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As filed with the Securities and Exchange Commission on August 6, 2008

Registration No. 333-          

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


FORM S-11
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES


CapitalSource Healthcare REIT
(Exact name of registrant as specified in its declaration of trust)

MARYLAND
(State or other jurisdiction of
incorporation or organization)
      26-2730129
(I.R.S. Employer Identification)

30699 Russell Ranch Road
Suite 200
Westlake Village, CA 91362
(800) 370-9431

(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)

James J. Pieczynski
President and Chief Executive Officer
CapitalSource Healthcare REIT
30699 Russell Ranch Road
Suite 200
Westlake Village, CA 91362
(800) 370-9431

(Name, address, including zip code, and telephone number,
including area code, of agent for service)

 



Copies of communications to:
James E. Showen, Esq.
Kevin L. Vold, Esq.
Hogan & Hartson LLP
555 Thirteenth Street, N.W.
Washington, DC 20004
(202) 637-5600
  Steven A. Museles
Chief Legal Officer
CapitalSource Inc.
4445 Willard Avenue, 12th Floor
Chevy Chase, MD 20815
(301) 841-2700
  David J. Goldschmidt, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
4 Times Square
New York, NY 10036
(212) 735-3000

         Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

         If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

         If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

         If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

         If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

         If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. o

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

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


CALCULATION OF REGISTRATION FEE

 
Title of each class of securities to be registered
  Proposed maximum
aggregate offering
price(1)(2)

  Amount of
registration fee

 

Common Shares of Beneficial Interest

  $345,000,000   $13,559

 

(1)
Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act.
(2)
Includes offering price of common shares that the underwriters have the option to purchase, if any.


         The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.


The information in this prospectus is not complete and may change. CapitalSource may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell the securities, nor is it a solicitation of an offer to buy the securities in any jurisdiction where an offer or sale is not permitted.

PROSPECTUS   SUBJECT TO COMPLETION, DATED AUGUST 6, 2008    

                      Shares

GRAPHIC

Common Shares of Beneficial Interest


         CapitalSource Healthcare REIT is a newly organized real estate investment trust, or REIT, formed principally to invest in healthcare-related real estate assets. We are managed and advised by a wholly owned subsidiary of CapitalSource Inc. (NYSE: CSE), or CapitalSource. Upon completion of this offering and its contribution to us of our initial assets as described in this prospectus, CapitalSource will own approximately        % of our outstanding common shares of beneficial interest, or common shares.


         We intend to qualify as a REIT for federal income tax purposes. Our common shares are subject to ownership limitations that are intended to assist us in qualifying and maintaining our qualification as a REIT. Our board of trustees intends to grant a limited exemption from these ownership limits to CapitalSource.


         This is our initial public offering and no public market currently exists for our common shares. CapitalSource is offering all of the common shares to be sold in this offering. We will not receive any proceeds from the sale of common shares by CapitalSource. We anticipate that the initial public offering price of these common shares will be between $            and $            per share. After this offering, the market price for our common shares may be outside this range. We intend to apply to list our common shares on the New York Stock Exchange under the symbol "CHR."


         Investing in our common shares involves a high degree of risk. See "Risk Factors" beginning on page 17.

 

 
 
  Per Share
  Total
 
   

Offering price

  $     $    
   

Discounts and commissions to underwriters

  $     $    
   

Offering proceeds to CapitalSource, before expenses

  $     $    
   

         Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

         CapitalSource has granted the underwriters an option to purchase up to            additional common shares on the same terms and conditions as set forth above if the underwriters sell more than            common shares in this offering. The underwriters can exercise this right at any time and from time to time, in whole or in part, within 30 days after the offering. The underwriters expect to deliver the common shares to investors on or about                        , 2008.

Joint Book-Running Managers

Banc of America Securities LLC    Citi    Credit Suisse

The date of this prospectus is                 , 2008.


        You should rely only on the information contained in this prospectus. We and CapitalSource have not, and the underwriters have not, authorized anyone to provide you with different information. CapitalSource is not making an offer of these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information contained in this prospectus is accurate as of the date on the front of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date.

        Information contained in our web site does not constitute part of this prospectus.

        CapitalSource Healthcare REIT, our logo, and other trademarks mentioned in this prospectus are the property of their respective owners.


TABLE OF CONTENTS

PROSPECTUS SUMMARY

  1

RISK FACTORS

  17

CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS

  45

USE OF PROCEEDS

  46

DISTRIBUTION POLICY

  46

CAPITALIZATION

  49

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

  50

SELECTED COMBINED FINANCIAL DATA

  58

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  60

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

  79

BUSINESS

  81

MANAGEMENT AGREEMENT

  106

CONFLICTS OF INTEREST IN OUR RELATIONSHIP WITH CAPITALSOURCE

  111

MANAGEMENT

  114

PRINCIPAL AND SELLING SHAREHOLDERS

  125

OTHER ARRANGEMENTS BETWEEN CAPITALSOURCE AND US

  126

DESCRIPTION OF SHARES OF BENEFICIAL INTEREST

  134

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

  143

UNDERWRITING

  169

LEGAL MATTERS

  174

EXPERTS

  174

WHERE YOU CAN FIND MORE INFORMATION

  174

INDEX TO FINANCIAL STATEMENTS

  F-1

        This prospectus includes market share, industry data and forecasts that we obtained from various U.S. government agencies, including the U.S. Census Bureau and the Centers for Medicare and Medicaid Services. In this prospectus, we also refer to additional information regarding market data obtained from internal sources, market research, and publicly available information.



PROSPECTUS SUMMARY

        This summary highlights information contained elsewhere in this prospectus. It is not complete and may not contain all of the information that you should consider before investing in our common shares. You should read this entire prospectus, including the information set forth under "Risk Factors" and our historical combined financial statements and related notes appearing elsewhere in this prospectus, before deciding to invest in our common shares.

        In this prospectus, unless the context otherwise requires or indicates, references to "we," "our company," "our," and "us" refer to CapitalSource Healthcare REIT. Unless the context otherwise requires or indicates, references to "CapitalSource" are to CapitalSource Inc. and its consolidated subsidiaries, including CapitalSource Finance LLC, the wholly owned subsidiary that will serve as our manager, and references in this prospectus to information about our assets, financial condition and results of operations are on a pro forma basis.

OVERVIEW OF OUR COMPANY

        We are a newly organized Maryland real estate investment trust, or REIT, investing in income producing healthcare-related facilities, principally skilled nursing facilities, or SNFs, located in the United States. Upon consummation of this offering, we believe we will own one of the largest portfolios of SNFs in the United States. As of March 31, 2008, our portfolio of properties consisted of 187 facilities located in 23 states and operated by 41 third-party operator groups. Approximately 98% of these facilities are SNFs, with the remainder being either long-term acute care facilities or assisted living facilities, or ALFs. In addition to these properties, we will hold a $150 million participation in a $375 million, five-year mezzanine loan made by CapitalSource in 2007. In this prospectus, we refer to this loan as the Genesis mezzanine loan.

        We are managed by CapitalSource Finance LLC, a wholly owned subsidiary of CapitalSource Inc., a NYSE-listed, middle market commercial finance company which will own            % of our outstanding common shares following this offering. CapitalSource has been a significant lender to middle market healthcare companies since its inception in 2000. Through March 31, 2008, CapitalSource had originated over $6.9 billion in loans to approximately 335 healthcare clients and, as of March 31, 2008, CapitalSource's healthcare finance loan portfolio included approximately $3.4 billion in commitments to approximately 168 clients. CapitalSource commenced its healthcare net lease business in January 2006 and, since that time, has made over $1 billion of direct real estate investments, all of which will be contributed to us immediately prior to the completion of this offering. We believe that CapitalSource's expertise, knowledge and relationships will enable us to originate, manage and enhance our healthcare-related investments. In addition, we believe that, along with our sale leaseback product, CapitalSource's commercial lending capabilities allow us to offer a broader array of healthcare financing solutions to facility operators than other healthcare REITs. As a result, we expect to see a wider range of quality investment opportunities.

        We expect to continue to invest primarily in SNFs. These properties fill an important and growing need in the healthcare industry by offering restorative, rehabilitative and custodial nursing care to seniors and other people not requiring the more extensive treatment available at hospitals. SNFs provide these services at considerably lower costs than hospitals or other facilities, and also provide services to residents beyond room and board, including occupational, physical, speech, respiratory and intravenous therapy, wound care, and orthopedic therapy as well as sales of pharmaceutical products and other services, which are generally not available in other forms of senior housing such as ALFs or independent living facilities, or ILFs. We believe that SNFs represent a highly attractive investment opportunity due to the aging of the United States population, the declining number of nursing homes, barriers to entry for new SNF construction and CapitalSource's in-depth knowledge of the healthcare reimbursement system.

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        We generate most of our revenues from our ownership of healthcare facilities through long-term triple-net leases with qualified operators. We also generate interest and fee income from our participation in the Genesis mezzanine loan. For the year ended December 31, 2007 and for the three months ended March 31, 2008, on a pro forma basis, we generated total revenues of $125.6 million and $31.8 million, net income of $48.6 million and $14.5 million, funds from operations, or FFO, of $84.7 million and $23.5 million, and funds available for distribution, or FAD, of $77.3 million and $21.5 million, respectively. FFO and FAD are not financial measures recognized under generally accepted accounting principles in the United States, or GAAP, and therefore, should not be considered a measure of liquidity, an alternative to net income or an indicator of any other performance measure determined in accordance with GAAP. Like many other REITs, we use FFO and FAD as supplemental measures of operating performance, as historical cost accounting for real estate assets assumes that the value of these assets diminishes predictably over time as evidenced by the provision for depreciation. Since real estate values have historically risen or fallen with market conditions, we believe that FFO and FAD should be examined in conjunction with net income to facilitate a clear understanding of our combined historical results. For more information with respect to FFO and FAD and a reconciliation of FFO and FAD to GAAP net income, see "Management's Discussion and Analysis of Financial Condition and Results of Operations."

OUR MANAGER

        We have a long-term management agreement with a wholly owned subsidiary of CapitalSource, a leading commercial finance, investment and asset management company focused on the middle market. CapitalSource provides senior and subordinate commercial loans, invests in real estate and residential mortgage assets, and engages in asset management and servicing activities. CapitalSource has 95 professionals dedicated to the healthcare industry, including 14 employees focused on healthcare real estate investment origination and 18 portfolio management employees, whose primary focus is healthcare real estate. In addition, our relationship with CapitalSource offers us access to CapitalSource's proprietary asset management database, its unique systems and its disciplined processes for underwriting and monitoring operators' asset performance. Our officers, who are employees of CapitalSource, have extensive experience investing in healthcare-related assets at CapitalSource and with other healthcare finance companies. Although our officers will not be dedicating all of their time to us, we believe the equity incentives granted to them in connection with this offering will ensure that their interests are aligned with those of our shareholders.

        Under our management agreement, our manager is responsible for administering our business activities and day-to-day operations, including sourcing originations, providing underwriting services and processing approvals for all real estate investments. Our manager also provides administrative, servicing and portfolio management functions with respect to our business and assets. Our manager's well-established operations and services benefit us in each of these areas.

        We have established a policy designed to minimize potential conflicts of interests with CapitalSource and to allocate investment opportunities between us. Under that policy, we will have the exclusive right to invest in all types of healthcare-related real property that are originated by or presented to CapitalSource through direct acquisitions of healthcare-related real property or equity investments in entities owning healthcare-related real property, and CapitalSource will continue to provide debt financing to healthcare-related companies through its commercial finance business. Our conflicts of interest policy also provides that all pari passu co-investments we make with CapitalSource must be on terms at least as favorable to us as to CapitalSource, and further requires that any co-investments we make in debt tranches of different priorities must be approved by our independent trustees unless the terms are no less favorable than those with the most favored third party participant or the terms are determined by third party bids or published market data. Our participation in other

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investments originated or sourced by CapitalSource will require approval of our independent trustees. For more information on this, see "Conflicts of Interest in Our Relationship with CapitalSource."

OUR COMPETITIVE STRENGTHS

        We believe several characteristics distinguish us from our competitors, including:

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OUR ASSETS

        As of March 31, 2008, our healthcare net lease portfolio consisted of 187 facilities with 22,179 beds in 23 states leased to 41 third-party operator groups. These facilities, which are principally SNFs, are subject to long-term, triple-net leases. We may lease an individual property to a single operator as part of an individual lease or we may lease multiple properties to a single operator as part of a master lease. We may also enter into multiple leases with a single operator. In addition, certain of our individual operators may be different subsidiaries of a common parent company or may have received guarantees from a common guarantor. As such, for determining concentrations of risk, we aggregate properties into operator groups based upon (1) related acquired properties under leases that share the same operator or guarantor or (2) a single entity that may be held liable for the rental payments on two or more properties as either operator or guarantor (through cross-collateralization or cross-default provisions). As of March 31, 2008, 157 of our 187 properties were subject to master leases or were cross-defaulted, providing additional credit support for the performance of these 157 properties.

        The following tables summarize information about these properties as of March 31, 2008:

Operator Diversification

Operator Group
  Facilities   Beds   Percentage of
Contractual
Rental Income
 

Delta Health Group

    17     2,186     13.3 %

Florida Institute for Long Term Care, LLC

    18     2,439     12.5 %

New Bell Facilities Services, L.P. 

    36     4,066     10.9 %

TenInOne Acquisition Group, LLC

    10     1,574     7.7 %

Signature Holdings II, LLC

    10     937     6.0 %

Other (36 operator groups)

    96     10,977     49.6 %
               

Total

    187     22,179     100.0 %
               

Geographic Diversification

State
  Facilities   Beds   Percentage of
Contractual
Rental Income
 

Florida

    59     7,302     37.3 %

Texas

    47     5,517     16.4 %

Tennessee

    10     1,589     9.7 %

Indiana

    14     1,392     6.4 %

Mississippi

    6     634     3.9 %

Other (18 states)

    51     5,745     26.3 %
               

Total

    187     22,179     100.0 %
               

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        Our loan asset is a $150 million participation in the Genesis mezzanine loan, a $375 million, five-year mezzanine loan made to FC-Gen Acquisition, Inc., a subsidiary of the entity that acquired the assets formerly owned by Genesis. The Genesis mezzanine loan matures in July 2012 and bears interest at a rate of 30-day LIBOR plus 7.5%. Interest on the loan is payable monthly in arrears. There is also a $3.75 million termination fee due at the time of repayment of the loan, of which we are entitled to $1.5 million. In addition, there is an additional termination fee that accrues monthly at the rate of 1% per annum on the outstanding principal balance of the loan and is payable at the time of the repayment of the loan. As of March 31, 2008, Genesis operated 137 owned properties (16,633 beds), 42 leased properties (5,162 beds), and 29 joint venture or managed facilities (3,932 beds). Of these facilities, 184 are SNFs and 24 are ALFs. In addition, as of March 31, 2008, Genesis operated an ancillary division that provides rehabilitation therapy services to providers. CapitalSource holds a $175 million participation in the Genesis mezzanine loan and holds a $50 million participation in the $1.3 billion first mortgage loan made to the property owning entities of the facilities and their ultimate parent. The remaining $50 million participation in the Genesis mezzanine loan is held by an affiliate of Citigroup Global Markets Inc., one of the underwriters in this offering.

OUR INDUSTRY AND MARKET OPPORTUNITY

        Healthcare is one of the largest industries in the United States and has strong growth characteristics. According to the 2007 National Health Expenditures forecast published by the Centers for Medicare and Medicaid Services, or CMS, healthcare spending in the United States is projected to grow at a compound annual growth rate, or CAGR, of approximately 6.7% through 2017. As a percentage of gross domestic product, or GDP, healthcare spending is projected to increase by over 3% to 19.5% of GDP in 2017 with an expected spending level of over $4.3 trillion. CMS projects that national nursing home expenditures will grow from $124.9 billion in 2006 to $217.5 billion in 2017, representing a 5.2% CAGR.

        A primary reason for the rapid expected growth in healthcare spending and a primary growth driver for long-term care facilities is the aging of the U.S. population and increasing life expectancies. According to a 2008 report by the Federal Interagency Forum on Aging-Related Statistics, in 2006, there were approximately 37 million people aged 65 or older, comprising just over 12% of the total U.S. population. The number of Americans aged 65 or older is expected to climb from approximately 37 million in 2006 to approximately 48 million in 2017, representing a CAGR of 2.5%, compared to a total U.S. population which is expected to grow at a CAGR of 0.8% over the same period. In 2030, the population of this age category is expected to be twice as large as in 2006, growing from 37 million to 71.5 million and representing nearly 20% of the total U.S. population. In addition, CMS projects that the number of Americans aged 85 or older is expected to increase 13% by 2010 and 27% by 2020. We believe these statistics validate our investment thesis, as there is a direct correlation between increased usage of SNFs and increases in age. In 2005, there were 30 SNF stays per 1,000 Medicare enrollees aged 65-74, compared with 228 stays per 1,000 Medicare enrollees age 85 and over. Overall, for Medicare enrollees aged 65 and over, SNF stays increased significantly from 28 per 1,000 Medicare enrollees in 1992 to 79 per 1,000 Medicare enrollees in 2005.

        In addition to positive demographic trends, the demand for services provided by operators of SNFs is expected to increase substantially during the next decade primarily due to the impact of cost containment measures by government and private-pay sources. We expect payors to continue to transfer higher acuity patients from hospitals to less expensive care settings, such as SNFs.

        According to CMS, in 2007 there were approximately 15,800 nursing homes with approximately 1.7 million beds and an average occupancy rate of 89%. We believe that the demand for these properties will continue to increase over time as a result of the aging population and limited new

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construction, coupled with a slight reduction in the number of nursing homes over the past several years. In addition to the typical zoning concerns and construction costs that generally limit all new construction projects, there are two other reasons why we expect new SNF construction to be limited. First, in many states it is a condition precedent to construction and operation of a new SNF that the operator obtain a certificate of need, or CON, from appropriate state regulators. Typically, state regulators grant CONs only if there is a clearly demonstrated need for additional facilities, which generally requires the operator/applicant to show that all other facilities in the targeted area are operating at or above 95% occupancy levels. This regulatory hurdle creates a considerable barrier to entry for new facility construction. Second, although private pay options and Medicare reimbursement represent the high margin portion of the nursing home industry, CMS notes that approximately 65% of the occupants of SNFs receive Medicaid benefits. As a result, facility operators must obtain and maintain long-term Medicaid contracts to provide them with suitable assurances that they will be able to operate with stable revenue streams. As with CONs, Medicaid contracts must be entered into with state agencies that are the payors of Medicaid reimbursement. These agencies operate within budgets and typically approve new reimbursement contracts only if there is a clearly demonstrated need. Again, this barrier to entry puts owners of existing facilities at a competitive advantage as compared to prospective new entrants into the SNF market.

OUR STRATEGY

        Our strategy is to capitalize on CapitalSource's platform to identify, evaluate and invest in properties that will provide us with strong, stable cash flow and capital appreciation. We expect to expand and further diversify our portfolio over time as follows:

Utilize the CapitalSource Platform to Source New Investments

        As a leading provider of financing alternatives to SNF operators and other middle market healthcare companies, CapitalSource has developed a platform to source potential healthcare real estate investments. CapitalSource has many significant relationships within the healthcare real estate industry and a team of dedicated employees who are responsible for identifying, evaluating, acquiring and monitoring new healthcare investments. We believe that CapitalSource's broad network of industry relationships and extensive resources will provide us with access to a strong pipeline of future acquisition opportunities.

Capitalize on Current Attractive Industry Conditions

        We believe that our industry is characterized by several attractive attributes that increase the number and the quality of investment opportunities available to us, including:

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Identify Attractive Investment Opportunities with New and Existing Operators

        We intend to focus our business and investment efforts on locating established, creditworthy, small owners and regional chains with operators that meet our standards for high quality and managerial experience. Our past, current and prospective clients and the clients of CapitalSource provide us with the foundation for an attractive investment strategy. We intend to pursue acquisitions that diversify our portfolio geographically and increase the number of our operators. We believe CapitalSource's underwriting experience allows it to accurately assess the quality of the operators with which we do business. CapitalSource has developed systems and personnel to evaluate potential investments to ensure we continue to invest in quality and profitable assets. Prior to making an investment, CapitalSource will consider the facility's historical and forecasted cash flow and its ability to meet operational needs, including capital expenditures. In addition, CapitalSource will consider qualitative factors such as the quality and experience of management, the creditworthiness of the operator of the facility, the physical condition and geographic location of the facility, the reimbursement environment, the occupancy and demand for similar healthcare facilities in the same or nearby communities, the payor mix and the overall general economic environment.

Opportunistically Expand into Additional Asset Classes

        Pursuant to our management agreement, we have the exclusive right to make all direct acquisitions of healthcare-related real property or equity investments in entities owning healthcare-related real property originated by or presented to CapitalSource. We may expand our portfolio of properties opportunistically to include other types of healthcare properties such as ILFs and ALFs or add additional loans to qualified operators. We may also expand our investment strategy to include other net leased assets that we believe would benefit from CapitalSource's underwriting and servicing expertise.

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OUR CORPORATE STRUCTURE

        Immediately prior to the consummation of this offering, CapitalSource will contribute all of its healthcare net lease assets and a $150 million participation in the Genesis mezzanine loan to us in exchange for             common shares, determined assuming that CapitalSource acquires these shares at a price equal to $        , the midpoint of the range set forth on the cover page of this prospectus. CapitalSource will sell all of the shares to be sold in this offering. The following chart shows the structure of our organization following completion of this offering:

CHART

SUMMARY RISK FACTORS

        An investment in our common shares involves significant risks. You should carefully consider the risks discussed in the section "Risk Factors" beginning on page 17 prior to deciding whether to invest in our common shares. These risks include, but are not limited to, the following:

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OUR TAX STATUS

        We intend to qualify as a REIT for federal income tax purposes under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, commencing with our taxable year ending December 31, 2008. As a REIT, we generally will not be subject to federal taxes on our taxable income to the extent that we distribute our taxable income to shareholders and maintain our qualification as a REIT. As a REIT, we are permitted to own up to 100% of a taxable REIT subsidiary, or TRS. We may form a TRS to hold a portion of our participation in the Genesis mezzanine loan. To the extent that a TRS is formed and generates income, it would be taxable as a corporation and would pay federal, state and local income tax on its net income.

        To maintain REIT status, we must meet, on a continuing basis, a number of organizational and operational requirements, including a requirement that we annually distribute at least 90% of our REIT taxable income to shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax at regular corporate rates. Even if we qualify for taxation as a REIT, we may be subject to some federal, state, and local taxes on our income or property. See "Material U.S. Federal Income Tax Considerations."

DISTRIBUTION POLICY

        We intend to distribute to our shareholders each year all or substantially all of our REIT taxable income. By making these distributions, we will not be required to pay corporate income tax or excise tax on our REIT income as we will be able to qualify for the tax benefits afforded to REITs under the Internal Revenue Code. While we expect to make distributions quarterly, the actual amount, timing and frequency of distributions will be determined by our board of trustees based upon those factors they deem relevant. See "Distribution Policy."

10


OWNERSHIP RESTRICTIONS

        To assist us in complying with the limitations on the concentration of ownership of a REIT imposed by the Internal Revenue Code, our declaration of trust will generally prohibit any shareholder from directly or indirectly owning (or being deemed to own by virtue of certain attribution provisions of the Internal Revenue Code) more than 7.9% or 9.9% in value or in number of shares, whichever is more restrictive, of our common shares or preferred shares, respectively. In addition, our declaration of trust will generally prohibit direct or indirect ownership (or deemed ownership by virtue of certain attribution provisions of the Internal Revenue Code) of our shares by any person that would cause us to own, actually or constructively (taking into account certain attribution provisions of the Internal Revenue Code), a 10% or greater interest in any of our operators. Our board of trustees intends to grant to CapitalSource a limited exemption from the ownership limitation applicable to our common shares. See "Description of Shares of Beneficial Interest—Restrictions on Ownership and Transfer."

CORPORATE INFORMATION

        We were organized in the State of Maryland on May 30, 2008. Our principal executive offices are located at 30699 Russell Ranch Road, Suite 200, Westlake Village, CA 91362 and our telephone number is (800) 370-9431. Our website address is                        . Information contained on our website is not part of this prospectus.

        CapitalSource's principal executive offices are located at CapitalSource Inc., 4445 Willard Avenue, 12th Floor, Chevy Chase, MD 20815. Information contained on CapitalSource's website is not part of this prospectus.

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The Offering

Common shares offered by CapitalSource

                    shares

Common shares to be outstanding immediately after this offering

                    shares

Use of Proceeds

  We will not receive any proceeds from the common shares being offered for sale by CapitalSource.

Listing

  We intend to apply to list our common shares on the NYSE under the symbol "CHR."

        The number of common shares outstanding after this offering includes             shares that we intend to grant to our trustees and officers and other employees of CapitalSource, and excludes             common shares available for future grant under our equity incentive plan. Unless otherwise stated, all information in this prospectus assumes that the underwriters do not exercise their option to purchase additional common shares from CapitalSource.

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SUMMARY FINANCIAL AND PRO FORMA INFORMATION

        We are newly organized and will not acquire our assets until completion of this offering. The financial statements included in this prospectus reflect the operations of the healthcare net lease segment of CapitalSource and a $150 million participation in the Genesis mezzanine loan as if the CapitalSource healthcare net lease segment and $150 million loan asset had been operated together in a single business as a separate, stand-alone company throughout all relevant periods. We refer to these operations as those of the "Carve-out Entity" in this prospectus. To facilitate an analysis of our financial condition and results of operations, we also present financial information in this prospectus on a pro forma basis.

        The following summary historical combined financial, pro forma and other data should be read in connection with "Unaudited Pro Forma Combined Financial Statements," "Selected Combined Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical combined financial statements and related notes thereto of the Carve-out Entity included elsewhere in this prospectus.

        The summary historical combined financial data as of December 31, 2007 and 2006 and for the years ended December 31, 2007 and 2006 have been derived from the Carve-out Entity's audited combined financial statements and notes thereto included elsewhere in this prospectus, which have been audited by Ernst & Young LLP, independent registered public accounting firm. The summary historical combined financial data as of March 31, 2008 and for the three months ended March 31, 2008 and 2007 have been derived from the Carve-out Entity's unaudited historical combined financial statements included elsewhere in this prospectus. The historical results are not necessarily indicative of the results to be expected in the future.

        The unaudited pro forma combined statements of operations for the year ended December 31, 2007 and the three months ended March 31, 2008 and March 31, 2007 have been prepared as though the acquisition of the properties acquired by the Carve-out Entity in the year ended December 31, 2007 and the three months ended March 31, 2008, respectively, as well as the contribution to us of our initial assets and the related transactions, had occurred as of January 1, 2007. The unaudited pro forma combined balance sheet as of March 31, 2008 has been prepared as though the acquisition of properties acquired by the Carve-out Entity in the year ended December 31, 2007 and the three months ended March 31, 2008, respectively, as well as the contribution to us of our initial assets and the related transactions, had occurred on March 31, 2008.

        The pro forma adjustments described below are based upon available information and assumptions that management believes are reasonable. These adjustments are estimates and may not prove to be accurate. Information regarding these adjustments constitutes forward-looking information and is subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. See "Risk Factors" and "Cautionary Language Regarding Forward-Looking Statements."

        The pro forma adjustments include the following items:

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        Our unaudited pro forma combined statements of operations do not give effect to the expenses incurred in connection with this offering because these non-recurring charges will be incurred by CapitalSource. Additionally, we expect to obtain a secured revolving credit facility that will be available primarily to finance our future direct real estate investments and for general corporate use. We do not believe this facility will be drawn in the near future and, therefore, we have not made any pro forma adjustments related to this facility.

 
  Year Ended December 31,   Three Months Ended March 31,  
 
  2006   2007   2007   2007   2008   2008  
 
   
   
  Pro Forma
(unaudited)

  (unaudited)
  (unaudited)
  Pro Forma
(unaudited)

 
 
  ($ in thousands)
 

Operating Information

                                     

Revenues

                                     
 

Operating lease income

  $ 30,380   $ 95,191   $ 105,612   $ 19,667   $ 26,709   $ 26,816  
 

Interest and fee income

    194     10,805     19,982     185     4,951     4,951  
                           
 

Total revenues

    30,574     105,996     125,594     19,852     31,660     31,767  

Operating expenses

                                     
 

Interest expense

    13,373     46,262     26,820     9,168     11,000     5,558  
 

Depreciation

    11,464     31,955     36,212     6,749     8,969     8,994  
 

General and administrative

    3,809     10,460     11,760     2,819     2,658     2,454  
 

Loss on impairment of assets

        1,225     1,225              
 

Loss on debt extinguishment

    2,497                      
                           
 

Total expenses

    31,143     89,902     76,017     18,736     22,627     17,006  
                           

Income (loss) before gain on sale of real estate and noncontrolling interests expense

    (569 )   16,094     49,577     1,116     9,033     14,761  

Gain on sale of real estate

        156     156              

Noncontrolling interests expense

    (4,711 )   (4,951 )   (1,089 )   (1,352 )   (1,153 )   (271 )
                           

Net income (loss)

  $ (5,280 ) $ 11,299   $ 48,644   $ (236 ) $ 7,880   $ 14,490  
                           

 

 
  As of March 31, 2008  
 
  Actual   Pro Forma  
 
  (unaudited)
  (unaudited)
 
 
  ($ in thousands)
 

Balance Sheet Information

             

Real estate investments, net

  $ 1,016,972   $ 1,016,972  

Loan, net

    151,369     151,369  

Total debt

    607,561     359,818  

Total equity

    519,584     800,307  

Total liabilities and equity

    1,247,826     1,247,826  

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  Year Ended December 31,   Three Months Ended March 31,  
 
  2006   2007   2007   2007   2008   2008  
 
   
   
  Pro Forma
(unaudited)

  (unaudited)
  (unaudited)
  Pro Forma
(unaudited)

 
 
  ($ in thousands)
 

Cash Flows

                                     

Provided by (used in) operating activities

  $ (10,139 ) $ (103,484 )       $ 7,080   $ 10,364        

Used in investing activities

    (513,664 )   (266,300 )         (91,396 )   (5,474 )      

Provided by (used in) financing activities

    530,311     379,364           88,038     (13,815 )      

Other Information

                                     

FFO

  $ 6,184   $ 43,098   $ 84,700   $ 6,513   $ 16,849   $ 23,484  

FAD

    4,886     36,491     77,301     5,682     14,898     21,525  

        Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time as evidenced by the provision for depreciation. However, since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient. In response, the National Association of Real Estate Investment Trusts, or NAREIT, created FFO as a supplemental measure of operating performance for REITs that excludes historical cost depreciation from net income. FFO, as defined by NAREIT, means net income, computed in accordance with GAAP, exclusive of gains (or losses) from sales of real estate, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. FAD represents FFO excluding: (i) net straight-line rental adjustments; (ii) rental income related to above/below market leases; and (iii) amortization of deferred financing costs.

