AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF LTC PARTNERS II, L.P

Limited Partnership Agreement

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Title: AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF LTC PARTNERS II, L.P
Governing Law: Delaware Date: 5/28/2004
Industry: Real Estate Operations Sector: Services

AMENDED AND RESTATED

AGREEMENT OF

LIMITED PARTNERSHIP OF

LTC PARTNERS II, L.P
, Parties: ltc properties inc

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EXHIBIT 4.2

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AMENDED AND RESTATED

AGREEMENT OF

LIMITED PARTNERSHIP OF

LTC PARTNERS II, L.P.

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TABLE OF CONTENTS

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ARTICLE 1. Definitions ......................................................................... 1

ARTICLE 2. Formation and Business of the Partnership; Filings .................................. 9

2.1 Formation ........................................................................... 9

2.2 Name ................................................................................ 9

2.3 Business ............................................................................ 9

2.4 REIT Requirements ................................................................... 10

2.5 Principal Place of Business ......................................................... 10

2.6 Registered Agent and Registered Office .............................................. 10

2.7 Term ................................................................................ 10

2.8 Filings ............................................................................. 10

2.9 Power of Attorney ................................................................... 10

ARTICLE 3. Partners and Partnership Interests; Capital Contributions ........................... 11

3.1 Partners ............................................................................ 11

3.2 Initial Capital Contributions ....................................................... 11

3.4 Capital Accounts .................................................................... 12

3.5 No Interest on or Return of Capital Contribution .................................... 13

3.6 Units ............................................................................... 13

ARTICLE 4. Allocations of Partnership Items .................................................... 13

4.1 Allocation of Profits and Losses .................................................... 13

4.2 Special Allocations ................................................................. 14

4.3 Curative Allocations ................................................................ 16

4.4 Tax Allocations ..................................................................... 16

4.5 Varying Interests ................................................................... 17

4.6 Allocations Between Transferor and Transferee ....................................... 17

ARTICLE 5. Distributions ....................................................................... 17

5.1 Distributions ....................................................................... 17

5.2 Certain Loans and Offset ............................................................ 18

5.3 REIT Distribution Requirements ...................................................... 18

5.4 Limitations on Distributions ........................................................ 19

5.5 Distributions Upon Liquidation ...................................................... 19

ARTICLE 6. Management of the Partnership ....................................................... 20

6.1 Rights, Powers and Duties of General Partner ........................................ 20

6.2 Delegation of Authority ............................................................. 22

6.3 Reliance by Third Parties ........................................................... 23

6.4 Limitation on Authority of the General Partner ...................................... 23

6.5 Payment of Partnership Expenses; Reimbursement of General Partner ................... 23

6.6 Compensation of the General Partner ................................................. 24

6.7 Loans by Partners or Affiliates to the Partnership .................................. 24

6.8 Title to Partnership Assets ......................................................... 24

6.9 Liability of the General Partner .................................................... 24

6.10 Other Matters Concerning the General Partner ........................................ 25

6.11 Outside Activities .................................................................. 25

6.12 Limited Partners .................................................................... 26

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ARTICLE 7. Books and Records; Tax Matters ....................................................... 26

7.1 Books and Records .................................................................... 26

7.2 Reports .............................................................................. 26

7.3 Code Elections and Tax Audits ........................................................ 27

ARTICLE 8. Transfers of Partnership Interests; Admission of Substitute or Additional

Limited Partners ..................................................................... 27

8.1 General Partner ...................................................................... 27

8.2 Purchase for Investment .............................................................. 28

8.3 Restrictions on Transfer of Limited Partnership Interests ............................ 28

8.4 Certain Restrictions on Transfer ..................................................... 30

8.5 Effective Dates of Transfers ......................................................... 30

ARTICLE 9. Dissolution, Liquidation and Winding-Up .............................................. 31

9.1 Events of Dissolution; Winding Up .................................................... 31

9.2 Cancellation of Certificate of Limited Partnership ................................... 31

9.3 Return of Capital .................................................................... 31

ARTICLE 10. Miscellaneous ........................................................................ 32

10.1 Notices .............................................................................. 32

10.2 Successors and Assigns 32

10.3 Amendments ........................................................................... 33

10.4 Waiver of Partition .................................................................. 33

10.5 Waivers .............................................................................. 33

10.6 Entire Agreement ..................................................................... 33

10.7 Interpretation ....................................................................... 33

10.8 Counterparts ......................................................................... 33

10.9 Applicable Law ....................................................................... 33

10.10 Partial Invalidity ................................................................... 33

10.11 No Third Party Rights ................................................................ 33

10.12 Compliance with Laws ................................................................. 34

10.13 Confidentiality ...................................................................... 34

10.14 Valid and Binding Agreement .......................................................... 34

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AMENDED AND RESTATED

AGREEMENT OF LIMITED PARTNERSHIP

LTC PARTNERS II, L. P.

THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP (this

"Agreement") is made and entered into as of the 1st day of May, 1996, by and

among LTC GP I, Inc., a Delaware corporation ("LTC Subsidiary"), and Messrs. Zev

Karkomi ("ZK") and Harvey J. Angell ("HA"), each a resident of the State of

Illinois, pursuant to the provisions of the Delaware Revised Uniform Limited

Partnership Act.

WHEREAS, LTC Partners II, L.P. (as further defined below, the

"Partnership") was formed as a limited partnership under the Delaware Revised

Uniform Limited Partnership Act pursuant to a Certificate of Limited Partnership

filed with the Secretary of State of the State of Delaware on October 10, 1995,

and is governed by an agreement of limited partnership (the "Original

Agreement") between LTC Subsidiary as the general partner of the Partnership (as

further defined below, the "General Partner") and Park Villa Corporation, a

Delaware corporation, as the original limited partner of the Partnership (the

"Original Limited Partner");

WHEREAS, in connection with the Partnership's acquisition of the

interests of ZK and HA in nine nursing home facilities currently owned as

tenants in common by the Partnership, ZK and HA, the General Partner and the

Original Limited Partner desire to (i) provide for the withdrawal of the

Original Limited Partner, (ii) admit ZK and HA to the Partnership as Limited

Partners, and (iii) amend and restate the Original Agreement in its entirety;

NOW, THEREFORE, in consideration of the mutual covenants herein

contained and other good and valuable consideration, the receipt and sufficiency

of which are hereby acknowledged, the parties hereto agree that the Original

Agreement is hereby amended to read in its entirety as follows:

ARTICLE 1. Definitions

As used in this Agreement, the following terms and phrases have the

meanings set forth below:

"Accountants" means such firm of independent certified public

accountants as may be selected by the General Partner on behalf of the

Partnership to audit the financial books and records of the Partnership and to

prepare statements and reports in connection therewith. The Limited Partners

acknowledge and expressly agree that the Accountants may be LTC Subsidiary's and

LTC's accountants, and initially will be Ernst & Young, LLP.

