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Home My WebLink About2011-05-24 City Council Item No. 14CITY OF LADE LSII`IOI\E % ` DREAM EXTREME,. JOINT REPORT TO CITY COUNCIL AND PUBLIC FINANCING AUTHORITY TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL HONORABLE CHAIRMAN AND MEMBERS OF THE PUBLIC FINANCING AUTHORITY FROM: ROBERT A. BRADY CITY MANAGER/EXECUTIVE DIRECTOR DATE: MAY 24, 2011 SUBJECT: 1. PUBLIC HEARING — A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF LAKE ELSINORE, CALIFORNIA, MAKING CERTAIN FINDINGS IN CONNECTION WITH THE ISSUANCE OF THE LAKE ELSINORE PUBLIC FINANCING AUTHORITY LOCAL AGENCY REVENUE BONDS (SUMMERLY PROJECT) 2011 SERIES A 2. A RESOLUTION OF THE BOARD OF DIRECTORS OF THE LAKE ELSINORE PUBLIC FINANCING AUTHORITY APPROVING THE ISSUANCE OF LAKE ELSINORE PUBLIC FINANCING AUTHORITY LOCAL AGENCY REVENUE BONDS (SUMMERLY PROJECT) 2011 SERIES A IN THE AGGREGATE PRINCIPAL AMOUNT NOT TO EXCEED $6,000,000 PURSUANT TO AN INDENTURE OF TRUST, AUTHORIZING THE SALE OF SUCH BONDS UPON CERTAIN TERMS AND CONDITIONS, APPROVING AN OFFICIAL STATEMENT, APPROVING THE EXECUTION OF A PURCHASE CONTRACT AND A CONTINUING DISCLOSURE AGREEMENT, AND TAKING OTHER ACTIONS RELATED THERETO Background On March 8, 2011, the Redevelopment Agency approved the Amended and Restated Disposition and Development Agreement (DDA) with McMillin Summerly LLP (developer) concerning development of the Summerly residential project within the Eastlake Specific Plan. AGENDA ITEM NO. 14 Page 1 of 195 Public Hearing Re Revenue Bonds (Summerly Project) May 24, 2011 Page 2 The DDA provides that the developer is entitled to reimbursement for extraordinary infrastructure cost within the Eastlake Specific Plan related to the project of up to $19 million. The DDA contemplates that "from time to time, and upon Developer's ... written request, Agency shall consult and cooperate with Developer ... periodically with respect to the issuance and sale of bonds ..." to pay for, among other things, the cost incurred by the developer for extraordinary infrastructure. On April 12, 2011, the Redevelopment Agency authorized the issuance of tax allocation bonds in an aggregate amount not to exceed $4,610,000. The Agency tax allocation bonds are secured by a pledge of tax increment from Project Areas II and III. The Agency tax allocation bonds were subsequently issued by the Redevelopment Agency and "privately placed" with the developer as an interim step. This interim step (that is, the private placement of the Agency bonds with the developer) was taken so that the Agency could act quickly and thereby avoid the risk that the State of California would act to limit the Agency's ability to issue bonds. As discussed in the April 12th staff report, the Finance Team anticipated a second step to this financing. Within 60 days, the Public Financing Authority (PFA) would be requested to consider issuing long -term, publicly offered bonds for the purpose of purchasing the Agency tax allocation bonds from the developer. That second step is before the City Council and PFA Board for consideration this evening. Discussion Following approval of the Agency tax allocation bonds on April 12th, the Finance Team commenced the process of developing a PFA bond issuance. The proposed PFA bonds are a public offering that would provide bond proceeds from third party investors necessary to purchase the Agency tax allocation bonds from the developer. Accordingly, the developer would receive bond proceeds (instead of principal and interest on the privately placed Agency tax allocation bonds). The Agency's commitment by way of a pledge of tax increment would remain unchanged. Upon the purchase of the Agency tax allocation bonds from the developer with the PFA bond proceeds, the parties have agreed that the reimbursement obligation for extraordinary infrastructure will be reduced by cash amount of bond proceeds received by the developer. City Resolution Prior to the issuance of the PFA bonds, State law requires that the City Council find that the extraordinary infrastructure facilities are to be located within the boundaries of the City and there are significant public benefits arising from the PFA's issuance of the PFA bonds. As noted above, the extraordinary infrastructure is located with the Eastlake Specific Plan and comprises significant public improvements of benefit to the Page 2 of 195 Public Hearing Re Revenue Bonds (Summerly Project) May 24, 2011 Page 3 community. A City resolution is attached for the City Council's consideration containing the necessary finding. PFA Resolution and Documents to be Approved Approval of the attached PFA Resolution will authorize the execution of the following documents: 1. Indenture of Trust 2. Bond Purchase Contract 3. Preliminary Official Statement 4. Continuing Disclosure Because of the uncertainty of interest rates, it is recommended that the PFA authorize the issuance of the PFA bonds in an amount not to exceed $6,000,000. This higher par amount allows for some flexibility in the final pricing of the bonds. Public Notice Process The item has been noticed by way of a published notice of public hearing and through the regular Agenda notification process. Legal Review Bond Counsel has reviewed the related financing documents and approved them as to form. Fiscal Impact The authorization will result in additional bonded indebtedness to the PFA in an amount not to exceed $6,000,000. However, the bonds are secured by the same pledge of Redevelopment Agency tax increment applicable to the previously issued Agency tax allocation bonds. Accordingly, the issuance of the PFA bonds will not increase the Agency's annual debt service obligations. Recommendation 1. It is recommended that the City Council: (a) Open a joint public hearing with the Lake Elsinore Public Finance Authority and take testimony (b) Waive further reading and a adopt Resolution No. 2011 -035 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF LAKE ELSINORE, CALIFORNIA, making certain findings in connection with the Page 3 of 195 Public Hearing Re Revenue Bonds (Summerly Project) May 24, 2011 Page 4 Issuance of Lake Elsinore Public Financing Authority Local Agency Revenue Bonds (Summerly Project) 2011 Series A in the Aggregate Principal Amount not to Exceed $6,000,000 2. It is recommended that the Board of Directors of the Public Finance Authority: (a) Open a joint public hearing with the City of Lake Elsinore and take testimony (b) Waive further reading and adopt PFA Resolution No. 2011 -002 A RESOLUTION OF THE BOARD OF DIRECTORS OF THE LAKE ELSINORE PUBLIC FINANCING AUTHORITY Approving the Issuance of Lake Elsinore Public Financing Authority Local Agency Revenue Bonds (Summerly Project) 2011 Series A in the Aggregate Principal Amount not to Exceed $6,000,000 Prepared by: James R. Riley�i Director of AdmibOrative Services Barbara Leibold City Attorney /Authority Counsel Approved by: Robert A. Brady City Manager /Executive Direct Attachments: City Resolution No. 2011 -035 PFA Resolution No. 2011 -002 Indenture of Trust Bond Purchase Contract Preliminary Official Statement Continuing Disclosure Page 4 of 195 RESOLUTION NO. 2011- 035 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF LAKE ELSINORE, CALIFORNIA, MAKING CERTAIN FINDINGS IN CONNECTION WITH THE ISSUANCE OF THE LAKE ELSINORE PUBLIC FINANCING AUTHORITY LOCAL AGENCY REVENUE BONDS (SUMMERLY PROJECT) 2011 SERIES A WHEREAS, the Lake Elsinore Public Financing Authority (the "Authority ") is a joint exercise of powers authority duly organized and existing under and pursuant to that certain Joint Exercise of Powers Agreement by and between the City of Lake Elsinore (the "City ") and the Redevelopment Agency of the City of Lake Elsinore (the "Agency "), under the provisions of Articles 1 through 4 (commencing with Section 6500) of Chapter 5 of Division 7 of Title 1 of the Government Code of the State of California (the "Act "), and is authorized pursuant to Article 4 of the Act to borrow money for the purpose of financing the acquisition of bonds, notes and other obligations to provide financing and refinancing for capital improvements of member entities of the Authority; and WHEREAS, the Agency has entered into that certain Disposition and Development Agreement (as amended and restated pursuant to the Amended and Restated Disposition and Development Agreement dated March 8, 2011, the "DDA ") pursuant to which the Agency is required to reimburse the developer (the "Developer ") for certain infrastructure costs incurred by the Developer; and WHEREAS, the Agency previously issued and delivered to the Developer its Subordinate Tax Allocation Bonds (Project Area No. II) Series 2011 and Subordinate Tax Allocation Bonds (Project Area No. III) Series 2011 (the "PA II Bonds," the "PA III Bonds," and collectively, the "Agency Bonds ") for the purpose of partially satisfying the obligations of the Agency under the DDA; and WHEREAS, for the purpose of acquiring the Agency Bonds from the Developer and treating the payment as acquisition of certain public infrastructure (the "Facilities ") pursuant to the DDA, the Authority has determined to issue its Local Agency Revenue Bonds (Summerly Project) 2011 Series A ( the "Bonds "); and WHEREAS, the City, as one of the members of the Authority, has heretofore held a public hearing pursuant to Section 6586.5 of Act; NOW, THEREFORE, the City Council of the City of Lake Elsinore, California, does hereby resolve as follows: Section 1. The City hereby finds and determines that (i) the Facilities are to be located within the boundaries of the City and (ii) there are significant public benefits arising from the Authority's issuance of the Authority Bonds to finance the Facilities, including, but not limited to, employment benefits from undertaking the acquisition of the Facilities in a timely fashion, as contemplated by Section 6586 of the Act. Page 5 of 195 Section 2. This Resolution shall take effect from and after the date of its passage and adoption. PASSED, APPROVED AND ADOPTED at a regular meeting of the City Council of the City of Lake Elsinore, California, this 24th day of May, 2011. ATTEST: VIRGINIA BLOOM CITY CLERK APPROVED AS TO FORM: BARBARA ZEID LEIBOLD CITY ATTORNEY AMY BHUTTA, MAYOR CITY OF LAKE ELSINORE 2 Page 6 of 195 INDENTURE OF TRUST by and between the LAKE ELSINORE PUBLIC FINANCING AUTHORITY UNION BANK, N.A., as Trustee Dated as of 1, 2011 Relating to Lake Elsinore Public Financing Authority Local Agency Revenue Bonds (Summerly Project), 2011 Series A 77053054.1 Page 7 of 195 TABLE OF CONTENTS Page ARTICLE I DEFINITIONS; AUTHORIZATION AND PURPOSE OF BONDS; EQUALSECURITY .......................................................... ..............................2 Section 1.01 Definitions .............................................................. ..............................2 Section 4.02 Section 1.02 Rules of Construction ............................................ .............................10 Cash Flow Management Fund ............. ............................... Section 1.03 Authorization and Purpose of Bonds ..................... .............................10 Section 4.05 Section 1.04 Equal Security ........................................................ .............................10 Investments .......................................... ............................... ARTICLE II ISSUANCE OF THE BONDS .......................................... .............................10 Section 2.01 Terms of the Bonds ................................................ .............................10 Section 2.02 Redemption of Bonds ............................................ .............................12 Section 2.03 Form of the Bonds ................................................. .............................15 Section 2.04 Execution of Bonds ................................................ .............................15 Section 2.05 Transfer of Bonds .................................................. .............................15 Section 2.06 Exchange of Bonds ................................................ .............................16 Section 2.07 Registration Books ................................................. .............................16 Section 2.08 Bonds Mutilated, Lost, Destroyed or Stolen ......... .............................16 Section 2.09 CUSIP Numbers .................................................... .............................17 Section 2.10 Use of Securities Depository ................................. .............................17 Section 2.11 Temporary Bonds .................................................. .............................18 ARTICLE III DEPOSIT AND APPLICATION OF PROCEEDS OF BONDS ...................18 Section 3.01 Issuance of Bonds .................................................. .............................18 Section 3.02 Application of Proceeds of Sale of Bonds and Other Amounts .........18 Section 3.03 Bond Purchase Fund .............................................. .............................19 Section 3.04 Costs of Issuance Fund .......................................... .............................19 Section 3.05 Validity of Bonds ................................................... .............................19 ARTICLE IV REVENUES; FLOW OF FUNDS ..................................... .............................19 Section 4.01 Pledge of Revenues; Assignment of Rights ........................ Section 4.02 Receipt, Deposit and Applications of Revenues ................. Section 4.03 Cash Flow Management Fund ............. ............................... Section 4.04 Redemption Fund ................................. ............................... Section 4.05 Reserved .............................................. ............................... Section 4.06 Investments .......................................... ............................... Section 4.07 Valuation and Disposition of Investments .......................... ARTICLE V .............19 .............20 .............22 .............23 .............23 .............23 .............24 COVENANTS OF THE AUTHORITY ............................ .............................24 Section 5.01 Punctual Payment .................................................. .............................24 Section 5.02 Extension of Payment of Bonds ............................ .............................24 Section 5.03 Against Encumbrances .......................................... .............................24 Section 5.04 Power to Issue Bonds and Make Pledge and Assignment ..................24 Section 5.05 Accounting Records and Financial Statements ..... .............................25 Section 5.06 No Parity Debt ....................................................... .............................25 77053054.1 i Page 8 of 195 TABLE OF CONTENTS (continued) Page Section 5.07 Tax Covenants Relating to Bonds ......................... .............................25 Section 5.08 Agency Bonds ........................................................ .............................28 Section 5.09 Further Assurances ................................................ .............................29 Section5.10 Immunity ................................................................ .............................29 Section 5.11 No Acceleration ..................................................... .............................29 ARTICLEVI THE TRUSTEE ................................................................. .............................29 Section 6.01 Section 6.02 Section 6.03 Section 6.04 Section 6.05 Section 6.06 Section 6.07 Section 6.08 Section 6.09 Section 6.10 Section 6.11 Section 6.12 Appointment of Trustee ........................... ............................... Acceptance of Trusts ............. ............................... Fees, Charges and Expenses of Trustee ................ Notice to Bond Owners of Default ....................... Intervention by Trustee .......... ............................... Removal of Trustee ................ ............................... Resignation by Trustee .......... ............................... Appointment of Successor Trustee ....................... Merger or Consolidation ........ ............................... Concerning any Successor Trustee ....................... Appointment to Co- Trustee ... ............................... Indemnification; Limited Liability of Trustee...... .........29 .........29 .........31 .........32 .........32 .........32 32 .........32 ...........................33 ...........................33 ...........................33 ...........................34 ARTICLE VII MODIFICATION AND AMENDMENT OF THE INDENTURE ................34 Section 7.01 Amendment Hereof ............................................... .............................34 Section 7.02 Effect of Supplemental Indenture .......................... .............................35 Section 7.03 Endorsement or Replacement of Bonds After Amendment ...............35 Section 7.04 Amendment by Mutual Consent ............................ .............................36 ARTICLE VIII EVENTS OF DEFAULT AND REMEDIES .................... .............................36 Content of Certificates ........................................... .............................41 Section 8.01 Events of Default ................................................... .............................36 Execution of Documents by Bond Owners ........... .............................41 Section 8.02 Remedies Upon Event of Default .......................... .............................36 Disqualified Bonds ................................................ .............................42 Section 8.03 Application of Revenues and Other Funds After Default ..................37 li Section 8.04 Power of Trustee to Control Proceedings .............. .............................37 Section 8.05 Appointment of Receivers ..................................... .............................38 Section 8.06 Non - Waiver ........................................................... .............................38 Section 8.07 Right to Institute Suit, Action or Proceeding ......... .............................38 Section 8.08 Termination of Proceedings ................................... .............................39 ARTICLE IX MISCELLANEOUS ................. ...............39 Section 9.01 Limited Liability of Authority ............................... .............................39 Section 9.02 Benefits of Indenture Limited to Parties ................ .............................40 Section 9.03 Discharge of Indenture .......................................... .............................40 Section 9.04 Is Deemed Included in All References to Predecessor .......................40 Section 9.05 Content of Certificates ........................................... .............................41 Section 9.06 Execution of Documents by Bond Owners ........... .............................41 Section 9.07 Disqualified Bonds ................................................ .............................42 77053054.1 li Page 9 of 195 Section 9.08 Section 9.09 Section 9.10 Section 9.11 Section 9.12 Section 9.13 Section 9.14 Section 9.15 Section 9.16 EXHIBIT A — FORI 77053054.1 TABLE OF CONTENTS (continued) Waiver of Personal Liability...... Partial Invalidity ........................ Destruction of Canceled Bonds. Funds and Accounts ................... Payment on Business Days........ Notices........ ............................... Unclaimed Moneys .................... Governing Law .......................... Execution of Counterparts ......... ✓I OF BOND ......... ............................... iii Page Page 10 of 195 INDENTURE OF TRUST THIS INDENTURE OF TRUST (this "Indenture ") is made and entered into as of 1, 2011, by and between the LAKE ELSINORE PUBLIC FINANCING AUTHORITY, a joint powers authority organized and existing under the laws of the State of California (the "Authority "), and UNION BANK, N.A., a national banking association organized and existing under the laws of the United States of America having a corporate trust office in Los Angeles, California, and being qualified to accept and administer the trusts hereby created (the "Trustee "); WITNESSETH: WHEREAS, the Authority is a joint powers authority duly organized and existing under and pursuant to that certain Joint Exercise of Powers Agreement, dated July 25, 1989, by and between the City of Lake Elsinore (the "City ") and the Redevelopment Agency of the City of Lake Elsinore (the "Agency "), and under the provisions of Articles 1 through 4 (commencing with Section 6500) of Chapter 5 of Division 7 of Title 1 of the Government Code of the State of California (the "Act'), and is authorized pursuant to Article 4 of the Act (the "Bond Law ") to borrow money for the purpose of financing the acquisition of bonds, notes and other obligations of, or for the purpose of making loans to, the City, the Agency and any associate member to provide financing for public capital improvements of the City, the Agency and any associate member; and WHEREAS, for the purpose of funding certain public facilities, the Authority desires to provide for the issuance of its Local Agency Revenue Bonds (Summerly Project), 2011 Series A (the "Bonds "); and WHEREAS, in order to provide for the authentication and delivery of the Bonds, to establish and declare the terms and conditions upon which the Bonds are to be issued and to secure the payment of the principal thereof, premium (if any) and interest thereon, the Authority has authorized the execution and delivery of this Indenture; and WHEREAS, the Authority has found and determined, and hereby affirms, that all acts and proceedings required by law necessary to make the Bonds, when executed by the Authority, authenticated and delivered by the Trustee and duly issued, the valid, binding and legal special obligations of the Authority, and to constitute this Indenture a valid and binding agreement for the uses and purposes herein set forth in accordance with its terms, have been done and taken, and the execution and delivery of this Indenture have been in all respects duly authorized: NOW, THEREFORE, THIS INDENTURE WITNESSETH, that in order to secure the payment of the principal of and the interest and premium (if any) on all Bonds at any time issued and Outstanding under this Indenture, according to their tenor, and to secure the performance and observance of all the covenants and conditions therein and herein set forth, and to declare the terms and conditions upon and subject to which the Bonds are to be issued and repaid, and in consideration of the premises and of the mutual covenants herein contained and of the purchase and acceptance of the Bonds by the Owners thereof, and for other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Authority does hereby covenant 77053054.1 Page 11 of 195 and agree with the Trustee, for the benefit of the respective Owners from time to time of the Bonds, as follows: ARTICLE I DEFINITIONS; AUTHORIZATION AND PURPOSE OF BONDS; EQUAL SECURITY Section 1.01 Definitions. Unless the context otherwise requires, the terms defined in this Section 1.01 shall for all purposes of this Indenture of any Supplemental Indenture and of the Bonds and of any certificate, opinion, request or other documents herein mentioned have the meanings herein specified. "Act" means Articles 1 through 4 (commencing with Section 6500) of Chapter 5, Division 7, Title 1 of the Government Code of the State, as in existence on the Closing Date or as thereafter amended from time to time. "Additional Agency Bonds" means Parity Debt as such term is defined in the Agency Bond Indentures. "Agency" means the Redevelopment Agency of the City of Lake Elsinore, a public body corporate and politic organized under the laws of the State, and any successor thereto. "Agency Bonds" means the Redevelopment Agency of the City of Lake Elsinore Subordinate Tax Allocation Bonds (Project Area No. II) Series 2011 and the Redevelopment Agency of the City of Lake Elsinore Subordinate Tax Allocation Bonds (Project Area No. III) Series 2011. "Annual Debt Service" means, for each Bond Year, the sum of (a) the interest payable on the Outstanding Bonds in such Bond Year, and (b) the principal amount of the Outstanding Bonds scheduled to be paid in such Bond Year. "Authority" means the Lake Elsinore Public Financing Authority, a joint powers authority duly organized and existing under the Joint Exercise of Powers Agreement, dated July 25, 1989, by and between the City and the Agency, together with any amendments thereof and supplements thereto and under the laws of the State. "Authority Representative" means the Chairman, Vice Chairman, Executive Director or Treasurer of the Authority, or any other authorized representative of the Authority as evidenced by a certificate of the Chairman or Executive Director. "Board" means the Board of Directors of the Authority. "Bond Counsel" means Fulbright & Jaworski L.L.P., or any attorney or firm of attorneys appointed by or acceptable to the Authority of nationally - recognized experience in the field of municipal law whose opinions are generally accepted by purchasers of municipal bonds or notes. 77053054.1 2 Page 12 of 195 "Bond Fund" means the fund by that name established and held by the Trustee pursuant to Section 4.02(b) hereof. "Bond Law" means the Marks -Roos Local Bond Pooling Act of 1985, constituting Article 4 of the Act (commencing with Section 6584), as in existence on the Closing Date or as thereafter amended from time to time. "Bond Purchase Fund" means the fund established pursuant to Section 3.03 hereof. "Bond Year" means each twelve -month period beginning on September 2 of each year and ending September 1 of the following year, except that the first Bond Year shall begin on the Closing Date and end on September 1, 2011. "Bonds" means the Lake Elsinore Public Financing Authority Local Agency Revenue Bonds (Summerly Project), 2011 Series A, authorized by, and at any time Outstanding pursuant to, the Bond Law and this Indenture. "Business Day" means any day other than (i) a Saturday or a Sunday, (ii) a day on which the offices of the City are not open for business, or (iii) a day on which banking institutions in the state in which the Trustee has its principal corporate trust office is authorized or obligated by law or executive order to be closed. "Certificate" or "Written Request' of the Authority means a written certificate or written request signed in the name of the Authority by an Authority Representative. Any such certificate or request may, but need not, be combined in a single instrument with any other instrument, opinion or representation, and the two or more so combined shall be read and construed as a single instrument. "City" means the City of Lake Elsinore, a political subdivision organized and existing under the laws of the State. "Closing Date" means the date of delivery of the Bonds to the original purchasers thereof. "Code" means the Internal Revenue Code of 1986 as in effect on the date of issuance of the Bonds or (except as otherwise referenced herein) as it may be amended to apply to obligations issued on the date of issuance of the Bonds, together with applicable proposed, temporary and final regulations promulgated, and applicable official public guidance published, under the Code. "Corporate Trust Office" means the corporate trust office of the Trustee at the address set forth in Section 9.13 and such office as the Trustee may designate in writing to the Authority from time to time. "Costs of Issuance" means all expenses incurred in connection with the authorization, issuance, sale and delivery of the Bonds, the purchase of the Agency Bonds, including, but not limited to, all compensation, fees and expenses (including, but not limited, to fees and expenses for legal counsel) of the Authority, the Trustee and the developer, compensation to any financial 77053054.1 3 Page 13 of 195 consultants or underwriters, legal fees and expenses, filing and recording costs, rating agency fees, costs of preparation and reproduction of documents and costs of printing. "Costs of Issuance Fund" means the fund established and held by the Trustee pursuant to Section 3.04 hereof. "DTC" means The Depository Trust Company, New York, New York, and its successors and assigns. "Event of Default" means any of the events described in Section 8.01 hereof. "Excess Investment Earnings" means the amount of excess investment earnings determined to be subject to rebate to the United States of America with respect to the investment of the gross proceeds of the Bonds, determined pursuant to Section 148(f) of the Code. "Fair Market Value" means the price at which a willing buyer would purchase the investment from a willing seller in a bona fide, arm's length transaction (determined as of the date the contract to purchase or sell the investment becomes binding) if the investment is traded on an established securities market (within the meaning of Section 1273 of the Code) and, otherwise, the term "Fair Market Value" means the acquisition price in a bona fide, arm's length transaction (as referenced above) if (i) the investment is a certificate of deposit that is acquired in accordance with applicable regulations under the Code, (ii) the investment is an agreement with specifically negotiated withdrawal or reinvestment provisions and a specifically negotiated interest rate (for example, a guaranteed investment contract, a forward supply contract or other investment agreement) that is acquired in accordance with applicable regulations under the Code, (iii) the investment is a United States Treasury Security - State and Local Government Series that is acquired in accordance with applicable regulations of the United States Bureau of Public Debt, or (iv) any commingled investment fund in which the City and related parties do not own more than a ten percent (10 %) beneficial interest therein if the return paid by the fund is without regard to the source of the investment. "Federal Securities" means any of the following which are non - callable and which at the time of investment are legal investments under the laws of the State of California for funds held by the Trustee, as shall be certified by the Authority to the Trustee: (1) direct general obligations of the United States of America (including obligations issued or held in book -entry form on the books of the United States Department of the Treasury) and obligations, the payment of principal of and interest on which are directly or indirectly guaranteed by the United States of America, including, without limitation, such of the foregoing which are commonly referred to as "stripped" obligations and coupons; and (2) any of the following obligations of the following agencies of the United States of America: (a) direct obligations of the Export-Import Bank, (b) certificates of beneficial ownership issued by the Farmers Home Administration, (c) participation certificates issued by the General Services Administration, (d) mortgage- backed bonds or pass - through obligations issued and guaranteed by the Government National Mortgage Association, (e) project notes issued by the 77053054.1 4 Page 14 of 195 United States Department of Housing and Urban Development, and (f) public housing notes and bonds guaranteed by the United States of America; or refunded municipal obligations, the timely payment of principal of and interest on are fully guaranteed by the United States of America. "Fiscal Year" means any twelve -month period extending from July 1 in one calendar year to June 30 of the succeeding calendar year, both dates inclusive, or any other twelve -month period selected and designated by the Authority as its official fiscal year period and certified to the Trustee in writing by an Authority Representative. "Indenture" means this Indenture of Trust, as originally executed or as it may from time to time be supplemented, modified or amended by any Supplemental Indenture pursuant to the provisions hereof. "Independent Accountanf' means any certified public accountant or firm of certified public accountants appointed and paid by the Authority, and who, or each of whom (a) is, in fact, independent and not under domination of the Authority or the City; (b) does not have any substantial interest, direct or indirect, in the Authority or the City; and (c) is not connected with the Authority or the City as an officer or employee of the Authority or the City but who may be regularly retained to make annual or other audits of the books of or reports to the Authority or the City. "Information Services" means Electronic Municipal Market Access system (referred to as "EMMA "), a facility of the Municipal Securities Rulemaking Board, at www.emma.msrb.org; provided, however, in accordance with then current guidelines of the Securities and Exchange Commission, Information Services shall mean such other organizations providing information with respect to called Bonds as the Authority may designate in writing to the Trustee. "Interest Account" means the account by that name established and held by the Trustee pursuant to Section 4.02(c)(i) hereof. "Interest Payment Date" means March 1 and September 1 in each year, beginning September 1, 2011, and continuing thereafter so long as any Bonds remain Outstanding. "Letter of Representations" means the letter of the Authority and the Trustee delivered to and accepted by DTC (or such other applicable Securities Depository) on or prior to the issuance of the Bonds in book -entry form setting forth the basis on which DTC (or such other applicable Securities Depository) serves as depository for the Bonds issued in book -entry form, as originally executed or as it may be supplemented or revised or replaced by a letter to a substitute Securities Depository. "Maximum Annual Debt Service" means, as of the date of calculation, the maximum amount obtained by totaling, for the current or any future Bond Year, the sum of (a) the principal amount of all such Outstanding Bonds maturing in such Bond Year; and (b) the interest which would be due during such Bond Year on the aggregate principal amount of such Bonds which would be Outstanding in such period if such Bonds are retired as scheduled, but deducting and excluding from such aggregate principal amount the aggregate principal amount of such Bonds no longer Outstanding. 77053054.1 5 Page 15 of 195 " Moody's" means Moody's Investors Service, and its successors and assigns. "Outstanding," when used as of any particular time with reference to Bonds, means all Bonds theretofore executed, issued and delivered by the Authority under this Indenture except: (a) Bonds theretofore canceled by the Trustee or surrendered to the Trustee for cancellation; (b) Bonds paid or deemed to have been paid within the meaning of Section 9.03; and (c) Bonds in lieu of or in substitution for which other Bonds shall have been executed, issued and delivered pursuant to this Indenture or any Supplemental Indenture. "Owner" or "Bond Owner," when used with respect to any Bond, means the person in whose name the ownership of such Bond shall be registered on the Registration Books. "Permitted Investments" means any of the following which at the time of investment are legal investments under the laws of the State for the moneys proposed to be invested therein (the Trustee entitled to rely on written investment direction of the Authority as a determination that such investment is a legal investment), but only to the extent that the same are acquired at Fair Market Value: (a) Federal Securities; (b) bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following federal agencies and provided such obligations are backed by the full faith and credit of the United States of America (stripped securities are only permitted if they have been stripped by the agency itself): (i) direct obligations or fully guaranteed certificates of beneficial ownership of the U.S. Export-Import Bank; (ii) certificates of beneficial ownership of the Farmers Home Administration; (iii) obligations of the Federal Financing Bank; (iv) debentures of the Federal Housing Administration; (v) participation certificates of the General Services Administration; (vi) guaranteed mortgage- backed bonds or guaranteed pass - through obligations of the Government National Mortgage Association; (vii) guaranteed Title XI financings of the U.S. Maritime Administration; and (viii) project notes, local authority bonds, new communities debentures and U.S. public housing notes and bonds of the U.S. Department of Housing and Urban Development; (c) bonds, debentures; notes or other evidence of indebtedness issued or guaranteed by any of the following non -full faith and credit U.S. government agencies (stripped securities are only permitted if they have been stripped by the Authority itself): (i) senior debt obligations of the Federal Home Loan Bank System; (ii) participation certificates and senior debt obligations of the Federal Home Loan Mortgage Corporation; (iii) mortgage- backed securities and senior debt obligations of the Federal National Mortgage Association (excluding stripped mortgage securities which are valued greater than par on the portion of unpaid principal); (iv) senior debt obligations of the Student Loan Marketing Association; (v) obligations (but only the interest component of stripped obligations) of the Resolution Funding Corporation; and (vi) consolidated systemwide bonds and notes of the Farm Credit System; 77053054.1 6 Page 16 of 195 (d) money market funds (including funds of the Trustee or its affiliates) registered under the Federal Investment Company Act of 1940, whose shares are registered under the Federal Securities Act of 1933, and having a rating by S &P of "AAAm -G," "AAAm," or "AAm," and, if rated by Moody's, rated "Aaa," "Aal" or "Aa2 ;11 (e) certificates of deposit secured at all times by collateral described in (a) or (b) above, which have a maturity of one year or less, which are issued by commercial banks, savings and loan associations or mutual savings banks, and such collateral must be held by a third party, and the Trustee must have a perfected first security interest in such collateral; (f) certificates of deposit, savings accounts, deposit accounts or money market deposits (including those of the Trustee and its affiliates) which are fully insured by the Federal Deposit Insurance Corporation; (g) investment agreements, including guaranteed investment contracts, forward purchase agreements and Reserve Account put agreements, which are general obligations of an entity whose long -term debt obligations, or claims paying ability, respectively, is rated in one of the two highest rating categories by Moody's or S &P; (h) commercial paper rated, at the time of purchase, "Prime -1" by Moody's and "A -1" or better by S &P; (i) bonds or notes issued by any state or municipality which are rated by Moody's and S &P in one of the two highest rating categories assigned by such agencies; 0) federal funds or bankers acceptances with a maximum term of one year of any bank which has an unsecured, uninsured and unguaranteed obligation rating of "Prime -1" or "A3" or better by Moody's and "A -1" or "A" or better by S &P; (k) repurchase agreements which provide for the transfer of securities from a dealer bank or securities firm (seller/borrower) to the Trustee and the transfer of cash from the Trustee to the dealer bank or securities firm with an agreement that the dealer bank or securities firm will repay the cash plus a yield to the Trustee in exchange for the securities at a specified date, which satisfy the following criteria: (i) repurchase agreements must be between the Trustee and (A) a primary dealer on the Federal Reserve reporting dealer list which falls under the jurisdiction of the Securities Investors Protection Corporation which are rated "A" or better by Moody's and S &P, or (B) a bank rated "A" or better by Moody's and S &P; (ii) the written repurchase agreement contract must include the following: (A) securities acceptable for transfer, which may be direct U.S. government obligations, or federal agency obligations backed by the full faith and credit of the U.S. government; (B) the term of the repurchase agreement may be up to 30 days; (C) the collateral must be delivered to the Trustee or a third party 77053054.1 7 Page 17 of 195 acting as agent for the Trustee simultaneous with payment (perfection by possession of certificated securities); (D) the Trustee must have a perfected first priority security interest in the collateral; (E) the collateral must be free and clear of third -party liens and, in the case of a broker which falls under the jurisdiction of the Securities Investors Protection Corporation, are not subject to a repurchase agreement or a reverse repurchase agreement; (F) failure to maintain the requisite collateral percentage, after a two -day restoration period, will require the Trustee to liquidate the collateral; and (G) the securities must be valued weekly, marked - to- market at current market price plus accrued interest and the value of collateral must be equal to 104% of the amount of cash transferred by the Trustee to the dealer bank or securities firm under the repurchase agreement plus accrued interest (unless the securities used as collateral are obligations of the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation, in which case the collateral must be equal to 105% of the amount of cash transferred by the Trustee to the dealer bank or securities firm under the repurchase agreement plus accrued interest). If the value of securities held as collateral falls below 104% of the value of the cash transferred by the Trustee, then additional cash and/or acceptable securities must be transferred; and (iii) a legal opinion must be delivered to the Trustee to the effect that the repurchase agreement meets guidelines under state law for legal investment of public funds; and (1) the Local Agency Investment Fund of the State of California, created pursuant to Section 16429.1 of the California Government Code, to the extent the Trustee is authorized to register such investment in its name. "Principal Account' ' means the account by that name established and held by the Trustee pursuant to Section 4.02(c)(ii) hereof. "Rebate Account" means the account established and held by the Trustee pursuant to Section 4.02(c)(v) hereof. "Record Date" means, with respect to any Interest Payment Date, the fifteenth (15th) calendar day of the month preceding such Interest Payment Date. "Redemption Fund" means the fund by such name established and held by the Trustee pursuant to Section 4.04 hereof. "Redemption Revenues" means (a) amounts received from the redemption of the Agency Bonds from amounts constituting prepayments of Special Taxes, (b) amounts received from the optional redemption of the Agency Bonds, and (c) amounts received from the special mandatory redemption and mandatory redemption of the Agency Bonds. "Registration Books" means the records maintained by the Trustee pursuant to Section 2.07 for the registration and transfer of ownership of the Bonds. 77053054.1 8 Page 18 of 195 "Reserve Account" means the account by that name established and held by the Trustee pursuant to Section 4.02(c)(iii) hereof. "Reserve Requirement" means, as of any calculation date, an amount equal to the least of (i) ten percent (10 %) of the proceeds of the Bonds (within the meaning of section 148 of the Code); (ii) 125% of average Annual Debt Service; or (iii) Maximum Annual Debt Service. Such amount shall never be greater than the amount as of the Closing Date. "Revenue Fund" means the fund by that name established and held by the Trustee pursuant to Section 4.02(a) hereof "Revenues" means: (a) all amounts received by the Authority from the Agency as principal of or interest on the Agency Bonds; (b) all moneys deposited and held from time to time by the Trustee in the funds and accounts established hereunder for the Bonds, other than the Rebate Account, the Redemption Fund and the Cash Flow Management Fund; and (c) income and gains with respect to the investment of amounts on deposit in the funds and accounts established hereunder for the Bonds, other than the Rebate Account, the Redemption Fund and the Cash Flow Management Fund. "S &P" means Standard & Poor's, a division of The McGraw -Hill Companies, Inc., its successors and assigns. "Securities Depositories" means DTC, 55 Water Street, New York 10041, Attention: Call Notification Department, Fax -(212) 855 -7232 and, in accordance with then current guidelines of the Securities and Exchange Commission, such other addresses and/or such other securities depositories as the Authority may designate in a Certificate of the Authority delivered to the Trustee. "State" means the State of California. "Supplemental Indenture" means any indenture, agreement or other instrument hereafter duly executed by the Authority and the Trustee in accordance with the provisions of Section 7.01 hereof. "Tax Regulations" means temporary and permanent regulations promulgated under or with respect to Section 103 and Sections 141 through 150, inclusive, of the Code. "Trustee" means Union Bank, N.A., and its successors and assigns, and any other corporation or association which may at any time be substituted in its place as provided in Article VI hereof. Section 1.02 Rules of Construction. All references in this Indenture to "Articles," "Sections" and other subdivisions are to the corresponding Articles, Sections or subdivisions of this Indenture, and the words "herein," "hereof," "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or subdivision hereof. Section 1.03 Authorization and Purpose of Bonds. The Authority has reviewed all proceedings heretofore taken relative to the authorization of the Bonds and has found, as a result 77053054.1 9 Page 19 of 195 of such review, and hereby finds and determines that all things, conditions, and acts required by law to exist, happen and be performed precedent to and in the issuance of the Bonds do exist, have happened and have been performed in due time, form and manner as required by law, and the Authority is now authorized under the Bond Law and each and every requirement of law, to issue the Bonds in the manner and form provided in this Indenture. Accordingly, the Authority hereby authorizes the issuance of the Bonds pursuant to the Bond Law and this Indenture. Section 1.04 Equal Security. In consideration of the acceptance of the Bonds by the Owners thereof, this Indenture shall be deemed to be and shall constitute a contract among the Authority, the Trustee and the Owners from time to time of the Bonds; and the covenants and agreements herein set forth to be performed on behalf of the Authority shall be for the equal and proportionate benefit, security and protection of all Owners of Bonds without preference, priority or distinction as to security or otherwise of any of the Bonds over any of the others by reason of the number or date thereof or the time of sale, execution or delivery thereof, or otherwise for any cause whatsoever, except as expressly provided therein or herein. ARTICLE II ISSUANCE OF THE BONDS Section 2.01 Terms of the Bonds. The Bonds authorized to be issued by the Authority under and subject to the Bond Law and the terms of this Indenture shall be designated the "Lake Elsinore Public Financing Authority Local Agency Revenue Bonds (Summerly Project), 2011 Series A" which shall be issued in the original aggregate principal amount of $ The principal of and interest and premium (if any) on the Bonds shall be payable in lawful money of the United States of America. The Bonds shall be issued in fully- registered form without coupons in denominations of $5,000 or any integral multiple thereof, so long as no Bond shall have more than one maturity date. The Bonds shall be initially registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York, and shall be evidenced by one Bond for each of the maturities in the principal amounts set forth below, and DTC is hereby appointed depository for the Bonds, and registered ownership may not thereafter be transferred except as set forth in Section 2.05 hereof. The Bonds shall be dated as of the Closing Date, shall mature in the following amounts and shall bear interest (calculated on the basis of a 360 -day year of twelve 30 -day months) at the following rates: Maturity Date Principal Interest September 1 Amount Rate 77053054.1 10 Page 20 of 195 Interest on the Bonds shall be payable on each Interest Payment Date to the person whose name appears on the Registration Books as the Owner thereof as of the Record Date immediately preceding each such Interest Payment Date, such interest to be paid by check of the Trustee mailed by first -class mail, postage prepaid, on each Interest Payment Date to the Owner at the address of such Owner as it appears on the Registration Books as of the preceding Record Date; provided, however, that at the written request of the Owner of at least $1,000,000 in aggregate principal amount of Outstanding Bonds filed with the Trustee prior to any Record Date, interest on such Bonds shall be paid to such Owner on each succeeding Interest Payment Date by wire transfer of immediately available funds to an account in the continental United States designated in such written request. Any such written request shall remain in effect until rescinded in writing by the Owner. Principal of and premium (if any) on any Bond shall be paid upon presentation and surrender thereof, at maturity or the prior redemption thereof, at the Corporate Trust Office of the Trustee. The principal of and interest and premium (if any) on the Bonds shall be payable in lawful money of the United States of America. Each Bond shall bear interest from the Interest Payment Date next preceding the date of authentication thereof, unless (a) it is authenticated on or before the Interest Payment Date and after the close of business on the preceding record date, in which event it shall bear interest from such Interest Payment Date; or (b) it is authenticated on or before February 15, 2011, in which event it shall bear interest from the Closing Date; or (c) interest with respect to any outstanding Bond is in default, such Bond shall bear interest from the Interest Payment Date to which interest has previously paid in full or made available for payment thereon payable on each Interest Payment Date. Section 2.02 Redemption of Bonds. (a) Optional Redemption. The Bonds are subject to redemption prior to maturity at the option of the Authority on any date on or after September 1, 20 , as a whole or in part, from any available source of funds at the redemption price equal to the principal amount of Bonds to be redeemed, together with accrued interest thereon to the date fixed for redemption, without premium. 77053054.1 11 Page 21 of 195 (b) Mandatory Sinking Payment Redemption. The Bonds maturing September 1, 20 are subject to mandatory redemption in part by lot, on September 1 in each year, commencing September 1, 20 , from mandatory sinking payments made by the Authority into the Principal Account of the Bond Fund, at a redemption price equal to the principal amount thereof to be redeemed, without premium, plus accrued interest thereon to the date of redemption in the aggregate principal amounts and on September 1 in the respective years as set forth in the following schedules; provided, however, that (i) in lieu of redemption thereof, such Bonds may be purchased by the Authority and tendered to the Trustee, and (ii) if some but not all of such Bonds have been redeemed pursuant to the redemption provisions described in subsections (a) above or (c) or (d) below, the total amount of all future mandatory sinking payments will be reduced by the aggregate principal amount of such Bonds so redeemed, to be allocated among such mandatory sinking payments on a pro rata basis (as nearly as practicable) in integral multiples of $5,000, as determined by the Authority. Sinking Fund Redemption Date (September 1) Principal Amount to be Redeemed Sinking Fund Redemption Date (September 1) Principal Amount to be Redeemed (c) Selection of Bonds for Redemption. Except as otherwise set forth in this Indenture, whenever provision is made in this Indenture for the redemption of less than all of the Bonds of any maturity, the Trustee shall select the Bonds to be redeemed from all Bonds of such maturity not previously called for redemption, by lot in any manner which the Trustee in its sole discretion shall deem appropriate. For purposes of such selection, all Bonds shall be deemed to be comprised of separate $5,000 portions and such portions shall be treated as separate Bonds which may be separately redeemed. (d) Notice of Redemption. The Trustee on behalf and at the expense of the Authority shall mail (by first -class mail) notice of any redemption to the respective Owners of any Bonds designated for redemption at their respective addresses appearing on the Registration Books, to the Securities Depositories and to one or more Information Services, at least thirty (30) but not more than sixty (60) days prior to the date fixed for redemption. Neither failure to receive any such notice so mailed nor any defect therein shall affect the validity of the proceedings for the redemption of such Bonds or the cessation of the accrual of interest thereon. Such notice shall state the date of the notice, the redemption date, and the redemption price and shall designate the CUSIP numbers, the Bond numbers (but only if less than all of the Outstanding Bonds are to be redeemed) and the maturity of the Bonds to be redeemed, and shall require that such Bonds be then surrendered at the Corporate Trust Office of the Trustee for redemption at the redemption price, giving notice also that further interest on such Bonds will not accrue from and after the redemption date. 77053054.1 12 Page 22 of 195 If at the time of mailing of any notice of optional redemption there shall not have been deposited with the Trustee moneys sufficient to redeem all the Bonds called for redemption, such notice shall state that it is subject to the deposit of the redemption moneys with the Trustee not later than the opening of business on the redemption date and will be of no effect unless such moneys are so deposited. The Authority shall have the right to rescind any notice of optional redemption by written notice to the Trustee on or prior to the date fixed for redemption. Any notice of such redemption shall be cancelled and annulled if for any reason funds will not be or are not available on the date fixed for redemption for the payment in full of the Bonds then called for redemption, and such cancellation shall not constitute an Event of Default hereunder. The Authority and the Trustee shall have no liability to the Owners or any other parry related to or arising from such rescission of redemption. The Trustee shall mail notice of such rescission of redemption in the same manner as the original notice of redemption was sent. In addition to the foregoing notice, further notice shall be given by the Trustee in said form by first -class mail to any Bond Owner whose Bond has been called for redemption but who has failed to tender his Bond for payment by the date which is sixty days after the redemption date, but no defect in said further notice nor any failure to give all or any portion of such further notice shall in any manner defeat the effectiveness of a call for redemption. Upon the payment of the redemption price of Bonds being redeemed, each check or other transfer of funds issued for such purpose shall, to the extent practicable, bear the CUSIP number identifying, by issue and maturity, the Bonds being redeemed with the proceeds of such check or other transfer. (e) Partial Redemption of Bonds. In the event only a portion of any Bond is called for redemption, then, upon surrender of such Bond, the Authority shall execute and the Trustee shall authenticate and deliver to the Owner thereof, at the expense of the Authority, a new Bond or Bonds of the same series and maturity date, of authorized denominations in aggregate principal amount equal to the unredeemed portion of the Bond to be redeemed. (f) Effect of Redemption. From and after the date fixed for redemption, if funds available for the payment of the principal of and interest (and premium, if any) on the Bonds so called for redemption shall have been duly provided, such Bonds so called shall cease to be entitled to any benefit under this Indenture other than the right to receive payment of the redemption price, and no interest shall accrue thereon from and after the redemption date specified in such notice. All Bonds redeemed pursuant to this Section 2.02 shall be canceled and destroyed. (g) Purchase in Lieu of Redemption. In lieu of redemption of any Bond, amounts on deposit in the Revenue Fund may also be used and withdrawn by the Trustee at any time, upon the Written Request of the Authority, for the purchase of such Bonds at public or private sale as and when and at such prices (including brokerage and other charges, but excluding accrued interest, which is payable from the Interest Account) as the Authority may in its discretion determine in accordance with all applicable laws and in accordance with the priority afforded the relative Bond under the Indenture. 77053054.1 13 Page 23 of 195 (h) Authority Notice. Notwithstanding any provisions in the Indenture to the contrary, upon any optional redemption or mandatory redemption from Special Taxes in part, the Authority shall deliver a Written Certificate to the Trustee at least sixty (60) days prior to the proposed redemption date or such later date as shall be acceptable to the Trustee so stating that the remaining payments of principal and interest on the Agency Bonds, together with other Revenues will be sufficient on a timely basis to pay debt service on the Bonds. The Authority shall certify in such Written Certificate that sufficient moneys for purposes of such redemption are or will be on deposit in the Redemption Fund, and is required to deliver such moneys to the Trustee together with other Revenues, if any, then to be delivered to the Trustee, which moneys are required to be identified to the Trustee in the Written Certificate delivered with the Revenues. Section 2.03 Form of the Bonds. The Bonds, the form of Trustee's certificate of authentication, and the form of assignment to appear thereon, shall be substantially in the form set forth in Exhibit A attached hereto and by this reference incorporated herein, with necessary or appropriate variations, omissions and insertions, as permitted or required by this Indenture. Section 2.04 Execution of Bonds. The Bonds shall be signed in the name and on behalf of the Authority with the manual or facsimile signatures of its Chairperson or Executive Director and attested with the manual or facsimile signature of its Secretary or any assistant duly appointed by the Board, and shall be delivered to the Trustee for authentication by it. In case any officer of the Authority who shall have signed any of the Bonds shall cease to be such officer before the Bonds so signed shall have been authenticated or delivered by the Trustee or issued by the Authority, such Bonds may nevertheless be authenticated, delivered and issued and, upon such authentication, delivery and issue, shall be as binding upon the Authority as though the individual who signed the same had continued to be such officer of the Authority. Also, any Bond may be signed on behalf of the Authority by any individual who on the actual date of the execution of such Bond shall be the proper officer although on the nominal date of such Bond such individual shall not have been such officer. Only such of the Bonds as shall bear thereon a certificate of authentication in substantially the form set forth in Exhibit A manually executed by the Trustee, shall be valid or obligatory for any purpose or entitled to the benefits of this Indenture, and such certificate of the Trustee shall be conclusive evidence that the Bonds so authenticated have been duly authenticated and delivered hereunder and are entitled to the benefits of this Indenture. Section 2.05 Transfer of Bonds. Subject to Section 2.10, any Bond may, in accordance with its terms, be transferred, upon the Registration Books, by the person in whose name it is registered, in person or by his duly authorized attorney, upon surrender of such Bond for cancellation, accompanied by delivery of a written instrument of transfer in a form acceptable to the Trustee, duly executed. Whenever any Bond or Bonds shall be surrendered for transfer, the Authority shall execute and the Trustee shall authenticate and deliver to the transferee a new Bond or Bonds of like maturity and aggregate principal amount of authorized denominations. The Trustee may require payment by the Bondowner requesting such transfer or exchange of any tax or other governmental charge required to be paid with respect to such transfer or exchange. The Trustee shall not be required to transfer, pursuant to this Section, either (a) all Bonds during the period established by the Trustee for the selection of Bonds for redemption, or (b) any Bonds selected for redemption pursuant to Section 2.02. The cost of printing Bonds and any services 77053054.1 14 Page 24 of 195 rendered or expenses incurred by the Trustee in connection with any transfer shall be paid by the Authority. Section 2.06 Exchange of Bonds. The Bonds of any series may be exchanged at the Corporate Trust Office of the Trustee for a like aggregate principal amount of Bonds of the same series of other authorized denominations and of the same maturity. The Trustee shall not be required to exchange, pursuant to this Section, either (a) all Bonds during the period established by the Trustee for the selection of Bonds for redemption, or (b) any Bonds selected for redemption pursuant to Section 2.02. The cost of printing Bonds and any service rendered or expenses incurred by the Trustee in connection with any exchange shall be paid by the Authority. Section 2.07 Registration Books. The Trustee will keep or cause to be kept at its Corporate Trust Office sufficient records for the registration and transfer of the Bonds which shall at all reasonable times during regular business hours be open to inspection by the Authority with reasonable prior notice; and, upon presentation for such purpose, the Trustee shall, under such reasonable regulations as it may prescribe, register or transfer or cause to be registered or transferred, on said records Bonds as hereinbefore provided. Section 2.08 Bonds Mutilated, Lost, Destroyed or Stolen. If any Bond shall become mutilated, the Authority, at the expense of the Owner of said Bond, shall execute, and the Trustee shall thereupon authenticate and deliver, a new Bond of like series, tenor and authorized denomination in exchange and substitution for the Bond so mutilated, but only upon surrender to the Trustee of the Bond so mutilated. Every mutilated Bond so surrendered to the Trustee shall be cancelled by it and destroyed. If any Bond hereunder shall be lost, destroyed or stolen, evidence of such loss, destruction or theft may be submitted to the Trustee and the Authority and, if such evidence be satisfactory to the Trustee and the Authority and indemnity for the Trustee and the Authority satisfactory to the Trustee shall be given, the Authority, at the expense of the Bond Owner, shall execute, and the Trustee shall thereupon authenticate and deliver, a new Bond of like series and tenor in lieu of and in substitution for the Bond so lost, destroyed or stolen (or if any such Bond shall have matured or shall have been called for redemption, instead of issuing a substitute Bond, the Trustee may pay the same without surrender thereof upon receipt of indemnity satisfactory to the Trustee). The Authority may require payment of a fee for preparing and authenticating each new Bond issued under this Section and of expenses which may be incurred by the Authority and the Trustee. Any Bond issued under the provisions of this Section 2.08, in lieu of any Bond alleged to be lost, destroyed or stolen shall constitute an original contractual obligation on the part of the Authority whether or not the Bond alleged to be lost, destroyed or stolen be at any time enforceable by anyone, and shall be equally and proportionately entitled to the benefits of this Indenture with all other Bonds secured by this Indenture. Section 2.09 CUSIP Numbers. The Trustee and the Authority shall not be liable for any defect or inaccuracy in the CUSIP number that appears on any Bond or in any redemption notice. The Trustee may, in its discretion, include in any redemption notice a statement to the effect that the CUSIP numbers on the Bonds have been assigned by an independent service and are included in such notice solely for the convenience of the Owners and that neither the Trustee, nor the Authority shall be liable for any inaccuracies in such numbers. 