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EXHIBIT 10.18
PROJECTED CASH SHORTFALL PROTECTION AGREEMENT
THIS PROJECTED CASH SHORTFALL PROTECTION AGREEMENT (this "Agreement") is
made and entered into as of October 30, 1998, by and among Berkshire Renovation,
LLC, a Delaware limited liability company ("Berkshire"), Encino Renovation, LLC,
a Delaware limited liability company ("Encino") and Rossmore Renovation, LLC, a
Delaware limited liability company ("Rossmore"; Berkshire, Encino, and Rossmore
may collectively be referred to herein as the "Owners" and, individually, as an
"Owner"), FINOVA Capital Corporation, a Delaware corporation ("Lender"), and ARV
Assisted Living, Inc., a Delaware corporation ("ARV").
RECITALS
WHEREAS, each of the Owners is the owner of certain real property (each,
a "Property") which includes an assisted living facility (each, a "Facility") to
be renovated or constructed thereon (each such Property and Facility
collectively referred to as a "Project") ; and
WHEREAS, ARV is a Member of each Owner; and
WHEREAS, as of October 21, 1998, ARV entered into a separate Management
Agreement (each, a "Management Agreement") with each Owner covering the
operation and management of the Project owned by such Owner; and
WHEREAS, the Owners have entered into that certain Master Loan and
Security Agreement (including the Schedule to Master Loan and Security Agreement
which is incorporated as an integral part thereof), dated of even date herewith,
with Lender (herein, the "Loan Agreement"), pursuant to which Lender has agreed
to provide a credit facility to each Owner in connection with the acquisition
and renovation or construction of such Owner's applicable Project; and
WHEREAS, it is a condition precedent to Lender's obligations under the
Loan Agreement that ARV provide certain assurances in favor of the Owners and
Lender with respect to certain construction cost overruns and operating deficits
in excess of projected operating losses; and
WHEREAS, in order to induce Lender to enter into the Loan Agreement and
to fund the Loans described therein, ARV is willing to provide the required
assurances in such amounts, for such period and under such terms as are set
forth in this Agreement.
NOW, THEREFORE, in order to induce Lender to provide the financing
described above, and in consideration of the mutual promises of the parties
hereto and of other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as follows:
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1. Definitions. Terms used herein with initial capital letters, to the
extent not otherwise defined herein, shall have the meanings given such terms in
the Loan Agreement. For the purposes of this Agreement, the following terms
shall have the meanings set forth below:
The term "Actual Costs" shall mean, with respect to any Facility at any
time, the total actual costs and expenses of the construction or renovation of
that Facility incurred by the Owner up to such time. "Actual Costs" shall not
include either: (i) costs and expenses of marketing and lease-up; or (ii)
additional costs and expenses directly attributable to change orders required by
Lender (other than any change orders required by Lender in order to bring the
Facility into compliance with applicable law), to the extent such additional
costs and expenses exceed the itemized budgeted costs and expenses under the
Budget. "Actual Costs" shall include, however, without limitation, the
additional costs and expenses related to change order requests from the Owner,
the General Contractor, and/or consultants, and any other additional costs and
expenses of construction or renovation of the Facility, arising for any other
reason and whether or not within the control of ARV.
The term "Approval Date" has the meaning set forth in Section 6(a)
hereof.
The term "Approved Cost Report" has the meaning set forth in Section
6(a) hereof.
The term "Borrowing Owner" shall mean any Owner which is the borrower
with respect to an Under-Budget Borrower Loan.
The term "Budgeted Costs" shall mean, with respect to any Facility at
any time, the total costs and expenses budgeted for that Facility from inception
up to such time, as set forth on the Budgets for each Facility attached hereto
as Exhibits A-1, A-2 and A-3. "Budgeted Costs" as of any date shall be
calculated by multiplying (a) the total budgeted costs and expenses to the Owner
of the Facility from inception through completion (excluding the costs and
expenses of marketing and lease-up), plus budgeted contingencies, as set forth
in the Facility's initial Budget by (b) the Completion Percentage for that
Facility as of such date.