"Act" means the Delaware Revised Uniform Limited Partnership Act, as

amended and as the same may be further amended from time to time, together with

any successor thereto.

"Adjusted Capital Account Deficit" means, with respect to any

Partner other than the General Partner, the deficit balance, if any, in such

Partner's Capital Account as of the end of any relevant Fiscal Year and after

(i) crediting to such Capital Account all amounts, if any, that such Partner (A)

is obligated or treated as obligated to restore with respect to any deficit

balance in such Capital Account pursuant to Section 1.704-1(b)(2)(ii)(c) of the

Regulations, or (B) is deemed

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to be obligated to restore with respect to any deficit balance pursuant to the

penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the

Regulations; and (ii) debiting to such Capital Account the items described in

Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6) of the Regulations. The foregoing

definition of "Adjusted Capital Account Deficit" is intended to comply with the

requirements of the alternate test for economic effect contained in Section

1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently

therewith.

"Affected Gain" has the meaning set forth in subsection 4.4(b)

hereof.

"Affiliate" means, when used with reference to a specified Person:

(i) if such Person is an individual, any member of the Immediate Family of such

Person; (ii) if such Person is a trust, any trustee or beneficiary of that

Person; or (iii) any Person that, directly or indirectly, Controls, is

Controlled by or is under common Control with, the specified Person, including,

without limitation, any Person that beneficially owns, directly or indirectly,

5% of more of the outstanding shares of capital stock or other equity securities

of that Person, that is an officer, director or partner of, or serves in a

similar capacity with respect to, such Person or of which such specified Person

is an officer, director or partner or serves in a similar capacity.

"Agreement" means this Agreement of Limited Partnership, as from

time to time amended, supplemented or otherwise modified or restated from time

to time.

"Allocated Purchase Price" means, as to each of the Facilities, the

amount set forth with respect to that asset on Schedule A hereto, including,

with respect to any indebtedness the principal amount of which is included in

such Allocated Purchase Price, any extension, renewal or refinancing of such

principal amount.

"Bankruptcy" means, with respect to any Person: (i) the filing by

such Person of a petition for relief, or the commencement by such Person of a

case or other proceeding seeking relief, under any provision of the federal

Bankruptcy Code or any other federal or state law relating to insolvency,

bankruptcy or reorganization; (ii) the filing against such Person of any such

petition or the commencement against such Person of any such proceeding

(including, but not limited to, a petition or application for the appointment of

a receiver or a trustee for such Person or a substantial part of such Person's

assets), unless such petition or proceeding is dismissed within 90 days from the

date of such filing or commencement; (iii) in the case of a petition or

proceeding described in clause (ii) above, the filing of an answer by such

Person admitting the allegations of such petition or the taking by such Person

of any action indicating such Person's approval of or acquiescence in any such

proceeding; (iv) an adjudication that such Person is insolvent or bankrupt; or

(v) the entry of an order for relief under the federal Bankruptcy Code with

respect to such Person.

"Acquired Assets" means the assets previously owned by Sellers and

in which undivided ownership interests were acquired by the Partnership pursuant

to the Purchase Agreements.

A "business day" means any day that is not a Saturday, Sunday or a

day on which banking institutions in the States of California or Illinois are

authorized or obligated by law or executive order to close.

"Capital Account" means, as to any Partner, the account maintained

under Section 3.4 hereof with respect to the Partnership Interest held by such

Partner.

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"Capital Contribution" means, with respect to any Partner, the total

amount of cash and the initial Gross Asset Value of all other property, if any,

contributed to the Partnership by that Partner or the predecessor holder(s) of

that Partnership Interest, less the aggregate amount of Contributed Debt

attributable to such Partner.

"Capital Expenditures" means any and all payments made directly or

indirectly for the purpose of acquiring or constructing or restoring real

property, fixed assets or equipment that in accordance with GAAP would be

treated as a debit to the fixed asset account of the Partnership, including

without limitation amounts paid or payable as principal under any conditional

sale or other title retention agreement or under any lease or other periodic

payment arrangement or agreement that is of such a nature that payment

obligations of the lessee or obligor thereunder would be required by GAAP to be

capitalized and shown as a liability on the balance sheet of the lessee or

obligor.

"Cash Flow from Operations" means for any Distribution Period, an

amount equal to the excess, if any, of (i) the rents and all other revenues that

are received by the Partnership during that Distribution Period and that the

Partnership is entitled to retain and use for its own purposes, over (ii) the

total amount paid or payable by the Partnership with respect to that

Distribution Period for the following purposes: (A) to pay the Preferred Return,

(B) to pay principal, interest or other amounts due in respect of indebtedness

owed by the Partnership or secured by the Partnership's assets, including

without limitation indebtedness to the General Partner or LTC, (C) for Capital

Expenditures with respect to the Acquired Assets (excluding for purposes of this

clause (ii) all Capital Expenditures paid for by incurring new indebtedness),

and (D) to pay costs and expenses incurred in operating the Partnership and for

Partnership general and administrative expenses as determined by the General

Partner in accordance with GAAP.

"Certificate" means the Certificate of Limited Partnership

establishing the Partnership, as filed with the office of the Delaware Secretary

of State pursuant to the Act and as the same may be amended from time to time.

"Closing Date" means the date on which the Closing (as defined in

the Contribution Agreement) occurs.

"Code" means the United States Internal Revenue Code of 1986, as

amended and as the same is further amended from time to time, as interpreted by

the applicable regulations thereunder. Any reference herein to a specific

provision of the Code shall be deemed to include a reference to any

corresponding provision of any succeeding law.

"Confidential Information" has the meaning set forth in subsection

10.13(a) hereof.

"Contributed Debt" means, with respect to any Partner, the aggregate

principal amount of indebtedness (and all accrued fees or interest related

thereto, if any) (i) that has been assigned by or otherwise transferred by that

Partner to the Partnership or that the Partnership shall have otherwise become

obligated to pay (including, without limitation, by way of guarantee,

endorsement or other contingent promise), or (ii) to which any property

contributed to the Partnership by, or otherwise attributable to, that Partner is

subject.

