169,736
Segment assets		1,476,420			61,312			247,499		13,366			1,798,597
Expenditures for long-lived assets		185,924			4,680			49,047		658			240,309
Deferred gains on the sale of real estate and deferred revenues		19,793			54,574			—		—			74,367

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)


	For the Year Ended and as of December 31, 2006 (Restated)
	Domestic		Greystone			International			Trinity		Total

Operating revenues	$	1,575,108	$	16,920		$	38,844		$	20,209	$	1,651,081
Interest income		8,799		194			483			101		9,577
Interest expense		5,732		—			462			10		6,204
Sunrise’s share of earnings (losses) and return on investment in unconsolidated communities		54,950		—			(11,248	)		—		43,702
Depreciation and amortization		44,115		3,462			240			831		48,648
Income (loss) before taxes		113,619		(14,490	)		(66,768	)		135		32,496
Investments in unconsolidated communities		93,327		—			10,945			—		104,272
Goodwill		121,827		36,525			—			59,663		218,015
Segment assets		1,571,769		55,206			138,091			83,235		1,848,301
Expenditures for long-lived assets		137,396		714			49,120			1,425		188,655
Deferred gains on the sale of real estate and deferred revenue		23,811		28,147			—			—		51,958


	For the Year Ended and as of December 31, 2005 (Restated)
	Domestic		Greystone			International			Total

Operating revenues	$	1,472,836	$	10,413		$	27,773		$	1,511,022
Interest income		4,855		69			1,307			6,231
Interest expense		9,368		—			2,514			11,882
Sunrise’s share of earnings (losses) and return on investment in unconsolidated communities		31,919		—			(18,447	)		13,472
Depreciation and amortization		40,791		1,992			198			42,981
Income (loss) before taxes		149,543		(8,180	)		(6,143	)		135,220
Investments in unconsolidated communities		52,962		150			10,228			63,340
Goodwill		124,256		29,072			—			153,328
Segment assets		1,437,365		67,076			83,344			1,587,785
Expenditures for long-lived assets		112,153		1,514			19,190			132,857
Deferred gains on the sale of real estate and deferred revenue		15,192		13,034			—			28,226

As Greystone’s development contracts are multiple element arrangements and there is not sufficient objective and reliable evidence of the fair value of undelivered elements at each billing milestone, we defer revenue recognition until the completion of the development contract. However, development costs are expensed as incurred, which results in a net loss for the segment. In 2007, 2006 and 2005, we billed and collected $28.2 million, $21.6 million and $14.4 million, respectively, of development fees of which $26.4 million, $15.1 million and $13.0 million, respectively, was deferred and will be recognized when the contract is completed.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

formed, we established a bonus pool in respect to each venture for the benefit of employees and others responsible for the success of these ventures. At that time, we agreed with our partner that after certain return thresholds were met, we would each reduce our percentage interests in venture distributions with such excess to be used to fund these bonus pools. During 2007, we recorded bonus expense of $27.8 million in respect of the bonus pool relating to the UK venture. These bonus amounts are funded from capital events and the cash is retained by us in restricted cash accounts. As of December 31, 2007, approximately $18.0 million of this amount was included in restricted cash. Under this bonus arrangement, no bonuses are payable until we receive distributions at least equal to certain capital contributions and loans made by us to the UK and Germany ventures. We currently expect this bonus distribution limitation will be satisfied in late 2008, at which time bonus payments would become payable.

In 2007 and 2006, the results in the international segment was also impacted by a $16.0 million and $50.0 million, respectively, charge that we recorded in relation to forecasted fundings under our German guarantees, which we believe will not be repaid to us.

We recorded $2.3 million, net, in exchange losses in 2007 ($7.3 million in gains related to the Canadian dollar and $9.6 million in losses related to the Euro and British pound) related to the weakened U.S. dollar.

During 2007, we generated 12.3%, 12.4% and 18.2% of revenue from Ventas, a private capital partner and HCP, respectively, for senior living communities which we manage. During 2006, we generated approximately 16.3% of total operating revenues from HCP for senior living communities which we manage. No other owners represented more than 10% of total operating revenues in 2006 or 2005.

During 2007, we recorded an impairment charge of $7.6 million (domestic segment) related to two communities acquired in 1999 and 2006. Also in 2007, we recorded an impairment charge of $56.7 million related to Trinity’s goodwill and intangible assets. During 2006 we recorded an impairment charge of $15.7 million related to seven small senior living communities, which were opened between 1996 and 1999.


23.	Accounts Payable and Accrued Expenses

Accrued expenses consist of the following (in thousands):


	December 31,
	2007		2006

Accounts payable and accrued expenses	$	71,240	$	65,460
Accrued salaries and bonuses		64,441		47,346
Accrued employee health and other benefits		67,096		64,487
Accrued legal, audit and professional fees		37,555		9,056
Other accrued expenses		35,030		29,738

	$	275,362	$	216,087


24.	Subsequent Events

Bank Credit Facility

There were $100.0 million of cash advances and $71.7 million of letters of credit outstanding under our Bank Credit Facility at December 31, 2007. On January 31, February 19, March 13, and July 23, 2008, we entered into further amendments to the Bank Credit Facility. These amendments, among other things:


	•	modified to August 20, 2008 the delivery date for the unaudited financial statements for the quarter ending March 31, 2008;

	•	modified to September 10, 2008 the delivery date for the unaudited financial statements for the quarter ending June 30, 2008;

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)


	•	temporarily (in February 2008) and then permanently (in July 2008) reduced the maximum principal amount available under the Bank Credit Facility to $160.0 million; and

	•	waived compliance with financial covenants in the Bank Credit Facility for the year ended December 31, 2007 and for the fiscal quarters ended March 31, 2008 and June 30, 2008, and waived compliance with the leverage ratio and fixed charge coverage ratio covenants for the fiscal quarter ending September 30, 2008.


	•	we must maintain liquidity of not less than $50.0 million, composed of availability under the Bank Credit Facility plus up to not more than $50.0 million in unrestricted cash and cash equivalents (tested as of the end of each calendar month), and any unrestricted cash and cash equivalents in excess of $50.0 million must be used to pay down the outstanding borrowings under the Bank Credit Facility;

	•	we are generally prohibited from declaring or making directly or indirectly any payment in the form of a stock repurchase or payment of a cash dividend or from incurring any obligation to do so; and

	•	the borrowing rate in US dollars, which was increased effective as of February 1, 2008, will remain LIBOR plus 2.75% or the Base Rate (the higher of the Federal Funds Rate plus 0.50% and Prime) plus 1.25% (through the end of the then-current interest period).

We do not expect to be in compliance with the leverage ratio and fixed charge coverage ratio for the quarter ending September 30, 2008 and no assurance can be given that we will be in compliance with these financial covenants for the quarter ending December 31, 2008. From and after the July 2008 amendment, we will continue to owe and pay fees on the unused amount available under the Bank Credit Facility as if the maximum outstanding amount was $160.0 million. Prior to the July 2008 amendment, fees on the unused amount were based on a $250.0 million outstanding maximum amount. We paid the lenders an aggregate fee of approximately $1.9 million for entering into these 2008 amendments.

As of June 30, 2008, we had outstanding borrowings of $75.0 million, outstanding letters of credit of $26.3 million and borrowing availability of approximately $58.7 million under the Bank Credit Facility. Taking into account the new liquidity covenants included in the July 2008 amendment to the Bank Credit Facility described above, we believe this availability, together with unrestricted cash balances of approximately $75.0 million at June 30, 2008, will be sufficient to support our operations over the next twelve months.

New Mortgage Debt

On May 7, 2008, 16 wholly-owned subsidiaries (the “Borrowers”) of Sunrise incurred mortgage indebtedness in the aggregate principal amount of approximately $106.7 million from Capmark Bank (“Lender”) as lender and servicer pursuant to 16 separate cross-collateralized, cross-defaulted mortgage loans (collectively, the “mortgage loans”). Shortly after the closing, the Lender assigned the mortgage loans to Fannie Mae. The mortgage loans bear interest at a variable rate equal to the “Discount” (which is the difference between the loan amount and the price at which Fannie Mae is able to sell its three-month rolling discount mortgage backed securities) plus 2.27% per annum, require monthly principal payments based on a30-year amortization schedule (using an interest rate of 5.92%) and mature on June 1, 2013.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

event the “Discount” rate exceeds the LIBOR rate, payments under the interest rate cap may not afford the Borrowers complete interest rate protection. The Borrowers purchased the rate cap for an initial period of three years for a cost of $0.3 million (including fees) and have placed in escrow the amount of $0.7 million to purchase additional interest rate caps to cover years four and five of the mortgage loans which amount will be returned to us in the event the mortgage loans are prepaid prior to the end of the third loan year.

Each mortgage loan is secured by a senior housing facility owned by the applicable Borrower (which facility also secures the other 15 mortgage loans as well), as well as the interest rate cap described above. In addition, our management agreement with respect to each of the facilities is subordinate to the mortgage loan encumbering such facility. In connection with the mortgage loans, we received net proceeds of approximately $103.1 million (after payment of lender fees, third party costs, escrows and other amounts), of which $53.0 million was used to pay down amounts outstanding under our Bank Credit Facility.

The mortgage loans may not be prepaid before May 8, 2009. Thereafter, each mortgage loan is prepayable at the end of each3-month term of the then-current Fannie Mae discount mortgage backed security, upon payment by us of a pre-payment fee in the amount of 1% of the then-outstanding principal amount of the mortgage loan being prepaid (except during the last three months of the loan term when no prepayment premium is payable). In connection with a partial prepayment, the applicable senior housing facility securing the mortgage loan being prepaid may be released only upon the satisfaction of certain conditions, including

(i) the remaining facilities have a 1.4 debt service coverage ratio (during the first 3 years of the loan term) or a 1.45 debt service coverage ratio (during the final 2 years of the loan term), in either case based on12-months trailing net operating income and a fixed rate of interest of 5.92% per annum,

(ii) not more than 30% of the then-outstanding principal balance (after prepayment) is secured by senior housing facilities located in a single state, and

(iii) not more than 65% of the then-outstanding principal balance (after prepayment) is secured by senior housing facilities located in the states of Indiana, Michigan and Ohio.

In addition, one or more facilities may be sold and the individual mortgage loan assumed by the buyer so long as the foregoing (i), (ii) and (iii) are satisfied and the assumed mortgage loan has a 1.40 debt service coverage ratio (if the assumed mortgage loan is fixed rate) or a minimum debt service coverage determined by Lender (if the assumed mortgage loan is variable rate) and the buyer is acceptable to the Lender.

Each Borrower has the right to convert the interest rate on its mortgage loan to a fixed rate of interest equal to a then-effective Fannie Mae interest rate plus 1.2% per annum, subject to the satisfaction of certain conditions, including that the applicable facility has sufficient net operating income, as determined in accordance with Fannie Mae’s then applicable underwriting standards. In the event of a conversion, the converted note is prepayable only upon payment of the greater of 1% of the outstanding principal balance and the payment of a yield maintenance premium or, during the 4th through 6th month prior to the maturity date, upon payment of a prepayment premium of 1% of the outstanding principal balance. A conversion may result in an extension of the maturity date of the mortgage loan being converted depending, among other things, on the reference rate used to determine the fixed rate.

The mortgage loans will become immediately due and payable, and the Lender will be entitled to interest on the unpaid principal sum at an increased rate, if any required payment is not paid on or prior to the date when due or on the happening of any other event of default including a misrepresentation by the applicable Borrower or the failure of the applicable Borrower to comply with the covenants contained in the mortgage loan documents. The mortgage loans contain various usual and customary covenants, including restrictions on transfers of the facilities and restrictions on transfers of direct or indirect interests in the Borrowers, and obligations regarding the payment of real property taxes, the maintenance of insurance, compliance with laws, maintenance of licenses in effect, use of the facilities only as permitted by the mortgage loan documents, entering into leases and occupancy agreements in

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

accordance with the mortgage loan documents and preparation and delivery to Lender of the reports required by the mortgage loan documents. The mortgage loans are non-recourse to the Borrowers and us, but are subject to usual and customary exceptions to non-recourse liability for damage suffered by Lender for certain acts, including misapplication of rents, security deposits, insurance proceeds and condemnation awards, failure to comply with obligations relating to delivery of books, records and financial and other reports of Borrower, and fraud or material misrepresentation. The mortgage loans are full recourse to the Borrower and us in the event of a Borrower’s acquisition of any property or operation of any business not permitted by the terms of the applicable mortgage or in the event of a violation of the transfer restrictions contained in the mortgages. During the term of the mortgage loans, we are required to maintain at all times (i) a net worth of not less than $100.0 million and (ii) cash and cash equivalents of not less than $25.0 million.

Senior Living Condominium Developments

As indicated above, in the first quarter of 2008, we suspended the development of all but one of our condominium projects and as a result, we expect to record pre-tax charges totaling approximately $22.0 million in the first quarter of 2008.

Legal and Accounting Fees Related to Accounting Review, Special Independent Committee Inquiry and Related Matters

As indicated above, during the six months ended June 30, 2008, we expect to incur legal and accounting fees of approximately $22.6 million related to the accounting review, the Special Independent Committee inquiry, the SEC Investigation and responding to various shareholder actions.

Real Estate Gains

During the first quarter of 2008, we completed the recapitalization of a venture with two underlying properties. As a result of this recapitalization, guarantees that were requiring us to use the profit-sharing method of accounting for our previous sale of real estate in 2004 were released and we expect to record a pre-tax gain on sale of approximately $6.7 million and received cash of approximately $5.4 million.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)


25.	Quarterly Results of Operations (Unaudited)

The following is a summary of quarterly results of operations for the fiscal quarter (in thousands, except per share amounts):


	Q1		Q2		Q3		Q4(2)			Total

2007
Operating revenue	$	395,887	$	408,018	$	429,512	$	419,133		$	1,652,550
Net income (loss)		7,480		7,992		38,230		(123,977	)		(70,275	)
Basic net income (loss) per common share	$	0.15	$	0.16	$	0.77	$	(2.48	)	$	(1.41	)
Diluted net income (loss) per common share		0.15		0.15		0.74		(2.48	)		(1.41	)
2006 (as restated)
Operating revenue	$	377,341	$	464,717	$	379,377	$	429,646		$	1,651,081
Net income (loss)		901		47,071		15,120		(47,808	)		15,284
Basic net income (loss) per common share	$	0.02	$	0.95	$	0.30	$	(0.96	)	$	0.31
Diluted net income (loss) per common share		0.02		0.91		0.29		(0.96	)		0.30
2006 (as previously reported)
Operating revenue	$	376,671	$	464,047	$	378,706	$	428,975		$	1,648,399
Net income (loss)		2,320		48,685		16,304		(46,952	)		20,357
Basic net income (loss) per common share	$	0.05	$	0.98	$	0.33	$	(0.94	)	$	0.42
Diluted net income (loss) per common share		0.05		0.95		0.32		(0.94	)		0.40


(1)		The sum of per share amounts for the quarters may not equal the per share amount for the year due to a variance in shares used in the calculations or rounding.

(2)		During the fourth quarter of 2007, we recorded an impairment charge of $56.7 million relating to Trinity’s goodwill and intangible assets and a $21.6 million charge to write-off our investment in Aston Gardens.

As described in Note 3, we have restated the 2006 results due to an error in recording revenue for non-refundable entrance fees and the related rent expense for two communities. The impact to net income for the first, second, third and fourth quarters of 2006 is $1.4 million, $1.6 million, $1.2 million and $0.9 million, respectively.

REPORT OF INDEPENDENT AUDITORS

To the Partners of

PS UK Investment (Jersey) Limited Partnership

We have audited the accompanying consolidated balance sheet of PS UK Investment (Jersey) Limited Partnership and its subsidiaries (‘the Partnership’) as of 31 December 2007, and the related consolidated statements of income, changes in partners’ capital, and cash flows for the year then ended. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit 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. We were not engaged to perform an audit of the Partnership’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PS UK Investment (Jersey) Limited Partnership and its subsidiaries at 31 December 2007, and the consolidated results of its operations and its cash flows for the year then ended in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

/s/ Ernst & Young, LLP

London, England

30 July 2008

PS UK INVESTMENT (JERSEY) LIMITED PARTNERSHIP

CONSOLIDATED INCOME STATEMENT


			For the Year Ended December 31,
	Notes		2007			2006			2005
						(Unaudited)			(Unaudited)

Operating revenue:
Resident fees			£	14,176,377		£	6,583,409		£	—

Total operating revenue				14,176,377			6,583,409			—

Operating expenses:
Facility operating expenses				12,191,116			7,256,183			—
Facility development and pre-rental expenses				6,394,516			4,535,897			2,438,240
General and administrative expenses				597,968			131,926			112,217
Facility lease expenses				26,042			40,626			—
Management fees		6		775,441			355,960			—
Depreciation		3		3,324,095			2,084,776			595

Total operating expenses				(23,309,178	)		(14,405,368	)		(2,551,052	)

Net operating loss				(9,132,801	)		(7,821,959	)		(2,551,052	)

Other income/(expense):
Financial income				973,715			194,676			132,916
Interest expense				(11,459,235	)		(4,425,643	)		—
Loss on extinguishment of debt				(238,122	)		—			—
Foreign exchange gain				5,808			—			—
Gain on sale of subsidiaries		5		114,437,152			—			—

Total other income/(expense)				103,719,318			(4,230,967	)		132,916

Profit/(loss) before tax				94,586,517			(12,052,926	)		(2,418,136	)

Income tax expense		9		—			—			—

Profit/(loss) for the year after tax		10	£	94,586,517		£	(12,052,926	)	£	(2,418,136	)

The accompanying notes form an integral part of these financial statements

PS UK INVESTMENT (JERSEY) LIMITED PARTNERSHIP

CONSOLIDATED BALANCE SHEET


			At December 31,
	Notes		2007		2006
					(Unaudited)

ASSETS
Current assets:
Cash and cash equivalents			£	20,421,691	£	8,848,123
Accounts receivable				344,149		531,713
Net receivables due from affiliates		6		336,986		—
Prepaid expenses and other current assets				2,560,883		1,504,638

Total current assets				23,663,709		10,884,474

Non current assets
Property and equipment		3		216,704,854		285,285,526
Restricted cash		5		11,588,218		—

Total non current assets				228,293,072		285,285,526
Assets held for sale		4		—		4,184,152

Total assets			£	251,956,781	£	300,354,152

LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities
Trade payables			£	100,018	£	328,467
Accrued expenses		7		9,479,017		8,400,856
Deferred revenue				309,658		220,758
Net payables due to affiliates		6		—		4,084,417
Other current liabilities		5		4,487,885		—
Current maturities of long-term debt		8		19,452,506		2,923,000

Total current liabilities				33,829,084		15,957,498

Non current liabilities
Partner loan		6		—		1,275,000
Long-term debt, net of finance costs		8		172,494,910		167,080,122
Derivative financial instruments				529,885		—

				173,024,795		168,355,122
Partners’ capital		10		45,102,902		116,041,532

Total non current liabilities				218,127,697		284,396,654

Total liabilities and partners’ capital			£	251,956,781	£	300,354,152

The accompanying notes form an integral part of these financial statements

PS UK INVESTMENT (JERSEY) LIMITED PARTNERSHIP

CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS’ CAPITAL


	For the Year Ended 31 December 2007
	Partners’		Accumulated						Foreign						Total
	Capital		Surplus/			Other			Currency			Distribution			Partners’
	Contributions		(Deficit)			Reserves			Translation			to Partners			Capital

At 1 January 2005 (unaudited)	£	20,814,613	£	(1,713,007	)	£	—-		£	740		£	—		£	19,102,346
Foreign currency translation		—		—			—			(919	)		—			(919	)

Total income and expense for the year recognized directly in equity		—		—			—			(919	)		—			(919	)
Loss for the year		—		(2,418,136	)		—			—			—			(2,418,136	)

Total income and expense for the year		—		(2,418,136	)		—			(919	)		—			(2,419,055	)
Partner contributions		20,084,077		—			—			—			—			20,084,077

At 31 December 2005 (unaudited)		40,898,690		(4,131,143	)		—			(179	)		—			36,767,368
Foreign currency translation		—		—			—			(305	)		—			(305	)
Revaluation of property and equipment		—		—			70,636,697			—			—			70,636,697

Total income and expense for the year recognized directly in equity		—		—			70,636,697			(305	)		—			70,636,392
Loss for the year		—		(12,052,926	)		—			—			—			(12,052,926	)

Total income and expense for the year		—		(12,052,926	)		70,636,697			(305	)		—			58,583,466
Partner contributions		20,690,698		—			—			—			—			20,690,698

At 31 December 2006 (unaudited)		61,589,388		(16,184,069	)		70,636,697			(484	)		—			116,041,532
Cash flow hedge (note 11)		—		—			(529,885	)		—			—			(529,885	)
Distribution to partners		—		—			—			—			(159,675,550	)		(159,675,550	)
Disposal of property and equipment revaluation		—		—			(70,636,697	)		—			—			(70,636,697	)
Revaluation of property and equipment		—		—			39,079,729			—			—			39,079,729

Total income and expense for the year recognized directly in equity		—	��	—			(32,086,853	)		—			(159,675,550	)		(191,762,403	)
Profit for the year		—		94,586,517			—			—			—			94,586,517

Total income and expense for the year		—		94,586,517			(32,086,853	)		—			(159,675,550	)		(97,175,886	)
Partner contributions		26,237,256		—			—			—			—			26,237,256

At 31 December 2007	£	87,826,644	£	78,402,448		£	38,549,844		£	(484	)	£	(159,675,550	)	£	45,102,902

The accompanying notes form an integral part of these financial statements

PS UK INVESTMENT (JERSEY) LIMITED PARTNERSHIP

CONSOLIDATED STATEMENT OF CASH FLOWS


	For the Year Ended December 31,
	2007			2006			2005
				(Unaudited)			(Unaudited)

Operating activities
Profit/(loss) for the year before tax	£	94,586,517		£	(12,052,926	)	£	(2,418,136	)
Adjustments to reconcile profit/(loss) for the year before tax to net cash flows from operating activities:
Net finance costs		10,717,833			4,230,967			(132,916	)
Depreciation		3,324,095			2,084,776			595
Provision for bad debt		29,819			16,658			—
Gain on sale of subsidiaries		(114,437,152	)		—			—
Loss on extinguishment of debt		(238,122	)		—			—
Changes in assets and liabilities:
Accounts receivable		157,745			(463,246	)		—
Prepaid expenses and other current assets		(1,056,246	)		(1,043,983	)		1,010,057
Trade payables and accrued expenses		849,712			268,812			7,082,358
Deferred revenue		88,880			220,758			—
Other current liabilities		4,487,885			—			—

Net cash flows (used in)/from operating activities		(1,489,034	)		(6,738,184	)		5,541,958

Investing activities
Increase in restricted cash		(11,588,218	)		—			—
Purchase of property and equipment		(89,329,492	)		(94,680,104	)		(93,843,506	)
Proceeds from sale of subsidiaries		245,381,485			—			—
Interest paid and capitalised		(4,695,605	)		(3,572,894	)		(2,219,469	)
Interest received		973,715			194,676			132,916

Net cash flows from/(used in) investing activities		140,741,885			(98,058,322	)		(95,930,059	)

Financing activities
Contributions by partners		26,237,256			20,690,698			20,084,077
Distributions to partners		(159,675,550	)		—			—
Net (repayments to)/borrowings from affiliates		(4,415,153	)		940,315			(616,500	)
Net repayments to partners		(1,275,000	)		—			—
Borrowings of long-term debt		148,153,886			93,235,075			69,937,922
Repayments of long-term debt		(126,918,499	)		—			—
Interest paid and expensed		(9,785,802	)		(4,279,290	)		—

Net cash flows (used in)/from financing activities		(127,678,862	)		110,586,798			89,405,499

Net increase/(decrease) in cash and cash equivalents before effect of exchange rate on cash		11,573,989			5,790,292			(982,602	)
Effect of exchange rate on cash		(421	)		(305	)		(919	)

Net increase/(decrease) in cash and cash equivalents		11,573,568			5,789,987			(983,521	)
Cash and cash equivalents at beginning of year		8,848,123			3,058,136			4,041,657

Cash and cash equivalents at end of year	£	20,421,691		£	8,848,123		£	3,058,136

PS UK Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements

At 31 December 2007


1.	Organization

PS UK Investment (Jersey) Limited Partnership (the Partnership), was formed under the laws of Jersey, Channel Islands on 31 May 2002, between Sunrise Assisted Living Investment, Inc. (SALII), a wholly owned subsidiary of Sunrise Senior Living, Inc. (Sunrise), Senior Housing UK Investment Limited Partnership (SHIP, previously PRICOA), SunCo LLC (SunCo), a wholly owned subsidiary of Sunrise and PS UK (Jersey) GP Limited (General Partner). On 29 January 2003, SALII transferred its entire interest in the Partnership to Sunrise Senior Living International L.P. (Sunrise LP), a wholly owned subsidiary of Sunrise. The Partnership was established for the purpose of acquiring land and buildings in order to construct, develop, market, operate, finance and sell assisted living facilities in the United Kingdom. As of 31 December 2007, the Partnership has four operating properties, seven properties under active development and three sites in pre-development in the United Kingdom. The facilities will offer accommodation and organize the provision of non-complex medical care services to elderly residents for a monthly fee. The Partnership’s services will generally not be covered by health insurance so the monthly fees will be payable by the residents, their family, or another responsible party. The Partnership shall be dissolved on 31 December 2012 unless extended or terminated earlier in accordance with the terms and provisions of the Partnership Agreement.


2.1	Basis of Preparation

The consolidated financial statements have been prepared on an historical cost basis, except for property and equipment relating to properties operating at year end and derivative financial instruments, which have been measured at fair value. The consolidated financial statements are presented in Sterling.

Statement of Compliance

The consolidated financial statements of PS UK Investment (Jersey) Limited Partnership and its subsidiaries have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board as they apply to the financial statements of the limited partnership and its subsidiaries for the year ended 31 December 2007.

Principles of Consolidation

The consolidated financial statements include the accounts of the Partnership and its wholly owned subsidiaries that will develop, own and operate assisted living facilities. All significant intercompany accounts and transactions eliminate upon consolidation.

2.2 Changes in Accounting Policies

IFRS 7 Financial Instruments: Disclosures

The Partnership has adopted IFRS 7, which requires disclosures that enable users to evaluate the significance of the Partnership’s financial instruments and the nature and extent of risks arising from those financial instruments. The new disclosures are included throughout the financial statements.

Amendment to IAS Presentation of Financial Statements — Capital Disclosures

The Partnership has adopted Amendment to IAS 1, which requires disclosures that enable users to evaluate the Partnership’s objectives, policies and processes for managing capital. The new disclosures are included throughout the financial statements.

100

PS UK Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

2.3 Significant Accounting Estimates

Estimation Uncertainty

The preparation of financial statements in conformity with International Financial Reporting Standards requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Deferred Tax Assets

Deferred tax assets are recognised for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits together with future tax planning strategies. The carrying value of recognised tax losses at 31 December 2007 was £nil (2006 — £nil) and the unrecognised tax losses at 31 December 2007 were £12,536,870 (2006 — £14,561,000). Further details are contained in note 9.

2.4 Summary of Significant Accounting Policies

Cash and Cash Equivalents

On the balance sheet and for purposes of the statement of cash flows, cash and cash equivalents consist of balances held by financial institutions. The Partnership considers all highly liquid temporary cash investments with an original maturity of three months or less when purchased to be cash equivalents.

Property and Equipment

Property and equipment is initially recorded at cost and includes interest and property taxes capitalised on long-term construction projects during the construction period, as well as pre-acquisition and other costs directly related to the acquisition, development and construction of facilities. Costs that do not directly relate to acquisition, development and construction of the facility are expensed as incurred. If a project is abandoned any costs previously capitalised are expensed. Maintenance and repairs are charged to expenses as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Buildings are depreciated over 40 years. Furniture and equipment is depreciated over 3 to 10 years.

Following initial recognition at cost, property and equipment is carried at a revalued amount, which is the fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. All categories of property and equipment are revalued simultaneously. Therefore, any fair value surplus or impairment has been apportioned between all categories in relation to costs or brought forward carrying amounts. Any revaluation surplus is credited to the individual partners’ capital account included in the partners’ capital section of the balance sheet, except to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss, in which case the increase is recognised in profit or loss. A revaluation deficit is recognised in profit or loss, except that a deficit directly offsetting a previous surplus on the same asset is directly offset against the surplus in the asset revaluation reserve.

Accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. Upon disposal, any revaluation reserve relating to the particular asset being sold is transferred to accumulated deficit.

Valuations are performed frequently enough to ensure that the fair value of a revalued asset does not differ materially from its carrying amount.

101

PS UK Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

Impairment of Assets

Property and equipment is reviewed for impairment whenever events or circumstances indicate that the asset’s discounted expected cash flows are not sufficient to recover its carrying amount. The Partnership measures an impairment loss by comparing the fair value of the asset to its carrying amount. Fair value of an asset is calculated as the present value of expected future cash flows. Based on management’s estimation process, no impairment losses were recorded as of 31 December 2007.

Restricted Cash

Cash that is pledged or is subject to withdrawal restrictions has been separately identified on the balance sheet as restricted cash.

Revenue Recognition

Operating revenue consists of resident fee revenue. Resident fee revenue is recognised monthly as services are rendered. Agreements with residents are generally for a term of one year and are cancellable by residents with thirty days notice. Interest income is recognised as interest accrues.

Operating Expenses

Operating expenses consists of:


	•	Facility operating expenses including labour, food, marketing and other direct costs of operating the communities.

	•	Facility development and pre-rental expenses associated with the development and marketing of communities prior to opening.

