NEW ISSUE-FULL BOOK ENTRY NO RATING

In the opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California (“Bond Counsel”), under existing statutes, regulations, rulings and judicial decisions, and assuming the accuracy of certain representations and compliance with certain covenants and requirements described herein, interest on the Bonds described herein is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and corporations. In the further opinion of Bond Counsel, interest on the Bonds is exempt from State of California personal income tax. See “TAX MATTERS” herein.

$2,285,000 CITY OF DESERT HOT SPRINGS COMMUNITY FACILITIES DISTRICT NO. 2006-1 IMPROVEMENT AREA 1 SPECIAL TAX REFUNDING BONDS SERIES 2010 Dated: Date of Delivery Due: September 1, as shown below

The Bonds captioned above (the “Bonds”), are being issued by the City of Desert Hot Springs Community Facilities District No. 2006-1 (the “District”) with regard to its Improvement Area 1 (“Improvement Area 1”). The Bonds are special tax obligations of the District, authorized pursuant to the Mello-Roos Community Facilities Act of 1982, as amended, being California Government Code Section 53311, et seq. (the “Act”), and are issued pursuant to a Indenture dated as of August 1, 2010 (the “Indenture”) by and between the District and Wells Fargo Bank, National Association, as Trustee (the “Trustee”). The Bonds are issued primarily to refund all of the District’s outstanding City of Desert Hot Springs Community Facilities District No. 2006- 1 Improvement Area 1 Special Tax Bonds, Series 2008A. Interest on the Bonds is payable March 1, 2011, and thereafter semiannually on March 1 and September 1 of each year.

The Bonds are being issued as fully registered bonds, registered in the name of Cede & Co. as nominee of The Depository Trust Company, New York, New York (“DTC”), and will be available to ultimate purchasers in the denomination of $5,000 or any integral multiple thereof, under the book- entry system maintained by DTC. See “APPENDIX F – BOOK-ENTRY SYSTEM.”

The Bonds are secured by and payable from a pledge of Net Special Tax Revenues (as defined herein) to be levied by the District on real property within the boundaries of the Improvement Area 1, from the proceeds of any foreclosure actions brought following a delinquency in the payment of the Special Taxes, and from amounts held in certain funds under the Indenture, all as more fully described herein. Unpaid Special Taxes do not constitute a personal indebtedness of the owners of the parcels within Improvement Area 1. In the event of delinquency, proceedings may be conducted only against the parcel of real property securing the delinquent Special Tax. There is no assurance the owners will be able to pay the Special Tax or that they will pay a Special Tax even though financially able to do so. To provide funds for payment of the Bonds and the interest thereon as a result of any delinquent Special Taxes, the District will establish a Reserve Fund from proceeds of the Bonds, as described herein. See “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS.” The Bonds are not a general obligation of the City.

Property in Improvement Area 1 subject to the Special Tax comprises 394 parcels subject to the Special Tax; 178 parcels are improved with a single family residence, the remainder are undeveloped but approved for development single family home sites. Currently, only the 178 completed homes and 38 of the undeveloped lots have been subject to a Special Tax levy. See “IMPROVEMENT AREA 1.”

The Bonds are subject to optional and mandatory redemption prior to maturity as described herein. See “THE BONDS — Redemption.”

NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE DISTRICT, THE COUNTY OF RIVERSIDE, THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE BONDS. THE BONDS DO NOT CONSTITUTE A DEBT OF THE DISTRICT WITHIN THE MEANING OF ANY STATUTORY OR CONSTITUTIONAL DEBT LIMITATION. THE INFORMATION SET FORTH IN THIS OFFICIAL STATEMENT, INCLUDING INFORMATION UNDER THE HEADING “SPECIAL RISK FACTORS,” SHOULD BE READ IN ITS ENTIRETY.

This cover page contains certain information for general reference only. It is not a summary of all of the provisions of the Bonds. Prospective investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision. See “SPECIAL RISK FACTORS” herein for a discussion of the special risk factors that should be considered, in addition to the other matters and risk factors set forth herein, in evaluating the investment quality of the Bonds.

MATURITY SCHEDULE

$430,000 5.000% Term Bond Due September 1, 2020; Yield 5.250%, Price 98.066%; CUSIP† 25041U AS0 $1,855,000 6.375% Term Bond Due September 1, 2038; Yield 6.450%, Price 99.029%; CUSIP† 25041U AT8

† Copyright 2010, American Bankers Association. CUSIP data herein are provided by Standard & Poor's CUSIP Service Bureau, a division of The McGraw-Hill Companies, Inc., and are provided for convenience of reference only. Neither the District nor the Underwriter assumes any responsibility for the accuracy of these CUSIP data.

The Bonds are offered when, as and if issued, subject to approval as to their legality by Stradling, Yocca Carlson & Rauth, A Professional Corporation, Newport Beach, California, Bond Counsel. Certain legal matters will also be passed on by Jones Hall, a Professional Law Corporation, San Francisco, California, as Disclosure Counsel. Certain legal matters will be passed upon for the District by the City Attorney and for the Underwriter by Goodwin Procter LLP, Los Angeles, California, as Underwriter's Counsel. It is anticipated that the Bonds will be available for delivery to DTC on or about August 17, 2010 in New York, New York.

The date of this Official Statement is August 5, 2010.

CITY OF DESERT HOT SPRINGS, CALIFORNIA

City Council Yvonne Parks, Mayor Scott Matas, Mayor Pro Tem Jan Pye, Councilmember Karl Baker, Councilmember Russell Betts, Councilmember

City Staff Rick Daniels, City Manager Jason Simpson, Assistant City Manager Jerryl Soriano, Interim Deputy City Clerk

______

SPECIAL SERVICES

Bond Counsel Stradling Yocca Carlson & Rauth, A Professional Corporation Newport Beach, California

Trustee Wells Fargo Bank, National Association Los Angeles, California

Financial Advisor Urban Futures, Inc. Irvine, California

Special Tax Consultant Albert A. Webb Associates Riverside, California

Disclosure Counsel Jones Hall, A Professional Law Corporation San Francisco, California

GENERAL INFORMATION ABOUT THIS OFFICIAL STATEMENT

Use of Official Statement. This Official Statement is submitted in connection with the sale of the Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose. This Official Statement is not to be construed as a contract with the purchasers of the Bonds.

Estimates and Forecasts. When used in this Official Statement and in any continuing disclosure by the District, in any press release and in any oral statement made with the approval of an authorized officer of the District, the words or phrases “will likely result,” “are expected to”, “will continue”, “is anticipated”, “estimate”, “project,” “forecast”, “expect”, “intend” and similar expressions identify “forward looking statements.” Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Any forecast is subject to such uncertainties. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances may occur. Therefore, there are likely to be differences between forecasts and actual results, and those differences may be material. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, give rise to any implication that there has been no change in the affairs of the District since the date hereof.

Limit of Offering. No dealer, broker, salesperson or other person has been authorized by the District to give any information or to make any representations in connection with the offer or sale of the Bonds other than those contained herein and if given or made, such other information or representation must not be relied upon as having been authorized by the District or the Underwriter. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the Bonds by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale.

Involvement of Underwriter. The Underwriter has reviewed the information in this Official Statement in accordance with, and as a part of, their 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 Underwriter has submitted the following statement for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, and as a part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter do not guarantee the accuracy or completeness of such information.

Preparation of this Official Statement. The information contained in this Official Statement has been obtained from sources that are believed to be reliable, but this information is not guaranteed as to accuracy or completeness. The information and expressions of opinions herein are subject to change without notice and neither delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the District since the date hereof. All summaries of the documents referred to in this Official Statement, are made subject to the provisions of such documents, respectively, and do not purport to be complete statements of any or all of such provisions.

THE BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON AN EXCEPTION FROM THE REGISTRATION REQUIREMENTS CONTAINED IN SUCH ACT. THE BONDS HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE.

TABLE OF CONTENTS INTRODUCTION...... 1 The Appraisal...... 32 PLAN OF FINANCE ...... 5 Value to Lien Ratios ...... 34 THE BONDS ...... 6 Direct and Overlapping Indebtedness ...... 37 Authority for Issuance...... 6 Overlapping Assessments and Taxes ...... 39 Description of the Bonds ...... 6 Estimated Tax Burden ...... 40 Redemption...... 8 SPECIAL RISK FACTORS...... 42 Transfer or Exchange of Bonds...... 11 Limited Obligation of the District to Pay Bonds Mutilated, Lost, Destroyed or Debt Service ...... 42 Stolen...... 11 Property Values and Property ESTIMATED SOURCES AND USES OF Development...... 42 FUNDS ...... 12 Current Market Conditions Increasing Risk SECURITY AND SOURCES OF of Mortgage Default...... 44 PAYMENT FOR THE BONDS ...... 13 Concentration of Ownership ...... 45 Special Taxes...... 13 Bankruptcy and Foreclosure Delays...... 45 Special Tax Methodology...... 14 Disclosure to Future Purchasers...... 47 Special Tax Fund...... 18 Parity Taxes and Special Assessments; Delinquent Payments of Special Tax; Private Debt ...... 47 Covenant for Superior Court Foreclosure.....19 Tax Delinquencies...... 48 Reserve Fund...... 20 Property or Mortgage Interest Owned by Additional Bonds...... 21 Federal Government ...... 49 DEBT SERVICE SCHEDULE AND No Acceleration Provisions...... 50 COVERAGE ...... 23 CONTINUING DISCLOSURE ...... 50 IMPROVEMENT AREA 1...... 26 UNDERWRITING ...... 51 General Description...... 26 FINANCIAL ADVISOR...... 51 Delinquency History...... 28 LEGAL OPINION ...... 51 OWNERSHIP AND VALUE OF PROPERTY TAX MATTERS...... 51 IN IMPROVEMENT AREA 1 ...... 29 NO RATING...... 53 Property Ownership Background...... 29 NO LITIGATION ...... 53 Current Property Ownership ...... 30 EXECUTION ...... 54 Skyborne Ventures ...... 31

APPENDIX A - RATE AND METHOD OF APPORTIONMENT OF SPECIAL TAX APPENDIX B - THE APPRAISAL APPENDIX C - THE CITY OF DESERT HOT SPRINGS AND RIVERSIDE COUNTY APPENDIX D - FORM OF OPINION OF BOND COUNSEL APPENDIX E - FORM OF CONTINUING DISCLOSURE UNDERTAKINGS APPENDIX F - THE BOOK ENTRY SYSTEM

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OFFICIAL STATEMENT

$2,285,000 CITY OF DESERT HOT SPRINGS COMMUNITY FACILITIES DISTRICT NO. 2006-1 IMPROVEMENT AREA 1 SPECIAL TAX REFUNDING BONDS SERIES 2010

This Official Statement, including the cover page and all Appendices hereto, is provided to furnish certain information in connection with the issuance by the City of Desert Hot Springs Community Facilities District No. 2006-1 (the “District”) of the bonds captioned above (the “Bonds”). The Bonds are issued by the District with regard to its Improvement Area 1 (“Improvement Area 1”).

Any statements made in this Official Statement involving matters of opinion or of estimates, whether or not so expressly stated, are set forth as such and not as representations of fact, and no representation is made that any of the estimates will be realized. Definitions of certain terms used herein and not defined herein have the meaning set forth in the Indenture (as hereinafter defined).

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 attached appendices, and the documents summarized or described in this Official Statement. A full review should be made of the entire Official Statement. The offering of the Bonds to potential investors is made only by means of the entire Official Statement.

Purpose of the Bonds. The Bonds are being issued to provide funds to refund all of the District’s Desert Hot Springs Community Facilities District No. 2006-1 Improvement Area 1 Special Tax Bonds, Series 2008A (the "Prior Bonds") issued in November 2008. Proceeds of the Bonds will also be used to provide a small amount of new money to complete fire station improvements, to establish a reserve fund for the Bonds and to pay the cost of issuance of the Bonds, as described herein. See "ESTIMATED SOURCES AND USES OF FUNDS." See also "PLAN OF FINANCE."

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Authority for Issuance. The Bonds are issued pursuant to the provisions of the Mello- Roos Community Facilities Act of 1982, as amended (Sections 53311, et seq., of the Government Code of the State of California) (the “Act”) and pursuant to a Indenture dated as of August 1, 2010 (the “Indenture”) between the District and Wells Fargo Bank, National Association, Los Angeles, California, as Trustee (the “Trustee”) and a resolution adopted on July 27, 2010 (the “Resolution”) by the City Council of the City (the “City Council”) which authorized the issuance of the Bonds payable from Special Taxes (as defined herein) levied on property within the District according to a methodology approved by the District. The City Council additionally designated portion of the District as Improvement Areas 1 through 5, each of which may independently issue bonds secured by special taxes levied within each respective area.

Bond Terms. The Bonds will be dated as of their date of delivery and bear interest from such date at the rate or rates set forth on the cover page of this Official Statement. Interest on the Bonds is payable on March 1 and September 1 of each year (each an “Interest Payment Date”), commencing March 1, 2011. The Bonds will be issued without coupons in denominations of $5,000 or any integral multiple thereof.

Registration of Ownership of Bonds. The Bonds will be issued only as fully registered bonds in book-entry form, registered in the name of Cede & Co., as nominee of The Depository Trust Company (“DTC”). Ultimate purchasers of Bonds will not receive physical certificates representing their interest in the Bonds. So long as the Bonds are registered in the name of Cede & Co., as nominee of DTC, references herein to the Owners will mean Cede & Co., and will not mean the ultimate purchasers of the Bonds. Payments of the principal, premium, if any, and interest on the Bonds will be made directly to DTC, or its nominee, Cede & Co. so long as DTC or Cede & Co. is the registered owner of the Bonds. Disbursements of such payments to DTC’s Participants is the responsibility of DTC and disbursements of such payments to the Beneficial Owners is the responsibility of DTC’s Participants and Indirect Participants, as more fully described herein. See “APPENDIX F – BOOK-ENTRY SYSTEM.”

Source of Payment of the Bonds. The Bonds are payable from “Net Special Tax Revenues” which are comprised of special taxes (the “Special Tax” or “Special Taxes”) to be levied by the District on taxable real property within the boundaries of Improvement Area 1, less certain administrative expenses, as described herein. Net Special Tax Revenues also include proceeds of any foreclosure actions brought following a delinquency in payment of the Special Taxes. The Bonds are also payable from amounts held in certain funds and accounts pursuant to the Indenture, including a reserve fund, all as more fully described herein. The Special Tax applicable to each taxable parcel in Improvement Area 1 will be levied and collected according to the tax liability determined by the City Council through the application of a rate and method of apportionment of Special Tax for the Improvement Area 1 (the “Rate and Method”) which was approved by the District in connection with the issuance of the Prior Bonds. The Rate and Method is set forth in APPENDIX A hereto. The Special Taxes represent liens on the parcels of land subject to a Special Tax and failure to pay the Special Taxes could result in proceedings to foreclose the delinquent property. The Special Taxes do not constitute the personal indebtedness of the owners of taxed parcels. See “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS — Special Tax Methodology” and “APPENDIX A — RATE AND METHOD OF APPORTIONMENT OF SPECIAL TAX.” The maximum authorized indebtedness for Improvement Area 1 is $8,000,000; additional bonds secured by the Special Taxes are allowed to be issued in the future.

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In the Indenture, the District directs the Trustee to establish a Reserve Fund (the “Reserve Fund”) from Bond proceeds in the amount of the Reserve Requirement, which amount is available to be transferred to the Bond Fund in the event of delinquencies in the payment of the Special Taxes, to the extent of such delinquencies. The Reserve Fund is required to be maintained at the Reserve Requirement from moneys available under the Indenture. See “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS — Reserve Fund.” If there are additional delinquencies after depletion of funds in the Reserve Fund, the District and Improvement Area 1 are not obligated to pay the Bonds or supplement the Reserve Fund.

The District and Improvement Area 1. The District is located in the City of Desert Hot Springs, and consists of five separate Improvement Areas. Improvement Area 1 of the District, the subject of this financing, contains approximately 117.75 gross acres consisting of approximately 60 acres partially developed as two single family home subdivisions, with the remaining acreage designated for common areas and private roadway and not subject to the Special Tax. There are 394 residential lots within Improvement Area 1. Currently 178 lots have been improved with a single family home owned by an individual homeowner; the remaining 216 lots are finished or near-finished but otherwise unimproved (other than 37 of the 216 lots which have concrete slabs for home development, but development is not proceeding and building permits have expired). There is currently no construction activity in Improvement Area 1 and it is unknown if or when construction may resume. The unfinished lots are owned by Skyborne Ventures LLC, a Delaware limited liability company ("Skyborne Ventures"). Skyborne Ventures is not a home developer and is holding the property for investment and resale of residential lots. See "IMPROVEMENT AREA 1– General Description" and "OWNERSHIP AND VALUE OF PROPERTY IN IMPROVEMENT AREA 1" herein.

Appraised Value of Property. An appraisal report dated July 12, 2010, with a date of value of July 1, 2010 (the “Appraisal”) of the real property subject to the Special Tax of Improvement Area 1 was prepared by Bruce W. Hull & Associates, Inc., Ventura, California (the “Appraiser”). The Appraisal valued the fee simple estate, subject to the Special Taxes, of the taxable property in Improvement Area 1, and subject to the limiting conditions and assumptions stated in the Appraisal. See Appendix B as to such limitations and assumptions. The Appraiser assigned the following market value as of the July 1, 2010 valuation date:

Finished Homes (178 homes) $26,080,000 Finished Lots (216 lots) 6,460,000 Total Estimated Value (394 parcels) $32,540,000

The Appraisal is set forth in APPENDIX B hereto. The valuation accounts for the lien of the Special Taxes and considers the fact that building permits have expired on the 37 lots with concrete slabs in place. The description herein of the Appraisal is intended for limited purposes only; the Appraisal should be read in its entirety. The conclusions reached in the Appraisal are subject to certain assumptions and qualifications which are set forth in the Appraisal.

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Debt Service Coverage on the Bonds. The maximum annual Special Tax authorized to be levied in the District is approximately 259% of the maximum annual debt service on the Bonds. Currently, only the completed homes and 38 of the undeveloped lots (all of which constitute Developed Property under the Rate and Method) are taxed pursuant to the Rate and Method, which taxation level generates sufficient moneys to pay the Prior Bonds. The maximum annual Special Tax authorized to be levied on the currently taxed parcels (consisting of all the completed homes and 38 undeveloped lots) is approximately 136% of the maximum annual debt service of the Bonds. See “OWNERSHIP AND VALUATION OF PROPERTY IN IMPROVEMENT AREA 1“ herein.

Additional Bonds and Liens. Under the terms of the Indenture, the District may issue additional bonds secured by the Net Special Tax Revenues on a parity with the Bonds ("Additional Bonds") under certain conditions. Additional Bonds may be issued as provided in the Indenture by means of a supplemental indenture and without any requirement for the consent of any Bond Owners. See “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS – Additional Bonds.” The District cannot predict if or when Additional Bonds will be issued since the need for Additional Bonds is related to the unknown future level of development that may occur in Improvement Area 1. Other taxes and/or special assessments with liens equal in priority to the continuing lien of the Special Taxes have been levied and may also be levied in the future on the property within Improvement Area 1 which could adversely affect the willingness of the landowners to pay the Special Taxes when due. See "SPECIAL RISK FACTORS - Parity Taxes and Special Assessments; Private Debt" herein.

Risks of Investment. See the section of this Official Statement entitled “SPECIAL RISK FACTORS” for a discussion of special factors that should be considered, in addition to the other matters set forth herein, in considering the investment quality of the Bonds.

Limited Obligation of the District. The general fund of the City is not liable and the full faith and credit of the City is not pledged for the payment of the interest on, or principal of or redemption premiums, if any, on the Bonds. The Bonds are not secured by a legal or equitable pledge of or charge, lien or encumbrance upon any property of the City or any of its income or receipts, except the money in the Special Tax Fund (described herein) established under the Indenture, and neither the payment of the interest on nor principal of or redemption premiums, if any, on the Bonds is a general debt, liability or obligation of the City. The Bonds do not constitute an indebtedness of the City within the meaning of any constitutional or statutory debt limitation or restrictions and neither the City Council, the City, the District nor any officer or employee thereof are liable for the payment of the interest on or principal of or redemption premiums, if any, on the Bonds other than from the proceeds of the Special Taxes and the money in the Special Tax Fund, as provided in the Indenture.

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Summary of Information. Brief descriptions of certain provisions of the Indenture, the Bonds and certain other documents are included herein. The descriptions and summaries of documents herein do not purport to be comprehensive or definitive, and reference is made to each such document for the complete details of all its respective terms and conditions, copies of which are available for inspection at the office of the Finance Director of the City. All statements herein with respect to certain rights and remedies are qualified by reference to laws and principles of equity relating to or affecting creditors’ rights generally. Capitalized terms used in this Official Statement and not otherwise defined herein have the meanings ascribed to such terms in the Indenture. The information and expressions of opinion herein speak only as of the date of this Official Statement and are subject to change without notice. Neither delivery of this Official Statement, any sale made hereunder, nor any future use of this Official Statement shall, under any circumstances, create any implication that there has been no change in the affairs of the City, the District or Improvement Area 1 since the date hereof.

PLAN OF FINANCE

The Bonds are being issued primarily to facilitate the refunding all of the City’s Desert Hot Springs Community Facilities District No. 2006-1 Improvement Area 1 Special Tax Bonds, Series 2008A (the "Prior Bonds") issued in November 2008 in the original principal amount of $2,080,000 (of which $2,025,000 is currently outstanding). The Prior Bonds were issued to provide money to finance certain capacity and development impact fees and a portion of the cost of land acquisition and improvement of fire station facilities, all related to planned new home development in Improvement Area 1. See "IMPROVEMENT AREA 1." Proceeds of the Bonds will additionally be used to fund the reserve fund requirement for the Bonds, to provide a small amount of new money to complete fire station improvements and to pay the cost of issuance of the Bonds.

On the date of issuance of the Bonds, a portion of the proceeds will be transferred to Wells Fargo Bank, National Association, as the Escrow Agent for the Prior Bonds (the “Escrow Agent”) for deposit into an Escrow Fund established under an Escrow Agreement dated as of August 1, 2010 by and between the City and the Escrow Agent in an amount sufficient for the payment of the principal of and interest on the Prior Bonds on September 1, 2010, plus a redemption premium of 3%. The Escrow Fund will be irrevocably pledged for such purpose.

The amounts held by the Escrow Agent for the Prior Bonds in the Escrow Fund will be invested in Federal Securities and are pledged solely to the payment of amounts due and payable by the City under the Prior Bonds. Neither the funds deposited in the Escrow Fund for the Prior Bonds nor the interest on the invested funds will be available for the payment of debt service on the Bonds.

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THE BONDS

Authority for Issuance

Pursuant to the Act, on November 21, 2006 the City Council of the City (the "City Council") adopted Resolution No. 2006-107 (the "Resolution of Intention"), stating its intention to form the District and the improvement areas within the District, including Improvement Area 1, and to authorize the levy of special taxes within the District, including special taxes levied on the taxable property within Improvement Area 1. Also on November 21, 2006 the City Council adopted Resolution No. 2006-108, declaring the necessity to incur bonded indebtedness with respect to the District, including bonded indebtedness with respect to Improvement Area 1, such bonded indebtedness with respect to Improvement Area 1 in an aggregate principal amount not to exceed $8,000,000 for the purpose of financing the acquisition, construction, expansion, improvement, or rehabilitation of the Facilities to serve Improvement Area 1. Subsequent to a noticed public hearing, the City Council adopted Resolution No. 2007-13 on January 16, 2007 (the "Resolution of Formation") which established the District (consisting of five improvement areas within the boundaries of the District), authorized the levy of special taxes within each improvement area within the District, determined the necessity to incur bonded indebtedness within each improvement area within the District, and called an election within the District on the proposition of incurring bonded indebtedness, levying special taxes and setting an appropriations limit.

On January 16, 2007, an election was held at which the landowners of property within Improvement Area 1 eligible to vote approved the issuance of bonds for Improvement Area 1 secured by special taxes levied on property within Improvement Area 1, to finance the Facilities. On August 7, 2007, the City Council, acting as the legislative body of the District, adopted an Ordinance (the "Ordinance") which authorizes the levy of a special taxes within Improvement Area 1 pursuant to that certain Rate and Method of Apportionment of Special Tax for Community Facilities District No. 2006-1 of the City of Desert Hot Springs (Improvement Area No. 1) (the "Rate and Method"). A copy of the Rate and Method is attached hereto as APPENDIX A.

The Bonds are issued pursuant to the provisions of the Act and the Indenture, approved by a resolution adopted by the City Council on July 27, 2010, and the Act. Bonded indebtedness with respect to Improvement Area 1 has been authorized in the aggregate principal amount not to exceed $8,000,000; $5,920,000 of the authorization remains authorized but unissued; additional bonds secured by the Special Taxes are allowed to be issued in the future. See "THE BONDS" and “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS – Additional Bonds” herein.

Description of the Bonds

Bond Terms. The Bonds will be dated as of and bear interest from the date of delivery thereof at the rates and mature in the amounts and years, as set forth on the cover page hereof. The Bonds are being issued in the denomination of $5,000 or any integral multiple thereof.

Interest on the Bonds will be payable semiannually on March 1 and September 1 of each year (each an “Interest Payment Date”), commencing March 1, 2011.

The principal of the Bonds shall be payable in lawful money of the United States of America upon presentation and surrender thereof upon maturity or earlier redemption at the

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Office of the Trustee. Payment of principal of any Bond shall be made only upon presentation and surrender of such Bond at the Office of the Trustee.

Notwithstanding the above, so long as any Bonds are in book-entry form, payments with respect to such Bonds will be made by wire transfer, or such other method acceptable to the Trustee, to DTC. See the following paragraph and “APPENDIX F –BOOK ENTRY SYSTEM” below.

Book-Entry Only System. The Bonds are being issued as fully registered bonds, registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York (“DTC”), and will be available to ultimate purchasers under the book-entry system maintained by DTC. Ultimate purchasers of Bonds will not receive physical certificates representing their interest in the Bonds. So long as the Bonds are registered in the name of Cede & Co., as nominee of DTC, references herein to the Owners will mean Cede & Co., and will not mean the ultimate purchasers of the Bonds. The Trustee will make payments of the principal, premium, if any, and interest on the Bonds directly to DTC, or its nominee, Cede & Co., so long as DTC or Cede & Co. is the registered owner of the Bonds. Disbursements of such payments to DTC’s Participants is the responsibility of DTC and disbursements of such payments to the Beneficial Owners is the responsibility of DTC’s Participants and Indirect Participants, as more fully described herein. See “APPENDIX F –BOOK ENTRY SYSTEM.” below.

Calculation and Payment of Interest. Interest shall be payable from the Interest Payment Date next preceding the date of authentication thereof unless (i) a Bond is authenticated on or before an Interest Payment Date and after the close of business on the preceding Record Date, in which event it shall bear interest from such Interest Payment Date, (ii) a Bond is authenticated on or before the first Record Date, in which event interest thereon shall be payable from the Closing Date, or (iii) interest on any Bond is in default as of the date of authentication thereof, in which event interest thereon shall be payable from the date to which interest has previously been paid or duly provided for.

Interest shall be paid in lawful money of the United States on each Interest Payment Date. Interest shall be paid by check of the Trustee mailed by first class mail, postage prepaid, on each Interest Payment Date to the Bond Owners at their respective addresses shown on the Registration Books as of the close of business on the preceding Record Date. Notwithstanding the foregoing, interest on any Bond which is not punctually paid or duly provided for on any Interest Payment Date shall, if and to the extent that amounts subsequently become available therefor, be paid on a payment date established by the Trustee to the Person in whose name the ownership of such Bond is registered on the Registration Books at the close of business on a special record date to be established by the Trustee for the payment of such defaulted interest, notice of which shall be given to such Owner not less than ten days prior to such special record date. So long as the Bonds are registered in the name of Cede & Co., as nominee of DTC, payments of the principal, premium, if any, and interest on the Bonds will be made directly to DTC, or its nominee, Cede & Co. Disbursements of such payments to DTC’s Participants is the responsibility of DTC and disbursements of such payments to the Beneficial Owners is the responsibility of DTC’s Participants and Indirect Participants, as more fully described herein. See “APPENDIX F – BOOK ENTRY SYSTEM” below.

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Redemption

Optional Redemption. The Bonds shall be subject to optional redemption, in whole or in part, on any Interest Payment Date on or after March 1, 2020, from any source of available funds, at a redemption price equal to the principal amount of the Bonds to be redeemed, plus accrued interest thereon to the date of redemption, without premium.

Mandatory Redemption From Prepayments. The Bonds shall be subject to mandatory redemption, in whole or in part, on any Interest Payment Date on or after March 1, 2011, from and to the extent of any prepayment of Special Taxes, at the following respective redemption prices (expressed as percentages) of the principal amount of the Bonds to be redeemed), plus accrued interest thereon to the date of redemption:

Redemption Dates Redemption Prices Any Interest Payment Date beginning March 1, 2011 through March 1, 2018 103% September 1, 2018 or March 1, 2019 102 September 1, 2019 or March 1, 2020 101 September 1, 2020 or thereafter 100

Mandatory Sinking Fund Redemption. The Bonds maturing September 1, 2020 and September 1, 2038 shall be subject to mandatory sinking fund redemption, in part, on September 1 in each year, commencing September 1, 2011 and September 1, 2021, respectively, at a Redemption Price equal to the principal amount of the Bonds to be redeemed, without premium, plus accrued interest thereon to the date of redemption, in the aggregate respective principal amounts in the respective years as follows:

Term Bonds of 2020

Sinking Fund Principal Amount Redemption Date To be (September 1) Redeemed 2011 $30,000 2012 35,000 2013 35,000 2014 40,000 2015 45,000 2016 45,000 2017 50,000 2018 45,000 2019 50,000 2020 (maturity) 55,000

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Term Bonds of 2038

Sinking Fund Principal Amount Redemption Date To be (September 1) Redeemed 2021 $55,000 2022 60,000 2023 65,000 2024 70,000 2025 75,000 2026 80,000 2027 85,000 2028 85,000 2029 95,000 2030 100,000 2031 110,000 2032 115,000 2033 125,000 2034 130,000 2035 135,000 2036 150,000 2037 155,000 2038 (maturity) 165,000

If some but not all of the Bonds maturing on September 1, 2020 or September 1, 2038 are redeemed pursuant to optional redemption, the principal amount of such Bonds to be redeemed pursuant to mandatory sinking fund redemption on any subsequent September 1 shall be reduced, by $5,000 or any integral multiple thereof, as designated by the District in a Written Certificate of the District filed with the Trustee; provided, however, that the aggregate amount of such reductions shall not exceed the aggregate amount of Bonds of such maturity redeemed pursuant to optional redemption. If some but not all of the Bonds maturing on September 1, 2020 or September 1, 2038 are redeemed pursuant to mandatory redemption from prepayments, the principal amount of such Bonds to be redeemed pursuant to mandatory sinking fund redemption on any subsequent September 1 shall be reduced by the aggregate principal amount of the Bonds of such maturity so redeemed pursuant to mandatory redemption from prepayments, such reduction to be allocated among redemption dates as nearly as practicable on a pro rata basis in amounts of $5,000 or any integral multiple thereof, as determined by the Trustee, notice of which determination shall be given by the Trustee to the District.

Redemption Procedure by Trustee. The Trustee on behalf and at the expense of the District shall mail (by first class mail) notice of any redemption to the respective Owners of any Bonds designated for redemption at their respective addresses appearing on the Registration Books and to the Original Purchaser at least 30 but not more than 60 days prior to the date fixed for redemption. Such notice shall state the date of the notice, the redemption date, the redemption place and the Redemption Price and shall designate the CUSIP numbers, if any, the Bond numbers and the maturity or maturities of the Bonds to be redeemed (except in the event of redemption of all of the Bonds of such maturity or maturities in whole), and shall require that such Bonds be then surrendered at the Office of the Trustee for redemption at the Redemption Price, giving notice also that further interest on such Bonds will not accrue from and after the date fixed for redemption. Neither the failure to receive any notice so mailed, nor any defect in

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such notice, shall affect the validity of the proceedings for the redemption of the Bonds or the cessation of accrual of interest thereon from and after the date fixed for redemption.

With respect to any notice of any optional redemption of Bonds of a Series, unless at the time such notice is given the Bonds to be redeemed shall be deemed to have been paid as provided in the Indenture, such notice shall state that such redemption is conditional upon receipt by the Trustee, on or prior to the date fixed for such redemption, of moneys that, together with other available amounts held by the Trustee, are sufficient to pay the Redemption Price of, and accrued interest on, the Bonds to be redeemed, and that if such moneys shall not have been so received said notice shall be of no force and effect and the District shall not be required to redeem such Bonds. In the event a notice of redemption of Bonds contains such a condition and such moneys are not so received, the redemption of Bonds as described in the conditional notice of redemption shall not be made and the Trustee shall, within a reasonable time after the date on which such redemption was to occur, give notice to the Persons and in the manner in which the notice of redemption was given, that such moneys were not so received and that there shall be no redemption of Bonds pursuant to such notice of redemption.

Selection of Bonds for Redemption. Whenever provision is made in the Indenture for the redemption of less than all of the Bonds, the Trustee shall select the Bonds to be redeemed from all Bonds not previously called for redemption (a) with respect to any optional redemption of Bonds of a Series, among maturities of Bonds of such Series as directed in a Written Request of the Community Facilities District, (b) with respect to any redemption pursuant to prepayment of Special Taxes, among maturities of all Series of Bonds on a pro rata basis as nearly as practicable, and (c) with respect to any other redemption of Additional Bonds, among maturities as provided in the Supplemental Indenture pursuant to which such Additional Bonds are issued, and by lot among Bonds of the same Series with the same maturity in any manner which the Trustee in its sole discretion shall deem appropriate and fair. For purposes of such selection, all Bonds shall be deemed to be comprised of separate $5,000 denominations and such separate denominations shall be treated as separate Bonds which may be separately redeemed.

Partial Redemption of Bonds. Upon surrender of any Bonds redeemed in part only, the District shall execute and the Trustee shall authenticate and deliver to the Owner thereof, at the expense of the District, a new Bond or Bonds of the same Series in authorized denominations equal in aggregate principal amount representing the unredeemed portion of the Bonds surrendered.

Effect of Redemption. Notice having been mailed as aforesaid, and moneys for the Redemption Price, and the interest to the applicable date fixed for redemption, having been set aside in the Redemption Fund, the Bonds shall become due and payable on said date, and, upon presentation and surrender thereof at the Office of the Trustee, said Bonds shall be paid at the Redemption Price thereof, together with interest accrued and unpaid to said date. If, on said date fixed for redemption, moneys for the Redemption Price of all the Bonds to be redeemed, together with interest to said date, shall be held by the Trustee so as to be available therefor on such date, and, if notice of redemption thereof shall have been mailed, as aforesaid and not canceled, then, from and after said date, interest on said Bonds shall cease to accrue and become payable. All moneys held by or on behalf of the Trustee for the redemption of Bonds shall be held in trust for the account of the Owners of the Bonds so to be redeemed without liability to such Owners for interest thereon.

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Transfer or Exchange of Bonds

So long as the Bonds are registered in the name of Cede & Co., as nominee of DTC, transfers and exchanges of Bonds will be made in accordance with DTC procedures. See “Appendix G” below. Any Bond may, in accordance with its terms, be transferred upon the Registration Books by the Person in whose name it is registered, in person or by his duly authorized attorney, upon surrender of such Bond for cancellation, accompanied by delivery of a written instrument of transfer, duly executed in a form acceptable to the Trustee. Whenever any Bond or Bonds shall be surrendered for transfer, the District shall execute and the Trustee shall authenticate and shall deliver a new Bond or Bonds of the same maturity in a like aggregate principal amount, in any authorized denomination. The Trustee shall require the Bond Owner requesting such transfer to pay any tax or other governmental charge required to be paid with respect to such transfer.

The Trustee shall not be obligated to make any transfer or exchange of Bonds during the period established by the Trustee for the selection of Bonds for redemption, or with respect to any Bonds selected for redemption.

Bonds Mutilated, Lost, Destroyed or Stolen

If any Bond shall become mutilated, the District, at the expense of the Owner of said Bond, shall execute, and the Trustee shall thereupon authenticate and deliver, a new Bond of like tenor in exchange and substitution for the Bond so mutilated, but only upon surrender to the Trustee of the Bond so mutilated. Every mutilated Bond so surrendered to the Trustee shall be canceled by it and delivered to, or upon the order of, the District. If any Bond shall be lost, destroyed or stolen, evidence of such loss, destruction or theft may be submitted to the Trustee and, if such evidence and indemnity satisfactory to the Trustee shall be given, the District, at the expense of the Owner, shall execute, and the Trustee shall thereupon authenticate and deliver, a new Bond of like tenor in lieu of and in replacement for the Bond so lost, destroyed or stolen (or if any such Bond shall have matured or shall have been selected for redemption, instead of issuing a replacement Bond, the Trustee may pay the same without surrender thereof). The District may require payment by the Owner of a sum not exceeding the actual cost of preparing each replacement Bond issued and of the expenses which may be incurred by the District and the Trustee.

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ESTIMATED SOURCES AND USES OF FUNDS

A summary of the estimated sources and uses of funds associated with the Prior Bonds and the sale of the Bonds follows:

Estimated Sources of Funds: Principal Amount of Bonds $2,285,000.00 Plus Funds Available from Prior Bonds 309,436.45 Less Original Issue Discount (26,328.25) Total $2,568,108.20

Estimated Uses of Funds: Deposit to Escrow Fund $2,174,468.75 Deposit to Reserve Fund 179,962.50 Deposit to Improvement Fund (1) 50,000.00 Costs of Issuance (2) 163,676.95 Total $2,568,108.20

(1) To be used to reimburse City for moneys advanced for cost of the project financed with Prior Bonds. (2) Includes legal fees, initial fees, expenses and charges of the Trustee, costs of printing the Official Statement, administrative fees of the District, Underwriter’s discount, financial advisory fees, and other costs of issuance.

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SECURITY AND SOURCES OF PAYMENT FOR THE BONDS

Under the Indenture, the Bonds are secured by the “Net Special Tax Revenues”, which are the proceeds of the Special Taxes received by or on behalf of Improvement Area 1, including any prepayments thereof, interest and penalties thereon and proceeds of the redemption or sale of property sold as a result of foreclosure of the lien of the Special Taxes, which shall be limited to the amount of said lien and interest and penalties thereon (collectively, the “Special Tax Revenues”), less Administrative Expenses (as defined in the Indenture). All of the Net Special Tax Revenues and all moneys deposited in the Bond Fund, the Reserve Fund and the Special Tax Fund are pledged to secure the repayment of the Bonds. Such pledge constitutes a first lien on the Net Special Tax Revenues and such amounts.

Special Taxes

A Special Tax applicable to each taxable parcel in Improvement Area 1 will be levied and collected according to the tax liability determined by the City Council through the application of the Rate and Method and set forth in APPENDIX A hereto, for all taxable properties in Improvement Area 1. Interest and principal on the Bonds is payable from the annual Special Taxes to be levied and collected on taxable property within Improvement Area 1, from amounts held in the funds and accounts established under the Indenture (other than the Rebate Fund) and from the proceeds, if any, from the sale of such property for delinquency of such Special Taxes.

The Special Taxes are exempt from the property tax limitation of Article XIIIA of the California Constitution, pursuant to Section 4 thereof as a “special tax” authorized by a two- thirds vote of the qualified electors. The levy of the Special Taxes was authorized by the District pursuant to the Act in an amount determined according to the Rate and Method approved by the District. See “Special Tax Methodology” below and “APPENDIX A — RATE AND METHOD OF APPORTIONMENT OF SPECIAL TAX.”

The amount of Special Taxes that the District may levy in Improvement Area 1 in any year, and from which principal and interest on the Bonds is to be paid, is strictly limited by the maximum rates approved by the qualified electors within Improvement Area 1 which are set forth as the annual “Maximum Special Tax” in the Rate and Method. Under the Rate and Method, Special Taxes for the purpose of making payments on the Bonds will be levied annually in an amount, not in excess of the annual Maximum Special Tax.

The Special Taxes and any interest earned on the Special Taxes constitute a trust fund for the principal of and interest on the Bonds pursuant to the Indenture and, so long as the principal of and interest on these obligations remains unpaid, the Special Taxes and investment earnings thereon will not be used for any other purpose, except as permitted by the Indenture, and will be held in trust for the benefit of the owners thereof and will be applied pursuant to the Indenture. The Rate and Method apportions the Special Tax Requirement (as defined in the Rate and Method and described below) among the taxable parcels of real property within Improvement Area 1 according to the rate and methodology set forth in the Rate and Method. See “Special Tax Methodology” below. See also “APPENDIX A — RATE AND METHOD OF APPORTIONMENT OF SPECIAL TAX.”

The District may levy the Special Tax at the annual Maximum Special Tax rate authorized by the qualified electors within Improvement Area 1 as set forth in the Rate and Method if conditions so require. The District has covenanted to annually levy the Special Taxes

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in an amount at least sufficient to pay the Special Tax Requirement (as defined below). Because each Special Tax levy is limited to the annual Maximum Special Tax rates authorized as set forth in the Rate and Method, no assurance can be given that, in the event of Special Tax delinquencies, the amount of the Special Tax Requirement will in fact be collected in any given year. See “SPECIAL RISK FACTORS — Tax Delinquencies” herein. The Special Taxes are collected for the District by the County of Riverside in the same manner and at the same time as ad valorem property taxes.

Special Tax Methodology

The District is legally authorized and has covenanted to cause the levy of the Special Taxes on the property within Improvement Area 1 in an amount determined according to the methodology contained in the Rate and Method.

The following is a synopsis of the provisions of the Rate and Method, which should be read in conjunction with the complete text of the Rate and Method, which is attached as APPENDIX A hereto. The meaning of the defined terms used in this section are as set forth in APPENDIX A. This section provides only a summary of the Rate and Method, and is qualified by more complete and detailed information contained in the entire Rate and Method attached as APPENDIX A.

Classification of Property. Each Fiscal Year each Assessor's Parcel within Improvement Area 1 will be classified Developed Property, Approved Property, Undeveloped Property, Taxable Association Property, or Taxable Public Property and subject to the levy of Special Taxes as determined in the Rate and Method and described below. Developed Property will be further classified as either Residential Property or Non-Residential Property. The following are certain definitions within the Rate and Method. The following is not a complete listing of all definitions and reference is made to the Rate and Method (a copy of which is attached hereto as "APPENDIX A") for such complete listing:

"Approved Property" means all Assessor's Parcels of Taxable Property that are included in a final map that was recorded prior to the January 1st preceding the Fiscal Year in which the Special Tax is being levied, and that have not been issued a building permit on or before March 1 of the Fiscal Year preceding the Fiscal Year in which Special Taxes are being levied.

"Assessor's Parcel" means a lot or parcel shown on an Assessor's Parcel Map with an assigned Assessor's Parcel number in Improvement Area 1.

"Assessor's Parcel Map" means an official map of the Assessor of the County of Riverside designating parcels by Assessor's Parcel number.

"Assigned Special Tax" means the Special Tax for each Land Use Category of Developed Property, as determined in accordance with the Rate and Method.

"Association Property" means any property owned by or irrevocably offered or dedicated to or for which an easement for purposes of right of way has been granted to a property owners' association, including any master or sub association.

"Backup Special Tax per Acre" means $9,103 per acre.

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"Developed Property" means all Assessor's Parcels, exclusive of Association Property and Public Property, upon which completed Dwelling Units or non-residential buildings have been constructed or for which building permits have been issued as of March 1 of the Fiscal Year preceding the Fiscal Year for which Special Taxes are being levied.

"Dwelling Unit" or "DU" means a single family home or condominium unit.

"Exempt Property" means all Assessor's Parcels within Improvement Area 1 designated as being exempt from the Special Taxes as determined in Section E of the Rate and Method.

"Non-Residential Property" means all Assessors' Parcels of Developed Property upon which completed non-residential buildings have been constructed or for which building permits have been or may be issued for construction of such buildings, as determined by the District Administrator.

"Public Property" means property owed by or irrevocably offered or dedicated to or for which an easement for purposes of public right of way has been granted to the federal government, the State of California, the County of Riverside, the District or any other local governmental or public agency; provided, however, that any property leased by a public agency to a private entity and subject to taxation under the Act will be classified and taxed according to its use.

"Residential Property" means all Assessors' Parcels of Developed Property upon which completed Dwelling Units have been constructed or for which building permits have been or may be issued for purposes of constructing one or more Dwelling Units, as determined by the District Administrator.

"Special Tax Requirement" means the amount required in any Fiscal Year for Improvement Area 1 to (i) pay debt service on all outstanding Bonds due in the calendar year which commences in such Fiscal Year, (ii) pay periodic costs for the Bonds, including, but not limited to, costs related to credit enhancement and rebate payments, (iii), pay Administrative Expenses (as that term is defined in the Rate and Method), (iv) pay an amount equal to reasonably anticipated delinquencies in the collection of Special Taxes, and (v) pay any amounts required to establish or replenish the Reserve Fund, less (vi) a credit for funds which are available pursuant to the Indenture to pay debt service on the outstanding Bonds.

