2005-1167.Pdf

NEW ISSUE BOOK-ENTRY ONLY NOT RATED

In the opinion of Orrick, Herrington & Sutcliffe LLP, San Francisco, California, Bond Counsel, based !lpon an analysis of existing laws, regulations, rulings and court decisions and assuming, among other matters, compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, and is exempt from State of California personal income taxes. In the further opinion of Bond Counsel, interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observes that it is included in adjusted current earnings in calculating corporate alternative mmimum taxable income. Bond Counsel expresses no opinion regarding other federal or state tax consequences caused by the ownership or disposition of, or accrual or receipt of interest on, the Bonds. See "CONCLUDING INFORMATION~Tax Matters" herein. ~ IIE'ft~ $6,550,345 CITY OF HERCULES !~u ...... ,!~ {It ASSESSMENT DISTRICT NO. 2005-1 . . (JOHN MUIR PARKWAY) ~~ ..~ LIMITED OBLIGATION IMPROVEMENT BONDS "-11:oll~ Dated: Date of Delivery Due: September 2, as shown below

The City of Hercules Assessment District No. 2005-1 (John Muir Parkway) Limited Obligation Improvement Bonds (the "Bonds") are being issued by the City of Hercules (the "City") pursuant to the provisions of the Improvement Bond Act of 1915 (Division 10 of the California Streets and Highways Code) and a Fiscal Agent Agreement, dated as of July 1, 2005 (the "Fiscal Agent Agreement"), by and between the City and The Bank of New York Trust Company, N.A., as fiscal agent (the "Fiscal Agent") to: (i) finance a portion of the costs of certain road, bridge, storm drain, sewer, water and miscellaneous improvements to John Muir Parkway of special benefit to property within the City's Assessment District No. 2005- 1 (John Muir Parkway) (the "District"), (ii) pay costs related to the issuance of the Bonds, (iii) make a deposit to a Reserve Fund for the Bonds, and (iv) prepay certain unpaid assessments levied in the City's Alfred Nobel Reassessment District No. 01-1. The Bonds are issued upon and secured by the unpaid special assessments levied on parcels within the District. The Bonds are limited obligations of the City. Assessment installments of principal and interest sufficient to meet annual debt service on the Bonds are to be included on the regular Contra Costa County tax bills sent to owners of property against which there are unpaid assessments. These annual assessment installments are to be used to pay debt service on the Bonds as it becomes due. To provide funds for payment of the Bonds and the interest thereon as a result of any delinquent installments, the City will establish a Reserve Fund as described herein. See "SECURITY FOR THE BONDS." Interest on the Bonds will be payable March 2 and September 2 of each year commencing March 2, 2006. The Bonds will be delivered as full book-entry bonds and, when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York. The Depository Trust Company will act as securities depository (the "Securities Depository'') of the Bonds. Individual purchases of Bonds will be made in book-entry form only, in authorized denominations of $5,000 and any integral multiple thereof. Beneficial Owners (as defined herein) of Bonds will not receive physical certificates representing the Bonds purchased. Principal of and interest on the Bonds will be paid by the Fiscal Agent to the Securities Depository, which will in tum remit such principal and interest to its participants for subsequent disbursement to the Beneficial owners of the Bonds as described herein. See "THE BONDS--Ceneral" and APPENDIX E---IHE BOOK ENTRY SYSTEM. The Bonds are subject to optional and mandatory redemption, including redemption on any Interest Payment Date from prepayments of assessments, as described herein. See "THE BONDS---Redemption Provisions." THE BONDS ARE NOT A GENERAL OBLIGATION OF THE CITY OF HERCULES, THE STA TE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF AND NEITHER THE FAITH AND CREDIT NOR THE TAXINC POWER OF THE CITY OF HERCULES, THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE BONDS. This cover page contains certain information for general reference only. Prospective investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision with respect to the Bonds. See the section of this Official Statement entitled "BONDOWNERS' RISKS" for a discussion of special risk factors that should be considered, in addition to the other matters set forth herein, in evaluating the investment quality of the Bonds.

MATURITY SCHEDULE $2,160,345 Serial Bonds CUSIP Prefix: 427034,.. Maturity Date Principal Interest Price or CUSIP Maturity Date Principal Interest CUSIP (Se~tember 2) Amount Rate Yield Suffix* (Se~tember 2) Amount Rate Yield Suffix* 2006 $ 75,345 3.00'X, 100% 059 2014 $150,000 4.30'X, 4.40% EA7 2007 115,000 3.15 3.25 DT7 2015 155,000 4.40 4.50 EB5 2008 120,000 3.40 355 DU4 2016 160,000 450 4.60 EC3 2009 125,000 3.60 3.75 DV2 2017 170,000 4.60 4.70 EDl 2010 125,000 3.75 3.90 DWO 2018 175,000 4.70 4.80 EE9 2011 130,000 3.90 4.00 DX8 2019 185,000 4.80 4.90 EF6 2012 135,000 4.05 4.15 DY6 2020 195,000 4.85 4.95 EG4 2013 145,000 4.20 4.30 023 $1,125,000 5.00% Tenn Bonds due September 2, 2025; Price 99.000%, to Yield 5.08%; CUSIP No. 427034 EH2* $1,430,000 5.00% Tenn Bonds due September 2, 2030; Price 98.375%, to Yield 5.115%; CUSIP No. 427034 EJ8* $1,835,000 5.10% Tenn Bonds due September 2, 2035; Price 98.481%, to Yield 5.20%; CUSIP No. 427034 EK5*

The Bonds are offered when, as and if issued, subject to the approval as to their legality by Orrick, Herrington & Sutcliffe LLP, San Francisco, California, Bond Counsel, and certain other conditions. Certain legal matters will be passed on for the City by the Law Offices of Pelletreau, AJderson & Cabral, Richmond, California, in its capacity as City Attorney for the City and by Quint & Thimmig LLP, San Francisco, California, :Jisclosure Counsel to the City for the Bonds. It is anticipated that the Bonds in book-entry form will be available for delivery in New York, New York, on or about July 27, 2005.