        FFO and FAD as presented herein are not necessarily comparable to FFO and FAD presented by other real estate companies due to the fact that not all real estate companies use the same definition. FFO and FAD should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of our financial performance or as an alternative to cash flow provided by operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is FFO or FAD necessarily indicative of sufficient cash flow to fund all of our needs, including dividends. FFO and FAD are not financial measures recognized under GAAP and are unaudited for all periods presented. We believe that in order to facilitate a clear understanding of our combined historical operating results, FFO and FAD should be examined in conjunction with net income as presented in the combined financial statements and data included elsewhere in this prospectus.

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        The following table is a reconciliation of our net income (loss) to FFO and FAD:

 
  Year Ended December 31,   Three Months Ended March 31,  
 
  2006   2007   2007   2007   2008   2008  
 
   
   
  Pro Forma
(unaudited)

  (unaudited)
  (unaudited)
  Pro Forma
(unaudited)

 
 
  ($ in thousands)
 

Net income (loss)

  $ (5,280 ) $ 11,299   $ 48,644   $ (236 ) $ 7,880   $ 14,490  

Adjustments:

                                     

Depreciation on real estate assets

    11,464     31,955     36,212     6,749     8,969     8,994  

Gain on sale of real estate

        (156 )   (156 )            
                           

FFO

  $ 6,184   $ 43,098   $ 84,700   $ 6,513   $ 16,849   $ 23,484  

Adjustments:

                                     

Straight-lining of rent

    (4,012 )   (7,668 )   (8,460 )   (1,637 )   (2,107 )   (2,115 )

Loss on extinguishment of debt

    2,497                      

Amortization related to above (below) market leases

    185     472     472     691     (156 )   (156 )

Amortization of deferred financing fees

    32     589     589     115     312     312  
                           

FAD

  $ 4,886   $ 36,491   $ 77,301   $ 5,682   $ 14,898   $ 21,525  
                           

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RISK FACTORS

        An investment in our common shares involves significant risk. You should carefully consider the material risks described below before making an investment decision. These risks are not the only ones that we may face. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us. If any of the following risks occurs, our business, financial condition or results of operations could be materially and adversely affected. If this were to happen, the price of our common shares could decline significantly and you could lose all or part of your investment.

RISKS RELATED TO CONFLICTS OF INTEREST AND OUR RELATIONSHIP WITH CAPITALSOURCE

We are highly dependent upon CapitalSource in the performance of its obligations under our management agreement, and we may not find a suitable replacement or be able to operate successfully as a stand-alone entity if CapitalSource is unable to perform or if our management agreement expires without being renewed or is terminated.

        We do not, and do not expect to, have any employees. Our officers and all of the professionals at CapitalSource that are dedicated to the healthcare industry are employees of CapitalSource. We do not have any separate facilities and rely completely on CapitalSource, which has significant discretion in implementing our operating policies and strategies. We depend on CapitalSource's diligence, skill and network of business contacts. CapitalSource will source, evaluate, negotiate, structure, close, service and monitor our investments. CapitalSource is currently, and from time to time may be, subject to various risks which could negatively impact or impair its business, operations or financial condition, including, without limitation, risks resulting from CapitalSource's recent formation and organization and future integration and operation of CapitalSource Bank, a wholly owned subsidiary of CapitalSource that is subject to regulation by the California Department of Financial Institutions and the Federal Deposit Insurance Corporation. Events or factors having a negative impact on CapitalSource's business or financial condition, or the industries in which it operates, may negatively impact CapitalSource's ability to provide us with essential services, which could harm our operations and performance.

        We are also subject to the risk that our manager will not renew the management agreement and that no suitable replacement will be found. After 2011, the expiration of the initial three-year term of the management agreement, or upon the expiration of any automatic one-year renewal term, CapitalSource may elect not to renew the management agreement without cause and without penalty, on 180 days' prior written notice to us. We can offer no assurance that CapitalSource Finance LLC will remain our manager, that we will be able to find an adequate replacement for it should our manager elect not to renew the management agreement, or that we will continue to have access to CapitalSource's principals and professionals and their information or deal flow. We are highly dependent upon CapitalSource for our success, and we may not be able to operate successfully as a stand-alone entity.

Termination of our management agreement would be difficult and costly, which could adversely affect our business and results of operations.

        We may not terminate the management agreement without cause during the initial three-year term or any renewal term. If we elect to not renew the agreement upon expiration of the initial three-year term or any renewal term, we will be required to pay a termination fee, within 90 days of termination, equal to the average annual management fee earned during the two years immediately prior to termination, multiplied by two. The termination fee will be calculated as of the end of the most recently completed fiscal quarter prior to the date of termination. In addition, following any termination of the management agreement, we must pay our manager all compensation accruing to the date of the termination. These provisions increase the cost of terminating the management agreement

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and may limit our ability to terminate the management agreement even if we believe CapitalSource's performance is not satisfactory.

We do not have the ability to choose the personnel performing the obligations of our manager and the management agreement does not limit the additional business activities in which CapitalSource, its affiliates or its personnel may engage, which could reduce the amount of time they dedicate to us.

        The management agreement does not require CapitalSource to dedicate specific personnel to fulfilling its obligations to us or require personnel to dedicate a specific amount of time to our affairs. CapitalSource is free, at any time and without consulting us, to change the composition, responsibilities and tenure of its personnel, including those persons who are designated as our officers. We can offer no assurance that CapitalSource will not remove or significantly change the responsibilities of key members of its personnel at any time or, if it does so, that CapitalSource will appoint or provide a suitable replacement. If CapitalSource elects to change the composition of the key personnel providing services under the management agreement (or such persons are no longer available or employed by CapitalSource), we are not entitled to terminate the management agreement, and any such change may have a material and adverse effect on our performance. In addition, the departure of a significant number of CapitalSource's professionals would have a material adverse effect on our performance. The ability of CapitalSource and its affiliates and employees to engage in other business activities could reduce the time and effort spent on the management of us.

        Additionally, the management agreement contains non-solicitation provisions that prohibit us from hiring employees of CapitalSource, except under very limited circumstances. Furthermore, Messrs. Delaney and Pieczynski are restricted by their respective employment agreements with CapitalSource and/or its affiliates from joining any entity that competes with CapitalSource, including us. These restrictions significantly reduce the number of qualified executive candidates that may comprise our management team if we were to elect to internalize our management functions.

The management agreement does not require CapitalSource to utilize any particular resources available to it and any failure by CapitalSource to utilize its resources for our benefit could have a negative impact on our performance.

        CapitalSource has proprietary information systems and access to the skills of professionals with experience and expertise that it intends to apply in its approach to real estate origination and the underwriting approval process. See "Business—Origination, Underwriting and Servicing." We can provide no assurance, however, that our Manager will use these or any other particular resources available to it in its management of us, and the management agreement does not require that our Manager utilize any of these resources in fulfilling its obligations to us. Furthermore, the failure of our Manger to use any particular resources does not give us the right to terminate the management agreement. Any failure by our Manager to utilize these resources could have a negative impact on our performance.

Conflicts of interest may arise by virtue of some of our officers and trustees holding key positions with CapitalSource and advising CapitalSource and its affiliates on their own investment opportunities, while at the same time providing essential services to us.

        All of our officers, as well as Mr. Delaney, our non-executive chairman, hold, and likely will continue to hold, key positions with CapitalSource and its affiliates and have responsibilities to advise CapitalSource and its affiliates in connection with their investment opportunities. In addition, these persons are, and likely will continue to be, the beneficiaries of separate compensation and incentive plans from CapitalSource and/or its affiliates in addition to any compensation or incentives received from us, which may incentivize them to devote more of their time and efforts to CapitalSource and its business. The stock holdings of Mr. Delaney and our officers, which represented approximately 4% of CapitalSource's outstanding shares of common stock as of March 10, 2008, provide further incentives to

18



them to focus their attention on CapitalSource and its business. Furthermore, the mortgage financing provided by our Manager and its affiliates is a competitive product to the long-term, triple-net leases that we structure with our operators. As a result, some of these people may have duties or otherwise have incentives to perform services for CapitalSource and/or its affiliates that are not in our best interest, thereby presenting conflicts of interest.

CapitalSource is a lender to some of our operators and may service these loans in a manner that favors their interests as a lender as opposed to our interests as a landlord.

        Through its healthcare and specialty finance segment, CapitalSource regularly makes secured loans to operators of healthcare facilities, including certain operators of our facilities, who often turn to CapitalSource for revolving loans collateralized by their Medicare and Medicaid receivables and other assets. As of March 31, 2008, CapitalSource had outstanding 25 revolving lines of credit to 18 of our operators, which loans had an aggregate principal balance of $422.8 million, bore interest at a weighted average rate of 6.9% per year and had a weighted average time to maturity of 1.3 years. In servicing each of these loans, CapitalSource frequently must assess the ability of our operators to repay principal and interest when due. Situations may arise where, in the course of its servicing activities, CapitalSource must decide whether to extend further credit to an operator, grant the operator a waiver from the terms of its loan documents or exercise remedies available to them. CapitalSource's interest as lender to some of our operators may result in its interests not being aligned to ours, as landlord to those operators. As a result, the decisions CapitalSource makes in this regard could have adverse consequences on our operators' ability to pay rent and otherwise comply with the terms of their leases with us. CapitalSource may act in its own interests, as opposed to ours, in these situations.

The management agreement and the agreement by which we will acquire our initial assets was not negotiated on an arm's-length basis. As a result, the terms may not be as favorable to us as if it was negotiated with an unaffiliated third party.

        The management agreement and the agreement by which we will acquire our initial assets was negotiated between related parties. As a result, we did not have the benefit of arm's-length negotiations of the type normally conducted with an unaffiliated third party and the terms may not be as favorable to us as if we did engage in negotiations with an unaffiliated third party, including the terms of the contribution and the consideration paid in exchange for the initial assets under the agreement by which we will acquire our initial assets. We have not obtained any independent third-party appraisals of the initial assets to be contributed to us, and our manager will determine the fair market value of the initial assets upon the closing of this offering. CapitalSource will contribute our initial assets to us immediately prior to the completion of this offering and, in exchange, we will issue to CapitalSource             common shares. As a result, the consideration that we will pay in exchange for the contribution of the assets upon the completion of this offering may exceed the fair market value of these assets.

        In addition, we may choose not to enforce, or to enforce less vigorously, our rights under the management agreement or the agreement by which we will acquire our initial assets because of our desire to maintain our ongoing relationship with our manager and CapitalSource. In addition, under the agreement by which we will acquire our initial assets, we will release and discharge CapitalSource from all liabilities (except certain income tax liabilities for tax periods (or portions of tax periods) ending on or before the closing of this offering) existing or arising on or before the contribution, including in connection with the contribution and this offering.

CapitalSource will source most of our investments, and we may also participate in investments in which CapitalSource is also participating, which could result in conflicts of interest.

        CapitalSource will source most of our investments, and we may participate in real estate loan transactions in which CapitalSource is also participating. Our participation in transactions originated by, or in which we co-invest or participate with, CapitalSource will not be the result of arm's-length

19



negotiations and may involve conflicts between our interests and the interests of CapitalSource in obtaining favorable terms and conditions. There is no assurance that our conflicts of interest policy that addresses some of the conflicts relating to our investments, which is described under "Conflicts of Interest In Our Relationship with CapitalSource," will be adequate to address all of the conflicts that may arise. In each case, some of the same officers will be determining the price and terms for the investments for both us and CapitalSource, and there can be no assurance that the procedural protections, such as obtaining market prices or other reliable indicators of fair market value, will be sufficient to ensure that the consideration we pay for these investments will not exceed the fair market value and that we would not have received more advantageous terms for an investment had we negotiated the purchase with an independent third-party. Additionally, CapitalSource may have administrative or management authority over such investments; for example, an affiliate of CapitalSource serves as the administrative agent for the Genesis mezzanine loan in which we hold a $150 million participation and an affiliate of CapitalSource holds a $175 million participation. We cannot provide any assurance that such investments will not be serviced in a manner that favors CapitalSource as opposed to us.

        Further, CapitalSource will continue to offer mortgage financing to owners of SNFs and other healthcare facilities, and this mortgage financing might be viewed as a competitive product to the long-term, triple-net leases we structure with operators. Our conflicts of interest policy relating to these origination activities may not be adequate to address the conflicts that may arise.

Our manager will have broad discretion to invest our funds and may make investments that ultimately produce investment returns that are substantially below expectations or that result in losses.

        Our manager is authorized to follow broad investment guidelines and has great latitude within those guidelines in determining the types of assets it may decide are proper investments for us. Our board of trustees will periodically review our investment guidelines and our investment portfolio, but will not review or approve each proposed investment that does not involve a potential conflict with CapitalSource. In addition, our board of trustees will rely primarily on information provided to them by our manager in reviewing our investments and our assets. Furthermore, transactions entered into by our manager on our behalf may be costly, difficult or impossible to unwind by the time they are reviewed by our board of trustees. Our manager's investment discretion could result in investment returns that are substantially below expectations or that result in losses, which would materially and adversely affect our business and results of operations.

The management fee is payable regardless of our performance, which might reduce its incentive to devote time and effort to us, which in turn could harm our business and results of operations.

        Our manager is entitled to receive from us an annual management fee, paid monthly, that is based on 0.50% of the value of our average gross invested assets, which constitutes the sum of our net real estate investments plus accumulated depreciation plus loan receivable of $150 million, regardless of the performance of our portfolio. For example, we would pay our manager a management fee for a specific period even if we experienced a net loss during the same period. Our manager's entitlement to non-performance-based compensation might reduce its incentive to devote time and effort to managing our business and seeking investments that provide attractive risk-adjusted returns for our portfolio. This in turn could hurt our business and results of operations. Furthermore, the obligation to pay a fixed monthly fee regardless of performance could reduce the amount of cash we have available for distributions to our shareholders, thereby decreasing the market price of our common shares.

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Our business plan relies on the use of the CapitalSource trademark and other intellectual property as well as information and communications systems belonging to CapitalSource and its affiliates, the loss of which could limit our ability to market, operate and expand our business.

        Our business plan relies on the use of the CapitalSource trademark and other intellectual property belonging to CapitalSource and its affiliates. We also will rely on CapitalSource to provide us with information and communications systems. Under an intellectual property agreement we will enter into with CapitalSource in connection with this offering, CapitalSource will license these intellectual property rights to us on a non-exclusive basis, for no consideration beyond the management fee payable under the management agreement. Upon termination of the management agreement, we will lose rights to use this trademark and intellectual property and access to the information and communications systems. Because we believe that our affiliation with CapitalSource and the ability to use its proprietary intellectual property afford us a competitive advantage, losing such rights and use of the information and communications systems could limit our ability to originate new investments and manage our existing properties and therefore have a material adverse effect on our business, financial condition and results of operations.

RISKS RELATED TO OUR BUSINESS AND OPERATIONS

We have no operating history. Our historical financial information may not be representative of the results we would have achieved as a separate stand-alone company and may not be a reliable indicator of our future performance or results.

        We were organized in May 2008 and have no operating history, and CapitalSource acquired its first healthcare net lease assets in January 2006. As a result, CapitalSource has held our initial assets for a limited time, which may not be a sufficient period to allow investors to evaluate the quality and performance of these assets and the viability of our business and investment strategy. Moreover, the historical financial information included in this prospectus has been derived from CapitalSource's accounting records and is limited to only two years of audited financial statements. CapitalSource did not separately account for our business, and we did not operate as a separate, stand-alone company for any of the historical periods presented. Therefore, our historical financial information may not reflect what our financial condition, results of operations or cash flows would have been had we been a separate, stand-alone company prior to March 31, 2008 or what our results will be in the future. This is primarily a result of the following factors:

21


Our portfolio currently consists predominantly of SNFs; any significant cost increases, reductions in reimbursement rates or other regulatory changes could negatively affect our operators' businesses and their ability to meet their obligations to us.

        Our initial assets are, and we expect a substantial majority of our future acquisitions to be, predominately comprised of SNFs. As a result of our focus on SNFs, any changes in governmental rules and regulations, particularly with respect to Medicare and Medicaid reimbursement, or any other changes negatively affecting SNFs, could have an adverse impact on our operators' revenues, costs and results of operations, which may affect their ability to meet their obligations to us.

Our failure to achieve our investment objectives and to manage future growth in an effective and efficient manner may have a negative impact on our business, financial condition and results of operations.

        Our ability to achieve our investment objectives depends on our ability to grow, which depends, in turn, on our manager and its ability to identify and invest in assets that meet our investment criteria. Accomplishing this result on a cost-effective basis is largely a function of CapitalSource's investment process, its ability to provide competent, attentive and efficient services to us and our access to financing on acceptable terms. Our ability to grow is also dependent upon CapitalSource's ability to successfully hire, train, supervise, manage and retain its employees. Additionally, our ability to invest in assets that meet our investment criteria on favorable terms and successfully integrate and operate them may be constrained by the following factors:

        Any failure to achieve our investment objectives or to manage our growth effectively could have a material negative impact on our business, financial condition and results of operations.

22


We are subject to risks associated with debt financing, which could impair our results of operations and limit our ability to make distributions to our shareholders and prevent us from making new acquisitions.

        On a pro forma basis, as of March 31, 2008, our initial assets were subject to approximately $339.8 million of outstanding mortgage indebtedness and approximately $20.0 million of non-recourse junior subordinated debt. Financing for future investments and our maturing commitments may be provided by borrowings under our proposed credit facility led by affiliates of the underwriters of this offering, private or public offerings of debt, the assumption of secured indebtedness, mortgage financings on a portion of our owned portfolio or through joint ventures. Our level of indebtedness could have important consequences to us and our shareholders. For example, it could:

        Our ability to make payments of principal and interest on our indebtedness depends on our future performance, which will be subject to general economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are beyond our control. If we are unable to generate sufficient cash flows from operations to service our debt, we may be required, among other things, to seek additional financing in the debt or equity markets, refinance or restructure all or a portion of our indebtedness, sell selected assets, reduce or delay planned capital expenditure or delay or abandon desirable acquisitions. Such measures might not enable us to service our debt and any failure to make required payments on our debt or abandonment of our planned growth strategy would result in an adverse effect on our liquidity, future ability to generate revenue and sustain profitability. In addition, any such financing, refinancing or sale of assets might not be available on economically favorable terms to us.

        Further, our outstanding indebtedness contains restrictions and covenants that require us and, in one instance, CapitalSource, to maintain or satisfy specified net worth, financial ratios and coverage tests. With respect to approximately $284.4 million of our mortgage indebtedness, we are subject to financial covenants requiring that the rents and net cash flow received from, or produced by, the encumbered properties exceed the debt service required on that debt by specified amounts over trailing 12-month periods. In addition, we have agreed in this same mortgage financing that we will, and we will act to ensure that our operators also will, conduct their businesses in material compliance with all applicable legal requirements, including applicable healthcare laws and regulations. Also in this

23


financing, CapitalSource is the guarantor of our obligations and is required to maintain a net worth of at least $500 million.

        In addition, we expect that the terms of our proposed credit facility will require us to comply with additional financial and other covenants, including covenants that:

        These restrictions may interfere with our ability to obtain financing or to engage in other business activities, which may inhibit our ability to grow our business and increase revenues. If we or CapitalSource fail to comply with any of these requirements, then the related indebtedness, and any other debt containing cross-default or cross-acceleration rights for our lenders, could become immediately due and payable. We cannot assure you that we could pay all of our debt if it became due, or that we could continue in that instance to make distributions to our shareholders and maintain our REIT qualification.

Mortgage debt obligations expose us to increased risk of loss of property, which could harm our ability to generate future revenues and could have an adverse tax effect.

        Our approximately $339.8 million of mortgage debt as of March 31, 2008 increases our risk of loss because defaults on indebtedness secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property securing any loans for which we are in default. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds, which could negatively impact our earnings. Further, our mortgage debt generally contains cross-default and cross-collateralization provisions and a default on one facility could affect our other facilities and financing arrangements.

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Failure to hedge effectively against interest rate changes may adversely affect our results of operations and our ability to make distributions to our shareholders.

        Upon consummation of this offering, we expect to have approximately $283.3 million in variable interest rate mortgage debt outstanding. We have purchased an interest rate cap in respect of this variable rate debt for the benefit of our lenders. These and other interest rate swap arrangements we may enter into in the future involve risk, including the risk that counterparties may fail to honor their obligations under these arrangements, that these arrangements may not be effective in reducing our exposure to interest rate changes and that these arrangements may result in higher interest rates than we would otherwise have. Moreover, no hedging activity can completely insulate us from the risks associated with changes in interest rates. Failure to hedge effectively against interest rate changes may materially adversely affect results of operations and our ability to pay dividends to our shareholders.

We may be limited in pursuing certain of our rights and remedies under our $150 million participation in the Genesis mezzanine loan and similar mezzanine loans that we may make in the future, which could increase our risk of loss on these loans.

        Upon consummation of this offering, we expect to acquire and hold as one of our initial assets a $150 million participation in the Genesis mezzanine loan. Our participation in this loan comprised 12% of our total assets as of March 31, 2008. We may make, originate or participate in similar mezzanine loans in the future. Mezzanine loans often do not have the benefit of a lien against a borrower's collateral and are junior to any lien holder both as to collateral and payment. As a result of the subordinate nature of these types of loans, we may be limited in our ability to enforce our rights to collect principal and interest or to recover any of the loan balance through our right to foreclose on the collateral. For example, we typically would not be contractually entitled to receive payments of principal on a subordinated loan until the senior loan is paid in full, and may only receive interest payments if the borrower is not in default under its senior loan. In many instances, we may also be prohibited from foreclosing on a mezzanine loan until the senior loan is paid in full. Moreover, any amounts that we might realize as a result of our collection efforts or in connection with a bankruptcy or insolvency proceeding under a mezzanine loan generally must be turned over to the senior lender until the senior lender has realized the full value of its own claims. In addition, if we acquire a direct or indirect ownership interest in the Genesis properties as a result of a foreclosure, we generally will have to engage an operator that qualifies as an independent contractor within the meaning of the REIT rules to operate those properties in order to maintain compliance with the REIT rules. These restrictions may materially and adversely affect our ability to recover any or all of the principal and the interest of any non-performing mezzanine loans that we hold.

Our ability to raise capital through sales of equity is dependent, in part, on the market price of our common shares and the failure to meet market expectations with respect to our business could depress the market price of our common shares and limit our ability to sell equity.

        As with other publicly traded companies, the availability of equity capital to us will depend, in part, on the market price of our common shares which, in turn, will depend upon various market conditions and other factors that may change from time to time including:

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        The market value of the equity securities of a REIT is generally based upon the market's perception of the REIT's growth potential and its current and potential future earnings and cash distributions. Our failure to meet the market's expectation with regard to future earnings and cash distributions would likely depress the market price of our common shares.

The average age of our facilities is 34 years and in certain circumstances, we may become responsible for capital improvements. To the extent such capital improvements are not undertaken, our ability to lease these facilities on favorable terms may be affected, which in turn could affect our business and financial conditions.

        The average age of our facilities is 34 years. Although under the triple-net lease structure our operators generally are responsible for capital improvement expenditures, it is possible that an operator may not be able to fulfill its obligations to keep its facility in good operating condition. Further, we may be responsible for capital improvement expenditure on such facilities after the terms of the triple-net leases expire. To the extent capital improvements are not undertaken or deferred, the value of a property may decline, we may not be able to attract or retain our operators or the rent we charge for these properties may decline.

Our assets may be subject to impairment charges that could be significant.

        We periodically evaluate our real estate investments and other related assets for impairment indicators. The judgment regarding the existence of impairment indicators is based on factors such as market conditions, operator performance and legal structure. If we determine that a significant impairment has occurred, we would be required to make an adjustment to the net carrying value of the asset, which could have a material adverse affect on our results of operations and FFO in the period in which the write-off occurs. As part of our impairment evaluation, on December 31, 2007, we recorded a charge of approximately $1.2 million.

Since real estate investments are illiquid, we may not be able to sell our properties, all of which are subject to various restrictions, when we desire which could adversely affect our liquidity and results of operations as well as our ability to service our debt.

        Real estate investments generally cannot be sold quickly. We may not be able to alter the composition of our portfolio promptly in response to changes in the real estate market. This inability to respond to changes in the performance of our investments could adversely affect our ability to service our debt, our liquidity and results of operations. The real estate market is affected by many factors that are beyond our control, including:

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        In addition, all of our properties are considered "special purpose" properties that cannot be readily converted to general residential, retail or office use. Healthcare facilities that participate in Medicare or Medicaid must meet extensive program requirements, including physical plant and operational requirements, which are revised from time to time. Such requirements may include a duty to admit Medicare and Medicaid patients, limiting the ability of the facility to increase its private pay census beyond certain limits. Medicare and Medicaid facilities are regularly inspected to determine compliance and may be excluded from the programs, in some cases without a prior hearing, for failure to meet program requirements. Transfers of operations of SNFs and other healthcare-related facilities are subject to regulatory approvals not required for transfers of other types of commercial operations and other types of real estate. Thus, if the operation of any of our properties becomes unprofitable due to competition, age of improvements or other factors such that our operator becomes unable to meet its obligations on the lease, the liquidation value of the property may be substantially less than would be the case if the property were readily adaptable to other uses. The receipt of liquidation proceeds or the replacement of an operator that has defaulted on its lease could be delayed by the approval process of any federal, state or local agency necessary for the transfer of the property or the replacement of the operator with a new operator licensed to manage the facility. In addition, certain significant expenditures associated with real estate investment, such as real estate taxes and maintenance costs, are generally not reduced when circumstances cause a reduction in income from the investment. Should such events occur, our income and cash flows from operations would be harmed.

        Moreover, we cannot predict how long it may take us to find a willing and suitable purchaser for any property and to close the sale of such property. We also cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. In addition, REIT tax rules intended to prevent us from holding property primarily for sale in the ordinary course of our business (rather than for investment) may cause us to forego or defer sales of assets that otherwise would be in our best interest. State laws mandate certain procedures for lease terminations, and in certain states, we would face a time consuming lease termination process, during which time the property could be subject to waste. These factors and any others that would impede our ability to respond to adverse changes in the performance of our properties could have a material adverse effect on our operating results and financial condition.

As an owner of real property, we may be exposed to environmental liabilities and to the extent any such liabilities are not adequately covered by insurance, our business, financial condition, liquidity and results of operations would suffer.

        Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner of real property may be liable in certain circumstances for the costs of investigation, removal or remediation of, or related releases of, certain hazardous or toxic substances, such as asbestos, at, under or disposed of, in connection with such property, as well as certain other potential costs relating to hazardous or toxic substances, including government fines and damages for injuries to persons and adjacent property. Such laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence or disposal of such substances and liability may be imposed on the owner in connection with the activities of an operator of the property. The cost of any required investigation, remediation, removal, fines or personal or property damages and the owner's liability therefore could exceed the value of the property and/or the assets of the owner and therefore be substantial. Although most of our leases require our operators to indemnify us for certain environmental liabilities, the scope of such obligations may be limited. For instance, most of our leases do not require an operator to indemnify us for environmental liabilities arising before the operator took possession of the premises. Further, we cannot assure you that any such operator would be able to

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fulfill its indemnification obligations to us. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.

Uninsured losses or losses in excess of our operators' insurance coverage could adversely affect our financial position and our cash flow.

        Under the terms of our leases, our operators generally are required to maintain comprehensive general liability, fire, flood, earthquake, boiler and machinery, nursing home or long-term care professional liability and extended coverage insurance with respect to our properties with policy specifications, limits and deductibles set forth in the leases or other written agreements between us and the operator. However, our properties may be adversely affected by casualty losses which exceed insurance coverages and reserves. Should an uninsured loss occur, we could lose both our investment in, and anticipated profits and cash flows from, the property. Even if it were practicable to restore the damage caused by a major casualty, the operations of the affected property would likely be suspended for a considerable period of time. In the event of any substantial loss affecting a property, disputes over insurance claims could arise.

RISKS RELATED TO THE OPERATORS OF OUR FACILITIES

        Our revenue and financial position could be weakened and our ability to fulfill our obligations under our indebtedness could be limited if any of our operators were unable to meet their obligations to us or failed to renew or extend their relationship with us as their lease terms expire, or if we were unable to lease or re-lease our facilities. These adverse developments could arise due to a number of factors, including those listed below.

The value of our facilities depends in large part on the success of our operators in running their businesses and their failure to do so could have a material adverse effect on our ability to successfully and profitably operate our business.