"Taxable Association Property" means all Association Property which is not Exempt Property.

"Taxable Property" means all Assessors' Parcels that are not Exempt Property. "Taxable Public Property" means all Public Property which is not Exempt Property.

"Undeveloped Property" means all Taxable Property not classified as Developed Property or Approved Property, exclusive of Taxable Association Property or Taxable Public Property.

Assigned Special Taxes and Maximum Special Taxes. The Assigned Special Taxes and Maximum Special Taxes are defined in the Rate and Method as follows:

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Developed Property:

Developed Property. The Maximum Special Tax for each Assessor's Parcel classified as Developed Property shall be the greater of (i) the applicable Assigned Special Tax, or (ii) the amount of the Backup Special Tax.

Assigned Special Tax. The Assigned Special Tax amounts for all Land Use Categories of Developed Property are described in the table below.

CITY OF DESERT HOT SPRINGS COMMUNITY FACILITIES DISTRICT NO. 2006-1 IMPROVEMENT AREA 1 ASSIGNED SPECIAL TAX RATES

Taxable Residential Floor Area Assigned Land Use Category Unit (Square Feet of DU) Special Tax Residential DU 1,549 sq ft or less $1,086 per DU Residential DU 1,550 to 1,799 sq ft $1,104 per DU Residential DU 1,800 to 2,049 sq ft $1,246 per DU Residential DU 2,050 to 2,299 sq ft $1,411 per DU Residential DU 2,300 to 2,549 sq ft $1,441 per DU Residential DU 2,550 sq ft or greater $1,562 per DU Non-Residential Acre NA $9,103 per Acre

Backup Special Tax. The total amount of the Backup Special Tax for a Final Subdivision of property will be determined by multiplying the acreage of all Assessor's Parcels of Taxable Property, exclusive of the acreage of any Taxable Association Property and/or Taxable Public Property, in the Final Subdivision by the Backup Special Tax per Acre. If a Final Subdivision includes both Assessor's Parcels or Residential Property and Assessor's Parcels of Non-Residential Property, the total amount of the Backup Special Tax for such Assessor's Parcels of Residential Property will be based only on the acreage of those Assessor's Parcels.

The Backup Special Tax for each Assessor's Parcel of Residential Property in a Final Subdivision will be determined by dividing the total amount of the Backup Special Tax for all of the Assessor's Parcels of Residential Property in the Final Subdivision, as determined as described above, by the number of Dwelling Units within such Final Subdivision and multiplying the result by the number of Dwelling Units on such Assessor's Parcel.

The Backup Special Tax for each Assessor's Parcel of Non-Residential Property in a Final Subdivision will be determined by multiplying the acreage of the Assessor's Parcel by the Backup Special Tax per Acre.

Notwithstanding the foregoing, if Assessor's Parcels of Residential Property are subsequently changed or modified by recordation of a lot line adjustment or similar instrument, the total amount of the Backup Special Tax will be recalculated so that the total amount of the Backup Special Tax for such Assessor's Parcels after such change

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will be equal to the aggregate amount of the Backup Special Tax for such Assessor's Parcels before such change occurred.

Approved Property, Undeveloped Property, Taxable Association Property and Taxable Public Property:

The Maximum Special Tax for Assessor's Parcels of Approved Property, Undeveloped Property, Taxable Association Property and Taxable Public Property is $9,103 per acre.

Method of Apportionment. Commencing Fiscal Year 2008/09 and for each following Fiscal Year, the City Council shall determine the, Special Tax Requirement and shall levy the Special Tax on all Taxable Property within Improvement Area 1 until the aggregate amount of the Special Taxes levied equals the Special Tax Requirement. The Special Tax will be levied for each Fiscal Year as follows:

First: The Special Tax shall be levied Proportionately on all Assessor's Parcels of Developed Property up to 100% of the applicable Assigned Special Tax as needed to satisfy the Special Tax Requirement.

Second: If additional monies are needed to satisfy the Special Tax Requirement after the first step has been completed, the Special Tax shall be levied Proportionately on each Assessor's Parcel of Approved Property up to 100% of the Maximum Special Tax for Approved Property.

Third: If additional monies are needed to satisfy the Special Tax Requirement after the fast two steps have been completed, then the Special Tax will be levied Proportionately on all Assessor's Parcels of Undeveloped Property up to 100% of the Maximum Special Tax for Undeveloped Property.

Fourth: If additional monies are needed to satisfy the Special Tax Requirement after the first three steps have been completed, the Special Tax to be levied on all Assessor's Parcels of Developed Property whose Maximum Special Tax is its Backup Special Tax shall be increased in equal percentages from the Assigned Special Tax up to the Maximum Special Tax for each such Assessor's Parcel.

Fifth: If additional monies are needed to satisfy the Special Tax Requirement after the first four steps have been completed, the Special Tax will be levied Proportionately on all Assessor's Parcels of Taxable Association Property up to 100% of its Maximum Special Tax;

Sixth: If additional monies are needed to satisfy the Special Tax Requirement after the first five steps have been completed, the Special Tax will be levied Proportionately on all Assessor's Parcels of Taxable Public Property up to 100% of its Maximum Special Tax.

Notwithstanding the above, under no circumstances will the Special Tax levied against any Assessor's Parcel of Residential Property for which an occupancy permit for private residential use has been issued be increased by more than ten percent (10%) per Fiscal Year as a consequence of delinquency or default by the owner in the payment of Special Taxes by the owner of any other Assessor's Parcel.

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Currently, the Special Tax is being levied against 216 parcels, which are all classified as Developed Property, under the Rate and Method. 38 are parcels owned by Skyborne Ventures and are undeveloped parcels but receive a levy of the Special Tax because building permits had been issued for the parcels. 37 of these 38 parcels have cement foundations in place, however home construction was stopped and homebuilding is not currently proceeding. The building permits have expired but the Special Tax for these 38 parcels as Developed Property continues.

Prepayment of the Special Tax. The Special Tax obligation may only be prepaid and permanently satisfied by a Parcel of Developed Property, Approved Property and/or Undeveloped Property for which a building permit has been issued, and Public Property and or Property Owner's Association Property that is not Exempt Property pursuant to the Rate and Method. The Maximum Special Tax obligation applicable to such Parcel may be 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 only be made if there are no delinquent Special Taxes with respect to such Parcel at the time of prepayment. Prepayment must be made not less than 60 days prior to any redemption date for any Bonds to be redeemed with the proceeds of such prepaid Special Taxes. See APPENDIX A hereto for the prepayment formula and the mechanics of prepayment.

Term of the Special Tax. For each Fiscal Year that any Bonds are outstanding, the Special Tax will be levied on all Assessor's Parcels of Taxable Property. If any delinquent Special Taxes remain uncollected prior to or after all outstanding Bonds are retired, the Special Tax may be levied to the extent necessary, up to the applicable Maximum Special Tax, to make up the deficiency resulting from such delinquent Special Taxes, but not later than the 2047-48 Fiscal Year.

Special Tax Fund

The Bonds are secured by a pledge of Net Special Tax Revenues, which are comprised of the Special Tax Revenues less Administrative Expenses (as defined in the Indenture). When received, the Special Taxes are required under the Indenture to be deposited into a Special Tax Fund to be held by the District in trust for the benefit of the District and the Owners of the Bonds, to the credit of which the District will deposit all Net Special Tax Revenue. Moneys in the Special Tax Fund will be disbursed as provided below and, pending any disbursement, will be subject to a lien in favor of the Owners of the Bonds.

As soon as practicable after the receipt by the District of the Special Taxes, but in any event no later than the date ten business days prior to the Interest Payment Date after such receipt, the District shall transfer such Special Taxes to the Trustee for deposit in the Special Tax Fund. On the business day immediately preceding each Interest Payment Date, after having made any requested transfer to the Administrative Expense Fund, the Trustee shall withdraw from the Special Tax Fund and transfer, first, to the Bond Fund, Net Special Tax Revenues in the amount, if any, necessary to cause the amount on deposit in the Bond Fund to be equal to the principal and interest due on the Bonds on such Interest Payment Date and, second, to the Reserve Fund, Net Special Tax Revenues in the amount, if any, necessary to cause the amount on deposit in the Reserve Fund to be equal to the Reserve Requirement. In the event that, on the business day prior to an Interest Payment Date, amounts in the Bond Fund are insufficient to pay the principal, if any, of and interest on the Bonds due and payable on such Interest Payment Date, including principal due and payable by reason of mandatory sinking fund redemption of such Bonds, the Trustee shall withdraw from the Reserve Fund, to

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the extent of any funds therein, the amount of such insufficiency, and shall transfer any amounts so withdrawn to the Bond Fund. On each Interest Payment Date, the Trustee shall withdraw from the Bond Fund for payment to the Owners of the Bonds the principal, if any, of and interest on the Bonds then due and payable, including principal due and payable by reason of mandatory sinking fund redemption of such Bonds.

Delinquent Payments of Special Tax; Covenant for Superior Court Foreclosure

The Special Tax will be collected in the same manner and the same time as ad valorem property taxes. In the event of a delinquency in the payment of any installment of Special Taxes, the District is authorized by the Act to order institution of an action in superior court to foreclose the lien therefor.

The District has covenanted in the Indenture that it will determine or cause to be determined, no later than September 15 of each year, whether or not any owners of property within the Improvement Area are delinquent in the payment of Special Taxes and, if such delinquencies exist, the District will order and cause to be commenced no later than November 1, and thereafter diligently prosecute, an action in the superior court to foreclose the lien of any Special Taxes or installment thereof not paid when due; provided, however, that the District shall not be required to order the commencement of foreclosure proceedings if (a) the total Special Tax delinquency in the Improvement Area for such Fiscal Year is less than 5% of the total Special Tax levied in such Fiscal Year, and (b) the amount then on deposit in the Reserve Fund is at least equal to the Reserve Requirement. Notwithstanding the foregoing, if the District determines that any single property owner in the Improvement Area is delinquent in excess of $2,500 in the payment of the Special Tax, then the District will diligently institute, prosecute and pursue foreclosure proceedings against such property owner. See “IMPROVEMENT AREA 1 – Delinquency History.”

The Indenture for the Prior Bonds also required the District to commence foreclosure proceedings when a certain delinquency threshold was met. To date, the District has not commenced foreclosure proceedings on any parcel in Improvement Area 1 pursuant to such requirement because the threshold was not met.

Under the Act, foreclosure proceedings are instituted by the bringing of an action in the superior court of the county in which the parcel lies, naming the owner and other interested persons as defendants. The action is prosecuted in the same manner as other civil actions. In such action, the real property subject to the special taxes may be sold at a judicial foreclosure sale for a minimum price which will be sufficient to pay or reimburse the delinquent special taxes.

The owners of the Bonds benefit from the Reserve Fund established pursuant to the Indenture; however, if delinquencies in the payment of the Special Taxes with respect to the Bonds are significant enough to completely deplete the Reserve Fund, there could be a default or a delay in payments of principal and interest to the owners of the Bonds pending prosecution of foreclosure proceedings and receipt by the District of the proceeds of foreclosure sales. Provided that it is not levying the Special Tax at the annual Maximum Special Tax rates set forth in the Rate and Method, the District may adjust (but not to exceed the annual Maximum Special Tax) the Special Taxes levied on all property within the District subject to the Special Tax to provide an amount required to pay debt service on the Bonds and to replenish the Reserve Fund.

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Under current law, a judgment debtor (property owner) has at least 140 days from the date of service of the notice of levy in which to redeem the property to be sold. If a judgment debtor fails to redeem and the property is sold, his or her 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 an action a foreclosure sale is set aside, the judgment is revived and the judgment creditor is entitled to interest on the revived judgment as if the sale had not been made (California Code of Civil Procedure Section 701.680).

Foreclosure by court action is subject to normal litigation delays, the nature and extent of which are largely dependent upon the nature of the defense, if any, put forth by the debtor and the condition of the calendar of the superior court of the county. Such foreclosure actions can be stayed by the superior court on generally accepted equitable grounds or as the result of the debtor’s filing for relief under the Federal bankruptcy laws. The Act provides that, upon foreclosure, the Special Tax lien will have the same lien priority as is provided for ad valorem taxes and special assessments.

No assurances can be given that the real property subject to a judicial foreclosure sale 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 District to purchase or otherwise acquire any lot or parcel of property foreclosed upon if there is no other purchaser at such sale.

Section 53356.6 of the Act requires that property sold pursuant to foreclosure under the Act be sold for not less than the amount of judgment in the foreclosure action, plus post- judgment interest and authorized costs, unless the consent of the owners of 75% of the outstanding Bonds is obtained. However, under Section 53356.6 of the Act, the District, as judgment creditor, is entitled to purchase any property sold at foreclosure using a “credit bid,” where the District could submit a bid crediting all or part of the amount required to satisfy the judgment for the delinquent amount of the Special Tax. If the District becomes the purchaser under a credit bid, the District must pay the amount of its credit bid into the redemption fund established for the Bonds, but this payment may be made up to 24 months after the date of the foreclosure sale.

The Special Taxes were first levied for Fiscal Year 2007-08. For current delinquency information on parcels in Improvement Area 1, see “IMPROVEMENT AREA 1 – Delinquency History” below.

Reserve Fund

A Reserve Fund (the "Reserve Fund") for the Bonds will be established under the Indenture, to be held by the Trustee. Upon delivery of the Bonds, the Reserve Fund will be established by depositing with the Trustee proceeds of the Bonds in the amount of the "Reserve Requirement" for the Bonds. The Reserve Requirement is the lesser of 10% of the original principal amount of the Bonds, 100% of maximum annual debt service on the Bonds, or 125% of average annual debt service on the Bonds, and will initially be $179,962.50. The District is required to maintain an amount of money or other security equal to the Reserve Requirement in the Reserve Fund at all times that the Bonds are outstanding. All amounts deposited in the Reserve Fund will be used and withdrawn by the Trustee 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 on, the Bonds. Whenever transfer is made from the Reserve Fund to the Bond Fund due to a deficiency in the Bond Fund, the Trustee will provide written notice thereof to the District.

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Whenever, on the Business Day prior to any Interest Payment Date, the amount in the Reserve Fund exceeds the then applicable Reserve Requirement, the Trustee will transfer an amount equal to the excess from the Reserve Fund to the Bond Fund to be used for the payment of the principal of and interest on the Bonds in accordance with the Indenture and/or to pay administrative expenses, except that investment earnings on amounts in the Reserve Fund may be withdrawn from the Reserve Fund for purposes of making payment to the Federal government to comply with rebate requirements.

Moneys in the Reserve Fund will be invested and deposited in accordance with the Indenture. Interest earnings and profits resulting from the investment of moneys in the Reserve Fund and other moneys in the Reserve Fund will remain therein until the balance exceeds the Reserve Requirement.

Whenever the balance in the Reserve Fund 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, and make any other transfer required under the Indenture, the Trustee will 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 of all of the Outstanding Bonds. If 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 will be transferred to the District, after payment of any amounts due the Trustee, to be used for any lawful purpose of the District.

Additional Bonds

Under the terms of the Indenture, the District may issue additional bonds secured by the Net Special Tax Revenues on parity with the Bonds ("Additional Bonds"). Additional Bonds may be issued as provided in the Indenture by means of a supplemental indenture and without any requirement for the consent of any Bond Owners. The conditions for the issuance of Additional Bonds include the following:

• The proceeds of the sale of such Additional Bonds shall be applied only for the purpose of (A) providing funds to pay costs of the Facilities, (B) providing funds to refund any Bonds, (C) providing funds to pay costs of issuance incurred in connection with the issuance of such Additional Bonds, and (D) providing funds to make any deposit to the Reserve Fund required pursuant to the Indenture;

• Serial Bonds of such Series of Additional Bonds shall be payable as to interest semiannually on March 1 and September 1 of each year and as to principal annually on September 1 of each year in which principal falls due, and the term Bonds of such Series of Additional Bonds shall have annual mandatory sinking fund redemptions on September 1;

• The Reserve Fund shall be increased at the time that such Additional Bonds become Outstanding to an amount at least equal to the Reserve Requirement, and an amount at least equal to the Reserve Requirement shall thereafter be maintained in the Reserve Fund; and

• The District shall have received a certificate from one or more Independent Consultants which, when taken together, certify that:

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(i) on the basis of the parcels of land and improvements existing in the District as of the March I preceding the proposed issuance of such Additional Bonds, for each Fiscal Year that Bonds will be Outstanding the amount of the Available Special Taxes that may be levied on all assessor’s parcels exclusive of association and public property, upon which completed dwelling units or non-residential buildings have been constructed (“Fully Developed Property”) in such Fiscal Year is at least equal to 110% of Annual Debt Service for the Corresponding Bond Year on all Outstanding Bonds; provided, however, that there shall be excluded from such calculation any Available Special Taxes levied or that may be levied on any parcel of Developed Property that, as of the date of such certificate, is in default in the payment of any Special Taxes levied thereon; provided further that, if such Additional Bonds are to be issued solely for the purpose of providing funds to refund any Outstanding Bonds issued hereunder and, upon such issuance, Annual Debt Service in each Bond Year, calculated for all Bonds to be Outstanding after the issuance of such Additional Bonds, shall be less than or equal to Annual Debt Service in such Bond Year, calculated for all Bonds Outstanding immediately prior to the issuance of such Additional Bonds, then the requirements of this subsection (i) shall not be required to be satisfied;

(ii) that not more than 25% of the Fully Developed Property is owned by any individual or entity or any group of related individuals or entities, including Skyborne Ventures LLC or any affiliate thereof; and

(iii) the sum of (A) the Assessed Value of parcels of Fully Developed Property for which a Qualified Appraisal Report has not been provided, plus (B) the Appraised Value of parcels of Fully Developed Property for which a Qualified Appraisal Report has been provided, as such Appraised Value is shown in such Qualified Appraisal Report, is at least four (4) times the sum of (I) the aggregate principal amount of Outstanding Bonds, plus (II) the aggregate principal amount of all fixed lien special assessments levied on parcels of Fully Developed Property, based upon information from the most recent Fiscal Year for which such information is available, plus (III) the sum of a portion of the aggregate principal amount of Other CFD Bonds, which portion shall be equal to the aggregate principal amount of such Other CFD Bonds multiplied by a fraction, the numerator of which is the amount of special taxes levied for such Other CFD Bonds on parcels of Fully Developed Property, and the denominator of which is the total amount of special taxes levied for such Other CFD Bonds on all parcels of land (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 such Other CFD Bonds occurs), based upon information from the most recent Fiscal Year for which such information is available.

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DEBT SERVICE SCHEDULE AND COVERAGE

Annual Debt Service. The annual debt service on the Bonds, based on the interest rates and maturity schedule set forth on the cover of this Official Statement, is set forth below.

DESERT HOT SPRINGS COMMUNITY FACILITIES DISTRICT NO. 2006-1 SPECIAL TAX REFUNDING BONDS SERIES 2010 DEBT SERVICE

Year Ending (Sept. 1) Principal Interest Total 2011 $ 30,000.00 $ 145,191.22 $ 175,191.22 2012 35,000.00 138,256.26 173,256.26 2013 35,000.00 136,506.26 171,506.26 2014 40,000.00 134,756.26 174,756.26 2015 45,000.00 132,756.26 177,756.26 2016 45,000.00 130,506.26 175,506.26 2017 50,000.00 128,256.26 178,256.26 2018 45,000.00 125,756.26 170,756.26 2019 50,000.00 123,506.26 173,506.26 2020 55,000.00 121,006.26 176,006.26 2021 55,000.00 118,256.26 173,256.26 2022 60,000.00 114,750.00 174,750.00 2023 65,000.00 110,925.00 175,925.00 2024 70,000.00 106,781.26 176,781.26 2025 75,000.00 102,318.76 177,318.76 2026 80,000.00 97,537.50 177,537.50 2027 85,000.00 92,437.50 177,437.50 2028 85,000.00 87,018.76 172,018.76 2029 95,000.00 81,600.00 176,600.00 2030 100,000.00 75,543.76 175,543.76 2031 110,000.00 69,168.76 179,168.76 2032 115,000.00 62,156.26 177,156.26 2033 125,000.00 54,825.00 179,825.00 2034 130,000.00 46,856.26 176,856.26 2035 135,000.00 38,568.76 173,568.76 2036 150,000.00 29,962.50 179,962.50 2037 155,000.00 20,400.00 175,400.00 2038 165,000.00 10,518.76 175,518.76 Total $2,285,000.00 $2,636,122.66 $4,921,122.66

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Estimated Debt Service Coverage. The District may levy up to the Maximum Special Tax rates on Taxable Property within Improvement Area 1, as described above. The following table sets forth the anticipated debt service coverage on the Bonds based on all parcels classified under the Rate and Method as "Developed Property" as defined the Rate and Method, which currently consists of 216 parcels (178 completed homes, 37 lots which only have a concrete foundation in place and no other development, and one lot with no improvements) taxed at the Maximum Special Tax rates under the Rate and Method. The table also shows coverage based on a levy of all classifications of parcels (394 parcels), however the need for a levy on all parcels has not yet occurred. The Bonds have been sized based upon the anticipated Special Tax revenues derived from the levy of the Special Tax only upon Developed Property, without taking into account Special Taxes that can be levied against other classifications of property. See "SECURITY AND SOURCES OF PAYMENT FOR THE BONDS – Special Taxes" and - "Special Tax Methodology.” See also OWNERSHIP AND VALUE OF PROPERTY IN IMPROVEMENT AREA 1" herein.

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DESERT HOT SPRINGS COMMUNITY FACILITIES DISTRICT NO. 2006-1 SPECIAL TAX REFUNDING BONDS SERIES 2010 DEBT SERVICE COVERAGE FROM MAXIMUM SPECIAL TAX

A+B C+D F+G E/H D/H A B C D E F G H I J MAXIMUM SPECIAL TAX ON Debt Service "DEVELOPED PROPERTY" Debt Service Coverage - Coverage - 216 All 394 “Developed” Subtotal Total Parcels Parcels Year Individually Skyborne “Developed "Undeveloped Total All Bonds City Adjusted Taxed at Taxed at Ending Owned Ventures Property” Property" Properties Debt Admin Debt "Max Special “Max Special (Sept. 1) (178 Parcels) (38 Parcels) (216 Parcels) (178 Parcels) (394 Parcels) Service Fees Service Tax" Tax” 2011 $249,199 $53,377 $302,576 $241,321 $543,896 $175,191 $35,000 $210,191 2.59x 1.44x 2012 249,199 53,377 302,576 241,321 543,896 173,256 35,000 208,256 2.61x 1.45x 2013 249,199 53,377 302,576 241,321 543,896 171,506 35,000 206,506 2.63x 1.47x 2014 249,199 53,377 302,576 241,321 543,896 174,756 35,000 209,756 2.59x 1.44x 2015 249,199 53,377 302,576 241,321 543,896 177,756 35,000 212,756 2.56x 1.42x 2016 249,199 53,377 302,576 241,321 543,896 175,506 35,000 210,506 2.58x 1.44x 2017 249,199 53,377 302,576 241,321 543,896 178,256 35,000 213,256 2.55x 1.42x 2018 249,199 53,377 302,576 241,321 543,896 170,756 35,000 205,756 2.64x 1.47x 2019 249,199 53,377 302,576 241,321 543,896 173,506 35,000 208,506 2.61x 1.45x 2020 249,199 53,377 302,576 241,321 543,896 176,006 35,000 211,006 2.58x 1.43x 2021 249,199 53,377 302,576 241,321 543,896 173,256 35,000 208,256 2.61x 1.45x 2022 249,199 53,377 302,576 241,321 543,896 174,750 35,000 209,750 2.59x 1.44x 2023 249,199 53,377 302,576 241,321 543,896 175,925 35,000 210,925 2.58x 1.43x 2024 249,199 53,377 302,576 241,321 543,896 176,781 35,000 211,781 2.57x 1.43x 2025 249,199 53,377 302,576 241,321 543,896 177,319 35,000 212,319 2.56x 1.43x 2026 249,199 53,377 302,576 241,321 543,896 177,538 35,000 212,538 2.56x 1.42x 2027 249,199 53,377 302,576 241,321 543,896 177,438 35,000 212,438 2.56x 1.42x 2028 249,199 53,377 302,576 241,321 543,896 172,019 35,000 207,019 2.63x 1.46x 2029 249,199 53,377 302,576 241,321 543,896 176,600 35,000 211,600 2.57x 1.43x 2030 249,199 53,377 302,576 241,321 543,896 175,544 35,000 210,544 2.58x 1.44x 2031 249,199 53,377 302,576 241,321 543,896 179,169 35,000 214,169 2.54x 1.41x 2032 249,199 53,377 302,576 241,321 543,896 177,156 35,000 212,156 2.56x 1.43x 2033 249,199 53,377 302,576 241,321 543,896 179,825 35,000 214,825 2.53x 1.41x 2034 249,199 53,377 302,576 241,321 543,896 176,856 35,000 211,856 2.57x 1.43x 2035 249,199 53,377 302,576 241,321 543,896 173,569 35,000 208,569 2.61x 1.45x 2036 249,199 53,377 302,576 241,321 543,896 179,963 35,000 214,963 2.53x 1.41x 2037 249,199 53,377 302,576 241,321 543,896 175,400 35,000 210,400 2.59x 1.44x 2038 249,199 53,377 302,576 241,321 543,896 175,519 35,000 210,519 2.58x 1.44x

Source: The Underwriter.

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IMPROVEMENT AREA 1

General Description

All of the land within the District is located within the boundaries of the City. The District as a whole consists of five improvement areas in two non-contiguous sections of the City. When the District was formed in early 2007, future development was planned to contain approximately 2,346 single-family residences on approximately 622 gross acres within the five improvement areas. Development has not proceeded as projected when the District was formed. The Bonds are issued only with respect to Improvement Area 1 of the District; security for the Bonds is limited to Special Taxes levied on the 394 parcels in Improvement Area 1.

District Property Background. Western Pacific Housing, Inc., a Delaware corporation ("Western Pacific") under the trade name "D.R. Horton America's Builder" originally acted as master developer of the property within Improvement Areas Nos. 1 through 4, which it originally intended to develop as a master-planned community known as "Skyborne." On September 19, 2008, Western Pacific sold substantially all of its interest in the Skyborne development to an unrelated entity, Skyborne Ventures LLC, a Delaware limited liability corporation ("Skyborne Ventures"). Given current real estate development market conditions, Skyborne Ventures has no current plans to complete any portion of the Skyborne development, preferring to hold the property and sell the land to homebuilders at such time as market conditions warrant.

At completion, Improvement Areas 1-4 were expected to consist of ten villages containing approximately 2,080 single-family residences on approximately 608 gross acres. The table below details the anticipated number of units at completion in each of the improvement areas under Western Pacific's original development plan. See "PROPERTY OWNERSHIP AND DEVELOPMENT" for a more detailed description of the development plan for Improvement Area 1.

Estimated Number of Villages Project Names Units at Completion Improvement Area 1 1 & 2 Aurora & Hopewell 394 Improvement Area 2 3 & 10 tbd 468 Improvement Area 3 4, 7, 8 & 9 tbd 597 Improvement Area 4 5 & 6 tbd 621 Total 2,080

Improvement Area No. 5 was the subject of formation proceedings to be developed with 266 single-family residences by Century Vintage Homes. There is currently no development activity ongoing in Improvement Area No. 5.

The Bonds are not secured by property in Improvement Areas 2-5.

Improvement Area 1. Improvement Area 1 is comprised of Tract Numbers 32030-1 and 32030-2 (final maps recorded June 19, 2006) within the City, and a total of 117.75 gross acres of land, including approximately 60 residential acres, with the balance being common areas and private streets. The property within Improvement Area 1 is bounded on the east by Karen Avenue and the south by Pierson Avenue. North of Improvement Area 1 are the

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unimproved future Villages 3 and 4 of Skyborne together with a now completed fire station. West of Improvement Area 1 is the unimproved future Village 5 of Skyborne.

Improvement Area 1 is the first improvement area within the District to attempt development and consists of two planned villages, Village 1 generally known as “Aurora at Skyborne” and Village 2 generally known as “Hopewell at Skyborne.” Final tract maps for both Villages 1 and 2 were recorded on June 19, 2006. Upon completion of planned development, Improvement Area 1 was expected to include 394 single-family residences on 60 acres, with approximately 58 acres devoted to common areas and private roadways. Village 1 (Aurora) consists of 58.63 gross acres, of which approximately 24 acres are 154 lots with completed homes; and Village 2 (Hopewell) consists of 59.12 gross acres, of which approximately 36 acres are 240 single-family residential lots.

Currently, 125 homes have been built and sold Village 1 and 53 have been built and sold in Village 2. The single-family residences constructed by Western Pacific within Village 1 began in 2006 and contained three floor plans ranging in size from 1,602 square feet to 2,000 square feet. Model homes for that project opened to the public and sales commenced in 2006. The model homes have since been sold. Further construction and marketing has stopped. Construction of the 50 single-family residences constructed by Western Pacific within Village 2 began in 2006 and were originally offered in seven floor plans ranging in size from 1,452 square feet to 2,964 square feet. Three model homes for that project opened to the public and sales commenced in 2006; those model homes have since been sold. Further construction and marketing has stopped.

Current Development in Improvement Area 1. Home construction stopped after construction and sale of the 125 homes in Village 1 and 53 in Village 2 described in the previous paragraph. Home construction currently remains stopped; the original builders are no longer involved and no projection has been made for the resumption of construction on the undeveloped parcels (which include 37 parcels with concrete slabs in place). The building permits issued for the 37 parcels with concrete slabs in place (plus one other parcel with no slab) have expired. The current owner of the undeveloped lots is Skyborne Ventures, an entity which is not a homebuilder and is holding the property for investment and eventual resale. No information is known or available as to if or when home construction will resume and if so, future home sizes or pricing on the 216 residential lots not currently improved with homes. No assurance is made that any future development will occur on the 216 residential lots not currently improved with homes. Bond investors should be aware of the possibility of those lots remaining unimproved indefinitely.

For information on historical and current resale home prices in Improvement Area 1, see the appraisal attached hereto. See also "OWNERSHIP AND VALUE OF PROPERTY IN IMPROVEMENT AREA 1."

Utilities. Utility services for the property in Improvement Area 1 are provided by the following:

Water/Sanitary Sewer: Mission Springs Water District Gas: The Gas Company Electricity: Southern California Edison Phone: Verizon

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Flood Zone Status. Pursuant to FEMA Flood Insurance Rate Map Panel No. 060245- 0900 B dated October 30, 1988, the property within Improvement Area 1 is situated within Flood Zones B and C described as areas between the limits of the 100-year and 500-year floodplain. Residents within Zone B and Zone C are not required to obtain flood hazard insurance.

Seismic Conditions. There are several identified faults within close proximity to or within the boundaries of the District, including the Southern Segment of the San Andreas Fault that could potentially result in damage to buildings, roads, bridges, and property within the District in the event of an earthquake. As described in the Appraisal, no faults are known to pass through the Improvement Area 1 site. Improvement Area 1 is located approximately 2 miles southwest of the Mission Creek Fault and approximately 3 miles northeast of the Banning Fault. Improvement Area 1 is located within Zone 3, an area of moderate seismic activity, considered to be the lowest risk zone in California. In addition Improvement Area 1 is not located within a Fault-Rupture Hazard Zone (formerly known as an Alquist-Priolo Special Study Zone), as defined by Special Publication 42 of the California Department of Conservation, Division of Mines and Geology. Due to the distance from any active faults or study zones, on-site fault rupture hazards are unlikely to occur. See "SPECIAL RISK FACTORS — Property Values- Natural Disasters."

Delinquency History

There are 13 (of the 216 levied) parcels delinquent in the payment of Special Taxes in Improvement Area 1 as of June 2010; 1 parcel is delinquent for 2 years, 7 are delinquent for both installments of the 2009-10 Special Taxes, and 6 are delinquent for only the second installment of the 2009-10 Special Taxes. The following table summarizes the delinquency status since the levy for the Special Taxes began.

City of Desert Hot Springs Community Facilities District No. 2006-1 Improvement Area 1 Delinquency Summary Fiscal Years 2007-08 to 2009-10

No. of Fiscal Parcels Parcels Annual Amount Percent Year Levied Delinquent Special Tax Delinquent Delinquent 2007-08 154 0 $176,974 $0 0.00% 2008/09 216 1 258,827 1,246 0.48 2009/10 – 1st 216 7 129,413 4,384 3.38 2009/10 – 2nd 216 13 129,413 7,829 6.04

Source: Riverside County Tax Collector data, compiled by Webb Associates. Data is as of June 16, 2010.

All of the delinquencies are on property owned by individual homeowners; none of the delinquencies are on the 38 taxed parcels owned by Skyborne Ventures (which parcels are undeveloped but receive a levy of the Special Tax because building permits had been issued for the parcels, which triggered the Special Tax levy on such parcels as Developed Property).

Future delinquencies could increase as a result of factors such as changes in the local or national economy, increases in the interest rates applicable to variable rate mortgages on properties within Improvement Area 1, risks associated with the use of nontraditional mortgages and/or increases in the unemployment rate in the area. See "SPECIAL RISK FACTORS –

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Current Market Conditions Increasing Risk of Mortgage Default," and " – Limited Obligation of the District To Pay Debt Service."

OWNERSHIP AND VALUE OF PROPERTY IN IMPROVEMENT AREA 1

There are 394 residential lots within Improvement Area 1. As of June 2010, 178 lots have been improved with single family homes owned by individual homeowners; the remaining 216 lots are finished or near-finished but otherwise unimproved (other than 37 of the 216 lots which have concrete slabs for home development, but development is not proceeding and building permits for such lots have expired). The unfinished lots are owned by Skyborne Ventures LLC, a Delaware limited liability company ("Skyborne Ventures"), an entity holding the property for resale.

The information about Skyborne Ventures contained in this Official Statement has been provided by representatives of Skyborne Venture and has not been independently confirmed or verified by the Underwriter, the City or the District. Neither the Underwriter, the City nor the District make any representation as to the accuracy or adequacy of this information. There may be material adverse changes in this information after the date of this Official Statement. No assurance can be given that the proposed development will occur as described herein or that it will be completed in a timely manner, if at all, or that the current property owners will continue to own the property.

The information herein regarding ownership of property in Improvement Area 1 has been included because it is considered relevant to an informed evaluation of the Bonds. The inclusion in this Official Statement of information related to Skyborne Venture and individual owners should not be construed to suggest that the Bonds, or the Special Taxes that will be used to pay the Bonds, are recourse obligations of any property owner in Improvement Area 1. A property owner may sell or otherwise dispose of land within Improvement Area 1 or a development or any interest therein at any time. Development is currently suspended and if resumed may be abandoned at any time.

Neither the Bonds nor the Special Taxes securing the Bonds are personal obligations of Skyborne Venture and/or individual owners and, in the event that a property owner defaults in the payment of its Special Taxes, the District may proceed with judicial foreclosure but has no direct recourse to the assets of such property owner. See "RISK FACTORS" herein.

Property Ownership Background

At the time the Prior Bonds were issued (November 2008), 163 lots represented homes owned by individual owners (six were owned by members of Skyborne Ventures, as individuals) and of the 231 then-remaining lots within Improvement Area 1, 216 were owned by Skyborne Ventures and 15 were owned by Western Pacific Housing, Inc.

Western Pacific was the prior owner and developer of the land within Improvement Areas 1 through 4 in the District, which it intended to develop in a master-planned community generally known as "Skyborne." Skyborne encompasses ten planned villages. Improvement Area 1 encompasses Villages 1 and 2. On September 19, 2008, Skyborne Ventures member Scott McDaniel, as an individual, purchased 3 model homes in Village 1, Skyborne Ventures member James M. Kozak, as an individual, purchased three model homes in Village 2, and Skyborne Ventures purchased substantially all of Western Pacific's remaining interest in the

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Skyborne development. Western Pacific is a wholly-owned subsidiary of D.R Horton, Inc., a Delaware corporation ("D.R. Horton") and originally developed the property within Improvement Area 1 under the trade name "D.R. Horton America's Builder." At the time the Prior Bonds were issued, of the 154 total lots within Village 1 (Aurora), 110 were completed homes owned by individuals and of the 240 lots in Village 2 (Hopewell), 53 were completed homes owned by individuals.

On September 19, 2008, Skyborne Ventures and Western Pacific closed a purchase- sale transaction, pursuant to which Skyborne Ventures purchased substantially all of Western Pacific's holdings in each of the improvement areas within the District for a purchase price of $7,800,000 which was paid in cash. Western Pacific retained ownership of 15 homes that were either complete or substantially complete, some of which were in escrow with individual purchasers. Skyborne Venture's purchase price included 29 finished lots within Village 1 (Aurora) (all of which are considered Developed Property under the Rate and Method) and 187 finished lots in Village 2 (Hopewell) (of which nine are considered Developed Property under the Rate and Method, the remainder not having received building permits). Substantially concurrently with that transaction, Scott McDaniel, as an individual, closed three purchase-sale transactions with respect to three completed model homes in Village 1 at the aggregate purchase price of $600,000, paid in cash. Also substantially concurrently with the Skyborne Ventures transaction, James M. Kozak, as an individual, closed three purchase-sale transactions with respect to three model homes in Village 2 (Hopewell) for the aggregate purchase price of $600,000 which was paid in cash. Skyborne Ventures also purchased 1,686 lots with tentative map approval in villages 3-10 (encompassing Improvement Areas Nos. 2 through 4, inclusive, in the remainder of the Skyborne development). The purchase price also included the purchase by Skyborne Ventures or all remaining improvements within Skyborne not yet turned over to the Skyborne Homeowners Association, the City or the Mission Springs Water District.

As of the approximate date the Prior Bonds were issued, of the 394 single-family lots within Improvement Area 1, individual homeowners owned 163 homes (including 110 homes within Village 1 (Aurora) and 53 homes within in Village 2 (Hopewell)). Of the remaining 231 lots (44 within Village 1 and 187 within Village 2 (Hopewell)), 216 were owned by Skyborne Ventures (29 within Village 1 (Aurora) and 187 within Village 2 (Hopewell)) and 15 within Village 1 (Aurora) were owned by Western Pacific. Of the 15 lots with completed or nearly completed homes owned by Western Pacific in Village 1 (Aurora), six were in escrow with individual homebuyers and the remaining nine were being held available for sale in Western Pacific's inventory. Western Pacific subsequently sold the nine completed homes in standing inventory and later sold its remaining holdings in Improvement Area 1 to Skyborne Ventures.

Current Property Ownership

Currently, the Special Tax levy on “Developed Property” under the Rate and Method is sufficient to meet the Special Tax Requirement, of which debt service on the Prior Bonds is the major component. The levy is based on allocating the Special Tax Requirement among the 216 parcels classified as Developed Property, comprised of 178 homes and 38 undeveloped lots. The 38 undeveloped parcels are classified as Developed Property for purposes of allocating the Special Tax due to the fact that building permits had been issued for the parcels, which triggered the “Developed Property” Special Tax classification and levy. 37 of those parcels have concrete slabs in place, however home construction was stopped and homebuilding is not currently proceeding. The building permits for the 38 undeveloped parcels have expired but such parcels will continue to be subject to the Special Tax levy as Developed Property under

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the Rate and Method. All the 38 lots are owned by Skyborne Ventures and are being held for eventual resale.

The 178 single-family homes in Improvement Area 1 have sold and resold periodically since construction in 2006 and 2007 and are owned by individual homeowners, financial institutions or government supported enterprises such as Fannie Mae and Freddie Mac. Some hold title to more than one property. Many of the more recent sales represent transfers that have been recorded when banks have taken possession of mortgaged homes and again when banks have sold these homes to private parties. The situation is not unlike what has occurred in other areas of Riverside County and the region as a whole.

The 216 finished lots with no homes on them, including the 37 with concrete foundations in place but home construction stopped (which are classified as “Developed Property” for purposes of application of the Special Tax because building permits had been issued) and one other parcel with no slab, are owned by Skyborne Ventures. The building permits issued for the 37 parcels with concrete slabs in place, plus one other parcel with no slab, have expired. Skyborne Ventures acquired the 216 lots on September 19, 2008, as summarized above. The transfer included not only the 216 finished/near-finished lots but also 1,686 mapped but unfinished lots in Skyborne Villages 3 through 10 (not in Improvement Area 1). See “IMPROVEMENT AREA 1 – General Description” above.

Skyborne Ventures is not a homebuilder and is holding its property in Improvement Area 1 for resale to homebuilders. Skyborne Ventures currently intends to hold the property in Improvement Area 1 and other parts of the District and maintain it in its current condition until the local real estate market returns to a condition under which home builders and land developers are able to achieve a profitable return on investment. Skyborne Ventures does not currently intend to make any sales of lots to builders in Improvement Area 1 or commence any further infrastructure improvements in other villages within Skyborne until the market improves.

Skyborne Ventures

Skyborne Ventures LLC is a Delaware limited liability company formed for the sole purpose of holding the property in Skyborne purchased from Western Pacific. Skyborne Ventures' members are James M. Kozak, as member and manager, Scott McDaniel, as member and manager and Lansing Industries, Inc. Profit Sharing Plan and Trust, as member. Gregory P. Lansing is the president and primary principal of Lansing Industries, Inc. Profit Sharing Plan and Trust. Skyborne Ventures was initially capitalized by contributions from its members in the amount of $7,800,000 which was used to pay the purchase price of the property purchased by Skyborne Ventures from Western Pacific in 2008. In addition, the members have funded approximately $1 million of additional capital for payment of taxes, HOA fees and on- going maintenance and upkeep of the 216 Finished Lots remaining in Improvement Area 1 and the remaining 1,686 lots in Skyborne Villages 3 through 10. Skyborne Ventures has not previously participated in the formation of or financing by a Mello-Roos Community Facilities District. Except with respect to the Prior Bonds, Skyborne Ventures has not undertaken any previous continuing disclosure obligation nor has it ever been delinquent in the payment of any real estate taxes with respect to properties its owns.

The following are brief biographies of members of Skyborne Ventures.

James M. Kozak is currently the President of Strategic Land Partners, L.P., of San Diego, California. For the previous eight years, Mr. Kozak was the President of Strata Equity

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Group, Inc. where he was responsible for direct investment in real estate investment opportunities ranging from raw land to resort/residential master planned communities. Mr. Kozak has worked in real estate acquisition, management and development since 1981.

Gregory P. Lansing is President of Lansing Companies, LLC, a land investment and development firm focused on the Southern California region, specifically the region known as the Inland Empire. Mr. Lansing has negotiated and brokered in excess of $500 million of Inland Empire land purchases and sales. He is a California licensed real estate broker.

Scott E. McDaniel presently is the manager of Regal Development, LLC which is engaged in the acquisition of and joint-venture development of large parcel land in Southern California. Mr. McDaniel is also a general partner in TMP Properties which is a real estate syndication firm engaged primarily in acquiring and developing raw land for sale to merchant builders.

The Appraisal

General. Bruce W. Hull & Associates, Inc., Ventura, California (the “Appraiser”) prepared an appraisal report dated July 12, 2010 of taxable property in Improvement Area 1, with a date of value of July 1, 2010 (the “Appraisal”). The Appraisal was prepared at the request of the City.

The Appraisal is set forth in APPENDIX B hereto. The description herein of the Appraisal is intended for limited purposes only; the Appraisal should be read in its entirety. The conclusions reached in the Appraisal are subject to certain assumptions and qualifications which are set forth in the Appraisal.

Value Estimate. The Appraisal valued the fee simple estate, subject to the Special Taxes, of the taxable property in Improvement Area 1, consistent with the Uniform Standards of Professional Appraisal Practice, the Appraisal Standards for Land-Secured Financings, issued by the California Debt and Investment Advisory Commission, and subject to the limiting conditions, assumptions and hypothetical conditions stated in the Appraisal; see Appendix B as to such limitations and assumptions. The Appraiser assigned the following market value as of the July 1, 2010 valuation date:

Finished Homes (178 homes) $26,080,000 Finished Lots (216 lots) 6,460,000 Total Estimated Value (394 parcels) $32,540,000

The preceding values are stated subject to the limiting conditions, hypothetical conditions, extraordinary assumptions and appraiser’s certification included in the Appraisal. The Appraisal is defined as a Summary Appraisal Report, which is intended to comply with the reporting requirements set forth under Standards Rule 2-2 of the Uniform Standards of Professional Appraisal Practice, effective January 1, 2010, for a Summary Appraisal Report. It is intended to follow the standards set forth in Appraisal Standards for Land-Secured Financings, issued by the California Debt and Investment Advisory Commission and last updated in July 2004. The Appraisal is set forth in Appendix B.

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Appraisal Methodology. The Appraisal specifies the methodology used to estimate value. The Appraiser did not develop or rely upon a so-called “developer method” discounted cash-flow analysis, since the Appraiser determined sufficient market data was available covering bulk lot sales of finished, semi-finished and mapped lots. The Appraiser developed a residual technique in which he attempted to reflect a calculation that would be performed by a typical merchant builder. For the purposes of developing an opinion of market value for both the existing single-family residences and the finished/near-finished lots, the Appraiser states that he relied upon the sales comparison approach. The City did not direct the Appraiser to use or refrain from using any particular methodologies.