The term "Capital Reserve" shall mean a reserve for each Facility, in an
amount to be agreed upon between the Owner of such Facility and ARV in its
capacity of manager of such Facility pursuant to the Management Agreement, which
reserve is to be used for capital improvements and replacements. At such time as
any Owner is required to maintain the Replacement Reserve described in Section
10.20 of the Loan Agreement, the term "Capital Reserve" shall mean and refer to
such Replacement Reserve account.
The term "Completion Percentage" shall mean, with respect to any
Facility at any time, the particular stage of completion of construction or
renovation of such Facility at that time, expressed as a percentage of
completion, based on calculations therefor determined pursuant to the Loan
Agreement.
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The term "Cost Overruns" shall mean, with respect to any Facility at any
time, the amount (if any) by which (a) the Actual Costs incurred by the Owner of
the Facility up to such time, exceed (b) the Budgeted Costs for that Facility at
such time.
The term "Cost Report" has the meaning set forth in Section 6 hereof.
The term "Cost Savings" shall mean, with respect to any Facility at any
time, the amount (if any) by which (a) the Budgeted Costs for that Facility at
such time, exceed (b) the Actual Costs incurred by the Owner for the Facility up
to such time.
The term "Cumulative Operating Deficit" shall mean, with respect to the
period from the Conversion Date applicable to each Facility through the end of
the most recent calendar month, the amount by which (a) all ordinary operating
expenses of the Facility (including, without limitation, expenses of
maintenance, insurance, "qualified debt service," taxes, amounts required to
maintain the Capital Reserve and the Emergency Reserve, and such other expenses
and charges as would normally be considered operating expenses of the Facility
under recognized and customary accounting principles and practices, but
excluding non-cash charges) exceed (b) the sum of (i) all gross revenues from
ordinary operations (including the proceeds of business interruption insurance,
if applicable) of the Facility for said period, and (ii) any amounts received by
the Owner of such Facility from ARV in the form of an "Operating Deficit
Payment," as defined in that certain Operating Deficit Payment Agreement dated
as of October 21, 1998 by and among ARV and each of the owners of the Group A
Facilities and the Group B Facilities (the "ODP Agreement"), and (iii) the
amount, if any, then remaining in the Operating Reserve. For purposes of this
Agreement, "qualified debt service" means debt service on any loan obtained with
respect to the Facility for the primary purpose of acquiring and developing
and/or renovating the Facility and paying expenses relating to the Facility.
The term "Cumulative Projected Results from Operations" shall mean those
amounts which are shown by the line item "Net Operating Income" in the
projections attached hereto as Exhibits B-1, B-2, and B-3 for each of the Group
A Facilities and the Rossmore Facility, respectively, with respect to the period
from the projected Conversion Date for such Facility through the end of the same
number of months of operation as have been included from the actual Conversion
Date for such Facility in the calculation of its Cumulative Operating Deficit.
The term "Emergency Reserve" shall mean a cash reserve, in the amount of
$100,000 for each Facility, to be maintained to address contingencies and which
may be withdrawn by the applicable Owner at any time and from time to time.
The term "Excess Operating Losses" shall mean the amount by which the
Cumulative Operating Deficit of a given Facility, calculated from the Conversion
Date applicable to such Facility through the end of the most recent calendar
month, exceeds the Cumulative Projected Results from Operations for the same
period, as shown on the projections for each of the Facilities which are
attached hereto as Exhibits B-1, B-2, and B-3.
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The term "Group" shall mean the Group A Facilities or the Group B
Facilities, as the context may require.
The term "Group A Facilities" shall mean the Facilities on the
Properties owned respectively by Berkshire Renovation, LLC and Encino
Renovation, LLC.
The term "Group B Facilities" shall mean the Facilities on the
Properties owned respectively by Rossmore Renovation, LLC, Bay Spring Village,
LLC, Inn At Lakewood Development, LLC, Laurel Ridge Development, LLC and
Lynnbrooke-Irvine, LLC.
