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HomeMy WebLinkAboutRoripaugh Official Statement 1 of 3 NEW ISSUE NOT RATED In the opinion of Quint & Thimmig LLP, San Francisco, California, Bond Counsel, subject, however, to certain qualifications described herein, under existing law, the interest on the 2006 Bonds is excludable from gross income of the owners thereof for federal income tax purposes and is not included as an item of tax preference in computing the federal alternative minimum tax for individuals and corporations under the Internal Revenue Code of 1986, as amended, but is taken into account in computing an adjustment used in determining the federal alternative minimum tax for certain corporations. In the further opinion of Bond Counsel, such interest is exempt from California personal income taxes. See "LEGAL MATTERS -Tax Exemption" herein. $51,250,000 TEMECULA PUBLIC FINANCING AUTHORITY COMMUNITY FACILITIES DISTRICT NO. 03-02 (RORIPAUGH RANCH) 2006 SPECIAL TAX BONDS Dated: Date of Delivery Due: September 1, as on the inside cover The Temecula Public Financing Authority Community Facilities District No. 03-02 (Roripaugh Ranch) 2006 Special Tax Bonds (the "2006 Bonds") are being issued under the Mello-Roos Community Facilities Act of 1982 (the "Act") and a Fiscal Agent Agreement, dated as of March 1, 2006, by and between the Temecula Public Financing Authority (the "Authority") and U.S. Bank National Association, as Fiscal Agent (the "Fiscal Agent"), and are payable from proceeds of Special Taxes (as defined herein) levied on property within the Temecula Public Financing Authority Community Facilities District No. 03-02 (Roripaugh Ranch) (the "District") according to the rate and method of apportionment of special tax approved by the qualified electors of the District and by the Board of Directors of the Authority, acting as the legislative body of the District. The 2006 Bonds are being issued (i) to finance, either directly or indirectly, the acquisition and construction of certain road, sewer, storm drain, fire facilities and park and recreation improvements (collectively, the "Improvements") within or in the vicinity of the District, (ii) to eliminate an existing special assessment lien (the "Prior Lien") on parcels in the District imposed by the County of Riverside Assessment District No. 161, (iii) to fund interest on the 2006 Bonds through September 1, 2006, (iv) to pay certain administrative expenses related to the District, (v) to pay the costs of issuing the 2006 Bonds and (vi) to establish a Reserve Fund for the 2006 Bonds. See "PLAN OF FINANCE; IMPROVEMENTS TO BE FINANCED WITH PROCEEDS OF THE 2006 BONDS" and "ESTIMATED SOURCES AND USES OF FUNDS" herein. The 2006 Bonds will be issued in denominations of $5,000 or integral multiples in excess thereof. The 2006 Bonds, when delivered, will be initially registered in the name of Cede & Co., as nominee of The Depository Trust Company ("DTC"), New York, New York. DTC will act as securities depository for the 2006 Bonds as described herein under "THE 2006 BONDS -Book-Entry and DTC." The 2006 Bonds are subject to optional redemption, mandatory redemption from prepayments of Special Taxes and mandatory redemption as described herein. THE 2006 BONDS, THE INTEREST THEREON, AND ANY PREMIUM PAYABLE ON THE REDEMPTION OF ANY OF THE 2006 BONDS, ARE NOT AN INDEBTEDNESS OF THE AUTHORITY (EXCEPT TO THE LIMITED EXTENT SET FORTH IN THE FISCAL AGENT AGREEMENT), THE STATE OF CALIFORNIA (THE "STATE") OR ANY OF ITS POLITICAL SUBDIVISIONS, AND NEITHER THE AUTHORITY (EXCEPT TO THE LIMITED EXTENT SET FORTH IN THE FISCAL AGENT AGREEMENT), THE STATE NOR ANY OF ITS POLITICAL SUBDIVISIONS IS LIABLE FOR THE 2006 BONDS. NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE AUTHORITY, THE DISTRICT (EXCEPT TO THE LIMITED EXTENT SET FORTH IN THE FISCAL AGENT AGREEMENT) OR THE STATE OR ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE 2006 BONDS. OTHER THAN THE SPECIAL TAXES LEVIED WITHIN THE DISTRICT, NO TAXES ARE PLEDGED TO THE PAYMENT OF THE 2006 BONDS. THE 2006 BONDS ARE NOT A GENERAL OBLIGATION OF THE AUTHORITY BUT ARE LIMITED OBLIGATIONS OF THE AUTHORITY FOR THE DISTRICT PAYABLE SOLELY FROM THE SOURCES PROVIDED IN THE FISCAL AGENT AGREEMENT. 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 the making of an informed investment decision with respect to the 2006 Bonds. Investment in the 2006 Bonds involves risks which may not be appropriate for some investors. See "BONDOWNERS'RISKS " herein for a discussion of special risk factors that should be considered in evaluating the investment quality of the 2006 Bonds. MATURITY SCHEDULE (See Inside Cover) Please refer to the inside cover page for a summary of the principal amounts, interest rates, reoffering yields and CUSIP® numbers for the 2006 Bonds. The 2006 Bonds are offered when, as and if issued and accepted by the Underwriter, subject to approval as to their legality by Quint & Thimmig LLP, San Francisco, California, Bond Counsel, and subject to certain other conditions. McFarlin & Anderson LLP, Lake Forest, California is acting as Disclosure Counsel. Certain legal matters will be passed on for the Authority and the District by Richards, Watson & Gershon, Los Angeles, California, acting as general counsel to the Authority and for Ashby USA, LLC by its counsel, Pillsbury Winthrop Shaw Pittman LLP, Los Angeles, California. It is anticipated that the 2006 Bonds, in book-entry form, will be available through the facilities of DTC on or about April 27, 2006. STONE &YOUNGBERG LLC Dated: April 13, 2006 MATURITY SCHEDULE $51,250,000 TEMECULA PUBLIC FINANCING AUTHORITY COMMUNITY FACILITIES DISTRICT NO. 03-02 (RORIPAUGH RANCH) 2006 SPECIAL TAX BONDS $9,370,000 Serial Bonds Base CUSIP® No. 87972Yf Maturity (September 1) 2007 2008 2009 2010 2011 Principal Amount $765,000 795,000 830,000 865,000 905,000 Interest Rate 4.00% 4.20 4.35 4.50 4.65 Price 100% 100 100 100 100 CUSIP® No.t BV7 BW5 BX3 BY1 BZ8 Maturity (September 1) 2012 2013 2014 2015 2016 Principal Amount $ 945,000 990,000 1,040,000 1,090,000 1,145,000 Interest Rate 4.75% 4.90 5.00 5.05 5.10 Price 100% 100 100 100 100 CUSIP® No.t CA2 CBO CCS CD6 CE4 $15,490,000 5.45% Term 2006 Bonds due September 1, 2026, Price 100% CUSIP® No.f 87972YCM6 $26,390,000 5.50% Term 2006 Bonds due September 1, 2036, Price 100% CUSIP® No. 87972YCN4t t CUSIP® A registered trademark of the American Bankers Association. Copyright © 1999-2006 Standard & Poor's, a Division of The McGraw-Hill Companies, Inc. CUSIP* data herein is provided by Standard & Poor's CUSIP® Service Bureau. Bureau. 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. Neither the Authority nor the Underwriter takes any responsibility for the accuracy of such numbers. TEMECULA PUBLIC FINANCING AUTHORITY BOARD OF DIRECTORS Ron Roberts, Chairperson Charles W. Washington, Vice Chairperson Jeff Comerchero, Member Maryann Edwards, Member Michael S. Naggar, Member AUTHORITY/CITY STAFF Shawn Nelson, Executive Director and City Manager of the City of Temecula Genie Roberts, Authority Treasurer and Finance Director of the City of Temecula Susan Jones, Authority Secretary and City Clerk of the City of Temecula SPECIAL SERVICES Bond Counsel Quint & Thimmig LLP San Francisco, California Authority Counsel Richards, Watson & Gershon A Professional Corporation Los Angeles, California Disclosure Counsel McFarlin & Anderson LLP Lake Forest, California Special Tax Consultant David Taussig & Associates, Inc. Newport Beach, California Financial Advisor to the Authority Fieldman, Rolapp & Associates Irvine, California Fiscal Agent U.S. Bank National Association Los Angeles, California Appraiser Stephen G. White, MAI Fullerton, California Market Absorption Consultant Empire Economics, Inc. Capistrano Beach, California NO DEALER, BROKER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INF6RMATION OR MAKE ANY REPRESENTATION WITH RESPECT TO THE 2006 BONDS, OTHER THAN AS CONTAINED IN THIS OFFICIAL STATEMENT, AND, IF GIVEN OR MADE, ANY SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE AUTHORITY, THE DISTRICT OR THE UNDERWRITER. THIS OFFICIAL STATEMENT DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE DESCRIBED ON THE COVER PAGE OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUYNOR SHALL THERE BE ANY OFFER, SOLICITATION OR SALE OF THE 2006 BONDS BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER, SOLICITATION OR SALE. THIS OFFICIAL STATEMENT IS NOT TO BE CONSTRUED AS A CONTRACT WITH THE PURCHASERS OF THE 2006 BONDS. Statements contained in this Official Statement which involve time estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed construed as representations or fact. The information set forth herein has been furnished by the Authority or other sources which are believed to be reliable, but it is not guaranteed as to accuracy or completeness. The Underwriter has provided the following sentence for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, and as 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 opinion herein are subject to change without notice and neither the delivery ofthis 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 District or any other entity described herein since the date hereof. This Official Statement is submitted in connection with the sale of securities referred to herein and may not be reproduced or be used, as a whole or in part, for any other purpose. IN CONNECTION WITH THE OFFERING OF THE 2006 BONDS, THE UNDERWRITER MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE 2006 BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE UNDERWRITER MAY OFFER AND SELL THE 2006 BONDS TO CERTAIN DEALERS AND DEALER BANKS AND BANKS ACTING AS AGENT AND OTHERS AT PRICES LOWER THAN THE PUBLIC OFFERING PRICES STATED ON THE COVER PAGE HEREOF AND SAID PUBLIC OFFERING PRICES MAY BE CHANGED FROM TIME TO TIME BY THE UNDERWRITER. THE 2006BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON AN EXEMPTION CONTAINED IN SUCH ACT. THE 2006 BONDSHAVENOT BEEN REGISTERED ORQUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE. TABLE OF CONTENTS Page INTRODUCTION 1 General 1 The Authority 1 The Community Facilities District 1 Purpose of the 2006 Bonds 4 Sources of Payment for the 2006 Bonds 4 Appraisal 5 Tax Exemption 6 Risk Factors Associated with Purchasing the 2006 Bonds 6 Forward Looking Statements 6 Professionals Involved in the Offering 7 Other Information 7 CONTINUING DISCLOSURE 7 PLAN OF FINANCE; IMPROVEMENTS TO BE FINANCED WITH PROCEEDS OF THE 2006 BONDS 8 ESTIMATED SOURCES AND USES OF FUNDS 9 THE 2006 BONDS 10 Description of the 2006 Bonds 10 Debt Service Schedule 11 Terms of Redemption 12 Transfer and Exchange of Bonds 14 Book-Entry and DTC 14 SECURITY FOR THE 2006 BONDS 14 General 14 Special Taxes 15 Rate and Method 15 Special Taxes and the Teeter Plan 18 Proceeds of Foreclosure Sales 18 Special Tax Fund 19 Bond Fund 19 Reserve Fund 20 Investment of Moneys in Funds 20 Additional Bonds 20 Letter of Credit 21 THE AUTHORITY 22 Authority for Issuance 22 THE COMMUNITY FACILITIES DISTRICT 23 General 23 Description of the District 24 Conditions to the Release of Building Permits 26 Specific Plan 27 Environmental Conditions 28 Development Agreement; Deferral Agreement 30 Other Matters 31 Acquisition of Improvements 32 PROPERTY OWNERSHIP AND DEVELOPMENT 32 Description of Project 32 Ashby USA, LLC 33 General 33 Estimated Development Costs; Plan of Finance 36 Ohio Savings Bank Loan Agreement 39 Sale of Phase II to KB Home Coastal Inc.; Take Down Options 44 Estimated Absorption 48 History of Property Tax Payment; Loan Defaults; Bankruptcy 48 Continental Residential, Inc 49 -i Davidson Roripaugh Ranch 122 LLC 51 The Tanamera/Roripaugh Entities 53 KB Home Coastal Inc 57 Estimated Special Tax Allocation by Property Ownership 59 Direct and Overlapping Debt 61 Estimated Value-to-Lien Ratios 63 Overlapping Assessment and Community Facilities Districts 65 Estimated Assessed Value-to-Lien Ratios 65 Transportation Uniform Mitigation Fee; Multiple Species Habitat Conservation Plan 66 Market Absorption Study 67 Appraised Property Value 69 BONDOWNERS' RISKS 70 Risks of Real Estate Secured Investments Generally 70 Concentration of Ownership 71 Failure to Develop Properties 71 Special Taxes Are Not Personal Obligations 71 The 2006 Bonds Are Limited Obligations of the District 72 Appraised Values 72 Land Development 72 Burden of Parity Liens, Taxes and Other Special Assessments on the Taxable Property 73 Disclosure to Future Purchasers 73 Government Approvals 74 Local, State ana Federal Land Use Regulations 74 Endangered and Threatened Species 75 Hazardous Substances 75 Levy and Collection of the Special Tax; Insufficiency of the Special Tax 76 Exempt Properties 77 Depletion of Reserve Fund 77 Potential Delay and Limitations in Foreclosure Proceedings 78 Adjustable Rate and Unconventional Mortgage Structures 78 Bankruptcy and Foreclosure Delay 79 Payments by FDIC and Other Federal Agencies 80 Payment of Special Tax Not a Personal Obligation of the Property Owners 81 Factors Affecting Parcel Values and Aggregate Value 81 No Acceleration Provisions 82 Community Facilities District Formation 82 Billing of Special Taxes 82 Collection of Special Tax 82 Right to Vote on Taxes Act 83 Ballot Initiatives and Legislative Measures 84 Limited Secondary Market 84 Loss of Tax Exemption 84 IRS Audit of Tax-Exempt Bond Issues 84 Limitations on Remedies 84 LEGAL MATTERS 85 Legal Opinion 85 Tax Exemption 85 No Litigation 85 No General Obligation of the Authority or the District 85 NO RATINGS 86 UNDERWRITING 86 PROFESSIONAL FEES 86 MISCELLANEOUS 86 -a APPENDIX A APPENDIX B APPENDIX C APPENDIX D APPENDIX E APPENDIX F APPENDIX G APPENDIX H APPENDIX I APPENDIX J APPENDIX K General Information About the City of Temecula A-1 Rate and Method of Apportionment of Special Tax Temecula Public Financing Authority Community Facilities District No. 03-02 (Roripaugh Ranch) B-l Summary Appraisal Report C-l Market Absorption Study D-l Summary of Certain Provisions of the Fiscal Agent Agreement E-l Form of Authority Continuing Disclosure Agreement F-l Form of Ashby USA, LLC and the Tanamera/Roripaugh Entities Continuing Disclosure Agreement G-l Form of Opinion of Bond Counsel H-l Book-Entry System 1-1 Boundary Map of the Community Facilities District J-l Building Permit Thresholds K-l -in [THIS PAGE INTENTIONALLY LEFT BLANK] City of Temecula (Riverside County, California) Regional Location Map R I V E R S I D E C O U N T Y S A N D I E G O C O U N T Y TEMECULA PUBLIC FINANCING AUTHORITY COMMUNITY FACILITIES DISTRICT No. O3-O2 (RORIPAUGH RANCH) -006 Aenal Portraits Date Flown: February 8,2006 Boundaries shown are approximate OFFICIAL STATEMENT $51,250,000 TEMECULA PUBLIC FINANCING AUTHORITY COMMUNITY FACILITIES DISTRICT NO. 03-02 (RORIPAUGH RANCH) 2006 SPECIAL TAX BONDS INTRODUCTION This introduction is not a summary of this Official Statement. It is only a brief description of and guide to, and is qualified by, more complete and detailed information contained in the entire Official Statement, including the cover page and appendices hereto, and the documents summarized or described herein. A full review should be made of the entire Official Statement. The offering of the 2006 Bonds to potential investors is made only by means of the entire Official Statement. GeneralThis Official Statement, including the cover page and appendices hereto, is provided to furnish information regarding the issuance and sale by the Temecula Public Financing Authority (the "Authority"), on behalf of the Temecula Public Financing Authority Community Facilities District No. 03-02 (Roripaugh Ranch) (the "District" or the "Community Facilities District") District") of $51,250,000 aggregate principal amount of the Temecula Public Financing Authority Community Facilities District No. 03-02 (Roripaugh Ranch) 2006 Special Tax Bonds (the "2006 Bonds"). The 2006 Bonds are issued pursuant to the Act (as defined below) and a Fiscal Agent Agreement, dated as of March 1,2006 (the "Fiscal Agent Agreement"), by and between the Authority, for and on behalf of the District, and U.S. Bank National Association, as Fiscal Agent (the "Fiscal Agent"). See "THE AUTHORITY -Authority for Issuance" herein. The Authority may issue additional bonds secured on a parity with the 2006 Bonds for the remaining $3,750,000 of authorization of the District or for refunding purposes. The 2006 Bonds and any parity bonds are referred to herein as the "Bonds." Capitalized terms used in this Official Statement andnot otherwise defined herein have the meanings given such terms in the Fiscal Agent Agreement, some of which are set forth in Appendix E hereto 'Summary of Certain Provisions of the Fiscal Agent Agreement." The Authority The Authority was formed on April 10, 2001, pursuant to a Joint Exercise of Powers Agreement between the City of Temecula, California (the "City'O and the Redevelopment Agency of the City of Temecula, in accordance with Articles 1 through 4 (commencing with Section 6500) of Chapter 5, Division 7, Title 1 of the Government Code of the State of California. See "THE AUTHORITY" and "THE COMMUNITY FACILITIES DISTRICT." The Community Facilities District The District was formed and established by the Board of Directors of the Authority on January 11, 2005 pursuant to the Mello-Roos Community Facilities Act of 1982, as amended (Section 53311 et seq. of the California Government Code, and referred to herein as the "Act"), following a public hearing and a landowner election at which the then qualified electors of the District unanimously authorized the District to incur bonded indebtedness in the aggregate not-to-exceed amount of $55,000,000 and approved the levy of a Special Tax (the "Special Tax") on certain real property located in the District for the payment of debt service and administrative expenses of the District. Once duly established, a community facilities district is a legally constituted governmental entity established for the purpose of financing specific facilities and services within defined boundaries. Subject to approval by a two-thirds vote of the qualified voters within a community facilities district and compliance with the provisions of the Act, a community facilities district may issue bonds and may levy and collect special taxes to repay such bonded indebtedness and interest thereon. The District is comprised of approximately 800 gross acres of land located in the far north end of the City, in the south-westerly portion of the County of Riverside (the "County"). The District is located along the south side of Murrieta Hot Springs Road, and along the future northerly extension of Butterfield Stage Road, about 1.5 miles east of Winchester Road (Highway 79). Nicolas Road and North Loop Road will provide internal circulation to a portion of the District. The land in the District is expected to be Droved for up to 2,105 dwelling units, but is currently 'y 10 net acres of 12 acres for an elementary school site, approximately 20 acres for a middle school site, an approximately 19.7-acre sports park (Planning Area 27), an approximately 5.1-acre neighborhood park (Planning Area 6), two private recreation facilities, private and public trails and paseos, an approximately 2-acre fire station site, and approximately 202.7 acres of natural open space to be preserved as permanent habitat and related flood control improvements to Long Valley Wash and Santa Gertrudis Creek. The property within the District is governed by the Roripaugh Ranch Specific Plan approved by the City Council. The property within the District is planned to be developed in 2 phases, which are referred to herein as Phase I, located in the northwest portion of the property and Phase II, located in the east portion of the property. Phase I is estimated to include approximately 515 homes and encompasses approximately 75.81 net acres. Phase II encompasses approximately 1,230 proposed residential lots which have been approved. Phases I and II are expected to contain gated neighborhoods. As of January 15, 2006, rough grading is complete for Phase I, and is approximately 90% complete for the "village core" area of Phase II (Planning Areas 10, 11, 12, 33A and 33B). Rough grading is approximately 80% complete for the balance of the property within Phase II. Builders in Phase L except for Continental Residential, Inc. (as defined below), have acquired their respective tracts within Phase I. Continental Residential, Inc. is not yet a landowner within the District, ana there can be no assurance that it will close escrow on its lots within the District at the times indicated or at all. The school sites may be sold by Ashby USA, LLC (as defined below) to Temecula Valley Unified School District if the School District chooses to purchase the sites. • Ashby USA, LLC ("Ashby USA, LLC"), the master developer of the property in the District, is a California limited liability company based in Corona, California, formed by its members with respect to the Roripaugh Ranch project. Ashby USA, LLC is managed by Ashby Development Company, hie., aCalifornia corporation. The other member of Ashby USA, LLC is USA Investment Partners, LLC, a Nevada limited liability company, and an affiliate of USA Commercial Mortgage Company, a Nevada corporation (dba "USA Capital"). Ashby USA, LLC had acquired all of the property within the District andhas sold or entered into agreements for the sale of property proposed for development of 515 homes within Phase I and has entered into option agreements for the sale of propertyproposedfordevelopmentofapproximately l,230homes inPhaseTl. (112 homes proposed in PA 12 and approximately 1,118 homes proposed in other Planning Areas of Phase II.) • An agreement has been entered into between Ashby USA, LLC and Continental Residential, Inc., a California corporation ("Continental Residential, Inc.") related to 104 lots in Planning Area 1 A, which sale is pending and is anticipated by Ashby USA, LLC and Continental Residential, Inc. to close in September 2006 after conditions to the issuance of building permits in Phase I are satisfied. • Ashby USA, LLC has closed escrow with Davidson Roripaugh Ranch 122 LLC whose manager is Davidson Project Service, Inc., a California corporation (99 lots in Planning Area 2). Ashby USA, LLC had sold 99 lots in Planning Area 3,100 lots in Planning Area 4 A and 113 lots in Planning Area 4B to three purchasers. Litigation against Ashby USA, LLC, among others, was filed by the purchaser of lots within Planning Area 4 A in February 2005 and by the purchaser of lots within Planning Area 4B in August 2005. Negotiations resulted in the sale of the lots in Planning Area 4A on June 30, 2005 to Tanamera/Roripaugh, LLC, a California limited liability company ("Tanamera/Roripaugh, LLC") and the sale of the lots in Planning Area Area 4B on January 6, 2006 to Traditions at Roripaugh, LLC, a California limited liability company ("Traditions at Roripaugh, LLC"). Upon each closing the respective lawsuits were dismissed with prejudice. In addition, on November 2, 2005, the lots in Planning Area 3 were sold by the prior owner to Tanamera/Roripaugh II, LLC, a California limited liability company ("Tanamera/Roripaugh II, LLC," and together with Tanamera/Roripaugh, LLC and Traditions at Roripaugh, LLC, the "Tanamera/Roripaugh Entities"). The Tanamera/Roripaugh Entities operate under the name of Tanamera Residential Group. The Tanamera/Roripaugh Entities are owned by Tanamera Homes, LLC, a California limited liability company ("Tanamera Homes, LLC"). Tanamera Homes, LLC is owned by Monac9 Diversified Corporation, a California corporation and Housing Partners, LLC, a Nevada limited liability company ("Housing Partners"). Housing Partners is owned by USA Investment Partners, LLC, a Nevada limited liability company ("USA Investment Partners, LLC"), which is a member of Ashby USA, LLC. In addition, on August 1,2003, Ashby USA, LLC entered into an option contract for the sale of 112 of the approximately 1,230 proposed single family lots proposed for development in Phase II with KB Home Coastal Inc., a California corporation (KB Home Coastal Inc."). Closing of the sale of all 112 units is conditioned upon Ashby USA, LLC's satisfaction of the conditions specified in the agreement, including satisfaction or conditions necessary for issuance of building permits and satisfaction of conditions relating to issuance of certificates of occupancy which is expected by Ashby USA, LLC to occur prior to June 1, 2007. Subsequently in 2005, Ashby USA, LLC entered into an Option Agreement and Agreement for Purchase and Sale of Real Property and Escrow Instructions (the "Option Agreement"), dated as of July 11, 2005, with KB Home Coastal Inc., as optionee, for the balance of approximately 1,118 of the approximately 1,230 proposed single family lots within Phase II. KB Home Coastal Inc. is not yet a landowner within the District, and there can be no assurance that it will exercise its option to purchase lots within the District at the times indicated or at all. Approximately 10 net acres in Planning Area 11 of Phase II were not part of the contract with KB Home Coastal hie. and are planned for sale by Ashby USA, LLC to a future purchaser for commercial development as a neighborhood retail center, hi addition, it is currently estimated by Ashby USA, LLC that the grading of the lots in Phase II to a blue-top condition and other development conditions will be completed from approximately September 2006 through May 2007. When this occurs, and Ashby USA, LLC's work is completed, which includes satisfaction of the conditions to release of building permits and satisfaction of conditions relating to issuance of certificates of occupancy, the option with KB Home Coastal Inc. provides for KB Home Coastal Inc. to begin taking down or closing on portions of the lots. Pursuant to the Option Agreement KB Home Coastal Inc. may acquire approximately 4121 of the lots in Phase II in Planning Areas 16,23,24 and 31, or may acquire allof me approximately 1,118 remaining lots in Phase II (not including the 112 lots in Planning Area 12 that are subject to a separate transaction). Based solely on Ashby USA, LLC's estimated completion date, acquisition is expected to commence in the third quarter after Ashby USA, LLC satisfies the conditions of the Option Agreement. If the option for approximately 412 lots is selected, the sale of the approximately 412 lots would close within 45 days of the ability to obtain building permits and satisfaction of conditions relating to issuance of certificates of occupancy and the date of acceptance of the Blue Top Condition specified in the Option Agreement (as described"below in "PROPERTY OWNERSHIP AND DEVELOPMENT -Description of Project -Ashby USA, LLC -Sale of Phase II to KB Home Coastal Inc.; Take Down Options," unless KB Home Coastal Inc. elects to delay the close for eight months after said election. If the option for approximately 412 lots is selected, Ashby USA, LLC would market the remaining approximately 706 lots to other merchant builders. If the approximately 1,118 lot option is exercised then the lots will be purchased over a period of approximately 5 years. There is no assurance that any agreements for lot sales not yet consummated will be performed as expected or with regard to the timing of completion of improvements. With regard to the timing of completion of improvements, the City has reviewed a construction schedule prepared by Ashby USA, LLC in January 2006 and has indicated that schedule was feasible but was aggressive. The January 2006 schedule assumed only minimal construction delays such as may occur due to delay in receipt of necessary Resource Agency or other approvals, delays in award of construction contracts, delays in delivery of construction materials, or delays due to inclement weather. The City has indicated that a time frame between March 2007 and September 2007 is a more realistic estimate of the time frame for completion of the necessary infrastructure to allow building permits to be issued for homes within Phase II. Ashby USA, LLC has subsequently modified its schedule with respect to certain items to take into account subsequent events. The Authority, the City and the Merchant Builders make no representation whatsoever that the schedule as provided by Ashby USA, LLC and modified from time to time, will be achieved. KB Home Coastal Inc. makes no representation as to Ashby USA, LLC's ability to timely complete the work to allow issuance of building permits in Phase II by June 1, 2007 as required under the Option Agreement (as defined below). The Market Absorption Study and the Appraisal were prepared utilizing an estimated September 2006 date of completion of necessary infrastructure to allow issuance of remaining buildingpermits for homes within Phase land an estimated September 2007 date of completion of necessary 1 424 lots represents the aggregate estimated number of lots in Planning Areas 16, 23, 24, and 31 at the time Ashby USA, LLC and KB Home Coastal Inc. entered into the Option Agreement. 1,129 represents the aggregate estimated number of lots in the other Planning Areas subject to the Option Agreement at the time Ashby USA, LLC and KB Home Coastal Inc. entered into the Option Agreement. Current estimates for Planning Areas 16, 23, 24 and 31 aggregate to 412 lots and for the other Planning Areas the lots aggregate to approximately 706 lots. For convenience of reference when describing the terms of the Option Agreement, the current number of estimated lots will be used rather than the estimated number of lots referenced in the Option Agreement. The actual number of lots in any Planning Area may change as development plans are refined over time. KB Home Coastal Inc. is not at this time able to represent what the unit counts in each Planning Area are. KB Home Coastal Inc. is not yet a current landowner within the District, and there can be no assurance that it will exercise its option to purchase lots within the District at the times indicated or at all. 2 Resource Agencies include the California Department of Fish and Game, the Army Corp of Engineers and the California Regional Water Quality Control Board. infrastructure to allow issuance of building permits for homes within Phase II. The September 2007 date of completion takes into account the possibility that the schedule prepared by Ashby USA, LLC, as modified from time to time, with respect to Phase II is not achieved. It is also possible that the schedule prepared by Ashby USA, LLC with respect to Phase I may not be achieved. The development of the property in the District is subject to a number of constraints, with various requirements that must be met for the issuance by the City of building permits for property in the District. Upon issuance of the 2006 Bonds, development requirements will have been met which allow up to 107 building permits to be issued. Ashby USA, LLC estimates it will satisfy the development requirements which allow up to 515 building permits to be issued by approximately the end of September 2006. Initially, development with respect to 54building permits in Planning Area 2 by Davidson Roripaugh Ranch 122 LLC and 53 building permits in Planning Areas 3 and 4A by the Tanamera/Roripaugh Entities is expected to commence during the second quarter of 2006. Development beyond 107 building permits requires satisfaction of specified development conditions. Ashby USA, LLC expects those conditions to be satisfied a few months before the time at which Ashby USA, LLC expects to satisfy the conditions which allow development of the residential and commercial lots in Phase II. See "THE COMMUNITY FACILITIES DISTRICT" and "PROPERTY OWNERSHIP AND DEVELOPMENT" for a description of the District, Ashby USA, LLC, the merchant builders and the development. The Authority, the City and the Merchant Builders make no representation as to the ability of Ashby USA, LLC to satisfy requirements in a timely fashion. The various merchant builders currently anticipated by Ashby USA, LLC to be involved in development within Phases land II include (i) Continental Residential, Inc., (ii) Davidson Roripaugh Ranch 122 LLC, for whom Davidson Builders, Inc. is expected to be under contract to develop the property, (iii) Tanamera Residential Group for the Tanamera/Roripaugh Entities, and (iv) KB Home Coastal Inc. These merchant builders, together with any other merchant builder which becomes involved in the development, are each individually referred to as a "Merchant Builder" and collectively referred to as the "Merchant Builders." Detailed information about the location of and property ownership and land uses in the District is set forth in "THE COMMUNITY FACILITIES DISTRICT" and "PROPERTY OWNERSHIP AND DEVELOPMENT "herein. Purpose of the 2006 Bonds The 2006 Bonds are being issued (i) to finance, either directly or indirectly, the acquisition and construction of certain road, sewer, storm drain, fire facilities, and park and recreation improvements (collectively, the "Improvements") to be located within or in the vicinity of the District, (ii) to eliminate an existing special assessment lien (the "Prior Lien"), on parcels in the District imposed by Assessment District No. 161 161 (Winchester Properties) of the County C'Cpunty Assessment District No. 161"), (iii) to fund interest on the 2006 Bonds through September 1, 2006, (iv) to pay certain administrative expenses related to the District, (v) to pay the costs of issuing the 2006 Bonds and (vi) to establish a Reserve Fund for the 2006 Bonds. See "PLAN OF FINANCE; IMPROVEMENTS TO BE FINANCED WITH PROCEEDS OF THE 2006 BONDS" herein. Sources of Payment for the 2006 Bonds The Bonds are secured by and payable from a first pledge of "Special Tax Revenues," defined in the Fiscal Agent Agreement as the proceeds of the Special Taxes received by the Authority, including any scheduled payments thereof and any prepayments thereof, interest thereon and proceeds of the redemption or sale of property sold as a result of foreclosure of the lien of the Special Taxes to the amount of said lien and interest thereon. "Special Tax Revenues" do not include any penalties collected in connection with delinquent Special Taxes which amounts may be forgiven or disposed of by the Authority in its discretion, and if collected, will be used in a manner consistent with the Act. "Special Taxes" are denned in the Fiscal Agent Agreement as the special taxes levied within the District pursuant to the Act, the ordinance adopted by the legislative body of the District providing for the levy of the Special Taxes and the Fiscal Agent Agreement. The Special Taxes will be levied in accordance with the Rate and Method of Apportionment of Special Tax (the "Rate and Method") recorded as a lien on the Property pursuant to the Notice of Special Tax Lien. Pursuant to the Act, the Rate and Method, the Resolution of Formation (as defined herein) and the Fiscal Agent Agreement, so long as any Bonds are outstanding, the Authority will annually levy the Special Tax against the land within the District not exempt from Special Taxes under the Act and the Rate and Method ("Taxable Property") in accordance with the proceedings for the authorization and issuance of the Bonds and the Rate and Method, to make provision for the collection of the Special Tax in amounts which will be sufficient to (a)(i) pay debt service due on all Bonds, for the calendar year that commences in such Fiscal Year; (ii) pay Administrative Expenses; and (iii) pay any amounts required to establish or replenish any bond or interest reserve funds for any Outstanding Bonds; less (b) a credit for funds available to reduce the annual Special Tax levy under the Fiscal Agent Agreement. See "SECURITY FOR THE 2006 BONDS -Special Taxes and the Teeter Plan" herein. The Rate and Method exempts from the Special Tax up to 511.11 acres of Property Owner's Association Property and Public Property. Such property includes parcels for a private mini-park, for a private recreation center, for open space, for flooa control facilities, for equestrian trails, for pumic parks, for school sites, and for a fire station site. See "SECURITY FOR THE 2006 BONDS -Rate and Method" and "BONDOWNERS' RISKS -Exempt Properties." The Authority has also covenanted in the Fiscal Agent Agreement to cause foreclosure proceedings to be commenced and prosecuted against certain parcels with delinquent installments of the Special Tax. For a more detailed description of the foreclosure covenant, see "SECURITY FOR THE 2006 BONDS -Proceeds of Foreclosure Sales." NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE AUTHORITY, THE DISTRICT (EXCEPT TO THE LIMITED EXTENT DESCRIBED HEREIN) OR THE STATE OR ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE 2006 BONDS. OTHER THAN THE SPECIAL TAXES OF THE DISTRICT, NO TAXES ARE PLEDGED TO THE PAYMENT OF THE 2006 BONDS. THE 2006 BONDS ARE NOT A GENERAL OBLIGATION OF THE AUTHORITY OR THE DISTRICT, BUT ARE LIMITED OBLIGATIONS OF THE AUTHORITY FOR THE DISTRICT PAYABLE SOLELY FROM THE SOURCES PROVIDED IN THE FISCAL AGENT AGREEMENT. Appraisal An appraisal prepared by an MAI appraiser of the residential and commercial land that comprises the District dated February 10, 2006 (the "Appraisal"), has been prepared by Stephen G. White, MAI of Fullerton, California (the "Appraiser") in connection with the issuance of the 2006 Bonds. The purpose of the appraisal was to estimate the aggregate market value of the "as-is" condition of the property in each of the 5 separate tracts in Phase I, the panhandle" area, plus the remaining ownership of Asnby USA, LLC comprising Phase II, the "pan" area. The Appraisal also reflects the proposed District financing, as well as the tax rates of approximately 1.6% to 1.7% of the estimated sales prices of the homes to be built in the District, including the Special Taxes, to the future homeowners. The Appraisal is based on certain assumptions. Subject to these assumptions, the Appraiser estimated that the fee simple market value of the Taxable Property within the District (subject to the lien of the Special Taxes) as of January 15, 2006, was as follows: Ownership Market Value Phase I -"Panhandle" Area: Builder (Tract Name) DR Horton -Continental Homes (Castillo) $ 17,280,000 Davidson Roripaugh Ranch 122 LLC (n/a) 18,070,000 Tanamera/Roripaugh II, LLC (Madison) 17,700,000 Tanamera/Roripaugh, LLC (Shutters) 18,260,000 Traditions at Roripaugh, LLC (Hamptons) 18.340.000 Subtotal $89,650,000 Phase II "Pan" Area: Owner Ashby USA, LLC $74.480.000 Total $164,130,000 The values are based on the assumption that the master developer will complete the infrastructure in a timely manner such that building permits will be available for development to occur as proj ected in the absorption conclusions by the Market Absorption Consultant. The Market Absorption Study contains projected absorption of production homes that differ from thpse of Ashby USA, LLC. The Market Absorption Study and the Appraisal were prepared utilizing an estimated September 2 006 date of completion of necessary infrastructure to allow issuance of remaining building permits for homes in Phase I and an estimated September 2007 date of completion of necessary infrastructure to allow issuance of building permits for homes in Phase II. The September 2007 date of completion takes into account the possibility that the schedule prepared by Ashby USA, LLC with respect to Phase II is not achieved. It is also possible that the schedule prepared by Ashby USA, LLC with respect to Phase I may not be achieved. The Authority, the City and the Merchant Builders make no representations as to the ability of Ashby USA, LLC to perform in the manner assumed by Ashby USA, LLC or assumed in the Appraisal, or as to the accuracy or completeness of the Appraisal or the Market Absorption Study. Thefee simple market value includesthe value of extensive grading and infrastructure improvements completed as of the date of value and the improvements to be financed oy the 2006 Bonds. The market values reported in the Appraisal result in an estimated overall value-to-lien ratio of 3.20:1, with a value of approximately 6.90:1 with respect to Phase I and approximately 1.95:1 with respect to Phase II, calculated with respect to the 2006 Bonds based on allocation of Special Taxes levied as Undeveloped Property and excluding the overlapping assessment debt relating to thePriorLien and general obligation bonddebt. The value-to-lien ratios of individual parcels will differ from the foregoing aggregate value-to-lien ratio. See Table 4-"Estimated Value-to-Lien Analysis" in "PROPERTY OWNERSHIP AND DEVELOPMENT -Value-to-Lien Ratios" section. See "BONDOWNERS' RISKS -Burden of Parity Liens, Taxes and Other Special Assessments on the Taxable Property" and "BONDOWNERS' RISKS -Appraised Values" herein and APPENDIX C -"Summary Appraisal Report" appended hereto for further information on the Appraisal and for limiting conditions relating to the Appraisal. Ashby USA, LLC has provided a letter of credit to the Trustee which may be drawn in the event Special Taxes due with respect to property owned by Ashby USA, LLC and the Tanamera/Roripaugh Entities are not paid. See "SECURITY FOR THE BONDS -Letter of Credit." Tax Exemption In the opinion of Bond Counsel, subject, however, to certain qualifications described herein, under existing law, interest on the 2006 Bonds is excludable from gross income of the Bondowners thereof for federal income tax purposes and is not included as an item of tax preference in computing the federal alternative minimum tax for individuals and corporations under the Internal Revenue Code of 1986, as amended, but is taken into account in computing an adjustment used in determining the federal alternative minimum tax for certain corporations. In the further opinion of Bond Counsel, such interest is exempt from Californiapersonal income taxes. Bond Counsel expresses no opinion regarding any other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest on, the 2006 Bonds. See "LEGAL MATTERS -Tax Exemption" herein. Risk Factors Associated with Purchasing the 2006 Bonds Investment in the 2006 Bonds involves risks that may not be appropriate for some investors. See the section of this Official Statement entitled "BONDOWNERS' RISKS for a discussion of certain risk factors which should be considered, in addition to the other matters set forth herein, in considering the investment quality of the 2006 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 21E 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 "PROPERTY OWNERSHIP AND DEVELOPMENT" therein. 