Valuation Reconciliation. The Appraisal reflects the following reconciliation. Relying on a mass appraisal technique (described in the Appraisal), as well as examining individual sales, pending sales and listings, the Appraiser arrived at a conclusion of value for the individually owned homes characterized by assigning the built homes to three value tiers, based on economies of scale and barriers to entry. These assigned values are $80 per square foot for homes between 1,400 and 1,800 square feet; $78 per square foot for homes between 1,801 and 2,200 square feet; and $76 per square foot for homes above 2,200 square feet. The indicated aggregate retail value is $26,078,252, which, divided by the subject improvement area’s 178 homes equates to an average retail value of $146,507 per home. The Appraiser rounded this to $26,080,000.

As to the undeveloped lots, the Appraiser developed a conclusion of value for the finished/nearly finished lots based on an examination of finished lot sales, pending sales and listings. He also performed a residual method as a check of reasonableness, and arrived at an assigned value conclusion of $35,000 per finished lot (expressed as part of a bulk value). Multiplied by 216, this rendered an initial indicated bulk value of $7,560,000. The cost to complete the lots was provided by the City Engineer, and totaled $831,600 for Village 1 (Aurora) and $404,700 for Village 2 (Hopewell). The Appraiser opted to rely on the City Engineer’s estimates, deeming them to be recent. There are 37 lots that are finished and contain poured slabs. The building permits are expired for these lots; as such the Appraiser concluded that the benefit of the poured slabs is offset by the expired permits. For this reason, the Appraiser treats them as contribution-neutral. The cost to complete the finished/nearly finished lots, according to the City, equates to $5,093 per lot. Considering cost to complete, the Appraiser concluded a bulk value of $29,907 per lot or $6,459,912 and rounded it to $6,460,000.

Assumptions and Limiting Conditions. In considering the estimate of value evidenced by the Appraisal, the Appraisal is based upon a number of standard and special assumptions which affect the estimates as to value, some of which include the following. See “APPENDIX B – THE APPRAISAL.”

• The property is appraised free and clear of any or all liens and encumbrances unless otherwise stated in the Appraisal. The valuation reflects the existence of the Special Tax.

• 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 arranging for engineering studies that may be required to discover them.

• The Appraiser is not qualified to detect hazardous waste and/or toxic materials. Any comment by the appraiser that might suggest the possibility of the

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presence or absence of such substances should not be taken as confirmation of the presence or absence of hazardous waste and/or toxic materials. Such determination would require investigation by a qualified expert relating to asbestos, urea-formaldehyde foam insulation, or other potentially hazardous materials, which may affect the value of the property. The Appraiser’s value estimate is predicated on the assumption that there is not such material on or in the property that would cause a loss in value unless otherwise stated in the Appraisal. No responsibility is assumed for any environmental conditions, or for any expertise or engineering knowledge required to discover them. The appraiser’s descriptions and resulting comments are the result of the routine observations made during the appraisal process.

• The Appraiser relied on cost estimates that were provided by the City Engineer. The report is conditioned upon that information being correct and reliable.

Limitations of Appraisal Valuation. Property values may not be evenly distributed throughout Improvement Area 1; thus, certain parcels may have a greater value than others. This disparity is significant because in the event of nonpayment of the Special Tax, the only remedy is to foreclose against the delinquent parcel.

No assurance can be given that the foregoing valuation can or will be maintained during the period of time that the Bonds are outstanding in that the City has no control over the market value of the property within Improvement Area 1 or the amount of additional indebtedness that may be issued in the future by other public agencies, the payment of which, through the levy of a tax or an assessment, may be on a parity with the Special Taxes. See “Overlapping Liens and Priority of Lien” below.

For a description of certain risks that might affect the assumptions made in the Appraisal, see “SPECIAL RISK FACTORS” herein.

Value to Lien Ratios

The aggregate property valuation of the real property within Improvement Area 1 has been estimated according to the Appraisal to be $32,540,000. See “Ownership and Valuation of Property in Improvement Area 1” above. The principal amount of the Bonds for Improvement Area 1 is $2,285,000. Consequently, the aggregate value of the taxable real property within the District is 14.24 times the aggregate principal amount of Bonds. Currently, only the completed homes and 38 of the undeveloped lots are taxed, since taxing at that level generates sufficient moneys to pay the Prior Bonds. See the tables below for a value to lien ratio based only on the currently taxed parcels. Additional bonds for the Improvement Area 1 are authorized to be issued; the District cannot predict if or when additional bonds will be issued.

In comparing the aggregate value of the real property within Improvement Area 1 and the principal amount of the Bonds, it should be noted that only the Assessor’s parcel of real property upon which there is a delinquent special tax can be foreclosed upon. All of the real property within Improvement Area 1 cannot be foreclosed upon as a whole to pay delinquent special taxes unless all of the property is subject to delinquent special taxes. Individual parcels may be foreclosed upon to pay delinquent special taxes levied against such parcels only. See "SECURITY AND SOURCES OF PAYMENT FOR THE BONDS.”

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The principal amount of the Bonds is not allocated pro-rata among the parcels within Improvement Area 1; rather, the annual special taxes for Improvement Area 1 will be billed annually for each parcel within Improvement Area 1. Upon sale of parcels, the buyer typically acquires the property subject to the unpaid portion of any special taxes and assessments levied against the parcel purchased. Special taxes and assessments are not required to be removed from the property and are not required to be, but may be, paid off in full upon transfer of property or upon development of the property.

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The following table summarizes the appraised value to lien ratio of all parcels in Improvement Area 1. Currently, only the completed homes and 38 of the undeveloped lots (all of which parcels constitute Developed Property under the Rate and Method) are taxed, since taxing at that level generates sufficient moneys to pay the Prior Bonds and will generate sufficient moneys to pay the Bonds.

City of Desert Hot Springs Community Facilities District No. 2006-1 Improvement Area 1 Estimated Value to Lien Ratios

City of Desert Hot Aggregate Springs Outstanding City of Desert CFD No. & City of Aggregate Projected Hot Springs 2006-1, IA 1 Desert Hot Outstanding Dwelling Allocated Estimated Percentage General CFD No. Debt Value- Springs CFD & Proposed Units at Property FY 2010-11 of FY 2010- Obligation 2006-1, IA 1 to-Lien No. 2006-1, IA Debt Value-to- Property Owner (1) Buildout Value (2) (3) Levy (4) 11 Levy Bond Debt 5) Debt (6) Ratio (7) 1 Debt Lien Ratio (8) Individual Owners Developed 178 $26,080,000 $213,162 82.36% $528,707 $1,881,926 13.86:1 $2,410,633 10.82:1 Skyborne Ventures, LLC Developed 38 1,136,482 45,665 17.64 23,039 403,074 2.82:1 426,113 2.67:1 Skyborne Ventures, LLC Undeveloped 178 5,323,518 -- 0.00 107,921 -- -- 107,921 49.33:1 Total 394 $32,540,000 $258,827 100.00% $659,667 $2,285,000 14.66:1 $2,944,667 11.05:1

(1) Development status based upon definition of developed as found in the Rate and Method of Apportionment. (2) Reflects the appraised value based on appraisal ownership status as of July 12, 2010, the date of value of the Appraisal. (3) The appraised values are based upon a per lot appraised amount consistent with the Appraiser's definition of developed. (4) Estimated Fiscal Year 2010-2011 Special Tax Levy based upon development status per the RMA definition of developed, as of July 1, 2010. (5) Consisting of Palm Springs Unified School District and Desert Community College District general obligation debt, based on Fiscal Year 2009-2010 Equalized Roll Assessed Valuation allocated to property owners based on ownership as of July 1, 2010. (6) Responsibility of the par amount has been allocated based on the projected FY 2010-2011 special tax levy, for which Principal is not amortized and Interest is not capitalized, based on development status, as defined by the RMA, as of July 1, 2010. (7) The Value-to-Lien ratios have been derived using the Appraised Value for both Developed and Undeveloped Parcels and the responsibility of the City of Desert Hot Springs CFD No. 2006-1, Improvement Area 1 Debt has been determined based only on the Special Tax that can be generated by Developed Parcels. (8) The Value-to-Lien ratio has been derived using the Appraised Value for both Developed and Undeveloped parcels and the responsibility of the Aggregate Outstanding and CFD No. 2006-1, Improvement Area 1 Debt as determined by the amount applicable to all parcels within Improvement Area No. 1. Source: Albert A. Webb Associates.

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Direct and Overlapping Indebtedness

The ability of the current property owners or future owners of land within Improvement Area 1 to pay the Special Taxes could be affected by the existence of other taxes and assessments imposed upon the property. Certain of these taxes relate to direct and overlapping tax and assessment debt set forth in the following table (the "Debt Report"). No assurance can be given that the assessed value of property within Improvement Area 1 will not be revised or that any such revision will not result in the assessed value of such property being revised downward. The District and the City anticipate that, due to economic conditions, the County of Riverside may revise such assessed values downward in 2010-11 and some subsequent years.

The Debt Report has been derived from data assembled and reported to the District by Albert A. Webb Associates, as of July 1, 2010. Neither the District, the City nor the Underwriter have independently verified the information in the Debt Report and do not guarantee its completeness or accuracy.

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City of Desert Hot Springs Community Facilities District No. 2006-1 Improvement Area 1 Direct and Overlapping Debt as of 7/1/2010

Assessed Value: 2010-2011 Equalized Roll Assessed Valuation $29,855,033

Land Secured Bond Indebtedness Parcels in Amount Outstanding Direct and Overlapping Bonded Debt Type Issued Outstanding % Applicable CFD No. 2006-1 IA 1(2) Applicable CITY OF DESERT HOT SPRINGS CFD NO. 2006-1, IA No. 1 CFD $2,220,000 $2,220,000 100.000% 394 $2,220,000 TOTAL LAND SECURED BONDED DEBT (1) $2,220,000

Authorized but Unissued Direct and Parcels in Amount Overlapping Indebtedness Type Authorized Unissued % Applicable CFD No. 2006-1 IA 1(2) Applicable CITY OF DESERT HOT SPRINGS CFD NO. 2006-1, IA No. 1 CFD $8,000,000 $5,780,000 100.000% 394 $5,780,000 TOTAL UNISSUED LAND SECURED INDEBTEDNESS (1) $5,780,000 TOTAL OUTSTANDING AND UNISSUED LAND SECURED INDEBTEDNESS $8,000,000

General Obligation Bond Indebtedness Parcels in Amount Outstanding Direct and Overlapping Bonded Debt Type Issued Outstanding % Applicable (3) CFD No. 2006-1 IA 1(2) Applicable PALM SPRINGS UNIFIED SCHOOL DISTRICT GO $394,039,035 $354,469,035 0.140080% 394 $496,540 DESERT COMMUNITY COLLEGE GO $346,500,000 $323,954,507 0.050355% 394 $163,127 TOTAL GENERAL OBLIGATION BONDED DEBT (1) $659,667

Authorized but Unissued Direct and Parcels in Amount Overlapping Indebtedness Type Authorized Unissued % Applicable (3) CFD No. 2006-1 IA 1(2) Applicable PALM SPRINGS UNIFIED SCHOOL DISTRICT GO $780,500,000 $386,460,965 0.140080% 394 $541,355 DESERT COMMUNITY COLLEGE GO $346,500,000 $0 0.050355% 394 $0 TOTAL UNISSUED GENERAL OBLIGATION INDEBTEDNESS (1) $541,355 TOTAL OUTSTANDING AND UNISSUED GENERAL OBLIGATION INDEBTEDNESS (1) $1,201,022

TOTAL OF ALL OUTSTANDING DIRECT AND OVERLAPPING BONDED DEBT (1) $2,879,667 TOTAL OF ALL OUTSTANDING AND UNISSUED DIRECT AND OVERLAPPING INDEBTEDNESS (1) $9,201,022

$32,540,000 Ratios to July 12, 2010 Appraised Valuation (4) Outstanding Land Secured Bonded Debt 14.66:1 Outstanding General Obligation Bonded Debt 49.33:1 Total Outstanding Bonded Debt 11.30:1 Unissued Land Secured Indebtedness 5.63:1 Unissued General Obligation Indebtedness 60.11:1 Total Unissued Indebtedness 5.15:1 Total Outstanding and Unissued Land Secured and General Obligation Indebtedness 3.54:1 (1) Assumed issuance of the Series 2010 Refunding Bonds in the original principal amount of $2,220,000. Albert A. Webb Associates is not aware of any additional bonded debt for parcels in the District for the referenced Fiscal Year, 2010-11. (2) As of Fiscal Year 2010-11, all parcels had subdivided for CFD 2006-1, Improvement Area No. 1. (3) % Applicable based upon 2009-10 Assessed Values for Direct and Overlapping Bonded Debt Districts. (4) As of July 12, 2010 Summary Appraisal Report prepared by Bruce W. Hull & Associates, Inc. Source: Albert A. Webb Associates

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Overlapping Assessments and Taxes

The following overlapping assessments and taxes are applicable to all properties within Improvement Area 1:

Overlapping Assessments:

Desert Water Agency. An assessment is levied by the Desert Water Agency at a rate of $0.08 per $100 of assessed value per parcel and pays for the state water project, valley-wide.

Desert Hot Springs LMD. The assessment pays for energy costs for street lighting, operation and maintenance of the facilities, and incidental costs of streetlights within Improvement Area 1. The assessment is currently $40.56 per parcel.

Desert Hot Springs Public Safety Fees. The assessment pays for the City of Desert Hot Springs Public Safety Fees. The assessment is currently $259.46 per parcel.

Desert Hot Springs Public Safety Measure Tax. The assessment is used to fund the City of Desert Hot Springs Public Safety Measure Tax. The assessment is currently $123.16 per parcel.

Riverside County Flood Control. An assessment is levied by the Riverside County Flood Control $3.64 per parcel. The assessment pays for the costs associated with the development, implementation, and management of storm water management activities required by the federally mandated NPDES Permit program.

CSA 152. The assessment is levied by the County of Riverside to pay County Flood Control stormwater/cleanwater charges. The assessment is currently $1.56 per parcel.

Coachella Mosquito and RIFA Fees. The assessment is used to pay for Coachella Valley mosquito and RIFA fees. The assessment is currently $16.48 per parcel.

City of Desert Hot Springs Drainage Assessment District No. 1. The assessment pays for the costs associated with the construction, operation, maintenance and servicing of flood control and appurtenant facilities including, but not limited to, personnel, electrical energy, utilities and other items necessary for the satisfactory operation of these services. There are currently twelve zones within the Drainage Assessment District, each with a different rate of assessment. The parcels in Improvement Area 1 are within Zone 12 and are currently charged a rate of $72.68 per single-family residence.

City of Desert Hot Springs Landscape and Lighting Maintenance District No. 2. The assessment pays for the landscape and lighting improvements and maintenance within the District. There are currently thirteen zones within the lighting maintenance district each with a different rate of assessment. The parcels in Improvement Area 1 are within Zone 13 and are currently charged a rate of $59.20 per single-family residence.

Ad Valorem Overrides:

Palm Springs Unified School District. Property within Improvement Area 1 is subject to a Palm Springs Unified School District debt service tax. This tax pays for new school construction,

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modernization, and improvement projects. The rate on such property for Fiscal Year 2009-10 is 0.14008% per $100 of the assessed value. The tax is used to pay debt service on $394,039,035 in bonds which were issued by the Palm Springs Unified School District under an authorization of $780,500,000, of which approximately $354,469,035 was outstanding as of July 1, 2010.

Desert Community College District Debt Service. Property within Improvement Area 1 is subject to a Desert Community College District debt service tax. This tax pays for new school construction, modernization, and improvement projects. The rate on such property for Fiscal Year 2009-10 is 0.050355% per $100 of assessed value. The tax is used to pay debt service on $346,500,000 in bonds which were issued by the Riverside Community College District under an authorization of $346,500,000, of which approximately $323,954,507 was outstanding as of July 1, 2010.

Private liens, such as deeds of trust securing loans obtained by a property owner, may be placed upon property in the District at any time. Under California law, the Special Taxes have priority over all existing and future private liens imposed on property subject to the lien of the Special Taxes.

Estimated Tax Burden

Based on the existing and authorized indebtedness and the overlapping assessments and taxes within Improvement Area 1, it is expected that the projected effective tax rate levied on a home within Improvement Area 1 will range from approximately 2.24% to 2.56%. See the table on the following page for the estimated fiscal year 2010-11 tax obligation for an average individually owned property in Improvement Area 1. The estimated tax rates and amounts presented herein are based on currently available information assembled and reported to the District by Albert A. Webb Associates, as of July 2010. Neither the District, the City nor the Underwriter have independently verified the information in this estimated tax burden table and do not guarantee its completeness or accuracy. The actual amounts charged may vary and may increase in future years depending on the amount of Bonds outstanding, the number of delinquencies in Improvement Area 1, the status of development of residential units in Improvement Area 1, among other factors.

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City of Desert Hot Springs Community Facilities District No. 2006-1 Improvement Area 1 Estimated Fiscal Year 2010-11 Tax Obligation For An Average Individually Owned Developed Property

AURORA - VILLAGE 1 HOPEWELL – VILLAGE 2 TOTAL/AVERAGE CFD Tax Category 2 3 1 3 4 5 6 1,550 – 1,799 1,800 – 2,049 1,800 – 2,049 1,800 – 2,049 2,050 – 2,299 2,300 – 2,549 Home Size Range S.F. S.F. Under 1,550 S.F. S.F. S.F. S.F. S.F. Avg. Home Size 1,760 2,000 1,452 1,939 1,964 2,195 2,435 No. of Units 85 40 4 29 10 6 4 178 Avg. AV per Unit $143,189.00 $152,380.00 $125,000.00 $154,966.00 $180,100.00 $190,421.00 $203,000.00 $151,774.00

Ad Valorem Property Taxes: Basic Levy (1.00%) 1,431.89 1,523.80 1,250.00 1,549.66 1,801.00 1,904.21 2,030.00 1,517.74 Palm Springs USD (0.12628%) 180.82 192.43 157.85 195.69 227.43 240.46 256.35 191.66 Desert C.C. (0.01995%) 28.57 30.40 24.94 30.92 35.93 37.99 40.50 30.28 Desert Water Agency (0.08000%) 114.55 121.90 100.00 123.97 144.08 152.34 162.40 121.42 Total General Property Taxes: 1,755.83 1,868.53 1,532.79 1,900.24 2,208.44 2,355.00 2,489.25 1,861.10

Assessments, Special Taxes & Parcel Charges: Desert Hot Springs LMD Fees 40.56 40.56 40.56 40.56 40.56 40.56 40.56 40.56 Desert Hot Springs Public Safety Fee 259.46 259.46 259.46 259.46 259.46 259.46 259.46 259.46 Desert Hot Springs Measure Tax 123.16 123.16 123.16 123.16 123.16 123.16 123.16 123.16 Riverside County Flood Control 3.64 3.64 3.64 3.64 3.64 3.64 3.64 3.64 CSA 152 1.56 1.56 1.56 1.56 1.56 1.56 1.56 1.56 City of Desert Hot Springs LLMD & DAD 131.88 131.88 131.88 131.88 131.88 131.88 131.88 131.88 Coachella Mosquito & RIFA Fees 16.48 16.48 16.48 16.48 16.48 16.48 16.48 16.48 CFD Annual Special Tax 1,104.00 1,246.00 1,086.00 1,246.00 1,246.00 1,411.00 1,562.00 1,197.54 Total Assessments & Parcel Charges: $1,680.74 $1,822.74 $1,662.74 $1,822.74 $1,822.74 $1,987.74 $2,138.74 $1,774.28

Projected Total Property Tax $3,436.57 $3,691.27 $3,195.53 $3,722.98 $4,031.18 $4,322.74 $4,627.99 $3,635.38 Projected Effective Tax Rate 2.40% 2.42% 2.56% 2.40% 2.24% 2.27% 2.28% 2.40%

(1) Fiscal Year 2010-2011 Equalized Roll Assessed Valuation. Source: Albert A. Webb Associates, based on Certified Roll from the Riverside County Assessor's Office.

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SPECIAL RISK FACTORS

The purchase of the Bonds described in this Official Statement involves a degree of risk that may not be appropriate for some investors. The following includes a discussion of some of the risks which should be considered before making an investment decision.

Limited Obligation of the District to Pay Debt Service

The District has no obligation to pay principal of and interest on the Bonds in the event Special Tax collections are delinquent, other than from amounts, if any, on deposit in the Reserve Fund 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. The Bonds are not general obligations of the District but are limited obligations of the District and the District payable solely from the proceeds of the Special Tax and certain funds held under the Indenture, including amounts deposited in the Reserve Fund and investment income thereon, and the proceeds, if any, from the sale of property in the event of a foreclosure. See “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS.” Any tax for the payment of the Bonds will be limited to the Special Tax to be collected within the jurisdiction of the District.

Property Values and Property Development

The value of Taxable Property within Improvement Area 1 is a critical factor in determining the investment quality of the Bonds. If a property owner defaults in the payment of the Special Tax, the District’s only remedy is to foreclose on the delinquent property in an attempt to obtain funds with which to pay the delinquent Special Tax. Land development and land values could be adversely affected by economic and other factors beyond the District’s control, such as: a general economic downturn; adverse judgments in future litigation that could affect the scope, timing or viability of development; relocation of employers out of the area; stricter land use regulations; shortages of water, electricity, natural gas or other utilities; destruction of property caused by earthquake, flood or other natural disasters; environmental pollution or contamination.

The Appraisal information included as APPENDIX B sets forth certain assumptions of the Appraiser in estimating the market value of the property within the District as of the date indicated. No assurance can be given that the land values are accurate if these assumptions are incorrect or that the values will not decline in the future if one or more events, such as natural disasters or adverse economic conditions, occur. See "See “OWNERHSHIP AND VALUE OF PROPERTY IN IMPROVEMENT AREA 1 – The Appraisal" above.

A land value determined by a county assessor or an appraiser is an opinion with respect to the market value, and is generally based upon a sales comparison approach, which determines the value of the subject property by comparing it to sales of comparable property, adjusted for differences between the subject and the comparable property. No assurance can be given that if a parcel with delinquent special taxes is foreclosed, any bid will be received for such property or, if a bid is received, that such bid will be equal to the value determined by the county assessor or an appraiser, or that it will be sufficient to pay delinquent special taxes.

Land Development. Land values are influenced by the level of development in the area in many respects.

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First, undeveloped or partially developed land is generally less valuable than developed land and provides less security to the owners of the Bonds should it be necessary for the District to foreclose on undeveloped or partially developed property due to the nonpayment of Special Taxes.

Second, failure to complete development on a timely basis could adversely affect the land values of those parcels that have been completed. Lower land values would result in less security for the payment of principal of and interest on the Bonds and lower proceeds from any foreclosure sale necessitated by delinquencies in the payment of the Special Tax. See “OWNERHSHIP AND VALUE OF PROPERTY IN IMPROVEMENT AREA 1 –Value Lien Ratios.” No assurance can be given that the proposed development within Improvement Area 1 will be completed, and in assessing the investment quality of the Bonds, prospective purchasers should evaluate the risks of noncompletion.

Risks of Real Estate Investment Generally. Continuing development of land within Improvement Area 1 may be adversely affected by changes in general or local economic conditions, fluctuations in the real estate market, increased construction costs, development, financing and marketing capabilities of individual property owners, water or electricity shortages, and other similar factors. Development in Improvement Area 1 may also be affected by development in surrounding areas, which may compete with Improvement Area 1. In addition, land development operations are subject to comprehensive federal, state and local regulations, including environmental, land use, zoning and building requirements. There can be no assurance that proposed land development operations within Improvement Area 1 will not be adversely affected by future government policies, including, but not limited to, governmental policies to restrict or control development, or future growth control initiatives. There can be no assurance that land development operations within Improvement Area 1 will not be adversely affected by these risks.

Natural Disasters. The value of the parcels in Improvement Area 1 in the future can be adversely affected by a variety of natural occurrences, particularly those that may affect infrastructure and other public improvements and private improvements on the parcels in Improvement Area 1 and the continued habitability and enjoyment of such private improvements. For example, the areas in and surrounding Improvement Area 1, like those in much of California, may be subject to earthquakes or other unpredictable seismic activity, however, the District is not located in a seismic special studies zone.

Other natural disasters could include, without limitation, landslides, floods, droughts or tornadoes. One or more natural disasters could occur and could result in damage to improvements of varying seriousness. 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 there could be significant delinquencies in the payment of Special Taxes, and the value of the parcels may well depreciate.

Legal Requirements. Other events that may affect the value of a parcel 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. Final development in Improvement Area 1 may also be adversely affected by the application of laws protecting endangered or threatened species.

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Hazardous Substances. Any discovery of a hazardous substance detected on property within Improvement Area 1 would affect the marketability and the value of some or all of the property in Improvement Area 1. In that event, the owners and operators of a parcel within Improvement Area 1 may be required by law to remedy conditions of the parcel relating to 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. California laws with regard to hazardous substances are also applicable to property within Improvement Area 1 and are as stringent as the federal laws. Under many of these laws, the owner (or operator) is obligated to remedy a hazardous substance condition of property whether or not the owner (or operator) has anything to do with creating or handling the hazardous substance. The effect, therefore, should any of the parcels be contaminated by a hazardous substance is to reduce the marketability and value of the parcel by the costs of remedying the condition, because the purchaser, upon becoming owner, will become obligated to remedy the condition just as is the seller.

Further, it is possible that liabilities may arise in the future with respect to any of the parcels within Improvement Area 1 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 it. All of these possibilities could significantly affect the value of a parcel within Improvement Area 1 that is realizable upon a foreclosure sale.

Current Market Conditions Increasing Risk of Mortgage Default

During calendar years 2003 and into 2008, many persons financed the purchase of new homes using mortgage loans that featured adjustable interest rates and “creative” loan structures, such as interest only payments, negative amortization of principal, and introductory “teaser” rates. Largely as a result of such loans and reduced underwriting standards associated with loans made during that time period, there has been a significant increase in foreclosures and decrease in home prices nationwide. The area in and near Improvement Area 1 has been negatively affected by the housing downturn and has experienced higher than average mortgage loan defaults and foreclosure rates, reflecting the fact that homeowners with limited economic resources may be unable or unwilling to pay higher mortgage payments as well as assessments and ad valorem tax payments when due. This circumstance has additionally been negatively impacted by the current general downturn in the United States economy, which includes significantly high unemployment rates both nationwide and in the area of Improvement Area 1.

Continued declines in the housing sales volume and pricing market could result in an increase in the Special Tax delinquency rate in Improvement Area 1 and possible depletion of the Reserve Fund. If there were significant delinquencies in Special Tax collections in Improvement Area 1 and the Reserve Fund was depleted, there could be a default in the payment of principal of and interest on the Bonds. In the event the owners of property within Improvement Area 1 experience a decline in income or an increase in mortgage interest rates, or both, they may be less able to pay their Special Taxes when due.

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Concentration of Ownership

Currently, the Special Tax is being levied against 216 parcels, 38 of the 216 parcels are owned by a single owner (Skyborne Ventures). Owners of property in Improvement Area 1 are not personally obligated to pay the Special Tax attributable to the owner's property. Rather, the Special Tax is an obligation only against the parcel of property, secured by the amount which could be realized in a foreclosure proceeding against the property, and not by any promise of the owner to pay. If the value of the property is not sufficient, taking into account other obligations also constituting a lien against the property, the City, Trustee and owners of the Bonds have no recourse against the owner, such as filing a lawsuit to collect money.

Failure of the large single landowner or any future owner of significant property subject to the Special Taxes in Improvement Area 1 to pay installments of Special Taxes when due could cause the depletion of the Reserve Fund prior to reimbursement from the resale of foreclosed property or payment of the delinquent Special Tax and, consequently, result in the delinquency rate reaching a level that would cause an insufficiency in collection of the Special Tax to meet the District’s obligations on the Bonds. In that event, there could be a delay or failure in payments on the Bonds. See “SPECIAL RISK FACTORS - Bankruptcy and Foreclosure Delays” below and “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS - Delinquent Payments of Special Tax; Covenant for Superior Court Foreclosure.”

Bankruptcy and Foreclosure Delays

The payment of the Special Tax and the ability of the District to foreclose the lien of a delinquent unpaid tax, as discussed in “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS — Delinquent Payments of Special Tax; Covenant for Superior Court Foreclosure,” may be limited by bankruptcy, insolvency or other laws generally affecting creditors' rights or by the laws of the State of California relating to judicial foreclosure. The various legal opinions to be delivered concurrently with the delivery of the Bonds (including Bond Counsel's approving legal opinion) will be qualified as to the enforceability of the various legal instruments by bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights, by the application of equitable principles and by the exercise of judicial discretion in appropriate cases.

Although bankruptcy proceedings would not cause the Special Taxes to become extinguished, bankruptcy of a property owner could result in a delay in prosecuting superior court foreclosure proceedings and could result in the possibility of delinquent Special Tax installments not being paid in full. Such a delay would increase the likelihood of a delay or default in payment of the principal of and interest on the Bonds. To the extent that property in Improvement Area 1 continues to be owned by a limited number of property owners, the chances are increased that the Reserve Fund established for the Bonds could be fully depleted during any such delay in obtaining payment of delinquent Special Taxes. As a result, sufficient moneys would not be available in the Reserve Fund for transfer to the Bond Fund to make up shortfalls resulting from delinquent payments of the Special Tax and thereby to pay principal of and interest on the Bonds on a timely basis.

To the extent that bankruptcy or similar proceedings were to involve a large property owner, the chances would increase the likelihood that the Bond Reserve Fund could be fully depleted during any resulting delay in receiving payment of delinquent Special Taxes. As a result, sufficient monies would not be available in the Bond Reserve Fund for transfer to the

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Bonds Redemption Account to make up any shortfalls resulting from delinquent payments of the Special Tax and thereby to pay principal of and interest on the Bonds on a timely basis.

Property Owned by FDIC. In addition, the ability of the City to foreclose upon the lien on property for delinquent Special Taxes may be limited for properties in which the Federal Deposit Insurance Corporation (the “FDIC”) has an interest. On November 26, 1996, the FDIC adopted a Statement of Policy Regarding the Payment of State and Local Property Taxes (the “Policy Statement”) (which superseded a prior statement issued by the FDIC and the Resolution Trust Corporation in 1991). The Policy Statement applies to the FDIC when it is liquidating assets in its corporate and receivership capacities. The Policy Statement provides, in part, that real property of the FDIC is subject to state and local real property taxes if those taxes are assessed according to the property's value, and that the FDIC is immune from ad valorem real property taxes assessed on other bases. The Policy Statement also provides that the FDIC will pay its proper tax obligations when they become due and will pay claims for delinquencies as promptly as is consistent with sound business practice and the orderly administration of the institution's affairs, unless abandonment of the FDIC interest in the property is appropriate. It further provides that the FDIC will pay claims for interest on delinquent property taxes owned at the rate provided under state law, but only to the extent the interest payment obligation is secured by a valid lien. The FDIC will not pay for any fines or penalties and will not pay nor recognize liens for such amounts. The Policy Statement also provides that if any property taxes (including interest) on FDIC-owned property are secured by a valid lien (in effect before the property became owned by the FDIC), the FDIC will pay those claims. No property of the FDIC is subject to levy, attachment, garnishment, foreclosure or sale without the FDIC's consent. In addition, a lien for taxes and interest may attach, but the FDIC will not permit a lien or security interest held by the FDIC to be eliminated by foreclosure without the FDIC's consent.

With respect to challenges to assessments, the Policy Statement provides: “The (FDIC) is only liable for state and local taxes which are based on the value of the property during the period for which the tax is imposed, notwithstanding the failure of any person, including prior record owners, to challenge an assessment under the procedures available under state law. In the exercise of its business judgment, the (FDIC) may challenge assessments which do not conform with the statutory provisions, and during the challenge may pay tax claims based on the assessment level deemed appropriate, provided such payment will not prejudice the challenge. The (FDIC) will generally limit challenges to the current and immediately preceding taxable year and to the pursuit of previously filed tax protests. However, the (FDIC) may, in the exercise of its business judgment, challenge any prior taxes and assessments provided that (1) the (FDIC's) records (including appraisals, offers or bids received for the purchase of the property, etc.) indicate that the assessed value is clearly excessive, (2) a successful challenge will result in a substantial savings to the (FDIC), (3) the challenge will not unduly delay the sale of the property, and (4) there is a reasonable likelihood of a successful challenge.”

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 simple interest unless the amount of tax is fixed at the time the FDIC acquires its fee simple interest in the property, nor will the FDIC recognize the validity of any lien to the extent it purports to secure the payment of any such amounts. Because the Special Taxes are neither ad valorem taxes nor special assessments, and because they are levied under a special tax formula under which the amount of the Special Tax is determined each year, the Special Taxes appear to fall within the category of taxes the FDIC generally will not pay under the Policy Statement.

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Following the County of Orange bankruptcy proceedings filed in December 1994, the FDIC filed claims against the County of Orange in the U.S. Bankruptcy Court and the Federal District Court which challenged special taxes that Orange County had levied on FDIC-owned property (and which the FDIC had paid) under the Act. The FDIC took a position similar to that outlined in the Policy Statement, to the effect that the FDIC, as a governmental entity, is exempt from special taxes under the Act. The Bankruptcy Court agreed, finding that the FDIC was not liable for post-receivership Mello-Roos taxes, and the Bankruptcy Appellate Panel affirmed. On appeal, the U.S. Court of Appeals for the Ninth Circuit, while not specifically asked to decide on the issue, stated in its decision filed on August 28, 2001, that “the FDIC, as a federal agency, is exempt from the Mello-Roos tax,” and quoted Section 53340(c) of the Act in stating that “’properties or entities’ of the federal government are exempt from the tax.”

The City is unable to predict what effect the application of the Policy Statement, or the ultimate outcome of the County of Orange case, would have in case of a Special Tax delinquency on a parcel in which the FDIC has an interest. However, prohibiting the judicial foreclosure sale of a FDIC-owned parcel would likely reduce the number of or eliminate the persons willing to purchase a parcel at a foreclosure sale. Owners of the Bonds should assume that the City will be unable to foreclose on parcels of land in the District owned by the FDIC. Such an outcome would cause a draw on the Reserve Fund and perhaps, ultimately, a default in payment of the Bonds.

Disclosure to Future Purchasers

The City has recorded a notice of the Special Tax lien in the Office of the County Recorder. 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 Improvement Area 1 or the lending of money secured by property in Improvement Area 1. The Act requires the subdivider of a subdivision (or its agent or representative) 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 these requirements, or failure by a purchaser or lessor to consider or understand the nature and existence of the Special Tax, could adversely affect the willingness and ability of the purchaser or lessor to pay the Special Tax when due.

Parity Taxes and Special Assessments; Private Debt

The City, the County and certain other public agencies are authorized by the Act to form other community facilities districts and improvement areas and, under other provisions of State law, to form special assessment districts, either or both of which could include all or a portion of the land within the District.

Property in the District is currently subject to certain overlapping tax and assessment liens, as shown in the overlapping debt statement. See “OWNERHSHIP AND VALUE OF PROPERTY IN IMPROVEMENT AREA 1.”

In general, as long as the Special Tax is collected on the County tax roll, the Special Tax and all other taxes, assessments and charges also collected on the tax roll are on parity, that is,

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are of equal priority. Questions of priority become significant when collection of one or more of the taxes, assessments or charges is sought by some other procedure, such as foreclosure and sale. In the event of proceedings to foreclose for delinquency of Special Taxes securing the 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 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. See “– Bankruptcy and Foreclosure Delays” above.

There can be no assurance that property owners within the Improvement Area 1 will not petition for the formation of other community facilities districts and improvement areas or for a special assessment district or districts and that parity special taxes or special assessments will not be levied by the County or some other public agency to finance additional public facilities. In addition to liens for special taxes or assessments to finance public improvements of benefit to land within Improvement Area 1, owners of property may obtain loans from banks or other private sources which loans may be secured by a lien on the parcels in Improvement Area 1. Such loans would increase amounts owed by the owner of such parcel with respect to development of its property in Improvement Area 1. However, the lien of such loans would be subordinate to the lien of the Special Taxes.

Tax Delinquencies

Under provisions of the Act, the Special Taxes will be billed to the properties within Improvement Area 1 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 nonpayment, as do regular property tax installments. Special Tax installment payments cannot be made separately from property tax payments. 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 Special Tax payments in the future.

The annual Special Tax will be billed and collected in two installments payable without penalty by December 10 and April 10. In the event such Special Taxes are not timely paid, moneys available to pay debt service on the Bonds becoming due on the subsequent respective March 1 and September 1 may be insufficient, except to the extent moneys are available in the Reserve Fund.

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In the event of non-payment of Special Taxes, funds in the Reserve Fund, if available, may be used to pay principal of and interest on the Bonds. If funds in the Reserve Fund for the 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 Bond holders pursuant to the Indenture. 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 Improvement Area 1 at the maximum Special 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.

See “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS — Delinquent Payments of Special Tax; Covenant for Superior Court Foreclosure,” 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 Special Taxes. See also “IMPROVEMENT AREA 1 – Delinquency History.”

Property or Mortgage Interest Owned by Federal Government

If a parcel with unpaid Special Taxes within the District is owned by a federal governmental entity, or a private deed of trust secured by a parcel with unpaid Special Taxes within the District is owned by a federal governmental entity, the ability to foreclose on the parcel to collect delinquent Special Taxes may be limited. Federal courts have held that, based on the supremacy clause of the United States Constitution, in the absence of Congressional intent to the contrary, a state or local agency cannot foreclose to collect delinquent taxes or assessments if foreclosure would impair the federal government interest.

The supremacy clause of the United States Constitution reads as follows: “This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, anything in the Constitution or Laws of any State to the contrary notwithstanding.”

This means that, unless Congress has otherwise provided, if a federal governmental entity owns a parcel with unpaid Special Taxes within the District but does not pay taxes and assessments levied on the parcel (including Special Taxes), the applicable state and local governments cannot foreclose on the parcel to collect the delinquent taxes and assessments.

Moreover, unless Congress has otherwise provided, if the federal government has a mortgage interest in the parcel and the District wishes to foreclose on the parcel as a result of delinquent Special Taxes, the property cannot be sold at a foreclosure sale unless it can be sold for an amount sufficient to pay delinquent taxes and assessments on a parity with the Special Taxes and preserve the federal government’s mortgage interest. In Rust v. Johnson (9th Circuit; 1979) 597 F.2d 174, the United States Court of Appeal, Ninth Circuit held that the Federal National Mortgage Association (“FNMA”) is a federal instrumentality for purposes of this doctrine, and not a private entity, and that, as a result, an exercise of state power over a mortgage interest held by FNMA constitutes an exercise of state power over property of the United States. See also “– Property Owned by FDIC” below.

The District has not undertaken to determine whether any federal governmental entity currently has, or is likely to acquire, any interest (including a mortgage interest) in any of the

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parcels subject to the Special Taxes within the District, and therefore expresses no view concerning the likelihood that the risks described above will materialize while the Bonds are outstanding.

No Acceleration Provisions

The Bonds do not contain a provision allowing for the acceleration of the Bonds in the event of a payment default or other default under the terms of the Bonds or the Indenture. Under the Indenture, a Bond holder is given the right for the equal benefit and protection of all Bond holders similarly situated to pursue certain remedies. So long as the Bonds are in book- entry form, DTC will be the sole Bond holder and will be entitled to exercise all rights and remedies of Bond holders.

CONTINUING DISCLOSURE

Pursuant to a Continuing Disclosure Agreement (the "Disclosure Agreement") by and among the District and Albert A Webb Associates, as dissemination agent, the District has agreed to provide, or cause to be provided, to the Municipal Securities Rulemaking Board or any other entity designated or authorized by the Securities and Exchange Commission to receive reports pursuant to Rule 15c2-12 of the Securities and Exchange Commission (the "Rule") certain annual financial information and operating data concerning the District. The Annual Report to be filed by the District is to be filed not later than 270 days following the close of each Fiscal Year, beginning March 31, 2011, and is to include audited financial statements of the City. The requirement that the City file its audited financial statements as a part of the Annual Report has been included in the Disclosure Agreement solely to satisfy the provisions of the Rule. The inclusion of this information does not mean that the Bonds are secured by any resources or property of the City. See "SECURITY AND SOURCES OF PAYMENT FOR THE BONDS" and "SPECIAL RISK FACTORS - Limited Obligation of District to Pay Debt Service” herein. The City has never failed to comply in all material respects with any previous undertakings with regard to the Rule to provide annual reports or notices of material events.

To assist the Underwriter in complying with the Rule, Skyborne Ventures will enter into a Continuing Disclosure Agreement (the "Landowner Disclosure Agreement") by and between Skyborne Ventures and Albert A Webb Associates, as dissemination agent, covenanting to provide a Semiannual Report not later than March 31 and September 30 of each year beginning with the Semiannual Report due March 31, 2011, and notice of certain material events as they occur. Thereafter, the Semiannual Report to be provided by Skyborne Ventures shall contain or reference the audited financial statements of Skyborne Ventures, if prepared, for its most recent fiscal year end, and the additional financial and operating data described in the Landowner Disclosure Agreement. Skyborne Ventures has represented that it is not aware of any material failure to comply with any previous undertakings to provide periodic disclosure reports or notices of material events pursuant to the Rule within the last five years.

Skyborne Venture's obligations under the Landowner Disclosure Agreement are subject to compliance by future developers of the property and the obligations are allowed to terminate upon development in Improvement Area 1 reaching certain levels and under certain other conditions specified in the Landowner Disclosure Agreement.

The full texts of the Disclosure Agreement and Landowner Disclosure Agreement are set forth in APPENDIX E - FORM OF CONTINUING DISCLOSURE UNDERTAKINGS.”

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UNDERWRITING

The Bonds were purchased through negotiation by E. J. De La Rosa & Co., Inc. (the “Underwriter”). The Underwriter agreed to purchase the Bonds at a price of $2,217,541.75 (which is equal to the par amount of the Bonds, less an original issue discount of $26,328.25 and less the Underwriter’s discount of $41,130.00). The initial public offering prices set forth on the cover page hereof may be changed by the Underwriter. The Underwriter may offer and sell the Bonds to certain dealers and others at a price lower than the public offering prices set forth on the cover page hereof.

FINANCIAL ADVISOR

The District has retained Urban Futures Incorporated, Irvine, California, as financial advisor (the “Financial Advisor”) in connection with the issuance of the Bonds. The Financial Advisor is not obligated to undertake, and has not undertaken to make, an independent verification or assume responsibility for the accuracy, completeness, or fairness of the information contained in this Official Statement. Urban Futures Incorporated, is an independent financial advisory firm and is not engaged in the business of underwriting, trading or distributing municipal securities or other public securities.

LEGAL OPINION

The validity of the Bonds and certain other legal matters are subject to the approving opinion of Stradling Yocca Carlson & Rauth, A Professional Corporation, Bond Counsel. A complete copy of the proposed form of Bond Counsel opinion is contained in Appendix E to this Official Statement, and the final opinion will be made available to registered owners of the Bonds at the time of delivery. The fees of Bond Counsel are contingent upon the sale and delivery of the Bonds.

TAX MATTERS

In the opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California (“Bond Counsel”), under existing statutes, regulations, rulings and judicial decisions, and assuming the accuracy of certain representations and compliance with certain covenants and requirements described herein, interest on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and corporations. In the further opinion of Bond Counsel, interest on the Bonds is exempt from State personal income tax. Bond Counsel notes that, with respect to corporations, interest on the Bonds will not be included as an adjustment in the calculation of alternative minimum taxable income.

The difference between the issue price of a Bond (the first price at which a substantial amount of the Bonds of the same maturity is to be sold to the public) and the stated redemption price at maturity with respect to such Bond constitutes original issue discount. Original issue discount accrues under a constant yield method, and original issue discount will accrue to a

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Bond Owner before receipt of cash attributable to such excludable income. The amount of original issue discount deemed received by the Bond Owner will increase the Bond Owner’s basis in the Bond. In the opinion of Bond Counsel, the amount of original issue discount that accrues to the owner of a Bond is excluded from the gross income of such owner for federal income tax purposes, is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, and is exempt from State personal income tax.

Bond Counsel’s opinion as to the effect of the exclusion from gross income of interest (and original issue discount) on the Bonds is based upon certain representations of fact and certifications made by the Community Facilities District and others and is subject to the condition that the Community Facilities District complies with all requirements of the Internal Revenue Code of 1986, as amended (the “Code”), that must be satisfied subsequent to the issuance of the Bonds to assure that interest (and original issue discount) on the Bonds will not become includable in gross income for federal income tax purposes. Failure to comply with such requirements of the Code might cause the interest (and original issue discount) on the Bonds to be included in gross income for federal income tax purposes retroactive to the date of issuance of the Bonds. The Community Facilities District has covenanted to comply with all such requirements. The Internal Revenue Service (the “IRS”) has initiated an expanded program for the auditing of tax-exempt bond issues, including both random and targeted audits. It is possible that the Bonds will be selected for audit by the IRS. It is also possible that the market value of the Bonds might be affected as a result of such an audit of the Bonds (or by an audit of other similar bonds). No assurance can be given that in the course of an audit, as a result of an audit, or otherwise, that Congress or the IRS might change the Code (or interpretation thereof) subsequent to the issuance of the Bonds to the extent that it adversely affects the exclusion from gross income of interest (and original issue discount) on the Bonds or their market value.