	•	General and administrative expense related to costs of the Partnership itself.

	•	Management fees paid to subsidiaries of Sunrise for managing the communities (note 6).

Taxes

Income and Corporation Taxes

No provision for income or corporation taxes has been included in the accompanying financial statements, as all attributes of income and loss pass through pro rata to the partners on their respective income tax returns in accordance with the Partnership Agreement.

Sales Taxes

Revenue, expenses and assets are recognised net of the amount of sales tax except:


	•	where the sales tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the sales tax is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and

	•	receivables and payables that are stated with the amount of sales tax included.

The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the balance sheet.

102

PS UK Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

Deferred Income Tax

Deferred income tax is provided using the liability method on temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. However, as note 9 indicates, the net deferred tax assets have not been recognised, because there is no assurance that enough profits will be generated in the future to be able to utilise the losses and expenditures carried forward. Accordingly, no provision for income taxes has been included in these financial statements, and there are no current or deferred income taxes.

Deferred income tax liabilities are recognised for all taxable temporary differences, except:


	•	where the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

	•	in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred income tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilized except:


	•	where the deferred income tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

	•	in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred income tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

The carrying amount of deferred income tax assets is reviewed each balance sheet date. Unrecognised deferred income tax assets are reassessed at each balance sheet date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on the tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.

Deferred income tax relating to items recognised directly in equity is recognised in equity and not in the income statement.

Deferred income tax assets and deferred income tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.

Derivative Financial Instruments and Hedging

The Partnership uses derivative financial instruments such as an interest rate swap to hedge its risks associated with the interest rate fluctuations. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative.

103

PS UK Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

Any gains or losses arising from changes in fair value on derivatives during the year that do not qualify for hedge accounting are taken directly to profit and loss.

The fair value of interest rate swap contracts is determined by reference to market values for similar instruments.

For the purpose of hedge accounting, hedges are classified as:


	•	fair value hedges when hedging the exposure to changes in the fair value of a recognised asset or liability or an unrecognised firm commitment (except for foreign currency risk); or

	•	cash flow hedges when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probably forecast transaction or the foreign currency risk in a unrecognised firm commitment; or

	•	hedges of a net investment in a foreign operation.

At the inception of a hedge relationship, the Partnership formally designates and documents the hedge relationship to which the Partnership wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.

Hedges which meet the strict criteria for hedge accounting are accounted for as follows:

Cash Flow Hedges

The effective portion of the gain or loss on the hedging instrument is recognised directly in equity, while any ineffective portion is recognised immediately in profit or loss.

Amounts taken to equity are transferred to profit or loss when the hedged transaction affects profit or loss, such as when the hedged financial income or financial expense is recognised.

If the forecast transaction or firm commitment is no longer expected to occur, amounts previously recognised in equity are transferred to profit or loss. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognised in equity remain in equity until the forecast transaction or firm commitment occurs.

Foreign Currency Translation

The consolidated financial statements are presented in Sterling, which is the Partnership’s functional and presentational currency. The financial statements of foreign subsidiaries, where the local currency is the functional currency, are translated into Sterling using exchange rates in effect at period end for assets and liabilities and average exchange rates during each reporting period for results of operations. Adjustments resulting from translation of financial statements are reflected as a separate component of partners’ capital.

Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the balance sheet date. All differences are taken to the statement of operations. Non monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transaction.

104

PS UK Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

Borrowing Costs

Borrowing costs are generally expensed as incurred. Borrowing costs which are directly attributable to the construction of an asset are capitalised while the asset is being constructed and form part of the cost of the asset. Capitalisation of borrowing costs commences when:


	•	Expenditure for the asset and borrowing costs are being incurred; and

	•	Activities necessary to prepare the asset for its intended use are in progress.

Capitalisation ceases when the asset is substantially ready for use. If active development is interrupted for an extended period, capitalisation of borrowing costs is suspended.

For borrowing associated with a specific asset, the actual rate on that borrowing is used. Otherwise, a weighted average cost of borrowing is used.

New Standards and Interpretations not Applied

The International Accounting Standards Board (“IASB”) and International Financial Reporting International Committee (“IFRIC”) have issued the following standards and interpretations with effective dates after the date of these financial statements that have not yet been adopted by the group:


IASB (IAS / IFRSs)		Effective date

IFRS 2	Amendment to IFRS 2 — Vesting Conditions and Cancellations	1 January 2009
IFRS 3	Business Combinations (revised January 2008)	1 July 2009
IFRS 8	Operating Segments	1 January 2009
IAS 1	Presentation of Financial Statements (revised September 2007)	1 January 2009
IAS 23	Borrowing Costs (revised March 2007)	1 January 2009
IAS 32	Amendment — Financial Instruments: Presentation	I January 2009
IAS 27	Consolidated and Separate Financial Statements (revised January 2008)	1 July 2009
IAS 28	Amendment — Investments in Associates	1 July 2009
IAS 31	Amendment — Interests in Joint Ventures	1 July 2009


IFRIC		Effective date

IFRIC 12	Service Concession Arrangements	1 January 2008
IFRIC 13	Customer Loyalty Programmes	1 July 2008
IFRIC 14	IAS 19 — The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction	1 January 2008
IFRIC 15	Agreements for the Construction of Real Estate	1 January 2009

The Directors do not anticipate that the adoption of these standards and interpretations will have a material impact on the Group’s financial statements in the period of initial application.

IAS 23 has been revised to require capitalisation of borrowing costs when such costs relate to a qualifying asset. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. The group already capitalizes borrowing costs in certain circumstances as disclosed in the accounting policies.

Whilst the revised IAS 1 will have no impact on the measurement of the Group’s results or net assets it may result in certain changes in the presentation of the Group’s financial statements from 2009 onwards.

105

PS UK Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

3. Property and Equipment

Property and equipment consists of the following at 31 December 2007:


	Land and			Furniture and			Construction
	Buildings			Equipment			in Progress			Total

As at 1 January 2007, net of accumulated depreciation and exchange adjustment	£	191,135,829		£	7,504,926		£	86,644,771		£	285,285,526
Additions, including interest capitalised		72,184,932			3,175,714			18,664,452			94,025,098
Disposals, net of revaluations and accumulated depreciation		(190,318,356	)		(7,078,522	)		—			(197,396,878	)
Revaluations		37,231,561			1,848,168			—			39,079,729
Depreciation charge for the year		(2,337,772	)		(986,323	)		—			(3,324,095	)
Transfer of net deferred financing costs		—			—			(964,526	)		(964,526	)

As at 31 December 2007, net of accumulated depreciation and exchange adjustment	£	107,896,194		£	4,463,963		£	104,344,697		£	216,704,854


	Land and			Furniture and			Construction
	Buildings			Equipment			in Progress		Total

As at 1 January 2007
Cost	£	192,580,010		£	8,146,986		£	86,644,771	£	287,371,767
Accumulated depreciation		(1,444,181	)		(641,985	)		—		(2,086,166	)
Exchange adjustment		—			(75	)		—		(75	)

Net carrying amount	£	191,135,829		£	7,504,926		£	86,644,771	£	285,285,526

As at 31 December 2007
Cost or fair value		108,254,315			5,300,970			104,344,697		217,899,982
Accumulated depreciation		(358,121	)		(837,007	)		—		(1,195,128	)

Net carrying amount	£	107,896,194		£	4,463,963		£	104,344,697	£	216,704,854

Construction in progress represents costs incurred in construction of ten facilities in development or pre-development. Costs to complete construction of ten facilities are estimated to be £151 million. The Partnership engaged Savills Commercial Ltd, an accredited independent valuer, to provide an opinion of the fair value of each of the four communities that were operating as at 31 December 2007, on a freehold basis as a fully equipped operational entity having regard to trading potential in existing use and present condition subject to the management contract in place. Fair value was determined using a discounted cash flow method of valuation assuming reasonable trade build up to future stabilization. Stabilization is generally considered to be the date at which a community is 95% occupied which usually occurs 12 to 18 months after opening. The date of the valuation was 31 December 2007.

If property and equipment were measured using the cost model, the carrying amounts would be as follows at 31 December 2007:


	Land and			Furniture and
	Buildings			Equipment			Total

Cost	£	71,477,319		£	2,973,916		£	74,451,235
Accumulated depreciation		(832,008	)		(358,120	)		(1,190,128	)

Net carrying amount	£	70,645,311		£	2,615,796		£	73,261,107

106

PS UK Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

Eleven facilities, four operating and seven under development, with a total carrying amount of £175,736,374, are subject to a first charge to secure the Partnership’s long-term debt (note 8). In 2006, approximately £3.7 million of land was held under a long-term lease with a term of 125 years and is treated as a capitalised lease. The lease was amortised over 125 years. The land was sold in 2007. Property and equipment consists of the following at 31 December 2006 (unaudited):


	Land and			Furniture and			Construction
	Buildings			Equipment			in Progress			Total

As at 1 January 2006, net of accumulated depreciation and exchange adjustment	£	—		£	1,344		£	124,087,897		£	124,089,241
Additions, including interest capitalised		125,174,145			4,913,341			(31,834,492	)		98,252,994
Revaluations		67,405,865			3,230,832			—			70,636,697
Depreciation charge for the year		(1,444,181	)		(640,595	)		—			(2,084,776	)
Transfer of assets held for sale		—			—			(4,184,152	)		(4,184,152	)
Transfer of net deferred financing costs		—			—			(1,424,482	)		(1,424,482	)
Exchange adjustment		—			4			—			4

As at 31 December 2006, net of accumulated depreciation and exchange adjustment	£	191,135,829		£	7,504,926		£	86,644,771		£	285,285,526

As at 1 January 2006
Cost		—			2,813			124,087,897			124,090,710
Accumulated depreciation		—			(1,390	)		—			(1,390	)
Exchange adjustment		—			(79	)		—			(79	)

Net carrying amount	£	—		£	1,344		£	124,087,897		£	124,089,241

As at 31 December 2006
Cost or fair value		192,580,010			8,146,986			86,644,771			287,371,767
Accumulated depreciation		(1,444,181	)		(641,985	)		—			(2,086,166	)
Exchange adjustment		—			(75	)		—			(75	)

Net carrying amount	£	191,135,829		£	7,504,926		£	86,644,771		£	285,285,526

Construction in progress represents costs incurred in construction of seventeen facilities in development or pre-development. Costs to complete construction of these seventeen facilities are estimated to be £302 million.

The Partnership engaged Savills Commercial Ltd, an accredited independent valuer, to provide an opinion of the Fair value of each of the seven Communities that were operating as at 31 December 2006, on a freehold basis as a fully equipped operational entity having regard to trading potential in existing use and present condition subject to the management contract in place. Fair value was determined using a discounted cash flow method of valuation assuming reasonable trade build up to future stabilization. Stabilization is generally considered to be the date at which a community is 95% occupied which usually occurs 12 to 18 months after opening. The date of the valuation was 31 December 2006.

107

PS UK Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

Property and equipment consists of the following at 31 December 2005 (unaudited):


	Furniture and			Construction
	Equipment			in Progress		Total

As at 1 January 2005, net of accumulated depreciation and exchange adjustment	£	1,999		£	28,024,862	£	28,026,861
Additions, including interest capitalised		—			96,063,035		96,063,035
Depreciation charge for the year		(595	)		—		(595	)
Exchange adjustment		(60	)		—		(60	)

As at 31 December 2005, net of accumulated depreciation and exchange adjustment	£	1,344		£	124,087,897	£	124,089,241

As at 1 January 2005
Cost		2,813			28,024,862		28,027,675
Accumulated depreciation		(795	)		—		(795	)
Exchange adjustment		(19	)		—		(19	)

Net carrying amount	£	1,999		£	28,024,862	£	28,026,861

As at 31 December 2005
Cost		2,813			124,087,897		124,090,710
Accumulated depreciation		(1,390	)		—		(1,390	)
Exchange adjustment		(79	)		—		(79	)

Net carrying amount	£	1,344		£	124,087,897	£	124,089,241

Construction in progress represents costs incurred in construction of twenty facilities in development or pre-development. Costs to complete construction of these twenty facilities are estimated to be £305 million.


4.	Assets Held for Sale

During 2007, the Partnership sold a parcel of undeveloped land as the Partnership was unable to obtain the required zoning for the development of the land. As at 31 December 2006, the land was classified as assets held for sale with a book value of £4,184,152. The land was subject to a land loan of £1,862,000 with an original maturity date of January 2007 which was extended to May 2007. The Partnership sold the land in May 2007. The Partnership recorded a net loss on this sale of £34,840.


5.	Sale of Subsidiaries

On 31 July 2007, a subsidiary of the Partnership entered into a Purchase and Sale Agreement with a Third Party Buyer (the Buyer) for the sale of a portfolio of subsidiary companies that own and operate fifteen senior living communities, divided into the Initial Portfolio Members and the Pipeline Portfolio Members. The Initial Portfolio Members include the subsidiary companies that own and operate the senior living communities known as Sunrise of Bassett, Sunrise of Edgbaston, Sunrise of Esher, Sunrise of Fleet, Sunrise of Guildford and Sunrise of Westbourne. The Pipeline Portfolio Members include the subsidiary companies that own and operate the senior living communities known as Sunrise of Bramhall II, Sunrise of Cardiff, Sunrise of Chorleywood, Sunrise of Eastbourne, Sunrise of Mobberley, Sunrise of Solihull, Sunrise of Southbourne, Sunrise of Tettenhall and Sunrise of Weybridge. The sale of the Initial Portfolio Members was completed concurrent with the execution of the Purchase and Sale Agreement for the purchase price of £224.8 million, of which £96.1 million was used to repay long-term debt. The Partnership recorded a net gain on the sale of the Initial Portfolio Members of £106.6 million. The Partnership placed £6.0 million in an escrow account to be used for income support to the Buyer if the net operating income of the six initial communities does not meet specified targets. The Buyer is eligible to receive income support for each of the six communities until each community reaches stabilization, as defined in the Purchase and Sale Agreement. The Partnership’s liability to provide income support does not exceed the £6.0 million. At 31 December 2007, the

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PS UK Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

balance in the escrow account for income support was £4.5 million, which is reflected on the balance sheet in restricted cash and other current liabilities. The remaining net proceeds from the sale of the Initial Portfolio Members were distributed to SHIP and Sunrise LP, with the exception of £7.1 million representing a portion of SunCo’s distribution which is held in a restricted cash account until the termination of the Partnership.

The Purchase and Sale Agreement sets out the Target Completion Date for each Pipeline Portfolio Member. The sale of the first Pipeline Portfolio Member, the subsidiary companies that owned and operated Sunrise of Mobberley, was completed on 31 December 2007 for the purchase price of £30.8 million, of which £20.6 million was used to repay long-term debt. The Partnership recorded a net gain on this sale of £7.9 million.

The Target Completion Dates for the remaining Pipeline Portfolio Members ranged from April 2008 until October 2009. A Floor Price has been established for each of the Pipeline Portfolio Members. Subsequent to the sale of each of the Pipeline Portfolio Members, the Floor Price may be increased based upon specific provisions within the Purchase and Sale Agreement regarding performance of the communities. The Buyer has the right to buy, and the Partnership has the right to require the Buyer to buy, each of the remaining Pipeline Portfolio Members until a date which is 540 days after the Target Completion Date for the specific Pipeline Portfolio Members. At that point, either the Partnership or the Buyer may terminate their rights. If all sales have not been completed by 31 October 2011, then the Partnership’s and the Buyer’s rights under the Purchase and Sale Agreement will terminate. Details of the three additional Pipeline Portfolio Members sold since 30 April 2008 are set out in note 13.

The results of the subsidiary companies sold in 2007 are presented below:


	2007			2006			2005
				(Unaudited)			(Unaudited)

Revenue	£	18,561,984		£	13,739,973		£	—
Expenses		(19,321,416	)		(19,465,988	)		(2,183,985	)

Net operating loss		(759,432	)		(5,726,015	)		(2,183,985	)

Other (expense)/income		(7,137,281	)		(4,343,129	)		65,147

Book loss before taxes		(7,896,713	)		(10,069,144	)		(2,118,838	)
Taxes payable related to book income:
Related to pre-tax profit/(loss)(1)		—			—			—
Related to gain on disposal(2)		—			—			—
Total taxes on book income for the subsidiaries sold	£	—		£	—		£	—


(1)		No taxes are due on operations, as the subsidiaries are in a tax loss position, and there is a net operating loss carry-forward of £13,717,412.

(2)		Note that the gain on disposal of the subsidiaries was recognized at the level of PS UK Sarl, and no Luxembourg tax was due on that gain.

The net cash flows incurred by the subsidiary companies sold in 2007 are as follows:


	2007			2006			2005
				(Unaudited)			(Unaudited)

Operating	£	(1,182,337	)	£	(8,235,124	)	£	4,915,227
Investing		146,018,109			(28,283,577	)		(72,225,290	)
Financing		(149,412,223	)		40,585,176			64,396,505

Net cash (outflow)/inflow	£	(4,576,451	)	£	4,066,475		£	(2,913,558	)

109

PS UK Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)


6.	Affiliate Transactions

The consolidated financial statements include the financial statements of the Partnership and the subsidiaries listed in the following table, all drawn up to 31 December 2007:


	Country of	% Equity Interest
Name	Incorporation	2007		2006
				(Unaudited)

PS UK Sarl	Luxembourg		100		100
Property Companies:
Sunrise of Fleet Limited	Jersey		0		100
Sunrise of Cardiff Limited	Jersey		100		100
Sunrise of Guildford Limited	Jersey		0		100
Sunrise of Westbourne Limited	Jersey		0		100
Sunrise of Edgbaston Limited	Jersey		0		100
Sunrise of Bassett Limited	Jersey		0		100
Sunrise of Mobberley Limited	Jersey		0		100
Sunrise of Esher Limited	Jersey		0		100
Sunrise of Solihull Limited	Jersey		100		100
Sunrise of Chorleywood Limited	Jersey		100		100
Sunrise of Weybridge Limited	Jersey		100		100
Sunrise of Bristol Leigh Woods Limited	Jersey		100		100
Sunrise of Brooklands Limited	Jersey		100		100
Sunrise of Tettenhall Limited	Jersey		100		100
Sunrise of Chichester Limited	Jersey		100		100
Sunrise of Morningside Limited	Jersey		100		100
Sunrise of Sonning Limited	Jersey		100		100
Sunrise of Sevenoaks Limited	Jersey		100		100
Sunrise of Southbourne Limited	Jersey		100		100
Sunrise of Eastbourne Limited	Jersey		100		100
Sunrise of Haywards Heath Limited	Jersey		0		100
Sunrise of Surbiton Limited	Jersey		100		100
Sunrise of Winchester Limited	Jersey		100		100
Sunrise of Bramhall II Limited	Jersey		100		100
Sunrise of Beaconsfield Limited	Jersey		100		100
Sunrise of Bagshot II Limited	Jersey		100		0
Sunrise of Brighton Limited	Jersey		100		0
Operating Companies:
Sunrise Operations Fleet Limited	England and Wales		0		100
Sunrise Operations Cardiff Limited	England and Wales		100		100
Sunrise Operations Guildford Limited	England and Wales		0		100
Sunrise Operations Westbourne Limited	England and Wales		0		100
Sunrise Operations Edgbaston Limited	England and Wales		0		100
Sunrise Operations Bassett Limited	England and Wales		0		100
Sunrise Operations Mobberley Limited	England and Wales		0		100
Sunrise Operations Esher Limited	England and Wales		0		100
Sunrise Operations Solihull Limited	England and Wales		100		100
Sunrise Operations Chorleywood Limited	England and Wales		100		100
Sunrise Operations Weybridge Limited	England and Wales		100		0
Sunrise Operations Tettenhall Limited	England and Wales		100		100
Sunrise Operations Southbourne Limited	England and Wales		100		100
Sunrise Operations Eastbourne Limited	England and Wales		100		0
Sunrise Operations Morningside Limited	England and Wales		100		0
Sunrise Operations Bramhall II Limited	England and Wales		100		0
Sunrise Operations Sonning Limited	England and Wales		100		0
Sunrise Operations Beaconsfield Limited	England and Wales		100		0

PS UK (Jersey) GP Limited is the ultimate controlling party of the Partnership through the governance of the Board of Directors and Executive Committee. The Board of Directors is appointed by SHIP and Sunrise. The Board

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PS UK Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

of Directors appoints the Executive Committee. All actions of the Executive Committee require the unanimous approval of all members.

Other Related Parties

The following table provides the closing balances for transactions which have been entered into with related parties for the relevant financial year.


	2007			2006
				(Unaudited)

Amounts due (from)/to other related parties
Sunrise and its wholly owned subsidiaries	£	(372,366	)	£	3,964,787
General Partner		(40,801	)		(40,801	)
Home Help Companies:
Sunrise Home Help Fleet Limited		—			24,894
Sunrise Home Help Westbourne Limited		—			23,315
Sunrise Home Help Guildford Limited		—			(24,987	)
Sunrise Home Help Edgbaston Limited		—			23,457
Sunrise Home Help Bassett Limited		—			32,149
Sunrise Home Help Mobberley Limited		—			27,354
Sunrise Home Help Esher Limited		—			54,249
Sunrise Home Help Cardiff Limited		(5,275	)		—
Sunrise Home Help Tettenhall Limited		14,447			—
Sunrise Home Help Solihull Limited		46,199			—
Sunrise Home Help Chorleywood Limited		20,810			—

	£	(336,986	)	£	4,084,417

Sunrise and its Wholly Owned Subsidiaries

Subsidiaries of the Partnership have entered into management and development agreements with Sunrise Senior Living Limited (SSL Ltd.), a wholly owned subsidiary of Sunrise, to provide development, design, construction, management, and operational services relating to the facilities in the United Kingdom. The development agreements commenced during 2002 and have or will terminate when the facilities open. The management agreements begin when the facilities open and will terminate fifteen years after the facility opens.

Under the development agreements, SSL Ltd., as developer of the properties, will receive development fees equal to 4% of total project costs for each facility and may be eligible to receive a performance fee equal to 1% of total project costs, if certain criteria are met. Total development fees incurred and capitalised by the Partnership in 2007 were £4,167,787 (2006 — £5,302,088) (2005 — £4,963,803).

Under the management agreements, SSL Ltd., as manager of the properties, will receive management fees equal to 5% — 7% of revenues based on facility occupancy levels. Total management fees incurred by the Partnership in 2007 were £775,441 (2006 — £355,960) (2005 — £nil).

The Partnership has an amount due from Sunrise and its wholly owned subsidiaries of £372,366 as of 31 December 2007 (2006 — £3,964,787 was payable to Sunrise). This receivable relates to an overpayment for the above described transactions as well as other development costs paid by Sunrise on behalf of the Partnership. The overpayment will be applied to future costs paid by Sunrise on behalf of the Partnership. This receivable is due on demand and is non-interest bearing.

111

PS UK Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

General Partner

The General Partner is responsible for managing the Partnership. The Partnership has an amount due from the General Partner of £40,801 as of 31 December 2007 (2006 — £40,801). This receivable relates to costs paid by the Partnership on behalf of the General Partner. This receivable is due on demand and is non-interest bearing.

Home Help Companies

Upon opening of each facility, each of the UK Operating Companies have entered into a Domiciliary Care Agreement with their respective Home Help Companies, wholly owned subsidiaries of Sunrise, whereby the Home Help Company will provide resident care services for the residents residing in the portion of the facility registered under the Care Standards Act of 2000. In return for this service, the Operating Company will pay the respective Home Help Company a fee equal to £45 per resident day in the first year and an amount to be agreed upon by both parties in the second and subsequent years. Total fees paid to the Home Help Companies in 2007 were £1,717,156 (2006 — £586,035) (2005 — £nil). In addition under the terms of the Domiciliary Care Agreement the Operating Company is required to provide working capital to the Home Help Company to cover the service expenses of the community not otherwise collected from the residents. Total working capital reimbursed from the Home Help Companies in 2007 was £468,425 (2006 — £428,387 was provided to the Home Help Companies) (2005 — £nil).

Partner Loan

Under the terms of the Partnership Agreement, Sunrise LP and SHIP have provided loans to the Partnership in amounts sufficient to protect the Partnership’s assets or business. The loans are unsecured, non-interest bearing and are repayable from available cash from operations or capital transactions. These loans were repaid in 2007.


7.	Accrued Expenses

Accrued expenses consist of the following:


	2007		2006
			(Unaudited)

Contractor accruals including retainage	£	7,411,190	£	8,050,741
Interest payable on mortgage debt		1,369,186		—
Other accrued expenses		698,641		350,115

	£	9,479,017	£	8,400,856


8.	Long-Term Debt and Commitments

The Partnership has obtained commitments for land loans, construction loans and revolving loans of up to approximately £273.8 million to fund eleven facilities and future capital transactions. The loans are for a term of eighteen months to seven years and are secured by the facilities. There was £191,947,416 outstanding at 31 December 2007 (2006 — £170,003,122). These amounts are net of finance costs of £1,278,140 at 31 December 2007 (2006 — £1,278,128).

112

PS UK Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

Principal maturities of long-term debt as of 31 December 2007 are as follows:


Current	Effective Interest Rate %		Maturity		2007		2006
							(Unaudited)

£1,862,000 bank loan		LIBOR + 2.00		2007	£	—	£	1,862,000
£12,195,000 bank loan		LIBOR + 1.25 to LIBOR + 2.25		2007		—		221,000
£15,200,000 bank loan		LIBOR + 1.25 to LIBOR + 2.25		2007		—		250,000
£18,536,000 bank loan		LIBOR + 1.25 to LIBOR + 2.25		2007		—		295,000
£16,298,000 bank loan		LIBOR + 1.25 to LIBOR + 2.25		2007		—		295,000
£63,945,752 bank loan		7.87 to 8.25		2008		19,227,570		—
£19,500,000 bank loan		LIBOR + 1.75		2008		224,936		—

					£	19,452,506	£	2,923,000

Non-current
£12,195,000 bank loan		LIBOR + 1.25 to LIBOR + 2.25		2007 - 2011		—		11,859,467
£15,200,000 bank loan		LIBOR + 1.25 to LIBOR + 2.25		2007 - 2011		—		14,803,173
£18,536,000 bank loan		LIBOR + 1.25 to LIBOR + 2.25		2007 - 2011		—		18,059,257
£16,298,000 bank loan		LIBOR + 1.25 to LIBOR + 2.25		2007 - 2012		—		15,797,234
£63,945,752 bank loan		7.87 to 8.25		2008 - 2010		32,456,816		—
£19,500,000 bank loan		LIBOR + 1.75		2008 - 2011		17,216,880		12,378,738
£20,346,000 bank loan		LIBOR + 1.25 to LIBOR + 2.25		2008 - 2012		—		17,164,974
£15,300,000 bank loan		LIBOR + 1.25 to LIBOR + 2.50		2009 - 2010		15,152,016		12,002,214
£18,451,680 bank loan		LIBOR + 1.25 to LIBOR + 1.75		2009 - 2011		13,313,696		3,040,186
£19,677,500 bank loan		LIBOR + 1.25 to LIBOR + 2.50		2009 - 2011		17,642,085		4,198,000
£21,034,664 bank loan		LIBOR + 1.25 to LIBOR + 1.75		2009 - 2012		10,051,651		—
£15,320,712 bank loan		LIBOR + 1.25 to LIBOR + 2.25		2009 - 2013		15,090,332		6,401,440
£15,953,000 bank loan		LIBOR + 1.35 to LIBOR + 1.75		2010		—		15,482,341
£17,157,644 bank loan		LIBOR + 2.15		2010		—		15,299,298
£19,472,082 bank loan		LIBOR + 0.85 to LIBOR + 1.50		2010		6,109,329		—
£21,428,205 bank loan		LIBOR + 0.85 to LIBOR + 1.50		2010		7,952,225		—
£16,729,000 bank loan		LIBOR + 1.35 to LIBOR + 1.75		2011		16,253,740		11,321,900
£22,252,592 bank loan		LIBOR + 1.35 to LIBOR + 1.75		2011		19,487,621		9,271,900
£20,664,096 bank loan		LIBOR + 1.25 to LIBOR + 1.50		2012		1,768,519		—

					£	172,494,910	£	167,080,122

£1,862,000 bank loan

This loan was secured by land and was fully repaid in May 2007.

£12,195,000 bank loan

This loan was secured by the facility and was fully repaid in July 2007.

£15,200,000 bank loan

This loan was secured by the facility and was fully repaid in July 2007.

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PS UK Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

£18,536,000 bank loan

This loan was secured by the facility and was fully repaid in July 2007.

£16,298,000 bank loan

This loan was secured by the facility and was fully repaid in July 2007.

£63,945,752 bank loan

This loan is unsecured and has payments beginning May 2008 and the balance repayable in February 2010.

£19,500,000 bank loan

This loan is secured by the facility and has bi-annual payments beginning October 2008 and the balance repayable in April 2011.

£20,346,000 bank loan

This loan was secured by the facility and was fully repaid in December 2007.

£15,300,000 bank loan

This loan is secured by the facility and has bi-annual payments beginning April 2009 and the balance repayable in September 2010.

£18,451,680 bank loan

This loan is secured by the facility and has bi-annual payments beginning June 2009 and the balance repayable in December 2011.

£19,677,500 bank loan

This loan is secured by the facility and has bi-annual payments beginning December 2009 and the balance repayable in September 2011.

£21,034,664 bank loan

This loan is secured by the facility and has bi-annual payments beginning November 2009 and the balance repayable in May 2012.

£15,320,712 bank loan

This loan is secured by the facility and has bi-annual payments beginning June 2009 and the balance repayable in June 2013.

£15,953,000 bank loan

This loan was secured by the facility and was fully repaid in July 2007.

£17,157,644 bank loan

This loan was secured by the facility and was fully repaid in July 2007.