"Contribution Agreement" means that certain Agreement Regarding

Contribution of Undivided Interests in Nursing Home Facilities dated as of

April_____________, 1996, among the Partnership, ZK and HA.

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"Control" means the ability, whether by the direct or indirect

ownership of shares or other equity interests, by contract or otherwise, to

elect a majority of the directors of a corporation, to select the managing

partner of a partnership or to otherwise select, or to have the power to remove

and then select, a majority of those Persons exercising governing authority over

an entity. In the case of a limited partnership, the sole general partner, each

of the general partners to the extent each has equal management authority, or if

such general partners do not have equal management authority, the managing

general partner or each managing general partner shall be deemed to Control of

such partnership; in the case of a trust, each trustee thereof and each Person

having the right to select any such trustee shall be deemed to Control of such

trust.

"Depreciation" means, with respect to any asset of the Partnership

for any Fiscal Year, the depreciation, amortization or other cost recovery

deduction allowed or allowable for federal income tax purposes in respect of

such asset for such Fiscal Year; provided, however, that if the Gross Asset

Value of an asset differs from its adjusted tax basis for federal income tax

purposes at the beginning of such Fiscal Year, Depreciation shall be an amount

that bears the same ratio to such beginning Gross Asset Value as the federal

income tax depreciation, amortization or other cost recovery deduction for such

Fiscal Year bears to such beginning adjusted tax basis and provided, further,

that if such adjusted tax basis is zero, Depreciation shall be determined with

respect to such beginning Gross Asset Value using any reasonable method selected

by the General Partner.

"Distribution Period" means as to each Fiscal Year, the period of

six calendar months that begins on January 1 or July 1 of that Fiscal Year,

except that the first Distribution Period shall begin on the Closing Date and

end on June 30, 1996.

"ERISA" means the Employee Retirement Income Security Act of 1974,

as amended and as in effect from time to time, as interpreted by the applicable

regulations thereunder (or, with respect to any provision of that statute

referred to herein, any corresponding provision of any succeeding law).

"Exchange Rights Agreement" means that certain Exchange Rights

Agreement dated as of the date hereof, among LTC, the Partnership, LTC

Subsidiary, ZK and HA,

"Facilities" means each of (i) the nursing home facility commonly

known as Magnolia Manor Nursing Center and located at 1837 Upper Wetumpka Rd.,

Montgomery, Alabama 36107, (ii) the nursing home facility commonly known as

Atmore Care Center and located at 715 E. Laurel St, Atmore, Alabama 36502, (iii)

the nursing home facility commonly known as H.E.B. Nursing Center and located at

2716 Tibbets Drive, Bedford, Texas 76022, (iv) the nursing home facility

commonly known as Altoona Manor and located at 200 7th Avenue S.W., Altoona,

Iowa 500090, (v) the nursing home facility commonly known as Carroll Manor and

located at 500 Valley Drive, Carroll, Iowa 51401, (vi) the nursing home facility

commonly known as Jefferson Manor and located at 100 East Sunset Rd., Jefferson,

Iowa 50129, (vii) the nursing home facility commonly known as Polk City Manor

and located at 1002 N.W. 114th Ave., Polk City, Iowa 50226, (viii) the nursing

home facility commonly known as Norwalk Manor and located at Sunset Drive,

Norwalk, Iowa 50211 and (ix) the nursing home facility commonly known as Granger

Manor and located at 2001 Kennedy Drive, Granger, Iowa 50109.

"Fiscal Year" means the annual accounting period ending on December

31 of each calendar year or, if different, the last day of the Partnership's

taxable year.

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"GAAP" means generally accepted accounting principles as in effect

from time to time.

"Gain on Sale" means as to any Facility sold by the Partnership, the

excess of the Sale Proceeds from that Sale over the Sales Price of that

Facility.

"General Partner" means LTC Subsidiary and each other Person

(including, but not limited to, LTC Subsidiary's successors and assigns), if

any, that after the date hereof becomes a general partner of the Partnership in

accordance with the terms hereof, in each case in such Person's capacity as such

general partner.

"Gross Asset Value" means, with respect to any asset, such asset's

adjusted basis for federal income tax purposes, except as follows:

(a) The initial Gross Asset Values of the assets contributed

by ZK and HA to the Partnership pursuant to Section 3.2 hereof are set

forth on Schedule B hereto; and the initial Gross Asset Value of any asset

contributed by a Partner to the Partnership after the Closing Date shall

be the gross fair market value of such asset at the time of such asset's

contribution, as determined by the General Partner;

(b) The Gross Asset Values of all Partnership assets at the

election of the General Partner may be adjusted to equal their respective

gross fair market values, as determined by the General Partner,

immediately prior to the following events:

(i) a Capital Contribution (other than a de minimis

Capital Contribution) is made to the Partnership by a new or

existing Partner as consideration for the acquisition of a (or an

additional) Partnership Interest;

(ii) the distribution by the Partnership to a Partner

of more than a de minimis amount of Partnership property as

consideration for the redemption of a Partnership Interest;

(iii) the liquidation of the Partnership within the

meaning of Section 1.704-1(b)(2)(ii)(g) of the Regulations; and

(iv) any other event as to which the General Partner

determines that an adjustment is necessary or appropriate to reflect

the relative economic interests of the Partners.

distributed to any Partner shall be the gross fair market value of such

asset on the date of distribution as determined by the General Partner

based upon an appraisal or other appropriate valuation prepared by an

independent third party experienced in valuing assets of that kind.

(d) The Gross Asset Value of a Partnership asset shall be

increased (or decreased) to reflect any adjustment to the adjusted basis

of such asset pursuant to Sections 734(b) or 743(b) of the Code, but only

to the extent that such adjustment is taken into account in determining

Capital Accounts pursuant to Section 1.704-1(b)(2)(iv)(m) of the

Regulations; provided, however, that Gross Asset Values shall not be

adjusted pursuant to this paragraph (d) to the extent that the General

Partner determines that an adjustment pursuant to paragraph (b) above is

necessary or appropriate in connection with a transaction that would

otherwise result in an adjustment pursuant to this paragraph (d).

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If the Gross Asset Value of an asset has been determined or adjusted

pursuant to paragraphs (a), (b) or (d) immediately above, such Gross Asset Value

thereafter shall be adjusted by the Depreciation subsequently taken into account

with respect to such asset for purposes of computing Profits and Losses. Any

adjustment to the Gross Asset Value of any item of Partnership property shall

require an adjustment to the Capital Accounts.

