Sunrise Senior Living 10K/A 2008 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, 2008

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

7902 Westpark Drive
McLean, VA		22102

(Address of principal		(Zip Code)
executive offices)

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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation 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 this Form 10-K or any amendment to this Form 10-K. o

Indicate by check marker whether the registrant is a large accelerated filter, an accelerated filter, a non-accelerated filer, or a capital 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 filerþ		Accelerated filero		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller Reporting Companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 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 $22.48 per share on the New York Stock Exchange on June 30, 2008 was $1,016.6 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 50,863,040 at February 20, 2009.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of our 2009 annual meeting proxy statement are incorporated by reference into Part III of this report.

EXPLANATORY NOTE

On March 2, 2009, Sunrise Senior Living, Inc. (the “Company”) filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (the “Original Form 10-K”). At the time of filing of the Original Form 10-K, the Company indicated that (a) it was not then in a position to include in the Original Form 10-K the separate financial statements of the following ventures and (b) it intended to file such financial statements as soon as they became available:

-PS UK Investment (Jersey) LP
- -PS Germany Investment (Jersey) LP
- -AL US Development Venture, LLC
- -Metropolitan Senior Housing, LLC
- -Sunrise Aston Gardens Venture, LLC
- -Sunrise First Assisted Living Holdings, LLC
- -Sunrise Second Assisted Living Holdings, LLC
- -Sunrise IV Senior Living Holdings, LLC

These statements are being included pursuant to Rule 3-09 of Regulation S-X.

This Amendment No. 1 on Form 10-K/A is being filed to amend Item 8 of the Original Form 10-K to provide the separate Rule 3-09 financial statements for each of the above ventures as well as to amend Item 1B, footnotes 11 and 25, Item 10 and the Exhibit Index.

In Item 1B in the Original Form 10-K, we disclosed that we had an unresolved SEC staff comment on our 2007 Form 10-K and our 2007 Form 10-K/A filed in December 2008 with respect to the timing of our recording of the impairment charge for our investment in the Fountains venture. On March 20, 2009, the SEC staff informed us that they did not object to our accounting treatment and that they had no further comments on our 2007 Form 10-K and subsequent amendments.

In the Form 10-K/A, we also revised Note 25, Subsequent Events, to reflect the sale of our Greystone subsidiary, for the Eleventh Amendment to our Bank Credit Facility and the default on a loan to a German community.

On March 18, 2009, we sold our Greystone subsidiary and our interests in Greystone seed capital partnerships to an entity controlled by Michael Lanahan and Paul Steinhoff, two senior executives of the Greystone subsidiary. Total consideration was (i) $2,000,000 in cash at closing; (ii) $5,700,000 in short-term notes; (iii) a $6,000,000 7-year note; (iv) a $2,500,000 note; and (v) 35% of the net proceeds received by the seed capital investors for each of the seed capital interests purchased from the Company.

On March 23, 2009, we entered into the Eleventh Amendment to our Bank Credit Facility. The purpose of the Eleventh Amendment is to provide the parties with an additional period of time to negotiate the terms of a twelfth amendment to the Bank Credit Facility which would comprehensively address any remaining issues between the parties with respect to the Bank Credit Facility through the Bank Credit Facility’s current stated maturity date of December 2, 2009, with the desired objective of obtaining the execution of such twelfth amendment prior to the close of business on April 30, 2009.

The Eleventh Amendment, among other matters, suspends until May 1, 2009 the obligation of the lenders under the Bank Credit Facility to (1) advance any additional proceeds of the loans to the borrowers under the Bank Credit Facility or (2) issue any new letters of credit. However, the lenders agreed to renew certain scheduled outstanding letters of credit in accordance with the annual renewal provisions of such letters of credit. The Eleventh Amendment also waived compliance with certain financial covenants of the Bank Credit Facility through April 29, 2009 and the applicability of certain cross-default provisions through April 30, 2009.

The Eleventh Amendment also permanently reduces the aggregate commitments of the lenders under the Bank Credit Facility from $160 million to $118.0 million (outstanding borrowings of $93.5 million plus outstanding letters of credit of $24.5 million).

The Company previously disclosed in the Original Form 10-K that it believed its expected cash balances and expected cash flow would be sufficient to enable the Company to meet its obligations only through March 31, 2009. Based on revised cash flow forecasts as well as a result of the cash proceeds from the March 18, 2009 sale of the Company’s Greystone subsidiary, the Company currently expects that its cash balances and expected cash flow will be sufficient to operate the Company and meet its obligations through April 30, 2009. However, the Company does not expect to be in compliance with the financial covenants in the Bank Credit Facility on April 30, 2009, which is the day following the date on which the waiver of certain financial covenants set forth in the Bank Credit Facility expires. Unless a subsequent waiver is granted, failure to comply with the financial covenants on April 30, 2009 would constitute an event of default under the Bank Credit Facility that would allow the Lenders to exercise certain remedies after the expiration of any applicable grace period.

On March 6, 2009, we did not make a payment of principal and interest on the loan to one German community and on March 16, 2009 we entered into a Standstill Agreement with this lender.

Item 10 is being amended to provide the current advance notice bylaw provision for shareholder proposals. The Exhibit Index is being amended to include as exhibits (1) Sunrise’s executive deferred compensation plan, effective January 1, 2009; (2) bonus deferral programs for certain executive officers; (3) amendment 2 to Sunrise Senior Living, Inc. long term incentive cash bonus plan; (4) amendment to the Sunrise Senior Living, Inc. senior executive severance plan; (5) consents to the incorporation by reference into the Company’s existing Form S-8 Registration Statements of the audited financial statements included in its 2008 Form 10-K, as amended; and (6) new certifications by its Principal Executive Officer and Principal Financial Officer, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended.

There are no other changes to the Original Form 10-K other than those outlined above. This Amendment does not modify or update disclosures therein in any way other than as outlined above.

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

Item 1B. Unresolved Staff Comments

None.

Item 8. Financial Statements and Supplementary Data (As Amended)


	Page
Sunrise Senior Living, Inc.
Report of Independent Registered Public Accounting Firm		4
Consolidated Balance Sheets		5
Consolidated Statements of Income		6
Consolidated Statements of Changes in Stockholders’ Equity		7
Consolidated Statements of Cash Flows		8
Notes to Consolidated Financial Statements		9

PS UK Investment (Jersey) LP
Report of Independent Auditors		68
Consolidated Income Statement		69
Consolidated Balance Sheet		70
Consolidated Statement of Changes in Partners’ Capital		71
Consolidated Statement of Cash Flows		72
Notes to Consolidated Financial Statements		73

PS Germany Investment (Jersey) LP
Report of Independent Auditors		100
Consolidated Income Statement		101
Consolidated Balance Sheet		102
Consolidated Statements of Changes in Partners’ Capital		103
Consolidated Statements of Cash Flows		104
Notes to Consolidated Financial Statements		105

AL US Development Venture, LLC
Independent Auditors’ Report		129
Consolidated Balance Sheets		130
Consolidated Statements of Operations		131
Consolidated Statements of Changes in Members’ Capital (Deficit)		132
Consolidated Statements of Cash Flows		133
Notes to Consolidated Financial Statements		134

Metropolitan Senior Housing, LLC
Report of Independent Auditors		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

Sunrise Aston Gardens Venture, LLC
Report of Independent Auditors		154
Consolidated Balance Sheets		155
Consolidated Statements of Operations		156
Consolidated Statements of Changes in Members’ Capital (Deficit)		157
Consolidated Statements of Cash Flows		158
Notes to Consolidated Financial Statements		159

Sunrise First Assisted Living Holdings, LLC
Independent Auditors’ Report		169
Consolidated Balance Sheets		170
Consolidated Statements of Operations		171
Consolidated Statements of Changes in Members’ (Deficit) Capital		172
Consolidated Statements of Cash Flows		173
Notes to Consolidated Financial Statements		174

Sunrise Second Assisted Living Holdings, LLC
Independent Auditors’ Report		179
Consolidated Balance Sheets		180
Consolidated Statements of Operations		181
Consolidated Statements of Changes in Members’ (Deficit) Capital		182
Consolidated Statements of Cash Flows		183
Notes to Consolidated Financial Statements		184

Sunrise IV Senior Living Holdings, LLC
Report of Independent Auditors		189
Consolidated Balance Sheets		190
Consolidated Statements of Operations		192
Consolidated Statements of Changes in Members’ (Deficit) Capital		193
Consolidated Statements of Cash Flows		194
Notes to Consolidated Financial Statements		196

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, 2008 and 2007, 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, 2008. 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, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 25 to the accompanying consolidated financial statements, the Company’s Bank Credit Facility expires on April 30, 2009, unless further extended. The Company’s cash balances and expected cash flow are not sufficient to enable the Company to meet its near term obligations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Notes 1, 13 and 25. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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 IssueNo. 06-8,Applicability of the Assessment of a Buyer’s Continuing Investments under FASB Statement No. 66, Accounting for Sales of Real Estate for Condominiums,effective January 1, 2007.

We have also 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, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2009 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

McLean, Virginia

February 27, 2009, except for Paragraphs 4 and 5 of Note 11
and Paragraphs 3 through 6 and Paragraphs 8 and 11 of
Note 25, as to which the date is March 26, 2009

SUNRISE SENIOR LIVING, INC.

CONSOLIDATED BALANCE SHEETS


	December 31,
(In thousands, except per share and share amounts)	2008			2007

ASSETS
Current Assets:
Cash and cash equivalents	$	29,513		$	138,212
Accounts receivable, net		54,842			76,909
Income taxes receivable		30,351			63,624
Due from unconsolidated communities		45,255			61,854
Deferred income taxes, net		25,341			33,567
Restricted cash		37,392			61,999
Assets held for sale		49,076			12,716
Prepaid insurance		8,850			23,720
Prepaid expenses and other current assets		24,288			57,363

Total current assets		304,908			529,964
Property and equipment, net		681,352			656,211
Property and equipment subject to financing, net		—			58,871
Investment in marketable securities		31,080			—
Due from unconsolidated communities		31,693			19,555
Intangible assets, net		70,642			83,769
Goodwill		39,025			169,736
Investments in unconsolidated communities		66,852			97,173
Investments accounted for under the profit-sharing method		22,005			—
Restricted cash		123,772			165,386
Other assets, net		10,228			17,932

Total assets	$	1,381,557		$	1,798,597

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current maturities of long-term debt	$	377,449		$	122,541
Outstanding draws on bank credit facility		95,000			100,000
Accounts payable and accrued expenses		184,144			275,362
Due to unconsolidated communities		914			37,344
Deferred revenue		7,327			9,285
Entrance fees		35,270			34,512
Self-insurance liabilities		35,317			67,267

Total current liabilities		735,421			646,311
Long-term debt, less current maturities		163,682			31,347
Liabilities related to properties accounted for under the financing method		—			54,317
Investment accounted for under the profit-sharing method		8,332			51,377
Guarantee liabilities		13,972			65,814
Self-insurance liabilities		68,858			74,971
Deferred gains on the sale of real estate and deferred revenues		88,706			74,367
Deferred income tax liabilities		28,129			82,605
Other long-term liabilities, net		126,543			133,717

Total liabilities		1,233,643			1,214,826

Minority interests		9,386			10,208
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, 50,872,711 and 50,556,925 shares issued and outstanding, net of 342,525 and 103,696 treasury shares, at December 31, 2008 and 2007, respectively		509			506
Additional paid-in capital		458,404			452,640
Retained (loss) earnings		(327,056	)		112,123
Accumulated other comprehensive income		6,671			8,294

Total stockholders’ equity		138,528			573,563

Commitments and contingencies
Total liabilities and stockholders’ equity	$	1,381,557		$	1,798,597

See accompanying notes

SUNRISE SENIOR LIVING, INC.

CONSOLIDATED STATEMENTS OF INCOME


	Year Ended December 31,
(In thousands, except per share amounts)	2008			2007			2006

Operating revenue:
Management fees	$	139,409		$	127,830		$	117,228
Buyout fees		621			1,626			134,730
Resident fees for consolidated communities		435,580			400,238			379,442
Ancillary fees		54,633			58,645			56,673
Professional fees from development, marketing and other		59,969			38,855			28,553
Reimbursed contract services		1,011,431			956,047			911,979

Total operating revenues		1,701,643			1,583,241			1,628,605
Operating expenses:
Community expense for consolidated communities		335,739			288,180			274,545
Community lease expense		60,145			62,588			59,046
Depreciation and amortization		51,276			52,701			47,687
Ancillary expenses		60,620			68,958			59,029
General and administrative		163,159			181,325			131,473
Venture expense		6,807			7,187			5,516
Development expense		78,305			72,016			63,634
Impairment of goodwill and intangible assets		121,828			—			—
Write-off of abandoned development projects		95,763			28,430			1,329
Impairment of owned communities and land parcels		36,510			7,641			15,049
Accounting Restatement, Special Independent Committee inquiry, SEC investigation and pending stockholder litigation		30,224			51,707			2,600
Restructuring cost		18,065			—			—
Provision for doubtful accounts		22,628			8,910			13,965
Loss on financial guarantees and other contracts		5,022			22,005			89,676
Write-off of unamortized contract costs		—			—			25,359
Reimbursable contract services		1,004,974			956,047			911,979

Total operating expenses		2,091,065			1,807,695			1,700,887

Loss from operations		(389,422	)		(224,454	)		(72,282	)
Other non-operating income (expense):
Interest income		6,600			9,514			9,476
Interest expense		(21,406	)		(6,650	)		(6,194	)
Loss on investments		(7,770	)		—			(5,610	)
Other (expense) income		(21,602	)		(6,089	)		6,706

Total other non-operating (expense) income		(44,178	)		(3,225	)		4,378
Gain on the sale and development of real estate and equity interests		17,374			105,081			51,347
Sunrise’s share of (loss) earnings and return on investment in unconsolidated communities		(13,846	)		108,947			43,702
(Loss) income from investments accounted for under the profit-sharing method		(1,329	)		22			(857	)
Minority interests		8,154			4,470			6,916

(Loss) income before benefit from (provision for) income taxes, discontinued operations and extraordinary loss		(423,247	)		(9,159	)		33,204
Benefit from (provision for) income taxes		43,483			(9,068	)		(17,527	)

(Loss) income before discontinued operations and extraordinary loss		(379,764	)		(18,227	)		15,677
Discontinued operations, net of tax		(37,284	)		(52,048	)		(393	)

(Loss) income before extraordinary loss		(417,048	)		(70,275	)		15,284
Extraordinary loss, net of tax		(22,131	)		—			—

Net (loss) income	$	(439,179	)	$	(70,275	)	$	15,284

Earnings per share data:
Basic net (loss) income per common share
(Loss) income before discontinued operations and extraordinary loss	$	(7.54	)	$	(0.37	)	$	0.32
Discontinued operations, net of tax		(0.74	)		(1.04	)		(0.01	)
Extraordinary loss, net of tax		(0.44	)		—			—

Net (loss) income	$	(8.72	)	$	(1.41	)	$	0.31

Diluted net (loss) income per common share
(Loss) income before discontinued operations and extraordinary loss	$	(7.54	)	$	(0.37	)	$	0.31
Discontinued operations, net of tax		(0.74	)		(1.04	)		(0.01	)
Extraordinary loss, net of tax		(0.44	)		—			—

Net (loss) income	$	(8.72	)	$	(1.41	)	$	0.30

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, 2006		43,453		$	435		$	326,207		$	167,114		$	(12,323	)	$	(569	)	$	480,864
Net income		—			—			—			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		—			—			—			—			—			—			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 from stock-based compensation		—			—			1,940			—			—			—			1,940

Balance at December 31, 2006		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 from stock-based compensation		—			—			2,163			—			—			—			2,163

Balance at December 31, 2007		50,557			506			452,640			112,123			—			8,294			573,563
Net loss		—			—			—			(439,179	)		—			—			(439,179	)
Foreign currency translation income, net of tax		—			—			—			—			—			5,583			5,583
Sunrise’s share of investee’s other comprehensive income		—			—			—			—			—			(7,206	)		(7,206	)

Total comprehensive loss																				(440,802	)

Issuance of restricted stock		165			—			(2	)		—			—			—			(2	)
Forfeiture or surrender of restricted or common stock		(211	)		(1	)		(1,025	)		—			—			—			(1,026	)
Stock option exercises		361			4			4,162			—			—			—			4,166
Stock-based compensation expense		—			—			4,202			—			—			—			4,202
Tax effect from stock-based compensation		—			—			(1,573	)		—			—			—			(1,573	)

Balance at December 31, 2008		50,872		$	509		$	458,404		$	(327,056	)	$	—		$	6,671		$	138,528

See accompanying notes.

SUNRISE SENIOR LIVING, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Year Ended December 31,
(In thousands)	2008			2007			2006

Operating activities
Net (loss) income	$	(439,179	)	$	(70,275	)	$	15,284
Less: Net loss from discontinued operations		37,284			52,048			393
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Extraordinary loss		22,131			—			—
Gain on the sale and development of real estate and equity interests		(17,374	)		(105,081	)		(51,347	)
Loss (income) from investments accounted for under the profit-sharing method		1,329			(22	)		857
Gain from application of financing method		—			—			(1,155	)
Unrealized loss on trading securities		7,770			—			—
Loss on sale of investments		—			—			5,610
Impairment of goodwill and intangible assets		121,828			—			—
Write-off of abandoned development projects		95,763			28,430			1,329
Provision for doubtful accounts		22,628			8,910			13,965
Benefit from deferred income taxes		(46,250	)		(8,854	)		(3,781	)
Impairment of owned communities and land parcels		36,510			7,641			15,049
Loss on financial guarantees and other contracts		5,022			22,005			89,676
Sunrise’s share of loss (earnings) and return on investment in unconsolidated communities		13,846			(108,947	)		(11,997	)
Distributions of earnings from unconsolidated communities		32,736			168,322			66,381
Minority interest in loss of controlled entities		(8,154	)		(4,470	)		(6,916	)
Depreciation and amortization		51,276			52,701			47,687
Write-off of unamortized contract costs		—			—			25,359
Amortization of financing costs, debt discount and guarantee liabilities		3,735			1,051			1,404
Stock-based compensation		3,176			7,020			6,463
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable		15,812			(15,124	)		(23,242	)
Due from unconsolidated senior living communities		(24,278	)		28,111			(83,451	)
Prepaid expenses and other current assets		39,660			(60,282	)		(4,041	)
Captive insurance restricted cash		2,728			(32,930	)		(48,840	)
Other assets		31,120			(35,505	)		6,222
Increase (decrease) in:
Accounts payable, accrued expenses and other liabilities		(76,484	)		127,983			22,204
Entrance fees		758			(3,586	)		913
Self-insurance liabilities		(22,935	)		12,866			30,186
Guarantee liabilities		(21,625	)		(5,829	)		—
Deferred gains on the sale of real estate and deferred revenue		6,788			29,621			983
Net cash (used in) provided by discontinued operations		(19,555	)		32,682			2,316

Net cash (used in) provided by operating activities		(123,934	)		128,486			117,511

Investing activities
Capital expenditures		(177,248	)		(244,803	)		(188,594	)
Acquisitions of business assets		—			(49,917	)		(34,315	)
Net funding for condominium project		(57,935	)		—			—
Dispositions of property		62,853			60,387			83,290
Change in restricted cash		51,778			(21,792	)		(11,428	)
Purchases of short-term investments		(102,800	)		(448,900	)		(172,575	)
Proceeds from short-term investments		63,950			448,900			172,575
Increase in investments and notes receivable		(205,344	)		(183,314	)		(343,286	)
Proceeds from investments and notes receivable		223,424			220,312			376,061
Payments related to Germany venture		(8,531	)		—			—
Investments in unconsolidated communities		(22,929	)		(29,297	)		(77,371	)
Distributions of capital from unconsolidated communities		—			601			5,954
Net cash provided by (used in) discontinued operations		329			(720	)		(69,237	)

Net cash used in investing activities		(172,453	)		(248,543	)		(258,926	)

Financing activities
Net proceeds from exercised options		4,162			—			4
Additional borrowings of long-term debt		210,788			143,564			54,140
Repayment of long-term debt		(18,451	)		(16,105	)		(40,781	)
Net (repayments) borrowings on Bank Credit Facility		(5,000	)		50,000			50,000
Contribution from minority interests		—			—			15,669
Distributions to minority interests		(1,344	)		(1,180	)		(630	)
Financing costs paid		(2,467	)		—			(75	)

Net cash provided by financing activities		187,688			176,279			78,327

Net (decrease) increase in cash and cash equivalents		(108,699	)		56,222			(63,088	)
Cash and cash equivalents at beginning of year		138,212			81,990			145,078

Cash and cash equivalents at end of year	$	29,513		$	138,212		$	81,990

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, 2008, we operated 435 communities, including 391 communities in the United States, 15 communities in Canada, 20 communities in the United Kingdom and nine communities in Germany (including two communities that were closed in January 2009), with a total resident capacity of approximately 54,340. Of the 435 communities we operated at December 31, 2008, 47 were wholly owned, 15 were leased under operating leases, 10 were consolidated as variable interest entities, 203 were owned in unconsolidated ventures and 160 were owned by third parties. We 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 ourselves, 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. 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.

We have reclassified in discontinued operations for all periods presented the operations of two communities which were sold in 2008 and for which we have no continuing involvement and our Trinity subsidiary which ceased operations in December 2008.

The accompanying consolidated financial statements have been prepared on the basis of us continuing as a going concern. As discussed in more detail in note 13, our Bank Credit Facility (the “Facility”) expires on March 30, 2009 unless further extended. At this time, we cannot borrow under the Facility and we have significant debt maturing in 2009 and 2010. We expect that our cash balances and expected cash flow are sufficient to enable us to meet our obligations only through March 31, 2009. These conditions raise substantial doubt about our ability to continue as a going concern.

Because of these factors and our current financial position, we are seeking to preserve cash, reduce our financial obligations and reach negotiated settlements with various creditors to preserve our liquidity. We have also stopped funding certain projects and other obligations, and are seeking waivers with respect to existing defaults under many of our debt obligations to avoid acceleration obligations. Specifically, we have stopped or reduced payments for our German communities, development projects, our Fountains venture and our Aston Gardens venture, each as described in more detail below. We are in the process of discussing a comprehensive restructuring plan with the lenders to our German communities, the lender to our Fountains portfolio, our venture partner in the Fountains portfolio and certain other lenders. For example, we have requested that the lenders to our German communities and the lender for the Fountains portfolio agree not to foreclose on the communities that are collateral for their loans or to commence or prosecute any action or proceeding to enforce any demand for payment by us

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

pursuant to our operating deficit agreements through March 31, 2009. Our lenders to eight of our nine German communities have agreed not to foreclose on the communities that are collateral for their loans or to commence or prosecute any action or proceeding to enforce their demand for payment by us pursuant to our operating deficit agreements until the earliest of the occurrence of certain other events relating to the loans on March 31, 2009. As of February 27, 2009, we have not stopped funding the ninth community as the next payment date is March 6, 2009. We do not intend to make the principal and interest payment due on that date and will seek waivers with respect to this default after that date.

We believe that it will be in the best interests of all creditors to grant such waivers or reach negotiated settlements with us to enable us to continue operating. However there can be no assurance that such waivers will be received or such settlements will be reached. If the defaults are not cured within applicable cure periods, if any, and if waivers or other relief are not obtained, the defaults can cause acceleration of our financial obligations under certain of our agreements, which we may not be in a position to satisfy. There can be no assurance that any of these efforts will prove successful. In the event of a failure to obtain necessary waivers or otherwise achieve a restructuring of our financial obligations, we may be forced to seek reorganization under the U.S. Bankruptcy Code.


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 the Sunrise Captive of $94.4 million and $128.2 million at December 31, 2008 and 2007, respectively, is available to pay claims. The earnings from the investment of the cash of Sunrise Captive are used to reduce future costs of and pay the liabilities of the Sunrise Captive. Interest income in the Sunrise Captive was $3.4 million, $3.5 million and $2.1 million for 2008, 2007 and 2006, 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 collectability, including our collection history and generally 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

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

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, pre-acquisition 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).

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

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

“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. At December 31, 2008, we no longer had any sales transactions accounted for under the financing method.

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 guarantees 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) income 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. At December 31, 2008, we have two transactions accounted for under the profit-sharing method.

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

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

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.

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, 2008, we consolidated eight 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,

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

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 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.

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.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

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, 2008, 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, 2008, 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.

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 re-occupancy 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, 2008 or December 31, 2007.

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 $35.3 million and $34.5 million at December 31, 2008 and 2007, respectively.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

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.

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.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

“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 $62.4 million and $54.6 million at December 31, 2008 and 2007, 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 consolidate 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.

“Ancillary services” is comprised of fees for providing care services to residents of certain communities owned by ventures and fees for providing home health assisted living services.

“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

We record compensation expense for our employee stock options, restricted stock awards, and employee stock purchase plan in accordance with SFAS No. 123(R),Accounting for Stock-Based Compensation(“SFAS 123(R)”). 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

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

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, 2008, 2007 and 2006 was $4.3 million, $4.2 million, and $3.3 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 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, including the operations of two communities which were sold in 2008 and our Trinity subsidiary which ceased operation in December 2008, all of which is included in discontinued operations.

New Accounting Standards

We adopted the provisions of SFAS No. 157,Fair Value Measurements(“SFAS 157”),as of January 1, 2008 for financial instruments. Under SFAS No. 157, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, SFAS 157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels. These levels, in order of highest priority to lowest priority, are described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available.

SFAS 157 was applied prospectively beginning January 1, 2008 and therefore there was no adjustment to our financial statements as a result of adopting SFAS 157.

We adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48,Accounting for Uncertainty in Income Taxes(“FIN 48”), on 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.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

We adopted the FASB’s Emerging Issues Task Force 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”) on January 1, 2007.EITF 06-8 states that in assessing the collectability of the sales price pursuant to paragraph 37 (d) of FAS No. 66, an entity should evaluate the adequacy of the buyer’s initial and continuing investment to conclude that the sales price is collectible in order for profit to be recognized under the percentage-of-completion method. If the initial and continuing investment is not adequate, then the deposit method of accounting should be used. We account for one investment in a condominium venture under the profit sharing method of accounting. We do not apply the percentage-of-completion method of accounting for sales as deposits are fully refundable. There was no adjustment to our financial statements as a result of adopting EITF06-8.

Future Adoption of Accounting Standards

We will adopt SFAS 157 for non-financial assets and non-financial liabilities 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 December 2007, the FASB issued SFAS No. 141 (revised 2007),Business Combinations(“SFAS 141R”). SFAS 141R requires most identifiable assets, liabilities, non-controlling interests, and goodwill acquired in business combinations to be recorded at “full fair value.” Transaction costs will no longer be included in the measurement of the business acquired and instead will be expensed as incurred. SFAS 141R applies prospectively to business combinations and earlier adoption is prohibited. We will adopt SFAS 141R effective January 1, 2009.

In December 2007, the FASB issued SFAS No. 160,Non-controlling Interests in Consolidated Financial Statements — an Amendment of ARB No. 51(“SFAS 160”). SFAS 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 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 160 also includes expanded disclosure requirements regarding the interests of the parent and its non-controlling interest. SFAS 160 is effective as of January 1, 2009. We are currently evaluating the impact that SFAS 160 will have on our financial statements.

In September 2008, the FASB issued FASB Staff PositionNo. FAS 133-1 andFIN 45-4,“Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161”(“FSPFAS 133-1 andFIN 45-4”). FSPFAS 133-1 andFIN 45-4 provides guidance on certain disclosures about credit derivatives and certain guarantees and clarifies the effective date of SFAS 161. We do not expect FSPFAS 133-1 andFIN 45-4, effective January 1, 2009, to have a material impact on our consolidated financial position or results of operations.


3.	Fair Value Measurements

We adopted the provisions of SFAS 157, as of January 1, 2008 for financial instruments. Under SFAS 157, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, SFAS 157 establishes a fair value hierarchy that prioritizes observable and

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

unobservable inputs used to measure fair value into three broad levels. These levels, in order of highest priority to lowest priority, are described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available.

At December 31, 2008, our wholly owned insurance captive held investments in five Student Loan Auction-Rate Securities (“SLARS”), four with a face amount of $8.0 million and one with a face amount of $6.9 million, for a total of $38.9 million. These SLARS are issued by non-profit corporations and their proceeds are used to purchase portfolios of student loans. The SLARS holders are repaid from cash flows resulting from the student loans in a trust estate. The student loans are 98% guaranteed by the Federal government against default. The interest rate for these five SLARS is reset every 7 to 35 days. The interest rates at December 31, 2008 ranged from 1.685% to 5.807%. Recent uncertainties in the credit markets have prevented us and other investors from liquidating our holdings of auction rate securities in recent auctions. We classify our investments in auction rate securities as trading and carry them at fair value. The fair value of the securities at December 31, 2008 was determined to be $31.1 million and we recorded an unrealized loss of $7.8 million for 2008.

Due to the lack of actively traded market data, the valuation of these securities was based on Level 3 unobservable inputs. These inputs include an analysis of sales discounts realized in the secondary market, as well as assumptions about risk after considering recent events in the market for auction rate securities. The discount range of SLARS in the secondary market ranged from 8.0% to 62.5% at December 31, 2008 with an average SLARS discount on closed deals of 10.43% at December 31, 2008.

As discussed in Note 13, we have interest rate caps relating to mortgage debt for 16 of our wholly owned subsidiaries. The fair value of the interest rate caps is an asset of $0.042 million at December 31, 2008. The valuation was based on Level 2 prevailing market data.


4.	Assets Held for Sale

At December 31, 2008 and December 31, 2007, approximately $49.1 million and $12.7 million of assets, respectively, were held for sale. The majority of these assets are undeveloped land parcels and certain condominium units that were acquired through an acquisition. In accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets,we classify an asset as held for sale when all of the following criteria are met:


	•	executive management has committed to a plan to sell the asset;

	•	the asset is available for immediate sale in its present condition;

	•	an active program to locate a buyer and other actions required to complete the sale have been initiated;

	•	the asset is actively being marketed; and

	•	the sale of the asset is probable and it is unlikely that significant changes to the sale plan will be made.

We classify land as held for sale when it is being actively marketed. For wholly owned operating communities, binding purchase and sale agreements are generally subject to substantial due diligence and historically these sales have not always been consummated. As a result, we generally do not believe that the “probable” criteria is met until the community is sold. Upon designation as an asset held for sale, we record the carrying value of the asset at the lower of its carrying value or its estimated fair value, less estimated costs to sell, and we cease depreciation.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)


5.	Allowance for Doubtful Accounts

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


	Accounts			Other
	Receivable			Assets		Total

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

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

Balance December 31, 2007		12,360			8,000		20,360
Provision for doubtful accounts(1)		24,164			—		24,164
Write-offs		(1,491	)		—		(1,491	)

Balance December 31, 2008	$	35,033		$	8,000	$	43,033


(1)		Includes provision associated with discontinued operations.


6.	Property and Equipment

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


	December 31,
	Asset Lives		2008			2007

Land and land improvements		15 years	$	130,806		$	77,709
Building and building improvements		40 years		473,732			337,310
Furniture and equipment		3-10 years		179,635			148,829

				784,173			563,848
Less: Accumulated depreciation				(191,718	)		(157,744	)

				592,455			406,104
Construction in progress				88,897			250,107

Property and equipment, net			$	681,352		$	656,211

Depreciation expense was $40.3 million, $35.2 million and $29.3 million in 2008, 2007 and 2006, respectively, excluding depreciation expense related to properties subject to the deposit method, financing method and profit-sharing method of accounting. See Note 8.

During 2008, we recorded impairment charges of $19.3 million related to five communities in the U.S., $5.2 million related to two communities in Germany and $12.0 million related to land parcels that are no longer expected to be developed. During 2007, we recorded an impairment charge of $7.6 million related to two communities in the U.S. During 2006, we recorded an impairment charge of $15.0 million related to six small senior living communities in the U.S.


7.	Acquisition of 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

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

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 are 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.


8.	Sales of Real Estate

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


	December 31,
	2008			2007		2006

Properties accounted for under basis of performance of services	$	9.6		$	3.6	$	1.8
Properties accounted for previously under financing method		0.5			32.8		—
Properties accounted for previously under deposit method		0.9			52.4		35.3
Properties accounted for under the profit-sharing method		6.7			—		—
Land and community sales		(0.9	)		5.7		5.4
Condominium sales		1.0			—		—
Sales of equity interests and other sales		(0.4	)		10.6		8.8

Total gains on the sale and development of real estate and equity interests	$	17.4		$	105.1	$	51.3

Basis of Performance of Services

During the years ended December 31, 2008, 2007 and 2006, we sold majority membership interests in entities owning partially developed land or sold partially developed land to ventures with four, three and nine underlying communities, respectively, for $78.7 million, $13.9 million and $45.5 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 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 $6.3 million, $1.7 million and $7.7 million were recorded in 2008, 2007 and 2006, respectively. Gains of $9.6 million, $3.6 million and $1.8 million were recognized in 2008, 2007 and 2006, respectively.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

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. Also, as part of the March 2007 transaction, we indemnified the buyer for a period of 12 months against any losses up to $1 million. An additional gain of $0.5 million was recognized in 2008 when the indemnification period expired. No gains were recognized in 2006.

Relevant details are as follows (in thousands):


	December 31,
	2008		2007		2006

Property and equipment subject to financing, net	$	—	$	—	$	62,520
Liabilities relating to properties subject to the financing method		—		—		(66,283	)
Depreciation expense		—		505		1,959
Management fees received		—		230		981

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 allowed 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 totaling approximately $8.7 million was initially deferred and is being recognized using the basis of performance of services method. We recorded $4.7 million of the gain in 2008.

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.

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. In 2008, the buyer reimbursed us for some

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

of the income support payments previously made. We recorded an additional gain of $0.9 million in 2008 relating to these reimbursements.

Relevant details are as follows (in thousands):


	December 31,
	2007		2006

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

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 an 18 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 $28.3 million in 2006 as these guarantees expired.

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

Land and Community Sales

During 2008, 2007 and 2006, we sold four, three and two pieces of undeveloped land, respectively. In addition, we sold two operating communities in 2008. There were no forms of continuing involvement that precluded sale accounting or gain recognition. We recognized (losses) gains of $(0.9) million, $5.7 million and $5.4 million, respectively, related to these land and community sales.

Sales of Equity Interests

During 2008, 2007 and 2006, we sold our equity interest in one, 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 losses or gains on sale of $(0.4) million, $10.6 million and $8.8 million, 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.

During 2008, we completed the recapitalization of a venture with two underlying properties that was initially sold in 2004. As a result of this recapitalization, the guarantees that required us to use the profit-sharing method of accounting for our previous sale of real estate in 2004 were released and we recorded a gain on sale of approximately $6.7 million.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

Relevant details are as follows (in thousands):


	Year Ended December 31,
	2008			2007			2006

Revenue	$	16,635		$	23,791		$	19,902
Expenses		(12,056	)		(17,450	)		(16,528	)

Income from operations before depreciation		4,579			6,341			3,374
Depreciation expense		—			—			—
Distributions to other investors		(5,908	)		(6,319	)		(4,231	)

(Loss) income from investments accounted for under the profit-sharing method	$	(1,329	)	$	22		$	(857	)

Investments accounted for under the profit-sharing method, net	$	13,673		$	(51,377	)	$	(29,148	)
Amortization expense on investments accounted for under the profit-sharing method	$	987		$	1,800		$	1,800

Condominium Sales

In 2006, we sold a majority interest in one condominium venture and one related assisted living venture to third parties. The sales are being accounted for under the profit-sharing method as discussed above. 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 $50.8 million. Of this amount, $10.0 million is recoverable as a loan from the venture and $14.8 million relates to proceeds from the sale of real estate, development fees and pre-opening fees. During 2008, 2007 and 2006, we recorded losses of approximately $2.8 million, $6.0 million and $17.2 million, respectively, due to this commitment. Through December 31, 2008, we have funded a total of $49.8 million to the venture. As of December 31, 2008, the condominium venture had sold 37 units and the residents have moved into the community. In accordance with SFAS 66, all gains realized relating to those sales have been deferred. SFAS 66 does not allow profits associated with condominium sales to be recognized until sufficient units have been sold to assure the entire property will not revert to a rental property. As a result, the venture will not begin to recognize any gains until 50% of the units have been sold. The venture has 70 refundable deposits holding units for prospective residents at December 31, 2008. There are a total of 240 units in the community. Construction of this project was substantially complete at December 31, 2008. To the extent that the pace of sales of condominium units is slower than anticipated or if we are unable to realize the prices projected for the condominium units, we could be subject to additional losses. No assurance can be given that additional pre-tax charges will not be required in subsequent periods with respect to this condominium venture.

In 2006, we acquired the long-term management contracts of two San Francisco Bay area continuing care retirement communities (“CCRC”) and the ownership of one community. As part of the acquisition, we also received ten vacant condominium units from the seller that we could renovate and sell. In 2007, we purchased an additional 37 units. Of the 47 units acquired, three were converted into a fitness center for the community, 14 were converted into seven double units and three were converted into a triple unit. In 2008, we sold eight of the 35 renovated units and recognized gains on those sales totaling $1.0 million.


9.	Variable Interest Entities

Under FIN 46R, if an entity is determined to be a variable interest entity (“VIE”), it must be consolidated by the primary beneficiary. The primary beneficiary is the party that absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns or both. We perform a qualitative and quantitative analysis using the methodology as described in Appendix A of FIN 46R to calculate expected losses to determine if

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

the entity is a VIE. If the entity is a VIE, we determine which party has the greater variability and is the primary beneficiary. At December 31, 2008, we are the primary beneficiary of eight VIEs and therefore consolidate those entities.

VIEs where Sunrise is the Primary Beneficiary

We have a management agreement with a not-for-profit corporation established to own and operate a CCRC in New Jersey. This entity is a VIE. The CCRC contains a 60-bed skilled nursing unit, a 32-bed assisted living unit, a 27-bed Alzheimer’s care unit and 252 independent living apartments. We have included $19.2 million and $20.1 million, respectively, of net property and equipment and debt of $23.9 million and $24.6 million, respectively, in our 2008 and 2007 consolidated balance sheets for this entity. The majority of the debt is bonds that are secured by a pledge of and lien on revenues, a letter of credit with Bank of New York and by a leasehold mortgage and security agreement. We guarantee the letter of credit. Proceeds from the bonds’ issuance were used to acquire and renovate the CCRC. In 2008 and 2007, we guaranteed $22.5 million and $23.2 million, respectively, of the bonds. The entity has incurred losses and has experienced negative working capital for several years and has failed the debt service coverage ratio related to the bonds. Management fees earned by us were $0.5 million, $0.5 million and $0.5 million in 2008, 2007 and 2006, respectively. The management agreement also provides for reimbursement to us for all direct cost of operations. Payments to us for direct operating expenses were $7.5 million, $4.2 million and $2.6 million in 2008, 2007 and 2006, respectively. The entity obtains professional and general liability coverage through our affiliate, Sunrise Senior Living Insurance, Inc. The entity had payables to us of $0.2 million and $0.2 million at December 31, 2008 and 2007, respectively. The entity also has a ground lease with us. Rent expense is recognized on a straight-line basis at $0.7 million per year. Deferred rent relating to this agreement is $5.6 million and $5.1 million at December 31, 2008 and 2007, respectively.