        The value of our facilities is tied to a large extent to the skills of the operators who operate them. We depend on our operators to operate the properties we own in a manner which generates revenues sufficient to allow them to meet their obligations to us, including their obligations to pay rent, maintain certain insurance coverage, pay real estate taxes and maintain the properties in a manner so as not to jeopardize their operating licenses or regulatory status. The ability of our operators to fulfill their obligations under our leases may depend, in part, upon the overall profitability of their operations, including any other SNFs or other properties or businesses they may acquire or operate. Cash flow generated by certain properties may not be sufficient for a operator to meet its obligations to us. Our financial position could be weakened and our ability to fulfill our obligations under our indebtedness could be limited if any of our major operators were unable to meet their obligations to us or failed to renew or extend their relationship with us as their lease terms expire, or if we were unable to lease or re-lease our properties on economically favorable terms.

Some of our current operators have, and prospective operators may have, an option to purchase the facilities we lease to them, which could disrupt our operations.

        Some of our current operators have, and some prospective operators will have, the option to purchase, or rights of first offer or first refusal for, the facilities we lease to them. We cannot assure you that the formulas we have developed for setting the purchase price of these facilities will yield a fair market value purchase price. Any purchase not at fair market value could be challenged by healthcare regulatory authorities and, if at less than full value, may prevent us from realizing full value on the sale.

        If our operators and prospective operators determine to purchase the facilities they lease either during the lease term or after their expiration, the timing of those purchases will be outside of our

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control and we may not be able to re-invest the capital on as favorable terms, or at all. Our inability to effectively manage the turn-over of our facilities could materially adversely affect our ability to execute our business plan and our results of operations.

Some of our operators account for a significant percentage of our contractual rental income.

        For the quarter ended March 31, 2008, our contractual rental income was $24.7 million, of which approximately $3.3 million (13.3%) was from Delta Health Group, which operates 17 SNFs in Florida and Mississippi, $3.1 million (12.5%) was from Florida Institute of Long Term Care, which operates 17 SNFs and one ALF in Florida, and $2.7 million (10.9%) was from New Bell Facilities Services, L.P., which operates 35 SNFs in Texas and one in Pennsylvania. No other operator generated more than 8% of our contractual rental income for the three months ended March 31, 2008.

        The failure or inability of any of these operators to meet their obligations to us could materially reduce our rental income and net income, which could in turn reduce the amount of dividends we pay and cause our share price to decline.

The geographic concentration of our investments could leave us vulnerable to an economic downturn, regulatory changes or acts of nature in those areas, resulting in a decrease in our revenues or otherwise negatively impacting our results of operations.

        As of March 31, 2008, the states in which we had our highest concentration of investments, as measured by contractual rental income, were Florida (37%) and Texas (16%). As a result, the conditions of those states' economies and real estate markets, changes in governmental laws and regulations, particularly with respect to Medicaid, acts of nature, demographics and other factors that may result in a decrease in demand for long-term care services in these states could have an adverse effect on our operators' revenues, costs and results of operations, which may limit their ability to meet their obligations to us. In addition, since some of these investments are located in Florida and Texas, our operators are particularly susceptible to revenue loss, cost increase or damage caused by hurricanes or other severe weather conditions or natural disasters. Any significant loss due to a natural disaster may not be covered by insurance and may lead to an increase in the cost of insurance and expenses for our operators, or could limit the future availability of such insurance which could limit their ability to satisfy their obligations to us.

The bankruptcy, insolvency or financial deterioration of our operators could delay or prevent our ability to collect unpaid rents or require us to find new operators.

        We receive most of our income as rent payments under leases of our properties. We have no control over the success or failure of our operators' businesses and, at any time, any of our operators may experience a downturn in its business that may weaken its financial condition. As a result, our operators may fail to make rent payments when due or declare bankruptcy. Any failure to make rent payments when due or bankruptcy could result in the termination of an operator's lease and could have a material adverse effect on our business, financial condition and results of operations, our ability to make distributions to our shareholders and the trading price of our common shares.

        If operators are unable to comply with the terms of the leases, we may be forced to modify the leases in ways that are unfavorable to us. Alternatively, the failure of an operator to perform under a lease could require us to declare a default, terminate the lease with respect to such operator and find a suitable replacement operator, or sell the property. There is no assurance that we would be able to lease a property on equal or better terms, if at all, or find another operator, successfully reposition the property for other uses or sell the property on favorable terms.

        If any lease expires or is terminated, we could be responsible for all of the operating expenses for that property until it is re-leased or sold. If we experience a significant number of un-leased properties, our operating expenses could increase significantly. Any significant increase in our operating costs may have a material adverse effect on our business, financial condition and results of operations, our ability to make distributions to our shareholders and the trading price of our common shares.

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        Any bankruptcy filing by or relating to one of our operators could bar all efforts by us to collect pre-bankruptcy debts from that operator or seize its property. An operator bankruptcy could also delay our efforts to collect past due balances under the leases and could ultimately preclude collection of all or a portion of these sums. It is possible that we may recover substantially less than the full value of any unsecured claims we hold, if any, which may have a material adverse effect on our business, financial condition and results of operations, our ability to make distributions to our shareholders and the trading price of our common shares. Furthermore, dealing with an operator's bankruptcy or other default may divert management's attention and cause us to incur substantial legal and other costs.

        If one or more of our operators files for bankruptcy relief, the Bankruptcy Code provides that a debtor has the option to assume or reject the unexpired lease within a certain period of time. However, our leases with operators that lease more than one of our properties are generally made pursuant to a single master lease covering all of that operator's properties leased from us, or are cross-defaulted with other leases, and consequently, it is possible that in bankruptcy the debtor-operator may be required to assume or reject the master lease or cross-defaulted leases as a whole, rather than making the decision on a property-by-property basis, thereby preventing the debtor-operator from assuming the better performing properties and terminating the master lease or cross-defaulted leases with respect to the poorer performing properties. The Bankruptcy Code generally requires that a debtor must assume or reject a contract in its entirety. Thus, a debtor cannot choose to keep the beneficial provisions of a contract while rejecting the burdensome ones; the contract must be assumed or rejected as a whole. However, where under applicable law a contract (even though it is contained in a single document) is determined to be divisible or severable into different agreements, or similarly, where a collection of documents is determined to constitute separate agreements instead of a single, integrated contract, then in those circumstances a debtor/trustee may be allowed to assume some of the divisible or separate agreements while rejecting the others.

Our operators are faced with increased litigation, rising insurance costs and enhanced government scrutiny that may affect their ability to make payments to us.

        As is typical in the healthcare industry, our operators are often subject to claims that their services have resulted in resident injury or other adverse effects. The insurance coverage maintained by our operators may not cover all claims made against them nor continue to be available at a reasonable cost, if at all. In some states, insurance coverage for the risk of punitive damages arising from professional liability and general liability claims and/or litigation may not, in certain cases, be available to operators due to state law prohibitions or limitations on availability. As a result, our operators operating in these states may be liable for damage awards (including punitive damage awards) that are either not covered or are in excess of their insurance policy limits. We also believe that there has been, and will continue to be, an increase in governmental investigations of long-term care providers, particularly in the area of Medicare/Medicaid false reimbursement claims, as well as an increase in enforcement actions resulting from these investigations. Insurance is not available to cover such losses. Any adverse determination in a legal proceeding or governmental investigation, whether currently asserted or arising in the future, could have a material adverse effect on an operator's financial condition.

        Moreover, advocacy groups that monitor the quality of care at healthcare facilities have sued healthcare operators and called upon state and federal legislators to enhance their oversight of trends in healthcare facility ownership and quality of care. Patients have also sued healthcare facility operators and have, in certain cases, succeeded in winning very large damage awards for alleged abuses. This litigation and potential litigation in the future has materially increased the costs incurred by our operators for monitoring and reporting quality of care compliance. In addition, the cost of medical malpractice and liability insurance has increased and may continue to increase so long as the present litigation environment affecting the operations of healthcare facilities continues. Increased costs could limit our operators' ability to make payments to us, potentially decreasing our revenue and increasing

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our collection and litigation costs. To the extent we are required to remove or replace the operators of our healthcare properties, our revenue from those properties could be reduced or eliminated for an extended period of time.

Operators that fail to comply with the requirements of governmental reimbursement programs such as Medicare or Medicaid, licensing and certification requirements, fraud and abuse regulations or new legislative developments may be unable to meet their obligations to us.

        Our operators are subject to numerous federal, state and local laws and regulations that are subject to frequent and substantial changes resulting from legislation, adoption of rules and regulations and administrative and judicial interpretations of existing law. The ultimate timing or effect of these changes cannot be predicted. These changes may have a dramatic effect on our operators' costs of doing business and on the amount of reimbursement by both government and other third-party payors. We have no direct control over our operators' ability to meet the numerous federal, state and local regulatory requirements. The failure of any of our operators to comply with these laws, requirements and regulations could adversely affect their ability to meet their obligations to us. In particular:

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Congressional hearings and investigations of acquisitions of nursing home facilities by private equity firms, along with recent legislation relating to nursing home care and financial transparency, could lead to increased oversight of the healthcare industry and heightened regulatory requirements that may have an adverse effect on our business.

        Over the past year, acquisitions of nursing home facilities by private equity firms have come under increased congressional scrutiny. In October 2007, certain members of the U.S. Senate asked the Government Accountability Office, or GAO, to investigate the effect of private equity ownership on the quality of care provided in nursing homes. In November 2007, the Sub-Committee on Health of the U.S. House of Representatives Committee on Ways and Means heard testimony from researchers, industry representatives and patient advocates regarding trends in nursing home ownership and quality of care. In February 2008, certain members of Congress introduced the Nursing Home Transparency and Improvement Act of 2008. This legislation proposes additional reporting requirements by nursing home staff, heightened penalties for nursing home quality deficiencies and greater transparency by companies, such as us, that own or operate nursing home facilities. The legislation provides for the disclosure of detailed reports relating to nursing home expenditures, civil monetary penalties of up to $100,000 for deficiencies in nursing home care and additional protections for nursing home residents, such as advance notice of the closure of a nursing home facility, mandated relocation of nursing home residents before a facility closes and the development of a standardized resident complaint system. In addition, the legislation contemplates heightened regulation of owners of nursing home facilities by granting authority to the Secretary of the U.S. Department of Health and Human Services to develop a national independent monitor program specific to interstate and large intrastate nursing home chains. The Secretary would be responsible for overseeing the efforts of owners of nursing home facilities, including publicly held companies like us, to comply with federal and state regulations, analyzing the management structure, expenditures and staffing of nursing home facilities, reporting findings and recommendations relating to such analyses and oversight to the federal and state governments and publishing such findings, analyses and recommendations. If enacted, the legislation could lead to substantial increases in the cost of regulatory compliance, and negatively impact the market price of our common shares and materially adversely affect our business and results of operations and the businesses of our operators.

        In addition, there have been published reports indicating that certain members of Congress would like to strengthen regulation of nursing facilities by mandating that there cannot be separation between owners and operators. Any such requirement, absent a corresponding change in the Internal Revenue Code and Treasury regulations affecting REITs, would require us either to sell all of our facilities or to acquire a nursing home operator and cease to qualify as a REIT, either of which would have enormous adverse effects on our business.

Our operators depend on reimbursement from governmental and other third-party payors and reimbursement rates from such payors may be reduced.

        Changes in the reimbursement rate or methods of payment from third-party payors, including the Medicare and Medicaid programs, or the implementation of other measures to reduce reimbursements for services provided by our operators has in the past, and could in the future, result in a substantial reduction in our operators' revenues and operating margins. Additionally, net revenue realizable under third-party payor agreements can change after examination and retroactive adjustment by payors during the claims settlement processes or as a result of post-payment audits. Payors may disallow requests for reimbursement based on determinations that certain costs are not reimbursable or reasonable or because additional documentation is necessary or because certain services were not covered or were not medically necessary. There also continues to be new legislative and regulatory proposals that could impose further limitations on government and private payments to healthcare providers. In some cases, states have enacted or are considering enacting measures designed to reduce their Medicaid

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expenditures and to make changes to private healthcare insurance. We cannot assure you that adequate reimbursement levels will continue to be available for the services provided by our operators, which are currently being reimbursed by Medicare, Medicaid or private third-party payors. Further limits on the scope of services reimbursed and on reimbursement rates could have a material adverse effect on our operators' liquidity, financial condition and results of operations, which could cause the revenues of our operators to decline and potentially jeopardize their ability to meet their obligations to us.

Increased competition as well as increased operating costs due to competition for qualified employees have resulted in lower revenues for some of our operators and may affect the ability of our operators to meet their payment obligations to us.

        The healthcare industry is highly competitive, and we expect that it will become more competitive in the future. Our operators are competing with numerous other companies providing similar healthcare services or alternatives such as home health agencies, life care at home, community-based service programs, retirement communities and convalescent centers. We cannot be certain the operators of all of our facilities will be able to achieve occupancy and rate levels that will enable them to meet all of their obligations to us. Our operators may encounter increased competition in the future that could limit their ability to attract residents or expand their businesses and therefore affect their ability to pay their lease payments.

        The market for qualified nurses, healthcare professionals and other key personnel is also highly competitive and our operators may experience difficulties in attracting and retaining qualified personnel. Increases in labor costs due to higher wages and greater benefits required to attract and retain qualified healthcare personnel incurred by our operators could affect their ability to pay their lease payments. This situation could be particularly acute in certain states that have enacted legislation establishing minimum staffing requirements.

Possible changes in the acuity profile of our operators' residents as well as payor mix and payment methodologies may significantly affect the profitability of our operators.

        The sources and amounts of our operators' revenues are determined by a number of factors, including licensed bed capacity, occupancy, the acuity profile of residents and the rate of reimbursement. Changes in the acuity profile of the residents as well as payor mix among private pay, Medicare and Medicaid may significantly affect our operators' profitability, which may affect their ability to meet their obligations to us.

Delays in our operators' collection of their accounts receivable could adversely affect their cash flows and financial condition and their ability to meet their obligations to us.

        Prompt billing and collection are important factors in the liquidity of our operators. Billing and collection of accounts receivable are subject to the complex regulations that govern Medicare and Medicaid reimbursement and rules imposed by non-government payors. The inability of our operators to bill and collect on a timely basis pursuant to these regulations and rules could subject them to payment delays that negatively impact their cash flows and ultimately their financial condition and their ability to meet their obligations to us.

We may make errors in evaluating information reported by our operators and, as a result, we may enter into leases that we would not have made if we had properly evaluated the information.

        We enter into leases and assess the creditworthiness of our operators based on detailed financial information and projections provided to us by our operators. Even if our operators provide us full and accurate disclosure of all material information concerning their facilities and operations, we may misinterpret or incorrectly analyze this information. In addition, not all of our operators are required

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under the terms of our leases to provide us with audited financial information. As such, mistakes made by us or mistakes or omissions made by our operators regarding their financial condition could cause us to make faulty leasing or portfolio management decisions, which could result in our inability to collect rents.

RISKS RELATING TO OUR ORGANIZATION AND STRUCTURE

We may assume unknown liabilities in connection with our contribution transactions.

        As part of our contribution transactions, we will receive certain assets or interests in certain assets subject to existing liabilities, some of which may be unknown to us at the time of the contribution. Unknown liabilities might include liabilities for cleanup or remediation of undisclosed environmental conditions, claims of operators, vendors or other persons dealing with the entities prior to the offering (that had not been asserted or threatened prior to the offering), tax liabilities, and accrued but unpaid liabilities incurred in the ordinary course of business. Our recourse with respect to such liabilities may be limited, as we will acquire these assets from CapitalSource on an "as is, where is" basis. Depending on the amount or nature of such liabilities, our business, financial condition and results of operations, our ability to make distributions to our shareholders and the market price of our shares may be materially and adversely affected.

Upon completion of this offering, CapitalSource will own            % of our outstanding common shares and will have the ability to control us and any matters presented to our shareholders.

        Upon completion of this offering, CapitalSource will own            % of our outstanding common shares, two CapitalSource employees will serve on our board of trustees, and CapitalSource will have the right to designate a third person to serve as a trustee on our board. Consequently, CapitalSource will be able to influence significantly our board of trustees and control the outcome of matters submitted for shareholder action, including the election of our board of trustees and approval of significant corporate transactions, such as business combinations, consolidations and mergers. In addition, under the agreement by which we will acquire our initial assets, CapitalSource will have approval rights that will require us to obtain CapitalSource's consent before taking certain corporate actions. See "Other Arrangements between CapitalSource and Us." The interests of CapitalSource may conflict with that of our other shareholders. CapitalSource could exercise its influence in a manner that is not in the best interests of our other shareholders. This concentration of ownership might also have the effect of delaying or preventing a change of control that our other shareholders may view as beneficial. As a result of such actions, the market price of our common shares could decline or shareholders might not receive a premium for their shares in connection with a change in control.

Our declaration of trust does not permit ownership in excess of 7.9% or 9.9% in value or in number of shares, whichever is more restrictive, of our common shares or preferred shares, and imposes certain other limits on the ownership of our shares. Attempts to acquire our shares in excess of these limits without prior approval from our board of trustees are void.

        In order for us to qualify as a REIT, no more than 50 percent of the value of outstanding shares may be owned, actually or constructively, by five or fewer individuals at any time during the last half of each taxable year. To make sure that we will not fail to qualify as a REIT under this test, subject to some exceptions, our declaration of trust generally prohibits any shareholder from directly or indirectly owning (or being deemed to own by virtue of certain attribution provisions of the Internal Revenue Code) more than 7.9% or 9.9% in value or in number of shares, whichever is more restrictive, of our common shares or preferred shares, respectively. In addition, our declaration of trust generally prohibits direct or indirect ownership (or deemed ownership by virtue of certain attribution provisions of the Internal Revenue Code) of our shares by any person that would cause us to own, actually or constructively (taking into account certain attribution provisions of the Internal Revenue Code), a 10%

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or greater interest in any of our operators. Our declaration of trust's ownership rules are complex and may cause the outstanding shares owned by a group of related individuals or entities to be deemed to be constructively owned by one individual or entity. As a result, for instance, the acquisition of less than 7.9% of the outstanding common shares by an individual or entity could cause that individual or entity to be treated as owning in excess of 7.9% of our outstanding common shares, and cause those excess shares to be subject to those remedies set forth in our declaration of trust in connection with a breach of the ownership limit. Any attempt to own or transfer shares in excess of the ownership limit without the consent of our board of trustees will be void, and could result in the shares being automatically transferred to a charitable trust. We intend to grant CapitalSource (including, for these purposes, its wholly owned subsidiaries) a waiver to own up to            % of our outstanding common shares. Such waiver will be conditioned on certain representations made, and certain covenants agreed to, by CapitalSource, and will be effective immediately upon the completion of this offering. We believe that this waiver will not jeopardize our status as a REIT for federal income tax purposes. See "Description of Shares of Beneficial Interest—Restrictions on Ownership and Transfer."

Transformation into a public company may increase our costs and disrupt the regular operations of our business.

        Although CapitalSource will bear the expenses incurred on our behalf in connection with this offering, we expect to incur significant additional legal, accounting, reporting and other expenses as a result of having publicly traded common shares. These costs will include, but are not limited to, costs and expenses for trustee fees, trustee and officer insurance, investor relations, expenses for compliance with the Sarbanes-Oxley Act of 2002, as amended, and rules implemented by the SEC and NYSE, and various other costs associated with being a public company.

        We also anticipate that we will incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act, as well as rules implemented by the SEC and NYSE. We expect these rules and regulations to increase our legal and financial compliance costs and make some management and corporate governance activities more time-consuming and costly. These rules and regulations may make it more difficult and more expensive for us to obtain trustee and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs, and therefore could have an adverse impact on our ability to recruit and bring on qualified independent trustees. We cannot predict or estimate the amount of additional costs we may incur as a result of these requirements or the timing of such costs.

        We may also be required to expend significant financial and managerial resources in connection with the comprehensive evaluation of our internal controls required to be conducted under Section 404 of the Sarbanes-Oxley Act. If for any period our management is unable to ascertain the effectiveness of our internal controls or if our auditors cannot attest to management's certification, we could be subject to regulatory scrutiny and a loss of public confidence, which could have an adverse effect on the price of our common shares.

        Additional demands associated with being a public company may disrupt regular operations of our business by diverting the attention of some of our senior management team away from revenue producing activities to management and administrative oversight, adversely affecting our ability to attract and complete business opportunities and increasing the difficulty in managing and growing our businesses. Any of these effects could harm our business, financial condition and results of operations.

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RISKS RELATED TO THIS OFFERING

There may not be an active market for our common shares, which may cause our common shares to trade at a discount and make it difficult to sell the common shares you purchase.

        Prior to this offering, there has been no public market for our common shares. The initial public offering price for our common shares will be determined by negotiations between the underwriters and CapitalSource. We cannot assure you that the initial public offering price will correspond to the price at which our common shares will trade in the public market subsequent to this offering or that the price of our shares available in the public market will reflect our actual financial performance.

        We intend to apply to list our common shares on the NYSE under the symbol "CHR." Listing on the NYSE will not ensure that an active market will develop for our common shares. Accordingly, no assurance can be given as to:

The market price and trading volume of our common shares may be volatile following this offering.

        Even if an active trading market develops for our common shares after this offering, the market price of our common shares may be highly volatile and be subject to wide fluctuations. In addition, the trading volume in our common shares may fluctuate and cause significant price variations to occur. If the market price of our common shares declines significantly, you may be unable to resell your shares at or above the initial public offering price. We cannot assure you that the market price of our common shares will not fluctuate or decline significantly in the future. Some of the factors, many of which are beyond our control, that could depress our share price or result in fluctuations in the price or trading volume of our common shares include:

37


We will be a "controlled company" within the meaning of the NYSE rules, and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements that provide protection to shareholders of other companies.

        After the completion of this offering, CapitalSource will own more than 50% of the total voting power of our common shares, and we will be a "controlled company" under the NYSE corporate governance standards. As a controlled company, we intend to utilize exemptions under the NYSE standards that free us from the obligation to comply with certain NYSE corporate governance requirements, including the requirements:


        As a result of our use of the "controlled company" exemption, you will not have the same protections afforded to shareholders of companies that are subject to all of the NYSE corporate governance requirements.

Future sales by us or CapitalSource of our common shares or convertible securities following this offering may reduce the market price for our common shares.

        We may issue additional securities in the future to raise capital. We cannot predict the effect, if any, that future sales by us of our common shares will have on the market price of our common shares. Sales of substantial amounts of our common shares in the public market or the perception that such sales might occur could reduce the market price of our common shares and the terms upon which we may obtain additional equity financing in the future.

        Moreover, as of the closing of this offering, CapitalSource will own            % of our outstanding common shares. In connection with the contribution to us of our initial assets by CapitalSource, we have agreed to register for resale, and upon demand, all of the shares issued to CapitalSource not being registered for sale in this offering. If CapitalSource were to exercise this registration right and demand registration of its remaining common shares, the market price of our common shares could decrease significantly. In addition, all common shares sold in this offering will be freely tradable without restriction (other than any restrictions set forth in our declaration of trust relating to our qualification as a REIT), unless the shares are owned by one of our affiliates. See "Description of Shares of Beneficial Interest—Shares Eligible for Future Sale."

        We, CapitalSource, our manager and each of our officers and trustees have also entered into lock-up agreements pursuant to which we and they agreed, as applicable, not to, without the prior written consent of Banc of America Securities LLC, Citigroup Global Markets Inc. and Credit Suisse Securities (USA) LLC, on behalf of the underwriters, during the period ending 180 days after the effective date of the registration statement of which this prospectus forms a part (subject to extension under certain circumstances), among other things, directly or indirectly, offer, sell, pledge, contract to sell (including any short sale), grant any options to purchase or otherwise dispose of, directly or indirectly, or enter into any transaction that is designed to, or could be expected to, result in the disposition of any of our common shares or other securities convertible into or exchangeable or exercisable for our common shares or derivatives of our common shares or common shares issuable upon exercise of options or warrants, subject to certain limited exceptions. Banc of America

38



Securities LLC, Citigroup Global Markets Inc. and Credit Suisse Securities (USA) LLC may, at any time, release all or a portion of the securities subject to the foregoing lock-up provisions. There are no present agreements between the underwriters and us or any of our executive officers, trustees or shareholders releasing them or us from these lock-up agreements.

Future offerings of debt securities or preferred shares, which may be senior to our common shares for the purposes of dividends and liquidating distributions, may adversely affect the market price of our common shares.

        In the future, we may raise capital through the issuance of debt or preferred equity securities. Upon liquidation, holders of our debt securities and preferred shares, if any, and lenders with respect to other borrowings will be entitled to our available assets prior to the holders of our common shares. Our preferred shares, if issued, could have a preference on liquidating distributions or a preference on dividend payments that could limit our ability to pay dividends or make liquidating distributions to the holders of our common shares. Because our decision to issue debt or preferred equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, holders of our common shares will bear the risk of our future offerings reducing the market price of our common shares and diluting the value of their share holdings in us.

We are subject to significant anti-takeover provisions.

        Our declaration of trust and bylaws provide for, among other things:

        In addition, Maryland law limits business combinations and control share acquisitions unless our board of trustees affirmatively elects not to be covered by the statutory provisions. Although we have opted out of the statutory limitations of both provisions, our board may in the future elect to be covered under the business combination provisions and the control share acquisitions provisions of Maryland law. Furthermore, Maryland law permits our board of trustees, without shareholder approval and regardless of what is provided in our declaration of trust or bylaws, to implement takeover defenses that we may not yet have and to take, or refrain from taking, certain other actions without those decisions being subject to any heightened standard of conduct or standard of review as such decisions may be subject in other jurisdictions. The declaration of trust, bylaws and Maryland law provisions, when taken together with the provisions of our management agreement, could discourage unsolicited acquisition proposals or make it more difficult for a third party to gain control of us, which could adversely affect the market price of our securities.

Our distributions are not guaranteed and may fluctuate and we could reduce or eliminate distributions on our common shares.

        Our board of trustees, in its sole discretion, will determine the amount and frequency of distributions to be made to our shareholders based on consideration of a number of factors, including, but not limited to, our results of operations, cash flow and capital requirements, economic conditions, tax considerations, borrowing capacity and other factors, including debt covenant restrictions that may impose limitations on cash payments. Consequently, our distribution levels may fluctuate, and the level

39



of distributions we make could be less than expected. If we reduce our distributions or elect or are required to retain rather than distribute our income, our share price could be adversely affected.

We may change our investment strategies and policies and capital structure without shareholder approval.

        Our board of trustees, without the approval of our shareholders, may alter our investment strategies and policies if it determines in the future that a change is in our shareholders' best interests. The methods of implementing our investment strategies and policies may vary in the sole discretion of our board as new investments and financing techniques are developed. Shareholders will not be able to influence how or when we develop and implement any changes to our investment strategies or policies.

Our rights and the rights of our shareholders to take action against our trustees are limited, which could limit your recourse in the event of actions deemed not to be in your best interests.

        Our declaration of trust limits the liability of our trustees and officers to us and our shareholders for money damages, except for liability resulting from:

        In addition, our declaration of trust permits us to agree to indemnify our present and former trustees and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law. Our bylaws require us to indemnify each present or former trustee or officer, to the maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us. In addition, we may be obligated to fund the defense costs incurred by our trustees and officers.

Market interest rates may have an effect on the value of our common shares.

        One of the factors that investors may consider in deciding whether to buy or sell our common shares is our distribution rate as a percentage of our share price, relative to market interest rates. If market interest rates increase, prospective investors may desire a higher distribution on our common shares or seek securities paying higher dividends or interest. The market price of our common shares likely will be based primarily on the earnings that we derive from rental income with respect to our facilities and our related distributions to shareholders, and not from the underlying appraised value of the facilities themselves. As a result, interest rate fluctuations and capital market conditions can affect the market value of our common shares. For instance, if interest rates rise, it is likely that the market price of our common shares will decrease, because potential investors may require a higher dividend yield on our common shares as market rates on interest-bearing securities, such as bonds, rise. In addition, rising interest rates would result in increased interest expense on our variable-rate debt, thereby adversely affecting cash flow and our ability to service our indebtedness and make distributions to shareholders.

RISKS RELATED TO OUR OPERATION AS A REIT

If we fail to qualify as a REIT in any given year, we will have reduced funds available for distribution to our shareholders and our income will be subject to taxation at regular corporate rates.

        We intend to elect to be taxed, and to qualify, as a REIT for federal income tax purposes, effective for our taxable year ending December 31, 2008. Given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations and the possibility of future changes in the law or our circumstances, we might not satisfy all requirements applicable to REITs for

40



any particular taxable year. Furthermore, our qualification as a REIT depends on our continuing satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements. Our ability to satisfy the asset tests will depend upon our analysis of the fair market values of our assets, some of which are not susceptible to a precise determination. Our compliance with the REIT annual income and quarterly asset requirements also depends upon our ability to successfully manage the composition of our income and assets on an ongoing basis. With respect to our compliance with the REIT organizational requirements, the IRS could contend that our ownership interests in securities of other issuers would give rise to a violation of one or more of the asset tests applicable to REITs.

        If in any taxable year we fail to qualify as a REIT,

        Any such corporate tax liability could be substantial and would reduce the amount of cash we have available for distribution to our shareholders, which, in turn, could have a material adverse impact on the value of, and trading prices for, our common shares. In addition, we would not be able to re-elect REIT status until the fifth taxable year following the initial year of disqualification unless we were to qualify for relief under applicable Internal Revenue Code provisions. Thus, for example, if the IRS successfully challenges our status as a REIT solely for our taxable year ended December 31, 2008, we would not be able to re-elect REIT status until our taxable year which began January 1, 2013, unless we were to qualify for relief. This treatment would significantly reduce our net earnings and cash flow because of our additional tax liability for the years involved, which could significantly impact our financial condition. In addition, even if we qualify as a REIT, any gain or income recognized by our TRS, to the extent we form one, will be subject to U.S. federal corporate income tax and applicable state and local taxes.