"Immediate Family" means, with respect to any individual, such

Person's spouse (then current or former), parents, brothers and sisters,

children and grandchildren (including in each case by adoption) and other lineal

descendants.

"Indemnitee" has the meaning set forth in subsection 6.9(a) hereof.

"Limited Partners" means each of ZK and HA and each other Person, if

any, who after the date of this Agreement executes a counterpart hereof and

becomes a limited partner of the Partnership pursuant to Section 8.3 hereof, in

each case in such Person's capacity as a limited partner of the Partnership.

"Loan Agreement" means that certain Agreement to Loan of even date

herewith made by LTC Subsidiary in favor of ZK and HA.

"LTC" means LTC Properties, Inc., a Maryland corporation.

"Majority-in-Interest of the Limited Partners" means Limited

Partner(s) who hold in the aggregate more than 50% of the Partnership Interests

then allocable to and held by the Limited Partners as a class.

"Minimum Gain Attributable to Partner Nonrecourse Debt" means

"partner nonrecourse debt minimum gain" as determined in accordance with Section

1.704-2(i)(2) of the Regulations.

"Nonrecourse Deductions" has the meaning set forth in Sections

1.704-2(b)(1) and (c) of the Regulations and shall be determined in accordance

with Section 1.704-2(c) of the Regulations.

"Nonrecourse Liabilities" has the meaning set forth in Section

1.704-2(b)(3) of the Regulations.

"Partner Nonrecourse Debt" has the meaning set forth in Section

1.704-2(b)(4) of the Regulations.

"Partner Nonrecourse Deductions" has the meaning set forth in

Section 1.704-2(i)(2) of the Regulations and the amount of Partner Nonrecourse

Deductions with respect to particular Partner Nonrecourse Debt shall be

determined in accordance with the rules of Section 1.704-2(i) of the

Regulations.

"Partners" means the General Partner and the Limited Partners, in

their respective capacities as such.

"Partnership" means the limited partnership formed under the Act

pursuant to this Agreement and any successor thereto.

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"Partnership Interest" means the ownership interest in the

Partnership representing a Capital Contribution, and includes any and all

benefits to which the holder of such a Partnership Interest may be entitled

pursuant to this Agreement, together with all obligations of such Person to

comply with the terms and conditions of this Agreement.

"Partnership Minimum Gain" has the meaning set forth in Section

1.704-2(b)(2) of the Regulations, and the amount of Partnership Minimum Gain

(and any net increase or decrease thereof) for a Fiscal Year shall be determined

in accordance with Section 1.704-2(d) of the Regulations.

"Partnership Record Date" means the record date established by the

General Partner for the distribution of Partnership cash pursuant to Section 5.1

hereof.

"Person" means any natural person, sole proprietorship, corporation,

general or limited partnership, limited liability company, trust, business

trust, real estate investment trust, joint venture, association, unincorporated

organization or other form of entity.

"Preferred Return" means an amount equal to a 10% per annum return

on the capital contributed to the Partnership by the Limited Partners pursuant

to subsection 3.2(b) hereof and not theretofore returned to the Limited

Partners. The Preferred Return shall be calculated on a daily basis on the basis

of a 360-day year and shall be cumulative but not compounded.

"Profits," "Loss" or "Losses" means, for any period, an amount equal

to the Partnerships's taxable income or loss for such period as determined for

federal income tax purposes by the Accountants, determined in accordance with

Sections 703(a) and 704(b) of the Code (with, for this purpose, all items of

income, gain, loss or deduction required to be stated separately pursuant to

Section 703(a) of the Code included in taxable income or loss), with the

following adjustments:

(a) All income of the Partnership, if any, that is exempt

from federal income tax and not otherwise taken into account in computing

Profits or Losses pursuant to this definition shall be added to such

taxable income or loss;

(b) All expenditures of the Partnership, if any, described

in Section 705(a)(2)(B) of the Code (including amounts paid or incurred to

organize the Partnership (unless an election is made pursuant to Section

709(b) of the Code) or to promote the sale of interests in the Partnership

and by treating deductions for losses incurred in connection with the sale

or exchange of Partnership property disallowed pursuant to Section

267(a)(1) or Section 707(b) of the Code, if any, as expenditures described

in Section 705(a)(2)(B) of the Code) and not otherwise taken into account

in computing Profits and Losses pursuant to this definition shall be

subtracted from such taxable income or loss;

recovery deductions taken into account in computing total income or loss,

there shall be taken into account Depreciation for such period;

(d) Gain or loss resulting from any disposition of

Partnership property with respect to which gain or loss is recognized for

federal income tax purposes shall be computed by reference to the Gross

Asset Value of such property rather than its adjusted tax basis;

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(e) In the event that the Gross Asset Value of any

Partnership asset is adjusted pursuant to this Agreement, the amount of

such adjustment shall be taken into account as gain or loss from the

disposition of such asset for purposes of computing Profits or Losses, and

to the extent that an adjustment to the adjusted tax basis of any

Partnership asset pursuant to Section 734(b) or Section 743(b) of the Code

is required by Sections 1.704-1 (b)(2)(iv)((m)(2) or (4) of the

Regulations to be taken into account in determining Capital Accounts as a

result of a distribution other than in liquidation of a Partner's

Partnership Interest, the amount of such adjustment shall be treated as an

item of gain (if the adjustment increases the basis of the asset) or loss

(if the adjustment decreases the basis of the asset) for purposes of

computing Profits or Losses and adjusting the Capital Accounts; and

(f) All items specially allocated pursuant to Sections 4.2

or 4.3 hereof shall not be taken into account in computing Profits or

Losses.

The amounts of the items of Partnership income, gain, loss or deduction

available to be specially allocated pursuant to Sections 4.2 and 4.3 hereof

shall be determined by applying rules analogous to those set forth in paragraphs

(a) through (f) immediately above.

"Purchase Agreements" means (i) that certain Agreement Regarding

Purchase/Sale of an Undivided Interest in Nursing Home Facility dated as of

January 23, 1996, between Magnolia Associates and the Partnership, and (iii)

that certain Agreement Regarding Purchase/Sale of an Undivided Interest in

Nursing Home Facility dated as of January 23, 1996, between I-Tex Associates

Limited Partnership and the Partnership.

"Regulations" means the income tax regulations promulgated under the

Code, whether in final or temporary form, as amended and as the same may

hereafter be amended from time to time (including corresponding provisions of

succeeding regulations).