£19,472,082 bank loan

This loan is secured by the facility and is repayable in full in November 2010.

£21,428,205 bank loan

This loan is secured by the facility and is repayable in full in November 2010.

114

PS UK Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

£16,729,000 bank loan

This loan is secured by the facility and is repayable in full in February 2011.

£22,252,592 bank loan

This loan is secured by the facility and is repayable in full in December 2011.

£20,664,096 bank loan

This loan is secured by the facility and has bi-annual payments beginning May

2010 and the balance repayable in November 2012.

Commitments

Sunrise has made guarantees on certain construction loans and operating deficit guarantees on the facilities upon opening, for which Sunrise will be paid a fee equal to a percentage of the loan amount.


9.	Income Taxes

The Partnership is not a taxable entity since attributes of income and loss pass through pro rata to the partners on their respective income tax returns in accordance with the Partnership Agreement. However, our operating companies are subject to UK income tax and our property companies are subject to Jersey income tax.

Major components of income for the years ended 31 December are as follows:


	2007		2006			2005
			(Unaudited)			(Unaudited)

Partnership income	£	88,569,571	£	436,676		£	236,951
Operating and property company profit/(loss)		6,016,946		(12,489,602	)		(2,655,087	)

Consolidated net profit/(loss)	£	94,586,517	£	(12,052,926	)	£	(2,418,136	)

The operating and property companies had the following deferred tax assets and liabilities at 31 December:


	2007			2006
				(Unaudited)

Deferred tax assets
Net operating losses for Operating and Property Companies	£	3,768,480		£	4,306,775
Pre-rental expense carry-forward		397			327,584

Total deferred tax assets		3,768,877			4,634,359

Deferred tax liabilities Capital allowances		(88,563	)		(158,710	)

Total deferred tax liabilities		(88,563	)		(158,710	)

Net deferred tax asset	£	3,680,314		£	4,475,649

In the UK, the applicable statutory tax rate for corporation tax in 2007 is 28% (2006 — 30%) (2005 — 30%), in Jersey the applicable 2007 statutory tax rate is levied at 20% (2006 — 22%) (2005 — 22%) on rental income arising in the UK.

As at 31 December 2007 the operating companies and the property companies had combined accumulated net operating losses of approximately £12,536,870 (2006 — losses of £14,561,000) which, once agreed with the tax authorities, can be carried forward indefinitely for offset against future taxable profits of the companies in which the

115

PS UK Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

losses arose. At the applicable statutory tax rates this would create a long-term deferred tax asset of £3,768,480 at 31 December 2007 (2006 — £4,306,775).

Additionally, the operating companies have pre-commencement expenses of approximately £1,491 as at 31 December 2007 (2006 — £1,091,947) which at the applicable statutory tax rate would create a deferred tax asset of £397 in 2007 (2006 — £327,584), as outlined above.

At the property company level, however, capital allowances in the amount of approximately £442,815 for 2007 (2006 — £721,407) at the statutory tax rate would create a deferred tax liability of £88,563 (2006 — £158,710), as mentioned above. This deferred tax liability reduces the above deferred tax assets, and thus our net deferred tax asset as at December 2007 would amount to £3,680,314 (2006 — £4,475,649).

Note that the ending deferred balances do not include activity related to the Operating Companies and Property Companies that were transferred into a new venture during 2007. These are the Operating Companies and Property Companies related to Fleet, Westbourne, Guilford, Edgbaston, Basset, Mobberley and Esher. At the end of 2006 each of the discontinued Operating Companies and Property Companies were in a tax loss position. See Note 5.

The net deferred tax assets have not been recognised, because there is no assurance that adequate profits will be generated in the future to be able to utilise the losses and expenditures carried forward. Accordingly, no provision for income taxes has been included in these financial statements, and there are no current or deferred income taxes recognised in the financial statements. Additionally the capital gain derived from the disposal of the UK Operating Companies and Jersey Property Companies is tax exempt in the UK and Jersey.


10.	Partners’ Capital

The Partnership consists of the General Partner, Sunrise LP (20%), SHIP (80%) and SunCo. The General Partner is responsible for the management and control of the business and affairs of the Partnership and has the right to transact business and sign documents in the Partnership’s name. The General Partner must obtain the approval of its Board of Directors for certain major actions as defined in the General Partner’s Shareholders’ Agreement.

The Partnership is arranged such that each partner’s capital account is increased by its proportionate share of net income or any additional capital contributions and is decreased by its proportionate share of net losses or the fair value of any property distributed to such partner. Cash distributed from operations and cash distributed from capital transactions shall be distributed to the partners and partnership interests in the order defined in the Partnership Agreement. There is no obligation of the Partnership to return the partners’ capital contributions other than as specified in the Partnership Agreement.

The partners had initially agreed to contribute £42,500,000 to the Partnership and subsequently increased their commitment to £117,500,000, of which £87,826,644 has been funded through to 31 December 2007.

116

PS UK Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

Activity in the individual partners’ capital accounts was as follows:


	Sunrise LP			SHIP			SunCo			Total

Balance at 1 January 2005 —unaudited	£	3,820,468		£	15,281,877		£	1		£	19,102,346
Contributions		4,016,816			16,067,261			—			20,084,077
Net loss for the year		(483,627	)		(1,934,509	)		—			(2,418,136	)
Foreign currency translation adjustment		(184	)		(735	)		—			(919	)

Balance at 1 January 2006 —unaudited		7,353,473			29,413,894			1			36,767,368
Contributions		4,138,139			16,552,559			—			20,690,698
Net loss for the year		(2,410,585	)		(9,642,341	)		—			(12,052,926	)
Other reserves		14,127,339			56,509,358			—			70,636,697
Foreign currency translation adjustment		(61	)		(244	)		—			(305	)

Balance at 31 December 2006— unaudited		23,208,305			92,833,226			1			116,041,532
Contributions		5,247,452			20,989,804			—			26,237,256
Net profit for the year		18,917,303			75,669,214			—			94,586,517
Other reserves		(6,417,371	)		(25,669,482	)		—			(32,086,853	)
Distributions		(37,638,798	)		(113,064,757	)		(8,971,995	)		(159,675,550	)

At 31 December 2007	£	3,316,891		£	50,758,005		£	(8,971,994	)	£	45,102,902


11.	Financial Risk Management Objectives and Policies

Interest Rate Risk

The main risk arising from the Partnership’s long-term debt with floating interest rates is cash flow interest rate risk. The interest rates on these loans are all LIBOR based plus a margin. The margin tends to be the highest during the construction phase, then is reduced during thelease-up phase and is reduced further once a facility reaches stabilization, as defined in the loan documents.

The Partnership estimates that the fair value of its long-term floating rate debt is approximately equal to its carrying value at 31 December 2007.

At 31 December 2007, the Partnership had approximately £50 million of floating-rate debt that has not been hedged. Debt incurred in the future also may bear interest at floating rates. Therefore, increases in prevailing interest rates could increase our interest payment obligations, which would negatively impact earnings. For example, a one-percent change in interest rates would increase or decrease annual interest expense by approximately £500,000 based on the amount of floating-rate debt that was not hedged at 31 December 2007.

The table below summarises the Partnership’s financial liabilities at 31 December based on contractual undiscounted payments, including interest.

117

PS UK Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

Year Ended 31 December 2007


	On		Less Than		Three to		One to		More Than
	Demand		Three Months		Twelve Months		Five Years		Five Years		Total

Interest bearing loans and borrowings	£	—	£	2,417,845	£	28,363,541	£	186,260,389	£	13,093,982	£	230,135,757
Trade payables		100,018		—		—		—		—		100,018
Accrued expenses		—		6,929,574		1,131,609		1,417,834		—		9,479,017

	£	100,018	£	9,347,419	£	29,495,150	£	187,678,223	£	13,093,982	£	239,714,792

Year Ended 31 December 2006


	On		Less Than		Three to		One to		More Than
	Demand		Three Months		Twelve Months		Five Years		Five Years		Total

Interest bearing loans and borrowings	£	—	£	1,905,293	£	10,507,059	£	175,256,666	£	34,273,990	£	221,943,008
Trade payables		328,467		—		—		—		—		328,467
Accrued expenses		—		5,564,572		753,532		2,082,752		—		8,400,856
Partner loan		—		—		—		—		1,275,000		1,275,000

	£	328,467	£	7,469,865	£	11,260,591	£	177,339,418	£	35,548,990	£	231,947,331

Hedging Activities

Cash Flow Hedges

The Partnership manages it exposure to interest rate risk by entering into interest rate swap agreements, in which it exchanges the periodic payments, based on a notional amount and agreed upon fixed interest and variable interest rates. Use of these derivative financial instruments has not had a material impact on the Partnership’s financial position at 31 December 2007 or the Partnership’s results of operations for the year ended 31 December 2007.

At 31 December 2007, the Partnership had an interest rate swap agreement in place with a notional amount of £90,000,000 whereby it pays a fixed rate of interest of 5.36% and receives a variable rate equal to3-month LIBOR on the notional amount. The swap agreement has a maturity date of 15 January 2011. The swap is being used to hedge the exposure to changes in the variable interest rate on the Partnership’s long-term debt. As at 31 December 2007, the fair value of the interest rate swap was £529,885.

Credit Risk

There are no significant concentrations of credit risk within the Partnership. With respect to credit risk arising from cash and restricted cash, the Partnership’s exposure to credit risk arises from the default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments.

Capital Management

The primary objective of the Partnership’s capital management is to permit the acquisition and development of approximately twenty-six facilities.

118

PS UK Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

are also made for initial site investigation costs as well as other expenses, fees and liabilities that the Partnership may occur. No changes were made in the objectives, policies or processes during the year ended 31 December 2007.

The following table provides the detail of the capital contributions made for the relevant financial year:


	2007			2006
				(Unaudited)

General partnership expenses	£	45,546		£	116,892
Initial site investigation costs
Initial investment approved projects:
Sunrise of Bath Limited		(11,065	)		194,197
Sunrise of Bristol Leigh Woods Limited		(2,263,093	)		471,056
Sunrise of Brooklands Limited		306,301			238,208
Sunrise of Chichester Limited		135,485			144,514
Sunrise of Haywards Heath Limited		123,493			226,891
Sunrise of High Wycombe Limited		(1,828	)		(118,501	)
Sunrise of Morningside Limited		(42,397	)		201,473
Sunrise of Murrayfield Limited		—			(291,500	)
Sunrise of Sevenoaks Limited		302,030			819,800
Sunrise of Surbiton Limited		387,664			380,637
Sunrise of Winchester Limited		270,544			316,843
Final investment approved projects:
Sunrise of Bagshot II Limited		5,166,024			—
Sunrise of Beaconsfield Limited		5,078,287			278,764
Sunrise of Bramhall II Limited		4,810,438			448,228
Sunrise of Cardiff Limited		—			683,924
Sunrise of Chorleywood Limited		—			2,297,153
Sunrise of Eastbourne Limited		3,021,973			1,590,947
Sunrise of Mobberley Limited		—			1,015,867
Sunrise of Sonning Limited		4,481,506			386,514
Sunrise of Solihull Limited		—			2,108,214
Sunrise of Southborne Limited		2,025,701			2,893,676
Sunrise of Tettenhall Limited		386,011			3,140,666
Sunrise of Weybridge Limited		2,014,636			3,146,235

	£	26,237,256		£	20,690,698


12.	Pensions and Other Post-Employment Benefit Plans

Eligible employees of the United Kingdom subsidiaries of the Partnership can participate in a Group Personal Pension Plan (the Plan), which is a money purchase pension plan to help save for retirement. Eligible employees are those who have completed the probationary period, as defined in each employee’s contract, and have reached age 18. The Plan contains three elements — employer-based contributions, equalling a minimum of 3% of eligible pensionable salary; optional member contributions; and mandatory employer matching contributions for managers and senior managers. During 2007, the Partnership contributed £30,069 (2006 — £23,698) (2005 — £nil) to the Plan.

119

PS UK Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)


13.	Subsequent Events

Three additional Pipeline Members were sold in 2008. On 30 April 2008, the subsidiary companies that owned and operated Sunrise of Solihull were purchased for £22.9 million with £21.1 million of the proceeds being used to repay £15.4 million of outstanding mortgage debt and £6.7 million of the Partnership’s unsecured bank debt. On 31 May 2008, the subsidiary companies that owned and operated Sunrise of Cardiff and Sunrise of Chorleywood were purchased for £53.3 million with £49.6 million of the proceeds being used to repay £35.3 million of outstanding mortgage debt and £14.3 million of the Partnership’s unsecured bank debt. A gain of approximately £19 million will arise on these sales. On 30 May 2008, the Partnership and the Buyer executed an agreement to add the subsidiary companies that own and operate Sunrise of Sonning and Sunrise of Beaconsfield to the Pipeline Members.

120

INDEPENDENT AUDITORS’ REPORT

To the Members of

AL U.S. Development Venture, LLC:

We have audited the accompanying consolidated balance sheet of AL U.S. Development Venture, LLC (the “Company”) as of December 31, 2007, and the related consolidated statements of operations, members’ deficit, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 2007 consolidated financial statements referred to above present fairly, in all material respects, the financial position of AL U.S. Development Venture, LLC as of December 31, 2007, 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.

/s/ Deloitte & Touche LLP

McLean, Virginia

February 29, 2008

121

AL U.S. DEVELOPMENT VENTURE, LLC

CONSOLIDATED BALANCE SHEETS


	As of December 31,
	2007			2006			2005
				(Unaudited)			(Unaudited)

ASSETS
Property and Equipment:
Land and land improvements	$	47,836,752		$	47,800,833		$	40,931,428
Building and building improvements		179,175,098			178,962,371			153,486,626
Furniture and equipment		13,302,079			13,107,160			11,230,326
Construction in progress		—			19,135			31,197,641

		240,313,929			239,889,499			236,846,021
Less accumulated depreciation		(23,501,494	)		(16,610,470	)		(14,658,439	)

Property and equipment — net		216,812,435			223,279,029			222,187,582
Cash and Cash Equivalents		7,547,327			6,539,184			—
Cash Held by AEW Member		—			3,416,771			11,094,765
Restricted Cash		6,000,000			—			—
Accounts Receivable — Less allowance for doubtful accounts of $383,057, $243,343, and $175,571, respectively		1,079,174			1,224,655			875,388
Prepaid Expenses and Other Current Assets		564,679			761,107			641,110
Deferred Financing Costs — Less accumulated amortization of $529,572, $2,359,258, and $1,489,611, respectively		4,085,851			1,572,757			2,243,958

Total	$	236,089,466		$	236,793,503		$	237,042,803

LIABILITIES AND MEMBERS’ (DEFICIT) CAPITAL
Liabilities:
Long-term debt	$	370,500,000		$	202,313,581		$	185,425,293
Derivative liability		17,039,343			—			—
Notes payable to affiliate		—			4,173,724			2,338,490
Accounts payable and accrued expenses		2,728,431			2,973,211			5,857,310
Payables to affiliates		3,197,737			9,145,059			4,829,679
Deferred revenue		3,953,863			3,250,730			3,114,810
Security and reservation deposits		44,301			85,341			91,645
Accrued interest		1,270,845			630,337			37,843

Total liabilities		398,734,520			222,571,983			201,695,070
Members’ (Deficit) Capital		(162,645,054	)		14,221,520			35,347,733

Total	$	236,089,466		$	236,793,503		$	237,042,803

See notes to consolidated financial statements.

122

AL U.S. DEVELOPMENT VENTURE, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS


	For the Years Ended December 31,
	2007			2006			2005
				(Unaudited)			(Unaudited)

Operating revenue:
Resident fees	$	76,325,155		$	64,822,893		$	51,029,044
Other income		379,149			226,946			137,805

Total operating revenue		76,704,304			65,049,839			51,166,849

Operating expenses:
Labor		27,361,910			25,044,073			19,529,473
Depreciation and amortization		6,766,201			6,431,137			7,801,309
Management fees		5,198,041			4,418,473			3,461,584
General and administrative		4,647,867			3,646,605			2,729,632
Insurance		2,526,045			4,066,943			2,812,243
Food		2,722,483			2,334,825			1,746,597
Taxes and license fees		2,701,310			1,878,673			1,391,581
Utilities		2,006,454			1,960,423			1,595,469
Repairs and maintenance		1,996,821			1,277,319			938,150
Advertising and marketing		994,128			1,117,188			594,066
Ancillary expenses		535,929			386,746			332,132
Bad debt		163,929			96,053			134,009

Total operating expenses		57,621,118			52,658,458			43,066,245

Income from operations		19,083,186			12,391,381			8,100,604

Other income (expense):
Amortization of financing cost		(914,656	)		(869,647	)		(738,748	)
Loss on extinguishment of debt		(1,188,688	)		—			—
Prepayment penalty		(4,154,962	)		—			—
Change in fair value of interest rate hedge instruments		(17,039,343	)		—			—
Interest expense		(20,637,838	)		(12,739,257	)		(9,033,706	)
Interest income		331,620			232,701			13,631

Total other expense		(43,603,867	)		(13,376,203	)		(9,758,823	)

Net loss	$	(24,520,681	)	$	(984,822	)	$	(1,658,219	)

See notes to consolidated financial statements.

123

AL U.S. DEVELOPMENT VENTURE, LLC

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL (DEFICIT)


	For the Years Ended December 31
							MS Senior
	SSLII			AEW Member			Living, LLC			Total

Members’ capital — December 31, 2004 (unaudited)	$	11,341,244		$	32,059,380		$	—		$	43,400,624
Cash contributions		653,703			2,673,560			—			3,327,263
Non-cash contribution adjustment		(35,062	)		(140,247	)		—			(175,309	)
Cash distributions		(512,414	)		(7,884,476	)		—			(8,396,890	)
Non-cash distributions		(229,947	)		(919,789	)		—			(1,149,736	)
Net loss		(331,644	)		(1,326,575	)		—			(1,658,219	)

Members’ capital — December 31, 2005 (unaudited)		10,885,880			24,461,853			—			35,347,733
Distributions		(8,030,842	)		(12,110,549	)		—			(20,141,391	)
Net loss		(196,964	)		(787,858	)		—			(984,822	)

Members’ capital — December 31, 2006 (unaudited)		2,658,074			11,563,446			—			14,221,520
Contributions		1,200,000			—			4,800,000			6,000,000
Distributions		(30,746,046	)		856,509			(128,456,356	)		(158,345,893	)
Transfer of equity		—			(12,584,916	)		12,584,916			—
Net loss		(4,904,136	)		164,961			(19,781,506	)		(24,520,681	)

Members’ deficit — December 31, 2007	$	(31,792,108	)	$	—		$	(130,852,946	)	$	(162,645,054	)

See notes to consolidated financial statements.

124

AL U.S. DEVELOPMENT VENTURE, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS


	For the Years Ended December 31,
	2007			2006			2005
				(Unaudited)			(Unaudited)

Cash flows from operating activities:
Net loss	$	(24,520,681	)	$	(984,822	)	$	(1,658,219	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		6,766,201			6,431,137			7,801,309
Amortization and loss on extinguishment of debt		2,103,344			869,647			738,748
Provision for bad debts		163,929			96,053			134,009
Changes in assets and liabilities:
Change in fair value of interest rate hedge instruments		17,039,343			—			—
Cash held by AEW Member		3,416,771			7,677,994			(6,355,684	)
Accounts receivable		(18,448	)		(445,320	)		(497,767	)
Prepaid expenses and other current assets		196,428			(119,997	)		(214,635	)
Accounts payable and accrued expenses		(244,780	)		(2,884,099	)		460,871
Payable to affiliates — net		(5,947,322	)		4,315,380			2,489,875
Accrued interest		640,508			592,494			37,843
Deferred revenue		703,133			135,920			790,935
Security and reservation deposits		(41,040	)		(6,304	)		(9,995	)

Net cash provided by operating activities		257,386			15,678,083			3,717,290

Cash flows from investing activities:
Restricted cash		(6,000,000	)		—			9,652,233
Investment in property and equipment		(299,607	)		(7,522,584	)		(32,264,573	)

Net cash used in investing activities		(6,299,607	)		(7,522,584	)		(22,612,340	)

Cash flows from financing activities:
Payment of financing costs		(4,616,438	)		(198,446	)		(33,493	)
Proceeds from note to affiliate		47,708			4,859,176			17,751,344
Repayment of note to affiliate		(4,221,432	)		(3,023,942	)		(24,565,140	)
Proceeds from long-term debt		371,330,817			17,032,214			30,808,064
Payment on long-term debt		(203,144,398	)		(143,926	)		—
Contributions		6,000,000			—			3,327,263
Distributions		(158,345,893	)		(20,141,391	)		(8,396,890	)

Net cash provided by (used in) financing activities		7,050,364			(1,616,315	)		18,891,148

Net increase (decrease) in cash and cash equivalents		1,008,143			6,539,184			(3,902	)
Cash and cash equivalents — Beginning of year		6,539,184			—			3,902

Cash and cash equivalents — End of year	$	7,547,327		$	6,539,184			—

Supplemental disclosure of non-cash flow information —
Change in derivative valuation	$	17,039,343		$	—		$	—
SSLII capital contribution accrued but unpaid in 2004		—			—			(175,309	)
Capital distributions accrued but unpaid		—			—			(1,149,736	)

	$	17,039,343		$	—		$	(1,325,045	)

Supplemental disclosure of cash flow information —
Cash paid for interest	$	19,997,330		$	12,146,763		$	9,032,386

See notes to consolidated financial statements.

125

AL U.S. Development Venture, LLC

Notes to Consolidated Financial Statements
As of and for the Years Ended December 31, 2007, 2006 (Unaudited), and 2005
(Unaudited)


1.	Organization

AL U.S. Development Venture, LLC (“AL U.S.”) was formed on December 23, 2002, as a limited liability company under the laws of the state of Delaware. The Company shall terminate on December 31, 2037, unless substantially all of its assets are sold or the members elect to dissolve the Company prior to this date. AEW Senior Housing Company, LLC (the “AEW Member”) held an 80% membership interest, and Sunrise Senior Living Investments, Inc. (“SSLII”), a wholly owned subsidiary of Sunrise Senior Living, Inc. (“SSLI”), is the managing member and held a 20% membership interest through June 14, 2007. On June 14, 2007 AEW Senior Housing Company, LLC transferred its 80% member interest to an unrelated third party, MS Senior Living, LLC, a Delaware limited liability company, pursuant to a Purchase and Sale Agreement dated April 9, 2007. As of December 31, 2007, MS Senior Living, LLC held an 80% interest in the Company and SSLII held a 20% interest in the Company.

The amended and restated limited liability agreement effective June 14, 2007 details the commitments of the members and provides the procedures for the return of capital to the members with defined priorities. All net cash flow from operations and capital proceeds is to be distributed according to the priorities pro rata as specified in the limited liability agreement. The managing member can request additional capital for operating shortfalls in the event that third party financing on terms acceptable to the executive committee cannot be procured. Contributions are made pro rata in proportion to the relative percentage interests of the member at the time of request. Net income is allocated to the members pro rata in proportion to the relative percentage interests of the members.

AL U.S. wholly owns the following five single-purpose limited liability companies and 10 single-purpose limited partnerships (the “Operator Entities”) that were organized to develop and own 15 assisted living facilities (the “Facilities”) to provide assisted living services for seniors:


Operator Entity	Location	Date Opened

AL US/Bonita Senior Housing, LP	San Diego (Bonita), California	April 2003
Boulder Assisted Living, LLC	Boulder, Colorado	May 2003
AL US/Huntington Beach Senior Housing, LP	Huntington Beach, California	February 2004
AL US/La Jolla Senior Housing, LP	Chula Vista (La Jolla/Pacific Beach), California	May 2003
AL US/La Palma Senior Housing, LP	La Palma, California	July 2003
Newtown Square Assisted Living, LLC	Newton Square, Pennsylvania	March 2004
AL US/Sacramento Senior Housing, LP	Sacramento, California	December 2003
AL US/Seal Beach Senior Housing, LP	Seal Beach, California	February 2004
AL US/Studio City Senior Housing, LP	Los Angeles (Studio City), California	June 2004
Wilmington Assisted Living, LLC	Wilmington, Delaware	December 2003
AL US/Woodland Hills Senior Housing, LP	Woodland Hills, California	May 2005
AL US/Playa Vista Senior Housing, LP	La Playa Vista, California	June 2006
GP Woods Assisted Living, LLC	Grosse Point Woods, Michigan	January 2005
AL US/GP Woods II Senior Housing, LLC	Grosse Point Woods II, Michigan	June 2006
AL/US San Gabriel Senior Housing, LP	San Gabriel, California	February 2005

Senior living services include a residence, meals, and non-medical assistance to elderly residents for a monthly fee. The Facilities’ services are generally not covered by health insurance, and, therefore, monthly fees are generally payable by the residents, their family, or another responsible party.


2.	Summary of Significant Accounting Policies

Basis of Accounting — The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The accompanying financial statements include the

126

AL U.S. Development Venture, LLC

Notes to Consolidated Financial Statements — (Continued)

consolidated accounts of AL U.S. and the Operator Entities (collectively, the “Company”) after elimination of significant intercompany accounts and transactions.

The accompanying consolidated financial statements and related footnotes for the years ended December 31, 2006 and 2005 are unaudited. They have been prepared on a basis consistent with that used in preparing the 2007 consolidated financial statements and footnotes thereto, and in the opinion of management, include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the Company’s results of operations and cash flows for the years ended December 31, 2006 and 2005.

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 amounts reported in the financial statements and accompanying notes. Significant estimates and assumptions have been made with respect to the useful lives of assets, recoverable amounts of receivables, amortization periods of deferred costs, and the fair value of financial statements, including derivatives. Actual results could differ from those estimates.

Property and Equipment — Property and equipment are recorded at the lower of cost, or if impairment is indicated, at fair value. Maintenance and repairs are charged to expense as incurred. The Company capitalizes property taxes, insurance and interest during construction to the extent such assets qualify for capitalization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, as follows:


Land improvements			10-15 years
Building and improvements			40 years
Furniture, fixtures, and equipment			3-10 years

Property and equipment are reviewed for impairment whenever events or circumstances indicate that the asset’s undiscounted expected cash flows are not sufficient to recover its carrying amount. The Company measures an impairment loss by comparing the fair value of the asset to its carrying amount. No impairment charge was recorded in 2007, 2006 (unaudited), or 2005 (unaudited).

Cash and Cash Equivalents — Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less. Throughout the year, the Company may have cash balances in excess of federally insured amounts on deposit with various financial institutions.

Restricted Cash — Restricted cash balances represent amounts set aside for debt service charges as required by the loan agreement.

Allowance for Doubtful Accounts — The Company provides an allowance for doubtful accounts on its outstanding receivables balance based on its collection history and an estimate of uncollectible accounts.

Deferred Financing Costs — Costs incurred in conjunction with obtaining permanent financing for the Company have been deferred and are amortized using the straight-line method, which approximates the effective interest method, to interest expense over the remaining term of the financing. Amortization expense for the years ended December 31, 2007, 2006, and 2005 was $914,656, $869,647 (unaudited), and $738,748 (unaudited), respectively.

Revenue Recognition and Deferred Revenue — Operating revenue consists of resident fee revenue, including resident community fees. Generally, resident community fees approximating 30 to 60 times the daily residence fee are received from residents upon occupancy. Resident community fees are deferred and recognized as income over one year corresponding to the terms of agreements with residents. The agreements are cancelable by residents with 30 days notice. All other resident fee revenue is recognized when services are rendered. The Company bills the residents one month in advance of the services being rendered, and therefore, cash payments received for services are recorded as deferred revenue until the services are rendered and the revenue is earned.

127

AL U.S. Development Venture, LLC

Notes to Consolidated Financial Statements — (Continued)

Income Taxes — No provision has been made for federal and state income taxes, as the liability for such taxes, if any, is that of the members and not the Company. The Company is subject to franchise taxes in the states of California, Michigan and Pennsylvania, where the properties are located. These taxes are expensed as incurred and are included in taxes and license fees in the accompanying consolidated financial statements.

Accounting for Derivatives — The Company accounts for its derivative instruments in accordance with the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 133, Accountingfor Derivative Instruments and Hedging Activity, as amended. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the consolidated balance sheets at fair value. The statement requires that changes in the derivative instrument’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met.

The Company’s derivative instruments consist of an interest rate swap and an interest rate cap that it has entered into to manage its exposure to interest rate risk. The Company’s interest rate instruments do not qualify for hedge accounting treatment in accordance with SFAS No. 133 and, as a result, changes in the fair value of the swap are recorded in net income.

Fair Value of Financial Instruments — Disclosures of estimated fair value are determined by management using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, estimates presented are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptionsand/or estimation methodologies may have a material effect on the estimated fair value amounts.

Cash and cash equivalents, restricted cash, accounts receivable, accounts payable and other accrued assets and liabilities are carried at amounts which reasonably approximate their fair values.


3.	Transactions with Affiliates

The Operator Entities entered into development agreements with Sunrise Development, Inc. (“SDI”), a wholly owned subsidiary of SSLI. SDI provided development, design, and construction services for the Facilities. The development agreements terminated in 2006 when SDI completed its services and was paid in full. SDI guaranteed the opening of the Facilities by a certain date and within a specified budget on a pooled basis. Total development fees accrued and capitalized by the Operator Entities for the year ended December 31, 2007, 2006 and 2005 were $0, $121,083 (unaudited) and $12,318,316 (unaudited), respectively.