77053054.1 15 Page 25 of 195 Section 2.10 Use of Securities Depository. (a) The Bonds shall be initially registered as provided in Section 2.01. Registered ownership of the Bonds, or any portion thereof, may not thereafter be transferred except: (i) to any successor of Cede & Co., as nominee of DTC, as its nominee, or to any substitute depository designated pursuant to clause (ii) of this Section (a "substitute depository"); provided, that any successor of Cede & Co., as nominee of DTC or a substitute depository, shall be qualified under any applicable laws to provide the services proposed to be provided by it; (ii) to any substitute depository upon (1) the resignation of DTC or its successor (or any substitute depository or its successor) from its functions as depository, or (2) a determination by the Authority to substitute another depository for DTC (or its successor) because DTC or its successor (or any substitute depository or its successor) is no longer able to carry out its functions as depository; provided, that any such substitute depository shall be qualified under any applicable laws to provide the services proposed to be provided by it; or (iii) to any person as provided below, upon (1) the resignation of DTC or its successor (or substitute depository or its successor) from its functions as depository, or (2) a determination by the Authority to remove DTC or its successor (or any substitute depository or its successor) from its functions as depository. (b) In the case of any transfer pursuant to clause (i) or clause (ii) of subsection (a) hereof, upon receipt of the Outstanding Bonds by the Trustee, together with a Written Request of the Authority to the Trustee, a new Bond for each maturity shall be authenticated and delivered in the aggregate principal amount of the Bonds then Outstanding, registered in the name of such successor or such substitute depository, or their nominees, as the case may be, all as specified in such Written Request of the Authority. (c) In the case of any transfer pursuant to clause (iii) of subsection (a) hereof upon receipt of the Outstanding Bonds by the Trustee, together with a Written Request of the Authority to the Trustee, new Bonds shall be authenticated and delivered in such denominations numbered in the manner determined by the Trustee and registered in the names of such persons as are requested in such a Written Request of the Authority, subject to the limitations of Section 2.01 hereof, provided, the Trustee shall not be required to deliver such new Bonds within a period of less than sixty (60) days from the date of receipt of such a Written Request of the Authority. After any transfer pursuant to this subsection, the Bonds shall be transferred pursuant to Section 2.05. (d) The Authority and the Trustee shall be entitled to treat the person in whose name any Bond is registered as the Owner thereof for all purposes of the Indenture and any applicable laws, notwithstanding any notice to the contrary received by the Trustee or the Authority; and the Authority and the Trustee shall have no responsibility for transmitting payments to, communication with, notifying, or otherwise dealing with any beneficial owners of the Bonds, and neither the Authority nor the Trustee will have any responsibility or obligations, 77053054.1 OR Page 26 of 195 legal or otherwise, to the beneficial owners or to any other party, including DTC or its successor (or substitute depository or its successor), except for the Owner of any Bonds. (e) So long as the Outstanding Bonds are registered in the name of Cede & Co. or its registered assigns, the Authority and the Trustee shall cooperate with Cede & Co., as sole registered Owner, or its registered assigns in effecting payment of the principal of and interest on the Bonds by arranging for payment in such manner that funds for such payments are properly identified and are made immediately available on the date they are due. (f) Notwithstanding anything to the contrary contained herein, so long as the Bonds are registered as provided in this Section 2. 10, payment of principal of and interest on the Bonds shall be made in accordance with the Letter of Representations delivered to DTC with respect to the Bonds. Section 2.11 Temporary Bonds. The Bonds may be initially delivered in temporary form exchangeable for definitive Bonds when ready for delivery, which temporary Bonds shall be printed, lithographed or typewritten, shall be of such denominations as may be determined by the Trustee, shall be in fully- registered form and shall contain such reference to any of the provisions hereof as may be appropriate. Every temporary Bond shall be authenticated and delivered by the Trustee upon the same conditions and terms and in substantially the same manner as definitive Bonds. If the Trustee authenticates and delivers temporary Bonds, it will register and authenticate definitive Bonds, and in that case, upon demand of the Owner of any temporary Bonds, such definitive Bonds shall be exchanged by the Trustee at its Corporate Trust Office, without cost to such Owner for temporary Bonds upon surrender of such temporary Bonds, and until so exchanged such temporary Bonds shall be entitled to the same benefit, protection and security hereunder as the definitive Bonds executed and delivered hereunder. All temporary Bonds surrendered pursuant to the provisions of this Section shall be canceled by the Trustee and shall not be redelivered. ARTICLE III DEPOSIT AND APPLICATION OF PROCEEDS OF BONDS Section 3.01 Issuance of Bonds. Upon the execution and delivery of this Indenture, the Authority shall execute and deliver the Bonds in the aggregate principal amount of Dollars ($ ) to the Trustee for authentication and delivery to the original purchaser thereof upon the Written Request of the Authority. Section 3.02 Application of Proceeds of Sale of Bonds. Upon the receipt of payment for the Bonds on the Closing Date, the Trustee shall apply the proceeds of sale thereof in the amount of $ (being the principal amount of $ , less an original issue discount of $ and less an underwriter's discount of $. as follows: (a) The Trustee shall deposit the amount of $ in the Bond Purchase Fund, which amount constitutes the purchase price of the Agency Bonds. (b) The Trustee shall deposit the amount of $ in the Reserve Account, which amount equals the initial Reserve Requirement. 77053054.1 17 Page 27 of 195 (c) The Trustee shall deposit the amount of $ in the Costs of Issuance Fund. Section 3.03 Bond Purchase Fund. The Trustee shall establish and maintain a separate fund to be known as the "Bond Purchase Fund" into which shall be deposited a portion of the proceeds of the sale of the Bonds in the amount set forth in Section 3.02(a). The Trustee shall disburse all amounts in the Bond Purchase Fund on the Closing Date to purchase the Agency Bonds. Following the disbursement of all amounts to purchase the Agency Bonds, the Trustee shall close the Bond Purchase Fund. Section 3.04 Costs of Issuance Fund. There is hereby established a fund to be held by the Trustee known as the "Costs of Issuance Fund" into which shall be deposited a portion of the Bond proceeds as set forth in Section 3.02(c). The moneys in the Costs of Issuance Fund shall be used to pay Costs of Issuance from time to time upon receipt of a Written Request of the Authority. On the date which is one hundred twenty (120) days following the Closing Date or upon the earlier receipt by the Trustee of a Written Request of the Authority stating that all Costs of Issuance have been paid, the Trustee shall transfer all remaining amounts in the Costs of Issuance Fund to the Revenue Fund. The Authority may at any time file a Written Request of the Authority requesting that the Trustee retain a specified amount in the Costs of Issuance Fund and transfer to the Revenue Fund all remaining amounts, and the Trustee shall comply with such request. Section 3.05 Validity of Bonds. The validity of the authorization and issuance of the Bonds shall not be affected in any way of any proceedings taken by the Agency with respect to the issuance and sale of the Agency Bonds, and the recital contained in the Bonds that the same are issued pursuant to the Bond Law shall be conclusive evidence of their validity and of the regularity of their issuance. ARTICLE IV REVENUES; FLOW OF FUNDS Section 4.01 Pledge of Revenues; Assignment of Rights. The Bonds shall be secured by a first lien on and pledge (which shall be effected in the manner and to the extent hereinafter provided) of all of the Revenues and Redemption Revenues and a first pledge of all of the moneys in the Bond Fund, the Revenue Fund and the Redemption Fund, including all amounts derived from the investment of such moneys. The Bonds shall be equally secured by a pledge, charge and first lien upon the Revenues and Redemption Revenues and such moneys without priority for number, date of Bonds, date of execution or date of delivery; and the payment of the interest on and principal of the Bonds and any premiums upon the redemption of any thereof shall be and are secured by an exclusive pledge, charge and first lien upon the Revenues and Redemption Revenues and such moneys. So long as any of the Bonds are Outstanding, the Revenues and Redemption Revenues and such other money shall not be used for any other purpose except as described hereunder for the payment of the Bonds; except that out of the Revenues and Redemption Revenues there may be apportioned such sums, for such purposes, as are expressly permitted by Section 4.02. 77053054.1 18 Page 28 of 195 The Authority hereby transfers in trust and assigns to the Trustee, for the benefit of the Owners from time to time of the Bonds, all of the Revenues and all of the right, title and interest of the Authority in the Agency Bonds. The Trustee shall be entitled to and shall receive all of the Revenues, and any Revenues collected or received by the Authority shall be deemed to be held, and to have been collected or received, by the Authority as the agent of the Trustee and shall forthwith be paid by the Authority to the Trustee. The assignment to the Trustee is solely in its capacity as Trustee under this Indenture and in accepting such assignment and taking any actions with respect to the Agency Bonds, the Trustee shall be entitled to all the indemnities, protections, immunities and limitations from liability afforded it as Trustee under this Indenture. The Trustee also shall be entitled to and, subject to the provisions hereof, shall take all steps, actions and proceedings reasonably necessary in its judgment to enforce, either jointly with the Authority or separately, all of the rights of the Authority and all of the obligations of the Agency under the Agency Bonds. Section 4.02 Receipt, Deposit and Applications of Revenues. (a) Deposit of Revenues; Revenue Fund. All Revenues (excluding Redemption Revenues) shall be promptly deposited by the Trustee upon receipt thereof in a special fund designated as the "Revenue Fund" which the Trustee shall establish, maintain and hold in trust hereunder. (b) Deposit of Revenues: Bond Fund: The Trustee shall establish, maintain and hold in trust a fund, entitled "Bond Fund." Within such fund, the Trustee shall establish, maintain and hold in trust separate special accounts entitled "Interest Account," "Principal Account" and "Reserve Account." On or before each Interest Payment Date, the Trustee shall transfer from the Revenue Fund for deposit into the Bond Fund the following amounts, in the priority set forth in Subsection (c) below. (c) A_ pplication of Revenues; Bond Fund. On or before each Interest Payment Date, the Trustee shall transfer from the Revenue Fund and deposit into the Bond Fund and the following respective special accounts therein, the following amounts in the following order of priority, the requirements of each such special account (including the making up of any deficiencies in any such account resulting from lack of Revenues sufficient to make any earlier required deposit) at the time of deposit to be satisfied before any transfer is made to any account subsequent in priority: (i) Interest Account. On or before each Interest Payment Date, the Trustee shall deposit in the Interest Account an amount required to cause the aggregate amount on deposit in the Interest Account to equal the amount of interest becoming due and payable on such Interest Payment Date on all Outstanding Bonds. No deposit need be made into the Interest Account if the amount contained therein is at least equal to the interest becoming due and payable upon all Outstanding Bonds on such Interest Payment Date. All moneys in the Interest Account shall be used and withdrawn by the Trustee solely for the purpose of paying the interest on the Bonds as it shall become due and payable (including accrued interest on any Bonds redeemed prior to maturity). 77053054.1 19 Page 29 of 195 (ii) Principal Account. On or before each date on which the principal of the Bonds shall be payable, the Trustee shall deposit in the Principal Account an amount required to cause the aggregate amount on deposit in the Principal Account to equal the aggregate amount of principal (including sinking fund payments) coming due and payable on such date on the Bonds pursuant to Section 2.01. All moneys in the Principal Account shall be used and withdrawn by the Trustee solely for the purpose of paying the principal of the Bonds (including sinking fund payments). (iii) Reserve Account. All amounts on deposit in the Revenue Fund on or before each Interest Payment Date, to the extent not required to pay any interest on or principal of any Outstanding Bonds then having come due and payable, shall be credited to the replenishment of the Reserve Account in an amount sufficient to maintain the Reserve Requirement therein. The Authority shall deposit from the repayment of the Agency Bonds, and maintain an amount of money equal to the Reserve Requirement in the Reserve Account at all times while the Bonds are Outstanding. Amounts in the Reserve Account will be used to pay debt service on the Bonds to the extent other moneys are not available therefor. Earnings on amounts in the Reserve Account in excess of the Reserve Requirement shall be deposited into the Revenue Fund, if and to the extent such earnings are not required to be retained in the Reserve Account to meet the Reserve Requirement. Upon redemption of the Bonds, amounts on deposit in the Reserve Account shall be reduced (to an amount not less than the Reserve Requirement) and the excess moneys shall be transferred to the Redemption Account and used for the redemption of the Bonds. Amounts in the Reserve Account may be used to pay the final year's debt service on the Bonds. (iv) Surplus. All remaining amounts on September 2 (or the next Business Day to the extent September 2 is not a Business Day) of each year, commencing September 2, 2011, on deposit in the Revenue Fund shall be transferred to the Authority to be used for any lawful purposes. (v) Rebate Account. The Trustee shall deposit in the Rebate Account (which account is hereby established as a separate account to be held by the Trustee) from time to time, as set forth in this Indenture, an amount determined by the Authority to be subject to rebate to the United States of America in accordance with Section 5.07(h). Amounts in the Rebate Account shall be applied and disbursed by the Trustee solely for the purposes and at the times set forth in written requests of the Authority filed with the Trustee pursuant to Section 5.07(h). The Trustee shall not be responsible for calculating rebate amounts or for the adequacy or correctness of any rebate report or rebate calculations. The Trustee shall be deemed conclusively to have complied with the provisions of the Indenture and any other agreement relating to the Bonds regarding calculation and payment of rebate if it follows the directions of the Authority and it shall have no independent duty to review such calculations or enforce the compliance with such rebate requirements by the Authority. Section 4.03 Redemption Fund. There is hereby established as a separate fund to be held by the Trustee, the "Redemption Fund," to the credit of which the Authority shall deposit, immediately upon receipt, all Redemption Revenues. Moneys in the Redemption Fund shall be 77053054.1 20 Page 30 of 195 held in trust by the Trustee for the benefit of the Authority and the Owners of the Bonds, and shall be used and withdrawn by the Trustee to redeem Bonds pursuant to Sections 2.02(a), 2.02(c) and 2.02(d) hereof on the applicable date thereof. Section 4.04 Investments. All moneys in any of the funds or accounts established with the Trustee pursuant to this Indenture shall be invested by the Trustee solely in Permitted Investments pursuant to the Written Request of the Authority given to the Trustee at least two (2) Business Days in advance of the making of such investments, which by their terms mature prior to the date on which such moneys are required to be paid out hereunder. Each such written direction shall contain the representation of the Authority that the investments identified therein constitute Permitted Investments hereunder upon which the Trustee may conclusively rely. In the absence of any such direction from the Authority, the Trustee shall invest any such moneys in clause (d) of the definition of Permitted Investments. Obligations purchased as an investment of moneys in any funds shall be deemed to be part of such fund or account. All interest or gain derived from the investment of amounts in any of the funds or accounts established hereunder shall be deposited in the fund or account from which such investment was made. For purposes of acquiring any investments hereunder, the Trustee may commingle funds held by it hereunder upon the Written Request of the Authority. The Trustee or its affiliate may (but shall not be obligated to) act as principal or agent in the acquisition or disposition of any investment and shall be entitled to its customary fees therefor. The Trustee is required to sell or present for redemption, any Permitted Investment it purchases whenever it shall be necessary to provide moneys to meet any required payment, transfer, withdrawal or disbursement from the fund to which such permitted investment is created. The Trustee shall incur no liability for losses arising from any investments made pursuant to this Section. The Authority acknowledges that to the extent regulations of the Comptroller of the Currency or other applicable regulatory entity grant the Authority the right to receive brokerage confirmations of security transactions as they occur, the Authority specifically waives receipt of such confirmations to the extent permitted by law. The Trustee will furnish to the Authority periodic cash transaction statements which include detail for all investment transactions made by the Trustee hereunder. The Trustee may purchase or sell to itself or any affiliate, as principal or agent, investments authorized by this Section. The Trustee may act as purchaser or agent in the making or disposing of any investment. Such investments, if registered, shall be registered in the name of the Trustee for the benefit of the Owners and held by the Trustee. The Trustee or any of its affiliates may act as sponsor, advisor or manager or provide administrative services in connection with any Permitted Investments. Section 4.05 Valuation and Disposition of Investments. Except as otherwise provided in the next sentence, all investments of amounts deposited in any fund, or account created by or pursuant to this Indenture, or otherwise containing gross proceeds of the Bonds (within the meaning of section 148 of the Code) shall be acquired, disposed of, and valued (as of the date that valuation is required by this Indenture or the Code) at Fair Market Value. Investments in funds or accounts (or portions thereof) that are subject to a yield restriction under 77053054.1 21 Page 31 of 195 the applicable provisions of the Code shall be valued at their present value (within the meaning of section 148 of the Code). COVENANTS OF THE AUTHORITY Section 5.01 Punctual Payment. The Authority shall punctually pay or cause to be paid the principal, interest and premium (if any) to become due in respect of all the Bonds, in strict conformity with the terms of the Bonds and of this Indenture, according to the true intent and meaning thereof, but only out of Revenues and other assets pledged for such payment as provided in this Indenture. Section 5.02 Extension of Payment of Bonds. The Authority shall not directly or indirectly extend or assent to the extension of the maturity of any of the Bonds or the time of payment of any claims for interest by the purchase of such Bonds or by any other arrangement, and in case the maturity of any of the Bonds or the time of payment of any such claims for interest shall be extended, such Bonds or claims for interest shall not be entitled, in case of any default hereunder, to the benefits of this Indenture, except subject to the prior payment in full of the principal of all of the Bonds then Outstanding and of all claims for interest thereon which shall not have been so extended. Nothing in this Section shall be deemed to limit the right of the Authority to issue Bonds for the purpose of refunding any Outstanding Bonds, and such issuance shall not be deemed to constitute an extension of maturity of the Bonds. Section 5.03 Against Encumbrances. The Authority shall not create, or permit the creation of, any pledge, lien, charge or other encumbrance upon the Revenues and other assets pledged or assigned under this Indenture while any of the Bonds are Outstanding, except the pledge and assignment created by this Indenture. Subject to this limitation, the Authority expressly reserves the right to enter into one or more other indentures for any of its corporate purposes, including, but not limited to, the purchase of Additional Agency Bonds and other programs under the Bond Law, and reserves the right to issue other obligations for such purposes. Section 5.04 Power to Issue Bonds and Make Pledge and Assignment. The Authority is duly authorized pursuant to law to issue the Bonds and to enter into this Indenture and to pledge and assign the Revenues, the Agency Bonds and other assets purported to be pledged and assigned, respectively, under this Indenture in the manner and to the extent provided in this Indenture. The Bonds and the provisions of this Indenture are and will be the legal, valid and binding special obligations of the Authority in accordance with their terms and priority of payment, and the Authority and the Trustee, subject to the provisions of this Indenture, shall at all times, to the extent permitted by law, defend, preserve and protect said pledge and assignment of Revenues and other assets and all the rights of the Bond Owners under this Indenture against all claims and demands of all persons whomsoever. Section 5.05 Accounting Records and Financial Statements. The Trustee shall at all times keep, or cause to be kept, proper books of record and account, prepared in accordance with industry standards, in which complete and accurate entries shall be made of all transactions made 77053054.1 22 Page 32 of 195 by the Trustee relating to the proceeds of Bonds, the Revenues and all funds and accounts established by the Trustee pursuant to this Indenture. Such books of record and account shall be available for inspection by the Authority, during regular business hours with reasonable prior notice. Not later than 45 days following each Interest Payment Date, the Trustee shall prepare and file with the Authority a report setting forth: (i) amounts withdrawn from and deposited into each fund and account maintained by the Trustee under the Indenture; (ii) the balance on deposit in each fund and account as of the date for which such report is prepared; and (iii) a brief description of all obligations held as investments in each fund and account. Copies of such reports may be mailed to any owner of at least 50% aggregate principal amount of Bonds Outstanding, upon the owner's written request at a cost not to exceed the Trustee's actual costs of duplication and mailing. Said reports may be in the form of the Trustee's regular semiannual statements. Section 5.06 No Parity Debt. Except for the Bonds, or bonds issued for the purpose of refunding the Bonds, the Authority covenants that no additional bonds, notes or other indebtedness shall be issued or incurred which are payable out of the Revenues in whole or in part. Section 5.07 Tax Covenants Relating to Bonds. (a) Special Definitions. When used in this Section, the following terms have the following meanings: (i) "Bonds" means, unless otherwise qualified, the Bonds. (ii) "Code" means the Internal Revenue Code of 1986, as amended. (iii) "Computation Date" has the meaning set forth in section 1.148 - 1(b) of the Tax Regulations. (iv) "Gross Proceeds" means any proceeds as defined in section 1.148 - l(b) of the Tax Regulations (referring to sales, investment and transferred proceeds), and any replacement proceeds as defined in section 1.148 -1(c) of the Tax Regulations, of the Bonds. (v) "Investment" has the meaning set forth in section 1.148 -1(b) of the Tax Regulations. (vi) "Nonpurpose Investment" means any investment property, as defined in section 148(b) of the Code, in which Gross Proceeds of the Bonds are invested and that is not acquired to carry out the governmental purposes of that series of Bonds. (vii) "Rebate Amount" has the meaning set forth in section 1.148 -1(b) of the Tax Regulations. 77053054.1 23 Page 33 of 195 (viii) "Tax Regulations" means the United States Treasury Regulations promulgated pursuant to sections 103 and 141 through 150 of the Code, or section 103 of the 1954 Code, as applicable. (ix) "Yield" of any Investment has the meaning set forth in section 1.148 -5 of the Tax Regulations; and of any issue of governmental obligations has the meaning set forth in section 1.148 -4 of the Tax Regulations. (b) Not to Cause Interest to Become Taxable. The Authority covenants that it shall not use, and shall not permit the use of, and shall not omit to use Gross Proceeds or any other amounts (or any property the acquisition, construction or improvement of which is to be financed directly or indirectly with Gross Proceeds) in a manner that if made or omitted, respectively, could cause the interest on any Bond to fail to be excluded, pursuant to Section 103(a) of the Code, from the gross income of the owner thereof for federal income tax purposes. Without limiting the generality of the foregoing, unless and until the Trustee receives a written opinion of Bond Counsel to the effect that failure to comply with such covenant will not adversely affect such exclusion of the interest on any Bond from the gross income of the owner thereof for federal income tax purposes, the Authority shall comply with each of the specific covenants in this Section. (c) Private Use and Private Payments. Except as would not cause any Bond to become a "private activity bond" within the meaning of section 141 of the Code and the Tax Regulations, the Authority shall take all actions necessary to assure that the Agency or other public agency at all times prior to the final cancellation of the last of the Bonds to be retired: (i) exclusively owns, operates and possesses all property the acquisition, construction or improvement of which is to be financed or refinanced directly or indirectly with Gross Proceeds of the Bonds and not use or permit the use of such Gross Proceeds (including through any contractual arrangement with terms different than those applicable to the general public) or any property acquired, constructed or improved with such Gross Proceeds in any activity carried on by any person or entity (including the United States or any agency, department and instrumentality thereof) other than a state or local government, unless such use is solely as a member of the general public; and (ii) does not directly or indirectly impose or accept any charge or other payment by any person or entity (other than a state or local government) who is treated as using any Gross Proceeds of the Bonds or any property the acquisition, construction or improvement of which is to be financed or refinanced directly or indirectly with such Gross Proceeds. (d) No Private Loan. Except as would not cause any Bond to become a "private activity bond" within the meaning of section 141 of the Code and the Tax Regulations and rulings thereunder, the Authority shall not use or permit the use of Gross Proceeds of the Bonds to make or finance loans to any person or entity other than a state or local government. For purposes of the foregoing covenant, such Gross Proceeds are considered to be "loaned" to a person or entity if: (i) property acquired, constructed or improved with such Gross Proceeds is sold or leased to such person or entity in a transaction that creates a debt for federal income tax purposes; (ii) capacity in or service from such property is committed to such person or entity 77053054.1 24 Page 34 of 195 under a take -or -pay, output or similar contract or arrangement; or (iii) indirect benefits of such Gross Proceeds, or burdens and benefits of ownership of any property acquired, constructed or improved with such Gross Proceeds, are otherwise transferred in a transaction that is the economic equivalent of a loan. (e) Not to Invest at Higher Yield. Except as would not cause the Bonds to become "arbitrage bonds" within the meaning of section 148 of the Code and the Tax Regulations and rulings thereunder, the Authority shall not (and shall not permit any person to), at any time prior to the final cancellation of the last Bond to be retired, directly or indirectly invest Gross Proceeds in any Investment, if as a result of such investment the Yield of any Investment acquired with Gross Proceeds, whether then held or previously disposed of, would materially exceed the Yield of the Bonds within the meaning of said section 148. (f) Not Federally- Guaranteed. Except to the extent permitted by section 149(b) of the Code and the Tax Regulations and rulings thereunder, the Authority shall not take or omit to take (and shall not permit any person to take or omit to take) any action that would cause any Bond to be "federally guaranteed" within the meaning of section 149(b) of the Code and the Tax Regulations and rulings thereunder. (g) Information Report . The Authority shall timely file any information required by section 149(e) of the Code with respect to Bonds with the Secretary of the Treasury on Form 8038 -G or such other form and in such place as the Secretary may prescribe. (h) Rebate of Arbitrage Profits. Except to the extent otherwise provided in section 148(f) of the Code and the Tax Regulations: (i) The Authority shall account for all Gross Proceeds (including all receipts, expenditures and investments thereof) on its books of account separately and apart from all other funds (and receipts, expenditures and investments thereof) and shall retain all records of accounting for at least six years after the day on which the last Bond is discharged. However, to the extent permitted by law, the Authority may commingle Gross Proceeds of Bonds with its other moneys, provided that it separately accounts for each receipt and expenditure of Gross Proceeds and the obligations acquired therewith. (ii) Not less frequently than each Computation Date, the Authority shall calculate the Rebate Amount in accordance with rules set forth in section 148(f) of the Code and the Tax Regulations and rulings thereunder. The Authority shall maintain a copy of the calculation with its official transcript of proceedings relating to the issuance of the Bonds until six years after the final Computation Date. (iii) In order to assure the excludability pursuant to section 103(a) of the Code of the interest on the Bonds from the gross income of the owners thereof for federal income tax purposes, the Authority shall pay to the United States the amount that when added to the future value of previous rebate payments made for the Bonds equals (i) in the case of the Final Computation Date as defined in section 1.148- 3(e)(2) of the Tax Regulations, one hundred percent (100 %) of the Rebate Amount on such date; and (ii) in the case of any other Computation Date, ninety percent (90 %) of the Rebate Amount on such date. Upon the Written 77053054.1 25 Page 35 of 195 Request of the Authority, the Trustee shall pay over to the Authority amounts in the Rebate Account for such purpose. In all cases, such rebate payments shall be made by the Authority at the times and in the amounts as are or may be required by section 148(f) of the Code and the Tax Regulations and rulings thereunder, and shall be accompanied by Form 8038 -T or such other forms and information as is or may be required by section 148(f) of the Code and the Tax Regulations and rulings thereunder for execution and filing by the Authority. Notwithstanding the foregoing, and provided that the Authority takes all steps available to it to cause the provision of such amounts, the monetary obligation of the Authority under this paragraph (iii) shall be limited to amounts provided to it for such purpose by the Agency. (i) Not to Divert Arbitrage Profits. Except to the extent permitted by section 148 of the Code and the Tax Regulations and rulings thereunder, the Authority shall not and shall not permit any person to, at any time prior to the final cancellation of the last of the Bonds to be retired, enter into any transaction that reduces the amount required to be paid to the United States pursuant to paragraph (h) of this Section because such transaction results in a smaller profit or a larger loss than would have resulted if the transaction had been at arm's length and had the Yields on the Bonds not been relevant to either party. 0) Bonds Not Hedge Bonds. The Authority represents that none of the Bonds is or will become a "hedge bond" within the meaning of section 149(g) of the Code. (k) Elections. The Authority hereby directs and authorizes any Authority Representative to make elections permitted or required pursuant to the provisions of the Code or the Tax Regulations, as such Representative (after consultation with Bond Counsel) deems necessary or appropriate in connection with the Bonds, in the Tax Certificate as to Arbitrage and the Provisions of Sections 103 and 141 -150 of the Internal Revenue Code of 1986, or similar or other appropriate certificate, form or document. (1) Closing Certificate. The Authority agrees to execute and deliver in connection with the issuance of the Bonds a Tax Certificate as to Arbitrage and the Provisions of Sections 103 and 141 -150 of the Internal Revenue Code of 1986, or similar document containing additional representations and covenants pertaining to the exclusion of interest on the Bonds from the gross income of the owners thereof for federal income tax purposes, which representations and covenants are incorporated as though expressly set forth herein. Section 5.08 Agency Bonds. The Trustee, as assignee of the Authority rights pursuant to Section 4.01, shall (subject to the provisions of this Indenture) promptly collect all amounts due as principal and interest on Agency Bonds from the Agency and, subject to the provisions hereof, shall enforce, and take all steps, actions and proceedings reasonably necessary for the enforcement of all of the rights of the Authority thereunder and for the enforcement of all of the obligations of the Agency thereunder. Section 5.09 Further Assurances. The Authority shall cause to be collected and paid to the Trustee all Revenues as such Revenues become due and payable. The Authority will adopt, make, execute and deliver any and all such further resolutions, instruments and assurances as may be reasonably necessary or proper to carry out the intention or to facilitate the 77053054.1 26 Page 36 of 195 performance of this Indenture, and for the better assuring and confirming unto the Owners of the Bonds the rights and benefits provided in this Indenture. Section 5.10 Immunity. The Authority is not entitled to any immunity, sovereign or otherwise, from any legal proceedings to enforce or collect upon this Indenture or the Bonds. To the extent that the Authority has or hereafter may acquire any right to immunity, the Authority hereby waives such rights for itself in respect of its obligations arising under this Indenture and the Bonds. Section 5.11 No Acceleration. The principal of the Bonds shall not be subject to acceleration hereunder. Nothing in this Section shall in any way prohibit the prepayment or redemption of Bonds or the defeasance of the Bonds and discharge of this Indenture. ARTICLE VI THE TRUSTEE Section 6.01 Appointment of Trustee. Union Bank, N.A., in Los Angeles, California, is hereby appointed Trustee by the Authority for the purpose of receiving all moneys required to be deposited with the Trustee hereunder and to allocate, use and apply the same as provided in this Indenture. The Authority agrees that it will maintain a Trustee having a corporate trust office in the State, with a combined capital and surplus of at least Seventy-Five Million Dollars ($75,000,000), and subject to supervision or examination by federal or State authority, so long as any Bonds are Outstanding. If such bank or trust company publishes a report of condition at least annually pursuant to law or to the requirements of any supervising or examining authority above referred to, then for the purpose of this Section 6.01 the combined capital and surplus of such bank or trust company shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. The Trustee is hereby authorized to pay the principal of and interest and redemption premium (if any) on the Bonds when duly presented for payment at maturity, or on redemption or purchase prior to maturity, and to cancel all Bonds upon payment thereof. The Trustee shall keep accurate records of all funds administered by it and of all Bonds paid and discharged. Section 6.02 Acceptance of Trusts. The Trustee hereby accepts the trusts imposed upon it by this Indenture, and agrees to perform said trusts, but only upon and subject to the following express terms and conditions: (a) The Trustee, prior to the occurrence of an Event of Default and after curing of all Events of Default which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default hereunder has occurred (which has not been cured or waived), the Trustee may exercise such of the rights and powers vested in it by this Indenture, and shall use the same degree of care and skill and diligence in their exercise, as a prudent person would use in the conduct of its own affairs. (b) The Trustee may execute any of the trusts or powers hereof and perform the duties required of it hereunder by or through attorneys, agents, or receivers, and shall be 77053054.1 27 Page 37 of 195 entitled to advice of counsel concerning all matters of trust and its duty hereunder. The Trustee may conclusively rely on an opinion of counsel as full and complete protection for any action taken or suffered by it hereunder. (c) The Trustee shall not be responsible for any recital herein or in the Bonds, or for any of the supplements hereto or thereto or instruments of further assurance, or for the sufficiency of the security for the Bonds issued hereunder or intended to be secured hereby and the Trustee shall not be bound to ascertain or inquire as to the observance or performance of any covenants, conditions or agreements on the part of the Authority hereunder. (d) The Trustee may become the Owner of Bonds secured hereby with the same rights which it would have if not the Trustee; may acquire and dispose of other bonds or evidences of indebtedness of the Authority with the same rights it would have if it were not the Trustee; and may act as a depository for and permit any of its officers or directors to act as a member of, or in any other capacity with respect to, any committee formed to protect the rights of Owners of Bonds, whether or not such committee shall represent the Owners of the majority in aggregate principal amount of the Bonds then Outstanding. (e) The Trustee shall be protected in acting upon any notice, request, consent, certificate, order, affidavit, letter, telegram or other paper or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons. Any action taken or omitted to be taken by the Trustee pursuant to this Indenture upon the request or authority or consent of any person who at the time of making such request or giving such authority or consent is the Owner of any Bond, shall be conclusive and binding upon all future Owners of the same Bond and upon Bonds issued in exchange therefor or in place thereof. The Trustee shall not be bound to recognize any person as an Owner of any Bond or to take any action at his request unless the ownership of such Bond by such person shall be reflected on the Registration Books. (f) As to the existence or non - existence of any fact or as to the sufficiency or validity of any instrument, paper or proceeding, the Trustee shall be entitled to rely upon a Certificate of the Authority as sufficient evidence of the facts therein contained and prior to the occurrence of an Event of Default hereunder of which the Trustee has been given notice or is deemed to have notice, as provided in Section 6.02(h) hereof, shall also be at liberty to accept a Certificate of the Authority to the effect that any particular dealing, transaction or action is necessary or expedient, but may at its discretion secure such further evidence deemed by it to be necessary or advisable, but shall in no case be bound to secure the same. (g) The permissive right of the Trustee to do things enumerated in this Indenture shall not be construed as a duty and it shall not be answerable for other than its negligence or willful misconduct. The immunities and exceptions from liability of the Trustee shall extend to its officers, directors, employees and agents. (h) The Trustee shall not be required to take notice or be deemed to have notice of any Event of Default hereunder except failure by the Authority to file with the Trustee any document required by this Indenture to be so filed subsequent to the issuance of the Bonds, unless the Trustee shall be specifically notified in writing of such default by the Authority or by 77053054.1 28 Page 38 of 195 the Owners of at least twenty -five percent (25 %) in aggregate principal amount of the Bonds then Outstanding and all notices or other instruments required by this Indenture to be delivered to the Trustee must, in order to be effective, be delivered at the Corporate Trust Office of the Trustee, and in the absence of such notice so delivered the Trustee may conclusively assume there is no Event of Default hereunder except as aforesaid. (i) At any and all reasonable times the Trustee, and its duly authorized agents, attorneys, experts, accountants and representatives, shall have the right (but not the duty) fully to inspect all books, papers and records of the Authority pertaining to the Bonds, and to make copies of any of such books, papers and records such as may be desired but which is not privileged by statute or by law. 0) The Trustee shall not be required to give any bond or surety in respect of the execution of the said trusts and powers or otherwise in respect of the premises hereof. (k) Notwithstanding anything elsewhere in this Indenture with respect to the execution of any Bonds, the withdrawal of any cash, the release of any property, or any action whatsoever within the purview of this Indenture, the Trustee shall have the right, but shall not be required, to demand any showings, certificates, opinions, appraisals or other information, or corporate action or evidence thereof; as may be deemed desirable for the purpose of establishing the right of the Authority to the execution of any Bonds, the withdrawal of any cash, or the taking of any other action by the Trustee. (1) Before taking the action referred to in Section 8.02, the Trustee may require that a satisfactory indemnity bond be furnished for the reimbursement of all expenses to which it may be put and to protect it against all liability, except liability which is adjudicated to have resulted from its negligence or willful default in connection with any such action. (m) All moneys received by the Trustee shall, until used or applied or invested as herein provided, be held in trust for the purposes for which they were received but need not be segregated from other funds except to the extent required by law. (n) The Trustee shall have no responsibility or liability with respect to any information, statements or recital in any offering memorandum or other disclosure material prepared or distributed with respect to the issuance of the Bonds. Section 6.03 Fees, Charges and Expenses of Trustee. The Trustee shall be entitled to payment and reimbursement for reasonable fees for its services rendered hereunder and all advances, counsel fees (including expenses) and other expenses reasonably and necessarily made or incurred by the Trustee in connection with such services. Upon the occurrence of an Event of Default hereunder, but only upon an Event of Default, the Trustee shall have a first lien with right of payment prior to payment of any Bond upon the amounts held hereunder for the foregoing fees, charges and expenses incurred by it respectively. The Trustee's right to payment of its fees and expenses shall survive the discharge and payment or defeasance of the Bonds and termination of the Indenture, and the resignation or removal of the Trustee. Section 6.04 Notice to Bond Owners of Default. If an Event of Default hereunder occurs with respect to any Bonds of which the Trustee has been given or is deemed to have 77053054.1 29 Page 39 of 195 notice, as provided in Section 6.02(h) hereof, then the Trustee shall promptly give written notice thereof by first -class mail to the Owner of each such Bond, unless such Event of Default shall have been cured before the giving of such notice; provided, however, that unless such Event of Default consists of the failure by the Authority to make any payment when due, the Trustee may elect not to give such notice to the Bond Owners if and so long as the Trustee in good faith determines that such Event of Default does not materially adversely affect the interests of the Bond Owners or that it is otherwise not in the best interests of the Bond Owners to give such notice. Section 6.05 Intervention by Trustee. In any judicial proceeding to which the Authority is a party which, in the opinion of the Trustee and its counsel, has a substantial bearing on the interests of Owners of any of the Bonds arising under this Indenture, the Trustee may intervene on behalf of such Bond Owners, and subject to Section 6.02(1) hereof, shall do so if requested in writing by the Owners of at least twenty -five percent (25 %) aggregate principal amount of such Bonds then Outstanding. Section 6.06 Removal of Trustee. The Owners of a majority in aggregate principal amount of the Outstanding Bonds may at any time, or the Authority may, so long as no Event of Default shall have occurred and then be continuing, remove the Trustee initially appointed, and any successor thereto, by an instrument or concurrent instruments in writing delivered to the Trustee at least thirty (30) days prior to the effective date of such removal, whereupon the Authority or such Owners, as the case may be, shall appoint a successor or successors thereto; provided that any such successor shall be a bank or trust company meeting the requirements set forth in Section 6.01. Section 6.07 Resignation by Trustee. The Trustee and any successor Trustee may at any time give thirty (30) days' written notice of its intention to resign as Trustee hereunder, such notice to be given to the Authority by registered or certified mail. Upon receiving such notice of resignation, the Authority shall promptly appoint a successor Trustee. Section 6.08 Appointment of Successor Trustee. In the event of the removal or resignation of the Trustee pursuant to Sections 6.06 or 6.07, respectively, the Authority shall promptly appoint a successor Trustee. In the event the Authority shall for any reason whatsoever fail to appoint a successor Trustee within ninety (90) days following the delivery to the Trustee of the instrument described in Section 6.06 or within ninety (90) days following the receipt of notice by the Authority pursuant to Section 6.07, the Trustee may apply to a court of competent jurisdiction for the appointment of a successor Trustee meeting the requirements of Section 6.01 hereof. Any such successor Trustee appointed by such court shall become the successor Trustee hereunder notwithstanding any action by the Authority purporting to appoint a successor Trustee following the expiration of such 90 -day period. Any resignation or removal of the Trustee pursuant to Section 6.06 or Section 6.07 and appointment of a successor Trustee shall become effective upon written acceptance of appointment by the successor Trustee. Upon such acceptance, the Authority shall cause notice thereof to be given by first -class mail, postage prepaid, to the Bond Owners at their respective addresses set forth on the Registration Books. 77053054.1 30 Page 40 of 195 Section 6.09 Merger or Consolidation. Any company into which the Trustee may be merged or converted or with which it may be consolidated or any company resulting from any merger, conversion or consolidation to which it shall be a party or any company to which the Trustee may sell or transfer all or substantially all of its corporate trust business, provided that such company shall meet the requirements set forth in Section 6.01, shall be the successor to the Trustee and vested with all of the title to the trust estate and all of the trusts, powers, discretions, immunities, privileges and all other matters as was its predecessor, without the execution or filing of any paper or further act, anything herein to the contrary notwithstanding. Section 6.10 Concerning any Successor Trustee. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to its predecessor and also to the Authority an instrument in writing accepting such appointment hereunder and thereupon such successor, without any further act, deed or conveyance, shall become fully vested with all the estates, properties, rights, powers, trusts, duties and obligations of its predecessors; but such predecessor shall, nevertheless, on the request of the Authority, or of the Trustee's successor, execute and deliver an instrument transferring to such successor all the estates, properties, rights, powers and trusts of such predecessor hereunder; and every predecessor Trustee shall deliver all securities and moneys held by it as the Trustee hereunder to its successor. Should any instrument in writing from the Authority be required by any successor Trustee for more fully and certainly vesting in such successor the estate, rights, powers and duties hereby vested or intended to be vested in the predecessor Trustee, any and all such instruments in writing shall, on request, be executed, acknowledged and delivered by the Authority. Section 6.11 Appointment to Co- Trustee. It is the purpose of this Indenture that there shall be no violation of any law of any jurisdiction (including particularly the law of the State) denying or restricting the right of banking corporations or associations to transact business as Trustee in such jurisdiction. It is recognized that in the case of litigation under this Indenture, and in particular in case of the enforcement of the rights of the Trustee on default, or in the case the Trustee deems that by reason of any present or future law of any jurisdiction it may not exercise any of the powers, rights or remedies herein granted to the Trustee or hold title to the properties, in trust, as herein granted, or take any other action which may be desirable or necessary in connection therewith, it may be necessary that the Trustee appoint an additional individual or institution as a separate or co- trustee. The following provisions of this Section 6.11 are adopted to these ends. In the event that the Trustee appoints an additional individual or institution as a separate or co- trustee, each and every remedy, power, right, claim, demand, cause of action, immunity, estate, title, interest and lien expressed or intended by this Indenture to be exercised by or vested in or conveyed to the Trustee with respect thereto shall be exercisable by and vested in such separate or co- trustee but only to the extent necessary to enable such separate or co- trustee to exercise such powers, rights and remedies, and every covenant and obligation necessary to the exercise thereof by such separate or co- trustee shall run to and be enforceable by either of them. Should any instrument in writing from the Authority be required by the separate trustee or co- trustee so appointed by the Trustee for more fully and certainly vesting in and confirming to it such properties, rights, powers, trusts, duties and obligations, any and all such instruments in writing shall, on request, be executed, acknowledged and delivered by the Authority. In case any 77053054.1 31 Page 41 of 195 separate trustee or co- trustee, or a successor to either, shall become incapable of acting, resign or be removed, all the estates, properties, rights, powers, trusts, duties and obligations of such separate trustee or co- trustee, so far as permitted by law, shall vest in and be exercised by the Trustee until the appointment of a new trustee or successor to such separate trustee or co- trustee. Section 6.12 Indemnification; Limited Liability of Trustee. The Authority further covenants and agrees to indemnify and save the Trustee and its officers, directors, agents and employees, harmless against any loss, costs, claims, expense and liabilities which it may incur arising out of or in the exercise and performance of its powers and duties hereunder, including the costs and expenses of defending against any claim of liability, but excluding any and all losses, costs, claims, expenses and liabilities which are due to the negligence or willful misconduct of the Trustee, its officers; directors, agents or employees. No provision in this Indenture shall require the Trustee to risk or expend its own funds or otherwise incur any financial liability hereunder if it is not assured to its satisfaction that repayment of such funds or adequate indemnity against such liability or risk is not assured to it. The Trustee shall not be liable for any action taken or omitted to be taken by it in accordance with the direction of the Owners of a majority in aggregate principal amount of Bonds Outstanding relating to the time, method and place of conducting any proceeding or remedy available to the Trustee under this Indenture. The obligations of the Authority under this paragraph shall survive the resignation or removal of the Trustee under this Indenture or any defeasance of the Bonds. ARTICLE VII MODIFICATION AND AMENDMENT OF THE INDENTURE Section 7.01 Amendment Hereof. (a) This Indenture and the rights and obligations of the Authority and of the Owners of the Bonds may be modified or amended at any time by a Supplemental Indenture which shall become binding upon execution by the Authority and the Trustee, without consent of any Bond Owners, to the extent permitted by law but only for any one or more of the following purposes: (i) to add to the covenants and agreements of the Authority contained in this Indenture, other covenants and agreements hereafter to be observed, to pledge or assign additional security for the Bonds (or any portion thereof), or to surrender any right or power herein reserved to or conferred upon the Authority; (ii) to make such provisions for the purpose of curing any ambiguity, inconsistency or omission, or of curing or correcting any defective provision, contained in this Indenture, or in any other respect whatsoever, as the Authority may deem necessary or desirable, provided that such modification or amendment does not materially adversely affect the interests of the Bond Owners in the opinion of Bond Counsel; (iii) to modify, amend or supplement the Indenture in such manner as to permit the qualification of this Indenture under the Trust Indenture Act of 1939, as amended, 77053054.1 32 Page 42 of 195 or any similar federal statute hereafter in effect, and to add such other terms, conditions and provisions as may be permitted by said act or similar federal statute; or (iv) to make such additions, deletions or modifications as may be necessary or desirable to assure exemption from federal income taxation of interest on the Bonds. (b) Except as set forth in the preceding paragraph of this Section 7.01, this Indenture and the rights and obligations of the Authority and of the Owners of the Bonds may only be modified or amended at any time by a Supplemental Indenture which shall become binding when the written consents of the Owners of a majority in aggregate principal amount of the Bonds then Outstanding are filed with the Trustee. No such modification or amendment shall (a) extend the maturity of or reduce the interest rate on any Bond or otherwise alter or impair the obligation of the Authority to pay the principal, interest or premiums (if any) at the time and place and at the rate and in the currency provided therein of any Bond without the express written consent of the Owner of such Bond, (b) reduce the percentage of Bonds required for the written consent to any such amendment or modification, or (c) without its written consent thereto, modify any of the rights or obligations of the Trustee. (c) The Trustee shall be provided an opinion of Bond Counsel that any such Supplemental Indenture entered into by the Authority and the Trustee complies with the provisions of this Article VII and the Trustee may conclusively rely upon such opinion. Section 7.02 Effect of Supplemental Indenture. From and after the time any Supplemental Indenture becomes effective pursuant to this Article VII, this Indenture shall be deemed to be modified and amended in accordance therewith, the respective rights, duties and obligations of the parties hereto or thereto and all Owners of Outstanding Bonds, as the case may be, shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modification and amendment, and all the terms and conditions of any Supplemental Indenture shall be deemed to be part of the terms and conditions of this Indenture for any and all purposes. Section 7.03 Endorsement or Replacement of Bonds After Amendment. After the effective date of any action taken as hereinabove provided, the Authority may determine that the Bonds shall bear a notation, by endorsement in form approved by the Authority, as to such action, and in that case upon demand of the Owner of any Bond Outstanding at such effective date and presentation of his Bond for that purpose at the Corporate Trust Office of the Trustee, a suitable notation as to such action shall be made on such Bond. If the Authority shall so determine, new Bonds so modified as, in the opinion of the Authority, shall be necessary to conform to such Bond Owners' action shall be prepared and executed, and in that case upon demand of the Owner of any Bond Outstanding at such effective date such new Bonds shall be exchanged at the Corporate Trust Office of the Trustee, without cost to each Bond Owner, for Bonds then Outstanding, upon surrender of such Outstanding Bonds. Section 7.04 Amendment by Mutual Consent. The provisions of this Article VII shall not prevent any Bond Owner from accepting any amendment as to the particular Bond held by him, provided that due notation thereof is made on such Bond. 77053054.1 33 Page 43 of 195 ARTICLE VIII EVENTS OF DEFAULT AND REMEDIES Section 8.01 Events of Default. The following events shall be Events of Default hereunder: (a) Default in the due and punctual payment of the principal of any Bond when and as the same shall become due and payable, whether at maturity as therein expressed, by proceedings for redemption or otherwise. (b) Default in the due and punctual payment of any installment of interest on any Bond when and as such interest installment shall become due and payable. (c) Failure by the Authority to observe and perform any of the covenants, agreements or conditions on its part in this Indenture or in the Bonds contained, other than as referred to in the preceding clauses (a) and (b), for a period of thirty (30) days after written notice, specifying such failure and requesting that it be remedied has been given to the Authority by the Trustee, or to the Authority and the Trustee by the Owners of the Bonds of not less than twenty -five percent (25 %) in the aggregate principal amount of the Bonds at that time Outstanding, provided, however, that if in the reasonable opinion of the Authority, provided to the Trustee in writing, the failure stated in such notice can be corrected, but not within such thirty (30) day period, such failure shall not constitute an Event of Default if corrective action is instituted by the Authority within such thirty (30) day period and diligently pursued until such failure is corrected. (d) The filing by the Authority of a petition or answer seeking reorganization or arrangement under the federal bankruptcy laws or any other applicable law of the United States of America, or if a court of competent jurisdiction shall approve a petition, filed with or without the consent of the Authority, seeking reorganization under the federal bankruptcy laws or any other applicable law of the United States of America, or if, under the provisions of any other law for the relief or aid of debtors, any court of competent jurisdiction shall assume custody or control of the Authority or of the whole or any substantial part of its property. Section 8.02 Remedies Upon Event of Default. Upon the occurrence and during the continuance of an Event of Default, the Trustee may pursue any available remedy at law or in equity to enforce the payment of the principal of and interest and premium (if any) on the Bonds, and to enforce any rights of the Trustee under or with respect to this Indenture. If an Event of Default shall have occurred and be continuing, the Trustee may, if requested so to do by the Owners of a majority in aggregate principal amount of Outstanding Bonds, and indemnified as provided in Section 6.02(1), the Trustee shall be obligated to exercise such one or more of the rights and powers conferred by this Article VIII, as the Trustee, being advised by counsel, shall deem most expedient in the interests of the Bond Owners. No remedy by the terms of this Indenture conferred upon or reserved to the Trustee (or to the Bond Owners) is intended to be exclusive of any other remedy, but each and every such 77053054.1 34 Page 44 of 195 remedy shall be cumulative and shall be in addition to any other remedy given to the Trustee or to the Bond Owners hereunder or now or hereafter existing at law or in equity. No delay or omission to exercise any rights or power accruing upon any Event of Default shall impair any such right or power or shall be construed to be a waiver of any such Event of Default or acquiescence therein; such right or power may be exercised from time to time as often as may be deemed expedient. Section 8.03 Application of Revenues and Other Funds After Default. All amounts received by the Trustee pursuant to any right given or action taken by the Trustee under the provisions of this Indenture shall be applied by the Trustee in the following order upon presentation of the several Bonds, and the stamping thereon of the amount of the payment if only partially paid, or upon the surrender thereof if fully paid. First, to the payment of the fees, costs and expenses of the Trustee in declaring such Event of Default and in carrying out the provisions of this Article VIII, including reasonable compensation to its agents, attorneys and counsel and any outstanding fees and expenses of the Trustee; and Second, to the payment of the whole amount of interest on and principal of the Bonds then due and unpaid, with interest on overdue installments of principal and interest to the extent permitted by law at the net effective rate of interest then borne by the Outstanding Bonds; provided, however, that in the event such amounts shall be insufficient to pay in full the full amount of such interest and principal, then such amounts shall be applied in the following order of priority: (a) first, to the payment of all installments of interest on the Bonds then due and unpaid, (b) second, to the payment of all installments of principal of the Bonds then due and unpaid, (c) third, to the payment of the redemption price (including principal and interest accrued to the redemption date, but excluding any premium) of the Bonds to be redeemed pursuant to this Indenture, and (d) fourth, to the payment of interest on overdue installments of principal and interest on the Bonds. Section 8.04 Power of Trustee to Control Proceedings. In the event that the Trustee, upon the happening of an Event of Default, shall have taken any action, by judicial proceedings or otherwise, pursuant to its duties hereunder, whether upon its own discretion or upon the request of the Owners of at least a majority in aggregate principal amount of the Bonds then Outstanding, it shall have full power, in the exercise of its discretion for the best interests of the Owners of the Bonds, with respect to the continuance, discontinuance, withdrawal, compromise, settlement or other disposal of such action; provided, however, that the Trustee shall not, unless there no longer continues an Event of Default, discontinue, withdraw, compromise or settle, or otherwise dispose of any litigation pending at law or in equity, if at the time there has been filed 77053054.1 35 Page 45 of 195 with it a written request signed by the Owners of a majority in aggregate principal amount of the Outstanding Bonds, opposing such discontinuance, withdrawal, compromise, settlement or other disposal of such litigation. Any suit, action or proceeding which any Owner of Bonds shall have the right to bring to enforce any right or remedy hereunder may be brought by the Trustee for the equal benefit and protection of all Owners of Bonds similarly situated and the Trustee is hereby appointed (and the successive respective Owners of the Bonds issued hereunder, by taking and holding the same, shall be conclusively deemed so to have appointed it) the true and lawful attorney -in -fact of the respective Owners of the Bonds for the purpose of bringing any such suit, action or proceeding and to do and perform any and all acts and things for and on behalf of the respective Owners of the Bonds as a class or classes, as may be necessary or advisable in the opinion of the Trustee as such attorney -in -fact. Section 8.05 Appointment of Receivers. Upon the occurrence of an Event of Default hereunder, and upon the filing of a suit or other commencement of judicial proceedings to enforce the rights of the Trustee and of the Bond Owners under this Indenture, the Trustee shall be entitled, as a matter of right, to the appointment of a receiver or receivers of the Revenues and other amounts pledged hereunder, pending such proceedings, with such powers as the court making such appointment shall confer. Section 8.06 Non - Waiver. Nothing in this Article VIII or in any other provision of this Indenture, or in the Bonds, shall affect or impair the obligation of the Authority, which is absolute and unconditional, to pay the interest on and principal of the Bonds to the respective Owners of the Bonds at the respective dates of maturity, as herein provided, out of the Revenues and other moneys herein pledged for such payment. A waiver of any default or breach or duty or contract by the Trustee or any Bond Owners shall not affect any subsequent default or breach of duty or contract, or impair any rights or remedies on any such subsequent default or breach. No delay or omission of the Trustee or any Owner of any of the Bonds to exercise any right or power accruing upon any default or breach shall impair any such right or power or shall be construed to be a waiver of any such default or breach or an acquiescence therein; and every power and remedy conferred upon the Trustee or Bond Owners by the Bond Law or by this Article VIII may be enforced and exercised from time to time and as often as shall be deemed expedient by the Trustee or the Bond Owners, as the case may be. Section 8.07 Right to Institute Suit, Action or Proceeding. No Owner of any Bond issued hereunder shall have the right to institute any suit, action or proceeding at law or in equity, for any remedy under or upon this Indenture, unless (a) such Owner shall have previously given to the Trustee written notice of the occurrence of an Event of Default; (b) the Owners of a majority in aggregate principal amount of all Bonds then Outstanding shall have made written request upon the Trustee to exercise the powers hereinbefore granted or to institute such action, suit or proceeding in its own name; (c) said Owners shall have tendered to the Trustee indemnity reasonably acceptable to the Trustee against the costs, expenses and liabilities to be incurred in compliance with such request; (d) the Trustee shall have refused or omitted to comply with such request for a period of sixty (60) days after such written request shall have been received by, and said tender of indemnity shall have been made to, the Trustee; and (e) no direction inconsistent 77053054.1 36 Page 46 of 195 with such written request has been given to the Trustee during such sixty (60) day period by the Owners of majority in aggregate principal amount of the Bonds then Outstanding. Such notification, request, tender of indemnity and refusal or omission are hereby declared, in every case, to be conditions precedent to the exercise by any Owner of Bonds of any remedy hereunder; it being understood and intended that no one or more Owners of Bonds shall have any right in any manner whatever by his or their action to enforce any right under this Indenture, except in the manner herein provided, and that all proceedings at law or in equity to enforce any provision of this Indenture shall be instituted, had and maintained in the manner herein provided and for the equal benefit of all Owners of the Outstanding Bonds. The right of any Owner of any Bond to receive payment of the principal of and interest and premium (if any) on such Bond as herein provided or to institute suit for the enforcement of any such payment, shall not be impaired or affected without the written consent of such Owner, notwithstanding the foregoing provisions of this Section 8.07 or any other provision of this Indenture. Section 8.08 Termination of Proceedings. In case the Trustee shall have proceeded to enforce any right under this Indenture by the appointment of a receiver or otherwise, and such proceedings shall have been discontinued or abandoned for any reason, or shall have been determined adversely, then and in every such case, the Authority, the Trustee and the Bond Owners shall be restored to their former positions and rights hereunder, respectively, with regard to the property subject to this Indenture, and all rights, remedies and powers of the Trustee shall continue as if no such proceedings had been taken. ARTICLE IX MISCELLANEOUS Section 9.01 Limited Liability of Authority. Notwithstanding anything in this Indenture contained, the Authority shall not be required to advance any moneys derived from any source of income other than the Revenues for the payment of the principal of or interest on the Bonds, or any premiums upon the redemption thereof, or for the performance of any covenants herein contained (except to the extent any such covenants are expressly payable hereunder from the Revenues). The Authority may; however, advance funds for any such purpose, provided that such funds are derived from a source legally available for such purpose and may be used by the Authority for such purpose without incurring indebtedness. The Bonds shall be revenue bonds, payable exclusively from the Revenues and other funds as in this Indenture provided. The general fund of the Authority is not liable, and the credit of the Authority is not pledged, for the payment of the interest and premium (if any) on or principal of the Bonds. The Owners of the Bonds shall never have the right to compel the forfeiture of any property of the Authority. The principal of and interest on the Bonds, and any premiums upon the redemption of any thereof, shall not be a legal or equitable pledge, charge, lien or encumbrance upon any property of the Authority or upon any of its income, receipts or revenues except the Revenues and other funds pledged to the payment thereof as in this Indenture provided. 