Dated: July 12, 2005

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

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

This Official Statement is not to be construed as a contract with the purchasers of the Bonds. Statements contained in this Official Statement which involve estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as a representation of facts. The information set forth herein has been obtained sources which are believed to be reliable, but it is not guaranteed as to accuracy or completeness and is not to be construed as a representation by the City. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder, under any circumstances, shall create any implication that there has been no change in the affairs of any party described herein subsequent to the date as of which such information is presented.

All summaries of the documents referred to in this Official Statement are made subject to the provisions of such documents, respectively, and do not purport to be complete statements of any or all of such provisions.

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

IN CONNECTION WITH THIS OFFICIAL STATEMENT, THE UNDERWRITER MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE UNDERWRITER MAY OFFER AND SELL THE BONDS TO CERTAIN DEALERS AND DEALER BANKS AND BANKS ACTING AS AGENTS AT PRICES LOWER THAN THE PUBLIC OFFERING PRICES STATED ON THE COVER PAGE HEREOF AND SAID PUBLIC OFFERING PRICES MAY BE CHANGED FROM TIME TO TIME BY THE UNDERWRITER.

THE BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON AN EXEMPTION CONTAINED IN SUCH ACT. THE BONDS HA VE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE.

When used in this Official Statement and in any continuing disclosure by the City, in any press release and in any oral statement made with the approval of an authorized officer of the City or any other entity described or referenced herein, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," "forecast," "expect," "intend" and similar expressions identify "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Any forecast is subject to such uncertainties. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances may occur. Therefore, there are likely to be differences between forecasts and actual results, and those differences may be material.

-i- CITY OF HERCULES

MAYOR AND MEMBERS OF THE CITY COUNCIL

Frank Batara, Mayor Trevor Evans-Young, Vice Mayor Adelfo "Ed" Balico, Councilman Charlene Raines, Councilmember Joanne Ward, Councilmember

CITY STAFF

Michael A. Sakamoto, City Manager Elizabeth W armerdam, Assistant City Manager Stephen R. Lawton, Director of Community Development Tim Hansen, Interim Finance Director Brent Salmi, City Engineer Erwin Blancaflor, Associate City Engineer and Director of Public Works Dennis Tagashira, Planning Manager Doreen Mathews, City Clerk

SPECIAL SERVICES

City Attorney Assessment Engineer Law Offices of Pelletreau, Alderson & Cabral Wildan/MuniFinancial Richmond, California Temecula, California

Bond Counsel Disclosure Counsel Orrick, Herrington & Sutcliffe LLP Quint & Thimmig LLP San Francisco, California San Francisco, California

Appraiser Fiscal Agent Seevers Jordan Ziegenmeyer The Bank of New York Trust Company, N.A. Rocklin, California Los Angeles, California

Underwriter Kinsell, Newcomb & De Dios, Inc. Solana Beach, California

-ii- TABLE OF CONTENTS

INTRODUCTION ...... 1 ESTIMATED SOURCES AND USES OF General ...... 1 FUNDS ...... 18 Authority and Purpose ...... 1 THE DISTRICT ...... 18 Security for Bonds ...... 1 General Description of the District ...... 18 Form of Bonds ...... 2 Improvements to be Financed...... 22 Payment of Interest ...... 2 Appraised Values ...... 23 Redemption ...... 2 Direct and Overlapping Bonded The Parcels ...... 3 Indebtedness; LLA District ...... 23 Property Values/ Appraisal ...... 3 The Primary Landowners ...... 25 Tax Matters...... 3 BONDOWNERS' RISKS ...... 26 Professionals Involved in the Offering ...... 3 General ...... 26 Continuing Disclosure ...... 4 Collection of the Assessments ...... 27 Bond Owner's Risks ...... 4 Risks Associates with Real Estate Secured Limited Liability ...... 4 Investments ...... 28 Other Information ...... 4 Availability of Funds to Pay Delinquent THEBONDS ...... 5 Assessment Installments ...... 28 General ...... 5 Owner Not Obligated to Pay Bonds or Payment ...... 5 Assessments...... 28 Optional Redemption ...... 6 Land Values ...... 28 Mandatory Sinking Fund Redemption ...... 6 Parity Taxes and Special Assessments ...... 29 Effect of Redemption ...... 7 Foreclosure ...... 29 Other General Redemption Provisions ...... 8 Concentration of Ownership ...... 32 No Additional Bonded Indebtedness of the Limited City Obligation Upon Delinquency .... 32 District ...... 9 Price Realized Upon Foreclosure ...... 33 Bonds Subject to Refunding ...... 9 Refunding Bonds ...... 34 SECURITY FOR THE BONDS ...... 10 Hazardous Materials...... 34 General ...... 10 Geologic, Topographic and Climatic Limited Obligation; No Required Advances Conditions ...... 34 from Available Surplus Funds ...... 11 Loss of Tax Exemption ...... 35 Establishment of Funds and Accounts ...... 11 Limitations on Remedies ...... 35 Reserve Fund ...... 12 Secondary Markets and Prices ...... 35 Covenant to Commence Superior Court No Acceleration Provision ...... 35 Foreclosure ...... 13 CONCLUDING INFORMATION ...... 35 Teeter Plan; Contra Costa County Tax Loss Legal Matters ...... 35 Reserve ...... 14 Tax Matters ...... 36 Priority of Lien...... 14 Absence of Litigation ...... 37 Agreement to Sell Agency-Owned Parcel...... 15 No Rating ...... 38 Sales of Tax-Defaulted Property Generally ...... 15 Underwriting ...... 38 Delinquency Resulting in Ultimate or Continuing Disclosure ...... 38 Temporary Default on Bonds ...... 15 Miscellaneous ...... 39 DEBT SERVICE SCHEDULE ...... 17

