NEW ISSUE NOT RATED

In the opinion of Stradiing Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, 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 (and original issue discount) 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 (and original issue discount) on the Bonds is exempt from State of California personal income tax. See ~LEGAL MATTERS - Tax Exemption."

$25,820,000 COMMUNITY FACILITIES DISTRICT NO. 04-2 (LAKE HILLS CREST) OF THE COUNTY OF RIVERSIDE SPECIAL TAX BONDS, SERIES 2005

Dated: Date of Delivery Due: September 1, as shown on inside cover Authority for Issuance. The bonds captioned above {the "Bonds") are being issued under the Mello-Roos Community Facilities Act of 1982 (the "Acr) and a Bond Indenture, dated as of July 1, 2005 (the "Indenture"), by and between the Community Facilities District No. 04-2 (Lake Hills Crest) of the County of Riverside (the "Community Facilities District~) and The Bank of New York Trust Company, N.A., as trustee (the "Trustee"). The Board of Supervisors (the "Board") of the County of Riverside (the ~countyn), acting as leglslatlve body of the Community Facilities District, and the eligible landowner voters in the Community Facilities District, have authorized the issuance of bonds in an aggregate principal amount not to exceed $32,500,000. The Bonds are the only series of bonds to be issued under this authorization, other than refunding bonds. See "THE BONDS - Authority for Issuance. H Security and Sources of Payment. The Bonds are payable from proceeds of Net Taxes (as defined herein) levied on property within the Community Facilities District according to the rate and method of apportionment of special tax approved by the Board and the eligible landowner voters in the Community Facilities District. The Bonds are secured by a pledge of the Net Taxes and other amounts in the Special Tax Fund (exclusive of the Administrative Expense Account). See "SECURITY FOR THE BONDS." Use of Proceeds. The Bonds are being issued to (i) finance the acquisition and construction of certain road and appurtenant drainage facilities and related grading required as a condition for the development of the property in the Community Facilities District, which will be owned by the County, (ii) finance the acquisition and construction of certain water and sewer facilities and related grading required as a condition of development of the property in the Community Facilities District, which will be owned by Western Municipal Water District of Riverside County, and (iii) finance the acquisition and construction of certain flood control and storm water drainage facilities and related grading required as a condition for the development of the property in the Community Facilities District, which will be owned by Riverside County Flood Control and Water Conservation District rRiverside County Flood Control"), (iv) fund a reserve fund for the Bonds, {v) fund capitalized interest on the Bonds through September 1, 2005, (vi) pay certain administrative expenses of the Community Facilities District, and (vii) pay the costs of issuing the Bonds. See ~FINANCING PLAN." Bond Terms. Interest on the Bonds is payable on March 1, 2006, and semiannually thereafter on each March 1 and September 1. The Bonds will be issued in denominations of $5,000 or integral multiples of $5,000. The Bonds, when delivered, will be initially registered in the name of Cede & Co., as nominee of The Depository Trust Company ("DTCH), New York, New York. OTC will act as securities depository for the Bonds. See "THE BONDS- General Bond Terms~ and "APPENDIX F OTC and the Book-Entry Only System.~ Redemption. The Bonds are subject to optional redemption, mandatory sinking fund redemption, and extraordinary redemption from Special Tax prepayments before maturity. In addition, the Term Bond maturing on September 1, 2035, is subject to extraordinary redemption from any surplus remaining in the Project Account following completion of the Public Facilities. See "THE BONDS~ Redemption.~ THE BONDS, THE INTEREST THEREON, AND ANY PREMIUMS PAYABLE ON THE REDEMPTION OF ANY OF THE BONDS, ARE NOT AN INDEBTEDNESS OF THE COUNTY, THE COMMUNITY FACILITIES DISTRICT, THE STATE OF CALIFORNIA (THE "STATE") OR ANY OF ITS POLITICAL SUBDIVISIONS WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY LIMITATION OR RESTRICTION, AND NEITHER THE COUNTY, THE COMMUNITY FACILITIES DISTRICT (EXCEPT TO THE LIMITED EXTENT DESCRIBED IN THIS OFFICIAL STATEMENT), THE STATE NOR ANY OF ITS POLITICAL SUBDIVISIONS IS LIABLE ON THE BONDS. NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE COUNTY, THE COMMUNITY FACILITIES DISTRICT (EXCEPT TO THE LIMITED EXTENT DESCRIBED IN THIS OFFICIAL STATEMENT) OR THE STATE OR ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE BONDS. OTHER THAN THE SPECIAL TAXES, NO TAXES ARE PLEDGED TO THE PAYMENT OF THE BONDS. THE BONDS ARE NOT A GENERAL OBLIGATION OF THE COMMUNITY FACILITIES DISTRICT, BUT ARE LIMITED OBLIGATIONS OF THE COMMUNITY FACILITIES DISTRICT PAYABLE SOLELY FROM THE SPECIAL TAXES AS MORE FULLY DESCRIBED IN THIS OFFICIAL STATEMENT. MATURITY SCHEDULE (see Inside cover) This cover page contains certain information for quick reference only. It is not a summary of the issue. Potential investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision. Investment in the Bonds involves risks which may not be appropriate for some investors. See "BONDOWNERS' RISKS" for a discussion of special risk factors that should be considered in evaluating the investment quality of the Bonds. The Bonds are offered when, as and if issued and accepted by the Underwriter, subject to approval as to their legality by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Bond Counsel, and subject to certain other conditions. Jones Hall, A Professional Law Corporation, San Francisco, California will pass upon certain legal matters for the Underwriter as its counsel. Certain legal matters will be passed upon for the County and the Community Facilities District by the Office of County Counsel. It is anticipated that the Bonds, in book-entry form, will be available for delivery on or about August 18, 2005. E. J. De La Rosa & Co., Inc.

The date of this Official Statement is: August 2, 2005 MATURITY SCHEDULE

$8, 720,000 Serial Bonds (Base CUSIPt: 76911F)

Maturity Principal Interest {Segtember 1) Amount Rate Yield CUSIPt 2006 $450,000 2.950% 2.950% NH3 2007 460,000 3.000 3.200 NJ9 2008 475,000 3.200 3.500 NK6 2009 490,000 3.600 3.900 NL4 2010 505,000 3.800 4.100 NM2 2011 525,000 4.000 4.200 NNO 2012 545,000 4.125 4.300 NP5 2013 565,000 4.200 4.400 NQ3 2014 590,000 4.375 4.550 NR1 2015 615,000 4.400 4.650 NS9 2016 640,000 4.500 4.750 NT? 2017 670,000 4.625 4.850 NU4 2018 695,000 4.700 4.900 NV2 2019 730,000 4.750 4.950 NWO 2020 765,000 4.800 5.000 NX8

$4,400,000 5.000% Term Bond due September 1, 2025, Yield: 5.05% CUSIPt No. 76911 FN Y6

$5,590,000 5.000% Term Bond due September 1, 2030, Yield: 5.10% CUSIPt No. 76911FN Z3

$7,110,000 5.100% Term Bond due September 1, 2035, Yield: 5.15% CUSIPt No. 76911FP A6

t Copyright 2005, 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 Community Facilities District, the County nor the Underwriter assumes any responsibility for the accuracy of these CUSiP data. GENERAL INFORMATION ABOUT THIS OFFICIAL STATEMENT

No Offering May Be Made Except by this Official Statement. No dealer, broker, salesperson or other person has been authorized to give any information or to make any representations with respect to the Bonds other than as contained in this Official Statement, and if given or made, such other information or representation must not be relied upon as ha•ling been authorized.

No Unlawful Off.,rs or Solicitations. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy n any state in which such offer or solicitation is not authorized or in which the person making such offer or solicitatior is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation.

Effective Date. ''his Official Statement speaks only as of its date, and the information and expressions of opinion contained in this Official Statement are subject to change without notice. Neither the delivery of this Official Statement nor an I sale of the Bonds will, under any circumstances, create any implication that there has been no change in the affairs of the County, the Community Facilities District, any other parties described in this Official Statement, or in :he condition of property within the Community Facilities District since the date of this Official Statement.

Use of this 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 a contract with the purchasers of the Bonds.

Preparation of tUs Official Statement. The information contained in this Official Statement has been obtained from sources that 3re believed to be reliable, but this information is not guaranteed as to accuracy or completeness.

The Underwriter has provided the following sentence for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal ,ecurities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarante-a the accuracy or completeness of such information.

Document ReferHnces and Summaries. All references to and summaries of the Indenture or other documents contained in this )fficial Statement are subject to the provisions of those documents and do not purport to be complete statements of those documents.

Stabilization of and Changes to Offering Prices. The Underwriter may overallot or take other steps that stabilize or maintain the mz rket price of the Bonds at a level above that which might otherwise prevail in the open market. If commenced, the L nderwriter may discontinue such market stabilization at any time. The Underwriter may offer and sell the Bonds to certain dealers, dealer banks and banks acting as agent at prices lower than the public offering prices stated on the cover page of this Official Statement, and those public offering prices may be changed from time to time by the Underwriter.

Bonds are Exem{Jt from Securities Laws Registration. The issuance and sale of the Bonds have not been registered under tt'·e Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, in reliance upon exemptions for the issuance and sale of municipal securities provided under Section 3(a)(2) of the Securities Act of Hl33 and Section 3(a)(12) of the Securities Exchange Act of 1934.

Estimates and Projections. Certain statements included or incorporated by reference in this Official Statement constitute "forward-looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995, Secticn 21E of the Unit<'" "tates Securities Exchange Act of 1"" '. as amended, and Section 27A of the United States Securities Act of 1933, as amended. Such statements are generally identifiable by the terminology used s Jch as "plan," "expect," "estimate," "budget" or other similar words.

THE ACHIEVEMEMT OF CERTAIN RESULTS OR OTHER EXPECTATIONS CONTAINED IN SUCH FORWARD­ LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS DESCRIBED TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE COMMUNITY FACILITIES DISTRICT DOES ~OT PLAN TO ISSUE ANY UPDATES OR REVISIONS TO THOSE FORWARD-LOOKING STATEMENTS IF OR WHEN ITS EXPECTATIONS, OR EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH SUCH STATEMENTS ARE BASED OCCUR. COUNTY OF RIVERSIDE

BOARD OF SUPERVISORS

Marion Ashley, Chairman, District 5 Bob Buster, Vice Chairman, District 1 John F. Tavaglione, Member, District 2 Jeff Stone, Member, District 3 Roy Wilson, Member, District 4

COUNTY STAFF

Larry Parrish, County Executive Officer Paul McDonnell, Treasurer & T~v Co!!<>rtnc Robert Byrd, Auditor-Controller William C. Katzenstein, County Counsel

BOND COUNSEL

Stradling Yocca Carlson & Rauth, a Professional Corporation Newport Beach, California

UNDERWRITER'S COUNSEL

Jones Hall, A Professional Law Corporation San Francisco, California

FINANCIAL ADVISOR

Fieldman, Rolapp & Associates Irvine, California

APPRAISER

Stephen G. White, MAI Fullerton, California

MARKET ABSORPTION CONSULTANT

En1pirc Econon1ics, Inc Capistrano Beach, California

SPECIAL TAX CONSUL TANT and CFD ADMINISTRATOR

Albert A. Webb Associates Riverside, California

TRUSTEE

The Bank of New York Trust Company, N.A. Los Angeles, California TABLE OF CONTENTS

Page Page INTRODUCTION 1 PROPERTY OWNERSHIP AND PROPOSED FINANCING PLA\I 5 DEVELOPMENT 35 Estimated Sources and Uses of Funds 5 Property Ownership 35 Facilities to be Financed with Proceeds of LHC Entities 35 the Bonds 6 Lake Hills-Riverside 39 Funding and Acquisition Agreement 6 Environmental Conditions 40 Water District JCFA 7 Proposed Development 42 Flood Control Di ,trict JCFA 7 BOND OWNERS' RISKS 46 THE BONDS 8 Limited Obligation of the Community Facilities General Bond Tnrms 8 District to Pay Debt Service 46 Authority for lssL ance 9 Levy and Collection of the Special Tax 46 Debt Service Schedule 11 Payment of Special Tax is not a Personal Redemption 12 Obligation of the Property Owner 47 Issuance of Parity Bonds for Refunding Only 15 Appraised Values 47 SECURITY FOR THE BONDS 16 Property Values and Property Development 48 Pledge of Net Taxes 16 Concentration of Property Ownership 50 Special Taxes 17 Other Possible Claims Upon the Value of Rate and Method 17 Taxable Property 50 Covenant to Fomclose 22 Exempt Properties 51 Special Tax Fund 23 Depletion of Reserve Account 51 Redemption Acc)unt of the Special Tax Fund 25 Bankruptcy and Foreclosure Delays 52 Reserve Accoun: of the Special Tax Fund 26 Disclosure to Future Purchasers 54 Earnings Fund 26 No Acceleration Provisions 55 THE COMMUNITv' FACILITIES DISTRICT 28 Loss of Tax Exemption 55 General 28 Voter Initiatives 55 Estimated Maximum Special Tax Proceeds LEGAL MATTERS 56 and Debt Service Coverage 28 Legal Opinions 56 Market Absorptic n Study 30 Tax Exemption 56 Appraised Property Value 30 No Litigation 58 Appraised Value to Burden Ratio 32 CONTINUING DISCLOSURE 58 Direct and Overlapping Governmental NO RATINGS 59 Obligations 33 UNDERWRITING 59 Estimated Tax B Jrden on Single Family PROFESSIONAL FEES 60 Home 34

APPENDIX A General Information About Riverside County APPENDIX B Rate and Method of Apportionment of Special Tax for Community Facilities District No. 04-2 (Lake Hills Crest) of the County of Riverside APPENDIXC Summary Appraisal Report APPENDIX D - Market Absorption Study Summary and Conclusions APPENDIX E - Summary of Bond Indenture APPENDIX F OTC and the Book-Entry Only System APPENDIX G Form of Issuer Continuing Disclosure Certificate APPENDIX H Form of Property Owner Disclosure Certificate APPENDIX I Form of Opinion of Bond Counsel APPENDIX J Community Facilities District Boundary Map [THIS PAGE INTENTIONALLY LEFf BLANK] OFFICIAL STATEMENT

$25,820,000 COMMUNITY FACILITIES DISTRICT NO. 04-2 (LAKE HILLS CREST) OF THE COUNTY OF RIVERSIDE SPECIAL TAX BONDS, SERIES 2005

INTRODUCTION

This Official Statement, including the cover page and attached appendices, is provided to furnish inform 3tion regarding the bonds captioned above (the "Bonds") to be issued by Community Facilities District No. 04-2 (Lake Hills Crest) of the County of Riverside (the "Community Facilities District").

This introc'uction 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 S•atement, 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.

Capitalize :I terms used but not defined in this Official Statement have the definitions given in the lnden'ure (as defined below).

The County. The County of Riverside (the "County") is located in southeastern California and en,;ompasses 7, 177 square miles. The County is bordered on the north by San Bernardino County, on the east by the State of Arizona, on the South by San Diego and Imperial Counties and on the west by Orange and San Bernardino Counties. See "APPENDIX A" for further informatior regarding the County.

Property Ownership. The current owners of the taxable property within the Community Facilities District are the following (collectively, the "Property Owners"):

LHC Riverside Associates, LLC, a California limited liability company ("LHC Riverside Associates"), and Riverside LHC, Ltd., a Florida limited partnership ("RiversidE· LHC"), as tenants in common (collectively, the "LHC Entities"), and

Lake Hills-Riverside, L.P., a California limited partnership {"Lake Hills- Riverside",.

Lake Hills-Riverside is currently under contract to acquire all of the LHC Entities' property in the Community Facilities District, and currently intends to develop 512 detached single-family homes within the Community Facilities District (however, it is possible that Lake Hills-Riverside will sell one residential neighborhood of 98 lots to another merchant builder for home constructior and sales).

Lake Hills·Riverside has engaged Lake Hills, LLC, a Delaware limited liability company, to act as develo~ er (the "Builder") in connection with the construction of single-family homes

1 within the Community Facilities District, and Lake Hills, LLC, has engaged Brehm Communities, a California corporation, to act as general contractor ("Brehm Communities" or the "Project Manager") in connection with the construction of single-family homes and public improvements within the Community Facilities District.

For detailed information about the Property Owners, current land uses and proposed development plans for the property in the Community Facilities District, see "PROPERTY OWNERSHIP AND PROPOSED DEVELOPMENT."

The Community Facilities District. The Community Facilities District was formed and established by the County on January 11, 2005, under the Mello-Roos Community Facilities Act of 1982, as amended (the "Act"), following a public hearing conducted by the Board of Supervisors of the County (the "Board"); on the same date a landowner election was held at which the qualified electors of the Community Facilities District authorized the Community Facilities District to incur bonded indebtedness and approved the levy of special taxes. See 'THE BONDS -Authority for Issuance."

Authority for Issuance of the Bonds. The Bonds will be issued under the Act, certain resolutions adopted by the Board, acting as legislative body of the Community Facilities District (the "Legislative Body"), and a Bond Indenture, dated as of August 1, 2005 (the "Indenture"), by and between the Community Facilities District and The Bank of New York Trust Company, N.A .. as trustee (the "Trustee"). See "THE BONDS - Authority for Issuance."

Purpose of the Bonds. Proceeds of the Bonds will be used primarily to finance the acquisition and construction of the following public improvements (collectively, the "Public Facilities"):

(i) certain road and appurtenant drainage facilities and related grading required as a condition for the development of the property in the Community Facilities District, which will be owned by the County,

(ii) certain water and sewer facilities and related grading required as a condition of development of the property in the Community Facilities District, which will be owned by Western Municipal Water District of Riverside County ("Western Municipal Water District"), and

(iii) certain flood control and storm water drainage facilities and related grading required as a condition for the development of the property in the Community Facilities District, which will be owned by Riverside County Flood Control and Water Conservation District ("Riverside County Flood Control").

Bond proceeds will also fund a reserve fund for the Bonds, fund capitalized interest on the Bonds through September 1, 2005, pay certain administrative expenses of the Community Facilities District, and pay the costs of issuing the Bonds. See "FINANCING PLAN."

The Public Facilities will be constructed in accordance with the following agreements:

an agreement entitled "Infrastructure Funding and Acquisition Agreement" dated as of June 1, 2005 (the "Funding and Acquisition Agreement"), by and among the Community Facilities District, the County, Riverside LHC, LHC Riverside Associates, Lake Hills-Riverside, the Builder and the Project Manager,

2 an agreement entitled "Joint Community Facilities Agreement," dated as of November 1, 2004 (the "Water District JCFA"), by and among the County, Western Municipal Water District, Riverside LHC, LHC Riverside Associates, Lake Hills­ Riverside. the Builder and the Project Manager, and

• an agreement entitled "Joint Community Facilities Agreement," dated as of June 1, 2004 (the "Flood Control District JCFA"), by and among the County, Riverside County Flood Control, Riverside LHC, LHC Riverside Associates, Lake Hills-Riverside, the Build,,r and the Project Manager.

See "FIN,~NCING PLAN - Facilities to be Financed with the Proceeds of the Bonds."

Security and Sources of Payment for the Bonds. The Bonds will be secured by and payable from a pledge of the net proceeds of the Special Taxes (as defined in the Indenture) levied on the prc,perty in the Community Facilities District (the "Net Taxes") in accordance with the Rate and Method of Apportionment of Special Tax for Community Facilities District No. 04-2 (Lake Hills Crest) of the County of Riverside (the "Rate and Method"). The Bonds will be secured by a pledge of the Net Taxes and other amounts in the Special Tax Fund (exclusive of the Administrative Expense Account). See "SECURITY FOR THE BONDS."

The Corr munity Facilities District will covenant in the Indenture to cause foreclosure proceedings to t,e commenced and prosecuted against parcels with delinquent installments of the Special Tax under certain circumstances. For a more detailed description of the foreclosure covenant see "SECURITY FOR THE BONDS - Covenant to Foreclose."

Appraise•/. An appraisal of the property within the Community Facilities District dated May 12, 2005 (the "Appraisal"), was prepared by Stephen G. White, MAI of Fullerton, California (the "Appraiser") in connection with the issuance of the Bonds. The purpose of the appraisal was to ascertain the market value of the fee simple estate for the taxable property in the Community Faci ities District as of a May 1, 2005, date of value. Subject to the assumptions contained in the Appraisal, the Appraiser estimated that the fee simple interest in the property within the Comrr unity Facilities District, subject to the lien of the Special Taxes, and assuming the completion cf the Public Facilities to be financed with the proceeds of the Bonds, had an estimated aggreuate value of $109,700,000. See "THE COMMUNITY FACILITIES DISTRICT - Appraised Prop ~rty Value" and "APPENDIX C Summary Appraisal Report" for further information on th,, Appraisal.

Market Absorption Study. Empire Economics, Inc., of Capistrano Beach, California (the "Market Ab:mrption Consultant"), prepared a Market Absorption Study dated March 11, 2005, (the "MarKet Absorptic:i Study"), to provide an estimate of the probable absorption schedules for thn forthcoming single-family residential developments proposed for the property in the Community Facilities District. Subject to the assumptions contained in the Market Absorption Stud•1, the Market Absorption Consultant estimated that the proposed 512 single­ family homes will be fully absorbed by the end of 2010. See "THE COMMUNITY FACILITIES DISTRICT - Market Absorption Study" and "APPENDIX D Market Absorption Study Summary and Conclusions' for further information on the Market Absorption Study.

3 Risk Factors Associated with Purchasing the Bonds. Investment in the Bonds involves risks that may not be appropriate for some investors. See "BOND OWNERS' RISKS" for a discussion of certain risk factors which should be considered, in addition to the other matters set forth in this Official Statement, in considering the investment quality of the Bonds.

Professionals Involved in the Offering. The following professionals are participating in this financing:

• The Bank of New York Trust Company, N.A., Los Angeles, California, will serve as the trustee, paying agent, registrar, authentication and transfer agent for the Bonds and will perform the functions required of it under the Indenture, and as dissemination agent for the Community Facilities District under the Issuer Continuing Disclosure Certificate described below.

Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California is serving as Bond Counsel to the Community Facilities District.

Jones Hall, A Professional Law Corporation, San Francisco, California, is serving as Underwriter's counsel.

Fieldman, Rolapp & Associates, Irvine, California, is serving as financial advisor to the County.

Stephen G. White, MAI, of Fullerton, California, prepared the Appraisal.

Empire Economics, Inc., of Capistrano Beach, California, prepared the Market Absorption Study.

Albert A. Webb Associates, of Riverside, California, acted as special tax consultant to the Community Facilities District and will act as administrator to the Community Facilities District.

4 FINANCING PLAN

Estimated Sources and Uses of Funds

The proceeds from the sale of the Bonds will be deposited into the following funds established by thE· Community Facilities District under the Indenture:

SOURCES Principal Amount of Bonds $25,820,000.00 Less: Original !ssue Discount (288,778.65) Less: Underwriter's Discount (412,861.80) Total Sources $25. 118,359.55

USES Deposit into Ccsts of Issuance Account of the Improvement Fund [1] $569,739.90 Deposit into Reserve Account of the Special Tax Fund [2] 1,675, 146.26 Deposit into Project Account of the Improvement Fund [3] 22,809,232.00 Deposit into Capitalized Interest Subaccount [4] 44,241.39 Deposit into Administrative Expense Account [5] 20 000.00 Total Uses $25, 118,359.55

[1] Includes, among other things, the acceptance and initial annual fees and expenses of the Trustee, leg al fees and expenses, costs of printing the Bonds and the preliminary and final official stalements for the Bonds, fees of financial consultants and all other related fees and expenses. [2] Equal to the Reserve Requirement with respect to the Bonds as of their date of delivery [3] Wil be used to pay the costs of the Public Facilities, as defined below. See .,_ Facilities to be Financed with Proceeds of the Bonds" below. [4] Represents interest on the Bonds through September 1, 2005, to be deposited ,n the Capitalized Interest Subaccount of the Interest Account of the Special Tax Fund. [5] Represents an amount estimated to pay Administrative Expenses from the Closing Date through the first apportionment of Special Taxes in February 2006.

5 Facilities to be Financed with Proceeds of the Bonds

Under the Resolution of Intention and the Community Facilities District Report. the Community Facilities District is authorized to finance the following Public Facilities:

Street Facilities. "Street Facilities" consist of certain road and appurtenant drainage facilities required as a condition for the development of the property in the Community Facilities District, which will be owned by the County, and may include street improvements to Lake Pointe Drive. Village Meadow Drive, Sky Ridge Drive. and Lincoln Street.

Water and Sewer Facilities. "Water and Sewer Facilities" consist of certain water and sewer facilities required as a condition of development of the property in the Community Facilities District, which will be owned by Western Municipal Water District, and may include water improvements in Lake Point Drive, Ridge Cliff, Old Lake Drive. Village Meadow Drive, Sky Ridge Drive, and Lincoln Street, a booster pump station and two reservoirs. and sewer improvements in Lake Point Drive. Village Meadow Drive, Spring Canyon Place, Sky Ridge Drive and Lincoln Street.

Flood Control Facilities. "Flood Control Facilities" consist of certain flood control and storm water drainage facilities required as a condition for the development of the property in the Community Facilities District, which will be owned by Riverside County Flood Control, and may include storm drain improvements to Spring Canyon Place and Sky Ridge Court.

Estimated Facilities Costs. The Bonds are anticipated to provide the following amounts for the acquisition and construction of the Public Facilities:

Street Facilities $7,342,964 Water and Sewer Facilities 10,575.633 Flood Control Facilities 904,710 Related Grading 3,985.925 Total: $22,809,232

See"- Estimated Sources and Uses of Funds" above.

Funding and Acquisition Agreement

The Funding and Acquisition Agreement provides that the Street Facilities will be constructed by Lake Hills-Riverside, Lake Hills, LLC, and Brehm Communities (collectively, the "Constructing Owner"), and sets forth, among other matters, those conditions under which the Street Facilities and related grading are to be constructed if the Constructing Owner is to be eligible to receive reimbursement for the costs of designing, engineering, and constructing the Street Facilities from the proceeds of the Bonds, and the "Purchase Price" (as defined in the Funding and Acquisition Agreement) for those Street Facilities ultimately acquired by the County.

Under the Funding and Acquisition Agreement, the Purchase Price (or the installments thereof) for each Street Facility and related grading is to be paid solely from the amounts in the Improvement Fund established under the Indenture, and the Community Facilities District is not

6 obligated to pay the Purchase Price for any Street Facilities except from the amounts in the Improvement Fund.

If the amounts deposited in the Improvement Fund, and any investment earnings thereon, are not sufficient to pay the purchase price of a Public Facility, including a Street Facility, the Cons:ructing Owner will be paid only those amounts remaining in the Improvement Fund toward the Purchase Price of the Public Facility, including a Street Facility. No priority is ascribed in the Funding and Acquisition Agreement or the Indenture to the funding of a particular Public Facility or type of Public Facility. Once the amounts deposited to the Improvement Funj, and any investment earnings thereon, are expended, the completion of any unfunded Public Facility will be the sole obligation of the Constructing Owner.

Notwithstanding any other provision of the Funding and Acquisition Agreement, the fact that there may net be sufficient funds available in the Improvement Fund to pay the Purchase Price for one or rrore Public Facilities, including the Street Facilities, will not relieve the Property Owners or the Constructing Owner from any of their obligations pursuant to the conditions of approval for Tract Nos. 28815 and 28816 to construct the Public Facilities, including the Street Facilities.

This section contains only a brief summary of the Funding and Acquisition Agreement. Potential purchas,irs of the Bonds are encouraged to review the entire Funding and Acquisition Agreement, which is available from the Special District Administrator of the County Executive Office.

Water District JCFA

The Water District JCFA sets forth conditions and procedures for the payment of the Water and Sewer Facilities costs with a portion of the proceeds of the Bonds. The Water District JCFA provides that Lake Hills-Riverside, the Builder and the Project Manager will remain obligated to construct the Water and Sewer Facilities and will remain responsible for any Water and Sewer Facilitins costs not paid with the proceeds of the Bonds.

The Water District JCFA also sets forth procedures and requirements for the design, construction, and dedication to Western Municipal Water District of the Water and Sewer Facilities.

Flood Control Dii,trict JCFA

The Flood Control District JCFA sets forth conditions and procedures for the payment of the Flood Contro Facilities costs with a portion of the proceeds of the Bonds. The Flood Control District JCFA provides that Lake Hills-Riverside, the Builder and the Project Manager will remain obligat,d to construct the Flood Control Facilities and will remain responsible for any Flood Control Facilities costs not paid with the proceeds of the Bonds.

The Flood Control District JCFA also sets forth procedures and requirements for the design, constructiJn, and dedication to Riverside County Flood Control of the Flood Control. Facilities.

7 THE BONDS

General Bond Terms

Dated Date, Maturity and Authorized Denominations. The Bonds will be dated their date of delivery and will mature in the amounts and on the dates set forth on the inside cover page of this Official Statement. The Bonds will be issued in fully registered form in denominations of $5,000 each or any integral multiple of $5,000.

Interest. The Bonds will bear interest at the annual rates set forth on the inside cover page of this Official Statement, payable semiannually on each March 1 and September 1, commencing March 1, 2006 (each, an "Interest Payment Date"). Interest will be calculated on the basis of a 360-day year composed of twelve 30-day months.

Payments of Interest and Principal. The Bonds are payable both as to principal and interest, and as to any premiums upon the redemption thereof, in lawful money of the United States of America. The principal of the Bonds and any premiums due upon the redemption thereof are payable upon presentation and surrender thereof at the Principal Office of the Trustee, or at the designated office of any successor Trustee.

Interest on any Bond is payable from the Interest Payment Date next preceding the date of its authentication unless (i) such date of authentication is an Interest Payment Date, in which event interest will be payable from such date of authentication; (ii) the date of authentication is after a Record Date but prior to the immediately succeeding Interest Payment Date, in which event interest will be payable from the Interest Payment Date immediately succeeding the date of authentication; or (iii) the date of authentication is prior to the close of business on the first Record Date occurring after the issuance of such Bond, in which event interest will be payable from the dated date of such Bond.

However, if at the time of authentication of such Bond interest is in default, interest on that Bond will be payable from the last Interest Payment Date to which the interest has been paid or made available for payment or, if no interest has been paid or made available for payment on that Bond, interest on that Bond will be payable from its dated date.

Interest on any Bond will be paid to the person whose name appears in the Bond Register as the Owner of such Bond as of the close of business on the Record Date. Such interest will be paid by check of the Trustee mailed on the applicable Interest Payment Date by first class mail, postage prepaid, to such Bondowner at his or her address as it appears on the Bond Register. In addition, upon a request in writing received by the Trustee on or before the applicable Record Date from an Owner of $1,000,000 or more in principal amount of the Bonds, payment will be made on the Interest Payment Date by wire transfer in immediately available funds to an account designated in writing by such Owner on or before the applicable Record Date.

However, for so long as the Bonds are registered in the name of Cede & Co. (DTC's partnership nominee), all payments of interest, principal and premium will be made to Cede & Co.

OTC and Book-Entry Only System. DTC will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities registered initially in the name of

8 Cede & Co. (DTC's partnership nominee). See "APPENDIX F - OTC and the Book-Entry Only System."

Authority for Is ,uance

Commu,1ity Facilities District Proceedings. The Bonds will be issued under the Act and the lndentu1·e. In addition, as required by the Act, the Board (acting in its own capacity and as the Legislat ve Body) has taken the following actions with respect to establishing the Community Faci ities District and authorizing issuance of the Bonds:

fiesolutions of Intention: On September 14, 2004, the Board adopted Resolution No. 04-427 stating its intention to establish the Community Facilities District and to authorize the levy of a special tax therein. On the same day the Board adopted Resolution No. 04-428 declaring its intention to incur bonded indebtedness in an amount not to exceed $32,500,000 within the Community Facilities District.

Resolution of Formation: Immediately following a noticed public hearing on January 11, 2005, the Board adopted Resolution No. 2005-03 (the "Resolution of Formation"), which established the Community Facilities District and authorized the levy of a special tax within the Community Facilities District, and called a special election by the quali1ied electors of the Community Facilities District.

Resolution of Necessity: On January 11, 2005, the Legislative Body adopted Resolution No. CFO 2005-01 declaring the necessity to incur bonded indebtedness in an aggregate amount not to exceed $32,500,000 within the Community Facilities District and submitting that proposition to the qualified electors of the Community Facilities District.

Landowner Election and Declaration of Results: On January 11, 2005, a special landowner election was held within the Community Facilities District in which the qualified electors approved a ballot proposition authorizing the issuance of up to

$32,500, 1 )00 in bonds to finance the acquisition and construction of the Public Facilities and the levy of the Special Taxes within the Community Facilities District. On January 11, 2005, the Legislative Body adopted Resolution No. CFD 2005-02, under which the Legislative Body approved the canvass of the votes.

N:;tice of Special Tax Lien: A Notice of Special Tax Lien was recorded in the real property records of Riverside County on January 25, 2005.

Ordinance Levying Special Taxes: The Board held the first reading of Ordinance No. 834 evying the Special Tax within the Community Facilities District on January 11, 2005, and held the second reading of the ordinance on January 25, 2005.

R,solution Authorizing Issuance of the Bonds: On June 28, 2005, the Legislative Body adopted Resolution No. CFD 2005-06 approving issuance of the Bonds for the Commun ty Facilities District in an amount not to exceed $27,425,000.

County Goals and Policies. The County has adopted Policy Number B-12, entitled "Local Goals and Policies for Land Secured Financing Districts," as amended (the "Goals and Policies").

9 The Goals and Policies generally establish goals and policies for the County's use of community facilities districts and assessment districts, and set forth four categories of community facilities districts, including "Traditional Community Facilities Districts" such as the Community Facilities District. The Goals and Policies establish an order of priority for financing by Traditional Community Facilities Districts and certain credit quality requirements for bonds issued by Traditional Community Facilities Districts, namely a 4:1 property value to public debt ratio (public debt is defined as community facilities district bonds and other bonds secured by special taxes or special assessments). Property value may be based on an appraisal or on assessed values.

The Goals and Policies also require that the total tax burden (that is, the anticipated maximum annual Traditional Community Facilities District special tax, together with ad valorem property taxes, special assessments, special taxes for any overlapping community facilities district, and any other taxes, fees and charges payable from and secured by the property) on any residential owner-occupied parcel in a Traditional Community Facilities District may not exceed 2% of the estimated base sales price of such parcel upon completion of the public and private improvements relating thereto.

The County may, in its discretion and to the extent permitted by law, waive any of the policies set forth in the Goals and Policies in particular cases. Exceptions to these policies will be considered that are consistent with current public financing practices when structuring bond refundings and workouts, when considering unique bond structures (such as escrowed bond proceeds or variable rate bonds) or when additional credit enhancements (such as bond insurance or credit supports) are present.

The County has determined that the issuance of the Bonds conforms with the Goals and Policies.

10 Debt Service Schedule

The following table presents the annual debt service on the Bonds (including sinking fund redemptions), assuming there are no optional or extraordinary redemptions.

Year Ending Total September 1 Principal Interest 111 Debt Service 2006 $450,000 $1,269,387.65 $1,719,387.65 2007 460,000 1,211,871.26 1,671,871.26 2008 475,000 1, 198,071.26 1,673,071.26 2009 490,000 1,182,871.26 1,672,871.26 2010 505,000 1, 165,231.26 1,670,231.26 2011 525,000 1,146,041.26 1,671,041.26 2012 545,000 1,125,041.26 1,670,041.26 2013 565,000 1, 102,560.00 1,667,560.00 2014 590,000 1,078,830.00 1,668,830.00 2015 615,000 1,053,017.50 1,668,017.50 2016 640,000 1,025,957.50 1,665,957.50 2017 670,000 997,157.50 1,667,157.50 2018 695,000 966,170.00 1,661, 170.00 2019 730,000 933,505.00 1,663,505.00 2020 765,000 898,830.00 1,663,830.00 2021 800,000 862, 110.00 1,662, 110.00 2022 835,000 822,110.00 1,657, 110.00 2023 880,000 780,360.00 1,660,360.00 2024 920,000 736,360.00 1,656,360.00 2025 965,000 690,360.00 1,655,360.00 2026 1,015,000 642, 110.00 1,657,110.00 2027 1,065,000 591,360.00 1,656,360.00 2028 1,115,000 538, 110.00 1,653, 110.00 2029 1, 170,000 482,360.00 1,652,360.00 2030 1,225,000 423,860.00 1,648,860.00 2031 1,285,000 362,610.00 1,647,610.00 2032 1,350,000 297,075.00 1,647,075.00 2033 1,420,000 228,225.00 1,648,225.00 2034 1,490,000 155,805.00 1,645,805.00 2035 1 565 000 79 815.00 1644815.00 Total: $25,820,000 $24,047,172.71 $49,867, 172. 71

[1] --he interest that will accrue through September 1, 2005, will be capitalized with the proceeds of the Bonds.

11 Redemption

Optional Redemption. The Bonds maturing on or after September 1, 2011 may be redeemed, at the option of the Community Facilities District from any source of funds on any Interest Payment Date on or after September 1, 2010, in whole, or in part from such maturities as are selected by the Community Facilities District and by lot within a maturity, at the following redemption prices expressed as a percentage of the principal amount to be redeemed, together with accrued interest to the date of redemption:

Redemption Redemption Date Price September 1, 2010 and March 1, 2011 102% September 1 , 2011 and March 1 , 2012 101% September 1, 2012 and any Interest Payment Date thereafter 100%

Mandatory Sinking Payment Redemption. The Term Bonds maturing on September 1, 2025 will be called before maturity and redeemed, from the Sinking Fund Payments that have been deposited into the Redemption Account, on September 1, 2021, and on each September 1 thereafter prior to maturity, in accordance with the schedule of Sinking Fund Payments set forth below. The Term Bonds so called for redemption will be selected by the Trustee by lot and will be redeemed at a redemption price for each redeemed Term Bond equal to the principal amount thereof, plus accrued interest to the redemption date, without premium, as follows:

Sinking Fund Redemption Date Redemption (September 1) Amount 2021 $800,000 2022 835,000 2023 880,000 2024 920,000 2025 (maturity) 965,000

The Term Bonds maturing on September 1, 2030 will be called before maturity and redeemed, from the Sinking Fund Payments that have been deposited into the Redemption Account, on September 1, 2026, and on each September 1 thereafter prior to maturity, in accordance with the schedule of Sinking Fund Payments set forth below. The Term Bonds so called for redemption will be selected by the Trustee by lot and will be redeemed at a redemption price for each redeemed Term Bond equal to the principal amount thereof, plus accrued interest to the redemption date, without premium, as follows:

Sinking Fund Redemption Date Redemption (September 1) Amount 2026 $1,015,000 2027 1,065,000 2028 1,115,000 2029 1, 170,000 2030 (maturity) 1,225,000

12 The Term Bonds maturing on September 1, 2035 will be called before maturity and redeemed, from 1he Sinking Fund Payments that have been deposited into the Redemption Account, on Sep:ember 1, 2031, and on each September 1 thereafter prior to maturity, in accordance with the schedule of Sinking Fund Payments set forth below. The Term Bonds so called for redemption will be selected by the Trustee by lot and will be redeemed at a redemption price for each redeemed Term Bond equal to the principal amount thereof, plus accrued interest le, the redemption date, without premium, as follows:

Sinking Fund Redemption Date Redemption (September 1} Amount 2031 $1,285,000 2032 1,350,000 2033 1,420,000 2034 1,490,000 2035 (maturity) 1,565,000

In the event of a partial optional redemption or extraordinary mandatory redemption of the Term Bonds, each of the remaining Sinking Fund Payments for such Term Bonds will be reduced, as nearly as practicable, on a pro rata basis, in integral multiples of $5,000.

Extraordinary Redemption from Special Tax Prepayments. The Bonds are subject to extraordinary redemption as a whole, or in part on a pro rata basis among maturities, on any Interest Payment Date, and will be redeemed by the Trustee, from Prepayments deposited to the Redemption Account under the Indenture, plus amounts transferred from the Reserve Account under the Indenture, at the following redemption prices, expressed as a percentage of the principal amoL nt to be redeemed, together with accrued interest to the redemption date:

Redemption Redemption Date Price Any Interest Payment Date prior to September 1, 2010 103% September 1 , 2010 and March 1 , 2011 102% September 1, 2011 and March 1, 2012 101% September 1, 2012 and any Interest Payment Date thereafter 100%

Extraordinary Redemption from Project Account Transfer. The Term Bonds maturing on September 1, 2035, are subject to extraordinary redemption, as a whole or in part, on any Interest Payment Date, from amounts transferred from the Project Account of the Improvement Fund in accordance with the Indenture.

The Indenture provides in part that upon receipt of a Certificate of the Administrator of the Community Facilities District stating that all or a specified portion of the amount remaining in the Improvement =und is no longer needed to pay "Project Costs" (as defined in the Indenture), the Trustee will transfer all or such specified portion, as applicable, of the moneys remaining on deposit in the Improvement Fund (plus amounts, if any, in the Reserve Account in excess of the Reserve Requirement) to the Principal Account or Redemption Account of the Special Tax Fund or to the Surplus Fund, as directed in the Certificate. Amounts transferred to the Redemption Account of the Special Tax Fund will be used to redeem Term Bonds in accordance with the Indenture.

13 The Term Bonds so called for redemption will be selected by the Trustee by lot and will be redeemed at a redemption price for each redeemed Term Bond equal to the principal amount thereof, plus accrued interest to the redemption date, without premium.

Selection of Bonds for Redemption. If less than all of the Bonds Outstanding are to be redeemed, the portion of any Bond of a denomination of more than $5,000 to be redeemed will be in the principal amount of $5,000 or an integral multiple of $5,000.

In selecting portions of such Bonds for redemption, the Trustee will treat such Bonds as representing that number of Bonds of $5,000 denominations which is obtained by dividing the principal amount of such Bonds to be redeemed in part by $5,000.

Notice of Redemption. When Bonds are due for redemption as described above, the Trustee will give notice, in the name of the Community Facilities District, of the redemption of such Bonds.

On the date fixed for redemption, there will become due and payable on each Bond or portion thereof called for redemption, the principal thereof, together with any premium, and interest accrued to the redemption date, and from and after the redemption date, interest thereon will cease to accrue and be payable.

At least 30 days but no more than 45 days prior to the redemption date, the Trustee will mail a copy of such notice, by first class mail, postage prepaid, to the respective Owners thereof at their addresses appearing on the Bond Register, and to the original purchaser of the Bonds.

Any notice of optional redemption of Bonds may state that such redemption is conditional upon the receipt by the Trustee on or prior to the date fixed for such redemption of moneys sufficient to pay the principal of, premium, if any, and interest on such Bonds to be redeemed and that, if such moneys are not so received, said notice will be of no force and effect and the Trustee will not be required to redeem such Bonds. If a redemption notice contains such a condition and such moneys are not so received, the redemption will not be made, and the Trustee will within a reasonable time thereafter give notice, in the manner in which the notice of redemption was given, that such moneys were not so received.

The actual receipt by the Owner of any Bond or the original purchaser of any Bond of notice of such redemption will not be a condition precedent to redemption, and neither the failure to receive nor any defect in such notice will affect the validity of the proceedings for the redemption of such Bonds, or the cessation of interest on the redemption date. A certificate by the Trustee that notice of such redemption has been given as herein provided shall be conclusive as against all parties and the Owner shall not be entitled to show that he or she failed to receive notice of such redemption.

In addition to the foregoing notice, further notice will be given by the Trustee as set out below, but no defect in this further notice nor any failure to give all or any portion of this further notice will in any manner defeat the effectiveness of a call for redemption if notice thereof is given as described above.

Each further notice of redemption will be sent not later than the date that notice of redemption is mailed to the Bondowners as described above by registered or certified mail or overnight delivery service or by such other means acceptable to such agencies to OTC and to any other registered securities depositories then in the business of holding substantial amounts

14 of obligations of types comprising the Bonds as determined by the Trustee and to one or more of the national information services that the Trustee determines are in the business of disseminating nc,tice of redemption of obligations such as the Bonds.

However, for so long as the Bonds are registered in the name of Cede & Co. (DTC's partnership nominee), all redemption notices to Bondowners will be sent only to OTC or Cede & Co., and it is th,, responsibility of OTC or Cede & Co. to send those notices to the beneficial owners of the Bc,nds. See "- General Bond Terms - OTC and Book-Entry Only System" above.

Effect of Notice and Availability of Redemption Money. If notice of redemption is duly given as described above, and the amount necessary for the redemption has been made available for that purpose and is available therefor on the date fixed for such redemption, the following will ap~ly:

(c1) the Bonds or portions thereof designated for redemption will, on the date fixed for redemption, become due and payable at the redemption price thereof as provided in the lnderture, anything in the Indenture to the contrary notwithstanding;

(t,) upon presentation and surrender thereof at the office of the Trustee, the redemption price of such Bonds will be paid to the Owners thereof;

(c) as of the redemption date the Bonds or portions thereof so designated for redempti Jn will be deemed to be no longer Outstanding and such Bonds or portions thereof will cease to bear further interest; and

(c) as of the date fixed for redemption, no Owner of any of the Bonds or portions thereof i;o designated for redemption will be entitled to any of the benefits of the lndenturE,, or to any other rights, except with respect to payment of the redemption price and interns! accrued to the redemption date from the amounts so made available.

Issuance of Parity Bonds for Refunding Only

The Corr munity Facilities District may at any time after the issuance and delivery of the Bonds issue Parity Bonds payable from the Net Taxes and other amounts deposited in the Special Tax Fund (other than in the Administrative Expense Account therein) and secured by a lien and charge upon such amounts equal to the lien and charge securing the Outstanding Bonds (and ani1 other Parity Bonds theretofore issued under the Indenture or under any Supplemental Indenture), but only for the purpose of refunding all or a portion of the Bonds or any Parity Bonds then Outstanding. The Community Facilities District may not issue Parity Bonds for the pu1·poses of funding additional Project Costs.

Parity Bonds issued to effect a partial refunding may be issued subject to the additional specific conditions set forth in the Indenture. See "APPENDIX E - Summary of Bond Indenture."

15 SECURITY FOR THE BONDS

Pledge of Net Taxes

General. The payment of the principal of, and interest and any premium on, the Bonds will be secured by a pledge of the Net Taxes and other amounts in the Special Tax Fund ( exclusive of the Administrative Expense Account).

Amounts in the Costs of Issuance Fund and the Improvement Fund are not pledged to the repayment of the Bonds. The Public Facilities to be financed with the proceeds of the Bonds are not in any way pledged to pay the debt service on the Bonds.

Net Taxes. The Indenture defines "Net Taxes" as "Gross Taxes" (the amount of all Special Taxes received by the District, together with the proceeds collected from the sale of property under the foreclosure provisions of the Indenture for the delinquency of such Special Taxes remaining after the payment of all costs related to such foreclosure actions or any settlement thereof), minus amounts set aside to pay Administrative Expenses. See " Special Tax Fund Administrative Expense Account" below.

The Indenture defines "Special Taxes" as the taxes authorized to be levied by the Community Facilities District on property within the Community Facilities District in accordance with the Ordinance, the Resolution of Formation, the Act and the voter approval obtained at the January 11, 2005 election in the Community Facilities District, including any scheduled payments and any Prepayments thereof, the net proceeds of the redemption or sale of property sold as a result of foreclosure of the lien of the Special Taxes to the amount of that lien, and penalties and interest thereon.

Limited Obligation. Neither the faith and credit nor the taxing power of the County, the State of California, or any political subdivision thereof other than the Community Facilities District is pledged to the payment of the Bonds. Except for the Special Taxes, no other taxes are pledged to the payment of the Bonds.

The Bonds are not general or special obligations of the County nor general obligations of the Community Facilities District, but are limited obligations of the Community Facilities District payable solely from certain amounts deposited by the Community Facilities District in the Special Tax Fund (exclusive of the Administrative Expense Account). The Community Facilities District's limited obligation to pay the principal of, premium, if any, and interest on the Bonds from amounts in the Special Tax Fund (exclusive of the Administrative Expense Account) is absolute and unconditional, free of deductions and without any abatement, offset, recoupment, diminution or set-off whatsoever.

No Owner of the Bonds may compel the exercise of the taxing power by the Community Facilities District (except as pertains to the Special Taxes) or the County or the forfeiture of any of their property.

The principal of and interest on the Bonds and premiums upon the redemption thereof, if any, are not a debt of the County, the State of California or any of its political subdivisions within the meaning of any constitutional or statutory limitation or restriction. The Bonds are not a legal or equitable pledge, charge, lien, or encumbrance upon any of the Community Facilities District's property, or upon any of its income, receipts or revenues, except the Net Taxes and

16 other amounts in the Special Tax Fund (exclusive of the Administrative Expense Account) that are, under the terms of the Indenture and the Act, set aside for the payment of the Bonds and interest thereon, and neither the members of the Legislative Body or the Board, nor any persons executing the Bonds, are liable personally on the Bonds by reason of their issuance.

Special Taxes

Levy of Special Taxes to Meet Special Tax Requirement. The Legislative Body will covenant in the I 1denture to levy the Special Tax in an amount sufficient, together with other amounts on deposit in the Special Tax Fund, to pay the following amounts (together, the "Special Tax Requirement"):

(1) the principal of and interest on the Bonds when due,

(2) the Administrative Expenses, and

(3) any amounts required to replenish the Reserve Account of the Special Tax Fund to th,3 Reserve Requirement.

The Community Facilities District will further covenant that it will take no actions that would discontinu3 or cause the discontinuance of the Special Tax levy or the Community Facilities District's authority to levy the Special Tax until the earlier of Fiscal Year 2035-36 or the date on which no 13onds are Outstanding.

Manner of Collection. Under the Act, the Special Taxes are payable and will be collected in the same manner and at the same time and in the same installment as the general taxes on real proJerty, and will have the same priority, become delinquent at the same times and in the same proportionate amounts and bear the same proportionate penalties and interest after delinquency as do the general taxes on real property.

Because the Special Tax levy is limited to the maximum Special Tax rates set forth in the Rate and Method, no assurance can be given that, in the event of Special Tax delinquencies, tho receipts of Special Taxes will, in fact, be collected in sufficient amounts in any given year to ,Jay debt se,vice on the Bonds.

Rate and Method

General. The Special Tax is levied and collected according to the Rate and Method, which provides the means by which the Board may annually levy the Special Taxes within the Community Facilities District, up to the Maximum Special Tax, and to determine the amount of the Special Tax that will need to be collected each Fiscal Year from the "Taxable Property" within the Commu1ity Facilities District.

The following is a synopsis of the provisions of the Rate and Method, which should be read in conjunctic n with the complete text of the Rate and Method, including its attachments, which is attached as "APPENDIX B." The meaning of the capitalized terms used but not defined in this section are as set forth in APPENDIX B. 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 M,;thod attached as APPENDIX B.

17 Special Tax Requirement. The Rate and Method defines the "Special Tax Requirement" as that amount required in any Fiscal Year to pay the following:

(i) annual debt service on all Outstanding Bonds due in the calendar year which commences in such Fiscal Year;

(ii) periodic costs on the Bonds, including but not limited to, credit enhancement and rebate payments on the Bonds;

(iii) Administrative Expenses (as defined in the Rate and Method);

(iv) an amount equal to any anticipated shortfall due to Special Tax delinquencies in the prior Fiscal Year; and

(v) any amount required to establish or replenish any reserve funds for the Bonds, less a credit for funds available to reduce the annual Special Tax levy as determined by the Administrator.

Assignment to Land Use Category. Each Fiscal Year, commencing with the 2005-06 Fiscal Year, all Parcels of Taxable Property within the Community Facilities District will be classified as Developed Property, Approved Property, Undeveloped Property, Public Property, or Property Owner's Association Property, as described below.

"Developed Property" means all Parcels of Taxable Property: (i) 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 (ii) that have been issued a building permit prior to the April 1st preceding the Fiscal Year in which the Special Tax is being levied.

"Approved Property'' means all Parcels of Taxable Property: (i) 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 (ii) that have not been issued a building permit prior to the April 1st preceding the Fiscal Year in which the Special Tax is being levied.

"Undeveloped Property'' means all Taxable Property not classified as Developed Property, Approved Property, Public Property or Property Owner's Association Property that is not Exempt Property.

"Public Property'' means, for any Fiscal Year, any Parcel within the boundary of the Community Facilities District which, as of the January 1 preceding the Fiscal Year for which the Special Tax is being levied, is owned by, dedicated to, or irrevocably offered for dedication to the federal government, the State of California, the County, or any other public agency, provided, however, that any Parcel leased by a public agency to a private entity and subject to taxation under Section 53340.1 of the Act will be taxed and classified according to its use.

"Property Owner's Association Property'' means any Parcel which, as of the January 1 preceding the Fiscal Year for which the Special Tax is being levied, is owned by a property owner association, including any master or sub-association.

18 ";raxable Property'' means all Parcels in the Community Facilities District which are not e

"Exempt Property'' is defined as up to 628.30 Acres of Public Property and Property Owner's Association Property. Exempt Property status will be assigned by the Administrator in the chronological order in which property becomes Public Property and Property Owner's Association Property. After the limit of 628.30 Acres has been reached, the Maximum Special Tax obligation for any additional Public Property or Property Owner's Association Property will be subject to the levy of the Special Tax as provided for in the Rate and Method, to the extent permitted under the Act and applicabl ~ laws. However, if 10.11 acres are dedicated for the purpose of a school site, these 10.11 Acres will be exempt in addition to the 628.30 Acres.

Maximum Special Tax Rate. The Maximum Special Tax rate is defined in the Rate and Method as follows:

09veloped Property. Commencing Fiscal Year 2005-06, and each Fiscal Year thereafte·, the Maximum Special Tax for each Parcel of Residential Property classified as Devel,)ped Property will be the greater of (i) the applicable Assigned Special Tax set or (ii) the Backup Special Tax. Commencing Fiscal Year 2005-06, and each Fiscal Year thereafter, the Maximum Special Tax for each Parcel of Non-Residential Property classified as Developed Property will be the Assigned Special Tax.

• Assigned Annual Special Tax. The Assigned Special Tax for each Parcel of Developed Property is determined by reference to Table 1 in the Rate and Method, which is as follows:

Assigned Special Taxable Tax Per Land Use Category Unit Taxable Unit 1-~esidential Property (4,201 or more Sq.Ft.) D/U $5, 170 2-~esidential Property (4,001 to 4,200 Sq.Ft.) D/U $4,615 3-~esidential Property (3,601 to 4,000 Sq.Ft.) D/U $4.470 4-~esidential Property (3,401 to 3,600 Sq.Ft.) D/U $4,065 5-~esidential Property (3,201 to 3,400 Sq.Ft.) D/U $3,965 6-~esidential Property (3,001 to 3,200 Sq.Ft.) D/U $3,740 7-,esidential Property (2,801 to 3,000 Sq.Ft.) D/U $3,515 8-,esidential Property (2,501 to 2,800 Sq.Ft.) D/U $3,415 9- ,esidential Property (2,500 or less Sq Ft.) D/U $3,170 1C - Non-Residential Property Acre $14,445

Backup Special Tax. The Backup Special Tax for each Parcel of Residential Property created by a specific Final Map will be determined by multiplying $14,445 by the total Acreage of Taxable Property within the Final Map, excluding the Acreage associated with lots or Parcels that are or are expected to be classified as Non-Residential Property, Public Property and Property Owner's Association Property under the current land use entitlements in such Final Map, and dividing such amount by the total number of lots classified or expected to be classified as Residential Property within the specific Final Map.

19 If a single Final Map is recorded for Tract No. 28815 and a single Final Map is recorded for Tract No. 28816 at the same time, both Final Maps will be treated as a single Final Map for purposes of determining the Backup Special Tax.

Notwithstanding the foregoing, if the number of Parcels of Residential Property in a specific Final Map is subsequently changed or modified by recordation of a lot line adjustment or similar instrument, then the Backup Special Tax will be recalculated for the area that has been changed or modified using the methodology described in the preceding paragraph.

Approved Property. The Maximum Special Tax for each Parcel of Approved Property expected to be classified as Residential Property under the current land use entitlements will be the Backup Special Tax computed as set forth above. The Maximum Special Tax for each Parcel of Approved Property expected to be classified as Non-Residential Property under the current land use entitlements will be $14,445 per Acre.

Public Property and/or Property Owner's Association Property that is not Exempt Property. The Maximum Special Tax for each Parcel of Public Property or Property Owner's Association Property that is not Exempt Property will be the amount determined by multiplying the Acreage of the Parcel by $14,445 per Acre.

Undeveloped Property. The Maximum Special Tax for each Parcel of Undeveloped Property will be the amount determined by multiplying the Acreage of the Parcel by $14,445 per Acre.