For January 1, 2005 through June 13, 2007, the Company had management agreements with Sunrise Senior Living Management, Inc. (“SSLMI”), an affiliate of SSLII, to manage the Facilities. The agreements had terms of 23 to 35 years and expired during 2027 and 2037. On June 14, 2007 new management agreements were established with SSLMI as part of a recapitalization. The agreements have terms of 30 years and expire in 2037. For January 1, 2005 through June 14, 2007, the agreements provided for management fees to be paid monthly, based on net operating income (“NOI”) hurdles for each facility. During each of the first six months, the management fee was the greater of 5% of the gross revenue of the facility, as defined in the agreements, or $17,500. Thereafter, fees ranged between 5-7% of the facility’s gross revenues depending on the NOI hurdles met. From June 15, 2007 through December 31, 2007 management fees are equal to 7% of gross operating revenues. Total management fees incurred in 2007, 2006, and 2005 were $5,198,041, $4,418,473 (unaudited), and $3,461,584 (unaudited), respectively.

The management agreement also provides for reimbursement to SSLMI for all direct costs of operation. Payments to SSLMI for direct operating expenses were $50,731,687, $26,938,496 (unaudited), and $20,460,164 (unaudited) in 2007, 2006, and 2005, respectively.

128

AL U.S. Development Venture, LLC

Notes to Consolidated Financial Statements — (Continued)

The Company obtains professional and general liability coverage through Sunrise Senior Living Insurance, Inc., an affiliate of SSLI. Related payments totaled $4,096,932, $3,964,492 (unaudited), and $2,661,699 (unaudited) in 2007, 2006, and 2005, respectively. A one time refund of liability premiums of $659,440 was given in 2007.

Pursuant to a purchase and sale agreement dated April 9, 2007, SSLII retained the liability for the uninsured loss layer for insured claims, including incurred but not reported claims, as of the closing date, for which SSLII was paid $1,058,575 by the AEW Member. The recorded liability and related expense of $1,109,023 was reversed during 2007.

The Company had payables to SSLI of $3,197,737, $9,145,059 (unaudited), $3,726,622 (unaudited) at December 31, 2007, 2006, and 2005, respectively. These transactions are subject to the right of offset wherein any receivables from the affiliate can be offset by any payables to the affiliate, and therefore, the amounts have been presented net as payable to affiliates, net on the accompanying consolidated financial statements. The amounts are non-interest bearing and due on demand.

The Company also had payables to the AEW Member of $1,103,057 (unaudited) at December 31, 2005 related to accrued distributions. No amounts were due to the AEW Member at December 31, 2007 or 2006 (unaudited).

During 2002, the Company entered into a revolving loan agreement with SSLI to provide up to $20.0 million (the “Note”) to partially finance the initial development and construction of the Facilities. The Note generally accrued interest on its outstanding balance at a fixed rate of 10% non-compounding. The note was due on December 23, 2010 but could be repaid earlier. The balance of the Note at December 31, 2006 and 2005 was $4,173,724 (unaudited) and $2,338,490 (unaudited), respectively, excluding accrued interest. On June 14, 2007, as part of a recapitalization, the Note was repaid. The payment represented $3,649,387 principal and $183,332 of accrued interest through June 14, 2007. The Company capitalized interest of $0, $73,926 (unaudited) and $131,105 (unaudited) related to the Note during the years ended December 31, 2007, 2006 and 2005, respectively. Interest paid on the Note during the years ended December 31, 2007, 2006 and 2005 was $183,332, $0 (unaudited) and $276,239 (unaudited), respectively.


4.	Concentrations of Credit Risk

The Company grants credit without collateral to its residents, most of whom are insured under third-party agreements. The mix of receivables from residents and third-party payors at December 31, 2007, 2006 (unaudited), and 2005 (unaudited) was 100% private pay.


5.	Long-Term Debt

Prior to June 14, 2007, the Company had long-term debt with three lenders, GE, Capmark and Guaranty.

The GE loan could voluntarily be prepaid at specified premiums. The Company made monthly interest payments for the first three years of the loan term with interest and principal payments to commence in 2007 in accordance with the loan agreement. The loan bore interest at a fixed rate of 6.13%. The loan agreement provided for an additional borrowing of up to $10.0 million collateralized by certain properties subject to conditions set forth in the loan document. This option was available to the Company through April 2007. The maturity date of the loan was October 25, 2011. The balance of the GE loan was $80,856,074 (unaudited) and $81,000,000 (unaudited) at December 31, 2006 and 2005, respectively. The GE loan was repaid on June 14, 2007.

The Capmark loan could voluntarily be prepaid in part or in full at any time without penalty. It bore interest at LIBOR plus 2.75%, and its maturity date was October 1, 2007. The interest rate at December 31, 2006 and 2005 was 10.00% (unaudited) and 7.85% (unaudited), respectively. The balance of the Capmark loan was $29,634,166 (unaudited) and $17,159,835 (unaudited) at December 31, 2006 and 2005, respectively. The Capmark loan was repaid on June 14, 2007.

129

AL U.S. Development Venture, LLC

Notes to Consolidated Financial Statements — (Continued)

The Guaranty loan could voluntarily be prepaid in part or in full at any time without penalty. It bore interest of LIBOR plus 2%, and its maturity date was November 1, 2007. The interest rate at December 31, 2006 and 2005 was 9.25% (unaudited) and 7.10% (unaudited), respectively. The balance of the Guaranty loan was $91,823,341 (unaudited) and $87,265,458 (unaudited) at December 31, 2006 and 2005, respectively. The Guaranty loan was repaid on June 14, 2007.

On December 31, 2006, the Company failed to meet certain debt covenants. The Company obtained a waiver from the lender on March 29, 2007.

On June 14, 2007, the Company refinanced its long-term debt. The previous debt, comprised of GE, Capmark and Guaranty loans was repaid and consisted of $202,757,095 of principal and $481,512 of accrued interest through June 14, 2007. Additionally, $4,154,962 of prepayment penalties were paid for the prepayment of the GE debt. No prepayment fees were required for any other loans. New debt was obtained with HSH Nordbank for $370,500,000 and is due on June 14, 2012. The loan bears interest at LIBOR plus 1.50%. The LIBOR rate was 4.60% as of December 31, 2007. The loan is secured by the Facilities.

The Company met both liquidity and debt service coverage ratio requirements as of December 31, 2007.

The fair value of the Company’s long term debt has been estimated based on current rates offered for debt with the same remaining maturities and comparable collateralizing assets. Changes in assumptions or methodologies used to make estimates may have a material effect on the estimated fair value. The estimated fair value of the Company’s long term debt approximated its carrying amount at December 31, 2007, 2006 (unaudited), and 2005 (unaudited).

On June 28, 2007, the Company entered into an interest rate swap and cap agreement with HSH Nordbank AG with terms extended to June 14, 2012 for the swap and June 14, 2010 for the cap. The interest rate swap limits LIBOR exposure to a maximum rate of 5.61% on a $259,350,000 notional amount, and the interest rate cap limits LIBOR exposure to a maximum rate of 6.25% on a notional amount of $111,150,000. The fair market value of the interest rate swap and cap at December 31, 2007, were a liability $17,092,193 and an asset of $52,850, respectively, and the net amount is included in the derivative liability on the 2007 consolidated balance sheet.

The Company utilizes these interest-rate related derivative instruments (interest rate swap and caps) to manage its exposure on its debt instruments. The Company does not enter into derivative instruments for any purpose other than cash flow hedging purposes. That is, the Company does not speculate using derivative instruments.

By using derivative financial instruments to hedge exposures to changes in interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, it does not possess credit risk. The Company minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterparties.


6.	Contingencies

The Company is involved in claims and lawsuits incidental to the ordinary course of business. While the outcome of these claims and lawsuits cannot be predicted with certainty, management of the Company does not believe the ultimate resolution of these matters will have a material adverse effect on the Company’s financial position.


7.	New Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements, (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for the Company’s financial assets and liabilities on January 1, 2008. The FASB has proposed a deferral of the provisions of SFAS 157 relating to

130

AL U.S. Development Venture, LLC

Notes to Consolidated Financial Statements — (Continued)

nonfinancial assets and liabilities that would delay implementation by the Company until January 1, 2009. SFAS 157 is not expected to materially affect how the Company determines fair value, but may result in certain additional disclosures.

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115,(“SFAS 159”). SFAS 159 permits companies to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for the Company on January 1, 2008. The Company did not elect the fair value option for any of its existing financial statements on the effective date and has not determined whether or not it will elect this option for any eligible financial instruments it acquires in the future.

* * * * * *

131

INDEPENDENT AUDITORS’ REPORT

To the Members of

Sunrise First Assisted Living Holdings, LLC

McLean, Virginia

We have audited the accompanying consolidated balance sheet of Sunrise First Assisted Living Holdings, LLC (the Company) as of December 31, 2006, and the related consolidated statements of operations, changes in members’ (deficit) capital, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with U.S. generally accepted auditing standards. These 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Sunrise First Assisted Living Holdings, LLC at December 31, 2006, and the results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.

/s/ Beers & Cutler PLLC

Vienna, Virginia

July 28, 2008

132

SUNRISE FIRST ASSISTED LIVING HOLDINGS, LLC

CONSOLIDATED BALANCE SHEETS


	December 31,
	2007			2006
	(Unaudited)

ASSETS
Real Estate, net	$	120,940,028		$	123,270,368
Other Assets
Cash and cash equivalents		2,156,679			1,946,157
Accounts receivable, less allowance for doubtful accounts of $453,319 and $577,928, respectively		964,924			1,125,070
Due from affiliates, net		335,603			1,660,615
Other assets		98,878			154,136
Restricted cash		663,165			634,013
Deferred financing costs, less accumulated amortization of $1,670,886 and $1,080,266, respectively		3,288,135			3,887,248

Total other assets		7,507,384			9,407,239

Total assets	$	128,447,412		$	132,677,607

LIABILITIES AND MEMBERS’ DEFICIT
Mortgages Payable	$	172,184,680		$	175,254,051
Other Liabilities
Accounts payable and accrued expenses		3,161,632			2,871,358
Due to affiliates, net		—			—
Deferred revenue		2,817,290			2,367,289
Note payable to affiliate		—			—
Deferred rent		1,421,489			1,225,126

Total other liabilities		7,400,411			6,463,773

Total liabilities		179,585,091			181,717,824

Members’ Deficit		(51,137,679	)		(49,040,217	)

Total liabilities and members’ deficit	$	128,447,412		$	132,677,607

The accompanying notes are an integral part of these consolidated financial statements.

133

SUNRISE FIRST ASSISTED LIVING HOLDINGS, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS


	Years Ended December 31,
	2007			2006			2005
	(Unaudited)						(Unaudited)

Operating Revenue	$	57,847,414		$	58,308,339		$	55,833,049
Operating expenses Labor		21,333,957			20,672,041			19,699,558
Food		2,442,164			2,379,689			2,239,177
General and administrative		6,823,926			7,357,504			6,652,993
Insurance		1,879,108			2,148,863			2,131,013
Utilities		1,733,849			1,901,748			1,744,987
Repair and maintenance		1,886,579			2,036,785			1,656,012
Management fees		3,462,404			3,911,592			3,964,787
Depreciation		3,991,506			3,849,154			3,717,927
Lease expense		414,592			409,294			412,178

Total operating expenses		43,968,085			44,666,670			42,218,632

Income from Operations		13,879,329			13,641,669			13,614,417
Other (expense) income
Interest income		187,126			150,191			105,477
Interest expense		(11,143,048	)		(14,510,145	)		(9,487,888	)

Total other expense		(10,955,922	)		(14,359,954	)		(9,382,411	)

Net income (loss)	$	2,923,407		$	(718,285	)	$	4,232,006

The accompanying notes are an integral part of these consolidated financial statements.

134

SUNRISE FIRST ASSISTED LIVING HOLDINGS, LLC

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ (DEFICIT) CAPITAL

Years Ended December 31, 2007, 2006 and 2005


Balance, January 1, 2005 (unaudited)	$	(1,443,308	)
Distributions (unaudited)		(6,497,297	)
Net Income (unaudited)		4,232,006

Balance, December 31, 2005 (unaudited)		(3,708,599	)
Distributions		(44,613,333	)
Net Loss		(718,285	)

Balance, December 31, 2006		(49,040,217	)
Distributions (unaudited)		(5,020,869	)
Net Income (unaudited)		2,923,407

Balance, December 31, 2007 (unaudited)	$	(51,137,679	)

The accompanying notes are an integral part of these consolidated financial statements.

135

SUNRISE FIRST ASSISTED LIVING HOLDINGS, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Years Ended December 31,
	2007			2006			2005
	(Unaudited)						(Unaudited)

Cash flows from operating activities
Net income (loss)	$	2,923,407		$	(718,285	)	$	4,232,006
Reconciling adjustments:
(Recovery of) provision for bad debts		(124,610	)		210,741			(12,112	)
Depreciation		3,991,506			3,849,154			3,717,927
Amortization of financing costs		590,620			757,512			286,999
Changes in:
Accounts receivable		284,756			(268,861	)		(163,036	)
Other assets		55,258			290,614			(18,456	)
Accounts payable and accrued expenses		290,274			958,976			279,142
Due from/to affiliates		1,325,012			(2,299,973	)		383,224
Deferred revenue		450,001			63,958			(279,620	)
Deferred rent		196,363			280,314			246,564

Net cash provided by operating activities		9,982,587			3,124,150			8,672,638
Cash flows from investing activities
Increase (decrease) in restricted cash		(29,152	)		1,064,600			(389,203	)
Investment in property and equipment		(1,661,166	)		(856,456	)		(917,792	)

Net cash (used in) provided by investing activities		(1,690,318	)		208,144			(1,306,995	)

Cash flows from financing activities
Financing costs refunded (paid)		8,493			(3,564,619	)		(46,779	)
Borrowing of long-term debt		—			175,977,070			—
Repayments of long-term debt		(3,069,371	)		(129,114,479	)		(2,463,233	)
Repayments of note payable to affiliate		—			(2,576,062	)		(53,957	)
Distributions to members		(5,020,869	)		(44,613,333	)		(6,224,676	)

Net cash used in financing activities		(8,081,747	)		(3,891,423	)		(8,788,645	)
Net increase (decrease) in cash and cash equivalents		210,522			(559,129	)		(1,423,002	)
Cash and cash equivalents, beginning of year		1,946,157			2,505,286			3,928,288

Cash and cash equivalents, end of year	$	2,156,679		$	1,946,157		$	2,505,286

Supplemental disclosure of cash flow information
Cash paid for interest	$	10,546,056		$	13,504,120		$	9,200,890

The accompanying notes are an integral part of these consolidated financial statements.

136

Sunrise First Assisted Living Holdings, LLC

Notes to the Consolidated Financial Statements

December 31, 2007, 2006 and 2005


Note 1 —	Organization

Sunrise First Assisted Living Holdings, LLC, (the Company) was formed on January 31, 2002 as a limited liability company under the laws of the State of Delaware. The Company began operations on March 22, 2002. The purpose of the Company is to lease and operate assisted living facilities which provide assisted living services to seniors in Alexandria, Virginia; Smithtown, New York; Northville, Michigan; Rochester, Michigan; Buffalo Grove, Illinois; Bloomingdale, Illinois; Mt. Vernon, New York; Blue Bell, Pennsylvania; Valencia, California; Riverside, California; Pacific Palisades, California; and Mission Viejo, California (the Facilities). Assisted living services provide a residence, meals and nonmedical assistance to elderly residents for a monthly fee. These services are generally not covered by health insurance and, therefore, monthly fees are generally payable by the resident, their family, or another responsible party.

Sunrise Senior Living Investments, Inc. (SSLII) was the initial member of the Company and is the managing member. SSLII is a wholly owned subsidiary of Sunrise Senior Living, Inc. (SSLI). On March 22, 2002, SSLII contributed to the Company, at historical cost, its membership interests in seven limited liability companies and five limited partnerships, each owning a separate assisted living facility (the Facilities). US Assisted Living Facilities, Inc. (USALF), a Delaware corporation, was admitted to the Company for an 80 percent ownership for a cash contribution of approximately $50.1 million. SSLII retained a 20 percent ownership in the Company. The Company transferred its membership interest or sold each of the Facilities to 12 separate special purpose vehicles (SPVs). Each SPV is administered by Global Securitization Services, LLC (GSS) and owned by an affiliate of GSS. The SPVs have been consolidated into the Company as all activities of the SPVs are controlled by and for the Company.

On September 13, 2006, USALF sold its 80 percent interest in the Company to SZR US Investments, Inc., a subsidiary of Sunrise Senior Living Investment Trust (Sunrise REIT), a public entity traded on the Toronto Stock Exchange. The Sunrise REIT has a strategic alliance with SSLII. In connection with the membership interest sale to SZR US Investments, Inc., the SPVs were terminated and the Facilities were reorganized into twelve wholly-owned subsidiaries.

In April 2007, Ventas, Inc. acquired all of the assets and assumed all of the outstanding debt of Sunrise REIT.


Note 2 —	Summary of Significant Accounting Policies

Principles of Consolidation — The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and the SPVs. All intercompany accounts and transactions have been eliminated in consolidation.

The consolidated financial statements for the years ended December 31, 2007 and 2005 are unaudited and include all normal reoccurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the years ended December 31, 2007 and 2005. In the opinion of management, these unaudited consolidated financial statements follow the same accounting policies and method of application as the 2006 audited consolidated financial statements.

Use of Estimates — The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

Cash and Cash Equivalents — The Company considers cash and cash equivalents to include currency on hand, demand deposits, and all highly liquid investments with a remaining maturity of three months or less at the date of purchase. The Company maintains its cash in bank deposit accounts that, at times, exceed federally insured limits. However, the Company has not experienced any losses in such accounts and management believes the Company is not exposed to any significant credit risk on these accounts.

137

Sunrise First Assisted Living Holdings, LLC

Notes to the Consolidated Financial Statements — (Continued)

Restricted Cash — Restricted cash includes cash reserved as required by the loan agreements and management agreements for real estate taxes, insurance, and capital expenditures.

Allowance for Doubtful Accounts — The Company provides an allowance for doubtful accounts on its outstanding receivables based on its collections history and an estimate of uncollectible accounts.

Real Estate — Real estate is recorded at cost, or if an impairment is indicated, at fair value. Maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Land is not depreciated. Real estate is reviewed for impairment whenever events or circumstances indicate that the asset’s undiscounted expected cash flows are not sufficient to recover its carrying amount. The Company measures an impairment loss by comparing the fair value of the asset to its carrying amount. Fair value of an asset is calculated at the present value of expected future cash flows. Based on management’s estimation process, no impairment losses were recorded for the years ended December 31, 2007, 2006 and 2005.

Deferred Financing Costs — Costs incurred in connection with obtaining permanent financing for the Facilities have been deferred and are amortized to interest cost over the remaining term of the financing on a straight-line basis, which approximates the effective interest method. Amortization expense was $590,620, $757,512, and $286,999 for the years ended December 31, 2007, 2006 and 2005, respectively, and is included in interest expense on the accompanying consolidated statements of operations.

In accordance withEITF 96-19,Debtor’s Accounting for a Modification or Exchange of Debt Instruments,fees paid as part of an extinguishment of debt are changed to expense and fees paid as part of an exchange or modification are amortized as an adjustment to interest expense over the remaining term of the modified debt. The Company has determined that a portion of the refinancing described in Note 5 is an exchange of debt and, accordingly, $3,813,132 of fees have been capitalized to deferred financing costs in 2006, including prepayment penalties of $2,876,534. For the year ended December 31, 2006, the Company charged $3,372,349 of fees to interest expense related to the extinguishment of debt.

Revenue Recognition and Deferred Revenue — Operating revenue consists of resident fee revenue, including resident community fees (approximately 30 to 60 times the daily residence fee) that are received from potential residents upon signing of the lease. Agreements with residents are for a term of one year and are cancelable by residents with 90 days notice. Resident community fees are deferred and recognized as income over the one-year agreement. The resident community fees are ratably refundable if the prospective resident does not move into the facility or moves out of the facility within 90 days. All other resident fee revenue is recognized when services are rendered. The Company bills the residents one month in advance of the services being rendered and, therefore, cash payments received for these services are recorded as deferred revenue until the services are rendered and the revenue is earned.

Advertising Costs — All advertising costs are expensed as incurred. Advertising costs of $743,745, $648,325 and $631,395 were recognized for the years ended December 31, 2007, 2006 and 2005, respectively, and are included in general and administrative expense in the accompanying consolidated statements of operations.

Income Taxes — The Company is treated as a partnership for federal income tax purposes. Accordingly, no provision for income taxes has been included in these consolidated financial statements since taxable income or loss passes through to the Company’s members. For states that do not recognize pass-through entities, state income taxes are reported by the Company as incurred and included in general and administrative expense on the accompanying consolidated statements of operations.

138

Sunrise First Assisted Living Holdings, LLC

Notes to the Consolidated Financial Statements — (Continued)


Note 3 —	Real Estate

Real estate consists of the following at December 31, 2007 and 2006:


	Asset Lives		2007			2006
	(Unaudited)

Land and land improvements		10-15 years	$	27,696,898		$	28,450,690
Building and building improvements		40 years		103,978,777			102,127,099
Furniture and equipment		3-10 years		10,711,310			10,148,030

				142,386,985			140,725,819
Less accumulated depreciation				(21,446,957	)		(17,455,451	)

			$	120,940,028		$	123,270,368


Note 4 —	Affiliate Transactions

Management Services — The Facilities had management agreements with Sunrise Senior Living Management, Inc. (SSLMI), a wholly-owned subsidiary of SSLI, to manage each of the Facilities. The agreements had terms of 25 years, beginning on March 22, 2002, and provided for management fees to be paid monthly based on a percentage of the Facility’s gross operating revenues (as defined in the agreements). On September 13, 2006 and concurrent with the sale of USALF’s interest to SZR US Investments, Inc., the Facilities entered into new management agreements with SSLMI under similar terms as the original management agreements and extended through September 30, 2036. Total management fees incurred during the years ended December 31, 2007, 2006 and 2005 were $3,462,404, $3,911,592 and $3,964,787, respectively.

The agreements also provided for the reimbursement of certain direct costs of operations. Direct cost of operations reimbursed to SSLMI during the years ended December 31, 2007, 2006 and 2005 were $21,333,957, $20,672,041, and $19,699,558, respectively.

The original management agreements for the Facilities required SSLMI to set aside from Facility operations a reserve account to cover the cost of certain fixed asset additions, repairs and maintenance. SSLMI was required to transfer funds of $400 per unit each year into this reserve account originally established by the members in the formation of the Company. The management agreements entered into on September 13, 2006 do not require reserves. As of December 31, 2007 and 2006, there was $0 in this reserve.

The Company obtains professional and general liability coverage through Sunrise Senior Living Insurance, Inc., a multi-provider captive insurance company and a subsidiary of SSLI. For the years ended December 31, 2007, 2006 and 2005, the Company recorded approximately $1,879,000, $2,149,000, and $2,131,000 in insurance expense, respectively, which is included in operating expenses on the accompanying consolidated statements of operations.

The Company had a net receivable from its affiliates consisting of the following as of December 31, 2007 and 2006:


	2007		2006
	(Unaudited)

Receivable from:
SSLI and its subsidiaries	$	335,603	$	1,660,615

The net receivable from SSLI and its subsidiaries at December 31, 2007 and 2006 relates to management services provided of $335,603 and $53,378, respectively.

In addition, at December 31, 2006, the net payable to SSLI and subsidiaries includes $1,607,237 of advances to a subsidiary of SSLI. The advances were repaid during 2008.

139

Sunrise First Assisted Living Holdings, LLC

Notes to the Consolidated Financial Statements — (Continued)

Note Payable to Affiliate — During 2002, SSLI loaned to one Facility $2,703,062 in the form of an unsecured note. The note had an original maturity date of April 1, 2004 with an option to extend for one year. The Company exercised options to extend the debt through January 2007. Interest accrues at the higher of six percent or the average30-day LIBOR plus three percent per annum. The rate is adjusted annually on April 30. The balance of the debt was paid in full during 2006. Interest paid during 2006 was $151,623.


Note 5 —	Mortgages Payable

During 2002, the Company assumed loans for eight of the Facilities in the amount of $96.7 million from SSLI. Additionally, the Company obtained new debt of $30 million for four of the Facilities. On September 13, 2006, the loans were refinanced upon closing of the sale of USALF’s interest to SZR US Investments, Inc. The excess loan proceeds were used to repay the note payable to affiliate, pay the related transaction costs, and fund distributions to members. Long-term debt consists of the following at December 31, 2007 and 2006:


	2007		2006
	(Unaudited)

Notes payable to a finance institution, due in monthly installments, with the remaining balance of the notes maturing October 1, 2016. The notes bear interest at 6.05 percent	$	49,842,557	$	50,756,905
Notes payable to a finance institution, due in monthly installments, with the remaining balance of the notes maturing October 1, 2013. The notes bear interest at 5.99 percent		122,342,123		124,497,146

Long-term debt	$	172,184,680	$	175,254,051


Note 6 —	Mortgage Note Payable

Principal maturities of long-term debt as of December 31, 2007 are as follows:


Year ending December 31, 2008	$	3,264,913
2009		3,468,496
2010		3,684,773
2011		3,914,536
2012		4,158,627
Thereafter		153,693,335

	$	172,184,680


Note 7 —	Members’ Capital

The Company maintains separate capital accounts for each member. The members are not liable for any debts, liabilities, contracts, or obligations of the Company.

The Operating Agreement details the commitments of the members and provides the procedures for the return of capital to the members with defined priorities. All profits and losses, net cash flow from operations, and capital proceeds, if any, are to be distributed according to the priorities specified in the Operating Agreement.

There were no accrued distributions at December 31, 2007 and 2006.


Note 8 —	Fair Value of Financial Instruments

140

factors that would significantly affect the reasonableness of fair value amounts, other’s estimates of fair value may differ from amounts presented herein.

Cash equivalents, accounts receivable, accounts payable and accrued expenses and other current assets and liabilities are carried at amounts that approximate their fair values due to the short-term maturities of these financial instruments.

Fixed rate debt with an aggregate carrying value of $172,184,680 and $175,254,051 as of December 31, 2007 and 2006, respectively, has an estimated aggregate fair value of $170,589,397, and $178,621,608, respectively.


Note 9 —	Commitments

On March 22, 2002, the Company assumed a lease agreement for the land associated with the Facility in Alexandria, Virginia. The lease expires on June 30, 2094 with two ten-year extension options. The lease has an annual base rent of $150,000, which escalated ten percent in 2005 and will escalate ten percent every five years thereafter. Lease expense is recognized on a straight-line basis over the term of the lease.

Future minimum lease payments as of December 31, 2007 are as follows:


Year ending December 31, 2008	$	165,000
2009		165,000
2010		173,250
2011		181,500
2012		181,500
Thereafter		35,506,755

	$	36,373,005


Note 10 —	Contingencies

The Company is involved in claims and lawsuits incidental to the ordinary course of business. While the outcome of these claims and lawsuits cannot be predicted with certainty, management and general counsel of the Company do not believe the ultimate resolution of these matters will have a material adverse effect on the Company’s financial position.

The mortgages described in Note 5 are cross-collateralized and cross-defaulted with one another and with the mortgages of Sunrise Second Assisted Living Holdings, LLC (Sunrise Second). The outstanding balances on the mortgages of Sunrise Second totaled $166,728,174 at December 31, 2007.


Note 11 —	New Accounting Pronouncements

In September 2006, the Financial Accounting Standard Board (“FASB”) issued SFAS No. 157, Fair Value Measurements, (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for the Company’s financial assets and liabilities on January 1, 2008. The FASB has proposed a deferral of the provisions of SFAS 157 relating to nonfinancial assets and liabilities that would delay implementation by the Company until January 1, 2009. SFAS 157 is not expected to materially affect how the Company determines fair value, but may result in certain additional disclosures.

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115, (“SFAS 159”). SFAS 159 permits companies to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for the Company on January 1, 2008. The Company did not elect the fair value option for any of its existing financial statements on the effective date and has not determined whether or not it will elect this option for any eligible financial instruments it acquires in the future.

141

INDEPENDENT AUDITORS’ REPORT

To the Members of

Sunrise Second Assisted Living Holdings, LLC

McLean, Virginia

We have audited the accompanying consolidated balance sheet of Sunrise Second Assisted Living Holdings, LLC (the Company) as of December 31, 2006, and the related consolidated statements of operations, changes in members’ (deficit) capital, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with U.S. generally accepted auditing standards. These 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Sunrise Second Assisted Living Holdings, LLC at December 31, 2006, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.

/s/ Beers & Cutler PLLC

Vienna, Virginia

July 28, 2008

142

SUNRISE SECOND ASSISTED LIVING HOLDINGS, LLC

CONSOLIDATED BALANCE SHEETS


	December 31,
	2007			2006
	(Unaudited)

ASSETS
Real Estate, net	$	116,089,085		$	117,998,402
Other Assets
Cash and cash equivalents		3,468,337			4,722,364
Accounts receivable, less allowance for doubtful accounts of $182,406 and $268,733, respectively		665,602			1,159,789
Due from affiliates, net		531,219			—
Insurance claims receivable		—			—
Other assets		15			42,814
Prepaid rent		2,174,755			2,202,696
Restricted cash		—			—
Deferred financing costs, less accumulated amortization of $1,167,926 and $719,756, respectively		3,922,447			4,373,953

Total other assets		10,762,375			12,501,616

Total assets	$	126,851,460		$	130,500,018


LIABILITIES AND MEMBERS’ DEFICIT
Mortgages Payable	$	166,728,174		$	169,786,761
Other Liabilities
Accounts payable and accrued expenses		3,039,355			2,660,135
Due to affiliates, net		—			1,007,323
Deferred revenue		3,271,406			2,344,826
Deferred rent		—			—

Total other liabilities		6,310,761			6,012,284

Total liabilities		173,038,935			175,799,045

Members’ Deficit		(46,187,475	)		(45,299,027	)

Total liabilities and members’ deficit	$	126,851,460		$	130,500,018

The accompanying notes are an integral part of these consolidated financial statements.