APPENDIX A THE APPRAISAL APPENDIX B GENERAL INFORMATION CONCERNING THE CITY OF HERCULES APPENDIX C FORMS OF CONTINUING DISCLOSURE CERTIFICATES APPENDIXD FORM OF OPINION OF BOND COUNSEL APPENDIX E THE BOOK ENTRY SYSTEM

-iii- CONCORD

-iv- OFFICIAL STATEMENT

$6,550,345 CITY OF HERCULES ASSESSMENT DISTRICT NO. 2005-1 (JOHN MUIR PARKWAY) LIMITED OBLIGATION IMPROVEMENT BONDS

The purpose of this Official Statement, which includes the cover page and appendices hereto (the "Official Statement"), is to provide certain information concerning the sale and issuance by the City of Hercules (the "City") of its City of Hercules Assessment District No 2005-1 Gohn Muir Parkway) Limited Obligation Improvement Bonds (the "Bonds").

INTRODUCTION

General

This Introduction is not a summary of this Official Statement. It is only a brief description of and guide to, and is qualified by, more complete and detailed information contained in the entire Official Statement, including the cover page and appendices hereto, and the documents summarized or described herein. A full review should be made of the entire Official Statement and such documents. The offering of the Bonds to potential investors is made only by means of the entire Official Statement.

Authority and Purpose

The City of Hercules Assessment District No. 2005-1 (John Muir Parkway) (the "District") was formed by the City and the assessments were levied under the Municipal Improvement Act of 1913, being Division 12 of the California Streets and Highways Code (the "1913 Act"), and the Bonds are being issued pursuant to the Improvement Bond Act of 1915, being Division 10 of the California Streets and Highways Code (the "Bond Law"). See "THE DISTRICT-General Description of the District" herein. The Bonds are being issued pursuant to a resolution of the City Council of the City adopted on June 28, 2005, and in accordance with the provisions of a Fiscal Agent Agreement, dated as of July 1, 2005 (the "Fiscal Agent Agreement"), by and between the City and The Bank of New York Trust Company, N.A., as fiscal agent (the "Fiscal Agent"). The proceeds from the sale of the Bonds will be used to: (i) finance a portion of the costs of certain road, bridge, storm drain, sewer, water and miscellaneous improvements to John Muir Parkway of special benefit to property within District (the "Improvements"), (ii) pay costs related to the issuance of the Bonds, (iii) fund the Reserve Fund for the Bonds, and (iv) prepay certain unpaid reassessments levied in the City's Alfred Nobel Reassessment District No. 01-1. See "ESTIMATED SOURCES AND USES OF FUNDS" and "THE DISTRICT" herein.

Security for Bonds

The interest on and principal of the Bonds are payable from the annual assessment installments collected on the ad valorem real property tax bills sent to owners of property within the District having unpaid assessments levied in the District (the "Assessments"). See "SECURITY FOR THE BONDS-General." There is also a Reserve Fund established under the Fiscal Agent Agreement in an amount equal to the Reserve Requirement. See "SECURITY FOR THE BONDS-Establishment of Funds and Accounts-Reserve Fund." The Assessments

-1- represent liens on the parcels (the "parcels") within the District subject thereto; they do not, however, constitute a personal indebtedness of the respective owners of such parcels. See "BONDOWNERS' RISKS-General."

Installments of the Assessments and interest thereon (the "Assessment Installments") which, along with certain investment earnings on funds held under the Fiscal Agent Agreement, are expected to be sufficient to pay the debt service on the Bonds, are to be included in the bills for ad valorem real property taxes mailed each year to the owners of parcels with unpaid Assessments by the Treasurer-Tax Collector of the County of Contra Costa. The Assessment Installments and all moneys and securities from time to time held by the Fiscal Agent in certain specified funds and accounts under the Fiscal Agent Agreement are pledged to the payment of the principal of and interest on the Bonds. See "SECURITY FOR THE BONDS-Establishment of Funds and Accounts."

To provide funds for payment of the Bonds and the interest thereon in the event of a delinquency in the payment of Assessment Installments, the City will establish a Reserve Fund for the Bonds and will deposit therein from the proceeds of the sale of the Bonds an amount in cash equal to the Reserve Requirement. Upon the occurrence of such a delinquency in the District, the Fiscal Agent is required to transfer the amount of the delinquency from the Reserve Fund into the Redemption Fund. See "SECURITY FOR THE BONDS-Establishment of Funds and Accounts-Reserve Fund." There is no assurance that funds will be available for this purpose; and if there are insufficient moneys in the Reserve Fund during the period of delinquency, a delay may occur in payments to the owners of the Bonds. No funds of the City other than the Reserve Fund will be available to cure any deficiency which may occur in the Redemption Fund. See "BONDOWNERS' RISKS." However, the City has covenanted that, with certain exceptions, in the event of a delinquency, it will order and cause to be commenced judicial foreclosure proceedings by the end of the fiscal year in which an Assessment Installment becomes delinquent. See "SECURITY FOR THE BONDS-Foreclosure Covenant."