We could lack access to funds to meet our dividend and tax obligations.

        As a REIT, we are required to distribute at least 90% of our REIT taxable income, excluding capital gains, to maintain our REIT qualification, and we need to distribute 100% of our REIT taxable income, including capital gains, to eliminate U.S. federal income tax liability. Moreover, we are subject to a 4% excise tax on the excess of the required distribution over the sum of the amounts actually distributed and amounts retained for which federal income tax was paid, if the amount of dividends which we distribute during a calendar year (plus excess dividends paid in prior years) does not equal at least the sum of 85% of our REIT ordinary income for the year, 95% of our REIT capital gain net income for the year and any undistributed taxable income from prior taxable years. We also could be required to pay additional taxes if we were to fail to qualify as a REIT in any given year. The amount of funds, if any, available to us could be insufficient to meet the distribution requirements and tax obligations. To qualify as a REIT and avoid the payment of income and excise taxes, we may need to borrow funds on a short-term basis, or possibly on a long-term basis, to meet the REIT distribution requirements even if the then prevailing market conditions are not favorable for these borrowings. These borrowing needs could result from, among other things, a difference in timing between the actual receipt of cash and inclusion of income for federal income tax purposes, the effect of non-deductible capital expenditures, the creation of reserves or required debt amortization payments.

Changes in taxation of corporate dividends may adversely affect the value of our shares.

        The maximum marginal rate of tax payable by domestic noncorporate taxpayers on dividends received from a regular "C" corporation under current law generally is 15% through 2010, as opposed

41



to higher ordinary income rates. The reduced tax rate, however, does not apply to ordinary income dividends paid to domestic noncorporate taxpayers by a REIT on its shares, except for certain limited amounts. Although the earnings of a REIT that are distributed to its shareholders generally remain subject to less U.S. federal income taxation than earnings of a non-REIT "C" corporation that are distributed to its shareholders net of corporate-level income tax, legislation that extends the application of the 15% rate to dividends paid after 2010 by "C" corporations could cause domestic noncorporate investors to view the stock of regular "C" corporations as more attractive relative to the shares of a REIT, because the dividends from regular "C" corporations would continue to be taxed at a lower rate while distributions from REITs (other than distributions designated as capital gain dividends) are generally taxed at the same rate as the investor's other ordinary income.

Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.

        Even if we remain qualified for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a lease termination and state or local income, property and transfer taxes. Any of these taxes would decrease cash available for the payment of our debt obligations. In addition, to the extent we derive income through our TRSs, which would be subject to corporate-level income tax at regular rates. We will be subject to a 100% penalty tax on amounts received by us (or on certain expenses deducted by a TRS) if certain arrangements among us, or any TRS that we form, and/or any operators of ours, as further described below, are not comparable to similar arrangements among unrelated parties.

Complying with REIT requirements may affect our profitability and may force us to liquidate or forgo otherwise attractive investments.

        To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the nature and diversification of our assets, the sources of our income and the amounts we distribute to our shareholders. For example, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets, including certain mortgage loans and mortgage backed securities. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of our assets can consist of the securities of one or more of our TRSs. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. Thus, we may be required to liquidate or forgo otherwise attractive investments in order to satisfy the asset and income tests or to qualify under certain statutory relief provisions. We also may be required to make distributions to shareholders at disadvantageous times or when we do not have funds readily available for distribution (e.g., if we have assets which generate mismatches, including timing differences, between taxable income and available cash). Then, having to comply with the distribution requirement could cause us to: (i) sell assets in adverse market conditions; (ii) borrow on unfavorable terms; or (iii) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt. Accordingly, satisfying the REIT requirements could have an adverse effect on our business results and profitability.

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Liquidation of assets may jeopardize our REIT qualification.

        To qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as dealer property or inventory.

Certain terms of our management agreement, which allow our manager to regulate our compliance with the REIT requirements, could restrict our officers and board of trustees from engaging in certain profitable activities and negatively impact our results of operations.

        Under the terms of our management agreement, our manager must not take any action that would adversely affect our qualification as a REIT under the Internal Revenue Code. If our manager is ordered to take any action by our board of trustees, our manager will be entitled to refrain from taking such action and notify us that it is our manager's judgment that such action would adversely affect our REIT status. Thus, in certain circumstances, our manager could restrict us from engaging in certain profitable transactions even if our board of trustees believes that such acquisition or divestiture would not adversely affect our REIT status. In addition, our manager, its directors, officers, stockholders and employees will not be liable to us, our board of trustees or our shareholders for any act or omission by CapitalSource, its directors, officers, stockholders or employees except as provided in the management agreement. Accordingly, certain terms of our management agreement relating to our compliance with the REIT requirements could negatively impact our profitability and results of operations.

REIT distribution requirements could adversely affect our ability to execute our business plan.

        We generally must distribute annually at least 90% of our taxable income, subject to certain adjustments and excluding any net capital gain, in order for federal corporate income tax not to apply to earnings that we distribute. To the extent that we do not distribute all of our net capital gain or do distribute at least 90%, but less than 100% of our "REIT taxable income," as adjusted, we will be subject to tax thereon at regular ordinary and capital gain corporate tax rates. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed taxable income.

        In addition, we may be unable to pursue investments that would be otherwise advantageous to us in order to satisfy the source-of-income, asset diversification, or distribution requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our ability to make certain attractive investments.

        Finally, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our shareholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws. We intend to make distributions to our shareholders to comply with the REIT requirements of the Internal Revenue Code.

Complying with REIT requirements with respect to our TRS limits our flexibility in operating or managing certain properties through our TRS.

        A TRS may not directly or indirectly operate or manage a healthcare facility. For REIT qualification purposes, the definition of a "healthcare facility" means a hospital, nursing facility, assisted living facility, congregate care facility, qualified continuing care facility, or other licensed facility which extends medical or nursing or ancillary services to patients and which, immediately before the termination, expiration, default, or breach of the lease of such facility, was operated by a provider of such services which was eligible for participation in the Medicare program under Title XVIII of the Social Security Act with respect to such facility. Although a TRS may lease or own certain healthcare

43



properties so long as an eligible independent contractor actually operates the qualified health care property, the TRS could be treated as directly or indirectly operating the facility unless a number of requirements are met. If the IRS were to treat a subsidiary corporation of ours as directly or indirectly operating or managing a healthcare facility, such subsidiary would not qualify as a TRS, which could jeopardize our REIT qualification under the REIT gross asset and income tests.

We may not be able to find a suitable operator for our healthcare property, which could reduce our cash flow and impair our ability to qualify as a REIT.

        We may not be able to find another qualified operator for a property if we have to replace an operator. Accordingly, if we are unable to find a qualified operator for one or more of our properties, rental payments could cease which could have a significant impact on our operating results and financial condition, in which case we could be required to sell such properties or terminate our qualification as a REIT. Although the REIT rules regarding foreclosure property allow us to acquire certain qualified healthcare property as the result of the termination or expiration of a lease (other than by reason of default, or the imminence of default, on the lease) of such property and, in connection with such acquisition, to operate a qualified healthcare facility through, and in certain circumstances derive income from, a qualified independent contractor for a period of two years (or up to six years if extensions are granted), once such period ends, the REIT rules prohibit the direct or indirect operation or management of such facility through a TRS of ours. Under other limited circumstances, a TRS of ours may lease or own certain healthcare properties so long as the facility is operated by an eligible independent contractor. If the IRS were to treat a TRS of ours as directly or indirectly operating or managing a qualified healthcare facility, such subsidiary would not qualify as a TRS, which could jeopardize our REIT qualification under the REIT gross asset and income tests.

Legislative or other actions affecting REITs could have a negative effect on us.

        The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the tax laws, with or without retroactive application, could materially adversely affect our investors or us. We cannot predict how changes in the tax laws might affect our investors or us. New legislation, Treasury regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT or the federal income tax consequences of such qualification.

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CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS

        This prospectus contains forward-looking statements. Forward-looking statements provide our current expectations or forecasts of future events. Forward-looking statements include statements about our expectations, beliefs, intentions, plans, objectives, goals, strategies, future events, performance and underlying assumptions and other statements that are not historical facts. You can identify forward-looking statements by their use of forward-looking words, such as "may," "will," "anticipates," "expect," "believe," "intend," "plan," "should," "seek" or comparable terms, or the negative use of those words, but the absence of these words does not necessarily mean that a statement is not forward-looking.

        These forward-looking statements are made based on our expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements.

        Important factors that could cause actual results to differ materially from our expectations are disclosed under "Risk Factors" and elsewhere in this prospectus. These factors include, among others:

        Except as required by law, we do not undertake any responsibility to release publicly any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this prospectus or to update you on the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by the forward-looking statements contained in this prospectus.

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USE OF PROCEEDS

        We will not receive any proceeds from the sale of our common shares by CapitalSource.


DISTRIBUTION POLICY

        We intend to make regular quarterly distributions to holders of our common shares. We intend to pay a pro rata initial distribution with respect to the period commencing on the consummation of this offering and ending                        , based on a distribution of $            per share for a full quarter. On an annualized basis, this would be $            per share, or an annual distribution rate of approximately            % based on an assumed initial public offering price of $            per share, the midpoint of the range indicated on the cover of this prospectus. We estimate that this initial annual distribution rate will represent approximately            % of estimated cash available for distribution for the twelve months ending March 31, 2009. We have estimated our cash available for distribution to our common shareholders for the twelve months ending March 31, 2009 based on adjustments to our pro forma net income available to common shareholders, as described below. This estimate was based upon our historical operating results and does not take into account any additional investments and their associated cash flows, unanticipated expenditures we may have to make or any debt we may incur. In estimating our cash available for distribution to holders of our common shares, we have made certain assumptions as reflected in the table and footnotes below.

        Our estimate of cash available for distribution does not include the effect of any changes in our working capital resulting from changes in our working capital accounts. Our estimate also does not reflect the amount of cash estimated to be used for investing activities, nor does it reflect the amount of cash estimated to be used for financing activities, other than scheduled amortization of our debt upon consummation of this offering. Although we have included all material investing and financing activities that we have commitments to undertake as of March 31, 2008, during the twelve months ending March 31, 2009, we may undertake additional investing and/or financing activities. Any such investing and/or financing activities may have a material effect on our estimate of cash available for distribution. Because we have made the assumptions set forth above in estimating cash available for distribution, we do not intend this estimate to be a projection or forecast of our actual results of operations or our liquidity, and have estimated cash available for distribution for the sole purpose of determining the amount of our initial annual distribution rate. Our estimate of cash available for distribution should not be considered as an alternative to cash flow from operating activities (computed in accordance with GAAP) or as an indicator of our liquidity or our ability to pay dividends or make distributions. In addition, the methodology upon which we made the adjustments described below is not necessarily intended to be a basis for determining future distributions.

        We intend to maintain our initial distribution rate for the twelve-month period following consummation of this offering unless actual results of operations, economic conditions or other factors differ materially from the assumptions used in our estimate. Distributions will be authorized by our board of trustees out of funds legally available therefor and will be dependent upon a number of factors, including restrictions under applicable law.

        Distributions to shareholders will generally be taxable to our shareholders as ordinary income. However, a portion of such distributions may be designated by us as long-term capital gain to the extent that such portion is attributable to our sale of capital assets held for more than one year. If we pay distributions in excess of our current and accumulated earnings and profits, such distributions will be a treated as a tax-free return of capital to the extent of each shareholder's tax basis in our common shares and as capital gain thereafter. We will furnish annually to each of our shareholders a statement setting forth distributions paid during the preceding year and their federal income tax status. For a discussion of the federal income tax treatment of our distributions, see "Material U.S. Federal Income Tax Considerations—Taxation of the Company as a REIT" and "Material U.S. Federal Income Tax Considerations—Taxation of U.S. Shareholders."

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        To the extent that our cash available for distribution is less than the amount required to be distributed under the REIT provisions of the Internal Revenue Code, we may consider various funding sources to cover any such shortfall, including borrowings, selling assets or using a portion of the proceeds we may receive in future offerings. As a REIT, we are required to distribute at least 90% of our REIT taxable income, excluding capital gains, to maintain our REIT qualification. Moreover, we will be subject to income tax at regular corporate rates on our REIT taxable income, including capital gains, that is not distributed and to an excise tax to the extent that certain percentages of our taxable income are not distributed by specified dates. See "Material U.S. Federal Income Tax Considerations—Annual Distribution Requirements."

        We cannot assure you that our estimated distributions will be made or sustained. Any distributions we pay in the future will depend upon our actual results of operations, economic conditions and other factors that could differ materially from our current expectations. Our actual results of operations will be affected by a number of factors, including the revenue we receive from our assets, our operating expenses, interest expense, the ability of our operators to meet their obligations and unanticipated expenditures. For more information regarding risk factors that could materially adversely affect our actual results of operations, see "Risk Factors." If our assets do not generate sufficient cash flow to allow funds to be distributed by us, we may be required to fund distributions from working capital, or borrowings under our credit facilities or reduce such distributions. Our proposed credit facility may contain provisions that restrict its use to fund distributions.

        The following table describes our pro forma net income for the twelve months ended March 31, 2008, and the adjustments we have made in order to estimate our cash available for distribution for the twelve months ending March 31, 2009.

($ in thousands, except per share data)

Pro forma net income for the year ended December 31, 2007

  $    

Less: Pro forma net income for the three months ended March 31, 2007

       

Add: Pro forma net income for the three months ended March 31, 2008

       
       

Pro forma net income for the 12 months ended March 31, 2008

  $    
       

Add: Pro forma real estate depreciation(1)

       

Add: Amortization of deferred financing fees(2)

       

Add: Non-cash compensation expense(3)

       

Add: Net increases in contractual rental income(4)

       

Less: Gain on sale of real estate

       

Less: Net effect of straight-line rents(5)

       

Less: Net effect of above (below) market leases(6)

       

Estimated cash flows from operating activities for the 12 months ending March 31, 2009

  $    
       

Estimated cash flows from investing activities for the 12 months ending March 31, 2009

  $    
       

Estimated cash flows from financing activities for the 12 months ending March 31, 2009(7)

  $    
       

Estimated cash available for distribution for the 12 months ending March 31, 2009

  $    
       

Estimated annual distribution for the 12 months ending March 31, 2009

       

Distribution excess

       

Estimated distribution per share for the 12 months ending March 31, 2009(8)

       

Distribution ratio based on estimated cash available for distribution to our holders of common shares(9)

       

(1)   Pro forma real estate depreciation for the 12 months ended December 31, 2007   $    
    Less: Pro forma real estate depreciation for the three months ended March 31, 2007        
    Add: Pro forma real estate depreciation for the three months ended March 31, 2008        
           
        $    
           

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(2)
Pro forma amortization of financing costs for the 12 months ended March 31, 2008.

(3)
Pro forma compensation expense related to certain equity incentive awards.

(4)
Represents the net increases in contractual rental income from existing leases and from new leases and renewals that were not in effect for the entire 12-month period ended March 31, 2008 or that will take effect during the 12-month period ending March 31, 2009 based upon leases entered into subsequent to March 31, 2008. Annual contractual rents typically increase 2-3% per annum.

(5)
Represents the conversion of estimated rental revenues for the 12 months ending March 31, 2008 from a straight-line accrual basis to a cash basis of recognition.

(6)
Represents the conversion of the amortization of above (below) market leases from an accrual basis to a cash basis.

(7)
Represents scheduled principal amortization of our debt for the 12 months ending March 31, 2009.

(8)
Based on a total of            common shares to be outstanding upon closing of the offering, on a fully diluted basis.

(9)
Calculated as estimated annual distribution per share divided by our cash available for distribution per share for the 12 months ending March 31, 2009.

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CAPITALIZATION

        The following table sets forth the capitalization of the Carve-out Entity on an historical basis and our capitalization, on a pro forma basis, in each case, as of March 31, 2008. This table should be read in conjunction with "Unaudited Pro Forma Combined Financial Statements," "Selected Combined Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our historical combined financial statements and the related notes included elsewhere in this prospectus.

 
  As of March 31, 2008  
 
  Actual   Pro Forma(1)  
 
  (unaudited)
($ in thousands)

 

Debt:

             
 

Mortgage Debt

  $ 339,818   $ 339,818  
 

Related Party Debt

    247,743      
 

Term Debt

    20,000     20,000  
           
   

Total Debt

    607,561     359,818  

Noncontrolling Interests

    43,158     10,178  

Equity:

             
 

Member's Equity

    519,584      
 

Common Shares

           
 

Additional Paid in Capital

           
 

Retained Earnings

           
           
   

Total Equity

    519,584     800,307  
           

Total Capitalization

  $ 1,170,303   $ 1,170,303  
           

(1)
The pro forma adjustments include:
Retirement of related party debt owed to CapitalSource in connection with the contribution of our initial assets in principal amount of approximately $248 million as of March 31, 2008; and

Elimination of certain noncontrolling interests reflecting the redemptions of interests held by minority partners in a portion of our assets.

49



UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

        The unaudited pro forma combined statements of operations for the year ended December 31, 2007 and the three months ended March 31, 2008 and March 31, 2007 have been prepared as though the acquisition of properties acquired by the Carve-out Entity in the year ended December 31, 2007 and the three months ended March 31, 2008, the contribution to us of our initial net assets and the related transactions had occurred as of January 1, 2007. The unaudited pro forma combined balance sheet as of March 31, 2008 has been prepared as though the contribution to us of our initial net assets and the related transactions had occurred on March 31, 2008.

        Further, the historical financial information presented herein has been adjusted to give pro forma effect to events that are directly attributable to the transaction, are factually supportable and are expected to have a continuing impact of our results. These unaudited pro forma combined financial statements should be read in conjunction with the historical combined financial statements and related notes of the Carve-out Entity, included elsewhere in this prospectus. These adjustments are subject to change based on the finalization of the terms of the contribution to us of our initial assets and the related transaction agreements. See "Other Arrangements Between CapitalSource and Us." In addition, such adjustments are estimates and may not prove to be accurate. Information regarding these adjustments constitutes forward-looking information and is subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. See "Risk Factors" and "Cautionary Language Regarding Forward-Looking Statements."

        The unaudited pro forma combined financial statements are for illustrative purposes only and do not reflect what our financial position and results of operations would have been had the acquisition of properties acquired by the Carve-out Entity in the year ended December 31, 2007 and the three months ended March 31, 2008, the contribution to us of our initial assets and the related transactions occurred on the dates indicated and are not necessarily indicative of our future financial position and future results of operations.

        The pro forma adjustments include the following items:

        Our unaudited pro forma combined statements of operations do not give effect to the initial expenses directly attributable to this offering because these non-recurring charges will be incurred by CapitalSource. Additionally, we expect to obtain a secured revolving credit facility that will be available primarily to finance our future direct real estate investments and for general corporate use. We do not believe this facility will be drawn in the near future and, therefore, we have not made any pro forma adjustments related to it.

50


Unaudited Pro Forma Combined Balance Sheet
As of March 31, 2008
($ in thousands)

ASSETS
 
 
  Historical(a)  
Transaction
Adjustments
  Pro Forma  
Real estate investments:                    
  Building and improvements   $ 910,300   $   $ 910,300  
  Land     107,197         107,197  
  Furniture and equipment     51,814         51,814  
  Less accumulated depreciation     (52,339 )       (52,339 )
               
  Real estate investments, net     1,016,972         1,016,972  
Loans, net     151,369         151,369  
Cash and cash equivalents     7,163         7,163  
Restricted cash     18,566         18,566  
Deposits     13,965         13,965  
Deferred financing fees, net     3,618         3,618  
Intangible lease assets, net     19,933         19,933  
Straight-line rent receivable     13,787         13,787  
Receivables and other assets, net     2,453         2,453  
               
Total assets   $ 1,247,826   $   $ 1,247,826  
               

LIABILITIES, NONCONTROLLING INTERESTS AND EQUITY

 
Liabilities:                    
Mortgage debt   $ 339,818   $   $ 339,818  
Related party debt     247,743     (247,743 )(b)    
Term debt     20,000         20,000  
Lease obligation, net     50,144         50,144  
Other liabilities     27,379         27,379  
               
Total liabilities     685,084     (247,743 )   437,341  

Noncontrolling interests

 

 

43,158

 

 

(32,980

)(c)

 

10,178

 

Equity

 

 

519,584

 

 

280,723

(b)(c)

 

800,307

 
               
Total liabilities, noncontrolling interests and equity   $ 1,247,826   $   $ 1,247,826  
               

See accompanying notes.

51


NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET

52


Unaudited Pro Forma Combined Statement of Operations
For the Three Months Ended March 31, 2008
($ in thousands, except per share data)

 
  Historical(a)   Acquisition
Adjustments
  Transaction Adjustments   Pro Forma  
Revenues:                          
  Operating lease income   $ 26,709   $ 107 (b) $   $ 26,816  
  Interest and fee income     4,951             4,951  
                   
    Total revenue     31,660     107         31,767  

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Interest expense     11,000         (5,442 )(c)   5,558  
  Depreciation     8,969     25 (d)       8,994  
  General and administrative     2,658         (204 )(e)(f)(g)(h)   2,454  
                   
    Total expenses     22,627     25     (5,646 )   17,006  

Income before noncontrolling interests expense

   
9,033
   
82
   
5,646
   
14,761
 

Noncontrolling interests expense

 

 

(1,153

)

 


 

 

882

(i)

 

(271

)
                   
Net income   $ 7,880   $ 82   $ 6,528   $ 14,490  
                   

Average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic                          
  Diluted                          

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic   $     $     $     $    
  Diluted   $     $     $     $    

53


Unaudited Pro Forma Combined Statement of Operations
For the Three Months Ended March 31, 2007
($ in thousands, except per share data)

 
  Historical(a)   Acquisition Adjustments   Transaction Adjustments   Pro Forma  
Revenues:                          
  Operating lease income   $ 19,667   $ 6,736 (b) $   $ 26,403  
  Interest and fee income     185     4,810 (j)       4,995  
                   
    Total revenue     19,852     11,546         31,398  

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Interest expense     9,168     705 (k)   (3,229 )(c)   6,644  
  Depreciation     6,749     2,304 (d)       9,053  
  General and administrative     2,819         642 (e)(f)(g)(h)   3,461  
                   
    Total expenses     18,736     3,009     (2,587 )   19,158  

Income before gain on sale of real estate and noncontrolling interests expenses

 

 

1,116

 

 

8,537

 

 

2,587

 

 

12,240

 

Noncontrolling interests expense

 

 

(1,352

)

 


 

 

1,085

(i)

 

(267

)
                   
Net income (loss)   $ (236 ) $ 8,537   $ 3,672   $ 11,973  
                   

Average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic                          
  Diluted                          

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic   $           $     $    
  Diluted   $           $     $    

54


Unaudited Pro Forma Combined Statement of Operations
For The Year Ended December 31, 2007
($ in thousands, except per share data)

 
  Historical(a)   Acquisition Adjustments   Transaction Adjustments   Pro Forma  
Revenues:                          
  Operating lease income   $ 95,191   $ 10,421 (b) $   $ 105,612  
  Interest and fee income     10,805     9,177 (j)       19,982  
                   
    Total revenue     105,996     19,598         125,594  

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Interest expense     46,262     1,027 (k)   (20,469 )(c)   26,820  
  Depreciation     31,955     4,257 (d)       36,212  
  General and administrative     10,460         1,300 (e)(f)(g)(h)   11,760  
  Loss on impairment of assets     1,225             1,225  
                   
    Total expenses     89,902     5,284     (19,169 )   76,017  

Income before noncontrolling interests expense

 

 

16,094

 

 

14,314

 

 

19,169

 

 

49,577

 

Gain on sale of real estate

 

 

156

 

 


 

 


 

 

156

 
Noncontrolling interests expense     (4,951 )       3,862 (i)   (1,089 )
                   
Net income   $ 11,299   $ 14,314   $ 23,031   $ 48,644  
                   

Average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic                          
  Diluted                          

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic   $           $     $    
  Diluted   $           $     $    

55


NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS

 
  Three Months Ended March 31,    
 
 
  Year Ended
December 31, 2007
 
 
  2008   2007  
 
  ($ in thousands)
 

Building and improvements

  $ 910,300   $ 910,300   $ 910,300  

Land

    107,197     107,197     107,197  

Furniture and equipment

    51,814     51,814     51,814  

Loans

    150,000     150,000     150,000  
               
 

Average gross invested assets

  $ 1,219,311   $ 1,219,311   $ 1,219,311  
               

Multiply by management fee rate

    0.125 %   0.125 %   0.50 %
               

Management fees

  $ 1,524   $ 1,524   $ 6,097  
               

56


NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS (Continued)

57



SELECTED COMBINED FINANCIAL DATA

        The following selected historical combined financial data should be read in connection with "Unaudited Pro Forma Combined Financial Statements," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our historical combined financial statements and related notes thereto included elsewhere in this prospectus.

        The selected historical combined financial data as of December 31, 2007 and 2006 and for the years ended December 31, 2007 and 2006 have been derived from our audited combined financial statements and notes thereto included elsewhere in this prospectus, which have been audited by Ernst & Young LLP, independent registered public accounting firm. The selected historical combined financial data as of March 31, 2008 and for the three months ended March 31, 2008 and 2007 have been derived from our unaudited historical combined financial statements included elsewhere in this prospectus. The historical results are not necessarily indicative of the results to be expected in future.

 
  Year Ended
December 31,
  Three Months Ended
March 31,
 
 
  2006   2007   2007   2008  
 
   
   
  (unaudited)
 
 
  ($ in thousands)
 
Operating Information                          
Revenues                          
  Operating lease income   $ 30,380   $ 95,191   $ 19,667   $ 26,709  
  Interest and fee income     194     10,805     185     4,951  
                   
  Total revenues     30,574     105,996     19,852     31,660  
Operating expenses                          
  Interest expense     13,373     46,262     9,168     11,000  
  Depreciation     11,464     31,955     6,749     8,969  
  General and administrative     3,809     10,460     2,819     2,658  
  Loss on impairment of assets         1,225          
  Loss on debt extinguishment     2,497              
                   
  Total expenses     31,143     89,902     18,736     22,627  
                   
(Loss) income before gain on sale of real estate and noncontrolling interests expense     (569 )   16,094     1,116     9,033  
Gain on sale of real estate         156          
Noncontrolling interests expense     (4,711 )   (4,951 )   (1,352 )   (1,153 )
                   
Net (loss) income   $ (5,280 ) $ 11,299   $ (236 ) $ 7,880  
                   

58


 

 
  As of December 31,   As of March 31,  
 
  2006   2007   2008  
 
   
   
  (unaudited)
 
 
  ($ in thousands)
 

Balance Sheet Information

                   

Assets

                   

Real estate investments:

                   

Buildings and improvements

  $ 608,963   $ 900,417   $ 910,300  

Land

    89,140     106,620     107,197  

Furniture and equipment

    34,395     51,545     51,814  

Less accumulated depreciation

    (11,464 )   (43,370 )   (52,339 )
               

Real estate investments, net

    721,034     1,015,212     1,016,972  

Loan, net

        150,894     151,369  

Cash and cash equivalents

    6,508     16,088     7,163  

Restricted cash

    12,881     23,738     18,566  

Deposits

    6,435     13,758     13,965  

Deferred financing fees, net

    4,294     3,824     3,618  

Intangible lease assets, net

    27,584     21,351     19,933  

Straight-line rent receivable

    4,012     11,680     13,787  

Receivables and other assets, net

    1,077     2,470     2,453  
               

Total assets

  $ 783,825   $ 1,259,015   $ 1,247,826  
               

Liabilities, noncontrolling interests and member's equity

                   

Mortgage debt

  $ 299,769   $ 341,086   $ 339,818  

Related party debt

    106,660     247,743     247,743  

Term debt

    20,000     20,000     20,000  

Lease obligations, net

    26,816     51,918     50,144  

Other liabilities

    16,231     30,910     27,379  
               

Total liabilities

    469,476     691,657     685,084  

Noncontrolling interests

    56,342     44,808     43,158  

Member's equity

    258,007     522,550     519,584  
               

Total liabilities, noncontrolling interests and member's equity

  $ 783,825   $ 1,259,015   $ 1,247,826  
               

59



MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

        The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our combined results of operations and financial condition. You should read this discussion in conjunction with the unaudited pro forma combined financial statements and the historical combined financial statements and the notes included elsewhere in this prospectus.

        The audited and unaudited financial statements included in this prospectus reflect the operations of the healthcare net lease segment of CapitalSource and a $150 million participation in the Genesis mezzanine loan as if the CapitalSource healthcare net lease segment and $150 million loan asset had been operated together in a single business as a separate, stand-alone company throughout all relevant periods. We refer to these operations as those of the "Carve-out Entity" in this prospectus. In this section, unless the context otherwise requires, references to "we," "us" and "our" refer to the Carve-out Entity.

OVERVIEW

        We are a newly organized Maryland real estate investment trust, or REIT, investing in income producing healthcare-related facilities, principally skilled nursing facilities, or SNFs, located in the United States. Immediately prior to the consummation of this offering, CapitalSource intends to contribute to us all of the assets and liabilities of its healthcare net lease segment and a $150.0 million participation in the $375.0 million Genesis mezzanine loan. We intend to focus our business on the ownership of SNFs and other healthcare-related properties that we will lease to licensed, independent third-party operators under triple-net leases. Under a typical triple-net lease, an operator agrees to pay a base monthly operating lease payment, subject to annual escalations, and all facility operating expenses, including real estate taxes and insurance, as well as make capital improvements. We believe the healthcare sector is relatively recession resistant compared to other real estate sectors and presents unique growth potential due to favorable demographics of a rapidly growing senior population and the increased use of healthcare services by the aging "baby boomer" generation. We believe SNFs provide an attractive and stable revenue stream as the services SNFs provide are largely paid for under government-sponsored Medicaid and Medicare contracts. We also believe there are significant barriers to entry that limit the number of new SNFs that can be built, due to the requirement that operators obtain either state-mandated Certificates of Need, or CONs, or Medicare and Medicaid reimbursement contracts.