Method of Apportionment. Under the Rate and Method, commencing with Fiscal Year 2005-06 and for each following Fiscal Year, the Legislative Body will determine the Special Tax Requirement and will levy the Special Tax until the amount of Special Taxes equals the Special Tax Requirement. The Special Tax will be levied each Fiscal Year as follows:

First. The Special Tax will be levied Proportionately on each Parcel of Developed Property at up to 100% of the applicable Assigned Special Tax 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 will be levied Proportionately on each Parcel of Approved Property at 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 first two steps have been completed, the Special Tax will be levied Proportionately on each Parcel of Undeveloped Property at 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 each Parcel of Developed Property whose Maximum Special Tax is derived by the application

20 of the Backup Special Tax will be increased in equal percentages from the Assigned Special Tax up to the Maximum Special Tax for each such Parcel, as needed.

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 Proportionalely on each Parcel of Public Property and/or Property Owner's Association Property that is not Exempt Property at up to 100% of the Maximum Special Tax.

Notwithstanding the above, under no circumstances will the Special Taxes levied against any Parcel of Residential Property be increased by more than 10% per Fiscal Year as a consequence of de inquency or default by the owner of any other Parcel within the Community Facilities District.

Appeals. Any owner of a Parcel claiming that the amount or application of the Special Tax levied on the "arcel is not correct and requesting a refund may file a written notice of appeal with the Administrator after the Special Tax in dispute has been paid but, not later than 12 months after th,i mailing of the property tax bill on which the Special Tax appears. The Administrator will pmmptly review the appeal, and if necessary, meet with the property owner, consider written and oral evidence regarding the amount of the Special Tax, convene the CFD special tax review board and decide the appeal. This procedure will be exclusive and its exhaustion by any property owner will be a condition precedent to any legal action by such owner.

Full Prepayment of Annual Special Taxes. The Maximum Special Tax obligation may only be prepaid an :J permanently satisfied for a Parcel of Public Property, Property Owner's Association Proper:y, Developed Property, Approved Property or Undeveloped Property for which a building pe·mit has been issued, provided that the terms set forth under the Rate and Method are satisfied, including (among others) the following conditions:

A prepayment may be made only if there are no delinquent Special Taxes with respect :o such Parcel at the time of prepayment.

No Special Tax prepayment will be allowed unless the amount of Maximum Special Taxes that may be levied on all Parcels of Taxable Property after the proposed prnpayment will be at least 1.1 times maximum annual debt service on the Bonds that will remain outstanding after the prepayment plus estimated annual Administrative Expenses.

The Prepayment Amount is generally calculated as the amount of outstanding Bonds to be redeemed with the Special Tax prepayment, plus the applicable Bond redemption premium, interest, and admini:;trative fees and expenses, and less a reserve fund credit, all as set forth in further detail in APPENDIX B.

Partial Prepayment of Annual Special Taxes. The Maximum Special Tax obligation on a Parcel of Developed Property may be partially prepaid in increments of $5,000.

The partial prepayment amount is generally calculated as the full Prepayment Amount multiplied by the percent by which the owner of the Parcels is partially prepaying the Maximum Special Tax obligation, all as set forth in further detail in APPENDIX B.

21 Duration of Special Tax Levy. Special Taxes will be levied for the period necessary to satisfy the Special Tax Requirement, but in no event may it be levied after Fiscal Year 2035-36 or the stated maturity of the Bonds, whichever is sooner.

Covenant to Foreclose

Sale of Property for Nonpayment of Taxes. The Indenture provides that the Special Tax is to be collected in the same manner as ordinary ad valorem property taxes are collected and, except as provided in the special covenant for foreclosure described below and in the Act, is to be subject to the same penalties and the same procedure, sale and lien priority in case of delinquency as is provided for ad valorem property taxes. Under these procedures, if taxes are unpaid for a period of five years or more, the property is subject to sale by the County.

Foreclosure Under the Mello-Roos Law. Under Section 53356.1 of the Act, if any delinquency occurs in the payment of the Special Tax, the Community Facilities District may order the institution of a Superior Court action to foreclose the lien therefor within specified time limits. In such an action, the real property subject to the unpaid amount may be sold at judicial foreclosure sale.

Such judicial foreclosure action is not mandatory. However, the Community Facilities District will covenant in the Indenture that, under Section 53356.1 of the Act:

• it will commence appropriate judicial foreclosure proceedings against parcels with total Special Tax delinquencies in excess of $5,500 (not including interest and penalties thereon) by the October 1 following the close of each Fiscal Year in which the last of such Special Taxes were due, and

it will commence appropriate judicial foreclosure proceedings against all parcels with delinquent Special Taxes by the October 1 following the close of each Fiscal Year in which it receives Special Taxes in an amount which is less than 95% of the total Special Taxes levied in such Fiscal Year, and

it will diligently pursue to completion such foreclosure proceedings.

However, notwithstanding the foregoing, the Community Facilities District may elect to accept payment from a property owner of at least the enrolled amount but less than the full amount of the penalties, interest, costs and attorneys' fees related to a Special Tax delinquency, if permitted by law.

Notwithstanding the foregoing, in certain instances the amount of a Special Tax delinquency on a particular parcel is so small that the cost of appropriate foreclosure proceedings will far exceed the Special Tax delinquency and in such cases foreclosure proceedings may be delayed by the Community Facilities District until there are sufficient Special Tax delinquencies accruing to such parcel (including interest and penalties thereon) to warrant the foreclosure proceedings cost.

The Community Facilities District covenants that it will deposit the net proceeds of any foreclosure in the Special Tax Fund and will apply such proceeds remaining after the payment of Administrative Expenses to make current payments of principal and interest on the Bonds, to bring the amount on deposit in the Reserve Account up to the Reserve Requirement, and to pay any delinquent installments of principal or interest due on the Bonds.

22 Sufficiencir of Foreclosure Sale Proceeds; Foreclosure Limitations and Delays. 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 rv ello-Roos Law does not require the Community Facilities 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 Mello-Roos Law requires that property sold pursuant to foreclosure under lhe Mello-Roos Law 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 Mello-Roos Law, tt1e Community Facilities District, as judgment creditor, is entitled to purchase any property sold at foreclosure using a "credit bid," where the Community Facilities 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 Community Facilities District becomes the purchaser under a credit bid, the Community Facilities 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.

Foreclosure by court action is subject to normal litigation delays, the nature and extent of which are largely d ~pendent on the nature of the defense, if any, put forth by the debtor and the Superior Court calE,ndar. In addition, the ability of the Community Facilities District to foreclose the lien of delinquent unpaid Special Taxes may be limited in certain instances and may require prior consent of thE, property owner if the property is owned by or in receivership of the Federal Deposit Insurance Corporation (the "FDIC"). See "BOND OWNERS' RISKS - Bankruptcy and Foreclosure Delays."

No Teeter Plan. Because the Community Facilities District does not participate in the "Teeter Plan" (which is the County's Alternative Method of Distribution of Tax Levies and Collections and of Tax Sale Proceeds, as provided for in Section 4701 et seq. of the California Revenue and Taxation Code), collections of Special Taxes will reflect actual delinquencies.

Special Tax Fund

Deposits. Under the Indenture, the Trustee will, on each date on which the Special Taxes are received from the Community Facilities District, deposit the Special Taxes in the Special Tax Fund to be held in trust for the Owners (except for Special Tax prepayments, which will be deposited to the Redemption Account as specified in a Certificate of the Administrator of the District).

Disbursements. The Trustee will transfer the Special Taxes on deposit in the Special Tax Fund on the daes and in the amounts described below, in the following order of priority, to:

(1) tre Administrative Expense Account of the Special Tax Fund;

(2) tr e Interest Account of the Special Tax Fund;

(3) tr e Principal Account of the Special Tax Fund;

(4) Ire Redemption Account of the Special Tax Fund;

23 (5) the Reserve Account of the Special Tax Fund;

(6) the Rebate Fund; and

(7) the Surplus Fund.

At maturity of all of the Bonds, and after all principal and interest then due on the Bonds then Outstanding has been paid or provided for and any amounts owed to the Trustee have been paid in full, moneys in the Special Tax Fund and any accounts therein may be used by the Community Facilities District for any lawful purpose.

Administrative Expense Account. The Trustee will transfer from the Special Tax Fund and deposit in the Administrative Expense Account of the Special Tax Fund from time to time amounts necessary to make timely payment of Administrative Expenses as set forth in a Certificate of the Administrator of the Community Facilities District.

Except as set forth in the following sentence, the total amount transferred in a Bond Year may not exceed the "Administrative Expenses Cap" until such time as there has been deposited to the Interest Account and the Principal Account an amount, together with any amounts already on deposit therein, that is sufficient to pay the interest and principal on all Bonds due in such Bond Year and to restore the Reserve Account to the Reserve Requirement. However, amounts in excess of the Administrative Expenses Cap may be transferred to the Administrative Expense Account to the extent necessary to collect delinquent Special Taxes.

The term "Administrative Expenses Cap" is defined in the Indenture as $40,000 per Bond Year, which will increase on July 1 of each year, commencing July 1, 2006, by 2% of the amount in effect for the prior Fiscal Year.

Interest Account and Principal Account. The principal of and interest due on the Bonds until maturity, other than principal due upon redemption, will be paid by the Trustee from the Principal Account and the Interest Account of the Special Tax Fund, respectively.

For the purpose of assuring that the payment of principal of and interest on the Bonds will be made when due, after making the transfer to the Administrative Expense Account required by the Indenture, at least one Business Day prior to each March 1 and September 1, the Trustee will make the following transfers from the Special Tax Fund first to the Interest Account and then to the Principal Account; provided, however, that to the extent that deposits have been made in the Interest Account or the Principal Account from the proceeds of the sale of the Bonds, or otherwise, the transfer from the Special Tax Fund need not be made; and provided, further, that, if amounts in the Special Tax Fund (exclusive of the Reserve Account) are inadequate to make the foregoing transfers, then any deficiency will be made up by transfers from the Reserve Account:

(a) To the Interest Account, an amount such that the balance in the Interest Account one Business Day prior to each Interest Payment Date is equal to the installment of interest due on the Bonds on that Interest Payment Date and any installment of interest due on a previous Interest Payment Date which remains unpaid. Moneys in the Interest Account will be used for the payment of interest on the Bonds as it becomes due.

24 (b) To the Principal Account, an amount such that the balance in the Principal Account one Business Day prior to September 1 of each year equals the principal payment du,, on the Bonds maturing on that September 1 and any principal payment due on a previous September 1 which remains unpaid. Moneys in the Principal Account will be usecl for the payment of the principal of such Bonds as it becomes due at maturity.

Redemption AccOL,nt of the Special Tax Fund

Sinking Fu11d Payments. With respect to each September 1 on which a Sinking Fund Payment is due, after the deposits have been made to the Administrative Expense Account, the Interest Account and the Principal Account of the Special Tax Fund as required by the Indenture, the Truslee will next transfer into the Redemption Account of the Special Tax Fund from the Special Ta, Fund the amount needed to make the balance in the Redemption Account one Business Day prior to each September 1 equal to the Sinking Fund Payment due on any Outstanding Bonds on such September 1; provided, however, that, if amounts in the Special Tax Fund are inadEquate to make these transfers, then any deficiency will be made up by an immediate transfer from the Reserve Account, if funded, pursuant to the Indenture.

Moneys so deposited in the Redemption Account will be used and applied by the Trustee to call and redeem Term Bonds in accordance with the Sinking Fund Payment schedules set forth in the Indenture.

Optional RE,demption. After making the deposits to the Administrative Expense Account, the lntere ,t Account and the Principal Account of the Special Tax Fund under the Indenture, and to the Redemption Account for Sinking Fund Payments then due as described above, and in accordance with the Community Facilities District's election to call Bonds for optional redemption under the Indenture, the Trustee will transfer from the Special Tax Fund and deposit in the F:edemption Account moneys available for the purpose and sufficient to pay the principal and the premiums, if any, payable on the Bonds called for optional redemption.

However, ar1ounts in the Special Tax Fund (other than the Administrative Expense Account therein) may be applied to optionally redeem Bonds only if immediately following such redemption the amount in the Reserve Account will equal the Reserve Requirement.

Special Tax Prepayments. Prepayments of Special Taxes deposited to the Redemption Accoun: will be applied on the redemption date established under the Indenture for the use of such Special Tax Prepayments, together with money transferred from the Reserve Account under the 11denture, to the payment of the principal of, premium, and interest on the Bonds to be redeemed with such Special Tax Prepayments.

Purchase in Lieu of Redemption. Moneys set aside in the Redemption Account will be used solely for the purpose of redeeming Bonds, and will be applied on or after the redemption date to the paymenl of principal of and premium, if any, on the Bonds to be redeemed upon presentation and surrender of such Bonds and, in the case of an optional redemption or an extraordinary redemption from Special Tax Prepayments, to pay the interest thereon.

However, in 1,eu or partially in lieu of such call and redemption, moneys deposited in the Redemption Account may be used to purchase Outstanding Bonds in the manner described below.

25 Purchases of Outstanding Bonds may be made by the Community Facilities District at public or private sale as and when and at such prices as the Community Facilities District may in its discretion determine but only at prices (including brokerage or other expenses) not more than par plus accrued interest, plus, in the case of moneys set aside for an optional redemption or an extraordinary redemption, the premium applicable at the next following call date according to the premium schedule established under the Indenture. Any accrued interest payable upon the purchase of Bonds may be paid from the amount reserved in the Interest Account of the Special Tax Fund for the payment of interest on the next following Interest Payment Date.

Reserve Account of the Special Tax Fund

Establishment. In order to further secure the payment of principal of and interest on the Bonds, certain proceeds of the Bonds will be deposited into the Reserve Account in an amount equal to the Reserve Requirement (see "FINANCING PLAN - Estimated Sources and Uses of Funds"). "Reserve Requirement" is defined in the Indenture to mean, as of any date of calculation, an amount equal to the least of the following:

(i) $1,675, 146.26,

(ii) 10% of the initial principal amount of the Bonds and Parity Bonds (as defined in the Indenture), if any,

(iii) Maximum Annual Debt Service on the then Outstanding Bonds and Parity Bonds, if any, or

(iv) 125% of average Annual Debt Service on the then Outstanding Bonds and Parity Bonds, if any.

Disbursements. Moneys in the Reserve Account will be used solely for the purpose of paying the principal of, including Sinking Fund Payments, and interest on the Bonds when due if the moneys in the Interest Account and the Principal Account of the Special Tax Fund are insufficient for those purposes. or moneys in the Redemption Account of the Special Tax Fund are insufficient to make a Sinking Fund Payment when due, and for the purpose of making any required transfer to the Rebate Fund under the Indenture.

See "APPENDIX E - Summary of Bond Indenture" for a description of the timing, purpose and manner of disbursements from the Reserve Account of the Special Tax Fund.

Earnings Fund

All earnings on all Funds and Accounts established and maintained under the Indenture (except earnings on the Administrative Expense Account of the Special Tax Fund, the Project Account of the Improvement Fund, and the Rebate Fund, which will remain therein) are to be placed in the Earnings Fund. Upon receipt of such earnings, the Trustee will disburse from the Earnings Fund earnings pursuant to a written direction of the Community Facilities District in the following order of priority:

(1) Earnings in excess of the Yield on the Bonds will be transferred to the Rebate Fund pursuant to a written direction of the Administrator of the Community Facilities District. Any amount remaining in the Earnings Fund after the deposit to the Rebate Fund has been satisfied will be applied by the Trustee in the priorities described below.

26 (2) To the Administrative Expense Account, the amount needed to pay the Administrative Expenses.

(3) To the Reserve Account, the amount required to bring the balance in such Account to I he Reserve Requirement required to be on deposit therein.

(4) A.ny remaining balance will be transferred to the Project Account of the Improvement Fund until completion of the Project.

(5) Any remaining balance will be transferred to the Special Tax Fund after completion )f the Project.

27 THE COMMUNITY FACILITIES DISTRICT

General

Description and Location. The Community Facilities District is located in the northwestern portion of the County, in an unincorporated area approximately one mile south of the 91 Freeway and approximately three miles east of the 1-15 Freeway. The property is generally surrounded by City of Corona to the west, an unincorporated community of Home Gardens to the northwest, the City of Riverside to the north, unincorporated Riverside County area to the south and east, and Lake Mathews just over a mile to the southeast.

The Community Facilities District is situated along Lakepointe Drive and Skyridge Drive, and extends for nearly two miles between Indiana Avenue (nearby to the northwest) and La Sierra Avenue (nearby to the southeast). All of the taxable property in the Community Facilities District is being developed for residential use as single-family detached homes.

See "APPENDIX A - General Information About Riverside County" for certain demographic information on the County. The boundary map of the Community Facilities District is attached as APPENDIX J.

Estimated Maximum Special Tax Proceeds and Debt Service Coverage

The Rate and Method is structured to produce Special Tax revenues from the Assigned Special Tax and the Maximum Special Tax which, when applied to the projected debt service on the Bonds plus the annual Administrative Expense Cap amount, is anticipated to result in a debt service coverage ratio of 110% for the life of the Bonds. The projected debt service coverage ratio for each Bond Year is set forth in the table below.

28 Table 1 Projected Debt Service Coverage

Bond Projected Less Total Available Projected Projected Year Ending Sp€icial Tax Administrative Special Tax Annual Debt Debt Service Revenues 111 Revenues Service [31 Coverage Ratio 2006 $2,)27,160 $(40,000) $1,987,160 $1,675, 146 1.186 2007 2,)27,160 (40,800) 1,986,360 1,671,871 1. 188 2008 2,)27,160 (41,616) 1,985,544 1,673,071 1. 187 2009 2,)27,160 (42,448) 1,984,712 1,672,871 1.186 2010 2, )27. 160 (43,297) 1,983,863 1,670,231 1.188 2011 2, )27. 160 (44, 163) 1,982,997 1,671,041 1. 187 2012 2,)27.160 (45,046) 1.982. 114 1,670,041 1. 187 2013 2,)27,160 (45,947) 1.981.213 1,667,560 1.188 2014 2,)27,160 (46,866) 1,980,294 1,668,830 1.187 2015 2, )27, 160 (47,804) 1,979,356 1,668,018 1. 187 2016 2,,)27, 160 (48,760) 1,978,400 1,665,958 1. 188 2017 2,')27, 160 (49.735) 1,977,425 1,667, 158 1.186 2018 2,,)27, 160 (50,730) 1,976,430 1,661,170 1 190 2019 2,1)27, 160 (51,744) 1,975,416 1,663,505 1. 188 2020 2,1)27,160 (52,779) 1,974,381 1,663,830 1. 187 2021 2,1)27,160 (53,835) 1,973,325 1,662, 110 1187 2022 2,1)27,160 (54,911) 1,972,249 1,657,110 1.190 2023 2,1)27, 160 (56,010) 1,971,150 1,660,360 1. 187 2024 2,ll27, 160 (57,130) 1,970,030 1,656,360 1. 189 2025 2,027,160 (58.272) 1,968,888 1,655,360 1. 189 2026 2,027, 160 (59,438) 1,967,722 1,657, 110 1. 187 2027 2,027,160 (60,627) 1,966,533 1,656,360 1.187 2028 2,027,160 (61,839) 1,965,321 1,653,110 1 189 2029 2,ll27, 160 (63,076) 1,964,084 1,652,360 1. 189 2030 2,027, 160 (64,337) 1,962,823 1,648,860 1.190 2031 2,027, 160 (65,624) 1,961,536 1,647,610 1. 191 2032 2,027,160 (66,937) 1,960,223 1,647,075 1.190 2033 2,027, 160 (68,275) 1,958,885 1,648,225 1. 188 2034 2,027, 160 (69,641) 1,957,519 1,645.805 1.189 2035 2,027, 160 (71,034) 1,956, 126 1,644,815 1. 189

[1] Assumes that all Special Tax revenues will be generated from the application of the Assigned Special Tax Rate to Developed Property under the Rate and Method for the life of the Bonds. [2] Administrative Expenses are projected to escalate at 2o/o per year starting with Bond Year ending September , , 2007. [3] Excludes dE bt service to be paid from capitalized interest. See "FINANCING PLAN - Estimated Sources anc Uses of Funds." Source: Albert A. WE bb Associates.

However, the debt service coverage ratio for the Bonds could fall below 110% under certain circumstanc,,s if the Community Facilities District exercises its right under the Indenture to cause the Trustee to transfer amounts in excess of the Administrative Expenses Cap to the Administrative Expense Account of the Special Tax Fund (but only to the extent necessary to collect delinquent Special Taxes) prior to the transfer of amounts necessary to pay debt service on the Bonds. See "SECURITY FOR THE BONDS - Special Tax Fund,''

29 Market Absorption Study

General. The Market Absorption Study was prepared by Empire Economics, Inc., to provide an estimate of the probable schedules for the forthcoming single-family residential developments proposed for the property in the Community Facilities District.

Subject to its assumptions and limiting conditions, the Market Absorption Study concluded that the property in the Community Facilities District is expected to be absorbed at the rates shown below:

Number of AbsorQlion Housing Neighborhood Site Designation Units [1] 2006 2007 2008 2009 2010 Rock Ridge Project Area #1 114 20 35 35 24 0 Stone View Project Area #2 104 30 30 30 14 0 Orchard Heights Project Area #3 98 25 30 30 13 0 High Point Project Area #4 93 15 25 25 28 0 Silver Sage Project Area #5 103 20 -29. -29. 20 23 Totals: Totals: 512 110 140 140 99 23

[1] Unit counts for the Rock Ridge and Stone View neighborhoods changed after the date of the Market Absorption Study, and are currently 110 units in Rock Ridge and 108 units in Stone View. See "PROPERTY OWNERSHIP AND PROPOSED DEVELOPMENT" below. Source: Empire Economics, Inc.

The County and the Community Facilities District make no representation as to the accuracy or completeness of the Market Absorption Study. The Summary and Conclusions from the Market Absorption Study are attached as APPENDIX D.

Appraised Property Value

The Appraisal. The Appraisal was prepared by Stephen G. White, MAI of Fullerton, California (the "Appraiser") to ascertain the market value of the fee simple estate of the 512 proposed single family detached homes and lots in the Community Facilities District as of a May 1, 2005 date of value. The Appraisal was 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, and with the appraisal standard proposed by the California Debt and Investment Advisory Commission.

Basis for Appraisal and Assumptions. The property rights appraised were of a fee simple interest subject to easements of record, the lien of the Special Taxes, and the lien of the Community Facilities District No. 84-2 (Lakehills) of the County of Riverside, Series 1999 Special Tax Refunding Bonds.

The Appraisal was based on certain assumptions and limiting conditions set forth in APPENDIX C, including the assumption that ail of the improvements and benefits to the property to be funded by the Bonds are completed and have accrued to the property. In this case, the Appraiser assumed that the proceeds of the Bonds would fund $22,470,000 for public facilities. (See "FINANCING PLAN" for the Community Facilities District's current estimate of the amount of Bond proceeds to be used for these purposes.)

30 The Appraiser relied on the Market Absorption Study for the projected home pricing. The Appraiser also assumed that the estimates of the remaining costs by ownership to get the lots from as is cone ition to "finished lots," which the Appraiser obtained from the property owners, are reasonat ly accurate.

As of the May 1, 2005 date of value, the property in the Community Facilities District was in the following condition:

Stone View: Grading was completed or nearing completion on the lots in the center and east portions of the neighborhood, and was still in process on the lots at the westerly end. Paving of streets at the far easterly end of the neighborhood was also just underway. Co1struction had not yet started on any of the homes.

Silver Sage: Grading was completed or nearing completion on the lots in the center and east portions of the neighborhood, and was still in process on the remaining lots. Paving of the streets at the far easterly end of the neighborhood was also just underway. Cc,nstruction had not yet started on any of the homes.

Orchard Heights: Grading was nearing completion on the lots in the south part of the neighborhood, and was still in process on the lots in the north part. Streets had not yet been paved and construction had not yet started on any of the homes.

Rock 1~idge: Rough grading was underway on these lots, but with a substantial amount of grading work yet to be completed to get all of the lots to a blue-top condition.

High f'oint: Rough grading was underway on these lots, but with a substantial amount of grading work yet to be completed to get all of the lots to a blue-top condition.

Value Estimate. The Appraiser estimated that, as of the May 1, 2005 date of value, the fee simple interest in the property within the Community Facilities District (subject to easements of record, to the lien of the Special Taxes, and to the Community Facilities District No. 84-2 (Lakehills) of the Ccunty of Riverside, Series 1999 Special Tax Refunding Bonds) had the following market valuE,s:

Property Owner Estimated Value LHC Riverside Associates, LLC/Riverside LHC, Ltd. $71,500,000 Lake Hil s-Riverside, L.P. 38,200 000 Total: $109,700,000

Valuation ME·thods. The Appraiser estimated the value of the property in the Community Facilities District based on the Sales Comparison Approach, which considers recent sales of bulk residenlial lots from the general area in comparison to the subject property on a finished lot basis. A deduction is then made for the estimated remaining costs to get the lots from the as is condition to finished lot condition, resulting in a value indication for the as is condition of the lots. The estimate of value for the property was achieved using the sales prices of comparable finished lots in the area that were listed or had sold within the prior 10 months. A discounted cash flow analysis was not used.

The County and the Community Facilities District make no representation as to the accuracy or completeness of the Appraisal. See APPENDIX C for the Summary Appraisal Report.

31 Appraised Value to Burden Ratio

The table below shows the projected value to burden ratio for the property in the Community Facilities District based on the appraised values set forth in the Appraisal, and the lien represented by the principal amount of the Bonds and the outstanding principal amount of the Community Facilities District No. 84-2 (Lakehills) of the County of Riverside, Series 1999 Special Tax Refunding Bonds (the "CFO 84-2 Bonds"). See "- Direct and Overlapping Governmental Obligations" below.

No assurance can be given that the amounts shown in this table will conform to those ultimately realized in the event of a foreclosure action following delinquency in the payment of the Special Taxes.

Table 2 Appraised Values and Value to Burden Ratio

Principal Projected Total Principal Amount Property Number Appraised Amount of of CFD 84-2 Value to Owner of Homes [1] Value [2] Bonds [31 Bonds [41 Burden [5] LHC Riverside Associates/Riverside LHC 372 $71,500,000 $18,759,844 $434,709 3.73:1 Lake Hills-Riverside, LP. 140 38,200,000 7060156 72 631 5.36:1 Total: 512 $109,700,000 $25,820,000 $507,340 4. 17:1

[1] Source: the Appraisal. [2] Market value estimated by the Appraiser as of May 1, 2005. [3] Allocation between Property Owners based on projected Fiscal Year 2005-06 levy. See "Table 5, Property Ownership" below. [4] See "- Direct and Overlapping Governmental Obligations" below. Allocation between Property Owners based on Fiscal Year 2004-05 levy. [5] Average value to burden per lot; actual value to burden per lot may vary. Source: Albert A. Webb Associates and the Appraiser.

32 Direct and Overlapping Governmental Obligations

Contained vtithin the boundaries of the Community Facilities District are certain overlapping local agencies providing public services and assessing property taxes, assessments, special taxes and other charges on the property in the Community Facilities District. Many of these local agencies have outstanding debt.

The direct and overlapping obligations affecting the property in the Community Facilities District for Fiscal Year 2004-05 are shown in the following table.

Table 3 Direct and Overlapping Governmental Obligations

COMMUNITY FACILITIES DISTRICT NO. 04-2 (LAKE HILLS CREST) OF THE COUNTY OF RIVERSIDE 2004-05 Secured Roll Assessed \/.due $1,848,768 Secured Property Taxes Description on Tax Bill f')pe Total Parcels rotal Le\') •:,;, Applicnble Parcels tcvi Amount COMMl:~! I'( /"ACILITJES DJST K4-2 CFO ! .130 $785,204 .16 ()_) ]'\, )(\ $287.628 N.\\'. 1vlOSQlJIT{) & VECTOR CON'I ROL DISTRl("l SP! 131.108 $400,486 0 001''.·., 3X $4 lvl\\'D STANDUY v,.:ES'I \VTR 220,204 SJ..184.4()2 0.203'\, 38 $6.877 ALVORD t_;:,.,;JrJED SCHOOL ( ;o 20,340 $2.706507 0.012°/;, 38 S3J3 RIVERSIDE C0\11'v1ll:\ITY COLI.F(iE c;o 222.716 $8,207,072 0 01 ?'\, .iX S 1.395 MFTROPOLITAN \VTR DFRT SV (_)() 413,378 $4.816,()(12 11.002'!·,, 3K SI07 (iENFRA! PLRPOSE I"/" 752,870 $1.J52.208.!08 0 001"';, 3k $18.488 211114-115 TOTAL PROPERTY 1AX l/ABIUTl' $314,831 TOTAL PROPERTY TAX LIABILITY AS PERCEI\TAGE OF 2004-05 ASSESSED VALLATIO'.'I 17.03°/o Land Secured Bond lndehtcdnesi Outstanding Direct and Ovcrlapr1ing Bonded Debt "f)·pc Issued ()utstanding ·~·;, Applicable Pa reds Amount COLJNTY O! Rl\'ERSJDE (TD 84-2 llEFLNDJN(i CFD $4,6.15J)()() S 1,385,000 36.63 l'\i, 26 $507,340 COL'"\ l'Y OJ· RI\TRSIOL CFD 04-2 Cl lJ TBU{I) rBD( I) 100 (){)'\, TBD( I I TOTAL OLTSTANDl'.\G LA'IID SECURED BO'.\D l'.'IDEBTED'IIESS (2) $507,340 (;cncral Obligation Bond lndl•htcdncss Outstanding Dirc\'1 and Overlapr,ing Bonded Debt Typi: Issued Outstanding o/o Applicahle Parcels Amount ALVORD UNIFIED SCHOOL GO S57,000J)00 $49,850,0110 0.041()"/I, 38 S20J<;7 I R!VERSIDI·: COJ\.1MUNITY COLLLC E GO $65,000JlOO $6:

Authorized and llnissued Direct 1·nd Overlapping Bonded Debt (2) T~ pc Authorized l!nissued %, Applicable Parcels Amount ALVORD LJNIFIED SCHOOL GO S57 _000JlOO $(1 0.042''.-t, ,x $0

1 RIVERS!OE ('0:'vlMlJNITY ('OLI.L( l·'. GO 5350JJOO,OOO 1'285,()()0,000 0.004 ',;, 38 '!>10.59 1) .\·1FTROPOLITAN \VATER DJSTRJ('l GO $850Jl00.000 so 0.0001% JX so TOTAL LNISSl:ED GEI\ER.\L OBLIGATIOl'i 801\D 1'1/DEBTED'.\ESS (2) $!0.599 TOTAL Ol:TSTAI\DING AI\D l:NJSSLED GENERAL OHLIGATION BOND 11\Dl:BTED'IIESS (2) 534,447 { ! l Excludc;, Md!o-Roo~ bonds to be ;.okL (2) Additional bonded indeblcdnc;.c; nr 1vailable bond authnrizauon may cxL;t but arc not shown becathc a lax w;1;, not levil·d for the rdCn:nccd fiscal year. Source: Albert A. Webb Associate;..

33 CFD 84-2 Bonds. The CFO 84-2 Bonds were originally issued in February 1999 in the total principal amount of $4,635,000, for the primary purpose of refunding certain outstanding special tax bonds previously issued by Community Facilities District No. 84-2 (Lakehills). The CFO 84-2 Bonds are currently outstanding in the principal amount of $1,385,000, and mature on September 1, 2006.

Estimated Tax Burden on Single Family Home

The following table sets forth the estimated total tax burden on single family homes in five land use categories set forth under the Rate and Method (categories selected as a conservative representative of the proposed homes to be constructed in the Community Facilities District), based on estimated tax rates for Fiscal Year 2004-05.

Table 4 Analysis of Taxes and Assessments As a Percent of Single Family Unit Base Sales Price

Land Use Category Under Rate and Method 4000-4200 3601-4000 3401-3600 2801-3000 2501-2800 Sq. Ft. Sq Ft. Sq. Ft. Sq.__Ft. Sq. Ft. Base Sales Price [11 $675,000 $615,000 $560,000 $525,000 $480,000 Ad Valorem Property Taxes (21 General Property Tax (1.00%) 6,750 6,150 5,600 5,250 4,800 Alvord USO G.O. Bond 307 280 255 239 218 Riverside Community College G.O. Bond 122 111 101 95 86 MWO G.O. Bonds 39 36 32 30 28 Subtotal Ad Valorem Taxes 7,218 6,576 5,988 5,614 5,132 Special Assessments/Taxes for Infrastructure [31 CFO No. 04-2 (Lake Hills Crest) 4,615 4,470 4,065 3,515 3,415 Special Assessments/Taxes for Services [4] CSA's 77 77 77 77 77 Flood Control Stormwater/Cleanwater 4 4 4 4 4 NW Mosquito & Vector Control 12 12 12 12 12 MWO Standby 9 9 9 Subtotal 102 102 102 102 102 Subtotal Assessments & Special Taxes 4,717 4,572 4.167 3,617 3,517 TOTAL $11,934 $11,148 $10,155 $9,231 $8,649 Taxes & Assessments as % of Base Price 1.77% 1.81 % 1.81 % 1. 76% 1.80% [1] As provided by the Appraisal dated May 12, 2005. [2] Ad valorem rates are based on the levy for Fiscal Year 2004-05. [3] Assumes that initial levy on Developed Property will occur after final maturity of the CFO 84-Bonds in September 2006. [4] Estimated based on the levy for Fiscal Year 2004-05. Source: Albert A. Webb Associates.

34 PROPERTY OWNERSHIP AND PROPOSED DEVELOPMENT

The informaUon about the Property Owners contained in this Official Statement has been provided by representatives of the Property Owners and has not been independently confirmed or verified by the Underwriter, the County or the Community Facilities District. Neither the Underwriter, the County nor the Community Facilities 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.

Property Ownership

The table bE low shows the current property ownership within the Community Facilities District.

Table 5 Property Ownership

Percentage Share of 2005-06 Number Special Tax Property Owner of Lots 111 Liability 121 LHC Entities 372 72.66% Lake Hills-Riverside 140 27.34% Total 512 100.00%

[1 Source: the Appraisal. [2: The projected Special Tax liability assumes that all parcels are levied as "Approved Property" for Fiscal Year 2005-06. Source: Albert A. Webb Associates and the Appraiser.

LHC Entities

Ownership Structure. The LHC Entities are LHC Riverside Associates, LLC, a California limited liability company, and Riverside LHC, Ltd., a Florida limited partnership, which own their property in the Community Facilities District as tenants in common (with an 80% share owned by Riverside LHC and a 20% share owned by LHC Riverside Associates).

Riverside LHC I Richland. The general partner of Riverside LHC is Urban Properties of California. Inc., a Florida corporation doing business in California as Urban West Properties of California, Inc. ("•Jrban West"). The limited partner of Riverside LHC is the Oakville Non­ Exempt Trust.

Urban West is affiliated through spousal ownership and management staff with Richland Investments, LLC, a real estate group owned by John H. Bray, an individual. Mr. Bray has been active in real estate investment and development in California, Texas, Florida and Canada for over 25 years through his companies, Richland Investments, LLC, Richland Properties, Inc., Richland Ventures, Inc., and Richland Communities, Inc., all based in Newport Beach and Roseville, California, and Tampa, Florida (collectively "Richland").

Richland has developed many office and industrial buildings, anchored retail shopping centers, and residential-master planned communities. Richland does not typically fully develop

35 its properties, electing to sell approved or semi-finished parcels to merchant builders or end users for further development.

The Internet site for Richland is www.richlandcommunities.com. This Internet address is included for reference only, and the information on this Internet site is not a part of this Official Statement or incorporated by reference into this Official Statement. No representation is made in this Official Statement as to the accuracy or adequacy of the information contained on this Internet site.

Land development activity by Richland and its affiliates in California has included significant holdings in eleven master-planned developments, including:

Development Location Description Morro Hills Master Plan Oceanside entitled for approximately 1,000 residential lots. public golf course, elementary school site, and village center portions of North Central Roseville Specific Plan Roseville approximately 1,715-acres entitled for approximately 1,500 residential units and approximately 285 acres designed for commercial, business professional and light industrial land use

Woodcreek East Roseville approximately 350 single family residential lots;

Highland Reserve North Specific Plan Roseville entitled for approximately 1,770 residential units and approximately 162 acres of commercial use

The Westlake Plaza Center Phase Ill Thousands entitled for approximately 475,000 square feet of Oaks office space and a 200-bed senior assisted living facility

Pinehurst Specific Plan Chino Hills entitled for approximately 693 residential lots with supporting retail use

Westlake North Specific Plan Westlake entitled for approximately 1.414.000 square feet of Village commercial and office space, and approximately 250 residential units

Lincoln Ranch Murrieta entitled for approximately 441 residential lots with supporting retail use

Crown Valley Specific Plan Riverside entitled for approximately 419 residential lots County

Richland will certify to the following representations at the Closing:

• Neither Richland nor any of its affiliates has ever defaulted to any material extent in the payment of special taxes or assessments in connection with the Community Facilities District or any other community facilities districts or assessment districts in California within the past five years. This representation is qualified by the following statement:

Richland has been a landowner in a number of community facilities districts in California. Richland has never had a special tax delinquency on property where Richland, or any related entity, was the original petitioner forming the community facilities district. Richland has also acquired land development projects that were either in default or on the verge of default in the payment of special taxes or assessments.

36 Richland has successfully restructured three out of four of these projects. However, in the course of implementing these projects, Richland or its affiliated companies has had one short term and one long term special tax delinquency. The first delinquency occurred in th3 City of Chino Hills Community Facilities District No. 9, wherein Richland Pinehurst, L.P. (one of the Richland Entities) was obligated to pay by November 1, 1996, and did not pay a one-time discharge payment in the amount of $1,079,964.56 on approximately 12.9 acres of commercially zoned property. On July 28, 1998, Richland Pinehurst, L.F. finalized a Settlement Agreement with the City of Chino Hills to pay the one-time discharge payment in five installments of $215,992.92 commencing on May 31, 1999, and each May 31st thereafter. All five installments have been paid. Since the one-time disc1arge payment was not structured to match any near term bondholder payment dates, all payment amounts owed to bondholders were made by the City of Chino Hills on a timely basis and the original bonds were successfully refunded in 1999.

The sEcond delinquency occurred in the City of Lancaster Communities District No. 89-1 ("CF) No. 89-1") wherein Richland Ventures, Inc. acquired residential property that was in arrears in the payment of both special and general property taxes. Richland Ventures, Inc. entered into a Memorandum of Understanding with the City of Lancaster, wherein Richland purchased subordinate bonds in the amount of $850,000 to retire delinquent CF) No. 89-1 special taxes and acquired residential parcels through periodic foreclose sale,;. Ultimately, Richland Ventures, Inc. sequentially acquired approximately 187 acres through series of foreclosure sales starting in April 1998 and ending in November 2000. Due to economic and entitlement issues with the proposed development, Richland Ventures, Inc. ceased paying its special and general property taxes after Docember 1998 and subsequently conveyed its holdings to a third party purchaser in F 3bruary 2002.

Neither Richland nor any of its affiliates is currently in default on any loans, lines of credit or other cbligation, the result of which could materially adversely affect the development and sale of the LHC Entities' property in the Community Facilities District.

Richland is solvent and no proceedings are pending or, to the actual knowledge of Richland, threatened in which Richland may be adjudicated as bankrupt or become the debtor in a bankruptc:r proceeding, or discharged from all of its respective debts or obligations, or granted an extensi,Jn of time to pay its respective debts or a reorganization or readjustment of its respective debts.

There i, no litigation or administrative proceeding of any nature in which Richland has been served, or to Richland's actual knowledge, is pending or threatened against Richland which, if successful, would materially adversely affect the ability of the LHC Entities to complete the development and ;ale of their property within the Community Facilities District, or to pay the Special Taxes or ordinary ad valorem property tax obligations when due on their property within the Community Facilit es District, or which challenges or questions the validity or enforceability of the Bonds, the R 9solution of Issuance, the Indenture, the Property Owner Continuing Disclosure Certificate or the Bond Purchase Contract.

Richland is not aware of any material failures to comply with previous undertakings by it or its affiliates to provide periodic continuing disclosure reports or notices of material events in California within the past five years.

37 LHC Riverside Associates I J.D. Pierce Company. The managing member of LHC Riverside Associates is J.D. Pierce Company, Inc., a California corporation that was formed in 1994 and is headquartered in Irvine, California. The other member of LHC Riverside Associates is Steven L. Craig.

J.D. Pierce Company is currently in the process of entitling, constructing and selling numerous projects in the Inland Empire region of southern California. J.D. Pierce Company and its affiliates had closings of approximately 160 homes in 2004 and expects to close in excess of 400 homes in 2005. The Internet site for J.D. Pierce Co. is www.jdpiercehomes.com. This Internet address is included for reference only, and the information on this Internet site is not a part of this Official Statement or incorporated by reference into this Official Statement. No representation is made in this Official Statement as to the accuracy or adequacy of the information contained on this Internet site.

Some of the other development projects recently completed or currently under development by J.D. Pierce Company and its affiliates in southern California include the following:

Number of Development Location Dwelling Units Mont Valier II San Jacinto 33 Celebrations Perris 28 Sonrisa Victorville 212 Tesoro San Jacinto 249 Sanderson Ranch San Jacinto 211 Cherrybrook Lane Victorville 123 BelAire Victorville 86 San Jacinto San Jacinto 600 [1] Veranda Beaumont 87 Sunday in the Park Lake Hills 110

[1] Being developed for investment and sale to merchant builders.

J.D. Pierce Company will certify to the following representations at the Closing:

Neither J.D. Pierce Company nor any of its affiliates has ever defaulted to any material extent in the payment of special taxes or assessments in connection with the Community Facilities District or any other community facilities districts or assessment districts in California within the past five years.

Neither J.D. Pierce Company nor any of its affiliates is currently in default on any loans, lines of credit or other obligation, the result of which could materially adversely affect the development and sale of the LHC Entities' property in the Community Facilities District.

J.D. Pierce Company is solvent and no proceedings are pending or, to the actual knowledge of J.D. Pierce Company, threatened in which J.D. Pierce Company may be adjudicated as bankrupt or become the debtor in a bankruptcy proceeding, or discharged from all of its respective debts or obligations, or granted an extension of time to pay its respective debts or a reorganization or readjustment of its respective debts.

There is no litigation or administrative proceeding of any nature in which J.D. Pierce Company has been served, or to J.D. Pierce Company's actual knowledge, is pending or

38 threatened against ,1.D. Pierce Company which, if successful, would materially adversely affect the ability of the LHC Entities to complete the development and sale of their property within the Community Facilitie:; District, or to pay the Special Taxes or ordinary ad valorem property tax obligations when due on their property within the Community Facilities District, or which challenges or questions the validity or enforceability of the Bonds, the Resolution of Issuance, the Indenture, the Property Owner Continuing Disclosure Certificate or the Bond Purchase Contract.

J.D. =>ierce Company is not aware of any material failures to comply with previous undertakinqs by it or its affiliates to provide periodic continuing disclosure reports or notices of material events in California within the past five years.

Lake Hills-Riversido

Ownership Structure. Lake Hills-Riverside is Lake Hills-Riverside, L.P., a California limited partnership whose general partner is MSIII GP, LLC, a California limited liability company, and whoBe limited partners are Hearthstone Multi-State Residential Value Added Fund, Ill, LLC, a Delaware limited liability company, and Hearthstone-SEPII Homebuilding Investors, LLC (SeriEs 2), a Delaware limited liability company.

Hearthstone, Inc., a California corporation ("Hearthstone"), is the manager of MSIII GP, LLC (the general partner of Lake Hills-Riverside) and the general partner of the managing member of Hearthst:ine Multi-State Residential Value Added Fund, Ill, LLC, and Hearthstone­ SEPII Homebuilding Investors, LLC (Series 2) (the limited partners of Lake Hills-Riverside). Hearthstone is a real estate investment company devoted exclusively to investing institutional capital in residential development. Hearthstone manages funds for numerous public and private pension plans, university endowments, Fortune 100 companies and large private trusts. Hearthstone invest~ these funds in homebuilding and residential lot development projects throughout the United States. The officers of Hearthstone have been involved in the development of ove1· 50,000 homes in all major regions of the United States in the course of their careers.

Hearthstone is headquartered in San Rafael, California, has offices in Los Angeles, San Diego and Chicago. Hearthstone has invested in over 300 homebuilding projects in approximately 20 sta· es.

The Internet site for Hearthstone is www.hearthstone.com. This Internet address is included for reference only, and the information on this Internet site is not a part of this Official Statement or incorpcrated by reference into this Official Statement. No representation is made in this Official Statement as lo the accuracy or adequacy of the information contained on this Internet site.

History of Property Tax Payments; Loan Defaults; Bankruptcy. Hearthstone will certify to the followin~. representations at the Closing:

NeithE r Hearthstone nor any of its affiliates has ever defaulted to any material extent in the paymE·nt of special taxes or assessments in connection with the Community Facilities District or E,ny other community facilities districts or assessment districts in California within the past five years.

39 Neither Hearthstone nor any of its affiliates is currently in default on any loans, lines of credit or other obligation, the result of which could materially adversely affect the development of the property in the Community Facilities District

Hearthstone is solvent and no proceedings are pending or, to the actual knowledge of Hearthstone, threatened in which Hearthstone may be adjudicated as bankrupt or become the debtor in a bankruptcy proceeding, or discharged from all of its respective debts or obligations, or granted an extension of time to pay its respective debts or a reorganization or readjustment of its respective debts.

There is no litigation or administrative proceeding of any nature in which Hearthstone has been served, or to the actual knowledge of Hearthstone, is pending or threatened against Hearthstone which, if successful, would materially adversely affect the ability of Hearthstone to complete the development and sale of its property within the Community Facilities District, or to pay the Special Taxes or ordinary ad valorem property tax obligations when due on its property within the Community Facilities District, or which challenges or questions the validity or enforceability of the Bonds, the Resolution of Issuance, the Indenture, the Property Owner Continuing Disclosure Certificate or the Bond Purchase Contract.

Hearthstone is not aware of any material failures to comply with any previous continuing disclosure undertakings by it or its affiliates to provide periodic continuing disclosure reports or notices of material events in California within the past five years.

Construction Services. Lake Hills-Riverside has engaged Lake Hills, LLC to act as the developer in connection with the construction of single-family homes within the Community Facilities District. Lake Hills, LLC, has engaged Brehm Communities to act as general contractor in connection with the construction of single-family homes within the Community Facilities District.

Brehm Communities is a homebuilding firm with over 40 years experience in the construction and sale of homes ranging from affordable condominiums and first-time homes to master-planned communities. Brehm Communities has completed over 3,000 homes in southern California communities that include San Diego County and the Inland Empire. Forrest "Woody" Brehm established the company and currently serves as its Chairman & Chief Executive Officer, and Horace Hogan II serves as the company's President & Chief Operating Officer.

More information about Brehm Communities is available on the Internet at www.brehmco.com. This Internet address is included for reference only, and the information on this Internet site is not a part of this Official Statement or incorporated by reference into this Official Statement. No representation is made in this Official Statement as to the accuracy or adequacy of the information contained on this Internet site.

Environmental Conditions

CEQA Review. In January 1999, the County approved a Mitigated Negative Declaration under the California Environmental Quality Act {"CEQA") in connection with development approvals for the property in the Community Facilities District (including the approval of Tentative Tract Maps 28815 and 28816). No additional discretionary approvals are required for the proposed development in the Community Facilities District that would require additional environmental review under CEQA.

40 Hazardous Substances. GeoSoils, Inc. of Murrieta, California, prepared a Phase I Environmental Site t,ssessment dated August 6, 1999, for the property in the Community Facilities District. The assessment concluded that the overall potential for significant amounts of hazardous materials/waste and/or petroleum contamination onsite is low; however, the uncertainty of potenlial environmental concerns could not be entirely eliminated, and the assessment made the following recommendations: (a) all debris and trash should be disposed of offsite; and (b) al hough not observed within the property, any hazardous or petroleum contaminated materials encountered should be evaluated prior to removal and disposal. The Property Owners have represented that all recommendations made in this report have been followed and will be followed during the course of site development on the property in the Community Facilities District.

Seismic Conditions. GeoSoils, Inc. of Murrieta, California, prepared a Grading Plan Review dated Noverrber 16, 2000, for the property in the Community Facilities District. The report concluded thEt the site appears suitable for its intended use, from a geotechnical viewpoint, provided tre recommendations presented in the report are implemented. The report noted that no known active faults cross the site area, and the site is not within an Alquist-Priolo Earthquake Fault Zcne. The report also concluded that the potential for liquefaction, is considered low to nil, provided the recommendations provided in the report are implemented during site design and construction.

Wetlands and Riparian Habitat. The development of the property in the Community Facilities District is being carried out in accordance with a Mitigation, Monitoring and Management Plan dated January 2001, prepared by PCR Services Corporation of Irvine, California, under which the Property Owners are required to create three riparian wetland habitats that will be p 3rtially used to satisfy mitigation requirements imposed in connection with the issuance of the following federal and state permits, which were issued due to impacts to wetlands and streamteds that constitute "jurisdictional waters" under federal and state laws and regulations:

Permit:; issued by the U.S. Army Corps of Engineers under Section 404 of the Clean Water Act, with a final expiration date of March 18, 2007.

A WatE,r Quality Waiver issued by the California Regional Water Quality Control Board effective as of February 18, 2000, under Section 401 of the Clean Water Act. The permit does not have an expi ·ation date.

A Streambed Alteration Agreement issued by the California Department of Fish and Game, originally Eiffective as of March 1, 2000, which was subject to subsequent extensions with an expiration date of March 1, 2004.

• A Biological Opinion issued by the United States Fish and Wildlife Service originally effective as of October 26, 2000, as further amended. This opinion has no expiration date.

The Property :Jwner has represented that all site work affecting wetlands authorized under the U.S. Army Corps of Engineers Section 404 permit will be completed before the permit expires. that all site work affecting streambeds authorized under the Streambed Alteration Agreement was comoleted before the expiration of the agreement, and that all mitigation measures required by these permits have been or will be complied with.

41 Proposed Development

No assurances can be made that the Property Owners will have the resources, willingness and ability to successfully complete development activities on their property within the Community Facilities District as currently planned. No representation is made as to the ability (financial or otherwise) of either Property Owner to complete its property development as currently planned.

General. All of the taxable property in the Community Facilities District is currently in the process of being developed as 512 detached single-family homes in five residential neighborhoods, as follows:

Stone View 108 lots Silver Sage 103 lots Orchard Heights 98 lots Rock Ridge 110 lots High Point 93 lots

Property Acquisition by Lake Hills-Riverside. The LHC Entities originally acquired all of the property in the Community Facilities District in June 1998. Lake Hills-Riverside has entered into an agreement to acquire all of the LHC Entities' property in the Community Facilities District through three phased take-downs. Lake Hills-Riverside exercised its option to acquire the first phase of 140 lots in March 2004. The option agreement requires Lake Hills­ Riverside to acquire the second phase ( 140 lots) no later than 10 days following the issuance of the Bonds, and to acquire the final phase (232 lots) by September 28, 2005.

Other than the issuance of the Bonds, no unsatisfied conditions remain to the obligation of Lake Hills-Riverside to exercise its option to acquire the remaining two phases on the schedule described above.

Possible Sale of Orchard Heights Neighborhood to Merchant Builder. Lake Hills­ Riverside is currently negotiating the sale of the Orchard Heights neighborhood, consisting of 98 proposed single-family homes, to another merchant builder, which would occur once the infrastructure and site work on the Orchard Heights neighborhood have been completed. The buyer entity would then carry out home construction and sales to end users. However, Lake Hills-Riverside has not made a final decision or entered into an agreement for the sale of this neighborhood as of the date of the Preliminary Official Statement. If Lake Hills-Riverside decides not to sell the Orchard Heights neighborhood to another builder, then Lake Hills­ Riverside intends to develop the Orchard Heights neighborhood as described below.

Entitlement Status. The project is being developed in accordance with two Tract Maps, as set forth below:

No. of Tentative Map Final Map Tract No. Lots Approval Approval 28815 235 Jan. 1999 Dec. 2004 28816 277 Jan. 1999 Dec. 2004

42 Utilities. It is expected that utility services for the property in the Community Facilities District will be provided by the following:

• Water: Western Municipal Water District • Sanitary sewer: Western Municipal Water District • Storm water c'rainage: Riverside County Flood Control • Electricity: Southern California Edison

lnfrastructurE Development. Mass grading, site work and off-site infrastructure improvements on the property in the Community Facilities District (including the construction of the Public Facilities b,'>ing financed with the proceeds of the Bonds) is currently underway, and is being carried out in phases corresponding to the planned development schedule. All grading is anticipated to be complete by December 2005, and all off-site infrastructure development (including sewer, water and storm drain improvements, street improvements (including curb, gutter, sidewalk and ~aving), two sewer lift stations, a water tank (including building and pump), offsite pump enhancement, and grading) is anticipated to be complete by May 2006.

As of May 1, 2005, based on information provided by the Property Owners, the Appraiser assumed !,at the total cost to complete the property in the Community Facilities District to "finished lot" condition (including grading, streets, utilities, fencing/walls, landscape, erosion control, fees, engineering. consultants, and contingency) was as follows:

Total Finished Lot Costs: $54,563,855 Less Estimated Costs to be Funded with Bond Proceeds: (22,500 000) Remaining •::osts to Complete: $32,063,855

The Appraiser further allocated these total remaining finished lot costs in the amount of $28,757,700 to the L -IC Entities' property (372 lots), and in the amount of $3,306, 155 to the Lake Hills-Riverside ,roperty (140 lots), resulting in an average remaining cost of $77,306 per lot for the lots owned by the LHC Entities and an average of $23,615 per lot for the lots owned by Lake Hills-Riversic e. According to the Appraiser, the differential is due to the fact that the bulk of the land development work completed thus far has been on the first takedown of the 140 lots currently owned by Lake Hills-Riverside, with a much greater amount of work yet to be completed on the lots -)wned by the LHC Entities.

43 Home Development. Lake Hills-Riverside's anticipated construction schedule and unit mix for the property in the Community Facilities District are set forth below. No assurance can be given that home construction and sales will be carried out on the schedule and according to the plans outlined below, or that these home construction and sale plans or base prices will not change after the date of this Official Statement.

Proposed Construction and Sales Schedule

First Home Number Begin Home Open Model Sale Last Home Sale Neighborhood of Units Construction Homes Closings Closings 111 Rock Ridge 110 Dec.2005 Feb. 2006 July 2006 Nov. 2007 Stone View 108 May 2005 Sept. 2005 Dec.2005 Sept. 2007 Orchard Heights 98 Dec. 2005 Feb. 2006 July 2006 Oct. 2007 Silver Sage 103 May 2005 Sept. 2005 Dec. 2005 Sept. 2007 High Point 93 Dec. 2005 Feb.2006 July 2006 Dec. 2007

[1] See "THE COMMUNITY FACILITIES DISTRICT - Market Absorption Study'" and "APPENDIX D - Market Absorption Study Summary and Conclusions." for a summary of the absorption conclusions contained in the Market Absorption Study.

Proposed Unit Mix

Number No. of Model Approx. Anticipated Neighborhood of Units Types Sguare Footage Base Prices Rock Ridge 110 3 2,600 to 3, 100 $478,000 to $523,000 Stone View 108 3 2,955 to 4,087 $523,000 to $618,000 Orchard Heights 98 3 3,412 to 3,829 $558,000 to $593,000 Silver Sage 103 3 4.143 to 5, 16B $672,000 to $747,000 High Point 93 3 3,800 to 4,200 $612,000 to $647,000

Site Development and Home Construction Financing Plan. Lake Hills-Riverside has financed and intends to finance the costs of land acquisition, infrastructure improvements and home construction costs through internal financing from its partners.

Lake Hills-Riverside intends to use internal partnership financing from its limited partners, Hearthstone Multi-State Residential Value Added Fund, Ill, LLC, and Hearthstone­ SEPII Homebuilding Investors, LLC (Series 2) (each a "Limited Partner"), together with home sale proceeds, to finance all carrying costs for the property (including property taxes and the Special Taxes) until full sell-out of the single-family homes within the Community Facilities District.

Under the Lake Hills-Riverside limited partnership agreement, the aggregate capital requirement of Lake Hills-Riverside equals an amount necessary to fund all costs of the development of the property in the Community Facilities District (less the amount of any debt financing), and the two Limited Partners commit to fund a total of 99% of the capital requirement, with each Limited Partner's respective share set forth in the agreement. The general partner of Lake Hills-Riverside may make capital calls on each Limited Partner to provide funds for project costs.

44 According to the audited financial statements of each Limited Partner, the investor members of each Limited Partner have committed certain capital amounts to the respective Limited Partner, which are due upon demand by that Limited Partner, and the failure by an investor member of either Limited Partner to provide capital upon demand can result in substantial forfeiture of existing investments, liability for damages to other members, and loss of rights to participate as members in company decisions of that Limited Partner.