Six consolidated VIEs are investment partnerships formed with third-party partners to invest capital in the pre-financing stage of certain Greystone projects. Three are located in Illinois and the other three are located in Massachusetts, Missouri and Texas. We own 49.5% of the investment partnerships with 49.5% owned by a third-party and 1% owned by our Greystone subsidiary, who serves as the General Partner. The investment partnerships raise capital through private offerings and invest the proceeds in the ventures, which is jointly owned by the investment partnerships and Greystone. The purpose of the venture is to develop senior living communities owned by a nonprofit entity. Greystone contributes its development services in exchange for an ownership interest. Upon achieving a specified level of pre-sales for each of the projects, permanent financing, usually in the form of tax exempt bonds is placed by the nonprofit entity to fund the remaining development of each project. 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 of generally between 50% and 75% of their investment. We have included $7.0 million and $9.0 million of cash related to these ventures in our 2008 and 2007 consolidated balance sheets, respectively. We funded $8.7 million and $1.6 million into these investment partnerships in 2008 and 2007, respectively.

Germany Venture

From 2003 through 2006, we invested $13.1 million for our portion of the equity required for our Germany venture. Our partner invested $52.4 million. Our equity investment was reduced to zero due tostart-up losses recorded from 2003 through 2006 and, accordingly, we had no investment carrying value at December 31, 2008. In 2006, we recorded a $50.0 million loss for expected payments under financial guarantees (operating deficit guarantees) given to lenders to our nine German communities. In 2007, we recorded an additional loss of $16.0 million for a cumulative loss of $66.0 million for expected future non-recoverable payments under financial guarantees. On September 1, 2008, we paid €3.0 million ($4.6 million) to the majority partner in our Germany venture for an option to purchase its entire equity interest in the venture through a two-step transaction in 2009. We exercised our option in January 2009 and acquired a controlling interest of 94.9%. Also on September 1, 2008, we entered into an agreement with our partner that gave us permission to immediately pursue potential restructuring of

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

loans with venture lenders, pursue potential sales of some or all of the nine communities in the venture and to merge certain subsidiaries of the venture to improve operational efficiencies and reduce VAT taxes paid. Our decision to purchase this option was based on the fact that we had 100% of the risk for the Germany venture but did not have control and had only 20% of the equity ownership. Neither the purchase of the option nor the exercise of the option altered our obligation under any financial guarantees for which we are responsible or altered any of the recourse/non-recourse provisions in any of the loans.

Under FASB Interpretation No. 46R,Consolidation of Variable Interest Entities(“FIN 46R”), the purchase of the option is a “reconsideration event” and we have determined that as of September 1, 2008 the venture is a variable interest entity and we are the primary beneficiary which requires us to consolidate the venture. FIN 46R requires that assets and liabilities be consolidated at current fair value. In accordance with FIN 46R, the excess of the consideration paid, the reported amount of any previously held interests and the fair value of the newly consolidated liabilities over the sum of the fair value of the newly consolidated assets is required to be reported as an extraordinary loss if the variable interest is not a business. As we currently do not have any plans to develop additional communities in Germany, we consider this to be an option to purchase nine communities as opposed to the acquisition of a business with intangible value and therefore, we recorded a non-cash extraordinary pre-tax loss of $22.1 million. Due to the valuation allowance on net deferred tax assets in the fourth quarter, no benefit for income taxes was allocated to extraordinary loss.

The components of the consolidation at their fair values at September 1, 2008 were as follows:


(In thousands)

Net working capital	$	2,418
Property and equipment		166,131
Long-term debt:
Mortgages		(191,165	)
Full recourse loan		(25,557	)
Guarantee liabilities		42,709
Management contract intangible		(930	)
Venture liability to Sunrise		(12,962	)
Lease liability to venture		8,473
Minority interest		(300	)
Consideration paid for option		(4,560	)
Cash paydown of venture debt		(6,388	)

Extraordinary loss	$	(22,131	)

The fair value of the property and equipment was based on an analysis of historical results, our operating plans, market data and third party appraisals. The fair value of the debt was Level 3 inputs (see Note 3) including giving consideration to the fair value of the underlying assets which are collateral for the debt and the operating deficit guarantees which guarantee to the lender the payment of monthly principal and interest. Upon consolidation, our existing receivables from the venture and guarantee and lease liabilities are eliminated for financial reporting purposes. We are required to eliminate the net receivables from the venture when we consolidate as these are now intercompany receivables. As the debt is now consolidated, guarantee liabilities are also eliminated for financial reporting purposes. We are still responsible for guarantee liabilities to the lenders. As of December 31, 2008, we determined that the recorded value for two of the communities was impaired. We recorded an impairment charge of $5.2 million.

After our purchase of the option, we restructured the debt for four of the nine communities. As a result of the debt restructuring, the lender assigned a participation interest in the loan to us in the amount of €30.2 million

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

($44.3 million) for a purchase price of $6.388 million in cash and a note that has full recourse to Sunrise in the amount of $25.6 million, resulting in a discount of $12.3 million. The remaining debt balance due to the lender after the participation is €50.0 million ($73.4 million), which is non-recourse to us, except we have guaranteed the debt to the extent that the sale price of the four Germany communities securing the debt is less than a stipulated release price for each community. The fair value of the communities approximates the €50.0 million due to the lender.

For the remaining five communities, we have provided guarantees to the lenders of the repayment of the monthly interest payments and principal amortization until the maturity dates of the loans. We have not guaranteed repayment of the remaining principal balance due upon maturity.

We closed the Reinbeck community, which is one of the four properties with a minimum release price, in January 2009. We are marketing this property for sale. If the Reinbeck community is sold for less than the minimum release price, we would be obligated to pay the difference between the minimum release price and sale price to the lender. It is possible that a loss in excess of the estimated fair value could occur and that we may be required to fund a loss greater than the difference between the fair value and release price. We have also closed our Hannover community, and we are marketing this property, as well. The loan on the Hannover community is non-recourse to us, but there is an operating deficit guarantee until debt maturity. Our guarantee of scheduled principal and interest payments for the Hannover community through 2011 is as follows (in thousands):


2009	€	1,718	$	2,421
2010		1,183		1,667
2011		1,013		1,428

	€	3,914	$	5,516

The following table sets forth the resident capacity, number of residents at December 31, 2008 and the date the community opened.

Residents at

Date

Resident

December 31,

Community

Capacity

2008

Opened

Klein Flottbeck

02/01/05

Munich

106

07/02/07

Oberursel

110

11/01/06

Wiesbaden

115

06/01/07

Konigstein

110

02/01/08

Frankfurt

109

06/19/06

Bonn

101

01/20/06

Our estimated future fundings to our German operations for operating losses are as follows (in thousands):


2009	€	10,471	$	14,758
2010		5,482		7,727
2011		1,781		2,510
2012		—		—

	€	17,734	$	24,995

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

agreed not to foreclose on the communities that are collateral for their loans or to commence or prosecute any action or proceeding to enforce their demand for payment by us pursuant to our operating deficit agreements until the earliest of the occurrence of certain other events relating to the loans or March 31, 2009. As of February 27, 2009, we have not stopped funding the ninth community as the next payment date is March 6, 2009. We do not intend to make the principal and interest payment due on that date and will seek waivers with respect to this default after that date.

Scheduled principal repayments of our Germany venture debt are shown in Note 13.

VIEs Where We Are Not the Primary Beneficiary but Hold a Significant Variable Interest in the VIEs

In July 2007, we formed a venture with a third party to purchase six communities from our first U.K. development venture. The entity was financed with £187.6 million of debt. The venture also entered into a firm commitment to purchase 11 additional communities from our first U.K. development venture. As of December 31, 2008, the venture has 11 operating communities in the U.K. Our equity investment in the venture is $2.8 million at December 31, 2008. The line item “Due from unconsolidated communities, net” on our consolidated balance sheet contains $1.3 million (£0.9 million) due from the venture. Our maximum exposure to loss is our equity investment of $4.1 million. We calculated the maximum exposure to loss as the maximum loss (regardless of probability of being incurred) that we could be required to record in our income statement as a result of our involvement with the VIE.

In September 2006, a venture was formed to acquire and operate six senior living facilities located in Florida (see note 12 — Aston Gardens). We own a 25% interest in the venture as managing member and our venture partner owns the remaining 75% interest. The venture was financed with $156 million of equity and $304 million of debt. In December 2008, we agreed to subordinate $10 million of the venture’s $39.5 million equity to Class A capital and the venture restructured its debt whereby our venture partner acquired $26.3 million (B-piece) of the $170 million senior loan and the senior lender has the remaining $143.7 million (A-piece). We wrote off our remaining $4.8 million equity investment as we consider it to be other than temporarily impaired. We have provided the venture an operating deficit loan of $5.7 million at December 31, 2008. Our maximum exposure to loss is the operating deficit loan, a total of $5.7 million at December 31, 2008 plus any additional fundings under the operating deficit guarantee.


10.	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.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)


11.	Intangible Assets and Goodwill

Intangible assets consist of the following (in thousands):


	Estimated		December 31,
	Useful Life		2008		2007

Management contracts less accumulated amortization of $32,433 and $23,084		1-30 years	$	65,532	$	76,909
Leaseholds less accumulated amortization of $3,992 and $3,577		10-29 years		3,892		4,307
Other intangibles less accumulated amoritization of $763 and $628		1-40 years		1,218		2,553

			$	70,642	$	83,769

Amortization was $11.0 million, $14.2 million and $8.8 million in 2008, 2007 and 2006, respectively. In addition, in 2006, we wrote off $25.4 million representing the unamortized intangible asset for management contracts that were bought out and other intangible assets. Amortization is expected to be approximately $10.0 million, $6.4 million, $3.1 million, $3.0 million and $2.9 million in 2009, 2010, 2011, 2012 and 2013, respectively.

Goodwill was $39.0 million and $169.7 million at December 31, 2008 and 2007, respectively. In 2006, we recorded goodwill of $59.3 million related to the acquisition of Trinity. We recorded goodwill of $31.5 million in 2005 related to the acquisition of Greystone 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.

In 2008 and 2007, we recorded an impairment charge of $9.8 million and $56.7 million related to our Trinity goodwill and related intangible assets. Trinity ceased operations in December 2008 (see Note 21). This impairment charge is recorded in discontinued operations. In 2008, we also recorded an impairment charge of $121.8 million related to all the goodwill for our North American business segment which resulted from our acquisitions of Marriott Senior Living, Inc. in 2003 and Karrington Health, Inc. in 1999. This impairment resulted from a revision in the fourth quarter of 2008 to our estimate of future cash flows from our North American business segment. During the fourth quarter of 2008, we concluded that the credit markets had declined to the point that it was unlikely that we would have significant income from development and pre-opening fees from the development of new Sunrise communities or income from recapitalization of ventures.

We considered the income approach and the market comparable approach in evaluating the goodwill of our North American business segment. The income approach uses the present value of the cash flows that are expected to be generated by the business in the future. The market comparable approach indicates the fair value of a business based on a comparison to publicly traded companies in the same industry. We used the income approach to value our business, and compared that result to the market approach to provide additional support for our valuation. In applying the income approach, we discounted projected cash flows at a 9% discount rate and applied a cap rate of 6.5% to residual cash flows. These factors were based on management’s judgment and recommendations from a valuation advisor. The impairment was recorded since the fair value of the North American business was less than the fair value of the net tangible assets and identifiable intangible assets.

The remaining goodwill at December 31, 2008 of $39.0 million relates to our Greystone subsidiary, which is not considered impaired as the entity has net liabilities due to the cumulative deferral of $62.4 million of development fees and the fair value of the entity is in excess of the net liabilities. As Greystone’s contracts are multiple element arrangements and there is not sufficient objective and reliable evidence of fair value of undelivered elements at each billing milestone, we defer revenue recognition until the completion of the development contract.

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, 2008:


	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		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		20.00	%
PS Germany Investment (Jersey) LP(2)		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	%
Santa Monica AL, LLC		15.00	%
Sunrise Third Senior Living Holdings, LLC		10.00	%
Cortland House, LP		10.00	%
Dawn Limited Partnership		10.00	%


(1)		Investments are accounted for under the profit-sharing method of accounting. See Note 8.

(2)		Investments are consolidated in accordance with FIN 46R. See Note 9.

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 $45.3 million and $81.4 million at December 31, 2008 and 2007, 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,
	2008			2007			2006

Assets, principally property and equipment	$	4,847,724		$	5,183,922		$	4,370,376
Long-term debt		3,933,188			4,075,993			2,971,318
Liabilities excluding long-term debt		552,360			549,628			583,008
Equity		362,176			558,301			816,050
Revenue		1,119,436			1,021,112			846,479
Net income (loss)		(130,762	)		(15,487	)		(56,968	)

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 $534.3 million, $487.3 million and $390.3 million in 2008, 2007 and 2006, respectively.

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


	December 31,
	2008			2007			2006

Sunrise’s share of earnings (losses) in unconsolidated communities	$	(31,133	)	$	60,700		$	(11,997	)
Return on investment in unconsolidated communities		33,483			72,710			55,699
Impairment of equity investments		(16,196	)		(24,463	)		—

	$	(13,846	)	$	108,947		$	43,702

Our investment in unconsolidated communities was greater than our portion of the underlying equity in the venture by $3.9 million and less than our portion of underlying equity in the venture by $17.9 million as of December 31, 2008 and 2007, respectively.

Return on Investment in Unconsolidated Communities

Sunrise’s return on investment in unconsolidated communities includes cash distributions from ventures arising from a refinancing of debt within ventures. We first record all equity distributions 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.

During 2008, our return on investment in unconsolidated communities was the result of the following: (1) the expiration of three contractual obligations which resulted in the recognition of $9.2 million of income from the recapitalization of three ventures; (2) receipt of $8.3 million of proceeds resulting from the refinancing of the debt of one of our ventures with eight communities; (3) the recapitalization and refinancing of debt of one venture with two communities which resulted in a return on investment of $3.3 million; and (4) distributions of $12.7 million

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

from operations from investments where the book value is zero and we have no contractual or implied obligations to support the venture.

During 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.

During 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.

Transactions

In January 2007, we entered into a venture to develop 18 assisted living communities in the United Kingdom (the “U.K.”) 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 U.K. 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 28 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.

During 2008 and 2007, our first U.K. development venture in which we have a 20% equity interest sold four and seven communities, respectively, 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 (loss) earnings in 2008 and 2007 of approximately $(3.6) million and $75.5 million, respectively. When our U.K. 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 2008 and 2007, we recorded bonus expense of $7.9 million and $27.8 million, respectively, in respect of the bonus pool relating to the U.K. venture. These bonus amounts are funded from capital events and the cash is retained by us in restricted cash accounts. As of December 31, 2008, approximately $1.6 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 U.K. and Germany ventures. This bonus distribution limitation was satisfied on October 31, 2008.

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

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

facilities. In the merger, Sunrise received approximately an 8% preferred ownership interest in AllianceCare and Tiffany Tomasso, our executive vice president of European operations, was appointed to the Board of Directors. Our investment in AllianceCare is accounted for under the cost method.

During 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.

During 2007, we contributed $4.4 million for a 20% interest in an unconsolidated venture which purchased an existing building for approximately $22.0 million and will renovate the building into a senior independent living facility. As of December 31, 2008, renovations on the building were approximately 85% complete and 100 units were available for rent. Eight of those units were rented at December 31, 2008.

During 2006, a 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 Sunrise 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 reserved our receivables due from the venture of approximately $1.9 million.

During 2008, the lease between a venture in which we hold a 25% ownership interest and the landlord was terminated. The venture received a $4.0 million termination fee of which we are entitled to our proportionate share, $1.0 million. As a result of this transaction, the venture will be liquidated. As of December 31, 2008, our carrying value for our investment in the venture was $1.7 million. Thus, under SFAS No. 144, we recorded a $0.7 million impairment charge in December 2008.

Aston Gardens

In September 2006, a venture with a third party 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. The third party funded 75% of the equity (approximately $117.0 million) 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 venture. We also received an initial 20 year contract to manage these properties. In 2007 and 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 were insufficient to achieve compliance with the debt covenants for the mortgage debt for the properties. In June 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 determined that our investment is permanently impaired and as a result, we recorded a pre-tax impairment charge of approximately $21.6 million in 2007. In December 2008, our equity partner paid $26 million to the venture lender who in turn waived the previous events of default and restructured the debt covenants. The equity partner now holds a $26 million subordinated loan from the venture. In conjunction with this restructuring, we subordinated $10 million of our equity to our partner and we agreed to resign as managing member of the venture and manager of the communities when we are released from various guarantees provided to the venture’s lender. We wrote off our remaining $4.8 million equity investment as we consider it to be other than temporarily impaired. We expect to resign as managing member of the venture and manager of the communities in the first quarter of 2009.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

Fountains Venture

In 2008, the Fountains venture in which we hold a 20% interest failed to comply with the financial covenants in the venture’s loan agreement. The lender has been charging a default rate of interest (6.68% at December 31, 2008) since April 2008. At loan inception, we provided the lender a guarantee of monthly principal and interest payments, and in 2008 we funded payments under this guarantee as the venture did not have enough available cash flow to cover the full amount of the interest payments at the default rate. Advances under this guarantee are recoverable in the form of a loan to the venture, which must be repaid prior to the repayment of equity capital to the partners, but is subordinate to the repayment of other venture debt. Through December 31, 2008, we have funded $14.2 million under this operating deficit guarantee which has been fully reserved. These advances under the operating deficit guarantee are in addition to what we have funded during 2008 under our income support guarantee to our venture partner, which also have been fully reserved. As the default occurred prior to the venture issuing its financial statements for the year ended December 31, 2007, the default was taken into consideration by the venture when testing its assets for impairment in accordance with FAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” at December 31, 2007. The book value of the venture’s assets exceeds the fair value by approximately $52 million. Based on that estimate, we recorded our proportionate share of the impairment, or approximately $10.3 million during 2008.

In January 2009, we informed the venture’s lenders and our venture partner that we were suspending payment of default interest and payment under the income support guarantee, and that we would seek a comprehensive restructuring of the loan, our operating deficit guarantees and our income support guarantee. Our failure to pay default interest on the loan is an additional default of the loan agreement, the management agreement and our agreement with our venture partner. We have requested that the lender for the Fountains portfolio agree not to foreclose on the communities that are collateral for their loans or to commence or prosecute any action or proceeding to enforce its demand for payment by us pursuant to our operating deficit agreements through March 31, 2009. As of February 27, 2009 the lender had not yet agreed to our request for a standstill agreement through March 31, 2009.


13.	Debt

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


	December 31,
	2008			2007

Bank Credit Facility	$	95,000		$	100,000
Mortgage debt on wholly-owned properties		246,948			86,096
Land loans		37,407			43,199
Debt of variable interest entities		23,905			24,593
German venture debt		185,901			—
Other		46,970			—

		636,131			253,888
Current maturities		(472,449	)		(222,541	)

	$	163,682		$	31,347

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

Principal maturities of long-term debt at December 31, 2008 are as follows (in thousands):


			Mortgages,				Variable		Germany
	Bank Credit		Wholly-Owned		Land		Interest		Venture
	Facility		Properties		Loans		Entity Debt		Debt		Other		Total

2009	$	95,000	$	86,346	$	34,327	$	23,905	$	185,901	$	46,970	$	472,449
2010		—		37,217		—		—		—		—		37,217
2011		—		2,364		3,080		—		—		—		5,444
2012		—		15,033		—		—		—		—		15,033
2013		—		100,539		—		—		—		—		100,539
Thereafter		—		5,449		—		—		—		—		5,449

	$	95,000	$	246,948	$	37,407	$	23,905	$	185,901	$	46,970	$	636,131

In addition to the amounts due under our Bank Credit Facility, the 2009 maturities include mortgages due on two wholly owned communities (one for $5.1 million and one for $39.9 million) and mortgage debt on three wholly owned communities that are currently in default as we have failed to comply with various financial covenants (one for $2.9 million, one for $5.1 million and one for $31.2 million); $34.3 million in land loans related to properties we intend to sell; $23.9 million of debt related to variable interest entities; $12.4 million of principal payments related to the debt of our German communities and the remaining amount of the German venture debt which is currently in default as we have stopped paying monthly interest and principal payments in 2009; a $21.4 million margin loan collateralized by auction rate securities with a book value of $31.1 million and a $25.6 million loan which is currently in default as we have stopped paying monthly interest payments in 2009.

Bank Credit Facility

On January 31, February 19, March 13, July 23, November 6, 2008 (“Ninth Amendment”) and January 20, 2009 (“Tenth Amendment”), we entered into further amendments to our Bank Credit Facility. These amendments, among other things:


	•	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 the financial covenants through March 30, 2009.

Our Bank Credit Facility contains various financial covenants and other restrictions, including provisions that (1) require us to meet certain financial tests; (2) require consent for changes in control; and (3) restrict our ability and our subsidiaries’ abilities to borrow additional funds, dispose of all or substantially all assets, or engage in mergers or other business combinations in which we are not the surviving entity, without lender consent.

In connection with the March 13, 2008 amendment, we 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, we 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 us, as well as proceeds (cash and non-cash) and products thereof, as security for the payment of obligations under the Bank Credit Facility arrangements.

In the Ninth and Tenth Amendments, the Bank Credit Facility provided that:


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

	•	effective on the date of the Ninth Amendment, the borrowing rate in US dollars, was LIBOR plus 3.75% or the Base Rate (the higher of the Federal Funds Rate plus 0.50% and Prime) plus 2.25% (through the end of

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)


		the then-current interest period). Notwithstanding anything to the contrary in the Bank Credit Facility, the minimum rate upon which interest could accrue upon any of the loans at any time shall not be less than 5% per annum;


	•	effective on the date of the Tenth Amendment, the borrowing rate in US dollars, will be LIBOR plus 4.75% for Eurodollar Rate Loans or the Base Rate (as defined in the Tenth Amendment) plus 3.25% for Base Rate Loans (5.18% at December 31, 2008);

	•	there can be no additional borrowings and no issuances of any new letters of credit until April 1, 2009, and then only if we achieve compliance with the financial covenants of the loan documents;

	•	compliance with the financial covenants of the Bank Credit Facility from December 30, 2008 through March 30, 2009 is waived;

	•	triggering of the cross default section of the Bank Credit Facility through March 30, 2009 for certain events of default which might occur under other credit facilities is waived; and

	•	we make principal repayments to lenders of $1.5 million and a modification fee of $0.4 million.

The Tenth Amendment also modifies certain negative covenants to limit our ability, among other things to (i) pledge certain assets or grant consensual liens on such assets; (ii) incur additional indebtedness; and (iii) dispose of real estate, improvements or other material assets.

We paid the lenders aggregate fees of approximately $2.5 million for entering into these 2008 amendments.

In the event that we are unable to revise and restructure our Bank Credit Facility before March 30, 2009, the lenders under the amended Bank Credit Facility could, among other things, exercise their rights to accelerate the payment of all amounts then outstanding under the amended Bank Credit Facility, exercise remedies against the collateral securing the amended Bank Credit Facility or require us to replace or provide cash collateral for the outstanding letters of credit. In the event of an acceleration of our Bank Credit Facility, we may not be able to make a full repayment of our outstanding borrowings.

As of December 31, 2008, we had no borrowing availability under the Bank Credit Facility. We expect that our cash balances and expected cash flow are sufficient to enable us to meet our obligations only through March 30, 2009.

New Mortgage Financing in 2008

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 borrowers must repay the mortgage loans in monthly installments of principal and variable interest. Principal payments are based on a30-year amortization schedule using an interest rate of 5.92%. Variable monthly interest payments are in an amount equal to (i) one third (1/3) of 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 (ii) 227 basis points (2.27%) times the outstanding loan amount divided by twelve (12) (3.99% at December 31, 2008). The maturity date on which the mortgage loans must be repaid in full is 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

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

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).

Other

Certain of our ventures have financial covenants that are based on the consolidated results of Sunrise Senior Living, Inc. 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. These events of default could allow the financial institutions who have extended credit to seek the remedies provided for in the loan documents.

Germany Venture Debt

Refer to Note 9 for a discussion of the consolidation of our German communities on September 1, 2008.

The book value, maturity dates and interest rates of the loans at December 31, 2008 are as follows (in thousands):


	Stated Value		Book Value						Contractual Rate
	at December 31,		at December 31,		Calculated		Debt		at December 31,
Property	2008		2008		Discount		Maturity	Interest Rate	2008

Bonn, Frankurt, Oberursel and Reinbeck	$	70,482	$	70,482	$	—	Jun-10	Euribor + 2.75%	5.353%
Klein Flottbeck		16,632		16,632		—	Mar-11	Euribor + 3.25%	5.853%
Munich		34,280		32,032		2,248	Nov-11/Dec-11	Euribor + 1.25% to	3.85% to 4.60%
								Euribor + 2.00%
Hannover		25,974		13,608		12,366	Oct-11/Dec-11	Euribor + 1.25% to	3.85% to 4.60%
								Euribor + 2.00%
Wiesbaden		32,762		25,983		6,779	Mar-11/Mar-12	Euribor + 2.1%	4.703%
Konigstein		30,058		25,682		4,376	Jul-12	Euribor + 1.75%	4.353%
								Euribor + 2.0%	4.603%
Hoesel land		1,482		1,482		—	Dec-08	Euribor + 2.25%	4.853%

Total non-recourse debt	$	211,670	$	185,901	$	25,769

In January 2009, we informed the lenders to our German communities and the Hoesel land, an undeveloped land parcel, that we were suspending payment of principal and interest on all loans for our German communities and that we would seek comprehensive restructuring of the loans and our operating deficit guarantees. As a result of our decision to cease payment of principal and interest on the loans for our German communities, we are in default of the loan agreements. Our lenders to eight of our nine German communities have agreed not to foreclose on the communities that are collateral for their loans or to commence or prosecute any action or proceeding to enforce their demand for payment by us pursuant to our operating deficit agreements through March 31, 2009. As of February 27, 2009, we have not stopped funding the ninth community as the next payment date is March 6, 2009. We do not intend to make the principal and interest payment due on that date and will seek waivers with respect to this default after that date.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

Value of Collateral and Interest Paid

At December 31, 2008 and 2007, the net book value of properties pledged as collateral for mortgages payable was $530.7 million and $266.8 million, respectively.

Interest paid totaled $27.1 million, $14.1 million and $13.9 million in 2008, 2007 and 2006, respectively. Interest capitalized was $6.4 million, $9.3 million and $5.4 million in 2008, 2007 and 2006, respectively.


14.	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,
	2008			2007

Deferred tax assets:
Sunrise operating loss carryforwards — federal	$	54,006		$	1,910
Sunrise operating loss carryforwards — state		25,827			7,903
Sunrise operating loss carryforwards — foreign		19,657			5,650
Financial guarantees		30,226			25,893
Accrued health insurance		8,203			14,872
Self-insurance liabilities		8,123			6,989
Stock-based compensation		6,672			7,636
Deferred development fees		35,085			29,258
Allowance for doubtful accounts		9,007			6,178
Tax credits		7,562			6,729
Accrued expenses and reserves		28,442			20,593
Entrance fees		15,939			14,228
Other		3,034			1,898

Gross deferred tax assets		251,783			149,737
U.S. federal and state valuation allowance		(110,297	)		(6,165	)
German valuation allowance		(19,322	)		(6,243	)
Canadian valuation allowance		(8,332	)		—
U.K. valuation allowance		(889	)		—

Net deferred tax assets		112,943			137,329

Deferred tax liabilities:
Investments in ventures		(105,573	)		(96,333	)
Basis difference in property and equipment and intangibles		(1,264	)		(74,826	)
Prepaid expenses		(2,519	)		(8,133	)
Other		(6,375	)		(7,075	)

Total deferred tax liabilities		(115,731	)		(186,367	)

Net deferred tax liabilities	$	(2,788	)	$	(49,038	)

Our worldwide taxable loss for 2008 was estimated to be $243.1 million. We have recognized significant losses for 2008 and 2007. As a result, all available sources of positive and negative evidence were evaluated. A

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

determination was made that deferred tax assets in excess of reversing deferred tax liabilities were not likely to be realized. Therefore, a valuation allowance on net deferred tax assets was established as of December 31, 2008. At December 31, 2008 and 2007, our total valuation allowance on deferred tax assets were $138.8 million and $12.4 million, respectively.

At December 31, 2008, we have estimated U.S. federal net operating loss carryforwards of $154.3 million which are carried forward to offset future taxable income in the U.S. for up to 20 years. At December 31, 2008 and 2007, we had state net operating loss carryforwards, after prior year provision to return adjustments, valued at $25.8 million and $8.2 million, respectively, which are expected to expire from 2011 through 2024. At December 31, 2008 and 2007, we had German net operating loss carryforwards to offset future foreign taxable income of $43.3 million and $13.0 million, respectively, which have an unlimited carryforward period to offset future taxable income in Germany. At December 31, 2008 and 2007, we had Canadian net operating loss carryforwards of $18.0 million and $1.8 million, respectively, to offset future foreign taxable income, which are carried forward to offset future taxable income in Canada for up to 20 years. At December 31, 2008, we had U.K. net operating loss carryforwards to offset future foreign taxable income of $3.0 million, which have an unlimited carryforward period to offset future taxable income in the U.K. As of December 31, 2008, we have fully reserved deferred tax assets with respect to all foreign subsidiaries. During 2008 and 2007, we provided income taxes for unremitted earnings of our foreign subsidiaries that are not considered permanently reinvested.

During 2008, we recorded an impairment charge in continuing operations of $121.8 million related to goodwill for our North American business segment. Of the total, $39.2 million was permanent goodwill and therefore impacted the effective tax rate.

At December 31, 2008 and 2007, we had Alternative Minimum Tax credits of $4.7 million and $4.9 million, respectively which carryforward indefinitely and can be offset against future regular U.S. tax. At December 31, 2008 and 2007, we had $1.3 million of foreign tax credit carryforwards as of each reporting date which expire in 2013. The major components of the provision for income taxes attributable to continuing operations are as follows (in thousands):


	2008			2007			2006

Current:
Federal	$	(252	)	$	12,921		$	16,054
State		3,019			2,903			5,228
Foreign		—			2,098			26

Total current expense		2,767			17,922			21,308
Deferred:
Federal		(46,701	)		(11,362	)		(4,114	)
State		1,613			1,282			561
Foreign		(1,162	)		1,226			(228	)

Total deferred benefit		(46,250	)		(8,854	)		(3,781	)

(Benefit from) provision for income taxes before discontinued operations and extraordinary loss	$	(43,483	)	$	9,068		$	17,527

Deferred tax assets for 2008 have been reduced by approximately $1.6 million reflecting deferred tax expense associated with stock-based compensation. Current taxes payable for 2007 and 2006 have been reduced by approximately $2.2 million and $1.9 million, respectively, reflecting the tax benefit to us of stock-based compensation during the year. The tax impact of stock-based compensation has been recognized as an increase or decrease to additional paid-in capital.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

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)	2008			2007			2006

(Loss) income before tax benefit (expense) taxed in the U.S	$	(366,629	)	$	(8,441	)	$	39,243
(Loss) income before tax benefit (expense) taxed in foreign jurisdictions		(56,618	)		(718	)		(6,039	)

(Loss) income from continuing operations before tax benefit (expense)	$	(423,247	)	$	(9,159	)	$	33,204

Tax at US federal statutory rate		(35.0	)%		35.0	%		35.0	%
State taxes, net		(5.1	)%		4.3	%		4.2	%
Work opportunity credits		(0.3	)%		4.9	%		(1.3	)%
Change in valuation allowance		29.9	%		(71.5	)%		11.0	%
Tax exempt interest		(0.3	)%		19.2	%		(4.5	)%
Tax contingencies		0.5	%		(20.1	)%		4.4	%
Write-off of non-deductible goodwill		3.7	%		0.0	%		0.0	%
Foreign rate differential		0.8	%		6.6	%		0.0	%
APB 23		(0.4	)%		(37.7	)%		0.0	%
Transfer pricing		0.5	%		(29.5	)%		0.0	%
Other		(4.6	)%		(10.1	)%		4.0	%

		(10.3	)%		(98.9	)%		52.8	%

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 gross unrecognized tax benefits as of December 31, 2008 and 2007 were $17.8 million and $31.3 million, respectively. Included in the December 31, 2008 and 2007 balances were $17.8 million and $15.5 million, respectively, of tax positions which, if recognized, would favorably impact the effective tax rate. Certain amounts in the table below have been reclassified to conform to the current year presentation.


(In thousands)	2008			2007

Gross unrecognized tax benefit at beginning of year	$	31,343		$	30,158
Change attributable to tax positions taken during a prior period		(14,196	)		—
Change attributable to tax positions taken during a current period		670			1,545
Decrease attributable to settlements with taxing authorities		—			—
Decrease attributable to lapse in statute of limitations		—			(360	)

Gross unrecognized tax benefit at end of year	$	17,817		$	31,343

We recognized interest and penalties related to unrecognized tax benefits as a component of tax expense. Our consolidated statement of income for the year ended December 31, 2008 and our consolidated balance sheet as of that date include interest and penalties of $(0.3) million and $4.2 million, respectively.

The IRS is currently examining our U.S. federal income tax returns for 2005 through 2007. The Canadian government is currently auditing the operating subsidiaries’ 2004 returns, with years after 2004 remaining subject to audit. The German government is currently auditing income tax returns for the years 2003 through 2004, with years after 2004 remaining subject to audit. There are no returns under audit by the U.K. government with years

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

after 2004 remaining open and subject to audit. At this time, we do not expect the results from any income tax audit to have a material impact on our financial statements, however, it is reasonably possible that the amount of the liability for unrecognized tax benefits could decrease by $2 million to $3 million during the next twelve month period.


15.	Stockholders’ Equity

Stock Options

We have equity award plans providing for the grant of incentive and nonqualified stock options to employees, directors, consultants and advisors. At December 31, 2008, these plans provided for the grant of options to purchase up to 24,597,772 shares of common stock. Under the terms of the plans, the option exercise price and vesting provisions 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 20,000 options outstanding under the plan at December 31, 2008. The Director’s Plan has now expired and no new options can be granted under it. 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.


	2008	2007	2006

Risk free interest rate	0.4% - 3.8%	3.6%	4.8% - 5.2%
Expected dividend yield	—	—	—
Expected term (years)	0.1 - 8.1	1.0	5.1 - 9.1
Expected volatility	27.8% - 79.3%	25.5%	56.1% - 60.7%

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, 2008 is presented below (share amounts are shown in thousands):


				Weighted		Remaining
				Average		Contractual
	Shares			Exercise Price		Term

Outstanding — beginning of year		3,554		$	14.64
Granted		4,914			2.29
Exercised		(361	)		11.53
Forfeited		(4	)		26.16
Expired		(296	)		22.04

Outstanding — end of year		7,807			6.72		7.2

Vested and expected to vest — end of year		6,056			6.72		7.2

Exercisable — end of year		2,942			14.39		2.8

The weighted average grant date fair value of options granted was $1.47, and $23.28 per share in 2008 and 2006, respectively. No options were granted or exercised in 2007. The total intrinsic value of options exercised was $4.6 million and $9.4 million, respectively, for 2008 and 2006, respectively. The fair value of shares vested was $1.0 million, $1.3 million and $5.2 million for 2008, 2007 and 2006, respectively. Unrecognized compensation expense related to the unvested portion of our stock options was approximately $6.2 million as of December 31, 2008, and is expected to be recognized over a weighted-average remaining term of approximately 2.2 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 due to our not being current in our SEC filings. The Compensation Committee set the new expiration date as 30 days after we became a current filer with the SEC. As a result of this modification, we recognized $2.4 million of stock-based compensation expense in 2007 and $0.4 million in 2008. We are now current in our SEC filings.

The amount of cash received from the exercise of stock options was approximately $4.2 million and there was no related tax benefit as we expect to have a net operating loss carryforward as of December 31, 2008.

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

On November 13, 2008, Mr. Ordan, CEO, was granted an award of 1,500,000 promotion stock options under our 2008 Omnibus Incentive Plan. The promotion options have a term of 10 years and an exercise price per share equal to the closing price per share of our common stock on the grant date. One-third of the promotion options will vest on the first three anniversaries of the date of grant, subject to Mr. Ordan’s continued employment on the applicable vesting date.

On December 23, 2008, Mr. Nadeau, CFO, Ms. Pangelinan, CAO, Mr. Schwartz, Senior Vice President, North American Operations, and Mr. Neeb, Chief Investment Officer, were granted awards of 750,000, 500,000, 200,000, and 500,000 retention stock options, respectively, under our 2008 Omnibus Incentive Plan. These retention options have a term of 10 years and an exercise price per share equal to the closing price per share of our common stock on the grant date. One-third of the retention options will vest on each of the first three anniversaries of the date of grant, subject to the executive’s continued employment on the applicable vesting date.

Restricted Stock

We have equity award plans providing for the grant of restricted stock to employees, directors, consultants and advisors. These grants vest over one to five years and some vesting may be accelerated if certain performance

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

criteria are met. Compensation expense is recognized using the straight-line method for restricted stock with graded vesting.

A summary of our restricted stock activity and related information for the years ended December 31, 2008, 2007 and 2006 is presented below (share amounts are shown in thousands):


				Weighted Average
				Grant Date
	Shares			Fair Value

Nonvested, January 1, 2006		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
Granted		164			18.25
Vested		(315	)		20.55
Canceled		(51	)		27.64

Nonvested, December 31, 2008		324			24.91

The total fair value of restricted shares vested was $20.55 per share and $14.01 per share for 2008 and 2007, respectively. Unrecognized compensation expense related to the unvested portion of our restricted stock was approximately $6.2 million as of December 31, 2008, and is expected to be recognized over a weighted-average remaining term of approximately 2.4 years.

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 between two and 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 our 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 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.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

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 amended in November 2008. 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 of us.

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, directly or through certain derivative positions, 10% 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 10% or more of the outstanding shares of common stock.

In general, if a person acquires, directly or through certain derivative positions, 10% 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, be entitled 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.