Form of Bonds

The Bonds are being issued in fully registered form and will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, which will act as securities depository of the Bonds. Ownership interests in the Bonds may be purchased in book-entry form only in Authorized Denominations consisting (subject to certain exceptions related to redemption) of principal amounts of $5,000 or any integral multiple of $5,000 in excess thereof. See "THE BONDS-General" and APPENDIX E-THE BOOK ENTRY SYSTEM. So long as the Bonds are in book-entry form only, all references in this Official Statement to the owners or holders of the Bonds shall mean DTC and not the Beneficial Owners of the Bonds.

Payment of Interest

Interest on the Bonds is payable semiannually on each March 2 and September 2, commencing March 2, 2006. See "THE BONDS-General."

Redemption

The Bonds are subject to redemption prior to maturity from mandatory sinking fund payments and prepayments of Assessments, refunding bonds and other available funds. Redemption from prepayments of Assessments or otherwise at the option of the City may occur on any Interest Payment Date. See "THE BONDS-Optional Redemption" and "-Mandatory Sinking Fund Redemption."

-2- The Parcels

The District currently includes 4 separate Contra Costa County Assessor's parcels located in the western portion of the City in an area which includes approximately 51.7 acres of land. The four parcels are characterized by three distinct components: a detached, single-family residential component incorporating 335 partially improved single-family residential lots covering approximately 32.56 acres, a commercial component encompassing 17.27 acres of land, and a proposed mixed-use affordable housing component with ground floor retail encompassing 1.87 acres of land. See "THE DISTRICT."

Property Values/Appraisal

In order to determine the value of the parcels within the District that are subject to the Assessments securing the repayment of the Bonds, the City engaged the services of Seevers Jordan Ziegenmeyer (the "Appraiser") to obtain a current appraised valuation of each parcel in the District. In an appraisal report (the "Appraisal Report") dated May 20, 2005, the Appraiser determined that, as of May 19, 2005, and assuming, among other matters, that the Improvements to be financed by the District have been completed, the cumulative value of the land in the District subject to the levy of assessments was $57,870,000. See APPENDIX A-APPRAISAL REPORT, and "THE DISTRICT-Land Valuesff herein.

The valuation by the Appraiser of the various parcels in the District was based on the sales comparison approach to value. The single-family residential component of two of the parcels in the District was also valued in reliance upon the extraction technique to value, which was reconciled with the sales comparison approach to estimate the hypothetical market value per loaded lot on those parcels. The Appraiser has noted that the sum of the hypothetical values for each of the four parcels are not equivalent to the market value of the District as a whole. The Appraisal Report is subject to various assumptions and limiting conditions, as more fully set forth in the Appraisal Report. The Assessments are levied separately on each County Assessor's parcel in the District, and the values of individual parcels vary significantly from those of other parcels. See "SPECIAL RISK FACTORS" herein for a discussion of various circumstances that could adversely affect the value of the parcels in the District. See also "THE DISTRICT-Land Values," and APPENDIX A-THE APPRAISAL.

Tax Matters

In the opinion of Orrick, Herrington & Sutcliffe LLP, San Francisco, California, Bond Counsel, under existing laws, regulations, rulings and court decisions, the interest on the Bonds is exempt from personal income taxes of the State of California and, assuming compliance with certain covenants described in this Official Statement, is excluded from gross income for federal income tax purposes and is not a specific preference item for purposes of the federal alternative minimum tax. A copy of the form of opinion of Bond Counsel is set forth in Appendix D hereto. For a more complete discussion of Bond Counsel's opinion and certain other tax consequences incident to the ownership of the Bonds, including certain exceptions to the tax treatment of interest, see "CONCLUDING INFORMATION-Tax Matters."

Professionals Involved in the Offering

The Bank of New York Trust Company, N.A. will act as Fiscal Agent under the Fiscal Agent Agreement. All proceedings in connection with the issuance and delivery of the Bonds are subject to the approval of Orrick, Herrington & Sutcliffe LLP, San Francisco, California, Bond Counsel, and subject to certain other conditions. Certain legal matters will be passed upon for the City by the Law Offices of Pelletreau, Alderson & Cabral, Richmond, California, in their capacity as City Attorney. Assessment engineering services in connection with the

-3- establishment of the District were provided by Wildan/MuniFinancial, Temecula, California. The appraisal was prepared by Seevers Jordan Ziegenmeyer of Rocklin, California. Certain legal matters will be passed upon for the City by Quint & Thimmig LLP, San Francisco, California, in its capacity as Disclosure Counsel to the City for the Bonds. Payment of the fees and expenses of Bond Counsel and Disclosure Counsel is contingent upon the sale and issuance of the Bonds.