However, if and to the extent this source of financing is inadequate to pay the cost to complete the planned development of the property, the property may not be developed as planned. There can be no assurance of the willingness or ability of the partners of Lake Hills­ Riverside to make such funds available in the future, or the ability of Lake Hills-Riverside to obtain financing t 0om other sources. There is no legal obligation to Bond holders to make any such funds available for construction or development, or the payment of ad valorem property taxes or the Spec>al Taxes.

The follov. ing table shows Lake Hills-Riverside's proforma cash flow projections for the development of the property in the Community Facilities District, net of Bond proceeds:

Projected Sources and Uses of Funds

2004 2005 2006 2007 Total Sources of Funds Partnership Equity $29,697,385 $73,679,615[1] $(35,752,000) $(67,625,000) s Home Sale Proceeds 21,423,000[21 126 254 000 130 207 000 277 884 000 Total Sources $29,697.385 $95,102,615 $90,502,000 $62,582,000 $277,884,000

Uses of Funds Land Purchase 14,520,385 24,839,615 39,360,000 Site Development 7,142,000 26,046,000 14,455,000 (2,230,000) 45,413,000 Site Development Fee,. and Permits 1,967,000 3,450,000 296,000 46,000 5,759,000 Home Construction 1.499,000 16.923,000 45,163,000 18,691,000 82,276,000 Home Construction Fe1~s and Permits 150,000 383,000 59,000 592,000 Sales and Marketing 544,000 4,724,000 2,073,000 1,382.000 8,723,000 General & Administrati1re 1,026,000 2,744,000 2,645,000 3.085,000 9,500,000 Property Taxes 361,000 750,000 1,080,000 358,000 2,549,000 Other 2,638,000 15 476 000 24 407 000 18991000 61,512,000 Total Uses $29,697,385 $95, 102,615 $90,502.000 $40,382,000 $255,684,000

Sources in Excess of Uses 22,200,000 22,200,000 Cumulative Annual 22,200,000

[1] As of June 30 2005, approximately $44,287,000 of this amount had been contributed by the Lake Hills~Riverside Limited Partners and expended on site development and home construction costs. [2J Represents ths proceeds of the anticipated sale of the Orchard Heights neighborhood to another merchant builder, as described abo11e

45 BOND OWNERS' RISKS

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 Community Facilities District to Pay Debt Service

The Community Facilities District has no obligation to pay principal of and interest on the Bonds if Special Tax collections are delinquent, other than from amounts, if any, on deposit in the Reserve Account of the Special Tax Fund or funds derived from the tax sale or foreclosure and sale of parcels for Special Tax delinquencies. The Community Facilities District is not obligated to advance funds to pay debt service on the Bonds.

Levy and Collection of the Special Tax

The principal source of payment of principal of and interest on the Bonds is the proceeds of the annual levy and collection of the Special Tax against property within the Community Facilities District. The annual levy of the Special Tax is subject to the Maximum Annual Special Tax rate authorized in the Rate and Method. The levy cannot be made at a higher rate even if the failure to do so means that the estimated proceeds of the levy and collection of the Special Tax, together with other available funds, will not be sufficient to pay debt service on the Bonds.

In addition, the Act provides that the Special Taxes levied against any parcel of residential property may not be increased by more than 10% as a consequence of delinquency or default by the owner of any other parcel or parcels within the Community Facilities District.

Because the Special Tax formula set forth in the Rate and Method is not based on property value, the levy of the Special Tax will rarely, if ever, result in a uniform relationship between the value of particular parcels of Taxable Property and the amount of the levy of the Special Tax against those parcels. Thus, there will rarely, if ever, be a uniform relationship between the value of the parcels of Taxable Property and their proportionate share of debt service on the Bonds, and certainly not a direct relationship.

The following are some of the factors that might cause the levy of the Special Tax on any particular parcel of Taxable Property to vary from the Special Tax that might otherwise be expected:

• Reduction in the number of parcels of Taxable Property for such reasons as acquisition of Taxable Property by a governmental entity and failure of the government to pay the Special Tax based upon a claim of exemption or, in the case of the federal government or an agency thereof, immunity from taxation, thereby resulting in an increased tax burden on the remaining taxed parcels.

Failure of the owners of Taxable Property to pay the Special Tax and delays in the collection of or inability to collect the Special Tax by tax sale or foreclosure and sale of the delinquent parcels, thereby resulting in an increased tax burden on the remaining parcels.

46 • Development of a parcel of Taxable Property more rapidly than developm,nt of other parcels of Taxable Property, thereby resulting in the application of development factors in the Special Tax formula to the parcel and resulting in an increased tax burden on the parcel of Taxable Property.

• Development of other parcels of Taxable Property less rapidly than expected, thereby resulting in delay in application of development factors in the Special Tax formula to the other parcels of Taxable Property and resulting in an increased tax burden on the parcel of Taxable Property.

Except as set forth above under "SECURITY FOR THE BONDS Special Taxes" and " - Rate and Method," the Indenture provides that the Special Tax is to be collected in the same manner as ordin 3ry ad valorem property taxes are collected and, except as provided in the special covenant for foreclosure described in "SECURITY FOR THE BONDS - Covenant to Foreclose" and in the Act, is subject to the same penalties and the same procedure, sale and lien priority in case of delinquency as is provided for ordinary ad valorem property taxes. Under these procedures, if taxes are unpaid for a period of five years or more, the property is deeded to the State and then is subject to sale by the County. In addition, the Community Facilities District has cov,,nanted to institute foreclosure against delinquent parcels under certain conditions.

If sales or foreclosures of property are necessary, there could be a delay in payments to owners of the Bonds pending such sales or the prosecution of foreclosure proceedings and receipt by the Community Facilities District of the proceeds of sale if the Reserve Account of the Special Tax Fund is depleted. See "SECURITY FOR THE BONDS - Covenant to Foreclose."

Payment of Spec:ial Tax is not a Personal Obligation of the Property Owner

An owner of Taxable Property is not personally obligated to pay the Special Tax. Rather, the Special Tax is an obligation only against the parcels of Taxable Property. If, after a default in the pa11ment of the Special Tax and a foreclosure sale by the Community Facilities District, the resulting proceeds are insufficient, taking into account other obligations also constituting a lien against the parcels of Taxable Property, the Community Facilities District has no recourse agairst the owner.

Appraised Values

The Appraisal attached as APPENDIX C estimates the market value of the taxable property within tile Community Facilities District. This market value is merely the present opinion of the Ap Jraiser, and is subject to the assumptions and limiting conditions stated in the Appraisal. The Community Facilities District has not sought the present opinion of any other appraiser of the value of the taxed parcels. A different opinion of market value might be rendered by a diff,,rent appraiser.

The opinion of market value relates to sale by a willing seller to a willing buyer, each having similar information and neither being forced by other circumstances to sell or to buy. Consequently, thB opinion is of limited use in predicting the selling price at a foreclosure sale, because the sale s forced and the buyer may not have the benefit of full information.

In addition, the opinion is a present opinion, based upon present facts and circumstances. Differing facts and circumstances may lead to differing opinions of value. The

47 appraised value is not evidence of future value because future facts and circumstances may differ significantly from the present.

No assurance can be given that any of the Taxable Property in the Community Facilities District could be sold for the estimated market value contained in the Appraisal if that property should become delinquent in the payment of Special Taxes and be foreclosed upon.

Property Values and Property Development

The value of Taxable Property within the Community Facilities District 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 Community Facilities 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 Community Facilities 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 conlamination, or unfavorable economic conditions.

Neither the Community Facilities District nor the County has evaluated development risks. Since these are largely business risks of the type that the property owner customarily evaluates individually, and inasmuch as changes in land ownership may well mean changes in the evaluation with respect to any particular parcel, the Community Facilities District is issuing the Bonds without regard to any such evaluation. Thus, the creation of the Community Facilities District and the issuance of the Bonds in no way implies that the Community Facilities District or the County has evaluated these risks or the reasonableness of these risks. On the contrary, the Board has made no such evaluation and is undertaking acquisition and construction of the Public Facilities even though these risks may be serious and may ultimately halt or slow the progress of land development and forestall the realization of Taxable Property values in the event of delinquency and foreclosure.

The following is a discussion of specific risk factors that could affect the timing or scope of property development in the Community Facilities District or the value of property in the Community Facilities District.

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

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 Community Facilities 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 "THE COMMUNITY FACILITIES DISTRICT - Appraised Value to Burden Ratios." No assurance can be given that the proposed development within the Community Facilities District will be

48 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 the Community Facilities District may be adversely affected by changes in general or local economic conditions, fluctuations in or a deterioration of the real estate market, increased construction cost,;, development, financing and marketing capabilities of the individual property owner, water or Electricity shortages, and other similar factors. Development in the Community Facilities District may also be affected by development in surrounding areas, which may compete with the Community Facilities District. In addition, land development operations are subject to comprE hensive federal, state and local regulations, including environmental, land use, zoning and building requirements. There can be no assurance that proposed land development operations within the Community Facilities District 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 the Community Facilities District will not be adversely affected by these risks.

Natural CHsasters. The value of the Taxable Property in the future can be adversely affected by a vari aty of natural occurrences, particularly those that may affect infrastructure and other public improvements and private improvements on the Taxable Property and the continued habitability and enjoyment of such private improvements. The areas in and surrounding the Community Facilities District, like those in much of California, may be subject to unpredictable seismic activity. See "PROPERTY OWNERSHIP AND PROPOSED DEVELOPMENT Environmental Conditions."

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 •,arying 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 re pair or replacement. Under any of these circumstances there could be significant delinquencies in the payment of Special Taxes, and the value of the Taxable Property may well depreciate or disappear.

Legal Requirements. Other events that may affect the value of Taxable Property include changes in the law or application of the law. Such changes may include, without limitation, local qrowth control initiatives, local utility connection moratoriums and local application of statewide tax and governmental spending limitation measures.

Hazardous Substances. One of the most serious risks in terms of the potential reduction in the value of Taxable Property is a claim with regard to a hazardous substance. In general, the own,ars and operators of Taxable Property may be required by law to remedy conditions of the parcel relating to releases or threatened releases of hazardous substances. The federal Comr rehensive 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 thei;e laws, but California laws with regard to hazardous substances are also stringent and similar. 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 Taxable Property be affected by a hazardous substance, is to reduce the marketability and

49 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.

The appraised values set forth in this Official Statement do not take into account the possible reduction in marketability and value of any of the Taxable Property by reason of the possible liability of the owner or operator for the remedy of a hazardous substance condition of the parcel. Neither the Property Owners nor the Community Facilities District are aware of any hazardous substance liability affecting any of the Taxable Property. However, it is possible that such liabilities do currently exist and that the Community Facilities District and the Property Owners are not aware of them.

Further, it is possible that liabilities may arise in the future with respect to any of the Taxable Property resulting from the existence, currently, on the parcel of a substance presently classified as hazardous but that 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 that 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 Taxable Property that is realizable upon a delinquency. See "PROPERTY OWNERSHIP AND PROPOSED DEVELOPMENT - Environmental Conditions."

Endangered and Threatened Species. It is illegal to harm or disturb any plants or animals in their habitat that have been listed as endangered species by the United States Fish & Wildlife Service under the Federal Endangered Species Act or by the California Fish & Game Commission under the California Endangered Species Act without a permit. Although the Property Owners believe that no federally listed endangered or threatened species would be affected by the proposed development within the Community Facilities District, the discovery of an endangered plant or animal could delay development of vacant property in the Community Facilities District or reduce the value of undeveloped property. See "PROPERTY OWNERSHIP AND PROPOSED DEVELOPMENT - Environmental Conditions."

Concentration of Property Ownership

As of the date of issuance of the Bonds, a limited number of property owners are the sole owners of Taxable Property in the Community Facilities District, whose property is currently responsible for payment of all of the Special Taxes. See "PROPERTY OWNERSHIP AND PROPOSED DEVELOPMENT."

Failure of any owner of property in the Community Facilities District to pay installments of the Special Tax when due could result in the depletion of the Reserve Account of the Special Tax Fund prior to reimbursement from the resale of foreclosed property or payment of the delinquent Special Tax and, consequently, an insufficiency of Special Tax proceeds to meet obligations under the Indenture. In that event, there could be a delay or failure in payments of the principal of and interest on the Bonds.

Other Possible Claims Upon the Value of Taxable Property

While the Special Taxes are secured by the Taxable Property, the security only extends to the value of such Taxable Property that is not subject to priority and parity liens and similar claims.

50 The table in the section entitled 'THE COMMUNITY FACILITIES DISTRICT Direct and Overlapping Governmental Obligations" shows the presently outstanding amount of governmental obligations (with stated exclusions), the tax or assessment for which is or may become an obligation of one or more of the parcels of Taxable Property. The table also states the additional amount of general obligation bonds the tax for which, if and when issued, may become an oblig ,lion of one or more of the parcels of Taxable Property. The table does not specifically identify which of the governmental obligations are secured by liens on one or more of the parcels of Taxable Property.

In addition, other governmental obligations may be authorized and undertaken or issued in the future, the :ax, assessment or charge for which may become an obligation of one or more of the parcels of Taxable Property and may be secured by a lien on a parity with the lien of the Special Tax securing the Bonds.

In general, the Special Tax and all other taxes, assessments and charges also collected on the tax roll a ·e on a parity, that is, are of equal priority. Questions of priority become significant when ~ollection of one or more of the taxes, assessments or charges is sought by some other procE,dure, such as foreclosure and sale. In the event of proceedings to foreclose for delinquency o' 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 a parity with the other taxes, assessments and charges, anc 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 Propeiy, regardless of whether the non-governmental liens were in existence at the time of the levy c,f the Special Tax or not, this result may not apply in the case of bankruptcy. See "- Bankruptc•1 and Foreclosure Delays" below.

Exempt Properti,~s

Certain properties are exempt from the Special Tax in accordance with the Rate and Method and the Act, which provides that properties or entities of the state, federal or local government are exempt from the Special Tax; provided, however, that property within the Community Facilities District acquired by a public entity through a negotiated transaction or by gift or devise, which is not otherwise exempt from the Special Tax, will continue to be subject to the Special Tax. See "SECURITY FOR THE BONDS - Rate and Method." In addition, although the Act provides that if property subject to the Special Tax is acquired by a public entity through eminent domain proceedings, the obligation to pay the Special Tax with respect to that property is to be treated as if it were a special assessment, the constitutionality and operation of these provisions :if the Act have not been tested, meaning that such property could become exempt from the cpecial Tax.

The Act further provides that no other properties or entities are exempt from the Special Tax unless the pr:iperties or entities are expressly exempted in a resolution of consideration to levy a new special tax or to alter the rate or method of apportionment of an existing special tax.

Depletion of Res,~rve Account

The Reserve Account of the Special Tax Fund is to be maintained at an amount equal to the Reserve Requirement. See "SECURITY FOR THE BONDS - Reserve Account of the Special Tax Fund " Funds in the Reserve Account of the Special Tax Fund may be used to pay principal of and interest on the Bonds if insufficient funds are available from the proceeds of the

51 levy and collection of the Special Tax against property within the Community Facilities District. If funds in the Reserve Account of the Special Tax 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 the Community Facilities District 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 Account of the Special Tax Fund will be depleted and not be replenished by the levy of the Special Tax.

Bankruptcy and Foreclosure Delays

Bankruptcy. The payment of the Special Tax and the ability of the Community Facilities District to foreclose the lien of a delinquent unpaid tax, as discussed in "SECURITY FOR THE BONDS," 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 or any other person claiming an interest in the property could result in a delay in superior court foreclosure proceedings and could result in the possibility of Special Tax installments not being paid in part or 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 the Community Facilities District continues to be owned by a limited number of property owners, the chances are increased that the Reserve Account of the Special Tax 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 Account of the Special Tax 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.

Glasply Marine Industries. On July 30, 1992 the United States Court of Appeals for the Ninth Circuit issued an opinion in a bankruptcy case entitled In re G/asply Marine Industries, holding that ad valorem property taxes levied by a county in the State of Washington after the date that the property owner filed a petition for bankruptcy would not be entitled to priority over the claims of a secured creditor with a prior lien on the property. Although the court upheld the priority of unpaid taxes imposed before the bankruptcy petition, unpaid taxes imposed subsequent to the filing of the bankruptcy petition were declared to be "administrative expenses" of the bankruptcy estate, payable after the claims of all secured creditors. As a result, the secured creditor was able to foreclose on the subject property and retain all the proceeds from the sale thereof except the amount of the pre-petition taxes. Pursuant to this holding, post­ petition taxes would be paid only as administrative expenses and only if a bankruptcy estate has sufficient assets to do so. In certain circumstances, payment of such administrative expenses may be allowed to be deferred. Once the property is transferred out of the bankruptcy estate (through foreclosure or otherwise) it would be subject only to current ad valorem taxes (i.e., not those accruing during the bankruptcy proceeding).

52 The Gla,ply decision is controlling precedent in bankruptcy court in the State of California. If G/asp/y were held to be applicable to Special Taxes, a bankruptcy petition filing would prevent thE lien for Special Taxes levied in subsequent fiscal years from attaching so long as the property \A.as part of the estate in bankruptcy, which could reduce the amount of Special Taxes available t,J pay debt service on the Bonds. However, Glasply speaks as to ad valorem property taxes, and not special taxes, and no case law exists with respect to how a bankruptcy court would treat 1he lien for special taxes levied after the filing of a petition in bankruptcy.

It should also be noted that on October 22, 1994, Congress enacted 11 U.S.C. § 362(b)(18), whicr added a new exception to the automatic stay for ad valorem property taxes imposed by a po itical subdivision after the filing of a bankruptcy petition. Under this Jaw, if a bankruptcy petition is filed on or after October 22, 1994, the lien for ad valorem property taxes in subsequent fiscal years will attach even if the property is part of the bankruptcy estate. Bond owners should be aware that the potential effect of 11 U.S.C. § 362(b)(18) on the Special Taxes also depends upc,n whether a court were to determine that the Special Taxes should be treated like ad valorem pr:iperty taxes for this purpose.

Property Owned by FDIC. In addition, the ability of the Community Facilities District to foreclose upon th~ 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 FD:c 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 Re:;olution 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, :hat 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 ~ roperty 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 prope1y of the FDIC is subject to levy, attachment, garnishment, foreclosure or sale without the FDIC':, 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 FDI C's cons er t.

With respE,ct 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 it:, 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 lo the pursuit of previously filed tax protests. However, the [FDIC] may, in the

53 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.

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 Community Facilities District 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 Community Facilities District will be unable to foreclose on parcels of land in the Community Facilities District owned by the FDIC. Such an outcome would cause a draw on the Reserve Account of the Special Tax Fund and perhaps, ultimately, a default in payment of the Bonds.

Disclosure to Future Purchasers

The Community Facilities District has recorded a notice of the Special Tax lien in the Office of the Riverside 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 the Community Facilities District or the lending of money secured by property in the Community Facilities District. The Act and the Goals and Policies require 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

54 property to comply with these requirements, or failure by a purchaser or lessor to consider or understand the n3ture 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.

No Acceleration Provisions

The Bonds do not contain a provision allowing for the acceleration of the Bonds in the event of a paym,nt 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 sirr ilarly situated to pursue certain remedies. See "APPENDIX E - Summary of Bond Indenture." So long as the Bonds are in book-entry form, OTC will be the sole Bond holder and will be entitled to exercise all rights and remedies of Bond holders.

Loss of Tax Exemption

As discussed under the caption "LEGAL MATTERS - Tax Exemption," interest on the Bonds might become includable in gross income for purposes of federal income taxation retroactive to the date the Bonds were issued as a result of future acts or omissions of the Community Facilities District in violation of its covenants in the Indenture. The Indenture does not contain a spPcial redemption feature triggered by the occurrence of an event of taxability. As a result, if inlerest on the Bonds were to be includable in gross income for purposes of federal income t2xation, the Bonds would continue to remain outstanding until maturity unless earlier redeemed pursuant to optional or mandatory redemption or redemption upon prepayment of thE Special Tax. See 'THE BONDS - Redemption."

Voter Initiatives

Under the California Constitution, the power of initiative is reserved to the voters for the purpose of enacl ing statutes and constitutional amendments. Since 1978, the voters have exercised this power through the adoption of Proposition 13 and similar measures, including Proposition 218, v1hich was approved in the general election held on November 5, 1996.

Any such initiative may affect the collection of fees, taxes and other types of revenue by local agencies ~ uch as the Community Facilities District. Subject to overriding federal constitutional principles, such collection may be materially and adversely affected by voter­ approved initiatives, possibly to the extent of creating cash-flow problems in the payment of outstanding obligc1tions such as the Bonds.

Proposition 218-Voter Approval for Local Government Taxes-Limitation on Fees, Assessments, ard Charges-Initiative Constitutional Amendment, added Articles XIIIC and XIIID to the California Constitution, imposing certain vote requirements and other limitations on the imposition of new or increased taxes, assessments and property-related fees and charges.

The Spec al Taxes and the Bonds were each authorized by not less than a two-thirds vote of the landcwners within the Community Facilities District who constituted the qualified electors at the time of such voted authorization. The Community Facilities District believes, therefore, that issuance of the Bonds does not require the conduct of further proceedings under the Act or Proposition 218.

Like its antecedents, Proposition 218 is likely to undergo both judicial and legislative scrutiny before its impact on the Community Facilities District and its obligations can be

55 determined. Certain provisions of Proposition 218 may be examined by the courts for their constitutionality under both State and federal constitutional law, the outcome of which cannot by predicted.

LEGAL MATTERS

Legal Opinions

The legal opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Bond Counsel, approving the validity of the Bonds will be made available to purchasers at the time of original delivery and is attached as APPENDIX I. Bond Counsel expresses no opinion to the Owners of the Bonds as to the accuracy, completeness or fairness of this Official Statement or other offering materials relating to the Bonds, and expressly disclaims any duty to advise the Owners of the Bonds as to matters related to this Official Statement. Bond Counsel represents the Underwriter on matters unrelated to the issuance of the Bonds.

Jones Hall, A Professional Law Corporation, San Francisco, California, is serving as Underwriter's counsel and will pass upon certain legal matters for the Underwriter. Certain legal matters will be passed upon for the County and the Community Facilities District by County Counsel.

Tax Exemption

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 of California personal income tax. Bond Counsel notes that, with respect to corporations, interest on the Bonds may be included as an adjustment in the calculation of alternative minimum taxable income which may affect the alternative minimum tax liability of such corporations.

The difference between the issue price of a Bond (the first price at which a substantial amount of the Bonds of the same series and 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 Bondowner before receipt of cash attributable to such excludable income. The amount of original issue discount deemed received by the Bondowner will increase the Bondowner's basis in the Bond. In the opinion of Bond Counsel, the amount of original issue discount that accrues to the owner of the 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 of California personal income tax.

Bond Counsel's opinion as to 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

56 Community Facilities District complies with all requirements of the Internal Revenue Code of 1986, as amendE·d (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 caus, 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 Facilicies District has covenanted to comply with all such requirements.

The amoiJnt by which a Bondowner's original basis for determining loss on sale or exchange in the applicable Bond (generally, the purchase price) exceeds the amount payable on maturity (or an an earlier call date) constitutes amortizable bond premium, which must be amortized under Section 171 of the Code; such amortizable bond premium reduces the Bondowner's bai;is in the applicable Bond (and the amount of tax-exempt interest received), and is not deductible for federal income tax purposes. The basis reduction as a result of the amortization of bond premium may result in a Bondowner realizing a taxable gain when a Bond is sold by the ONner for an amount equal to or less (under certain circumstances) than the original cost of the Bond to the Owner. Purchasers of the Bonds should consult their own tax advisors as to the treatment, computation and collateral consequences of amortizable bond premium.

The Internal Revenue Service (the "IRS") has initiated an expanded program for the auditing of tax-e>:empt bond issues, including both random and targeted audits. It is possible that the Bonds w II 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 similar bonds).

Bond Counsel's opinions may be affected by actions taken (or not taken) or events occurring (or not occurring} after the date hereof. 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 anj 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 express,,s no opinion as to 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 tal

Although Bond Counsel has rendered an opinion that interest (and original issue discount) on the Bonds is excluded from gross income for federal income tax purposes provided that the Commun ty 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.

A copy of he proposed form of opinion of Bond Counsel is attached as Appendix I.

57 No Litigation

At the time of delivery of the Bonds, the County and the Community Facilities District will certify that there is no action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, public board or body, pending with respect to which the Community Facilities District has been served with process or threatened, which:

• in any way questions the powers of the Board, the Legislative Body or the Community Facilities District, or

• in any way questions the validity of any proceeding taken by the Board or the Legislative Body in connection with the issuance of the Bonds, or

• wherein an unfavorable decision, ruling or finding could materially adversely affect the transactions contemplated by the Bond Purchase Contract, or

which, in any way, could adversely affect the validity or enforceability of the Resolutions, the Bonds, the Indenture, the Issuer Continuing Disclosure Certificate or the Bond Purchase Contract, or

to the knowledge of the Community Facilities District, which in any way questions the exclusion from gross income of the recipients thereof of the interest on the Bonds for federal income tax purposes, or

in any other way questions the status of the Bonds under State tax laws or regulations.

CONTINUING DISCLOSURE

The Community Facilities District. The Community Facilities District will covenant in a continuing disclosure certificate, the form of which is set forth in "APPENDIX G Form of Issuer Continuing Disclosure Certificate" (the "Issuer Continuing Disclosure Certificate"), for the benefit of holders and beneficial owners of the Bonds, to provide certain financial information and operating data relating to the Community Facilities District and the Bonds by not later than nine months after the end of the Community Facilities District's fiscal year, or April 1 of each year, beginning on April 1, 2006. The Issuer Continuing Disclosure Certificate also requires the Community Facilities District to provide notices of the occurrence of certain enumerated events, if material. The initial Dissemination Agent under the Issuer Continuing Disclosure Certificate will be The Bank of New York Trust Company, N.A.

The covenants of the Community Facilities District in the Issuer Continuing Disclosure Certificate will be made in order to assist the Underwriter in complying with Securities and Exchange Commission Rule 15c2-12(b)(5) (the "Rule"). A default under the Issuer Continuing Disclosure Certificate will not, in itself, constitute an Event of Default under the Indenture, and the sole remedy under the Issuer Continuing Disclosure Certificate in the event of any failure of the Community Facilities District or the Dissemination Agent to comply will be an action to compel specific performance.

During the past 5 years, the County (as the administrator of several special districts or agencies either formed by the County or of which the County is a member) has on two

58 occasions not met the continuing disclosure requirement under the Rule on a timely basis. In one instance, thE dissemination agent failed to file the annual report for Community Facilities District No. 89-1 Nhich the County had timely provided to the dissemination agent. The annual report was subse,1uently filed in February, 2003, promptly after the County became aware of the failure to file. The second incident involved Riverside County Public Financing Authority Rancho Villages Project/AD No. 159 Series 2003 (Junior Lien Bonds). Although other financings relating to Assessment District No. 159 have a report date of April 1, the report date for the 2003 financing had a February date. The annual report for all three issues (1999, 2000, and 2003) was provided to the dissemination agent on March 17, 2004.

The Property Owners. Each Property Owner will covenant in a continuing disclosure certificate, the form of which is set forth in "APPENDIX H Form of Property Owner Disclosure Certificate" (the "=>roperty Owner Continuing Disclosure Certificate"), for the benefit of holders and beneficial owners of the Bonds, to provide certain information relating to that Property Owner and the parcels its owns within the Community Facilities District on a semi-annual basis, and to provide notices of the occurrence of certain enumerated events. The initial Dissemination Agent under each Property Owner Continuing Disclosure Certificate will be The Bank of New York Trust Company, N.A.

The obligation of each Property Owner to provide information is limited to the type of information descr bed in its continuing disclosure undertakings, and no determination has been made that any Property Owner is an "obligated person" for purposes of the Rule. The Community Facil ties District will not assume any responsibility for the enforcement of any Property Owner's obligations under its continuing disclosure undertakings, or for the accuracy of the information contained in any Property Owner's Semi-Annual Report.

The obligations of each Property Owner under its Property Owner Continuing Disclosure Certificate will terminate on the earlier of (i) legal defeasance, prior redemption or payment in full of all the Bards, (ii) the date on which that Property Owner's property in the Community Facilities District is no longer responsible for 20% or more of the Special Taxes, or (iii) the date on which that Property Owner prepays in full all of the Special Taxes attributable to its property in the Community Facilities District.

A default under a Property Owner Continuing Disclosure Certificate will not, in itself, constitute an Event of Default under the Indenture, and the sole remedy under a Property Owner Continuinfl Disclosure Certificate in the event of any failure of the applicable Property Owner or the Disssmination Agent to comply will be an action to compel specific performance.

NO RATINGS

The Bonds have not been rated by any securities rating agency.

UNDERWRITING

The Bond1 are being purchased by E. J. De La Rosa & Co., Inc. at a purchase price of $25, 118,359.55 (which represents the aggregate principal amount of the Bonds ($25,820,000.00) less an original issue discount of $288,778.65 and less an underwriter's discount of $412,861.80).

59 The purchase agreement relating to the Bonds provides that the Underwriter will purchase all of the Bonds, if any are purchased, the obligation to make such purchase being subject to certain terms and conditions set forth in such purchase agreement.

The Underwriter may offer and sell Bonds to certain dealers and others at prices lower than the offering price stated on the cover page hereof. The offering prices may be changed from time to time by the Underwriter.

PROFESSIONAL FEES

In connection with the issuance of the Bonds, fees payable to certain professionals are contingent upon the issuance and delivery of the Bonds. Those professionals include:

the Underwriter;

Stradling Yocca Carlson & Rauth, a Professional Corporation, as Bond Counsel;

• Jones Hall, A Professional Law Corporation, as Underwriter's counsel;

Albert A. Webb Associates, as Special Tax Consultant (as to a portion of its fees);

Fieldman, Rolapp & Associates, as Financial Advisor to the County; and

The Bank of New York Trust Company, N.A., as Trustee for the Bonds.

EXECUTION

The execution and delivery of the Official Statement by the Community Facilities District has been duly authorized by the County of Riverside on behalf of the Community Facilities District.

COMMUNITY FACILITIES DISTRICT NO. 04-2 (LAKE HILLS CREST) OF THE COUNTY OF RIVERSIDE

By: Isl Dean Deines Deputy County Executive Officer County of Riverside, on behalf of Community Facilities District No. 04-2 (Lake Hills Crest) of the County of Riverside

60 APPENDIX A

GENERAL INFORMATION ABOUT RIVERSIDE COUNTY

The folio Ning information is included only for the purpose of supplying general information regc rding Riverside County. This information is provided only for general informational purposes, and provides prospective investors limited information about Riverside County and its economic base. The Bonds are not a debt of the County, the State or any of its political subdivisiJns, and neither the County, the State nor any of its political subdivisions is liable therefor.

History and Location of Riverside County

Riverside County, which encompasses 7,177 square miles, was organized in 1893 from territory in San Eiernardino and San Diego Counties. Located in the southeastern portion of California, Rivers de County is bordered on the north by San Bernardino County, on the east by the State of Arizona, on the South by San Diego and Imperial Counties and on the west by Orange and San Bernardino Counties. There are 24 incorporated cities in Riverside County.

Riverside County's varying topology includes desert, valley and mountain areas as well as gently rolling :errain. Three distinct geographical areas characterize Riverside County: the western valley a ·ea, the higher elevations of the mountains, and the deserts. The western valley, the San ,Jacinto mountains and the Cleveland National Forest experience the mild climate typical of Southern California. The eastern desert areas experience warmer and dryer weather conditior,s. Riverside County is the site for famous resorts, such as Palm Springs, as well as a leading area for inland water recreation. Nearly 20 lakes in Riverside County are open to the public. The dry summers and moderate to cool winters make it possible to enjoy these and other recreatiJnal and cultural facilities on a year-round basis.

Riverside County Population

According to the State Department of Finance, Demographic Research Unit, Riverside County's population was estimated at 1,877,000 as of January 1, 2005. The largest cities in Riverside Count)' are the cities of Riverside, Moreno Valley, Corona, Hemet, Indio, Palm Springs, Murrieta, Temecula and Cathedral City. The areas of most rapid population growth continue to be those more populated and industrialized cities in the western and central regions of Riverside County and the southwestern unincorporated region of Riverside County between Sun City and Temecula.

The follov1ing table sets forth annual population figures, as of January 1, for cities located within Riverside County for each of the years listed:

A-1 COUNTY OF RIVERSIDE Population Estimates

1990(') 2000 111 2001 2002 2003 2004 2005 Banning 20,570 23,562 23,972 24,659 25.696 27,672 27,954 Beaumont 9,685 11,384 11,562 12,280 13,962 16,632 18,982 Blythe 8,428 20,465 20,839 21,304 21,381 22,200 22,005 Calimesa 7,139 7,214 7,316 7,428 7,477 7,434 Canyon Lake 9,952 10,164 10,410 10,649 10,847 10,912 Cathedral City 30,085 42,647 44, 111 45,698 47,908 49,452 50,632 Coachella 16,896 22,724 23,369 24,432 27, 123 28, 146 30,764 Corona 76,095 124,966 129,797 134,796 138,797 144,274 144,070 Desert Hot Springs 11,668 16,582 16,781 16,990 17,404 18,004 19,386 Hemet 36,094 58,812 60,052 61.869 63,017 64,889 66,455 Indian Wells 2.647 3,816 4,150 4,376 4,454 4,514 4,781 Indio 36,793 49,116 50,464 52,507 55, 155 60, 175 66, 118 Lake Elsinore 18,285 28,930 30,045 31,250 33,469 35.989 38,045 La Quinta 11,215 23,694 26,097 28,894 30,852 33, 104 36,145 Moreno Valley 118,779 142,379 144,401 147,340 151,887 157.865 165,328 Murrieta 44,282 46,465 51,950 68,555 79,045 85,102 Norco 23.302 24, 157 24,497 25,026 25.516 25,861 26,703 Palm Desert 23,252 41, 155 42,099 43, 129 44,490 45,610 49,280 Palm Springs 40, 181 42,805 43,422 43,981 44,564 45,039 45,731 Perris 21,460 36, 189 36,927 37,742 38.699 42048 44,594 Rancho Mirage 9,778 13,249 13,849 14,431 15, 155 15,787 16,416 Riverside 226.505 255, 166 262,311 271,004 277,527 281,810 285,537 San Jacinto 16.210 23,779 24,627 25,447 26,381 27, 198 28,437 Temecula 27,099 57,716 61,803 73, 164 75,996 78,841 81,397 Unincorporated 385,386 420,721 431,455 444,225 460,689 485,379 504,792 County Total 1,170,413 1,545,387 1,590,473 1,654,220 1,726,754 1,807,858 1,877,000

( 1) From U.S. Census. Source: State Department of Finance estimates (as of January 1 ).

Population

The following sets forth the County and the State population estimates as of January 1 for the years 2001 through 2005:

RIVERSIDE COUNTY AND STATE OF CALIFORNIA Estimated Population

Year Riverside State of (January 1) County California 2001 1,590,473 34,441,561 2002 1,654,220 35,088,671 2003 1,726,754 35,691,442 2004 1,807,858 36,271,091 2005 1,877,000 36,810,358 Source: State of California Department of Finance, Demo~iraph1c Research Unit.

A-2 Riverside County Employment

Riverside County and San Bernardino County comprise the Riverside-San Bernardino Metropolitan Statistical Area. The following table summarizes the civilian labor force, employment and unemployment in the Riverside-San Bernardino Metropolitan Statistical Area for the calendar years 1999 through 2003.

RIVERSIDE-SAN BERNARDINO Metropolitan Statistical Area Civilian Labor Force, Employment and Unemployment, Employment by Industry (Annual Averages)

2000 2001 2002 2003 2004 Civilian Labor Force (1l 1,508,000 1,562,300 1,639,700 1,688,300 1,650,500 Employment 1,430,800 1,484, 100 1,543,400 1,588,700 1,556, 100 Unemployment 77,200 78,200 96,300 99,600 94,400 Unemployment Rate 5.1 o/o 5.0% 5.9°/o 5.9°/o 5.7°/o 2 Wage and Sala[Y Em~l1Jyment { ) Agriculture 21,700 20,900 20,300 20,300 18,800 Natural Resources and Mining 1,300 1,200 1,200 1,200 1,200 Construction 80, 100 88,400 90,900 99,000 110,800 Manufacturing 120,100 118,600 115,400 116,100 120,000 Wholesale Trade 38,300 41,600 41,900 43,500 44,400 Retail Trade 127,400 132,200 137,500 142,700 151,800 Transportation, Warehc using and Utilities 46,400 45,600 46,800 50, 100 54,300 Information 12.900 14,600 14, 100 13,900 13,800 Finance and Insurance 20,600 22,900 23,500 25,700 27,800 Real Estate and Rental and Leasing 14,200 15,300 15,900 16,900 17,500 Professional and Busin1?ss Services 97,000 101,700 106,800 115,400 125,200 Educational and Health Services 102,200 106,000 112,400 115,800 117,700 Leisure and Hospitality 100,800 104,400 107,200 109,000 115,200 Other Services 35,000 37.100 38, 100 38,400 38,800 Federal Government 18,200 16,900 16,900 17,000 17, 100 State Government 24,600 25,800 26,600 26,600 26,600 Local Government 149 300 157 600 169 300 167 900 167 800 Total All Industries 1,010,100 1,050,700 1,084,000 1,119,400 1, 168,500

( 1) Labor force cata 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.

A-3 Largest Employers in Riverside County

The following table lists the largest employers within the County:

COUNTY OF RIVERSIDE Major Employers (As of January 1, 2005)

EMPLOYER NAME LOCATION INDUSTRY Calif. State Transportation Lake Elsinore Government Offices-State Casino Morongo Cabazon Casinos Chase Manhattan Mortgage Corp Moreno Valley Real Estate Loans Desert Regional Medical Ctr Palm Springs Hospitals Eisenhower Medical Ctr Rancho Mirage Clinics Guidant Corp Temecula Physicians & Surgeons Equip & Supls-Mfrs Handsome Rewards Perris Mail Order & Catalog Shopping JW Marriott Desert Springs Rst Palm Desert Hotels & Motels La Quinta Resort & Club La Quinta Hotels & Motels Labtechniques Rancho Mirage Laboratories-Medical National RV Holdings Inc Perris Motor Homes-Manufacturers Oasis Distributing Thermal Fruits & Vegetables-Growers & Shippers Parkview Community Hospital Riverside Hospitals Parts Depot Beaumont Motorcycles & Motor Scooters-Supplies Pechanga Resort & Casino Temecula Casinos Riverside Community College Riverside Schools-Universities & Colleges Academic Riverside Community Hospital Riverside Hospitals Riverside County Regional Med Moreno Valley Hospitals Signatures Perris Mail Order & Catalog Shopping Spa Resort Casino Palm Springs Casinos Starcrest Perris Mail Order & Catalog Shopping Starcrest Products of CA Perris Mail Order & Catalog Shopping University of California Riverside Schools-Universities & Colleges Academic Valley Health System Hemet Hospitals Watson Pharmaceuticals Inc Corona Drug Millers

Source: State of California Employment Development Department.

A-4 Riverside Count( 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 payment~ (fines, fees, penalties, etc.) and personal contributions to social insurance. According to U S. government definitions, the resultant figure is commonly known as "disposable perscnal income."

COUNTY OF RIVERSIDE Effective Buying Income For Calendar Years 1999 through 2003

Median Total Effective Household Buying Income Effective Buying /ear Area (OOO's Omitted l Income ·1999 Riverside County $ 22,453,426 $35,145 California 590,376,663 39,492 United States 4,877,786,658 37,233

:>000 Riverside County $ 25, 144, 120 $39,293 California 652.190,282 44,464 United States 5,230824,904 39,129

:>001 Riverside County $ 23,617,301 $37,480 California 650,521,407 43,532 United States 5,303,481,498 38,365

:•002 Riverside County $ 25,180,040 $38,691 California 647,879,427 42,484 United States 5,340,682,818 38,035

:•003 Riverside County $ 27,623,743 $39,321 California 674,721.020 42,924 United States 5,466,880,008 38,201

Source: Sales & Marketing Management Survey of Buying Power.

A-5 Construction Trends

Provided below are the building permits and valuations for the County for calendar years 2000 through 2004.

COUNTY OF RIVERSIDE Total Building Permit Valuations (valuations in thousands)

2000 2001 2002 2003 2004 Permit Valuation New Single-family $2,519,841 $3,051, 190 $3,670,371 $4,665,675 $4,997,513 New Multi-family 125,296.2 174,628.0 165,413.0 406,483 0 404,615.9 Res. Alterations/Additions 67 303.7 70 849.7 106 855.8 135176.6 Total Residential 2,712,441.3 3,296,668. 1 3,923,627.4 5, 179,014.5 6,537,305.6

New Commercial 393,509.9 287,068.6 297,963.6 360,707.4 580,057.8 New Industrial 98,621 .8 74,766.3 80,881 .6 112,706.6 203,311 .9 New Other 119,978.4 152,854.0 187,510.6 261,793.6 334,001.0 Com. Alterations/Additions 157 802.1 143 351 .7 174 785.7 1731655 222 495.5 Total Nonresidential 769,912.2 658,040.6 741,141.5 908,373. 1 1,339,866. 1

New Dwelling Units Single Family 13,630 16,556 20,591 25, 137 29,478 Multiple Family 1 .780 2458 2.073 5,224 4 748 TOTAL 15,410 19,014 22,664 30,361 34,226

Source: Construction Industry Research Board, Building Permit Summary.

A-6 Riverside County Commercial Activity

Commercial activity is an important factor in Riverside County's economy. Much of Riverside Coun1y's commercial activity is concentrated in central business districts or small neighborhood commercial centers in cities. There are eight regional shopping malls in Riverside Counly: Riverside Plaza, Galleria at Tyler (Riverside), Palm Springs Mall, Desert Fashion Mall, Indio Fashion Mall, Hemet Valley Mall, Palm Desert Town Center and Moreno Valley Mall at TJwngate. There are also two factory outlet malls (Desert Hills Factory Stores and Lake Elsinore Outlet Center) and over 200 area centers in Riverside County.

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.

During the first two quarters of 2004, total taxable transactions in Riverside County were reported to be $12, 107,280,000, or 16.5% greater than total taxable transactions of $10,391,604 that were reported in Riverside County during the first two quarters of 2003. Annual figures are not yet available for 2004.

COUNTY OF RIVERSIDE Taxable Transactions (figures in thousands)

1999 2000 2001 2002 2003 Retail Stores: Apparel Stores $ 495,945 $ 538,578 $ 565,295 $ 610,388 $ 746,015 General Merchandise Stores 1,845,651 2,062,738 2,275,736 2,459,046 2,671,971 Specialty Stores 1, 186,231 1,277,359 1,379,979 1,501,106 1,649,224 Food Stores Group 828.641 889,894 930,232 967, 171 1,028,392 Eating and Drinking Group 1,233,274 1,364,808 1,465,467 1,559,215 1,713,632 Household Group 447,594 517,578 526,083 594,049 691,051 Building Materials G ·oup 1,017,564 1,210,838 1,339,020 1,427,831 1.678,347 Automotive Group 3,145,417 3,812,690 4,148,261 4,563,779 5, 198,391 Other Retail Stores 485 407 515 991 543 208 568 148 653,929 Retail Store Totals 10,685,724 12.190,474 13, 173,281 14,250,733 16,030,952 Business and Personnel Services 794,847 851,744 832,562 881,524 944,658 All Other Outlets 3 596 374 3 937 231 4 225 712 4 366 737 4 733 525 TOTAL ALL OUTLETS $15 QZ6 945 $16 9Z9449 $18 231 555 $19498 994 $21 ZQ9 135

(1) This category was included in Auto Dealers and Auto Supplies and Building Materials and Farm Implements in these years. Source: State Department of Equalization

A-7 Riverside County Agriculture

Agriculture remains a leading source of income in Riverside County. Principal agricultural products are milk, eggs, table grapes, grapefruit, nursery, alfalfa, dates, lemons and avocados. Four areas in Riverside County account for the major portion of agricultural activity: the Riverside/Corona and San Jacinto/Temecula Valley Districts in the western portion of Riverside County, the Coachella Valley in the central portion and the Palo Verde Valley near Riverside County's eastern border.

Riverside County Transportation

Easy access to job opportunities in Riverside County and nearby Los Angeles, Orange and San Diego Counties is important to Riverside County's employment picture. Several major freeways and highways provide access between Riverside County and all parts of Southern California. The Riverside Freeway (State Route 91) extends southwest through Corona and connects with the Orange County freeway network in Fullerton. Interstate 10 traverses the width of Riverside County, the western-most portion of which links up with major cities and freeways in the eastern part of Los Angeles County and the southern part of San Bernardino County. Interstate 15 and 215 extend north and then east to Las Vegas, and south to San Diego. The Moreno Valley Freeway (U.S. 60) provides an alternate (to Interstate 10) east-west link to Los Angeles County.

Currently, Metrolink provides commuter rail service to Los Angeles and Orange Counties from several stations in Riverside County. Transcontinental passenger rail service is provided by Amtrak with a stop in Indio. Freight service to major west coast and national markets is provided by two transcontinental railroads Burlington Northern/Santa Fe and Union Pacific. Truck service is provided by several common carriers, making available overnight delivery service to major California cities.

Transcontinental bus service is provided by Greyhound Lines. lntercounty, intercity and local bus service is provided by the Riverside Transit Agency to western County cities and communities. The Sunline Transit Agency provides local bus service throughout the Coachella Valley, including the cities of Palm Springs and Indio. The City of Banning also operates a local bus system.

Riverside County seat, located in the City of Riverside, is within 20 miles of the Ontario International Airport in neighboring San Bernardino County. This airport is operated by the Los Angeles Department of Airports. Four major airlines schedule commercial flight service at Palm Springs Regional Airport. County-operated general aviation airports include those in Thermal, Hemet. Blythe and French Valley. The cities of Riverside, Corona and Banning also operate general aviation airports. There is a military base at March Air Force Base, which converted from an active duty base to a reserve-only base on April 1, 1996. Plans for joint military and civilian use of the base thereafter are presently being formulated by the March AFB Joint Powers Authority, comprised of Riverside County and the Cities of Riverside, Moreno Valley and Perris.

A-8 Riverside County Environmental Control Services

Water Supply. Riverside County obtains a large part of its water supply from groundwater sources, with certain areas of Riverside County, such as the City of Riverside, relying almost entirely on groundwater. As in most areas of Southern California, this groundwater source is not sufficient to meet countywide demand and Riverside County's water supply is supplemented by imported water. At the present time imported water is provided by the Colorado River tlqueduct and the State Water Project.

At the regional and local level, there are several water districts that were formed for the primary purpose of :,upplying supplemental water to the cities and agencies within their areas. The Rancho Califcrnia Water District, the Coachella Valley Water District, the Western Municipal Water District and the Eastern Municipal Water District are the largest of these water districts in terms of area served. Riverside County is also served by the San Gorgonio Pass Water Agency, Desert Water Agency and Palo Verde Irrigation District.

Flood Control. Primary responsibility for planning and construction of flood control and drainage systems v. ithin Riverside County is provided by the Riverside County Flood Control and Water Conservation District and the Coachella Valley Storm Water Unit.

Sewage. There are 18 wastewater treatment agencies in Riverside County's Santa Ana River region and nine in Riverside County's Colorado River Basin region. Most residents in the rural unsewered aroas of Riverside County rely upon septic tanks and leach fields as an environmentally acce,ptable method of sewage disposal.

Riverside County Education

There are four elementary school districts, one high school district, eighteen unified (K- 12) school districts and four community college districts in Riverside County. Ninety-five percent of all K-12 students attend schools in the unified school districts. The three largest unified districts are l~iverside Unified School District, Moreno Valley Unified School District and Corona-Norco Unifie:J School District.

There are seven two-year community college campuses located in the communities of Riverside, Moreno valley, Norco, San Jacinto, Menifee, Coachella Valley and Palo Verde Valley. There are also two universities and a four-year college located in the City of Riverside - the University of Cali'ornia, Riverside, La Sierra University and California Baptist College.

A-9 [THIS PAGE INTENTIONALLY LEFf BLANK] APPENDIX B

RATE Al'IID METHOD OF APPORTIONMENT OF SPECIAL TAX FOR COMMUIIIITY FACILITIES DISTRICT NO. 04-2 (LAKE HILLS CREST) OF THE COUNTY OF RIVERSIDE [THIS PAGE INTENTIONALLY LEFr BLANK] RATE AND METHOD OF APPORTIONMENT OF SPECIAL TAX FOR COMMUNITY FACILITIES DISTRICT :'110. 04-2 OF THE COUNTY OF RIVERSIDE (LAKE HILLS CREST)

A Special Tax (all capitalized terms are defined in Section A. Definitions below), shall be applicable to each Parcel of Taxable Property located within the boundaries of Community Facilities District No. 04-2 (Lake Hills Crest) of the County of Riverside. The amount of Special Tax to be levied each Fiscal Year, commencing in Fiscal Ycar 2005-2006 for a Parcel shall be determined by the Legislative Body of the CFD by applying the appropriate Special Tax for Developed Proper!)', Approved Property, Undeveloped Property, and Public Property andlt1r Property Owner's Association Property that is not Exempt Property as set forth in Sections B. C, and D below. All of the real property within the CFD, unless exempted by law or by the provisions hereof in Section E., 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 acreage of a Parcel as indicated on the most recent Assessor's Parcel Map, or if the land area is not shown on such Assessor's Parcel Map, the land area shown on the applicable Final Map, parcel map, condominium plan, or other similar instrument.

"Act" means the Mello-Roos Community Facilities Act of 1982, as amended, being Chapter 2.5, of Part I of Division 2 of Title 5 of the California Government Code.

~~ Administriitive Expenses" means aJl actual or reasonably estitnated costs and expenses of the County that are chargeable or allocable to carry out its duties as the administrator of the CFD as allowed by the Act, which shall include without limitation, all costs and expenses ari:;ing out of or resulting from the annual levy and collection of the Special Tax, Special Tax appeals, foreclosure, trustee fees, rebate compliance calculation fees, any litigation involving the CFD, continuing disclosure undertakings of the County as imposed by applicable laws and regulations, communication with bondholders and normal administrative expenses.

"Administrator" means the County Executive Officer of the County, or his or her designee.

"Approved Property" means all Parcels of Taxable Property: (i) that are included in a Final Map that was recorded prior to the January I st preceding the Fiscal Year in which the Special Tax is being levied, and (ii) that have not been issued a building permit prior to the April I st preceding the Fiscal Year in which the Special Tax is being levied.

B-1 "Assessor's Parcel Map" means an official map of the Assessor of the County designating parcels by an Assessor's parcel number.

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

"Backup Special Tax" means the Special Tax amount set forth in Section C.1.b., below.

"Bonds" means any bonds or other debt (as defined in the Act) issued by the CFO and secured by the levy of Special Taxes.

"CFD" means Community Facilities District No. 04-2 (Lake Hills Crest) of the County of Riverside established pursuant to the Act.

"County" means the County of Riverside.

"Developed Property" means all Parcels of Taxable Property: (i) 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 (ii) that have been issued a building permit prior to the April I st preceding the Fiscal Y car in which the Special Tax is being levied.

"Exempt Property" means any Parcel which is exempt from Special Taxes pursuant to Section E., below.

"Final Map" 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 ofa condominium plan pursuant to California Civil Code 1352 that creates individual Parcels for which building pennits may be issued without further subdivision.

"Fiscal Year" means the period starting on July I of any calendar year and ending on June 30 of the following calendar year, commencing July I, 2005.

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

"Land Use Category" means any of the categories listed in Table I, below.

"Legislative Body" means the Board of Supervisors of the County acting ex officio as the Legislative Body of the CFO.

"Maximum Special Tax" means the maximum Special Tax, determined in accordance with Section C, which can be levied in any Fiscal Year on any Parcel.

"Non-Residential Property" means all Parcels of Developed Property for which a building permit was issued for a non-residential use.

B-2 "Outstanding Bonds" means all issued Bonds, 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 prepayment of a Parcel's obligation.

"Parccl(s)'' means a lot or parcel shown on an Assessor's Parcel Map within the boundary of the CFD with an assigned parcel number valid at the time the Special Tax is enrolled for 1hc Fiscal Year for which the Special Tax is being levied.

"Property Owner's Association Property" means any Parcel which, as of the January I preceding n e Fiscal Year for which the Special Tax is being levied, is owned by a property owner association, including any master or sub-association.

"Proportionately" means for (i) Developed Property, that the ratio of the actual Special Tax levy to 1he Assigned Special Tax is the same for all Parcels of Developed Property, (ii) Approved Property that the ratio of the actual Special Tax levy to the Maximum Special Tax s the same for all Parcels of Approved Property, (iii) Undeveloped Property, that the ratic, of the actual Special Tax levy per Acre to the Maximum Special Tax per Acre is the same for all such Parcels , and (iv) Public Property and/or Property Owner's Association Property, that is not Exempt pursuant to Section E., the ratio of the actual Special Tax levy per Acre to the maximum Special Tax per Acre is the same for all such Property.

"Public Prcperty" means, for any Fiscal Year, any Parcel within the boundary of the CFD which, as of the January I preceding the Fiscal Year for which the Special Tax is being levied, is owned by, dedicated to, or irrevocably offered for dedication to the federal government, the State of California, the County, or any other public agency, provided, hc,wever, that any Parcel leased by a public agency to a private entity and subject to taxation under Section 53340.1 of the Act shall be taxed and classified according to its use.

"Residential Floor Area" means all of the square footage of living area within the perimeter o O a residential structure, not including any carport, walkway, garage, overhang, patio, enclosed patio or similar area, on a Parcel. The determination of Residential Floor Arca shall be made by reference to the building permit(s) for the Parcel.

"Residential Property" means all Parcels of Developed Property for which a huilding permit has teen issued for purposes of constructing one or more residential dwelling units.

"Special Ta,:(cs)" means the special tax to be levied in any Fiscal Year on each Parcel of Taxable Pror crty.

"Special Ta~ Requirement" means that amount required in any Fiscal Year to pay: (i) annual debt service on all Outstanding Bonds due in the calendar year which commences in such Fiscal Year: (ii) periodic costs on the Bonds, including but not limited to, credit enhancement and rebate payments on the Bonds; (iii) Administrative Expenses; and (iv) an amount equal to any anticipated shortfall due to Special Tax

B-3 delinquencies in the prior Fiscal Year; and (v) any amount required to establish or replenish any reserve funds for the Bonds, less (vi) a credit for funds available to reduce the annual Special Tax levy as detennined by the Administrator.

"Taxable Property" means all Parcels in the CFD which are not exempt from the Special Tax pursuant to law or Section E., below.

"Undeveloped Property" means all Taxable Property not classified as Developed Property, Approved Property, Public Property and/or Property Owner's Association Property that is not Exempt Property pursuant to the provisions of Section E.

B. ASSIGNMENT TO LAND USE CATEGORY

Each Fiscal Year, commencing with the 2005-2006 Fiscal Year, all Parcels of Taxable Property within the CFD shall be classified as Developed Property, Approved Property, Undeveloped Property, Public Property, or Property Owner's Association Property and shall be subject to the levy of Special Taxes in accordance with this Rate and Method of Apportionment as determined pursuant to Sections C., D., and E. below.

Parcels of Developed Property shall further be classified as Residential Property or Non­ Residential Property. A Parcel of Residential Property shall further be classified to the appropriate Land Use Category based on the Residential Floor Area for such Parcel as shown in Table 1 below.

C. MAXIMUM SPECIAL TAX RATE

1. Developed Property

Commencing Fiscal Year 2005-2006, and each Fiscal Year thereafter, the Maximum Special Tax for each Parcel of Residential Property classified as Developed Properly shall be the greater of (i) an amount derived by application of the applicable Assigned Special Tax set forth in Table 1 or (ii) the amount derived by application of the Backup Special Tax as provided for in Section C. l .b. below.

Commencing Fiscal Year 2005-2006, and each Fiscal Year thereafter, the Maximum Special Tax for each Parcel of Non-Residential Property classified as Developed Property shall be the Assigned Special Tax described in Table 1.

a. Assigned Special Tax

The Assigned Special Tax for each Land Use Category within the CFO is shown in Table I below.

