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Preliminary Official Statement, dated March 27, 2006
Jr PRELIMINARY OFFICIAL STATEMENT DATED MARCH 27, 2006 r 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 c 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 S in determining the federal alternative minimum tax for certain corporations. In the further opinion of Bond Counsel, such interest 8 is exempt from California personal income taxes. See "LEGAL MATTERS -Tax Exemption " herein. to I $52,010,000* | TEMECULA PUBLIC FINANCING AUTHORITY I COMMUNITY FACILITIES DISTRICT NO. 03-02 | (RORIPAUGH RANCH) f 2006 SPECIAL TAX BONDS g Dated: Date of Delivery Due: September 1, 1, as on the inside cover o g The Temecula Public Financing Authority Community Facilities District No. 03-02 (Roripaugh Ranch) 2006 Special Tax Bonds (the E "2006 Bonds") are being issued under the Mello-Roos Community Facilities Act of 1982 (the "Act") and a Fiscal Agent Agreement, dated 40 as of March 1, 2006, by and between the Temecula Public Financing Authority (the "Authority") and U.S. Bank National Association, 52 as Fiscal Agent (the "Fiscal Agent"), and are payable from proceeds of Special Taxes (as defined herein) levied on property within the ;s Temecula Public Financing Authority Community Facilities District No. 03-02 (Roripaugh Ranch) (the "District") according to the rate O and method of apportionment of special tax approved by the qualified electors of the District and by the Board of Directors of the Authority, jg1 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, dj 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 -2 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 g OF FINANCE; IMPROVEMENTS TO BE FINANCED WITH PROCEEDS OF THE 2006 BONDS" and "ESTIMATED SOURCES AND £ USES OF FUNDS" herein. SE 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 0 will act as securities depository for the 2006 2006 Bonds as described herein under "THE 2006 BONDS -Book-Entry and DTC." .g -5 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 E £ THE 2006 BONDS, ARE NOT AN INDEBTEDNESS OF THE AUTHORITY (EXCEPT TO THE LIMITED EXTENT SET FORTH £ g IN THE FISCAL AGENT AGREEMENT), THE STATE OF CALIFORNIA (THE "STATE") OR ANY OF ITS POLITICAL 1 3 SUBDIVISIONS, AND NEITHER THE AUTHORITY (EXCEPT TO THE LIMITED EXTENT SET FORTH IN THE FISCAL 5 « AGENT AGREEMENT), THE STATE NOR ANY OF ITS POLITICAL SUBDIVISIONS IS LIABLE FOR THE 2006 BONDS. .1 S NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE AUTHORITY, THE DISTRICT (EXCEPT TO |[ g 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 o '= LEVIED WITHIN THE DISTRICT, NO TAXES ARE PLEDGED TO THE PAYMENT OF THE 2006 BONDS. THE 2006 BONDS £ "I ARE NOT A GENERAL OBLIGATION OF THE AUTHORITY BUT ARE LIMITED OBLIGATIONS OF THE AUTHORITY zrj! FOR THE DISTRICT PAYABLE SOLELY FROM THE SOURCES PROVIDED IN THE FISCAL AGENT AGREEMENT. 13 O o> "o This cover page contains certain information for quick reference only. It is not a summary of the issue. Potential c _£ investors must read the entire Official Statement to obtain information essential to the making of an informed investment £ j= 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 g c= evaluating the investment quality of the 2006 Bonds. 1:1 0 "^ g ;§ MATURITY SCHEDULE 1 i •3 ~ (See Inside Cover) OJ-— j= •£ Please refer to the inside cover page for a summary of the principal amounts, interest rates, reoffering yields and CUSIP® numbers "g § for the 2006 Bonds. to tn g <g The 2006 Bonds are offered when, as and if issued and accepted by the Underwriter, subject to approval as to their legality by E £ Quint & Thimmig LLP, San Francisco, California, Bond Counsel, and subject to certain other conditions. McFarlin & Anderson LLP, Lake g ° Forest, California is acting as Disclosure Counsel. Certain legal matters will be passed on for the Authority and the District by Richards, 52 'to Watson & Gershon, Los Angeles, California, acting as general counsel to the Authority and for Ashby USA, LLC by its counsel, Pillsbury g g-Winthrop Shaw Pittman LLP, Los Angeles, California. It is anticipated that the 2006 Bonds, in book-entry form, will be available through O % the facilities of DTC on or about April 27, 2006. STONE &YOUNGBERG LLC w w Dated: Arp ril -, '2006 Preliminary, subject to change. MATURITY SCHEDULE TEMECULA PUBLIC FINANCING AUTHORITY COMMUNITY FACILITIES DISTRICT NO. 03-02 (RORIPAUGH RANCH) 2006 SPECIAL TAX BONDS $ Serial Bonds Base CUSIP8 No. f Maturity Principal Interest CUSIP® Maturity Principal Interest CUSIP* (September 1) Amount Rate Yield No.f (September 1) Amount Rate Yield No.f 2007 $ % % 2016 $ % % 2008 2017 2009 2018 2010 2019 2011 2020 2012 2021 2013 2022 2014 2023 2015 2024 % Term 2006 Bonds due September 1, 20 , Yield % CUSIP® No.f % Term 2006 Bonds due September 1, 2036, Yield % CUSIP® No.f Preliminary, subject to change. 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 CUSIP8 Service 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 INFORMATION 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 ORA 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 as representations of 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. THE2006BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON AN EXEMPTION CONTAINED IN SUCH ACT. THE 2006 BONDS HAVE NOT 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 foe 57 Estimated Special Tax Allocation by Property Ownership 59 Direct and Overlapping Debt 61 Estimated Value-to-Lien Ratios 63 Overlapping Assessment and Cpmmunity Facilities Districts 65 Estimated Assessed Value-to-Lien Ratios 66 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 -n 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-l 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] .-f" City of Temecula (Riverside County, California) Regional Location Map R I V E R S I D E C O U N T Y TEMECULA PUBLIC FINANCING AUTHORITY COMMUNITY FACILITIES DISTRICT No. O3-O2 (RORIPAUGH RANCH) D 2006 Aenal Portraits Date Flown: February 8. 2006 Boundaries shown are approximate OFFICIAL STATEMENT $52,010,000* 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") of $52,010,000* 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 $2,990,000* 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'^ 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. *Preliminary, subject to change. 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 developed with 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 acres of commercial development proposed for a neighborhood retail center, approximately 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 I . f* T-»l T 1 • ' . ^f f\f\t\ /1 , f* .1 i t ' l l 11 r» TV1 TT VT-»1 ^ complete for Phase I, and is approximately 90% complete for the "village core" area of Phase II (Planning Areas 10, II, 12, 33A and 33B). Rough grading is approximately 80% complete for the balance of the property within Phase II. Builders in Phase I, 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, and 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 ySA,LLC ("Ashby US A, LLC"), themaster 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, Inc., 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"). Ashby USA, LLC had acquired all of the property within the District and has 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 property proposed for development of approximately 1,230 homes in Phase II. (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). • AshbyUSA, LLC hadsold 99 lots inPlanning Area3,100 lots in Planning Area 4Aand 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 4A in February 2005 and by the purchaser of lots within Planning Area 4B in August 20057 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 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 Monaco 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 of 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 Inc. and. are planned for sale by Ashby USA, LLC to a future purchaser for commercial development as a neighborhood retail center. In 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 buildinepermits 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 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 inPhase 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 Proj ect -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^ 06 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 Agency2 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 oetweenMarch 2007 and September 2007 is a morerealistic 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 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 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. 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 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, 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 54 building 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 I and 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 properly 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 (Winchester Properties) of the County ("County 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 defined 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 Kate and Method of Apportionment ofSpecial 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 flood control facilities, for equestrian trails, for public 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 THE2006 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 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: 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 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 projected 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 A bsorption 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 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. The fee simple market value includes the value of extensive grading and infrastructure improvements completed 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 overall value-to-lien ratio of 3.16:1 ,* with a value of approximately 6.80:1* with respect to Phase I and approximately 1.92:1 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-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 Entities are not paid. See "SECURITY FOR THE BONDS -Letter of Credit." Tax Exemption Lithe 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 ACHIEVEMENT S 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. Preliminary, subject to change. Professionals Involved in the Offering U.S. Bank National Association, Los Angeles, California, will serve as the 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. DavidTaussig & Associates, Inc., NewportBeach, 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 the 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 US A, 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 provide annually certain financial information and operating data relating to the 2006 Bonds, the District, 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 notice of 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 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, controlled, 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 influence over 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 me 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/Roripaugh Entities: 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 andas 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 the Fiscal Agent Agreement, and the sole remedy under the Authority Continuing Disclosure Agreement, the Ashby US A, LLC Continuing Disclosure Agreement orthe Tanamera/Rpripaugh Entities, in the event of any failureof the Authority, Ashby USA, LLC, the Tanamera/Roripaugh Entities or the 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 obligations of Ashby, US A, 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 the 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 APPENDIX F -"Form of Authority Continuing Disclosure Agreement" and APPENDIX 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 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 Murrieta 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 and available moneys provided by Ashby USA, LLC in the aggregate amount of approximately $5 83, 6 10.63 will be applied to discharge the Prior Lien, including the fieri relating to authorized but unissued bonds relating to the Prior Lien or to reimburse Ashby USA, LLC for its provision of funds used to prepay the lien. See "THE COMMUNITY FACILITIES DISTRICT -Acquisition of Improvements" regarding the Acquisition Agreement between the Authority and Ashby USA, LLC regarding certain 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 willaccept 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 $ Less: Original Issue Discount ( ) Less: Underwriter's Discount _ Total Sources Uses: Deposit into Improvement Fund(1) Deposit to Refunding Fund for payment of Prior Lien(2) Deposit into Reserve Fund Deposit into Capitalized Interest Account of the Bond Fund(3) Deposit into Administrative Expense Fund Deposit into Cost of Issuance Fund(4) Total Uses $ <» See "PLAN OF FINANCE; IMPROVEMENTS TO BEFINANCED WITH PROCEEDSOF THE 2006 BONDS" abpve. Within the Improvement Fund $ ___ willb.e deposited into the City Account, $ will be deposited into the EMWD Account, $ will be deposited into the Acquisition Account, andS will be deposited into the Public Works Administration Account. ( ' 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. (3) 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 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 of business on the Record Date preceding the Interest Payment Date, or by wire transfer to an account within 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 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 of business 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 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 Principal Interest Total Debt Service 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 $ *Preliminary, subject to change. 11 Terms of Redemption The 2006 Bonds are subject 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, 20 are subject to optional redemption prior to their stated maturity on any Interest Payment Date on or after September 1, 20 , as a whole, or in part among maturities so as to maintain substantially level debt service on the Bonds andT>y 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, 20 , are subject to mandatory sinking payment redemption in part on September 1, 20 , 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 $ (maturity) The 2006 Bonds maturing on September 1, 2036, are subject to mandatory sinking payment redemption in part on September 1, 20 , 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: Sinking Fund Redemption Date Sinking Payments $ 2036 (maturity) 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 redemp^n or mandatory redemption from prepaid Special Taxes, as specified in writing by the Treasurer to the Fiscal Agent. *Preliminary, subject to change. 12 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 the date fixed for redemption: Redemption Date Redemption Price Any Interest Payment Date from September 1, 103% 2006 through March 1, 2013 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 whichnotice of redemption can timely be given under the Fiscal Agent Agreement, in part, at a redemption price equal to theprincipal amount thereof to 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, 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 me Securities Depositories, to one or more Information Services, and to the respective registereqBondowners 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 oe 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 numbers ofthe 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 ofthe 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 ofthe Fiscal Agent for redemption atthe said redemption price, and shall state that further interest on the 2006 Bonds calledior 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 ofthe Authority, a new 2006 Bond or 2006 Bonds, of the same maturity, of authorized denominations in aggregate principal amount equal to the unredeemed portion ofthe 2006 Bond or 2006 Bonds. *Preliminary, subject to change. 13 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 in 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 Bonds 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 subj ect 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 forthe 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 of, and 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. Aiiiuums in me /\uiiiiiiisuaiivc nxpeiise r uiiu, me v^osi ui issuance r uiiu, me n.eiuiiumg r unu anu 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 the 2006 Bonds and are free and clear of any lien or obligation imposed under the Fiscal Agent Agreement. 14 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 m 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 the 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 taxation within the District, it does not constitute a personal indebtedness of the owners of property within the District. There is no assurance that the owners of real property in the District will be financially able topay the annual Special Tax or that they will pay such tax even if financially able to do so. See "BONDOWNERS' RISKS" herein. 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 APPENDIX B -"Rate and Method of Apportionment of Special Tax Temecula Public Financing Authority CommunityFacilities District No. 03-02 (Roripaugh Ranch)." The qualified electors of the District approved the Rate and Method on January 11, 2005. Capitalized terms used in the following paragraphs but not 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 and liquidity 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; (iii) the Administrative Expenses; (iv) any reasonably anticipated delinquent Special Taxes based on the delinquency rate for Special Taxes levied in 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 Parcels of Taxable Property within the District shall be classified as either Taxable 15 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 Properly 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 District was established, which property counts toward the limitation of 511.11 acres of Property Owner's 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 levied and for which the Land Use is private mini park or private recreation center, or (iy) 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 recordedas 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 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 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 it will not acquire or otherwise take ownership of the Lot, or (iy) 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 othergovernmental agency, provided such conveyance, dedication, or offer is submitted to the CFD Administrator prior to the May 1 1 preceding the Fiscal Year for which the Special Tax is being levied. (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. 16 (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 dwellingunits 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 $5,620 per 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. DIX B -"Rate andMethod of Apportionment of Special Tax Temecula Public Financing ty Facilities District No. 03-02 (Roripaugh Ranch) -Table 1" herein for a listing of the See APPENDIX BAuthority Communi _ 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 leviedProportionately 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 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 increased as a consequence 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 the first 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. Prepayment in Full. The Maximum Special Tax obligation may be prepaid and permanently satisfied fora 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. 03-17 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 securedroll taxes are distributed to taxing agencies within the County County on the oasis of the tax levy, rather than on the basis of actual tax collections. By policy, the County does 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 specifiedtime limits. In such an action, the real property subj ect to the unpaid amount may be sold at judicial 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 by 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. AggregateDelinquencies. 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 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 The constitutionality of the aforementioned legislation, d, has not been tested; and there can be no assurance that, 1 subject 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. 18 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 couldbe a default or 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, delinquencies, required to pay debt service on the Bonds. There is, however, no assurance that the maximum Special Tax rates will be 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 in the Special Tax Prepayments Account established in the Bond Fund. Interest Payment Date, the Fiscal Agent shall withdraw from the Special Tax Fund and ring amounts in the following order 01 priority (i) to the Bond Fund an amount, taking into On each transfer the followir _ account any amounts then on deposit in the Bond Fund and any expected transfers from the Improvement Fund, the Reserve Fund, the Capitalized Merest 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 due on the Bonds on such Interest Payment 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 in Funds" below and APPENDFX 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 Acc9unt and the Special Tax Prepayments Account. Moneys in the Bond Fund and 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. Capitalized Interest Account. Moneys in the Capitalized Interest Account shall be transferred to the Bond Fund 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 19 Bonds, including any amounts due on the Bonds by reason of the sinking payments or an optional redemption of the Bonds. In 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 cover the amount ofsuch BondFund insufficiency. If, after the foregoing 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). Reserve Requirement is defined in the Fiscal Agent Agreement to mean with respect to the 2006 Bonds an amount, as 01 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 original 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 in Funds" 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 directedby 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 $2,990,000* 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: (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 of Additional Bonds proposed to be issued, plus (iii) the aggregate *Preliminary, subject to change. 20 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 setforth in the Fiscal Agent Agreement have theretofore been satisfied, orthe Letters of Credit haveall 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 event that any Letter of Credit has theretofore been drawn uponpursuant to the provisions 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 APPENDDt 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, LLQ will provide a letter or letters of credit from Ohio Savings Bank, with a confirmation by Citibank, N.A., 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's parcels 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 thethird'quarterof'2006once the conditions precedent to the issuance of building permits for all lots within Planning Areas 3, 4A and 4B are 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 Phasellwill be satisfied by June 1, 2007 so that the portion oftheLetter of Credit or Letters of Credit relating to the property owned by Ashby USA, LLC will 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 (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 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 date; or (ii) in whole, if the rating of the unsecured debt obligations of the provider of the letter of credit (or, if applicable, the provider of any related confirmation) have oeen 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 amountmay be reduced as property sales occur and the expected annual Special Taxes that maybe levied on parcels owned bythe applicable landowner andits affiliates decline, or if certain value to lien and accessability 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 ofthe Fiscal Agent Agreement pertaining to the Letter of Credit, see, AppendixE hereto "Summary of Certain Provisions ofthe 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 ofthe City of Temecula. The Joint Powers Agreement was entered into pursuant to the provisions of Articles 1 through 4 (commencing with Section 6500) of Chapter 5, Division 7, Title 1 ofthe Government Code ofthe 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 ofthe members ofthe City Council ofthe City. The Authority has no independent staff. The Executive Director ofthe Authority is the City Manager of the City, and the Treasurer ofthe Authority is the City's Finance Director. The Executive Director administers the day-to-day affairs ofthe Authority, and the Treasurer has custody of all money ofthe Authority from whatever source. Authority for Issuance The 2006 Bonds are issued 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 ofthe 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 adopted ResolutionNo. TPFA 04-10 (the "Amending Resolution"), which added facilities eligible to be funded by the District and changed the date ofthe public hearing from September 28, 2004 to November 9, 2004. Resolution ofComplexitv: On December 7,2004, the Authority adopted Resolution No. TPFA 04-11 (the Resolution of Complexity"), which continued the the public hearing to January 11, 2005. 22 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 the 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 and 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, LLCandthe Merchant Builders andhasnot been independently confirmeaor 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 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 2006 Bonds 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. 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 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 23 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 of 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% complete for 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 inblue 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/Rpripaugh 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 building permits. Applicable taxes will need to be paid in connection with recordation. Pursuant to the agreementwith Ashby USA, LLC, final payment by Continental Residential, Inc. to Ashby USA, LLC of the purchase price of the 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 pf the purchase ofthe 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 ofthe units within Phases I and II. Construction ofthe schools is not a condition to development ofthe property within the Community Facilities District. A portion of the Roripaugh Ranch proposed development is located within County Assessment District No. 161 and is participating in a portion ofthe shared funding of community infrastructure needs. 24 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. AshbyUSA, 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, AshbyUSA, 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 expected to 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 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 AshbyUSA, LLC's workis 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 ofthe 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 ofthe 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 ofthe Option Agreement. If the option for approximately 412 lots is selected, the sale ofthe approximately 412 lots would close within 45 days ofthe 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 of Real Property and Escrow Instructions, dated as of July 11,2005, with KB Home Coastallnc., 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 imr Plan, the Development /being mapped first by an . ^ ___ „ , .. .. „ 0 subdivided into individual single-family lots by a "B" tract map. Tract Map No. 29353-2 recorded in September 2003 andis 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 of the Preannexation and Development Agreement (currently approximately November 26,2012) or (ii) expiration ofthe 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 29353-2 (Phase I) priorto the fulfillment of certain development conditions. See " -Development Agreement," below. Utility services for parcels in the District will be provided by Southern California Edison (electricity), Southern California Gas Company (natural gas), CR&R Disposal (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 25 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. Butterfield Stage 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 will be prepared to make an offer of fair market value to the owners when the appraisals are approvedby 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 the 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 bid package 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 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 ana 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 construction at the time such buildingpermits 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 26 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, 2006, 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 thai: (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 Entittements for Phases I and II for the issuance of thepuilding 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 trie Specific Plan, including lot size and the maximum 1,500 units 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 Phasellhave theability to construct at least 1,230 dwellingunits 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 allow 515 building permits to be issued by 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 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 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 inPhase 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 1 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 amixed-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 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 the Deferral Agreement. 27 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 proj ect 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 the County's Assessment T-V • A ' i 1 s~ -t \ T-» ' * • i • , ' ' ' 1 1 ^ 1 t i i . /* r« • , 1 ^ j"\ -i ,,-i /~\ • i • City ads pproximately $436,098 to the Center for Natural Lands Management. Rough grading is substantially comp)lleettee iinn Phase II iand in the Village Core area of Phase II r-A 1 lr-fc • j • i 1 • j 1 r» /\ ft /i j • j -I 1 1 /•• T»I TT • 1 • • , t . ~t -I • i t 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 gnatcatcner, Quino checkerspot 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 AssessmentDistrict 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 F\VS permits in violation offederal law. The impacted area included an estimated 4.33 acres of Riversidean Sage Scrub, 2.42 acres of transitional/degraded Riversidean Sage Scrub, and approximately 2.2 acres of ruderal, weed or agricultural areas. In response to the violation offederal 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 offederal 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. Under the 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 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 obtained all 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 toundaries 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 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 28 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 thejurisdiction 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 criteria and is approved by the Army Corp of Engineers. In March 2003, a permit was issued by the U.S. Army Corp of Engineers which determined that the activity complied with the terms and conditions of the nationwide permifissued 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 willow scrub 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) onDecember 11,2002. Under the Section 401 permit, the period 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 in 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 me 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 USA, 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 andFederal Land Use Regulations." The proj ect 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 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 hydraulic analyses for Santa Gertrudis Creek or Long Valley Wash and determined that no Flood Insurance Study data hadpreviously 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 29 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. For 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 defined 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 USA, 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, etseq. (the "Development Agreement Law"). The applicable statute of limitations relating to 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 vandly executed development agreement. One appellate case in California, Santa Margarita Residents v. SanLuis ObispoBd. of Supervisors, has held that development agreements are enforceable under the Development Agreement Law. However, the development agreement in that case did not address the type of vested rights obtained in the Development Agreement. Consequently, although the Development Agreement purports to provide Ashby USA, LLC with a vested right to build the development as currently plannedana as described herein, if the Development Agreement were to be challenged in a California court, 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 building permits based on the completion of the fire station. On February 28,2006, the City Council adopted the ordinance approving the First Amendment 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 30 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 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 additiqnal 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 protectiqn(either modified 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 do not pertain 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 Area33B for a park and ride and trail head; and (4) Ashby USA, LLC would be 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 33B are contained in 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 City under 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 thepublic 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. 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 31 parcels in the District are or will be subj ect to recorded covenants, conditions and restrictions that provide for a levy of 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 Improvements from Ashby US A, LLC upon completion of various discrete components of infrastructure and inspection thereof by the City. The Acquisition Agreement provides that the infrastructure will be acquired for an amount based upon the documented Actual Cost (as defined in the Acquisition Agreement) thereof 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 andthe Merchant Builders andhasnot been independently confirmed or 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 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 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] FIGURE 2-1 CL CD LAND USE §LOW DENSITY RESIDENTIAL LOW MEDIUM DENSITY RESIDENTIAL MED. DENSITY RES. (Standard) SMED. DENSITY RES. (Clustered Courtyard) NEIGHBORHOOD COMMERCIAL NEIGHBORHOOD PARK gSPORTS PARK PRIVATE MINI PARK PRIVATE RECREATION CENTER EDUCATIONAL (Schools) BPUBLIC INSTITUTIONAL (Fl» SHtton) HABITAT FLOOD CONTROL LANDSCAPE SLOPE PUBLIC STREETS PRIVATE STREETS CODE L LM M1 M2 NC NP SP MP RC S1.S2 PI OS1 OS2 OS3 ACRES 107.8 194.8 21.5 68.9 15.4 8.1 19.7,3 92 32.0 2.0 202.7 39.1 21.2 35.4 9.8 DENSITY 1.1 4,8 5.7 9.4 UNITS 117 939 122 837 2.5 2,015 City/County Boundary Pedestrian Bridge •mcc Notes: * A1S' wida multi-use trail is located in Banning Areas 13,20 and 21 adjacent to the property boundary, * Planning Areas 1@, 30,21. 33A and 338 will have 1 acre minimum lots adjacent to the property boundary and 1/2 acre minimum lota adjacent to the 1 acre Job, •oCD Q. Q a. Table 1 Temecula Public Financing Authority Community Facilities District No. 03-02 (Roripaugh Ranch) Property Ownership and Development Status Name of Landowner/Merchant Builder0' Development Est. Phase/Total Specific Plan Number Planning of Units Completed or Under Construction as of No. of Lots for Which There is a recorded Area Phase I-Residential Ashby USA, LLC/Continental Units January 15,2006'4' Final Map Asnby l Residential, Inc.(1) 1A 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 15,2006 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 Eaving; a few lots have iterate. 298 Phase II -Residential and Commercial Ashby USA, LLC/KB Home Coastal Inc. (Option)(2X3> Total Phase I and Phase II 1.230 1,745 298 Rough grading in process. 0) (2) (3) 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 USA, 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, Inc., 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 a joint venture 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 Fontana along the Jurupa Hills. The master developer is Ten Ninety, Ltd., aCalifornia Limited Partnership owned byCreative 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 in Fiesta Development, Inc., a partnership that was established in 1996. Fiesta Development, Inc. was created to develop large parcels of land to sell to the merchant builder community and to build single-family 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 project. 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 proj ect 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 was formed in 2003 and commenced 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, California. • 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 US A 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 US A 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 Resort Partners, a $50 million real estate equity fund developing several proj ects 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 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 $44,000,000* of District bond proceeds will be available. District eligible costs not funded 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 of 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 * Preliminary, subject to change. 36 Report" appended hereto for further information on the Appraisal and for limiting conditions relating to the Appraisal. 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. Table 2 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 UJ 00 Sources Lot Sales -Residential"1 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 2ni Series of Bonds SUBTOTAL Uses: PHASE I -Improvements Land costs Soft Costs" Land Improvement Costs Construction Costs Constr. Loan -Bank of the West pay-off Other Contrib. & Related Party pay-off GRC Exit Fee (3.6%)4) SUBTOTAL Uses: PHASE n -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%)4) 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 As of Dec 31 2005 $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 $8,661,108 23,005,243 23,279,883 347,042 517,641 35,171,903 21,239,549 $112,222,369 $13,561,414 279,804 1,024,167 3,100,000 $17,965,385 $92,551,802 $92,250,234 $2,138,105 Jan-March 2006 $5,212,169 6,165,000 $11,377,169 $290,000 5,053,517 182,426 $5,525,943 $1,487,530 800,000 1,540,000 801,050 $4,628,580 $1,538,972 441,232 200,000 640,000 $2,820,204 $6,895,872 $6,078,855 $540,548 Apr-June 2006 $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 $4,495,562 2,000,000 6,400,000 400,000 10,000,000 $23,295,562 $9,197,508 5,500,000 730,706 2,800,000 $18,228,214 $28,862,904 $19,537,872 $173,772 July-Sept 2006 $6,610,695 25,000,000 12,000,000 $43,610,695 $90,000 1,476,526 237,985 $1,804,511 4,148,997 1,468,375 5,590,000 81,309 16,821,184 $28,109,865 $8,692,514 2,565,852 2,200,000 $13,458,366 $20,886,035 $22,486,707 $411,725 Oct-Dec 2006 $7,115,000 16,500,000 17,000,000 $40,615,000 $34,600 $34,600 $4,016,346 200,000 2,600,000 15,000,000 $21,816,346 $7,759,744 1,836,644 919,136 2,500,000 $13,015,524 $16,843,124 $18,023,346 $6,160,255 Jan-June 2007 $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 $1,874,000 100,000 57,000,000 1,872,000 $60,846,000 $4,822,227 $4,822,227 $8,662,255 $61,642,823 $154,648 July-Dec 2007 $93,535,000 35,986,000 5,520,000 $135,041,000 473,725 $473,725 $400,000 47,578,816 13,483,717 $4,662,756 $66,125,289 $5,336,481 $61,262,533 $68,596,633 Thereafter $116,210,000 $8,400,000 $124,610,000 2,353,672 $2,353,672 6,651,720 $6,651,720 300,000 $300,000 $6,951,720 $2,353,672 $183,901,241 Totals $307,335,805 6,534,000 35,986,000 13,920,000 35,171,903 26,135,000 146,400,000 36,010,573 834,194 44,000,000 2,200,000 $654,527,476 $2,165,277 11,183,132 13,740,367 5,314,776 26,135,000 15,975,523 1,806,508 $76,320,583 $8,661,108 $39,427,678 27,748,258 16,577,042 1,800,000 $35,171,903 $146,400,000 34,723,266 13,186,476 $323,695,731 $45,572,379 10,623,532 1,030,706 7,143,303 6,240,000 $70,609,920 $186,990,193 $283,636,041 $183,901,241 (1) (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 the parcels in Phase II. If .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 Asnby 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. Soft costs which are not included in the foregoing values include a combination of planning, engineering, environmental, endowment and consultant costs as well as interest on loans, financing costs and taxes. GRC exit fee relates to payoff of amounts due relating to original acquisition of the property. 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 of sales of lots in Planning Area 1A expected to close in the third quarter 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. In 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 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 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 and Planning Area 31 are part of the land that is the subj ect of the Option Agreement. The remaining portion of Land A represents open space (PA13), 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 1A, 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 Improvements' 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 US A, 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 of the sale of such 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 the greater of (i) the Minimum Release Price (as defined in the Loan Agreement) for such Planning Area, or (ii) 100% of the Net Proceeds received from the sale of the 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 of the 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 $16,330,000 of Loan proceeds inareserve fund to pay$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). The Loan Agreement originally provided that 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 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 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 US A, 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 may be 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 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 US A, 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 hie. 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"), a junior 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 a junior 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 • AshbyUSA, LLCandKB Home Coastal Inc. enteredinto 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 in position 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 AshbyUSA, 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 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 Bank one or more irrevocable letters of credit in an aggregate amount of $3 9 million (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 anotification 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 Credit with cash after all Ashby USA LLC' s work is complete, no title obj ections 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 hie. 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 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 certificates of occupancy (subj ect 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 Inc.'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 Home 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 draw upon the KB Home Coastal Inc. Letter of Credit; provided; however, that all 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. 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. In 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. In the event of a material breach of the Option Agreement by Ashby US A, 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 Inc. 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). In 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 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 not issue 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 theproposed 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 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 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 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 1 A, 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$3,05 0,000 had been expended in connection with the development of the project, excluding a non-refundable deposit paid in connection with its purchase agreement with Ashby US A, 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 IA 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 IA or to pay special taxes, is entirely voluntary. Development Experience. DR Horton and its subsidiaries, including Continental Residential, Inc., 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 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 respectto Phasell 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 Inc., 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 by the Planning Department: (1) deposit of landscape maintenance bonds; (2) completion of landscape plans for perimeter slopes; and (3) submission ofthe 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 workto 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 Ranch 122 LLC andrely inpart on Ashby USA, 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 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. • 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 net acres. 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 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 of the 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 February28,2006 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 of any kind to 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 $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 9/04-6/03-1/04-6/04-6/02-2/01-1/02-6/02-Present 12/05 Present Present 1/04 12/02 12/03 12/03 TanameraHom.es, LLC built approximately 326 homes in calendar year 2004 and approximately 23 5 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, theremaining 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 ForTanamera/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 projected 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 arate of approximately 13 homes per quarter thereafter beginning in the 2nd quarter of 2007. The Market Absorption Study andthe Appraisal were prepared'utilizing anestimated September2006date 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 issuance of building permits for homes in Phase II. The September 2007date 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, 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 A bsorption 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 2007date of completion ofnecessary 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 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 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 1,23 0 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, Ftorida, 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 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 fromKBH's website at kbhomes.com. This Internet address is included for reference only and the information on the Internet site is not apart 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 project is preliminary, and subj ect 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 approval of building plans which haveexpired; (2) submission of construction landscaping plans; (3) deposit of 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 Coastal 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 Inc. 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., andKBH 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. A bsorption. 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 thoseof 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 inmaterial 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 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 ofundeveloped 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. In 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 the 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 anda sheriffs salewas 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 ofundeveloped 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. In 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 Liabib'ty Fiscal Year 2006-07 Property Owner Phase I -Residential Ashby USA, LLC Davidson Roripaugh Ranch 122 LLC Tanamera/Roripaugh n, LLC Tanamera/Roripaugh, LLC Traditions at Roripaugh, LLC Subtotal -Phase I Residential Merchant Builder'" 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 99 100 113 515 Gross Acreage'2' 19.11 13.42 13.79 15.27 22.3 83.89 Est. Allocation of FY 2006-07 Undeveloped Special Tax (3)(4)* $205,608 144,381 148,387 164,331 239.930 $902,637 Percent of Allocation'5'* 5.77% 4.05% 4.17% 4.61% 6.73% 25.34% Phase II -Residential and Commercial AshbyUSA, LLC Ashby USA, LLC Ashby USA, LLC AshbyUSA, LLC AshbyUSA, LLC AshbyUSA, LLC AshbyUSA, 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 Lie. (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 $27,794 76,299 172,255 146,217 151,597 35,325 2.050.374 $2,659,862 Total Phase I and Phase II 456.24 % (1) (2) (3) (4) (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 II, 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 Tanssig & Associates, Inc. *Preliminary, subject to change. 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 as to its completeness or accuracy. The District may issue up to $2,990,000* 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. agenciesThe Debt Report generally includes long term obligations sold in the public credit markets by public ! 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. In many cases long term obligations issued by a public agency are payable only from the general fund or other revenues 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 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. Preliminary, subject to change. 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 $36,529,505 SECURED PROPERTY TAX ROLL Ljescripitun uf i u*. Dili General Purpose Temecula Valley Unified School District Metropolitan Water Debt Service RCWD R Div Debt Service AD 161 Series A AD 161 Series B AD 161 Series C NPDES -Santa Margarita Temecula Parks/Lighting Svs. MWD Standby EMWD Standby-Combined Charge Fiscal Year 2005-06 Total Property Tax Liability Total Parcels Type Levied 1% 809,881 GO 39,783 GO 430,515 GO 33,466 AD 3,609 AD 3,498 AD 3,379 SPL 59,242 CSD 28,098 WTR 209,944 WTR 212,481 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 PERCENTAGE OF FISCAL YEAR 2005-06 ASSESSED VALUATION LAND SECURED BOND INDEBTEDNESS Outstanding Direct and Overlapping Bonded Debt AD 161 Series A'2' AD 161 Series B121 AD 161 Series C21 Total Land Secured Bonded Debt'11 Unissued Direct and Overlapping Bonded Debt AD 161 (21 Total Unissued Land Secured Bonded Debt1" Type Issued AD $3,971,000 AD $19,596,000 AD $4,638,000 Type Issued AD $3,380,213 Outstanding $1,808,691 $8,668,065 $2,532,737 Outstanding $1,197,929 Parcels Levied in CFD 301 301 301 Parcels Levied in CFD 301 % Applicable 3.123% 5.108% 1.799% % Applicable 10.886% TOTAL OUTSTANDING AND UNISSUED LAND SECURED BONDED INDEBTEDNESS GENERAL OBLIGATION BOND INDEBTEDNESS Outstanding Direct and Overlapping Bonded Debt Temecula Valley Unified School District RCWD R Div Debt Service Metropolitan Water Debt Service Total General Obligation Bonded Deb*11 Authorized Direct and Overlapping Bonded Debt Temecula Valley Unified School District RCWD R Div Debt Service Metropolitan Water Debt Service Total General Obligation Bonded Deb<!) Type Issued GO $65,000,000 GO $130,932,007 GO $850,000,000 Type Authorized GO $65,000,000 GO $130,932,007 GO $850,000,000 Outstanding $46,485,000 $111,476,729 $419,390,000 Unissued $0 $0 $0 Parcels Levied in CFD 3081 308 Parcels Levied in CFD 3081 308 % Applicable 0.279% 0.007% 0.002% % Applicable 0.279% 0.007% 0.002% 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 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 $9329 $146,865 Amount of Debt $0 $0 $0 $0 $675,258 $691,712 $822.123 (I) 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 delinquency in the payment of Special Taxes, the District may foreclose only against delinquent parcels. As, of January 15,2006, the parcels in the District have an appraised value-to-lien ratio of approximately 3.16:1, 6.80:1* withrespect to Phase land 1.92:1 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. Ashby USA,T,LC 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 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 yalue 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 page sets forth the value-to-lien analysis for the District at build out based on assumed Developed Property Special Taxes assuming the units inrhase II are developed as 1,230 residential units. *Preliminary, subject to change. 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 Potential Merchant Builder" »" 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 Phase II -Residential and Commercial Ashby USA, LLC51 Continental Residential, Inc. Davidson Roripaugh Ranch 122 Tanamera Residential Group Tanamera Residential Group Tanamera Residential Group .esidential -KB Home Coastal jc. (Option) ommercial -To be determined Planning Area 1A 23 4A 4B 10-12,14,26, 30, 31, Loop Road 33A Number of Units 104 99 99 100 ill 515 Acreage'21 19.11 13.42 13.79 15.27 .22J 83.89 372.35 Total Appraised Value13' 2006 Bonds141" $17,280,000 $3,001,737 18,070,000 2,107,860 17,700,000 2,166,354 18,260,000 2,399,113 $89,650,000 $13,177,875 Value-to-Lien Ratio15'* 5.76 8.57 8.17 7.61 121 6.8 1.92 Total Phase I and Phase II 1.745 456.24 116 (1) (2) 0) (4) (5) (6) (7) Continental Residential., Inc. and KB Home Coastal Inc. are not currently landowners within .the District, anoLthere^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 into these planning areas provided by Ashby USA, LLC. Provided by Ashby USA, LLC andmay not reflect the parcel configuration as of January 15, 2006. The actual Special Tax'Allocation for me initial year of the levy of the, Special Tax. "' pursuant to tne Rate and Method,based on the parcel configuration at such time as which may not reflect what is shown. Includes 2006 Bonds to be issuedby thi , unaevelppedtax rates, actual allocation of debt will vary depending on size of unit and categorization as Developed Property Average value-tp-lien per lot; actual value-to-lien may vary by lot . The Appraisal utilizes B discounted cash fIowanaIysisofPna.se IT and. does not allocate value among the various planningareas. The Merchant Builders have riot independently verified the information in the appraised value or the allocation of 200oBonds and overlapping land secured debt to their respective proj ects. calculated .urernent, ased on or Sources: Development Plans from Ashby USA, LLC; Canty Engineering Group, Inc.; Appraisal. * Preliminary, subject to change. 64 Community Fac Estimate Property Owner Phase I -Residential Ashby USA, LLC Davidson Roripaugh Ranch Tanamera/Roripaugh II, LLC Tanamera/Roripaugh, LLC Traditions at Roripaugh, LLC Subtotal -Phase I Residential Potential Merchant Planning Builder""71 Area Continental Residential, Inc. 1A Davidson Roripaugh Ranch 2 Tanamera Residential Group 3 Tanamera Residential Group 4A Tanamera Residential Group 4B Number of Units 104 99 99 100 113 515 Acreage121 Total Appraised Value'" 2006 Bonds'4'" Value-to-Lien Ratio"1* 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 $2,886,162 3,263,191 3,072,783 2,515,724 3.229.333 $14,967,193 5.99 5.54 5.76 7.26 5.68 5.99 Phase II -Residential and Commercial Ashby USA, LLC" Total Phase I and Phase II Residential -Coastal Inc. (\ Commercial -determined BHome ition) 'obe 10-26, 30, R^aiTJk 1.230 372.35 3.16 (2) (3) (4) Continental Residential, Inc. and KB Home Coastal Inc. are not currently landowners, within the District, and there there can be no assurance that, either, of them will close escrow,on, theirJotswithin the District at the times indicated or at all. Classification of property into these planning areas provided oy Ashby USA, LLC. Provided by Ashbv USA, LLC and may not reflect the parcel configuration as ofJanuary 15, 2006. As ofJanuary 15,2006, Based on the Appraisal. The actual Special Tax Allocation for the initial year of the levy of the Special Tax. Fiscal Year 2006,-QJ will be calculated .pursuant to the Rate and Method based on the t5arcel configuration at such time as needed to levy the Special Tax Requirement, which may not reflect what is shown. Includes 20u6 Bonds toTbe issued by the District; debt hasbeen allocated based on undeveloped tax rates, actuaT allocation oTdebt will vary depending on size of unit and categorization as Developed Property or Undeveloped Property. Average value-to-lien per.lot; actual value-to-lienmay vary by lot. . , . The Appraisal utilizes 11 discounted cash flow analysis of Phase II and does not allocate value among the various planning areas. The Merchant Builders have.not independently verified the information in the appraised value or the allocation of2006 Bonds and overlapping land secured debt to their respective projects. Sources: Development Plans from Ashby USA, LLC; Canty Engineering Group, Inc.; Appraisal. • Preliminary, subject to change. Overlapping Assessment and Community Facilities Districts Prior Lien; County of Riverside Assessment District No. 161. A portion of the property within the District is subject to the County Assessment District No. 161 lien. A portion of the proceeds of the 2006 Bonds together with moneys provided by Ashby USA, LLC, will be used to prepay the outstanding lien of County Assessment District No. 161 (i.e., the Prior Lien). The aggregate amount of the lien is $583,610.40. The County has agreed to release the Prior Lien when the 2006 Bonds are issued and the prepayment of the outstanding lien 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 to the issuance of additional debt by other governmental agencies which would be secured by taxes or assessments on a parity with the Special Taxes. To the extent such indebtedness is payable from assessments, other special taxes levied pursuant to the Act or taxes, such assessments, special taxes and taxes will be secured by liens on the property within a district on a parity with a lien of the Special Taxes. Accordingly, the debt on the property within the District could increase, without any corresponding increase in the value of the property therein, and thereby severely reduce the ratio that exists at the time the 2006 Bonds are issued 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 could also affect the ability and willingness of the property owners within the District to pay the Special Taxes when due. 65 Moreover, in the event of a delinquency in the payment of Special Taxes, no assurance can be given that the proceeds of any foreclosure sale of the property with delinquent Special Taxes would be sufficient to pay the delinquent Special Taxes. See "BONDOWNERS' RISKS." 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 of September 1, 2005, based on the Fiscal Year 2005-06 assessed value of approximately $36,529,505 the parcels in the District have an assessed value-to-lien ratio of less than 1:1 taking into account outstanding direct 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 review of 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, Ashby USA, LLC and the Merchant Builders* entered into an agreement entitled "Rqripaugh 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, subject 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 AssessmentDistrict 161 Sub-Regional Habitat Conservation Plan 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 for the Center 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 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 *KB Home is not a party to the Transportation Uniform Mitigation Fee Agreement. 66 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)permitnumberTE-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 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 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 ana other matters delayed completion of the 33.49 acres ofrestoration. 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, Inc., 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 -S530,000-Avg. PA-23 PA-24 PA-16 PA-17 PA-18 Segment #3: Above $600,000-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 $600,000-Avg. 112 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 $405,990 $415,990 $415,990 $450,990 $510,990 $510,990 5779,990 $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 Upper $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 Lower 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 iaies 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-Uec 25 0 20 20 0000000000000 65 0000 65 2007 an-Jun 25 27 27 27 27 000000000000 133 0000 133 2007 Jul-Uec 25 27 27 27 27 000000000000 133 0000 133 2008 an-Jun 24 27 25 26 27 35 0 32 0030 0 27 25 015 0 129 164 67 82 15 293 2008 Jul-Uec 0 23 00 32 35 0 32 00 17 13 27 250 15 0 55 164 67 82 15 219 2009 an-Jun 00000 35 0 32 000 30 27 25 015 00 164 67 82 15 164 2009 Jul-Uec 00000 35 0 16 16 00 30 27 25 0 15 00 164 67 82 15 164 2010 an-Jun 00000 29 60 32 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 000000 35 012 20 0000 25 015 0 107 67 25 15 107 2011 Jul-Dec 000000 35 00 320000 30 060 103 67 30 6 103 2012 an-Jun 00000 019 00 32 0000 30 00081 51 30 081 2012 Jul-Uec 000000000 200000 33 000 53 20 33 0 53 See APPENDIX D -"Market Absorption Study" for a discussion of the assumptions and limiting conditions 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 $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 those of Ashby USA, LLC. The Market Absorption Study and the Appraisal were prepared utilizing an estimated September 2006 date ofcompletion of necessary infrastructure to allow issuance of remaining building permits for homes in Phase I and an estimated September 2007 date ofcompletion of necessary infrastructure to allow issuance of building permits for homes in Phase II. The September 2007 date ofcompletion 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 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 69 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 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 3.16:1 ,* with avalue of approximately 6.80:1 *with respect to tracts within Phase I and 1.92:1* 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 riskfactors 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 : Preliminary, subject to change. 70 policies; and (iii) natural disasters (including, without limitation, earthquakes, wildfires and floods), which may result in uninsured losses. 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 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 unexpecteddelays, 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 US A, 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 obtainnecessary 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 forthe 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 maybe 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 andsale. In 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 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 maybe 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. 2005-003913 8, 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. AshbyUSA,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 projects in the City of Temecula and threatened to do so on this project 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 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 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 formerrule. (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. 