It is possible that subsequent to the issuance of the Bonds there might be federal, state, or local statutory changes (or judicial or regulatory interpretations of federal, state, or local law) that affect the federal, state, or local tax treatment of the Bonds or the market value of the Bonds. No assurance can be given that subsequent to the issuance of the Bonds such changes or interpretations will not occur.

Bond Counsel’s opinions may be affected by actions taken (or not taken) or events occurring (or not occurring) after the Closing Date. Bond Counsel has not undertaken to determine, or to inform any person, whether any such actions or events are taken or do occur. The Indenture and the Tax Certificate relating to the Bonds permit certain actions to be taken or to be omitted if a favorable opinion of Bond Counsel is provided with respect thereto. Bond Counsel expresses no opinion as to the effect on the exclusion from gross income of interest (and original issue discount) on the Bonds for federal income tax purposes with respect to any Bond if any such action is taken or omitted based upon the advice of counsel other than Stradling Yocca Carlson & Rauth, a Professional Corporation. Although Bond Counsel is expected to render an opinion that interest (and original issue discount) on the Bonds is excluded from gross income for federal income tax purposes provided that the Community Facilities District continues to comply with certain requirements of the Code, the ownership of the Bonds and the accrual or receipt of interest (and original issue discount) with respect to the Bonds may otherwise affect the tax liability of certain persons. Bond Counsel expresses no opinion regarding any such tax consequences. Accordingly, before purchasing any of the Bonds, all potential purchasers should consult their tax advisors with respect to collateral tax consequences relating to the Bonds.

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A copy of the proposed form of opinion of Bond Counsel is attached hereto as Appendix D.

NO RATING

The District has not applied for a rating on the Bonds and does not intend to.

NO LITIGATION

At the time of delivery of and payment for the Bonds, the District Attorney will deliver his opinion that to the best of its knowledge there is no action, suit, proceeding, inquiry or investigation at law or in equity before or by any court or regulatory agency pending against the District affecting its existence or the titles of its officers to office or seeking to restrain or to enjoin the issuance, sale or delivery of the Bonds, the application of the proceeds thereof in accordance with the Indenture, or the collection or application of the Special Tax to pay the principal of and interest on the Bonds, or in any way contesting or affecting the validity or enforceability of the Bonds, the Indenture or any action of the District contemplated by any of said documents, or in any way contesting the completeness or accuracy of this Official Statement or any amendment or supplement thereto, or contesting the powers of the District or its authority with respect to the Bonds or any action of the District contemplated by any of said documents.

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EXECUTION

All quotations from, and summaries and explanations of the Indenture, the Bonds, the Act or other statutes and documents contained herein do not purport to be complete, and reference is made to said documents and statutes for full and complete statements of their provisions.

This Official Statement is submitted only in connection with the sale of the Bonds by the District. All estimates, assumptions, statistical information and other statements contained herein, while taken from sources considered reliable, are not guaranteed by the District or the Underwriter. The information contained herein should not be construed as representing all conditions affecting the District or the Bonds.

The execution and delivery of this Official Statement by the District has been duly authorized by the City Council of the City on behalf of the District.

CITY OF DESERT HOT SPRINGS COMMUNITY FACILITIES DISTRICT NO. 2006-1

By: /s/ Rick Daniels City Manager

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APPENDIX A

RATE AND METHOD OF APPORTIONMENT OF SPECIAL TAX

A-1

[THIS PAGE INTENTIONALLY LEFT BLANK]

RATES AND METHOD OF APPORTIONMENT OF SPECIAL TAX FOR COMMUNITY FACILITIES DISTRICT NO. 2006-1 OF THE CITY OF DESERT HOT SPRINGS (IMPROVEMENT AREA NO. 1)

A Special Tax (as hereinafter defined) shall be levied on all Assessor’s Parcels of Taxable Property in Improvement Area No. 1 (“IA No. 1”) of Community Facilities District No. 2006-1 of the City of Desert Hot Springs (the “District”) in each Fiscal Year, in an amount determined by the City Council of the City of Desert Hot Springs (the “Council” or the “City”) through the application of the appropriate Special Tax for “Developed Property,” “Approved Property,” “Undeveloped Property,” “Taxable Association Property,”or “Taxable Public Property”as provided below. All Assessor’s Parcels in IA No. 1, unless exempted by law or by the provisions hereof, shall be taxed for the purposes, to the extent and in the manner herein provided.

A. DEFINITIONS

The terms hereinafter set forth have the following meanings:

“Acre or Acreage” means the land area of an Assessor’s Parcel as shown on the Assessor’s Parcel Map, or if the land area is not shown on an Assessor’s Parcel Map, the land area shown on the applicable final map, lot line adjustment, condominium plan, or other recorded parcel map.

“Act” means the Mello Roos Community Facilities Act of 1982, as amended, being Chapter 2.5 (commencing with Section 53311) of Part 1 of Division 2 of Title 5 of the California Government Code.

“Administrative Expenses” means the following actual or reasonably estimated costs directly related to the administration of IA No. 1: the costs of computing the Special Taxes and preparing the annual Special Tax levy schedules (whether by the City, the District, or an agent thereof); the costs of collecting the Special Taxes (whether by the City or otherwise); the costs of remitting the Special Taxes to the fiscal agent or trustee; the costs of the fiscal agent or trustee (including its legal counsel) in the discharge of the duties required of it under the Indenture; the costs to the City, IA No. 1 or any agent thereof in complying with arbitrage rebate requirements; the costs to the City, IA No. 1 or any agent thereof to provide continuing disclosure information; the costs associated with preparing Special Tax disclosure statements and responding to public inquiries regarding the Special Taxes; the costs of the City, IA No. 1 or any agent thereof related to an appeal of the Special Tax. Administrative Expenses shall also include amounts advanced by the City or IA No. 1 for any other administrative purposes of IA No. 1, including attorney’s fees and other costs related to commencing and pursuing to completion any foreclosure proceedings for the collection of delinquent Special Taxes.

1 City of Desert Hot Springs IA No. 1 of CFD No. 2006-1 11/16/2006 “Approved Property”means all Assessor’s Parcels of Taxable Property that are included in a final map that was recorded prior to the January 1st preceding the Fiscal Year in which the Special Tax is being levied, and that have not been issued a building permit on or before March 1 of the Fiscal Year preceding the Fiscal Year in which Special Taxes are being levied.

“Assessor’s Parcel”means a lot or parcel shown on an Assessor’s Parcel Map with an assigned Assessor’s Parcel number in IA No. 1.

“Assessor’s Parcel Map”means an official map of the Assessor of the County of Riverside designating parcels by Assessor’s Parcel number.

“Association Property” means any property owned by or irrevocably offered or dedicated to or for which an easement for purposes of right of way has been granted to a property owners’association, including any master or sub association.

“Assigned Special Tax” means the Special Tax for each Land Use Category of Developed Property, as determined in accordance with Section C.1.a below.

“Backup Special Tax” means the Special Tax amount determined for an Assessor’s Parcel pursuant to Section C.1.b.

“Backup Special Tax Per Acre”means $9,103 per Acre.

“Bonds”means any bonds or other indebtedness (as defined in the Act), whether issued in one or more series, secured only by the levy of Special Taxes on Assessor’s Parcels in IA No. 1.

“CFD No. 2006-1” means the City of Desert Hot Springs Community Facilities District No. 2006-1.

“City”means the City of Desert Hot Springs.

“Council”means the City of Desert Hot Springs City Council.

“Developed Property” means all Assessor’s Parcels, exclusive of Association Property and Public Property, upon which completed Dwelling Units or non-residential buildings have been constructed or for which building permits have been issued as of March 1 of the Fiscal Year preceding the Fiscal Year for which Special Taxes are being levied.

“District Administrator”means an official of the City, or an agent thereof, responsible for determining the Special Tax Requirement and providing for the levy and collection of the Special Taxes.

“Dwelling Unit”or “DU”means a single family home or condominium unit.

2 City of Desert Hot Springs IA No. 1 of CFD No. 2006-1 11/16/2006 “Exempt Property” means all Assessor’s Parcels within IA No. 1 designated as being exempt from the Special Tax as determined in Section E.

“Final Subdivision” means a subdivision of property by recordation of a final map, parcel map, or lot line adjustment, pursuant to the Subdivision Map Act (California Government Code Section 66410 et seq.) or recordation of a condominium plan pursuant to California Civil Code Section 1352 that creates individual lots for which building permits may be issued without further subdivision, as determined by the District Administrator.

“Fiscal Year” means the period starting on July 1 and ending on the following June 30.

“IA No. 1” means Improvement Area No. 1 of CFD No. 2006-1 as identified on the Boundary Maps for the District attached hereto as Exhibit A. Further details concerning the Legal Description of the Improvement Area are attached hereto as Exhibit B.

“Indenture” means the indenture, fiscal agent agreement, trust agreement, or resolution, pursuant to which Bonds are issued, as modified, amended and/or supplemented from time to time.

“Land Use Category”means for Assessor’s Parcels of Developed Property, the categories of Residential Property and Non-Residential Property identified in Table 1.

“Maximum Special Tax” means the Maximum Special Tax, determined as provided in Section C, which can be levied in any Fiscal Year on any Assessor’s Parcel of Taxable Property in IA No. 1.

“Non-Residential Property”means all Assessor’s Parcels of Developed Property upon which completed non-residential buildings have been constructed or for which building permits have been or may be issued for construction of such buildings, as determined by the District Administrator.

“Proportionately”means for Developed Property that the ratio of the amount of Special Tax levied to the Assigned Special Tax is the same for all Assessor’s Parcels of Developed Property within each Land Use Category identified in Table 1. For Approved Property, Undeveloped Property, Taxable Public Property and Taxable Association Property, “Proportionately” means that the ratio of the amount of Special Tax levied per Acre to the Maximum Special Tax per Acre is the same for all Assessor’s Parcels of Approved Property, Undeveloped Property, Taxable Public Property or Taxable Association Property.

“Public Property”means property owned by or irrevocably offered or dedicated to or for which an easement for purposes of public right of way has been granted to the federal government, the State of California, the County of Riverside, the City or any other local governmental or public agency; provided, however, that any property leased

3 City of Desert Hot Springs IA No. 1 of CFD No. 2006-1 11/16/2006 by a public agency to a private entity and subject to taxation under Section 53340.1 of the Act shall be classified and taxed according to its use.

“Residential Floor Area” for any Assessor’s Parcel of Residential Property means all of the square footage of living area within the perimeter of a residential structure, not including any carport, walkway, garage, overhang, patio, enclosed patio, or similar area. The determination of Residential Floor Area shall be made by reference to the most recent building permit(s) issued for each Assessor’s Parcel.

“Residential Property” means all Assessor’s Parcels of Developed Property upon which completed Dwelling Units have been constructed or for which building permits have been or may be issued for purposes of constructing one or more Dwelling Units, as determined by the District Administrator.

“Special Tax” means the special tax to be levied in each Fiscal Year on each Assessor’s Parcel of Taxable Property in IA No. 1 to fund the Special Tax Requirement.

“Special Tax Requirement” means the amount required in any Fiscal Year for IA No. 1 to: (i) pay debt service on all outstanding Bonds due in the calendar year which commences in such Fiscal Year; (ii) pay periodic costs for the Bonds, including but not limited to, costs related to credit enhancement and rebate payments; (iii) pay Administrative Expenses; (iv) pay an amount equal to reasonably anticipated delinquencies in the collection of Special Taxes; and (v) pay any amounts required to establish or replenish the reserve fund for the outstanding Bonds; less (vi) a credit for funds which are available pursuant to the Indenture to pay debt service on the outstanding Bonds.

“Taxable Property” means all of the Assessor’s Parcels which are not Exempt Property.

“Taxable Association Property” means all Association Property which are not Exempt Property.

“Taxable Public Property” means all Public Property which are not Exempt Property.

“Undeveloped Property”means all Taxable Property not classified as Developed Property or Approved Property, exclusive of Taxable Association Property or Taxable Public Property.

B. CLASSIFICATION AND LAND USE CATEGORIZATION

For each Fiscal Year, all Assessor’s Parcels of Taxable Property within IA No. 1 shall be classified as Developed Property, Approved Property, Undeveloped Property, Taxable Association Property, or Taxable Public Property and shall be subject to the levy of Special Taxes as determined pursuant to Sections C and D below. Assessor’s Parcels of Developed Property shall be classified as either Residential Property or Non-Residential Property. 4 City of Desert Hot Springs IA No. 1 of CFD No. 2006-1 11/16/2006 For purposes of determining the applicable Assigned Special Tax for Assessor’s Parcels of Developed Property which are classified as Residential Property, all such Assessor’s Parcels shall be assigned to a Land Use Category based upon the square footage of the Residential Floor Area of the Dwelling Unit(s) constructed or to be constructed thereon as specified in or shown on the building permit(s) issued therefor.

C. ASSIGNED AND MAXIMUM SPECIAL TAXES

1. Developed Property

The Maximum Special Tax for each Assessor’s Parcel classified as Developed Property shall be the greater of (i) the applicable Assigned Special Tax or (ii) the amount of the Backup Special Tax therefor.

a. Assigned Special Tax

The Assigned Special Tax amounts for all Land Use Categories of Developed Property are specified in Table 1 below.

TABLE 1

Assigned Special Taxes for Land Use Categories of Developed Property

Residential Floor Area Assigned Special Land Use Taxable (Square Feet of Dwelling Tax per DU or Category Unit Unit) Acre 1. Residential DU 1,549 sq. ft. or less $1,086 per DU Property 2. Residential DU 1,550-1,799 sq. ft. $1,104 per DU Property 3. Residential DU 1,800-2,049 sq. ft. $1,246 per DU Property 4. Residential DU 2,050-2,299 sq. ft. $1,411 per DU Property 5. Residential DU 2,300-2,549 sq. ft. $1,441 per DU Property 6. Residential DU 2,550 sq. ft. or greater $1,562 per DU Property 7. Non Residential Acre N/A $9,103 per Acre Property

b. Backup Special Tax

The total amount of the Backup Special Tax for a Final Subdivision of property shall be determined by multiplying the Acreage of all Assessor’s

5 City of Desert Hot Springs IA No. 1 of CFD No. 2006-1 11/16/2006 Parcels of Taxable Property, exclusive of the Acreage of any Taxable Association Property and/or Taxable Public Property, in the Final Subdivision by the Backup Special Tax per Acre. If a Final Subdivision includes both Assessor’s Parcels of Residential Property and Assessor’s Parcels of Non-Residential Property, the total amount of the Backup Special Tax for such Assessor’s Parcels of Residential Property shall be based only on the Acreage of those Assessor’s Parcels.

The Backup Special Tax for each Assessor’s Parcel of Residential Property in a Final Subdivision shall be determined by dividing the total amount of the Backup Special Tax for all of the Assessor’s Parcels of Residential Property in the Final Subdivision, as determined pursuant to the preceding paragraph, by the number of Dwelling Units within such Final Subdivision and multiplying the result by the number of Dwelling Units on such Assessor’s Parcel.

The Backup Special Tax for each Assessor’s Parcel of Non-Residential Property in a Final Subdivision shall be determined by multiplying the Acreage of the Assessor’s Parcel by the Backup Special Tax per Acre.

Notwithstanding the foregoing, if Assessor’s Parcels of Residential Property are subsequently changed or modified by recordation of a lot line adjustment or similar instrument, the total amount of the Backup Special Tax shall be recalculated so that the total amount of the Backup Special Tax for such Assessor’s Parcels after such change will be equal to the aggregate amount of the Backup Special Tax for such Assessor’s Parcels before such change occurred.

2. Approved Property, Undeveloped Property, Taxable Association Property and Taxable Public Property

The Maximum Special Tax for Assessor’s Parcels of Approved Property, Undeveloped Property, Taxable Association Property and Taxable Public Property shall be $9,103 per Acre.

D. METHOD OF APPORTIONMENT OF THE SPECIAL TAX

Commencing with Fiscal Year 2007-08 and for each following Fiscal Year, the Council shall determine the Special Tax Requirement and shall levy the Special Tax on all Assessor’s Parcels of Taxable Property until the aggregate amount of the Special Taxes equals the Special Tax Requirement. The Special Tax shall be levied for each Fiscal Year as follows:

First: The Special Tax shall be levied Proportionately on all Assessor’s Parcels of Developed Property up to 100% of the applicable Assigned Special Tax as needed to satisfy the Special Tax Requirement;

6 City of Desert Hot Springs IA No. 1 of CFD No. 2006-1 11/16/2006 Second: If additional moneys are needed to satisfy the Special Tax Requirement after the first step has been completed, the Special Tax shall be levied Proportionately on all Assessor’s Parcels of Approved Property up to 100% of the Maximum Special Tax for Approved Property;

Third: If additional moneys are needed to satisfy the Special Tax Requirement after the first two steps have been completed, the Special Tax shall be levied Proportionately on all Assessor’s Parcels of Undeveloped Property up to 100% of the Maximum Special Tax for Undeveloped Property;

Fourth: If additional moneys are needed to satisfy the Special Tax Requirement after the first three steps have been completed, the Special Tax to be levied on all Assessor’s Parcels of Developed Property whose Maximum Special Tax is its Backup Special Tax shall be increased in equal percentages from the Assigned Special Tax up to the Maximum Special Tax for each such Assessor’s Parcel;

Fifth: If additional moneys are needed to satisfy the Special Tax Requirement after the first four steps have been completed, the Special Tax shall be levied Proportionately on all Assessor’s Parcels of Taxable Association Property up to 100% of its Maximum Special Tax;

Sixth: If additional moneys are needed to satisfy the Special Tax Requirement after the first five steps have been completed, the Special Tax shall be levied Proportionately on all Assessor’s Parcels of Taxable Public Property up to 100% of its Maximum Special Tax.

Notwithstanding the above, under no circumstances will the Special Taxes levied on any Assessor’s Parcel of Residential Property for which an occupancy permit for private residential use has been issued be increased by more than ten percent (10%) in any Fiscal Year as a consequence of delinquency or default in the payment of Special Taxes by the owner of any other Assessor’s Parcel.

E. EXEMPTIONS

The District Administrator shall classify as Exempt Property Assessor’s Parcels of (i) Public Property or (ii) Association Property; provided that such classification shall not reduce the Acreage of all Taxable Property to less than 54.10 Acres. The District Administrator shall not classify an Assessor’s Parcel of Public Property or Association Property as Exempt Property if such classification would reduce the sum Acreage of all Taxable Property to less than 54.10 Acres. Such Assessor's Parcels that cannot be classified as Exempt Property because such classification would reduce the Acreage of all Taxable Property to less than 54.10 Acres will be classified as Taxable Association Property or Taxable Public Property, and will continue to be subject to the Special Tax. The District Administrator shall classify such Assessor’s Parcels as Exempt Property in the chronological order in which property becomes Public Property or Association Property.

7 City of Desert Hot Springs IA No. 1 of CFD No. 2006-1 11/16/2006 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; provided, however, that IA No. 1 may directly bill the Special Tax, may collect Special Taxes at a different time or in a different manner if necessary to meet its financial obligations, and may covenant to foreclose and may foreclose on Assessor’s Parcels having delinquent Special Taxes as permitted by the Act.

G. TERM OF THE SPECIAL TAX

For each Fiscal Year that any Bonds are outstanding, the Special Tax shall be levied on all Assessor’s Parcels of Taxable Property. If any delinquent Special Taxes remain uncollected prior to or after all outstanding Bonds are retired, the Special Tax may be levied to the extent necessary, up to the applicable Maximum Special Tax, to make up the deficiency resulting from such delinquent Special Taxes, but not later than the 2047-48 Fiscal Year.

H. PREPAYMENT OF SPECIAL TAX

The following definitions apply to this Section H:

“CFD Public Facilities” means $4,700,000 or such lower number as (i) shall be determined by the Administrator as sufficient to provide the public facilities under the authorized bonding program of the CFD, or (ii) shall be determined by the Administrator concurrently with a covenant that it will not issue any more Bonds to be supported by Special Taxes within Improvement Area No. 1 as levied under this Rate and Method of Apportionment.

“Construction Fund” means an account specifically identified in the Indenture to hold funds which are currently available for expenditure to acquire or construct public facilities eligible under the Act.

“Future Facilities Costs” means the CFD Public Facilities minus public facility costs available to be funded through existing construction or escrow accounts or funded by the Outstanding Bonds, and minus public facility costs funded by interest earnings on the Construction Fund actually earned prior to the date of prepayment.

“Outstanding Bonds” means all previously issued bonds issued by and secured by the levy of Special Taxes within the CFD, which will remain outstanding after the first interest and/or principal payment date following the current Fiscal Year, excluding bonds to be redeemed at a later date with the proceeds of prior prepayments of Maximum Special Taxes.

1. Prepayment in Full

The Maximum Special Tax obligation within any Tax Zone may only be prepaid and permanently satisfied by a Parcel of Developed Property, Approved Property 8 City of Desert Hot Springs IA No. 1 of CFD No. 2006-1 11/16/2006 and/or Undeveloped Property for which a building permit has been issued, and Public Property and/or Property Owner’s Association Property that is not Exempt Property pursuant to Section E. 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 herein; provided that a prepayment may be made only if there are no delinquent Special Taxes with respect to such the Parcel at the time of prepayment. An owner of a Parcel intending to prepay the Maximum Special Tax obligation shall provide the Administrator with written notice of intent to prepay, and within 5 business days of receipt of such notice, the Administrator shall notify such owner of the amount of the non-refundable deposit determined to cover the cost to be incurred by the CFD in calculating the proper amount of a prepayment. Within 15 days of receipt of such non- refundable deposit, the Administrator shall notify such owner of the prepayment amount of such Parcel. Prepayment must be made not less than 60 days prior to any redemption date for any Bonds to be redeemed with the proceeds of such prepaid Special Taxes.

The Prepayment Amount (defined below) shall be calculated as summarized below (capitalized terms as defined below):

Bond Redemption Amount plus Redemption Premium plus Future Facilities Amount plus Defeasance Amount plus Administrative Fees and Expenses less Reserve Fund Credit Total: equals Prepayment Amount

As of the proposed date of prepayment, the Prepayment Amount (defined below) shall be calculated as follows:

1. Confirm that no Special Tax delinquencies apply to such Parcel.

2. For Parcels of Developed Property, compute the Maximum Special Tax for the Parcel to be prepaid. For Parcels of Approved Property or Undeveloped Property to be prepaid, compute the Maximum Special Tax for that Parcel as though it was already designated as Developed Property, based upon the building permit which has already been issued for that Parcel. For Parcels of Public Property and/or Property Owner’s Association Property to be prepaid, compute the Maximum Special Tax for that Parcel.

3. Divide the Maximum Special Tax computed pursuant to paragraph 2 by the total estimated Maximum Special Taxes based on the projected Developed Property Special Tax, or if at buildout the actual Developed Property Special Tax which could be charged, less any Parcels which have been prepaid.

9 City of Desert Hot Springs IA No. 1 of CFD No. 2006-1 11/16/2006 4. Multiply the quotient computed pursuant to paragraph 3 by the Outstanding Bonds to compute the amount of Outstanding Bonds to be retired and prepaid (the “Bond Redemption Amount”).

5. Multiply the Bond Redemption Amount computed pursuant to paragraph 4 by the applicable redemption premium, if any, on the Outstanding Bonds to be redeemed (the “Redemption Premium”).

6. Compute the Future Facilities Costs.

7. Multiply the quotient computed pursuant to paragraph 3 by the amount determined pursuant to paragraph 6 to compute the amount of Future Facilities Costs to be prepaid (the “Future Facilities Amount”).

8. Compute the amount needed to pay interest on the Bond Redemption Amount from the first bond interest and/or principal payment date following the current Fiscal Year until the earliest redemption date for the Outstanding Bonds.

9. Determine the Special Taxes levied on the Parcel in the current Fiscal Year which have not yet been paid.

10. Compute the amount the Administrator reasonably expects to derive from the reinvestment of the Prepayment Amount less the Future Facilities Amount and the Administrative Fees and Expenses from the date of prepayment until the redemption date for the Outstanding Bonds to be redeemed with the prepayment.

11. Add the amounts computed pursuant to paragraphs 8 and 9 and subtract the amount computed pursuant to paragraph 10 (the “Defeasance Amount”).

12. Verify the administrative fees and expenses, including the costs of computation of the prepayment, the costs to invest the prepayment proceeds, the costs of redeeming the Outstanding Bonds, and the costs of recording any notices to evidence the prepayment and the redemption (the “Administrative Fees and Expenses”).

13. The reserve fund credit (the “Reserve Fund Credit”) shall equal the lesser of: (a) the expected reduction in the reserve requirement (as defined in the Indenture), if any, associated with the redemption of Outstanding Bonds as a result of the prepayment, or (b) the amount derived by subtracting the new reserve requirement (as defined in the Indenture) in effect after the redemption of Outstanding Bonds as a result of the prepayment from the balance in the reserve fund on the prepayment date, but in no event shall such amount be less than zero.

14. The Maximum Special Tax prepayment is equal to the sum of the amounts computed pursuant to paragraphs 4, 5, 7, 11 and 12, less the amount computed pursuant to paragraph 13 (the “Prepayment Amount”).

10 City of Desert Hot Springs IA No. 1 of CFD No. 2006-1 11/16/2006 15. From the Prepayment Amount, the amounts computed pursuant to paragraphs 4, 5, 11, and 13 shall be deposited into the appropriate fund as established under the Indenture and be used to retire Outstanding Bonds or make debt service payments. The amount computed pursuant to paragraph 7 shall be deposited into the Construction Fund. The amount computed pursuant to paragraph 12 shall be retained by the CFD.

The Prepayment Amount may be sufficient to redeem other than a $5,000 increment of Bonds. In such cases, the increment above $5,000 or integral multiple thereof will be retained in the appropriate fund established under the Indenture to be used with the next prepayment of bonds or to make debt service payments.

As a result of the payment of the current Fiscal Year’s Special Tax levy as determined under paragraph 9 (above), the Administrator shall remove the current Fiscal Year’s Special Tax levy for such Parcel from the County tax rolls. With respect to any Parcel that is prepaid, the Board shall cause a suitable notice to be recorded in compliance with the Act, to indicate the prepayment of Special Taxes and the release of the Special Tax lien on such Parcel, and the obligation of such Parcel to pay the Special Tax shall cease.

Notwithstanding the foregoing, no Special Tax prepayment shall be allowed unless the amount of Maximum Special Taxes that may be levied on Taxable Property both prior to and after the proposed prepayment is at least 1.1 times the maximum principal and interest due in any Fiscal Year of all Outstanding Bonds plus the anticipated Administrative Expenses.

Tenders of Bonds in prepayment of Maximum Special Taxes may be accepted upon the terms and conditions established by the Board pursuant to the Act. However, the use of Bond tenders shall only be allowed on a case-by-case basis as specifically approved by the Board.

2. Prepayment in Part

The Maximum Special Tax on a Parcel of Developed Property or a Parcel of Approved Property or Undeveloped Property for which a building permit has been issued may be partially prepaid in increments of $5,000. The amount of the prepayment shall be calculated as in Section H.1; except that a partial prepayment shall be calculated according to the following formula:

PP = ((PE –A)x F)+A

These terms have the following meaning:

PP = the partial prepayment

11 City of Desert Hot Springs IA No. 1 of CFD No. 2006-1 11/16/2006 PE = the Prepayment Amount calculated according to Section H.1 F = the percent by which the owner of the Parcel(s) is partially prepaying the Maximum Special Tax. A = the Administrative Fees and Expenses calculated according to Section H.1

The owner of a Parcel who desires to partially prepay the Maximum Special Tax shall notify the Administrator of (i) such owner’s intent to partially prepay the Maximum Special Tax, (ii) the amount of partial prepayment expressed in increments of $5,000, and (iii) the company or agency that will be acting as the escrow agent, if applicable and within 5 days of receipt of such notice, the Administrator shall notify such property owner of the amount of the non- refundable deposit determined to cover the cost to be incurred by the CFD in calculating the proper amount of a partial prepayment. Within 15 business days of receipt of such non-refundable deposit, the Administrator shall notify such owner of the partial prepayment amount of such Parcel. Partial prepayment must be made not less than 60 days prior to any redemption date for any Bonds to be redeemed with the proceeds of such prepaid Special Taxes.

With respect to any Parcel that is partially prepaid, the Administrator shall (i) distribute the funds remitted to it according to Paragraph 15 of Section H.1, and (ii) indicate in the records of the CFD that there has been a partial prepayment of the Maximum Special Tax and that a portion of the Maximum Special Tax equal to the outstanding percentage (1.00 - F) of the remaining Maximum Special Tax shall continue to be authorized to be levied on such Parcel pursuant to Section D.

12 City of Desert Hot Springs IA No. 1 of CFD No. 2006-1 11/16/2006

APPENDIX B

THE APPRAISAL

B-1

[THIS PAGE INTENTIONALLY LEFT BLANK]

SUMMARY APPRAISAL REPORT Valuation of Residential Tracts

COMMUNITY FACILITY DISTRICT NO. 2006-1, IA NO. 1

Prepared for Jason Simpson Assistant City Manager City of Desert Hot Springs 65-950 Pierson Boulevard, Desert Hot Springs, CA 92240

Bruce W. Hull & Associates, Inc. • 1056 E. Meta Street, Suite 202 Ventura • California• 93001 Tel (805) 641-3275 • Fax (805) 641-3278 BRUCE W. HULL & ASSOCIATES INC. REAL ESTATE APPRAISERS & CONSULTANTS

July 12, 2010

Jason Simpson Assistant City Manager City of Desert Hot Springs 65950 Pierson Boulevard, Desert Hot Springs, CA 92240

Reference: Appraisal of Improvement Area No. 1, CFD 2006-1 Desert Hot Springs, California

Dear Mr. Simpson:

At your request and authorization, we have prepared the attached draft appraisal report of Improvement Area No. 1, CFD 2006-1 Desert Hot Springs, California.

We have valued the fee simple estate, subject to the CFD special tax for the subject property consistent with the Uni- form Standards of Professional Appraisal Practice, the Appraisal Standards for Land-Secured Financings, issued by the California Debt and Investment Advisory Commission, and subject to the CFD and the limiting conditions and hypothetical conditions stated in this report.

As a result of this investigation, study and our knowledge and experience, the following market value has been as- signed as of the effective date of July 1, 2010.

FINISHED HOMES $26,080,000

FINISHED LOTS $6,460,000

TOTAL $32,540,000

The preceding values are stated subject to the limiting conditions, hypothetical conditions, extraordinary assump- tions and appraiser’s certification included in the attached report.

This report is defined as a Summary Appraisal Report, which is intended to comply with the reporting requirements set forth under Standards Rule 2-2 of the Uniform Standards of Professional Appraisal Practice, effective January 1, 2010, for a Summary Appraisal Report. It is intended to follow the standards set forth in Appraisal Standards for Land-Secured Financings, issued by the California Debt and Investment Advisory Commission and last updated in July 2004.

The following narrative summary appraisal report sets forth the data and analyses upon which our opinion of value is, in part, predicated.

Respectfully submitted,

BRUCE W. HULL & ASSOCIATES, INC.

Bruce W. Hull, MAI State Certified General Real Estate Appraiser (AG004964)

Jeremy Bagott State Certified General Real Estate Appraiser (AG031250)

! Table of Contents

Assumptions and Limiting Conditions! 1

Hypothetical Conditions 3

Extraordinary Assumptions 3

Purpose of the Appraisal! 3

Intended Use of the Appraisal! 3

Client/Intended User! 3

Definitions! 3

Market Value 3

Cost Approach 4

Finished Lot 4

Income Capitalization Approach 4

Land-residual Technique 4

Mass Appraisal 5

Sales Comparison Approach 5

Owner of Record! 5

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

i Three-Year Sales History! 5

Relevant Dates! 6

The Subject Property! 6

Interest Appraised! 7

Scope of Work! 7

Viewing of Site 7

Research 7

Analysis 8

Reporting 8

Discussion of the Economy! 9

Yield Spreads 9

Yield Curves 9

Fed Funds Rate 10

Inflation 10

Fuel Prices 11

Gross Domestic Product 12

Unemployment 13

Consumer Sentiment 14

Purchasing, Goods and Retail 15

Retail 16

Housing 17

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

ii Commercial Real Estate 20

REIT Acquisitions 22

Consumer Credit 23

Conclusion 23

Area and Region Data! 24

Economic Influences – Riverside County 24

Physical Influences – Riverside County 26

Governmental Influences – Riverside County 26

Societal Influences – Riverside County 27

Economic Influences – Coachella Valley 29

Physical/Environmental Influences – Coachella Valley 31

Governmental Influences – Coachella Valley 31

Societal Influences – Coachella Valley 32

Summary of Subject Neighborhood and Property! 34

Neighborhood 34

Economic Influences – Desert Hot Springs 34

Physical/Environmental Influences – Desert Hot Springs 34

Governmental Influences – Desert Hot Springs 35

Societal Influences – Desert Hot Springs 35

Discussion of Supply and Demand/Product Type and Neighborhood 36

Subject Description! 42

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

iii Comments on Subject Improvement Area (Skyborne Project) 53

Skyborne Village 1 / Aurora 56

Skyborne Village 1 / Aurora Product Mix 57

Base Components and Finishes in Village 1 / Aurora Product 57

Planned-Unit Development Amenities in Village 1 / Aurora 58

Skyborne Village 2 / Hopewell 58

Skyborne Village 2 / Hopewell Product Mix 59

Base Components and Finishes in Village 2 / Hopewell Product 59

Planned-Unit Development Amenities in Village 2 / Hopewell 60

Conclusion 61

Assessments and Taxes! 62

Bond Maturity Schedule 62

Analysis of Ad Valorem and Special Taxes: Sampling of Built Properties 64

Highest and Best Use! 65

Valuation Section! 66

Valuation Methods Selected 66

Sales Comparison Approach for Existing Single-Family Residences 66

Sales within Skyborne Project 18 months prior to Date of Value 66

Sales within Skyborne Project 18 months prior to Date of Value (arranged by gross living area) 67

Discussion of Barriers to Entry/Economies of Scale 68

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

iv Discussion of Sky Pointe Drive Sales in Subject Improvement Area 69

Pending Sale Activity in Subject Improvement Area 69

Sales and Pending Sales outside the Subject Improvement Area 69

Listings within Skyborne Project as of the Date of Value 70

Market Idiosyncracies 71

Sales of Finished Lots 72

Residual Method 75

Reconciliation and Value Conclusion! 77

Reconciliation 77

Value Conclusion 78

Marketing and Exposure Time! 80

Marketing Time 80

Exposure Time 80

Certification! 81

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

v Assumptions and Limiting Conditions

1. This is a Summary Appraisal Report, which is intended to comply with the reporting requirements set forth under Standard Rule 2-2(b) of the Uniform Standards of Professional Appraisal Practice for a Summary Appraisal Report. As such, it might not include full discussions of the data, reasoning, and analyses that were used in the appraisal process to develop the appraisers’ opinion of value. Supporting documentation concerning the data, reasoning, and analyses is retained in the appraisers’ files. The information contained in this report is specific to the needs of the client and for the intended use stated in this report. The appraisers are not responsible for unauthorized use of this report.

2. No responsibility is assumed for legal or title considerations. Title to the property is assumed to be good and mar- ketable unless otherwise stated in this report.

3. The property is appraised free and clear of any or all liens and encumbrances unless otherwise stated in this report.

4. Responsible ownership and competent property management are assumed unless otherwise stated in this report.

5. The information furnished by others is believed to be reliable. However, no warranty is given for its accuracy.

6. All engineering is assumed to be correct. Any plot plans and illustrative material in this report are included only to assist the reader in visualizing the property.

7. 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 arranging for engineering studies that may be required to discover them.

8. It is assumed that there is full compliance with all applicable federal, state, and local environmental regulations and laws unless otherwise stated in this report.

9. It is assumed that all applicable zoning and use regulations and restrictions have been complied with, unless non- conformity has been stated, defined, and considered in this appraisal report.

10. It is assumed that all required licenses, certificates of occupancy or other legislative or administrative authority from any local, state, or national governmental or private entity or organization have been or can be obtained or re- newed for any use on which the value estimates contained in this report are based.

11. Any sketch in this report may show approximate dimensions and is included to assist the reader in visualizing the property. Maps and exhibits found in this report are provided for reader reference purposes only. No guarantee as to accuracy is expressed or implied unless otherwise stated in this report. No survey has been made for the purpose of this report.

12. It is assumed that the utilization of the land and improvements is within the boundaries or property lines of the property described and that there is no encroachment or trespass unless otherwise stated in this report.

13. The appraiser is not qualified to detect hazardous waste and/or toxic materials. Any comment by the appraiser that might suggest the possibility of the presence or absence of such substances should not be taken as confirmation

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

1 of the presence or absence of hazardous waste and/or toxic materials. Such determination would require investiga- tion by a qualified expert relating to asbestos, urea-formaldehyde foam insulation, or other potentially hazardous materials, which may affect the value of the property. The appraiser’s value estimate is predicated on the assumption that there is not such material on or in the property that would cause a loss in value unless otherwise stated in this report. No responsibility is assumed for any environmental conditions, or for any expertise or engineering knowl- edge required to discover them. The appraiser’s descriptions and resulting comments are the result of the routine observations made during the appraisal process.

14. Any proposed improvements are assumed to be completed in a good, workmanlike manner in accordance with the submitted plans and specifications.

15. The distribution, if any, of the total valuation in this report between land and improvements applies only under the stated program of utilization. The separate allocations for land and buildings must not be used in conjunction with any other appraisal and are invalid if so used.

16. Possession of this report, or a copy thereof, does not carry with it the right of publication. It may not be used for any purpose by any person other than the party to whom it is addressed without the written consent of the appraiser, and in any event, only with proper qualification and only in its entirety.

17. The Americans with Disabilities Act (“ADA”) became effective January 26, 1992. The appraisers have not made a specific compliance survey and analysis of this property to determine whether or not it is in conformity with the various detailed requirements of the ADA. The appraiser is not a qualified expert as to the requirements of the ADA Act. It is possible that a compliance survey of the property, together with a detailed analysis of the requirements of the ADA, could reveal that the property is not in compliance with one or more of the requirements of the Act. If so, this fact could have a negative effect upon the value of the property. Since the appraisers have no direct evidence relating to this issue, possible noncompliance with the requirements of the ADA in estimating the value of the prop- erty has not been considered.

18. Where necessary, we have relied on cost estimates that were provided by the developer and/or the city engineer. This report is conditioned upon that information being correct and reliable.

19. It is incumbent on the client to read this report in its entirety and bring to the attention of the appraiser in a timely fashion any known inconsistencies, or incorrect data or facts published in this appraisal report. The appraisers have the right to revise this report, including all conclusions thereof, should new data or information come to light.

20. Requesting valuation services by Bruce W. Hull & Associates, Inc., including all associates, subcontractors, em- ployees or assigns of said, constitutes an agreement by the client/intended user that any damage or loss, whatever the cause or perceived cause, will only entitle the client/intended user, at most, to replacement of the physical report, provided such replacement is requested in writing and the date of valuation is no more than five years prior to the date of request. Except for such replacement, Bruce W. Hull & Associates, Inc., including associates, subcontractors, employees or assigns of said, accepts no warranty or liability for any incidental or consequential damages, perceived or otherwise, that may arise from this appraisal assignment or the resulting opinion of value.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

2 21. It is an assumption in this report that the homeowners association is a functioning entity independent of the de- veloper, is competently managed, is not the subject of litigation and maintains adequate replacement reserves cover- ing common-area components.

Hypothetical Conditions

There are no hypothetical conditions in the appraisal report.

Extraordinary Assumptions

There are no extraordinary assumptions in this appraisal report.

Purpose of the Appraisal

The purpose of this appraisal is to develop an opinion of the fee simple value, subject to the special tax, of Improve- ment Area No. 1 within the City of Desert Hot Springs CFD 2006-1.

Intended Use of the Appraisal

The intended use of this appraisal is to assist the client in determining feasibility for refunding of bonds of a Com- munity Facilities District.

Client/Intended User

The client and intended user is the City of Desert Hot Springs and its representatives and assigns.

Definitions

Market Value Market value, as defined by 12 CFR, Part 34, means the most probable price which a property should bring in a com- petitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consum- mation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

• Buyer and seller are typically motivated;

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

3 • Both parties are well informed or well advised, and acting in what they consider their own best interests;

• A reasonable time is allowed for exposure in the open market;

• Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and

• The price represents the normal consideration for the property sold unaffected by special or creative fi- nancing or sales concessions granted by anyone associated with the sale.

Cost Approach The cost approach is defined as follows:

“A set of procedures in which an appraiser derives a value indication by estimating the current cost to re- produce or replace the existing structure, deducting for all accrued depreciation in the property, and adding the estimated land value.”

Finished Lot

The term "finished lot," in the context of a residential subdivision, is defined as:

“A parcel with legal entitlements created by a recorded subdivision map whose physical characteristics are a fine-graded level pad with an infrastructure contiguous to each individual lot, asphalt-paved roads and necessary utilities. This term assumes the payment of all applicable fees with the exception of building permits and plan-check fees.”

Income Capitalization Approach The income capitalization approach is defined as follows:

“A set of procedures in which an appraiser derives a value indication for income-producing property by converting anticipated benefits into property value. This conversion is accomplished either by 1) capitaliz- ing a single year’s income expectancy or an annual average of several years’ income expectancies at a market-derived capitalization rate or a capitalization rate that reflects a specified income pattern, return on investment, and change in the value of the investment; or 2) discounting the annual cash flows for the hold- ing period and the reversion at a specified yield rate.”

Land-residual Technique

The term "land residual technique" is defined as:

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

4 “Land value calculated by capitalizing residual net operating income to the land or by taking an assumed or real value for the land and improvements together and subtracting the cost of required labor, capital and entrepreneurial coordination to build the improvements. "Residual," in the context of an appraisal, is used to denote the result of a valuation procedure in which the value of known components are subtracted from a known total, thus solving for the unknown component's value.”

Mass Appraisal

A mass appraisal is defined as follows:

“The process of valuing a universe of properties as of a given date using standard methodology, employing common data, and allowing for statistical testing.”

Sales Comparison Approach The sales comparison approach is defined as follows:

“The process in which a market value estimate is derived by analyzing the market for similar properties and comparing these properties to the subject property.”

Owner of Record

The 178 homes are owned by individual homeowners, financial institutions or government supported enterprises such as Fannie Mae and Freddie Mac. Some hold title to more than one property. In addition, 216 finished or near- finished lots are vested in Skyborne Ventures, LLC, a Delaware limited liability company. Members of Skyborne Ven- tures are James M. Kozak, president of Strategic Land Partners, L.P., of San Diego; Gregory P. Lansing, president of Lansing Companies; and Scott E. McDaniel, manager of Regal Development, LLC, and general partner in TMP Prop- erties.

Three-Year Sales History

The single-family homes in the subject improvement area have sold and resold periodically since construction in 2006 and 2007. Many of the more recent sales represent transfers that have been recorded when banks have taken posses- sion of mortgaged homes and again when banks have sold these homes to private parties. The situation is not unlike what has occurred in other areas of Riverside County and the region as a whole. Skyborne Ventures, LLC, acquired the 216 finished or near-finished lots on September 19, 2008, from Western Pacific Housing, Inc., a Delaware corpora-

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

5 tion, which is an entity associated with homebuilder D.R. Horton. The Document No. was 514879. The sale price was $7,800,000 and the transfer included not only the 216 finished/ near-finished lots but also 1,686 mapped but unfin- ished lots in Skyborne Villages 3 through 10.

The appraisers have been provided a letter of intent dated August 5, 2009, from RSI Land for 177 finished lots, which states the latter’s intent to purchase the lots for what equates to $36,500 per finished lot in accordance with a defini- tion of finished lot that has not been provided to the appraisers. The letter calls out a 30-day feasibility period in which due diligence is to be conducted. These lots pertain to Village 2 / Hopewell. The letter of intent was never signed and, as indicated by a Skyborne representative, was rejected due to the latter’s belief that the lots were more valuable. Province West, a firm specializing in the brokering of entitled residential tracts, currently lists 216 Skyborne lots on its Web site. According to Jim Kozak, Skyborne Ventures is considering listing 100 of the lots, but has not yet signed a listing agreement, nor has a listing price been decided upon.

Relevant Dates

EVENT DATE

Site surveillance June 15, 2010 and June 16, 2010

Effective date of value July 1, 2010

Date of issuance July 12, 2010

The appraisal assignment represents a current date of value. It is not retrospective nor prospective in nature.