B-4 TABLE I Assigned Special Taxes for Developed Property Community Facilities District No. 04-2

Assigned Taxable Special Tax Per Land Use Category Unit Taxable Unit 1-Re sidel!.tial Pro[)erty (4,201 or more Sq.Ft.) D/U $5, 170 2-Re sidential Property_(4,00I to 4,200 Sq.Ft.) D/U $4,615 3-Re sidential Prope_rt)'.(3,601 to 4,000 Sq.Ft.) D/U $4,470 4-Re sidential Property_ (3,40 I to 3,600 Sq.Ft) D/U $4,065 5-Re sidential Propeli)'. (3,201 to 3,400 Sq,Ft.) D/U $3,965 6-Re sidenlial Pro[Jerty (3,001 to 3_,?00 Sq.Ft.) D/U $3,740 7-Re sidential Pro[Jerty (2,801 to 3,000 Sa.Ft.) D/U $3,515 $3,415 8-Re sidential Properly (2.501 lo 2,800 Sa.Ft.) D/U ··--·-- 9-Re sidential Property (2,500 or less Sa Ft.) D/U---· $3, 170 'lion-Residential Property Acre $14,44J_ IO - ·-

b. Backup Special.Tax

The Backup Special Tax for each Parcel of Residential Property created by a specific Final Map shall be determined by multiplying $14,445 by the total Acreage of Taxable Property within said Final Map, excluding the Acreage associated with lots or Parcels that are or are expected to be classified as Non-Residential Property, Public Property and Property Owner's Association Property pursuant to the current land use entitlements in such Final Map and dividing such amount by the total number of lots classified or expected to be classified as Residential Property within the specific Final Map.

If a single Final Map is recorded for Tract No. 28815 and a single Final Map is recorded for Tract No. 28816 at the same time, both Final Maps shall be treated as a single Final Map for purposes of determining the Backup Special Tax.

Notwithstanding the foregoing, if the number of Parcels of Residential Property in a specific Final Map is subsequently changed or modified by recordation of a lot line adjustment or similar instrument, then the Backup Special Tax shall be recalculated for the area that has been changed or modified using the methodology described in the preceding paragraph.

2. Approved Property

The Maximum Special Tax for each Parcel of Approved Property expected to be classil'ied as Residential Property pursuant to the current land use entitlements shall be the Backup Special Tax computed pursuant to Section C. I .b. The

B-5 Maximum Special Tax for each Parcel of Approved Property expected to be classified as Non-Residential Property pursuant to the current land use entitlements shall be $14,445 per Acre.

3. Public Property and/or Property Owner's Association Property that is not Exempt Property pursuant to tbe provisions of Section E.

The Maximum Special Tax for each Parcel of Public Property andior Property Owner's Association Property that is not Exempt Property pursuant to the provisions of Section E., shall be the amount determined by multiplying the Acreage of the Parcel by $14,445 per Acre.

4. Undeveloped Property

The Maximum Special Tax for each Parcel of Undeveloped Property shall be the amount determined by multiplying the Acreage of the Parcel by $14,445 per Acre.

D. METHOD OJ<' APPORTIONMENT OF THE SPECIAL TAX

Commencing with Fiscal Year 2005-2006, and for each following Fiscal Year, the Legislative Body shall determine the Special Tax Requirement and shall levy the Special Tax until the amount of Special Taxes equals the Special Tax Requirement. The Special Tax shall be levied each Fiscal Y car as follows:

First: The Special Tax shall be levied Proportionately on each Parcel of Developed Property at up to 100% of the applicable Assigned Special Tax to satisfy the Special Tax Requirement;

Second: If additional monies arc needed to satisfy the Special Tax Requirement after the first step has been completed, the Special Tax shall be levied Proportionately on each Parcel of Approved Property at up to I 00% of the Maximum Special Tax for Approved Property;

Third: If additional monies are needed to satisfy the Special Tax Requirement after the first two steps have been completed, the Special Tax shall be levied Proportionately on each Parcel of Undeveloped Property at 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 each Parcel of Developed Property whose Maximum Special Tax is derived by the application of the Backup Special Tax which shall be increased in equal percentages from the Assigned Special Tax up to the Maximum Special Tax for each such Parcel, as needed;

Fifth: If additional monies are needed to satisfy the Special Tax Requirement after the first four steps have been completed, the Special Tax shall be levied Proportionately on each Parcel of Public Property and/or Property Owner's Association Property that is not

B-6 Exempt Property pursuant to the provisions of Section E. at up to 100% of the Maximum Special Tax.

Notwithstanc ing the above, under no circumstances will the Special Taxes levied against any Parcel of Residential Property be increased by more than ten percent (I 0%) per Fiscal year a,; a consequence of delinquency or default by the owner of any other Parcel within the (TD.

E. EXEMPTIONS

The Legislative Body shall not levy Special Taxes on up to 628.30 Acres of Public Property and Property Owner's Association Property. Exempt Property status will be assigned by the Administrator in the chronological order in which property becomes Public Propc!·ty and Property Owner's Association Property.

After the limit of 628.30 Acres has been reached, the Maximum Special Tax obligation for any addit onal Public Property and/or Property Owner's Association Property shall be subject to the levy of the Special Tax as provided for in the fifth step in Section D .. to the extent permitted under the Act and applicable laws. However, if I 0.11 acres are dedicated for the purpose of a school site, these 10.11 Acres will be exempt in addition to the 628.30 A,;res.

F. MA:"11:"IIER OF COLLECTIOi\

The Special Tax shall be collected in the same manner and at the same time as ordinary Ad valorem property taxes and shall be subject to the same penalties, the same procedure, sale and lien priority in the case of delinquency; provided, however, that County 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 actually foreclose on Parcels having delinquent Special Taxes as permitted by the Act.

G. APPEALS

Any owner of a Parcel claiming that the amount or application of the Special Tax levied on the Parcel is not correct and requesting a refund may file a written notice of appeal with the Administrator after the Special Tax in dispute has been paid but, not later than 12 months alter the mailing of the property tax bill on which the Special Tax appears. The Admininrator shall promptly review the appeal, and if necessary, meet with the property owner, consider written and oral evidence regarding the amount of the Special Tax, convene the CFD special tax review board and decide the appeal. This procedure shall be exclusive and its exhaustion by any property owner shall be a condition precedent to any legal action by such owner.

B-7 H. PREP A Y\1ENT OF SPECIAL TAX

The following definitions apply to Section H only:

•'CFD Public Facilities" means either $24,592,241 (in 2004 dollars), which shall increase by the Construction Inflation Index on July 1, 2004, and on each July 1 thereafter, 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 Legislative Body concurrently with a covenant that it will not issue any more Bonds to be supported by Special Taxes levied under this Rate and Method of Apportionment.

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

"Construction Inflation Index" means the annual percentage change in the Engineering News-Record Building Cost Index for the City of Los Angeles, measured as of the calendar year, which ends in the previous Fiscal Year. In the event this index ceases to be published, the Construction Inflation Index shall be another index as determined by the Administrator that is reasonably comparable to the Engineering News Record Building Cost Index for the City of Los Angeles.

"Future Facilities Costs" means the CFD Public Facilities minus public facility costs available to be funded through escrow accounts or funded by the Outstanding Bonds as defined in Section A, and minus public facility costs funded by interest earnings on the Construction Fund actually earned prior to the date of prepayment.

1. Prepavment in Full

The Maximum Special Tax obligation may only be prepaid and permanently satisfied for a Parcel of Public Property, Property Owner's Association Property, Developed Property, Approved Property or Undeveloped Property for which a building permit has been issued. If Lot 277 of Tract 28816 has been acquired by a school district, this Parcel may he fully prepaid as if a building permit had been issued for Residential Property with Residential Floor Area of 4,20 I square feet. The Maximum Special Tax obligation applicable to a 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 Parcel at the time of prepayment. An owner of a Parcel intending to prepay the Maximum Special Tax obligation for the Parcel shall provide the Administrator with written notice of intent to prepay and within 10 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 costs to he incurred hy the CFD in calculating the Prepayment Amount (as defined below) for the Parcel. Within 15 business days of receipt of such

B-8 nonrefundable deposit, the Administrator shall notify such owner of the Prepayment Amount for the Parcel.

The Prepayment Amount (defined below) shall equal the sum of the amounts as identified below (capitalized terms arc defined below):

. Bond Redemption Amount _ plus . Redemption Premi11m __ plus Future Facilities f,.__ m_o~u_n_t ______~ nlus Defcasance Amount------n Ius Administrative Fees and Expenses less Reserve Fund Credit ----- Tota : equals Prepayment Amount

The Prepayment Amount shall be determined as of the proposed prepayment date as follows:

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

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

3_ Divide the Maximum Special Tax obligation derived pursuant to paragraph 2 by the total projected Maximum Special Taxes at build out of $2,027, 160, less the Maximum Special Tax obligation for any Parcels which have prepaid.

4. Multiply the quotient derived pursuant to paragraph 3 by the principal amount of the Outstanding Bonds to determine the amount of Outstanding Bonds to be redeemed with the Prepayment Amount (the "Bond Redemption Amount").

5. Multiply the Bond Redemption Amount by the applicable redemption premium, if any, on the Outstanding Bonds to be redeemed (the "!?edemption Premium").

6. Determine the Future Facilities Costs.

7. Multiply the quotient derived pursuant to paragraph 3 by the amount derived pursuant to paragraph 6 to determine the amount of Future Facilities Costs for the Parcel (the "Future Facilities Amount").

B-9 8. Determine the amount needed to pay interest on the Bond Redemption Amount from the first bond interest andior principal payment date following the current Fiscal Year until the earliest redemption date for the Outstanding Bonds on which Bonds can be redeemed from Special Tax prepayments.

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

I 0. Determine the amount the Administrator reasonably expects to derive from the investment of the Bond Redemption Amount from the date of prepayment until the redemption date for the Outstanding Bonds to be redeemed with the Prepayment Amount.

11. Add the amounts derived pursuant to paragraphs 8 and 9 and subtract the amount derived pursuant to paragraph IO (the "LJefeasance Amount").

12. Verify the administrative fees and expenses, including the cost of computing of the Prepayment Amount, the cost to invest the Prepayment Amount, the cost of redeeming the Outstanding Bonds, and the cost of recording notices to evidence the prepayment of the Maximum Special Tax obligation for the Parcel and the redemption of Outstanding Bonds (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 Prepayment Amount is equal to the sum of the Bond Redemption Amount, the Redemption Premium, the Future Facilities Amount, the Defeasance Amount and the Administrative Fees and Expenses, less the Reserve Fund Credit.

15. From the Prepayment Amount, the Bond Redemption Amount, the Redemption Premium, and the Defeasance Amount shall be deposited into the appropriate fund as established under the Indenture and be used to redeem Outstanding Bonds or make debt service payments. The Future Facilities Amount shall be deposited into the Construction Fund. The Administrative Fees and Expenses shall be retained by the CFO.

The Prepayment Amount may be sufficient to redeem other than a $5,000 increment of Bonds. In such event, the increment above $5,000 or an integral multiple thereof will be retained in the appropriate fund established under the

B-10 Indenture to be used with the next redemption from other Maximum Special Tax obliga ion prepayments of Outstanding Bonds or to make debt service payments.

As a result of the payment of the current Fiscal Year's Special Tax levy as determined pursuant to paragraph 9 above, the Administrator shall remove the curreni Fiscal Year's Special Tax levy for the prepaying Parcel from the County tax roll. With respect to any Parcel for which the Maximum Special Tax obliga'ion is prepaid, the Legislative Body shall cause a suitable notice to be rccord~d in compliance with the Act, to indicate the prepayment of the Maximum Special Tax obligation and the release of the Special Tax lien for the Parcel, and the obi igation of the Parcel to pay the Special Tax shall cease.

Notwi 0hstanding the foregoing, no Special Tax prepayment shall be allowed unless the amount of Maximum Special Taxes that may be levied on all Parcels of Taxable Property after the proposed prepayment will be at least 1.1 times maxirrum annual debt service on the Bonds that will remain outstanding after the prepayment plus estimated annual Administrative Expenses.

2. Prepayment in Part

The Maximum Special Tax obligation on a Parcel of Developed Property may be partial y prepaid in increments of $5,000. For purposes of determining the partial prepa, mcnt amount of the provisions of Section H. l shall he modified as provid~d by the following formula:

PP~ ((P1 -A)x F)+A

These ,erms have the following meaning:

PP = Partial Prepayment

P,. = !he Prepayment Amount calculated according to Section H. l

F = the percent by which the owner of the Parcel(s) is partially prepaying the Maximum Special Tax obligation.

A= the Administrative Fees and Expenses determined pursuant to Section H. l

The ov111er of a Parcel who desires to partially prepay the Maximum Special Tax obligation for the Parcel shall notify the Administrator of (i) such owner's intent to part:ally prepay the Maximum Special Tax obligation, (ii) the percentage by which the Maximum Special Tax obligation shall be prepaid, and (iii) the compa1y or agency that will be acting as the escrow agent, if any. Within IO businc,:s days of receipt of such notice, the Administrator shall notify such owner of the 1111ount of the non-refundable deposit determined lo 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 amount of the Partial Prepayment for

B-1 t the Parcel. A Partial Prepayment must be made not less than 60 business days prior to any redemption date for the Outstanding Bonds to be redeemed with the proceeds of the Partial Prepayment.

With respect to any Parcel for which the Maximum Special Tax obligation is partially prepaid, the Administrator shall ( i) distribute the Partial Prepayment as provided in Paragraph 13 of Section H. l, and (ii) indicate in the records of the CFD that there has been a Partial Prepayment for the Parcel and that a portion of the Maximum Special Tax obligation equal to the remaining percentage (1.00 - F) of the Maximum Special Tax obligation will continue, and the Special Tax shall continue on the Parcel pursuant to Section D.

I. TERM OF THE SPECIAL TAX

Special Taxes shall be levied for the period necessary to satisfy the Special Tax Requirement, but in no event shall it be levied after Fiscal Year 2035-2036 or the stated maturity of the Bonds, whichever is sooner.

B-12 APPENDIX C

SUMMARY APPRAISAL REPORT SUMMARY APPRAISAL REPORT

COVERING

County of Riverside Community Facilities District No. 04-2 (Lake Hills Crest)

DA TE OF VALUE: SUBMITTED TO:

May I, 2005 Mr. Dean Deines County of Riverside-Executive Office 4080 Lemon St., 4'h Floor Riverside, CA 92501-3651

DATE OF REPORT: SUBMITTED BY:

May 12, 2005 Stephen G. White, MAI 1370 N. Brea Blvd., Suite 205 Fullerton, CA 92835 Stephen G. White, lW:AI

Real Estate Appraiser

1310 N. BREA BLVO., SUITE 205 · FULLERTON, CALlf'OANIA 92835-4128 C714J 73S--159S · FAX \714) 7,18-4371

May 12, 2005

Mr. Dean Deines Re: Community Facilities District County ofRiversid~-Executive Office No. 04-2 (Lake Hills Crest) 1 4080 Lemon St., 4 1, Floor Riverside, CA 92501-3651

Dear Mr. Deines:

In accordance with your request and the County's authorization, I have completed a Complete Appraisal of the taxable property within the above referenced Community Facilities District (CFO). This property is in the master planned community of Lake Hills Reserve and is comprised of 512 single-family residential lots which are currently being graded and arc planned to be developed with five different neighborhoods or product types of homes. One ownership entity currently owns part of the lots in three of the neighborhoods ( 140 lots total), and these lots represent the first of three takedowns of the purchase of all oft 1c lots from the other ownership entity that still owns the balance of the lots in those three 1eighborhoods as well as all of the lots in the other two neighborhoods (372 lots total).

The purpose of thi; appraisal is to estimate the market value of each of the two separate ownerships, by firsl considering the value of the lots by neighborhood/product type and then considering the sp~cific allocation of the lots in each neighborhood to the appropriate ownership entity. The valuation also reflects the as is condition of the lots ranging from partially graded to near finished condition, and the proposed public bond financing together with the projected tax rate of J_ l.8% (on projected base home pricing) to the future homeowners, including the special taxes.

Based on the inspections of the properties and analysis of matters pertinent to value, the following conclusicns of market value have been arrived at, subject to the Assumptions and Limiting Conditiorn,, and as of May I, 2005:

OwnershiE No. Lots :Vlarket Value

LH(: River,;ide Associates, LL('./Rivcrside LH(\ Ltd. 372 $ 71,500,000 Lake Hills-Riverside, L.P. 140 $ 38 200,000 $109,700,000

(Ol'iE HUNDRED Nll'iE MILLION SEVEN HUNDRED THOUSAl'iD DOLLARS) MR. DEAN DEINES MAY 12,2005 PAGE2

The following is the balance of this 44-page Summary Appraisal Report which includes the Certification, Assumptions and Limiting Conditions, definitions, property data, exhibits, valuation and market data from which the value conclusions were derived.

Sincerely, ./4LJ. d:lz ... Stephen G. White, MAI (State Certified General Real Estate Appraiser No. AG O133 l l)

SGW:sw Ref: 05010 TABLE OF CONTENTS PAGES

Certification...... 5 Assumptions and Limiting Conditions...... 6-7 Purpose and Use of the Appraisal, Scope of the Appraisal, Date of Value, Property Rights Appraised, Definitions...... 8-9

GENERAL PROPERTY DATA

Location, D,!scription of Surroundings, Description of Lake Hills Reserve...... I 0-16

STONEVIEW

Property Data, Valuation. 17-25

SILVERSAGE

Property Data, Valuation. 26-29

ORCHARD HEIGHTS

Property Da ca, Valuation ...... 30-33

ROCKRIDGE

Property Da.a, Valuation ... 34-36

HIGHPOINT

Property Da·a, Valuation. 37-39

CONCLUSION OW VALUE BY OWNERSHIP...... 40

ADDENDA

Tabulation Residential Land Sales ...... 41 Qualifications of Appraiser...... 42-44 CERTIFICATION

I certify that, to the best of my knowledge and belief:

1. The statements of fact contained in this report are true and correct.

2. The reported analyses, opinions and conclusions are limited only by the reported assumptions and limiting conditions, and arc my personal, impartial, and unbiased professional analyses, opinions and conclusions.

3. I have no present or prospective interest in the properties that arc the subject of this report, and no personal interest with respect to the parties involved.

4. I have no bias with respect to the properties that are the subject of this report or to the parties involved with this assignment.

5. My engagement in this assignment was not contingent upon developing or reporting predetermined results.

6. My compensation for completing this assignment is not contingent upon the development or reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this appraisal.

7. My analyses, opinions and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice.

8. I have made a personal inspection of the properties that arc the subject of this report.

9. No one provided significant professional assistance to the person signing this report, other than data research and some report writing by my associate, Kirsten Patterson.

IO. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives.

As of the date of this report, I have completed the requirements of the continuing education program of the Appraisal Institute.

~ LJ. ""1l____ _ Stephen G. White, MAI (State Certified General Real Estate Appraiser No. AGO 13311)

5 ASSUMPTIOl\'S Al\'D LIMITING CONDITIONS

This appraisal has been based upon the following assumptions and limiting conditions:

I. No responsibility is assumed for the legal descriptions provided or for matters pertaining t,) legal or title considerations. Title to the properties is assumed to be good and mirkctablc unless otherwise stated.

2. The prope1t es are appraised free and clear of any or all liens or encumbrances unless otherwise stiled.

3. Responsible ownership and competent prope1ty management are assumed.

4. The information furnished by others is believed to be reliable, but no warranty ts given for its accuracy.

5. All engineering studies, if applicable, arc assumed to be correct. Any plot plans or other illustrative material in this report arc included only to help the reader visualize the property.

6. It is assumed that there are no hidden or unapparent conditions of the properties, subsoil, or i.tructures that render them more or less valuable. No responsibility is assumed fm such conditions or for obtaining the engineering studies that may be required to discover them.

7. It is assumed that the properties are in full compliance with all applicable federal, state and local environmental regulations and laws unless the lack of compliance is stated, described and considered in the appraisal report.

8. It is assumed that the properties conform to all applicable zoning and use regulations and restrictions unless a nonconf()rtnity has been identified, described and con&idered in the appraisal report.

9. It is assumed that all required licenses, certificates of occupancy, consents and other legislative or administrative authority from any local, state or national government or private entity or organization have been or can be obtained or renewed for any use on which the va Jue estimates contained in the report are based.

I 0. It is assumed that the use of the land and improvements is confined within the boundaries ,ir property lines of the properties described and that there arc no encroachments or trespasses unless noted in the report.

11. Unless othe1wise stated in this report, the existence of hazardous materials, which may or may not be present on the properties, was not observed by the appraiser. However, the appraiser is not qualified to detect such substances. The presence of such substan:es may affect the value of the property, but the values estimated in this

6 ASSUMPTIONS AND LIMITING CONDITIONS, Continuing

appraisal are based on the assumption that there is no such material on or in the properties that would cause a loss in value. No responsibility is assumed for such conditions or for any expertise or engineering knowledge required to discover them. The client should retain an expert in this field, if desired.

12. Possession of this report, or a copy thereof, does not carry with it the right of publication, unless otherwise authorized. It is understood and agreed that this report will be utilized in the Official Statement, as required for the bond issuance.

13. The appraiser, by reason of this appraisal, is not required to give further consultation or testimony or to be in attendance in court with reference to the properties in question unless arrangements have previously been made.

SPECIAL ASSUMPTIONS AND LIMITING CONDITIONS

1. Estimates of the remaining costs by ownership to get the lots from as is condition to "finished lots" have been obtained from the property owners, and these figures have been assumed to be reasonably accurate and have been relied upon in this appraisal.

2. The valuation has assumed that the CFD bond-financed facilities will include ±$22,470,000 to finance street improvements, storm drain facilities, water facilities and sewer facilities.

3. The valuation reflects that there are existing County of Riverside CFD 84-2 bonds in the outstanding amount of ±$1,385,000 that constitute an overlapping lien on the subject property, but these bonds will mature in September 2006.

4. The Market Absorption Study dated March 11, 2005 by Empire Economics, Inc. has been relied upon for the projected home pricing.

7 PURPOSE AND USE OF THE APPRAISAL

The purpose of this appraisal is to estimate the market value of the as is condition of each of the two separate ownerships comprising the taxable property within Community Facilities District No. o,t-2 (Lake Hills Crest) of the County of Riverside, reflecting the proposed public bond financing. This Summary Appraisal Report is to be used as required in the bond issuance.

SCOPE OF THE APPRAISAL

It is the intent cf this Complete Appraisal that all appropriate data considered pertinent in the valuation of tre subject properties be collected, confirmed and reported in a Summary Appraisal Report, in conformance with the Uniform Standards of Professional Appraisal Practice and the guidelines of the California Debt and Investment Advisory Commission. This has includ!d an inspection of the subject properties and their surroundings; obtaining of pertinent property data on the subject properties, including review of various maps and documents relaing to the properties, the subdivision and layout of the lots and the planned development/product types; obtaining of comparable land sales from a variety of sources; and analysis of ill of the data to the value conclusions.

DATE OF VALUE

The date ofvalle for this appraisal is May 1, 2005.

PROPERTY RIGHTS APPRAISED

This appraisal fr of the fee simple interest in the subject properties, subject to the special tax and assessment '1iens.

DEFINITION OF MARKET VALUE

The most probable price, as of a specified date, in cash or in terms equivalent to cash, or in other precisely revealed terms for which the specified property rights should sell after reasonable expo,ure in a competitive market under all conditions requisite to fair sale, with the buyer and seller each acting prudently, knowledgeably and for self-interest, and assuming that neither is under undue duress.

DEFINITION OF FINISHED LOT

This term describes the condition of residential lots in a single-family subdivision for detached homes in which the lots are fully improved and ready for homes to be built. Th is reflects that the lots have all development entitlements, infrastructure improvements completed, finish grading completed, all in-tract utilities extended to the property line of each lot, stree: improvements completed, common area improvements/landscaping (associated with :he tract) completed, resource agency permits (if necessary), and all

8 DEFINITION OF FINISHED LOT, Continuing development fees paid, exclusive of building permit fees, in accordance with the conditions of approval of the specific tract map.

DEFINITION OF BLUE-TOP LOT

This term describes residential lots in a single-family subdivision for detached homes in which the lots and streets have been rough graded, and the offsite infrastmcture of streets and utilities are completed to the tract, but not within the tract.

9 LOCATION MAP

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IO GENERAL PROPERTY DATA

LOCATION

The map on the opposite page indicates the approximate location of the subject community of Lake Hills Reserve that extends northwest and southeast from the arrow on the map. The master-planned community of Lake Hills Reserve lies along Lakepointe Dr. and Skyridge Dr., and extends for nearly two miles between Indiana Ave. (nearby to the northwest) and La Sierra Ave. (nearby to the southeast), in unincorporated Riverside County area.

The community of Lake Hills Reserve is located in the northwest part of the County of Riverside, about one mile south of the 91 Freeway and approximately 3 miles east of the 1-15 Freeway. Nearby to the west arc the City Limits of Corona, nearby to the northwest is the unincorporated community of Home Gardens, and nearby to the north are the City Limits of Riverside. To the south and east is unincorporated Riverside County area. and just over a mile to the southeast is Lake Mathews.

DESCRIPTION OF SURROUNDINGS

Lake Hills Reserve stretches nearly two miles along the ridgelines of a hilly and largely undeveloped area east of the City of Corona and south of the City of Riverside and the 91 Freeway. Residential developments arc scattered to the northwest, north, east and southeast of the subject, including the original part of the master-planned community of Lake Hills.

To the south and west is mostly hilly, undeveloped land with some citrus groves in the canyon or valley areas. The general area has experienced significant residential development over the past 10 years, including the master-planned community of Victoria Grove across La Sierra Ave. to the southeast, as well as three smaller infill tracts in the area nearby to the north. In addition, KB Home is currently developing a tract of homes across La Sierra Ave. to the east, and two more tracts of homes are planned farther to the east.

To the northwest of the subject the land slopes down to Indiana Ave. and the unincorporated community of Home Gardens which includes a mix of newer and older residential development, On the south side of Indiana Ave. at Lincoln St. is a small neighborhood of homes built in 1989 through which Lake Hills Reserve will be accessed from the northwest. Hornes in this neighborhood range in size from , 1,250 s.f. to 1,840 s.f., and recent sales indicate prices from $375,000 to $415,000. Farther to the west along the south side of Indiana A vc. arc two neighborhoods of homes that were built in the late 1980's. These homes range in size from ±1,400 s.f. to 2,200 s.f., and recent sales indicate prices from $355,000 to $510,000.

Adjacent to the central portion of the subject, at Lakepointe Dr. and Skyridge Dr., is a small tract of 43 homes that were built in the rnid- I 990's. These homes range in

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size from ±2,400 s.f. to 3,000 s.f. and many have good views. Recent sales indicate prices from $516,000 to $550,000. The land then slopes down to the north to various other neighborhoods of homes off of Lakcpointe Dr., southerly of Indiana Ave. The homes nearest the subject and part of the way up the hill were built in the early to mid- l 990's and range in size from ±2,250 s.f. to 3,000 s.f. Recent sales indicate the prices from $495,000 to $599,000. The homes farthest down the hill were built from the early to late l 990's, and range in size from ±1,200 s.f. to 2,200 s.f. Recent sales indicate prices from $340,000 to $493,000.

To the northeast of the subject the land slopes well down to other homes off of Lake Knoll Pkwy., and adjacent to the east and southeast are homes off of Lakepointe Dr. that terrace down the hill from the subject. All of these neighborhoods were earlier phases of the Lake Hills community, and many of the homes have good views. The homes were built in the late 1980's through the late 1990's, and range in size from ±1,400 s.f to 2,600 s.f. Recent sales indicate the prices from $365,000 to $585,000.

To the south and southwest of the subject is undeveloped land that slopes down the hills into canyon and valley areas.

DESCRIPTION OF LAKE HILLS RESERVE

Overview

Lake Hills Reserve is a master planned community that contains a total of ±835 acres. The site is planned to be developed with 512 single family homes within five different neighborhoods, as well as a school site and a community park. Approximately 600 acres of the community will remain as open space. The five different neighborhoods are briefly described as follows:

StoneView: I 08 lots, 8,063 s.f. average pad size; homes to be 2.955 s.f. to 4.087 s.f. with projected base pricing of$525,000 to $620,000.

SilverSage: 103 lots, 11,402 s.f. average pad size; homes to be 4,227 s.f. to 5,121 s.f. with projected base pricing of$675,000 to $750,000.

Orchard Heights: 98 lots, 7.102 s.f. average pad size; homes to be 3,412 s.[ to 3,829 s.f. with projected base pricing of$560,000 to $595.000.

RockRidgc: 110 lots, 7,212 s.f. average pad size; homes to be 2.600 s.f. to 3,100 s.f with projected base pricing of $480,000 to $525,000.

HighPoint: 93 lots, 10,749 s.f. average pad size: homes to be 3,800 s.f. to 4,200 s.f. with projected base pricing of$615,000 to $650,000.

The residential development will be fairly spread out with much open space of canyon and hill areas between and/or around the various neighborhoods. The streets into and through the community will be meandering, with a number of single-loaded

13 DESCRIPTION OF LAKE HILLS RESERVE, Continuing

streets ar,d cul-de-sacs. With its hilltop location, many homes within the community will have panoramic views of the distant mountains, city lights, canyon and valley areas, and Lake Mathews. These factors will create a low density and rural-type of setting, though still in close proximity to the 91 Freeway.

The first phases of development will be taking place on the lots in the southeast part of the ccmmunity, with development then moving northwesterly to the center and northwest parts of the community.

Ownersl!iI!

As previously indicated, Lake Hills - Riverside, L.P. ( commonly known by the builder r.ame of Brehm Communities) currently owns 140 of the lots and LHC Riverside Associates, LLC/Riverside LHC, Ltd. (LHC) currently owns 372 of the lots. LHC ( or related entities) acquired the property for all 512 lots in 1998. In September 2003 an escrow was entered into with Brehm to sell the 512 lots in three takedowns, with 140 lots to close in March 2004, 140 lots to close in December 2004 and 232 lots to close in September 2005. The sale price was $39,300,000 plus an amount

The first takedown of 140 lots closed on March 30, 2004. However, the second takedown was delayed since the CFD had not yet been funded, and it is now projected that both the second and third takedowns will close in September 2005. (Note: The ownership of the specific lots is discussed in later sections of the report.)

Streets and Access

Access t,J Lake Hills Reserve from the northwest is by Lincoln St. south from Indiana J,ve. which turns into Skyridge Dr. It then meanders through the west part of the community and connects to Lakcpointe Dr. in the central area. Lakepointe Dr. provides access to the community from the north and from the southeast. At the north, Lakepointe Dr. extends southerly from Indiana Ave. to the center part of the community. It will then continue southerly and easterly through the community, conncctir.g to the existing portion of the road that continues southeasterly down the hill and through the existing neighborhoods. Access is then east to La Sierra Ave. by Lake Cre ,t Dr.

The extension of Lakepointe Dr. into the subject community from the southeast is currently being paved. It has then been graded for some distance further, and grading is still underway on the portion through the center of the community. Grading s also underway on Skyridge Dr. into the community, and it has not yet been paved.

14 DESCRIPTION OF LAKE HILLS RESERVE, Continuing

Utilities

The utilities are being extended into the subject community as part of the construction of the streets, and are provided as follows:

Water & Sewer: Western Municipal Water District Electric: Southern California Edison Gas: Southern Ca1ifornia Gas Co1npany Telephone: SBC

Zoning/General Plan/ Approvals

The single-family lots in the subject community have the zoning designations of R-1, 7,200; R-1, 10,000; R-1, 15,000; and R-4. The first three designations permit one family dwelling with a minimum of 7,200 s.f., 10,000 s.f., and 15,000 s.f., respectively, and the R-4 designation is for planned residential development. The general plan designation is SP-144, with further designations of low, medium and medium high density residential, permitting from Yz-acrc minimum lot sizes up to 8 dwelling units per acre. The speci fie approvals for the planned development of Lake Hills Reserve are by final Tract Map Nos. 28815 and 28816 which were recorded December 2, 2004.

Drainage/Flood Hazard

Drainage will be within master-planned facilities that will be constructed throughout the community. Per FEMA Flood Map Panel Nos. 060245 13808 and 060245 0715A, both dated November 20, 1996, the subject lots arc located in Zones C

(outside of the 100-year floodplain) and D (area of undetermined but possible flood hazards). However, as indicated on the tentative tract maps, the lots are not subject to inundation or flood hazard, and this is evident due to the hilltop location of the subject lots.

Soil/Seismic/Environmental Conditions

Per the tentative tract maps, this land is not subject to liquefaction or other geological hazards, nor is it in a Special Studies Zone. Review of other maps confirms that the subject property is not located within an Alquist Priolo Earthquake Fault Zone.

This appraisal has assumed that, for all of the subject lots, all necessary grading and compacting has been or will be properly completed; that there are no abnormal soil or geological conditions that would affect the development of the lots as planned; that all necessary environmental pem1its and approvals have been obtained for single family residential development as planned; and that there are no other environmental conditions, including endangered species or habitat that would have a negative effect

15 DESCRIPTION OF LAKE HILLS RESERVE, Continuing

on the i:fanned development. Furthermore, it has been assumed that all required mitigation measures have taken place or are reflected in the costs to complete the lots to finish,:d condition.

Title Report

A Preliminary Report by First American Title dated August 20, 2003, Order No. 0625-1016410, has been reviewed. Exceptions to title include a lien of special tax for CFD No. 84-2 as recorded January 30, 1989, and many easements for roads, public utilities, pipe lines, pole lines, access/ingress/egress, communications facilities, cables, drainage, conduits and underground facilities. It is noted that many of these easements are typical and necessary for a subdivision such as the subject, and other easements have been accommodated in the final tract maps. This appraisal has assu:ncd that there are no exceptions to title that would have a negative effect on the deve .opment of the lots with homes, as planned.

Highest and Best Use

The term highest and best use is defined as that use which is reasonable and probable, and supports the highest present value of the land or improvements, also described as the most profitable use which is legal, physically possible and financially feasible as of the effective date of the appraisal.

The higt est and best use is concluded to be for development of homes on the subject lots as p .anned, and as allocated into the five different neighborhoods with different product types for each neighborhood. This use is legal by the planning approvals and the recorded tract maps, and it is physically possible as the lots are graded to buildablc pads with all infrastructure in place. In addition, the use is financially feasible as evidenced by t11c strong dctnand for vacant/buildablc residential lots as well as for new homes in this general area that has resulted in significantly increasiug prices in recent years.

The projected base pricing for the homes, as previously listed, is from the Market Absorption Study dated March 11, 2005 by Empire Economics, Inc. This study indicates that these are relatively high-priced homes, considering the lot sizes as well as the home sizes, but this is regarded as being appropriate since their market orientation is expected to be towards move-up households. This study also concludes that the 512 homes would be absorbed (sold and occupied) from the first quarter of2006 through the first quarter of 2010.

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17 STONEVIEW

PROPERTY DI\TA

Locatioit

This neighborhood is comprised of 108 single-family lots which are scattered throughcut the north, central and southeasterly portions of Lake Hills Reserve.

Record Owner

LHC Riverside Associates LLC/Riverside LHC, Ltd. owns Lots 34 to 37 and 66 to 70 of Tract No. 28815, and Lots I to 58, 64 to 68 and 273 to 276 of Tract No. 28816 (82 lots). Lake Hills - Riverside, LP. owns Lots I to 5, 24 to 33, 38 to 42, 202, 203, 212 and 222 to 224 of Tract No. 28815 (26 lots).

Legal D,~scription

The I 08 lots are described as Lots I to 5, 24 to 42, 66 to 70, 202, 203, 212, and 222 to 224 of Tract No. 28815, and Lots I to 58, 64 to 68, 74 to 79 and 273 to 276 of Tract No. 28816.

Assessor Data-2004/05

Assessor information is not yet available for the individual subject lots. The tax rate areas include 53-012 and 53-033 with a base tax rate of 1.09926, but the projected total tax rate to future homeowners is ±1.8% (on projected base home pricing) including the special taxes for this CFO.

No. of Lots/Lot Sizes

This neighborhood comprises a total of 108 lots, with pad sizes ranging from 5,400 s.f. to 16,516 s.f. or an average of ±8,063 s.f. The actual lot sizes range from 6,887 s.f. to 36, 130 s.f., or an average of 11,704 s.f., but this includes from a minor to a significa11t amount of side and/or rear slope area to most of the lots.

Streets i,nd Access

These lots are located on South Cliff Ct., Skyridge Dr., Blue Mountain Ct., Ridge Field Dr, Lakepointe Dr., Blue Bird Pl., Village Meadow Dr. and Silver Moon Ct. These w JI all be two-lane streets within 60' dedicated right-of-ways, and four of the streets aie short cul-de-sacs.

18 PROPERTY DAT A, Continuing

Physical Condition/TopographyNiew

As of the May I, 2005 date of value, grading is completed or nearing completion on the lots in the center and east portions of the neighborhood, and is still in process on the lots at the westerly end. Paving of streets at the far easterly end of the neighborhood was also just underway. Construction had not yet started on any of the homes.

The western part of the neighborhood has a gradual slope down to the west along Sky Ridge Dr. with minor terracing between some of the lots. The lots on the north edge back to open space with city lights and distant mountain views, and some of the lots along the south edge back to canyon areas with views of the hills and open space to the south.

The lots in the center of the neighborhood have a gradual slope down to the southwest. Some on the outside perimeter back to slope or canyon areas and may have partial views of the mountains to the north or the hills and open area to the south. The lots in the southeast part of the neighborhood have hill and canyon views to the south and some distant views of Lake Matthews.

It is estimated that approximately 60-65% of the lots will have view potential.

Planned Development

The l 08 lots arc planned to be developed with a neighborhood of homes called Stone View at Lake Hills Reserve. There will be three floor plans that arc described as follows:

Residence One: 2.955 to 3,144 s.f., one story, with 3 bedrooms, office or optional bedroom 4. family room, nook, 2 1h baths, and 3-space tandem garage; optional exercise room in lieu of the tandem portion of the garage adds ±189 s.f.

Residence Two: 3,486 to 3,671 s.f., t\vo story, with 3 bedrooms, master retreat or optional bedroom 4, office or optional bedroom 5, family room, nook, 3 baths and 3-spacc tandem garage; optional super family room in lieu of the tandem portion of the garage adds+ 185 s.f.

Residence Three: 4,087 s.f., two story, with 3 bedrooms, office or optional bedroom 4 with full bath, bonus roon1 or optional bedroom 5, n1aster retreat, family room, nook, 3Yi baths and 3-spacc tandem garage.

Per the Market Absorption Study dated March 11, 2005 by Empire Economics, Inc., the projected base pricing is $525,000 to $620,000, or an average of $571,667. In addition, there will be lot premiums for size and view. The first sales release is scheduled to be June 4, 2005, and completion of models is anticipated in August or September.

19 VALUATION

Method of Analysis

The Saks Comparison Approach is used to estimate the value of the subject lots, as if in a finished lot condition. This approach considers recent sales of bulk residential lots from the general area in comparison to the subject property on a finished lot basis. Then, a deduction is made for the estimated remaining costs to get the subject lots from the as is condition to finished lot condition, resulting in a value indication for the a; is condition of the lots.

Analysii: of Finished Lot Value

A search was made for recent sales of bulk single-family residential lots in the general area. A detailed tabulation of the residential land sales data is in the Addenda section at the end of this report. The following discussion and analysis references the 10 sales in that tabulation.

Data N c,. 1 represents recent offers that were received for a resale by Brehm of the subject lots comprising the Orchard Heights neighborhood. The offers ranged from prices of $250,000 to $280,000 per finished lot. These lots have a minimum size of 7, 162 s.:'. and an average size of 11,632 s.f., with pad sizes of 4,625 s.f. minimum and 7,!(12 s.f. average, and are targeted for homes of 3,412 s.f. to 3,829 s.f. with projected base pricing of $560,000 to $595,000. Approximately 50-55% of the lots will hav,: view potential.

In comparison to the subject, the lots are fairly similar in size and are targeted for fairly similar homes in terms of the average projected base pricing. However, the view potential is estimated to be slightly inferior to the subject. Overall, I have concluded that the range of $250,000 to $280,000 per finished lot supports a close indicaticn for the subjoct.

Data Ne,. 2 is located within several miles to the northeast of the subject, beyond La Sierra Ave. and south of Dufferin Ave. This is raw and hilly land with an approved tentative tract map for 15,000 s.f. minimum lots, with typical pad sizes of 9,000 s.f. This sale was negotiated in November/December 2004 and just closed in early April at a pric~ reflecting $267,000 per finished lot, including a CFD of ±$25,000 per lot. The purd1aser was a partnership of Lennar Homes and Standard Pacific, and they were ter tatively planning homes that would be an average size of ±3, 700 s.f. with projected average base pricing of $630,000. Only a limited number of the lots are expected to have view potential. It is also of interest that KB Home purchased an earlier rhase of 208 of these lots in December 2003 at a price of $211,000 per finished lot. This indicates an increase of 27% from the period of July 2003 when the earlier sale was negotiated to November/December 2004 when this more recent sale was negotiated.

20 VALUATION, Continuing

In comparison to the subject, the lots are much larger in size and are planned for larger and higher-priced homes, though the view potential is far inferior. The general location is fairly similar, though the projected tax rate is slightly lower than the subject. Overall, the lot size and view potential are considered to be approximately offsetting factors, and the price of $267,000 per finished lot supports a close indication for the subject.

Data No. 3 is located in the area referred to as the "dairylands" or North Corona, which is 5'12 miles north of the 91 Freeway and 2Y:, miles west of the 15 Freeway. This is a pending sale of fairly flat land that formerly was a dairy and now has an approved tentative tract map for 92 lots. 7,200 s.f. minimum size. The sale was negotiated in late 2004/early 2005 at a price reflecting $245,000 per finished lot, including the planned CFO. The homes will likely average ±3,500 s.f. in size, but the projected pricing is not known.

In comparison to the subject, the lots arc fairly similar in minimum size but generally smaller overall, the tax rate is similar, but the location is considered to be inferior and the lack of view potential is far inferior. Thus, the indication at $245,000 per finished lot supports a far lower limit for the subject.

Data No. 4 is located at the southwest side of Corona, south of Chase Dr.!Foothill Pkwy. and west of Lincoln Ave., and up against the foothills to the south. This was a sale of raw and undulating land with an approved tentative tract map for 157 lots, 7,200 s.f. minimum size but an average size of well over 8,000 s.f. The lots are in a canyon area with many lots backing to open space but with limited view potential. The price was negotiated shortly prior to the closing in November 2004, and indicated ±$350,000 per finished lot. The homes were anticipated to range in size from 3,200 to 3,500 s.f., with average base pricing of ±$700,000. It is planned that there will be a CFO with a probable tax rate between 1.6% and I. 9%.

In comparison to the subject, the lots are slightly larger in tcnns of the pad or usable area, and the Corona location is considered to be superior as evidenced by the much higher projected pricing for the homes. The tax rate will also likely be similar, but the view potential is inferior to the subject. Overall, this sale supports a far upper limit for the subject at $350,000 per finished lot.

Data No. 5 is located in the newly-developing master-planned community of Dos Lagos which is located on Temcscal Canyon Rd., between Weirick Rd. and Cajalco Rd. in the South Corona area. The community will include a golf course that many homesites will front along. This sale is located in the gated neighborhood called Temeseal Heights and was the sale of 7,200 s.f minimum lots, many of which have golf course frontage. The price was negotiated in early to mid 2003 and the sale closed in October 2004 at the price reflecting $215,000 per finished lot. The profonna home pricing at the time the land sale was negotiated was an average of

21 VALUATION, Continuing

Jc$500,0)0, and current pricing ranges from the low to mid $700,000's, indicating a ±-45% increase.

In comp1rison to the subject, the lots are fairly similar in minimum size but generally smaller ,werall. The tax rate is similar, but the South Corona location is superior to the subject, and the golf course frontage to many lots is superior to the subject view potential. Considering an upward time adjustment of at least 35-40% since the price was neg,)tiated about two years ago, a current indication is at ±$295,000 per finished lot, and his supports a close but firm upper limit for the subject.

Data Nos. 6, 7 and 8 are located in the master-planned community of The Retreat, which is located nearby to the west of the 1-15 Freeway and southerly of Weirick Rd. in the South Corona area. This is an upscale community that will be gated and includes a private golf course and other amenities, with golf course frontage and/or good views to many of the lots in this hillside community. These lots were delivered by the naster developer in blue-top condition, with approved tentative tract maps. The projected tax rate, reflecting the CFO, was ±1.5-1.6%.

Data No. 6 was the sale of 8,000 s.f. minimum lots, but with an average size of ±11,350 s.f. About 30% of these lots have golf course frontage or other view potentia,. The sale consisted of two phases that were negotiated in March and May 2003 an:! closed in July and November 2004. The price reflected $218,130, and the proform1 base home pricing was $521,990 to $591,990. However, the current base pricing ranges from the mid $700,000's to the high $800,000's, indicating an increase of about 4 7%.

In comparison to the subject, the lots are slightly larger in terms of the usable or pad area, the tax rate is similar, but the South Corona location and the location in an upscale gated community arc considered to be superior. In addition, the view potential is fairly similar to slightly superior to the subject. Considering an npward time adjustment of at least 35-40% since the price was negotiated about two years ago, the current indication at ±$300,000 per finished lot supports a firm upper limit for the subject.

Data N,), 7 was also a sale of 8,000 s.f. minimum lots, with an average size of ±11,000 s.f. However, about 70-75% of the lots have golf course frontage and 10- 15% o' the other lots have good views. This sale was negotiated in November/December 2003 and closed in December 2004 at the price indicating $267,353 per finished lot. The homes were planned to range in size from 3,000 s.f. to 5,700 s.f. and the proforma base home pricing was a wide range from $535,000 to $880,000. The actual homes range in size from 3,614 to 4,442 s.f. with current pricing from the high $700,000's.

22 V ALVA TION, Continuing

The comparison to the subject is similar to Data No. 6, except that these lots have far superior golf course frontage and view potential to the subject. Considering an upward time adjustment of at least 25-30% since the sale was negotiated, the current indication at ±$340,000 per finished lot supports a far upper limit for the subject.

Data No. 8 was a sale of 10,000 s.f. minimum lots, and with an average size of ±13.400 s.f. About 35-40% of these lots have golf course frontage and'or other views. The sale was negotiated in late 2003 and closed in December 2004 at the price indicating $239,352 per finished lot. The homes were planned to range in size from 3, 700 to 4,800 s.f, with proforma base pricing of $650,000 to $790,000. The actual home sizes will be 3,758 s.f. to 5,262 s.f., but current projected pricing is not known.

The comparison to the subject is also similar to Data No. 6, except that these are larger lots as well as having far superior golf course frontage'view potential. Considering an upward time adjustment of at least 25-30% since the sale was negotiated, the current indication at 1$305,000 per finished lot supports a far upper limit for the subject.

Data Nos. 9 and 10 are located in the newly-developing, master-planned community of Sycamore Creek, which is located along the westerly side of the 1-15 Freeway at Indian Truck Trail. This community includes a wide range of housing product and various recreation amenities, and some of the tracts are and will be view oriented. The typical overall tax rate for homes in the community is .l] .8%.

Data No. 9 is located in Phase 2A of Sycamore Creek and was the sale of 4,000 s.f. minimum lots, some with good territorial view potential. The sale was negotiated in August 2004 and closed in October at the price reflecting $212,428 per finished lot. The homes were projected to range in size from 2,050 to 2,550 s.f., with projected base pricing of $415,000 to $445,000, but current projected pricing is not known.

In comparison to the subject, the lots are much smaller at 4,000 s.f. minimum and the view potential is far inferior, but the South Corona location is superior to the subject and is a partially offsetting factor. Considering an upward time adjustment of at least I 0-15% since the sale was negotiated, a current indication at ±$240,000 per finished lot supports a far lower limit for the subject.

Data No. 10 is also located in Phase 2A of Sycamore Creek and was the sale of 6,000 s.f. minimum lots, some with good territorial view potential. The sale was negotiated in August 2004 and closed in September at the price reflecting $243,250 per finished lot. The homes were projected to range in size from 3,000 to 4,200 s.f., with projected base pricing of $525,000 to $575,000. The actual homes will range in size from 2,661 to 4, 164 s. f and the current projected pricing is from the low $600,000's, indicating an increase ofcLl5-20%.

23 VALUATIOl'i, Continuing

The co:nparison to the suhject is similar to Data No. 9, except that these lots arc larger al 6,000 s.f. minimum, though still smaller than the subject. The view potentilll is also far inferior but the South Corona location is superior. Considering an up"' ard time adjustment of at least 10-15% since the sale was negotiated, a current indication at ±$274,000 per finished lot supports a close indication for the subject.

In summary, on a per finished lot basis, the sales data supports far lower limits at $240,000 and $245,000, close indications from $250,000 to $280,000, a close but firm upper limit at $295,000, and firm to far upper limits from $300,000 to $350,000.

Alternatively, on the basis of a finished lot ratio (price per finished lot divided by average base home price). the sales data items indicate the overall range from 33'Yo to ±50%. It is noted that the more recent data indicate the range of 42% to 50%, and the saks that were negotiated some time ago indicate the lower part of the range from 3 3% to 43%. In addition, it is noted that a higher finished lot ratio is supportable when reflecting significant potential view premiums above the potential base pricing, and this would be the case with the subject lots.

I have concluded on a finished lot ratio of 46-47% for the subject, and applied this to the projected average base home price of$571,667. This results in the following:

$571,667 x .46-.47 - 5262,967 to $268,683/finished lot

Based on the foregoing, I have concluded on a value for the subject lots of $265,000 per fini ;hed lot.

Deduction for Remaining Costs to get to Finished Lots

Inform,,tion was provided by the property owners as to the remaining costs to get all of the lots from as is condition to finished lots. These costs include items of grading, streets,' utilities, fencing/walls, landscape, erosion control, fees, engineering, consultants, and contingency. The total estimated remaining costs are $32,063,855, net of the CFD bond proceeds of $22,500,000 that will finance part of the cost of the facilities.

In addi1ion, these costs have been allocated as $28,757,700 to the 372 lots owned by LHC Riverside Associates, LLC/Riverside LHC, Ltd. (LHC) and $3,306, 155 to the 140 lot:; owned by Lake Hills - Riverside, L.P. (Brehm). This reflects an average remaining cost of $77,306 per lot for the lots owned by LHC and an average of $23,61:: per lot for the lots owned by Brehm. The differential is due to the fact that the bu!( of the land development work completed thus far has been on the first takedovm of the 140 lots owned by Brehm, with a much greater amount of work yet to be ccmpleted on the lots owned by LHC.

24 VALUATION, Continuing

Conclusion of Value

Based on the foregoing, the value allocation to the two ownership portions of the lots in the Stone View neighborhood is calculated as follows:

LHC Ownership

$265.000/lot (if finished condition) less $77,306/lot (costs to complete) -

SI 87,694/lot (as is condition) x 82 lots 00 $15,390,908

Brehm Ownership

5265,000/lot (if finished condition) less $23,615/lot (costs to complete)~

$241,385/lot (as is condition) x 26 lots~ $6,276,010

25 ·====---,1 SILVERSAGE .

~,' ..... · /\.8

26 SIL VERSAGE

PROPERTY DATA

Location

This neighborhood is comprised of I 03 single-family lots which arc scaltcrcd throughout the easterly half of Lake Hills Reserve.

Record Owner/Ownership History

LHC Riverside Associates LLC/Riverside LHC, Ltd. owns Lots 59 to 65, 71 to 87 and 165 to 173 of Tract No. 28815 and Lot 277 of Tract No. 28816 (34 lots). Lake Hills- Riverside, LP. owns Lots 6 to 16, 88, 89, 174 to 201, 204 to 211, 213 to 221 and 225 to 235 of Tract No. 28815 (69 lots).

Legal Description

The 103 lots are described as Lots 6 to 16, 59 to 65, 71 to 89, 165 to 201, 204 to 211, 213 to 221 and 225 to 235 of Tract No. 28815 and Lot 277 of Tract No. 28816.

Assessor Data-2004/05

Assessor information is not yet available for the individual subject lots. The tax rate areas include 53-012 and 53-033 with a base tax rate of 1.09926, but the projected total tax rate to future homeowners is ± 1.8% ( on projected base home pricing) including the special taxes for this CFD.

No, of Lots/Lot Sizes

This neighborhood comprises a total of I 03 lots, with pad sizes ranging from 5,319 s.f. to 24, 123 s.f. or an average of 11,402 s.f. The actual lot sizes range from 7,987 s.f. to 37,580 s.f., or an average of 18,834 s.f., but this includes from a minor to a significant amount of side and/or rear slope area to most of the lots.

Streets and Access

These lots arc located on Ridge Field Dr., Village Meadow Dr., Morning Mist Ct., Moon Rise Dr.. Rocky Bend Ct., Ridge Cliff Dr .. Old Lake Rd., Lakcpointe Dr. and Silver Moon Ct. These will all be two-lane streets within 60' dedicated right-of~ ways, and four of the streets are short cul-de-sacs.

Phvsical Condition/Topography/View

As of the May 1, 2005 date of value, grading is completed or nearing completion on the lots in the center and east portions of the neighborhood, and is still in process on

27 PROPERTY DATA, Continuing

the remaining lots. Paving of the streets at the far easterly end of the neighborhood was als,) just underway. Construction had not yet started on any of the homes.

The 11 lots at the northwest part of the neighborhood have a very gradual slope down t,J the northeast and homes on the north side of Ridge Field Dr. will have territorial and distant mountain views. The lots on the southwest side terrace down to the southwest, and back to slope areas or open space and have limited views of the hills and canyon areas to the south. Some of the lots in the central part of the neighbc,rhood back to open space and have canyon/hill views to the south. The lots in the east part of the neighborhood have the best views, some being of city lights and mo 1ntains to the north and others being of canyon/hill and Lake Matthews views to the south.

It is est1 mated that approximately 60-65% of the lots will have view potential.

Planned Development

The 10 3 lots arc planned to be developed with a neighborhood of homes called SilverSage at Lake Hills Reserve. There will be three floor plans that arc described as follows:

Residence One: 4,227 to 4A72 s.f., two story, with 3 bedrooms, 3;S baths, master retreat, oft, super loft or optional bedroom 4, study or optional bedroom 6 with bath 5, family room .md 3-space tandem garage; optional morning room or bedroom 5 with bath 4 in lieu of · andem portion of garage adds ±245 s.f.

Residence Two: 4,557 to 4,785 s.f., two story, with 4 bedroon1s, 3V2 baths, 1nastcr sitting area, Iott or optional bedroom 5, sludy or optional bedroom 7 with hath 5, fa1nily roo1n, nook and 4-space tandem garage: optional theater or bedroom 6 with bath 4 in lieu of one space in · andem portion of the garage adds + 228 s.f.

Jlesidence Three: 5,121 to 5,41 l s.f., two story, with 4 bcdroon1s, 3'.!2 baths, n1astcr sitting room, loft or optional bedroom 5, family room, nook, study or optional casita sitting room and 3-space garage; optional casita with bedroom 6 and bath 4 in lieu of third-car garage adds J_290 s.f.

Per the Market Absorption Study dated March 11, 2005 by Empire Economics, Inc., the projected base pricing is $675,000 to $750,000, or an average of $710,000. In additior, there will be lot premiums for size and view. The first sales release is schedul,~d to be June 4, 2005, and completion of the models is anticipated to be in the third quarter of this year.

VALUATION

Metho

This is the same as for StoneView.

28 VALUATION, Continuing

Analysis of Finished Lot Value

The analysis is fairly similar to that for Stone View, except that these subject lots are much larger in terms of the average size and pad size. The lots arc planned to be developed with much larger and far higher priced homes, though the view potential is fairly similar. Considering these factors, the data would support far lower limits at $250,000 to $280,000 per finished lot, closer but firm lower limits at $300,000 and $305,000 per finished lot, and close but firm upper limits at $340,000 to $350,000 per finished lot.

Considering a finished lot ratio of 46-47% and the projected average base pricing of $710,000, the following indication results:

S710,000 x .46-.47 = $326.600 to $333.700/finishcd lot

Based on the foregoing, I have concluded on a value of $330,000 per finished lot for the subject lots.

Deduction for Remaining Costs to get to Finished Lots

This discussion is also the same as for StoneVicw, thus the deductions are $77,306 per lot for the lots owned by LHC and $23,615 per lot for the lots owned by Brehm.

Conclusion of Value

Based on the foregoing, the value allocation to the two ownership portions of the lots in the SilverSagc neighborhood is calculated as follows:

LHC Ownership

$330,000/lot (if finished condition) less $77,306/lot (costs to complete)=

$252.694/lot ( as is condition) x 34 lots = $8.591,596

Brehm Ownership

S330,000ilot (if finished condition) less $23,615/lot ( costs to complete) -

$306,385/lot ( as is condition) x 69 lots - $2 LI 40,565

29 ORCHARD HEIGHTS

~.. .. Ny 5

~ \\ . \ \ l

30 ORCHARD HEIGHTS

PROPERTY DATA

Location

This neighborhood is comprised of98 single-family lots which are located in the east central area of Lake Hills Reserve.