The Rights Agreement was amended in November 2008 to: (1) modify the definition of beneficial ownership so that it covers, with certain exceptions (including relating to swaps dealers), interests in shares of common stock created by derivative positions in which a person is a receiving party to the extent that actual shares of common stock are directly or indirectly held by the counterparties to such derivative positions; and (2) decrease from 20% to 10% the threshold of beneficial ownership of common stock above which investors become “Acquiring Persons” under the Rights Agreement and thereby trigger the issuance of the rights. Pursuant to the amendment, stockholders who beneficially owned more than 10% of our common stock as of November 19, 2008 were permitted to maintain their existing ownership positions without triggering the preferred stock purchase rights.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)


16.	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,
	2008			2007			2006

Numerator for basic net (loss) income per share:
(Loss) income from continuing operations	$	(379,764	)	$	(18,227	)	$	15,677
(Loss) income from discontinued operations		(37,284	)		(52,048	)		(393	)
Extraordinary loss		(22,131	)		—			—

Net (loss) income	$	(439,179	)	$	(70,275	)	$	15,284

Numerator for diluted net (loss) income per share:
(Loss) income from continuing operations	$	(379,764	)	$	(18,227	)	$	15,677
(Loss) income from discontinued operations		(37,284	)		(52,048	)		(393	)
Extraordinary loss		(22,131	)		—			—

Diluted net (loss) income	$	(439,179	)	$	(70,275	)	$	15,284

Denominator:
Denominator for basic net (loss) income per common share — weighted average shares		50,345			49,851			48,947
Effect of dilutive securities:
Employee stock options and restricted stock		—			—			1,775
Convertible notes		—			—			—

Denominator for diluted net (loss) income per common share — weighted average shares plus assumed conversions		50,345			49,851			50,722

Basic net (loss) income per common share
(Loss) income from continuing operations	$	(7.54	)	$	(0.37	)	$	0.32
Loss from discontinued operations		(0.74	)		(1.04	)		(0.01	)
Extraordinary loss		(0.44	)		—			—

Total net (loss) income	$	(8.72	)	$	(1.41	)	$	0.31

Diluted net (loss) income per common share
(Loss) income from continuing operations	$	(7.54	)	$	(0.37	)	$	0.31
Loss from discontinued operations		(0.74	)		(1.04	)		(0.01	)
Extraordinary loss		(0.44	)		—			—

Total net (loss) income	$	(8.72	)	$	(1.41	)	$	0.30

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 661,423, 1,367,157 and 133,500 for 2008, 2007 and 2006, 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.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)


17.	Commitments and Contingencies

Leases for Office Space

Rent expense for office space, excluding Trinity, for 2008, 2007 and 2006 was $9.7 million, $7.1 million and $6.6 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 2008, we ceased using approximately 40,276 square feet of office space at our corporate headquarters and recorded a charge of $2.0 million.

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 annual base rent of $1.1 million increased to $1.2 million in 2008 and will then decrease in 2009 through the remainder of the lease term. Both the initial agreements, 2006 and 2008 amendments provided for lease incentives for leasehold improvements for a total of $2.2 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.

Trinity Leases

Trinity is subject to 27 leases for office space with future minimum lease payments at December 31, 2008 of $1.8 million, $1.6 million, $1.3 million, $0.9 million and $0.1 million for 2009, 2010, 2011, 2012 and 2013, respectively. Trinity filed a plan of liquidation and dissolution before the Delaware Chancery Court in January 2009. The Chancery Court will supervise the disposition of the assets of Trinity for the benefit of its creditors. These obligations under long-term leases for office space used in Trinity’s operations are expected to be reduced or eliminated by the legal requirement for the landlord to mitigate damages by re-leasing the vacated space and any amounts not relieved will be resolved pursuant to the plan of dissolution.

In December 2008, Trinity ceased operations and terminated all employees. At December 31, 2008, all leased premises were vacated and leasehold improvements and furniture, fixtures and equipment were abandoned. As a result, we recorded a charge of $2.7 million related to the lease abandonment which is included in loss from discontinued operations. See Note 21.

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 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 three other ground leases related to three 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 and two ground leases related to abandoned projects or land parcels.

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

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

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 $66.7 million, $69.0 million and $62.0 million for 2008, 2007 and 2006, respectively, including contingent rent expense of $5.3 million, $8.2 million and $6.5 million for 2008, 2007 and 2006, respectively.

Future minimum lease payments (excluding Trinity) under office, ground and other operating leases at December 31, 2008 are as follows (in thousands):


2009	$	61,522
2010		62,101
2011		59,552
2012		59,304
2013		55,894
Thereafter		202,838

	$	501,211

Letters of Credit

In addition to $24.4 million in letters of credit related to our Bank Credit Facility and the Sunrise Captive at December 31, 2008, we have letters of credit outstanding of $1.5 million and $1.9 million as of December 31, 2008 and 2007, respectively. These letters of credit primarily relate to our insurance programs.

Guarantees

As discussed in Note 8, in connection 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 connection 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 considered recoverable.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

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, 2008 and fundings during 2008 are as follows (in thousands):


									Fundings
			FIN 45		FAS 5		Total		From
			Liability		Liability		Liability		January 1,
			for Future		for Future		for Future		2008
	Maximum Potential		Fundings at		Fundings at		Fundings at		Through
	Amount of Future		December 31,		December 31,		December 31,		December 31,
Guarantee Type	Fundings		2008		2008		2008		2008

Debt repayment	$	1,510	$	169	$	—	$	169	$	—
Operating deficit		Uncapped		947		—		947		20,426
Operating deficit for Germany		Uncapped		—		—		—		20,038
Income support		Uncapped		740		11,991		12,731		7,000
Other				—		125		125		125

Total			$	1,856	$	12,116	$	13,972	$	47,589

As of September 1, 2008, the operating deficit guarantees for Germany are no longer reported as financial guarantees due to the consolidation of this venture for financial reporting purposes. See further discussion in Note 9.

Aston Gardens

In July 2008, we received notice of default from our equity partner alleging a default under our management agreement for six communities as a result of the venture’s receipt of a notice of default from a lender. In December 2008, the venture’s debt was restructured and we entered into an agreement with our venture partner under which we agreed to resign as managing member of the venture and manager of the communities when we are released from various guarantees provided to the venture’s lender. The management fees for the years 2008 and 2007 were $3.2 million and $3.7 million, respectively.

At loan inception, we provided the lender a guarantee of monthly principal and interest payments and during 2008 we made payments under this guarantee since the venture did not have enough available cash flow to cover the default interest payments. Advances under this guarantee are recoverable in the form of a loan in a capital or refinancing event prior to the repayment of capital to the partners but subordinate to the repayment of the debt. Through December 31, 2008, we have funded $6.2 million under this guarantee.

Fountains

In 2008, the Fountains venture, in which we hold a 20% interest, failed to comply with the financial covenants in the venture’s loan agreement. The lender has been charging a default rate of interest (6.68% at December 31, 2008) since April 2008. At loan inception, we provided the lender a guarantee of monthly principal and interest payments, and in 2008 we funded payments under this guarantee as the venture did not have enough available cash flow to cover the full amount of the interest payments at the default rate. Advances under this guarantee are recoverable in the form of a loan to the venture, which must be repaid prior to the repayment of equity capital to the partners, but is subordinate to the repayment of other venture debt. Through December 31, 2008, we have funded $14.2 million under this operating deficit guarantee which has been fully reserved. These advances under the operating deficit guarantee are in addition to what we have funded during 2008 under our income support guarantee to our venture partner, which also have been fully reserved. As the default occurred prior to the venture issuing its financial statements for the year ended December 31, 2007, the default was taken into consideration by the venture when testing its assets for impairment in accordance with FAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” at December 31, 2007. The book value of the venture’s assets exceeds the fair value by

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

approximately $52 million. Based on that estimate, we recorded our proportionate share of the impairment, or approximately $10.3 million during 2008.

In January 2009, we informed the venture’s lenders and our venture partner that we were suspending payment of default interest and payments under the income support guarantee, and that we would seek a comprehensive restructuring of the loan, our operating deficit guarantees and our income support guarantee. Our failure to pay default interest on the loan is an additional default of the loan agreement. We have requested that the lender for the Fountains portfolio agree not to foreclose on the communities that are collateral for their loans or to commence or prosecute any action or proceeding to enforce its demand for payment by us pursuant to our operating deficit agreements through March 31, 2009. As of February 27, 2009, the lender has not yet agreed to our request for a standstill agreement through March 31, 2009.

Other

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 $3.2 billion at December 31, 2008. 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 an obligation with respect to two continuing care retirement communities we manage, 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, 2008, the remaining liability under this obligation is $49.6 million. We have not funded under these guarantees, and do not expect to fund under such guarantees in the future.

Senior Living Condominium Project

In 2006, we sold a majority interest in one condominium venture and one related assisted living venture to third parties (see further discussion in Note 8). 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 $50.8 million. Of this amount, $10.0 million is recoverable as a loan from the venture and $14.8 million relates to proceeds from the sale of real estate, development fees and pre-opening fees. During 2008, 2007 and 2006, we recorded losses of approximately $2.8 million, $6.0 million and $17.2 million due to this commitment. Through December 31, 2008, we have funded a total of $49.8 million to the venture. Construction of this project was substantially complete at December 31, 2008. To the extent that the pace of sales of condominium units is slower than anticipated or if we are unable to realize the prices projected for the condominium units, we could be subject to additional losses. No assurance can be given that additional pre-tax charges will not be required in subsequent periods with respect to this condominium venture.

Agreements with Marriott International, Inc.

Our agreements with Marriott International, Inc. related to our purchase of Marriott Senior Living Services, Inc. in 2003 provide that Marriott has the right to demand that we provide cash collateral security for Assignee Reimbursement Obligations, as defined in the agreements, in the event that our implied debt rating is not at least B- by Standard and Poors or B1 by Moody’s Investor Services. Assignee Reimbursement Obligations relate to possible liability with respect to leases assigned to us in 2003 and entrance fee obligations assumed by us in 2003 that remain outstanding (approximately $8.9 million at December 31, 2008). Marriott has informed us that they reserve all of their rights to issue a Notice of Collateral Event under the Assignment and Reimbursement Agreement.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

Employment Agreements

We have employment agreements with Mark S. Ordan, the Chief Executive Officer, Richard J. Nadeau, Chief Financial Officer, Julie A. Pangelinan, the Chief Accounting Officer, Daniel J. Schwartz, Senior Vice President — North American Operations and Greg Neeb, the Chief Investment Officer.

Each of the employment agreements provides for a three-year employment term with automatic one-year renewals at the end of that term and each year thereafter unless either party provides notice to the other, at least 120 days prior to the next renewal date, that the term will not be extended. Under the employment agreements, Mr. Ordan, Mr. Nadeau, Ms. Pangelinan, Mr. Schwartz and Mr. Neeb will receive an annual base salary of $650,000, $500,000, $400,000, $350,000, and $400,000 per year, respectively, and each of such executives will be eligible for an annual bonus under our annual incentive plan.

Pursuant to each of the employment agreements, in the event that the executive’s employment is terminated by us, the executive will be entitled to severance benefits specified in the contracts. In the event that the executive becomes subject to any golden parachute excise taxes under Section 4999 of the Internal Revenue Code, the executive will be entitled to an additional payment such that the executive is placed in the same after-tax position as if no excise tax had been imposed. However, if the aggregate payments that the executive is entitled to receive exceeds by 10 percent or less the maximum amount that the executive could receive without being subject to the excise tax, then the executive will not receive suchgross-up payment, and payments otherwise subject to the excise tax will be reduced to the maximum amount that the executive could receive without being subject to the excise tax.

Prior to his resignation from his position as our chief executive officer effective November 1, 2008, Mr. Klaassen was party to an employment agreement with us. See Notes 19 and 24 of the Notes to the Consolidated Financial Statements for more information regarding our obligation to provide certain compensation and benefits to Mr. Klaassen in connection with his resignation or otherwise as required under his employment agreement.

Legal Proceedings

Trinity OIG Investigation andQui TamAction

As previously disclosed, on September 14, 2006, we acquired all of the outstanding stock of Trinity Hospice Inc. (“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 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 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 tam plaintiff, 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 they file on its behalf. On June 6, 2007, the Department of Justice and the U.S. Attorney for Arizona filed a Notice

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

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. 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 million 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 second amended complaint names Sunrise Senior Living, Inc., KRG Capital, LLC, aka KRG Capital Partners, LLC, KRG Capital, LLC, KRG Capital Fund II, L.P., KRG Capital Fund II (PA), L.P., KRG Capital Fund II (FF), L.P., KRG Co-Investment, L.L.C., American Capital Strategies, LTD, and Trinity as defendants. On October 21, 2008, the United States, through the Civil Division of the U.S. Department of Justice, and the U.S. Attorney’s Office for the District of Arizona, filed a motion with the District Court to intervene in the pending case, but only as the case relates to defendant Trinity Hospice, Inc. The United States has indicated that it does not intend to intervene in the case as it relates to any other defendant, including Sunrise Senior Living, Inc. The motion is currently pending. The lawsuit is styled United 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.

At December 31, 2007, we had $6 million accrued for possible fines, penalties and damages relating to this matter. We have reduced this accrual to $1 million at December 31, 2008 based on our current estimate of expected losses.

IRS Audit

The Internal Revenue Service is auditing our federal income tax returns for the years ended December 31, 2005, 2006 and 2007. In July 2008, our 2005 federal income tax return audit was settled with the IRS, resulting in a tax liability of approximately $0.2 million. In January 2009, the IRS reopened the audit of our 2005 federal income tax return when they decided to audit our 2007 federal income tax return as a result of a refund claim filed with our 2007 federal income tax return relating to the 2007 net operating loss carryback for which we were seeking reimbursement of a certain portion of the federal income taxes we had paid in 2005.

In February 2009, we settled with the IRS on our employment tax audits for 2004, 2005, and 2006. The IRS determined that we were liable for payroll tax deposit penalties on stock option exercises during 2004, 2005, and 2006 for certain deposits that were made after the prescribed due dates. The total penalty was approximately $0.2 million for the three years. We paid the total penalty in November 2008.

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 had

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

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, styled United 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, and First 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 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 caption In 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’ motion to dismiss the complaint was filed on August 11, 2008. Lead plaintiffs filed their opposition brief to the motion to dismiss on October 10, 2008. The parties subsequently submitted stipulations to the court noting that they had met with a mediator and were pursuing settlement discussions, and, as a result, requested and obtained from the court extensions of the date for the defendants to file their reply brief in support of their motion to dismiss.

On February 27, 2009, Sunrise and its current or former directors or officers who were named individually as defendants entered into an agreement, subject to court approval, to settle the putative class action. The settlement calls for the certification by the court of a class consisting of persons (with certain exceptions) who purchased Sunrise common stock between February 26, 2004 and July 28, 2006, and payment of $13.5 million in cash into an interest-bearing escrow account by March 6, 2009. Upon final approval of the settlement by the court, the funds, less any costs of administration and any attorneys’ fees and expenses that the court might award to plaintiffs’ counsel, would be disbursed to participating class members according to a distribution plan to be submitted to and approved by the court.

Concurrently with entering into the settlement agreement, Sunrise and the Individual Defendants also are entering into agreements and releases with two of its insurance carriers, which provided primary and excess insurance coverage, respectively, under certain Directors’ and Officers’ Liability insurance policies for the relevant periods. The two insurance carriers are combining to pay $13.4 million toward the settlement amount, which will exhaust the coverage limits under the primary policy (after taking account of prior payments for related defense costs), but will not exhaust coverage limits under the excess policy. Sunrise and the Individual Defendants are providing releases to the carrier for which the coverage limits will be exhausted for all claims under its policy, and are providing to the other carrier releases as to claims under its policy relating to the settled putative class action litigation and the putative derivative litigations referenced below, in each case subject to court approval of the related settlement agreement. Taking into account the insurance contribution, the net cost of the settlement of the putative securities class action lawsuit to Sunrise is expected to be approximately $100,000. No amounts are to be paid by the Individual Defendants.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

The settlement agreement reached in this putative securities class action litigation follows the settlement agreement, subject to court approval, entered into on February 19, 2009 by Sunrise and the individuals named as defendants in two putative stockholder derivative actions brought by certain alleged stockholders of Sunrise for the benefit of the company, entitledIn re Sunrise Senior Living Derivative Litigation, Inc.,CaseNo. 1:07CV00143-RBW, pending in the U.S. District Court in the District of Columbia, andYoung, et al. v. Klaassen, et al.,CaseNo. 2770-N (CCNCC), pending in the Delaware Chancery Court, which settlement agreement and related funding arrangements are described in greater detail below.

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. 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 consolidated case is captioned:In re Sunrise Senior Living Derivative Litigation, Inc,Case No. 1:07CV00143 (the “District of Columbia action”). The consolidated 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. Subsequently, the plaintiffs filed an amended consolidated complaint that did not substantially alter the nature of their claims. The amended consolidated complaint was accepted by the Court and deemed to have been filed on March 28, 2008. We and the individual defendants filed motions to dismiss the amended consolidated complaint on June 16, 2008. The plaintiffs also filed a motion to lift the stay on discovery in this derivative suit. The motion was denied after briefing.

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 “Delaware action”). 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 those documents to the plaintiffs on May 16, 2008. Supplemental briefing on defendants’ motions to dismiss has been completed and, while the motions were pending, the plaintiffs requested that the Chancery Court stay the action, at least temporarily. The defendants did not oppose that request, and the Chancery Court granted an indefinite stay of proceedings on November 19, 2008, and directed the parties to provide a further status report by February 1, 2009. Following the parties’ status report, in which it was proposed that the stay remain in place, the Chancery Court extended the stay on February 17, 2009, and directed the parties to provide a further report by May 4, 2009.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

On February 19, 2009, the Company and the individual defendants entered into an agreement to settle the District of Columbia and Delaware actions. Under the terms of this settlement, which is subject to court approval, the Company, in addition to corporate governance measures that it already has implemented or is in the process of implementing, has agreed to (1) require independent directors to certify that they are independent under the rules of the New York Stock Exchange and to give prompt notification of any changes in their status that would render them no longer independent and (2) implement a minimum two-year vesting period, with appropriate exceptions, for stock option awards to employees. In addition, Paul J. Klaassen, the Company’s non-executive chairman, and the Company have agreed that the 700,000 stock options granted to Mr. Klaassen in conjunction with his previous employment agreement executed in September 2000 will be repriced from (a) $8.50 per share, the price set on September 11, 2000 by the Compensation Committee of the Company’s Board based on the prior day’s closing price, to (b) $13.09 per share, the closing price on the business day prior to November 10, 2000, the date on which the Company’s full Board approved the terms of the employment agreement. The agreement also provides that if plaintiffs in the District of Columbia action apply to the court for an award of attorneys’ fees and expenses, the Companyand/or its insurers will pay the amount so awarded, not to exceed $1.0 million, within 10 days following final approval of the settlement and the fee and expense award. Plaintiffs in the Delaware action will not make any separate application for an award of fees or expenses. The amount of attorneys’ fees and expenses that the court awards to plaintiffs is to be funded by one of the Company’s directors’ and officers’ liability insurance carriers under an applicable policy of insurance. No amounts are to be paid by the Company or by the individual defendants in the District of Columbia and Delaware actions.

Resolved or Settled Litigation

As previously disclosed, we were a defendant in a lawsuit filed by CGB Occupational Therapy, Inc. (“CGB”) in September 2000 in the U.S. District Court for the Eastern District of Pennsylvania. CGB provided therapy services to two nursing home communities in Pennsylvania that were owned by RHA Pennsylvania Nursing Homes (“RHA”) and managed by one of our subsidiaries. In 1998, RHA terminated CGB’s contract. In its lawsuit, CGB alleged, among other things, that in connection with that termination, Sunrise tortiously interfered with CGB’s contractual relationships with RHA and several of the therapists that CGB employed on an at-will basis. In a series of court decisions during 2002 through 2005, CGB was awarded compensatory damages of $109,000 and punitive damages of $2 million. In 2005, Sunrise appealed the punitive damages award. On August 23, 2007, a panel of the U.S. Court of Appeals for the Third Circuit vacated the $2 million punitive damages award and remanded the case with instructions that the district court enter a new judgment for punitive damages in the amount of $750,000. On September 5, 2007, CGB filed a petition for rehearing with the U.S. Court of Appeals for the Third Circuit. That petition was denied on September 24, 2007. The Company paid $750,000 in damages and $149,000 in interest to CGB on February 1, 2008 in full and complete satisfaction of the judgment.

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

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

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.


18.	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 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 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.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

We recognized the following in our consolidated statements of operations related to Sunrise REIT (in thousands):


	Twelve Months
	Ended
	December 31,
	2007

Management fees	$	5,518
Reimbursed contract services		77,277
Gain on sale and development of real estate		8,854
Interest income received from Sunrise REIT convertible debentures		—
Interest incurred on borrowings from Sunrise REIT		414
Sunrise’s share of earnings and return on investment in unconsolidated communities		180

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 Klaassen, our Chairman of the Board of Directors and his wife 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 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 for the provision of these services. We estimate that the aggregate cost of providing these services to SSLF totaled approximately $52,000 for 2006. 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. We 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, 2007 or 2008. 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 2008 and $0.3 million in both 2007 and 2006. In 2008, 2007 and 2006, we earned $3,000, $6,000 and $6,000 in management fees. We rent the conference center for management, staff and corporate events and paid approximately $0.02 million in 2008,

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

$0.1 million in 2007 and $0.2 million in 2006 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, expires September 30, 2013, and was amended in January 2007 to include additional space. 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 $95,000, $90,000 and $88,000 in sublease payments in 2008, 2007 and 2006, respectively

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.

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

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

communities, telephonic inquiries, and 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. We paid SEI approximately $0.5 million under SEI’s contract in 2008.

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.

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 represented the fair market value of the interest at the time of purchase as furnished to us by independent appraisers. The purchase of the fractional interest was approved by the Audit Committee of our Board of Directors.


19.	Employee Benefit Plans

401k Plan

We have a 401(k) Plan (“the Plan”) covering all eligible employees. Under the Plan, eligible employees may make pretax 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 $1.7 million, $1.6 million and $2.5 million in 2008, 2007 and 2006, 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 zero, $0.4 million and $0.3 million in 2008, 2007 and 2006, 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 zero and $0.2 million in 2008 and 2007.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

Chief Executive Officer Deferred Compensation Plan

Pursuant to an employment agreement with Mr. Klaassen, 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, notwithstanding any termination of Mr. Klaassen’s employment (such as his retirement in November 2008). 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 had 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 and contributed the current year funding in the third quarter of 2008. At December 31, 2008, we had contributed an aggregate of $1.4 million into this plan, leaving approximately $0.5 million to be contributed.


20.	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 have an estimated aggregate fair value $0.5 million at December 31, 2007.

The fair value of ourlong-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. Per SFAS No. 157, we have applied Level 2 type inputs to determine the estimated fair value of our debt. Fixed rate debt with an aggregate carrying value of $5.4 million and $9.1 million has an estimated aggregate fair value of $5.4 million and $9.2 million at December 31, 2008 and 2007, respectively. Variable rate debt with an aggregate carrying value of $630.8 million and $244.8 million at December 31, 2008 and 2007, respectively, had an estimated fair value of $613.1 million at December 31, 2008 and approximated its carrying value at December 31, 2007.

Disclosure about fair value of financial instruments is based on pertinent information available to management at December 31, 2008 and 2007. 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.


21.	Discontinued Operations

In the fourth quarter of 2008, we determined not to provide any additional funding to our Trinity subsidiary due to our review of our sources of cash and future cash requirements. As a result, we wrote-off the remaining goodwill and other intangible assets related to Trinity of approximately $9.8 million in the fourth quarter of 2008. As of December 31, 2008, Trinity had ceased operations.

In December 2008, two communities were sold to unrelated third parties and for which we have no continuing involvement. Their results of operations have been reclassified to discontinued operations.

The following amounts related to Trinity and the two sold communities have been segregated from continuing operations and reported as discontinued operations.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)


	For the Years Ended December 31,
(In thousands)	2008			2007			2006

Revenue	$	39,761		$	69,309		$	22,476
Expenses		(68,085	)		(82,955	)		(22,503	)
Impairments		(10,054	)		(56,729	)		(681	)
Gain (loss) on sale of real estate		1,094			—			—
Income taxes		—			18,327			315

Loss from discontinued operations	$	(37,284	)	$	(52,048	)	$	(393	)

Due to the valuation allowance on net deferred tax assets in the fourth quarter, no benefit for income taxes was allocated to discontinued operations for 2008.


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 and the United Kingdom), Germany and Greystone. All segments develop, acquire, dispose and manage senior living communities.

Germany was added as an operating segment on September 1, 2008 when we began to consolidate the nine communities in our venture. The results prior to September 1, 2008 include management fees, revenues and expenditures relating to our health care business in Germany and charges related to our guarantees. Subsequent to September 1, 2008, the results also include the revenues and expenses related to the operations of the nine communities. For further discussion, refer to Note 9.

Segment results are as follows (in thousands):


	For the Year Ended and as of December 31, 2008
	North
	America			Greystone			International			Germany			Total

Revenues	$	1,595,929		$	23,966		$	48,677		$	33,071		$	1,701,643
Interest income		4,470			72			1,544			514			6,600
Interest expense		10,593			—			1,229			9,584			21,406
Foreign exchange (loss) gain		—			—			(17,267	)		1,356			(15,911	)
Sunrise’s share of earnings and return on investment in unconsolidated communities		(7,318	)		—			(6,528	)		—			(13,846	)
Depreciation and amortization		44,848			3,249			1,182			1,997			51,276
Loss from continuing operations		(291,089	)		(19,318	)		(35,654	)		(33,703	)		(379,764	)
Investments in unconsolidated communities		51,372			—			15,480			—			66,852
Goodwill		—			39,025			—			—			39,025
Segment assets		1,080,145			48,644			97,594			155,174			1,381,557
Expenditures for long-lived assets		127,788			1,564			47,800			96			177,248
Deferred gains on the sale of real estate and deferred revenue		22,815			62,415			3,476			—			88,706

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)


	For the Year Ended and as of December 31, 2007
	North
	America			Greystone			International		Germany			Total

Revenues	$	1,509,215		$	16,471		$	39,710	$	17,845		$	1,583,241
Interest income		8,143			208			1,014		149			9,514
Interest expense		5,527			—			1,118		5			6,650
Foreign exchange (loss) gain		—			—			3,966		(6,280	)		(2,314	)
Sunrise’s share of earnings and return on investment in unconsolidated communities		31,812			1,600			75,535		—			108,947
Depreciation and amortization		47,747			4,068			750		136			52,701
(Loss) income from continuing operations		(21,536	)		(19,693	)		54,847		(31,845	)		(18,227	)
Investments in unconsolidated communities		80,423			—			16,750		—			97,173
Goodwill		130,711			39,025			—		—			169,736
Segment assets		1,489,786			61,312			213,538		33,961			1,798,597
Expenditures for long-lived assets		191,076			4,680			48,908		139			244,803
Deferred gains on the sale of real estate and deferred revenue		19,793			54,574			—		—			74,367


	For the Year Ended and as of December 31, 2006
	North
	America		Greystone			International			Germany			Total

Revenues	$	1,572,840	$	16,920		$	28,413		$	10,432		$	1,628,605
Interest income		8,800		194			419			63			9,476
Interest expense		6,655		—			(493	)		32			6,194
Foreign exchange gain (loss)		—		—			(1,139	)		445			(694	)
Sunrise’s share of earnings and return on investment in unconsolidated communities		54,950		—			(7,068	)		(4,180	)		43,702
Depreciation and amortization		43,985		3,462			160			80			47,687
Income (loss) from continuing operations		96,425		(14,490	)		(6,574	)		(59,684	)		15,677
Investments in unconsolidated communities		93,327		—			10,945			—			104,272
Goodwill		181,490		36,525			—			—			218,015
Segment assets		1,655,004		55,206			104,105			33,986			1,848,301
Expenditures for long-lived assets		138,760		714			48,945			175			188,594
Deferred gains on the sale of real estate and deferred revenue		23,811		28,147			—			—			51,958

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 2008, 2007 and 2006, we billed and collected $13.2 million,

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

$28.2 million and $21.6 million, respectively, of development fees of which $7.8 million, $26.4 million and $15.1 million, respectively, was deferred and will be recognized when the contract is completed.

During 2008 and 2007, our first U.K. development venture in which we have a 20% equity interest sold four and seven communities, respectively, to a venture in which we have a 10% interest. We recorded equity in (loss) earnings in 2008 and 2007 of approximately $(3.6) million and $75.5 million, respectively. When our U.K. 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 2008 and 2007, we recorded bonus expense of $7.9 million and $27.8 million, respectively, in respect of the bonus pool relating to the U.K. venture. These bonus amounts are funded from capital events and the cash is retained by us in restricted cash accounts. As of December 31, 2008, approximately $1.6 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 U.K. and Germany ventures. This bonus distribution limitation was satisfied on October 31, 2008.

We recorded $15.9 million, net, in exchange losses in 2008 ($14.2 million in losses related to the Canadian dollar and $1.7 million in losses related to the Euro and British pound).

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).

During 2008, we generated 12.0% and 18.8% of revenue from Ventas and HCP, respectively, for senior living communities which we manage. During 2007, we generated 11.8% and 18.9% of revenue from Ventas 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.

In 2008 and 2007, we recorded an impairment charge of $8.9 million and $56.7 million related to our Trinity goodwill and related intangible assets. Trinity ceased operations in December 2008 (see Note 21). This impairment charge is recorded in discontinued operations. In 2008, we also recorded an impairment charge of $121.8 million related to all the goodwill for our North American business segment which resulted from our acquisition of Marriott Senior Living, Inc. in 2003 and Karrington Health, Inc. in 1999. The impairment was recorded as the fair value of the North American business was less than the fair value of the net tangible assets and identifiable intangible assets.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)


23.	Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following (in thousands):


	December 31,
	2008		2007

Accounts payable and accrued expenses	$	66,760	$	71,240
Accrued salaries and bonuses		30,123		64,441
Accrued employee health and other benefits		47,685		67,096
Accrued legal, audit and professional fees		8,933		43,120
Other accrued expenses		30,643		29,465

	$	184,144	$	275,362


24.	Severance and Restructuring Plan

On July 31, 2008, we announced a program to reduce corporate expenses. We expect to achieve this through reorganization of corporate cost structure, including a voluntary separation program for certain team members, as well as a reduction of spending related to administrative processes, vendors, consultants and other costs. In September 2008, we concluded the voluntary separation program. As a result of this program and other staffing reductions in 2008, we have eliminated 165 positions in overhead and development, primarily in our McLean, Virginia headquarters. Through December 31, 2008, we have recorded severance charges related to this program of $15.0 million. We expect to record additional severance charges of $2.0 million in the first and second quarters of 2009. Primarily all of the restructuring charges are reflected in our domestic segment.

With the elimination of these positions, we reconfigured our office space and two floors of leased space in our headquarters were vacated. We ceased using the space on December 31, 2008 and the space is available for immediate sublease. The fair value of the lease obligation of the vacated space is approximately $2.4 million. A charge of $2.0 million (net of an existing straight-line lease liability of approximately $0.4 million) was recorded in 2008 for this obligation. In addition, we recorded an impairment charge of $0.9 million related to the leasehold improvements in the vacated space.

As previously disclosed, Mr. Paul Klaassen resigned as our chief executive officer effective November 1, 2008 and became our non-executive Chair of the Board. Upon his resignation as our chief executive officer, under his employment agreement, he became entitled to receive:


	•	annual payments for three years, beginning on the first anniversary of the date of termination, equal to Mr. Klaassen’s annual salary ($0.5 million) and bonus ($0) for the year of termination;

	•	continuation of the medical insurance and supplemental coverage provided to Mr. Klaassen and his family until Mr. Klaassen attains or, in the case of his death, would have attained, age of 65 (but to his children only through their attainment of age 22); and

	•	continued participation in his deferred compensation plan in accordance with the terms of his employment agreement.

The fair value of the continued participation of Mr. Klaassen in the deferred compensation plan cannot be reasonably estimated, as it is dependent upon Mr. Klaassen’s selection of available investment options and the future performance of those selections. Accordingly, no additional accrual was recorded with respect to the continued participation by Mr. Klaassen in his deferred compensation plan. There is no deferred compensation liability at December 31, 2008 due to the market value of the investment selections. See Note 19 of the Notes to the Consolidated Financial Statements for more information regarding Mr. Klaassen’s deferred compensation account.

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

The following table reflects the activity related to this severance and restructuring plan through December 31, 2008:


						Cash Payments			Liability at
	Initial					and Other			December 31,
(In thousands)	Charges		Adjustments			Settlements			2008

Voluntary severance	$	8,426	$	—		$	(5,114	)	$	3,312
Involuntary severance		5,198		—			(3,680	)		1,518
CEO retirement compensation		3,736		(2,213	)		—			1,523
Lease termination costs		2,918		—			(524	)		2,394

	$	20,278	$	(2,213	)	$	(9,318	)	$	8,747


25.	Subsequent Events

Bank Credit Facility

The Tenth Amendment to the Bank Credit Facility, signed on January 20, 2009, provided that there can be no additional borrowings and no issuances of any new letters of credit until April 1, 2009, and then only if we achieve compliance with the financial covenants of the loan documents. The interest rate was increased to LIBOR plus 475 basis points for Eurodollar Rate Loans and the Base Rate (as defined in the Tenth Amendment) plus 325 basis points for the Base Rate Loans. The Tenth Amendment also:


	•	waives compliance with the financial covenants of the Bank Credit Facility from December 30, 2008 through March 30, 2009;

	•	waives triggering of the cross default section of the Bank Credit Facility through March 30, 2009 for certain events of default which might occur under other credit facilities; and

	•	provides for principal repayments to lenders of $1.5 million and a modification fee of $0.4 million.

The Company previously disclosed in its Form 10-K for the year ended December 31, 2008 that it believed its expected cash balances and expected cash flow would be sufficient to enable the Company to meet its obligations only through March 31, 2009. Based on revised cash flow forecasts as well as a result of the cash proceeds from the March 18, 2009 sale of the Company's Greystone subsidiary, the Company currently expects that its cash balances and expected cash flow will be sufficient to operate the Company and meet its obligations through April 30, 2009. However, the Company does not expect to be in compliance with the financial covenants in the Bank Credit Facility on April 30, 2009, which is the day following the date on which the waiver of certain financial covenants set forth in the Bank Credit Facility expires. Unless a subsequent waiver is granted, failure to comply with the financial covenants on April 30, 2009 would constitute an event of default under the Bank Credit Facility that would allow the Lenders to exercise certain remedies after the expiration of any applicable grace period.

Germany Venture

On January 2, 2009, we exercised our option to purchase the remaining interest in our Germany venture not previously held by us and acquired a 94.9% controlling interest (see Note 9).

In January 2009, we informed the lenders to our German communities and the Hoesel land, an undeveloped land parcel, that our German subsidiary was suspending payment of principal and interest on all loans for our German communities and that we would seek a comprehensive restructuring of the loans and our operating deficit guarantees. As a result of the failure to make payments of principal and interest on the loans for our German communities, we are in default of the loan agreements. Our lenders to eight of our nine German communities have agreed not to foreclose on the communities that are collateral for their loans or to commence or prosecute any action or proceeding to enforce their demand for payment by us pursuant to our operating deficit agreements until the earliest of the occurrence of certain events relating to the loans or March 31, 2009. On March 6, 2009, we did not make a payment of principal and interest on the loan to the ninth community and on March 16, 2009 we entered into a Standstill Agreement with the lender.

Trinity

In January 2009, Trinity filed a plan of liquidation and dissolution before the Delaware Chancery Court. The Chancery Court will supervise the disposition of the assets of Trinity for the benefit of its creditors. At December 31,

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)

2008, the recorded assets of Trinity are $8.4 million and the recorded liabilities of Trinity are $36.1 million. The recorded liabilities of $36.1 million do not include: 1) approximately $2.7 million of obligations under long-term leases for office space used in the Trinity operations that are expected to be reduced or eliminated by the legal requirement for the landlord to mitigate damages by re-leasing the vacated space, 2) any amount that may be due to the plaintiffs related to the investigation of Trinity by the OIG and theQui TamAction discussed in Note 17 to the consolidated financial statements or 3) any amounts due to us.

Fountains

In January 2009, we informed the venture’s lenders and our venture partner that we were suspending payment of default interest at that date and payments under the income support guarantee, and that we would seek a comprehensive restructuring of the loan, our operating deficit guarantees and our income support guarantee. Our failure to pay default interest on the loan is an additional default of the loan agreement. We have requested that the lender for the Fountains portfolio agree not to foreclose on the communities that are collateral for their loans or to commence or prosecute any action or proceeding to enforce its demand for payment by us pursuant to our operating deficit agreements through March 31, 2009. As of February 27, 2009, the lender had not yet agreed to our request for a standstill agreement through March 31, 2009.

Greystone

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements — (Continued)


26.	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

2008
Operating revenue	$	419,369		$	421,774		$	424,895		$	435,605		$	1,701,643
Loss from continuing operations		(29,557	)		(28,248	)		(49,526	)		(272,433	)		(379,764	)
Loss from discontinued operations		(3,568	)		(3,528	)		(5,885	)		(24,303	)		(37,284	)
Extraordinary loss		—			—			(13,255	)		(8,876	)		(22,131	)
Net loss		(33,125	)		(31,776	)		(68,666	)		(305,612	)		(439,179	)
Basic net loss per common share Continuing operations	$	(0.59	)	$	(0.56	)	$	(0.98	)	$	(5.41	)	$	(7.54	)
Discontinued operations		(0.07	)		(0.07	)		(0.12	)		(0.48	)		(0.74	)
Extraordinary loss		—			—			(0.26	)		(0.18	)		(0.44	)
Net loss		(0.66	)		(0.63	)		(1.36	)		(6.07	)		(8.72	)
Diluted net income (loss) per common share
Continuing operations	$	(0.59	)	$	(0.56	)	$	(0.98	)	$	(5.41	)	$	(7.54	)
Discontinued operations		(0.07	)		(0.07	)		(0.12	)		(0.48	)		(0.74	)
Extraordinary loss		—			—			(0.26	)		(0.18	)		(0.44	)
Net loss		(0.66	)		(0.63	)		(1.36	)		(6.07	)		(8.72	)
2007
Operating revenue	$	377,280		$	391,212		$	411,737		$	403,012		$	1,583,241
Income (loss) from continuing operations		6,723			8,913			39,992			(73,855	)		(18,227	)
Income (loss) from discontinued operations		757			(921	)		(1,762	)		(50,122	)		(52,048	)
Net income (loss)		7,480			7,992			38,230			(123,977	)		(70,275	)
Basic net income (loss) per common share
Continuing operations	$	0.13		$	0.18		$	0.80		$	(1.48	)	$	(0.37	)
Discontinued operations		0.02			(0.02	)		(0.03	)		(1.00	)		(1.04	)
Net income (loss)		0.15			0.16			0.77			(2.48	)		(1.41	)
Diluted net income (loss) per common share
Continuing operations	$	0.13		$	0.17		$	0.77		$	(1.48	)	$	(0.37	)
Discontinued operations		0.02			(0.02	)		(0.03	)		(1.00	)		(1.04	)
Net income (loss)		0.15			0.15			0.74			(2.48	)		(1.41	)


(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 2008, we recorded an impairment charge of $121.8 million related to all of the goodwill for our North American business segment. Also, we determined that a valuation allowance on the net deferred tax assets was required. Because of this, we reversed the tax benefit associated with our extraordinary loss recorded in the third quarter.