77053054.1 37 Page 47 of 195 Section 9.02 Benefits of Indenture Limited to Parties. Nothing in this Indenture, expressed or implied, is intended to give to any person other than the Authority, the Trustee, and the Owners of the Bonds, any right, remedy or claim under or by reason of this Indenture. Any covenants, stipulations, promises or agreements in this Indenture contained by and on behalf of the Authority shall be for the sole and exclusive benefit of the Trustee and the Owners of the Bonds. Section 9.03 Discharge of Indenture. If the Authority shall pay and discharge any or all of the Outstanding Bonds in any one or more of the following ways: (a) by well and truly paying or causing to be paid the principal of, and the interest and premium (if any) on, such Bonds as and when the same become due and payable; (b) by irrevocably depositing with the Trustee, in trust, at or before maturity, money which, altogether with the available amounts then on deposit in the funds and accounts established with the Trustee pursuant to this Indenture, is fully sufficient to pay such Bonds, including all principal, interest and premiums (if any); or (c) by irrevocably depositing with the Trustee or any other fiduciary, in trust, Federal Securities in such amount as an Independent Accountant shall determine will, together with the interest to accrue thereon and available moneys then on deposit in the funds and accounts established with the Trustee pursuant to this Indenture, be fully sufficient to pay and discharge the indebtedness on such Bonds (including all principal, interest and redemption premiums) at or before their respective maturity dates. If the Authority shall have taken any of the actions specified in (a), (b) or (c) above, and if such Bonds are to be redeemed prior to the maturity thereof, notice of such redemption shall have been mailed pursuant to Section 2.02(f) or provision satisfactory to the Trustee shall have been made, for the mailing of such notice, then, at the election of the Authority, and notwithstanding that any of such Bonds shall not have been surrendered for payment, the pledge of the Revenues and other funds provided for in this Indenture with respect to such Bonds, pledge of Revenues and all other pecuniary obligations of the Authority under this Indenture with respect to all such Bonds, shall cease and terminate, except only the obligation of the Authority to pay or cause to be paid to the Owners of such Bonds not so surrendered and paid all sums due thereon from amounts set aside for such purpose as aforesaid, and all expenses and costs of the Trustee. Any funds held by the Trustee following any payments or discharge of the Outstanding Bonds pursuant to this Section 9.03, which are not required for said purposes, shall be paid over to the Authority. Section 9.04 Is Deemed Included in All References to Predecessor. Whenever in this Indenture or any Supplemental Indenture the Authority is named or referred to, such reference shall be deemed to include the successor to the powers, duties and functions, with respect to the management, administration and control of the affairs of the Authority, that are presently vested in the Authority, and all the covenants, agreements and provisions contained in this Indenture by or on behalf of the Authority shall bind and inure to the benefit of its successors whether so expressed or not. 77053054.1 38 Page 48 of 195 Section 9.05 Content of Certificates. Every certificate with respect to compliance with a condition or covenant provided for in this Indenture shall include (a) a statement that the person or persons making or giving such certificate have read such covenant or condition and the definitions herein relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate are based; (c) a statement that, in the opinion of the signers, they have made or caused to be made such examination or investigation as is necessary to enable them to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of the signers, such condition or covenant has been complied with. Any such certificate made or given by an officer of the Authority may be based, insofar as it relates to legal matters, upon a certificate or opinion of or representations by counsel, unless such officer knows that the certificate or opinion or representations with respect to the matters upon which his certificate may be based, as aforesaid, are erroneous, or in the exercise of reasonable care should have known that the same were erroneous. Any such certificate or opinion or representation made or given by counsel may be based, insofar as it relates to factual matters, on information with respect to which is in the possession of the Authority, or upon the certificate or opinion of or representations by an officer or officers of the Authority, unless such counsel knows that the certificate or opinion or representations with respect to the matters upon which his certificate, opinion or representation may be based, as aforesaid, are erroneous, or in the exercise of reasonable care should have known that the same were erroneous. Section 9.06 Execution of Documents by Bond Owners. Any request, consent or other instrument required by this Indenture to be signed and executed by Bond Owners may be in any number of concurrent writings of substantially similar tenor and may be signed or executed by such Bond Owners in person or by their agent or agents duly appointed in writing. Proof of the execution of any such request, consent or other instrument or of a writing appointing any such agent, shall be sufficient for any purpose of this Indenture and shall be conclusive in favor of the Trustee and of the Authority if made in the manner provided in this Section 9.06. The fact and date of the execution by any person of any such request, consent or other instrument or writing may be proved by the affidavit of a witness of such execution or by the certificate of any notary public or other officer of any jurisdiction, authorized by the laws thereof to take acknowledgments of deeds, certifying that the person signing such request, consent or other instrument or writing acknowledged to him the execution thereof. The ownership of Bonds shall be proved by the Registration Books. Any request, consent or vote of the Owner of any Bond shall bind every future Owner of the same Bond and the Owner of any Bond issued in exchange therefor or in lieu thereof, in respect of anything done or suffered to be done by the Trustee or the Authority in pursuance of such request, consent or vote. In lieu of obtaining any demand, request, direction, consent or waiver in writing, the Trustee may call and hold a meeting of the Bond Owners upon such notice and in accordance with such rules and obligations as the Trustee considers fair and reasonable for the purpose of obtaining any such action. 77053054.1 39 Page 49 of 195 Section 9.07 Disqualified Bonds. In determining whether the Owners of the requisite aggregate principal amount of Bonds have concurred in any demand, request, direction, consent or waiver under this Indenture, Bonds which are owned or held by or for the account of the Authority (but excluding Bonds held in any employees' retirement fund) shall be disregarded and deemed not to be Outstanding for the purpose of any such determination, provided, however, that for the purpose of determining whether the Trustee shall be protected in relying on any such demand, request, direction, consent or waiver, only Bonds which the Trustee knows to be so owned or held shall be disregarded. Section 9.08 Waiver of Personal Liability. No officer, agent or employee of the Authority shall be individually or personally liable for the payment of the interest on or principal of the Bonds; but nothing herein contained shall relieve any such officer, agent or employee from the performance of any official duty provided by law. Section 9.09 Partial Invalidity. If any one or more of the covenants or agreements, or portions thereof, provided in this Indenture on the part of the Authority (or of the Trustee) to be performed should be contrary to law, then such covenant or covenants, such agreement or agreements, or such portions thereof, shall be null and void and shall be deemed separable from the remaining covenants and agreements or portions thereof and shall in no way affect the validity of this Indenture or of the Bonds; but the Bond Owners shall retain all rights and benefits accorded to them under the Bond Law or any other applicable provisions of law. The Authority hereby declares that it would have entered into this Indenture and each and every other section, paragraph, subdivision, sentence, clause and phrase hereof and would have authorized the issuance of the Bonds pursuant hereto irrespective of the fact that any one or more sections, paragraphs, subdivisions, sentences, clauses or phrases of this Indenture or the application thereof to any person or circumstance may be held to be unconstitutional, unenforceable or invalid. Section 9.10 Destruction of Canceled Bonds. Whenever in this Indenture provision is made for the surrender to the Authority of any Bonds which have been paid or canceled pursuant to the provisions of this Indenture, the Trustee shall destroy such Bonds. Section 9.11 Funds and Accounts. Any fund or account required by this Indenture to be established and maintained by the Authority or the Trustee may be established and maintained in the accounting records of the Authority or the Trustee, as the case may be, either as a fund or an account, and may, for the purpose of such records, any audits thereof and any reports or statements with respect thereto, be treated either as a fund or as an account. All such records with respect to all such funds and accounts held by the Authority shall at all times be maintained in accordance with generally accepted accounting principles and all such records with respect to all such funds and accounts held by the Trustee shall be at all times maintained in accordance with industry practices; in each case with due regard for the protection of the security of the Bonds and the rights of every Owner thereof. Any fund or account required by this Indenture to be established and maintained by the Authority or the Trustee may be established and maintained in the form of multiple funds, accounts or sub - accounts therein. Section 9.12 Payment on Business Days. Whenever in this Indenture any amount is required to be paid on a day which is not a Business Day, such payment shall be required to be 77053054.1 40 Page 50 of 195 made on the Business Day immediately following such day, provided that interest shall not accrue from and after such day. Section 9.13 Notices. Any notice, request, complaint, demand or other communication under this Indenture shall be given by first -class mail or personal delivery to the party entitled thereto at its address set forth below, or by facsimile or other form of electronic communication, at its number set forth below. Notice shall be effective either (a) upon transmission by telecopy or other form of telecommunication, (b) 48 hours after deposit in the United States mail, postage prepaid, or (c) in the case of personal delivery to any person, upon actual receipt. The Authority or the Trustee may, by written notice to the other parties, from time to time modify the address or number to which communications are to be given hereunder. If to the Authority: Lake Elsinore Public Financing Authority 130 South Main Street Lake Elsinore, California 92530 Attention: Executive Director (951) 674 -3124 (951) 674 -2392 - Fax If to the Trustee: Union Bank, N.A. 120 South San Pedro Street, 4th Floor Los Angeles, California 90011 Attention: Corporate Trust Department (213) 972 -5677 (213) 972 -5694 - Fax Section 9.14 Unclaimed Moneys. Anything in this Indenture to the contrary notwithstanding, subject to the laws of the State, any moneys held by the Trustee in trust for the payment and discharge of any of the Bonds which remain unclaimed for two (2) years after the date when such Bonds or any interest thereon have become due and payable, either at their stated maturity dates or by call for earlier redemption, if such moneys were held by the Trustee at such date, or for two (2) years after the date of deposit of such moneys if deposited with the Trustee after said date when such Bonds become due and payable, shall be repaid by the Trustee to the Authority, as its absolute property and free from trust, and the Trustee shall thereupon be released and discharged with respect thereto and the Bond Owners shall look only to the Authority for the payment of such Bonds; provided, however, that before being required to make any such payment to the Authority, the Trustee shall, at the expense of the Authority, cause to be mailed to the Owners of all such Bonds, at their respective addresses appearing on the Registration Books, a notice that said moneys remain unclaimed and that, after a date named in said notice, which date shall not be less than thirty (30) days after the date of mailing of such notice, the balance of such moneys then unclaimed will be returned to the Authority. Section 9.15 Governing Law. This Indenture shall be construed and governed in accordance with the laws of the State of California. 77053054.1 41 Page 51 of 195 Section 9.16 Execution of Counterparts. This Indenture may be executed in any number of counterparts, each of which shall for all purposes be deemed to be an original and all of which shall together constitute but one and the same instrument. 77053054.1 42 Page 52 of 195 IN WITNESS WHEREOF, the LAKE ELSINORE PUBLIC FINANCING AUTHORITY has caused this Indenture to be signed in its name and UNION BANK, N.A., in token of its acceptance of the trust created hereunder, has caused this Indenture to be signed in its corporate name by its officer identified below, all as of the day and year first above written. ATTEST: Secretary LAKE ELSINORE PUBLIC FINANCING AUTHORITY 0 Executive Director UNION BANK, N.A., as Trustee Authorized Officer 77053054.1 43 Page 53 of 195 EXHIBIT A No. R- UNLESS THIS BOND IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE SECURITIES DEPOSITORY (AS DEFINED IN THE INDENTURE OF TRUST) TO THE TRUSTEE FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY BOND ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE SECURITIES DEPOSITORY (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE SECURITIES DEPOSITORY), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. NEITHER THE PAYMENT OF THE PRINCIPAL OR ANY PART THEREOF NOR ANY INTEREST THEREON CONSTITUTES A DEBT, LIABILITY OR OBLIGATION OF THE CITY OF LAKE ELSINORE OR THE REDEVELOPMENT AGENCY OF THE CITY OF LAKE ELSINORE. UNITED STATES OF AMERICA STATE OF CALIFORNIA COUNTY OF RIVERSIDE LAKE ELSINORE PUBLIC FINANCING AUTHORITY LOCAL AGENCY REVENUE BOND (SUMMERLY PROJECT), 2011 SERIES A RATE OF INTEREST MATURITY DATE DATED DATE CUSIP 2011 REGISTERED OWNER: Cede & Co. ' "To ► :u• L The LAKE ELSINORE PUBLIC FINANCING AUTHORITY, a joint powers authority organized and existing under the laws of the State of California (the "Authority "), for value received, hereby promises to pay (but only out of the Revenues and other moneys and securities hereinafter referred to) to the Registered Owner identified above or registered assigns (the "Registered Owner "), on the Maturity Date identified above, the Principal Amount identified above in lawful money of the United States of America; and to pay interest thereon at the Rate of Interest identified above in like money from the Interest Payment Date (as hereinafter defined) next preceding the date of authentication of this Bond (unless this Bond is authenticated on or before an Interest Payment Date and after the fifteenth calendar day of the month preceding such Interest Payment Date occurs, in which event it shall bear interest from such Interest Payment 77053054.1 A -1 Page 54 of 195 Date, or unless this Bond is authenticated on or prior to August 15, 2011, in which event it shall bear interest from the Dated Date identified above; provided, however, that if, at the time of authentication of this Bond, interest is in default on this Bond, this Bond shall bear interest from the Interest Payment Date to which interest hereon has previously been paid or made available for payment), payable semiannually on March 1 and September 1 in each year, commencing September 1, 2011 (each, an "Interest Payment Date "), until payment of such Principal Amount in full. The Principal Amount hereof is payable upon presentation hereof at the corporate trust office (the "Corporate Trust Office ") of Union Bank, N.A., as trustee (the "Trustee ") or such other place as designated by the Trustee. Interest hereon is payable by check of the Trustee mailed by first class mail on each Interest Payment Date to the Registered Owner hereof at the address of the Registered Owner as it appears on the Registration Books of the Trustee as of the first calendar day of the month in which such Interest Payment Date occurs; except that at the written request of the owner of at least $1,000,000 in aggregate principal amount of outstanding Bonds filed with the Trustee prior to the fifteenth calendar day of the month preceding any Interest Payment Date, interest on such Bonds shall be paid to such owner on such Interest Payment Date by wire transfer of immediately available funds to an account in the continental United States designated in such written request. Notwithstanding any other provision herein to the contrary, so long as this Bond shall be registered in book - entry-only form, the payment of the principal of, and redemption premium, if any, and interest on, this Bond shall be paid in immediately available funds in such manner as determined by the Authority, the Trustee and the Owner. It is hereby certified that all things, conditions and acts required to exist, to have happened and to have been performed precedent to and in the issuance of this Bond do exist, have happened and have been performed in due time, form and manner as required by the Constitution and statutes of the State of California and by the Act, and that the amount of this Bond, together with all other indebtedness of the Authority, does not exceed any limit prescribed by the Constitution or statutes of the State of California or by the Act. This Bond shall not be entitled to any benefit under the Indenture, or become valid or obligatory for any purpose, until the certificate of authentication hereon shall have been manually signed by the Trustee. This Bond is one of a duly authorized issue of bonds of the Authority designated the "Lake Elsinore Public Financing Authority Local Agency Revenue Bonds (Summerly Project), 2011 Series A" (the "Bonds "), limited in principal amount to $ , secured by an Indenture of Trust, dated as of 1, 2011 (the "Indenture "), by and between the Authority and the Trustee. Reference is hereby made to the Indenture and all indentures supplemental thereto for a description of the rights thereunder of the owners of the Bonds, of the nature and extent of the Revenues (as that term is defined in the Indenture), of the rights, duties and immunities of the Trustee and of the rights and obligations of the Authority thereunder; and all of the terms of the Indenture are hereby incorporated herein and constitute a contract between the Authority and the Registered Owner hereof, and to all of the provisions of which Indenture the Registered Owner hereof, by acceptance hereof, assents and agrees. The Bonds are authorized to be issued pursuant to the provisions of the Marks -Roos Local Bond Pooling Act of 1985, constituting Article 4 (commencing with Section 6584) of 77053054.1 A -2 Page 55 of 195 Chapter 5 of Division 7 of Title 1 of the Government Code of the State of California (the "Act'). The Bonds are special obligations of the Authority and, as and to the extent set forth in the Indenture, are payable solely from and secured by a first lien and pledge of the Revenues and certain other moneys and securities held by the Trustee as provided in the Indenture. All of the Bonds are equally secured by a first pledge of, and charge and lien upon, all of the Revenues and such other moneys and securities, and the Revenues and such other moneys and securities constitute a trust fund for the security and payment of the principal of and interest and premium (if any) on the Bonds. The full faith and credit of the Authority is not pledged for the payment of the principal of or interest or redemption premiums (if any) on the Bonds. The Bonds are not secured by a legal or equitable pledge of, or charge, lien or encumbrance upon, any of the property of the Authority or any of its income or receipts, except the Revenues and such other moneys and securities as provided in the Indenture. The Bonds have been issued to provide funds to be applied by the Authority to purchase of bonds of Redevelopment Agency of the City of Lake Elsinore (the "Agency Bonds "), as more particularly described in the Indenture. The Bonds are subject to redemption prior to their maturity date, at the option of the Authority on any date on or after September 1, 20. as a whole or in part from any available source of funds at the redemption price equal to the principal amount of the Bonds to be redeemed, together with accrued interest thereon to the date fixed for redemption, without premium. The Bonds maturing September 1, 20 are subject to mandatory redemption in part by lot, on September 1 in each year commencing September 1, 20 , from mandatory sinking payments made by the Authority as provided in the Indenture, at a redemption price equal to the principal amount thereof to be redeemed, without premium, plus accrued interest thereon to the date of redemption in the aggregate principal amounts and on September 1 in the respective years as set forth in the following schedules; provided, however, that (i) in lieu of redemption thereof, such Bonds may be purchased by the Authority and tendered to the Trustee, and (ii) if some but not all of such Bonds have been redeemed pursuant to the redemption provisions described above or below, the total amount of all future mandatory sinking payments will be reduced by the aggregate principal amount of such Bonds so redeemed, to be allocated among such mandatory sinking payments on a pro rata basis (as nearly as practicable) in integral multiples of $5,000, as determined by the Authority. 77053054.1 A -3 Page 56 of 195 Sinking Fund Redemption Date (September 1) Principal Amount to be Redeemed Sinking Fund Redemption Date (September 1) Principal Amount to be Redeemed For as long as a book - entry -only system is in effect with respect to the Bonds and DTC or a successor Securities Depository is the sole registered owner of the Bonds, in the event of the redemption of less than all of a maturity of the Bonds, the particular ownership interests of such maturity to be redeemed will be determined by DTC and its participants, or by a successor Securities Depository or any other intermediary, in accordance with their respective operating rules and procedures, which may be different than pro rata. IN WITNESS WHEREOF, the Authority has caused this Bond to be executed in its name and on its behalf by the manual signatures of its Chairperson and Secretary all as of the Dated Date identified above. Attest: Secretary LAKE ELSINORE PUBLIC FINANCING AUTHORITY Chairman 77053054.1 A -4 Page 57 of 195 TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Bonds described in the within - mentioned Indenture and registered on the registration books of the Trustee. Dated: .2011 UNION BANK, N.A., as Trustee C Authorized Signatory 77053054.1 A -5 Page 58 of 195 ASSIGNMENT For value received the undersigned hereby sells, assigns and transfers unto (Name, Address and Tax Identification or Social Security Number of Assignee) the within Bond and hereby irrevocably constitute(s) and appoint(s) , attorney, to transfer the same on the registration books of the Trustee with full power of substitution in the premises. Dated: Signature Guaranteed: Signature: Note: Signature(s) must be guaranteed by an Note: The signature(s) on this assignment eligible guarantor institution. must correspond with the name(s) as written on the face of the within- registered Bond in every particular without alteration or enlargement or any change whatsoever. 77053054.1 A -6 Page 59 of 195 $ Lake Elsinore Public Financing Authority Local Agency Revenue Bonds (Summerly Project) 2011 Series A Purchase Contract 2011 Lake Elsinore Public Financing Authority 130 South Main Street Lake Elsinore, California 92530 Ladies and Gentlemen: O'Connor & Company Securities, Inc. (the "Underwriter ") hereby offers to enter into the following agreement (the "Purchase Contract ") with the Lake Elsinore Public Financing Authority (the "Authority "). Upon the acceptance hereof by you, this offer will be binding upon the Authority and the Underwriter. This offer is made subject to (i) the written acceptance hereof by you and (ii) withdrawal by the Underwriter upon written notice (by facsimile or otherwise) delivered to you at any time prior to the acceptance hereof by you. The Authority acknowledges and agrees that: (1) the purchase and sale of the Bonds (as defined below) pursuant to this Purchase Contract is an arm's- length commercial transaction between the Authority and the Underwriter; (ii) in connection with such transaction, the Underwriter is acting solely as a principal and not as an agent or a fiduciary of the Authority; (iii) the Underwriter has not assumed (individually or collectively) a fiduciary responsibility in favor of the Authority with respect to: (x) the offering of the Bonds or the process leading thereto (whether or not any Underwriter, or any affiliate of the Underwriter, has advised or is currently advising the Authority on other matters); or (y) any other obligation to the Authority except the obligations expressly set forth in the Purchase Contract; and (iv) the Authority has consulted with its own legal and financial advisors to the extent it deemed appropriate in connection with the offering of the Bonds. 1. Purchase and Sale. Upon the terms and conditions and upon the basis of the representations, warranties and agreements set forth herein, the Underwriter hereby agrees to purchase from the Authority, at the Closing Time on the Closing Date (both as defined herein), and the Authority hereby agrees to sell and deliver to the Underwriter, $ aggregate principal amount of its Local Agency Revenue Bonds (Summerly Project) 2011 Series A (the "Bonds "). The Bonds shall be dated the date of their initial delivery, and shall mature on September I in the years shown on Exhibit A hereto, shall bear interest at the rates shown on Exhibit A hereto and shall be subject to redemption and have such other terms as are provided in the Indenture of Trust, dated as of 1, 2011 (the "Indenture "), by and between the Authority and Union Bank, N.A., as trustee (the "Trustee "). Interest on the Bonds shall be payable each March 1 and September 1 to maturity or earlier redemption of the Bonds, beginning September 1, 2011. The purchase price for the Bonds shall be an amount equal to $ Page 60 of 195 (being the aggregate principal amount thereof ($) less an underwriter's discount of $ and [less /plus an original issue discount /premium of $ ]). (The date of such payment and delivery is referred to herein as the "Closing Date," the hour and date of such delivery and payment is referred to herein as the "Closing Time," and the other actions contemplated hereby to take place at the time of such payment and delivery being herein sometimes called the "Closing. ") 2. The Bonds. The Bonds shall be described in, and shall be issued and secured pursuant to, the provisions of the Constitution and the laws of the State of California including the provisions of the Marks -Roos Local Bond Pooling Act of 1985, constituting Article 4 of Chapter 5 (commencing with Section 6584) of Division 7 of Title 1 of the Government Code of the State of California (the "Bond Law "), and the Indenture, authorizing the issuance of the Bonds. The Bonds are being issued for the purpose of funding a reserve fund for the Bonds, to acquire from McMillin Summerly LLC the Agency Bonds (as defined in the Indenture) issued by the Redevelopment Agency of the City of Lake Elsinore (the "Agency ") pursuant to the respective Indentures, each dated as of April 1, 2011 (collectively, the "Agency Indentures "), by and between the Agency and Union Bank, N.A., as trustee (the "Agency Bonds Trustee "), and to pay the costs of issuance of the Bonds and the Agency Bonds. The Bonds are secured by the Revenues (as defined in the Indenture), consisting primarily of amounts received by the Authority from the Agency pursuant to the Agency Bonds. The Bonds shall be payable and shall be subject to redemption as provided in the Indenture and shall be as described in the Preliminary Official Statement of the Authority, dated , 2011 (the "Preliminary Official Statement "), and the Official Statement of the Authority dated of even date herewith. Such Official Statement, including the cover page and the appendices thereto, relating to the Bonds, as amended to conform to the terms of this Purchase Contract and with such changes and amendments thereto as have been mutually agreed to by the Authority and the Underwriter, is hereinafter referred to as the "Official Statement." This Purchase Contract, the Indenture and the Continuing Disclosure Agreement, dated as of 1, 2011 (the "Continuing Disclosure Agreement "), by and between the Authority and Union Bank, N.A., as dissemination agent, are referred to herein as the "Authority Documents." 3. Offering by the Underwriter. It shall be a condition to the Authority's obligations to sell and to deliver the Bonds to the Underwriter and to the Underwriter's obligation to purchase, to accept delivery of and to pay for the Bonds that the entire principal amount of the Bonds shall be issued, sold and delivered by the Authority and purchased, accepted and paid for by the Underwriter at the Closing. It is understood that the Underwriter proposes to offer the Bonds for sale to the public (which may include selected dealers) at prices or yields as set forth on the inside cover page of the Official Statement. Concessions from the public offering price may be allowed to selected dealers. It is understood that the initial public offering price and concessions set forth in the Official Statement may vary after the initial public offering. It is further understood that the Bonds may be offered to the public at prices other than 2 Page 61 of 195 the par value thereof. The net premium on the sale of the Bonds to the public, if any, shall accrue to the benefit of the Underwriter. 4. Official Statement, Delivery of Other Documents, Use of Documents. (a) The Authority hereby authorizes the use by the Underwriter of the Preliminary Official Statement and the Official Statement (including any supplements or amendments thereto) and the Indenture and the Agency Indentures and the information therein contained, in connection with the public offering and sale of the Bonds. (b) The Authority shall deliver to the Underwriter, within seven business days from the date hereof, such number of copies of the final Official Statement executed on behalf of and approved for distribution by the Authority as the Underwriter may reasonably request in order for the Underwriter to comply with the rules of the Municipal Securities Rulemaking Board (the "MSRB ") and Rule 15c2- 12(b)(4) under the Securities Exchange Act of 1934. (c) As soon as practicable following receipt thereof, the Underwriter shall deliver the Official Statement, and any supplements or amendments thereto, to the Electronic Municipal Market Access system ( "EMMA ") through the MSRB. 5. Representations, Warranties and Agreements of the Authority. The Authority represents, warrants and agrees as follows: (a) The Authority is a joint exercise of powers authority duly organized and validly existing under the laws of the State of California. (b) The Authority has full legal right, power and authority (i) to enter into the Authority Documents, (ii) to sell, issue and deliver the Bonds to the Underwriter as provided herein, and (iii) to carry out and consummate the transactions on its part contemplated by the Authority Documents and the Official Statement. (c) By all necessary official action, the Authority has duly authorized and approved the Authority Documents, has duly authorized and approved the Preliminary Official Statement and the Official Statement and has duly authorized and approved the execution and delivery of, and the performance by the Authority of the obligations in connection with the issuance of the Bonds on its part contained in the Bonds and the Authority Documents, and the consummation by it of all other transactions contemplated by the Authority Documents in connection with the issuance of the Bonds. (d) To the best of its knowledge, the Authority is not in any material respect in breach of or default under any applicable constitutional provision, law or administrative regulation of any state or of the United States, or any agency or instrumentality of either, or any applicable judgment or decree, or any loan agreement, indenture, bond, note, resolution, agreement (including, without limitation, the Indenture) or other instrument to which the Authority is a party which breach or default has or may have an adverse effect on the ability of the Authority to perform its obligations under the Indenture, and no event has occurred and is continuing which with the passage of time or the giving of notice, or both, would constitute such a default or event of default under any such instrument; and the execution and delivery of the 3 Page 62 of 195 Bonds and the Authority Documents, and compliance with the provisions on the Authority's part contained therein, will not conflict in any material way with or constitute a material breach of or a material default under any constitutional provision, law, administrative regulation, judgment, decree, loan agreement, indenture, bond, note, resolution, agreement or other instrument to which the Authority is a party nor will any such execution, delivery, adoption or compliance result in the creation or imposition of any lien, charge or other security interest or encumbrance of any nature whatsoever upon any of the property or assets of the Authority or under the terms of any such law, regulation or instrument, except as provided by the Bonds and the Indenture. (e) To the best of its knowledge, all authorizations, approvals, licenses, permits, consents and orders of any governmental authority, legislative body, board, agency or commission having jurisdiction of the matter which are required for the due authorization by, or which would constitute a condition precedent to or the absence of which would materially adversely affect the due performance by, the Authority of its obligations in connection with the issuance of the Bonds under the Authority Documents have been duly obtained, except for such approvals, consents and orders as may be required under the "Blue Sky" or securities laws of any state or of the United States in connection with the offering and sale of the Bonds;.except as described in or contemplated by the Official Statement, all authorizations, approvals, licenses, permits, consents and orders of any governmental authority, board, agency or commission having jurisdiction of the matters which are required for the due authorization by, or which would constitute a condition precedent to or the absence of which would materially adversely affect the due performance by, the Authority of its obligations under the Indenture have been duly obtained. (f) The Bonds when issued will conform to the descriptions thereof contained in the Official Statement under the captions "INTRODUCTORY STATEMENT" and "THE BONDS," and the Authority Documents when executed and delivered will conform to the descriptions thereof contained in the Official Statement under the captions "INTRODUCTORY STATEMENT," "THE BONDS," "SOURCES OF PAYMENT FOR THE BONDS" and "APPENDIX A — SUMMARY OF THE INDENTURE." (g) The Bonds, when issued, authenticated and delivered in accordance with the Indenture, and sold to the Underwriter as provided herein, will be validly issued and outstanding obligations of the Authority, entitled to the benefits of the Indenture, and upon such issuance and delivery, the Indenture will provide, for the benefit of the owners from time to time of the Bonds, the legally valid and binding pledge of and lien and security interest it purports to create. (h) As of the date hereof, there is no action, suit, proceeding, inquiry or investigation, notice of which has been served on the Authority, at law or in equity before or by any court, government agency, public board or body, pending or to the best knowledge of the officer of the City executing this Purchase Contract on behalf of the Authority, threatened against the Authority, affecting the existence of the Authority, or affecting or seeking to prohibit, restrain or enjoin the sale, issuance or delivery of the Bonds or the pledge and lien on the Revenues pursuant to the Indenture, or contesting or affecting as to the Authority the validity or enforceability of the Bond Law, the Bonds or the Authority Documents, or contesting the tax - exempt status of interest on the Bonds, or contesting the completeness or accuracy of the 4 Page 63 of 195 Preliminary Official Statement or the Official Statement, or contesting the powers of the Authority for the issuance of the Bonds, or the execution and delivery or adoption by the Authority of the Authority Documents, or in any way contesting or challenging the consummation of the transactions contemplated hereby or thereby; nor, to the best knowledge of the Authority, is there any basis for any such action, suit, proceeding, inquiry or investigation, wherein an unfavorable decision, ruling or finding would materially adversely affect the validity of the Bond Law, as to the Authority, or the authorization, execution, delivery or performance by the Authority of the Bonds or the Authority Documents. (i) The Authority will furnish such information, execute such instruments and take such other action in cooperation with the Underwriter as the Underwriter may reasonably request in order (x) to qualify the Bonds for offer and sale under the "Blue Sky" or other securities laws and regulations of such states and other jurisdictions of the United States as the Underwriter may designate, (y) to determine the eligibility of the Bonds for investment under the laws of such states and other jurisdictions, and will use its best efforts to continue such qualifications in effect so long as required for the distribution of the Bonds; provided, however, that the Authority shall not be required to execute a general or special consent to service of process or qualify to do business in connection with any such qualification or determination in any jurisdiction, provided, that the Underwriter shall bear all costs in connection with the Authority's action under (x) and (y) herein, and (z) to assure or maintain the tax- exempt status of the interest on the Bonds. 0) As of the date thereof, the Preliminary Official Statement does not, except for the omission of certain information permitted to be omitted in accordance with Rule 15c2 -12 (as defined below), contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein with respect to the Authority, in light of the circumstances under which they were made, not misleading. (k) At the time of the Authority's acceptance hereof, and (unless an event occurs of the nature described in paragraph (m) of this Section 5) at all times subsequent thereto up to and including the date of the Closing, the Official Statement does not and will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that these representations and warranties of the Authority shall apply only to the information contained in the Official Statement relating to the Authority. (1) If the Official Statement is supplemented or amended pursuant to paragraph (m) of this Section 5, at the time of each supplement or amendment thereto and (unless subsequently again supplemented or amended pursuant to such paragraph) at all times subsequent thereto up to and including the date of the Closing, the Official Statement as so supplemented or amended will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that these representations and warranties of the Authority shall apply only to the information contained in the Official Statement relating to the Authority. 5 Page 64 of 195 (m) If between the date of this Purchase Contract and that date which is 25 days after the end of the underwriting period (as determined in accordance with Section 14 hereof) any event known to the Authority shall occur affecting the Authority which might adversely affect the marketability of the Bonds or the market prices thereof, or which might cause the Official Statement, as then supplemented or amended, to contain any untrue statement of a material fact or to omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, the Authority shall notify the Underwriter thereof, and if in the opinion of the Underwriter such event requires the preparation and publication of a supplement or amendment to the Official Statement, the Authority will at its expense prepare and fumish to the Underwriter a reasonable number of copies of such supplement to, or amendment of, the Official Statement in a form and in a manner approved by the Underwriter. (n) The Authority will refrain from taking any action, or permitting any action to be taken, with regard to which the Authority may exercise control, that results in the loss of the tax - exempt status of the interest on the Bonds. (o) Any certificate signed by any officer of the City on behalf of the Authority and delivered to the Underwriter pursuant to the Indenture, this Purchase Contract or any document contemplated thereby shall be deemed a representation and warranty by the Authority to the Underwriter as to the statements made therein. (p) The Authority will cause the proceeds from the sale of the Bonds to be paid to the Trustee for the purposes specified in the Indenture and the Official Statement. So long as any of the Bonds are outstanding and except as may be authorized by the Indenture, the Authority will not issue or sell any bonds or other obligations, other than the Bonds sold thereby, the interest on and premium, if any, or principal of which will be payable from the payments to be made under the Indenture. (q) The Authority shall honor all other covenants on its part contained in the Indenture which are incorporated herein and made a part of this Purchase Contract. 6. Representations, Warranties and Agreements of the Authority with respect to the Agency Bonds. The Authority represents, warrants and agrees as follows: (a) The Agency is a redevelopment agency duly organized and validly existing under the laws of the State of California. [UPDATE IF AB 101 PASSES] (b) The Agency has full legal right, power and authority (i) to enter into the Agency Indentures; and (ii) to carry out and consummate the transactions on its part contemplated by the Agency Indentures, the Preliminary Official Statement and the Official Statement. (c) By all necessary official action, the Agency has duly authorized and approved the execution and delivery of the Agency Indentures, has duly authorized and approved the execution and delivery of, and the performance by the Agency of the obligations on its part contained in the Agency Indentures and the consummation by it of all other transactions contemplated by the Agency Indentures in connection with the issuance of the Bonds. 6 Page 65 of 195 (d) To the best of its knowledge, except as disclosed in the Official Statement, the Agency is not in any material respect in breach of or default under any applicable constitutional provision, law or administrative regulation of any state or of the United States, or any agency or instrumentality of either, or any applicable judgment or decree, or any loan agreement, indenture, bond, note, resolution, agreement (including, without limitation, the Agency Indentures) or other instrument to which the Agency is a party which breach or default has or may have an adverse effect on the ability of the Agency to perform its obligations under the Agency Indentures, and no event has occurred and is continuing which with the passage of time or the giving of notice, or both, would constitute such a default or event of default under any such instrument; and the execution and delivery of the Agency Indentures, and compliance with the provisions on the Agency's part contained therein, will not conflict in any material way with or constitute a material breach of or a material default under any constitutional provision, law, administrative regulation, judgment, decree, loan agreement, indenture, bond, note, resolution, agreement or other instrument to which the Agency is a party nor will any such execution, delivery, adoption or compliance result in the creation or imposition of any lien, charge or other security interest or encumbrance of any nature whatsoever upon any of the property or assets of the Agency or under the terms of any such law, regulation or instrument, except as provided by the Agency Indentures. (e) Except as described in or contemplated by the Official Statement, all authorizations, approvals, licenses, permits, consents and orders of any governmental authority, legislative body, board, agency or commission having jurisdiction of the matter which are required for the due authorization by, or which would constitute a condition precedent to or the absence of which would materially adversely affect the due performance by the Agency of its obligations in connection with the Agency Indentures, have been duly obtained, except for such approvals, consents and orders as may be required under the "Blue Sky" or securities laws of any state in connection with the offering and sale of the Bonds. (f) As of the date hereof, there is no action, suit, proceeding, inquiry or investigation, notice of which has been served on the Agency, at law or in equity before or by any court, government agency, public board or body, pending against the Agency, affecting the existence of the Agency or the titles of its officers to their respective offices, or affecting or seeking to prohibit, restrain or enjoin the execution and delivery of the Agency Indentures, or contesting the completeness or accuracy of the descriptions of the Agency contained in the Preliminary Official Statement or the Official Statement, or the execution and delivery by the Agency of the Agency Indentures, or in any way contesting or challenging the consummation of the transactions contemplated hereby or thereby, wherein an unfavorable decision, ruling or finding would materially adversely affect the authorization, execution, delivery or performance by the Agency of the Agency Indentures. (g) As of the date thereof, the Preliminary Official Statement did not, except for the omission of certain information permitted to be omitted in accordance with Rule 15c2 -12, contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein with respect to the Agency, in light of the circumstances under which they were made, not misleading. 7 Page 66 of 195 (h) At the time of the Authority's acceptance hereof, and (unless an event occurs of the nature described in paragraph 0) of this Section 6) at all times subsequent thereto up to and including the date of the Closing, the Official Statement did not and will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that these representations and warranties of the Authority shall apply only to the information contained in the Official Statement relating to the Agency. (i) If the Official Statement is supplemented or amended pursuant to paragraph 0) of this Section 6, at the time of each supplement or amendment thereto and (unless subsequently again supplemented or amended pursuant to such paragraph) at all times subsequent thereto up to and including the date of the Closing, the Official Statement as so supplemented or amended will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that these representations and warranties of the Authority shall apply only to the information contained in the Official Statement relating to the Agency. 0) If between the date of this Bond Purchase Contract and that date which is 25 days after the end of the underwriting period (as determined in accordance with Section 14 hereof) any event known to the Authority shall occur affecting the Agency which might adversely affect the marketability of the Bonds or the market prices thereof, or which might cause the Official Statement, as then supplemented or amended, to contain any untrue statement of a material fact or to omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, the Authority shall notify the Underwriter thereof, and if in the opinion of the Underwriter such event requires the preparation and publication of a supplement or amendment to the Official Statement, the Authority will prepare and furnish to the Underwriter a reasonable number of copies of such supplement to, or amendment of, the Official Statement in a form and in a manner approved by the Underwriter. (k) Any certificate signed by any officer of the Authority and delivered to the Underwriter pursuant to the Agency Indentures or any document contemplated thereby shall be deemed a representation and warranty by the Authority to the Underwriter as to the statements made therein. 7. Closing. At 8:00 a.m., California time, on ; 2011, or on such earlier date or as soon thereafter as practicable, as may be mutually agreed upon by the Authority and the Underwriter, the Authority will, subject to the terms and conditions hereof, cause the Trustee to deliver to the Underwriter, the Bonds, in definitive form duly authenticated by the Trustee, together with the other documents hereinafter mentioned; and the Underwriter will accept such delivery and will pay the purchase price of the Bonds at the offices of Fulbright & Jaworski, L.L.P., Los Angeles, California, as set forth in Section 1 hereof by delivering federal or other immediately available funds in the amount of such purchase price to the Trustee. The Bonds shall be prepared in fully- registered form without coupons in authorized denominations and registered in the name of the Underwriter. 