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. NEITHER THE AUTHORITY NOR THE DISTRICT PLANS TO ISSUE ANY UPDATES OR REVISIONS TO THE FORWARD-LOOKING STATEMENTS SET FORTH IN THIS OFFICIAL STATEMENT. Professionals Involved in the Offering U.S. Bank National Association, Los Angeles, California, will serve asthe fiscal agent, paying agent, registrar and authentication and transfer agent for the 2006 Bonds, and will perform the other functions required of it under the Fiscal Agent Agreement. Quint & Thimmig LLP, San Francisco, California is serving as Bond Counsel to the Authority. McFarlin & Anderson LLP, Lake Forest, California, is acting as Disclosure Counsel to the Authority. Pillsbury Winthrop Shaw Pittman LLP, Los Angeles, California, is counsel for Ashby USA, LLC and the Tanamera/Roripaugh Entities. Bond Counsel, Disclosure Counsel and Pillsbury Winthrop Shaw Pittman LLP have served and continue to serve as counsel to the Underwriter in other transactions. DavidTaussijg &Associates, Inc., Newport Beach, California, acted as special tax consultant for the District. Fieldman, Rolapp and Associates, Irvine, California, acts as Financial Advisor to the Authority. The appraisal work was done by Stephen G. White, MAI of Fullerton, California. Empire Economics, Inc., Capistrano Beach, California, acted as Market Absorption Consultant. Payment of the fees and expenses of Bond Counsel, Disclosure Counsel, the Fiscal Agent and the Underwriter, and of a portion of the fees and expenses of the Financial Advisor and the Special Tax Consultant, is contingent upon the sale and delivery of the 2006 Bonds. Other Information This Official Statement speaks only as of its date, and the information contained herein is subject to change. Brief descriptions of me 2006 Bonds, certain sections of the Fiscal Agent Agreement, security for the 2006 Bonds, special risk factors, the Authority, the District, Ashby USA, LLC, the Merchant Builders, information regarding the development plan for the property owned by Ashby USA, LLC and the Merchant Builders and other information are included in this Official Statement. Such descriptions and information do not purport to be comprehensive or definitive. The descriptions herein of the 2006 Bonds, the Fiscal Agent Agreement, and other resolutions and documents are qualified in their entirety by reference to the complete texts of the 2006 Bonds, the Fiscal Agent Agreement, such resolutions and other documents. All such descriptions are further qualified in their entirety by reference to laws and to principles of equity relating to or affecting generally the enforcement of creditors' rights. Copies of such documents may be obtained upon written request from the Temecula Public Financing Authority, 43200 Business Park Drive, Temecula, California 92590 Attention: Treasurer. The Authority may charge for copying and mailing any documents requested. CONTINUING DISCLOSURE The Authority. The Authority has covenanted for the benefit of the owners of the 2006 Bonds to to the 2006 Bonds, the District, the Special Tax, the occurrence of delinquencies in payment of the Special Tax, and the status of foreclosure proceedings, if any, respecting Special Tax delinquencies (the "Authority Annual Report"), and to provide notice of the occurrence of certain enumerated events, if material. The Authority Annual Report is to be provided by the Authority not later than eight months after the end of the Authority's fiscal year (which currently would be March 1), commencing with the report due March 1, 2007. The Authority, the City and related entities have never failed to comply in all material respects with any previous undertakings with regard to Securities and Exchange Commission Rule 15c2-12(b)(5) (the "Rule") to provide annual reports or notices of material events. Ashby USA, LLC. Ashby USA, LLC has covenanted for the benefit of the owners of the 2006 Bonds to provide semi-annually certain financial information and information regarding the development of the property owned by it or its Affiliates (as defined below), in the District (the "Ashby USA, LLC Semi-Annual Report ), and to provide nqticeof the occurrence of certain enumerated events, if material. The Ashby USA, LLC Semi-Annual Report is to be provided not later than April 1 and October 1, commencing with the report due not later than October 1, 2006. Ashby USA, LLC has informed the Authority that it and its Affiliates have never failed to comply in all material respects with any previous undertakings with regard to the Rule to provide reports or notices of material events. For purposes of the Ashby USA, LLC Continuing Disclosure Agreement entered into by Ashby USA, LLC the term "Affiliate" is defined to provide that an Affiliate of another Person means (a) a Person directly or indirectly owning, controlling, or holding with power to vote, 15% or more of the outstanding voting securities of such other Person, (b) any Person 15% or more of whose outstanding voting securities are directly or indirectly owned, C9ntrolled, or held with power to vote, by such other Person, and (c) any Person directly or indirectly controlling, controlled by, or under common control with, such other Person; for purposes hereof, "control" means the power to exercise a controlling infl uenceover the management or policies of a Person, unless such power is solely the result of an official position with such Person. Notwithstanding the foregoing, none of the following entities shall be considered to be an "Affiliate" of Ashby USA, LLC: Continental Residential, Inc., Davidson Roripaugh Ranch 122, LLC, Tanamera/Roripaugh, LLC, Tanamera/Roripaugh II, LLC, Traditions at Roripaugh, LLC and KB Home Coastal Inc. Tanamera/Roripaugh, LLC; Tanamera/Roripaugh II, LLC and Traditions at Roripaugh, LLC. Tanamera/Roripaugh, LLC,Tanamera/Roripaugh II, LLC and Traditions at Roripaugh, LLC have covenanted for the benefit of the owners of the 2006 Bonds to provide semi-annually certain financial information and information regarding the development of the properties owned by each of them or their Affiliates, other than property owned by Ashby USA, LLC in the District (the "Tanamera/Roripaugh Entities Semi-Annual Report"), and to provide notice of the occurrence of certain enumerated events, if material. The Tanamera/Roripaugh Entities Semi-Annual Report is to be provided not later than April 1 and October 1, commencing with the report due not later than October 1, 2006. The Tanamera/Roripaugh Entities have indicated that in connection with the Willowbrook project in the City of Ferris CFD No. 2002-1 (Willowbrook), an affiliate of Tanamera Homes, LLC was late in providing the continuing disclosure report that was due on December 31,2003. The report was filed in September 2004. Other than such continuing disclosure report, Tanamera/Roripaugh Entities have informed the Authority that they and their Affiliates have never failed to comply in all material respects with any previous undertakings with regard to the Rule to provide reports or notices of material events. The definition of "Affiliate' in the Tanamera/Roripaugh Entities Continuing Disclosure Agreement is substantially the same as the definition of "Affiliate" set forth above, except that none of the following entities shall be considered to be an "Affiliate" of the Tanamera/RoripaughEntities: Ashby USA, LLC, Continental Residential, Inc., Davidson Roripaugh Ranch 122, LLC, and KB Home Coastal Inc Filing of Annual Reports; Ashby USA, LLC Semi-Annual Reports; Tanamera/Roripaugh Entities; Forms of Reports. Each Authority Annual Report will be filed by the Fiscal Agent, as dissemination agent for the Authority with each Nationally Recognized Municipal Securities Information Repository and with each State Repository, if any. Each Ashby USA, LLC Semi-Annual Report and Tanamera/Roripaugh Entities Semi-Annual Report will be filed by the Fiscal Agent, as dissemination agent for Ashby USA, LLC and as dissemination agent for the Tanamera/Roripaugh Entities, with each Nationally Recognized Municipal Securities Information Repository and with each State Repository, if any. These covenants have been made in order to assist the Underwriter in complying with the Rule;'provided, however, a default under the Authority Continuing Disclosure Agreement, the Ashby USA, LLC Continuing Disclosure Agreement or the Tanamera/Roripaugh Entities Continuing Disclosure Agreement will not, in itself, constitute a default under " *'* ' ' • ' . -• -. . • • r Disclosure Agreement, the _ i Entities, in the event of any failure ot tne Authority, Asnby u SA, LLU, tne i anamera/Konpaugn entities orthe applicable Dissemination Agent, to comply with the Authority Continuing Disclosure Agreement, the Ashby USA, LLC Continuing Disclosure Agreement or the Tanamera/Roripaugh Entities Continuing Disclosure Agreement will be an action to compel performance. The Authority has no obligation to enforce Continuing Disclosure Agreement obligationsof Ashby, USA, LLC or Tanamera/Roripaugh Entities. Ashby USA, LLC's continuing disclosure obligations will terminate upon the occurrence of certain events, including when it or its Affiliates' property is subject to less than 15% of the Special Tax levy of the District for me then current Fiscal Year. The Tanamera/Roripaugh Entities continuing disclosure obligations will terminate upon the occurrence of certain events, including when they and their Affiliates' property is subject to less than 15% of the Special Tax levy of the District for the then current Fiscal Year. For a complete listing of items of information which will be provided in the Authority Annual Reports, the Ashby USA, LLC's Semi-Annual Reports and the Tanamera/Roripaugh Entities Semi-Annual Reports, see APPENDFX F -"Form of Authority Continuing Disclosure Agreement" andAPPENDIX G-"Form of Ashby USA, LLC Continuing Disclosure Agreement and Form of Tanamera/Roripaugh Entities Continuing Disclosure Agreement." PLAN OF FINANCE; IMPROVEMENTS TO BE FINANCED WITH PROCEEDS OF THE 2006 BONDS Acquisition or Construction of Improvements; Payment of Prior Lien. Proceeds of the 2006 Bonds are not sufficient to finance acquisition and construction of all of the Improvements, but will be used, to the extent of available funds to acquire or construct the Improvements, all of which are to be constructed within or in the vicinity of the District. Ashby USA, LLC will finance Improvements not financed with proceeds of the 2006 Bonds. The Improvements which proceeds of the 2006 Bonds may be expended for, include construction of portions of Muni eta Hot Springs Road, Butterfield Stage Road, and Nicolas Road, bridges over Long Valley Wash and Santa Gertrudis Creek for Butterfield Stage Road and over Santa Gertrudis Creek for Nicolas Road, grading, detention basins and storm drainage improvements to Santa Gertrudis Creek and Long Valley Wash Channel, habitat mitigation for the Santa Gertrudis Creek and Long Valley Wash Channel improvements, and fire station site acquisition and construction, and equipping of the fire station. Eligible Improvement costs also include the acquisition of right-of-way, the cost of design, engineering and planning, the cost of any environmental or traffic studies, surveys or other reports, the cost of any required environmental mitigation and any required noise mitigation measures, landscaping and irrigation, soils testing, permits, plan check and inspection fees, insurance, legal and related overhead costs, coordination and supervision and any other related costs or appurtenances. In addition, 2006 Bond proceeds andavailable moneys provided by Ashby USA, LLC in the aggregate amount of approximately $583,610.63 will be applied to discharge the Prior Lien, including the hen relating to authorized but unissued bonds relatin See ing tome Prior Lien or to reimburse Ashby USA, LLC for its provision of funds used to prepay the lien. "THE COMMUNITY FACILITIES DISTRICT -Acquisition of Improvements" regarding the Acquisition Agreement between the Authority and Ashby USA, LLC regarding cert:ain of the Improvements which are to be acquired by the Authority from Ashby USA, LLC. The balance of the proceeds of the 2006 Bonds will be used (i) to fund interest on the 2006 Bonds through September 1,2006, (ii) to pay certain administrative expenses related to the District, (iii) to pay the costs of issuing the 2006 Bonds, and (iv) to establish a Reserve Fund for the 2006 Bonds. The Authority has entered into a Joint Community Facilities Agreement with the City whereby the City agrees to accept dedication of certain Improvements. The Authority has entered into a Joint Community Facilities Agreement (Street Improvements) with the County and Ashby USA, LLC, pursuant to which the County wilFaccept certain road improvements financed by the District. The Authority has entered into a Joint Community Facilities Agreement (Flood Control Improvements) with the Riverside County Flood Control and Water Conservation District, the County, the City, and Ashby USA, LLC, pursuant to which the Riverside County Flood Control and Water Conservation District will accept certain completed storm drain improvements financed by the District. The Authority has entered into a Joint Community Facilities Agreement with the Eastern Municipal Water District pursuant to which the Eastern Municipal Water District will acceptcertain completed sewer and water improvements financed by the District. The Authority has entered into an Acquisition Agreement with Ashby USA, LLC providing for the acquisition by the Authority from Ashby USA, LLC of certain Improvements. Any of the foregoing agreements may be amended without any requirement for notice to or the consent of the owners of the 2006 Bonds. ESTIMATED SOURCES AND USES OF FUNDS The proceeds from the sale of the 2006 Bonds will be deposited into the respective accounts and funds established by the Authority under the Fiscal Agent Agreement, as follows: Sources: Principal Amount of 2006 Bonds $51,250,000.00 Less: Underwriter's Discount (955.625.00) Total Sources $50,294,375.00 Uses: Deposit into Improvement Fund(1) $44,307,106.40 Deposit to Refunding Fund for payment of Prior Lien(2) 491,15 8.10 Deposit into Reserve Fund 3,503,850.00 Deposit into Capitalized Interest Account of the Bond Fund(3) 942,260.50 Deposit into Administrative Expense Fund 60,000.00 Deposit into Cost of Issuance Fund(4) 990.000.00 Total Uses $50,294,375.00 (1) See "PLAN OF FINANCE; IMPROVEMENTS TO BE FINANCED WITHPROCEEDS OF THE2006 BONDS" above. Within the Improvement Fund $4,162,710.00 will be deposited into the City Account, $1,381,015.00 will be deposited into the EMWD Account, $38,083.381.40 will be deposited into the Acquisition Account, and $680,000.00 will be deposited into the Public Works Administration Account. (2) Used to prepay Prior Lien on parcels in the District imposed by County Assessment District No. 161. Ashby USA, LLC will provide additional funds to effect a full prepayment. Represents gross funded capitalized interest through September 1, 2006. Includes, among other things, the fees and expenses of Bond Counsel, Disclosure Counsel, the Financial Advisor, the Special Tax Consultant and the Fiscal Agent, the cost of printing the Preliminary and final Official Statements and reimbursement to the District and Ashby USA, LLC for costs advanced towards the issuance of the 2006 Bonds and the formation of the District. THE 2006 BONDS Description of the 2006 Bonds The 2006 Bonds will be dated their date of delivery and will bear interest at the rates per annum set forth on the cover page hereof, payable semiannually on each March 1 and September 1, commencing on September 1, 2006 (each an "Interest Payment Date"), and will mature in the amounts and on the dates set forth on the inside cover page hereof. The 2006 Bonds will be issued in fully registered form in denominations of $5,000 each or any integral multiple thereof and when delivered, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company ("DTC"), New York, New York. DTC will act as securities depository for the 2006 Bonds. Ownership interests in the 2006 Bonds may be purchased in book-entry form only, in denominations of $5,000 or any integral multiple thereof within a single maturity. So long as the 2006 Bonds are held in book-entry form, principal of, premium, if any and interest on the 2006 Bonds will be paid directly to DTC for distribution to the beneficial owners of the 2006 Bonds in accordance with the procedures adopted by DTC. See "THE 2006 BONDS -Book-Entry and DTC." In the event that the 2006 Bonds are not registered in the name of Cede & Co., as nominee of DTC or another eligible depository, both the principal and redemption price, including any premium, of the 2006 Bonds shall be payable by check in lawful money of the United States of America upon presentation of the 2006 Bonds at the principal office of the Fiscal Agent as specified in the Fiscal Agent Agreement; and interest on the 2006 Bonds (including the final interest payment upon maturity or earlier redemption) is payable by check of the Fiscal Agent mailed on the Interest Payment Dates by first class mail to the registered owner thereof at such registered owner' s address as it appears on the registration books maintained by the Fiscal Agent at the close ofbusiness on the Record Date preceding the Interest Payment Date, or by wire transfer to an account within the the United States made on such Interest Payment Date upon written instructions of any Bondowner of $ 1,000,000 or more in aggregate principal amount of 2006 Bonds received before the applicable Record Date, which instructions shall continue in effect until revoked in writing, or until such 2006 Bonds are transferred to a new Bondowner. The registered owner of any 2006 Bond will be the person or persons in whose name or names a 2006 Bond is registered on the registration books kept for that purpose by the Fiscal Agent in accordance with the terms of the Fiscal Agent Agreement (initially being DTC with respect to all of the 2006 Bonds). The "Record Date" with respect to any 2006 Bonds, means the fifteenth day of the month next preceding the month of the applicable Interest Payment Date, whether or not such day is a Business Day. So long as the 2006 Bonds are in book-entry only form, all references in this Official Statement to the owners or holders of the 2006 Bonds mean DTC and not the Beneficial Owners. The The 2006 Bonds will bear interest at the rates set forth on the cover hereof payable on the Interest Payment Dates in each year. Interest will be calculated on the basis of a 360-day year comprised of twelve 30-day months. Each 2006 Bond shall bear interest from the Interest Payment Date next preceding the date of authentication thereof unless (i) it is authenticated on an Interest Payment Date, in which event it shall bear interest from such date of authentication, or (ii) it is authenticated prior to an Interest Payment Date and after the close ofbusiness on the Record Date (as defined below) preceding such Interest Payment Date, in which event it shall bear interest from such Interest Payment Date, or (iii) it is authenticated prior to the Record Date preceding the first Interest Payment Date, in which event it shall bear interest from the Closing Date; provided, however, that if at the time of authentication of a Bond, interest is in default thereon, such Bond shall bear interest from the Interest Payment Date to which interest has previously been paid or made available for payment thereon. The principal of, and interest and premium, if any, payable on the 2006 Bonds will be payable when due, by wire transfer of the Fiscal Agent, to The Depository Trust Company, New York, New York ("DTC"), which will in turn remit such principal, interest and premium, if any, to its Participants (as described in APPENDIX I -"Book-Entry System"), which Participants will in turn remit such principal, interest and premium, if any, to the Beneficial Owners (as defined in APPENDIX I-"Book-Entry System") of the 2006 Bonds as described in APPENDIX I -"Book-Entry System." 10 Debt Service Schedule The following table presents the annual debt service on the 2006 Bonds (including sinking fund redemptions), assuming that there are no optional redemptions or mandatory redemptions from prepayments of Special Taxes. Year Ending September 1 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 Principal -$ 765,000 795,000 830,000 865,000 905,000 945,000 990,000 1,040,000 1,090,000 1,145,000 1,205,000 1,270,000 1,340,000 1,415,000 1,490,000 1,570,000 1,660,000 1,750,000 1,845,000 1,945,000 2,050,000 2,165,000 2,280,000 2,405,000 2,540,000 2,680,000 2,825,000 2,980,000 3,145,000 3,320,000 $51,250,000 Interest $ 942,260.50 2,735,595.00 2,704,995.00 2,671,605.00 2,635,500.00 2,596,575.00 2,554,492.50 2,509,605.00 2,461,095.00 2,409,095.00 2,354,050.00 2,295,655.00 2,229,982.50 2,160,767.50 2,087,737.50 2,010,620.00 1,929,415.00 1,843,850.00 1,753,380.00 1,658,005.00 1,557,452.50 1,451,450.00 1,338,700.00 1,219,625.00 1,094,225.00 961,950.00 822,250.00 674,850.00 519,475.00 355,575.00 182,600.00 $54,722,433.00 Total Debt Service 0) $ 942,260.50 3,500,595.00 3,499,995.00 3,501,605.00 3,500,500.00 3,501,575.00 3,499,492.50 3,499,605.00 3,501,095.00 3,499,095.00 3,499,050.00 3,500,655.00 3,499,982.50 3,500,767.50 3,502,737.50 3,500,620.00 3,499,415.00 3,503,850.00 3,503,380.00 3,503,005.00 3,502,452.50 3,501,450.00 3,503,700.00 3,499,625.00 3,499,225.00 3,501,950.00 3,502,250.00 3,499,850.00 3,499,475.00 3,500,575.00 3,502,600.00 $105,972,433.00 (1> Will be paid from funds deposited into the Capitalized Interest Account of the Bond Fund. 11 Terms of Redemption The 2006 Bonds are subj ect to redemption upon the circumstances, on the dates and at the prices set forth as follows. Optional Redemption. The 2006 Bonds maturing on or after September 1, 2015 are subject to optional redemption prior to their stated maturity on any Interest Payment Date on or after September 1, 2014, as a whole, or in part among maturities so as to maintain substantially level debt service on the Bonds and by lot within a maturity, at a redemption price (expressed as a percentage of the principal amount of the 2006 Bonds to be redeemed), as set forth below, together with accrued interest thereon to the date fixed for redemption: Redemption Date Redemption Price September 1, 2014 and March 1, 2015 102% September 1, 2015 and March 1, 2016 101 September 1, 2016 and any Interest Payment 100 Date thereafter Mandatory Sinking Payment Redemption. The 2006 Bonds maturing on September 1, 2026, are subject to mandatory sinking payment redemption in part on September 1, 2017, and on each September 1 thereafter to maturity, by lot, at a redemption price equal to the principal amount thereof to be redeemed, together with accrued interest to the date fixed for redemption, without premium, from sinking payments as follows: Redemption Date Sinking Payments 2017 $1,205,000 2018 1,270,000 2019 1,340,000 2020 1,415,000 2021 1,490,000 2022 1,570,000 2023 1,660,000 2024 1,750,000 2025 1,845,000 2026 (maturity) 1,945,000 The 2006 Bonds maturing on September 1, 2036, are subject to mandatory sinking payment redemption in part on September!, 2027, and on each September 1 thereafter to maturity, by lot, at a redemption price equal to the principal amount thereof to be redeemed, together with accrued interest to the date fixed for redemption, without premium, from sinking payments as follows: 12 Sinking Fund Redemption Date Sinking Payments 2027 $2,050,000 2028 2,165,000 2029 2,280,000 2030 2,405,000 2031 2,540,000 2032 2,680,000 2033 2,825,000 2034 2,980,000 2035 3,145,000 2036 (maturity) 3,320,000 The amounts in the foregoing tables shall be reduced to the extent practicable so as to maintain level debt service on the 2006 Bonds as a result of any prior partial redemption of the 2006 Bonds pursuant to an optional redemption or mandatory redemption from prepaid Special Taxes, as specified in writing by the Treasurer to the Fiscal Agent. Redemption from Special Tax Prepayments. Special Tax Prepayments and any corresponding transfers from the Reserve Fund shall be used to redeem the 2006 Bonds on the next Interest Payment Date for which notice of redemption can timely be given, by lot within a maturity and allocated among maturities of the 2006 Bonds so as to maintain substantially level debt service on the Bonds, at a redemption price (expressed as a percentage of the principal amount of the 2006 Bonds to be redeemed), as set forth below, together with accrued interest to me date fixed for redemption: Redemption Date Redemption Price Any Interest Payment Date from September 1, 103% 2006 through March 1,2014 September 1, 2014 and March 1, 2015 102 September 1, 2015 and March 1, 2016 101 September 1, 2016 and any Interest Payment 100 Date thereafter Mandatory Redemption From Improvement Fund Transfer. The 2006 Bonds are subject to mandatory redemption on the next Interest Payment Date for which notice of redemption can timely be given under the "Fiscal Agent Agreement, in part, at a redemption price equal to the principal amount thereofio be redeemed, together with accrued interest to the date fixed for redemption, without premium, from amounts transferred from the Improvement Fund to the Bond Fund pursuant to the Fiscal Agent Agreement. Purchase In Lieu of Redemption. In lieu of any redemption, moneys in the Bond Fund may be used and withdrawn by the Fiscal Agent for purchase of Outstanding 2006 Bonds, Bonds, upon the filing with the Fiscal Agent of an officer's certificate requesting such purchase, at public or private sale as and when, and at such prices (including brokerage and other charges) as such officer's certificate mayprovide, but in no event may 2006 Bonds be purchased at a price in excess of the principal amount thereof, plus interest accrued to the date of purchase and any premium which would otherwise be due if such 2006 Bonds were to be redeemed in accordance with the Fiscal Agent Agreement. Notice of Redemption. The Fiscal Agent shall cause notice of any redemption to be mailed by first class mail, postage prepaid, at least thirty (30) days but not more than sixty (60) days prior to the date fixed for redemption, to the Securities Depositories, to one or more Information Services, and to the respective registered Bondowners of any 2006 Bonds designated for redemption, at their addresses appearing on the Bond registration books in the principal office of the Fiscal Agent; but such mailing shall not be a condition precedent to such redemption and failure to mail or to receive any such notice, or any defect therein, shall not affect the validity of the proceedings for the redemption of the 2006 Bonds. Such notice shall state the redemption date and the redemption price and, if less than all of the then Outstanding 2006 Bonds are to be called for redemption, shall designate the CUSIP® numbers and Bond 13 numbers of the 2006 Bonds to be redeemed by giving the individual CUSIP* number and Bond number of each 2006 Bond to be redeemed or shall state that all 2006 Bonds between two stated Bond numbers, both inclusive, are to be redeemed or that all of the 2006 Bonds of one or more maturities have been called for redemption, shall state as to any 2006 Bond called in part the principal amount thereof to be redeemed, and shall require that such 2006 Bonds be surrendered at the principal office of the Fiscal Agent for redemption at the said redemption price, and shall state that further interest on the 2006 Bonds called for redemption will not accrue from and after the redemption date. Partial Redemption. Whenever provision is made in the Fiscal Agent Agreement for the redemption of less than all of the Bonds or any given portion thereof, the Fiscal Agent shall select the Bonds to be redeemed, from all Bonds or such given portion thereof not previously called for redemption, among maturities as directed in writing by the Treasurer (who shall specify Bonds to be redeemed so as to maintain, as much as practicable, substantially level debt service on the Bonds), and by lot within a maturity in any manner which the Fiscal Agent deems appropriate. Upon surrender of 2006 Bonds redeemed in part only, the Authority shall execute and the Fiscal Agent shall authenticate and deliver to the registered Bondowner, at the expense of the Authority, a new 2006 Bond or 2006 Bonds, of the same maturity, of authorized denominations in aggregate principal amount equal to the unredeemed portion of the 2006 Bond or 2006 Bonds. Effect of Redemption. From and after the date fixed for redemption, if funds available for the payment of the principal of, and interest and any premium on, the 2006 Bonds so called for redemption shall have been deposited m the Bond Fund, such 2006 Bonds so called shall cease to be entitled to any benefit under the Fiscal Agent Agreement other than the right to receive payment of the redemption price, and no interest shall accrue thereon on or after the redemption date for such 2006 Bonds. Transfer and Exchange of Bonds Any 2006 Bond may, in accordance with the terms of the Fiscal Agent Agreement, be transferred upon the books of the Fiscal Agent required to be kept pursuant to the Fiscal Agent Agreement by the person in whose name it is registered, in person or by his duly authorized attorney, upon surrender of such 2006 Bond for cancellation, accompanied by delivery of a written instrument of transfer in a form acceptable to the Fiscal Agent. 2006 Bonos may be exchanged at the principal office of the Fiscal Agent for a like aggregateprincipal amount of 2006 Bonds of authorized denominations and of the same series andmaturity. The Fiscal Agent shall collect from the Bondowner requesting such exchange any tax or other governmental charge required to be paid with respect to such transfer or exchange. No transfer or exchange shall be required to be made of any 2006 Bonds (i) fifteen days prior to the date established by the Fiscal Agent for selection of Bonds for redemption, (ii) with respect to a Bond after such Bond has been selected for redemption, or (iii) between a Record Date and the succeeding Interest Payment Date. Book-Entry and DTC The Depository Trust Company ("DTC"), New York, New York, will act as securities depository for the 2006 Bonds. The 2006 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 2006 Bond certificate will be issued for each maturity of the 2006 Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC. All references in this Official Statement to the Bondowners or an owner of 2006 Bonds shall mean DTC or its designee and not the beneficial owners of the 2006 Bonds. See APPENDIX I -"Book-Entry System." SECURITY FOR THE 2006 BONDS GeneralThe Bonds are secured by a pledge of all of the Special Tax Revenues and all moneys deposited in the Bond Fund, the Reserve Fund and, until disbursed as provided in the Fiscal Agent Agreement, in the Special Tax Fund. Pursuant to the Act and the Fiscal Agent Agreement, and subject to the Maximum Special Taxes that may be levied in any Fiscal Year, the Authority will annually levy in each Fiscal Year the Special Taxes in an amount required for the payment of principal of and interest on any outstanding Bonds becoming due and payable during the calendar year commencing in each Fiscal Year, including any necessary replenishment of Reserve Fund for the Bonds and an amount estimated to be sufficient to pay the Administrative Expenses during such year. The Special Tax Revenues and all deposits into said funds (until disbursed as provided in the Fiscal Agent Agreement) are pledged to the payment of the principal or, and 14 interest and any premium on, the Bonds as provided in the Fiscal Agent Agreement and in the Act until all of the Bonds have been paid and retired or until moneys or Federal Securities (as defined in the Fiscal Agent Agreement) have been set aside irrevocably for that purpose. Amounts in the Administrative Expense Fund, the Cost of Issuance Fund, the Refunding Fund and the Improvement Fund are not pledged to the repayment of the 2006 Bonds. The Improvements constructed or acquired with the proceeds of the 2006 Bonds are not in any way pledged to pay the debt service on the 2006 Bonds. Any proceeds of condemnation or destruction of any Improvements financed with the proceeds of the 2006 Bonds are not pledged to pay the debt service on the 2006 Bonds and are free and clear of any lien or obligation imposed under the Fiscal Agent Agreement. Special Taxes The Authority has covenanted in the Fiscal Agent Agreement to comply with all requirements of the Act so as to assure the timely collection of Special Taxes, including without limitation, the enforcement of delinquent Special Taxes. The Fiscal Agent Agreement provides that the Special Taxes are payable and will be collected in the same manner and at the same time and in the same installment as the general taxes on real property, and will have the same priority, become delinquent at the same times and in the same proportionate amounts and bear the same proportionate penalties and interest after delinquency as do the general taxes on real property; provided, the Authority may provide for direct collection of me Special Taxes from property owners in certain circumstances. Because the Special Tax levy is limited to the maximum Special Tax rates set forth in the Rate and Method, no assurance can be given that, in the event of Special Tax delinquencies, the receipts of Special Taxes will, in fact, be collected in sufficient amounts in any given year to pay debt service on the 2006 Bonds. Although the Special Tax, when levied, will constitute a lien on parcels subject to to taxation within the District, it does not constitute a personal indebtedness of the owners of property within the District. m " '' " " ' ' ' " financially able to pay able to do so. See BONDOWNERS' RISKS" herein. There is no assurance that the owners of real property in the District will be financiallyjible tojsay the annual Special Tax or that they will pay such tax even if financially;'' ' " " T ~"~ —~« NEITHER THE FAITH AND CREDIT OF THE AUTHORITY NOR THE TAXING POWER OF THE DISTRICT (EXCEPT TO THE LIMITED EXTENT DESCRIBED HEREIN) OR THE STATE OR ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE 2006 BONDS. OTHER THAN THE SPECIAL TAXES OF THE DISTRICT, NO TAXES ARE PLEDGED TO THE PAYMENT OF THE 2006 BONDS. THE 2006 BONDS ARE NOT A GENERAL OBLIGATION OF THE AUTHORITY, BUT ARE LIMITED OBLIGATIONS OF THE AUTHORITY FOR THE DISTRICT PAYABLE SOLELY FROM SOURCES PLEDGED IN THE FISCAL AGENT AGREEMENT. Rate and Method General. The Special Tax is levied and collected according to the Rate and Method set forth in defined herein have the meanings given to them in the Rate and Method. The Rate and Method provides the means by which the Board of Directors of the Authority may annually levy the Special Taxes within the District up to the Maximum Special Tax. The Rate and Method provides that the Annual Special Tax may be levied for a period not to exceed 50 Fiscal Years, commencing with Fiscal Year 2005-06. No amounts were levied in Fiscal Year 2005-06. Special Tax Requirement. Annually, at the time of levying the Special Tax, the Authority will determine the amount of money to be collected from Taxable Property in the District (the "Special Tax Requirement"), which will be the amount required in any Fiscal Year to pay the following: (i) annual debt service on all outstanding Bonds due in the calendar year which commences in such Fiscal Year; (ii) periodic cost on the Bonds, including, but not limited to, the costs of remarketing, credit enhancement andliquidity facility fees (including such fees for instruments that serve as the basis of a reserve fund in lieu of cash related to any such Bonds) and rebate payments; 15 (iii) the Administrative Expenses; (iv) any reasonably anticipated delinquent Special Taxes based on the delinquency rate for Special Taxes levied m the previous Fiscal Year or otherwise reasonably expected; and (v) any amount required to establish or replenish any reserve funds for the Bonds; and less (vi) available funds as directed under the Fiscal Agent Agreement. Developed and Undeveloped Property; Exempt Property. The Rate and Method declares that for each Fiscal Year, all Parcels of Taxable Property within the District shall be classified as either Taxable Property or Exempt Property. Taxable Property shall be further classified as Residential Property, Non-Residential Property, Taxable Property Owner's Association Property, or Taxable Public Property. Residential Property and Non-Residential Property shall be further classified as Developed Property and Undeveloped Property. (i) 'Developed Property" means all Parcels of Taxable Property, for which a Final Map was recorded as of the January 1 and a building permit for new construction was issued as of the April 1 preceding the Fiscal Year in which the Special tax is being levied, exclusive of Property Owner's Association Property and Public Property. (ii) ' 'Exemptions" is defined to include up to 511.11 acres of Property Owner's Association and Public Property. The Rate and Method specifies the classification of certain Property Owner's Association Property or Public Property, as applicable at the time the Districtwas established, which property counts toward the limitation of 511.11 acres of Property Owner's Association Property and Public Property. (iii) "Non-Residential Property" means all Parcels of Taxable Property which are not classified as Residential Property, Property Owner's Association Property, or Public Property. (iv) "Property Owner's Association Property" means (i) any Parcel for which the owner of record, as determined from the County Assessor's secured tax roll for the Fiscal Year in which the Special Tax is being levied, is a property owner's association, including any master or sub-association, (ii) any Lot located in a Final Map that was recorded as of the January 1 preceding the Fiscal Year in which the Special Tax is being levied and which, as determined from such Final Map, is or will be open space, a common area recreation facility or a private street owned by a property owner' s association, (iii) any Lot within a Final Map that is located within the boundaries of the District and was recorded as of the January 1 preceding the Fiscal Year in which the Special Tax is being levied and for which the Land Use is private mini park or private recreation center, or (iv) any Lot or Parcel which, as of the April 1 preceding the Fiscal Year for which the Special Tax is being levied, has been conveyed, irrevocably dedicated or irrevocably offered to a property owner's association, including any master or sub-association, provided such conveyance, dedication or offer is submitted to the CFD Administrator prior to the May 1 preceding the Fiscal Year for which the Special Tax is being levied. (v) 'Public Property" means (i) any Parcel for which the owner of record, as determined from the County Assessor' s secured tax roll for the Fiscal Year in which the Special Tax is being levied, is the federal government, the State of California, the County, the City, or any local government or other governmental agency, (ii) any property within a Final Map that is located within the boundaries of the District and was recorded as of the January 1 preceding the Fiscal Year in which the Special Tax is being levied and which, as determined from such Final Map, is or will be a public street, (iii) any Lot within aFinal Map that is located within the boundaries of the District and was recorded as of the January 1 preceding the Fiscal Year in which the Special Tax is being levied and for which the Land Use is neighborhood park, sports park, educational, public institutional, habitat, flood control, or landscape slope, unless such Lot has an underlying residential land use and the applicable public entity has provided notice to the City that if will not acquire or otherwise take ownership of the Lot, or (iv) any Lot or Parcel which, as of the April 1 preceding the Fiscal Year for which the Special Tax is being levied, has been conveyed, irrevocably dedicated to, or irrevocably offered to the federal government, the State of California, the County, the City, or any local government or other governmental agency, provided such conveyance, dedication, or offer is submitted to the CFD Administrator prior to the May 1 preceding the Fiscal Year for which the Special Tax is being levied. 16 (vi) "Residential Property" means all Parcels of Taxable Property, exclusive of Property Owner's Association'Property and Public Property, designated with a residential Lana Use. (vii) 'Taxable Property" means all Parcels which are not exempt from the Special Tax pursuant to law or the Rate and Method as Exempt Property. (viii) 'Taxable Property Owner's Association Property" means all Parcels of Property Owner's Association Property which are not exempt "from the Special Tax pursuant to law or the provisions of the Rate and Method relating to Exempt Property. (ix) 'Taxable Public Property" means all Parcels of Public Property which are not exempt from the Special Tax pursuant to law or the provisions of the Rate and Method relating to Exempt Property. (x) "Undeveloped Property" means all Taxable Property not classified as Developed Property, exclusive of Property Owner's Association Property and Public Property. Maximum Special Tax. The Maximum Special Tax for each Parcel of Developed Residential Property shall be the greater of the applicable Dwelling Unit Special Tax or Acreage Special Tax. If there are two or more residential dwelling units located on a Parcel, the applicable Dwelling Unit Special Tax for such Parcel shall be the sum of the Dwelling Unit Special Tax for each such residential dwelling unit. The Maximum Special Tax for each Parcel of Undeveloped Residential Property, Non-Residential Property, Taxable Property Owner' s Association Property, and Taxable Public Property shall be the applicable Acreage Special Tax. The Dwelling Unit Special Tax for Developed Residential Property ranges from $1,586 to $4,230 per residential dwelling unit based on the residential floor area of the residential unit. The Acreage Special Tax rates range from $5,620per acre to $17,665 per acre depending on the property classification or land use as low density, low medium density, medium density standard; medium density cluster, nonresidential property, Taxable Property Owner's Association Property or Taxable Public Property. The Maximum Special Tax is not subject to escalation. See APPENDIX B -"Rate andMethod of Apportionment of Special Tax Temecula Public Financing Authority Community Facilities District No. 03-02 (Roripaugh Ranch) -Table 1" herein for a listing of the tax classifications and tax rates in the District. Method of Apportionment. The Rate and Method provides that commencing with Fiscal Year 2005-06 and for each following Fiscal Year, the District Administrator shall levy the Special Tax on all Taxable Property to fund the Special Tax Requirement as follows: First: The Special Tax shall be levied Proportionately on each Parcel of Developed Property, up to 100% of the applicable Dwelling Unit Special Tax in the case of Developed Residential Property and up to 100% of the applicable Acreage Special Tax in the case of Developed Non-Residential Property; Second: If additional Special Taxes are needed after the first step, the Special Tax shall be levied Proportionately on each Parcel of Undeveloped Property, up up to 100% of the applicable Acreage Special Tax; Third: If additional Special Taxes are needed after the second step, the Special Tax for parcels of Developed Property for which the Maximum Special Tax is derived from the applicable Acreage Special Tax shall be increased equally, measured on a percentage basis, from the amounts levied under the preceding Step 1 up to 100% of the applicable Acreage Special Tax (i.e., the percentage increase shall be equal for all applicable Parcels, until the Maximum Special Tax is reached); and Fourth: If additional Special Taxes are needed after the third step, the Special tax shall be levied Proportionately on each Parcel of Taxable Property Owner's Association Property and Taxable Public Property up to the applicable Maximum Special Tax. Notwithstanding the above, under no circumstances will the Special Taxes levied against any Parcel used as aprivate residence be increasedas aconsequence of delinquency or default by the owner of any other Parcel or Parcels within the District by more than ten percent (10%) per Fiscal Year. In addition, under no circumstances will the Acreage Special Tax be levied against Parcels of Developed Residential Property if the Special Taxes which may be levied pursuant to therirst and second steps above are equal to or greater than the sum of estimated Administrative Expenses and one hundred ten percent (110%) of the then maximum annual debt service for outstanding Bonds. 17 Prepayment in Full. The Maximum Special Tax obligation maybe prepaid and permanently satisfied for a Parcel of Developed Property, Non-Residential Property and Taxable Property Owner's Association Property. The Maximum Special Tax obligation applicable to such Parcel may be fully prepaid and the obligation of the Parcel to pay the Special Tax permanently satisfied as described in the Rate and Method, provided that a prepayment may be made only if there are no delinquent Special Taxes with respect to the Parcel and all other parcels which are under the same ownership and located within the District. The Full Prepayment Amount for an applicable Parcel after the issuance of 2006 Bonds is calculated based on Bond Redemption Amounts and other costs, all as specified in APPENDIX B -"Rate and Method of Apportionment of Special Tax Temecula Public Financing Authority Community Facilities District No. 03-02 (Roripaugh Ranch) -Section H" herein. Any such prepayment will result in a redemption of Bonds prior to maturity. See "THE 2006 BONDS -Terms of Redemption." In addition, the Act authorizes a public agency which acquires property subject to the Special Tax to prepay the Special Tax so long as the Authority determines the prepayment arrangement will fully protect the interests of the owners of the Bonds. Prepayment in Part. The Maximum Special Tax on a Parcel of Developed Residential Property, Non-Residential Property, or Taxable Property Owner's Association Property may be partially prepaid to allow redemption of Bonds in increments of $5,000. The amount of the prepayment shall be calculated pursuant to the Rate and Method. Special Taxes and the Teeter Plan The County has adopted a Teeter Plan as provided for in Section 4701 et seq. of the California Revenue and Taxation Code, under which a tax distribution procedure is implemented and secured roll taxes are distributed to taxing agencies within the County on the basis of the tax levy, rather than on the basis of actual tax collections. By policy, the County does not not include assessments, reassessments and special taxes, including the Special Taxes of the District, in its Teeter program. Proceeds of Foreclosure Sales Pursuantto Section 53356.1 oftheAct, in the event of any delinquency in the payment of the Special Tax, the District may order the institution of a Superior Court action to foreclose the lien therefor within specified time limits. In such an action, the real property subject to the unpaid amount maybe sold atjudicial foreclosure sale. Such judicial foreclosure action is not mandatory. Under the Fiscal Agent Agreement, on or about February 15 and June 15 of each Fiscal Year, the Treasurer shall compare the amount of Special Taxes theretofore levied in the District to the amount of Special Tax Revenue theretofore received oy the Authority, and: Individual Delinquencies. If the Treasurer determines that any single parcel subject to the Special Tax in the District is delinquent in the payment of Special Taxes in the aggregate amount of $5,000, or more, then the Treasurer will send or cause to be sent a notice of delinquency (and a demand for immediate payment thereof) to the property owner within 45 days of such determination, and (if the delinquency remains uncured) foreclosure proceedings will be commenced by the Authority within 90 days of such determination. Notwithstanding the foregoing, the Treasurer may defer such action if the amount in the Reserve Fund is at least equal to the Reserve Requirement. Aggregate Delinquencies. If the Treasurer determines that (i) the total amount of delinquent Special Tax for the prior Fiscal Year for the entire District (including total individual delinquencies described above) exceeds 5% of the total Special Tax due and payable for the prior Fiscal Year or (ii) there are ten (10) or fewer owners of real property in the District, determined by reference to the latest available secured property tax roll of the County, the Treasurer shall notify or cause to be notified property owners who are then delinquent in the payment of Special Taxes (and demand immediate payment of the delinquency) within 45 days of such determination, and the Authority will commence foreclosure proceedings within 90 days of such determination against each parcel of land in the District with a Special Tax delinquency. It should be noted that any foreclosure proceedings commenced as described above could be stayed by the commencement of bankruptcy proceedings by or against the owner of the delinquent property. See "BONDOWNERS' RISKS -Bankruptcy and Foreclosure Delay." No assurances can be given that a judicial foreclosure action, once commenced, will be completed or that it will be completed in a timely manner. See "BONDOWNERS' RISKS -Potential Delay and Limitations in Foreclosure Proceedings." If a judgment of foreclosure and order of sale is obtained, the judgment creditor (the District) must cause a Notice of Levy to be issued. Under current law, a judgment debtor (property owner) has 120 days (or in certain limited cases a shorter period) from the date of service of the Notice of Levy and 20 days from the subsequent notice of sale in which to redeem the property to be sold. If a judgment debtor fails to so redeem and the property is sold, his only remedy is an action to set 18 aside the sale, which must be brought within 90 days of the date of sale. If, as a result of such action, a foreclosure sale is set aside, the judgment is revived and the judgment creditor is entitled to interest on the revived judgment as if the sale had not been made. The constitutionality of the aforementioned legislation, which repeals the former one-year redemption period, has not been tested; and there can be no assurance that, if tested, such legislation will be upheld. Any parcel subj ect to foreclosure sale must be sold at the minimum bid price unless a lesser minimum bid price is authorized by the owners of 75% of the principal amount of the Bonds Outstanding. No assurances can be given that the real property subject to sale or foreclosure will be sold or, if sold, that the proceeds of sale will be sufficient to pay any delinquent Special Tax installment. The Act does not require the Authority or the District to purchase or otherwise acquire any lot or parcel of property offered for sale or subject to foreclosure if there is no other purchaser at such sale. The Act does specify that the Special Tax will have the same lien priority in the case of delinquency as for ad valorem property taxes. If delinquencies in the payment of Special Taxes exist, there could be a defaulter delay inpayments to the Bondowners of the 2006 Bonds pending prosecution of foreclosure proceedings and receipt by the District of foreclosure sale proceeds, if any. However, within the limits of the Rate and Method and the Act, the District may adjust the Special Taxes levied on all property within the District in future Fiscal Years to provide an amount, taking into account such delinquencies, required to pay debt service on the Bonds. There is, however, no assurance that the maximum Special Tax rates will DC at all times sufficient to pay the amounts required to be paid on the Bonds by the Fiscal Agent Agreement. Special Tax Fund Pursuant to the Fiscal Agent Agreement, except as described below, all Special Tax Revenues received by the District will be deposited in the Special Tax Fund, which will be held by the Fiscal Agent on behalf of the District. Moneys in the Special Tax Fund shall be held in trust by the Fiscal Agent for the benefit of the District and the Bondowners. Pending disbursement, moneys in the Special Tax Fund will be subj ect to a lien in favor of the Bondowners and the Authority established under the Fiscal Agent Agreement. Disbursements. Moneys in the Special Tax Fund will be disbursed as needed to pay the obligations of the District as provided in the Fiscal Agent Agreement. The Authority shall promptly remit any Special Tax Revenues received by it to the Fiscal Agent for deposit by the Fiscal Agent to the Special Tax Fund, except that, any Special Tax Revenues constituting payment of the portion of the Special Tax levy for Administrative Expenses shall be deposited by the Treasurer in the Administrative Expense Fund and any proceeds of Special Tax Prepayments shall be transferred by the Treasurer to the Fiscal Agent for deposit by the Fiscal Agent directly m the Special Tax Prepayments Account established in the Bond Fund. On each Interest Payment Date, the Fiscal Agent shall withdraw from the Special Tax Fund and transfer the following amounts in the following order of priority (i) to the Bond Fund an amount, taking into account any amounts then on deposit in the Bond Fund and any expected transfers from the Improvement Fund, the Reserve Fund, the Capitalized Interest Account and the Special Tax Prepayments Account to the Bond Fund, such that the amount in the Bond Fund equals the principal (including any sinking payment), premium, if any, and interest due on the Bonds on such InterestTayment Date and (ii) to the Reserve Fund an amount, taking into account amounts then on deposit in the Reserve Fund, such that the amount in the Reserve Fund is equal to the Reserve Requirement. Investment. Moneys in the Special Tax Fund will be invested and deposited as described in " -Investment of Moneys m Funds" below and APPENDIX E -"Summary of Certain Provisions of the Fiscal Agent Agreement." Interest earnings and profits resulting from such investment and deposit will be retained m the Special Tax Fund to be used for the purposes of such Fund. Bond Fund The Fiscal Agent will hold the Bond Fund in trust for the benefit of the Bondowners. There are created in the Bond Fund, as separate accounts to be held by the Fiscal Agent, the Capitalized Interest Account and the Special Tax Prepayments Account. Moneys in the Bond Funoand the accounts therein shall be disbursed for the payment of the principal