Record Owner/Ownership History

LHC Riverside Associates LLC/Rivcrsidc LHC, Ltd. owns Lots 48 to 58 and 123 to 164 of Tract No. 28815 (53 lots). Lake Hills Riverside, L.P. owns Lots 17 to 23, 43 to 4 7 and 90 to 122 of Tract No. 28815 ( 45 lots).

Legal Description

The 98 lots are described as Lots 17 to 23, 43 to 58 and 90 to 164 of Tract No. 28815.

Assessor Data-2004/05

Assessor information is not yet available for the individual subject lots. The tax rate areas include 53-012 and 53-033 with a base tax rate of 1.09926, but the projected total tax rate to future homeowners is ±1.8% (on projected base home pricing) including the special taxes for this CFD.

No. of Lots/Lot Sizes

This neighborhood comprises a total of 98 lots, with pad sizes ranging from 4,625 s.f. to 12,842 s.f. or an average of7,102 s.f. The actual lot sizes range from 7,162 s.f. to 23,030 s.f., or an average of 11,632 s.f., but this includes from a minor to a significant amount of side and/or rear slope area to most of the lots.

Streets and Access

These lots are located on Lakcpointe Dr., Sky Land Ct., Golden Bluff Loop, Village Meadow Dr. and Broken Rock Ct. These will all be two-lane streets within 60' dedicated right-of-ways, and two of the streets are short cul-de-sacs.

Physical Condition/Topography/View

As of the May I, 2005 date of value, grading is nearing completion on the lots in the south part of the neighborhood, and is still in process on the lots in the north part. Streets had not yet been paved and construction had not yet started on any of the homes.

31 PROPERTY DA TA, Continuing

Most of the lots around the northerly edge of the neighborhood will have good views to the nort1 of city lights and distant mountains. Other of the lots in the north part of the neightorhood and many of the lots in the south part of the neighborhood will back to open space and have views to the south of canyons and hills and open space. It is estimited that approximately 50-55% of the lots will have view potential.

Planned Development

The 98 lots are planned to be developed with a neighborhood of homes called Orchard Heights. It is currently planned that there will be four floor plans, and the sizes arc ,,nticipated to be 3,412 s.f., 3,472 s.f., 3,652 s.f. and 3,829 s.f. Per the Market Absorption Study dated March 11, 2005 by Empire Economics, Inc., the projected base pricing is from $560,000 to $595,000, or an average of $575,000. In addition, there will be lot premiums for size and view.

It is currently anticipated that Brehm will resell these lots to another merchant builder, thus the timing of home constrnction is not known at this point in time.

VALUATION

Method of Analysis

This is the same as for Stone View.

Analysis of Finished Lot Value

The analyi.is is also similar to that for StoneView. These lots are fairly similar in size though the average pad size is slightly smaller. The planned homes range in size from larger on the low end to slightly smaller on the high end, but the projected pricing is fairly similar. While it is estimated that a slightly lower percentage of these lots will have view potential than the StoneView lots, the best views are from a much high,:r elevation than the Stone View lots.

Overall, I have concluded on a similar value for these lots as for the Stone View lots, or a value of$265,000 per finished lot.

Deduction for Remaining Costs to get to Finished Lots

This discrn:sion is also the same as for StoneView, thus the deductions are $77,306 per lot for 1hc lots owned by LHC and $23,615 per lot for the lots owned by Brehm.

32 VALUATION, Continuing

Conclusion of Value

Based on the foregoing, the value allocation to the two ownership portions of the lots in the Orchard Heights neighborhood is calculated as follows:

LHC Ownership

$265,000/lot (if finished condition) less $77,306/lot ( costs to complete) ~

$187,694/lot (as is condition) x 53 lots= $9,947,782

Brehm Ownership

$265,000/lot (if finished condition) less $23,615/lot (costs to complete)=

$241,385/lot (as is condition) x 45 lots= $10,862,325

33 ROCKRIDGE

,, 177 "- ~;-·-- ti -.i:1 179

180

PARK SITE

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34 ROCKRIDGE

PROPERTY DAT A

Location

This neighborhood is comprised of 110 single-family lots which are located in the west central area of Lake Hills Reserve.

Record Owner/Ownership History

LHC Riverside Associates LLC/Rivcrside LHC, Ltd. currently owns all ofthese lots.

Legal Description

The 110 lots arc described as Lots 163 to 272 of Tract No. 28816.

Assessor Data-2004/05

Assessor information is not yet available for the individual subject lots. The tax rate areas include 53-012 and 53-033 with a base tax rate of 1.09926, but the projected total tax rate to future homeowners is ± 1.8% ( on projected base home pricing) including the special taxes for this CFO.

No. of Lots/Lot Sizes

This neighborhood comprises a total of 110 lots, with pad sizes ranging from 4,936 s.f. to 16,285 s.f. or an average of 7,212 s.f. The actual lot sizes range from 6,141 s.f. to 20,647 s.f., or an average of 9,420 s.f., but this includes from a minor to a significant amount of side and/or rear slope area to most of the lots.

Streets and Access

These lots arc located on Angel Canyon Dr., Blacksagc Ct., Spring Canyon Pl., Valley Spring Dr., Valley Dale Ct., Village Meadow Dr. and Lakepointe Dr. These will all be two-lane streets within 60' dedicated right-of-ways, and three of the streets are short cul-de-sacs.

Physical Condition/Topography/View

As of the May I, 2005 date of value, rough grading was underway on these lots, but with a substantial amount of grading work yet to be completed to get all of the lots to a blue-top condition. The lots in this neighborhood will gradually terrace down to the south and west. This will result in view potential of city lights, canyons and/or hills to approximately 50-55% of the lots.

35 PROPERTY DAT A, Continuing

Planned Development

The 110 l,Jts arc planned to be developed with a neighborhood of homes called RockRidge. II is currently planned that there will be three floor plans, and the sizes arc anticipated lo be approximately 2,600 s.f., 2,850 s.f and 3,100 s.f. Per the Market Absorption Study dated March I 1, 2005 by Empire Economics, Tnc., the projected base pricing is from $480,000 to $525,000, or an average of $503,333. In addition, there will be lot premiums for size and view. It is projected that constrncticn of the homes will start in the first quarter of 2006.

VALUATION

Method of Analysis

This is the same as for S!oneView.

Analysis of Finished Lot Value

The analysis is also similar to that for StoneView. However, these lots are slightly smaller in terms of the average size and the average pad size, and the lots are targeted to be developed with smaller and lower-priced homes. In addition, the view potential ii: slightly inferior to the Stoneview lots. Considering these factors, !he data would support close indications at $240,000 and $245,000 per finished lot, and firm upper limits at $250,000 to $280,000 per finished lot.

Considering a finished lot ratio of 46-47% and the projected average base home pricing of'.,503,333, the following indication results:

$50:l,333 x .46-.47 ~ $231,533 to $236,567/finished lot

Based on he foregoing, I have concluded on a value of $235,000 per finished lot for !he subject lots.

Deduction for Remaining Costs to get to Finished Lots

This discu:;sion is also the same as for StoncView. Thus, since all of the lots are owned by LHC, the deduction is $77,306 per lot.

Conclusion of Value

Based on the foregoing, the as is value of the subject lots is calculated as follows:

$23:i,000/lot ( if finished condition) less $77 ,306/lot ( costs to complete) ~

SIS"',694/lot (as is condition) x 110 lots - $17,346,340

36 HIGHPOINT

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37 HIGHPOINT

PROPERTY DATA

Location

This neighborhood is comprised of 93 single-family lots which are located in the westerly part of Lake Hills Reserve.

Record Owner/Ownership History

LHC Riven;ide Associates LLC/Riverside LHC, Ltd. currently owns all of these lots.

Legal Description

The 93 loti: are described as Lots 59 to 63, 69 to 73 and 80 to l 62 of Tract No. 28816.

Assessor Data-2004/05

Assessor in formation is not yet available for the individual subject lots. The tax rate areas include 53-012 and 53-033 with a base tax rate of 1.09926, but the projected total tax rate to future homeowners is 1,1.8% (on projected base home pricing) including tr e special taxes for this CFO.

No. of Lots/Lot Sizes

This neighborhood comprises a total of 93 lots, with pad sizes ranging from 5,275 s.f. to 25,416 s.f. or an average of 10,749 s.f. The actual lot sizes range from 7,778 s.f. to 77,0:i2 s.f., or an average of 15,252 s.f, but this includes from a minor to a significant :,mount of side and/or rear slope area to most of the lots.

Streets and Access

These lots are located on Skyridge Dr., Least Bells Ct., Gnatcatcher Ct., Glendon Creek Ct., Laurel Branch Ct., Crescent Glen Ct., South Peak Ct., South Cliff Ct. and Pinnacle Peak Ct. These will all be two-lane streets within 60' dedicated right-of~ ways, and eight of the streets will be short cul-de-sacs.

Physical Condition/TopographyNiew

As of the May I, 2005 date of value, rough grading was underway on these lots, but with a substantial amount of grading work yet to be completed to get all of the lots to a blue-top condition. The lots in this neighborhood will terrace up the ridgclines from west lo cast and northeast. Many of the lots will back to open space, and approximately 65% of the lots will have view potential.

38 PROPERTY DATA, Continuing

Planned Development

The 93 lots are planned to be developed with a neighborhood of homes called HighPoint. It is currently planned that there will be three floor plans, and the sizes are anticipated to be approximately 3,800 s.f., 4,000 s.f. and 4,200 s.f. Per the Markel Absorption Study dated March 11, 2005 by Empire Economics, Inc., the projected base pricing is from $615,000 to $650,000, or an average of $633,333. In addition, there will be lot premiums for size and view. It is projected that construction of the homes will start in the first quarter of 2006.

VALUATIOl'I

Method of Analysis

This is the same as for Stone View.

Analysis of Finished Lot Value

The analysis is similar to previous analyses, and considering the lot sizes as well as the projected home size and pricing, the value of these lots is higher than the Stone View lots but lower than the SilverSage lots.

Considering a finished lot ratio of 46-47% and the projected average base home pricing of$633,333, the following indication results:

$633,333 x .46-.47 ~ $291,333 to $297,667/finishcd lot

I have concluded on a value of$295,000 per finished lot for the snbject lots.

Deduction for Remaining Costs to get to Finished Lots

This discussion is also the same as for Stone View. Thus, since all of the lots are owned by LHC, the deduction is $77,306 per lot.

Conclusion of Value

Based on the foregoing, the as is value of the subject lots is calculated as follows:

$295,000l]ot (if finished condition) less $77,306/lot ( costs to complete) -

$217,694/lot (as is condition) x 93 lots - $20.245.542

39 COl'iCLUSION OF VALUE RY OWNERSHIP

Based on the foregoing, the following conclusion of value for each ownership 1s calculated as follows:

r1eighborhood

StoncVic,v $15,390,908 $ 6,276,0 IO S ilvcrSagc $ 8,591,596 $21, 140,565 Orchard I !eights $ 9,947,782 $10.862,3'5 l<_ockRidge S 17,346.340 l !ighPoint soo 245 542

Total $71,522,168 $38,278,900

Thus, as a result of this analysis, I have arrived at the fol lowing conclusions of market value, subject to the Assumptions and Limiting Conditions and as of May I, 2005:

Ownerstili!_ No. I~ots l\1arket \ 1alue

LHC Riverside Associates, LLC/Rivcrsidc LHC, Ltd. 372 $ 71,500,000 Lake Hi! s-Riverside. LP. 140 $ 38 200.000 $109,700,000

(ONE HUNDRED NINE MILLION SEVEI\ HUNDRED THOUSAND DOLLARS)

40 ADDENDA TABLLATIO~ OF RESIDENTIAL LAND SALES

Rec. No :-.1in. Lot Price-'Lot Fin. Lot ~.EJ.. Location-'Projs"Ct '.\amc S_t;ller-'13uycr Date Lots Pa~i Sit.e Produq l:jn_i1hc_sl Lo_! B-~ti.2 Itemarks

Both sides Lakcpointe Ur. at Golden Rrchn1 Communities Offers 98 ±7.000 3,412-3,829 s.[ n'a 43- Portion of subject property; referred to as Bluff Loop, Cmncorp :Riverside area n-'a $560,000-$595,000 $250.000- 49'\, Orchard Height~ neighborhood (n:a) $280,000 2 Both sides l\1cA!!istcr St . S-'O Dufftrin La Sierra Ave. Venture 4105 207 15,000 3, 700 s.f avg n:a 4"") Vacant, undulating land: approved tent Avf' 1 lninrnrr, ·Ri, ,,, .._;,;,-.. "'""'' C:.tcm,l,,r,l p..,,...;r;,./1 ,,..,.,,,. -'" s'"-'","v"~'"'"'" "'"' "'fr-· ~ .;>,s\>1,,,vv u<11.l 111,1, pu1cmiai, lU Uc (11/:1) CFD with l .55~'u tax rate

KEC Archibald Ave. & Schkisman Rd., SC Eastvale D.-vel. Corp. Escrow 92 7,200 n.,,a $172.000 nia Vacant, former dairy; raw land with Unincorp. Capital Pacific Housing n!a $245,000 approved tent. tract map; to have CFO (11,,a) with+ l.8%, tax rate

1 4 S'Jy end Skyline Dr __ S. 0 Chase Dr.. Far Wcst-JEC Corona Props ] ji()4 157 7.200 3.200-3.500 sf. $197,452 ±50'Y., Vacant, hilly land; raw condition with Corona Centex llomcs ±$700.000 ±$350,000 approved tent tract map; some view (n/a) pmcmial; to have CFO

5 E,1() Tcmescal Canyon Rd., S·'() Cajalco Tcmcscal Canyon Propertics-8 ]()i04 62 7.200 3.000-3,700 s.f n/a 43%, PA 10 of Dos Lagos; delivered as blue- Rd .. Corona Taylor \Voodrow Homes S470,000-S530.000 $215,000 top lots; many Jots with golf course (Vcntana) frontage; l.8-1.91% tax rate

6 Roth sides Retreat Pkwy.,. 75 mile s:o Corona I !ills LLC 704& !37 8,000 3,175-4.800 s.f. $197,558 40~10 P.A. 7 A!7Bi8 of The Retreat; to he \Veirick Rd., Unincorporated Beazer Homes 11 104 S52 l .990-$591,990 $218,130 delivered as hlue-top lots: golf course ( \\..1asterpkce) frontage: price set 5103; ±15o/,., tax rate

7 ;;;;;~'? mile \Vi() Retreat Pk\\'}· (q: .75 n1i. Corona Hills LLC 12f04 51 8,000 3,000-5,700 s.f. $247,616 38Q;b P.A. 5B ofThe Retreat; to be delivered s:o Wcilick Rd., Unincorporated L.znnar Hon1es $535,000-$880,000 $267.353 as blue-top lots: much golf course front- tCastellina) age & other views; ±l.5-I.6°/o tax rate

8 2".J tract w:o Retreat Pkwy \(<' ..75 mi. Corona Hills LLC 1204 98 10,000 3.700-4,800 s.f. $217,608 33°/o P.A. 6 of The Retreat; to be deJh.-ered as s.·o \Vdrick Rd., Unincorporated KB Uon1e $650,000-$790,000 $239,352 blue-top lots; golf course frontage/good (Siena Ridge) views; pricc set 12/03: ±l.5°/o tax rate

1 9 r,.;:s & \V S Corn! Canyon Rd., W"ly Star!icld Sycan1ore Creek lnv. J0/04 101 4,000 2,050-2,550 s.f. $165,520 49~!,;, PA 1 of Sycamore Creek, Phase 2A; from \rfayhew Canyon Rd., Corona SCC-Canyon II $415,000-$445,000 $212,428 delivered as blue-top lots; temtorial (An:1cthyst Hills) viev.:s; price set 8i04; :::::l .8i;,,Q tax rate

10 S\V IS :\1:ayh.:w Canyon Rd., Lumerina Starficld Syca1nore Cre<.'k ln\ 904 93 6,000 3.000-4,200 s.f S194,250 44°/o PA 8 of Sycamore Creek, Phase 2A.; St. to Coral Canyon Rd., Cnrona PLC Sycamore Creek lI $525,000-$575.000 $243,250 delivered as blue-top lots; territorial llkniage) views; price set 8104; =l .8°/o tax rate

Note: Home pricing is original proforma or earliest available QUALIFICATIONS OF STEPHEN G. WHITE, MAI

PROFESSIONAL EXPERIENCE

Real Estate Appraiser since 1976. 1983 through current date: Self-employed: office located at 1370 l'i. Brea Blvd., Suite 205, Fullerton, CA 92835 (Phone: 714-738-1595) 1976-1982: Employed by Cedric A. White, Jr., MAI, independent appraiser located in Anaheim. Real estate appraisals have been completed on 1nost types of properties for purposes of tair market value> leased fee value, leasehold value, easement value, partial acquisitions and severance damages.

PROFESSIONAL ORGANIZATIONS

Member, Appraisal Institute; MAI designation obtained 1985

Affiliate Member, Pacific West Association of Realtors

LICENSES

Licensed by the State of California as a Certified General Real Estate Appraiser: OREA ID No. AG01331 l; vahd through September 22, 2006.

EDUCATION

B.A. Economics & Business, Westmont College, Santa Barbara (1976) Appraisal Institute Courses: Basic Appraisal Principles, Methods and Techniques Capitalization Theory and Techniques Urban Properties Litigation Valuation Standards of Professional Appraisal Practice Numerous seminars and continuing education on various appraisal subjects, including valuation of easements and leased fee interests. litigation, the n1oney market and its impact on real estate, and standards of professional appraisal practice.

COURT/TESTIMONY EXPERIENCE

Qualified as an expert witness in the Superior Courts of Orange, Los Angeles, Riverside and San Bernardino Counties; also before the Assessment Appeals Board of Orange and Los Angeles Counties.

TYPES OF PROPERTY APPRAISED

Residential: vacant Jots, acreage and subdivisions; single filmily residences, condominiums, townhomes and apartn1ent complexes.

Commercial: vacant lots/acreage~ office buildings, retail stores, shopping centers, restaurants, hotels and motels.

42 QUALIFICATIONS, Page 2

Industrial: Yacant lots and acreage; warehouses, manufacturing buildings, R&D buildings, industrial parks, mini-\l·archouscs.

Special Pur~ose: mobilehome parks, churches, automobile agencies, medical buildings, convalescent hospitals, case1nents, leased fee an

CLIENT LIST

Corporations:

Aer;: Energy MC'P Foods British Pacific Properties Merrill Lynch Relocation BSI c:onsultants Orangeland RV Park ('ro,vn c:entral Petroleum Pacific Scientific East11an Kodak Company Penhall International Firc!;tonc Building Materials Pie 1N Save Stores Foodmaker Realty Corp. Sargent-Fletcher Co. Greyhound Lines Shell-W cstcrn E&P Holiday Rambler Corp. Southern Distributors C~orp. International Baking Co. Southern California Edison Johnson Controls The Home Depot Karr pgrounds of America Tooley and Company La Habra Products, Inc. Wastewater Disposal Co. Developers:

Brighton Homes Mission Viejo l~o. Cita1 ion Builders Premier tlomcs Davison-Ferguson Investment Devel. Presley Homes D.T. Smith Homes Rockefeller & Associates Irvir. c C:ompany Taylor Woodrow Hornes Katr ryn Thompson Developers Unocal Land & Development Marl: Taylor, Inc. Law Firms:

Baldikoski, Klotz & Dragonette Nossaman, Guthner, Knox & Elliott Best Best & Krieger Oliver, Barr & Vose Bo\vic, Arneson, Kadi, Wiles & Giannone Ollestad. Freedman & Taylor Bradshaw, John Palmieri, Tyler, Wiener, Wilhelm & Bye, Hatcher & Piggott Waldron Callahan, McCune & Will is Paul, Hastings, Jonofsky & Walker Cool:sey, Coleman & Howard Piggott, George B. Hamilton & Samuels Pothier, Rose Horf an, Rosen, Beckham & (~orcn Rosenthal & Zimmerman Kent, John Rutan & Tucker Kirk and & Ellis Sikora & Price, Inc. Lath m & Watkins Smith & Politiski McKee, Charles C. Williams, Gerold G. Mos1ch, Nicholas J. W oodrun; Spradlin & Smart Lon,, David M. Yates, Scaly M.

43 QUALIFICATIONS, Page 3 Financial Institutions:

Barclays Bank San Clemente Savings & Loan Chino Valley Bank United Calif. Savings Bank Continental Bank National Credit Union Admin. First Interstate Mortgage First Wisconsin Bank Security Pacific Bank Ahn1anson Trust Company Washington Square Capital Sunwcst Bank

Cities:

City of Anaheim City of Orange City of Baldwin Park City of Placentia City of Buena Park City of Riverside City of Cypress City of Santa Ana City of Duarte City of Santa Fe Springs City of La Habra City of Stanton City of Laguna Beach City of Tustin City of Mission Viejo City of Yorba Linda Counties:

County of Orange (~ounty of Riverside Other Governmental:

Agua Mansa Industrial Cirowth Association Metropolitan Water District El Toro Water District Orange County Water District Federal Deposit Insurance Corporation (FDIC) Trabuco (:anyon Water District Kern County E1nployccs Rctiren1ent Association U.S. Postal Service

School Districts:

Anaheim Union High School Dist. Moreno Valley Unified School Dist. Banning Unified School Dist. Newhall School Dist. Capistrano Unified School Dist. Ne"'11ort-Mesa Unified School Dist. Castaic Union School Dist. Placentia-Yorba Linda Unified Dist. Cypress School Dist. Poway Unified School Dist. Etiwanda School Dist. Rialto Unified School Dist. Fullerton School Dist. Saddleback Unified School Dist. Garden Grove Unified School Dist. Santa Ana Unified School Dist. Irvine Unified School Dist. So. Org. Cnty Comm. College Dist. Lake Elsinore Unified School Dist. Tcm pie City School Dist. Churches/Church Organizations:

Calvary Church, Santa Ana First Church of the Nazarene Central Baptist Church, Pomona Lufheran Church, Missouri Synod Christian & Missionary Alliance Church, Santa Ana Presbytery of Los Rancho Christian Church Foundation St. Mark's Lutheran Church, Hae. Hts. Congregational Church, Fullerton Vineyard Christian Fellowship Other: Biola University Garden Grove Boys' Club Cedars-Sinai Medical Center The Sheepfold

44 APPENDIX D

MARKET ABSORPTION STUDY SUMMARY AND CONCLUSIONS [THIS PAGE INTENTIONALLY LEFT BLANK] MARKET ABSORPTION STUDY SUMMARY AND CONCLUSIONS

COl\ilMUNITY FACILITIES DISTRICT NO. 04-2 (LAKE HILLS CREST)

RIVERSIDE COUNTY, CALIFORNIA

GRADING ACTIVITY ON A PORTION OF THE SITE

BY EMPIRE ECONOMICS, INC.

MARCH 11, 2005

Empire Econon1ics A Release Date: March 11, 2005 CERTIFICATION OF INDEPENDENCE

The Securities & Exchange Commission has recently taken action against Wall Street firms that have utilized their research analysts to promote companies that they conduct business with, citing this as a potential conflict of interest. Accordingly, Empire Economics (Empire), in order to ensure that its clients are not placed in a situation that could cause such conflicts of interest, provides a Certification of Independence. Specifically, the Certificate states that Empire performs consulting services for public entities only in order to avoid potential conflicts of interest that could occur if it also provided consulting services for developers/builders. For example, if a research firm for a specific Community Facilities District or Assessment District were to provide consulting services to both the public entity as well as the property owner/dcvclopcribuilder, then a potential conflict of interest could he created, given the different objectives of the public entity versus the property owner/developer.

Accordingly, Empire Economics certifies that the Market Absorption Study for the County of Riverside CFO No. 04-2 (Lake Hills Crest) was performed in an independent professional manner, as represented by the following statements:

l- Empire was retained to perform the Market Absorption Study by the County of Riverside, not the District's property owner or the developer/builder.

l- Empire has not performed any consulting services for the District's property owner nor the developer/builder during at least the past five years.

);, Empire will not perform any consulting services for the District's property owner nor the developer/builder during at least the next three years.

);, Empire's compensation for performing the Market Absorption Study for the District is not contingent upon the issuance of Bonds; Empire's fees arc paid on a non-contingency basis.

Therefore, based upon the statements set-forth above, Empire hereby certifies that the Markel Absorption Study for the County of Riverside CFO No. 04-2 (Lake Hills Crest) was performed in an independent professional manner.

Empire Economics, Inc. Joseph T. Janczyk, President

E1npire Econonlics Release Date: March 11, 2005 INTRODUCTION TO THE BOND FINANCING PROGRAM

The County of RiversUe has formed a Community Facilities District for Lake Hills Crest, a Planned Community in the northwestern portion of Riverside County that is being developed by Brehm Communities, as a means of funding the various "public" infrastructure components that arc required for the development of its forthcoming residential projects. Specifically, CFD No. 04-2 is expected to have 512 single-family detached housing units. Based upon the development strategy of Brehm Communities, CFO No. 04-2 has been partitioned into five Project Areas (PA); their housing units and lot sizes characteristics are as follows:

Project Arca# I: 114 single-family units on lots of some 7,000 sq.ft Project Arca 112: 104 single-family units on lots of some 8,000 sq.ft Project Area 113: 98 single-family units on lots of some 8,000 sq.ft. Project Arca #4: 93 single-family units on lots of some 9,000 sq.ft. Project Area 115: 103 single-family units on lots of some 15,000 sq.ft

Together, these five PA in CFO No. 04-2 arc expected to have a total of 512 single-family detached housing units. The for:hcoming residential products in CFD No. 04-2 are considered to be oriented primarily towards the move-up market, considering that they are relatively large homes of some 3, 700 sq.ft. that are priced at some $596,000, on the average. Specifically, this can be attributed to its topography of rolling hills and ridge lines which results in large sized lots, and many of these have vie\V orientations.

CFO No. 04-2 (Lake Hills Crest) is expected to have a Bond Issue in the amount of some $25,000,000 for facilities related to the County of Riverside - some $8 million, flood control - some 2.6 million and the Western Municipal Water District - some $14 million.

The County of Riverside has retained Empire Economics, an economic and real estate consulting firm, to perform a Market Absorption Study for CFD No. 04-2. The purpose of the Market Absorption Study for CFD No. 04-2 is tc, provide an estimate of the probable absorption schedules for the forthcoming residential properties. Specifically, from the viewpoint of prospective Bond Purchasers, the particular componenls of the lr, frastructure should be tin:1e-phased and location-phased in a tnanner that approximately coincidEs with the expected marketability/absorption of the projects in CFO No. 04-2. Otherwise, to the extent that the infrastructure is not appropriately phased, then the following types of market inefficiencies may occur:

On the one hand, if certain projects do not have the infi-astructure that is required to support their development in a timely manner, then they would not be able to respond to the demand in the marhetplace, resulting in a market shortage.

On the other hand, if too much infrastructure is built, then pro;ects for which there is not present(v a market iemand would incur high car,ying costs due to the market surplus, and this could adversely impact their.financial feasibility.

Thus, the Market Absorption Study formulates guidelines on the appropriate or optimal time-phasing and location-phasing o t" the infrastructure for the properties located in CFD No. 04-2, as a means of providing the bond purchasers with a reasonable amount of security from a market absorption pcrspecti ve.

Empire Economics 2 Release Date: March 11, 2005 SOUTHERN CALIFORNIA MARKET REGION

.Laur ;\~ter ······•· ,-. Am.hoy, :- >::: ,. /\ S:u1-t:t·'Cl~11t:i ,He-spt-ria l:fflmi,u, /°" • . . _ .... l'.. la\:P'\ <{. '". ;;, "' . · Valles:... ,<. • ~v7! SI!!)}.-". • .·.- .,. • 0,2.'\"ent•.fo ~· . , . B=um= ··~"G!alU,<\ ... } numsand Oak< •.. ,:,. ·. ·····•·PaJ.ad•1m · Rmulto -:- . ···•·. · ·•• .... · <,1•m1,1~ ·.• · .C" I "el,s ·0111arn, .Twt.~ PUM$ Porthltt* •. ;;,to . ,.·/f. . .. i, Cl,ofo·~'-:. ·. P.o;fuln,, . -C0,Rhe1 .. . .a:;,.~,(. ~-,.,,.. .; """"i.J..... ·, ·;;..·""!· ..-· - '';' :....~·~ Lo -.:-::::S:ff·-~;·ll"... B.=· en<'!'.i";·-..1, ...... ••11a1itn..... "· ··.),. " \ • \,_,, . • ··~ "" • w . \ - "-"--•..---..- 11<,w,. . I .•• -1'"" .• - " Nfiwpolt Beat lt . 's.,1 ,Lii'g#lia B<":i,h '\Te:nttctda c6 .. ~;)H ('\('JfW'l\{(lo

·.Oft':u1.-.1d~·. . ;(':nl~l.'.ld.'.:,

.~mitas

CFO NO. 04-2 (LAKE HILLS CREST)

Empire Economics 3 Release l)ate: t\Jarch 11, 2005 THE MARKET AREA FOR CFD NO. 04-2 (LAKE HILLS CREST)

Qilrtlffl()l1( ~!11.t',.\e -Fontana '!'

~ ~ ~ ~ ,:;.·n:111d T.,Hl<'B ; '/ .w H't<•'¢T$'.ld!t Dr E Rivers~ Or <:,imr,vrtk'<,..., HV.;ihc;r O·!'·; Chino O $chMte'~ .,,I Lcim.\ G:le:'.,:,·:'.';;~~o.,,, .. ~

71 T

U,$ 'S(l!'t•'&',!)$ rj;: ;fhino HH Q S:!E--Rpy t"W)ik:i?r n ' 14-i ·~ St "

A I I A Prencta Urwts Btvd Yorba Un

* ,\IEARBY COMMUNITIES* R,

1:<:rnpirc Economics 4 Release Date: l\1arch 11, 2005 CHARACTERISTICS OF THE EXPECTED PRODUCT MIX FOR THE COUNTY OF RIVERSIDE CFD NO. 04-2

The properties in the County of Riverside CFO No. 04-2 have received planning approvals/entitlements for some 512 housing single-family detached housing units. The characteristics and composition of the 512 forthcoming housing units in CFO No. 04-2 by Project Areas (PA), as set­ forth by Brehm Communities, the developer/builder, are as follows:

~ Project Area #I is anticipated to have a total of some 114 housing units; they arc expected to commence escrow closings to homeowners in the 3rd quarter of 2006. The 114 single family homes on lots of some 7000 sq.ft., arc expected to be priced from $480,000-$525,000, some $503,333 on the average, with 2,600-3, I 00 sq.ft. of living area, some 2,850 sq.ft, on the average, for a value ratio (price/living area) of some $177.

~ Project Area #2 is anticipated to have a total of some 104 housing units; they are expected to commence escrow closings to homeowners in the I" quarter of 2006. The 104 single family homes on lots of some 8,000 sq.ft., are expected to be priced from $525,000-$620,000, some $571,667 on the average, with 2,955-4,087 sq.ft. of living area, some 3,510 sq.ft. on the average, for a value ratio of some $163.

~ Project Arca #3 is anticipated to have a total of some 98 housing units; they are expected to commence escrow closings to homeowners in the 2nd quarter of 2006. The 98 single family homes on lots of some 8,000 sq.ft., arc expected to be priced from $560,000-$595,000, some $575,000 on the average, with 3,412-3,829 sq.ft. of living area, some 3,591 sq.ft. on the average, for a value ratio of some $160.

~ Project Area #4 is anticipated to have a total of some 93 housing units; they are expected to commence escrow closings to homeowners in the 3rd quarter of 2006. The 93 single family homes on lots of some 9,000 sq.ft., are expected to be priced from $615,000-$650,000, some $633,333 on the average, with 3,800-4,200 sq.ft.ofliving area, some 4,000 sq.ft.on the average, for a value ratio of some $158.

~ Proj cct Arca #5 is anticipated to have a total of some 103 housing units; they are expected to commence escrow closings to homeowners in the 1"-2006. The 103 single family homes on lots of some 15,000 sq.ft., are expected to be priced from $675,000-$750,000, some $710,000 on the average, with 4,143-5,168 sq.fl of living area, some 4,623 sq.ft. on the average, for a value ratio of some $154.

Therefore, the 512 housing units in CFO No. 04-2 are single-family detached homes that are relatively high priced, considering their lot sizes as well as their sizes of living areas, and this is regarded as being appropriate, since their market orientation is expected to be towards move-up households.

Empire Economics 5 Release Date: March 11, 2005 ROLE OF Tl-IE MARKET STUDY IN THE BOND FINANCING

The Market Absorption Study for CFO No. 04-2 (Lake Hills Crest) has a multiplicity of roles with regards to the Bond Financing; accordingly, these are now discussed.

Marketing Prospects for the Various Products Types

Official Statement

Prospective Bond Purchasers

Aggregate Levels of Special Tax Revenues

Maximum Special Taxes for the Residential Products Conforming to the Issuer's Policies

Share of Payments: Developer/Builder vs. Final-Users Determined by the Absorption Schedules

Appraisal of Property

Discounted Cash Flow - Present Value

Absorption Schedules

The Issuing Agency for the Bond Issue, the County of Riverside, along with the Financial Advisor, can utilize the Market '\bsorption Study, Appraisal, and Special Tax Revenue to structure the Bond Issue for CFO No. 04-2.

Empire Econo1nics 6 Release Date: March 11, 2005 METHODOLOGY UNDERLYING THE MARKET STUDY

To pcrfonn a comprehensive analysis of the macroeconomic and microeconomic factors that arc expected to influence the absorption of the residential single-family detached housing products in CFD No. 04-2. Empire's Market Absorption Study conducts a systematic analysis of the following factors:

MACROECONOMIC FACTORS FOR CFD NO. 04-2 MARKET AREA

* Market Supply Planning Projections * Market Demand Economic Conditions * Reconciliation * Growth Potential for the Market Area

MICROECONOMIC FACTORS FOR CFD NO. 04-2

Regional Development Patterns Socioeconomic: School and Crime Housing Price Trends and Patterns Competitive Market Analysis - Product Types Residential Projects *Location *Product Types *Prices *Special Taxes/Assessments *F catures/Amenities

ABSORPTION SCHEDliLES Each Product Type * Residential Single-Family Detached Hornes *Market Entry to Build-Out

Therefore, the Market Absorption Study systematically proceeds from the macroeconomic analysis of the Market Region's future housing, industrial and commercial growth to the microeconomic analysis of the estimated absorption schedules for the residential single-family detached housing products in the County of Riverside CFD No. 04-2 (Lake Hills Crest).

Empire Econon1it.:s 7 Release Date: March l l, 2005 RECENT/EXPECTED ECONOMIC TRENDS/PATTERNS

The purpose of this section is to discuss the recent/expected economic trends/patterns for the United States (US), California (CA), and Riverside County (RC), including Gross Domestic Product, employment, housing starts, mortgage rates and oil/gas prices.

Recent /Expected Real Gross Domestic Product Trends/Patterns - Annually

With regards to th! recent/expected growth rates for Gross Domestic Product (GDP) for the United States economy, th,;se are as follows: • During 1999 and 2000, real GDP increased at strong rates ofby 4.5% and 3.7%, respectively. • Then, in 200 I, as the economy slowed, real GDP increased by only 0.8%. • In 2002 anc 2003, when the economy rebounded, real GDP increased by 1.9% and some 4.4% respective!:,,. • For 2004, r<:al GDP rose at a rate of 3.83%, as the economy continued to expand at a healthy rate. • Then, for 2(105, real GDP is expected to continue to decrease slightly to a rate of some 3.58%.

Next, with respect 10 the rates of change for the various components of real GDP during 2003 through 2005, they arc as follows: • Consumption, which increased at some 3.80% in 2003, decreased slightly to a rate of some 3.68% in 2004, and it expected to moderate further to a rate of some 3.43% in 2005. • Business investment, which recorded an increase of some 9.75% in 2003, peaked at some 13.3'Yo in 2004, and is expected lo diminish to 6.68% in 2005. • Finally, with respect to government purchases, these are expected to remain fairly stable: 2.28% in 2003 to 2.10% in 2004, and then 2.00% in 2005.

Therefore, comparing the rates of growth for the various components of real GDP for 2005 as compared to 2004 reveals that the overall rate of growth is expected to moderate slightly, along with the rates of growth for each of the sectors as well, including consumption, investment and government spending.

UNITED STATES REAL GDP AND ITS COMPO:>!ENTS: ANN VALLY

3 ,r. !I)", ," < ,•; ,2 ,.; 0 ,." "'

1?99 Ni~l ;'111)1 }fl<>! l(~H :'0(14 20!)5 C~L'', Usc·r•lt f ,,r., i 70'- "M', I •I('\ 440•, ltl". JS!,", ·-1-,,,.,,,,,,r,1,m 49{!", 4 Jo•. l 'H', llfl"o 1{1)", .14"!'. h>1N,n,-,,, ~lW, "''"'· sn.v, -,')(>'', )7<',. i1.10'. (, (,~·,. ·- (),,v,•11m«1,1 171¥', 1.IH", lW'. 441l'" 2 2~'. } l•l", JO(I',

Empire Economics Release Date: March 11, 2005 Recent/Expected Employment Trends/Patterns - Annually

With regards to the rcccnliexpcctcd growth rates for employment, these arc now discussed for the United Slates, California, and Riverside-San Bernardino economies, both on an annual as well as a quarterly basis.

For the United States economy, the recent trends/patterns for employment have been as follows: • In 1999 and 2000, employment growth was strong, some 2.44% and 2.20%, respectively. • Then, in 2001, due to the economic slowdown, employment was virtnally stable. • For 2002, employment declined by-1.13% followed by a smaller decline of-0.26% in 2003. • In 2004, as the economy moved into its recovery phase, employment rose by some I. 13%. • For 2005, the economy is expected to expand further with employment rising 1.58%.

California's employment followed a generally similar pattern: • Strong rates of employment growth in I 999 and 2000 of 2.9% and 3.5'Yo, respectively. • Then in 2001, employment rose only moderately, some 0.80%. • However, in 2002 to 2003, employment declined to -0.99% and -0.45%, respectively. • For 2004, the economy moved into a recovery, with an employment gain of 1.02%,. • In 2005, the economy is expected to have stronger growth, with employment growing at a rate of 1.51 %.

Riverside-San Bernardino counties, on a con1parative basis, have performed favorably: • R-SB counties experienced strong, though diminishing, rates of employment growth during 1999-2002, from 6.44% in 1999 to 3.38% in 2002. • But employment growth rebounded in 2003, with a growth rate of 3.47%. • Then, in 2004, employment rose at higher level of some 4.89%. • For 2005, employment growth is expected be strong, with an increase of some 4. 10%.

Therefore, during 2005, the United States, California, and Riverside-San Bernardino counties are expected to generally experience strong rates of employment growth.

U:>'ITED STATl'.S, CAI.IFOR'.\IA & RIVERSIDE-SA', BER',ARDl~O COl'.\TIES RECENT/EXPECTErl El\1PL()YMENT TRENDS: A!'\'.\LAIJ,Y

(,'",:

0%

-l"o'

1999 21)1)(1 2(Ktl 2002 :oo< 21){~1 )(!!Vi i_:y,, 'i\% ~U111t,0 d Sbie, 2.44",; 2 20'\, {)1)0% -l 11% -026% l ('alifm,,,a :.90":,, ) S(l•\, I)~{)':,, -0 'l9~o -U 1"",, 102'", l 51",, R-SB Counll,·s 1,_440.. , '26% 4 ,~~·. ~ .

Empire Economics 9 Release Date: March 11, 2005 Recent/Expected Tends/Patterns for Housing Starts - Annually

With regards to the recent trends and patterns for housing starts, they are as follows:

• The United S .ates housing market experienced a strong recovery during the 200 I to 2004 time period, with f1e number of new homes rising from 1,573,400 in 2000 lo 1,938,975 in 2004. For 2005, the United States housing market is expected to decrease somewhat, to 1,785,675, due to higher mortg2 ge rates.

• For the California housing market, housing starts have had a strong recovery during 2000 to 2004, as the number of new homes rose from 139,073 in 1999 to 210,150 in 2004. The California housing market is expected to decrease somewhat in 2005 to some 188,000, again as a result of higher mortgage rates.

• Finally, with respect to Riverside County, housing starts rose dramatically during the 1999- 2004 time period, from 14,577 homes in 1999 to 33,870 homes in 2004. For 2005, the level of activity is exJected to moderate slightly, to some 30,100 homes, due to the expectation of higher mortgage rates.

So, for 2005, the United States, California, and Riverside County housing markets arc expected lo decline somewhat from their 2004 levels, due primarily to higher levels of mortgage rates.

UNITED STATES, CALIFORNIA AND RIVERSIDE COUNTY HOUSING STARTS: ANNUALLY

2,500,000 250.000

>- 2, )00,000 200.000 I- z U) :::, 0 0 1, )00,000 ------150,000 c z ~c <( w 1- ~ 1, )00,000 100,000 z z ~ :::, ...0 :i 'i00,000 50,000 <( 0

0 0 1999 2000 2001 2002 2003 2004 2005 - left United Ste tes 1,663,100 1.573,400 i,601,200 1,712,340 1,858,760 1,938,975 1,785,675 _._.Right: Califomiil 139,073 148,540 148,757 164,318 194,882 210,150 188,000 Right: Riversido County 14,577 17,692 19,890 20,990 28,366 33,870 30,100

Empire Economics IO Release Date: March I I, 2005 Recent/Expected Trends in Mortgage Rates - Annually

The recent/expected trends/patterns for mortgage rates, including the 15 year fixed rate mortgage, as well as the JO-year Treasury Bond which influences the 15 year fixed rate mortgage, and also the 1 year adjustable, arc now discussed:

• During the 2000 to 2003 time period, the rates on the I 0-ycar Treasury Bond, 15 year fixed mortgage and the I year adjustable mortgage all declined: the 10-year Treasury Bond from 6.00% to 3.95% (-2.05%), the 15 year fixed mortgage from 7.73% to 5.17% (-2.56%), and the 1 year adjustable mortgage from 7.05% to 3.76% (-3.29%).

• From 2003 to 2004, the rates started to rise: on the I 0-ycar Treasury Bond from 3.95% to 4.33% (+0.38%), the 15 year fixed mortgage from 5.17% to 5.25% (+0.08%}, and the I year adjustable mortgage from 3.76% to 3.87% (0.11 %).

• For 2005, as compare to 2004, the rates are expected to rise moderately, on the I 0-year Treasury Bond from 4.33% to 5.09% (+0.76%), the 15 year mortgage from 5.25% to 6.16% (+ 0.91%), and the 1 year adjustable mortgage from 3.87% to 4.94'Yo (1.07%).

So, during 2005, financial rates are expected to rise at a moderate pace, the increase in the 10-ycar Bond will drive the 15 year fixed rates up by some 0.91% while the increases in the discount rate by the Federal Reserve Board will drive up the I year adjustable rate mortgages by some 1.07%.

UNITED STATES ~10RTGAGE RATES: ANNUALLY

900%

8.00'"<,

,... 7.00% .,,l .,,l < 6.00%, ;;i z 5.00% 7. < 4.00°'ii .,,l ~ ;;. 3.00''/o ~ .,,l

7000 2001 2002 ::oo., 2004 :wos c:::J l 0-Yr Bond 5.00''•<1 .S.95% 4.J.<'\,(l 5.09% -+--1 Yr Adjustah!e 701% 5.82% .<.7(,% 3.87"--0 4.94""<, -·k· 15 Year- Fix~·d 77"1'!{, 6 SO% 5.9W'.;, 5.17"-<, 5.25""<> 6. H,'Vi, --JO-Year Fixed 6.97%, 6.54% 5.8J% 5.89% 6.81'%

Empire Econo1nics 11 Release Date: March 11, 2005 ReccnttExpected Trends/Patterns for Gas Prices in California - Annually

With regards to the rcccnt/cxpcctcd annual gas prices per gallon in California, they are as follows:

• From 1999 to 2000, California gas prices rose significantly from Sl.47 to $1.77, respectively, an increase cf some S0.30.

• Then, gas pr ces declined to $1.62 in 2002, a decrease of-$0.12 from SI .74 in 2001.

• However, with the invasion of Iraq and uncertainty in the Middle East, California gasoline prices rose dramatically to S2.27 in 2004, an increase of $0.65 from 2002.

• For 2005, gas prices arc expected to rise further to $2.41, an additional increase of some S0.14 from 2004.

So, during 1999 to '.'.004, California gas prices have risen significantly, by some $0.80 per gallon, and they arc expected to increase by another S0.14 in 2005.

CALIFORNIA GAS PRICES: ANNUALLY

$3 00

$2.50 ,.. -l -l $LOO < :iz ...: < $1 50 u"' -...Qi! $1.00

$0.50

]999 2000 2001 2002 2004 2005 lt::ioaso!ine Pnce~ - CA $],47 $1.77 $1.74 $1.62 $1.94 $2.27 $2.41

Empire Economics 12 Release Date: March 11, 2005 SOCIOECONOMICS CHARACTERISTICS: CRIME LEVELS AND THE QUALITY OF SCHOOLS

When households consider the purchase of a home, the primary factors are the location (relative to their place of employment) and price (within their incomc!affordability levels). Furthermore, secondary socioeconomic factors that arc significant include the safety of the neighborhood as well as the quality of the schools: accordingly, these arc now discussed

Crime Levels and "lleighborhood Safety

To gauge the safety of Riverside County and the CFO No. 04-2 Neighborhood Area, infonnation on crime levels was obtained utilizing the Federal Bureau of Investigation (FBI) Index for the 2003 calendar year.

The FBI Crime Index represents a compilation of crime data using the Uniforn1 Crime Reporting system to ensure reliability and consistency among various geographical areas. The FBI Crime Index has two components for crime: violent crime and property crime. Violent crime consists of murder and non-negligent man-slaughter, forcible rape, robbery. and aggravated assault. Prope11y crime consists of burglary, larceny-theft, motor vehicle then and arson. For the State of California, approximately 88% of all crimes arc property crimes whereas 12% are violent crimes. However, it should be noted that these statistics do not measure the "human or emotional" reactions of individuals to different types of crime. To adjust for the population differences of various geographical areas. Empire Economics divides the crime levels by the population to represent the number of crimes per 1,000 people.

For California, as a whole, the average crime rate is approximately 40.2 per 1,000 people per year. For Southern California the rate is 39.1, slightly lower than the state, while for Riverside County, the rate is 45.0. So, Riverside County has a somewhat higher crime rate than either California or Southern California. According to the FBI index, Riverside County has a crime rate of about 45 per 1,000 people per year. With respect to the CFO No. 04-2 Neighborhood Area, consisting primarily of the City of Riverside, an urbanized area. it has a somewhat higher crime rate, some 48.7.

RIVERSIDE COUNTY CRIME RATES BY CITY • DESIGNATES CITY IN THE CFO MARKET AREA 120

w Riverside County Average. 45 0 ~ 100 ~ 0 w ~ Q z 80 < 0 ' 0 "r ;- 60 w z u 0 ~ .. , c w "~ 40 0w ;, . "u 20 ' . I I • . : ;-- ?~ ;.'' . . {;i 0 ~ ~ -----~-- ~ I ~ { ~ ~ ~ i-' ~ ' I II I I' I I' ' ' ' ~ ' ,, '

En1pire Economics I} Rclea::;c Date: March 1 I, 2005 Quality of Schools and Education

To gauge the quality of schools in Riverside County and the CFD No. 04-2 Neighborhood Area, information was compiled on educational achievement, specifically the SAT I scores.

For the Southern California counties, as a whole, the SAT I scores (with 1600 being the highest possible) were at '- level of 1,014 and this is similar to the scores for California as a whole. some 1,015. While for Riverside County, in particular, the SAT I scores amount to 963, somewhat below the overall average:; for California and also Southern California.

For Riverside County, the average SAT I score was 963. For the school district in the CFD No. 04-2 Neighborhood Arca, the Riverside Unified School District, their SAT I score amounts to 970, and this is slightly higher than for Riverside County as a whole.

SAT I TEST SCORES: :\

Therefore, from a socioeconomic perspective, Riverside County has a somewhat higher crime rate and a somewhat lower ~ducational achievement level than California and also Southern California, as a whole. Furthcnnor!, within Riverside County, the City of Riverside, wherein CFO 04-2 is situated, has a slightly higher crime rate but the school district has a slightly higher educational achievement level than the count:, as a whole.

Empire Economics 14 Release Date: March 11, 2005 OVERVIEW OF RECENT/EXPECTED FACTORS UNDERLYING CHANGES IN HOUSING PRICES

During 1980-200 I housing appreciation was driven by the fundamental factor of employment growth, along with accommodating financial factors, such as stable or somewhat declining mortgage rates. However, since early 2002. the primary fundamental factor, employment growth, has experienced only minimal growth; instead, housing appreciation has been driven by financial factors. Thus. there has been a structural shift in the forces driving housing price appreciation. from employment growth to financial factors. Specifically, these financial factors include first, fixed mortgage rates declining to historic lows, then the shift to adjustable rate mortgages, and. most recently, the use of "creative" mortgage structures.

The acceptance of these aggressive financial structures by households has been based, to a large, degree, on their perceptions of escalating rates of housing price appreciation and a severe housing shortage; however, these perceptions may have been somewhat exaggerated. Furthermore, the use of these aggressive mortgage structures has been bolstered by homebuilders that have there own m011gage companies as well as lending institutions that desire to retain their business levels.

However, unlike fundamental factors. these financial factors arc subject to a substantial amount of volatility within a short period of time; in fact, there are substantial economic forces that are likely to emerge during the near tcnn that should result in a substantial rise in interest rates. such as record levels of federal and trade deficits. As mortgages rates rise, particularly for households with adjustable rate loans and creative loan structures, some of these households that cannot keep apace with the higher payments will be "forced" to sell their homes at reduced prices, since the new purchasers will have to qualify for loans with higher m011gage rates.

This result will be a housing market bubble that will cause some price adjustments, but these adjustments are not expected to be broad based but rather specific to those homeowners that over­ burdened themselves by using adjustable rate loans and creative mortgage structures. By comparison. those homeowners who positioned themselves with fixed-rate loans and who do not sell their home during the next several years are not likely to be impacted adversely.

Empire Economics 15 Release Date: March 11, 2005 Interrelationships of Employment Growth, Mortgage Rates and Housing Price Changes: 1984-2001

The most significant factor underlying changes in housing prices/sales is the rate of employment growth. Specifically, employment growth is regarded as being a "fundamental" factor because the creation of job growth drives the demand for housing: when employment growth is robust, housing prices/sales arc also ,trong, and, conversely, when employment losses occur, then housing prices/sales are weak.

The next most signi ii cant factor underlying housing price changes would be the mortgage financing that is available to households. This includes the effective mortgage rate on a loan as well as the credit criteria utilized by knding institutions, such as the loan to value ratio and the mortgage to income ratio. This is rcgard~d as a "financial" factor, since it is not by itself, a direct determinant of the amount of housing demand; instead, it impacts the price of a home that a household can afford. More favorable financial flctors, such as declining mortgage rates and/or easier qualifying terms, typically result in stronger rat(,s of housing price appreciation.

Another factor that reinforces housing price trends is the level of new homes being constructed/sold. If the supply of new homes is below the amount required to fulfill the demand generated by the employment growth, then there is further upward pressure on housing prices.

The specific impact, of employment growth and mortgage rates on housing prices for Riverside County (RC) during the two recent economic cycles that span the 1984-2001 time period are now discussed.

Prior Economic Cycle: 1984-1993

',- During 1984-1988, employment growth in RC was strong (+7.13%/yr.) but housing appreciation was only modern .e (+4. 95%/yr.) because mortgage rates were relatively high ( I 0.31 %).

',- During 1989-1990, as the rate of employment growth for RC continued to be strong ( I 6. 79%/yr.) and mortgage ra1es declined (from 10.31% to 9.86%), there was an acceleration in the rate of housing price aprreciation ( + 12.56%/yr. ). l- Then, during 1991-1993, when the RC economy experienced an economic slowdown with employment remaining stable (+0.99%/yr.), housing prices were also stable (+0.87%/yr.) despite a significant decrease in mortgage rates (9.86% to 7.75%).

Empire Econo1nics 16 Release Date: March I!, 2005 Current Economic Cycle: 1994 to 2001

;;.. During 1994-1995, the RC economy started to recover, with increasing employment growth (3.08%) but housing prices declined (-5.05%) further despite lower mortgage rates (7.75% to 6.93%); this can be attributed to the time lags between the employment and housing markets, as households required additional time to gain their confidence as they recovered from the economic recession.

;;.. Then, during 1996-1998, as the RC economic recovery gained momentum with stronger employment growth ( t 4.20%/yr.), prices started to rise (-0.24%) despite slightly higher mortgage rates (6.93% to 7.35%).

>" During 1999-2001, the rate of RC employment growth continued at a strong level (+5.28%/yr.) and mmtgage rates declined (7.35% to 7.26%), resulting in a strong rate of price appreciation (8.73'Yo).

RIVERSIDE COU'ITY EMPLOYMENT, HOUSING PRICES AND MORTGAGE RATES HOUSING PRICE CHANGES DRIVEN BY EMPLOYMENT CHAI\GES

20% ~ORTGAGE RATES 10.3lo/o 9.86~/(I 7.35°,(J 7 26% ...... ~7~%~(,:% 15% ...... 12.56°,~ "zo z .,, - HOUSTNC:i PRT('E CHANGES ~;:::: 10%, ~u'" '" - "' ,..~ " R73'Yo " .. 5: 5o/o "'u"' - 4.9So/o ~f 308% toj ..~"' z 0°/o 1 1 z; D LJ ~~ ·0.24%, :,:u= " _501o -5.05%,

·10'% I 984-1988 1989-1990 1991-1993 1994-1995 1996-1998 1999-2001

i::::::::JLEFT AXIS: Employment (Jnn1,1h ... LEFT AXIS: :\tfortgagc Rates . ··RIGHT AXIS: Price Changes

En1pire Economics 17 Release Date: March 11, 2005 Housing Price Appreciation: 2002-2004: Financial Factors

During 2002-2004 the primary factors underlying housing price appreciation have been financial factors, such as historically low fixed rates as well as adjustable rate mortgages, rather than employment grmvth, which has been minimal. Accordingly, these arc now discussed first for Southern California, as a whole, and then for Riverside County, in particular.

);, For 2002, RC's ,;mploymcnt rose moderately (+3.38) and price appreciation accelerated ( t!2. I%), primarily as a result of lower levels of mortgage rates (6.95% to 6.54%), reflecting a disequilibrium between weak employment growth and very strong price appreciation.

);, For 2003, RC'1 employment growth was moderate (+3.26%) yet price appreciation continued to be strong (-+ 15.8%), primarily as a result ofdrnmatically lower levels of mortgage rates (6.54% in 2002 to 5.83% in 2003), reflecting a continuation of the disequilibrium between weak employment growth and very strong price appreciation.

);, For 2004, RC's employment was stronger (+4.59%) and price appreciation was extremely strong ( t28.1%), despite fixed rate mortgages rising slightly (5.83% in 2003 to an estimated 5.89% in 2004); the continued price appreciation can be explained by households shifting from fixed rate to variable rate mo1gages.

RIVERSIDE COL:NTY EMPLOYME'lT, uot;Sl'lG PRICES A:"I.D MORTGAGt<: RATES HOllSl~G PRICE CHA~GE:S DRIVE~ BY MORTGAGE RATF:S

.l5'.

15 8%

O"O, L=-::J

.'i'O I 2002 2004

c:::J Employment Changes & Mortgage Ra!es HOl1smg Pnce Changes

The recent increas3 in housing prices, some 56% during 2002-2004, were not supported by employment growth and higher household incomes but instead by lower mortgage rates, adjustable mortgages and creat vc financing.

Therefore, a comparison of the prior and the recent economic conditions reveal that the strong rates of price appreciation that occurred during 2002 through 2004 are a result of primarily financial market conditions, declining fixed mortgage rates, the recent shift to variable rate mortgages and easier qualifying terms, rather than the fundamental economic factor, employment growth.

Empire Economics 18 Release Dale: March 11, 2005 Financial Factors and Housing Price Appreciation: 2002-2004

The housing price appreciation during 2002-2004 has been driven primarily by financial factors: first, fixed mortgage rates declined to historic lows, then a shift to adjustable rate mortgages, and, most recently, the use of"creativc" mortgage structures; accordingly, these arc now discussed.

,- During 2002 to 2"d-2003, fixed-rate mortgage loans declined from 6.54% in 2002 to an historic low of 5.51 'Vo in 2"d-2003. Given the same monthly mortgage payment, the decline in the mortgage rates would support a housing price increase of some 14%.

