PAYMENT AND PERFORMANCE GUARANTY AGREEMENT

Exhibit 10.4

PAYMENT AND PERFORMANCE GUARANTY AGREEMENT

      THIS PAYMENT AND PERFORMANCE GUARANTY AGREEMENT (this “Guaranty”) is made effective as of the 7 ^th day of August, 2006, by ADVOCAT INC. , a Delaware corporation (the “Guarantor”), for the benefit of CAPMARK FINANCE INC. , a California corporation, formerly known as GMAC Commercial Mortgage Corporation (including its successors, transferees and assigns, “Lender”).

R E C I T A L S:

     A. Diversicare Afton Oaks, LLC, a Delaware limited liability company (the “Afton Oaks Borrower”), Diversicare Assisted Living Services NC I, LLC, a Delaware limited liability company (the “NC I Borrower”), Diversicare Assisted Living Services NC II, LLC, a Delaware limited liability company (the “NC II Borrower”), Diversicare Briarcliff, LLC, a Delaware limited liability company (the “Briarcliff Borrower”), Diversicare Chisolm, LLC, a Delaware limited liability company (the “Chisolm Borrower”), Diversicare Hartford, LLC, a Delaware limited liability company (the “Hartford Borrower”), Diversicare Hillcrest, LLC, a Delaware limited liability company (the “Hillcrest Borrower”), Diversicare Lampasas, LLC, a Delaware limited liability company (the “Lampasas Borrower”), Diversicare Pinedale, LLC, a Delaware limited liability company (the “Newport Borrower”), Diversicare Windsor House, LLC, a Delaware limited liability company (the “Windsor Borrower”), and Diversicare Yorktown, LLC, a Delaware limited liability company (the “Yorktown Borrower”; the Afton Oaks Borrower, the NC I Borrower, the NC II Borrower, the Briarcliff Borrower, the Chisolm Borrower, the Hartford Borrower, the Hillcrest Borrower, the Lampasas Borrower, the Newport Borrower, the Windsor Borrower and the Yorktown Borrower, together with their successors and/or assigns, may be referred to collectively herein as the “Borrowers” or individually as a “Borrower”), has borrowed the sum of THIRTY MILLION SIX HUNDRED TWENTY-FIVE THOUSAND AND NO/100 DOLLARS ($30,625,000.00) (the “Loan”) from Lender, evidenced by Borrowers’ Note I (as defined in the Loan Agreement [as herein defined]) and Note II (as defined in the Loan Agreement) of even date herewith (collectively, the “Note”) and that certain Loan Agreement by and between Lender and Borrowers of even date herewith (the “Loan Agreement”), and secured by, among other things, those certain Deed of Trust and Security Agreements and/or Mortgage and Security Agreements, of even date herewith (collectively, the “Mortgage”) granting a first lien on the skilled care nursing facilities and/or assisted living facilities more particularly described in the Loan Agreement (collectively, the “Facility”).

     B. The Note, the Loan Agreement, the Mortgage and the other documents, certificates, instruments and agreements executed by Borrowers in connection with the Loan or to otherwise evidence or secure the Loan, and all renewals, supplements, or amendments thereto or a part thereof, are collectively referred to as the “Loan Documents”.

     C. As a condition of making the Loan, Guarantor has agreed to guaranty, absolutely and unconditionally, payment of the Guaranty Obligations (as defined below), subject to the terms and conditions set forth in this Guaranty.

AGREEMENT

      NOW, THEREFORE , in consideration of the above and as an inducement to Lender to make the Loan evidenced by the Note and the Loan Agreement, and as security for the payment of the Loan and all interest from time to time accrued and unpaid thereon, and all expenses, fees, charges and other amounts from time to time due and owing to Lender under the Note, and the other Loan Documents, and for the performance of all covenants, agreements and other obligations from time to time owing to, or for the benefit of, Lender pursuant to the Loan Documents, including, without limitation, the payment and performance of all of Borrowers’ obligations pursuant to Article IV of the Loan Agreement (collectively referred to herein as the “Guaranty Obligations”), Guarantor, intending to be legally bound, hereby covenants, agrees, represents and warrants as follows:

     1.  Guaranty . Guarantor hereby absolutely and unconditionally guarantees to the Lender the full, regular and punctual payment and performance of the Guaranty Obligations within ten (10) days of the Lender’s demand therefor. Without limiting the generality of the foregoing, “Guaranty Obligations” is used herein in its most comprehensive sense to include all debts, obligations and indebtedness described in the Loan Documents, whether now or hereafter made, incurred, or created, voluntary or involuntary, due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and regardless of whether there is any recourse with respect to any portion of such Guaranty Obligations as against Borrowers or any partner of Borrowers. In addition, Guarantor guarantees the full payment of, and agrees to reimburse Lender for, all costs of collection incurred by Lender in enforcing the Guaranty Obligations and pursuing any remedies set forth in the Loan Documents and/or the Guaranty, including, without limitation, court costs and actual attorneys’ fees (including, but not limited to, fees in any bankruptcy or appellate proceeding).