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 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 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 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 maybe 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 affected parcel 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 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. Other funds 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 subject 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 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 "SECURITYFOR 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 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, may be 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 securedby 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 financed the purchase of new homes using loans with little or no down payment and with adjustable interest rates that start low and are subject to being reset at higher rates on a specified date or upon the occurrence of specified conditions. Many of these loans allow the borrower to pay interest only for an initial period, in some cases up to 10 years. Currently, in Southern 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 properly 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 subj ect 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 controllingprecedent 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 localreal propertytaxes 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 anyproperty taxes (including interest) onFDIC owned property are secured by a valid lien (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 subject 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 the FDIC 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 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 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 and approved 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 orproceeding 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 provisions 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 In 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 not subject to early redemption and will remain outstanding to maturity or until redeemed under the optional 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 maybe 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 purchased by Stone & Youngberg LLC at a purchase price of $ (which represents the aggregate principal amount of the 2006 Bonds ($ ), less original issue discount of $ and less an underwriter's discount of $ ). 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:. 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 4th 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 from 27,099 to 90,872, a gain of 63,773 or 235.3%. In 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 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 % Change Population — 1,170,413 0.6% 13.7 7.2 7.7 9.8 6.5 4.6 6.4 4.9 ,223,227 ,268,844 ,304,447 ,331,988 ,355,571 ,381,781 ,400,384 ,441,237 ,473,307 10.2 1,522,855 14.9 1,590,473 18.4 1,654,220 5.3 1,726,754 3.7 1,807,858 15.3 1,877,000 % Change —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 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001* 2002 2003 2004 2005" 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 Construction Activity The following table shows a five year history of construction activity in the City. CITY OF TEMECULA BUILDING PERMITS AND VALUATIONS 2000 -2004 2000 2001 2002 2003 2004 Valuation: Residential Non-residential Total Residential Units: Single family Multiple family Total $156,787,850 $127,823,375 $100,516,115 $194,699,509 58.320.736 39.602.913 43.487.229 36.087.001 $215.108,586 $167,426,288 $144,003.344 $230,786,510 1,142 944 650 1,271 244 0_ 0 142 1,386 944 650 1.413 $185,041,089 56.658.233 $241,699,322 888 408 1.296 Source: Construction Industry Research Board. A-2 The following table shows historical commercial and residential construction and property values. CITY OF TEMECULA COMMERCIAL AND RESIDENTIAL CONSTRUCTION AND PROPERTY VALUES Fiscal Years ending June 30,1992 -2005 Property Values<2) Commercial Residential Commercial Construction'1' Residential Construction'1' Fiscal Year (ending June 30) 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Number of Units 158 150 130 162 136 202 203 337 437 265 252 304 277 116 Value $ 902 6,316 10,639 29,221 23,572 32,863 66,226 159,286 52,497 39,511 51,686 41,402 61,823 79,578 Number of Units 337 802 1,186 968 987 857 835 1,384 1,179 1,606 938 1,162 1,472 918 Value $ 10,605 50,347 113,002 85,410 93,674 85,257 105,527 180,840 148,660 169,687 97,773 145,387 179,071 241,322 $1,078,926 1,473,713 1,526,353 1,466,641 1,478,230 1,347,000 1,321,044 1,378,364 1,524,091 1,935,537 2,183,862 2,633,661 2,711,397 2,835,143 $1,542,280 1,454,943 1,489,077 1,539,257 1,677,720 1,856,203 1,958,706 2,067,549 2,303,303 2,627,716 3,017,148 4,127,318 4,808,116 5,488,914 Values in thousands of dollars. Source: (1) City ofTemecula, Building and Safety Department. (2) County Land Use Statistical Recap Report. Economic Condition Temecula's economic base is anchored by a number of firms specializing inbiomedical technology and supplies, high technology controllers and semi-conductors, among others. The City's retail base is also experiencing growth and is home to several auto dealers including Honda, Toyota and Nissan. The following tables set forth maj or manufacturing and non-manufacturing employers: A-3 Employer CITY OF TEMECULA MAJOR MANUFACTURING EMPLOYERS (As of November, 2005) Approximate No. of Employees Type of Business Guidant Corporation International Rectifier/Hexfet Channell Commercial Corp. Milgard Manufacturing Bianchi International Opto 22 Inc. Chemicon International Plant Equipment, Inc. Magnecomp Corporation Solid State Stamping Tension Envelope Molding International & Engineering 2,354 700 344 325 225 205 201 200 118 110 110 102 Medical equipment Power semi-conductors Cable enclosures Custom windows Leather goods Electric/automation controls Medical products Telephone equipment Manufacture computer disks Manufacture electronic contacts Envelope manufacturer Manufacturer Employer Temecula Valley Unified School District (TVUSD) Manpower of Temecula Professional Hospital Supply Albertsons Costco Wholesale City of Temecula JC Penney Corp. The Scotts Company Paradise Chevrolet/Cadillac Temecula Creek Inn Macy's Southwest Traders FFF Enterprise, Inc. CITY OF TEMECULA MAJOR NON-MANUFACTURING EMPLOYERS (As of November, 2005) Approximate No. of Employees 2,608 1,871 850 604 400 315 209 190 184 180 172 170 142 Type of Business Public school system Business services Wholesaler distributor Supermarket Wholesale warehouse City government Retail Distributor Automobile dealer Hospitality Retail Wholesale Distributor Wholesale Distributor Source: City of Temecula Finance Department. Sales Tax Revenues Industrial and business parks offering clean industries and convenient office space provide growing employment opportunities. The retail community is expanding rapidly with excellent shopping venues A-4 including the regional Promenade Mall, a unique Historic Old Town area and neighborhood strip centers. A wide selection of restaurants allows diners to choose between nationally recognized chains or intimate dining bistros. CITY OF TEMECULA SALES TAX HISTORY Year 1989-90 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 "Budget Estimate. Amount $632,153 $9,186,547 $10,652,400 $14,009,322 $16,321,929 $19,237,317 $21,572,199 $25,392,314 $27,802,830 $29,200,000* Source: City ofTemecula Finance Department. CITY OF TEMECULA PRINCIPAL SECURED PROPERTY OWNERS FOR THE YEAR ENDED JUNE 30, 2005 Taxpayer Advanced Cardiovascular System Inc. International Rectifier Corporation Temecula Towne Center Associates Lakha-Aldenwood Properties LLC Kimco Palm Plaza Limited Partnership Portofino Development Starwood Wasserman Temecula STCA California Acacia Limited Partnership Solana Ridge LLC 2005 Assessed Valuation Type of Business (in thousands) Manufacturing $152,155 Manufacturing 128,471 Real Estate Development 98,285 Real Estate Development 47,500 Real Estate Development 41,738 Real Estate Development 30,428 Property Management 29,692 Manufacturing 29,233 Real Estate Development 27,264 Real Estate Development 25.544 $610,313 Percent of Total Assessed (Valuation) 2.05% 1.73% 1.33% 0.64% 0.56% 0.41% 0.40% 0.39% 0.37% 0.34% 8.24% Source: Riverside County Assessor's Office and City ofTemecula Finance Department. A-5 CITY OF TEMECULA ASSESSED AND ESTIMATED ACTUAL VALUE OF TAXABLE PROPERTY FOR THE FISCAL YEARS ENDED JUNE 30,1997 THROUGH 2005 (Values in Thousands) Fiscal Year Taxes 1997 1998 1999 2000 2001 2002 2003 2004 2005 Total Secured and Unsecured $3,203,187 $3,279,750 $3,445,913 $3,827,394 $4,563,253 $5,201,010 $6,201,896 $6,931,291 $7,794,688 Exemptions Veteran Church, etc. $(22,276) $(24,100) $(24,216) $(25,597) $(29,666) $(33,360) $(30,010) $(43,142) $(53,240) Net Assessed Value $3,180,911 $3,255,651 $3,421,696 $3,801,797 $4,533,587 $5,167,650 $6,171,886 $6,888,149 $7,741,448 Exemptions Homeowners $(53,023) $(56,665) $(60,119) $(61,464) $(64,372) $(68,938) $(82,926) $(92,362) $(94,237) Net Total Assessed Value $3,127,888 $3,198,986 $3,361,578 $3,740,333 $4,469,215 $5,098,712 $6,088,960 $6,795,787 $7,647,211 Estimated Actual Value $3,127,888 $3,198,986 $3,361,578 $3,740,333 $4,469,215 $5,098,712 $6,088,960 $6,795,787 $7,647,211 Source: Riverside County Assessor's Office. General Information Industrial Real Estate. In June 2004, the City had 12.5 million square feet of manufacturing space in existence or under construction. This was an increase from 9.0 million square feet in 2002. The City's supply represents 4.0% of the Inland Empire's total of 313 million square feet. In June 2004, the City's industrial vacancy rate was approximately 5.0%. The City industrial vacancy rate was well below the 8.6% average for the inland regions' 12 major submarkets. Office Real Estate. In 2003, the region's net space absorption was 1.23 million square feet. For the four quarters ended June 2004, a net of 731,551 square feet was taken off the market. The vacancy rate has dropped from 25% in 1997 to 9.2% in the third quarter of 2004. Agriculture. The climate and soil in the City are particularly favorable for growing avocado, grape and citrus crops. There are currently several agricultural management firms in the Temecula area which manage agricultural production of thousands of acres of land owned by individual investors, partnerships and corporations. The agricultural managers apply economies of scale, by combining many small and medium sized parcels of land as if these parcels were one large ranch. In addition, a substantial wine industry has been developed in the City and the surrounding area. As of May, 2005, there were twenty (20) wineries which produce wine with locally grown grapes. Climate. Temecula Valley enjoys a mild Mediterranean climate with year-round temperatures averaging in the mid 70's. The weather is comparable to the Napa Valley, as evidenced by a thriving wine industry, with warm, dry days and cool evenings. Summer-time temperatures, which can average in the mid 80's or the mid 90's during the day, are often cooled by afternoon ocean breezes blowing into the valley through gaps in the Santa Ana foothills to the west. Although separated from the Pacific by the Santa Rosa range of mountains, the Rainbow Gap funnels the mild beach climate into the valley. Mild winter temperatures average in the mid 60's. Yearly average average rainfall in Temecula is approximately 14 inches, as compiled by the Rancho California Water District.A-6 Thequality ofair in the Temecula Valley is consistentlybetter than that of surrounding communities. Ocean breezes flow through the Rainbow Gap almost every day, sweeping away smog. In the summer, Pacific winds yield temperatures up to 10 degrees lower than in towns just a few miles away. Education. The City is served by Temecula Valley Unified School District, one of the fastest growing school districts in the State, with 4 high schools (including a continuation school), 5 middle schools, 2 charter schools, 1 home-schooling program, and 15 elementary schools. In addition, there are 9 private schools and several pre-schools. The general boundaries extend north to Jean Nicholas Road in French Valley, south to the Riverside County line, east to Vail Lake, and west to the Temecula city limit. The District covers approximately 150 square miles. As of May, 2005, approximately 25,653 students (Grades K-12) are enrolled in the District. The University of California, Riverside has opened an extension center in the City and Mt. San Jacinto Community College operates a campus ten miles north of the City to serve the growing population. Temecula began the 1990s with a well-educated population, and its population trends and school performance figures have allowed it to maintain that position. Transportation. Interstate 15 and its connecting arterials provide convenient links to San Diego and Riverside, Los Angeles (Interstate 10), Orange County (Highway 91) and San Bernardino (Interstate 215). The French Valley Airport, 4 miles north of Interstate 15 on Winchester Road, accommodates business jets and commuter airlines. Housing. Temecula is unique in that its residents are about equidistant from both San Diego and Orange County via the Interstate 15 freeway. As a result, it is receiving growth impulses from the south as well as the north, as families spill into the Inland Empire from Southern California's more congested coastal counties. Temecula's rapid population growth represents a relatively new phenomenon in Southern California. A large number of the City's new residents have migrated north from San Diego County along the Interstate 15 freeway. Normally, a Southern California community undergoes rapid growth only when population spills from Orange or Los Angeles counties. The latest population data shows Temecula with 81,397 residents as of January 1,2005, which includes the annexation of the Vail Ranch area in July, 2001 and the March, 2004 annexation of the community of Redhawk, which became official June 30, 2005. A-7 [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX B RATE AND METHOD OF APPORTIONMENT OF SPECIAL TAX TEMECULA PUBLIC FINANCING AUTHORITY COMMUNITY FACILITIES DISTRICT NO. 03-02 (RORIPAUGH RANCH) [THIS PAGE INTENTIONALLY LEFT BLANK] RATE AND METHOD OF APPORTIONMENT OF SPECIAL TAX TEMECULA PUBLIC FINANCING AUTHORITY COMMUNITY FACILITIES DISTRICT NO. 03-02 (RORIPAUGH RANCH) A Special Tax shall be levied and collected on all Taxable Property located within the boundaries of CFD No. 03-02 Temecula Public Financing Authority Community Facilities District No. 03-02 (Roripaugh Ranch) ("CFD No. 03-02"). The amount of Special Tax to be levied in each Fiscal Year on a Parcel in CFD No. 03-02, commencing with Fiscal Year 2005 -2006, shall be determined by the CFD Administrator through the application of the procedures described below. All of the real property in CFD No. 03-02, unless exempted by law or the provisions herein, shall be taxed for the purposes, to the extent and in the manner herein provided. A. DEFINITIONS hi addition to the capitalized terms set forth in the preceding paragraph, capitalized terms used in this Section A shall have the following meanings: "Acre" means 43,560 square feet of land. The Acres for a Parcel means the land area of the Parcel as shown on or determined from the applicable Assessor's Parcel Map. Notwithstanding the foregoing, the Acres attributable to each Parcel of Residential Property that is (i) located in a Final Map and (ii) an individual single-family home lot or Condominium shall be computed by the CFD Administrator by dividing the sum of the land area for all such Parcels of Residential Property in the Final Map by the number of such Parcels. The Acres for any leasehold or possessory interest shall be the Acres for the Parcel which corresponds to such leasehold or possessory interest. "Acreage Special Tax" means the special tax set forth in Section C.2 below. "Act" means the Mello -Roos Community Facilities Act of 1982, as amended, being Chapter 2.5, Part 1, Division 2 of Title 5 of the Government Code of the State of California. "Administrative Expenses" means the actual or reasonably estimated costs directly related to the administration of CFD No. 03-02, including but not limited to the following: (i) the costs of computing the Special Taxes and of preparing the annual Special Tax collection schedules (whether by the CFD Administrator or designee thereof, or both); (ii) the costs of collecting the Special Taxes (whether by the Authority, County, City, or otherwise); (iii) the costs of remitting the Special Taxes to the fiscal agent or trustee for any Bonds; (iv) the costs of commencing and pursuing to completion any foreclosure action arising from delinquent Special Taxes; (v) the costs of the fiscal agent or trustee (including its legal counsel) in the discharge of the duties required of it under any Indenture; (vi) the costs of the Authority, City, or designee of complying with arbitrage rebate and disclosure requirements of applicable federal and State of California securities laws, the Act, and the California Government Code, including property owner or Bond owner inquiries regarding the Special CFD No. 03-02 Page 1 of 12 January 5, 2005 Taxes; (vii) the costs associated with the release of funds from any escrow account; (viii) the costs of the Authority, City, or designee related to any appeal of a Special Tax; and (ix) an allocable share of the salaries of the City staff and City overhead expense directly relating to the foregoing. Administrative Expenses shall also include amounts advanced by the City or the Authority for any administrative purposes of CFD No. 03-02. "Assessor" means the County Assessor of the County of Riverside. "Assessor's Parcel Map" means an official map of the Assessor designating parcels of land or Condominium units by number. "Authority" means the Temecula Public Financing Authority. "Board of Directors" means Board of Directors of the Authority, acting as the legislative body of CFD No. 03-02. "Bonds" means any bonds or other indebtedness (as defined in the Act), whether in one or more series, the repayment of which is secured by the levy of Special Taxes on Parcels within CFD No. 03-02. "CFD Administrator" means the Finance Director of the City, or designee thereof, responsible for determining the Special Tax Requirement and providing for the levy and collection of Special Taxes. "City" means the City of Temecula, California. "Condominium" means a residential dwelling unit meeting the statutory definition of a condominium contained in the California Civil Code, Section 1351, and for which a condominium plan has been recorded pursuant to California Civil Code, Section 1352. "County" means the County of Riverside, California. "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. "Dwelling Unit Special Tax" means the special tax set forth in Section C.I below. "Exempt Property" means any Parcel located within the boundaries of CFD No. 03-02 which is is exempt from the Special Tax pursuant to law or Section E below. "Final Map" means a subdivision of property by recordation of a (i) final map or parcel map approved by the City pursuant to the Subdivision Map Act (California Government Code CFD No. 03-02 Page 2 of 12 January 5, 2005 Section 66410 et seq.), (ii) lot line adjustment approved by the City, or (iii) condominium plan pursuant to California Civil Code 1352. "Fiscal Year" means the period starting on each July 1 and ending on the following June 30. "Indenture" means the indenture, fiscal agent agreement, trust agreement, resolution or other instrument pursuant to which Bonds are issued, as modified, amended and/or supplemented from time to time, and any instrument replacing or supplementing the same. "Land Use " means the land use set forth in the Land Use Plan. "Land Use Plan" means the approved land use plan for the Specific Plan. "Lot" means (i) any lot within a Final Map that is located at least partially within the boundaries of CFD No. 03-02 or (ii) any land within the boundaries of CFD No. 03-02 that is conveyed, dedicated, or otherwise acquired by or irrevocably offered to the federal government, the State of California, the County, the City, or any local government or other governmental agency. "Maximum Special Tax" means the maximum special tax, determined in accordance with Section C, that can be levied in any Fiscal Year on any Parcel. "Non-Residential Property" means all Parcels of Taxable Property which are not classified as Residential Property, Property Owner's Association Property, or Public Property. "Parcel" means a parcel (i) which is located at least partially within the boundaries of CFD No. 03-02 and (ii) to which an Assessor's parcel number is assigned as shown on an Assessor's Parcel Map. "Planning Area" means those planning areas designated by number on the Land Use Plan. "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 private park or 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 CFD No. 03-02 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 CFD No. 03-02 Page 3 of 12 January 5, 2005 submitted to the CFD Administrator prior to the May 1 preceding the Fiscal Year for which the Special Tax is being levied. "Proportionately" means that with respect to a given classification of property the ratio of the Special Tax to the Dwelling Unit Special Tax or Acreage Special Tax, as applicable, is the same for all Parcels assigned to such classification. For example, levying the Special Tax Proportionately on Parcels of Developed Residential Property means that for all such Parcels the ratio of the Special Tax to the Dwelling Unit Special Tax is the same. "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 CFD No. 03-02 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 a Final Map that is located within the boundaries of CFD No. 03-02 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 it 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. "Residential Floor Area" means all of the square footage within the perimeter of a residential structure, not including any carport, walkway, garage, overhang, patio, enclosed patio, or similar area as determined from the applicable building permit(s) issued for such structure as of the April 1 preceding the Fiscal Year in which the Special Tax is being levied. Such determination shall be final following the final inspection or certification of occupancy for the dwelling unit(s). "Residential Property" means all Parcels of Taxable Property, exclusive of Property Owner's Association Property and Public Property, designated with a residential Land Use. "Special Tax" means the Special Tax levied in each Fiscal Year on each Parcel. "Special Tax Requirement" means (a) that amount with respect to CFD No. 03-02 required in any Fiscal Year to pay (i) for annual debt service on all outstanding Bonds due in the calendar year which commences in such Fiscal Year; (ii) periodic costs on the Bonds, including, but not limited to, the costs of remarketing, credit enhancement, and liquidity facility fees (including such fees for instruments that serve as the basis of a reserve fund in CFD No. 03-02 Page 4 of 12 January 5, 2005 lieu of cash related to any such Bonds) and rebate payments; (iii) the Administrative Expenses; (iv) any reasonably anticipated delinquent Special Taxes based on the delinquency rate for Special Taxes levied in the previous Fiscal Year or otherwise reasonably expected; (v) any amounts required to establish or replenish any reserve funds established for the Bonds, and less (b) available funds as directed under the Indenture. "Specific Plan" means the Roripaugh Ranch Specific Plan (City of Temecula Resolution 02-112, Ordinance 02-13), as amended. "Taxable Property" means all Parcels which are not exempt from the Special Tax pursuant to law or Section E below. "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 Section E below. "Taxable Public Property" means all Parcels of Public Property which are not exempt from the Special Tax pursuant to law or Section E below. "Undeveloped Property" means all Parcels of Taxable Property which are not classified as Developed Property, exclusive of Property Owner's Association Property and Public Property. B. ASSIGNMENT TO LAND USE CATEGORY Each Fiscal Year, commencing with Fiscal Year 2005-2006, all Parcels 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 (hereinafter referred to as "Developed Residential Property," "Developed Non-Residential Property," "Undeveloped Residential Property," or "Undeveloped Non-Residential Property"). For purposes of determining the applicable Dwelling Unit Special Tax, Developed Residential Property shall be assigned to classifications one through fifteen in Table 1 below based on Residential Floor Area. If a Parcel consists of two or more Lots located in a Final Map that was recorded as of the January 1 preceding the Fiscal Year for which the Special Tax is being levied, each such Lot shall be treated as a Parcel and classified independently of the other; however, the aggregate Special Tax for the Lots will be levied on the Parcel. C. MAXIMUM SPECIAL TAX RATE 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 CFD No. 03-02 Page 5 of 12 January 5, 2005 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. 1. Dwelling Unit Special Tax The Dwelling Unit Special Tax rates are shown in Table 1 below. TABLE 1 DWELLING UNIT SPECIAL TAX KATES FOR DEVELOPED RESIDENTIAL PROPERTY SPECIAL TAX CLASSIFICATION 1 Residential 2 Residential 3 Residential 4 Residential 5 Residential 6 Residential 7 Residential 8 Residential 9 Residential 10 Residential 1 1 Residential 12 Residential 13 Residential 14 Residential 15 Residential RESIDENTIAL FLOOR AREA >5,000 >4,400 and <=5,000 >4,200 and <=4,400 >4,000 and <=4,200 >3,800 and <=4,000 >3,600 and <=3,800 >3,400 and <=3,600 >3,200and<=3,400 >3,000 and <=3,200 >2,800and<=3,000 >2,600 and <=2,800 >2,400 and <=2,600 >2,200 and <=2,400 >2,000 and <=2,200 <=2,000 DWELLING UNIT SPECIAL TAX $4,230' $3,995' $3,520' $3,356' $3,192' $3,028' $2,865' $2,701' $2,537' $2,374' $2,210' $2,046' $1,883' $1,719' $1,586' 'Per residential dwelling unit CFD No. 03-02 Page 6 of 12 January 5, 2005 2. Acreage Special Tax The Acreage Special Tax rates are shown in Table 2 below. TABLE 2 ACREAGE SPECIAL TAX RATES PROPERTY CLASSIFICATION/LAND U§E Developed and Undeveloped Residential Property Low Density (L) or Low -Estate Density (L-E) Low Medium Density (LM) Medium Density Standard (Ml) Medium Density Clustered (M2) Developed and Undeveloped Non-Residential Property (NC) Taxable Property Owner's Association Property Taxable Public Property ACREAGE SPECIAL TAX $5,620 Per Acre $17,665 Per Acre $17,665 Per Acre $17,665 Per Acre $8,247 Per Acre $17,665 Per Acre $17,665 Per Acre D. Notwithstanding the above, if the Land Use Plan is amended or the zoning of the Planning Areas is otherwise amended resulting in a Land Use which is not shown in Table 2 above, then the Acreage Special Tax rate applicable to each Parcel to which the new Land Use applies shall be $17,665. In addition, if at anytime subsequent to the issuance of Bonds the Land Use Plan is amended or the zoning or configuration of the Planning Areas Areas is otherwise amended, the CFD Administrator shall determine if the Acreage Special Taxes that may thereafter be levied are less than the sum of estimated Administrative Expenses and one hundred ten percent (110%) of the maximum annual debt service for outstanding Bonds. If the amended Land Use Plan, zoning, and/or Planning Area configuration has resulted in such a reduction, then the Acreage Special Tax for each Parcel to which such amendments apply shall be computed using the Acreage Special Tax rate(s) previously applicable to such Parcel. If the previous Land Use for any portion of a Parcel to which the amended Land Use Plan, zoning, and/or Planning Area configuration applies was not low density (L), low-estate density (L-E), low medium density (LM), medium density standard (Ml), medium density clustered (M2), or neighborhood commercial (NC) then the applicable Acreage Special Tax rate shall be $17,665. METHOD OF APPORTIONMENT OF THE SPECIAL TAX Commencing with Fiscal Year 2005-2006 and for each following Fiscal Year, the CFD Administrator shall levy the Special Tax on all Taxable Property to fund the Special Tax Requirement as follows: CFD No. 03-02 Page 7 of 12 January 5, 2005 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 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 a private residence be increased as a consequence of delinquency or default by the owner of any other Parcel or Parcels within CFD No. 03-02 by more than ten percent (10%) per Fiscal Year, hi addition, under no circumstances will the Acreage Special Tax be levied against Parcels of Developed Residential Property if the Special Taxes which maybe levied pursuant to the first and second steps above are equal to or greater than sum of estimated Administrative Expenses and one hundred ten percent (110%) of the then maximum annual debt service for outstanding Bonds. E. EXEMPTIONS The Board of Directors shall not levy a Special Tax on up to 511.11 Acres of Property Owner's Association Property and Public Property. If the total number of Acres of Property Owner's Association Property and Public Property exceeds 511.11, the chronological order in which such property is classified will determine which Parcels are classified as Exempt Property and which are classified as Taxable Property. If a Lot or Parcel is no longer classified as Property Owner's Association Property or Public Property, its status as Exempt Property will be revoked. The following property shall be classified as Property Owner's Association Property or Public Property, as applicable, at the time CFD No. 03-02 is established and shall count toward the limitation of 511.11 Acres of Property Owner's Association Property and Public Property set forth in the preceding paragraph: CFD No. 03-02 Page 8 of 12 January 5, 2005 • Property Owner's Association Property and Public Property: Lots A and B (portion of Murrieta Hot Springs Road), Lot 2 (private mini park), Lot 5 (private recreation center), and Lot 8 (open space) of Tract 29353-1; Lots H and 5 (open space), Lots A through G and M through O (streets), Lots I, J, and K (flood control), Lot L (equestrian trail), Lots 2 and 9 (parks), Lots 10 and 11 (school sites), and Lot 12 (fire station) of Tract 29353-2; and the property described in and conveyed to the City pursuant to a grant deed dated May 21, 2003 and recorded with the County as Document Number 2003-371374. Subject to Section 53317.5 of the Act, if a Lot or Parcel classified as Developed Residential Property is acquired by a public entity by any means, including by negotiated transaction, gift, devise, or foreclosure, such Lot or Parcel will notwithstanding anything else herein be subject to the Special Tax in accordance with the terms for Developed Residential Property. In addition, if a Parcel of Public Property is is leased to a non-governmental entity, then the leasehold or possessory interest, in accordance with Section 53340.1 of the Act, shall be subject to the applicable Acreage Special Tax. F. MANNER OF COLLECTION The Special Tax shall be collected in the same manner and at the same time as ordinary ad valorem property taxes and shall be subject to the same penalties, the same procedure, sale and lien priority in the case of delinquency; provided, however, that the Special Tax may be billed directly and/or may be collected at a different time or in a different manner if necessary or convenient to meet the financial obligations of CFD No. 03-02, or as otherwise determined by the CFD Administrator. The foreclosure remedies provided for in the Indenture shall apply upon the nonpayment of the Special Tax. G. REVIEW AND APPEALS Any taxpayer may file a written appeal of the Special Tax levied on his/her property with the CFD Administrator, provided that the appellant is current in his/her payments of Special Taxes. During the pendency of an appeal, all Special Taxes previously levied must be paid on or before the payment date established when the levy was made. The appeal must specify the reasons why the appellant claims the Special Tax is in error. The CFD Administrator shall review the appeal, meet with the appellant if the CFD Administrator deems necessary, and advise the appellant of its determination. If the CFD Administrator agrees with the appellant, the CFD Administrator shall grant a credit to eliminate or reduce future Special Taxes on the appellant's property. No refunds of previously paid Special Taxes shall be made. H. PREPAYMENT OF SPECIAL TAX 1. Full Prepayment-Developed Residential Property, Non-Residential Property, and Taxable Property Owner's Association Property CFD No. 03-02 Page 9 of 12 January 5, 2005 The Maximum Special Tax for any Parcel of Developed Residential Property, Non-Residential Property, or Taxable Property Owner's Association Property may be prepaid and permanently satisfied as described herein, provided that a prepayment may be made only if at the time of the prepayment there are no delinquent Special Taxes with respect to such Parcel and all other Parcels which are under the same ownership and located within CFD No. 03-02. An owner of a Parcel intending to prepay the Maximum Special Tax shall provide the CFD Administrator with written notice of intent to prepay, and within 10 business days of receipt of such written notice, the CFD Administrator shall notify such owner of the non-refundable deposit determined to cover the cost to be incurred by the CFD No. 03-02 in calculating the prepayment amount. Within 10 business days of receipt of such non-refundable deposit, the CFD Administrator shall notify such owner of the prepayment amount. Prepayment must be made not less than 60 days prior to to any redemption date, unless otherwise authorized by the CFD Administrator, for any Bonds to be redeemed with the prepayment proceeds. The "Full Prepayment Amount" means an amount equal to the sum of (1) Bond Redemption Amount, (2) Redemption Premium, (3) Defeasance Amount, and (4) Fees, less the Reserve Fund Credit, where the terms "Bond Redemption Amount," "Redemption Premium," "Defeasance Amount," "Fees," and "Reserve Fund Credit" have the following meanings: "Bond Redemption Amount" means the principal amount of Bonds to be redeemed and equals the greater of (a) the quotient derived by dividing (i) the applicable Dwelling Unit Special Tax, in the case of Residential Property, or Acreage Special Tax, in the case of Non-Residential Property or Taxable Property Owner's Association Property by (ii) the sum of the aggregate Dwelling Unit Special Taxes (for Residential Property) and Acreage Special Taxes (for Non-Residential Property) for CFD No. 03 -02 (and excluding from (ii) any Special Taxes which have been prepaid) or (b) the quotient derived by dividing (iii) the applicable Acreage Special Tax by (iv) the sum of the aggregate Acreage Special Taxes (for Residential Property and Non-Residential Property) for CFD No. 03-02 (and excluding from (iv) any Special Taxes which have been prepaid) in each case multiplied by the principal amount of outstanding Bonds rounded up to the nearest $5,000. The aggregate special taxes under (a) and (b) above means the aggregate special taxes upon completion of the development of CFD No. 03-02. Prior to the completion of the development of CFD No. 03-02, the aggregate special taxes under (a) and (b) above shall be as projected by the CFD Administrator. "Redemption Premium" means the Bond Redemption Amount multiplied by the applicable redemption premium, if any, for the Bonds to be redeemed. "Defeasance Amount" means the amount needed to pay interest on the CFD No. 03-02 Page 10 of 12 January 5, 2005 Bond Redemption Amount until the earliest redemption date for the outstanding Bonds. Credit shall be given for any portion of the Special Tax heretofore paid by the Parcel for which the Full Prepayment Amount is being calculated and which will be, but has not yet been, utilized to pay interest and principal on the Bonds. "Fees" equal the fees and expenses of CFD No. 03-02 related to the Full Prepayment Amount, including, but not limited to, the costs of computing the Full Prepayment Amount, the costs of redeeming Bonds, and the costs of recording any notices to evidence that the Maximum Special Tax has been prepaid. "Reserve Fund Credit" shall equal the lesser of (i) the reduction in the applicable "Reserve Requirement," as such term is defined in the Indenture, if any, following the redemption of Bonds from proceeds of the Prepayment Amount or (ii) the amount derived by subtracting the new Reserve Requirement in effect after the redemption of Bonds from proceeds of the Full Prepayment Amount from the balance in the "Reserve Fund," as such term is defined in the Indenture, on the prepayment date, but in no event shall such amount be less than zero. The CFD Administrator shall remove any portion of the Special Tax which has been enrolled but not paid. With respect to any Parcel that has prepaid the Maximum Special Tax, the Board of Directors shall cause a suitable notice to be recorded in compliance with the Act, to indicate the prepayment of the Maximum Special Tax and the release of the Special Tax lien on such Parcel, and the obligation of such Parcel to pay the Special Tax shall cease. 2. Partial Prepayment -Developed Property, Non-Residential Property, and Taxable Property Owner's Association Property The Maximum Special Tax for any Parcel of Developed Residential Property, Non-Residential Property, or Taxable Property Owner's Association Property may be prepaid in part as described herein, provided that (i) the Bond Redemption Amount must be an integral multiple of $5,000 and (ii) at the time of the prepayment there are no delinquent Special Taxes with respect to such Parcel and all other Parcels which are under the same ownership and located within CFD No. 03-02. The "Partial Prepayment Amount" shall be computed using the methodology in Section H. 1 and substituting the portion of the Maximum Special Tax to be prepaid by the Parcel for its Dwelling Unit Special Tax and Acreage Special Tax when determining the Bond Redemption Amount, The owner intending to prepay a portion of the Maximum Special Tax shall notify the CFD Administrator in writing of (i) such owner's intent to partially prepay the Maximum Special Tax, (ii) the percentage by which the Maximum Special Tax shall CFD No. 03-02 Page 11 of 12 January 5,2005 be prepaid, and (iii) the company or agency that will be acting as the escrow agent, if applicable, and within 10 business days of receipt of such written notice, the CFD Administrator shall notify such owner of the non-refundable deposit determined to cover the cost to be incurred by CFD No. 03-02 in calculating the amount of the partial prepayment. Within 10 business days of receipt of such non-refundable deposit, the CFD Administrator shall notify such owner of the Partial Prepayment Amount. Prepayment must be made not less than 60 days prior to any redemption date, unless authorized by the CFD Administrator, for any Bonds to be redeemed with the prepayment proceeds. With respect to any Parcel that has prepaid a portion of the Maximum Special Tax, the CFD Administrator shall indicate in the records of CFD No. 03-02 that there has been a partial prepayment of the Maximum Special Tax, the amount of the Maximum Special Tax which has been prepaid, and the amount of the Maximum Special Tax which continue to be levied on such Parcel. The Bond Redemption Amount, Redemption Premium, Defeasance Amount, and Reserve Fund Credit shall be used to pay interest on and redeem Bonds in accordance with the Indenture. Notwithstanding the foregoing, no prepayment shall be allowed unless the amount of Maximum Special Taxes that may be levied in CFD No. 03 -02 after the proposed prepayment is at least the sum of (i) the estimated Administrative Expenses and (ii) one hundred ten percent (110%) of the annual debt service on the Bonds, taking into account the amount of Bonds to remain outstanding after such prepayment. I. TERM The Maximum Special Tax shall be levied for a period not to exceed 50 Fiscal Years, commencing with Fiscal Year 2005-2006. C:\Home\temecula\Roripaugh Ranch\RMA\CFD 2003-2 RMA 11 REVISED FINAL (Clean).doc CFD No. 03-02 Page 12 of 12 January 5, 2005 APPENDIX C SUMMARY APPRAISAL REPORT [THIS PAGE INTENTIONALLY LEFT BLANK] SUMMARY APPRAISAL REPORT COVERING Temecula Public Financing Authority Community Facilities District No. 03-02 (Roripaugh Ranch) DATE OF VALUE: SUBMITTED TO: January 15, 2006 Temecula Public Financing Authority 43200 Business Park Dr. Temecula, CA 92590 Attn: Genie Roberts Director of Finance DATE OF REPORT: SUBMITTED BY: February 10, 2006 Stephen G. White, MAI 1370 N. Brea Blvd., Suite 205 Fulleiton, CA 92835 Stephen G. White, MAI MAI Heal Estate Appraiser I37O N, BREA BLVD., SUITE ZOB • FULLERT0N, CALIFORNIA S283S-4J 20 C7t-4> 738-1S9S -FAX C7!*> 73S-<»37I February 10, 2006 Genie Roberts, Director of Finance Temecula Public Financing Authority 43200 Business Park Dr. Temecula, CA 92590 Re: Community Facilities District No. 03-02 (Roripaugh Ranch) Dear Ms. Roberts: In accordance with your request and the City's authorization, I have prepared a Complete Appraisal of the taxable properties within the above-referenced Community Facilities District (CFD). The taxable properties include the residential and commercial land that comprises the master-planned community of Roripaugh Ranch. The land in the first phase or "panhandle" area consists of lots in semi-finished condition, and the land in the future phases or the "pan" area consists of land which is currently being graded. The "panhandle" area comprises a total of 515 single-family lots in 5 different tracts, which are owned by or under contract to three different different merchant builders. The "pan" area is planned for a total of 1,230 dwelling units, with lot sizes ranging from ±2,600 s.f. to over an acre, plus a 10.7-acre commercial site, and all of the residential lots are under option to a merchant builder. The purpose of this appraisal is to estimate the aggregate market value of the as is condition of the property in each of the 5 separate tracts in the "panhandle" area, plus the remaining ownership of the master developer comprising the "pan" area. This appraisal also reflects the proposed public bond financing, as well as the tax rates of ±1.6-1.7%, including special taxes, to the future homeowners. Based on the inspections of the properties and analysis of matters pertinent to value, the following conclusions of market value have been arrived at, subject to the Assumptions and Limiting Conditions, and as of January 15, 2006: "Panhandle" Area: Builder (Tract Name) DR Horton-Continental Homes (Castillo) Davidson Communities (n/a) Tanamera Homes (Madison) Tanamera Homes (Shutters) Tanamera Homes (Hamptons) Sub-total "Pan" Area: Owner Ashby USA, LLC Market Value $ 17,280,000 $ 18,070,000 $ 17,700,000 $ 18,260,000 $ 18.340.000 $ 89,650,000 $ 74.480.000 $164,130,000 (ONE HUNDRED SIXTY-FOUR MILLION ONE HUNDRED THIRTY THOUSAND DOLLARS) (Note: These 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 projected in the absorption conclusions by Empire Economics.) MS. GENIE ROBERTS FEBRUARY 10, 2006 PAGE 2 The following is the balance of this 67-page Summary Appraisal Report which includes the Certification, Assumptions and Limiting Conditions, definitions, property data, exhibits, valuation and market data from which the value conclusions were derived. Sincerely, Stephen G. White, MAI (State Certified General Real Estate Appraiser No. AG 013311) SGW:sw Ref: 05062 TABLE OF CONTENTS PAGES Certification 5 Assumptions and Limiting Conditions 6-7 Purpose and Use of the Appraisal, Scope of the Appraisal, Date of Value, Property Rights Appraised, Definitions 8-9 GENERAL PROPERTY DATA Location, General Area Description, Description of Roripaugh Ranch 10-17 DR HORTON-CONTINENTAL HOMES (CASTILLO) 18-24 DAVIDSON COMMUNITIES (N/A) 25-28 TANAMERA HOMES (MADISON) 2932 TANAMERA HOMES (SHUTTERS) 33-36 TANAMERA HOMES (HAMPTONS) 37-40 ASHBY USA, LLC OWNERSHIP 41-59 ADDENDA Tabulation of Residential Land Sales 60-61 Tabulation of Commercial Land Sales 62 Empire Economics-Estimated Absorption Schedules 63 Roripaugh Completion Cost-As of 1-15-06 64 Qualifications of Appraiser 65-67 CERTIFICATION I certify that, to the best of my knowledge and belief: 1. The statements of fact contained in this report are true and correct. 2. The reported analyses, opinions and conclusions are limited only by the reported assumptions and limiting conditions, and are my personal, impartial, and unbiased professional analyses, opinions and conclusions. 3. I have no present or prospective interest in the property that is the subject of this report, and no personal interest with respect to the parties involved. 4. I have no bias with respect to the property that is the subject of this report or to the parties involved with this assignment. 5. My engagement in this assignment was not contingent upon developing or reporting predetermined results. 6. My compensation for completing this assignment is not contingent upon the development or reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this appraisal. 7. The reported analyses, opinions and conclusions were developed, and this report has been prepared, in conformity with the Code of Professional Ethics & Standards of Professional Appraisal Practice of the Appraisal Institute, which include the Uniform Standards of Professional Appraisal Practice. 8. I have made a personal inspection of the property that is the subject of this report. 9. No one provided significant professional assistance to the person signing this report, other than data research by my associate, Kirsten Patterson. 10. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. As of the date of this report, I have completed the requirements of the continuing education program of the Appraisal Institute. Stephen G. White, MAI (State Certified General Real Estate Appraiser No. AG013311) ASSUMPTIONS AND LIMITING CONDITIONS This appraisal has been based upon the following assumptions and limiting conditions: 1. No responsibility is assumed for the legal description provided or for matters pertaining to legal or title considerations. Title to the property is assumed to be good and marketable unless otherwise stated. 2. The property is appraised free and clear of any or all liens or encumbrances unless otherwise stated. 3. Responsible ownership and competent property management are assumed. 4. The information furnished by others is believed to be reliable, but no warranty is given for its accuracy. 5. All engineering studies, if applicable, are assumed to be correct. Any plot plans or other illustrative material in this report are included only to help the reader visualize the property. 6. It is assumed that there are no hidden or unapparent conditions of the property, subsoil, or structures that render it more or less valuable. No responsibility is assumed for such conditions or for obtaining obtaining the engineering studies that may be required to discover them. 7. It is assumed that the property is in full compliance with all applicable federal, state and local environmental regulations and laws unless the lack of compliance is stated, described and considered in the appraisal report. 8. It is assumed that the property conforms to all applicable zoning and use regulations and restrictions unless a nonconformity has been identified, described and considered in the appraisal report. 9. It is assumed that all required licenses, certificates of occupancy, consents and other legislative or administrative authority from any local, state or national government or private entity or organization have been or can be obtained or renewed for any use on which the value estimate contained in the report is based. 10. It is assumed that the use of the land and improvements is confined within the boundaries or property lines of the property described and that there is no encroachment or trespass unless noted in the report. 11. Unless otherwise stated in this report, the existence of hazardous materials, which may or may not be present on the property, was not observed by the appraiser. However, the appraiser is not qualified to detect such substances. The presence of such substances may affect the value of the property, but the value estimated in this ASSUMPTIONS AND LIMITING CONDITIONS. Continuing appraisal is based on the assumption that there is no such material on or in the property that would cause a loss in value. No responsibility is assumed for such conditions or for any expertise or engineering knowledge required to discover them. The client should retain an expert in this field, if desired. 12. Possession of this report, or a copy thereof, does not carry with it the right of publication, unless otherwise authorized. It is understood and agreed that this report will be utilized in the Official Statement, as required for the bond issuance. 13. The appraiser, by reason of this appraisal, is not required to give further consultation or testimony or to be in attendance in court with reference to the property in question unless arrangements have previously been made. SPECIAL ASSUMPTIONS AND LIMITING CONDITIONS 1. Estimates of the remaining costs and fees to get the five tracts and the remaining raw land from their as is condition to finished single-family residential lots or mass graded superpads (including costs for all appropriate infrastructure, common area improvements, in-tract improvements, etc.) have been obtained from the property owners/builders and from the master developer. These costs are integral to the analysis of the value of the as is condition of the land, and have been relied upon in this appraisal as being reasonably accurate. 2. The Market Absorption Study dated February 1, 2006 by Empire Economics has been relied upon and utilized in this appraisal. 3. The valuation has assumed that the CFD bond proceeds will be available to fund ±$44,865,000 in public facilities and will fund the prepayment of Assessment District No. 161 in the amount of ±$539,000. 4. The valuation has assumed that the master developer will complete the necessary infrastructure in a timely manner such that building permits will be available for development to occur as projected in the absorption conclusions by Empire Economics. PURPOSE AND USE OF THE APPRAISAL The purpose of this appraisal is to estimate the aggregate market value of all of the taxable property located within Community Facilities District No. 03-02 (Roripaugh Ranch) of the City of Temecula, reflecting the proposed public bond financing. This Summary Appraisal Report is to be used as required in the bond issuance. SCOPE OF THE APPRAISAL It is the intent of this Complete Appraisal that all appropriate data considered pertinent in the valuation of the subject properties be collected, confirmed and reported in a Summary Appraisal Report, in conformance with the Uniform Standards of Professional Appraisal Practice and the guidelines of the California Debt and Investment Advisory Commission. This has included an inspection of the subject properties and the surroundings; review of various maps and documents relating to the properties and the developments which are planned or currently underway; obtaining of pertinent property data on the subject properties; obtaining of comparable land sales from a variety of sources; and analysis of all of the data to the value conclusions.DATE OF VALUE The date of value for this appraisal is January 15, 2006. PROPERTY RIGHTS APPRAISED This appraisal is of the fee simple interest in the subject properties, subject to the special tax and assessment liens. DEFINITION OF MARKET VALUE The most probable price, as of a specified date, in cash or in terms equivalent to cash, or in other precisely revealed terms for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to fair sale, with the buyer and seller each acting prudently, knowledgeably and for self-interest, and assuming that neither is under undue duress. DEFINITION OF FINISHED LOT This term describes the condition of residential lots in a single-family subdivision for detached homes in which the lots are fully improved and ready for homes to be built. This reflects that the lots have all development entitlements, 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, resource agency permits (if necessary), and all development fees paid, exclusive of building permit fees, in accordance with the conditions of approval of the specific tract map. DEFINITION OF BLUE-TOP LOT This term describes residential lots in a single-family subdivision for detached homes in which the lots and streets have been rough graded, and the offsite infrastructure of streets and utilities is completed to the tract, but not within the tract. DEFINITION OF MASS GRADED SUPERPAD Also referred to as a sheet graded site or a superpad, it is a parcel of land for detached or attached residential development which has been rough graded to a fairly flat condition, with the infrastructure of streets and utilities completed to and along the site. This is similar to a blue-top lot but it typically refers to a larger acreage parcel. DEFINITION OF RAW LAND In this case, the land is entitled for development, but it has not been graded from its raw condition, and still lacks the necessary infrastructure of streets, utilities, etc. LOCATION MAP 10 GENERAL PROPERTY DATA LOCATION The community of Roripaugh Ranch is located along Murrieta Hot Springs Rd. and along the future northerly extension of Butterfield Stage Rd., about \l/2 miles east of Winchester Rd., in the City of Temecula. GENERAL AREA DESCRIPTION The community of Roripaugh Ranch is located at the far north end of Temecula, surrounded by unincorporated Riverside County area to the north, northwest and east, and nearby to the east of the City of Murrieta. This is a partially developed, semi-rural area, with nearby surroundings including low density estate-type residential area, newer residential tracts, and much undeveloped land. In addition, the French Valley Airport is located about a mile to the northwest, and the Lake Skinner Recreation Area is located within 2 miles to the northeast. In the area to the north of the "panhandle" area is the relatively new master-planned community of Rancho Bella Vista. This overall community comprises ±800 acres, and is planned for close to 2,000 dwelling units. The first phase comprising the tracts of homes on the north side of Murrieta Hot Springs Rd. and nearest to the subject community were completed several years ago, and there are now five tracts of homes under construction in the center and north part of the community. In addition, this community includes much open space, including areas at the southwest and southeast ends that are adjacent to the subject community. To the north and northeast of the "pan" area is a large area of undeveloped land that is within unincorporated County area. To the east, southeast and south of the "pan" area is a semi-rural residential area, also within unincorporated County area, and subdivided into lots of ±2 to 20 acres in size. Some of the lots are improved with custom homes and various lots are still vacant. To the southwest and west of the "pan" area, extending north to just south of the "panhandle" area is more of the low density, semi-rural residential area, within the City of Temecula. This area also consists of custom homes on large lots, and much undeveloped land. Adjacent to the west of the "panhandle" area is a new 79-lot tract of homes called Valdemosa that are currently being built by KB Home. Farther west are various neighborhoods of homes that have been completed in the past ±5 years. In summary, the community of Roripaugh Ranch is located in newly developing area at the north end of Temecula, adjacent to much unincorporated County area. 11 PropoeedUnd Use Plan *™ -K »* 6 \li I fi 11 § Pf« <-lfit DESCRIPTION OF RORIPAUGH RANCH Overview Roripaugh Ranch is a master planned community that is being developed by Ashby USA, LLC. It consists of a total of ±805 acres that are planned to be developed with a total of 1,745 single-family detached homes, and a 10.7-acre commercial site that is planned for a neighborhood retail center. In addition, there will be two private recreation centers of 5.2 and 4.0 acres, a 5-acre neighborhood park, a 20-acre sports park, a 12-acre elementary school, a 20-acre middle school, a 2-acre fire station, and 263 acres of open space (habitat, flood control and landscape slope). The planned residential development consists of 515 lots in Phase 1, which is referred to as the "panhandle" area, and 1,230 lots in Phase 2, which is referred to as the "pan" area. The 515 lots in the "panhandle" area are allocated into 5 separate tracts, 4 of which are owned by merchant builders and the fifth which is under contract to a merchant builder. These lots are all ±5,000 s.f. minimum, and currently range from partially finished to near finished condition. The 1,230 lots in the "pan" area are allocated into 15 Planning Areas, all of which is currently being graded. The various Planning Areas or tracts include lot sizes of ±2,600 s.f. minimum (cluster-type product), 3,150 s.f. minimum, 4,000 s.f. minimum, 5,000 s.f. minimum, 6,000 s.f. minimum, and tracts with ±l/2 acre and 1+ acre lots. The "panhandle" area will be guard-gated at the main entrance from Murrieta Hot Springs Rd. on Roripaugh Meadows Dr., with secondary gated entrances at the west end in Planning Area 1 and at the east end between Planning Areas 4A and 4B. The "pan" area will be guard-gated on North Loop St. just east of the second school site and on South Loop St. just east of the fire station. Planning Areas 10, 12, 14, 15, 16 and 33 are outside of these guard gates and will be separately gated with remote or card access. One of the private recreation centers is a 5.2-acre site that is located in the center of the "panhandle" area, and construction is nearing completion on this facility. The other center consists of a 4-acre site that is located in the center of the "pan" area. Both centers will include clubhouses, pools, tennis courts, play areas, other landscaped areas and parking areas. The community sports park will include Little League baseball fields, soccer fields, play areas and parking areas. The 21.2 acres of landscape slope area are located along the west and south edges of the "panhandle" area. The 202.7 acres habitat area comprise the bulk of the north end of the "pan" area plus the northeast part of the "panhandle" area. The 39.1 acres of flood control mostly consists of the Long Valley Channel that runs east-west through the southerly part of the "pan" area, plus a small portion of the Santa Gertrudis Creek that runs northeasterly into the center of the "pan" area at the west side, and then into the habitat area. 13 DESCRIPTION OF RORIPAUGH RANCH, Continuing Streets and Access The primary access points to Roripaugh Ranch will be by Murrieta Hot Springs Rd. and Butterfield Stage Rd. Murrieta Hot Springs Rd. comes from the west, extends along the north side of the "panhandle" area, and will terminate at Butterfield Stage Rd. at the north center part of the community. It is currently a paved road from the west on the land adjacent to the north of Roripaugh Ranch, or along approximately two-thirds of the "panhandle" area, and becomes a graded dirt road where it turns southerly into the subject community, but is to be paved by March 2006. Butterfield Stage Rd. comes from the south and will extend northerly along the west side of the south portion of the "pan" area, and then will curve northeasterly and northerly through the north portion of the "pan." It is currently paved up to a point southerly of the subject community, and is in the process of being graded along with the grading of the "pan" area. Paving is due to be completed in September 2006. There will also be a loop road through the "pan" area, with North Loop Road being an easterly extension of Nicolas Rd. (west of Butterfield Stage Rd.) and South Loop Road being an easterly extension of Calle Chapos (west of Butterfield Stage Rd.). This loop road will provide access to all of the tracts in the "pan" area, including the recreation center and school sites. This road is also in process of being graded along with the grading of the "pan" area, and is due to be paved by the end of the year. Utilities All utilities are available to the community, and have been or will be installed in the major streets and in-tract streets as part of the development of the community. The utilities are provided as follows: Water: Eastern Municipal Water District or Rancho California Water District Sewer: Eastern Municipal Water District Electric: Southern California Edison Company Gas: Southern California Gas Company Telephone: Verizon Zoning/General Plan/Approvals The overall community of Roripaugh Ranch has specific plan approval by SP-11. For the subject land, the zoning and general plan designations are per the Land Use designations on the Specific Plan, and include Low Density Residential (L), Low Medium Density Residential (LM), Medium Density Residential (Ml & M2), and Neighborhood Commercial (NC). Specific approvals for the five tracts in the "panhandle" area include the recorded tract maps for Tract Nos. 29661-2, 29661-3 and 29661-4, the approved but not yet 14 DESCRIPTION OF RORIPAUGH RANCH, Continuing recorded final tract maps for Tract Nos. 29661 (Tanamera) and 29661-1 (DR Horton-Continental), and Tentative Tract No. 32004 for the additional 6 lots in the DR Morton-Continental tract which is expected to be approved by April 2006. The more specific approvals for the "pan" area are by the recorded "A" tract map (Tract No. 29353-2) for Planning Areas 10, 12, 14, 15 and 33 and "A" tract map (Tract No. 29353) for Planning Areas 16, 17, 18, 19, 20, 21, 22, 23, 24 and 31 which is due to record in March 2006. Five of the ten Tentative Tract Maps have been submitted to the City for approval, and the other five are anticipated to be submitted by early March 2006. Drainage/Flood Hazard Drainage is and will be within master-planned facilities throughout the community, and within each of the individual tracts. The northerly part of the overall community gradually slopes and terraces down to the south and west, and the southerly part of the "pan" area slopes down to the north, toward Long Valley Channel. Drainage is ultimately into the Santa Gertrudis Creek channel and the Long Valley channel. Per FEMA Flood Insurance Rate Map No. 060245 2765B dated 11/20/96, all of the Roripaugh Ranch community is located in Zone C, which is outside of the 100-year floodplain. Furthermore, all of the developable area is above the Santa Gertrudis Creek and Long Valley channels, and improvements to these channels as well as construction of various detention basins throughout the community will handle the projected storm flows. Soil/Geologic Conditions This appraisal has assumed that all necessary grading and compacting has been or will be properly completed by the master developer; that there are no abnormal soil or geologic conditions that would affect the development of the land as planned; and that all necessary costs to complete the grading and any required mitigation have been spent or are properly reflected in the remaining land development costs as discussed later. It is also noted that the tentative tract maps for all of the developable land in the "pan" area indicate that special hazard areas (earthquake, subsidence and liquefaction) do not exist on the subject property. Environmental Conditions It has been assumed that all necessary environmental permits and approvals have been obtained for development of the land as planned, and that the Pechanga Cultural Resources has approved the required mitigation. Thus, this appraisal has assumed that all necessary costs to complete any necessary mitigation have been spent or are properly reflected in the remaining land development costs, as discussed later, and that there are no other environmental conditions, including endangered 15 DESCRIPTION OF RORIPAUGH RANCH, Continuing species or significant habitat, watercourses or wetlands that would have a negative effect on the planned development. Timing of Development Release of building permits by the City is contingent upon various items, including funding of the CFD and completion of certain infrastructure. Upon funding of the CFD (projected for late March 2006) there will be sufficient infrastructure improvements completed for the City to release 107 building permits. Of these 107, 54 will be allocated to Davidson Communities for Tract No. 29661-2 in the "panhandle" area and 53 will be allocated to Tanamera Homes of which 27 will be utilized for Planning Area 3 and 26 will be utilized for Planning Area 4A. Thus, it is anticipated that construction can be underway on three of the tracts in the "panhandle" by April 2006. The necessary infrastructure improvements that are tied to the release of up to the 515th building permit are projected to be completed by September 2006. Thus, all remaining building permits for the tracts in the "panhandle" are projected to be available in September 2006, which would provide for construction to begin at that time on the remaining two tracts (Planning Areas 1 and 4B), and for all remaining buildings permits to be available for the other three tracts. It is currently estimated that the lots in the "pan" area will be completed to a blue-top condition from approximately July through October 2006. However, the necessary infrastructure to provide for the release of the 516th through 1,745th building permits will not be completed by that point in time. The master developer projects that the infrastructure will be completed by January 2007, but the City projects that the timeframe between March 2007 and September 2007 is more realistic for assumption of completion of the necessary infrastructure. Thus, the absorption study by Empire Economics, and therefore also this appraisal, have assumed that all building permits for the "pan" area will be available by September 2007. At this point, the escrow to KB Home on Planning Area 12 and the option to KB Home on the balance of the Planning Areas in the "pan" provide for closings of land sales. Work could then get underway to complete the lots to a finished condition and begin construction of homes. Highest and Best Use The term highest and best use is defined as that reasonable and probable use that will support the highest present value as defined, as of the effective date of the appraisal. Alternatively, it is that use from among reasonable, probable and legal alternative uses, found to be physically possible, legally permissible, appropriately supported, financially feasible, and which results in the highest land value. 