PS UK Investment (Jersey) Limited Partnership

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 years ended 31 December 2008 (unaudited), 2007 and 2006 (unaudited)


			Unaudited						Unaudited
			2008			2007			2006
	Notes		£			£			£
*Operating revenue:*
Resident fees				9,788,455			14,176,377			6,583,409


Total operating revenue				9,788,455			14,176,377			6,583,409


*Operating expenses:*
Facility operating expenses				11,135,347			12,191,116			7,256,183
Facility development and pre-rental expenses				3,597,483			6,394,516			4,535,897
General and administrative expenses				365,905			597,968			131,926
Facility lease expenses				6,868			26,042			40,626
Management fees		6		489,154			775,441			355,960
Depreciation		3		3,137,723			3,324,095			2,084,776


Total operating expenses				(18,732,480	)		(23,309,178	)		(14,405,368	)


*Net operating loss*				(8,944,025	)		(9,132,801	)		(7,821,959	)


*Other income/(expense):*
Financial income				1,419,935			973,715			194,676
Interest expense				(11,440,469	)		(11,459,235	)		(4,425,643	)
Loss on extinguishment of debt				(130,305	)		(238,122	)		—
Foreign exchange (loss)/gain				(6,605	)		5,808			—
Gain on sale of subsidiaries		5		41,785,790			114,437,152			—


Total other income/(expense)				31,628,346			103,719,318			(4,230,967	)


*Profit/(loss) before tax*				22,684,321			94,586,517			(12,052,926	)


Income tax expense		9		(5,632	)		—			—


*Profit/(loss) for the year after tax*		10		22,678,689			94,586,517			(12,052,926	)

The accompanying notes form an integral part of these financial statements

PS UK Investment (Jersey) Limited Partnership

Consolidated balance sheet

at 31 December 2008 (unaudited) and 2007


			Unaudited
			2008		2007
	Notes		£		£
*Assets*
Current assets:
Cash and cash equivalents				14,857,587		20,421,691
Accounts receivable				467,268		344,149
Net receivables due from affiliates		6		—		336,986
Financial asset		5		15,552,515		—
Prepaid expenses and other current assets				5,872,401		2,560,883


Total current assets				36,749,771		23,663,709


*Non current assets*
Property and equipment		3		212,124,077		216,704,854
Restricted cash				14,169,887		11,588,218


Total non current assets				226,293,964		228,293,072


*Total assets*				263,043,735		251,956,781


*Liabilities and partners’ capital*

*Current liabilities*
Trade payables				67,498		100,018
Accrued expenses		7		7,273,775		8,061,183
Deferred revenue				334,840		309,658
Net payables due to affiliates		6		5,423,676		—
Other current liabilities		5		—		4,487,885
Current maturities of long-term debt, net of finance costs		8		22,894,514		19,452,506


Total current liabilities				35,994,303		32,411,250


*Non current liabilities*
Contractor retention				1,536,911		1,417,834
Long-term debt, net of finance costs		8		169,872,879		172,494,910
Derivative financial instruments				4,195,303		529,885


Total non-current liabilities				175,605,093		174,442,629
Partners’ capital		10		51,444,339		45,102,902


Total non current liabilities				227,049,432		219,545,531


*Total liabilities and partners’ capital*				263,043,735		251,956,781

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 2008 (unaudited), 2007 and 2006 (unaudited)


	Partners’		Accumulated						Foreign						Total
	capital		surplus/			Other			currency			Distribution			partners’
	contributions		(deficit)			reserves			translation			to partners			capital
	£		£			£			£			£			£
At 1 January 2006*		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 recognised 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*		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 recognised 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
Cash flow hedge (note 11)*		—		—			(3,665,418	)		—			—			(3,665,418	)
Distribution to partners*		—		—			—			—			(17,360,867	)		(17,360,867	)
Disposal of property and equipment revaluation*		—		—			(39,079,729	)		—			—			(39,079,729	)
Revaluation of property and equipment*		—		—			32,066,606			—			—			32,066,606


Total income and expense for the year recognised directly in equity*		—		—			(10,678,541	)		—			(17,360,867	)		(28,039,408	)
Profit for the year*		—		22,678,689			—			—			—			22,678,689


Total income and expense for the year*		—		22,678,689			(10,678,541	)		—			(17,360,867	)		(5,360,719	)
Partner contributions*		11,702,156		—			—			—			—			11,702,156


At 31 December 2008		99,528,800		101,081,137			27,871,303			(484	)		(177,036,417	)		51,444,339

*unaudited

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 31 December 2008 (unaudited), 2007 and 2006 (unaudited)


		Unaudited					Unaudited
	2008			2007			2006
	£			£			£
*Operating activities*
Profit/(loss) for the year before tax		22,678,689			94,586,517			(12,052,926	)
Adjustment to reconcile profit/(loss) for the year before tax to net cash flows from operating activities:
Net finance costs		10,157,444			10,717,833			4,230,967
Depreciation		3,137,723			3,324,095			2,084,776
Provision for bad debt		21,980			29,819			16,658
Gain on sale of subsidiaries		(41,785,790	)		(114,437,152	)		—
Loss on extinguishment of debt		(130,305	)		(238,122	)		—
Tax on continuing operations		5,632			—			—
Changes in assets and liabilities:
Accounts receivable		(145,099	)		157,745			(463,246	)
Prepaid expenses and other current assets		(3,311,519	)		(1,056,246	)		(1,043,983	)
Trade payables and accrued expenses		(706,484	)		849,712			268,812
Deferred revenue		25,242			88,880			220,758
Other current liabilities		(4,487,885	)		4,487,885			—


*Net cash flows used in operating activities*		(14,540,372	)		(1,489,034	)		(6,738,184	)


*Investing activities*
Increase in restricted cash		(2,581,668	)		(11,588,218	)		—
Purchase of property and equipment		(74,678,504	)		(89,329,492	)		(94,680,104	)
Proceeds from sale of subsidiaries		97,802,551			245,381,485			—
Interest paid and capitalised		(3,324,135	)		(4,695,605	)		(3,572,894	)
Interest received		1,419,935			973,715			194,676



*Net cash flows from investing activities*		18,638,179			140,741,885			(98,058,322	)


*Financing activities*
Contributions by partners		11,702,156			26,237,256			20,690,698
Distributions to partners		(17,360,867	)		(159,675,550	)		—
Net borrowings from/(repayments to) affiliates		5,753,282			(4,415,153	)		940,315
Net repayments to partners		—			(1,275,000	)		—
Borrowings of long-term debt		92,067,675			148,153,886			93,235,075
Repayments of long-term debt		(91,754,860	)		(126,918,499	)		—
Interest paid and expensed		(10,070,012	)		(9,785,802	)		(4,279,290	)


*Net cash flows (used in)/from financing activities*		(9,662,626	)		(127,678,862	)		110,586,798


Net (decrease)/increase in cash and cash equivalents before effect of exchange rate on cash		(5,564,819	)		11,573,989			5,790,292
Effect of exchange rate on cash		715			(421	)		(305	)


Net (decrease)/increase in cash and cash equivalents		(5,564,104	)		11,573,568			5,789,987
Cash and cash equivalents at beginning of year		20,421,691			8,848,123			3,058,136


*Cash and cash equivalents at end of year*		14,857,587			20,421,691			8,848,123

The accompanying notes form an integral part of these financial statements

PS UK Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements
at 31 December 2008 (unaudited), 2007 and 2006 (unaudited)

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), 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 2008, the Partnership has four operating properties, five properties under active development and one site 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 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 2008.

		*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

		During the year ended 31 December 2008, the Partnership has not adopted any new accounting policies which were not in place as of 31 December 2007 and for the year then ended.

PS UK Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements
at 31 December 2008 (unaudited), 2007 and 2006 (unaudited)

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.

		*Financial Asset*

		The Partnership has recorded a financial asset representing its contractual right to receive a variable amount of future cash related to prior sales of its subsidiary companies (note 5). Significant management judgment is required to determine the amount of the financial asset that will be recognised, based on forecasted operating results of communities it has sold.

		*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 2008 was £nil (unaudited) (2007 — £nil) and the carryforward tax losses at 31 December 2008 were £7,121,467 (unaudited) (2007 — £6,345,698). 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.

PS UK Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements
at 31 December 2008 (unaudited), 2007 and 2006 (unaudited)

2.4		Summary of significant accounting policies(continued)

		*Property and equipment*(continued)

		Accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and 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.

		*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 2008 (unaudited) or 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 respect to the partnership 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.

PS UK Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements
at 31 December 2008 (unaudited), 2007 and 2006 (unaudited)

2.4		Summary of significant accounting policies(continued)

		*Taxes*(continued)

		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 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.

PS UK Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements
at 31 December 2008 (unaudited), 2007 and 2006 (unaudited)

2.4		Summary of significant accounting policies(continued)

		*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.

		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.

PS UK Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements
at 31 December 2008 (unaudited), 2007 and 2006 (unaudited)

2.4		Summary of significant accounting policies(continued)

		*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 dominated 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.

		*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.

PS UK Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements
at 31 December 2008 (unaudited), 2007 and 2006 (unaudited)

2.4		Summary of significant accounting policies(continued)

		*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 1 and IAS 27 Amendment — Cost of investment in Subsidiary Jointly Controlled Entity or Associate		1 January 2009
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 27 Consolidated and Separate Financial Statements (revised January 2008)		1 July 2009
IAS 32 and IAS 1 Financial Instruments Puttable at Fair Value and Obligations arising on Liquidation		1 January 2009
IAS 39 Eligible Hedged Items		1 January 2009
Improvements to IFRS		Various dates

IFRIC		Effective date
IFRIC 13 Customer Loyalty Programmes		1 July 2008
IFRIC 15 Agreements for construction of real estate		1 January 2009
IFRIC 16 Hedges of a net investment in a foreign operation		1 October 2008
IFRIC 17 Distributions of Non-cash asset to Owners		1 July 2009

		The Directors of the General Partner 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.

PS UK Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements
at 31 December 2008 (unaudited), 2007 and 2006 (unaudited)

3.		Property and equipment

		Property and equipment consists of the following at 31 December 2008 (unaudited):


				Furniture
	Land and			and			Construction
	buildings			equipment			in progress			Total
	£			£			£			£
As at 1 January 2008, net of accumulated depreciation and exchange adjustment		107,896,194			4,463,963			104,344,697			216,704,854
Additions, including interest capitalised		88,206,908			3,277,722			(13,481,991	)		78,002,639
Disposals, net of revaluations and accumulated depreciation		(106,593,913	)		(4,055,092	)		—			(110,649,005	)
Revaluations		30,510,879			1,555,727			—			32,066,606
Depreciation charge for the year		(2,263,062	)		(874,661	)		—			(3,137,723	)
Transfer of net deferred financing costs		—			—			(863,294	)		(863,294	)


As at 31 December 2008, net of accumulated depreciation and exchange adjustment		117,757,006			4,367,659			89,999,412			212,124,077


As at 1 January 2008
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


As at 31 December 2008
Cost or fair value		118,996,113			4,836,201			89,999,412			213,831,726
Accumulated depreciation		(1,239,107	)		(468,542	)		—			(1,707,649	)


Net carrying amount		117,757,006			4,367,659			89,999,412			212,124,077

		Construction in progress represents costs incurred in construction of six facilities in development or pre-development. Costs to complete construction of six facilities are estimated to be £75 million.

		In prior years, the Partnership engaged Savills Commercial Ltd., an accredited independent valuer, to provide an opinion of the fair value of each of the communities that were operating as of each year end. Due to the deteriorating economic conditions during 2008 and the resulting negative impact on real estate value, the Partnership has determined the Floor Price, as defined in the Purchase and Sale agreement discussed in Note 5, provides a more accurate representation of fair value as it is a contractually agreed upon fixed price between knowledgeable, willing parties. The Floor Price is not impacted by current economic conditions and has been reduced by estimated costs to sell and estimated losses prior to sale to determine the fair value of the Partnership’s land, buildings, furniture and equipment related to the four communities that were operating as of 31 December 2008.

PS UK Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements
at 31 December 2008 (unaudited), 2007 and 2006 (unaudited)

3.		Property and equipment(continued)

		If property and equipment were measured using the cost model, the carrying amounts would be as follows at 31 December 2008 (unaudited):


				Furniture
	Land and			and
	buildings			equipment			Total
	£			£			£
Cost		88,485,233			3,280,474			91,765,707
Accumulated depreciation		(1,239,107	)		(468,542	)		(1,707,649	)


Net carrying amount		87,246,126			2,811,932			90,058,058

		Nine facilities, four operating and five under development, with a total carrying amount of £210,868,188 are subject to a first charge to secure the Partnership’s long-term debt (note 8).

		Property and equipment consists of the following at 31 December 2007:


	Land and			Furniture			Construction
	Buildings			and 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


As at 1 January 2007
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

PS UK Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements
at 31 December 2008 (unaudited), 2007 and 2006 (unaudited)

Property and equipment(continued)


	Land and			Furniture			Construction
	Buildings			and equipment			in progress		Total
	£			£			£		£

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 these 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:


				Furniture
	Land and			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

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.

PS UK Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements
at 31 December 2008 (unaudited), 2007 and 2006 (unaudited)

3.		Property and equipment(continued)

		Property and equipment consists of the following at 31 December 2006 (unaudited):


	Land and			Furniture			Construction
	Buildings			and 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 of 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

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.

PS UK Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements
at 31 December 2008 (unaudited), 2007 and 2006 (unaudited)

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 Portfolios 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 2008, the balance in the escrow account for income support was £nil (unaudited) (2007 — £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 £4.2 million (unaudited) (2007 — £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 Members, 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 during 2007.

		The Target Completion Dates for the remaining Pipeline Portfolio Members range from January 2009 until January 2010. A Floor Price has been established within the Purchase and Sale Agreement for each of the Pipeline Portfolio Members and this is the consideration received at settlement. A Final Price based on the performance of the communities, is determined at a date subsequent to the sale of each of the Pipeline Portfolio Members based upon specific provisions within the Purchase and Sale Agreement. 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.

PS UK Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements
at 31 December 2008 (unaudited), 2007 and 2006 (unaudited)

Sale of Subsidiaries(continued)

The results of the subsidiary companies sold in 2008 are presented below:


	Unaudited			Unaudited			Unaudited
	2008			2007			2006
	£			£			£
Revenue		7,547,877			8,045,671			—
Expenses		(10,377,255	)		(11,236,920	)		1,200,985

Net operating loss		(2,829,378	)		(3,191,249	)		(1,200,000	)

Other (expense)/income		(3,017,506	)		(3,016,854	)		38,761

Book income/(loss) before taxes		(5,846,884	)		(6,208,103	)		(1,161,239	)
Taxes payable related to book income:
Related to pre-tax profit/(loss)		—			—			—
Related to gain on disposal		—			—			—
Total taxes on book income for the subsidiaries sold		—			—			—

The net cash flows incurred by the subsidiary companies sold in 2008 are as follows:


	Unaudited			Unaudited			Unaudited
	2008			2007			2006
	£			£			£
Operating		(3,172,567	)		(4,247,679	)		(611,261	)
Investing		85,202,096			(14,299,095	)		(40,406,162	)
Financing		(85,079,166	)		20,509,140			40,426,955

Net cash (outflow)/inflow		(3,049,637	)		1,962,366			(590,469	)

PS UK Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements
at 31 December 2008 (unaudited), 2007 and 2006 (unaudited)

5.		Sale of Subsidiaries(continued)

		The results of the subsidiary companies sold in 2007 are presented below:


				Unaudited
	2007			2006
	£			£
Revenue		18,561,984			13,739,973
Expenses		(19,321,416	)		(19,465,988	)

Net operating loss		(759,432	)		(5,726,015	)

Other income/(expense)		(7,137,281	)		(4,343,129	)

Book loss before taxes		(7,896,713	)		(10,069,144	)
Taxes payable related to book income:
Related to pre-tax profit/(loss)		—			—
Related to gain on disposal		—			—
Total taxes on book income for the subsidiaries sold		—			—

The net cash flows incurred by the subsidiary companies sold in 2007 are as follows:


				Unaudited
	2007			2006
	£			£
Operating		(1,182,337	)		(8,235,124	)
Investing		146,018,109			(28,283,577	)
Financing		(149,412,223	)		40,585,176

Net cash (outflow)/inflow		(4,576,451	)		4,066,475

PS UK Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements
at 31 December 2008 (unaudited), 2007 and 2006 (unaudited)

5.1		*Sale of Subsidiaries —(unaudited)***

		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.

		The remaining net proceeds from the sale of the Mobberley Portfolio Members and additional proceeds from the sale of the Initial Portfolio Members were distributed in 2008 to SHIP and Sunrise LP, with the exception of £1.7 million representing a portion of Sunrise LP’s and SunCo’s distributions which are held in a restricted cash account until the termination of the Partnership or earlier as discussed in Note 6.

		Four 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 £5.7 million of the Partnership’s unsecured bank debt. On 30 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.

		On 31 October 2008, the subsidiary companies that owned and operated Sunrise of Tettenhall were purchased for £23.0 million with £21.1 million of the proceeds being used to repay £15.4 million of outstanding mortgage debt and £5.7 million of the Partnership’s unsecured bank debt. The Partnership recorded a net gain on the sale of these four additional Pipeline Members of £26.2 million during 2008. The remaining net proceeds from the sale of the Solihull, Cardiff and Chorleywood Pipeline Portfolio Members were distributed to SHIP with the exception of £0.1 million representing a portion of SunCo’s distribution which is held in a restricted cash account until the termination of the Partnership.

		A percentage of the excess (if any) of the Final Price over the Floor Price (“Top Up Payment”) is to be received by the Partnership. This Top Up Payment is to be reduced by 1) a maximum of £5 million representing additional income support (as defined in the Purchase and Sale Agreement) for the Seed Portfolio and 2) a percentage of any potential shortfall between the Final Price and Floor Price (“Clawback”) specific to two communities. At 31 December 2008, the Partnership has recorded a financial asset of £15,552,515 and corresponding gain for the expected Top Up Payment for the sold Pipeline Portfolio Members. This financial asset has been recorded at fair value at 31 December 2008 based on managements’ forecast of future operating results for the communities.

PS UK Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements
at 31 December 2008 (unaudited), 2007 and 2006 (unaudited)

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 2008 (unaudited) or the date of disposal:


			% equity interest
		Country of	Unaudited
Name		incorporation	2008		2007
PS UK SARL	Luxembourg			100		100
Property Companies:
Sunrise of Cardiff Limited	Jersey			0		100
Sunrise of Solihull Limited	Jersey			0		100
Sunrise of Chorleywood Limited	Jersey			0		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			0		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 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		100
Sunrise of Brighton Limited	Jersey			100		100
Operating Companies:
Sunrise Operations Cardiff Limited	England and Wales			0		100
Sunrise Operations Solihull Limited	England and Wales			0		100
Sunrise Operations Chorleywood Limited	England and Wales			0		100
Sunrise Operations Weybridge Limited	England and Wales			100		100
Sunrise Operations Tettenhall Limited	England and Wales			0		100
Sunrise Operations Morningside Limited	England and Wales			100		100
Sunrise Operations Sonning Limited	England and Wales			100		100
Sunrise Operations Sevenoaks Limited	England and Wales			100		0
Sunrise Operations Southbourne Limited	England and Wales			100		100
Sunrise Operations Eastbourne Limited	England and Wales			100		100
Sunrise Operations Winchester Limited	England and Wales			100		0
Sunrise Operations Bramhall II Limited	England and Wales			100		100
Sunrise Operations Beaconsfield Limited	England and Wales			100		100
Sunrise Operations Bagshott II Limited	England and Wales			100		0

PS UK Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements
at 31 December 2008 (unaudited), 2007 and 2006 (unaudited)

6.		Affiliate transactions(continued)

		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 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.


	Unaudited
	2008			2007
Amounts due (from)/to other related parties	£			£
Sunrise and its wholly owned subsidiaries		5,440,083			(372,366	)
General Partner		(40,801	)		(40,801	)
Home Help Companies:
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
Sunrise Home Help Bramhall II Limited		36			—
Sunrise Home Help Beaconsfield Limited		1,382			—
Sunrise Home Help Weybridge Limited		4,472			—
Sunrise Home Help Bagshot II Limited		1,382			—
Sunrise Home Help Sonning Limited		1,382			—
Sunrise Home Help Southbourne Limited		7,299			—
Sunrise Home Help Eastbourne Limited		8,441			—

		5,423,676			(336,986	)

		*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 been 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 2008 were £4,912,938 (unaudited) (2007 — £4,167,787) (2006 — £5,302,088) (unaudited).

		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 2008 were £489,154 (unaudited) (2007 — £775,441) (2006 — £355,960) (unaudited).

PS UK Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements
at 31 December 2008 (unaudited), 2007 and 2006 (unaudited)

6.		Affiliate transactions(continued)

		The Partnership has an amount due to Sunrise and its wholly owned subsidiaries of £5,440,083 (unaudited) as of 31 December 2008 (2007 — £372,366 was due from Sunrise). 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 £40,801 as of 31 December 2008 (unaudited) (2007 — £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 has 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 2008 were £908,419 (unaudited) (2007 — £1,717,156) (2006 — £586,035) (unaudited). 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 provided to the Home Help Companies in 2008 was £633,735 (unaudited) (2007 — £468,425) (2006 — £428,387) (unaudited) was reimbursed from the Home Help Companies.

		*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:


	Unaudited
	2008		2007
	£		£
Contractor accruals including retainage		5,200,015		5,993,356
Interest payable on mortgage debt		1,227,288		1,369,186
Other accrued expenses		846,472		698,641

		7,273,775		8,061,183

PS UK Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements
at 31 December 2008 (unaudited), 2007 and 2006 (unaudited)

8.		Long-term debt and commitments

		The Partnership has obtained commitments for land loans, construction loans and revolving loans of up to approximately £262.5 million to fund nine facilities and future capital transactions (unaudited) (2007 — £273.8 million to fund eleven facilities and future capital transactions). The loans are for a term of eighteen months to five years and are secured by the facilities. There was £192,767,393 (unaudited) outstanding at 31 December 2008 (2007 — £191,947,416). These amounts are net of finance costs of £1,037,973 (unaudited) at 31 December 2008 (2007 — £1,278,140) and include accrued interest of £3,303,645 (unaudited) at 31 December 2008 (2007 — £827,533).

		Principal maturities of long-term debt as of 31 December 2008 are as follows:


	Effective				Unaudited 2008		2007
	interest rate%		Maturity		£		£
Current
£79,282,382 bank loan		7.87 to 8.25		2008-2010		22,219,514		19,227,570
£19,500,000 bank loan	LIBOR + 1.75			2008-2011		—		224,936
£18,451,680 bank loan	LIBOR + 1.25 to LIBOR + 1.75			2009-2011		435,000		—
£21,034,664 bank loan	LIBOR + 1.25 to LIBOR +1.75			2009-2012		240,000		—

						22,894,514		19,452,506


Non-current
£79,282,382 bank loan		7.87 to 8.25		2008-2010		21,226,995		32,456,816
£19,500,000 bank loan	LIBOR + 1.75			2008 - 2011		—		17,216,880
£15,300,000 bank loan	LIBOR + 1.25 to LIBOR + 2.50			2009 - 2010		—		15,152,016
£21,428,205 bank loan	LIBOR + 0.85 to LIBOR + 1.50			2009-2010		19,142,573		7,952,225
£18,451,680 bank loan	LIBOR + 1.25 to LIBOR + 1.75			2009 - 2011		17,834,307		13,313,696
£21,034,664 bank loan	LIBOR + 1.25 to LIBOR + 1.75			2009-2012		20,536,964		10,051,651
£15,320,712 bank loan	LIBOR + 1.25 to LIBOR + 2.25			2009 - 2013		—		15,090,332
£20,664,096 bank loan	LIBOR + 1.25 to LIBOR + 1.50			2010-2012		15,505,120		1,768,519
£20,437,698 bank loan	LIBOR + 1.40 to LIBOR + 1.65			2010-2013		9,318,827		—
£19,784,870 bank loan	LIBOR + 2.00 to LIBOR + 2.25			2010-2013		8,160,044		—
£19,472,082 bank loan	LIBOR + 0.85 to LIBOR + 1.50			2010		16,490,783		6,109,329
£19,677,500 bank loan	LIBOR + 1.25 to LIBOR + 2.50			2011		19,541,391		17,642,085
£16,729,000 bank loan	LIBOR + 1.35 to LIBOR + 1.75			2011		—		16,253,740
£22,252,592 bank loan	LIBOR + 1.35 to LIBOR + 1.75			2011		22,115,875		19,487,621

						169,872,879		172,494,910

		£79,282,382 bank loan This loan is unsecured and has payments beginning May 2008 with the balance scheduled to be repayable in May 2010. As described in note 5 a subsidiary of the Partnership entered into a Purchase and Sale Agreement with a Third Party Buyer for the sale of a portfolio of subsidiary companies that own and operate senior living communities. This agreement has enabled the Partnership to draw down this facility which is repayable in tranches within 120 days of each future sale completion. As described in note 13, £7.4 million of the Partnership’s unsecured bank debt was repaid following the Southbourne sale. The directors of the General Partner will manage cash flow such that the Partnership’s unsecured bank debt and other liabilities are settled in preference to making further distributions, following the receipt of proceeds from future pipeline sales, which in turn trigger part repayment of the unsecured facility as described above.

		£19,500,000 bank loan This loan is secured by the facility and was fully repaid in May 2008.

		£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.

		£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.

PS UK Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements
at 31 December 2008 (unaudited), 2007 and 2006 (unaudited)

8.		Long-term debt and commitments(continued)

		£15,300,000 bank loan This loan is secured by the facility and was fully repaid in April 2008.

		£21,428,205 bank loan This loan is secured by the facility and is repayable in full in November 2010.

		£15,320,712 bank loan This loan is secured by the facility and was fully repaid in October 2008.

		£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.

		£20,437,698 bank loan This loan is secured by the facility and has bi-annual payments beginning December 2010 and the balance repayable in June 2013.

		£19,784,870 bank loan This loan is secured by the facility and has bi-annual payments beginning December 2010 and the balance repayable in June 2013.

		£19,472,082 bank loan This loan is secured by the facility and is repayable in full in November 2010.

		£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.

		£16,729,000 bank loan This loan is secured by the facility and was fully repaid in May 2008.

		£22,252,592 bank loan This loan is secured by the facility and is repayable in full in December 2011.

		*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 2008, total fees paid and capitalized by the Partnership were £640,890 (unaudited) (2007 — £392,584).

		*Commitments — unaudited*

		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.

PS UK Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements
at 31 December 2008 (unaudited), 2007 and 2006 (unaudited)

8.		Long-term debt and commitments(continued)

		*Commitments — unaudited*(continued)

		The Operating Deficit Guarantees commence when the facility opens and may be terminated by the lender if the Interest Cover Ratio and Debt Service Cover Ratio (and in some cases the Occupancy level) equals or exceeds the benchmarks determined by the Guarantee Agreements for a specified period of time. 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 would generally be advanced to the Partnership as non-interest bearing and subordinate to the claims of the primary lender.

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, the operating companies are subject to UK corporation tax on their net trading profits, and the property companies are subject to UK income tax on profits generated in a “Property” business as a result of owning land in the UK. Note for completeness purposes that the property companies are also subject to tax in Jersey. However, because Double Tax Relief will apply, and because starting 2008/2009 Jersey is to reduce its income tax rate to zero, only the UK tax rates are applied.

		Gains arising in the Luxembourg subsidiary are not taxable due to the profit participating loan in place with the Jersey Limited Partner which effectively attributes the profit to the investing partners.

		Major components of income for the years ended 31 December are as follows:


	Unaudited						Unaudited
	2008			2007			2006
	£			£			£
Partnership income		9,481,749			88,569,571			436,676
PS UK SARL (Luxembourg) profit/(loss)		22,132,797			14,424,091			(559,767	)
UK Operating companies loss		(6,004,680	)		(4,227,699	)		(14,033,380	)
Jersey Property companies (loss)/profit		(2,931,177	)		(4,179,446	)		2,103,545


Consolidated net profit/(loss)		22,678,689			94,586,517			(12,052,926	)

The operating and property companies had the following deferred tax assets and liabilities at 31 December:


	Unaudited
	2008			2007
	£			£
Deferred tax assets
Net operating tax loss for Operating and Property Companies		1,902,223			1,607,551
Pre-rental expense carry-forward		12,579			397


Total deferred tax assets		1,914,802			1,607,948


Deferred tax liabilities
Capital allowances in advance of depreciation		(274,258	)		(88,563	)


Total deferred tax liabilities		(274,258	)		(88,563	)

PS UK Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements
at 31 December 2008 (unaudited), 2007 and 2006 (unaudited)

Income taxes(continued)

		In the UK, the applicable average statutory tax rate for corporation tax in 2008 is 28.5% (unaudited) (2007 — 30%) (2006 — 30%). The applicable 2008 statutory tax rate for income tax on rental income arising in the UK, to a non UK resident has been reduced from 22% to 20% as of 1 April 2008 (unaudited) (2007- 20%). As explained, the Jersey companies pay income tax in the UK rather than Jersey as double tax relief is available such that tax is not paid in both territories on the rental income.

		The above results in a current tax payable and tax expense of £5,632 (unaudited) (2007- £nil) (2006- £nil) (unaudited).

		A reconciliation between tax expense and property company income per books multiplied by the statutory rate for the period ended 31 December 2008 is as follows:


	Unaudited						Unaudited
	2008			2007			2006
	£			£			£
Accounting profit before tax from property companies:		(2,931,177	)		(4,179,446	)		(14,033,380	)
At statutory tax rate of 20% (2007 - 22%)		(586,235	)		(923,438	)		(3,087,344	)

Adjustments to book income:
Non-deductible pre-rental expenses (mainly project costs not capitalised)		590,614			923,438			3,087,344
Under provision in prior years		1,253			—			—


Total tax charge		5,632			—			—

		No adjustments have been made to the UK operating company losses and as such they are carried forward as unrecognised tax losses.

		As at 31 December 2008 the operating companies and the property companies had combined accumulated net operating losses of approximately £7,121,467 (unaudited) (2007 — loss of £6,345,698) which, once agreed with the tax authorities, can be carried forward indefinitely for offset against future taxable profits of the companies in which the losses arose. At the applicable statutory tax rates this would create a long-term deferred tax asset of £1,902,223 (unaudited) at 31 December 2008 (2007 — £1,607,948).

		Additionally, the operating and property companies have pre-commencement expenses of approximately £50,176 (unaudited) as at 31 December 2008 (2007 — £1,491) which at the applicable statutory tax rates would create a deferred tax asset of £12,579(unaudited) in 2008 (2007 — £397) as outlined above.

		At the property company level capital allowances in advance of depreciation in the amount of approximately £1,371,291 (unaudited) for 2008 (2007 — £442,815) at the statutory tax rate would create a deferred tax liability of £274,258 (unaudited) (2007 — £88,563) as mentioned above.

PS UK Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements
at 31 December 2008 (unaudited), 2007 and 2006 (unaudited)

Income taxes(continued)

		Note that the ending deferred tax balances do not include activity related to the Operating Companies and Property Companies that were transferred into a new venture during 2008. These are the Operating Companies and Property Companies related to Solihull, Cardiff, Chorleywood, and Tettenhall. At the end of 2008 each of the discontinued Operating Companies and Property Companies were in a tax loss position. See Note 5.

		The 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.

		Property companies —unaudited

		With effect from the 2009 year of assessment the standard rate of income tax for Jersey companies has changed. For the period ended 31 December 2009 and subsequent periods, the Company will be taxable at the standard rate of 0%. The comparative figures have been prepared using the previous standard rate of 20%.

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.

		The partners had initially agreed to contribute £42,500,000 to the Partnership and subsequently increased their commitment to £117,500,000, of which £99,528,800 (unaudited) has been funded through to 31 December 2008 (2007 — £87,826,644).

PS UK Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements
at 31 December 2008 (unaudited), 2007 and 2006 (unaudited)

10.		Partners’ capital(continued)

		Activity in the individual partners’ capital accounts was as follows:


	Sunrise LP			SHIP			SunCo			Total
	£			£			£			£

Balance at 1 January 2006 — unaudited		7,353,473			29,413,894			1			36,767,368
Contributions — unaudited		4,138,139			16,552,559,			—			20,690,698
Net loss for the year — unaudited		(2,410,585	)		(9,642,341	)		—			(12,052,926	)
Other reserves — unaudited		14,127,339			56,509,358			—			70,636,697
Foreign currency translation adjustment — unaudited		(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	)

Balance at 31 December 2007		3,316,891			50,758,005			(8,971,994	)		45,102,902
Contributions — unaudited		2,340,432			9,361,724			—			11,702,156
Net profit for the year — unaudited		4,535,738			18,142,951			—			22,678,689
Other reserves — unaudited		(2,135,708	)		(8,542,833	)		—			(10,678,541	)
Distributions — unaudited		(2,178,290	)		(14,670,351	)		(512,226	)		(17,360,867	)

At 31 December 2008 — unaudited		5,879,063			55,049,496			(9,484,220	)		51,444,339

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 the lease-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 2008 (unaudited) and 31 December 2007.

		At 31 December 2008, the Partnership had approximately £58 million (unaudited) (2007 — £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 £580,000 (unaudited) (2007 — £500,000) (2006 — £1,700,000) (unaudited) based on the amount of floating-rate debt that was not hedged at 31 December 2008.

		The table below summarises the Partnership’s financial liabilities at 31 December based on contractual undiscounted payments, including interest.

PS UK Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements
at 31 December 2008 (unaudited), 2007 and 2006 (unaudited)

11.		Financial risk management objectives and policies(continued)

		*Interest rate risk*(continued)

		As at 31 December 2008 — (unaudited)


			Less		Three
	On		than three		to twelve		One to		More than
	demand		months		months		five years		five years		Total
	£		£		£		£		£		£
Interest bearing loans and borrowings		—		1,648,546		30,791,239		186,913,855		—		219,353,640
Trade payables		67,498		—		—		—		—		67,498
Accrued expenses		—		6,039,089		—		—		—		6,039,089
Contractor retention		—		928,987		305,699		1,536,911		—		2,771,597

		67,498		8,616,622		31,096,938		188,450,766		—		228,231,824

As at31 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		—		1,384,157		27,006,517		190,270,379		13,093,982		231,755,035
Trade payables		100,018		—		—		—		—		100,018
Accrued expenses		—		6,656,499		—		—		—		6,656,499
Contractor retention		—		273,075		1,131,609		1,417,834		—		2,822,518

		100,018		8,313,731		28,138,126		191,688,213		13,093,982		241,334,070

		*Hedging activities*

		Cash flow hedges

		The Partnership manages its 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.

		At 31 December 2008 (unaudited) and 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 to 3-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 2008, the fair value of the interest rate swap was £4,195,303 (unaudited) (2007 — £529,885).

PS UK Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements
at 31 December 2008 (unaudited), 2007 and 2006 (unaudited)

11.		Financial risk management objectives and policies(continued)

		*Credit risk*

		The Partnership has recorded a contingent financial asset representing its contractual right to receive future cash for the previous sales of certain of its subsidiary entities. The future cash is receivable from the counterparty to the Purchase and Sale Agreement discussed in note 5. The maximum exposure should the counterparty be unable to pay would be the amount of the financial asset recorded of £15,552,515 (unaudited).

		There are no other 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.

		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 2008.

PS UK Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements
at 31 December 2008 (unaudited), 2007 and 2006 (unaudited)

11.		Financial risk management objectives and policies(continued)

		*Capital management*(continued)

		The following table provides the detail of the capital contributions made for the relevant financial year:


	Unaudited
	2008			2007
	£			£
General partnership expenses		(250,000	)		45,546
Initial site investigation costs
Initial investment approved projects:
Sunrise of Bath Limited		—			(11,065	)
Sunrise of Bristol Leigh Woods Limited		—			(2,263,093	)
Sunrise of Brooklands Limited		(77,646	)		306,301
Sunrise of Chichester Limited		—			135,485
Sunrise of Haywards Heath Limited		—			123,493
Sunrise of High Wycombe Limited		—			(1,828	)
Sunrise of Morningside Limited		—			(42,397	)
Sunrise of Brighton		1,315,706			—
Sunrise of Surbiton		(53,627	)		387,664
Final investment approved projects:
Sunrise of Bagshot II Limited		—			5,166,024
Sunrise of Beaconsfield Limited		—			5,078,287
Sunrise of Bramhall II Limited		—			4,810,438
Sunrise of Cardiff Limited		250,000			—
Sunrise of Eastbourne Limited		585,439			3,021,973
Sunrise of Sevenoaks Limited		3,024,593			302,030
Sunrise of Solihull Limited		369,231			—
Sunrise of Sonning Limited		—			4,481,506
Sunrise of Southbourne Limited		1,398,049			2,025,701
Sunrise of Tettenhall Limited		1,047,585			386,011
Sunrise of Weybridge Limited		501,592			2,014,636
Sunrise of Winchester Limited		3,591,234			270,544

		11,702,156			26,237,256

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 2008, the Partnership contributed £nil (unaudited) (2007 — £30,069) (2006 — £23,698) to the Plan.

13.		Subsequent events after the balance sheet date of 31 December 2008 (unaudited)

		On 2 January 2009, the subsidiary companies that owned and operated Sunrise of Southbourne were purchased for £29.5 million with £27.4 million of the proceeds being used to repay £20.0 million of outstanding mortgage debt and £7.4 million of the Partnership’s unsecured bank debt. A gain of approximately £6.0 million will arise on this sale.

14.		Subsequent events after the balance sheet date of 31 December 2007

		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.

Report of Independent Auditors

To the Partners of PS Germany Investment (Jersey) Limited Partnership

We have audited the accompanying consolidated balance sheet of PS Germany 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 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 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.