        We are managed by a wholly owned subsidiary of CapitalSource. Our manager will receive an annual management fee of 0.50% of our average gross invested assets. Gross invested assets are defined as net real estate investments plus accumulated depreciation plus loan receivable of $150.0 million. In addition to this management fee, our general and administrative expenses will include other expenses that we expect to incur as a result of being a public company. See "Unaudited Pro Forma Combined Financial Statements" for a more detailed description of these anticipated costs. Our real property assets were previously reported within CapitalSource's healthcare net lease segment. Our executives, who are employees of CapitalSource, have extensive experience investing in healthcare real estate assets. We intend to capitalize on this experience and believe we will benefit from CapitalSource's expertise, knowledge and relationships within the healthcare industry, which will enable CapitalSource to originate, manage and add value to our current and future healthcare-related investments.

        As of March 31, 2008, our $1.0 billion of real property assets were leased on a triple-net basis to 41 operator groups. Only three operator groups produced more than 10% of our contractual rental income, with the largest operator group contributing only 13% of our contractual rental income for the three months ended March 31, 2008. The substantial majority of our operator groups each contributed

60



less than 5% of our contractual rental income for that period. We expect that our $150.0 million participation in the Genesis mezzanine loan will be our largest revenue generating investment by total revenue; this participation generated 16.1% of our total revenues for the three months ended March 31, 2008. As of March 31, 2008, our leases had average remaining terms of 8.6 years and typically have annual escalations on a fixed rate or tied to an index such as the CPI. As of March 31, 2008, 157 of our 187 properties were subject to master leases or were cross defaulted, providing additional credit support for the performance of these 157 properties.

        Substantially all of our revenues and sources of cash flows from operations are derived from operating lease income and interest and fee income earned on the Genesis mezzanine loan. These items represent our primary source of liquidity to fund distributions and are dependent upon our operators' and obligor's continued ability to make contractual rent and interest payments to us. To the extent that our operators or obligor experience operating difficulties and are unable to generate sufficient cash to make payments to us, there could be a material adverse impact on our combined results of operations, liquidity and/or financial condition. To mitigate this risk, we will rely on CapitalSource's portfolio management services, which involve review of periodic operating and financial data for our properties, review of operator/obligor credit, periodic property inspections and review of covenant compliance relating to licensure, real estate taxes, letters of credit and other collateral. CapitalSource uses a proprietary database to collect property-specific data, and considers current industry trends and risks when analyzing such data. We believe CapitalSource's portfolio management practices generally provide timely portfolio information that would typically enable an early intervention to address potential areas of payment risk, and in so doing, support both the collectibility of revenue and the value of our investment.

        Our primary objectives are to maintain and enhance shareholder value and to pay consistent cash dividends to our shareholders. We will seek to increase dividend payments to shareholders by taking advantage of appropriate opportunities to expand our portfolio and by leasing properties subject to annual increases in rental income from our leases. To meet these objectives, we will attempt to invest in properties that provide opportunity for additional value and current returns to our shareholders and diversify our investment portfolio by geographic location and operator.

        We intend to qualify as a REIT for federal income tax purposes under the Internal Revenue Code commencing with our taxable year ending December 31, 2008. We generally will not be subject to federal taxes on our taxable income to the extent that we distribute our taxable income to shareholders and maintain our qualification as a REIT. As a REIT, we are permitted to own up to 100% of a taxable REIT subsidiary, or TRS. We may form a TRS to hold a portion of our participation in the Genesis mezzanine loan. To the extent a TRS is formed and generates income, it would be taxable as a corporation and would pay federal, state and local income tax on its taxable income at the applicable corporate rates. As a result, our financial statements after this offering may include a provision for income tax expense relating to the taxable income of our TRS.

KEY TRANSACTIONS IN 2007 AND 2006

        During 2007 and 2006, we completed the following key transactions:

61


62



FACTORS AFFECTING OUR BUSINESS AND THE BUSINESS OF OUR OPERATORS

        The continued success of our business is dependent on a number of macroeconomic and industry trends. Many of these trends will influence our ongoing ability to find suitable investment properties while other factors will impact our operators' ability to conduct their operations profitably and meet their obligations to us.

Industry trends

        One of the primary trends affecting our business is the long-term increase in the average age of the U.S. population. This increase in life expectancy is expected to be a primary driver for growth in the healthcare and SNF industries. We believe this demographic trend is resulting in an increased demand for services provided to the elderly. We believe that the low cost healthcare setting of a SNF will benefit our operators and facilities in relation to higher-cost healthcare providers. We believe that these trends will support a growing demand for the services provided by SNF operators, which in turn will support a growing demand for our properties.

        The growth in demand for services provided to the elderly has resulted in an increase in healthcare spending. According to the 2007 National Health Expenditures forecast published by CMS, healthcare spending in the United States is projected to grow at an average annual growth rate of approximately 6.7% through 2017. As a percentage of gross domestic product, or GDP, healthcare spending is projected to increase by over 3% to 19.5% of GDP in 2017 with an expected spending level of over $4.3 trillion. CMS also projects that national nursing home expenditures will grow from $124.9 billion in 2006 to $217.5 billion in 2017, representing a 5.2% CAGR.

Competitive environment for healthcare real estate investing

        We compete with other public and private companies who structure triple-net leases with operators of varying types of healthcare properties. While the overall landscape for healthcare finance is competitive, we believe there has been a trend in our industry over the last few years of companies pursuing large portfolio transactions. In addition, we believe our industry has also experienced a trend over the last few years of companies seeking to diversify into other asset classes and away from SNFs. In contrast, we have focused, and will continue to focus, on smaller and middle- market transactions, primarily involving SNFs. CapitalSource has experience identifying and underwriting the abilities of local, regional and national operators. We believe that this experience helps us identify new operator relationships and create new opportunities with existing relationships that fall below the radar of other providers of capital. We believe that our continued focus on SNFs has enabled us to develop broad expertise in the markets in which we compete.

63


Liquidity and access to capital

        We anticipate that our single largest cash-based expense will be the interest expense we incur on our debt obligations. To continue to expand our portfolio, we will rely on access to the capital markets on an ongoing basis.

        Our indebtedness outstanding upon consummation of this offering will be comprised principally of our mortgage debt. At the closing of this offering, we do not anticipate that we will have made any draws on the secured, revolving credit facility that we expect to enter into with affiliates of the underwriters at or prior to closing of this offering. To the extent this facility is available to us, we believe it, and our cash flows from operations, will be sufficient to sustain our capital requirements for the next 18 to 24 months.

Factors affecting our operators' profitability

        Our revenues are derived from rents we receive from triple-net leases with our operators. Certain economic factors present both opportunities and risks to our operators and, therefore, influence their ability to meet their obligations to us. These factors directly affect our operators' operations and, given our reliance on their performance under our leases, present risks to us that may affect our results of operations or ability to meet our financial obligations.

        Our operators' revenues are largely derived from third-party sources. Therefore, we indirectly rely on these same third-party sources to obtain our rents. The majority of these third-party payments come from the federal Medicare program and state Medicaid programs. Our operators also receive payments from other third-party sources, such as private insurance companies or private-pay residents, but these payments typically represent a small portion of our operators' revenue streams. The sources and amounts of our operators' revenues are determined by a number of factors, including licensed bed capacity, occupancy rates, the acuity profile of residents and the rate of reimbursement. Changes in the acuity profile of the residents as well as the mix among payor types, including private pay, Medicare and Medicaid, may significantly affect our operators' profitability and, in turn, their ability to meet their obligations to us. Managing, billing and successfully collecting third-party payments is a relatively complex activity that requires significant experience and is critical to the successful operation of a SNF.

        Labor and related expenses typically represent our operators' largest cost component. Therefore, the labor markets in which our operators operate affect their ability to operate in a cost efficient manner and profitably. In order for our operators to be successful, they must possess the management capability to attract and maintain skilled and motivated workforces. Much of the required labor needed to operate a SNF requires specific technical experience and education. In recent years, many of the markets in which we own properties have experienced skilled labor shortages. These trends can require our operators to increase their payroll costs to attract labor and adequately staff their operations. Increases in labor costs due to higher wages and greater employee benefits required to attract and retain qualified personnel could affect our operators' ability to meet their obligations to us. A successful operator must be able to source qualified skilled labor and minimize staff turnover, as high turnover rates can sometimes challenge their ability to operate effectively and profitably.

        While our revenues are generated from the rents our operators pay to us, we seek to establish our rent at an appropriate level so that our operators are able to succeed. This requires discipline to ensure that we do not overpay for the properties we acquire. While we operate in a competitive environment, we carefully assess the long-term risks facing our operators as we consider an investment. Because our leases are long-term arrangements, we are required to assess both the short and long-term capital needs of the properties we acquire. SNFs are generally highly specialized real estate assets. We believe we have developed broad expertise in assessing the short and long-term needs of this asset class.

64


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        Our combined financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"), which requires us to make estimates and judgments about future events that affect the reported amounts in the financial statements and the related disclosures. We base estimates on our experience and on various other assumptions believed to be reasonable under the circumstances. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting would have been applied, resulting in a different presentation of our financial statements. From time to time, we re-evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. We believe that the following critical accounting policies, among others, affect our more significant estimates and judgments used in the preparation of our financial statements. For more information regarding our critical accounting policies, see Note 2, Summary of Significant Accounting Policies in our accompanying audited combined financial statements for the year ended December 31, 2007.

        We lease our direct real estate investments through long-term, triple-net operating leases that typically include fixed rental payments, subject to escalation over the life of the lease. We recognize operating lease income on a straight-line basis over the life of the lease when collectibility is reasonably assured.

        For straight-line rent, we generally record reserves against revenues from leases when collection is uncertain or when negotiations for restructurings of troubled operators result in significant uncertainty regarding ultimate collection. The amount of the reserve is estimated based on what management believes will likely be collected. We continually evaluate the collectibility of our straight-line rent assets. If it appears that we will not collect future rent due under our leases, we will record a provision for loss related to the straight-line rent asset.

        We do not recognize any revenue on contingent rents until payments are received and all contingencies have been eliminated.

        We allocate the purchase price of our real estate investments to net tangible and identified intangible assets acquired, primarily lease intangibles, based on their estimated fair values. In making estimates of fair values for purposes of allocating the purchase price, we utilize a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. We also consider information obtained about each property as a result of our pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired and liabilities assumed.

        In assessing lease intangibles, we recognize above-market and below-market in-place lease values for acquired operating leases based on the present value of the difference between: (1) the contractual amounts to be received pursuant to the leases negotiated and in-place at the time of acquisition of the facilities; and (2) management's estimate of fair market lease rates for the facility or equivalent facility, measured over a period equal to the remaining non-cancelable term of the lease. Factors to be considered for lease intangibles also include estimates of carrying costs during hypothetical lease-up periods, market conditions, and costs to execute similar leases. The capitalized above-market or below-

65



market lease values are classified as intangible assets, net, and lease obligations, net, respectively, and are amortized to operating lease income over the remaining non-cancelable term of each lease.

        We assess our real estate investments and the related intangible assets for impairment indicators whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Our assessment of the existence of impairment indicators is based on factors such as, but not limited to, market conditions, operator performance and legal structure. If we determine that indicators of impairment are present, we evaluate the carrying value of the related real estate investments in relation to the future undiscounted cash flows of the underlying facilities. Provisions for impairment losses related to long-lived assets may be recognized when expected future undiscounted cash flows are determined to be less than the carrying values of the assets. An adjustment is made to the net carrying value of the leased properties and other long-lived assets for the excess over their estimated fair value. The fair value of the real estate investment is determined by market research, which includes valuing the property as a healthcare facility as well as other alternative uses. All impairments are taken as a period cost at that time, and depreciation is adjusted going forward to reflect the new value assigned to the asset.

        If we decide to sell a real estate investment, we evaluate the recoverability of the carrying amounts of the assets. If the evaluation indicates that the carrying value is not recoverable from estimated net sales proceeds, the property is written down to estimated fair value less costs to sell. Our estimates of cash flows and fair values of the properties are based on current market conditions and consider matters such as rental rates and occupancies for comparable properties, recent sales data for comparable properties, and, where applicable, contracts or the results of negotiations with purchasers or prospective purchasers.

        We evaluate the collectibility of loans and other amounts receivable from third parties based on a number of factors, including (i) corporate and facility-level financial and operations reports, (ii) compliance with the financial covenants set forth in the loan agreement, (iii) the financial stability of the applicable borrower or operator and any guarantor and (iv) the payment history of the borrower or operator. Our level of reserves, if any, for loans and other amounts receivable from third parties fluctuates depending upon all of these factors.

        Since we operated within qualified REIT subsidiaries of CapitalSource (and hence were not subject to federal income taxes), and as we intend to elect to be taxed as a REIT under the applicable provisions of the Internal Revenue Code, commencing with the year ended December 31, 2008, neither our historical combined financial statements nor our pro forma combined financial statements include any provision for federal income tax. We still may be subject to state and local taxation in various state and local jurisdictions, including those in which we transact business or reside. In addition, we may form a taxable REIT subsidiary to hold a portion of our initial assets, which may include a portion of our participation in the Genesis mezzanine loan. To the extant a TRS is formed and generates income, it would be taxable as a corporation and would pay federal, state and local income tax on its taxable income at the applicable corporate rates. As a result, our financial statements after this offering may include a provision for income tax expense relating to the taxable income of our TRS. If we fail to qualify as a REIT in any taxable year, all of our taxable income for that year would be subject to federal income tax at regular corporate rates, including any applicable alternative minimum tax. In addition, we also will be disqualified from taxation as a REIT for the four taxable years following the

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year during which qualification was lost, unless we were entitled to relief under specific statutory provisions.

RESULTS OF OPERATIONS

        The following is a discussion of the combined results of operations of CapitalSource's healthcare net lease segment and the $150.0 million participation in the Genesis mezzanine loan as carved out of the accounts of CapitalSource and as though the combined healthcare net lease segment and loan participation had been a separate, stand-alone company for the respective periods presented.

        Revenues consist of rents we collect from operators as stipulated in our long term triple-net leases as well as interest and fee income earned on the Genesis mezzanine loan. Additionally, as required under GAAP, we recognize certain non-cash revenue due to straight-lining of rent as well as amortization of lease intangibles. While not a significant component of revenue, we also earn interest on overnight deposits.

        Certain of our leases provide for periodic and determinable increases in base rent. Base rental revenues under these leases are recognized on a straight-line basis over the term of the applicable lease. We recognize operating lease income on a straight-line basis over the life of the lease when collectibility is reasonably assured. Recognizing rental income on a straight-line basis results in recognized revenue exceeding cash amounts contractually due from our operators during the first half of the term for leases that have straight-line treatment.

        Certain of our other leases provide for an annual increase in rental payments only if certain revenue parameters or other contingencies are met. We recognize the increased rental revenue under these leases only if the revenue parameters or other contingencies are met rather than on a straight-line basis over the term of the applicable lease.

        We recognize a variety of cash and non-cash charges in our financial statements. Our expenses consist primarily of depreciation expense and the interest expense we incur as well as general and administrative costs associated with operating our business.

        Prior to completion of this offering, certain management, administrative and operational services of CapitalSource were shared among us and other CapitalSource segments. For purposes of financial statement presentation, the costs for these shared services have been allocated to us based on actual direct costs incurred, or allocated based the value of real estate and loan assets. See Note 9, Related Party Transactions, to our audited combined financial statements included elsewhere in this prospectus for additional information about these allocations. CapitalSource's management believes that the allocations are reasonable. However, actual expenses may have been materially different from the allocated expenses if we had operated as an unaffiliated stand-alone entity. Going forward, we will incur expenses in the form of the management fee and other costs we expect to incur as a public company.

        Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time as evidenced by the provision for depreciation. However, since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered presentations of operating results for real estate

67


companies that use historical cost accounting to be insufficient. In response, NAREIT created FFO as a supplemental measure of operating performance for REITs that excludes historical cost depreciation from net income. FFO, as defined by NAREIT, means net income, computed in accordance with GAAP, exclusive of gains (or losses) from sales of real estate, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. FAD represents FFO excluding: (i) net straight-line rental adjustments; (ii) rental income related to above/below market leases; and (iii) amortization of deferred financing costs.

        FFO and FAD as presented herein are not necessarily comparable to FFO and FAD presented by other real estate companies due to the fact that not all real estate companies use the same definition. FFO and FAD should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of our financial performance or as an alternative to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is FFO or FAD necessarily indicative of sufficient cash flow to fund all of our needs including dividends. FFO and FAD are not financial measures recognized under GAAP and are unaudited for all periods presented. We believe that in order to facilitate a clear understanding of our combined historical operating results, FFO and FAD should be examined in conjunction with net income as presented in the combined financial statements and data included elsewhere in this prospectus.

        The following table reflects the results of our operations and our operating performance for the three months ended March 31, 2008 and 2007.

 
  Three Months
Ended March 31,
   
   
 
 
  Change  
 
  2008   2007  
 
  (unaudited)
   
   
 
 
  ($ in thousands)
 
 
   
   
   
  %
 
Revenues:                          
  Operating lease income   $ 26,709   $ 19,667   $ 7,042     36 %
  Interest and fee income     4,951     185     4,766     2,576 %
                   
    Total revenues     31,660     19,852     11,808     59 %
Expenses:                          
  Interest expense     11,000     9,168     1,832     20 %
  Depreciation     8,969     6,749     2,220     33 %
  General and administrative     2,658     2,819     (161 )   (6 )%
                   
    Total expenses     22,627     18,736     3,891     20 %

Income before noncontrolling interests expense

 

 

9,033

 

 

1,116

 

 

7,917

 

 

709

%
  Noncontrolling interests expense     (1,153 )   (1,352 )   199     15 %
                   
Net income (loss)   $ 7,880   $ (236 ) $ 8,116     3,439 %
                   
FFO   $ 16,849   $ 6,513   $ 10,336     159 %
                   
FAD   $ 14,898   $ 5,682   $ 9,215     162 %
                   

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        The table below reflects the reconciliation of FFO and FAD to net income available to common shareholders, the most directly comparable GAAP measure, for the periods presented.

 
  Three Months Ended March 31,  
 
  2008   2007  
 
  (unaudited)
 
 
  ($ in thousands)
 

Net income (loss)

  $ 7,880   $ (236 )
 

Adjustments:

             
 

Depreciation and amortization on real estate assets

    8,969     6,749  
 

Depreciation on real estate assets related to noncontrolling interests

         
 

Loss (gain) on sale of real estate assets

         
           
 

FFO

    16,849     6,513  
 

Adjustments:

             
 

Straight-lining of rent

    (2,107 )   (1,637 )
 

Loss (gain) on extinguishment of debt

         
 

Amortization related to above (below) market leases

    (156 )   691  
 

Amortization of deferred financing fees

    312     115  
           
 

FAD

  $ 14,898   $ 5,682  
           

        The following is a discussion of the combined statements of operations for the three months ended March 31, 2008 and 2007.

        Net income increased by $8.1 million from a loss of $0.2 million for the three months ended March 31, 2007 to net income of $7.9 million for the three months ended March 31, 2008. The increase in net income is a result of an increase in revenue by $11.8 million. The components of this increase in revenue are more fully explained below. The increase was partly offset by an increase of $3.9 million in total expenses. The components of this increase in expenses are more fully explained below.

        Operating lease income increased by $7.0 million or 36% from $19.7 million for the three months ended March 31, 2007 to $26.7 million for the three months ended March 31, 2008. Approximately $5.2 million of this increase was due to increased rental income from acquisitions in the second and third quarters of 2007 as well as the first quarter of 2008. An additional $0.7 million of this increase was due to escalations in contractual rental income. Finally, the remaining $0.9 million was due to intangible lease amortization. We acquired a large portfolio in June 2007 (see "—Key Transactions" above) that has a significant intangible lease obligation. The impact of this intangible lease obligation was a net increase in operating lease income.

        Interest and fee income increased by $4.8 million from $0.2 million for the three months ended March 31, 2007 to $5.0 million for the three months ended March 31, 2008. Substantially all of the increase was due to interest and fees earned on the Genesis mezzanine loan that was originated in July 2007.

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        Interest expense increased by $1.8 million or 20% from $9.2 million for the three months ended March 31, 2007 to $11.0 million for the three months ended March 31, 2008. The increase reflects increased borrowings due to our increased asset base. However, in the same period 30-day LIBOR declined significantly. The increase in interest expense would have been significantly higher if 30-day LIBOR had remained at the same level.

        Depreciation expense increased by $2.2 million or 33% from $6.8 million for the three months ended March 31, 2007 to $9.0 million for the three months ended March 31, 2008. Approximately $1.5 million of this increase related to depreciation on real property assets and $0.7 million was due to depreciation on personal property as a result of acquisitions in 2007.

        General and administrative expense decreased by approximately $0.1 million from $2.8 million for the three months ended March 31, 2007 to $2.7 million for the three months ended March 31, 2008. The most significant reason for the decrease was due to the decrease in non-recurring legal and professional fees from $1.7 million incurred in the quarter ended March 31, 2007 as compared to $0.1 million in the three months ended March 31, 2008. The fees represented costs incurred for our mortgage debt that could not be capitalized as they represented a modification and not the initial closing of the mortgage debt. This decrease in fees was partly offset by the increase in the allocated general and administrative expense from $1.2 million for the three months ended March 31, 2007 to $2.5 million for the three months ended March 31, 2008. This increase was driven by the increased asset base as of March 31, 2008.

        FFO increased by $10.3 million or 159% from $6.5 million for the three months ended March 31, 2007 to $16.8 million for the three months ended March 31, 2008. The increase was primarily driven by an increase in operating lease income of $7.0 million and an increase in interest and fee income of $4.8 million, partially offset by an increase in interest expense and general and administrative expense, all of which reflect the increased asset base as of March 31, 2008. No depreciation expense is attributed to our noncontrolling interests because holders of these interests do not have ownership rights in or claims to, any real property assets.

        FAD increased by $9.2 million or 162% from $5.7 million for the three months ended March 31, 2007 to $14.9 million for the three months ended March 31, 2008. The increase was driven by an increase in FFO as described above. The increase was partially offset by the amortization of intangible lease obligations as more fully described in operating lease income above.

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        The following table reflects the results of our operations and our operating performance measures for the years ended December 31, 2007 and 2006:

 
  Year Ended December 31,    
   
 
 
  Change  
 
  2007   2006  
 
  ($ in thousands)
  ($ in thousands)
  %
 
Revenues:                          
  Operating lease income   $ 95,191   $ 30,380   $ 64,811     213 %
  Interest and fee income     10,805     194     10,611     5,470 %
                   
    Total revenues     105,996     30,574     75,422     247 %

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Interest expense     46,262     13,373     32,889     246 %
  Depreciation     31,955     11,464     20,491     179 %
  General and administrative     10,460     3,809     6,651     175 %
  Loss on impairment of assets     1,225         1,225      
  Loss on debt extinguishment         2,497     (2,497 )   (100 )%
                   
    Total expenses     89,902     31,143     58,759     189 %
Income (loss) before gain on sale of real estate and noncontrolling interests expense     16,094     (569 )   16,663     2,928 %
  Gain on sale of real estate     156         156      
  Noncontrolling interests expense     (4,951 )   (4,711 )   (240 )   (5 )%
                   
Net income (loss)   $ 11,299   $ (5,280 ) $ 16,579     314 %
                   
FFO   $ 43,098   $ 6,184   $ 36,914     597 %
                   
FAD   $ 36,491   $ 4,886   $ 31,606     647 %
                   

        The table below reflects the reconciliation of FFO and FAD to net income available to common shareholders, the most directly comparable GAAP measure, for the periods presented.

 
  Year Ended December 31,  
 
  2007   2006  
 
  ($ in thousands)
 

Net income (loss)

  $ 11,299   $ (5,280 )
 

Adjustments:

             
 

Depreciation and amortization on real estate assets

    31,955     11,464  
 

Depreciation on real estate assets related to noncontrolling interests

         
 

Loss (gain) on sale of real estate assets

    (156 )    
           

FFO

  $ 43,098   $ 6,184  
           
 

Adjustments:

             
 

Straight-lining of rent

  $ (7,668 ) $ (4,012 )
 

Loss (gain) on extinguishment of debt

        2,497  
 

Amortization related to above (below) market leases

    472     185  
 

Amortization of deferred financing fees

    589     32  
           

FAD

  $ 36,491   $ 4,886  
           

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        The following is a discussion of the combined statements of operations for the years ended December 31, 2007 and 2006.

        Net income increased by $16.6 million from a loss of $5.3 million for the year ended December 31, 2006 to income of $11.3 million for the year ended December 31, 2007. The increase in net income is a result of an increase in revenue of $75 million. The components of this increase in revenue are more fully explained below. The increase was partly offset by an increase of $58.8 million in total expenses. The components of this increase in expenses are more fully explained below.

        Operating lease income increased by $64.8 million or 213% from $30.4 million for the year ended December 31, 2006 to $95.2 million for the year ended December 31, 2007. $65.1 million of this increase is due to increased rental income from properties acquired in 2007 and a full year impact of the properties acquired during the year ended December 31, 2006. This increase was partially offset due to higher intangible lease amortization of $0.5 million in 2007 from $0.2 million in 2006.

        Interest and fee income increased by $10.6 million to $10.8 million for the year ended December 31, 2007. Of this increase, $10.0 million was due to interest and fees earned on the Genesis mezzanine loan that was originated in July 2007. The remaining $0.6 million was due to the increased interest on cash on deposits in various cash accounts.

        Interest expense increased by $32.9 million or 246% from $13.4 million for the year ended December 31, 2006 to $46.3 million for the year ended December 31, 2007. The majority of this increase reflects increased borrowings as allocated from CapitalSource due to our increased asset base. The decrease in 30-day LIBOR was not significant until the last quarter of 2007. We believe that the increase in interest expense would have been higher if 30-day LIBOR had remained at the same level in all of 2007.

        Depreciation expense increased by $20.5 million or 179% from $11.5 million for the year ended December 31, 2006 to $32.0 million for the year ended December 31, 2007. Of this increase, $16.4 million was due to depreciation on real property assets and $4.1 million of this increase was due to depreciation on personal property as a result of asset growth in 2007.

        General and administrative expense increased by $6.7 million or 175% from $3.8 million for the year ended December 31, 2006 to $10.5 million for the year ended December 31, 2007. Of this amount, $4.5 million was a direct result of increased allocation of general and administrative expenses due to increased asset base. Another $1.7 million represents legal and professional fees incurred for our mortgage debt that could not be capitalized as they represented a modification and not the initial closing of the mortgage debt.

        During the year ended December 31, 2007, we recognized a $1.2 million impairment related to one of our SNFs.

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        During the year ended December 31, 2006, we recorded a loss of $2.5 million upon extinguishment of the debt related to our first transaction (as more fully described in "—Key Transactions"), based upon the amounts paid in connection with the prepayment fees relative to the fair value of debt recorded.

        FFO increased by $36.9 million or 597% from $6.2 million for the year ended December 31, 2006 to $43.1 million for the year ended December 31, 2007. The increase was primarily driven by an increase in operating lease income of $64.8 million and an increase in interest and fee income of $10.6 million, partially offset by an increase in interest expense and general and administrative expense, all of which reflect the increased asset base for the year ended December 31, 2007. No depreciation expense is attributed to our noncontrolling interests because holders of these interests do not have ownership rights in or claims to, any real property assets.

        FAD increased by $31.6 million or 647% from $4.9 million for the year ended December 31, 2006 to $36.5 million for the year ended December 31, 2007. The increase was driven by an increase in FFO as described above. The increase in FAD was partially offset by the increase in straight-line rent from $4.0 million to $7.7 million. Also partially offsettting the increase was a $2.5 million loss on extinguishment of debt. Finally, the increase in amortization of lease intangibles and deferred loan expenses also contributed to the increase in FAD.

RISK MANAGEMENT

        The objective of our risk management approach is to support achievement of our business strategies while maintaining appropriate risk levels. Our asset/liability management process focuses on a variety of risks, including interest rate risk, concentration risk, and credit risk. Effective management of these risks is an important determinant of the absolute levels and variability of FFO, FAD and net worth. The following discussion addresses our integrated management of assets and liabilities.

        We receive a significant portion of our revenue by leasing our assets under long-term triple-net leases in which the rental rate is generally fixed with annual escalators, subject to certain limitations. We also earn revenue from our participation in the Genesis mezzanine loan. We anticipate our revolving credit facility will bear interest at a variable rate with a spread over 30-day LIBOR. Additionally, approximately $284.4 million of our existing mortgage debt bears interest at a spread over 30-day LIBOR.

        The general fixed nature of our assets subject to long-term triple-net leases and the variable nature of the bulk of our indebtedness creates interest rate risk. If interest rates were to rise significantly, our lease and other revenue might not be sufficient to enable us to meet our debt obligations. In July 2007, we entered into an interest rate cap on the $284.4 million variable rate mortgage debt with a 30-day LIBOR strike price of 6.75%. The cap expires in March 2009.

        We may engage in hedging strategies in the future, depending on management's analysis of the interest rate environment and the costs and risks of such strategies. We do not anticipate purchasing derivative instruments for speculative purposes.