16 DESCRIPTION OF RORIPAUGH RANCH, Continuing The planned development of Roripaugh Ranch, as discussed on previous and following pages, is physically possible with the completion of the grading and infrastructure; it is legally permissible based on the City approvals; and it is financially feasible as supported by the Market Absorption Study prepared by Empire Economics, Inc., dated February 1, 2006. Based also on my investigation of recent residential land sales in the general Temecula and Murrieta areas, there would be good demand for available residential land in the subject community. This is due to the limited supply of available and buildable land; due to the continuing demand for new homes in this area; and due to the desirability of the subject community by reason of its location and amenities. Thus, I have concluded that the planned development for the subject land is representative of the highest and best use. (Note: The conclusion of highest and best use reflects the assumption, that the master developer will complete the necessary infrastructure in a timely manner such that building permits will be available for development to occur as previously discussed and as projected in the absorption conclusions by Empire Economics, Inc.) 17 r/?/4C7 /VQ 29661-1 adkan o50ao *aH i oo ao02 ;S OF 05H DR HORTON-CONTINENTAL HOMES (CASTILLO) PROPERTY DATA Location This tract is located on the south side of Murrieta Hot Springs Rd., ±1,100' west of Roripaugh Meadows Rd. (opposite Pourray Rd.). Record Owner/Ownership History The current owner is Ashby USA, LLC. They acquired this land over 5 years ago as part of the overall acquisition of the land for the Roripaugh Ranch community. This site is under contract to be sold to Continental Residential, Inc., known by the merchant builder name of DR Horton-Continental Homes, and the sale is anticipated to close in October 2006 after building permits are available to this tract (projected for September 2006 as previously discussed). The sale price for 98 of the lots is $6,046,262 or $61,697 per lot as negotiated in April 2001, and the sale price for the other 6 lots is $99,000 per lot as negotiated in October 2003. These prices reflect the lots in blue-top condition, and then an additional reimbursement will be made by Continental Residential, Inc. to Ashby USA, LLC for additional work completed over and above blue-top condition to install some of the in-tract utilities. Legal Description The 98 lots are described as Lots 1 to 5, 7, 8, and 10 to 100 of Tract No. 29661-1 (final map approved but not yet recorded), and the 6 lots are described as Lots 1 to 6 of Tentative Tract No. 32004 (anticipated to be approved by April 2006). Assessor Data (2005/06) The tract is currently identified as Assessor Parcel No. 957-340-048 and a portion of 957-340-055. The current assessed value for parcel 048 is $527,357 for land and $0 for improvements, which does not reflect the value enhancement by the subdivision and land development work that has taken place thus far. " An allocation of the assessed value for parcel 055 is not available. The tax rate area is 13-117, with a base tax rate of 1.03817%, but the projected total tax rate to future homeowners is ±1.6-1.7% including the special taxes for this CFD and other overlapping debt. No. of Lots/Lot Sizes The tract consists of 104 lots. The lots are ±5,000 s.f. minimum size (±50' x 100'), and the average size is ±6,000 s.f. 19 PROPERTY DATA, Continuing Planned Development/Current Status The lots are planned to be developed by DR Morton-Continental Homes with a tract of homes called Castillo. There will be four floor plans, with sizes of 1,949 s.f., 2,478 s.f., 2,791 s.f. and 2,949 s.f. The most recent projected pricing by the builder is $410,000 for Plan 1, $430,000 for Plan 2, $460,000 for Plan 3 and $480,000 for Plan 4, or a weighted average of ±$453,000. As of the January 15, 2006 date of value, the lots were graded to a blue-top condition, and about 65% of the in-tract sewer and water had been installed. This tract is above grade of the land to the south, resulting in minor territorial view potential to lots along the south end of the tract. As previously indicated, building permits will not be available to be pulled for this tract until September 2006 and the builder anticipates closing their purchase on these lots in October 2006. Thus, construction of homes would not start until October 2006 or thereafter. Title Report A preliminary report by Orange Coast Title Builder Services, dated March 3, 2004, has been reviewed. This report notes the following: several Assessment Districts by the County of Riverside and Improvement Districts of Eastern Municipal Water District; easements for sewer facilities, monuments, landscaping and street; the development agreement and subdivision agreements with the City of Temecula; provisions of the environmental constraint note on the subdivision map; location within the Murrieta Creek/Santa Gertrudis Valley Area Drainage Plan adopted by the County that requires certain fees to be paid; no access rights to Murrieta Hot Springs Rd.; and perpetual air or flight easement/avigation rights to airspace above portions of the land; CC&R's for Roripaugh Ranch. This appraisal has assumed that none of these items have a negative effect on the development of the property as planned, and either have no effect on the valuation or are appropriately reflected in the valuation in terms of a cost factor. VALUATION Method of Analysis The Sales Comparison Approach is used to estimate the value of the subject lots, as if in a finished lot condition. This approach considers recent sales of residential land or bulk single-family residential lots from the general area in comparison to the subject property. Then, a deduction is made for the estimated remaining costs and fees to get the lots from as is condition to finished lot condition. 20 VALUATION, Continuing Analysis of Finished Lot Value A search was made in this general area for recent sales of similar residential land or bulk single-family residential lots. The pertinent units or measures of comparison to the subject property are on the basis of price per finished lot and/or on the basis of a finished lot ratio (ratio of finished lot cost to average projected home price). A detailed tabulation of the pertinent data is in the Addenda section of this report identified as Tabulation of Residential Land Sales. The pertinent sales for this subject property are Nos. 1 through 15, and the following discussion and analysis references these data items from the tabulation. Sale Nos. 1 through 3 are the recent closed sales of the three subject Tanamera Homes tracts (Planning Areas 4A, 3 and 4B, respectively) which are discussed later. These sales closed in June 2005, November 2005 and January 2006 at prices reflecting $203,696 to $207,150 per finished lot. Effectively, these purchases were from Griffin Communities, Shea Homes and Meeker Development by Tanamera Homes, an entity that has affiliated ownership with the master developer ownership (Ashby USA, LLC), in order to avoid litigation that could have delayed development of Roripaugh Ranch. However, the prices were considered to be at market value, and also reflected that building permits might not have been available until June or September 2006. The planned homes on these tracts are fairly similar to slightly larger in size to the planned homes on the subject lots, and the projected pricing is about 5-10% higher. Overall, these three sales support close indications to close upper limits for the subject DR Horton-Continental Homes (Castillo) tract at $203,696 to $207,150 per finished lot. Sale No. 4 is located adjacent to the west of the subject "panhandle", and was a sale of 79 lots to KB Home, 6,800 s.f. minimum size, that was negotiated in mid 2004 and closed in September 2004 at the price reflecting $210,000 per finished lot. Homes are currently under construction, ranging in size from 2,675 s.f. to 3,586 s.f., with base pricing from ±$539,000 to $610,000. Considering an upward time adjustment of 15-20% since the sale was negotiated about l'/2 years ago, a current indication is at ±$247,000 per finished lot. In comparison to the subject, the lots are much larger but this is partially offset by the slightly inferior location due to lacking the identity and amenities of the master-planned community, though the tax rate is similar. However, the homes being built on this sale are much larger and higherpriced than those planned for the subject lots. Overall, the indication at $247,000 per finished lot supports a far upper limit for the subject. Sale No. 5 is located in the French Valley area to the north of the subject, in the Crown Valley Village community. This is a pending sale of 140 lots, 7,200 s.f. minimum size, which was negotiated in March/April 2005 and will close upon formation of the CFD (±April 2006) at a price reflecting $225,000 per finished lot. The projected home pricing was a general range of $450,000 to $550,000. In 21 VALUATION, Continuing comparison to the subject, these are much larger lots which is far more than offsetting to the slightly inferior location, though the tax rate will be fairly similar. Thus, the indication at $225,000 per finished lot supports a firm upper limit for the subject. Sale No. 6 is located toward the north end of Murrieta, to the northwest of the subject, and was the sale of 95 lots, 6,000 s.f. minimum size, that was negotiated in September 2004 and closed in December 2004 at the price reflecting $220,000 per finished lot. The buyer planned homes of 2,070 s.f. to 3,518 s.f. with pricing of $475,000 to $575,000, with sales to commence in the Spring of 2006. Considering an upward time adjustment of ±15%, a current indication is at $253,000 per finished lot. This supports a far upper limit for the subject considering the larger lots which are planned for much higher-priced homes, though the tax rate is similar. Sale No. 7 is located in Phase 2B of the master-planned community of Harveston, which which is about 2l/i miles southwest of the subject. This sale consisted of 106 lots at 3,100 s.f. minimum size and 92 lots at 4,250 s.f. minimum size. It was negotiated in October 2004 and closed in November 2004 at the blended price indicating $201,000 per finished lot. The buyer planned homes of 1,780 s.f. to 2,181 s.f. on the smaller lots and 2,358 s.f. to 2,790 s.f. on the larger lots, and the Phase 1 pricing is ±$430,000 to $470,000 for the smaller product and ±$490,000 to $520,000 for the larger product. In comparison to the subject, these are smaller lots, the tax rate is similar, but the location is considered to be similar to slightly superior. This results in homes on the smaller lots that are smaller and slightly lower-priced than projected for the subject and homes on the larger lots that are larger and higher-priced than projected for the subject. Considering an upward time adjustment of ±10-15%, a current indication is at ±$226,000 per lot which supports a firm upper limit for the subject. Sale Nos. 8, 9 and 10 are located in Phase 3 of Harveston, and were part of a bulk sale that also included a site for 64 attached units. The sale was negotiated in September/October 2005 and closed in November 2005. Sale No. 8 consisted of 76 lots, 2,700 s.f. minimum, that sold at a price reflecting $174,000 per finished lot, Sale No. 9 consisted of 130 lots, 4,950 s.f. minimum, that sold at a price reflecting $201,000 per finished lot, and Sale No. 10 consisted of 112 lots, 5,850 s.f. minimum, that sold at a price reflecting $221,000 per finished lot. The location is outside of and considered to be inferior to the area within the main loop portion of Harveston that includes Phase 2B, but is considered to be similar to slightly superior to the subject. In addition, the tax rate is similar to the subject. Sale No. 8 supports a far lower limit for the subject at $174,000 per finished lot due to the much smaller lots. Sale No. 9 supports a close indication at $201,000 per finished lot due to the similar lot size at 4,950 s.f., though planned for slightly larger 22 VALUATION, Continuing and higher-priced homes. Sale No. 9 supports a firm upper limit at $221,000 per finished lot due to the larger lots at 5,850 s.f. minimum that are planned for much larger and higher-priced homes than the subject. Sale No. 11 is located in the master-planned community of Wolf Creek, which is toward the southerly end of Temecula, about 6 miles southerly of the subject. This was a sale of 6,000 s.f. minimum lots that closed in December 2005 from the master developer to Lennar Homes at a price reflecting $270,000 per finished lot. Lennar plans to build homes ranging in size from 3,000 s.f. to 3,600 s.f., with projected pricing in the high $500,000's to the low $600,000's. In comparison to the subject, the tax rate is similar but these are larger lots that are planned for much larger and higher-priced homes, thus supporting a far upper limit for the subject at $270,000 per finished lot. Sale Nos. 12,13 and 14 are located in Phase 2 of the master-planned community of Morgan Hill, which is adjacent to the south end of Temecula, about 6 miles south/southeast of the subject. These sales were negotiated in August 2004 and closed in December reflecting prices of $220,453 per finished lot for the 6,000 s.f. minimum lots, $227,743 per finished lot for the 7,000 s.f. minimum lots and $246,393 per finished lot for the 8,000 s.f. minimum lots. These sales are superior to the subject due to the larger lot sizes, as reflected by the larger and higher-priced homes than are planned than on the subject lots, as well as having some view potential. These factors are more than offsetting to an upward time adjustment, resulting in firm to far upper limits for the subject from ±$220,000 to $246,000 per finished lot. Sale No. 15 is located in the master-planned community of Canyon Hills which is at the east side of Lake Elsinore, several miles east of the 1-15 Freeway. This was a sale of 131 lots, 4,900 s.f. minimum, which closed in July 2005 at a price reflecting $192,500 per finished lot. The buyer planned homes of 1,947-2,303 s.f. with projected pricing of $416,000 to $440,000. In comparison to the subject, the lots are fairly similar in size, the tax rate is similar, but the location is considered to be inferior which is evidenced by the smaller and lower-priced homes that are planned. Thus, this sale supports a firm lower limit for the subject at $192,500 per finished lot. In summary, on the basis of price per finished lot, the sales data supports a far lower limit at $174,000, a closer but firm lower limit at $192,500 per finished lot, close indications to close upper limits from $201,000 to $207,150, and firm to far upper limits from ±$220,000 to $270,000. On the basis of a finished lot ratio, these sales as discussed indicate the overall range from 39% to 45%. Considering the desirable amenities of the subject community, I have concluded that the upper mid-portion of the range is most supportable, or a 23 VALUATION, Continuing range of 43-44%. Based on the projected home pricing at an average of ±$451,000 for the subject, the following indication results: $451,OOOx.43-.44= $193,930 to $198,440/finished lot Lastly, as previously discussed, the subject property has the limiting factor of not being able to pull building permits until September 2006, or not for approximately 8 months from the date of value. It is noted that on many sales of residential land, the buyer/builder closes on the purchase a number of months prior to the eventual start of construction of the homes, even if the purchase was of lots in blue-top or nearfinished lots. However, in the case of the subject lots this is not a matter of choice but a firm limitation and thus the subject tract will trail three other tracts in the "panhandle" by about 6 months. Based on the foregoing, I have concluded on a value of $195,000 per finished lot for the subject tract. Deduction for Costs to get to Finished Lots Information provided by the property owner owner is that the remaining costs and fees to get from the as is condition to finished lots is approximately $3,000,000 ($28,846 per lot), excluding the TUMF (Transportation Uniform Mitigation Fee) that is to be credited by the City for infrastructure work that will be funded by the CFD bond proceeds. Conclusion of Value Based on the foregoing, the value indication of the as is condition is calculated as follows:If finished lot condition: 104 lots @$195,000/lot = $20,280,000 Less remaining costs/fees to get to finished lots: -3.000.000 $17,280,000 Thus, as the result of this analysis, I have arrived at the following conclusion of market value for the subject Continental Homes (Castillo) tract, subject to the Assumptions and Limiting Conditions, and as of January 15, 2006: $17,280,000 (SEVENTEEN MILLION TWO HUNDRED EIGHTY THOUSAND DOLLARS) 24 DAVIDSON COMMUNITIES (N/A) 25 DAVIDSON COMMUNITIES (N/A) PROPERTY DATA Location This tract is located on the south side of Murrieta Hot Springs Rd., ±550' west of Roripaugh Meadows Rd. (opposite Pourray Rd.). Record Owner/Ownership History The current owner is Davidson Roripaugh Ranch 122 LLC, and they are known by the merchant builder name of Davidson Communities. They acquired this land from Ashby USA, LLC by deed recorded May 30, 2003, Document No. 391651. The sale price was $8,266,717 or $83,502 per lot, and this was negotiated in February 2003. Terms included 64% of the price carried by the seller in two notes, but these have now been paid off. Legal Description The tract is described as Lots 1 to 88 and 90 to 100 of Tract No. 29661-2, recorded April 28, 2004. Assessor Data (2005/06) The 99 lots comprise Assessor Parcel Nos. 957-710-001 through 012, 957-711-001 through 044, 957-712-001 through 014, 957-713-001 through 013, 957-720-001 through 003, 957-722-001, 003 through 013 and 957-723-001. The assessed values are $79,488 per lot lot for land and $0 for improvements, or a total assessed value of $7,869,312 for the overall tract. The tax rate area is 13-117, with a base tax rate of 1.03817%, but the projected total tax rate to future homeowners is ±1.6-1.7% including the special taxes for this CFD and other overlapping debt. No. of Lots/Lot Sizes The tract consists of a total of 99 lots. The lots are ±5,000 s.f. minimum size (±50' x 100'), and the average size is closer to 6,000 s.f. Planned Development/Current Status The lots are planned to be developed with a tract of homes that as yet does not have a project name. It is planned that there will be three floor plans, with sizes of 2,960 s.f., 3,178 s.f. and 3,357 s.f. The original proforma pricing was $335,000 to $375,000, but the most recent projected pricing by the builder is $538,000 to $558,000. As of the January 15, 2006 date of value, the lots were in a partially finished condition with the in-tract utilities installed and the in-tract streets paved. 26 PROPERTY DATA, Continuing This tract is above grade of the land to the south, resulting in minor territorial view potential to lots along the south end of the tract. As to the timing of development, it was previously discussed that upon funding of the CFD (projected for late March 2006), 54 building permits are to be available to this tract. The remaining 45 building permits are projected to be available in September 2006. Title Report A preliminary report by Orange Coast Title Builder Services, dated September 13, 2004, has been reviewed. This report notes the items as mentioned for the previous subject tract. In addition, it notes easements for public utilities, storm drain purposes, open space/paseo purposes, landscape/irrigation purposes that affect one or more lots in the tract, and the subdivision improvement agreement with the City. However, the easements are along the side or the rear of a lot, or within common areas of the tract, and do not impact the development of any of the lots. This appraisal has assumed that none of these items have a negative effect on the development of the property as planned, and either have no effect on the valuation or are appropriately reflected in the valuation in terms of a cost factor. VALUATION Method of Analysis This is the same as previously discussed for DR Horton-Continental Homes (Castillo). Analysis of Finished Lot Value The discussion and analysis is similar to that for the previous DR Horton-Continental Homes (Castillo) tract. However, while these are similar lots in terms of the location and the minimum size of 5,000 s.f., they are targeted by Davidson Communities to be developed with significantly larger and higher-priced homes than for the previous subject tract or than the other three tracts in the "panhandle" as discussed later. The result is that this tract will have the niche of the higher-priced homes in the "panhandle" reflecting the segmentation in product, though all tracts have 5,000 s.f. minimum lots. Thus, for the subject property the sales data would support a far lower limit at $192,500 per finished lot, closer but firm lower limits from $201,000 to $207,150 per finished lot, a close indication to close upper limit at $221,000 per finished lot, and far upper limits at $247,000+ per finished lot. In terms of a finished lot ratio, a 27 VALUATION, Continuing range of 41-42% is considered to be appropriate to reflect the much higher-priced homes but competing with much other product on similar 5,000 s.f. minimum lots. Based on average pricing of ±$548,000, the indication is as follows: $548,000 x .41-.42 = $224,680 to $230,160/finished lot It is also noted that this tract has the desirable factors of the lots being in a near finished condition and with building permits to be available within ±3 months from the date of value. Overall, I have concluded that the most supportable range for the subject tract is well over $207,150 per finished lot and closer to but under $221,000 per finished lot, and the conclusion is at $218,000 per finished lot. Deduction for Costs to get to Finished Lots Information provided by the property owner is that the remaining costs and fees to get from the as is condition to finished lots is $3,512,058 ($35,475 per lot), excluding the TUMF (Transportation Uniform Mitigation Fee) that is to be credited by the City for for infrastructure work that will be funded by the CFD bond proceeds. Conclusion of Value Based on the foregoing, the value indication of the as is condition is calculated as follows:If finished lot condition: 99 lots @$218,000/lot = $21,582,000 Less remaining costs/fees to get to finished lots: -3.512.058 $18,069,942 Thus, as the result of this analysis, I have arrived at the following conclusion of value for the subject Davidson Communities tract, subject to the Assumptions and Limiting Conditions, and as of January 15, 2006: $18,070,000 (EIGHTEEN MILLION SEVENTY THOUSAND DOLLARS) 28 TANAMERA HOMES (MADISON) 29 TANAMERA HOMES (MADISON) PROPERTY DATA Location This tract is located at the southwest corner of Murrieta Hot Springs Rd. and Roripaugh Meadows Rd. (opposite Pourray Rd.). Record Owner/Ownership History The current owner is Tanamera/Roripaugh II, LLC, known by the builder name of Tanamera Homes. They acquired these lots from Shea Homes Limited Partnership by deed recorded November 1, 2005, Document No. 904748, at a price of $18,340,000 or $185,253 per lot. The deal went into escrow in July 2005, and the price reflected the lots in a near finished condition and with finished lots estimated at $206,153 per lot. Shea Homes Limited Partnership had acquired these lots from Ashby USA, LLC in May 2003 at a price of $8,169,356 or $82,519 per lot for the lots in a blue-top condition. Legal Description The lots are described as Lots 1 to 44, 46 to 59 and 61 to 101 of Tract No. 29661-3, recorded April 28, 2004. Assessor Data (2004/05) The 99 lots comprise Assessor Parcel Nos. 957-720-004 through 014, 957-721-001 through 022, 957-722-014 through 024 & 026 through 030, 957-723-002 through 010 & 012 through 029, 957-730-001 through 007, 957-732-001 through 010 and 957-733-001 through 006. The assessed values are $78,469 per lot for land and $0 for improvements, or a total assessed value of $7,768,431 for the overall tract. The tax rate area is 13-117, with a base tax rate of 1.03817%, but the projected total tax rate to future homeowners is ±1.6-1.7% including the special taxes for this CFD and other overlapping debt. No. of Lots/Lot Sizes The tract consists of a total of 99 lots. The lots are ±5,000 s.f. minimum size (±50' x 100'), and the average size is closer to 6,000 s.f. Planned Development/Current Status The lots are planned to be developed with a tract of homes that will be called Madison. It is planned that there will be four floor plans, with sizes of 1,974 s.f., 2,334 s.f., 2,437 s.f., 2,699 s.f. The current projected pricing by Tanamera Homes is 30 PROPERTY DATA, Continuing $459,990, $489,990, $499,990 and $519,990 or a weighted average of ±$498,000. As of the January 15, 2006 date of value, the lots were in a partially finished condition with wet utilities installed, and street improvements of paving, curb and gutter completed. Remaining items include dry utilities, minor street improvements, landscaping and development impact fees. This tract is above grade of the land to the south, resulting in minor territorial view potential to lots along the south end of the tract. As to the timing of development, it was previously discussed that upon funding of the CFD (projected for late March 2006), 27 building permits are to be available to this tract. The remaining 72 building permits are projected to be available in September 2006. Title Report A preliminary report by Fidelity National Title Company, dated October 14, 2005, has been reviewed. This report notes the items as mentioned for the previous subject tracts, and the discussion is the same as for the the Davidson Communities tract. Thus, this appraisal has assumed that none of these items have a negative effect on the development of the property as planned, and either have no effect on the valuation or are appropriately reflected in the valuation in terms of a cost factor. VALUATION Method of Analysis This is the same as discussed for the two previous subject tracts. Analysis of Finished Lot Value The discussion and analysis is similar to that for the previous two subject tracts, though this tract is targeted for homes that are larger and higher-priced than the subject DR Morton-Continental (Castillo) tract but are smaller and much lowerpriced than the subject Davidson Communities tract. However, this subject tract also has the desirable factors of the lots being in a near finished condition and with building permits to be available within about 3 months from the date of value. It is noted that the sale of this subject property that was negotiated in June/July 2005 and closed in November 2005 was at a price that reflected $206,153 per finished lot, and the other data would support a firm lower limit at $201,000 per finished lot but a firm upper limit at $221,000 and above per finished lot. Considering a finished lot ratio of 43-44% and the projected average base pricing of $498,000, the following indication results: $498,000 x .42-.4S = $214,140 to $219,120/finished lot 31 VALUATION, Continuing The value conclusion for this subject tract is based on $210,000 per finished lot. Deduction for Costs to get to Finished Lots Information provided by the property owner is that the remaining costs to get the lots from the as is condition to finished lots are a total of $31,224 per lot, which indicates the following: 99 lots @$31,224/lot = $3,091,176 Conclusion of Value Based on the foregoing, the value indication of the as is condition is calculated as follows:If finished lot condition: 99 lots @$210,000/lot = $20,790,000 Less remaining costs/fees to get to finished lots: -3.091,176 $17,698,824 Thus, as the result of this analysis, I have arrived at the following conclusion of value for the subject Tanamera Homes (Madison) tract, subject to the Assumptions and Limiting Conditions, and as of January 15, 2006: $17,700,000 (SEVENTEEN MILLION SEVEN HUNDRED THOUSAND DOLLARS) 32 TANAMERA HOMES (SHUTTERS) ^Mj M iC&iIrDsK:«fe "|0i IOMI '|f i; ••...,... .,,.. ...1,..,'. , § i ; P^^:-'^V^VlVHl ** i" I* i f ! ; ! " * ' i » !*(*—'•*>*-** il i »)•--A-J-1, P«i • *^..I; -IN .' *.*;t" -• i ^! •> x «s!S» i « ,V.';.•"•:» '• •i!.> j -.:?« ' ,I':-• • »•"•"«•".'«"«r"« 'I-I' fHi , *?il»?' v * "."V^jf*.•.'.*.•.•.; : , j;X?| \ ^ — I: ••—-v . -.' !; ^X^" *rfsl4 KI* sLJb K55 elk* y> "••! U O sKSSHt1. k".^ ^ I,QH H' S*S|§ i,L--^^ S^Uj « e«8K if sitli |*ss I<*B» 33 TANAMERA HOMES (SHUTTERS) PROPERTY DATA Location This tract is located at the southeast corner of Murrieta Hot Springs Rd. and Roripaugh Meadows Rd. (opposite Pourray Rd.). Record Owner/Ownership History The current owner is Tanamera/Roripaugh, LLC, also known by the builder name of Tanamera Homes. They acquired these lots from Roripaugh Ranch 100, L.P. (Griffin Communities) by deed recorded June 29, 2005, Document No. 514872, and the sale had been negotiated in April 2005. The sale price was $18,625,000 or $186,250 per lot for 100 lots in near finished condition, with finished lots estimated at $207,150. Roripaugh Ranch 100, L.P. had acquired the lots from Ashby USA, LLC in May 2003 at a price of $7,715,135 or $77,151 per lot for the lots in a bluetop condition, and the sale had been negotiated in October 2002. Legal Description The lots are described as Lots 1 to 82 and 84 to 101 of Tract No. 29661-4, recorded April 28, 2004. Assessor Data (2005/06) The 100 lots comprise Assessor Parcel Nos. 957-730-008 through Oil, 957-731-001 through 013, 957-732-011 through 020, 957-733-007 through 016 & 018 through 028, 957-740-001 through Oil, 957-741-001 through 022, 957-742-001 through 012, and 957-743-001 through 007. The assessed values are $72,984 per lot for land and $0 for improvements, or a total assessed value of $7,289,400 for the overall tract. The tax rate area is 13-117, with a base tax rate of 1.03817%, but the projected total tax rate to future homeowners is ±1.6-1.7% including the special taxes for this CFD and other overlapping debt. No. of Lots/Lot Sizes The tract consists of a total of 100 lots. The lots are ±5,000 s.f. minimum size (±50' x 100'), and the average size is closer to 6,300 s.f. Planned Development/Current Status The lots are planned to be developed with a tract of homes to be called Shutters. It is planned that there will be four floor plans, with sizes of 2,007 s.f., 2,896 s.f., 3,088 s.f., and 3,246 s.f. Current projected pricing is $459,990, $524,990, $529,990 and 34 PROPERTY DATA, Continuing $539,990, or a weighted average of ±$522,000. As of the January 15, 2006 date of value, the lots were in a partially finished condition with wet utilities installed, and street improvements of paving, curb and gutter completed. Remaining items include dry utilities, minor street improvements, landscaping and development impact fees. This tract is above grade of the land to the south, resulting in minor territorial view potential to lots along the south end of the tract. As to the timing of development, it was previously discussed that upon funding of the CFD (projected for late March 2006), 26 building permits are to be available to this tract. The remaining 74 building permits are projected to be available in September 2006. Title Report A preliminary report by Orange Coast Title Company dated December 29, 2005 has been reviewed. This report essentially notes the same items as mentioned for the previous subject tracts, and the discussion is the same as for the Davidson Communities Communities tract. Thus, this appraisal has assumed that none of these items have a negative effect on the development of the property as planned, and either have no effect on the valuation or are appropriately reflected in the valuation in terms of a cost factor. VALUATION Method of Analysis This is the same as discussed for the three previous subject tracts. Analysis of Finished Lot Value The discussion and analysis is similar to that for the previous three subject tracts, and it is noted that this tract is targeted for homes that are slightly larger and higherpriced than for the Tanamera Homes (Madison) tract but smaller and lower-priced homes than for the Davidson Communities tract. This tract is similar to the previous two subject tracts with the desirable factors of the lots being in a near finished condition and with building permits to be available within about 3 months from the date of value. It is also noted that the sale of this subject property in June 2005 was at a price that reflected $207,150 207,150 per finished lot, and the other data would support a far lower limit at $201,000 per finished lot and a close upper limit at $221,000 per finished lot. Considering a lower finished lot ratio of 41-42% to reflect the relatively higher pricing for homes on 5,000 s.f. minimum lots (similar to the analysis of the Davidson 35 VALUATION, Continuing Communities tract), and the projected average base pricing of $522,000, the following indication results: $522,000 x .41-.42 = $214,020 to $219,240/finished lot The value conclusion for this subject tract is based on $214,000 per finished lot. Deduction for Costs to get to Finished Lots Information provided by the property owner is that the remaining costs to get the lots from the as is condition to finished lots are a total of $31,376 per lot. Thus, this results in the following cost deduction from the estimated finished lot value: 100 lots @$31,376/lot -$3,137,600 Conclusion of Value Based on the foregoing, the value indication of the as is condition is calculated as follows:If finished lot condition: 100 lots @$214,000/lot = $21,400,000 Less remaining costs/fees to get to finished lots: -3.137.600 $18,262,400 Thus, as the result of this analysis, I have arrived at the following conclusion of value for the subject Tanamera Homes (Shutters) tract, subject to the Assumptions and Limiting Conditions, and as of January 15, 2006: $18,260,000 (EIGHTEEN MILLION TWO HUNDRED SIXTY THOUSAND DOLLARS) 36 TANAMERA HOMES (HAMPTONS) 37 TANAMERA HOMES (HAMPTONS) PROPERTY DATA Location This tract is located on the south side of Murrieta Hot Springs Rd., ±1,200' east of Roripaugh Meadows Rd. (opposite Pourray Rd.). Record Owner/Ownership History The current owner is Traditions at Roripaugh, LLC, known by the builder name of Tanamera Homes. They acquired these lots from Roripaugh Ranch I, L.P. by deed recorded January 6, 2006, Document No. 14387, at a price of $18,876,516 or $167,049 per lot. The deal was negotiated in August/September 2005 and the price reflected the lots in a blue-top condition with a minor amount of street improvements completed including sewer and water, and with finished lots estimated at $203,696 per lot. Roripaugh Ranch I, LP (known by the merchant builder name of Meeker Companies) had acquired these lots from Ashby USA, LLC in June 2003 at a price of $7,553,000 or $66,841 per lot, and this was negotiated in May 2003. Legal Description The lots are described as Lots 1 to 113 of Tract No. 29661, for which the final map has been approved but is not yet recorded. Assessor Data (2005/06) This tract is currently identified as Assessor Parcel No. 957-340-054. The current assessed value is $7,026,530 for land and $0 for improvements. The tax rate area is 13-117, with a base tax rate of 1.03817%, but the projected total tax rate to future homeowners is ±1.6-1.7% including the special taxes for this CFD and other overlapping debt. No. of Lots/Lot Sizes The tract consists of a total of 113 lots. The lots are ±5,000 s.f. minimum size (±50' x 100'), and the average size is closer to 6,000 s.f. Planned Development/Current Status The lots are planned to be developed with a tract of homes to be called Hamptons. It is planned that there will be four floor plans, with sizes of 2,346 s.f., 2,589 s.f., 2,715 s.f. and 2,951 s.f. Current projected pricing is $489,990, $509,990, $519,990 and $529,990, or a weighted average of ±$517,000. As of the January 15, 2006 date of value, the lots were in a graded blue-top condition. In addition, Rimrock Rimrock Ranch Rd. 38 PROPERTY DATA, Continuing along the west side of the tract had been completed and paved including installation of sewer and water, as part of the land development work completed on the Tanamera Homes (Shutters) tract adjacent to the west. This tract is above grade of the land to the south, resulting in minor territorial view potential to lots along the south end of the tract. As to the timing of development, it was previously discussed that building permits will not be available to this tract until September 2006, and all building permits are projected to be available at that time. Title Report A preliminary report by Orange Coast Title Company, dated December 29, 2005, has been reviewed. This report essentially notes the same items as mentioned for the previous subject tracts, and the discussion is the same as for the Davidson Communities tract. Thus, this appraisal has assumed that none of these items have a negative effect on the development of the property as planned, and either have no effect on the valuation or are appropriately reflected in the valuation in terms of a cost factor. VALUATION Method of Analysis This is the same as discussed for the four previous subject tracts. Analysis of Finished Lot Value The discussion and analysis is similar to that for the previous four subject tracts, and it is noted that this tract is targeted for homes that are fairly similar in size and pricing to the Tanamera Homes (Shutters) tract. However, this subject tract has the less desirable factors of the final tract map not yet recorded, the land development work not yet completed to a near finished lot condition, and building permits not being available until September 2006. Thus, I have concluded that the value of these lots is below the Tanamera Homes (Shutters) tract, but still well above the value of the DR Horton-Continental Homes (Castillo) tract due to being targeted for much larger and higher-priced homes than that tract. It is also noted that the sale of this subject tract was negotiated in August/September 2005 and recently closed at the price reflecting $203,696 per finished lot. In summary, I have concluded on a value of $205,000 per finished lot for this tract. 39 VALUATION, Continuing Deduction for Costs to get to Finished Lots Information provided by the property owner is that the remaining costs to get the lots from the as is condition to finished lots are estimated at $42,705 per lot. Thus, this results in the following cost deduction from the estimated finished lot value: 113 lots @$42,705/lot = $4,825,665 Conclusion of Value Based on the foregoing, the value indication of the as is condition is calculated as follows:If finished lot condition: 113 lots @$205,000/lot = $23,165,000 Less remaining costs/fees to get to finished lots: -4.825.665 $18,339,335 Thus, as the result of this analysis, I have arrived at the following conclusion of value for the subject Tanamera Homes (Hamptons) tract, subject to the Assumptions and Limiting Conditions, and as of January 15, 2006: $18,340,000 (EIGHTEEN MILLION THREE HUNDRED FORTY THOUSAND DOLLARS) 40 MAP OF ASHBY USA, LLC OWNERSHIP 41 ASHBY USA, LLC OWNERSHIP PROPERTY DATA Location This ownership comprises all of the land in the "pan" area, located on Murrieta Hot Springs Rd., Butterfield Stage Rd., Nicolas Rd., North Loop Rd. and South Loop Rd. Record Owner/Ownership History All of this land is owned by Ashby USA, LLC. They acquired the land in this "pan" area by deed recorded in October 2001 from Roripaugh Ranches, Inc., as part of the bulk purchase of all of the land for the community of Roripaugh Ranch. However, it is noted that KB Home is in escrow to purchase Planning Area 12, and they also have a separate option to purchase all or a large portion of the remaining residential lots in the "pan" area. For Planning Area 12, the deal was negotiated in August 2003 at a price of $85,000 per lot and the sale will close when the lots are completed to blue-top condition and when building permits are available to these lots (516th building permit threshold), which is projected to be by September 2007. For the option on the other lots, KB Home has posted a $39,000,000 letter of credit that will be converted to cash when the lots are completed by Ashby USA, LLC in a blue-top condition, and when building permits are available for these lots which is projected to be by September 2007. At that time, KB Home may elect to purchase either the 412 lots comprising Planning Areas 16, 23, 24 and 31 in a single takedown or the 1,118 lots comprising all of the remaining "pan" area (excepting the 112 lots in Planning Area 12) in multiple takedowns over a period of years. If the option of 412 lots is selected, the sale would close within 45 days, or there can be an 8-month extension. If the option of all of the lots is selected, these would be taken down over a period of ±5 years as home construction takes place. The prices for the lots in each Planning Area have been set, ranging from $164,000 to $490,111 per lot for the bluetop condition, and the prices will not escalate as future takedowns would occur. Legal Description 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 will be subdivided into individual single-family lots by a "B" tract map. Tract No. 29353-2 recorded in September 2003 and it is the "A" map for the west portion of the "pan" area, and Tract No. 29353 is the "A" map for the balance of the "pan" area and it is due to record in March 2006. The separate tentative tract maps for each Planning Area (the "B" maps) have been prepared and five of the 10 maps have been submitted to the City for approval, with the remaining five maps to be submitted by early March 2006. 42 PROPERTY DATA, Continuing The description of each Planning Area is as follows: Plan. Area 10 11 12 14 15 16 17 18 19 20 21 22 23 24 31 33 ("A" Lot 13478124 3 11 107896 5,6 Map) Tract 29353-2 29353-2 29353-2 29353-2 29353-2 29353 29353 29353 29353 29353 29353 29353 29353 29353 29353 29353-2 ("B" Map) Tent. Tr. No. 30766 n/a 32355 32356 32356 29368 29368 29368 29367 29366-2 29366-1 32358 30768 30768 32357 30767 Assessor Data (2005/06) The Planning Areas noted on the previous page comprise all or portions of Assessor Parcel Nos. 958-260-013, 014, 019 & 022 and 958-810-006, 007, 008, 010, Oil, 012, 013 & 015. The current assessed values for these parcels are a total of $6,193,442 for land and $0 for improvements. The tax rate areas are 13-016 and 13-116, with a base tax rate of 1.03817%, but the projected total tax rate to future homeowners is ±1.6-1.7% including the special taxes for this CFD and other overlapping debt. No. Lots/Lot Sizes/Planned Product The following product mix information was obtained from the master developer, Ashby USA, LLC. It reflects what has been approved by the Planning Commission in general, and also reflects what is shown on the tentative tract maps for each Planning Area. However, as previously noted, the tentative tract maps are not yet approved, but some have been submitted to the City for processing of approvals. It is also noted that this product mix information is consistent with the updated Market Absorption Study dated February 1, 2006 by Empire Economics, Inc., and the product size and pricing for each Planning Area is as shown in the Market Absorption Study. The table on the following page shows the allocation of the lots by Planning Area, and also shows the minimum or typical lot sizes, as well as the planned product by size and projected pricing. It is noted that Planning Area 11 is not shown on the table since it is the commercial site. The site contains 10.7 acres of net usable area, and is planned for future development with a neighborhood retail center. 43 PROPERTY DATA, Continuing Plan. No. Area Lots Lot Size 10 14 10,000 s.f. min.; 14,000 s.f. avg.; 8,075 s.f. min. pad 12 112 3,150 s.f. min. (45x70) 14 92 3,150 s.f. min. (45x70); ±4,000 s.f. avg. 15 104 3,150 s.f. min. (45x70); ±4,000 s.f. avg. 16 121 5,000 s.f. min. (50 x 100); 6,700 s.f. avg. 17 147 6,000 s.f. min. (60 x 100); 8,500 s.f. avg. 18 121 6,000 s.f. min. (60 x 100); 8,500 s.f. avg. 19 25 17 @20,000 s.f. min.; 16,100 s.f. min. pad 8 @1 acre min.; 22,000 s.f. min. pad 20 35 25 @20,000 s.f. min.; 11,600 s.f. min. pad 10 @1 acre min.; 14,400 s.f. min. pad 21 24 14 @20,000 s.f. min.; 15,300 s.f. min. pad 10 @1 acre min.; 22,000 s.f. min. pad 22 130 Cluster (±2,600 s.f. min.) 23 47 4,000 s.f. min. (50 x 80) 24 75 4,000 s.f. min. (50 x 80) 31 169 Cluster (±2,600 s.f. min.) 33 14 8 @20,000 s.f. min. 6 @1 acre min. 1,230 Product Size/Pricing 4,001-5,187 s.f.; $779,9904909,990 2,050-2,300 s.f.; $405,990-$430,990 2,050-2,300 s.f.; $405,9904430,990 2,050-2,300 s.f.; $405,9904430,990 2,500-3,787 s.f.; $450,9904510,990 2,969-3,711 s.f.; $510,9904545,990 2,969-3,711 s.f.; $510,9904545,990 4,001-5,187 s.f.; $779,9904909,990 3,676-5,318 s.f.; $787,9904909,990 4,001-5,187 s.f.; $779,9904909,990 3,676-5,318 s.f.; $787,9904909,990 4,001-5,187 s.f.; $779,9904909,990 3,676-5,318 s.f.; $787,9904909,990 1,809-2,300 s.f.; $370,0004415,990 2,029-2,707 s.f.; $415,9904445,990 2,029-2,707 s.f.; $415,9904445,990 1,809-2,300 s.f.; $370,0004415,990 4,001-5,187 s.f.; $779,9904909,990 3,676-5,318 s.f.; $787,9904909,990 Status of Development All of this land is currently in the process of being graded and it is estimated that the various Planning Areas will be completed to a blue-top condition during the time frame of July through October 2006. Title Report Preliminary reports by Orange Coast Title Builder Services, dated September 13, 2004, have been reviewed. These reports note similar items as mentioned for the previous subject tracts, as well as various other easements to the Metropolitan Water District of Southern California, Southern California Edison Company, GTE California Inc., General Telephone Company, Rancho California Water District and Verizon California, Inc. Similar to the previous discussion for other subject tracts, this appraisal has assumed that none of these items have a negative effect on the development of the property as planned, and either have no effect on the valuation or are appropriately reflected in the valuation in terms of a cost factor. 44 VALUATION Method of Analysis Due to the size of this ownership at 1,230 lots, and since the lots could potentially be sold off over the next 4 to 5 years, I have concluded that the appropriate method of analysis is the subdivision or developmental approach. 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 deductions for the remaining land development costs, costs of overhead and marketing, holding costs, and profit to the master developer. The estimated net proceeds over time are then discounted to a present value indication. The first step is to estimate the appropriate retail land values for the 16 individual Planning Areas, including the commercial site, reflecting the condition at which the land will be delivered by the master developer, which is blue-top lots for the residential land and mass graded superpad for the commercial site. The second step is to estimate the timing in which the sales of the Planning Areas would be projected to occur. The third step is to estimate the appropriate expenses to be deducted over time for the remaining land development costs to get the land from as is condition to the deliverable condition, together with overhead and marketing costs, holding costs, and profit. The last step is to estimate an appropriate discount rate or internal rate of return at which to discount the projected net cash flows into a present value indication. This present value indication represents the as is condition of the land as of the date of value. Analysis of Residential Land Values Planning Areas 22 & 31: These Planning Areas are to be developed with a clustertype detached product that will have lot sizes of ±2,600 s.f. minimum, with projected product pricing of $370,000 to $415,990 or an average of ±$395,000. Based on the previous discussion for the subject DR Horton-Continental Homes (Castillo) tract, Sale No. 8 supports a close indication at $174,000 per finished lot due to being similar lots of 2,700 s.f. minimum and which are planned for homes of fairly similar size and pricing. Sale Nos. 1 through 3 would support far upper limits at $203,696 to $207,150 per finished lot due to being much larger lots, which are planned for much larger and higher-priced homes. Considering a finished lot ratio of 43-44% (as discussed for the DR Horton-Continental Homes tract in the "panhandle") and the average projected home price of ±$395,000, the following indication results: $395,000 x .4S-.44 = $169,850 to $173,800/fin. lot 45 VALUATION, Continuing Lastly, it is noted that the purchase prices in the KB Home option to purchase from Ashby USA, LLC reflect $209,547 per finished lot for Planning Area 22 and $211,053 per finished lot for Planning Area 31. However, it is noted that while these are recently negotiated prices, the initial takedowns by KB Home would not occur until building permits are available (assumed to be September 2007), and future takedowns could extend thereafter, all with no price escalation. I have concluded on a value of $170,000 per finished lot for Planning Areas 22 and 31. Planning Area 12, 14 & 15: These Planning Areas consists of 3,150 s.f. minimum lots and are targeted for homes in the price range of $405,990 to $430,990, or an average of ±$418,000. The sales data would support a firm lower limit at $174,000 per finished lot but a firm upper limit at ±$200,000 per finished lot. Considering a finished lot ratio of 43-44% and the projected average home pricing of $418,000, the following indication results: $$418,000 x ,43-.44 = $179,740 to $183,920/fin. lot It is noted that the purchase price for the lots in Planning Areas 14 and 15 in the option to KB Home reflects $219,555 per finished lot. However, similar to previous discussion, this appears to represent a "future" price, and greater weight is given to the current sales data. Thus, I have concluded on a value of $180,000 per finished lot for Planning Areas 12, 14 and 15. Planning Areas 23 & 24: These Planning Areas consist of 4,000 s.f. minimum lots that are targeted for homes in the price range of $415,990 to $445,990, or an average of ±$429,000. The sales data supports a far lower limit at $174,000 per finished lot, a closer indication near the range of ±$200,000 per finished lot, and far upper limits at ±$220,000 per finished lot and above. Based on a finished lot ratio of 43-44%, the following indication results: $429,000 x .4S-.44 = $184,470 to $188,760/fin. lot It is noted that the purchase price for both of these Planning Areas in the option to KB Home reflects $234,174 per finished lot, but limited weight is given to this indication. The conclusion for the Planning Areas 23 and 24 is based on $185,000 per finished lot. Planning Area 16: This Planning Area consists of 5,000 s.f. minimum lots with an average size of ±6,700 s.f., that are targeted for homes in the price range of $450,990 to $510,990, or an average of ±$481,000. These lots are similar in size to the five tracts in the "panhandle", though it is noted that while the homes are planned to be relatively large in size, the projected pricing is lower than four of the tracts and higher than only the DR Horton-Continental Homes (Castillo) tract. Thus, the 46 VALUATION, Continuing valuation of the DR-Horton-Continental Homes (Castillo) tract supports a lower limit at $195,000 per finished lot but the valuation of the Tanamera Homes (Madison) tract at $210,000 per finished lot supports a close upper limit. Based on a finished lot ratio of 43-44%, the following indication results: $481,000 x .4S-.44 = $206,830 to $211,640/fin. lot It is noted that the purchase price for this Planning Area in the option to KB Home reflects $283,778 per finished lot. However, similar to previous discussion, less weight is given to this than to the current sales data together with the current projected home pricing and a supportable finished lot ratio. Thus, the conclusion of value is $210,000 per finished lot for Planning Area 16. Planning Areas 17 & 18: These Planning Areas consist of 6,000 s.f. minimum lots, with an average size of ±8,500 s.f., that are targeted for homes in the price range of $510,990 to $545,990, or an average of ±$527,000. Sale Nos. 1, 2 and 3 support firm lower limits at $203,696 to $207,150 per finished lot due to being smaller lots and planned for smaller and lower-priced homes. Sale No. 4 supports a firm upper limit at the time-adjusted indication of $247,000 per finished lot due to being larger lots with larger and higher-priced homes being built. Sale No. 10 supports a close indication at $221,000 per finished lot due to being fairly similar size lots with the planned homes also being fairly similar in size and pricing. Based on a finished lot ratio of 43-44%, the following indication results: $527,000 x .4S-.44 = $226,610 to $231,880/fm. lot It is noted that the purchase price for these Planning Areas in the option to KB Home reflects $344,402 per finished lot, though this is considered to be far above current market value. In summary, I have concluded on a value of $230,000 per finished lot for Planning Areas 17 and 18. Planning Area 10: This Planning Area consists of 10,000 s.f. minimum lots, with an average size of 14,000 s.f. and a minimum pad size of 8,075 s.f. The targeted home pricing is a range of $779,990 to $909,990 or an average of ±$846,000. However, it is also noted that a similar home size and pricing is planned for Planning Areas 19, 20, 21 & 33 but on much larger lots of 20,000 s.f. (±¥2. acre) minimum size. Initially, the analysis of the 6,000 s.f. lots and the conclusion of $230,000 per finished lot supports a far lower limit for these 10,000 s.f. minimum lots. In addition, Sale No. 11 at a price of $270,000 per finished lot for 6,000 s.f. minimum lots supports a far lower limit for the subject due to the much smaller lot size. Sale Nos. 16 through 21 from the Tabulation of Residential Land Sales consist of relatively larger lots, and are discussed in the following paragraphs. 47 VALUATION, Continuing Sale No. 16 is located along Santiago Rd. between Margarita Rd. and Ynez Rd., in a hilly area of large estate homes on large lots. The land sold in raw condition with an approved tentative tract map and an approved parcel map for a total of 15 lots, 1-acre minimum size, up to 2.02 acres, and with an average pad size of ±23,000 s.f. The sale was negotiated in September 2003 and closed in December 2004 at a price reflecting $394,000 per finished lot. The buyer planned homes of 4,490 to 5,689 s.f., with projected pricing to average ±$1,100,000, but current projected pricing is not known. Considering an upward time adjustment of 30-35% since the price was set in September 2003, a current indication is at ±$520,000 per finished lot. This supports a significantly far upper limit for the subject due to the much larger lots with potential for much higher-priced homes as well as the much lower tax rate. Sale No. 17 is located in the master-planned community of Morgan Hill, in unincorporated Riverside County area but adjacent to the southerly end of Temecula. The buyer had purchased similar '/2-acre minimum lots in Phase 1 in September 2003 at a price of $215,000 per finished lot, and this sale reflected the price of $285,000 per finished lot for 22 lots in Phase 2. The price was negotiated in August 2004, with the first takedown of 7 lots closing in October 2004 and the second takedown of 13 lots closing in December 2004. The homes range in size from 3,902 s.f. to 4,559 s.f., and the projected pricing as of September 2004 was ±$900,000 to $1,000,000, and current pricing is from the low $1,000,000's. Considering an upward time adjustment of 15-20%, a current indication is at ±$335,000 per finished lot. In comparison to the subject, the location is fairly similar, the tax rate is similar, but the lots are much larger in size and the home pricing is slightly higher than projected for the subject. Overall, the indication at $335,000 per finished lot supports a firm upper limit for the subject. Sale No. 18 is located east of Mockingbird Canyon Rd. and south of Van Buren Blvd. in the unincorporated Woodcrest area nearby to the south of Riverside. This is a low density, residential estate area with several other tracts of new homes under construction in the nearby area. This was a sale of vacant land in rough graded condition and with a final tract map ready to record for 65 lots, 1-acre minimum size. The sale was negotiated in February 2005, with 9 of the lots closing in April and the other 56 lots closing in September at a price reflecting $300,000 per finished lot. The buyer, KB Home, planned homes of 3,758 s.f. to 5,262 s.f. with average pricing of $808,000. Some of the homes will have territorial views, and the tax rate to the homebuyers will likely be near 1.65%. In comparison to the subject, the location is considered to be fairly similar but the lots are much larger, and the result is that the planned homes are slightly larger but lower in price than the homes targeted for the subject. In addition, the tax rate will likely be slightly lower than the subject. Overall, considering also that the sale was negotiated about a year ago, the indication at $300,000 per finished lot supports a firm lower limit for the subject. 48 VALUATION, Continuing Sale No. 19 is a pending purchase by KB Home of ±l-acre minimum lots that are located nearby to the west of Sale No. 18. The sale was negotiated in September 2005 and is due to close in early 2006 at a price reflecting $330,000 to $340,000 per finished lot. KB Home plans to build two product lines, one being an extension of the Alicante tract of homes that are being built on Sale No. 18. The projected average home size is 5,000 s.f., but specific pricing was not available. The comparison to the subject is similar to Sale No. 18, except that this is a more current transaction, resulting in a firm upper limit for the subject at $330,000 to $340,000 per finished lot. Sale No. 20 is located adjacent to the north of Sale No. 18, and was land in raw and hilly condition with an approved tentative tract map for 64 lots, typically 30,000 s.f. to 1 acre in size. The buyer, Keystone Communities, planned homes of 2,800 s.f. to 4,550 s.f., with projected pricing in the wide range from $600,000 to $800,000. Some of the lots will have good territorial views, and there will be a CFD with an estimated tax rate of 1.75%. The sale was negotiated in March 2005 and closed in July 2005 at the price reflecting $319,000 per finished lot. The comparison to the subject is also similar to Sale Nos. 18 and 19, though the planned homes are smaller and lower-priced. Overall, the indication at $319,000 per finished lot supports a close indication for the subject. Sale No. 21 is located in a low density/estate residential area south of Overlook Pkwy. and east of Washington St. in the east part of Riverside. This is raw and hilly land on which the buyer, Pulte Homes, planned to process a tentative tract map for 87 lots, V2-acre minimum size but with typical and average sizes being over an acre and up to 3.7 acres. They planned homes of 2,835 s.f. to 4,027 s.f., with proforma pricing of $670,000 to $755,000 as of the land sale negotiation in August 2004. The sale closed in June 2005 at a price reflecting $300,000 per finished lot. Again, the comparison to the subject is similar to Sale Nos. 18, 19 and 20, with the location being fairly similar to the subject, the lots being much larger though planned for smaller and lower-priced homes than the subject, but the tax rate being much lower with no CFD. Considering also that the sale was negotiated nearly l'/2 years ago, the indication at $300,000 per finished lot is a firm lower limit for the subject. On the basis of a finished lot ratio, the sales data for these larger lots indicates the range of 30% to 46%, but more typically the range of 36-42%. The lower range of finished lot ratios than previously discussed for the other sales data reflects the greater risk and slower anticipated absorption for this higher-priced product. I have concluded on a range of 37-38% for the subject, and based on the average projected price of $846,000 this indicates the following: $846,000 x .37-38 = $313,020 to $321,480/fin. lot 49 VALUATION, Continuing It is also noted that the purchase price for this Planning Area in the option to KB Home reflects $494,556 per finished lot, but it is lumped in with the half-acre lots of Planning Areas 19, 20, 21 and 33 and it also appears to represent a future price. I have concluded that the range of ±$330,000 to $340,000 per finished lot is supportable for the Planning Areas with the 20,000 s.f. minimum lots, but have concluded on a lower value of $315,000 per finished lot for Planning Area 10. Planning Areas 19. 20. 