"Regulatory Allocations" has the meaning set forth in Section 4.3

hereof.

"REIT" means a real estate investment trust as defined in Section

856 of the Code.

"REIT Requirements" means the requirements (i) for LTC to qualify as

a REIT under the Code and Regulations and to avoid any federal income or excise

tax liability; and (ii) for the General Partner to qualify as a "qualified REIT

subsidiary" under the Code and the Regulations. "REIT Requirements" also

includes the ownership limitation provisions set forth in LTC's certificate of

incorporation.

"REIT Shares" means the shares of common stock, par value $.01 per

share, of LTC.

"Restricted Entity" means any "employee benefit plan" as defined in

and subject to ERISA, any "plan" as defined in and subject to Section 4975 of

the Code, or any entity any portion or all of the assets of which are deemed

pursuant to United States Department of Labor Regulation Section 2510.3-101 or

otherwise pursuant to ERISA or the Code to be, for any purpose of ERISA or

Section 4975 of the Code, assets of any such "employee benefit plan" or "plan"

that invests in such entity.

"Sale" means any sale or other disposition for value of all or

substantially all of the assets that make up a Facility, but does not include

any borrowing by the Partnership that is secured by all or a portion of such

assets.

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"Sale Expenses" means costs and expenses incurred by the Partnership

in connection with a Sale, including fees and expenses of attorneys,

accountants, appraisers and brokers, sales and transfer taxes, insurance costs

and other expenses; provided, however, that Sale Expenses do not included

payments of principal, interest or other amounts due from the Partnership as a

result of such Sale in respect of indebtedness secured by the Facility sold.

"Sale Price" means, as to any Sale, the sum of (x) the Allocated

Purchase Price of that Facility, (y) the total amount of Capital Expenditures

made with respect to that Facility prior to the Sale and (z) the Sale Expenses

incurred by the Partnership in connection with that Sale. Sale Price and Sale

Expenses shall be determined on an aggregate basis with respect to any two or

more Facilities sold to a single purchaser (or group of affiliated purchasers)

in one or a series of related transactions.

"Sale Proceeds" means, as to any Sale, the total proceeds actually

received by the Partnership from that Sale either in cash or through the

assumption of debt. Sale Proceeds shall be calculated on an aggregate basis with

respect to any two or more Facilities sold to a single purchaser (or group of

affiliated purchasers) in one or a series of related transactions.

"Sellers" means (i) Magnolia Associates Limited Partnership, an

Illinois limited partnership, and (ii) I-Tex Associates Limited Partnership, an

Iowa limited partnership.

"Tax Items" has the meaning set forth in subsection 4.4(a) hereof.

"Termination Date" means September 29, 2040.

"Transfer," when used in this Agreement with respect to a

Partnership Interest, shall be deemed to refer to a transaction by which a

Person purports to assign its Partnership Interest or any portion thereof

(including Units) to another Person, and includes a sale, assignment, exchange,

gift, pledge, mortgage or other disposition, by law or otherwise.

"Unit" means a fractional, undivided share of the Partnership

Interests of all Partners issued hereunder, and is further defined in Section

3.6 hereof.

ARTICLE 2. Formation and Business of the Partnership; Filings

2.1 Formation. LTC Subsidiary, ZK and HA hereby agree to continue

the Partnership as a limited partnership pursuant to the provisions of the Act

and on the terms and subject to the conditions set forth herein.

2.2 Name. The name of the Partnership shall be LTC Partners II,

L.P., or such other name as the General Partner may from time to time determine.

2.3 Business. The purpose and nature of the business of the

Partnership is to acquire, own, finance, develop and re-develop, construct,

improve, maintain, operate, lease, manage, sell, exchange, convey, mortgage and

otherwise invest in, deal with or dispose of the Acquired Assets, any and all

properties, businesses and activities related to the Acquired Assets and all

direct and indirect interests therein, and to conduct such other activities as

in the determination of the General Partner may be necessary, desirable or

incidental to or in connection with the foregoing. The Partnership may engage in

any lawful act or activity for which a limited partnership may be organized

under the Act (provided that such act or activity is in furtherance of the

foregoing purposes), including, without limitation, the execution, delivery and

performance of the Partnership's obligations under the Exchange Rights Agreement

and the performance of

<PAGE>

the Partnership's obligations under the Purchase Agreements and each other

contract provided for or contemplated by the Purchase Agreements.

2.4 REIT Requirements. Notwithstanding the provisions of Section

2.3 hereof or any other provision of this Agreement, the Partnership shall not

engage in any act or activity that the General Partner determines (i) could

adversely affect the ability of LTC to continue to qualify as a REIT, (ii) could

subject LTC to any additional tax under Section 857 or Section 4981 of the Code

or other potentially adverse consequence under the Code, (iii) could otherwise

violate the REIT Requirements, or (iv) could violate any law or regulation of

any governmental body or agency having jurisdiction over LTC or its securities,

unless such act or activity shall have been specifically consented to by the

General Partner in writing. Nothing in this Section 2.4 shall, however, waive or

in any way limit the Partnership's obligation pursuant to subsection 5.1 (a)

hereof to distribute to the Limited Partners with respect to each Distribution

Period cash in an aggregate amount equal to the Preferred Return for that

Distribution Period.

2.5 Principal Place of Business. The principal place of business

of the Partnership shall be located at 300 Esplanade Drive, Suite 1860, Oxnard,

CA 93030, or such other place as may be selected from time to time by the

General Partner; provided, however, that the General Partner shall notify the

Limited Partners of any change in the location of the principal place of

business of the Partnership within 30 days thereafter.

2.6 Registered Agent and Registered Office. The registered agent

for service of process on the Partnership shall be The Corporation Trust

Company, and the registered office of the Partnership in the State of Delaware

shall be at c/o The Corporation Trust Company, Corporation Trust Center, 1209

Orange Street, Wilmington, Delaware 19801; provided, however, that the General

Partner may change the registered agent and/or the registered office of the

Partnership from time to time to such other Person and/or such other location as

the General Partner shall determine. The General Partner shall notify the

Limited Partners of any change in the registered agent or the registered office

of the Partnership within 30 days thereafter.

2.7 Term. The Partnership's term shall continue through the close

of business on the Termination Date, unless the Partnership is sooner dissolved,

or the term of the Partnership is extended, pursuant to Article 9 hereof.