The term "Net Cash Flow" for any period means the amount by which (a)
the cash funds derived from operations of the Facility with respect to the
period in question, without reduction for any non-cash charges, exceeds (b) the
cash funds used, with respect to the period in question, to (i) pay all ordinary
operating expenses of the Facility (including, without limitation, expenses of
maintenance, insurance, "qualified debt service," taxes and such other expenses
and charges as would normally be considered operating expenses of the Facility
under recognized and customary accounting principles and practices) and (ii)
establish and maintain the Capital Reserve and the Emergency Reserve.
The term "Request Date" shall mean the date any Owner requests Lender to
fund an Under-Budge Borrower Loan.
The term "Under-Budget Borrower Loan" has the meaning set forth in
Section 2(a) hereof.
2. ARV to Fund Cost Overruns; Timing and Procedure for Funding.
(a) ARV hereby covenants and agrees to fund any Cost Overruns
incurred in connection with the operation of the Projects, subject to
the limitations set forth herein. The foregoing notwithstanding, in the
event either Berkshire or Encino experience a Cost Overrun, but such
Owner is permitted, in accordance with Section 11.2 of the Loan
Agreement, to obtain a loan from the other for the reason that the other
Owner constitutes an Under-Budget Borrower as described in said Section
(any such loan being referred to herein as an "Under-Budget Borrower
Loan"), or with respect to Rossmore, if Rossmore experiences a Cost
Overrun, but Rossmore is permitted to obtain an Under-Budget Borrower
Loan from one or more of the Loan B Borrowers by reason of such Loan B
Borrower qualifying as an Under-Budget Borrower in accordance with the
provisions of Section 11.2 of the Master Loan and Security Agreement
applicable to Loan B, then ARV shall be entitled to reduce the amount of
the Cost Overrun required to be funded by it hereunder by first giving
effect to all permitted Under-Budget Borrower Loans.
(b) In the event that any Project incurs a Cost Overrun
described in Section 2(a) above for which ARV is responsible, the Owner
shall, within ten (10) days following the applicable Cost Report
identifying such Cost Overrun, or otherwise as soon as practicable after
receipt of such Owner's most recent monthly reports from the manager of
the Project, whichever is later, give written notice to
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ARV specifying the amount of the Cost Overrun to be funded by ARV.
Within five (5) business days following the receipt of such notice by
ARV, ARV shall pay to the Owner, in cash, the amount of such Cost
Overrun (each such payment being referred to herein as a "Cost Overrun
Payment").
3. ARV to Fund Excess Operating Losses; Timing and Procedure for
Funding.
(a) ARV hereby covenants and agrees to fund any Excess Operating
Losses incurred in connection with the operation of the Projects, in
each case during the period from the Conversion Date applicable to such
the Project through the date of release set forth in Section 4 below
with respect to such Project.
(b) In the event that any Project has incurred Excess Operating
Losses as of the end of any calendar month falling within the period of
ARV's obligations described herein, the Owner shall, within ten (10)
days following the end of such month, or as soon as practicable after
receipt of that month's reports from the manager of the Project,
whichever is later, give written notice to ARV specifying the amount of
the Excess Operating Losses incurred. Within five (5) business days
following the receipt of such notice by ARV, ARV shall pay to the Owner,
in cash, the amount of such Excess Operating Losses (each such payment
an "Excess Operating Deficit Payment"), less the amount of all Excess
Operating Deficit Payments previously made by ARV to such Owner.
4. RELEASE FROM COVERAGE. ARV SHALL BE RELEASED FROM ITS OBLIGATION TO
MAKE EXCESS OPERATING DEFICIT PAYMENTS WITH RESPECT TO A PARTICULAR PROJECT UPON
THE EARLIER OF (I) EIGHTEEN (18) MONTHS AFTER THE DATE OF STABILIZATION FOR SUCH
PROJECT; OR (II) THE CLOSING OF A SALE OF THE PROJECT TO A THIRD PARTY;
PROVIDED, HOWEVER, THAT ARV SHALL REMAIN LIABLE WITH RESPECT TO THE REMAINING
PROJECTS IN AN AGGREGATE AMOUNT EQUAL TO ANY REMAINING UNFUNDED PORTION OF ITS
COMMITMENT HEREUNDER.