Continuing Disclosure

The City and the three primary landowners in the District have each agreed to provide, or cause to be provided, to each nationally recognized municipal securities information repository and any public or private repository or entity designated by the State as a state repository for purposes of Rule 15c2-12(b )(5) adopted by the Securities and Exchange Commission (each, a "Repository") certain information and notice of certain material events. See "CONCLUDING INFORMATION-Continuing Disclosure" herein, and APPENDIX C-FORMS OF CONTINUING DISCLOSURE CERTIFICATES, for a description of the specific nature of the annual reports and notices of material events to be provided. The continuing disclosure obligation of the landowners is subject to termination upon the occurrence of certain events. See "CONCLUDING INFORMATION-Continuing Disclosure" herein.

Bond Owner's Risks

Certain events could affect the availability of funds sufficient to pay the principal of and interest on the Bonds when due. See the section of this Official Statement entitled "BONDOWNERS' RISKS" for a discussion of certain factors which should be considered, in addition to other matters set forth herein, in evaluating an investment in the Bonds. The Bonds are not rated by any nationally recognized rating agency.

Limited Liability

As authorized by the Bond Law, the City has determined not to obligate itself to advance available funds from the City treasury to cure any deficiency or delinquency which may occur in the Redemption Fund created and held by the Fiscal Agent by reason of the failure of a property owner to pay an Assessment installment.

The Bonds are not an obligation of the State of California (the "State") or any of its political subdivisions, other than the City to the limited extent set forth in the Indenture, and neither the City nor the State or any of its political subdivisions has pledged its full faith and credit for the payment of the Bonds.

Other Information

This Official Statement speaks only as of its date, and the information contained herein is subject to change.

Brief descriptions of the Bonds and the Fiscal Agent Agreement are included in this Official Statement. Such descriptions and information do not purport to be comprehensive or definitive. All references herein to the Fiscal Agent Agreement, the Bonds and the laws of the State as well as the proceedings of the City are qualified in their entirety by reference to such documents, laws and proceedings, and with respect to the Bonds, by reference to the form thereof included in the Fiscal Agent Agreement.

Unless the context clearly requires otherwise, capitalized terms not otherwise defined herein shall have the meanings set forth in the Fiscal Agent Agreement.

-4- Copies of the Fiscal Agent Agreement, and the resolutions and other documents described or referred to herein may be obtained from the City. The City's address for such purpose is: City of Hercules, 111 Civic Drive, Hercules, California 94547, Attention: Financial Services Manager. The City may charge for duplication and mailing in response to requests for documents.

THE BONDS

General

The District proceedings are being conducted pursuant to the 1913 Act and a resolution of intention adopted by the City Council of the City. The Bonds, which represent the unpaid assessments levied against privately owned property in the District, are issued pursuant to the provisions of the 1915 Act and the Fiscal Agent Agreement.

The Bonds will be issued in fully registered form, without coupons, in the denomination of $5,000 each or in any integral multiple thereof (except that one Bond may be in an odd amount). The Bonds will be dated the date of delivery, and will bear interest at the rates per annum, will mature on the dates (each a "Principal Payment Date"), and will mature in the amounts set forth on the front cover of this Official Statement.

The Bonds are being issued as fully registered bonds, registered in the name of Cede & Co. as nominee of The Depository Trust Company, New York, New York ("OTC") and will be available to ultimate purchasers in book-entry form the denomination of $5,000 or any integral multiple thereof, under the book-entry system maintained by OTC. Purchasers will not receive physical certificates representing their beneficial ownership interest in the Bonds. While the Bonds are subject to the book-entry system, the principal, interest and any prepayment premium with respect to a Bond will be paid by the Fiscal Agent to OTC, which in turn is obligated to remit such payment to its OTC Participants for subsequent disbursement to Beneficial Owners of the Bonds as described herein. See APPENDIX E-THE BOOK-ENTRY SYSTEM.

Payment

Interest on the Bonds is payable March 2, 2006, and thereafter semiannually on March 2 and September 2 of each year (each an "Interest Payment Date"). The Bonds shall bear interest from the Interest Payment Date next preceding the date of authentication and registration thereof, unless (i) its date of authentication is an Interest Payment Date, in which event the Bond shall bear interest from its authentication date, (ii) its date of authentication is after the fifteenth day of the month preceding an Interest Payment Date (a "Record Date"), in which event the Bond shall bear interest from the Interest payment Date immediately succeeding the date of its authentication or (iii) its date of authentication is before the close of business on the first Record Date, in which event the bond shall bear interest from the dated date. Interest on the Bonds shall be calculated on the basis of a 360-day year, consisting of twelve 30-day months.

Payments of interest on the Bonds due on or before the maturity or prior redemption thereof will be made only to the person whose name appears in the Bond Register as the registered owner thereof at the close of business on a Record Date. Such interest will be paid by first class mail, postage prepaid, on the Interest Payment Date to such registered owner at his address as it appears on such Bond Register, except that in the case of an Owner of one million dollars or more in aggregate principal amount of Bonds, upon written request of such Owner to the Fiscal Agent, in form satisfactory to the Fiscal Agent, received not later than the Record Date, such interest shall be paid on the Interest Payment Date in immediately available funds by

-5- wire transfer to an account in the United States. Payment of the principal of and redemption premiums, if any, on the Bonds shall be made only to the person whose name appears in the Bond Register as the registered owner thereof, upon the surrender of the Bonds at the corporate office of the Fiscal Agent in Los Angeles, California at maturity or on redemption prior to maturity.