of, and interest and any premium on, the Bonds and for the other purposes as provided below, and, pending such disbursement, shall be subject to a lien in favor of the owners of the Bonds. Special Tax Prepayments Account. Moneys in the Special Tax Prepayments Account shall be transferred by the Fiscal Agent to the Bond Fund on the next date for which notice of redemption of Bonds can timely be given under the Fiscal Agent Agreement and shall be used (together with any applicable amounts transferred from the Reserve Fund) to redeem Bonds on the applicable redemption date. 19 Capitalized Interest Account. Moneys in the Capitalized Interest Account shall be transferred to the Bond Funa on the Business Day prior to each Interest Payment Date, in the amount equal to and to be used for the payment of interest on the Bonds due on the next succeeding Interest Payment Date; provided that no such transfer shall exceed the amount then on deposit in the Capitalized Interest Account. Bond Fund. On each Interest Payment Date, the Fiscal Agent shall withdraw from the Bond Fund and pay to the owners of the Bonds the principal, and interest and any premium, then due and payable on the Bonds, including any amounts due on the Bonds by reason of the sinking payments or an optional redemption of the Bonds, hi the event that amounts in the Bond Fund are insufficient for the purposes set forth in the preceding sentence, the Fiscal Agent shall withdraw from the Reserve Fund to the extent of any funds therein amounts to coyer the amount ofsuch BondFund insufficiency. If, after the foregoing transfers, transfers, there are insufficient funds in the Bond Fund to make the payments described above, the Fiscal Agent shall apply the available funds first to the payment of interest on the Bonds, then to the payment of principal due on the Bonds other than by reason of sinking payments, and then to the payment of principal due on the Bonds by reason of sinking payments. Any sinking payment not made as scheduled shall be added to the sinking payment to be made on the next sinking payment date. Investment. Moneys in the Bond Fund, the Capitalized Interest Account and the Special Tax Prepayments Account shall be invested and deposited in accordance with the provisions of the Fiscal Agent Agreement relating to Investment of Moneys. See APPENDIX E -"Summary of Certain Provisions of the Fiscal Agent Agreement." Reserve Fund In order to further secure the payment of principal of and interest on the 2006 Bonds, certain proceeds of the 2006 Bonds will be deposited into the Reserve Fund in an amount equal to the initial Reserve Requirement (see "ESTIMATED SOURCES AND USES OF FUNDS" herein). Tleserve Requirement is defined in the Fiscal Agent Agreement to mean with respect to the 2006 Bonds an amount, as of any date of calculation, equal to the least of (i) the then largest Annual Debt Service for any Bond Year after the calculation is made through the final maturity date of any Outstanding Bonds, (ii) 125% of the then average annual debt service on the Bonds, or (iii)10% of the outstanding principal amount of the 2006 Bonds. The moneys in the Reserve Fund will only be used for payment of principal of, interest and any redemption premium on, the 2006 Bonds and at the direction of the District, for payment of rebate obligations related to the 2006 Bonds. If Special Taxes are prepaid and Bonds are to be redeemed with the proceeds ofsuch prepayment, a proportionate amount in the Reserve Fund (determined on the basis of the principal amount of Bonds to be redeemed and the originalprincipal amount of the Bonds and only to the extent that the amount remaining on deposit in the Reserve Fund is at least equal to the Reserve Requirement) will be applied to the redemption of the Bonds. Moneys in the Reserve Fund will be invested and deposited as described in "Investment of Moneys inFunds" below. See APPENDIX E -"Summary of Certain Provisions of the Fiscal Agent Agreement" for a description of the timing, purpose and manner of disbursements from the Reserve Fund. Investment of Moneys in Funds Moneys in any fund or account created or established by the Fiscal Agent Agreement and held by the Fiscal Agent will be invested by the Fiscal Agent in Permitted Investments, as directed by an Authorized Officer, that mature prior to the date on which such moneys are required to be paid out under the Fiscal Agent Agreement. In the absence of any direction from an Authorized Officer, the Fiscal Agent will invest, to the extent reasonably practicable, any such moneys in money market funds rated in the highest rating category by Moody's or S&P, (including those for which the Fiscal Agent or its affiliates or its subsidiaries provide investment, advisory or other services). See APPENDIX E -"Summary of Certain Provisions of the Fiscal Agent Agreement" for a definition of "Permitted Investments." Additional Bonds Bonds secured on a parity with the 2006 Bonds (each a series of "Additional Bonds") maybe issued with respect to the remaining $3,750,000 of authorization or for refunding purposes where the issuance of such Additional Bonds results in a reduction of Annual Debt Service on all Outstanding Bonds than that which exists on the Bonds adjusted for prepayments (if any). The Authority may issue Additional Bonds subject to satisfaction of certain conditions, including the following: 20 (A) Value-to-Lien Ratio. The District Value (as defined in the Fiscal Agent Agreement) shall be at least three times the sum of: (i) the aggregate principal amount of all Bonds then Outstanding, plus (ii) the aggregate principal amount of the series ofAdditional Bonds proposed to be issued, plus (iii) the aggregate principal amount of any fixed assessment liens on the parcels in the District subject to the levy of Special Taxes, plus (iv) a portion of the aggregate principal amount of any and all other community facilities district bonds then outstanding and payable at least partially from special taxes to be levied on parcels of land within the District (the "Other District Bonds") equal to the aggregate principal amount of the Other District Bonds multiplied by a fraction, the numerator of which is the amount of special taxes levied for the Other District Bonds on parcels of land within the District, and the denominator of which is the total amount of special taxes levied for the Other District Bonds on all parcels of land against which the special taxes are levied to pay the Other District Bonds (such fraction to be determined based upon the maximum special taxes which could be levied in the year in which maximum annual debt service on the Other District Bonds occurs), based upon information from the most recent available Fiscal Year. (B) The Special Tax Coverage. The Authority shall obtain a certificate of a Tax Consultant to the effect that (i) the amount of the maximum Special Taxes that may be levied in each Fiscal Year, less an amount sufficient to pay annual Administrative Expenses (as determined by the Treasurer), shall be at least one hundred ten percent (110%) of the total Annual Debt Service for each such Fiscal Year on the Bonds and the proposed Additional Bonds, and (ii) the Assigned Special Tax that may be levied on Developed Property (as such term is defined in the Rate and Method of Apportionment of Special Taxes for the District) in the next Fiscal Year, based upon the status of the land in the District as of the date of issuance of the Additional Bonds, shall not be less than the aggregate maximum Annual Debt Service on the Bonds (to remain Outstanding following the issuance of the Additional Bonds) and the proposed Additional Bonds. (C) Increase in Letters of Credit. Unless all of the conditions to the release of any Letter of Credit set forth in the Fiscal Agent Agreement have theretofore been satisfied, or the Letters of Credit have all been reduced to $0.00 pursuant to the provisions of the Fiscal Agent Agreement, there shall be delivered to the Fiscal Agent an amendment to each Letter of Credit then held by the Fiscal Agent to increase the amount available to be drawn under each such Letter of Credit to reflect the expected increase in the Special Taxes that will need to be levied on the parcels to which each Letter of Credit pertains to pay the debt service on the Additional Bonds, as determined by the Treasurer upon consultation with the Tax Consultant. In the eventthat anyLetter of Credit has theretofore been drawn upon pursuant to the pro visions of the Fiscal Agent Agreement relating to expiration of a Letter of Credit and failure to provide a replacement Letter of Credit or as a result of a ratings downgrade, there shall be deposited with the Fiscal Agent monies in an amount equal to the amount that the corresponding Letter of Credit would need to be increased pursuant to the preceding sentence, and the funds so deposited shall be disposed of in the same manner as the proceeds of the draw on the Letter of Credit under the Fiscal Agent Agreement. See APPENDIX E -"Summary of Certain Provisions of the Fiscal Agent Agreement." The District may issue bonds or other obligations payable from Net Taxes which are subordinate to the 2006 Bonds. Nothing in the Fiscal Agent Agreement shall prohibit the Authority from issuing bonds or otherwise incurring debt secured by a pledge of Special Tax Revenues subordinate to the pledge thereof. Letter of Credit Prior to the issuance of the 2006 Bonds, Ashby USA, LLC will provide a letter or letters of credit from Ohio Savings Bank, with a confirmation by Citibank, N.A.,1 to the Fiscal Agent in a stated amount equal to two years estimated expected annual Special Taxes (assuming Build-Out) to be levied on the County Assessor'sparcels for the property owned by Ashby US A, LLC and the Tanamera/Roripaugh Entities. Ashby USA, LLC anticipates that the portion of the Letter of Credit relating, to the property owned by the Tanamera/Roripaugh Entities will be released in the third quarter of 2006 once the conditions precedent to the issuance of building permits for all lots within Planning Areas 3, 4A and 4Bare satisfied. Ashby USA, LLC anticipates that the Parcel Value of the land in Phase II will increase to an amount in excess of three times the Parcel Liens and that the conditions precedent to the issuance of building permits for all lots to be developed in Phase II will be satisfied by June 1,2007 so that the portion of the Letter of Credit or Letters of Credit relating to the property owned by Ashby USA, LLC win be released by the end of the second quarter of 2007. A letter of credit shall be subject to draw by the Fiscal Agent in the amount of any Special Taxes levied by the District on any of the parcels to which such letter of credit pertains which are delinquent; or Citibank, N.A. is acting as confirming bank to an Ohio Savings Bank Letter of Credit and draws under the Letter of Credit will be made on Citibank, N.A. 21 (i) in whole if the letter of credit (or any related confirmation) expires prior to the date on which it is eligible for release in whole as described in the Fiscal Agent Agreement and a replacement letter of credit satisfying the criteria of a letter of credit is not delivered to the Fiscal Agent at least 5 days prior to such expiration date; or (ii) in whole, if the rating of the unsecured debt obligations of theprovider of the letter of credit (or, if applicable, the provider of any related confirmation) have been reduced to BBB or its equivalent or lower by Moody' s Investors Service or Standard & Poor' s Ratings Group. Amounts drawn on the letter of credit as a result of a Special Tax delinquency on parcels to which it pertains will be deposited to the Special Tax Fund and used for the purpose of such Fund, and amounts drawn on any letter of credit as a result of the expirationof the letter of credit prior to the date on which it is eligible for release in whole and a replacement letter of credit was not delivered to the Fiscal Agent will be held in the Reserve Fund for the Bonds and drawn upon, with the proceeds of the draw deposited to the Special Tax Fund, for the Bonds, in the amount of any delinquent Special Taxes levied in the District with respect to the parcels to which the letter of credit pertains, or released or reduced to the same extent the corresponding letter of credit would have been released or reduced. No assurance can be given that a draw on a Letter of Credit will be timely honored by the provider of the Letter of Credit or any confirmation related thereto. The Letter of Credit amount may be reduced as property sales occur and the expected annual Special Taxes that may be levied on parcels owned by the applicable landowner and its affiliates decline, or if certain value to lien and accessabihty to building permit tests are met. Notwithstanding the foregoing, a Letter of Credit shall not be reduced if the reason for the reduction is the sale of property to an owner (a) that will own, together with its affiliates, property responsible for 10% or more of the expected annual Special Taxes that may be levied on such parcels in the District (assuming Build-Out) and (b) that will own land in a planning area and either (x) the then Parcel Value of such land is less than three times the Parcel Liens for such land, or (y) there are conditions precedent to the issuance of building permits for all lots to be developed in such planning area, as such conditions are set forth in the Development Agreement and unless the property owner provides evidence that the new owner has posted its own Letter of Credit securing the payment of special taxes to be levied by the District on such property. For a description of the terms pfthe Fiscal Agent Agreement pertaining to the Letter of Credit, see, AppendixE hereto "Summary of Certain Provisions of the Fiscal Agent Agreement -Letters of Credit Provisions." THE AUTHORITY The Temecula Public Financing Authority was established pursuant to a Joint Exercise of Powers Agreement, dated April 10, 2001 (the "Joint Powers Agreement'), by and between the City and the Redevelopment Agency of the City of Temecula. The Joint Powers Agreement was entere4 into pursuant to the provisions of Articles 1 through 4 (commencing with Section 6500) of Chapter 5, Division 7, Title 1 of the Government Code of the State of California. The Authority was formed for the primary purpose of assisting in the financing and refinancing of public capital improvements in the City. The Authority is administered by a five-member Board of Directors, which currently consists of the members of the City Council of the City. The Authority has no independent staff. The Executive Director of the Authority is the City Manager of the City, and the Treasurer of the Authority is the City's Finance Director. The Executive Director administers the day-to-day affairs of the Authority, and the Treasurer has custody of all money of the Authority from whatever source. Authority for Issuance The 2006 Bonds are issue4 pursuant to the Act and the Fiscal Agent Agreement. In addition, as required by the Act, the Board of Directors of the Authority has taken the following actions with respect to establishing the District and authorizing issuance of the 2006 Bonds: Resolutions of Intention: On August 24, 2004, the Board of Directors of the Authority adopted ResolutionNo. TPFA 04-08 stating its intention to establish the District and to authorize the levy of a special tax therein, and on the same day the Authority adopted Resolution No. TPFA 04-09 stating its intention to incur bonded indebtedness in an amount not to exceed $55,000,000 within the District for the purpose of financing the cost of certain public improvements (the "Improvements") and to eliminate an existing special assessment lien (the "Prior Lien"), imposed by County Assessment District No. 161. See "PLAN OF FINANCE; IMPROVEMENTS TO BE FINANCED WITH PROCEEDS OF THE 2006 BONDS" herein. Resolution Amending Resolutions of Intention: On September 28, 2004, the Authority Authority adopted ResolutionNo. TPFA 04-10Tthe "Amending Resolution"), which added facilities eligible to be funded by the District and changed the date of the public hearing from September 28, 2004 to November 9, 2004. 22 Resolution of Complexity: On December 7,2004, the Authority adopted ResolutionNo. TPFA 04-11 (the Resolution of Complexity"), which continued the public hearing to January 11, 2005. Resolution of Formation: On January 11, 2005 subsequent to the conclusion of a noticed public hearing, the Authority adopted Resolution No. TPFA 05-01 (the "Resolution of Formation"), which established the District and authorized the levy of a special tax within the District. Resolution of Necessity: On January 11, 2005, the Authority adopted Resolution No. TPFA 05-02 declaring the necessity to incur bonded indebtedness in an amount not to exceed $55,000,000 within the District and submitting that proposition to the qualified electors of the District. Resolution Calling Election: On January 11,2005, the Authority adopted Resolution No. TPFA 05-03 calling an election by me landowners for the same date on the issues of the levy of the Special Tax, the incurring of bonded indebtedness and the establishment of an appropriations limit. Landowner Election and Declaration of Results: On January 11,2005, an election was held within the District in which the landowners eligible to vote, being the qualified electors within the District, unanimously waived all time limits for holding the election and ballot arguments, and approved a ballot proposition authorizing the issuance of up to $55,000,000 in bonds to finance the costs of the Improvements ana the costs of eliminating the Prior Lien, the levy of a special tax and the establishment of an appropriations limit for the District. On January 11,2005, the Authority adopted Resolution No. TPFA 05-04, pursuant to which the Authority approved the canvass of the votes and declared the District to be fully formed with the authority to levy the Special Taxes, to incur the bonded indebtedness and to have the established appropriations limit. Special Tax Lien and Levy: A Notice of Special Tax Lien was recorded in the real property records of the County on January 14,2005 as Document No. 2005-0039138; and a First Amendment to Notice of Special Lien was recorded on March 10, 2006 as Document No. 2006-0174544. Ordinance Levying Special Taxes: On January 11, 2005, the Authority introduced Ordinance No. TPFA 05-01 levying the Special Tax within the District and said Ordinance was adopted on January 25, 2005. Resolution Authorizing Issuance of the 2006 Bonds: On February 28,2006, the Authority adopted Resolution No. TPFA 06-01 approving issuance of the 2006 Bonds. THE COMMUNITY FACILITIES DISTRICT The information about Ashby USA, LLC and the Merchant Builders contained in this Official Statement has been provided by representatives of Ashby USA, LL C and the Merchant Builders and has not been independently confirmedor verified by the Underwriter, the District or the Authority. Such information is included because it may be relevant to an informed evaluation of the security for the 2006 Bonds. However, because ownership of the property may change at any time, no assurance can be given that the planned development will occur at all, will occur in a timely manner or will occur as presently anticipated and described below or that Ashby USA, LLC and the Merchant Builders will acquire or own the property within the District at all. No representation is made herein as to the accuracy or adequacy of such information, as to the experience, abilities or financial resources of Ashby USA, LLC and the Merchant Builders or any other landowner, or as to the absence of material adverse changes in such information subsequent to the date hereof, or that the information given below or incorporated herein by reference is correct as of any time subsequent to its date. Ashby USA, LLC and the Merchant Builders are not personally liable for payment of the Special Taxes or the 2006 Bonds, and thefollowing information should not be construed to suggest that the Special Taxes or the 2006 Bonds are personal obligations or indebtedness of Ashby USA, LLC and the Merchant Builders or that Ashby USA, LLC and the Merchant Builders will continue to own their respective parcels of land. GeneralThe District is comprised of approximately 800 gross acres of land located in the far northeast section of the City, in the south-westerly portion of the County. The District is located along the south side of Murietta Hot Springs Road, and along Butterfield Stage Road, about 1.5 miles east of Winchester Road (Highway 79). Nicolas Road and North Loop Road will provide internal circulation to a portion of the District. The District is a master-planned community that is approved for up to 2,105 dwelling units, but is currently planned for approximately 1,745 units. In addition, there is expected to be approximately 10 net 23 acres of commercial development proposed for a neighborhood retail center, approximately 12 gross acres for an elementary school site, approximately 20 gross acres for a middle school site, an approximately 19.7-acre sports park (Planning Area 27), an approximately 5.1 acre neighborhood park (Planning Area 6), two private recreation facilities, private and public trails and paseos, an approximately 2-acre fire station site, and approximately 202.7 acres of natural open space to be preserved as permanent habitat, and related flood control improvements to Long Valley Wash and Santa Gertrudis Creek. 39.1 acres of flood control mostly consist of the Long Valley Wash that runs east-west through the southerly part of Phase II, plus a small portion of the Santa Gertrudis Creek runs northeasterly into the center of Phase II at the west side, and then into the habitat area. Views consist of the open space and the valley in Phase II. The property within the District is governed by the Roripaugh Ranch Specific Plan. The District is surrounded by unincorporated County to the north, northwest and east, and is nearby to the east of the City of Murrieta. The Roripaugh Ranch proposed development is east of existing or approved development. It is located immediately adjacent to the developed areas of Rancho Bella Vista on the northwest. Commercial uses exist to the west or the proposed development. The French Valley Airport is located approximately one mile to the northwest, and Lake Skinner Recreation Area is located approximately 2 miles to the northeast. Ashby USA, LLC has provided the County's Airport Land Use Commission with avigation easements necessary for all the parcels in the District. The proposed structures within the District comply with the current height restrictions of the French Valley Airport and the Airport Land Use Commission. The avigation easement was accepted by the County on April 10, 2003. The property within the District is planned to be developed in 2 phases, which are referred to herein as Phase I located in the northwest portion of the property and Phase II located in the east portion of the property. Phase I is estimated to include approximately 515 homes, including 6 homes which result from a specific plan amendment in January 2005 which allowed homes on a site previously proposed for a detention basin. Phase I encompasses approximately 75.81 net acres. Phase II encompasses approximately 1,230 proposed residential lots which have been approved. The number of residential lots may increase or decrease as tentative maps are processed by Ashby USA, LLC through the City. All neighborhoods in Phases I and II will be gate guarded, with some tracts also being gated with remote or card access. The community is expected to provide a wide range of housing. The lot sizes are expected to span from approximately 1 acre custom lots to 3,150 square foot courtyard lots. Description of the District As of January 15,2006, rough grading is complete for Phase I, is approximately 90% complete for the "village core" area of Phase II (Planning Areas 10, 11, 12, 33A and 33B) and is approximately 80% completefor the balance of the property within Phase II. As of January 15,2006, the Merchant Builders in Phase I, except for Continental Residential, Inc., have taken title to the property. The property was, or will be, delivered to Merchant Builders in Phase I in blue top or superpad condition. Continental Residential, Inc. is scheduled to take title to the property subsequent to the date at which conditions precedent to the issuance of building permits have been satisfied, which conditions are estimated by Ashby USA, LLC to be satisfied by the end of September 2006 such that the acquisition can occur in October 2006. See Appendix K for a description of some of the thresholds for installation of improvements under the Development Agreement and Conditions of Approval. Final maps encompassing the 298 home sites purchased by Davidson Roripaugh Ranch 122 LLC, Tanamera/Roripaugh, LLC and Tanamera/Roripaugh II, LLC were recorded on April 28,2004. Final maps encompassing 98 ofthe 104 proposed home sites to be purchased by Continental Residential, Inc. and the 113 home sites purchased by Traditions at Roripaugh, LLC have been approved by City staff, but recordation is pending submittal to the City Council and satisfaction of conditions enabling issuance of buildingpermits. Applicable taxes will need to be paid in connection with recordation. Pursuant to the agreementwitn Ashby USA, LLC, final payment by Continental Residential, Inc. to Ashby USA, LLC of the purchase price ofthe lots in Planning Area 1A is due within five (5) business days of Ashby USA, LLC's notification to Continental Residential, Inc. that the final maps are in recordable condition and all blue-top improvements have been completed. Ashby USA, LLC estimates such maps will be ready for recordation during the third quarter of 2006. The Temecula Valley Unified School District is expected to construct an elementary school and a middle school within the District. The proposed school sites are located in Planning Areas 28 and 29 on the south side of North Loop Road. Ashby USA, LLC and the Temecula Valley Unified School District have not yet begun negotiations regarding the price or timing of the purchase of the school sites. The School District has indicated that it has the capacity to serve the initial students generated from the development, including students generated from Phase I (i.e., the 515 units), and that the timing ofthe purchase ofthe school sites and the construction ofthe schools will depend on the timing of absorption of me units within Phases I and II. Construction ofthe schools is not a condition to development ofthe property within the Community Facilities District. 24 A portion of the Roripaugh Ranch proposed development is located within County Assessment District No. 161 and is participating in a portion of the shared funding of community infrastructure needs. The Prior Lien will be paid with aggregate of approximately $583,610.63 of proceeds of the 2006 Bonds and funds of Ashby USA, LLC. Ashby USA, LLC currently owns the property in Planning Area 1A subject to the sales contract with Continental Residential, Inc. in Phase I and all of the property in Phase II which, with the exception of the commercial acreage, is subject to agreements with KB Home Coastal Inc. The property in Phase II is expected to be developed with a total of approximately 1,230 units, proposed to be a combination of singlefamily residential units and no more than 3 Planning Areas with cluster lots, single family residential units. In addition, Ashby USA, LLC intends to develop or sell approximately 10 acres to a commercial builder to develop a neighborhood retail center. An approximately 10 net acre commercial development is located in Planning Area 11 in Phase II. Ashby USA, LLC estimates development of the commercial site will occur in 2008 See "PROPERTY OWNERSHIP AND DEVELOPMENT" herein. On August 1, 2003, Ashby USA, LLC entered into an option contract for the sale of 112 of the approximately 1,230 single family lots proposed for development in Phase II with KB Home Coastal Inc. Closing of the sale of all 112 units is conditioned upon Ashby USA, LLC's satisfaction of the conditions specified in the agreement, including satisfaction of conditions necessary for issuance of building permits and satisfaction of conditions relating to issuance of certificates of occupancy which is expectedto occur prior to June 1 2007. On July 11,2005, Ashby USA, LLC entered into an option contract with KB Home Coastal Inc. for the balance of approximately 1,118 of the approximately 1,230 proposed single family lots within Phase II. It is currently estimated by Ashby USA, LLC that the grading of the lots in Pnase II to to a blue-top condition and other development conditions willbe completed from approximately September 2006 through May 2007. When this occurs, and Ashby USA, LLC's work is completed, which includes satisfaction of the conditions to release of building permits and satisfaction of conditions relating to issuance of certificates of occupancy, the option with KB Home Coastal Inc. provides for KB Home Coastal Inc. to begin taking down or closing on portions of the lots. KB Home Coastal Inc. may either acquire approximately 412 of me lots in Phase II in Planning Areas 16,23, 24, and 31, or may acquire all of the approximately 1,118 remaining lots in Phase II (not including the 112 lots in Planning Area 12 that are subject to a separate transaction). Based solely on Ashby USATLLC's estimated completion date, acquisition is expected to commence in the third quarter after Ashby USA, LLC satisfies the conditions of the Option Agreement. If the option for approximately 412 lots is selected, the sale of the approximately 412 lots would close within 45 days of the ability to obtain building permits, satisfaction of conditions relating to issuance of certificates of occupancy and the date of acceptance of Blue Top Condition specified in the Option Agreement and Agreement for Purchase and Sale ofReal Property and Escrow Instructions, dated as of July 11,2005, with KB Home Coastal Inc., as optionee, and Ashby USA, LLC, as optionor (the ' Option Agreement'), unless KB Home Coastal Inc. elects to delay the close for eight months after said election. If the option for approximately 412 lots is selected, Ashby USA, LLC would market the remaining approximately 706 lots to other merchant builders. If the approximately 1,118 lot option is exercised then the lots will be purchased over a period of approximately 5 years. KB Home Coastal Inc. is not yet a landowner within the District, and there can be no assurance that it will exercise its option to purchase lots within the District at the times indicated or at all. The City has imposed conditions of approval on the development in the District through the Specific Plan, the Development Agreement and Tentative Tract Maps. The various Planning Areas have been or are being mapped first by an A" tract map into one large lot, and then the residential Planning Areas are being subdivided into individual single-family lots by a "B" tract map. Tract Map No. 29353-2 recorded in September 2003 and is the "A" map for the west portion of Phase II and Tract Map No. 29353 is the "A" map for the balance of the Phase II area. Tract Map No. 29353 is still a tentative tract map that is being processed. The separate tentative tract maps for each Planning Area (the "B" maps) in Phase II are being prepared. The Tentative Tract Maps for Planning Areas 10, 16, 17, 18, 19, 23, 24 and 33A have been submitted to the City for review. Ashby USA, LLC anticipates submitting the Tentative Tract Maps for Planning Areas 12,20, 21, and 22, in the second quarter of 2006. Ashby USA, LLC expects processing of tentative tract maps to take 3 to 4 months and that such maps will be finalized and recorded over a period from July through November 2006. The Preannexation and Development Agreement allows the tentative tract maps to have a term equal to the greater of (i) the term or the Preannexation and Development Agreement (currently approximately November 26,2012) or (ii) expiration of the tentative map pursuant to the applicable provisions of the Government Code. In September 2003, the City and Ashby USA, LLC entered into a Deferral Agreement (as defined below) whereby the City agreed to allow Ashby USA, LLC to record the final map for Tract 293 5 3-2 (Phase I) prior to the fulfillment of certain development conditions. See " -Development Agreement," below. Utility services for parcels in the District will be provided by Sc (electricity), Southern California Gas Company (natural gas), CR&R Disposal ( 25 Southern California Edison refuse collection), EMWD (sewer and water (portion)), Rancho California Water District (water (portion)), Riverside County Flood Control and Water Conservation District (storm water), Adelphia (cable) and Verizon (telephone). Public schools are located in the Temecula Valley Unified School District. The property is located within 30 miles of Mount Palomar Observatory. See " -ASHBY USA, LLC -Merchant Builder Litigation Against Ashby USA, LLC; Sales of Merchant Builder Tracts" below for a description of the sale of property by Ashby USA, LLC to merchant builders, the filing of litigation regarding satisfaction of terms of the purchase agreement and the subsequent sale of property to the Tanamera/Roripaugh Entities. Conditions to the Release of Building Permits Development within the District is subject to development conditions that relate to phasing of the development. In certain cases, Ashby USA, "LLC has determined to proceed with all of the required improvements concurrently rather than in the phases allowed by the development approvals. Construction has been delayed beyond Ashby USA, LLC' s original anticipated schedule. Construction is progressing, and agreements for the major work have been/are soon to be awarded. ButterfieldStage Road'Improvements and Easements. Among; the remaining development conditions are requirements relating to the construction of Butterfield Stage Road including the alignment of Butterfield Stage Road south of the development as well as the construction of Butterfield Stage Road through the development from the southern District boundary to Murietta Hot Springs Road. With respect to improvements to Butterfield Stage Road south of the District, Ashby USA, LLC has been unsuccessful in its attempts to negotiate with two property owners for the purchase of rights of way over portions of their property required for the construction of a segment of the Butterfield Stage Road improvements south of the District. Section 3.1.3.5 of the Development Agreement allows the Developer to ask the City to attempt to acquire the rights of way in the event Ashby USA, LLC is unable to do so. On August 23, 2005, the City and Ashby USA, LLC entered into an agreement entitled "Agreement Between the City of Temecula and Ashby USA, LLC for the Acquisition of Certain Property for Public Rights of Way in Connection with the Roripaugh Ranch Project" pursuant to the authority of Section 3.1.3.5 of the Development Agreement and Government Code Section 66462.5. The City is currently appraising the property and win be prepared to make an offer of fair market value to the owners when the appraisals are approved by the City Council. Negotiations will commence at that time. The City anticipates that it will take approximately eight (8) months for it to complete the acquisition of the rights of way on these two parcels. If me City is unable to negotiate the purchase of the rights of way, there is a process whereby the City can obtain a right of access to the property while the negotiations proceed if the City Council makes certain findings required by law. As of March 27, 2006, the City does not anticipate the process to preclude completion of improvements during the first quarter of 2007 but cannot guarantee that the access can be obtained to complete the improvements by that time. With respect to improvements to Butterfield Stage Road within the District, grading of Butterfield Stage Road is approximately 65% complete. Construction includes construction of two full-width bridges within and over Santa Gertrudis Creek and Long Valley Wash. The bidpackage for Butterfield Stage Road, including the two bridges is ready and Resource Agency approvals have been obtained. Prefabricated components of the bridge structures have been completed and delivered to the project site. Completion is estimated by Ashby USA, LLC to occur in the third quarter of 2006. Nicolas Road and Bridge Structure; Resource Agency Approvals for Nicolas Road -Ashby USA, LLC is required to construct a 40 foot wide improvement of Nicolas Road from 450 feet east of the existing Nicolas Road/Calle Girasol intersection to Liefer Road, including the full width bridge structure over Santa Gertrudis Creek. Ashby USA, LLC is working to obtain offers of dedication which are anticipated at such time as Ashby USA, LLC pays the acquisition costs for the offers of dedication. Portions of the road plans are approved and other plan revisions are in process. An Environmental Impact Report amendment is in process. Ashby USA, LLC is preparing plans and information requested by the Resource Agencies in order for Resource Agencies and the Flood Control District to review the proposed design. Ashby USA, LLC is assuming that Ashby USA, LLC will be able to obtain the necessary Resource Agency and Flood Control District approvals in approximately 120 days from March 15, 2006, so as to enable completion of these improvements prior to June 1, 2007. Fire Station Conditions to the Release of Building Permits. A fire station is planned in Planning Area 32 located in the southwest portion of the District, at the intersection of Butterfield Stage Road and South Loop Road. The fire station will enhance fire protection and emergency response for the surrounding community. Under the original Development Agreement, the Fire Chief; in his sole discretion, could allow a maximum of 250 building permits to be issued for Phase I so long as the permanent fire station and the secondary access (as defined in Attachment 5 to the Development Agreement) are substantially under 26 construction at the time such building permits are requested. On October 21,2004, the City and Ashby USA, LLC entered into a "First Operating Memorandum to the Recorded Development Agreement between the City of Temecula and Ashby USA, LLC. The First Operating Memorandum provides additional funding for the construction of thepermanent fire station necessary to provide fire protection within the District and for the surrounding area. The First Operating Memorandum requires that the City process an Amendment to the Development Agreement to revise the Development Agreement to change the thresholds required for issuance of building permits under the Fire Chiefs discretion based on the status of the fire station. On February 28, 20067 the City Council adopted the ordinance approving the First Amendment to the Development Agreement. The First Amendment provides for the issuance of up to five hundred fifteen (515) residential building permits for Planning Areas 1 A, 2,3, 4A and 4B upon a finding by the City Manager Manager that: (1) thepermanent fire station is substantially under construction; (2) permanent access to the fire station via Butterfield Stage Road and Murrieta Hot Springs Road is substantially under construction so as to be completed concurrent with the opening of the fire station; (3) access to the fire station via Calle Chapos between the fire station's eastern most driveway and Walcott Lane will be completed concurrent with the opening of the fire station; and (4) all other requirements of the Development Agreement and Conditions of Approval of the Land Use Entitlements for Phases I and II for the issuance of the building permits have been fulfilled. As of March 21, 2006, the City and Ashby USA LLC entered into a Second Operating Memorandum pursuant to Section 3.5.5 of the Development Agreement. The Second Operating Memorandum provides that: (1) in calculating the allowable number of dwelling units per residential Planning Area in the Phase II (Pan") area of the Specific Plan, the applicable densities densities shall be applied to the "gross" acreage of the Planning Area and not the "net" acreage as discussed in Table 5-2; (2) all other requirements of the Specific Plan, including lot size and the maximum 1,500 units in Phase II, would remain in effect; and (3) Ashby USA LLC warrants and represents to the City and the Authority that with this change, Ashby or its successors in Phase II have the ability to construct at least 1,230 dwelling units in Phase II. The fire station is currently under construction and completion of the fire station is expected in the second quarter of 2006. Ashby USA, LLC estimates the fire station will open during the fourth quarter of 2006. (For additional information about the Development Agreement, see "The Community Facilities District -Development Agreement" herein.) The foregoing only describe some of the development conditions that must be satisfied in order to fully develop property in the District. See Appendix K for a further description of thresholds for installation of improvements under the Development Agreement and Conditions of Approval. Ashby USA, LLC does not anticipate the items described above or any of the thresholds set forth in Appendix K or otherwise applicable to its development to unduly delay the expected development of the property and estimates the completion of the development thresholds to allow515 building permits to be issuedby the end of September 2006 and completion of the balance of the building permit thresholds to be satisfied prior to June 1, 2007. Construction is subject to weather and other delays. With regard to the timing of completion of improvements, the City has reviewed a construction schedule prepared by Ashby USA, LLC in January 2006 andhas indicated that schedule was feasible butwas aggressive. The January 2006 schedule assumed only minimal construction delays such as may occur due to delay in receipt of necessary Resource Agency or other approvals, delays in award of construction contracts, delays in delivery of construction materials, or delays due to inclement weather. The City has indicated a time frame between March 2007 and September 2007 is a more realistic estimate of the time frame for completion of the necessary infrastructure to allow buildingpermits to be issued for homes in Phase II. Ashby USA, LLC has subsequently modified its schedule with respect to certain items to take into account subsequent events. The Authority, the City and the Merchant Builders make no representation whatsoever that the schedule, as provided by Ashby USA, LLC and modified from time to time, will be achieved. KB Home Coastal Inc. makes no representation as to Ashby USA, LLC's ability to timely complete the work to allow issuance of buildingpermits in Phase II by June 1, 2007 as required under the Option Agreement. The Market Absorption Study and the Appraisal were prepared utilizing an estimated September 2006 date of completion of necessary infrastructure to allow issuance of remaining building permits for homes in Phase I and an estimated September 2007 date of completion of necessary infrastructure to allow issuance of building permits for homes in Phase II. The September 2007 date of completion takes into account the possibility that the schedule prepared by Ashby USA, LLC, as modified from time to time, with respect to Phase II is not achieved. It is also possible that the schedule prepared by Ashby USA, LLC with respect to Phase I may not be achieved. Specific Plan The Roripaugh Ranch Specific Plan was adopted in November 2002 by the City. The Roripaugh Ranch Specific Plan development concept provides for a mixed-use development of residential, commercial and public facilities (e.g. parks, schools) within the framework of a comprehensive master planned community. The Specific Plan concept includes both single family, commercial, landscape paseos, public park facilities, as well as other privately owned recreational facilities within the community. Specific Plan Amendment No. 1 was approved on January 11, 2005. Specific Plan Amendment No. 1 allows 6 homes to be built on property previously planned for use as a detention basin. Specific Plan No. 2 was approved by 27 the City Council on February 14,2006 and allows for the development of Planning Area 33B as a park and ride and trail head in accordance with the First Amendment to tne Deferral Agreement. Environmental Conditions Environmental Impact Report. In connection with the Roripaugh Ranch Specific Plan approval, the City processed an Environmental Impact Report (the "EIR") for the property encompassed by the Roripaugh Ranch Specific Plan. The EIR was certified by the City in November 2002 (State Clearing House No. 97121030). The draft Environmental Impact Report (DEIR) was issued on June 1, 1999, and over the interveningyears a Revised Draft Environmental Impact Report was issued and the project was revisedbased on input from the City and local residents. Endangered Species Act. The project site is within the boundary of the Assessment District 161 Subarea Habitat Conservation Plan approved by the U.S. Fish and Wildlife Service ("FWS"). (The Assessment District 161 Subarea Habitat Conservation Plan is separate from from the County's Assessment District 161.) Required mitigation is provided through the transfer of approximately 201 acres to the City andrecording of a conservation easement overlying the open space recorded for the Center for Natural Lands Management, hi addition, Ashby USA, LLC paid approximately $436,098 to the Center for Natural Lands Management. Rough grading is substantially complete in Phase I and in the Village Core area of Phase II of the District and approximately 80% complete in the balance of Phase II in compliance with the applicable requirements. Grading has occurred in all areas of the District which are to be graded and grading continues to bring the property to the correct grade for development. The site contains two major drainages (Santa Gertrudis Creek and Long Valley Wash) plus several other minor tributary drainages. The site supports a number of listed or otherwise protected species, such as the California gnatcatcher, Quino checkerspqt butterfly, Stephen's kangaroo rat, and possibly burrowing owls. In 1998, the FWS adopted the "Permit Revocation Rule" or more commonly, the "no surprises rule" which substantially restricted the FWS authority to revoke or modify these types of permits. The "no surprises rule" was held invalid by a Federal District Court in Washington D.C. on the grounds that the FWS did not comply with Federal procedures under the Administrative Procedures Act for public notice in adopting new regulations, but did not rule on the substantive validity of the rule, and enjoined enforcement of the regulation. Spirit of the Sage Council v. Norton 294 F. Supp. 2d 67 (2003). On December 14,2004, the FWS adopted a new "no surprises rule," effective January 10, 2005, with the same text as the former rule. (69 Fed. Reg. 71723). The FWS states that the new rule complies with procedures under the Administrative Procedures Act and the Court's decision in Spirit of the Sage Council. (69 Fed. Reg. 71723). The 262 acres of Roripaugh Ranch open space include 201 acres of preserved habitat as required in the Assessment District 161 Subarea Habitat Conservation Plan ("AD 161 SHCP") as required for the federal Endangered Species Act Section 10(a) permit number TE-030505-0 issued by the FWS on December 4, 2001. In March 2003 Ashby USA, LLC graded approximately 8.96 acres of the land designated as the Preserved Habitat Area pursuant to the AD 161 SHCP with FWS permits in violation of federal law. The impacted area included an estimated 4.33 acres of Riversidean Sage Scrub, 2.42 acres of transitional/degradedRiversidean Sage Scrub, and approximately 2.2 acres of ruderal, weed or agricultural areas, hi response to the violation of federal law, the FWS approved a "Conceptual Mitigation Plan for Impacts to Areas Within the Jurisdiction of the United States Department of Interior Fish and Wildlife Service Under Section 10(a)(l) (B) of the Endangered Species Act on June 2, 2004 ("Restoration Plan"). Pursuant to the Restoration Plan, Ashby USA, LLC is required to restore an additional 21.65 acres of Riversidean Sage Scrub (4.33 acres at 5:1 ratio) to offset the impacts to mature Riversidean Sage Scrub caused by Ashby USA, LLC grading in violation of federal law. The City and Ashby USA, LLC entered into that certain "Open Space Grading and Restoration