2.8 Filings. The General Partner shall execute, acknowledge,

record and file, at the expense of the Partnership, any and all such amendments

to the Certificate as the General Partner deems necessary or appropriate and all

such requisite fictitious name statements and notices in all such jurisdictions

as the General Partner determines may be necessary to cause the Partnership to

be treated as a limited partnership under, and otherwise to comply with, the

laws of each jurisdiction in which the Partnership conducts business. The

Partners, acting directly or through an attorney-in-fact, shall execute and

deliver all such other certificates, instruments and other documents, make all

such other filings and do all such other acts as in each case shall, in the

judgment of the General Partner, be required by applicable law or otherwise

necessary or appropriate for the formation and operation of the Partnership and

the qualification of the Partnership to do business in any and all jurisdictions

in which the Partnership conducts business.

2.9 Power of Attorney. Each Limited Partner hereby constitutes and

appoints the General Partner and its authorized officers and attorneys-in-fact

of each of them, and each of said Persons acting singly, in each case with full

power of substitution, as such Limited Partner's true and lawful agent and

attorney-in-fact, with full power and authority in such

<PAGE>

Limited Partner's name, place and stead, to make, execute, swear to,

acknowledge, deliver and to the extent appropriate to publish, file and record

in the appropriate public offices:

(a) any and all certificates, agreements, instruments and

other documents that the General Partner deems necessary or appropriate

(i) to form, qualify or continue the existence or qualification of the

Partnership as a limited partnership (or a partnership in which the

limited partners have limited liability) in the State of Delaware and in

all other jurisdictions in which the Partnership conducts business

(including, without limitation, the Certificate and all amendments or

restatements thereof); (ii) to reflect any amendment or other modification

or restatement of this Agreement adopted in accordance herewith or to

correct any mistake, omission or inconsistency or cure any ambiguity

herein; (iii) to effect or reflect the admission, withdrawal or

substitution of any Partner pursuant to the provisions of this Agreement

or the making or return of any Capital Contribution; and/or (iv) to effect

or reflect the dissolution and termination of the Partnership and the

liquidation of the Partnership's assets pursuant to the terms of this

Agreement (including, without limitation, a certificate of cancellation);

and

(b) any and all consents, approvals, waivers, certificates,

agreements, instruments and other documents that the General Partner deems

necessary or appropriate to evidence or confirm any vote, consent,

approval, agreement or other action that is made, given or taken by the

Partners or any of them in accordance with the terms of this Agreement.

The power of attorney granted pursuant to this Section 2.9 is

irrevocable and is a special power coupled with an interest, in recognition of

the fact that each of the Partners will be relying upon the power of the General

Partner to act as contemplated by this Agreement in any filing or other action

by the General Partner on behalf of the Partnership, and to the maximum extent

permitted by applicable law, said power of attorney shall survive the death,

incompetency, incapacity, disability, dissolution, termination or Bankruptcy of

a Limited Partner and the assignment or other Transfer of all or any portion of

such Limited Partner's Partnership Interest, and shall extend to and be binding

upon such Limited Partner's heirs, successors, assigns and personal

representatives.

ARTICLE 3. Partners and Partnership Interests: Capital Contributions

3.1 Partners. As of the execution and delivery hereof, the General

Partner of the Partnership is LTC Subsidiary and the Limited Partners of the

Partnership are ZK and HA, each of whom is hereby admitted to the Partnership.

3.2 Initial Capital Contributions. LTC Subsidiary heretofore has

contributed to the Partnership, in readily available funds, such amount as was

required by the Partnership to complete the purchase of a 68.82% undivided

interest in the Acquired Assets pursuant to the Purchase Agreements, to pay all

costs incidental to such purchase and to provide such initial working capital

for the Partnership as the General Partner determined to be necessary for the

conduct of the Partnership's business. The cash contributed to the Partnership

by LTC Subsidiary pursuant to this Section 3.2 is set forth on Schedule B

hereto.

As of the execution and delivery hereof, each of ZK and HA is

contributing to the Partnership, pursuant to the Contribution Agreement, an

undivided ownership interest in the Acquired Assets of 15.59%, subject in each

case to the indebtedness encumbering such assets.

<PAGE>

3.3 Additional Capital Contributions. No Partner shall have any

obligation to make any Capital Contribution to the Partnership after the date

hereof, even if the failure to do so could result in the Bankruptcy of, or any

other adverse consequence to, the Partnership. Any such additional Capital

Contribution that the General Partner may desire to make to the Partnership

shall be made only with the consent of a Majority-in-Interest of the Limited

Partners. Except for the aforesaid Capital Contributions, any and all sums

advanced to the Partnership by the General Partner or any of its Affiliates

(other than loans made pursuant to Section 5.2 hereof, which loans shall be

governed by the provisions of that Section) shall be deemed loans to the

Partnership. Each such loan at the General Partner's election shall be evidenced

by a promissory note in form and substance satisfactory to the General Partner.

The principal amount of each such loan (i) shall bear interest at an annual rate

equal to the Prime Rate (as published in the Western Edition of the Wall Street

Journal) as from time to time in effect plus one percentage point, with interest

payable monthly in arrears, and (ii) shall be due and payable in full on demand

of the Person making such loan; provided, however, that if demand is made prior

to the first anniversary of the making of the loan and prior to the dissolution

of the Partnership, but only from and to the extent of Partnership cash

available for distribution to the Partners in excess of the cash required to pay

the Preferred Return for the Distribution Period immediately preceding the

Distribution Period in which the demand is made.

3.4 Capital Accounts. A separate book account shall be established

and maintained with respect to each Partner's interest in the Partnership's

capital in accordance with the following provisions:

(a) To each Partner's Capital Account there shall be

credited such Partner's Capital Contributions, such Partner's distributive

share of Profits and all other items, if any, of Partnership income or

gain allocated to such Partner, the amount of all Partnership liabilities,

if any, that are assumed by such Partner or that are secured by any

property distributed to such Partner, and all other items, if any, in the

nature of income or gain that are allocated to such Partner pursuant to

Sections 4.1, 4.2 or 4.3 hereof; and

(b) To each Partner's Capital Account there shall be debited

(i) the amount of cash distributed to such Partner, (ii) such Partner's

distributive share of Losses, the Gross Asset Value of any Partnership

asset distributed by the Partnership to such Partner pursuant to any

provision of this Agreement (net of the aggregate amount of Partnership

liabilities, if any, that are assumed by such Partner in respect of, or

that are secured by, such distributed property), (iii) to the extent not

otherwise included in calculating a Partner's Capital Contribution, the

amount of all liabilities, if any, of such Partner that are assumed by the

Partnership, and (v) all other items, if any, in the nature of expenses or

losses that are allocated to such Partner pursuant to Sections 4.1, 4.2 or

4.3 hereof,

The Capital Account balances of the Partners as of the date hereof

are set forth on Schedule B hereto.