Optional Redemption

The Bonds are subject to optional redemption by the City prior to maturity, as a whole or in part in denominations of $5,000 or any integral multiple thereof on any Interest Payment Date upon at least thirty days' written notice to the Bondowner, from any moneys deposited in the Redemption Fund from any source for such purpose by the City, at a redemption price equal to the principal amount thereof, together with a redemption premium equal to the following amounts on the following dates (expressed as a percentage of the principal amount redeemed) plus accrued interest thereon to the date of redemption.

Redemption Dates Redemption Premium Any Interest Payment Date on or prior to 3.0% March 2, 2015 September 2, 2015 and March 2, 2016 2.0 September 2, 2016 and March 2, 2017 1.0 September 2, 2017 and any Interest Payment 0.0 date thereafter

In addition, any Bond may be redeemed in whole or in part in integral multiples of $5,000 on any Interest Payment Date, at the option of the City, upon at least thirty days' written notice to the Bondowner, from any moneys from prepayments of Assessments by property owners deposited in the Prepayment Account of the Redemption Fund, upon payment of the principal amount thereof, together with a redemption premium equal to the following percentages of the principal amount of Bonds to be redeemed, plus accrued interest to the date of redemption.

Mandatory Sinking Fund Redemption

The Bonds maturing on September 2, 2025 (the "2025 Term Bonds") are subject to mandatory redemption on or after September 2, 2021, by lot, at a redemption price equal to the principal amount thereof to be redeemed, without premium, solely from amounts deposited in the Redemption Fund pursuant to the Fiscal Agent Agreement, as follows:

Sinking Fund Redemption Date Redemption (September 2) Amount 2021 $205,000 2022 215,000 2023 225,000 2024 235,000 2025 (Maturity) 245,000

-6- The Bonds maturing on September 2, 2030 (the "2030 Term Bonds") are subject to mandatory redemption on or after September 2, 2026, by lot, at a redemption price equal to the principal amount thereof to be redeemed, without premium, solely from amounts deposited in the Redemption Fund pursuant to the Fiscal Agent Agreement, as follows:

Sinking Fund Redemption Date Redemption (September 2) Amount 2026 $260,000 2027 270,000 2028 285,000 2029 300,000 2030 (Maturity) 315,000

The Bonds maturing on September 2, 2035 (the "2035 Term Bonds" and, with the 2025 Term Bonds and the 2030 Term Bonds, the "Term Bonds") are subject to mandatory redemption on or after September 2, 2031, by lot, at a redemption price equal to the principal amount thereof to be redeemed, without premium, solely from amounts deposited in the Redemption Fund pursuant to the Fiscal Agent Agreement, as follows:

Sinking Fund Redemption Date Redemption (September 2) Amount 2031 $330,000 2032 350,000 2033 365,000 2034 385,000 2035 (Maturity) 405,000

In the event that the Term Bonds subject to mandatory redemption are redeemed in part prior to their stated maturity date from any moneys other than the mandatory sinking account payments, the remaining mandatory sinking account payments for such Term Bonds shall be reduced proportionately in $5,000 lots in each year remaining until and including the final maturity date of such Term Bonds.

Effect of Redemption

From and after the date fixed for redemption pursuant to the Fiscal Agent Agreement, if funds available for the payment of the principal of and interest (and redemption premium, if any) on the Bonds or portion of Bonds so called for redemption have been duly provided, then Bonds or portion of Bonds so called for redemption will become due and payable at the redemption price therein specified, and from and after such date (unless the City shall default in the payment of the redemption price or interest) such Bonds or portions of Bonds shall be defeased and shall cease to be entitled to any benefit or security under the Fiscal Agent Agreement (other than the right to receive payment of the redemption price and interest) and shall cease to bear interest.

Receipt of notice of redemption by the owner of a Bond shall not be a condition precedent to redemption and failure by the owner of a Bond to actually receive such notice of redemption shall not affect the validity of the proceedings for the redemption of such Bond or the cessation of interest.

-7- Other General Redemption Provisions

Selection of Bonds for Redemption. If less than all of the Outstanding Bonds are to be redeemed, the City shall designate in a written direction to the Fiscal Agent the aggregate amount of Bonds of each maturity to be redeemed pursuant to Section 8768 of the Act and the Fiscal Agent shall select the Bonds of each maturity to be redeemed by lot. The Fiscal Agent shall promptly notify the City in writing of the numbers of the Bonds, or portions thereof, selected for redemption.

Purchase of Bonds in lieu of Redemption. In lieu, or partially in lieu, of such call and redemption, moneys deposited in the Prepayment Account of the Redemption Fund may be used by the Fiscal Agent as directed in writing by the City to purchase Outstanding Bonds in the manner provided in the Fiscal Agent Agreement. Purchases of Outstanding Bonds may be made by the City prior to the selection of Bonds for redemption by the Fiscal Agent, at public or private sale as and when and at such prices as the City may in its discretion determine, but only at prices (including brokerage or other expenses) of not more than par plus accrued interest, and any accrued interest payable upon the purchase of Bonds may be paid from the amount in the Redemption Fund for payment of interest on the next following Interest Payment Date.