The Subject Property

The appraised property in this assignment represents that land and improvements of the City of Desert Hot Springs Community Facilities District No. 2006-1, Improvement Area 1, located in the City of Desert Hot Springs, Riverside County, California. More specifically, the appraised property consists of 394 single-family residential lots in Tract No. 32030-1 (Skyborne Village 1 / Aurora) and Tract No. 32030-2 (Skyborne Village 2 / Hopewell). The subject improve- ment area is located in the 92240 ZIP code. A breakdown of homes and finished/near-finished lots is provided in the table below.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

6 OF WHICH TOTAL CONTAIN RESIDEN- COMPLETED REMAINING TIAL LOTS HOMES FINISHED LOTS

TRACT 32030-1 (VIL- 154 125 29 LAGE 1/AURORA)

TRACT 32030-2 (VIL- 240 53 187 LAGE 2/HOPEWELL)

TOTAL 394 178 216

All 178 built homes have completed escrow in initial transactions between the developer and separate and distinct private parties. The appraisers know of no significant concentration of ownership of the built homes. Thirty-seven of the remaining finished lots contain poured slabs.

Interest Appraised

The interest appraised in this assignment is the fee simple interest, subject to the special tax of Communities Facilities District 2006-1.

Scope of Work

Viewing of Site

Certified General Appraiser Bruce Hull, MAI, viewed the appraised property on June 15, 2010, and June 16, 2010.

Research The due diligence of the appraisal assignment included having done the following:

• Compiling demographic information and relating that data to the subject property to determine feasibility and demand. Interviewing brokers Dan McDonough of Province West; Marc Kleiman of Province West; Libby Frantz of Whittlesey Doyle; Erik Christianson of Hoffman Company; Stacy Osso of Whittlesey Doyle; Ed Fitzpatrick of Shopoff Group; Bill Korek of Korek Land; and former D.R. Horton broker Orville Power of Vertical Infill, Inc. We also spoke with a representative of Skyborne Ventures, LLC., Jim Kozak.

• Gathering and analyzing information on the subject market, including reviewing real estate brokerage pub- lications on historic and projected growth in the subject market, and researching the micro- and mac- roeconomic fundamentals relating to the subject.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

7 • Interviewing representatives of the City of Desert Hot Springs to obtain information relating to the subject property.

• Searching the area for relevant comparable land transactions, including sales and offerings, and interview- ing appropriate market participants to get pertinent information relating to each transaction.

• Reviewing the Official Statement City of Desert Hot Springs, Community Facilities District No. 2006-1 Im- provement Area 1, Special Tax Bonds, Series 2008A; the California Special Studies Zone, Desert Hot Springs Quadrangle, issued by the California Division of Mines and Geology; assessment and MLS data.

Analysis The cost and income approaches to value were developed in this appraisal assignment. The appraisers have not de- veloped or relied upon a so-called “developer method” discounted cash-flow analysis, since sufficient market data was available covering bulk lot sales of finished, semi-finished and mapped lots. In other words, the appraisers were not forced to rely on the sales of individual custom lots and then build a discounted-cash flow model to simulate the absorption of the subject lots into the marketplace. Similarly, the existing single-family homes have not been valued using the cost approach. We have, however, developed a residual technique in which we have attempted to reflect a calculation that would be performed by a typical merchant builder. For the purposes of developing an opinion of market value for both the existing single-family residences and the finished/near-finished lots, we have relied upon the sales comparison approach.

Reporting

Based on the assignment elements above, the report is written in a summary format. There is a work file correspond- ing to this appraisal assignment. It is either in the custody of the appraiser or the appraiser has made arrangements for the retention, access and retrieval with the party having custody of the work file.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

8 Discussion of the Economy

What follows is a brief discussion of the economic indicators we believe have the greatest impact on the real estate market. This section is important to any discussion of real estate value as it illustrates the economic fundamentals that underlie the current market as of the date of value.

Yield Spreads Wide but narrowing bond-yield spreads between the 10-year Treasury and non-investment grade instruments signal measured optimism and a greater willingness to take risks. Spreads, however, are still wide relative to the early part of the decade. These wider spreads may very well be the new “normal.” Widening spreads spell trouble for small businesses, which are a driver of the economy and commercial real estate market. At the end of October 2008, credit spreads had widened alarmingly. As of January 2009, however, the spread stopped widening and began a 10-month narrowing phase. This was positive. Since May 2010, however, the spread has started to widen. The source for the data is the Federal Reserve.

10-Year Treasury to Baa Corporate Bond Spread 10.00

7.50

5.00

2.50

0 Jan-06 Jan-07 May-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10

Ten-Year Treasury Corporate Bonds (Baa)

Yield Curves A steep yield curve signals expectations of an accelerating economy that could spark inflation, pushing up longer- term yields; a flatter curve means few inflation qualms and the expectation of only moderate growth. An inverted curve, where 3-month bills yield more than 10-year notes, signals recession. The June 2010 curve signals investor ex- pectations of high levels of future inflation. The source for the data below is the Federal Reserve.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

9 Yield Curves 6.00 5.00 4.00 3.00 2.00 1.00 0 U.S. 3-Month T-Bill U.S. 6-Month T-Bill U.S. 5-Year Bond U.S. 10-Year Bond U.S. 30-Year Bond

Jun-10 Mar-09 May-08 Jan-06

Fed Funds Rate In a climate of restricted credit markets and banks unwilling to lend to each other, the fed funds rate as an indicator becomes less meaningful. Under normal conditions, raising the federal funds rate will dissuade banks from taking out interbank loans, which in turn will make cash that much harder to procure. Conversely, dropping the interest rates will encourage banks to borrow money and therefore invest more freely. Thus, this interest rate acts as a regula- tory tool to control how freely the U.S. and world economies operate. The federal funds rate has been at emergency levels since late 2008 as banks de-leverage and accumulate capital. This low cost of borrowing is being priced into real estate and it may have serious consequences when the Fed attempts to raise the key rate. The source for the data is the Federal Reserve.

Federal Funds Rate 6.00

4.50

3.00

1.50

0 Jun-04 Feb-05 Sep-05 May-06 Jan-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10

Inflation Wholesale prices have fallen, according to The Producer Price Index (PPI) for finished goods. While lower prices seem like a boon for cash-strapped consumers, some economists have begun to grow concerned over the dangers of

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

10 deflation in a recession. A drop in prices signals a drop in demand and may inhibit businesses and consumers from ramping up their spending and hurts heavily leveraged segments of the economy.

Consumer Price Index for All Urban Consumers, U.S. Cities, (Unadj. Index, All Items) 220

210

200

190

180

170

160 Jan-98 May-99 Sep-00 Jan-02 May-03 Sep-04 Jan-06 May-07 Sep-08 Jan-10

The six-month moving average for the Consumer Price Index, which tends to smooth out erratic monthly changes, shows a steady increase in inflation since the end of 2009.

Trend in Six-Month Monthly Moving Averages, Change in CPI 218.0

217.3

216.5

215.8

215.0 Period Ending Dec-09 Period Ending Jan-10 Period Ending Feb-10 Period Ending Mar-10 Period Ending Apr-10

Fuel Prices There is a strong relationship between fuel prices and real estate. The correlation is most apparent in residential real estate. When fuel prices remain low for a prolonged period, suburban living becomes dramatically more affordable and these low fuel prices, if they remain low long enough, are eventually priced into the real estate. Its most extreme form is the “exurb,” which is, in effect, a suburb beyond the suburbs. The Antelope Valley, the Victor Valley and Fra-

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

11 zier Park/Lebec come to mind. Here, life is often framed by many hours spent behind the wheel of an automobile in daily commutes. When fuel prices spike, as they did in the Summer of 2008, shock waves roll through the exurbs and home values adjust to the downside. Suddenly urban living begins to look more appealing and an oversupply devel- ops as a greater percentage of suburban and exurban dwellers relocate closer employment centers.

Fuel prices have remained relatively level since May 2009. We expect them to to slowly edge upward when the econ- omy rebounds.

Avg. Gas Price, Regular Unleaded – California vs. U.S. 5.00

4.30

3.60

2.90

2.20

1.50 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10

CA State Avg. National Avg.

Gross Domestic Product The U.S. economy grew in the third quarter and the fourth quarter 2009 as consumer spending and investment in new home-building rebounded, unofficially ending the worst recession in 70 years. However, the appraisers are hesi- tant to declare an inflection point. The economy is not yet on solid footing and an undetermined amount of GDP growth in the private sector’s contribution to GDP is likely due to government stimulus. For the 1st quarter 2010, the most recent available, GDP was up 4.1 percent based on current dollars and 3.2 percent in Year 2000 dollars. The source of the data below is the Federal Reserve.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

12 Qtrly. Change in GDP (Seasonally Adjusted and Annualized (%) 30

20

10

0

-10 1947q2 1952q1 1956q4 1961q3 1966q2 1971q1 1975q4 1980q3 1985q2 1990q1 1994q4 1999q3 2004q2 2009q1

GDP % change based on current dollars GDP % change based on chained Year 2000 dollars

The line chart below looks only at Year 2000 dollars.

Qtrly. Change in GDP (Seasonally Adjusted, Annualized and 2000 Dollars) 10

5

0

-5

-10 1987q3 1992q1 1996q3 2001q1 2005q3 2010q1

Unemployment Just four states recorded a drop in the unemployment rate for December 2009, indicating that though the labor mar- ket continues to inch toward stabilization, widespread job growth still hasn’t arrived. In January 2010, the Labor De- partment reported that the unemployment for the nation as a whole held steady at 10 percent in December from a month earlier. Just 16 states, including California, have higher jobless rates than the national average. Most of the country continues to see job losses, but employment increased in 11 states and Washington D.C. The source of the data below is the U.S. Bureau of Labor Statistics.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

13 Unemployment, Non-farm Payroll Jobs 14.00%

12.00%

10.00%

8.00%

6.00%

4.00% Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10

California U.S.

A prerequisite for the unemployment rate to fall is for the average weekly hours of production to rise to and stay at pre-recession levels. This has begun to occur, setting the stage for an increase in temporary employment.

Avg. Weekly Hours of Production, Seasonally Adjusted 34.8

34.5

34.1

33.8

33.5

33.1

32.8 Oct-05 Feb-06 Jun-06 Oct-06 Feb-07 Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb_10 Jun-10

Consumer Sentiment "The rebound in sentiment in late summer due to falling oil prices has been almost completely reversed as newer problems, including the credit crunch, deteriorating jobs market and problems in Detroit, have erupted," said T.J. Marta, Economic and Fixed Income strategist for RBC Capital Markets. The index has rebounded somewhat but is still volatile.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

14 RBC Overall Consumer Outlook Index 120

90

60

30

0 Jan-02 Oct-02 Jul-03 Apr-04 Jan-05 Oct-05 Jul-06 Apr-07 Jan-08 Oct-08 Jul-09 Apr-10

The trend in the six-month moving average for the RBC Overall Consumer Outlook Index shows a general drop-off in sentiment and spending followed by a steady upswing.

Consumer Confidence and Spending – Trend in Six-Month Moving Average 15%

13%

11%

9%

6%

4%

2%

0% Period Ending Mar-10 Period Ending Apr-10 Period Ending May-10 Period Ending Jun-10

Purchasing, Goods and Retail Business executives commit to purchases of big-ticket items if they anticipate increased demand. A three-month up- trend in orders – excluding defense, aircraft and other transportation equipment – would presage an expanding economy. This has not yet occurred. Source of the data below is the U.S. Census Bureau.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

15 Advance Durable Goods New Orders (m$), Seasonally Adj. 230,000

216,000

202,000

188,000

174,000

160,000 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10

Quarterly revenue trends for the railroads are a good leading indicator of where the economy is heading. Although revenue climbed slightly, railroad and economic bellwether CSX Corporation reported a 15 percent decline in total volume of cargoes hauled; bellwether coal volumes declined 18 percent. The company noted that coal inventories at domestic utilities have reached record levels, representing more than twice the rate of present consumption, and prompting CEO Michael Ward to concede: "Our coal business will be affected by weak demand well into 2010."

Coal represents about 30 percent of total volumes hauled for both CSX Corporation and Norfolk Southern, so the outlook for coal is a key indicator for these operators in particular. Looking to the automotive segment, where the Cash for Clunkers program provided a short-lived boost, freight volume nonetheless declined from prior-year levels at a 28 percent clip during the third quarter.

Quartely Revenue for Railroad Bellwether CSX 3,000

2,700

2,400

in $millions 2,100

1,800 2004q1 2005q1 2006q1 2007q1 2008q1 2009q1 2010q1

Retail During the 2009 holiday shopping season, foot traffic fell 2.9 percent while retail sales rose 1.7 percent. Holiday sales dropped 5.6 percent in 2008, according to the International Council of Shopping Centers, making it the worst holiday season in more than 40 years. Nonetheless, retail sales have been slowly creeping up over an eight-month period, which is positive.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

16 Seasonally Adjusted Monthly Retail Sales (Excluding Food) in $millions 350,000

340,000

330,000

320,000

310,000

300,000 Jan-06 Jun-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10

Housing Authorized new housing units have fallen dramatically since 2005 after a run-up beginning in 2000, as the annual chart below indicates. On a monthly basis, there has been a long period of steady decline of both single-family hous- ing starts and new permits. Whether the trend is beginning to level off is inconclusive at this time.

While the number of permits authorized for multifamily units saw a spike in mid-2008, it, too, has succumbed to the credit restrictiveness and general slump in all residential real estate. In existing multifamily properties nationwide, rents have softened; job losses have made it difficult for landlords to arrest rising vacancy rates and rent increases are out of the question for many. These conditions, along with credit restrictiveness, have resulted in fewer permits being pulled for multifamily construction.

New Privately Owned Housing Units Permitted, Started – (1,000s of Units) 2,000

1,500

1,000

500

0 Jan-04 Jun-04 Nov-04 Apr-05 Sep-05 Feb-06 Jul-06 Dec-06May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10

New Privately Owned Housing Units Started – Single-Family Residential New Privately Owned Housing Units Authorized – Single-Family Residential Privately Owned Multifamily Permits issued in Permit-Issuing Places (5 Units or More)

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

17 Non-performing 1-4 unit residential mortgages at banks regulated by the FDIC have exploded over the past six quar- ters as the bar chart below illustrates. The same has occurred at Freddie Mac and Fannie Mae. On a more positive note, as the line chart below it illustrates, household-income-to-home-price ratios are now in line with 2001 levels, which indicates housing has become more affordable in many markets relative to incomes. The source of the data below is the FDIC.

Non-Performing Assets – 1-4 Unit Residential 100,000,000

75,000,000

50,000,000 In $1,000s 25,000,000

0 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09

Past Due Assets 30-89 Days (Loans Secured by 1-4 Unit Residential Real Estate) Past Due Assets over 90 Days (Loans Secured by 1-4 Unit Residential Real Estate) Assets in Non-Accrual Status (Loans Secured by 1-4 Unit Residential Real Estate)

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

18 U.S. Median Home Price vs. U.S. Median Household Income 160

140

120

100

80

60 Jan-00 Nov-00 Sep-01 Jul-02 May-03 Mar-04 Jan-05 Nov-05 Sep-06 Jul-07 May-08

U.S. Median Household Income (Indexed at 100 in Jan. 2003) U.S. Median Home Price, Existing Homes (S&P/Case-Shiller) (index adjusted 2003 = 100)

If soured mortgages are not being unwound at Freddie Mac, Fannie Mae and the FDIC-regulated institutions in an expeditious manner, than the foreclosure-filings data below would understate the number of non-performing mort- gages. We believe this is the case. The source of the data below is Realtytrac.

U.S. Foreclosure Filings (in Housing Units) 425,000

343,750

262,500

181,250

100,000 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10

The chart below, which shows the foreclosure trend in six-month moving averages, indicates no clear trend.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

19 Trend in Six-Month Moving Averages for Foreclosures 1.50% 1.00% 0.50% 0% -0.50% -1.00% -1.50% -2.00% Period Ending Feb-10 Period Ending Mar-10 Period Ending Apr-10 Period Ending May-10

National Association of Home Builders produces the Housing Market Index (HMI), a weighted, seasonally adjusted statistic derived from ratings for present single-family sales, single-family sales in the next six months and buyers traffic. The first two components are measured on a scale of "good," "fair" and "poor," and the last one is measured on a scale of "high," "average" and "low."

A rating of 50 indicates that the number of positive or good responses received from the builders is about the same as the number of negative or poor responses. Ratings higher than 50 indicate more positive or good responses. The in- dex paints a dismal picture.

Housing Market Index 80

60

40

20

0 Jan-85 Sep-86 May-88 Jan-90 Sep-91 May-93 Jan-95 Sep-96 May-98 Jan-00 Sep-01 May-03 Jan-05 Sep-06 May-08 Jan-10

Commercial Real Estate There is no better leading indicator for the future of commercial real estate than the Architecture Billings Index. The Architecture Billings Index (ABI) is an index derived from the monthly Work-on-the-Boards survey, conducted by the AIA Economics & Market Research Group. The ABI serves as a leading economic indicator that leads nonresidential construction activity by approximately 9-12 months. The indexes are developed from the monthly Work-on-the- Boards survey panel where participants are asked whether their billings increased, decreased, or stayed the same in the month that just ended. According to the proportion of respondents choosing each option, a score is generated, which represents an index value for each month.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

20 Architecture Billings Index 65.0 60.0 55.0 50.0 45.0 40.0 35.0 30.0 Greater than 50 = Expansion Greater 1996q1 1997q1 1998q1 1999q1 2000q1 2001q1 2002q1 2003q1 2004q1 2005q1 2006q1 2007q1 2008q1 2009q1 2010q1

Because it is not seasonally adjusted and fairly erratic on a quarter-by-quarter basis, more can be discerned by look- ing at a six-month moving average of the Architecture Billing Index. The bar chart below indicates that the degree of falloff in architecture billing has moderated since the six-month moving average for the period ending the last day of December 2008 with a slight upward trend for the most recent period.

Architecture Billing Index Trend in Six-Quarter Moving Averages 5.00% 3.75% 2.50% 1.25% 0% -1.25% -2.50% -3.75% -5.00% Period Ending Mar-09 Period Ending Jun-09 Period Ending Sep-09 Period Ending Dec-09

Capitalization rates are a proxy for how investors see the future for commercial real estate. If they demand higher capitalization rates on acquisitions, it indicates they are taking a more cautious view of the future. The measure, how- ever, can be self-correcting. Higher capitalization rates can dampen real estate values, which, in turn, allows proper- ties to reprice. When properties are purchased at a lower basis, they can rent at lower lease rates, benefiting many businesses.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

21 Average U.S. Capitalization Rates by Segment (Korpacz Investor Survey) 9.00%

8.00%

7.00%

6.00%

5.00% 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10

Regional Mall CBD Office Warehouse Apartment

REIT Acquisitions REIT acquisitions are a bellwether for the overall health of the commercial real estate market. As the chart below il- lustrates, 2007 and 2008 saw a net fall in REIT acquisitions. The significant 2008 falloff notwithstanding, REITS have been taking advantage of opening credit and equity markets this year to refinance debt as maturities loom and raise funds for potential acquisitions from competitors weakened by the recession. The source is the U.S. Department of the Treasury.

REIT Net Acquisitions of Assets (b$) 150.0 120.0 90.0 60.0 30.0 0 -30.0 -60.0 -90.0 2003 2004 2005 2006 2007 2008

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

22 Consumer Credit Figures provided by FICO Inc. in July 2010 show that 25.5 percent of consumers — almost 43.4 million people — now have a credit score of 599 or below, categorizing them as poor risks for lenders. It's unlikely they will be able to get credit cards, auto loans or mortgages under the tighter lending standards banks now use. Their restricted access to credit is one reason for the slow economic recovery, since consumers relied so heavily on debt to fuel their spending during the boom years earlier in the decade.

Conclusion

A real estate boom, fueled by heavily leveraged loans built on low or even no down payments, caused home prices soared in most of the country — especially in Arizona, California, Florida and Nevada and metro areas of Washing- ton, D.C., and New York — during a brief period of easy lending, especially from 2002 to 2006.

The price plunge has wiped out trillions of dollars in home equity and caused the worst financial crisis since the Great Depression. Susan Wachter, professor of real estate at the University of Pennsylvania, fears that foreclosures and tight credit could send home prices falling to the point that millions of families and thousands of banks are thrust into insolvency. Commercial real estate is now in the throes of the same repricing pressure. Impractical workouts and “extend and pretend” practices at commercial banks and the now nationalized Fannie Mae and Freddie Mac will only prolong the inevitable and hide residential inventory that will need to be dealt with sooner or later.

Meanwhile, delinquencies on loans in commercial mortgage-backed securities spiked in January from a month ear- lier, with late payments in each of the five main property types increasing for the fifth straight month, according to Fitch Ratings. Commercial-property owners got increasingly behind on their mortgages in 2009 as occupancy rates and rents fell, helping to send property values tumbling from their bubble highs.

Turmoil in the European debt markets in mid-2010 as a result of a crisis in Greece only reinforces the fact that the global economy is still in a state of fragility.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

23 Area and Region Data

Economic Influences – Riverside County In 2006 to 2008, according to the U.S. Census Bureau, the leading industries in Riverside County were educational services, and health care, and social assistance, 18 percent, and retail trade, 13 percent.

Among the most common occupations were management, professional, and related occupations, 28 percent; sales and office occupations, 27 percent; service occupations, 19 percent; production, transportation, and material moving occupations, 13 percent; and construction, extraction, maintenance and repair occupations, 13 percent. Seventy-seven percent of the people employed were private wage and salary workers; 14 percent were federal, state, or local gov- ernment workers; and 8 percent were self-employed in sole-proprietorships and similar non-incorporated entities.

The median income of households in Riverside County was $58,168. Eighty percent of households received earnings and 18 percent received retirement income other than Social Security. Twenty-six percent of the households received Social Security. The average income from Social Security was $15,454. These income sources are not mutually exclu- sive; that is, some households received income from more than one source.

Ventura Los Angeles California Riverside

Per Capita Personal Income Trend by County $50,000

$44,000

$38,000

$32,000

$26,000

$20,000 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

In 2006 to 2008, according to the U.S. Census Bureau, 13 percent of people were in poverty. Sixteen percent of related children under 18 were below the poverty level, compared with 8 percent of people 65 years old and over. Ten per- cent of all families and 26 percent of families with a female householder and no husband present had incomes below the poverty level.

During the same period, Riverside County had a total of 754,000 housing units, 14 percent of which were vacant. Of the total housing units, 73 percent was in single-unit structures, 17 percent was in multi-unit structures, and 10 per- cent was mobile homes. Forty-one percent of the housing units were built since 1990.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

24 In 2006 to 2008, Riverside County had 647,000 occupied housing units – 446,000 (69 percent) owner-occupied and 201,000 (31 percent) renter-occupied.

Any discourse on commercial real estate appraisal should include discussion of the desert resort cities in the Coachella Valley are also in Riverside County. These include Indian Wells, La Quinta, Rancho Mirage, Palm Springs and Palm Desert. Indio is the center of an important date growing region. Almost all the date groves are in the East Coachella Valley, near Coachella and east of La Quinta.

Irrigation of more than 100,000 acres of the Coachella Valley since the early 20th century has enabled a thriving agri- cultural industry. The Coachella Valley Water District, in its 2010 annual report, listed the year's total crop value at over $575 million on land irrigated with Colorado River water. Total acreage irrigated (includes double cropping) was 59,236. Average gross value per acre was listed as $9,714.

From a commercial appraisal standpoint, there is good cumulative attraction for tourism and hospitality properties in parts of the Coachella Valley.

In terms of commercial property mix, the county's real estate is well segmented with free-standing retail, shopping center properties, general commercial, industrial, R&D, warehouse and office.

From the appraisers’ perspective, there is good equilibrium of generative, supportive and suscipient retail in River- side County. From a retail appraisal perspective, shopping in Riverside County ranges from anchored community centers, neighborhood centers, power and lifestyle centers and regional centers.

In terms of residential, there is a good mix in the county of apartment building properties, residential condominiums (air rights) and single-family residential properties of varying densities.

A retail appraisal principle states that shopping centers don't create new retail demand. Retail expansion in Riverside County is dependent on the state of the county's single-and multifamily (apartment and condominium ) units.

A commercial real estate appraiser would infer that there is moderately developed pool of unique employee skills, manufacturing expertise, pooling of knowledge, relationships to distribution channels and customer service capabili- ties in the county.

The March Air Reserve Base is located within Riverside County. In 1993, as part of The Pentagon's post-Cold War base closing/realignment plan, its unit complement was adjusted, and in 1996 it was transferred to the United States Air Force Reserve and renamed March Air Reserve Base. Land no longer needed as a result of the downsizing was put under the control of the March Joint Powers Authority, a commission that represents the county and the base's adjoining cities. Of the base’s 6,700 acres, the Air Force Reserves retained 2,258 acres at the airport.

March Air Reserve Base, established in 1918, is one of the oldest airfields operated by the United States military and has been a major training center for American aviators. The airfield's 13,300-foot runway is the longest in California. Beginning in the 1920s, the base, which covers about 6,700 acres, became one of the centers of development of aerial bombardment. Known as March Air Force Base for most of its life, it served as the home base for bomber units that fought in the Pacific theater of World War II, the Korean War, and the Vietnam War. March also hosted fighter, aerial

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

25 refueling, and transport units. The base gained notoriety when it hosted the first ever Bob Hope USO show during World War II.

A commercial real estate appraiser will identify a reverse multiplier effect associated with the post-Cold War reduc- tion of units at the base.

Another military asset in Riverside County is Chocolate Mountain Aerial Gunnery Range, an aerial and gunnery practice area used by the Navy and Marine Corps. A large part of the Chocolate Mountains lie within the gunnery range, and are off-limits to the public. From a commercial appraisal standpoint, there is no significant multiplier ef- fect from this military base.

Physical Influences – Riverside County

Riverside County is situated in the southeastern portion of California. It extends from Orange County in the west to the Colorado River along the Arizona border in the east. Riverside County is part of the Five-County Greater Los Angeles Metropolitan Area, which also includes the counties of Los Angeles, Orange, San Bernardino and Ventura. San Diego and Imperial counties border Riverside County to the south. Riverside County is inland of Los Angeles County, and south of San Bernardino County.

The county is rectangular in shape. According to the U.S. Census Bureau, the county has a total area of 7,303 square miles. The county is one of the largest in the Lower 48 States. It is the fourth-largest county in the state and is ap- proximately 180 miles wide along its east-west axis. It is about the size of the State of New Jersey. Much or all of the county is often referred to as being in the Inland Empire.

The county's primary terrain is desert. Most of Joshua Tree National Park lies in the county, as does some of the Sal- ton Sea, the largest lake in California.

Forests, National Parks and protected lands in Riverside County include the Cleveland National Forest, the Coachella Valley National Wildlife Refuge, Joshua Tree National Park, San Bernardino National Forest and the Santa Rosa and San Jacinto Mountains National Monument.

The San Andreas Fault runs down the Coachella Valley's eastern rim. The Coachella Valley's many hot springs are a result of the fault. The Santa Rosa Mountains to the West are part of the Lake Elsinore Fault zone.

Governmental Influences – Riverside County Riverside County's name stems from the name of its eponymous county seat, the City of Riverside. The county was formed in 1893 from a small portion of San Bernardino County and a larger part of San Diego County.

The Riverside County Board of Supervisors is the governing body of the county, certain special districts and the Housing Authority. The Board enacts ordinances and resolutions, adopts the annual budget, approves contracts ap- propriates funds, determines land use zoning for the unincorporated area, appoints certain county officers and mem-

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

26 bers of various boards and commissions. There is a Chair, Vice-Chair and three supervisors for a total of five county supervisors.

The supervisors are elected by the electorate to four-year terms and are non-partisan. Each seat on the board repre- sents a specific area or district. The board chooses a Chair and Vice Chair from among its members annually.

The credit bubble beginning in 2002 and culminating in 2005 put new pressures on highway infrastructure. Toll roads built in the 1990s helped dampen the pain for many commuters.

Three U.S. Interstate Highways run through Riverside County. They are the I-10, the I-15 and the I-215. In addition, about a dozen State Routes provide access to the county and within the county. With the exception of U.S. Route 95, only the I-10, State Route 177 and State 78 provide significant highway access in the eastern third of the county.

Public transit includes Riverside Transit Agency serves the western third of Riverside County, as far east as Banning. The SunLine Transit Agency serves the Coachella Valley. Palo Verde Valley Transit Agency provides service in Blythe, near the Arizona border. Pass Transit serves the San Gorgonio Pass communities.

Corona Cruiser serves the community of Corona.

Riverside County is also served by Greyhound buses. Amtrak trains stop in Riverside and Palm Springs. Metrolink trains provide commuter rail service from western Riverside County to Los Angeles and Orange Counties.

As of early 2010, Palm Springs International Airport (PSP) was served by ten airlines.

Institutions of higher learning include California Baptist University, California Southern Law School, College of the Desert, La Sierra University, Mount San Jacinto College, Palo Verde Community College, Riverside Community Col- lege and University of California, Riverside.

University of California, Riverside, is located on 1,200 acres near Box Springs Mountain in the City of Riverside. In the fall of 2009, enrollment consisted of 16,996 undergraduates and 2,443 graduate students. The institution offered 65 undergraduate majors at that time.

California Baptist University was founded in 1950 by the California Southern Baptist Convention. Its fall 2009 en- rollment exceeded 4,100 students. At that time, it offered 90 undergraduate majors and concentrations and 25 gradu- ate majors and credentials.

Societal Influences – Riverside County

Many onetime residents of Los Angeles' urban areas and inner suburbs relocated to Riverside County from roughly 2002 to 2005, during a credit bubble, Riverside, together with adjacent San Bernardino County, was consistently one of the most urbanizing counties in the state.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

27 Population by County 12,000,000

9,000,000

6,000,000

3,000,000

0 1970 1980 1990 2000 2001 2002 2003 2004 2005 2006 2007

San Bernardino Los Angeles Orange Riverside

According to the California Department of Conservation, Southern California counties dominated the top ten urban- izing list during the 2006 with Riverside County’s record-breaking development pace accounting for nearly 23 per- cent of new urban land in the state. Riverside County converted nearly 38,000 net acres of farmland to urban use from 2002 to 2006. San Bernardino County, during that same period, urbanized nearly 19,000 acres of farmland.

The population of Riverside County was 1,545,387 at the 2000 Census, and by 2008 the U.S. Census Bureau estimated the population had grown to about 2,100,000.

In 2006 to 2008, according to the U.S. Census Bureau, there were 647,000 households in Riverside County. The aver- age household size was 3.1 people.

The chart below illustrates a relatively low percentage of families living below the poverty line in Riverside County coupled with a median household income that falls in the middle range when compared to cohorts.

Median Income vs. % Families below Poverty Line, Census 2000 $60,000 15.0

$48,750 11.3

$37,500 7.5

$26,250 3.8

$15,000 0 Ventura San Bernardino Riverside Orange Los Angeles

Families below Poverty Line Median Household Income

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

28 In 2006 to 2008, 79 percent of people 25 years and over had at least graduated from high school and 20 percent had a bachelor's degree or higher. Twenty-one percent were dropouts; they were not enrolled in school and had not gradu- ated from high school.

Economic Influences – Coachella Valley Economic activity in the Coachella Valley is characterized by travel- and tourism-related businesses, recreation, light manufacturing, retail, construction, health care and social service and accommodations and food service. A commer- cial real estate appraiser evaluating a property in the Coachella Valley would probably be remiss not to mention the valley's interconnectedness to recreation, specifically golfing. The Coachella Valley, as of midyear 2010, is said to have 121 golf courses in service or under construction; the Coachella Valley is known as the "golf capital of the world."

A commercial real estate appraiser would likely see a good cumulative attraction for recreation properties, such as golf courses and tennis clubs, in the Coachella Valley.

Shopping centers of note in the Coachella Valley include Village Square Shopping Center, Tyselling Shopping Center, One Eleven La Quinta Shopping Center, Town and Country Shopping Center, Coachella Plaza Shopping Center, Coachella Shopping Center, Indio Fashion Mall Shopping Center and the Indio Plaza Shopping Center. A retail ap- praisal principle states that shopping centers don't create new retail demand. Retail expansion in the Coachella Valley is and will be dependent on the state of the valley's single-and multifamily (apartment and condominium ) units.

From a retail appraisal perspective, shopping in the Coachella Valley ranges from anchored community shopping centers, neighborhood shopping centers, power and lifestyle centers and regional shopping centers. A commercial real estate appraiser will note a good equilibrium of generative, supportive and suscipient retail in the Coachella Val- ley.

The McCallum Theatre in Palm Desert draws traveling theatrical companies, singers, dancers, magicians and sym- phonies. The Annenberg Theatre, part of the Palm Springs Desert Museum, offers ballet, opera and classical music year-round.

A commercial real estate appraiser working on a valuation project in the Coachella Valley will note that the area plays host to a variety of annual festivals, including the Palm Springs International Film Festival, the Palm Springs Interna- tional Festival of Short Films, the Hispanic Film Fest and a summer Jewish film series at Camelot Theatres in Palm Springs, the Riverside County Fair and National Date Festival and the Tamale Festival.

Office building clusters can be found along East Tahquitz Canyon Way, South Palm Canyon Drive in Palm Springs and directly south of Palm Springs International Airport along the Ramon Road Corridor. Additional office building clusters can be found along Bob Hope Drive and Dinah Shore Drive in Rancho Mirage, and professional and medical office buildings can be found along the Cook Street Corridor in Palm Desert. Office buildings also occur along Ave- nue 46 and Indio Boulevard in Indio.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

29 Warehouse and industrial buildings occur east of Jefferson Street and south of the Interstate 10 in Indio. Additional business park, light-industrial, industrial condo and industrial building clusters can be found in Palm Desert along the Dinah Shore Drive Corridor. Warehouse and showroom space, along with industrial building nodes can be found in the vicinity of Palm Springs International Airport.

Additional warehouse and light-industrial buildings can be found along Varner Road and the Rio Del Sol Road Cor- ridor in Thousand Palms.

In terms of residential real estate, the commercial real estate appraiser will note a good mix of apartment building properties, residential condominiums (air rights) and single-family residential properties of varying densities.

In terms of property mix, a commercial real estate appraiser will likely view the Coachella Valley's real estate as well segmented with free-standing retail, shopping center properties, general commercial buildings, industrial buildings, R&D space, warehouses and office buildings.

As of midyear 2010, residential and commercial development land was abundant throughout the Coachella Valley from Desert Hot Springs in the north to Thermal in the south. Development land zoned for industrial, commercial and residential can be found in great abundance on both sides of Interstate 10 in Indio. Clusters of commercial, indus- trial and residential land can be found north of Interstate 10 in Thousand Palms and south of the I-10 in Rancho Mi- rage.

Cathedral City: The City of Cathedral City is the second largest city in the Coachella Valley. It flanks Interstate 10 and the Union Pacific Railroad transportation corridor.

Coachella: The City of Coachella is the gateway city to the Salton Sea. There is large-tract agricultural acreage in Coachella including the adjacent unincorporated communities of Thermal and Mecca, where approximately 70,000 acres of land is irrigated by the Colorado River via a strategic canal system.

Desert Hot Springs: The City of Desert Hot Springs is known for its spas, fed by natural hot springs. It is located north of Palm Springs and Interstate 10 at the base of the Little San Bernardino Mountains.

Indian Wells: The City of Indian Wells is one of the wealthiest per capita cities in nation. It is home to the BNP Par- ibas Open (formerly the Pacific Life Open) Tennis Masters Tournament at the Indian Wells Tennis Garden, the second- largest tennis facility in the nation.

Indio: The City of Indio is most populous and fastest-growing city in the Coachella Valley.

La Quinta: Like Indio, the City of La Quinta is ranked one of the fastest-growing cities in California.

Palm Desert: The City of Palm Desert is considered by many the business hub of the Coachella Valley as well as the home to the Coachella Valley's only junior college, College of the Desert. The new California State University San Bernardino-Palm Desert campus and University of California, Riverside's Heckman International Center for Entre- preneurial Management is also based here. There are 17 hotels, 32 golf courses, 14 shopping centers and plazas, and attractions such as The Living Desert Zoo and Botanical Gardens and McCallum Centre for the Performing Arts.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

30 Palm Springs: The City of Palm Springs, known in the '30s, '40s and '50s as the playground of the Hollywood stars, helped immeasurably in bringing worldwide fame to the Coachella Valley. About 50 percent of the population is full- time and the rest are weekenders, vacationers and seasonal residents.

Once known as Agua Caliente, the site of present-day Palm Springs was selected in 1863 as a stop on the stagecoach line between the New Mexico Territory and Los Angeles.

The Palm Springs International Airport, as of midyear 2010, was served by ten airlines that connect to hundreds of cities worldwide. The public airport covers 940 acres and has two runways. The airport's airfreight facilities, Inter- state 10, and Union Pacific Railroad provide transportation and logistics.

The 261,000-square-foot Palm Springs Convention Center is located within walking distance (as of midyear 2010) of 1,600 hotel rooms. It re-launched in the fall of 2005, after an extensive $32 million renovation and expansion.

Rancho Mirage: The City of Rancho Mirage a city characterized by gated country clubs, golf courses and luxury ex- ecutive estates.

The unincorporated community of Bermuda Dunes is primarily a residential area of about 3,000 residents and home to the Bermuda Dunes Airport, a private airfield. The unincorporated communities of Mecca, Thermal and Oasis are agricultural in nature with developable acres for commercial, light manufacturing and business parks in the corridor, according to the Riverside County general plan.

Physical/Environmental Influences – Coachella Valley The Coachella Valley, an agricultural and desert valley, extends about 45 miles in Riverside County southeast from the San Bernardino Mountains to the Salton Sea. It is in the Sonoran Desert of California. About 15 miles wide along most of its length, the Coachella Valley is bordered on the north and east by the Little San Bernardino Mountains, on the west by the San Jacinto Mountains and the Santa Rosa Mountains.

The San Andreas Fault crosses the valley from the Chocolate Mountains in the southeast corner and along the center- line of the Little San Bernardinos. The latter, which separates the Coachella Valley on the south from the Mojave De- sert on the north, boast peaks as high as around 11,000 feet that average between 3,000 to 5,000 feet.

Streams, rivers, and creeks in the Coachella Valley include Garner Wash, Salt Creek, Thousand Palm Canyon Wash, Travertine Palms Wash, Box Canyon Wash and Whitewater River.

Interstate 10 is the valley's key connector to the U.S. Interstate Highway System and links the valley to all major Cali- fornia freeway corridors.

Governmental Influences – Coachella Valley The Coachella Valley Association of Governments was formed in 1973 under California's Joint Powers Law to ad- dress issues of valley-wide significance. The association works on a variety of projects important to the Coachella

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

31 Valley, both as the lead agency and as part of larger jurisdictional or regional teams. Members include Blythe, Cathe- dral City, Coachella, Desert Hot Springs, Indian Wells, Indio, La Quinta, Palm Desert, Palm Springs, Rancho Mirage, Agua Caliente B.C.I., Cabazon B.M.I, Torres Martinez D.C.I and Riverside County.

The Coachella Valley Water District is a local government agency, governed by five directors elected to four-year terms by district voters.

The district was established in 1918 in response to threats to water supplies specifically the Whitewater River by land speculators. The district's boundaries have grown to encompass nearly 640,000 acres 1,000 square miles. Most of the district is located in Riverside County, though boundaries extend into Imperial and San Diego counties.

The district's roots are in agricultural irrigation. It delivers about 280,000 acre-feet annually of imported water to some of the most productive farms anywhere. It also provides drinking water to more than 100,000 homes and busi- nesses, from wells drilled into an aquifer with capacity estimated at 39.2 million acre-feet.

Hospitals and medical centers in and near the Coachella Valley include the Eisenhower Medical Center in Rancho Mirage and Palm Springs; the John F. Kennedy Memorial Hospital, Indio; and the Kaiser Foundation Hospital, River- side; Hi-Desert Medical Center, Joshua Tree.

Colleges and universities with over 2000 students nearest to Coachella Valley include the University of California - Riverside; Riverside Community College; College of the Desert, Palm Desert; Mount San Jacinto College, San Jacinto; Crafton Hills College, Yucaipa; and the University of Redlands.

Societal Influences – Coachella Valley The population of the Coachella Valley is estimated at nearly 600,000 people. It is part of the 14th largest metropolitan area in the United States, the Inland Empire. The Coachella Valley is the second-largest sub-region in the Inland Em- pire metropolitan area, after the Greater San Bernardino Area.

Palm Springs has a permanent population of over 410,000 with an estimated seasonal influx of roughly 100,000 peo- ple. The Coachella Valley is home to some of the fastest growing cities in California such La Quinta, which had a five- year growth rate of over 52% from 2000 to 2005.

Between 2005 and 2020, some 212,000 permanent residents are projected to move to the Coachella Valley. The growth translates to 75,750 new households with 5,050 new homes needed to be built annually.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

32 Est. Populations of Cities in Coachella Valley, 2008

Cathedral City

Coachella

Desert Hot Springs

Indian Wells

Indio

La Quinta

Palm Desert

Palm Springs

Rancho Mirage

0 22,500 45,000 67,500 90,000

The valley has seen rapid population growth which began in earnest with the real estate boom of the 1990s. State projections estimate that the valley's population will surpass 600,000 by the year 2020 and 1.1 million by 2066. De- mographers believe the total population already surpassed the 500,000 mark at midyear 2010. This does not include the temporary seasonal residents known as "snowbirds" who over-winter in the Coachella Valley.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

33 Summary of Subject Neighborhood and Property

Neighborhood

Economic Influences – Desert Hot Springs As of this writing in 2010, Desert Hot Springs had reportedly over 20 spa and resort properties with lodging ameni- ties. Most are boutique hotels. These spas range from 4 to 110 rooms each.

In 2006 to 2008, a three-year period covered by the U.S. Census Bureau’s American Community Survey, according to the U.S. Census Bureau, the leading industries in Desert Hot Springs were retail trade, 19 percent, and construction, 18 percent.

The median income of households in Desert Hot Springs was $38,465. Seventy-eight percent of the households re- ceived earnings and 14 percent received retirement income other than Social Security. Twenty-three percent of the households received Social Security. The average income from Social Security was $13,300. These income sources are not mutually exclusive; that is, some households received income from more than one source.

In 2006-2008, Desert Hot Springs had 7,300 occupied housing units – 3,500 (48 percent) owner-occupied and 3,800 (52 percent) renter-occupied.

Shopping centers in or near Desert Hot Springs are Hacienda Palms Shopping Center, Desert Hot Springs Town Cen- ter Shopping Center. Retail buildings and shopping centers occur along Hacienda Avenue, Palm Drive and Tahquitz Road.

The nearest light-industrial building clusters can be found north of Interstate 10 and west of North Indian Canyon Drive in Palm Springs in North Village Centre and north of the Palm Springs International Airport. Office buildings, which are not in great abundance in Desert Hot Springs, can be found along Pierson Boulevard. Showroom, flex and warehouse properties can also be found along Pierson Boulevard and along North Indian Canyon Drive. Here, too, it should be noted that industrial buildings of any type are not in great abundance in Desert Hot Springs.

In terms of property mix, the appraisers view the city's real estate as narrowly segmented with free-standing retail, shopping center properties, general commercial properties and office properties.

The appraisers see a good cumulative attraction for spa and hospitality properties in Desert Hot Springs.

Physical/Environmental Influences – Desert Hot Springs

Desert Hot Springs is a city in Riverside County. It is located within the Coachella Valley. Desert Hot Springs, part of the Palm Springs Desert Resorts, is located 112 miles from Los Angeles in the foothills of the San Bernardino Moun- tains, overlooking Palm Springs and the Coachella Valley.

The appraisers would be remiss not to discuss to the two aquifers for which the city derives its name. One delivers natural hot mineral water and the other. The other is the source of municipal drinking water.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

34 There are more than 330 days of sunshine per year. The summer months are generally warm, but dry due to the low humidity and elevation above the rest of the valley. Elevation of Desert Hot Springs is 1,185 feet.

Desert Hot Springs is a city of spas and resorts in the foothills of Joshua Tree National Park and within the sphere of influence of Palm Springs.

Governmental Influences – Desert Hot Springs The City contracts out for fire protection and emergency medical services (EMS) with the Riverside County Fire De- partment through a cooperative agreement with CAL FIRE California Department of Forestry and Fire Protection. Riverside County Fire Station 37 has 1 paramedic engine company. Riverside County Fire Station 36 covers the west end of the city with a paramedic engine company.

The City Council of Desert Hot Springs is governed by five elected officials who also serve as the city's Redevelop- ment Agency Board. The mayor is elected at large and serves a two-year term.

Palm Springs International Airport offers connects to major hubs and is 12 miles away from the Desert Hot Springs Civic Center.

Sun Line buses provide service between Desert Hot Springs and other Coachella Valley cities.

The area code for all establishments is 760.

Hospitals and medical centers in or near Desert Hot Springs are Desert Regional Medical Center in Palm Springs, Eisenhower Medical Regional Medical Center, Rancho Mirage; Hi-Desert Medical Center, Joshua Tree.

Colleges and universities with over 2000 students nearest to Desert Hot Springs include the University of California - Riverside; Riverside Community College; College of the Desert, Palm Desert; Mount San Jacinto College, San Jacinto; Crafton Hills College, Yucaipa; and the University of Redlands.