Agreement" (the "Restoration Agreement") dated as of May 11,2004 in order to implement the requirements of the Fish and Wildlife Service to cure the violations. Underthe Restoration Plan, Ashby USA, LLC is obligated to guarantee the plant growth for a period of five years from installation. Open space grading and restoration began in October 2005, and included irrigation and planting and was anticipated to be completed by January 31, 2005. Weather conditions and other conditions delayed completion of the 33.49 acres of restoration. Heavy rains and freezing temperatures in the winter of 2005 prohibited the completion of grading and caused plant material not to germinate, which required plants to be regrown. As of March 21, 2006, the easterly 18.21 acres have have been graded and the westerly 15.28 acres have been irrigated and planted. Both areas will be hydro-seeded as soon as the plant pallette has been approved by the applicable Resource Agency and weather permits. Ashby USA, LLC expects the five year monitoring period to commence on April 15,2006. In addition to the Restoration Plan, Ashby USA, LLC has obtainedall required Resource Agencies amendments with respect to improvements within the boundaries of the project and is preparing a revised Wetland Mitigation Plan relating to improvements located outside the boundaries of the District. Ashby USA, LLC expects construction described in the revised Wetland Mitigation Plan to begin soon after approval. As noted above, there has been a delay in installation of plant material which constitutes a portion of the restoration work. Ashby USA, LLC has recently contacted the Fish and Wildlife Service and 28 presented its plan for restoration as outlined above so as to resolve any issues relating to the delay in installation of the plant material beyond January 31,2005 and to avoid being in violation offederal law. The Fish and Wildlife Service will review the information presented by Ashby USA, LLC regarding the completion of restoration and determine if it is satisfied with Ashby USA, LLC's proposed remediation schedule or whether it will require additional mitigation measures. Fish and Wildlife Service requirements are not anticipated to adversely affect the development of the property within the Community Facilities District.Mitigation Relating to Waters of the United States. The EIR indicates the project site includes a jurisdictional wetland subject to the jurisdiction of the U.S. Army Corp of Engineers which has jurisdiction over developments in or affecting the navigable waters of the United States pursuant to the Rivers and Harbors Act and the Clean Water Act. The development within the District is expected to impact approximately 3.38 acres of waters of the United States, including 0.5 acres of wetlands. Among other things, Ashby USA, LLC is to create 6.7 acres of southern willow scrub and 1.5 acres of freshwater marsh wetlands, and maintain the mitigation for five years or until it reaches success criteria and is approved by the Army Corp of Engineers. In March 2003, apermit was issued by the U.S. Army Corp of Engineers which determined that the activity complied with the terms and conditions of the nationwide permit issued under Section 404 of the Clean Water Act, provided that the activity meets the criteria in the permit's terms and conditions (the "Section 404 Permit"). Under the Section 404 Permit, Ashby USA, LLC is allowed to modify Santa Gertrudis Creek and Long Valley Wash and is required to provide approximately 6 acres of southern willowscrub and fresh water marsh habitat within the 8.2-acre mitigation site within Santa Gertrudis Creek. The Santa Gertrudis Creek and the Long Valley Wash flood control channels will be maintained as open space in perpetuity. The Section 404 Permit provides the time limit for completing the authorized activity, but such period is subject to extension. The work is estimated to be completed by the third quarter of 2006. The Section 401 Water Quality Certification was issued by the California Regional Water Quality Control Board (San Diego Division) on December 11,2002. Under the Section 401 permit, theperiod for completion of the work ends not later than nine months following the close of the calendar year in which impacts first occur (estimated end date September 2006), but such period is subject to extension. Streambed'Alteration Agreement. Ashby USA, LLC met with the California Department of Fish and Game ("CDFG") to review the development. The CDFG issued a Section 1603 Permit m March 2003. The permit expires on March 1,2008 and requires that Ashby USA, LLC complete the approximately 6 acres of southern willow scrub and fresh water marsh habitat within the 8.2-acre mitigation site within Santa Gertrudis Creek. The permit is subject to extension in certain circumstances. National Pollution Discharge Elimination System Permit and Storm Water Pollution Prevention Plan. Pursuant to the Federal Clean Water Act (Section 402(g)) and State General Construction Activity Storm Water Permit, a National Pollution Discharge Elimination System (NPDES) permit and storm water pollution prevention plan was required from the California Regional Water Quality Control Board (San Diego Region) for grading and construction of areas greater than five acres. Ashby USA, LLC had a Storm Water Pollution Prevention Plan prepared for the project and was notified on January 10, 2003, that the California Regional Water Quality Control Board (San Diego Division) had processed the notice to comply with the general permit to discharge storm waters associated with construction activity. The proposed discharge from the Roripaugh Ranch proj ect will comply with the applicable provisions of the Clean Water Act. Other Requirements. As indicated above most required development approvals were obtained over the last several years. The project was required to sign a pre-excavation agreement with the Pechanga Band of Luiseno Mission Indians ("Pechanga"). Pechanga monitors as well as Ashby USA, LLC monitors were on site during grading to recover any artifacts. Pechanga has approved the work plan for the grading of the remaining area to be graded within the District. To date, items found have been relocated or handled in accordance with the applicable work plans. Ashby US A, LLC is not aware of any additional permits required to proceed with development of the property other than the usual permits required from the City and applicable local agencies. See"BONDOWNERS' RISKS-Local, State and Federal Land Use Regulations." The project site has been used for dry farming agriculture for many years. Crops grown in the site in the past primarily include grains and grasses. Soil samples were taken in 1999 in accordance with with federal and state testing protocols in connection with the Phase I Environmental Site Assessment report dated June 30, 1999. The 1999 Phase 1 Environmental Site Assessment report identified waste oil containers, solvent containers, stained soil, above ground storage tanks and stockpiles of trash, including, but not limited to wood, metals, tires and rusted 55-gallon drums. The remediation work was reviewed in February 2002 and in May 2003 by SID Geotechnical, Inc. to confirm the areas of environmental concern were remediated satisfactorily. The EIR indicated several Planning Areas were within a 100-year flood plain for the existing Santa Gertrudis Creek and Long Valley Wash. On review by FEMA, FEMA was unable to locate any previous 29 hydraulic analyses for Santa Gertrudis Creek or Long Valley Wash and determined that no Flood Insurance Study data had previously been performed for the area. The current Flood Insurance Rate Maps for the area show the entire development to be within Zone C, which is defined as "areas of minimal flooding." Ashby USA, LLC's engineer is preparing a FEMA map so that a Conditional Letter of Map Revision ("CLOMR'*) or Letter of Map Revision ( LOMR") can be processed for flood plain modifications within Zone C. The City has allowed grading of the entire District. Flooding will be mitigated through the construction of the Santa Gertrudis Creek and Long Valley Wash channel improvements and construction of various detention basins. Development Agreement; Deferral Agreement Ashby USA, LLC and the City have entered into a Preannexation and Development Agreement (the "Development Agreement"), as of December 17, 2002, regarding the proposed development. The Development Agreement was recorded on January 9, 2003 as Document No. 2003-018567. Tor purposes of the Development Agreement, the proposed development includes the improvement of the proposed development sites for the purposes consistent with the proposed development's land use authorization as set forth in the Development Plan (as defined in the Development Agreement), including, without limitation, grading, construction of infrastructure and public facilities related to the off-site Improvements and the onsite Improvements, the construction of structures and buildings and the installation of landscaping. Pursuant to the terms of the Development Agreement, Ashby US A, LLC has the right to develop the proposed development in a manner consistent with the approved Specific Plan, and applicable rules, regulations and official policies. Ashby USA, LLC has sold, or entered into contracts for sale of, the residential portion of the proposed development to Merchant Builders, with home construction and sales of production units during 2006 to 2012, depending on absorption. The Development Agreement provides that as long as the project is constructed in a manner consistent with the Development Plan and Existing Regulations (as denned in the Development Agreement), the project may be constructed at the rate and in the sequence that Ashby USA, LLC deems appropriate. The Market Absorption Study estimates build-out within the District will occur in 2012. See APPENDIX D -"Market Absorption Study." By entering into the Development Agreement, Ashby US A, LLC obtained a vested right to proceed with the project in accordance with the development approvals identified in the Development Agreement. However, development remains subject to any remaining discretionary approvals required in order to complete the project as contemplated by the foregoing entitlements and subject to changes in City laws, regulations, plans or policies specifically mandated and required by changes in state or federal laws or regulations. The Development Agreement and Conditions of Approval contain thresholds for installation of improvements. See Appendix K. Termination of the Development Agreement by one party due to the default of the other party will not affect a right or duty emanating from City entitlements or approvals on the project. The Development Agreement was approved in November 2002 and entered into as of December 17, 2002 pursuant to California Government Code Section 65864, et seq. (the "Development Agreement Law"). The applicable statute of limitations relatingto a challenge to the Development Agreement has expired. The Development Agreement Law provides that a developer can obtain a vested right to develop its real property pursuant to a validly executed development agreement. One appellate case in California, Santa Margarita Residents v. SanLuis ObispoBd. oj"Supervisors,.has heldthat development agreements are enforceable under the Development Agreement Law. However, the development agreement in that case did not address the type there can be no assurances that such court would enforce the Development Agreement if the City fails to fulfill its obligations under the Development Agreement or if more restrictive local land use regulations are adopted in the future. Additionally, public entities not bound by the terms of the Development Agreement may impose additional conditions on the development. See "BONDOWNERS' RISKS -Failure to Develop Properties" and " -Ballot Initiatives and Legislative Measures" herein. On October 21,2004, the City and Ashby USA, LLC entered into the First Operating Memorandum pursuant to Section 3.5.5 of the Development Agreement. This First Operating Memorandum provides for the additional contribution by Ashby USA, LLC of $1.1 million to the fire station construction which may be reimbursed to Ashby USA, LLC out of the proceeds of the 2006 Bonds. Additionally, the First Operating Memorandum provides that the City will process an amendment to Section 4.1.6 of the Development Agreement in order to change the thresholds for issuance of buildingpermits based on the completion of the fire station. On February 28,2006, the City Council adopted the ordinance approving the First Amendment 30 to the Development Agreement. The First Amendment provides for the issuance of up to a maximum of five hundred fifteen (515) residential buildings permits for Planning Areas 1A, 2, 3, 4A and 4B upon a finding by the City Manager that: (1) the permanent fire station is substantially under construction; (2) permanent access to the fire station via Butterfield Stage Road and Murrieta Hot Springs Road is substantially under construction so as to be completed concurrent with the opening of the fire station; (3) access to the Fire Station via Calle Chapps between the Fire Station's eastern most driveway and Walcott Lane will be completed concurrent with the opening of the fire station; and (4) all other requirements of the Development Agreement and Conditions of Approval of the Land Use Entitlements for Phases I and II for the issuance of the building permits have been fulfilled. As of March 21,2006 the City and Ashby USA LLC entered into a Second Operating Memorandum pursuant to Section 3.5.5 of the Development Agreement. The Second Operating Memorandum provides that: (1) in calculating the allowable number of dwelling units per residential Planning Area in the Phase II ("Pan") area of the Specific Plan, the applicable densities shall be applied to the "gross" acreage of the Planning Area and not the "net" acreage as discussed in Table 5-2; (2) all other requirements of the Specific Plan, including lot size and the maximum 1,500 units in Phase II, would remain in effect; and (3) Ashby USA LLC warrants and represents to the City and the Authority that with this change, Ashby or its successors in Phase II have the ability to construct at least 1,230 dwelling units in Phase II. In September 2003, the City and Ashby USA, LLC entered into a Deferral Agreement whereby the City agreed to allow Ashby USA, LLC to record the final map for Tract 29353-2 (Phase I) prior to the fulfillment of conditions requiring construction drawings for all parks, landscaped medians and proposed Temecula Community Services District slope/landscape maintenance areas to be reviewed and approved by the Director of Community Services and requiring that Ashby USA, LLC post security and enter into an agreement to improve the public parks, landscaped medians and proposed Temecula Community Services District slope/landscaped maintenance areas. The Deferral Agreement provided that additional final maps and land use approvals would not be processed until either (i) the conditions specified in the Deferral Agreement are satisfied or (ii) the Deferral Agreement is amended by City Council action. The Deferral Agreement provides that no maps or land use entitlements will be approved until certain conditions are met. The conditions include a requirement that Ashby USA, LLC obtain approval of the landscaping for streets, the sports park and the 5.1 acre neighborhood park. The Deferral Agreement also requires resolution of fuel modification issues for fire protection (eithermodified landscaping or hardscape). The fuel modification has been resolved by providing for a single loaded street in the northerly boundary of Phase II and through construction of a recessed wall, fire setback area and fuel modification in the north easterly area of the District. These modifications were included within a Specific Plan amendment approved January 11,2005. The City and Ashby USA LLC entered into a First Amendment to the Deferral Agreement on January 28, 2005. This First Amendment provides that: (1) Ashby USA, LLC will complete the improvements required by the original Deferral Agreement, except for the Sports Park, prior to the issuance of the first building permit within the District, even if the Improvements donotpertain to that portion of the District for which a residential building permit is sought; (2) Ashby USA, LLC shall design and construct, at its own expense, a second Community Building at the Sports Park; (3) Ashby USA, LLC shall convey an additional 1.4 acres to the City for the Sports Park; (4) Ashby USA, LLC shall contribute 2.3 acres of land in Planning Area 33B fora park and ride and trail head; and (4) Ashby USA, LLC wouldbe allowed to submit applications for land use entitlements for Phases I and II, but the City retains the authority to withhold building permits if the requirements of the First Amendment to the Deferral Agreement or the Deferral Agreement are not timely completed. Ashby USA, LLC has completed the improvements referenced in clause (1) above and is proceeding with the items referenced in items (2) through (4). The modifications described in the First Amendment concerning Planning Area 3 3B are contained m the Second Amendment to the Roripaugh Ranch Specific Plan adopted by the City Council on February 28, 2006. Other Matters Additional Approvals. Additional discretionary approval, such as design review for architecture (Merchant Builders) and tentative tract approvals is needed for development in the District as contemplated by the EIRthat mayrequire additional environmental review by the Cityunder the California Environmental Quality Act. Ashby USA, LLC does not anticipate that obtaining any of the approvals will constrain development of the property. Long Valley Wash Recreational Trails Agreement. On January 11,2005, the City, Roripaugh Ranch Community Association, and Ashby USA, LLC entered into an agreement in which the Roripaugh Ranch Community Association and Ashby USA, LLC agreed to maintain in perpetuity the public trails in the Long Valley Wash. In addition, the Roripaugh Ranch Community Association and Ashby USA, LLC agreed to maintain insurance naming the City, the County, the Riverside County Water Conservation and Flood Control District and the Temecula Community Services District as additional insured and to defend, indemnify and hold harmless such parties against any claims or lawsuits relating to the public use and maintenance of the Long Valley Wash recreational trails and public access to the channel right of way. 31 Covenants, Conditions and Restrictions. Covenants, conditions and restrictions will be recorded against the property prior to sale of individual units. In addition, the future residential units will be assessed monthly assessments to cover maintenance of common areas not being maintained by the City. All of the parcels in the District are or will be subject to recorded covenants, conditions and restrictions that provide foralevyof the Roripaugh Ranch Community Association's assessments, on a basis subordinate to the lien of the Special Taxes. Acquisition of Improvements The Authority and Ashby USA, LLC have entered into an Acquisition Agreement (the "Acquisition Agreement") dated as of March 1, 2006. Under the terms of the Acquisition Agreement, the Authority will use proceeds of the 2006 Bonds in the Acquisition Account of the Improvement Fund to acquire some of the 1 upon the documented Actual Cost (as defined in the Acquisition Agreement) or for such other amount as may be agreed upon by Ashby USA, LLC and the Authority. The Acquisition Agreement may be amended at any time without any requirement for notice to or the consent of the Bondowners. PROPERTY OWNERSHIP AND DEVELOPMENT The information about Ashby USA, LLC and the Merchant Builders contained in this Official Statementhas been provided by representatives of Ashby USA, LLC and the Merchant Builders andhasnot been independently confirmedor verified by the Underwriter, theDistrict or the Authority. Such information is included because it may be relevant to an informed evaluation of the security for the 2006 Bonds. However, because ownership of the property may change at any time, no assurance can be given that the planned development will occur at all, will occur in a timely manner or will occur as presently anticipated and described below or that Ashby USA, LLC and the Merchant Builders will acquire or own the property within the District at all. No representation is made herein as to the accuracy or adequacy of such information, as to the experience, abilities or financial resources of Ashby USA, LLC ana the Merchant Builders or any other landowner, or as to the absence of material adverse changes in such information subsequent to the date hereof, or that the information given below or incorporated herein by reference is correct as of any time subsequent to its date. Ashby USA, LLC and the Merchant Builders are not personally liable for payment of the Special Taxes or the 2006Bonds, and the following information should not be construed to suggest that the Special Taxes or the 2006 Bonds are personal obligations or indebtedness of Ashby USA, LLC and the Merchant Builders or that Ashby USA, LLC and the Merchant Builders will continue to own their respective parcels of land. Description of Project. Ashby USA, LLC owned all of the property within the District and has sold a portion of the District to the Merchant Builders. Table 1 below sets forth information regarding the projects being developed in the District. Only certain of the Merchant Builders referenced below are currently landowners within the District, and there can be no assurance that those who are not yet owners will close escrow on their lots within the District at the times indicated or at all. See "BONDOWNERS' RISKS -Concentration of Ownership," " -Failure to Develop Properties" and " -Land Development." 32 [THIS PAGE INTENTIONALLY LEFT BLANK] in Si. 5 8S v II I 2I Proposed Land Use Plan Table 1 Temecula Public Financing Authority Community Facilities District No. 03-02 (Roripaugh Ranch) Property Ownership and Development Status Name of Landowner/Merchant Builder*1' Development Phase/Specific Plan Planning Area Est. Total Number of Units Units Completed or Under Construction as of No. of Lots for Which There is a recorded January 15,2006(4) Final Map Phase I -Residential Ashby USA, LLC/Continental Residential, Inc.(l) 1A 104"> Davidson Roripaugh Ranch 122 LLC 2 Tanamera/Roripaugh II, LLC Tanamera/Roripaugh, LLC Traditions at Roripaugh, LLC Subtotal -Phase I -Residential 4A 4B 99 99 100 113 515 99 99 100 Status of Maps Final map approved but not yet recorded. Final map recorded! Final map recorded. Final map recorded! Final map approved but not yet recorded. Status of Development as of January IS, 2006 Graded; blue-top, except 6 lots in Tentative Tract Map anticipated to be approved by May 2006; in-tract sewer and water stubbed; 65% of sewer and water installed to lots. Near finished condition with wet in-tract utilities installed and the in-tract street paved. Graded; near finished condition with wet intract utilities installed and the in-tract street paved. Graded; near finished condition with wet intract utilities installed and the in-tract street paved. Graded, blue-top condition; some in-tract sewer and water installed; no curb no paving; a few lots have laterals. 298 Phase II -Residential and Commercial Ashby USA, LLC/KB Home Coastal Inc. (Option)™31 Total Phase I and Phase II 1.230 1,745 0ao _o 298 Rough grading in process. 0) (2) (3) (4) Continental Residential, Inc. is anticipated to close lots for 104 units at the end of the third quarter of 2006, assuming improvements are constructed as anticipated by Ashby US A, LLC. The final map which has been reviewed and approved by City staff does not include 6 lots which were approved pursuant to a Specific Plan Amendment on January 11, 2005. Ashby USA, LLC anticipates the Tentative Tract Map No. 32004 for the additional 6 units will be approved by May 2006 and the final map will be ready for recordation by August 2006. Continental Residential Inc. anticipates acquisition of the 104 lots once Ashby USA, LLC has satisfied its obligations pursuant to the terms of Continental Residential, Inc.'s purchase agreement. Closing is conditioned on Ashby USA, LLC's satisfaction of development conditions such that Continental Residential, Inc. can obtain building permits and certificates of occupancy. See " -Sale of Phase II to KB Home Coastal Inc.; Take Down Options" regarding KB Home Coastal Inc. s option to purchase some or all of the Phase II residential property. Commercial property is located in Planning Area 11. Issuance of building permits is contingent on the 2006 Bonds being issued. Upon issuance of the 2006 Bonds, up to 107 building permits may be pulled within Planning Areas 2, 3 and 4A. Source: Ashby USA, LLC. Ashby USA, LLC General Ashby USA, LLC and its Members. Ashby USA, LLC ("Ashby USA, LLC") is a California limited liability company based in Corona, California, formed by its members with respect to the Roripaugh Ranch proj ect. Ashby USA, LLC is managed by Ashby Development Company, hie., a California corporation. The other member of Ashby USA, LLC is USA Investment Partners, LLC, a Nevada limited liability company, and an affiliate of USA Commercial Mortgage Company, a Nevada corporation (dba "USA Capital"). 33 Members and Affiliates. The primary principal of Ashby Development Company, Inc. is Richard Ashby. Mr. Ashby received his Master's degree from the University of California at Long Beach. After graduation he taught industrial education at Newport Harbor High from 1962 until 1965. Upon leaving his teaching position, Mr. Ashby entered the contracting, building and development profession. Mr. Ashby's building and development expertise now encompasses over 40 years of experience. In addition to the Roripaugh Ranch Project, the following is a partial list of some of Mr. Ashby's accomplishments: Mr. Ashby is one of three partners in Creative Communities, which was founded in 1972 and has developed a number of quality commercial sites, two major land development projects and several residential subdivisions to include: • More than 200 single family homes and town homes in Huntington Harbor, La Habra and Yorba Linda. All of the homes were built and sold. • Two large land development projects: • Rolling Hills Estates Estates -A 1,500 acre planned community as ajointventure between Creative Communities and Bramalea of California with 4,500 homes, a regional mall, church site and two commercial sites. Developed between 1976 and 1981 with the lots sold to builders, its success earned Creative Communities recognition as "Builder of the Year" in 1979 for the California Builders Industry Association. The joint venture built on part of the development and sold the remainder to other builders. • Southridge Village -a 2,800 acre, master-planned residential development project located in the City of Fpntana along the Jurupa Hills. The master developer is Ten Ninety, Ltd., a California Limited Partnership owned by Creative Communities and the three principals of Creative Communities as individuals. The project consists of 8,350 residential units and includes a 12.5 acre commercial shopping center (Southridge Plaza), a three acre strip shopping center, more than 300 acres of parks, seven new schools, a fire and police station, a day care center, and a community building and recreation center. Ten Ninety, Ltd. sold lots to merchant builders, including other Richard Ashby entities as shown below and marked with two asterisks. In addition to his involvement with Creative Communities, Mr. Ashby maintains (50%) ownership velopmentjlnc. was created and to build single-family in Fiesta Development, Inc., a partnership that was established in 1996. Fiesta Development, Inc. wascreated to develop large parcels of land to sell to the merchant builder community ' -• • • " • ' -•• residential properties. A partial list of projects owned by or in which Fiesta Development or its principals are in some manner involved include: • Country Village Homes-a 186 unit single family project in Southridge Village, Fontana, California. Fiesta Development constructed and sold all homes in the project. • Park Series -a 125 unit project, and AppleBrook -a 130 unit project, both also in Southridge Village, Fontana, California. Fiesta Development constructed and sold all homes in the project. • Country Club Estates -a 365 lot development located in Fontana, California. Fiesta Development participated as a builder and developer, selling homes and lots in the proj ect. • Grizzly Ridge, Murrieta, California -a 212 lot land subdivision. All lots were sold by Fiesta Development to merchant builders. • Mission Grove, Riverside, California -183 lots, all sold to merchant builders. 34 • Summerbreeze -92 lot subdivision in Southridge Village, Fontana, California. All homes built and sold out. • Sun Ridge -a 74 unit development of finished lots also within Southridge Village. All homes built and sold out. • Sunset Ranch -202 lots in Moreno Valley, California. All homes built and sold out. • Las Flores -a 127 unit development in Southridge Village, Fontana, California. All homes built and sold out. • Stone Gate -a 226 unit subdivision, and Stone Gate II -a 74 lot subdivision, both in Menifee Valley, California. All homes built and sold out. • Country View Estates -a 325 unit project in Harvest Valley on Hwy 74 in the Homeland /Romoland area of Riverside County, California. Of the 325 units, 106 homes have been built and sold, 22 are under construction but in escrow, and 24 are under construction. Construction on the remaining units has not yet begun. Mesa Verde Estates -3,450 unit development in the City of Calimesa. A tentative map for this project is in process. The owners may sell a majority of the lots on an as is basis and to start home production on the balance of the lots or may add a development partner. Development is expected to occur over the next 3 to 4 years. • Lomas del Sol -8,271 unit development with two golf courses located in the City of Coachella. A tentative map for this project is in process. The owners may sell a majority of the lots on an as is basis and start home production on the balance of the lots or may add a development partner. Development is expected to occur over a 10 year period beginning in 2007. • Stone Ridge -a 1,900 unit development project in Riverside County. A tentative map for this project is in process. The owners may sell a majority of the lots on an as is basis and start home production on the balance of the lots or may add a development partner. Development is expected to occur over the next 3 to 5 years. • Bundy Canyon -a 228 unit development project in Riverside County. A grading permit for this project is expected to be issued in the second quarter of 2006. In addition to his involvement with the entities described above, Mr. Ashby is the manager of R&D Land Investors, LLC ("R & D Land Investors, LLC"), a California limited liability company. R&D Land Investors,LLC wasformed in2003 andcommenced conducting business shortly thereafter with the purchase of approximately 23 parcels of unentitled land in Riverside County. R&D Land Investors, LLC is a real estate holding company and it anticipates selling its interest in the properties listed below prior to commencement of any development and/or construction. R&D Land Investors, LLC cannot, at this time, estimate when it intends to sell the properties. A partial list of projects owned by or in which R&D Land Investors, LLC is involved include the following: • Friedman I and Friedman II -an approximate 318 lot development and an approximately 210 lot development in the Homeland /Romoland area of Riverside County, California. • Chess -an approximate 120 lot development in the Homeland /Romoland area of Riverside County, Canforma. • Underwood-an approximately 499 lot development in the Homeland /Romoland area of Riverside County, California. • Walston -an approximately 58 lot development in the Homeland /Romoland area of Riverside County, California. 35 The primary principals of USA Investment Partners, LLC are Tom Hantges and Joe Milanowski. Thomas Hantges. Mr. Hantges is a 32-year resident of Las Vegas, Nevada, and had been active in the real estate business since 1974. Mr. Hantges founded USA Commercial Mortgage Company (dba "USA Capital") in 1989. Mr. Hantges has actively developed multifamily housing throughout Las Vegas and Reno, Nevada. From 1989 through 1996, he managed the USA Capital Land Fund, a partnership formed to develop residential and multifamily projects throughout southern Nevada. Mr. Hantges is currently managing Tanamera Resort Partners, a $50 million real estate equity fund developing several projects primarily in Reno, Nevada. Mr. Hantges obtained both his B.A. and M.B.A. from the University of Nevada Las Vegas and is a Chartered Financial Analyst (CFA). Joseph D. Milanowski. Mr. Milanowski joined USA Capital in 1993 after five years with Southwest Gas, a leading utility in the Southwest, in the Finance Department. Since joining USA Capital, Mr. Milanowski has been involved with analyzing and financing nearly $500 million in real estate transactions including master-planned communities, apartments, land development and residential construction. His primary responsibilities for USA Capital include project analysis and financing of various commercial development projects for the company. Mr. Milanowski is also involved with the management of Tanamera ResortPartners, a $50 million real estate equity fund developing several projects primarily in Reno, Nevada. Mr. Milanowski has lived in Las Vegas since 1988. Mr. Milanowski obtained his BA in Economics from the University of Michigan and his MBA in finance from the University of Arizona. Agreements for provision of Public Facilities. Ashby USA, LLC has entered into separate improvement agreements withEMWD for sewer and water service to be provided to the property within the District. These agreements cover the backbone improvements only. Each Merchant Builder will need to enter into separate separate improvement agreements for in-tract sewer and water facilities with respect to their respective portion of the development. Ashby USA, LLC has entered into improvement agreements and posted surety bonds with the City for completion of portions of backbone streets and storm drain facilities. Ashby USA, LLC or a Merchant Builder will be required to post surety bonds with the City prior to recordation of the individual tract maps within the individual planning areas for completion of in-tract improvements. Estimated Development Costs; Plan of Finance Ashby USA, LLC estimates that the total cost to improve each Phase of the project from raw land to blue-top lots with backbone improvements, including financing costs, is approximately $76,320,583 for Phase I, $323,495,731 for Phase II, and $70,609,920 for public improvements, a portion of which are District eligible costs for which approximately $3 9,464,396.40 of District bond proceeds will be available. District eligible costs not fundea with proceeds of the 2006 Bonds will be financed through the loan from Ohio Savings Bank discussed below in the Section captioned " -Plan of Finance,"proceeds of sales to Merchant Builders or through other funds available to Ashby USA, LLC or with a second series of bonds. These foregoing costs include the installation of all backbone improvements not being funded by the District, including backbone dry utilities, street lights and common landscaping and perimeter walls. These costs also include repayment or loans. As of December 31, 2005, Ashby USA, LLC had spent approximately $19,055,143 for land improvement costs and construction costs in connection with Phase I, approximately $24,144,566 for land improvement costs and construction costs in connection with Phase II and approximately $17,965,385 in connection with public improvement costs. The foregoing amounts exclude soft costs such as planning, engineering, environmental, endowment, and consultant costs as well as excluding interest on loans, financing cost and taxes. The foregoing merely reflect Ashby USA, LLC's presentplan for the development of the property and include repayment of loans with proceeds of subsequent loans. There can be no assurance that Ashby USA, LLC will have the resources, willingness or ability to successfully implement the development plan as described above. In addition to the foregoing costs of Ashby USA, LLC, each Merchant Builder will incur costs to develop its Planning Area from the blue-top lot condition, for which Ashby USA, LLC is responsible, to finished lots (ready for house construction). These costs include for the Merchant Builders all in-tract improvements including fees paid at building permit issuance. Additional costs have been included for those items that are traditionally considered a house cost, but are often used to determine a finished lot value. Estimated costs utilized in the Appraisal for estimating finished lot value range from $28,846 per lot to $ 110,899 per lot, depending on the specifics of each Planning Area. APPENDIX C -"Summary Appraisal Report" appended hereto for further information on the Appraisal and for limiting conditions relating to the Appraisal. 36 Table 2 summarizes the sources and uses of funds to complete, as a whole, Ashby USA, LLC's development in the District and the expected cash flow from Ashby USA, LLC's operations within the District. Ashby USA, LLC projects land sales to merchant and commercial builders and to the School District to occur over an approximate period from 2004 through anticipated close of purchases under the Option Agreement, which may occur through 2012. Table2 below summarizes the sources and uses of funds to complete, as a whole, Ashby USA, LLC's development in the District and the expected cash flow from Ashby USA, LLC's operations within the District. 37 Table 2 Community Facilities District No. 03-02 Ashby USA, LLC's Estimated Sources and Uses of Funds Sources Lot Sales -Residential11' Lot Sales -Commercial Lot Sales -School Sites2' Option Maintenance Payments Constr. Loan -Bank Midwest Constr. Loan -Bank of the West Constr. Loan -Ohio Saving Bank Related Party Contributions Related Party Loans CFD Funding CFD Funding 2nd Series of Bonds SUBTOTAL Uses: PHASE I -Improvements Land costs Soft Costs3' Land Improvement Costs Construction Costs Constr. Loan -Bank of the West pay-off Other Contrib. & Related Party pay-off GRC Exit Fee (3.6%)" SUBTOTAL Uses: PHASE II -Improvements Land cost Soft Costs32' Land Improvement Costs Construction Costs Offsite Improvements Constr. Loan -Bank Midwest pay-off Constr. Loan -Ohio Saving Bank pay-off Other Contrib. & Related Party pay-off GRC Exit Fee (3.6%)* SUBTOTAL Uses: Public Improvements Street Improvements Storm Drain Improvements Environmental Mitigation Parks Other Contributions SUBTOTAL CASH OUTFLOWS (Improvements) CASH OUTFLOWS (Finance Activity) CUMULATIVE NET CASH FLOW (1) As of Dec 31 2005 Jan-March 2006 Apr-June 2006 July-Sept 2006 Oct-Dec 2006 Jan-June 2007 July-Dec 2007 Thereafter Totals $26,652,942 35,171,903 26,135,000 63,835,529 34,510,573 634,194 $186,940,141 $2,165,277 10,400,532 13,740,367 5,314,776 13,299,647 9,010,000 683,682 54,614,281 $5,212,169 6,165,000 $11,377,169 $290,000 5,053,517 182,426 5,525,943 $6,534,000 30,000,000 1,500,000 10,000,000 $48,034,000 $343,000 6,305,310 228,690 6,877,000 $6,610,695 25,000,000 12,000,000 $43,610,695 $90,000 1,476,526 237,985 1,804,511 $7,115,000 16,500,000 17,000,000 $40,615,000 $34,600 34,600 $52,000,000 4,899,471 200,000 5,000,000 2,200,000 $64,299,471 $25,000 4,611,851 4,636,851 $93,535,000 35,986,000 5,520,000 $135,041,000 473,725 473,725 $116,210,000 $307,335,805 6,534,000 35,986,000 $8,400,000 13,920,000 35,171,903 26,135,000 146,400,000 36,010,573 834,194 44,000,000 2,200,000 $124,610,000 $654,527,476 $ 2,165,277 11,183,132 13,740,367 5,314,776 26,135,000 2,353,672 15,975,523 1,806,508 2,353,672 76,320,583 8,661,108 23,005,243 23,279,883 347,042 517,641 35,171,903 $1,487,530 800,000 1,540,000 801,050 $4,495,562 2,000,000 6,400,000 400,000 4,148,997 1,468,375 5,590,000 81,309 21,239,549 10,000,000 16,821,184 $4,016,346 $1,874,000 200,000 2,600,000 100,000 15,000,000 57,000,000 1,872,000 21,816,346 60,846,000 $4,822,227 $17,965,385 $2,820,204 $18,228,214 $13,458,366 $13,015,524 $4,822,227 112,222,369 4,628,580 23,295,562 28,109,865 $13,561,414 279,804 1,024,167 3,100,000 $1,538,972 441,232 200,000 640,000 $9,197,508 5,500,000 730,706 2,800,000 $8,692,514 2,565,852 2,200,000 $7,759,744 1,836,644 919,136 2,500,000 $400,000 47,578,816 13,483,717 $4,662,756 66,125,289 $8,661,108 $39,427,678 27,748,258 16,577,042 1,800,000 $35,171,903 $146,400,000 34,723,266 6,651,720 13,186,476 6,651,720 323,695,731 $45,572,379 10,623,532 300,000 1,030,706 7,143,303 6,240,000 $300,000 $70,609,920 $92,551,802 $92,250,234 $2,138,105 $6,895,872 $6,078,855 $540,548 $28,862,904 $19,537,872 $173,772 $20,886,035 $22,486,707 $411,725 $16,843,124 $18,023,346 $6,160,255 $8,662,255 $61,642,823 $154,648 $5,336,481 $61,262,533 $68,596,633 $6,951,720 $2,353,672 $183,901,241 $186,990,193 $283,636,041 $183,901,241 (2) (3) (4) Ashby USA, LLC anticipates arranging for refinancing in the July to December 2007 and thereafter time periods assuming KB Home Coastal Inc. exercises the options to acquire '' 'arpels in Ph^se II. lf,KB Home Coastal Inc. does not elect to acquire the parcels in Phase II, Ashby USA, LLC anticipates marketing the parcels not acquired by KB Home >y USA, LLC and meTemecula Valley Unified School District have not yet begun negotiations regarding the price or timing of the purchase of the school sites, costs which are not included in the foregoing values include a combination of planning, engineering, environmental, endowment and consultant costs as well asi loans,"financingcosts ah3"faxes. GRC exit fee relates to payoff of amounts due relating to original acquisition of the property. as interest on The discussion and budgets set forth above merely reflect Ashby USA, LLC's present plan for the development of the property Ashby USA, LLC owns or previously owned within the District. There can be no assurance that Ashby USA, LLC will have the resources, willingness or ability to successfully implement the development plan as described above. Plan of Finance. Ashby USA, LLC is financing development of the property from sources provided by its members and a variety of loans. On September 2, 2005, Ashby USA, LLC obtained a $ 146,400,000 loan from Ohio Savings Bank (the "Loan," as further described below), with a maximum of $103,500,000 outstanding at one time for refinancing the acquisition of the land and for financing of the blue top improvements. The loan terms are described below. A loan from Bank Midwest with an outstanding balance of $34,988,188 on September 2, 2005 was paid on September 2, 2005 with proceeds of the Ohio Savings Bank Loan. A loan in the amount of $26,135,000 from Bank of the West for which approximately $12,795,667.62 was outstanding as of December 31,2005 was paid in part with proceeds of sales of lots in Planning Area 3 (closed on November 2,2005), and was further paid down in January 2006 to approximately $7,742,151.02 with proceeds of sales of lots in Planning Area 4B (closed January 6, 2006). The loan is expected to be further paid down with proceeds ofsalesof lots in Planning Area 1A expected to close in the thirdquarter of 2006. Financing costs accrue on the outstanding amount until the loan is paid. The note held by Bank of the West is due September 2, 2006, as the result of a recent extension granted by Bank of the West and Ashby USA, LLC anticipates that it will have funds to pay the note on or before such date. hi addition, there is a loan in the amount of $34,831,680 from USA Capital of which approximately $9,436,227.01 was outstanding as of December 31, 2005 secured by a deed of trust with respect to Phase I and Phase II. As of December 31, 2005, approximately $61,165,094 had had been expended in connection with the improvements to the land in the proj ect. Such amount excludes land acquisition costs, soft costs, debt service and general and administrative costs. Ohio Savings Bank Loan Agreement Ashby USA, LLC and Ohio Savings Bank, a federal savings bank ("Ohio Savings Bank"), as lender, entered into the Loan Agreement, dated as of August 29, 2005, as modified by a Modification Agreement dated February 14,2006 entered into by Ashby USA, LLC and Ohio Savings Bank (collectively, the "Loan Agreement"). Ashby USA, LLC and Ohio Savings Bank have subsequently entered into forebearance agreements relating to the issuance of the 2006 Bonds and receipt by Ohio Savings Bank of $4,000,000 in reimbursement for eligible construction cost on or before April 30,2006 and a letter agreement to extend the date for completion of improvements to June 1, 2007. Ohio Savings Bank is making a revolving loan (the "Loan") to Ashby USA, LLC in the amount that cannot be outstanding at any one time in an amount greater than $106,500,000, of which $103,500,000 may be used by Ashby USA, LLC to refinance the acquisition of the Land A (as defined below) and to finance Blue Top Improvements (as defined below). $3,000,000 of the $106,500,000 is set aside to support a letter of credit in a maximum amount of $8,005,000 described below. The maximum amount that may be loaned to Ashby USA, LLC under the Loan is $146,400,000. The Loan will also finance the construction of the Blue Top Improvements necessary to complete approximately 1,102 detached residential building sites for single family homes on the Land A. The Loan is evidenced by a note from Ashby USA, LLC to Ohio Savings Bank, secured by a first Deed of Trust recorded against the Land A and that portion of the Land B (as defined below) owned by Ashby USA, LLC. The Loan is guaranteed by Richard K. Ashby and Justin Ashby pursuant to a guaranty (the "Guaranty"). There is also a letter of credit to be issued by Ohio Savings Bank and confirmed by Citibank, N.A. in the the maximum amount of $8,005,000, which is secured in part by $3,000,000 available under the Loan and equity provided by Ashby USA, LLC. As of March 21,2006, the principal amount outstanding under the Loan was approximately $61,244,457.00. 39 Under the Loan Agreement, "Land A" is defined as Planning Areas 13 through 32, inclusive. Of these parcels, Planning Areas 14-24 andPlanning Area 31 are part of the land that is the subject of the Option Agreement. The remaining portion of Land A represents open space (PA 13), flood control channels (PA's 25 and 26), parkland (PA 27), school sites (PA's 28 and 29), the proposed Recreation Center (PA 30), and the land for the fire station (PA 32). "Land B" is defined in the Loan Agreement as Planning Areas 1 A, IB, 2, 3, 4A, 4B, 5, 6, 7A, 7B, 1C, 8, 9A, 9B, 10, 12, 33A and 33B, which have the following land uses: Planning Area Proposed Land Use 1A Residential (Continental Property) IB Park site 2 Residential (Davidson Roripaugh Ranch 122 LLC Property) 3 Residential (Tanamera Residential Group) 4A Residential (Tanamera Residential Group) 4B Residential (Tanamera Residential Group) 5 Recreation Center 6 Park site 7A Open Space 7B Detention Basin 7C Detention Basin 8 Open Space 9A Open Space 9B Open Space 10 Residential (KB Home Coastal Inc. (Option)) 12 Residential (KB Home Coastal Inc. (Option)) 33A Residential (KB Home Coastal Inc. (Option)) 33B Residential (KB Home Coastal Inc. (Option)) The term Blue Top Improvements1 means all earthwork, infrastructure and other improvements necessary to develop 1,102 single family lots on the Land A in accordance with the Option Agreement (including bringing the Land A to Blue Top Condition). Under the Loan Agreement, if no Event of Default has occurred and is continuing, (i) Ohio Savings Bank will release Planning Areas 25,26,27 and 32 of Land A from the lien of the Deed of Trust for no consideration (unless Ashby USA, LLC receives consideration), except for a processing fee, (ii) Ohio Savings Bank will release Planning Area 30 of Land A for no consideration (unless Ashby USA, LLC receives consideration) if Ohio Savings Bank has already released Planning Areas 25, 26, 27 and 32, and (iii) Ohio Savings Bank will release Planning Areas 28 or 29 (the potential school sites) of Land A upon payment of the greater of 100% of the net proceeds ofthe saleofsuch Planning Area or an amount equal to 90% of the appraised value (as determined by an appraisal acceptable to Ohio Savings Bank) of such Planning Areas. With respect to the Land B, the property will be released upon the payment of me greater of (i) the Minimum Release Price (as defined in the Loan Agreement) for such Planning Area, or (ii) 100% ofthe Net Proceeds received from the sale ofthe lot. Advances are made under the Loan in the form of a continual revolving credit. The interest rate on the loan is 7.75% to the end of the first month, then the greater of 7.25% or the "prime rate" plus 1.25%. Accrued interest is due on the first day of each calendar month in consecutive monthly installments commencing on October 1, 2005. Unless Ohio Savings Bank extends the term of the Loan an additional six months, the Loan becomes due and payable on August 29, 2007. If Ashby USA, LLC fails to pay any 1 Forpurposes of this Official Statement, the term "Improvements" means certainroad, sewer, storm drain, fire facilities, and park and recreation improvements which proceeds ofthe 2006 Bonds may finance. The Loan Agreement used the term "Improvements" to mean all earthwork infrastructure and other improvements necessary to develop approximately 1,102 single family lots on the Land A in accordance with the Option Agreement, as such term is more particularly defined in the Loan Agreement. For convenience of reference, such Loan Agreement "Improvements" are referred to in the Official Statement as "Blue Top Improvements." Blue Top Improvements is not a defined term in the Loan Agreement. 