     2.  Payments . All payments to be made by Guarantor to Lender hereunder shall be made in lawful money of the United States of America, in immediately available funds, at 200 Witmer Road, Horsham, Pennsylvania 19044, or such other location designated by Lender in writing, and shall be accompanied by a notice from Guarantor stating that such payments are made under this Guaranty. All payments available to Lender for application in payment or reduction of the Guaranty Obligations may be applied by Lender in such manner and in such amount, and at such time or times and in such order and priority as Lender may see fit and to the payment or reduction of such portion of the Guaranty Obligations as Lender may elect.

     3.  Subsequent Acts by Lender . Lender may, in its sole discretion and without notice to Guarantor, take any action which might otherwise be deemed a legal or equitable release or discharge of Guarantor’s obligations hereunder without either impairing or affecting the liability of Guarantor for payment of the Guaranty Obligations (but in no event shall Lender collect more than the aggregate amount of the Guaranty Obligations), which actions might include, by way of illustration and not limitation:

          (a) at any time or from time to time, the time for Borrowers’ performance of or compliance with any provision of the Loan Documents may be extended or such performance or compliance may be waived by Lender;

          (b) the acceptance of partial payment of the Guaranty Obligations;

          (c) any of the acts permitted in the Loan Documents may be performed;

          (d) the Loan Documents may from time to time be amended and/or renewed by Borrowers and Lender for the purpose of adding any provisions thereto or changing in any manner the rights of Lender or of Borrowers thereunder;

          (e) the maturity date of the Note may be changed or renewed in whole or in part;

          (f) the maturity of the Note may be accelerated in accordance with the terms of the Loan Documents or any future agreement between Borrowers and Lender or the holder of such Note;

          (g) any collateral security for all or any part of the Guaranty Obligations may be exchanged, released, compromised, consolidated, surrendered or otherwise dealt with, and Lender’s interest therein may be released and may or may not be perfected;

          (h) the settlement, release, compounding, compromise, cancellation, rearrangement or consolidation of any of the Guaranty Obligations;

          (i) the collection of or other liquidation of any claims Lender may have in respect to the Guaranty Obligations;

          (j) the granting of indulgences, forbearance, compromises, extensions or adjustments in respect to any covenant or agreement under the Loan Documents; and/or

          (k) the release from liability of any Guarantor and/or any additional parties who may guarantee payment of the Guaranty Obligations or any portion thereof.

4. Certain Rights, Subordination, Etc.

          (a) Lender may pursue its rights and remedies under this Guaranty and shall be entitled to payment hereunder notwithstanding any other guaranty of all or any part of the Guaranty Obligations, and notwithstanding any action taken by Lender to enforce any of its rights or remedies under such other guaranty, or any payment received thereunder (but in no event shall Lender collect more than the aggregate amount of the Guaranty Obligations).

          (b) Any obligation or debt of Borrowers now or hereafter held by Guarantor is hereby subordinated to the Guaranty Obligations and, except for the obligations due under the Management Agreement (as defined in the Loan Agreement), which obligations are governed by the Subordination Agreement (as defined in the Loan Agreement), Guarantor shall not enforce or collect any such indebtedness from Borrowers. Nevertheless, upon request by Lender, Guarantor shall collect, enforce and receive such indebtedness of Borrowers to Guarantor. Any sums collected at Lender’s request or collected in contravention of the prohibition set forth herein shall be held by Guarantor as trustee for Lender and shall be paid over to Lender on account of the Guaranty Obligations; provided, however, that such payments shall not impair, reduce or affect in any manner the liability of Guarantor under the other

provisions of this Guaranty (but in no event shall Lender collect more than the aggregate amount of the Guaranty Obligations).

          (c) Guarantor agrees that if any event of default exists under the Loan Documents (“Event of Default”) and is continuing, (i) such Guarantor shall not accept payment from any other guarantor of any Guaranty Obligations by way of contribution or similar rights on account of any payment made hereunder by Guarantor to Lender, all of which rights are hereby subordinated to Guarantor’s obligations hereunder to Lender, (ii) Guarantor will not take any action to exercise or enforce any rights to such contribution, and (iii) if Guarantor should receive payment, satisfaction or security for any indebtedness of Borrowers to Lender, the same shall be delivered to Lender in the form received, endorsed or signed as may be appropriate for application on account of or as security for the indebtedness of Borrowers to Lender and, until so delivered, shall be held in trust for Lender as security for the indebtedness of Borrowers to Lender.