21 & 33: These Planning Areas consist of a mix of 20,000 s.f. minimum lots and 1-acre minimum lots. The 20,000 s.f. lots are targeted for the same home pricing as Planning Area 10, or a range of $779,990 to $909,990, or an average of ±$846,000. The 1-acre minimum lots are targeted for home pricing of $787,990 to $909,990, or an average of ±$845,000, which is nearly the same as for the 20,000 s.f. minimum lots. Based on the discussion for Planning Area 10 as well as consideration of the sales data, I have concluded on an average value for Planning Areas 19, 20, 21 & 33 at $335,000 per finished lot. Analysis of Commercial Land This is Planning Area 11 which comprises the 10.7 net acre site that is planned for a future neighborhood retail center. A search was made for recent sales of commercial land in the general Temecula and Murrieta areas. The pertinent data is shown on the Tabulation of Commercial Land Sales in the Addenda section of this report, and are briefly discussed and analyzed in the following paragraphs. Data No. 1 was a closed sale in June 2005 on a 43-acre (net) site at a price of $8.49 per s.f. This site is located on the east side of Winchester Rd., between Auld Rd. at the north and Calle Andras Rd. at the south, at the entrance to the French Valley Airport. This is a large vacant site that was purchased for development of a Wal-Mart store. The location is considered to be superior to the subject, and the lower tax rate is superior, but the size is substantially larger and the raw condition with gently undulating topography is inferior. Overall, the indication at $8.49 per s.f. supports a far lower limit for the subject. Data No. 2 was a closed sale in February 2005 on a 7.15-acre site at a price of $10.92 per s.f. It is located at the corner of Winchester Rd. and Willows Ave. in Temecula, near a fairly new neighborhood retail center and near the Four Seasons project by K. Hovnanian. The site has good frontage along Winchester Rd., plus frontage on two other streets that provide good access. The buyer plans to develop a commercial center that will include office, retail and medical space. In comparison to the subject, the location is considered to be slightly superior, the size is smaller and the tax rate is lower, but these factors are approximately offset by an upward time adjustment. Thus, the indication at $10.92 per s.f. supports a close indication for the subject. Data No. 3 was a closed sale in March 2005 on a 3.71-acre site at a price of $11.70 per s.f. It is located along Hwy. 79 South at the corner with La Paz Rd., nearby to the east of the 15 Freeway. This site has good traffic exposure and good commercial potential, but it is restricted from retail and restaurant uses. The buyer needed to resolve some access issues, and then planned to develop medical office condos. In comparison to the subject, this is a 50 VALUATION, Continuing much smaller site, the location is considered to be superior and the tax rate is lower. These factors are slightly more than offsetting to the zoning restrictions, access issues and an upward time adjustment. Thus, the indication at $11.70 per s.f. supports a close upper limit for the subject. Data No. 4 was a closed sale in May 2005 on a 4.2-acre site at a price of $12.50 per s.f. The site is located at Jefferson St. and Elm St. in Murrieta, in an area of much new commercial development along Jefferson St. The buyer plans to develop retail stores along the front of the site and industrial space at the rear. In comparison to the subject, the location is considered to be fairly similar, but the size is much smaller and the tax rate is lower, and these factors are more than offsetting to an upward time adjustment, resulting in a firm upper limit for the subject at $12.50 per s.f. Data No. 5 was a closed sale in September 2005 on a 6.19-acre site at a price of $17.06 per s.f. This was a vacant and finished site that is at the southerly end of Murrieta Plaza, a 400,000 s.f. retail center on 45 acres that has exposure from the 215 Freeway and is anchored by a Sam's Club. The buyer plans to build two retail buildings of 40,000 s.f. and 25,000 s.f. In comparison to the subject, the location is far superior, the size is smaller and the tax rate is lower. Thus, the indication at $17.06 per s.f. supports a far upper limit for the subject. Data No. 6 was a closed sale in November 2004 on a 6.08-acre site at a price of $8.68 per s.f. The site is located on Madison Ave. nearby to the south of Murrieta Hot Springs Rd. in Murrieta, in a good retail area. The site was in raw condition and gently undulating, thus requiring grading. The buyer is a retail and hotel developer, but plans for the site were not known. The cost to get the site to finished condition is unknown, but likely at least $2.00 to $3.00 per s.f., resulting in an effective price of $10.68 to $11.68 per s.f. for a finished site. In comparison to the subject, the location is superior, the size is smaller and the tax rate is lower, but these factors are approximately offset by an upward time adjustment. Thus, this sale supports a close indication to close upper limit for the subject at $10.68 to $11.68 per s.f. Data No. 7 was a closed sale in March 2005 on a 4.2-acre site at a price of ±$17.76 per s.f. This sale consists of four contiguous ±l-acre parcels on a cul-de-sac, with frontage along the 15 Freeway, and nearby to the south of a large retail center with a Target store and multi-plex theaters. In comparison to the subject, this sale is far superior in terms of the location, the much smaller size, as well as being subdivided into smaller parcels, and the lower tax rate. These superior factors are far more than offsetting to an upward time adjustment, resulting in a far upper limit for the subject at ±$17.76 per s.f. Data No. 8 was a closed sale in April 2005 on a 3.55-acre site at a price of $13.48 per s.f. This site is located at the corner of Madison Ave. and Juniper St. in Murrieta, nearby to the southwest of the 15 Freeway, and in an area of much new commercial development. The buyer planned to develop the site with retail and restaurant uses. In comparison to the subject, the location is far superior, the size is substantially smaller and the tax rate is lower. These factors are more than offsetting to an upward time adjustment, thus resulting in a far upper limit for the subject at $13.48 per s.f. In summary, the data supports a far lower limit at $8.49 per s.f., a close indication at $10.92 per s.f., close indication to close upper limit at $10.68 to $11.68 per s.f., a close upper limit at $11.70 per s.f., and firm to far upper limits from $12.50 to $17.76 per s.f. The value conclusion reflects current value, but also is based on the assumption of significant surrounding residential development, since an assumed sale of the subject commercial site in the cash flow does not occur for several years, 51 VALUATION, Continuing as discussed later. I have concluded on a supportable value for the subject property of $11.00 per s.f. This results in the following: 10.7 acres or 466,092 s.f. @$11.00/s.f. = $5,127,000 Deductions to Blue-Top Condition from Finished Lots Next, a deduction is made to reflect that the residential lots will be delivered by the master developer in a blue-top condition, and the previous analyses were of the land as if finished lots. Thus, the deduction is for the costs to get from blue-top condition to finished lots, since the revenues in the discounted cash flow analysis are based on the blue-top condition. No deduction is made for the commercial site, since the value was of the mass graded superpad condition, and this is the condition at which it will be delivered by the master developer. Estimated cost deductions were provided by the master developer. These costs include development costs (streets, utilities, etc.) as well as fees. The deductions, shown as Builder's Costs/Lot, plus the the resulting value of the lots in a blue-top condition are shown in the following table: Plan. Area 10 12 14 15 16 17 18 19 20 21 22 23 Est. Value/Fin. Lot $315,000 $180,000 $180,000 $180,000 $210,000 $230,000 $230,000 $335,000 $335,000 $335,000 $170,000 $185,000 Builder's Costs/Lot $110,899 $44,943 $44,943 $44,943 $51,778 $62,402 $62,402 $110,899 $110,899 $110,899 $45,547 $50,174 Value/Blue-Top Lot $204,101 $135,057 $135,057 $135,057 $158,222 $167,598 $167,598 $224,101 $224,101 $224,101 $124,453 $134,826 No. of Lots 14 112 92 104 121 147 121 25 35 24 130 47 Total Value In Blue-Top Condition $2,857,414 $15,126,384 $12,425,244 $14,045,928 $19,144,862 $24,636,906 $20,279,358 $5,602,525 $7,843,535 $5,378,424 $16,178,890 $6,336,822 52 VALUATION, Continuing Plan. Est. Value/Builder's Value/Blue-No. of Area Fin. Lot Costs/Lot Top Lot Lots 24 31 33 $185,000 $170,000 $335,000 $50,174 $45,547 $110,899 $134,826 $124,453 $224,101 75 169 14 Value In Blue-Top Condition $10,111,950 $21,032,557 $3,137,414 Absorption/Rate of Land Sales Residential Land: For purposes of this valuation, the discounted cash flow analysis considers land sales as they would be projected to occur over time, on a quarterly basis. The projected timing of the land sales is based on the estimated absorption by Empire Economics which reflects closed home sales, and these are projected to start in the first half of 2008 (Jan-June 2008) for each product type in the "pan" area. This is shown on the "Estimated Absorption Schedules for CFD No. 03-02 (Roripaugh Ranch)" from the Empire Economics study, a copy of which is in the Addenda section of this report. As previously discussed, this is based on the assumption that building permits will not be available to the "pan" area until September 2007. Typically, there is at least a 9 to 12-month or more period of time from the closing of the land sale to a builder until the first closed sales of production homes in that tract. At a minimum, this reflects the time necessary to develop the lots from blue-top to finished condition and complete construction of first the model homes and then the production homes. There usually is also some lag time from when the builder closes on the land sale until the land development work commences. I have estimated that the land sale to a builder would occur approximately 9 months or in the third quarter prior to the projected first closed sale of a production home, based on the Empire Economics study. It is noted that the first sales would not close until September 2007 (third quarter of 2007) when building permits would be available. Based on the foregoing, the projected absorption or land sale for each of the planning areas is shown on the following page: 53 VALUATION, Continuing Plan. Area 10 12 14 15 16 17 18 19 20 21 22 23 24 31 33 No. of Lots 14 112 92 104 121 147 121 25 35 24 130 47 75 169 14 Timing of Land Sale 3rd qtr '07 3rd qtr '07 4th qtr '08 2nd qtr '10 3rd qtr '07 3rd qtr '07 4th qtr '09 3rd qtr '07 3rd qtr '08 2nd qtr '09 2nd qtr '09 3rd qtr '07 4lh qtr '07 3rd qtr '07 2nd qtr '10 Commercial Land: Based on the Empire Economics study, the absorption of the commercial space would occur in 2008. It is noted that this reflects absorption of completed commercial space, or occupancy of completed buildings. Similar to the residential land sales, and considering the relatively large size of this potential commercial development, the sale of the commercial land would take place well before the completed space was available for occupancy. Construction would likely take at least a year or more, and there would likely be additional lag time from the close of the land sale until construction commences. Thus, I have concluded that the land sale would occur at the earliest possible time which is the third quarter of 2007. Deductions for Costs to get to Blue-Top Condition A deduction is made for the remaining costs to the master developer to get the land from as is condition to blue-top lots for the residential land and mass graded superpad condition for the commercial site. These costs include items of engineering, grading, construction of streets, utilities, walls, entries, recreation facilities, landscaping, fees, contingency, etc. The remaining estimated costs to complete, as provided by the master developer, are a total of $68,564,433 as of January 15, 2006. The breakdown of these costs is shown on the table included in the Addenda section of this report which is titled Roripaugh Completion Cost As of 1-15-06. As indicated on the table, the remaining costs include CFD and Non-CFD items, and it also indicates that the total expenditures will be $19,153,479 for the first quarter of 2006 (excluding the amounts spent up to January 15, 2006), $24,328,104 for the second quarter of 2006, $20,785,673 for the third quarter of 2006, $3,897,177 for the fourth quarter of 2006, $100,000 for the first quarter of 2007 and a total of $300,000 thereafter and through 2010. 54 VALUATION, Continuing For the cost items that are shown as CFD Improvements, 6 of these items are on the Priority A list that are to be funded by the current CFD bond proceeds, including Murrieta Hot Springs Rd., Butterfield Stage Rd., Long Valley Channel, Santa Gertrudis Creek, Fire Station Grading and Roripaugh Valley Rd. In addition, the current CFD bond proceeds will fund the item noted as Payoff AD 161. The total cost of the 6 items was estimated at $44,395,714 and the Payoff AD 161 is indicated to be an amount of $600,000. As indicated by the table in the Addenda section, the remaining total cost amount for these 7 items as of January 15, 2006 is $24,954,951. The deduction for the costs to get to blue-top condition only includes the items that will not be funded by the CFD bond proceeds. Thus, the revised cost amounts that are exclusive of the remaining costs for the 7 items noted above, and allocating the last $300,000 into the last three quarters of 2007, are shown in the following table: Quarter Cost Amount 1st qtr '06 2nd qtr '06 3rd qtr '06 4th qtr '06 1st qtr '07 2nd qtr '07 3rd qtr '07 4th qtr '07 $13,029,638 $14,828,104 $11,454,563 $3,897,177 $100,000 $100,000 $100,000 $100,000 Total $43,609,482 A second cost factor in the discounted cash flow analysis is Overhead/Marketing, and this reflects the master developer costs of overhead, administration, marketing, sales, etc. This amount is based on 5% of gross revenues from the land sales, and then distributed evenly over the 18 quarters in the cash flow. Discount Rate/Internal Rate of Return This rate is inclusive of developer's profit, and also reflects the factors of the time value of money, and the risk of the projected cash flows inherent in this type of overall project. In my experience, this rate typically ranges from just under 20% up to nearer 30%, depending on the size and status of the project, the length of the projected build-out, the location, the perceived risk, etc. The Korpacz Real Estate Investor Survey for the fourth quarter of 2005 2005 indicates a range of rates from 12.0% to 25.0% or an average of 18.15%, inclusive of developer's profit. However, this includes all types of development, and primarily much smaller projects than the subject such as a single tract of homes. The subject property, comprising the "pan" area, has the positive factors of the Temecula location, with much nearby development that has been very successful, 55 VALUATION, Continuing including the recent and ongoing development in the communities of Rancho Bella Vista and Central Park. In addition, there are 3 major builders that are committed to the development of the tracts of homes in the "panhandle" area, with construction to start soon on three of the tracts, plus the commitment of KB Home to all or a large portion of the "pan" area. There are also the desirable factors of the recreational amenities to be provided, the gated neighborhoods, the parks and schools within the community, and the significant amount of surrounding open space. However, there are also the risk factors that the land development is not yet complete, though a large part of the grading operation has been completed and part of the infrastructure has been completed. There is also the risk factor that timing of building permits being available is tied to completion of certain infrastructure items. However, this has already been reflected by the conservative projection that building permits will not be available until September 2007, which is the outside date of the range of March through September 2007 as estimated by the City. It is also noted that home sales have not yet commenced to provide a known amount of market acceptance, but the projected pricing is considered to be reasonable. It is also significant that while the subject property is fairly sizable at 1,230 residential lots plus the commercial site, the length of the absorption for the land sales is only 4l/i years or 18 quarters. This is based on the absorption study completed by Empire Economics, in which the annual home sales for the "pan" area were projected to range from 134 to 328 for the years 2008 through 2012. Lastly, it is noted that the land values are based on current market values, and they are not appreciated or adjusted up for time over the 41/2-year period. Based on the significant land value appreciation over the past several years, which has been at a much higher rate than the increases in land development costs, a lower discount rate could be appropriate to reflect the likely future land value increases. Based on the foregoing, I have concluded on a discount rate at just below the midportion of the overall range of 20-30%, or a rate of 24%. Conclusion of Value The discounted cash flow analysis is shown on the following page, which incorporates the foregoing factors. As indicated, this analysis results in a present value indication of $74,479,439. 56 DISCOUNTED CASH FLOW ANALYSIS Quarterly REVENUES (Land Sales) Planning Area 10 Planning Area 12 Planning Area 14 Planning Area 15 Planning Area 16 Planning Area 17 Planning Area 18 Planning Area 19 Planning Area 20 Planning Area 21 Planning Area 22 Planning Area 23 Planning Area 24 Planning Area 31 Planning Area 33 Commercial Land Total PROJECT COSTS Land Development Overhead/Marketing 5% Total NET CASH FLOWS DISCOUNT FACTOR 24% PV OF CASH FLOWS PRESENT VALUE 1Q-2006 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $13,029,638 $525,737 $13,555,375 -$13,555,375 0.943396 -$12,788,089 $74,479,439 2Q-2006 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $14,828,104 $525,737 $15,353,841 -$15,353,841 0.892857 -$13,708,786 3Q-2006 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $11,454,563 $525,737 $11,980,300 -$11,980,300 0.847458 -$10,152,796 4Q-2006$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $3,897,177 $525,737 $4,422,914 -$4,422,914 0.806452 -$3,566,866 1Q-2007$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $$0 $0 $0 $0 $0 $100,000 $525,737 $625,737 -$625,737 0.769231 -$481,336 2Q-2007$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $100,000 $525,737 $625,737 -$625,737 0.735294 -$460,101 3Q-2007 $2,857,414 $15,126,384 $0 $0 $19,144,862 $24,636,906 $0 $5,602,525 $0 $0 $0 $6,336,822 $0 $21,032,557 $0 $5,127,000 $99,864,470 $100,000 $525,737 $625,737 $99,238,733 0.704225 $69,886,432 4Q-2007$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $10,111,950 $0 $0 $0 $10,111,950 $100,000 $525,737 $625,737 $9,486,213 0.675676 $6,409,604 1Q-2008$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $525,737 $525,737 -$525,737 0.649351 -$341,387 2Q-2008$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $525,737 $525,737 -$525,737 0.625000 -$328,585 DISCOUNTED CASH FLOW ANALYSIS, Continuing 3Q-2008 $0 $0 $0 $0 $0 $0 $0 $0 $7,843,535 $0 $0 $0 $0 $0 $0 $0 $7,843,535 $0 $525,737 $525,737 $7,317,798 0.602410 4Q-2008 $0 $0 $12,425,244 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $12,425,244 $0 $525,737 $525,737 $11,899,507 0.581395 1Q-2009 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $525,737 $525,737 -$525,737 0.561798 2Q-2009 $0 $0 $0 $0 $0 $0 $0 $0 $0 $5,378,424 $16,178,890 $0 $0 $0 $0 $0 $21,557,314 $0 $525,737 $525,737 $21,031,577 0.543478 3Q-2009 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $525,737 $525,737 -$525,737 0.526316 4Q-2009 $0 $0 $0 $0 $0 $0 $20,279,358 $0 $0 $0 $0 $0 $0 $0 $0 $20,279,358 $0 $525,737 $525,737 $19,753,621 0.510204 1Q-2010 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $525,737 $525,737 -$525,737 0.495050 2Q-2010 $0 $0 $0 $14,045,928 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $3,137,414 $0 $17,183,342 $0 $525,737 $525,737 $16,657,605 0.480769 Total $2,857,414 $15,126,384 $12,425,244 $14,045,928 $19,144,862 $24,636,906 $20,279,358 $5,602,525 $7,843,535 $5,378,424 $16,178,890 $6,336,822 $10,111,950 $21,032,557 $3,137,414 $5,127,000 $189,265,213 $43,609,482 $9,463,266 $53,072,743 $136,192,470 $4,408,312 $6,918,318 -$295,358 $11,430,205 -$276,704 $10,078,378 -$260,266 $8,008,464 VALUATION, Continuing Thus, as the result of this analysis, I have arrived at the following conclusion of market value for the subject Ashby USA, LLC ownership, subject to the Assumptions and Limiting Conditions, and as of January 15, 2006: $74,480,000 (SEVENTY-FOUR MILLION FOUR HUNDRED EIGHTY THOUSAND DOLLARS) 59 ADDENDA TABULATION OF RESIDENTIAL LAND SALES No. Location/Project Name 1 SEC Murrieta Hot Springs Rd. & Roripaugh Meadows Rd., Temecula (Shutters) 2 SWC Murrieta Hot Springs Rd. & Roripaugh Meadows Rd., Temecula (Madison) 3 S/S Murrieta Hot Springs Rd., ±1,200' E/O Roripaugh Meadows Rd., Temecula (Hamptons) 4 S/S Murrieta Hot Springs Rd. at Chandler Dr., Temecula (Valdemosa) 5 SWC Auld Rd. & Pourray Rd., French Valley (n/a) 6 SWC Keller Rd. & Meadowlark Rd., Murrieta (Lantana) 7 W'ly side Harveston Dr. from Charleston Ln. to Dalton Rd., Temecula (Charleston & Aberdeen) 8 NE/S Ynez Rd. at Waverly Ln., Temecula (n/a) 9 N'ly corner Date St. & Ynez Rd., Temecula (n/a) 10 ±175'NW/ODateSt. and±560'NE/O Ynez Rd., Temecula (n/a) 11 NE/S Wolf Creek Dr. South, .4 mile SE/O Wolf Valley Rd., Temecula (n/a) 12 N'ly corner Butterfield Stage Rd. & Morgan Hill Dr., Temecula area (Montevina) Rec. Seller/Buyer Date Roripaugh Ranch 100, L.P. 6/05 Tanamera/Roripaugh, LLC Shea Homes Ltd. Ptnshp. 1 1 /05 Tanamera/Roripaugh II, LLC Roripaugh Ranch I, L.P. 1/06 Traditions at Roripaugh, LLC CRV Temecula Estates 9/04 KB Home Coastal, Inc. Warm Springs Investments Escrow n/a Murrieta 15, G.P. 12/04 YCH Murrieta, LP Harveston, LLC 1 1/04 Acacia Credit Fund 9-A LLC Harveston, LLC 11/05 MW Housing Partners III, L.P. Harveston, LLC 11/05 MW Housing Partners III, L.P. Harveston, LLC 1 1/05 MW Housing Partners III, L.P. Wolf Creek Dev., LLC 1 2/05 Lennar Homes McMillin Morgan Hill 12/04 McMillin Montevina, LLC No. Lots 100 99 113 79 140 95 106 92 198 76 130 112 112 146 Min. Lot Size 5,000 5,000 5,000 6,800 7,200 6,000 3,100 4,250 2,700 4,950 5,850 6,000 6,000 Product 1, 942-2,699 s.f. $437,9904512,990 2,007-3,246 s.f. $447,9904537,990 2,346-2,951 s.f. $489,9904529,990 2,675-3586 s.f. n/a n/a ±$450,0004550,000 2,070-3,518 s.f. $475,0004575,000 1,780-2,757 s.f. ±$430,0004523,000 1 ,950 s.f. avg. $391,550avg. 3,092 s.f. avg. $5 19,675 avg. 3,129 s.f. avg. $538,125 avg. 3,000-3,600 s.f. High $500,000' s to Low $600,000' s 2,494-3,239 s.f. $465,9904528,990 Price/Lot Finished Lot $186,250 $207,150 $185,253 $206,153 $167,049 $203,696 $160,601 $210,000 n/a $225,000 $73,685 $220,000 $182,685 $201,000 $150,026 $174,000 $180,824 $203,000 $200,672 $221,000 $238,000 $270,000 $199,000 $220,453 Fin. Lot Ratio 44% 41% 39% n/a ±45% 42% n/a 44% 39% 41% 45% 44% Planning Area 4A of Roripaugh Ranch; delivered as near finished lots; ±1.9-2.0% tax rate Planning Area 3 of Roripaugh Ranch; delivered as near finished lots; ±1.9-2.0% tax rate Planning Area 4B of Roripaugh Ranch; delivered as blue-top lots plus minimal sewer & water; ±1.9-2.0% tax rate Raw land with approved tentative tract map; price set in mid 2004; ±1.8% tax rate Crown Valley Village Phase HI; blue-top lots with final tract map; ±1.9% tax rate Raw land with approved tentative tract map; has CFD with ±1.8% tax rate Phase 2B of Harveston; delivered as semi-finished lots; to be two product types; ±1.8-1.9% tax rate Phase 3 of Harveston; delivered as semifinished lots with rec. tract map; ±1.8-1.9% tax rate Phase 3 3 of Harveston; delivered as semifinished lots with rec. tract map; ±1.8-1.9% tax rate Phase 3 of Harveston; delivered as semifinished lots with rec. tract map; ±1.8-1.9% tax rate Southerly portion of Wolf Creek; delivered as blue-top lots with approved tract map; ±1.9% tax rate Phase 2, PA 11 of Morgan Hill; delivered as blue-top lots with app'd final map; some views; ±1.8% tax rate TABULATION OF RESIDENTIAL LAND SALES, Continuing No. Location/Project Name 13 E' ly corner Butterfield Stage Rd. & Morgan Hill Dr., Temecula area (Ruffino) 14 S'ly side Morgan Hill Dr., 2ntl tract E'ly of Butterfield Stage Rd., Temecula area (Blackstone) 15 NE/O Canyon Hills Rd., ±<A mile SE/O Railroad Canyon Rd., Lake Elsinore (Weatherly) 16 N/S Santiago Rd., E/S and W/S Cresta Verde Ct., Temecula (Gallery Reserve) 17 NE/O Butterfield Stage Rd., 2nd tract S/O Morgan Hill Dr., Unincorp./Temecula area (Ventana) 18 W/S Washington St. at Nandina Ave., Unincorp./Woodcrest area (Alicante) 19 NE/S Mockingbird Cyn. Rd. at Mariposa Ave., Unincorp./Woodcrest area (Alicante & other) 20 W/S Washington St., ±350' N/O Nandina Ave., Unincorp./Woodcrest area (n/a) 21 14 mi. S/O Overlook Pkwy, !/2 mi. E/O Washington St., Riverside (n/a) Seller/Buyer McMillin Morgan Hill McMillin Ruffino, LLC McMillin Morgan Hill McMillin Blackstone, LLC Pardee Home Construction Pulte Home Corp. Woodbridge Inland Estates Gallery Reserve Partners LLC McMillin Morgan Hill Ventana Morgan II Young California Riverside KB Home Coastal Scott Lissoy KB Home Coastal Riverside 67 Group, LLC Keystone Riverside 64 LLC Estate of John A. Kunny Pulte Home Corp. Rec. Date 12/04 12/04 7/05 12/04 10/04 12/04 4/05 9/05 Escrow 7/05 6/05 No. Lots 131 59 131 15 7 13 20 9 54 65 131 64 87 Min. Lot Size Product 7,000 2,774-3,614 s.f. $497,990-$557,990 8,000 3, 100-3, 949 s.f. $570,9904589,990 4,900 1,947-2,303 s.f. $416,000-$440,000 ±1 acre 4,490-5,689 s.f. $1,1 00,000 avg. 22,000 3,902-4,559 s.f. $900,000-$ 1,000,000 1 acre 3,758-5,262 s.f. $808,000 avg. 1 acre 5,000 s.f. avg. n/a 30,000 2,800-4,550 s.f. $600,000-$800,000 '/2 acre 2,835-4,027 s.f. $670,000-$755,000 Price/.Lot Finished Lot $205,250 $227,743 $223,000 $246,393 $135,916 $192,500 $216,667 $394,000 n/a $285,000 $209,23 1 $300,000 n/a $330,000-$340,000 n/a $319,000 n/a $300,000 Fin. Lot Ratio 43% 43% 45% 36% 30% 37% n/a 46% 42% Remarks Phase 2, PA 10 of Morgan Hill; delivered as blue-top lots with app'd final map; some views; ±1.8% tax rate Phase 2, PA 15 of Morgan Hill; delivered as blue-top lots with app'd final map; some views; ±1.8% tax rate Canyon Hills community; delivered as blue-top lots with approved tent, tract map; ±1.9% tax rate Purchased in raw condition with app'd tent, tract & parcel maps; 23,000 sf avg. pad size; no CFD/± 1.1% tax rate Morgan Hill community; purchased 12 lots in 9/03 at $215,000/fin. lot; 1.9% tax rate Land in rough graded condition with final tract map ready to record; 1.65% tax rate Land in raw/hilly condition with rec. tract map; to be two products; to close early 2006; planning to form CFD Land in raw/hilly condition with approved tentative tract map; est. 1.75% tax rate Land in raw/hilly condition; buyer processing tentative tract map approvals; no CFD Note: Home pricing is original proforma or earliest available TABULATION OF COMMERCIAL LAND SALES No. Location 1 SEC Winchester Rd. & Auld Rd., Unincorp. County area Seller/Buyer French Valley Properties LLC Wal-Mart Stores, Inc. Rec. Date 6/05 Net Acres 43.0 Price/S.F. Remarks $8.49 Vacant, gently undulating site; buyer plans to build a Wal-Mart store 2 NEC Winchester Rd. & Willows Ave., Murrieta 3 NWC Hwy. 79 South & La Paz Rd., Teraecula Bungalow Investments LLC 2/05 7.15 $10.92 TransCan Temecula LLC Temecula Bedford Court Inv. 3/05 3.71 $11.70 Michael H. Hedayat Vacant, fairly level site; irregular shape but much street frontage; planned for Winchester Commercial Center with office, retail & medical Vacant, fairly level site; buyer to resolve access issues; planned for medical office condos 4 W'ly corner Jefferson Ave. & Elm St., Murrieta Daleo Properties #1, LLC Elm Street Investors, LP 5/05 4.2 $12.50 Vacant, fairly level site; buyer plans retail space along front and industrial space at rear 5 NW/S Jackson Ave., ±.4 mile S/O Murrieta Hot Springs Rd., Murrieta 6 6 SW/S Madison Ave., ±820' SE/O Murrieta Hot Springs Rd., Murrieta 7 Both sides of Calex Ct. @Juniper St., Murrieta GMS Murrieta Plaza, LLC 9/05 Alesco Development Co., LLC Pacific Makai Prop. Mgmt. 11/04 Advance Management & Inv. Pom S. Kim Murrieta 15 Investors, LLC 3/05 6.19 $17.06 Vacant, fairly level site; part of 400,000 s.f. retail center anchored by Sam's Club; buyer plans retail buildings of 40,000 s.f. and 25,000 s.f. 6.08 $8.68 Vacant, gently undulating, below street grade; zoned for commercial/retail; buyer is retail & hotel developer 4.2 ±$17.76 Vacant, fairly flat; 4 subdivided lots; near Target & theaters; freeway visibility; buyers plans unknown E'ly corner Madison Ave. & Juniper St., Arizona Tile Supply, Inc. Murrieta Juniper Street Land Partners 4/05 3.55 $13.48 Vacant, fairly flat site; near freeway; buyer plans retail/restaurant uses ESTIMATED ABSORPTION SCHEDULES f OR CFO NO. 03-62 (RORIPAUGH RANCH) EWPIR6 ECONOMICS — FEBRUARY 1, 2006; SUBJECT TO REVISION CRITICAL ASSUMPTION: ASHBY USA, LLC COMPLETES THE CONDITIONS OF DEVELOPMENT IN A TIMELY MANNER , **»ftM«ft*«%» 2R&S .HMt J5HL JSKL. _fe*.!M!J:» » JBS Is* *8^*-23 33 P* «$» 21,53 »H!a»fA1*CT'«« rsa^o J££«£. Empire Economics 41 Release Date: February 1, 2006 RORIPAUGH COMPLETION COST AS OF 91-15-06 Purpose •Development Costs Engineering Environmental Muss Grading Rough Grading Recreation Facility MAS Loop m. fw«i Bridge} Sctiool Fromag* Habitat Fencinfl MonumwiMMMt Multi-use Tmil Project Wall* Sated Entries Secondary Entn*s Pedestrian Bridge CNN* Slope Utility ConneetJOfi Qffsite Intersections Mitisation Fa«s . Bonds & Permits TIM* & Insu ranee Soft Cost* Contingency Subtotal: CTO bnpntvMMMM*: Murrieta Hot Spnnss Rd. ButterfieW Stage Rd. MicoJa* Rd, CalteChapos Long Valley Channel Sarrta Gertrude* CreeK Envirortmenta! Mitisation Sport* Park Fire Station Grading N. LoopRd. S. Loop RO. 1 Roripaugh Valley Rd. Ftesta Ranch Rd. Neighborhood Park Fire Station Contribution Payoff A0 161 CFD ft Non-CFD Work i Completed Work Cost to Complete Loan Funds Remaining$0 $3SO,000 $1.600000 $1,268,375 S8.«00,fX» $6,200,000 $230,000 $300,000 $300,000 5200,000 $1.300,000 $800.000 $200,000 $500,000 1600,000 $781,309 $501,080 $900,000 $317787 $5,120,789 $33,395 512,623 $25,815,338 $$1.481,986 $13,035,825 $8.801,143 $175,000 $7.600,00) 12.720,186 $1.000,008 $4,873,525 $0 $1,361,862 $300,000 $246,782 $178.01? $1500,000 $0 $600,000 $43,875,326 $69,690,665 $69,690,665 l*n» 1-1»«t $11,721 $6,044 54,307 $22,072 _M-W> $115,070 SV95.568 $^3,3^ $146,435 173,118 $143.327 $105.635 $1,104.159 $69,690,665 $1,126.232 $68,564.*33 1stCH2M6 3350.000 $7SO,OOQ $800.000 $8«3^fi. $2,B005W $650.000 $300.000 $501,050 $500,000 $306,076 $803,729 $27.351 $8.313 $7,892,522 $1.420,386 $4,000,000 $175.000 $2,000,000 $1.361.852 $526,882 $103,455 $73,382 $1,000,000 $0 $600,000 $11,260,957 $68,890,865 $19,153.479 $50.537,186 2rtdQt2Q06 $7SO,OOOj $468,37$ $2,520,500 $2,000,000 $230,300 $300,090^ $200,000 $€513,000 $see,a0o $260,000 ~~l $400,000 S400000 *809,?2S $9,428.10* $4,000,000 $2,SOO,000 $3,500,000 $2,000,000 $700,000 $2,500,000 $200,000 $14,900,000 $50,537,186 $24,328,104 $26,209,062_MJ^2I_ $2,490.000 $2,200,000 $300.000 $300,000 , $$00,000 $400,000 S81SOS $809,729 $7,081,038 $4.920,755 $4,000,000 $3,836,644 $573,71 1 $373,525 s $13,704,635 $28,209,082 $29.785,673 $$,423,40$ ««\ CK2006 _____Mffiffio 52GO.OOQ $691,802 $1Jt1,602 $2,805,575 $2,605,575 $5,423,409 $3,S97,177 $1,526.232 1StQV200T S.IQO..OOO $1^0,000 i $0 $1,526,232 $106,000 i $1,426,232 thru 2010 *0 SKX5.000 $300,008 $1,426,232 $300,000 $0 Totals $0 $350,000 $1,500,000 $1,268,375 $6,400,000 $6,200,OCH> $230,000 $300,000 $300,000 $200,000 $1.300,000 $800,000 $200,000 $500,000 $500,000 $781,308 $50JL050 5900,000 $317,797 $3,120,789 $33,395 $12.823 $25,815,338 SI ,431, 986 $13.035.825 $8,801,143 $175,000 $7.600,000 $2,720.196 $1.000.000 $4,873.675 $0 $1.361.852 $603,000. $246,782 $179,017 $1,200,000 SO $600.000 $43.875,328 QUALIFICATIONS OF STEPHEN G. WHITE, MAI PROFESSIONAL EXPERIENCE Real Estate Appraiser since 1976. 1983 through current date: Self-employed; office located at 1370 N. Brea Blvd., Suite 205, Fullerton, CA 92835 (Phone: 714-738-1595) 1976-1982: Employed by Cedric A. White, Jr., MAI, independent appraiser located in Anaheim. Real estate appraisals have been completed on most types of properties for purposes of fair market value, leased fee value, leasehold value, easement value, partial acquisitions and severance damages. PROFESSIONAL ORGANIZATIONS Member, Appraisal Institute; MAI designation obtained 1985 Affiliate Member, Pacific West Association of Realtors LICENSES Licensed by the State of California as a Certified General Real Estate Appraiser; OREA ID No. AG013311; valid through September 22, 2006. EDUCATION B.A. Economics & Business, Westmont College, Santa Barbara (1976) Appraisal Institute Courses: Basic Appraisal Principles, Methods and Techniques Capitalization Theory and Techniques Urban Properties Litigation Valuation Standards of Professional Appraisal Practice Numerous seminars and continuing education on various appraisal subjects, including valuation of easements and leased fee interests, litigation, the money market and its impact on real estate, and standards of professional appraisal practice. COURT/TESTIMONY EXPERIENCE Qualified as an expert witness in the Superior Courts of Orange, Los Angeles, Riverside and San Bernardino Counties; also before the Assessment Appeals Board of Orange and Los Angeles Counties. TYPES OF PROPERTY APPRAISED Residential: vacant lots, acreage and subdivisions; single family residences, condominiums, townhomes and apartment complexes. Commercial: vacant lots/acreage; office buildings, retail stores, shopping centers, restaurants, hotels and motels. 65 QUALIFICATIONS, Page 2 Industrial: vacant lots and acreage; warehouses, manufacturing buildings, R&D buildings, industrial parks, mini-warehouses. Special Purpose: mobilehome parks, churches, automobile agencies, medical buildings, convalescent hospitals, easements, leased fee and leasehold interests. CLIENT LIST Corporations: Aera Energy British Pacific Properties BSI Consultants Crown Central Petroleum Eastman Kodak Company Firestone Building Materials Foodmaker Realty Corp. Greyhound Lines Holiday Rambler Corp. International Baking Co. Johnson Controls Kampgrounds of America La Habra Products, Inc. Developers: Brighton Homes Citation Builders Davison-Ferguson Investment Devel. D.T. Smith Homes Irvine Company Kathryn Thompson Developers Mark Taylor, Inc. Law Firms: Baldikoski, Klotz & Dragonette Best, Best & Krieger Bowie, Arneson, Kadi, Wiles & Giannone Bradshaw, John Bye, Hatcher & Piggott Callahan, McCune & Willis Cooksey, Coleman & Howard Hamilton & Samuels Horgan, Rosen, Beckham & Coren Kent, John Kirkland & Ellis Lathan & Watkins McKee, Charles C. Mosich, Nicholas J. Long, David M. MCP Foods Merrill Lynch Relocation Orangeland RV Park Pacific Scientific Penhall International Pic 'N Save Stores Sargent-Fletcher Co. Shell-Western E&P Southern Distributors Corp. Southern California Edison The Home Depot Tooley and Company Wastewater Disposal Co. Mission Viejo Co. Premier Homes Presley Homes Rockefeller & Associates Taylor Woodrow Homes Unocal Land & Development Nossaman, Guthner, Knox & Elliott Oliver, Barr & Vose Ollestad, Freedman & Taylor Palmieri, Tyler, Wiener, Wilhelm & Waldron Paul, Hastings, Jonofsky & Walker Piggott, George B. Pothier, Rose Rosenthal & Zimmerman Rutan & Tucker Sikora & Price, Inc. Smith & Politiski Williams, Gerold G. Woodruff, Spradlin & Smart Yates, Sealy M. 66 QUALIFICATIONS, Page 3 Financial Institutions: Barclays Bank Chino Valley Bank Continental Bank First Interstate Mortgage Security Pacific Bank Washington Square Capital Cities: City of Anaheim City of Baldwin Park City of Buena Park City of Cypress City of Duarte City of La Habra City of Laguna Beach City of Mission Viejo Counties:County of Orange Other Governmental: Agua Mansa Industrial Growth Association El Toro Water District Federal Deposit Insurance Corporation (FDIC) Kem County Employees Retirement Association School Districts: Anaheim Union High School Dist. Banning Unified School Dist. Capistrano Unified School Dist. Castaic Union School Dist. Cypress School Dist. Etiwanda School Dist. Fullerton School Dist. Garden Grove Unified School Dist. Irvine Unified School Dist. Lake Elsinore Unified School Dist. Churches/Church Organizations: San Clemente Savings & Loan United Calif. Savings Bank National Credit Union Admin. First Wisconsin Bank Ahmanson Trust Company Sun west Bank City of Orange City of Placentia City of Riverside City of Santa Ana City of Santa Fe Springs City of Stanton City of Tustin City of Yorba Linda County of Riverside Metropolitan Water District Orange County Water District Trabuco Canyon Water District U.S. Postal Service Moreno Valley Unified School Dist. Newhall School Dist. Newport-Mesa Unified School Dist. Placentia-Yorba Linda Unified Dist. Poway Unified School Dist. Rialto Unified School Dist. Saddleback Unified School Dist. Santa Ana Unified School Dist. So. Org. Cnty Comm. College Dist. Temple City School Dist. Calvary Church, Santa Ana First Church of the Nazarene Central Baptist Church, Pomona Lutheran Church, Missouri Synod Christian & Missionary Alliance Church, Santa Ana Presbytery of Los Rancho Christian Church Foundation St. Mark's Lutheran Church, Hac. Hts. Congregational Church, Fullerton Vineyard Christian Fellowship Other: Biola University Cedars-Sinai Medical Center Garden Grove Boys' Club The Sheepfold 67 APPENDIX D MARKET ABSORPTION STUDY [THIS PAGE INTENTIONALLY LEFT BLANK] MARKET ABSORPTION STUDY SUMMARY AND CONCLUSIONS CITY OF TEMECULA COMMUNITY FACILITIES DISTRICT NO. 03-02 (RORIPAUGH RANCH) CITY OF TEMECULA RIVERSIDE COUNTY, CALIFORNIA BY EMPIRE ECONOMICS, INC. MARKET STUDY UPDATE: FEBRUARY 2, 2006 (ORIGINAL STUDY: JULY 13, 2004) Empire Economics Release Date: February 2, 2006 CERTIFICATION OF INDEPENDENCE The Securities & Exchange Commission has recently taken action against Wall Street firms that have utilized their research analysts to promote companies that they conduct business with, citing this as a potential conflict of interest. Accordingly, Empire Economics (Empire), in order to ensure that its clients are not placed in a situation that could cause such conflicts of interest, provides a Certification of Independence. Specifically, the Certificate states that Empire performs consulting services for public entities only in order to avoid potential conflicts of interest that could occur if it also provided consulting services for developers/builders. For example, if a research firm for a specific Community Facilities District or Assessment District, were to provide consulting services to both the public entity as well as the property owner/developer/builders, then a potential conflict of interest could be created, given the different objectives of the public entity versus the property owner/developer. Accordingly, Empire Economics certifies that the Market Absorption Study for CFD No. 03-02 of the City of Temecula was performed in an independent professional manner, as represented by the following statements: > Empire was retained to perform the Market Absorption Study by the City of Temecula, not the District's property owner/developer, Ashby USA, LLC or the various builders. Empire has not performed any consulting services for the District's property owner nor the developer/builders during at least the past five years. > Empire will not perform any consulting services for the District's property owner nor the developer/builders during at least the next three years. > Empire's compensation for performing the Market Absorption Study for the District is not contingent upon the issuance of Bonds; Empire's fees are paid on a non-contingency basis. Therefore, based upon the statements set-forth above, Empire hereby certifies that the Market Absorption Study for CFD No. 03-02 of the City of Temecula was performed in an independent professional manner. Empire Economics, Inc. Joseph T. Janczyk, President Empire Economics 2 Release Date: February 2,2006 INTRODUCTION TO THE BOND FINANCING PROGRAM Roripaugh Ranch, a Planned Community of single-family homes and also a commercial-retail center that is being developed by Ashby USA, LLC, is located in the northeasterly portion of the City of Temecula, southerly of Murrieta Hot Springs Road and easterly/westerly of Butterfield Stage Road. Roripaugh Ranch is expected to have some 1,745 single-family detached homes; this consists of 515 homes in Phase I, also referred to as the "panhandle" area, and another 1,230 homes in Phase II, also referred to as the "pan" area. With regards to Phase I, 515 homes have already been approved, based upon a recommendation from the Planning Commission. With regards to Phase II, 1,230 have already been approved by the Planning Commission. Accordingly, for purposes of the Market Absorption Study, Empire Economics is utilizing 1,745 single-family homes. The City of Temecula along with the Property Owner, Ashby USA, LLC, have formed Community Facilities District No. 03-02 to assist with the financing of the infrastructure that is required to support the development of residential and commercial-retail products in the District, hereafter referred to as CFD No. 03-02. Specifically, the Bond Issue would be utilized to provide funds for various items, including roadway, drainage, park, water and sewer improvements. The specific size of the Bond Issue and the particular improvements included will depend upon various factors which will be finalized when these bonds are sold. The purpose of the Market Absorption Study for the City of Temecula's Bond Financing for CFD No. 03-02 is to provide an estimate of the probable absorption schedules for the forthcoming residential properties. Specifically, from the viewpoint of prospective Bond Purchasers, the particular components of the infrastructure should be time-phased and location-phased in a manner that approximately coincides with the expected marketability/absorption of the projects in CFD No. 03-02. Otherwise, to the extent that the infrastructure is not appropriately phased, then the following types of market inefficiencies may occur: On the one hand, if certain projects do not have the infrastructure that is required to support their development in a timely manner, then they would not be able to respond to the demand in the marketplace, resulting in a market shortage. On the other hand, if too much infrastructure is built, then projects for which there is not presently a market demand would incur high carrying costs due to the market surplus, and this could adversely impact their financial feasibility. Thus, the Market Absorption Study formulates guidelines on the appropriate or optimal time-phasing and location-phasing of the infrastructure for the properties located in the City of Temecula's CFD No. 03-02, as a means of providing the bond purchasers with a reasonable amount of security from a market absorption perspective. Furthermore, the absorption schedules for CFD No.03-02 are based upon Ashby USA, LLC delivering the parcels to the various builders according to the time schedule that was provided to Empire Economics by Ashby USA, LLC, based upon their fulfillment of numerous and complex conditions of development in a timely manner. Empire Economics 3 Release Date: February 2,2006 Empire Economics Release Date: Febraary 2, 2006 Empire Economics Release Date: February 2, 2006 CHARACTERISTICS OF THE EXPECTED PRODUCT MIX FOR THE PROJECTS/PRODUCTS IN CFD NO. 03-02 For purposes of the Market Absorption Study for the CFD No. 03-02 Mello-Roos Bond Financing, Empire Economics has performed a review of the planning approvals that Roripaugh Ranch has received as well as the development strategy of Ashby USA, LLC, the developer. CFD No. 03-02 (Roripaugh Ranch) is expected to have 1,745 single-family detached homes in two separate phases. The expected number of housing units as well as their characteristics, such as prices and sizes of living area, are as follows: * Phase I is expected to have a total of 515 single-family detached housing units, 29.5% of the total, that are priced at some $507,302 for some 2,783 sq.ft. of living area, on the average, and these are spread among five Planning Areas with three builders; accordingly, their characteristics are as follows: * Planning Area # 2: Davidson is expected to have 99 homes on lots of some 6,265 sq.ft. that are priced at some $538,000 to $$558,000 for some 2,960 to 3,357 sq.ft. of living area. * Planning Area # 1: D.R. Horton is expected to have 104 homes on lots of some 6,285 sq.ft. that are priced at some $410,000 to $480,000 for some 1,949 to 2,949 sq.ft. of living area. * Planning Area # 3: Tanamera is expected to have 99 homes on lots of some 6,000 sq.ft. that are priced at some $459,990 to $519,990 for some 1,974 to 2,699 sq.ft. of living area. * Planning Area # 4A: Tanamera is expected to have 100 homes on lots of some 6,310 sq.ft. that are priced at some $459,990 to $539,990 for some 2,007 to 3,246 sq.ft. of living area. * Planning Area # 4B: Tanamera is expected to have 113 homes on lots of some 6,580 sq.ft. that are priced at some $489,990 to $529,990 for some 2,346 to 2,951 sq.ft. of living area. * Phase II is expected to have a total of 1,230 single-family homes, 70.5% of the total, that are priced at some $510,671 for some 2,864 sq.ft. of living area, on the average, and these are spread among fifteen Planning Areas with the only builder being KB Home; accordingly, their characteristics by market segments and planning areas are as follows: * Market Segment #1 is expected to have 607 homes in five projects with homes priced at some $370,000-$430,990 for some 1,809-2,300 sq.ft. of living area, and their characteristics are as follows: Empire Economics 6 Release Date: February 2, 2006 Planning Areas: 31.22.12. 14 & 15 * Planning Area #31: 169 homes on lots of some 3,150 sq.ft. that are priced at some $370,000 -$415,990 for some 1,809 to 2,300 sq.ft. of living area. * Planning Area # 22: 130 homes on lots of some 3,150 sq.ft. that are priced at some $370,000 -$415,990 for some 1,809 to 2,300 sq.ft. of living area. * Planning Area # 12: 112 homes on lots of some 6,120 sq.ft. that are priced at some $405,990 -$430,990 for some 2,050 to 2,300 sq.ft. of living area. * Planning Area # 14: 92 homes on lots of some 3,880 sq.ft. that are priced at some $405,990 -$430,990 for some 2,050 to 2,300 sq.ft. of living area. * Planning Area # 15: 104 homes on lots of some 3,880 sq.ft. that are priced at some $405,990 -$430,990 for some 2,050 to 2,300 sq.ft. of living area. * Market Segment #2 is expected to have 511 homes in five projects with homes priced at some $415,9904545,990 for some 2,029-3,711 sq.ft. of living area, on the average and their characteristics are as follows: Planning Areas: 23.24.16.17 & 18 * Planning Area # 23: 47 homes on lots of some 5,313 sq.ft. that are priced at some $415,990 -$445,990 for some 2,029 to 2,707 sq.ft. of living area. * Planning Area # 24: 75 homes on lots of some 5,313 sq.ft. that are priced at some $415,990 -$445,990 for some 2,029 to 2,707 sq.ft. of living area. * Planning Area #16: 121 homes on lots of some 6,696 sq.ft. that are priced at some $450,990 -$510,990 for some 2,500 to 3,787 sq.ft. of living area. * Planning Area # 17: 147 homes on lots of some 8,703 sq.ft. that are priced at some $510,990 -$545,990 for some 2,969 to 3,711 sq.ft. of living area. * Planning Area #18: 121 homes on lots of some 8,703 sq.ft. that are priced at some $510,990 -$545,990 for some 2,969 to 3,711 sq.ft. of living area. * Market Segment #3 is expected to have 112 homes in five projects with homes priced at some $779,990 to $909,990 for some 3,676 to 5,318 sq.ft. of living area, and their characteristics are as follows: Planning Areas: 10.19. 20, 21 & 33 * Half-Acre Lots: 76 homes on lots of some 20,000 sq.ft. that are priced at some $779,990 to $909,990 for some 4,001 to 5,187 sq.ft. of living area. * Acres Lots: 36 homes on lots of some 42,298 sq.ft. that are priced at some $787,990 -$909,990 for some 3,676 to 5,318 sq.ft. of living area. Therefore, CFD No. 03-02 is partitioned into two phases and each of these have single-family detached homes with a broad price range, from $370,000 to $909,990 and so the product mix is regarded as being diversified. CFD No. 03-02 is also expected to have some 15.4 acres for commercial-retail projects that are expected to be oriented towards the households in CFD No. 03-02. For additional information on the expected characteristics of the forthcoming residential products in CFD No. 03-02, please refer to the following graphs. Empire Economics 7 Release Date: February 2, 2006 CFD NO.03-02 (RORIPAUGH RANCH) EXPECTED PRODUCT MIX BY PHASES AND PLANNING AREAS 180 160 --140 120 --100 --CFD NO.03-02 (RORIPAUGH RANCH) EXPECTED PRODUCT MIX EXPECTED PRICES FOR THE FORTHCOMING HOMES $900,000 y» $800,000 $700,000 -$600,000 -— $500,000 -$400,000 -$300,000 -— $200,000 -$100,000 -— $0 Empire Economics Release Date: February 2, 2006 ROLE OF THE MARKET STUDY IN THE BOND FINANCING The Market Absorption Study for CFD No. 03-02 has a multiplicity of roles with regards to the Bond Financing; accordingly, these are now discussed. Marketing Prospects for the Various Product Types Official Statement Prospective Bond Purchasers Aggregate Levels of Special Tax Revenues Maximum Special Taxes for the Residential Products Conforming to the Issuer's Policies Share of Payments: Developer/Builders vs. Final-Users Determined by the Absorption Schedule Appraisal of Property Discounted Cash Flow -Present Value Absorption Schedules The Issuing Agency for the Bond Issue, the City of Temecula, along with the Financial Advisor can utilize the Market Absorption Study, Appraisal, and Special Tax Revenue to structure the Bond Issue for CFD No. 03-02. Empire Economics Release Date: February 2, 2006 METHODOLOGY UNDERLYING THE MARKET STUDY To perform a comprehensive analysis of the macroeconomic and microeconomic factors that are expected to influence the absorption of the residential single-family detached and commercial-retail products in CFD No. 03-02, Empire's Market Absorption Study conducts a systematic analysis of the following factors: MACROECONOMIC FACTORS FOR CFD NO. 03-02 * Market Supply Planning Projections * Market Demand Economic Conditions * Reconciliation * Growth Potential for the Market Area MICROECONOMIC FACTORS FOR CFD NO. 03-02 Regional Development Patterns Socioeconomic: School and Crime Housing Price Trends and Patterns Competitive Market Analysis -Product Type Residential Single-Family Detached *Location *Product Type *Prices * Special Taxes *Features/Amenities ABSORPTION SCHEDULES Product Type *Residential Single-Family Detached Commercial-Retail Center *Market Entry to Build-Out Therefore, the Market Absorption Study systematically proceeds from the macroeconomic analysis of the Market Region's future housing, industrial and commercial growth to the microeconomic analysis of the estimated absorption schedules for the residential single-family detached and commercial-retail products in CFD No. 03-02. Empire Economics 10 Release Date: February 2,2006 RECENT/EXPECTED ECONOMIC TRENDS/PATTERNS The purpose of this section is to discuss the recent/expected economic trends/patterns for the United States (US), California (CA), and Riverside County (RC), including Gross Domestic Product, employment, housing starts, mortgage rates and gas prices. Recent /Expected Real Gross Domestic Product Trends/Patterns With regards to the recent/expected growth rates for Gross Domestic Product (GDP) for the United States economy, they are as follows: • During 1999 and 2000, real GDP increased at strong rates of by 4.50% and 3.70%, respectively. • Then, in 2001 and 2002, as the economy slowed, real GDP increased by only 0.80% and 1.60%, respectively. • In 2003 and 2004, as the economy rebounded, real GDP increased by some 2.70% and 4.20%, respectively. • For 2005, real GDP growth moderated somewhat to a rate of 3.38%. • For 2006, real GDP is expected to moderate further to a rate of some 2.85%. Next, with respect to the actual/expected rates of change for the various components of real GDP for 2005 as compared to 2006 are as follows: • Consumption, which increased at some 3.58% in 2005 is expected to moderate to a rate of some 2.78% in 2006. • Business investment, which increased at some 7.15% in 2005 is expected to moderate to 4.83% in 2006. • Finally, with respect to government purchases, which grew at a rate of 1.88% in 2005 are expected to increase by 2.13% in 2006. Therefore, comparing the rates of growth for the various components of real GDP for 2006 as compared to 2005 reveals that the overall rate of growth is expected to moderate somewhat while among the various sectors, consumption and investment are expected to moderate while the rate of growth for government spending rises. UNITED STATES REAL GDP AND ITS COMPONENTS: ANNUALLY Empire Economics 11 Release Date: February 2, 2006 Recent/Expected Employment Trends/Patterns With regards to the recent/expected growth rates for employment, these are now discussed for the United States, California, and Riverside-San Bernardino counties economies. For the United States economy, the recent trends/patterns for employment have been as follows: • In 1999 and 2000, employment growth was strong, some 2.44% and 2.20%, respectively. • Then, in 2001, due to the economic slowdown, employment was virtually stable. • For 2002, employment declined by -1.13%, followed by a decrease of -0.26% in 2003. • In 2004, as the economy moved into its recovery phase, employment rose by some 1.13%. • For 2005, as the economy expanded further, employment rose by 1.64%. • For 2006, as the economy slows, employment growth is expected to moderate to 1.25% California's employment followed a generally similar pattern: • Strong rates of employment growth in 1999 and 2000 of 2.90% and 3.50%, respectively. • Then in 2001, employment rose only moderately, some 0.80%. • However, in 2002 to 2003, employment declined to -0.99% and -0.45%, respectively. • For 2004, the economy moved into a recovery, with an employment gain of 1.02%. • In 2005, the economy had stronger growth, with employment rising at a rate of 1.54%. • For 2006, as the economy slows, employment growth is expected to moderate to 1.10% Riverside-San Bernardino (R-SB) counties, on a comparative basis, have performed favorably: • R-SB counties experienced strong, though diminishing, rates of employment growth during 1999-2002, from 6.44% in 1999 to 3.38% in 2002. • Employment growth moderated in 2003, with a growth rate of 3.26%. • Then, in 2004, employment rose at higher level of some 4.60%. • For 2005, employment growth moderated to a rate of some 2.00%. • For 2006, the rate of employment growth is expected to moderate further, to some 1.45% Therefore, during 2006, the United States, California and R-SB counties economies are all expected to experience lower rates of employment growth. ZouIi UNITED STATES, CALIFORNIA & RIVERSIDE -SAN BERNARDINO COUNTIES RECENT/EXPECTED EMPLOYMENT TRENDS: ANNUALLY ZS3 United States Empire Economics 12 Release Date: February 2, 2006 Recent/Expected Trends/Patterns for Housing Starts With regards to the recent trends and patterns for housing starts, they are as follows: • The United States housing market experienced a strong growth during the 2000 to 2005 time period, with the number of new homes rising from 1,573,400 in 2000 to 2,044,125 in 2005. For 2006, the United States housing market is expected to moderate to some 1,803,550 new homes, due to the combined impacts of a slowing economy as well as higher mortgage rates. • For the California housing market, housing starts have had strong growth during 1999 to 2005, as the number of new homes rose from 139,073 in 1999 to 212,954 in 2005. The California housing market is expected to decrease somewhat in 2006 to some 183,180 new homes, also as a result of a slowing economy and higher mortgage rates. • Finally, with respect to Riverside County, housing starts rose dramatically during the 1999-2004 time period, from 14,577 homes in 1999 to 35,696 homes in 2005. For 2006, the level of activity is expected to moderate somewhat, to some 29,740 homes, due to the expectation of higher mortgage rates as well as higher gas prices. So, for 2006, the United States, California, and Riverside County housing markets are expected to decline somewhat from their 2005 levels, due primarily to a slowing economy as well as higher levels of mortgage rates as well as higher gas prices. UNITED STATES, CALIFORNIA AND RIVERSIDE COUNTY HOUSING STARTS: ANNUALLY CO UJ CO Q UJ — Left: United States ^^^~ Right: California Right: Riverside County -^ 4^ 1999 1,663,100 139,073 14,577 -— • 2000 1 ,573,400 148,540 17,692 _^. . ^—^r^ 2001 1,601,200 148,757 19,890^2002 1,712,340 164,318 20,990 j^£ " 2003 1,858,760 194,882 28,366 2004 1,963,700 210,150 33,870 >-2005 2,044,125 212,954 35,696 s. 2006 1,803,550 183,180 29,740 r 250,000 ZID0 UZDL O u. Empire Economics 13 Release Date: February 2, 2006 Recent/Expected Trends in Mortgage Rates The recent/expected trends/patterns for mortgage rates, including the 15 year fixed rate mortgage, as well as the 10-year Treasury Bond which influences the 15 year fixed rate mortgage, and the 1 year adjustable, are now discussed: • During the 2000 to 2003 time period, the rates on the 10-year Treasury Bond, 15 year fixed mortgage and the 1 year adjustable mortgage all declined: the 10-year Treasury Bond from 6.00% to 3.95% (-2.05%), the 15 year fixed mortgage from 7.73% to 5.17% (-2.56%), and the 1 year adjustable mortgage from 7.05% to 3.76% (-3.29%). • From 2003 to 2005, the rates started to rise: on the 10-year Treasury Bond from 3.95% to 4.29% (+0.34%), the 15 year fixed mortgage from 5.17% to 5.42% (+0.25%), and the 1 year adjustable mortgage from 3.76% to 4.49% (+0.73%). • For 2006 as compare to 2005, the rates are expected to rise further, the 10-year Treasury Bond from 4.29% to 4.75% (+0.46%), the 15 year mortgage from 5.42% to 6.07% (+0.65%), and the 1 year adjustable mortgage from 4.49% to 5.44% (+0.95%). So, during 2006, financial rates are expected to rise at a faster pace, with an increase in the 10-year Treasury Bond driving up the 15 year fixed rates by some 0.65% while the increases in the federal fund rate by the Federal Reserve Board drives up the 1 year adjustable rate mortgages by some 0.95%. 9.00% -hJ N^ 6 00% £• 5.00% -1 4 00% -hJ w ["• lin-VrRnnH — • — 1 Yr Adjustable --A--15 Year -Fixed 30-Year Fixed UNIT ^N "^\ ! 2000 6.00% 7.05% 7.73% 8.06% ED STATES MORTG "1 \>-^^\ 2001 5.00% 5.82% 6.50% 6.97% 7^*-^ \\-^ \ 2002 4.60% 4.62% 5.98% 6.54% AGE RATES: ANNU^ •*«^^ ~--^.A ^ 2003 3.95% 3.76% 5.17% 5.83% --A-^. 2004 4.27% 3.88% 5.20% 5.97% iLLY _^-** A'"" —^I ^ 2005 4.29% 4.49% 5.42% 5.87% ^** 2006 4.75% 5.44% 6.07% 6.51% Empire Economics 14 Release Date: February 2, 2006 Recent/Expected Trends/Patterns for Gas Prices in California With regards to the recent/expected annual gas prices per gallon in California, they are as follows: • From 1999 to 2000, California gas prices rose significantly from $1.47 to $1.77, respectively, an increase of some $0.30. • Then, gas prices declined to $1.62 in 2002, a decrease of-$0.12 from $1.74 in 2001. • However, with the invasion of Iraq and uncertainty in the Middle East, California gasoline prices rose dramatically to $2.23 in 2004, an increase of $0.61 from 2002. • For 2005, gas prices rose further to $2.61, an additional increase of some $0.38 from 2004. • For 2006, gas prices are expected to decline slightly, to some $2.51, a decrease of some $0.10 from 2005. So, during 1999 to 2005, California gas prices have risen significantly, by some $1.14 per gallon but they are expected to decline slightly in 2006, by some $0.10. -<< uS $3.00 -i $2.50 -$2.00 $1.50 -$1.00 $0.50 1999 CALIFORNIA GAS PRICES: ANNUALLY 2000 2001 2002 2003 ED Gasoline Gasoline Prices -CA $1.47 $1.77 $1.74 $1.62 $1.94 Empire Economics 15 Release Date: February 2, 2006 COMPETITIVENESS OF CFD NO. 03-02 FROM A REGIONAL PERSPECTIVE From a regional perspective, the competitiveness of CFD No. 03-02's forthcoming residential and commercial-retail projects/products are influenced by the development patterns for employment and housing within the Southern California Market Region (MR), and their interrelationships with the CFD No. 03-02 Market Area. Specifically, Business Parks generate industrial-office development while Planned Communities generate residential and commercial-retail development; additionally, the flow of traffic between them is facilitated by the freeways and highways. > Expansion of Employment Centers and Business Parks The currently established major employment centers are Orange, San Diego and Los Angeles (OC/SD/LA) counties as well as the western portions of Riverside and San Bernardino counties. Furthermore, there has been some expansion from these into various Business Parks located in the CFD No. 03-02 Market Area, the southwestern portion of Riverside County. Specifically, these Business Parks are situated primarily along Interstates 15 and 215, major north-south freeways that link the western portions of Riverside and San Bernardino counties. The potential for the future expansion of Business Parks depends, to a significant degree, upon their freeway accessibility. * The Eastern Transportation Corridor, which links Orange County and western Riverside County, facilitates the expansion of the employment centers into Riverside County. With respect to the expansion of these employment centers in western Riverside County this has occurred primarily along Route 91 as well as Interstates 15 and 215. > Commuting Patterns: Employment Centers to Residential Areas Some of the households employed in the OC/SD/LA and western San Bernardino County employment centers reside in the CFD No. 03-02 Market Area, since it offers moderately priced housing; these commuting patterns are based upon the freeways/highways that link the employment centers to the Market Area. The expansion of the residential centers depends upon accessibility, whether by freeway or secondary roads. * There is strong spillover of housing demand from San Diego County into southwestern Riverside County along Interstates 15 and 215, major north-south freeways that link Riverside and San Diego counties. ¥ Additionally, the completion of the Eastern Transportation Corridor which links Orange County with Riverside County facilitates the commute to the western portion of Riverside County. With respect to commuting in western Riverside County this is based upon the use of Route 91 as well as Interstates 15 and 215. For additional information on the regional development patterns, please refer to the following exhibit. Empire Economics 16 Release Date: February 2, 2006 §• oo ECONOMIC BASES SUPPORTING DEVELOPMENT FOR CFD NO.03-02 (RORIPAUGH RANCH) RESIDENTIAL DEVELOPMENT PATTERNS: 1997-2000 AND <T> en fC ft ft K)8ON Arlanza -I. Casa I A M,emeta ^HHoommeeWW '%»g"a.n_ ^Xa!?'° "^ S\ *&pf* " 'H"-* ^* I »_Temecula I, tl Pacific Oce»» SOCIOECONOMIC CHARACTERISTICS: CRIME LEVELS AND THE QUALITY OF SCHOOLS When households consider the purchase of a home, the primary factors are the location (relative to their place of employment) and price (within their income/affordability levels). Furthermore, secondary socioeconomic factors that are significant are the safety of the neighborhood as well as the quality of the schools; accordingly, these are now discussed. Crime Levels and Neighborhood Safety To gauge the safety of Riverside County and the CFD No. 03-02 Neighborhood Area, information on crime levels was obtained utilizing the most recently available data from the Federal Bureau of Investigation (FBI) Index. The FBI Crime Index represents a compilation of crime data using the Uniform Crime Reporting system to ensure reliability and consistency among various geographical areas. The FBI Crime Index has two components for crime: violent crime and property crime. Violent crime consists of murder and non-negligent man-slaughter, forcible rape, robbery, and aggravated assault. Property crime consists of burglary, larceny-theft, motor vehicle theft and arson. For the state of California, approximately 88% of all crimes are property crimes whereas 12% are violent crimes. However, it should be noted that these statistics do not measure the "human or emotional" reactions of individuals to different types of crime. To adjust for the population differences of various geographical areas, Empire Economics divides the crime levels by the population to represent the number of crimes per 1, 000 people. For California, as a whole, the average crime rate is approximately 40.2 per 1,000 people per year. For Southern California the rate is 39.1, which is slightly lower than the state average. While for Riverside County, the rate is 45.0, somewhat higher than for Southern California and also California. With respect to the CFD No. 03-02 Market Area, in particular, the crime rate is some 31.5 per 1,000 people, substantially below the crime rate for Riverside County. RIVERSIDE COUNTY CRIME RATES BY CITY ' DESIGNATES CITY IN THE CFD MARKET AREA Empire Economics 18 Release Date: February 2, 2006 Quality of Schools and Education To gauge the quality of schools in Riverside County and the CFD No. 03-02 Neighborhood Area, information was compiled on educational achievement, specifically the SAT I scores. For the Southern California counties, as a whole, the SAT I scores (with 1,600 being the highest possible) were at a level of 1,014 and this is similar to the scores for California as a whole, some 1,015. While for Riverside County, in particular, the SAT I scores amount to 958, somewhat below the overall averages for California and also Southern California. For Riverside County, the average SAT I score was 958. For the school districts in the vicinity of CFD No. 03-02, Temecula and Murrieta, the SAT I scores amounted to 1036 and 1018, respectively, and both of these are higher than the county average. SAT I TEST SCORES: MATH AND VERBAL AVERAGE ( * DESIGNATES SCHOOL DISTRICT IN THE CFD) Therefore, from a socioeconomic perspective, Riverside County has a higher crime rate and a lower educational achievement level than California and also Southern California, as a whole. Within Riverside County, the City of Temecula has a significantly lower crime rate (more desirable) and a generally higher educational achievement levels (also more desirable). So, comparing the CFD No. 03-02 Market Area with Riverside County as a whole reveals that the City of Temecula is regarded as being very desirable from a socioeconomic perspective. Empire Economics 19 Release Date: February 2, 2006 POTENTIAL "FINANCIAL" RISK FACTORS UNDERLYING THE CREDIT QUALITY AND BOND SIZING FOR LAND SECURED FINANCINGS IN SOUTHERN CALIFORNIA There has recently been a substantial amount of discussion on the potential for a housing market bubble, including remarks of "froth in some local markets" by the former Federal Reserve Board Chairman, Alan Greenspan, based primarily upon the use of exotic mortgage structures; these remarks have dealt with the housing market on a national as well as a regional level. However, developing Planned Communities have characteristics that differentiate them from broader markets: they represent the marketing of new homes to purchasers at current prices that exclusively utilize current mortgage rates and financing structures, and they are also concentrated in particular geographical locations. The purpose of this section is to focus specifically on the potential implications of the recent use of adjustable rate and creative financing techniques that are presently available for home purchasers on the credit quality underlying land-secured financings in Southern California. There has been a fundamental shift in the driving force underlying the recent rates of housing price appreciation, from the historical role of employment growth as the driving force to the recent role of adjustable rate and creative financing techniques as the driving force. These financial factors have been the primary driving force underling the extraordinary rate of housing price appreciation in Southern California of more than 75% since January 2002. Consequently the current levels of housing prices and land values are subject to potentially substantial downward adjustments, due to mortgage rate resets (as mortgages are adjusted from teaser rates to market rates) as well as higher short-term rates (due to rate hikes by the Federal Reserve Board). These adjustments, in turn, may cause a softening in housing prices and land values that could adversely impact the credit quality underlying land-secured financings. Creative financing refers to the use of loan structures other than fixed-rate or 1 year adjustable, including the following: interest only, payment option loans as well as initial teaser rates (below market rates that are offered only for a limited time period) with very low initial payments that result in negative amortizations (higher principal balance), less stringent lending standards such as low/no documentation, and much higher mortgage payment to income ratios, among others. Structural Shift of Factors Underlying Housing Price Appreciation Since January 2002 there has been a fundamental shift in the primary factor underlying housing price appreciation in Southern California; the primary driving force was initially declining mortgage rates as well as the extensive use of adjustable and creative financing as compared to the traditional driving force of strong employment growth. Specifically, the term "driving force" is utilized herein to refer to a SIGNIFICANT CHANGE in a major economic/financial factor that has STRONG DISCERNIBLE IMPACT on housing prices. Empire Economics 20 Release Date: February 2,2006 > January 2002 through June 2003: The rates on fixed 30-year mortgage loans declined to recent historic lows in June 2003, and were a driving force underlying the rate of housing price appreciation of some 13.4% on an annualized basis; however, since June 2003, fixed rate mortgages have been ABOVE their recent historic lows. > July 2003 to March 2004: As fixed mortgage rates rose, purchasers shifted to adjustable rate mortgages which offered significantly lower rates, and these were a driving force underlying the rate of housing price appreciation of some 18.8% on an annualized basis; however, since March 2004, adjustable rates have been ABOVE their recent historic lows. > April 2004 -Presently: As adjustable mortgage rates rose due to the Federal Reserve Board increasing the federal funds rate, home buyers shifted to various types of creative financial structures, and these were a driving force underlying the rate of housing price appreciation of some 24.1% on an annualized basis; however, since Fall-2005, 2005, some lenders have started to tighten their qualification standards. Potential Adjustments for Mortgage Payments The extensive use of adjustable rate mortgages and also creative mortgage structures since June 2003 means that such homeowners have monthly mortgage payments which are subject to significant upward adjustments due to automatic mortgage rate resets as well as potentially higher interest rates: > Mortgage Resets (Stable Mortgage Rates) reflect the changes in mortgage payments that households with adjustable and creative mortgage structures will incur as the initial "teaser" rates are realigned with the current "market" rates. The dollar volume of mortgages subject to resets for the United States mortgage market is expected to increase from $83 billion in 2005 to more that $ 1 trillion in 2007. > Higher Mortgage Rates would result in even higher monthly payments for homeowners with adjustable rate mortgages as well as creative mortgage structures; the increase in their mortgage payments depends upon the degree to which short-term rates rise. The recent use of adjustable rate and creative financing techniques by home purchasers is especially significant for residential land secured financings, since these financings are predominately for developing Planned Communities that represent the marketing of new homes to purchasers at current prices that exclusively utilize current mortgage rates and financing structures and they are also concentrated in particular geographical locations. Specific Impacts of Rate Resets and Higher Mortgage Rates on the Land Secured Credit Quality To the extent that mortgage payments rise due to various possible combinations of automatic mortgage rate resets as well as potentially higher short-term rates that directly impact adjustable rate and creative mortgages, then the credit quality underlying recent land-secured financings may be diminished in the following ways: Empire Economics 21 Release Date: February 2, 2006 > Lower housing prices resulting in a higher Special Tax to Housing Price Burden for homeowners, possibly in excess of the Issuer's policy of a maximum total tax burden, typically some 1.8% to 2.0% of the initial sales prices, even though these maximums may have been satisfied at the time that the Special Taxes were established. > Significantly lower land values resulting in a reduced Value/Lien ratio, possibly below the Issuer's policy of typically some 3 to 1 or 4 to 1 when the bonds are sold, thereby diminishing the security for bond holders. (The Appraisal for the Bond Issue is valid only for the stated Date of Value; it is not meant to be a prediction of future values.) > Higher levels of Special Tax delinquencies as monthly payments of owners increase resulting in diminishing the maximum Special Tax to the bond debt service coverage ratios for bond holders that may adversely impact the Issuer's ability to meet the debt service payments in a timely manner, possibly resulting in the use of the bond reserve fund. Adjustable rate mortgages (some 79% of current mortgages) have significantly higher delinquency rates than fixed rate mortgages; additionally, homeowners that use adjustable rate mortgages also have higher loan to value ratios as well, some 90% as compared to homeowners with fixed rate loans, some 81%. Accordingly, in arriving at these conclusions, this section systematically discusses the following: 1. Recent Shift in the Primary Factors Underling Housing Price Appreciation 2. Financial Factors "Driving" Recent Housing Price Appreciation 3. Mortgage Rate Resets: Realignment of Adjustable/Creative Loans to Market Rates 4. Mortgage Rate Increases: Potential for Further Federal Reserve Board Rate Hikes 5. Specific Impacts of Higher Mortgage Rates on the Land-Secured Credit Quality This section should not be construed as a forecast that mortgage rates will rise significantly in the foreseeable future; rather, it sets forth the POTENTIAL risk factors that mortgage rate resets as well as higher mortgage mortgage rates along with the near-term policy of the Federal Reserve Board would have on the credit quality underlying land-secured financings. Empire Economics acknowledges that financial markets, due to their high degree of economic efficiency and complexity, are difficult to forecast, and, as such, the use of the term "Potential" Risk Factor is regarded as being appropriate. Empire Economics 22 Release Date: February 2,2006 1. Recent Shift in the Primary Factors Underlying Housing Price Appreciation The primary factors underlying housing price appreciation in Southern California since January 2002, declining mortgage rates as well as the extensive use of adjustable and creative financing, represent a fundamental shift from the traditional factor, employment growth. Specifically, the term "driving force" is utilized herein to refer to a SIGNIFICANT CHANGE in a major economic/financial factor that has STRONG DISCERNIBLE IMPACT on housing prices. > During 1984-2001 housing price appreciation was driven by employment growth, along with accommodating financial factors, such as stable or somewhat declining mortgage rates. During this time period financial factors played only a secondary role: for instance, during 1991-1993 when employment decreased, housing prices declined, even though mortgage rates fell by more than two percentage points from their 1989-1990 levels. > However, since January 2002, as housing prices escalated at strong rates, the primary fundamental factor, employment growth, has experienced only minimal growth, less than 1% per year, on the average. Instead, housing price appreciation has been driven primarily by financial factors, particularly the use of adjustable rate mortgages and creative financing techniques. SOUTHERN CALIFORNIA EMPLOYMENT, HOUSING PRICES AND MORTGAGE RATES, HOUSING PRICE CHANGES DRIVEN BY EMPLOYMENT CHANGES MORTGAGE RATES SINCE 2002, EMPLOYMENT GROWTH HAS BEEN MINIMAL YET PRICE APPRECIATION HAS BEEN STRONG STRONG EMPLOYMENT RESULTED IN STRONG HOUSING PRICE APPRECIATION 8.56% 9.81% 1984-1988 1989-1990 Employment Changes 1991-1993 1994-1995 1996-1998 1999-2001 2002-2005 A Mortgage Rates -Fixed ™*— Housing Price Changes Sources: Empire Economics, Employment Development Department, Freddie Mac & Office of Federal Housing During 2002 to 2005 the financial factors have been the strong driving force underlying the rates of housing price appreciation. Specifically, the rates of housing price appreciation have been generally similar among all of the Southern California counties, despite their differences in geographic location, employment growth and housing supply. Empire Economics 23 Release Date: February 2, 2006 > The rates of employment growth for the counties varied substantially during 2002 to 2005, from a low of -1.15% per year for Los Angeles County to a high of 4.60% per year for Riverside-San Bernardino counties. > The supply of new housing has also exhibited a wide variation during 2002 to 2005 as compared to 1999-2001, from declines of-26% in Ventura County and -14% in Orange County to increases of 80% in Riverside-San Bernardino counties. Therefore, the financial factors have been so strong that they have effectively overshadowed other possible explanatory factors such as geographical locations, employment growth and housing supply. 