143

SUNRISE SECOND ASSISTED LIVING HOLDINGS, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS


	Years Ended December 31,
	2007			2006			2005
	(Unaudited)						(Unaudited)

Operating Revenue	$	61,838,255		$	58,683,362		$	56,993,261
Operating expenses
Labor		22,920,882			21,444,384			22,425,562
Food		2,503,202			2,442,275			2,348,003
General and administrative		5,686,159			5,472,770			5,239,771
Insurance		1,877,288			1,837,703			2,492,301
Utilities		2,054,908			2,118,585			1,967,640
Repair and maintenance		1,923,713			1,692,775			1,430,900
Management fees		3,714,168			3,808,151			3,846,488
Depreciation		3,674,177			3,968,698			3,931,837
Impairment loss on property and equipment		—			—			3,587,827
Gain on insurance recovery		—			—			(3,587,827	)

Total operating expenses		44,354,497			42,785,341			43,682,502

Income from Operations		17,483,758			15,898,021			13,310,759
Other (expense) income
Interest income		196,052			167,624			99,223
Interest expense		(10,582,682	)		(8,992,769	)		(7,855,583	)

Total other expense		(10,386,630	)		(8,825,145	)		(7,756,360	)

Net income	$	7,097,128		$	7,072,876		$	5,554,399

The accompanying notes are an integral part of these consolidated financial statements.

144

SUNRISE SECOND ASSISTED LIVING HOLDINGS, LLC

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ (DEFICIT) CAPITAL
Years Ended December 31, 2007, 2006 and 2005


Balance, January 1, 2005 (unaudited)	$	9,359,855
Distributions (unaudited)		(6,812,082	)
Net Income (unaudited)		5,554,399

Balance, December 31, 2005 (unaudited)		8,102,172
Distributions		(60,474,075	)
Net Income		7,072,876

Balance December 31, 2006		(45,299,027	)
Contributions (unaudited)		227,712
Distributions (unaudited)		(8,213,288	)
Net Income (unaudited)		7,097,128

Balance December 31, 2007 (unaudited)	$	(46,187,475	)

The accompanying notes are an integral part of these consolidated financial statements.

145

SUNRISE SECOND ASSISTED LIVING HOLDINGS, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Years Ended December 31,
	2007			2006			2005
	(Unaudited)						(Unaudited)

Cash flows from operating activities
Net income	$	7,097,128		$	7,072,876		$	5,554,399
Reconciling adjustments:
Provision for bad debts		202,006			27,710			(6,093	)
Depreciation		3,674,177			3,968,698			3,931,837
Amortization of prepaid rent		—			27,941			27,941
Amortization of financing costs		448,170			315,148			163,446
Impairment loss on property and equipment		—			—			3,587,827
Gain on insurance recovery		—			—			(3,587,827	)
Changes in:
Accounts receivable		292,182			(259,610	)		(165,700	)
Insurance claims receivable		—			51,386			(45,000	)
Other assets		70,740			210,001			(4,754	)
Accounts payable and accrued expenses		379,220			31,934			634,732
Due to (from) affiliates		(1,538,542	)		1,688,996			(558,123	)
Deferred revenue		926,579			190,456			(872,068	)
Deferred rent		—			(457,325	)		149,464

Net cash provided by operating activities		11,551,660			12,868,211			8,810,081
Cash flows from investing activities
Increase (decrease) in restricted cash		—			851,913			(625,943	)
Investment in property and equipment		(1,764,860	)		(527,876	)		(534,584	)

Net cash (used in) provided by investing activities		(1,764,860	)		324,037			(1,160,527	)

Cash flows from financing activities
Financing costs refunded (paid)		3,336			(4,227,644	)		4,395
Borrowing of long-term debt		—			170,523,000			—
Repayments of long-term debt		(3,058,587	)		(124,470,089	)		(2,563,252	)
Contributions from members		227,712			—			—
Distributions to members		(8,213,288	)		(52,329,245	)		(7,573,684	)

Net cash used in financing activities		(11,040,827	)		(10,503,978	)		(10,132,541	)
Net (decrease) increase in cash and cash equivalents		(1,254,027	)		2,688,270			(2,482,987	)
Cash and cash equivalents, beginning of year		4,722,364			2,034,094			4,517,081

Cash and cash equivalents, end of year	$	3,468,337		$	4,722,364		$	2,034,094

Supplemental disclosure of cash flow information Cash paid for interest	$	10,188,449		$	8,994,268		$	7,698,584

Non-cash financing activities
Distribution of property	$	—		$	8,144,830		$	—

The accompanying notes are an integral part of these consolidated financial statements.

146

Sunrise Second Assisted Living Holdings, LLC

Notes to the Consolidated Financial Statements

December 31, 2007, 2006 and 2005


Note 1 —	Organization

Sunrise Second Assisted Living Holdings, LLC (the Company) was formed on September 13, 2002 as a limited liability company under the laws of the State of Delaware. The Company began operations on September 30, 2002. The purpose of the Company is to lease and operate assisted living facilities which provide assisted living services to seniors in Fair Oaks, California; Littleton, Colorado; Atlanta, Georgia; Marietta, Georgia; Alpharetta, Georgia; Wall, New Jersey; Edina, Minnesota; Westminster, Colorado; Palos Park, Illinois; Baton Rouge, Louisiana; and Arlington, Massachusetts (the Facilities). The Company also leased and operated a facility in New Orleans, Louisiana prior to September 13, 2006. Assisted living services provide a residence, meals and non-medical assistance to elderly residents for a monthly fee. These services are generally not covered by health insurance and, therefore, monthly fees are generally payable by the residents, their family, or another responsible party.

Sunrise Senior Living Investments, Inc. (SSLII) was the initial member of the Company and is the managing member. SSLII is a wholly-owned subsidiary of Sunrise Senior Living, Inc. (SSLI). During 2002, SSLII contributed to the Company, at historical cost, its membership interests in 12 limited liability companies and one limited partnership each owning a separate assisted living facility (the Facilities). US Assisted Living Facilities II, Inc. (USALF), a Delaware corporation, was admitted to the Company for an 80 percent ownership for a cash contribution of approximately $58.7 million. SSLII retained a 20 percent ownership in the Company. The Company transferred its membership interest or sold each of the Facilities to 13 separate special purpose vehicles (SPVs). Each SPV is administered by Global Securitization Services, LLC (GSS) and owned by an affiliate of GSS. The SPVs have been consolidated into the Company as all activities of the SPVs are controlled by and for the Company.

On September 13, 2006, USALF sold its 80 percent interest in the Company to SZR US Investments, Inc., a subsidiary of Sunrise Senior Living Real Estate Investment Trust (Sunrise REIT), a public entity traded on the Toronto Stock Exchange. The Sunrise REIT has a strategic alliance with SSLII. Prior to the closing of the sale, the Company transferred the facility near New Orleans, Louisiana (the Bayou St. John Facility) to SSLII (see Note 10). In connection with the membership interest sale to SZR US Investments, Inc., the SPVs were terminated and the Facilities were reorganized into twelve wholly-owned subsidiaries.

In April 2007, Ventas Inc. acquired all of the assets and assumed all outstanding debt of Sunrise REIT.


Note 2 —	Summary of Significant Accounting Policies

Principles of Consolidation — The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and the SPVs. All intercompany accounts and transactions have been eliminated in consolidation.

The consolidated financial statements for the years ended December 31, 2007 and 2005 are unaudited and include all normal adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the years ended December 31, 2007 and 2005. In the opinion of management, these unaudited consolidated financial statements follow the same accounting policies and methods of application as the 2006 audited consolidated financial statements.

147

Sunrise Second Assisted Living Holdings, LLC

Notes to the Consolidated Financial Statements — (Continued)

limits. However, the Company has not experienced any losses in such accounts and management believes the Company is not exposed to any significant credit risk on these accounts.

Restricted Cash — Restricted cash includes cash reserved as required by the loan agreements and management agreements for real estate taxes, insurance, and capital expenditures.

Allowance for Doubtful Accounts — The Company provides an allowance for doubtful accounts on its outstanding receivables based on its collection history and an estimate of uncollectible accounts.

Real Estate — Real estate is recorded at cost, or if an impairment is indicated, at fair value. Maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Land is not depreciated. Real estate is reviewed for impairment whenever events or circumstances indicate that the asset’s undiscounted expected cash flows are not sufficient to recover its carrying amount. The Company measures an impairment loss by comparing the fair value of the asset to its carrying amount. Fair value of an asset is calculated as the present value of expected future cash flows. Based on management’s estimation process, management recorded an impairment loss of $3,587,827 during 2005 related to the Bayou St. John Facility as described in Note 10.

Deferred Financing Costs — Costs incurred in connection with obtaining permanent financing for the Facilities have been deferred and are amortized to interest cost over the remaining term of the financing on a straight-line basis, which approximates the effective interest method. Amortization expense was $448,170, $315,148, and $163,446 for the years ended December 31, 2007, 2006 and 2005, respectively, and is included as interest expense in the consolidated statements of operations.

In accordance withEITF 96-19,Debtor’s Accounting for a Modification or Exchange of Debt Instruments,fees paid as part of an extinguishment of debt are charged to expense and fees paid as part of an exchange or modification are amortized as an adjustment to interest expense over the remaining term of the modified debt. The Company has determined that the debt refinancing described in Note 5 is an exchange of debt and, accordingly, $4,227,644 of fees have been capitalized to deferred finance costs, including prepayment penalties of $3,375,029.

Revenue Recognition — Operating revenue consists of resident fee revenue, including resident community fees (approximating 30 to 60 times the daily residence fee) that are received from residents upon signing of the lease. Agreements with residents are for a term of one year and are cancelable by residents with 90 days notice. Resident community fees and related costs are deferred and recognized as income and expense, respectively, over the one-year agreement. The resident community fees are ratably refundable if the prospective resident does not move into the facility or moves out of the facility within 90 days. All other resident fee revenue is recognized when services are rendered. The Company bills the residents one month in advance of the services being rendered and therefore, cash payments received for these services are recorded as deferred revenue until the services are rendered and the revenue is earned.

Advertising Costs — All advertising costs are expensed as incurred. Advertising costs of $652,639, $668,280, and $596,337 were recognized for the years ended December 31, 2007, 2006 and 2005, respectively, and are included in general and administrative expense in the accompanying consolidated statements of operations.

Income Taxes — The Company is treated as a partnership for federal income tax purposes. Accordingly, no provision for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the members individually in accordance with the Company’s operating agreement. State income taxes are recorded by the Company as incurred and included in general and administrative expenses on the accompanying consolidated statements of operations.

148

Sunrise Second Assisted Living Holdings, LLC

Notes to the Consolidated Financial Statements — (Continued)


Note 3 —	Real Estate

Real estate consists of the following at December 31, 2007 and 2006:


	Asset Lives		2007			2006
			(Unaudited)

Land and land improvements		10-15 years	$	21,566,550		$	21,496,934
Building and building improvements		40 years		102,079,276			100,901,038
Furniture and equipment		3-10 years		10,850,553			10,333,547

				134,496,379			132,731,519
Less accumulated depreciation				(18,407,294	)		(14,733,117	)

			$	116,089,085		$	117,998,402


Note 4 —	Affiliate Transactions

Management Services — The Facilities had management agreements with Sunrise Senior Living Management, Inc. (SSLMI), a wholly-owned subsidiary of SSLI, to manage each of the Facilities. The agreements had terms of 25 years, beginning on March 22, 2002, and provided for management fees to be paid monthly based on a percentage of the Facility’s gross operating revenues (as defined in the agreements). On September 13, 2006, concurrent with the sale of USALF’s interest to SZR US Investments, Inc., the Facilities entered into new management agreements with SSLMI under similar terms as the original management agreements and extended through September 30, 2036. Total management fees incurred during the years ended December 31, 2007, 2006 and 2005 were $3,714,168, $3,808,151 and $3,846,488, respectively.

The agreements also provided for the reimbursement to SSLMI of all direct costs of operations. Direct costs of operations reimbursed to SSLMI during the years ended December 31, 2007, 2006 and 2005 were $22,920,882, $21,444,384 and $22,425,562, respectively.

The original management agreements for the Facilities required SSLMI to set aside from Facility operations a reserve account to cover the cost of certain fixed asset additions, repairs and maintenance. SSLMI was required to transfer funds of $550 per unit each year into this reserve account originally established by the members in the formation of the Company. The management agreements entered into on September 13, 2006 do not require reserves. As of December 31, 2007 and 2006, there was $0 in this reserve.

The Company obtains professional and general liability coverage through Sunrise Senior Living Insurance, Inc., a multi-provider captive insurance company and a subsidiary of SSLI. For the years ended December 31, 2007, 2006 and 2005, the Company recorded approximately $1,877,000, $1,838,000 and $2,492,000 in insurance expense, respectively, which is included in operating expenses on the accompanying consolidated statements of operations.

The Company had a net receivable from (payable to) its affiliates consisting of the following as of December 31, 2007 and 2006:


	2007		2006
	(Unaudited)

Receivable from (payable to):
SSLI and its subsidiaries	$	531,219	$	(1,007,323	)

The net receivable from (payable to) SSLI and its subsidiaries at December 31, 2007 and 2006 relates to management services, net of advances.

149

Sunrise Second Assisted Living Holdings, LLC

Notes to the Consolidated Financial Statements — (Continued)


Note 5 —	Mortgages Payable

In December 2002, each Facility obtained long-term debt, which was secured by liens on the real property. The mortgages bore interest at an annual rate of 6.14 percent, were due in monthly installments and were scheduled to mature in January 2010. The amounts outstanding under the mortgages at December 31, 2005 totaled $123,733,851.

On September 13, 2006, the loans were refinanced upon closing of the sale of USALF’s interest to SZR US Investments, Inc. The excess loan proceeds were used to pay the related transaction costs and fund distributions to members. The mortgages bear interest at an annual rate of 6.05 percent, are due in monthly installments and mature October 1, 2016. The amounts outstanding under the mortgages at December 31, 2007 and 2006 totaled $166,728,174 and $169,786,761, respectively.

Principal maturities of long-term debt as of December 31, 2007 are as follows:


Year ending December 31, 2008	$	3,248,850
2009		3,450,948
2010		3,665,618
2011		3,893,642
2012		4,135,851
Thereafter		148,333,265

	$	166,728,174


Note 6 —	Members’ Capital

The Company maintains separate capital accounts for each member. The members are not liable for any debts, liabilities, contracts, or obligations of the Company.

The Operating Agreement details the commitments of the members and provides the procedures for the return of capital to the members with defined priorities. All profits and losses, net cash flows from operations and capital proceeds, if any, are to be distributed according to the priorities specified in the Operating Agreement.

There were no accrued distributions at December 31, 2007 and 2006.


Note 7 —	Fair Value of Financial Instruments

The following disclosures of estimated fair value were determined by management, using available market information and valuation methodologies. Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 2007 and 2006. Although management is not aware of any factors that would significantly affect the reasonableness of fair value amounts, other’s estimates of fair value may differ from amounts presented herein.

Cash equivalents, accounts receivable, accounts payable and accrued expenses and other current assets and liabilities are carried at amounts which approximate their fair values due to the short-term nature of these financial instruments.

Fixed rate debt with an aggregate carrying value of $166,728,174 and $169,786,761 as of December 31, 2007 and 2006, respectively, has an estimated aggregate fair value of $164,670,961 and $171,096,269, respectively.


Note 8 —	Commitments

On December 20, 2002, the Company assumed a lease agreement for the land associated with the property in Arlington, Massachusetts. The lease expires on October 26, 2085. The lease was paid in full by the former lessee by

150

Sunrise Second Assisted Living Holdings, LLC

Notes to the Consolidated Financial Statements — (Continued)

a single payment of $2,375,000 on October 26, 2000. Lease expense is recognized on a straight-line basis over the term of the lease.

The Facility in Huntcliff, Georgia is a condominium facility containing 248 units, of which the Company owned 244 units at December 31, 2006. The Company purchased 2 additional units on July 25, 2007 and February 13, 2008 for approximately $225,000 for each unit. The operating agreement provides that the Company is required to purchase the remaining two units if and when such units become available. The Company estimates the current value of the remaining obligation for the remaining two units is approximately $450,000.


Note 9 —	Contingencies

The Company is involved in claims and lawsuits incidental to the ordinary course of business. While the outcome of these claims and lawsuits cannot be predicted with certainty, management and general counsel of the Company do not believe the ultimate resolution of these matters will have a material adverse effect on the Company’s financial position.

The mortgages described in Note 5 are cross-collateralized and cross-defaulted with one another and with the mortgages payable of Sunrise First Assisted Living Holdings, LLC (Sunrise First). The outstanding balances on the mortgages of Sunrise First total $172,184,680 at December 31, 2007.

Note 10 — Bayou St. John Facility

On August 29, 2005, major flooding occurred in the Bayou St. John Facility as a result of Hurricane Katrina. The Bayou St. John Facility incurred extensive exterior wind damage and interior flooding. No injuries or property loss to residents or employees were reported to management. Management determined the carrying value of the Bayou St. John Facility was impaired as a result of Hurricane Katrina and recorded an impairment loss of approximately $3,587,827 for the year ended December 31, 2005. Management intended to rebuild the damaged Facility, evaluated its property insurance coverage and recorded an insurance receivable and associated gain on insurance recovery of approximately $3,587,827 as of and for the year ended December 31, 2005.

On September 13, 2006, USALF assigned and relinquished all right, title and interest to the Bayou St. John Facility to SSLII and any and all insurance proceeds received in relation to the facility as a result of damage from Hurricane Katrina in exchange for $1,875,000. This amount represents 100 percent of the gross insurance proceeds held in escrow at June 30, 2006 and released as of the date of this transaction. Effective September 31, 2006, the Company no longer has a direct ownership interest in the Bayou St. John Facility. Accordingly, the Company distributed the net assets of the facility to SSLII and $1,875,000 was distributed to USALF.


Note 11 —	New Accounting Pronouncements

151

REPORT OF INDEPENDENT AUDITORS

To the Members of

Metropolitan Senior Housing, LLC:

In our opinion, the accompanying consolidated balance sheet, and the related consolidated statements of operations, changes in members’ deficit, and cash flows, present fairly, in all material respects, the financial position of Metropolitan Senior Housing, LLC (the “Company”) at December 31, 2006, 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. The financial statements of the Company for the year ended December 31, 2005 were audited by other auditors whose report dated May 24, 2006 expressed an unqualified opinion on those statements.

/s/ PricewaterhouseCoopers LLP

McLean, VA

May 18, 2007

152

METROPOLITAN SENIOR HOUSING, LLC

CONSOLIDATED BALANCE SHEETS


	As of December 31,
	2007			2006
	(Not covered by
	auditors’ report)

ASSETS
Land and land improvements	$	35,955,737		$	35,662,196
Building and building improvements		124,115,007			123,431,038
Furniture and equipment		19,027,991			18,352,996

		179,098,735			177,446,230
Less accumulated depreciation		(38,056,349	)		(32,672,264	)

Rental property, net		141,042,386			144,773,966
Cash		303,511			2,205,398
Receivable from affiliates		1,745,806			1,454,864
Prepaid expenses and other current assets		99,316			92,809
Restricted cash		955,856			1,216,530
Deferred financing costs, less accumulated amortization of $917,555 and $359,098, respectively		3,351,195			3,882,647

Total assets	$	147,498,070		$	153,626,214

LIABILITIES AND MEMBERS’ DEFICIT
Notes payable	$	190,000,000		$	190,000,000
Accounts payable and accrued expenses		118,956			261,355

Total liabilities		190,118,956			190,261,355
Members’ deficit		(42,620,886	)		(36,635,141	)

Total liabilities and members’ deficit	$	147,498,070		$	153,626,214

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

153

METROPOLITAN SENIOR HOUSING, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS


	For the Years Ended December 31,
	2007			2006			2005
	(Not covered						(Not covered
	by auditors’						by auditors’
	report)						report)

Operating revenue
Lease income from affiliates	$	19,981,144		$	18,193,626		$	21,466,735

Operating expenses
Taxes and insurance		2,104,522			1,831,921			1,708,480
General and administrative		80,296			337,205			65,396
Depreciation		5,384,085			5,347,188			5,359,582
Bad debt expense		—			6,728,816			474,763

		7,568,903			14,245,130			7,608,221

Other income (expense)
Interest income		74,927			44,928			8,380
Interest expense		(12,112,773	)		(8,552,697	)		(8,455,779	)

Net income (loss)	$	374,395		$	(4,559,273	)	$	5,411,115

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

154

METROPOLITAN SENIOR HOUSING, LLC

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ (DEFICIT) CAPITAL
(Information as of December 31, 2007 and for the years ended December 31, 2007 and 2005 not
covered by auditors’ report included herein)


	For the Years Ended December 31, 2007, 2006, and 2005
	Sunrise Senior
	Living			Federal Street			HVP Sun
	Investments, Inc.			Operating, LLC			Investing, LLC			Total

Members’ capital at December 31, 2004	$	23,870,162		$	29,739,772		$	—		$	53,609,934
Distributions		(2,691,852	)		(3,826,116	)		—			(6,517,968	)
Net income		2,218,557			3,192,558			—			5,411,115

Members’ capital at December 31, 2005		23,396,867			29,106,214			—			52,503,081
Contributions		432,355			1,297,069			—			1,729,424
Distributions		(2,548,424	)		(3,627,303	)		—			(6,175,727	)
Net loss through December 12, 2006		(1,766,435	)		(2,541,941	)		—			(4,308,376	)
Transfer of members’ interest		—			(24,234,039	)		24,234,039			—
Distributions		(29,956,969	)		—			(50,175,677	)		(80,132,646	)
Net loss from December 12, 2006 through December 31, 2006		(62,724	)		—			(188,173	)		(250,897	)

Members’ deficit at December 31, 2006		(10,505,330	)		—			(26,129,811	)		(36,635,141	)
Distributions		(1,590,035	)		—			(4,770,105	)		(6,360,140	)
Net income		93,599			—			280,796			374,395

Members’ deficit at December 31, 2007	$	(12,001,766	)	$	—		$	(30,619,120	)	$	(42,620,886	)

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

155

METROPOLITAN SENIOR HOUSING, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS


	For the Years Ended December 31,
	2007			2006			2005
	(Not covered						(Not covered
	by auditors��						by auditors’
	report)						report)

Operating activities
Net income (loss)	$	374,395		$	(4,559,273	)	$	5,411,115
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		5,384,085			5,347,188			5,359,582
Amortization of financing costs		558,457			285,856			232,854
Provision for bad debts		—			6,728,816			474,763
Changes in assets and liabilities:
Receivable from affiliates		(290,942	)		(385,801	)		(869,056	)
Prepaid expenses and other current assets		(6,507	)		118,606			41,620
Restricted cash		260,674			(688,518	)		(27,419	)
Deferred rent receivable		—			2,156,571			5,862
Accounts payable and accrued expenses		(142,399	)		154,737			23,520
Payables to affiliates		—			(804,399	)		(1,474,319	)

Net cash provided by operating activities		6,137,763			8,353,783			9,178,522

Investing activities
Investment in leased property		(1,652,505	)		(1,056,679	)		(1,045,999	)

Net cash used in investing activities		(1,652,505	)		(1,056,679	)		(1,045,999	)

Financing activities
Financing costs paid		(27,005	)		(3,457,078	)		—
Proceeds from notes payable		—			190,000,000			—
Repayment of notes payable		—			(107,215,679	)		(2,097,770	)
Contributions from members		—			1,729,424			—
Distributions to members		(6,360,140	)		(86,308,373	)		(5,974,804	)

Net cash used in financing activities		(6,387,145	)		(5,251,706	)		(8,072,574	)

Net (decrease) increase in cash		(1,901,887	)		2,045,398			59,949
Cash at beginning of year		2,205,398			160,000			100,051

Cash at end of year	$	303,511		$	2,205,398		$	160,000

Supplemental disclosures of cash flow information:
Cash paid for interest	$	11,554,317		$	7,629,491		$	8,222,925

Accrued distribution to members	$	—		$	—		$	543,164

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

156

Metropolitan Senior Housing, LLC

Notes to Consolidated Financial Statements
December 31, 2006 (Information as of December 31, 2007 and for the
years ended December 31, 2007 and 2005 not covered by auditors’ report included herein)


1.	Organization

Metropolitan Senior Housing, LLC (the “LLC”) was formed on June 29, 2000 under the laws of the State of Delaware and began operations on June 29, 2000. The LLC shall terminate on December 31, 2025, unless substantially all of its assets are sold or the members elect to dissolve the LLC prior to this time.

Sunrise Senior Living Investments, Inc. (“SSLII”), a wholly owned subsidiary of Sunrise Senior Living, Inc. (“SSLI”), is the managing member and prior to December 12, 2006, held a 41% equity interest in the LLC, and Federal Street Operating, LLC (“Federal Street”) held a 59% equity interest through December 12, 2006. On December 12, 2006, Federal Street transferred its ownership interest to an unrelated third party, HVP Sun Investing, LLC, (“HVP”) a Delaware Limited Liability Company, pursuant to a Purchase and Sale Agreement dated October 17, 2006 (the “Purchase and Sale Agreement”). As of December 31, 2007 and 2006 HVP held a 75% interest in the LLC and SSLII owned a 25% equity interest in the LLC.

The LLC wholly owns the following 12 single-purpose LLCs (“Owner Entities”), which were organized to purchase or develop and own 12 assisted-living facilities (the “Facilities”) to provide assisted living services for seniors:


Owner Entity	Location	Date Purchased

Metropolitan/Hunter Mill Senior Housing, LLC	Oakton, Virginia	6/29/2000
Metropolitan/West Essex Senior Housing, LLC	Fairfield, New Jersey	6/29/2000
Metropolitan/Wayland Senior Housing, LLC	Wayland, Massachusetts	6/29/2000
Metropolitan/Bellevue Senior Housing, LLC	Bellevue, Washington	9/29/2000
Metropolitan/Cohasset Senior Housing, LLC	Cohasset, Massachusetts	9/29/2000
Metropolitan/Decatur Senior Housing, LLC	Decatur, Georgia	9/29/2000
Metropolitan/Glen Cove Senior Housing, LLC	Glen Cove, New York	9/29/2000
Sunrise LaFayette Hills Assisted Living Limited Partnership	Whitemarsh, Pennsylvania	9/29/2000
Sunrise Paoli Assisted Living Limited Partnership	Malvern, Pennsylvania	9/29/2000
Metropolitan/Paramus Senior Housing, LLC	Paramus, New Jersey	9/29/2000
Metropolitan/Walnut Creek Senior Housing, LLC	Walnut Creek, California	9/29/2000
Sunrise Oakland Assisted Living Limited Partnership	Oakland Hills, California	10/30/2001

As discussed in note 3, prior to December 12, 2006, all 12 Facilities were leased under separate operating lease agreements to wholly owned subsidiaries of MSH Operating, LLC (“Operator”) which is an affiliate of the LLC due to common ownership. Subsequent to December 12, 2006, the 12 Facilities were leased under a master operating sublease agreement to the Operator.


2.	Significant Accounting Policies

Basis of Accounting

The Company’s financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. The accompanying financial statements include the consolidated accounts of Metropolitan Senior Housing, LLC and the Owner Entities (collectively, the “Company”) after elimination of material intercompany accounts and transactions.

The accompanying consolidated financial statements and related footnotes for the years ended December 31, 2007 and 2005 are unaudited. They have been prepared on a basis consistent with that used in preparing the 2006 consolidated financial statements and footnotes thereto and, in the opinion of management, include all adjustments

157

Metropolitan Senior Housing, LLC

Notes to Consolidated Financial Statements — (Continued)

(consisting of normal recurring accruals) necessary for a fair presentation of the Company’s consolidated results of operations and cash flows for the years ended December 31, 2007 and 2005.

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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Rental Property

Rental property is recorded at cost, including closing costs. Maintenance and repairs are charged to expense as incurred. Rental property is reviewed for impairment whenever events or circumstances indicate that the asset’s undiscounted expected cash flows are not sufficient to recover its carrying amount. The Company measures an impairment loss by comparing the fair value of the asset to its carrying amount. Fair value of an asset is calculated as the present value of expected future cash flows. Based on management’s estimation process, no impairment losses were recorded as of December 31, 2007, 2006, and 2005.

Depreciation on rental property is computed using the straight-line method over the following estimated useful lives of the related assets.


Building and building improvements			40 years
Land and land improvements			10-15 years
Furniture and equipment			3-10 years

Cash and Cash Equivalents

Cash and cash equivalents include cash and short-term deposits with maturities of three months or less when purchased. Cash and cash equivalents include unrestricted funds deposited with commercial banking institutions. At times, the Company’s cash and cash equivalents balances with financial institutions exceed federally insured limits. The Company mitigates this risk by depositing funds with major financial institutions.

Allowance for Doubtful Accounts

An allowance for doubtful accounts has been provided against the portion of accounts receivable from the Operator, which is estimated to be uncollectible based on the rent for the Facilities exceeding Facility net operating income. Accounts receivable in the accompanying balance sheets are shown net of an allowance for doubtful accounts. At December 31, 2007 and 2006, the allowance was $0.

Deferred Financing Costs

The costs incurred by the Company to obtain financing have been deferred and will be amortized over the term of the financing secured using the straight-line method which approximates the effective interest method. When debt is exchanged for debt with substantially different terms prior to the contractual maturity date, the unamortized portion of the deferred financing costs are expensed and included in interest expense on the accompanying statement of operations. If the Company determines that the terms of a new debt instrument are not substantially different from the terms of the original debt instrument, then the unamortized costs associated with the original debt instrument, as well as, certain costs associated with the new debt instrument will be amortized over the modified term of the debt instrument.