Since the date of completion of our audit of the accompanying financial statements and initial issuance of our report thereon dated 10 September 2008, the Partnership, as discussed in Note 2.1.1 relating to going concern and paragraphs 2 to 6 of Note 11.1 to the financial statements, has not complied with certain covenants of loan agreements with banks and the guarantor of the loans, Sunrise Senior Living Inc., has also not complied with specific covenants in respect of its Bank Credit Facility. This raises substantial doubt about the Partnership’s ability to continue as a going concern. The Partnership Management’s plans as to these matters also are described in Note 11.1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Ernst & Young LLP

London, England
10 September 2008
except for Note 2.1.1 relating to going concern and paragraphs 2 to 6 of Note 11.1, as to which the date is 23 December 2008

100

PS Germany Investment (Jersey) Limited Partnership

Consolidated income statement

Eight months ended 31 August 2008(unaudited) and years ended 31 December 2007 and 2006


			Unaudited
			8 months ended			Year ended			Year ended
			31 August			31 December			31 December
			2008			2007			2006
	Notes		€			€			€
*Operating revenue:*
Resident fees				7,580,322			6,321,192			2,803,890
Rental income		5		4,231,552			4,673,335			2,394,728


Total operating revenue				11,811,874			10,994,527			5,198,618


*Operating expenses:*
Facility operating expenses				13,755,243			13,860,525			7,128,251
Facility development and pre-rental expenses				619,524			2,707,130			4,790,673
General and administrative expenses				8,044			209,777			247,551
Management fees		5		353,683			313,560			139,708
Depreciation		4		3,730,872			4,560,805			2,168,000
Negative fair value movement on property and equipment		4		12,146,724			63,613,081			10,739,995


Total operating expenses				30,614,090			85,264,878			25,214,178


*Net operating loss*				(18,802,216	)		(74,270,351	)		(20,015,560	)


*Other income/(expenses):*
Interest income				130,292			2,999			40,566
Interest expense				(9,438,235	)		(11,265,789	)		(3,927,736	)
Foreign exchange loss				—			(712	)		—


Total other income/(expenses)				(9,307,943	)		(11,263,502	)		(3,887,170	)


*Loss before tax and minority interests*				(28,110,159	)		(85,533,853	)		(23,902,730	)
Income tax expense		8		—			—			—


*Loss for the period after tax before minority interests*				(28,110,159	)		(85,533,853	)		(23,902,730	)
Minority interests				427,944			1,544,885			770,254


*Net loss for the period after minority interests*		9		(27,682,215	)		(83,988,968	)		(23,132,476	)

The accompanying notes form an integral part of these financial statements

101

PS Germany Investment (Jersey) Limited Partnership

Consolidated balance sheet

at 31 August 2008(unaudited) and 31 December 2007


			Unaudited
			31 August			31 December
			2008			2007
	Notes		€			€
*Assets*
*Current assets:*
Cash and cash equivalents		3		2,454,693			1,526,263
Accounts receivable				912,362			645,584
Prepaid expenses and other current assets				268,889			180,943
Receivables due from affiliates		5		460,945			4,391,014


Total current assets				4,096,889			6,743,804


*Non current assets*
Property and equipment		4		110,473,901			124,295,892
Restricted cash		7		5,863,645			5,737,273
Rent receivable		5		5,772,630			4,454,895
Participation rights		5		—			900,000


Total non current assets				122,110,176			135,388,060


*Total assets*				126,207,065			142,131,864


*Liabilities and partners’ capital*

*Current liabilities*
Trade payables				302,821			442,405
Accrued expenses		6		1,683,499			1,701,471
Payables due to affiliates		5		19,269,476			16,430,307
Partner loan		5		2,010,000			—
Current maturities of long-term debt		7		7,845,988			3,718,340


Total current liabilities				31,111,784			22,292,523


*Non current liabilities*
Partner loan		5		—			2,010,000
Notes payable to affiliates		5		11,070,710			10,469,296
Long-term debt, net of finance costs		7		177,122,051			172,379,204


Total non current liabilities				188,192,761			184,858,500


Minority interest				38,844			466,788
Partners’ capital		9		(93,136,324	)		(65,485,947	)


*Total partners’ capital*				(93,097,480	)		(65,019,159	)


*Total liabilities and partners’ capital*				126,207,065			142,131,864

The accompanying notes form an integral part of these financial statements

102

PS Germany Investment (Jersey) Limited Partnership

Consolidated statement of changes in partners’ capital

Eight months ended 31 August 2008(unaudited) and years ended 31 December 2007 and 2006


	Partners’					Asset			Foreign									Total
	capital		Accumulated			revaluation			currency			Partners’			Minority			partners’
	contributions		deficit			reserve			translation			capital			interests			capital
	€		€			€			€			€			€			€
At 1 January 2006(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	)
Foreign currency translation(unaudited)		—		—			—			31,838			31,838			—			31,838


Total income and expense for the period recognised directly in equity(unaudited)		—		—			—			31,838			31,838			—			31,838
Loss for the period(unaudited)		—		(27,682,215	)		—			—			(27,682,215	)		(427,944	)		(28,110,159	)


Total income and expense for the period(unaudited)		—		(27,682,215	)		—			31,838			(27,650,377	)		(427,944	)		(28,078,321	)
Partner contributions(unaudited)		—		—			—			—			—			—			—


At 31 August 2008(unaudited)		50,463,173		(143,085,930	)		—			(513,567	)		(93,136,324	)		38,844			(93,097,480	)

The accompanying notes form an integral part of these financial statements

103

PS Germany Investment (Jersey) Limited Partnership

Consolidated statement of cash flows

Eight months ended 31 August 2008(unaudited) and years ended 31 December 2007 and 2006


			Unaudited
			8 months ended			Year ended			Year ended
			31 August			31 December			31 December
			2008			2007			2006
	Notes		€			€			€
*Operating activities*
Loss for the period after tax before minority interests				(28,110,159	)		(85,533,853	)		(23,902,730	)
Adjustments to reconcile loss for the period after tax before minority interests to net cash flows from operating activities:
Net finance costs				9,307,943			11,263,502			3,887,170
Negative fair value movement on property and equipment				12,146,724			63,613,081			10,739,995
Depreciation				3,730,872			4,560,805			2,168,000
Provision for bad debt				—			31,583			2,932
Changes in assets and liabilities:
Accounts receivable				(266,778	)		(360,651	)		(195,473	)
Prepaid expenses and other current assets				(87,947	)		73,048			(226,362	)
Trade payables and accrued expenses				(291,705	)		130,707			814,658
Rent receivable				(1,317,735	)		(2,156,573	)		(1,421,933	)


Net cash flows used in operating activities				(4,888,785	)		(8,378,351	)		(8,133,743	)


*Investing activities*
Increase in restricted cash				(126,372	)		(5,737,273	)		—
Purchase of property and equipment				(2,327,599	)		(43,755,464	)		(68,429,779	)
Interest paid and capitalised				(93,281	)		(1,235,851	)		(1,077,332	)
Repayment/(purchase) of participation rights				900,000			(100,000	)		(300,000	)
Interest received				130,292			2,999			40,566


Net cash flows used in investing activities				(1,516,960	)		(50,825,589	)		(69,766,545	)


*Financing activities*
Contributions by partners				—			54,000			14,040,080
Contributions by minority interests				—			(54,000	)		894,568
Financing cost paid				—			(430,159	)		—
Net borrowings from/(repayments to) affiliates				6,802,174			(3,810,859	)		8,170,511
Notes payable to affiliates				601,414			6,808,090			1,885,470
Borrowings of long-term debt				11,012,604			143,550,913			58,899,239
Repayments of long-term debt				(2,193,975	)		(77,713,608	)		(6,797,160	)
Interest paid and expensed				(8,886,942	)		(8,688,172	)		(3,347,577	)


Net cash flows from financing activities				7,335,275			59,716,205			73,745,131


Net increase/(decrease) in cash and cash equivalents before effect of exchange rate on cash				929,530			512,265			(4,155,157	)
Effect of exchange rate on cash				(1,100	)		(586	)		—


Net increase/(decrease) in cash and cash equivalents				928,430			511,679			(4,155,157	)
Cash and cash equivalents at beginning of period				1,526,263			1,014,584			5,169,741


Cash and cash equivalents at end of period		3		2,454,693			1,526,263			1,014,584

The accompanying notes form an integral part of these financial statements

104

PS Germany Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements

for the eight months ended 31 August 2008(unaudited)and years ended 31 December 2007 and 2006

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 August 2008, the Partnership has nine operating properties and 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.

		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 exercised its option in January 2009. Also on 1 September 2008, Sunrise entered into an agreement with SHIP whereby Sunrise obtained 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. Based on FIN46 of the US Accounting Standards and the transfer of control, the Partnership has been consolidated within the Sunrise Senior Living, Inc. group effective from 1 September 2008.

		These financial statements are as of and from the period ended 31 August 2008 which is the day immediately before the consolidation of the Partnership by Sunrise for financial reporting purposes.

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.

		*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 eight months ended 31 August 2008.

		*Principles of consolidation*

		The consolidated financial statements include the financial statements of the Partnership and its wholly owned subsidiary undertakings. The Partnership wholly owns thirteen (unaudited) (2007 - thirteen) 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 twelve 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 and operate assisted living facilities. All significant intercompany accounts and transactions eliminate upon consolidation.

2.1.1		*Going concern— related to the year ended 31 December 2007*

		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 September 2008, the amount of funding provided by Sunrise under these loans and guarantees was approximately€32 million. Sunrise has estimated that they will need to fund an additional€31million through 2012 until the communities reach stabilization. The General Partner has made recent inquires of Sunrise as the Guarantor to the Partnership to ensure that any guarantees it has given can be met. Sunrise is taking the steps set out below to satisfy this obligation and continues to fund the Partnership as the need arises.

		Sunrise expects to breach certain loan covenants as of 31 December 2008, and accordingly, believes that on 1 January 2009 it will no longer be able to borrow under the existing Bank Credit Facility.

		In the event that Sunrise is unable to obtain revised terms and restructure its Bank Credit Facility by 31 January 2009, or Sunrise fails to comply with the new liquidity covenants included in the July 2008 amendment for any calendar month, the lenders under the amended Bank Credit Facility could, amongst other things, exercise their rights to accelerate the payment of all amounts then outstanding under the amended Bank Credit Facility, exercise remedies against the collateral securing the amended Bank Credit Facility, require Sunrise to replace or provide cash collateral for the outstanding letters of credit or pursue further modification with respect to the amended Bank Credit Facility.

		Sunrise is working with their lenders to revise and restructure their Bank Credit Facility and expect to achieve this restructuring prior to 30 March 2009. Sunrise is also seeking to refine their Bank Credit Facility through new lenders and is discussing their potential sources of capital with other third parties. However, no assurance can be given that Sunrise’s efforts will be successful. The financial statements have been prepared assuming that Sunrise continues as a going concern and do no include any adjustments that might result from our outcome of this uncertainty. 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.

105

PS Germany Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements

for the eight months ended 31 August 2008(unaudited)and years ended 31 December 2007 and 2006


2.1.2		*Going concern — related to the period ended 31 August 2008 (unaudited)*

		The consolidated financial statements have been prepared on a going concern basis. As of 31 August 2008, partners’ capital had a deficit balance of approximately€93 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. In January 2009, Sunrise disclosed to the General Partner that it would not honor these financial guarantees and would seek to compromise such liabilities. As of 30 September 2008, the amount of funding provided by Sunrise under these loans and guarantees was approximately€32 million. Without these loans and guarantees from Sunrise, the Partnership would not have been in compliance with certain of its debt covenants as of 31 August 2008.

		Sunrise breached certain loan covenants as of 31 December 2008. On 23 March 2009, Sunrise and the lenders under the Bank Credit Facility executed the Eleventh Amendment to the Bank Credit Facility. The purpose of the Amendment is to provide the parties with an additional period of time to negotiate the terms of a twelfth amendment to the Bank Credit Facility which would comprehensively address any remaining issues between the parties with respect to the Bank Credit Facility through the Bank Credit Facility’s current stated maturity date of 2 December 2009, with the desired objective of obtaining the execution of such twelfth amendment prior to the close of business on 30 April 2009.

		The Eleventh Amendment, among other matters, suspends until 1 May 2009 the obligation of the lenders under the Bank Credit Facility to (1) advance any additional proceeds of the loans to the borrowers under the Bank Credit Facility or (2) issue any new letters of credit. However, the lenders agreed to renew certain scheduled outstanding letters of credit in accordance with the annual renewal provisions of such letters of credit. The Amendment also waived compliance with certain financial covenants of the Bank Credit Facility through 29 April 2009 and the applicability of certain cross-default provisions through 30 April 2009.

		The Amendment also permanently reduces the aggregate commitments of the lenders under the Bank Credit Facility from $160 million to $118.0 million (outstanding borrowings of $93.5 million plus outstanding letters of credit of $24.5 million).

		Sunrise previously disclosed in its Form 10-K for the year ended 31 December 2008 that it believed its expected cash balances and expected cash flow would be sufficient to enable Sunrise to meet its obligations only through 31 March 2009. Based on revised cash flow forecasts as well as a result of the cash proceeds from the 18 March 2009 sale of Sunrise’s Greystone subsidiary, Sunrise currently expects that its cash balances and expected cash flow will be sufficient to operate and meet its obligations through 30 April 2009. However, Sunrise does not expect to be in compliance with the financial covenants in the Bank Credit Facility on 30 April 2009, which is the day following the date on which the waiver of certain financial covenants set forth in the Bank Credit Facility expires. Unless a subsequent waiver is granted, failure to comply with the financial covenants on 30 April 2009 would constitute an event of default under the Bank Credit Facility that would allow the Lenders to exercise certain remedies after the expiration of any applicable grace period.

		In the event of an acceleration of the Bank Credit Facility, Sunrise may not be able to fully repay its outstanding borrowings.

		The financial statements have been prepared assuming that the Partnership and Sunrise continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty. The conditions described above raise substantial doubt about the Partnership’s and Sunrise’s ability to continue as a going concern.

106

PS Germany Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements

for the eight months ended 31 August 2008(unaudited)and years ended 31 December 2007 and 2006


2.2		Changes in accounting policies

		During the eight month period ended 31 August 2008 the Partnership has not adopted any new accounting policies which were not in place as at 31 December 2007 and for the year then ended.

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 on operating sub-leases.

		*Estimation uncertainty*

		The preparation of financial statements in conformity with IFRS 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 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 August 2008 was€nil (31 December 2007:€nil) and the unrecognised tax losses at 31 August 2008 was€90 million (31 December 2007:€70 million). Further details are contained in note 8.

107

PS Germany Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements

for the eight months ended 31 August 2008(unaudited)and years ended 31 December 2007 and 2006

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 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.

		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 deficit has been apportioned between all categories in relation to cost 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.

		Based on independent valuations, a negative fair value deficit was recorded as of 31 August 2008 and 31 December 2007.

		*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.

108

PS Germany Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements

for the eight months ended 31 August 2008(unaudited)and years ended 31 December 2007 and 2006

2.4		Summary of significant accounting policies(continued)

		*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 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

		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.

		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

109

PS Germany Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements

for the eight months ended 31 August 2008(unaudited)and years ended 31 December 2007 and 2006

2.4		Summary of significant accounting policies(continued)

		*Deferred income taxes*(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.

		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.

		*Foreign currency translation*

		The consolidated financial statements are presented in Euros, which is the Partnership’s functional and presentational currency. 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 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*

		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.

110

PS Germany Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements

for the eight months ended 31 August 2008(unaudited)and years ended 31 December 2007 and 2006

2.4		Summary of significant accounting policies(continued)

		*Borrowing costs*(continued)

		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 1 and IAS 27 Amendment — Cost of investment in a Subsidiary, Jointly Controlled Entity or Associate		1 January 2009
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 27 Consolidated and Separate Financial Statements (revised January 2008)		1 July 2009
IAS 32 and IAS 1 Financial Instruments Puttable at Fair Value and Obligations arising on Liquidation		1 January 2009
IAS 39 Eligible Hedged Items		1 January 2009
Improvements to IFRS		Various dates


IFRIC		Effective date
IFRIC 13 Customer Loyalty Programmes		1 July 2008
IFRIC 15 Agreements for construction of real estate		1 January 2009
IFRIC 16 Hedges of a net investment in a foreign operation		1 October 2008
IFRIC 17 Distributions of Non-cash asset to Owners		1 July 2009

		The Directors of the General Partner do not anticipate that the adoption of these standards and interpretations will have a material impact on the Partnership’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 Partnership’s results or net assets it may result in certain changes in the presentation of the Partnership’s financial statements from 2009 onwards.

111

PS Germany Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements

for the eight months ended 31 August 2008(unaudited)and years ended 31 December 2007 and 2006

3.		Cash and cash equivalents

		For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise the following at 31 August 2008 and 31 December 2007:


	Unaudited
	31 August		31 December
	2008		2007
	€		€
Cash at banks and on hand		2,454,693		1,526,263

		2,454,693		1,526,263

Cash at banks earns interest at floating rates based on daily bank deposit rates.

4.		Property and equipment

		Property and equipment consists of the following at 31 August 2008 (unaudited):


				Furniture
	Land and			and			Construction
	buildings			equipment			in progress			Total
	€			€			€			€
As at 1 January 2008, net of accumulated depreciation		91,311,548			7,258,702			25,725,642			124,295,892
Additions, including interest capitalised		22,052,409			1,912,847			(21,544,376	)		2,420,880
Revaluations		(7,904,229	)		(426,504	)		(3,815,991	)		(12,146,724	)
Depreciation charge for the year		(2,358,179	)		(1,372,693	)		—			(3,730,872	)
Transfer of net deferred financing costs		—			—			(365,275	)		(365,275	)


As at 31 August 2008, net of accumulated depreciation		103,101,549			7,372,352			—			110,473,901


As at 1 January 2008 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


As at 31 August 2008 cost or fair value		110,412,722			11,469,238			—			121,881,960
Accumulated depreciation		(7,311,173	)		(4,096,886	)		—			(11,408,059	)


Net carrying amount		103,101,549			7,372,352			—			110,473,901

The Partnership has determined that the valuations prepared by Savills Commercial Ltd as of 31 December 2007 for seven of the eight operating properties continue to be representative of fair value as of 31 August 2008 as the operating results of the seven operating properties through 31 August 2008 have not significantly differed from the operating forecasts provided when the valuations were performed. The negative revaluation for the eight months ended 31 August 2008 results from the valuation of the ninth community that opened in February 2008, the updated valuation (prepared by Savills Commercial Ltd. as of 30 September 2008) for one operating community and the valuation of a piece of land that the Partnership has decided it will not develop. The market value for the land was based on market-based evidence as of 31 August 2008.

112

PS Germany Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements

for the eight months ended 31 August 2008(unaudited)and years ended 31 December 2007 and 2006

4.		Property and equipment(continued)

		If property and equipment were measured using the cost model, the carrying amounts would be as follows at 31 August 2008(unaudited):


				Furniture
	Land and			and			Construction
	buildings			equipment			in progress		Total
	€			€			€		€
Cost		189,004,152			15,411,617			3,965,991		208,381,760
Accumulated depreciation		(7,311,173	)		(4,096,886	)		—		(11,408,059	)


Net carrying amount		181,692,979			11,314,731			3,965,991		196,973,701

Nine facilities and one parcel of undeveloped land, with a total carrying amount, under the cost model, of€197 million 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 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.

113

PS Germany Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements

for the eight months ended 31 August 2008(unaudited)and years ended 31 December 2007 and 2006

4.		Property and equipment(continued)

		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

		Ten facilities, eight operating and one under development, and one parcel of undeveloped land, with a total carrying amount, under the cost model, of€198.6 million 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

114

PS Germany Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements

for the eight months ended 31 August 2008(unaudited)and years ended 31 December 2007 and 2006

Property and equipment(continued)

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.

115

PS Germany Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements

for the eight months ended 31 August 2008(unaudited)and years ended 31 December 2007 and 2006

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 August 2008:


		% equity interest
		Unaudited
	Country of	31 August		31 December
Name	incorporation	2008		2007
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.

116

PS Germany Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements

for the eight months ended 31 August 2008(unaudited)and years ended 31 December 2007 and 2006

5.		Affiliate transactions(continued)

		*Other related parties*

		The following table provides the closing balances as at 31 August 2008 and 31 December 2007 for transactions which have been entered into with related parties for the relevant financial period.


	Unaudited
	31 August		31 December
	2008		2007
	€		€
Amounts due from other related parties
General Partner
PS Germany (Jersey) GP Limited		40,853		40,853
Care Companies:
Sunrise Reinbek Pflege GmbH		—		1,388,936
Sunrise Klein Flottbek Pflege GmbH		38,521		984,301
Sunrise Villa Camphausen Pflege GmbH		29,114		704,803
Sunrise Frankfurt-Westend Pflege GmbH		59,553		630,165
Sunrise Oberursel Pflege GmbH		63,372		375,574
Sunrise Wiesbaden Pflege GmbH		102,049		136,448
Sunrise Munchen-Thalkirchen Pflege GmbH		110,492		105,661
Sunrise Hannover Pflege GmbH		16,991		24,273


		460,945		4,391,014


Amounts due to other related parties
Sunrise and its wholly owned subsidiaries		19,127,319		16,430,307
Care Companies:
Sunrise Reinbek Pflege GmbH		12,244		—
Sunrise Konigstein Pflege GmbH		129,913		—

		19,269,476		16,430,307

		*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 for the eight months ended 31 August 2008 were€nil(unaudited)(year ended 31 December 2007 -€1,492,881) (year ended 31 December 2006 -€2,940,527).

		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 for the eight months ended 31 August 2008 were€353,683(unaudited)(year ended 31 December 2007 -€313,560) (year ended 31 December 2006 -€139,708).

		The Partnership has an amount due to Sunrise and its wholly owned subsidiaries of€19,127,319 as of 31 August 2008(unaudited)(as of 31 December 2007 -€16,430,307). This payable relates to the above described transactions as well as other development and operating costs paid by Sunrise on behalf of the Partnership. This payable is due on demand and is non-interest bearing.

117

PS Germany Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements

for the eight months ended 31 August 2008(unaudited)and years ended 31 December 2007 and 2006

5.		Affiliate transactions(continued)

		*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 August 2008(unaudited)(as of 31 December 2007 - -€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.

		*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 LP, 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 for the eight months ended 31 August 2008 were€478,479(unaudited)(year ended 31 December 2007 -€401,414) (year ended 31 December 2006 -€175,490), 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 for the eight months ended 31 August 2008 were€1,576,759(unaudited)(year ended 31 December 2007 -€1,033,587) (year ended 31 December 2006 -€346,683) 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 for the eight months ended 31 August 2008 was€4,231,552(unaudited)(year ended 31 December 2007 -€4,673,335) (year ended 31 December 2006 -€2,394,728). 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 nine subleases as of 31 August 2008 and eight subleases as of 31 December 2007 are as follows:


	Unaudited
	31 August		31 December
	2008		2007
	€		€
Within one year		6,349,372		5,417,734
Within one to two years		6,349,372		5,417,734
Within two to three years		6,349,372		5,417,734
Within three to four years		6,349,372		5,417,734
Within four to five years		6,349,372		5,417,734
After five years		114,639,600		100,239,754

		146,386,460		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 August 2008,€179,129(unaudited)(31 December 2007 -€118,031) of the rent receivable will be received in the next 12 months. Total rent receivable for the eight months ended 31 August 2008 was€5,772,630(unaudited)(year ended 31 December 2007 -€4,454,895) (year ended 31 December 2006 -€2,298,332).

118

PS Germany Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements

for the eight months ended 31 August 2008(unaudited)and years ended 31 December 2007 and 2006

5.		Affiliate transactions(continued)

		*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€nil in 2008(unaudited),€100,000 in 2007 and€300,000 in 2006 (€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 for the eight months ended 31 August 2008 was€nil(unaudited)(year ended 31 December 2007 -€nil) (year ended 31 December 2006 -€nil). In June 2008, the Participation Rights Agreements were terminated and the Participation Rights were repaid to the Partnership.

		*Partner loan*

		Under the terms of the Partnership Agreement, Sunrise LP and SHIP have provided loans to the Partnership. The loans are unsecured, non-interest bearing and are repayable from available cash from operations or capital transactions. In September 2008, these loans were repaid to Sunrise LP and SHIP.

		*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€11,070,710 outstanding at 31 August 2008(unaudited) including accrued interest of€1,070,710(unaudited) (31 December 2007 -€10,469,296 including accrued interest of€469,296), (31 December 2006 -€3,661,206 including accrued interest of€172,026).

		*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). In December 2007, this director resigned from the Partnership.

6.		Accrued expenses

		Accrued expenses consist of the following at 31 August 2008 and 31 December 2007:


	Unaudited
	2008		2007
	€		€
Contractor accruals		—		24,734
Professional fee accruals		425,526		806,486
Interest payable on mortgage debt		22,955		467,263
Other accrued expenses		1,235,018		402,988

		1,683,499		1,701,471

119

PS Germany Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements

for the eight months ended 31 August 2008(unaudited)and years ended 31 December 2007 and 2006

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€184,968,039 outstanding at 31 August 2008(unaudited)(31 December 2007 -€176,097,544). These amounts are net of finance costs of€2,032,210 at 31 August 2008(unaudited)(31 December 2007 -€2,084,076).

		Principal maturities of long-term debt as of 31 August 2008 and 31 December 2007:


		Calendar		Unaudited
	Effective	year of		2008		2007
	interest rate%	maturity		€		€
Current
€1,202,500 bank loan	2.25 + EURIBOR		2008		1,202,500		1,202,500
€2,358,100 bank loan	3.25 + EURIBOR		2008		1,165,220		515,840
€13,761,900 bank loan	3.25 + EURIBOR		2008		2,542,700		2,000,000
€3,317,603 bank loan	1.125 - 2.00 + EURIBOR		2008-2009		130,000		—
€3,380,292 bank loan	1.125 - 2.00 + EURIBOR		2009		90,000		—
€16,898,403 bank loan	1.125 - 2.00 + EURIBOR		2008-2009		660,000		—
€21,062,550 bank loan	1.125 - 2.00 + EURIBOR		2009		545,000		—
€21,613,301 bank loan	1.35 - 2.25 + EURIBOR		2008-2009		1,137,544		—
€2,992,567 bank loan	1.35 - 2.25 + EURIBOR		2008-2009		101,924		—
€4,289,330 bank loan	1.125 - 2.00 + EURIBOR		2009		53,100		—
€17,032,444 bank loan	1.125 - 2.00 + EURIBOR		2009		218,000		—

					7,845,988		3,718,340


Non-current
€2,358,100 bank loan	3.25 + EURIBOR		2008-2011		—		1,036,260
€13,761,900 bank loan	3.25 + EURIBOR		2008-2011		8,384,034		10,340,239
€3,317,603 bank loan	1.125 - 2.00 + EURIBOR		2008-2011		2,397,658		2,472,894
€3,380,292 bank loan	1.125 - 2.00 + EURIBOR		2009-2011		3,160,252		2,565,010
€16,898,403 bank loan	1.125 - 2.00 + EURIBOR		2008-2011		14,884,362		15,125,874
€21,062,550 bank loan	1.125 - 2.00 + EURIBOR		2009-2011		20,166,157		18,574,495
€21,613,301 bank loan	1.35 - 2.25 + EURIBOR		2008-2011		19,903,787		18,957,299
€2,992,567 bank loan	1.35 - 2.25 + EURIBOR		2008-2012		1,777,789		1,730,797
€3,961,848 bank loan	2.75 + EURIBOR		2012		3,947,486		3,944,845
€4,230,775 bank loan	2.75 + EURIBOR		2012		4,215,439		4,212,618
€4,239,762 bank loan	2.75 + EURIBOR		2012		4,224,393		4,221,566
€4,289,330 bank loan	1.125 - 2.00 + EURIBOR		2009-2012		4,236,239		1,327,079
€4,520,586 bank loan	2.75 + EURIBOR		2012		4,504,198		4,455,250
€15,223,829 bank loan	2.75 + EURIBOR		2012		15,168,643		15,204,428
€16,799,225 bank loan	2.75 + EURIBOR		2012		16,738,327		16,727,128
€17,032,444 bank loan	1.125 - 2.00 + EURIBOR		2009-2012		16,491,812		14,586,650
€18,399,642 bank loan	2.75 + EURIBOR		2012		18,332,944		18,320,677
€18,656,160 bank loan	2.75 + EURIBOR		2012		18,588,531		18,576,095

					177,122,051		172,379,204

€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. As of March 2009, this loan remains unpaid.

120

PS Germany Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements

for the eight months ended 31 August 2008(unaudited)and years ended 31 December 2007 and 2006

7.		Long-term debt and commitments(continued)

		€2,358,100 bank loan This loan is secured by the 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€1,000,000 through 31 August 2008 and it is anticipated the Partnership will be required to make the additional€500,000 quarterly principal payments through the remaining term of the loan.

€3,317,603 bank loan

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.

€16,898,403 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.

121

PS Germany Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements

for the eight months ended 31 August 2008(unaudited)and years ended 31 December 2007 and 2006

7.		Long-term debt and commitments(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 August 2008, total funds in the Debt Service Reserve Account were€5,863,645(unaudited) (as of 31 December 2007 —€5,737,273) which is reflected as restricted cash on the balance sheet. In September 2008, the balance in the Debt Service Reserve Account was applied against the outstanding balance of the loans.

		*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. For the eight month period ended 31 August 2008, total fees paid and capitalized by the Partnership were€nil(unaudited)(year ended 31 December 2007 -€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 with the following exception. The Operating Deficit Guarantees for loans with principal balances of€85,953,624(unaudited)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 August 2008 (unaudited) and 31 December 2007.

		Sunrise has also guaranteed 25% of the principal balance of the€1,202,500 land loan (unaudited).

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 eight months ended 31 August 2008 and years ended 31 December 2007 and 2006 are as follows:


	Unaudited
	2008			2007			2006
	€			€			€
Partnership income		2,404,747			4,819,612			3,805,979
Operating and property company loss		(30,086,962	)		(88,808,580	)		(26,938,455	)


Consolidated net loss		(27,682,215	)		(83,988,968	)		(23,132,476	)

122

PS Germany Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements

for the eight months ended 31 August 2008(unaudited)and years ended 31 December 2007 and 2006

8.		Income taxes (continued)

		The operating and property companies had the following deferred tax assets and liabilities at 31 August 2008 and 31 December 2007:


	Unaudited
	2008			2007
	€			€
Deferred tax assets
Net operating losses for Operating and Property Companies		14,225,605			18,392,000
Negative fair value movement on property and equipment		13,666,968			19,629,212


Total deferred tax assets		27,892,573			38,021,212


Deferred tax liabilities
Property and equipment		(381,759	)		(517,682	)
Rent abatement		(976,935	)		(1,183,018	)
Facility development and operating expense		(2,784,715	)		(4,691,445	)
Deferred finance cost		(473,051	)		(680,290	)


Total deferred tax liabilities		(4,616,460	)		(7,072,435	)

Net deferred tax asset		23,276,113			30,948,777

As at 31 August 2008 the operating companies and property companies had combined accumulated net operating losses of approximately€90,035,478 (unaudited) (31 December 2007 -€69,666,665) 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 15.8% for the eight months ended 31 August 2008 (unaudited) (year ended 31 December 2007 - 26.4%) this would create a long-term deferred tax asset of€14,225,605 at 31 August 2008 (unaudited) (31 December 2007 -€18,392,000).

Additionally, a negative fair value charge taken for accounting purposes for the eight months ended 31 August 2008 in the amount of€12,146,724 (unaudited) (year ended 31 December 2007 -€63,613,081) would create a deferred tax asset at 31 August 2008 of€13,666,968 (unaudited) (31 December 2007 -€19,629,212) at the above tax rates.

The deferred tax liabilities outlined above (depreciation, rent abatement, development and operating expenses, and deferred finance cost) in the amount of€29,218,104 at 31 August 2008 (unaudited) (31 December 2007 -€26,789,529) at the applicable statutory tax rate of 15.8% (as at 31 December 2007 - 26.4%) would create a long-term deferred tax liability of€4,616,460 at 31 August 2008 (unaudited) (31 December 2007 -€7,072,435). 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€23,276,113 at 31 August 2008 (unaudited) (31 December 2007 -€30,948,776).

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 periods.

123

PS Germany Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements

for the eight months ended 31 August 2008(unaudited)and years ended 31 December 2007 and 2006

8.		Income taxes (continued)

		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 approximately 10.5% (after taking into consideration that the trade tax paid is a deduction of both the German corporate tax and trade tax base) for the eight months ended 31 August 2008 (unaudited) and the year ended 31 December 2007. The German holding company has a trade tax net operating loss as described above. 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

		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 Shareholders’ Agreement.

		A portion of Sunrise LP’s 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’s in the capital account is 20% of the Partnerships’ capital.

		The partners had originally agreed to contribute€67,000,000 to the Partnership, of which€50,463,173 has been funded through to 31 August 2008(unaudited) and 31 December 2007.

		Activity in the individual partners’ capital accounts was as follows:


	Sunrise LP			SHIP			SunCo		Total
	€			€			€		€
Balance at 1 January 2006 -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	)


Balance at 31 December 2007		(13,470,622	)		(52,015,326	)		1		(65,485,947	)
Contributions —unaudited		—			—			—		—
Net loss for the period —unaudited		(5,194,088	)		(22,488,127	)		—		(27,682,215	)
Foreign currency translation —unaudited		6,368			25,470			—		31,838


At 31 August 2008 -unaudited		(18,658,342	)		(74,477,983	)		1		(93,136,324	)

124

PS Germany Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements

for the eight months ended 31 August 2008(unaudited)and years ended 31 December 2007 and 2006

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 the lease-up phase and is reduced further once a facility reaches stabilization, as defined in the loan documents. The Partnership has not utilised hedging instruments to reduce its exposure to cash flow interest rate risk.

		The subordinate loan with Sunrise LP was 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€130 million at 31 August 2008(unaudited) (as of 31 December 2007 -€178 million). The fair value of the debt was determined giving consideration to the fair value of the of the underlying assets which are collateral for the debt and the operating deficit guarantees from Sunrise which guarantee to the lender the payment of monthly principal and interest.

		At 31 August 2008, the Partnership had approximately€187 million of floating-rate debt(unaudited) (as of 31 December 2007 -€178 million). Debt incurred in the future also may bear interest at floating rates. Therefore, increases in prevailing interest rates could increase the Partnership’s 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€1.87 million based on the amount of floating-rate debt at 31 August 2008(unaudited) (as of 31 December 2007 -€1.78 million).

125

PS Germany Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements

for the eight months ended 31 August 2008(unaudited)and years ended 31 December 2007 and 2006

10.		Financial risk management objectives and policies (continued)

		*Interest rate risk (continued)*

		The table below summarises the Partnership’s financial liabilities at 31 August 2008 and 31 December 2007 based on contractual undiscounted payments, including interest.

		As at 31 August 2008 (unaudited)


			Less		Three
	On		than three		to twelve		One to		More than
	demand		months		months		five years		five years		Total
	€		€		€		€		€		€
Interest bearing loans and borrowings		—		5,625,441		15,009,028		205,322,444		—		225,956,913
Trade payables		302,821		—		—		—		—		302,821
Accrued expenses		—		1,683,499		—		—		—		1,683,499
Partner loan		—		2,010,000		—				—		2,010,000

		302,821		9,318,940		15,009,028		205,322,444		—		229,953,233

As at 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

		*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 was to permit the acquisition and development of senior living facilities. During 2008, the Partnership decided it would not develop any further facilities.

		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 were also made for initial site investigation costs as well as other expenses, fees and liabilities that the Partnership incurred. No changes were made in the objectives, policies or processes during the eight months ended 31 August 2008.

126

PS Germany Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements

for the eight months ended 31 August 2008(unaudited)and years ended 31 December 2007 and 2006

10.		Financial risk management objectives and policies(continued)

		*Capital management (continued)*

		The following table provides the detail of the capital contributions made for the relevant financial period:


	Unaudited
	Eight months ended		Year ended
	31 August		31 December
	2008		2007
	€		€
Final investment approved projects:
Sunrise Frankfurt-Westend Senior Living GmbH & Co. KG.		—		6,000
Sunrise Hannover Senior Living GmbH & Co. KG		—		6,000
Sunrise Klein Flottbek Senior Living GmbH & Co. KG		—		6,000
Sunrise Konigstein Senior Living GmbH & Co. KG		—		6,000
Sunrise Munchen-Thalkirchen Senior Living GmbH & Co. KG		—		6,000
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

		—		54,000

11.		*Events after the balance sheet date of 31 August 2008(unaudited)***

		This note provides information and serves as an update to note 11.1 “Events after the balance sheet date of 31 December 2007” which was previously approved by the directors of the General Partner on 23 December 2008.

		On 24 December 2008, related to the€11,224,376 demand discussed in note 11.1 below, Sunrise entered into a Pre-Negotiation and Standstill Agreement (the “Hannover Standstill Agreement”) by and among Sunrise and Natixis, London Branch. Pursuant to the terms of the Hannover Standstill Agreement, the Agent agreed, inter alia, to commence discussions and negotiations with Sunrise and the Borrower relating to certain obligations of Sunrise and the Borrower under the Loans and Funding Obligations, and to not commence or prosecute any action or proceeding to enforce its demand for payment by Sunrise of the Cash Flow Deficit prior to the occurrence of an event of default, as defined in the Hannover Standstill Agreement, or 31 March 2009. Sunrise Senior Living and Natixis also entered into a Standstill Agreement ( the “Hannover Borrower Standstill Agreement”) dated 23 December 2008, which agreement is governed by the laws of the Federal Republic of Germany, pursuant to which the Agent agreed,inter alia, not to enforce any of its acceleration and prepayment rights under the Loans prior to the occurrence of an event of default, as defined in the Hannover Borrower Standstill Agreement, and shall expire on 31 March 2009 (unless terminated earlier pursuant to the provisions of the Hannover Borrower Standstill Agreement).

		On 1 January 2009 the Operating Companies of Konigstein and Munchen-Thalkirchen purchased the Care Companies of the same named location for€1 each. Subsequently, the Care Companies transferred their trade and assets into the Operating Companies and the current operations staff employed by the German Management Company, Sunrise Senior Living GmbH, were transferred to the Operating Companies.

		On 31 January 2009, the Partnership closed operations in the Hannover and Reinbek communities.

		In January 2009 the German communities, which are now consolidated under Sunrise Senior Living, Inc. suspended payment of principal and interest on all loans, in spite of Sunrise’s operating deficit guarantees. As a result of the failure to make payments of principal and interest to the lenders of the German communities and Sunrise’s failure to pay the operating deficits, the German communities are in default under their loans and Sunrise is in default under its financial guarantees for the loans of the German communities and the Hoesel land. Sunrise informed the lenders to the German communities and the Hoesel land that it would seek a comprehensive restructuring of the loans and its operating deficit guarantees.

127

PS Germany Investment (Jersey) Limited Partnership

Notes to the consolidated financial statements

for the eight months ended 31 August 2008(unaudited)and years ended 31 December 2007 and 2006

11.		*Events after the balance sheet date of 31 August 2008(unaudited)(continued)*

		On 13 February 2009, Natixis, London Branch, in its capacity as agent and security trustee for certain lenders under a loan agreement for Sunrise’s community in Munich, Germany, dated 24 March 2006, sent Sunrise a demand letter requesting that they pay an amount of€8,076,878 corresponding to the “Cash Flow Deficit” pursuant to the Funding Obligations under the loan. On 19 February 2009, Sunrise entered into a Pre-Negotiation and Standstill Agreement (the “Munich Standstill Agreement”) by and among Sunrise and Natixis, London Branch. Pursuant to the terms of the Munich Standstill Agreement, the Agent agreed, inter alia, to commence discussions and negotiations with Sunrise and the Borrower relating to certain obligations of Sunrise and the Borrower under the Loans and the Funding Obligations, and to not commence or prosecute any action or proceeding to enforce its demand for payment by Sunrise of the Cash Flow Deficit prior to the occurrence of an event of default, as defined in the Munich Standstill Agreement, or 31 March 2009. Sunrise and Natixis also entered into a Standstill Agreement (the “Munich Borrower Standstill Agreement”) dated 19 February 2009, which agreement is governed by the laws of the Federal Republic of Germany, pursuant to which the Agent agreed, inter alia, not to enforce any of its acceleration and prepayment rights under the Loans prior to the occurrence of an event of default, as defined in the Munich Borrower Standstill Agreement, and shall expire on 31 March 2009 (unless terminated earlier pursuant to the provisions of the Munich Borrower Standstill Agreement).