2. Financial Factors "Driving" Recent Housing Price Appreciation in Southern California The particular factors that have been the driving forces underlying recent strong rates of housing price appreciation in Southern California during January 2002 through 2005 are now discussed. Specifically, the factors which have driven housing prices since January 2002 started with fixed mortgage rates declining to recent historic lows, then a shift to adjustable rate mortgages, and, most recently, a shift to "creative" mortgage structures. January 2002 to June 2003: Prices Driven by Declining Fixed Rates; Fixed Rates Now Higher > Fixed-rate 30-year mortgage loans declined from 7.00% in January 2002 to a low of 5.23% in June 2003, and were a driving force underlying the rate of housing price appreciation of some 13.4% on an annualized basis. > Since June 2003, rates on fixed rate mortgages have been ABOVE their recent historic lows and, as such, they are no longer considered to be a driving force underlying housing price appreciation. RECENT MORTGAGE RATE TRENDS: FIXED-RATE MORTGAGE LOANS TRENDLINE: FIXED RATE MORTGAGES DECLINE TO HISTORIC LOWS 7 FIXED RATE MORTGAGES AT HISTORIC LOWS: JUNE 2003 TRENDLINE FIXED RATE MORTGAGES RISE Sources: Empire Economics & Freddie Mac Empire Economics 24 Release Date: February 2,2006 July 2003 to March 2004: Prices Driven by Adjustable Rate Loans; Adjustable Rates Higher > Starting in July 2003, as rates on fixed rate mortgages rose, households shifted to adjustable rate mortgages which offered favorable terms, due to the Federal Reserve Board maintaining a low federal funds rate, and these attained a recent historic low of 3.41%. During the July 2003 to March 2004 time period, adjustable rates were significantly below fixed rates of by some 215 basis points. The use of adjustable rates were a driving force underlying the rate of housing price appreciation of some 18.8% on an annualized basis. > Since March 2004, the rates on adjustable rate mortgages have been ABOVE their recent historic lows, and, as such, they are no longer considered to be a driving force underlying housing price appreciation. RECENT MORTGAGE RATE TRENDS: 1-YEAR ADJUSTABLE RATE LOANS ADJUSTABLE RATF MORTGAGES AT HISTORIC LOWS: MARCH 2004 For Southern California, the percentage of adjustable rate loans has risen dramatically, from 19% in 2001 to 79% during 2005; conversely, fixed rate loans have decreased from 81% in 2001 to only 21% in 2005. Additionally, each of the Southern California counties exhibited a similar pattern in the shift from fixed-rate to adjustable rate mortgages as well. TYPES OF MORTGAGE LOANS -SOUTHERN CALIFORNIA 100% -i 90% -80% -70% -g 60% -£ 50% -O^ 40% -S 30% -20% -10% -0% -200 2002 _ 2003 , 2004 | Imp! 2005 TlH-— i — I ,d D Share-Fixed O Share-Variable Sources: Lmnirc Economics. Mo (gage Bankers Association & Rea Properly Empire Economics 25 Release Date: February 2, 2006 Furthermore, for Southern California, the ratio of the mortgage loans (first and seconds) to the housing purchase prices during 2001 to 2005 has risen for homeowners with adjustable rate mortgages as compared to homeowners with fixed-rate loans. For homeowners with adjustable rate loans, the ratio of their loans to the purchase price of the homes has risen from 85% in 2001 to 90% in 2005, a gain of five percentage points. While for homeowners with fixed-rate mortgages the ratio of their loans to the purchase price of their homes has declined from 87% in 2001 to 81% in 2005, a decrease of six percentage points. So, homeowners with adjustable rate mortgages have substantially higher amounts of mortgage debt (90%) as compared to homeowners with fixed rate mortgages (81%). LOAN TO VALUE RATIOS -SOUTHERN CALIFORNIA FIXED-RATE VS. VARIABLE-RATE LOANS 2001 2002 O Fixed: Loan/Value 2003 2004 2005 DVariable: Loan/Value Sources: Empire Economics, Mortgage Bankers Association & Real Property April 2004 to Present: Prices Driven by Shifting to Creative Loan Structures: Since April 2004, as adjustable rates rose due to the Federal Reserve Board increasing the federal funds rate, home buyers shifted to various types of creative financial structures. These have been the driving force underlying the rate of housing price appreciation of some 24.1% on an annualized basis. Creative financing refers to the use of loan structures other than fixed-rate or 1 year adjustable, including the following: interest only, payment option loans as well as initial teaser rates such as 1% for the first year that results in negative amortizations (higher principal balance), less stringent lending standards such as low/no documentation, and much higher mortgage payment to income ratios, among others. During the 2001 to 2004 time period, for the United States as a whole, there has been a dramatic shift from fixed rate to adjustable rate loans: fixed rate mortgage loans declined from 75% in 2001 to only 19% in 2004. Adjustable rates that were amortized (interest and principal) rose from 20% to 29% while adjustable rates that are interest only (no reduction of principal) rose dramatically, from 5% in 2001 to 53% in 2004. Empire Economics 26 Release Date: February 2, 2006 100% -u> S 60% -§PERCENTAGE OF I I I 10% -0% -RECEINT TRENDS FOR VARIOUS MORTGAGE LOAN STRUCTURES TXED RATE, ADJUSTABLE RATE AND INTEREST ONLY — XX* 1Fixed R£ \ — — , i — — I te AI M2001 02002 SourcIM-Amon es: Emp re Ertized 2003 conomics, . p|||i|j AR B2004 ^oan Performance & yV*V xxx XxXx?g< VI-Interes Mortgage E tOnly ankers AssoHd ciation Conclusions In conclusion, since January 2002, the primary driving force underlying housing price appreciation has been households initially taking advantage of recent historically low fixed rates through June 2003, then a shift to adjustable rate mortgages through March 2004, and finally, since then, the use of creative financing structures. Specifically, for the same monthly mortgage payment, the use of lower mortgage rates and creative mortgage structures has bolstered housing prices substantially since January 2002. 50% -50c 2S 3^5/0%-td OH Hio £ 15% _ tt 0% -RELATIONSHIP OF HOUSING PRICE APPRECIATION AND TYPES OF MORTGAGE FINANCINGS Shift to Creative Structures; April 2004 to December 2005, Appreciation: 42.1% [ Fixed Rates Decline: Tnn-70n7 tn Time 700^ Appreciation: 20.1% Shift to Variable Rates: July-2003 to March Appreciation: 14.1% & pfe® ^©@o^ HR&BAA IBBil»8 Sources: Empire Economics & Office of Federal Housing Empire Economics 27 Release Date: February 2, 2006 3. Mortgage Rate Resets: Realignment of Adjustable/Creative Loans to Market Rates There may be some softness in housing prices and land values even if mortgage rates remain stable during the foreseeable future, as households with various types of "adjustable rate" and "creative" debt structures have their initial teaser rates realigned to the current market rates. The resets are expected to generally result in higher monthly payments for homeowners since both the fixed as well as adjustable rate loans attained their recent historical lows in June 2003 and March 2004, respectively, and, since then, these rates have moved upwards: > Fixed Rate Loans were recently at some 6.32%, some 109 basis points above their recent historic low. > Adjustable Rate Loans were recently at some 5.22%, some 181 basis points above their recent historic lows. With regard to the amount of mortgages that are subject to such resets, based upon data for the United States mortgage market as a whole, these are expected to rise dramatically, from some $0.83 billion in 2005 to more that $1.0 trillion in 2007. ESTIMATED MORTGAGE LOAN -RESETS SI.20 •, SI. 00 | $0.80 • -JaH ai $0.60 -z: O -J H SJ $0.40 -§o S0.20 -$0.00 -VARIABLE RATE LOANS WITH ADJUSTABLE MORTGAGE RATES S0.083 1 -«ol I 1 2005 1)0.330 2006 m $1.001 pif®i@®« ' H „-•—.— \ 2007 D Mortgage Loans -TRILLIONS Sources: Empire Economics & DB Global Markets Research The specific types of resets that may occur for adjustable rate and creative loan structures as rates are realigned with the marketplace are as follows: > Adjustable Rate Mortgages are expected to have upward reset adjustments to their monthly payments as a result of the Federal Reserve Board's policy since June 2004 which has caused the short end of the yield curve to rise significantly. The one-year adjustable loans, which were at their recent historic lows in March 2004, have started to have higher monthly payments, and such loans are now some 181 basis points above their cyclical lows. Empire Economics 28 Release Date: February 2, 2006 For instance, a household that entered into an adjustable rate loan in March 2004 with a rate of 3.41% would encounter an approximate adjustment in March 2005 to a rate of 4.23%. This represents an increase of some 82 basis points which results in the household's mortgage payment rising by some 24%. So, for a household with a monthly mortgage payment of some $2,000 per month, their payment would increase to some $2,480 per month. > Creative Mortgage Structures will undergo reset adjustments over time as the starter teaser rates are adjusted to their market rates. Since creative mortgages are typically based upon short-term rates and also have further adjustments due to teaser rates, then the mortgage payments of such households may rise by much more than for adjustable rate mortgages. So, households with adjustable and creative mortgage structures will encounter higher mortgage payments as their initial teaser rates are realigned to the market rates which have significantly higher mortgage payments due to the recent hikes of the federal funds rate by the Federal Reserve Board. For example, the types of adjustments that may occur for various loan structures can be gauged by comparing their initial payments with their payments at the start of year six, after the five year time span during which rates are fixed at a low level; accordingly, these adjustments for various interest rate scenarios are as follows: Mortgage Loan of $500,000 Initial Payments -First Five Years Rates Decline 100 BP Payment: Start of Sixth-Yr. Change from Initial Pymt. Rates Stable Payment: Start of Sixth-Yr. Change from Initial Pymt. Rates Rise 100 BP Payment: Start of Sixth-Yr. Change from Initial Pymt. Fixed Rate 30-Year $2,998 (Interest & Principal) $2,998 0% $2,998 0% $2,998 0% Hybrid ARM Interest Only $2,553 (Interest Only) $2,960 16% $3,260 28% $3,513 38% Option ARM Initial Min. Pymts. $1,608 (Minimum Payments) (Negative Amortization) $3,289 105% $3,575 122% $3,928 144% > Homeowners with fixed rate mortgages can expect stable mortgage payments of some $2,998 per year for the entire term of the loan of 30 years, regardless of what happens to mortgage rates after they originate their loans. Homeowners with Hybrid ARM Interest Only Loans have lower payments for the initial five years but can then can expect higher mortgage payments starting in year six: from $2,553 to $3,260 (+28%) if rates are stable or, if rates rise by 100 basis points (one percent), from $2,553 to $3,513 (+38%). Homeowners with Option ARMs that initially make minimum payments (negative amortization) of some $1,608 can expect very significant increases in their monthly payments at the start of year six: from the initial payment of $1,608 to $3,575 (+122%) if rates are stable, or if rates rise by 100 basis points, from $1,608 to $3,928 (+144%). Empire Economics 29 Release Date: February 2, 2006 Additionally, the mortgage delinquency levels for homeowners with adjustable and creative mortgages have traditionally been significantly higher than for homeowners with fixed rate loans. This is typically attributed to homeowners with adjustable rate loans having difficulty with higher mortgage payments as rates rise as well as such households having "low" equity levels (due to higher loan to price ratios as well as negative amortization), and hence less of an incentive to "hold-on" to the home, especially if the rate of appreciation diminishes. During the 2000-2005 time period, the 5.4% delinquency rate for adjustable rate loans has been above the 3.6% delinquency rate for fixed rate loans by some 50% (5.4% vs. 3.6%.). DELINQUENCY RATES: FIXED-RATE VS. VARIABLE-RATE LOANS 2003 2004 200 Q Variable-Rale Sources: Empire Economics & National Delinqut 4. Mortgage Rate Increases: Potential for Further Federal Reserve Board Rate Hikes Since the financial markets, being very efficient, are difficult to forecast, especially mid-term and longterm rates, it is not the position of Empire Economics to forecast that mortgage rates will rise. Nevertheless, it is worthwhile to explore the potential implications of the Federal Reserve Board continuing its current policy of increasing the federal funds rate, since this directly impacts the shortend of the yield curve, and, in turn, adjustable rate mortgage rates as well as the creative mortgage structures. The Federal Reserve Board, according to some analysts, is expected to raise the federal funds rate to some 4.75%, significantly above its prior level of 1.0% in June 2004; the federal funds rate is presently at 4.50%. Consequently, the primary driving forces underlying the strong rates of housing price appreciation, adjustable rates and creative financing structure, will diminish substantially over time. (Note: Since the recent fixed rate of some 6.32% is some 110 basis points above the recent one-year adjustable rate of 5.22%, even a moderate decline in fixed rates would not become a driving force for further price appreciation because they are significantly higher than adjustable rates.) Empire Economics 30 Release Date: February 2, 2006 Therefore, further increases in the federal funds rate will result in the short-term rates rising, and this, in turn, will cause the following: > Existing Borrowers would have higher monthly payments as adjustable rate mortgages rise and creative teaser rates are realigned to HIGHER market rates, as compared to the current market rates. > New Borrowers would face HIGHER rates, reducing their ability to qualify for loans that support existing prices, thereby placing downward pressure on home prices. RECENT MORTGAGE RATES FIXED AND ADJUSTABLE AND THE FEDERAL RESERVE BOARD 8.00' 7.00% PRICE APPRECIATION: 13.4%/yr . 18.8%/yr 24.1%/yr FIXED RATE MORTGAGES RISE FIXED RATE MORTGAGES AT HISTORIC LOWS: JULY 2003 ADJUSTABLE RATE MORTGAGES RISE ADJUSTABLE RATE MORTGAGES AT HISTORIC LOWS: MARCH 2004 FEDERAL RESERVE BOARD RAISES THE FEDERAL FUNDS RATES DUE TO POTENTIAL INFLATIONARY PRESSURES. FEDERAL RESERVE BOARD LOWERS THE FEDERAL FUNDS RATES DUE TO NASDAQ MELTDOWN AND 9-1 1 ATACKS. II I I I I I I I I I I I I I I I I I I I I il I ! I I I I I ] Federal Funds 2 •Fixed: 30-Yr Variable 1-Yr Sources: Empire Economics, Federal Reserve Board & Freddie Mac 5. Specific Impacts of Higher Mortgage Rates on the Land-Secured Credit Quality The widespread use of adjustable rate and creative financing for newly developing residential projects have significant implications for the Credit Quality underlying Land Secured Financing: > Special Tax Rates set-forth in the Rate and Method of Apportionment of Special Taxes are based upon current housing prices which have recently realized strong rates of appreciation as a result of the utilization of adjustable and creative financing techniques by home purchasers. Empire Economics 31 Release Date: February 2, 2006 Appraisals are based upon current land values, which, in turn, are derived from current housing prices, that have appreciated at a strong rate in recent years, and so they also reflect the use of adjustable and creative financing techniques. Furthermore, since the value of the land is a residual value, that is, the price of the home less the construction costs of building the home, most of the decline in the price of a home is passed through to the land, since construction costs are relatively stable in the short-run. For example, if a home with an initial price of $400,000 declines to $350,000, a reduction of some -$50,000 or -12.5%, the value of the finished lot for the same sized home declines from $149,000 to $113,600, a reduction of-$35,400 or -23.8%. Similarly, a decline in the price of a home by 25% results in a reduction of the value of a finished lot for the same sized home by some 48%! (Note: The above discussion focuses on the value of a finished lot which includes entitlements and infrastructure infrastructure improvements; by comparison, the value of "raw" land, land without any entitlements or infrastructure improvements, may approach zero.) CHANGES IN HOUSING PRICES AND FINISHED LOT LAND VALUES * LAND VALUES DELCINE AT A FASTER RATE -60% Price $ 400,000 Price $ 400,000 to Price $ 400,000 to Price $ 400,000 to Price $ 400,000 to $375,000 $350,000 $325,000 $300,000 I Change in Housing Prices 1 Change in Finished Lot Value Therefore, the Credit Quality underlying Land Secured Financings reflects the use of current prices and land values, and, as such, includes, among other factors, the underlying use of adjustable and creative loan structures by homeowners. Empire Economics 32 Release Date: February 2, 2006 Consequently, should mortgage rates rise significantly, the Credit Quality of the land secured bonds is subject to substantial weakening due to the following: Lower housing prices resulting in a higher Special Tax to Home Price Burden for homeowners, possibly in excess of the Issuer's policy of a maximum total tax burden, typically some 1.8% to 2.0% of the initial sales prices, even though these maximums may have been satisfied at the time that the Special Taxes were established. Significantly lower land values resulting in a reduced Value/Lien ratio, possibly below the Issuer's policy of typically some 3 to 1 or 4 to 1 when the bonds are sold, thereby diminishing the security for bond holders. (The Appraisal for the Bond Issue is valid only for the stated Date of Value; it is not meant to be a prediction of future values.) > Higher levels of Special Tax delinquencies as monthly payments of owners increase resulting in diminishing the maximum Special Tax to the bond debt service coverage ratios for bond holders that may adversely impact the Issuer's ability to meet the debt service payments in a timely manner, possibly resulting in the use of the bond reserve fund. Adjustable rate mortgages (some 79% of current mortgages) have significantly higher delinquency rates than fixed rate mortgages; additionally, homeowners that use adjustable rate mortgages also have higher loan to value ratios as well, some 90% as compared to homeowners with fixed rate loans, some 81%. Therefore, as mortgage rate resets occur to the current market rates, and furthermore, to the extent that mortgage rates rise further, then the Credit Quality for Land Secured financing may be diminished, resulting in Higher Tax Burdens due to lower housing prices, Lower Value/Lien Ratios due to lower land values, and Higher Special Tax Delinquencies due to higher monthly mortgage payments. Empire Economics 33 Release Date: February 2, 2006 COMPETITIVE MARKET ANALYSIS OF THE PROJECTS IN THE CFD NO. 03-02 COMPETITIVE HOUSING MARKET AREA The purpose of this section is to provide an overview of the currently active Planned Communities and other residential projects in the CFD No. 03-02 Competitive Housing Market Area, and then to compare these to the expected characteristics of the forthcoming residential projects/products in CFD No. 03-02. Original Market Surveys Conducted in July 2005 (A sample of these projects was re-surveyed in January 2006, and these had prices that were slightly or somewhat higher than those reported in July 2005, and so this section has not been updated except for the CFD No. 03-02 product characteristics.) The CFD No. 03-02 Housing Competitive Market Area currently has several Major Planned Communities (PC) or project groupings with single-family detached homes that are located in the City of Temecula and its vicinity. The twenty-one currently active projects, along with the forthcoming projects in CFD No. 03-02, have a total of 3,735 housing units: 1,745 forthcoming homes in CFD No. 03-02 and 1,990 homes in the currently active projects. Of these, 1,121 homes in the currently active projects have closed escrow and so they are considered to be occupied. > CFD No. 03-02: forthcoming projects with 1,745 homes. > Harveston: 6 active projects with 600 homes of which 311 have closed escrow. > Rancho Bella Vista: 5 active projects with 686 homes of which 497 have closed escrow. > Not in PC: 6 active projects with 652 homes of which 313 have closed escrow. > Large Lot Products: 4 active projects with 52 homes of which none have closed escrow. CFD NO.03-02 (RORIPAUGH RANCH) COMPETITIVE HOUSING MARKET AREA: CHARACTERISTICS OF ACTIVE PROJECTS DEVELOPMENT STATUS 1,400 • !,000 -400 -0 -H Escrows Closed 23 Future Units CFDN (Rori Rar /S<VrWvyS <<Xxxx /<SWsr/Vx/Av^V •A/V \A.,A <<xxSx< <<XxXx <VxVx xVv koxo><< $88 k/<$xwx8Sx8< **AW/V^ 0.03-jaugh ch) )2 0 1,745 r FFPI Harv VVM OOy <Wx$x1l eston 311 289 R Vr1 anch Vi3 Bel sta a 497 189 rr-r-r-H Notip= nPC 1 313 339 cvyi Large Lot Products 0 52 Empire Economics 34 Release Date: February 2,2006 The prices of homes in these projects, including the currently active comparable projects and also the forthcoming projects in the CFD, are some $614,595 for some 3,068 sq.ft., on the average, and the prices for the projects in the various categories are as follows: > CFD No. 03-02: $509,680 for some 2,840 sq.ft. of living area. > Harveston: $465,081 for some 2,386 sq.ft. of living area. > Rancho Bella Vista: $451,590 for some 2,569 sq.ft. of living area. > Not in PC: $456,872 for some 2,857 sq.ft. of living area. > Large Lot Products: $1,333,750 for some 5,007 sq.ft. of living area. CFD NO.03-02 (RORIPAUGH RANCH) COMPETITIVE HOUSING AREA HOUSING PRICES AND LIVING AREAS HPenp tu0 o H LEFT: Price » RIGHT: Living Area MARKET *1 CFD No.03-02 (Roripaugh Ranch) $509,680 2,840 ^ XX^IHarveston $465,081 2,386 • >fXX 1 Rancho Bella Vista $451,590 2,569 •••\,-XAAX,//VN> ^SfSf^ XXX KXX XX? XxXx)?* JOO( Not in PC $456,872 2,857 A. <v>^5S< WS V§S P/VV\AXWvSN k^AWxSv i^/vWs/s i^/SwhfSsf ^b.fAWjA b5^foS5foV SOQ II5o<> vv< vv< A Large Lot Products $1,333,750 5,007 1 Tola s/Average s S6 14,595 3,068 wwPi -4,000 ptd 3 — fO <-8 8 ! O O C SIZE OF LIVING AI To compare the prices of the homes in these projects, their value ratios are utilized, the price per sq. ft. of living area, since this effectively makes adjustments for differences in their sizes of living areas. Accordingly, the value ratios for all of the projects amount to $194 per sq. ft. of living area and their Special Taxes/Assessments amount to some $2,786/yr. (0.50% as a ratio to the housing prices); accordingly, the value ratios and Special Tax/Assessment characteristics for the forthcoming product types in CFD No. 03-02 and the currently active comparable projects are as follows: > CFD No. 03-02 has an expected value ratio of $179, somewhat below the overall average and the expected Special Taxes amount to $3,375/yr. (0.61%), above the overall average/ratio. > Harveston has a value ratio of $199, similar to the overall average and their Special Taxes/Assessments amount to $3,127/yr. (0.67%), above the overall average/ratio. > Rancho Bella Vista has a value ratio of $178, somewhat below the overall average and their Special Taxes/Assessments amount to $2,096/yr. (0.47%), below the overall average/ratio. > Not in PC projects have a value ratio of $163, significantly below the overall average and their Special Taxes/Assessments amount to $2,413/yr. (0.53%), slightly above the overall ratio. > Large Lot Products have a value ratio of $265, substantially above the overall average (due to their large lots sizes as well as their customized features) and their Special Taxes/Assessments amount to $3,108/yr. (0.12%), significantly below the overall ratio. Empire Economics 35 Release Date: February 2, 2006 CFD NO.03-02 (RORIPAUGH RANCH) COMPETITIVE HOUSING MARKET AREA VALUE RATIOS AND SPECIAL TAXES ~r $4,000 --$3,000 5; -• $2,500 $2,000 a The currently active residential projects have experienced escrow closings (move-ins) at a rate of some 911 homes per year, for an average of some 43 units per project per year; the distribution of these sales is as follows: > The six projects in Harveston have an overall sales rate of 295 homes annually, some 49 per project, on the average. > The five projects in Rancho Bella Vista have an overall sales rate of 328 homes annually, some 66 per project, on the average. > The six projects Not in Planned Communities (PC) but in the vicinity of CFD No. 03-02 have an overall sales rate of 255 homes annually, some 43 per project, on the average. ^ The four Large Lot Products projects have an overall sales rate of 33 homes annually, some 8 per project, on the average. £ 300 CFD NO.03-02 (RORIPAUGH RANCH) COMPETITIVE HOUSING MARKET AREA SALES RATES 1 ' ' ' Harveston Rancho Bella Vista Not in PC Large Lot Products Empire Economics 36 Release Date: February 2, 2006 CHARACTERISTICS OF THE *COMPARABLE* ACTIVE PROJECTS IN THE COMPETITIVE HOUSING MARKET AREA BY GEOGRAPHICAL LOCATIONS Projetl ;FD No.03-02 (Rorirjsugh Ranch] ~FD Mo 03-02 (Rorioaugh Ranch) :FD Ho 03-02 (Rorioaugh Ranch] ;FD No.03-02 (Roripaugh Ranch] Harvaslon 1 Harveslon 1 Harveston I Harvest I Harveslon II Harveston 1 Rancho Bells Vista Rancho Belt? Vista Rancho Bella Vista Ranctio Bella Vista Rancho Bella Vista Not in PC Not in PC Not in PC Not in PC Not in PC Not in PC aroe Lot Products arge Lot Products «.L*P««B mMRMia liatisricBl Summary ro»o.»S-DJ(,.,»,hMl aneston laiicho Bella Vista JOT in PC ™U.P«*K» roials.Aiera»es pmject Phase 1 Phase II • Segment 1 Phase II -Segment II Phase II -Segment III Ashville Auburn Lane Lake Front Cottaqes Sausaiito Chatham walden San Lucas II San Alicia San Marino II St. Auqustme Sr Regis Vaidemosa Jackson Crossing Cascades II -Greens Laurel Valley Avondate The Preserve Gallerv -Traditions Las Alturas -De Luge LasAlturaS LaCresta T»R«.™ Builder Five Builders KB Home KB Home KB Home Lennar Homes Lennar Homes Lennar Homes Lennar Homes Lennar Homes Chris to her Homes C««HO™, Centex Homes Centex Homes Centex Homes Centex Homes KB Home Fields communities Lennar Homes Lennar Homes Richmond American Centex Homes Gallery Homes Craftman Homes C,,l,™nH=™, OM™H™. Sales /Year NA 66 4J « * Product Type Single-family Detached Single-family Detached Single-family Detached Single-family Detached Single-family Delached Single-family Detached Sinqle-familv Detached Sinole-famny Detached Si nole-f amity Detached Smole-familv Detached Single-family Detached Single-family Detached Single-family Detached Single-family Detached Sinrjle-family Detached Single-family Detached Single-family Detached Smqte-family Detached Single-family Detached Single-family Detached Semi -Custom Delached Semi -Custom Detached Semi Custom Delached Semi -Custom Delached 4''4S 515 607 511 112 62 119 139 109 78 93 153 139 182 134 78 79 140 70 36 130 197 8g_. 28 ,.,„ «65: 52 >.,» Closed „QQQ0 45 135 39 51 41 115 112 126 75 69 0 56 B3 56 190 0000» »7o ,.,:, ject Si« and S 515 607 511 112 62 74 4 70 27 52 38 27 56 59 g 79 84 62 33 74 7g9-, 2S ,.,« i,, ,:„ " ,M tot, ta^r. N/A N/A N/A N/A 55 45 65 40 50 40 73 70 80 55 50 30 45 30 30 55 65 8e-, 10 N.A m^33 »» $471 594 $391 594 $460 990 $783,990 $370,990 $397.000 3425,000 5434,990 $485.420 $505 000 $394,990 S383.990 $426,990 S411990 $466,990 $530 000 S3B8.99Q 5456,500 S500.000 5490,000 $472.990 5920.000 $1.000,000 $1,000,000 $1.300,000 S48L69S ' »,..,» s«.»» SI. 055.000 S5H..OO HHUSin«P™. $507,302 $408,792 $473,623 $845,490 $405,990 $41 1 500 $442.500 $463 990 $525.505 $541 000 $399 990 $432,490 $440,990 $478.490 $505.990 $295.250 3392,990 S4S8.000 5512.000 $525,000 $527,990 $1010000 $1 225 000 $1,300.000 $1.800.000 sm«o S45 1.590 S4M..72 S,35!.,.,0 S614.?95 S525.594 3424,990 5498,990 5909,990 5440,990 5426,000 $460,000 $492,990 $565 590 5577,000 $404990 $480,990 S454.990 $544990 $544 990 560,500 $396.990 $51 9,500 $524,000 $560,000 5562,990 51 100 000 51 450 000 51 600,000 52,300.000 S533.403 »«.,» »».«3 Sl.6i:.500 »».,» 2247 1.954 2499 1 684 1 767 1 991 1873 2521 2,770 1 752 1,650 2204 2058 2.600 2675 1.920 2154 2617 2811 2 420 3381 4700 4700 5000 2.422 "2.0 53 :.4i3 4.445 Z«i Size of Living \K, 2,783 2,132 2,931 1913 1934 2.125 2205 3058 3.082 1,966 2,362 2477 2915 3107 3131 2010 2694 3151 3140 3017 3S29 5100 5,100 6.000 2..40 :,,» 2.B, s.«», 3.0« 3040 2,300 3325 2 141 2259 2.537 3594 2 180 3,113 2750 3771 3613 3586 2099 3,233 3684 3468 3,613 4.276 5,500 5500 7000 3.166 -,m> 3.2S1 i.569 .,.« ,, 5182 S192 $163 5212 5213 5208 $210 $172 $203 $182 5178 $164 5163 594 $196 $181 5163 $167 $175 5264 5240 5255 5300 >„» S,7. SI 63 $165 S,,4 spl Yrar $3.000 $2.500 $3.000 52,680 52,922 $2,955 53155 53468 $1,960 $2,076 52.161 52058 $2,225 51,476 51965 $2,440 53072 $2.888 52640 55,400 5980 5650 $5,400 S3.375 ;:.»» S2.,a S3.10S S2.,«, Pme 059% 061% 063% 059% 0.66% 0710/0670/068% 066% 049% 0 48% 049% 043% 044% 0.50% 050% 050% 060% 0.55% 050% 0.05% 0.08% 0.05% 030% 0.61% .47,. 0.53% 0 12% „,, ooaI IESTIMATED ABSORPTION SCHEDULES FOR THE PROJECTS/PRODUCTS IN CFD NO. 03-02 The purpose of this section is to estimate the absorption schedules for the forthcoming residential and commercial retail projects/products in CFD No. 03-02; accordingly, this is based upon a consideration of the following: First, the potential demand schedules for the residential and commercial-retail projects/products for CFD No. 03-02 were derived, based upon a consideration of the following: > The growth prospects for the Southern California Market Region, in general, and Riverside County, in particular. > How much of this growth the CFD No. 03-02 Market Area, is expected to capture, in particular. > The proportion of the Market Area demand that is expected to be captured by the projects/products in CFD No. 03-02, based upon an evaluation of their competitiveness in the marketplace. Thus, the result of this analysis is the POTENTIAL demand for the residential and commercial-retail projects/products in CFD No. 03-02. Next, the ability of the residential and commercial-retail projects/products in CFD No. 03-02 to respond to this demand is estimated. Specifically, this represents, from a time perspective, when the products will have the infrastructure in place that is required to support their development. So, the result of this analysis is the INFRASTRUCTURE DEVELOPMENT of the projects/products in CFD No. 03-02, and this reflects their ability to respond to the demand in the marketplace. The following absorption schedules are based upon the critical assumption that the developer, Ashby, USA, LLC, will be able to deliver the parcels to the various builders according to the time schedule that was provided to Empire Economics by Ashby USA, LLC. Specifically, this requires the fulfillment of numerous and complex conditions of development in a timely manner. However, to the extent that the development conditions are not fulfilled in a timely manner, and the delivery of the parcel to the various builders does not occur according to the schedule set-forth by Ashby USA, LLC, then the estimated absorption for the forthcoming projects in CFD No. 03-02 could be substantially delayed. Ashby USA, LLC expects that building permits for the forthcoming projects in Phase II will be released in January 2007. Empire also considered comments provided by the City of Temecula on the Ashby USA, LLC's expected time schedule, and, based upon these, Empire assumed that building permits for the forthcoming projects in Phase II will be released in September 2007. Then, based upon a consideration of the POTENTIAL demand and the INFRASTRUCTURE DEVELOPMENT, the absorption rate for the residential projects/products in the various market segments are calculated, from the year in which the projects/products are expected to enter the marketplace, and continuing thereafter on an annualized basis, until all of the units are occupied. Accordingly, based upon an analysis of the economic and real estate conditions along with the characteristics of the forthcoming residential product types/projects in CFD No. 03-02, the estimated absorption schedules are as follows: Empire Economics 38 Release Date: February 2,2006 Phase I is expected to have a total of 515 single-family detached housing units, 29.5% of the total, that are priced at some $507,302 for some 2,783 sq.ft. of living area, on the average, and these are spread among five Planning Areas with three builders, and they are expected to be absorbed at the following rate: 65 homes during July-December 2006 266 homes in 2007 and then the remaining 184 homes in 2008 The development of the projects in Phase I is constrained by the number of building permits that Ashby USA, LLC has available based upon the infrastructure improvements that have been completed thus far. Specifically, the number of permits that are currently available is significantly below the number of building permits that these projects require for their full development. Accordingly, the Empire absorption schedules assume that Ashby USA, LLC allocated the permits among the various builders in a manner that is acceptable to them. Empire has received signed "Acknowledgements" as well as the "Permit Sharing Agreement" from the various builders. * Phase II is expected to have a total of 1,230 single-family homes, 70.5% of the total, that are priced at some $370,000 to $909,990 with living areas of 1,809 to 5,318 sq.ft, and these are spread among fifteen Planning Areas with the only builder being KB Home; accordingly, their estimated absorption schedule, based upon the assumption that building permits are available as of September 2007, is as follows: no homes in 2006 or 2007 328 homes in 2008 another 328 homes in 2009 230 homes in 2010 210 homes in 2011 and then the remaining 134 homes in 2012 Therefore, the 1,745 forthcoming residential units in the CFD No. 03-02 are expected to be absorbed during the July 2006 to December 2012 time period, at a rate of some 328 homes per year, on the average, when most of the projects are on the marketplace. Specifically, the rate of absorption is expected to start at some 65 homes in 2006, as the first projects enter the marketplace, rise to peak levels of 512 homes in 2008, when most of the projects are on the marketplace, decreases to 328, 230 and 210 homes in 2009, 2010, and 2011, respectively, as some of the projects are closed-out, and then, finally, the remaining 134 homes in 2012. With regards to the various commercial-retail project, 15.4 acres, its absorption is based upon the occupancy of the homes in CFD No. 03-02 along with threshold levels required to support commercial centers, and its absorption is expected to occur in 2008. For additional information on the estimated absorption schedules for the residential products in the CFD No. 03-02, please refer to the following table and graph. Empire Economics 39 Release Date: February 2, 2006 Potential Financial Risk Factors The potential financial risk factor reflects the implications of the recent use of adjustable rate and creative financing techniques by home purchasers on the credit quality underlying land-secured financings in Southern California. There has been a fundamental shift in the driving force underlying the recent rates of housing price appreciation, from the historical role of employment growth as the driving force to the recent role of adjustable rate and creative financing techniques as the driving force. These financial factors have been the primary driving force underling the extraordinary rate of housing price appreciation in Southern California of more than 75% since January 2002. Consequently the current levels of housing prices and land values are subject to potentially substantial downward adjustments, due to mortgage rate resets (as mortgages are adjusted from teaser rates to market rates) as well as higher short-term rates (due to rate hikes by the Federal Reserve Board). These adjustments, in turn, may cause a softening in housing prices and land values that could adversely impact the credit quality underlying land-secured financings. Creative financing refers to the use of loan structures other than fixed-rate or 1 year adjustable, including the following: interest only, payment option loans as well as initial teaser rates (below market rates that are offered only for a limited time period) with very low initial payments that result in negative amortizations (higher principal balance), less stringent lending standards such as low/no documentation, and much higher mortgage payment to income ratios, among others. Consequently, to the extent that mortgage payments rise due to various possible combinations of automatic mortgage rate resets as well as potentially higher short-term rates that directly impact adjustable rate and creative mortgages, then the credit quality underlying recent land-secured financings may be diminished in the following ways: > Lower housing prices prices resulting in a higher Special Tax to Housing Price Burden for homeowners, possibly in excess of the Issuer's policy of a maximum total tax burden, typically some 1.8% to 2.0% of the initial sales prices, even though these maximums may have been satisfied at the time that the Special Taxes were established. > Significantly lower land values resulting in a reduced Value/Lien ratio, possibly below the Issuer's policy of typically some 3 to 1 or 4 to 1 when the bonds are sold, thereby diminishing the security for bond holders. (The Appraisal for the Bond Issue is valid only for the stated Date of Value; it is not meant to be a prediction of future values.) > Higher levels of Special Tax delinquencies as monthly payments of owners increase resulting in diminishing the maximum Special Tax to the bond debt service coverage ratios for bond holders that may adversely impact the Issuer's ability to meet the debt service payments in a timely manner, possibly resulting in the use of the bond reserve fund. Adjustable rate mortgages (some 79% of current mortgages) have significantly higher delinquency rates than fixed rate mortgages; additionally, homeowners that use adjustable rate mortgages also have higher loan to value ratios as well, some 90% as compared to homeowners with fixed rate loans, some 81%. Empire Economics 40 Release Date: February 2,2006 I EMPIRE ECONOMICS — FEBRUARY 2, 2006; SUBJECT TO REVISION CRITICAL ASSUMPTION: ASHBY USA, LLC COMPLETES THE CONDITIONS OF DEVELOPMENT IN A TIMELY MANNER o§ Planning Area Phase 1 PA-2 PA-1 PA-3 PA-4A PA-4B Phases II+ Segment #1: Below $420, 000-Avg. PA-31 PA-22 PA-1 2 PA-14 PA-1 5 Segment #2: $420,000 -$530, 000-Avg. PA-23 PA-24 PA-1 6 PA-1 7 PA-1 8 Segment # 3: Above S600,000-Avg. PA: 10.19-21,33 PA: 10,19-21,33 Statsitical Summary: Units 99 104 99 100 113 169 130 112 92 104 47 75 121 147 121 76 36 Builder D.R Morton 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 Phase I 515 29.5% Phases 11+ 1,230 70.5% Segment # 2: $420,000 -$530,000-Avg. 51 1 Segment # 3: Above $600.000-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 5313 6.696 8,703 8,703 20,000 42,298 Expected Housing Prices Lower $533,000 $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 $460,990 $783,990 $481,698 Average $548,141 $450,918 $498,490 $522,364 $516,597 $395,495 $395,495 $417,657 $41 7 657 $417,657 $429 323 $429,323 $480,990 $526 740 $526,740 $845,990 $844 990 $507,302 $510,671 $478.623 $845.490 $509,680 Upper $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 $498,990 $909,990 $533,403 Expected Living Areas Lower 2,960 1.949 1,974 2,007 2,346 1,809 1,809 2.050 2,050 2,050 2,029 2029 2,500 2,969 2,969 4,001 3,676 2,247 2.495 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 2,406 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 2300 3,325 5,253 3,166 Sale Rates Annually 50 55 55 55 55 70 Sequence 65 Seauence Seauence 60 Sequence 55 50 Seauence 30 Seauence 2006 Jan-June 0000000000000000000000 2006 July-Dec. 0 20 20 0000000000000 65 0000 65 2007 Jan-June 27 27 27 27 000000000000 133 0000 133 2007 July-Dec. 27 27 27 27 000000000000 133 0000 133 2008 24 27 25 26 27 35 0 32 0D 30 0 27 25 0 15 0 129 164 67 82 15 293 2008 23 00 32 35 0 32 00 17 13 27 25 0 15 0 55 164 67 82 15 219 2009 0000 35 0 32 000 30 27 25 0 15 00 164 82 15 164 2009 0000 35 0 16 16 00 30 27 25 0 15 00 164 82 15 164 2010 0000 29 6Q 32 002 13 25 0 16 00 123 40 16 123 2010 000000 35 Q 32 0000 22 30 15 0 107 25 15 107 2011 000000 35 o 12 20 0000 25 0 15 0 107 25 15 107 2011 000000 35 00 32 0000 30 060 103 30 6 103 2012 J J000000 19 00 32 0000 30 000 81 30 0 81 2012 July-Dec. 000o0000 20 0000 33 000 53 20 33 0 53 £K)O 8 oo§s? 8-K> §O CITY OF TEMECULA CFD NO. 03-02 (RORIPAUGH RANCH) ESTIMATED RESIDENTIAL ABSORPTION SCHEDULES COo 553oIa:owUJ LL OKm GO 600 500 400 300 200 100 2006 2007 2008 2009 I Phase I 2010 B Phases II+ 2011 2012 ASSUMPTIONS AND LIMITING CONDITIONS The Market Absorption Study for CFD No. 03-02 is based upon various assumptions and limiting conditions; accordingly, these are as follows: Title to Property Property Boundaries Accuracy of Information from Others Date of Study Hidden or Unapparent Conditions Opinions of a Legal/Specialized Nature Right of Publication of Report Soil and Geological Studies Earthquakes and Seismic Hazards Testimony or Court Attendance Maps and Exhibits Environmental and Other Regulations Required Permits and Other Governmental Authority Liability of Market Analyst Presence and Impact of Hazardous Material Structural Deficiencies of Improvements Presence of Asbestos Acreage of Property Designated Economic Scenario Provision of the Infrastructure; Role of Coordinator Developer/Builders Responsiveness to Market Conditions Financial Strength of the Project Developer/Builders Market Absorption Study Timeliness of Results For additional information on the various assumptions and limiting conditions, please refer to the comprehensive Market Absorption Study. Empire Economics 43 Release Date: February 2, 2006 [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX E SUMMARY OF CERTAIN PROVISIONS OF THE FISCAL AGENT AGREEMENT The following is a brief summary of certain provisions of the Fiscal Agent Agreement not otherwise described in the text of this Official Statement. Such summary is not intended to be definitive, and reference is made to the text of the Fiscal Agent Agreement for the complete terms thereof. Definitions Except as otherwise defined in this summary, the terms previously defined in this Official Statement have the respective meanings previously given. In addition, the following terms have the following meanings when used in this summary: "Account Party" means the property owner that provides a Letter of Credit to secure the payment of Special Taxes on property the Account Party or its affiliates own in the District. "Acquisition Account" means the account by that name established by the Fiscal Agent Agreement within the Improvement Fund. "Acquisition Agreement" means the Acquisition Agreement, dated as of March 1, 2006, between the Authority Authority and Ashby, USA, LLC, as originally executed and as it may be amended from time to time. "Administrative Expenses" means costs directly related to the administration of the District consisting of the costs of computing the Special Taxes and preparing the annual Special Tax collection schedules (whether by the Treasurer or designee thereof or both) and the costs of collecting the Special Taxes (whether by the County or otherwise); the costs of remitting the Special Taxes to the Fiscal Agent; fees and costs of the Fiscal Agent (including its legal counsel) in the discharge of the duties required of it under the Fiscal Agent Agreement; the costs of the Authority, the City or any designee of either the Authority or the City of complying with the disclosure provisions of the Act, the Continuing Disclosure Agreement and the Fiscal Agent Agreement, including those related to public inquiries regarding the Special Tax and disclosures to Bondowners and the Original Purchaser; the costs of the Authority, the the City or any designee of either the Authority or the City related to an appeal of the Special Tax; any amounts required to be rebated to the federal government in order for the Authority to comply with the Fiscal Agent Agreement; an allocable share of the salaries of the City staff directly related to the foregoing and a proportionate amount of City general administrative overhead related thereto. Administrative Expenses shall also include amounts advanced by the Authority or the City for any administrative purpose of the District, including costs related to prepayments of Special Taxes, recordings related to such prepayments and satisfaction of Special Taxes, amounts advanced to ensure compliance with the Fiscal Agent Agreement, administrative costs related to the administration of any joint community facilities agreement regarding the District, and the costs of commencing and pursuing foreclosure of delinquent Special Taxes. "Administrative Expense Fund" means the fund by that name established by the Fiscal Agent Agreement. E-l "Agreement" means the Fiscal Agent Agreement, as it may be amended or supplemented from time to time by any Supplemental Agreement adopted pursuant to the provisions thereof. "Annual Debt Service" means, for each Bond Year, the sum of (i) the interest due on the Outstanding Bonds in such Bond Year, assuming that the Outstanding Bonds are retired as scheduled (including by reason of the provisions of the Fiscal Agent Agreement providing for mandatory sinking payments), and (ii) the principal amount of the Outstanding Bonds due in such Bond Year (including any mandatory sinking payment due in such Bond Year pursuant to the Fiscal Agent Agreement). "Auditor" means the auditor/controller of the County. "Authority Attorney" means any attorney or firm of attorneys employed by the Authority or the City in the capacity of general counsel to the Authority. "Authorized Officer" means the Chairperson, Executive Director, Treasurer, Secretary or any other officer or employee authorized by the Board of Directors of the Authority or by an Authorized Officer to undertake the action referenced in the Fiscal Agent Agreement as required to be undertaken by an Authorized Officer. "Bond Counsel" means (i) Quint & Thimmig LLP, or (ii) any other attorney or firm of attorneys acceptable to the Authority and nationally recognized for expertise in rendering opinions as to the legality and tax-exempt status of securities issued by public entities."Bond Fund" means the fund by that name established under the Fiscal Agent Agreement. "Bond Register" means the books for the registration and transfer of Bonds maintained by the Fiscal Agent under the Fiscal Agent Agreement. "Bond Year" means the one-year period beginning September 2nd in each year and ending on September 1st in the following year, except that the first Bond Year shall begin on the Closing Date and end on September 1,2006. "Bonds" means the 2006 Bonds, and, if the context requires, any Parity Bonds, at any time Outstanding under the Fiscal Agent Agreement or any Supplemental Agreement. "Build-Out" means, when making calculations pursuant to the Fiscal Agent Agreement as to one or more parcels of property, or otherwise in connection with clause (viii) of the definition "Letter of Credit" in the Fiscal Agent Agreement, the assumption that the property contains the number, size and type of homes projected in the development plans used by the Tax Consultant in connection with its email regarding "Letter of Credit Calculations" dated February 14, 2006, which provided the initial stated amounts of the Letters of Credit to be delivered to the Fiscal Agent on the Closing Date by two of the landowners in the District, which assumptions may be adjusted from time to time based upon actual completed construction of homes in the District (as reported in connection with requests to reduce the amount of any Letter of Credit by or on behalf of an Account Party or as otherwise known by the Tax Consultant). "Business Day" means any day other than (i) a Saturday or a Sunday or (ii) a day on which banking institutions in the state in which the Fiscal Agent has its principal corporate trust office are authorized or obligated by law or executive order to be closed. E-2 "Capitalized Interest Account" means the account by that name established within the Bond Fund by the Fiscal Agent Agreement. "City" means the City of Temecula, California. "City Account" means the account by that name established by the Fiscal Agent Agreement within the Improvement Fund. "Code" means the Internal Revenue Code of 1986 as in effect on the date of issuance of the Bonds or (except as otherwise referenced herein) as it may be amended to apply to obligations issued on the date of issuance of the Bonds, together with applicable proposed, temporary and final regulations promulgated, and applicable official public guidance published, under the Code. "Continuing Disclosure Agreement" shall mean that certain Continuing Disclosure Agreement executed by the Authority and the Fiscal Agent on the Closing Date, as originally executed and as it may be amended from time to time in accordance with the terms thereof. "Costs of Issuance" means items of expense payable or reimbursable directly or indirectly by the Authority or the City and related to the authorization, sale and issuance of the Bonds, which items of expense shall include, but not be limited to, printing costs, costs of reproducing and binding documents, closing costs, filing and recording fees, initial fees and charges of the Fiscal Agent including its first annual administration fee, expenses incurred by the City or the Authority in connection with the issuance of the Bonds and the establishment of the District, special tax consultant fees and expenses, preliminary engineering fees and expenses, Bond (underwriter's) discount, legal fees and charges, including bond counsel, disclosure counsel and landowner's counsel, financial consultants' fees, charges for execution, transportation and safekeeping of the Bonds, landowner expenses related to the District formation and the issuance of the Bonds, City costs related to the District formation, and other costs, charges and fees in connection with the foregoing. "Costs of Issuance Fund" means the fund by by that name established by the Fiscal Agent Agreement. "County" means the County of Riverside, California. "PTC" means the Depository Trust Company, New York, New York, and its successors and assigns. "Debt Service" means the scheduled amount of interest and amortization of principal on the 2006 Bonds and the scheduled amount of interest and amortization of principal payable on any Parity Bonds during the period of computation, excluding amounts scheduled during such period which relate to principal which has been retired before the beginning of such period. "Depository" means (a) initially, DTC, and (b) any other Securities Depository acting as Depository pursuant to the Fiscal Agent Agreement. "District Value" means the market value, as of the date of the appraisal described below and/or the date of the most recent County real property tax roll, as applicable, of all parcels of real property in the District subject to the levy of the Special Taxes and not delinquent in the payment of any Special Taxes then due and owing, including with respect E-3 to such nondelinquent parcels the value of the then existing improvements and any facilities to be constructed or acquired with any amounts then on deposit in the Improvement Fund and with the proceeds of any proposed series of Parity Bonds, as determined with respect to any parcel or group of parcels by reference to (i) an appraisal performed within six (6) months of the date of issuance of any proposed Parity Bonds by an MAI appraiser (the "Appraiser") selected by the Authority, or (ii), in the alternative, the assessed value of all such nondelinquent parcels and improvements thereon as shown on the then current County real property tax roll available to the Treasurer. It is expressly acknowledged that, in determining the District Value, the Authority may rely on an appraisal to determine the value of some or all of the parcels in the District and/or the most recent County real property tax roll as to the value of some or all of the parcels in the District. Neither the Authority nor the Treasurer shall be be liable to the Owners, the Original Purchaser or any other person or entity in respect of any appraisal provided for purposes of this definition or by reason of any exercise of discretion made by any Appraiser pursuant to this definition. "District-wide Maximum Special Taxes" means the maximum Special Taxes that can be levied on all property in the District assuming Build-Out of all property, as computed from time to time by the Tax Consultant. "EMWD" means the Eastern Municipal Water District. "EMWD Account" means the account by that name established by the Fiscal Agent Agreement within the Improvement Fund. "Fair Market Value" means the price at which a willing buyer would purchase the investment from a willing seller in a bona fide, arm's length transaction (determined as of the date the contract to purchase or sell the investment becomes binding) if the investment is traded on an established securities market (within the meaning of section 1273 of the Code) and, otherwise, the term "Fair Market Value" Value" means the acquisition price in a bona fide arm's length transaction (as referenced above) if (i) the investment is a certificate of deposit that is acquired in accordance with applicable regulations under the Code, (ii) the investment is an agreement with specifically negotiated withdrawal or reinvestment provisions and a specifically negotiated interest rate (for example, a guaranteed investment contract, a forward supply contract or other investment agreement) that is acquired in accordance with applicable regulations under the Code, (iii) the investment is a United States Treasury Security—State and Local Government Series that is acquired in accordance with applicable regulations of the United States Bureau of Public Debt, or (iv) the investment is the Local Agency Investment Fund of the State of California but only if at all times during which the investment is held its yield is reasonably expected to be equal to or greater than the yield on a reasonably comparable direct obligation of the United States. "Federal Securities" means any of the following which are non-callable and which at the time of investment are legal investments under the laws of the State of California for funds held by the Fiscal Agent: (i) direct general obligations of the United States of America (including obligations issued or held in book entry form on the books of the United States Department of the Treasury) and obligations, the payment of principal of and interest on which are directly or indirectly guaranteed by the United States of America, including, without limitation, such of the foregoing which are commonly referred to as "stripped" obligations and coupons; or (ii) any of the following obligations of the following agencies of the United States of America: (a) direct obligations of the Export-Import Bank, (b) certificates of beneficial ownership issued by the Farmers Home Administration, (c) participation certificates issued by the General Services Administration, (d) mortgagebacked bonds or pass-through obligations issued and guaranteed by the Government E-4 National Mortgage Association, (e) project notes issued by the United States Department of Housing and Urban Development, and (f) public housing notes and bonds guaranteed by the United States of America. "Fiscal Agent" means the Fiscal Agent appointed by the Authority and acting as an independent fiscal agent with the duties and powers provided in the Fiscal Agent Agreement, its successors and assigns, and any other corporation or association which may at any time be substituted in its place, as provided in the Fiscal Agent Agreement. "Fiscal Year" means the twelve-month period extending from July 1 in a calendar year to June 30 of the succeeding year, both dates inclusive. "Improvement Fund" means the fund by that name created by and held by the Fiscal Agent Agreement. "Independent Financial Consultant" means any consultant or firm of such consultants appointed by the Authority, the City or the Treasurer, and who, or each of whom: (i) has experience in matters relating to the issuance and/or administration of bonds under the Act; (ii) is in fact independent and not under the domination of the Authority; (iii) does not have any substantial interest, direct or indirect, with or in the Authority, or any owner of real property in the District, or any real property in the District; and (iv) is not connected with the City or the Authority as an officer or employee of the City or the Authority, but who may be regularly retained to make reports to the City or the Authority. "Information Services" means Financial Information, Inc.'s "Daily Called Bond Service", 30 Montgomery Street, 10th Floor, Jersey City, New Jersey 07302, Attention: Editor; Kenny Information Services' "Called Bond Service", 65 Broadway, 16th Floor, New York, New York 10006; Moody's Investors Service "Municipal and Government", 99 Church Street, New York, New York 10007, Attention: Municipal News Reports; Standard & Poor's Corporation "Called Bond Record", 25 Broadway, 3rd Floor, New York, New York 10004; and, in accordance with then current guidelines of the Securities and Exchange Commission, such other addresses and/or such services providing information with respect to called bonds as the Authority may designate in an Officer's Certificate delivered to the Fiscal Agent. "Interest Payment Dates" means March 1 and September 1 of each year, commencing September 1,2006. "Joint Community Facilities Agreement -EMWD" means the Joint Community Facilities Agreement, dated as of January 1, 2005, among the Authority, EMWD and Ashby USA, LLC. "Letter of Credit" means a standby letter of credit, which is: (i) irrevocable during its term; (ii) in a form reasonably satisfactory to the Treasurer and the Original Purchaser; (iii) for the benefit of the Fiscal Agent; (iv) issued by federal or state chartered bank or other financial institution reasonably acceptable to the Treasurer and the Original Purchaser, which bank's or E-5 institution's unsecured debt obligations are rated at least "A-" or better by Moody's or S&P;(v) at the time of delivery thereof to the Fiscal Agent for purposes of the Fiscal Agent Agreement, accompanied by one or more opinions addressed to the Fiscal Agent and the Authority to the effect, singly or together, that the Letter of Credit is a legal, valid and binding obligation of the provider thereof, enforceable against the provider thereof in accordance with its terms, except as limited by applicable reorganization, insolvency, liquidation, readjustment of debt, moratorium or other similar laws affecting the enforcement of rights of creditors generally as such laws may be applied in the event of a reorganization, insolvency, liquidation, readjustment of debt or other similar proceeding of or moratorium applicable to the provider thereof and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law); (vi) for a term of at least one year, effective from no later than the date it is delivered to the Fiscal Agent, and any Letter of Credit provided in substitution for any then outstanding Letter of Credit shall be for a term of at least one year commencing not later than the expiration