158

Metropolitan Senior Housing, LLC

Notes to Consolidated Financial Statements — (Continued)

Revenue Recognition

The Facilities are leased to the Operator and rental revenue on these operating leases is due and recognized on a straight-line basis over the term of the lease. Additional rental income is recognized when a Facility’s gross revenues exceed the threshold stated per the related lease agreement.

Income Taxes

No provision for federal income taxes has been made in the accompanying statements, because the Company’s profits and losses are reported on the individual members’ tax returns. The Company’s tax return and the amount of allocable Company profits or losses are subject to examination by federal taxing authorities. If such examinations result in changes to Company profits and losses, the tax liability of the members could be changed accordingly. State income taxes are recorded by the Company as incurred.

Fair Value of Financial Instruments

The following disclosures of estimated fair value were determined by management, using available market information and valuation methodologies. Cash equivalents, accounts receivable, accounts payable, and accrued expenses and other assets and liabilities are carried at amounts that approximate their fair values.

Fixed-rate debt with an aggregate carrying value of $190,000,000 has an estimated aggregate fair value of $188,020,370 and $189,967,868 at December 31, 2007 and 2006, respectively.

Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 2007 and 2006. Although management is not aware of any factors that would significantly affect the reasonableness of fair value amounts, these amounts have not been comprehensively revalued for purposes of these financial statements since December 31, 2007 and 2006, and current estimates of fair value may differ from amounts presented herein.


3.	Affiliate Transactions

Operating Lease Agreements

Prior to December 12, 2006, the Owner Entities of the Company were party to lease and security agreements (“Original Lease Agreements”) with wholly owned subsidiaries of the Operator. The Original Lease Agreements had initial terms that ended from December 31, 2004 to May 31, 2007 and had five renewal options of five years that extended through the 30th anniversary of the dates of the leases. The Original Lease Agreements provided for escalating base rent plus additional rent, calculated as a specified percentage of gross revenues in excess of an amount specified for each lease year, to be paid monthly.

Four of the Original Lease Agreements expired on December 31, 2004, and the Operator exercised its renewal options. In 2005, the Company and the Operator agreed to renewal terms of one year that reduced the base rent and reduced or eliminated the additional rent component for the expired leases. In 2006, the Company renegotiated additional one-year agreements for these leases using the same methodology.

On December 12, 2006, the Company entered into a sublease and security agreement (“New Lease Agreement”) with the Operator. The New Lease Agreement has an initial term of three years, ending on December 31, 2009. There are seven three year renewal options that extend through June 29, 2030; base rent will be established at fair market rent on the date the option is exercised. The New Lease Agreement provides for base rent of $20,046,092 per annum, and additional rent calculated as 50% of the excess of annual aggregate Gross Revenues over $59,700,000, payable in monthly installments based on estimates.

159

Metropolitan Senior Housing, LLC

Notes to Consolidated Financial Statements — (Continued)

The following is a schedule of minimum future rentals due to the Company for the subsequent years under noncancelable leases in place as of December 31, 2007:


2008	$	20,046,092
2009		20,046,092

	$	40,092,184

Receivable and Payable to Affiliates

The Company had net receivables from affiliates at December 31 consisting of the following:


	2007			2006
	(Not covered by
	auditors’ report)

Receivable (payable) from affiliates
Operator	$	1,952,286		$	1,384,050
SSLI and its subsidiaries		(206,480	)		70,814

	$	1,745,806		$	1,454,864

The net receivables from the Operator are related to base and additional rents on the Facilities. The net receivable from Operator is net of costs paid by Operator on behalf of the Company.

On December 12, 2006, in conjunction with the transfer of membership interest to HVP, the Company legally released the Operator from the obligation related to unpaid rent, as such the Company has determined the amount is uncollectible and has recorded bad debt expense related to the receivable of $6,728,816.

The Company obtains professional and general liability insurance coverage through Sunrise Senior Living Insurance, Inc., a multi-provider captive insurance company and a subsidiary of SSLI. The liability for the insurance deductibles has been estimated and recorded in accounts payable and accrued liabilities in the consolidated balance sheets if an amount remains unpaid at year end. In 2005, the Company transferred to the Operator the insurance expense related to the operations and retained and continued to record the property-related insurance expense in its consolidated financial statements. In 2007, 2006, and 2005, the Company included approximately $326,334, $108,000, and $122,000, respectively, of insurance expense in taxes and insurance in the consolidated statements of operations.


4.	Debt

During 2000, the Company assumed loans for eight of the Facilities. The loans were for a term of seven years and were collateralized by liens on the real property. The loans bore interest at an annual rate of 8.66% with a maturity date of April 2007. Payments of principal and interest in the amount of $611,028 were payable monthly. There were no balances outstanding under the loans as of December 31, 2007 and 2006, respectively. Repayment of the outstanding balance of $67,373,663 was made on December 12, 2006 in conjunction with the transfer of Federal Street’s member’s interest to HVP.

On December 29, 2003, the Company obtained loans for four of the Facilities. The loans were for a term of seven years and were collateralized by liens on the real property. The loans bore interest at an annual rate of 5.60% with a maturity date of January 2011. Payments of principal and interest in the amount of $248,038 were payable monthly. There were no balances outstanding under the loans as of December 31, 2007 and 2006, respectively. Repayment of the outstanding balance of $37,771,290 was made on December 12, 2006 in conjunction with the transfer of Federal Street’s member’s interest to HVP.

160

Metropolitan Senior Housing, LLC

Notes to Consolidated Financial Statements — (Continued)

On December 12, 2006, the Company obtained loans for all 12 Facilities in conjunction with the transfer of Federal Street’s interest to HVP. The notes payable are collateralized by the related real property and contain an automatic extension period of 1 year, unless the Company defaults on the loan. The loans bear interest at an annual fixed rate of 6% through the maturity date of December 31, 2013. During the extension period, the loan bears interest at LIBOR + 2.75%. Monthly payments are interest only through January 1, 2009. Subsequent to January 1, 2009, interest and principal payments of $1,139,147 are payable monthly.


	Principal
Borrower	Balance

Metropolitan/Cohasset Senior Housing, LLC	$	12,200,000
Metropolitan/Glen Cove Senior Housing, LLC		25,750,000
Metropolitan/Paramus Senior Housing, LLC		15,510,000
Sunrise Lafayette Hills Assisted Living Limited Partnership		12,800,000
Sunrise Paoli Assisted Living Limited Partnership		12,888,000
Metropolitan/Decatur Senior Housing, LLC		13,810,000
Metropolitan/Bellevue Senior Housing, LLC		18,200,000
Metropolitan/Walnut Creek Senior Housing, LLC		13,500,000
Metropolitan/West Essex Senior Housing, LLC		20,200,000
Metropolitan/Hunter Mill Senior Housing, LLC		13,226,000
Sunrise Oakland Assisted Living Partnership		26,400,000
Metropolitan/Wayland Senior Housing, LLC		5,516,000

	$	190,000,000

Because the terms of eight of the twelve loans obtained on December 12, 2006 were substantially different from the terms of the loans that were in place prior to December 12, 2006, the repayment of the eight loans was accounted for as an extinguishment of debt and deferred financing costs of $845,313 and related accumulated amortization of $808,956 were written off and has been included in interest expense on the accompanying statement of operations. The Company incurred costs of $1,458,753 in conjunction with obtaining the loans, which have been deferred and amortized over the terms of the loans.

The terms of the remaining four loans were not substantially different from the replaced loans and were with the same lender, and therefore have been accounted for as debt modifications. The unamortized portion of the deferred financing costs incurred in conjunction with the original loans will be amortized over the term of the replacement loans. A prepayment penalty in the amount of $1,545,329 was assessed against the prepayment of the four modified loans; this penalty has been deferred and will be amortized over the term of the replacement loans. The Company incurred costs of $452,997 in conjunction with obtaining the replacement loans, which have been deferred and amortized over the terms of the replacement loans.

In the event that the Company prepays the loans, a prepayment penalty will be assessed that is calculated as the greater of (a) 1% of the amount of the principal being prepaid; or (b) a minimum rate of return to the lender.

161

Metropolitan Senior Housing, LLC

Notes to Consolidated Financial Statements — (Continued)

Principal maturities of long-term debt as of December 31, 2007 were as follows:


2008	$	—
2009		2,173,175
2010		2,309,126
2011		2,453,580
2012		2,563,212
Thereafter		180,500,907

	$	190,000,000


5.	Members’ Deficit (Information as of and for the years ended December 31, 2007 and 2005 not covered by auditors’ report included herein)

During 2001 and 2000, Federal Street contributed approximately $13.0 million and $62.0 million, respectively, to the Company for a 75% interest, and SSLII contributed property of approximately $4.0 million and $21.0 million, respectively, for a 25% interest. The Company maintains separate capital accounts for Federal Street and SSLII.

On December 29, 2003, the Company obtained $40.0 million of financing. The loan proceeds, net of transaction costs and a required $2.0 million escrow deposit, of approximately $37.0 million were accounted for as a capital transaction distribution and were distributed to Federal Street in accordance with the operating agreement. In January 2004, the escrow was released and the Company distributed the $2.0 million to Federal Street and accounted for the distribution as a capital transaction. As a result of these capital transactions, the capital account of Federal Street was reduced by approximately $39.0 million. Accordingly, Federal Street’s equity interest in the Company decreased from 75% to 59%, and SSLII’s equity interest increased from 25% to 41%.

The Company maintains separate capital accounts for Federal Street and SSLII. Net income has been allocated to the individual members’ capital accounts based on its ownership interest as follows: in the year ended December 31, 2005 and through December 12, 2006, 59% to Federal Street and 41% to SSLII, and from December 13, 2006 to December 31, 2007, 75% to HVP and 25% to SSLII.

On March 31, 2004, Federal Street and SSLII amended the LLC’s operating agreement and the facility operating agreements of the Owner Entities (Amendments). Under the Amendments, after the priority distributions are made to Federal Street and SSLII, any remaining distributable cash will be paid to SSLII until the payable balance to SSLI and its subsidiaries is reduced to zero. The Amendments were effective January 1, 2004. During 2007, 2006, and 2005, distributable cash of approximately $0, $0.06 million, and $0.45 million, respectively, was paid to SSLII to reduce the outstanding payable balance.

Priority distributions of net cash flow from operations during 2007, 2006, and 2005 of approximately $0, $3.6 million, and $3.8 million, respectively, were paid to Federal Street and $0, $2.5 million, and $2.7 million, respectively, were paid to SSLII. These distributions of net cash flow from operations were paid to Federal Street and SSLII according to their equity interest percentages of 59% and 41%, respectively.

The operating agreement details the commitments of the members and provides the procedures for the return of capital to the members with defined priorities. All profits and losses, net cash flow from operations, and capital proceeds, if any, are to be distributed according to the priorities specified in the operating agreement.

On December 12, 2006, Federal Street sold 100% of its interest in the Company to HVP. The purchase and sale agreement covered Federal Street’s interest in the Company as well as their 100% interest in the Operator, Federal Street’s percentage of interest in the Owner Entities and in the ownership of 12 senior housing facilities with a gross property value of $288 million. The purchase price to Federal Street, per the Purchase and Sale Agreement, was $124,032,082. Pursuant to the Purchase and Sale Agreement, there will be adjustments made to the purchase price

162

Metropolitan Senior Housing, LLC

Notes to Consolidated Financial Statements — (Continued)

based upon specifically defined activity which took place prior to the closing date. Capital distributions, as a result of the ownership transfer, were treated as distributions from capital transactions in accordance with the Limited Liability Company Agreement of Metropolitan Senior Housing, LLC dated June 29, 2000. At closing, HVP deposited $750,000 (“Escrow Proceeds”) into an escrow account that bears interest for the seller. Certain stipulations are outlined in Section 9.05 (b) of the Purchase and Sales Agreement regarding the release of the escrow balance to HVP. In accordance with the amended and restated limited liability company agreement (“LLC Agreement”) the initial contributions of SSLII and HVP were adjusted to reflect the purchase price paid by HVP for Federal Street’s member’s interest and the consequent value attributable to SSLII’s member’s interest. A distribution was made to SSLII during the closing of the transfer of interest to HVP to reduce SSLII’s unreturned contributions, as defined in the LLC Agreement, to 25% of the total unreturned contributions.

The share of income, distributions, and expenses will be allocated 75% to HVP and 25% to SSLII. Upon liquidation, the LLC Agreement provides that, after return of capital to both partners, the remaining proceeds are to be split 75%/25%. Distributions of net cash flow from operations during 2007 of approximately $4.8 million and $1.6 million were paid to HVP and SSLII, respectively.


6.	Contingencies

The Company is involved in claims and lawsuits incidental to the ordinary course of business. While the outcome of these claims and lawsuits cannot be predicted with certainty, management and general counsel of the Company do not believe the ultimate resolution of these matters will have a material adverse effect on the Company’s financial position.


7.	New Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for the Company’s financial assets and liabilities on January 1, 2008. The FASB has proposed a deferral of the provisions of SFAS 157 relating to nonfinancial assets and liabilities that would delay implementation by the Company until January 1, 2009. SFAS 157 is not expected to materially affect how the Company determines fair value, but may result in certain additional disclosures.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115, (“SFAS 159”). SFAS 159 permits companies to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for the Company on January 1, 2008. The Company did not elect the fair value option for any of its existing financial instruments on the effective date and has not determined whether or not it will elect this option for any eligible financial instruments it acquires in the future.

163

REPORT OF INDEPENDENT AUDITORS

To the Partners of

PS Germany Investment (Jersey) Limited Partnership

We have audited the accompanying consolidated balance sheets of PS Germany Investment (Jersey) Limited Partnership and its subsidiaries (’the Partnership’) as of 31 December 2007 and 2006, and the related consolidated statements of income, changes in partners’ capital, and cash flows for each of the two years in the period ended 31 December 2007. These financial statements are the responsibility of the Partnership’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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Partnership’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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 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 PS Germany Investment (Jersey) Limited Partnership and its subsidiaries at 31 December 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the two years in the period ended 31 December 2007 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

/s/ Ernst & Young LLP

London, England

10 September 2008

164

PS GERMANY INVESTMENT (JERSEY) LIMITED PARTNERSHIP

CONSOLIDATED INCOME STATEMENT


	Years Ended 31 December
			2007			2006			2005
	Notes		€			€			€
									Unaudited

Operating revenue:
Resident fees				6,321,192			2,803,890			810,892
Rental income		5		4,673,335			2,394,728			1,013,166

Total operating revenue				10,994,527			5,198,618			1,824,058

Operating expenses:
Facility operating expenses				13,860,525			7,128,251			2,501,520
Facility development and pre-rental expenses		5		2,707,130			4,790,673			2,130,542
General and administrative expenses				209,777			247,551			286,405
Management fees		5		313,560			139,708			43,073
Depreciation		4		4,560,805			2,168,000			947,257
Negative fair value movement on property and equipment		4		63,613,081			10,739,995			—

Total operating expenses				85,264,878			25,214,178			5,908,797

Net operating loss				(74,270,351	)		(20,015,560	)		(4,084,739	)

Other income/(expenses):
Interest income				2,999			40,566			40,801
Interest expense				(11,265,789	)		(3,927,736	)		(1,455,990	)
Foreign exchange loss				(712	)		—			—

Total other income/(expenses)				(11,263,502	)		(3,887,170	)		(1,415,189	)

Loss before tax and minority interests				(85,533,853	)		(23,902,730	)		(5,499,928	)
Income tax expense		8		—			—			—

Loss for the year after tax before minority interests				(85,533,853	)		(23,902,730	)		(5,499,928	)
Minority interests				1,544,885			770,254			237,324

Net loss for the year after minority interests		9		(83,988,968	)		(23,132,476	)		(5,262,604	)

The accompanying notes form an integral part of these financial statements

165

PS GERMANY INVESTMENT (JERSEY) LIMITED PARTNERSHIP

CONSOLIDATED BALANCE SHEET


	At 31 December
			2007			2006
	Notes		€			€

Assets
Current assets:
Cash and cash equivalents		3		1,526,263			1,014,584
Accounts receivable				645,584			316,516
Prepaid expenses and other current assets				180,943			253,991
Receivables due from affiliates		5		4,391,014			1,504,691

Total current assets				6,743,804			3,089,782

Non current assets
Property and equipment		4		124,295,892			148,973,764
Restricted cash		7		5,737,273			—
Rent receivable		5		4,454,895			2,298,322
Participation rights		5		900,000			800,000

Total non current assets				135,388,060			152,072,086

Total assets				142,131,864			155,161,868

Liabilities and partners’ capital
Current liabilities
Trade payables				442,405			268,607
Accrued expenses		6		1,701,471			1,059,034
Payables due to affiliates		5		16,430,307			16,809,312
Current maturities of long-term debt		7		3,718,340			1,592,090

Total current liabilities				22,292,523			19,729,043

Non current liabilities
Partner loan		5		2,010,000			2,010,000
Notes payable to affiliates		5		10,469,296			3,661,206
Long-term debt, net of finance costs		7		172,379,204			108,701,520

Total non current liabilities				184,858,500			114,372,726

Minority interest				466,788			2,065,673
Partners’ capital		9		(65,485,947	)		18,994,426

Total partners’ capital				(65,019,159	)		21,060,099

Total liabilities and partners’ capital				142,131,864			155,161,868

The accompanying notes form an integral part of these financial statements

166

PS GERMANY INVESTMENT (JERSEY) LIMITED PARTNERSHIP

CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS’ CAPITAL


	Years Ended 31 December
	Partners’					Asset			Foreign									Total
	Capital		Accumulated			Revaluation			Currency			Partners’			Minority			Partners’
	Contributions		Deficit			Reserve			Translation			Capital			Interests			Capital
	€		€			€			€			€			€			€

At 1 January 2005(unaudited)		20,857,904		(3,019,667	)		—			—			17,838,237			1,226,393			19,064,630
Revaluation of property and equipment		—		—			5,888,024			—			5,888,024			—			5,888,024

Total income and expense for the year recognised directly in equity		—		—			5,888,024			—			5,888,024			—			5,888,024
Loss for the year		—		(5,262,604	)		—			—			(5,262,604	)		(237,324	)		(5,499,928	)

Total income and expense for the year		—		(5,262,604	)		5,888,024			—			625,420			(237,324	)		388,096
Partner contributions		15,511,189		—			—			—			15,511,189			952,290			16,463,479

At 31 December 2005(unaudited)		36,369,093		(8,282,271	)		5,888,024			—			33,974,846			1,941,359			35,916,205
Revaluation of property and equipment		—		—			(5,888,024	)		—			(5,888,024	)		—			(5,888,024	)

Total income and expense for the year recognised directly in equity		—		—			(5,888,024	)		—			(5,888,024	)		—			(5,888,024	)
Loss for the year		—		(23,132,476	)		—			—			(23,132,476	)		(770,254	)		(23,902,730	)

Total income and expense for the year		—		(23,132,476	)		(5,888,024	)		—			(29,020,500	)		(770,254	)		(29,790,754	)
Partner contributions		14,040,080		—			—			—			14,040,080			894,568			14,934,648

At 31 December 2006		50,409,173		(31,414,747	)		—			—			18,994,426			2,065,673			21,060,099
Foreign currency translation		—		—			—			(545,405	)		(545,405	)		—			(545,405	)

Total income and expense for the year recognised directly in equity		—		—			—			(545,405	)		(545,405	)		—			(545,405	)
Loss for the year		—		(83,988,968	)		—			—			(83,988,968	)		(1,544,885	)		(85,533,853	)

Total income and expense for the year		—		(83,988,968	)		—			(545,405	)		(84,534,373	)		(1,544,885	)		(86,079,258	)
Partner contributions		54,000		—			—			—			54,000			(54,000	)		—

At 31 December 2007		50,463,173		(115,403,715	)		—			(545,405	)		(65,485,947	)		466,788			(65,019,159	)

The accompanying notes form an integral part of these financial statements

167

PS GERMANY INVESTMENT (JERSEY) LIMITED PARTNERSHIP

CONSOLIDATED STATEMENT OF CASH FLOWS


	Years Ended 31 December
			2007			2006			2005
	Notes		€			€			€
									Unaudited

Operating activities
Loss for the year before tax				(85,533,853	)		(23,902,730	)		(5,499,928	)
Adjustments to reconcile loss for the year before tax to net cash flows from operating activities:
Net finance costs				11,263,502			3,887,170			1,415,189
Negative fair value movement on property and equipment				63,613,081			10,739,995			—
Depreciation				4,560,805			2,168,000			947,257
Provision for bad debt				31,583			2,932			—
Changes in assets and liabilities:
Accounts receivable				(360,651	)		(195,473	)		(123,973	)
Prepaid expenses and other current assets				73,048			(226,362	)		1,252,470
Trade payables and accrued expenses				130,707			814,658			(2,916	)
Rent receivable				(2,156,573	)		(1,421,933	)		(876,389	)

Net cash flows used in operating activities				(8,378,351	)		(8,133,743	)		(2,888,290	)

Investing activities
Increase in restricted cash				(5,737,273	)		—			—
Purchase of property and equipment				(43,755,464	)		(68,429,779	)		(52,109,887	)
Interest paid and capitalised				(1,235,851	)		(1,077,332	)		(461,152	)
Purchase of participation rights				(100,000	)		(300,000	)		(500,000	)
Interest received				2,999			40,566			40,801

Net cash flows used in investing activities				(50,825,589	)		(69,766,545	)		(53,030,238	)

Financing activities
Contributions by partners				54,000			14,040,080			15,511,189
Contributions by minority interests				(54,000	)		894,568			952,290
Financing cost paid				(430,159	)		—			—
Net (repayments to)/borrowings from affiliates				(3,810,859	)		8,170,511			(1,478,263	)
Notes payable to affiliates				6,808,090			1,885,470			1,775,736
Borrowings of long-term debt				143,550,913			58,899,239			46,806,715
Repayments of long-term debt				(77,713,608	)		(6,797,160	)		(5,200,000	)
Interest paid and expensed				(8,688,172	)		(3,347,577	)		(1,100,353	)

Net cash flows from financing activities				59,716,205			73,745,131			57,267,314

Net increase/(decrease) in cash and cash equivalents before effect of exchange rate on cash				512,265			(4,155,157	)		1,348,786
Effect of exchange rate on cash				(586	)		—			—

Net increase/(decrease) in cash and cash equivalents				511,679			(4,155,157	)		1,348,786
Cash and cash equivalents at beginning of year				1,014,584			5,169,741			3,820,955

Cash and cash equivalents at end of year		3		1,526,263			1,014,584			5,169,741

The accompanying notes form an integral part of these financial statements

168

PS Germany Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements

for the years ended 31 December 2007, 2006 and 2005


1.	Organization

PS Germany Investment (Jersey) Limited Partnership (the Partnership) was formed under the laws of Jersey, Channel Islands on 31 May 2002, between Sunrise Assisted Living Investment, Inc. (SALII), a wholly owned subsidiary of Sunrise Senior Living, Inc. (Sunrise), Senior Housing Germany Investment Limited Partnership (SHIP), SunCo LLC (SunCo), a wholly owned subsidiary of Sunrise and PS Germany (Jersey) GP Limited (General Partner). On 29 January 2003, SALII transferred its entire interest in the Partnership to Sunrise Senior Living International L.P. (Sunrise LP), a subsidiary of Sunrise. The Partnership was established for the purpose of acquiring land and buildings in order to construct, develop, market, operate, finance and sell assisted living facilities in Germany. As of 31 December 2007, the Partnership has eight operating properties and one property under active development in Germany as well as one parcel of undeveloped land. The facilities will offer accommodation and organize the provision of non-complex medical care services to elderly residents for a monthly fee. The Partnership’s services will generally not be covered by health insurance so the monthly fees will be payable by the residents, their family, or another responsible party. The Partnership shall be dissolved on 31 May 2010 unless extended or terminated earlier in accordance with the terms and provisions of the Partnership Agreement.

2.1 Basis of preparation

The consolidated financial statements have been prepared on an historical cost basis, except for property and equipment relating to properties operating at the year end, which have been measured at fair value. The consolidated financial statements are presented in Euros.

Going concern

The consolidated financial statements have been prepared on a going concern basis. As of 31 December 2007, partners’ capital had a deficit balance of approximately €65 million. This deficit is the result of accumulated operating losses of the partnership and negative fair value charges related to the property owned by the partnership. As discussed in notes 5 and 7, Sunrise has provided loans to the partnership to cover operating deficits. Sunrise has also provided guarantees to the third party lenders of the partnership that they will continue to provide funding for the operating deficits of the partnership. As of 30 June 2008, the amount of funding provided by Sunrise under these loans and guarantees was approximately €27 million. Sunrise has estimated that they will need to fund an additional €36 million through 2012 until the communities reach stabilization. Based on the guarantee of future funding from Sunrise, the General Partner believes it is appropriate to prepare the consolidated financial statements on a going concern basis as of 31 December 2007.

Statement of compliance

The consolidated financial statements of PS Germany Investment (Jersey) Limited Partnership and its subsidiaries have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the International Accounting Standards Board as they apply to the financial statements of the limited partnership and its subsidiaries for the year ended 31 December 2007.

Principles of consolidation

The consolidated financial statements include the financial statements of the Partnership and its wholly owned subsidiary undertakings. The Partnership wholly owns eleven General Partnerships that in turn own twelve non-wholly owned limited partnerships which the General Partnerships control with the unilateral right and obligation to manage and represent the limited partnerships. These eleven non-wholly owned limited partnerships are also included in the consolidated financial statements of the Partnership as it is the Partnership’s policy to consolidate non-wholly owned interests when it holds the unilateral ability to conduct the ordinary course of business of the non-wholly owned interests. The Partnership’s wholly owned and non-wholly owned subsidiaries will develop, own

169

PS Germany Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

and operate assisted living facilities. All significant intercompany accounts and transactions eliminate upon consolidation.

2.2 Changes in accounting policies

IFRS 7 Financial Instruments: Disclosures

Amendment to IAS Presentation of Financial Statements — Capital Disclosures

2.3 Significant accounting judgement and estimates

Judgements

In the process of applying the Partnership’s accounting policies, management has made the following judgements, apart from those involving estimation, which have the most significant effect on the amounts recognised in the financial statements:

Operating lease commitments — partnership as lessor

The Partnership has entered into commercial property leases on its property portfolio. The Partnership has determined that it retains all the significant risks and rewards of ownership of these properties, a portion of which are leased out on operating sub-leases.

Estimation uncertainty

Deferred tax assets

Deferred tax assets are recognised for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgment is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits together with future tax planning strategies. The carrying value of recognised tax losses at 31 December 2007 was €nil (2006: €nil) and the unrecognised tax losses at 31 December 2007 were approximately €70 m (2006: €51m). Further details are contained in note 8.

2.4 Summary of significant accounting policies

Cash and cash equivalents

170

PS Germany Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

Property and equipment

Property and equipment is initially recorded at cost and includes interest and property taxes capitalised on long-term construction projects during the construction period, as well as pre-acquisition and other costs directly related to the acquisition, development and construction of facilities. Costs that do not directly relate to acquisition, development and construction of the facility are expensed as incurred. If a project is abandoned any costs previously capitalised are expensed. Maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Buildings are depreciated over 40 years. Furniture and equipment is depreciated over 3 to 10 years.

Any revaluation surplus is credited to the individual partners’ capital account included in the partners’ capital section of the balance sheet, except to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss, in which case the increase is recognised in profit or loss. A revaluation deficit is recognised in profit or loss, except that a deficit directly offsetting a previous surplus on the same asset is directly offset against the surplus in the asset revaluation reserve.

Valuations are performed frequently enough to ensure that the fair value of a revalued asset does not differ materially from its carrying amount.

Based on independent valuations, a negative fair value deficit was recorded as of 31 December 2007 and 31 December 2006.

Impairment of non-financial assets

Non-financial assets are reviewed for indications of impairment whenever events or circumstances indicate that the asset’s discounted expected cash flows are not sufficient to recover its carrying amount. The Partnership measures an impairment loss by comparing the fair value of the asset to its carrying amount. Fair value of an asset is calculated as the present value of expected future cash flows.

Restricted cash

Cash that is pledged or is subject to withdrawal restrictions has been separately identified on the balance sheet as restricted cash.

Leases

Leases where the Partnership retains substantially all the risks and benefits of ownership of the asset are classified as operating leases.

Revenue recognition

Operating revenue consists of resident fee revenue and rental income. Resident fee revenue is recognised monthly as services are rendered. Agreements with residents are generally for a term of one year and are cancellable

171

PS Germany Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

by residents with thirty days notice. Rental income arising on the facilities is accounted for on a straight-line basis over the lease terms on ongoing leases (note 5).

Interest income is recognised as interest accrues.

Operating expenses

Operating expenses consist of:


	•	Facility operating expenses including labour, food, marketing and other direct costs of operating the communities.

	•	Facility development and pre-rental expenses associated with the development and marketing of communities prior to opening.

	•	General and administrative expenses related to costs of the Partnership itself.

	•	Management fees paid to a subsidiary of Sunrise for managing the communities (note 5).

Taxes

Income and corporation taxes

Sales taxes

Revenue, expenses and assets are recognised net of the amount of sales tax except:


	•	where the sales tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the sales tax is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and

	•	receivables and payables that are stated with the amount of sales tax included.

The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the balance sheet.

Deferred income tax

Deferred income tax is provided using the liability method on temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. However, as note 8 indicates, the net deferred tax assets have not been recognised, because there is no assurance that enough profits will be generated in the future to be able to utilise the losses and expenditures carried forward. Accordingly, no provision for income taxes has been included in these financial statements, and there are no current or deferred income taxes.

Deferred income tax liabilities are recognised for all taxable temporary differences, except:


	•	where the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

172

PS Germany Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)


	•	in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.