40 installment of interest within 10 calendar days after it becomes due or fails to pay the entire indebtedness when it becomes due, all unpaid principal and accumulated interest could be accelerated at the direction of Ohio Savings Bank and become immediately due and payable and then bear interest at a default rate equal to the Loan rate plus 5%. Unless otherwise authorized by Ohio Savings Bank, the amount of Loan proceeds that may be used for each category, item or purpose of Blue Top Improvement costs cannot exceed the amounts set forth in an exhibit to the Loan Agreement, including those Blue Top Improvements which may be acquired under the Acquisition Agreement with proceeds of the 2006 Bonds. The budget for the Blue Top Improvements to be financed by the 2006 Bonds and other moneys available to Ashby USA, LLC under the Loan, or otherwise, include the following: Blue Top Improvements Budget Murrieta Hot Springs Road $4,600,000 Butterfield Stage Road $21,400,000 Nicolas Road $9,800,000 Calle Chapos $200,000 Long Valley Channel $7,600,000 Santa Gertrudes Creek $3,000,000 Environmental Mitigation $ 1,000,000 Sports Park $5,600,000 Fire Station Grading $ 100,000 North Loop Road $2,100,000 South Loop Road $600,000 Roripaugh Valley Road $ 1,700,000 Fiesta Ranch Road $ 1,100,000 Neighborhood Park $ 1,500,000 Fire Station Contribution $3,100,000 Payoff of AD 161 $600,000 Capital Contribution to the City $2,500,000 Ohio Savings Bank will reserve $16,330,000of Loan proceeds inareserve fund to pay$l,894,612 in interest due under the Bank of the West Loan, and $14,435,388.00 for the regular monthly installments of interest due on the Loan (i.e., capitalized interest for purposes of payment of the Loan). TheLoan Agreement originally providedthat until the 2006 Bonds have been issued, advances under the Loan were limited to: (i) $35,714,000 to release the Land A from an existing deed of trust with Bank Midwest; (ii) $1,830,000 to pay the loan fee; (iii) $32,000 to pay certain expenses; (iv) up to $20,000,000 for payment of "Development Costs" (as identified in the Loan Agreement, and (v) up to $560,000 for the payment of interest due for loans encumbering the Land B. To date, the items listed in (i) -(iii), inclusive, have been financed with the Loan. The Loan Agreement was modified to, among other things, allow an additional $10,000,000 of permitted funding for items (iv) and (v) prior to issuance of the 2006 Bonds. If less than $52,000,000 aggregate principal amount of 2006 Bonds are issued, Ashby USA, LLC can provide additional collateral to qualify for the additional Loan proceeds. Ashby USA, LLC can request advances of Loan proceeds not more than two times in any calendar month, using draw request forms. When the Blue Top Improvements have been fully installed and Ashby USA, LLC has fulfilled all its obligations under the Loan Agreement, Ohio Savings Bank will disburse the final advance or release a retainage to Ashby USA, LLC. The amount outstanding at any one time under the Loan Agreement cannot exceed 51 % of the "as as is" value of the Land A, as determined by an appraisal acceptable to Ohio Savings Bank. All merchant builder contracts affecting the Land A have been assigned to Ohio Savings Bank. In addition, any proceeds of the 2006 Bonds that are to be reimbursed to Ashby USA, LLC have been assigned to Ohio Savings Bank. 41 Security for the Loan The Loan is evidenced by the Note, which is secured by among other security: • the Deed of Trust; • the assignment to Ohio Savings Bank of all payments under the merchant builder contracts. • Any property that is part of the Land B that is released from the Bank of the West Deed of Trust will become encumbered by the Deed of Trust. • The Guaranty. • Richard Ashby's 1/3 interest in tax increment payable to an entity called Ten Ninety (as evidenced by an assignment of 1/3 of any tax increment received by Ten Ninety from the City of Fontana). Selected Covenants and Conditions Under the Loan Agreement, there are several covenants made by Ashby USA, LLC and conditions for the making of advances by Ohio Savings Bank, including: 1. Ashby USA, LLC will begin construction and installation of Blue Top Improvements on or before the 30th day after the closing of the loan. (Ashby USA, LLC began construction and installation on or before the required date.) 2. Ashby USA, LLC must request in writing any change in the Blue Top Improvement plans that involves an expenditure in excess of $50,000, or the deletion of any facility, improvement or expenditure. 3. The Blue Top Improvements must be substantially complete by the earliest of: (i) the 120th day prior to the August 29,2007 maturity date of the loan (i.e., May 1,2007); (ii) June 1, 2007 (as such date maybe extended pursuant to KB Home Coastal Inc.'s Option Agreement); or (iii) any earlier date required by the Option Agreement of KB Home Coastal Inc.. As of March 24, 2006, KB Home Coastal Inc. has agreed to extend the date for completion of the Blue Top lots to June 1, 2007. 4. Ashby USA, LLC and Ohio Savings Bank agree that at all times the loan will be "in balance," meaning that the unadvanced portion of the loan and amounts which may be re-advanced together with any required Ashby USA, LLC equity funds, equals or exceeds the estimated remaining cost, in the aggregate, to complete the Blue Top Improvements and to pay for all other items. If Ohio Savings Bank determines that the loan is not "in balance," Ohio Savings Bank has no further obligation to make an advance unless Ashby USA, LLC deposits sufficient cash amounts within 30 days or Ohio Savings Bank elects to allow Ashby USA, LLC to prove its ability to pay all amounts required to place the loan "in balance" again. 5. Under the Loan Agreement, Ashby USA, LLC is obligated to complete improvements so that Ashby USA, LLC can obtain reimbursement for authorized Blue Top Improvement costs in an amount not less than the following cumulative total amounts by the following dates (unless an extension is provided due to a force majeure event): (i) $4,000,000 by April 30, 2006; (ii) $10,000,000 by June 30, 2006; (iii) $25,000,000 by December 31, 2006; and (iv) $40,000,000 by June 30,2007. Ashby USA, LLC must satisfy conditions of the Acquisition Agreement in order to be paid for improvements completed under the Acquisition Agreement. The Authority has made no commitment that any of such amounts will be available at the times specified by Ohio Savings Bank and Ashby USA, LLC in the Loan Agreement. 6. The final map subdividing the Land A must be recorded by April 27,2006 (240 days after the date of the Loan Agreement). 42 Events of Default There are numerous events of default under the Loan Agreement, including: 1. Ashby USA, LLC fails to pay any amounts due and owing under the Loan Agreement. 2. Ashby USA, LLC or Guarantor fails to observe or perform any term, covenant or agreement under the Loan Agreement or the Guaranty. 3. Ashby USA, LLC or Guarantor becomes insolvent. 4. A material adverse change occurs in the financial condition of Ashby USA, LLC, either of the guarantors, and certain affiliates of Ashby USA, LLC. For purposes of the Loan Agreement, the death or incapacity of any guarantor is considered a change in financial condition. 5. Stock, membership or interest of Ashby USA, LLC, or certain affiliates of Ashby USA, LLC is transferred. 6. Ashby USA, LLC or either guarantor makes false, incorrect or incomplete statements to Ohio Savings Bank. 7. A default or an event of default occurs under any loan document, any other loan made by Ohio Savings Bank to Ashby USA, LLC, or any surety bond or letter of credit issued to or for the benefit of Ohio Savings Bank in connection with the loan and/or the credit facility. 8. The failure of any of the conditions described in "Selected Covenants and Conditions," including failure to make certain benchmark principal payments. 9. The failure of Ashby USA, LLC to perform under the Option Agreement, including any default thereunder or the occurrence of an event that with notice or the passage of time, or both, would constitute such a default, including the failure to complete the Blue Top Improvements by June 1, 2007. 10. The failure of KB Home Coastal Inc. to replace the KB Home Cpastal Inc. Letter of Credit with cash and an additional letter of credit if KB Home Coastal Inc. elects the First Option Alternative. 11. If Richard Ashby is no longer employed by or associated with Ashby USA, LLC, or if he becomes deceased. The foregoing are only some of the potential events of default. In such an event, Ohio Savings Bank may, at its option, exercise any of the remedies available to it under the Loan Agreement, including (i) terminating the Loan Agreement, (ii) seeking specific performance, and (iii) accelerating the payment of the Loan and foreclosing on the Deed of Trust. Deeds of Trust The Loan is secured by a Deed of Trust recorded against the Land A and that portion of the Land B that is owned by Ashby USA, LLC. The Deed of Trust may be released against any lots sold if certain release payments and costs are paid. By virtue of subordination agreements, the Ohio Savings Bank received a title policy that shows that the Deed of Trust is in first position in relation to other deeds of trust. There are several other deeds of trust on the property, which the Loan Agreement allows to be in the following priority: • Ashby Development Company, Inc. ("ADC") and GRC Development Company, L.P., a California limited partnership ("GRC"), ajunior creditor, entered into an option agreement under which ADC is obligated to make certain payments to GRC with respect to all of the property that remains subj ect to the Deed of Trust. The junior debt is secured by ajunior deed of trust by ADC (the "ADC Deed of Trust") for the benefit of GRC. ADC's rights and obligations under this option agreement have been assigned to and assumed by Ashby USA, LLC. 43 • Ashby USA, LLC and KB Home Coastal Inc. entered into the Option Agreement relating to portions of the land secured by the Deed of Trust, which is secured by a deed of trust (the "KB Home Coastal Inc. Deed of Trust") for the benefit of KB Home Coastal Inc. Pursuant to an agreement between KB Home Coastal Inc., Ashby USA, LLC and Ohio Savings Bank KB Home Coastal Inc. has agreed that the lien of the Deed of Trust is senior and prior to the lien of the KB Home Coastal Inc. Deed of Trust. • USA Investment Partners, LLC made a loan to Ashby USA, LLC in the principal amount of $4,250,000. The loan is secured by a junior deed of trust by Ashby USA, LLC for the benefit of USA Investment Partners, LLC, and is inposition behind the Deed of Trust, the ADC Deed of Trust and the KB Home Coastal Inc. Deed of Trust. • The Land B is currently encumbered by a deed of trust in favor of Bank of the West. The deed secures the repayment of the outstanding amounts owed to Bank of the West, which as of December 31,2005 was approximately $8,311,037. The note held by Bank of the West is due September 2, 2006, as the result of a recent extension granted by Bank of the West. Ashby USA, LLC intends to repay the loan to Bank of the West from the proceeds of the sale of property to the Tanamera/Roripaugh Entities, Continental Residential, Inc. and KB Home Coastal Inc. Once Bank of the West is paid, the portion of the Land B owned by Ashby USA, LLC that was previously encumbered by the deed of trust in favor of Bank of the West will be encumbered by Ohio Savings Bank's Deed of Trust. The plans described herein and Ashby USA, LLC's projections are subject to change. There can be no assurance that Ashby USA, LLC has the willingness or ability to successfully implement the development plans described above. In the event that cost overruns occur which exceed the funds described in the section captioned "Plan of Finance" above, Ashby USA, LLC will need to raise additional funds. No assurance can be given that such funds could be raised or would be raised on a timely basis. Continued development in the District may also be adversely affected by changes in general economic conditions, fluctuations in the real estate market and other similar factors. See "BONDOWNERS' RISKS" herein for a discussion of risk factors. If and to the extent that internal financing and land sales revenues or alternative sources are inadequate to pay the costs to complete the planned development of the lots within the District, portions of the project may not be developable. Sale of Phase II to KB Home Coastal Inc.; Take Down Options KB Home Coastal Inc. as optionee, and Ashby USA, LLC, as optionor, entered into the Option Agreement in July 2005. The Option Agreement grants KB Home Coastal Inc. an option to purchase a portion of the residential lots in Phase II (herein, the "Phase II Residential Property"). Specifically, KB Home Coastal Inc. can elect: (i) to exercise the option on the approximately 1,118 of the approximately 1,230 lots of the Phase II Residential Property ((the "Overall Option Alternative"); (ii) to exercise the option for approximately 412 lots of the Phase II Residential Property (the "First Option Alternative"); or (iii) not to exercise the option to purchase any of the Phase II Residential Property (the "Termination Option Alternative"). Each election is described in more detail below. In each case, the term of the option commenced on the date that KB Home Coastal Inc. delivered a feasibility notice and title approval notice, which occurred on July 27,2005 and expires on the "Outside Closing Date" which is defined as 20 calendar quarters after the delivery or deemed delivery of Acceptance of the Blue Top Condition on the Overall Property (as defined below). KB Home Coastal Inc. is not yet a current landowner within the District, and there can be no assurance that it will exercise its option to purchase lots within the District at the times indicated or at all. In connection with the Option Agreement KB Home Coastal Inc. has deposited with Ohio Savings Bankoneor more irrevocable letters of credit in an aggregate amount of $39million (the "KB Home Coastal Inc. Letter of Credit"), based on the satisfaction of certain conditions under the Option Agreement (including Ashby USA, LLC receiving its construction financing and the title company issuing a title policy to KB Home Coastal Inc.). Ashby USA, LLC's approved lender (Ohio Savings Bank) is named as the beneficiary of the KB Home Coastal Inc. Letter of Credit, and Ashby USA, LLC has assigned its rights under the KB Home Coastal Inc. Letter of Credit to Ohio Savings Bank. The deposit represented by the KB Home Coastal 44 Inc. Letter of Credit is deemed to be earned by Ashby USA, LLC and becomes nonrefundable to KB Home Coastal Inc. upon (i) the delivery of a notice evidencing acceptance by KB Home Coastal Inc. of the portion of the Phase II Residential Property for which the option is exercised in Blue Top Condition (the "Acceptance Notice"), or (ii) KB Home Coastal Inc. 's election or deemed election of the Termination Option Alternative, except in the event KB Home Coastal Inc. 's election to terminate the Option Agreement is due to a material default by Ashby USA, LLC. The beneficiary of the KB Home Coastal Inc. Letter of Credit has the right to draw upon the KB Home Coastal Inc. Letter of Credit when Ashby USA, LLC has received a notification of non-renewal and if KB Home Coastal Inc. has failed to renew or provide a replacement letter of credit within 30 days after receipt of notice from Ashby USA, LLC of such non-renewal. The KB Home Coastal Inc. Letter of Credit may also be drawn upon if (i) KB Home Coastal Inc. fails to annually renew the KB Home Coastal Inc. Letter of Credit; (ii) KB Home Coastal Inc. fails to replace the KB Home Coastal Inc. Letter of Creditwith cash after all Ashby USA LLC's work is complete, no title objections have been made, and there is no default by Ashby USA, LLC under the Development Agreement; or (iii) the option is terminated and the KB Home Coastal Inc. Letter of Credit is not replaced with cash. The KB Home Coastal Inc. Letter of Credit may also be drawn upon if an amount is awarded to Ashby USA, LLC by an arbitrator. Otherwise the KB Home Coastal Inc. Letter of Credit is replaced by cash, which is turned over to Ashby USA, LLC. The escrow holder has recorded a performance deed of trust against the Phase II Residential Property which secures Ashby USA, LLC's obligation to refund the deposit to KB Home Coastal Inc. in the event of a material default by Ashby USA, LLC and KB Home Coastal Inc.'s subsequent election to terminate the Option Agreement. It is currently estimated by Ashby USA, LLC that the grading of the lots in Phase II to a blue-top condition will be completed from approximately September 2006 through May 2007. When this occurs, and Ashby USA, LLC's work is completed, which includes satisfaction of the conditions to release of building permits and satisfaction of conditions relating to issuance of certificates of occupancy, the option with KB Home Coastal Inc. provides for KB Home Coastal Inc. to begin taking down or closing on portions of the lots. KB Home Coastal Inc. may either acquire approximately 412 of the lots in Phase II in Planning Areas 16,23,24, and 31, or may acquire all of the approximately 1,118 remaining lots in Phase II (not including the 112 lots in Planning Area 12 that are subject to a separate transaction). The sale of the approximately 412 lots would close within 45 days of the ability to obtain building permits, satisfaction of conditions relating to issuance of certificates of occupancy and the date of acceptance of the Blue Top Condition specified in the Option Agreement, provided however, that KB Home Coastal Inc. has the right to extend the closing date for eight months. If KB Home Coastal Inc. terminates the Option, then the KB Home Coastal Inc. Letter of Credit must be replaced by $39 million in cash, which cash is released to Ohio Savings Bank and applied to reduce amounts due from Ashby USA, LLC. If KB Home Coastal Inc. exercises the Overall Option Alternative (approximately 1,118 lots), then the KB Home Coastal Inc. Letter of Credit must be replaced with approximately $51 million in cash, which cash is released to Ohio Savings Bank and applied to reduce amounts due from Ashby USA, LLC. If KB Home Coastal Inc. exercises the First Option Alternative (approximately 412 lots), the KB Home Coastal Inc. Letter of Credit is replaced with approximately $15.4 million in cash, which is released to Ashby USA, LLC and an additional KB Home Coastal Inc. Letter of credit for approximately $23.6 million must be provided by KB Home Coastal Inc. The deposit and KB Home Home Coastal Inc. Letter of Credit should always be equal to 19.76% of the purchase price. Under the Option Agreement, Ashby USA, LLC is obligated to deliver the lots in Blue Top Condition on or before June 1, 2007 (subject to force majeure). The failure to deliver the lots in Blue Top Condition provides KB Home Coastal Inc. with an option to terminate the Option Agreement, or extend the date for completing such work with Ashby USA, LLC paying for any costs, fees or expenses incurred in connection with the KB Home Coastal Inc. Letter of Credit. The Option Agreement defines Blue Top Condition as follows: (i) all civil and soils engineering work pertaining to rough grading and the construction and installation of improvements outside the boundaries of the Phase II Residential Property has been performed and paid for, all improvements outside the boundaries of the Phase II Residential Property has been completed, and all other obligations have been completed that will allow the issuance of building permits and and certificates of occupancy (subject to completion of improvements to be constructed by KB Home Coastal Inc. as the merchant builder); (ii) each lot is graded in accordance with the grading plans; 45 (iii) all wet and dry utilities have been completed up to the property line; (iv) permanent access over public streets has been provided to the property line; (v) all storm water requirements and best management practices are in place and have been complied with; (vi) all contractor and consultant requirements have been provided to KB Home Coastal Inc.; and (vii) except for the work that KB Home Coastal Inc. must complete as described in the Option Agreement, all work necessary for the City to issue building permits and occupancy permits for approximately 1,118 units has been completed. As noted above, KB Home Coastal Inc. has the following three options, which may be exercised on or before a date that is 60 days following KB Home Coastal Inc.' s receipt of the "Estimated Completion Date Notice." The Estimated Completion Date Notice will be provided to KB Home Coastal Inc. when Ashby USA, LLC' s engineer estimates that the improvements to bring the Phase II Residential Property to Blue Top Condition are four months away. KB Home Coastal fnc.'s failure to exercise the option in that time frame could result in a deemed election of the Termination Option Alternative. The three options available to KB Home Coastal Inc. under the Option Agreement are as follows: Optional: The Overall Option Alternative: If KB H9me Coastal Inc. elects the Overall Option Alternative, a minimum of 63 lots within the Phase II Residential Property must be purchased and escrow closed during each calendar quarter of every year commencing in the third quarter following the date of delivery of the Acceptance Notice (said date being referred to herein as the "Blue Top Date") and continuing for 20 quarters until all of the approximately 1,118 lots in the Phase II Residential Property have been purchased. However, KB Home Coastal Inc. may elect to purchase the first lots prior to the third quarter followingthe Blue Top Date. KB Home Coastal Inc. can purchase any or all of the lots in increments as long as KB Home Coastal Inc. gives Ashby USA, LLC at least 45 days advance notice of which lots it intends to purchase. Within 10 days of the Blue Top Date, the KB Home Coastal Inc. Letter of Credit will be replaced with cash in an amount equal to 19.76% of the purchase price of all approved lots in the Phase II Residential Property, which shall be immediately paid to Ohio Savings Bank to credit to amounts due from Ashby USA, LLC and credited against the purchase price of the Phase II Residential Property. The failure to replace the KB Home Coastal Inc. Letter of Credit with cash will allow the beneficiary of the KB Home Coastal Inc. Letter of Credit to drawuponthe KB Home Coastal Inc. Letter of Credit; provided; however, thatall Ashby USA, LLC's work required under the Option Agreement is completed, the title company has not received notice of any disapproved exceptions and Ashby USA, LLC is not in default under the Development Agreement contingent on arbitration award in case of dispute. Option #2: The First Option Alternative: If KB Home Coastal Inc. Inc. elects the First Option Alternative, the approximately 412 lots to be acquired must be purchased and escrow closed within 45 days from the Blue Top Date; provided, however, that KB Home Coastal Inc. has the right to extend the closing date for eight months. The KB Home Coastal Inc. Letter of Credit will be replaced within 10 days after the Blue Top Date with (i) cash in the amount of approximately 19.76% of the purchase price of the approximately 412 lots to be acquired (the "Purchase Deposit"), which will be immediately paid to Ashby USA, LLC and credited against the purchase price of the approximately 412 lots, and (ii) a letter of credit for the difference between the Purchase Deposit and $39 million, as adjusted proportionately if more or less than the approximately 412 lots are approved, which will secure the payment of the purchase price for the approximately 412 lots. The failure to replace the KB Home Coastal Inc. Letter of Credit with cash/letter of credit will allow the beneficiary of the KB Home Coastal Inc. Letter of Credit to draw upon the KB Home Coastal Inc. Letter of Credit provided; however, that all Ashby USA, LLC's work under the Option Agreement is completed, the title company has not received notice of any disapproved exceptions and Ashby USA, LLC is not in default under the Development Agreement contingent on arbitration award in case of dispute. Ashby USA, LLC would then market and sell the balance of the lots to other merchant builders. Option #3: The Termination Option Alternative: If KB Home Coastal Inc. elects the Termination Option Alternative, the KB Home Coastal Inc. Letter of Credit will be replaced within 10 days of such election with a like amount of cash to be immediately paid to Ohio Savings Bank to credit to amounts due from Ashby USA, LLC, and KB Home Coastal Inc. shall have no further obligation to purchase any of the lots in the Phase II Residential Property unless termination is due to a material default by Ashby USA, LLC, 46 in which case the KB Home Coastal Inc. Letter of Credit is released to KB Home Coastal Inc. and KB Home Coastal Inc. owes no amounts to Ashby USA, LLC. As soon as KB Home Coastal Inc. gives notice of either the Overall Option Alternative or the First Option Alternative, KB Home Coastal Inc. assumes all obligations and liabilities of the applicable property, to the same extent as if fee simple ownership and possession had been conveyed and delivered, including the (i) payment of all real property taxes and assessments, (ii) the payment of certain interest on the purchase price of the lots, (iii) the payment of loan costs associated with the Loan, and (iv) all obligations associated with the District. When KB Home Coastal Inc. delivers a notice indicating its intention to close on lots (the "Closing Notice"), the Option Agreement becomes a purchase and sale agreement with respect to the incremental lots indicated on the Closing Notice and the Option Agreement remains an option with respect to the balance of the lots.The Option Agreement acknowledges that, either prior to or subsequent to the close of escrow, Ashby USA, LLC intends to establish one or more community facilities districts ("CFDs") on the Phase II Residential Property which will (i) encumber the Phase II Residential Property with the annual levy of special taxes or other charges ("Impositions"), and (ii) pledge the Phase II Residential Property as security for a borrowing, the issuance of bonds, or the payment of Impositions. KB Home Coastal Inc. agrees to take title to the Phase II Residential Property (or portion thereof) upon the close of escrow subject to any CFDs and Impositions in existence, and subsequent to the close of escrow to have any of the CFDs or Impositions formed or imposed upon the Phase II Residential Property, so long as the aggregate of all Impositions on a lot does not exceed 2% of the estimated sales price of a home on such lot at the time the special tax rates are set or modified. hi closing on the lots, the Option Agreement provides that, except with Ashby USA, LLC's written consent, (i) no more than two escrow closings may occur in any month (which may include multiple lot closings) and (ii) no lots may close during the fourth quarter of a year and no more than 400 lots during any 2nd or 3 quarter. hi the event of a material breach of the Option Agreement by Ashby USA, LLC prior to the Blue Top Date, but subject to certain cure rights of lenders: (i) KB Home Coastal Inc. can deliver a written notice of termination, in which event the KB Home Coastal hie. Letter of Credit is returned to KB Home Coastal Inc. and the Phase II Residential Property is released from the deed of trust; or (ii) KB Home Coastal Inc. can elect to extend the Blue Top Date and exercise its Takeover Rights (as defined below). hi the event of a material breach of the Option Agreement by Ashby USA, LLC following the Blue Top Date: (i) KB Home Coastal Inc. can deliver a written notice of termination, in which event the escrow holder returns the portion of the the KB Home Coastal Inc. Letter of Credit which has not been applied to purchase increments and no other sums, and the Phase II Residential Property is released from the deed of trust; (ii) KB Home Coastal Inc. can exercise its Takeover Rights (defined below); or (iii) KB Home Coastal Inc. can commence an action of specific performance and incidental damages of $500,000 or less, in which event KB Home Coastal Inc. must still perform its obligations. Subject to certain cure rights of lenders, KB Home Coastal Inc. has a right to take over certain work should Ashby USA, LLC fail to perform such work ("Takeover Rights"), as follows: a) Prior to the Blue Top Date, KB Home Coastal Inc. can take over and fund the obligations of Ashby USA, LLC to bring the property to Blue Top Condition, and Ashby USA, LLC is required to 47 reimburse KB Home Coastal Inc. for such costs (plus a 10% administrative charge) in cash or as a credit against the purchase price of the lots to be acquired by KB Home Coastal Inc. b) Following the Blue Top Date, if the City will notissue a building permit or occupancy permit because of the failure of Ashby USA, LLC to complete the work required of it in the Option Agreement, KB Home Coastal Inc. may perform such work, and Ashby USA, LLC is required to reimburse KB Home Coastal Inc. for such costs (plus a 10% administrative charge) in cash or as a credit against the purchase price of the lots to be acquired by KB Home Coastal Inc. Estimated Absorption As of January 15,2006, Ashby USA, LLC has closed the sale of 411 of the proposed residential lots in Phase I, has an agreement for sale of an additional 104 lots in Phase I to Continental Residential, Inc. and has options for the sale of the approximately 1,230 residential lots within Phase II to KB Home Coastal Inc., with closings for the final lots in Phase Phase I estimated to occur at the end of the third quarter of 2006 and initial closings for lots in Phase II estimated to occur as described above with respect to the Option Agreement and the option agreement for the 112 lots. Ashby USA, LLC estimates sales of completed homes in Phase I will occur from the fourth quarter of 2006 through 2008. The foregoing absorption estimates were provided by Ashby USA, LLC. The Market Absorption Study contains projected absorption of production homes that differ from those of Ashby USA, LLC. The Market Absorption Study and the Appraisal were prepared utilizing an estimated September 2006 date of completion of necessary infrastructure to allow issuance of remaining building permits for homes in Phase I and an estimated September 2007 date of completion of necessary infrastructure to allow issuance of building permits for homes in Phase II. The September 2007 date of completion takes into account the possibility that the schedule prepared by Ashby USA, LLCwith respect toPhasell is not achieved. It is also possible that the schedule prepared by Ashby USA, LLC with respect to Phase I may not be achieved. See "PROPERTY OWNERSHIP AND DEVELOPMENT -Market Absorption Study" and APPENDIX D -"Market Absorption Study." History of Property Tax Payment; Loan Defaults; Bankruptcy The authorized signatories executing a certificate on behalf of Ashby USA, LLC certify that, to their actual knowledge: Under the definition of Affiliate in the Ashby USA, LLC Continuing Disclosure Agreement, Ashby USA, LLC has numerous Affiliates consisting of various entities that are developing or have been involved in the development of numerous projects over an extended period of time. It is likely that some of such Affiliates have been delinquent at one time or another in the payment of ad valorem property taxes, special assessments or special taxes. Ashby USA, LLC does not have actual knowledge that Ashby USA, LLC or any such Affiliate is currently delinquent in any material amount in the payment of ad valorem property taxes, special assessments or special taxes. • Neither Ashby USA, LLC nor any of its Affiliates is currently in default on any loans, lines of credit or other obligation related to its development in the District or any of its other projects which default would in any way materially and adversely affect its ability to develop its property in the District as described in the Official Statement or to pay the Special Taxes for which it is responsible. Except as described under" -Deeds of Trust," no Affiliate has any loans, lines of credit, or other obligations related to the development in the District. • Ashby USA, LLC, the Members of Ashby USA, LLC and the parent entities of such Members of Ashby USA, LLC are solvent and no proceedings are pending, or threatened in which Ashby USA, LLC, the Members of Ashby USA, LLC and the parent entities of such Members of Ashby USA, LLC maybe adjudicated as bankrupt or discharged from any or all of their respective debts or obligations, or granted an extension extension of time to pay their respective debts or obligations, or be allowed to reorganize or readjust their respective debts or obligations. • No action, suit, proceedings, inquiry or investigations at law or in equity, before or by any court, regulatory agency, public board or body, is pending (with service of process to Ashby USA, LLC or an Affiliate having been accomplished) against Ashby USA, LLC or any Affiliate or, to Ashby USA, LLC' s 48 actual knowledge, threatened, which if successful, would materially adversely affect the ability of Ashby USA, LLC to complete the development and sale of the property proposed for development by such entity within the District or to pay special taxes or ad valorem tax obligations when due on such property within the District. Merchant Builder Litigation against Ashby USA, LLC; Sales of Merchant Builder Tracts. In 2003, Ashby USA, LLC sold land in Planning Areas 4A to Roripaugh Ranch 100 L.P. A complaint was filed on May 28,2004 by Roripaugh Ranch 100, L.P. for which Griffin Communities acts as merchant builder (100 lots in Planning Area 4A) against Ashby USA, LLC alleging breach of contract and fraud, and seeking damages, declaratory relieve and a temporary restraining order. Ashby USA, LLC was never served with that lawsuit and the lawsuit was dismissed one week after it was filed on June 4, 2004. A second complaint was filed on February 10,2005 by Roripaugh Ranch 100, L.P. against Ashby USA, LLC relating relating to breach of contract and breach of covenant of good faith and seeking damages and declaratory relief. Ashby USA, LLC was served with that complaint on March 1, 2005. Ashby USA, LLC and Roripaugh Ranch 100, L.P. have resolved the issues raised in the complaint and a series of agreements have been entered into whereby Tanamera/Roripaugh, LLC became the owner of the property in Planning Area 4A on June 30,2005 and the lawsuit was dismissed with prejudice as of that date. During the time period of negotiations to resolve the Griffin Communities litigation, an agreement was entered into by Tanamera/Roripaugh II, LLC with Shea Homes Limited Partnership, a California limited partnership ("Shea Homes Limited Partnership") with respect to lots in Planning Area 3, which sale closed on November 2, 2005. A third complaint was filed in August 2005, by Roripaugh Ranch 1, LP, a California limited partnership for which Meeker Companies, Inc., a California corporation ("Meeker Companies, Inc.") acts as merchant builder (113 lots in Planning Area 4B). Roripaugh Ranch 1, LP's lawsuit against Ashby USA, LLC, and others, alleged, among other things, breach of contract and breach of the covenant of good faith and seeking damages and declaratory relief. Ashby USA, LLC was served with that complaint in August 2005. Ashby USA, LLC and Roripaugh Ranch 1, LP resolved the issues raised in the complaint and a series of agreements were executed whereby Traditions at Roripaugh, LLC became the owner of the property in Planning Area 4B on January 6, 2006, and the lawsuit was dismissed with prejudice as of that date. Continental Residential, Inc. Continental Residential, Inc., a California corporation ("Continental Residential, Inc.") has entered into an agreement with Ashby USA, LLC for the acquisition of lots for development of 104 residential units on approximately 14.53 net acres in Planning Area 1A, including 6 lots which were approved pursuant to a Specific Plan amendment approved on January 11,2005. Ashby USA, LLC has indicated lots for all 104 units are expected to close in September 2006 upon Ashby USA, LLC's satisfaction of development conditions such that Continental Residential, Inc. can obtain building permits and certificates of occupancy. Continental Residential, Inc. is not yet a landowner within the District, and there can be no assurance that it will close escrow on its lots within the District at the times indicated or at all. Continental Residential, Inc. is a subsidiary of DR Horton, Inc, a Delaware corporation ("DR Horton"). DR Horton is a New York Stock Exchange listed corporation traded under the ticker symbol "DHL" DR Horton was founded as a family business in 1978. DR Horton now has over 50 divisions operating in over 700 communities, located in 23 states across the United States. Additionally DR Horton provides mortgage and title insurance services in many of its markets. Description of the Project. The development which constitutes Continental Residential, Inc.'s project, together with the estimated lot sizes, unit sizes and base sales price range, is set forth below. Minimum Estimated Unit Estimated Lot Size Size Base Sales Project Name (Square Feet) (Square Feet) Price Range Total Units Castillo 5,000 sq.ft. 1,949-2,949 $410,000 -$480,000 104 49 Status of Permits and Approvals. The lots for 98 of the units are encompassed within a tentative tract map. The final map for 98 of the units has been processed by Ashby USA, LLC and has been approved by City staff, but is not expected to be recorded until Ashby USA, LLC satisfies development conditions such that Continental Residential, Inc. can obtain building permits and certificates of occupancy, which is estimated to occur by the end of the third quarter of 2006 for all 104 units. The lots for 6 of the units are encompassed within a tentative tract map which Ashby USA, LLC anticipates will be approved by May 2006. Continental Residential is obligated to complete submission of construction landscaping plans. Ashby USA, LLC is obligated to complete the following tasks as required by the Planning Department: (1) deposit of landscape maintenance bonds; (2) completion of landscape plans for perimeter slopes; and (3) submission of the final report from the archaeologist and paleontologist monitor. Pursuant to the purchase agreement between Ashby USA, LLC and Continental Residential, Inc., Ashby USA, LLC is obligated to deliver bluetop lots to Continental Residential, Inc. As described above, under " -Status of Permits and Approvals," Ashby USA, LLC will be constructing all backbone public improvements and has rough graded the lots. Continental Residential, Inc. will be responsible for final grading and for constructing in-tract street, water, sewer and dry utility improvements for the detached single family housing lots. Continental Residential, Inc. will construct model and production homes. Continental Residential, Inc. estimates it will begin model construction in the fourth quarter of 2006. Closings of home sales are expected to commence in the third quarter of 2007. Final grading for the lots is estimated to commence in the third quarter of 2006. The majority of the in-tract sewer has been installed and a portion of the in-tract water has been installed by Ashby USA, LLC. In-tract water is anticipated to be completed in the fourth quarter of 2006 and streets, curbs and gutters are estimated to commence construction in the fourth quarter of 2006. Because Continental Residential, Inc. will acquire rough graded sites, Continental Residential, Inc. is responsible for work to bring the lots to a "finished" condition. As of March 1, 2006, Continental Residential, Inc.'s estimated costs for in-tract improvement costs and fees to achieve finished lots aggregate $3,200,000 of which approximately $50,000 had been expended as of January 15, 2006, and approximately $3,150,000 remained to be expended. In addition, Continental Residential, Inc. will incur model and production home construction costs. Plan of Finance. Continental Residential, Inc. is financing development of the property from internal sources provided by its parent entity. As of January 15, 2006, Continental Residential, Inc. estimates that approximately $3,050,000 had been expended in connection with the development ofthe project, excluding anon-refundable refundable deposit paidin connection with its purchase agreement with Ashby USA, LLC. Continental Residential, Inc. is not yet a landowner within the District, and there can be no assurance that it will close escrow on its lots within the District at the times indicated or at all. There is no assurance that amounts necessary to finance the remaining site development and construction costs within Planning Area 1A will be available from Continental Residential, Inc. or any other source, when needed. Continental Residential, Inc. is under no legal obligation of any kind to borrow or expend funds for the development of the property within Planning Area 1A. Any contribution of capital by Continental Residential, Inc. or any other Continental Residential, Inc. entity, or any borrowings by Continental Residential, Inc., whether to fund costs of development within Planning Area 1A or to pay special taxes, is entirely voluntary. Development Experience. DR Horton and its subsidiaries, including Continental Residential, Inc., designs, constructs, markets and sells single-family residences, town homes and condominiums primarily to entry-level and "move-up" buyers and is a geographically diverse homebuilder in the United States of America. DR Horton, delivered approximately 43,567 homes and had approximately $10.66 billion in revenues for the DR Morton's fiscal year ended September 30, 2005. Absorption. According to DR Horton, DR Horton's development has a projected absorption rate of 35 units per quarter, with home closings commencing in the third quarter of 2007. The foregoing absorption estimates were provided by DR Horton and rely in part on Ashby USA, LLC's projected completion of infrastructure improvements. The Market Absorption Study contains projected absorption of production homes that differ from those of Ashby USA, LLC. The Market Absorption Study and the Appraisal were prepared utilizing an estimated September 2006 date of completion of necessary infrastructure to allow issuance of remaining building permits for homes in Phase I and an estimated September 2007 date of completion of necessary infrastructure to allow issuance of building permits for homes in Phase II. The September 2007 date of completion takes into account the possibility that the schedule prepared by Ashby USA, LLC with respect to Phase II is not achieved. It is also possible that the schedule prepared by Ashby 50 USA, LLC with respect to Phase I may not be achieved. See "PROPERTY OWNERSHIP AND DEVELOPMENT -Market Absorption Study" and APPENDIX D -"Market Absorption Study." History of Property Tax Payment; Loan Defaults; Bankruptcy. DR Horton has made the following representations: • Under the definition of Affiliate in Ashby USA, LLC Continuing Disclosure Agreement, DR Horton has numerous Affiliates consisting of various entities that are developing or have been involved in the development of numerous projects over an extended period of time. It is likely that DR Horton, and any of such Affiliates have been delinquent at one time or another in the payment of ad valorem property taxes, special assessments or special taxes. DR Horton does not have actual knowledge that it or any such Affiliate is currently delinquent in any material amount in the payment of ad valorem property taxes, special assessments or special taxes. • Neither DR Horton nor any of its Affiliates is currently in default on any loans, lines of credit or other obligation related to its development in the District or any of its other projects which default would in any way materially and adversely affect its ability to develop its development in the District as described in the Official Statement or to pay the Special Taxes for which it is responsible. No Affiliate has any loans, lines of credit, or other obligation related to the development in the District. • DR Horton and its Affiliates are solvent and neither DR Horton nor any of its current Affiliates has ever filed bankruptcy or been declared bankrupt, or has any proceeding pending or to DR Horton's actual knowledge threatened in which it may be adjudicated as bankrupt, or discharged from any or all of its debts or obligations. • No action, suit, proceedings, inquiry or investigations at law or in equity, before or by any court, regulatory agency, public board or body, is pending (with service of process to DR Horton or an Affiliate having been accomplished) against DR Horton or any Affiliate or, to DR Horton' actual knowledge, threatened, which if successful, would materially adversely affect the ability of DR Horton to complete the acquisition and development of the property expected to be owned within the District to pay Special Taxes, assessments or ad valorem tax obligations when due on its property within the District. Davidson Roripaugh Ranch 122 LLC Davidson Roripaugh Ranch 122 LLC, a California limited liability company, acquired the lots proposed for development of 99 residential units on approximately 14.67 net acres in Planning Area 2 on May 30,2003. Davidson Roripaugh Ranch 122 LLC. The manager of Davidson Roripaugh Ranch 122 LLC is Davidson Project Service hie., a California corporation. Davidson Roripaugh Ranch 122 LLC is under common ownership with Davidson Builders, Inc., a California corporation, which has specialized in building single-family attached and detached homes in San Diego County since 1979. Description of the Project. The development which constitutes Davidson Roripaugh Ranch 122 LLC's project, together with the estimated lot sizes, unit sizes and base sales price range, is set forth below. Minimum Estimated Unit Estimated Lot Size Size Base Sales Total Project Name (Square Feet) (Square Feet) Price Range Units Not yet named 5,000 2,960-3,357 $538,000 -$558,000 99 Status of Permits and Approvals. The lots for the 99 units are encompassed within a final map recorded on April 28, 2004. Davidson Roripaugh Ranch 122 LLC is obligated to complete submission of construction landscaping plans. Ashby USA, LLC is obligated to complete the following tasks as required bythe Planning Department: (1) deposit of landscape maintenance bonds; (2) completion of landscape plans for perimeter slopes; and (3) submission of the final report from the archaeologist and paleontologist monitor. Pursuant to the purchase agreement between Ashby USA, LLC and Davidson Roripaugh Ranch 122 LLC, Ashby USA, LLC was obligated to deliver blue top lots to Davidson Roripaugh Ranch 122 LLC. As described above, under " -Status of Permits and Approvals," Ashby USA, LLC will be constructing all backbone public improvements and rough grading the lots. Davidson Roripaugh Ranch 122 LLC will be 51 responsible for final grading and for constructing model and production homes. By agreement among the merchant builders and based on development conditions, Davidson Roripaugh Ranch 122 LLC will utilize 54 of the 107 building permits for which development thresholds have been satisfied following issuance of the 2006 Bonds. Davidson Roripaugh Ranch 122 LLC estimates it will begin model construction in the second quarter of 2006. Closings of home sales are expected to commence in the fourth quarter of 2006. As of January 15, 2006, Davidson Roripaugh Ranch 122 LLC has installed the in-tract water and sewer, and the in-tract streets have been paved and curbs and gutters have been installed. Because Davidson Roripaugh Ranch 122 LLC acquired blue top sites, Davidson Roripaugh Ranch 122 LLC is responsible for work to bring the lots to a "finished" condition. Davidson Roripaugh Ranch 122 LLC's estimated costs for in-tract improvement, excluding fees such as the Transportation Uniform Mitigation Fee, to achieve finished lots aggregate approximately $5,518,908. Approximately $2,006,850 had been expended as of January 15, 2006, and approximately $3,512,058 remained to be incurred. In addition, Davidson Roripaugh Ranch 122 LLC will incur model and production home construction costs. Plan of Finance. Davidson Roripaugh Ranch 122 LLC has a loan with Wachovia Bank National Association, a national banking association, as agent for First Union Commercial Corporation, a North Carolina corporation, with an available facility of $8,651,000 of which approximately $7,566,878 was outstanding as of March 9,2006 and a loan in the amount of $5,500,000 from Lowe Enterprises Residential Investors, LLC, a Delaware limited liability company, of which approximately $5,221,017 was outstanding as of February 28,2006. Davidson Roripaugh Ranch 122 LLC also has a revolving line of credit facility of $18,651,000 for construction of the homes upon meeting certain terms and conditions. As of January 15, 2006, Davidson Roripaugh Ranch 122 LLC estimates that approximately $2,006,850 had been expended in connection with the development of the project, excluding land acquisition costs and excluding consultant costs. There is no assurance that amounts necessary to finance the remaining site development and construction costs within Planning Area 2 will be available from the lenders referenced above, or any other source, when needed. Davidson Roripaugh Ranch 122 LLC is under no legal obligation of any kind to borrow or expend funds for the development of the property within Planning Area 2. Any contribution of capital to Davidson Roripaugh Ranch 122 LLC or any borrowings by Davidson Roripaugh Ranch 122 LLC whether to fund costs of development within Planning Area 2 or to pay special taxes, is entirely voluntary. Development Experience. Davidson Builders, Inc. and its subsidiaries and Affiliates, including Davidson Roripaugh Ranch 122 LLC designs, constructs, markets and sells single-family residences primarily to entry-level and "move-up" buyers and is a geographically diverse homebuilder in the United States of America. Davidson Builders, Inc., and its subsidiaries and Affiliates delivered approximately 174 homes and had approximately $ 184 million in revenues for the Davidson Builders, Inc. 