date of the Letter of Credit for which it is being substituted; (vii) for the account of any entity other than the City, the Authority, the District or any other governmental entity; (viii) in a stated amount equal to two years estimated expected annual Special Taxes to be levied on the County Assessor's parcels to which it pertains assuming Build-Out of such parcels; and (ix) not secured, as to the reimbursement of any draws thereon, by any property located in the District, or if so secured, any such security shall be expressly subordinate to the lien of the Special Taxes. A standby letter of credit may be accompanied by a confirming letter of credit for the purposes of satisfying the requirements in clause (iv) above; and if a confirming letter of credit is provided, the legal opinion referred to in clause (v) above shall be with respect to the confirming letter of credit and not the related Letter of Credit. Any Letter of Credit delivered to the Fiscal Agent shall be accompanied by a written certificate from the provider thereof or the account party thereto which identifies the County Assessor's parcels in the District to which such Letter of Credit initially pertains. "Maximum Annual Debt Service" means the largest Annual Debt Service for any Bond Year after the calculation is made through the final maturity date of any Outstanding Bonds. "Moody's" means Moody's Investors Service, and any successor thereto. "Officer's Certificate" means a written certificate of the Authority signed by an Authorized Officer of the Authority. "Ordinance" means any ordinance of the Authority levying the Special Taxes. "Original Purchaser" means Stone & Youngberg LLC, the first purchaser of the 2006 Bonds from the Authority. E-6 "Outstanding." when used as of any particular time with reference to Bonds, means (subject to the provisions of the Fiscal Agent Agreement) all Bonds except: (i) Bonds theretofore canceled by the Fiscal Agent or surrendered to the Fiscal Agent for cancellation; (ii) Bonds paid or deemed to have been paid within the meaning of the Fiscal Agent Agreement; and (iii) Bonds in lieu of or in substitution for which other Bonds shall have been authorized, executed, issued and delivered by the Authority pursuant to the Fiscal Agent Agreement or any Supplemental Agreement. "Owner" or "Bondowner" means any person who shall be the registered owner of any Outstanding Bond. "Parcel Liens" means, with respect to any parcel or parcels of real property in the District, sum of: (i) the aggregate principal amount of all Bonds then Outstanding allocable to such parcel or parcels based upon the portion of the debt service payable on the Bonds from the Special Taxes levied (or that, but for capitalized interest on the Bonds, could be levied) on such parcel or parcels in the then annual Fiscal Year, plus (ii) the aggregate principal amount of any fixed assessment liens on the parcel or parcels, plus (iii) 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 such parcel or parcels (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 such parcel or parcels, 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. "Parcel Value" means the market value, as of the date of the appraisal described below and/or the date of the most recent County real property tax roll, as applicable, of parcels of real property in the District identified by an Account Party (the "Identified Parcels"), which Identified Parcels are (i) parcels in the District with respect to which the Account Party has provided a Letter of Credit, (ii) are subject to the levy of the Special Taxes, and (iii) are not delinquent in the payment of any Special Taxes then due and owing, including with respect to the Identified Parcels the value of the then existing improvements and any facilities to be constructed or acquired with any amounts then on deposit in the Improvement Fund, all as determined with respect to the Identified Parcels by reference to (A) an appraisal (or an update to a prior appraisal) performed within the six (6) months prior to the date the Treasurer prepares the written direction described in the Fiscal Agent Agreement by an MAI appraiser (the "Appraiser") selected by the Authority, or (B), in the alternative, the assessed value of all the Identified Parcels and improvements thereon as shown on the then current County real property tax roll available to the Treasurer. It is expressly acknowledged that, in determining a Parcel Value, the Authority may rely on an appraisal to determine the value of some or all of the Identified Parcels and/or the most recent County real property tax roll as to the value of some or all of the Identified Parcels. Neither the Authority nor the Treasurer shall be liable to the Owners, the Original Purchaser or any other person or entity in respect of any appraisal provided for purposes of this definition or by reason of any exercise of discretion made by any Appraiser pursuant to this definition. "Parity Bonds" means bonds issued by the Authority for the District on a parity with any then Outstanding Bonds pursuant to the Fiscal Agent Agreement. E-7 "Participating Underwriter" shall have the meaning ascribed thereto in the Continuing Disclosure Agreement. "Permitted Investments" means any of the following, but only to the extent that the same are acquired at Fair Market Value: (a) Federal Securities. (b) Time certificates of deposit or negotiable certificates of deposit issued by a state or nationally chartered bank (including the Fiscal Agent and its affiliates) or trust company, or a state or federal savings and loan association; provided, that the certificates of deposit shall be one or more of the following: continuously and fully insured by the Federal Deposit Insurance Corporation, and/or continuously and fully secured by securities described in subdivision (a) of this definition of Permitted Investments which shall have a market value, as determined on a markedto-market basis calculated at least weekly, and exclusive of accrued interest, of not less than 102 percent of the principal amount of the certificates of deposit. (c) Commercial paper of ""prime" quality of the highest ranking or of the highest letter and numerical rating as provided by either Moody's or S&P, which commercial paper is limited to issuing corporations that are organized and operating within the United States of America and that have total assets in excess of five hundred million dollars ($500,000,000) and that have an "A" or higher rating for the issuer's debentures, other than commercial paper, by either Moody's or S&P, provided that purchases of eligible commercial paper may not exceed 180 days' maturity nor represent more than 10 percent of the outstanding commercial paper of an issuing corporation. (d) A repurchase agreement with a state or nationally charted bank or trust company or a national banking association or government bond dealer reporting to, trading with, and recognized as a primary dealer by the Federal Reserve Bank of New York, provided that all of the following conditions are satisfied: (1) the agreement is secured by any one or more of the securities described in subdivision (a) of this definition of Permitted Investments, (2) the underlying securities are required by the repurchase agreement to be held by a bank, trust company, or primary dealer having a combined capital and surplus of at least one hundred million dollars ($100,000,000) and which is independent of the issuer of the repurchase agreement, and (3) the underlying securities are maintained at a market value, as determined on a marked-to-market basis calculated at least weekly, of not less than 103 percent of the amount so invested. (e) An investment agreement or guaranteed investment contract with, or guaranteed by, a financial institution or an insurance company the long-term unsecured obligations or claims paying ability, as applicable, of which, at the time of the investment, are rated "AA-" (or its equivalent) or better by Moody's and S&P. (f) The Local Agency Investment Account of the State Treasurer of the State of California as permitted by the State Treasurer pursuant to Section 16429.1 of of the California Government Code. (g) Investments in a money market account (including any accounts of the Fiscal Agent or its affiliates) rated in the highest rating category by Moody's or S&P. E-g "Principal Office" means the principal corporate trust office of the Fiscal Agent set forth in the Fiscal Agent Agreement, except for the purpose of maintenance of the registration books and presentation of Bonds for payment, transfer or exchange, such term shall mean the office at which the Fiscal Agent conducts its corporate agency business, or such other or additional offices as may be designated by the Fiscal Agent. "Project" means the facilities eligible to be funded by the District more particularly described in the Resolution of Formation. "Public Works Administration Account" means the account by that name created and held by the Fiscal Agent pursuant to the Fiscal Agent Agreement. "Rate and Method of Apportionment of Special Taxes" means the rate and method of apportionment of special taxes for the District, as approved pursuant to the Resolution of Formation, and as it may be modified in accordance with the Act. "Record Date" 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. "Refunding Bonds" means bonds issued by the Authority for the District the net proceeds of which are used to refund all or a portion of the then Outstanding Bonds; provided that the debt service on the Refunding Bonds in any Bond Year is not in excess of the debt service on the Bonds being refunded and the final maturity of the Refunding Bonds is not later than the final maturity of the Bonds being refunded. "Refunding Fund" means the fund by that name established pursuant to the Fiscal Agent Agreement. "Reserve Fund" means the fund by that name established pursuant to the Fiscal Agent Agreement. "Reserve Requirement" means, as of any date of calculation an amount equal to the least of (i) the then Maximum Annual Debt Service, (ii) one hundred twenty-five percent (125%) of the then average Annual Debt Service, or (iii) ten percent (10%) of the then Outstanding principal amount of the Bonds. "Resolution of Formation" means Resolution No. TPFA 05-01, adopted by the Board of Directors of the Authority on January 11, 2005. "Resolution of Intention" means Resolution No. TPFA 04-08, adopted by the Board of Directors of the Authority on August 24, 2004, as amended by Resolution No. 04-10, adopted by the Board of Directors of the Authority on September 28, 2004. "S&P" means Standard & Poor's Ratings Service, a division of McGraw-Hill, and any successor thereto. "Securities Depositories" means The Depository Trust Company, 55 Water Street, 50th Floor, New York, New York 10041-0099, Attention: Call Notification Department, Fax (212) 855-7232; and, in accordance with then current guidelines of the Securities and Exchange Commission, such other addresses and/or such other securities depositories as the Authority may designate in an Officer's Certificate delivered to the Fiscal Agent. "Special Tax Fund" means the fund by that name established by the Fiscal Agent Agreement. E-9 "Special Tax Prepayments" means the proceeds of any Special Tax prepayments received by the Authority, as calculated pursuant to the Rate and Method of Apportionment of the Special Taxes, less any administrative fees or penalties collected as part of any such prepayment. "Special Tax Prepayments Account" means the account by that name established within the Bond Fund under the Fiscal Agent Agreement. "Special Tax Revenues" means the proceeds of the Special Taxes received by the Authority, including any scheduled payments 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; provided that amounts collected in respect of delinquent Special Taxes shall not be Special Tax Revenues to the extent, and only to the extent, of any proceeds of a draw on a Letter of Credit under the Fiscal Agent Agreement (which amounts shall be repaid to the Letter of Credit provider, as specified in the Fiscal Agent Agreement). "Special Tax Revenues" does not include any penalties collected in connection with delinquent Special Taxes. "Special Taxes" means the special taxes levied within the District pursuant to the Act, the Ordinance and the Fiscal Agent Agreement. "Supplemental Agreement" means an agreement the execution of which is authorized by a resolution which has been duly adopted by the Authority under the Act and which agreement is amendatory of or supplemental to the Fiscal Agent Agreement, but only if and to the extent that such agreement is specifically authorized under the Fiscal Agent Agreement. "Tax Consultant" means David Taussig & Associates, Inc. or another independent financial or tax consultant retained by the Authority or the City for the purpose of computing the Special Taxes. "Treasurer" means the Treasurer of the Authority or such other officer or employee of the Authority performing the functions of the chief financial officer of the Authority. "2006 Bonds" means the Bonds so designated and authorized to be issued under the Fiscal Agent Agreement. Funds and Accounts The Fiscal Agent Agreement provides for the following funds, in addition to the Special Tax Fund, the Bond Fund and the Reserve Fund described in the text of this Official Statement: Improvement Fund. There is established under the Fiscal Agent Agreement as a separate fund to be held by the Fiscal Agent the Improvement Fund, and within the Improvement Fund a City Account, an EMWD Account, an Acquisition Account and a Public Works Administration Account. Deposits shall be made to the accounts within the Improvement Fund as required by the Fiscal Agent Agreement. Moneys in the accounts within the Improvement Fund shall be held in trust by the Fiscal Agent for the benefit of the Authority, and shall be disbursed for the payment or reimbursement of costs of the Project. Amounts in the Improvement Fund, including the accounts therein, are not pledged as security for the Bonds. E-10 Disbursements from the City Account of the Improvement Fund shall be made by the Fiscal Agent upon receipt of an Officer's Certificate which shall: (a) set forth the amount required to be disbursed, the purpose for which the disbursement is to be made (which shall be for payment of a cost of any of the portions of the Project to be constructed by the City, or to reimburse expenditures of the Authority, the City or any other party for any of such Project costs previously paid), that the disbursement is a proper expenditure from the City Account of the Improvement Fund, and the person to which the disbursement is to be paid; and (b) certify that no portion of the amount then being requested to be disbursed was set forth in any Officer's Certificate previously filed requesting a disbursement. Disbursements from the Acquisition Account within the Improvement Fund shall be made by the Fiscal Agent upon receipt of an Officer's Certificate, which shall: (a) set forth the amount required to be disbursed, the purpose for which the disbursement is to be made (which shall be for a Project cost identified in the Acquisition Agreement, or for a cost of the City or the Authority in administering the Acquisition Agreement not able to be funded from amounts in the Public Works Administration Account), that the disbursement is a proper expenditure from the Acquisition Account of the Improvement Fund, and the person to which the disbursement is to be paid; and (b) certify that no portion of the amount then being requested to be disbursed was set forth in any Officer's Certificate previously filed requesting a disbursement. Disbursements from the EMWD Account of the Improvement Fund shall be made by the Fiscal Agent upon receipt of a certificate executed by Ashby USA, LLC and EMWD in the form of Exhibit C to the Joint Community Facilities Agreement -EMWD which shall set forth the amount required to be disbursed. Disbursements from the Public Works Administration Account shall be made by the Fiscal Agent upon receipt of an Officer's Certificate, or a written demand of the Public Works Director of the City, which shall: (i) set forth the amount required to be disbursed and state that the disbursement is for payment of costs of the City to administer the Acquisition Agreement; and (ii) certify that no portion of the amount then being requested was set forth in any Officer's Certificate or written demand previously filed requesting a disbursement. Each such Officer's Certificate or other certificate submitted to the Fiscal Agent as described in the Fiscal Agent Agreement shall be sufficient evidence to the Fiscal Agent of the facts stated therein, and the Fiscal Agent shall have no duty to confirm the accuracy of such facts. Moneys in the accounts within the Improvement Fund will be invested and deposited in accordance with the Fiscal Agent Agreement. Interest earnings and profits from the investment and deposit of amounts in the accounts within the Improvement Fund shall be retained in the respective accounts of the Improvement Fund to be used for the purposes of the respective account. If: (i) the Treasurer determines in the Treasurer's sole discretion that work necessary to construct and complete the Project has been abandoned, or that for any reason (including, but not limited to, termination of, or the occurrence of any event that would permit termination of, the Acquisition Agreement), all or any portion of the amounts then on deposit in the Acquisition Account, the EMWD Account and/or the City Account will not be expended for Project costs, or (ii) Treasurer receives a written certificate of an Independent Financial Consultant to the effect that the Project has been abandoned or all or any portion of the amounts then on deposit in the Acquisition Account, the EMWD Account and the City Account will not be expended for Project costs, the Treasurer shall E-ll file an Officer's Certificate with the Fiscal Agent to that effect and which identifies the amounts then on deposit in the accounts within the Improvement Fund that are not expected to be used for Project costs due to such abandonment or other reason. The Fiscal Agent, upon receipt of such certificate, shall transfer the amounts identified therein from the Acquisition Account, the EMWD Account and the City Account, as applicable, to the Bond Fund to be used (i) to redeem the 2006 Bonds on the next Interest Payment Date for which notice of redemption can timely be given pursuant to the Fiscal Agent Agreement if the amount so transferred is at least $100,000, or (ii) if such amount is less than $100,000, to pay debt service on the Bonds on the next Interest Payment Date. On the earlier of (i) the date of receipt by the Fiscal Agent of an Officer's Certificate to the effect that Ashby, USA, LLC has notified the Authority in writing that no further disbursements will be made from the EMWD Account, or (ii) March March 1, 2016, the Fiscal Agent shall transfer all amounts then on deposit in the EMWD Account to the Acquisition Account to be used for the purposes of such account, or, if the Acquisition Account has theretofore been closed, to the Bond Fund to be used to pay Debt Service on the Bonds on the next Interest Payment Date, and following such transfer the EMWD Account shall be closed.Upon receipt by the Fiscal Agent of an Officer's Certificate to the effect that all improvements to be funded from the City Account have been completed or that no further withdrawals will be made from the City Account, any amounts remaining on deposit in the City Account shall be transferred by the Fiscal Agent to the Acquisition Account, or, if the Acquisition Account has theretofore been closed, to the Bond Fund to be used to pay Debt Service on the Bonds on the next Interest Payment Date, and when no amounts remain on deposit in the City Account the City Account shall be closed. Upon receipt by the Fiscal Agent of an Officer's Certificate stating that the Project has been completed and that all costs of the Project have been paid, or that any such costs are not required to be paid from any of the City Account, the EMWD Account, or the Acquisition Account of the Improvement Fund, the Fiscal Agent shall transfer the amount, if any, remaining in the Public Works Administration Account to the Administrative Expense Fund to be used for purposes of the Administration Expense Fund. Following such transfer, the Public Works Administration Account shall be closed. Upon receipt by the Fiscal Agent of an Officer's Certificate stating that the Project has been completed and that all costs of the Project have been paid, or that any such costs are no longer required to be paid from the Acquisition Account, the Fiscal Agent shall transfer the amount, if any, remaining in the Acquisition Account to the Bond Fund to be used to pay Debt Service on the Bonds on the next Interest Payment Date, and when no amounts remain on deposit in the Acquisition Account the Acquisition Account shall be closed. Costs of Issuance Fund. There is established under the Fiscal Agent Agreement as a separate fund to be held by the Fiscal Agent the Costs of Issuance Fund, to the credit of which a deposit shall be made as required by the Fiscal Agent Agreement. Moneys in the Costs of Issuance Fund shall be held in trust by the Fiscal Agent, shall be disbursed as provided below for the payment or reimbursement of Costs of Issuance, and are not pledged as security for the Bonds. Amounts in the Costs of Issuance Fund shall be disbursed from time to time to pay Costs of Issuance, as set forth in a requisition containing respective amounts to be paid to the designated payees, signed by the Treasurer and delivered to the Fiscal Agent concurrently with the delivery of the Bonds, or otherwise in an Officer's Certificate E-12 delivered to the Fiscal Agent after the Closing Date. The Fiscal Agent shall pay all Costs of Issuance after receipt of an invoice from any such payee which requests payment in an amount which is less than or equal to the amount set forth with respect to such payee pursuant to an Officer's Certificate requesting payment of Costs of Issuance. The Fiscal Agent shall maintain the Costs of Issuance Fund for a period of 90 days from the date of delivery of the Bonds and then shall transfer any moneys remaining therein, including any investment earnings thereon, to the Treasurer for deposit by the Treasurer in the Administrative Expense Fund. Moneys in the Costs of Issuance Fund will be invested and deposited in accordance with the Fiscal Agent Agreement. Interest earnings and profits resulting from said investment shall be retained by the Fiscal Agent in the Costs of Issuance Fund to be used for the purposes of such fund. Reserve Fund. There is established under the Fiscal Agent Agreement as a separate fund to be held by the Fiscal Agent the Reserve Fund, to the credit of which a deposit shall be made as required by the Fiscal Agent Agreement equal to the Reserve Requirement as of the Closing Date for the Bonds, and deposits shall be made as provided in the Fiscal Agent Agreement. Moneys in the Reserve Fund shall be held in trust by the Fiscal Agent for the benefit of the Owners of the Bonds as a reserve for the payment of principal of, and interest and any premium on, the Bonds and shall be subject to a lien in favor of the Owners of the Bonds. Except as otherwise provided in the Fiscal Agent Agreement, all amounts deposited in the Reserve Fund shall be used and withdrawn by the Fiscal Agent solely for the purpose of making transfers to the Bond Fund in the event of any deficiency at any time in the Bond Fund of the amount then required for payment of the principal of, and interest and any premium on, the Bonds or, in accordance with the provisions of the Fiscal Agent Agreement, for the purpose of redeeming Bonds from the Bond Fund. Whenever transfer is made from the Reserve Fund to the Bond Fund due to a deficiency in the Bond Fund, the Fiscal Agent shall provide written notice thereof to the Treasurer, specifying the amount withdrawn. The Treasurer shall then shall provide the notice described in the Fiscal Agent Agreement. Whenever, on the Business Day prior to any Interest Payment Date, or on any other date at the request of the Treasurer, the amount in the Reserve Fund exceeds the Reserve Requirement, the Fiscal Agent shall provide written notice to the Treasurer of the amount of the excess and shall transfer an amount equal to the excess from the Reserve Fund (i) to the Acquisition Account, so long as such account has not theretofore been closed, and (ii) following the closure of the Acquisition Account, to the Bond Fund to be used for the payment of interest on the Bonds on the next Interest Payment Date in accordance with the Fiscal Agent Agreement. Whenever the balance in the Reserve Fund equals or exceeds the amount required to redeem or pay the Outstanding Bonds, including interest accrued to the date of payment or redemption and premium, if any, due upon redemption, the Fiscal Agent shall upon the written direction of the Treasurer transfer the amount in the Reserve Fund to the Bond Fund to be applied, on the next succeeding Interest Payment Date to the payment and redemption, in accordance with the Fiscal Agent Agreement, as applicable, of all of the Outstanding Bonds. In the event that the amount so transferred from the Reserve Fund to the Bond Fund exceeds the amount required to pay and redeem the Outstanding Bonds, the balance in the Reserve Fund shall be transferred to the Authority to be used for any lawful purpose of the Authority. E-13 Notwithstanding the foregoing, no amounts shall be transferred from the Reserve Fund pursuant to the Fiscal Agent Agreement until after (i) the calculation of any amounts due to the federal government pursuant to the Fiscal Agent Agreement following payment of the Bonds and withdrawal of any such amount from the Reserve Fund for purposes of making such payment to the federal government, and (ii) payment of any fees and expenses due to the Fiscal Agent. Whenever Special Taxes are prepaid and Bonds are to be redeemed with the proceeds of such prepayment pursuant to the Fiscal Agent Agreement, a proportionate amount in the Reserve Fund (determined on the basis of the principal of Bonds to be redeemed, and the original principal of the Bonds) shall be transferred on the Business Day prior to the redemption date by the Fiscal Agent to the Bond Fund to be applied to the redemption of the Bonds pursuant to the Fiscal Agent Agreement. The Treasurer shall deliver to the Fiscal Agent an Officer's Certificate specifying any amount to be so transferred, and the Fiscal Agent may rely on any such Officer's Certificate. Amounts in the Reserve Fund may at any time be used, at the written direction of an Authorized Officer, for purposes of paying any rebate liability under the Fiscal Agent Agreement. Moneys in the Reserve Fund shall be invested in accordance with the investment provisions of the Fiscal Agent Agreement. Bond Fund. There is established under the Fiscal Agent Agreement as a separate fund to be held by the Fiscal Agent the Bond Fund, to the credit of which deposits shall be made as required by the Fiscal Agent Agreement, and any other amounts required to be deposited therein by the Act. There is also created in the Bond Fund a separate account held by the Fiscal Agent, the Capitalized Interest Account, to the credit of which deposits shall be made under the Fiscal Agent Agreement. There is also created in the Bond Fund a separate account to be held by the Fiscal Agent consisting of the Special Tax Prepayments Account, to the credit of which deposits shall be made as provided in the Fiscal Agent Agreement. Moneys in the Bond Fund and the accounts therein shall be held in trust by the Fiscal Agent for the benefit of the Owners of the Bonds, shall be disbursed for the payment of the principal of, and interest and any premium on, the Bonds as provided below, and, pending such disbursement, shall be subject to a lien in favor of the Owners of the Bonds. 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 set forth in the Fiscal Agent Agreement, or a redemption of the Bonds required by the Fiscal Agent Agreement, such payments to be made in the priority listed in the second succeeding paragraph. Notwithstanding the foregoing, amounts in the Bond Fund as a result of a transfer pursuant to the Fiscal Agent Agreement shall be used to pay the principal of and interest on the Bonds prior to the use of any other amounts in the Bond Fund for such purpose. In the event that amounts in the Bond Fund are insufficient for the purposes set forth in the preceding paragraph, the Fiscal Agent shall withdraw from the Reserve Fund to the extent of any funds therein amounts to cover the amount of such Bond Fund insufficiency. Amounts so withdrawn from the Reserve Fund shall be deposited in the Bond Fund. E-14 If, after the foregoing transfers, there are insufficient funds in the Bond Fund to make the payments provided for in the Fiscal Agent Agreement, 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 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. 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 notice to the Fiscal Agent can timely be given under the Fiscal Agent Agreement, and shall be used (together with any amounts transferred pursuant to the Fiscal Agent Agreement to redeem Bonds on the redemption date selected in accordance with the Fiscal Agent Agreement. Moneys in the Capitalized Interest Account shall be transferred to the Bond Fund 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. When no amounts remain on deposit in such account, the Capitalized Interest Account shall be closed. Moneys in the Bond Fund, the Capitalized Interest Account and the Special Tax Prepayments Account shall be invested and deposited in accordance with the Fiscal Agent Agreement. Interest earnings and profits resulting from the investment and deposit of amounts in the Bond Fund, the Capitalized Interest Account and the Special Tax Prepayments Account shall be retained in the Bond Fund, the Capitalized Interest Account and the Special Tax Prepayments Account, respectively, to be used for purposes of such fund and accounts. Special Tax Fund. There is established under the Fiscal Agent Agreement as a separate fund to be held by the Fiscal Agent the Special Tax Fund, to the credit of which the Fiscal Agent shall deposit amounts received from or on behalf of the Authority consisting of Special Tax Revenues, and any amounts required by the Fiscal Agent Agreement to be deposited therein. The Authority shall promptly remit any such amounts received by it to the Fiscal Agent for deposit by the Fiscal Agent to the Special Tax Fund. Notwithstanding the foregoing, (i) 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 (ii) any proceeds of Special Tax Prepayments shall be transferred by the Treasurer to the Fiscal Agent for deposit by the Fiscal Agent (as specified in writing by the Treasurer to the Fiscal Agent) directly in the Special Tax Prepayments Account established pursuant to the Fiscal Agent Agreement. Moneys in the Special Tax Fund shall be held in trust by the Fiscal Agent for the benefit of the Authority and the Owners of the Bonds, shall be disbursed as provided below and, pending disbursement, shall be subject to a lien in favor of the Owners of the Bonds and the Authority. 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 pursuant to the Fiscal Agent Agreement, such that the amount in the Bond Fund equals the principal E-15 (including any sinking payment), premium, if any, and interest due on the Bonds on such Interest Payment 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. Moneys in the Special Tax Fund shall be invested and deposited in accordance with the Fiscal Agent Agreement. Interest earnings and profits resulting from such investment and deposit shall be retained in the Special Tax Fund to be used for the purposes thereof. Administrative Expense Fund. There is established under the Fiscal Agent Agreement, as a separate fund to be held by the Treasurer the Administrative Expense Fund to the credit of which deposits shall be made as required by the Fiscal Agent Agreement. Moneys in the Administrative Expense Fund shall be held in trust by the Treasurer for the benefit of the Authority, shall be disbursed as provided below, and are not pledged as security for the Bonds. Amounts in the Administrative Expense Fund will be withdrawn by the Treasurer and paid to the Authority or its order upon receipt by the Treasurer of an Officer's Certificate stating the amount to be withdrawn, that such amount is to be used to pay an Administrative Expense or a Costs of Issuance, and the nature of such Administrative Expense or Costs of Issuance. Amounts transferred from the Costs of Issuance Fund to the Administrative Expense Fund pursuant to the Fiscal Agent Agreement shall be separately identified at all times, and shall be expended for purposes of the Administrative Expense Fund prior to the use of amounts transferred to the Administrative Expense Fund from the Special Tax Fund pursuant to the Fiscal Agent Agreement. Annually, on the last day of each Fiscal Year commencing with the last day of Fiscal Year 2005-2006, the Treasurer shall withdraw any amounts then remaining in the Administrative Expense Fund in excess of $40,000 that have not otherwise been allocated to pay Administrative Expenses incurred but not yet paid, and which are not otherwise encumbered, and transfer such amounts to the Fiscal Agent for deposit by the Fiscal Agent in the Special Tax Fund. Moneys in the Administrative Expense Fund will be invested and deposited in accordance with the Fiscal Agent Agreement. Interest earnings and profits resulting from said investment shall be retained by the Treasurer in the Administrative Expense Fund to be used for the purposes of such fund. Refunding Fund. There is hereby established under the Fiscal Agent Agreement as a separate fund to be held by the Fiscal Agent the Refunding Fund, to the credit of which a deposit shall be made as required by the Fiscal Agent Agreement. Moneys in the Refunding Fund shall be held in trust by the Fiscal Agent for the benefit of the Authority, shall be disbursed as provided in the Fiscal Agent Agreement, and are not pledged as security for the Bonds. On the Closing Date, all amounts on deposit in the Refunding Fund shall be transferred by the Fiscal Agent to U.S. Bank National Association, as agent for the County, to be used to pay in full and discharge the assessment liens on property in the District for the County's Assessment District No. 161. After disbursement of all amounts on deposit in the Refunding Fund, the Refunding Fund shall be closed. E-16 Letter of Credit Provisions The Fiscal Agent shall hold any Letter of Credit delivered to it for the benefit of the Reserve Fund. The Fiscal Agent shall advise the Treasurer in writing promptly following the actual knowledge of the Fiscal Agent that the credit rating of the provider of any Letter of Credit (or, if a confirming letter of credit has been delivered with a Letter of Credit, the credit rating of the provider of the confirming letter of credit) then in effect has been reduced to BBB (or its equivalent) or lower by S&P or Moody's. The Fiscal Agent shall draw upon a Letter of Credit promptly following receipt by the Fiscal Agent of a written direction of the Treasurer instructing the Fiscal Agent to draw on a Letter of Credit, identifying the Letter of Credit and the amount to be so drawn, and to the effect that Special Taxes levied in the District on "parcels to which the Letter of Credit pertains" (as such phrase is discussed in the Fiscal Agent Agreement) are then delinquent in the amount so to be drawn on the Letter of Credit. The amount received pursuant to any draw on a Letter of Credit under the Fiscal Agent Agreement shall not act as a credit in respect of the amount of any Special Taxes that have been levied in the District on the parcels to which it pertains. Upon collection of any delinquent Special Taxes with respect to the property for which a draw on a Letter of Credit has been made, the Authority shall send to the provider of the Letter of Credit (or its written designee) the amount so collected, less any costs or Administrative Expenses incurred in connection with the delinquency or the related draw on the Letter of Credit, with the amount to be sent to the provider not in any event to exceed the amount of the proceeds of the draw on the Letter of Credit received by the Fiscal Agent. The proceeds of any draw on a Letter of Credit described in this paragraph shall be deposited by the Fiscal Agent to the Special Tax Fund. In addition to the foregoing, the Fiscal Agent shall draw upon the the full amount available under a Letter of Credit (x) as soon as practicable following receipt by the Fiscal Agent of actual knowledge that the then rating of the Letter of Credit provider's unsecured debt obligations has been reduced to BBB (or its equivalent) or lower by Moody's or S&P (if a confirming letter of credit has been delivered together with a Letter of Credit, the foregoing rating criteria shall be applied to the ratings of the institution providing the confirming letter of credit), or (y) five days prior to the stated termination date of the Letter of Credit (or any confirming letter of credit provided therewith) if the Letter of Credit (and any related confirming Letter of Credit) is not replaced prior to such expiration date by a letter of credit (which may include a confirming letter of credit) which satisfies the requirements set forth in the definition of "Letter of Credit" in the Fiscal Agent Agreement. The amount received pursuant to any draw on a Letter of Credit under the Fiscal Agent Agreement shall in no way reduce or act as a credit in respect of the amount of any Special Taxes that have been levied in the District. If a confirming letter of credit has been provided with a Letter of Credit, the Fiscal Agent shall draw on the confirming letter of credit as necessary to satisfy the foregoing requirements. The proceeds of any draw on a Letter of Credit described in the preceding paragraph shall be held by the Fiscal Agent in a separate subaccount within the Reserve Fund created by the Fiscal Agent for such purpose, to be (a) drawn upon by the Fiscal Agent and the proceeds of such draw deposited by the Fiscal Agent to the Special Tax Fund, such draw to occur at the written direction of the Treasurer prior to any Interest Payment Date to the effect that the amount specified in such written direction to be drawn is in the amount of any delinquent Special Taxes levied on the "parcels to which the Letter of Credit pertains" (as such phrase is discussed in the Fiscal Agent Agreement), or (b) released or reduced at the written direction of the Treasurer when the Letter of Credit to which such proceeds pertain would otherwise be released or reduced under the Fiscal Agent Agreement (with any amount so reduced or released to be sent by the Fiscal Agent to E-17 the account party with respect to the Letter of Credit upon which the amounts so held were drawn).The Fiscal Agent shall release, or reduce the amount available to be drawn on, a Letter of Credit upon receipt of written direction from the Treasurer to the effect that (I)(x) the then aggregate Parcel Value of the parcels in a planning area of the District identified in such written direction (the "Identified Parcels")/for which Identified Parcels the applicable Letter of Credit was provided, is at least three times the Parcel Liens, and (I)(y) the conditions precedent to the issuance of building permits for all of the Identified Parcels (as such conditions precedent are set forth in the Preannexation and Development Agreement, dated as of December 17, 2002, by and between the City and Ashby USA, LLC, as amended and then in effect (the "Development Agreement")) have been satisfied; or (II) the amount of the Letter of Credit may be reduced to $0.00 under the provisions of the Fiscal Agent Agreement; or (III) the Identified Parcels are subject to less than 10% of the expected annual Special Tax levy in the District (assuming Build-Out). The Treasurer shall review appraisals (or updates to prior appraisals) submitted to the Treasurer by or on behalf of an Account Party that are conducted by an appraiser and in a form acceptable to the Treasurer, to determine if any Letter of Credit is to be released or reduced pursuant to the Fiscal Agent Agreement and, if so, shall so advise the Fiscal Agent in writing. Promptly following receipt of written direction from the Treasurer as to a Letter of Credit, the Fiscal Agent shall complete and deliver to the applicable Letter of Credit provider the appropriate certificates and annexes to the subject Letter of Credit to effectuate the release or reduction of such Letter of Credit. In connection with any such reduction, the amount available to be drawn on the applicable Letter of Credit shall be reduced to an amount equal to two times the expected annual Special Taxes that may be be levied on the "parcels to which the Letter of Credit pertains" (as such phrase is discussed in the Fiscal Agent Agreement) assuming Build-Out of such parcels, other than the Identified Parcels specified in the written direction of the Treasurer described above (however, in any event, the Letter of Credit shall be released if the conditions referenced in clause (III) of the first sentence of the Fiscal Agent Agreement have been satisfied). The Fiscal Agent shall reduce or acknowledge reduction of the amount of any Letter of Credit held by it upon receipt by the Fiscal Agent of: (a) a Letter of Credit which satisfies the requirements set forth in the definition of "Letter of Credit" in the Fiscal Agent Agreement in substitution or replacement for all or a portion of the amount available to be drawn under any Letter of Credit then held by the Fiscal Agent, accompanied by a written statement of the provider of or account party under such new Letter of Credit as to the parcels and the outstanding Letter of Credit to which the new Letter of Credit pertains, and then the amount under the then applicable outstanding Letter of Credit may be reduced by the amount available to be drawn under the new Letter of Credit; or (b) from time to time, but not more than once every six months (commencing no sooner than six months after the Closing Date), an Account Party may present evidence to the Treasurer as to the expected annual Special Taxes that may be levied on parcels in the District to which the Letter of Credit pertains, assuming Build-Out (the "Maximum Amount"). If the Maximum Amount, multiplied by two (herein, the "Revised Stated Amount"), is less than the current stated amount of the applicable Letter of Credit, then the Treasurer shall provide written direction to the Fiscal Agent to reduce the applicable Letter of Credit by the difference between the current stated amount of the Letter of Credit and the Revised Stated Amount of the Letter of Credit. Promptly following receipt of such written direction from the Treasurer, the Fiscal Agent shall complete and deliver to the applicable Letter of Credit provider E-18 the appropriate certificates and annexes to the subject Letter of Credit to effectuate the reduction of the stated amount of such Letter of Credit. 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 (I) 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 (II) 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 (as such term is defined in clause (I)(y) in the preceding paragraph); unless the Account Party provides evidence that the new owner has posted its own Letter of Credit securing the payment of Special Taxes to be levied on such property. The Fiscal Agent shall, on or each January 1, April 1, July 1 and October 1, ascertain, with respect to each Letter of Credit then held by the Fiscal Agent, the then rating of each Letter of Credit provider's (or, if a confirming letter of credit has been provided with a Letter of Credit, that the confirming letter of credit provider's) unsecured debt obligations, in connection with the administration of the Fiscal Agent Agreement. In calculating the Maximum Amount described in the Fiscal Agent Agreement, and for purposes of such clause as used in the Fiscal Agent Agreement, the term "parcels in the District to which the Letter of Credit pertains" shall mean the parcels in the District which were initially identified by the applicable Account Party as being the subject of the respective Letter of Credit less any parcels that are, at the time of calculation, (a) owned by a party unaffiliated with the applicable Account Party, so long as the maximum Special Taxes levied levied on such parcels (assuming Build-Out) is less than 10% of the District-wide Maximum Special Taxes, (b) in a planning area whose Parcel Value is more than three times the Parcel Liens, and are not subject to conditions precedent to the issuance of building permits which conditions apply to all lots to be developed in the planning area in which the parcels are located, as such conditions are set forth in the Development Agreement (as such term is defined in clause (I)(y) in the third preceding paragraph), (c) subject to a separate Letter of Credit, or (d) owned by individual homeowners. Parity Bonds The Authority may issue one or more series of Bonds, in addition to the 2006 Bonds, by means of a Supplemental Agreement and without the consent of any Bondowners, upon compliance with the provisions described below. Any such Bonds that comply with the requirements described below shall be Parity Bonds, and such Parity Bonds shall constitute Bonds under the Fiscal Agent Agreement and shall be secured by a lien on the Special Tax Revenues and funds pledged for the payment of the Bonds under the Fiscal Agent Agreement on a parity with all other Bonds Outstanding under the Fiscal Agent Agreement. The Authority may issue the Parity Bonds subject to the following specific conditions precedent: (A) The Authority shall be in compliance on the date of issuance of the Parity Bonds with all covenants set forth in the Fiscal Agent Agreement and all Supplemental Agreements. (B) The Supplemental Agreement providing for the issuance of such Parity Bonds shall provide that interest thereon shall be payable on March 1 and September 1, and principal thereof shall be payable on September 1 in any year in which E-19 principal is payable (provided that there shall be no requirement that any Parity Bonds pay interest on a current basis). (C) The Supplemental Agreement providing for the issuance of such Parity Bonds may provide for the establishment of separate funds and accounts, and shall provide for a deposit to the Reserve Fund in an amount necessary so that the amount on deposit therein, following the issuance of such Parity Bonds, is equal to the Reserve Requirement. (D) The District Value 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 of Parity 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 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. (E) 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 Parity 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 Parity Bonds, shall not be less than the aggregate maximum Annual Debt Service on the Bonds (to remain Outstanding following the issuance of the Parity Bonds) and the proposed Parity Bonds. (F) 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 Parity Bonds, as determined by the Treasurer upon consultation with the Tax Consultant. In the event that any Letter of Credit has theretofore been drawn upon pursuant to the Fiscal Agent Agreement, there shall be deposited with the Fiscal Agent monies in an amount equal to the otherwise 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. E-20 (G) The Authority shall deliver to the Fiscal Agent an Officer's Certificate certifying that the conditions precedent to the issuance of such Parity Bonds set forth in subsections (A), (B), (C), (D), (E) and, if applicable, (F) above have been satisfied. In delivering such Officer's Certificate, the Authorized Officer that executes the same may conclusively rely upon such certificates of the Fiscal Agent, the Tax Consultant and others selected with due care, without the need for independent inquiry or certification. Notwithstanding the foregoing, the Authority may issue Refunding Bonds as Parity Bonds without the need to satisfy the requirements of clauses (D), (E) and (F) above, and without limitation on the number of series of such Refunding Bonds; and, in connection therewith, the Officer's Certificate in clause (G) above need not make reference to said clauses (D), (E) and (F). Nothing in the Fiscal Agent Agreement prohibits the Authority from issuing bonds or otherwise incurring debt secured by a pledge of Special Tax Revenues subordinate to the pledge thereof under the Fiscal Agent Agreement. Covenants of the Authority The Authority will punctually pay or cause to be paid the principal of, and interest and any premium on, the Bonds when and as due in strict conformity with the terms of the Fiscal Agent Agreement and any Supplemental Agreement, and it will faithfully observe and perform all of the conditions, covenants and requirements of the Fiscal Agent Agreement and all Supplemental Agreements and of the Bonds. The Bonds are limited obligations of the Authority on behalf of the District and are payable solely from and secured solely by the Special Tax Revenues and the amounts in the Bond Fund (including the Special Tax Prepayments Account and the Capitalized Interest Account therein), the Reserve Fund and, until disbursed as provided in the Fiscal Agent Agreement, the Special Tax Fund. In order to prevent any accumulation of claims for interest after maturity, the Authority may not, directly or indirectly, extend or consent to the extension of the time for the payment of any claim for interest on any of the Bonds and may not, directly or indirectly, be a party to the approval of any such arrangement by purchasing or funding said claims for interest or in any other manner. In case any such claim for interest shall be extended or funded, whether or not with the consent of the Authority, such claim for interest so extended or funded shall not be entitled, in case of default under the Fiscal Agent Agreement, to the benefits of the Fiscal Agent Agreement, except subject to the prior payment in full of the principal of all of the Bonds then Outstanding and of all claims for interest which shall not have been so extended or funded. The Authority will not encumber, pledge or place any charge or lien upon any of the Special Tax Revenues or other amounts pledged to the Bonds superior to or on a parity with the pledge and lien herein created for the benefit of the Bonds, except as permitted by the Fiscal Agent Agreement. The Authority will keep, or cause to be kept, proper books of record and accounts, separate from all other records and accounts of the Authority, in which complete and correct entries are made of all transactions relating to the expenditure of amounts disbursed from the Administrative Expense Fund and to the Special Tax Revenues. Such books of record and accounts will at all times during business hours be subject to the inspection of E-21 the Fiscal Agent and the Owners of not less than ten percent (10%) of the principal amount of the Bonds then Outstanding, or their representatives duly authorized in writing. The Fiscal Agent will keep, or cause to be kept, proper books of record and accounts, separate from all other records and accounts of the Fiscal Agent, in which complete and correct entries must be made of all transactions relating to the expenditure of amounts disbursed from the Bond Fund (including Special Tax Prepayments Account and the Capitalized Interest Account therein), the Special Tax Fund, the Reserve Fund, the Refunding Fund, the Improvement Fund (including the accounts therein) and the Costs of Issuance Fund. Such books of record and accounts must at all times during business hours be subject to the inspection of the Authority and the Owners of not less than ten percent (10%) of the principal amount of the Bonds then Outstanding, or their representatives duly authorized in writing upon reasonable prior notice. The Authority Authority will preserve and protect the security of the Bonds and the rights of the Owners, and will warrant and defend their rights against all claims and demands of all persons. From and after the delivery of any of the Bonds by the Authority, the Bonds shall be incontestable by the Authority. The Authority will comply with all applicable provisions of the Act and law in administering the District and completing the acquisition of the Project. The Authority shall comply with all requirements of the Act so as to assure the timely collection of Special Tax Revenues, including without limitation, the enforcement of delinquent Special Taxes. On or within five (5) Business Days of each June 1, the Fiscal Agent is required provide the Treasurer with a notice stating the amount then on deposit in the Bond Fund, the Capitalized Interest Account and the Reserve Fund, and informing the Authority that the Special Taxes may need to be levied pursuant to the Ordinance as necessary to provide for the debt service to become due on the Bonds in the calendar year that commences in the Fiscal Year for which the levy is to be made, and Administrative Expenses and replenishment (if necessary) of the Reserve Fund so that the balances therein equal the Reserve Requirement. The receipt of or failure to receive such notice by the Treasurer shall in no way affect the obligations of the Treasurer under the following two paragraphs. Upon receipt of such notice, the Treasurer shall communicate with the Auditor to ascertain the relevant parcels on which the Special Taxes are to be levied, taking into account any parcel splits during the preceding and then current year. The Treasurer shall effect the levy of the Special Taxes each Fiscal Year in accordance with the Ordinance by each July 15 that the Bonds are outstanding, or otherwise such that the computation of the levy is complete before the final date on which Auditor will accept the transmission of the Special Tax amounts for the parcels within the District for inclusion on the next next real property tax roll. Upon the completion of the computation of the amounts of the levy, the Treasurer shall prepare or cause to be prepared, and shall transmit to the Auditor, such data as the Auditor requires to include the levy of the Special Taxes on the next real property tax roll. The Treasurer shall fix and levy the amount of Special Taxes within the District required for the payment of principal of and interest on any outstanding Bonds of the District becoming due and payable during the ensuing year, including any necessary replenishment or expenditure of the Reserve Fund for the Bonds and an amount estimated to be sufficient to pay the Administrative Expenses (including amounts necessary to discharge any obligation under the Fiscal Agent Agreement) during such year, taking into account the balances in such funds and in the Special Tax Fund. The Special Taxes so E-22 levied shall not exceed the authorized amounts as provided in the proceedings pursuant to the Resolution of Formation. The Special Taxes shall be payable and be collected in the same manner and at the same time and in the same installment as the general taxes on real property are payable, and have the same priority, become delinquent at the same time and in the same proportionate amounts and bear the same proportionate penalties and interest after delinquency as do the ad valorem taxes on real property; provided that, pursuant to and in accordance with the Ordinance, the Special Taxes may be collected by means of direct billing of the property owners within the District, in which event the Special Taxes shall become delinquent if not paid when due pursuant to said billing. Pursuant to Section 53356.1 of the Act, the Authority covenants with and for the benefit of the Owners of the Bonds that it will order, and cause to be commenced as described below, and thereafter diligently prosecute to judgment (unless such delinquency is theretofore brought current), an action in the superior court to foreclose the lien of any Special Tax or installment thereof not paid when due as provided in the following paragraph. The Treasurer shall notify the Authority Attorney of any such delinquency of which it is aware, and the Authority Attorney shall commence, or cause to be commenced, such proceedings. 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 Revenues theretofore received by the Authority. 