5. Definition of "Date of Stabilization." For purposes of this
Agreement, the term "Date of Stabilization" means the earlier of (i) the date a
given Facility has maintained a ninety-two percent (92%) occupancy level for
three consecutive months ("Stabilization"), or (ii) the first day of the first
calendar month following the period during which the Project has achieved
positive "Net Cash Flow" for each of three (3) consecutive calendar months.
6. Cost Reports and Approved Cost Reports.
(a) Preparation of Cost Reports. In connection with each request
for Lender to approve an Under-Budget Borrower Loan, ARV shall promptly
prepare and deliver to Lender and each Owner whose Facility is in the
same Group as the Borrowing Owner's Facility a report (a "Cost Report")
that sets forth the Cost Overruns incurred (or Cost Savings realized)
for each Facility in the Group as of the Request Date. Each Cost Report
shall be in such detail as required by Lender and shall in addition be
supported by a statement from the Architect for each Facility as to the
Completion Percentage for such Facility at that time. Each Cost Report
approved by Lender as establishing the right of one or more Owners to
make an Under-Budget Borrower Loan to a Borrowing Owner shall be
referred to as an "Approved Cost Report," and the date of such approval
is the "Approval Date".
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(b) Disputes; Failure to Deliver Cost Report. If the conclusions
of a Cost Report are disputed by the Owner of the relevant Facility or
by Lender, or if ARV fails to timely deliver a Cost Report for such
Facility, then the Owner may prepare and deliver to ARV and Lender a
Cost Report for its Facility.
7. Maximum Liability of ARV. ARV's total liability hereunder with
respect to the making of Cost Overrun Payments and Excess Operating Deficit
Payments shall not exceed $4,000,000. The foregoing amount shall not be
segregated among Owners, such that each Owner shall have the right to receive
payments hereunder until ARV has funded a total of $4,000,000.
8. Enforcement by Lender. ARV acknowledges and agrees that ARV's
obligations under this Agreement have been specifically negotiated for by Lender
and were a material consideration to Lender in its willingness to enter into the
Loan Agreement and to fund the Loans thereunder. Accordingly, this Agreement
shall be specifically enforceable by Lender against ARV, ARV agreeing that
monetary damages shall be inadequate to fully compensate Lender for damages
which it shall experience in the event of the failure of ARV to perform its
obligations hereunder. At any time where there an exists an Event of Default
under the Loan Agreement, any Cost Overrun Payments or Excess Operating Deficit
Payments required to be made by ARV hereunder shall be made directly to Lender,
and each of the Owners hereby irrevocably consents to the making of such
payments by ARV directly to Lender.
9. No Other Compensation for Payment. ARV shall not be entitled to
receive any compensation for the payments made by it herein or for the
performance of its obligations hereunder.
10. Miscellaneous.
(a) Entire Agreement. This Agreement, together with the Loan
Agreement, represents the entire and integrated agreement between the
parties regarding the matters described herein and supersedes all prior
negotiations, representations or agreements, either written or oral the.
This Agreement may be amended only by a written instrument signed by the
parties hereto. Except to the extent expressly provided otherwise in
this Agreement, this Agreement and the definitions herein shall apply to
each Real Property and Facility separately. Notwithstanding anything
contained herein, this Agreement is not intended to alter the rights or
duties of the various parties under the ODP Agreement.
(b) Governing Law. This Agreement shall be construed and
enforced in accordance with the internal laws of the State of Arizona.
Any action to interpret or enforce this Agreement shall be solely
brought in the State of Arizona. To the extent permitted by law, the
parties agree that the sole venue for such action shall be Maricopa
County, Arizona.