8 Page 67 of 195 8. Closing Conditions. The Underwriter has entered into this Purchase Contract in reliance upon the representations and warranties of the Authority contained herein, and in reliance upon the representations and warranties to be contained in the documents and instruments to be delivered at the Closing and upon the performance by the Authority of its obligations hereunder, both as of the date hereof and as of the date of the Closing. Accordingly, the Underwriter's obligations under this Purchase Contract to purchase, to accept delivery of and to pay for the Bonds shall be conditioned upon the performance by the Authority of its obligations to be performed hereunder and under such documents and instruments at or prior to the Closing, and shall also be subject to the following additional conditions: (a) The representations and warranties of the Authority contained herein shall be true, complete and correct on the date hereof and on and as of the date of the Closing, as if made on the date of the Closing; (b) At the time of the Closing, the Indenture and the Agency Indentures shall be in full force and effect in accordance with their terms and shall not have been amended, modified or supplemented and the Official Statement shall not have been supplemented or amended, except in any such case as may have been agreed to by the Underwriter; (c) At the time of the Closing, all necessary official action of the Authority and the Agency and of the other parties thereto relating to the Authority Documents and the Agency Indentures shall have been taken and shall be in full force and effect and shall not have been amended, modified or supplemented in any material respect; (d) Subsequent to the date hereof, there shall not have occurred any change in or affecting particularly the Authority, the Agency, the Bonds or the Agency Bonds, as the foregoing matters are described in the Official Statement, which in the reasonable opinion of the Underwriter materially impairs the investment quality of the Bonds; (e) At or prior to the Closing, the Underwriter shall have received copies of each of the following documents: (1) The Official Statement and each supplement or amendment, if any, thereto, executed by the Executive Director of the Authority; (2) A copy of the Indenture, executed by the Authority and the Trustee; (3) Copies of the Agency Indentures, executed by the Agency and the Agency Bonds Trustee; (4) A copy of this Purchase Contract, executed by the Authority and the Underwriter; (5) A certificate of the Authority with respect to the matters described in Sections 5 and 6 and in paragraphs (a), (b), (c) and (d) of this Section 8; 9 Page 68 of 195 (6) An opinion (the "Final Approving Legal Opinion "), dated the date of the Closing of Fulbright & Jaworski, L.L.P., Bond Counsel for the Authority, substantially in the form set forth in Appendix G to the Official Statement; (7) A supplemental opinion, dated the date of the Closing and addressed to the Underwriter, of Fulbright & Jaworski L.L.P., Bond Counsel for the Authority, in substantially the form attached hereto as Exhibit B; (8) An opinion, dated the date of the Closing and addressed to the Underwriter, of the City Attorney of the City, as Special Counsel for the Authority and the Agency, in substantially the form attached hereto as Exhibit C; (9) A reliance letter, dated the date of the Closing and addressed to the Underwriter and the Trustee, respectively, of Fulbright & Jaworski L.L.P., Bond Counsel for the Authority, regarding the final approving opinion; (10) An opinion, dated the date of the Closing and addressed to the Underwriter and the Authority of Fulbright & Jaworski L.L.P., Disclosure Counsel, in substantially the form attached hereto as Exhibit D; (11) An opinion, dated the date of the Closing and addressed to the Underwriter and the Authority of Fulbright & Jaworski L.L.P., Bond Counsel for the Authority, with respect to the Agency Bonds in substantially the form acceptable to the Underwriter; (12) Transcripts of all proceedings relating to the authorization and issuance of the Bonds certified by the Secretary or an Assistant Secretary of the Authority; (13) An opinion of counsel to the Trustee and the Agency Bonds Trustee, to the effect that: (i) Due Organization and Existence — the Trustee and Agency Bonds Trustee have been duly organized and are validly existing and in good standing, with full corporate power to undertake the trust duties and obligations under the Indenture and the Agency Indentures; (ii) Corporate Action — the Trustee and the Agency Bonds Trustee have duly authorized, executed and delivered the Indenture and the Agency Indentures, and by all proper corporate action have authorized the acceptance of the duties and obligations of the Trustee and the Agency Bonds Trustee under the Indenture and the Agency Indentures, respectively, and have authorized in such capacity the authentication and delivery of the Bonds and the Agency Bonds; (iii) Due Authorization, Execution and Delivery — assuming due authorization, execution and delivery by the Authority and the Agency, the Indenture and the Agency Indentures are the valid, legal and binding agreements 10 Page 69 of 195 of the Trustee and the Agency Bonds Trustee, respectively, enforceable in accordance with their terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights in general and by general equity principles (regardless of whether such enforcement is considered in a proceeding in equity or at law); and (iv) Consents — exclusive of federal or state securities laws and regulations, to the best of such counsel's knowledge after reasonable inquiry and investigation, other than routine filings required to be made with governmental agencies in order to preserve the Trustee and the Agency Bonds Trustee's authority to perform a trust business (all of which routine filings such counsel believes, after reasonable inquiry and investigation, to have been made), no consent, approval, authorization or other action by any governmental or regulatory authority having jurisdiction over the Trustee or the Agency Bonds Trustee is or will be required for the execution by the Trustee or the Agency Bonds Trustee of the Indenture or the Agency Indentures or the authentication and delivery of the Bonds or the Agency Bonds; (14) The general resolutions of the Trustee and the Agency Bonds Trustee authorizing the execution and delivery of certain documents by certain officers of the Trustee and Agency Bonds Trustee, which resolutions authorize the execution and delivery of the Indenture and the Agency Indentures; (15) A certificate of the Trustee and Agency Bonds Trustee, dated the date of Closing, certifying that, subject to the limitations provided herein, the Trustee and Agency Bonds Trustee represent and warrant and agree with the Underwriter that as of the date of Closing: (i) Due Organization and Existence — the Trustee and Agency Bonds Trustee are duly organized and existing as a national banking association in good standing under the laws of the United States having the full power and authority to enter into and perform their duties under the Indenture and the Agency Indentures, respectively, and to authenticate and deliver the Bonds and the Agency Bonds to the Underwriter pursuant to the terms of the Indenture and the Agency Indentures, respectively; (ii) No Conflict — to the best of the knowledge of the Trustee and the Agency Bonds Trustee, after due investigation, the execution and delivery by the Trustee of the Indenture and by the Agency Bonds Trustee of the Agency Indentures and the authentication and delivery by the Trustee and the Agency Bonds Trustee of the Bonds and the Agency Bonds, respectively, and compliance with the terms thereof will not, in any material respect, conflict with, or result in a violation or breach of, or constitute a default under, any loan agreement, indenture, bond, note, resolution or any other agreement or instrument to which the Trustee or the Agency Bonds Trustee is a party or by which it is bound, or any law or any rule, regulation, order or decree of any court or governmental agency I I Page 70 of 195 or body having jurisdiction over the Trustee or the Agency Bonds Trustee or any of its activities or properties, or result in the creation or imposition of any lien, charge or other security interest or encumbrance of any nature whatsoever upon any of the property or assets of the Trustee or the Agency Bonds Trustee; and (iii) No Litigation — to the best of the knowledge of the Trustee and the Agency Bonds Trustee, no litigation has been served upon the Trustee or the Agency Bonds Trustee to restrain or enjoin the Trustee's or the Agency Bonds Trustee's participation in, or in any way contesting the powers of the Trustee or the Agency Bonds Trustee with respect to, the transactions contemplated by the Indenture or the Agency Indentures, respectively; (16) Executed copies of the Continuing Disclosure Agreement, substantially in the form presented in Appendix F to the Official Statement; (17) Such additional legal opinions, certificates, instruments and other documents as the Underwriter may reasonably request to evidence the truth and accuracy, as of the date hereof and as of the date of the Closing, of the Authority's representations and warranties contained herein and of the statements and information contained in the Official Statement and the due performance or satisfaction by the Authority on or prior to the date of the Closing of all the agreements then to be performed and conditions then to be satisfied by it. All the opinions, letters, certificates, instruments and other documents mentioned above or elsewhere in this Purchase Contract shall be deemed to be in compliance with the provisions hereof if, but only if, they are in form and substance satisfactory to Bond Counsel and the Underwriter. The opinions and other documents presented as exhibits to this Purchase Contract or as appendices to the Official Statement shall be deemed satisfactory provided they are substantially in the forms attached as exhibits to this Purchase Contract or as appendices to the Official Statement. If the Authority shall be unable to satisfy the conditions to the obligations of the Underwriter to purchase, to accept delivery of and to pay for the Bonds contained in this Purchase Contract, or if the obligations of the Underwriter to purchase, to accept delivery of and to pay for the Bonds shall be terminated for any reason permitted by this Purchase Contract, this Purchase Contract shall terminate and neither the Underwriter nor the Authority shall be under any further obligation hereunder. 9. Termination. The Underwriter shall have the right to terminate the Underwriter's obligations under this Purchase Contract to purchase, to accept delivery of and to pay for the Bonds by notifying the Authority in writing or by telegram, of their election to do so, if, after the execution hereof and prior to the Closing: (a) the United States has become engaged in hostilities which have resulted in a declaration of war or a national emergency; (b) there shall have occurred the declaration of a general banking moratorium by any authority of the United States or the States of New York or California; (c) an event shall have occurred or been discovered as described in paragraph (m) of Section 5 or paragraph (m) of Section 6 hereof which in the opinion of the Underwriter requires the preparation and publication of disclosure 12 Page 71 of 195 material or a supplement or amendment to the Official Statement; (d) any legislation, ordinance, rule or regulation shall be introduced in, or be enacted by any governmental body, department or agency in the State of California, or a decision by any court of competent jurisdiction within the State of California shall be rendered which, in the Underwriter's reasonable opinion, materially adversely affects the market price of the Bonds; (e) legislation shall be introduced, by amendment or otherwise, or be enacted by the House of Representatives or the Senate of the Congress of the United States, or a decision by a court of the United States shall be rendered, or a stop order, ruling, regulation or official statement by or on behalf of the Securities and Exchange Commission or other governmental agency having jurisdiction of the subject matter shall be made or proposed, to the effect that the issuance, offering or sale of obligations of the general character of the Bonds, or the Bonds, as contemplated hereby or by the Official Statement, is or would be in violation of any provision of the Securities Act of 1933, as amended and as then in effect, or the Securities Exchange Act of 1934, as amended and as then in effect, or the Trust Indenture Act of 1939, as amended and as then in effect, or with the purpose or effect of otherwise prohibiting the issuance, offering or sale of obligations of the general character of the Bonds, or the Bonds, as contemplated hereby or by the Official Statement; (f) additional material restrictions not in force as of the date hereof shall have been imposed upon trading in securities generally by any governmental authority or by any national securities exchange; (g) the New York Stock Exchange, or other national securities exchange or association or any governmental authority, shall impose as to the Bonds, or obligations of the general character of the Bonds, any material restrictions not now in force, or increase materially those now in force, with respect to the extension of credit by or the charge to the net capital requirements of broker - dealers; (h) trading in securities on the New York Stock Exchange or the American Stock Exchange shall have been suspended or limited or minimum prices have been established on either such exchange; or (i) any action shall have been taken by any government in respect of its monetary affairs which, in the reasonable opinion of the Underwriter, has a material adverse effect on the United States securities market. If this Purchase Contract shall be terminated pursuant to Section 8 or this Section 9, or if the purchase provided for herein is not consummated because any condition to the Underwriter's obligation hereunder is not satisfied or because of any refusal, inability or failure on the part of the Authority to comply with any of the terms or to fulfill any of the conditions of this Purchase Contract, or if for any reason the Authority shall be unable to perform all of its obligations under this Purchase Contract, the Authority shall not be liable to the Underwriter for damages on account of loss of anticipated profits arising out of the transactions covered by this Purchase Contract. 10. Payment of Costs and Expenses. (a) All costs and expenses incident to the sale and delivery of the Bonds to the Underwriter, including, but not limited to: (i) the fees and expenses of the Authority and its Counsel, the Financing Consultant, Disclosure Counsel and other consultants; (ii) the fees and expenses of the Agency, its Counsel, the Financing Consultant, Disclosure Counsel and other consultants; (iii) the fees and expenses of Bond Counsel; (iv) all costs and expenses incurred in connection with the preparation and printing of the Bonds and the Agency Bonds; (v) all expenses in connection with the preparation, printing, distribution and delivery of the Preliminary Official Statement, the Official Statement and any amendment or supplement thereto; (vi) California Municipal Statistics fees, CUSIP® Bureau charges, fees of Public Securities Association and California Public Securities Association, 13 Page 72 of 195 MSRB fees, California Debt and Investment Advisory Commission fees; (vii) the fees and expenses of the Trustee and Agency Bonds Trustee and its counsel and all other fees and expenses of the Underwriter except as provided in paragraph (b) below shall be payable by the Authority from the proceeds of the Bonds. (b) The Underwriter shall pay all advertising expenses in connection with the public offering of the Bonds and all other expenses incurred by it in connection with its public offering and distribution of the Bonds. 11. Representations, Warranties and Agreements to Survive Delivery. The representations, warranties, indemnities, agreements and other statements of the Authority and the Underwriter or their officers or partners set forth in, or made pursuant to, this Purchase Contract will remain operative and in full force and effect regardless of any investigation made by or on behalf of the Authority or the Underwriter or any controlling person and will survive delivery of and payment for the Bonds. 12. Notices. Any notice or other communication to be given under this Purchase Contract may be given by delivering the same in writing: To the Authority: Lake Elsinore Public Financing Authority c/o City of Lake Elsinore 130 South Main Street Lake Elsinore, California 92530 Attention: City Manager To the Underwriter: O'Connor & Company Securities, Inc. 250 Newport Center Drive, Suite 303 Newport Beach, California 92660 Attention: Tony Wetherbee 13. Parties in Interest. This Purchase Contract is made solely for the benefit of the Authority and the Underwriter (including the successors or assigns of the Underwriter) and no other person shall acquire or have any right hereunder or by virtue hereof. All of the Authority's representations, warranties and agreements contained in this Purchase Contract shall remain operative and in full force and effect, regardless of: (i) any investigations made by or on behalf of the Underwriter; (ii) delivery of and payment for the Bonds pursuant to this Purchase Contract; and (iii) any termination of this Purchase Contract. 14. Determination of End of the Underwriting Period. For purposes of this Purchase Contract, the "End of the Underwriting Period" for the Bonds shall mean the earlier of (a) the day of the Closing unless the Authority has been notified in writing by the Underwriter, on or prior to the day of the Closing, that the "end of the underwriting period" for the Bonds for all purposes of Rule 15c2 -12 of the Securities and Exchange Commission promulgated under the Securities Exchange Act of 1934 (the "Rule ") will not occur on the day of the Closing, or (b) the date on which notice is given to the Authority by the Underwriter in accordance with the following sentence. In the event that the Underwriter has given notice to the Authority pursuant to clause (a) above that the "end of the underwriting period" for the Bonds will not occur on the 14 Page 73 of 195 day of the Closing, the Underwriter agrees to notify the Authority in writing as soon as practicable following the "end of the underwriting period" for the Bonds for all purposes of the Rule. 15. Effectiveness. This Purchase Contract shall become effective upon the execution of the acceptance by the designees of the Authority and shall be valid and enforceable at the time of such acceptance. 16. Headings. The headings of the sections of this Purchase Contract are inserted for convenience only and shall not be deemed to be a part hereof. 17. Governing Law. This Purchase Contract shall be construed in accordance with the laws of the State of California. 18. Counterparts. This Purchase Contract may be executed in any number of counterparts. 15 Page 74 of 195 If the foregoing is in accordance with your understanding of the Purchase Contract please sign and return to us the enclosed duplicate copies hereof, whereupon it will become a binding agreement among the Authority and the Underwriter in accordance with its terms. Accepted: This day of 2011 LAKE ELSINORE PUBLIC FINANCING AUTHORITY Executive Director Very truly yours, O'CONNOR & COMPANY SECURITIES, INC. Title: 16 Page 75 of 195 Exhibit A Lake Elsinore Public Financing Authority Local Agency Revenue Bonds (Summerly Project), 2011 Series Maturity Date Principal (September 1) Amount Coupon Yield Price A -1 Page 76 of 195 Exhibit B Supplemental Opinion of Fulbright & Jaworski L.L.P. Addressed to the Underwriter Lake Elsinore Public Financing Authority Local Agency Revenue Bonds (Summerly Project), 2011 Series A [Closing Date] O'Connor & Company Securities, Inc. 250 Newport Center Drive, Suite 303 Newport Beach, California 92660 Ladies and Gentlemen: This letter is addressed to you, as the Underwriter, pursuant to Section 8(e)(7) of the Purchase Contract, dated , 2011 (the "Purchase Contract "), by and between you and the Lake Elsinore Public Financing Authority (the "Authority "), providing for the purchase of $ aggregate principal amount of Lake Elsinore Public Financing Authority Local Agency Revenue Bonds (Summerly Project), 2011 Series A (the "Authority Bonds "). The Authority Bonds are being issued pursuant to the Indenture of Trust, dated as of 1, 2011 (the "Indenture "), between the Authority and Union Bank, N.A. (the "Trustee "). Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Indenture or, if not defined in the Indenture, in the Purchase Contract. In addition to the opinions set forth in our final legal opinion concerning the validity of the Authority Bonds and certain other matters, dated the date hereof and addressed to the Authority (but which may be relied upon by you to the same extent as if such opinion were addressed to you), and based on and subject to the matters referred to in the second through fourth paragraphs of said final legal opinion (but excluding the last sentence of the fourth paragraph thereof) (which are hereby incorporated herein by reference), and in reliance thereon, as of the date hereof, we are of the following opinions or have reached the following conclusions: 1. The Authority Bonds are not subject to the registration requirements of the Securities Act of 1933, as amended, and the Indenture of Trust is exempt from qualification pursuant to the Trust Indenture Act of 1939, as amended. B -1 Page 77 of 195 2. The Purchase Contract has been duly executed and delivered by the Authority and (assuming due authorization, execution and delivery by, and validity against, the Underwriter) is a valid and binding agreement of the Authority. We call attention to the fact that the rights and obligations under the Purchase Contract may be subject to bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors' rights, to the application of equitable principles, and to the exercise of judicial discretion in appropriate cases and to the limitations on legal remedies against entities formed pursuant to Government Code Section 6500 and following in the State of California. We express no opinion with respect to any indemnification, contribution, choice of law, choice of forum or waiver provisions contained therein. 3. The statements contained in the Official Statement, dated 2011, with respect to the Authority Bonds, on the cover of the Official Statement and under the captions "INTRODUCTORY STATEMENT," "THE BONDS," "SOURCES OF PAYMENT FOR THE BONDS," "LEGAL MATTERS — TAX MATTERS," "APPENDIX A — SUMMARY OF THE INDENTURE" and "APPENDIX B — SUMMARY OF THE AGENCY INDENTURES" insofar as such statements expressly summarize certain provisions of the Indenture, the Agency Indentures, the Authority Bonds and our opinion concerning certain federal tax matters relating to the Authority Bonds, are accurate in all material respects. This letter is furnished by us as bond counsel to the Authority. No attorney - client relationship has existed or exists between our firm and you in connection with the Authority Bonds or by virtue of this letter. Our engagement with respect to the Authority Bonds has terminated as of the date hereof, and we disclaim any obligation to update this letter. This letter is delivered to you as Underwriter, is solely for your benefit as such Underwriter and is not to be used, circulated, quoted or otherwise referred to or relied upon for any other purpose or by any other person. This letter is not intended to be relied upon by owners of the Authority Bonds. The foregoing represent our interpretation of applicable law to the facts as described herein. We bring to your attention the fact that our conclusions are an expression of professional judgment and are not a guarantee of a result. Respectfully submitted, B -2 Page 78 of 195 Exhibit C Opinion of Leibold McClendon & Mann, Special Counsel to the Authority and the Agency and addressed to the Underwriter Lake Elsinore Public Financing Authority Local Agency Revenue Bonds (Summerly Project), 2011 Series A [Closing Date] Lake Elsinore Public Financing Authority 130 South Main Street Lake Elsinore, California 92530 Redevelopment Agency of the City of Lake Elsinore 130 South Main Street Lake Elsinore, California 92530 O'Connor & Company Securities, Inc. 250 Newport Center Drive, Suite 303 Newport Beach, California 92660 Ladies and Gentlemen We are counsel to the Lake Elsinore Public Financing Authority (the "Authority ") and the Redevelopment Agency of the City of Lake Elsinore (the "Agency "), and have acted on behalf of the Authority and the Agency in connection with the issuance of the above - referenced $ Lake Elsinore Public Financing Authority Local Agency Revenue Bonds (Summerly Project) 2011 Series A (the "Bonds "). In such capacity, we have examined the original, certified copies, or copies otherwise identified to our satisfaction as being true copies of such resolutions, documents, certificates, and records as we have deemed relevant and necessary (except as we have specifically limited the scope of our investigation herein) as the basis for the opinions set forth herein relying on such examination and pertinent law and subject to the limitations and qualifications hereinafter set forth, we are of the opinion that: 1. The Authority is a joint powers authority duly organized and validly existing under the laws of the State of California acting pursuant to the Joint Powers Act (as such term is defined in the Official Statement of the Bonds). C -1 Page 79 of 195 2. The Agency is a redevelopment agency duly organized and validly existing under the laws of the State of California acting pursuant to the Redevelopment Law (as such term is defined in the Official Statement of the Bonds). 3. To our knowledge, the Authority has the full legal right, power and authority to perform all of its obligations under the Authority Documents, as such term is defined in the Purchase Contract dated , 2011 (the "Purchase Contract ") between the Authority and O'Connor & Company Securities, Inc. (the "Underwriter "). The governing board of the Authority has duly authorized, and the Authority has executed and delivered, the Authority Documents and, assuming due authorization, execution and delivery by the other parties thereto, as necessary, the Authority Documents constitute legal, valid and binding agreements of the Authority enforceable against the Authority in accordance with their terms, except as the enforceability thereof may be limited by bankruptcy, moratorium, insolvency, equitable remedies and other laws affecting creditors' rights or remedies. 4. To our knowledge, the Agency has the full legal right, power and authority to perform all of its obligations under the Agency Indentures, as such term is defined in the Purchase Contract. The governing board of the Agency has duly authorized, and the Agency has executed and delivered, the Agency Indentures and, assuming due authorization, execution and delivery by the other parties thereto, as necessary, the Agency Indentures constitute legal, valid and binding agreements of the Agency enforceable against the Agency in accordance with their terms, except as the enforceability thereof may be limited by bankruptcy, moratorium, insolvency, equitable remedies and other laws affecting creditors' rights or remedies. 5. To our knowledge, there is no action, suit or proceeding before or by any court, public board or body pending or threatened wherein an unfavorable decision, ruling or finding would (a) affect the creation, organization, existence or powers of the Authority or the Agency, or the titles of their officers to their respective offices, (b) in any way affect the validity or enforceability of the Authority Documents or the Agency Indentures, or (c) find illegal, invalid or unenforceable the Authority Documents or the Agency Indentures, or the transactions contemplated thereby, or any other agreement or instrument related to the issuance of the Bonds to which the Authority or the Agency is a party. 6. To our knowledge, the execution and delivery of the Authority Documents or the Agency Indentures and the other instruments contemplated by any of such documents to which the Authority or the Agency is a party, will not conflict with or constitute a breach of or default under any applicable law or administrative rule or regulation of the State of California, the United States or any department, division, agency or instrumentality of either thereof, or any applicable court or administrative decree or order or any loan agreement, note, resolution, indenture, contract, agreement or other instrument to which the Authority or the Agency is a party or is otherwise subject or hound in a manner which would materially adversely affect the Authority or the Agency's performance under the Authority Documents or the Agency Indentures. 7. All approvals, consents, authorizations, elections and orders of or filings or registrations with any governmental authority, hoard, agency or commission having jurisdiction which would constitute a condition precedent to, or the absence of which would materially C -2 Page 80 of 195 adversely affect, the performance by the Authority and the Agency of their obligations under the Authority Documents or the Agency Indentures have been obtained and are in full force and effect. 8. This opinion relies upon the work of various legal counsel, financial advisors, consultants and experts and expresses no opinion on: (1) any financial, engineering, or statistical data, (2) fiscal matters, (3) forecasts, projections, estimates, assumptions and expressions of opinions contained in any documents and Authority Documents and the Agency Indentures, (4) the relationship between applicable law and the Bonds or other documents referenced herein, including but not limited to, statements relating to the treatment of the Bonds or the interest, discount or premium related thereto for tax purposes under the law of any jurisdiction, or (5) statements contained in the Official Statement relating to the Bonds (including the cover page and the Appendices thereto). 9. In basing the opinions set forth in this letter on 'bur knowledge," the words 'bur knowledge" signifies that, in the course of our representation of the Authority and the Agency, we are currently not aware of any facts that would give us actual knowledge or actual notice, and we have no current actual knowledge or current actual notice, that any such opinions or other matters are not accurate. Except as otherwise stated in this opinion, we have undertaken no investigation or verification of such matters. Further, the words 'bur knowledge" as used in this opinion are intended to be limited to the current actual knowledge of the attorneys within our firm who have been directly involved in representing the Authority and the Agency in any capacity, including but not limited to, in connection with the Authority Documents and the Agency Indentures. This letter is furnished by us as special counsel to the Authority and the Agency. Other than the Authority and the Agency, no attorney - client relationship has existed or exists between us and you in connection with the Bonds or by virtue of this letter. Our engagement with respect to the Bonds has terminated as of the date hereof, and we disclaim any obligation to update this letter. This letter is delivered to you, is solely for your benefit and is not to be used, circulated, quoted or otherwise referred to or relied upon for any other purpose or by any other person. This letter is not intended to, and may not, be relied upon by owners of the Bonds. Respectfully submitted, C -3 Page 81 of 195 Exhibit D Opinion of Fulbright & Jaworski, L.L.P., Disclosure Counsel Addressed to the Issuer and the Underwriter S Lake Elsinore Public Financing Authority Local Agency Revenue Bonds (Summerly Project), 2011 Series A [Closing Date] Lake Elsinore Public Financing Authority 130 South Main Street Lake Elsinore, California 92530 O'Connor & Company Securities, Inc. 250 Newport Center Drive, Suite 303 Newport Beach, California 92660 Ladies and Gentlemen: We have acted as Disclosure Counsel to the Lake Elsinore Public Financing Authority (the "Issuer ") with respect to the issuance of the above captioned bonds (the "Bonds "). The Bonds are being issued pursuant to the provisions of the Constitution and the laws of the State of California, including the provisions of the Marks -Roos Local Bond Pooling Act of 1985, constituting Article 4 of Chapter 5 (commencing with Section 6584) of Division 7 of Title 1 of the Government Code of the State of California, as in existence on the Closing Date or as thereafter amended from time to time (the "Bond Law "). The Bonds shall be issued and secured pursuant to an Indenture of Trust, dated as of 1, 2011 (the "Indenture "), by and between the Authority and Union Bank, N.A., as trustee (the "Trustee "), authorizing the issuance of the Bonds. The Bonds are more fully described in the final Official Statement of the Issuer, dated , 2011 (the "Official Statement "). Capitalized terms not otherwise defined herein shall have the meaning ascribed thereto in the Official Statement. In rendering this opinion, we have reviewed such records, documents, certificates and opinions, and made such other investigations of law and fact as we have deemed necessary or appropriate. This opinion is limited to matters governed by the federal securities law of the United States, and we assume no responsibility with respect to the applicability or effect of the laws of any other jurisdiction. F -I Page 82 of 195 In our capacity as Disclosure Counsel, we have rendered certain legal advice and assistance to you in connection with the preparation of the Official Statement. Rendering such legal advice and assistance involved, among other things, discussions and inquiries concerning various legal matters, review of certain records, documents and proceedings, and participation in conferences with, among others, your representatives and representatives of Bond Counsel, the Financing Consultant, the Authority, the City, the Agency, and other consultants, at which conferences the contents of the Official Statement and related matters were discussed. On the basis of the information made available to us in the course of the foregoing (but without having undertaken to determine or verify independently, or assuming any responsibility for, the accuracy, completeness or fairness of any of the statements contained in the Official Statement), no facts have come to the attention of the personnel in our firm directly involved in rendering legal advice and assistance in connection with the preparation of the Official Statement which cause us to believe that the Official Statement as of its date (excluding therefrom financial, engineering and statistical data; forecasts, projections, estimates, assumptions and expressions of opinions; the treatment of the Bonds or the interest, discount or premium related thereto for tax purposes under the law of any jurisdiction; and the statements contained in the Official Statement under the caption "LEGAL MATTERS — TAX MATTERS," and in the Appendices thereto, as to all of which we express no view) contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. During the period from the date of the Official Statement to the date of this opinion, except for our review of the certificates and opinions regarding the Official Statement delivered on the date hereof, we have not undertaken any procedures or taken any actions which were intended or likely to elicit information concerning the accuracy, completeness or fairness of any of the statements contained in the Official Statement. We are furnishing this opinion to you, as Disclosure Counsel to the Issuer, solely for your benefit. This opinion is rendered in connection with the transaction described herein, and may not be relied upon by you for any other purpose. This opinion shall not extend to, and may not be used, circulated, quoted, referred to, or relied upon by, any other person, firm, corporation or other entity without our prior written consent. Our engagement with respect to this matter terminates upon the delivery of this opinion to you at the time of the closing relating to the Bonds, and we have no obligation to update this opinion. Very truly yours, F -2 Page 83 of 195 NEWISSUE- BOOK- ENTRYONLY RATING S &P.. " ( See "CONCLUDING INFORMATION- RATING ON THE BONDS" herein) In the opinion ofFulbright & Jaworski L.L.P, Los Angeles, California, Bond Counsel, under existing lmv interest on the Bonds is exempt from personal income taxes of the State of California and, assuming compliance with the tar covenants described herein, interest on the Bonds is excluded pursuant to section 103(a) of the Internal Revenue Code of 1986 (the "Code') from the gross income of the owners thereoffor federal income tax purposes and is not an item of preference under section 57(a) of the Code for purposes of the federal alternative minimum tax. See, however, "LEGAL MATTERS - TAX MATTERS" herein regarding certain other tar considerations. RIVERSIDE COUNTY STATE OF CALIFORNIA S4,9159000* LAKE ELSINORE PUBLIC FINANCING AUTHORITY LOCAL AGENCY REVENUE BONDS (SUMMERLY PROJECT), 2011 SERIES A Dated: Date of Delivery - Due: September 1 as shown on the inside cover. This cover page contains certain information for quick reference only. It is not a summary of the issue. Potential investors must read the entire Official Statement to obtain information essential to making an informed investment decision. See "BONDOWNERS' RISKS" herein for a discussion of special risk factors that should be considered in evaluating the investment quality of the Bonds. Interest on the Bonds is payable semiannually on March 1 and September 1 of each year, commencing on September 1, 2011, until maturity or earlier redemption (see "THE BONDS - GENERAL PROVISIONS" and "THE BONDS - REDEMPTION" herein). The information contained within this Official Statement was prepared under the direction of the Lake Elsinore Public Financing Authority (the "Authority") by the following firm serving as Financing Consultant to the Authority: ROD GUNN ASSOCIATES, INC. MATURITY SCHEDULE (see inside cover) Proceeds from the Bonds will be used, in part, to acquire on the delivery date of the Bonds, the Agency Bonds (as defined herein) previously issued by the Lake Elsinore Redevelopment Agency with respect to two separate Redevelopment Projects as described herein. The Bonds are special obligations of the Authority payable solely from and secured by revenues from repayment of the Agency Bonds, the Reserve Account held by the Trustee (as defined herein) and certain other funds held under the Indenture as described herein. Repayment of the Agency Bonds will be from Tax Revenues (as defined herein) attributable to the Redevelopment Project to which such Agency Bond relates, as described herein (see "SOURCES OF PAYMENT FOR THE BONDS" and `BONDOWINERS' RISKS" herein), and interfund loans with respect to the Redevelopment Projects to the extent of available surplus revenues as described herein. It is anticipated that the Bonds, in book -entry form, will be available for delivery through the facilities of The Depository Trust Company in New York, New York, on or about 2011 (see "APPENDIX G - DTC AND BOOK - ENTRY -ONLY SYSTEM "). The date of the Official Slatemem is , 2011. * Preliminary, subject to change. O'CONNOR & COMPANY SECURITIES Page 84 of 195 $4,915,000x* LAKE ELSINORE PUBLIC FINANCING AUTHORITY LOCALAGENCY REVENUE BONDS Maturity Date September 1 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 (SUMMERLY PROJECT), 2011 SERIES A MATURITY SCHEDULE (Base CUSIP ® *) S ** Serial Bonds Principal Interest Reoffering Amount ** Rate Rate $ ** _ %Term Bond due September 1, 2033, Price S xx _% Term Bond due September 1, 2038, Price CUSIP® Suffix* % CUSIP® Suffix* % CUSIP® Suffix* * CUSIP' Copyright 2011, American Bankers' Association. CUSIP' data herein is provided by Standard & Poor's CUSIP °' Service Bureau, a Division of The McGraw -Hill Companies, Inc. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP' Service Bureau. CUSIP' numbers are provided for convenience of reference only. The Authority and the Underwriter do not guarantee the accuracy of the CUSIP*' data herein. ** Preliminary, subject to change. Page 85 of 195 LAKE ELSINORE PUBLIC FINANCING AUTHORITY LAKE ELSINORE, CALIFORNIA AUTHORITY GOVERNING BOARD Daryl Hickman, Chairperson Brian Tisdale, ice Chairperson Amy Bhutta, Board Member Robert E. Magee, Board Member Melissa A. Melendez, Board Member CITY COUNCIL Amy Bhutta, Mayor Robert E. Magee, Mayor Pro Tem Melissa A. Melendez, Council Member Daryl Hickman, Council Member Brian Tisdale, Council Member AGENCY BOARD OF DIRECTORS Melissa A. Melendez, Chairperson Brian Tisdale, Vice Chairperson Amy Bhutta, Board Member Daryl Hickman, Board Member Robert E. Magee, Board Member CITY, AUTHORITY AND AGENCY STAFF Robert A. Brady, City Manager /Authority and Agency Executive Director Barbara Leibold, Esq., City Attorney /Authority and Agency Counsel James R. Riley, CPA, Director ofAdministrative Services /Authority and Agency Treasurer PROFESSIONAL SERVICES Bond Counsel and Disclosure Counsel Fulbright & Jaworski L.L.P. Los Angeles, California City Attorney Leibold, McClendon & Mann, P.C. Laguna Hills, California Financing Consultant Rod Gunn Associates, Inc. Huntington Beach, California Trustee and Fiscal Agent Union Bank, N.A. Los Angeles, California Fiscal Consultant HdL Coren & Cone Diamond Bar, California Underwriter O'Connor & Company Securities, Inc. Newport Beach, California Underwriter's Counsel McFarlin & Anderson LLP Lake Forest, California FOR ADDITIONAL INFORMATION James R. Riley, CPA, City of Lake Elsinore (951) 674 -3124 O'Connor & Company Securities, Inc. (949) 706 -0444 Page 86 of 195 GENERAL INFORMATION ABOUT THE OFFICIAL STATEMENT Use of Official Statement. This Official Statement is submitted in connection with the offer and sale of the Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose. This Official Statement is not to be construed as a contract with the purchasers of the Bonds. Estimates and Forecasts. When used in this Official Statement and in any continuing disclosure by the Agency, in any press release and in any oral statement made with the approval of an authorized officer of the Agency, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "forecast," "expect," "intend," and similar expressions identify "forward- looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 21 E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward - looking statements. Any forecast is subject to such uncertainties. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances may occur. Therefore, there are likely to be differences between forecasts and actual results and those differences may be material. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, give rise to any implication that there has been no change in the affairs of the Agency or any other entity described or referenced herein since the date hereof. Neither the Authority nor the Agency plan to issue any updates or revisions to the forward - looking statements set forth in this Official Statement. Limiter! Offering. No dealer, broker, salesperson or other person has been authorized by the Authority or the Agency to give any information or to make any representations in connection with the offer or sale of the Bonds other than those contained herein and if given or made, such other information or representation must not be relied upon as having been authorized by the Authority, the Agency or the Underwriter. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the Bonds by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale. Involvement of Underwriter. The Underwriter has submitted the following statement for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, and as a part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. The information and expressions of opinions herein are subject to change without notice and neither delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Authority, the Agency or any other entity described or referenced herein since the date hereof. All summaries of the documents referred to in this Official Statement are made subject to the provisions of such documents and do not purport to be complete statements of any or all of such provisions. THE BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS CONTAINED IN SUCH ACT. THE BONDS HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE. iii Page 87 of 195 TABLE OF CONTENTS INTRODUCTORY STATEMENT THE AUTHORITY ...................... Authorization and Format ion .......... ..............................1 19-1-9 Bond Authorization and I ssuance ... ..............................1 -9 Financing Purpose of the Bonds .... .............................22 THE AGENCY ........................... ............................... .= Formation....................................... .............................23 Tax Allocation Financing ............... .............................22 Redevelopment Agency Project Area Boundaries ......_4 THE REDEVELOPMENT PROJECTS .....................44 2324 Redevelopment Project No. II ....... .............................44 Formation....................................... .............................44 2424 General Description ....................... .............................44 2626 Redevelopment Project No. 111 ...... .............................44 Formation....................................... .............................44 General Description ....................... .............................44 THE AGENCY BONDS ................ .............................53 2626 Redevelopment Project 11 Bonds ... .............................53 Authorization............................................................... Prior Project 11 Loans ..................... .............................;3 Redevelopment Project Ill Bonds .. .............................66 Authorization ................................. .............................66 Prior Project III Loan ..................... .............................66 Financing Purpose of the Agency Bonds ....................66 SECURITY AND SOURCES OF REPAYMENT ...... 77 REDEMPTION OF THE BONDS .............................88 Mandatory Redemption from Optional 2929 Prepayments of the Agency Bonds .......................... 88 Mandatory Sinking Payment Redemption ..................88 THE BONDS GENERAL PROVISIONS ..................88 Registration, Transfer and Exchange ..........................88 Payment......................................... .............................88 Notice............................................. .............................88 3233 LEGAL MATTERS ....................... .............................99 PROFESSIONAL SERVICES .... ............................... ()4 FINANCIAL STATEMENTS ........ .............................99 CONTINUING DISCLOSURE ..... .............................99 3334 AVAILABILITY OF LEGAL DOCUMENTS .......104,0 SELECTED ESSENTIAL FACTS ......................... 114-4 - ESTIMATED SOURCES AND USES OF FUNDS........ ............................... ............................154 5 THE BONDS ............................... ...........................1545 Sources of Funds ........................... ..........................154 -5 Uses of Funds ............................... ..........................1544 THE AGENCY BONDS ............... ..........................16 -46 THEBONDS .. ............................... ...........................1747 GENERAL PROVISIONS ............ .........................174 -7 Repayment of the Bonds .............. ...........................1747 Transfer or Exchange of Bonds ... ...........................174-7 Bonds Mutilated, Lost, Destroyed or Stolen ........... 174 -'7 REDEMPTION ............................ ...........................184% Mandatory Redemption from Optional Prepayments of the Agency Bonds ......................184$ Mandatory Sinking Payment Redemption ..............1848 Notice of Redemption; Rescission ..........................19;69 373-7 Redevelopment Plan Limitations on Tax iv Open Market Purchase of Bonds ............................ 19-1-9 Selection of Bonds for Redemption ........................194 -9 Effect of Redemption .................... .........................1949 Partial Redemption ...................... ...........................202A SCHEDULED DEBT SERVICE ON THE BONDS..... ............................... ...........................2133 SCHEDULED DEBT SERVICE ON THE REDEVELOPMENT PROJECT II BONDS...... 2324 SCHEDULED DEBT SERVICE ON THE REDEVELOPMENT PROJECT III BONDS...... 2424 SOURCES OF PAYMENT FOR THE BONDS.... 2626 REPAYMENT OF THE BONDS ...........................2626 TheBonds .... ............................... ...........................2626 Reserve Account .......................... ...........................2626 REPAYMENT OF THE AGENCY BONDS .......... 2626 Tax Allocation Financing ............. ...........................2636 InGeneral .... ............................... ...........................2626 Allocation of Taxes ...................... ...........................2727 Pledge of Tax Revenues .............. ...........................2727 Redevelopment Project 11 Bonds . ..........................2737 Redevelopment Project III Bonds ...........................2828 Alternative Method of Tax Apportionment ( "Teeter Plan ") .......................... ...........................2934 ISSUANCE OF ADDITIONAL DEBT ..................292-9 The Authority _ ........................... ........................... 2929 TheAgency ... ............................... ...........................2924 Subordinate Debt ......................... ...........................3049 BONDOWNERS' RISKS ............. ...........................3233 THE BONDS ............................... ...........................3243 General......... ............................... ...........................3242 No Liability of the Authority to the Owners ........... 3233 No Effective Acceleration on Default .....................3243 Enforceability of Remedies ......... ...........................3232 Investment of Funds .................... ...........................3334 Secondary Market ................................................... 3334 THE AGENCY BONDS ............. ...........................3343 Risk Factors Relating to the Reduction of Tax Increment Revenues ................. ...........................3344 Reduction in Inflationary Rate .... ...........................3444 Assessment Appeals .................... ...........................3533 Proposition 8Adiustments ........... ...........................35445 Levy and Collection .................... ...........................3646 Pro eny Owner Bankruptcy ........ ...........................3646 Risk Factors Related to Real Estate Market Conditions .. ............................... ........................... 3636 Development Risks ...................... ...........................3646 Adiustable Rate and Unconventional Mortgage Structures ............................... ..............................3 6-36 Risk Factors Related to Natural and Man -Made Disasters .... ............................... ...........................3747 Risk Factors Relating to the Agency Bonds and the Redevelopment Law ........... ...........................3747 The Agency Bonds are Limited Obligation s ...... .... 373-7 Redevelopment Plan Limitations on Tax Revenues .... ............................... ...........................3835 Page 88 of 195 Risk Factors Related to Bankruptcy of the Authority and the Agency ........ ...........................3838 Risk Factors Related to State Budget Legislation... 3838 Risk Factors Related to Assumptions and Projections of Tax Revenues ..... ...........................4049 PROPERTY TAXATION IN CALIFORNIA ........ 4144 CONSTITUTIONAL AMENDMENTS 6969 AFFECTING TAX INCREMENT REVENUES.4144 IMPLEMENTING LEGISLATION .......................4144 Prior Proposition 8 Adiustments .. ...........................6964 CONSTITUTIONAL CHALLENGES TO TRANSFERS OF OWNERSHIP ...........................7070 PROPERTY TAX SYSTEM ..... ...........................4242 Redevelopment Project No. 11 ..... ...........................7079 PROPERTY TAX COLLECTION DELINQUENCIES ... ............................... _............717 PROCEDURES ......................... ..........................42 =42 SUPPLEMENTAL ASSESSMENTS .....................4243 PASS - THROUGH AGREEMENTS AND TAX COLLECTION FEES ......... ...........................4343 STATUTORY PAYMENTS ...... ...........................7272 UNITARY PROPERTY TAX., ............................... 434-3 BUSINESS INVENTORY AND Statutory Tax Sharing .................. ...........................7575 REPLACEMENT REVENUE .. ...........................4343 COUNTY PROPERTY TAX COLLECTION PROPOSITION 87 ...................... ...........................4444 REIMBURSEMENT ................ ........................... FUTURE INITIATIVES .............. ...........................4444 ALLOCATION OF STATE ASSESSED THE AUTHORITY ....................... ..........................4.545 UNITARY TAXES ................... ...........................7575 GENERAL.... ............................... ...........................4545 HOUSING SET - ASIDE ............... ..........................7676 AUTHORIZATION ..................... ...........................4545 FUTURE DEVELOPMENT IN THE TheBonds ..... ............................... ...........................4543 REDEVELOPMENT PROJECTS .......................7676 The Agency Bonds ....................... ...........................4545 PROJECTED TAX REVENUES AND DEBT AUTHORITY FINANCIAL STATEMENTS ....... ..4543 DEBT SERVICE PAYMENTS ON THE Projected Tax Revenues ............... ...........................7979 AGENCCY BONDS AND DEBT SERVICE Debt Service Coverage Based Upon Projected COVERAGE ON THE AUTHORITY BONDS..4646 Tax Revenues ............................ ...........................7979 THE AGENCY .............................. ...........................4747 LEGAL MATTERS ...................... ...........................8282 GOVERNMENT ORGANIZATION ......................4747 ENFORCEABILITY OF REMEDIES ...................8283 AGENCY POWERS ................... ...........................4848 APPROVAL OF LEGAL PROCEEDINGS ...........8282 REDEVELOPMENT PLANS ..... ...........................4848 TAX MATTERS ..................................................... General.......... ............................... ...........................4848 ABSENCE OF LITIGATION ..... ...........................8484 Amended and Restated Redevelopment Plans........ 4848 Redevelopment Plan Limitations . ...........................4949 RATING ON THE BONDS ........ ...........................8583 Redevelopment Plan Expiration ... ..........................4944 UNDERWRITING ...................... ...........................8585 Receipt of Tax Increment Time Limits ...................4949 EXPERTS................................ ............................... Time Limit on Incurring Indebtedness ....................5034 FINANCIAL STATEMENTS OF THE AGENCY. Limitation on the Amount of Tax Increment THE FINANCING CONSULTANT .......................8585 Receipts...... ............................... ...........................5038 FORWARD- LOOKING STATEMENTS ............... Limit on the Amount of Bonded Indebtedness .......5039 ADDITIONAL INFORMATION ...........................8686 AGENCY FINANCIAL ADMINISTRATION ....... 51-54 AnnualBudget ............................. ...........................515} EXECUTION.......................... ............................... Agency Accounting Records and Financial Statements.. ............................... ...........................513} Annual Financial Report .............. ...........................5233 Filing of Statement of Indebtedness .......................5233 THE REDEVELOPMENT PROJECTS ................533 -3 REDEVELOPMENT PROJECT NO. 11 .................5333 Assessed Values by Land Use ...... ...........................5333 Top Ten Taxable Property Owners ..........................5434 Redevelopment Project No. II Map ........................5535 TAX INCREMENT REVENUES ...........................6464 TAXABLE VALUATIONS ......... ...........................6464 Historical Taxable Valuations ...... ...........................6464 v SUPPLEMENTAL ASSESSMENT RE V ENUES..6666 ASSESSMENT APPEALS .......... ...........................6747 General.................................... ............................... 6767 Base Year Appeals ....................... ...........................6767 Redevelopment Project No. 11 ..... ...........................6767 Redevelopment Project No. III .... ...........................6868 Proposition 8Adjustments ....... .............. ................. 6969 General.................................... ............................... 6969 Prior Proposition 8 Adiustments .. ...........................6964 TRANSFERS OF OWNERSHIP ...........................7070 Redevelopment Project No. 11 ..... ...........................7079 DELINQUENCIES ... ............................... _............717 -4 FORECLOSURES ....................... ..........................7174 PASS - THROUGH AGREEMENTS AND STATUTORY PAYMENTS ...... ...........................7272 Pass - Through Agreements ........... ...........................72-72 Statutory Tax Sharing .................. ...........................7575 COUNTY PROPERTY TAX COLLECTION REIMBURSEMENT ................ ........................... 7573 ALLOCATION OF STATE ASSESSED UNITARY TAXES ................... ...........................7575 HOUSING SET - ASIDE ............... ..........................7676 FUTURE DEVELOPMENT IN THE REDEVELOPMENT PROJECTS .......................7676 PROJECTED TAX REVENUES AND DEBT SERVICE COVERAGE ........... ...........................7979 Projected Tax Revenues ............... ...........................7979 Debt Service Coverage Based Upon Projected Tax Revenues ............................ ...........................7979 LEGAL MATTERS ...................... ...........................8282 ENFORCEABILITY OF REMEDIES ...................8283 APPROVAL OF LEGAL PROCEEDINGS ...........8282 TAX MATTERS ..................................................... 824? ABSENCE OF LITIGATION ..... ...........................8484 CONCLUDING INFORMATION ......................... 8-W RATING ON THE BONDS ........ ...........................8583 UNDERWRITING ...................... ...........................8585 EXPERTS................................ ............................... 8585 FINANCIAL STATEMENTS OF THE AGENCY. 8585 THE FINANCING CONSULTANT .......................8585 FORWARD- LOOKING STATEMENTS ............... 8686 ADDITIONAL INFORMATION ...........................8686 REFERENCES.. ........... ......................................... 8686 EXECUTION.......................... ............................... 8686 Page 89 of 195 APPENDIX A -1 SUMMARY OF THE INDENTURE ....................... A -1 APPENDIXB ................................. ............................B -1 SUMMARY OF THE AGENCY INDENTURE ...... B -1 APPENDIXC ............................. ............................... C -1 FISCAL CONSULTANT REPORT ........................ C -1 APPENDIXD ............................. ............................... D -1 vi AGENCY AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR ENDING JUNE 30, 201 0 ............ ............................D -1 APPENDIXE .. ............................... ............................E -1 FORM OF CONTINUING DISCLOSURE AGREEMENT......................... ............................... E -1 APPENDIX F FORM OF OPINION OF BOND COUNSEL................................ ............................... F -1 APPENDIXG ............................ ............................... G -1 DTC AND BOOK- ENTRY -ONLY SYSTEM......... G -1 Page 90 of 195 VICINITY MAP (INSERT MAP 1) vii Page 91 of 195 OFFICIAL STATEMENT $49915,000* LAKE ELSINORE PUBLIC FINANCING AUTHORITY LOCAL AGENCY REVENUE BONDS (SUMMERLY PROJECT), 2011 SERIES A This Official Statement which includes the cover page and appendices (the "Official Statement ") is provided to furnish certain information concerning the sale by the Lake Elsinore Public Financing Authority (the "Authority ") of its Local Agency Revenue Bonds (Summerly Project), 2011 Series A (the "Bonds "), in the aggregate principal 'amount of $4,915,000.* INTRODUCTORY STATEMENT This Introductory Statement contains only a brief description of this issue and does not purport to be complete. The Introductory Statement is subject in all respects to more complete information in the entire Official Statement and the offering of the Bonds to potential investors is made only by means of the entire Official Statement and the documents summarized herein. Potential investors must read the entire Official Statement to obtain information essential to make an informed investment decision (see "BONDOWNERS'RISKS" herein). THE AUTHORITY Authorization and Formation The Authority is a joint exercise of powers authority organized and existing under and by virtue of the Joint Exercise of Powers Act, constituting Articles 1 through 4 (commencing with Section 6500) of Chapter 5, Division 7, Title 1 of the Government Code of the State (the "Joint Powers Act "). The City of Lake Elsinore (the "City "), pursuant to Resolution No. 89 -32, adopted on July 25, 1989, and the Redevelopment Agency of the City of Lake Elsinore (the "Agency "), pursuant to Resolution No. 89 -43 adopted on July 25, 1989, formed the Authority by the execution of ajoint exercise of powers agreement (see "THE AUTHORITY" herein). Bond Authorization and Issuance Pursuant to the Joint Powers Act, the Authority is authorized, among other things, to issue revenue bonds to provide funds to acquire local obligations issued by local agencies, such revenue bonds to be repaid from the repayment of the local obligations so acquired by the Authority, such as the Agency Bonds (the "Agency Bonds ") described herein (see "INTRODUCTORY STATEMENT — THE AGENCY BONDS" and "INTRODUCTORY STATEMENT — SECURITY AND SOURCES OF REPAYMENT" below). The Bonds are being issued pursuant to the Indenture, as defined herein (see "APPENDIX A — SUMMARY OF THE INDENTURE "). The Bonds are being sold to the Underwriter pursuant to, and subject to the terms and conditions of, the Purchase Contract, by and among the Underwriter and the Authority (the "Purchase Contract "). The Indenture and the Purchase Contract were approved by the Authority pursuant to a resolution, adopted on 2011. It is anticipated that the Bonds, in book -entry form, will be available for delivery through the facilities of The Depository Trust Company, on or about 2011 (see "APPENDIX G — DTC AND BOOK - ENTRY -ONLY SYSTEM "). Preliminary, subject to change. Page 92 of 195 Financing Purpose of the Bonds The Bonds are being issued: I. To provide funds to acquire the Agency Bonds on the date of delivery of the Bonds; 2. To fund the Reserve Account (as defined in the Indenture). The amount of Bond proceeds deposited into the Reserve Account will be $430,112.50* (an amount equal to the Reserve Requirement) (see "SOURCES OF PAYMENT FOR THE BONDS - REPAYMENT OF THE BONDS - Reserve Account" herein); and 3. To pay the expenses of the Authority in connection with the issuance of the Bonds (see "ESTIMATED SOURCES AND USES OF FUNDS" herein) THE AGENCY Formation The Agency is a public body, corporate and politic, existing under and by virtue of the Community Redevelopment Law of the State, constituting Part 1 of Division 24 (commencing with Section 33000) of the Health and Safety Code of the State (the "Redevelopment Law "). The Agency was activated in July 1980. The City Council of the City (the "City Council "), at the same time, declared itself to be the members of the Agency and appointed the City Manager to be the Agency's Executive Director (see "THE AGENCY" herein). The Agency is comprised of 3 Redevelopment Projects: (i) the Rancho Laguna Redevelopment Project No. I ( "Redevelopment Project No. I "); (ii) the Rancho Laguna Redevelopment Project No. 11 ( "Redevelopment Project No. 11 ") and (iii) the Rancho Laguna Redevelopment Project No. III ( "Redevelopment Project No. III ") (see map entitled "Redevelopment Agency Project Area Boundaries" below). Collectively, Redevelopment Project No. 11 and Redevelopment Project No. 111 are referred to herein as the "Redevelopment Projects." Tax Allocation Financing The Redevelopment Law provides a means for financing redevelopment projects based upon an allocation of taxes collected within a redevelopment project. The taxable valuation of a redevelopment project last equalized prior to adoption of the redevelopment plan, or base roll, is established and, except for any period during which the taxable valuation drops below the base year level, the taxing agencies within the redevelopment project thereafter receive the taxes produced by the levy of the then current tax rate upon the base roll. Taxes collected upon any increase in taxable valuation over the base roll (except such portion generated by rates levied to pay voter- approved bonded indebtedness on or after January 1, 1989, for the acquisition or improvement of real property) are allocated to a redevelopment agency (the "Tax Increment Revenues ") and may be pledged by a redevelopment agency to the repayment of any indebtedness incurred in financing or refinancing a redevelopment project. Redevelopment agencies themselves have no authority to levy property taxes and must look specifically to the allocation of taxes produced as above indicated. * Preliminary, subject to change. 2 Page 93 of 195 Redevelopment Agency Project Area Boundaries (Insert MAP 2) Page 94 of 195 THE REDEVELOPMENT PROJECTS Redevelopment Project No. II Formation. The Redevelopment Plan for Redevelopment Project No. 11 was adopted by Ordinance No. 671 on July 18, 1983, and, thereafter, has been amended three times: by Ordinance No. 987 on November 22, 1994, to conform time limits to AB1290; by Ordinance No. 1249 on February 26, 2008, to repeal the debt establishment limit for affordable housing debt as provided by SB211, to extend the effectiveness date and time limit to repay debt and collect tax increment revenues as provided by SB 1045, and to make certain technical corrections; and by Ordinance No. 1261 on April 28, 2009, to adopt an Amended and Restated Redevelopment Plan. The Amended and Restated Redevelopment Plan (i) reflects changes in the Redevelopment Law that impose additional requirements and restrictions not reflected in the original text, (ii) incorporates all prior amendments, (iii) updates the land use provisions, (iv) clarifies and restates the time limits and financial limits, and (v) improves the format and presentation of the text and map of the Redevelopment Project. General Description. Redevelopment Project No. II has an area of 4,859 acres in three non- contiguous areas. The first area runs parallel on both sides of Interstate 15, extending in each direction from Railroad Canyon Road, a major arterial highway (see map entitled "Redevelopment Agency Project Area Boundaries" above). This area includes the City Shopping Center, anchored by a 126,000 square foot Wal -Mart and a 53,000 square foot Von's Grocery Store. This area also includes two major subdivisions, Summerhill and Tuscany Hills. Summerhill includes 428 completed single family homes. Tuscany Hills is a planned community, ultimately consisting of 2,000 homes. 