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 shall 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 shall 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. If the Treasurer determines that (i) the total amount of delinquent Special Tax for the prior Fiscal Year for the entire District, (including the total of delinquencies under subsection (A) 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 within 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 shall commence foreclosure proceedings within 90 days of such determination against each parcel of land in the the District with a Special Tax delinquency. The Authority will adopt, make, execute and deliver any and all such further resolutions, instruments and assurances as may be reasonably necessary or proper to carry out the intention or to facilitate the performance of the Fiscal Agent Agreement, and for the better assuring and confirming unto the Owners of the rights and benefits provided in the Fiscal Agent Agreement. The Authority shall assure that the proceeds of the 2006 Bonds are not so used as to cause the 2006 Bonds to satisfy the private business tests of section 141(b) of the Code or the private loan financing test of section 141 (c) of the Code. E-23 The Authority shall not take any action or permit or suffer any action to be taken if the result of the same would be to cause the 2006 Bonds to be "federally guaranteed" within the meaning of Section 149(b) of the Code. The Authority shall take any and all actions necessary to assure compliance with section 148(f) of the Code, relating to the rebate of excess investment earnings, if any, to the federal government, to the extent that such section is applicable to the 2006 Bonds. If necessary, the Authority may use amounts in the Reserve Fund, amounts on deposit in the Administrative Expense Fund, and any other funds available to the District, including amounts advanced by the Authority or the City, in its respective sole discretion, to be repaid by the District as soon as practicable from amounts described in the preceding clauses, to satisfy its obligations under the Fiscal Agent Agreement. The Treasurer shall take note of any investment of monies under the Fiscal Agent Agreement in excess of the yield on the 2006 Bonds, and shall take such actions as are necessary to ensure compliance with the Fiscal Agent Agreement, such as increasing the portion of the Special Tax levy for Administration Expenses as appropriate to have funds available in the Administrative Expense Fund to satisfy any rebate liability under the Fiscal Agent Agreement. The Authority shall not take, or permit or suffer to be taken by the Fiscal Agent or otherwise, any action with respect to the proceeds of the 2006 Bonds which, if such action had been reasonably expected to have been taken, or had been deliberately and intentionally taken, on the date of issuance of the 2006 Bonds would have caused the 2006 Bonds to be "arbitrage bonds" within the meaning of section 148 of the Code. In determining the yield of the 2006 Bonds to comply with the Fiscal Agent Agreement, the Authority will take into account redemption (including premium, if any) in advance of maturity based on the reasonable expectations of the Authority, as of the Closing Date, regarding prepayments of Special Taxes and use of prepayments for redemption of the Bonds, without regard to whether or not prepayments are received or 2006 Bonds redeemed. The Authority shall take all actions necessary to assure the exclusion of interest on the 2006 Bonds from the gross income of the Owners of the 2006 Bonds to the same extent as such interest is permitted to be excluded from gross income under the Code as in effect on the date of issuance of the 2006 Bonds. The Authority covenants and agrees that it will comply with and carry out all of the provisions of the Continuing Disclosure Agreement. Notwithstanding any other provision of the Fiscal Agent Agreement, failure of the Authority to comply with the Continuing Disclosure Agreement shall not be considered a default under the Fiscal Agent Agreement; however, any Participating Underwriter or any holder or Beneficial Owner (as defined in the Fiscal Agent Agreement) of the Bonds may take such actions as may be necessary and appropriate to compel performance by the Authority of its obligations thereunder, including seeking mandate or specific performance by court order. One or more owners of real property in the District as of the Closing Date have also executed continuing disclosure agreements for the benefit of the holders and beneficial owners of the Bonds. Any Participating Underwriter or holder or beneficial owner may take such actions as may be necessary and appropriate directly against any such landowner to compel performance by it of its obligations thereunder, including seeking mandate or specific performance by court order; however the Authority shall have no obligation whatsoever to enforce any obligations under any such agreement. E-24 The Authority covenants and agrees to not consent or conduct proceedings with respect to a reduction in the maximum Special Taxes that may be levied in the District below an amount, for any Fiscal Year, equal to 110% of the aggregate of the Debt Service due on the Bonds in such Fiscal Year, plus a reasonable estimate of Administrative Expenses for such Fiscal Year. It is hereby acknowledged that Bondowners are purchasing the Bonds in reliance on the foregoing covenant, and that said covenant is necessary to assure the full and timely payment of the Bonds. The Authority covenants not to exercise its rights under the Act to waive delinquency and redemption penalties related to the Special Taxes or to declare Special Tax penalties amnesty program if to do so would materially and adversely affect the interests of the owners of the Bonds and further covenants not to permit the tender of Bonds in payment of any Special Taxes except upon receipt of a certificate of an Independent Financial Consultant that to accept such tender will not result in the Authority having insufficient Special Tax revenues to pay the principal of and interest on the Bonds remaining Outstanding following such tender. Investments Moneys in any fund or account created or established by the Fiscal Agent Agreement and held by the Fiscal Agent is required to be invested by the Fiscal Agent in Permitted Investments, as directed pursuant to an Officer's Certificate filed with the Fiscal Agent at least two (2) Business Days in advance of the making of such investments. In the absence of any such Officer's Certificate, the Fiscal Agent shall invest to the extent reasonably practicable, any such moneys in the Permitted Investments described in clause (g) of the definition thereof in the Fiscal Agent Agreement, which by their terms mature prior to the date on which such moneys are required to be paid out thereunder. The Treasurer shall make note of any investment of funds thereunder in excess of the yield on the Bonds, so that appropriate actions can be taken to assure compliance with the Fiscal Agent Agreement. Moneys in any fund or account created or established by Fiscal Agent Agreement and held by the Treasurer will be invested by the Treasurer in any Permitted Investment, which in any event by their terms mature prior to the date on which such moneys are required to be paid out under the Fiscal Agent Agreement. Obligations purchased as an investment of moneys in any fund shall be deemed to be part of such fund or account, subject, however, to the requirements of the Fiscal Agent Agreement for transfer of interest earnings and profits resulting from investment of amounts in funds and accounts. Whenever in the Fiscal Agent Agreement any moneys are required to be transferred by the Authority to the Fiscal Agent, such transfer may be accomplished by transferring a like amount of Permitted Investments. The Fiscal Agent and its affiliates or the Treasurer may act as sponsor, advisor, depository, principal or agent in the acquisition or disposition of any investment. Neither the Fiscal Agent nor the Treasurer shall incur any liability for losses arising from any investments made pursuant to the Fiscal Agent Agreement. The Fiscal Agent will not be required to determine the legality of any investments. Except as otherwise provided in the next sentence, all investments of amounts deposited in any fund or account created by or pursuant to the Fiscal Agent Agreement, or otherwise containing gross proceeds of the Bonds (within the meaning of Section 148 of the Code) shall be acquired, disposed of, and valued (as of the date that valuation is required by the Fiscal Agent Agreement or the Code) at Fair Market Value. The Fiscal Agent shall have no duty in connection with the determination of Fair Market Value other than to E-25 follow the investment direction of an Authorized Officer in any written direction of any Authorized Officer. Investments in funds or accounts (or portions thereof) that are subject to a yield restriction under the applicable provisions of the Code and (unless valuation is undertaken at least annually) investments in the subaccounts within the Reserve Fund shall be valued at their present value (within the meaning of section 148 of the Code). The Fiscal Agent shall not be liable for verification of the application of such sections of the Code. Investments in any and all funds and accounts may be commingled in a separate fund or funds for purposes of making, holding and disposing of investments, notwithstanding provisions herein for transfer to or holding in or to the credit of particular funds or accounts of amounts received or held by the Fiscal Agent or the Treasurer, provided that the Fiscal Agent or the Treasurer, as applicable, shall at all times account for such investments strictly in accordance with the funds and accounts to which they are credited and otherwise as provided in the Fiscal Agent Agreement. The Fiscal Agent or the Treasurer, as applicable, shall sell at Fair Market Value, or present for redemption, any investment security whenever it shall be necessary to provide moneys to meet any required payment, transfer, withdrawal or disbursement from the fund or account to which such investment security is credited and neither the Fiscal Agent nor the Treasurer shall be liable or responsible for any loss resulting from the acquisition or disposition of such investment security in accordance with the Fiscal Agent Agreement. Liability of Authority The Authority shall not incur any responsibility in respect of the Bonds or the Fiscal Agent Agreement other than in connection with the duties or obligations explicitly therein or in the Bonds assigned to or imposed upon it. The Authority shall not be liable in connection with the performance of its duties under the Fiscal Agent Agreement, except for its own negligence or willful default. The Authority shall not be bound to ascertain or inquire as to the performance or observance of any of the terms, conditions, covenants or agreements of the Fiscal Agent in the Fiscal Agent Agreement or of any of the documents executed by the Fiscal Agent in connection with the Bonds, or as to the existence of a default or event of default thereunder. In the absence of bad faith, the Authority, including the Treasurer, may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Authority and conforming to the requirements of the Fiscal Agent Agreement. The Authority, including the Treasurer, shall not be liable for any error of judgment made in good faith unless it shall be proved that it was negligent in ascertaining the pertinent facts. No provision of the Fiscal Agent Agreement shall require the Authority to expend or risk its own general funds or otherwise incur any financial liability (other than with respect to the Special Tax Revenues) in the performance of any of its obligations under the Fiscal Agent Agreement, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. The Authority and the Treasurer may rely and shall be protected in acting or refraining from acting upon any notice, resolution, request, consent, order, certificate, report, warrant, bond or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or proper parties. The Authority may consult with counsel, who may be the Authority Attorney, with regard to legal questions, and the opinion of such counsel shall be full and complete authorization and protection in respect E-26 of any action taken or suffered by it under the Fiscal Agent Agreement in good faith and in accordance therewith. The Authority shall not be bound to recognize any person as the Owner of a Bond unless and until such Bond is submitted for inspection, if required, and his title thereto satisfactory established, if disputed. Whenever in the administration of its duties under the Fiscal Agent Agreement the Authority or the Treasurer shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action under the Fiscal Agent Agreement, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of willful misconduct on the part of the Authority, be deemed to be conclusively proved and established by a certificate of the Fiscal Agent, an Appraiser, an Independent Financial Consultant or a Tax Consultant, and such certificate shall be full warrant to the Authority and the Treasurer for any action taken or suffered under the provisions of the Fiscal Agent Agreement or any Supplemental Agreement upon the faith thereof, but in its discretion the Authority or the Treasurer may, in lieu thereof, accept other evidence of such matter or may require such additional evidence as to it may seem reasonable. In order to perform its duties and obligations under the Fiscal Agent Agreement, the Authority and/or the Treasurer may employ such persons or entities as it deems necessary or advisable. The Authority shall not be liable for any of the acts or omissions of such persons or entities employed by it in good faith under the Fiscal Agent Agreement, and shall be entitled to rely, and shall be fully protected in doing so, upon the opinions, calculations, determinations and directions of such persons or entities. The Fiscal Agent The Fiscal Agent undertakes to perform such duties, and only such duties, as are specifically set forth in the Fiscal Agent Agreement, and no implied covenants or obligations shall be read into the Fiscal Agent Agreement against the Fiscal Agent. Any company into which the Fiscal Agent may be merged or converted or with which it may be consolidated or any company resulting from any merger, conversion or consolidation to which it shall be a party or any company to which the Fiscal Agent may sell or transfer all or substantially all of its corporate trust business, provided such company shall be eligible under the following paragraph, shall be the successor to such Fiscal Agent without the execution or filing of any paper or any further act, anything therein to the contrary notwithstanding. The Authority may at any time remove the Fiscal Agent initially appointed, and any successor thereto, and may appoint a successor or successors thereto, but any such successor shall be a bank, corporation or trust company having a combined capital (exclusive of borrowed capital) and surplus of at least Fifty Million Dollars ($50,000,000), and be subject to supervision or examination by federal or state authority. If such bank, corporation or trust company publishes a report of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority above referred to, then for the purposes of the Fiscal Agent Agreement, combined capital and surplus of such bank or trust company shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. The Fiscal Agent may at any time resign by giving written notice to the Authority and by giving to the Owners notice by mail of such resignation. Upon receiving notice of E-27 such resignation, the Authority shall promptly appoint a successor Fiscal Agent by an instrument in writing. Any resignation or removal of the Fiscal Agent shall become effective upon acceptance of appointment by the successor Fiscal Agent. If no appointment of a successor Fiscal Agent shall be made within forty-five (45) days after the Fiscal Agent shall have given to the Authority written notice or after a vacancy in the office of the Fiscal Agent shall have occurred by reason of its inability to act, the Fiscal Agent or any Owner may apply to any court of competent jurisdiction to appoint a successor Fiscal Agent. Said court may thereupon, after such notice, if any, as such court may deem proper, appoint a successor Fiscal Agent. If, by reason of the judgment of any court, or reasonable agency, the Fiscal Agent is rendered unable to perform its duties under the Fiscal Agent Agreement, all such duties and all of the rights and powers of the Fiscal Agent thereunder shall be assumed by and vest in the Treasurer of the Authority in trust for the benefit of the Owners. The Authority covenants for the direct benefit of the Owners that its Treasurer in such case shall be vested with all of the rights and powers of the Fiscal Agent under the Fiscal Agent Agreement, and shall assume all of the responsibilities and perform all of the duties of the Fiscal Agent thereunder, in trust for the benefit of the Owners of the Bonds. In such event, the Treasurer may designate a successor Fiscal Agent qualified to act as Fiscal Agent thereunder. The recitals of facts, covenants and agreements in the Fiscal Agent Agreement and in the Bonds contained shall be taken as statements, covenants and agreements of the Authority, and the Fiscal Agent assumes no responsibility for the correctness of the same, or makes any representations as to the validity or sufficiency of the Fiscal Agent Agreement or of the Bonds, or shall incur any responsibility in respect thereof, other than in connection with the duties or obligations in the Fiscal Fiscal Agent Agreement or in the Bonds assigned to or imposed upon it. The Fiscal Agent shall not be liable in connection with the performance of its duties under the Fiscal Agent Agreement, except for its own negligence or willful default. The Fiscal Agent assumes no responsibility or liability for any information, statement or recital in any offering memorandum or other disclosure material prepared or distributed with respect to the issuance of the Bonds. In the absence of bad faith, the Fiscal Agent may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Fiscal Agent and conforming to the requirements of the Fiscal Agent Agreement; but in the case of any such certificates or opinions by which any provision of the Fiscal Agent Agreement are specifically required to be furnished to the Fiscal Agent, the Fiscal Agent shall be under a duty to examine the same to determine whether or not they conform to the requirements of the Fiscal Agent Agreement. Except as provided above in this paragraph, Fiscal Agent shall be protected and shall incur no liability in acting or proceeding, or in not acting or not proceeding, in good faith, reasonably and in accordance with the terms of the Fiscal Agent Agreement, upon any resolution, order, notice, request, consent or waiver, certificate, statement, affidavit, or other paper or document which it shall in good faith reasonably believe to be genuine and to have been adopted or signed by the proper person or to have been prepared and furnished pursuant to any provision of the Fiscal Agent Agreement, and the Fiscal Agent shall not be under any duty to make any investigation or inquiry as to any statements contained or matters referred to in any such instrument. The Fiscal Agent shall not be liable for any error of judgment made in good faith unless it shall be proved that the Fiscal Agent was negligent in ascertaining the pertinent facts. E-28 No provision of the Fiscal Agent Agreement shall require the Fiscal Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers. The Fiscal Agent shall be under no obligation to exercise any of the rights or powers vested in it by the Fiscal Agent Agreement at the request or direction of any of the Owners pursuant to the Fiscal Agent Agreement unless such Owners shall have offered to the Fiscal Agent reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction. The Fiscal Agent may become the owner of the Bonds with the same rights it would have if it were not the Fiscal Agent. The Fiscal Agent shall have no duty or obligation whatsoever to enforce the collection of Special Taxes or other funds to be deposited with it under the Fiscal Agent Agreement, or as to the correctness of any amounts received, and its liability shall be limited to the proper accounting for such funds as it shall actually receive. In order to perform its duties and obligations under the Fiscal Agent Agreement, the Fiscal Agent may employ such persons or entities as it deems necessary or advisable. The Fiscal Agent shall not be liable for any of the acts or omissions of such persons or entities employed by it in good faith hereunder, and shall be entitled to rely, and shall be fully protected in doing so, upon the opinions, calculations, determinations and directions of such persons or entities. The Fiscal Agent may rely and shall be protected in acting or refraining from acting upon any notice, resolution, request, consent, order, certificate, report, warrant, bond or other paper or document believed in good faith by it to be genuine and to have been signed or presented by the proper party or proper parties. The Fiscal Agent may consult with counsel, who may be counsel to the Authority, with regard to legal questions, and the opinion of such counsel shall be full and complete authorization and protection in respect of any action taken or suffered by it under the Fiscal Agent Agreement in good faith and in accordance therewith. The Fiscal Agent shall not be bound to recognize any person as the Owner of a Bond unless and until such Bond is submitted for inspection, if required, and his title thereto satisfactorily established, if disputed. Whenever in the administration of its duties under the Fiscal Agent Agreement the Fiscal Agent shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action under the Fiscal Agent Agreement, such matter (unless other evidence in respect thereof be in the Fiscal Agent Agreement specifically prescribed) may, in the absence of willful misconduct on the part of the Fiscal Agent, be deemed to be conclusively proved and established by an Officer's Certificate, and such certificate shall be full warrant to the Fiscal Agent for any action taken or suffered under the provisions of the Fiscal Agent Agreement or any Supplemental Agreement upon the faith thereof, but in its discretion the Fiscal Agent may, in lieu thereof, accept other evidence of such matter or may require such additional evidence as to it may seem reasonable. Amendment of the Fiscal Agent Agreement The Fiscal Agent Agreement and the rights and obligations of the Authority and of the Owners of the Bonds may be modified or amended at any time by a Supplemental Agreement pursuant to the affirmative vote at a meeting of Owners, or with the written E-29 consent without a meeting, of the Owners of at least sixty percent (60%) in aggregate principal amount of the Bonds then Outstanding, exclusive of Bonds disqualified as provided in the Fiscal Agent Agreement. No such modification or amendment shall (i) extend the maturity of any Bond or reduce the interest rate thereon, or otherwise alter or impair the obligation of the Authority to pay the principal of, and the interest and any premium on, any Bond, without the express consent of the Owner of such Bond, or (ii) permit the creation by the Authority of any pledge or lien upon the Special Taxes superior to or on a parity with the pledge and lien created for the benefit of the Owners of the Bonds (except as otherwise permitted by the Act, the laws of the State of California or the Fiscal Agent Agreement), or (iii) reduce the percentage of Bonds required for the amendment of the Fiscal Agent Agreement. Any such amendment may not modify any of the rights or obligations of the Fiscal Agent without its written consent. The Fiscal Agent Agreement and the rights and obligations of the Authority and of the Owners may also be modified or amended at any time by a Supplemental Agreement, without the consent of any Owners, only to the extent permitted by law and only for any one or more of the following purposes: (A) to add to the covenants and agreements of the Authority in the Fiscal Agent Agreement contained, other covenants and agreements thereafter to be observed, or to limit or surrender any right or power in the Fiscal Agent Agreement reserved to or conferred upon the Authority; (B) to make modifications not adversely affecting any outstanding series of Bonds of the Authority in any material respect; (C) to make such provisions for the purpose of curing any ambiguity, or of curing, correcting or supplementing any defective provision contained in the Fiscal Agent Agreement, or in regard to questions arising under the Fiscal Agent Agreement, as the Authority or the Fiscal Agent may deem necessary or desirable and not inconsistent with the Fiscal Agent Agreement, and which shall not adversely affect the rights of the Owners of the Bonds; (D) to make such additions, deletions or modifications as may be necessary or desirable to assure exemption from gross federal income taxation of interest on the Bonds; and (E) in connection with the issuance of Parity Bonds under and pursuant to the Fiscal Agent Agreement. Discharge of the Fiscal Agent Agreement The Authority shall have the option to pay and discharge the entire indebtedness on all or any portion of the Bonds Outstanding in any one or more of the following ways: (A) by well and truly paying or causing to be paid the principal of, and interest and any premium on, such Bonds Outstanding, as and when the same become due and payable; (B) by depositing with the Fiscal Agent, in trust, at or before maturity, money which, together with the amounts then on deposit in the funds and accounts therein as provided in the Fiscal Agent Agreement is fully sufficient to pay such Bonds Outstanding, including all principal, interest and redemption premiums; or E-30 (C) by irrevocably depositing with the Fiscal Agent, in trust, cash and Federal Securities in such amount as the Authority shall determine as confirmed by Bond Counsel or an independent certified public accountant will, together with the interest to accrue thereon and moneys then on deposit in the funds and accounts therein as provided in the Fiscal Agent Agreement, be fully sufficient to pay and discharge the indebtedness on such Bonds (including all principal, interest and redemption premiums) at or before their respective maturity dates. If the Authority shall have taken any of the actions specified in (A), (B) or (C) above, and if such Bonds are to be redeemed prior to the maturity thereof notice of such redemption shall have been given as in the Fiscal Agent Agreement provided or provision satisfactory to the Fiscal Agent shall have been made for the giving of such notice, then, at the election of the Authority, and notwithstanding that any Bonds shall not have been surrendered for payment, the pledge of the Special Taxes and other funds provided for in the Fiscal Agent Agreement and all other obligations of the Authority under the Fiscal Agent Agreement with respect to such Bonds Outstanding shall cease and terminate. Notice of such election shall be filed with the Fiscal Agent. Notwithstanding the foregoing, the obligation of the Authority to pay or cause to be paid to the Owners of the Bonds not so surrendered and paid all sums due thereon, all amounts owing to the Fiscal Agent pursuant to the Fiscal Agent Agreement, and otherwise to assure that no action is taken or railed to be taken if such action or failure adversely affects the exclusion of interest on the Bonds from gross income for federal income tax purposes, shall continue in any event. Upon compliance by the Authority with the foregoing with respect to all Bonds Outstanding, any funds held by the Fiscal Agent after payment of all fees and expenses of the Fiscal Agent, which are not required for the purposes of the preceding paragraph, shall be paid over to the Authority and any Special Taxes thereafter received by the Authority shall not be remitted to the Fiscal Agent but shall be retained by the Authority to be used for any purpose permitted under the Act. E-31 [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX F FORM OF AUTHORITY CONTINUING DISCLOSURE AGREEMENT This CONTINUING DISCLOSURE AGREEMENT (the "Disclosure Agreement") is executed and entered into as of March 1, 2006, by and between U.S. Bank National Association, a national banking association organized and existing under and by virtue of the laws of the United States of America (the "Bank"), in its capacity as Dissemination Agent (the "Dissemination Agent") and in its capacity as Fiscal Agent (the "Fiscal Agent"), and the Temecula Public Financing Authority, a joint exercise of powers authority organized and existing under and by virtue of the Constitution and of the laws of the State of California (the "Authority"), for and on behalf of the Temecula Public Financing Authority Community Facilities District No. 03-02 (the "District"); WITNESSETH: WHEREAS, pursuant to the 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 the Fiscal Agent, the Authority has issued its 2006 Special Tax Bonds in the aggregate principal amount of $ (the "2006 Bonds"); and WHEREAS, this Disclosure Agreement is being executed and delivered by the Authority and the Fiscal Agent for the benefit of the owners and beneficial owners of the 2006 Bonds and in order to assist the underwriter of the 2006 Bonds in complyingwith Securities and Exchange Commission Rule 15c2-12(b)(5); NOW, THEREFORE, for and in consideration of the mutual premises and covenants herein contained, the parties hereto agree as follows: Section 1. Definitions. Capitalized undefined terms used herein shall have the meanings ascribed thereto in the Fiscal Agent Agreement. In addition, the following capitalized terms shall have the following meanings: "Annual Report" shall mean any Annual Report provided by the Authority pursuant to, and described in, Sections 2 and 3 of this Disclosure Agreement. "Annual Report Date" shall mean the date in each year that is eight months after the end of the Authority's fiscal year, which date, as of the date of this Disclosure Agreement, is March 1. "Disclosure Representative" shall mean the Finance Director of the City of Temecula, as Treasurer of the Authority, or his or her designee, or such other office or employee as the Authority shall designate in writing to the Fiscal Agent from time to time. "Dissemination Agent" shall mean U.S. Bank National Association, acting in its capacity as Dissemination Agent hereunder, or any successor Dissemination Agent designated in writing by the Authority and which has filed with the Fiscal Agent a written acceptance of such designation. "Listed Events" shall mean any of the events listed in Section 4(a) of this Disclosure Agreement. F-l "National Repository" shall mean any Nationally Recognized Municipal Securities Information Repository for purposes of the Rule. Information on the National Repositories as of a particular date is available on the Internet atwww.sec.gov/info/municipal/nrmsir.htm. "Official Statement" shall mean the Official Statement, dated April , 2006, relating to the 2006 Bonds. "Participating Underwriter" shall mean Stone & Youngberg LLC. "Repository" shall mean each National Repository and each State Repository. "Rule" shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time. "State Repository" shall mean any public or private repository or entity designated by the State of California as a state repository for the purpose of the Rule and recognized as such by the Securities and Exchange Commission. As of the date of this Disclosure Agreement, there is no State Repository. Section 2. Provision of Annual Reports. (a) The Authority shall, or, upon furnishing the Annual Report to the Dissemination Agent, shall cause the Dissemination Agent to, provide to each Repository, to the Fiscal Agent and to the Participating Underwriter an Annual Report which is consistent with the requirements of Section 3 of the Disclosure Agreement, not later than the Annual Report Date, commencing with the report for the 2005-06 fiscal year. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may include by reference other information as provided in Section 3 of this Disclosure Ag[eement;provided, however, that the audited financial statements of the Authority, if any, may be submitted separately from the balance of the Annual Report, and later than the date required above for the filing of the Annual Report if not available by that date. If the Authority's fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 4(f). The Annual Report may be provided in electronic format to each Repository and the Participating Underwriter, and may be provided through the services of a "central post office" approvedby the Securities and Exchange Commission. For example, any filings under this Continuing Disclosure Agreement may be made solely by transmitting such filing to the Texas Municipal Advisory Council (the "MAC") as provided at http:www.disclosureusa.org unless the United States Securities and Exchange Commission has withdrawn the interpretive advice in its letter to the MAC dated September 7, 2004. (b) Not later than fifteen (15) Business Days prior to the date specified in subsection (a) for providing the Annual Report to Repositories, the Authority shall provide the Annual Report (in a form suitable for reporting to the Repositories) to the Dissemination Agent, the Fiscal Agent (if the Fiscal Agent is not the Dissemination Agent) and the Participating Underwriter. If by such date, the Fiscal Agent has not received a copy of the Annual Report, the Fiscal Agent shall contact the Disclosure Representative and the Dissemination Agent to inquire if the Authority is in compliance with the first sentence of this subsection (b). The Authority shall provide a written certification with each Annual Report furnished to the Dissemination Agent to the effect that such Annual Report constitutes the Annual Report F-2 required to be furnished by it hereunder. The Dissemination Agent may conclusively rely upon such certification of the Authority and shall have no duty or obligation to review such Annual Report. (c) If the Fiscal Agent is unable to verify that an Annual Report has been provided to Repositories by the date required in subsection (a), the Fiscal Agent shall send a notice to the Repositories and the appropriate State Repository, if any, in substantially the form attached as Exhibit A. (d) The Dissemination Agent shall: (i) determine each year prior to the date for providing the Annual Report the name and address of each National Repository and each State Repository, if any; and (ii) file a report with the Authority, the Participating Underwriter and (if the Dissemination Agent is not the Fiscal Agent) the Fiscal Agent certifying that the Annual Report has been provided pursuant to this Disclosure Agreement, stating the date it was provided and listing all the Repositories to which it was provided. Section 3. Content of Annual Reports. The Authority's Annual Report shall contain or incorporate by reference the following: (a) The Authority's audited financial statements, if any,prepared in accordance with generally accepted accounting principles as promulgated to apply to government entities from time to time by the Governmental Accounting Standards Board. If the Authority's audited financial statements, if any, are not available by the time the Annual Report is required to be filed pursuant to Section 2(a), the Annual Report shall contain unaudited financial statements in a format similar to that used for the Authority's audited financial statements, and the audited financial statements, if any, shall be filed in the same manner as the Annual Report when they become available. If the Authority's audited financial statements, if any, or unaudited financial statements are already filed, the Annual Report may reference that such financial statements are on file with the Repositories. (b) The following information: (i) The principal amount of 2006 Bonds and parity bonds, if any, outstanding as of September 30 next preceding the date of the Annual Report Date; (ii) The balance in the Reserve Fund, if any, and a statement of the Reserve Requirement as of the September 30 next preceding the Annual Report Date and the balance in the other funds and accounts held under the Fiscal Agent Agreement; (iii) Information regarding the amount of the annual special taxes levied in the District by the Rate and Method of Apportionment of Special Tax land use categories, the names of the owners of property responsible for more than 5% of the Special Tax levy and the amount of Special Tax owed, as shown on such assessment roll of the Riverside County Assessor last equalized prior to the September 30 next preceding the Annual Report Date; F-3 (iv) The total assessed value of all parcels within the District on which the Special Taxes are levied, as shown on the assessment roll of the Riverside County Assessor last equalized prior to the September 30 next preceding the Annual Report Date, and a statement of assessed value for the property in the District by Rate and Method of Apportionment of Special Tax land use categories; (v) The Special Tax delinquency rate for all parcels within the District on which the Special Taxes are levied, as shown on the assessment roll of the Riverside County Assessor last equalized prior to the September 30 next preceding the Annual Report Date, the number of parcels within the District on which the Special Taxes are levied and which are delinquent inpayment of Special Taxes based on parcels, as shown on the assessment roll on the Riverside County Assessor last equalized prior to the September 30 next preceding the Annual Report Date, the amount of each delinquency, the length of time delinquent and the date on which foreclosure was commenced, or similar information pertaining to delinquencies deemed appropriate by the District; provided, however, that parcels with aggregate delinquencies of $5,000 or less (excluding penalties andinterest) maybe grouped together and such information may be provided by category. (vi) The status of foreclosure proceedings for any parcels within the District on which the Special Taxes are levied and a summary of the results of any foreclosure sales as of the September 30 next preceding the Annual Report Date; (vii) The identity of any property owner representing more than five percent (5%) of the annual Special Tax levy who is delinquent inpayment of such Special Taxes, as shown on such assessment roll of the Riverside County Assessor last equalized prior to the September 30 next preceding the Annual Report Date; (viii) A summary of (a) zoning changes, if any, approved by the City of Temecula (the "City") for property subject to the Special Tax in the District and (b) building permits issued by the City for property subject to the Special Tax in the District; and (ix) If the Authority or the City establishes a community facilities district overlapping all or a portion of the District, the principal amount of bonds authorized for such community facilities district, the percentage of such bonds supported by special taxes on property within the District, and the amount of bonds issued by such community facilities district. (c) In addition to any of the information expressly required to be provided under paragraphs (a) and(b) of this Section, the Authority shall provide such further information, if any, as maybe necessary to make the required statements, in the light of the circumstances under which they are made, not misleading. F-4 Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the Authority or related public entities, which have been submitted to each of the Repositories or the Securities and Exchange Commission. If the document included by reference is a final official statement, it must be available from the Municipal Securities Rulemaking Board. The District shall clearly identify each such other document so included by reference. A form of information cover sheet for municipal secondary market disclosure recommended by the Municipal Securities Rulemaking Board is attached as Exhibit B. Section 4. Reporting of Significant Events. (a) Pursuant to the provisions of this Section 4, the Authority shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the 2006 Bonds, if material: (i) Principal and interest payment delinquencies; (ii) Non-payment related defaults; (iii) Unscheduled draws on debt service reserves reflecting financial difficulties; (iv) Unscheduled draws on credit enhancements reflecting financial difficulties; (v) Substitution of credit or liquidity providers, or their failure to perform; (vi) Adverse tax opinions or events affecting the tax-exempt status of the security; (vii) Modifications to rights of security holders; (viii) Contingent or unscheduled bond calls; (ix) Defeasances; (x) Release, substitution, or sale of property securing repayment of the securities; (xi) Rating changes; and (xii) Receipt by the Authority of notice that a credit on liquidity facility will not be renewed, replaced or extended. (b) The Fiscal Agent shall, within five (5) business days of obtaining actual knowledge of the occurrence of any of the Listed Events, contact the Disclosure Representative, inform such person of the event, and request that the Authority promptly notify the Dissemination Agent in writing whether or not to report the event pursuant to subsection (f), provided, however, that the Dissemination Agent shall have F-5 no liability to Bond Owners for any failure to provide such notice. For purposes of this Disclosure Agreement, "actual knowledge" of the occurrence of the Listed Events described under clauses (ii), (iii), (vi), (x) and (xi) above shall mean actual knowledge by an officer at the corporate trust office of the Fiscal Agent. The Fiscal Agent shall have no responsibility for determining the materiality of any of the Listed Events. (c) Whenever the Authority obtains knowledge of the occurrence of a Listed Event, whether because of a notice from the Fiscal Agent pursuant to subsection (b) or otherwise, the Authority shall as soon as possible determine if such event would be material under applicable federal securities law. (d) If the Authority determines that knowledge of the occurrence of a Listed Event would be material under applicable federal securities law, the Authority shall promptly notify the Dissemination Agent in writing. Such notice shall instruct the Dissemination Agent to report the occurrence pursuant to subsection (f). The Authority shall provide the Dissemination Agent with a form of notice of such event in a format suitable for reporting to the Municipal Securities Rulemaking Board and each State Repository, if any. (e) If in response to a request under subsection (b), the Authority determines that the Listed Event would not be material under applicable federal securities law, the Authority shall so notify the Dissemination Agent in writing and instruct the Dissemination Agent not to report the occurrence pursuant to subsection (f).(f) If the Dissemination Agent has been instructed by the Authority to report the occurrence of a Listed Event, the Dissemination Agent shall file a notice of such occurrence with each Repository or the Municipal Securities Rulemaking Board and each State Repository and shall provide a copy of such notice to the Participating Underwriter. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(viii) and (ix) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to owners of affected 2006 Bonds pursuant to the Fiscal Agent Agreement. Section 5. Termination of Reporting Obligation. All of the Authority's obligations under this Disclosure Agreement shall terminate upon the earliest to occur of (i) the legal defeasance of the 2006 Bonds, (ii) prior redemption of the 2006 Bonds or (iii) payment in full of all the 2006 Bonds. If such determination occurs prior to the final maturity of the 2006 Bonds, the Authority shall give notice of such termination in the same manner as for a Listed Event under Section 4(f). Section 6. Dissemination Agent. The Authority may, from time to time, appoint or engage a Dissemination Agent to assist in carrying out its obligations under this Disclosure Agreement, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. The initial Dissemination Agent shall be U.S. Bank National Association. The Dissemination Agent may may resign by providing forty-five (45) days' written notice to the Authority and the Fiscal Agent (if the Fiscal Agent is not the Dissemination Agent). The Dissemination Agent shall have no duty to prepare the Annual Report nor shall the Dissemination Agent be responsible for filing any Annual Report not provided to it by the Authority in a timely manner and in a form suitable for filing. If at any time there is not any other designated Dissemination Agent, the Fiscal Agent shall be the Dissemination Agent. Section 7. Amendment: Waiver. Notwithstanding any other provision of this Disclosure Agreement, the Authority, the Fiscal Agent and the Dissemination Agent may amend this Disclosure Agreement (and the Fiscal Agent and the Dissemination Agent shall agree to any amendment so requested by the Authority, so long as such amendment does not adversely affect the rights or obligations of the Fiscal F-6 Agent or the Dissemination Agent), and any provision of this Disclosure Agreement may be waived, provided that the following conditions are satisfied: (a) if the amendment or waiver relates to the provisions of Sections 2(a), 3 or 4(a), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature, or status of an obligated person with respect to the 2006 Bonds, or type of business conducted; (b) the undertakings herein, as proposed to be amended or waived, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the primary offering of the 2006 Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and (c) the proposed amendment or waiver either (i) is approved by owners of a maj ority of the owners of the 2006 Bonds affected thereby in the manner provided in the Fiscal Agent Agreement for amendments to the Fiscal Agent Agreement with the consent of owners, or (ii) does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the owners or beneficial owners of the 2006 Bonds. If the annual financial information or operating data to be provided in the Annual Report is amended pursuant to the provisions hereof, the first annual financial information containing the amended operating data or financial information shall explain, in narrative form, the reasons for the amendment and the impact of the change in the type of operating data or financial information being provided. If an amendment is made to the undertaking specifying the accounting principles to be followed in preparing financial statements, the annual financial information for the year in which the change is made shall present a comparison between the financial statements or information prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. The comparison shall include a qualitative discussion of the differences in the accounting principles and the impact of the change in the accounting principles on the presentation of the financial information in order to provide information to investors to enable them to evaluate the ability of the Authority to meet its obligations, including its obligation to pay debt service on the 2006 Bonds. To the extent reasonably feasible, the comparison shall be quantitative. A notice of the change in the accounting principles shall be sent to the Repositories in the same manner as for a Listed Event under Section 4(f). Section 8. Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent the Authority from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that that which is required by this Disclosure Agreement. If the Authority chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Agreement, the Authority shall have no obligation under this Disclosure Agreement to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event. Section 9. Default. In the event of a failure of the Authority, the Dissemination Agent or the Fiscal Agent to comply with any provision of this Disclosure Agreement, the Fiscal Agent may (and, at the written direction of any Participating Underwriter or the owners of at least 25% aggregate principal amount of Outstanding Bonds, shall, upon receipt of indemnification reasonably satisfactory to the Fiscal Agent), or F-7 any owner or beneficial owner of the 2006 Bonds may, take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the Authority, the Dissemination Agent or the Fiscal Agent, as the case may be, to comply with its obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed an Event of Default under the Fiscal Agent Agreement, and the sole remedy under this Disclosure Agreement in the event of any failure of the Authority, the Dissemination Agent or the Fiscal Agent to comply with this Disclosure Agreement shall be an action to compel performance. Section 10. Duties. Immunities and Liabilities of Fiscal Agent and Dissemination Agent. Section 7.01 and Section 7.02 of the Fiscal Agent Agreement are hereby made applicable to this Disclosure Agreement as if this Disclosure Agreement were (solely for this purpose) contained in the Fiscal Agent Agreement, and the Fiscal Agent and the Dissemination Agent shall be entitled to the protections, limitations from liability and indemnities afforded to the Fiscal Agent thereunder. The Dissemination Agent and the Fiscal Agent shall have only such duties hereunder as are specifically set forth in this Disclosure Agreement. This Disclosure Agreement does not apply to any other securities issued or to be issued by the Authority. The Dissemination Agent shall have no obligation to make any disclosure concerning the 2006 Bonds, the Authority or any other matter except as expressly set out herein, provided that no provision of this Disclosure Agreement shall limit the duties or obligations of the Fiscal Agent under the Fiscal Agent Agreement. The Dissemination Agent shall have no responsibility for the preparation, review, form or content of any Annual Report or any notice of a Listed Event. The fact that the Fiscal Agent has or may have any banking, fiduciary or other relationship with the District or any other party, apart from the relationship created by the Fiscal Agent Agreement and this Disclosure Agreement, shall not be construed to mean that the Fiscal Agent has knowledge or notice of any event or condition relating to the 2006 Bonds or the District except in its respective capacities under such agreements. No provision of this Disclosure Agreement shall require or be construed to require the Dissemination Agent to interpret or provide an opinion concerning any information disclosed hereunder. Information disclosed hereunder by the Dissemination Agent may contain such disclaimer language concerning the Dissemination Agent's responsibilities hereunder with respect thereto as the Dissemination Agent may deem appropriate. The Dissemination Agent may conclusively rely on the determination of the District as to the materiality of any event for purposes of Section 4 hereof. Neither the Fiscal Agent nor the Dissemination Agent make any representation as to the sufficiency of this Disclosure Agreement for purposes of the Rule. The Dissemination Agent shall be paid compensation by the District for its services provided hereunder in accordance with its schedule of fees, as amended from time to time, and all expenses, legal fees and advances made or incurred by the Dissemination in the performance of its duties hereunder. The District's obligations under this Section 10 shall survive the termination of this Disclosure Agreement. Section 11. Beneficiaries. The Participating Underwriter and the owners and beneficial owners from time to time of the 2006 Bonds shall be third party beneficiaries under this Disclosure Agreement. This Disclosure Agreement shall inure solely to the benefit of the District, the Fiscal Agent, the Dissemination Agent, the Participating Underwriter and owners and beneficial owners from time to time of the 2006 Bonds, and shall create no rights in any other person or entity. Section 12. Notices. Any notice or communications herein required or permitted to be given to the Authority, the Fiscal Agent or the Dissemination Agent shall be in writing and shall be be deemed to have been sufficiently given or served for all purposes by being delivered or sent by telecopy or by being deposited, F-8 postage prepaid, in a post office letter box, to the addresses set forth below, or to such other address as may be provided to the other parties hereinafter listed in writing from time to time, namely: If to the Authority: If to the Community Facilities District: If to the Dissemination Agent: If to the Fiscal Agent: If to the Participating Underwriter: Temecula Public Financing Authority 43200 Business Park Drive Temecula, California 92590 Attention: Director of Finance Telephone: 951/694-6430 Telecopier: 951/694-6479 Community Facilities District No. 03-02 (Roripaugh Ranch) 43200 Business Park Drive Temecula, California 92590 Attention: Director of Finance Telephone: 951/694-6430 Telecopier: 951/694-6479 U.S. Bank National Association 633 West Fifth Street, 24th Floor LM-CA-T24T Los Angeles, California 90071 Telephone: 213/615-6030 Telecopier: 213/615-6199 U.S. Bank National Association 633 West Fifth Street, 24th Floor LM-CA-T24T Los Angeles, California 90071 Telephone: 213/615-6030 Telecopier: 213/615-6199 Stone & Youngberg LLC One Ferry Building San Francisco, California 94111 Telephone: 415/445-2300 Attention: Municipal Research Department Section 13. Future Determination of Obligated Persons, hi the event the Securities Exchange Commission amends, clarifies or supplements the Rule in such a manner that requires any landowner within the Authority to be an obligated person as defined in the Rule, nothing contained herein shall be construed to require the Authority to meet the continuing disclosure requirements of the Rule with respect to such obligated person and nothing in this Disclosure Agreement shall be deemed to obligate the Authority to disclose information concerning any owner of land within the Authority except as required as part of the information required to be disclosed by the Authority pursuant to Section 4 and Section 5 hereof. F-9 Section 14. Severability. In case any one or more of the provisions contained herein shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof. Section 15. State of California Law Governs. The validity, interpretation and performance of this Purchase Agreement shall be governed by the laws of the State of California. Section 16. Counterparts. This Disclosure Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. Section 17. Merger. Any person succeeding to all or substantially all of the Dissemination Agent's corporate trust business shall be the successor Dissemination Agent without the filing of any paper or any further act. F-10 IN WITNESS WHEREOF, the parties hereto have executed this Disclosure Agreement as of the date first above written. TEMECULA PUBLIC FINANCING AUTHORITY, FOR AND ON BEHALF OF TEMECULA PUBLIC FINANCING AUTHORITY COMMUNITY FACILITIES DISTRICT NO. 03-02 (RORIPAUGH RANCH) By: Authorized Officer U.S. BANK NATIONAL ASSOCIATION, as Fiscal Agent By: Authorized Officer U.S. BANK NATIONAL ASSOCIATION, as Dissemination Agent By: Authorized Officer F-ll EXHIBIT A NOTICE TO MUNICIPAL SECURITIES RULEMAKING BOARD OF FAILURE TO FILE ANNUAL REPORT Name of Issuer: Temecula Public Financing Authority, for and on behalf of Temecula Public FinancingAuthority Community Facilities District No. 03-02 (Roripaugh Ranch) Name of Bond Issue: Temecula Public Financing Authority Community Facilities District No. 03-02 (Roripaugh Ranch) 2006 Special Tax Bonds Date of Issuance: April , 2006 NOTICE IS HEREBY GIVEN that the Temecula Public Financing Authority (the "Authority") has not provided an Annual Report with respect to the above-named 2006 Bonds as required by the Continuing Disclosure Agreement, dated as of March 1, 2006, by and between U.S. Bank National Association, in its capacity as Fiscal Agent, and in its capacity as Dissemination Agent, and the Authority. [The Authority anticipates that the Annual Report will be filed by .] Dated: , U.S. BANK NATIONAL ASSOCIATION, as Fiscal Agent, on behalf of the Temecula Public Financing Authority Authorized Officer cc: Temecula Public Financing Authority Stone & Youngberg LLC F-12 EXHIBIT B Municipal Secondary Market Disclosure Information Cover Sheet This cover sheet should be sent with all submissions made to the Municipal Securities Rulemaking Board, Nationally Recognized Municipal Securities Information Repositories, and any applicable State Information Depository, whether the filing is voluntary or made pursuant to Securities and Exchange Commission Rule 15c2-12 or any analogous state statute. See www.sec.gov/info/municipal/nrmsir.htm for list of current NRMSIRs and SIDs IF THIS FILING RELATES TO A SINGLE BOND ISSUE: Provide name of bond issue exactly as it appears on the cover of the Official Statement (please include name of state where Issuer is located): [INSERT ISSUE NAME, INCLUDING $ AMOUNT] Provide nine-digit CUSIP* numbers* if available, to which the information relates: [INSERT CUSIP® NUMBERS] IF THIS FILING RELATES TO ALL SECURITIES ISSUED BY THE ISSUER OR ALL SECURITIES OF A SPECIFIC CREDIT OR ISSUED UNDER A SINGLE INDENTURE: Issuer's Name (please include name of state where Issuer is located): Other Obligated Person's Name (if any): (Exactly as it appears on the Official Statement Cover) Provide six-digit CUSIP* number(s)*, if available, of Issuer: *(Contact CUSIP® 's Municipal Disclosure Assistance Line at 212.438.6518 for assistance with obtaining the proper CUSIP* numbers.) TYPE OF FILING: D Electronic (number of pages attached) D Paper (number of pages attached) If information is also available on the Internet, give URL: F-13 WHAT TYPE OF INFORMATION ARE YOU PROVIDING? (Check all that apply) A. D Annual Financial Information and Operating Data pursuant to Rule 15c2-12 (Financial information and operating data should not be filed with the MSRB.) Fiscal Period Covered: B. D Audited Financial Statements or CAFR pursuant to Rule 15c2-12 Fiscal Period Covered: C. D Notice of a Material Event pursuant to Rule 15c2-12 (Check as appropriate) D Principal and interest payment delinquencies 2. D Non-payment related defaults 3. D Unscheduled draws on debt service reserves reflecting financial difficulties 4. Q Unscheduled draws on credit enhancements reflecting financial difficulties 5. D Substitution of credit or liquidity providers, or their failure to perform D Adverse tax opinions or events affecting the taxexempt status of the security D Modifications to the rights of security holders D Bond calls D Defeasances D Release, substitution, or sale of property securing repayment of the securities 11. D Rating changes D. D Notice of Failure to Provide Annual Financial Information as Required E. D Other Secondary Market Information (Specify): I hereby represent that I am authorized by Issuer Contact: Name the Issuer or obligor or its agent to distribute this information publicly: Title Employer Address Telephone Email Address Dissemination Agent Contact, if any: Name City State Zip Code Fax Issuer Web Site Address Title Employer Address Telephone Email Address Obligor Contact, if any: Name City State Zip Code Fax Relationship to Issuer Title Employer Address Telephone Email Address Investor Relations Contact, if any: Name Telephone City State Zip Code Fax Obligor Web site Address Title Email Address F-14 APPENDIX G FORM OF DEVELOPER CONTINUING DISCLOSURE AGREEMENT A separate Developer Continuing DisclosureAgreement willbe providedby (i) Ashby USA, LLCand (ii) Tanamera/Roripaugh, LLC; Tanamera/Roripaugh II, LLC and Traditions at Roripaugh, LLC. Continental Residential, Inc., Davidson Roripaugh Ranch 122, LLC and KB Home Coastal, Inc. are not considered a Major Developer (as defined below) and will not be subject to a Continuing Disclosure Agreement. This DEVELOPER CONTINUING DISCLOSURE AGREEMENT (this "Disclosure Agreement") is executed and entered into as of March 1,2006, by and betweenU.S. Bank National Association, anational banking association organized and existing under and by virtue of the laws of the United States of America, as Dissemination Agent (the "Dissemination Agent") and as Fiscal Agent (the "Fiscal Agent"), and [Ashby USA, LLC, a California limited liability company ("Ashby USA, LLC")]/[Tanamera/Roripaugh, LLC, Tanamera/Roripaugh II, LLC and Traditions at Roripaugh, LLC, each a California limited liability company ("Tanamera/Roripaugh, LLC," "Tanamera/Roripaugh II, LLC" and "Traditions at Roripaugh, LLC," respectively, and together, the "Tanamera/Roripaugh Entities"). The parties hereto may be referred to in some instances as a party ("Party"); WITNESSETH: WHEREAS, pursuant to the Fiscal Agent Agreement, dated as of March 1,2006 (the "Fiscal Agent Agreement"), by and between the Temecula Public Financing Authority (the "Authority"), for and on behalf of the Temecula Public Financing Authority Community Facilities District No. 03-02 (Roripaugh Ranch) (the "District"), and the Fiscal Agent, the Authority has issued its 2006 Special Tax Bonds, in the aggregate principal amount of $ (the "2006 Bonds"); WHEREAS, [Ashby USA, LLC]/[Tanamera/Roripaugh Entities] is the owner of property within the District planned for development with residential, commercial, park, open space and infrastructure uses; and WHEREAS, this Disclosure Agreement is being executed and delivered by [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] and the Fiscal Agent for the benefit of the owners and beneficial owners of the 2006 Bonds and in order to assist the underwriter of the 2006 Bonds in complying with Securities and Exchange Commission Rule 15c2-12(b)(5); NOW, THEREFORE, for and in consideration of the mutual premises and covenants herein contained, the parties hereto agree as follows: Section 1. Definitions. Capitalized undefined terms used herein shall have the meanings ascribed thereto in the Fiscal Agent Agreement. In addition, the following capitalized terms shall have the following meanings: "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, controlled, 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 influence over 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. "Assumption Agreement" means an agreement between a Major Developer, or an Affiliate thereof, the Fiscal Agent and the Dissemination Agent containing terms substantially similar to this Disclosure G-l Agreement, whereby such Major Developer or Affiliate agrees to provide Semi-Annual Reports and notices of significant events with respect to the portion of the Property owned by such Major Developer and its Affiliates. "Bond Counsel" means an attorney or a firm of attorneys whose experience in matters relatingto the issuance of obligations by the states and their political subdivisions and the tax-exempt status of the interest thereon is recognized nationally. 'Development Plan" means, with respect to a Major Developer, the specific improvements such Major Developer intends to make, or cause to be made, to such Major Developer's Propertyin order for such Property to enable production units or commercial property within the Property to be completed and sold to third parties, the time frame in which such improvements are intended to be made and the estimated costs of such improvements; [Ashby USA, LLC's]/[Tanamera/Roripaugh Entities'] Development Plan, as of the date hereof, is described in the Official Statement under the caption "PROPERTY OWNERSHIP AND DEVELOPMENT -[Ashby USA, LLC]/[The Tanamera/Roripaugh Entities]." "Dissemination Agent" means the Fiscal Agent, acting in its capacity as Dissemination Agent hereunder, or any successor Dissemination Agent designated in writing by [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] and which has filed with the Fiscal Agent a written acceptance of such designation. "Event of Bankruptcy" means, with respect to aPerson, that such Person files a petition or institutes a proceeding under any act or acts, state or federal, dealing with or relating to the subject or subjects of bankruptcy or insolvency, or under any amendment of such act or acts, either as a bankrupt or as an insolvent, or as a debtor, or in any similar capacity, wherein or whereby such Person asks or seeks or prays to be adjudicated a bankrupt, or is to be discharged from any or all of such Person's debts or obligations, or offers to such Person's creditors to effect a composition or extension of time to pay such Person's debts or asks, seeks or prays for reorganization or to effect a plan of reorganization, or for a readjustment of such Person's debts, or for any other similar relief, or if any such petition or any such proceedings of the same or similar kind or character is filed or instituted or taken against such Person and the same shall remain undismissed for aperiod of60 days, or if a receiver of the business orofthe property or assets of such Person is appointed by any court, or if such Person makes a general assignment for the benefit of such Person's creditors. "Financial Statements" means, with respect to a Major Developer, the full financial statements, special purpose financial statements, project operating statements or other reports reflecting the financial position of such Major Developer; provided that, if full financial statements, special purpose financial statements, project operating statements or other reports reflecting the financial position are audited and prepared in accordance with generally accepted accounting principles as in effect from time to time, then Financial Statements shall include such audited financial statements or reports. "Financing Plan" means, with respect to a Major Developer, the method by which such Major Developer intends to finance its Development Plan, including specific sources of funding for such Development Plan; [Ashby USA, LLC's]/[the Tanamera/Roripaugh Entities'] Financing Plan, as of the date hereof, is described in the Official Statement under the caption "PROPERTY OWNERSHIP AND DEVELOPMENT -[Ashby USA, LLC]/[The Tanamera/Roripaugh Entities]." "First Report Date" means March 31, of each year, commencing March 31, 2007. "First Report Period" means with respect to a Report due on the First Report Date, the last six months of the fiscal year just ended. "Listed Events" means any of the events listed in Section 4(a) hereof. "Major Developer" means any Property Owner, including [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities], that owns any portion of the Property within the District, for which production units are not completed and sold to third parties, for which the Property owned by such Property Owner together with Property owned by Affiliates of such Property Owner, is subj ect to 15% or more of the Special Tax levy of the District for the then current Fiscal Year of the District; provided, however, that the G-l term shall not include any Property Owner that would otherwise qualify as a Major Developer if such Property Owner has assumed the obligations hereunder pursuant to Section 5. "National Repository" means any Nationally Recognized Municipal Securities Information Repository for purposes of the Rule. The Nationally Recognized Municipal Securities Information Repositories for purposes of the Rule are identified in the Securities and Exchange Commission website located at sec.gov/info/municipal/nrmsir.htm. "Official Statement" means the Official Statement, dated April , 2006, relating to the 2006 Bonds. "Participating Underwriter" means Stone & Youngberg LLC. "Person" means an individual, a corporation, a partnership, a limited liability company, an association, a joint stock company, a trust, any unincorporated organization or a government or political subdivision thereof. "Property" means the real property within the boundaries of the District owned on the date of the Official Statement by [Ashby USA, LLC] /[the Tanamera/Roripaugh Entities] and that is not exempt from the Special Taxes. "Property Owner" means any Person that owns a fee interest in any Property. "Report Dates" means, collectively, the First Report Dates and the Second Report Dates. "Report Period" means, with respect to a Report due on the First Report Date, the last six months of the calendar year just ended, and with respect to a Report due on the Second Report Date, the first six months of the then current calendar year. "Repository" means each National Repository and each State Repository. "Rule" means Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time. "Second Report Date" means September 30 of each year, commencing September 30, 2006. "Second Report Period" means with respect to a Report due on the Second Report Date, the first six months of the current calendar year. "Semi-Annual Report" means any Semi-Annual Report provided by [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] pursuant to, and as described in, Sections 2 and 3 hereof. "State Repository" means any public or private repository or entity designated by the State of California as a state repository for the purpose of the Rule and recognized as such by the Securities and Exchange Commission. As of the date of this Disclosure Agreement, there is no State Repository. Section 2. Provision of Semi-Annual Reports, (a) So long as [Ashby USA, LLC's]/[the Tanamera/Roripaugh Entities'] obligations hereunder have not been terminated pursuant to Section 6, (i) [AshbyUSA, LLC]/[Tanamera/Roripa ughEntities] shall prepare a Semi-Annual Report not later than March 31 and September 30 of each year, and (ii) not later than April 15 and October 15 (15 days after the Report Date) [AshbyUSA, LLC]/[Tanamera/Roripaugh Entities] shall, or, upon receipt of the Semi-Annual Report by the Dissemination Agent, the Dissemination Agent shall, provide to each Repository, the Authority, the Fiscal Agent (if the Fiscal Agent is not the Dissemination Agent), the District and the Participating Underwriter a Semi-Annual Report which is consistent with the requirements of Section 3 of this Disclosure Agreement, commencing with the first Semi-Annual Report Date to occur September 30,2006. The Semi-Annual Report may be submitted as a single document or as separate documents comprising a package, and may include by reference other information as provided in Section 3 hereof; provided, however, that the audited financial statements of [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] may be submitted G-3 separately from the balance of the Semi-Annual Report that is to be provided no later than the First Report Date, and later than the date required above for the filing of such Semi-Annual Report if not available by that date. The Semi-Annual Report may be provided in electronic format to each Repository and the Participating Underwriter and may be provided through the services of a "central post office" approved by the Securities and Exchange Commission. For example, any filing under this Continuing Disclosure Agreement may be made solely by transmitting such filing to the Texas Municipal Advisory Council (the "MAC") as provided at http://www.disclosureusa.org unless the United States Securities and Exchange Commission has withdrawn the interpretive advice in its letter to the MAC dated September 7, 2004. (b) If by April 15 or October 15(15 days after a Report Date), the Fiscal Agent has not received a copy of the Semi-Annual Report, the Fiscal Agent shall notify [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] and the Dissemination Agent of such failure to receive the Semi-Annual Report. [Ashby USA, LLC]/[The Tanamera/Roripaugh Entities] shall provide a written certification with, or as part of, each Semi-Annual Report furnished to the Fiscal Agent to the effect that such Semi-Annual Report constitutes the Semi-Annual Report required to be furnished by it hereunder. The Fiscal Agent and Dissemination Agent may conclusively rely upon such certification of [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] and shall have no duty or obligation to review such Semi-Annual Report. (c) If the Fiscal Agent is unable to verify that a Semi-Annual Report has been provided to the Repositories by the date required in subsection (a), the Fiscal Agent shall send a notice to the Municipal Securities Rulemaking Board, the appropriate State Repository, if any, the Fiscal Agent and the Participating Underwriter in substantially the form attached as Exhibit A. (d) The Dissemination Agent shall: (i) determine prior to each Report Date the name and address of each National Repository and each State Repository, if any; (ii) provide any Semi-Annual Report received by it to each Repository, as provided herein; and (iii) with respect to each Semi-Annual Report received by it and provided by it to each Repository, file a report with the Authority, [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities], the Fiscal Agent (if the Dissemination Agent is not the Fiscal Agent) and each Participating Underwriter certifying that the Semi-Annual Report has been provided pursuant to this Disclosure Agreement, stating the date it was provided and listing all the Repositories to which it was provided. Sections. Content of Semi-Annual Reports. [Ashby US A, LLC's]/[Tanamera/Roripaugh Entities'] Semi-Annual Report shall contain or incorporate by reference the following: (a) With respect only to the Semi-Annual Report that is required to be provided no later than each First Report Date, such Semi-Annual Report shall contain Financial Statements for each Major Developer (other than any Major Developer with respect to which [Ashby USA, LLC's]/[the Tanamera/Roripaugh Entities'] obligations hereunder have been assumed in accordance with Section 5 or terminated in accordance with Section 6 hereof). If audited Financial Statements are required to be provided, and such audited Financial Statements are not available by the time such Semi-Annual Report is required to be filed pursuant to Section 2(a) hereof, such Semi-Annual Report shall contain unaudited Financial Statements, and the audited Financial Statements shall be filed as a supplement or amendment to the Semi-Annual Report when they become available. Such Financial Statements shall be for the most recently ended fiscal year for the entity covered thereby. The Semi-Annual Report shall contain the following caveat about all Financial Statements delivered as a part of the Semi-Annual Report: "The Financial Statements of [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] included with, or referred to in, the Semi-Semi-Annual Report are for informational purposes only. In the event of a failure to pay any installment of Special Taxes, and after depletion of the Reserve Funds, the real property in Community Facilities District No. 03-02 is the sole security for the 2006 Bonds. The obligation of [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] to pay unpaid Special Tax installments does not constitute G-4 a personal indebtedness of [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] or any member, parent, subsidiary, or person or entity controlling or controlled by the Developer (each an "Affiliate") for which the funds or assets (other than the property in Community Facilities District No. 03-02 that is delinquent) of [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] or any Affiliate may be required, by operation of law or otherwise, to be used to pay debt service on the 2006 Bonds. It should not be inferred from the inclusion of the