Societal Influences – Desert Hot Springs The population of Desert Hot Springs, according to the U.S. Census Bureau, was 23,000 in 2006-2008. The California Department of Finance estimates the population in January 2010 at 26,811. The median age was 29.6 years. Thirty- three percent of the population was under 18 years and 9 percent was 65 years and older. According to the city, from 1990-2005, Desert Hot Springs’s population increased from 11,668 to 19,386.

The population was 16,582 at the 2000 United States Census. Rapid development and high population growth since 1980, when there were 2,500 residents, brought the city to an estimated 25,000 residents in the year 2008.

In 2006-2008 there were 7,300 households in Desert Hot Springs. The average household size was 3 people.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

35 In 2006-2008, 69 percent of people 25 years and over had at least graduated from high school and 8 percent had a bachelor's degree or higher. Thirty-one percent were dropouts; they were not enrolled in school and had not gradu- ated from high school.

The town was founded by L. W. Coffee on July 12, 1941. The original site was centered on the intersection of Palm Drive and Pierson Boulevard and was only a square mile in area. He named it Desert Hot Springs in honor of the waters Yerxa had discovered.

Desert Hot Springs became a tourist destination in the 1950s through its small spa hotels. The streets are laid out over a six square mile area. The area incorporated as a city in 1963, with 1,000 residents. Desert Hot Springs experienced periods of explosive growth in the 1980s and 1990s when most of the vacant lots were filled with new houses and duplex apartments. The city's population doubled in the 1980s and increased by 5,000 in the 2000 census. A new high school opened in 1999.

In 2006-2008, 22 percent of people were in poverty. Twenty-four percent of related children under 18 were below the poverty level, compared with 19 percent of people 65 years old and over. Fourteen percent of all families and 37 per- cent of families with a female householder and no husband present had incomes below the poverty level.

We believe there is average employment stability in the Coachella Valley, average convenience to employment centers and average protection from detrimental conditions. The property is somewhat isolated relative to Desert Hot Springs, though it is generally compatible to peer developments. Utilities are adequate. We believe it has average appeal to a suburban-rural market.

Discussion of Supply and Demand/Product Type and Neighborhood

Since the midpoint in the decade, property values of the subject’s product type have decreased dramatically within the region. Since their construction in 2006-2007, the built homes in the subject improvement area have also decreased in value dramatically. This trend is in lockstep with macroeconomic trends.

There is no significant change likely in present land use in Desert Hot Springs and there are no substantially incom- patible land uses.

Permit issuance for the construction of new single-family homes in Desert Hot Springs has ground to a halt. In 2009, according to the city’s planning department, there was just one permit issued. The chart below illustrates the swings in permit issuance since the late 1990s. The source for the data is City-Data.com and the city’s planning department.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

36 Single-Family New House Building Permits in Desert Hot Springs

1996

1997

1998

1999

2000

2001

2002

Year 2003

2004

2005

2006

2007

2008

2009

0 375 750 1125 1500 Permits Issued

According to the real estate data provider Dataquick, the median single-family home price in Desert Hot Springs’ ZIP Code 92240 as of May 2010 was $102,000 or $63 per square foot. The median home size was 1,619 square feet of gross living area. The median price per square foot in the Skyborne project was $79.69 and the average price per square foot in the project was $82.73 based on 22 sales that have occurred 18 months prior to the date of value. Based on a sam- pling, the median square footage of gross living area in the subject improvement area is slightly over 2000 square feet and the average, slightly below that.

We believe there is little possibility for the creation of additional master-planned communities such as Skyborne in or around Desert Hot Springs in the short term. We do, however, believe that buildout will occur on the finished lots in the subject improvement area within the mid-term, say, within one-and-a-half to three years. We forecast no further substantial changes in the economic base that would either favorably or adversely affect the project area.

We believe the project generally meshes with the the population in the neighborhood, though it may be somewhat aspirational for the socio-economic characteristics of the neighborhood. See the bar chart below. Note Desert Hot Springs ZIP code 92240’s ranking among Coachella Valley cohorts has the lowest median sales price per square foot in May 2010.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

37 Median $ per Square Foot for Single-Family Homes in Coachella Valley

While the median price per square foot for the area containing the appraised improvement area lags behind its co- horts in the Coachella Valley, the subject posted the second-highest sales volume for May 2010 of 93 sales. This may well be a function of its low price per square foot. We can infer that home buyers are identifying value in the subject’s ZIP code and voting with their cash.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

38 Volume of Sales for Single-Family Homes in Coachella Valley

Although the real estate market in much of Southern California has been marred by the cataclysmic events surround the subprime crisis earlier in the decade – indeed, since the midpoint in the decade, property values of the subject’s product type have decreased dramatically within the region – on a brighter note, year-over-year data has shown signs of significant improvement. For example, 12 areas in the Coachella Valley have shown year-over-year gains in median home price while just five have seen year-over-year losses.

It should be noted that the subject improvement area’s ZIP code has seen year-over-year growth in sales price of 27.5 percent. While this is a positive development, it may also be a commentary on just how dramatically area prices fell during the market’s downleg. The bar chart below illustrates the bounce-back effect in prices expressed as a year- over-year percentage.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

39 % Change in Price for Single-Family Homes Year-over-Year, May 2010

The table below represents home sales and price data from Dataquick dated May 2010.

Median Price (in 1,000s) for Median Median $/Sq Single- Price % Chg Condos Price (in Price % Chg Ft for Single- SFR Sales Family from May Sales (Vol- 1,000s) for from May Family Riverside County (Volume) Homes 2009 ume) Condos 2009 Homes La Quinta 108 $390 28.1 20 $273 -33 $141 Dsrt Hot Spr 92240 93 $102 27.5 3 $125 16.8 $63 Cathedrl Cty 92234 74 $171 8.9 20 $122 -1.8 $106 Indio 92201 70 $154 7.9 14 $71 29.5 $85 Indio 92203 67 $212 12.2 4 $157 84.1 $90 Palm Desert 92211 59 $355 7.6 33 $282 4.5 $161 Palm Sprngs 92262 54 $342 51.4 39 $128 -4.3 $167 San Jacinto 92583 53 $125 4.2 1 $45 -40 $71 Palm Desert 92260 42 $350 -7.9 29 $210 -13.4 $160 San Jacinto 92582 38 $151 0.3 n/a n/a n/a $67 Rancho Mrg 37 $602 -7.3 29 $400 11.1 $208

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

40 Median Price (in 1,000s) for Median Median $/Sq Single- Price % Chg Condos Price (in Price % Chg Ft for Single- SFR Sales Family from May Sales (Vol- 1,000s) for from May Family Riverside County (Volume) Homes 2009 ume) Condos 2009 Homes Coachella 34 $145 0.3 n/a n/a n/a $77 Palm Sprngs 92264 28 $400 -16.8 60 $170 -2.9 $197 Indian Wells 26 $950 54.5 5 $640 49.7 $252 Thousand P 9 $110 50.7 n/a n/a n/a $82 Dsrt Hot Spr 92241 7 $110 -4.3 n/a n/a n/a $72 Thermal 2 $128 -20.3 n/a n/a n/a $69

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

41 Subject Description

The appraised property in this assignment represents that land and improvements of the City of Desert Hot Springs Community Facilities District No. 2006-1, Improvement Area 1, located in the City of Desert Hot Springs, Riverside County, California. More specifically, the appraised property consists of 394 single-family residential lots in Tract No. 32030-1 (Skyborne Village 1 / Aurora) and Tract No. 32030-2 (Skyborne Village 2 / Hopewell).

OF WHICH TOTAL CONTAIN RESIDEN- COMPLETED REMAINING TIAL LOTS HOMES FINISHED LOTS

TRACT 32030-1 (VIL- 154 125 29 LAGE 1/AURORA)

TRACT 32030-2 (VIL- 240 53 187 LAGE 2/HOPEWELL)

TOTAL 394 178 216

All 178 built homes have completed escrow in initial transactions between the developer and separate and distinct private parties. The appraisers know of no significant concentration of ownership of the built homes. Thirty-seven of the remaining finished lots contain poured slabs.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

42 Besides Improvement Area 1, the subject of this appraisal assignment, there are three additional improvement areas as part of the planned development containing an additional 1,686 homes. These additional improvements areas are not subject to the CFD 2006-1 Improvement Area 1, nor have they have been appraised in this assignment for that reason.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

43 The appraised property (Improvement Area 1 within the City of Desert Hot Springs CFD 2006-1) is situated in west- ern portion of City of Desert Hot Springs. It is bounded to the north by Pierson Boulevard, east of Twentynine Palms

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

44 Highway (State Route 62), west of Karen Avenue. It is located at the northeast corner of Skyborne Drive and Pierson Boulevard.

Lands earmarked for Skyborne Villages III and IV are located to the north of the appraised property. Karen Avenue is located to the east of Improvement Area 1. Further to the east are desert lands zoned residential. Zoning and uses along Pierson are governed by the Pierson Boulevard Corridor Specific Plan.

Assessor’s Parcel Map for Sections of Evening Sky Drive and Starcross Drive

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

45 Assessor’s Parcel Map for Sections of Promenade Drive, Skyborne Drive and Starcross Drive

Assessor’s Parcel Map for Sections of Starcross Drive, Skylark Street, Morning Star Drive and North Light Lane

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

46 Assessor’s Parcel Map for Sections of Crescent Street, Sky Pointe Drive and Kitetail Drive

Assessor’s Parcel Map for Sections of Sky Pointe Drive and Crescent Street

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

47 Assessor’s Parcel Map for Sections of Promenade Drive, Crescent Drive, Kitetail Drive and Loftwood Street

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

48 Aerial close-up of Village 1 / Aurora, circa 2009

Aerial close-up of Village 2 / Hopewell, circa 2009

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

49 Aerial close-up of both Village 1 (Aurora) and Village 2 (Hopewell), circa 2009.

Aerial midrange shot of both Village 1 (Aurora) and Village 2 (Hopewell), circa 2009.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

50 Aerial establishing shot of subject improvement area, cities, circa 2009

62819 N Crescent St, Desert Hot Springs, CA 92240 | MLS# 21394158 6/16/10 8:30 PM

What follows are a sampling of photos of built homes in the appraised improvement area.

62819 North Crescent Street Under Contract (MLS-listed) Listed at: $145,000

62819 N Crescent St Desert Hot Springs, CA 92240

BEDS: 3 BATHS: 2 SQ. FT.: 1,926 $/SQ. FT.: $75 LOT SIZE: 2,614 Sq. Ft. PROPERTY TYPE: Single Family Residential Detached STORIES: 1 VIEW: Mountain YEAR BUILT: 2007 COMMUNITY: Skyborne COUNTY: Riverside MLS#: 21394158 SOURCE: DAMLS STATUS: Contingent ON REDFIN: 76 days

Short Sale. Very well maintained 2 and half year Listing Provided Courtesy of: Paul Taylor, Coldwell Banker Residential old home in the gated community of Skybourne. Bruce W. Hull & Associates, Inc. Summary Appraisal Report Southerly exposure with great mountain views. Enclosed backyard. Close to Community Pool and Activity Center. Short Sale, terms and commission subject to Bank approval. Buyers must be approved for a loan or if it is a cash offer, we will need51 verification of funds. Appointment only as owner is in possession.

Additional Rooms Laundry Information Interior Features Breakfast Counter/Bar Laundry Area Ceramic Tile Floors Breakfast Nook Gas or Electric Dryer Hookup Wall-to-Wall Carpet Driveway Appliances Equipment Dishwasher Cable Television Heating & Cooling Microwave Forced Air Heating Building Information Built-In & Free Standing Air Conditioning Ground Floor Unit Water & Sewer Concrete Tile Roof Parking Information Front & Rear Sprinklers Concrete Slab Foundation Double Garage District Water Source Square Footage Source: Estimated Attached Garage Unknown Sewer Fence Information Property Information Pool & Spa Information Block Wall CC&R's Has Pool Gated Community Location Information In-Ground Pool Land: Fee Subdivision: Skyborne Has Spa Cross Street Address: Pierson Blvd. Homeowners Association Community Spa Map Book: Riverside Thomas Guide Information In Ground Spa Map Page: 697 Dues #1: $108.00 Lot Information Map X Coordinate: A Listing Price Information APN: 667290077 Map Y Coordinate: 3 Original Price: $145,000.00 Lot #: 228 Directions: From I-10 Freeway exit Price Per Acre: $2,416,666.67 Indian Canyon, go north to Pierson Association Features Blvd., turn left on to Pierson, right onto Barbecue Karen, left onto Promenade, left onto Pool Hopewel, left onto N Crescent. Spa School Information Listing Information School District: Other Listing Date: Thursday, April 1, 2010 Status Date: Monday, April 12, 2010 Information For Agents Contingent Date: Monday, April 12, Has Sign 2010 http://www.redfin.com/CA/Desert-Hot-Springs/62819-N-Crescent-St-92240/home/17330081 Page 1 of 4 62760 North CRESCENT St, Desert Hot Springs, CA 92240 | MLS# I10049824 6/16/10 8:20 PM

62760 North Crescent Street, Skyborne

For Sale (MLS-listed) $137,700

62760 North CRESCENT St Desert Hot Springs, CA 92240

BEDS: 3 BATHS: 3 SQ. FT.: 1,978 $/SQ. FT.: $70 LOT SIZE: 6,098 Sq. Ft. PROPERTY TYPE: Residential, Single Family STYLE: Two Level YEAR BUILT: 2007 62437 South STARCROSS Dr,COMMUNITY: Desert HotDesert Springs, Hot Springs CA 92240 | MLS# 09-389023 6/16/10 8:23 PM COUNTY: Riverside MLS#: I10049824 SOURCE: MRMLS STATUS: Active ON REDFIN: 38 days

HUD owned property. Sold "AS IS". Newer two story, 3 bedroom, 3 bath home in a planned urban development. Listing Provided Courtesy of: MITZE MC CURRY, REAL ESTATE RESOURCE For Sale (MLS-listed) SRVC 62437 South Starcross Drive, Skyborne $98,000Bathroom Information Additional Rooms Laundry Information # of Baths (Full): 3 Family Room Laundry Room 62437 South STARCROSSHeating & Cooling Dr Parking Information Homeowners Association Desert Hot Springs, CAForced 92240 Air Heating # of Garage Spaces: 2 Information Central Air Conditioning Garage is Attached Fee #1: $130 Interior Access BEDS: 2 Lot Information Property Information BATHS: 2 Lot Size (Sq. Ft.): 6,098 Location Information Detached/No Common Walls Land Lease Type: Fee SQ. FT.: 1,618 Lot Size Source: Public Records Cross Streets: See Map Legal Tract #: 32030 Square Footage Source: Public $/SQ. FT.: $61 Legal Disclosures Legal Lot #: 234 Records LOT SIZE: 5,662 PlannedSq. Ft. Development Tax Parcel Number: 667290075 PROPERTY TYPE: Residential,Unknown Single Property FamilyAssessments Listing Information Real Estate Owned MLS: MRMLS Listing Co-Agent VIEW: Mountain, Yes Possession: Close Of Escrow First Name: JOHNNA Listing Co-Office YEAR BUILT: 2006 Listing Terms: Cash Last Name: WRIGHT Name: REAL ESTATE RESOURCE COMMUNITY: Desert Hot Springs Listing Terms: Cash To New Loan SRVC COUNTY: Riverside Listing Terms: FHA Loan MLS#: 09-389023 SOURCE: TheMLSListing last changed June 14, 2010, 2:01 AM STATUS: Active ON REDFIN: 315 days Views of 62760 North CRESCENT St, Desert Hot Springs, CA 92240

THIS IS A SHORT SALE. Listing Provided Courtesy of: Paul Villar, The Real Estate Consult. Wstsd

Additional Rooms Equipment Laundry Information Living Room Dishwasher Inside Laundry

Fireplace Information Interior Features Heating & Cooling

In Family Room Carpet Bruce W. Hull & Associates,Other Inc. Heating (See Remarks) Summary Appraisal Report Central Air Conditioning Pool & Spa Information Parking Information 52 Community Poolhttp://www.redfin.com/CA/Desert-Hot-Springs/62760-N-Crescent-St-92240/home/12494982Garage is Attached Building Information Page 1 of 4 Total Floors: 1 Lot Information Location Information Lot Size (Sq. Ft.): 5,662 Driving Directions: Take I-10 E INDIO Property Information Lot Size Source: Vendor Enhanced Take exit #117/29 PALMS/YUCCA Detached/No Common Walls VALLEY,RT PIERSON, LT LOCAL Square Footage Source: Vendor Legal Disclosures ROAD, RT ON STARCROSS Enhanced Commission To Buyers Agent Tax Parcel Number: 667240014 Take Property As Is Listing Information MLS: CLAW Possession: Close Of Escrow Listing Terms: Cash To New Loan

Listing last changed June 15, 2010, 9:39 PM

Views of 62437 South STARCROSS Dr, Desert Hot Springs, CA 92240

http://www.redfin.com/CA/Dsrt-Hot-Spgs/62437-S-Starcross-Dr-92240/home/12494959 Page 1 of 4 11804 EVENING SKY Dr, Desert Hot Springs, CA 92240 | MLS# P736928 6/16/10 8:24 PM

11804 Evening Sky Drive, Skyborne

For Sale (MLS-listed) $145,000

11804 EVENING SKY Dr Desert Hot Springs, CA 92240

BEDS: 3 BATHS: 3 SQ. FT.: 1,786 $/SQ. FT.: $81 LOT SIZE: 7,840 Sq. Ft. PROPERTY TYPE: Residential, Single Family STYLE: One Level, Contemporary VIEW: Has View YEAR BUILT: 2006 COMMUNITY: Desert Hot Springs 11744 Evening Sky Dr,COUNTY: Desert HotRiverside Springs, CA 92240 | MLS# 41399519 6/16/10 8:26 PM MLS#: P736928 SOURCE: CARETS STATUS: Active ON REDFIN: 20 days

Great home. Buy It!! This is a short sale. Granite and many upgrades. Hardscape is done. Great 11744 Evening Sky Drive, Skyborne Underhome. Contract (MLS-listed) Listed at: $159,000

11744 Evening Sky Dr Desert Hot Springs, CA 92240

BEDS: 3 Listing Provided Courtesy of: Mark Donaldson, ReMax Real Estate One BATHS: 3 SQ. BathroomFT.: 1,786 Information Additional Rooms Interior Features $/SQ. FT.:# of$89 Baths (Full): 3 Other Eating Area (See Remarks) Carpet (Partial) LOT SIZE: 7,841 Sq. Ft. PROPERTY TYPE:HeatingSingle & Cooling Family Residential Utility Information Parking Information CentralDetached Furnace Other Water Availability # of Garage Spaces: 2 STORIES:Central1, Ground Air Conditioning Level (No Unit Above) Homeowners Association Property Features VIEW:BuildingMountain Information Information 32+ Inch Wide Doors YEAR BUILT:Year2006 Built Source: Assessor Fee #1: $200 Property Information COMMUNITY:GroundSkyborne Level Entry (With Steps) Location Information Detached/No Common Walls COUNTY:FrameRiverside Exterior Cross Streets:Comments see mapon Subject ImprovementLand Lease Area Type:(Skyborne Fee Project) MLS#:Concrete41399519 Roof SOURCE: DAMLS Driving Directions: see map Square Footage Source: Public Builders Tract Name: unk The improvement area appraised in this assignment contains no excess or surplus land. There is, however, a wash STATUS: Contingent Legal Tract #: 32030 Records Builders Tract Code: OTHR ON REDFIN: 20 days Legal Lotand #: a 119 detention basin within theTax improvement Parcel Number: area. 667240029 The common-area landscaping is consistent with desert influ- Lot Information ences. It utilizes hardscaping and drought-resistant varieties of shrubs. School Information Listing Information Impressive home Lotat Skyborne. Size (Sq. Ft.):Built 7,840 in 2006, this School District: Other MLS: SoCalMLS 3BR plus 3BA homeLot comesSize (Acres): with it 0.18all: Beautiful Listing Terms: Cash kitchen with graniteLot counters, Size Source: stainless Public steel Records Listing Terms: Cash To New Loan appliances and large island; Comfortable Legal Disclosures bedrooms with a master suite, and a third bedroom In Foreclosure that can be used as a casita with its own bath; Short Pay/Subject to Lender Approval entry rotunda; large ceramic tiled floors in public Listing BruceProvided W. CourtesyHull & Associates, of: Byron Lohman, Inc. Windermere Real Estate Summary Appraisal Report areas; abundantListing double last garage changed with storage; nicely landscaped yardMay with 27, crushed 2010, 3:05 stone, PM artificial turf, pond and shady pergola. Hurry! 53

Bedroom InformationViews of 11804 EVENINGAdditional SKY Dr, Rooms Desert Hot Springs,Fireplace CA 92240 Information Walk-in Closet(s) Has Entry Has Fireplace Master Suite In Living Room Laundry Information Family Room Laundry Room Appliances Has Eating Area Dishwasher Equipmenthttp://www.redfin.com/CA/Desert-Hot-Springs/11804-Evening-Sky-Dr-92240/home/12498990Breakfast Counter/Bar Page 1 of 4 Garbage Disposal Cable Television Guest House/Casita Microwave Building Information Interior Features Refrigerator Ground Floor Unit Ceramic Tile Floors Trash Compactor Direct Garage Access Wall-to-Wall Carpet Built-In Gas Main Floor Bedroom Driveway Water & Sewer New Construction French Doors Front, Side & Rear Sprinklers Spanish Clay Tile Roof Window Blinds Auto Timer for Sprinklers Concrete Slab Foundation Heating & Cooling Unknown Sewer Square Footage Source: Assessor Forced Air Heating Pool & Spa Information Patio Information Natural Gas Heating Has Pool Has Patio Air Conditioning Has Spa Concrete Slab Patio Central Air Conditioner Community Spa Lot Information Parking Information Property Information APN: 667240032 Double Garage Has Yard Lot #: 122 Attached Garage CC&R's Lot Size Source: Assessor Has Garage Door Opener Cross Fenced Association Features Fence Information Cul-de-Sac Homeowners Association Block Wall Gated Community Maintenance/Landscaping Unit Development/PUD http://www.redfin.com/CA/Desert-Hot-Springs/11744-Evening-Sky-Dr-92240/home/12497840 Page 1 of 4 Zoning corresponds to a specific plan, which considers the development of up to 2,140 single family residences in a community consisting of ten planning areas with a series of gated, neighborhoods, public and private streets and open space. The 604-acre project site is located in the Coachella Valley region of Riverside County, and lies within the corporate limits of the City of Desert Hot Springs. The project also includes the development of the local street sys- tem, dedication of park space, private parks, a proposed public school site, potential well site, and a proposed fire station or park and ride site. Improvement appear to conform to zoning regulations.

Streets appear to confirm to a high standard. There curbs, gutters, storm drains and street lights. The villages ap- peared to be well-sewered and adequately provided with public wet and dry utilities.

No environmental obsolescence or potential environmental hazards were observed or are known to the appraiser. It should be noted that Skyborne is frequently subject to high winds.

THE ASSESSORS PARCEL The APNs for Tract 32030-1 for Village 1 /Aurora NUMBER 667-240-001 through 038 667-250-001 through 038 667-260-001 through 078

The APNs for Tract 32030-2 for Village 2/ Hopewell

667-270-001 through 079 667-280-001 through 085 667-290-001 through 076

SIZE AND DIMENSIONS Improvement Area 1 contains 117.75 acres of gross land area. The net tax- able area is 60.11 acres.

ZONING DESCRIPTION See comment on the specific plan above.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

54 ACCESS The appraised improvement area has access to Pierson Boulevard via collector street, Skyborne Drive. Pierson is a major east-west arterial for the City of Desert Hot Springs. A second collector, Promenade Drive, provides access to Karen Avenue. The Village 1 / Aurora tract is accessed via Skyborne while the Village 2 / Hopewell tract is accessed via Prome- nade Drive.

Besides access to Pierson Boulevard, the appraised improvement area also has good access to Twentynine Palms Highway (State Route 62). Ac- cording to CalTrans, the back annual average daily traffic count at State Route 62 and Pierson Boulevard in 2008 was 19,000.

We believe the access and roadscaping for the existing dwellings and fin- ished lots within the improvement area are adequate to service the dwell- ings and to market the finished lots.

UTILITIES We believe the lots in the appraised improvement area are adequately served by typical wet and dry utilities.

Water/Sanitary Sewer: Mission Springs Water District Gas: The Gas Company Electricity: Southern California Edison Phone: Verizon

EARTHQUAKE ZONE The Coachella is a seismically active area. The San Andreas Fault runs down the Coachella Valley's eastern rim. The valley’s many hot springs are a result of the fault. The Santa Rosa Mountains to the West are part of the Lake Elsinore Fault zone. According to the California Division of Mines and Geology, Department of Conservation, the subject improve- ment area is located near several potentially active faults. (See Desert Hot Springs Quadrangle excerpt further in this section.)

FEMA ZONE DATA Map Panel No. 060245-0900B, revision date October 30, 1988. The prop- erty in Improvement Area 1 is situated within Flood Zones B and C. Resi- dents in Zones B and C are not required to carry flood hazard insurance.

TOPOGRAPHY The topography of Improvement Area 1 is essentially level, though with a slight downward southeast slope. On an individual-lot level, all parcels appear are in at least finished-lot condition.

DRAINAGE There is no indication that the improvement area as a totality does not drain in a suitable and adequate fashion. Similarly, there is no indication that any particular finished pad does not drain properly.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

55 EASEMENTS Typical easements such as those for public utilities and street and side- walk dedications are assumed. There is no evidence of any easement that would present a meaningful obstacle for development of any of the fin- ished lots.

ENCROACHMENTS No evidence of any encroachments was observed during site visitation.

Excerpt from Desert Hot Springs Quadrangle, revised January 1980.

Skyborne Village 1 / Aurora In the Skyborne Village 1 / Aurora, lots range from 5,500 square feet to 15,100 square feet. The median is 6,498 square feet and the mean is 6,786 square feet. The net taxable land area for Skyborne Village 1 / Aurora is 1,044,991 square feet. There are 125 completed homes and 29 finished or near-finished lots.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

56 Skyborne Village 1 / Aurora Product Mix

GROSS LIV- TOTAL HOMES ING FLOOR PLANNED FOR PRODUCTION AGGREGATE PLAN AREA S ROOMS PROJECT HOMES BUILT GLA

1 1,602 1 2 Bd. + Casita/2 Ba 52 42 67,284

2 1,760 1 2 Bd. + Casita/3 Ba 53 43 75,680

3 2,000 1 2 Bd. + Casita/2.5 Ba 49 40 80,000

Totals 154 125 222,964

Base Components and Finishes in Village 1 / Aurora Product

ROOFING Concrete tile

EXTERIOR Stucco

LANDSCAPING Front-yard landscaping with automatic sprinklers

GARAGE Sectional steel garage door, fully drywalled.

KITCHEN Ceramic tile countertops, white appliance package, food prep. island

DOORING Panelized interior and wardrobe doors.

FLOORING Ceramic tile entries, carpeting, vinyl flooring in kitchen, laundry room and baths.

FIREPLACE Gas fireplace with ceramic surround and glass door.

LIGHTING Recessed lighting.

INTERIOR WALLS Bullnosed.

BATHS Marble countertops.

HVAC Central air-conditioning, forced-air heating.

WINDOWS Dual-glazed vinyl.

CLOSETS Air-conditioned walk-in closets in master suites.

MISC. CAT 5 wiring in all bedrooms and in kitchen; TV outlets in all bedrooms.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

57 Planned-Unit Development Amenities in Village 1 / Aurora

SWIMMING POOL One.

PLAYGROUND One children’s playground with landscaped detention basin that does double-duty as a play area.

GATED ENTRY The development is built as a gated community, but at the time of site visitation there was no indication of the security gate’s operation.

MONUMENT ENTRY One.

CLUBHOUSE 12,000 square foot clubhouse, which is common to both Aurora and Hopewell. This clubhouse was devoid of furnishings and did not appear to be operational as of the appraiser’s visit.

COST-TO-COMPLETE Please refer to the final reconciliation. ITEMS

HOA DUES Homeowners association dues for Aurora are approximately $132.00 monthly.

REPLACEMENT RE- No replacement reserves study has been obtained or analyzed. SERVES

Skyborne Village 2 / Hopewell In the Skyborne Village 2 / Hopewell, lots range from 5,500 square feet to 13,604 square feet. The median is 6,050 square feet and the mean is 6,556 square feet. The net taxable land area for Skyborne Village 2 / Aurora is 1,573,480 square feet. There are 53 completed homes and 187 finished or near-finished lots.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

58 Skyborne Village 2 / Hopewell Product Mix

GROSS TOTAL HOMES LIVING PLANNED FOR PRODUCTION AGGREGATE PLAN AREA FLOORS ROOMS PROJECT HOMES BUILT GLA

1 1,452 1 3 Bd/2 Ba 24 4 5,808

2 1,802 1 2 Bd + Den/2 Ba 40 9 16,218

3 1,939 1 3 Bd /2 Ba 40 10 19,390

4 1,964 2 3 Bd + Study/3 Ba 38 10 19,640

5 2,195 2 4 Bd + Loft/3 Ba 41 10 21,950

6 2,435 2 3 Bd + 2 Lofts/3 Ba 30 6 14,610

7 2,647 2 4 Bd + Study + Loft/3 Ba 27 4 10,588

Totals 240 53 108,204

Base Components and Finishes in Village 2 / Hopewell Product

ROOFING Concrete tile

EXTERIOR Stucco

LANDSCAPING Front-yard landscaping with automatic sprinklers

GARAGE Sectional steel garage door, fully drywalled.

KITCHEN Ceramic tile countertops, white appliance package, food prep. island

DOORING Panelized interior and wardrobe doors.

FLOORING Ceramic tile entries, carpeting, vinyl flooring in kitchen, laundry room and baths.

FIREPLACE Gas fireplace with ceramic surround and glass door.

LIGHTING Recessed lighting.

INTERIOR WALLS Bullnosed.

BATHS Marble countertops.

HVAC Central air-conditioning, forced-air heating.

WINDOWS Dual-glazed vinyl.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

59 CLOSETS Air-conditioned walk-in closets in master suites.

MISC. CAT 5 wiring in all bedrooms and in kitchen; TV outlets in all bedrooms.

Planned-Unit Development Amenities in Village 2 / Hopewell

SWIMMING POOL One.

PLAYGROUND One children’s playground with landscaped detention basin that does double-duty as a play area.

GATED ENTRY The development is built as a gated community, but at the time of site visitation there was no indication of the security gate’s operation.

MONUMENT ENTRY One.

CLUBHOUSE 12,000 square foot clubhouse, which is common to both Aurora and Hopewell. This clubhouse was devoid of furnishings and did not appear to be operational as of the appraiser’s visit.

COST-TO-COMPLETE Please refer to the final reconciliation. ITEMS

HOA DUES Homeowners association dues for Aurora are approximately $132.00 monthly.

REPLACEMENT RE- No replacement reserves study has been obtained or analyzed. SERVES

According to our records, the homes and infrastructure in the subject improvement area were built in 2006 and 2007. We assign an aggregate effective age to the homes of 3 years. The 2010 National Building Cost Manual shows a typi- cal physical life in the absence of unusual physical, functional or economic obsolescence of 70 years for homes of Quality Class 1, 2 and 3. We believe the remaining economic life is 68 years.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

60 Subject’s Built Home Sizes

6%

44%

50%

Between 1,400 SF and 1,800 SF Between 1,801 SF and 2,200 SF Above 2,200 SF

Conclusion With a few exceptions, the project appears to be well-maintained. The appraiser conducting the site visitation noted no signs of needed repairs or deferred maintenance.

Architectural attractiveness is good. Our base quality of construction (materials and finish) are average for tract homes of the subject’s vintage. Condition of exteriors is generally good. Although we have not toured the interiors of any of the homes, extrapolating on the condition of the exteriors, we infer similar quality. It should be noted, how- ever, that some existing homes have been in foreclosure and in our experience, the quality will not be on par with that of privately owned homes.

We believe the mix of room sizes and layouts is adequate to make the home attractive to a variety of potential buyers. There is good overall usability and compatibility. The overall appeal and marketability is above-average for the De- sert Hot Springs area, which, on one hand is positive, but on the other, may represent somewhat of an over- improvement for the area.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

61 Assessments and Taxes

Proposition 13, officially titled the "People's Initiative to Limit Property Taxation," was a ballot initiative to amend the constitution of the state of California. The initiative was enacted by the voters of California on June 6, 1978. It was upheld as constitutional by the United States Supreme Court in the case of Nordlinger v. Hahn, 505 U.S. 1 (1992). Proposition 13 is embodied in Article 13A of the California Constitution. The most significant portion of the act is the first paragraph, which capped real estate taxes:

“ Section 1. (a) The maximum amount of any ad valorem tax on real property shall not exceed One percent (1 percent) of the full cash value of such property. The one percent (1 percent) tax to be collected by the counties and apportioned according to law to the districts within the counties.

The "assessed value" may only be increased by a maximum of 2 percent per year, until and unless the property un- dergoes a change in ownership. At the time of the change in ownership the low assessed value may be reassessed to full current market value which will produce a new base year value for the property, but future assessments are like- wise restricted to the 2 percent annual maximum increase of the new base year value.

In addition to ad valorem tax, a special tax is levied on the built homes and on the finished/nearly finished pads in Improvement Area 1 that contain poured slabs. The table below represents the bond maturity schedule from the offi- cial statement of the CFD bonds in place as of the date of value. The amount of the short bond was originally stated at $160,000 and has since been revised to $105,000 per De La Rosa & Co.

Bond Maturity Schedule

AMOUNT COUPON AT PAR MATURITY

$105,000 6.00% Through Sept. 2014

$185,000 8.75% Through Sept. 2020

$460,000 9.00% Through Sept. 2028

$1,275,000 9.00% Through Sept. 2038

An approximate breakdown of the CFD facilities costs, performed by DPFG in early 2007, follows on the next page.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

62 CFD Facilities for Improvement Area 1 (in allocation $)

$2,001,297

$668,444

$1,460,849 $576,772

$1,475,109

Street Improvements Fire Station Park Improvements Capacity and Dev. Impact Fees Facilities Contingencies

To fund the CFD facilities, a special tax has been assigned in according with the chart below.

Improvement Area 1 Assigned Special Tax Rates

1,549 SF or less

1,550 to 1,799 SF

1,800 to 2,049 SF

2,050 to 2,299 SF

Residential Floor Area 2,300 to 2,549 SF

2,550 or greater

$1,000 $1,150 $1,300 $1,450 $1,600 Assigned Special Tax per DU

The back-up special tax for non-residential is $9,103.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

63 Below is a sampling of 10 existing single-family residences in the subject improvement area. Each has sold in the past 18 months. In all but one case, the effective rate of taxation, intended here to express the relationship between the tax amount and the total assessed value, was above 2 percent.

Analysis of Ad Valorem and Special Taxes: Sampling of Built Properties

Implied Rate of Total As- Effective Taxation sessed Tax Rate of above Ad APN Street Value Tax Year Owner Amount Taxation Valorem 667-290-051 11634 E Crescent St $174,000 2009 Nelson, Keith et al. $4,017.92 2.31% 1.21% 667-240-032 11744 Evening Sky Dr $150,000 2009 Haisma,Gary $3,503.10 2.34% 1.24% 667-290-054 62905 N Crescent St $162,000 2009 Transue,Stephen et ux. $3,791.60 2.34% 1.24% 667-260-067 11837 Morning Star Dr $176,000 2009 Clark,Daniel E Sr et ux. $3,963.82 2.25% 1.15% 667-240-036 11662 Evening Sky Dr $162,000 2009 Baudoin,Leilani et al. $3,650.24 2.25% 1.15% 667-290-061 62894 N Crescent St $179,000 2009 Mendoza,Nina $4,194.74 2.34% 1.24% 667-260-020 62699 S Starcross Dr $245,000 2009 Curiel,Jason $4,474.16 1.83% 0.73% 667-260-073 11852 Morning Star Dr $176,000 2009 Lang,Jane $3,963.60 2.25% 1.15% 667-240-030 11788 Evening Sky Dr $159,000 2009 Ps Land Llc $3,613.14 2.27% 1.17% 667-250-037 11609 Evening Sky Dr $168,000 2009 Jimenez,Jose D et ux. $3,724.52 2.22% 1.12%

High Tax 2.34% 1.24% Rate Low Tax 1.83% 0.73% Rate Median Tax 2.26% 1.16% Rate Mean Tax 2.24% 1.14% Rate

As the table above indicates, the high in the range of effective tax rates was 2.34 percent and the low was 1.83 percent. The median was 2.26 percent and the mean, 2.24 percent.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

64 Highest and Best Use

The highest and best use is a basic concept in real estate valuation because it represents the underlying premise (i.e., land use) upon which the estimate of value is based. In this report the highest and best use is defined as:

“The reasonably probable and legal use of vacant land or improved property, which is physically possible, appropri- ately supported, financially feasible, and that results in the highest value”

Proper application of this analysis requires the subject property to first be considered as if vacant in order to identify the ideal improvements in terms of use, size and timing of development. The existing improvements (if any) are then compared to the ideal improvements to determine if the use should be continued, altered, or discontinued in prepara- tion for redevelopment of the site with a more productive or ideal use.

With the exception of those built-out lots that are bank-owned or otherwise in the hands of mortgagees, the built homes belong to individual homeowners. The unbuilt lots are in a finished lot or near-finished lot condition. There has been a demand, although tepid in some parts of the Coachella Valley, including Desert Hot Springs, for finished lots in the marketplace. While prices of homes have decreased, merchant builders and speculators have demonstrated demand for turnkey finished lots in the current market. As the residual analysis indicates, current market conditions suggest fragile feasibility for development of finished lots for builders willing to engage in cash transactions.

The subject’s specific plan is a 2,140-unit proposed residential development in the City of Desert Hot Springs. The approximately 604 +/- acre project site is located approximately 0.25 mile east of State Route 62 and north of Pierson Boulevard. The project also includes the development of the local street system, dedication of park space, private parks, a proposed public school site, potential well site, and a proposed fire station or park and ride site.

There is indication from market participants that capital markets have been reluctant to backstop transactions. This will continue to affect values and volume.

It is our opinion that the highest and best use of the individually owned built homes in the appraised improvement area, were the sites vacant, is an interim speculative residential use, pending greater stability in the resale market, the organic formation of new households in the Coachella Valley and the winding down of non-performing mortgages in the region. We also believe the institutional debt market must return to the segment before the market for finished and entitled lots can fully recover. We believe the highest and best use for the individually owned built homes, as improved, is their current use. In other words, we believe the mix and configurations of the available product is ade- quate to attract buyers at the right price.

Further, it is our opinion that the highest and best use of the finished or nearly finished lots in the subject improve- ment area, as vacant, is an interim speculative residential use, pending greater stability in the resale market and the winding down of non-performing mortgages.

We believe the ideal use, once stability has returned to the market for finished and entitled lots, will be a more mod- est offering of gross living area and amenities to match a less extravagant (and a less leveraged) home buyer. We be- lieve the user of finished or nearly finished lots would be a merchant builder with substantial economies of scale to build out the lots in a very efficient manner. As mentioned previously, we believe the time is one to three years hence.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

65 Valuation Section

Valuation Methods Selected The cost and income approaches to value have not been developed in this appraisal assignment. The appraisers have not developed or relied upon a so-called “developer method” discounted cash-flow analysis, since market data was available covering bulk lot sales. In other words, the appraisers were not forced to rely on the sales of individual cus- tom lots and then build a discounted-cash flow model to simulate the absorption of the subject lots into the market- place. Similarly, the existing single-family homes have not been valued using the cost approach. We have, however, developed a residual technique in which we have attempted to reflect a calculation that would be performed by a typical merchant builder. This residual technique was used as a check for reasonableness of the sales comparison ap- proach to value for the finished lots. The sales comparison approach was relied upon exclusively in the valuation of the built homes.

For the purposes of developing an opinion of market value for both the existing single-family residences and the finished/near-finished lots, we have relied upon the sales comparison approach.

Sales Comparison Approach for Existing Single-Family Residences As a first step in valuing the built single-family residences in Improvement Area 1, we researched sales and listings within the Skyborne project in the multiple listing service and assessment data. The latter was obtained from NDC Data, an online subscription database used by thousands of residential appraisers and loan underwriters nationwide. We found 32 resales of completed homes in the subject improvement area, but we eliminated transfers in which fi- nancial and governmental institutions took ownership of a property. We found five such transfers on Crescent Street, four on Starcross Drive and one on Skylark. Since these represent foreclosure transactions, they are not considered arm’s-length in nature. We focused, instead, only on transfers in which a private party was the grantee. Of these, we isolated 22 such transfers. These sales occurred from February 2009 to May 2010. Six have occurred in 2010, with the remaining 16 occurring in 2009. Annualizing the 2010 sales suggests volume is slowing. A breakdown of salient ele- ments of these 22 sales is provided below.