's fiscal year ended December 31,2005. Absorption. According to Davidson Roripaugh Ranch 122 LLC, Davidson Roripaugh Ranch 122 LLC's development has a projected absorption rate of 32 units per quarter, with home closings commencing in the fourth quarter of 2006. The foregoing absorption estimates were provided by Davidson Roripaugh Ranchl22LLC andrely inparton AshbyUSA, LLC's projected completion ofinfrastructure improvements. The Market Absorption Study contains projected absorption of production homes that differ from those of Ashby USA, LLC. The Market Absorption Study and the Appraisal were prepared utilizing an estimated September 2006 date of completion of necessary infrastructure to allow issuance of remaining building permits for homes in Phase I and an estimated September 2007 date of completion of necessary infrastructure to allow issuance of building permits for homes in Phase II. The September 2007 date of completion takes into account the possibility that the schedule prepared by Ashby USA, LLC with respect to Phase II is not achieved. It is also possible that the schedule prepared by Ashby USA, LLC with respect to Phase I may not be achieved. See "PROPERTY OWNERSHIP AND DEVELOPMENT -Market Absorption Study" and APPENDIX D -"Market Absorption Study." History of Property Tax Payment; Loan Defaults; Bankruptcy. Davidson Roripaugh Ranch 122 LLC has made the following representations: • Under the definition of Affiliate in Ashby USA, LLC Continuing Disclosure Agreement, Davidson Roripaugh Ranch 122 LLC has numerous Affiliates consisting of various entities that are developing or have been involved in the development of numerous proj ects over an extended period of time. 52 It is likely that Davidson Roripaugh Ranch 122 LLC and any of such Affiliates have been delinquent at one time or another in the payment of ad valorem property taxes, special assessments or special taxes. Davidson Roripaugh Ranch 122 LLC does not have actual knowledge that it or any such Affiliate is currently delinquent in any material amount in the payment of ad valorem property taxes, special assessments or special taxes. • Neither Davidson Roripaugh Ranch 122 LLC nor any of its Affiliates is currently in default on any loans, lines of credit or other obligation related to its development in the District or any of its other proj ects which default would in any way materially and adversely affect its ability to develop its development in the District as described in the Official Statement or to pay the Special Taxes for which it is responsible. No Affiliate has any loans, lines of credit, or other obligation related to the development in the District. • Davidson Roripaugh Ranch 122 LLC and its Affiliates are solvent and neither Davidson Roripaugh Ranch 122 LLC nor any of its current Affiliates has ever filed bankruptcy or been declared bankrupt, or has any proceeding pending or to Davidson Roripaugh Ranch 122 LLC's actual knowledge threatened in which it may be adjudicated as bankrupt, or discharged from any or all of its debts or obligations. • No action, suit, proceedings, inquiry or investigations at law or in equity, before or by any court, regulatory agency, public board or body, is pending (with service of process to Davidson Roripaugh Ranch 122 LLC or an Affiliate having been accomplished) against Davidson Roripaugh Ranch 122 LLC or any Affiliate or, to Davidson Roripaugh Ranch 122 LLC' actual knowledge, threatened, which if successful, would materially adversely affect the ability of Davidson Roripaugh Ranch 122 LLC to complete the acquisition and development of the property expected to be owned within the District to pay Special Taxes, assessments or ad valorem tax obligations when due on its property within the District. The Tanamera/Roripaugh Entities The Tanamera/Roripaugh Entities operate under the name of Tanamera Residential Group. The Tanamera/Roripaugh, Entities are owned by Tanamera Homes, LLC, a California limited liability company ("Tanamera Homes, LLC"). Tanamera Homes, LLC is owned by Monaco Diversified Corp., a California corporation, and Housing Partners, LLC, a Nevada limited liability company ("Housing Partners"). Housing Partners is owned by USA Investment Partners, LLC, a Nevada limited liability company ("USA Investment Partners, LLC"), which is a member in Ashby USA, LLC. The principals of Tanamera Residential Group include Tom Hantges and Joe Milanowski, who are also principals of USA Commercial Real Estate Group and who are described above, as well as Anthony and Sue Monaco who have specialized in building singlefamily detached homes in Southern California since 1985. Description of Projects. The developments which constitute the Tanamera/Roripaugh Entities' projects, together with the estimated lot sizes, unit sizes, and base sales price ranges are set forth below. Minimum Estimated Unit Planning Area/Lot Size Size Estimated Base Total Project Name (square feet) (square feet) Sales Price Range Units 3-Madison 5,000 1,974-2,699 $459,990 -$519,990 99 4A-Shutters 5,000 2,007-3,246 $459,990 -$539,990 100 4B-Hamptons 5,000 2,346-2,951 $489,000 -$529,990 113 Status of Permits and Approvals. The lots for the 99 units in Planning Area 3 and the 100 units in Planning Area 4A are encompassed within a final map recorded on April 28,2004. The lots for the 113 units in Planning Area 4B are encompassed within a final map which has been approved by City staff but which has not yet been presented to the City Council which is required before it can be recorded. Tanamera/Roripaugh, LLC acquired the lots in Planning Area 4A on June 30, 2005 from Griffin Communities. The lots in Planning Area 4A are proposed for development of 100 residential units on 15.12 net acres. As of January 15, 2006, the lots are in a near-finished condition with some improvements such as sidewalks and street lights remaining and remaining fees to be paid. 53 Tanamera/Roripaugh II, LLC acquired the lots in Planning Area 3 on November 2, 2005 from Shea Homes Limited Partnership. The lots in Planning Area 3 are proposed for development of 99 residential units on approximately 13.9 net acres. As of January 15,2006, the lots are in a near-finished condition with some improvements such as sidewalks and street lights remaining and remaining fees to be paid. Traditions at Roripaugh, LLC acquired the lots in Planning Area 4B from Roripaugh Ranch 1, LP, a California limited partnership for which Meeker Companies, Inc., a California corporation was to act as merchant builder on January 6, 2006. The lots in Planning Area 4B are proposed for development of 113 residential units on approximately 22.3 netacres. As of January 15,2006, the lots were graded to a blue-top condition, and some of the in-tract utilities had been installed. The Tanamera/Roripaugh Entities are obligated to complete the following tasks as required by the Planning Department: (1) re-approval of building building plans which have expired; and (2) submission of construction landscaping plans. Ashby USA, LLC is obligated to complete the following tasks as required bythe Planning Department: (1) deposit of landscape maintenance bonds; (2) completion of landscape plans forperimeter slopes; and (3) submission ofthe final report from the archaeologist and paleontologist monitor. Pursuant to a prior purchase agreement between Ashby USA, LLC and Shea Homes Limited Partnership, predecessor to Tanamera/Roripaugh II, LLC, Ashby USA, LLC was obligated to deliver blue-top lots with respect to Planning Area 3. As described above, under " -Status of Permits and Approvals," Ashby USA, LLC will be constructing all backbone public improvements and rough grading the lots. The Tanamera/Roripaugh Entities will be responsible for final grading and for constructing in-tract street, water, sewer and dry utility improvements for the detached single housing lots. Tanamera Residential Group will construct model and production homes. By agreement among the Merchant Builders and based on development conditions, the Tanamera/Roripaugh Entities will utilize 53 ofthe 107 building permits for which development thresholds have been satisfied following issuance of the 2006 Bonds and anticipate allocating 27 of such permits to Planning Area 3, 21 of such permits to Planning Area 4A and 5 of such permits to Planning Area 4B. Tanamera Residential Group estimates it will begin model construction for the lots in Planning Areas 3 and 4A in the second quarter of 2006. Closings of home sales are expected to commence in the fourth quarter of 2006. As of January 15, 2006, most ofthe in-tract water, streets, curbs and gutters in Planning Areas 3 and 4A had been installed by the applicable prior merchant builders. Because the Tanamera/Roripaugh Entities each acquired the sites with in-tract improvements installed with respect to Planning Areas 3 and 4A, and in a graded condition with respect to Planning Area 4B, each Tanamera/Roripaugh Entity is responsible for the respective remaining work and/or fees to bring the lots to a "finished" condition. The Tanamera/Roripaugh Entities' estimated costs for in-tract improvement and fees to achieve finished lots aggregate $ 11,054,441. In addition, each Tanamera/Roripaugh Entity will incur model and production home construction costs. Plan of Finance. Tanamera/Roripaugh, LLC financed the acquisition of the property in Planning Area 4A with a loan from Vineyard Bank in the amount of $ 11,700,000. The outstanding balance of this loan as of February 28,2006 is $ 11,474,275. Tanamera/Roripaugh, LLC is currently in the process of negotiating a development and construction loan with Vineyard Bank for completion of the development work and construction of 4 models and 17 production units. Tanamera/Roripaugh, LLC expects to close this loan in April 2006. Tanamera/Roripaugh, LLC expects to finance the construction ofthe remaining 79 lots with a loan from Vineyard Bank. All construction loans will be paid down through sales to buyers beginning in the 4th quarter of 2006. Minimal costs have been expended in connection with the construction and development ofthe project as of February 27, 2006. Tanamera/Roripaugh II, LLC financed the acquisition of the property in Planning Area 3 with a loan from KeyBank and Weyerhaeuser Realty Investors in the amount of $11,920,000 and $7,190,000, respectively. The outstanding balances of both loans as of February 28, 2006 are $11,255,018 and $5,995,254, respectively. Tanamera/Roripaugh II, LLC is currently in the process of negotiating a development and construction loan with KeyBank for completion ofthe development work and construction of 4 models and 23 production units. Tanamera/Roripaugh II, LLC expects to close this loan in April 2006. Tanamera/Roripaugh II, LLC expects to finance the construction ofthe remaining 72 lots with a loan from KeyBank. All construction loans will be paid down through sales to buyers beginning in the 4th quarter of 2006. Minimal costs have been expended in connection with the construction anddevelopment ofthe project as of February 27, 2006. 54 Traditions at Roripaugh, LLC financed the acquisition and development of the property in Planning Area 4B with loans from Downey Savings and Weyerhaeuser Realty Investors in the amount of $ 14,612,000 and $9,860,000, respectively. The outstanding balances of both loans as of February 28, 2006 are $10,667,394 and $8,212,278, respectively. Traditions at Roripaugh, LLC will be submitting for a construction loan with Downey Savings for construction of 4 models in the 2nd quarter of 2006. Traditions at Roripaugh, LLC expects to finance the construction of the remaining 109 units with a loan from Downey Savings. All construction loans will be paid down through sales to buyers. Minimal costs have been expended in connection with the construction and development of the project as of February 27, 2006. There is no assurance that amounts necessary to finance the remaining site development and construction costs within Planning Areas 3, 4A and 4B will be available from the Tanamera/Roripaugh Entities or any other source, when needed. The Tanamera/Roripaugh Entities are under no legal obligation ofanykindto borrow or expend funds for the development of their respective property within the Planning Areas. Any contribution of capital by any member entity, or any borrowings by a Tanamera/Roripaugh Entity, whether to fund costs of development within the applicable Planning Area or to pay special taxes, is entirely voluntary. Development Experience. Recent projects developed by Tanamera Residential Group include the following: Project Name August Moon Ravenswood Willowbrook Savannah Bella Rosa Santa Fe Crossing Winchester Shenandoah Magdalena City/Location Victorville Apple Valley Ferris Victorville Hesperia Ferris Victorville Victorville Victorville No. of Lots 128 173 181 166 104 150 218 242 179 Type of Role of Develop-Project ment Manager SFR SFR SFR SFR SFR SFR SFR SFR SFR Builder Developer/Builder Builder Developer/Builder Developer/Builder Builder Developer/Builder Developer/Builder Developer/Builder Price Range $208,000 208,000 $520,000 $236,000 $366,000 $520,000 $179,000 $129,000 $159,000 $199,000 -347,000 -720,000 -375,000 -470,000 -720,000 -329,000 -189,000 -359,000 -379,000 Square Feet 1,354-3,400-2,200 -2,194-3,400 -1,300-1,800-1,800-2,400 -2,286 5,000 3,400 3,490 5,000 1,850 2,220 2,600 3,400 Time Period of Development 10/04-1/06 9/04 -Present 6/03-1/04-6/04-6/02-2/01-1/02-6/02-12/05 Present Present 1/04 12/02 12/03 12/03 TanameraHomes, LLC built approximately 326 homes in calendar year 2004 and approximately 235 homes in calendar year 2005. Absorption. For Tanamera/Roripaugh, LLC, Tanamera Residential Group has allocated 21 available building permits (4 models and 17 production units) to this project. Production of these units is scheduled to commence in the 2nd quarter of 2006 with the models being completed in the 3rd quarter of 2006 and the 17 production units being completed and sold in the 4th quarter of 2006. Based on Ashby USA, LLC's projected completion of the infrastructure improvements, the remaining permits will become available in the 3rd quarter of 2006. As such, Tanamera/Roripaugh, LLC projects that it will begin closing the remaining homes at a rate of approximately 13 homes per quarter thereafter beginning in the 2nd quarter of 2007. The Market Absorption Study and the Appraisal were prepared utilizing an estimated September 2006 date of completion of necessary infrastructure to allow issuance of remaining building permits for homes in Phase I and an estimated September 2007 date of completion of necessary infrastructure to allow issuance of building permits for homes in Phase II. The September 2007 date of completion takes into account the possibility that the schedule prepared by Ashby USA, LLC with respect to Phase II is not achieved. It is also possible that the schedule prepared by Ashby USA, LLC with respect to Phase I may not be achieved. See "PROPERTY OWNERSHIP AND DEVELOPMENT -Market Absorption Study" and APPENDIX D -"Market Absorption Study." 55 For Tanamera/Roripaugh II, LLC, Tanamera Residential Group has allocated 27 available building permits (4 models and 23 production units) to this project. Production of these units is scheduled to commence in the 2nd quarter of 2006 with the models being completed in the 3rd quarter of 2006 and the 23 production units being completed and sold in the 4th quarter of 2006. Based on Ashby USA, LLC' s proj ected completion of the infrastructure improvements, the remaining permits will become available in the 3rd quarter of 2006. As such, Tanamera/Roripaugh II, LLC, projects that it will begin closing the remaining homes at a rate of approximately 13 homes per quarter thereafter beginning in the 2nd quarter of 2007. The Market AbsorptionStudy and the Appraisal were prepared utilizing an estimated September 2006date of completion of necessary infrastructure to allow issuance of remaining building permits for homes in Phase I and an estimated September 2007 date of completion of necessary infrastructure to allow issuance of building permits for homes in Phase II. The September 2007 date of completion takes into account the possibility that the schedule prepared by Ashby USA, LLC with respect to Phase II is not achieved. It is also possible that the schedule prepared by Ashby USA, LLC with respect to Phase I may not be achieved. See "PROPERTY OWNERSHIP AND DEVELOPMENT -Market Absorption Study" and APPENDIX D -"Market Absorption Study." For Traditions at Roripaugh, LLC, Tanamera Residential Group has allocated 5 available building permits of which only 4 will be used for the construction of model homes on this project. Traditions at Roripaugh, LLC estimates the models will be completed in the 3rd quarter of 2006. Production units for this project will commence after additional building permits become available. Additional permits become available at such time as Ashby USA, LLC completes the project infrastructure improvements which is scheduled for completion in the 3rd quarter of 2006. As such, Traditions at Roripaugh, Roripaugh, LLC projects that it will begin closing the homes at a rate of approximately 13 homes per quarter beginning in the 2 quarter of 2007. The Market Absorption Study and the Appraisal were prepared utilizing an estimated September 2 006 date of completion of necessary infrastructure to allow issuance of remaining building permits for homes in Phase I and an estimated September 2007date of completion of necessary infrastructure to allow issuance of building permits for homes in Phase II. The September 2007 date of completion takes into account the possibility that the schedule prepared by Ashby USA, LLC with respect to Phase II is not achieved. It is also possible that the schedule prepared by Ashby USA, LLC with respect to Phase I may not be achieved. See "PROPERTY OWNERSHIP AND DEVELOPMENT -Market Absorption Study" and APPENDIX D -"Market Absorption Study." History of Property Tax Payment; Loan Defaults; Bankruptcy. An authorized representative executing a certificate on behalf of each of the Tanamera/Roripaugh Entities certifies that, to its actual knowledge: • Under the definition of Affiliate in the Tanamera/Roripaugh Entities Continuing Disclosure Agreement, the Tanamera/Roripaugh Entities have numerous Affiliates consisting of various entities that are developing or have been involved in the development of numerous proj ects over an extended period of time. It is likely that some of such Affiliates have been delinquent at one time or another in the payment of ad valorem property taxes, special assessments or special taxes. The Tanamera/Roripaugh Entities do not have actual knowledge that any of them or any such Affiliate is currently delinquent in any material amount in the payment of ad valorem property taxes, special assessments or special taxes. Neither the Tanamera/Roripaugh Entities nor any of their Affiliates are currently in default on any loans, lines of credit or other obligation related to its development in the District or any of its other projects which default would in any way materially and adversely affect their ability to develop their developments in the District as described in the Official Statement or to pay the Special Taxes for which each is responsible. Except as described in the Official Statement, no Affiliate has any loans, lines of credit, or other obligations related to the development in the District. • The Tanamera/Roripaugh Entities, the Members of the Tanamera/Roripaugh Entities, and the parent entities of such Members of the Tanamera/Roripaugh Entities are solvent and no proceedings are pending, or threatened in which the Members of the Tanamera/Roripaugh Entities and the parent entities of such Members of the Tanamera/Roripaugh Entities may be adjudicated as bankrupt or discharged from any or all of their respective debts or obligations, or granted an extension of time to pay their respective debts or obligations, or be allowed to reorganize or readjust their respective debts or obligations. • No action, suit, proceedings, inquiry or investigations at law or in equity, before or by any court, regulatory agency, public board or body, is pending (with service of process to the 56 Tanamera/Roripaugh Entities or an Affiliate having been accomplished) against the Tanamera/Roripaugh Entities or any Affiliate or, to the Tanamera/Roripaugh Entities actual knowledge, threatened, which if successful, would materially adversely affect the ability of the Tanamera/Roripaugh Entities to complete the acquisition and development of their respective property expected to be owned within the District to pay Special Taxes, assessments or ad valorem tax obligations when due on its property within the District. KB Home Coastal Inc. KB Home Coastal Inc. ("KB Home Coastal Inc."), a California corporation, entered into an option agreement dated August 1, 2003, with Ashby USA, LLC for Phase II, for the acquisition of lots for development of approximately 112 residential units on approximately 10.6 net acres in Planning Area 12. Closing of the sale of all 112 units is conditioned upon Ashby USA, LLC's satisfaction of the conditions specified in the agreement, including satisfaction of conditions necessary for issuance of building permits and satisfaction of conditions relating to issuance of certificates of occupancy which is expected to occur prior to June 1, 2007. On July 11, 2005, KB Home Coastal Inc. entered into the Option Agreement that provides for the acquisition of the balance of the 1,230 residential lots in Phase II, or smaller portions thereof as specified in the Option Agreement. The purchases are anticipated to commence once Ashby USA, LLC completes infrastructure required to enable issuance of building permits and satisfaction of conditions relating to issuance of certificates of occupancy. KB Home Coastal Inc. is a wholly-owned subsidiary of KB Home, a Delaware Corporation ("KBH"). KBH has domestic operations divisions in California, Arizona, Nevada, New Mexico, Florida, Colorado, Georgia, North Carolina, South Carolina, Illinois, Indiana, Louisiana, Maryland, Virginia and Texas. Countrywide KB Home Loans, a joint venture between Countrywide Financial Corporation and KBH also operates a full-service mortgage company for the convenience of KBH buyers. Founded in 1957, KBH is a Fortune 500 company listed on the NYSE under the ticker symbol "KBH." KBH is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the SEC. Such reports, proxy statements and other information, including its Annual Report on Form 10-K and its most recent quarterly Report on Form 10-Q, may be inspected and copied at the public reference facilities maintained by the SEC at prescribed rates at 450 Fifth Street,N.W., Washington, D.C. 20549 and at the SEC's regional offices at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. In addition, the aforementioned material may also be inspected at the offices of the NYSE at 20 Broad Street, New York, New York 10005. All documents subsequently filed by KBH pursuant to the requirements of the Exchange Act Act after the date of this Official Statement will be available for inspection in the same manner as described above. Copies of KBH's Annual Report and related financial statements, prepared in accordance with generally accepted accounting standards, are available from KBH's website at kbhomes.com. This Internet address is included for reference only and the information on the Internet site 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 contained on the Internet site. Description of the Project. The development which constitutes KB Home Coastal Inc.' s proj ect is preliminary, and subject to various approvals, including approvals which will affect the product type and mix among the units. Status of Permits and Approvals. Ashby USA, LLC and KB Home Coastal Inc., are obligated to complete the following tasks as requiredby the Planning Departmental) re-approval of building plans which have expired; (2) submission of construction landscaping plans; (3) depositof landscape maintenance bonds; (4) completion of landscape plans for perimeter slopes; and (5) submission of the final report from the archaeologist and paleontologist monitor. Under the agreements with Ashby USA, LLC, Ashby USA, LLC is responsible for satisfying a number of conditions prior to acquisition of the property by KB Home Coastal Inc. Ashby USA, LLC is constructing regional infrastructure improvements, including roads, sewer, and drainage. See Appendix K for a description of some of the thresholds for installation of improvements under the Development Agreement and Conditions of Approval which must be completed by Ashby USA, LLC before building permits can be issued in Phase II. Upon completion of such improvements by Ashby USA, LLC and acceptance of the Blue Top Condition, KB Home Coastal Inc. will be responsible for processing various architecture approvals with the City. KB Home Coastal Inc. Inc. will construct in-tract improvements after obtaining necessary City approvals. 57 Sale of Phase II to KB Home Coastal Inc.; Take Down Options. In connection with the purchase of approximately 112 lots in Planning Area 12, KB Home Coastal deposited approximately $3 million into escrow. The date specified in the purchase agreement for Ashby USA, LLC to complete certain improvements has passed, and the contract automatically extends day by day until Ashby USA, LLC completes the improvements, or KB Home Coastal hie. provides the notice specified in the agreement to terminate the agreement and request return of the $3 million deposit. Subsequent to entering into an option agreement with respect to Planning Area 12, Ashby USA, LLC and KB Home Coastal Inc. entered into the Option Agreement with respect to approximately 1,118 lots in Phase II. For a description of the Option Agreement, see PROPERTY OWNERSHIP AND DEVELOPMENT -Ashby USA, LLC-Sale of Phase II to KB Home Coastal Inc.; Take Down Options" above. Plan of Finance. If the lots are purchased, KB Home Coastal Inc. currently expects to finance the acquisition of its lots through its internal resources and expects to finance construction of in-tract improvements and housing units through internal resources and home sales. At this time, KB Home Coastal Inc. has not determined the estimated total costs to get from blue top condition to completed residential units. Once Ashby USA, LLC notifies KB Home Coastal Inc. that it has completed the improvements required under the Option Agreement, KB Home Coastal Inc. will evaluate the estimated total remaining costs in determining whether to acquire lots under the Option Agreement or the option agreement relating to the 112 lots. There is no assurance that amounts necessary to finance the remaining site development and construction costs within Phase II will be available from KB Home Coastal Inc., or any other source, when needed. KB Home Coastal Inc., and KBH are under no legal obligation of any kind to acquire the property within Phase II or to borrow or expend funds for the development of the property within Phase II. Any contribution of capital by KB Home Coastal Inc. or any other KBH entity, or any borrowings by KB Home Coastal Inc., whether to fund costs of development within Phase II or to pay special taxes, is entirely voluntary. Development Experience. In fiscal year ending November 30, 2005, KBH delivered homes to approximately 37,140 families in the United States and France. Absorption. KB Home Coastal Inc. 's development plans are preliminary and KB Home Coastal Inc. has not yet established a projected absorption rate for the project. Depending on satisfaction of the conditions to acquisition under the agreements with Ashby USA, LLC, the closings of home sales may commence at the end of 2007 to early 2008. The foregoing absorption estimates were provided by KB Home Coastal Inc. and rely on Ashby USA, LLC's projected completion of infrastructure improvements. The Market Absorption Study contains projected absorption of production homes that differ from those of Ashby USA, LLC. The Market Absorption Study and the Appraisal were prepared utilizing an estimated September 2006 date of completion of necessary infrastructure to allow issuance of remaining building permits for homes in Phase I and an estimated September 2007 date of completion of necessary infrastructure to allow issuance of building permits for homes within Phase II. The September 2007 date of completion takes into account the possibility that the schedule prepared by Ashby USA, LLC with respect to Phase II is not achieved. See "PROPERTY OWNERSHIP AND DEVELOPMENT -Market Absorption Study" and APPENDIX D -"Market Absorption Study." History of Property Tax Payment; Loan Defaults; Bankruptcy. KB Home Coastal Inc. to the actual knowledge of KB Home Coastal Inc.'s current management has made the following representations: • Under the definition of Affiliate in the KB Home Coastal Inc. Continuing Disclosure Agreement, KB Home Coastal Inc. has numerous Affiliates consisting of various entities that are developing or have been involved in the development of numerous projects over an extended period of time. It is likely that some of such Affiliates have been delinquent at one time or another in the payment of ad valorem property taxes, special assessments or special taxes. KB Home Coastal Inc. does not have actual knowledge that any of them or any such Affiliate is currently delinquent in any material amount in the payment of ad valorem property taxes, special assessments or special taxes. • Except as described below, neither KB Home Coastal Inc. nor, to KB Home Coastal Inc.'s actual knowledge, any of its current Affiliates in California (as defined in the Ashby USA, LLC Continuing Disclosure Agreement) has ever been delinquent in the payment of any ad valorem property taxes, special assessments or special taxes in any material amount within the past 5 years, 58 • Neither KB Home Coastal Inc. nor any of its Affiliates is currently in material default on any loans, lines of credit or other obligation related to its development in the District or any of its other projects which default would in any way materially and adversely affect its ability to develop its property in the District as described in the Official Statement or to pay the Special Taxes for which it is responsible, • KB Home Coastal Inc. and its Affiliates are solvent and neither KB Home Coastal Inc. nor any of its current Affiliates has ever filed bankruptcy or been declared bankrupt, or has any proceeding pending or to KB Home Coastal Inc.'s actual knowledge threatened in which KB Home Coastal Inc. or its Affiliates may be adjudicated as bankrupt, or discharged from any or all of its debts or obligations, and • No action, suit, proceedings, inquiry or investigations at law or in equity, before or by any court, regulatory agency, public board or body, is pending (with service of process to KB Home Coastal Inc. or an Affiliate having been accomplished) against KB Home Coastal Inc. or any Affiliate or, to KB Home Coastal Inc.' s actual knowledge, threatened, which if successful, would materially adversely affect the ability of KB Home Coastal Inc. to complete the development and sale of the property currently owned within the District or to pay special taxes or ad valorem tax obligations when due on its property within the District. KB Home Greater Los Angeles Inc., a California corporation, one of KBH's divisions, and its affiliate, KB Home Holdings, Inc. owned approximately 500 acres of undeveloped land in the Rosamond area of southern Kern County, California. The property is within two assessment districts formed by the Rosamond Community Services District, AD 1990-2 and AD 1991 -3, both of which issued assessment bonds, hi approximately 1995, KB Home Greater Los Angles, Inc. and KB Home Holdings, Inc. determined that based upon changed market conditions, the value of the property did not support the tax tax burden on the property and KB Home Greater Los Angeles Inc. and KB Home Holdings, Inc. discontinued paying the ad valorem property taxes and the special assessments on the property. The Rosamond Community Services District obtained a foreclosure judgment against theproperty and a sheriffs sale was held on July 30,2002. There were no bidders at the sheriffs sale. Kern County held a tax sale on March 3, 2003. Four parcels, totaling approximately 480 acres, were sold at the tax sale to two buyers. The affiliate has been informed, however, that for reasons unknown to the affiliate, the tax sales were rescinded and title to these four parcels reverted back to KB Home and KB Home Holdings, Inc., as the case may be. Kern County held a tax sale in late 2005 that resulted in the sale of four parcels; and as of December 1, 2005, KB Home and HB Home Holdings, Inc. continued to own approximately 122 acres in three tax parcels which are still in default. In 1996, KB Home implemented a new business model to transition from a more speculative business into a more disciplined organization to reduce the exposure to the risk inherent in building large numbers of homes that sit unoccupied until a buyer turns up to a business model of building homes after it has lined up a buyer with mortgage approval. There are exceptions to this business model. The foregoing information is made to the actual knowledge of KB Home Coastal Inc.'s management. Estimated Special Tax Allocation by Property Ownership Based on the Appraisal, as of January 15,2006, the taxable property consists of undeveloped land in five separate ownerships -Ashby USA, LLC for Planning Area 1A in Phase I and for all of Phase II, and Davidson Roripaugh Ranch 122 LLC, Tanamera/Roripaugh II, LLC, Tanamera/Roripaugh, LLC and Traditions at Roripaugh, LLC for the portion of Phase I not owned by Ashby USA, LLC. Rough grading is currently underway in the entire District and some in-tract improvements have been completed in Phase I. Based on current and expected ownership, Ashby USA, LLC, the five Merchant Builders in Phase I and KB Home Coastal Inc., would be responsible for their respective portions of the estimated Fiscal Year 2006-07 Special Tax levy. Prior to the acceptance by KB Home Coastal Inc. of any parcels in Phase II, the property taxes for Phase II are the responsibility of Ashby USA LLC. hi addition, during the term of the Option Agreement prior to KB Home Coastal Inc.'s acceptance of the Blue Top Condition, the property taxes and assessments are the responsibility of Ashby USA, LLC. Under the Option Agreement, upon KB Home Coastal Inc.'s acceptance of the Blue Top Condition, the property taxes and assessments would become the responsibility of KB Home Coastal Inc., i.e., KB Home Coastal Inc. will pay the property taxes and assessments on the lots it has not yet taken down once it has accepted the Blue Top Condition. Until acquisition of lots by KB Home Coastal Inc., Ashby USA, LLC would be liable for property taxes and assessments if KB Home Coastal Inc. defaulted in its obligation under the Option Agreement to pay such property taxes and assessments. 59 Table 3 Temecula Public Financing Authority Community Facilities District No. 03-02 (Roripaugh Ranch) Owners of Taxable Property as of January 15,2006 and Estimated Allocation of Special Tax Liability Fiscal Year 2006-07 Property Owner Phase I -Residential AshbyUSA, LLC Davidson Roripaugh Ranch 122 LLC Tanamera/Roripaugh n, LLC Tanamera/Roripaugh, LLC Traditions at Roripaugh, LLC Subtotal -Phase I Residential Merchant Builder'1' Continental Residential, Inc. Davidson Roripaugh Ranch 122 LLC Tanamera Residential Group Tanamera Residential Group Tanamera Residential Group Planning Area 1A23 4A 4B Number of Units 104 99 99 100 111 515 Gross Acreage'2' 19.11 13.42 13.79 15.27 223 83.89 Est. Allocation of FV 2006-07 Undeveloped Special Tax'3"4' $205,446 144,204 148,477 164,143 239.984 $902,255 Percent of Allocation'5' 5.77% 4.05% 4.17% 4.61% 6.74% 25.34% Phase II-Residential and Commercial AshbyUSA, LLC AshbyUSA, LLC AshbyUSA, LLC AshbyUSA, LLC AshbyUSA, LLC AshbyUSA, LLC Ashby USA, LLC Subtotal -Phase II Residential and Commercial KB Home Coastal Inc. (Option) Commercial land -to be determined KB Home Coastal Inc. (Option) KB Home Coastal Inc. (Option) KB Home Coastal Inc. (Option) KB Home Coastal Inc. (Option) KB Home Coastal Inc. (Option) 10 11 12 14 15 33A 16-26, 30, 31, Loop Road 14 112 92 104 14 894 1,230 8.12 15.19 16.01 13.59 14.09 10.32 295.03 372.35 $27,773 76,197 172,333 145,984 151,681 35,250 2.049.122 $2,658,340 74.66% Total Phase I and Phase II 456.24 100.00% (i) (2) (3) (•») (5) Continental Residential, Inc. is not currently a landowner within the District, and there can be no assurance that it will close escrow on the lots within the District at the time indicated or at all. KB Home Coastal Inc. is not currently a landowner within the District, and there can be no assurance that it will exercise its option to purchase lots within the District at the times indicated or at all. KB Home Coastal Inc. will not become an owner until building permits and certificates of occupancy can be issued in Phase n, acceptance by KB Home Coastal Inc. of Ashby USA, LLC's work and election of either the Overall Option Alternative or the First Option Alternative. Until such time, KB Home Coastal Inc. is not responsible for any property taxes or assessments. Gross acres differ slightly from gross acres on the Roripaugh Ranch Land Use Plan prepared by The Keith Companies. Gross acreage per County of Riverside Assessor's Maps. Net acreage shown for Planning Areas 2, 3, and 4A as final subdivision maps are recorded. The actual Special Tax Allocation for Fiscal Year 2006-07 will be calculated pursuant to the Rate and Method based on the parcel configuration at such time as needed to levy the Special Tax Requirement. Debt Service plus administrative fees. Total may not add due to rounding. Source: David Taussig & Associates, Inc. 60 Assuming no parcels are categorized as Developed Property in Fiscal Year 2006-07, the projected Fiscal Year 2006-07 Maximum Special Tax allocation for Undeveloped Property is $5,849,094 and the projected Special Tax levy for Undeveloped Property is approximately $3,558,558.76. These amounts are estimates based on the estimated debt service plus estimated administrative fees of $60,000. Direct and Overlapping Debt Table 4 below sets forth the existing authorized indebtedness payable from taxes and assessments that may be levied within the District prepared by Canty Engineering Group, Inc. and based on what was levied for Fiscal Year 2005-06 (the "Debt Report"). The Debt Report is included for general information purposes only. In certain cases, the percentages of debt calculations are based on assessed values, which will change significantly as sales occur and assessed values increase to reflect housing values. The District believes the information is current as of its date, but makes no representation as to to its completeness or accuracy. The District may issue up to $3,750,000 of Additional Bonds. Other public agencies, such as the City, may issue additional indebtedness at any time, without the consent or approval of the District or the Authority. See " -Overlapping Community Facilities and Assessment Districts" below. The Debt Report generally includes long term obligations sold in the public credit markets by public s whose boundaries overlap the boundaries of the District in whole or in part. Such long term obligations generally are not payable from property taxes, assessment or special taxes on land in the District. hi many cases long term obligations issued by a public agency are payable only from the general fund or other re venues of such public agency. Additional indebtedness could be authorized by the District, the City or other public agencies at any time. The Authority has not undertaken to commission annual appraisals of the market value of property in the District for purposes of its Annual Reports pursuant to the Authority Continuing Disclosure Agreement, and information regarding property values for purposes of a direct and overlapping debt analysis which may be contained in such reports will be based on assessed values as determined by the County Assessor. See Appendix F hereto for the form of the Authority Continuing Disclosure Agreement. agencies 61 Table 4 Temecula Public Financing Authority CFD 03-02 (Roripaugh Ranch) Secured Property Tax Roll and Direct and Overlapping Debt ASSESSED VALUE Fiscal Year 2005-06 Secured Roll Assessed Valuation SECURED PROPERTY TAX ROLL $36,529,505 Ljexui tffiiuri oj I UA Dili Total Parcels Type Levied General Purpose 1% 809,881 Temecula Valley Unified School District GO 39,783 Metropolitan Water Debt Service GO 430,5 1 5 RCWD R Div Debt Service GO 33,466 AD 161 Series A AD 3,609 AD 161 Series B AD 3,498 AD 161 Series C AD 3,379 NPDES -Santa Margarita SPL 59,242 Temecula Parks/Lighting Svs. CSD 28,098 MWD Standby WTR 209,944 EMWD Standby-Combined Charge WTR 2 1 2,48 1 Fiscal Year 2005-06 Total Property Tax Liability Total Levy $1,708,046,335 $4,321,348 $5,247,282 $10,357,895 $290,628 $1,376,737 $319,780 $401,183 $3,014,973 $2,733,248 $4,505,616 Parcels Levied in CFD 308 308 3081 301 301 301 36 308 308 308 % Applicable 0.021% 0.279% 0.036% 0.007% 3.123% 5.108% 1.799% 0.027% 2.159% 0.181% 0.341% TOTAL PROPERTY TAX AS A PERCENTAGE OF FISCAL YEAR 2005-06 ASSESSED VALUATION LAND SECURED BOND INDEBTEDNESS Outstanding Direct and Overlapping Bonded Debt Type Issued AD 161 Series A2' AD $3,971,000 AD 161 Series Bm AD $19,596,000 AD 161 Series C12' AD $4,638,000 Total Land Secured Bonded Debt"1 Unissued Direct and Overlapping Bonded Debt Type Issued AD 161 l21 AD $3,380,213 Total Unissued Land Secured Bonded Debf" TOTAL OUTSTANDING AND UNISSUED LAND SECURED BONDED INDEBTEDNESS GENERAL OBLIGATION BOND INDEBTEDNESS Outstanding Direct and Overlapping Bonded Debt Type Issued Temecula Valley Unified School District GO $65,000,000 RCWD R Div Debt Service GO $ 1 30,932,007 Metropolitan Water Debt Service GO $850,000,000 Total General Obligation Bonded Debt11 Authorized Direct and Overlapping Bonded Debt Type Authorized Temecula Valley Unified School District GO $65,000,000 RCWD R Div Debt Service GO $130,932,007 Metropolitan Water Debt Service GO $850,000,000 Total General Obligation Bonded Deblf ' ' TOTAL OUTSTANDING AND UNISSUED LAND SECURED BONDED INDEBTEDNESS TOTAL OF ALL OUTSTANDING, DIRECT AND OVERLAPPING DEBT TOTAL OF ALL OUTSTANDING AND UNISSUED DIRECT AND OVERLAPPING DEBT Outstanding $1,808,691 $8,668,065 $2,532,737 Outstanding $1,197,929 Outstanding $46,485,000 $111,476,729 $419,390,000 Unissued $0 $0 $0 Parcels Levied in CFD 301 301 301 Parcels Levied in CFD 301 Parcels Levied in CFD 3081 308 Parcels Levied in CFD 3081 308 % Applicable 3.123% 5.108% 1.799% % Applicable 10.886% % Applicable 0.279% 0.007% 0.002% % Applicable 0.279% 0.007% 0.002% Levy Amount $365,295 $12,043 $1,899 $743 $9,076 $70,329 $5,754 $109 $65,097 $4,940 $15,364 $550,647 1.51% Amount of Debt $56,481 $442,796 $45,569 $544,847 Amount of Debt $130,411 $130,411 $675,258 Amount of Debt $129,543 $7,993 S9.329 $146,865 Amount of Debt $0 $0 $0 $0 $675,258 $691,712 $822 123 (1) Additional bonded debt or available bond authorization may exist but is not shown because a tax was not levied for the referenced fiscal year. <2) Will be eliminated as part of the sale of the 2006 Bonds. Source: Canty Engineering Group, Inc. 62 Estimated Value-to-Lien Ratios The values, direct and overlapping debt and total tax burden on individual parcels varies among parcels within the District. The value of individual parcels is significant because in the event of a based on allocation of Special taxes levied as Undeveloped Property and excluding the overlapping assessment debt relating to the Prior Lien and general obligation bond debt. AshbyUSATLLChasprovidec a letter of credit to the Trustee which may be drawn in the event Special Taxes due with respect to property owned by Ashby USA, LLC are not paid. See "SECURITY FOR THE BONDS -Letter oT Credit." Table 5 below sets forth the yalue-to-lien analysis for the District as of the January 15, 2006 appraisal date of value and on an allocation of value presented in the Appraisal to the allocation of the Bonds based on the Undeveloped Special Taxes applicable to the parcels in the District. Table 6 on the following age sets forth the value-to-hen analysis for the District at build out based on assumed Developed Property Special Taxes assuming the units in Phase II are developed as 1,230 residential units. 