1,020 homes have been constructed and occupied. The second area includes the municipal baseball stadium area, a portion of the auto center and the Summerly Planned Community, which is located in both Redevelopment Project No. II and Redevelopment Project No. III. Approximately 833 single family homes are planned in the first phase of the Summerly Planned Community. The Summerly Planned Community is in the early development stages. The third area is located at the west end of Lake Elsinore and is developed with commercial uses and single family homes. Of the 4,859 acres within Redevelopment Project No. 11, 2,398.13 (49.35 %) are vacant. In terms of total taxable value, residential uses comprise 59.8% of the assessed value, commercial uses comprise 20.6% of the assessed value, industrial uses comprise 4.4% of the assessed value and vacant land comprises 11.2% of the assessed value within Redevelopment Project No. II (see "THE REDEVELOPMENT PROJECTS — REDEVELOPMENT PROJECT NO. II" herein for a description of Redevelopment Project No. I1). Redevelopment Project No. III Formation. The Redevelopment Plan for Redevelopment Project No. Ill was adopted by Ordinance No. 815 on September 8, 1987, and, thereafter, has been amended three times: by Ordinance No. 987 on November 22, 1994, to conform time limits to AB 1290; by Ordinance No. 1249 on February 26, 2008, to repeal the debt establishment limit for affordable housing debt as provided by SB211 and to extend the effectiveness date and time limit to repay debt and collect tax increment revenues as provided by SB 1045, and to make certain technical corrections; and by Ordinance No. 1262 on April 28, 2009, to adopt an Amended and Restated Redevelopment Plan. The Amended and Restated Redevelopment Plan (i) reflects changes in the Community Redevelopment Law that impose additional requirements and restrictions not reflected in the original text, (ii) incorporates all prior amendments, (iii) updates the land use provisions, (iv) clarifies and restates the time limits and financial limits, and (v) improves the format and presentation of the text and the project areas maps. General Description. Redevelopment Project No. III, as shown on the map "Redevelopment Agency Project Area Boundaries" above, consists of four (4) non - contiguous parcels of land. Page 95 of 195 PARCEL I is in the Eastlake Specific Plan area adjacent to the southeasterly shore line of Lake Elsinore (the "Lake ") and some of the commercial operations adjacent to and associated with the municipal airport facility. Parcel 1 contains approximately 1,886 acres. PARCEL 2 is adjacent to the municipal airport facility and is used for agricultural purposes and a five (5) acre commercial site. Parcel 2 contains approximately 84.5 acres. PARCEL 3 is generally referred to as "the Avenues." This area is characterized by older single family residential units, many of which have been converted to multiple family units, on partially developed roadways. Parcel 3 contains approximately 466 acres. PARCEL 4, know as "the Heights," is also a residential area. The roads are generally unpaved. The area is dominated by steep slopes. Parcel 4 contains approximately 1,104 acres. 1,151.73 acres of the 3,541 acres within Redevelopment Project No. III are vacant. In terms of taxable value, residential uses comprise 66.5% of the assessed value, commercial uses comprise 2.8% of the assessed value, industrial uses comprise 0.3% of the assessed value and vacant land comprises 27.0% of the assessed value within Redevelopment Project No. III (see "THE REDEVELOPMENT PROJECTS — REDEVELOPMENT PROJECT NO. I11" herein for a description of Redevelopment Project No. III). THE AGENCY BONDS On April 13, 2011, the Agency issued its Subordinate Tax Allocation Bonds (Project Area No. B) Series 2011 (the "Redevelopment Project II Bonds ") and its Subordinate Tax Allocation Bonds (Project No, 111) Series 2011 (the "Redevelopment Project III Bonds ") (collectively the Redevelopment Project No. 11 Bonds and the Redevelopment Project No. III Bonds are referred to herein as the "Agency Bonds "). The Authority will be acquiring the Agency Bonds from proceeds of the Bonds. Redevelopment Project II Bonds Authorization. The Authority will be acquiring the previously issued Redevelopment Project 11 Bonds in the principal amount of $3,260,000. The Redevelopment Project II Bonds were authorized by Resolution of the Agency and issued on April 13, 2011. The Agency has pledged a lien on Redevelopment Project No. 11 Tax Revenues to the repayment of the Redevelopment Project 11 Bonds. "Redevelopment Project No. 11 Tax Revenues" consist of Tax Increment Revenues from the Agency's Redevelopment Project No. II, excluding (i) amounts required to be deposited into the Agency's Low and Moderate Income Housing Fund, (ii) the SB 2557 County Administrative fees and collection charges and (iii) amounts required to be paid pursuant to certain Pass - Through Agreements (as this term is defined herein) (see "SOURCES OF PAYMENT FOR THE BONDS," .. BONDOWNERS' RISKS" and "TAX INCREMENT REVENUES" herein). The pledge of Redevelopment Project No. 11 Tax Revenues is on a subordinate basis with any payments required under 2 prior obligations of the Agency (the "Prior Project 11 Loans ") (see "Prior Project I1 Loans" below). Debt service on the Redevelopment Project 11 Bonds and the Prior Project No. II Loans is estimated to be covered by Redevelopment Project No. 11 Tax Revenues by a ratio of approximately 2.19 to 1. In addition, in the event there is not sufficient Redevelopment Project No. II Tax Revenues to pay debt service on the Redevelopment Project 11 Bonds, the Agency has covenanted to make an interfund loan from Redevelopment Project No. 1, Redevelopment Project No. III and the Low and Moderate income Housing Fund (see "SOURCES OF PAYMENT FOR THE BONDS — REPAYMENT OF THE AGENCY BONDS — Pledge of Tax Revenues" herein). Prior Project II Loans In February 2010, the Authority issued its Tax Allocation Revenue Bonds (1999 Series C Refunding), 2010 Series A (the "Authority 2010A Bonds "). Proceeds of the Authority 2010A Bonds were loaned, in part, by the Authority to the Agency pursuant to a Project 11 Loan Agreement, dated as of February 1, 2010 (the "Project No. 1120 1 OA Loan Agreement "). The loan pursuant to the Project No. 11201 OA Loan Page 96 of 195 Agreement (the "Project No. II 2010A Loan ") was in the principal amount of $5,505,000 of which $5,300,000 currently remains outstanding. The Project No. 11 2010A Loan matures on September 1, 2033. In November 2010, the Authority issued its Tax Allocation Bonds (1999 Series A Refunding), 2010 Series C (the "Authority 2010C Bonds "). Proceeds of the Authority 2010C Bonds were also loaned, in part, by the Authority to the Agency pursuant to a Project 11 Loan Agreement, dated as of November I, 2010 (the "Project No. 11 2010C Loan Agreement "). The loan pursuant to the Project No. II 2010C Loan Agreement (the "Project No. II 2010C Loan ") was in the principal amount of $13,215,000 all of which currently remains outstanding. The Project No. 11201 OA Loan matures on September 1, 2030. (collectively the Project 1120 1 OA Loan and the Project 1120 1 OC loan are referred to herein as the "Prior Project 11 Loans). The pledge of Redevelopment Project No. 11 Tax Revenues is on a subordinate basis with any payments required under the Prior Project 11 Loans. No additional obligations on a parity with the Prior Project II Loans are authorized except for refunding purposes. Redevelopment Project III Bonds Authorization. The Authority will be acquiring the previously issued Redevelopment Project III Bonds in the amount of $1,350,000. The Redevelopment Project Ill Bonds were authorized by Resolution of the Agency and issued on April 13, 2011. The Agency has pledged a lien on Redevelopment Project No. III Tax Revenues to the repayment of the Redevelopment Project III Bonds. "Redevelopment Project No. III Tax Revenues" consist of Tax Increment Revenues from the Agency's Redevelopment Project No. 111, excluding (i) amounts required to be deposited into the Agency's Low and Moderate Income Housing Fund, (ii) the SB 2557 County Administrative fees and collection charges and (iii) amounts required to be paid pursuant to certain Pass - Through Agreements (as this term is defined herein) (see "SOURCES OF PAYMENT FOR THE BONDS," `BONDOWNERS' RISKS" and "TAX INCREMENT REVENUES" herein). The pledge of Redevelopment Project No. III Tax Revenues is on a subordinate basis with any payments required under a prior obligation of the Agency (the "Prior Project III Loan ") (see "Prior Project 111 Loan" below). Debt service on the Redevelopment Project III Bonds and the Prior Project No. III Loan is estimated to be covered by Redevelopment Project No. III Tax Revenues by a ratio of approximately 2.80 to 1. In addition, in the event there is not sufficient Redevelopment Project No. Il Tax Revenues to pay debt service on the Redevelopment Project III Bonds, the Agency has covenanted to make an interfund loan from Redevelopment Project No. I, Redevelopment Project No. 11 and the Low and Moderate Income Housing Fund (see "SOURCES OF PAYMENT FOR THE BONDS — REPAYMENT OF THE AGENCY BONDS — Pledge of Tax Revenues" herein). Prior Project III Loan In February 2010, the Authority issued its Tax Allocation Bonds (1999 Series C Refunding), 2010 Series A (the "Authority 2010A Bonds "). Proceeds of the Authority 2010A Bonds were also loaned, in part, by the Authority to the Agency pursuant to a Project III Loan Agreement, dated as of February 1, 2010 (the "Project No. III 2010A Loan Agreement "). The loan pursuant to the Project No. III 2010A Loan Agreement (the "Project No. III 2010A Loan ") was in the principal amount of $2,075,000 of which $1,980,000 currently remains outstanding. The Project No. III 2010A Loan matures on September 1, 2033. No additional obligations on a parity with the Prior Project III Loan are authorized except for refunding purposes. Financing Purpose of the Agency Bonds On March 8, 2011, the Agency approved the Amended and Restated Disposition and Development Agreement (the °Summerly DDA ") with McMillin Summerly LLP (the "Developer ") concerning development of the Summerly Residential Project ( "Summerly Project ") within the Eastlake Specific Plan Page 97 of 195 area of the City. The Summerly Project is a 1,489 lot planned community in Redevelopment Project Nos. 11 and 111. The DDA provides that the Developer is entitled to reimbursement for extraordinary infrastructure costs related to the Summerly Project of up to $19 million. Proceeds of the Agency Bonds deposited into the Improvement Fund will be to acquire certain completed infrastructure within the Summerly Project. SECURITY AND SOURCES OF REPAYMENT The Bonds The Bonds are secured under an Indenture of Trust, dated as of June 1, 2011 (the "Indenture "), between the Authority and Union Bank, N.A., Los Angeles, California, as trustee (the "Trustee ") (see "APPENDIX A - SUMMARY OF THE INDENTURE "). The Bonds are special obligations of the Authority payable solely from and secured by the proceeds of: (i) Payment of the Agency Bonds to be acquired by the Authority with the proceeds of the Bonds; (ii) The Reserve Account established with the proceeds of the Bonds and held pursuant to the Indenture (see "SOURCES OF PAYMENT FOR THE BONDS — REPAYMENT OF THE BONDS - Reserve Account' herein); and (iii) Any investment earnings with respect to such moneys. (collectively, the "Revenues "). The Bonds are special obligations of the Authority. The Bonds do not constitute a debt or liability of the City, the State of California (the "State ") or of any political subdivision thereof, other than the Authority. The Authority shall be obligated to pay the principal of the Bonds, and the interest thereon, only from the funds described herein, and neither the faith and credit nor the taxing power of the City, the State or any of its political subdivisions is pledged to the payment of the principal of or the interest on the Bonds. The Authority has no taxing power. The Agency Bonds The Agency Bonds were issued pursuant to an Indenture of Trust, dated as of April 1, 2011 (the "Agency Indenture "), between the Authority and Union Bank, N.A., Los Angeles, California, as trustee (the "Agency Trustee ") (see "APPENDIX B - SUMMARY OF THE AGENCY INDENTURE "). Repayment of the Agency Bonds will be from: 1. Tax Revenues attributable to the Redevelopment Project to which such Agency Bond relates (see "THE AGENCY BONDS" above); and 2. Interfund loans with respect to the redevelopment projects of the Agency to the extent of available surplus revenues as described herein (see "SOURCES OF PAYMENT FOR THE BONDS — REPAYMENT OF THE AGENCY BONDS" herein). The Agency Bonds are limited obligations of the Agency. The Agency Bonds do not constitute a debt or liability of the State or of any political subdivision thereof, other than the Agency. The Agency shall be obligated to pay the principal of the Agency Bonds, and the interest thereon, only from the funds described herein, and neither the faith and credit nor the taxing power of the City, the State or any of its political subdivisions is pledged to the payment of the principal of or the interest on the Agency Bonds. The Agency has no ad valorem taxing power. Page 98 of 195 REDEMPTION OF THE BONDS Mandatory Redemption from Optional Prepayments of the Agency Bonds The Bonds are subject to mandatory redemption from optional prepayments under the Indenture prior to maturity, in whole or in part, on a pro rata basis among maturities (as nearly as practicable) and by lot within a maturity, on September 1, 2016, and on any date thereafter, at a redemption price equal to the principal amount thereof, plus accrued interest to the date of redemption, as described herein (see "THE BONDS - REDEMPTION — Mandatory Redemption From Optional Prepayments of the Agency Bonds" herein). Mandatory Sinking Payment Redemption The Bonds maturing September 1, 2033, and September 1, 2038, are subject to mandatory sinking payment redemption, without premium, prior to their maturity date, in part by lot on September 1 in each year commencing September 1, 2022, in the case of the Bonds maturing September 1, 2033, and September 1, 2034, in the case of the Bonds maturing September 1, 2038, from mandatory sinking payments under the Indenture (see "THE BONDS - REDEMPTION — Mandatory Sinking Payment Redemption" herein). THE BONDS GENERAL PROVISIONS Registration, Transfer and Exchange The Bonds will be issued in fully- registered form without coupons. Any Bond may, in accordance with its terms, be transferred or exchanged, pursuant to the provisions of the Indenture (see "TILE BONDS - GENERAL PROVISIONS - Transfer or Exchange of Bonds" herein). When delivered, the Bonds will be registered in the name of The Depository Trust Company, New York, New York ( "DTC "), or its nominee. DTC will act as securities depository for the Bonds. Individual purchases of Bonds will be made in book - entry form only in the principal amount of $5,000 or any integral multiple thereof. Purchasers of beneficial interests in the Bonds will not receive certificates representing their ownership interests in Bonds purchased (see "APPENDIX G — DTC AND BOOK - ENTRY —ONLY SYSTEM "). Payment Principal of the Bonds and any premium upon redemption will be payable in each of the years and in the amounts set forth on the inside cover page hereof upon surrender at the corporate trust office of the Trustee in Los Angeles, California. Interest on the Bonds will be paid by check of the Trustee mailed by first -class mail on the Interest Payment Date (as defined in the Indenture) to the person entitled thereto (except as otherwise described herein for interest paid to an account in the continental United States of America by wire transfer as requested in writing no later than the applicable Record Date (as defined in the Indenture) by owners of $1,000,000 or more in aggregate principal amount of Bonds) (see "THE BONDS - GENERAL PROVISIONS" herein). Initially, interest on and principal and premium, if any, of the Bonds will be payable when due by wire of the Trustee to DTC which will, in turn, remit such interest, principal and premium, if any, to DTC's Direct Participants (as defined herein), which will, in turn, remit such interest, principal and premium, if any, to Beneficial Owners (as defined herein) of the Bonds (see "APPENDIX G — DTC AND BOOK - ENTRY -ONLY SYSTEM")- Notice Notice of any redemption will be mailed by first -class mail by the Trustee at least thirty (30) but no more than sixty (60) days prior to the date fixed for redemption to the registered owners of any Bonds designated for redemption and to the Securities Depositories and one or more Information Services provided in the Indenture. Neither failure to receive such notice nor any defect in the notice so mailed will affect the sufficiency of the proceedings for redemption of such Bonds or the cessation of accrual of interest on the redemption date (see "THE BONDS - REDEMPTION - Notice of Redemption; Rescission" herein). Page 99 of 195 The Authority shall have the right to rescind any optional redemption by written notice to the Trustee on or prior to the date fixed for redemption. Any notice of optional redemption shall be cancelled and annulled if for any reason funds will not be or are not available on the date fixed for redemption for the payment in full of the Bonds then called for redemption, and such cancellation shall not constitute an Event of Default under the Indenture. LEGAL MATTERS The legal proceedings in connection with the issuance of the Bonds are subject to the approving opinion of Fulbright & Jaworski L.L.P., Los Angeles, California, as Bond Counsel ( "Bond Counsel "). Such opinion, and certain tax consequences incident to the ownership of the Bonds, including certain exceptions to the tax treatment of interest, are described more fully under the heading "LEGAL MATTERS" herein. Certain legal matters will be passed on for the City and the Agency by Leibold, McClendon & Mann, P.C., Laguna Hills, California, as City Attorney and Agency Counsel and by Fulbright & Jaworski L.L.P., Los Angeles, California, as Disclosure Counsel. Certain legal matters will be passed on for the Underwriter by McFarlin & Anderson LLP, Lake Forest, California. PROFESSIONAL SERVICES Union Bank, N.A., Los Angeles, California, will serve as Trustee under the Indenture. The Trustee will act on behalf of owners of the Bonds (the "Bondowners ") for the purpose of receiving all moneys required to be paid to the Trustee, to allocate, use and apply the same, to hold, receive and disburse the Revenues and other funds held under the Indenture, and otherwise to hold all the offices and perform all the functions and duties provided in the Indenture to be held and performed by the Trustee. Rod Gunn Associates, Inc., Huntington Beach, California, Financing Consultant (the "Financing Consultant "), advised the Authority as to the financial structure and certain other financial matters relating to the Bonds and assisted the Authority and the Agency with the preparation of this Official Statement. HdL Coren & Cone, Diamond Bar, California (the "Fiscal Consultant "), prepared the Fiscal Consultant Report containing certain background information on the Agency and Redevelopment Project No. I, including the projection of Tax Revenues used in sizing and structuring the Loan. See "APPENDIX C - FISCAL CONSULTANT REPORT" for more complete information regarding Tax Revenues. Fees payable to Bond Counsel, Disclosure Counsel, Underwriter's Counsel and the Financing Consultant are contingent upon the sale and delivery of the Bonds. FINANCIAL STATEMENTS The Agency's financial statements for the fiscal year ended June 30, 2010, are attached hereto as "APPENDIX D" and have been audited by Diehl, Evans & Company, LLP, Certified Public Accountants & Consultants, Irvine, California. The Agency's audited financial statements are public documents and are included within this Official Statement without the prior approval of the auditor. The auditor has not performed any post -audit of the financial condition of the Agency. The Agency represents that there have been no material adverse changes in its financial position since June 30, 2010. CONTINUING DISCLOSURE The Agency has undertaken all responsibilities for any required continuing disclosure to Bondowners as described below. The Authority shall have no liability to the Bondowners or any other person with respect to such disclosures provided by the Agency. The Agency will covenant to provide annually certain financial information and operating data relating to Redevelopment Project No.1 by not later than February 15 of each year, commencing February 15, 2012, and to provide the audited financial statements of the Agency for the fiscal year ending June 30, 2011, and for each subsequent fiscal year when they are available (together, the "Annual Report"), and to provide notices of the occurrence of certain other enumerated events. The Annual Report and the notice of enumerated events will be filed by the Trustee, acting as dissemination agent, on behalf of the Agency Page 100 of 195. with the Municipal Securities Rulemaking Board ( "MSRB ") in an electronic format as prescribed by the MSRB. The specific nature of the information to be contained in the Annual Report or the notices of enumerated events and certain other terms of the continuing disclosure obligation are summarized in "APPENDIX E - FORM OF CONTINUING DISCLOSURE AGREEMENT." The Agency has not previously failed to comply with any undertaking to provide any required continuing disclosure. AVAILABILITY OF LEGAL DOCUMENTS The summaries and references contained herein with respect to the Indenture, the Bonds, the Agency Indenture, the Agency Bonds and other statutes or documents do not purport to be comprehensive or definitive and are qualified by reference to each such document or statute, and references to the Bonds are qualified in their entirety by reference to the form thereof included in the Indenture. Copies of the documents described herein are available for inspection during the period of initial offering of the Bonds at the offices of the Underwriter, O'Connor & Company Securities, Inc., 250 Newport Center Drive, Suite 303, Newport Beach, California, 92660 (949) 706 -0444. Copies of these documents may be obtained after delivery of the Bonds from the City at 130 S. Main Street, Lake Elsinore, California 92530, telephone (951) 674 -3124. 10 Page 101 of 195 SELECTED ESSENTIAL FACTS The following summary does not purport to be complete. Reference is hereby made to the complete Official Statement in this regard. THE BONDS Principal Amount of Bonds: $4,915,000* Additional Bonds: No Additional Bonds are authorized to be secured by the Agency Bonds except bonds issued to refund the Bonds. However, the Agency is authorized to issue additional indebtedness secured by the Tax Revenues on a parity with the Agency Bonds, and the Authority may issue bonds to acquire the additional indebtedness of the Agency. When and if issued, the Bonds and such additional bonds of the Authority would be secured by separate indebtedness of the Agency which in turn, will be secured by the same Tax Revenues on a parity with each other (see "SOURCES OF PAYMENT FOR THE BONDS — ISSUANCE OFADDITIONAL DEBT" herein). First Optional Redemption Date: September 1, 2016, at 100% of principal amount (see "TI3E BONDS REDEMPTION — Mandatory Redemption From Optional Prepayments of the Agency Bonds" herein). Primary Source of Revenues for Repayment: The Bonds are repayable from Revenues, as defined herein, which primarily consist of repayment of the Agency Bonds (see "SOURCES OF PAYMENT FOR THE BONDS" and "BONDOWNERS' RISKS" herein). Priority: All the Bonds are equally secured by a first pledge of and lien on the Revenues as described herein (see "SOURCES OF PAYMENT FOR THE BONDS — REPAYMENT OF THE BONDS" and "BONDOWNERS' RISKS "). Debt Service Coverage from Repayment of 100% the Agency Bonds (see "THE AUTHORITY — DEBT SERVICE PAYMENTS ON THE LOAN AND DEBT SERVICE COVERAGE ON THE AUTHORITY BONDS" herein): * Preliminary, subject to change. Page 102 of 195 THE AGENCY BONDS Redevelopment Project 11 Bonds Principal Amount of the Redevelopment Project $3,260,000 II Bonds: Outstanding Principal Amount of the Project $5,300,000 No. 1120 1 OA Loan: Outstanding Principal Amount of the Project $13,215,000 No. 11201 OC Loan: Additional Indebtedness: Additional indebtedness on a parity with the Redevelopment Project II Bonds is permitted subject to certain conditions (see "SOURCES OF PAYMENT FOR THE BONDS — ISSUANCE OF ADDITIONAL DEBT" herein). Primary Source of Revenues for Repayment of the Redevelopment Project 11 Bonds: No additional indebtedness senior to the Redevelopment Project 11 Bonds is allowed (other than to refund the Project No. 11 2010A Loan and the 2010C Loan). Redevelopment Project No. 11 Tax Revenues. (see "TAX INCREMENT REVENUES" herein). Priority: The Agency has pledged a lien on Redevelopment Project No. 11 Tax Revenues, on a subordinate basis to the Project No. 11 2010A Loan and the Project No. Il 2010C Loan (see "SOURCES OF PAYMENT FOR THE BONDS" and "BONDOWNERS' RISKS" herein). Minimum Ratio of Estimated Redevelopment 219% (see "TAX INCREMENT REVENUES - Project No. 11 Tax Revenues in any Fiscal PROJECTED TAX REVENUES AND DEBT SERVICE Year to Maximum Annual Debt Service on COVERAGE" herein). the Redevelopment Project II Bonds, Project No. IIA Loan and the Project No. II 2010C Loan: Interfund Loans: In the event there are not sufficient Redevelopment Project No. II Tax Revenues to pay debt service on the Project No. II Loan, the Agency has covenanted to make an interfund loan from Redevelopment Project No. I, Redevelopment Project No. III and the Low and Moderate Income Housing Fund (see "SOURCES OF PAYMENT FOR THE BONDS — REPAYMENT OF THE AGENCY BONDS — Pledge of Tax Revenues" herein). 12 Page 103 of 195 Redevelopment Project III Bonds Principal Amount of the Redevelopment Project $1,350,000 III Bonds: Outstanding Principal Amount of the Project $1,980,000 No. 1112010A Loan: Additional Indebtedness: Additional indebtedness on a parity with the Redevelopment Project III Bonds is permitted subject to certain conditions (see "SOURCES OF PAYMENT FOR THE BONDS — ISSUANCE OF ADDITIONAL DEBT" herein). Primary Source of Revenues for Repayment of the Redevelopment Project III Bonds: Priority: No additional indebtedness senior to the Redevelopment Project II Bonds is allowed (other than to refund the Project No. III 2010A Loan). Redevelopment Project No. III Tax Revenues. (see "TAX INCREMENT REVENUES" herein). The Agency has pledged a lien on Redevelopment Project No. III Tax Revenues, on a subordinate basis to the Project III 2010A Loan (see "SOURCES OF PAYMENT FOR THE BONDS" and `BONDOWNERS' RISKS" herein). Minimum Ratio of Estimated Redevelopment 280% (see "TAX INCREMENT REVENUES - Project No. III Tax Revenues in any Fiscal PROJECTED TAX REVENUES AND DEBT SERVICE Year to Maximum Annual Debt Service on COVERAGE" herein). the Redevelopment Project III Bonds and the Project No. III 2010A Loan: Interfund Loans: In the event there are not sufficient Redevelopment Project No. III Tax Revenues to pay debt service on the Project No. III Loan, the Agency has covenanted to make an interfund loan from Redevelopment Project No. 1, Redevelopment Project No. 11 and the Low and Moderate Income Housing Fund (see "SOURCES OF PAYMENT FOR THE BONDS — REPAYMENT OF THE AGENCY BONDS — Pledge of Tax Revenues ues" herein). . 13 Page 104 of 195 THE REDEVELOPMENT PROJECTS Redevelopment Project No. 11 Year Established: Last Date to Receive Tax Increment Revenues: Size (in Acres): Ten Largest Taxpayers (expressed as a percentage of total Secured and Unsecured 2010 -11 Assessed Value): Land Use as a percentage of 2010 -11 Fiscal Year Assessed Value: Redevelopment Project No. III Year Established: Last Date to Receive Tax Increment Revenues: Size (in Acres): Ten Largest Taxpayers (expressed as a percentage of total Secured and Unsecured 2009 -10 Assessed Value): Land Use as a percentage of 2009 -10 Fiscal Year assessed value: 14 1983 July 18, 2034 4,859 Acres (2,398.13 acres (4935 %) are vacant) 13.52% (see "THE REDEVELOPMENT PROJECTS - REDEVELOPMENT PROJECT NO. 11 — Top Ten Taxable Property Owners" herein). Residential 59.8 %, Commercial 20.6 %, Industrial 4.4 %, Vacant Land 11.2 %, Other 4.0% (see "THE REDEVELOPMENT PROJECTS - REDEVELOPMENT PROJECT NO. II — Assessed Values By Land Use" herein). 1987 September 8, 2038 3,540 Acres (1,151.73 acres are vacant) 12.47% (see "THE REDEVELOPMENT PROJECTS - REDEVELOPMENT PROJECT No. Ill — Top Ten Taxable Property Owners" herein). Residential 66.5 %, Commercial 2.8 %, Industrial 03 %, Vacant Land 27.0 %, Other 3.4% (see "THE REDEVELOPMENT PROJECTS - REDEVELOPMENT PROJECT NO. III — Assessed Value By Land Use" herein). Page 105 of 195 ESTIMATED SOURCES AND USES OF FUNDS THE BONDS Proceeds from the sale of the Bonds will be used to acquire the Agency Bonds in the aggregate principal amount indicated below. Under the provisions of the Indenture, the Trustee will receive the proceeds from the sale of the Bonds and will apply them as follows: Sources of Funds Principal Amount of the Bonds Original Issue Discount Underwriter's Discount Net Bond Proceeds Uses of Funds Acquisition Fund 01 Costs of Issuance Fund (2) Reserve Account (3) Total (1) To be used to acquire the Agency Bonds. (2) Amounts in the Costs of Issuance Fund will be used to pay fees and expenses of Bond Counsel, the Financing Consultant, Disclosure Counsel, Underwriter's Counsel, Rating Agency Fees and Trustee Fees, printing costs and other costs associated with the issuance of the Bonds. (5) An amount equal to the Reserve Requirement (see "SOURCES OF PAYMENT FOR THE BONDS — REPAYMENT OF THE BONDS — Reserve Account "). 15 Page 106 of 195 THE AGENCY BONDS Under the provisions of the Agency Indenture, the Trustee will receive the proceeds of the Agency Bonds and will apply or credit them as follows: Redevelopment Redevelopment Proiect II Bonds Proiect. III Bonds Sources of Funds Principal Amount of the Agency Bonds Less Authority Discount Total Available Funds Uses of Funds Improvement Fund m Costs of Issuance (2) Total To be used to acquire extraordinary infrastructure under the Summerly DDA (see "INTRODUCTORY STATEMENT —THE AGENCY BONDS — Financing Purpose of the Agency Bonds "). «� Costs of Issuance include fees of Bond Counsel, Agency Counsel, the Financing Consultant, the Fiscal Consultant, the Trustee and other costs related to the Agency Bonds. 16 Page 107 of 195 THE BONDS GENERAL PROVISIONS Repayment of the Bonds Interest is payable on the Bonds at the rates per annum set forth on the inside cover page hereof. Interest with respect to the Bonds will be computed on the basis of a year consisting of 360 days and twelve 30- day months. Each Bond will be dated as of the closing date, and interest with respect thereto will be payable from the Interest Payment Date next preceding the date of authentication thereof, unless (a) it is authenticated on or before an Interest Payment Date and after the close of business on the preceding Record Date, in which event it shall bear interest from such Interest Payment Date; (b) it is authenticated on or before August 15, 2011, in which event interest thereon will be payable from the closing date; or (c) interest on any Bond is in default as of the date of authentication, in which event interest thereon will be payable from the date to which interest has been paid in full, payable on each Interest Payment Date. Interest on the Bonds will be payable by check of the Trustee mailed by first -class mail on the applicable Interest Payment Date to the person appearing on the registration books as the owner thereof, initially Cede & Co., or by wire transfer made on such Interest Payment Date to any owner of $1,000,000 or more in aggregate principal amount of outstanding Bonds, who shall have requested such transfer pursuant to written instructions provided prior to the applicable Record Date to the Trustee. The owners of the Bonds shown on the registration books on the Record Date for the Interest Payment Date will be deemed to be the owners of the Bonds on said Interest Payment Date for the purpose of the paying of interest. Principal of the Bonds and any premium upon early redemption is payable upon presentation and surrender thereof, at the corporate trust office of the Trustee in Los Angeles, California. Transfer or Exchange of Bonds Any Bond, in accordance with its terms, may be transferred or exchanged, pursuant to the provisions of the Indenture, upon surrender of such Bond for cancellation at the corporate trust office of the Trustee. Whenever any Bond or Bonds shall be surrendered for transfer or exchange, the Trustee shall authenticate and deliver a new Bond or Bonds for like aggregate principal amount or maturity amount of authorized denominations. The Trustee is not required to transfer or exchange any Bonds or portions thereof during the period established by the Trustee for selection of Bonds for redemption, or any Bonds selected for redemption. The cost of printing Bonds and any services rendered or expenses incurred by the Trustee in connection with any transfer shall be paid by the Authority. Bonds Mutilated, Lost, Destroyed or Stolen If any Bond becomes mutilated, the Authority, at the expense of the Bondowner, will execute, and the Trustee will thereupon authenticate and deliver, a new Bond of like series and tenor in exchange and substitution for the Bond so mutilated, but only upon surrender to the Trustee of the Bond so mutilated. Every mutilated Bond so surrendered to the Trustee will be canceled by it. If any Bond is lost, destroyed or stolen, evidence of such loss, destruction or theft may be submitted to the Trustee and, if such evidence is satisfactory to the Trustee and indemnity for the Trustee and the Authority satisfactory to the Trustee shall be given, the Authority, at the expense of the Bondowner, will execute, and the Trustee will thereupon authenticate and deliver, a new Bond of like series and tenor in lieu of and in replacement for the Bond so lost, destroyed or stolen (or if any such Bond has matured or has been called for redemption, instead of issuing a replacement Bond, the Trustee may pay the same without surrender thereof upon receipt of indemnity satisfactory to the Trustee). The Trustee may require payment of a fee for preparing and authenticating each new Bond issued pursuant to the Indenture. Any Bond issued under the 17 Page 108 of 195 provisions of the Indenture in lieu of any Bond alleged to be lost, destroyed or stolen will be entitled to the benefits of the Indenture with all other Bonds secured by the Indenture. REDEMPTION Mandatory Redemption from Optional Prepayments of the Agency Bonds The Bonds are subject to mandatory redemption from optional prepayments prior to maturity on any date on or after September 1, 2016, as a whole or in part, on a pro rata basis among maturities (as nearly as practicable) and by lot within a maturity, from prepayments of the Agency Bonds by the Agency of all or any portion of the Agency Bonds at 100% of the principal amount of the Bonds to be redeemed, together with accrued interest thereon to the date fixed for redemption. Mandatory Sinking Payment Redemption The Bonds maturing on September 1, 2033, and September 1, 2038, are subject to mandatory redemption, in part by lot, on September 1 in each year commencing September 1, 2022, in the case of the Term Bonds maturing September 1, 2033, and September 1, 2034, in the case of the Term Bonds maturing September 1, 2038, from mandatory sinking payments made by the Authority pursuant to the Indenture at a redemption price equal to the principal amount thereof to be redeemed, without premium, plus accrued interest thereon to the date of redemption as set forth in the following schedule; provided, however, that (i) in lieu of redemption thereof, the Bonds may be purchased by the Authority and tendered to the Trustee, and (ii) if some but not all of the Bonds have been redeemed pursuant to mandatory redemption from optional prepayments provisions described herein, the total amount of all future sinking payments will be reduced by the aggregate principal amount of the Bonds so redeemed, to be allocated among such sinking payments on a pro rata basis (as nearly as practicable) in integral multiples of $5,000 as determined by the Authority. SCHEDULE OF MANDATORY SINKING PAYMENT REDEMPTIONS TERM BONDS MATURING SEPTEMBER 1, 2033 September 1 Principal September 1 Principal Year Amount* Year Amount* 2022 2028 2023 2029 2024 2030 2025 2031 2026 2032 2027 2033 SCHEDULE OF MANDATORY SINKING PAYMENT REDEMPTIONS TERM BONDS MATURING SEPTEMBER 1, 2038 September 1 Principal September 1 Principal Year Amount* Year Amount* 2034 2037 2035 2038 2036 * Preliminary, subject to change. 18 Page 109 of 195 Notice of Redemption; Rescission When redemption is authorized or required, written notice of redemption is required to be mailed by the Trustee to the respective Owners of any Bonds designated for redemption at their addresses appearing on the bond registration books, to the Securities Depositories, and to the Information Services, all as provided in the Indenture, by first -class mail, postage prepaid, no less than thirty (30), nor more than sixty (60) days prior to the date fixed for redemption. Neither failure to receive such notice nor any defect in the notice so mailed will affect the sufficiency of the proceedings for redemption of such Bonds or the cessation of accrual of interest on the redemption date. In addition to the foregoing notice, further notice will be given by the Trustee to any Bondowner whose Bond has been called for redemption but who has failed to tender his or her Bond for payment by the date which is sixty (60) days after the redemption date, but no defect in such further notice will in any manner defeat the effectiveness of a call for redemption. If at the time of mailing of any notice of optional redemption there shall not have been deposited with the Trustee moneys sufficient to redeem all the Bonds called for redemption, such notice shall state that it is subject to the deposit of the redemption moneys with the Trustee not later than the opening of business on the redemption date and will be of no effect unless such moneys are so deposited. The Authority shall have the right to rescind any redemption from optional prepayment under the Agency Indenture by written notice to the Trustee on or prior to the date fixed for redemption. Any notice of such redemption shall be cancelled and annulled if for any reason funds will not be or are not available on the date fixed for redemption for the payment in full of the Bonds then called for redemption, and such cancellation shall not constitute an Event of Default under the Indenture. The Authority and the Trustee shall have no liability to the Owners or any other party related to or arising from such rescission of redemption. The Trustee shall mail notice of such rescission of redemption in the same manner as the original notice of redemption was sent. Open Market Purchase of Bonds The Agency may at any time buy Bonds of any series at public or private sale and any Bonds so purchased shall be tendered to the Trustee for cancellation. Selection of Bonds for Redemption Except as otherwise set forth in the Indenture, whenever provision is made in the Indenture for the redemption of less than all of the Bonds of any maturity, the Trustee shall select the Bonds to be redeemed from all Bonds of such maturity not previously called for redemption, by lot in any manner which the Trustee, in its sole discretion, shall deem appropriate. For purposes of such selection, all Bonds shall be deemed to be comprised of separate $5,000 portions and such portions shall be treated as separate Bonds which may be separately redeemed. Effect of Redemption From and after the date fixed for redemption, if funds available for the payment of the principal of and interest (and premium, if any) on the Bonds so called for redemption shall have been duly provided, such Bonds so called shall cease to be entitled to any benefit under the Indenture other than the right to receive payment of the redemption price, and no interest shall accrue thereon from and after the redemption date specified in such notice. All Bonds redeemed pursuant to the Indenture shall be cancelled and destroyed. 19 Page 110 of 195 Partial Redemption In the event only a portion of any Bond is called for redemption, then upon surrender of such Bond the Authority will execute and the Trustee will authenticate and deliver to the Bondowner thereof, at the expense of the Authority, a new Bond or Bonds of the same series and maturity date, of authorized denominations equal in an aggregate principal amount to the unredeemed portion of the Bond to be redeemed. 20 Page 111 of 195 SCHEDULED DEBT SERVICE ON THE BONDS The following table sets forth semi - annual debt service on the Bonds Interest Payment Date Principal Coupon Interest September 1, 2011 March 1, 2012 September 1, 2012 March 1, 2013 September 1, 2013 March 1, 2014 September 1, 2014 March 1, 2015 September 1, 2015 March 1, 2016 September 1, 2016 March 1, 2017 September 1, 2017 March 1, 2018 September 1, 2018 March 1, 2019 September 1, 2019 March 1, 2020 September 1, 2020 March 1, 2021 September 1, 2021 March 1, 2022 September 1, 2022 March 1, 2023 September 1, 2023 March 1, 2024 September 1, 2024 March 1, 2025 September 1, 2025 March 1, 2026 September 1, 2026 March 1, 2027 September 1, 2027 March 1, 2028 September 1, 2028 March 1, 2029 September 1, 2029 March 1, 2030 September 1, 2030 March 1, 2031 September 1, 2031 March 1, 2032 September 1, 2032 March 1, 2033 September 1, 2033 March 1, 2034 September 1, 2034 March 1, 2035 September 1, 2035 March 1, 2036 September 1, 2036 21 Annual Debt Bond Debt Service Service Balance Page 112 of 195 Scheduled Debt Service on the Bonds (Continued) Interest Pavment Date Principal Coupon March 1, 2037 September 1, 2037 March 1, 2038 September 1, 2038 Annual Debt Bond Interest Debt Service Service Balance 22 Page 113 of 195 SCHEDULED DEBT SERVICE ON THE REDEVELOPMENT PROJECT II BONDS The following table sets forth semi - annual debt service on the Redevelopment Project 11 Bonds. Annual Debt Bond Interest Payment Date Principal Coupon Interest Debt Service Service Balance March 1, 2011 September 1, 2011 March 1, 2012 September 1, 2012 March 1, 2013 September 1, 2013 - March 1, 2014 September 1, 2014 March 1, 2015 September 1, 2015 March 1, 2016 September 1, 2016 March 1, 2017 September 1, 2017 March 1, 2018 September 1, 2018 March 1, 2019 September 1, 2019 March 1, 2020 September 1, 2020 March 1, 2021 September 1, 2021 March 1, 2022 September 1, 2022 March 1, 2023 September 1, 2023 March 1, 2024 September 1, 2024 March 1, 2025 September 1, 2025 March 1, 2026 September 1, 2026 March 1, 2027 - September 1, 2027 March 1, 2028 September 1, 2028 March 1, 2029 September 1, 2029 March 1, 2030 September 1, 2030 March 1, 2031 September 1, 2031 March 1, 2032 September 1, 2032 March 1, 2033 September 1, 2033 23 Page 114 of 195 SCHEDULED DEBT SERVICE ON THE REDEVELOPMENT PROJECT III BONDS The following table sets forth semi - annual debt service on the Redevelopment Project III Bonds. Annual Debt Bond Interest Payment Date Principal Coupon Interest Debt Service Service Balance September 1. 2011 March 1, 2012 September 1. 2012 March 1. 2013 September 1. 2013 March 1. 2014 September 1. 2014 March 1. 2015 September 1, 2015 March 1, 2016 September 1, 2016 March 1, 2017 September I, 2017 March 1. 2018 September 1, 2018 March 1, 2019 September 1, 2019 March 1, 2020 September 1, 2020 March 1, 2021 September 1, 2021 March 1, 2022 September 1, 2022 March 1, 2023 September 1, 2023 March 1, 2024 September 1, 2024 March 1. 2025 September I, 2025 March 1, 2026 September 1, 2026 March 1, 2027 September 1, 2027 March 1, 2028 September 1, 2028 March 1, 2029 September 1, 2029 March 1, 2030 September 1, 2030 March 1, 2031 September 1, 2031 March 1, 2032 September 1, 2032 March 1, 2033 September 1, 2033 March 1, 2034 September 1, 2034 March 1, 2035 September 1, 2035 March 1, 2036 September 1, 2036 24 Page 115 of 195 Scheduled Debt Service on the Redevelopment Project III Bonds (Continued) Annual Debt Bond Interest Payment Date Principal Coupon Interest Debt Service Service Balance March 1, 2037 September 1, 2037 March 1, 2038 September 1, 2038 25 Page 116 of 195 SOURCES OF PAYMENT FOR THE BONDS REPAYMENT OF THE BONDS The Bonds The Bonds are secured under an Indenture of Trust, dated as of June 1, 2011 (the "Indenture "), between the Authority and Union Bank, N.A., Los Angeles, California, as trustee (the "Trustee ") (see "APPENDIX A - SUMMARY OF THE INDENTURE"). The Bonds are special obligations of the Authority payable solely from and secured by the proceeds of: (i) Payment of the Agency Bonds to be acquired by the Authority with the proceeds of the Bonds; (ii) The Reserve Account established with the proceeds of the Bonds and held pursuant to the Indenture (see "SOURCES OF PAYMENT FOR THE BONDS — REPAYMENT OF THE BONDS - Reserve Account' herein); and (iii) Any investment earnings with respect to such moneys. (collectively, the "Revenues "). The Bonds are special obligations of the Authority. The Bonds do not constitute a debt or liability of the State or of any political subdivision thereof, other than the Authority. The Authority shall be obligated to pay the principal of the Bonds and the interest thereon, only from the funds described herein and neither the faith and credit nor the taxing power of the City, the State or any of its political subdivisions is pledged to the payment of the principal of or the interest on the Bonds. The Authority has no taxing power. Reserve Account In order to further secure the payment of principal of and interest on the Bonds, the Trustee is required to deposit in the Reserve Account, under the Indenture, an amount sufficient to maintain the Reserve Requirement on deposit in the Reserve Account. The "Reserve Requirement' means, in respect of any Bond Year (as defined in the Indenture) as computed by the Authority, the least of (i) 10% of the original proceeds of the Bonds, (ii) 125% of the Average Annual Debt Service as of the date of issuance, or (iii) the Maximum Annual Debt Service. In the event that the Agency fails to deposit with the Trustee the full amount required by the Agency Indenture to pay principal and interest due on the Bonds, the Trustee will withdraw from the Reserve Account the difference between the amount required to be on deposit and the amount available on such date. Amounts in excess of the Reserve Requirement will be transferred to the Revenue Fund under the Indenture to be applied as a credit against the next succeeding loan payment under the Agency Indenture (see "ESTIMATED SOURCES AND USES OF FUNDS "). REPAYMENT OF THE AGENCY BONDS Tax Allocation Financing In General. The Redevelopment Law provides a means for financing redevelopment projects based upon an allocation of taxes collected within a redevelopment project. The taxable valuation of a redevelopment project last equalized prior to adoption of the redevelopment plan, or base roll, is established and, except for any period during which the taxable valuation drops below the base year level, the taxing agencies within the redevelopment project thereafter receive the taxes produced by the levy of the then current tax rate upon the base roll. Taxes collected upon any increase in taxable valuation over the base roll (except such portion generated by rates levied to pay voter - approved bonded indebtedness approved by the voters on or after January 1, 1989, for the acquisition or improvement of real property) (herein, the "Tax Increment Revenues ") are allocated to a redevelopment agency and may be pledged by a redevelopment agency to the repayment of any indebtedness incurred in financing or refinancing a redevelopment 26 Page 117 of 195 project. Redevelopment agencies themselves have no authority to levy property taxes and must look specifically to the allocation of taxes produced as above indicated. Allocation of Taxes. As provided in the redevelopment plans of The Redevelopment Projects, and pursuant to Article 6 of Chapter 6 of the Redevelopment Law and Section 16 of Article XVI of the Constitution of the State of California, taxes levied upon taxable property in the Redevelopment Projects each year by or for the benefit of the State of California and any city, county, city and county, district or other public corporation (herein collectively referred to as "taxing agencies ") for fiscal years beginning after the effective date of the Redevelopment Projects are divided as follows: (I) To Taxing Agencies: That portion of the taxes which would be produced by the rate upon which the tax is levied each year by or for each of said taxing agencies upon the total sum of the assessed value of the taxable property in the Redevelopment Projects as shown upon the assessment roll used in connection with the taxation of such property by such taxing agency last equalized, prior to the effective date of the ordinance approving the Redevelopment Projects (or ordinances approving amendments to the redevelopment plan adding to the Redevelopment Projects), shall be allocated to, and when collected shall be paid into the funds of the respective taxing agencies as taxes by or for said taxing agencies on all other property are paid; and (2) To the Agency: Except for the taxes which are attributable to a tax rate levy by a taxing agency for the purpose of producing revenues to repay bonded indebtedness approved by the voters of the taxing agency on or after January 1, 1989, which shall be allocated to and when collected shall be paid to such taxing agency, that portion of said levied taxes each year in excess of the amounts provided in paragraph (1) above, shall be allocated to, and when collected, shall be paid into a special fund of the Agency to pay the principal of and interest on bonds, Loan, moneys advanced to, or indebtedness (whether funded, refunded, assumed, or otherwise) incurred by the Agency to finance or refinance, in whole or in part, redevelopment activities within the Redevelopment Projects. Unless and until the total assessed valuation of the taxable property in the Redevelopment Projects exceeds the total assessed value of the taxable property in The Redevelopment Projects as shown by the last equalized assessment roll referred to in paragraph (1) above, all of the taxes levied and collected upon the taxable property in the Redevelopment Projects shall be paid into the funds of the respective taxing agencies. When said bonds, Loan, advances, and indebtedness, if any, and interest thereon, have been paid, all moneys thereafter received from taxes upon the taxable property in the Redevelopment Projects shall be paid into the funds of the respective taxing agencies as taxes on all other property are paid. The Agency is authorized to make pledges of the portion of taxes mentioned in paragraph (2) above to repay specific advances, Loan and indebtedness as appropriate in carrying out the redevelopment plans of the Redevelopment Projects. Pledge of Tax Revenues Redevelopment Project II Bonds. The Agency has pledged a lien on Redevelopment Project No. 11 Tax Revenues to the repayment of the Redevelopment Project Il Bonds. "Redevelopment Project No. 11 Tax Revenues" consist of Tax Increment Revenues from the Agency's Redevelopment Project No. 11, excluding (i) amounts required to be deposited into the Agency's Low and Moderate Income Housing Fund, (ii) the SB 2557 County Administrative fees and collection charges and (iii) amounts required to be paid pursuant to certain Pass - Through Agreements (as this term is defined herein). The pledge of Redevelopment Project No. II Tax Revenues is on a subordinate basis with any payments required under the Prior Project 11 Loans. In February 2010, the Authority issued its Tax Allocation Revenue Bonds (1999 Series C Refunding), 2010 Series A (the "Authority 2010A Bonds "). Proceeds of the Authority 2010A Bonds were loaned, in part, by the Authority to the Agency pursuant to a Project II Loan Agreement, dated as of February 1, 2010 (the "Project No. 11 2010A Loan Agreement "). The loan pursuant to the Project No. II 2010A Loan Agreement (the "Project No. 11 2010A Loan ") was in the 27 Page 118 of 195 principal amount of $5,505,000 of which $5,300,000 currently remains outstanding. The Project No. Il 2010A Loan matures on September 1, 2033. In November 2010, the Authority issued its Tax Allocation Bonds (1999 Series A Refunding), 2010 Series C (the "Authority 2010C Bonds "). Proceeds of the Authority 2010C Bonds were also loaned, in part, by the Authority to the Agency pursuant to a Project 11 Loan Agreement, dated as of November 1, 2010 (the "Project No. II 2010C Loan Agreement "). The loan pursuant to the Project No. 11 2010C Loan Agreement (the "Project No. 11 2010C Loan ") was in the principal amount of $13,215,000 all of which currently remains outstanding. The Project No. 11201 OA Loan matures on September 1, 2030. In addition, in the event there is not sufficient Redevelopment Project No. II Tax Revenues to pay debt service on the Redevelopment Project 11 Bonds, the Agency has covenanted to make an interfund loan from Redevelopment Project No. I, Redevelopment Project No. III and the Low and Moderate Income Housing Fund (see "SOURCES OF PAYMENT FOR THE BONDS — REPAYMENT OF THE AGENCY BONDS — Pledge of Tax Revenues" herein). Redevelopment Project III Bonds The Agency has pledged a lien on Redevelopment Project No. III Tax Revenues to the repayment of the Redevelopment Project III Bonds. "Redevelopment Project No. III Tax Revenues" consist of Tax Increment Revenues from the Agency's Redevelopment Project No. 111, excluding (i) amounts required to be deposited into the Agency's Low and Moderate Income Housing Fund, (ii) the SB 2557 County Administrative fees and collection charges and (iii) amounts required to be paid pursuant to certain Pass - Through Agreements (as this term is defined herein) (see "SOURCES OF PAYMENT FOR THE BONDS," "BONDOWNERS'RISKS" and "TAX INCREMENT REVENUES" herein). The pledge of Redevelopment Project No. III Tax Revenues is on a subordinate basis with any payments required under the Prior Project III Loan. In February 2010, the Authority issued its Tax Allocation Bonds (1999 Series C Refunding), 2010 Series A (the "Authority 2010A Bonds "). Proceeds of the Authority 2010A Bonds were also loaned, in part; by the Authority to the Agency pursuant to a Project III Loan Agreement, dated as of February I, 2010 (the "Project No. III 2010A Loan Agreement "). The loan pursuant to the Project No. 111 2010A Loan Agreement (the "Project No. III 2010A Loan ") was in the principal amount of $2,075,000 of which $1,980,000 currently remains outstanding. The Project No. III 2010A Loan matures on September 1, 2033. In addition, in the event there is not sufficient Redevelopment Project No. 11 Tax Revenues to pay debt service on the Redevelopment Project III Bonds, the Agency has covenanted to make an interfund loan from Redevelopment Project No. 1, Redevelopment Project No. II and the Low and Moderate Income Housing Fund (see "SOURCES OF PAYMENT FOR THE BONDS — REPAYMENT OF THE AGENCY BONDS — Pledge of Tax Revenues" herein). The Agency Bonds are a limited obligation of the Agency payable solely from Tax Revenues (as defined in the Loan Agreements), and further, from certain funds and accounts created under the Loan Agreements and investment earnings thereon. The Agency Bonds do not constitute a debt or liability of the State or of any political subdivision thereof or a pledge of the faith and credit of the City, the State, or any such political subdivision, other than the Agency. Neither the City, the State nor the Agency shall be obligated to pay the principal of the Agency Bonds, or the interest thereon, except from the funds described herein, and neither the faith and credit nor the taxing power of the City, the State or any of its political subdivisions is pledged to the payment of the principal of or the interest on the Agency Bonds. The Agency has no ad valorem property taxing power. The Loan is a limited obligation of the Agency payable solely from Redevelopment Project No. I Tax Revenues (as defined in the Agency Indenture), and further, from certain funds and accounts created under the Agency Indenture and investment earnings thereon. The Loan does not constitute a debt or liability of the State or of any political subdivision thereof or a pledge of the faith and credit of the City, the State, or any such political subdivision, other than the Agency. Neither the City, the State nor the Agency shall be obligated to pay the principal of the Loan, or the 28 Page 119 of 195 interest thereon, except from the funds described herein, and neither the faith and credit nor the taxing power of the City, the State or any of its political subdivisions is pledged to the payment of the principal of or the interest on the Loan. The Agency has no ad valorem property taxing power. Alternative Method of Tax Apportionment ( "Teeter Plan ") Sections 4701 through 4717 of the California Revenue and Taxation Code permit counties to use a method of apportioning taxes (commonly referred to as the "Teeter Plan ") whereby all local agencies with Historical delinquency rates less that 3 %, including redevelopment agencies, receive from the County 100% of their respective shares of the amount secured ad valorem taxes levied, without regard to actual collections of taxes. Due to this allocation method, the Agency is held harmless from tax delinquencies and, as a consequence, the Agency receives no adjustments for redemption payments of delinquent collections. The unsecured taxes are allocated based on actual unsecured tax collections. The County makes a one -time adjustment for changes in the tax roll in the following year. The County of Riverside has adopted this method of distributing taxes and will continue to do so unless the County Board of Supervisors takes action to discontinue the practice. There is no assurance that the County will continue to allocate tax revenues in this manner. If this method of distributing taxes is discontinued, significant delinquencies in the payment of ad valorem taxes may have an adverse affect on the Agency's ability to make payments under the Loan as such payments come due and payable and accordingly the Authority's ability to pay debt service on the Bonds. ISSUANCE OF ADDITIONAL DEBT The Authority The Authority will not have any indebtedness secured by the Revenues other than the Bonds, except bonds issued to refund the Bonds. However, the Agency is authorized to issue additional obligations secured by Tax Revenues on a parity with the Agency Bonds, and the Authority may issue bonds to acquire the additional obligations of the Agency. When and if issued, each series of bonds of the Authority would be secured by a separate obligation of the Agency. The Agency The Agency has covenanted under the Agency Indenture that it will not issue any obligations senior to the Agency Bonds other than to refund the 2010A Loan and the 2010C Loan. In addition to the Agency Bonds, the Agency may issue or incur Parity Debt (as defined in the Agency Indenture), secured by the respective Redevelopment Project Tax Revenues in such principal amount as shall be determined by the Agency. The Agency may issue and deliver any Parity Debt subject to the following specific conditions which are conditions precedent to the issuance and delivery of such Parity Debt issued under the Agency Indenture: The Agency may only issue or incur Parity Debt on a parity basis with the Bonds subject to the following specific conditions, which are hereby made conditions precedent to the issuance of any such Parity Debt: (a) No Event of Default shall have occurred and be continuing, and the Agency shall otherwise be in compliance with all covenants set forth in this Indenture. (b) The Pledged Tax Revenues received or to be received for the then current Fiscal Year based on the most recent taxable valuation of property in the respective Redevelopment Project as evidenced in a written document from an appropriate official of the County, exclusive of State subvention and taxes levied to pay outstanding bonded indebtedness and assuming no increase in the total assessed valuation of property in the Respective Redevelopment Project shall, immediately following the issuance of such Parity Debt, be at least equal to one hundred twenty -five percent (125 %) of the maximum annual 9 Page 120 of 195 debt service with respect to the respective Agency Bonds and all Parity Debt that will be Outstanding immediately following the issuance of such Parity Debt. (c) The documents authorizing such Parity Debt shall provide that: (1) Interest on such Parity Debt is payable on March I and September I in each year of the term of such Parity Debt except the first twelve -month period, during which interest may be payable on either March I or September 1; and (2) The principal of such Parity Debt is payable only on September 1 in any year. (d) The issuance of such Parity Debt shall not cause the Agency to exceed any applicable limitation on tax increment revenues (including any limitation on the time during which tax increment revenues may be received) under the respective Redevelopment Plan. (e) For purposes of determining whether the above Parity Debt coverage tests are satisfied, Tax Revenues will be adjusted to fully reflect any unsubordinated statutory pass- through payments then in effect, at that time taking their maximum percentage of Pledged Tax Revenues. In addition, all petitions to lower assessed values (at the reduced amount requested by the taxpayer) shall be reflected at the prior three years' historical average rate of assessment appeals granted in the coverage calculations. Also, the recorded County assessed valuation of property in the Redevelopment Project shall be adjusted to account for increases due to completed new construction or change of ownership as certified by an Independent Redevelopment Consultant. (f) The Agency shall deliver to the Trustee a Certificate of the Agency certifying that the conditions precedent to the issuance of such Parity Debt set forth in subsections (a), (b), (c), (d) and (e) have been satisfied. (g) The Agency shall make the following assumptions when computing Pledged Tax Revenues for purposes of the above Parity Debt coverage tests, or for any other reason: (1) the tax rate will be 1 % unless any override tax rates extend for the full term of the Indenture; and (2) the average total tax collection percentage of the past three years, rather than that of the present year, will be used (but not over 100 %). In the event such Parity Debt is to be issued solely for the purpose of refunding and retiring any outstanding Bonds, and provided that such issuance does not result in a net increase in the maximum annual debt service with respect to the Bonds and any Parity Debt, and provided the Agency is in compliance with paragraph (d) above, interest and principal payments on the Outstanding Bonds to be so refunded and retired from the proceeds of such Parity Debt being issued shall be excluded from the foregoing computation of maximum annual debt service. Nothing contained in the Indenture shall limit the issuance of any tax allocation bonds of the Agency payable from the Pledged Tax Revenues and secured by a lien and charge on the Pledged Tax Revenues if, after the issuance and delivery of such tax allocation bonds, none of the Bonds theretofore issued hereunder will be Outstanding. In addition, nothing contained in the Indenture shall limit the Agency from incurring any indebtedness secured by the Pledged Tax Revenues and wholly subordinate to the Bonds, provided that such indebtedness does not, and will not cause the Agency to violate any aspect of the respective Redevelopment Plan. Subordinate Debt. The Agency may issue or incur obligations having a lien on the respective Tax Revenues which is subordinate to the pledge of the respective Tax Revenues, provided that the issuance of such obligations will not cause the Agency to exceed any applicable plan limitations. 