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(c) No Waiver. No failure by a party to insist upon the strict
performance of any term or covenant of this Agreement or to exercise any
right or remedy consequent upon a breach thereof, shall constitute a
waiver of any such breach or of any such term or covenant. No waiver by
Lender or any Owner of any breach by ARV shall affect or alter this
Agreement, but each and every term and covenant of this Agreement shall
continue in full force and effect with respect to any other then
existing or subsequent breach hereof.
(d) Notices. Any approvals, disapprovals, consents or other
notices required or permitted to be sent or given hereunder shall be in
writing and delivered personally, sent by facsimile, mailed, certified
mail, return receipt requested, or delivered by overnight or other
courier service to the following addresses, or such other addresses as
shall be given by notice delivered hereunder, and shall be deemed to
have been given upon confirmation of receipt thereof by the individual
who is the addressee of such communication, which confirmation may be in
writing (including by facsimile) or may be verbal (including by
telephone):
If to any Owner, to:
c/o ARV Assisted Living, Inc.
245 Fischer Avenue, D-1
Costa Mesa, California 92626
Attention: Chief Executive Officer
Fax: (714) 751-1743
With a copy to:
c/o ARV Assisted Living, Inc.
245 Fischer Avenue, D-1
Costa Mesa, California 92626
Attention: Legal Department
Fax: (714) 435-7102
With a copy to:
Alex Brown Realty, Inc.
225 East Redwood Street
Baltimore, MD 21202
Attention: Thomas R. Burton
Fax: (410) 625-2694
and to:
Vintage Senior Housing, LLC
500 Newport Center Drive, Suite 200
Newport Beach, CA 92660
Attention: Eric K. Davidson
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Fax: (949) 721-8558
If to ARV, to:
ARV ASSISTED LIVING, INC.
245 Fischer Avenue, D-1
Costa Mesa, California 92626
Attention: President
Fax: (714) 751-1743
With a copy to:
ARV ASSISTED LIVING, INC.
245 Fischer Avenue, D-1
Costa Mesa, California 92626
Attention: Legal Department
Fax: (714) 435-7102
If to Lender, to:
FINOVA Capital Corporation
311 South Wacker Drive, Suite 4400
Chicago, Illinois 60606
Attention: Portfolio Manager
Fax: (312) 322-3553
with a copy to:
FINOVA Capital Corporation
7272 East Indian School Road, Suite 410
Scottsdale, Arizona 85251
Attention: Vice President-Associate General Counsel
Fax: (602) 874-6445
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and to:
FINOVA Capital Corporation
311 South Wacker Drive, Suite 4400
Chicago, Illinois 60606
Attention: Vice President-Group Counsel
Fax: (312) 322-3553
(e) Waiver of Jury Trial; Legal Costs. Each of the parties
hereto specifically waives any right to a trial by jury in any court
with respect to any matter arising out of this Agreement. The prevailing
party in any action arising under this Agreement shall be entitled to be
paid all costs and reasonable attorneys' fees incurred therein.
(f) Rules of Construction. The captions throughout this
Agreement are for convenience of reference only and the words contained
therein shall in no way be held or deemed to limit, explain, modify, or
add to the interpretation or meaning of any provision or the scope or
intent of this Agreement, nor in any way affect this Agreement.
(g) Gender. The use of any gender herein shall be deemed to
include the other gender and the use of the singular herein shall be
deemed to include the plural (and vice versa) whenever appropriate.
(h) Severability. If any term or provision of this Agreement or
the application thereof to any person or circumstance shall, to any
extent, be invalid or unenforceable, the remainder of this Agreement, or
the application of such term or provision to persons or circumstances
other than those as to which it is held invalid or unenforceable, shall
not be affected thereby, and each term and provision of this Agreement
shall be valid and enforceable to the fullest extent permitted by law.
(i) Time of the Essence. TIME IS OF THE ESSENCE TO EACH AND
EVERY PROVISION HEREOF.
(j) Further Assurances. Each party covenants and agrees to
execute such other and further documents and to do such further acts as
may be reasonable required to carry out the terms and provisions of this
Agreement upon request by the other party.
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