          (d) In the event of any default by Borrowers with respect to the Guaranty Obligations, Guarantor agrees to pay or perform on demand the Guaranty Obligations in the time and manner as provided in Paragraph 1 hereof. Lender shall not be under a duty to protect, secure or insure or be required to liquidate any security or lien provided by the Mortgage or other such collateral held by Lender prior to making such demand.

          (e) Notwithstanding any payment or payments made by Guarantor under this Guaranty, Guarantor expressly, irrevocably and unconditionally waives and releases any and all “claims” (as that term is defined in the Bankruptcy Reform Act of 1978, as amended, 11 U.S.C. Sections 101 et seq ., and the regulations adopted and promulgated pursuant thereto (collectively, the “Bankruptcy Code”)) it may now or hereafter have against Borrowers, and shall not be entitled to, and hereby expressly waives, any and all rights of subrogation, reimbursement, indemnity, exoneration and contribution against Borrowers, which Guarantor may now or hereafter have against Borrowers without regard to whether any such right or claim arises expressly; provided, that such waiver and release shall not be effective as to any such claim or entitlement or such subrogation and other rights that accrue after the indefeasible payment, performance or other satisfaction in full of the Guaranty Obligations.

     5.  Representations and Warranties . Guarantor represents and warrants to Lender that:

          (a) Existence, Power and Qualification . Guarantor is a duly organized and validly existing corporation, has the power to own its properties and to carry on its business as is now being conducted, and is duly qualified to do business and is in good standing in every jurisdiction in which the character of the properties owned by it or in which the transaction of its business makes its qualification necessary.

          (b) Power and Authority . Guarantor has full power and authority to incur the Guaranty Obligations provided for herein, all of which have been authorized by all proper and necessary action.

          (c) Financial Position . The financial statements of the Guarantor heretofore furnished to Lender are complete and correct and fairly present the financial position of the

Guarantor as of the date thereof. Since the date of said financial statements there has been no material adverse change in the financial position or operations, or the business taken as a whole, of Guarantor from that set forth therein.

          (d) Litigation . Except as shown on Exhibit A attached hereto, there are no legal or arbitral proceedings or any proceedings by or before any governmental or regulatory authority or agency now pending against Guarantor, in which an adverse decision could materially and adversely affect the financial position of Guarantor.

          (e) No Breach . The execution and delivery of this Guaranty, the consummation of the transactions herein contemplated and compliance with the terms and provisions hereof will not (i) conflict with or result in a breach of, or require any consent (not heretofore obtained at the time this representation is made) under, any applicable law, administrative proceeding or regulation, or any order, writ, injunction or decree of any court or governmental authority or agency, or any agreement or instrument to which Guarantor is a party or by which Guarantor is bound or to which Guarantor is subject, (ii) constitute a default under any such agreement or instrument or under Guarantor’s articles of incorporation, partnership agreement, operating agreement or any other agreement or instrument binding upon Guarantor, or (iii) result in the creation or imposition of any lien upon any of the revenues or assets of Guarantor pursuant to the terms of any such agreement or instrument.

          (f) Approvals . To the best of Guarantor’s knowledge, no authorizations, approvals, or consents of (other than those heretofore obtained and in full force and effect), and no filings or registrations with (other than those heretofore obtained and in full force and effect), any governmental or regulatory authority or agency are necessary for the execution, delivery or performance by Guarantor of this Guaranty or for the validity or enforceability thereof.

          (g) Taxes, etc . Guarantor has filed all United States federal and state tax returns and all other tax returns that are required to be filed by Guarantor and has paid all taxes due pursuant to such returns or pursuant to any assessment received by Guarantor, except such taxes, the payment of which is not yet due, or which if due, is not yet delinquent or is being contested in good faith or which has not been finally determined.

          (h) Benefit . The making of the Loan by Lender to Borrowers will directly benefit Guarantor.

     6.  Financial Covenants and Other Information . Guarantor shall provide Lender the following financial statements and information on a continuing basis during the term of the Loan:

          (a) Within one hundred twenty (120) days after the end of each fiscal year of Guarantor, audited financial statements of Guarantor prepared by a nationally recognized accounting firm or independent certified public accountant acceptable to Lender, which statements shall be prepared in accordance with GAAP and certified by the chief financial officer of Guarantor as true and correct in all material respects and shall include a balance sheet and a statement of income and expenses for the year then ended. In lieu of its obligations

hereunder, Guarantor may submit to lender, upon its filing thereof, a copy of form 10K as filed with the United States Securities and Exchange Commission.

          (b) Within forty-five (45) days of the end of each fiscal quarter of Guarantor, unaudited financial statements of Guarantor, prepared in accordance with GAAP, which statements shall include a balance sheet and statement of income and expenses for the quarter then ended, certified by the chief financial officer of Guarantor as true and correct in all material respects. In lieu of its obli