30 Page 121 of 195 J� Page 122 of 195 BONDOWNERS' RISKS BEFORE PURCHASING ANY OF THE BONDS, ALL PROSPECTIVE INVESTORS AND THEIR PROFESSIONAL ADVISORS SHOULD CAREFULLY CONSIDER, AMONG OTHER THINGS, THE FOLLOWING RISK FACTORS, WHICH ARE NOT MEANT TO BE AN EXHAUSTIVE LISTING OF ALL RISKS ASSOCIATED WITH THE PURCHASE OF THE BONDS. MOREOVER, THE ORDER OF PRESENTATION OF THE RISK FACTORS DOES NOT NECESSARILY REFLECT THE ORDER OF THEIR IMPORTANCE. The purchase of the Bonds involves investment risk. If a risk factor materializes to a sufficient degree, it could delay or prevent payment of principal of and/or interest on the Bonds. Such risk factors include, but are not limited to, the following matters: THE BONDS General The ability of the Authority to pay the principal of and interest on the Bonds depends upon the receipt by the Trustee of sufficient Revenues from repayment of the Loan, amounts on deposit in the Reserve Account and interest earnings on amounts in the funds and accounts for the Bonds established by the Indenture. A number of risks that could adversely impact the security or payment of the Bonds are outlined below. No Liability of the Authority to the Owners Except as expressly provided in the Indenture, the Authority will not have any obligation or liability to the owners of the Bonds with respect to the payment when due of the Loan, or with respect to the observance or performance by the Agency of other agreements, conditions, covenants and terms required to be observed or performed by it under the Loan, the Agency Indenture, the Indenture or any related documents or with respect to the performance by the Trustee of any duty required to be performed by it under the Indenture. No Effective Acceleration on Default In the event of default under the Indenture, as a practical matter, Bondowners will be limited to obtaining the moneys in the Reserve Account and enforcing the obligation of the Agency to repay the Agency Bonds on an annual basis to the extent of the Tax Revenues. No real or personal property in The Redevelopment Projects is pledged to secure the Bonds or the Agency Bonds and it is not anticipated that the Agency will have available moneys sufficient to redeem all of the Bonds or the Agency Bonds in the event of an acceleration resulting from an event of default. Enforceability of Remedies The remedies available to the Trustee and the registered owners of the Bonds upon an event of default under the Indenture or any other document described herein are in many respects dependent upon regulatory and judicial actions which are often subject to discretion and delay. Under existing law and judicial decisions, the remedies provided for under such documents may not be readily available or may be limited. The various legal opinions to be delivered concurrently with the delivery of the Bonds will be qualified to the extent that the enforceability of the legal documents with respect to the Bonds is subject to limitations imposed by bankruptcy, reorganization, insolvency or other similar laws affecting the rights of creditors generally and by equitable remedies and proceedings generally. 32 Page 123 of 195 Investment of Funds The Reserve Account and all other funds held under the Indenture are required to be invested in Permitted Investments as provided in the Indenture (see "APPENDIX A — SUMMARY OF THE INDENTURE „). All investments, including Permitted Investments, authorized by law from time to time for investments by redevelopment agencies contain a certain degree of risk. Such risks include, but not limited to, a lower rate of return than expected, decline in market value and loss or delayed receipt of principal. The occurrence of these events with respect to amounts held under the Indenture, or the funds and accounts held by the Agency could have a material adverse effect on the security for the Bonds and /or the financial condition of the Agency. Secondary Market There can be no guarantee that there will be a secondary market for the Bonds or, if a secondary market exists, that such Bonds can be sold for any particular price. Occasionally, because of general market conditions or because of adverse history or economic prospects connected with a particular issue, secondary marketing practices in connection with a particular issue are suspended or terminated. Additionally, prices of issues for which a market is being made will depend upon then prevailing circumstances. Such prices could be substantially different from the original purchase price. THE AGENCY BONDS Risk Factors Relating to the Reduction of Tax Increment Revenues General. Tax Increment Revenues allocated to the Agency are a portion of the taxes allocated to the Agency each year which are determined by the amount of incremental valuation of taxable property in the Redevelopment Projects, the current rate or rates at which property in the Redevelopment Projects is taxed and the percentage of taxes collected in the Redevelopment Projects. The Agency has no taxing power, nor does the Agency have the power to affect the rate at which property is taxed. At least four types of events that are beyond the control of the Agency could occur and cause a reduction in Tax Increment Revenues arising from the Redevelopment Projects, thereby impairing the ability of the Agency to make payments of principal of and interest and premium (if any) when due on the Agency Bonds and consequently, the Authority's ability to pay debt service on the Bonds. First, a reduction of taxable values of property or tax rates in the Redevelopment Projects or a reduction of the rate of increase in taxable values of property in the Redevelopment Projects caused by economic or other factors beyond the Agency's control (such as a relocation out of the Redevelopment Projects by one or more major property owners, successful appeals by property owners for a reduction in a property's assessed value, a reduction of the general inflationary rate, a reduction in transfers of property, construction activity or other events that permit reassessment of property at lower values, or the destruction of property caused by natural or other disasters, including earthquake) could occur, thereby causing a reduction in Tax Increment Revenues. Second, the California electorate or legislature could adopt limitations with the effect of reducing Tax Increment Revenues payable to the Agency. Such limitation already exists under Article XIIIA of the California Constitution, which was adopted pursuant to the initiative process. For a further description of Article XIIIA, see "PROPERTY TAXATION IN CALIFORNIA — CONSTITUTIONAL AMENDMENTS AFFECTING TAX INCREMENT REVENUES” herein. Third, a reduction in the tax rate applicable to property in the Redevelopment Projects by reason of discontinuation of certain override tax levies in excess of the 1% basic levy will reduce Tax Increment Revenues otherwise available to pay debt service. Such override can be expected to decline over time until it reaches the I% basic levy and may be discontinued at any time, which may cause a reduction in Tax Increment Revenues and consequently Tax Revenues. 33 Page 124 of 195 Fourth, delinquencies in the payment of property taxes by the owners of land in the Redevelopment Projects could have an adverse effect on the Agency's ability to make timely payments of principal of and interest on the Agency Bonds and consequently, the Authority's ability to pay debt service on the Bonds (see "SOURCES OF PAYMENT FOR THE BONDS — REPAYMENT OF THE LOANS — Alternative Method of Tax Apportionment ( "Teeter Plan ")" herein). Tax Increment Revenues allocated to the Agency are distributed throughout the year in installments, with the first major installment in February, a second major installment in May of the succeeding year and a final payment by the end of July in that year. The payments are adjusted to reflect actual collections. Any reduction in Tax Increment Revenues, and, consequently, Tax Revenues, whether for any of the foregoing reasons or any other reason, could have an adverse effect on the Agency's ability to make timely payments of principal of and interest on the Agency Bonds and consequently, the Authority's ability to pay debt service on the Bonds. Reduction in Inflationary Rate. As described in greater detail below, Article XIIIA of the California Constitution (commonly known as Proposition 13) provides that the full cash value basis of real property used in determining taxable value may be adjusted from year to year to reflect the inflationary rate. Following the year a base year value is first enrolled, the base year value is factored annually for inflation. Pursuant to Article XIIIA, section 2(b), and Revenue and Taxation Code Section 51, the percentage increase cannot exceed 2% of the prior year's value. To interpret Section 51, the State Board of Equalization (the "SBE ") promulgated Property Tax Rule 460, General Application. Subdivision (a) of Rule 460 provides the general interpretation of Proposition 13 as follows: (a) Sections 1 and 2 of Article XIIIA of the Constitution provide for a limitation on property taxes and a procedure for establishing the current taxable value of locally assessed real property by reference to a base year full cash value which is then modified annually to reflect increase in the inflation rate not to exceed two percent per year or declines in value from whatever cause. Specifically, with respect to the applicable inflation rate, Rule 460, subdivision (b)(5) states that: (b)(5) INFLATION RATE. For each lien date after the lien date in which the base year value is determined, the full value of real property shall be modified to reflect the percentage change in cost of living, as defined in Section 51 of the Revenue and Taxation Code; provided that such value shall not reflect an increase in excess of 2 percent of the taxable value of the preceding lien date. Because Section 51 does not distinguish between positive and negative changes in the California Consumer Price Index ( "CCPI "), and because Article XIIIA, section 2(b) of the California Constitution specifically provides adjustments based upon reductions in the CCPI, it is the opinion of the SBE that Section 51 requires inflation factor adjustments that may be positive or negative. If positive, the increase is limited to 2 %, however, there is no such limitation to downward adjustments, including instances in which the net change to the CCPI is zero or less than zero percent. Utility property assessed by the SBE may be revalued annually and such assessments are not subject to the inflation limitations of Article XIIIA. The taxable value of personal property is also established on the lien dates and is not subject to the annual two percent limit of locally assessed real property. Secured property includes property on which any property tax levied by a county becomes a lien on that property. Unsecured property typically includes value for tenant improvements, fixtures, inventory and personal property. A tax levied on unsecured property does not become a lien against the taxed unsecured property, but may become a lien on certain other secured property owned by the taxpayer. The taxes levied on unsecured property are levied at the previous year's secured property tax rate. The Fiscal Consultant has based its projections on an adjustment of 0.753% inflation growth for Fiscal Year 2011 -12 and assumed resumption of 2% annual growth thereafter. A 2% growth rate has been assumed by the Fiscal Consultant because it is the maximum inflationary growth rate permitted by law 34 Page 125 of 195 and this rate of growth has been achieved in all but seven years since 1981. The years in which less than 2% growth was realized were 1983 -84 (1.0 %), 1995 -96 (1.19 %), 1996 -97 (1.11 %), 1999 -00 (1.85 %), 2004 -05 (1.87 %), 2009 -10 (0.99763 %) a negative (0.237 %) for Fiscal Year 2010 -11 and 0.753 for Fiscal Year 2011 -12. Should the assessed value of real property not increase at the allowed annual rate of 2 %, the Agency's receipt of future Tax Increment Revenues, may be adversely affected. See "PROPERTY TAXATION IN CALIFORNIA -CONSTITUTIONAL AMENDMENTS AFFECTING TAX INCREMENT REVENUES" herein. Assessment Appeals. An assessee of locally- assessed or state - assessed property may contest the taxable value enrolled by the county assessor or by the SBE, respectively. The assessee of SBE- assessed property or locally- assessed personal property, the valuation of which is subject to annual reappraisal, actually is contesting the determination of the full cash value of property when filing an assessment appeal. Because of the limitations to the determination of the full cash value of locally- assessed real property by Article XIIIA (described herein), however, an assessee of locally- assessed real property generally is contesting only the original determination of the base assessment value of the parcel, i.e., the value assigned after a change of ownership or completion of new construction. At the time of reassessment, after a change of ownership or completion of new construction, the assessee may appeal the base assessment value of the property. Under an appeal of a base assessment value, the assessee appeals the actual underlying market value of the sales transaction or the recently completed improvement. A base assessment appeal has significant future revenue impact because a reduced base year assessment will then reduce the compounded value of the property prospectively. Except for the 2% inflation factor, the value of the property cannot be increased until a change of ownership occurs or additional improvements are added. The taxable value of utility property may be contested by utility companies and railroads to the SBE. Generally, the impact of utility appeals is on the Statewide value of a utility determined by the SBE. As a result, the successful appeal of a utility may not affect the taxable value of a redevelopment project but could affect a redevelopment project's allocation of unitary property taxes. The actual impact on Tax Increment Revenues is dependent upon the actual revised value of assessments resulting from values determined by the Riverside County Assessment Appeals Board or through litigation and the ultimate timing of successful appeals. Because the County Auditor - Controller adjusts revenues to the Agency to reflect roll corrections from successful appeals, the Agency may bear the burden of appeals. The actual valuation impact to the respective Redevelopment Project from successful assessment appeals will occur on the assessment roll prepared after the actual valuation reduction. See "TAX INCREMENT REVENUES — ASSESSMENT APPEALS" for information regarding current appeals and the Fiscal Consultant's assumptions regarding the projection of Tax Revenues. Proposition 8 Adjustments. The assessee of locally- assessed real property also may contest the current assessment value (the base assessment value plus the compounded annual inflation factor) when specified conditions have caused the full cash value to drop below the current assessment value. Pursuant to Section 5 l (b) of the Revenue and Taxation Code, the assessor may place a value on the tax roll lower than the compounded base assessment value, if the full cash value of real property has been reduced by damage, destruction, depreciation, obsolescence, removal of property or other factors causing a decline in the value. Reductions in value pursuant to Section 51(b), commonly referred to as "Proposition 8 appeals," can be achieved either by formal appeal or administratively by assessor staff appraising the property. A reduced full cash value placed on the tax roll does not change the base assessment value. The future impact of a parcel subject to a Proposition 8 appeal is dependent upon a change in the conditions which caused the drop in value. In fiscal years subsequent to a successful Proposition 8 appeal, the assessor may determine that the value of the property has increased as a result of corrective actions or improved market conditions and enroll a value on the tax roll up to the parcel's compounded base assessment value. See "TAX INCREMENT- REVENUES — ASSESSMENT APPEALS - Proposition 8 Adjustments" for information regarding recent Proposition 8 adjustments. 35 Page 126 of 195 Levy and Collection. Neither the Agency nor the Authority has an independent power to levy and collect property taxes. Any reduction in the tax rate or the implementation of any constitutional or legislative property tax decrease could reduce the Tax Increment Revenues and accordingly, could have an adverse impact on the ability of the Agency to pay debt service on the Loan, and, consequently, the Authority's ability to pay debt service on the Bonds. Likewise, delinquencies in the payment of property taxes could have an adverse effect on the Agency's ability to make timely debt service payments. The Agency receives from the County 100% of its respective share of the secured ad valorem taxes levied, without regard to actual collections of taxes (see "SOURCES OF PAYMENT FOR THE BONDS — REPAYMENT OF THE AGENCY BONDS — Alternative Method of Tax Apportionment ( "Teeter Plan „)” herein). Due to this allocation method, the Agency is held harmless from tax delinquencies and, as a consequence, the Agency receives no adjustments for redemption payments of delinquent collections. The unsecured taxes are allocated based on actual unsecured tax collections. The County makes a one -time adjustment for changes in the tax roll in the following year. However, there is no assurance that the County will continue to allocate tax revenues in this manner (see "TAR INCREMENT REVENUES — DELINQUENCIES" and "- FORECLOSURES" herein). Property Owner Bankruptcy. On July 30, 1992, the United States Court of Appeals for the Ninth Circuit issued an opinion in a bankruptcy case entitled In re Glasply Marine Industries holding that ad valorem property taxes levied by a county in the State of Washington after the date that the property owner filed a petition for bankruptcy would not be entitled to priority over the claims of a secured creditor with a prior lien on the property. Similar results were reached by several circuit courts in other circuits. Subsequently, however, Section 362(b)(18) of the Bankruptcy Code (the "Bankruptcy Code ") was enacted, effectively overturning this line of decisions and providing that local governments may rely on statutory property tax liens to secure payment of property taxes even after the filing of a bankruptcy petition. Risk Factors Related to Real Estate Market Conditions Development Risks. Generally, the Agency's ability to pay debt service on the Loan, and, consequently, the Authority's ability to pay debt service on the Bonds, will be dependent upon the economic strength of the Redevelopment Projects. The general economy of the Redevelopment Projects will be subject, in part, to the development risks generally associated with real estate development projects. Projected development within the Redevelopment Projects may be subject to unexpected delays, disruptions and changes. For example, real estate development operations may be adversely affected by changes in general economic conditions, fluctuations in the real estate market, fluctuations in interest rates, unexpected increases in development costs and by other factors. Further, real estate development operations within the Redevelopment Projects could be adversely affected by future governmental policies, including governmental policies to restrict or control development. If projected development in the Redevelopment Projects is delayed or halted, the economy of the Redevelopment Projects could be adversely affected, causing a reduction of the Tax Increment Revenues available to pay debt service on the Agency Bonds and consequently, the Authority's ability to pay debt service on the Bonds. Adiustable Rate and Unconventional Mortgage Structures. Since the end of 2002, many persons have financed the purchase of new homes using loans with little or no down payment and with adjustable interest rates that start low and are subject to being reset at higher rates on a specified date or upon the occurrence of specified conditions. Many of these loans allow the borrower to pay interest only for an initial period, in some cases up to 10 years. Currently, in Southern California, a substantial portion of outstanding home loans are adjustable rate loans which were obtained at historically low interest rates. In the opinion of some economists, the significant increase in home prices in this time period has been driven, in part, by the ability of home purchasers to access adjustable rate and non - conventional loans. Increases in interest rates on new loans, which have resulted in increased loan payments, have contributed to a decrease in home sales as purchasers are unable to qualify for loans with higher interest rates. Such decrease in home sales has resulted in a decrease in home prices. Such reduction in home prices has 36 Page 127 of 195 resulted in recent homebuyers having loan balances that exceed the value of their homes, given their low down payments and small amount of equity in their homes. Furthermore, there has been tightening of underwriting criteria for mortgage loans such that lenders no longer offer 100% financing or require stricter verification, higher income -to -loan ratio, higher credit ratios or some combination of such factors. There has also been tightening of the credit market, especially with respect to the availability of `jumbo" loans. As a result, potential homeowners may have difficulty finding financing and rising interest rates may price potential homeowners out of the market. In addition, many borrowers who purchased homes in recent years may not be able to access replacement financing for their adjustable rate mortgage Loan, which have reset or will soon reset at a significantly higher interest rate, for a number of reasons. Many borrowers have financed 100% of the price of their home with adjustable rate loans. As home values decline, such borrowers may not be able to obtain replacement financing because the outstanding loan balances exceed the value of their homes. For the reasons discussed above, homeowners who purchased their homes with adjustable rate loans may experience difficulty in making their loan payments and paying property taxes levied on their property (see "SOURCES OF PAYMENT FOR THE BONDS — REPAYMENT OF THE LOAN - Alternative Method of Tax Apportionment ( "Teeter Plan ") and "PAX INCREMENT REVENUES— FORECLOSURES" herein). Risk Factors Related to Natural and Man -Made Disasters The value of the assessed property in the Redevelopment Projects in the future could be adversely affected by a variety of factors, particularly those which may affect infrastructure and other public improvements and private improvements on the parcels of assessed property and the continued habitability and enjoyment of such private improvements. Such additional factors include, without limitation, geologic conditions such as earthquakes, topographic conditions such as earth movements, landslides, liquefaction, floods or fires, and climatic conditions such as tornadoes, droughts, and the possible reduction in water allocation or availability. It is possible that one or more of the conditions referenced above may occur and may result in damage to improvements of varying seriousness, that the damage may entail significant repair or replacement costs and that repair or replacement may never occur either because of the cost or because repair or replacement will not facilitate habitability or other use, or because other considerations preclude such repair or replacement. Under any of these circumstances, the value of the assessed property may well depreciate or disappear. According to the Safety Element of the City's General Plan, the City is located in a seismically active region and could be impacted by a major earthquake originating from several faults in the area. Seismic hazards encompass both potential surface rupture and ground shaking. An environmental condition that may result in the reduction in the assessed value of parcels would be the discovery of a hazardous substance that would limit the beneficial use of a property within Redevelopment Project No. I. In general, the owners and operators of a property may be required by law to remedy conditions of the property relating to releases or threatened releases of hazardous substances. The owner may be required to remedy a hazardous substance condition of property whether or not the owner or operator had anything to do with creating or handling the hazardous substance. The effect, therefore, should any of the property within the Redevelopment Projects be affected by a hazardous substance would be to reduce the marketability and value of the property by the costs of remedying the condition, causing a reduction of Tax Revenues available to pay debt service on the the Agency Bonds and consequently, the Authority's ability to pay debt service on the Bonds. Risk Factors Relating to the Agency Bonds and the Redevelopment Law The Agency Bonds are Limited Obligations. The Agency has no power to levy and collect property taxes, and any property tax limitation, legislative measure, voter initiative or provision of additional sources of income to taxing agencies having the effect of reducing the property tax rate must necessarily 37 Page 128 of 195 reduce the amount of Tax Revenues that would otherwise be available to pay the principal of, interest on and premium, if any, on the Agency Bonds and consequently, the Authority's ability to pay debt service on the Bonds. Redevelopment Plan Limitations on Tax Revenues. The Redevelopment Law requires, in certain circumstances, a redevelopment agency to either include in the redevelopment plan or to adopt by ordinance a limitation on the amount of taxes that may be divided and allocated to the redevelopment agency with respect to the Redevelopment Projects. Pursuant to the Redevelopment Law, taxes may not be allocated to a redevelopment agency beyond this limitation except by amendment of the redevelopment plan. The redevelopment plans for the Redevelopment Projects contain such tax increment revenue limitations. In addition, under the provisions of Assembly Bill 1290 ( "AB 1290 "), enacted by the State Legislature in 1993, AB 1290 limits the time a redevelopment agency may pay indebtedness or receive property taxes pursuant to Section 33670 of the Redevelopment Law (see "THE AGENCY — REDEVELOPMENT PLANS — Redevelopment Plan Limitations" herein for the applicable redevelopment plan limitations for Redevelopment Project No. 1). Risk Factors Related to Bankruptcy of the Authority and the Agency The Authority and the Agency are public agencies and, like the City, are not subject to the involuntary procedures of the Bankruptcy Code. The Authority and /or the Agency may seek voluntary protection under Chapter 9 of the Bankruptcy Code. In the event the Authority and /or the Agency were to become a debtor under the Bankruptcy Code, the Authority and/or the Agency would be entitled to all of the protective provisions of the Bankruptcy Code as applicable in a Chapter 9 proceeding. Such a bankruptcy could adversely impact the payments under the Indenture and the Agency Indenture. Among the adverse effects might be: (i) the application of the automatic stay provisions of the Bankruptcy Code, which, until relief is granted, would prevent collection of payments from the Authority and /or the Agency or the commencement of any judicial or other action for the purpose of recovering or collecting a claim against the Authority and /or the Agency; (ii) the avoidance of preferential transfers occurring during the relevant period prior to the filing of a bankruptcy petition; (iii) the occurrence of unsecured or secured debt which may have priority of payment superior to that of the owners of the Bonds; and (iv) the possibility of the adoption of a plan for the adjustment of the Authority's and /or the Agency's debt without the consent of the Trustee or all of the owners of the Bonds, which plan may restructure, delay, compromise or reduce the amount of any claim against the Authority. However, the bankruptcy of the Authority, and not the Agency, should not affect the Trustee's rights under the Agency Indenture. The Authority could still challenge the assignment, and the Trustee and /or the owners of the Bonds may have to litigate these issues in order to protect their interests. Risk Factors Related to State Budget Legislation In connection with its approval of the budget for the 1992 -93, 1993 -94, 1994 -95, 2002 -03, 2003 -04, 2004 -05, 2005 -06, and 2008 -09 Fiscal Years, the State Legislature enacted legislation which, among other things, reallocated funds from redevelopment agencies to school districts by shifting a.portion of each agency's tax increment revenues, net of amounts due to other taxing agencies, to school districts for such fiscal years for deposit in the Educational Revenue Augmentation Fund ( "ERAF "). The amount required to be paid by a redevelopment agency under such legislation was apportioned among all of its redevelopment project areas on a collective basis, and was not allocated separately to individual project areas. In 2008, the State Legislature adopted, and the Governor of the State signed, legislation, Chapter 751, Statutes 2008 (AB t 389) ( "AB 1389 "), that among other things required redevelopment agencies to pay into ERAF in Fiscal Year 2008 -09, prior to May 10, 2009, an aggregate amount of $350 million, of which the Agency was to pay approximately $1,435,000. AB 1389 provides that part of the ERAF obligation of the Agency is calculated based on the gross tax increment revenues received by the Agency and the other part of the ERAF obligation of the Agency is calculated based on net tax increment revenues (after any 38 Page 129 of 195 pass- through payments to other taxing entities). AB 1389 provided that required transfers to ERAF are subordinate to payments on bonds secured by tax increment revenues. AB 1389 provides that in the event a redevelopment agency does not make the required ERAF payment, it shall be prohibited from issuing new bonds, notes, interim certificates, debentures, or other obligations. On April 30, 2009, a California superior court, in California Redevelopment Association a Genest (County of Sacramento) (Case No. 34- 2008- 00028334), held that the required payment by redevelopment agencies into ERAF in Fiscal Year 2008 -09 pursuant to AB 1389 violated the California constitution and invalidated and enjoined the operation of the California Health and Safety Code section requiring such payment. On May 26, 2009, the State did file a notice that it would appeal the decision of the superior court but subsequently dropped its appeal. In connection with various legislation related to the budget for the State for its Fiscal Year 2009 -10, in late July 2009, the State legislature adopted, and the Governor of the State signed, Assembly Bill No. 26 ( "AB 26 ") (the "2009 SERAF Legislation "). The 2009 SERAF Legislation mandates that redevelopment agencies in the State make deposits to the Supplemental Educational Revenue Augmentation Fund ( "SERAF "), that is established in each county treasury throughout the State, in the aggregate amounts of $1.7 billion for Fiscal Year 2009 -10, which were due prior to May 10, 2010, and $350 million for Fiscal Year 2010 -11, which were due prior to May 10, 2011. The California Redevelopment Association along with certain other redevelopment agencies were not successful in challenging the constitutionality of the 2009 SERAF Legislation. An appeal is pending before the Third District Court of Appeal. No assurance can be made that the appeal will be successful. The Agency has estimated that the total amount payable by it pursuant to the 2009 SERAF Legislation for all of its redevelopment project areas will be $6,970,262 for Fiscal Year 2009 -10 and $1,435,054 for Fiscal Year 2010 -11. The Agency has made its 2009 -10 and Fiscal Year 2010 -11 SERAF payments. On January 10, 2011, the Governor released his budget proposals for fiscal year 2011 -12. The proposed budget reflects the Governor's attempt to resolve shortfalls in revenue totaling $25.4 billion for 2010 -11 and 2011 -12. Among a number of proposals to close this budget shortfall is a proposal to disestablish all redevelopment agencies in the State. Under the Governor's proposal, in 2011 -12 existing indebtedness and tax sharing obligations would continue to be paid. Indebtedness is referred to in this proposal as including debt service on bonds and all other contractual obligations of the agency. In addition, $1.7 billion would be taken by the State to reduce its costs for Medi -Cal and the courts system. Housing Set - Aside requirements would be ended and existing Housing Fund balances would be transferred to local housing authorities. Tax increment revenue amounts remaining after payment of debt obligations, tax sharing and the State's take -away would be divided among cities, counties and special districts. Beginning with fiscal year 2012 -13, tax increment revenues would be used first to pay existing debt obligations and all remaining tax increment revenue would be distributed to the taxing entities. Implementation of the proposed budget, including the redevelopment provisions, would require implementing legislation by the Legislature. Draft legislation implementing this proposal was released by the California Department of Finance on February 23, 2011 (the Proposed Legislation). The Proposed Legislation has been formally introduced as Senate Bill 101 and it is being debated in the Legislature as of this date. There is no assurance whether the Proposed Legislation will be enacted in its present form or that it will be enacted at all. Senate Bill 101 was introduced as an urgency measure which requires a two - thirds affirmative vote of both the Senate and the Assembly and would allow the legislation to become effective immediately upon passage and signature by the Governor. If the legislation is included as part of the budget approval package it could be approved by the Legislature with a majority vote and would be still be immediately effective. The language as it exists in Senate Bill 101 is clear that its provisions would be effective as of 39 Page 130 of 195 the date of enactment and would make provision for review and possible reversal of some Agency actions taken prior to the Bill's enactment. There are also provisions that may limit the Agency's future ability to spend the proceeds of the Bonds. It cannot be determined at this time what those limitations might be or if they will be enacted. Senate Bill 101 proposes to implement its purposes using a number of complex provisions that may contain inconsistencies that would need to be revised. The Agency cannot predict what changes may be made to the Proposed Legislation or if similar legislation might be enacted in any form. Similarly, the Agency cannot predict the impact on the Agency or the Bonds of this legislation or any similar legislation that may be enacted. (to Come from Danny Kim why we are clear of State Budget proposals) Information about the State budget and State spending is regularly available from various State offices, including the Department of Finance, the Office of the Legislative Analyst and the State Treasurer. However, none of such information is incorporated by such reference. Risk Factors Related to Assumptions and Projections of Tax Revenues Any reduction in Tax Increment Revenues, whether for any of the foregoing reasons or any other reason, could have an adverse effect on Tax Revenues and on the Agency's ability to make timely payments of principal of, premium, if any, and interest on the Agency Bonds, which is secured by such Tax Revenues. To estimate the total Tax Revenues available to pay debt service on the Agency's obligations, the Fiscal Consultant has made certain assumptions with regard to the assessed valuation in the Redevelopment Projects, future tax rates, and the percentage of taxes collected. See "APPENDIX C —FISCAL CONSULTANT REPORT" for a full discussion of the assumptions underlying the projections set forth herein with respect to Tax Revenues. The Agency believes these assumptions to be reasonable, but to the extent that the assessed valuations, the tax rates, and the percentage of taxes collected are less than the Agency's assumptions, the total Tax Revenues available will, in all likelihood, be less than those projected herein and consequently, the Authority's ability to pay debt service on the Bonds may be adversely affected. See "TAX INCREMENT REVENUES" herein. 40 Page 131 of 195 PROPERTY TAXATION IN CALIFORNIA CONSTITUTIONAL AMENDMENTS AFFECTING TAX INCREMENT REVENUES The Tax Increment Revenues include a portion of the ad valorem taxes levied on real property within the Redevelopment Projects. Article XIIIA of the California Constitution limits the amount of ad valorem tax on real property to I% of "full cash value," as determined by the County Assessor. Article XIIIA defines "full cash value" to mean "the County Assessor's valuation of real property as shown on the 1975 -76 tax bill under "full cash value," or thereafter the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment period." Furthermore, all real property valuation may be increased to reflect the inflationary rate, as shown by the consumer price index, not to exceed 2% per year, or may be reduced in the event of declining property values caused by damage, destruction or other factors. Article XIIIA exempts from the 1 % tax limitation any taxes to repay indebtedness approved by the voters prior to July 1, 1978, and any bonded indebtedness for the acquisition or improvement of real property approved on or after July 1, 1978, by two - thirds of the voters voting on the proposition approving such bonds, and requires a vote of two - thirds of the qualified electorate to impose special taxes, while totally precluding the imposition of any additional ad valorem, sales or transaction tax on real property. In addition, Article XIIIA requires the approval of two - thirds of all members of the State legislature to change any State tax law resulting in increased tax revenues. Article XIIIB of the California Constitution limits the annual appropriations from the proceeds of taxes of the State and any city, county, school district, authority or other political subdivision of the State to the level of appropriations for the prior fiscal year, as adjusted for changes in the cost of living, population and services rendered by the governmental entity. Article XIIIB includes a requirement that if an entity's revenues in any year exceed the amount permitted to be spent, the excess would have to be returned by revising tax or fee schedules over the subsequent two years. Section 33678 of the Redevelopment Law provides that the allocation of taxes to a redevelopment agency for the purpose of paying principal of, or interest on, the Loan, advances or indebtedness incurred for redevelopment activity shall not be deemed the receipt by such agency of proceeds of taxes within the meaning of Article XIIIB, nor shall such portion of taxes be deemed receipt of proceeds of taxes by, or any appropriation subject to the limitation of, any other public body within the meaning or the purpose of the Constitution and laws of the State, including Section 33678 of the Redevelopment Law. Two California appellate court decisions have upheld the constitutionality of Section 33678, and in the one case in which a petition for review was filed in the California Supreme Court, such petition was denied. IMPLEMENTING LEGISLATION Legislation enacted by the California Legislature to implement Article XIIIA (Chapter 292, Statutes of 1978, as amended) provides that, notwithstanding any other law, local agencies may not levy any property tax, except to pay debt service on indebtedness approved by the voters prior to July 1, 1978, and that each county will levy the maximum tax permitted by Article XIIIA of $4.00 per $100 assessed valuation (based on the traditional practice of using 25% of full cash value as the assessed value for tax purposes). The legislation further provided that, for Fiscal Year 1978 -79 only, the tax levied by each county was to be appropriated among all taxing agencies within the county in proportion to their average share of taxes levied in certain previous years. Effective as of the 1981 -82 Fiscal Year, assessors in California no longer record property values in the tax rolls at the assessed value of 25% of market values. All taxable property value is shown at full market value. In conformity with this change in procedure, all taxable property value included in this Official Statement (except as noted) is shown at 100% of market value and all general tax rates reflect the $1 per $100 of taxable value. 41 Page 132 of 195 Future assessed valuation growth allowed under Article XIIIA (i.e., new construction, change of ownership, and 2% annual value growth) will be allocated on the basis of "situs" among the jurisdictions that serve the tax rate area within which the growth occurs. Local agencies and schools will share the growth of "base" revenue from the tax rate area. Each year's growth allocation becomes part of each agency's allocation in the following year. The Agency is unable to predict the nature or magnitude of future revenue sources which may be provided by the State to replace lost property tax revenues. Article XIIIA effectively prohibits the levying of any other ad valorem property tax above those described in this section, even with the approval of the affected voters. CONSTITUTIONAL CHALLENGES TO PROPERTY TAX SYSTEM There have been many challenges to Article XIIIA of the California Constitution. The United States Supreme Court heard the appeal in Nordlinger v. Hahn, a challenge relating to residential property. Based upon the facts presented in Nordlinger, the United States Supreme Court held that the method of property tax assessment under Article XIIIA did not violate the federal Constitution. The Agency cannot predict whether there will be any future challenges to California's present system of property tax assessment and cannot evaluate the ultimate effect on the Agency's receipt of Tax Increment Revenues should a future decision hold unconstitutional the method of assessing property. PROPERTY TAX COLLECTION PROCEDURES In California, property that is subject to ad valorem taxes is classified as "secured" or "unsecured." The secured classification includes property on which any property tax levied by a county becomes a lien on that property sufficient, in the opinion of the county assessor, to secure payment of the taxes. Every tax levied by a county that becomes a lien on secured property has priority over all present and future private liens arising pursuant to State law on the secured property, regardless of the time of the creation of the other liens. A tax levied on unsecured property does not become a lien against the taxed unsecured property, but may become a lien on other property owned by the taxpayer. Secured and unsecured property are entered on separate parts of the assessment roll maintained by the county assessor. The payment of delinquent taxes with respect to property on the secured roll may be enforced only through the sale of the property securing the taxes to the State for the amount of taxes that are delinquent. Such property may thereafter be redeemed by payment of the delinquent taxes and penalties. Unsecured personal property taxes may be collected, in the absence of timely payment by the taxpayer, through (1) a civil action against the taxpayer; (2) filing a certificate of delinquency for record in the county recorder's office, in order to obtain a lien on property of the taxpayer; (3) seizure and sale of personal property, improvements or possessory interests belonging or assessed to the taxpayer; and (4) filing a certificate in the office of the County Clerk specifying certain facts in order to obtain a judgment lien on certain property of the taxpayer. Except for property assessed by the State, the valuation of taxable property is determined as of January I each year, and equal installments of taxes levied upon secured property become delinquent on the following December 10 and April 10. Taxes on unsecured property are due February 1 and become delinquent August 31, and such taxes are levied at the prior year's secured tax rate. The valuation of State - assessed property is determined on January 1 of each year. SUPPLEMENTAL ASSESSMENTS A bill enacted in 1983, SB 813 (Chapter 498, Statutes of 1983), provides for the supplemental assessment and taxation of property as of the occurrence of a change of ownership or completion of new construction. Previously, statutes enabled the assessment of such changes only as of the next tax lien date following the change, and thus delayed the realization of increased property taxes from the new assessments for up to 14 months. As enacted, Chapter 498 provides increased revenue to redevelopment agencies to the extent that supplemental assessments, as a result of new construction or changes of ownership, occur within the 42 Page 133 of 195 boundaries of redevelopment projects subsequent to the lien date. To the extent such supplemental assessments occur within The Redevelopment Projects, Tax Increment Revenues may increase. TAX COLLECTION FEES SB 2557, enacted in 1990 (Chapter 466, Statutes of 1990), authorized county auditors - controllers to determine property tax administration costs proportionately attributable to local jurisdictions and to submit invoices to the jurisdictions for such costs. Subsequent legislation, SB 1559 (Chapter 697, Statutes of 1992), specifically includes redevelopment agencies among entities subject to a property tax administration charge. The projections of Tax Revenues within the Redevelopment Projects take such administrative costs into account. UNITARY PROPERTY TAX AB 454 (Chapter 921, Statutes of 1987) provides a revised method of reporting and allocating property tax revenues generated from most State - assessed unitary properties commencing with Fiscal Year 1988- 89. Under AB 454, the State reports to each county auditor - controller only the countywide unitary taxable value of each utility, without an indication of the distribution of the value among tax rate areas. AB 454 provides two formulas for auditor - controllers to use in order to determine the allocation of unitary property taxes generated by the countywide unitary value, which are: (i) for revenue generated from the 1% tax rate, each jurisdiction is to receive up to 102% of its prior year unitary property Tax Increment Revenue; however, if countywide revenues generated from unitary properties are greater than 102% of prior year revenues, each jurisdiction receives a percentage share of the excess unitary revenues equal to the percentage of each jurisdiction's share of secured property taxes; and (ii) for revenue generated from the application of the debt service tax rate to countywide unitary taxable value, each jurisdiction is to receive a percentage share of revenue based on the jurisdiction's annual debt service requirements and the percentage of property taxes received by each jurisdiction from unitary property taxes. The provisions of AB 454 apply to all State - assessed property, except railroads and non - unitary properties, the valuation of which will continue to be allocated to individual tax rate areas. The provisions of AB 454 do not constitute an elimination or a revision of the method of assessing utilities by the State Board of Equalization. AB 454 allows, generally, valuation growth or decline of State - assessed unitary property to be shared by all jurisdictions within a county. BUSINESS INVENTORY AND REPLACEMENT REVENUE Prior to 1979, the State reimbursed cities, counties, special districts and redevelopment agencies that portion of taxes which would have been generated by the exempted portion of business inventory value (50 %). In 1979, the California Legislature enacted AB 66 (Chapter 1150, Statutes of 1979), eliminating the assessment and taxation of business inventory property and providing for replacement revenue for local agencies, except redevelopment agencies. In 1980, the California Legislature enacted AB 1994 (Chapter 610, Statutes of 1980), providing partial replacement revenue for the loss of business inventory revenues by redevelopment agencies. In 1990, the California Legislature amended Section 16112.7 of the California Government Code (Chapter 449, Statutes of 1990) which precludes redevelopment agencies from pledging special subvention revenues toward the payment of debt service for bonded indebtedness incurred after July 31, 1990 (the effective date of the legislation). The 1992 -93 State Budget reduced the State's funding for the special subvention. As enacted under AB 222 (Chapter 188, Statutes of 1991), the Budget Act eliminated 1991 -92 subvention payments for most redevelopment projects, including The Redevelopment Projects. Additionally, the 1992 -93 State Budget implemented further cuts in funding for the State's special subvention to redevelopment agencies. As a result, these revenues are not included in the projections of estimated Tax Revenues within the Redevelopment Projects. 43 Page 134 of 195 PROPOSITION 87 Under prior State law, if a taxing entity increased its tax rate to obtain revenues to repay general obligation bonds approved by two - thirds of the voters, the redevelopment agency with a redevelopment project that includes property affected by the tax rate increase would have realized a proportionate increase in tax increment revenues. Proposition 87, approved by the voters of the State on November 8, 1988, requires that all revenues produced by such a tax rate increase (approved by the voters on or after January 1, 1989) go directly to the taxing entity that increased the tax rate to repay the general obligation bonded indebtedness. As a result, redevelopment agencies no longer receive an increase in tax increment revenues when taxes on property in a redevelopment project are increased to repay voter - approved general obligation debt. FUTURE INITIATIVES Each of Article XIIIA, Article XIIIB and Proposition 87 was adopted as a measure that qualified for the ballot pursuant to California's initiative process. From time to time other initiative measures could be adopted, further affecting revenues of the Agency or the Agency's ability to expend revenues. The nature and impact of these measures cannot be anticipated by the Authority or the Agency. Article XII1B. On September 6, 1979, California voters approved Proposition 4, or the Gann Initiative, which added Article XIIIB to the California Constitution. The principal thrust of Article XIIIB is to limit the annual appropriations of the State and any city, county, school district, authority or any other political subdivision of the State. The amendment includes a requirement that if an entity's revenues in any year exceed amounts permitted to be spent, the excess will be returned to the taxpayer by revising the tax override rate over the subsequent two years. To the extent such tax rates are revised, Tax Increment Revenues may be affected, since Tax Increment Revenues allocated to the Agency are a function of the combinations of tax rates levied by certain taxing agencies having jurisdiction within the Redevelopment Projects and assessments of property located within the Redevelopment Projects. 44 Page 135 of 195 THE AUTHORITY GENERAL The Authority is a joint exercise of powers authority organized and existing under and by virtue of the Joint Powers Act. The City, pursuant to Resolution No. 89 -32, adopted on July 25, 1989, and the Agency, pursuant to Resolution No. 89 -4, adopted on July 25, 1989, formed the Authority by the execution of a Joint Exercise of Powers Agreement (the "Joint Powers Agreement'). The Authority is governed by a five- member board which consists of all members of the City Council. The Authority reorganizes its officers, a chair and vice chair, annually. The City Manager acts as the Executive Director and the Secretary and the Director of Administrative Services of the City acts as the Treasurer of the Authority. The current Authority governing board is as follows: AUTHORITY GOVERNING BOARD Daryl Hickman, Chairperson Brian Tisdale, Vice Chairperson Amy Bhutta, Board Member Robert E. Magee, Board Member Melissa A. Melendez, Board Member The Bond Law, as defined in the Indenture, provides for the issuance of revenue bonds ofjoint exercise of powers authorities, such as the Authority, to be repaid solely from the revenues of certain public obligations, such as the Loan. The Authority has no taxing power. AUTHORIZATION The Bonds The Bonds are to be issued and secured pursuant to the Indenture, and are to be sold to the Underwriter, as authorized by a resolution, adopted on May 24, 2011. The Bonds are being sold to provide moneys to enable the Authority to acquire the Agency Bonds. The Authority authorized the execution of the Indenture and the acquisition of the Agency Bonds pursuant to a resolution, adopted May 24, 2011. The Bonds are also issued in accordance with the laws of the State, and particularly the Marks -Roos Local Bond Pooling Act of 1985, as amended, constituting Article 4 (commencing with Section 6584), of Chapter 5, Division 7, Title 1 of the Government Code of the State. The Agency Bonds The Agency Bonds were authorized by Resolution of the Agency, adopted on April 13, 2011. The Agency Bonds are governed by the laws of the State, and particularly the Community Redevelopment Law of the State, constituting Part 1 of Division 24 (commencing with Section 33000) of the Health and Safety Code of the State (the "Redevelopment Law "). AUTHORITY FINANCIAL STATEMENTS The Authority is authorized to finance or refinance indebtedness in connection with public capital improvements undertaken and completed by making the Loan for such purposes. The Authority, as required by the California Government Code, conducts an annual audit. The minimum requirements of the audit are required to be those prescribed by the State Controller for special districts and are required to conform to generally accepted auditing standards. 45 Page 136 of 195 DEBT SERVICE PAYMENTS ON THE AGENCCY BONDS AND DEBT SERVICE COVERAGE ON THE AUTHORITY BONDS The Bonds are special obligations of the Authority payable solely from and secured by revenues from repayment of the Agency Bonds, and certain funds and accounts established under the Indenture. The receipt of revenues from repayment of the Agency Bonds is subject to several variables described herein (see "BONDOWNERS" RISKS - THE AGENCY BONDS" herein). The Authority provides no assurance that the Revenues and the coverage ratios shown will be achieved. TABLE NO. 1 LAKE ELSINORE PUBLIC FINANCING AUTHORITY LOCAL AGENCY REVENUE BONDS (SUMMERLY PROJECT), 2011 SERIES A M Coverage Ratio Page 137 of 195 D.S. Payments D.S. Payments Total D.S. on the on the Payments on Debt Service - Redevelopment Redevelopment the Agency Payments on Bond Year Proiect 11 Bonds Proiect III Bonds Bonds the Bonds 2011 $90,858 $38,595 $129,453 2012 305,315 119,958 425,273 2013 307,795 119,238 427,033 2014 309,420 118,338 427,758 2015 305,340 117,318 422,658 2016 306,020 121,238 427,258 2017 306,175 119,813 425,988 2018 304,875 118,063 422,938 2019 308,225 121,313 429,538 2020 305,875 119,213 425,088 2021 308,175 117,113 425,288 2022 304,775 120,013 424,788 2023 305,213 117,335 422,548 2024 - 304,885 119,658 424,543 2025 308,793 116,598 425,391 2026 306,553 118,538 425,091 2027 308,548 120,095 428,643 2028 304,395 121,270 425,665 2029 304,478 117,063 421,541 2030 308,413. 117,855 426,268 2031 305,818 118,265 424,083 2032 307,075 118,293 425,368 2033 306,803 117,938 424,741 2034 117,200 117,200 2035 121,000 121,000 2036 119,025 119,025 2037 121,663 121,663 2038 118,525 118,525 M Coverage Ratio Page 137 of 195 THE AGENCY GOVERNMENT ORGANIZATION The Agency is a public body, corporate and politic, existing under and by virtue of the California Community Redevelopment Law, being Part 1 of Division 24 (commencing with Section 3J000) of the Health and Safety Code of the State (the "Redevelopment Law "). The Agency was activated on July 15, 1980, and is governed by a five- member board (the "Governing Board ") which consists of all members of the City Council. The Chairperson and Vice Chairperson are appointed to a one -year term by the Agency Governing Board from among its members. The City Council and Agency's members and term expiration dates are as follows: City Council Member Amy Bhutta, Mayor Robert E. Magee, Mayor Pro Tem Daryl Hickman, Council Member Melissa A. Melendez, Council Member Brian Tisdale, Council Member Agency Members Melissa A. Melendez, Chairperson Brian Tisdale, Vice Chairperson Amy Bhutta, Board Member Daryl Hickman, Board Member Robert E. Magee, Board Member Term Expires November 2012 November 2012 November 2014 November 2012 November 2014 The City performs certain general administrative functions for the Agency. The City Manager serves as the Agency's Executive Director, the City Clerk serves as Agency Secretary and the Director of Administrative Services serves as Agency Treasurer. The costs of such functions, as well as additional services performed by City staff are allocated annually to the Agency. The Agency reimburses the City for such allocated costs out of available Tax Increment Revenues. Such reimbursement is subordinate to any outstanding Loan and indebtedness of the Agency. Current City Staff assigned to administer the Agency include: CITY AND AGENCY STAFF Robert A. Brady, City Manager and Agency Executive Director Barbara Leibold, Esq., City Attorney and Agency Counsel James R. Riley, CPA, Director ofAdministrative Services and Agency Treasurer The City Attorney is appointed by and serves at the pleasure of the Lake Elsinore City Council. Legal services are performed under contract with the firm of Leibold, McClendon & Mann, P.C.: Barbara Leibold, Esq., City Attorney David Mann, Esq., Assistant City Attorney 47 Page 138 of 195 AGENCY POWERS All powers of the Agency are vested in its members. Pursuant to the Redevelopment Law, the Agency is a separate public body and exercises governmental functions, including planning and implementing redevelopment projects. The Agency may exercise the right to issue or incur the Loan, advances or other indebtedness for authorized purposes and to expend their proceeds, and the right to acquire, sell, rehabilitate, develop, administer or lease property. The Agency may demolish buildings, clear land and cause to be constructed certain improvements, including streets, sidewalks and utilities, and can further prepare for use as a building site any real property which it owns or administers. The Agency may, from any funds made available to it for such purposes, pay for all or part of the value of land and the cost of buildings, facilities or other improvements to be publicly owned and operated, provided that such improvements are of benefit to a redevelopment project and cannot be financed by any other reasonable method. The Agency may not construct or develop buildings, with the exception of public buildings and housing, and must sell or lease cleared property which it acquires within a redevelopment project for redevelopment in conformity with a particular redevelopment plan, and may further specify a period within which such redevelopment must begin and be completed. REDEVELOPMENT PLANS General Under the Redevelopment Law, the City Council is required to adopt, by ordinance, a redevelopment plan (the "Redevelopment Plan" and collectively, the "Redevelopment Plans ") for each of the Redevelopment Projects. The Agency may only undertake those activities within the Redevelopment Projects specifically authorized in the adopted Redevelopment Plans. A redevelopment plan is a legal document, the content of which is largely prescribed in the Redevelopment Law rather than a "plan" in the customary sense of the word. The general objective of each of the Agency's Redevelopment Plans is to encourage investment in the Redevelopment Projects by the private sector. The Redevelopment Plans provide for the acquisition of property, the demolition of buildings and improvements, the relocation of any displaced occupants, and the construction of streets, parking facilities, utilities and other public improvements. The Redevelopment Plans also allow the redevelopment of land by private enterprise, the rehabilitation of structures, the rehabilitation or construction of low and moderate income housing, and participation by owners and the tenants of properties in the Redevelopment Projects. Amended and Restated Redevelopment Plans Each of the Agency's Redevelopment Plans was originally adopted in the 1980s and the format and presentation was generally outdated. Subsequent amendments were separately documented and it was difficult to sort through these documents to determine the governing provisions of the Redevelopment Plans. In April, 2009, the Agency adopted "Amended and Restated Redevelopment Plans" for each of the Redevelopment Projects. Each of the Amended and Restated Redevelopment Plans now (i) reflect changes in the Redevelopment Law that impose additional requirements and restrictions not reflected in the original Redevelopment Plans, (ii) incorporate all prior amendments to the original Redevelopment Plans, (iii) incorporate updated land use provisions, and (iv) clarify and restate the time limits and financial limits (see "Redevelopment Plan Limitations" below). 48 Page 139 of 195 Redevelopment Plan Limitations The applicable redevelopment plan limitations for the Redevelopment Projects are shown on the following table and are discussed below: TABLE NO. 2 REDEVELOPMENT PLAN LIMITATIONS Last Date to Repay Redevelopment Redevelopment Last Date to Incur Debt with Tax Tax Increment Limit on Total Project Plan Expiration New Debt Increment Revenues Revenues Limit Bond Debt Redevelopment July 18, 2024 Expired except for July 18, 2034 $15 million net $120 million Project No. 11 Housing annually Redevelopment September 8, 2028 Expired except for September S. 2038 $20 million net $150 million Project No. 111 Housing annually Redevelopment Plan Expiration. Chapter 942, Statutes of 1993, as codified in Section 33333.6 of the Redevelopment Law, limits the life of redevelopment plans adopted prior to January 1, 1994, to 40 years from the date of adoption or January 1, 2004, whichever is later. For the Redevelopment Projects, the initial redevelopment plan expiration dates were July 18, 2023, in the case of the Redevelopment Project No. II and September 8, 2027, in the case of the Redevelopment Project No. III. In enacting Senate Bill 1045 ( "SB 1045 "), the State Legislature amended the time limits specified in Section 33333.6 of the Redevelopment Law. Section 33333.6(e) of the Redevelopment Law now provides that the City Council may adopt an ordinance to extend the limit for the duration of a redevelopment plan by one additional year. Pursuant to SB 1045, the City Council adopted an ordinance for each Redevelopment Project on November 22, 1994, to extend the term of the redevelopment plan of each of the Redevelopment Projects by one year. Senate Bill 1096 ( "SB 1096 ") further amended Section 33333.6(e) of the Redevelopment Law to provide that the City Council may adopt an ordinance to extend the limits for certain redevelopment projects by an additional year for each year that a payment was made to a countywide ERAF (2 years maximum) by a redevelopment agency. However, to qualify under SB 1096, a redevelopment plan must meet one of the following criteria: 1. SB 1096 provides that for redevelopment plans with less than twenty years of time remaining prior to expiration from June 30, 2005, the redevelopment plans may be extended by one year for each year that the required ERAF payment was made. 2. SB 1096 provides that if a redevelopment plan has more than ten years but less than twenty years of time remaining prior to expiration of the redevelopment plan, the time limit may be extended only if certain findings are made by the City Council. 