        We evaluate our concentration risk in terms of investment mix and geographic mix. Investment mix measures the portion of our real estate owned investments (based on contractual rental income as of

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March 31, 2008) that relate to our various property types. Geographic mix measures the portion of our real estate owned investments (based on contractual rental income as of March 31, 2008) that relate to our top five states. The following table reflects concentration risk for 2007 and 2006:

 
  Year Ended
December 31,
 
 
  2007   2006  

Investment Mix:

             
 

Skilled Nursing Facilities

    97.8 %   97.7 %
 

Assisted Living Properties

    1.1 %   0.8 %
 

Long Term Acute Care

    1.1 %   1.5 %

Geographic Mix:

             
 

Florida

    37.6 %   43.7 %
 

Texas

    16.5 %   6.7 %
 

Tennessee

    9.7 %   4.2 %
 

Indiana

    6.5 %   8.2 %
 

Mississippi

    4.0 %   4.5 %
 

Remaining states

    25.7 %   32.7 %

        The financial condition of our operators and borrowers and their ability to meet our rent obligations or interest payments will largely determine our revenues and our ability to make distributions to our shareholders. In addition, any failure by operators or borrowers to effectively conduct their operations could have a material adverse effect on their business reputation or on their ability to enlist and maintain patients in their facilities. The inability or unwillingness to satisfy their obligations under their agreements with us could significantly harm us and our ability to service our indebtedness and other obligations and to make distributions to our shareholders as required for us to continue to qualify as a REIT. The following table highlights our five largest operator groups or borrower based on all sources of the contractual revenues for the three months ended March 31, 2008 (including the interest income from our participation in the Genesis mezzanine loan):

 
  Three Months Ended
March 31, 2008
 
 
  ($ in thousands)   %  

Customer Mix:

             
 

FC-Gen Acquisition, Inc. 

  $ 4,732     16.1 %
 

Delta Health Group

    3,300     11.2 %
 

Florida Institute for Long Term Care

    3,098     10.5 %
 

New Bell Facilities Services, L.P. 

    2,683     9.1 %
 

TenInOne Acquisition Group, LLC

    1,912     6.5 %
 

Remaining portfolio (37 operator groups)

    13,728     46.6 %
           
 

Total Portfolio

  $ 29,453     100.0 %
           

        We regularly monitor our credit risk under our lease agreements with our operators by, among other things, evaluating two key metrics that we believe best portray each operator's ability to pay rent to us. Using financial information reported to us, we monitor for each lease (1) the ratio of facilities' annualized NOI before management fees to annualized contractual rental income and (2) the ratio of facilities' annualized NOI after management fees to annualized contractual rental income. For the quarter ended March 31, 2008, the ratios of NOI before and after management fees were 2.0x and 1.4x, respectively.

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LIQUIDITY AND CAPITAL RESOURCES

        During 2007 and 2006, our principal sources of liquidity were borrowings under mortgage debt, as more fully described below, and loans made by and equity contributions received from CapitalSource. Our liquidity is expected to be provided from cash flows from operations, secured mortgage loans, borrowings under our anticipated revolving credit facility and offerings of common shares. Further, we anticipate that cash flows from operations over the next twelve months will be adequate to fund our business operations, distributions to shareholders and debt amortization.

        We intend to continue to fund future investments through cash flows from operations, borrowings under our proposed revolving credit facility, assumption of indebtedness, disposition of assets (in whole or in part through joint venture arrangements with third parties) and issuances of secured or unsecured long-term debt, equity or other securities. We believe that our cash flows from operations and borrowings under our proposed revolving credit facility will provide sufficient liquidity to satisfy our short- and long-term capital requirements.

        Upon the closing of the offering, we expect that we will have a secured revolving credit facility with borrowing capacity expected to be $         million. We expect that the revolving credit facility will bear interest at a fluctuating 30-day LIBOR-based rate per annum plus an applicable percentage based on our consolidated leverage.

        In December 2006, we entered into a $287.1 million loan agreement with Column Financial, Inc. ("Column"), an affiliate of one of the underwriters of this offering, to finance the acquisition of 65 healthcare properties. Under the terms of this agreement, we were required to make constant monthly payments of principal and interest based upon a 25-year amortization of principal and an interest rate fixed at 7.25% until December 28, 2006, and thereafter at a fixed rate equal to the 10-year US Treasury swap rate plus 1.90%. In March 2007, we amended this loan agreement to, among other things, modify the interest rate to 30-Day LIBOR plus 1.85% and change the maturity date from January 11, 2017 to April 9, 2009, with three one-year extensions at our option and without additional cost. On July 31, 2007, we further modified this loan agreement to divide the loan into a senior $250.0 million senior loan and a $36.1 million mezzanine loan. The interest rate under the senior loan is 30-Day LIBOR plus 1.54% and the interest rate under the mezzanine loan is 30-Day LIBOR plus 4% (with the effect that the weighted average interest rate under the two loans taken together is unchanged after the modification). As of March 31, 2008, 65 properties, with a net book value of $359.5 million, collateralize this mortgage debt.

        As of March 31, 2008, 11 properties are encumbered by an aggregate of approximately $56.7 million of long-term financing obtained from Highland Mortgage Company which is guaranteed by HUD, and bears interest at a weighted average rate of 6.61%. As of March 31, 2008, 11 properties, with a total carrying value of $100.3 million, collateralize this mortgage debt.

        In November 2006, in connection with the property acquisition from REIT Solutions described above under "—Key Transactions," we entered into five $4.0 million junior subordinated unsecured seller notes. The term of the notes is 15 years, and interest is payable quarterly at a fixed rate of 9%.

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        Our mortgage and other secured debt requires us to comply with various financial and other covenants. The terms of the Column mortgage debt described above subject us to financial covenants requiring that the rents and net cash flow received from, or produced by, the encumbered properties exceed the debt service required on that debt by specified amounts over trailing 12-month periods. In addition, we have agreed in this same mortgage financing that we will, and we will act to ensure that our operators also will, conduct their businesses in material compliance with all applicable legal requirements, including applicable healthcare laws and regulations. Also in this financing, CapitalSource is the guarantor of our obligations and is required to maintain a net worth of at least $500 million.

        In addition, we expect the terms of our proposed credit facility will require us to comply with additional financial and other covenants, including covenants that:

        These covenants may interfere with our ability to obtain financing or to engage in other business activities, which may inhibit our ability to grow our business and increase revenues. If we or CapitalSource fail to comply with any of these requirements, then the related indebtedness, and any other debt containing cross-default or cross-acceleration rights for our lenders, could become immediately due and payable. We cannot assure you that we could pay all of our debt if it became due, or that we could continue in that instance to make distributions to our shareholders and maintain our REIT qualification.

        In order to qualify as a REIT, we must make annual distributions to our shareholders of at least 90% of our REIT taxable income (excluding net capital gain).

        We expect that REIT taxable income will be less than cash flow due to the allowance of depreciation and other non-cash deductions in computing REIT taxable income. Although we anticipate that we generally will have sufficient cash or liquid assets to enable us to satisfy the 90% distribution requirement, it is possible that from time to time we may not have sufficient cash or other

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liquid assets to meet the 90% distribution requirement or we may decide to retain cash or distribute such greater amount as may be necessary to avoid income and excise taxation. If we do not have sufficient cash or liquid assets to enable us to satisfy the 90% distribution requirement, or if we desire to retain cash, we may borrow funds, issue additional equity securities, pay taxable dividends in our common shares, if possible, distribute other property or securities or engage in a transaction intended to enable us to meet the REIT distribution requirements.

        Capital expenditures to maintain and improve our triple-net leased properties generally will be incurred by our operators. Accordingly, we do not believe that we will incur any major expenditures in connection with these triple-net leased properties. After the terms of the triple-net leases expire, or in the event that the operators are unable or unwilling to meet their obligations under the triple-net leases, we anticipate that any expenditures relating to the maintenance of these triple-net leased properties for which we may become responsible will be funded by cash flows from operations or through additional borrowings. To the extent that unanticipated expenditures or significant borrowings are required, our liquidity may be affected adversely. Our ability to borrow funds may be restricted in certain circumstances by the terms of our proposed revolving credit facility.

        Cash flows from operations are derived largely from net income, adjusted for straight-line rent, cash collected that was billed in prior periods and depreciation. We intend on making distributions based largely from cash provided by operations.

        Cash used in investing activities consists of cash that was used during the period for the purposes of making new investments both in real property and loan advances.

        Cash provided by financing activities consists of cash we received from issuance of debt and equity contributions from CapitalSource. This cash provided the primary basis for the investments in new properties or for loan advances. We expect that, following the completion of this offering, we will continue to fund future investments through cash flows from operations, borrowings under our revolving credit facility, assumption of indebtedness, disposition of assets (in whole or in part through joint venture arrangements with third parties) and issuance of secured or unsecured long-term debt, equity or other securities.

        Our primary sources of cash include rent and interest receipts, borrowings, and proceeds from sale of real property as well as loans and equity contributions from CapitalSource. CapitalSource is not required to provide any funding to us or guarantee any future indebtedness in the future. Our primary uses of cash include debt service payments, real estate property acquisitions, loan advances and general and administrative expenses. These sources and uses of cash are reflected in our combined statements of cash flow and are discussed in further detail below.

        Cash provided by operations increased by $3.3 million from $7.1 million in the three months ended March 31, 2007 to $10.4 million in the three months ended March 31, 2008. The increase was due to increased net income as more fully described above partially offset by a decrease in liabilities and increase in straight line receivables.

        Cash used in investing activities decreased from $91.4 million in the three months ended March 31, 2007 to $5.5 million in the three months ended March 31, 2008. The decrease in cash used reflects the

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higher acquisition activity in 2007 as compared to the three months ended March 31, 2008, as more fully described in "—Key Transactions" above.

        Cash from financing activities decreased from cash provided from our parent of $88.0 million in the three months ended March 31, 2007 to cash distributed to our parent of $13.8 million in the three months ended March 31, 2008. The change from contributions to distributions reflects the asset acquisitions in 2007 as more fully described in "—Key Transactions" above.

        Cash used in operations increased by $93.3 million from $10.1 million in the year ended December 31, 2006 to $103.5 million in the year ended December 31, 2007. The increase was due to cash used to fund the Genesis mezzanine loan. The increase was partially offset by an increase in net income. This increase was due to increased investments in 2007 and a large number of acquisitions that happened in the latter half of 2006 that had a full year's impact in 2007.

        Cash used in investing activities decreased by $247.4 million from $513.7 million in 2006 to $266.3 million in 2007. This decrease was largely due to a decrease in investment activity in 2007 as compared to the prior period. An additional $5 million of this decrease was due to sale of real estate in 2007.

        Cash provided from financing activities decreased by $150.9 million from $530.3 million in 2006 to $379.4 million in 2007. This decrease was largely reflective of the decreased investment activity in 2007 when compared to 2006.

Contractual Obligations

        We are not a party to any other material noncancelable commitments beyond our management agreement and our long-term debt obligations. Under the terms of the management agreement, CapitalSource will receive an annual base management fee, payable monthly, equal to 0.50% of our average gross invested assets. Gross invested assets are defined as net real estate investments plus accumulated depreciation plus loan net receivable of $150 million.

        The following table summarizes the effect that our long term debt obligations (which includes principal and interest payments) are expected to have on our cash flow in future periods as of December 31, 2007. The table below excludes $248 million in related party debt owed to CapitalSource that will be contributed to us along with our initial assets. Amounts payable under the management agreement are not included in the table below because such amounts are not fixed and determinable. We are not a party to any material off-balance sheet commitments.

 
  Mortgage
Debt(1)
  Term
Debt
  Total  
 
  ($ in thousands)
 

2008

  $ 5,117   $   $ 5,117  

2009

    5,491         5,491  

2010

    5,894         5,894  

2011

    6,325         6,325  

2012

    265,127         265,127  

Thereafter

    51,347     20,000     71,347  
               

Total

  $ 339,301   $ 20,000   $ 359,301  
               

(1)
The contractual obligations of our mortgage debt are computed based on the assumption that we will exercise the three one-year extension options. See Note 7. Borrowings.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We are exposed to market risks related to fluctuations in interest rates on the Genesis mezzanine loan receivable and certain of our debt. Interest rate risk is sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control. We may hold derivative instruments to manage our exposure to these risks, and our derivative instruments are expected to be matched against specific debt obligations. The purpose of the following analyses is to provide a framework to understand our sensitivity to hypothetical changes in interest rates as of December 31, 2007. Many of the statements contained in these paragraphs are forward-looking and should be read in conjunction with our disclosures under the heading "Cautionary Language Regarding Forward-Looking Statements" and "Risk Factors."

        Part of our initial assets is a $150 million participation in the Genesis mezzanine loan that was made by CapitalSource as part of the acquisition financing to the entity that acquired Genesis Healthcare Corporation. The Genesis mezzanine loan bears interest at a variable interest rate based on 30-day LIBOR, which is reset monthly.

        We utilize debt financing primarily for the purpose of making investments in long-term care facilities. Certain of our acquisitions have involved the assumption of "in-place" long-term fixed rate debt. We have also utilized variable rate mortgage debt to effectuate other acquisitions. We may in the future utilize short-term borrowings under revolving credit facilities that we may obtain to fund future acquisitions. Depending on future market conditions, management may decide to replace variable rate debt with long-term fixed rate debt, or issue common shares to provide long-term financing.

        Our future earnings, cash flows and estimated fair values relating to financial instruments are dependent upon prevalent market rates of interest, such as LIBOR. For our fixed rate debt, changes in interest rates generally affect the fair market value, but do not impact earnings or cash flows. Conversely, for our variable rate debt, changes in interest rates generally do not impact fair market value, but do affect our future earnings and cash flows. Certain of our fixed rate debt is generally not prepayable, either as a result of contractual lockouts or through economically unfavorable prepayment premiums. Therefore, interest rate risk and changes in fair market value should not have a significant impact on such fixed rate debt until we would be required to refinance such debt.

        With respect to our variable rate mortgage debt, which is priced based on 30-day LIBOR, each one percentage point increase in 30-day LIBOR would result in an increase in interest expense of approximately $2.8 million, annually. With respect to the Genesis mezzanine loan, a one percent increase in 30-day LIBOR would result in an increase in interest income of $1.5 million, annually. Thus, to the extent that both the Genesis mezzanine loan and our variable rate mortgage debt continue to be outstanding concurrently, the net estimated effect would be an approximate $1.3 million reduction of our annual earnings.

        The table below details the principal amounts and the average interest rates for the Genesis mezzanine loan and our existing debt for each category based on the final maturity dates as of December 31, 2007. The Genesis mezzanine loan pays interest only with the principal due at maturity, while certain items in the various categories of debt require periodic principal payments prior to the final maturity date. The fair value estimate for the Genesis mezzanine loan is based on the estimates of management and on rates currently prevailing for comparable loans. The fair market value estimates

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for debt securities are based on discounting future cash flows utilizing rates we would expect to pay for debt of a similar type and remaining maturity as of December 31, 2007.

 
  Maturity Date    
   
 
 
  Total Book
Value
  Estimated
Fair Value
 
 
  2008   2009   2010   2011   2012   Thereafter  
 
  ($ in Millions)
 

Assets:

                                                 

Loan, net

  $ 150.8   $ 150.8   $ 150.8   $ 150.8   $ 0   $ 0   $ 150.8   $ 150.8  
 

Average interest rate

                                        13.1 %      

Liabilities:

                                                 

Fixed rate debt

  $ 76.8   $ 76.1   $ 75.5   $ 74.8   $ 74.0   $ 73.2   $ 76.8   $ 73.4  
 

Average interest rate

    7.2 %   7.2 %   7.2 %   7.3 %   7.3 %   7.3 %   7.2 %      

Variable rate debt

  $ 284.3   $ 279.8   $ 275.0   $ 269.8   $ 264.3   $ 0   $ 284.3   $ 279.6  
 

Average interest rate

                                        6.45 %      

        The book value and fair value at December 31, 2006 of each category presented above was:

 
  Total
Book Value
  Estimated
Fair Value
 
 
  ($ in Millions)
 

Assets:

             

Loan, net

  $ 0   $ 0  
 

Average interest rate

    20 %   19.3 %

Liabilities:

             

Fixed rate debt

  $ 12.6   $ 9.8  
 

Average interest rate

    6.0 %      

Variable rate debt

  $ 287.1   $ 281.4  
 

Average interest rate

    7.2 %      

        The estimated impact of changes in interest rates discussed above are determined by considering the impact of the hypothetical interest rates on our borrowing costs, lending rates and other current interest rate indexes from which our financial instruments may be priced. These analyses do not consider the effects of industry specific events, changes in the real estate markets, or other overall economic activities that could increase or decrease the fair value of our financial instruments. If such events or changes were to occur, we would consider taking actions to mitigate and/or reduce any negative exposure to such changes. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in our capital structure.

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BUSINESS

OVERVIEW OF OUR COMPANY

        We are a newly organized Maryland real estate investment trust, or REIT, investing in income producing healthcare-related facilities, principally skilled nursing facilities, or SNFs, located in the United States. Upon consummation of this offering, we believe we will own one of the largest portfolios of SNFs in the United States. As of March 31, 2008, our portfolio of properties consisted of 187 facilities located in 23 states and operated by 41 third-party operator groups. Approximately 98% of these facilities are SNFs, with the remainder being either long-term acute care facilities or ALFs. In addition to these properties, we will hold a $150 million participation in a $375 million, five-year mezzanine loan made by CapitalSource in 2007. In this prospectus, we refer to this loan as the Genesis mezzanine loan.

        We are managed by CapitalSource Finance LLC, a wholly owned subsidiary of CapitalSource Inc., a NYSE-listed, middle market commercial finance company which will own            % of our outstanding common shares following this offering. CapitalSource has been a significant lender to middle market healthcare companies since its inception in 2000. Through March 31, 2008, CapitalSource had originated over $6.9 billion in loans to approximately 335 healthcare clients and, as of March 31, 2008, CapitalSource's healthcare finance loan portfolio included approximately $3.4 billion in commitments to approximately 168 clients. CapitalSource commenced its healthcare net lease business in January 2006 and, since that time, has made over $1 billion of direct real estate investments, all of which will be contributed to us immediately prior to the completion of this offering. We believe that CapitalSource's expertise, knowledge and relationships will enable us to originate, manage and enhance our healthcare-related investments. In addition, we believe that, along with our sale leaseback product, CapitalSource's commercial lending capabilities, allow us to offer a broader array of healthcare financing solutions to facility operators than other healthcare REITs. As a result, we expect to see a wider range of quality investment opportunities.

        We expect to continue to invest primarily in SNFs. These properties fill an important and growing need in the healthcare industry by offering restorative, rehabilitative and custodial nursing care to seniors and other people not requiring the more extensive treatment available at hospitals. SNFs provide these services at considerably lower costs than hospitals or other facilities, and also provide services to residents beyond room and board, including occupational, physical, speech, respiratory and intravenous therapy, wound care, and orthopedic therapy as well as sales of pharmaceutical products and other services, which are generally not available in other forms of senior housing such as ALFs or ILFs. We believe that SNFs represent a highly attractive investment opportunity due to the aging of the United States population, the declining number of nursing homes, barriers to entry for new SNF construction and CapitalSource's in-depth knowledge of the healthcare reimbursement system.

        We generate most of our revenues from our ownership of healthcare facilities through long-term triple-net leases with qualified operators. We also generate interest and fee income from our participation in the Genesis mezzanine loan. For the year ended December 31, 2007 and for the three months ended March 31, 2008, on a pro forma basis, we generated operating revenue of $15.6 million and $31.8 million, net income of $48.6 million and $14.5 million, funds from operations, or FFO, of $84.7 million and $23.5 million, and funds available for distribution, or FAD, of $77.3 million and $21.5 million, respectively. FFO and FAD are not financial measures recognized under generally accepted accounting principles in the United States, or GAAP, and therefore, should not be considered a measure of liquidity, an alternative to net income or an indicator of any other performance measure determined in accordance with GAAP. Like many other REITs, we use FFO and FAD as supplemental measures of operating performance, as historical cost accounting for real estate assets assumes that the value of these assets diminishes predictably over time as evidenced by the provision for depreciation. Since real estate values have historically risen or fallen with market conditions, we believe that FFO

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and FAD should be examined in conjunction with net income to facilitate a clear understanding of our combined historical results. For more information with respect to FFO and FAD and a reconciliation of FFO and FAD to GAAP net income, see "Management's Discussion and Analysis of Financial Condition and Results of Operations."

OUR MANAGER

        We have a long-term management agreement with a wholly owned subsidiary of CapitalSource, a leading commercial finance, investment and asset management company focused on the middle market. CapitalSource provides senior and subordinate commercial loans, invests in real estate and residential mortgage assets, and engages in asset management and servicing activities. CapitalSource has 95 professionals dedicated to the healthcare industry, including 14 employees focused on healthcare real estate investment origination and 18 portfolio management employees, whose primary focus is healthcare real estate. In addition, our relationship with CapitalSource offers us access to CapitalSource's proprietary asset management database, its unique systems and its disciplined processes for underwriting and monitoring operators' asset performance. Our officers, who are employees of CapitalSource, have extensive experience investing in healthcare-related assets at CapitalSource and with other healthcare finance companies. Although our officers will not be dedicating all of their time to us, we believe the equity incentives granted to them in connection with this offering will ensure that their interests are aligned with those of our shareholders.

        Under our management agreement, our manager is responsible for administering our business activities and day-to-day operations, including sourcing originations, providing underwriting services and processing approvals for all real estate investments. Our manager also provides administrative, servicing and portfolio management functions with respect to our business and assets. Our manager's well-established operations and services benefit us in each of these areas.

        We have established a policy designed to minimize potential conflicts of interests with CapitalSource and to allocate investment opportunities between us. Under that policy, we will have the exclusive right to invest in all types of healthcare-related real property that are originated by or presented to CapitalSource through direct acquisitions of healthcare-related real property or equity investments in entities owning healthcare-related real property, and CapitalSource will continue to provide debt financing to healthcare-related companies through its commercial finance business. Our conflicts of interest policy also provides that all pari passu co-investments we make with CapitalSource must be on terms at least as favorable to us as to CapitalSource, and further requires that any co-investments we make in debt tranches of different priorities must be approved by our independent trustees unless the terms are no less favorable than those with the most favored third party participant or the terms are determined by third party bids or published market data. Our participation in other investments originated or sourced by CapitalSource will require approval of our independent trustees. For more information on this, see "Conflicts of Interest in Our Relationship with CapitalSource."

OUR COMPETITIVE STRENGTHS

        We believe several characteristics distinguish us from our competitors, including:

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OUR ASSETS

        As of March 31, 2008, our healthcare net lease portfolio consisted of 187 facilities with 22,179 beds in 23 states leased to 41 third-party operator groups. These facilities, which are principally SNFs, are subject to long-term, triple-net leases.

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        The following tables summarize information about these properties as of March 31, 2008:

Operator Diversification

Operator Group
  Facilities   Beds   Percentage of
Contractual
Rental Income
 

Delta Health Group

    17     2,186     13.3 %

Florida Institute for Long Term Care, LLC

    18     2,439     12.5 %

New Bell Facilities Services, L.P. 

    36     4,066     10.9 %

TenInOne Acquisition Group, LLC

    10     1,574     7.7 %

Signature Holdings II, LLC

    10     937     6.0 %

Other (36 operator groups)

    96     10,977     49.6 %
               

Total

    187     22,179     100.0 %
               

 
Geographic Diversification

State
  Facilities   Beds   Percentage of
Contractual
Rental Income
 

Florida

    59     7,302     37.3 %

Texas

    47     5,517     16.4 %

Tennessee

    10     1,589     9.7 %

Indiana

    14     1,392     6.4 %

Mississippi

    6     634     3.9 %

North Carolina

    6     682     3.2 %

Pennsylvania

    4     585     2.9 %

Maryland

    3     413     2.8 %

Nevada

    4     468     2.3 %

Wisconsin

    5     582     2.3 %

Ohio

    3     349     2.2 %

Kentucky

    5     344     1.7 %

Oklahoma

    5     657     1.3 %

Massachusetts

    2     231     1.1 %

Arizona

    2     192     1.1 %

Kansas

    2     108     1.1 %

Alabama

    1     174     *  

Iowa

    1     201     *  

Colorado

    3     283     *  

Alaska

    1     90     *  

Arkansas

    2     185     *  

New Mexico

    1     102     *  

California

    1     99     *  
               

Total

    187     22,179     100.0 %
               

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Lease Expirations

 

Year
  Number of
Expiring Leases
  Percentage of
Contractual
Rental Income
 

2008

    4     2.6 %

2009

    1     0.4 %

2010

    2     0.8 %

2011

    6     6.5 %

2012

    6     4.2 %

2013

    5     4.1 %

2014

    3     1.0 %

2015

    2     1.2 %

2016

    9     29.0 %

2017

    7     21.8 %

Thereafter

    18     28.4 %
           

Total

    63     100.0 %
           

        Our loan asset is a $150 million participation in the Genesis mezzanine loan, a $375 million, five-year mezzanine loan made to FC-Gen Acquisition, Inc., a subsidiary of the entity that acquired the assets formerly owned by Genesis. The Genesis mezzanine loan matures in July 2012 and bears interest at a rate of 30-day LIBOR plus 7.5%. Interest on the loan is payable monthly in arrears. There is also a $3.75 million termination fee due at the time of repayment of the loan, of which we are entitled to $1.5 million. In addition, there is an additional termination fee that accrues monthly at the rate of 1% per annum on the outstanding principal balance of the loan and is payable at the time of the repayment of the loan. As of March 31, 2008, Genesis operated 137 owned properties (16,633 beds), 42 leased properties (5,162 beds), and 29 joint venture or managed facilities (3,932 beds). Of these facilities, 184 are SNFs and 24 are ALFs. In addition, as of March 31, 2008, Genesis operated an ancillary division that provides rehabilitation therapy services to providers. CapitalSource holds a $175 million participation in the Genesis mezzanine loan and holds a $50 million participation in the $1.3 billion first mortgage loan made to the property owning entities of the Genesis facilities and their ultimate parent. The remaining $50 million participation in the Genesis mezzanine loan is held by an affiliate of Citigroup Global Markets Inc., one of the underwriters in this offering.

OUR INDUSTRY AND MARKET OPPORTUNITY

        Healthcare is one of the largest industries in the United States and has strong growth characteristics. According to the 2007 National Health Expenditures forecast published by CMS, healthcare spending in the United States is projected to grow at a CAGR of approximately 6.7% through 2017. As a percentage of GDP, healthcare spending is projected to increase by over 3% to 19.5% of GDP in 2017 with an expected spending level of over $4.3 trillion. CMS projects that national nursing home expenditures will grow from $124.9 billion in 2006 to $217.5 billion in 2017, representing a 5.2% CAGR.

        A primary reason for the rapid expected growth in healthcare spending and a primary growth driver for long-term care facilities is the aging of the U.S. population and increasing life expectancies. According to a 2008 report by the Federal Interagency Forum on Aging-Related Statistics, in 2006, there were approximately 37 million people aged 65 or older, comprising just over 12% of the total U.S. population. The number of Americans aged 65 or older is expected to climb from approximately 37 million in 2006 to approximately 48 million in 2017, representing a CAGR of 2.5%, compared to a

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total U.S. population which is expected to grow at a CAGR of 0.8% over the same period. In 2030, the population of this age category is expected to be twice as large as in 2006, growing from 37 million to 71.5 million and representing nearly 20% of the total U.S. population. In addition, CMS projects that the number of Americans aged 85 or older is expected to increase 13% by 2010 and 27% by 2020. We believe these statistics validate our investment thesis, as there is a direct correlation between increased usage of SNFs and increases in age. In 2005, there were 30 SNF stays per 1,000 Medicare enrollees aged 65-74, compared with 228 stays per 1,000 Medicare enrollees age 85 and over. Overall, for Medicare enrollees aged 65 and over, SNF stays increased significantly from 28 per 1,000 Medicare enrollees in 1992 to 79 per 1,000 Medicare enrollees in 2005.

        In addition to positive demographic trends, the demand for services provided by operators of SNFs is expected to increase substantially during the next decade primarily due to the impact of cost containment measures by government and private-pay sources. We expect payors to continue to transfer higher acuity patients from hospitals to less expensive care settings, such as SNFs.

        According to CMS, in 2007 there were approximately 15,800 nursing homes with approximately 1.7 million beds and an average occupancy rate of 89%. We believe that the demand for these properties will continue to increase over time as a result of the aging population and limited new construction, coupled with a slight reduction in the number of nursing homes over the past several years, as there are limits on supply. In addition to the typical zoning concerns and construction costs that generally limit all new construction projects, there are two other reasons why we expect new SNF construction to be limited. First, in many states it is a condition precedent to construction and operation of a new SNF that the operator obtain a certificate of need, or CON, from appropriate state regulators. Typically, state regulators grant CONs only if there is a clearly demonstrated need for additional facilities, which generally requires the operator/applicant to show that all other facilities in the targeted area are operating at or above 95% occupancy levels. This regulatory hurdle creates a considerable barrier to entry for new facility construction. Second, although private pay options and Medicare reimbursement represent the high margin portion of the nursing home industry, CMS notes that approximately 65% of the occupants of SNFs receive Medicaid benefits. As a result, facility operators must obtain and maintain long-term Medicaid contracts to provide them with suitable assurances that they will be able to operate with stable revenue streams. As with CONs, Medicaid contracts must be entered into with state agencies that are the payors of Medicaid reimbursement. These agencies operate within budgets and typically approve new reimbursement contracts only if there is clearly demonstrated need. Again, this barrier to entry puts owners of existing facilities at a competitive advantage as compared to prospective new entrants into the SNF market.