	•	where the deferred income tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

	•	in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred income tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on the tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.

Deferred income tax relating to items recognised directly in equity is recognised in equity and not in the income statement.

Foreign currency translation

The consolidated financial statements are presented in Euros, which is the Partnership’s functional and presentational currency. Monetary assets and liabilities dominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the balance sheet date. All differences are taken to profit or loss. Non monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transaction.

Borrowing costs


	•	Expenditure for the asset and borrowing costs are being incurred; and

	•	Activities necessary to prepare the asset for its intended use are in progress.

Capitalisation ceases when the asset is substantially ready for use. If active development is interrupted for an extended period, capitalisation of borrowing costs is suspended.

For borrowing associated with a specific asset, the actual rate on that borrowing is used. Otherwise, a weighted average cost of borrowing is used.

173

PS Germany Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

New standards and interpretations not applied


IASB (IAS / IFRSs)	Effective date


IFRS 2 Amendment to IFRS 2 — Vesting Conditions and Cancellations		1 January 2009
IFRS 3 Business Combinations (revised January 2008)		1 July 2009
IFRS 5 Non current assets held for sale and discontinued operations		1 July 2009
IFRS 8 Operating Segments		1 January 2009
IAS 1 Presentation of Financial Statements (revised September 2007)		1 January 2009
IAS 16 Amendment — Property, Plant and Equipment		1 January 2009
IAS 19 Amendment — Employee Benefits		1 January 2009
IAS 23 Borrowing Costs (revised March 2007)		1 January 2009
IAS 27 Consolidated and Separate Financial Statements (revised January 2008)		1 July 2009
IAS 28 Amendment — Investments in Associates		1 July 2009
IAS 31 Amendment — Interests in Joint Ventures		1 July 2009
IAS 32 Amendment — Financial Instruments” Presentation		1 January 2009

IFRIC		Effective date

IFRIC 12 Service Concession Arrangements		1 January 2008
IFRIC 13 Customer Loyalty Programmes		1 July 2008
IFRIC 14 IAS 19 — The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction		1 January 2008
IFRIC 15 Agreements for the Construction of Real Estate		1 January 2009

The Directors do not anticipate that the adoption of these standards and interpretations will have a material impact on the Group’s financial statements in the period of initial application.


3.	Cash and cash equivalents

For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise the following at 31 December:


	2007		2006
	€		€

Cash at banks and on hand		1,526,263		1,014,584

		1,526,263		1,014,584

Cash at banks earns interest at floating rates based on daily bank deposit rates.

174

PS Germany Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)


4.	Property and equipment

Property and equipment consists of the following at 31 December 2007:


				Furniture
	Land and			and			Construction
	Buildings			Equipment			in Progress			Total
	€			€			€			€

As at 1 January 2007, net of accumulated depreciation		85,589,031			6,622,089			56,762,644			148,973,764
Additions, including interest capitalised		68,688,800			5,844,216			(29,541,701	)		44,991,315
Revaluations		(60,014,126	)		(3,598,955	)		—		��	(63,613,081	)
Depreciation charge for the year		(2,952,157	)		(1,608,648	)		—			(4,560,805	)
Transfer of net deferred financing costs		—			—			(1,495,301	)		(1,495,301	)

As at 31 December 2007, net of accumulated depreciation		91,311,548			7,258,702			25,725,642			124,295,892

As at 1 January 2007 Cost or fair value		87,589,868			7,737,634			56,762,644			152,090,146
Accumulated depreciation		(2,000,837	)		(1,115,545	)		—			(3,116,382	)

Net carrying amount		85,589,031			6,622,089			56,762,644			148,973,764

As at 31 December 2007 Cost or fair value		96,264,542			9,982,895			25,725,642			131,973,079
Accumulated depreciation		(4,952,994	)		(2,724,193	)		—			(7,677,187	)

Net carrying amount		91,311,548			7,258,702			25,725,642			124,295,892

Construction in progress represents costs incurred in construction of two facilities in development or pre-development. Costs to complete construction of the two facilities are estimated to be €26 million. One of the facilities was completed in February 2008. The Partnership has not decided whether it intends to complete development of the remaining facility.

The Partnership engaged Savills Commercial Ltd, an accredited independent valuer, to provide an opinion of the fair value of each of the eight communities that were operating as of 31 December 2007, on a freehold basis as a fully equipped operational entity having regard to trading potential in existing use and present condition subject to the management contract in place. Fair value was determined using a discounted cash flow method of valuation assuming reasonable trade build up to future stabilization. Stabilization is considered by the directors to be the date at which a community is 95% occupied which usually occurs 12 to 18 months after opening. The date of the revaluation was 31 December 2007. An independent valuation was also obtained for a parcel of undeveloped land. Fair value was determined by reference to market — based evidence. The date of the valuation was 31 December 2006. For 2007, management has determined the fair value of the undeveloped land has not materially differed from the valuation at 31 December 2006.

If property and equipment were measured using the cost model, the carrying amounts would be as follows at 31 December 2007:


				Furniture
	Land and			and			Construction
	Buildings			Equipment			in Progress		Total
	€			€			€		€

Cost		166,951,743			13,498,770			25,875,642		206,326,155
Accumulated depreciation		(4,952,994	)		(2,724,193	)		—		(7,677,187	)

Net carrying amount		161,998,749			10,774,577			25,875,642		198,648,968

175

PS Germany Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

Ten facilities, eight operating and one under development, and one parcel of undeveloped land, with a total carrying amount of €198,648,968 are subject to a first charge to secure the Partnership’s long-term debt (note 7).

Property and equipment consists of the following at 31 December 2006:


				Furniture
	Land and			and			Construction
	Buildings			Equipment			in Progress			Total
	€			€			€			€

As at 1 January 2006, net of accumulated depreciation		40,368,862			3,463,127			57,881,908			101,713,897
Additions, including interest
capitalised		62,427,109			4,598,041			206,961			67,232,111
Revaluations		(15,800,920	)		(677,099	)		(150,000	)		(16,628,019	)
Depreciation charge for the year		(1,406,020	)		(761,980	)		—			(2,168,000	)
Transfer of net deferred financing costs		—			—			(1,176,225	)		(1,176,225	)

As at 31 December 2006, net of accumulated depreciation		85,589,031			6,622,089			56,762,644			148,973,764

As at 1 January 2006 Cost or fair value		40,963,679			3,816,692			57,881,908			102,662,279
Accumulated depreciation		(594,817	)		(353,565	)		—			(948,382	)

Net carrying amount		40,368,862			3,463,127			57,881,908			101,713,897

As at 31 December 2006 Cost or fair value		87,589,868			7,737,634			56,762,644			152,090,146
Accumulated depreciation		(2,000,837	)		(1,115,545	)		—			(3,116,382	)

Net carrying amount		85,589,031			6,622,089			56,762,644			148,973,764

Revaluations of €16,628,019 include the 2006 charge to the consolidated income statement of €10,739,995 together with the write back of the 2005 surplus of €5,888,024 recorded in Asset revaluation reserve.

Construction in progress represents costs incurred in construction of six facilities in development or pre-development. Costs to complete construction of the six facilities are estimated to be €102 million.

The Partnership engaged Savills Commercial Ltd, an accredited independent valuer, to provide an opinion of the fair value of each of the five communities that were operating as of 31 December 2006, on a freehold basis as a fully equipped operational entity having regard to trading potential in existing use and present condition subject to the management contract in place. Fair value was determined using a discounted cash flow method of valuation assuming reasonable trade build up to future stabilization. Stabilization is generally considered to be the date at which a community is 95% occupied which usually occurs 12 to 18 months after opening. The date of the revaluation was 31 December 2006. An independent valuation was also obtained for a parcel of undeveloped land. Fair value was determined by reference to market — based evidence. The date of the valuation was 31 December 2006.

176

PS Germany Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

If property and equipment were measured using the cost model, the carrying amounts would be as follows at 31 December 2006:


				Furniture
	Land and			and			Construction
	buildings			equipment			in progress		Total
	€			€			€		€

Cost		98,262,942			7,654,555			56,912,644		162,830,141
Accumulated depreciation		(2,000,837	)		(1,115,544	)		—		(3,116,381	)

Net carrying amount		96,262,105			6,539,011			56,912,644		159,713,760

Property and equipment consists of the following at 31 December 2005 (unaudited):


				Furniture
	Land and			and			Construction
	buildings			equipment			in progress			Total
	€			€			€			€

As at 1 January 2005, net of accumulated depreciation		—			2,859			43,483,479			43,486,338
Additions, including interest capitalised		35,835,832			3,052,531			15,957,676			54,846,039
Revaluations		5,127,847			760,177			—			5,888,024
Depreciation charge for the year		(594,817	)		(352,440	)		—			(947,257	)
Transfer of net deferred financing costs		—			—			(1,559,247	)		(1,559,247	)

As at 31 December 2005, net of accumulated depreciation		40,368,862			3,463,127			57,881,908			101,713,897

As at 1 January 2005
Cost		—			3,984			43,483,479			43,487,463
Accumulated depreciation		—			(1,125	)		—			(1,125	)

Net carrying amount		—			2,859			43,483,479			43,486,338

As at 31 December 2005 Cost or fair value		40,963,679			3,816,692			57,881,908			102,662,279
Accumulated depreciation		(594,817	)		(353,565	)		—			(948,382	)

Net carrying amount		40,368,862			3,463,127			57,881,908			101,713,897

Construction in progress represents costs incurred in construction of nine properties in development or pre-development. Costs to complete construction of the nine facilities are estimated to be €189 million.

The Partnership engaged Savills Commercial Ltd, an accredited independent valuer, to provide an opinion of the fair value of each of the five communities that were operating as at 31 December 2005, on a freehold basis as a fully equipped operational entity having regard to trading potential in existing use and present condition subject to the management contract in place. Fair value was determined using a discounted cash flow method of valuation assuming reasonable trade build up to future stabilization. Stabilization is generally considered to be the date at which a community is 95% occupied which usually occurs 12 to 18 months after opening. The date of the valuation was 31 December 2005.

177

PS Germany Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)


5.	Affiliate transactions

The consolidated financial statements include the financial statements of the Partnership and the subsidiary undertakings listed in the following table, all drawn up to 31 December 2007:


	Country of	% equity Interest
Name	Incorporation	2007		2006

PS Assisted Living SARL	Luxembourg		100		100
Sunrise Properties Germany GmbH	Germany		100		100
PSRZ (Germany) GP GmbH	Germany		100		100
General Partners:
PSRZ Klein Flottbek GmbH	Germany		100		100
PSRZ Reinbek GmbH	Germany		100		100
PSRZ Villa Camphausen GmbH	Germany		100		100
PSRZ Frankfurt-Westend GmbH	Germany		100		100
PSRZ Oberursel GmbH	Germany		100		100
PSRZ Wiesbaden GmbH	Germany		100		100
PSRZ Hannover GmbH	Germany		100		100
PSRZ Munchen-Thalkirchen GmbH	Germany		100		100
PSRZ Konigstein GmbH	Germany		100		100
PSRZ Meerbusch GmbH	Germany		100		100
PSRZ Ratingen-Hosel GmbH	Germany		100		100
PSRZ Bad Soden GmbH	Germany		100		100
Property Companies:
Sunrise Klein Flottbek Senior Living GmbH & Co. KG	Germany		94		94
Sunrise Reinbek Senior Living GmbH & Co. KG	Germany		94		94
Sunrise Villa Camphausen Senior Living GmbH & Co. KG	Germany		94		94
Sunrise Frankfurt-Westend Senior Living GmbH & Co. KG	Germany		94		94
Sunrise Oberursel Senior Living GmbH & Co. KG	Germany		94		94
Sunrise Wiesbaden Senior Living GmbH & Co. KG	Germany		94		94
Sunrise Hannover Senior Living GmbH & Co. KG	Germany		94		94
Sunrise Munchen-Thalkirchen Senior Living GmbH & Co. KG	Germany		94		94
Sunrise Konigstein Senior Living GmbH & Co. KG	Germany		94		94
Sunrise Meerbusch Senior Living GmbH & Co. KG	Germany		94		94
Sunrise Ratingen-Hosel Senior Living GmbH & Co. KG	Germany		94		94
Sunrise Bad Soden Senior Living GmbH & Co. KG	Germany		94		94
Operating Companies:
Sunrise Klein Flottbek GmbH	Germany		100		100
Sunrise Reinbek GmbH	Germany		100		100
Sunrise Villa Camphausen GmbH	Germany		100		100
Sunrise Frankfurt-Westend GmbH	Germany		100		100
Sunrise Oberursel GmbH	Germany		100		100
Sunrise Wiesbaden GmbH	Germany		100		100
Sunrise Hannover GmbH	Germany		100		100
Sunrise Munchen-Thalkirchen GmbH	Germany		100		100
Sunrise Konigstein GmbH	Germany		100		100

PS Germany (Jersey) GP Limited is the ultimate controlling party of the Partnership through the governance of the Board of Directors and Executive Committee. The Board of Directors is appointed by SHIP and Sunrise. The Board of Directors appoints the Executive Committee. All actions of the Executive Committee require the unanimous approval of all members.

178

PS Germany Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

Other related parties

The following table provides the closing balances for transactions which have been entered into with related parties for the relevant financial year.


	2007		2006
	€		€

Amounts due from other related parties
General PartnerPS Germany (Jersey) GP Limited		40,853		40,853
Care Companies:
Sunrise Reinbek Pflege GmbH		1,388,936		577,028
Sunrise Klein Flottbek Pflege GmbH		984,301		787,799
Sunrise Villa Camphausen Pflege GmbH		704,803		41,927
Sunrise Frankfurt-Westend Pflege GmbH		630,165		8,399
Sunrise Oberursel Pflege GmbH		375,574		48,685
Sunrise Wiesbaden Pflege GmbH		136,448		—
Sunrise Munchen-Thalkirchen Pflege GmbH		105,661		—
Sunrise Hannover Pflege GmbH		24,273		—

		4,391,014		1,504,691

Amounts due to other related parties Sunrise and its wholly owned subsidiaries		16,430,307		16,809,312

		16,430,307		16,809,312

Sunrise and its wholly owned subsidiaries

Subsidiaries of the Partnership have entered into management and development agreements with Sunrise Senior Living Germany GmbH (SSL Germany), a wholly owned subsidiary of Sunrise, to provide development, design, construction, management, and operational services relating to the facilities in Germany. The development agreements commenced during 2002 and have or will terminate when the facilities open. The management agreements begin when the facilities open and will terminate fifteen years after the facility opens.

Under the development agreements, SSL Germany, as developer of the properties, will receive development fees equal to 4% of total project costs for each facility and may be eligible to receive a performance fee equal to 1% of total project costs, if certain criteria are met. Total development fees incurred and capitalised by the Partnership in 2007 were €1,492,881 (2006 — €2,940,527) (2005 — €3,864,062).

Under the management agreements, SSL Germany, as manager of the properties, will receive management fess equal to 5% — 7% of revenues based on facility occupancy levels. Total management fees incurred by the Partnership in 2007 were €313,560 (2006 — €139,708) (2005 — €43,073).

The Partnership has an amount due to Sunrise and its wholly owned subsidiaries of €16,430,307 as of 31 December 2007 (2006 — €16,809,312). This payable relates to the above described transactions as well as other development costs paid by Sunrise on behalf of the Partnership. This payable is due on demand and is non-interest bearing.

General Partner

The General Partner is responsible for managing the Partnership. The Partnership has an amount due from the General Partner of €40,853 as of 31 December 2007 (2006 — €40,853). This receivable relates to costs paid by the Partnership on behalf of the General Partner. This receivable is due on demand and is non-interest bearing.

179

PS Germany Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

Care Companies

Upon opening of each facility, each of the German Operating Companies has entered into a Service Agreement with their respective Care Companies, wholly owned subsidiaries of Sunrise, whereby the Care Company will provide emergency resident care services for the residents residing in a portion of the facility. Total amounts paid to the Care Companies in 2007 were €401,414 (2006 — €175,490) (2005 — €51,215), representing the net profit on the services provided. In addition under a second Service Agreement the Operating Company will provide non-care resident services for the residents residing in a portion of the facility. Total fees received by the Operating Companies in 2007 were €1,033,587 (2006 — €346,683) (2005 — €68,186) representing the net profit on the services provided.

Rent receivable and rental income

Upon the opening of each facility, each of the Care Companies enters into subleases for a portion of each facility under a twenty-five year sublease with their respective Operating Company. Total rental income received by the Partnership in 2007 was €4,673,335 (2006 — €2,394,728) (2005 - €1,013,166). The subleases may include an abatement of all or a portion of the first year’s rent. The excess of rents accrued over the amounts contractually due pursuant to the underlying leases is recorded as rent receivable on the consolidated balance sheet.

Future minimum lease payments to be received under eight subleases as of 31 December 2007 are as follows:


	€

2008		5,417,734
2009		5,417,734
2010		5,417,734
2011		5,417,734
2012		5,417,734
Thereafter		100,239,754

		127,328,424

Further, rent receivable, which represents the excess of the rent income accrued over the amount contractually due, will be paid commencing from the second year of the lease and will be fully paid by the last year of the lease. As of 31 December 2007, €118,031 (2006 — €59,717) of the rent receivable will be received in the next 12 months. Total rent receivable in 2007 was €4,454,895 (2006 — €2,298,332) (2005 — 876,389).

Participation rights

A subsidiary of the Partnership entered into Participation Rights Agreements with nine of the Care Companies. These agreements grant the Partnership a share in the profits of the Care Companies. The Partnership paid €100,000 in 2007, €300,000 in 2006 and €500,000 in 2005 (€100,000 to each Care Company), the nominal value of the Participation Rights, which will be repaid at the end of the Participation Rights Agreement. These agreements will terminate in accordance with the terms of the Participation Rights Agreements. The share of profits received by the Partnership in 2007 was €nil (2006 — €nil) (2005 — €nil). In June 2008, the Participation Rights were repaid.

Partner loan

180

PS Germany Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

Notes payable to affiliates

In December 2005, a subsidiary of the Partnership entered into a subordinate loan agreement with Sunrise LP to fund the operating deficits of the facilities up to €10 million. Interest accrues at EURIBOR plus 4.25% on the subordinated debt and the debt matures on the earlier of the date the construction loans terminate or five years from the date of the subordinate loan agreement. There was €10,469,296 outstanding at 31 December 2007 including accrued interest of €469,296 (2006 — €3,661,206 including accrued interest of €172,026) (2005 — €1,775,736 including accrued interest of €nil).

Key management personnel

A director of certain subsidiaries of the Partnership is a partner in a law firm that provides legal services to the Partnership. During 2007, the Partnership paid fees to this law firm of €100,757 (2006 — €267,584) (2005 — €72,115). In December 2007, this director resigned from the Partnership.


6.	Accrued expenses

Accrued expenses consist of the following:


	2007		2006
	€		€

Contractor accruals		24,734		126,386
Professional fee accruals		806,486		553,374
Interest payable on mortgage debt		467,263		79,005
Other accrued expenses		402,988		300,269

		1,701,471		1,059,034

181

PS Germany Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)


7.	Long-term debt and commitments

The Partnership obtained commitments for land loans, construction loans and revolving loans of up to €193.9 million to fund nine facilities and one parcel of undeveloped land. The loans are for terms ranging from two to seven years and are secured by the facilities. Advances under the loans bear interest of EURIBOR plus 1.125% to EURIBOR plus 3.25%. There was €176,097,544 outstanding at 31 December 2007 (2006 — €110,293,610). These amounts are net of finance costs of €2,084,076 at 31 December 2007 (2006 — €2,050,705). Land loans maturing during 2008 are expected to be re-financed with construction loans.

Principal maturities of long-term debt as of 31 December 2007 are as follows:


					2007		2006
Current	Effective Interest Rate%		Maturity		€		€

€1,202,500 bank loan		2.25 + EURIBOR		2008		1,202,500		1,189,090
€2,358,100 bank loan		3.25 + EURIBOR		2008		515,840		403,000
€13,761,900 bank loan		3.25 + EURIBOR		2008		2,000,000		—

						3,718,340		1,592,090

Non-current
€17,304,415 bank loan		2.25 + EURIBOR		2009		—		16,322,065
€2,440,000 bank loan		2.25 + EURIBOR		2010		—		2,312,738
€2,535,304 bank loan		2.25 + EURIBOR		2010		—		2,688,453
€2,786,390 bank loan		2.50 + EURIBOR		2010		—		2,167,896
€2,926,074 bank loan		2.50 + EURIBOR		2010		—		2,632,437
€18,494,696 bank loan		2.25 + EURIBOR		2010		—		15,899,508
€19,575,100 bank loan		2.50 + EURIBOR		2010		—		14,716,980
€19,969,848 bank loan		2.50 + EURIBOR		2010		—		16,333,768
€2,358,100 bank loan		3.25 + EURIBOR		2008 - 2011		1,036,260		1,552,100
€3,317,603 bank loan		1.125 - 2.00 + EURIBOR		2011		2,472,894		420,714
€3,380,292 bank loan		1.125 - 2.00 + EURIBOR		2011		2,565,010		424,989
€13,761,900 bank loan		3.25 + EURIBOR		2008 - 2011		10,340,239		13,210,497
€16,899,403 bank loan		1.125 - 2.00 + EURIBOR		2011		15,125,874		4,502,554
€21,062,550 bank loan		1.125 - 2.00 + EURIBOR		2011		18,574,495		7,474,486
€21,613,301 bank loan		1.35 - 2.25 + EURIBOR		2011		18,957,299		8,042,335
€2,992,567 bank loan		1.35 - 2.25 + EURIBOR		2012		1,730,797		—
€3,961,848 bank loan		2.75 + EURIBOR		2012		3,944,845		—
€4,230,775 bank loan		2.75 + EURIBOR		2012		4,212,618		—
€4,239,762 bank loan		2.75 + EURIBOR		2012		4,221,566		—
€4,289,330 bank loan		1.125 - 2.00 + EURIBOR		2012		1,327,079		—
€4,520,586 bank loan		2.75 + EURIBOR		2012		4,455,250		—
€15,223,829 bank loan		2.75 + EURIBOR		2012		15,204,428		—
€16,799,225 bank loan		2.75 + EURIBOR		2012		16,727,128		—
€17,032,444 bank loan		1.125 - 2.00 + EURIBOR		2012		14,586,650		—
€18,399,642 bank loan		2.75 + EURIBOR		2012		18,320,677		—
€18,656,160 bank loan		2.75 + EURIBOR		2012		18,576,095		—

						172,379,204		108,701,520

182

PS Germany Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

€1,202,500 bank loan

This loan is secured by land and is repayable in full in December 2008. In December 2007, the maturity date was extended to December 2008.

€2,358,100 bank loan

This loan is secured by facility and has quarterly payments with the balance repayable in June 2009.

€13,761,900 bank loan

This loan is secured by the facility and has quarterly payments beginning June 2009 and the balance repayable in March 2011. In accordance with the loan agreement, additional quarterly principal payments of €500,000 are made if the Debt to Net Operating Income ratio exceeds 8.25 beginning January 2007 or exceeds 8.0 beginning July 2007. Total principal payments made in 2007 were €1,000,000. The Partnership paid €500,000 in the first quarter of 2008 and it is anticipated the Partnership will be required to make the €500,000 principal payments for each of the remaining quarters in 2008.

€17,304,415 bank loan

This loan was secured by the facility and was repaid in full in April 2007 upon refinancing of the debt by the Partnership.

€2,440,000 bank loan

This loan was secured by the facility and was repaid in full in April 2007 upon refinancing of the debt by the Partnership.

€2,535,304 bank loan

This loan was secured by the facility and was repaid in full in April 2007 upon refinancing of the debt by the Partnership.

€2,786,390 bank loan

This loan was secured by the facility and was repaid in full in April 2007 upon refinancing of the debt by the Partnership.

€2,926,074 bank loan

This loan was secured by the facility and was repaid in full in April 2007 upon refinancing of the debt by the Partnership.

€18,494,696 bank loan

This loan was secured by the facility and was repaid in full in April 2007 upon refinancing of the debt by the Partnership.

€19,575,100 bank loan

This loan was secured by the facility and was repaid in full in April 2007 upon refinancing of the debt by the Partnership.

€19,969,848 bank loan

This loan was secured by the facility and was repaid in full in April 2007 upon refinancing of the debt by the Partnership.

€3,317,603 bank loan

183

PS Germany Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

This loan is secured by the facility and is repayable in full in December 2011.

€3,380,292 bank loan

This loan is secured by the facility and is repayable in full in November 2011.

€16,899,403 bank loan

This loan is secured by the facility and is repayable in full in October 2011.

€21,062,550 bank loan

This loan is secured by the facility and is repayable in full in December 2011.

€21,613,301 bank loan

This loan is secured by the facility and is repayable in full in March 2011.

€2,992,567 bank loan

This loan is secured by the facility and is repayable in full in March 2012.

€3,961,848 bank loan

This loan is secured by the facility and is repayable in full in April 2012.

€4,230,775 bank loan

This loan is secured by the facility and is repayable in full in April 2012.

€4,239,762 bank loan

This loan is secured by the facility and is repayable in full in April 2012.

€4,289,330 bank loan

This loan is secured by the facility and is repayable in full in July 2012.

€4,520,586 bank loan

This loan is secured by the facility and is repayable in full in April 2012.

€15,223,829 bank loan

This loan is secured by the facility and is repayable in full in April 2012.

€16,799,225 bank loan

This loan is secured by the facility and is repayable in full in April 2012.

€17,032,444 bank loan

This loan is secured by the facility and is repayable in full in July 2012.

€18,399,642 bank loan

This loan is secured by the facility and is repayable in full in April 2012.

€18,656,160 bank loan

This loan is secured by the facility and is repayable in full in April 2012.

184

PS Germany Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

Debt Service Reserve

In April 2007, the Partnership refinanced eight construction loans relating to four of the facilities. In accordance with the new loan agreements, the Partnership was required to open a Debt Service Reserve Account held by the Lender. These funds will be advanced to the Partnership when a debt service ratio of not less than 1.0 to 1.0 has been achieved as of 28 February 2009 and a debt service ratio of not less than 1.25 to 1.0 has been achieved as of 28 February 2010. If the debt service ratios are not achieved, the Partnership will be required to make principal payments. As of 31 December 2007, total funds in the Debt Service Reserve Account were €5,737,273, which is reflected as restricted cash on the balance sheet.

Commitments

Concurrent with the Partnership entering into the loan agreements with the lenders, Sunrise has also entered into certain guarantee agreements with the lenders related to construction cost overruns and operating deficits for which Sunrise has been paid a fee by the Partnership equal to a percentage of the loan amount. As of 31 December 2007, total fees paid and capitalized by the Partnership were €1,865,100.

The Cost Overrun Guarantees commence when construction of the facility commences and terminate when all obligations related to the construction of the facility have been satisfied. Under the Cost Overrun Guarantees, Sunrise agrees to immediately make available to the Partnership funds to cover any cost overruns incurred during the period of construction. These funds are generally advanced to the Partnership as non-interest bearing and subordinate to the claims of the primary lender.

The Operating Deficit Guarantees commence when the facility opens and terminate when the third party debt is paid in full for loans with principal balances of €101,548,327, with the following exception. The Operating Deficit Guarantees for loans with principal balances of €76,633,293 may be terminated by the lender if the Interest Cover Ratio and Debt Service Cover Ratio equals or exceeds the benchmarks determined by the Guarantee Agreements for 12 consecutive months. Under the Operating Deficit Guarantees, Sunrise agrees to immediately make available to the Partnership funds to cover any operating deficits of the facility. These funds are generally advanced to the Partnership as non-interest bearing and subordinate to the claims of the primary lender. As discussed in note 5, Sunrise LP has entered into a subordinate loan agreement of up to €10.0 million for the funding of operating deficits of the facilities. All operating deficit funding in excess of €10.0 million has been recorded as part of the Payables due to affiliates balance as at 31 December 2007.


8.	Income taxes

The Partnership is not a taxable entity since attributes of income and loss pass through pro rata to the partners on their respective income tax returns in accordance with the Partnership Agreement. However, the operating companies and property companies are subject to German income tax.

Major components of income for the years ended 31 December are as follows:

��


	2007			2006			2005
	€			€			€
							Unaudited

Partnership income		4,819,612			3,805,979			2,402,331
Operating and property company loss		(88,808,580	)		(26,938,455	)		(7,664,935	)

Consolidated net loss		(83,988,968	)		(23,132,476	)		(5,262,604	)

185

PS Germany Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

The operating and property companies had the following deferred tax assets and liabilities at 31 December:


	2007			2006
	€			€

Deferred tax assets
Net operating losses for Operating and Property Companies		18,392,000			13,441,272
Negative fair value movement on property and equipment		19,629,212			2,835,359

Total deferred tax assets		38,021,212			16,276,631

Deferred tax liabilities
Property and equipment		(517,682	)		(338,970	)
Rent abatement		(1,183,018	)		(606,757	)
Facility development and operating expense		(4,691,445	)		(3,846,626	)
Deferred finance cost		(680,290	)		(180,778	)

Total deferred tax liabilities		(7,072,435	)		(4,973,131	)

Net deferred tax asset		30,948,777			11,303,500

As at 31 December 2007 the operating companies and property companies had combined accumulated net operating losses of approximately €69,666,665 (2006 — €50,913,909) (2005 — €24,555,458) which according to German tax laws can be carried forward indefinitely for offset against future taxable profits of the companies in which the losses arose. At the applicable statutory tax rate of 26.4% for 2007, 2006 and 2005 this would create a long-term deferred tax asset of €18,392,000 at 31 December 2007 (2006 — €13,441,272).