		In February 2009 Sunrise entered into additional standstill agreements with lenders to six of the nine German communities and the land at Hoesel. Total debt outstanding from the Partnership to these lenders was€126 million as of 28 February 2009. Pursuant to the standstill agreements, such lenders have agreed, among other things, not to foreclose on the communities that are collateral for their loans or to commence or prosecute any action or proceeding to enforce their demand for payment by Sunrise pursuant to the operating deficit guarantees, and to commence discussions and negotiations with Sunrise relating to its and the German communities’ obligations. Such standstill agreements will generally remain in effect until the earliest of the occurrence of certain other events relating to the loans and 31 March 2009.

		On 6 March 2009, Sunrise did not make the€1,429,079 principal and interest payment due on the ninth German community. On 16 March 2009, Sunrise entered into a Standstill Agreement with this lender. Total debt outstanding from the Partnership to this lender was€12 million as of 28 February 2009.

11.1		Events after the balance sheet date of 31 December 2007

		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 its option 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. Based on FIN46 of the US Accounting Standards and the transfer of control, the Partnership has been consolidated within the Sunrise Senior Living, Inc. group as of 1 September 2008.

		On 1 October 2008 the Operating Companies of Oberusel, Villa Camphausen, Klein Flottbek, Wiesbaden, Frankfurt-Westend and Reinbek purchased the Care Companies of the same named location for€1 each. Subsequently, the Care Companies transferred their trade and assets into the Operating Companies and the current operations staff employed by the German Management Company, Sunrise Senior Living GmbH, were transferred to the Operating Companies. This change is estimated to result in annual cost savings of approximately€300,000 -€400,000.

		On 9 October 2008,€700,000 was received as final settlement in respect of legal matters relating to a former contractor of the Konigstein property.

		On 7 November2008 the joint shareholders and partners of the Hannover and Reinbek Care Companies, Operating Companies, Property Companies and Sunrise Properties Germany GmbH (HoldCo) resolved to close all operations in those locations. The final closing date is expected to occur on 31 January 2009. The financial effects are estimated at approximately€300,000 (€166,000 in closing costs and€134,000 for discontinued operations) and include costs of closing down operations, assistance to relocate the residents, security of the buildings, employee salary payments and other charges that may arise. Bank valuations completed on 7 July 2008 for Reinbeck and 13 August 2008 for Hannover show that the estimated market value is higher than the current book values of both properties and therefore no additional write down is anticipated at this time.

		On 3 December 2008, Natixis, an agent for a group of lenders, issued a demand in respect of the Hannover PropCo and OpCo loans, claiming€11,224,376 as an amount due for a breach of the Loan to Value covenants. On 18 December 2008, Natixis issued a corresponding demand on Sunrise Senior Living, Inc. as guarantor of the loans. The Borrowers, Sunrise Hannover Senior Living GmbH & Co. KG and Sunrise Hannover GmbH, together with Sunrise are contesting the claim and have commenced negotiations with Natixis. A standstill agreement is under discussion with Natixis, which, when signed, will be effective for a period of 60 days from the date of signing.

		The General Partner is aware that some bank covenants, most notably related to NOI and Loan to Value, have not been met as the Partnership strives to reach stabilization of the facilities, but the Partnership continues to make timely payments. As of 23 December 2008, no additional bank or lender notices have been received other than the one disclosed above regarding Hannover.

128

INDEPENDENT AUDITORS’ REPORT

To the Members of
AL U.S. Development Venture, LLC:

We have audited the accompanying consolidated balance sheets of AL U.S. Development Venture, LLC (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of operations, statements of changes in members’ deficit, and cash flows for the years 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 audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes 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 audits provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of AL U.S. Development Venture, LLC as of December 31, 2008 and 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, VA

February 27, 2009

129

AL U.S. DEVELOPMENT VENTURE, LLC

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2008 and 2007


	2008			2007

ASSETS

PROPERTY AND EQUIPMENT:
Land and land improvements	$	47,844,921		$	47,836,752
Building and building improvements		179,475,734			179,175,098
Furniture and equipment		13,656,404			13,302,079


		240,977,059			240,313,929

Less accumulated depreciation		(30,432,217	)		(23,501,494	)


Property and equipment — net		210,544,842			216,812,435

CASH AND CASH EQUIVALENTS		4,902,428			7,547,327

RESTRICTED CASH		6,000,000			6,000,000

ACCOUNTS RECEIVABLE — Less allowance for doubtful accounts of $317,704 and $383,057, respectively		879,732			1,079,174

RECEIVABLES FROM AFFILIATES — Net		526,301			—

PREPAID EXPENSES AND OTHER CURRENT ASSETS		581,415			564,679

DEFERRED FINANCING COSTS — Less accumulated amortization of $1,385,343 and $529,572 in 2008 and 2007, respectively		3,232,465			4,085,851


TOTAL	$	226,667,183		$	236,089,466


LIABILITIES AND MEMBERS’ DEFICIT

LIABILITIES:
Long-term debt	$	370,500,000		$	370,500,000
Derivative liability		35,299,943			17,039,343
Accounts payable and accrued expenses		2,526,180			2,728,431
Payables to affiliates — Net		—			3,197,737
Deferred revenue		3,958,776			3,953,863
Security and reservation deposits		35,000			44,301
Accrued interest		997,797			1,270,845


Total liabilities		413,317,696			398,734,520

MEMBERS’ DEFICIT		(186,650,513	)		(162,645,054	)


TOTAL	$	226,667,183		$	236,089,466

See notes to consolidated financial statements.

130

AL U.S. DEVELOPMENT VENTURE, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 and 2006 (unaudited)


	2008			2007			2006
							(unaudited)
OPERATING REVENUE:
Resident fees	$	81,133,786		$	76,325,155		$	64,822,893
Other income		464,267			379,149			226,946


Total operating revenue		81,598,053			76,704,304			65,049,839


OPERATING EXPENSES:
Labor		28,982,119			27,361,910			25,044,073
Depreciation		6,930,723			6,766,201			6,431,137
Management fees		5,711,864			5,198,041			4,418,473
General and administrative		4,931,848			4,647,867			3,646,605
Insurance		3,707,937			2,526,045			4,066,943
Taxes and license fees		3,125,100			2,701,310			1,878,673
Food		2,995,409			2,722,483			2,334,825
Utilities		2,120,210			2,006,454			1,960,423
Repairs and maintenance		1,850,236			1,996,821			1,277,319
Advertising and marketing		928,410			994,128			1,117,188
Ancillary expenses		678,910			535,929			386,746
Bad debt		100,148			163,929			96,053


Total operating expenses		62,062,914			57,621,118			52,658,458


INCOME FROM OPERATIONS		19,535,139			19,083,186			12,391,381


OTHER INCOME (EXPENSE):
Amortization of financing cost		(855,771	)		(914,656	)		(869,647	)
Loss on extinguishment of debt		—			(1,188,688	)		—
Prepayment penalty		—			(4,154,962	)		—
Change in fair value of interest rate hedge instruments		(18,260,600	)		(17,039,343	)		—
Interest expense		(23,610,348	)		(20,637,838	)		(12,739,257	)
Interest income		60,267			331,620			232,701


Total other expense		(42,666,452	)		(43,603,867	)		(13,376,203	)


NET LOSS	$	(23,131,313	)	$	(24,520,681	)	$	(984,822	)

See notes to consolidated financial statements.

131

AL U.S. DEVELOPMENT VENTURE, LLC

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL (DEFICIT)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, and 2006 (unaudited)


	SSLII			AEW Member			MS Senior Living			Total

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’ CAPITAL — December 31, 2007		(31,792,108	)		—			(130,852,946	)		(162,645,054	)

Contributions		—			—			—			—
Distributions		(477,036	)		1,511,035			(1,908,145	)		(874,146	)
Transfer of equity		—			(1,511,035	)		1,511,035			—
Net loss		(4,626,263	)		—			(18,505,050	)		(23,131,313	)


MEMBERS’ DEFICIT — December 31, 2008	$	(36,895,407	)	$	—		$	(149,755,106	)	$	(186,650,513	)

See notes to consolidated financial statements.

132

AL U.S. DEVELOPMENT VENTURE, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, and 2006 (unaudited)


	2008			2007			2006
							(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(23,131,313	)	$	(24,520,681	)	$	(984,822	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation		6,930,723			6,766,201			6,431,137
Amortization and loss on extinguishment of debt		855,771			2,103,344			869,647
Provision for bad debts		100,148			163,929			96,053
Change in fair value of interest rate hedge instruments		18,260,600			17,039,343			—
Changes in assets and liabilities:
Change in cash held by AEW Member		—			3,416,771			7,677,994
Accounts receivable		99,294			(18,448	)		(445,320	)
Prepaid expenses and other current assets		(16,736	)		196,428			(119,997	)
Accounts payable and accrued expenses		(202,251	)		(244,780	)		(2,884,099	)
Payable to/receivable from affiliates — net		(3,724,038	)		(5,947,322	)		4,315,380
Deferred revenue		4,913			703,133			135,920
Security and reservation deposits		(9,301	)		(41,040	)		(6,304	)
Accrued interest		(273,048	)		640,508			592,494


Net cash (used in) provided by operating activities		(1,105,238	)		257,386			15,678,083


CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash		—			(6,000,000	)		—
Investment in property and equipment		(663,130	)		(299,607	)		(7,522,584	)


Net cash used in investing activities		(663,130	)		(6,299,607	)		(7,522,584	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of financing costs		(2,385	)		(4,616,438	)		(198,446	)
Proceeds from note to affiliate		—			47,708			4,859,176
Repayment of note to affiliate		—			(4,221,432	)		(3,023,942	)
Proceeds from long-term debt		—			371,330,817			17,032,214
Payment on long-term debt		—			(203,144,398	)		(143,926	)
Contributions		—			6,000,000			—
Distributions		(874,146	)		(158,345,893	)		(20,141,391	)


Net cash (used in) provided by financing activities		(876,531	)		7,050,364			(1,616,315	)


NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(2,644,899	)		1,008,143			6,539,184

CASH AND CASH EQUIVALENTS — Beginning of year		7,547,327			6,539,184			—


CASH AND CASH EQUIVALENTS — End of year	$	4,902,428		$	7,547,327		$	6,539,184


SUPPLEMENTAL DISCLOSURE OF NONCASH FLOW INFORMATION — Change in derivative valuation	$	18,260,600		$	17,039,343		$	—


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION — Cash paid for interest (including $6,682,000 for derivatives)	$	23,883,396		$	19,997,330		$	12,146,763

See notes to consolidated financial statements.

133

AL U.S. DEVELOPMENT VENTURE, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2008

1.		ORGANIZATION

		AL U.S. Development Venture, LLC (“the Company.”) 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, 2008, 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

134

		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 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 year ended December 31, 2006 are unaudited. They have been prepared on a basis consistent with that used in preparing the 2008 and 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 year ended December 31, 2006.

		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 2008, 2007, or 2006 (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.

135

		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, 2008, 2007, and 2006 was $855,771, $914,656, and $869,647 (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.

		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”) No. 133, Accountingfor Derivative Instruments and Hedging Activity, as amended. FASB 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 FASB 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 assumptions and/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.		FAIR VALUE MEASUREMENTS

		The Company adopted the provisions of FASB No. 157,Fair Value Measurements, as of January 1, 2008. Under FASB No. 157, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, FASB No. 157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels. These levels, in order of highest priority to lowest priority, are described below:

136

		Level 1— Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

		Level 2— Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

		Level3 — Unobservable inputs are used when little or no market data is available.

		In February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2,Effective Date of FASB Statement No. 157, delaying the effective date of FASB Statement 157 for items such as nonfinancial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) and nonfinancial long-lived asset groups measured at fair value for an impairment assessment. The Company is evaluating the impact FSP No. 157-2 will have on our nonfinancial assets and liabilities that are measured at fair value, but are recognized or disclosed at fair value on a nonrecurring basis. As of December 31, 2008, the assessment of fair value of the nonfinancial assets and liabilities did not indicate impairment. The Company elected to defer implementation of FSP No. 157-2 until the fiscal year beginning January 1, 2009.

		As of December 31, 2008, the carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and other liabilities were representative of their fair values because of the short-term maturity of these instruments.

4.		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, 2008, 2007 and 2006 were $0 , $0, and $12.4 million (unaudited), respectively.

		For January 1, 2006 through June 13, 2007, the Company had management agreements with Sunrise Senior Living Management, Inc. (“SSLMI”), an affiliate of SSLII, to manage the facility. 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, 2006 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, 2008 management fees are equal to 7% of gross operating revenues. Total management fees incurred in 2008, 2007, and 2006 were $5,711,864, $5,198,041, and $4,418,473 (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 $53,986,269, $50,731,687, and $26,938,496 (unaudited) in 2008, 2007, and 2006, respectively, in accordance with the terms of the management agreement.

137

		The Company obtains professional and general liability coverage through Sunrise Senior Living Insurance, Inc., an affiliate of SSLI. Related payments totaled $4,690,282, $4,096,932, and $3,964,492 (unaudited) in 2008, 2007, and 2006, respectively. Refunds of liability premiums of $616,428, $659,440, and $0 (unaudited) were given in 2008, 2007, and 2006 respectively.

		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 Company had previously recorded a liability and related expense of $1,109,023 relating to such claims, which was reversed during 2007.

		The Company had net receivables from SSLI of $526,301 as of December 31, 2008, and net payables to SSLI of $3,197,737 and $9,145,059 (unaudited) at December 31, 2007 and 2006, 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 a receivable and payable from/to affiliates in 2008, 2007, and 2006, respectively, in the accompanying consolidated financial statements. The amounts are non-interest bearing and due on demand.

		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 was $4,173,724 (unaudited), excluding accrued interest. On June 14, 2007, the Note was repaid, as part of a recapitalization. The payment represented $3,649,387 of principal and $183,332 of accrued interest through June 14, 2007. The Company capitalized interest of $0, $0, and $73,926 (unaudited) related to the Note during the years ended December 31, 2008, 2007 and 2006, respectively.

5.		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, 2008, 2007, and 2006 (unaudited) were 100% private pay.

6.		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) at December 31, 2006. The GE loan was repaid on June 14, 2007.

138

		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 was 10.00% (unaudited). The balance of the Capmark loan was $29,634,166 (unaudited) at December 31, 2006. The Capmark loan was repaid on June 14, 2007.

		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 was 9.25% (unaudited). The balance of the Guaranty loan was $91,823,341 (unaudited) at December 31, 2006. 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 defeasance fees were required for any other loans. New debt was obtained from HSH Nordbank for $370,500,000 and is due on June 14, 2012. The loan bears interest on the one-month London Interbank Offered Rate (LIBOR) plus 1.50%. The LIBOR rate was .044% and 4.60% as of December 31, 2008 and 2007, respectively. The loan is secured by the Facilities.

		The loan requires the Company to meet both liquidity and debt service coverage ratio requirements. As of December 31, 2008 and 2007, the Company was in compliance with these requirements.

		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. Per FASB No. 157, the Company has applied Level 2 type inputs to determine that the estimated fair value of the Company’s long-term debt was $346,848,871 at December 31, 2008 and approximated its carrying amount at December 31, 2007 and 2006 (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. Per FASB No. 157, the Company has applied Level 2 inputs to determine the estimated fair value of the Company’s interest rate swap and cap agreements. The fair market value of the Company’s interest rate swap and cap agreements is mainly based on observable interest rate yield curves for similar instruments. As of December 31, 2008 and 2007, the fair market value of the interest rate swap and cap liability of $35,300,289 and an asset of $346, respectively, and the net amount is included in the derivative liability on the 2008 consolidated balance sheet. 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 to mitigate the impact of changes in interest rates on its cash flows. That is, the Company does not speculate using derivative instruments.

139

		FASB No. 157 requires that nonperformance risk be considered in measuring the fair value of assets and liabilities. For derivatives, nonperformance risk refers to the risk that one of the parties to a derivative transaction will be unable to perform under the contractual terms of that derivative, such as the risk that one party will be unable to make cash payments at periodic net settlement dates or upon termination. The Company has considered the counterparty’s credit risk as well as the effect of its own credit standing in determining the fair value of its interest rate swap and cap agreements. The Company minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterparties.

7.		DISTRIBUTIONS

		During 2007, a net distribution of $856,509 was recorded to the former AEW Member, which was composed of approximately $7,010,703 of cash distributions netted against the former AEW Member share of deal proceeds of $7,867,212. During 2008, the former AEW Member returned $1,511,035 to the venture after a postsale due diligence review of the 2007 transaction revealed that the Company had overdistributed to the former AEW Member. This amount has been recorded in the accompanying consolidated statements of changes in members’ deficit as a negative distribution in 2008, along with a transfer of equity to increase MS Senior Living, LLC’s equity balance.

8.		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.

9.		NEW ACCOUNTING PRONOUNCEMENTS

		In February 2007, the FASB issued FASB No. 159,The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115,(“SFAS 159”). FASB Statement 159 permits companies to measure many financial instruments and certain other items at fair value. FASB 159 was 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 determined that it will not elect this option for any eligible financial instruments it acquires in the future.

		In March 2008, the FASB issued FASB No. 161 “Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133 (“FASB No. 161”), which changes the disclosure requirements for derivative instruments and hedging activities. Pursuant to FASB No. 161, entities are required to provide enhanced disclosures about (a) how and why an entity uses derivatives instruments, (b) how derivative instruments and hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. FASB No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company does not expect the adoption of FASB No. 161 to have a material impact on the Company’s financial statements.

******

140

Report of Independent Auditors

To the Members of Metropolitan Senior Housing, LLC:

In our opinion, the accompanying consolidated statements of operations, changes in members' deficit, and cash flows, present fairly, in all material respects, the results of operations and the cash flows of Metropolitan Senior Housing, LLC (the “Company”) for the year ended December 31, 2006 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.



	/s/ PricewaterhouseCoopers LLP

McLean, VA
May 18, 2007

141

Metropolitan Senior Housing, LLC

Consolidated Balance Sheets

As of December 31, 2008 and 2007


	2008			2007
	(not covered by			(not covered by
	auditors’ report)			auditors’ report)
Assets
Land and land improvements	$	35,973,191		$	35,955,737
Building and building improvements		125,031,150			124,115,007
Furniture and equipment		19,481,796			19,027,991

		180,486,137			179,098,735
Less accumulated depreciation		(43,513,484	)		(38,056,349	)

Rental property, net		136,972,653			141,042,386

Cash		1,931,046			303,511
Receivable from affiliates,net		2,701,771			1,745,806
Prepaid expenses and other current assets		84,978			99,316
Restricted cash		494,200			955,856
Deferred financing costs, less accumulated amortization of $1,483,955 and $917,555, respectively		2,784,795			3,351,195

Total assets	$	144,969,443		$	147,498,070


Liabilities and Members’ Deficit
Notes payable	$	190,000,000		$	190,000,000
Accounts payable and accrued expenses		197,119			118,956
Acccrued interest		981,667

Total liabilities		191,178,786			190,118,956

Members’ deficit		(46,209,343	)		(42,620,886	)

Total liabilities and members’ deficit	$	144,969,443		$	147,498,070

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

142

Metropolitan Senior Housing, LLC

Consolidated Statements of Operations

For the years ended December 31, 2008, 2007, and 2006


	2008			2007			2006
	(not covered by			(not covered by
	auditors’ report)			auditors’ report)
Operating Revenue
Lease income from affiliates	$	21,130,662		$	19,981,144		$	18,193,626


Operating Expenses
Taxes and insurance		2,395,538			2,104,522			1,831,921
General and administrative		198,886			80,296			337,205
Depreciation		5,457,135			5,384,085			5,347,188
Bad debt expense		—			—			6,728,816

		8,051,559			7,568,903			14,245,130


Other Income (Expense)
Interest income		6,610			74,927			44,928
Interest expense		(12,156,400	)		(12,112,773	)		(8,552,697	)

Net income (loss)	$	929,313		$	374,395		$	(4,559,273	)

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

143

Metropolitan Senior Housing, LLC

Consolidated Statements of Changes in Members’ (Deficit) Capital

For the years ended December 31, 2008, 2007, and 2006 (Information as of
December 31, 2008 and 2007 and for the years ended December 31, 2008 and 2007 not
covered by auditors’ report included herein)


	Sunrise Senior			Federal
	Living			Street			HVP Sun
	Investments,			Operating,			Investing,
	Inc.			LLC			LLC			Total
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	)


Distributions		(1,278,405	)		—			(3,239,365	)		(4,517,770	)
Net income		232,328			—			696,985			929,313


Members’ deficit at December 31, 2008	$	(13,047,843	)	$	—		$	(33,161,500	)	$	(46,209,343	)

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

144

Metropolitan Senior Housing, LLC

Consolidated Statements of Cash Flows

For the years ended December 31, 2008, 2007, and 2006


	2008			2007			2006
	(not covered by			(not covered
	auditors’			by auditors’
	report)			report)
Operating activities
Net income (loss)	$	929,313		$	374,395		$	(4,559,273	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		5,457,135			5,384,085			5,347,188
Amortization of financing costs		566,400			558,457			285,856
Provision for bad debts		—			—			6,728,816
Changes in assets and liabilities:
Receivable from affiliates		(955,965	)		(290,942	)		(385,801	)
Prepaid expenses and other current assets		14,338			(6,507	)		118,606
Restricted cash		461,656			260,674			(688,518	)
Deferred rent receivable		—			—			2,156,571
Accounts payable and accrued expenses		78,163			(142,399	)		154,737
Accrued interest		981,667			—			—
Payables to affiliates		—			—			(804,399	)

Net cash provided by operating activities		7,532,707			6,137,763			8,353,783


Investing activities
Investment in leased property		(1,387,402	)		(1,652,505	)		(1,056,679	)


Financing activities
Financing costs paid		—			(27,005	)		(3,457,078	)
Proceeds from notes payable		—			—			190,000,000
Repayment of notes payable		—			—			(107,215,679	)
Contributions from members		—			—			1,729,424
Distributions to members		(4,517,770	)		(6,360,140	)		(86,308,373	)

Net cash used in financing activities		(4,517,770	)		(6,387,145	)		(5,251,706	)


Net increase / (decrease) in cash		1,627,535			(1,901,887	)		2,045,398
Cash at beginning of year		303,511			2,205,398			160,000

Cash at end of year	$	1,931,046		$	303,511		$	2,205,398


Supplemental disclosures of cash flow information:
Cash paid for interest	$	10,608,333		$	11,554,317		$	7,629,491

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

145

Metropolitan Senior Housing, LLC

Notes to Consolidated Financial Statements

December 31, 2006 (Information as of December 31, 2008 and 2007 and for the years ended
December 31, 2008 and 2007 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 interesting in the LLC. 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, 2008 and 2007 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

146

Metropolitan Senior Housing, LLC
Notes to Consolidated Financial Statements
December 31, 2006 (Information as of December 31, 2008 and 2007 and for the years ended
December 31, 2008 and 2007 not covered by auditors’ report included herein)

		ended December 31, 2008 and 2007 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 (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, 2008 and 2007.

		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, 2008, 2007, and 2006.

		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 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.

		Restricted Cash

		Restricted cash balances represent amounts set aside for debt service charges as required by the loan agreement. Restricted cash set aside for capital projects and approved by members totaled $16,913 and $483,875 as of December 31, 2008 and 2007, respectively.

147

		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 is expensed and included in interest expense in 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.

		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

		Disclosure about fair value of financial instruments is based on pertinent information available to management using available market information and valuation methodologies as of December 31, 2008 and 2007. 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, 2008 and 2007, and current estimates of fair value may differ from amounts presented herein.

		Cash equivalents, accounts receivable, accounts payable, and accrued expenses and other assets and liabilities are carried at amounts that approximate their fair values.

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,

148

		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.

		Minimum future rentals due to the Company for the year 2009 under noncancelable leases in place as of December 31, 2008 is $20,046,092.

		Receivable and Payable to Affiliates

		The Company had net receivables from affiliates at December 31 consisting of the following:


	2008			2007
	(not covered by			(not covered by
	auditors’ report)			auditors’ report)
Receivable from affiliates
Operator	$	2,755,077		$	1,952,286
SSLI and its subsidiaries		(53,306	)		(206,480	)

	$	2,701,771		$	1,745,806

		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 and has recorded bad debt expense related to the receivable at that date 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

149

		remains unpaid at year end. In 2008, 2007, and 2006, the Company included approximately $315,000, $326,000, and $108,000, respectively, of insurance expense in taxes and insurance in the consolidated statements of operations.

4.		Debt

		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 January 1, 2014. 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

150

of the replacement loan. 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.

Principal maturities of long-term debt as of December 31, 2008 were as follows:


2009		2,006,704
2010		2,298,711
2011		2,442,515
2012		2,563,212
2013		2,755,665
Thereafter		177,933,193

	$	190,000,000

		The Company has estimated the fair value of the mortgage notes payable to be $186,070,864 and $188,020,370 at December 31, 2008 and 2007, respectively. The fair value has been determined by the Company using available market information and a discounted cash flow methodology with an interest rate of 6.50% and 6.25% at December 31, 2008 and 2007, respectively. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different assumptions or estimation methodologies may have a material effect on the fair value of the mortgage notes payable.

5.		Members’ Deficit

		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 maintained 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%.

		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

151

		subsidiaries is reduced to zero. The Amendments were effective January 1, 2004. During 2006, distributable cash of approximately $0.06 million was paid to SSLII to reduce the outstanding payable balance.

		Priority distributions of net cash flow from operations during 2006 of approximately $3.6 million were paid to Federal Street and $2.5 million, 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. 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 bore 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.

		Net income (loss) has been allocated to the individual members’ capital accounts based on its ownership interest as follows: from January 1 through December 12, 2006, 59% to Federal Street and 41% to SSLII, and from December 13, 2006 to December 31, 2008, 75% to HVP and 25% to SSLII.

		Distributions, subsequent to December 12, 2006 are 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%. In 2008 and 2007, distributions of net cash flow from operations of approximately $3.2 million and $4.8 million, respectively, were paid to HVP and $1.3 million and $1.6 million, respectively, were paid to SSLII.

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

152

		resolution of these matters will have a material adverse effect on the Company’s financial position.

7.		New Accounting Pronouncements

		In February 2007, the FASB issued FASB Statement No. 159,The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115. FASB No. 159 permits companies to measure many financial instruments and certain other items at fair value. FASB No. 159 was 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 determined that it will not elect this option for any eligible financial instruments it acquires in the future.

		In February 2008, the FASB issued FASB Staff Position (FSP) No. 157-2,Effective Date of FASB Statement No. 157, delaying the effective date of FASB No. 157 for items such as nonfinancial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) and nonfinancial long-lived asset groups measured at fair value for an impairment assessment. The Company is evaluating the impact FSP No. 157-2 will have on our nonfinancial assets and liabilities that are measured at fair value, but are recognized or disclosed at fair value on a nonrecurring basis. As of December 31, 2008, the assessment of fair value to the nonfinancial assets and liabilities did not indicate impairment. Therefore, the Company elects to defer implementation of FSP No. 157-2 until the fiscal year beginning January 1, 2009.

153

INDEPENDENT AUDITORS’ REPORT

To the Members of
Sunrise Aston Gardens Venture, LLC:

We have audited the accompanying consolidated balance sheet of Sunrise Aston Gardens Venture, LLC (the “Company”) as of December 31, 2007, and the related consolidated statements of operations, changes in members’ 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 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sunrise Aston Gardens 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, VA

December 22, 2008

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SUNRISE ASTON GARDENS VENTURE, LLC

CONSOLIDATED BALANCE SHEETS
As of December 31


	2008			2007
	(Unaudited)
ASSETS
PROPERTY AND EQUIPMENT:
Land and land improvements	$	41,949,662		$	41,888,406
Building and building improvements		398,824,751			398,382,224
Furniture and equipment		10,011,742			9,586,898
Construction in progress		340,949			310,895

		451,127,104			450,168,423
Less accumulated depreciation		(26,608,471	)		(14,735,598	)

Property and equipment — net		424,518,633			435,432,825
CASH AND CASH EQUIVALENTS		1,833,399			2,718,647
RESTRICTED CASH		1,611,241			1,511,197
ACCOUNTS RECEIVABLE — Less allowance for doubtful accounts of $19,378 (Unaudited) and $10,811 for 2008 and 2007, respectively		352,023			334,196
PREPAID EXPENSES AND OTHER CURRENT ASSETS		275,904			286,598
DEFERRED FINANCING COSTS — Less accumulated amortization of $2,524,447 (Unaudited) and $1,401,217, respectively		3,758,728			4,859,614
RESIDENT LEASE INTANGIBLE — Less accumulated amortization of $6,156,828 (Unaudited) and $3,345,975 for 2008 and 2007, respectively		—			2,810,853
RECEIVABLES FROM AFFILIATES — Net		339,309			—

TOTAL	$	432,689,237		$	447,953,930


LIABILITIES AND MEMBERS’ CAPITAL
LIABILITIES:
Notes payable	$	299,327,695		$	301,399,741
Derivative liability		16,289,596			6,839,732
Accounts payable and accrued expenses		1,608,671			1,795,426
Payables to affiliates, net		—			1,974,003
Deferred revenue		2,446,824			2,502,550
Security and reservation deposits		210,831			327,781
Payable to affiliates, long-term		6,189,666			—
Accrued interest		1,734,005			—

Total liabilities		327,807,288			314,839,233
MEMBERS’ CAPITAL		104,881,949			133,114,697

TOTAL	$	432,689,237		$	447,953,930

See notes to consolidated financial statements.

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SUNRISE ASTON GARDENS VENTURE, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2008 (Unaudited) and 2007 (Audited)

and for the Period June 27, 2006 (Inception) through December 31, 2006 (Unaudited)


	2008			2007			2006
	(Unaudited)						(Unaudited)
OPERATING REVENUE:
Resident fees	$	66,608,274		$	67,592,971		$	17,703,380
Other income		1,209,387			1,224,567			298,035

Total operating revenue		67,817,661			68,817,538			18,001,415

OPERATING EXPENSES:
Labor		18,869,880			18,003,624			5,045,396
Depreciation and amortization		14,683,726			15,547,904			3,872,439
General and administrative		5,625,450			7,150,525			1,273,211
Taxes and license fees		3,745,705			3,745,508			845,045
Utilities		4,214,457			3,855,839			1,182,464
Food		3,957,410			3,826,512			1,018,607
Management fees		4,063,301			3,729,740			880,795
Insurance		4,007,763			3,487,949			833,611
Repairs and maintenance		2,642,027			2,592,935			475,301
Advertising and marketing		925,835			735,047			242,984
Ancillary expenses		229,721			262,299			114,172
Bad debt		8,567			10,811			—

Total operating expenses		62,973,842			62,948,693			15,784,025

INCOME FROM OPERATIONS		4,843,819			5,868,845			2,217,390
OTHER INCOME (EXPENSE):
Change in fair value of interest rate hedge instruments		(677,936	)		(6,073,558	)		(766,174	)
Interest expense		(23,608,733	)		(21,322,708	)		(5,026,921	)
Interest income		49,125			199,565			123
Guarantee fee and other expenses		(67,095	)		—			—

NET LOSS	$	(19,460,820	)	$	(21,327,856	)	$	(3,575,582	)

See notes to consolidated financial statements.

156

SUNRISE ASTON GARDENS VENTURE, LLC

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL (DEFICIT)
For the Years Ended December 31, 2008 (Unaudited) and 2007 (Audited)


	SSLII			GECCT			Total
MEMBERS’ CAPITAL — June 27, 2006 (Inception) (Unaudited)	$	—		$	—		$	—
Contributions (Unaudited)		39,004,534			117,013,601			156,018,135
Net loss (Unaudited)		(893,896	)		(2,681,686	)		(3,575,582	)

MEMBERS’ CAPITAL — December 31, 2006 (Unaudited)		38,110,638			114,331,915			152,442,553
Contributions		500,000			1,500,000			2,000,000
Net loss		(5,331,964	)		(15,995,892	)		(21,327,856	)

MEMBERS’ CAPITAL — December 31, 2007		33,278,674			99,836,023			133,114,697
Contributions (Unaudited)		—			—			—
Net loss (Unaudited)		(4,865,205	)		(14,595,615	)		(19,460,820	)
Other Comprehensive Loss (Unaudited)
Loss on derivatives held as cash flow hedge (Unaudited)		(2,192,982	)		(6,578,946	)		(8,771,928	)

MEMBERS’ CAPITAL — December 31, 2008 (Unaudited)	$	26,220,487		$	78,661,462		$	104,881,949

See notes to consolidated financial statements.

157

SUNRISE ASTON GARDENS VENTURE, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2008 (Unaudited) and 2007 (Audited)

and for the Period June 27, 2006 (Inception) through December 31, 2006 (Unaudited)


	2008			2007			2006
	(Unaudited)						(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(19,460,820	)	$	(21,327,856	)	$	(3,575,582	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		15,806,956			15,664,800			3,817,990
Change in fair value of interest rate hedge instruments		677,936			6,073,558			766,174
Bad debt expense		8,567			10,811			—
Changes in assets and liabilities:
Accounts receivable		(26,394	)		1,309,885			(1,654,892	)
Prepaid expenses and other current assets		10,694			(16,893	)		(269,705	)
Accounts payable and accrued expenses		(186,755	)		(203,421	)		1,998,847
Payable to affiliates — net		(2,313,312	)		(3,255,236	)		5,729,239
Deferred revenue		(55,726	)		1,882,833			619,717
Security and reservation deposits		(116,950	)		(90,160	)		417,941
Accrued Interest		1,734,005			—			—

Net cash (used in) provided by operating activities		(3,921,799	)		48,321			7,849,729

CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash		(100,044	)		(1,066,312	)		(444,885	)
Investment in property and equipment		(958,681	)		(1,160,931	)		(145,052,007	)
Investment in resident lease intangible		—			—			(6,156,828	)

Net cash used in investing activities		(1,058,725	)		(2,227,243	)		(151,653,720	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of financing costs		(22,344	)		—			(6,260,831	)
Payment on long-term debt		(2,072,046	)		(2,142,465	)		(413,279	)
Contributions		—			1,500,000			156,018,135
Funding on long-term loan from affiliates		6,189,666			—			—

Net cash provided by (used in) financing activities		4,095,276			(642,465	)		149,344,025


NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(885,248	)		(2,821,387	)		5,540,034
CASH AND CASH EQUIVALENTS — Beginning of year		2,718,647			5,540,034			—

CASH AND CASH EQUIVALENTS — End of year	$	1,833,399		$	2,718,647		$	5,540,034


SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW INFORMATION —
Long-term debt assumed upon purchase of real estate	$	—		$	—		$	133,955,485
Long-term debt acquired upon purchase of real estate		—			—			170,000,000
Non-cash capital contribution		—			500,000			—
Non-cash change in swap valuation		9,449,864			—			—

	$	9,449,864		$	500,000		$	303,955,485

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION —
Cash paid for interest	$	20,796,415		$	20,478,433		$	4,853,648

See notes to consolidated financial statements.

158

SUNRISE ASTON GARDENS VENTURE, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ORGANIZATION

Sunrise Aston Gardens Venture, LLC, (the “Company”) was formed on June 27, 2006 as a limited liability company under the laws of the state of Delaware. The Company began operations on September 25, 2006. The Company shall terminate in 2021, unless substantially all of its assets are sold or the members elect to dissolve the Company prior to that date. The Company was funded by a capital contribution of approximately $39 million from Sunrise Senior Living Investments, Inc. (“SSLII”), which is a wholly owned subsidiary of Sunrise Senior Living, Inc. (“SSLI”), and a capital contribution of approximately $117 million from General Electric Credit Corporation of Tennessee (“GECCT”), a wholly owned subsidiary of General Electric Healthcare Financial Services (“GEHFS”), an affiliate of GE, (collectively, with SSLII, the “Members”), with the balance funded through financing obtained or assumed by the Company. SSLII holds a 25% ownership interest in the Company; GECCT holds a 75% ownership interest in the Company. SSLII is the managing member.

The amended and restated limited liability agreement effective August 25, 2006, amended December 19, 2008, (the “LLC Agreement”) details the commitments of the members and provides the procedures for the return of capital to the members. All net cash flow from operations and capital proceeds is to be distributed to the members as specified in the LLC Agreement. Contributions are made in proportion to the percentage interests of the member at the time of request. Net income is allocated to the members in proportion to the percentage interests of the members. SSLI provides an operating deficit guarantee. Funding under the operating deficit guarantee was $6,189,666 and $0 as of December 31, 2008 (unaudited) and 2007, respectively.

On July 19, 2006, the Company formed six wholly owned subsidiaries (the “Operator Entities”) that were organized to own and operate independent and assisted senior living facilities (the “Facilities”) which provide services to seniors:



Operator Entity		Location
Sunrise AG Pelican Pointe, LLC		Venice, Florida
Sunrise AG Tampa Bay, LLC		Tampa, Florida
Sunrise AG Parkland Commons, LLC		Parkland, Florida
Sunrise AG Pelican Marsh, LLC		Naples, Florida
Sunrise AG Sun City Center, LLC		Sun City Center, Florida
Sunrise AG Courtyards, LLC		Sun City Center, Florida

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 residents, their family, or another responsible party.

The Facilities are managed by an affiliate of SSLII (see Note 4).

159

SUNRISE ASTON GARDENS VENTURE, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

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 consolidated accounts of Sunrise Aston Gardens Venture, LLC, and the Operator Entities (collectively, the “Company”) after elimination of significant intercompany accounts and transactions.

The accompanying consolidated financial statements and related footnotes as of and for the year ended December 31, 2008 and for the period June 27, 2006 (Inception) through December 31, 2006 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 year ended December 31, 2008 and for the period June 27, 2006 (Inception) through December 31, 2006.

Consideration of Going Concern — The accompanying consolidated financial statements have been prepared on the basis of Sunrise Aston Gardens Venture, LLC continuing as a going concern. The Facilities have been negatively impacted by adverse economic conditions in Florida during 2007, 2008 and continuing into 2009. The Company had been unable to meet the required debt service coverage ratios for the loan agreement with HSH Nordbank AG (“HSH-Nordbank”) during 2007. As a result, at December 31, 2007, the Company was in default of certain financial covenants with the HSH-Nordbank loan agreement, which has an outstanding balance of $170,000,000 (see Note 6). The Company remained in default through December 22, 2008. At December 31, 2008, the Company was in compliance with the required debt service, occupancy and other financial covenants for all loan agreements.