In the event that all or any part of a Partnership Interest or any

one or more Units are "transferred" within the meaning of Section 1.704-1

(b)(2)(iv)(f) of the Regulations, the transferee shall succeed to the Capital

Account of the transferor to the extent that such Capital Account relates to the

Partnership Interest (or portion thereof) so transferred.

The foregoing provisions of this Section 3.5 and other provisions of

this Agreement relating to the maintenance of the Capital Accounts are intended

to comply with the maintenance of capital account provisions of Section

1.704-1(b) of the Regulations and shall be interpreted and

<PAGE>

applied in a manner consistent therewith. In the event the General Partner shall

determine that it is prudent to modify the manner in which the Capital Accounts,

or any one or more debits or credits thereto (including, without limitation,

debits or credits relating to liabilities that are secured by contributed or

distributed property or that are assumed by the Partnership or any Partner), are

computed in order to comply with such Regulations, the General Partner may make

such modification, provided that the General Partner has provided that such

modification is not likely to have a material economic effect on any Partner.

The General Partner also shall (i) make all adjustments, if any, that are

necessary or, in the judgment of the General Partner, appropriate to maintain

the proper proportions of the Capital Accounts and the amount of Partnership

capital reflected on the Partnership's balance sheet, as computed for book

purposes, in accordance with Regulations Section 1.704-1 (b)(2)(iv)(q), and (ii)

make all modifications, if any, that the General Partner deems appropriate in

the event there occur one or more unanticipated events that might otherwise

cause this Agreement not to comply with Regulations Section 1.704-1(b).

3.5 No Interest on or Return of Capital Contribution. No Partner

shall be entitled to interest on such Partner's Capital Contribution or the

balance in such Partner's Capital Account. Except as specifically provided

herein or as required by applicable law, no Partner shall have any right to

demand, withdraw or receive such Partner's Capital Contribution or any Capital

Account balance.

3.6 Units. In consideration of the Capital Contributions made by

the Limited Partners and the other transactions being consummated concurrently

herewith, LTC Subsidiary heretofore has been issued an aggregate of 351,988

Units, and each of ZK and HA is being issued as of the date hereof an aggregate

of 79,752 Units. At such time as any one or more Units are Transferred

(including, but not limited to, pursuant to the Exchange Rights Agreements),

there shall be transferred to the Transferee a Partnership Interest and an

amount of the transferor's Capital Account equal to the Capital Account balance

of the transferor immediately prior to the Transfer multiplied by a fraction,

the numerator of which is the number of Units so Transferred and the denominator

of which is the total number of Units held by the transferor immediately prior

to the Transfer.

In addition to setting forth the Capital Account balances of the

Partners as of the date herof, Schedule B hereto shall set forth the number of

Units held by the Limited Partners from time to time, and upon the issuance of

new Units or the Transfer or cancellation of issued and outstanding Units, the

General Partner shall cause Schedule B to be amended or restated as necessary to

reflect the then current ownership of Units.

ARTICLE 4. Allocations of Partnership Items

The Profits, Losses and other Partnership items of income, gain,

loss and deduction shall be allocated to the Partners pursuant to the provisions

of this Article 4.

4.1 Allocation of Profits and Losses.

(a) Except as otherwise provided in this Article 4, Profits

for each Fiscal Year shall be allocated to the Partners as follows:

(i) First. 100% to the Limited Partners in proportion

to their respective Capital Account balances until the Limited

Partners have been allocated pursuant to this paragraph 4.1(a)(i)

Profits in an aggregate amount equal to the amount of the excess, if

any, of all distributions made pursuant to subsection 5.1(a)

<PAGE>

hereof over all prior allocations of Profits to the Limited Partners

pursuant to this paragraph 4.1(a)(i);

(ii) Second. 100% to the Limited Partners in proportion

to their respective Capital Account balances until the Limited

Partners have been allocated pursuant to this paragraph 4.1(a)(ii)

Profits in an aggregate amount equal to the amount of the excess, if

any, of all distributions made pursuant to subsection 5.1(b) hereof

over all prior allocations of Profits to the Limited Partners

pursuant to this paragraph 4.1(a)(ii);

(iii) Third. 100% to the Limited Partners in proportion

to their respective Capital Account balances until the Limited

Partners have been allocated pursuant to this paragraph 4.1(a)(iii)

Profits in an aggregate amount equal to the amount of the excess, if

any, of all distributions made pursuant to subsection 5.1 (c) hereof

over all prior allocations of Profits to the Limited Partners

pursuant to this paragraph 4.1(a)(iii);

(iv) Fourth. 100% to the Limited Partners in proportion

to their respective Capital Account balances until the Limited

Partners have been allocated pursuant to this paragraph 4.1(a)(iv)

Profits in an aggregate amount equal to the amount of the excess, if

any, of all distributions made pursuant to subsection 5.1 (d) hereof

over all prior allocations of Profits to the Limited Partners

pursuant to this paragraph 4.1(a)(iv); and

(v) Thereafter. 100% to the General Partner.

(b) Losses for each Fiscal Year shall be allocated 100% to

the General Partner.

4.2 Special Allocations. Notwithstanding any provision of Section

4.1 hereof to the contrary, the following special allocations shall be made in

the following order:

(a) Except as otherwise provided in Section 1.704-2(f) of

the Regulations, notwithstanding any other provision of this Article 4, if

there is a net decrease in Partnership Minimum Gain for any Fiscal Year

(except as a result of conversion or refinancing of Partnership

indebtedness, certain capital contributions or revaluation of the

Partnership property as further outlined in Section 1.704-2(f) of the

Regulations), each Partner shall be specially allocated items of

Partnership income and gain for such Fiscal Year (and, if necessary,

subsequent Fiscal Years) in an amount equal to that Partner's share of the

net decrease in Partnership Minimum Gain as determined under Section

1.704-2(g) of the Regulations. The items to be so allocated shall be

determined in accordance with Sections 1.704-2(f)(6) and 1.704-2(j)(2) of

the Regulations, and the allocations to be so made shall be made in

proportion to the respective amounts required to be allocated to each

Partner pursuant thereto. This subsection 4.2(a) is intended to comply

with the minimum gain chargeback requirement in Section 1.704-2(f) of the

Regulations and shall be interpreted consistently therewith.