OUR STRATEGY

        Our strategy is to capitalize on CapitalSource's platform to identify, evalute and invest in properties that will provide us with strong, stable cash flow and capital appreciation. We expect to expand and further diversify our portfolio over time, as follows:

Utilize the CapitalSource Platform to Source New Investments

        As a leading provider of financing alternatives to SNF operators and other middle market healthcare companies, CapitalSource has developed a platform to source potential healthcare real estate investments. CapitalSource has many significant relationships within the healthcare real estate industry and a team of dedicated employees who are responsibile for identifying, evaluating, acquiring and monitoring new healthcare investments. We believe that CapitalSource's broad network of industry relationships and extensive resources will provide us with access to a strong pipeline of future acquisition opportunities.

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Capitalize on Current Attractive Industry Conditions

        We believe that our industry is characterized by several attractive attributes that increase the number and the quality of investment opportunities available to us, including:

Identify Attractive Investment Opportunities with New or Existing Operators

        We intend to focus our business and investment efforts on locating established, creditworthy, small owners and regional chains with operators that meet our standards for high quality and managerial experience. Our past, current and prospective clients and the clients of CapitalSource provide us with the foundation for an attractive investment strategy. We intend to pursue acquisitions that diversify our portfolio geographically and increase the number of our operators. We believe CapitalSource's underwriting experience allows it to accurately assess the quality of the operators with which we do business. CapitalSource has developed systems and personnel to evaluate potential investments to enable us to continue to invest in quality and profitable assets. Prior to making an investment, CapitalSource will consider the facility's historical and forecasted cash flow and its ability to meet operational needs, including capital expenditures. In addition, CapitalSource will consider qualitative factors such as the quality and experience of management, the creditworthiness of the operator of the facility, the physical condition and geographic location of the facility, the reimbursement environment, the occupancy and demand for similar healthcare facilities in the same or nearby communities, the payor mix and the overall general economic environment.

Opportunistically Expand into Additional Asset Classes

        Pursuant to our management agreement, we have the exclusive right to make all direct acquisitions of health-care related real property or equity investments in entities owning healthcare-related real property originated by or presented to CapitalSource. We may expand our portfolio of properties opportunistically to include other types of healthcare properties such as ILFs and ALFs or add additional loans to qualified operators. We may also expand our investment strategy to include other net leased assets that we believe would benefit from CapitalSource's underwriting and servicing expertise.

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OUR CORPORATE STRUCTURE

        Immediately prior to the consummation of this offering, CapitalSource will contribute all of its healthcare net lease assets and a $150 million participation in the Genesis mezzanine loan to us in exchange for            common shares, determined assuming that CapitalSource acquires these shares at a price equal to $        , the midpoint of the range set forth on the cover page of this prospectus. CapitalSource will sell all of the shares to be sold in this offering. The following chart shows the structure of our organization following completion of this offering:

CHART

ORIGINATION, UNDERWRITING AND SERVICING

        CapitalSource has created an integrated approach to our real estate origination and underwriting approval process that effectively combines the skills of its professionals with its proprietary information systems. This process allows CapitalSource to move efficiently and quickly from initial review of a prospective deal to the closing of the transaction while maintaining its rigorous underwriting standards. Along the way, a large number of professionals become involved in the analysis and decision-making with respect to each potential real estate opportunity. We believe that the high level of involvement of CapitalSource's staff in the various phases of the approval process allows us to minimize our risk of owning our assets.

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CapitalSource's Investment Approval Process

         LOGO

Origination

        CapitalSource's origination process begins with its development officers, who are charged with identifying, contacting and screening target properties and operators. These development officers spend a significant portion of their time meeting face-to-face with key decision makers and deal referral sources such as private equity investors, business brokers, attorneys, investment bankers and executives within the healthcare industry.

        To support its development officers, CapitalSource actively markets our business in an effort to build awareness of the CapitalSource brand as well as our own and to generate potential acquisition opportunities. CapitalSource has developed an aggressive marketing strategy focusing on enhancing the awareness of prospective operators of our brand. Components of this strategy include:

        Once a prospective investment is identified, the development officer or an investment officer enters transaction data into CapitalSource's proprietary transaction management database, DealTracker. The development officer then works closely with an investment officer and provides detailed information regarding the opportunity, including an executive summary with historical and projected financials, seller's asking price, and history of the operator at the facility (i.e., information on past regulatory survey deficiency issues). Based on these discussions, the investment officer makes a determination whether to proceed with the prospect.

        If the investment officer determines that the potential transaction meets our initial standards, he or she will prepare a term sheet. The term sheet is reviewed by a director, linked to DealTracker and

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electronically distributed to the professional staff involved in the origination, credit, and legal functions of CapitalSource's business. This distribution provides an opportunity for other investment officers and staff to review the proposed transaction and, as appropriate, provide comments and suggestions.

        Once the term sheet receives the required internal approvals from CapitalSource, it is sent to the prospective client. The investment officer and the prospective operator then negotiate the principal terms of the transaction and, if the terms are agreed to, execute the term sheet.

Underwriting

        Once the term sheet has been executed, CapitalSource typically requires that the prospective client remit a good faith deposit to cover a portion of CapitalSource's transaction costs incurred on our behalf in connection with the proposed transaction, including legal and auditing expenses and any third-party expenses, such as property appraisals, property condition reports, surveys, title reviews and Phase I environmental studies. Once this deposit is received, the responsible investment officer prepares an initial client memorandum, or ICM, briefly summarizing the terms of the proposed transaction and its associated risks. This memorandum is linked to DealTracker and distributed to the entire professional staff involved in the origination, credit and legal functions of our business. Once the ICM has been prepared, the framework of the proposed transaction is discussed with the credit committee to obtain the committee's initial feedback.

        Following the discussion of the ICM with the credit committee, the legal team is engaged by the investment officer to begin legal due diligence.

        Additionally, CapitalSource will perform extensive financial due diligence and underwriting procedures relating to the proposed transaction. The investment officer concurrently conducts detailed due diligence focusing on the physical and environmental condition of the facility, the operator's management team, the local competition and various financial results and projections. As part of CapitalSource's due diligence, the investment officer will visit the facility and have the operator answer questions regarding the condition of the building, occupancy, reimbursement rate and quality of care. Additionally, the investment officer is responsible for ordering third-party reports and assessing the appraisal, property condition assessment, environmental report and management background check when they are made available.

        CapitalSource has incorporated the underwriting, diligence and client examination functions into its integrated process due to the emphasis CapitalSource places on credit and risk analysis. We believe that the in-house examination and due diligence functions that CapitalSource performs enables us to maintain a high level of quality control over these functions while delivering faster transaction execution than our competitors. The expertise and experience of the professionals at CapitalSource also facilitate our comprehensive efforts in the ongoing management of our real estate portfolio, as discussed below. CapitalSource's underwriting officers typically possess significant levels of credit approval experience with banks, finance companies, accounting and/or audit firms. The underwriting officers work with analysts and examiners to conduct a detailed, comprehensive accounting examination of prospective operators as part of the underwriting process.

        CapitalSource's underwriters focus primarily on ensuring the creditworthiness of our prospective clients and our "credit first" philosophy.

        To apply consistent underwriting standards, these professionals use due diligence methodologies for healthcare facilities and their operators that have been developed by CapitalSource. These procedures include detailed examinations and customized analyses by our underwriting teams of the following key factors:

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        As part of the evaluation of a proposed investment, the underwriting team prepares a comprehensive memorandum for presentation to the credit committee. When the underwriting memorandum is complete, it is provided to the director of credit for review. After any requested revisions are made, the lead underwriting officer submits the underwriting memorandum to the credit committee members and links it to DealTracker at the same time.

        At the conclusion of due diligence, a detailed credit committee memorandum, which CapitalSource refers to as a "CCM," describing and analyzing the proposed transaction is prepared by the investment officer. The CCM is reviewed by the director and circulated to the credit committee for review along with the underwriting memorandum, and also linked to DealTracker.

Investment Approval

        Approval from our credit committee is required prior to funding any transaction. The members of our credit committee consist of members of CapitalSource's credit committee, along with Mr. Pieczynski, our president and CEO, and Mr. Chavez, our CFO. The credit committee meets weekly on an as-needed basis. The investment officer and lead underwriting officer present their recommendations on each potential transaction under consideration and a unanimous vote by the credit committee is required to approve the transaction. Transactions involving CapitalSource and its affiliates are subject to different approval requirements. See "Conflicts of Interest in Our Relationship with CapitalSource."

Portfolio Management/Servicing

        We believe that effective portfolio management is essential to maximizing the performance and value of our investments. Expertise in servicing and managing the assets in our portfolio is one of the many benefits we expect CapitalSource will provide to us.

        CapitalSource has a dedicated healthcare real estate portfolio team who work together in managing all of our real estate investments. The team includes loan officers and account executives, each of whom is assigned a portfolio of relationships and is tasked with monitoring compliance, evaluating deviations from projections, taking action to reduce impairment and losses, providing client service, and keeping management informed of any issues and trends. These professionals report directly to the directors and portfolio managers of the group, who are charged with overseeing the entire real estate portfolio.

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        CapitalSource's portfolio management personnel will perform the following functions:

        Regular meetings are held among the investment and portfolio management teams to review issues, updates, and financial performance of each of the transactions. Based on the discussions in that meeting, the directors and portfolio managers meet with the real estate president, investment team and development officers to discuss any major issues or deviations from our previous expectations based on our underwriting review. Additionally, on a quarterly basis, this same group reviews the financial monitoring model and discusses specifics on any operator financial performance deviation from our previous expectations based on our underwriting review.

        When modifications are required that are not in the normal course of the transaction, an appropriate evaluation is conducted and approval obtained before proceeding with a change to the transaction. The portfolio management team works closely with the accounting and tax groups with respect to all proposed modifications. All modifications require approval from the credit, business and legal arms of CapitalSource's portfolio management team.

        We evaluate our operators and facilities periodically based on events or circumstances that affect the risk profile of a transaction, and in any case at least quarterly. In these reviews, CapitalSource assesses, among other things, industry comparability, financial trends in comparison to underwriting, and history of payment and financial covenant compliance. Based on this review, steps may be taken to alter the level of scrutiny and servicing needs on a particular transaction. Any material negative changes in credit matrices are brought to the attention of the Group Chief Credit Officer.

        We believe that the scope and depth of CapitalSource's portfolio management operations will distinguish us from many other real estate investment companies and will provide a platform for pursuing and maintaining attractive real estate investments.

Proprietary Information Systems

        We believe that effective use of technology can streamline business functions, expedite turnaround time and enhance management and servicing abilities. As of March 31, 2008, CapitalSource employed 27 information systems employees, including 21 network support personnel and 6 applications

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developers. In addition to widely used commercial software, CapitalSource has developed three proprietary systems that it uses in its daily operations:

        Currently, CapitalSource is considering other commercially available alternatives to potentially replace CAM.

OUR OPERATING POLICIES

Policies with Respect to Financings and Other Activities

        If our board of trustees determines that additional funding is required, we may raise such funds through additional equity offerings, debt financing, and retention of cash flow (subject to maintaining our qualifications as a REIT) or a combination of these methods. We intend to employ what we believe to be a modest level of leverage of up to 60% of our total portfolio of real property assets, with any borrowings in excess of those levels requiring the approval of our board of trustees.

        We expect our assets to continue to generate rent sufficient to enable us to service the debt that currently encumbers some of the properties and to enable us to pay a regular quarterly dividends. As of March 31, 2008, we had mortgage debt in the form of a $247.5 million senior loan and a $35.8 million mezzanine loan. Both of these loans mature on April 9, 2009, subject to our ability to extend the loans. The interest rate under the senior loan is 30-day LIBOR plus 1.54%, and the interest rate under the mezzanine loan is 30-day LIBOR plus 4.00%. In addition, other assets are encumbered by an aggregate of approximately $56.5 million of long-term HUD insured mortgage financing that bears interest at a weighted average rate of 6.61%, and approximately $20.0 million of non-recourse junior subordinated financing bearing interest at 9.00% per annum.

        In the future, we expect to finance unencumbered assets and new acquisitions with internally generated cash flows, our anticipated revolving secured credit facility with affiliates of the underwriters of this offering, mortgage loans, additional HUD financing and subordinated debt, as well as through a combination of public and private offerings of equity and debt securities. The timing, source and amount of cash flows provided by financing activities and used in investing activities are sensitive to the capital markets environment, especially to changes in interest rates. Changes in the capital markets environment may impact the availability of cost-effective capital.

        We have authority to offer our common shares or other equity or debt securities in exchange for property and to repurchase or otherwise reacquire our shares or any other securities and may engage in such activities in the future. Subject to the percentage of ownership limitations and gross income and asset tests necessary for REIT qualification, we may invest in securities of other REITs, other entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities. We may engage in the purchase and sale of investments. We do not underwrite the securities of other issuers.

Disposition Policies

        While there are no current plans to dispose of any of our assets, with the assistance of CapitalSource we will evaluate our portfolio on a regular basis to determine if it continues to satisfy our investment criteria. Subject to certain restrictions applicable to REITs, we may decide to sell our

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assets opportunistically and use the proceeds of any such sale for additional investments, working capital purposes, or to repay outstanding debt.

Equity Capital Policies

        Subject to applicable law, our board of trustees has the authority, without further shareholder approval, to issue additional common shares and preferred shares or otherwise raise capital, including through the issuance of senior securities, in any manner and on the terms and for the consideration it deems appropriate, including in exchange for property. Our shareholders, including CapitalSource, will have no preemptive right to additional shares issued in any offering, and any offering may cause a dilution of investment.

Investment Guidelines

Objectives and Policies

        Our investment policy is to invest primarily in long-term care properties, primarily SNFs, through the ownership of such properties under triple-net leases with the operators of those properties. We do not participate in the operations of our investment properties, but rather our investment is limited to the ownership of primarily the land, building, improvements and related rights that are then leased to operators under long-term triple-net leases. In addition, we may also invest in real estate by providing, or participating in debt financing on long-term care properties, to the extent CapitalSource decides not to pursue such investments for its own account. See "Conflicts of Interest in Our Relationship with CapitalSource."

        All of our current portfolio of $1.0 billion in gross owned properties was acquired by CapitalSource after January 1, 2006. In addition, we have a $150 million participation in the Genesis mezzanine loan. At this time, we anticipate completing new investments during the remainder of 2008 though nothing is definitive at this time. In light of the competitive environment for healthcare real estate acquisitions and the tight credit markets, we can give no assurances that we will complete a significant level of new investments during the near term. In addition, CapitalSource has retained the first right to originate mortgage and mezzanine loans; therefore, we do not anticipate originating any meaningful level of mortgage or mezzanine loans.

        Historically, our investments have consisted of:

Investment Criteria

        In evaluating potential investments, we generally consider factors such as:

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        In addition, we assess the value of all properties, the interest rates and covenant requirements of any debt to be assumed in connection with an acquisition, and the anticipated sources of repayment of any existing debt that is not to be assumed.

        For investments in long-term care properties, we tend to favor moderate cost per bed/unit opportunities. We seek to invest primarily in properties that are located in suburban and rural areas of states. Prior to determining whether we will make an investment, we will generally conduct a property site visit to assess the overall physical condition of the property, make inquiries regarding trends in patient/resident mix, referral sources, overall occupancy trends and expected trends in labor costs, as well as viewing competing properties in the surrounding area to ascertain the general "competitiveness" of the investment target. In addition, we obtain and review appraisals, environmental and property condition reports, zoning, state surveys and financial statements of the property prior to making the investment. We prefer to invest in a property that has a significant market presence in its community and where state certificate of need, state Medicaid contracts and/or licensing procedures limit the entry of competing properties.

Prohibited Investments and Activities.

        Our policies, which are subject to change by our board of trustees without shareholder approval, impose certain prohibitions and restrictions on our investment practices or activities including prohibitions against:

Conflicts of Interest Policies

        We, our executive officers, certain of our trustees and CapitalSource will face conflicts of interests because of our relationships with each other. Our assets and investments will be sourced and originated by CapitalSource. CapitalSource will continue to offer mortgage financing to owners of SNFs and other healthcare facilities, and this mortgage financing might be viewed as a competitive product to the long-term, triple-net leases we structure with operators. To mitigate conflicts of interest in these origination activities, we have developed a conflicts of interest policy with CapitalSource with respect to the origination of investments, the allocation of investment opportunities, the terms of investments purchased from CapitalSource, the terms upon which we may make certain co-investments with CapitalSource and the servicing and management of assets in which both we and CapitalSource have an interest. See "Conflicts of Interest in Our Relationship with CapitalSource."

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Interested Trustee, Officer and Employee Transactions

        We will adopt a policy that, unless the action is approved by a majority of our independent trustees and is not otherwise prohibited by law, we will not:

        However, our bylaws do not prohibit any of our trustees, officers, employees or agents, in their personal capacity or in a capacity as an affiliate, employee or agent of any other person, or otherwise, from having business interests and engaging in business activities similar to or in addition to or in competition with those of or relating to us.

        Pursuant to Maryland law, a contract or other transaction between a company and a trustee or between the company and any other corporation or other entity in which a trustee serves as a trustee or has a material financial interest is not void or voidable solely on the grounds of the common directorship or interest, the presence of that director at the meeting at which the contract or transaction is authorized, approved or ratified or the counting of the director's vote in favor thereof if (1) the material facts relating to the common directorship or interest and as to the transaction are disclosed to the board of directors or a committee of the board, and the board or committee in good faith authorizes the transaction or contract by the affirmative vote of a majority of disinterested directors, even if the disinterested directors constitute less than a quorum, (2) the material facts relating to the common directorship or interest of the transaction are disclosed to the shareholders entitled to vote thereon, and the transaction is approved in good faith by vote of the shareholders, or (3) the transaction or contract is fair and reasonable to the company at the time it is authorized, ratified or approved.

Policies with Respect to Other Activities

        We have not engaged in trading, underwriting or agency distribution or sale of securities of other issuers and do not intend to do so. We have not in the past, but we may in the future, invest in the securities of other issuers for the purpose of exercising control over such issuers. At all times, we intend to make investments in a manner as to qualify as a REIT, unless because of circumstances or changes in the Internal Revenue Code or corresponding Treasury Regulations, our board of trustees determines that it is no longer in our best interest to qualify as a REIT. We intend to make investments in such a way that we will not be treated as an investment company under the Investment Company Act. After this offering, we will become subject to the information reporting requirements of the Securities Exchange Act of 1934, as amended, referred to as the Exchange Act. Pursuant to these requirements, we will file periodic reports, proxy statements and other information, including audited consolidated financial statements, with the SEC. We will furnish our shareholders with annual reports containing consolidated financial statements audited by our independent registered public accounting firm and with quarterly reports containing unaudited consolidated financial statements for each of the first three quarters of each fiscal year.

Future Revisions in Policies and Strategies

        Our board of trustees has the power to modify or waive our operating policies and strategies without the consent of our shareholders to the extent that the board of trustees (including a majority of our independent trustees) determines that a modification or waiver is in the best interest of our

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shareholders. Among other factors, developments in the market that either affect the policies and strategies mentioned herein or that change our assessment of the market may cause our board of trustees to revise our policies and strategies.

HEALTHCARE REIMBURSEMENT AND REGULATION

Medicare

        All of our properties are used as healthcare facilities, particularly as SNFs, and we are therefore directly affected by the risk associated with the healthcare industry. Our operators, as well as any facilities that may be owned and operated for our own account from time to time, derive a substantial portion of their net operating revenues from third-party payors, including the Medicare and Medicaid programs. These programs are highly regulated by federal, state and local laws, rules and regulations and are subject to frequent and substantial change.

        In 1997, the Balanced Budget Act significantly reduced spending levels for the Medicare and Medicaid programs, in part because the legislation modified the payment methodology for SNFs by shifting payments for services provided to Medicare beneficiaries from a reasonable cost basis to a prospective payment system. Under the prospective payment system, SNFs are paid on a per diem prospective case-mix adjusted basis for all covered services. Implementation of the prospective payment system has affected each long-term care facility to a different degree, depending upon the amount of revenue such facility derives from Medicare patients.

        Legislation adopted in 1999 and 2000 provided for a few temporary increases to Medicare payment rates, but these temporary increases have since expired. Specifically, the Balanced Budget Refinement Act of 1999 included a 4% across-the-board increase of the adjusted federal per diem payment rates for all patient acuity categories (known as Resource Utilization Groups, or RUGs), that were in effect from April 2000 through September 30, 2002. In 2000, the Benefits Improvement and Protection Act of 2000 included a 16.66% increase in the nursing component of the case-mix adjusted federal periodic payment rate, which was implemented in April 2000 and also expired October 1, 2002.

        The Balanced Budget Refinement Act and the Benefits Improvement and Protection Act also established temporary increases, beginning in April 2001, to Medicare payment rates to SNFs that were designated to remain in place until CMS implemented refinements to the existing RUG case-mix classification system to more accurately estimate the cost of non-therapy ancillary services. The Balanced Budget Refinement Act provided for a 20% increase for 15 RUG categories until CMS modified the RUG case-mix classification system. The Benefits Improvement and Protection Act modified this payment increase by reducing the 20% increase for three of the 15 RUGs to a 6.7% increase and instituting an additional 6.7% increase for eleven other RUGs.

        On August 4, 2005, CMS published its final rule, effective October 1, 2005, establishing Medicare payments for SNFs under the prospective payment system for federal fiscal year 2006 (October 1, 2005 to September 30, 2006). The final rule modified the RUG case-mix classification system and added nine new categories to the system, expanding the number of RUGs from 44 to 53. The implementation of the RUG refinements triggered the expiration of the temporary payment increases of 20% and 6.7% established by the Balanced Budget Refinement Act and the Benefits Improvement and Protection Act, respectively.

        Additionally, CMS announced updates in the final rule to reimbursement rates for SNFs in federal fiscal year 2006 based on an increase in the "full market-basket" of 3.1%. In the August 4, 2005 final rule, CMS estimated that the increases in Medicare reimbursements to SNFs arising from the refinements to the prospective payment system and the market basket update under the final rule would offset the reductions stemming from the elimination of the temporary increases during federal

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fiscal year 2006. CMS estimated that there would be an overall increase in Medicare payments to SNFs totaling $20 million in fiscal year 2006 compared to 2005.

        A significant change enacted under the Medicare Modernization Act is the creation of a new prescription drug benefit, Medicare Part D, which went into effect January 1, 2006. The significant expansion of benefits for Medicare beneficiaries arising under the expanded prescription drug benefit could result in financial pressures on the Medicare program that could result in future legislative and regulatory changes with impacts for our operators. As part of this new program, the prescription drug benefits for patients who are dually eligible for both Medicare and Medicaid are being transitioned from Medicaid to Medicare, and many of these patients reside in long-term care facilities. The Medicare program experienced significant operational difficulties in transitioning prescription drug coverage for this population when the benefit went into effect on January 1, 2006. Although it is unclear whether or how issues involving Medicare Part D might have any direct financial impacts on our operators, a June 2007 report by the Medicare Payment Advisory Commission (MedPAC, which is an independent body that advises Congress on Medicare payment policies) examined how Part D is affecting pharmacy services for residents of nursing facilities and other stakeholders and considered alternative approaches for delivering Part D benefits in nursing facilities. MedPAC did not make recommendations, although the report indicated that MedPAC will continue monitoring the delivery of Part D benefits to residents of long-term care facilities.

        On February 8, 2006, the President signed into law a $39.7 billion budget reconciliation package called the Deficit Reduction Act of 2005, or Deficit Reduction Act, to lower the federal budget deficit. The Deficit Reduction Act included estimated net savings of $8.3 billion from the Medicare program over five years.

        The Deficit Reduction Act contained a provision reducing payments to SNFs for allowable bad debts. Previously, Medicare reimbursed SNFs for 100% of beneficiary bad debt arising from unpaid deductibles and coinsurance amounts. In 2003, CMS released a proposed rule seeking to reduce bad debt reimbursement rates for certain providers, including SNFs, by 30% over a three-year period. Subsequently, in early 2006 the Deficit Reduction Act reduced payments to SNFs for allowable bad debts by 30% effective October 1, 2005 for those individuals not dually eligible for both Medicare and Medicaid. Bad debt payments for the dually eligible population will remain at 100%. Consistent with this legislation, CMS finalized its 2003 proposed rule on August 18, 2006, and the regulations became effective on October 1, 2006. CMS estimated that implementation of this bad debt provision will result in a savings to the Medicare program of $490 million from 2006 to 2010.

        The Deficit Reduction Act also contained a provision governing the therapy caps that went into place under Medicare on January 1, 2006. The therapy caps limit the physical therapy, speech-language therapy and occupation therapy services that a Medicare beneficiary can receive during a calendar year. The therapy caps were in effect for calendar year 1999 and then suspended by Congress for three years. An inflation-adjusted therapy limit ($1,590 per year) was implemented in September of 2002, but then once again suspended in December of 2003 by the Medicare Modernization Act. Under the Medicare Modernization Act, Congress placed a two-year moratorium on implementation of the caps, which expired at the end of 2005.

        On July 31, 2006, CMS published a notice updating the payment rates to SNFs for fiscal year 2007 (October 1, 2006 to September 30, 2007). The market basket increase factor for 2007 was 3.1%. CMS estimated that the payment update would increase aggregate payments to SNFs nationwide by approximately $560 million in fiscal year 2007 compared to 2006.

        On August 3, 2007, CMS published its final rule for updating the payment rates used under the prospective payment system for SNFs for federal fiscal year 2008 (October 1, 2007 to September 30, 2008). The market basket increase for fiscal year 2008 is 3.3%. Under the final rule, aggregate Medicare payments for nursing homes would increase by approximately $690 million for fiscal year

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2008 compared to 2007. In addition, the rule revises and rebases the SNF market basket, which is used in calculating SNF payment rates.

        In August 2007, the United States House of Representatives passed the Children's Health and Medicare Protection Act, which proposed significant cuts to the Medicare program. This bill would have limited the SNF market basket increase for 2008 to the first quarter of fiscal year 2008. After the first quarter, the bill would have decreased the update to zero. Although Congress did not include this provision in the Medicare legislation enacted in December 2007, the House of Representatives subsequently dropped these and all other Medicare provisions from the legislation, it remains possible that such Medicare provisions will be considered by the full Congress in the future.

        The inflation-adjusted therapy caps are set at $1,810 for calendar year 2008. These caps do not apply to therapy services covered under Medicare Part A in a SNF, although the caps apply in most other instances involving patients in SNFs or long-term care facilities who receive therapy services covered under Medicare Part B. The Deficit Reduction Act permitted exceptions in 2006 for therapy services to exceed the caps when the therapy services are deemed medically necessary by the Medicare program. The Tax Relief and Health Care Act of 2006, signed into law on December 20, 2006, extend these exceptions through March 31, 2008. The Medicare, Medicaid, and SCHIP Extension Act of 2007 signed into law on December 29, 2007 extend the exceptions through June 30, 2008. Future and continued implementation of the therapy caps could have a material adverse effect on our operators' financial condition and operations, which could adversely affect their ability to meet their payment obligations to us.

        In general, we cannot be assured that federal reimbursement will remain at levels comparable to present levels or that such reimbursement will be sufficient for our operators to cover all operating and fixed costs necessary to care for Medicare and Medicaid patients. We also cannot be assured that there will be any future legislation to increase Medicare payment rates for SNFs, and if such payment rates for SNFs are not increased in the future, some of our operators may have difficulty meeting their payment obligations to us.

Medicaid and Other Third-Party Reimbursement

        Each state has its own Medicaid program that is funded jointly by the state and federal government.

        Federal law governs how each state manages its Medicaid program, but there is wide latitude for states to customize Medicaid programs to fit the needs and resources of their citizens. Currently, Medicaid is the single largest source of financing for long-term care in the United States. Rising Medicaid costs and decreasing state revenues caused by recent economic conditions have prompted an increasing number of states to cut or consider reductions in Medicaid funding as a means of balancing their respective state budgets. Existing and future initiatives affecting Medicaid reimbursement may reduce utilization of (and reimbursement for) services offered by the operators of our properties.

        In recent years, many states have announced actual or potential budget shortfalls. As a result of these budget shortfalls, many states have announced that they are implementing or considering implementing "freezes" or cuts in Medicaid reimbursement rates, including rates paid to SNF and long-term care providers, or reductions in Medicaid enrollee benefits, including long-term care benefits. We cannot predict the extent to which Medicaid rate freezes, cuts or benefit reductions ultimately will be adopted, the number of states that will adopt them or the impact of such adoption on our operators. However, extensive Medicaid rate cuts, freezes or benefit reductions could have a material adverse effect on our operators' liquidity, financial condition and operations, which could adversely affect their ability to make lease payments to us.

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        The Deficit Reduction Act included $4.7 billion in estimated savings from Medicaid and the State Children's Health Insurance Program over five years. The Deficit Reduction Act gave states the option to increase Medicaid cost-sharing and reduce Medicaid benefits, accounting for an estimated $3.2 billion in federal savings over five years. The remainder of the Medicaid savings under the Deficit Reduction Act comes primarily from changes to prescription drug reimbursement ($3.9 billion in savings over five years) and tightened policies governing asset transfers ($2.4 billion in savings over five years).

        Asset transfer policies, which determine Medicaid eligibility based on whether a Medicaid applicant has transferred assets for less than fair value, became more restrictive under the Deficit Reduction Act, which extended the look-back period to five years, moved the start of the penalty period and made individuals with more than $500,000 in home equity ineligible for nursing home benefits (previously, the home was excluded as a countable asset for purposes of Medicaid eligibility). These changes could have a material adverse effect on our operators' financial conditions and operations, which could adversely affect their ability to meet their payment obligations to us.