3. If a redevelopment project has less than ten years remaining before the expiration of the redevelopment plan, the time limit may be extended without making specific findings. The Agency has determined that currently the Redevelopment Plans do not satisfy the findings required by SB 1096. Receipt of Tax Increment Time Limits. In addition, under the provisions of Assembly Bill 1290 ( "AB 1290 "), enacted by the State Legislature in 1993, Chapter 942, Statutes of 1993, as codified in Section 33333.6 of the Redevelopment Law, for redevelopment plans adopted prior to January 1, 1994, a redevelopment agency may not pay indebtedness or receive property taxes pursuant to Section 33670 of the Redevelopment Law after ten years from the termination of the redevelopment plan except to accommodate certain specific low and moderate income housing obligations or to pay debt service on bonds, indebtedness or other financial obligations authorized prior to January 1, 1994. M9 Page 140 of 195 Pursuant to SB 1045, the City Council adopted an ordinance relating to each Redevelopment Project on November 22, 1994, to extend the term of the redevelopment plans of the Redevelopment Projects by one year. This extension in turn extended the period within which the Redevelopment Projects may repay indebtedness by one year. Time Limit on Incurring Indebtedness For redevelopment plans adopted prior to 1994, Chapter 942, Statutes of 1993, as codified in Section 3333;.6 of the Redevelopment Law, stipulates that the time limit for establishing indebtedness shall not exceed 20 years from the adoption of the redevelopment plan or January 1, 2004, whichever is later. Pursuant to Senate Bill 211, which was signed into law as Chapter 741, Statutes of 2001, a city council may amend a redevelopment plan to eliminate the time limit to establish indebtedness in redevelopment projects adopted prior to January 1, 1994, by ordinance. If the redevelopment plan is so amended, existing tax sharing agreements will continue and certain statutory tax sharing for entities without pass- through agreements will be required beginning in the fiscal year following the year the eliminated limit would have taken effect. The time limit for incurring new indebtedness for Redevelopment Project No. 11 and Redevelopment Project No. III has expired. The Summerly DDA was originally executed by the Agency in 2002 prior to the expiration of the time limit for incurring new indebtedness. The Agency Bonds have been deemed to be a refunding of existing indebtedness and exempt from the time limit to establish new debt. Limitation on the Amount of Tax Increment Receipts. The Redevelopment Law requires each redevelopment agency, for redevelopment plans adopted prior to 1994, to either include in each redevelopment plan or to adopt by ordinance a limitation on the amount of taxes that may be divided and allocated to the redevelopment agency with respect to the related redevelopment project. Pursuant to Section 33333.2, taxes may not be allocated to a redevelopment agency beyond this limitation except by amendment of the redevelopment plan. The net amount of Tax Increment Revenues that may be collected by the Agency for the Redevelopment Project No. II is $15 million annually. The net amount of Tax Increment Revenues that may be collected by the Agency for the Redevelopment Project No. III is $20 million annually. Limit on the Amount of Bonded Indebtedness, Redevelopment plans of an agency are required to include a limit on the amount of bonded indebtedness to be repaid with tax increment revenues that can be outstanding at one time. These limits can be extended only by an amendment of the redevelopment plan. The limit on the amount of bonded indebtedness for the Redevelopment Project No. 11 is $120 million. The limit on the amount of bonded indebtedness for the Redevelopment Project No. III is $150 million. 50 Page 141 of 195 AGENCY FINANCIAL ADMINISTRATION Annual Budget The law requires redevelopment agencies to adopt an annual budget. All expenditures and indebtedness of the Agency are required to be in conformity with the adopted or amended budget. The Executive Director of the Agency is responsible for preparing the proposed budget and submitting it to the Agency Governing Board. After reviewing the proposed budget at a public meeting, the Agency Governing Board holds a public hearing. The Agency Governing Board adopts the budget prior to the start of each fiscal year. The Director of Administrative Services of the City is responsible for controlling expenditures within budgeted appropriations. Agency Accounting Records and Financial Statements Every redevelopment agency is required to present an annual report to its legislative body within six months of the end of the fiscal year. The annual report is required, among other things, to include an independent financial "audit report" and a fiscal statement for the previous fiscal year. The California Health and Safety Code defines "audit report" to mean an examination of and opinion on the financial statements of the agency which presents the results of the operations and financial position of the agency. The independent financial audit is required to be conducted in accordance with generally accepted auditing standards and the rules governing audit reports promulgated by the Governmental Accounting Standards Board. The independent financial audit report is also required to include an opinion of the agency's compliance with laws, regulations and administrative requirements governing activities of the agency. The California Health and Safety Code requires the fiscal statement to contain the following information: (1) The amount of outstanding indebtedness of the agency and each Redevelopment Project. (2) The amount of Tax Increment Revenues generated in the Agency and in each Redevelopment Project. (3) The amount of Tax Increment Revenues paid to a taxing agency, other than school or community college district, pursuant to a tax sharing agreement. (4) The financial transactions report required to be submitted to the State Controller. (5) The amount allotted to school or community college districts pursuant to the Redevelopment Law. (6) The amount of existing indebtedness and the total amount of payments required to be paid on existing indebtedness for that fiscal year. (7) Any other fiscal information which the Agency believes is useful to describe its programs. The Agency Indentures require the Agency to keep, or cause to be kept, proper books and accounts separate from all other records and accounts of the Agency and the City in which complete and correct entries are made of all transactions relating to the Redevelopment Projects and the Tax Increment Revenues. The Agency Indentures requires the Agency to file with the Trustee annually, within 180 days after the close of each fiscal year, so long as the Agency Bonds are outstanding, its audited financial statements showing the Redevelopment Projects Tax Revenues and the financial condition of the Redevelopment Projects, including the balances in all funds and accounts related to the Redevelopment Projects as of the end of such fiscal year. The audited financial statements are required to be accompanied by a Written Certificate of the Agency stating that the Agency is in compliance with its obligations under the Agency Indentures. The Agency covenants under the Agency Indentures to furnish a copy of such statements upon reasonable request to any Bondowner. 51 Page 142 of 195 Annual Financial Report The Agency retained the firm of Diehl, Evans & Company, LLP, Certified Public Accountants & Consultants, Irvine, California, to examine the component unit financial statements of the Agency as of and for the Fiscal Year ended June 30, 2010, which is included as "APPENDIX D." The firm's examination was made in accordance with generally accepted auditing standards and the "Guidelines for Compliance Audits of California Redevelopment Agencies" issued by the State Controller. The Agency's audited financial statements are public documents and are included within this Official Statement without the prior approval of the auditor. The auditor has not performed any post -audit of the financial condition of the Agency. The Agency represents that there have been no material adverse changes in its financial position since June 30, 2010. Filing of Statement of Indebtedness Section 33675 of the Redevelopment Law requires that the Agency file, not later than the first day of September of each year with the county auditor, a statement of indebtedness certified by the chief financial officer of the Agency for each redevelopment project for which the redevelopment plan provides for the division of taxes pursuant to Section 33670 of the Redevelopment Law. The statement of indebtedness is required to contain, among other things, the date on which the bonds were delivered, the principal amount, term, purpose, interest rate and total interest of the bonds, the principal amount and the interest due in the fiscal year in which the statement of indebtedness is filed and the outstanding balance and amount due on the bonds. Similar information must be given for each loan, advance or indebtedness that the Agency has incurred or entered into which is payable from tax increment revenues. As amended by Assembly Bill 1290 (Chapter 942, Statutes of 1993) ( "AB 1290 "), Section 33675 requires each redevelopment agency to file a reconciliation statement for each redevelopment project for which the redevelopment agency receives tax increment revenues pursuant to Section 33670. The reconciliation statement is to show, among other things, (i) for each loan, advance or indebtedness, for each redevelopment project, the total debt service obligations of the redevelopment agency to be paid in the fiscal year for which the statement of indebtedness is filed; (ii) the total debt service remaining to be paid on such indebtedness; and (iii) the available revenues as of the end of that fiscal year. "Available revenues" consist of all Tax Increment Revenues held by the redevelopment agency as cash or cash equivalents and all cash or cash equivalents held by the redevelopment agency that are irrevocably pledged or restricted to payment of a loan, advance or indebtedness that the redevelopment agency has listed on a statement of indebtedness. For purposes of Section 33675, amounts held in a redevelopment agency's Low and Moderate Income Housing Fund do not constitute available revenues, and amounts deposited by a redevelopment agency in its Low and Moderate Income Housing Fund constitute indebtedness of the redevelopment agency. Section 33675(g) has been amended by AB 1290 to provide that payments of Tax Increment Revenues from the county auditor to a redevelopment agency may not exceed the redevelopment agency's aggregate total outstanding debt service obligations, minus the available revenues of the redevelopment agency, as shown on the reconciliation statement. Payments to a trustee under a bond resolution or indenture or payments to a public agency in connection with payments by such public agency pursuant to a bond issue shall not be disputed in any action under Section 33675. The Agency believes that the amendments to Section 33675 limiting the payment of Tax Increment Revenues to an amount not greater than the difference between a redevelopment agency's total outstanding debt obligations and total available revenues, as reported on the redevelopment agency's reconciliation statement, will not have an adverse impact on the Agency's ability to meet its debt service obligations. 52 Page 143 of 195 THE REDEVELOPMENT PROJECTS REDEVELOPMENT PROJECT NO. II Assessed Values by Land Use The following table represents the breakdown of land use in the Redevelopment Project No. II by the number of parcels and by net taxable assessed value for fiscal year 2010-11. This information is based on Riverside County land use designations as provided by Riverside County through tax roll data. It should be noted that the County land use designations do not necessarily parallel City land use and zoning designations. Unsecured and SBE non - unitary values are connected with parcels that are already accounted for in other categories. The values shown in the table have been adjusted for successful appeals not yet reflected on the 2010 -11 tax roll. TABLE NO.3 REDEVELOPMENT AGENCY OF THE CITY OF LAKE ELSINORE REDEVELOPMENT PROJECT NO. II 2010 -11 ASSESSED VALUES BY LAND USE CATEGORY Category Parcels Assessed Value Percentage Residential 3,145 $627,296,376 59.8% Commercial 306 215,713,830 20.6% Industrial 61 46,560,012 4.4% Recreational 2 1,704,997 0.2% Institutional 3 41,356 0.0% Vacant Land 1,317 117,485,267 11.2% Exempt 208 0 0.0% Subtotal 5,042 $1,008,801,838 96.1% SBE Non - Unitary 4,800 0.0% Possessory Int. 4,831,343 0.6% Unsecured 35.972.873 1.1% Subtotal $40,809,016 3.9% Totals: 5,042 $1,049,455,447 100.0% Source: Fiscal Consultant Report (see "APPENDIX C — FISCAL CONSULTANT REPORT "). 53 Page 144 of 195 Top Ten Taxable Property Owners 1.15% Set forth in the table below are the ten largest property taxpayers for the Redevelopment Project No. 11 for Fiscal Year 2010 -11 (current as of February 28, 2011). TABLE NO. 4 REDEVELOPMENT AGENCY OF THE CITY OF LAKE ELSINORE REDEVELOPMENT PROJECT NO. I1 1.11% TEN LARGEST PROPERTY TAXPAYERS (2010 -11 SECURED AND UNSECURED) % of %of Redevelopment Redevelopment Project Project Assessed Incremental Primary Land Use Property Owner Assessed Value Value Value (Planned Land Use) 1 Broadstone River's EdgefO $28,042,552 2.67% 2.91% Residential (Broadstone River's Edge Apartments - 184 unit apartment) 2 Wal -Mart Stores Inc. 16,626,942 1.58% 1.73% Commercial (Wal -Mart store) 3 Elsinore Veto (1) 14,433,812 1.38% 1.50% Commercial (neighborhood retail Commercial (auto dealership - Lake center includes Denny's, Starbucks, Von's, Kragen, GNC, Payless Shoes, Elsinore Ford) Wachovia and El Pollo Loco) 4 Albertsons Inca') 13,762,824 1.31% 1.43% Commercial (Lake Elsinore Town Commercial (The Plaza recently Center - Albertsons) 5 Blue Canary Inc. °) 13,149,481 1.25% 1.37% Commercial (Lake Elsinore Town completed, includes Remax and vacant Center, includes Rent -A- Center, Auto Zone, Big Lots, Radio Shack, Rite -Aid offices) and H &R Block) 6 Dav A North Lake (1) 12,039,211 1.15% 1.25% Residential (North Lake Apartments — 128 unit apartment) 7 LEVC Group o) 11,702,191 1.11% 1.22% Commercial (neighborhood shopping center includes Riverside County Lake Elsinore Health Center, Big Lots, Bank of America, Century 21, small retail stores and restaurants) 8 Stebor Properties 11,417,268 1.09% 1.19% Commercial (auto dealership - Lake Elsinore Ford) 9 Lake Elsinore Medical 11 1.06% 1.16% Commercial (The Plaza recently Campus °) completed, includes Remax and vacant offices) 10 Grand Oaks Apartments In 9.506,484 0.91% 0.99% Residential (apartment complex) Total $141,859,087 13.52% 14.75% en Pending Appeal (see "TAX INCREMENT REVENUES— ASSESSMENT APPEALS —Base YearAppeals "). Source: Fiscal Consultant Report (see "APPENDIX C — FISCAL CONSULTANT REPORT "). 54 Page 145 of 195 Redevelopment Project No. II Map Insert Aerial 6824 55 Page 146 of 195 Redevelopment Project No. II Aerial Insert Aerial 6826 56 Page 147 of 195 Redevelopment Project No. 11 Aerial Insert Aerial 6822 57 Page 148 of 195 REDEVELOPMENT PROJECT NO. III Assessed Value by Land Use The following table represents the breakdown of land use in the Redevelopment Project No. III by the number of parcels and by net taxable assessed value for fiscal year 2010 -11. This information is based on Riverside County land use designations as provided by Riverside County through tax roll data. It should be noted that the County land use designations do not necessarily parallel City land use and zoning designations. Unsecured and SBE non - unitary values are connected with parcels that are already accounted for in other categories. The values shown in the table have been adjusted for successful appeals not yet reflected on the 2010 -11 tax roll. Source: Fiscal Consultant Report (see "Appendix C — Fiscal Consultant Report "). 58 Page 149 of 195 TABLE NO.5 REDEVELOPMENT AGENCY OF THE CITY OF LAKE ELSINORE REDEVELOPMENT PROJECT NO. III 2010 -11 ASSESSED VALUES BY LAND USE CATEGORY Category Parcels Assessed Value Percentage Residential 1,743 $219,030,385 66.5% Commercial 12 9,195,013 2.8°% Industrial 2 1,141,229 0.3% Recreational 3 5,300,000 1.6% Institutional 2 0 0.0% Vacant Land 6,272 89,035,499 27.0% Exempt 464 0 0.00% Subtotal 8,498 $323,702,126 98,3^% SET Non - Unitary Possessory Int. 1,837,313 0.6% Unsecured 3.646.451 1.1% Subtotal $5,483,764 1.7% Totals 8,511 $329185,890 100.00% Source: Fiscal Consultant Report (see "Appendix C — Fiscal Consultant Report "). 58 Page 149 of 195 Top Ten Taxable Property Owners Set forth in the table below are the ten largest property taxpayers for the Redevelopment Project No. III for Fiscal Year 2010 -11 (current as February 28, 2011). TABLE NO.6 REDEVELOPMENT AGENCY OF THE CITY OF LAKE ELSINORE REDEVELOPMENT PROJECT NO. III TEN LARGEST PROPERTY TAXPAYERS (2010 -11 SECURED AND UNSECURED) % of Redevelopment Source, Fiscal Consultant Report (see "Appendix C — Fiscal Consultant Report' W Page 150 of 195 Project Assessed %of Incremental Property Owner Assessed Value Value Value Primary Land Use I McMillin Summerly $11,984,054 3.64% 4.55% Vacant Land - residential 2 Robert C. Gregory Trust 8,037,253 2.44% 3.05% Commercial (auto dealership — Lake Chevrolet) 3 JIC DP Diamond 5,288,592 1.61% 2.01% Vacant Land (Lake Elsinore Development Diamond Stadium and parking lot) 4 County Club Holdings 3,329,736 1.01% 1.27% Vacant Land (residential) 5. Beazer HMS Holdings 2,706,000 0.82% 1.03% Residential / Vacant land 6 SITL Investment Inc. (1) 2,302,743 0.70% 0.87% Vacant Land (residential) 7. Shu M. Lu 1157,709 0.66% 0.82% Vacant Land (residential) 8. Federal National 2,097,954 0.64% 0.80% Residential Mortgage Association 9 Quantum Entertainment 1,622,250 0.49% 0.62% Possessory Interest (Lake Group Inc. Elsinore Diamond Stadium) 10 Pacific Horizon Builders 1,536,908 0.47% 0.58% Recreational (golf course — The Links at Summerly) Total $41,063,199 12.47% 15.60% Source, Fiscal Consultant Report (see "Appendix C — Fiscal Consultant Report' W Page 150 of 195 Redevelopment Project No. III Aerial Insert Aerial 6854 reel Page 151 of 195 Redevelopment Project No. III Aerial Insert Aerial 6840 ON Page 152 of 195 Redevelopment Project No. III Aerial Insert Aerial 6856 M Page 153 of 195 Redevelopment Project No. III Aerial Insert Aerial 6850 63 Page 154 of 195 TAX INCREMENT REVENUES TAXABLE VALUATIONS The Tax Increment Revenues include a portion of the ad valorem taxes levied on real property within the Redevelopment Projects. Article XIIIA of the California Constitution limits the amount of ad valorem tax on real property to I % of "full cash value," as determined by the County Assessor. Article XIIIA defines "full cash value" to mean "the County Assessor's valuation of real property as shown on the 1975 -76 tax bill under "full cash value," or thereafter the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment period." Historical Taxable Valuations Redevelopment Project No. 11. There has been substantial growth in Redevelopment Project No. II since its inception. The 2010 -11 taxable values for Redevelopment Project No. 11 represents tax incremental value of $962,983,623. Between 2001 -02 and 2010 -11, the taxable value within the Redevelopment Project No. 11 increased by $538,392,309 (105.4 %). The growth in assessed value was very steady during the period between 2000- 01 and 2007 -08. In 2008 -09 through 2010 -11, Redevelopment Project No. 1I experienced decreases due to drops in residential value. Secured values grew in the past ten years, adding $525,348,524 (107.6 %) over this ten -year period. Until 2008 -09, increases in secured value have overcome fluctuations in unsecured value. Despite decreases in unsecured values in six of the years, unsecured values have increased by $13,043,785 (57.07 %) since 2001 -02. The number of residential units increased by 1,403 (55.8 %) during this period, necessitating the need for commercial development. Industrial development also added to the growth within the Redevelopment Project No. II. Redevelopment Project No. III. Between 2001 -02 and 2010 -11, the taxable value within the Redevelopment Project No. III increased by $184,806,660 (128.0°/x). With the exception of 2009 -10 and 2010 -11, the assessed value increased in each year during this period. From 2009 -10 to 2010 -11 assessed value in Redevelopment Project No. fl dropped by $32,809,431 (- 9.1 %). This drop was the result of assessed value declines in the secured tax rolls. Over the ten -year period examined, secured values have increased by $182.05 million (126.9 %) and unsecured values have increased by $2.7 million (306.0 %). Growth has been steady and with large annual increases from 2003 -04 through 2007 -08. New residential construction, commercial and industrial development and transfer of ownership accounted for the majority of the growth within Redevelopment Project No. 111. The Redevelopment Project No. III has incremental value of $263,173,051 for 2010 -11. This represents an increase of 3,986.7% over the base year value. Over the ten year period examined, annual growth in assessed value averaged 11.01% despite the declines for 2009 -10 and 2010 -11. 64 Page 155 of 195 TABLE NO. 7 REDEVELOPMENT AGENCY OF THE CITY OF LAKE ELSINORE REDEVELOPMENT PROJECT NO. II HISTORICAL VALUES Secured 2006 -07 2007 -08 2008 -09 2009 -10 2010 -11 Land $351,273,467 $439,150,900 $489,440,608 $392,095,346 $378,755,179 Improvements 707,451,682 870,627,427 798,152,763 680,157,236 648,186,332 Personal Prop 2,798,583 2,862,152 2,798,906 2,493,957 1,573,314 Exemptions (9.405.238) (13.523.375) (13.647.5791 (14.277.7001 (14.164.658) TOTAL SECURED $1,052,118,494 $1.299,117,104 $1,276.744,698 $1,060468,839 $1,014,350,167 Unsecured Land $221 $921 $930 $728 44,036 Improvements 13,611,310 16,220442 16,350,258 15,617,297 15,713.836 Personal Prop 17,206,107 19,951,950 23,125,803 19,613,665 20,308,393 Exemptions 0 (40,000 (46.050) (90-380) (93,392) TOTAL UNSECURED GRAND-TOTAL $30,817,638 $36,133,313 $39,430.941 $35,141,310 $35,972,873 Successful Appeal 1'1 iL335a5Q,411 1.31(.175.fi39 51,095.610.149 1.050 i 3 04 (712,186) Adjusted Grand Total 1,049,610,854 Incremental Value $996,464,308 $1,248,778,593 $1,229,703,815 $1,009,138,325 $963,139,030 Annual Change 22.22% 25.32% (1.53 %) (17.94 %) (4.56 %) Adjusted for seven successful appeals not reflected on the 2010 -11 Lien Date Roll. Source: County of Riverside Lien Date Rolls. 65 Page 156 of 195 TABLE NO.8 REDEVELOPMENT AGENCY OF THE CITY OF LAKE ELSINORE REDEVELOPMENT PROJECT NO. III HISTORICAL VALUES Secured o] 2006 -07 2007 -08 2008 -09 2009 -10 2010 -11 Land $142,677132 $182,838,902 $207,938,071 $171,713,976 1587137,049 Improvements 176,406,367 243,339,281 232,372,320 188,658,328 168,869,302 Personal Prop 27,360 24,294 16,434 14.768 10,570 Exemptions 97( 6.768) (1.002.074) (1.025.504) (1.047,678) (1.035.639) TOTAL SECURED $318,134,191 $425,200,403 $439,301,321 $359,339,394 $325,981,282 Unsecured Land $0 - $0 $34,808 $0 $116,295 Improvements 247,723 512,090 463,199 457,930 814,493 Personal Prop 997,453 2,790,913 2,373,819 2,197,997 2,715,663 Exemptions 0 0 0 0 0 TOTAL $1,245,176 $3,303,003 $2,871,826 $2,655,927 $3,646,451 UNSECURED Successful Appeals (2) (441,843) Adjusted Grand Total $329,627,733 Incremental Value $253,366,528 $362,490,567 $376,160,308 $295,982,482 $263,173,051 Annual Change 47.91% 43.07% 3.77% (21.31 %) (11.08 %) t'1 Secured values include state assessed non - unitary utility property (2)Adjusted for eight successful appeals not reflected on the 2010 -11 Lien Date Roll Source: County of Riverside Lien Date Rolls. SUPPLEMENTAL ASSESSMENT REVENUES Chapter 498 of the Statutes of 1983 provides for the reassessment of property upon a change of ownership or completion of new construction. Such reassessment is referred to as a Supplemental Assessment and is determined by applying the current years tax rate to the amount of increase in a property's value and prorating the resulting property taxes to reflect the portion of the tax year remaining as determined by the date of the change in ownership or completion of new construction. Supplemental Assessments become a lien against Real Property. Since 1984 -85 revenues derived from Supplemental Assessments have been allocated to redevelopment agencies and taxing entities in the same manner as regularly collected property taxes. The receipt of Supplemental Tax Revenues by the Agency typically follows the change of ownership by a year or more. The revenue from Supplemental Assessments was a negative $76,624 within the Redevelopment Projects during fiscal year 2009 -10. The Agency received $1,112,443 during fiscal year 2008 -09. This revenue is indicative of new development that was assessed after finalization of the tax roll and sales of property at prices that were higher than the assessed value. The Fiscal Consultant has not included revenues or revenue reductions resulting from Supplemental Assessments in their projections. Table 9 illustrates the .. Page 157 of 195 amounts of Supplemental Assessment Revenues that have been received by the Agency for the Redevelopment Projects during the previous five fiscal years. TABLE NO.9 REDEVELOPMENT AGENCY OF THE CITY OF LAKE ELSINORE REDEVELOPMENT PROJECT NO. II AND REDEVELOPMENT PROJECT III SUPPLEMENTAL ASSESSMENT REVENUES Redevelopment Project No. 11 2005 -06 2006 -07 2007 -08 2008 -09 2009 -10 Supplemental Revenue $1,359,338 $1,405,022 $1,414,785 $742,872 ($94,804) Total Redevelopment Project Revenue $10,298,76 $11,495,10 $14,044,98 $13,184,85 $10,146,76 7 5 7 8 5 Supplemental Revenue as %of Total 13.20% 12.22% 10.07% 5.63% (0.93 %) Revenue Redevelopment Proiect No.111 Source: Riverside County Auditor - Controller's Office, Disbursement Tax Division "Tax Increment Summary". ASSESSMENT APPEALS General In California, there are two types of appeals: a base year appeal and a Proposition 8 appeal. The first type of appeal is a base year assessment appeal where owners challenge the original, or base year, valuation assigned by the County Assessor. Any reduction resulting from a base year assessment appeal is permanent and can only increase above the allowable inflationary adjustment if the property is sold or experiences new construction. Any base year appeal must be made within 4 years of the change of ownership or new construction date. The second type of appeal is a Proposition 8 appeal based on Section 51 of the Revenue and Taxation Code which allows for temporary reductions in the taxes paid on properties where the assessed value of property becomes higher than its actual market value. After the market value of the property subject to the Proposition 8 appeal increases, the assessment can be increased up to its pre - appeal value. Base Year Appeals Historically only a small percentage of appeals requested by property owners have been granted. While the outcome of pending appeals cannot be determined in advance, the Fiscal Consultant has estimated the assessed value reduction that may result from the pending appeals based on an analysis of pending and historical appeals data (see "APPENDIX C — FISCAL CONSULTANT REPORT "). The projections of Tax Revenues prepared by the Fiscal Consultant have incorporated any such reductions to the Fiscal Year 2010 -11 assessed value. Redevelopment Project No. 11. Within Redevelopment Project No. Il there have been 797 assessment appeals filed since 2005 -06. Of the 797 appeals filed, 45 have been allowed with a reduction in value and 196 have been denied. There are 556 appeals currently pending on 503 properties within Redevelopment Project No. II area. Based on the historical averages, the Fiscal Consultant expects that 94 of the currently pending appeals will be allowed and that these successful appeals will result in an assessed value reduction of $8,906,269. This reduction has been incorporated by the Fiscal Consultant in the 67 Page 158 of 195 2005 -06 2006 -07 2007 -08 2008 -09 2009 -10 Supplemental Revenue $351,469 $620,821 $690,601 $369,571 ($76,624) Total Redevelopment Project Revenue $2,132,596 $3,174,408 $4,337,256 $4,161,401 $2,906,801 Supplemental Revenue as %of Total 16.48% 19.56% 15.92% 8.88% (2.64 %) Revenue Source: Riverside County Auditor - Controller's Office, Disbursement Tax Division "Tax Increment Summary". ASSESSMENT APPEALS General In California, there are two types of appeals: a base year appeal and a Proposition 8 appeal. The first type of appeal is a base year assessment appeal where owners challenge the original, or base year, valuation assigned by the County Assessor. Any reduction resulting from a base year assessment appeal is permanent and can only increase above the allowable inflationary adjustment if the property is sold or experiences new construction. Any base year appeal must be made within 4 years of the change of ownership or new construction date. The second type of appeal is a Proposition 8 appeal based on Section 51 of the Revenue and Taxation Code which allows for temporary reductions in the taxes paid on properties where the assessed value of property becomes higher than its actual market value. After the market value of the property subject to the Proposition 8 appeal increases, the assessment can be increased up to its pre - appeal value. Base Year Appeals Historically only a small percentage of appeals requested by property owners have been granted. While the outcome of pending appeals cannot be determined in advance, the Fiscal Consultant has estimated the assessed value reduction that may result from the pending appeals based on an analysis of pending and historical appeals data (see "APPENDIX C — FISCAL CONSULTANT REPORT "). The projections of Tax Revenues prepared by the Fiscal Consultant have incorporated any such reductions to the Fiscal Year 2010 -11 assessed value. Redevelopment Project No. 11. Within Redevelopment Project No. Il there have been 797 assessment appeals filed since 2005 -06. Of the 797 appeals filed, 45 have been allowed with a reduction in value and 196 have been denied. There are 556 appeals currently pending on 503 properties within Redevelopment Project No. II area. Based on the historical averages, the Fiscal Consultant expects that 94 of the currently pending appeals will be allowed and that these successful appeals will result in an assessed value reduction of $8,906,269. This reduction has been incorporated by the Fiscal Consultant in the 67 Page 158 of 195 projections of Tax Revenues as a reduction to the 2011 -12 assessed value. Reductions in revenue for refunds resulting from these successful appeals have not been estimated. _Redevelopment Project No. III. Within Redevelopment Project No. Ill since 2005, there have been a total of 760 appeals filed. Of these, 19 have been allowed with a reduction in value, 374 have been denied or withdrawn and there are 367 assessment appeals currently pending on 336 parcels. Reductions in value on the successful appeals have totaled $928,536. The amount of assessed value currently under appeal is $20,410,306. Based upon the historical rate that appeals have been allowed with a reduction in value and upon the average reduction in value that has been allowed on those successful appeals, the Fiscal Consultant has estimated the loss in value that may result from the currently pending appeals. By applying these historical averages to the pending appeals, the Fiscal Consultant has estimated that the Agency will experience a loss in assessed value of $231,811 on 16 of the pending appeals during 2011 - 12. Reductions in revenue for refunds resulting from these successful appeals have not been estimated. The following table summarizes the Fiscal Consultant's estimate for losses on pending assessment appeals. TABLE NO. 10 REDEVELOPMENT AGENCY OF THE CITY OF LAKE ELSINORE REDEVELOPMENT PROJECT NO. II AND REDEVELOPMENT PROJECT III ASSESSMENT APPEALS Redevelopment Protect No. 11 No. of No. of No. & Value of Est. No. of Est. Reduction on Pending Total No. Resolved Successful Average Appeals Appeals Appeals Allowed of Appeals Appeals Appeals Reduction Pending' Allowed (2011 -12 Value Adjustment) 797 241 45 22.17% 503 94 $8,906,269 ($215,101,254) Redevelopment Pro'ect No 111 No. of No, of No. & Value of Est. No. of Est. Reduction on Pending Total No. Resolved Successful Average Appeals Appeals Appeals Allowed of Appeals A eats Appeals Reduction Pending' Allowed (2011 -12 Value Ad iustmenn 760 393 19 2149% 336 16 $231,811 ($20,410,306) Pending appeals do not include 53 appeals that are pending on the same parcels for multiple years within the Redevelopment Project No. 11 and 31 appeals that are pending on the same parcels for multiple years within the Redevelopment Project No. III. Source: The Fiscal Consultant. Within the top ten taxpayers in the Redevelopment Project No. II area, eight have filed assessment appeals that are currently pending. Broadstone Rivers Edge and Albertson's are seeking a reduction of their 2010 -11 valuation. Elsinore Veto, Dav A North Lake and LEVC Group are seeking reductions of their 2009 -10 and 2010 -11 valuations and Blue Canary, Lake Elsinore Medical Campus and Grand Oaks Apartments are seeking a reduction to their 2009 -10 valuations. Within the top ten taxpayers in the Redevelopment Project No. 111, none have filed assessment appeals that are currently pending. The table below summarizes the reductions in assessed value sought by these top ten taxpayers. 68 Page 159 of 195 TABLE NO. 11 REDEVELOPMENT AGENCY OF THE CITY OF LAKE ELSINORE REDEVELOPMENT PROJECT NO. 11 ASSESSMENT APPEALS TOP TEN TAXPAYERS Proposition 8 Adjustments General. In 1978, California voters passed "Proposition 8." This constitutional amendment allows a temporary reduction in assessed value when a property suffers a "decline in value." A decline in value occurs when the current market value of a property is less than the current assessed value as of the lien date. Under the terms of Proposition 8, it is the County Assessor's obligation to assess all properties at the lesser of current market value or at the property's base value, as adjusted for inflation and for any changes that have occurred to the property since it was last purchased. Properties that have their values reduced to the current market value are annually reviewed by the County Assessor to determine the new market value of the property. The value that is enrolled each year is the lesser of the current market value or the property's adjusted base value. Adjusting the property's value to the current market value may entail a further decrease in value or an increase in value that is not limited by constitutional restriction on annual value increases. Once the property has again reached its adjusted base value, it may be increased in value only by the rate of inflation to a maximum annual rate of two percent as required by the State constitution. Prior Proposition 8 Adjustments. The Assessor completed an annual review of properties in the County, including the Redevelopment Projects, and made adjustments for "decline in value." Such adjustments are included in the 2010 -11 Fiscal Year assessment roll. Within the assessment rolls for Fiscal Year 2010 -11, there were a number of properties that had already been reduced in value under Proposition 8. For Fiscal Year 2010 -I1 there were a total of 8,120 parcels in the City of Lake Elsinore that at some point had their values reduced pursuant to Proposition 8. If a property's value had been reduced in some earlier year, its value may have been adjusted either upward or downward for the current year depending on what the Assessor had determined the market value of that property to be as of January 1, 2010, the lien date for Fiscal Year 2010 -11. Below is a summary of the parcels reduced under Proposition 8 for the 2010 -11 Fiscal Year m• Page 160 of 195 Fiscal No. Of Value Under Owners Opinion Max. Potential Owner Year Parcels Appeal of Value Value Loss Broadstone Rivers Edge 2010 -11 1 $28,042,552 $22,000,000 $6,042,552 Elsinore Veto 2009 -10 1 6,601,549 3,300,775 3,300,774 2010 -11 1 6,585,901 3,293,000 3,292,901 New Albertson's 2010 -11 1 6,669,763 3,300,000 3,369,763 Blue Canary 2009 -10 1 465,774 399,788 65,986 Dav A North Lake 2009 -10 2 12,062,377 9,344,000 2,718,377 2010 -11 2 12,039,211 6,910,000 5,129,211 LEVC Group 2009 -10 6 11,730,000 7,200,000 4,530,000 2010 -11 6 11,702,191 7,200,000 4,502,191 Lake Elsinore Medical Campus 2009 -10 107 11,205,081 5,502,000 5,703,081 Grand Oaks Apartments 2009 -10 1 13,122,714 8,298,566 4,824,148 Proposition 8 Adjustments General. In 1978, California voters passed "Proposition 8." This constitutional amendment allows a temporary reduction in assessed value when a property suffers a "decline in value." A decline in value occurs when the current market value of a property is less than the current assessed value as of the lien date. Under the terms of Proposition 8, it is the County Assessor's obligation to assess all properties at the lesser of current market value or at the property's base value, as adjusted for inflation and for any changes that have occurred to the property since it was last purchased. Properties that have their values reduced to the current market value are annually reviewed by the County Assessor to determine the new market value of the property. The value that is enrolled each year is the lesser of the current market value or the property's adjusted base value. Adjusting the property's value to the current market value may entail a further decrease in value or an increase in value that is not limited by constitutional restriction on annual value increases. Once the property has again reached its adjusted base value, it may be increased in value only by the rate of inflation to a maximum annual rate of two percent as required by the State constitution. Prior Proposition 8 Adjustments. The Assessor completed an annual review of properties in the County, including the Redevelopment Projects, and made adjustments for "decline in value." Such adjustments are included in the 2010 -11 Fiscal Year assessment roll. Within the assessment rolls for Fiscal Year 2010 -11, there were a number of properties that had already been reduced in value under Proposition 8. For Fiscal Year 2010 -I1 there were a total of 8,120 parcels in the City of Lake Elsinore that at some point had their values reduced pursuant to Proposition 8. If a property's value had been reduced in some earlier year, its value may have been adjusted either upward or downward for the current year depending on what the Assessor had determined the market value of that property to be as of January 1, 2010, the lien date for Fiscal Year 2010 -11. Below is a summary of the parcels reduced under Proposition 8 for the 2010 -11 Fiscal Year m• Page 160 of 195 TABLE NO. 12 REDEVELOPMENT AGENCY OF THE CITY OF LAKE ELSINORE PROPOSITION 8 REDUCTIONS IN VALUE No. of Percent Parcels 2009 -10 Value 2010 -11 Value Change Change City (non- 4,618 $1,050,341,278 $958,848,024 ($91,491254) (8.71 %) Redevelopment) Redevelopment 1,958 403,028,614 373,626,777 (29,401,837) (7.30 %) Project No. 11 Redevelopment 866 118.223342 101.482.455 (16.740.887) 14.16% Project No. III Source: Fiscal Consultant Report (see "APPENDIX C — FISCAL CONSULTANT REPORT "). TRANSFERS OF OWNERSHIP As previously discussed, one of the events that trigger a reevaluation of property is the transfer of ownership. Transfers of ownership are occurring at a rate higher than historical averages. This has been attributed, in part, to the amount of foreclosure activity. The median price of these transfers of ownership has continued to decline (see "TAX INCREMENT REVENUES — TAXABLE VALUATIONS "). The loss of taxable valuation will have an adverse effect on the receipt of Tax Revenues. A review of recent transfers of ownership was conducted by the Fiscal Consultant and a number of transfers were found to have occurred after the January 1, 2010 lien date for the current fiscal year. These transfers of ownership occurred from January 1, 2010 through February 2011. As a result, the sales values on these transfers of ownership are expected to be reflected in the tax rolls for 2011 -12 and 2012- 13. Redevelopment Project No. II Within the Redevelopment Project No. I1, 705 transfers of ownership were found. These transfers of ownership occurred between January 1, 2010 through February 2011, and are expected to result in a increase of value in the amount of $1,254,701 to the Fiscal Year 2011 -12 tax roll and a decrease of value in the amount of $446,611 for Fiscal Year 2012 -13 for the Redevelopment Project No. 11. The impacts of these transfers are included in the projections by the Fiscal Consultant of Tax Increment Revenue (see "APPENDIX C — FISCAL CONSULTANT REPORT "). Redevelopment Project No. III Within the Redevelopment Project No. III, 488 transfers of ownership were found. These transfers of ownership occurred between January 1, 2010 through February 2011, and are expected to result in a decrease of value in the amount of $855,972 to the Fiscal Year 2010 -11 tax roll and an increase of value in the amount of $1,839,610 for Fiscal Year 2012 -13 for the Redevelopment Project No. 111. The impacts of these transfers are included in the projections by the Fiscal Consultant of Tax Increment Revenue (see "APPENDIX C — FISCAL CONSULTANT REPORT "). 70 Page 161 of 195 DELINQUENCIES The Agency receives from the County 100% of its respective share of the secured ad valorem taxes levied, without regard to actual collections of taxes (see "SOURCES OF PAYMENT FOR THE BONDS — REPAYMENT OFTHE AGENCY BONDS — Alternative Method of Tax Apportionment ( "Teeter Plan ")" herein). Due to this allocation method, the Agency is held harmless from tax delinquencies and, as a consequence, the Agency receives no adjustments for redemption payments of delinquent collections. The unsecured taxes are allocated based on actual unsecured tax collections. The County makes a one -time adjustment for changes in the tax roll in the following year. However, there is no assurance that the County will continue to allocate tax revenues in this manner. If the County does not allocate taxes in accordance with its Teeter Plan, tax delinquencies could cause temporary disruptions of the receipt of Tax Revenues to the extent delinquencies exceeded redemption payments of delinquent collections. FORECLOSURES As a result of the recent nationwide increase in defaults on residential mortgages there has been concern expressed in the financial markets over the possible impact that these defaults may have on redevelopment agency revenues in general. Reliable information on foreclosure activity is difficult to find and information that is available is not readily applicable to discrete areas within cities and redevelopment project areas. Much of the information available is segregated by county or ZIP Code. The information within the following table is based on information available for the ZIP Codes identified as containing the City of Lake Elsinore from the RealtyTrac U.S. Foreclosure Market Report as of May 11, 2011. Since the City ZIP Codes encompass areas that are outside of the Redevelopment Projects and areas that are outside of the city limits, this information is illustrative only. TABLE NO. 13 REDEVELOPMENT AGENCY OF THE CITY OF LAKE ELSINORE FORECLOSURE DATA FOR THE CITY OF LAKE ELSINORE ZIP CODES 92530 THROUGH 92532 Notices of Notices of Trustee Real Estate Owned Total City As 2L Default Filed Sale Filed by Lender Residential Parcels May 11, 2011 333 462 437 13,459 According to RealtyTrac, the "Notices of Default" are based on the number of properties where a publicly recorded notice has been given that a property owner has missed scheduled loan payments for a loan secured by a property. "Notices of Trustee Sale" are based on the number of properties where a document has been filed announcing the public sale of a property to recover a debt owed by the owner of the property. These notices are mailed to the parties affected by the sale of the property, are advertised in local publications and are recorded as public records. "Real Estate Owned by Lender" reflects the number of properties that are owned by the lender as the result of a foreclosure. Real Estate Owned by Lender occurs after or in lieu of foreclosure. Generally the foreclosure process may be halted by the property owner by paying the amount that is in default on the loan and bringing the loan current. The number of parcels on which Notices of Default or Notices of Trustee's Sale have been filed or are lender owned total 9.15% of all residential parcels within the City. The City is located within ZIP Codes 92530, 92531 and 92532, which.also include unincorporated areas of Riverside County. The Fiscal 71 Page 162 of 195 Consultant was unable to determine how many of the parcels represented in Table No. 12 above may be located within the Redevelopment Projects or that are located within the city limits. Redevelopment Project No. II According to foreclosure data reported by DataQuick, there are 87 parcels within the Redevelopment Project No. 11 that appear to have foreclosure activity. Based on data provided by DataQuick, the 87 parcels in foreclosure yet to be sold may result in an increase of $1,390,907 in assessed value for Fiscal Year 2012 -13. The impact of these transfers is included in the projections by the Fiscal Consultant of incremental taxable value and tax increment revenue (see "APPENDIX C — FISCAL CONSULTANT REPORT "). Redevelopment Project No. III According to foreclosure data reported by DataQuick, there are 60 parcels within the Redevelopment Project No. III that appear to have foreclosure activity. Based on data provided by DataQuick, the 60 parcels in foreclosure yet to be sold may result in an increase of $2,682,745 in assessed value for Fiscal Year 2012 -13. The impact of these transfers is included in the projections by the Fiscal Consultant of incremental taxable value and tax increment revenue (see "APPENDIX C FISCAL CONSULTANT REPORT "). PASS- THROUGH AGREEMENTS AND STATUTORY PAYMENTS Prior to the enactment of Assembly Bill 1290 ( "AB 1290 "), enacted by the State Legislature in 1993, under the Redevelopment Law a redevelopment agency could enter into an agreement to pay tax increment revenues to any taxing agency that has territory located within a redevelopment project in an amount which, in the agency's determination, was appropriate to alleviate any financial burden or detriment caused by the redevelopment project. These agreements normally provide for a pass- through of tax increment revenue directed to the affected taxing agency, and, therefore, are commonly referred to as "pass- through agreements" The Agency has entered into pass- through agreements with respect to Tax Increment Revenues relating to the Redevelopment Projects. Although AB 1290 prohibits redevelopment agencies from entering into pass- through agreements, AB 1290 does not affect existing pass- through agreements. In place of such agreements, AB 1290 provides a statutory formula for the allocation of tax increment revenues ( "Statutory Tax Sharing "), which formula applies to all redevelopment projects created after enactment of AB 1290 and to territory that is added to existing redevelopment projects (see "APPENDIX C — FISCAL CONSULTANT REPORT ',). Pass - Through Agreements The Agency has the following pass - through agreements with respect to the Redevelopment Projects: REDEVELOPMENT PROJECT NO. II Riverside County Riverside County was allocated approximately 29.47% of the 1% General Levy generated in Redevelopment Project No. Il (the "County Share ") in Fiscal Year 2010 -11. Pursuant to the tax sharing agreement with the County, the County will receive 50% and the Agency will receive the remaining 50% of the County Share relating to subareas A, B and C of the project area, and the County will receive 100% of the County Share relating to subarea D of the project area. The cumulative amount of the County Share that may be distributed to the Agency is $8,000,000. The Agency may only spend its portion of the County Share on "Mutually Agreeable Projects." 72 Page 163 of 195 Riverside County Flood Control District The Flood Control District was allocated approximately 3.61% of the 1% General Levy generated in Redevelopment Project No. II (the "Flood Control District Share ") in Fiscal Year 2010 -I1. Pursuant to the tax sharing agreement with the Flood Control District, the Flood Control District will receive 80% of the Flood Control District Share and the Agency will receive 20% of the Flood Control District Share. Elsinore Malley Municipal Water District The Municipal Water District was allocated approximately 7.88% of the 1% General Levy generated in Redevelopment Project No. II (the "Municipal Water District Share ") in Fiscal Year 2010 -11. Pursuant to the tax sharing agreement with the Municipal Water District, the Municipal Water District will receive 100% of the Municipal Water District Share, to be used to pay debt service on indebtedness incurred to finance or refinance construction of improvements of benefit to Redevelopment Project No. 11. When all such indebtedness has been repaid, the Municipal Water District Share will thereafter be distributed to the Agency. In addition, the Municipal Water District will also receive any Tax Increment Revenues generated by any tax override levied to service any Municipal Water District debt established after formation of Redevelopment Project No. 11. Elsinore Water District Elsinore Water District (the "Water District') was allocated approximately 0.70% of the I % General Levy generated in Redevelopment Project No. II (the "Water District Share ") in Fiscal Year 2010 -11. Pursuant to the tax sharing agreement with the Water District, the Water District will receive 100% of the Water District Share. In addition, the Water District will also receive any Tax Increment Revenues generated by any tax override levied to service any Water District debt established after formation of Redevelopment , Project No. II. Elsinore Malley Cemetery District Elsinore Valley Cemetery District (the "Cemetery District') was allocated approximately 1.06% of the 1% General Levy generated in Redevelopment Project No. II (the "Cemetery District Share ") in Fiscal Year 2010 -11. Pursuant to the tax sharing agreement with the Cemetery District, the Cemetery District will receive 100% of the Cemetery District Share. REDEVELOPMENT PROJECT NO. III Riverside County Flood Control District On June 27, 1989, the Agency entered into a Cooperation Agreement with the Flood Control District and the City under which the following agreement was made: Taxes attributable to that area within the territorial limits of the Flood Control District which would have otherwise been levied upon taxable property in Redevelopment Project No. III shall be paid by the Agency into a fund of the Flood Control District designated "Project Area Ill Flood Control Fund" to be used to finance or refinance flood control facilities which benefit Redevelopment Project No. III. Elsinore School District On June 14, 1988, the Agency entered into a Cooperation Agreement with the Elsinore School District (the "School District') and the City under which the following agreement was made: The School District shall be entitled to receive in each year fifty percent (50 %) of its tax revenues which the School District would have been entitled to receive in the absence of the adoption of a Redevelopment Plan for Redevelopment Project No. III. Elsinore Union High School District On June 14, 1988, the Agency entered into a Cooperation Agreement with the Elsinore Union High School District (the "Union High District') and the City under which the following agreement was made: 73 Page 164 of 195 The Union High District shall be entitled to receive in each year fifty percent (50 %) of its tax revenues which the Union High District would have been entitled to receive in the absence of the adoption of a Redevelopment Plan for Redevelopment Project No. III. The School District and Union High District merged into the Lake Elsinore Unified School District effective July 1, 1990. All pass- through revenues still apply. Mi. San Jacinto Community College District On June 14, 1988, the Agency entered into a Cooperation Agreement with the Mt. San Jacinto Community College District (the "Community College District ") and the City under which the following agreement was made: The Community College District shall be entitled to receive in each year fifty percent (50 %) of its tax revenues which the Community College District would have been entitled to receive in the absence of the adoption of a Redevelopment Plan for Redevelopment Project No. III. Riverside County Superintendent ofSehools On June 14, 1988, the Agency entered into a Cooperation Agreement with the Riverside County Superintendent of Schools (the "School Superintendent ") and the City under which the following agreement was made: The School Superintendent shall be entitled to receive in each year one hundred percent (100 %) of its tax revenues which the School Superintendent would have been entitled to receive in the absence of the adoption of a Redevelopment Plan for Redevelopment Project No. III. Elsinore Malley Municipal Water District On June 14, 1988, the Agency entered into a Cooperation Agreement with the Municipal Water District and the City under which the following agreement was made: Taxes attributable to that area within the territorial limits of the Municipal Water District which would have otherwise been levied upon taxable property in Redevelopment Project No. III shall be paid by the Agency into a fund of the Municipal Water District designated "Rancho Laguna Redevelopment Project Water Facilities Fund" to be used to finance or refinance water facilities which benefit Redevelopment Project No. III. Elsinore Water District On June 14, 1988, the Agency entered into an Agreement with the City and the Water District under which the following agreement was made: All tax and assessment revenues that would have been received by the Water District had there been no provision for tax increment financing of Redevelopment Project No. III will continue to be received by the Water District. County Agreement The Agency and the City attempted to enter into a cooperation agreement with the County with respect to Redevelopment Project No. 111. In an agreement, dated June 23, 1990, the City, the Agency and the County negotiated a settlement which the County signed on July 27, 1993. The agreement was subsequently modified by an amendment, dated February 8, 1994. The agreement provides that the County is entitled to receive for each year in which the tax revenues are (a) at least $500,000 but less than $1,500,000 for such year, twenty -five percent (25 %) of the tax revenues which the County would have been entitled to receive in the absence of the adoption of the Redevelopment Plan for Redevelopment Project No. III, (b) at least $1,500,000 but less than $2,500,000 for such year, thirty-seven and one -half percent (371/2%) of the tax revenues which the County would have been entitled to receive in the absence of the adoption of the Redevelopment Plan for Redevelopment Project No. III, (c) at least $2,500,000 but less than $4,000,000 for such year, fifty percent (50 %) of the tax revenues which the County would have been entitled to receive in the absence of the adoption of the Redevelopment Plan for Redevelopment 74 Page 165 of 195 Project No. 111, (d) at least $4,000,000 but less than $6,000,000 for such year, sixty -two and one -half percent (62'h %) of the tax revenues which the County would have been entitled to receive in the absence of the adoption of the Redevelopment Plan for Redevelopment Project No. 111, (e) at least $6,000,000 but less than $8,000,000 for such year, seventy -five percent (75 %) of the tax revenues which the County would have been entitled to receive in the absence of the adoption of the Redevelopment Plan for Redevelopment Project No. 111, and (f) over $8,000,000 for such year, one hundred percent (100 %) of the tax revenues which the County would have been entitled to receive in the absence of the adoption of the Redevelopment Plan for Redevelopment Project No. III, provided that in the fiscal year in which the total exceeds $8;000,000 for such year, the Agency and the County agree to review the conditions then current to determine the possible payback to the County of its increment paid to the Agency. Furthermore, the County agreed to defer receipt of tax revenues it should receive under the above formula through January, 1997, and that in January 1999, all moneys so deferred by the County would be paid back by the Agency from the then - current tax revenues, without interest, in equal payments over five (5) years. Statutory Tax Sharing Pursuant to Section 33607.7 of the Health and Safety Code, for redevelopment projects adopted prior to January 1, 1994, any amendment that increases the amount of tax increment revenues to be received by a redevelopment project or extends any of the measure's required time limits triggers payments to taxing entities with whom the agency does not have a pass- through agreement. The AB 1290 payments, which are to begin the fiscal year following the year that the redevelopment project's original plan limitations would have taken effect, are calculated using the increase in assessed value above the amount of assessed value in the redevelopment project in the year that the former limit would have been reached COUNTY PROPERTY TAX COLLECTION REIMBURSEMENT Chapter 466 allows counties to recover charges for property tax administration in an amount equal to their 1989 -90 property tax administration costs, as adjusted annually. For fiscal year 2009 -10, the County collection charges were $101,982 for Redevelopment Project No. 11 and $27,797 for Redevelopment No. 111. For purposes of these projections, The Fiscal Consultant has assumed that the County will continue to charge the Agency for property tax administration. For purposes of their projection, the County's administrative charge and redevelopment fee is estimated between 1.046% and 1.042% of the respective Redevelopment Projects' annual Gross Revenue. ALLOCATION OF STATE ASSESSED UNITARY TAXES Legislation enacted in 1986 (Chapter 1457) and 1987 (Chapter 921) provided for a modification of the distribution of tax revenues derived from utility property assessed by the State Board of Equalization (the SBE), other than railroads. Prior to the 1988 -89 Fiscal Year, property assessed by the SBE was assessed statewide and was allocated according to the location of individual components of a utility in a tax rate area. Commencing in 1988 -89, tax revenues derived from unitary property assessed by the SBE are accumulated in a single Tax Rate Area for the County. It is then distributed to each taxing entity in the County in the following manner: (1) each taxing entity will receive the same amount as in the previous year plus an increase for inflation of up to two percent; (2) if utility tax revenues are insufficient to provide the same amount as in the previous year, each taxing entity's share would be reduced pro -rata county wide; and (3) any increase in revenue above two percent would be allocated in the same proportion as the taxing entity's local secured taxable values are to the local secured taxable values of the County. 75 Page 166 of 195 To administer the allocation of unitary tax revenues to redevelopment agencies, the County no longer includes the taxable value of utilities as part of the reported taxable values of the project area, therefore, the base year of project areas have been reduced by the amount of utility value that existed originally in the base year. Within the Redevelopment Project No. II, the Auditor Controller has reported that $84,388 in unitary tax revenue will be allocated to the Agency for 2010 -11 and $13,987 for the Redevelopment Project No. III. These revenue amounts tend to remain fairly constant but are subject to adjustments by the SBE for inflation growth, declines in value due to assessment appeals by utility companies and others taxed under this system and increases in value resulting from development of new facilities. Because the Fiscal Consultant cannot reasonably project changes in this revenue stream, the Fiscal Consultant have assumed that the unitary tax revenue will remain constant in future years. Table 14 illustrates the amounts of Unitary Revenues that have been received by the Agency for the Redevelopment Project during the previous five fiscal years. TABLE NO. 14 REDEVELOPMENT AGENCY OF THE CITY OF LAKE ELSINORE UNITARY REVENUE HISTORY 2005 -06 2006 -07 2007 -08 2008 -09 2009 -10 Redevelopment Project No. 2 $44,164 $67,240 $73,937 $87,126 $80,089 Redevelopment Project No. 3 4,231 8,005 9,748 14,026 12,924 Source: Riverside County Auditor- Controller's Office, Disbursement Tax Division "Tax Increment Summary". HOUSING SET -ASIDE In accordance with Section 33334.2 of the Redevelopment Law, not less than twenty percent (20 %) of all taxes which are allocated to the Agency from The Redevelopment Projects (see "INTRODUCTORY STATEMENT — THE AGENCY - Tax Allocation Financing" herein) are required to be deposited in the Low and Moderate Income Housing Fund to be used by the Agency for purposes of improving, increasing and preserving the City's supply of housing for persons and families of low or moderate income (including the payment of indebtedness issued or incurred for such purposes) (the "Housing Set -Aside Revenues "). Funds available from the twenty percent (20 %) requirement may be used outside a redevelopment project on a finding by the Agency and the City Council that such use will be of benefit to such redevelopment project. The Redevelopment Law also permits agencies with more than one redevelopment project to set aside less than twenty percent (20 %) of the taxes allocated to the agency from one redevelopment project if the difference is made up from another redevelopment project in the same year and if the agency and the legislative body of the community find that such use of funds will benefit such other redevelopment project. The Housing Set -Aside Revenues are calculated as 20% of Tax Increment Revenues (including Unitary Tax Revenues); therefore the amount of Housing Set -Aside Revenues is not affected by payments under any pass- through agreements or statutory pass- through requirements. FUTURE DEVELOPMENT IN THE REDEVELOPMENT PROJECTS The following proposed developments are identified to give an indication of the longer range potential for future development in the Redevelopment Projects. Due to the current economic downturn, development has slowed significantly and has largely been suspended. Therefore, no assurance can be given that the development of the land described within the Redevelopment Projects will occur, or that it will occur in a timely manner or in the configuration or intensity described, or that the proposed developers will obtain or retain ownership of any land within the Redevelopment Projects. 