Financial Statements in the Semi-Annual Report of [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] that the funds or assets of [Ashby US A, LLC]/[the Tanamera/Roripaugh Entities] or any Affiliate (other than the property in Community Facilities District No 03-02) are available to cure any delinquencies in the payment of Special Taxes." (b) With respect to all Semi-Annual Reports, such Semi-Annual Reports shall contain the following information with respect to each Major Developer (other than any Major Developer with respect to which [Ashby USA, LLC' s]/[the Tanamera/Roripaugh Entities' ] obligations hereunder have been assumed in accordance with Section 5 or terminated in accordance with Section 6 hereof) for the First Report Period or Second Report Period, as applicable; provided, that, if such information is required from [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] as to another Major Developer which is not an Affiliate of [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities], [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] shall only be required to provide such information that it has actual knowledge of: (i) If information regarding such Major Developer has not previously been included in a Semi-Annual Report or in the Official Statement, the Development Plan of such Major Developer or, if information regarding such Major Developer has previously been included in a Semi-Annual Report or in the Official Statement, a description of the progress made in the Development Plan of such Major Developer since the date of such information and a description of any material changes in such Development Plan and the causes or rationale for such changes; (ii) If information regarding such Major Developer has not previously been included in a Semi-Annual Report or in the Official Statement, the Financing Plan of such Major Developer or, if information regarding such Major Developer has previously been included in a Semi-Annual Report or in the Official Statement, a description of any material changes in the Financing Plan of such Major Developer and the causes or rationale for such changes; (iii) A description or update of the status of tentative and final maps recorded within the District relating to Property owned by such Major Developer; (iv) The number of building permits issued with respect to any of such Major Developer's Property during the six-month period ending on the last day of the applicable Report Period as well as the number of building permits issued with respect to such such Major Developer's Property included in each previous Semi-Annual Report, set forth opposite such previous reporting period; (v) A description of how many residential lots and acres and how many commercial acres of Property were owned by such Maj or Developer as of the end of the Report Period covered by such Semi-Annual Report, and how many residential lots and acres and how many commercial acres of such Major Developer's Property (i) with respect to residential or commercial uses, have production units or commercial buildings completed and sold to third parties, (ii) with respect to the Major Developer's Property planned for park/open space uses, have been developed with a park or designated as open space on a final residential tract map and (iii) with respect to the Major Developer's Property planned for infrastructure use, have the infrastructure planned for such property been constructed during the applicable Report Period, and how many acres of such Major Developer's Property had notreached suchlevel of development described in clauses (i), (ii)and (iii) above; (vi) A description of any sales (including pending sales for which a non-refundable deposit equal to or in excess of $50,000 has been made) of portions of such Major Developer's Property during the applicable Report Period, including the identification of each buyer (other than G-5 individual home buyers) and the number of residential lots and commercial or other acres sold; provided, however, that sales of five or fewer commercial or other acres may be aggregated for the purpose of such description; (vii) A statement as to whether or not such Maj or Developer and all of its Affiliates paid, prior to their becoming delinquent, all Special Taxes, properly taxes, assessments and special taxes levied on the Property owned by such Major Developer and such Affiliates that would have been delinquent had they not been paid by the preceding December 10 or April 10, respectively, and if such Maj or Developer or any of such Affiliates is delinquent in the payment of such Special Taxes, property taxes, assessments or special taxes levied on the Property owned by such Maj or Developer and its Affiliates, a statement identifying each parcel that is so delinquent, specifying the amount of each such delinquency and describing any plans to resolve such delinquency; (viii) An update of the status of any previously reported Listed Event described in Section 4 hereof and information regarding Listed Events, if any, required to be reported pursuant to Section 4 hereof; (ix) Unless disclosed in the Official Statement or a prior Semi-Annual Report, any material change in the legal structure or organization of a Major Developer; (x) The filing and service of process on such Maj or Developer of a lawsuit against such Major Developer seeking damages, or a judgment in a lawsuit against the Major Developer, either of which could have a significant impact on the Major Developer's ability to pay Special Taxes or to sell or develop all or any portion of the Major Developer's Property; (xi) If applicable, a statement that a Property Owner no longer meets the definition of Major Developer, which statement shall be provided in the manner required for Semi-Annual Reports by the next succeeding date on which a Semi-Annual Report would have been filed unless such fact has previously been reported under this Section 3 or Section 4; and (xii) Information regarding the letter of credit provided with respect to . Describe Letter of Credit(s) provided, if applicable]. (c) hi addition to any of the information expressly required to be provided under paragraphs (a) and (b) of this Section, [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] shall provide such further information, if any, as may be necessary to make the specifically required statements, in the light of the circumstances under which they are made, not misleading. Major Developers that are Affiliates of each other may, but are not required to, file a single Semi-Annual Report covering all such entities. Any or all of the items listed above may be included by specific reference to other documents which have been submitted to each of the Repositories or the Securities and Exchange Commission. If the document included by reference is a final official statement, it must be available from the Municipal Securities Rulemaking Board. [Ashby USA, LLC]/[The Tanamera/Roripaugh Entities] shall clearly identify each such other document so included by reference. If a Property Owner which was a Maj or Developer no longer meets the definition of Major Developer, no Semi-Annual Report shall be required to be filed by or with respect to such Property Owner under this Section 3; provided, however, that notice that the Property Owner does not meet the definition of Major Developer shall be provided in the manner required for Semi-Annual Reports by the next succeeding date on which a Semi-Annual Report would have been filed unless such fact has previously been reported under Section 3 or Section 4. Section 4. Reporting of Listed Events, (a) Pursuant to the provisions of this Section 4, [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] shall promptly give, or cause to be given notice of the occurrence of any of the following events with respect to each Major Developer (other than any Major Developer with respect to which [Ashby USA, LLC's]/[the Tanamera/Roripaugh Entities'] obligations hereunder have been assumed in accordance with Section 5 or terminated in accordance with Section 6 hereof); provided, however, that, if such information is required from [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] as to another Major Developer which is not an Affiliate of [Ashby USA, G-6 LLC]/[theTanamera/RoripaughEntities], [AshbyUSA,LLC]/[the Tanamera/RoripaughEntities] shall only be required to provide such information that it has actual knowledge of: (i) Unless disclosed in the Official Statement or a prior Semi-Annual Report, any conveyance by such Major Developer of any of its Property to an entity that is not an Affiliate of such Major Developer, the result of which conveyance is to cause the transferee to become a Major Developer. In addition, if the transferee has assumed any obligations of the Developer under this Disclosure Agreement pursuant to Section 5 hereof, a copy of the executed Assumption Agreement shall be attached to the Notice; (ii) Any failure of such Major Developer, or any Affiliate of such Major Developer, to, in the reasonable judgment of such Major Developer, pay prior to delinquency general property taxes, special taxes or assessments with respect to its Property; (iii) Any denial or termination of credit, any denial or termination of, or default under, any line line of credit or loan or any other loss of a source of funds expected to be used for the Project that would have a material adverse affect on such Major Developer's most recently disclosed Financing Plan or Development Plan or on the ability of such Major Developer, or any Affiliate of such Major Developer, to pay Special Taxes within the District prior to delinquency; (iv) The occurrence of an Event of Bankruptcy with respect to such Major Developer, or any Affiliate of such Major Developer, that, in the reasonable judgment of such Major Developer, would have a material adverse affect on such Major Developer's most recently disclosed Financing Plan or Development Plan or on theability of such Major Developer, or any Affiliate of such Major Developer that owns any portion of the Property, to pay Special Taxes within the District prior to delinquency; (v) Any significant amendments to land use entitlement approvals for such Major Developer's Property, if such amendments, in the reasonable judgment of such Major Developer, would prevent or significantly delay the implementation of such Major Developer's Development Plan as described in the Official Statement or in any previous Semi-Annual Report; (vi) Any previously undisclosed governmentally-imposed preconditions to commencement or continuation of development on such Major Developer's Property, if such preconditions, in the reasonable judgment of such Major Developer, would prevent or significantly delay such Major Developer's Development Plan as described in the Official Statement or in any previous Semi-Annual Report; (vii) Any previously undisclosed legislative, administrative or judicial challenges to development on such Major Developer's Property, if such challenges, in the reasonable judgment of such Major Developer, would prevent or significantly delay such Major Developer's Development Plan as described in the Official Statement or in any previous Semi-Annual Report; (viii) Any changes, in the reasonable judgment of such Major Developer, in the alignment, design or likelihood of completion of significant public improvements affecting such Major Developer'sProperty, including majorthoroughfares, sewers, water conveyance systems and similar facilities that, in the reasonable judgment of such Major Developer, would prevent or significantly delay such Major Developer's Development Plan as described in the Official Statement or any previous Semi-Annual Report; (ix) The filing of any lawsuit against a Major Developer which, in the reasonable judgment of such Major Developer, will adversely affect the completion of the development of Property owned by such Major Developer, or litigation which if decided against the Major Developer, in the reasonable judgment of the Major Developer, would materially adversely affect the financial condition of the Major Developer; or (x) Any previously undisclosed information relating to endangered species, hazardous substances or archaeological resources, which could have a significant impact on the Major G-7 Developer's ability to pay Special Taxes or to sell or develop all or any portion of the Major Developer's Property. (b) Whenever [ Ashby USA, LLC obtains]/[the Tanamera/Roripaugh Entities obtain knowledge of the occurrence of a Listed Event, [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] shall promptly notify the Dissemination Agent, the Fiscal Agent, the Participating Underwriter and the District in writing. The Fiscal Agent shall report the occurrence pursuant to subsection (c) below. [Ashby USA, LLC]/[The Tanamera/Roripaugh Entities] shall provide the Dissemination Agent with a form of notice of such event in a format suitable for reporting to the Municipal Securities Rulemaking Board and each State Repository, if any. (c) If the Fiscal Agent has received notice of a Listed Event, the Fiscal Agent shall file a notice of such occurrence with each Repository or the Municipal Securities Rulemaking Board and each State Repository and shallprovide a copy of such notice to each Participating Underwriter, to the Fiscal Agent and to the District. A form of information cover sheet for municipal secondary market disclosure recommended by the Municipal Securities Rulemaking Board is attached as Exhibit B. Section 5. Assumption of Obligations. If any portion of the Property owned by [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities], or any Affiliate of [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities], is conveyed to a Person such that, upon such conveyance, such Person will be a Maj or Developer, all of the obligations of [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] hereunder with respect to the Property owned by such Maj or Developer and its Affiliates shall be assumed by such Major Developer or by an Affiliate. In order to effect such assumption, such Major Developer or Affiliate thereof shall enter into an Assumption Agreement. A copy of the Assumption Agreement shall be provided to the Participating Underwriter and to the Dissemination Agent, the Fiscal Agent and the District as set forth in Section 4(4(a)(i) in the mannerprovided in Section 4(b) and 4(c). Property sold in numerous takedowns to a Maj or Developer maybe the subject ofa single Assumption Agreement that will automatically include any additional property purchased by such Major Developer. Notwithstanding the foregoing, there shall be no requirement that a transferee enter into an Assumption Agreement pro vided that such transferee is an Affiliate of [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] pursuant to the Option Agreements (as defined in the Official Statement), as such agreements may be amended. Section 6. Termination of Reporting Obligation. [Ashby USA, LLC's]/[The Tanamera/Roripaugh Entities'] obligations under this Disclosure Agreement with respect to a Major Developer shall terminate upon the earliest to occur of (a) the date on which such Major Developer is no longer a Major Developer, as defined herein, (b) the date on which [Ashby USA, LLC's]/[the Tanamera/Roripaugh Entities'] obligations with respect to such Maj or Developer are assumed under an Assumption Agreement entered into pursuant to Section 5 hereof, or (c) the date on which all Special Taxes levied on any Property owned by such Major Developer and its Affiliates are paid or prepaid in full; provided, however, that upon the occurrence of any of the events described in clause (a) through (c) with respect to a Maj or Developer, [Ashby USA, LLC's]/[the Tanamera/Roripaugh Entities'] obligations hereunder with respect to each other Major Developer, if any, not previously terminated shall remain in full force and effect. All of [Ashby USA, LLC's]/[the Tanamera/Roripaugh Entities'] obligations under this Disclosure Agreement shall terminate, except as provided in Section 11 hereof, upon the earliest to occur of (x) the date on which no Property Owner is a Major Developer, (y) the date on which (i) [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] is no longer a Major Developer, and (ii) [Ashby USA, LLC is]/[the Tanamera/Roripaugh Entities are] no longer [has/have] any obligations under this Disclosure Agreement with respect to any remaining Property as a result of the sale of Property to owners who are not Major Developers or such obligations having been assumed under one or more Assumption Agreements entered into pursuant to Section 5 hereof, or (z) the date on which all of the 2006 Bonds have been legally defeased, redeemed, or paid in full. Upon the occurrence of any such termination prior to the final maturity of the 2006 Bonds, [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] shall give notice of such termination in the same manner as for a Listed Event under Section 4 hereof. Section 7. Dissemination Agent The initial Dissemination Agent shall be U.S. Bank National Association. [Ashby USA, LLC]/[The Tanamera/Roripaugh Entities] may, from time to time, appoint or engage a Dissemination Agent to assist [it/them] in carrying out [its/their] obligations under this Disclosure Agreement, and may discharge any such Dissemination Agent, with or without appointing a successor G G O -O Dissemination Agent. [Ashby USA, LLC]/[The Tanamera/Roripaugh Entities] may serve as Dissemination Agent. The Dissemination Agent may resign by providing thirty (30) days' written notice to [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities], the Authority and the Fiscal Agent (if the Fiscal Agent is not the Dissemination Agent), such resignation to become effective upon acceptance of the appointment by a successor Dissemination Agent. Upon receiving notice of such resignation, [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] shall promptly appoint a successor Dissemination Agent by an instrument in writing, delivered to the Fiscal Agent. If no appointment of a successor Dissemination Agent shall be made pursuantto the foregoing provisions of this Section within forty-five (45) days after the Dissemination Agent shall have given to [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities], the Authority and the Fiscal Agent written notice of its resignation, the Dissemination Agent may apply to any court of competent jurisdiction to appoint a successor Dissemination Agent. Said court may thereupon after such notice, if any, as such court may deem proper, appoint a successor Dissemination Agent. The Authority shall provide [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] and the Fiscal Agent with written notice of the identity of any successor Dissemination Agent appointed or engaged by [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities]. The Dissemination Agent shall have no duty to prepare the Semi-Annual Report nor shall the Dissemination Agent be responsible for filing any Semi-Annual Report not provided to it by [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] in a timely manner and in a form suitable for filing. If the Dissemination Agent is other than the Fiscal Agent, the Dissemination Agent shall be paid compensation by [Ashby USA, LLC]/[the Tanamera/RoripaughEntities] for its services provided hereunder in accordance with the Dissemination Agent's schedule of fees as amended from time to time, which schedule, as amended, shall be reasonably acceptable, and all reasonable expenses, reasonable legal fees and advances incurred by the Dissemination Agent in for the performance of its duties hereunder. If the Dissemination Agent is the Fiscal Agent, the Authority shall be responsible for payingthe fees and expenses of the Dissemination Agent for its services provided hereunder in accordance with its agreement with the Authority. Section 8. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement, [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities], the Dissemination Agent and the Fiscal Agent may amend this Disclosure Agreement (and the Fiscal Agent shall agree to any amendment so requested by [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] ,providedthat the Fiscal Agent shall not be obligated to enter into such amendment that modifies or increases its duties and obligations hereunder), and any provision of this Disclosure Agreement may be amended or waived, provided that the following conditions are satisfied: (a) if the amendment or waiver relates to Sections 2(a), 3 or 4(a) hereof, it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature, or status of an obligated person (as defined in the Rule) with respect to the 2006 Bonds, or type of business conducted; (b) the undertakings herein, as proposed to b e amended or waived, would, in the opinion of Bond Counsel approved by the Authority, have complied with the requirements of the Rule at the time of the primary offering of the 2006 Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and (c) the proposed amendment or waiver either (i) is approved by owners of the 2006 Bonds in the manner provided in the Fiscal Agent Agreement for amendments to the Fiscal Agent Agreement with the consent of owners of the 2006 Bonds, or (ii) does not, in the opinion of Bond Counsel, materially impair the interests of owners or beneficial owners of the 2006 Bonds. If the financial information or operating data contained within the Financial Statements to be provided in the Semi-Annual Report or amendment or supplement thereto is amended pursuant to the provisions hereof, the first Semi-Annual Report containing the operating data or financial information in accordance with such amendment shall explain, in narrative form, the reasons for the amendment and the impact of the change in the type of operating data or financial information being provided. As required by the Rule, if an amendment is made to the provisions hereof specifying the accounting principles to be followed in preparing Financial Statements, the financial information for the year in which the change is made shall present a comparison between the Financial Statements or information prepared on G-9 the basis of the new accounting principles and those prepared on the basis of the former accounting principles. The comparison shall include a qualitative discussion of the differences in the accounting principles and the impact of the change in the accounting principles on the presentation of the Financial Statements, in order to enable investors to evaluate the ability of the Major Developer to generally meet its obligations. To the extent reasonably feasible, the comparison shall be quantitative. A notice of the change in the accounting principles shall be sent to the Repositories in the same manner as for a Listed Event under Section 4 hereof. Section 9. Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Semi-Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Agreement. If [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] [chooses/choose] to include any information in any Semi-Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Agreement, [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] shall have no obligation under this Disclosure Agreement to update such information or include it in any future Semi-Annual Report or notice of occurrence of a Listed Event. Section 10. Default. In the event of a failure of [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] or the Fiscal Agent to comply with any provision of this Disclosure Agreement, the Fiscal Agent may (and, at the written direction of the Participating Underwriter or the owners of at least 25% aggregate principal amount of Outstanding Bonds, and after adequate indemnification, shall), or any owner or beneficial owner of the 2006 Bonds may, take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities], the Dissemination Agent or the Fiscal Agent, as the case may be, to comply with its obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed an Event of Default under the Fiscal Agent Agreement, and the sole remedy under this Disclosure Agreement in the event of any failure of [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities], the Dissemination Agent or the Fiscal Agent to comply with this Disclosure Agreement shall be an action to compel performance. Section 11. Duties, Immunities and Liabilities of Fiscal Agent and Dissemination Agent. Neither the Fiscal Agent nor the Dissemination Agent (if other than the Fiscal Agent or the Fiscal Agent in its capacity as Dissemination Agent) shall have any responsibility for the content of any Semi-Annual Report. The Dissemination Agent (if other than the Fiscal Agent or the Fiscal Agent in its capacity as Dissemination Agent) shall have only such duties as are specifically set forth in this Disclosure Agreement, and [Ashby USA, LLC agrees]/[the Tanamera/Roripaugh Entities agree] to indemnify and save the Dissemination Agent (if other than the Fiscal Agent), its officers, directors, employees and agents, harmless against any loss, expense and liabilities which it or they may incur arising out of or in the exercise or performance of their powers and duties hereunder, including the reasonable costs and expenses (including attorneys fees) of defending against any claim of liability with counsel approved by [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities], which approval shall not be unreasonably withheld, but excluding losses, expenses and liabilities due to such Dissemination Agent's negligence, willful misconduct or failure to comply with any provision of this Disclosure Agreement. The obligations of [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] under this Section shall survive resignation or removal of such Dissemination Agent and payment of the 2006 Bonds and the resignation or removal of the Fiscal Agent. Any action for which indemnification is sought from [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] shall be deemed an action on a contract (this Agreement) for which the provisions of Section 18 are applicable. All of the protections from liability applicable to the Fiscal Agent shall apply to the Dissemination Agent. The Dissemination Agent and Fiscal Agent shall have no responsibility for the preparation, review, form or content of any Semi-Annual Report or any notice of a Listed Event. No provision of this Disclosure Agreement shall require or be construed to require the Dissemination Agent or Fiscal Agent to interpret or provide an opinion concerning any information disclosed hereunder. Information disclosed hereunder by the Dissemination Agent may contain such disclaimer language concerning the Dissemination Agent's responsibilities hereunder with respect thereto as the Dissemination Agent may deem appropriate. The Dissemination Agent and Fiscal Agent may conclusively rely on the determination of [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities] as to the materiality of any event for purposes of Section 4 hereof. G-10 If to the Tanamera Entities: If to the Community Facilities District: Neither the Fiscal Agent nor the Dissemination Agent make any representation as to the sufficiency of this Disclosure Agreement for purposes of the Rule. [Ashby USA, LLC's]/[The Tanamera/Roripaugh Entities'] obligations under this Section shall survive the termination of this Disclosure Agreement. Section 12. Notices. Any notice or communications to or among any of the parties to this Disclosure Agreement shall be given to all of the following and may be given as follows: [If to Ashby USA, LLC: Ashby USA, LLC 470 East Harrison Street Corona, California 92879 Telephone: (951)898-1692 Telecopier: (951) 898-1693 Attention: Chief Financial Officer]/Twinleaf Homes, LLC 28475 Old Town Front Street, Suite D Temecula, California 92590 Telephone: (951) 857-0070 Telecopier: (951) 639-9025 Attention: Ken Rose Temecula Public Financing Authority Community Facilities District No. 03-02 (Roripaugh Ranch) 43200 Business Park Drive Temecula, California 92590 Telephone: (951) 694-6430 Telecopier: (951) 694-6499 Attention: Finance Director U.S. Bank National Association 633 West Fifth Street, 24th Floor LM-CA-T24T Los Angeles, California 90071 Telephone: (213) 615-6005 Telecopier: (213) 615-6199 U.S. Bank National Association 633 West Fifth Street, 24th Floor LM-CA-T24T Los Angeles, California 90071 Telephone: (213) 615-6005 Telecopier: (213) 615-6199 Stone & Youngberg LLC One Ferry Building San Francisco, California 94111 Telephone: (415) 445-2300 Telecopier: (415) 445-2395 Attention: Municipal Research Department Section 13. Beneficiaries. The Participating Underwriter and the owners and beneficial owners from time to time of the 2006 Bonds shall be third party beneficiaries under this Disclosure Agreement. This Disclosure Agreement shall inure solely to the benefit of [Ashby USA, LLC]/[the Tanamera/Roripaugh Entities], the Fiscal Agent, the Dissemination Agent, the Participating Underwriter and owners and beneficial owners from time to time of the 2006 Bonds, and shall create no rights in any other person or entity. Any action by a beneficiary of this Agreement shall be subject to Section 18 below. If to the Dissemination Agent: If to the Fiscal Agent: If to the Participating Underwriter: G-ll Section 14. Counterparts. This Disclosure Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. Section 15. Merger. Any person succeeding to all or substantially all of the Dissemination Agent's corporate trust business shall be the successor Dissemination Agent without the filing of any paper or any further act. Section 16. Severability. In case any one or more of the provisions contained herein shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof. Section 17. State of California Law Governs. The validity, interpretation and performance of this Disclosure Agreement shall be governed by the laws of the State of California. Section 18. Attorneys' Fees. In the event of the bringing of any action or suit by any Party against another Party arising out of this Agreement, the Party in whose favor final judgment shall be entered shall be entitled to recover from the other Party all costs and expenses of suit, including reasonable attorneys' fees. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; EXECUTION PAGE FOLLOWS] G-12 IN WITNESS WHEREOF, the parties hereto have executed this Disclosure Agreement as of the date first above written. [ASHBY USA, LLC, a California limited liability company By: Ashby Development Company, Inc., a California corporation, its Managing Member By: Justin K. Ashby, President By: USA Investment Partners, LLC, a Nevada limited liability company, its Member By: USA Commercial Mortgage Company, a Nevada corporation, its non-Member Manager By: Joseph D. Milanowski, [Title]]/[TANAMERA/RORIPAUGH, LLC, a California limited liability company Name: Title: TANAMERA/RORIPAUGH II, LLC, a California limited liability company Name: Title: TRADITIONS AT RORIPAUGH, LLC, a California limited liability company Name: Title:] G-13 U.S. BANK NATIONAL ASSOCIATION, as Fiscal Agent By: Authorized Officer U.S. BANK NATIONAL ASSOCIATION, as Dissemination Agent By: Authorized Officer G-14 EXHIBIT A NOTICE TO MUNICIPAL SECURITIES RULEMAKING BOARD OF FAILURE TO FILE SEMI-ANNUAL REPORT Name of Obligated Person:: [Ashby USA, LLC, a California limited liability company]/[Tanamera/Roripaugh , LLC, Tanamera/Roripaugh II, LLC and Traditions at Roripaugh, LLC, each a California limited liability company Name of Bond Issue: Temecula Public Financing Authority Community Facilities District No. 03-02 (Roripaugh Ranch) 2006 Special Tax Bonds Date of Issuance: April , 2006 NOTICE IS HEREBY GIVEN that [Ashby USA, LLC has]/[Tanamera/Roripaugh, LLC, Tanamera/Roripaugh II, LLC and Traditions at Roripaugh, LLC have] not provided a Semi-Annual Report with respect to the above-named Bonds as required by Section 2 of the Continuing Disclosure Agreement, dated as of March 1, 2006, by and between [Ashby USA, LLC]/[Tanamera/Roripaugh, LLC, Tanamera/Roripaugh II, LLC and Traditions at Roripaugh, LLC] and U.S. Bank National Association, as Fiscal Agent. [Ashby USA, LLC]/[Tanamera/Roripaugh, LLC, Tanamera/Roripaugh II, LLC and Traditions atRoripaugh, LLC] [anticipates/anticipate] that the Semi-Annual Report will be filed by . Dated: U.S. BankNational Association, as Dissemination Agent, on behalf of [Ashby USA, LLC]/[Tanamera/Roripaugh, LLC, Tanamera/Roripaugh II, LLC and Traditions at Roripaugh, LLC] Authorized Officer cc: Temecula Public Financing Authority c/o City of Temecula G-15 EXHIBIT B Municipal Secondary Market Disclosure Information Cover Sheet This cover sheet should be sent with all submissions made to the Municipal Securities Rulemaking Board, Nationally Recognized Municipal Securities Information Repositories, and any applicable State Information Depository, whether the filing is voluntary or made pursuant to Securities and Exchange Commission Rule 15c2-12 or any analogous state statute. See www.sec.gov/info/municipal/nrmsir.htm for list of current NRMSIRs and SIDs IF THIS FILING RELATES TO A SINGLE BOND ISSUE: Provide name of bond issue exactly as it appears on the cover of the Official Statement (please include name of state where Issuer is located): [INSERT ISSUE NAME, INCLUDING $ AMOUNT] Provide nine-digit CUSIP® numbers* if available, to which the information relates: [INSERT CUSIP® NUMBERS] IF THIS FILING RELATES TO ALL SECURITIES ISSUED BY THE ISSUER OR ALL SECURITIES OF A SPECIFIC CREDIT OR ISSUED UNDER A SINGLE INDENTURE: Issuer's Name (please include name of state where Issuer is located): Other Obligated Person's Name (if any): (Exactly as it appears on the Official Statement Cover) Provide six-digit CUSIP® number(s)*, if available, of Issuer: '(Contact CUSIP®'s Municipal Disclosure Assistance Line at 212.438.6518 for assistance with obtaining the proper CUSIP® numbers.) TYPE OF FILING: D Electronic (number of pages attached) D Paper (number of pages attached) If information is also available on the Internet, give URL: G-16 WHAT TYPE OF INFORMATION ARE YOU PROVIDING? (CHECK ALL THAT APPLY) A. D Annual Financial Information and Operating Data pursuant to Rule 15c2-12 (Financial information and operating data should not be filed with the MSRB.) Fiscal Period Covered: B. D Audited Financial Statements or CAFR pursuant to Rule 15c2-12 Fiscal Period Covered: C. D Notice of a Material Event pursuant to Rule 15c2-12 (Check as appropriate) 1. D Principal and interest payment delinquencies 6. D Adverse tax opinions or events affecting the taxexempt status of the security 2. D Non-payment related defaults 7. D Modifications to the rights of security holders 3. D Unscheduled draws on debt service reserves 8. D Bond calls reflecting financial difficulties 4. D Unscheduled draws on credit enhancements 9. D Defeasances reflecting financial difficulties 5. D Substitution of credit or liquidity providers, or 10. D Release, substitution, or sale of property securing their failure to perform repayment of the securities 11. D Rating changes D. D D Notice of Failure to Provide Annual Financial Information as Required E. D Other Secondary Market Information (Specify): I hereby represent that I am authorized by the Issuer or obligor or its agent to distribute this information publicly: Issuer Contact: Name Employer Address Telephone Email Address Dissemination Agent Contact, if any: Name Employer Address Telephone Email Address Obligor Contact, if any: Name Employer Address Telephone Email Address Title City Fax Issuer Web Site Title City Fax Relationship to Title City Fax State Address State Issuer State Zip Code Zip Code Zip Code Obligor Web site Address G-17 Investor Relations Contact, if any: Name Title Telephone Email Address G-18 APPENDIX H FORM OF OPINION OF BOND COUNSEL April __, 2006 Board of Directors Temecula Public Financing Authority 43200 Business Park Drive Temecula, California 92590 OPINION: $ Temecula Public Financing Authority Community Facilities District 03-02 (Roripaugh Ranch) 2006 Special Tax Bonds Members of the Board of Directors: We have acted as bond counsel in connection with the issuance by the Temecula Public Financing Authority (the "Authority") of its $ Temecula Public Financing Authority Community Facilities District 03-02 (Roripaugh Ranch) 2006 Special Tax Bonds (the "Bonds") pursuant to the Mello-Roos Community Facilities Act of 1982, as amended (Section 53311 et seq., of the California Government Code) (the "Act"), 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 Temecula Public Financing Authority Community Facilities District 03-02 (Roripaugh Ranch) (the "District"), and U.S. Bank National Association, as fiscal agent, and Resolution No. TPFA 06-adopted by the Authority on February 28, 2006 (the "Resolution"). We have examined the law and such certified proceedings and other documents as we deem necessary to render this opinion. As to questions of fact material to our opinion, we have relied upon representations of the Authority contained in the Resolution and in the certified proceedings and certifications of public officials and others furnished to us, without undertaking to verify the same by independent investigation. Based upon the foregoing, we are of the opinion, under existing law, as follows: 1. The Authority is duly created and validly existing as a joint exercise of powers authority, with the power to adopt the Resolution, enter into the Fiscal Agent Agreement and perform the agreements on its part contained therein and issue the Bonds. 2. The Fiscal Agent Agreement has been duly entered into by the Authority, for and on behalf of the District, and constitutes a valid and binding obligation of the Authority Authority enforceable upon the Authority. H-l Temecula Public Financing Authority April __, 2006 Page 2 3. Pursuant to the Act, the Fiscal Agent Agreement creates a valid lien on the funds pledged by the Fiscal Agent Agreement for the security of the Bonds, on a parity with the pledge thereof for the security of any Parity Bonds that may be issued under, and as such term is defined in, the Fiscal Agent Agreement. 4. The Bonds have been duly authorized, executed and delivered by the Authority and are valid and binding limited obligations of the Authority on behalf of the District, payable solely from the sources provided therefor in the Fiscal Agent Agreement, on a parity with any Parity Bonds that may be issued under and as such term is defined in the Fiscal Agent Agreement. 5. Subject to the Authority's compliance with certain covenants, interest on the Bonds is excludable from gross income of the owners thereof for federal income tax purposes under section 103 of the Internal Revenue Code of 1986, as amended (the "Code") and, under section 55 of the Code, is not included 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 Bonds to not be excludable from gross income under section 103 of the Code for the federal income tax purposes retroactively to the date of issuance of the Bonds. 6. The interest on the Bonds is exempt from personal income taxation imposed by the State of California. Ownership of the Bonds may result in other tax consequences to certain taxpayers, and we express no opinion regarding any such collateral consequences arising with respect to the Bonds. The rights of the owners of the Bonds and the enforceability of the Bonds, the Resolution and the Fiscal Agent Agreement may be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights heretofore or hereafter enacted and also may be subject to the exercise of judicial discretion in accordance with general principles of equity. In rendering this opinion, we have relied upon certifications of the Authority and others with respect to certain material facts. Our opinion represents our legal judgment based upon such review of the law and facts that we deem relevant to render our opinion and is not a guarantee of a result. This opinion is given as of the date hereof and we assume no obligation to revise or supplement this opinion to reflect any facts or circumstances that may hereafter come to our attention or any changes in law that may hereafter occur. Respectfully submitted, H-2 APPENDIX I BOOK-ENTRY SYSTEM Thefollowingdescription of the procedures and record keeping with respect to beneficial ownership interests in the 2006 Bonds, payment of principal of and interest on the 2006 Bonds to Direct Participants, Indirect Participants or Beneficial Owners (as such terms are defined below) of the 2006 Bonds, confirmation and transfer of beneficial ownership interests in the 2006 Bonds and other Bond-related transactions by and between DTC, Direct Participants, Indirect Participants and Beneficial Owners of the 2006 Bonds is based solely on information furnished by DTC to the District which the District believes to be reliable, but the Authority, the District and the Underwriter do not and cannot make any independent representations concerning these matters and do not take responsibility for the accuracy or completeness thereof. Neither the DTC, Direct Participants, Indirect Participants nor the Beneficial Owners should rely on the foregoing information with respect to such matters, but should instead confirm the same with DTC or the DTC Participants, as the case may be. The Depository Trust Company ("DTC"), New York, New York, will act as securities depository for the 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 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. DTC, the world's largest depository, is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency' registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 2 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues and money market instruments from over 85 countries that DTC's participants (the "Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. andnon-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC, in turn, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Government Securities Clearing Corporation, MBS Clearing Corporation, and Emerging Markets Clearing Corporation, (NSCC, GSCC, MBSCC, and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as U.S. and non-U.S. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (the "Indirect Participants"). DTC has Standard & Poor's highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com. Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the 2006 Bonds on DTC's records. The ownership interest of each actual purchaser of each 2006 Bond (the "Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the 2006 Bonds are to be accomplishedby entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the 2006 Bonds, except in the event that use of the book-entry system for the 2006 Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants withDTC are registered in the name of DTC's partnership nominee, Cede & Co. or such other name as requested by an authorized representative of DTC. The deposit of 2006 Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge 1-1 of the actual Beneficial Owners of the 2006 Bonds; DTC's records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct or Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of 2006 Bonds may wish to take certain steps to augment the transmissions to them of notices of significant events with respect to the 2006 Bonds, such as redemptions, tenders, defaults, and proposed amendments to the 2006 Bonds documents. For example, Beneficial Owners of 2006 Bonds may wish to ascertain that the nominee holding holding the 2006 Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. Redemption notices shall be sent to DTC. If less than all of the 2006 Bonds are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed. Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent or vote with respect to the 2006Bonds unless authorized by aDirect Participant in accordance with DTC's Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the District as soon as possible after the Record Date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the 2006 Bonds are credited on the Record Date (identified in a listing attached to the Omnibus Proxy). Principal, redemption price and interest payment on the 2006 Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC' s receipt of funds and corresponding detail information from the District, the Authority orthe Fiscal Agent, on a payment date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC (nor the nominee), the Fiscal Agent, the Authority or the District, subject to any statutory and regulatory requirements as may be in effect from time to time. Payment of principal, redemption price and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Fiscal Agent, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. DTC may discontinue providingits service as depository with respect to the 2006 Bonds at any time by giving reasonable notice to the Fiscal Agent. Under such circumstances, in the event that a successor depository is not obtained, Bond certificates are required to be printed and delivered as described in the Fiscal Agent Agreement. The Authority may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Bond certificates will be printed and delivered as described in the Fiscal Agent Agreement. The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that the Authority and the District believe to be reliable, but the Authority and the District take no responsibility for the accuracy thereof. 1-2 Discontinuance of DTC Services In the event that (a) DTC determines not to continue to act as securities depository for the 2006 Bonds, or (b) the Authority determines that DTC shall no longer act and delivers a written certificate to the Fiscal Agent to that effect, then the Authority will discontinue the Book-Entry System with DTC for the 2006 Bonds. If the Authority determines to replace DTC with another qualified securities depository, the Authority will prepare or direct the preparation of a new single separate, fully registered Bond for each maturity of the 2006 Bonds registered in the name of such successor or substitute securities depository as are not inconsistent with the terms of the Fiscal Agent Agreement. If the Authority fails to identify another qualified securities depository to replace the incumbent securities depository for the 2006 Bonds, then the 2006 Bonds shall no longer be restricted to being registered in the 2006 Bond registration books in the name of the incumbent securities depository or its nominee, but shall be registered in whatever name or names the incumbent securities depository or its nominee transferring or exchanging the 2006 Bonds shall designate. In the event that the Book-Entry System is discontinued, the following provisions would also apply: (i) the 2006 Bonds will be made available in physical form, (ii) principal of, andredemption premiums if any, on the 2006 Bonds will be payable upon surrender thereof at the trust office of the Fiscal Agent identified in the Fiscal Agent Agreement, and (lii) the 2006 Bonds will be transferable and exchangeable as provided in the Fiscal Agent Agreement. The Authority, the District and the Fiscal Agent do not have any responsibility or obligation to DTC Participants, to the persons for whom they act as nominees, to Beneficial Owners, or to any other person who is not shown on the registration books as being an owner of the 2006 Bonds, with respect to (i) the accuracy of any records maintained by DTC or any DTC Participants; (ii) the payment by DTC or any DTC Participant of any amount in respect of the principal of, redemption price of or interest on the 2006 Bonds; (Hi) the delivery of any notice which is permitted or required to be given to registered owners under the Fiscal Agent Agreement; (iv) the selection by DTC or any DTCParticipant ofany person to receive payment in the event of a partial redemption of the 2006 Bonds; (v) any consent given or other action taken by DTC as registered owner; or (vi) any other matter arising with respect to the 2006 Bonds or the Fiscal Agent Agreement. The Authority, the District and the Fiscal Agent cannot and do not give any assurances that DTC, DTC Participants or others will distribute payments of principal of or interest on the 2006 Bonds paid to DTC or its nominee, as the registered owner, or any notices to the Beneficial Owners or that they will do so on a timely basis or will serve and act in a manner described in this Official Statement. The Authority, the District and the Fiscal Agent are not responsible or liable for the failure of DTC or any DTC Participant to make any payment or give any notice to a Beneficial Owner in respect to the 2006Bonds or any error or delay relating thereto. 1-3 [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX J BOUNDARY MAP OF THE COMMUNITY FACILITIES DISTRICT [THIS PAGE INTENTIONALLY LEFT BLANK] SHEET 1 OF 1 PROPOSED BOUNDARIES OF TEMECULA PUBLIC FINANCING AUTHORITY COMMUNITY FACILITIES DISTRICT NO. 03-02 (RORIPAUGH RANCH) RIVERSIDE COUNTY STATE OF CALIFORNIA (1) Filed in the office of the Secretary of the Board of Directors of Temecula Public Financing Authority this 23rtJ day of riuaus+ , 2004. SeeWary oflhe Jsoard of Directors Temecula Public Financing Authority (2) I hereby certify that the within map showing the proposed boundaries of Community Facilities District No. 03-02 (Roripaugh Ranch) of Temecula Public Financing Authority, County of Riverside, State of California, was approved by the Board of Directors of Temecula Public Financing Authority at a regular meeting thereof, held on the w+k day of ftujust 2004, by its Resolution No. jPFA ot-ati • Secretary of theJBoard of Directors Temecula Public Financing Authority Reference is hereby made to the Assessor's maps of the County of Riverside for an exact description of the lines and dimensions of each lot and parcel. FY 2004-05 Assessor Parcel Numbers 957-340-046 957-340-048 Through 957-340-055 958-260-011 958-260-013 Through 958-260-021 958-810-001 958-810-002 and 958-810-006 Through 958-8)0-015 (3) Recorded this %&-day o 2004, at the hour of g, o'clock fi .m., in Book tyfr , Pagesjo] of Maps of Assessment and Community Facilities Districts in the Office of the County Recorder in the County of Riverside, State of California. Fee*-!.-No. LEGEND CFD Boundary County Recorder of Riverside County PREPARED BY DAVIDTAUSSIO & ASSOCIATES, INC. N [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX K BUILDING PERMIT THRESHOLDS Temecula Public Financing Authority Community Facilities District No. 03-02 (Roripaugh Ranch) Building Permit Thresholds As of January 15,2006 Building Permit Threshold/Requirement Prior to the 1st Building Permit: a. Initially, prior to issuance of the 1s' building permit, complete flow-by detention basins relating to Planning Areas 3, 4A and 4B. b. Submit plans for structural protection from vegetation fires to the Fire Prevention Bureau. Phase I (Planning Areas 1-4B, 6 (neighborhood park) and 32 (fire station) Prior to the 34th Building Permit a. Provide secondary access for each Planning Area to existing Murrieta Hot Springs Road. Prior to the 100th Building Permit a. Complete 0.3 acre mini-park site to the satisfaction of the Community Services Director, including permanent utilities. Status Complete. Complete for Phase I; Murietta Hot Springs Road serves as fuel buffer. Complete. Improvements substantially complete; Certain utility fees must be paid in connection with installation of permanent utilities. Ashby USA, LLC's Estimated Date of Completion* Complete. Phase I complete. Complete. Estimated completion 2nd quarter 2006. Prior to the 108th Building Permit: *As provided by Ashby USA, LLC. The City has reviewed Ashby USA, LLC's schedule and noted that the schedule assumes minimal completion delays and weather delays. The City has indicated a completion range from March 2007 to September 2007. The Market Absorption Study and Appraisal assume completion of improvements to allow issuance of remaining building permits in Phase I by September 2006 and in Phase II by September 2007. K-l a. Obtain permission from adjacent affected property owners to allow for grading and any related driveway improvements necessary to continue to allow legal vehicular access on to Nicolas Road. b. Pay $2,000,000 for design and construction of a fire station and complete construction of the fire station and acquire fire truck. City Manager must find that the permanent fire station is substantially under construction and permanent access to the fire station via Butterfield Stage Road, Murrieta Hot Springs Road and via Calle Chapos between the fire stations' eastern most driveway and Walcott lane will be completed concurrent with the opening of the fire station and all other requirements of the Development Agreement and Conditions of Approval of the Land Use Entitlements for the issuance of the building permits have been fulfilled c. Butterfield Stage Road -Construct half-width improvements from Murrieta Hot Springs Road to the south project boundary at Planning Area 32, including construction of two full-width width bridges within and over Santa Gertrudis Creek and Long Valley Wash. d. Butterfield Stage Road -Dedicate full-width right-of-way from the northern project boundary to Murrieta Hot Springs Road. e. Butterfield Stage Road -full-width grading from northern project boundary to Murrieta Hot Springs Road. f. Murrieta Hot Springs Road -Construct full-width improvements from east of Pourroy Road at the northern project boundary to the MWD pipeline property. Murrieta Hot Springs Road -Construct half-width improvements from the MWD pipeline property to Butterfield Stage Road. Nicolas Road -Offer a dedication for a 110 foot right-of-way from Butterfield Stage Road to the west project boundary. Nicolas Road -Construct northerly half-width plus 10 feet from Butterfield Stage Road to the western project boundary. 2 properties need to access Nicolas Road; driveway construction by Ashby USA, LLC is required. $2 million paid, plus an additional $ 1.1 million paid subject to reimbursement after Bond proceeds are received; contract awarded and notice to proceed issued. Rough grading approximately 65% complete; bid package is ready; Resource Agencies* approval obtained. Dedication complete. Grading complete. Rough grading complete; underground utilities complete; remaining improvements in construction. Rough grading complete; underground utilities installation complete; street improvements under contract. Dedication complete in Final Tract Map 29353-2; acceptance of dedication upon completion of improvements. Rough grading completed; improvement plans approved pending payment of fees; contract for storm drain awarded August 2005. Estimated receipt of permission in the 1st quarter of 2006. Estimated fire station completion February 2006. Operation subject to Ashby USA, LLC completion of other improvements, including all required road access. Estimated completion in the 3rd quarter of 2006. Dedication complete. Grading Complete. Estimated completion in the 2nd quarter 2006. Estimated completion in the 3rd quarter 2006. Offer of dedication is complete; construction completion estimated in the 2rd quarter of 2006. Estimated completion in the 3rd quarter of 2006. Resource Agencies include the California Department of Fish and Game, the Army Corp of Engineers and the California Regional Water Quality Control Board. K-2 South Loop Road -Construct southerly half-width in front of fire station (Planning Area 32). k. Construct full width arch culverts for Santa Gertrudis Creek at Butterfield Stage Road and North Loop Road. 1. Construct full width arch culverts for Long Valley Wash at Butterfield Stage Road. m. Nicolas Road -Construct 40 foot improvements 450 feet east of the existing Nicolas Road/Calle Girasol intersection to MWD ROW, including full-width bridge over Santa Gertrudis Creek.* n. Complete secondary access for the Phase I area at one of (i) Nicolas/Calle Girasol intersection, (ii) Calle Chapos, or (iii) Butterfield Stage Road to Rancho California Road. Rough grading completed; improvement plans approved pending payment of fees; potential impact to fire station operation. Plans approved; bid opened February 28. Plans approved; bid opened February 28; need access road easement from Property Owner. No grading yet; EMWD underground utilities complete. Completion of various facilities listed elsewhere are expected to satisfy this requirement. Coordinating with Resource Agencies and Flood Control District. Bid package under review. Plans for Butterfield Stage Road to Rancho California Road are approved pending recordation of easements required. Estimated completion in the 2nd quarter of 2006. Estimated completion in the 3rd quarter of 2006. Estimated completion in the 3rd quarter of 2006. Estimated completion in the 3rd quarter of 2006. Estimated completion in the 3rd quarter of 2006. Estimated Completion prior to June 1,2007. Estimated completion 3rd quarter of 2006. Estimated Completion in the first quarter of 2007. Prior to the 250th Building Permit: a. Complete park portion of the private recreation center in Planning Area 5 to the satisfaction of the Community Services Director. 90% of construction has been completed. Estimated completion in the 1st quarter of 2006. Prior to the 359* Building Permit: a. Complete the building and pool portion of the private recreation center in Planning Area 5 to the satisfaction of the Community Services Director. 98% complete, plastering and filling of pool on hold until sufficient residents are in the community. Estimated completion in the 3rd quarter of 2006. * Nicolas Road improvement east of the existing Nicolas Road/Calle Girasol intersection to MWD Right of Way is only required if Nicolas Road will serve as the secondary access. Ashby USA, LLC anticipates secondary access will be satisfied by via Calle Chapos. K-3 Prior to the 400th Building Permit: a. Complete 5.1 acre neighborhood park (Planning Area 6) including all permanent utilities and the 90 day maintenance period and grant deed accepted by the City. b. "A" Street (Roripaugh Valley Road)-Construct full-width improvements from Murietta Hot Springs Road to Butterfield Stage Road. c. "B" Street (Fiesta Ranch Road)-Construct full-width improvements from Nicolas Road to "A" Street (Roripaugh Valley Road). d. North Loop Road -Construct a full-width bridge over and within Santa Gertrudis Creek and connect the bridge to Butterfield Stage Road with full width improvements. e. Construct the following traffic signals and related intersection improvements: 1. Traffic signal at the intersection of Pourroy Road and Murrieta Hot Springs Road. 2. Traffic signals may be required, as warranted, at the two other project entrances from Murrieta Hot Springs Road located to the east and west of the Pourroy Road main project entrance. f. Complete nature walk and adjacent landscape areas (Lot 36), including all permanent utilities and the 90 day maintenance period and grant deed accepted by the City. Complete the trail in Planning Area 7A and the trail between Planning Areas 4B and 6. Rough grading 100% complete; Park plans approved; bids opened January 2006; construction commencing March 2006. 90% complete; dry utility sidewalk and striping improvements not complete. 90% complete; dry utility sidewalk and striping improvements not complete. Minor grading completed; bid opened February 28, 2006. Bid being awarded. The City will install if the City determines it is appropriate. Nature walk 90% complete; Planning Area 7A trail 90% complete; trail between Planning Areas 4B and 6 not yet started; revised landscaping plans for the Phase I perimeter slopes are required by the City Planning Department. Estimated completion in the 3rd quarter of 2006. Estimated completion in the 2nd quarter of 2006. Estimated completion in the 2nd quarter of 2006. Estimated completion in the 3rd quarter of 2006. Estimated completion in the 2nd quarter of 2006. The City will install if the City determines it is appropriate. Estimated completion in the 3rd quarter of 2006. PHASE II (Planning Areas 10,11,12,14 -24, 27 -31, 33A and 33B**) Prior to the issuance of any building permit in Phase II, the following improvements must be completed: ** A Specific Plan amendment was approved by the City Council in January 2005 increasing the permit threshold from prior to the 510th building permit to prior to the 516th building permit. K-4 a. Complete acquisition of right of way for the off-site or County portions of Butterfield Stage Road. b. Construct Santa Gertrudis Creek Channel from the arch culvert/bridge crossing Butterfield Stage Road westerly to the confluence with the existing Santa Gertrudis Creek. c. Butterfield Stage Road -Construct remaining half-width improvements from Murrieta Hot Springs Road to the south project boundary at Planning Area 32, including construction of two full-width bridges within and over Santa Gertrudis Creek and Long Valley Wash. d. Murrieta Hot Springs Road -Construct remaining half-width improvements from the MWD pipeline property to Butterfield Stage Road. e. North Loop Road -Construct full-width improvement from the bridge structure at North Loop Road/Santa Gertrudis Creek crossing to the Long Valley Wash Bridge structure at South Loop Road. f. South Loop Road -Construct the full width bridge structure crossing Long Valley Wash and construct full width street improvements from the bridge to gatehouse (private road improvements). g. Nicolas Road -Construct remaining improvements from Butterfield Stage Road to western project boundary. h. Construct specified traffic signals and related intersection improvements at Butterfield Stage Road at (i) Murrieta Hot Springs Road, (ii) Nicolas Road and (iii) Calle Chapos. i. Butterfield Stage Road -Construct full width improvement from the southern project boundary at Planning Area 32 to Rancho California Road, excluding any existing improvements. Easements acquired except for two property owners (Developer has asked the City to assist with the acquisition of these easements); grading bid package in process. Bid package is ready pending Flood Control District approval of plan which is waiting for execution of easements on other facilities. See item c of 108th Building Permit threshold. Completion of bridge and street improvements. Full width under construction. See item f of 108th Building Permit threshold. Full width of Murrieta Hot Springs Road is under construction. Mass grading 100% complete; public and private portions are each in final plan check; bid packages are being prepared for public section. Mass grading 60% complete; bridge contract awarded; public and private portions of improvement plans are each in final plan check. See Item (i) of 108th Building Permit threshold. Traffic signal plans approved. Improvement plans approved pending right of way acquisition -See item a of Phase II; Shea Homes Limited Partnership has built 2 lanes of paving in front of its development at La Serena; bid package under review; easement acquisition of 2 parcels may impact schedule. Estimated completion in the 4th quarter of 2006. Estimated completion in the 3rd quarter of 2006. Estimated completion in the 3rd quarter of 2006. Estimated completion in the 2nd quarter of 2006. Estimated completion in the 3rd quarter of 2006. Estimated completion in the 3rd quarter of 2006. Estimated completion in the 3rd quarter of 2006. Estimated completion in the 4th quarter of 2006. Estimated completion in the 4th quarter of 2006. K-5 j. Nicolas Road -Construct 40 foot improvement 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. k. Calle Girasol and the Nicolas Road/Calle Girasol intersection -relating to the ultimate intersection with Nicolas Road, including right-of-way acquisition. 1. Calle Chapos -Construct 38 foot width on center improvements from Butterfield Stage Road to the existing paved terminus at Walcott Lane. m. Winchester Road at Nicolas Road traffic signal with the ultimate lane configurations. n. Butterfield Stage Road at Rancho California Road traffic signal with the ultimate lane configurations. o. Submit plans for structural protection from vegetation fires to the Fire Prevention Bureau. Complete sewer in Nicolas Road in accordance with Eastern Municipal Water District requirements. Portions of road plans approved; channel and bridge design in process; EIR amendment in process. Offers of dedication in process; requires payment of acquisition costs; portions of road plans approved and other plan revisions in process; EIR amendment in process. Rough grading 80% complete. Plan approved with minor revisions; in process of obtaining property owner acceptance of easement. Engineering plans in plan check. Proposed fuel modification plan is street layout included in a draft Tentative Map for Phase II Planning Areas; the proposed plan is subject to review by the Fire Prevention Bureau once submitted. Sewer complete from Liefer Road to the west project boundary. Estimated completion prior to June 1,2007. Estimated completion prior to June 1,2007. Estimated completion in the 2nd quarter of 2006. Estimated completion in the 4th quarter of 2006. Estimated completion in the 1st quarter of 2007. Phase n estimated completion in the 2nd quarter of 2006. Estimated completion in the 2nd quarter of 2006. Prior to the 700th Building Permit: a. Complete the 19.7 acre sports park site (Planning Area 27), satisfy the 90 day maintenance maintenance period and grant deed accepted by the City. b. Complete the riverwalk multi-use trails on both sides of Long Valley Wash. Prior to the 800th Building Permit: a. Complete park portion of the private recreation center in Planning Area 30 and satisfy the 90 day maintenance period and grant deed acceptable to the City. Graded to 100% of mass graded condition; park plans submitted; conceptual design approved by TCSD; bid package being prepared. Final revisions submitted to Riverside Flood Control. Plans in review by City Planning Dept. Estimated completion in the first quarter of 2007. Estimated completion in the first quarter of 2007. Estimated completion in the first quarter of 2007. K-6 Prior to the 1,150^ Building Permit: Plans in review by City Planning Dept. Estimated completion in a. Complete the building and pool portion of the private recreation centers in the first quarter of 2007. Planning Areas 27 and 30. K-7 [THIS PAGE INTENTIONALLY LEFT BLANK] Recycled Paper -Printed by IMAGEMASTER 800.452.5152