Notice of Redemption. When Bonds are to be called for redemption under the Fiscal Agent Agreement and the Fiscal Agent has received the required notice from the City, the Fiscal Agent shall give notice, in the name of the City, of the redemption of such Bonds. Such notice of redemption shall (a) specify the CUSIP numbers, serial numbers and the maturity date or dates of the Bonds selected for redemption, except that where all the Bonds are subject to redemption, or all the Bonds of one maturity, are to be redeemed, the serial numbers thereof need not be specified; (b) state the date fixed for redemption and for surrender of the Bonds to be redeemed; (c) state the redemption price; (d) state the place or places where the Bonds are to be surrendered for redemption; and (e) in the case of Bonds to be redeemed only in part, state the portion of such Bonds which is to be redeemed. Such notice shall further state that on the date fixed for redemption, there shall 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 that from and after such date, interest thereon shall cease to accrue and be payable. At least thirty (30) days but no more than forty-five (45) days prior to the redemption date, the Fiscal Agent shall 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. The actual receipt by the Owner of any Bond of notice of such redemption shall not be a condition precedent thereto, and failure to receive such notice shall not affect the validity of the proceedings for the redemption of such Bonds, or the cessation of interest on the redemption date.

At least two (2) Business Days before notice of redemption is given to the Owners, the Fiscal Agent shall send a copy of the notice of redemption by facsimile, certified mail or overnight delivery to the Securities Depositaries; provided, that failure to provide notice to the Securities Depositaries or to the Information Services shall not affect the validity of proceedings for the redemption of any Bonds.

With respect to any notice of optional redemption of Bonds, such notice may state that such redemption shall be conditional upon the receipt by the Fiscal Agent 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 shall not have been so received, said notice shall be of no force and effect and the Fiscal Agent shall not be required to redeem such Bonds. In the event that such notice of redemption contains such a condition and such moneys are not so received, the redemption shall not be made, and the Fiscal Agent shall within

-8- a reasonable time thereafter give notice, in the manner in which the notice of redemption was given, that such moneys were not so received.

So long as the Bonds are held in book-entry only form, notice of redemption will be mailed by the Fiscal Agent only to DTC and not to the Beneficial Owners (as defined in Appendix E) of Bonds under the DTC book-entry only system. Neither the City nor the Fiscal Agent is responsible for notifying the Beneficial Owners, who are to be notified in accordance with the procedures in effect for the DTC book-entry system. See APPENDIX E-THE BOOK ENTRY SYSTEM.

No Additional Bonded Indebtedness of the District

The Bonds represent the entire amount of the unpaid Assessments of the District levied against property within the District.

Bonds Subject to Refunding

The Bonds are subject to refunding pursuant to Division 11.5 of the Streets and Highways Code of the State of California. Under that Division, the City may issue refunding bonds for the purpose of redeeming the Bonds. The City may issue and sell refunding bonds without giving notice to and conducting a hearing for the owners of property in the District, or giving notice to the owners of the Bonds, if the City Council finds that:

(a) each estimated annual installment of principal and interest on the reassessment to secure the refunding bonds is less than the corresponding annual installment of principal and interest on the portion of the original assessment being superseded and supplanted by the same percentage for all subdivisions of land within the District, and any amount added to the annual installments on the reassessment due to a delinquency in payment on the original assessment need not be considered in this calculation;

(b) the number of years to maturity of all refunding bonds is not more than the number of years to the last maturity of the Bonds; and

(c) the principal amount of the reassessment on each subdivision of land within the District is less than the unpaid principal amount of the portion of the original assessment being superseded and supplanted by the same percentage for each subdivision of land within the District, and any amount added to a reassessment because of a delinquency in payment on the original assessment need not be considered in this calculation.

Upon issuing refunding bonds, the City Council could require that the Bonds be exchanged for refunding bonds on any basis which the City Council determines is for the City's benefit, if the Bondowners consent to the exchange. As an alternative to exchanging the refunding bonds for the Bonds, the City could sell the refunding bonds and use the proceeds to pay the principal of and interest and redemption premium, if any, on the Bonds as they become due, or advance the maturity of the Bonds and pay the principal of and interest and redemption premium thereon. See "THE BONDS-Redemption Provisions-Optional Redemption of Bonds."

-9- SECURITY FOR THE BONDS

General

The Bonds are issued upon and secured by the unpaid Assessments together with interest thereon and such unpaid Assessments together with interest thereon constitute a trust fund for the redemption and payment of the principal of the Bonds and the interest thereon. All of the Bonds are secured by the money in the Redemption Fund created pursuant to the assessment proceedings under the Fiscal Agent Agreement and by the unpaid Assessments. Principal of and interest on the Bonds are payable exclusively out of the Redemption Fund and the Reserve Fund held by the Fiscal Agent under the Fiscal Agent Agreement.

Unpaid Assessments do not constitute a personal indebtedness of the owners of the parcels within the District and the owners have made no commitment to pay the principal of or interest on the Bonds or to support payment of the Bonds in any manner. In the event of delinquency, proceedings may be conducted only against the real property securing the delinquent Assessment. Thus, the value of the real property within the District is a critical factor in determining the investment quality of the Bonds. A summary of land values of the parcels within the District is set forth under the heading "THE DISTRICT-Land Values" below. The unpaid Assessments are not required to be paid upon sale of property within the District. There is no assurance the property owners will be able to pay the Assessment Installments or that they will pay the Assessment Installments even though financially able to do so. See "BONDOWNERS' RISKS."

The unpaid Assessments are collected in semi-annual installments, together with interest on the declining balances, on the tax roll on which general ad valorem taxes on real property are collected, and are payable and become delinquent at the same time and in the same proportionate amounts and bear the same proportionate penalties and interest after delinquency as do general ad valorem taxes, and the properties upon which the Assessments were levied are subject to the same provisions for sale and redemption as are properties for nonpayment of general ad valorem taxes.