In December 2008, GECCT, SSLI, and HSH-Nordbank executed an agreement whereby the $170,000,000 loan with HSH-Nordbank was severed into two separate tranches. The Tranche A note (“Tranche A”) continues to be held by HSH-Nordbank in the amount of $143,750,000 with a variable interest rate of LIBOR plus 1.95% per annum. GE HFS purchased the Tranche B note (“Tranche B”) in the amount of $26,250,000. Tranche B is subordinated to Tranche A and carries an interest rate of 10% per annum. The execution of this agreement and purchase of Tranche B by GE HFS cured all existing defaults with HSH-Nordbank. Additionally, the loan was modified to include an option to extend the maturity date subject to various conditions including no events of default through the original maturity date. The extension option would allow the borrowers to extend the maturity date of the debt from September 25, 2011 to September 25, 2012.

GECCT intends to hold its investment in the Company through at least December 31, 2017. Additionally, GECCT intends to take steps to refinance the Company’s debt currently held by HSH-Nordbank when the debt becomes due in 2011 (or the extended maturity date of 2012). GECCT intends to accomplish this refinancing either through a third party lender or by a GECCT affiliate acting as a lender.

As a result, the consolidated financial statements do not include any adjustments to reflect the possible effects on the recoverability of assets or the amounts of liabilities that may result from the resolution of the uncertainity about the Company’s ability to continue as a going concern.

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

160

SUNRISE ASTON GARDENS VENTURE, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

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, impairment of long lived assets, recoverable amounts of receivables, amortization periods of deferred costs, and the fair value of financial instruments, 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. The Company determined fair values using various commonly used methods including estimated cash flow projections discounted at appropriate rates and capitalization rates based on available market information. No impairment charge was recorded in 2008 (unaudited) or 2007.

In accordance with Financial Accounting Standards Board (“FASB”) Statement No. 142,Goodwill and Other Intangible Assets, and FASB Statement No. 141,Business Combinations, upon acquisition of the Facilities, the Company allocated the total purchase price of $455,161,750, to identifiable tangible and intangible assets based upon their relative fair values. The Company determined fair values using various commonly used methods including estimated cash flow projections discounted at appropriate rates and capitalization rates based on available market information. The purchase price was allocated to land, building and improvements, furniture and equipment, inventory, and residential leasing intangible assets. The fair value of land was based upon relevant and recent comparable sales. The fair value of land improvements and building and improvements was based upon replacement cost as if the building were vacant.

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.

Residential Leasing Intangible Assets —The fair value of above and below market leases is based on the present value of the difference between the contractual amounts to be paid pursuant to the acquired

161

SUNRISE ASTON GARDENS VENTURE, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

leases and management’s estimate of the market lease rates measured over a period equal to the remaining terms of the leases. The origination value of in-place leases is based on costs to execute similar leases including commissions and other related costs. The foregone value associated with acquiring a built-in expense reimbursement revenue stream on a leased building is based on assessments of common expenses, real estate taxes, insurance, and other operating expenses during the estimated time required to lease up the building from vacant to the occupancy level at the date of acquisition. The Company allocated $6,156,828 of the purchase price to residential leasing intangible assets at acquisition, including $7,495,598 allocated to in-place leases and a net value of ($1,338,770) allocated to above and below market leases.

The fair value of above and below market leases and the origination value of in-place leases are reflected as residential leasing intangible assets on the accompanying consolidated balance sheets. Residential leasing intangible assets are being amortized under the straight-line method over their respective estimated useful lives. Above and below market leases are amortized over a period of one year, based on the weighted-average remaining terms of the respective leases. For the year ended December 31, 2007 and for the period June 27, 2006 (Inception) through December 31, 2006, the net amortization charge of above and below market leases was ($1,004,078) and ($334,692) (unaudited), respectively, which is reflected as an increase in resident fees on the accompanying consolidated statements of operations. Above and below market leases have been fully amortized as of December 31, 2007. In-place leases are amortized over a period of two years, based on management’s estimate of the average length of stay. For the years ended December 31, 2008 (unaudited) and 2007 and for the period June 27, 2006 (Inception) through December 31, 2006 (unaudited), amortization of in-place leases was $2,810,853 (unaudited), $3,747,798 and $936,947 (unaudited), which has been included in depreciation and amortization expense in the accompanying consolidated statements of operations. Residential leasing intangible assets have been fully amortized as of December 31, 2008.

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, 2008, 2007 and for the period June 27, 2006 (Inception) through December 31, 2006 was $1,123,230 (unaudited), $1,120,973 and $280,244 (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.

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.

162

SUNRISE ASTON GARDENS VENTURE, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

Accounting for Derivatives— The Company accounts for its derivative instruments in accordance with FASB Statement No. 133,Accounting for Derivative Instruments and Hedging Activity, as amended. FASB Statement 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. For the period June 27, 2006 (Inception) through December 31, 2006 (unaudited) and for the year ended December 31, 2007 and the nine months ended September 30, 2008 (unaudited), the Company’s interest rate instruments did not qualify for hedge accounting treatment in accordance with FASB Statement No. 133 and, as a result, changes in the fair value of the swap of $677,936 (unaudited), $6,073,558 and $766,174 (unaudited) are recorded in net loss for the years ended December 31, 2008 and 2007 and for the period June 27, 2006 (Inception) through December 31, 2006, respectively. Beginning October 1, the Company’s interest rate swap contract qualified for hedge accounting treatment in accordance with FASB Statement No. 133, and therefore, the Company recorded the change in the fair market value of the swap of $8,771,928 (unaudited) as an adjustment to accumulated other comprehensive loss in the accompanying financial statements. The total derivative liability recorded on the consolidated balance sheets is $16,289,596 (unaudited) and $6,839,732 as of December 31, 2008 and 2007.

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 assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Cash and cash equivalents, restricted cash, accounts receivable, and accounts payable, are carried at amounts which reasonably approximate their fair values because of the short term maturity of these investments.

FAIR VALUE MEASUREMENTS

The Company adopted the provisions of SFAS No. 157,Fair Value Measurements, as of January 1, 2008. Under SFAS No. 157, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels. These levels, in order of highest priority to lowest priority, are described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

163

SUNRISE ASTON GARDENS VENTURE, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available.

In February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2,Effective Date of FASB Statement No. 157, delaying the effective date of FASB Statement 157 for items such as nonfinancial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) and nonfinancial long-lived asset groups measured at fair value for an impairment assessment. The Company is evaluating the impact FSP No. 157-2 will have on our nonfinancial assets and liabilities that are not measured at fair value, but are recognized or disclosed at fair value on a nonrecurring basis. As of December 31, 2008, the assessment of fair value to the nonfinancial assets and liabilities did not indicate impairment. The Company elected to defer implementation of FSP No. 157-2 until the fiscal year beginning January 1, 2009.

TRANSACTIONS WITH AFFILIATES

The Facilities have entered into management agreements with Sunrise Senior Living Management, Inc. (“SSLMI”), a wholly owned subsidiary of SSLI, to manage each of the Facilities. The agreements have terms of 20 years, beginning on September 25, 2006, and provide for management fees to be paid monthly based on a percentage of the Facilities’ gross revenues. Total management fees incurred were $4,063,301 (unaudited), $3,729,740 and $880,795 (unaudited) in 2008, 2007 and 2006, respectively.

The management agreement also provides for reimbursement to SSLMI for all direct costs of operation. Payments to SSLMI for direct operating expenses were $35,925,000 (unaudited), $39,628,950 and $5,046,189 (unaudited) in 2008, 2007 and 2006, respectively.

The Company obtains professional and general liability coverage through Sunrise Senior Living Insurance, Inc., an affiliate of SSLI. Related payments totaled $3,095,168 (unaudited) in 2008 and $2,692,281 in 2007. Refunds of liability premiums of $177,902 (unaudited) and $188,072 were given in 2008 and 2007, respectively.

The Company had receivables from SSLI of $339,309 (unaudited) and payables to SSLI of $1,974,003 at December 31, 2008 and 2007, 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.

164

SUNRISE ASTON GARDENS VENTURE, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

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, 2008 (unaudited) and 2007 was 100% private pay.

NOTES PAYABLE

As part of the purchase of the Facilities on September 25, 2006, the Company assumed loans for four of the Facilities in the aggregate amount of $133,955,485 and obtained new debt of $170 million for two of the Facilities. Notes payable consists of the following at December 31, 2008 (unaudited) and 2007:

On September 25, 2006, the Company assumed notes payable of $26,296,181 for the Courtyards property in the original loan amount of $26,975,000 payable to Capmark Financial, Inc. (“Capmark”). The notes are secured by a deed of trust on the facility, bear interest at fixed rates of 5.81% and 6.19% per annum, require monthly principal and interest payments, and mature on January 1, 2015.

On September 25, 2006, the Company assumed a note payable of $23,500,000 for the Sun City property, in the original amount of $24,966,000 payable to Capmark. The note is secured by a deed of trust on the facility, bears interest at a fixed rate of 6.24% per annum, due in monthly installments of interest only through November 2006, with monthly installments of principal and interest thereafter, with the remaining balance of the note maturing on November 1, 2015.

On September 25, 2006, the Company assumed notes payable of $34,572,673 for the Tampa Bay property, in the original amount of $34,900,000 payable to Capmark. The notes are secured by a deed of trust on the facility, bears interest at fixed rates of 5.61% and 5.83% per annum, requires monthly principal and interest payments, and matures on July 1, 2015.

On September 25, 2006, the Company assumed a note payable of $49,586,631 for the Pelican Pointe property, in the original amount of $50,000,000 payable to Key Bank. The note is secured by a deed of trust on the facility, bears interest at a fixed rate of 6.11% per annum, requires monthly principal and interest payments, and matures on December 1, 2015.

On September 25, 2006, the Company entered into a note payable of $170,000,000 for the Parkland Commons and Pelican Marsh properties payable to HSH-Nordbank. The note is secured by a deed of trust on both facilities, bears interest at one-month LIBOR plus 1.95%, due in monthly installments of interest only through September 2010 and monthly installments of principal and interest thereafter, with the remaining balance of the note maturing September 25, 2011. The one-month LIBOR rate as of December 31, 2008 and 2007 was 0.44% (unaudited) and 4.60%, respectively. Additionally, the terms of the loan agreement include restrictions related to sale of the Courtyards facility, Sun City Center facility, Tampa Bay facility and Pelican Pointe facility.

In December 2008, GECCT, SSLI, and HSH-Nordbank executed an agreement whereby the $170,000,000 loan with HSH-Nordbank was bifurcated into two separate tranches. The Tranche A note (“Tranche A”) continues to be held by HSH-Nordbank in the amount of $143,750,000 with a variable interest rate of LIBOR plus 1.95% per annum. GECCT purchase the Tranche B note (“Tranche B”) in the amount of $26,250,000. Tranche B is subordinated to Tranche A and carries an interest rate of 10% per annum. The execution of this agreement and purchase of Tranche B by GE HFS cured all existing defaults with HSH-Nordbank. Additionally, the loan was modified to include an option to extend the maturity date subject to various conditions including no events of default through the original maturity date. The extension option would allow the borrowers to extend the maturity date of the debt from September 25, 2011 to September 25, 2012.

165

SUNRISE ASTON GARDENS VENTURE, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

Principal maturities of long-term debt as of December 31, 2008 (unaudited) are as follows:


2009	$	2,404,846
2010		3,178,768
2011		172,087,749
2012		2,859,707
2013		3,058,235
Thereafter		115,738,390

	$	299,327,695

The Company is subject to certain debt service, occupancy, and other financial covenants pursuant to the note agreements. On December 31, 2006 (unaudited), December 31, 2007 and March 31, 2008, the Company failed to meet certain financial covenants with HSH-Nordbank. A failure to achieve a coverage ratio of at least 1.05:1 constitutes an event of default. Upon an event of default, the lender has remedies ranging from a written waiver of default to requiring the setting up of a lockbox on cash receipts, and acceleration of the debt obligation. As of March 2008, the Company has implemented an excess cash sweep to escrow accounts held by HSH-Nordbank in accordance with provisions of the loan documents. Also, SSLMI has agreed to subordinate 2% of management fees to be paid into the escrow accounts. In June 2008, HSH-Nordbank issued a notice of an event of default due to the failure of the Company to maintain the required debt service coverage ratio. As a result of this event of default, the Company immediately began accruing interest on the loan at the default rate as defined in the loan agreement, which is 3.5% higher than the LIBOR plus 1.95% previously charged. Additionally, the default notice also required a principal payment be made on the loan no later than July 31, 2008, in an amount sufficient to achieve compliance with the debt service ratio requirement. As described above, the execution of the agreement and purchase of Tranche B by GE HFS cured all existing defaults with HSH-Nordbank.

GECCT intends to hold its investment in the Company through at least December 1, 2017. Additionally, GECCT intends to take steps to refinance the Company’s debt currently held by HSH-Nordbank when the debt becomes due in 2011 (or the extended maturity date of 2012). GECCT intends to accomplish this refinancing either through a third party lender or by a GECCT affiliate acting as lender.

166

SUNRISE ASTON GARDENS VENTURE, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

The HSH-Nordbank debt referred to above is guaranteed by the Company through a payment guaranty agreement between the Company and HSH-Nordbank. Additionally, SSLI has executed a guaranty of non-recourse obligations agreement and an operating deficit agreement with HSH-Nordbank. The balance due on the guaranty under this provision was $6,189,666 (unaudited) and $0 as of December 31, 2008 and 2007, respectively. In the event certain condition occur (i.e. borrower files for bankruptcy) as described in the agreement, the non-recourse obligation agreement unconditionally guarantees SSLI’s payment and performance on the HSH-Nordbank debt up to SSLII’s 25% ownership interest in the Company.

The fair value of the Company’s notes payable 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. For the debt on the HSH-Nordbank properties of Parkland Commons and Pelican Marsh, which is LIBOR based, the estimated fair value of this debt approximated its carrying value of $170,000,000 at December 31, 2008 (unaudited) and 2007. Per FASB No. 157, the Company has applied Level 2 type inputs to the Company’s remaining fixed rate notes payables, and determined that notes payables with carrying values of $129,327,695 (unaudited) and $131,399,741 at December 31, 2008 and 2007, respectively, had fair values of $125,778,626 (unaudited) and $129,717,926, respectively.

On September 26, 2006, the Company entered into an interest rate swap agreement with HSH-Nordbank. The interest rate swap pays interest at a fixed rate of 5.075% in exchange for interest based on LIBOR, in order to eliminate the variability of cash flows in interest payments associated with the $170 million mortgage payable, the source of which is due to changes in LIBOR. The fair market value of the interest rate swap at December 31, 2008 and 2007, was a liability of $16,289,596 (unaudited) and $6,839,732, respectively, and is included in the derivative liability on the consolidated balance sheets.

The Company utilizes this interest-rate related derivative instrument (interest rate swap) to manage its exposure on its debt instrument. 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.

FASB No. 157 requires that nonperformance risk be considered in measuring the fair value of assets and liabilities. For Derivatives, nonperformance risk refers to the risk that one of the parties to a derivative transaction will be unable to perform under the contractual terms of that derivative, such as the risk that one party will be unable to make cash payments at periodic net settlement dates or upon termination. The Company has considered the counterparty’s credit risk as well as the effect of its own credit standing in determining the fair value of its interest rate swap agreement. The Company minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterparties.

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.

167

SUNRISE ASTON GARDENS VENTURE, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

In August 2006, a plaintiff filed suit against SSLI, claiming it was entitled to broker commissions in connection with the purchase of the Facilities. SSLI’s request to dismiss this claim was granted and the plaintiff filed an amended complaint in 2007. Pursuant to the Company’s LLC Agreement, the Company is obligated to reimburse SSLI and GECCT up to a maximum of $2,666,667 in connection with this litigation. As of November 16, 2007, the plaintiff and SSLI executed a settlement agreement whereby SSLI agreed to pay the plaintiff a total of $2 million in exchange for dismissal of any claims with each party being responsible for their own legal costs. The $2 million was paid to the plaintiff in December 2007 through a $2 million capital contribution from SSLII and GECCT in proportion to their respective ownership percentages. SSLII’s contribution of $500,000 was reflected as a reduction of the payables to affiliate, net, balance in the consolidated balance sheets. Additionally, the Company has incurred a total of $906,353 in legal costs associated with this suit. In accordance with the Company’s LLC Agreement, SSLII and GECCT are obligated to contribute capital totaling $666,667 in proportion to their respective ownership percentages. Per the LLC Agreement, the remaining amount of legal costs totaling $239,686 is the responsibility of SSLI and is included as a receivable from SSLI in the payables to affiliates, net, balance in the consolidated balance sheet as of December 31, 2007. This amount was paid in 2008. A total of $2,666,667 representing settlement and legal costs is included in general and administrative expenses in the consolidated statement of operations in 2007. There were no additional costs related to this settlement incurred in 2008.

8. NEW ACCOUNTING PRONOUNCEMENTS

In February 2007, the FASB issued FASB Statement No. 159,The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115. FASB Statement No. 159 permits companies to measure many financial instruments and certain other items at fair value. FASB Statement No. 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.

In March 2008, the FASB issued FASB Statement No. 161 “Disclosures about Derivative Instruments and Hedging Activities” an amendment of FASB Statement No. 133 (“FASB No. 161”), which changes the disclosure requirements for derivative instruments and hedging activities. Pursuant to FASB No. 161, entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. FASB No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company does not expect the adoption of FASB No. 161 to have a material impact on the Company’s financial statements.

168

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

169

SUNRISE FIRST ASSISTED LIVING HOLDINGS, LLC

CONSOLIDATED BALANCE SHEETS


	December 31,
	2008			2007
	(Unaudited)			(Unaudited)
ASSETS
Real Estate, net	$	118,777,796		$	120,940,028
Other Assets
Cash and cash equivalents		3,224,177			2,156,679
Accounts receivable, less allowance for doubtful accounts of $462,591 and $453,319, respectively		844,433			964,924
Due from affiliates, net		—			335,603
Other assets		299,601			98,878
Restricted cash		555,698			663,165
Deferred financing costs, less accumulated amortization of $2,267,963 and $1,670,886, respectively		2,691,058			3,288,135

Total other assets		7,614,967			7,507,384

Total assets	$	126,392,763		$	128,447,412

LIABILITIES AND MEMBERS’ DEFICIT
Mortgages Payable	$	169,212,741		$	172,184,680
Other Liabilities
Accounts payable and accrued expenses		3,622,712			3,161,632
Deferred revenue		2,845,865			2,817,290
Due to affiliates, net		1,635,096			—
Deferred rent		1,660,554			1,421,489

Total other liabilities		9,764,227			7,400,411

Total liabilities		178,976,968			179,585,091

Members’ Deficit		(52,584,205	)		(51,137,679	)

Total liabilities and members’ deficit	$	126,392,763		$	128,447,412

The accompanying notes are an integral part of these consolidated financial statements.

170

SUNRISE FIRST ASSISTED LIVING HOLDINGS, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS


	Years Ended December 31,
	2008			2007			2006
	(Unaudited)			(Unaudited)
Operating Revenue	$	58,526,054		$	57,847,414		$	58,308,339
Operating expenses
Labor		22,235,110			21,333,957			20,672,041
Food		2,681,658			2,442,164			2,379,689
General and administrative		6,842,822			6,823,926			7,357,504
Insurance		1,906,512			1,879,108			2,148,863
Utilities		1,897,666			1,733,849			1,901,748
Repair and maintenance		2,024,205			1,886,579			2,036,785
Management fees		3,498,192			3,462,404			3,911,592
Depreciation		3,809,751			3,991,506			3,849,154
Lease expense		411,510			414,592			409,294

Total operating expenses		45,307,426			43,968,085			44,666,670

Income from Operations		13,218,628			13,879,329			13,641,669
Other (expense) income
Interest income		33,331			187,126			150,191
Interest expense		(10,976,110	)		(11,143,048	)		(14,510,145	)

Total other expense		(10,942,779	)		(10,955,922	)		(14,359,954	)

Net income (loss)	$	2,275,849		$	2,923,407		$	(718,285	)

The accompanying notes are an integral part of these consolidated financial statements.

171

SUNRISE FIRST ASSISTED LIVING HOLDINGS, LLC

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ (DEFICIT) CAPITAL

Years Ended December 31, 2008, 2007 and 2006


Balance, January 1, 2006	$	(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	)
Distributions (unaudited)		(3,722,375	)
Net Income (unaudited)		2,275,849

Balance, December 31, 2008 (unaudited)	$	(52,584,205	)

The accompanying notes are an integral part of these consolidated financial statements.

172

SUNRISE FIRST ASSISTED LIVING HOLDINGS, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Years Ended December 31,
	2008			2007			2006
	(Unaudited)			(Unaudited)
Cash flows from operating activities
Net income (loss)	$	2,275,849		$	2,923,407		$	(718,285	)
Reconciling adjustments:
Provision for (recovery of) bad debts		9,272			(124,610	)		210,741
Depreciation		3,809,751			3,991,506			3,849,154
Amortization of financing costs		597,077			590,620			757,512
Changes in:
Accounts receivable		111,219			284,756			(268,861	)
Other assets		(200,723	)		55,258			290,614
Accounts payable and accrued expenses		461,080			290,274			958,976
Due from/to affiliates		1,970,699			1,325,012			(2,299,973	)
Deferred revenue		28,575			450,001			63,958
Deferred rent		239,065			196,363			280,314

Net cash provided by operating activities		9,301,864			9,982,587			3,124,150

Cash flows from investing activities
Increase (decrease) in restricted cash		107,467			(29,152	)		1,064,600
Investment in property and equipment		(1,647,519	)		(1,661,166	)		(856,456	)

Net cash (used in) provided by investing activities		(1,540,052	)		(1,690,318	)		208,144

Cash flows from financing activities
Financing costs refunded (paid)		—			8,493			(3,564,619	)
Borrowing of long-term debt		—			—			175,977,070
Repayments of long-term debt		(2,971,939	)		(3,069,371	)		(129,114,479	)
Repayments of note payable to affiliate		—			—			(2,576,062	)
Distributions to members		(3,722,375	)		(5,020,869	)		(44,613,333	)

Net cash used in financing activities		(6,694,314	)		(8,081,747	)		(3,891,423	)

Net increase (decrease) in cash and cash equivalents		1,067,498			210,522			(559,129	)
Cash and cash equivalents, beginning of year		2,156,679			1,946,157			2,505,286

Cash and cash equivalents, end of year	$	3,224,177		$	2,156,679		$	1,946,157

Supplemental disclosure of cash flow information
Cash paid for interest	$	9,511,923		$	10,546,056		$	13,504,120

The accompanying notes are an integral part of these consolidated financial statements.

173

Sunrise First Assisted Living Holdings, LLC

Notes to the Consolidated Financial Statements
December 31, 2008, 2007 and 2006

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 had 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, 2008 and 2007 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, 2008 and 2007. 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.

Restricted Cash— Restricted cash includes cash reserved as required by the loan agreements and management agreements for real estate taxes, insurance, and capital expenditures.

174

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, 2008, 2007 and 2006.

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 $597,077, $590,620 and $757,512 for the years ended December 31, 2008, 2007 and 2006, respectively, and is included in interest expense on the accompanying consolidated statements of operations.

In accordance with EITF 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 $644,111, $743,745 and $648,325 were recognized for the for the years ended December 31, 2008, 2007 and 2006, 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.

Note 3— Real Estate

Real estate consists of the following at December 31, 2008 and 2007:


	Asset Lives	2008			2007
		(Unaudited)			(Unaudited)
Land and land improvements	10-15 years	$	27,863,110		$	27,696,898
Building and building improvements	40 years		105,128,848			103,978,777
Furniture and equipment	3-10 years		11,042,546			10,711,310

			144,034,504			142,386,985
Less accumulated depreciation			(25,256,708	)		(21,446,957	)

		$	118,777,796		$	120,940,028

175

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, 2008, 2007 and 2006 were $3,498,192, $3,462,404 and $3,911,592, respectively.

The agreements also provided for the reimbursement of direct labor costs incurred which during the years ended December 31, 2008, 2007 and 2006 were $22,235,110, $21,333,957 and $20,672,041, 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, 2008 and 2007, 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, 2008, 2007 and 2006, the Company recorded approximately $1,907,000, $1,879,000 and $2,149,000 in insurance expense, respectively, which is included in operating expenses on the accompanying consolidated statements of operations.

The Company had a net (payable to) receivable from its affiliates consisting of the following as of December 31, 2008 and 2007:


	2008			2007
	(unaudited)			(unaudited)
(Payable to) receivable from:
SSLI and its subsidiaries	$	(1,635,096	)	$	335,603

The net (payable to) receivable from SSLI and its subsidiaries at December 31, 2008 and 2007 relates to management services, net of advances.

Note 5— Mortgage Notes 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, 2008 and 2007:


	2008		2007
	(Unaudited)		(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		48,954,523		49,842,557
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		120,258,218		122,342,123

Long-term debt	$	169,212,741	$	172,184,680

Principal maturities of long-term debt as of December 31, 2008 are as follows:


Year ending December 31, 2009	$	3,445,251
2010		3,660,159
2011		3,888,474
2012		4,111,508
2013		110,953,471
Thereafter		43,153,878

	$	169,212,741

176

Fixed rate debt with an aggregate carrying value of $169,212,741 and $172,184,680 as of December 31, 2008 and 2007, respectively, has an estimated aggregate fair value of $190,956,589 and $170,589,397, respectively.

Note 6— 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, 2008 and 2007. 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 that approximate their fair values due to the short-term maturities of these financial instruments.

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, 2008 and 2007.

Note 8 — 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, 2008 are as follows:


Year ending December 31, 2009	$	165,000
2010		173,250
2011		181,500
2012		181,500
2013		181,500
Thereafter		35,325,255

	$	36,208,005

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 of Sunrise Second Assisted Living Holdings, LLC (Sunrise Second). The outstanding balances on the mortgages of Sunrise Second totaled $163,757,613 at December 31, 2008.

Note 10 — New Accounting Pronouncements

177

The Partnership did not elect the fair value option for any of its existing financial instruments on the effective date and has determined that it will not elect this option for any eligible financial instruments it acquires in the future.

In February 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. 157-2, Effective Date of FASB Statement No. 157, delaying the effective date of FASB Statement 157 for items such as nonfinancial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) and nonfinancial long-lived asset groups measured at fair value for an impairment assessment. The Partnership is evaluating the impact FSP No. 157-2 will have on our nonfinancial assets and liabilities that are not measured at fair value, but are recognized or disclosed at fair value on a nonrecurring basis. As of December 31, 2008, the assessment of fair value of the nonfinancial assets and liabilities did not indicate impairment. The Partnership elects to defer implementation of FSP No. 157-2 until the fiscal year beginning January 1, 2009.

178

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

179

SUNRISE SECOND ASSISTED LIVING HOLDINGS, LLC

CONSOLIDATED BALANCE SHEETS


	December 31,
	2008			2007
	(Unaudited)			(Unaudited)
ASSETS
Real Estate, net	$	113,890,378		$	116,089,085
Other Assets
Cash and cash equivalents		3,640,789			3,468,337
Accounts receivable, less allowance for doubtful accounts of $304,602 and $182,406, respectively		658,834			665,602
Due from affiliates, net		—			531,219
Other assets		37,967			15
Prepaid rent		2,149,014			2,174,755
Deferred financing costs, less accumulated amortization of $1,616,205 and $1,167,926, respectively		3,474,168			3,922,447

Total other assets		9,960,772			10,762,375

Total assets	$	123,851,150		$	126,851,460

LIABILITIES AND MEMBERS’ DEFICIT
Mortgages Payable	$	163,757,613		$	166,728,174
Other Liabilities
Accounts payable and accrued expenses		3,024,725			3,039,355
Due to affiliates, net		1,407,581			—
Deferred revenue		2,919,391			3,271,406

Total other liabilities		7,351,697			6,310,761

Total liabilities		171,109,310			173,038,935

Members’ Deficit		(47,258,160	)		(46,187,475	)

Total liabilities and members’ deficit	$	123,851,150		$	126,851,460

The accompanying notes are an integral part of these consolidated financial statements.

180

SUNRISE SECOND ASSISTED LIVING HOLDINGS, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS


	Years Ended December 31,
	2008			2007			2006
	(Unaudited)			(Unaudited)
Operating Revenue	$	63,689,985		$	61,838,255		$	58,683,362
Operating expenses
Labor		23,780,786			22,920,882			21,444,384
Food		2,801,155			2,503,202			2,442,275
General and administrative		5,848,138			5,686,159			5,472,770
Insurance		1,824,550			1,877,288			1,837,703
Utilities		2,364,036			2,054,908			2,118,585
Repair and maintenance		2,173,753			1,923,713			1,692,775
Management fees		3,808,000			3,714,168			3,808,151
Depreciation		3,666,152			3,674,177			3,968,698

Total operating expenses		46,266,570			44,354,497			42,785,341

Income from Operations		17,423,415			17,483,758			15,898,021
Other (expense) income
Interest income		37,657			196,052			167,624
Interest expense		(10,446,225	)		(10,582,682	)		(8,992,769	)

Total other expense		(10,408,568	)		(10,386,630	)		(8,825,145	)

Net income	$	7,014,847		$	7,097,128		$	7,072,876

The accompanying notes are an integral part of these consolidated financial statements.

181

SUNRISE SECOND ASSISTED LIVING HOLDINGS, LLC

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ (DEFICIT) CAPITAL
Years Ended December 31, 2008, 2007 and 2006


Balance, January 1, 2006	$	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	)
Contributions (unaudited)		228,454
Distributions (unaudited)		(8,313,986	)
Net Income (unaudited)		7,014,847

Balance December 31, 2008 (unaudited)	$	(47,258,160	)

The accompanying notes are an integral part of these consolidated financial statements.

182

SUNRISE SECOND ASSISTED LIVING HOLDINGS, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Years Ended December 31,
	2008			2007			2006
	(Unaudited)			(Unaudited)
Cash flows from operating activities
Net income	$	7,014,847		$	7,097,128		$	7,072,876
Reconciling adjustments:
Provision for bad debts		122,365			202,006			27,710
Depreciation		3,666,152			3,674,177			3,968,698
Amortization of prepaid rent		—			—			27,941
Amortization of financing costs		448,279			448,170			315,148
Changes in:
Accounts receivable		(115,597	)		292,182			(259,610	)
Insurance claims receivable		—			—			51,386
Other assets		(12,211	)		70,740			210,001
Accounts payable and accrued expenses		(14,630	)		379,220			31,934
Due to (from) affiliates		1,938,800			(1,538,542	)		1,688,996
Deferred revenue		(352,015	)		926,579			190,456
Deferred rent		—			—			(457,325	)

Net cash provided by operating activities		12,695,990			11,551,660			12,868,211

Cash flows from investing activities
Increase in restricted cash		—			—			851,913
Investment in property and equipment		(1,467,445	)		(1,764,860	)		(527,876	)

Net cash (used in) provided by investing activities		(1,467,445	)		(1,764,860	)		324,037

Cash flows from financing activities
Financing costs refunded (paid)		—			3,336			(4,227,644	)
Borrowing of long-term debt		—			—			170,523,000
Repayments of long-term debt		(2,970,561	)		(3,058,587	)		(124,470,089	)
Contributions from members		228,454			227,712			—
Distributions to members		(8,313,986	)		(8,213,288	)		(52,329,245	)

Net cash used in financing activities		(11,056,093	)		(11,040,827	)		(10,503,978	)

Net increase (decrease) in cash and cash equivalents		172,452			(1,254,027	)		2,688,270
Cash and cash equivalents, beginning of year		3,468,337			4,722,364			2,034,094

Cash and cash equivalents, end of year	$	3,640,789		$	3,468,337		$	4,722,364

Supplemental disclosure of cash flow information
Cash paid for interest	$	9,172,337		$	10,188,449		$	8,994,268

Non-cash financing activities
Distribution of property	$	—		$	—		$	8,144,830

The accompanying notes are an integral part of these consolidated financial statements.

183

Sunrise Second Assisted Living Holdings, LLC

Notes to the Consolidated Financial Statements
December 31, 2008, 2007 and 2006

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 had 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, 2008 and 2007 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, 2008 and 2007. 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.

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.

Restricted Cash — Restricted cash includes cash reserved as required by the loan agreements and management agreements for real estate taxes, insurance, and capital expenditures.

184

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. No impairment losses were recorded for the years ended December 31, 2008, 2007 and 2006.

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 $448,279, $448,170 and $315,148 for the years ended December 31, 2008, 2007 and 2006, respectively, and is included as interest expense in the consolidated statements of operations.

In accordance with EITF 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 $566,361, $652,639 and $668,280 were recognized for the years ended December 31, 2008, 2007 and 2006, 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.

Note 3— Real Estate

Real estate consists of the following at December 31, 2008 and 2007:


	Asset Lives	2008			2007
		(Unaudited)			(Unaudited)
Land and land improvements	10-15 years	$	21,599,709		$	21,566,550
Building and building improvements	40 years		102,992,209			102,079,276
Furniture and equipment	3-10 years		11,371,906			10,850,553

			135,963,824			134,496,379
Less accumulated depreciation			(22,073,446	)		(18,407,294	)

		$	113,890,378		$	116,089,085

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, 2008, 2007 and 2006 were $3,808,000, $3,714,168 and $3,808,151, respectively.

185

The agreements also provided for the reimbursement to SSLMI of all direct labor costs which during the years ended December 31, 2008, 2007 and 2006 were $23,780,786, $22,920,882 and $21,444,384, 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, 2008 and 2007, 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, 2008, 2007 and 2006, the Company recorded approximately $1,825,000, $1,877,000 and $1,838,000 in insurance expense, respectively, which is included in operating expenses on the accompanying consolidated statements of operations.

The Company had a net (payable to) receivable from its affiliates consisting of the following as of December 31, 2008 and 2007:


	2008			2007
	(Unaudited)			(Unaudited)
(Payable to) receivable from :
SSLI and its subsidiaries	$	(1,407,581	)	$	531,219

The net (payable to) receivable from SSLI and its subsidiaries at December 31, 2008 and 2007 relates to management services, net of advances.

Note 5— Mortgages Payable

On September 13, 2006, mortgage debt was 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, 2008 and 2007 totaled $163,757,613 and $166,728,174, respectively.

Principal maturities of long-term debt as of December 31, 2008 are as follows:


Year ending December 31, 2009	$	3,433,637
2010		3,647,230
2011		3,874,110
2012		4,115,104
2013		4,371,088
Thereafter		144,316,444

	$	163,757,613

Fixed rate debt with an aggregate carrying value of $163,757,613 and $166,728,174 as of December 31, 2008 and 2007, respectively, has an estimated aggregate fair value of $185,124,611 and $164,670,961, respectively.

Note 6— Fair Value of Financial Instruments

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.

186

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 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, 2008 and 2007.

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 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 $169,212,741 at December 31, 2008.

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.

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 13, 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

In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115. FASB Statement No. 159 permits companies to measure many financial instruments and certain other items at fair value. FASB Statement No. 159 was effective for the Partnership on January 1, 2008. The Partnership did not elect the fair value option for any of its existing financial instruments on the effective date and has determined that it will not elect this option for any eligible financial instruments it acquires in the future.

187

188


		Reznick Group, P.C. 2002 Summit Boulevard Suite 1000 Atlanta, GA 30319-1470		Tel: (404) 847-9447 Fax: (404) 847-9495 www.reznickgroup.com

INDEPENDENT AUDITORS’ REPORT

To the Members
Sunrise IV Senior Living Holdings, LLC

We have audited the accompanying consolidated statements of operations, changes in members’ capital, and cash flows of Sunrise IV Senior Living Holdings, LLC for the year ended December 31, 2006. These 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Sunrise IV Senior Living Holdings, LLC for the year ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 in the consolidated financial statements, the Company failed its debt service coverage ratio requirement for each quarter ended in 2008, and does not have sufficient operating cash to support its debt service requirements. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Reznick Group, P.C.