Sales within Skyborne Project 18 months prior to Date of Value

$/ Lot Year Bedroo APN Street Sale Price Sale Date Grantee Size GLA Built Beds Baths $/SF m 667-290-051 11634 E Crescent St $163,000 05/13/10 Nelson,Keith et al. 6,534 2,200 2007 4 3.00 $74.09 $40,750 667-270-065 11549 Sky Pointe Dr $225,000 08/14/09 Mercado,Francisco et ux. 5,662 2,200 2007 4 3.00 $102.27 $56,250 667-240-032 11744 Evening Sky Dr $130,000 04/01/09 Haisma,Gary 7,840 1,786 2006 3 2.75 $72.79 $43,333 667-250-031 62443 N Starcross Dr $145,000 12/10/09 House,Anthony L 5,662 2,009 2006 3 2.50 $72.18 $48,333 667-290-054 62905 N Crescent St $149,000 12/01/09 Transue,Stephen et ux. 6,534 1,926 2007 3 2.00 $77.36 $49,667 667-260-067 11837 Morning Star Dr $150,000 03/31/09 Clark,Daniel E Sr et ux. 7,405 2,009 2006 3 2.50 $74.66 $50,000 667-260-053 11869 Skylark St $150,000 04/28/09 Billioux,George et ux. 6,098 2,009 2006 3 2.50 $74.66 $50,000 667-260-048 11745 Skylark St $150,000 04/13/09 Hyman,Sherry J 6,969 2,009 2006 3 2.50 $74.66 $50,000 667-240-036 11662 Evening Sky Dr $151,500 08/25/09 Baudoin,Leilani et al. 7,840 1,786 2006 3 2.75 $84.83 $50,500

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

66 $/ Lot Year Bedroo APN Street Sale Price Sale Date Grantee Size GLA Built Beds Baths $/SF m 667-290-061 62894 N Crescent St $155,500 08/07/09 Mendoza,Nina 6,098 2,435 2007 3 3.00 $63.86 $51,833 667-260-026 62659 S Starcross Dr $159,000 12/18/09 Heitland,Vicki 5,662 1,786 2006 3 2.75 $89.03 $53,000 664-300-007 10673 Aurora Pl $160,000 03/22/10 Gaubeca,Michael et ux. 9,147 2,214 2006 3 2.50 $72.27 $53,333 667-260-006 62560 N Starcross Dr $161,500 03/10/10 Kenton,Frida 5,662 2,009 2006 3 2.50 $80.39 $53,833 667-260-020 62699 S Starcross Dr $174,000 05/21/10 Curiel,Jason 6,969 2,009 2006 3 3.00 $86.61 $58,000 664-300-001 10511 Aurora Pl $175,000 03/01/10 Gibbs,John et ux. 9,147 2,214 2006 3 2.50 $79.04 $58,333 667-260-073 11852 Morning Star Dr $178,000 02/20/09 Lang,Jane 6,969 2,009 2006 3 2.50 $88.60 $59,333 667-270-066 11575 Sky Pointe Dr $195,000 04/13/10 Yanus,John et ux. 5,662 1,806 2007 3 2.00 $107.97 $65,000 667-240-030 11788 Evening Sky Dr $115,000 07/29/09 Ps Land Llc 6,969 1,618 2006 2 1.75 $71.08 $57,500 667-260-050 11801 Skylark St $130,000 03/03/09 Chawdhry,Rahat 6,098 1,618 2006 2 1.75 $80.35 $65,000 667-250-037 11609 Evening Sky Dr $140,000 10/28/09 Jimenez,Jose D et ux. 10,890 1,618 2006 2 1.75 $86.53 $70,000 667-260-013 62622 N Starcross Dr $142,500 11/04/09 Wilcox,William D 5,662 1,618 2006 2 1.75 $88.07 $71,250 667-240-017 62415 S Starcross Dr $192,000 07/15/09 Curry, Ross H et ux. 6,534 1,618 2006 2 1.75 $118.67 $96,000

Mini- Oldest 02/20/09 mum $63.86 $40,750 Most Maxi- Recent 05/21/10 mum $118.67 $96,000 Median 09/26/09 Median $79.69 $53,583 Mean $82.73 $56,875 Mode $74.66 $50,000 Std. Dev. $13.06 $11,680 Std. Dev./M ean 15.79% 20.54%

Sales within Skyborne Project 18 months prior to Date of Value (arranged by gross living area)

$/ Lot Year Bedroo APN Street Sale Price Sale Date Grantee Size GLA Built Beds Baths $/SF m 667-290-061 62894 N Crescent St $155,500 08/07/09 Mendoza,Nina 6,098 2,435 2007 3 3.00 $63.86 $51,833 664-300-007 10673 Aurora Pl $160,000 03/22/10 Gaubeca,Michael et ux. 9,147 2,214 2006 3 2.50 $72.27 $53,333 664-300-001 10511 Aurora Pl $175,000 03/01/10 Gibbs,John et ux. 9,147 2,214 2006 3 2.50 $79.04 $58,333 667-290-051 11634 E Crescent St $163,000 05/13/10 Nelson,Keith et al. 6,534 2,200 2007 4 3.00 $74.09 $40,750 667-270-065 11549 Sky Pointe Dr $225,000 08/14/09 Mercado,Francisco et ux. 5,662 2,200 2007 4 3.00 $102.27 $56,250 667-250-031 62443 N Starcross Dr $145,000 12/10/09 House,Anthony L 5,662 2,009 2006 3 2.50 $72.18 $48,333 667-260-067 11837 Morning Star Dr $150,000 03/31/09 Clark,Daniel E Sr et ux. 7,405 2,009 2006 3 2.50 $74.66 $50,000 667-260-053 11869 Skylark St $150,000 04/28/09 Billioux,George et ux. 6,098 2,009 2006 3 2.50 $74.66 $50,000 667-260-048 11745 Skylark St $150,000 04/13/09 Hyman,Sherry J 6,969 2,009 2006 3 2.50 $74.66 $50,000 667-260-006 62560 N Starcross Dr $161,500 03/10/10 Kenton,Frida 5,662 2,009 2006 3 2.50 $80.39 $53,833 667-260-020 62699 S Starcross Dr $174,000 05/21/10 Curiel,Jason 6,969 2,009 2006 3 3.00 $86.61 $58,000 667-260-073 11852 Morning Star Dr $178,000 02/20/09 Lang,Jane 6,969 2,009 2006 3 2.50 $88.60 $59,333 667-290-054 62905 N Crescent St $149,000 12/01/09 Transue,Stephen et ux. 6,534 1,926 2007 3 2.00 $77.36 $49,667 667-270-066 11575 Sky Pointe Dr $195,000 04/13/10 Yanus,John et ux. 5,662 1,806 2007 3 2.00 $107.97 $65,000 667-240-032 11744 Evening Sky Dr $130,000 04/01/09 Haisma,Gary 7,840 1,786 2006 3 2.75 $72.79 $43,333 667-240-036 11662 Evening Sky Dr $151,500 08/25/09 Baudoin,Leilani et al. 7,840 1,786 2006 3 2.75 $84.83 $50,500 667-260-026 62659 S Starcross Dr $159,000 12/18/09 Heitland,Vicki 5,662 1,786 2006 3 2.75 $89.03 $53,000 667-240-030 11788 Evening Sky Dr $115,000 07/29/09 Ps Land Llc 6,969 1,618 2006 2 1.75 $71.08 $57,500

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

67 $/ Lot Year Bedroo APN Street Sale Price Sale Date Grantee Size GLA Built Beds Baths $/SF m 667-260-050 11801 Skylark St $130,000 03/03/09 Chawdhry,Rahat 6,098 1,618 2006 2 1.75 $80.35 $65,000 667-250-037 11609 Evening Sky Dr $140,000 10/28/09 Jimenez,Jose D et ux. 10,890 1,618 2006 2 1.75 $86.53 $70,000 667-260-013 62622 N Starcross Dr $142,500 11/04/09 Wilcox,William D 5,662 1,618 2006 2 1.75 $88.07 $71,250 667-240-017 62415 S Starcross Dr $192,000 07/15/09 Curry, Ross H et ux. 6,534 1,618 2006 2 1.75 $118.67 $96,000

Mini- Oldest 02/20/09 mum $63.86 $40,750 Most Maxi- Recent 05/21/10 mum $118.67 $96,000 Median 09/26/09 Median $79.69 $53,583 Mean $82.73 $56,875 Mode $74.66 $50,000 Std. Dev. $13.06 $11,680 Std. Dev./M ean 15.79% 20.54%

Discussion of Barriers to Entry/Economies of Scale

One of the most salient features of real estate is the tendency for the price per square foot to decrease as the net square footage increases. Conversely, the price per square foot tends to rise as the size decreases. This is due to factors related to economies of scale and barrier to entry.

The purchase of a small home will have a lower overall barrier to entry than the purchase of a large home. In other words, the product will be within reach of more buyers and the seller will be able to command a higher price per square foot for the smaller home. Conversely, a buyer purchasing a larger home will demand an economies-of-scale discount, which will lower the price per square foot. The same forces apply to nearly all sectors of real estate, whether units in multifamily project or square feet in warehouse space.

The scatter chart below, which examines gross living area of homes sold in Skyborne 18 months prior to the date of value vs. price per square foot, suggests a bias toward a lower value per square foot for larger homes and a higher value per foot for smaller homes.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

68 Gross Living Area vs. Price Paid per SF in Improvement Area

Discussion of Sky Pointe Drive Sales in Subject Improvement Area There are two outliers among the sales within the subject improvement area. These are 11549 Sky Pointe Drive and 11575 Sky Pointe Drive, which sold for more than $100 per square foot. The appraisers believe these represent the sales of model homes, which typically sell with furniture and upgrades.

Pending Sale Activity in Subject Improvement Area Pending Sale: 62468 S. Starcross Road, Skyborne Improvement Area 1. APN: 667-240-026. This is a pending short sale for $127,000 or $78.49 per square foot. The property’s gross living area is 1,618 square feet. The lot size is 9,147 square feet. No backyard landscaping, no granite, in good condition but average quality of construction, according to the broker. She believes the property would fetch an additional $10,000 were the short sale proviso lifted. It was originally sold by Western Pacific Homes for $296,000 in June 2007. The original purchase-money loan was through DHI Mortgage Co. with a first-trust deed of $236,604, or a nearly 80 percent loan-to-value ratio.

Sales and Pending Sales outside the Subject Improvement Area Sale: 8989 Silver Star Avenue, Desert Hot Springs. APN: 661-450-029. This approved short sale was recorded in April 2010 for $136,000, or $83.44 per square feet. The property’s gross living is 1,630 square feet. The property has three bedrooms and two baths. The lot size is 6,534 square feet. Upgrades appear to be limited to granite countertops. The grantee in the transaction was John A. Mitchell; the grantor was Vanessa Jones. The first trust deed was for the amount of $75,800, equating to a loan-to-value ratio of 56 percent. The 2009 overall tax rate was 2.16 percent, suggest- ing the presence of a CFD special tax. The homeowners association fees were $76.00 monthly. Amenities in the planned unit development include tennis courts.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

69 Sale: N. Agua Dulce Drive, Desert Hot Springs. APN: 656-490-003. This sale was recorded in February 2010 for $150,000, or $72.01 per square feet. The property’s gross living is 2,083 square feet. The property has three bedrooms and two baths. The lot size is 7,405 square feet. Upgrades appear to be minimal. The grantee in the transaction was Lopez, Jesus et ux.; the grantor was the Federal Home Loan Mortgage Corporation. The first trust deed was for the amount of $147,184 in a fixed FHA loan , equating to a loan-to-value ratio of nearly 100 percent. The 2009 overall tax rate was 1.56 percent, suggesting the presence of a modest CFD special tax. The homeowners association fees were $85.00 monthly. Amenities in the planned unit development include security gates.

Pending Sale: 9235 Silver Star Avenue. APN: 661-440-020. This property became a pending sale in June 2010. The list price was $166,900, or $97.15 per square feet. The property spent 78 days on the market, according to MLS. The property’s gross living is 1,718 square feet. The property has two bedrooms and two baths. The lot size is 10,019 square feet. Upgrades appear to be minimal. The would-be grantor is Fannie Mae. The 2009 overall tax rate was 1.26 percent. The homeowners association fees were $110.00 monthly. It is unclear what amenities the planned unit devel- opment includes.

Pending Sale: 11495 Foxdale Drive. APN: 638-316-008. This property became a pending sale in March 2010. The list price was $161,000, or $77.29 per square feet. The property spent 3 days on the market, according to MLS. It is said to be a short sale. The property’s gross living is 2,083 square feet. The property has a pool and jacuzzi, but is otherwise minimally upgraded. There are three bedrooms and two baths. The lot size is 9,583 square feet. The would-be grantor is Romeo S. Herrera who, according to assessment records, resides off-site. The 2009 overall tax rate was 1.62 percent.

Relying on the assessor’s measure of gross living area (“GLA”), we had difficulty matching the sales to their respec- tive models in the Aurora and Hopewell tracts. Had it been possible to break out the resales above by model within each tract, it is unlikely that sufficient resales of each model would allow for the development of a separate opinion of value for each. For this reason, we chose to express each sale using two units of comparison: sales price per square foot and sales price per bedroom. The standard deviation divided by the mean for each range suggested the lowest standard deviation was with the sales price per square foot as a unit of comparison.

Listings within Skyborne Project as of the Date of Value

List LIst Year Price Price/ APN Street List Price List Date Comments Lot Size GLA Built Beds Baths /SF Bedroom 667-240-032 11744 Evening Sky Drive $159,000 05/27/10 Granite counters, 7,841 1,786 2006 3 3 $89.03 $53,000 landscaped yard with crushed stone, artificial turf, pond and pergola.

667-240-029 11804 Evening Sky Drive $145,000 05/27/10 Marketed as short sale. 7,840 1,786 2006 3 3 $81.19 $48,333 Granite countertops and many upgrades. Hardscaping.

667-240-014 62437 S. Starcross Drive $98,000 08/05/09 Short sale. 5,662 1,618 2006 2 2 $60.57 $49,000

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

70 List LIst Year Price Price/ APN Street List Price List Date Comments Lot Size GLA Built Beds Baths /SF Bedroom 667-290-075 62760 N. Crescent Street $137,700 05/09/10 HUD-owned property. 6,098 1,978 2007 3 3 $69.62 $45,900 Sold "as is" 667-290-007 62819 N. Crescent Street $145,000 04/01/10 Short Sale. Said to be 6,534 1,926 2007 3 2 $75.29 $48,333 “very well maintained.”

Most Dated 08/05/09 Minimum $60.57 $45,900 Most Recent 05/27/10 Maximum $89.03 $53,000 Median $75.29 $48,333 Mean $75.14 $48,913 Mode N/A $48,333 Std. Dev. $10.87 $2,572 Std. 14.46% 5.26% Dev./ Mean

Market Idiosyncracies Given the unprecedented spike in real estate values during the middle part of the decade and the ensuing foreclo- sures, mortgage resets and disposition of non-performing assets, the market is confused and volatile. Our research has found what we believe were seller concessions amounting to 3 percent or more of the sales price in many residen- tial markets. These concessions tend to mask the true, cash-equivalent value and are only uncovered through discus- sions with the brokers and market participants who care enough to reveal them. Listing and pending-sale prices are also masked in the current market by banks who seek to generate multiple offers by treating listings as “opening bids.” Short sales mask the true “days on market” numbers since listing times are often prolonged due to delays caused by unenthusiastic lenders when offers come in and below-market listing prices prompted by moral hazard on the part of the seller, who does not share evenly in the financial loss that short sale would generate. All of these fac- tors cause distortion.

Conclusion

Relying on a mass appraisal technique, as well as examining individual sales, pending sales and listings, we have arrived at a conclusion of value characterized by allocating the built homes into three categories: Homes with be- tween 1,400 and 1,800 square feet of gross living area, homes with between 1,801 and 2,200 square feet of gross living area and homes with more than 2,200 square feet of gross living area. We then, based on our examination of these sales, pending sales and listings, both inside and outside the appraised improvement area, assigned three per-square- foot value tiers, based on economies of scale and barriers to entry discussed above. These values are $80 per square foot for homes between 1,400 and 1,800 square feet; $78 per square foot for homes between 1,801 and 2,200 square feet; and $76 per square foot for homes above 2,200 square feet.

Indicated values are discussed are computed in the table below:

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

71 BETWEEN 1,400 BETWEEN 1,801 SF AND 1,800 SF SF AND 2,200 SF ABOVE 2,200 SF TOTAL

VALUE AS- $80 $78 $76 SIGNED PER SF

NO. OF BUILT 89 79 10 178 UNITS

AGGREGATE 148,772 157,198 25,198 331,168 GROSS LIVING AREA (SF)

INDICATED $11,901,760 $12,261,444 $1,915,048 $26,078,252 VALUE

INDICATED $26,080,000 VALUE (ROUNDED)

The indicated aggregate retail value is $26,078,252, which, divided by the subject improvement area’s 178 homes equates to an average retail value of $146,507 per home. We have rounded this to $26,080,000.

Sales of Finished Lots After interviewing market participants, we believe there has been a measured increase in the market for finished lots or nearly finished lots. This, we believe, can be attributed to buyers purchasing the lots for a cost below the cost to manufacture them. We believe there is added interest by speculators, especially those willing to engage in all-equity transactions. Conversations with market participants indicate that capital markets and institutions are still leery about debt investment in finished lots, especially in the Coachella Valley.

While finished lots have been aggressively pursued in some Southern California submarkets for the above reasons, we don’t believe there is nearly as much demand for mapped parcels in which the buyer would have to finish the lot.

Even more out of favor, according to our research, is raw land at the edge of urban development, which we believe is most volatile. In a depressed or contracting economy, there is significantly less interest in developing most property types. Development land is hit from many sides: Municipal bond investors can require higher returns for the financ-

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

72 ing of off-site infrastructure. Lenders on commercial real estate become more restrictive regarding construction loans, vacancies in the built environment increase and rents soften, making projects that were once feasible, unfeasible.

We have searched the marketplace and found the following data appropriate:

Sale Datum 1: 6.03 acres in Palm Springs, APN: 501-620-001. The address associated with the property is 2714 North Whitewater Club Drive, Palm Springs. This sale represents 23 finished lots and two complete model homes (Country Club Estates). The seller in the transaction was WC Real Estate LLC and the buyer, Dos Palmas Development LLC of Laguna Beach, California. The property sold for $1,125,000 in June 2009 after being listed for $2,000,000. Extracting the value of the built homes from the transaction at $225,000 per home, according to the broker, leaves an indicated aggregate value of $675,000, or $29,348 per lot. The zoning is R-G-A, which allows residential cluster development with a density not to exceed eight units per acre with a required minimum lot size of 5,000 square feet. Lot sizes range from 6,278 square feet to 10,293 square feet with an average of 7,769 square feet. Project is said to have all enti- tlements, a recorded final tract map (Final Tract Map 32675, with a tentative tract map approved in July 2006). Grad- ing of site commenced in July 2006 with model home beginning in 2006. Thirteen of the 25 lots back to a golf course that was not being maintained at the time of sale. The golf course was owned by a separate ownership group and was in litigation. The broker in the transaction believes the project’s proximity to the golf course had no substantial con- tributory value. He believed at the time that it was more likely than not that the golf course would be allowed to re- vert back to a natural state. The broker characterized this sale as arm’s length in nature.

Pending Sale Datum 2: 300 finished lots (Monte Vina) outside Terra Lago in Indio off Avenue 44. This was a for- mer Centex project sold to investor Scott Lissoy, who is now said to have the project under contract. According to another broker, the property has been in escrow several months. This broker also believes there is an issue with with drawing electrical power to the site. The average lot size is 7,200 square feet. The agreed-upon price prior to the elec- trical problem being discovered, according to a broker we spoke with, was approximately $9,000,000 or $30,000 per finished lot.

Pending Sale Datum 3: 118 finished lots (Aliante) in North Indio. This pending sale represents 118 finished lots with a recorded final map. The minimum lot size is 8,128 square feet. The tract is located north of Avenue 44 and east of Golf Center Parkway. This transaction has been in escrow for at least seven months. One broker believes the trans- action may have fallen out of escrow as the seller AmTrust was seized by the FDIC, which may be trying to pool the AmTrust assets into a massive portfolio sale. It was said to be in escrow for $28,000 to $30,000 on a finished-lot basis.

Sale Datum 4: 205 finished lots at the northwest corner of Avenue 53 and Tyler Street (Los Jardines), Coachella. The grantor is Tyler 53 Development Group, LLC; the grantee is the Coachella Valley Housing Coalition, a self-help builder. Sale represents 205 finished lots with a final map. In June 2009, the buyer sought approval of an architectural review with the City of Coachella Planning Commission to construct a mix of four floor plans on the 205 lots. It should be noted that the Los Jardines tract, Tract 31553, has existing housing. The entire tract is a 66.7 acres and 265 unit subdivision. The minimum lot size is 6,200 square feet. The project closed “as-is” for $16,500 per lot.

Sale Datum 5: 60 mapped but unfinished lots in Wildomar, Riverside County, APN 368-080-032. The address asso- ciated with this property is 32625 Cert Street (at the Palomar Street and Cert Street). This sale represents 60 lots for single-family detached product. The seller in the transaction was Bank of America, the buyer, Wildomar Land LLC. The property sold for $670,000, or $11,167 per lot in August 2009. No list price was disclosed on public listing sheet

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

73 prior to the sale. A listing was found dating to June 3, 2009, suggesting a listing period of less than three months. The broker characterized the transaction as “straightforward” and “arm’s-length” in nature.

Listing Datum 6: Listing of 11 finished lots, 1197 Dadash Street, Beaumont, Lots remaining in a 23 lot development known as Mountain View Estates. Land encompasses 1.75 acres or 76,230 square feet. The list price is $450,000 or $40,909 per finished lot. Twelve sister lots have already been built and single-family homes currently being sold by the bank from $220,000 to $240,000. Nine homes were said to have sold in the first weekend of sales. Off-site infra- structure is completed, street is cap-paved. There is no homeowners association or CFD special tax. The lots have been listed since at least January 2010. The broker believes some minor soil re-compaction will be necessary as the lots have been sitting. Broker believes they will eventually go out at $30,000 per lot and believes the absence of a CFD special tax make the lots superior to the subject, along with location.

Listing Datum 7: Skyborne Improvement Area 1, 177 finished lots in subject. The appraisers have been provided a letter of intent dated August 5, 2009, which was rejected by Skyborne Ventures, from RSI Land for 177 finished lots, which states the latter’s intent to purchase the lots for what equates to $36,500 per finished lot in accordance with a definition of finished lot that has not been provided to the appraisers. The letter names a 30-day feasibility period in which due diligence is to be conducted. These lots pertain to Village 2 / Hopewell only and have a significantly lower cost to complete versus the lots in Village 1 / Hopewell.

Overview of Market Data

DATUM 1 DATUM 2 DATUM 3 DATUM 4

23 FINISHED 205 FINISHED LOTS, PALM 300 FINISHED 118 FINISHED LOTS, SPRINGS LOTS, INDIO LOTS, INDIO COACHELLA

LOT DESCRIPTION Finished Finished Finished “As-is”

SALES STATUS Closed Pending Pending Closed

SALE PRICE/ $29,348 Said to be in escrow Said to be in escrow $16,500 on finished-lot FINISHED LOT for approx. $30,000 for approx. $28,000 to basis $30,000

AVERAGE LOT SIZE 7,769 7,200 (Minimum) 8,128 (Minimum) 6,200 (SF)

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

74 DATUM 5 DATUM 6 DATUM 7

177 FINISHED 60 MAPPED 11 FINISHED LOTS (SUBJECT), LOTS, WILDO- LOTS, BEAU- DESERT HOT MAR MONT SPRINGS

LOT DESCRIPTION Finished Finished Finished

SALES STATUS Closed Listing Letter of Intent

SALE PRICE/ $11,167 $40,909 $36,500 FINISHED LOT

AVERAGE LOT SIZE Unknown Unknown 6,556 SF (Hopewell), (SF) 6,786 SF (Aurora)

Conclusion via the Sales Comparison Approach

We believe a value of $35,000 per lot, based on the data above, is reasonable. Multiplied by 216, this renders an initial indicated value of $7,560,000. This is a bulk value, as the comparable sales examined in this section represent sales of bulk lots. However, in order to develop an “as-is” value, the costs to complete must be subtracted from this amount. We will do this in the reconciliation.

Residual Method As a check on this, we have done what a typical merchant builder would do, which is to residual the finished lot value from a finished house and reconciling the value to our value derived via the sales comparison approach.

ASSUMPTION OF MEDIAN SALES $150,000 PRICE OF FINISHED HOME

LESS BUILDING COST (AT $50/PSF FOR $100,000 2,000 SF PRODUCT)

LESS PROFIT TO BUILDER (10% OF $15,000 SALE PRICE)

MAX. AMOUNT ALLOCABLE FOR FIN- $35,000 ISHED LOT ACQUISITION

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

75 We believe the range for finished lots, based on the residual worksheet above, would be seen as $30,000 to $35,000 by a merchant builder before costs-to-complete were subtracted. We do this in the reconciliation.

Costs to Complete – Village 1 (Aurora)

$281,600

$60,000

$25,000 $15,000

$450,000

Asphalt Concrete Cap Utility Cover Adj. Incidental Curb Replacement Survey Monument Drainage Improvements

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

76 Costs to Complete – Village 2 (Hopewell)

$64,000

$25,000 $15,000

$299,200

Asphalt Concrete Cap Utility Cover Adj. Incidental Curb Replacement Survey Monument

Reconciliation and Value Conclusion

Reconciliation Relying on a mass appraisal technique, as well as examining individual sales, pending sales and listings, we have arrived at a conclusion of value for the individually owned homes characterized by assigning the built homes to three value tiers, based on economies of scale and barriers to entry. These assigned values are $80 per square foot for homes between 1,400 and 1,800 square feet; $78 per square foot for homes between 1,801 and 2,200 square feet; and $76 per square foot for homes above 2,200 square feet. The indicated aggregate retail value is $26,078,252, which, divided by the subject improvement area’s 178 homes equates to an average retail value of $146,507 per home. We have rounded this to $26,080,000.

We then developed a conclusion of value for the finished/nearly finished lots based on an examination of finished lot sales, pending sales and listings. We also performed a residual method as a check of reasonableness. We arrived at an assigned value conclusion of $35,000 per finished lot (as expressed as part of a bulk value). Multiplied by 216, this renders an initial indicated bulk value of $7,560,000.

The cost to complete the lots was provided by the city engineer for the City of Desert Hot Springs. They total of $831,600 for Village 1 (Aurora) and $404,700 for Village 2 (Hopewell). The appraisers have opted to rely on the city engineer’s estimates, as they are recent.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

77 There are 37 lots that, besides being finished, contain poured slabs. The developer is said to have plans that corre- spond to the poured slabs. The plans were part of the sale from Western Pacific transaction. However, the building permits are expired for these lots. We believe the benefit of the poured slabs is offset by the expired permits. For this reason, we treat them as contribution-neutral.

The cost to complete the finished/nearly finished lots, according to the City of Desert Hot Springs, equates to $5,093 per lot.

Considering the cost to complete, we conclude at a bulk value of $29,907 per lot or $6,459,912. This rounds to $6,460,000.

Value Conclusion

At your request and authorization, we have prepared the above draft appraisal report of Improvement Area No. 1, CFD 2006-1.

We have valued the fee simple estate, subject to the CFD special tax for the subject property consistent with the Uni- form Standards of Professional Appraisal Practice, the Appraisal Standards for Land-Secured Financings, issued by the California Debt and Investment Advisory Commission, and subject to the CFD and the limiting conditions and hypothetical conditions stated in this report.

As a result of this investigation, study and our knowledge and experience, the following market value has been as- signed as of the effective date of July 1, 2010.

FINISHED HOMES $26,080,000

FINISHED LOTS $6,460,000

TOTAL $32,540,000

The preceding values are stated subject to the limiting conditions, hypothetical conditions, extraordinary assump- tions and appraiser’s certification included in the attached report.

This report is defined as a Summary Appraisal Report, which is intended to comply with the reporting requirements set forth under Standards Rule 2-2 of the Uniform Standards of Professional Appraisal Practice, effective January 1, 2010, for a Summary Appraisal Report. It is intended to follow the standards set forth in Appraisal Standards for Land-Secured Financings, issued by the California Debt and Investment Advisory Commission and last updated in July 2004.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

78 The above narrative summary appraisal report sets forth the data and analyses upon which our opinion of value is, in part, predicated.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

79 Marketing and Exposure Time

Marketing Time Marketing time has been defined in the Dictionary of Real Estate Appraisal (Third Edition, Chicago, Appraisal Insti- tute, 1993) as:

The time it takes an interest in real property to sell on the market subsequent to the date of an appraisal.

Reasonable marketing time is an estimate of the amount of time it might take to sell a property interest in real estate at the estimated market value level during the period immediately after the effective date of the appraisal; the anticipated time required to expose the property to a pool of prospective purchasers and to allow appropriate time for negotiation, the exercise of due diligence, and the consummation of a sale at a price supportable by concurrent market conditions.

Exposure Time Exposure time has been defined in the Dictionary of Real Estate Appraisal (Third Edition, Chicago, Appraisal Insti- tute, 1993) as:

The time a property remains on the market.

The estimated length of time the property interest being appraised would have been offered on the market prior to a hypothetical consummation of a sale at market value on the effective date of the appraisal; a retro- spective estimate based upon an analysis of past events assuming a competitive and open market. Exposure time is always presumed to occur prior to the effective date of the appraisal. The overall concept of reason- able exposure encompasses not only adequate, sufficient and reasonable time but also adequate, sufficient, and reasonable effort.

We believe both the marketing and exposure time for the subject property, based on our research, would each be be- tween eight months and one year.

Bruce W. Hull & Associates, Inc. Summary Appraisal Report

80 Certification

We certify that to the best of our knowledge and belief:

− The statements of fact contained in this report are true and correct.

− The reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting condi- tions and are our personal, impartial, and unbiased professional analyses, opinions, and conclusions.

− We 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. Similarly, we have no bias with respect to the property that is the subject of this report or to the parties involved with this assignment.

− Our engagement in this assignment was not contingent upon developing or reporting predetermined results.

− Our compensation for completing this assignment is not contingent upon the development or reporting of a prede- termined value or direction in value that favors the cause of the client, the amount of the value opinion, the attain- ment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this ap- praisal.

− The reported analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the requirements of the Code of Professional Ethics & Standards of Professional Appraisal Practice of the Ap- praisal Institute.

− The reported analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice.

− The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly author- ized representatives.

− Certified general appraiser Bruce Hull, MAI, has personally viewed the property that is the subject of this report and no one provided significant real property appraisal assistance to the persons signing this certification.

As of the date of this report, Bagott and Hull have completed the continuing education program of the Appraisal Institute.

Bruce W. Hull, MAI Jeremy Bagott State Certified General State Certified General Real Estate Appraiser (AG004964) Real Estate Appraiser (AG031250)

Bruce W. Hull & Associates, Inc.! Summary Appraisal Report

81 Bruce W. Hull, MAI 1056 E. Meta Street, Suite 202 Ventura, California 93001 (805) 641-3275 • Facsimile (805) 641-3278 E-Mail Address – [email protected]

Bruce W. Hull, MAI, provides a wide variety of appraisal services for public agencies, developers and financial institutions. About Bruce Hull Bruce Hull has been in the appraisal field since graduating in 1969 from Westmont College, Santa Barbara. After being employed by the Ventura County Assessor's Office for five years, he established an appraisal company in Orange County in 1974. In August 1995, he established an office in Ventura while maintaining an Orange County location. While most projects he works on are in Southern California, assignments have been completed from the Bay Area and Lake Tahoe to San Diego. His assignments have been diverse, including large master-planned developments, shopping centers, large retail uses, and mitigation land. A brief summary of the more challenging assignments is provided on the following pages.

Assessment Districts/Bond Issues Bruce W. Hull has been involved in the appraisals of the following bond issues for community facilities districts and assessment districts. (This represents a partial list of assignments completed from 1990 to the present.) CFD No. 9 (Orangecrest - Improvement Areas 1, 3 & 5); City of Riverside CFD No. 2000-1 (Crosby Estate @ Rancho Santa Fe); Solana Beach CFD No. 2001-01 (Murrieta Valley U.S.D.);Murrieta CFD No. 90-1 (Lusk-Highlander); City of Riverside CFD No. 99-2, Otay Ranch SPA I, City of Chula Vista CFD No. 7 (Victoria Grove); County of Riverside CFD No. 10 (Fairfield Ranch); City of Chino Hills CFD No. 2000-1; Tejon Industrial Complex; Lebec CFD No. 99-1; Santa Margarita Water District CFD No. 97-3; City of Chula Vista CFD No. 2 (Riverside Unified School District); City of Riverside CFD No. 89-1; City of Corona A.D. Refunding; Lake Sherwood, County of Ventura CFD No. 9; City of Chino Hills CFD NO. 88-12; City of Temecula CFD No. 90-1 (Refunding); City of Corona A.D. No. 97-1-R; City of Oxnard A.D. No. 96-1; Valley Center Municipal Water District; San Diego County A.D. No. 96-1; City of Oxnard CFD No. 88-1 (Saddleback Valley Unified School Dist.); Rancho Santa Margarita CFD No. 89-2 (Saddleback Valley Unified School Dist.); Rancho Santa Margarita CFD No. 89-3 (Saddleback Valley Unified School Dist); Rancho Santa Margarita A.D. No. 95-1; (Centex) City of Corona Hull Resume (Continued)

A.D. No. 95-1; Coyote Hills, City of Fullerton A.D. No. 95-1; Sycamore Creek, City of Orange Prop. CFD No. 2 (Riverside Unified School District); City of Riverside CFD No. 91-1; City of Rancho Cucamonga Prop. CFD No. 2; City of Chino CFD No. 9; County of San Bernardino A.D. No. 89-1; City of Corona CFD No. 87-1 (Series B); City of Moreno Valley CFD No. 90-1; City of Corona CFD No. 89-1; (Saddleback Valley Unified School District); Orange County A.D. No. 96-1; City of Oxnard A.D. Nos. 86-3, 87-1 and 89-1 (Refunding); City of Oxnard CFD No. 90-1; City of Corona CFD No. 1 (Refunding); City of Jurupa CFD No. 88-12; City of Temecula

Master-planned Development These are typically more than 1,000 acres in size and have a wide variety of residential product, often ranging from condominiums to large estate type of properties. In addition, there is often commercial use within the development. The firm has been involved in the following projects: Lake Sherwood, Hidden Valley Wood Ranch, Simi Valley Rancho San Clemente, San Clemente Towne Center, Rancho Santa Margarita Rancho Trabuco North and South, Rancho Santa Margarita Hunters Ridge, Fontana The Corona Ranch, Corona Mountain Cove, Temescal Mountain Gate, South Corona The Foothill Ranch, Corona Orangecrest, City of Riverside Aliso Viejo, County of Orange Talega Valley, City of San Clemente/County of Orange Otay Ranch, City of Chula Vista

Retail Consultant to the city of Long Beach regarding a 30-acre site (Long Beach Naval Hospital), which the city was acquiring from the U.S. Navy for inclusion in a 100-acre shopping center site. Towne Center, Rancho Santa Margarita, is a master-planned project, which contains two shopping centers (Towne Center, 160,000 square feet plus a major anchor of 122,000 square feet; Plaza Antonio, 165,000 square feet). Mission Grove, City of Riverside, is a 395,362 square-foot center, which included several major anchors. Victoria Gardens Master Plan was a proposed mixed-use project consisting of 3,065 acres of land including a mixture of residential (2,150 acres); commercial (335 acres of which 92 acres was a regional center site); schools; parks; and open space for the remainder of the lands. Menifee Village, Riverside County, is a 1977-acre master-planned development, which had Hull Resume (Continued) approvals for 5,256 units. The assignment included the valuation of Planning Area 2-7, a commercial site that had been developed with a Target Store, Ralph's Market, and in-line stores (190,000 square feet becoming a 257,000 square-foot center).

Mitigation Lands Mitigation lands which are often acquired by public agencies or nonprofit organizations. Projects Bruce W. Hull & Associates has worked on include: Bolsa Chica, Huntington Beach, a 42-acre site that was part of a larger wetlands conservation program. This acreage was unique, since it was subject to "tidal flushing" and had both fresh and saltwater affecting the lands. This assignment was completed for Metropolitan Water District. San Joaquin Marsh, city of Irvine, consisted of approximately 289 acres of wetlands acquired for use as a buffer zone by the Irvine Ranch Water District. Eagle Valley, a 1072-acre parcel near Lake Matthews in Riverside County, was acquired by Metropolitan Water District for use as a water-treatment plant and buffer zone. Poormans Reservoir, Moreno Valley, a 38-acre site acquired by the city of Moreno Valley for preservation/open space use.

Partial List of Clients The company has conducted appraisal assignments for many types of clients. A partial list of these includes the following. Anaheim City Unified School District Bank of America NT & SA Bank of Montreal Bear, Stearns & Co., Inc. Best Best & Krieger LLP (Law Firm) Carpinteria Valley Unified School District Chino Unified School District Citicorp, N.A. City of Brea City of Chino City of Chino Hills City of Chula Vista City of Colton City of Corona City of Fullerton City of Huntington Beach City of Jurupa City of Mission Viejo City of Moreno Valley City of Orange City of Oxnard City of Rancho Cucamonga City of Riverside City of San Bernardino Hull Resume (Continued)

City of San Marcos City of Temecula Coast Federal Bank Colton Joint Unified School District County of Los Angeles County of Orange County of Riverside County of San Bernardino County of Ventura Downey Savings and Loan Federal National Mortgage Association (FNMA) Federal Deposit Insurance Corporation (FDIC) Fieldman, Rolapp & Associates (Financial Consultants) Irvine Ranch Water District Irvine Unified School District Jurupa Community Services District Metrobank Metropolitan Water District Meserve, Mumper & Hughes (Law Firm) Munger, Tolles & Olson LLP (Law Firm) Murrieta Valley Unified School District Rialto Unified School District Riverside Unified School District Saddleback Valley Unified School District Santa Margarita Water District Sidley & Austin (Law Firm) Solana Beach Unified School District Southern California Edison Company Stone & Youngberg LLC (Bond Underwriters) Talmantz Aviation The Irvine Company Wells Fargo Bank Wells Fargo Mortgage Company Weyerhaeuser Mortgage Company

Court Experience Hull is a qualified expert witness in the following courts: United States District Court/Central District of California, Los Angeles Los Angeles County Superior Court Orange County Superior Court Riverside County Superior Court Ventura County Superior Court

Organizations Member - Appraisal Institute (No. 6894)

Hull Resume (Continued)

Licenses Real Estate Broker - State of California Certified General Real Estate Appraiser - State of California (Certificate: AG004964)

Guest Speaker UCLA Symposium on Mello-Roos Districts – 1988, 2001, and 2005 “Exploring the Rumors and Realities of Land Secured Debt in California” – Conference sponsored by Stone & Youngberg, LLC, bond underwriters, held in Los Angeles on January 15, 1992 “Appraisals for Land Secured Financing” presentation for Stone & Youngberg, LLC, bond underwriters, held at San Francisco Headquarters on March 5, 1998

Miscellaneous Member Advisory Panel to California Debt Advisory Commission regarding Appraisal Standards for Land Secured Financing (May, 1994) and (June 2004)

Jeremy Bagott California Certified General Appraiser License: AG031250

Main Address 1056 East Meta Street, Suite 202 Ventura, CA 93001 (805) 794-0555 • Facsimile (805) 641-3278 E-Mail Address – [email protected]

Bay Area Addresss 1150 Ballena Boulevard, Suite 253 Alameda, CA 94501

About Jeremy Bagott Jeremy Bagott, a certified general real estate appraiser in the state of California, has focused on valuation of commercial real estate for public agencies. Assignments have included appraisals of shopping centers, industrial subdivisions, commercial business parks, residential master-planned communities and development land. He has been involved in appraisal of properties in condemnation cases, public financings and work for private-sector entities. A former editor at the Los Angeles Daily News, Bagott holds a bachelor’s degree from California State University, Northridge, and is a former U.S. Marine. What follows is a sampling of projects:

Mello-Roos Districts/Bond Issues CFD No. 3, City of Carlsbad, CA, Carlsbad Oaks North Business Park CFD No. 2003-1, County of San Bernardino, CA, Citrus Plaza Regional Shopping Center CFD No. 2001-1, Tejon Ranch, CA, Tejon Industrial Complex Public Improvements CFD No. 4-Infrastructure, Moreno Valley, CA CFD No. 8, Fillmore Business Park, Fillmore, CA COP Series-2008, City of Maywood, CA CFD No. 2009-1, City of Chino, CA

Special-Purpose Properties Middle School Site, Adelanto School District, Victorville, CA Elementary School, Bassett Unified School District, Baldwin Park, CA City Hall, Maywood, CA Police Station, Maywood, CA Central Library, Maywood, CA Signage Rights, Parking Garage, Oxnard, CA Community Center, Boyle Heights (Los Angeles), CA Elementary School Site, Oxnard School District, Oxnard, CA Elementary School, Pleasant Valley School District, Camarillo, CA Bagott Resume (Cont.)

Master-planned Developments Riverpark, Oxnard, CA The Preserve, Chino, CA Mission Ranch, Riverside, CA Canyon Crest, Brea, CA Residential tracts, commercial parcels, Lake Elsinore, CA

Apartment Buildings, Small-Income and Single-Family Residential Residential parcels for fire station expansion, City of Fullerton, CA Neighborhood Stabilization Program services provider for City of Palmdale, CA Apartment building for City of Long Beach, CA Highest-and-best-use analyses for fire-damaged multi-tenant properties, Palmdale, CA Apartment Buildings, Palmdale, CA

Appraisal of hundreds of individual single-family and income properties for many different purposes, including mortgage financing, estate planning and condemnation.

Retail Citrus Plaza, lifestyle center, Redlands, CA Mountain Grove, Redlands, CA McDonalds, Grapevine, CA Starbucks, ground lease, Grapevine, CA Panda Express, Grapevine, CA In-N-Out Burger, development site, Grapevine, CA Chevron Station, Grapevine, CA Restaurant and shops, Santa Barbara, CA Retail-Commercial land, Victorville, CA Retail-Residential Mixed-Use, East Los Angeles, CA Regional center anchored by 16-screen multiplex, Oxnard, CA Single-tenant store, Oxnard, CA

Multi-family Development Shea Artisan Luxury Apartments, Oxnard, CA Las Brisas Specific Plan, affordable housing, Oxnard, CA Senior housing, mixed-use retail, Ventura, CA Multi-family development land, Oxnard, CA

Office Multi-tenant office building, Oxnard, CA Multi-tenant office building, Mission Viejo, CA Multi-tenant office complex, Ventura, CA Bagott Resume (Cont.)

Industrial Industrial land, Channel Islands Business Park, Oxnard, CA Brownfield (refinery), Carson, CA Ridge Centerpointe Business Park, Moreno Valley, CA Encroachment, industrial land, Oxnard, CA Manufacturing plant, Oxnard, CA

Hospitality Hampton Inn and Suites, Poway, CA Country Inn, Santa Barbara, CA Marriott Escondido Hotel and Conference Center, Escondido, CA Hadsten House, Solvang, CA Best Western, Grapevine, CA Holiday Inn, development site, Grapevine, CA

Condemnation Industrial flex property, Alameda Corridor East Construction Authority, Diamond Bar, CA Mixed-use property, 1st Street and Utah, Los Angeles Unified School District, Los Angeles, CA Office, 4127 Cesar Chavez Ave., Los Angeles Unified School District, Los Angeles, CA Benedict Canyon Estate, take of subterranean easement for sewer line, Beverly Hills, CA Air rights, Santa Fe Ave., taking of air rights, Compton Unified School District, Compton, CA Drainage and temporary construction easements, Victorville, CA

List of Recently Completed Courses Advanced Income Capitalization, June 2007, Arcadia, CA – Appraisal Institute Advanced Applications, July 2007, Houston, TX – Appraisal Institute Advanced Sales Comparison, Cost Approaches, Feb. 2008, Pleasanton, CA – Appraisal Institute Report Writing and Valuation Analysis, January 2008, Houston, TX – Appraisal Institute General Appraiser Report Writing, Case Studies, Nov. 2007, St. Paul, MN – Appraisal Institute General Market Analysis, Highest and Best Use, Sept. 2007, Fullerton, CA – Appraisal Institute General Appraiser Income Capitalization, July 2008, Boise, ID – Appraisal Institute

Publication South Florida Sun-Sentinel – Op-ed on credit crisis, January 2008. Ventura County Star – Op-ed on credit crisis, January 2008 Pittsburgh Post Gazette – Op-ed on hidden housing inventory, November 2009 North County (San Diego) Times – Op-ed on residential real estate in 2010 Los Angeles Daily News – Op-ed on residential real estate in 2010

Membership Associate Member – Appraisal Institute Bagott Resume (Cont.)

Participant Compact for a Sustainable Ventura County

APPENDIX C

GENERAL INFORMATION ABOUT THE CITY OF DESERT HOT SPRINGS

The following information concerning the City of Desert Hot Springs and the County of Riverside and surrounding areas are included only for the purpose of supplying general information regarding the community. The Bonds are not a debt of the City, the State or any of its political subdivisions, and neither the City, the State nor any of its political subdivisions is liable therefor.

General Description and Background

The City of Desert Hot Springs is a very vibrant and growing community of over 26,000 residents. The area's reasonable cost of living and attractive quality of life means it's easy to retain a highly skilled workforce at competitive rates while building an enterprise in a very business friendly community.

Desert Hot Springs, part of the Palm Springs Desert Resorts, is located just 112 miles from Los Angeles in the foothills of the San Bernardino Mountains, overlooking Palm Springs and the Coachella Valley.

Population

The following sets forth the City, the County and the State population estimates as of January 1 for the years 2006 to 2010:

CITY OF DESERT HOT SPRINGS, RIVERSIDE COUNTY AND STATE OF CALIFORNIA Estimated Population

City of Year Desert Hot Riverside State of (January 1) Springs County California 2006 22,163 1,966,607 37,195,240 2007 24,907 2,034,840 37,559,440 2008 25,939 2,078,601 37,883,992 2009 26,584 2,109,882 38,255,508 2010 26,811 2,139,535 38,548,090

Source: State of California Department of Finance, Demographic Research Unit.

C-1

Commercial Activity

During the first two quarters of calendar year 2009, total retail sales reported in the City were approximately $39,253,000, an 18.3% decrease over the total retail sales of $48,068,000 reported in the City during the first two quarters of calendar year 2008. The table below shows the number of establishments selling merchandise subject to sales tax and the valuation of taxable transactions within the City for the last five years for which data is available. Annual figures are not yet available for 2009.

CITY OF DESERT HOT SPRINGS Taxable Retail Sales Number of Permits and Valuation of Taxable Transactions

Retail Stores Total All Outlets

Number Taxable Number Taxable of Permits Transactions of Permits Transactions 2004 161 $77,200 329 $82,056 2005 170 88,493 320 94,182 2006 181 90,275 338 95,513 2007 181 87,369 351 94,617 2008 162 85,051 312 91,671

Source: State Board of Equalization.

During the first two quarters of calendar year 2009, total retail sales reported in the County were approximately $10,959,564,000, an 18.8% decrease over the total retail sales of $13,495,271,000 reported in the County during the first two quarters of calendar year 2008. The table below shows the number of establishments selling merchandise subject to sales tax and the valuation of taxable transactions within the County for the last five years for which data is available. Annual figures are not yet available for 2009.

COUNTY OF RIVERSIDE Taxable Retail Sales Number of Permits and Valuation of Taxable Transactions

Retail Stores Total All Outlets

Number Taxable Number Taxable of Permits Transactions of Permits Transactions 2004 20,642 $18,715,949 42,826 $25,237,148 2005 22,691 20,839,212 44,222 28,256,491 2006 23,322 21,842,345 43,672 29,816,237 2007 22,918 21,242,516 45,279 29,023,609 2008 23,604 18,689,249 46,272 26,003,595

Source: State Board of Equalization.

C-2

Employment and Industry

The City is included in the Riverside-San Bernardino-Ontario labor market area. The unemployment rate in the Riverside-San Bernardino-Ontario MSA was 14.4% in June 2010, above the year-ago estimate of 13.6%. This compares with an unadjusted unemployment rate of 12.2% for California and 9.5% for the nation during the same period. The unemployment rate was 14.5% in Riverside County, and 14.3% in San Bernardino County.

The following table shows the average annual estimated numbers of wage and salary workers by industry. The table does not include proprietors, the self-employed, unpaid volunteers or family workers, domestic workers in households, and persons in labor management disputes.