63 Table 5 Temecula Public Financing Authority Community Facilities District No. 03-02 (Roripaugh Ranch) Estimated Value-to-Lien Analysis (Assuming Current Status of Development) (As of January 15, 2006 Date of Value) Property Owner Phase I -Residential Ashby USA, LLC Davjdson Roripaugh Ranch 122 Tanamera/Roripaugh II., LLC Tanamera/Roripaugh, LLC Traditions at Roripaugh, LLC Subtotal -Phase I Residential Potential Merchant Builder*""' Continental Residential, Inc. Davjdson Roripaugh Ranch 122 Tanamera Residential Group Tanamera Residential Group Tanamera Residential Group Planning Area 1A 23 4A 4B Number of Units 104 99 99 100 ill 515 Acreage'2' 19.11 13.42 13.79 15.27 ^3 83.89 Total Appraised Value13' 17,700,000 18,260,000 2006 Bonds14' $17,280,000 $2,957,125 18,070,000 2,075,625 2,137,125 2,362,625 $89,650,000 $12,986,750 Value-to-Lien Ratio'" 5.84 8.71 8.28 7.73 131 6.90 Phase II -Residential and Commercial Ashby USA, LLC*> Total Phase I and Phase II Residential -KB Home Coastal Inc. (Option) Commercial -To be determined 10-1 3f3-12,14, 26, >0, 31, Loop Road, 33A 1.745 372.35 456.24 L95 3.20 (1) (2) (3) (4) (5) (6) (7) Continental Residential., Inc. and KB Home Coastal Inc. are npt currently landowners within, .the District, andjhere.can.be no assurance that either of them will close escrow on their lots within the District at the times indicated oral all. Classification of property innttoo ttheessee pplaannnninngg areas provided bbyy AAsshbbyy USA, LLC. Provided by Ashbv USA,, ELC and mav not .reflect the parcel configuration as of January 15, 2006. As 01 January 15,, 2006,, based on the Appraisal.. The actual Snecial Tax, Allocation for me initial year of the levy of the, Special Tax pursuant to the Rate and Met{iod,based on the parcel configuration at such time whicn may not reflect what is shown.. Includes 2006 Bonds to be issued by undeveloped tax rates, actual allocation of debt will vary depending on size ofunit Average value-tp-lien per lot; actual value-to-lien may vary by lot. , . The Appraisal utilizes B discountecTcash flow analysisofPnase Hand does not allocate value among the various pi The Merchant Builders have not independently verified the information in the appraised value or the allocation ol and overlapping land secured debt to their respective projects. oped Property „ r.anningareas. of 2006T3onds Sources: Development Plans from Ashby USA, LLC; Canty Engineering Group, Inc.; Appraisal. 64 Temecula Public TiKancing Ai Community Facilities District No. 03-O2 ^ imunity D2 (Roripaugh Ranch) Estimated Value-to-Lien Analysis at Build-Out (Utilizing Appraisal Values) Property Owner Phase 1 -Residential AshbyUSA, LLC Potential Merchant Builder'"7' Continental Residential, Inc. Davidson Roripaugh Ranch Davidson Roripaugh Ranch Tanamera/Roripaugh II, LLC Tanamera Residential Group Tanamera/Roripaugh, LLC Traditions at Roripaugh, LLC Tanamera Residential Group Tanamera Residential Group Planning Area 1A 3 4A 4B Subto.tal -Phase I Residential Number of Units 104 99 99 100 113 515 Total Appraised Acreage12' Value'3' 19.11 14.67 13.9 15.12 22.3 85.3 $17,280,000 18,070,000 17,700,000 18,260,000 18,340,000 $89,650,000 2006 Bonds'4' $2,844,277 3,209,490 3,028,138 2,479,229 3.182.759 $14,743,893 Value-to-Lien Ratio15' 6.08 5.63 5.85 7.37 5.76 6.08 Phase II -Residential and Commercial AshbyUSA, LLC7' Total Phase I and Phase II Residential-KB 1 Coastal Inc. (Qptu Commercial -To I determined 1.230 1.745 372.35 456.24 2.04 120 to t e s e panning ar y AshbvUSA, LLC ary 13, 2006, based provie y sy , . d mav not .reflect the parcel configuration as of January 15, 2006. ued by the District; debt has actual allocation of. debt will vary dependin unit and categonzation as D (5) (6) (7) Average yalue-to-Uen ipraisal utilizes . overlapping land secureTdeb'tlb'th^lf'reTpTctfve'projecfs' ,_, areas. onds and Sources: Development Plans from Ashby USA, LLC; Canty Engineering Group, Inc.; Appraisal. Overlapping Assessment and Community Facilities Districts Prior Lien; County of Riverside Assessment District No. 161. A portion of the property within the Bistrict is subject to the County Assessment District No. 161 lien. A portion of the proceeds of the 2006 onds together with moneys provided by Ashby USA, LLC, will be used to prepay the outstanding,hen of County Assessment District No. 161 u.e.., the Prior Lien). The aggregate amount of the hen is $583,610.40. The County has a.greed to release the Prior Lien when the 2006 Bonds are issued and the prepayment of the outstanding hen is paid. Additional Debt Payable from Taxes or Assessments. The District has no control over the amount of additional debt payable from taxes or assessments levied on all or a portion of the property within a special district which may. be incurred in the future by other governmental agencies, including, but not limited to, the County, the City or any other governmental agency having jurisdiction over all or a portion of the property within the District. Furthermore, nothing prevents the owners of property within the District from consenting the of ouier governmental agencies which would be secured by axes To the extent such indebtedness is payable from ang to trie issuance ot additional debt by taxes or assessments on aparity with the Special ._ _ assessments, other specialtaxes levied pursuant to the Actortaxes, such assessments, specialtaxes and taxes will be secured by liens on the property within a district on a parity with a lien of the Special Taxes. Acc.ordinely, the debt on the property within the District could increase., without any corresponding ame of the property therein, and thereby severely reduce the ratio that exists at the time the d between the value of the property and the debt secured by the Special Taxes and other taxes and assessments which may be levied on such property. The incurring of such additional indebtedness men 200( se in the var Jonds are issuec . could also affect the ability and willingness of the property owners within the District to pay the Special Taxes when due. »ver, in the event of a delinquency in the payment of Special Taxes, m ds of any foreclosure sale of the .property with delinquent Special T; nquent Special Taxes. See "BONDOWNERS'RISKS." .o assurance can be.given axes would be sufficient Moreo that the proceei to pay the delinquent Specia Estimated Assessed Value-to-Lien Ratios The assessed values, direct and overlapping debt and total tax burden on individual parcels varies among parcels within the District. The value of individual parcels is significant because in the event of a delinquency in the payment of Special Taxes, the District may foreclose only against delinquent parcels. As 65 of September L 2005, based on the Fiscal Year 2Q05-06. assessed value of approximately $36,529,505 the Sarcels in the District have an assessed value-to-hen ratio of less than 1:1 taking into account outstanding irect and overlapping bonded debt. See Table 4 above. Transportation Uniform Mitigation Fee; Multiple Species Habitat Conservation Plan Transportation Uniform Mitigation Fee. The County and the 14 cities in western Riverside County, including the City, adopted a new transportation fee for development, which when enacted added approximately $7,248 to every new single-family house and approximately $5,021 to each future apartment or condominium unit in the County, subject to credit for a portion, if any, of transportation facility fees imposed by the County or applicable city which relates to facilities encompassed within the new transportation fee. New retail, service and industrial development will also be charged the transportation fee based on the square footage of new development ($8.90 per square foot for retail, $5.08 per square foot for service and $1.65 per square foot for industrial). The fee was approved by the County in February 2003. The fee was approved by the City on January 28, 2003, effective 61 days thereafter. The fee was implemented by the other cities in the County between February 1, and June 1, 2003. Cities may opt out of the fee, but then they will not be able to receive any money from Measure A, the County's half-cent sales tax initiative. Extension of the term of Measure A was approved by the voters at the November 5, 2002 election. Measure A is estimated to cover more than 50% of the cost of maintaining cities' roads and streets. The half-cent sales tax program is now extended an additional 30 years and will expire in 2039. The Transportation Uniform Mitigation Fee is subject to increase based on an inflation index and also after the firsttwo years and every five years thereafter may be increased upon reviewof facilities encompassed within the transportation fee. The two year increase is expected to be effective commencing with Fiscal Year 2006-07 and establish a rate of approximately $9,693 for every new single-family house and approximately $6,806 for each multi-family residential unit as provided in the applicable ordinance. On February 28,2006 the City, AshbyUSA, LLC and the Merchant Builders1 entered into an agreement entitled "Roripaugh Ranch Project Transportation Uniform Mitigation Fee Program Improvement Credit Agreement." This Agreement provides: (1) the means by which the payment of the costs of construction of Transportation Uniform Mitigation Fee improvements through the 2006 Bonds is offset against Ashby USA, LLC's and the Merchant Builders' obligation to pay the applicable Transportation Uniform Mitigation Fee and (2) a means, subj ect to the separate approval of the Western Riverside County Council of Governments, for deposits to be made to the Special Tax Fund established under the Fiscal Agent Agreement to the extent the actual and authorized payment costs for construction of Transportation Uniform Mitigation Fee improvements exceeds Ashby USA, LLC's and the Merchant Builders'* Transportation Uniform Mitigation Fee obligation. Multiple Species Habitat Conservation Plan. The project site is within the boundary of the Assessment District 161 Sub-Regional Habitat ConservationPlan approved by the Fish and Wildlife Service ("FWS"). Mitigation is provided through the transfer of approximately 201 acres to the City and recording of a conservation easement overlying the open space recorded fortheCenter for Natural Lands Management. Because of the participation in the Assessment District 161 Sub-Regional Habitat Conservation Plan, the property within the District is not subject to the fee adopted by the City relating to the costs of a Multiple Species Habitat Conservation Plan. In 1998, the FWS adopted the "Permit Revocation Rule" or more commonly, the "no surprises rule" which substantially restricted the FWS's authority to revoke or modify these types ofpermits. The "no surprises rule" was held invalid by a Federal District Court in Washington D.C. on the grounds that the FWS did not comply with Federal procedures under the Administrative Procedures Act for public notice in adopting new regulations, but did not rule on the substantive validity of the rule, and enjoined enforcement of the re_gulation. Spirit of the Sage Council v. Norton 294 F. Supp. 2d 67 (2003). On December 14,2004, the FWS adopted a new "no surprises rule," effective January 10,2005, witnthe same text as the former rule. (69 Fed. Reg. 71723). The FWS states that the new rule complies with Srocedures under the Administrative Procedures Act and the Court's decision in Spirit of the Sage Council. 59 Fed. Reg. 71723). The 262 acres of Roripaugh Ranch open space include 201 acres of preserved habit as required in the AD 161 SHCP as required for the federal Endangered Species Act Section 10(a) permit number TE-030505-0 issued by the Fish and Wildlife Service on December 4, 2001. In March 2003 Ashby USA, LLC graded approximately 8.96 acres of the land designated as the Preserved Habitat Area pursuant to the AD 161 SHCP with Fish and Wildlife Service permits in violation of federal law. The impacted area included estimated 4.33 acres of Riversidean Sage Scrub, 2.42 acres of transitional/degraded Riversidean Sage Scrub, and approximately2.2 acres of ruderal, weed or agricultural areas. In response to the violation of federal law, the Fish and Wildlife Service approved a "Conceptual Mitigation Plan forlmpacts to Areas Within the Jurisdiction *KB Home is not a parry to the Transportation Uniform Mitigation Fee Agreement. 66 of the United States Department of Interior Fish and Wildlife Service Under Section 10(a)(l) (B) of the Endangered Species Action on June 2, 2004 ("Restoration Plan"). Pursuant to the Restoration Plan, Ashby USA, LLC is required to restore additional 21.65 acres of Riversidean Sage Scrub (4.33 acres at 5:1 ratio) to offset the impacts to mature Riversidean Sage Scrub caused by Ashby USA, LLC grading in violation of federal law. The City and Ashby USA, LLC entered into that certain "Open Space Grading and Restoration Agreement" dated as of May 11, 2004 in order to implement the requirements of the FWS to cure the violations. Weather conditions in the winter of 2005 and other matters delayed completion of the 33.49 acres of restoration. See "THE COMMUNITY FACILITIES DISTRICT -Environmental Conditions -Endangered Species Act" for a description of the status of the restoration work. Ashby USA, LLC has recently contacted the Fish and Wildlife Service and presented its plan for restoration so as to resolve any issues relating to the delay in installation of the plant material beyond January 31,2005 and to avoid being in violation of federal law. Market Absorption Study Empire Economics, hie., the market absorption consultant (the "Market Absorption Consultant"), has prepared a market analysis of the property in the District in its Market Absorption Study, dated February 1, 2006 (Original Study July 13, 2004) (the "Market Absorption Study"). Based upon its analysis of the expected demographic-economic trends, the Market Absorption Consultant estimated the District is expected to accommodate the approximately 1,745 residential units with build-out by the end of 2010. The Market Absorption Study is subject to a number of assumptions and limiting conditions. The Market Absorption Study contains projected absorption of production homes that differ from those of Ashby USA, LLC. The Market Absorption Study and the Appraisal were prepared utilizing an estimated September 2006 date of completion of necessary infrastructure to allow issuance of remaining building permits for homes in Phase I and an estimated September 2007 date of completion of necessary infrastructure to allow issuance of building permits for homes in Phase II. The September 2007 date of completion takes into account the possibility that the schedule prepared by Ashby USA, LLC with respect to Phase II is not achieved. It is also possible that the schedule prepared by Ashby USA, LLC with respect to Phase I may not be achieved. The Market Absorption Consultant's estimated absorption rates of the different categories of residential units are as follows: 67 Table 7 Temecula Public Financing Authority Community Facilities District No. 03-02 (Roripaugh Ranch) Projected Absorption February 2,2006 Planning Area Phase IPA-2 PA -1A PA-3 PA-4A PA-4B Phase H+ Segment #1: Below $420,000-Avg. PA-31 PA-22 PA-12 PA-14 PA-15 Segment #2: $420,000 -$530,000-Avg. PA-23 PA-24 PA-16 PA-17 PA-18 Segment #3: Above $«00,000-Avg. PA: 10, 19-21, 33 PA: 10, 19-21 ,33 Statistical Summary: Phase I Phase n+ Units 99 104 99 100 113 169 130 112 92 104 47 75 121 147 121 76 36 Builder Davidson D.R. Horton Tanamera Tanamera Tanamera KB Home KB Home KB Home KB Home KB Home KB Home KB Home KB Home KB Home KB Home KB Home KB Home 515 29.5% 1,230 70.5% Segment #1 Below $420,000-Avg. 607 Segment #2 $420,000 -$530,000-Avg. 5 1 1 Segment #3 Above S600,000-Avg. 1 1 2 Overall 1,745 Lot Size Average 6,265 6,285 6,000 6,310 6,580 3,150 3,150 6,120 3,880 3,880 5,313 5,313 6,696 8,703 8,703 20,000 42,298 Estimated Housing Prices Lower $538,000 $410,000 $459,990 $459,990 $489,990 $370,000 $370,000 $405,990 $405,990 $405,990 $415,990 $415,990 $450,990 $510,990 $510,990 $779,990 $787,990 $471,594 $485,908 $391,594 $460,990 $783,990 $481,698 Average $548,141 $450,918 $498,490 $522,364 $516,597 $395,495 $395,495 $417,657 $417,657 $417,657 $429,323 $429,323 $480,990 $526,740 $526,740 $845,990 $844,990 $507,302 $510,671 $408,792 $478,623 $845,490 $509,680 $558,000 $480,000 $519,990 $539,990 $529,990 $415,990 $415,990 $430,990 $430,990 $430,990 $445,990 $445,990 $510,990 $545,990 $545,990 $909,990 $909,990 $525,594 $536,657 $424,990 $498,990 $909,990 $533,403 Expected Living Areas Tower 2,960 1,949 1,974 2,007 2,346 1,809 1,809 2,050 2,050 2,050 2,029 2,029 2,500 2,969 2,969 4,001 3,676 2,247 2,495 1,954 2,499 3,839 2,422 Average 3,181 2,642 2,434 2,943 2,714 2,080 2,080 2,167 2,167 2,167 2,408 2,408 3,138 3,350 3,350 4,681 4,378 2,783 2,864 2,132 2,931 4,530 2,840 upper 3,357 2,949 2,699 3,246 2,951 2,300 2,300 2,300 2,300 2,300 2,707 2,707 3,787 3,711 3,711 5,187 5,318 3,040 3,219 2,300 3,325 5,253 3,166 tales Rates Annually 50 55 55 55 55 70 Sequence 65 Sequence Sequence 60 Sequence 55 50 Sequence 30 Sequence 2006 an-Jun 00000000000000000000000 2006 Jul-Dec 250 20 20 0000000000000 650000 65 2007 lan-Jun 25 27 27 27 27 000000000000 133 0000 133 2007 Jul-Uec 25 27 27 27 27000000000000 133 0000 133 2008 an-Jun 24 27 25 26 27 35 0 32 00 30 0 27 25 015 0 129 164 67 82 15 293 2008 Jul-Uec 0 23 00 32 350 3200 17 13 27 25 0 15 0 55 164 67 82 15 219 2009 an-Jun 0000035 0 32 00030 27 25 015 00 164 67 82 15 164 2009 Jul-Uec 00000 35 0 16 16 00 30 27 250 15 00 164 67 82 15 164 2010 an-Jun 0000029 6032 00213 25 016 00 123 67 40 16 123 2010 Jul-uec 000000 35 0 32 0000 2230 15 0 107 67 25 15 107 2011 an-Jun 00000035 012 20 000025 015 0 107 67 25 15 107 2011 Jul-Uec 000000 35 00 32 0000 30 060 103 67 30 6 103 2012 an-Jun 00000019 00 32 000030 00081 51 30 081 2012 Jul-l»ec 000000000 20 0000 33 000 53 20 33 0 53 OO See APPENDIX D -"Market Absorption Study" for a discussion of the assumptions and limiting conditions of the Market Absorption Study. Appraised Property Value An appraisal prepared by an MAI appraiser of the residential and commercial land that comprises the District dated February 10, 2006 (the "Appraisal"), has been prepared by Stephen G. White, MAI of Fullerton, California (the "Appraiser") in connection with issuance of the 2006 Bonds. The purpose of the appraisal was to estimate the aggregate market value of the "as-is" condition of the property in each of the 5 separate tracts in Phase I, the "panhandle" area, plus the remaining ownership of Ashby USA, LLC comprising Phase II, the "pan" area. The Appraisal also reflects the proposed District financing, as well as the tax rates of approximately 1.6% to 1.7%, of the estimated sales prices of the homes to be built in the District, including the Special Taxes, to the future homeowners. The Appraisal is based on certain assumptions. Subject to these assumptions, the Appraiser estimated that the fee simple market value of the Taxable Property within the District (subject to the lien of the Special Taxes) as of January 15, 2006, was as follows: Market Ownership Value Phase I -"Panhandle" Area: Builder (Tract Name) DR Horton -Continental Homes (Castillo) $ 17,280,000 Davidson Roripaugh Ranch 122 LLC (n/a) 18,070,000 Tanamera/Roripaugh II, LLC (Madison) 17,700,000 Tanamera/Roripaugh, LLC (Shutters) 18,260,000 Traditions at Roripaugh, LLC (Hamptons) 18,340,000 Subtotal $89,650,000 Phase II "Pan" Area: Owner Ashby USA, LLC S74.480.000 Total $164,130,000 The values are based on the assumption that the master developer will complete the infrastructure in a timely manner such that building permits will be available for development to occur as proj ected in the absorption conclusions by the Market Absorption Consultant. The Market Absorption Study contains projected absorption of production homes that differ from those of Ashby USA, LLC. The Market Absorption Study and the Appraisalwereprepared'utilizing an estimatedSeptember 2006 date ofcompletion of necessary infrastructure to allow issuance of remaining building permits for homes in Phase I and an estimated September 2007 date of completion of necessary infrastructure to allow issuance of building permits for homes in Phase II. The September 2007 date of completion takes into account the possibility that the schedule prepared by Ashby USA, LLC with respect to Phase II is not achieved. The Authority, the City and the Merchant Builders make no representations as to the ability of Ashby USA, LLC to perform in the manner assumed by Ashby USA, LLC or assumed in the Appraisal, or as to the accuracy or completeness of the Appraisal or the Market Absorption Study. See "PROPERTY OWNERSHIP AND DEVELOPMENT -Market Absorption Study" and APPENDIX D -"Market Absorption Study." The Appraisal uses a sales comparison approach to estimate the value of the property in Phase I. This approach considers recent sales of residential land or bulk lots from the general area in comparison to the property in Phase I. Then a deduction is made for the estimated remaining cost and and fees to get the lots from "as is" condition to finished lots. "Finished lots" are lots that are fully improved and ready for homes to be built. This reflects that the lots have all development entitlements, infrastructure improvements completed, finish grading completed, all in-tract utilities extended to the property line of each lot, street improvements completed, common area improvements/landscaping (associated with the tract) completed, and all development fees paid, exclusive of building permit fees, in accordance with the conditions of approval of the specific tract map (which, as described in "Property Ownership" above, is not yet the condition of the property within Phase I), less the estimated cost to achieve finished lots (based on the status of the development process as of January 15, 2006. The estimate of value was based on fee simple 69 ownership, subject only to easements of record and the lien of the Special Taxes and other special tax and assessment liens. The Appraisal uses a subdivision or developmental approach to estimate the value of the property in Phase II. This method uses a discounted cash flow analysis which involves the discounting of the projected net proceeds from assumed sales of the land over the appropriate period of time. The sales of land represent the gross proceeds, less deduction for the remaining land development costs, cost of overhead and marketing, holding cost, and profit to Ashby USA, LLC. The estimated net proceeds over time are then discounted to a present value indication. Neither the Authority nor the District makes any representation as to the accuracy or completeness of the Appraisal. See Appendix C hereto for more information relating to the Appraisal. The fee simple market value includes the value of extensive grading as of the date of value and the improvements to be financed by the 2006 Bonds. The market values reported in the Appraisal result in an estimated aggregate value-to-lien ratio of 3.20:1, with a value of approximately 6.90:1 with respect to tracts within Phase I and 1.95:1 with respect to Phase II, calculated with respect to the 2006 Bonds based on allocation of Special Taxes levied as Undeveloped Property and excluding the overlapping assessment debt relating to the Prior Lien and general obligation bond debt. The value-to-lien ratios of individual parcels will differ from the foregoing aggregate value. See Table 5 -"Estimated Value-to-Lien Analysis (Assuming Current Status of Development) (As of January 15,2006 Date of Value)" and Table 6 "Estimated Value-to-Lien Analysis at Build-Out (Utilizing Appraisal Values)" in "PROPERTY OWNERSHIP AND DEVELOPMENT -Value-to-Lien Ratios" section. See "BONDOWNERS' RISKS -Burden of Parity Liens, Taxes and Other Special Assessments on the Taxable Property" and "BONDOWNERS' RISKS -Appraised Values" herein and APPENDIX C -"Summary Appraisal Report" appended hereto for further information on the Appraisal and for limiting conditions relating to the Appraisal. Ashby USA, LLC has provided a letter of credit to the Trustee which may be drawn in the event Special Taxes due with respect to property owned by Ashby USA, LLC or the Tanamera/Roripaugh Entities are not paid. See "SECURITY FOR THE BONDS -Letter of Credit."BONDOWNERS' RISKS In addition to the other information contained in this Official Statement, the following risk factors should be carefully considered in evaluating the investment quality of the 2006 Bonds. The Authority cautions prospective investors that this discussion does not purport to be comprehensive or definitive, the risk factors are listed in no particular order of importance, and does not purport to be a complete statement of all factors which may be considered as risks in evaluating the credit quality of the 2006 Bonds. The occurrence of one or more of the events discussed herein could adversely affect the ability or willingness of property owners in the District to pay their Special Taxes when due. Any such failure to pay Special Taxes could result in the inability of the Authority to make full and punctual payments of debt service on the 2006 Bonds. In addition, the occurrence of one or more of the events discussed herein could adversely affect the value of the property in the District. Risks of Real Estate Secured Investments Generally The Bondowners will be subject to the risks generally incident to an investment secured by real estate, including, without limitation, (i) adverse changes in local market conditions, such as changes in the market value of real property in the vicinity of the District, the supply of or demand for competitive properties in such area, and the market value of residential property and/or sites in the event of sale or foreclosure; (ii) changes in real estate tax rate and other operating expenses, governmental rules (including, without limitation, zoning laws and laws relating to endangered species and hazardous materials) and fiscal policies; and (iii) natural disasters (including, without limitation, earthquakes, wildfires and floods), which may result in uninsured losses. 70 Concentration of Ownership As of the date hereof, Ashby USA, LLC and the Merchant Builders are responsible for all of the Special Taxes. If any such entity fails in its obligations under the applicable agreements or if any such entity is unwilling or unable to pay its portion of the Special Tax when due, a potential shortfall in the Bond Fund could occur, which would result in the depletion of the Reserve Fund prior to reimbursement from the resale of foreclosed property or payment of the delinquent Special Taxes and, consequently, a delay or failure in payments of the principal of or interest on the 2006 Bonds. No property owner is obligated in any manner to continue to own and/or develop any of the land it presently owns within the District. The Special Taxes are not a personal obligation of Ashby USA, LLC, any Merchant Builder or of any owner of the parcels, and the District can offer no assurance that any current owner or any future owner will be financially able to pay such installments or that it will will choose to pay even if financially able to do so. Failure to Develop Properties Development of property within the District may be subject to economic considerations and unexpected delays, disruptions and changes which may affect the willingness and ability of Ashby USA, LLC or Merchant Builders or any property owner to pay the Special Taxes when due. Development is conditioned upon Ashby USA, LLC' s completion of the infrastructure in a timely manner such that building permits will be available for development to occur as projected. Delays in completion of infrastructure will delay satisfaction of conditions relating to issuance of building permits. Land development is also subject to comprehensive federal, State and local regulations. Approval is required from various agencies in connection with the layout and design of developments, the nature and extent of improvements, construction activity, land use, zoning, school and health requirements, as well as numerous other matters. Grading is currently substantially completed for all of the development. See "Government Approvals" and "Local, State and Federal Land Use Regulations" below. It is possible that the approvals necessary to complete development of the property within the District will not be obtained on a timely basis. Failure to obtain any such approval could adversely affect land development operations within the District. In addition, there is a risk that future governmental restrictions on land development within the District will be enacted, either directly by a governmental entity with jurisdiction or by the voters through the exercise of the initiative power. The failure to complete the development or the required infrastructure in the District or substantial delays in the completion of the development or the required infrastructure for the development due to litigation, the inability to obtain required funding, failure to obtain necessary governmental approval or other causes may reduce the value of the property within the District and increase the length of time during which Special Taxes will be payable from Undeveloped Property, and may affect the willingness and ability of the owners of property within the District to pay the Special Taxes when due. The issuance of building permits for the property within the District is dependent upon Ashby USA, LLC's completion of certain public improvements as described in Appendix K. See also, "SECURITY FOR THE 2006 BONDS." Bondowners should assume that any event that significantly impacts the ability to develop land in the District would cause the property values within the District to decrease and could affect the willingness and ability of the owners of land within the District to pay the Special Taxes when due. Special Taxes Are Not Personal Obligations The owners of land within the District are not personally liable for the payment of the Special Taxes. Rather, the Special Tax is an obligation only of the land within the District. If the value of the land within the District is not sufficient to fully secure the Special Tax, then the District has no recourse against the owners under the laws by which the Special Tax has been levied and the 2006 Bonds have been issued. 71 The 2006 Bonds Are Limited Obligations of the District The District has no obligation to pay principal of and interest on the 2006 Bonds in the event Special Tax collections are delinquent, other than from amounts, if any, on deposit in certain funds and accounts held under the Fiscal Agent Agreement, or funds derived from the tax sale or foreclosure and sale of parcels on which levies of the Special Tax are delinquent, nor is the District obligated to advance funds to pay such debt service on the Bonds. Appraised Values The Appraisal summarized in Appendix C hereto estimates the fee simple interest market value of the Taxable Property within the District. This value is merely the present opinion of the Appraiser, and is qualified by the Appraiser as stated in the Appraisal. The Authority has not sought the present opinion of any other appraiser of the value of the Taxable Property. A different present opinion of such value might be rendered by a different appraiser. The opinion of value relates to sale by a willing seller to a willing buyer, each having similar information and neither being forced by other circumstances to sell nor to buy. Consequently, the opinion is of limited use in predicting the selling price at a foreclosure sale, because the sale is forced and the buyer may not have the benefit of full information. In addition, the opinion is a present opinion. It is based upon present facts and circumstances. Differing facts and circumstances may lead to differing opinions of value. The appraised market value is not evidence of future value because future facts and circumstances may differ significantly from the present. No assurance can be given that if any of the Taxable Property in the District should become delinquent in the payment of Special Taxes, and be foreclosed upon, that such property could be sold for the amount of estimated market value thereof contained in the Appraisal. Land Development A major risk to the Bondowners is that development by the property owners in the District may be subject to unexpected delays, disruptions and changes which may affect the willingness and ability of the property owners to pay Special Taxes when due. For example, proposed development within a portion of the District could be adversely affected by delays in or the inability to obtain final environmental clearances required in connection with particular parcels of property or the public improvements, unfavorable economic conditions, competing development projects, an inability of the current owners or future owners of the parcels to obtain financing, fluctuations in the real estate market or interest rates, unexpected increases in development costs, changes in federal, state or local governmental policies relating to the ownership of real estate, faster than expected depletion of existing water allocations, the appearance of previously unknown environmental impacts necessitating preparation of a supplemental environmental impact report, the presence of previously unknown Indian artifacts or burial grounds and and by other similar factors. There can be no assurance that land development operations within the District will not be adversely affected by the factors described above. In addition, partially developed land is less valuable than developed land and provides less security for the 2006 Bonds (and therefore to the Bondowners) should it be necessary for the District to foreclose on undeveloped property due to the nonpayment of Special Taxes. Moreover, failure to complete future development on a timely basis could adversely affect the land values of those parcels which have been completed. Lower land values result in less security for the payment of principal of and interest on the 2006 Bonds and lower proceeds from any foreclosure sale necessitated by delinquencies in the payment of the Special Taxes. See BONDOWNERS' RISKS -Failure to Develop Properties." 72 Furthermore, an inability to develop the land within the District as planned will reduce the expected diversity of ownership of land within the District, making the payment of debt service on the 2006 Bonds more dependent upon timely payment of the Special Taxes levied on the undeveloped property. Because of the concentration of undeveloped property ownership, the timely payment of the 2006 Bonds depends upon the willingness and ability of the current owners of undeveloped land and any home builders to whom finished lots are sold to pay the Special Taxes levied on the undeveloped land when due. Furthermore, continued concentration of ownership increases the potential negative impact of a bankruptcy or other financial difficulty experienced by the existing landowners. See "Concentration of Ownership" above. Burden of Parity Liens, Taxes and Other Special Assessments on the Taxable Property While the Special Taxes are secured by the Taxable Property, the security only extends to the value of such Taxable Property that is not subject to priority and parity liens and similar claims. The table in the section entitled "PROPERTY OWNERSHIP AND DEVELOPMENT -Direct and Overlapping Debt" presents the presently outstanding amount of governmental obligations (with stated exclusions), the tax or assessment which is or may become an obligation of one or more of the parcels of Taxable Property, and furthermore states the additional amount of general obligation bonds the tax for which, if and when issued, may become an obligation of one or more of the parcels of Taxable Property. The table does not specifically identify which of the governmental obligations are secured by liens on one or more of the parcels of Taxable Property. In addition, other governmental obligations may be authorized and undertaken or issued in the future, the tax, assessment or charge for which may become an obligation of one or more of the parcels of Taxable Property and may be secured by a lien on a parity with the lien of the Special Tax securing the 2006 Bonds. In general, the Special Tax and all other taxes, assessments and charges collected on the County tax roll are on a parity, that is, are of equal priority. Questions of priority become significant when collection of one or more of the taxes, assessments or charges is sought by some other procedure, such as foreclosure and sale, hi the event of proceedings to foreclose for delinquency of Special Taxes securing the 2006 Bonds, the Special Tax will be subordinate only to existing prior governmental liens, if any. Otherwise, in the event of such foreclosure proceedings, the Special Taxes will generally be on a parity with the other taxes, assessments and charges, and will share the proceeds of such foreclosure proceedings on a pro-rata basis. Although the Special Taxes will generally have priority over non-governmental liens on a parcel of Taxable Property, regardless of whether the non-governmental liens were in existence at the time of the levy of the Special Tax or not, this result may not apply in in the case of bankruptcy. While governmental taxes, assessments and charges are a common claim against the value of a parcel of Taxable Property, other less common claims may be relevant. One of the most serious in terms of the potential reduction in the value that may be realized to pay the Special Tax is a claim with regard to a hazardous substance. See "Hazardous Substances" below. Disclosure to Future Purchasers The District has recorded a notice of the Special Tax lien in the Office of the County Recorder on January 14,2005, as Document No. 2005-0039138, as amended by a recording following February 28,2006 approval of an amended notice. While title companies normally refer to such notices in title reports, there can be no guarantee that such reference will be made or, if made, that a prospective purchaser or lender will consider such Special Tax obligation in the purchase of a parcel of land or a home in the District or the lending of money thereon. The Act requires the subdivider (or its agent or representative) of a subdivision to notify a prospective purchaser or long-term lessor of any lot, parcel, or unit subject to a Mello-Roos special tax of the existence and maximum amount of such special tax using a statutorily prescribed form. California Civil Code Section 1102.6b requires that in the case of transfers other than those covered by the above requirement, the seller must at least make a good faith effort to notify the prospective purchaser of the special tax lien in a format prescribed by statute. Failure by an owner of the property to comply with the above requirements, or failure by a purchaser or lessor to consider or understand the nature and existence 73 of the Special Tax, could adversely affect the willingness and ability of the purchaser or lessor to pay the Special Tax when due. Government Approvals The current landowners or their predecessors have secured most discretionary approvals, permits and government entitlements necessary to develop the land within the District. Nevertheless, development within the District is contingent upon the construction of a number of major public improvements as well as the necessary local in-tract improvements. The installation of the necessary improvements and infrastructure is subject to the receipt of construction or building permits from the City and other public agencies. The failure to obtain any such approval could adversely affect construction within the District. A slow down or stoppage of the construction process could adversely affect land values. No assurance can be given that permits will be obtained in a timely fashion, if at all. The failure to do so may result in the prevention, or significant delays in the development of the property within the District or portions thereof. See "Failure to Develop Properties" herein. Local, State and Federal Land Use Regulations There can be no assurance that land development operations within the District will not be adversely affected by future government policies, including, but not limited to, governmental policies which directly or indirectly restrict or control development. During the past several years, citizens of a number of local communities in California have placed measures on the ballot designed to control the rate of future development. During the past several years, state and federal regulatory agencies have significantly expanded their involvement in local land use matters through increased regulatory enforcement of various environmental laws, including the Endangered Species Act, the Clean Water Act and the Clean Air Act, among others. Such regulations can substantially impair the rate and amount of development without requiring just compensation unless the effect of the regulation is to deny all economic use of the affected property. Bondowners should assume that any event that significantly impacts the ability to construct homes on land in the District could cause the land values within the District to decrease substantially and could affect the willingness and ability of the owners of land to pay the Special Taxes when due or to proceed with development of land in the District. See "Failure to Develop Properties" herein. Ashby USA, LLC must also comply with all applicable laws, ordinances, regulations and conditions of approval with respect to the construction of the development Failure to do so could result in a party bringing a legal action seeking various remedies, including, but not limited to, an injunction to stop construction of the project. Of particular concern is the payment of prevailing wages on construction of the public improvements and compliance with the requirements for preservation of cultural artifacts and human remains of Native Americans, specifically the Pechanga Band of Luiseno Indians. Ashby USA, LLC must pay prevailing wages pursuant to Labor Code Section 1720 etseq. for the public improvements as required by Section 8.01 of the Acquisition Agreement by andbetweenthe Authority and Ashby USA, LLC dated March 1, 2006. If Ashby USA, LLC does not maintain certified payrolls documenting the payment of prevailing wages and otherwise comply with the requirements of the Prevailing Wage Law, it cannot be reimbursed for such work with Bond proceeds for construction of the public improvements and will still be obligated to construct the public improvements with its own funds. Such an event would likely adversely impact construction of the housing units. As described in "THE COMMUNITY FACILITIES DISTRICT -Environmental Conditions -Other Requirements," Ashby USA, LLC signed a pre-excavation agreement with the Pechanga Band providing for the monitoring of grading on the property in order to fulfill its responsibilities under the conditions of approval and State law to identify and preserve cultural artifacts and human remains relating to Native Americans and specifically the Pechanga Band. The Pechanga Band and Ashby USA, LLC have also approved a work plan to complete grading of the property after some disagreements as to the scope of the required monitoring. Despite the fact that grading is almost complete, Ashby USA, LLC will still need to comply with the applicable laws, regulations and conditions of approval as well as the pre-excavation agreement and required work plan in the event any cultural artifacts or human remains are found. Failure to do so will likely result in a legal action by the Pechanga Band to enforce these obligations. The Pechanga 74 Band has filed such actions on other proj ects in the City of Temecula and threatened to do so on this proj ect until the work plan was approved. Endangered and Threatened Species It is illegal to harm or disturb any plants or animals in their habitat that have been listed as endangered species by the United States Fish & Wildlife Service ("FWS") under the Federal Endangered Species Act or by the California Department of Fish & Game ("CDFG") under the California Endangered Species Act without a permit. Thus, the presence of an endangered plant or animal could delay development of undeveloped property in the District or reduce the value of undeveloped property. Failure to develop the undeveloped property in the District as planned, or substantial delays in the completion of the planned development of the property may increase the amount of Special Taxes to be paid by the owners of undeveloped property and affect the willingness and ability of the owners of property within the District to pay the Special Taxes when due. See "THE COMMUNITY FACILITIES DISTRICT -Environmental Conditions." In 1998, the FWS adopted the "Permit Revocation Rule" or more commonly, the "no surprises rule" which substantially restricted the FWS authority to revoke or modify these types of permits. The "no surprises rule" was held invalid by a Federal District Court in Washington D.C. on the grounds thatthe FWS did not comply with Federal procedures under the Administrative Procedures Act for public notice in adopting new regulations, but did not rule on the substantive validity of the rule, and enj oined enforcement of the regulation. Spirit of the Sage Council v. Norton 294 F. Supp. 2d 67 (2003). On December 14, 2004, the FWS adopted anew "no surprises rule," effective January 10,2005, with the same text as the former rule. (69 Fed. Reg. 71723). The FWS states that the new rule complies with procedures under the Administrative Procedures Act and the Court's decision in Spirit of the Sage Council. (69 Fed. Reg. 71723). The 262 acres of Roripaugh Ranch open space include 201 acres of preserved habit as required in the AD 161 SHCP as required for the federal Endangered Species Act Section 10(a) permit number TE-030505-Oissued by the FWS on December 4,2001. hi March 2003, Ashby USA, LLC graded approximately 8.96 acres of the land designated as the Preserved Habitat Area pursuant to the AD 161 SHCP with Fish and Wildlife Service permits in violation of federal law. The impacted area included estimated 4.33 acres of Riversidean Sage Scrub, 2.42 acres of transitional/degradedRiversidean Sage Scrub, and approximately 2.2 acres of ruderal, weed or agricultural areas. In response to the violation of federal law, the Fish and Wildlife Service approved a "Conceptual Mitigation Plan for Impacts to Areas Within the Jurisdiction of the United States Department of Interior Fish and Wildlife Service Under Section 10(a)(l) (B) of the Endangered Species Acton on June 2, 2004 ("Restoration Plan"). Pursuant to the Restoration Plan, Ashby USA, LLC is required to to restore additional 21.65 acres of Riversidean Sage Scrub (4.33 acres at 5:1 ratio) to offset the impacts to mature Riversidean Sage Scrub caused by Ashby USA, LLC grading in violation of federal law. The City and Ashby USA, LLC entered into that certain "Open Space Grading and Restoration Agreement" dated as of May 11,2004 in order to implement the requirements of the Fish and Wildlife Service to cure the violations. The installation of the new plant material pursuant to the Restoration Plan was to be completed before January 31,2005,provided, however, that Ashby USA, LLC is obligated to guarantee the plant growth for a period of five years from installation. Weather conditions in the winter of 2005 and other matters delayed completion of the 33.49 acres of restoration. See "THE COMMUNITY FACILITIES DISTRICT -Environmental Conditions -Endangered Species Act" for a description of the status of the restoration work. Ashby USA, LLC has recently contacted the Fish and Wildlife Service and presented its plan for restoration as outlined above so as to resolve any issues relating to the delay in installation of the plant material beyond January 31, 2005 and to avoid being in violation of federal law. Hazardous Substances While governmental taxes, assessments, and charges are a common claim against the value of a taxed parcel, other less common claims may be relevant. One of the most serious in terms of the potential reduction in the value that may be realized to pay the Special Tax is a claim with regard to hazardous substances. In general, the owners and operators of parcels within the District may be required by law to remedy conditions of the parcels related to the releases or threatened releases of hazardous substances. The federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980, sometimes referred to as "CERCLA" or the "Superfund Act," is the most well-known and widely applicable of these laws, but California laws with regard to hazardous substances are also stringent and similar. Under many 75 of these laws, the owner (or operator) is obligated to remedy a hazardous substances condition of a property whether or not the owner (or operator) has anything to do with creating or handling the hazardous substance. The effect, therefore, should any parcel within the District be affected by a hazardous substance, would be to reduce the marketability and value of the parcel by the costs of remedying the condition, because the owner (or operator) is obligated to remedy the condition. Further, such liabilities may arise not simply from the existence of a hazardous substance but from the method of handling or disposing of it. All of these possibilities could significantly affect the financial and legal ability of a property owner to develop the affectedparcel or other parcels, as well as the value of the property that is realizable upon a delinquency and foreclosure. The appraised value of the property within the District does not take into account the possible