,- Starting in 3"1-2003, fixed rate mortgage rose significantly from 5.51 % in 2"d-2003 to 6.03% in 3"1-2003, and have remained above their historic lows, with the most recent being some 5.95'Yo for the 41h-2004. However, since the Federal Reserve Board continued to maintain a low discount rate, I year adjustable rate mortgages, based upon short-term yields, remained at low levels. This created a significant differential between the 30 year fixed rate of 6.03% versus the 1 year adjustable variable rate of3.74%. in the 3'd-2003. Consequently, homebuyers shifted from fixed to variable types of loans. Given the same monthly mortgage payment, a shift to the variable rate (full amortized) would support a housing price increase of some 17%.

>- Starting in June 2004, the Federal Reserve Board began to increase the discount rate from 1.0% to 2.25% in December 2004, thereby resulting in the rate on I year adjustable mortgages from 3.53% in the I 51-2004 to 4.08% in the 4'h-2004. fn response to the increase in adjustable rate mortgages, the next step for home buyers was to shift from adjustable loans being amortized (payment of principal and interest) to various types of creative financial structures, such as interest only loans. Given the same monthly mortgage payment, a shift to the variable rate (interest-rate only - no amortization) would support a housing price increase of some 21 %.

,.. With regards to the more aggressive use of adjustable rate loans and creative loan structures, some headlines for recent articles arc as follows:

3/2004 OC Business Journal "Homebuilder Loans Get Riskier as Housing Prices Soar" Lennar, Centex and Standard Pacific - Own Lending Companies

I 0/2004 LA Times:" Record Number of New Home Loans are ARMs 79%"

12/2004 LA Times" Lenders Get Creative Again" "Lenders Try To Keep The Party Going"

Therefore, housing price appreciation since early 2002 has been driven by households taking advantage of historic low fixed rates, then a shift to adjustable rate mortgages, and finally, the use of creative financing structures. Specifically, for the same monthly mortgage payment, the use of lower mortgage rates have enabled households to bolster prices by some 50% since early 2002.

Empire Economics 19 Release Date: March 11. 2005 Potential Impact of "Other" Non-Financial Factors on Recent Price Appreciation

The primary facton underlying the strong rates of housing price appreciation during 2002-2004 have been historically l,)w level of mortgage rates along with homes buyers utilizing variable rate mortgages.

The prices for hom~s in some counties, such as Orange, Ventura and San Diego, arc higher than for homes in all of the other counties, particularly Riverside and San Bernardino (Source: Dataquick};. However, the recenl rates of housing price appreciation during 2002-2004 have been similar among all of the Southern California counties, some 51% to 56% (Source: Federal Housing).

SOUTHERN CALIFOR~IA COlJ~TIES HOUSING PRICES AND RECENT CIIA~GES FOR 2002-2004

60'% 56% I $] .000.000 53%, 51'% 52%, ; $9()().000 50o/o ; SC\00,IKJO

: ~?00,0110 40%) $633.343 $61.\200 $573,077 $600,()00

30o/o $459.662 S500JJOO

20%, $306,177 : $'.100.000

: $~(10.()00 I Oo/o

$100.()00

O'X, so Orange Lus Angde~ Rivers1Je-San San Diego Ventura

Bernardino t.mpit~ f:rnoomks

Therefore, the rate c.f housing price appreciation, during 2002-2004 has been similar among all of the Southern California counties.

This provides an in,ight into the recent rates of housing price appreciation for Southern California, specifically, that it has been driven primarily by financial factors, since the mortgage rates for homebuycrs arc simlar for all of the various counties.

However, there are significant differences in their geographic location, employment growth and housing supply; accordingly these arc now discussed.

>'" The nominal prices of homes various significantly among the SC counties, from a low of $306, 177 for Rivcrside-Sa1 Bernardino counties to a high of $633,343 for Orange County.

Empire Econon1lcs 20 Release Date: March 11, 2005 ,.- The geographic locations vary substantially, from the coastal areas of Orange, San Diego and Ventura counties to the Inland Valley and Desert areas of Riverside, San Bernardino and Los Angles counties (most of the development in LA county is inland rather than coastal).

,.- The rates of employment growth have also varied substantially during 2002-2004, from a low of -0.67%, per year for Los Angeles County to a high of 3.74% per year for Riverside-San Bernardino counties.

,.- The sectors underlying employment growth also vary substantially. among the counties: For most of the counties, financial services and constmction, with the other sectors, varying by county. such as education/health. professional services, government and retail trade.

,.- The supply of new housing has also exhibited a wide variation during 2002-2004 as compared to 1999-2001, from declines of-26% in Ventura County and-14'Yo in Orange County to increases of 80% in Riverside-San Bernardino counties.

Therefore. these financial factors have been so strong that they have effectively overshadowed the traditional factors such as geographical locations, employment growth and its composition and housing supply.

COMPARATIVE ANALYSIS OF FACTORS UNDERLYING HOUSING PRICE APPRECIATION SOUTHERN CALIFORNIA COUNTIES: 2002 • 2004

Los San Riverside Specific Factors Orange Angeles Diego San Bernardino Ventura

Price Annreciation · Similar Amono all of the SC Counties Price Annreciation: 2002-2004 :, I 1"'" 'ii 8% 5_, ~% S'i <)'\; 51.9% (Price Index - Repeat Sales)

Other Factors Van Sinnificantlv Amon the SC Counties

Houslna Prices · December 2004 (,33.3-13 S,159.M,2 S'-7'Ul7"7 $ 1{)6 1,-~ S611.200

Geooranhic Location · Develooment Coastal Inland/Desert Coastal Inland Coastal

Emolovment Growth 2002-2004 -Annuallv 1.09% -0.67% 1.09% 3.74% 0.65%

Stronaest Emnlovment Sectors Financial Services Yes Yos Yes Yes Construction Yes Yes Yes Yes ' Education/Health Yes Yes Yes Professional Services Yes Govomrnenl Yes Yes Retail Trade Yes

Residential Permits - Chanoe -14.3% 35.3% 5.1% 302'% -26.3% ( Ch;inge 2002-2004 vs. 1999-2001)

Empire Econon1ics 21 Release Date: March 11 2005 Conclusions on Housing Prices

The above analysi, reveals that the recent rates of housing price appreciation will need to come to terms with the weak underlying fundamental factor, low levels of employment growth. There are two primary scenarios :'or the resolution of the current employment/price appreciation disequilibrium, and each of these, in turn depends upon the extent to which there is a re-emergence of the fundamental factors, the economic recovery along with its employment growth.

Scenario A: Smooth Transition This scenario is craracterized by the Southern California and Riverside County economies entering their recovery phr,scs during the foreseeable future, thereby generating employment growth and providing "fundamental" support for the housing market. Under this scenario, such employment growth would provide support for the recent rates of housing appreciation, and allow the market to return to an equilibrium, even if mortgage rates rise moderately.

Scenario B: Abrupt Transition This scenario is characterized by the Southern California and Riverside County economies experiencing only minimal amounts of employment growth during the foreseeable future, and so the recovery phase wo1ld be delayed. Consequently, there would not be sufficient employment growth to provide the "fund2mental" support for the housing market. Under this scenario. without substantial employment growh, the rate of housing appreciation could stabilize, and there may even be a potential for actual declines .n housing prices, if mortgage rates should rise substantially.

The most probable scenario for Riverside County is for the rate of housing price appreciation to moderate during 2005, as compared to the relatively strong rates that were experienced during 2001- 2004, based upon a consideration of the following factors:

Factors which will tend to bolster price appreciation are as follows:

>- Economic reco•1ery, with stronger rates of employment growth.

>- Willingness of 10uscholds to utilize variable rate and interest-rate only loans.

Factors tl1at may te.1d to mitigate price appreciation are as follows:

;.. The strong rates of price appreciation in recent years and record levels of prices have caused housing affordability to be relatively low.

;.. Upward pressure on mortgage rates as the economy recovers.

>- Upward pressure as a result of the large federal budget deficits.

;.. Risk of short-tcnn variable rate loan rates rising as the economy recovers.

Therefore, based ~pon a consideration of the factors discussed above, the rate of housing price appreciation for Riverside County during 2005 is expected to moderate.

Empire Econon1ics 22 Release Date: March 11, 2005 COMPETITIVE MARKET ANALYSIS ()F THE PROJECTS IN THE CFD NO. 04-2 COMPETITIVE HOUSING MARKET AREA

The purpose of this section is to provide au overview of the currently active Plauued Communities with for-sale housing in the CFO No. 04-2 Competitive Housing Vlarket Area, and to compare these with the characteristics of the planned projects in CFO No. 04-2 (Lake Hills Crest).

Competitive Market Analysis of CFD No. 04-2

The CFO No. 04-2 Competitive Housing Market Area currently has nine currently active comparable projects situated in its vicinity.

COMPETTIVE HOUSING MARKET AREA FOR CFD NO. 04-2

(·AllfORN!A

,ct',!!)1),Jt c• ,> ! ~ flCmuto

" j" )._""t f,1,a:tY,li"WJ l)J •.!:,.

The currently active comparable projects, along with the forthcoming projects in CFO No. 04-2. have a total of 14 active/forthcoming projects with 1,357 housing units of which 401 have had their escrows closed and so they are considered to be occupied. The currently active projects as well as the forthcoming projects in CFO No. 04-2 have each been portioned into two sub-groups: those with relatively smaller lot sizes as wen as those with relatively larger lot sizes; accordingly, the distribution of these projects among these various segments is as follows:

Empire l(conomics 23 Release Date: March 11, 2005 Y CFO No. 04-2 Lots 7-9,000 sq.ft.: 4 forthcoming projects with 409 homes.

Y CFO No. 04-2 Lots 15,000 sq.ft.: I forthcoming project with 103 homes.

"' Comparable Lots 5,500-11,000 sq.ft.: 5 active projects with 343 homes of which 228 arc occupied.

Y Comparable Lots 20,000-43,560 sq.ft.: 4 active projects with 502 homes of which 173 are occupied.

CFD N0.04-2 COMPETITIVE 11m;s1NG MARKET AREA: CHARACTERISTICS OF ACTIVE PROJECTS DEVELOPMEl'ff STATUS

100

150

100

'.50

'.00

50

00

50 : {): Comparabks Lots:~.',(~) ('FD Nn 04-2 LuL< 7-'I.OllO { Fl) No 04 :,_ l <>h ] 'iJlfm 11.00() 41,';(,f) O l:«<:n,w, C o,ed O Fu1ure Uml; 41)\l 101 "'1;, 1.")

The prices of home:; in the currently active projects and CFD No. 04-2, based upon their currently active/forthcoming projects, arc some $614,196 as a whole; however, there is a substantial amount of variation among them. The prices, on the average, from lowest to highest, are as follows: Comparable Smaller Lots: $56 3,628, CFO No. 04-2 - Smaller Lots: $570,833, Comparable - Larger Lots: $690,528 and CFO No. 04-2 Larger Lots: $710,000.

The living area of hc,mes in the currently active projects and CFO No. 04-2, based upon their currently active/forthcoming projects, are some 3,520 sq.ft., as a whole; however, there is also a substantial amount of variation among them as well. The square footages of living area, from smallest to largest, on the average, are as follows: Comparable Smaller Lots: 3,288 sq.ft., CFO No. 04-2 - Smaller Lots: 3,488 sq.ft., Compaf,lbles Larger Lots: 3,565 sq.ft., and CFO No. 04-2 Larger Lots: 4,623 sq.ft.

Empire Econotnics 24 Release Date: March 11, 2005 CFD NO. 04-2 COMP!;TITIVE HOUSING MARKET AREA HOUSING PRICES AND LIVING AREAS

swoo,ooo 5,000

s:oo,noo • 4.500

4,{){10 ~ $600.000 "'~ ~ "' t:: 3,500 ~ "'~. ~ " C) $500,000 0 /. J,000 " :; ~ 5 < x $400,000 2,500 ~ ~ < c C) 7. ~ 2,000 u"' $300,l){lO § ii ~ ' J,50{1 c~ $200,000 "'~ 1,000 :;

$100,000 : 500

$0 0 ' !h, .• ''' 1 .. , , '' ,, •"<.Ill I ,,c\,,,

To compare the prices of the homes in these comparable projects and CFO No. 04-2, their value ratios are utilized, the price per sq. ft of living area, since this effectively makes adjustments for differences in their sizes of living areas. Accordingly. the value ratios for all of the active/forthcoming projects amounts to $176 per sq. ft of living area and their Special Taxes/ Assessments amounts to some $3,389/yr. (0.55% as a ratio to the housing prices); accordingly, the value ratios and Special Tax/ Assessment characteristics for each of the active/forthcoming projects arc as follows:

',- CFO No. 04-2 Smaller Lots has a value ratio of $164 and their Special Taxes amount to $4,281/yr. (0.75%).

',- Comparable - Smaller Lots has a value ratio of S 176 and their Special Taxes/ Assessments amount to S2.770lyr. (0.49%).

Jr CFO No. 04-2 Larger Lots has a value ratio of S 154 and their Special Taxes amount to SS,325/yr. (0. 75%).

l- Comparable Larger Lots has a value ratio of $194 and their Special Taxes/Assessments amount to $2, 785/yr. (0.40°!.,).

Empire Economics 25 Release Date: March 11, 2005 CFU '.SO. 04-2 COMPETITl\'E HOIJSl:--G ~IARKH AREA VALt:E RATIOS AND SPt~CIAL TAXES

$1,,0{)IJ

• : $",()()!) $2110

• $4,0()()

$2,llllll

$1,llllll

so c,,, ,.,,.' •s <, I 'I'·•

The currently active projects have an estimated sales rate of some 307 homes per year, for an average of some 34 units per project per year; the distribution of these sales among the various projects is as follows:

Y Comparable - Smaller Lots: five projects with 212 homes annually, 42 per project.

, Comparable - Larger Lots: four projects with 95 homes annually. 24 per project.

CFO '.'i0.04-2 CO\IPETITJVE IIOUSl'.'iG MARKET AREA SALES RATES 400 "'

42 3'\ll

~ ~ • < ~00 ~ "z ~ < ~ ~ z 250 z ~ lO -t: ~ 2!2 21 e ~ 200 ," •.. ~ • • •~ 2

50

0

For additional info1nation on the Comparable Projects in the CFO No. 04-2 Competitive Housing Market Area, pleas, refer to the following table.

Empire Economics 26 Release Date: March 11, 2005 CHARACTERISTICS OF THE *COMPARABLE* ACTIVE PROJECTS(:", THE CO~IPETITIVE 110(.;SING ~!AR KET AREA BY GEOGRAPHICAL LOCA TIO:S,S

',prn,I rroJ«r p"'I'"' !lm! r,,,j,· llu.,,i"t Pde,·, ~,,,,,.11.i,ii,1 \«·· \ah1<· \m·'1m,·H!,,Ta, .... l pp,r L,,-.,., l R>tj<> ,\n,,mm' Lau

CFD 04-2 Forthcoming Projects in CFO ~o. 04-2

!.10«• .a .• Im Ll,,!I :h,r<'•' 'sdn,H. ""'' ' l!I 0..1 ,·isnOO

, ,,: ')Iv.' • L kcll :.( ""'' ,<,•l,i.,l .. ,c,,, '>,I ,,i,:_p,sJ :1, .. qy,

•ll N• L,;,,u :,r,cs, ls1fr:1CL!c:e• :,; I s,.1_

!']):-;., "' C Le:, ',>(p L->\,· it: <(';,;s, 'J:ch.,·,ii,,n>

Lu,, _, ,·;p -,,, .. ,:,1,:,,1,.,.,,,, '"l,r\\,•,··•'D,i' ;1-10 ~-I'(' ;Ml '"·''q tc''.LCO''i-" (;,·· ''(lS ' • ' ' ' ' ' \'dill'• ,.

, ,·,;- .. ,.,~I.·- l ,··· ' · ,kT, lf\S S-1'" ,,,,,,,,; ,,,1,\ I ,1,,,., !--- ' ... , ... 1.. ,•1c, 1,, •• ),H, fa•p:r!ba;c• 'k·1'·,"kJ'~1·,c., 9,,,., :<\] ",1.;"0,1 \(,i<

,, .. ,,_"_-\+, I .,>p ih;C,.cd. R1 h .. \l'"' lm,•L,.-a I I l:' ssc~on -;«<) 5,1,1 <;<•)0' ,12:

••;.,.H,·· L,,,. :,,no,> ;d,[l,l,l 1,,,~,<):- .j )j, ,;)' ,>.,hi i ,•naw ""'"'(''"'""'"'''°' " " l':I.'.• ~ :,-1'' ,,q .,1 .. cl., ; h ~.,,,,,,.-1, ,,,., 1·,.-,,,1 .. 'i'M j_n,)' •l•' 1-,c,r-rchni<• Mi ''•'" '"'" ,,,'3("-'<1 ,·,--r.u .. o:c- ,,,-, R. ·,h to,; r,li,n"· I,' 1,, S'Wl"'"

··-r.-1.-h·, ',o)•" p b..J.e ( TSL'( \\,1:c•, -""' ll,•1.;,•, -b,OP 2'-1 1,-, <,1,•;.4n;, ,·1,,w C ,10 q,, .j)'' ,1->•·

~·1cs le,·, 1-,,,.,.,., ,,,i-,i,·"!S"u"'""' I

l:J'.'<<> ;_;.; ·,," 'A.(l(1,> SA IH Pl · 1'."'" '!C '"'' . <-1 $'•·1 I '-1'.'1 !.i'.'.<>·i-: 1,,,,. ' ' "'>"'1<) :i:· u,:, s:q •.h.,·,

l,1.1.,\, .. -1.,, -;,;l.SJI ;,p, ,:,,- ,! )O~ " P'I ''II

E1npirc Econon1ics 27 Release Date: March 11. 2005 EST[MATED ABSORPTION SCHEDULES FOR THE PRODUCTS/PROJECTS IN CFD NO. 04-2 (LAKE HILLS CREST)

The purpose of thi,; section is to estimate the absorption schedules for the residential products/projects in CFD No. 04-2; ,ccordingly, this is based upon a consideration of the following:

First, the potential demand schedules for the residential products/projects for CFD No. 04-2 were derived, based upo1 a consideration of the following:

;.- The growth prospects for the Southern California Market Region, m general, and Riverside County, in part.cular.

;.- How much oft:1is growth the CFD No. 04-2 Market Area is expected to capture, in particular.

J.- The proportion of the Market Arca demand that is expected to be captured by the projects in CFD No. 04-2, based upon an evaluation of their competitiveness in the marketplace.

Then, the absorption rate for the residential and products/projects in the various market segments are calculated, from the year in which the products/projects are expected to enter the marketplace, and continuing thereafter on an annualized basis. until all of the units/acres arc occupied/utilized. The absorption represents the completed construction of the structure as well as being occupied by a final­ user.

The application of this algorithm results in the absorption schedules for the products/projects in CFD No. 04-2 (Lake Hills Crest), and these arc as follows:

)., Project Are1 #1 is anticipated to have a total of some 114 housing units; they are expected to commence ~scrow closings to homeowners in the 3rd quarter of 2006. The 114 single family homes on lots of some 7,000 sq.ft.. are expected to be priced from $480,000-S525,000, some $503,333 on the average, with 2,600-3, I 00 sq.ft. of living area, some 2,850 sq.ft, on the average, for a value ratio (price/living area) of some $177. These are expected to be absorbed at a rate of 20 homes in 2006, another 35 homes per year in 2007 and 2008 and the remaining 24 homes in 2C 09.

;.- Project Area #2 is anticipated to have a total of some I 04 housing units; they arc expected to commence ,~scrow closings to homeowners in the 1" quarter of 2006. The I 04 single family homes on lots of some 8,000 sq.ft., are expected to be priced from $525,000-$620,000, some $571,667 01 the average, with 2,955-4,087 sq.ft. of living area, some 3,510 sq.ft. on the average, fo1 a value ratio of some $163. These arc expected to be absorbed at a rate of 30 homes per year during 2006 through 2008 and the remaining 14 homes in 2009.

Empire Econon1ics 28 Release Date: March 11, 2005 "' Project Area #3 is anticipated to have a total of some 98 housing units; they arc expected to commence escrow closings to homeowners in the 2nd quarter of 2006. The 98 single family homes on lots of some 8,000 sq.ft., arc expected to be priced from S560,000-$595,000, some $575,000 on the average, with 3,412-3,829 sq.tl of living area, some 3,591 sq.ft. on the average, for a value ratio of some S 160. These arc expected to be absorbed at a rate of 25 homes in 2006. another 30 homes per year in 2007 and 2008 and the remaining l 3 homes in 2009.

"' Project Area #4 is anticipated to have a total of some 93 housing units; they are expected to commence escrow closings to homeowners in the 3'd quarter of 2006. The 93 single family homes on lots of some 9,000 sq.ft., are expected to be priced from $6 l 5,000-S650,000. some S633,333 on the average. with 3,800-4,200 sq.ft. of living area, some 4,000 sq.ft. on the average, for a value ratio of some $158. These are expected to be absorbed at a rate of 15 homes in 2006, another 25 homes per year in 2007 and 2008 and the remaining 28 homes in 2009.

"' Project Area #5 is anticipated to have a total of some 103 housing units; they arc expected to commence escrow closings to homeowners in the I st quarter of 2006. The l 03 single family homes on lots of some 15,000 sq.ft., arc expected to be priced from $675,000-S750,000, some $710,000 on the average, with 4,143-5,168 sq.ft. of living area, some 4,623 sq.ft. on the average, for a value ratio of some S 154. These are expected to be absorbed at a rate of 20 per year during 2006 to 2009 and then the remaining 23 homes in 20 IO.

So. for the forthcoming residential projects/products in CFD No. 04-2, they are expected to be absorbed during the 2006 to 2010 time period, starting with l IO homes in 2006, then l 40 homes in 2007 and also 2008, followed by 99 homes in 2009 and then the remaining 23 homes in 2010.

The expected absorption schedule for the residential projects in CFO No. 04-2 can also be expressed as a capture rate of the expected market demand for the CFO No. 04-2 Market Area. the northwestern portion of Riverside County. Specifically, the residential capture rate reflects the percentage of the MA's demand that is fulfilled by the absorption of the homes in CFO No. 04-2. For the 2006-2010 time period, as a whole, the capture rate amounts to some 2.5%, on the average. In 2006, as the projects enter the marketplace, the CFO No. 04-2's capture rate on the MA's demand is some 3.3%. Then, during 2007 and 2008 , when most of the projects are on the marketplace, the capture rate rises to 4.0% and 3.7%, respectively. Finally, as the projects arc closed-out in 2009 and 2010. the capture rates decline to some 2.5'Vo and 0.4%,, respectively.

Closing Comments

The estimated absorption schedule for the residential products/projects in the CFD No. 04-2 is subject to change due to potential shifts in economic/real estate market conditions and/or the development strategy by the developer/builder.

For additional information on the estimated absorption schedules for the residential products/projects in CFD No. 04-2 (Lake Hills Crest), please refer to the following table and graphs.

E1npirc Economics 29 Release Date: March 11, 2005 ESTIMATF,O RESIDENTIAL ABSORPTION SCHEDULES CFD NO, !14-2 (LAKE HILLS CRF.ST)

!\'larch 11. 2005; Subject to Re\."ision

'-/'./ vvv·, ,.·".,··'..-" ' .. Projt><:·! .-\r,:a~ >>;., - ' I - Loi Sias 7000 R()!HI 8()()() 9000 15011{) fot,1ls Map (:O

Oe,·dopment Slntus I -:---- Uous i 114 l(N 98 Hll --'·"------j--- I Share 221% 20.3% !9.!% 18.2% 20.1% 1()()0% I --E--- - Future 104 98 OS l(H 512 1" -- Eiir.m1.-si:1,,acd 0 (( " " ; Commence Occupancies )rd-2JHl6 l,1·200(, 2ml-2006 3rd-2001i l~t-20(){, ( ____

Prircs - t:stlmall'd Plan <1 I :,',4SO,O()(l + :-\.'i2~JWO $560,000 $1\!5,00() 1'675.()()() Plan# 2 $50.'i,()(){j S,57()J)()(j $5(,.'i.()0{) l,63\000 1,70.'i.OOO Plan Ii 3 $'i2.',000 )t,20JllH) $~80,000 S750.(10() Plan # 4 $:'i'l5,0()() S,501,Hl Average -----l-----''--='------===----1'---·',",i,i,,33).1,)71,667 $575,0{)0 __ 1 \7 I 0.(11e's"_ -~-'--'c'c'"c' ,12,0_ ,_ ---- l.h'ing Areas - t:stimatcd ----- Plan# I 2,1,0{) ~.9)) 3,412 J,ROO 4,143

Plan# 2 2.~.'i() 3.4qs 3,412 4,f)()() '------Plan fl 3 ''"''- '"" 3,652 4,200 ).11,8 Plan fl 4 ' 3,829 Average 2 SS(> ~_.______,__-1,.51(1 3,591 -,.0()0 l.691 ------j --- ' ------Value Ratio· Estimated i1ii $163 :\,)(,() l -,-1-,-.-----1,---,,-,-,----'----,-,,-.,---l­ ------l-----="---c--_:c__:__~_--=c__ (Pncc .' Area) l ! .. ·. -----

1-- 1 - ______J I Empire Economics' Absor_ption - Occupancies ~_!l~~~ners J

Absorption Rate - Annually 2005 0 0 0 0 0 2006 20 30 15 20 110 ---- 2007 __ ,_ 35 30 t ---,,30 25 20 140 2008 35 30 30 25 20 140 2009 24 14 13 28 20 --- 99 2010 0 - 0 0 0 23 23 L______r---- - l-----l------l------'---- _ ~~~~rptl~n Rat~ - cumuljatlvely 2005 ___ 0 O 0 ,' 0 2006 : 20 30 25 15 20 110 . - ~-- 2007 55 60 55 40 40 250 - 2008 I 90 90 85 65 60 390 ----~- ·---- 2009 114 104 98 93 80 1- 489 2010 -i 114 104 98 93 103 512-- . .. . I .... .-· ..

Empire Economics }0 Release Date: March IL 2005 CUSD CFO NO. 04-2 (LAKE HILLS CREST) ESTIMATED RESIDENTIAL ABSORPTION SCHEDULES 160

140

>- ..J 120 ..J . . <( ·~·~· -- :::, z z :~=~=ti~i,.,...... ,,,• I <( 100 '·~-~-~-~ •.'5 U) (!) z iii 80 0 ..J u ;;: 0 60 u~ U)w u. 40 0 w~ Ol 20 ::.:::, z 0 2005 2006 2007 2008 2009 2010 [!]Project# 5 0 20 20 20 20 23 l1l Project# 4 0 15 25 25 28 0 9Project # 3 0 25 30 30 13 0 Ci! Project # 2 0 30 30 30 14 0 DProject # 1 0 20 35 35 24 0

Ernpirc E.conornics 31 Release Date: March IL 2005 ASSUMPTIONS AND LIMITING CONDITIONS

The Market Absorption Study for CFD No. 04-2 is based upon vanous assumptions and limiting conditions; accordingly, these are as follows:

Title to Property Property Boundaries Accuracy of Information from Others Date of Study Hidden or Unapparent Conditions Opinions of a Legal/Specialized Nature Right of Publication of Report Soil and Geological Studies Earthquakes and Seismic Hazards Testimony or Court Attendance Maps and Exhibits Environmental and Other Regulations Required Permits and Other Governmental Authority Liability of Market Analyst Presence and Impact of Hazardous Material Structural Deficiencies of Improvements Presence of Asbestos Acreage of Property Designated Economic Scenario Provision of the lnfrastrncture; Role of Coordinator Developer/Builders Responsiveness to Market Conditions Financial Strength of the Project Developer/Builder Market Absorption Study Timeliness of Results

For additional info,mation on the various assumptions and limiting conditions, please refer to the comprehensive Market Absorption Study.

Ernpirc Econornic~ 32 Release Date: :vtarch 11, 2005 [THIS PAGE INTENTIONALLY LEFf BLANK] APPENDIXE

SlJMMARY OF THE INDENTURE

The follo~ving is a s1unntary of certain definitions and provisions (~{ the Indenture ivhich are not described elsewhere ir; the Official Statement. This summary does not purport to be comprehensive and reference should be tna,ie to the Indenture for a JUI/ and cotnplete staten1ent r~f its provisions.

DEFINITIONS

Unless the con1cxt otherwise requires, the following terms sha11 have the following meanings:

"Account" merns any account created pursuant to the Indenture.

"Act" means the Mello-Roos Community Facilities Act of 1982, as amended, heing Sections 53311 et seq. of the California Government Code.

"'Administrativ, Expense Account" means the Account by that name of the Special Tax fund created and established pursuant to the Indenture.

"Administrativ,: Expenses" means the administrative costs with respect to the calculation and collection of the Special Taxes, including all attorneys' fees and other costs related thereto, the fees and expenses of the Trustee, any fees and related costs for credit enhancement for the Bonds or any Parity Bonds which are not otherwise paid as Costs of Issuance, any costs related to the District's co1npliance \Vith state and federal laws requiring ,;ontinuing disclosure of information concerning the Bonds and the District, and any other costs otherwise incurred hy the County staff on behalf of the District in order to carry out the purposes of the District as set forth in the Resolution of hirmation and any obligation of the District under the Indenture.

"Administrativi: Expenses Cap'" means S40,000 per Bond Y car, increased on July I of each year, commencing July I, 2006 by two percent (2%) of the amount in effect for the prior Fiscal Ycar.

"Administrator of the District" means the County Executive Officer or any other person or persons designated by the Courty Executive Officer by a written certificate signed by the County Executive Officer and containing the specimen signature of each such person.

"Annual Debt Service" means the principal amount of any ()utstanding Bonds or Parity Bonds payable in a Bond Y car either at maturity or pursuant to a Sinking Fund Payment and any interest payable on any Outstanding Bonds or Parity Bonds in such Bond Year, if the Bonds and any Parity Bonds are retired as scheduled.

"Appraisal" means the appraisal of the taxable property in the District dated May 12, 2005 delivered in connection with the initial sale and issuance of the Bonds.

"Authorized Investments" means any of the following which at the time of investment arc legal investments under the laws of the State l"or the moneys proposed to be invested therein:

(l) (A) Direct obligations (other than an obligation subject to variation in principal repayment) of the United States of America ("United States Treasury Obligations"); (B) obligations fully and unconditionally guaranteed as to timely payment of principal and interest by the United States or America; (C) obligations fully and unconditionally guaranteed as to timely payment of principal and i11terest hy any agency or instrumentality of the United States of America when such obligations are hacked by the full faith and credit of the United States of America; or (D) evidences of

E-1 ownership of proportionate interests in future interest and principal payments on obligations described above held by a bank or trust company as custodian. under which the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor and the underlying government obligations are not available lo any person claiming through the custodian or to whom the custodian may be obligated.

(2) Federal Housing Administration debentures.

(3) The listed obligations of government-sponsored agencies which arc not backed by the full faith and credit of the United States of America:

Federal Home Loan Mortgage Cotporation (Fl!LMC) Participation certificates (excluded are stripped mortgage securities which are purchased at prices exceeding their principal amounts) Senior Debt obligations Farm Credit Banks (fonnerly: Federal Land Banks, Federal Intermediate Credit Banks and Banks for Cooperatives) Consolidated system-wide bonds and notes Federal Home Loan Banks (FHL Banks) Consolidated debt obligations Federal National Mortgage Association (FNMA) Senior debt ohligations Mortgage-hacked securities ( excluded are stripped mortgage securities which arc purchased at prices exceeding their principal amounts) Student Loan Marketing Association (SLMA) Senior debt obligations (excluded are securities that do not have a fixed par value and/or whose terms do not promise a fixed dollar amount at maturity or call date) Financing Corporation (FICO) Debt obligations Resolution Funding Corporation (REFCORP) Debt obligations

(4) Unsecured ce1tificates of deposit, time deposits, and bankers' acceptances (having maturities of not more than 30 days) of any bank (including the Trustee and any affiliate) the short­ tcrm obligations of which are rated "A-I" or better by Standard & Poor's.

(5) Deposits the aggregate amount of which are fully insured by the Federal Deposit Insurance Corporation (FDIC), in banks (including the Trustee and any affiliate) which have capital and surplus of at least $5 million.

(6) Commercial paper (having original matm;tics of not more than 270 days rated at the time of purchase "A-I+'' by Standard & Poor's and "Prime-I" by Moody's).

(7) Money market funds rated "AAm" or "AAm-G" by Standard & P,x,r's, or better, including funds for which the Trustee. its parent holding company, if any, or any affiliates or subsidiaries of the Trustee provide investment advisory or other management services.

(8) "State Obligations," which means:

(A) Direct general obligations of any state of the United States of America or any subdivision or agency thereof to which is pledged the full faith and credit of a state the

E-2 unsecured general obligalion debt of which is rated "A3" by Moody's and "A,, by Standard & Poor';, or better, or any obligation folly and unconditionally guaranteed by any state, subdi\ ision or agency whose unsecured general obligation debt is so rated.

(B) Direct general short-term obligations of any state agency or subdivision or agcnc:, thereof described in (A) above and rated "A-I+" by Standard & Poor's and "Prime-I" by Mendy's.

(C) Special Revenue Bonds (as defined in the United States Bankruptcy Code) of any slate, slate agency or subdivision described in (A) above and rated "AA" or better by Stand, rd & Poor's and "Aa'' or better by Moody's.

(9) Pre-refunded municipal obligations rated "AAA" by S & P and "Aaa" by Moody's 111ecting the following rcq_!Jircruents:

(A) the municipal obligations are (I) not subject to redemption prior to maturity or (2) the trustee for the n1unicipal obligations has been given irrevocable inslructions concerning their call and redcn1ption and the issuer of the n1unicipal obligations has coven,lnted not to redecn1 such n1unicipa] obligations other lhan as set forth in such instructions;

(B) the municipal obligations arc secured by cash or Cnited States Treasury Obligations which may be applied only to payment of the principal of, interest and premium on sue 1 n1unicipal obligations:

(C) the principal of and interest on the United States Treasury Obligations (plus any c,1sh in the escro\11..-) has been verified by the report of independent certified public accourtants to be sufficient to pay in full all principal of, interest and premium, if any, due and to become due on the municipal obligations ("Verification");

(D) the cash or United States Treasury Obligations serving as security for the municipal obligation.') are held hy an escrow agent or trustee in trust for O\Vners of the n1unicipal obligations;

(E) no substitution of a 1Jnited States Treasury Obligation shall he pern1illc

(FJ the cash or United States Treasury Obligations arc not available to satisfy any otfcr clain1s. including those by or against the trustee or escrow agenl.

( I 0) Repurchase agreements:

(A) With (I) any domestic bank, or domestic branch of a foreign bank, the Jong term d,,bt of which is rated al least "A" by Standard & Poor's and Moody's: or (2) any broker-dealer \vith "retail customers'' or a related affiliate thereof which broker-dealer has, or the parent company (which guarantees the provider) of which has, long-term debt rated al least"/.'' by Standard & Poor's and Moody's. which broker-dealer falls under the jurisdiction of the ~)ecurities investors Protection Corporation; or (3) any olhcr entity rated "!\ ., or better by Standard & 1'<1or's and Moody's. provided that:

(a) The market value of the collateral is maintained at levels equal to I 04'/, of the amount of cash transferred by the Trustee to the provider of the repurchase

E-3 agreement plus accrued interest with the collateral being valued weekly and marked-to­ n1arket at one current 1narket price plus accrued interest;

(b) The Trustee or a third party acting solely as agent therefor or for the District (the "Holder of the Collateral") has possession of the collateral or the collateral has been transferred to the Holder of the Collateral in accordance with applicable state and federal laws (other than by means of entries on the transferor's books);

(c) The repurchase agreement shall state and an opinion of counsel shall be rendered at the time such collateral is delivered that the Holder of the Collateral has a pcrl'ected first pri01ity security interest in the collateral, any substituted collateral and all proceeds thereof (in the case of bearer securities, this means the Holder of the Collateral is in possession);

(d) The repurchase agreement shall provide that if during its term the provider's rating by either Moody's or Standard & Poor's is withdrawn or suspended or falls below "A-" by Standard & Poor's or "A3"' by Moody's. as appropriate. the provider must, at the direction of the District or the Trustee, within 10 days of receipt of such direction, repurchase all collateral and tem1inate the agreement, with no penalty or premium to the District or Trustee.

(B) Notwithstanding the above. if a repurchase agree111ent has a term of 270 days or less (with no evergreen provision), collateral levels need not be as specified in (a) above, so long as such collateral levels arc 103% or better and the provider is rated at least "A., by Standard & Poor's and Moody's, respectively.

(11) In vestment agreements with a domestic or foreign bank or cnrporation (other than a life or property casualty insurance company) the long-term debt of which or. in the case of a guaranteed corporation the long-term debt, or, in the case of a monoline financial guaranty insurance company. claims paying ability, of the guarantor is rated at least "AA" by Standard & Poor's and "Aa' by Moody's; provided that, by the terms of the investment agreement:

(A) interest payments are to be made to the Trustee at times and in amounts as necessary to pay debt service (or, if the investment agreement is for the Improvement Fund. construction draws) on the Bonds;

(B) the invested funds are available for withdrawal without penalty or premium, upon not more than seven days' prior notice, for the reasons under the Indenture; the District and the Trustee agree to give or cause to be given notice in accordance with the terms of the investn1cnt agreement. so as to receive funds thereunder with no penalty or premium paid~

(C) the investment agreement shall state that is the unconditional and general obligation of, and is not subordinated to any other obligation of, the provider thereof, or. in the case of a bank. that the obligation of the bank to make payments under the agreement ranks pari passu with the obligations of the bank to its other depositors and its other unsecured and unsubordinated creditors;

(D) the District am! the Trustee receives the opinion of domestic counsel (which opinion shall be addressed to the District and the Trustee) that such investment agreement is legal. valid, binding and enforceable upon the provider in accordance with its terms and of foreign counsel (if applicable) in form and substance acceptable, and addressed to, the District;

E-4 (E) the investment agreement shall provide that if during its term.

(I) the provider's rating by either Standard & Poor's or Moody's falls bclov• "AA-" or "Aa3", respectively, the provider shall, at its option, within IO days of receipt of publication of such downgrade, either (i) collatcralize the investment agreement by dcliwring or transfen-ing in accordance with applicable state and federal laws (other than by mean, of entries on the provider's books) to the District, the Trustee or a third party acting so lei) as agent therefor (the "Holder of the Collateral") collateral free and clear of any third­ party liens or claims the market value of which collateral is maintained at 104% of U.S. Trcasciry and GNMA obligations and 105%. of FNMA and FHLMC obligations (with a market value approach); or (ii) repay the principal of and accrued but unpaid interest on the invcsl 1nent: and

(2) the provider's rating by either Standard & Poor's or Moody's is withdrawn or suspended or falls below "A-" or "A3", respectively, the provider must, at the direction of the District or the Fiscal Agent, within IO days of receipt of such direction. repay the principal of and accrued but unpaid interest on the investment, in either case with no penal I y or premium tn the District or Trustee; and

(F) The invcstn1ent agrcc,nent sha11 state and an opinion of counsel shall be rendered. in the event collateral is required to be pledged by the provider under the terms of the investment agreement at the time such collateral is delivered, that the Holder of the Collateral has a perfected first priority security interest in the collateral, any substituted collateral and all proceeds thereof (in the case of bearer securities, this means the Holder of the Collateral is in possession); and

(G) the investment agreement must provide that if during its term

(I) the provider shall default in its payment obligations, the provider's ob1igations under the invcstn1cnt agreement :,;hall, at the direction of the [)istrict or the Trustee, be accelerated and amounts invested and accrued but unpaid interest thereon shall be repaid to the District or Trustee. as appropriate, and

(2) the provider shall become insolvent, not pay its debts as they becorre due, be declared or petition lo be declared bankrupt, etc. ("event of insolvency"), the provider's obligations shall automatically be accelerated and amounts invested and accrued but unpaid interest thereon shall be repaid to the Disttict or Trustee, as appropriate.

(12) The State of California Local Agency Investment Fund; provided that the Trnstee may restrict ir,vestments in such Fund to the extent necessary to keep monies available lor the purposes of the Indenture.

( 13) The Riverside County Treasurer's Investment Pool.

"Authorized Representative of the County" means the County Executive Officer or any other person or persons designated by the County Executive Officer by a w1itten certificate signed by the County Executive Officer and containing the specimen signature of each such person.

"Hond Counsel" means an attorney at law or a firm of attorneys selected by the District of nationally recognized standing in matters pertaining to the tax-exempt nature of interest on honds issued hy slates and their political subdivisi,ms duly admitted to the practice of law before the highest court of any stale of the United States of America or the District of Columbia.

E-5 "Bond Register" means the books which the Trustee shall keep or cause to be kept on which the registration and transfer of the Bonds and any Parity Bonds shall be recorded.

"Bondowncr" or "'Owner" means the person or persons in whose nan1e or nan1cs any Bond or Parity Bond is registered.

"Bonds" means the Series 2005 Bonds.

"Bond Year" means the twelve month period commencing on September 2 of each year and ending on September 1 of the following year, except that the first Bond Y car for the Bonds or an issue of Parity Bonds shall begin on the Delivery Date and end on the first September I which is not more than 12 months after the Delivery Date.

"Business Day" means a day which is not a Saturday or Sunday or a day of the year on which banks in New York, New York, Los Angeles, California, or the city where the corporate trust office of the Trustee is located, are not required or authorized to remain closed.

"Capitalized Interest Suhaccount" means the Suhaccount by that name of the Interest Account of the Special Tax Fund created and established pursuant to the Indenture.

"Certificate of the Special Tax Administrator" means a certificate of the Administrator of the District, or any successor entity appointed by the C'.ounty, to adrn.inister the ca]culation an

"Code" means the Internal Revenue Code of 1986, as amended. and any Regulations. rulings, judicial decisions, and notices, announcernents, and other releases of the United States Treasury Departn1ent or fnternal Revenue Service interpreting and construing iL

"Continuing Disclosure Certificate" means that certain Continuing Disclosure Certificate dated as of August I, 2005 executed by the District acknowledged by The Bank of New York Trust Company, N.A., together with any amendments thereto.

"Costs of Issuance" means the costs and expenses incurred in connection with the formation of the District and the issuance and sale of the Bonds or any Parity Bonds, including the acceptance and initial annual fees and expenses of the Trustee, legal fees an

"Costs of Issuance Account'' means the Account of the Acquisition and Construction Fund created and established pursuant to the Indenture.

"County'" means the County of Riverside, California.

"Delivery Date" means, with respect to the Bonds and each issue of Parity Bonds, the date on which the bonds of such issue were issued and delivered to the initial purchasers thereof.

"Depository" shall mean The Depository Trust Company. New York, New York, and its successors and assigns as securities depository for the Certificates, or any other securities depository acting as Depository under the Indenture.

"Developed Property'' means real property within the District for which a building pern1it has been issued.

E-6 "Developer" means the landowners which arc parties to the Funding Agreement.

"District" means Community Facilities District No. 04-2 (Lake Hills Crest) of the County of Riverside established pursuant to the Act and the Resolution of Formation.

"Earnings Fund" means the fund by that name established pursuant to the Indenture in which there arc established the Account,. uescrihcd in the Indenture.

"Federal Securities" means any of the following: (a) non-callable direct obligations of the United States of America (''Trrnsuries"), (b) evidence of ownership of proportionate interests in future interest and principal payments on Treasuries held by a hank or trust co111pany as custodian, under which the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor and the underlying Trca,;urics arc not availahlc to any person c]aiming through the custodian or to whon1 the custodian may be ohl·gated, and (c} pre-refunded municipal obligations rated "AAA" and "Aaa" by Standard & Poor's and Moody's, respectively (or any combination thereof).

''Fiscal Year" n1cans the period beginning on July I of each year and ending on lhc next foJlowing June 30.

"Funding Agree mcnt" means that certain Infrastructure Funding and Funding Agreement dated as of July I, 2005 by and among the County, Riverside LIJC, LTD, LIIC Riverside Associates LLC, Lake Hills - Riverside. L.P., Lake Hi:ls, LLC and Brehm Communities. together with any amendments thereto.

"Gross Taxes" means the amount of all Special Taxes received by the District, together with the proceeds collected from the sale of propc1iy pursuant to the foreclosure provisions of the Indenture for the delinquency of such Special Taxes remaining after the payment of all costs related to such foreclosure actions or any settlement thereof.

"Improvement Fund" means the fond by that name established pursuant to the Indenture.

"Indenture" tncans this Rond Indenture, together with any Supplemental Indenture approved pursuant to the Indenture.

"Independent Fi:1ancial Consu1tant'' means a financial consultant or firm of surh consultants generally n.·co.gnize

(I) is in fact independent and not under the domination of the District or the County;

(2) does not have any substantial interest, direct or indirect, in the District or the County; and

(3) is not connected with the District or the County as a member, officer or employee of the District or the County, but who may be regularly retained to make annual or other reports to the District or the County.

"Interest Account" means the account by that name created and established in the Special Tax Fund pursuant to the Indenture.

"Interest Payme1t Date" means each March I and September I. commencing March l, 2006; provided, however, that, if any such day is not a Business Day, interest up to the Interest Payment Date will he paid on the Business Day next succeeding such date.

E-7 "Investment Agreement" means one or more agreements for the investment of funds of the District complying with the criteria therefor as set fmth in Subsection ( l l) of the definition of Authorized Investments.

"Legislative Body" means the Board of Supervisors of the County of Riverside acting ex officio as the lcgislalive body of the District.

"Maximum Annual Debt Service" means the maximum sum obtained for any Bond Y car prior to the final maturity of the Bonds and any Parity Bonds hy adding the following for each Bond Ycar:

(I) the principal amount of all Outstanding Bonds and Parity Bonds payable in such Bond Year either at n1aturity or pursuant to a Sinking Fund Paytnent; and

(2) the interest payable on the aggregate principal amount of all Bonds and Parity Bonds Outslanding in such Bond Year if the Bonds and Parity Bonds arc retired as scheduled.

'·Moody's" means Moody's Investors Service, its successors and assigns.

"Net Taxes" means (iross Taxes minus amounts set aside to pay Administrative Expenses.

"Nominee" shall mean the nominee of the Depository, which may be the Depository. as detennined from time to tin1e pursuant to the Indcnlure.

"Ordinance" means Ordinance No. 834 adopted by the Board of Supervisors of the County on January 25. 2005, providing for the levying of the Special Tax.

"Outstanding" or "Outstanding Bonds and Parity Bonds" means all Bonds and Parity Bonds theretofore issued by the District, except:

(I) Bonds and Paiity Bonds theretofore cancelled or surrendered for cancellation in accordance with of the Indenture;

(2) Bonds and Parily Bonds for payment or redemption of which monies shall have been theretofore deposited in trust (whether upon or prior to the maturity or the redemption date of such Bonds or Parity Bonds), provided that. if such Bonds or Parity Bonds are to be redeemed prior to the maturity Lhereof, notice of such redemption shall have been given as provided in the Indenture or any applicable Supplemental Indenture for Parity Bonds; and

(3) Bonds and Parity Bonds which have been surrendered to the Trustee for transfer or exchange pursuain Lo the Indenture or for which a replacement has been issued pursuant of the Indenture.

"Parity Bonds" means all bonds, notes or other similar evidences of indebtedness hereafter issued. payable out of the Net Taxes and which. as provided in the Indenture or any Supplemental Indenture, rank on a parity with the Bonds.

"Participants" shall mean those broker-dealers, banks and other financial institutions from time to time for which the Depository holds Bonds or Parity Bonds as securilies depository.

"Person" 111eans natural persons, firms. corporations. partnerships, associations, tn1sts, public bodies and other entities.

"Prepayments" means any amounts paid by the District to the Trustee and designated by the District as a prepayment of Special Taxes for one or more parcels in the Dislrict made in accordance with lhc RMA.

E-8 "Principal Account" means the account by that name created and established in the Special Tax Fund pursuant to the Indenture.

"Principal Office of the Trustee" means the office of the Trustee located in Los Angeles, California, m such other office or offices as the Trustee may designate fro111 ti1nc to time. or the office of any successor Tru.slcc \Vherc it principally conducts its business of serving as trustee under in

"Project" means those public facilities described in the Resolution of Formation which are to be acquired or constructed within and outside of the District, including all engineering, planning and design .services and other incidcrllal expenses related to such facilities and other facilities, if" any, authorized by the qualified electors ,vithi11 the District fro1n time to tin1c.

"Project Accot.:nl'' n1cans the Account by that name of the Improvement Fund created and establishc

"Project (~osts·· n1eans the arnounts necessary to finance the Project, to create and replenish any necessary reserve f"un

"Rating Agenc/' means Moody's and Standard & Poor's, or both, as the context requires.

"Rebate AccOl'.nf' means the account by that name created and cstahlishc

"Rebate Fund'' 1ncans the fund by that na1nc established pursuant to the Indenture in \Vhich there arc established the Account; described in the Indenture.

"Rebate Regulations" 1neans any fina], temporary or proposed Regulations prornu]gatc

"'Record Date" rneans the fifteenth day of the month preceding an Interest Payment l)ate, regardless of whether such day is a Business Day.

"Redemption t, ecount'' means the account by that name created and established in the Special Tax Fund pursuant to the Jncenturc.

"Regulations" r1cans the regulations adopted or proposed hy the I)cpartmcnt of Treasury fron1 time to tin1e with respect to obligations issued pursuant to Section I 03 of the Code.

"Rcprcsentatior Letter" shall mean the Blanket Letter of Representations from the District and the Paying Agent to the Dcrository as described in the Indenture.

"Reserve Account" means the account by that name created and established in the Special Tax Fund pursuant to the Imlcnturc,

"'Reserve Requ rcmcnl'' 1ncans that an1ount as of any date of calculation equal to the lesser of (i) $1,675,146.25, (ii) 10% of the initial principal amount of the Bonds and Parity Bonds, if any, (iii) Maximum Annual Debt Service on the then Outstanding Bonds and Parity Bonds, if any; and (iv) 125'7' of average Annual Debt Service on the then Outstanding Bonds and Parity Bonds.

"Resolution of Formation" means Resolution No. 2005-03 adopted by the Board of Supervisors of the County on January 11, 2005, pursuant to which the County formed the District.

'·RMA" means the Rate and Method of Apportionment of Special Taxes for the District approved by the qualified electors of the District at the January 11, 2005 election, as amended from time to time.

"Series 2005 Bonds" means the District's Special Tax Bonds, Series 2005 issued on August 18, 2005 in the aggregate principal amount of $25,820.000.

"Sinking Fund Payment" means the annual payment to be deposited in the Redemption Account to rc

"Six-Month Period" means the period of time beginning on the Delivery Date of each issue of Bonds or Parity Bonds, as applicable, and ending six consecutive months thereafter. and each six-month period thereafter until the latest maturity date of the Bonds and the Parity Bonds (and any obligations that refund an issue of the Bonds or Parity Bonds).

"Special Tax Fund" ,ncans the fund by that name created and estahlishcd pursuant to the Indenture.

"Special Taxes" means the taxes authorized to be levied by the District on property within the District in accordance with the Ordinance, the Resolution of Formation, the Act an

"Standard & Poor's" means Standard & Poor's Ratings Group, a division of MeGraw-Ilill. its successors and assigns.

"Supplemental Indenture" means any supplemental indenture amending or supplementing the Indenture.

"Surplus Fund" means the fund by that name created and established pursuant to the Indenture.

"Tax Certificate" means the certificate by that name to be executed by the District on a Delivery Date to establish certain facts and expectations and which contains certain covenants relevant to cornpliancc with the Code.

"Tax-Exempt" means, with reference to an Authorized Investment, an Authorized Investment the interest earnings on which are excludable from gross income for federal income tax purposes pursuant to Section I 03(a) of the Code, other than one described in Section 57(a)(5)(C) of the Code.

"Term Bonds" means the Series 2005 Bonds maturing on September l, 2025. September I, 2030 and September I. 2035 and any term maturities of an issue of Parity Bonds as specified in a Supplemental Indenture.

"Treasurer" means the Treasurer-Tax Collector of the County of Riverside.

"Trnstee" means The Bank of New York Trnst Company, N.A., a national banking association duly organized and existing under the laws of the United States, at its principal corporate trust office in Los

E-10 Angeles, California, an

"Underwriter" means E.J. De La Rosa & Co. with respect to the Bonds and. with respect to each issue of Parity Bonds, the ins1itution or institutions, if any, with whon1 the District enters into a purchase contract for the sa]e of such issue.

"Vcri l'ication" 1 hall have the meaning contained in the definition of Authorized Investments (9 )( c ).

CREATION OF FUNDS AND APPLICATION OF PROCEEDS

Creation of Funds; Application of Proceeds.

(a) The Trnslec has established the following funds and accounts:

(I) The Community Facilities District No. 04-2 Special Tax Fund (the "Special Tax Fund") (in which there shall be established and created an Interest Account (in which there shall be established the Capitalized Interest Subaccount). a Principal Account, a Redemption Account, a Reserve Account and an Administrative Expense Account.)

(2) The Community Facilities District No. 04-2 Rebate Fund (the "Rebate Fund").

(3) The Community Facilities District No. 04-2 Improvement Fund (the "Improvement Fund") (in which there shall be established a Costs oflssuance Account and a Project Account).

(4) The Community Facilities District No. 04-2 Surplus Fund (the "Surplus Fund").

(5) The Community Facilities District No. 04-2 Earnings Fund (the "Earnings Fund").

The amounts on deposit in the foregoing funds, accounts and subaccounts shall be held by the Trustee and the Trustee shaJJ in,-est and disburse the amounts in such funds, accounts and subaccounts in accordance with the provisions of fie Indenture and shall disburse investment earnings thereon in accordance with the provisions of the Indenture.

In connection with the issuance of any Parity Bonds. the Trustee, at the direction of the Authorized Representative of the County, may create new funds, accounts or subaccounts, or rnay create a

(b) The prcceeds of the sale of the Bonds shall be received by the Trustee on behalf of the District and deposited and transfeJTed as set forth in the Official Statement under the caption "FINANCING PLAN · Estimated Sources and Uses of Funds."

The Trustee ma~r, in its discretion. estah1ish a tetnporary fund or account in its hooks and records to facilitate such transfers.

Deposits to and Disbursements from Special Tax Fund.

(a) Except tor Prepayments which shall be deposited to the Redemption Account as specified in a Certificate of the Administrator of the District, the Trustee shall, on each date on which the Special Taxes arc received from the District, deposit the Special Taxes in the Special Tax Fund to be held in trust for the Owners. The Trustee shall trans for the Special Taxes on deposit in the Special Tax Fund on the dates and in the amounts set forth in the Imlcnture, in the following order of priority, to:

E-11 (I) the Administrative Expense Account of the Special Tax Fund:

(2) the Interest Account of the Special Tax Fund:

(3) the Principal Account of the Special Tax Fund;

(4) the Redemption Account of the Special Tax Fund;

(5) the Reserve Account of the Special Tax Fund;

( 6) the Rebate Fund: and

(7) the Surplus Fund.

(b) At maturity of all of the Bonds and Parity Bonds and. after all principal and interest then due on the Bonds and Parity Bonds then Outstanding has been paid or provided for and any amounts owed to the Trustee have been paid in full, moneys in the Special Tax Fund and any accounts therein may be used by the District for any lawful purpose.

Administrative Expense Account of the Special Tax Fund. The Trustee shall transfer from the Special Tax Fund and deposit in the Administrative Expense Account of the Special Tax Fund from time to tin1c an1ounts necessary to n1ake tin1ely pay111cnt of Administrative Expenses as set forth in a Certificate of the Administrator of the District; provided, however, that, except as set forth in the following sentence, the total amount transferred in a Bond Y car shall not exceed the Administrative Expenses Cap until such time as there has been deposited to the Interest Account and the Principal Account an amount, together with any amounts already on deposit therein, that is sufficient to pay the interest and principal on all Bonds and Parity Bonds due in such Bond Y car and to restore the Reserve Account to the Reserve Requirement. Notwithstanding the foregoing, amounts in excess of the Administrative Expenses Cap may be transferred to the Administrative Expense Account to the extent necessary to coJlect delinquent Special Taxes. Moneys in the Administrative Expense Account of the Special Tax Fund may be invested in any Authorized Investments as directed in writing by the Administrator of the District and shaJI be disbursed as directed in a Certificate of the Administrator of the District.