76 Page 167 of 195 The City maintains an information website. The City's internet address is wwwlake- elsinore.orn. In particular, click on "Documents" at the top of the home page, then Economic Development, then "Downtown Master Plan" for a description of current planning in the downtown area. For an overview of economic activity, see also "A Conversation with Bob Brady, City Manager " The website also maintains a list of major projects undertaken by the Redevelopment Agency. The City's website is included for reference only and the information on such website is not a part of this Official Statement or incorporated by reference into this Official Statement. No representation is made in this Official Statement as to the accuracy or adequacy of the information included in such internet site. Significant development opportunities remain in the Redevelopment Projects. This is reflected in the availability of vacant land. There are 3,046.50 acres of vacant land in the Redevelopment Projects (64837 acres in Redevelopment Project No. I and 2,398.13 acres in Redevelopment Project No. 11). Vacant land is 9.9% of the total assessed value in Redevelopment Project No. 1 and 11.1% of the total assessed value in Redevelopment Project No. 11. The relative large Redevelopment Projects (1,910 acres in Redevelopment Project No. I and 4,859 acres in Redevelopment Project No. II) represent a single economic development area in which a single development may be in 2 or more Redevelopment Projects. Examples include the Auto Center where Toyota has acquired land in Redevelopment Project No. 1, Ford has a dealership in Redevelopment Project No. II and Chevrolet, Buick and GMC have dealerships in Redevelopment Project No. 1I1; the Summerly Development is in Redevelopment Project Nos. II and 111; the "downtown" includes Redevelopment Projects Nos. I and III; and the Municipal Stadium is in Redevelopment Project No. III but borders on Redevelopment Project No. II. Summerly Project Summerly is a 1,489 lot planned community in Redevelopment Project Nos. 11 and III. An 18 -hole golf course, "The Links," has been completed and is open for play. The entire site has been mass graded and there are 421 nearly completed finished lots and 11 completed model homes. Pursuant to a disposition and development agreement, all the Tax Increment Revenues are required to be accrued, on a subordinate basis, to reimburse the developer for certain public infrastructure improvements upon meeting certain conditions precedent. North Tuscany Hills The Tuscany Hills Specific Plan describes a master planned community of 2,000 homes of which 1,020 homes are completed. All the undeveloped property in Tuscany Hills is owned by Centex Homes (in April 2009, Pulte Homes announced it was acquiring Centex Homes). Although Centex Homes began predevelopment activities, including engineering of the extensive offsite improvements required, site development, including grading, has not commenced. Centex Homes is not currently actively working on the project. Tuscany Hills is in Redevelopment Project No. 1I. Diamond Project The Diamond Specific Plan project site consists of 87.2 acres, generally located along Diamond Drive between Lakeshore Drive and south of Malaga Road. Existing uses within the Diamond Specific Plan include Diamond Stadium and approximately 80,000 square -feet of commercial uses in an existing center called Lake Elsinore Valley Center along Lakeshore Drive. The balance of the site is undeveloped. The Diamond Specific Plan area is accessed from Interstate 15 by existing roadways including Diamond Drive and Lakeshore Drive. The Diamond Project is in Redevelopment Project Nos. II and 111. Anticipated uses identified in the specific plan include retail, restaurants, entertainment, hotel, office, stadium, trails, education center, residential, and plazas. The developer is proposing to develop the project in five (5) phases, depending upon economic conditions, over a seven -to -ten (7 -10) year period. 77 Page 168 of 195 Marina Project The Marina Specific Plan for Waters Edge is a 77 -acre property located between the Lake and Lakeshore Drive at Lucerne Street in Redevelopment Project No. I. The area within the Marina Specific Plan for Waters Edge is proposed to include a 83 -acre marina including 300 boat slips, a commercial area to include watercraft dealers, various retail establishments, office lofts, restaurants and a 150 -unit hotel. The project also includes 3 residential areas for the development of townhomes and condominium type units. The Specific Plan related environmental review is nearly complete. The City is awaiting a final site plan and associated final information for the specific plan from the developers. The developer has not indicated when such information will be delivered. Toyota —Auto Center Toyota has acquired a site in the City's Auto Center for the development of a new car dealership. The site is in Redevelopment Project No. I. The site is currently being graded and construction is expected to commence at a later date. Downtown Master Plan The Agency sponsored the drafting of a downtown master plan (the "Downtown Master Plan ") prepared by Cooper Carry, a national consulting firm. The Downtown Master Plan boundary is generally located south of Interstate 15 and north of the lakefront between Riley Street and Chestnut Street and includes a portion of all three Redevelopment Projects. The major concept of the Downtown Master Plan is to connect the downtown to the Lake. This would require the re- alignment of Main Street and Lakeshore Drive to physically connect the downtown to the Lake. The Master Plan will require various public improvements including a public pier, street improvements and a new city hall. It is expected to stimulate new private development. Pottery Court The Agency has committed approximately $4,000,000 to Bridge Housing Corporation for the development of a 113 -unit affordable housing apartment complex on 4.29 acres in Redevelopment Project No. I. The Agency received a $1 million grant from the U.S. Department of Housing and Urban Development for this project. Construction is expected to commence in 2011. Outlet Center Expansion and Upgrading The 100 store Lake Elsinore Outlet Center recently announced an expansion and rehabilitation. The Outlet Center is in Redevelopment Project No. I. County Club Heights Residential Development Three different investor groups have accumulated a significant amount of vacant property in the "Heights" for future residential development. Development of this area currently has not been scheduled. The Heights is in Redevelopment Project No. III. Lake Elsinore Technology Center The Agency received a $2.6 million grant from the U.S. Economic and Development Administration to assist in the development of the Lake Elsinore Technology Center ( "LETC ") in Redevelopment Project No. I. As proposed, the LETC consists of a 13,200 square -foot business incubator that will provide 10 -15 businesses with professional office space at below market -rate rents. 78 Page 169 of 195 PROJECTED TAX REVENUES AND DEBT SERVICE COVERAGE Projected Tax Revenues The Agency's Fiscal Consultant has prepared the projections of Tax Revenues for the Redevelopment Projects, as set forth in the Fiscal Consultant's Report. See "APPENDIX C — FISCAL CONSULTANT REPORT" for more detailed information on projected Tax Revenues for the Redevelopment Projects, including an explanation of the assumptions on which such projections are based. Receipt of projected Tax Revenues in the amounts and at the times projected by the Agency depends on the realization of certain assumptions relating to the Tax Increment Revenues (including Unitary Tax Revenues). Based upon the projected Tax Increment Revenues (including Unitary Tax Revenues), the Agency expects sufficient Tax Revenues should be available to the Agency to pay principal of and interest on the Agency Bonds. Although the Agency believes that the assumptions upon which the projected Tax Revenues are based are reasonable, the Agency, the Fiscal Consultant and the Financing Consultant provide no assurance that the projected Tax Revenues will be achieved. To the extent that the assumptions are not actually realized, the Agency's ability to timely pay principal and interest on the Agency Bonds may be adversely affected. Debt Service Coverage Based Upon Projected Tax Revenues The tables on the following pages show debt service coverage based upon projected Tax Revenues contained in the Fiscal Consultant Report (see "APPENDIX C — FISCAL CONSULTANT REPORT "). All of the projections of Tax Revenues commence with the reported values for Fiscal Year 2010 -11. Certain deductions for Base Year Assessment Appeals, based on projections by the Fiscal Consultant, are reflected in the projections commencing with Fiscal Year 2011 -12. The Fiscal Consultant also adjusted the projections for certain "Transfer Sales," "Foreclosure Sales" and "Foreclosures" (as those terms are defined in the Fiscal Consultant Report) that occurred between January 1, 2010 and February 8, 2011. The projections include a (0.753 %) inflation factor for Fiscal Year 2011 -12 and 2% growth in real property taxable values thereafter. The projections by the Fiscal Consultant do not include estimated growth in assessed value due to new development (see "BONDOWNERS' RISKS" herein and "APPENDIX C — FISCAL CONSULTANT REPORT"). Receipt of projected Tax Revenues in the amounts and at the times projected by the Agency depends on the realization of certain assumptions relating to the Tax Increment Revenues (including Unitary Tax Revenues). Based upon the projected Tax Increment Revenues (including Unitary Tax Revenues), the Agency expects sufficient Tax Revenues should be available to the Agency to pay principal of and interest on the Agency Bonds. Although the Agency believes that the assumptions upon which the projected Tax Revenues are based are reasonable, the Agency, the Fiscal Consultant and the Financing Consultant provide no assurance that the projected Tax Revenues will be achieved. To the extent that the assumptions are not actually realized, the Agency's ability to timely pay principal and interest on the Agency Bonds may be adversely affected. Fiscal Year 2011 2012 TABLE NO. 15 REDEVELOPMENT AGENCY OF THE CITY OF LAKE ELSINORE REDEVELOPMENT PROJECT NO. II PROJECTED TAX REVENUES AND DEBT SERVICE COVERAGE Redevelopment Project No. Project No. II Project No. Il II 2010C Redevelopment Projected Projected Tax 2010A Loan Loan Project It Total DS Surplus Tax Revenues Pavments Payments Bonds Payments Revenues (1) $3,549,000 $326,244 $687,053 $90,858 3,549,000 324,944 993,718 305,315 79 $1,104,155 $2,444,845 1,623,977 1,925,023 Coverage (percentage) 321% 219% Page 170 of 195 2013 3,627,000 317,994 998,518 307,795 1,624,307 2,002,693 223% 2014 3,704,000 321,194 998.018 309,420 1,628,632 2,075,368 227% 2015 3,782,000 319,244 997,318 305,340 1,621,902 2,160;098 233% 2016 3,862,000 322,619 995336 306,020 1,624,375 2,237,625 238% 2017 3,943,000 320,519 996,861 306,175 1,623,555 2,319,445 243% 2018 4,026,000 323,244 999,761 304,875 1,627,880 2,398,120 247% 2019 4,111,000 325,619 996,324 308,225 1,630,168 2,480,832 252% 2020 4,197,000 322,619 995,905 305,875 1,624399 2,572,601 258% 2021 4,285,000 314,419 998,249 308,175 1,620,843 2,664,157 264% 2022 4,375,000 3161325 997,249 304,775 1,618,349 2.756,651 270% 2023 4,467,000 312,925 995,249 305,213 1,613,387 2,853,613 277% 2024 4,560,000 319,425 996,199 304,885 1,620,509 2,939,491 281% 2025 4,655,000 319,700 995,174 308,793 1,623,667 3,031,333 287% 2026 4,753,000 314713 996,924 306,553 1,618,190 3,134,810 294% 2027 4,852,000 319,725 996,944 308,548 1,625,217 3,226,783 299% 2028 4,953,000 314,213 994,594 304,395 1,613,202 3,339,798 307% 2029 5,056,000 313,700 999,588 304,478 1,617,766 3,438,234 313% 2030 5,161,000 312,925 997,500 308,413 1,618,838 3,542,162 319% 2031 5,269,000 1,366,888 305,818 1,672,706 3,596,294 315% 2032 5,378,000 1,370,200 307,075 1,677,275 3,700,725 321% 2033 5,490,000 1,305,100 306,803 1,611,903 3,878,097 341% (0 In the event there are not sufficient Redevelopment Project No. 11 Tax Revenues to pay debt service on the Redevelopment Project 11 Bonds, the Agency has covenanted to make an interfund loan from Redevelopment Project No. 1, Redevelopment Project No. ID and the Low and Moderate Income Housing Fund (see "SOURCES OF PAYMENT FOR THE BONDS - REPAYMENT OF THE AGENCY BONDS - Pledge of Tax Revenues" herein). Source: Fiscal Consultant Report (see "Appendix C- Fiscal Consultant Report") 30 Page 171 of 195 TABLE NO. 16 * Debt service is presented on a bond -year basis. 0) Source: Fiscal Consultant Report (see "Appendix C- Fiscal Consultant Report") (2) In the event there are not sufficient Redevelopment Project No. III Tax Revenues to pay debt service on the Project No. III Loan, the Agency has covenanted to make an interfand loan from Redevelopment Project No. 1, Redevelopment Project No. 11 and the Low and Moderate Income Housing Fund (see "SOURCES OF PAYMENT FOR THE BONDS - REPAYMENT OF THE AGENCY BONDS - Pledge of Tax Revenues or Housing Set -Aside Revenues" herein). 81 Page 172 of 195 REDEVELOPMENT AGENCY OF THE CITY OF LAKE ELSINORE REDEVELOPMENT PROJECT NO. III PROJECTED TAX REVENUES AND DEBT SERVICE COVERAGE Redevelopment Project No. Redevelopment Project No. III III 2O10A Project III Total Debt Projected Fiscal Projected Tax Loan Bonds DS Service Surplus Tax Coverage Year* Revenues (p Pavments Payments Payments Revenues (S) (Pereentaee) 2010 -11 $730,000 $143,213 $38,595 $181,808 $548,192 402% 2011 -12 733,000 142,113 119,958 262,071 470,929 280°% 2012 -13 764,000 145,463 119,238 264,701 499,299 289°% 2013 -14 783,000 143,663 118,338 262,001 520,999 299% 2014 -15 802,000 141,863 117,318 259,181 542,819 309% 2015 -16 821,000 145,363 121,238 266,601 554,399 308% 2016 -17 841,000 143,413 119,813 263,226 577,774 319% 2017 -18 861,000 146,300 118,063 264,363 596,637 326% 2018 -19 882,000 143,850 121,313 265,163 616,837 333% 2019 -20 903,000 146,225 119,213 265,438 637,562 340% 2020 -21 924,000 143,225 117,113 260,338 663,662 355% 2021 -22 946,000 145,131 120,013 265,144 680,856 357% 2022 -23 969,000 146,731 117,335 264,066 704,934 367% 2023 -24 992,000 148,013 119,658 267,671 724,329 371% 2024 -25 1,015,000 143,288 116,598. 259,886 755,114 391% 2025 -26 1,0387000 143,563 118,538 262,101 775,899 396°% 2026 -27 1,063,000 143,575. 120,095 263,670 799,330 403% 2027 -28 1,087,000 143,325 121,270 264,595 822,405 411% 2028 -29 972,000 142,813 117,063 259,876 712,124 374"% 2029 -30 994.000 147,038 117,855 264,893 729,107 375% 2030 -31 1,017,000 145,738 118,265 264,003 752,997 385% 2031 -32 1,040,000 144,175 118,293 262,468 777,532 396% 2032 -33 1,064,000 147,350 117,938 265,288 798,712 401% 2033 -34 1,088,000 117,200 117,200 970,800 928°% 2034 -35 1,113,000 121,000 121,000 992,000 920% 2035 -36 1,125,000 119,025 119,025 1,005,975 945% 2036 -37 1,150,000 121,663 121,663 1,028,337 945% 2037 -38 1,176,000 118,525 118,525 1,057,475 992% * Debt service is presented on a bond -year basis. 0) Source: Fiscal Consultant Report (see "Appendix C- Fiscal Consultant Report") (2) In the event there are not sufficient Redevelopment Project No. III Tax Revenues to pay debt service on the Project No. III Loan, the Agency has covenanted to make an interfand loan from Redevelopment Project No. 1, Redevelopment Project No. 11 and the Low and Moderate Income Housing Fund (see "SOURCES OF PAYMENT FOR THE BONDS - REPAYMENT OF THE AGENCY BONDS - Pledge of Tax Revenues or Housing Set -Aside Revenues" herein). 81 Page 172 of 195 LEGAL MATTERS ENFORCEABILITY OF REMEDIES The remedies available to the Trustee and the owners of the Bonds upon an event of default under the Indenture, the Agency Indenture or any other document described herein are in many respects dependent upon regulatory and judicial actions which are often subject to discretion and delay. Under existing law and judicial decisions, the remedies provided for under such documents may not be readily available or may be limited. The various legal opinions to be delivered concurrently with the delivery of the Bonds will be qualified to the extent that the enforceability of certain legal rights related to the Indenture is subject to limitations imposed by bankruptcy, reorganization, insolvency or other similar laws affecting the rights of creditors generally and by equitable remedies and proceedings generally. APPROVAL OF LEGAL PROCEEDINGS Fulbright & Jaworski L.L.P., Los Angeles, California, as Bond Counsel, will render an opinion which states that the Indenture and the Agency Indenture are valid and binding contracts of the Authority and are enforceable in accordance with their terms. The legal opinion of Bond Counsel will be subject to the effect of bankruptcy, insolvency, moratorium and other similar laws affecting creditors' rights and to the exercise of judicial discretion in accordance with general principles of equity. The Authority has no knowledge of any fact or other information which would indicate that the Indenture or the Agency Indenture are not so enforceable against the Authority or the Agency, as applicable, except to the extent such enforcement is limited by principles of equity and by State and federal laws relating to bankruptcy, reorganization, moratorium or creditors' rights generally. Certain legal matters will be passed on for the Authority by Leibold, McClendon & Mann, P.C., Laguna Hills, California, Authority Counsel and by Fulbright & Jaworski L.L.P., Los Angeles, California, as Disclosure Counsel. Certain legal matters will be passed on for the Underwriter by McFarlin & Anderson LLP, Lake Forest, California, as Underwriter's Counsel Fees payable to Bond Counsel, Disclosure Counsel and Underwriter's Counsel are contingent upon the sale and delivery of the Bonds. TAX MATTERS The Internal Revenue Code of 1986 (the "Code ") imposes certain requirements that must be met subsequent to the issuance and delivery of the Bonds for interest thereon to be and remain excluded pursuant to section 103(a) of the Code from the gross income of the owners thereof for federal income tax purposes. Noncompliance with such requirements could cause the interest on the Bonds to be included in the gross income of the owners thereof for federal income tax purposes retroactive to the date of issuance of that series of the Bonds. The Authority has covenanted in the Indenture to maintain the exclusion of the interest on the Bonds from the gross income of the owners thereof for federal income tax purposes. In the opinion of Fulbright & Jaworski L.L.P., Bond Counsel, under existing law interest on the Bonds is exempt from personal income taxes of the State of California and, assuming compliance with the aforementioned covenant, interest on the Bonds is excluded pursuant to section 103(a) of the Code from the gross income of the owners thereof for federal income tax purposes. Bond Counsel is of the further opinion that the Bonds are not "specified private activity bonds" within the meaning of section 57(a)(5) of the Code and, therefore, the interest on the Bonds is not treated as an item of tax preference for purposes of computing the alternative minimum tax imposed by section 55 of the Code; however, the receipt or accrual of interest on the Bonds owned by a corporation may affect the computation of its alternative minimum taxable income. A corporation's alternative minimum taxable income is the basis on which the alternative minimum tax imposed by section 55 of the Code will be computed. i% Page 173 of 195 To the extent that a purchaser of a Bond acquires that Bond at a price in excess of its "stated redemption price at maturity" (within the meaning of section 1273(a)(2) of the Code), such excess will constitute "bond premium" under the Code. Section 171 of the Code, and the Treasury Regulations promulgated thereunder, provide generally that bond premium on a tax - exempt obligation must be amortized over the remaining term of the obligation (or a shorter period in the case of certain callable obligations); the amount of premium so amortized will reduce the owner's basis in such obligation for federal income tax purposes, but such amortized premium will not be deductible for federal income tax purposes. Such reduction in basis will increase the amount of any gain (or decrease the amount of any loss) to be recognized for federal income tax purposes upon a sale or other taxable disposition of the obligation. The amount of premium which is amortizable each year by a purchaser is determined by using such purchaser's yield to maturity. The rate and timing of the amortization of the bond premium and the corresponding basis reduction may result in an owner realizing a taxable gain when its Bond is sold or disposed of for an amount equal to or in some circumstances even less than the original cost of the Bond to the owner. Purchasers of Bonds at a price that includes bond premium should consult their own tax advisors with respect to the computation and treatment of such bond premium, including, but not limited to, the calculation of gain or loss upon the sale, redemption or other disposition of the Bond. The excess, if any, of the stated redemption price at maturity of Bonds of a maturity over the initial offering price to the public of the Bonds of that maturity is "original issue discount" Original issue discount accruing on a Bond is treated as interest excluded from the gross income of the owner thereof for federal income tax purposes and is exempt from California personal income tax to the same extent as would be stated interest on that Bond. Original issue discount on any Bond purchased at such initial offering price and pursuant to such initial offering will accrue on a semiannual basis over the term of the Bond on the basis of a constant yield method and, within each semiannual period, will accrue on a ratable daily basis. The amount of original issue discount on such a Bond accruing during each period is added to the adjusted basis of such Bond to determine taxable gain upon disposition (including sale, redemption or payment on maturity) of such Bond. The Code includes certain provisions relating to the accrual of original issue discount in the case of purchasers of Bonds who purchase such Bonds other than at the initial offering price and pursuant to the initial offering. Purchasers of Bonds of a maturity having original issue discount should consult their own tax advisors with respect to the tax consequences of ownership of Bonds with original issue discount. Pursuant to the Indenture and the Agency Indenture, and in the Tax Certificate Pertaining to Arbitrage and Other Matters under Sections 103 and 141 -150 of the Internal Revenue Code of 1986, to be delivered by the Authority and the Agency in connection with the issuance of the Bonds, each of the Authority and the Agency will make representations relevant to the determination of, and will make certain covenants regarding or affecting, the exclusion of interest on the Bonds from the gross income of the owners thereof for federal income tax purposes. In reaching its opinions described in the immediately preceding paragraph, Bond Counsel will assume the accuracy of such representations and the present and future compliance by the Authority with such covenants. Further, except as stated above, Bond Counsel will express no opinion as to any federal or state tax consequences of the receipt of interest on, or the ownership or disposition of, the Bonds. Bond Counsel has not undertaken to advise in the future whether any events after the date of issuance of the Bonds may affect the tax status of interest on the Bonds or the tax consequences of the ownership of the Bonds. No assurance can be given that future legislation, or amendments to the Code, if enacted into law, will not contain provisions that could directly or indirectly reduce the benefit of the exemption of interest on the Bonds from personal income taxation by the State of California or of the exclusion of the interest on the Bonds from the gross income of the owners thereof for federal income tax purposes. Furthermore, Bond Counsel expresses no opinion as to any federal, state or local tax law consequences with respect to the Bonds, or the interest thereon, if any action is taken with respect to the Bonds or the proceeds thereof upon the advice or approval of other counsel. Although Bond Counsel is of the opinion that interest on the Bonds is exempt from California personal income tax and excluded from the gross income of the owners thereof for federal income tax purposes, an owner's federal, state or local tax liability may be otherwise affected by the ownership or disposition of the Bonds. The nature and extent of these other tax consequences will depend upon the owner's other 83 Page 174 of 195 items of income or deduction. Without limiting the generality of the foregoing, prospective purchasers of the Bonds should be aware that (i) section 265 of the Code denies a deduction for interest on indebtedness incurred or continued to purchase or carry the Bonds and the Code contains additional limitations on interest deductions applicable to financial institutions that own tax - exempt obligations (such as the Bonds), (ii) with respect to insurance companies subject to the tax imposed by section 831 of the Code, section 832(b)(5)(B)(i) reduces the deduction for loss reserves by 15% of the sum of certain items, including interest on the Bonds, (iii) interest on the Bonds earned by certain foreign corporations doing business in the United States could be subject to a branch profits tax imposed by section 884 of the Code, (iv) passive investment income, including interest on the Bonds, may be subject to federal income taxation under section 1375 of the Code for Subchapter S corporations that have Subchapter C earnings and profits at the close of the taxable year if greater than 25% of the gross receipts of such Subchapter S corporation is passive investment income, (v) section 86 of the Code requires recipients of certain Social Security and certain Railroad Retirement benefits to take into account, in determining the taxability of such benefits, receipts or accruals of interest on the Bonds and (vi) under section 32(i) of the Code, receipt of investment income, including interest on the Bonds, may disqualify the recipient thereof from obtaining the earned income credit. Bond Counsel has expressed no opinion regarding any such other tax consequences. Bond Counsel's opinion is not a guarantee of a result, but represents its legal judgment based upon its review of existing statutes, regulations, published rulings and court decisions and the representations and covenants of the Authority described above. No ruling has been sought from the Internal Revenue Service (the "Service ") with respect to the matters addressed in the opinion of Bond Counsel, and Bond Counsel's opinion is not binding on the Service. The Service has an ongoing program of auditing the tax - exempt status of the interest on municipal obligations. If an audit of the Bonds is commenced, under current procedures the Service is likely to treat the Authority as the "taxpayer," and the owners would have no right to participate in the audit process. In responding to or defending an audit of the tax - exempt status of the interest on the Bonds, the Authority may have different or conflicting interest from the owners. Public awareness of any future audit of the Bonds could adversely affect the value and liquidity of the Bonds during the pendency of the audit, regardless of its ultimate outcome. ABSENCE OF LITIGATION The Authority and the Agency will furnish a certificate, dated as of the date of delivery of the Bonds, that there is not now known to be pending or threatened any litigation restraining or enjoining the execution or delivery of the Indenture, the Agency Indenture or the sale or delivery of the Bonds or in any manner questioning the proceedings and authority under which the Indenture and the Agency Indenture are to be executed or delivered or the Bonds are to be delivered or affecting the validity thereof. 84 Page 175 of 195 CONCLUDING INFORMATION RATING ON THE BONDS Standard & Poor's Ratings Services, a Standard & Poor's Financial Services LLC business ( "S &P "), has assigned the Bonds a rating of " " ( outlook). This rating reflect only the views of S &P. Explanations of the significance of such rating must be obtained from S &P. There is no assurance that such rating will continue for any given period of time or will not be revised downward or withdrawn entirely by such rating agency, if, in the judgment of such rating agency, circumstances so warrant. Any such downward revision or withdrawal of such rating may have an adverse effect on the market price of the Bonds. The above rating is not a recommendation to buy, sell or hold the Bonds, and such rating may be subject to revision or withdrawal at any time by the rating agency. UNDERWRITING The Bonds are being sold to O'Connor & Company Securities, Inc., Newport Beach, California (the "Underwriter "). The Bonds are being sold to the Underwriter pursuant to, and subject to the terms and conditions of, the Purchase Contract, by and among the Underwriter, the Authority and the Agency (the "Purchase Contract "). The Underwriter is offering the Bonds at the prices set forth on the inside cover page hereof. The initial offering prices may be changed from time to time and concessions from the offering prices may be allowed to dealers, banks and others. The Underwriter has purchased the Bonds at a price of S ( %), which amount represents the principal amount of the Bonds, less original issue discount of $ and less an Underwriter's discount of $ The Underwriter will pay certain of its expenses relating to the offering. EXPERTS The Fiscal Consultant Report prepared by HdL Coren & Cone, Diamond Bar, California, has been included in this Official Statement in reliance on and upon the authority of said firm as experts in the matters covered therein. FINANCIAL STATEMENTS OF THE AGENCY Included herein as Appendix D are the audited financial statements of the Agency as of and for the year ended June 30, 2010, together with the report thereon, dated December 27, 2010, of Diehl, Evans & Company, LLP, Certified Public Accountants & Consultants, Irvine, California (the "Auditor "). Such audited financial statements have been included herein in reliance upon the report of the Auditor. The Auditor has not undertaken to update the audited financial statements of the Agency or its report or to take any action intended or likely to elicit information concerning the accuracy, completeness or fairness of the statements made in this Official Statement, and no opinion is expressed by the Auditor with respect to any event subsequent to its report, dated December 27, 2010. The Agency's audited financial statements are public documents and are included within this Official Statement without the prior approval of the auditor. THE FINANCING CONSULTANT The material contained in this Official Statement was prepared by Rod Gunn Associates, Inc., Huntington Beach, California, an independent financial consulting firm, who advised the Authority and the Agency as to the financial structure and certain other financial matters relating to the Bonds. The information set forth herein has been obtained by the Financing Consultant from sources which are believed to be reliable, but such information is not guaranteed by the Financing Consultant as to accuracy or 85 Page 176 of 195 completeness, nor has it been independently verified. Fees paid to the Financing Consultant are contingent upon the sale and delivery of the Bonds. FORWARD- LOOKING STATEMENTS Certain statements included or incorporated by reference in this Official Statement constitute "forward - looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 21 E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended. Such statements are generally identifiable by the terminology used such as "plan," "expect," "estimate," "project," "budget" or similar words. Such forward - looking statements include, but are not limited to, certain statements contained in the information under the caption "TAX INCREMENT REVENUES" herein. THE ACHIEVEMENT OF CERTAIN RESULTS OR OTHER EXPECTATIONS CONTAINED IN SUCH FORWARD- LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS DESCRIBED TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD - LOOKING STATEMENTS. THE AUTHORITY DOES NOT PLAN TO ISSUE ANY UPDATES OR REVISIONS TO THE FORWARD- LOOKING STATEMENTS SET FORTH IN THIS OFFICIAL STATEMENT. ADDITIONAL INFORMATION The summaries and references contained herein with respect to the Indenture, the Agency Indenture, the Bonds, statutes and other documents, do not purport to be comprehensive or definitive and are qualified by reference to each such document or statute and references to the Bonds are qualified in their entirety by reference to the form hereof included in the Indenture. Copies of the Indenture, the Agency Indenture and other documents are available for inspection during the period of initial offering on the Bonds at the offices of the Underwriter, O'Connor & Company Securities, Inc., 250 Newport Center Drive, Suite 303, Newport Beach, California, 92660 (949) 706 -0444. Copies of these documents may be obtained after delivery of the Bonds from the City at 130 S. Main Street, Lake Elsinore, California 92530, telephone (951)674 -3124. The Authority and the Agency will provide annual financial statements and other pertinent credit information, including the Annual Financial Report, if one is prepared, upon request. Copies of all periodic reports may also be made available by any other means maintained by the Authority and the Agency, or their agents, to provide information to persons wishing to receive it. REFERENCES Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the Authority and the purchasers or owners of any of the Bonds. EXECUTION The execution of this Official Statement by the Executive Director and its distribution to the purchaser has been duly authorized by the Authority. LAKE ELSINORE PUBLIC FINANCING AUTHORITY By: Executive Director I Page 177 of 195 APPENDIX A SUMMARY OF THE INDENTURE FEW Page 178 of 195 APPENDIX B SUMMARY OF THE AGENCY INDENTURE w Page 179 of 195 APPENDIX C FISCAL CONSULTANT REPORT C -1 Page 180 of 195 APPENDIX D AGENCY AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR ENDING JUNE 309 2010 m Page 181 of 195 APPENDIX E FORM OF CONTINUING DISCLOSURE AGREEMENT E -1 Page 182 of 195 APPENDIX F FORM OF OPINION OF BOND COUNSEL Date of Delivery Lake Elsinore Public Financing Authority 130 South Main Street Lake Elsinore, California 92530 Lake Elsinore Public Financing Authority Local Agency Revenue Bonds (Summerly Project), 2011 Series A Members of the Board of Directors We have acted as bond counsel to the Lake Elsinore Public Financing Authority (the "Authority ") in connection with the issuance by the Authority of $ aggregate principal amount of Lake Elsinore Public Financing Authority Local Agency Revenue Bonds (Summerly Project), 2011 Series A (the "Bonds "), pursuant to the provisions of Article 4 (commencing with section 6584) of Chapter 5 of Division 7 of Title 1 of the California Government Code (the "Law ") and pursuant to an Indenture of Trust, dated as of June 1, 2011 (the "Indenture "), by and between the Authority and Union Bank, N.A., as trustee (the "Trustee "). We have examined the Law and such certified proceedings and other papers as we deem necessary to render this opinion. As to questions of fact material to our opinion, we have relied upon representations of the Authority contained in the Indenture and in the certified proceedings and certifications of public officials and others famished to us, without undertaking to verify the same by independent investigation. Based upon the foregoing we are of the opinion, under existing law, as follows: 1. The Authority is ajoint exercise of powers authority duly organized and validly existing under the laws of the State of California with the full power to enter into the Indenture, to perform the agreements on its part contained therein and to issue the Bonds. 2. The Indenture has been duly approved by the Authority and constitutes the valid and binding obligation of the Authority enforceable against the Authority in accordance with its terms. 3. The Indenture creates a valid lien on the funds pledged by the Indenture for the security of the Bonds, subject to no prior lien granted under the Law. 4. The Bonds have been duly authorized, executed and delivered by the Authority and are valid and binding special obligations of the Authority, payable solely from the sources provided therefor in the Indenture. 5. Under existing law, interest on the Bonds is exempt from personal income taxes of the State of California and, assuming compliance with the covenant described below, interest on the Bonds is F -1 Page 183 of 195 excluded pursuant to section 103(a) of the Internal Revenue Code of 1986 (the "Code ") from the gross income of the owners thereof for federal income tax purposes. The Bonds are not "specified private activity bonds" within the meaning of section 57(a)(5) of the Code and, therefore, the interest on the Bonds is not treated as an item of tax preference for purposes of computing the alternative minimum tax imposed by section 55 of the Code; however, the receipt or accrual of interest on the Bonds owned by a corporation may affect the computation of its alternative minimum taxable income, upon which the alternative minimum tax is imposed. The Code imposes certain requirements that must be met subsequent to the issuance and delivery of the Bonds for interest thereon to be and remain excluded from the gross income of the owners thereof for federal income tax purposes. Noncompliance with such requirements could cause the interest on the Bonds to be included in gross income retroactive to the date of issue of the Bonds. The Authority has covenanted in the Indenture to maintain the exclusion of interest on the Bonds from the gross income of the owners thereof for federal income tax purposes. Pursuant to the Indenture and the Agency Indenture, and in the Tax Certificate Pertaining to Arbitrage and Other Matters under Sections 103 and 141 -150 of the Internal Revenue Code of 1986, which has been delivered by the Authority and the Agency in connection with the issuance of the Bonds, each of the Authority and the Agency has made representations relevant to the determination of, and has made certain covenants regarding or affecting, the exclusion of interest on the Bonds from the gross income of the owners thereof for federal income tax purposes. In reaching our opinions expressed in paragraph 5 above, we have assumed the accuracy of such representations and the present and future compliance by the Authority with such covenants. Our opinions expressed in paragraph 5 above are rendered in reliance on representations and certifications of the Authority made in a Tax Certificate dated the date hereof pertaining to the use, expenditure, and investment of the proceeds of the Bonds. Except as stated in paragraph 3 above, we express no opinion as to any federal or state tax consequences of the receipt of interest on, or the ownership or disposition of, the Bonds. Furthermore, we express no opinion as to any federal, state or local tax law consequences with respect to the Bonds, or the interest thereon, if any action is taken with respect to the Bonds or the proceeds thereof upon the advice or approval of other counsel. The rights of the owners of the Bonds and the enforceability of the Bonds and the Indenture may be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights heretofore or hereafter enacted and may also be subject to the exercise of judicial discretion in appropriate cases. Our opinions are based on existing law, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service; rather, such opinions represent our legal judgment based upon our review of existing law that we deem relevant to such opinions and in reliance upon the representations and covenants referenced above. Respectfully submitted, F -2 Page 184 of 195 APPENDIX G DTC AND BOOK-ENTRY-ONLY SYSTEM The following description of the procedures and record keeping with respect to beneficial ownership interests in the Bonds, payment of principal of and interest on the Bonds to Direct Participants, Indirect Participants or Beneficial Owners (as such terms are defined below) of the Bonds, confirmation and transfer of beneficial ownership interests in the Bonds and other Bond - related transactions by and between DTC, Direct Participants, Indirect Participants and Beneficial Owners of the Bonds is based solely on information furnished by DTC to the Authority which the Authority believes to be reliable, but the Authority and the Underwriter do not and cannot make any independent representations concerning these matters and do not take responsibility for the accuracy or completeness thereof. Neither the DTC, Direct Participants, Indirect Participants nor the Beneficial Owners should rely on the foregoing information with respect to such matters, but should instead confirm the same with DTC or the DTC Participants, as the case may be. The Depository Trust Company ( "DTC "), New York, New York, will act as securities depository for the Bonds. The Bonds will be issued as fully- registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully- registered Bond will be issued for each maturity of the Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC. DTC, the world's largest securities depository, is a limited - purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non -U.S. equity issues, corporate and municipal debt issues and money market instruments (from over 100 countries) that DTC's participants ( "Direct Participants ") deposit with DTC. DTC also facilitates the post -trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book -entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non -U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly -owned subsidiary of The Depository Trust & Clearing Corporation ( "DTCC "). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non -U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ( "Indirect Participants "). DTC has Standard & Poor's highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org. Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC's records. The ownership interest of each actual purchaser of each Bonds (`Beneficial Owner ") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. G -1 Page 185 of 195 Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Bonds, except in the event that use of the book -entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co. or such other name as requested by an authorized representative of DTC. The deposit of the Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC's records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct or Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of the Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the Trustee and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Bonds are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed. Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with DTC's MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Authority as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Principal, redemption price and interest payments on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detailed information from the Authority or the Trustee, on payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC, the Trustee or the Authority, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal, redemption price and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Authority or the Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to the Authority or the Trustee. Under such circumstances, in the G -2 Page 186 of 195 event that a successor depository is not obtained, Bond certificates are required to be printed and delivered. The Authority may decide to discontinue use of the system of book - entry-only transfers through DTC (or a successor securities depository). In that event, the Bond certificates will be printed and delivered to DTC. The information in this section concerning DTC and DTC's book -entry system has been obtained from sources that the Authority believes to be reliable, but the Authority takes no responsibility for the accuracy thereof. Discontinuance of DTC Services In the event that (a) DTC determines not to continue to act as securities depository for the Bonds, or (b) the Authority determines that DTC shall no longer act and delivers a written certificate to the Trustee to that effect, then the Authority will discontinue the book -entry system with DTC for the Bonds. If the Authority determines to replace DTC with another qualified securities depository, the Authority will prepare or direct the preparation of a new single separate, fully - registered Bond for each maturity of the Bonds registered in the name of such successor or substitute securities depository as are not inconsistent with the terms of the Indenture. If the Authority fails to identify another qualified securities depository to replace the incumbent securities depository for the Bonds, then the Bonds shall no longer be restricted to being registered in the Bonds registration books in the name of the incumbent securities depository or its nominee, but shall be registered in whatever name or names the incumbent securities depository or its nominee transferring or exchanging the Bonds shall designate. In the event that the book -entry system is discontinued, the following provisions would also apply: (i) the Bonds will be made available in physical form, (ii) principal of, and redemption premiums if any, on the Bonds will be payable upon surrender thereof at the trust office of the Trustee identified in the Indenture, and (iii) the Bonds will be transferable and exchangeable as provided in the Indenture. The Authority or the Trustee do not have any responsibility or obligation to DTC Participants, to the persons for whom they act as nominees, to Beneficial Owners, or to any other person who is not shown on the registration books as being an owner of the Bonds, with respect to (i) the accuracy of any records maintained by DTC or any DTC Participants; (ii) the payment by DTC or any DTC Participant of any amount in respect of the principal of redemption price of or interest on the Bonds; (iii) the delivery of any notice which is permitted or required to be given to registered owners under the Indenture; (iv) the selection by DTC or any DTC Participant of any person to receive payment in the event of a partial redemption of the Bonds; (v) any consent given or other action taken by DTC as registered owner; or (vi) any other matter arising with respect to the Bonds or the Indenture. The Authority or the Trustee cannot and do not give any assurances that DTC, DTC Participants or others will distribute payments of principal of or interest on the Bonds paid to DTC or its nominee, as the registered owner, or any notices to the Beneficial Owners or that they will do so on a timely basis or will serve and act in a manner described in this Official Statement. The Authority or the Trustee are not responsible or liable for the failure of DTC or any DTC Participant to make any payment or give any notice to a Beneficial Owner in respect to the Bonds or any error or delay relating thereto. G -3 Page 187 of 195 CONTINUING DISCLOSURE AGREEMENT This Continuing Disclosure Agreement (the "Disclosure Agreement "), dated as of 1, 2011, is executed and delivered by the Lake Elsinore Public Financing Authority (the "Authority ") and Union Bank, N.A., as dissemination agent hereunder (the "Dissemination Agent ") in connection with the issuance of the S Lake Elsinore Public Financing Authority Local Agency Revenue Bonds (Summerly Project), 2011 Series A (the "Bonds "). The Bonds are being issued pursuant to an Indenture of Trust, dated as of 1, 2011 (the "Indenture "), by and between the Authority and Union Bank, N.A., as trustee (the "Trustee "). The Authority and the Dissemination Agent covenant and agree as follows: SECTION 1. Purpose of the Disclosure Agreement. This Disclosure Agreement is being executed and delivered by the Authority for the benefit of the Beneficial Owners of the Bonds and in order to assist the Participating Underwriter in complying with the Rule (as defined herein). SECTION 2. Definitions. In addition to the definitions set forth in the Indenture, which apply to any capitalized term used in this Disclosure Agreement unless otherwise defined in this Section, the following capitalized terms shall have the following meanings: "Agency" shall mean the Redevelopment Agency of the City of Lake Elsinore or its successor agency, if any. "Annual Report" shall mean any Annual Report provided by the Authority pursuant to, and as described in, Sections 3 and 4 of this Disclosure Agreement. "Beneficial Owner" shall mean any person which (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Bonds (including persons holding Bonds through nominees, depositories or other intermediaries), or (b) is treated as the owner of any Bonds for federal income tax purposes. "Disclosure Representative" shall mean the Executive Director of the Authority or his or her designee, or such other officer or employee as the Authority shall designate in writing to the Dissemination Agent (if other than the Authority) from time to time. "Dissemination Agent" shall mean Union Bank, N.A., acting in its capacity as Dissemination Agent hereunder, or any successor Dissemination Agent designated in writing by the Authority and which has filed with the Authority a written acceptance of such designation. "Listed Events" shall mean any of the events listed in Section 5(a) of this Disclosure Agreement. "MSRB" shall mean the Municipal Securities Rulemaking Board established pursuant to Section 15B(b)(1) of the Securities Exchange Act of 1934 or any other entity designated or authorized by the Securities and Exchange Commission to receive reports pursuant to the Rule. Until otherwise designated by the MSRB or the Securities and Exchange Commission, filings with the MSRB are to be made through the Electronic Municipal Marketplace Access (EMMA) website of the MSRB, currently located at http://emma.msrh.org. "Participating Underwriter" shall mean any of the original underwriters of the Bonds required to comply with the Rule in connection with offering of the Bonds. "Rule" shall mean Rule 15c2- 12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time. 77053960.1 Page 188 of 195 SECTION 3. Provision of Annual Reports. (a) The Authority shall, or shall cause the Dissemination Agent to, not later than February 15 of each year, commencing February 15, 2012, provide to the MSRB and the Participating Underwriter an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Agreement. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may include by reference other information as provided in Section 4 of this Disclosure Agreement. If the Authority's fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 5(c). (b) Not later than fifteen (15) Business Days prior to the date specified in subsection (a) for providing the Annual Report to the MRSB, the Authority shall provide the Annual Report to the Dissemination Agent (if other than the Authority). The Authority shall provide, or cause the preparer of the Annual Report to provide, a written certificate with each Annual Report furnished to the Dissemination Agent to the effect that such Annual Report constitutes the Annual Report required to be furnished to it hereunder. The Dissemination Agent may conclusively rely upon such certification of the Authority and shall have no duty or obligation to review such Annual Report. (c) If the Dissemination Agent is unable to provide to the MSRB an Annual Report by the date required in subsection (a), the Authority shall send a notice to the MSRB in substantially the form attached as Exhibit A. (d) The Dissemination Agent shall, to the extent information is known to it, file a report with the Authority certifying that the Annual Report has been provided pursuant to this Disclosure Agreement, stating the date it was provided. SECTION 4. Content of Annual Reports. The Annual Report shall contain or include by reference the following: (a) The audited financial statements of the Agency, or if audited financial statements of the Agency is not available then audited financial statements of the Authority, prepared in accordance with generally accepted accounting principles in effect from time to time. If any of such audited financial statements are not available by the time the Annual Report is required to be filed pursuant to Section 3(a), the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the Official Statement, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available. (b) An update of tabular information relating to Project Area No. II and Project Area No. III of the kind presented in the section of the Official Statement entitled: [TO COME] Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the Authority or related public entities, which are available to the public on the MSRB's Internet Website or filed with the Securities and Exchange Commission. SECTION 5. Reporting of Listed Events. (a) Pursuant to the provisions of this section, upon the occurrence of any of the following events (in each case to the extent applicable) with respect to the Bonds, the Authority shall give, or cause to be given by so notifying the Dissemination Agent in writing and instructing the 77053960.1 2 Page 189 of 195 Dissemination Agent to give, notice of the occurrence of such event, in each case, pursuant to Section 5(c) hereof: 1. principal or interest payment delinquencies; 2. non - payment related defaults, if material; 3. modifications to the rights of the Bondholders, if material; 4. optional, contingent or unscheduled calls, if material, and tender offers; 5. defeasances; 6. rating changes; 7. adverse tax opinions or the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701 - TEB) or other material notices or determinations with respect to the tax status of the Bonds or other material events affecting the tax status of the Bonds; 8. unscheduled draws on the debt service reserves reflecting financial difficulties; 9. unscheduled draws on the credit enhancements reflecting financial difficulties; 10. substitution of the credit or liquidity providers or their failure to perform; 11. release, substitution or sale of property securing repayment of the Bonds, if material; 12. bankruptcy, insolvency, receivership or similar proceedings of the Authority, which shall occur as described below; 13. appointment of a successor or additional trustee or the change of name of a trustee, if material, or; 14. the consummation of a merger, consolidation, or acquisition involving the Authority or the sale of all or substantially all of the assets of the Authority other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material. For these purposes, any event described in item 12 of this Section 5(a) is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent, or similar officer for the Authority in a proceeding under the United States Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the Authority, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement, or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the Authority. (b) Upon receipt of notice from the Authority and instruction by the Authority to report the occurrence of any Listed Event, the Dissemination Agent shall provide notice thereof to the 77053960.1 3 Page 190 of 195 MSRB in accordance with Section 5(c) hereof. In the event the Dissemination Agent shall obtain actual knowledge of the occurrence of any of the Listed Events, the Dissemination Agent shall, immediately after obtaining such knowledge, contact the Disclosure Representative, inform such person of the event, and request that the Authority promptly notify the Dissemination Agent in writing whether or not to report the event pursuant to Section 5(c). For purposes of this Disclosure Agreement, "actual knowledge" of the occurrence of such Listed Event shall mean actual knowledge by the Dissemination Agent, if other than the Trustee, and if the Dissemination Agent is the Trustee, then by the officer at the corporate trust office of the Trustee with regular responsibility for the administration of matters related to the Indenture. The Dissemination Agent shall have no responsibility to determine the materiality, if applicable, of any of the Listed Events. (c) The Authority, or the Dissemination Agent, if the Dissemination Agent has been instructed by the Authority to report the occurrence of a Listed Event, shall file a notice of such occurrence with the MSRB in a timely manner not more than ten business days after the occurrence of the event. SECTION 6. Termination of Reporting Obligation. The Authority's obligations under this Disclosure Agreement shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Bonds. If such termination occurs prior to the final maturity of the Bonds, the Authority shall give notice of such termination in the same manner as for a Listed Event under Section 5(c). SECTION 7. Dissemination Agent. The Authority may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Agreement, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. The Dissemination Agent shall not be responsible in any manner for the content of any notice or report prepared by the Authority pursuant to this Disclosure Agreement. If at any time there is not any other designated Dissemination Agent, the Authority shall be the Dissemination Agent. The Dissemination Agent may resign by providing thirty days' written notice to the Authority and the Trustee. The Dissemination Agent shall have no duty to prepare any information report nor shall the Dissemination Agent be responsible for filing any report not provided to it by the Authority in a timely manner and in a form suitable for filing. SECTION 8. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement, the Authority may amend this Disclosure Agreement, and any provision of this Disclosure Agreement may be waived, provided that the following conditions are satisfied: (a) If the amendment or waiver relates to the provisions of Sections 3(a), 4, or 5(a), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature or status of an obligated person with respect to the Bonds, or the type of business conducted; (b) The undertaking, as amended or taking into account such waiver, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the original execution and delivery of the Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; (c) The amendment or waiver either (i) is approved by the Beneficial Owners in the same manner as provided in the Indenture for amendments to the Indenture with the consent of Beneficial Owners, or (ii) does not, in the opinion of a nationally recognized bond counsel, materially impair the interests of the Beneficial Owners; and 77053960.E 4 Page 191 of 195 (d) Any amendment that modifies or increases the duties or obligations of the Dissemination Agent shall be agreed to in writing by the Dissemination Agent. In the event of any amendment or waiver of a provision of this Disclosure Agreement, the Authority shall describe such amendment in the next Annual Report, and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type (or, in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by the Authority. SECTION 9. Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent the Authority from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Agreement. If the Authority chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Agreement, the Authority shall have no obligation under this Agreement to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event. SECTION 10. Default. In the event of a failure of the Authority to comply with any provision of this Disclosure Agreement, the Dissemination Agent (at the written request of any Participating Underwriter or the Beneficial Owners of at least 25% aggregate principal amount of Outstanding Bonds, shall, but only to the extent funds in an amount satisfactory to the Dissemination Agent have been provided to it or it has been otherwise indemnified to its satisfaction from any cost, liability, expense or additional charges and fees of the Dissemination Agent whatsoever, including, without limitation, fees and expenses of its attorneys), or any Beneficial Owner may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the Authority to comply with its obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed an Event of Default under the Indenture, and the sole remedy under this Disclosure Agreement in the event of any failure of the Authority to comply with this Disclosure Agreement shall be an action to compel performance. SECTION 11. Duties, Immunities and Liabilities of Dissemination Agent. Article VI of the Indenture is hereby made applicable to this Disclosure Agreement as if this Disclosure Agreement were (solely for this purpose) contained in the Indenture and the Dissemination Agent shall be entitled to the protections, limitations from liability and indemnities afforded the Trustee thereunder. The Dissemination Agent (if other than the Trustee or the Trustee in its capacity as Dissemination Agent) shall have only such duties as are specifically set forth in this Disclosure Agreement, and the Authority agrees to indemnify and save the Dissemination Agent and the Trustee, their officers, directors, employees and agents, harmless against any loss, expense and liabilities which they may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys' fees) of defending against any claim of liability, but excluding liabilities due to the respective parties' gross negligence or willful misconduct. The Dissemination Agent shall be paid compensation by the Authority for its services provided hereunder in accordance with its schedule of fees as amended from time to time and all expenses, legal fees and advances made or incurred by the Dissemination Agent in the performance of its duties hereunder. The Dissemination Agent shall have no duty or obligation to review any information provided to them hereunder and shall not be deemed to be acting in any fiduciary capacity for the Authority, the Beneficial Owners, or any other party. Neither the Trustee nor the Dissemination Agent shall have any liability to the Beneficial Owners or any other party for any monetary damages or financial liability of any kind whatsoever related to or arising from this Agreement. The obligations of the Authority under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Bonds. 77053960.1 - Page 192 of 195 SECTION 12. Filings with the MSRB. All financial information, operating data, financial statements, notices, and other documents provided to the MSRB in accordance with this Disclosure Agreement shall be provided in an electronic format prescribed by the MSRB and shall be accompanied by identifying information as prescribed by the MSRB. SECTION 13. Notices. Any notices or communications to the Authority or the Dissemination Agent may be given as follows: To the Authority: Lake Elsinore Public Financing Authority 130 South Main Street Lake Elsinore, California 92530 Attention: Executive Director (951) 674 -3124 (951) 674 -2392 Fax To the Dissemination Agent: Union Bank, N.A. 120 South San Pedro Street, 4'h Floor Los Angeles, California 90012 Attention: Corporate Trust Department (213) 972 -5677 (213) 972 -5694 Fax Any person may, by written notice to the other persons listed above, designate a different address or telephone number(s) to which subsequent notices or communications should be sent. SECTION 14. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of the Authority, the Dissemination Agent, the Participating Underwriter and Beneficial Owners, and shall create no rights in any other person or entity. SECTION 15. Governing Law. This Disclosure Agreement shall be construed and governed in accordance with the laws of the State of California. SECTION 16. Counterparts. This Disclosure Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. 77053960.1 6 Page 193 of 195 IN WITNESS WHEREOF, the parties hereto have caused this Continuing Disclosure Agreement to be duly executed and delivered by their respective officers as of the date first above written. LAKE ELSINORE PUBLIC FINANCING AUTHORITY By Executive Director UNION BANK, N.A., as Dissemination Agent LM Authorized Officer 77053960.1 7 Page 194 of 195 EXHIBIT A NOTICE TO MSRB OF FAILURE TO FILE ANNUAL REPORT Name of Obligated Party: Lake Elsinore Public Financing Authority Name of Bonds: Lake Elsinore Public Financing Authority Local Agency Revenue Bonds (Summerly Project), 2011 Series A Date of Delivery: 2011 NOTICE IS HEREBY GIVEN that the Authority has not provided an Annual Report with respect to the above - captioned Bonds as required by the Continuing Disclosure Agreement, dated as of January 1, 2011, with respect to the Bonds. [The Authority anticipates that the Annual Report will be filed by .] Dated: UNION BANK, N.A. M cc: Authority and Underwriter 77053960.1 Page 195 of 195