reduction in marketability and value of any of the parcels of Taxable Property by reason of the possible liability of the owner (or operator) for the remedy of a hazardous substance condition of the parcel. The District has not independently verified and is not aware that the owner (or operator) of any of the parcels of Taxable Property has such a current liability with respect to any such parcels of Taxable Property, except as expressly noted. However, it is possible that such liabilities do currently exist and that the District is not aware of them. See "THE COMMUNITY FACILITIES DISTRICT -Environmental Conditions" for a description of the prior agricultural use of the property and the remediation of certain conditions identified in the 1999 Phase 1 Environmental Site Assessment report. Further, it is possible that liabilities may arise in the future with respect to any of the parcels of Taxable Property resulting from the existence, currently, on the parcel of a substance presently classified as hazardous but which has not been released or the release of which is not presently threatened, or may arise in the future resulting from the existence, currently, on the parcel of a substance not presently classified as hazardous but which may in the future be so classified. Further, such liabilities may arise not simply from the existence of a hazardous substance but from the method of handling or disposing of it. All of these possibilities could significantly affect the value of a parcel of Taxable Property that is realizable upon a delinquency. See "THE COMMUNITY FACILITIES DISTRICT -Environmental Conditions" herein for a description of the prior use of the property. Levy and Collection of the Special Tax; Insufficiency of the Special Tax The principal source of payment of principal of and interest on the 2006 Bonds is the proceeds of the annual levy and collection of the Special Tax against property within the District. The annual levy of the Special Tax is subject to the maximum tax rates authorized. The levy cannot be made at a higher rate even if the failure failure to do so means that the estimated proceeds of the levy and collection of the Special Tax, together with other available funds, will not be sufficient to pay debt service on the 2006 Bonds. Otherfunds which might be available include funds derived from the payment of penalties on delinquent Special Taxes and funds derived from the tax sale or foreclosure and sale of parcels on which levies of the Special Tax are delinquent. The levy of the Special Tax will rarely, if ever, result in a uniform relationship between the value of particular taxed parcels and the amount of the levy of the Special Tax against such parcels. Thus, there will rarely, if ever, be a uniform relationship between the value of such parcels and the proportionate share of debt service on the 2006 Bonds, and certainly not a direct relationship. The Special Tax levied in any particular tax year on a parcel of Taxable Property is based upon the revenue needs and application of the Rate and Method. Application of the Rate and Method will, in turn, be dependent upon certain development factors with respect to each parcel of Taxable Property by comparison with similar development factors with respect to the other parcels of Taxable Property within the District. Thus, in addition to annual variations of the revenue needs from the Special Tax, the following are some of the factors which might cause the levy of the Special Tax on any particular parcel of Taxable Property to vary from the Special Tax that might otherwise be expected: (1) Reduction in the number of parcels of Taxable Property, for such reasons as acquisition of parcels of Taxable Property by a government and failure of the government to pay the Special Tax based upon a claim of exemption or, in the case of the federal government or an agency 76 thereof, immunity from taxation, thereby resulting in an increased tax burden on the remaining parcels of Taxable Property. (2) Failure of the owners of parcels of Taxable Property to pay the Special Tax and delays in the collection of or inability to collect the Special Tax by tax sale or foreclosure sale of the delinquent parcels, thereby resulting in an increased tax burden on the remaining parcels. In addition, if a substantial portion of land within the District becomes Property Owner's Association Property or Pubic Property, then whether sufficient Special Taxes will be collected to pay principal and interest on the 2006 Bonds when due will depend on the ability and/or willingness of owners of such property to pay the Special Tax levied on the non-exempt portion of their property. Except as set forth above under "SECURITY FOR THE 2006 BONDS -Special Taxes" and " -Rate and Method" herein, the Fiscal Agent Agreement provides that the Special Tax is to be collected in the same manner as ordinary ad valorem property taxes are collected and, except as provided in the special covenant for foreclosure described in "SECURITY FOR THE 2006 BONDS -Proceeds of Foreclosure Sales" and in the Act, is subject to the same penalties and the same procedure, sale and lien priority in case of delinquency as is provided for ad valorem property taxes. Pursuant to these procedures, if taxes are unpaid, the property is then is subject to sale by the District. In addition, the Rate andMethod limits the increase of Special Taxes levied onparcels of Developed Property or Undeveloped Property to cure delinquencies of other property owners in the District. See "SECURITY FOR THE 2006 BONDS -Rate and Method" herein. In the event that sales or foreclosures of property are necessary, there could be a delay in payments to owners of the 2006 Bonds pending such sales or the prosecution of foreclosure proceedings and receipt by the Authority of the proceeds of sale if the Reserve Fund is depleted. See "SECURITY FOR THE 2006 BONDS -Proceeds of Foreclosure Sales." Exempt Properties Certain properties are exempt from the Special Tax in accordance with the Rate and Method (see "SECURITY FOR THE 2006 BONDS -Rate and Method" herein). In addition, the Act provides that properties or entities of the state, federal or local government are exempt from the Special Tax; provided, however, that property within the District acquired by a public entity through a negotiated transaction or by gift or devise, which is not otherwise exempt from the Special Tax, will continue to be subj ect to the Special Tax. It is possible that property acquired by a public entity following a tax sale or foreclosure based upon failure to pay taxes could become exempt from the Special Tax. In addition, although the Act provides that if property subject to the Special Tax is acquired by a public entity through eminent domain proceedings, the obligation to pay the Special Tax with respect to that property is to be treated as if it were a special assessment, the constitutionality and operation of these provisions of the Act have not been tested, meaning that such property could become exempt from the Special Tax. In the event that additional property is dedicated to the City or other public entities, this additional property might become exempt from the Special Tax. The Act further provides that no other properties or entities are exempt from the Special Tax unless the properties or entities are expressly exempted in a resolution of consideration to levy a new special tax or to alter the rate or method of apportionment of an existing special tax. Depletion of Reserve Fund The Reserve Fund is to be maintained at an amount equal to the Reserve Requirement (see "SECURITY FOR THE 2006 BONDS -Special Tax Fund-Disbursements" herein). Funds in the Reserve Fund may be used to pay principal of and interest on the 2006 Bonds in the event the proceeds of the levy and collection of the Special Tax against property within the District is insufficient. If funds in the Reserve Fund for the 2006 Bonds Bonds are depleted, the funds can be replenished from the proceeds of the levy and collection of the Special Tax that are in excess of the amount required to pay all amounts to be paid to the 77 Bondowners pursuant to the Fiscal Agent Agreement. However, no replenishment from the proceeds of a Special Tax levy can occur as long as the proceeds that are collected from the levy of the Special Tax against property within the District at the maximum tax rates, together with other available funds, remains insufficient to pay all such amounts. Thus it is possible that the Reserve Fund will be depleted and not be replenished by the levy of the Special Tax. Potential Delay and Limitations in Foreclosure Proceedings The payment of property owners' taxes and the ability of the District to foreclose the lien of a delinquent unpaid Special Tax pursuant to its covenant to pursue judicial foreclosure proceedings, maybe limited by bankruptcy, insolvency or other laws generally affecting creditors' rights or by the laws of the State relating to judicial foreclosure. See "SECURITY FOR THE 2006 BONDS -Proceeds of Foreclosure Sales" and "BONDOWNERS' RISKS -Bankruptcy and Foreclosure Delay" herein. In addition, the prosecution of a foreclosure could be delayed due to many reasons, including crowded local court calendars or lengthy procedural delays. The ability of the District to collect interest and penalties specified by State law and to foreclose against properties having delinquent Special Tax installments may be limited in certain respects with regard to properties in which the Federal Deposit Insurance Corporation (the "FDIC") has or obtains an interest. The FDIC would obtain such an interest by taking over a financial institution which has made a loan which is secured by property within the District. The FDIC has adopted a policy statement regarding the payment of state and local real property taxes (the "Policy Statement") which provides that the FDIC intends to pay valid real property taxes, interest and penalties, in accordance with state law, on property which at the time of the tax levy is owned by a financial institution in an FDIC receivership, unless abandonment of the FDIC interest is determined to be appropriate. However, the Policy Statement is unclear as to whether the FDIC considers special taxes such as the Special Taxes to be "real property taxes" which it intends to pay. Furthermore, the Policy Statement provides that, with respect to parcels on which the FDIC holds a mortgage lien, it will not permit its lien to be foreclosed by a taxing authority without its specific consent, and that it will not pay or recognize liens for any penalties, fines, or similar claims imposed for the non-payment of taxes. The Authority and the District are unable to predict what effect the application of the Policy Statement would have in the event of a delinquency on a parcel within the District in which the FDIC has or obtains an interest, although prohibiting the lien of the FDIC to be foreclosed at a judicial foreclosure sale would likely reduce or eliminate the persons willing to purchase a parcel at a foreclosure sale. In addition, potential investors should be aware that judicial foreclosure proceedings are not summary remedies and can be subject to significant procedural and other delays caused by crowded court calendars and other factors beyond control of the Authority or the District. Potential investors should assume that, under current conditions, it is estimated that a judicial foreclosure of the lien of Special Taxes will take up to two or three years from initiation to the lien foreclosure sale. At a Special Tax lien foreclosure sale, each parcel will be sold for not less than the "minimum bid amount" which is equal to the sum of all delinquent Special Tax installments, penalties and interest thereon, costs of collection (including reasonable attorneys' fees), post-judgment interest and costs of sale. Each parcel is sold at foreclosure for the amounts secured by the Special Tax lien on such parcel and multiple parcels may not be aggregated in a single "bulk" foreclosure sale. If any parcel fails to obtain a "minimum bid," the Authority may, but is not obligated to, seek superior court approval to sell such parcel at an amount less than the minimum bid. Such Superior Court approval requires the consent of the owners of 75% of the aggregate principal amount of the Outstanding Bonds. Adjustable Rate and Unconventional Mortgage Structures Since the end of 2002, many persons have financedthe purchase of new homes using loans with little or no down payment and with adj ustable interest rates that start low and are subj ect 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 78 California, a substantial portion of outstanding home loans are adjustable rate loans 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. These economists predict that as interest rates on new loans increase and as the interest rates on existing adjustable rate loans are reset (and payments are increased) there will be a decrease in home sales due to the inability of purchasers to qualify for loans with higher interest rates. They further predict that such a decrease in home sales will, eventually, result in a decrease in home prices. Some economists are concerned that such a reduction in home prices will result 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. Homeowners in the District who purchase their homes with with adjustable rate and non-conventional loans with no or low down payments may experience difficulty in making their loan payments due to automatic mortgage rate increases and rising interest rates and should homeowners in the District have loan balances that exceed the value of their homes, those homeowners may choose not to make their loan payments even if they are able to. This could result in an increase in the Special Tax delinquency rate in the District and draws on the Reserve Fund. If there were significant delinquencies in Special Tax collections in the District and the Reserve Fund was fully depleted, there could be a default in the payment of principal of and interest on the 2006 Bonds. Some economists have also predicted that, as mortgage loan defaults increase bankruptcy filing by such homeowners are also likely to increase. Bankruptcy filings by homeowners with delinquent Special Taxes would delay the commencement and completion of foreclosure proceedings to collect delinquent Special Taxes. Taxes. See "SPECIAL RISK FACTORS —Bankruptcy and Foreclosure Delay" below. Bankruptcy and Foreclosure Delay The payment of Special Taxes and the ability of the District to foreclose the lien of a delinquent Special Taxes as discussed in the section herein entitled "SECURITY FOR THE 2006 BONDS" may be limited by bankruptcy, insolvency, or other laws generally affecting creditors' rights or by the laws of the State relating to judicial foreclosure. In addition, the prosecution of a judicial foreclosure may be delayed due to congested local court calendars or procedural delays. The various legal opinions to be delivered concurrently with the delivery of the 2006 Bonds (including Bond Counsel's approving legal opinion) will be qualified, as to the enforceability of the various legal instruments, by moratorium, bankruptcy, reorganization, insolvency or other similar laws affecting the rights of creditors generally. Although bankruptcy proceedings would not cause the obligation to pay the Special Tax to become extinguished, bankruptcy of a property owner or of a partner or other equity owner of a property owner, could result in a stay of enforcement of the lien for the Special Taxes, a delay in prosecuting Superior Court foreclosure proceedings or adversely affect the ability or willingness of a property owner to pay the Special Taxes and could result in the possibility of delinquent Special Taxes not being paid in full. In addition, the amount of any lien on property securing the payment of delinquent Special Taxes could be reduced if the value of the property were determined by the bankruptcy court to have become less than the amount of the lien, and the amount of the delinquent Special Taxes in excess of the reduced lien could then be treated as an unsecured claim by the court. Any such stay of the enforcement of the lien for the Special Tax, or any such delay or non-payment, would increase the likelihood of a delay or default in payment of the principal of and interest on the 2006 Bonds and the possibility of delinquent Special Taxes not being paid in full. Moreover, amounts received upon foreclosure sales may not be sufficient to fully discharge delinquent installments. To the extent that a significant percentage of the property in the District is owned by any major landowner, any Merchant Builders or any other property owner, and such owner is the subject of bankruptcy proceedings, the payment of the Special Tax and the ability of the Authority to foreclose the lien of a delinquent unpaid Special Tax could be extremely curtailed by bankruptcy, insolvency, or other laws generally affecting creditors' rights or by the laws of the State relating to judicial foreclosure. On July 30, 1992, the United States Court of Appeals for the Ninth circuit issued its opinion in a bankruptcy case entitled In re Glasply Marine Industries. In that case, the court held that ad valorem 79 property taxes levied by Snohomish County in the State of Washington after the date that the property owner filed a petition for bankruptcy were not entitled to priority over a secured creditor with a prior lien on the property. The court upheld the priority of unpaid taxes imposed after the filing of the bankruptcy petition as "administrative expenses" of the bankruptcy estate, payable after all secured creditors. As a result, the secured creditor was to foreclose on the property and retain all of the proceeds of the sale except the amount of the pre-petition taxes. According to the court's ruling, as administrative expenses, post-petition taxes would have to be paid, assuming that the debtor has sufficient assets to do so. In certain circumstances, payment of such administrative expenses may be allowed to be deferred. Once the property is transferred out of the bankruptcy estate (through foreclosure or otherwise) it would at that time become subject to current ad valorem taxes. The Act provides that the Special Taxes are secured by a continuing lien, which is subject to the same lien priority in the case of delinquency as ad valorem taxes. No case law exists with respect to how a bankruptcy court would treat the lien for the Special Taxes levied after the filing of a petition in bankruptcy. Glasply is controlling precedent for bankruptcy courts in the State. If the Glasply precedent was applied to the levy of the Special Tax, the amount of Special Tax received from parcels whose owners declare bankruptcy could be reduced. It should also be noted that on October 22,1994, Congress enacted 11 U.S. C. Section 362(b)(18), which added a new exception to the automatic stay for ad valorem property taxes imposed by a political subdivision after the filing of a bankruptcy petition. Pursuant to this new provision of law, in the event of a bankruptcy petition filed on or after October 22, 1994, the lien for ad valorem taxes in subsequent fiscal years will attach even if the property is part of the bankruptcy estate. Bondowners should be aware that the potential effect of 11 U.S. C. Section 362(b)(18) on the Special Taxes depends upon whether a court were to determine that the Special Taxes should be treated like ad valorem taxes for this purpose. Payments by FDIC and Other Federal Agencies The ability of the Authority to collect interest and penalties specified by state law and to foreclose the lien of delinquent Special Taxes may be limited in certain respects with regard to properties in which the FDIC, the Drug Enforcement Agency, the Internal Revenue Service or other similar federal governmental agencies has or obtains an interest. Specifically, with respect to the FDIC, on June 4, 1991, the FDIC issued a Statement of Policy Regarding the Payment of State and Local Property Taxes (the "1991 Policy Statement"). The 1991 Policy Statement was revised and superseded by a new Policy Statement effective January 9, 1997 (the "Policy Statement"). The Policy Statement provides that real property owned by the FDIC is subject to state and local real property taxes only if those taxes are assessed according to the property's value, and that the FDIC is immune from real property taxes assessed on any basis other than property value. According to the Policy Statement, the FDIC will pay its property tax obligations when they become due and payable and will pay claims for delinquent property taxes as promptly as is consistent with sound business practice and the orderly administration of the institution's affairs, unless abandonment of the FDIC's interest in the property is appropriate. The FDIC will pay claims for interest on delinquent property taxes owed at the rate provided under state law, to the extent the interest payment obligation is secured by a valid lien. The FDIC will not pay any amounts in the nature of fines or penalties and will not pay nor recognize liens for such amounts. If any property taxes (including interest) onFDIC owned property are securedby avalidlien (in effect before the property became owned by the FDIC), the FDIC will pay those claims. The Policy Statement further provides that no property of the FDIC is subj ect to levy, attachment, garnishment, foreclosure or sale without the FDIC's consent. In addition, the FDIC will not permit a lien or security interest held by the FDIC to be eliminated by foreclosure without the FDIC's consent. The Policy Statement states that the FDIC generally will not pay non ad valorem taxes, including special assessments, on property in which it has a fee interest unless the amount of tax is fixed at the time that the FDIC acquires its fee interest in the property, nor will it recognize the validity of any lien to the extent it purports to secure the payment of any such amounts. Special taxes imposed under the Act and a 80 special tax formula which determines the special tax due each year, are specifically identified in the Policy Statement as being imposed each year and therefore covered by the FDIC's federal immunity. With respect to property in California owned by theFDIC on January 9,1997 and that was owned by the Resolution Trust Corporation (the "RTC") on December 31, 1995, or that became the property of the FDIC through foreclosure of a security interest held by the RTC on that date, the FDIC will continue the RTC's prior practice of paying special taxes imposed pursuant to the Act if the taxes were imposed prior to the RTC's acquisition of an interest in the property. All other special taxes may be challenged by the FDIC. The Authority is unable to predict what effect the application of the Policy Statement would have in the event of a delinquency on a parcel within the District in which the FDIC has or obtains an interest, although prohibiting the lien of the FDIC to be foreclosed at a judicial foreclosure sale would would reduce or eliminate the persons willing to purchase a parcel at a foreclosure sale. Bondowners should assume that the District will be unable to foreclose on any parcel owned by the FDIC. Such an outcome could cause a draw on the Reserve Fund and perhaps, ultimately, a default in payment on the 2006 Bonds. Based upon the secured tax roll as of January 1, 2004, the FDIC does not presently own any of the property in the District. The Authority expresses no view concerning the likelihood that the risks described above will materialize while the 2006 Bonds are outstanding. Payment of Special Tax Not a Personal Obligation of the Property Owners An owner of Taxable Property is not personally obligated to pay the Special Tax. Rather, the Special Tax is an obligation only against the parcels of Taxable Property. If the value of the parcels of Taxable Property is not sufficient, taking into account other obligations also payable thereby to fully secure the Special Tax, the District has no recourse against the owner. Factors Affecting Parcel Values and Aggregate Value Geologic, Topographic and Climatic Conditions. The value of the Taxable Property in the District in the future can be adversely affected by a variety of additional factors, particularly those which may affect infrastructure and other public improvements and private improvements on the parcels of Taxable Property and the continued habitability and enjoyment of such private improvements. Such additional factors include, without limitation, geologic conditions such as earthquakes and volcanic eruptions, 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 can be expected that one or more of such conditions 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 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 parcels of Taxable Property may well depreciate or disappear. Seismic Conditions. The District, like all California communities, may be subject to unpredictable seismic activity. The occurrence of seismic activity in the District could result in substantial damage to properties in the District which, in turn, could substantially reduce the value of such properties and could affect the ability or willingness of the property owners to pay their Special Taxes. Any major damage to structures as a result of seismic activity could result in greater reliance on undeveloped property in the payment of Special Taxes. Prior to the issuance of grading permits, engineering reports addressing geologic, seismic or soil limitations and foundation design were prepared for applicable Planning Areas. None of the school sites lies within the Alquist-Priolo Earthquake Fault Zone. Legal Requirements. Other events which may affect the value of a parcel of Taxable Property in the District include changes in the law or application of the law. Such changes may include, without limitation, local growth control initiatives, local utility connection moratoriums and local application of statewide tax and governmental spending limitation measures. 81 No Acceleration Provisions The 2006 Bonds do not contain a provision allowing for the acceleration of the 2006 Bonds in the event of a payment default or other default under the terms of the 2006 Bonds or the Fiscal Agent Agreement. So long as the 2006 Bonds are in book-entry form, DTC will be the sole Bondowner and will be entitled to exercise all rights and remedies of Bondowners. Community Facilities District Formation California voters, on June 6, 1978, approved an amendment ("Article XIIIA") to the California Constitution. Section 4 of Article XIIIA, requires a vote of two-thirds of the qualified electorate to impose "special taxes," or any additional ad valorem, sales or transaction taxes on real property. At an election held pursuant to the Act, more than two-thirds of the qualified electors within the District, consisting of the landowners within the boundaries of the District, authorized the District to incur bonded indebtedness to finance the development of the property within the District andapproved the Rate and Method. The Supreme Court of the State has not yet decided whether landowner elections (as opposed to resident elections) satisfy requirements of Section 4 of Article XIIIA, nor has the Supreme Court decided whether the special taxes of a District constitute a "special tax" for purposes of Article XIIIA. Section 53341 of the Act requires that any action or proceeding to attack, review, set aside, void or annul the levy of a special tax or an increase in a special tax pursuant to the Act shall be commenced within 30 days after the special tax is approved by the voters. No such action has been filed with respect to the Special Tax. Billing of Special Taxes A special tax formula can result in a substantially heavier property tax burden being imposed upon properties within a District than elsewhere in a city or county, and this in turn can lead to problems in the collection of the special tax. In some Districts the taxpayers have refused to pay the special tax and have commenced litigation challenging the special tax, the District and the bonds issued by the District. Under pro visions of the Act, the Special Taxes are billed to the properties within the District which were entered on the Assessment Roll of the County Assessor by January 1 of the previous fiscal year on the regular property tax bills sent to owners of such properties. Such Special Tax installments are due and payable, and bear the same penalties and interest for non-payment, as do regular property tax installments. These Special Tax installment payments cannot be made separately from property tax payments, except in certain limited circumstances. Therefore, the unwillingness or inability of a property owner to pay regular property tax bills as evidenced by property tax delinquencies may also indicate an unwillingness or inability to make regular property tax payments and installment payments of Special Taxes in the future. See "SECURITY FOR THE 2006 BONDS -Proceeds of Foreclosure Sales," for a discussion of the provisions which apply, and procedures which the District is obligated to follow, in the event of delinquency in the payment of installments of Special Taxes. Collection of Special Tax hi order to pay debt service on the 2006 Bonds, it is necessary that the Special Tax levied against land within the District be paid in a timely manner. The District has covenanted in the Fiscal Agent Agreement under certain conditions to institute foreclosure proceedings against property with delinquent Special Tax in order to obtain funds to pay debt service on the 2006 Bonds. If foreclosure proceedings were instituted, any mortgage or deed of trust holder could, but would not be required to, advance the amount of the delinquent Special Tax to protect its security interest. In the event such superior court foreclosure is necessary, there could be a delay in principal and interest payments to the Bondowners pending prosecution of the foreclosure proceedings and receipt of the proceeds of the foreclosure sale, if any. No assurances can be given that the real property subject to foreclosure and sale at a judicial foreclosure sale will be sold or, if sold, that the proceeds of such sale will be sufficient to pay any delinquent Special Tax installment. Although the Act authorizes the Authority as the Governing Board of the District to cause such an action to be commenced and diligently pursued to completion, the Act does not specify the obligations of the 82 Governing Board with regard to purchasing or otherwise acquiring any lot or parcel of property sold at the foreclosure sale if there is no other purchaser at such sale. See "SECURITY FOR THE 2006 BONDS -Proceeds of Foreclosure Sales." Right to Vote on Taxes Act An initiative measure commonly referred to as the "Right to Vote on Taxes Act" (the "Initiative") was approved by the voters of the State at the November 5, 1996 general election. The Initiative added Article XIIIC ("Article XIIIC") and Article XIIID to the California Constitution. According to the "Title and Summary" of the Initiative prepared by the California Attorney General, the Initiative limits "the authority of local governments to impose taxes and property-related assessments, fees and charges." The provisions of the Initiative have not yet been interpreted by the courts, although a number of lawsuits have been filed requesting the courts to interpret various aspects of the Initiative. Among other things, Section 3 of Article XIII states that " . . . the initiative power shall not be prohibited or otherwise limited in matters of reducing or repealing any local tax, assessment, fee or charge." The Act provides for aprocedure, which includes notice hearing, protest and voting requirements to alter the rate and method of apportionment of an existing special tax. However, the Act prohibits a legislative body from adopting any resolution to reduce the rate of any special tax or terminate the levy of any special tax pledged to repay any debt incurred pursuant to the Act unless such legislative body determines that the reduction or termination of the special tax would not interfere with the timely retirement of that debt. On July 1, 1997, a bill signed into law by the Governor of the State enacting Government Code Section 5854, which states that: "Section 3 of Article XIIIC of the California Constitution, as adopted at the November 5,1996, general election, shall not be construed to mean that any owner or beneficial owner of a municipal security, purchased before or after that date, assumes the risk of, or in any way consents to, any action by initiative measure that constitutes an impairment of contractual rights protected by Section 10 of Article I of the United States Constitution." Accordingly, although the matter is not free from doubt, it is likely that the Initiative has not conferred on the voters the power to repeal or reduce the Special Taxes if such reduction would interfere with the timely retirement of the 2006 Bonds. It may be possible, however, for voters or the District to reduce the Special Taxes in a manner which does not interfere with the timely repayment of the 2006 Bonds but which does reduce the maximum amount of Special Taxes that may be levied in any year below the existing levels. Therefore, no assurance can be given with respect to the levy of Special Taxes for Administrative Expenses. Furthermore, no assurance can be given with respect to the future levy of the Special Taxes in amounts greater than the amount necessary for the the timely retirement of the 2006 Bonds. Like its antecedents, the Initiative is likely to undergo both judicial and legislative scrutiny before its impact on the District and its obligations can be determined. Certain provisions of The Initiative may be examined by the courts for their constitutionality under both State and federal constitutional law. The District is not able to predict the outcome of any such examination. The foregoing discussion of the Initiative should not be considered an exhaustive or authoritative treatment of the issues. The District does not expect to be in a position to control the consideration or disposition of these issues and cannotpredict the timing or outcome of any judicial or legislative activity in this regard. Interim rulings, final decisions, legislative proposals and legislative enactments may all affect the impact of The Initiative on the 2006 Bonds as well as the market for the 2006 Bonds. Legislative and court calendar delays and other factors may prolong any uncertainty regarding the effects of The Initiative. 83 Ballot Initiatives and Legislative Measures The Initiative was adopted pursuant to a measure qualified for the ballot pursuant to California's constitutional initiative process and the State Legislature has in the past enacted legislation which has altered the spending limitations or established minimum funding provisions for particular activities. From time to time, other initiative measures could be adopted by California voters or legislation enacted by the State Legislature. The adoption of any such initiative or enactment of legislation might place limitations as to the ability of the State, the County, the City, the District or local districts to increase revenues or to increase appropriations or as to the ability of a property owner to complete the development of the property. Limited Secondary Market There can be no guarantee that there will be a secondary market for the 2006 Bonds or, if a secondary market exists, that such 2006 Bonds can be sold for any particular price. Although the Authority, the the District and Ashby USA, LLC has committed to provide certain statutorily-required financial and operating information, there can be no assurance that such information will be available to Bondowners on a timely basis. The failure to provide the annual financial and operating information does not give rise to monetary damages but merely an action for specific performance. Occasionally, because of general market conditions, lack of current information 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. Loss of Tax Exemption As discussed under the caption "LEGAL MATTERS -Tax Exemption," the interest on the 2006 Bonds could become includable in gross income for federal income tax purposes retroactive to the date of issuance of the 2006 Bonds as a result of acts or omissions of the Authority in violation of certain pro visions of the Code and the covenants of the Fiscal Agent Agreement. In order to maintain the exclusion from gross income for federal income tax purposes of the interest on the 2006 Bonds, the Authority has covenanted in the Fiscal Agent Agreement not to take any action, or fail to take any action, if such action or failure to take such action would adversely affect the exclusion from gross income of interest on the 2006 Bonds under the Internal Revenue Code of 1986, as amended. Should such an event of taxability occur, the 2006 Bonds are notsubjectto early redemption and will remain outstanding to maturity or until redeemedunder theoptional redemption or mandatory redemption provisions of the Fiscal Agent Agreement. IRS Audit of Tax-Exempt Bond Issues The Internal Revenue Servicehas initiated an expanded program for the auditing of tax-exempt bond issues, including both random and targeted audits. It is possible that the 2006 Bonds will be selected for audit by the Internal Revenue Service. It is also possible that the market value of the 2006 Bonds might be affected as a result of such an audit of the 2006 Bonds (or by an audit of similar bonds). Limitations on Remedies Remedies available to the Bondowners may be limited by a variety of factors and may be inadequate to assure the timely payment of principal of and interest on the 2006 Bonds or to preserve the tax-exempt status of the 2006 Bonds. See "Payments by FDIC and other Federal Agencies," "No Acceleration Provision" and "Billing of Special Taxes" herein. 84 LEGAL MATTERS Legal Opinion The legal opinion of Quint & Thimmig LLP, San Francisco, California, Bond Counsel, approving the validity of the 2006 Bonds will be made available to purchasers at the time of original delivery and the form of such opinion is attached hereto as Appendix H. Tax Exemption In the opinion of Quint & Thimmig LLP, San Francisco, California, Bond Counsel, under existing law, subject to the Authority's compliance with certain covenants, interest on the 2006 Bonds is excludable from gross income of the owners thereof for federal income tax purposes under Section 55 of the Code, is not includable as an item of tax preference in computing the federal alternative minimum tax for individuals and corporations under the Code but is taken into account in computing an adjustment used in determining the federal alternative minimum tax for certain corporations. Failure by the Authority to comply with one or more of such covenants could cause interest on the 2006 Bonds to not be excludable from gross income under Section 103 of the Code for federal income tax purposes retroactively to the date of issuance of the 2006 Bonds. In the further opinion of Bond Counsel, interest on the 2006 Bonds is exempt from California personal income taxes. Bondowners should also be aware that the ownership or disposition of, or the accrual or receipt of interest on, the 2006 Bonds may have federal or state tax consequences other than as described above. Bond Counsel expresses no opinion regarding any federal or state tax consequences arising with respect to the 2006 Bonds other than as expressly described above. The form of Bond Counsel's opinion is set forth in Appendix H. No Litigation At the time of delivery of the 2006 Bonds, the Authority and the District will certify that there is no action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court or regulatory agency, public board or body pending with respect to which they have been served with process or to their knowledge threatened against the Authority or the District affecting their existence, or the titles of their respective officers which would materially adversely affect the ability of the Authority to perform its obligations under the 2006 Bonds or certain documents related thereto or seeking to restrain or to enjoin the issuance, sale or delivery of the 2006 Bonds, the application of the proceeds thereof in accordance with the Fiscal Agent Agreement, or the collection or application of the Special Tax to pay the principal of and interest on the 2006 Bonds, or in any way contesting or affecting the validity or enforceability of the 2006 Bonds, or the Fiscal Agent Agreement or any action of the Authority or the District contemplated by either of said documents, or in any way contesting the completeness or accuracy of this Official Statement or any amendment or supplement hereto, or contesting the powers of the Authority or the District or their authority with respect to the 2006 Bonds or any action of the Authority or the District contemplated by either of said documents, nor, to the knowledge of the Authority, is there any basis therefor. No General Obligation of the Authority or the District The 2006 Bonds are not general obligations of the Authority or the District, but are limited obligations of the Authority for the District payable solely from proceeds of the Special Tax and proceeds of the 2006 Bonds, including amounts in the Reserve Fund, the Special Tax Fund and the Bond Fund. Any tax levied for the payment of the 2006 Bonds shall be limited to the Special Taxes to be collected within the jurisdiction of the District. 85 NO RATINGS The 2006 Bonds have not been rated by any securities rating agency. UNDERWRITING The 2006 Bonds are being purchasedby Stone & YoungbergLLC at apurchase priceof $50,294,375 (which represents the aggregate principal amount of the 2006 Bonds ($51,250,000, less an underwriter's discount of $955,625). The purchase agreement relating to the 2006 Bonds provides that the Underwriter will purchase all of the 2006 Bonds, if any are purchased, the obligation to make such purchase being subject to certain terms and conditions set forth in such purchase agreement. The Underwriter may offer and sell 2006 Bonds to certain dealers and others at prices lower than the offering price stated on the cover page hereof. The offering prices may be changed from time to time by the Underwriter. PROFESSIONAL FEES Feespayable to certainprofessionals, in connection with the 2006 Bonds, including the Underwriter, Quint & Thimmig LLP, as Bond Counsel, McFarlin & Anderson LLP, as Disclosure Counsel, and U.S. Bank National Association, as the Fiscal Agent, are contingent upon the issuance of the 2006 Bonds. The fees of David Taussig & Associates, Inc., as Special Tax Consultant, and Fieldman, Rolapp & Associates, as Financial Advisor to the Authority, are in part contingent upon the issuance of the 2006 Bonds. MISCELLANEOUS References are made herein to certain documents and reports which are brief summaries thereof which summaries do not purport to be complete or definitive and reference is made to such documents and reports for full and complete statement of the contents thereof. Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representatives of fact. This Official Statement is not to be construed as a contract or agreement between the District or the Authority and the purchasers or owners of any of the 2006 Bonds. The execution and delivery of the Official Statement by the District has been duly authorized by the Authority on behalf of the District. TEMECULA PUBLIC FINANCING AUTHORITY COMMUNITY FACILITIES DISTRICT NO. 03-02 (RORIPAUGH RANCH) By: /s/Shawn Nelson Shawn Nelson, Executive Director, Temecula Public Financing Authority, on behalf of the District 86 NO RATINGS The 2006 Bonds have not been rated by any securities rating agency. UNDERWRITING The2006Bonds are being purchased by Stone & YoungbergLLC at apurchase priceof $50,294,375 (which represents the aggregate principal amount of the 2006 Bonds ($51,250,000, less an underwriter's discount of $955,625). The purchase agreement relating to the 2006 Bonds provides that the Underwriter will purchase all of the 2006 Bonds, if any are purchased, the obligation to make such purchase being subject to certain terms and conditions set forth in such purchase agreement. The Underwriter may offer and sell 2006 Bonds to certain dealers and others at prices lower than the offering price stated on the cover page hereof. The offering prices may be changed from time to time by the Underwriter. PROFESSIONAL FEES Fees payable to certainprofessionals, in connection with the 2006 Bonds, including the Underwriter, Quint & Thimmig LLP, as Bond Counsel, McFarlin & Anderson LLP, as Disclosure Counsel, and U.S. Bank National Association, as the Fiscal Agent, are contingent upon the issuance of the 2006 Bonds. The fees of David Taussig & Associates, Inc., as Special Tax Consultant, and Fieldman, Rolapp & Associates, as Financial Advisor to the Authority, are in part contingent upon the issuance of the 2006 Bonds. MISCELLANEOUS References are made herein to certain documents and reports which are brief summaries thereof which summaries do not purport to be complete or definitive and reference is made to such documents and reports for full and complete statement of the contents thereof. Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representatives of fact. This Official Statement is not to be construed as a contract or agreement between the District or the Authority and the purchasers or owners of any of the 2006 Bonds. The execution and delivery of the Official Statement by the District has been duly authorized by the Authority on behalf of the District. TEMECULA PUBLIC FINANCING AUTHORITY COMMUNITY FACILITIES DISTRICT NO. 03-02 (RORIPAUGH RANCH) By: Is/Shawn Nelson Shawn Nelson, Executive Director, Temecula Public Financing Authority, on behalf of the District 86 APPENDIX A GENERAL INFORMATION ABOUT THE CITY OF TEMECULA The following information is provided for background purposes only. The City of Temecula has no liability or responsibility whatsoever with respect to the 2006 Bonds or the Fiscal Agent Agreement. General Information Following a vote by the residents on November 7, 1989, the City incorporated under the general laws of the State of California on December 1, 1989. The City has a Council-Manager form of government and is represented by the five members of the City Council who are elected at-large to serve a four-year term. The Mayor is selected annually by the members of the City Council. The Temecula Community Services District (TCSD) was also established in 1989. The TCSD is responsible for providing parks and recreation services to the citizens of Temecula, as well as street lighting and slope maintenance in certain areas of the district. Other governmental entities, such as the State of California, the County and various school, water and other districts, also provide various levels of service within the City of Temecula. However, the Temecula City Council does not have continuing oversight responsibility over these other governmental entities. Located on Interstate 15, the City of Temecula is the 9th largest city in the Inland Empire and the 4* largest in Riverside County (as of July 1, 2005), encompassing approximately 30 square miles. The City of Temecula is 85 miles southeast of Los Angeles, approximately 55 miles north of San Diego, approximately 60 miles southeast of Orange County and approximately 20 miles inland from the cities of San Juan Capistrano and Oceanside. The City's approximately 90,872 residents are offered a broad range of housing options from apartments to luxury custom homes. Population From 1990-2005, theCity's population grew from27,099 to 90,872, a gain of 63,773 or 235.3%. hi this same period, Riverside County added 706,587, a gain of 60.4%. CITY OF TEMECULA AND COUNTY OF RIVERSIDE POPULATION FROM 1990 TO 2005 Temecula Riverside County Year Population % Change Population % Change 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001* 2002 2003 2004 2005" 27,099 27,264 31,005 33,226 35,771 39,284 41,850 43,760 46,564 48,828 53,791 61,803 73,164 75,996 78,841 90,872 —0.6% 13.7 7.2 7.7 9.8 6.5 4.6 6.4 4.9 10.2 14.9 18.4 5.3 3.7 15.3 1,170,413 1,223,227 1,268,844 1,304,447 1,331,988 1,355,571 1,381,781 1,400,384 1,441,237 1,473,307 1,522,855 1,590,473 1,654,220 1,726,754 1,807,858 1,877,000 —4.5% 3.7 2.8 2.1 1.8 1.9 1.3 2.9 2.2 3.4 4.4 4 4.4 4.7 3.8 Increase includes Vail Ranch annexation. Increase includes Redhawk annexation which added approximately 9,475 individuals, effective June 30, 2005. Source: California Department of Finance. A-l