Atlanta, Georgia
November 10, 2008

Atlantan Baltimoren Bethesdan Charlotten Chicagon Los Angelesn Sacramenton Tysons Corner

189

Sunrise IV Senior Living Holdings, LLC

CONSOLIDATED BALANCE SHEETS

As of December 31


	2008			2007
	(unaudited)			(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	3,750,444		$	9,511,370
Accounts receivable, less allowance for doubtful accounts of $2,444,635 and $1,478,345, respectively		9,682,959			10,219,287
Prepaid expenses and other current assets		1,247,477			952,147


Total current assets		14,680,880			20,682,804

Property and equipment
Land and land improvements		68,982,717			68,577,973
Building and improvements		330,077,012			323,799,471
Furniture, fixtures and equipment		27,746,456			23,503,903
Construction in progress		822,530			2,070,893

		427,628,715			417,952,240
Less accumulated depreciation		(39,627,099	)		(28,308,784	)

Property and equipment, net		388,001,616			389,643,456

Restricted cash		5,800,305			7,646,620
Resident lease intangible, less accumulated amortization of $7,310,914 and $6,666,074, respectively		967,260			1,612,100
Deferred financing costs, less accumulated amortization of $5,866,348 and $4,164,835, respectively		2,565,001			4,231,152

Total assets	$	412,015,062		$	423,816,132

(continued)

190

Sunrise IV Senior Living Holdings, LLC

CONSOLIDATED BALANCE SHEETS — CONTINUED

As of December 31


	2008			2007
	(unaudited)			(unaudited)
LIABILITIES AND MEMBERS’ (DEFICIT) CAPITAL
Current liabilities
Accounts payable and accrued expenses	$	10,535,724		$	11,687,579
Distributions payable		—			25,268
Payable to affiliates		26,320,335			15,372,992
Interest rate swap liability		14,667,490			2,027,015
Deferred revenue		12,335,862			12,915,685
Security and reservation deposits		1,616,662			2,126,029
Unearned entrance fees		23,731,416			22,331,639
Resident refund liabilities		1,429,293			1,466,747
Current maturities of long-term debt		4,991,411			4,505,969


Total current liabilities		95,628,193			72,458,923

Long-term debt, less current maturities		326,809,931			329,720,265


Total liabilities		422,438,124			402,179,188

Members’ (deficit) capital		(10,423,062	)		21,636,944


Total liabilities and members’ (deficit) capital	$	412,015,062		$	423,816,132

See notes to consolidated financial statements

191

Sunrise IV Senior Living Holdings, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended December 31, 2008 (unaudited), 2007 (unaudited) and 2006


	2008			2007			2006
	(unaudited)			(unaudited)
Operating revenue
Resident fees and health care revenue	$	134,628,630		$	133,289,103		$	125,996,511
Amortization of entrance fees		2,856,062			1,778,872			945,722
Management fee income		1,295,410			398,712			272,159
Lease income		4,211,310			3,169,848			3,267,009
Other income		8,465,357			4,739,072			4,576,816


Total operating revenue		151,456,769			143,375,607			135,058,217


Operating expense
Labor		57,137,631			55,556,035			53,860,356
Selling, general, and administrative		27,855,479			25,909,411			23,009,297
Insurance and taxes		12,410,562			11,485,100			11,809,251
Management fees		8,659,320			8,126,892			7,447,461
Utilities		6,888,338			6,679,745			6,715,587
Food		9,801,905			7,606,053			7,067,446
Repairs and maintenance		4,763,591			4,248,739			4,936,157
Provision for bad debts		1,928,301			963,657			326,719
Depreciation and amortization		11,963,155			13,604,815			14,321,917
Loss on impairment		—			51,712,900			—

Total operating expense		141,408,282			185,893,347			129,494,191


Income (loss) from operations		10,048,487			(42,517,740	)		5,564,026

Other income (expense)
Interest expense		(29,321,331	)		(24,386,028	)		(24,057,734	)
Gain on sale of residences		—			—			634,978
Change in fair value of interest rate hedge instruments		(12,640,475	)		(8,390,737	)		1,360,721
Lease modification income		2,000,000			—			—
Other miscellaneous income		574,551			809,516			699,818


Net loss	$	(29,338,768	)	$	(74,484,989	)	$	(15,798,191	)

See notes to consolidated financial statements

192

Sunrise IV Senior Living Holdings, LLC

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ (DEFICIT) CAPITAL

Years ended December 31, 2008 (unaudited), 2007 (unaudited) and 2006


	SSLII			US SLI
	20%			80%			Total
Members’ capital, balance at December 31, 2005 (unaudited)	$	27,082,240		$	103,975,102		$	131,057,342

Distributions		(434,060	)		(9,716,174	)		(10,150,234	)
Net loss		(3,159,638	)		(12,638,553	)		(15,798,191	)

Members’ capital, balance at January 31, 2006		23,488,542			81,620,375			105,108,917

Distributions		(1,044,277	)		(7,942,707	)		(8,986,984	)
Net loss		(14,896,998	)		(59,587,991	)		(74,484,989	)

Members’ capital, balance at December 31, 2007 (unaudited)		7,547,267			14,089,677			21,636,944

Distributions		(103,156	)		(2,618,082	)		(2,721,238	)
Net loss		(5,867,754	)		(23,471,014	)		(29,338,768	)

Members’ capital (deficit), balance at December 31, 2008 (unaudited)	$	1,576,357		$	(11,999,419	)	$	(10,423,062	)

See notes to consolidated financial statements

193

Sunrise IV Senior Living Holdings, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2008 (unaudited), 2007 (unaudited) and 2006


	2008			2007			2006
	(unaudited)			(unaudited)
Cash flows from operating activities
Net loss	$	(29,338,768	)	$	(74,484,989	)	$	(15,798,191	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Loss on impairment		—			51,712,900			—
Depreciation and amortization		11,963,155			13,604,815			14,321,917
Amortization of unearned entrance fees		(2,856,062	)		(1,778,872	)		(945,722	)
Amortization of resident refund liabilities discount		71,794			103,445			132,962
Amortization of financing costs		1,701,513			1,689,303			1,652,627
Amortization of management fee contract		(480,000	)		(480,000	)		(480,000	)
Provision for bad debts		1,928,301			963,657			326,719
Change in fair value of interest rate hedge instruments		12,640,475			8,390,737			(1,360,721	)
Changes in operating assets and liabilities:
Accounts receivable		(1,391,973	)		(4,607,301	)		(3,447,084	)
Prepaid expenses and other current assets		(295,330	)		1,220,520			6,992,585
Note receivable		—			60,744			6,680
Accounts payable and accrued expenses		(573,873	)		1,220,230			35,108
Payable to affiliates		12,798,557			8,056,870			1,639,448
Deferred revenue		(99,823	)		1,655,413			411,485
Security and reservation deposits		(509,367	)		298,485			(417,500	)
Unearned entrance fees		4,255,839			13,079,714			9,121,789


Net cash provided by operating activities		9,814,438			20,705,671			12,192,102


Cash flows from investing activities
Change in restricted cash		1,846,315			1,683,447			(3,972,192	)
Investment in property and equipment		(10,254,457	)		(13,820,131	)		(9,684,898	)
Due from affiliates		—			2,000,000			6,000,000
Payable to affiliates		(1,851,214	)		1,851,214			2,507,092

Net cash used in investing activities		(10,259,356	)		(8,285,470	)		(5,149,998	)

(continued)

194

Sunrise IV Senior Living Holdings, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS — CONTINUED

Years ended December 31, 2008 (unaudited), 2007 (unaudited) and 2006


	2008			2007			2006
	(unaudited)			(unaudited)
Cash flows from financing activities
Financing costs paid		(35,362	)		(16,939	)		(150,000	)
Proceeds from long-term debt		4,049,449			8,400,980			—
Payment on long-term debt		(6,474,341	)		(3,048,781	)		(628,784	)
Payment on resident refund liabilities		(109,248	)		(519,228	)		(245,258	)
Distributions		(2,746,506	)		(11,411,186	)		(10,171,307	)

Net cash used in financing activities		(5,316,008	)		(6,595,154	)		(11,195,349	)


Net (decrease) increase in cash and cash equivalents		(5,760,926	)		5,825,047			(4,153,245	)
Cash and cash equivalents at beginning of period		9,511,370			3,686,323			7,839,568


Cash and cash equivalents at end of period	$	3,750,444		$	9,511,370		$	3,686,323


Supplemental disclosure of cash flow information
Cash paid for interest	$	29,945,936		$	20,407,418		$	22,272,145


Supplemental disclosure for non-cash investing and financing activities
Investment in property and equipment	$	577,982		$	1,002,364		$	(2,092,535	)
Accounts payable and accrued expenses		(577,982	)		(1,002,364	)		2,092,535
Change in distributions payable		(25,268	)		(2,424,202	)		(21,073	)
Distributions		25,268			2,424,202			21,073

	$	—		$	—		$	—

See notes to consolidated financial statements

195

Sunrise IV Senior Living Holdings, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008 (unaudited), 2007 (unaudited), and 2006

NOTE 1 — ORGANIZATION

Sunrise IV Senior Living Holdings, LLC, (the Company), a Delaware limited liability company, was formed on June 30, 2005. The Company began operations on July 1, 2005. The Company was formed to acquire certain assets and certain liabilities, as defined in the purchase agreement, of 16 senior living facilities (Facilities) as noted below for a purchase price of $449,064,326, excluding transaction costs. The Facilities provide the varying lifestyle needs of seniors and elderly residents by combining the services for independent living, assisted living, Alzheimer’s and related dementia care, and skilled nursing facilities in a campus setting. The Company shall terminate upon achievement of certain events and/or dates as outlined in the operating agreement.

Sunrise Senior Living Investments, Inc., (SSLII) a wholly-owned subsidiary of Sunrise Senior Living, Inc. (SSLI) is the managing member and holds a 20% interest. US Senior Living Investments, LLC (US SLI) holds an 80% interest in the Company.

A summary of the 16 Facilities are as follows:


Facility		State
Fountains at La Cholla		AZ
Fountains at Canterbury		OK
Fountains at Albemarle		NC
Fountains at Crystal Lake		IL
Fountains at La Jolla		CA
Fountains at Bellevue		WA
Fountains at Sea Bluffs		CA
Fountains at Franklin		MI
Fountains at Millbrook		NY
Fountains at Lake Pointe Woods		FL
Fountains at Boca Ciega		FL
Fountains at Carlotta		CA
Fountains at Bronson Place		MI
Fountains at The Washington House		VA
Fountains at Greenbriar		MO
Fountains at River Vue		NY

196

Sunrise IV Senior Living Holdings, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008 (unaudited), 2007 (unaudited), and 2006

NOTE 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 consolidated accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

The accompanying consolidated financial statements and related footnotes for the years ended December 31, 2008 and 2007 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 (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, 2008 and 2007.

Going Concern

The accompanying consolidated financial statements have been prepared on the basis of Sunrise IV Senior Living Holdings, LLC continuing as a going concern. The Facilities have been negatively impacted by adverse economic conditions during 2008 and continuing subsequent to year end. The Company failed the debt service coverage ratio requirement for each quarter ended in 2008. As a result, in 2008, the Company is in default of certain financial covenants with the HSH Nordbank AG (Nordbank) loan agreement, which had an outstanding balance of $331,801,342 (unaudited) at December 31, 2008, and the lender has remedies which include the acceleration of the debt obligation (see Note 5 to the consolidated financial statements). In July 2008, the lender issued a notice of default and in September 2008, the lender issued a second notice of default which requires the Company to remit all excess cash to Nordbank. The Company recorded an impairment charge of $51,712,900 (unaudited) in 2007 relating to the Albemarle, Canterbury, Crystal Lake, Bronson Place, La Jolla, and Lake Pointe Woods properties, which are security for the HSH-Nordbank loan, to record these properties at their estimated fair value of $155,200,000 (unaudited). These conditions raise substantial doubt about the Company’s ability to continue as a going concern and, therefore, the Company may be unable to realize its assets and discharge its liabilities in the normal course of business.

The Members have had discussions with Nordbank about the possibility of restructuring the loan agreement. There can be no assurances that the terms of the loan agreement will be restructured. Management believes the fair value of the Facilities is sufficient to cover the Company’s outstanding debt obligations in the event that the Company should find it necessary to sell certain Facilities. As a result, the consolidated financial statements do not include any adjustments to reflect the possible effects on the recoverability of assets or the

197

Sunrise IV Senior Living Holdings, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008 (unaudited), 2007 (unaudited), and 2006

amounts of liabilities that may result from the resolution of the uncertainty about the Company’s ability to continue as a going concern.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the 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, health care services revenue, and the fair value of financial instruments. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers cash and its cash equivalents to include all highly liquid investments with a maturity of three months or less at the date of purchase. The Company maintains its cash in deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on such accounts.

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.

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. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, as follows:


Building and Improvements		40 years
Land improvements		10-15 years
Furniture and Equipment		3-10 years

In accordance with Financial Accounting Standards Board (FASB) Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” 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

198

Sunrise IV Senior Living Holdings, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008 (unaudited), 2007 (unaudited), and 2006

Company measures an impairment loss by comparing the fair value of the asset to its carrying amount. The Company determines fair values using various commonly used methods including estimated cash flow projections discounted at appropriate rates and capitalization rates based on available market information. Based on management’s estimation process, no impairment losses were recorded in 2008 (unaudited) and 2006. In 2007, the Company recorded an impairment charge of $51,592,484 (unaudited) which is included in the loss on impairment line of the accompanying consolidated statement of operations for the year ended December 31, 2007.

Depreciation expense was $11,318,315 (unaudited), $11,683,118 (unaudited), and $11,162,130 for 2008, 2007, and 2006, respectively.

The acquisition of the Facilities has been accounted for using the provisions of FASB Statement No. 141, “Business Combinations” and FASB Statement No. 142, “Goodwill and Other Intangible Assets”. Based on appraisals and various valuation methods, the purchase price was allocated to working capital, land, building, equipment, identifiable intangible assets, debt, and resident lease intangibles. Following is a condensed balance sheet showing the fair values of the assets acquired and the liabilities assumed as of the date of acquisition:


Land and Land Improvements	$	74,854,505
Building and Improvements		349,395,728
Furniture, Fixtures and Equipment		19,334,960
Resident Lease Intangible		8,398,591

		451,983,784

Accounts Payable and Accrued Expenses		(641,492	)
Resident Refund Liabilities, net of discount		(2,277,966	)

		(2,919,458	)

Net assets acquired	$	449,064,326

Restricted Cash

Restricted cash includes cash escrow reserves for working capital, which are required by the State of Florida for Lake Pointe Woods and Boca Ciega Bay. These restricted cash amounts, which are held by state authorities, totaled $1,259,012 (unaudited) as of December 31, 2008 and 2007. The reserve requirements under state statutes are calculated by applying a certain percentage to the applicable Facilities’ net operating expenses plus debt service reserve, as defined.

199

Sunrise IV Senior Living Holdings, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008 (unaudited), 2007 (unaudited), and 2006

In addition to the working capital reserves, there is a furniture, fixtures, and equipment escrow account to be used to replace fixtures, equipment, structural elements, and other components of the Facilities as the need arises. It represents funding from operations net of fixed asset purchases and is a requirement of the joint venture agreement. The balance of the furniture, fixtures, and equipment escrow account was $4,541,293 (unaudited) and $6,177,221 (unaudited) as of December 31, 2008 and 2007, respectively, and is included in restricted cash in the accompanying consolidated balance sheets.

Security deposits are classified as restricted cash in the accompanying consolidated balance sheets and totaled $0 (unaudited) and $210,387 (unaudited) as of December 31, 2008 and 2007, respectively.

Resident Lease Intangible

Resident lease intangible includes the fair value assigned at acquisition to the in-place resident leases at the 16 facilities, in connection with the purchase of the Facilities. This asset is being amortized over 2 to 5 years, which approximates the average resident’s stay. Amortization expense for the years ended December 31, 2008, 2007, and 2006 was $644,840 (unaudited), $1,926,394 (unaudited), and $3,159,787, respectively, and is included in depreciation and amortization in the accompanying consolidated statements of operations. The Company recorded an impairment charge of $120,416 (unaudited) relating to resident leasing intangible assets in 2007. Estimated amortization expense for the next two ensuing years is $644,840 for 2009 and $322,420 for 2010.

Deferred Financing Costs

Costs incurred in connection with obtaining permanent financing for the Facilities have been deferred and are amortized to interest expense over the remaining term of the financing. Accounting principles generally accepted in the United States of America require that the effective yield method be used to amortize financing costs; however, the effect of using the straight-line method is not materially different from the results that would have been obtained under the effective yield method. Amortization expense for the years ended December 31, 2008, 2007, and 2006 was $1,701,513 (unaudited), $1,689,303 (unaudited), and $1,652,627, respectively, and is a component of interest expense in the accompanying consolidated statements of operations.

Unearned Entrance Fees

The Company utilizes entrance fee agreements at certain communities whereby an agreed-upon percentage of the fee is refundable to the resident or the resident’s estate upon the termination of the contract. The entrance fee is recorded by the Company as a current

200

Sunrise IV Senior Living Holdings, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008 (unaudited), 2007 (unaudited), and 2006

liability on the accompanying consolidated balance sheets. The nonrefundable portion of the entrance fee is amortized into income using the straight-line method over the estimated remaining life expectancy of the resident, based upon an actuarial projection.

Resident Refund Liabilities

In conjunction with the acquisition, the Company assumed certain resident refund liabilities, which will be required to be repaid to the residents vacating the units, based on the terms of the resident agreement. As these liabilities do not require re-occupancy of the apartment to be refunded, the Company has recorded the estimated liability to the residents as a resident refund liability.

Future Service Obligation

The Company owns three Continuing Care Retirement Communities (CCRC) and is, therefore, obligated to provide services and the use of facilities to the residents of these communities over their remaining lives based on the terms of the continuing care contract agreements. The CCRC facilities include: Fountains at Lake Pointe Woods, Fountains at Carlotta and Fountains at The Washington House. When the present value of estimated costs to be incurred under the Care Agreements exceeds the present value of estimated revenues, the present values of such excess costs are accrued. The present value of estimated costs did not exceed the present value of estimated revenues as of December 31, 2008 (unaudited) and December 31, 2007 (unaudited); therefore, no future service obligation has been reflected on the accompanying balance sheets.

Revenue Recognition

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 and related expenses are recognized as income and expense over 12 months beginning on the resident move-in date. All other resident fee revenue is recognized when services are rendered. Agreements with residents are for a term of one year and are cancelable by residents with 30-days’ notice.

In conjunction with the acquisition, the Company acquired the Facilities free of any management agreements. Under the Management Right Purchase Agreement, Sunrise Senior Living Management, Inc. (SSLMI) acquired the rights to enter into long-term management agreements with each Facility. In exchange for such long-term management agreements, SSLMI agreed to pay the Company $12,000,000 in six installment payments of $2,000,000 each. The deferred revenue related to the transaction is being amortized over 25 years, which equals the life of the management contracts. For the years ended December 31, 2008

201

Sunrise IV Senior Living Holdings, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008 (unaudited), 2007 (unaudited), and 2006

(unaudited), 2007 (unaudited), and 2006, $480,000 has been recognized as revenue in each year, and is included in other miscellaneous income in the accompanying consolidated statements of operations.

Lease income is recognized on a straight-line basis over the terms of the respective leases.

The Company periodically sells condominium units at some of the Facilities. The Company has no continuing involvement following a sale and therefore, the transactions qualify for full accrual profit recognition at the time of sale. Revenue from the sale of condominiums is recorded, net of the costs of the sale, as gain on sale of residences in the accompanying consolidated statements of operations.

Health Care Services Revenue

Health care services revenue is recorded at established rates with contractual adjustments deducted to arrive at net health care services revenue.

Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates of health care services revenue will change by a material amount.

Health care services rendered to Medicare beneficiaries are paid on a Prospective Payment System (PPS). Fee amounts are determined annually and are based on the acuity level of the resident. As a result, PPS does not have estimated annual settlements. Medicaid payment methodologies vary by state. Most state Medicaid programs will perform desk reviews of all submitted cost reports and audit only selected providers. Differences between the estimated amounts accrued and final settlements are reported in operations in the year of settlement. There are no receivables for estimated Medicare and Medicaid settlements at December 31, 2008 (unaudited), 2007 (unaudited), and 2006.

Income Taxes

The Company is treated like a partnership for federal income tax purposes. Accordingly, no provision for federal 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.

Accounting for Derivatives

The Company accounts for its derivative instruments in accordance with FASB Statement

202

Sunrise IV Senior Living Holdings, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008 (unaudited), 2007 (unaudited), and 2006

No. 133, “Accounting for Derivative Instruments and Hedging Activity”, as amended. FASB Statement 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 sheet 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 interest rate swaps 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 FASB Statement No. 133 and, as a result, changes in the fair value of the swap are recorded in net income.

NOTE 3 — FAIR VALUE MEASUREMENTS

The Company adopted the provisions of FASB Statement No. 157, “Fair Value Measurements”, as of January 1, 2008. Under FASB Statement No. 157, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, FASB Statement No. 157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels. These levels, in order of highest priority to lowest priority, are described below:

Level 1 — Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

Level 2 — Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level3 — Unobservable inputs are used when little or no market data is available.

In February 2008, the FASB issued FASB Staff Position (FSP) No. 157-2, “Effective Date of FASB Statement No. 157”, delaying the effective date of FASB Statement No. 157 for items such as nonfinancial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) and nonfinancial long-lived asset groups measured at fair value for an impairment assessment. The Company is evaluating the impact FSP No. 157-2 will have on our nonfinancial assets and liabilities that are not measured at fair value, but are recognized or disclosed at fair value on a nonrecurring basis. As of December 31, 2008, the assessment of fair value of the nonfinancial assets and liabilities did not indicate impairment. The Company elected to defer implementation of FSP No. 157-2 until the fiscal year beginning January 1, 2009.

203

Sunrise IV Senior Living Holdings, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008 (unaudited), 2007 (unaudited), and 2006

As of December 31, 2008, the carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable and accounts payable were representative of their fair values because of the short-term maturity of these instruments.

NOTE 4 — AFFILIATE TRANSACTIONS

Management Services

The Company has entered into management agreements with Sunrise Senior Living Management, Inc. (SSLMI), a wholly-owned subsidiary of SSLII, to manage each of its facilities. The agreements have terms of 25 years and expire on July 1, 2030. The agreements provide for management fees to be paid monthly. The fee consists of a fixed fee of $2,530 per month and a percentage fee equal to 5.5 percent of the adjusted gross revenue on a monthly basis for the first 24 months and a fixed fee of $2,760 per month and 6 percent of the adjusted gross revenue on a monthly basis for the remainder of the term. Total management fees were incurred in the amount of $8,659,320 (unaudited), $8,126,892 (unaudited), and $7,447,461 for 2008, 2007, and 2006, respectively.

The management agreements require the Facilities to maintain a reserve account to cover the cost of certain fixed asset additions, repairs, and maintenance, as defined in the agreements. Upon formation of the Company, the members established a reserve in the amount of $1,490,000. The required per unit annual reserve payment for the years 2008, 2007, and 2006 was $1,692 (unaudited), $1,650 (unaudited), and $1,610, respectively. The reserve payment shall increase by 2.5 percent each year thereafter. As outlined in the management agreements, SSLMI is required to transfer funds on a quarterly basis into the reserve account. The balance in this reserve was $4,541,293 (unaudited) and $6,177,221 (unaudited) as of December 31, 2008 and 2007, respectively, which is included in restricted cash on the accompanying consolidated balance sheets.

Receivable and Payable to Affiliates

In conjunction with the acquisition, the Company acquired the Facilities free of any management agreements. Under the Management Right Purchase Agreement, SSLMI acquired the rights to enter into long-term management agreements with each facility. In exchange for such long-term management agreements, SSLMI agreed to pay the Company $12,000,000 in six installment payments of $2,000,000 each. As of December 31, 2008 and 2007, no amounts remained outstanding. The deferred revenue related to the transaction is being amortized over 25 years, which equals the life of the management contracts. For the years ended December 31, 2008 (unaudited), 2007 (unaudited), and 2006, $480,000 has been recognized as revenue in each year, and is included in other miscellaneous income in the accompanying consolidated statements of operations.

204

Sunrise IV Senior Living Holdings, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008 (unaudited), 2007 (unaudited), and 2006

Under the operating agreement, SSLI has an obligation to fund the Company’s cash flow shortfall for members’ distributions through an income support guarantee to US SLI. In 2008, 2007, and 2006, SSLI funded $7,000,000 (unaudited), $5,828,868 (unaudited), and $0, respectively. The outstanding balance of the advances as of December 31, 2008 and 2007, was $12,828,868 (unaudited) and $5,828,868 (unaudited), respectively, which is included in payable to affiliates in the consolidated balance sheets.

Under the operating agreement, SSLI also has an obligation to fund the Company’s negative operating cash flows for any month through a mezzanine financing guarantee (Mezzanine Financing). The Mezzanine Financing accrues interest at the rate of 10% per annum, which is capitalized annually. Mezzanine Financing of $13,933,110 (unaudited) was funded during 2008 and $183,376 (unaudited) of accrued interest was capitalized. These amounts are recorded as payable to affiliates in the consolidated balance sheets.

As of December 31, 2008 and 2007, the Company had net payables to its affiliates of $26,320,335 (unaudited) and $15,372,992 (unaudited), respectively.

NOTE 5 — LONG-TERM DEBT

In accordance with the acquisition, the Company obtained a loan from HSH Nordbank AG (Nordbank) with a commitment amount of $405,750,000 of which $330,750,000 was drawn on the date of acquisition. The loan is collateralized by the assets of each Facility and guaranteed by SSLI. The loan matures on June 30, 2010, with an option to extend the loan for an additional two years, subject to certain debt service coverage ratio tests as defined in the loan agreement. In 2008 and 2007, the Company borrowed an additional $4,049,449 (unaudited) and $8,400,980 (unaudited), respectively, under the loan to fund expansions at the Fountains at La Cholla and Fountains at Lake Pointe Woods facilities, respectively. There was $331,801,342 (unaudited) and $334,226,234 (unaudited) outstanding under the loan as of December 31, 2008 and 2007, respectively.

The loan bears interest at LIBOR plus 2.25 percent. The LIBOR rate was 0.44 percent (unaudited), 4.60 percent (unaudited), and 5.32 percent as of December 31, 2008, 2007 and 2006, respectively. The loan required payments of interest only for the first two years. Thereafter, the loan began amortization. Interest expense (excluding swaps) for the years ended December 31, 2008, 2007 and 2006 was $24,535,693 (unaudited), $24,837,335 (unaudited), and $24,040,140, respectively.

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. Per FASB Statement No. 157, the Company has applied Level 2

205

Sunrise IV Senior Living Holdings, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008 (unaudited), 2007 (unaudited), and 2006

type inputs to determine that the estimated fair value of the Company’s long-term debt approximated its carrying amount at December 31, 2008 (unaudited) and 2007 (unaudited).

Notwithstanding the defaults, the scheduled principal maturities of long-term debt as of December 31, 2008 and 2007 are as follows:


	2008		2007
	(unaudited)		(unaudited)
2008	$	—	$	4,505,969
2009		4,991,411		4,879,962
2010		326,809,931		324,840,303
2011		—		—

	$	331,801,342	$	334,226,234

The Company utilizes derivative financial instruments in the form of interest rate swaps to hedge interest rate exposure on variable-rate debt. The Company does not enter into derivative instruments for any purpose other than to mitigate the impact of changes in interest rates on its cash flows. That is, the Company does not speculate using derivative instruments. The Company entered into two separate interest rate swap agreements with Nordbank in 2005 as follows:


Hedged Amount	Interest Rate	Term
$107,500,000	4.19%	5 years
$107,500,000	4.29%	7 years

The Company adopted FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. The fair market value of the interest rate swap at December 31, 2008 and 2007 was a liability of $14,667,490 (unaudited) and $2,027,015 (unaudited), respectively, and the net amount is included in the interest rate swap liability on the accompanying consolidated balance sheets. Amounts received or paid in connection with the swap agreements were recognized as adjustments to interest related to the designated debt. For the year ended December 31, 2008, the Company recorded swap interest expense of $2,901,828 (unaudited), and for the years ended December 31, 2007 and 2006, the Company recorded swap interest credit of $2,244,055 (unaudited) and $1,767,995, respectively.

FASB Statement No. 157 requires that nonperformance risk be considered in measuring the fair value of assets and liabilities. For derivatives, nonperformance risk refers to the risk that one of the parties to a derivative transaction will be unable to perform under the contractual terms of that derivative, such as the risk that one party will be unable to make cash payments

206

Sunrise IV Senior Living Holdings, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008 (unaudited), 2007 (unaudited), and 2006

at periodic net settlement dates or upon termination. The Company has considered the counterparty’s credit risk as well as the effect of its own credit standing in determining the fair value of its interest rate swap agreements. The Company minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterparties.

NOTE 6 — LEASE INCOME

The Company receives lease income from non-residential tenants under operating leases.

Future minimum lease payments as of December 31, 2008 (unaudited) are as follows:


2009	$	5,809,923
2010		5,914,742
2011		6,008,884
2012		6,078,929
2013		6,241,019
Thereafter		7,175,302

Total	$	37,228,799

The tenant base includes nursing homes, assisted living providers and home owners associations. Future minimum lease payments do not include amounts received for reimbursement of the facility operating expenses. Additionally, future minimum lease payments do not include revenues earned from temporary tenants with lease commitments that span less than one year.

In 2008, the Company amended two of the lease agreements with its nonresidential tenants. As a condition to the amendments, the tenants were required to pay the Company a lump sum of $2,000,000 (unaudited). This one time income amount is included in lease modification income in the accompanying consolidated statements of operations.

NOTE 7 — LEASE EXPENSE

The Company entered into a contingent lease agreement with Pacific Regent Tower 1 Condominium Association for the use of the health center. The rent expense is contingent based on the actual costs allocable to the premises for a lease year. There is not a fixed minimum lease payment. The lease is for a term of ninety-nine years or the useful life of the building, whichever is shorter. The lease expense for the years ended December 31, 2008, 2007, and 2006 was $1,589,294 (unaudited), $1,568,131 (unaudited), and $1,298,380, respectively.

207

Sunrise IV Senior Living Holdings, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008 (unaudited), 2007 (unaudited), and 2006

NOTE 8 — GAIN ON SALE

In 2006, the Company sold three condominium suites to residents. In connection with the sales of these residences, the Company received proceeds of $2,225,500. Costs associated with the sales were $1,590,522 for 2006 which have been netted with the proceeds on the sale. The sale transactions were not considered to be “available for sale,” rather, condominium sales are analyzed individually by management, given current occupancy levels and market conditions, and sold as the opportunity arises. There were no gains on sale in 2008 (unaudited) or 2007 (unaudited).

NOTE 9 — 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 was as follows:


	2008			2007			2006
	(unaudited)			(unaudited)
Medicare		25.92	%		23.54	%		20.50	%
Medicaid		1.62	%		2.38	%		2.31	%
Private		72.46	%		74.08	%		77.19	%

		100.00	%		100.00	%		100.00	%

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.

NOTE 11 — NEW ACCOUNTING PRONOUNCEMENT

In February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.” FASB Statement No. 159 permits companies to measure many financial instruments and certain other items at fair value. FASB Statement No. 159 was 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 determined that it will not elect this option for any eligible financial instruments it acquires in the future.

208

Sunrise IV Senior Living Holdings, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008 (unaudited), 2007 (unaudited), and 2006

NOTE 12 — SUBSEQUENT EVENT

In January 2009, SSLI informed the Company’s lenders and US SLI that SSLI was suspending payment of default interest and payments under the income support guarantee, and that SSLI would seek a comprehensive restructuring of the loan, its operating deficit guarantees and its income support guarantee. The Company’s failure to pay default interest on the loan is an additional default of the loan agreement. SSLI’s failure to pay default interest on the loan is also a default of the management agreements with SSLMI and its agreement with US SLI. SSLI has requested that the lender for the Fountains portfolio agree not to foreclose on the communities that are collateral for their loans or to commence or prosecute any action or proceeding to enforce its demand for payment by SSLI pursuant to its operating deficit agreements through March 31, 2009. The lender has not agreed to SSLI’s request for a standstill agreement through March 31, 2009.

Due to the defaults under the management agreements and SSLI’s agreement with US SLI caused by SSLI’s failure to pay default interest on the loan, starting in 2009, SSLMI is only entitled to a management fee of 3% of the adjusted gross revenue on a monthly basis for the remainder of the term of its management agreements unless the event of default is cured.

209

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Changes to Procedures for Recommending Director Nominees

On November 13, 2008, the Board approved Amended and Restated Bylaws of the Corporation (the “Revised Bylaws”), which Amended and Restated Bylaws were effective as of November 14, 2008. The principal changes between the Revised Bylaws and the bylaws in effect prior to the approval of the Revised Bylaws with respect to the procedure for director nominations are as follows:

Stockholder Advance Notice Provisions. The Bylaws were amended to extend the applicability of the Bylaws’ advance notice provisions to all stockholder nominations and proposals of business (whether in respect of annual meetings or special meetings) and increase advance notice requirements for submission of stockholder proposals:

	•		Annual meetings: Under the Revised Bylaws, stockholders proposing matters for consideration at an annual meeting must provide notice not earlier than 120 days and not later than 90 days prior to the anniversary of the date on which the Corporation first mailed its proxy materials for the immediately preceding annual meeting. If, however, the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, stockholder notice must be delivered not earlier than 120 days and not later than 90 days prior to the date of such annual meeting. If the first public announcement of the date is less than 100 days prior to the date of such annual meeting, then stockholder notice must be delivered not later than the 10th day following such public announcement.

	•		Special meetings: Stockholders proposing matters for consideration at a special meeting must provide notice not less than 120 calendar days prior to the date of the special meeting. If the first public announcement of the date of such special meeting is less than 130 days prior to the date of such special meeting, stockholder notice must be delivered not later than the 10th day following such public announcement.

In addition, the advance notice requirements with respect to annual and special meetings were amended to require certain additional disclosures regarding the stockholders making proposals or nominations, including disclosure of all ownership interests (including derivative interests) and rights to vote any shares of any security of the Corporation and disclosure regarding the business proposed or director nominee, including a description of any compensation, agreements, arrangements and understandings between the proposing stockholder and the nominee and a description of any agreements, arrangements and understandings between the proposing stockholder and any persons (including their names) in connection with the business proposal, and a signed nominee questionnaire.

PART IV

Item 15. Exhibits and Financial Statement Schedules

a. (1) All financial statements

Consolidated financial statements filed as part of this report are listed under Part II, Item 8 of this Form 10-K.

(2) Financial statement schedules

No schedules are required because either the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information is included in the consolidated financial statements or the notes thereto.

b. Exhibits

The exhibits listed in the accompanying index are filed as part of this report.

210

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 31^st day of March, 2009.

SUNRISE SENIOR LIVING, INC.


By:		/s/ Richard J. Nadeau Richard J. Nadeau Chief Financial Officer

211

EXHIBIT INDEX

INCORPORATED BY REFERENCE

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

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

Amended and Restated Certificate of Incorporation of Sunrise, effective as of November 14, 2008.

Def 14A

October 20, 2008

3.2

Amended and Restated Bylaws of Sunrise, effective as of November 14, 2008.

8-K

November 19, 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

4.3

Amendment, dated as of November 19, 2008, to the Rights Agreement, dated as of April 24, 2008, between the Corporation and American Stock Transfer & Trust Company, as rights agent.

8-K

November 19, 2008

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

212

INCORPORATED BY REFERENCE

Exhibit

Number

Description

Form

Filing Date with SEC

Number

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

2008 Omnibus Incentive Plan.+

Def 14A

October 20, 2008

10.13

Form of Executive Restricted Stock Agreement.+

10-Q

May 10, 2005

10.4

10.14

Form of Restricted Stock Unit Agreement.+

8-K

March 14, 2006

10.1

10.15

Form of Director Stock Option Agreement.+

8-K

September 14, 2005

10.2

10.16

Form of Stock Option Certificate.+

10-K

March 24, 2008

10.14

10.17

Form of Non-Qualified Stock Option Agreement.+

10-K

March 2, 2009

10.17

10.18

Form of Incentive Stock Option Agreement.+

10-K

March 2, 2009

10.18

10.19

Form of Restricted Stock Agreement.+

10-K

March 2, 2009

10.19

10.20

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

10.21

Form of Sunrise Assisted Living Holdings, L.P. Class A Limited Partner Unit Agreement.+

10-K

March 29, 2002

10.89

10.22

Sunrise Employee Stock Purchase Plan, as amended.+

Def 14A

April 7, 2005

10.23

Sunrise Executive Deferred Compensation Plan, effective January 1, 2009.+*

N/A

10.24

Greystone Communities Nonqualified Deferred Compensation Plan.+

10-K

July 31, 2008

10.25

Bonus Deferral Programs for Certain Executive Officers.+*

N/A

10.26

Sunrise Assisted Living, Inc. Long Term Incentive Cash Bonus Plan effective August 23, 2002.+

10-Q

November 13, 2002

10.1

10.27

Amendment 1 to Sunrise Assisted Living, Inc. Long Term Incentive Cash Bonus Plan.+

10-K

March 16, 2005

10.32

10.28

Amendement 2 to Sunrise Senior Living, Inc. Long Term Incentive Cash Bonus Plan.+*

N/A

10.29

��

Sunrise Senior Living, Inc. Senior Executive Severance Plan.+

10-K

March 16, 2006

10.53

10.30

Amendment to the Sunrise Senior Living, Inc. Senior Executive Severance Plan.+*

N/A

10.31

Form of Indemnification Agreement.+

10-K

March 16, 2006

10.54

10.32

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

10.33

Amendment No. 1 to Amended and Restated Employment Agreement by and between Sunrise and Paul J. Klaassen.+

10-K

March 24, 2008

10.30

10.34

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

10.35

Employment Agreement between the Corporation and Mark S. Ordan, dated November 13, 2008.+

8-K

November 19, 2008

10.1

10.36

Letter Agreement between the Corporation and Julie Pangelinan, dated November 17, 2008.+

8-K

November 19, 2008

10.2

213

INCORPORATED BY REFERENCE

Exhibit

Number

Description

Form

Filing Date with SEC

Number

10.37

Separation Agreement and General Release between the Company and John F. Gaul, dated December 9, 2008.+

8-K

December 15, 2008

10.1

10.38

Employment Agreement between Sunrise Senior Living, Inc. and Julie A. Pangelinan, dated January 14, 2009.+

8-K

January 21 2009

10.2

10.39

Employment Agreement between Sunrise Senior Living, Inc. and Daniel J. Schwartz, dated January 16, 2009.+

8-K

January 21 2009

10.3

10.40

Employment Agreement between Sunrise Senior Living, Inc. and Greg Neeb, dated January 21, 2009.+

8-K

January 21 2009

10.4

10.41

Employment Agreement between Sunrise Senior Living, Inc. and Ricahrd J. Nadeau, dated February 25, 2009.+

8-K

February 26, 2009

10.1

10.42

2008 Non-Employee Director Fees and Other Compensation+

10-K

March 2, 2009

10.45

10.43

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

10.44

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

10.45

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

10.46

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

10.47

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

10.48

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

10.49

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

10.50

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

10.51

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

214

INCORPORATED BY REFERENCE

Exhibit

Number

Description

Form

Filing Date with SEC

Number

10.52

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

10.53

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

10.54

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

10.55

Ninth 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 November 6, 2008.

10-Q

November 7, 2008

10.2

10.56

Tenth 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 20, 2008.

8-K

January 21, 2009

10.1

10.57

Eleventh 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 Administrative Agent, Swing Line Lender and L/C Issuer and other lender parties thereto, dated March 20, 2009.

8-K

March 23, 2009

10.1

10.58

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

10.59

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

215

INCORPORATED BY REFERENCE

Exhibit

Number

Description

Form

Filing Date with SEC

Number

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

Letter dated March 16, 2008 regarding surrender of bonus compensation.+

10-K

March 24, 2008

10.65

10.62

Multifamily Mortgage, Assignment of Rents and Security Agreement.

8-K

May 12, 2008

10.1

10.63

Discount MBS Multifamily Note.

8-K

May 12, 2008

10.1

10.64

Pre-Negotiation and Standstill Agreement dated December 24, 2008, by and among Sunrise Senior Living, Inc., Sunrise Hannover Senior Living GmbH & Co. KG, Sunrise Hannover GmbH and Natixis, London Branch.

8-K

December 24, 2008

10.1

10.65

Standstill Agreement, dated December 23, 2008, by and among Sunrise Senior Living, Inc., Sunrise Hannover Senior Living GmbH & Co. KG, Sunrise Hannover GmbH and Natixis, London Branch.

8-K

December 24, 2008

10.2

Subsidiaries of the Registrant.

10-K

March 2, 2009

23.1

Consent of Ernst & Young LLP

10-K

March 2, 2009

23.1

23.2

Consent of Ernst & Young LLP*

N/A

23.3

Consent of Ernst & Young LLP*

N/A

23.4

Consent of Ernst & Young LLP*

N/A

23.5

Consent of Deloitte & Touche LLP.*

N/A

23.6

Consent of PricewaterhouseCoopers LLP.*

N/A

23.7

Consent of Deloitte & Touche LLP.*

N/A

23.8

Consent of Beers & Cutler PLLC.*

N/A

23.9

Consent of Beers & Cutler PLLC.*

N/A

23.10

Consent of Reznick Group P.C.*

N/A

31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

10-K

March 2, 2009

31.1

31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

10-K

March 2, 2009

31.2

31.3

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

N/A

31.4

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

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

March 2, 2009

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

March 2, 2009

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

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


+		Represents management contract or compensatory plan or arrangement.

*		Filed herewith.

216

Sunrise Senior Living Inactive 10-K/A2008 FY Annual report (amended)