Interest Account and Principal Account of the Special Tax Fund. The principal of and interest due on the Bonds and any Parity Bonds until maturity, other than principal due upon redemption, shall be paid by the Trustee from the Principal Account and the Interest Account of the Special Tax Fund, respectively. For the purpose of assuring that the payment of principal of and interest on the Bonds and any Parity Bonds will be made when due, after making the transfer required by the Indenture to the Administrative Expense Account of the Special Tax Fund, at least one Business Day prior to each March 1 and September 1, the Trustee shall make the following transfers from the Special Tax Fund first to the Interest Account and then to the Principal Account; provided, however. that to the extent that deposits have been made in the Interest Account or the Principal Account from the proceeds of the sale of an issue of the Bonds, any Parity Bonds, or otherwise, the transfer from the Special Tax Fund need not be made; and provided, further, that, if amounts in the Special Tax Fund (exclusive of the Reserve Account) are inadequate to make the foregoing transfers, then any deficiency shall be made up by transfers from the Reserve Account:

(a) To the Interest Account, an amount such that the balance in the Interest Account one Business Day prior to each Interest Payment Date shall be equal to the installment of interest due on the Bonds and any Parity Bonds on said Interest Payment Date and any installment of interest due on a previous Interest Payment Date which remains unpaid. Moneys in the Interest Account shall be used for the payment of interest on the Bonds and any Parity Bonds as the same become due.

E-12 (b) To th,, Principal Account, an amount such that the balance in the Principal Account one Business Day prior to September I of each year, commencing September I, 2006, shall equal the principal payment due on the Bonds and any Parity Bonds maturing on such September 1 and any principal payment due on a previous September I which remains unpaid. Moneys in the Principal Account shall be used for the payment of the princip,,l of such Bonds and any Parity Bonds as the same become due at maturity.

Redemption Account of the Special Tax Fund.

(a) With tespcct to each September I on which a Sinking Fund Payment is due, after the deposits have heen made to the <\dministrativc Expense Account, the Interest Account and the Principal Account of the Special Tax Fund, the Trustee shall next transfer into the Redemption Account of the Special Tax Fund from the Special Tax I-'und the amount needed to make the balance in the Redemption Account one Business Day prior to each Septemhc · I equal to the Sinking Fund Payment due on any Outstanding Bonds and Parity Bonds on such Septen1ber I; rrovidcd, however, that, if amounts in the SpeciaJ Tax Fund are inadequate to n1akc the foregoing transfers, then any deficiency shall be made up by an immediate transfer from the Reserve Account, if funded. Moneys so Jeposited in the Redemption Account shall be used and applied hy the Trustee to call and redeem Term Bonds in accordance with the Sinking Fund Payment schedules set forth in the Indenture, and to redeem Parity Bonds in accordance with any Sinking Fund Payment schedule in the Supplemental Indenture for such Parity Bonds.

(b) After naking the deposits to the Administrative Expense Account, the Interest Account and the Principal Account of the Special Tax Fund and to the Redemption Account for Sinking Fund Payrnents then due pursuant to stbparagraph (a) above, and in accordance with the District's election to call Bonds for optional redemption, or to call Parity Bonds for optional redemption as set forth in any Supplemental Indenture for Parity Bonds. the Trustee sha]] transfer fro111 the Special Tax Fund and deposit in the Redemption Account moneys available for the purpose and sufficient to pay the principal and the premiums. if any, payable on the Bonds or Parity Bonds called for optional redemption; provided. however, that amounts in the Special Tax Fund (other than the Alministrativc Expense Account therein) may be applied to optionally redeem Bonds and Parity Bonds only if im11ediately following such redemption the amount in the Reserve Account will equal the Reserve Requirement.

(c) Prepayments deposited to the Redemption Account shall be applied on the redemption date, together with money transferred from the Reserve Account, to the payment of the principal of, premium, and interest on the Bonds ar d Parity Bonds lo he redeemed with such Prepayments.

(d) Moneys set aside in the Redemption Account shall he used solely for the purpose of redeeming Bonds and Parity Bonds and shall be applied on or after the redemption date to the payment of principal of and premium, if any, on the Bonds or Parity Bonds to be redeemed upon presentation and surrender of such Bon Js or Pa1ity Bonds and in the case of an optional redcn1ption or an extraordinary redemption from Preparments to pay the interest thereon; provided, however, that in lieu or partially in lieu of such call and redemption, moneys deposited in the Redemption Account may be used to purchase Outstanding Bonds or Parity Bond; in the manner provided in the Indenture. Purchases of Outstanding Bonds or Parity Bonds may be made by the District at public or private sale as and when and at such prices as the District may in its disc.-etion determine but only at prices (including brokerage or other expenses) not more than par plus accrued interest, plus. in the case of moneys set aside for an optional redemption or an extraordinary redemptirn, the premium applicable at the next following call date according to the premium schedule established pu ·suant to the Indenture. or in the case of Parity Bonds the premium established in any Supplemental Indenture. Any accrued interest payable upon the purchase of Bonds or Parity Bonds may be paid from the amount rt served in the Interest Account of the Special Tax Fund for the pay1ncnt of interest on the next following Interest Payment Date.

E-13 Reserve Account of the Special Tax Fund. There shall be maintained in the Reserve Account of the Special Tax Fund an amount equal to the Reserve Requirement. If funded, the amounts in the Reserve Account shall be applied as follows:

(a) Moneys in the Reserve Account shall be used solely for the purpose of paying the principal of, including Sinking Fund Payments, and interest on the Bonds and any Parity Bonds when due in the event that the moneys in the Interest Account and the Principal Account of the Special Tax Fund arc insufficient therefor or moneys in the Redemption Account of the Special Tax Fund arc insufficient lo make a Sinking Fund Payment when due and for the purpose of making any required transfer to the Rebate Fund upon written direction from the Dist1ict. If the amounts in the Interest Account, the Principal Account or the Redemption Account of the Special Tax Fund arc insufficient to pay the principal of, including Sinking Fund Payments, or interest on any Parity Bonds when due, or an1ounts in the Special Tax Fund arc insufficient to rnakc tran~fers to the Rebate Fund when required, the Trustee shall withdraw from the Reserve Account for deposit in the interest Account, the Principal Account or the Redemption Account of the Special Tax Fund or the Rebate Fund, as applicable, moneys necessary for such purposes.

(b) Whenever moneys arc withdrawn from the Reserve Account, after making the required transfers to the Administrative Expense Account, the lnterest Account, Principal Account and the Rcdcn1ption Account of the Special Tax Fund, the Trustee shall transfer to the Reserve Account from available moneys in the Special Tax Fund, or from any other legally available funds which the District elects lo apply to such purpose, the amount needed to restore the amount of such Reserve Account to the Reserve Requirement. Moneys in the SpeciaJ Tax Fund shall be dccn1cd avai]able for transfer to the Reserve Account only if the Trustee determines that such amounts will not be needed to make the deposits required to be made to the Administrative Expense Account, the Interest Account, the Principal Account or the Rc

(c) In connection with an optional redemption or extraordinary redemption from Prepayments of Bonds or Parity Bonds in accordance with any Supplemental Indenture, or a partial defeasancc of Bonds or Parity Bonds, amounts in the Reserve Account may be applied to such redemption or partial defeasance so long as the amount on deposit in the Reserve Account following such redemption or partial defeasance equals the Reserve Requirement. The District shall set forth in a Certificate of the Authorized Representative the amount in the Reserve Account to be transferred to the Redemption Account on a redernption date or to be transferred pursuant to the Indenture to partially defease Bonds, and the Trustee shall make such transfer on the applicable redemption or defeasance date, subject to the limitation in the preceding sentence.

(d) Notwithstanding any provision in the Indenture to the contrary, moneys in the Reserve Account in excess of the portion of the Reserve Requirement required to be on deposit therein (other than investment earnings) shall be withdrawn from such Reserve Account by the Trustee on each September 2 and shall be transferred in the order of priority as specified for the Earnings Fund.

Rebate Fund.

(a) The Trustee shall establish and maintain a fund separate from any other fund established and maintained under the Indenture designated as the Rebate Fund. All money at any time deposited in the Rebate Fund shall be held by the Trustee in trust, for payment to the United States Treasury. A separate Account of the Rebate Fund shall be established for the Bonds and each issue of Parity Bonds the interest on which is excluded from gross income for federal income tax purposes. All amounts on deposit in the Rebate Fund with respect to the Bonds or an issue of Parity Bonds shall be governed by the rebate provisions of the Indenture and the Tax Certificate for such issue, unless the District obtains an opinion of Bond Counsel that the

E-14 exclusion from gross income for federal income tax purposes of interest payments on the Bonds and Pa1;ty Bond.swill not he adversely affected if such requiren1ent.s arc not satisfied.

The follDwing rquircmcnts shall be satisfied with respect to each Account of the Rebate Fund:

(i) Annual Computation. Within 55 days of the end of each Bond Year, the District shall calculate or cause to be calculated the amount of rcbatablc arbitrage for the Bonds and each issue of Parity Bonds, in accordance with Section 148(1)(2) of the Code and Section 1.148-3 of the Rebate Regulations (taking into account any apphcahle exceptions with respect to the computation of the rcbatablc arbitra;;c described in the Tax Certificate for each issue (e.g., the temporary investments exceptions of Sc,;tion 148(1)(4)(8) and (C) or the Code), and taking into account whether the election pursuant to Section 148(f)(4)(C)(vii) of the Code (the "I WY., Penalty") has been made). for this purpose treating he last day of the applicable Bond Y car as a computation date, within the meaning of Section 1.148-1 (b) of the Rebate Regulations (the "Rebatablc Arbitrage"). The District shall obtain expert advice as, o the amount of the Rebatable Arbitrage.

(ii) Annual Transfer. Within 55 days of the end of each Bond Year for which Rebatable i\rhitragc must 11e calculated as required by the Tax Certificate for each issue, upon the wriucn direction of the i\dministralor of the Di.strict, an a,nount shal1 be deposited to each Account or the Rebate Fund by the Trustee from any funds so designated by the District, including the Earnings Fund, if and to the extent required, so that the balance in the Rebate Fund shall equal the amount of Rebatable Arbit ·age so calculated by or on behalf of the District in accordance with (i) of Subsection (a)( I) with respect to the Bonds and each issue of Parity Bonds. In the event that immediately following any transfer required by the previous sentence, or the date on which the l)istrict dctcnnin:?s that no transfer is required ror such Bond Y car, the amount then on deposit to the credit of the applicable subaccount of the Rebate Fund exceeds the amount required to be on deposit therein, upon \.Vr.tten insl!uctions from the Adn1inistrator of the District, the Trustee shall \Vith

(iii) Payment to the Treasury. The Trustee shall pay, as directed in writing by the Administrator of the District, to the United States Treasury, out of amounts in each Account of the Rebate Pund,

'.X) not later than 60

Y) not later than 60 days after the payment or redemption of all of the Bonds or an issue of Parity Bonds, as applicable, an amount equal to I 00% of the Rchatablc Arbitrage calculated as of the end or such applicable Bond Year, and any income attributable to the Rebalable Arbitrage, computed in accordance with Section I 48(f) of the Code.

In the event that prior to the time of any payment required to he made from the Rebate Fund, the amount in the Rebate FunJ is nol sufficient to make such payment when such payment is due, the District shall calculate or cause to be c a]culated the an1ount of such deficiency and deposit an amount received fro1n any legally available source equal to such deficiency prior to the time such payment is due. Each payment required to be made pursuant lo Subsection (a)( I) shall be made to the Internal Revenue Service Center, Ogden, Utah 84201 on or before the date on which such payment is due, and shall be accompanied by Internal Revenue Service Form 8038-T prerared by the District, or shall be made in such other manner as provided under the Code.

E-15 (b) Disposition of Unexpended Funds. Any funds remaining in the Accounts of the Rebate Fund with respect to the Bonds or an issue of Parity Bonds after redemption and payment of such issue and after making the payments described in Subsection (a)(l)(iii) or (a)(2)(iii) (whichever is applicable), may be withdrawn by the Tmstcc at the written direction of the District and utilized in any manner by the District.

(c) Survival of Dcfcasance and Final Payment. Notwithstanding anything in the Indenture to the contrary. the obligation to comply with the foregoing rebate requirements shall survive the defeasance and final payment of the Bonds and any Parity Bonds with respect to which an Account has been created in the Rebate Fund.

(d) Amendment Without Consent of Owners. The rebate provisions of the Indenture may be deleted or amended in any manner without the consent of the Owners, provided that prior to such event there is delivered to the District an opinion of Bond Counsel to the effect that such deletion or amendment will not adversely affect the exclusion from gross income for federal income tax purposes of interest on the Bonds and any issue of Parity Bonds issued on a tax-exempt basis.

Surplus Fund. After making the transfers required lo the Administrative Expense Account, Interest Account, Principal Account. Redemption Account, Reserve Account and Rebate f'und, as soon as practicable after each September I, and in any event prior to each October 1, the Trustee shall transfer all remaining amounts in the Special Tax Fund to the Surplus Fund, unless on or prior lo such date, it has received a Certificate of the Administrator of the District directing that certain amounts be retained in the Special Tax .f<~und because the District has inc]u

The amounts in the Surplus Fund arc not pledged to the repayment of the Bonds or the Parity Bonds and may he used by the District for any lawful purpose. In the event that the District reasonably expects to use any portion of the moneys in the Surplus Fund to pay debt service on any Outstanding Bonds or Parity Bonds, the District will notify the Trustee in a Certificate of the Authorized Representative and the Tmstee will segregate such amount into a separate subaccount and the moneys on deposit in such subaccounl of the Surplus Fund shall be invested at the written direction of the District in Authorized Investments the interest on which is excludable from gross income under Section 103 or the Code (other than bonds the interest on which is a tax preference item for purposes of computing the ahernative n1inin1um tax of individuals and corporations under the Code) or in Authorized Investments al a yiel

Improvement Fund.

(a) The moneys in the Costs of Issuance Account of the Improvement Fund shall be disbursed by the Trustee pursuant lo a Certificate of the Administrator of the District, and any halance therein shall be transfen-ed by the Trustee to the Project Account as directed in writing by the Administrator of the District.

E-16 (b) The moneys in the Project Account of the Improvement Fund shall be applied exclusively to pay the Project Costs. Amounts for Project Costs shall be disbursed by the Trustee from the Project Account of Jhc Jn1provcrncn1 Purd as specified in a request for disbursctncnt of Project (~osts, suhstantially in the rorn1 of Exhibit ll to the Indenture, which must be submitted in connection with each requested disbursement. Each such request for disbun;cment shall be sufficient evidence to the Trustee of the facts stated therein anc.l the Trustee shall have no duty to confirn1 the accuracy of such facts.

(c) Upon receipt of a Certificate of the Administrator of the District stating that all or a specified portion of lhc an1ount ,-.e111aining in the Jmprovcn1ent Fund is no longer needed to pay Project Co:.-;ts, the Trustee shall transfer all or such specified portion, as applicable, of the moneys remaining on deposit in the Improvement Fund lo the Principal Account or Redemption Account of the Special Tax Fund or to the Surplus Fund, as directed in the Certificate, provided that in connection with any direction to transfer an1ounts to the Surplus Fund there shal have been delivered to the Trustee with such Ccrtil,cate an opinion of Bond Counsel to the effect lhal such tiansfer to the Surplus Fund witl not ac.lverscly affect lhe exclusion from gross income for federal incon1e tax )urposcs of interest on the Bonds or any Parity Bonds which were issued on a tax­ cxempt has is for federal income tax purposes. Amounts transferred to the Redemption Account of the Special Tax Fund shat! be used lo redeem Bonds.

1<:arnings Funcl. All earnings, except earnings on the Adrninistrative Expense Fund, the Project Account of the Improve nent Fune.I and the Rebate Fund which shall remain therein, on all Funds and Accounts arc to be placed in the Earnings Fund. Upon receipt of such earnings, the Trustee shall disburse fror11 the t:arning~ Fund earnings pursuant to a written direction of the District in the following order of priority:

(I) Earnings in excess of the Yield on the Bonds shall be transferred to the Rebate Fund pursuant to a v:ritten direction of the A

(2) To the Administrative Expense Account, the amount needed to pay the Administrative Expenses.

(3) To the Reserve Account, lhe amount required to bring the balance in such Account to the Reserve Requirement required to be on deposit therein.

(4) Any ren1aining balance to the Project Account of the Jn1provc1ncnt Fund until completion of the Project.

(5) Any remaining balance to the Special Tax Fune.I after completion of the Project.

Investments. Moneys held in any of the Funds, Accounts and Subaccounts under the Indenture shall be invested at the writtrn direction of the District in accordance with the limitations set forth below only in Authorized Investments which shall be deemed at all times to be a part of such Funds, Accounts and Subaccount&. Any loss resulting fron1 such Authorized Investments shall be credited or charged to the f<'und, Account or Subaccount from which such invcstrncnt was n1a

(a) Money:; in the Improvement Fund shall be invested in Authorized Investments which will by their terms mature, or n the case of an Investment Agreement arc available without penalty, as close as practicable to the dale lhe District estimates the moneys represented hy the particular invcstn1ent will be needed for withdrawal froru the In1proven1ent Fund. Notwithstanding anything in the Indenture to the contrary, amounts in the Improvement Fund three years after the Delivery Date for the Bonds shall he invested

E-17 by the District only in Authorized Investments the interest on which is excluded from gross income under Section 10.~ of the Code (other than bonds the interesl on which is a tax preference item for purposes of computing the alternative minimum tax of individuals and corporations under the Code) or in Authorized Investments at a yield not in excess of the yield on the issue of Bonds or Parity Bonds from which such proceeds were derived. un]ess in the opinion of Bond Counsel such restriction is not necessary to prevent int.crest on the Bonds or any Parity Bonds which \Vere issued on a tax-exempt basis for fe

(b) Moneys in the Interest Account, the Principal Account and the Redemption Account of the Special Tax Fund shall be invested only in Authorized Investments which will by their terms mature, or in the case of an Invcstn1ent Agreement are avai]able for withdrawal without penahy, on such dates so as lo ensure the payment of principal of, premium, if any, and interest on the Bonds and any Parity Bonds as the same become due.

(c) Monies in the Reserve Account of the Special Tax Fund may be invested only in Authorized Investments which, taken together, have a weighted average maturity not in excess of five years; provided that such amounts may be invested in an Investment Agreement to the later of the final maturity of the Bonds or any Parity Bonds so long as such amounts may be withdrawn at any time, without penalty, for application in accordance with the Indenture; and provided that no such Authorized Investment of amounts in the Reserve Account allocable to the Bonds or an issue of Parity Bonds shall mature later than the respective final maturity date of the Bonds or the issue of Parity Bonds, as applicable,

(d) Moneys in the Rebate Fund shall be invested only in Authorized Investments of the type described in clause (I) of the definition thereof which by their terms will mature, as nearly as practicable, on the dates such amounts arc needed to be paid to the United States Government pursuant to the Indenture or in Authorized Investments of the type desctibed in clause (7) of the definition thereof.

(e) In the absence of written investment directions from the District, the Trustee shall invest solely in Authorized Investments specified in clause (7) of the definition thereof.

Notwithstanding anything to the contrary contained in this section, an amount of interest received \Vith respect to any Authorized Investment equal to the amount of accrued mterest, if any, paid as part of the purchase price of such Authmized Investment shall be credited to the Fund or Account for the credit of which such Authorized Investment was acquired.

The Trustee shall sclL or present for redemption, any Authorized Investment whenever it may be necessary to do so in order to provide moneys to meet any payment or transfer to such Funds and Accounts or from such Funds and Accounts. For the purpose of determining at any given time the balance in any such Funds and Accounts, any such investments constituting a patt of such Funds and Accounts shall be valued at their cost. except that amounts in the Reserve Account shall be valued at the market value thereof at least semiannually on or before each Interest Payment Date. In making any valuations under the Indenture, the Tn1stee n1ay uti]ize such con1puterizcd securities pricing services as 111ay be available to it, inc1uding, without limitation, those available through its regular accounting system, and conclusively rely thereon. Notwithstanding anything in the Indenture to the contrary, the Trustee shall not be responsible for any loss frorn investrnents, sales or transfers un

The Tmstee may act as principal or agent in the making or disposing of any investment and shall be entitled to its customary fee for making such investment. The Trustee may sell at the best market price obtainable, or present for redemption, any Authorized Investment so purchased whenever it shall be necessary to provide moneys to meet any required payment. transfer, withdrawal or disbursement from the fund or account to which such Authorized Investment is credited, and, subject lo the provisions of the Indenture, the Trustee shall not be liable or responsible for any loss resulting from such investment. For investment

E-18 purposes, the Trustee may commingle the funds and accounts established under the Indenture, but shall account for each separately.

The District acknowledges that, to the extent regulations of the Comptroller of the Ctmency or other applicable regulatory ,ntity grant the District the right to receive brokerage confirmations of security transactions as they occur, the District specifically waives receipt of such confirmations to the extent permitted by law. The Tmstee will furnish the District monthly cash transaction statements which include detail for all in vestrr1cnt transactlons 111ade by the Trustee under the Indenture.

COVENANTS AND WARRANTY

Warranty. The DistJict shall preserve and protect the security pledged under the Indenture to the Bonds and any Parity B.mds against all claims and demands of all persons.

Covenants. So long as any of the Bonds or Parity Bonds issued under the Indenture are Outstanding and unpaid, the District makes the following covenants with the Bondowners under the provisions of the Act and the Indenture (to be performed by the District or its proper officers, agents or employees), which covenants are necessary and dcsir1blc to secure the Bonds and Parity Bonds and tend to make them n1orc rnarketab]c; provided, however, that said covenants do not require the District to expend any funds or n1oneys other than the Special Taxes and o her amounts deposited to the Special Tax Fund:

Punctual Payment; Against Encumbrances. The District covenants that it will receive all Special Taxes in trust for the Owners and will cause the deposit of all Special Taxes with the Trustee immediately upon their apportionment to the District, and the District shall have no beneficial right or interest in the amounts so deposited ,except as provided by the Indenture. All such Special Taxes shall be disbursed, allocated and applied s,Jlely to the uses and purposes set forth in the Indenture, and shall be accounted for separatc]y and apa1t frorn a11 other n1oney, funds, accounts or other resources of the District.

The District covenants that it will duly and punctually pay or cause to be paid the principal of and interest on every Bond rnd Parity Bond issued under the Indenture, together with the premium. if any, thereon on the date, at the place and in the manner set forth in the Bonds and the Parity Bonds and in accordance with the Indenture to the extent that Net Taxes and other amounts pledged under the Indenture arc available therefor, and that the payments into the Funds and Accounts created under the Indenture will be made, all in strict conformity with the terms of the Bonds, any Parity Bonds, and the Indenture, and that it will faithfully ohscrvc and perforn1 all of the conditions. covenants and rcquircn1cnts of the Indenture and all Supplen1ental Indentures and of the Bends and any Parity Bonds issued under the Indenture.

The District will not mortgage or otherwise encumber, pledge or place any charge upon any of the Net Taxes except as provided in the Indenture, and will not issue any obligation or security having a lien or charge upon the Net Taxes su11erior to or on a parity with the Bonds, other than Parity Bonds. Nothing in the Indenture shall prevent the District from issuing or incurring indebtedness which is payable from a pledge of Net Taxes which is subnrdinate in all respects to the pledge of Net Taxes to repay the Bonds and the Parity Bonds.

Lm of Special Tax. The Legislative Body covenants to levy the Special Tax in an amount sufficient, together with other amounts on deposit in the Special Tax Fund, to pay (I) the principal of and interest on the Bonds and any Parity Londs when due, (2) the Administrative Expenses, and (3) any amounts required to replenish the Reserve Account of the Special Tax Fund to the Reserve Requirement (the "Special Tax Requirement"). The District further covenants that it will take no actions that would discontinue or cause the discontinuance of the S['ecial Tax levy or the District's authority to levy the Special Tax until the earlier of Fiscal Year 2015-36 or the date on which no Rands or Parity Bonds are Outs1anding.

E-19 Commence Foreclosure Proceedings. Pursuant 10 Section 53356. 1 of the Act, the District covenants with and for the benefit of the Owners of the Bonds and any Parity Bonds that ii will commence appropriate judicial foreclosure proceedings against parcels with total Special Tax delinquencies in excess of $5,500 (not including interest and penalties thereon) by the October I following the close of each Fiscal Y car in which the last of such Special Taxes were due and will commence appropriate judicial foreclosure proceedings against all parcels with delinquent Special Taxes by the October I following the close of each Fiscal Year in which it receives Special Taxes in an amoulll which is less than 95% of the total SpeciaJ Taxes levied in such Fiscal Year, and diligenlly pursue to completion such foreclosure proceedings; provided, however, that, notwithstanding the foregoing, the District may elect to accept payment from a property owner of al least the enrolled amount but less than the full amount of the penalties, interest, costs and attorneys' fees related to a Special Tax delinquency, if permitted by law. Notwithstanding the foregoing, in certain instances the amount of a Special Tax delinquency on a particular parcel is so small that the cost of appropriate foreclosure proceedings will far exceed the Special Tax delinquency and in such cases foreclosure proceedings may be delayed by the District until there arc sufficient Special Tax delinquencies accrning to such parcel (including interest and penalties thereon) to warrant the foreclosure proceedings cost.

The District covenants that it will deposit the net proceeds of any foreclosure in the Special Tax Fund and will apply such proceeds remaining after the payment of Administrative Expenses to make current payments of principal and interest on the Bonds and any Parity Bonds, lo bring the amount on deposit in the Reserve Account up to the Reserve Requirement and to pay any delinquent installments of principal or interest due on the Bonds and any Parity Bonds.

Payment of Claims, The District will pay and discharge any and all lawful claims for labor. materials or supplies which, if unpaid, might become a lien or charge upon the Net Taxes or other funds in the Special Tax Fund (other than the Administrative Expense Account therein), or which might impair the security of the Bonds or any Parity Bonds then Outstanding; provided, however, that nothing in the Indenture shall require the District to make any such payments so long as the District in good faith shall contest the validity of any such claims.

Books and Accgunts. The District will keep proper books of records and accounts, separate from all other records and accounts of the District, in which complete and correct entries shall be made of all transactions relating to the Project, the levy of the Special Tax and the deposits to the SpcciaJ Tax Fund. Such books of records and accounts shall at all times during business hours be subject to the inspection of the Trustee or of the Owners of not less than 10% of the principal amount of the Bonds or the Owners of not less than I 0% of any issue of Parity Bonds then Outstanding or their representatives authorized in writing.

Federal Tax Covenants. Notwithstanding any other provision of the Indenture. absent an opinion of Bond Counsel that the exclusion from gross income of interest on the Bonds and any Parity Bonds issued on a tax-exempt basis for federal income tax purposes will not be adversely affected for federal income tax purposes, the District covenants to comply with all applicable requirements of the Code necessary to preserve such exclusion from gross income and specifically covenants, without limiting the generality of the foregoing, as follows:

(I) Private Activity. The District will take no action or refrain from taking any action or make any use of the proceeds of the Bonds or any Parity Bonds or of any other monies or property which would cause the Bonds or any Parity Bonds issued on a tax-exempt basis for federal income tax purposes to be "private activity bonds" within the meaning of Section 141 of the Code.

(2) Arbitra_g_<;. The District will make no use of the proceeds of the Bonds or any Parity Bonds or of any other amounts or property, regardless of the source, or take any action or refrain from taking any action which will cause the Bonds or any Parity Bonds issued on a tax-exempt basis for federal income tax purposes to be "arbitrage bonds" within the meaning of Section 148 of the Code.

E-20 (3) Fed.era] Guaranty. The District will make no use of the proceeds of the Bonds or any Parity Bonds or lake or omit to take any action that would cause the Bonds or any Parity Bonds issued on a tax-exernpt t·asis for federal incon1e tax purposes to he "fcdera11y guaranteed" within the meaning of Section 149(b) of the Code.

(4) · nfornu!tion ~cporting. The District will take or cause to be taken all necessary action to comply with the informational reporting requirement of Section l49(e) of the Code.

(5) •kdge Bonds. The District will make no use of the proceeds of the Bonds or any Parity Bonds or rny other amounts or property, regardless of the source, or take any action or refrain from taking any action that would cause the Bonds or any Pa1ity Bonds issued on a tax-exempt basis for federal incom.= tax purposes to be considered "hedge bonds" within the rncaning of Section 149(g) of the (:ode unle:;s the District takes all necessary action to assure cornpliance with the requircn1cnts of Section J 49(g: of the Code to maintain the exclusion from gross income for federal income tax purposes of interest on the Bonds and any applicable Parity Bonds.

(6) vliscellancous. The District will take no action or refrain from taking any action inconsistent with its expectations stated in the Tax Certificate executed on the Delivery Date hy the District in connc ction with the Bond~ and any issue of Parity Bonds and will comply wi1h the covenants and requirements slated therein and incorporated by reference in the Indenture.

(7) ,Jther Tax Exempt Issues. The District will not use proceeds of other tax exempt securities to redeem any Bonds or Parity Bonds without first obtaining the written opinion of Bond Counsel that doing so will not impair the exclusion from gross income for federal income tax purposes of interest on the Bonds and any Parity Bonds issued on a tax·cxempt basis.

(8) ~ubseguent Opinions. If the District obtains a subsequent opinion of Bond Counsel other than Stradling Yocea Carlson & Rauth, a Professional Corporation ("SYCR"), where such opinion is required in connection with a change or an1cndment to the Indenture or the procedures set forth in the Tax Certificate, it will obtain an opinion suhstantially to the effect originally delivered by SYCR that intere;t on the Bonds is excluded from gross income for federal income tax purposes.

!<.eduction of M axirrmm Spectal Taxes. The District finds and determines that, historically, delinquencies in the payrrent of special taxes authorized pursuant to the Act in community facilities districts in Southern C'a1ifornia have fron1 tin1c to tin1e been at levels requiring lhe levy of special taxes at the n1axi111um authorized rates in order 10 make timely payn1ent of principal of and interest on the outstanding indebtedness of such cornmunity facilities districts. For this reason, the District dcterrnines that a reduction in the 111axi111un1 Special Tax rates authori;:ed to be levied on parcels in the District below the levels provided in the Indenture would interfere with the timely retirement of the Bonds and Parity Bonds. The District determines it to be necessary in order to prefierve the security for the Bonds and Parity Bonds lo covenant, and, to the n1axirnu1n extent that the law permit:; it to do so, the District does covenant, that it shall not initiate proceedings to reduce the rnaxirnurn Special T lx ralcs ror the District, unless, in connection therewith, the District receives a certificate from one or more Independent Financial Consultants which, when taken together, certify that (i) such changes do not reduce the maximum Special Taxes that may be levied in each year on property within the District to an amount <,vhich is less than 110% of the Annual Debt Service due in each corresponding future Bond Year with respect to the Bonds and Parity Bonds Outstanding as of the date of such proposed reduction; (ii) based on the current ccvclopment plan for parcels within the District, do not reduce the maximum Special Taxes expected to be levied on Developed Property upon the buildout of such parcels in each year aft.er buildout to an amount wbich is less than 110% of the Annual Debt Service due in each corresponding future Bond Year with respect to the Bonds and Parity Bonds Outstanding as of the date of such proposed reduction; and (iii) the District is no delinquent in the payment of the principal of or interest on the Bonds or any Parity Bonds. !'or purposes of estimating Administrati vc Expenses for the foregoing calculation, the Independent

E-21 Financial Consultants shall compute the Administrative Expenses for the current Fiscal Year and escalate that amount by two percent (2%) in each subsequent Fiscal Year.

~ovcnan,uo Defend. The District covenants that, in the event that any initiative is adopted by the qualified electors in the District which purports to reduce the maximum Special Tax below the levels specified above or to Jimlt the power of the District to levy the Spccla1 Taxes for the purposes set forth ahovc, it will commence and pursue legal action in order to preserve its ability to cornply with such covenants.

Limitation.. on Right _!Q_ Tender l_l_!1nds. The District covenants that it will not adopt any policy pursuant to Section 53341. l of the Act pcmtitting the tender of Bonds or Parity Bonds in full payment or partial payment of any Special Taxes unless the District shall have first received a certificate from an Independent Financial Consultant that the acceptance of such a tender will not result in the District having insufficient Special Tax revenues to pay the principal of and interest on the Bonds and Parity Bonds when due.

Continuing Disclosure. The District covenants to comply with the terms of the Continuing Disclosure Certificate and with the terms of any agreement executed hy the District with respect to any Parity Bonds to assist the Underwriter in complying with Ruic 15(c)2-12 adopted by the Securities and Exchange Commission.

Furthe.c Assurances. The District shall make, execute and deliver any and all such further agreements, instruments and assurances as may be reasonably necessary or proper to carry out the intention or to facilitate the performance of this Resolution and for the better assuring and confirming unto the Owners of the Bonds and any Parity Bonds of the rights and hcnefits provided in this Resolution.

AMENDMENTS TO INDENTURE

Supplemental Indentures or Orders Not Requiring Bondowner Consent. The District may from time to time, and at any time, without notice to or consent of any of the Bondowncrs, adopt Supplemental Indentures for any of the following purposes:

(a) to cure any ambiguity, to correct or supplement any provisions in the Indenture which may be inconsistent with any other provision in the Jn

(b) to add to the covenants and agreements of and the limitations and the restrictions upon the District contained in the Indenture, other covenants, agreements, limitations and restrictions to be observed by the District which arc not contrary to or inconsistent with the Indenture as theretofore in effect or which further secure Bond or Parity Bond payments;

(c) to provide for the issuance of any Parity Bonds, and to provide the terms and conditions under which such Parity Bonds may be issued, subject to and in accordance with the provisions of the Indenture;

(d) to modify, amend or supplement the Indenture in such manner as to permit the qualification of the Indenture under the Trust Indenture Act of 1939, as amended, or any similar federal statute hereafter in effect, or to comply with the Code or regulations issued thereunder, and to add such other terms, conditions and provisions as may be permitted by said act or similar federal statute, and which shall not materially adversely affect the interests of the Owners of the Bonds or any Parity Bonds then Outstanding;

(e) to modify, alter or amend the RMA in any manner, so long as the Trustee receives a certificate of an Independent Financial Consultant stating that (i) such changes do not reduce the maximum Special Taxes that may be levied in each year on property within the District to an amount which is less than 110%. of the Annual Debt Service due in each corresponding future Bond Year with respect to the Bonds and Parity Bonds Outstanding as of the date of such amendment; and (ii) based on the current development plan for

E-22 parcels within the District, do not reduce the maximum Special Taxes expected to be levied on Developed Prope11y upon the buildout of such parcels in each year aller buildout to an amount which is Jess than 110% of the Annual Debt Service due in each corresponding future Bond Year with respect to the Bonds and Parity Bonds Outstanding as of the date of such amendment; or

(f) to :nodify, alter, amend or supplement the Indenture in any other respect which is not 111atcria11y adverse tc, the Bondowncrs.

Supplemental Indentures or Orders Requiring Bondowner Consent. Exclusive of the Supp]emcntal lndcn1 ures not requiring Owner consent, the Owners of not less than a majority in aggregate principal amount of, he Bonds and Parity Bonds Outstanding shall have the right to consent to and approve the adoption by the District of such Supplemental Indentures as shall be deemed necessary or desirable by the District for the purp,,se of waiving, modifying, altering, amending, adding to or rescinding, in any particular, any of the tcnns or provisions contained in the lndenture; provided, however, that nothing in the Indenture shall pcnnit, or be construed as permitting, (a) an extension of the maturity date of the principal, or the payment date of in:erest on, any Bond or Parity Bond; (b) a reduction in the principal amount of, or redemption premium on, any Bond or Parity Bond or the rate of interest thereon: (c) a preference or priority of any Bond or Parity Bond over any other Bond or Parity Bond: or (d) a reduction in the aggregate principal amount of the Bond, and Parity Bonds the Owners of which arc required to consent to such Supplemental Indenture, without the consent of the Owners of all Bonds and Parity Bonds then Outstanding.

If at any time the District shall desire to adopt a Supplemental Indenture, which pursuant to the terms of the Indenture shal I require the consent of the Bondowners, the District shall so notify the Trnstee and shall deliver to the Trustee a copy of the proposed Supplemental Indenture. The Trustee shall, at the expense of the District, cause notice of the proposed Supplemental Indenture to be mailed, by first class mail, postage prepaid, to all Bondowners at their addresses as they appear in the Bond Register. Such notice shall briefly set forth the nature of the proposed Supplemental Indenture and shall state that a copy thereof is on file at the office of the Trustee for inspection by all Bondowners. The failure of any Bondowners to receive such notice shall not affect the validity of such Supplemental Indenture when consented to and approved by the Owners of not less than a majority in aggregate principal amount of the Bonds and Parity Bonds Outstanding as required by the Indenture. Whenever at any time within one year after the date of the first mai1ing of such notice, the Trustee shall receive an instrnment or instruments purporting to be executed by the Owners of not less than a majority in aggregate principal amount of the Bonds and Parity Bonds Outstanding, which instrument or instruments shall refer to the proposed Supplemental Indenture described in such notice, and shall specifically consent to and approve the adoption thereof by the District substantially in the form of the copy referred to in such notice as on file with the Trustee, such proposed SuppJernental Indenture, when duly adopted by the Di~trict, shall thereafter become a part of the proceedings for the issuance of the Bonds and any Parity Bonds. In determining whether the Owners of a majority of the aggregate principal amount of the Bonds and Parity Bonds have consented to the adoption of any Supplemental Indenture, Bonds or Parity Bonds which are owned by the District or by any person directly or indirectly controlling or controlled by or under the direct or indirect common control with tlie District, shall be disregarded and shall be treated as though they were not Outstanding for the purpose of any such determination.

Upon tl1e adoption of any Supplemental Indenture and the receipt of consent to any such Supplemental Indenture from the Owners of not less than a majority in aggregate principal amount of the Outstanding Bonds and Parity Bonds in instances where such consent is required pursuant to the provisions of the Indenture, the Indenture shall be, and shall be deemed to be, modified and amended in accordance therewith, and the respective rights, duties and obligations under the Indenture of the District and all Owners of Outstanding Bonds and Parity Bonds shall thereafter be determined, exercised and enforced under the Indenture, subject in all respects to such modifications and amendments.

Notation of Bonds or Parity Bonds; Delivery of Amended Bonds or Parity Bonds. After the effective date of any ;iction taken as provided in the Indenture, the District may dctennine that the Bonds or

E-23 any Parity Bonds may bear a notation, by endorsement in fom1 approved by the District, as to such action, and in that case upon demand of the Owner of any Outstanding Bond or Parity Bond at such effective date and presentation of his Bond or Parity Bond for the purpose al the office of the Trustee or at such additional offices as the Trustee may select and designate for that purpose, a suitable notation as lo such action shall be made on such Bonds or Parity Bonds. If the District shall so determine, new Bonds or Parity Bonds so modified as, in the opinion of the District, shall be necessary to confmm to such action shall be prepared and executed, and in that case upon demand of the Owner of any Outstanding Bond or Parity Bond at such effective date such new Bonds or Parity Bonds shall be exchanged at the office of the Tmstcc or at such additional offices as the Trustee may select and designate for that purpose, without cost to each Owner of Outstanding Bonds or Parity Bonds, upon surrender of such Outstanding Bonds or Parity Bonds.

TRUSTEE

Trustee. The Bank of New York Trust Company, N.A. shall be the Trustee for the Bonds and any Parity Bonds unless and until another Trustee is appointed by the District. The Trustee represents that it has a combined capital (exclusive of borrowed capital) and surplus of at least $75,000,000. The District may, at any time, appoint a successor Trustee satisfying the requirements of the Indenture for the purpose of receiving all money which the District is required to deposit with the Trustee under the Indenture and to allocate, use and apply the same as provided in the Indenture.

Removal of Trustee. The District may at any time at its sole discretion remove the Trustee initially appointed, and any successor thereto, by delivering to the Trustee a written notice of its decision to remove the Trustee and may appoint a successor or successors thereto; provided that any such successor shall be a bank, association or trust company having a combined capital (exclusive of borro\vcd capital) and surplus of at least $75,000,000, and subject to supervision or examination hy federal or state authority. Any removal shall become effective only upon acceptance of appointment by the successor Trustee. If any bank, association or trust company appointed as a successor publishes a report of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority ahove referred to. then for the purposes of the Indenture the combined capital and surplus of such bank, association or trust company shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. Any removal of the Trustee and appointment of a successor Trustee shall become effective only upon acceptance of appointment by the successor Trustee and notice being sent by the successor Trustee lo the Bondowners of the successor Trustee's identity and address.

Resignation of Trustee. The Trustee may at any time resign by giving written notice to the District and by giving to the Owners notice of such resignation, which notice shall be mailed to the Owners at their addresses appearing in the registration books in the office of the Trustee. Upon receiving such notice of resignation, the District shall promptly appoint a successor Trustee satisfying the criteria above by an instrument in writing. Any resignation or ren1oval of the Trustee and appointment of a successor Trustee sha11 become effective only upon acceptance of appointment hy the successor Trustee.

If no successor Trustee shall have been appointed and have accepted appointment within rorty-five (45) days of giving notice of removal or notice of resignation as aforesaid, the resigning Trustee or any Owner (on behalf of itself and all other Owners), may petition any court of competent jurisdiction for the appointment of a successor Trustee, and such court may thereupon, after such notice (if any) as it may deem proper. appoint such successor Trustee.

EVENTS OF DEFAULT; REMEDIES

Events of Default. Any one or more of the following events shall constitute an "Event of Default":

E-24 (a) default in the due and punctual payment of the principal of or redemption premium, if any, on any Bond or Parity Fond when and as the same shall become due and payable, whether at maturity as therein expressed, by declaration or otherwise;

(b) default in the due and punctual payment of the interest on any Bond or Parity Bond when and as the same shall bec,,me due and payable; or

(c) exec pt as described in (a) or (b), default shall be made by the District in the observance of any of the agreements, c:mditions or covenants on its part contained in the Indenture, the Bonds or any Parity Bonds, and such default shall have continued for a period of 30 days after the District shall have been given notice in writing of ,,uch default by the Trustee or the Owners of 25% in aggregate principal amount of the Outstanding Bonds and Parity Bonds.

The Trustee agrees to give notice to the Owners as soon as practicable upon the occurrence of an Event of Default under (a) or (b) above and within 30 days of the Trustee's knowledge of an event of default under (e) above.

Remedies ol' Owners. Upon the occurrence of an Event of Default, the Trustee may pursue any availab]c rcn1cdy at h1w or in equity to enforce the payn1ent of the principal of. premiun1, if any, and interest on the Outstanding Bonds and Parity Bonds, and to enforce any rights of the Trustee under or with respect to the Indenture, including:

(a) by mandamus or other suit or proceeding at law or in equity to enforce his rights against the District and any of tho members, officers and employees of the District, and to compel the District or any such members, officers or employees to perform and carry out their duties under the Act and their agreements with the Owners as provid :d in the Indenture:

(b) by suit in equity to enjoin any actions orthings which are unlawful or violate the rights of the Owners: or

(c) by a suit in equity to require the District and its members, officers and employees to account as the trustee of an express trust.

If an Event cf Default shall have occurred and be continuing and if requested so to do by the Owners of at least twenty-fiv,: percent (25Ck)) jn aggregate principal a1nount of Outstanding Bonds and Parily Bonds and if indemnified to its satisfaction, the Trustee shall be obligated lo exercise such one or more of the rights and powers conferred by the lndenturc, as the Trustee, being advised by counsel, shall decn1 most expedient in the interests of the Ovmers of the Bonds and Parity Bonds.

No remedy conferred upon or reserved to the Trustee or to the Owners is intended to be exclusive of any other remedy. E.vcry such remedy shall be cumulative and shall be in addition to every other remedy given under lhe Inderturc or now or hereafter existing, at Jaw or In equity or by statute or otherwise, and may be exercised without exhausting and without regard to any other remedy conferred by the Act or any other law.

Application of Revenues and Other Funds After Default. All amounts received by the Trustee pursuant to any right given or action taken by the Trustee under the provisions of the Indenture relating to the Bonds and Parity Bonds shall be applied by the Trustee in the following order upon presentation of the several Bonds and Parity Bonds:

Firs! to the payment of the fees, costs and expenses of the Trustee in declaring such Event of Default and in carrying out the provisions of the Indenture, including reasonable compensation to its agents, attorreys and counsel, and to the payment of all other outstanding fees and expenses of the Trustee; and

E-25 Second, to the payment of the whole amount of interest on and principal of the Bonds and Parity Bonds then due and unpaid, with interest on overdue installments of principal and interest to the extent permitted by law at the net effective rate of interest then borne by the Outstanding Bonds anu Parity Bonds; provided, however, that in the event such amounts shall be insufficient to pay in full the full amount of such interest and principal, then such amounts shall be applied in the following order of priority:

(a) first to the payment of all installments of interest on the Bonds and Parity Bonds then due and unpaid on a pro rata basis based on the total amount then due and owing;

(b) second, to the payment of all installments of principal, including Sinking Fund Payments, of the Bonds and Parity Bonds then due and unpaid on a pro rata basis based on the total an1ount then due and o\ving; and

(cl third, to the payment of interest on overdue installments of principal and interest on the Bonds and Parity Bonds on a pro rala basis based on the tota1 an1ount then due and owing.

Power of Trustee to Control Proceedings. In the event that the Trustee, upon the happening of an Event of Default, shall have taken any action. by judicial proceedings or otherwise, pursuant to its duties under the lnuenture, whether upon its own discretion or upon the request of the Owners of twenty-five percent (25%) in aggregate principal amount of the Bonds and Parity Bonds then Outstanding, it shall have full power, in the exercise of its discretion for the best interests of the Owners of the Bonds and Parity Bonds, wilh respect to the continuance, discontinuance, withdrawal, compromise, settlement or other disposal of such action; provided, ho\\·evcr, that the Trustee shall not, unless there no longer continues an Event of Default, discontinue, withdraw, compron1ise or settle, or other\.vise dispose of any litigation pending at law or in equity, if at the tin1e there has been filed with it a written request signed by the Owners of a majority in aggregate principal amount of the Outstanding Bonds and Parity Bonds under the Indenture opposing such discontinuance, v.,ithdrawal. con1pron1ise. settlement or other such litigation. Any suit. action or proceeding which any Owner of Bonds or Parity Bonds shall have the right to bring to enforce any right or remedy under the Indenture may be brought by the Trustee for the equal benefit and protection of all Owners of Bonds and Parity Bonds similarly situated and the Trustee is appointeu (and the successive respective Owners of the Bonds and Parity Bonds, by taking and holding the same, shall he conclusively deemed so to have appointed it) the true and lawful attorney in [act of the respective Owners of the Bonds and Parity Bonds for the purposes of bringing any such suit, action or proceeding and to do and pe1form any and all acts anu things for and on behalf of the respective Owners of the Bonds and Parity Bonds as a class or classes, as may be necessary or advisable in the opinion of the Trustee as such attorney-in-fact.

Appointment of Receivers. Upon the occun-cncc of an Event of Default, and upon the filing of a suit or other commencement or judicial proceedings to enforce the rights of the Trustee and of the Owners of the Bonds and Parity Bonds under the Indenture, the Trustee shall be entitled, as a matter of right. to the appointment of a receiver or receivers of the Net Taxes and other amounts pledged under the Indenture. pending such proceedings, with such powers as the court n1aking such appointment shall confer.

Non-Waiver. Nothing in the Indenture, or in the Bonds or the Parity Bonds, shall affect or impair the oh ligation of the District. which is absolute and unconditional. to pay the interest on and principal of the Bonds and Parity Bonds to the respective Owners of the Bonds and Parity Bonds at the respective dates of maturity. out of the Net Taxes and other moneys pledged for such payment.

A waiver of any default or breach of duty or contract by the Trustee or any Owners shall not affect any subsequent default or breach of duty or contract, or impair any rights or remedies on any such subsequent default or breach. No delay or omission of the Trustee or any Owner of any of the Bonds or Parity Bonds to exercise any right or power accruing upon any default sha11 in1pair any such right or power or shall be construed to he a waiver of any such default or an acquiescence therein; and every power and rctncdy

E-26 conferred upon the Trnstee or the Owners by the Act or by the Indenture may be enforced and exercised from time to time and as cften as shall be deemed expedient by the Trustee or the Owners, as the case may be.

Limitatiom on Rights and Remedies of Owners. No Owner of any Bond or Parity Bond shall have the right to institute any suit, action or proceeding at law or in equity, for any remedy under or upon the Indenture, unless (a) such Owner shall have previously given to the Trustee written notice of the occurrence of an Event of Default (b) the Owners of a majority in aggregate principal amount of all the Bonds and Parity Bonds then Outstanding shall have made written request upon the Trnstce to exercise the powers granted in Indenture or to instit1te such action, suit or proceeding in its own name; (c) said Owners shall have tendered to the Trustee indcrnnity reasonably acccptab]c to the Trustee against the costs, expenses and liabilities to be incurred in compliance with such request; and (d) the Trustee shall have refused or omitted to comply with such request for a p,,riod of sixty (60) days after such written request shall have been received by, and said tender of indemnity ,.hall have been made to, the Trustee.

Such notification, request, tender of indemnity and refusal or omission are declared, in every case, to be conditions prccc,;ent to the exercise by any Owner of Bonds and Parity Bonds of any remedy under tbe Indenture; it being understood and intended that no one or more Owners of Bonds and Parity Bonds shall have any right in any manner whatever by his or their action to enforce any right under the Indenture, except in the manner provided in the Indenture that all proceedings at law or in equity to enforce any provision of the Indenture shall be instituted, had and maintained in the manner provided in the Indenture for the equal benefit of all Owners of the

The right 01· any Owner of any Bond and Parity Bond to receive payment of the principal of and interest and premium (if any) on such Bond and Parity Bond as provided in the Indenture to institute suit for the enforcement of Lny such payment, shall not be impaired or affected without the w1itten consent of such Owner, notwithstanding the foregoing provisions any other provision of the Indenture.

Terminatio1 of Proceedings. In case the Trustee shall have proceeded to enforce any right under the Indenture by the app,intment of a receiver or otherwise, and such proceedings shall have been discontinued or abandoned for any reason, or shall have been determined adversely, then and in every such case, the District, the Trnstee and the Owners shall be restored to their former positions and rights under the Indenture, respectively, with rqard to the property subject to the Indenture, and all rights, remedies and powers of the Trustee sha11 continu;:: as if no such proceedings had hcen taken.

DEFEASANCE AND PARITY BONDS

Defeasance. If the District shall pay or cause to be paid, or there shall otherwise he paid, to the Owner of an Outstanding Bond or Parity Bond the interest due thereon and the principal thereof, at the times and in the manner stipulated in the Indenture or any Supplemental Indenture, then the Owner of such Bond or Parity Bond shall cease to be entitled to the pledge of Net Taxes, and, other than as set forth below, all covenants, agreements and other obligations of the District to the Owner of such Bond or Parity Bond under the Indenture and any Supplemental Indenture relating to such Parity Bond shall thereupon cease, terminate and become void and be discharged and satisfied. In the event of a defeasance of all Outstanding Bonds and Parity Bonds, the Trnstee shall execute and deliver to the District all such instrnments as may be desirable to evidence such discharge and satisfaction, and the Trustee shall pay over or deliver to the District's general fund all money or sernrities held hy it pursuant to the Indenture which arc not required for the payment of the principal of, premium, if any, and interest due on such Bonds and Parity Bonds.

Any Outstanding Bond or Parity Bond shall be deemed to have been paid within the meaning expressed in the first paragraph above if such Bond or Parity Bond is paid in any one or more of the following ways:

E-27 (a) by paying or causing to be paid the principal of, premium, if any, and interest on such Bond or Parity Bond. as and when the same become due and payable:

(h) by depositing with the Trustee, in trust, at or before maturity, money which, together with the amounts then on deposit in the Special Tax Fund (exclusive of the Administrative Expense Account) and the Ea111ings Fund and availahlc for such purpose, is fully sufficient to pay the principal of. premium, if any, and interest on such Bond or Parity Bond, as and when the same shall become due and payable: or

(c) by depositing with the Trustee or another escrow bank appointed by the District, in trust, Federal Secmities, in which the District may lawfully invest its money, in such amount as will be sufficient, together with the interest to accrue thereon and moneys then on deposit in the Special Tax Fund (exclusive of the Adrninistrative Expense i\ccount) and the Earnings Fund and available ror such purpose, together with the interest to accrue thereon, to pay and discharge the principal of. premium, if any, and interest on such Bond or Parity Bond, as and when the same shall become due and payable.

If paid as provided above, then, at the election of the District, and notwithstanding that any Outstanding Bonds and Parity Bonds shall not have been surrendere

Upon a defcasance, the Trustee, upon request of the District, shall release the rights of the Owners of such Bonds and Parity Bonds which have been defeased under the Indenture and any Supplemental Indenture and execute and deliver to the I)istrict a11 such instruments as 1nay be desirable to evidence such release, discharge and satisfaction. In the case or a defcasance of all Outstanding Bonds and Parity Bonds. the Trustee shall pay over or deliver to the District any funds held by the Trustee at the time of a defeasance, which arc not required for the purpose of paying and discharging the principal or or interest on the Bonds and Parity Bonds when due. The Trnstee shall, at the written direction of the District, mail, first class. postage prepaid, a notice to the Bondowncrs whose Bonds or Parity Bonds have been defcased, in the form directed by the District. staling that the dcfcasancc has occurred.

Conditions for the Issuance of Parity Bonds and Other Additional Indebtedness. The District may at any time alter the issuance and delivery of the Bonds issue Parity Bonds payable from the Net Taxes and other amounts deposited in the Special Tax Fund (other than in the Administrative Expense Account therein) and secured by a lien and charge upon such amounts equal to the lien and charge securing the Outstanding Bonds and any other Parity Bonds theretofore issued under the Indenture or under any Supplemental Indenture for the purpose of refunding all or a portion of the Bonds or any Parity Bonds then Outstanding. The District shall not issue Parity Bonds for the purposes of funding additional Project Costs. Parity Bonds which may only be issued to effect a partial refunding may be issued subject to the following additional specific conditions, which are made conditions precedent to the issuance of any such Parity Bonds:

E-28 (a) The District shall he in compliance with all covenants set forth in the Indenture and any Supplemental Indenture then in effect and a certificate of the District to that effect shall have been filed with the Trustee; provided, however, that Parity Bonds may be issued notwithstanding that the District is not in compliance with all such covenants so long as immediately following the issuance of such Parity Bonds the District will be in rn npliance with all such covenants.

(h) The issuance of such Parity Bonds shall have been duly authorized pursuant to the Act and all applicable laws, and lhe issuance of such Parity Bonds shall have been provided for by a Supplemental Indenture duly adopted by the District which shall specify the following:

(I) the purpose for which such Parity Bonds arc to be issued and the fund or funds into which the p ·oceeds thereof arc to be deposited, including a provision requiring the proceeds of such Parity Bonds to be applied solely for the purpose of refunding any Outstanding Bonds or Parity Bonds, inclt:ding payment of all costs and the funding of all reserves incidental to or connected with such refunding;

(2) the authorized principal amount of such Parity Bnnds;

(3) the date and the maturity date or dates of such Parity Bonds; provided that (i) each maturity dato shall fall on an September L (ii) all such Parity Bonds of like maturity shall be identical in all respec.s, except as to number, and (iii) fixed serial maturities or Sinking Fund Payments, or any combination thereof. shall he established to provide for the retirement of a11 such Parity Bonds on or before their ·espective maturity dates;

(4) the description of the Parity Bonds, the place of payment thereof and the procedure for execution and authentication;

(5) the denominations and method of numbering of such Parity Bonds;

(6) the amount and due date of each mandatory Sinking Fund Payment, if any, for such Parity Bond,:;

(7) the amount, if any, to be deposited from the proceeds of such Parity Bonds in the Reserve Account of the Specia] Tax Fund to increase the amount therein to the Reserve Requirement;

(8) the form of such Parity Bonds; and

(9) such other provisions as are necessary or appropriate an

(c) The District shall have received the following documents or money or securities, all of such documents dated or certified, as the case may be, as of the date of delivery of such Parity Bonds by the Trustee (unless the Trnstee sr:all accept any of such documents bearing a prior date):

( l) a certified copy of the Supplemental Indenture authorizing the issuance of such Parity Bond,;

(2) a written request of the District as to the delivery of such Parity Bonds;

(3) an opinion of Bond Counsel and/or general counsel to the District to the effect that (i) the Dishict has the right and power under the Act to adopt the Indenture and the Supplemental Indentures relating to such Parity Bonds, and the Indenture and all such Supplemental Indentures have been duly and lawfully adopted by the District, arc in full force and effect and are valid and binding

E-29 upon the District and enforceah]e in accordance with their lcrn1s (except as cnforcernent rnay be lin1ited by bankruptcy, insolvency, reorganization and other sin1i]ar lavvs relating to the enforcerr1ent of creditors' rights); (ii) the Indenture creates the valid pledge which it purports to create of the Net Taxes and other amounts as provided in the Indenture, subject to the application thereof to the purposes and on the conditions pern1itted by the Indenture; and (lii) such Parity Bonds are valid and binding limited obligations of the District, enforceable in accordance with their terms (except as enforcement may be limited by bankruptcy, insolvency, reorganization and other similar laws relating to the enforcement of creditors' rights) and the terms of the Indenture and all Supplemental Indentures thereto and entitled to the hcnefils of the Indenture and all such Supp]en1cntal Indentures, and such Parity Bonds have been duly and validly authorized and issued in accordance with the Act (or other applicable laws) and the Indenture and all such Supplemental Indentures; and a further opinion of Bond Counsel to the effect that., assun1ing cotnpliance by the District with certain tax covenants, the issuance of the Parity Bonds will not adversely affect the exclusion fron1 gross incon1c for federal income tax purposes of interest on the Bonds and any Parity Bonds theretofore issued on a tax-exempt basis, or lhc cxen1ption fron1 State of California personal incorne taxation of interest on any Outstanding Bonds and Parity Bonds theretofore issued;

(4) a certificate of the District containing such staten1ents as 111ay be reasonably necessary to show cornpliancc with the requiren1ents of the Indenture:

(5) where the Parity Bonds arc issued to refund the Bonds or other Parity Bonds, a ccttificatc of an In

(6) such further docun1ents, n1oncy and securities as arc required by the provisions of the Indenture and the Supplemental Indenture providing for the issuance of such Parity Bonds.