Additionally, a negative fair value charge taken for accounting purposes in 2007 in the amount of €63,613,081 (2006 — €10,739,995) would create a deferred tax asset of €19,629,212 (2006 — €2,835,359) at the above tax rate.

On the other hand, the deferred tax liabilities outlined above (depreciation, rent abatement, development and operating expenses, and deferred finance cost) in the amount of €26,789,529 at 31 December 2007 (2006 — €18,837,616) at the applicable statutory tax rate of 26.4% would create a long-term deferred tax liability of €7,072,435 at 31 December 2007 (2006 — €4,973,131). This long-term deferred tax liability will reduce the long-term deferred tax asset mentioned above, thus the net long-term deferred tax asset is €30,948,776 at 31 December 2007 (2006 — €11,303,500).

Deferred tax assets have not been recognised in respect of these losses as they may not be used to offset taxable profits that may arise elsewhere in the group and there can be no assurance that the subsidiary companies, in which the losses have arisen, will generate profits in future years.

Furthermore, the German operating and property entities are trade tax exempt. However, the German holding company is subject to the trade tax, but does not generate trade taxable income. The trade tax applicable statutory tax rate is 12% (after taking into consideration that the trade tax paid is a deduction of both the German corporate tax and trade tax base) for 2007 and 2006. The German holding company has a trade tax net operating loss of €82,345,466 as of 31 December 2007 (2006 — €26,037,021). However, due to the business model it is unlikely that these losses could be used in the future.

Accordingly, no provision for income taxes has been included in these financial statements, and there are no current or deferred income taxes recognised in the financial statements.


9.	Partners’ capital

186

PS Germany Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

to transact business and sign documents in the Partnership’s name. The General Partner must obtain the approval of its Board of Directors for certain major actions as defined in the Shareholders’ Agreement.

A portion of Sunrise LP contributions is made directly to companies owned by the Partnership. The Partnership is arranged such that each partner’s capital account is increased by its proportionate share of net income or any additional capital contributions and is decreased by its proportionate share of net losses or the fair value of any property distributed to such partner. Cash available from operations and cash available from capital transactions shall be distributed to the partners and partnership interests in the order defined in the Partnership Agreement. There is no obligation of the Partnership to return the partners’ capital contributions other than as specified in the Partnership Agreement. A portion of Sunrise LP contributions and profit share is disclosed as minority interest in the balance sheet. The total of this and the balance attributable to Sunrise LP in the capital account is 20% of the Partnerships’ assets.

The partners have agreed to contribute €67,000,000 to the Partnership, of which €50,463,173 has been funded through to 31 December 2007.

Activity in the individual partners’ capital accounts was as follows:


	Sunrise LP			SHIP			SunCo		Total
	€			€			€		€

Balance at 1 January 2005 —unaudited		2,586,532			15,251,704			1		17,838,237
Contributions		2,415,761			13,095,428			—		15,511,189
Net loss for the year		(862,662	)		(4,399,942	)		—		(5,262,604	)
Asset revaluation reserve		1,177,605			4,710,419			—		5,888,024

Balance at 31 December 2005 —unaudited		5,317,236			28,657,609			1		33,974,846
Contributions		2,017,006			12,023,074			—		14,040,080
Net loss for the year		(4,010,292	)		(19,122,184	)		—		(23,132,476	)
Asset revaluation reserve		(1,177,605	)		(4,710,419	)		—		(5,888,024	)

Balance at 31 December 2006		2,146,345			16,848,080			1		18,994,426
Contributions		54,000			—			—		54,000
Net loss for the year		(15,561,886	)		(68,427,082	)		—		(83,988,968	)
Foreign currency translation		(109,081	)		(436,324	)		—		(545,405	)

At 31 December 2007		(13,470,622	)		(52,015,326	)		1		(65,485,947	)


10.	Financial risk management objectives and policies

Interest rate risk

The main risk arising from the Partnership’s long-term debt with floating interest rates is cash flow interest rate risk. The interest rates on these loans are all EURIBOR based plus a margin. The margin tends to be the highest during the construction phase, then is reduced during thelease-up phase and is reduced further once a facility reaches stabilization, as defined in the loan documents. The Partnership has not yet utilised hedging instruments to reduce its exposure to cash flow interest rate risk, but may do so in the future.

The subordinate loan with Sunrise LP will be used to fund operating deficits including interest expense on long-term debt.

The Partnership estimates that the fair value of its long-term floating rate debt is approximately equal to its carrying value at 31 December 2007.

187

PS Germany Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

At 31 December 2007, the Partnership had approximately €178 million of floating-rate debt that has not been hedged. Debt incurred in the future also may bear interest at floating rates. Therefore, increases in prevailing interest rates could increase our interest payment obligations, which would negatively impact earnings. For example, a one-percent change in interest rates would increase or decrease annual interest expense by approximately €1.8 million based on the amount of floating-rate debt that was not hedged at 31 December 2007.

The table below summarises the Partnership’s financial liabilities at 31 December based on contractual undiscounted payments, including interest.


	Year Ended 31 December 2007
			Less		Three
	On		Than Three		to Twelve		One to		More Than
	Demand		Months		Months		Five Years		Five Years		Total
	€		€		€		€		€		€

Interest bearing loans and borrowings		—		3,183,097		10,751,790		214,889,168		—		228,824,055
Trade payables		442,405		—		—		—		—		442,405
Accrued expenses		—		1,701,471		—		—		—		1,701,471
Partner loan		—		—		—		2,010,000		—		2,010,000

		442,405		4,884,568		10,751,790		216,899,168		—		232,977,931


	Year Ended 31 December 2006
			Less		Three
	On		Than Three		to Twelve		One to		More Than
	Demand		Months		Months		Five Years		Five Years		Total
	€		€		€		€		€		€

Interest bearing loans and borrowings		—		1,724,330		6,362,080		130,190,926		—		138,277,336
Trade payables		268,607		—		—		—		—		268,607
Accrued expenses		—		1,059,034		—		—		—		1,059,034
Partner loan		—		—		—		2,010,000		—		2,010,000

		268,607		2,783,364		6,362,080		132,200,926		—		141,614,977

Credit risk

Capital management

The primary objective of the Partnership’s capital management is to permit the acquisition and development of approximately twenty-six facilities.

To maintain the capital structure, the Partnership will require additional capital contributions from Sunrise LP and SHIP in accordance with the Limited Partnership agreement. Capital contributions for initial investment approval projects are made pursuant to the initial investment proposal approved budget. Capital contributions for final investment approved projects are made pursuant to the approved development budget. Capital contributions are also made for initial site investigation costs as well as other expenses, fees and liabilities that the Partnership may occur. No changes were made in the objectives, policies or processes during the year ended 31 December 2007.

188

PS Germany Investment (Jersey) Limited Partnership

Notes to the Consolidated Financial Statements — (Continued)

The following table provides the detail of the capital contributions made for the relevant financial year:


	2007		2006
	€		€

General partnership expenses		—		25,184
Initial investment approved projects:
Sunrise Meerbusch Senior Living GmbH & Co. KG		—		(75,000	)
Sunrise Ratingen-Hosel Senior Living GmbH & Co. KG		—		75,000
Final investment approved projects:
Sunrise Frankfurt-Westend Senior Living GmbH & Co. KG		6,000		—
Sunrise Hannover Senior Living GmbH & Co. KG		6,000		2,429,197
Sunrise Klein Flottbek Senior Living GmbH & Co. KG		6,000		—
Sunrise Konigstein Senior Living GmbH & Co. KG		6,000		4,338,537
Sunrise Munchen-Thalkirchen Senior Living GmbH & Co. KG		6,000		2,994,568
Sunrise Oberursel Senior Living GmbH & Co. KG		6,000		—
Sunrise Reinbek Senior Living GmbH & Co. KG		6,000		—
Sunrise Villa Camphausen Senior Living GmbH & Co. KG		6,000		—
Sunrise Wiesbaden Senior Living GmbH & Co. KG		6,000		4,252,594

		54,000		14,040,080


11.	Events after the balance sheet date

On 1 September 2008, Sunrise paid €3,000,000 to SHIP for an option to purchase their entire interest in the Partnership through a two-step transaction. Sunrise expects to exercise their options in 2009. Also on 1 September, Sunrise entered into an agreement with SHIP whereby Sunrise will have the sole right to control certain major decisions of the Partnership, including potential restructuring of loans with lenders and pursuing potential sales of the nine communities and the one parcel of undeveloped land in the Partnership.

189

Part IV


Item 15.	Exhibits and Financial Statement Schedules (As Amended)

(a) List of documents filed as part of this Annual Report onForm 10-K:

(1) Financial statements:


	Page

Sunrise Senior Living, Inc.
Report of Independent Registered Public Accounting Firm		35
Consolidated Balance Sheets		36
Consolidated Statements of Income		37
Consolidated Statements of Changes in Stockholders’ Equity		38
Consolidated Statements of Cash Flows		39
Notes to Consolidated Financial Statements		40
PS UK Investment (Jersey) LP
Report of Independent Auditors		94
Consolidated Income Statement		95
Consolidated Balance Sheet		96
Consolidated Statement of Changes in Partners Capital		97
Consolidated Statement of Cash Flows		98
Notes to Consolidated Financial Statements		99
AL US Development Venture, LLC
Independent Auditors’ Report		120
Consolidated Balance Sheets		121
Consolidated Statements of Operations		122
Consolidated Statements of Changes in Members’ Capital (Deficit)		123
Consolidated Statements of Cash Flows		124
Notes to Consolidated Financial Statements		125
Sunrise First Assisted Living Holdings, LLC
Independent Auditors’ Report		131
Consolidated Balance Sheets		132
Consolidated Statements of Operations		133
Consolidated Statements of Changes in Members’ (Deficit) Capital		134
Consolidated Statements of Cash Flows		135
Notes to Consolidated Financial Statements		136
Sunrise Second Assisted Living Holdings, LLC
Independent Auditors’ Report		141
Consolidated Balance Sheets		142
Consolidated Statements of Operations		143
Consolidated Statements of Changes in Members’ (Deficit) Capital		144
Consolidated Statements of Cash Flows		145
Notes to Consolidated Financial Statements		146
Metropolitan Senior Housing, LLC
Report of Independent Auditors		151
Consolidated Balance Sheets		152
Consolidated Statements of Operations		153
Consolidated Statements of Changes in Members’ (Deficit) Capital		154
Consolidated Statements of Cash Flows		155
Notes to Consolidated Financial Statements		156
PS Germany Investment (Jersey) LP
Report of Independent Auditors		163
Consolidated Income Statement		164
Consolidated Balance Sheet		165
Consolidated Statements of Changes in Partners’ Capital		166
Consolidated Statements of Cash Flows		167
Notes to Consolidated Financial Statements		168
Sunrise Aston Gardens Venture, LLC*
Sunrise IV Senior Living Holdings*


*		To be filed by amendment as soon as these financial statements become available. See Item 1B, “Unresolved Staff Comments”.

190

(2) Financial Statement Schedules:

All schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable or are included in the consolidated financial statements.

(3) Exhibits:

(b) Exhibits.

Sunrise files as part of this Annual Report onForm 10-K the Exhibits listed on the Exhibit Index.

191

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 15^th day of October, 2008.

SUNRISE SENIOR LIVING, INC.


By:	/s/ Richard J. Nadeau

Richard J. Nadeau

Chief Financial Officer

192

EXHIBIT INDEX


				INCORPORATED BY REFERENCE
Exhibit						Exhibit
Number			Description	Form	Filing Date with SEC	Number


	2	.1	Stock Purchase Agreement dated as of December 30, 2002 by and among Marriott International, Inc., Marriott Senior Holding Co., Marriott Magenta Holding Company, Inc. and Sunrise Assisted Living, Inc.	10-K	March 27, 2003		2	.3

	2	.2	Amendment No. 1 to Stock Purchase Agreement, dated as of March 28, 2003, by and among Marriott International, Inc., Marriott Senior Holding Co., Marriott Magenta Holding Company, Inc. and Sunrise Assisted Living, Inc.	8-K	April 9, 2003		2	.2

	2	.3	Master Agreement (CNL Q3 2003 Transaction) dated as of the 30th day of September, 2003 by and among (i) Sunrise Development, Inc., (ii) Sunrise Senior Living Management, Inc., (iii) Twenty Pack Management Corp., Sunrise Madison Senior Living, L.L.C. and Sunrise Development, Inc. (collectively, as the Tenant), (iv) CNL Retirement Sun1 Cresskill NJ, LP, CNL Retirement Edmonds WA, LP, CNL Retirement Sun1 Lilburn GA, LP and CNL Retirement Sun1 Madison NJ LP, and (v) Sunrise Senior Living, Inc.	8-K	October 15, 2003		2	.4

	2	.4	Securities Purchase Agreement by and among Sunrise Senior Living, Inc., Greystone Partners, Ltd., Concorde Senior Living, LLC, Mahalo Limited, Westport Advisors, Ltd., Greystone Development Company, LLC, Michael B. Lanahan, Paul F. Steinhoff, Jr., Mark P. Andrews and John C. Spooner, dated as of May 2, 2005.	10-Q	August 9, 2005		2	.1

	2	.5	Asset Purchase Agreement by and among Sunrise Senior Living Investments, Inc., Fountains Continuum of Care Inc. and various of its subsidiaries and affiliates, and George B. Kaiser, dated as of January 19, 2005.	10-Q	May 10, 2005		10	.1

	2	.6	Facilities Purchase and Sale Agreement by and among Sunrise Senior Living Investments, Inc., and Fountains Charitable Income Trust and various of its subsidiaries and affiliates, dated as of January 19, 2005.	10-Q	May 10, 2005		10	.2

	2	.7	Purchaser Replacement and Release Agreement by and among Sunrise Senior Living, Inc. and various of its subsidiaries and affiliates and Fountains Charitable Income Trust and various of its subsidiaries and affiliates, dated as of February 18, 2005.	10-Q	May 10, 2005		10	.3

	2	.8	Agreement and Plan of Merger, dated as of August 2, 2006, by and among Sunrise Senior Living, Inc., a newly-formed indirect wholly owned subsidiary of Sunrise and Trinity Hospice, Inc., American Capital Strategies, Ltd. and certain affiliates of KRG Capital Partners, LLC, as the principal stockholders of Trinity Hospice, Inc.	10-K	March 24, 2008		2	.8

	3	.1	Restated Certificate of Incorporation of Sunrise.	S-1	October 8, 1996		3	.1

193


				INCORPORATED BY REFERENCE
Exhibit						Exhibit
Number			Description	Form	Filing Date with SEC	Number


	3	.2	Certificate of Amendment to Restated Certificate of Incorporation of Sunrise regarding name change.	10-Q	August 13, 2003		3	.1

	3	.3	Certification of Elimination of the Series C Junior Participation Preferred Stock of Sunrise Senior Living, Inc.	8-K	April 27, 2006		3	.1

	3	.4	Certification of Designation of the Series D Junior Participating Preferred Stock.	8-K	April 21, 2006		3	.1

	3	.5	Certificate of Amendment to Restated Certificate of Incorporation of Sunrise regarding increase in authorized shares of common stock.	10-K	July 31, 2008		3	.5

	3	.6	Amended and Restated Bylaws of Sunrise, as amended.	8-K	March 18, 2008		3	.1

	4	.1	Form of Common Stock Certificate.	10-K	March 24, 2008		4	.1

	4	.2	Rights Agreement between Sunrise Senior Living, Inc. and American Stock Transfer & Trust Company, as Rights Agent dated April 24, 2006.	8-K	April 21, 2006		4	.1

	10	.1	1995 Stock Option Plan, as amended.+	10-K	March 31, 1998		10	.20

	10	.2	1996 Directors’ Stock Option Plan, as amended.+	10-K	March 31, 1999		10	.36

	10	.3	1996 Non-Incentive Stock Option Plan, as amended.+	10-Q	May 15, 2000		10	.8

	10	.4	1997 Stock Option Plan, as amended.+	10-K	March 31, 1998		10	.25

	10	.5	1998 Stock Option Plan.+	10-K	March 31, 1999		10	.41

	10	.6	1999 Stock Option Plan.+	10-Q	May 13, 1999		10	.1

	10	.7	2000 Stock Option Plan.+	10-K	March 12, 2004		10	.4

	10	.8	2001 Stock Option Plan.+	10-Q	August 14, 2001		10	.15

	10	.9	2002 Stock Option and Restricted Stock Plan.+	10-Q	August 14, 2002		10	.1

	10	.10	2003 Stock Option and Restricted Stock Plan.+	10-Q	August 13, 2002		10	.1

	10	.11	Forms of equity plan amendment adopted on March 19, 2008 regarding determination of option exercise price.+	10-K	July 31, 2008		10	.11

	10	.12	Form of Executive Restricted Stock Agreement.+	10-Q	May 10, 2005		10	.4

	10	.13	Form of Restricted Stock Unit Agreement.+	8-K	March 14, 2006		10	.1

	10	.14	Form of Director Stock Option Agreement.+	8-K	September 14, 2005		10	.2

	10	.15	Form of Stock Option Certificate.+	10-K	March 24, 2008		10	.14

	10	.16	Restricted Stock Agreement by and between Sunrise Senior Living, Inc. and Michael B. Lanahan, dated as of May 10, 2005.+	10-Q	August 9, 2005		10	.2

194


				INCORPORATED BY REFERENCE
Exhibit						Exhibit
Number			Description	Form	Filing Date with SEC	Number


	10	.17	Form of Sunrise Assisted Living Holdings, L.P. Class A Limited Partner Unit Agreement.+	10-K	March 29, 2002		10	.89

	10	.18	Sunrise Employee Stock Purchase Plan, as amended.+	Def 14A	April 7, 2005		B

	10	.19	Sunrise Executive Deferred Compensation Plan, effective June 1, 2001.+	10-Q	August 14, 2001		10	.14

	10	.20	Amendment to Sunrise Assisted Living Executive Deferred Compensation Plan.+	10-Q	August 13, 2003		10	.2

	10	.21	Second Amendment to Sunrise Assisted Living Executive Deferred Compensation Plan.+	10-K	March 24, 2008		10	.20

	10	.22	Third Amendment to Sunrise Assisted Living Executive Deferred Compensation Plan.+	10-K	March 24, 2008		10	.21

	10	.23	Fourth Amendment to Sunrise Assisted Living Executive Deferred Compensation Plan.+	10-K	March 24, 2008		10	.22

	10	.24	Fifth Amendment to Sunrise Assisted Living Executive Deferred Compensation Plan.+	10-K	March 24, 2008		10	.23

	10	.25	Greystone Communities Nonqualified Deferred Compensation Plan.+	10-K	July 31, 2008		10	.25

	10	.26	Bonus Deferral Programs for Certain Executive Officers.+	8-K	March 14, 2006		10	.2

	10	.27	Sunrise Assisted Living, Inc. Long Term Incentive Cash Bonus Plan effective August 23, 2002.+	10-Q	November 13, 2002		10	.1

	10	.28	Amendment 1 to the Sunrise Assisted Living, Inc. Long Term Incentive Cash Bonus Plan.+	10-K	March 16, 2005		10	.32

	10	.29	Sunrise Senior Living, Inc. Senior Executive Severance Plan.+	10-K	March 16, 2006		10	.53

	10	.30	Form of Indemnification Agreement.+	10-K	March 16, 2006		10	.54

	10	.31	Amended and Restated Employment Agreement dated as of November 13, 2003 by and between Sunrise and Paul J. Klaassen.+	10-K	March 12, 2004		10	.1

	10	.32	Amendment No. 1 to Amended and Restated Employment Agreement by and between Sunrise and Paul J. Klaassen.+	10-K	March 24, 2008		10	.30

	10	.33	Employment Agreement by and between Sunrise Senior Living, Inc. and Michael B. Lanahan, dated as of May 10, 2005.+	10-Q	August 9, 2005		10	.1

	10	.34	2007 Non-Employee Director Fees and Other Compensation.+	10-K	July 31, 2008		10	.34

	10	.35	2007 Summary of Certain Compensation Arrangements for Named Executive Officers.+	10-K	July 31,2008		10	.35

195


				INCORPORATED BY REFERENCE
Exhibit						Exhibit
Number			Description	Form	Filing Date with SEC	Number


	10	.36	Master Credit Facility Agreement by and between Sunrise Riverside Assisted Living, L.P., Sunrise Parma Assisted Living, L.L.C., Sunrise Wilton Assisted Living, L.L.C., Sunrise Wall Assisted Living, L.L.C., Sunrise Weston Assisted Living, Limited Partnership and Glaser Financial Group, Inc. dated as of November 29, 2001, as amended.	10-Q	May 14, 2002		10	.6

	10	.37	Credit Agreement by and among Sunrise Senior Living, Inc. and certain subsidiaries, as the Borrowers, the subsidiaries of the Borrower as identified therein, as the Guarantors, Bank of America, N.A., as the Administrative Agent, Swing Line Lender and L/C Issuer, Wachovia Bank, National Association, as Syndication Agent, and other lender parties thereto, dated as of December 2, 2005.	8-K	December 8, 2005		10	.1

	10	.38	Pledge, Assignment and Security Agreement between Sunrise Senior Living, Inc. and Bank of America, N.A., as Administrative Agent, dated as of December 2, 2005.	10-K	March 24, 2008		10	.41

	10	.39	First Amendment to Credit Agreement by and among Sunrise Senior Living, Inc. and certain subsidiaries, as the Borrowers, the subsidiaries of the Borrower as identified therein, as the Guarantors, Bank of America, N.A., as the Administrative Agent, Swing Line Lender and L/C Issuer, and other lender parties thereto, dated as of March 6, 2006.	10-K	March 24, 2008		10	.42

	10	.40	Second Amendment to the Credit Agreement by and among Sunrise Senior Living, Inc. and certain subsidiaries, as the Borrowers, the subsidiaries of the Borrower as identified therein, as the Guarantors, Bank of America, N.A., as the Administrative Agent, Swing Line Lender and L/C Issuer, and other lender parties thereto, dated as of January 31, 2007.	10-K	March 24, 2008		10	.43

	10	.41	Third Amendment to Credit Agreement by and among Sunrise Senior Living, Inc. and certain subsidiaries, as the Borrowers, the subsidiaries of the Borrower as identified therein, as the Guarantors, Bank of America, N.A., as the Administrative Agent, Swing Line Lender and L/C Issuer, and other lender parties thereto, dated as of June 27, 2007.	10-K	March 24, 2008		10	.44

	10	.42	Fourth Amendment to Credit Agreement by and among Sunrise Senior Living, Inc. and certain subsidiaries, as the Borrowers, the subsidiaries of the Borrower as identified therein, as the Guarantors, Bank of America, N.A., as the Administrative Agent, Swing Line Lender and L/C Issuer, and other lender parties thereto, dated as of September 17, 2007.	10-K	March 24, 2008		10	.45

196


				INCORPORATED BY REFERENCE
Exhibit						Exhibit
Number			Description	Form	Filing Date with SEC	Number


	10	.43	Fifth Amendment to Credit Agreement by and among Sunrise Senior Living, Inc. and certain subsidiaries, as the Borrowers, the subsidiaries of the Borrower as identified therein, as the Guarantors, Bank of America, N.A., as the Administrative Agent, Swing Line Lender and L/C Issuer, and other lender parties thereto, dated as of January 31, 2008.	10-K	March 24, 2008		10	.46

	10	.44	Sixth Amendment to Credit Agreement by and among Sunrise Senior Living, Inc. and certain subsidiaries, as the Borrowers, the subsidiaries of the Borrower as identified therein, as the Guarantors, Bank of America, N.A., as the Administrative Agent, Swing Line Lender and L/C Issuer, and other lender parties thereto, dated as of February 19, 2008.	10-K	March 24, 2008		10	.47

	10	.45	Pledge, Assignment and Security Agreement between Sunrise Senior Living, Inc. and Bank of America, N.A., as Administrative Agent, dated as of February 19, 2008.	10-K	March 24, 2008		10	.48

	10	.46	Seventh Amendment to Credit Agreement by and among Sunrise Senior Living, Inc. and certain subsidiaries, as the Borrowers, the subsidiaries of the Borrower as identified therein, as the Guarantors, Bank of America, N.A., as the Administrative Agent, Swing Line Lender and L/C Issuer, and other lender parties thereto, dated as of March 13, 2008.	10-K	March 24, 2008		10	.49

	10	.47	Security Agreement by and among Sunrise Senior Living, Inc. and certain subsidiaries, as the Loan Parties, and Bank of America, N.A., as the Administrative Agent, Swing Line Lender and L/C Issuer, and other lender parties thereto, dated as of March 13, 2008.	10-K	March 24, 2008		10	.50

	10	.48	Eighth Amendment to Credit Agreement by and among Sunrise Senior Living, Inc. and certain subsidiaries, as the Borrowers, the subsidiaries of the Borrower as identified therein, as the Guarantors, Bank of America, N.A., as the Administrative Agent, Swing Line Lender and L/C Issuer, and other lender parties thereto, dated as of July 23, 2008.	10-K	July 31,2008		10	.48

	10	.49	Second Amended and Restated Operating Agreement of Sunrise Second Assisted Living Holdings, LLC dated as of December 20, 2002 by and between Sunrise Assisted Living Investments, Inc. and US Assisted Living Facilities II, Inc.	10-K	March 27, 2003		10	.100

	10	.50	Amended and Restated Master Owner/Manager Agreement dated as of December 20, 2002 by and between Sunrise Second Assisted Living Holdings, LLC, together with its subsidiaries, and Sunrise Assisted Living Management, Inc.	10-K	March 27, 2003		10	.103

197


				INCORPORATED BY REFERENCE
Exhibit						Exhibit
Number			Description	Form	Filing Date with SEC	Number


	10	.51	Limited Liability Agreement of AL U.S. Development Venture, LLC dated as of December 23, 2002 by and between Sunrise Assisted Living Investments, Inc. and AEW Senior Housing Company, LLC.	10-K	March 27, 2003		10	.98

	10	.52	ROFO Agreement dated as of December 23, 2002 by and between AEW Capital Management, L.P., Sunrise Assisted Living, Inc., Sunrise Assisted Living Investments, Inc., Sunrise Assisted Living Management, Inc., and Sunrise Development, Inc.	10-K	March 27, 2003		10	.99

	10	.53	Development Agreement dated as of December 23, 2002 by and between Sunrise Development, Inc. and certain Sunrise affiliates.	10-K	March 27, 2003		10	.102

	10	.54	Operating Deficit Loan Agreement dated as of December 23, 2002 by and between Sunrise Assisted Living Management, Inc. and certain Sunrise affiliates.	10-K	March 27, 2003		10	.104

	10	.55	Pre-Opening Services and Management Agreement dated as of December 23, 2002 by and between Sunrise Assisted Living Management, Inc. and certain Sunrise affiliates.	10-K	March 27, 2003		10	.105

	10	.56	Assumption and Reimbursement Agreement made effective as of March 28, 2003, by and among Marriott International, Inc., Sunrise Assisted Living, Inc., Marriott Senior Living Services, Inc. and Marriott Continuing Care, LLC.	10-Q	May 15, 2003		10	.4

	10	.57	Assumption and Reimbursement Agreement (CNL) made effective as of March 28, 2003, by and among Marriott International, Inc., Marriott Continuing Care, LLC, CNL Retirement Properties, Inc., CNL Retirement MA3 Pennsylvania, LP, and CNL Retirement MA3 Virginia, LP.	10-Q	May 15, 2003		10	.5

	10	.58	Ground Lease, dated June 7, 1994, by and between Sunrise Assisted Living Limited Partnership and Paul J. Klaassen and Teresa M. Klaassen.	S-1	March 20, 1996		10	.16

	10	.59	Termination of Lease Agreement by and between Sunrise Assisted Living Limited Partnership and Paul J. Klaassen and Teresa M. Klaassen, dated as of December 13, 2007.	10-K	March 24, 2008		10	.61

	10	.60	Amended and Restated Ground Lease, dated August 29, 2003, by and between Sunrise Fairfax Assisted Living, L.L.C. and Paul J. Klaassen and Teresa M. Klaassen.	10-K	March 24, 2008		10	.62

	10	.61	Stipulated Final Order of the Delaware Court of Chancery, dated September 5, 2007, settling the litigation previously filed by Millenco, L.L.C. seeking an order from the Court of Chancery of the State of Delaware pursuant to Section 211 of the Delaware General Corporation Law.	8-K	September 10, 2007		10	.1

198


				INCORPORATED BY REFERENCE
Exhibit						Exhibit
Number			Description	Form	Filing Date with SEC	Number


	10	.62	Stipulated Final Order of the Delaware Court of Chancery, dated October 10, 2007, settling certain litigation filed by SEIU Master Trust regarding Sunrise Senior Living Inc.’s 2007 annual meeting of stockholders.	8-K	October 12, 2007		10	.1

	10	.63	Letter dated March 16, 2008 regarding surrender of bonus compensation.+	10-K	March 24, 2008		10	.65

	10	.64	Multifamily Mortgage, Assignment of Rents and Security Agreement.	8-K	May 12, 2008		10	.1

	10	.65	Discount MBS Multifamily Note.	8-K	May 12, 2008		10	.1

	21		Subsidiaries of the Registrant.	10-K	July 31,2008		21

	31	.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	10-K	July 31,2008		31	.1

	31	.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	10-K	July 31,2008		31	.2

	31	.3	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*	N/A	N/A		N/A

	31	.4	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*	N/A	N/A		N/A

	32	.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	10-K	July 31,2008		32	.1

	32	.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	10-K	July 31,2008		32	.2

	32	.3	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*	N/A	N/A		N/A

	32	.4	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*	N/A	N/A		N/A


+		Represents management contract or compensatory plan or arrangement.

*		Filed herewith.

199

Sunrise Senior Living Inactive 10-K/A2007 FY Annual report (amended)