(b) Except as otherwise provided in Section 1.704-2(i)(4) of

the Regulations, notwithstanding any other provision of this Article 4

other than subsection 4.2(a), if there is a net decrease in Minimum Gain

Attributable to Partner Nonrecourse Debt during any Fiscal Year (other

than due to the conversion, refinancing or other change in the debt

instrument causing such debt to become partially or wholly

<PAGE>

nonrecourse, certain capital contributions, or certain revaluations of

Partnership property (as further outlined in Section 1.704-2(i)(4) of the

Regulations), each Partner shall be specially allocated items of

Partnership income and gain for such Fiscal Year (and, if necessary,

subsequent Fiscal Years) in an amount equal to such Partner's share of the

net decrease in the Minimum Gain Attributable to Partner Nonrecourse Debt,

as determined under Section 1.704-2(g) of the Regulations. The items to be

so allocated shall be determined in accordance with Sections 1.704-2(i)(4)

and 1.704-2(j)(2) of the Regulations. This subsection 4.2(b) is intended

to comply with the minimum gain chargeback requirement with respect to

Partner Nonrecourse Debt contained in Section 1.704-2(i)(4) of the

Regulations and shall be interpreted consistently therewith.

respect of any Fiscal Year any adjustment, allocation or distribution

described in Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6) of the

Regulations and such Partner has an Adjusted Capital Account Deficit,

items of Partnership income and gain for such Fiscal Year (and, if

necessary, subsequent Fiscal Years) shall be specially allocated to such

Partner in an amount and manner sufficient to eliminate the Adjusted

Capital Account Deficit as quickly as possible; provided, however, that an

allocation pursuant to this subsection 4.2(c) shall be made only if and to

the extent that such Partner would have Adjusted Capital Account Deficit

after all other allocations provided for in this Article 4 have been

tentatively made as if this subsection 4.2(c) was not in this Agreement.

This subsection 4.2(c) is intended to constitute a "qualified income

offset" under Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be

interpreted consistently therewith.

(d) In the event any Partner has a deficit Capital Account

at the end of any Fiscal Year that is in excess of the sum of (i) the

amount such Partner is obligated to restore pursuant to any provision of

this Agreement, and (ii) the amount such Partner is deemed to be obligated

to restore pursuant to the penultimate sentences of Sections 1.704-2(g)(1)

and 1.704-2(i)(5) of the Regulations, such Partner shall be specially

allocated items of Partnership income and gain for such Fiscal Year (and,

if necessary, subsequent Fiscal Years) in the amount of such excess as

quickly as possible; provided, however, that an allocation pursuant to

this subsection 4.2(d) shall be made only if and to the extent that such

Partner would have a Capital Account deficit in excess of such sum after

all other allocations provided for in this Article 4 have been made as if

subsection 4.2(c) hereof and this subsection 4.2(d) were not in this

Agreement

(e) Nonrecourse Deductions for any Fiscal Year shall be

specially allocated to Partners as determined by the General Partner in

accordance with the Regulations. A Partner's share of nonrecourse

liabilities shall be determined in accordance with Section 1.752 of the

Regulations. The Partners hereby agree that: (i) in accordance with

Section 1.752-3(a)(2) of the Regulations, ZK and HA shall be allocated a

portion of the nonrecourse liabilities of the Partnership equal to the

amount of taxable gain that would be allocated to them under Section

704(c) of the Code if the Partnership disposed of (in a taxable

transaction) any property contributed by them to the Partnership

(including under the Contribution Agreement), subject to the nonrecourse

liabilities encumbering such property in full satisfaction of such

liabilities and for no other consideration; and (ii) any excess

nonrecourse liabilities of the Partnership described in Section

1.752-3(a)(3) of the Regulations shall be allocated among the Partners

using any reasonable method selected by the General Partner that is

permitted under Section 1.752-3(a)(3) of the Regulations.

<PAGE>

(f) Partner Nonrecourse Deductions for any Fiscal Year shall

be specially allocated to the Partner that bears the economic risk of loss

with respect to the Partner Nonrecourse Debt to which such Partner

Nonrecourse Deductions are attributable (as determined under Sections

1.704-2(b)(4) and 1.704.2(i)(1) of the Regulations).

(g) To the extent an adjustment to the adjusted tax basis of

any Partnership asset pursuant to Section 734(b) or Section 743(b) of the

Code is required, pursuant to Section 1.704-1(b)(2)(iv)(m)(2) or Section

1.704-1 (b)(2)(iv)(m)(4) of the Regulations, to be taken into account in

determining the Capital Accounts, the amount of such adjustment to the

Capital Accounts shall be treated as an item of gain (if the adjustment

increases the basis of the asset) or loss (if the adjustment decreases

such basis) and such gain or loss shall be specially allocated to Partner

in accordance with their respective Capital Account balances in a manner

consistent with the manner in which the Capital Accounts are required to

be adjusted pursuant to such sections of the Regulations.

(h) Notwithstanding anything to the contrary contained

herein, the General Partner (or if there is more than one General Partner,

all of the General Partners as a group) shall be allocated not less than

1% of each material item of Partnership income, gain, loss, deduction and

credit at all times during the existence of the Partnership; provided,

however, that temporary nonconformance with the provisions of this Section

4.2(h) shall be permitted to the extent permitted by Revenue Procedure

89-12 or any successor provision.

4.3 Curative Allocations. The allocations set forth in Section 4.2

(the "Regulatory Allocations") are intended to comply with certain requirements

of the Regulations. The Partners intend that, to the extent possible, all

Regulatory Allocations shall be offset either with other Regulatory Allocations

or with special allocations of other items of partnership income, gain, loss or

deduction pursuant to this Section 4.3. Therefore, notwithstanding any other

provision of this Article 4 (other than the Regulatory Allocations), the General

Partner shall make such offsetting special allocations of Partnership income,

gain, loss or deduction in whatever manner the General Partner determines

appropriate so that, to the extent possible, after such offsetting allocations

are made, each Partner's Capital Account balance is equal to the Capital Account

balance that Partner would have had if the Regulatory Allocations were not part

of this Agreement and all Partnership items were allocated pursuant to Section

4.1 hereof. In exercising its discretion under this Section 4.3, the General

Partner shall take into account future Regulatory Allocations under subsections

4.2(a) and (b) hereof that, although not yet made, are likely to offset other

Regulatory Allocations previously made under

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