        Private payors, including managed care payors, increasingly are demanding discounted fee structures and the assumption by healthcare providers of all or a portion of the financial risk of operating a healthcare facility. Efforts to impose greater discounts and more stringent cost controls are expected to continue. Any changes in reimbursement policies that reduce reimbursement levels could adversely affect the revenues of our operators, thereby adversely affecting their ability to make monthly lease payments to us.

        In May of 2007, CMS awarded 13 states and the District of Columbia grants totaling over $547 million to build Medicaid long-term care programs that provide alternatives to nursing home care and help people remain at home. Similarly, individual states have been promoting alternatives to nursing homes to cope with the aging population through laws and the development and promotion of community-based systems of care. CMS' grants and the activities of states evidence a shift from a focus on institutional care to a system that offers more choices, including home and community-based services. This trend could have potential adverse effects on our operators' financial conditions, which could affect their ability to meet their payment obligations to us.

Fraud and Abuse Laws and Regulations

        There are various extremely complex federal and state laws governing a wide array of referral relationships and other arrangements, and prohibiting fraud by healthcare providers, including criminal provisions that prohibit filing false claims or making false statements to receive payment or certification under Medicare and Medicaid, and failing to refund overpayments or improper payments. The federal and state governments are devoting increasing attention and resources to anti-fraud initiatives against healthcare providers. Penalties for healthcare fraud have been increased and expanded over recent years, including broader provisions for the exclusion of providers from the Medicare and Medicaid programs. The Office of the Inspector General for the U.S. Department of Health and Human Services, or OIG-HHS, has described a number of new and ongoing initiatives for 2008 to study instances of potential Medicare and Medicaid overbilling and/or fraud in SNFs and nursing homes. The OIG-HHS, in cooperation with other federal and state agencies, also continues to focus on the activities of SNFs in certain states in which we have properties.

        In addition, the federal False Claims Act allows a private individual with knowledge of fraud against the Medicare or Medicaid programs to bring a claim on behalf of the federal government and earn a percentage of the federal government's recovery from such a claim. Because of these monetary incentives, these so-called "whistleblower" suits have become more frequent. Some states currently have statutes that are analogous to the federal False Claims Act. The Deficit Reduction Act encourages states to enact such legislation by permitting states to retain an additional 10% of any recovery in a suit

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for false or fraudulent claims submitted to that state's Medicaid program if the enacted legislation is at least as effective as the federal False Claims Act in rewarding and facilitating whistleblower suits. Enforcement activity may increase as additional states enact legislation in response to the Deficit Reduction Act. The violation of any of these laws or regulations by an operator may result in the imposition of fines or other penalties that could jeopardize that operator's ability to make lease payments to us or to continue operating its facility.

Certificates of Need (CONs) and Related State Licensing

        State mandated regulations governing CONs control the development and expansion of healthcare services and facilities in certain states. Some states also require regulatory approval prior to changes in ownership of certain healthcare facilities. States that do not have CON programs may have other laws or regulations that limit or restrict the development or expansion of healthcare facilities. To the extent that CONs or other similar approvals are required for expansion or the operations of our facilities, either through facility acquisitions, expansion or provision of new services or other changes, such expansion could be affected adversely by the failure or inability of our operators to obtain the necessary approvals, changes in the standards applicable to such approvals or possible delays and expenses associated with obtaining such approvals.

Environmental Matters

        A wide variety of federal, state and local environmental and occupational health and safety laws and regulations affect healthcare facility operations. These complex federal and state statutes, and their enforcement, involve myriad regulations, many of which involve strict liability on the part of the potential offender. Some of these federal and state statutes may directly impact us. Under various federal, state and local environmental laws, ordinances and regulations, an owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances at, under or disposed of in connection with such property, as well as other potential costs relating to hazardous or toxic substances (including government fines and damages for injuries to persons, adjacent property, and/or natural resources). This may be true even if we did not cause or contribute to the presence of such substances. The cost of any required remediation, removal, fines or personal or property damages and the owner's liability therefor could exceed or impair the value of the property, and/or the assets of the owner or secured lender. In addition, the presence of such substances, or the failure to properly dispose of or remediate such substances, may adversely affect the owner's ability to sell or rent such property or to borrow using such property as collateral.

Other Laws

        Other laws that impact how our operators conduct their operations include federal and state laws designed to protect the confidentiality and security of patient health information, laws protecting consumers against deceptive practices, and laws generally affecting our operators, management of property and equipment and how our operators generally conduct their operations, such as fire, and health and safety laws; and federal and state laws mandating quality of services and care, and quality of food service; resident rights (including abuse and neglect laws) and the handling and destruction of controlled substances governed by the Drug Enforcement Agency and health standards set by the federal Occupational Safety and Health Administration. Additional costs to comply with these rules could have a material adverse effect on our operators' financial condition, which could cause the revenues of our operators to decline and potentially jeopardize their ability to meet their obligations to us.

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Legislative and Regulatory Developments

        Each year, legislative and regulatory proposals may be introduced or proposed in Congress and state legislatures as well as by federal and state agencies that, if implemented, could result in major changes in the healthcare system, either nationally or at the state level. In addition, regulatory proposals and rules are released on an ongoing basis that may have major impacts on the healthcare system generally and the industries in which our operators do business. Legislative and regulatory developments can be expected to occur on an ongoing basis at the local, state and federal levels that have direct or indirect impacts on the policies governing the reimbursement levels paid to our facilities by public and private third-party payors, the costs of doing business and the threshold requirements that must be met for facilities to continue operation or to expand.

        The Medicare Modernization Act, which is one example of such legislation, was enacted in December 2003. The significant expansion of other benefits for Medicare beneficiaries under this Act, such as the prescription drug benefit, could create financial pressures on the Medicare program that might result in future legislative and regulatory changes with impacts on our operators. Although the creation of a prescription drug benefit for Medicare beneficiaries was expected to generate fiscal relief for state Medicaid programs, the structure of the benefit and costs associated with its implementation may mitigate the relief for states that originally was anticipated.

        The Deficit Reduction Act is another example of such legislation. The provisions in the legislation designed to create cost savings from both Medicare and Medicaid could diminish reimbursement for our operators under both Medicare and Medicaid.

        CMS also launched the Nursing Home Quality Initiative program in 2002, which requires nursing homes participating in Medicare to provide consumers with comparative information about the quality of care at the facility. In the fall of 2006, a new quality campaign, Advancing Excellence for America's Nursing Home Residents, was launched. The initiative lasts for two years with the ultimate goal being improvement in quality of life and efficiency of care delivery. In the event any of our operators do not maintain the same or superior levels of quality care as their competitors, patients could choose alternate facilities, which could adversely impact our operators' revenues. In addition, the reporting of such information could lead to reimbursement policies that reward or penalize facilities on the basis of the reported quality of care parameters.

        In late 2005, CMS began soliciting public comments regarding a demonstration project to examine pay-for-performance approaches in the nursing home setting that would offer financial incentives for facilities delivering high quality care. CMS anticipates that the demonstration could begin in late 2008. CMS may also commence the next phase of the Post Acute Care Payment Reform Demonstration (PAC-PRD) project in 2008, where information will be collected about Medicare beneficiaries' experiences in post-acute care settings. The purpose of the demonstration project, which was mandated by the Deficit Reduction Act, is to use the information obtained to guide future Medicare payment policy.

        In February 2008, certain members of Congress introduced the Nursing Home Transparency and Improvement Act of 2008. This legislation proposes additional reporting requirements by nursing home staff, heightened penalties for nursing home quality deficiencies and greater transparency by companies, such as us, that own or operate nursing home facilities. Specifically, the Act provides for the disclosure of detailed reports relating to nursing home expenditures, civil monetary penalties of up to $100,000 for deficiencies in nursing home care and additional protections for nursing home residents, such as advance notice of the closure of a nursing home facility or the relocation of nursing home residents and the development of a standardized resident complaint system. In addition, the Act contemplates heightened regulation of owners of nursing home facilities by granting the authority to the Secretary of the Department of Health and Human Services to develop a national independent monitor program specific to interstate and large intrastate nursing home chains. The Secretary will be responsible for

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overseeing the efforts of owners of nursing home facilities to comply with federal and state regulations, analyzing the management structure, expenditures and staffing of nursing home facilities, reporting findings and recommendations relating to such analyses and oversight to the federal and state governments and publishing such findings, analyses and recommendations. Additionally, in February 2008, the President released his budget proposing a zero percent market basket update in 2009 through 2011 for SNFs followed by a full update less 0.65% annually thereafter. The President's budget also proposed to eliminate bad debt reimbursements for unpaid beneficiary cost-sharing over four years for all providers. We cannot be certain if either of these proposals will be enacted by Congress.

        Medicare prospective payments to nursing facilities have been slated to increase by an annual market basket index (MBI) factor of 3.4%, as announced by CMS in late July. The MBI annual update will be effective for services rendered on or after October 1, 2008, and are expected to increase Medicare payments to nursing home providers by $780 million for the rate year from October 1, 2008—September 30, 2009. Although the average rate hike is estimated at 3.4%, the actual overall net impact to an individual SNF will be affected by the case mix of the facility as well as the influence of the wage index to the labor component of the RUG rate. CMS has indicated that it will continue to study and evaluate the acuity weights and overall reasonableness of the current 53 RUG level payments to ensure that payments are adequate and effectively measure and account for the resource consumption of labor and services. It is likely that refinements and recalibrations of the current RUG categories will occur in the future, and such changes could impact Medicare reimbursements to nursing facilities.

        Other proposals under consideration include efforts by individual states to control costs by decreasing state Medicaid reimbursements in the current or future fiscal years and federal legislation addressing various issues, such as improving quality of care and reducing medical errors throughout the health care industry. We cannot accurately predict whether specific proposals will be adopted or, if adopted, what effect, if any, these proposals would have on operators and, thus, our business.

COMPETITION

        Our income-generating potential will depend, in large part, on CapitalSource's ability to originate real estate related investment opportunities in healthcare facilities. In originating these investments, CapitalSource will face competition from other REITs, investment companies, healthcare operators and other institutional investors when it attempts to identify investment opportunities. Competition may result in higher prices for healthcare real estate assets and reduced returns on equity.

        Our ability to compete successfully for healthcare real property investments will be determined by a number of factors, including CapitalSource's ability to identify suitable acquisition or investment targets and to negotiate acceptable terms for any such acquisitions, as well as the availability of capital, including partnering with suitable co-investors. If CapitalSource does not identify investments that meet our investment guidelines, our ability to increase shareholder value through profitable growth may be limited.

        Some of our competitors are significantly larger than us and CapitalSource, and have greater financial resources and lower cost of capital than we do. To the extent that a competitor is willing to risk larger amounts of capital in a particular transaction or to employ more liberal underwriting standards when evaluating potential lending opportunities than we are, our origination volume and profit margins for our portfolio could be adversely affected. Our competitors may also be willing to accept lower returns on their investments and may succeed in originating or acquiring assets we have targeted for origination or in refinancing mezzanine loans that are in our portfolio. There is considerable competition in our sector and there can be no assurance that we will compete effectively or that we will not encounter further increased competition in the future that could limit our ability to conduct our business effectively.

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INSURANCE

        In the opinion of senior management, our properties are adequately covered by insurance.

EMPLOYEES

        We do not, and expect that we will not, have any employees.

LEGAL PROCEEDINGS

        From time to time, we may be party to legal proceedings. We do not believe that any currently pending or threatened proceeding, if determined adversely to us, would have a material adverse effect on our business, financial condition or results of operations, including our cash flows.

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MANAGEMENT AGREEMENT

        Prior to the closing of this offering, we will enter into a management agreement with our manager, pursuant to which our manager will provide for the day-to-day management of our operations.

MANAGEMENT SERVICES

        The management agreement appoints CapitalSource Finance LLC, a wholly owned subsidiary of CapitalSource, to manage all of our real estate assets and day-to-day operations subject to the terms and conditions of the management agreement. In performing its duties under the management agreement, our manager will use commercially reasonable efforts to comply with, and to cause the personnel providing services to us to comply with, our conflicts of interest policy and investment guidelines. Our manager, at all times, will be subject to the supervision and direction of our board of trustees, the terms and conditions of the management agreement and such further limitations or parameters as may be imposed from time to time by our board of trustees. Our manager is also responsible for (i) the selection, purchase, management and sale of our investments, (ii) our financing activities and (iii) providing us with investment advisory services. Our manager is responsible for our day-to-day operations and will perform (or cause to be performed) such services and activities relating to our investments and operations as may be appropriate, including, without limitation:

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        Pursuant to the terms of the management agreement, CapitalSource will provide us with a senior management team along with appropriate support personnel to provide the management services described in the management agreement, who are expected to devote their time to our management as necessary and appropriate, commensurate with the level of our activity.

        Our manager has not assumed any responsibility under the management agreement other than to render the services called for under the management agreement in good faith and in a commercially reasonable manner and is not responsible for any action of our board of trustees in following or declining to follow its advice or recommendations, including as set forth in our conflicts of interest policy or investment guidelines. The management agreement provides that our manager and its affiliates, and their directors, officers, employees and stockholders, will not be liable to us, any of our subsidiaries, our board of trustees or our shareholders for any acts or omissions by our manager, its officers, employees or its affiliates, performed in accordance with and pursuant to the management agreement, except by reason of acts constituting bad faith, willful misconduct, gross negligence or

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reckless disregard by our manager or its affiliates of their respective duties under the management agreement. We have agreed to indemnify our manager and its affiliates, and the directors, officers, employees and stockholders of our manager and its affiliates, with respect to any and all expenses, losses, damages, liabilities, demands, charges and claims (including reasonable attorney's fees) in respect of or arising from any acts or omissions of our manager and its affiliates, and their directors, officers, employees and stockholders, performed in good faith under the management agreement and not constituting bad faith, willful misconduct, gross negligence or reckless disregard of their respective duties. Our manager has agreed to indemnify us and our trustees, officers and shareholders and each person, if any, controlling us, with respect to any and all expenses, losses, damages, liabilities, demands, charges and claims (including reasonable attorney's fees) in respect of or arising from any acts or omissions of our manager or its affiliates constituting bad faith, willful misconduct, gross negligence or reckless disregard of its duties under the management agreement or any claims by CapitalSource's employees relating to the terms and conditions of their employment with CapitalSource. CapitalSource will maintain reasonable and customary "errors and omissions" and other customary insurance coverage.

        Our manager is required to refrain from any action that, among other things, (i) would adversely affect our qualification as a REIT under the Internal Revenue Code or our status as an entity exempted from investment company status under the Investment Company Act, (ii) would violate any law, rule or regulation of any governmental body or agency having jurisdiction over us or of any exchange on which our securities may be listed or that would otherwise not be permitted by our declaration of trust or bylaws, (iii) would exceed its authority granted pursuant to the management agreement or otherwise conveyed by our board of trustees, or (iv) would violate our conflicts of interest policy. If our manager is ordered to take any action by our board of trustees, our manager will notify our board of trustees if it is our manager's judgment that such action would adversely affect such status or violate any such law, rule, regulation or policy or our declaration of trust or bylaws.

TERM AND TERMINATION RIGHTS

        The management agreement has an initial three-year term expiring on                 , 2011, and will be automatically renewed for one-year terms thereafter unless we or our manager elect to not renew the agreement upon the expiration date of the initial term or any renewal term by providing the other party with at least 180 days prior notice of the intention not to renew the agreement. The management agreement does not limit the number of renewal terms. The management agreement may not be terminated without cause during the initial term or any renewal term. We may only elect not to renew the management agreement upon the expiration of the initial term or any renewal term. If we elect not to renew the agreement upon expiration of the initial term or any renewal term, we will be required to pay our manager a termination fee, within 90 days of termination, equal to the average annual management fee earned during the two years immediately prior to termination, multiplied by two. In addition, if the management agreement is terminated without cause by us or a successor to us within one year following a change in control of our company, our manager will be entitled to receive a termination fee within 90 days of termination, equal to the average annual management fee earned during the two years immediately prior to termination, multiplied by three. The termination fee will be calculated as of the end of the most recently completed fiscal quarter prior to the date of termination. In addition, following any termination of the management agreement, we must pay our manager all compensation accruing to the date of termination. Additionally, the management agreement contains non-solicitation provisions that prohibit us from hiring employees of CapitalSource.

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        We also may terminate the management agreement with 30 days' prior written notice for cause, without paying the termination fee, if any of the following events occur, which will be determined by the unanimous vote of our independent trustees:

        Our manager may at any time assign or delegate its duties under the management agreement to any affiliate of our manager provided that our manager shall remain liable to us for the affiliate's performance.

MANAGEMENT FEE

        We have agreed to pay our manager a management fee that is intended to reimburse our manager for providing certain services to us as described above under "Management Services." Our manager may also be entitled to certain expense reimbursements as described below. Expense reimbursements to our manager will be made monthly.

Monthly Management Fee

        We will pay our manager an annual management fee monthly in arrears in an amount equal to 0.50% of our average gross invested assets, which constitute the sum of our net real estate investments plus accumulated depreciation plus our loan receivable of $150 million. Our manager will use the proceeds from this fee in part to pay compensation to its officers and employees provided to us who, notwithstanding that certain of them also are our officers, will receive no cash compensation directly from us.

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Reimbursement of Expenses

        We will pay all our operating expenses, except those specifically required to be borne by our manager under the management agreement. Our manager is responsible for the employment expenses of its employees, including our officers and any trustees who are also employees of CapitalSource. CapitalSource is also responsible for:

        The costs and expenses required to be paid by us include, but are not limited to:

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CONFLICTS OF INTEREST IN OUR RELATIONSHIP WITH CAPITALSOURCE

        We, our executive officers, certain of our trustees and CapitalSource will face conflicts of interest because of our relationships with each other. See "Risk Factors—Risks Related to Conflicts of Interest and Our Relationship with CapitalSource." Although we engaged separate legal counsel to represent us, the terms of our management agreement, including the fee structure, were not negotiated at arm's-length, nor were the terms of the agreement relating to the contribution of our initial assets negotiated at arm's-length. As a result, the terms of these agreements, including the consideration paid for our initial assets, may not be as favorable to us as if the agreements had been negotiated with unaffiliated parties. Further, CapitalSource will continue to offer mortgage financing to healthcare facilities, which is a competitive product to the triple-net leases we structure with our operators. In addition, none of the employees of CapitalSource nor any of our officers will devote their time to us exclusively.

        As described above, the compensation we will pay to our manager consists of a management fee that is not tied to our performance, so we pay it regardless of performance, and it may not provide sufficient incentive to CapitalSource to seek to achieve attractive risk-adjusted returns on our portfolio. Moreover, CapitalSource is authorized to follow broad investment guidelines and has great latitude within those guidelines in determining the types of assets it may decide are proper investments for us. See "Business—Investment Guidelines." Our board of trustees will periodically review our investment guidelines and our investment portfolio. However, our board of trustees is not expected to review or approve every individual investment. In addition, our board of trustees will rely primarily on information provided to it by our manager. Finally, any transactions entered into by our manager on our behalf may be costly, difficult or impossible to unwind by the time they are reviewed by our board of trustees.

CONFLICTS OF INTEREST POLICIES

        We have adopted certain policies that are designed to minimize certain potential conflicts of interest. Unless otherwise approved by the majority of our trustees, all of our investments must be in accordance with our investment guidelines described elsewhere in this prospectus. We have developed our conflicts of interest policy with CapitalSource in an effort to address conflicts with respect to the allocation of investment opportunities. However, we cannot make any assurances regarding the success of investments that are allocated to us or to CapitalSource. This conflicts of interest policy includes the following:

First Right to Invest

        CapitalSource has agreed to provide us with the first right to invest in all assets originated by or presented to CapitalSource or any of its affiliates with one or more of the following characteristics, regardless of how such assets are originated or identified, unless otherwise specified below:


Pari Passu Co-Investments

        The economic terms of any co-investment with CapitalSource or any of its affiliates made on a pari passu basis must be at least as favorable to us as to CapitalSource or such affiliate.

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Co-Investments with Debt Tranches of Different Priorities

        We have adopted the following policies with respect to co-investments with CapitalSource or any of its affiliates involving debt tranches of different priorities.

Participation

        We have adopted the following policies with respect to our participation in investments in which CapitalSource and its affiliates are also participating:

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Fees

        In connection with any investment purchased from CapitalSource or any co-investment or participation with CapitalSource, CapitalSource will provide us with our pro rata portion of any fees generated in connection with such investment.

Legal Counsel

        CapitalSource's legal department will provide legal services to us, such as advice as to corporate governance matters, regulatory requirements, tax matters, litigation matters and such other matters as we or our board may from time to time reasonably request, for which services we will reimburse CapitalSource at its lawyers' standard rates. In the provision of such legal services, we and our officers and trustees shall, to the extent permitted by applicable law, be entitled to all attorney-client privileges available and all fiduciary obligations owed by attorneys to their clients under applicable law.

        This conflicts of interest policy may be changed or waived by us and CapitalSource (which approval must be made by a majority of our independent trustees) without the approval of our shareholders.

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MANAGEMENT

TRUSTEES AND EXECUTIVE OFFICERS

        Upon completion of this offering, our board of trustees will consist of five trustees, including the trustee nominees named below, each of whom has been nominated for election and has consented to serve as a trustee upon completion of this offering. Two of our initial trustees, Mr. Pieczynski, our president and chief executive officer, and Mr. Delaney, our non-executive chairman, are CapitalSource's employees. Under the terms of the Master Transaction Agreement pursuant to which we will acquire our initial assets from CapitalSource, we have agreed to expand our board to six members if CapitalSource chooses to exercise its right under this agreement to designate an additional person to serve as a trustee on our board following this offering. Subject to CapitalSource's rights to designate trustee nominees, our board of trustees will be elected annually by our shareholders, commencing in 2009 in accordance with our bylaws. Our bylaws provide that a majority of the entire board of trustees may establish, increase or decrease the number of trustees, provided that the number of trustees shall never be less than one nor more than 11. All of our executive officers will serve at the discretion of our board of trustees. The following table sets forth certain information about our trustee nominees and executive officers.

Name
  Age   Position with Us

John K. Delaney

    45   Chairman of the Board of Trustees

James J. Pieczynski

    45   President, Chief Executive Officer and Trustee

Alexander J. Chavez

    43   Chief Financial Officer and Treasurer

Imran Javaid

    34   Chief Accounting Officer and Controller

Elizabeth A. Stone

    44   General Counsel and Secretary

Bary G. Bailey

    49   Independent Trustee nominee

William C. Scott

    71   Independent Trustee nominee

        Independent Trustee nominee

        Biographies for our executive officers, trustees and trustee nominees are as follows:

John K. Delaney

        Mr. Delaney, a co-founder of CapitalSource, is the Chief Executive Officer of CapitalSource and Chairman of its Board of Directors. He has been the Chief Executive Officer and has served on CapitalSource's Board of Directors since its inception in 2000. From 1993 until its sale to Heller Financial in 1999, Mr. Delaney was the co-founder, Chairman and Chief Executive Officer of HealthCare Financial Partners, Inc., a provider of commercial financing to small and medium-sized healthcare service companies. Mr. Delaney received his undergraduate degree from Columbia University and his juris doctor degree from Georgetown University Law Center.

James J. Pieczynski

        Mr. Pieczynski has served as CapitalSource's Co-President—Healthcare and Specialty Finance since January 2006. Mr. Pieczynski served as CapitalSource's Managing Director—Healthcare Real Estate Group from February 2005 until assuming his current responsibilities and served as CapitalSource's Director—Long Term Care from November 2001 through January 2005. Prior to joining CapitalSource, Mr. Pieczynski was employed from 1993 until 2001 at LTC Properties, Inc., which is a healthcare REIT focused on the long-term care sector, where he held a variety of positions including President, Chief Financial Officer, and Chief Strategic Planning Officer. Mr. Pieczynski received his undergraduate degree from the University of Illinois, Urbana-Champaign.

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Alexander J. Chavez

        Mr. Chavez joined CapitalSource in January 2006 as Director in the Healthcare Real Estate Group. Prior to joining CapitalSource, from 1996 through 2004, Mr. Chavez served as Senior Vice President and Treasurer of LTC Properties, Inc. While at LTC, Mr. Chavez was involved in all aspects of the business, including securing nearly $1 billion of financing in public debt, equity and securitization markets. Prior to joining LTC, Mr. Chavez was employed by Ernst & Young, LLP, where he served as an Audit Manager specializing in the healthcare and real estate industries from 1990 to 1996. Mr. Chavez holds a Bachelor's of Science degree in Accounting from the University of Southern California.

Imran Javaid

        Mr. Javaid has served as a Director in the Healthcare Real Estate Group of CapitalSource since January 2006. Mr. Javaid served as an Investment Officer from January 2004 until assuming his current responsibilities and served as an Investment Associate from August 2001 through January 2004. Prior to joining CapitalSource, Mr. Javaid was employed from August 1999 through August 2001, with the Realty Group of The Carlyle Group, a global private equity firm based in Washington, D.C. Prior to that, Mr. Javaid worked for KPMG, LLP in its Assurance & Advisory Services Group. Mr. Javaid holds a B.A. in Accounting from Franklin & Marshall College. Mr. Javaid is a CFA charterholder and a CPA.

Elizabeth A. Stone

        Ms. Stone joined the legal department of the Healthcare Real Estate Group of CapitalSource in March 2006. Prior to joining CapitalSource, Ms. Stone was a partner in the Los Angeles office of the law firm of Jeffer, Mangels, Butler & Marmaro, and also practiced in the Los Angeles offices of Heller Ehrman LLP, where she acted as Special Counsel from 2002 through February 2006.

Bary G. Bailey

        Since May 2007, Mr. Bailey has actively pursued acquisition opportunities working with several private equity firms and has also acted as an independent consultant to companies and entities operating in the life sciences sector. Prior to May 2007, Mr. Bailey served as Executive Vice President and Chief Financial Officer of Valeant Pharmaceuticals from December 2002 to March 2007 and as an Executive Vice President through May 2007. Mr. Bailey previously served as Executive Vice President, Pharmacy and Technology of PacifiCare Health Systems, Inc., a provider of managed care services to approximately 5 million members, from July 2000 to December 2002. In that capacity, Mr. Bailey was responsible for managing approximately 1,500 employees in both operations and technology.

William C. Scott

        Since March 1998, Mr. Scott has served as a member of the board of directors of Skilled Healthcare Group Inc. and served as its Chairman from March 1998 until April 2005. Since December 1985, Mr. Scott has also held various positions with Summit Care Corporation, including Chief Executive Officer and Chief Operating Officer, which Skilled Healthcare Group Inc. acquired in March 1998. Mr. Scott served as Senior Vice President of Summit Health, Ltd., Summit's former parent company, from December 1985 until its acquisition by OrNda Healthcorp in April 1994.

TRUSTEE INDEPENDENCE

        Upon completion of this offering, our board of trustees will have four non-management members, three of whom are independent trustees. Mr. Pieczynski, our president and chief executive officer, and Mr. Delaney, our non-executive chairman, are employees of CapitalSource and have been appointed to our board of trustees by CapitalSource.

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        After completion of this offering, CapitalSource will own more than 50% of the total voting power of our common shares. As such, we will be deemed to be a "controlled company" under the rules of the NYSE, and we will qualify for, and intend to rely on, the "controlled company" exception to the board of trustees and committee composition requirements under the rules of the NYSE. Pursuant to this exception, we will be exempt from the NYSE's requirements that:

        The "controlled company" exception does not modify the independence requirements for the audit committee, and we intend to comply with the requirements of the Sarbanes-Oxley Act, described below, and the NYSE rules, which require that our audit committee be composed of three independent trustees within one year from the date of this prospectus.

        For a trustee to be "independent" under the NYSE's corporate governance listing standards, our board must affirmatively determine that the trustee has no material relationship with us, either directly or as a partner, shareholder, or officer of an organization that has a relationship with us. In addition, the NYSE's rules set forth certain relationships between a trustee, or an immediate family member of a trustee, and the company which would preclude the board of trustees from determining a trustee to be independent.

        SEC rules impose additional independence requirements for all members of the audit committee. These rules set forth two basic criteria. First, audit committee members are barred from accepting, directly or indirectly, any consulting, advisory or other compensatory fee from the company or its affiliate, other than in the member's capacity as a member of the board of trustees and any board committee. The second basic criterion for determining independence provides that a member of the audit committee of a listed company's board may not be an affiliated person of the company or any subsidiary of the company apart from his or her capacity as a member of the board and any board committee. For this purpose, designees of affiliated persons are also disqualified. Messrs. Bailey, Scott and            , the trustees who are not CapitalSource employees, are "independent" under these SEC rules.

BOARD COMMITTEES

        Our board of trustees has established three committees, the principal functions of which are briefly described below. Matters put to a vote by any one of our three committees must be approved by a majority of the trustees on the committee who are present at a meeting, in person or as otherwise permitted by our bylaws, at which there is a quorum or by the unanimous written consent of the trustees on that committee.

Audit Committee

        Our board of trustees has established an audit committee, which will be composed of Messrs. Bailey, Scott and                        . In addition, our audit committee will be required to have a designated "audit committee financial expert" within the meaning of SEC rules. Mr. Bailey will chair the committee and has been determined by our board of trustees to be an audit committee financial expert.

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        The audit committee's primary duties and assigned roles will be to:

Compensation Committee

        Our board of trustees has established a compensation committee, which will be composed of Messrs.                         ,                         and                         . Mr.                         will chair the committee. The principal functions of the compensation committee are to:

Nominating and Corporate Governance Committee

        Our board of trustees has established a nominating and corporate governance committee, which will be composed of Messrs.                         ,                         and                         . Mr.                         will chair the committee. The principal functions of the nominating and corporate governance committee are to:

        The nominating and corporate governance committee charter sets forth certain criter