RIVERSIDE-SAN BERNARDINO METROPOLITAN STATISTICAL AREA (RIVERSIDE COUNTY) Civilian Labor Force, Employment and Unemployment (Annual Averages)

2005 2006 2007 2008 2009 Civilian Labor Force (1) 1,707,400 1,751,300 1,774,800 1,783,800 1,778,200 Employment 1,616,600 1,665,100 1,671,900 1,636,900 1,541,600 Unemployment 90,800 86,200 102,900 146,900 236,500 Unemployment Rate 5.3% 4.9% 5.8% 8.2% 13.3% Wage and Salary Employment: (2) Agriculture 18,300 17,300 16,400 15,900 15,200 Mining and Logging 1,400 1,400 1,300 1,200 1,200 Construction 123,300 127,500 112,500 90,700 67,400 Manufacturing 121,000 123,400 118,500 106,900 88,500 Wholesale Trade 49,900 54,200 56,800 54,100 48,300 Retail Trade 165,700 173,200 175,600 168,600 154,900 Transportation, Warehousing and Utilities 60,200 63,800 69,500 70,200 66,500 Information 14,500 15,300 15,400 14,900 14,800 Finance and Insurance 30,100 31,700 30,700 28,000 27,000 Real Estate and Rental and Leasing 18,900 19,900 19,500 18,700 16,600 Professional and Business Services 133,200 142,300 145,000 137,400 127,300 Educational and Health Services 119,900 122,100 127,000 131,500 132,600 Leisure and Hospitality 122,600 128,100 132,600 131,000 123,000 Other Services 40,800 42,500 41,200 40,800 36,700 Federal Government 18,700 19,300 19,400 19,600 20,100 State Government 27,000 27,400 28,700 29,600 29,700 Local Government 174,800 175,700 177,200 180,700 177,500 Total All Industries 1,240,300 1,285,000 1,287,300 1,239,700 1,147,100

(1) Labor force data is by place of residence; includes self-employed individuals, unpaid family workers, household domestic workers, and workers on strike. (2) Industry employment is by place of work; excludes self-employed individuals, unpaid family workers, household domestic workers, and workers on strike. Source: State of California Employment Development Department.

C-3

Major Employers

The following table lists the largest employers within the County:

COUNTY OF RIVERSIDE Major Employers (As of January 1, 2010)

Employer Name Location Industry Abbott Vascular Temecula Physicians & Surgeons Agua Caliente Casino Rancho Mirage Casino Corona City Hall Corona City Government Corona Regional Medical Center Corona Hospital Corrections Department Morco Correctional Institution Crossroads Truck Dismantling Mira Loma Automobile Wrecking (Whls) Eisenhower Medical Center Rancho Mirage Hospitals Fantasy Springs Resort Casino Indio Bowling Centers Handsome Rewards Perris Internet & Catalog Shopping Hemet Valley Medical Ctr Hemet Hospitals Hub International Of CA Ins Riverside Insurance J W Marriott-Desert Spgs Resrt Palm Desert Hotels & Motels Kaiser Permanente Riverside Physicians & Surgeons La Quinta Resort & Club La Quinta Resorts Morongo Casino Resort & Spa Cabazon Casinos Pechanga Development Corp Temecula Casinos Riverside Community Hospital Riverside Hospitals Riverside County Regional Med Moreno Valley Hospitals Riverside Forklift Training Riverside Trucks-Industrial (Whls) Spa Resort Casino Pal Springs Hotel Starcrest Of California Perris Internet & Catalog Shopping Starcrest Products-California Perris Gift Shops Sun World Intl LLC Coachella Fruits & Vegetables-Growers & Shippers University Of Cal-Riverside Riverside Schools-Universities & Colleges Academic Watson Pharmaceuticals Inc Corona Marketing Programs & Services

Source: California Employment Development Dept., America’s Labor Market Information System (ALMIS) Employer Database, 2010 2nd Edition.

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Construction Activity

The following is a five year summary of the valuation of building permits issued in the City during the past five calendar years.

CITY OF DESERT HOT SPRINGS Building Permit Valuation (Valuation in Thousands of Dollars)

2005 2006 2007 2008 2009 Permit Valuation New Single-family $132,799.5 $75,257.9 $18,435.4 $1,429.4 $325.7 New Multi-family 4,083.6 15,561.3 3,860.8 370.5 0.0 Res. Alterations/Additions 1,068.5 2,094.2 817.7 651.2 403.4 Total Residential 137,951.7 92,913.4 23,113.8 2,451.1 729.1

New Commercial 0.0 593.1 3,634.6 0.0 0.0 New Industrial 0.0 0.0 0.0 0.0 0.0 New Other 5,318.5 6,604.5 2,729.7 724.4 1,583.7 Com. Alterations/Additions 1,033.4 2,479.5 1,348.3 1,019.1 915.3 Total Nonresidential $6,351.9 $9,677.1 $7,712.6 $1,743.4 $2,499.0

New Dwelling Units Single Family 1,008 558 123 8 2 Multiple Family 41 169 35 4 0 TOTAL 1,049 727 158 12 2

Source: Construction Industry Research Board, Building Permit Summary.

The following is a five year summary of the valuation of building permits issued in the County during the past five calendar years.

COUNTY OF RIVERSIDE Building Permit Valuation (Valuation in Thousands of Dollars)

2005 2006 2007 2008 2009 Permit Valuation New Single-family $6,243,791.7 $4,412,255.1 $2,207,519.5 $1,214,753.0 $892,790.0 New Multi-family 407,432.1 431,580.9 238,315.9 243,741.9 75,756.1 Res. Alterations/Additions 164,312.5 158,099.4 141,997.0 118,488.7 85,148.0 Total Residential 6,815,536.3 5,001,935.4 2,587,832.4 1,576,983.5 1,053,694.1

New Commercial 552,666.9 648,065.7 682,331.0 539,943.4 94,651.4 New Industrial 120,367.6 288,352.6 184,505.6 70,410.8 12,277.6 New Other 344,703.2 290,006.3 240,767.0 138,765.2 107,322.1 Com. Alterations/Additions 274,337.7 303,408.9 350,539.1 292,693.8 162,557.5 Total Nonresidential $1,292,075.4 $1,529,833.4 $1,458,142.7 $1,041,813.1 $376,818.7

New Dwelling Units Single Family 29,994 20,692 9,763 3,815 3,431 Multiple Family 4,140 4,519 2,690 2,104 759 TOTAL 34,134 25,211 12,453 5,919 4,190

Source: Construction Industry Research Board, Building Permit Summary.

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Effective Buying Income

“Effective Buying Income” is defined as personal income less personal tax and nontax payments, a number often referred to as “disposable” or “after-tax” income. Personal income is the aggregate of wages and salaries, other labor-related income (such as employer contributions to private pension funds), proprietor's income, rental income (which includes imputed rental income of owner-occupants of non-farm dwellings), dividends paid by corporations, interest income from all sources, and transfer payments (such as pensions and welfare assistance). Deducted from this total are personal taxes (federal, state and local), nontax payments (fines, fees, penalties, etc.) and personal contributions to social insurance. According to U.S. government definitions, the resultant figure is commonly known as “disposable personal income.”

COUNTY OF RIVERSIDE Effective Buying Income 2005 through 2010

Total Effective Median Household Buying Income Effective Buying Year Area (000’s Omitted) Income 2005 City of Desert Hot Springs $213,823 $25,237 Riverside County 32,004,438 41,326 California 720,798,106 44,681 United States 5,894,663,363 40,529

2006 City of Desert Hot Springs $245,545 $26,641 Riverside County 35,656,620 43,490 California 764,120,963 46,275 United States 6,107,092,244 41,255

2007 City of Desert Hot Springs $279,855 $27,429 Riverside County 38,631,365 45,310 California 814,894,438 48,203 United States 6,300,794,040 41,792

2008 City of Desert Hot Springs $298,995 $28,386 Riverside County 40,935,408 46,958 California 832,531,445 48,952 United States 6,443,994,426 42,303

2009 City of Desert Hot Springs $310,818 $28,449 Riverside County 41,337,770 47,080 California 844,823,319 49,736 United States 6,571,536,768 43,252

Source: The Nielsen Company (US), Inc.

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Transportation

The city is one the direct route between Los Angeles and Phoenix and is approximately a two hour drive from L.A. via 1-10 or San Diego via 1-15 and 1-10. It is conveniently located just 12 miles from Palm Springs International Airport, which offers connections worldwide.

Sun Line buses provide service between Desert Hot Springs and other Coachella Valley cities.

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APPENDIX D

FORM OF OPINION OF BOND COUNSEL

Upon issuance and delivery of the Bonds, Stradling Yocca Carlson & Rauth, a Professional Corporation, Bond Counsel, proposes to render its final approving opinion in substantially the following form.

August 17, 2010

City of Desert Hot Springs Community Facilities District No. 2006-1 Desert Hot Springs, California

Re: $2,285,000 City of Desert Hot Springs Community Facilities District No. 2006-1, Improvement Area 1, Special Tax Refunding Bonds, Series 2010

Ladies and Gentlemen:

We have reviewed the Constitution and the laws of the State of California and certain proceedings taken by the City Council of the City of Desert Hot Springs, acting as the legislative body of City of Desert Hot Springs Community Facilities District No. 2006-1 (the “District”) in connection with the issuance by the District of its $2,285,000 Improvement Area 1, Special Tax Refunding Bonds, Series 2010 (the “Bonds”). The Bonds are being issued under that certain Indenture, dated as of August 1, 2010, by and between Wells Fargo Bank, National Association (the “Trustee”) and the District (the “Indenture”). In rendering our opinion, we have relied upon certain representations of fact and certifications made by the District, the original purchasers of the Bonds and others, and such other information and documents as we consider necessary to render this opinion. We have not undertaken to verify through independent investigation the accuracy of the representations and certifications relied upon by us.

The Bonds have been issued pursuant to the Mello-Roos Community Facilities Act of 1982, as amended (comprising Chapter 2.5, Part 1, Division 2, Title 5 of the Government Code of the State of California) and an authorizing resolution adopted by the City Council of the City of Desert Hot Springs acting in its capacity as the legislative body of the District (the “Board”) on July 27, 2010 (the “Resolution”) approving the Indenture. The Bonds are dated August 17, 2010 and mature on the dates and in the amounts set forth in the Indenture. Interest on the Bonds is payable on the dates and at the rates per annum set forth in the Indenture. The Bonds are registered Bonds in the form set forth in the Indenture and are redeemable in the amounts, at the times and in the manner set forth in the Indenture.

All terms not defined herein have the meaning ascribed to those terms in the Indenture.

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Based upon and subject to the foregoing, and in reliance thereon, we are of the following opinions:

1. The Bonds have been duly and validly authorized by the District and are legal, valid and binding limited obligations of the District, enforceable in accordance with their terms and the terms of the Indenture, except to the extent that enforceability may be limited by moratorium, bankruptcy, reorganization, insolvency or other similar laws affecting creditors’ rights generally, or by the exercise of judicial discretion in accordance with general principles of equity or otherwise in appropriate cases. The Bonds are limited obligations of the District but are not a debt of the City of Desert Hot Springs, the State of California or any other political subdivision thereof within the meaning of any constitutional or statutory limitation, and, except as to the Special Taxes (as defined in the Indenture), neither the faith and credit nor the taxing power of the City of Desert Hot Springs, the State of California, or any of its political subdivisions is pledged for the payment thereof.

2. The Indenture has been duly authorized by the District. The Indenture creates a valid pledge of, and the Bonds are secured by the Special Taxes and the amounts on deposit in certain funds and accounts established under the Indenture, as and to the extent provided in the Indenture.

3. Under existing statutes, regulations, rulings and judicial decisions, interest on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and corporations; however, it should be noted that, with respect to corporations, such interest will not be included as an adjustment in calculating alternative minimum taxable income.

4. Interest on the Bonds is exempt from State of California personal income taxes.

5. The difference between the issue price of a Bond (the first price at which a substantial amount of the Bonds of a maturity are to be sold to the public) and the stated redemption price at maturity with respect to such Bond constitutes original issue discount. Original issue discount accrues under a constant yield method, and original issue discount will accrue to a Bond owner before receipt of cash attributable to such excludable income. The amount of original issue discount deemed received by a Bond owner will increase the Bond owner’s basis in the applicable Bond. Original issue discount that accrues to the Bond owner is excluded from the gross income of such owner for federal income tax purposes, is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations (as described in paragraph (3) above), and is exempt from State of California personal income taxes.

The opinions expressed in paragraphs (3) and (5) above as to the exclusion from gross income for federal income tax purposes of interest and original issue discount on the Bonds is subject to the condition that the District complies with all requirements of the Internal Revenue Code of 1986, as amended (the “Code”), that must be satisfied subsequent to the issuance of the Bonds to assure that such interest and original issue discount will not become includable in gross income for federal income tax purposes. Failure to comply with such requirements of the Code might cause interest and original issue discount on the Bonds to be included in gross income for federal income tax purposes retroactive to the date of issuance of the Bonds. The District has covenanted to comply with all such requirements. Except as set forth in paragraphs (3), (4) and (5) above, we express no opinion as to any tax consequences related to the Bonds.

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Certain requirements and procedures contained or referred to in the Indenture, the Bond Purchase Agreement, dated August 5, 2010, between the District and E. J. De La Rosa & Co., Inc. (the “Underwriter”), and the Tax Certificate may be changed, and certain actions may be taken, under the circumstances and subject to the terms and conditions set forth in such documents, upon the advice or with the approving opinion of counsel nationally recognized in the area of tax-exempt obligations. We express no opinion as to effect on the exclusion of interest on the Bonds from gross income for federal income tax purposes on and after the date on which any such change occurs or action is taken upon the advice or approval of counsel other than Stradling Yocca Carlson & Rauth, a Professional Corporation.

The opinions expressed herein are based on an analysis of existing statutes, regulations, rulings and judicial decisions and cover certain matters not directly addressed by such authorities. Such opinions may be affected by actions taken (or not taken) or events occurring (or not occurring) after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions or events are taken or do occur. Such actions or events may adversely affect the value or tax treatment of the Bonds and we express no opinion with respect thereto.

We express no opinion herein as to the accuracy, completeness or sufficiency of the Official Statement relating to the Bonds or other offering material relating to the Bonds and purchasers of the Bonds should not assume that we have reviewed the Official Statement.

Respectfully submitted,

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APPENDIX E

FORM OF CONTINUING DISCLOSURE UNDERTAKINGS

CONTINUING DISCLOSURE AGREEMENT (City)

THIS CONTINUING DISCLOSURE AGREEMENT (the "Disclosure Agreement") is dated as of August 17, 2010, is by and between the City of Desert Hot Springs Community Facilities District No. 2006-1 (the "District"), and Albert A Webb Associates, in its capacity as Dissemination Agent (the "Dissemination Agent").

RECITALS:

WHEREAS, pursuant to a Indenture dated as of August 1, 2010 (the “Indenture”) by and between the District and Wells Fargo Bank, National Association, as the Trustee, the District has issued its City of Desert Hot Springs Community Facilities District No. 2006-1 Improvement Area 1 Special Tax Refunding Bonds Series 2010 (the "Bonds"), in the aggregate principal amount of $2,285,000; and

WHEREAS, this Disclosure Agreement is being executed and delivered by the District and the Dissemination Agent for the benefit of the Holders and Beneficial Owners of the Bonds and in order to assist the Participating Underwriter of the Bonds in complying with Securities and Exchange Commission Rule 15c2-12(b)(5);

NOW, THEREFORE, for and in consideration of the mutual promises and covenants herein contained, the parties hereto agree as follows:

SECTION 1. Definitions. In addition to the definitions set forth in the Indenture, which apply to any capitalized term used in this Disclosure Agreement unless otherwise defined in this Section, the following capitalized terms shall have the following meanings:

"Annual Report" shall mean any Annual Report provided by the District pursuant to, and as described in, Sections 2 and 3 of this Disclosure Agreement.

"Beneficial Owner" shall mean any person which (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Bonds (including persons holding Bonds through nominees, depositories or other intermediaries), or (b) is treated as the owner of any Bonds for federal income tax purposes.

"Disclosure Representative" shall mean the designees of the District to act as the disclosure representative.

"Dissemination Agent" shall mean Albert A Webb Associates, acting in its capacity as Dissemination Agent hereunder, or any successor Dissemination Agent designated in writing by the District.

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"Listed Events" shall mean any of the events listed in Section 4(a) of this Disclosure Agreement and any other event legally required to be reported pursuant to the Rule.

“MSRB” shall mean the Municipal Securities Rulemaking Board or any other entity designated or authorized by the Securities and Exchange Commission to receive reports pursuant to the Rule. Until otherwise designated by the MSRB or the Securities and Exchange Commission, filings with the MSRB are to be made through the Electronic Municipal Market Access (EMMA) website of the MSRB, currently located at http://emma.msrb.org.

"Official Statement" means the Official Statement, dated August 5, 2010, relating to the Bonds.

"Participating Underwriter" shall mean any of the original underwriters of the Bonds required to comply with the Rule in connection with offering of the Bonds.

"Rule" shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time.

"State" shall mean the State of California.

SECTION 2. Provision of Annual Reports.

(a) The District shall, or shall cause the Dissemination Agent to, not later than January 15 after the end of the District's fiscal year, commencing with the fiscal year ending June 30, 2010 (for the report due January 15, 2011), provide to the MSRB an Annual Report which is consistent with the requirements of Section 3 of this Disclosure Agreement. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may include by reference other information as provided in Section 3 of this Disclosure Agreement. Not later than fifteen (15) Business Days prior to said date, the District shall provide the Annual Report to the Dissemination Agent. The District shall provide an Officer’s Certificate with each Annual Report furnished to the Dissemination Agent to the effect that such Annual Report constitutes the Annual Report required to be furnished by the District hereunder. The Dissemination Agent may conclusively rely upon such Officer’s Certificate of the District.

(b) If by fifteen (15) Business Days prior to the date specified in subsection (a) for providing the Annual Report to the MSRB, the Dissemination Agent has not received a copy of the Annual Report, the Dissemination Agent shall contact the District to determine if the District is in compliance with subsection (a).

(c) The Dissemination Agent shall file a report with the District certifying that the Annual Report has been provided pursuant to this Disclosure Agreement, stating the date it was provided to the MSRB. If the Dissemination Agent is unable to verify that an Annual Report has been provided to the MSRB by the date required in subsection (a), the Dissemination Agent shall immediately notify the District. If the District is unable to provide to the MSRB an Annual Report by the report due date, the District shall, by written direction, cause the Dissemination Agent to provide to the MSRB a notice, in substantially the form attached as Exhibit A.

SECTION 3. Content of Annual Reports. The District's Annual Report shall contain or include by reference the following:

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(a) The following information:

1. The principal amount of Bonds Outstanding as of the October 31 next preceding the Annual Report Date.

2. The balance in the Reserve Fund, and a statement of the Reserve Requirement, as of the October 31 next preceding the Annual Report Date.

3. The total assessed value of all parcels within the Improvement Area on which the Special Taxes are levied, as shown on the assessment roll of the Riverside County Assessor last equalized prior to the October 31 next preceding the Annual Report Date, and a statement of assessed value-to-lien ratios therefor, either by individual parcel or by categories (e.g. "below 3:1", "3:1 to 4:1" etc.).

4. The Special Tax delinquency rate for all parcels within the Improvement Area on which the Special Taxes are levied, as shown on the assessment roll of the Riverside County Assessor last equalized prior to the October 31 next preceding the Annual Report Date, the number of parcels within the Improvement Area on which the Special Taxes are levied and which are delinquent in payment of Special Taxes, as shown on the assessment roll of the Riverside County Assessor last equalized prior to the October 31 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 Community Facilities District; provided, however, that parcels with aggregate delinquencies of $2,000 or less (excluding penalties and interest) may be grouped together and such information may be provided by category.

(b) The District's audited financial statements, if any, prepared in accordance with generally accepted accounting principles as promulgated to apply to governmental entities from time to time by the Governmental Accounting Standards Board. If the District'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) hereof, the Annual Report shall contain unaudited financial statements in a format similar to that used for the District'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.

Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues with respect to which the District is an "obligated person" (as defined by the Rule), which have been filed with the MSRB 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.

SECTION 4. Reporting of Significant Events.

(a) Pursuant to the provisions of this Section 4, the District shall give an Officer’s Certificate including notice of the occurrence of any of the following events with respect to the Bonds, if material:

1. Principal and interest payment delinquencies.

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2. Non-payment related defaults. 3. Modifications to rights of Bondholders. 4. Optional, contingent or unscheduled Bond calls. 5. Defeasances. 6. Rating changes. 7. Adverse tax opinions or events affecting the tax-exempt status of the Bonds. 8. Unscheduled draws on the debt service reserves, if any, reflecting financial difficulties. 9. Unscheduled draws on credit enhancements reflecting financial difficulties. 10. Substitution of credit or liquidity providers, or their failure to perform. 11. Release, substitution, or sale of property securing repayment of the Bonds.

(b) Whenever the District obtains knowledge of the occurrence of a Listed Event, the District shall as soon as possible determine if such event would constitute material information for Holders of Bonds, provided, that any event under subsection (a)(6) will always be defined to be material.

(c) If the District determines that knowledge of the occurrence of a Listed Event would be material under applicable Federal securities law, the District shall, or by written direction cause the Dissemination Agent (if not the District) to, promptly file a notice of such occurrence with the MSRB in electronic format, accompanied by such identifying information as is prescribed by the MSRB. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(4) and (5) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to the Holders of affected Bonds pursuant to the Indenture.

(d) If in response to a request under subsection (b), the District determines that the Listed Event would not be material under applicable federal securities laws, the District shall so notify the Dissemination Agent in writing and instruct the Dissemination Agent not to report the occurrence pursuant to subsection (e).

SECTION 5. Termination of Reporting Obligation. The obligations of the District, the Dissemination Agent under this Disclosure Agreement shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Bonds. If such termination occurs prior to the final maturity of the Bonds, the District shall give notice of such termination in the same manner as for a Listed Event under Section 4(e) hereof. If the District’s obligations under the Agreement are assumed in full by some other entity, such person shall be responsible for compliance with this Disclosure Agreement in the same manner as if it were the District, and the District shall have no further responsibility hereunder.

SECTION 6. Dissemination Agent. The District may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Agreement, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. The Dissemination Agent may resign at any time by providing at least 30 days’ notice in writing to the Issuer and the District.

SECTION 7. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement, the District and the Dissemination Agent may amend this Disclosure Agreement (and the Dissemination Agent shall agree to any amendment so requested by the

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Issuer, provided no amendment increasing or affecting the obligations or duties of the Dissemination Agent shall be made without the consent of either such party) and any provision of this Disclosure Agreement may be waived if such amendment or waiver is supported by an opinion of counsel expert in federal securities laws acceptable to the Issuer, the District and the Dissemination Agent to the effect that such amendment or waiver would not, in and of itself, cause the undertakings herein to violate the Rule if such amendment or waiver had been effective on the date hereof but taking into account any subsequent change in or official interpretation of the Rule.

SECTION 8. Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent the District from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Agreement. If the District 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 District shall have no obligation under this Agreement to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event.

SECTION 9. Duties, Immunities and Liabilities of Dissemination Agent. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Agreement, and the District agrees to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense and liabilities which they may incur arising out of or in the exercise or performance of their respective powers and duties hereunder, including the costs and expenses (including attorneys’ fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent's negligence or willful misconduct. 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 Agent in the performance of its duties hereunder. The Dissemination Agent shall have no duty or obligation to review any information provided to it hereunder and shall not be deemed to be acting in any fiduciary capacity for the Issuer, the Bondholders, or any other party. The obligations of the District under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Bonds.

SECTION 10. Notices. Any notices or communications to or among any of the parties to this Disclosure Agreement may be given as follows:

To the District: City of Desert Hot Springs 65-950 Pierson Boulevard Desert Hot Springs, California 92240 Attn: CFD Administrator

To the Dissemination Agent: Albert A Webb Associates 3788 McCray Street Riverside, CA 92506

Any person may, by written notice to the other persons listed above, designate a different address or telephone number(s) to which subsequent notices or communications should be sent.

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SECTION 11. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of the District, the Dissemination Agent, the Participating Underwriter and Holders and Beneficial Owners from time to time of the Bonds, and shall create no rights in any other person or entity.

SECTION 12. 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.

IN WITNESS WHEREOF, the parties hereto have executed this Disclosure Agreement as of the date first above written.

CITY OF DESERT HOT SPRINGS COMMUNITY FACILITIES DISTRICT NO 2006-1

By: Authorized Officer

ALBERT A. WEBB ASSOCIATES, as Dissemination Agent

By: Authorized Officer

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EXHIBIT A

NOTICE TO MSRB OF FAILURE TO FILE ANNUAL REPORT

Name of Issuer: City of Desert Hot Springs Community Facilities District 2006-1

Name of Bond Issue: $2,285,000 City of Desert Hot Springs Community Facilities District No. 2006-1 Improvement Area 1 Special Tax Refunding Bonds Series 2010

Date of Issuance: August 17, 2010

NOTICE IS HEREBY GIVEN that the City of Desert Hot Springs Community Facilities District No. 2006-1 (the "District") has not provided an Annual Report with respect to the above- named Bonds as required by the Indenture dated as of August 1, 2010 (the “Indenture”) by and between the District and Wells Fargo Bank, National Association, as Trustee. The District anticipates that the Annual Report will be filed by ______.

Dated: ______

Albert A Webb Associates, as Dissemination Agent, on behalf of City of Desert Hot Springs Community Facilities District No. 2006-1

By: Authorized Officer cc: City of Desert Hot Springs

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FORM OF LANDOWNER CONTINUING DISCLOSURE AGREEMENT

CONTINUING DISCLOSURE AGREEMENT (Landowner)

THIS CONTINUING DISCLOSURE AGREEMENT (this "Disclosure Agreement"), dated as of August 17, 2010, is by and among SKYBORNE VENTURES LLC, a Delaware limited liability company (the "Landowner") and ALBERT A. WEBB ASSOCIATES, as Dissemination Agent (the "Dissemination Agent").

WITNESSETH:

WHEREAS, pursuant to the Indenture, dated as of August 1, 2010 (the "Indenture"), by and between City of Desert Hot Springs Community Facilities District No. 2006-1 (the "District") and the Trustee, the District has issued the City of Desert Hot Springs Community Facilities District No. 2006-1 Improvement Area 1 Special Tax Refunding Bonds, Series 2010 (the "Bonds") in the aggregate principal amount of $2,285,000; and

WHEREAS, the Bonds are payable from and secured by special taxes levied on certain of the property within Improvement Area 1 of City of Desert Hot Springs Community Facilities District No. 2006-1 (the "Improvement Area");

WHEREAS, the Landowner is developing the property within the Improvement Area; and

WHEREAS, this Disclosure Agreement is being executed and delivered by the Landowner and the Bank for the benefit of the holders and beneficial owners of the Bonds and in order to assist the underwriters of the Bonds in complying with Securities and Exchange Commission Rule 15c2-l2(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 Indenture. 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, 5% or more of the outstanding voting securities of such other Person, (b) any Person 5% 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.

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"Assumption Agreement" means an agreement between a Major Developer, or an Affiliate thereof, and the Trustee containing terms substantially similar to this Disclosure 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, and with respect to the improvements or payments necessary to cause the Planned Development Stage to be reached that such Major Developer, or an Affiliate thereof, intends or is obligated (contractually or otherwise) to make or cause to be made.

"Development Plan" means, with respect to a Major Developer, the specific improvements such Major Developer intends to make, or cause to be made, in order for the Planned Development Stage to be reached, the time frame in which such improvements are intended to be made and the estimated costs of such improvements.

"Disclosure Representative" means James M. Kozak, or such other person as the Landowner shall designate in writing to the Trustee from time to time.

"Dissemination Agent" means the Bank, acting in its capacity as Dissemination Agent hereunder, or any successor Dissemination Agent designated in writing by the Landowner and which has filed with the Trustee a written acceptance of such designation.

"Event of Bankruptcy" means, with respect to a Person, 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 a period of 60 days, or if a receiver of the business or of the 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.

"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. Currently, the Landowner has no plans to commence further development or construction on additional units within Improvement Area 1 and intends to sell the property at some point in the future.

"Financial Statements" means, with respect to a Major Developer, the full financial statements (including, if applicable, consolidated financial statements), special purpose financial statements, project operating statements or other reports reflecting the financial position of each entity, enterprise, fund, account or other person (other than a financial institution acting as a lender in the ordinary course of business) identified in such Major Developer's Financing Plan as a source of funding for such Major Developer's Development Plan; provided, however, that, if such financial statements or reports are otherwise prepared as audited financial statements or reports, then Financial Statements means such audited financial statements or reports.

"First Report Date" means March 31st of each year.

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"Listed Events" means any of the events listed in Section 4(a) hereof.

"Major Developer" means, as of any date, any Property Owner, including the Landowner, that owns Property that has not reached the Planned Development Stage that, together with Property that has not reached the Planned Development Stage owned by Affiliates of such Property Owner, is subject to 20% or more of the Special Tax levy for the then current Fiscal Year.

“MSRB” shall mean the Municipal Securities Rulemaking Board or any other entity designated or authorized by the Securities and Exchange Commission to receive reports pursuant to the Rule. Until otherwise designated by the MSRB or the Securities and Exchange Commission, filings with the MSRB are to be made through the Electronic Municipal Market Access (EMMA) website of the MSRB, currently located at http://emma.msrb.org.

"Official Statement" means the Official Statement, dated August 5, 2010, relating to the Bonds.

"Participating Underwriter" means any of the original underwriters of the Bonds required to comply with the Rule in connection with offering of the Bonds.

"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.

"Planned Development Stage" means, with respect to any portion of the Property, the stage of development to which the Landowner intends to develop such property, as described in the Official Statement, which is the stage at which such portion of the Property is ready to be presented to the marketplace as a finished residential unit.

"Property" means the real property within the boundaries of the Improvement Area 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 Date and the Second Report Date.

"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 30th of each year.

"Semi-Annual Report" means any Semi-Annual Report provided by the Landowner pursuant to, and as described in, Sections 2 and 3 hereof.

"Special Tax" means the special tax authorized to be levied on the Property pursuant to Mello-Roos Communities Facilities District Act of 1982 and the Rate and Method of Appointment of Special Tax for Community Facilities District No. 2006-1 of the City of Desert Hot Springs (Improvement Area 1).

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Section 2. Provision of Semi-Annual Reports. (a) The Landowner shall, or, upon furnishing the Semi-Annual Report to the Dissemination Agent, shall cause the Dissemination Agent to, provide to the MSRB a Semi-Annual Report which is consistent with the requirements of Section 3 hereof, not later than each Report Date, commencing with the First Report Date for next year (March 31, 2011). 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 the Landowner, if any, may be submitted 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.

(b) Not later than 15 business days prior to the date specified in subsection (a) for providing the Semi-Annual Report to the MSRB, the Landowner shall provide the Semi-Annual Report (in a form suitable for reporting to the MSRB) to the Dissemination Agent and the Trustee (if the Trustee is not the Dissemination Agent). If by such date, the Trustee has not received a copy of the Semi-Annual Report, the Trustee shall contact the Disclosure Representative and the Dissemination Agent to inquire if the Landowner is in compliance with the first sentence of this subsection (b).

(c) If the Trustee is unable to verify that a Semi-Annual Report has been provided to the MSRB by the date required in subsection (a), the Trustee shall send a notice to the MSRB, in substantially the form attached as Exhibit A.

(d) The Dissemination Agent shall file a report with the Landowner certifying that the Annual Report has been provided pursuant to this Disclosure Agreement, stating the date it was provided to the MSRB. If the Dissemination Agent is unable to verify that an Annual Report has been provided to the MSRB by the date required in subsection (a), the Dissemination Agent shall immediately notify the Landowner. If the Landowner is unable to provide to the MSRB an Annual Report by the report due date, the Landowner shall, by written direction, cause the Dissemination Agent to provide to the MSRB a notice, in substantially the form attached as Exhibit A.

Section 3. Content of Semi-Annual Reports. The Landowner's 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 the First Report Date, Financial Statements for each Major Developer prepared in accordance with generally accepted accounting principles, as in effect from time to time. 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, if available, and the audited Financial Statements shall be filed in the same manner as 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, and may be consolidated with such entity's parent company.

(b) The following information with respect to each Major Developer:

(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

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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 significant 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 significant changes in the Financing Plan of such Major Developer and the causes or rationale for such changes.

(iii) A description of any sales of portions of such Major Developer's Property that has not reached the Planned Development Stage during the six-month period ending on the last day of the second month preceding the month in which the Report Date occurs (the six-month period ending on January 31 for the First Report Date and the six-month period ending on July 31 for the Second Report Date), including the identification of each buyer and the number of lots or acres sold.

(iv) The number of single family residences on such Major Developer's Property conveyed to buyers by such Major Developer during the six-month period ending on the last day of the second month preceding the month in which the Report Date occurs.

(v) A description of how many lots or acres of Property were owned by such Major Developer as of the last day of the second month preceding the month in which the Report Date occurs, how many lots or acres of, and how many units on, such Major Developer's Property reached the Planned Development Stage during the six-month period ending on the last day of the second month preceding the month in which the Report Date occurs and how many Iots or acres of such Major Developer's Property had not reached the Planned Development Stage as of the last day of the second month preceding the month in which the Report Date occurs.

(vi) A description of any change in the financial condition of such Major Developer or any entity identified in the Financing Plan of such Major Developer as a source of funding for such Major Developer's Development Plan that would materially interfere with its ability to complete the Development Plan or to pay its Special Taxes prior to delinquency.

(vii) An update of the status of any previously reported Listed Event described in Section 4 hereof.

(c) In addition to any of the information expressly required to be provided under paragraphs (a) and (b), above, the Landowner 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 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 MSRB 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 Landowner shall clearly identify each such other document so included by reference.

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Section 4. Reporting of Significant Events. (a) Pursuant to the provisions of this Section, the Landowner shall promptly give, or cause to be given notice of the occurrence of any of the following events with respect to each Major Developer:

(i) Any conveyance by such Major Developer of Property owned by such Major Developer 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.

(ii) Any failure of such Major Developer, or any Affiliate of such Major Developer, to pay, prior to delinquency, general property taxes, assessments, or Special Taxes with respect to its Property.

(iii) Any denial or termination of credit, any denial or termination of, or default under, any line of credit or loan or any other loss of a source of funds that could 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 owning any Property, to pay Special Taxes owing with respect to its Property, when due.

(iv) The occurrence of an Event of Bankruptcy with respect to such Major Developer, or any Affiliate of such Major Developer, that could 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 when due.

(v) Any significant amendments to land use entitlements for such Major Developer's Property, which could have a material adverse effect on such Major Developer's ability to pay Special Taxes or to sell or develop such Major Developer's Property.

(vi) Any previously undisclosed governmentally-imposed preconditions to commencement or continuation of development on such Major Developer's Property, if material.

(vii) Any previously undisclosed legislative, administrative or judicial challenges to development on such Major Developer's Property, if material.

(viii) Any changes in the alignment, design or likelihood of completion of significant public improvements affecting such Major Developer's Property, including major thoroughfares, sewers, water conveyance systems and similar facilities which could have a material adverse effect on such Major Developer's ability to pay Special Taxes or to sell or develop such Major Developer's Property.

(ix) The assumption of any obligations by a Major Developer pursuant to Section 6 hereof.

(b) Whenever the Landowner obtains knowledge of the occurrence of a Listed Event, if there is no Dissemination Agent, the Landowner shall promptly file a notice of such occurrence with the Trustee, the District, the Municipal Securities Rulemaking Board and each State Repository, if any. Whenever the Landowner obtains knowledge of the occurrence of a Listed Event, if there is a Dissemination Agent, the Landowner shall promptly notify the Dissemination Agent, the Trustee and the District in writing. Such notice shall instruct the

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Dissemination Agent to report the occurrence pursuant to subsection (c). The Landowner 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 Dissemination Agent has been instructed by the Landowner to report the occurrence of a Listed Event, the Dissemination Agent shall file a notice of such occurrence with the Municipal Securities Rulemaking Board and each State Repository, if any.

Section 5. Assumption of Obligations. If a portion of the Property owned by the Landowner, or any Affiliate of the Landowner, is conveyed to a Person that, upon such conveyance, will be a Major Developer, the obligations of the Landowner hereunder with respect to the Property owned by such Major Developer and its Affiliates, and with respect to the improvements or payments necessary to cause the Planned Development Stage to be reached that such Major Developer, or an Affiliate thereof, intends or is obligated (contractually or otherwise) to make or cause to be made, may be assumed by such Major Developer or by an Affiliate thereof. In order to effect such assumption, such Major Developer or Affiliate shall enter into an Assumption Agreement.

Section 6. Termination of Reporting Obligation. The Landowner's obligations under this Disclosure Agreement shall terminate upon the earliest to occur of (a) the date on which the Planned Development Stage has been reached, (b) the date on which (i) the Landowner is no longer a Major Developer, and (ii) the Landowner no longer has any obligations under this Disclosure Agreement with respect to any Major Developer as a result of such obligations having been assumed under one or more Assumption Agreements entered into pursuant to Section 6 hereof, or (c) the date on which all of the Bonds have been legally defeased, redeemed, or paid in full; upon such termination, the Landowner shall have no obligation to provide any Semi- Annual Report or notice of any Listed Event that it would otherwise have been obligated to provide after the date of such termination. The Landowner's obligations under this Disclosure Agreement with respect to a Major Developer shall terminate upon the earliest to occur of (x) the date on which such Major Developer is no longer a Major Developer, as defined herein, or (y) the date on which the Landowner's obligation with respect to such Major Developer are assumed under an Assumption Agreement entered into pursuant to Section 6 hereof; upon such termination, the Landowner shall have no obligation to provide any Semi-Annual Report or notice of any Listed Event with respect to such Major Developer that it would otherwise have been obligated to provide after the date of such termination, provided, however, that upon the occurrence of any of the events described in clauses (x) or (y), the Landowner's obligations hereunder with respect to each other Major Developer, if any, shall remain in full force and effect. Upon the occurrence of any such termination prior to the final maturity of the Bonds, the Landowner shall give notice of such termination in the same manner as for a Listed Event under Section 4 hereof.

Section 7. Dissemination Agent. The Landowner may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Agreement, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. The Dissemination Agent may resign by providing 30 days' written notice to the Landowner and the Trustee. The Dissemination Agent shall have no duty to prepare any Semi-Annual Report or any Notice of Listed Event. The Landowner shall be responsible for paying the fees and expenses of the Dissemination Agent.

Section 8. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement, the Landowner, the Trustee and the Dissemination Agent may amend this

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Disclosure Agreement (and the Trustee and the Dissemination Agent shall agree to any amendment so requested by the Landowner, so long as such amendment does not adversely affect the rights or obligations of the Trustee 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 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 with respect to the 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 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 (i) is approved by holders of the Bonds in the manner provided in the Indenture for amendments to the Indenture with the consent of holders, or (ii) does not, in the opinion of nationally recognized bond counsel, materially impair the interests of holders.

If the financial information or operating data to be provided in the Semi-Annual Report is amended pursuant to the provisions hereof, the first 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 Semi-Annual Report in which such financial statements are first included 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 statements or information, in order to provide information to investors to enable them to evaluate the ability of the Major Developer to 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 MSRB 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 the Landowner 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 the Landowner chooses 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, the Landowner 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 the Landowner or the Trustee to comply with any provision of this Disclosure Agreement, the Trustee may (and, at the written direction of any Participating Underwriter or the holders of at least 25% aggregate principal amount of

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Outstanding Bonds, shall, upon receipt of indemnification reasonably satisfactory to the Trustee), or any holder or beneficial owner of the Bonds may, take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the Landowner or the Trustee, 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 Indenture, and the sole remedy under this Disclosure Agreement in the event of any failure of the Landowner or the Trustee to comply with this Disclosure Agreement shall be an action to compel performance.

Section 11. Duties, Immunities and Liabilities of Trustee and Dissemination Agent. The Dissemination Agent and the Trustee shall have only such duties hereunder as are specifically set forth in this Disclosure Agreement. The Landowner agrees to indemnify and save each of the Trustee and the Dissemination Agent, and their respective 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 its powers and duties hereunder, including the reasonable costs and expenses (including attorneys fees) of defending against any such claim of liability, but excluding losses, expenses and liabilities due to the Trustee's or the Dissemination Agent's (or any of their officers', directors', employees' or agents') negligence or willful misconduct. The Dissemination 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 to interpret or provide an opinion concerning any information disclosed hereunder. The Dissemination Agent may conclusively rely on the determination of the Landowner as to the materiality of any event for purposes of Section 4 hereof. Neither the Trustee nor the Dissemination Agent make any representation as to the sufficiency of this Disclosure Agreement for purposes of the Rule. The Landowner's obligations under this Section shall survive the termination of this Disclosure Agreement.

Section 12. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of the Landowner, the Trustee, the Dissemination Agent, the Participating Underwriters and holders and beneficial owners from time to time of the Bonds, and shall create no rights in any other person or entity.

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Section 13. 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.

IN WITNESS WHEREOF, the parties hereto have executed this Disclosure Agreement as of the date first above written.

SKYBORNE VENTURES LLC, a Delaware limited liability company

By: Authorized Officer

ALBERT A. WEBB ASSOCIATES, as Dissemination Agent

By: Authorized Officer

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EXHIBIT A

NOTICE TO MUNICIPAL SECURITIES RULEMAKING BOARD OF FAILURE TO FILE SEMI-ANNUAL REPORT

Name of Issuer: City of Desert Hot Springs Community Facilities District No. 2006-1

Obligated Person: Skyborne Ventures LLC

Name of Bond Issue: City of Desert Hot Springs Community Facilities District No. 2006-1 Improvement Area 1 Special Tax Refunding Bonds, Series 2010

Date of Issuance: August 17, 2010

NOTICE IS HEREBY GIVEN that Skyborne Ventures LLC (the "Landowner") has not provided a Semi-Annual Report with respect to the above-named Bonds as required by the Continuing Disclosure Agreement, dated as of August 17, 2010, by and among the Landowner and Wells Fargo Bank, National Association, in its capacity as Trustee and in its capacity as Dissemination Agent. [The Landowner anticipates that the Semi-Annual Report will be filed by ______.]

Dated:

Albert A Webb Associates, on behalf of Skyborne Ventures LLC

By:

cc: Skyborne Ventures LLC City of Desert Hot Springs Community Facilities District No. 2006-1

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APPENDIX F

THE BOOK ENTRY SYSTEM

Book-Entry System

DTC will act as securities depository for the Bonds. The Bonds will be issued as fully- registered bonds registered in the name of Cede & Co. (DTC’s partnership nominee). One fully-registered Bond will be issued for each maturity of the Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC. DTC 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 securities that its participants (the “Participants”) deposit with DTC. DTC also facilitates the settlement among Participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in Participants’ accounts, thereby eliminating the need for physical movement of securities certificates. “Direct Participants” include securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is owned by a number of its Direct Participants and by the New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as securities brokers and dealers, banks, and trust companies that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). The Rules applicable to DTC and its Participants are on file with the Securities and Exchange Commission.

Purchases of the Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC’s records. The ownership interest of each actual purchaser of each Bond (“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, but Beneficial Owners are 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 Bonds are to be accomplished by entries made on the books of Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Bonds, except in the event that use of the book-entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co. The deposit of Bonds with DTC and their registration in the name of Cede & Co. effect no change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such securities are credited, which may or may not be the Beneficial Owners. The 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.

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Redemption notices shall be sent to Cede & Co. If less than all of the bonds within an issue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. will consent or vote with respect to the Bonds. Under its usual procedures, DTC mails an Omnibus Proxy to an issuer as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Principal, mandatory redemption and interest payments on the Bonds will be made to DTC. DTC’s practice is to credit Direct Participants’ accounts on payment dates in accordance with their respective holdings shown on DTC’s records unless DTC has reason to believe that it will not receive payment on the date payable. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC, the Trustee or the District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to DTC is the responsibility of the District or the Trustee, disbursement of such payments to Direct Participants shall be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners shall be responsibility of Direct and Indirect Participants.

The District cannot and does not give any assurances that DTC, DTC Participants or others will distribute payments of principal, interest or premium with respect to the Bonds paid to DTC or its nominee as the registered owner, or will distribute any redemption notices or other notices, to the Beneficial Owners, or that they will do so on a timely basis or will serve and act in the manner described in this Official Statement. The District is 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 with respect to the Bonds or an error or delay relating thereto.

The foregoing description of the procedures and record-keeping with respect to beneficial ownership interests in the Bonds, payment of principal, interest and other payments on the Bonds to DTC Participants or Beneficial Owners, confirmation and transfer of beneficial ownership interests in such Bonds and other related transactions by and between DTC, the DTC Participants and the Beneficial Owners is based solely on information provided by DTC. Accordingly, no representations can be made concerning these matters and neither the DTC 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.

Discontinuance of Book-Entry System

DTC may discontinue providing its services with respect to the Bonds at any time by giving notice to the Trustee and discharging its responsibilities with respect thereto under applicable law or the District may terminate participation in the system of book-entry transfers through DTC or any other securities depository at any time. In the event that the book-entry system is discontinued, the District will execute, and the Trustee will authenticate and make available for delivery, replacement Bonds in the form of registered bonds. In addition, the principal of and redemption premium, if any, on the Bonds will be payable as set forth in the Indenture and summarized above under the caption “Description of the Bonds.” Bonds will be transferable and exchangeable on the terms and conditions provided in the Indenture. See “Transfer or Exchange of Bonds” above.

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