MISCELLANEOUS

Cancellation of Bonds and Parity Bonds. All Bonds and Parity Bonds surrendered to the Trustee for payment upon maturity or for redemption shall be upon payment therefor, and any Bond or Parity Bond purchased by the District as authorized in the Indenture and delivered to the Trustee for such purpose shall be, cancelled forthwith and shall not be reissued. The Trustee shall destroy such Bonds and Parity Bonds, as provided by law, and, upon request of the District, furnish to the District a certificate of such destruction.

Execution of Documents and Proof of Ownership. Any request, direction. consent, revocation of consent, or other instrument in writing required or permitted by the Indenture lo be signed or executed by Bondowncrs n1ay be in any nurnhcr of concurrent instrun1cnts of sin1ilar tenor may be signed or executed by such Owners ln person or by their attorneys appointed by an inslrun1ent ln ~Titing for that purpose, or by the bank. trust con1pany or other depository for such Bonds. Proor of the execution of any such instrun1cnt or of any instrument appointing any such attorney, and of the ownership of Bonds or Parity Bonds shall he sufficient for the purposes of the Indenture (except as otherwise provided), if made in the following manner:

(a) The fact and date of the execution by any Owner or his or her attorney of any such instrument and of any inst111tnent appointing any such attorney, n1ay be proved by a signature guarantee of any hank or trust company located within the United States of America. Where any such instrument is executed by an officer of a corporation or association or a 1nc1nbcr of a partnership on behalf of such corporation, association or parlnership, such signature guarantee shall also constitute sufficient proof of his authority.

(b) As to any Bond or Parity Bond, the person in whose name the same shall be registered in the Bond Register shall he deemed and regarded as the absolute owner thereof for all purposes, and payment of or

E-30 on account of the prir,cipal of any such Bond or Parity Bond, and the interest thereon, shall he made only to or upon the order of the registered Owner thereof or his or her legal representative. All such payments shall be valid and effectual to satisfy and discharge the liability upon such Bond or Parity Bond and the interest thereon to the extent of the sum or sums to be paid. Neither the District nor the Trustee shall be affected by any notice to the contrary.

Nothing contained in the Indenture shall be construed as limiting the Trustee or the District to such proof, it being intended that the Trustee or the District may accept any other evidence of the matters stated which the Trustee or the District may deem sufficient. Any request or consent of the Owner of any Bond or Parity Bond shall hind every future Owner of the same Bond or Parity Bond in respect of anything done or suffered to he done b~· the Trustee or the District in pursuance of such request or consent.

Unclaimed Moneys. Anything in the Indenture lo the contrary notwithstanding, any money held by the Trustee in trust for the payment and discharge of any of the Outstanding Bonds and Parity Bonds which ren1ain unclain1ed for 18 rnonths after the date when such Outstanding Bonds or Parity Bonds have becon1e due and payable, if such money was held by the Trustee at such date, or for two years after the date of deposit of such money if deposited with the Trustee after the date when such Outstanding Bonds or Parity Bonds become due and payable, shall be repaid by the Trustee to the District, as its absolute property and free from t1ust, and the Trustee shall thereupon be released and discharged with respect thereto and the Owners shall look only to the Distnet for the payment of such Outstanding Bonds or Parity Bonds; provided, however, that, before hcing requirec to make any such payment to the District, the Trustee, at the expense of the District, shall cause to he ma:led by first-class mail, postage prepaid, lo the registered Owners of such Outstanding Bonds or Parity Bones at their addresses as they appear on the registration books of the Trustee a notice that said money remains unclaimed and that. after a date named in said notice, which date shall not be less than 30 days after the date of Lhe mailing of such notice, the balance of such money then unclaimed will be returned lo the District.

Provisions C onstitntc Contract. The provisions of the Indenture shall constitute a contract between the District and the B ,ndowners and the provisions of the Indenture shall be construed in accordance with the laws of the State of California.

In case any suit, action or proceeding to enforce any right or exercise any remedy shall be brought or taken and, should saic suit, action or proceeding be abandoned, or be determined adversely to the Bondowners or the Trustee, then tie District, the Trustee and the Bondowners shall be restored to their former positions, rights and remedies a~ if such suil, action or proceeding had not been brought or taken.

After the issuance and delivery of the Bonds the Indenture shall be irrepealable, but shall be subject to n1odifications to the e:{tent and in the n1anncr provided in the Indenture, but to no greater extent and in no other manner.

J<'uture Contracts. Nothing in the Indenture shall he deemed to restrict or prohibit the District from making contracts or creating bonded or other indebtedness payable from a pledge of the Net Taxes which is subordinate to the pledge under the Indenture, or which is payable from the general fund of the District or from taxes or any source other than the Net Taxes and other amounts pledged under the Indenture.

Further Assurances. The District will adopt, make, execute and deliver any and all such further resolutions, instruments and assurances as may be reasonably necessary or proper to carry out the intention or to facilitate the perforrnance of the Indenture, and for the better assuring and confirrning unto the Owners of the Bonds or any Parity Bonds the 1ights and benefits provided in the Indenture.

Severability. If any covenant, agreement or provision, or any portion thereof. contained in the Indenture, or the application thereof to any person or circumstance, is held to be unconstitutional. invalid or unenforceable, the remainder of the Indenture and the application of any such covenant, agreement or

E-31 provision, or portion thereof, to other persons or circumstances, shall he deemed severable and shall not be affected thereby, and the Indenture, the Bonds and any Parity Bonds issued pursuant to the Indenture shall remain valid and the Bondowncrs shall retain all valid rights and benefits accorded to them under the laws of the State of California.

E-32 APPENDIX F

OTC ANO THE BOOK-ENTRY ONLY SYSTEM

The fol/o.ving description of the Depository Trust Company ('OTC'?, 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 OTC Participants or Beneficial Owners, confirmation and transfer of beneficial ownership interest in the Bonds and other related transactions by and between OTC, the OTC Participants and the Beneficial Owners is based solely on information provided by OTC. Accordingly, no representations can be made concerning these matters and neither the OTC Participants nor the Beneficial Owners should rely on the foregoing information with respect to such matters, but should instead confirm the same with OTC or the OTC Participants, as the case may be. Neither the issuer of the Bonds (the "Issuer'? nor the trustee or fiscal agent appointed with respect to the Bonds (the "Trustee'? take any respons>bility for the information contained in this Appendix.

No assurances can be given that OTC, OTC Participants or Indirect Participants will distribute to the Beneficial Owners (a) payments of interest, principal or premium, if any, with respect to the Bends, (b) certificates representing ownership interest in or other confirmation or ownership interei:t in the Bonds, or (c) redemption or other notices sent to OTC or Cede & Co., its nominee, as tne registered owner of the Bonds, or that they will so do on a timely basis, or that OTC, OTC Participants or OTC Indirect Participants will act in the manner described in this Appendix. The current "Rules" applicable to OTC are on file with the Securities and Exchange Commission ancl the current "Procedures" of OTC to be followed in dealing with OTC Participants are ori file with OTC.

DTC and its Participants. The Depository Trust Company ("OTC"), New York, NY, will act as securitieE depository for the Bonds. The Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of OTC. One fully-registered security certificate will be issued for each maturity of the Bonds, each in the aggregate principal amount of such maturity, and will be deposited with OTC.

OTC, the world's largest depository, is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the \Jew York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. OTC holds and provides asset servicing for over 2 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments from over 85 countries that DTC's participants ("Direct Participants") deposit with OTC. OTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participant:; include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. OTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC, in turn, is owned by a number of Direct Participants of OTC and Members of the National Securities Clearing Corporation, Go~ernment Securities Clearing Corporation, MBS Clearing Corporation, and Emerging Markets Clearing Corporation, (respectively, "NSCC", "GSCC", "MBSCC", and "EMCC", also sullsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the

F-1 American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. Access to the OTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). OTC has Standard & Poor's highest rating: AAA. The OTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about OTC can be found at www.dtcc.com.

Book-Entry Only System. Purchases of the Bonds under the OTC 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 Security ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from OTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Bonds, except in the event that use of the book-entry system for the Bonds is discontinued.

To facilitate subsequent transfers, all Bonds deposited by Direct Participants with OTC are registered in the name of DTC's partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of OTC. The deposit of the Bonds with OTC and their registration in the name of Cede & Co. or such other OTC nominee do not effect any change in beneficial ownership. OTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC's records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by OTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of the Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Security documents. For example, Beneficial Owners of the Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them.

Redemption notices shall be sent to OTC. 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 OTC nor Cede & Co. (nor any other OTC nominee) will consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures, OTC mails an Omnibus Proxy to the issuer as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting

F-2 rights to those Di ·ect Participants to whose accounts the Bonds are credited on the record date (identified in a listng attached to the Omnibus Proxy).

Payments of principal of, premium, if any, and interest evidenced by the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of OTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detail information from the Issuer or the Trustee, on payable date in accordar ce with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is t11e 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 OTC (nor its nominee), the Issuer or the Trustee, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal of, premium, if any, and interest evidenced by the Bonds to Cede & Co. (or such other nominee as may be requested by an authorized repmsentative of OTC) is the responsibility of the Issuer or the Trustee, disbursement of such payments to Direct Participants will be the responsibility of OTC, and disbursement of rnch payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

OTC may discontinue providing its services as depository with respect to the Bonds at any time by givin,1 reasonable notice to the Issuer or the Trustee. Under such circumstances, in the event that a ,;uccessor depository is not obtained, Security certificates are required to be printed and delive·ed.

The lssue1· may decide to discontinue use of the system of book-entry transfers through OTC ( or a succe~ sor securities depository). In that event, Bond certificates will be printed and delivered.

Discontfouance of DTC Services. In the event that (a) OTC determines not to continue to act as securities depository for the Bonds, or (b) the Issuer determines that OTC will no longer so act and delivers a written certificate to the Trustee to that effect, then the Issuer will discontinue the Book-Entry Only System with OTC for the Bonds. If the Issuer determines to replace OTC with another qualified securities depository, the Issuer will prepare or direct the preparation of a new single separate, fully registered Bond for each maturity of the Bonds registered in the name of such successor or substitute securities depository as are not inconsistent with :he terms of the indenture or fiscal agent agreement executed in connection with the Bonds. If the Issuer fails to identify another qualified securities depository to replace the incumbent securities depository for the Bonds, then the Bonds will no longer be restricted to being registered in the Bond registration books in the name of the incumbent securities depository or its 1ominee, but will be registered in whatever name or names the incumbent securities depositc-ry or its nominee transferring or exchanging the Bonds designates.

If the Book-Entry Only System is discontinued, the following provisions would also apply: (i) the Bonds will be made available in physical form, (ii) principal of, and redemption premiums, if any, on, the Bonds will be payable upon surrender thereof at the corporate trust office of the Trustee, (iii) interest on the Bonds will be payable by check mailed by first-class mail or, upon the written request of any Owner of $1,000,000 or more in aggregate principal amount of Bonds received by the Trustee on or prior to the 15th day of the calendar month immediately preceding the interest payment date, by wire transfer in immediately available funds to an account with a financial institution within the continental United States of America designated by such Owner, and (iv) the BondB will be transferable and exchangeable as provided in the indenture or fiscal agent agreement e,xecuted in connection with the Bonds.

F-3 [TIIIS PAGE INTENTIONALLY LEFT BLANK] APPENDIXG

FORlln OF ISSUER CONTINUING DISCLOSURE CERTIFICATE

CONTINUING DISCLOSURE CERTIFICATE (Community Facilities District)

$25,820,000 COMMUNITY FACILITIES DISTRICT NO. 04-2 (LAKE HILLS CREST) OF THE COUNTY OF RIVERSIDE SPECIAL TAX BONDS, SERIES 2005

This Continuing Disclosure Certificate (this "Disclosure Certificate") is executed and delivered by Community Facilities District No. 04-2 (Lake Hills Crest) of the County of Riverside (the "District") in connection with the issuance of the bonds captioned above (the "Bonds"). The Bonds are being issued pursuant to a Bond Indenture dated as of August 1, 2005 (the "Indenture"), by and between the District and The Bank of New York Trust Company, N.A., as trustee (the "Trus .ee"). This Disclosure Certificate is countersigned and accepted by The Bank of New York TruHt Company, N.A., as Trustee for the Bonds and initial Dissemination Agent hereunder. The District hereby covenants and agrees as follows:

Section 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the District. and countersigned and accepted by the Trustee and Dissemination Agent, for the benefit of the holders and beneficial owners of the Bonds and in order to assist the Participating Underwriter in complying with S.E.C. Rule 15c2-12(b)(5).

Section 2. Definitions. In addition to the definitions set forth above and in the Indenture, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section, thE following capitalized terms shall have the following meanings:

"Annual Report" means any Annual Report provided by the District pursuant to. and as described in, Sect ons 3 and 4 of this Disclosure Certificate.

"Annual Report Date" means the date that is nine months after the end of the District's fiscal year (curren:ly April 1 based on the District's fiscal year end of June 30).

"Central Post Office" means DisclosureUSA (information regarding which is currently located atwww.DsclosureUSA.org), the Internet-based filing system approved by the Securities and Exchange Commission to receive and submit filings to the National Repositories, or any similar filing system approved by the Securities and Exchange Commission.

"Disclosur9 Representative" means the County Executive Officer of the County of Riverside, or his or her designee, or such other person as the Community Facilities District designates in writi 19 to the Trustee from time to time.

"Dissemination Agent" means The Bank of New York Trust Company, N.A., or any successor Dissemination Agent designated in writing by the District and which has filed with the District and the T r,;stee a written acceptance of such designation.

G-1 "District' means Community Facilities District No. 04-2 (Lake Hills Crest) of the County of Riverside.

"Listed Events" means any of the events listed in Section 5(a) of this Disclosure Certificate.

"National Repository" means any Nationally Recognized Municipal Securities Information Repository for purposes of the Rule. Information on the National Repositories as of a particular date is available on the Securities and Exchange Commission's Internet site at www.sec.gov.

"Official Statement" means the final official statement executed by the District in connection with the issuance of the Bonds.

"Participating Underwriter' means E. J. De La Rosa & Co .. Inc., the original underwriter of the Bonds required to comply with the Rule in connection with offering of the Bonds.

"Repository'' means each National Repository and each State Repository. if any.

"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.

"State Repository" means any public or private repository or entity designated by the State of California as a state repository for the purpose of the Rule and recognized as such by the Securities and Exchange Commission. As of the date of this Disclosure Certificate, there is no State Repository.

Section 3. Provision of Annual Reports.

(a) The District shall, or upon furnishing the Annual Report to the Dissemination Agent, shall cause the Dissemination Agent to, not later than the Annual Report Date, commencing April 1, 2006, provide to each Repository an Annual Report that is consistent with the requirements of Section 4 of this Disclosure Certificate, with a copy to the Participating Underwriter. In lieu of filing the Annual Report with each Repository, the District or the Dissemination Agent may file the Annual Report with the Central Post Office, with a copy to the Participating Underwriter.

(b) The Annual Report may be submitted as a single document or as separate documents comprising a package, and may include by reference other information as provided in Section 4 of this Disclosure Certificate; provided that the audited financial statements of the County may be submitted separately from the balance of the Annual Report, and later than the date required above for the filing of the Annual Report if not available by that date. If the District's fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 5(f).

(c) Not later than 15 Business Days prior to the Annual Report Date, the District shall provide the Annual Report to the Dissemination Agent (if other than the District) and the Trustee (if other than the Dissemination Agent). If by this date the Dissemination Agent has not received a copy of the Annual Report, the Dissemination Agent shall contact the Disclosure Representative and the Trustee (if other than the Dissemination Agent) to inquire if the District is in compliance with this subsection (c).

G-2 (d) If the Dissemination Agent is unable to verify that the Annual Report has been provided to the Repositories by the Annual Report Date as required in subsection (a) above. the Dissemination AgHnt shall send a notice to (i) the Municipal Securities Rulemaking Board, and (ii) the appropriate, State Repository, if any, in substantially the form attached hereto as Exhibit A. with a copy to ·he Participating Underwriter. In lieu of filing the notice with each Repository, the Disseminatior Agent may file the notice with the Central Post Office, with a copy to the Participating Underwriter.

(e) Wit, respect to each Annual Report. the Dissemination Agent shall:

(i) determine each year prior to the Annual Report Date the name and address of each National Repository and each State Repository, if any;

(ii) provide any Annual Report received by it to each Repository, as provided herein; anc

(iii) if the Dissemination Agent is other than the District, and to the extent the Annual Re Jort has been furnished to it, file a report with the District, the Trustee (if other than the Dissemination Agent) and the Participating Underwriter certifying that the Annual Report has been provided pursuant to this Disclosure Certificate, stating the date it was pro, ided and listing all the Repositories to which it was provided or stating that it was provid ,d to the Central Post Office, as appropriate.

Section 4. Content of Annual Reports. The District's Annual Report shall contain or incorporate by refErence the following documents and information:

(a) ThE• County's audited financial statements for the most recently completed fiscal year, prepared in accordance with Generally Accepted Accounting Principles as promulgated to apply to governm ,ntal entities from time to time by the Governmental Accounting Standards Board, together wi:h the following statement:

THE COUNTY'S ANNUAL FINANCIAL STATEMENT IS PROVIDED SOLELY TO COMPLY WITH THE SECURITIES EXCHANGE COMMISSION STAFF'S INTERPRETATION OF RULE 15C2-12. NO FUNDS OR ASSETS OF THE COUNTY ARE REQUIRED TO BE USED TO PAY DEBT SERVICE ON THE BONDS, AND THE COUNTY IS NOT OBLIGATED TO ADVANCE AVAILABLE FUNDS TO COVER ANY DELINQUl:NCIES. INVESTORS SHOULD NOT RELY ON THE FINANCIAL CONDITION OF THE COUNTY IN EVALUATING WHETHER TO BUY, HOLD OR SELL THE BONDS.

(b) ThE following information:

(i) The principal amount of the Bonds outstanding as of the September 30 next preceding the Annual Report Date.

(ii) The balance in the Reserve Account of the Special Tax Fund (along with a statement of the Reserve Requirement) as of the September 30 next preceding the Annual Report Date.

(iii) The total assessed value of all parcels within the District on which the Special Taxes are levied, as shown on the assessment roll of the Riverside County

G-3 Assessor last equalized prior to the September 30 next preceding the Annual Report Date, and a statement of assessed value-to-lien ratios for those parcels, either by individual parcel or by value-to-lien category (e.g., "below 3:1," "3:1 to 4:1 ," etc.).

(iv) (A) With respect to all parcels within the District on which the Special Taxes are levied, the Special Tax delinquency rate and the number of parcels which are delinquent in the payment of Special Taxes, in each case as shown on the assessment roll of the Riverside County Assessor's last equalized roll prior to the September 30 next preceding the Annual Report Date, (B) the date of which foreclosure was commenced, (C) the identity of all property owners representing more than 5% of the annual special Tax levy whose property is delinquent in payment of the special Taxes, as shown on the assessment roll of the Riverside County Assessor's last equalized roll prior to the September 30 next preceding the Annual Report Date, (D) or similar information pertaining to delinquencies deemed appropriate by the District

(v) The status of foreclosure proceedings for any parcels within the District on which the Special Taxes are levied, and a summary of the results of any foreclosure sales as of the September 30 next preceding the Annual Report Date.

(vi) A land ownership summary listing property owners responsible for more than 5% of the annual Special Tax levy, as shown on the assessment roll of the Riverside County Assessor last equalized prior to the September 30 next preceding the Annual Report Date.

(c) In addition to any of the information expressly required to be provided under paragraphs (a) and (b) of this Section, the District 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.

(d) Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the District or related public entities, which have been submitted to each of the Repositories or the Securities and Exchange Commission. If the document included by reference is a final official statement, it must be available from the Municipal Securities Rulemaking Board. The District shall clearly identify each such other document so included by reference.

Section 5. Reporting of Significant Events.

(a) The District shall promptly give, or cause to be given, notice of the occurrence of any of the following events with respect to the Bonds, if material:

(1) Principal and interest payment delinquencies.

(2) Non-payment related defaults.

(3) Unscheduled draws on debt service reserves reflecting financial difficulties.

(4) Unscheduled draws on credit enhancements reflecting financial difficulties.

(5) Substitution of credit or liquidity providers, or their failure to perform.

G-4 (6) Adverse tax opinions or events affecting the tax-exempt status of the security.

(7) M:)difications to rights of security holders.

(8) Contingent or unscheduled bond calls.

(9) Defeasances.

(10) Release, substitution, or sale of property securing repayment of the securities.

( 11) Rating changes.

(b) The Trustee shall, within five business days after obtaining actual knowledge of the occurrence of any Listed Event, contact the Disclosure Representative, inform the Disclosure Representative of the event, and request that the District promptly notify the Dissemination Agent in writing whether or not to report the event pursuant to subsection (f) below; provided, however, that the Dissemination Agent shall have no liability to Bond owners for any failure !,) provide such notice. For purposes of this Disclosure Certificate, "actual knowledge" of Ire occurrence of a Listed Event described under clauses (2), (3), (6), (10) or (11) of subsection (a) above mean the actual knowledge by an officer at the corporate trust office of the Truotee. The Trustee shall have no responsibility for determining the materiality of any of the Listed Events.

(c) Whenever the District obtains knowledge of the occurrence of a Listed Event, whether becaus,, of a notice from the Trustee pursuant to subsection (b) above or otherwise, the District shall ,,s soon as possible determine if such event would be material under applicable Federal securitiei; law.

(d) If the District determines that knowledge of the occurrence of a Listed Event would be material under applicable Federal securities law, the District shall promptly notify the Dissemination Anent in writing. The notice shall instruct the Dissemination Agent to report the occurrence pursL ant to subsection (f) below. The District shall provide the Dissemination Agent with a form of notice of a Listed Event in a format suitable for reporting to the Municipal Securities Rulemaking Board and each appropriate State Repository, if any.

(e) If, in response to a request under subsection (b) above, the District determines that the Listed E·,ent would not be material under applicable Federal securities law, the District shall so notify the Dissemination Agent in writing and instruct the Dissemination Agent not to report the occurre·nce pursuant to subsection (f) below.

(f) If the Dissemination Agent has been instructed by the District to report the occurrence of a Lisled Event, the Dissemination Agent shall file a notice of such occurrence with (i) the Municipal :,ecurities Rulemaking Board, and (ii) each appropriate State Repository, if any, with a copy to the Trustee (if different than the Dissemination Agent) and the Participating Underwriter. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(8) and (9) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to holders of affected Bonds pursuant to the Indenture.

(g) In lieu of filing the notice of the occurrence of a Listed Event with each appropriate State Repository, if any, the Dissemination Agent may file the notice of the occurrence of a

G-5 Listed Event with the Central Post Office, with a copy to the Trustee (if different than the Dissemination Agent) and the Participating Underwriter.

Section 6. Termination of Reporting Obligation. The District's obligations under this Disclosure Certificate 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 5(f).

Section 7. 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 Certificate, 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 District and the Trustee. If at any time there is not any other designated Dissemination Agent, the District shall be the Dissemination Agent.

Section 8. Amendment· Waiver. Notwithstanding any other provision of this Disclosure Certificate, the District, the Trustee and the Dissemination Agent may amend this Disclosure Certificate (and the Trustee and the Dissemination Agent shall agree to any amendment so requested by the District, 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 Certificate may be waived, provided that the following conditions are satisfied:

(a) if the amendment or waiver relates to the provisions of Sections 3(a), 4 or 5(a), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature, or status of an obligated person with respect to the Bonds, or 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 either (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 the Trustee or nationally recognized bond counsel, materially impair the interests of the holders or beneficial owners of the Bonds.

If the annual financial information or operating data to be provided in the Annual Report is amended pursuant to the provisions hereof, the first annual financial information filed pursuant hereto containing the amended operating data or financial information shall explain, in narrative form, the reasons for the amendment and the impact of the change in the type of operating data or financial information being provided.

If an amendment is made to the undertaking specifying the accounting principles to be followed in preparing financial statements, the annual financial information for the year in which the change is made shall present a comparison between the financial statements or information prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. The comparison shall include a qualitative discussion of the differences in the accounting principles and the impact of the change in the accounting principles on the presentation of the financial information, in order to provide information to

G-6 investors to enable them to evaluate the ability of the District to meet its obligations. To the extent reasonabl:1 feasible, the comparison shall be quantitative. A notice of the change in the accounting principles shall be sent to the Repositories in the same manner as for a Listed Event under Section 5(f 1.

Section 9. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the District from disseminating any other information, using the means of dissemination set forth in this Disclosure Certificate 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 thc1t which is required by this Disclosure Certificate. 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 Certificate. the District shall have no obligation under this Disclosure Certificate to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event.

Section 11)_ Default. In the event of a failure of the District or the Trustee to comply with any provision of I his Disclosure Certificate, the Trustee may (and, at the written direction of the Participating Underwriter or the holders of at least 25% aggregate principal amount of 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 District or the Trustee, as the case may be, to comply with its obligations under this Disclosure Certifi :ate. A default under this Disclosure Certificate shall not be deemed an Event of Default under the Indenture, and the sole remedy under this Disclosure Certificate in the event of any failure of the District or the Trustee to comply with this Disclosure Certificate shall be an action to cc mpel performance.

Section 11. Duties. Immunities and Liabilities of Trustee and Dissemination Agent. Article VII of the Indenture is hereby made applicable to this Disclosure Certificate as if this Disclosure Certifi:ate were (solely for this purpose) contained in the Indenture, and the Trustee and the Dissemination Agent shall be entitled to the protections, limitations from liability and indemnities afforcled to the Trustee thereunder. The Dissemination Agent and the Trustee shall have only such duties as are specifically set forth in this Disclosure Certificate, and the District agrees to indemr ify and save the Dissemination Agent, the Trustee and their officers, directors, employees, attorneys, agents and receivers, harmless against any loss, expense and liabilities which it may incJr arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent's or the Trustee's respective neglig3nce or willful misconduct. This Disclosure Certificate does not apply to any other securities ii,sued or to be issued by the District. The Dissemination Agent shall have no responsibility for :he preparation, review, form or content of any Annual Report or any notice of a Listed Event. No provision of this Disclosure Certificate 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 District as le, the materiality of any event for purposes of Section 5 of this Disclosure Certificate. Neither the Trustee nor the Dissemination Agent make any representation as to the sufficiency of this Disclosure Certificate for purposes of the Rule. The obligations of the District under this Secticn shall survive the termination of this Disclosure Certificate. Any company succeeding to all or substantially all of the Dissemination Agent's corporate trust business shall be the successor to the Dissemination Agent hereunder without the execution or filing of any paper or any further act.

G-7 The Dissemination Agent may conclusively rely upon the Annual Report provided to it by the District as constituting the Annual Report required of the District in accordance with this Disclosure Agreement and shall have no duty or obligation to review such Annual Report. The Dissemination Agent shall have no duty to prepare the Annual Report, nor shall the Dissemination Agent be responsible for filing any Annual Report not provided to it by the District in a timely manner in a form suitable for filing with the Repositories. In accepting the appointment under this Disclosure Certificate, the Dissemination Agent is not acting in a fiduciary capacity to the Holders or Beneficial Owners of the Certificates, the District, the Participating Underwriter or any other party or person. No provision of this Disclosure Certificate shall require the Dissemination Agent to risk or advance or expend its own funds or incur any financial liability.

Section 12. Notices. Any notice or communications to be among any of the parties to this Disclosure Certificate may be given as follows:

To the Issuer: Community Facilities District No. 04-2 of the Gou nty of Riverside 4080 Lemon Street, 4th Floor Riverside, CA 92501-3679 Fax: 951-955-1105

To the Trustee: The Bank of New York Trust Company, N.A. and Dissemination Agent: 200 S. Flower Street, Suite 500, Los Angeles, California 90017 Attention: Corporate Trust Department Fax: (213) 630-6210

To the Participating Underwriter: E. J. De La Rosa & Co., Inc. 11900 West Olympic Blvd Suite 500 Los Angeles, CA 90064-1151 Attention: Public Finance Department Fax: 310-207-1995 email: [email protected] and: [email protected]

Any person may, by written notice to the other persons listed above, designate a different address or telephone number(s) to which subsequent notices or communications should be sent

Section 13. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the District, the Trustee, 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.

G-8 Section 14. Counterparts. This Disclosure Certificate may be executed in several counterparts, each of which shall be regarded as an original, and all of which shall constitute one and the same instrument.

Date: August 18, 2005

COMMUNITY FACILITIES DISTRICT NO. 04-2 OF THE COUNTY OF RIVERSIDE

By:~~~~--=-~-=--,---~~~~~~~~~ Dean Deines, Deputy County Executive Officer County of Riverside, on behalf of Community Facilities District No. 04-2 (Lake Hills Crest) of the County of Riverside

AGREED AND ACCEPTED:

THE BANK OF NEW YORK TRUST COMPANY, N.A., as Dissemination Agent

By: Aut 1orized Officer

THE BANK OF NEW YORK TRUST COMPANY, N.A., as Trustee

Aul 1orized Officer

G-9 EXHIBIT A

NOTICE OF FAILURE TO FILE ANNUAL REPORT

Name of Issuer: Community Facilities District No. 04-2 (Lake Hills Crest) of the County of Riverside (the "District")

Name of Bond Issue: Community Facilities District No. 04-2 (Lake Hills Crest) of the County of Riverside Special Tax Bonds, Series 2005

Date of Issuance: August 18, 2005

NOTICE IS HEREBY GIVEN that the District has not provided an Annual Report with respect to the above-named Bonds as required by Section 5.2(j) of the Bond Indenture dated as of August 1, 2005, between the District and The Bank of New York Trust Company, N.A. The District anticipates that the Annual Report will be filed by------·

TRUSTEE:

The Bank of New York Trust Company, N.A.

By:------­ Its:------

G-10 APPENDIX H

FORM OF PROPERTY OWNER DISCLOSURE CERTIFICATE

CONTINUING DISCLOSURE CERTIFICATE (Property Owner)

$25,820,000 COMMUNITY FACILITIES DISTRICT NO. 04-2 {LAKE HILLS CREST) OF THE COUNTY OF RIVERSIDE SPECIAL TAX BONDS, SERIES 2005

This Continu ng Disclosure Certificate (this "Disclosure Certificate") is executed and delivered by , a (the "Property Owner"), in connection with the issuance by Community Facilities District No. 04-2 (Lake Hills Crest) of the County of Riverside , the "District") of the bonds captioned above (the "Bonds"). The Bonds are being issued pursuant to a Bond Indenture dated as of August 1, 2005 (the "Indenture"), by and between the District and The Bank of New York Trust Company, N.A., as trustee (the "Trustee"). The Property Owner covenants and agrees as follows:

Section 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the Property Owner for the benefit of the holders and beneficial owners of the Bonds.

Section 2. Definitions. In addition to the definitions set forth above and in the Indenture, which apply to any c3pitalized term used in this Disclosure Certificate unless otherwise defined in this Section, the following capitalized terms shall have the following meanings:

"Affiliate" of a1other Person means (a) a Person directly or indirectly owning, controlling, or holding with powe,r 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, co11trolled, or held with power to vote, by such other Person, and (c) any Person directly or inc irectly controlling, controlled by, or under common control with, such other Person. For purpose,, hereof, control means the power to exercise a controlling influence over the management or Jolicies of a Person, unless such power is solely the result of an official position with such Person.

"Assumption Agreement" means an undertaking of a Major Owner, or an Affiliate thereof, for the benefit of the holders and beneficial owners of the Bonds containing terms substantially similar to this Disclcsure Certificate (as modified for such Major Owner's development and financing plans with respect to the District), whereby such Major Owner or Affiliate agrees to provide Semi-Annual Reports and notices of significant events, setting forth the information described in sections 4 and 5 hereof, respectively, with respect to the portion of the property in the District owned b:1 such Major Owner and its Affiliates and, at the option of the Property Owner or such Major Owner, agrees to indemnify the Dissemination Agent pursuant to a provision substantially in the form of Section 11 hereof.

"Central Post Office" means DisclosureUSA (information regarding which is currently located at www.DisclosureUSA.org), the Internet-based filing system approved by the Securities

H-1 and Exchange Commission to receive and submit filings to the National Repositories, or any similar filing system approved by the Securities and Exchange Commission.

"Dissemination Agent" means The Bank of New York Trust Company, N.A., or any successor Dissemination Agent designated in writing by the Property Owner, with the written consent of the District, and which has filed with the Property Owner, the District and the Trustee a written acceptance of such designation, and which is experienced in providing dissemination agent services such as those required under this Disclosure Certificate.

"District" means Community Facilities District No. 04-2 (Lake Hills Crest) of the County of Riverside.

"Listed Events" means any of the events listed in Section 5(a) of this Disclosure Certificate.

"Major Owner" means, as of any Report Date, an owner of land in the District responsible in the aggregate for 20% or more of the Special Taxes in the District actually levied at any time during the then-current fiscal year.

"National Repository" means any Nationally Recognized Municipal Securities Information Repository for purposes of the Rule. Information on the National Repositories as of a particular date is available on the Securities and Exchange Commission's Internet site at www.sec.gov.

"Official Statement" means the final official statement executed by the District in connection with the issuance of the Bonds.

"Participating Underwriter' means E. J. De La Rosa & Co., Inc., the original underwriter 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.

"Property" means the property owned by the Property Owner in the District.

"Report Date" means (a) September 30 each year, and (b) March 31 each year.

"Repository'' means each National Repository and each State Repository, if any.

"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.

"Semi-Annual Report" means any Semi-Annual Report provided by the Property Owner pursuant to, and as described in, Sections 3 and 4 of this Disclosure Certificate.

"Special Taxes" means the special taxes levied on taxable property within the District.

"State Repository" means any public or private repository or entity designated by the State of California as a state repository for the purpose of the Rule and recognized as such by the Securities and Exchange Commission. As of the date of this Disclosure Certificate, there is no State Repository.

H-2 Section 3. Provision of Semi-Annual Reports.

(a) The Property Owner shall, or upon written direction shall cause the Disseminatic,n Agent to, not later than the Report Date, commencing September 30, 2005, provide to each Repository a Semi-Annual Report which is consistent with the requirements of Section 4 of this Disclosure Certificate with a copy to the Trustee (if different fror1 the Dissemination Agent), the Participating Underwriter and the District. Not later than 15 calendar days prior to the Report Date, the Property Owner shall provide the Semi-Annual Report to the Dissemination Agent. The Property Owner shall provide a written certification with (or included as a part of) each Semi-Annual Report furnished to the Dissemination Agent, the Trustee (if different from the Dissemination Agent), the Participating Underwriter and the District to the effect that such Semi-Annual Report constitutes the Semi-Annual Report required to be furnished by it under this Disclosure Certificate. The Dissemination Agent, the Trustee, the Participating Underwriter and the District may conclusively rely upon such certification of the Property Owner and shall have no duty or obligation to review the Semi-Annual Report. In lieu of filing the Semi-Annual Report with each Repository or the Dissemination Agent, the Property Owner or the Dissemination Agent may file the Semi-Annual Report with the Central Pos: Office, with a copy to the Trustee (if different from the Dissemination Agent), the Participating Underwriter and the District. The Semi-Annual Report may be submitted a~ a single document or as separate documents comprising a package, and may incorporate by reference other information as provided in Section 4 of this Disclosure Cartificate.

(b) If the Dissemination Agent does not receive a Semi-Annual Report 15 calendar days prior to the Report Date, the Dissemination Agent shall send a reminder notice to thE Property Owner that the Semi-Annual Report has not been provided as required under Section 3(a) above. The reminder notice shall instruct the Property Owner to determine whether its obligations under this Disclosure Certificate have terminated (pursuant to Section 6 below) and, if so, to provide the Dissemination Agent with a notice of such termination in the same manner as for a Listed Event (pursuant to Section 5 below). If the Property Owner does not provide, or cause the Dissemination Agent to provide, a Semi-Annual Report to the Repositories by the Report Date as required in s Jbsection (a) above, the Dissemination Agent shall send a notice to (i) each National Repository or the Municipal Securities Rulemaking Board, and (ii) each appropriate State Repository, if any, in substantially the form attached hereto as Exhibit A, with a cory to the Trustee (if other than the Dissemination Agent), the District and the Participating Underwriter. In lieu of filing the notice with each Repository, the Property Owner or thE Dissemination Agent may file the notice with the Central Post Office, with a copy to the Trustee (if other than the Dissemination Agent), the District and the Participating Underwriter.

(c) With respect to each Semi-Annual Report, the Dissemination Agent shall:

(i) determine prior to each Report Date the name and address of each National Repository and each State Repository, if any;

(ii) file each Semi-Annual Report that has been furnished to it with the Repo ,itories.

H-3 (iii) to the extent the Semi-Annual Report has been furnished to it, file the Semi-Annual Report with the Repositories and file a report with the Property Owner, the Trustee (if the Dissemination Agent is other than the Trustee), the District and the Participating Underwriter certifying that the Semi-Annual Report has been provided pursuant to this Disclosure Certificate, stating the date it was provided and listing all the Repositories to which it was provided.

Section 4. Content of Semi-Annual Reports. The Property Owner's Semi-Annual Report shall contain or incorporate by reference the information set forth in Exhibit B, any or all of which may be included by specific reference to other documents, including official statements of debt issues of the Property Owner or related public entities, which have been submitted to each of the Repositories or the Securities and Exchange Commission. If the document included by reference is a final official statement, it must be available from the Municipal Securities Rulemaking Board. The Property Owner shall clearly identify each such other document so included by reference.

In addition to any of the information expressly required to be provided in Exhibit B, the Property Owner's Semi-Annual Report shall include 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.

Section 5. Reporting of Significant Events.

(a) The Property Owner shall give, or cause to be given, notice of the occurrence of any of the following Listed Events with respect to the Bonds, if material:

(i) bankruptcy or insolvency proceedings commenced by or against the Property Owner and, if known, any bankruptcy or insolvency proceedings commenced by or against any Affiliate of the Property Owner which could have a significant impact on the Property Owner's ability to pay Special Taxes or to sell or develop the Property;

(ii) failure to pay any taxes, special taxes (including the Special Taxes) or assessments due with respect to the Property prior to the delinquency date;

(iii) filing of a lawsuit against the Property Owner or, if known, an Affiliate of the Property Owner, which, if determined adversely to the Property Owner or such Affiliate, could reasonably be determined to have a significant material adverse impact on the Property Owner's ability to pay Special Taxes or to sell or develop the Property;

(iv) material damage to or destruction of any of the improvements on the Property (whether or not covered by applicable insurance policies); and

(v) any payment default or other material default by the Property Owner on any loan with respect to the construction of improvements on the Property.

H-4 (b) Whenever the Property Owner obtains knowledge of the occurrence of a Listed Event. the Property Owner shall as soon as possible determine if such event would be mat,rial under applicable Federal securities law.

(c) If the Property Owner determines that knowledge of the occurrence of a Listed Event would be material under applicable Federal securities law, the Property Owner shall, or shall cause the Dissemination Agent to, promptly file a notice of such occurrence with (i) each National Repository or the Municipal Securities Rulemaking Board, and (i) each appropriate State Repository, if any, with a copy to the Trustee, the District and the Participating Underwriter.

(d) In lieu of filing the notice of the occurrence of a Listed Event with each Repository, t ,e Property Owner or the Dissemination Agent may file the notice of the occurrence 01' a Listed Event with the Central Post Office, with a copy to the Trustee, the District and tre Participating Underwriter.

Section 6. Duration of Reporting Obligation.

(a) All of the Property Owner's obligations hereunder shall commence on the date hereof and shall terminate (except as provided in Section 11) on the earliest to occur of the following:

(i) upon the legal defeasance, prior redemption or payment in full of all the Bonds, or

(ii) at such time as Property owned by the Property Owner is no longer responsible for payment of 20% or more of the Special Taxes, or

(iii) the date on which the Property Owner prepays in full all of the Special Taxes attributable to the Property.

If the Property Owner's obligations under this Disclosure Certificate terminate, the Property Owner shall, or shall cause the Dissemination Agent to, promptly file a notice of sucl1 termination with each Repository, with a copy to the Trustee, the District and the Participating Underwriter. In lieu of filing the notice of the occurrence of termination v, ith each Repository, the Property Owner or the Dissemination Agent may file the notice of the occurrence of termination with the Central Post Office, with a copy to the Trustee, the District and the Participating Underwriter.

(b) If all or a portion of the Property in the District owned by the Property Owner, or any Affiliate of the Property Owner, is conveyed to a Person that, upon such conveyance, will be a Major Owner, the obligations of the Property Owner hereunder with respect to the property in the District owned by such Major Owner and its Affiliates may be assumed by such Major Owner or by an Affiliate thereof and the Property Owner's obli~1ations hereunder will be terminated. In order to effect such assumption, such Major Owner or Affiliate shall enter into an Assumption Agreement in form and substance saisfactory to the District and the Participating Underwriter, and with notice to the Dissemination Agent.

Section 7. Dissemination Agent. The Property Owner may, from time to time, with the written consent of th a District, appoint or engage a Dissemination Agent to assist the Property

H-5 Owner in carrying out its obligations under this Disclosure Certificate, and may discharge any such Dissemination Agent with the written consent of the District, with or without appointing a successor Dissemination Agent. The Dissemination Agent may resign by providing 30 days' written notice to the District, the Property Owner and the Trustee.

Section 8. Amendment· Waiver. Notwithstanding any other provision of this Disclosure Certificate, the Property Owner may amend this Disclosure Certificate, and any provision of this Disclosure Certificate may be waived, provided that the following conditions are satisfied (provided, however, that the Dissemination Agent shall not be obligated under any such amendment that modifies or increases its duties or obligations hereunder without its written consent thereto):

(a) if the amendment or waiver relates to the provisions of sections 3(a), 4 or 5(a), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature, or status of an obligated person with respect to the Bonds, or 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 either (i) is approved by holders of the Bonds in the manner provided in the Indenture with the consent of holders, or (ii) does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the holders or beneficial owners of the Bonds.

Section 9. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the Property Owner from disseminating any other information. using the means of dissemination set forth in this Disclosure Certificate 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 Certificate. If the Property Owner 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 Certificate, the Property Owner shall have no obligation under this 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 Property Owner to comply with any provision of this Disclosure Certificate, the Trustee shall (upon written direction and only to the extent indemnified to its satisfaction from any liability, cost or expense, including fees and expenses of its attorneys), and the Participating Underwriter and 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 Property Owner to comply with its obligations under this Disclosure Certificate. A default under this Disclosure Certificate shall not be deemed an event of default under the Indenture, and the sole remedy under this Disclosure Certificate in the event of any failure of the Property Owner to comply with this Disclosure Certificate shall be an action to compel performance.

Section 11. Duties, Immunities and Liabilities of Dissemination Agent. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Certificate, and the Property Owner agrees to indemnify and save the Dissemination Agent, its

H-6 officers, directors, c1nd employees, harmless against any loss, expense and liabilities which it may incur arising o Jt of or in the exercise or performance of its powers and duties hereunder during the time that the Property Owner is a Major Owner obligated to comply with the Disclosure Certifica:e, including the reasonable costs and expenses (including attorneys' fees) of defending against any such claim of liability, but excluding liabilities, costs and expenses due to the Dissemination Agent's negligence or willful misconduct or failure to perform its duties hereunder. The Dissemination Agent shall be paid compensation for its services provided hereunder from the Administrative Expense Fund established under the Indenture in accordance with th,e Dissemination Agent's schedule of fees as amended from time to time, which schedule, as amended, shall be reasonably acceptable, and all reasonable expenses, reasonable legal foes and advances made or incurred by the Dissemination Agent in the performance of its c uties 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 District, the Property Owner, the Trustee, the Bond owners, or any other party. The obligations of the Property Owner under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Bonds. Any company succeeding to all or substantially all of the Dissemination Agent's corporate trust business shall be the successor to the Di:;semination Agent hereunder without the execution or filing of any paper or any further act.

Section 12. Notices. Any notice or communications to be among any of the parties to this Disclosure Certi"icate may be given as follows:

To the lssum: Community Facilities District No. 04-2 (Lake Hills Crest) of the County of Riverside 4080 Lemon Street, 4th Floor Riverside, CA 92501-3679 Fax: 951-955-1105

To the TrustE,e: The Bank of New York Trust Company, N.A. and Disserr ination Agent: 200 S. Flower Street, Suite 500, Los Angeles, California 90017 Attention: Corporate Trust Department Fax: (213) 630-6210

To the Partic paling Underwriter: E. J. De La Rosa & Co., Inc. 11900 West Olympic Blvd, Suite 500 Los Angeles, CA 90064-1151 Attention: Public Finance Department Fax: 310-207-1995 email: [email protected] and: [email protected]

To the Property Owner:

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.

H-7 Section 13. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the District, the Property Owner (its successors and assigns), the Trustee, 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. All obligations of the Property Owner hereunder shall be assumed by any legal successor to the obligations of the Property Owner as a result of a sale, merger, consolidation or other reorganization.

Section 14. Counterparts. This Disclosure Certificate may be executed in several counterparts, each of which shall be regarded as an original, and all of which shall constitute one and the same instrument.

Date: August 18, 2005

a ______

By;

Name:------

Title:

AGREED AND ACCEPTED: The Bank of New York Trust Company, N.A., as Dissemination Agent

By:------­ Title:

H-8 EXHIBIT A

NOTICE OF FAILURE TO FILE SEMI-ANNUAL REPORT

Name of Issuer: Community Facilities District No. 04-2 (Lake Hills Crest) of the County of Riverside (the "District")

Name of Bond Issue: Community Facilities District No. 04-2 (Lake Hills Crest) of the County of Riverside Special Tax Bonds, Series 2005 Date of Issuance: August 18, 2005

NOTICE JS HEREBY GIVEN that (the "Major Owner") has not provided a Semi-Annual Report with respect to the above-named bonds as required by that certain Continuing Disclosure Certificate (Property Owner), dated August 18, 2005. The Major Owner anticipates that the Semi-Annual Report will be filed by ______

Dated: ______

DISSEMINATION AGENT: The Bank of New York Trust Company, N.A.

By:-~~~~~~~­ Its: ------~

H-9 EXHIBIT B

SEMI-ANNUAL REPORT

COMMUNITY FACILITIES DISTRICT NO. 04-2 (LAKE HILLS CREST) OF THE COUNTY OF RIVERSIDE SPECIAL TAX BONDS, SERIES 2005

This Semi-Annual Report is hereby submitted under Section 4 of the Continuing Disclosure Certificate (the "Disclosure Certificate") dated as of August 18, 2005 executed by the undersigned (the "Property Owner") in connection with the issuance of the above-captioned bonds by Community Facilities District No. 04-2 (Lake Hills Crest) of the County of Riverside (the "District").

Capitalized terms used in this Semi-Annual Report but not otherwise defined have the meanings given to them in the Disclosure Certificate.

I. Property Ownership and Development

The information in this section is provided as of ______(this date must be not more than 60 days before the date of this Semi-Annual Report).

A. Property currently owned by the Property Owner in the District (the "Property"):

Development Name(s)

Total Lots and Homes Completed Since Property Sold Since the Property Sold Since Homes the Date of Issuance of the Date of Issuance of the the Last Semi-Annual in the Development Bonds(August18,2005) Bonds(August18.2005) Report

Acres* Acres* Lots Lots Lots Homes Homes Homes Homes

For bulk land sales only (excluding sales of finished lots or completed homes).

B. Status of land development or home construction activities on the Property:

C. Status of building permits and any significant amendments to land use or development entitlements with respect to the Property:

H-10 D. Statm, of any land purchase contracts with regard to the Property, whether acquisition of land in the District by the Property Owner or sales of land to other property owners (other than individual homeowners).

II. Legal and Financial Status of Property Owner

Unless such nformation has previously been included or incorporated by reference in a Semi-Annual Report describe any change in the legal structure of the Property Owner or the financial condition ar d financing plan of the Property Owner that would materially and adversely interfere with its ability to complete its development plan described in the Official Statement.

Ill. Change in Dovelopment or Financing Plans

Unless such nformation has previously been included or incorporated by reference in a Semi-Annual Report, describe any development plans or financing plans relating to the Property that are materially di'ferent from the proposed development and financing plan described in the Official Statement.

IV. Official Statement Updates

Unless such nformation has previously been included or incorporated by reference in a Semi-Annual Report, describe any other significant changes in the information relating to the Property Owner or the Property contained in the Official Statement under the heading "PROPERTY OWNERSHIP AND PROPOSED DEVELOPMENT" that would materially and adversely interfere with the Property Owner's ability to develop and sell the Property as described in the Official Statement.

V. Other Material Information

In addition le, any of the information expressly required above, provide such further information, if any, cs may be necessary to make the specifically required statements, in the light of the circumstances under which they are made, not misleading.

H-11 Certification

The undersigned Property Owner hereby certifies that this Semi-Annual Report constitutes the Semi-Annual Report required to be furnished by the Property Owner under the Disclosure Certificate.

Dated: ______

a ______

By;

Its:

H-12 APPENDIX I

FORM OF OPINION OF BOND COUNSEL

[Date of Delivery]

Con1munity Facilities District No. 04-'2 (Lake Hills Crest) of the County of Riverside Riverside, California

Re: $25,820.000 Community Facilities District No. 04-2 (Lake Hills Crest) of the Count_v of Riverside Special fox Bonds Series 2005

Ladies and Gentlemen:

We have examined the Constitution and the laws of the State of California, a certified record of the proceedings of the Cm nty of Riverside taken in connection with the formation of Community Facilities District No. 04-2 (Lake Hills Crest) of the County of Riverside (the "District") and the authorization and issuance of the District'; Special Tax Bonds Series 2005 in the aggregate principal amount or $25,820,000 (the ''Bonds'') and such othe:· information. certificates. opinions and documents as we consider necessary to render this opinion. We hav,! assumed the genuineness of a11 docun1ents and signatures presented to us, the authenticity of documents submitted to us as originals and the conformity to originals of documents submitted as copies. In rendering 1his opinion, we have relied upon certain representations of fact and certifications n1ade by the [)istrict, the init al purchasers of the Bonds and others. 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 Con1n1unity Facilities Act of 1982, as amended (comprising Chapter 2.5 of Part l of Division 2 of Title 5 of lhe Government Code of the State of California), and a Bond Indenture, dated as of August I. 2005 (the "Indenture"), by and between the District and The Bank of New York Trust Company, N.A., as Trustee (the "Tnistee"). All capitali1.cJ terms not defined herein shall have the meaning set fo11h in the Indenture.

The Bonds arc dated their date of delivery and n1ature on the dates and in the amounts set forth in the Indenture. The Bonds tear interest payable semiannually on each March 1 and September 1, commencing on March l, 2006, at the rates per annum set forth in the Indenture. The Bonds are registered Bonds in the form set forth in the Indenture, redeemable in the amounts, at the times and in the manner provided for in the Indenture.

Based upon om examination of the foregoing, and in reliance thereon and on all matters of fact as we deem relevanl under the circumstances, and upon consideration of app]icab]e laws, we are of the opinion that:

(I) 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 tenns and the terms of the Indenture, except as the same may be limited by bankruptcy, insolvency. reorganization, moratorium, fraudulent conveyance ,,nd other similar laws affecting creditors' rights generally, by the exercise of judicial discretion in accordance with general principles of equity or otherwise in appropriate cases and by the limitations on legal remedies against public agencies in the State of California. The Bonds are limited obligations of the District but are not a debt of the County or Riverside, the State of California or any other

1-1 political subdivision thereof within the meaning of any constitutional or statutory limitation, and, except for the Special Taxes pledged by the District, neither the faith and credit nor the taxing power of the County of Riverside, the State of California, or any of its political subdivisions is pledged for the payment thereof.

(2) The execution and delivery of the Indenture has been duly authorized by the District, and the Indenture is valid and binding upon the District and is enforceable in accordance with its terms, except to the extent that enforceability may he limited by bankrnptcy, insolvency, reorganization, moratorium, fraudulent conveyance or transfer or other similar laws affecting creditors' rights generally, by the exercise of judicial discretion in accordance with general principles of equity or otherwise in appropriate cases and by the limitations on legal remedies against public agencies in the State of California; provided, however, we express no opinion as to the enforceability of the covenant of the District contained in the Indenture to levy Special Taxes for the payn1cnt of Administrative Expenses or as to any indemnification, contribution, choice of law, choice of forurn, pena]ty or waiver provisions contained therein.

(3) The Indenture creates a valid pledge of that which the Indenture purports to pledge, subject to the provisions of the Indenture, except to the extent that enforceability of the Indenture may be limited by bankn1ptcy. insolvency, reorganization, 111oratorium, fraudulent conveyance and other sirnilar Jaws affecting creditors' rights generally, by the exercise of judicial discretion in accordance with general principles of equity or otherwise in appropriate cases an

(4) Under existing statutes, regulations, rulings and judicial decisions, interest (and original issue discount) on the Bonds is excluded from gros~ income for federal inco111e 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 (and original issue discount) will be included as an adjustment in the calculation of alternative minimum taxable income, which rnay affect the alternative n1ini111um tax liability of corporations.

(5) Interest (and original issue discount) on the Bonds is exempt from State of California personal income lax.

(6) The difference between the issue price of a Bond (the first price at which a substantial amount of the Bonds of a maturity arc 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 accrnes under a constant yield method, and original issue discount will accrue to a Bond owner before receipt of cash attributable to such excludahle income. The an1ount 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 for 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 calculating the federal alternative minimum tax imposed on individuals or corporations (as described in paragraph 4 above) and is exempt from State of California personal income tax,

(7) The amount by which a Bond owner's original basis for detennining loss on sale or exchange in the applicable Bond (generally the purchase price) exceeds the amount payable on maturity (or on an earlier call date) constitutes amortizablc Bond premium which must be amortized under Section 171 of the Code: such amortizable Bond premium reduces the Bond owner's basis in the applicable Bond (and the amount of tax-exempt interest received), and is not deductible for federal income lax purposes. The basis reduction as a result of the amortization of Bond premium may result in a Bond owner realizing a taxable gain when a Bond is sold by the owner for an amount equal to or less (under certain circumstances) than the original cost of the Bond to the owner.

I-2 The opinions expressed in paragraphs (4) and (6) above as to the exclusion from gross income for federal income tax purposes of interest (and original issue discount) on the Bonds are 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 includablc in gross income for federal income tax purposes. Failure to comply with such requ rements of the Code might cause interest (and original issue discount) on the Bonds to be included in gross in:ome 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 (4), (5), (6) and (7) above, we e-..press no opinion as to any tax consequences related to the Bonds.

Certain agreements, requirements and procedures contained or referred to in the Indenture and the Tax Ce11ificate executed by the DistJict with respect to the Bonds may be changed and certain actions may be taken or omitted, under the c 1rcumstances and subjecl to the terms and conditions set forth in such documents. We express no opinion as to the exclusion of interest (and original issue discount) 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 or omitted upon the advice or approval of counsel other than Stradling Yocca Carlson & Rauth, a Professional Corporation.

We are a

The opinions expressed herein are based upon an analysis of existing statutes, regulations, rulings and judicial decisions and cover certain matters not directly addressed by such authorities. We call attention to the fact that the foregoing opinions may be affected by actions taken (or not taken) or events occurring (or not occurring) after the dat1; hereof. We have not undertaken to detern1ine, or to inforrn any pers.on, whether such actions or events are taken (or not taken) or do occur (or do not occur). Our engagement with respcc! to the Bonds terminates upon their issuance, and we disclaim any obligation to update the matters set forth herein.

We express no opinion herein as to the accuracy, completeness or sufficiency of the Official Statement or other offering material, if any, relating to the Bonds and expressly disclaim any duty to advise the o,vncrs of the Bonds with respect to the n1attcrs contained in the Official Statement or other offcrlng rnalcrial, if any.

Respectfully submitted,

1-3 [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIXJ

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