The Assessments may be prepaid in whole or in part at any time by the property owners in the District. Any such prepayment will result in a redemption of the Bonds prior to maturity. See "THE BONDS-Redemption Provisions." If only Assessments on parcels with high value to lien ratios are prepaid, the credit quality of the Bonds that remain outstanding and are secured by unpaid Assessments on parcels with lower value to lien ratios could deteriorate. See "BONDOWNERS' RISKS" herein.

The Assessments securing the Bonds have been allocated among the parcels within the District in proportion to the special benefits to be received from the improvements to be financed, in part, by the District. The Assessment for each parcel was determined by the Engineer of Work for the District, MuniFinancial, based on the permissible land use for the parcels, as set forth in the City's General Plan or any applicable Specific Plan, relative trip generation characteristics, the City's traffic model, floor area to parcel area ratios, and the gross area of the parcel. The Assessments have been based on an average floor ratio, compiled from both existing and proposed developments. The Assessments are related to the degree with which developments specially benefit from the proposed improvements based on the number of peak hour trips generated by the various developments. Reference is made to the Assessment Engineer's Report on file with the City for a full discussion of the manner in which the Assessments were determined.

-10- Limited Obligation; No Required Advances from Available Surplus Funds

The Bonds are limited obligation improvements bonds under the Bond Law. Notwithstanding any other provision of the Fiscal Agent Agreement, the City is not obligated to advance available surplus funds from the City treasury to cure any deficiency in the Redemption Fund or the Reserve Fund.

The Bonds are not an obligation of the City (except to the limited extent set forth in the Fiscal Agent Agreement), the State or any of its political subdivisions, and neither the faith and credit nor the taxing power of the City, the State of California or any political subdivision thereof is pledged to the payment of the Bonds.

Establishment of Funds and Accounts

For administering the proceeds of the sale of Bonds and payment of interest and principal on the Bonds, the Fiscal Agent will establish and direct to be maintained seven funds or accounts under the Fiscal Agent Agreement to be known as the Improvement Fund, the Assessment Fund, the Administrative Expense Fund, the Costs of Issuance Fund, the Redemption Fund, the Reserve Fund and the Rebate Fund. The Assessment Fund and the Administrative Expense Fund will be held by the City.

Improvement Fund. The moneys in the Improvement Fund, which consists of the Construction Account and the Acquisition Account, will be held by the Fiscal Agent and disbursed for the purpose of paying for the acquisition and construction of the Improvements authorized to be financed with proceeds of the Bonds, including reimbursing the Developer for cost related to a portion of the Improvements. See "THE DISTRICT-Improvements to be Financed" herein. Amounts to pay the costs of the Improvements will be paid from the Improvement Fund upon receipt by the Fiscal Agent of written directions from the City Engineer stating, among other things, that the conditions to the release of such funds have been satisfied.

After completion of the acquisition and construction of the Improvements, and the payment of all claims from the Improvement Fund, including claims, if any, by the City for amounts advanced by the City to the Improvement Fund toward the costs of the Improvements, the City Council shall determine the amount of the surplus, if any, remaining in the Improvement Fund. Any such surplus shall be, in such amounts as the City Council may determine, (i) transferred to the Redemption Fund to be used as a credit on the assessment, or (ii) transferred to the Redemption Fund to be used to redeem Bonds on the next redemption date, pursuant to Section 10427.1 of the 1913 Act.

Costs of Issuance Fund. A portion of the proceeds of the Bonds shall be deposited into the Costs of Issuance Fund and shall be applied to pay Costs of Issuance. Any amount remaining in the Costs of Issuance Fund on January 1, 2006 shall be transferred to the City for deposit in the Administrative Expense Fund and the Costs of Issuance Fund will be closed.

Assessment Fund. On the dates following the date on which the City receives money from the County of Contra Costa constituting the City's apportionment of tax revenues (including Assessment Installments and moneys collected representing the Administrative Expense Requirement) (the "Apportionment"), the City will authorize the Director of Finance to deposit a portion of such Apportionment to the Administrative Expense Fund as provided in the Fiscal Agent Agreement and the remainder of the Apportionment and any other amounts constituting Assessment Installments in the Assessment Fund. On or prior to the first day of February and June of each year, the City will transfer to the Fiscal Agent (i) amounts into the Interest Account of the Redemption Fund in an amount sufficient to make the Interest Payment on the next

-11- Interest payment Date for the Bonds, and (ii) amounts into the Principal Account of the Redemption Fund in an amount sufficient to make the Principal Payment due on the following September 2.

On July 1 of each Bond Year, any moneys remaining in the Assessment fund after the foregoing deposits have been made shall (i) if there are sufficient moneys to redeem Bonds, be transferred by the City to the Fiscal Agent for deposit in the Prepayment Account in the Redemption Fund and used to redeem Bonds or (ii) remain in the Assessment Fund and the City shall provide for a credit against each of the unpaid Assessments to be levied the next fiscal year in amounts equal to each parcel's proportionate share.

Redemption Fund. The principal of and interest on the Bonds shall be paid by the Fiscal Agent from the Redemption Fund. On or before each Interest Payment Date, there shall be withdrawn from the Redemption Fund for payment to the Bondowners the principal of (including Sinking Fund Payments), and interest and any premium, then due and payable on the Bonds. Prior to each Interest Payment Date, the City shall determine if the amounts on deposit in the Redemption Fund are sufficient to pay the Debt Service due on the Bonds on the next such Interest Payment Date. In the event the amounts in the Redemption Fund are insufficient for such purpose, the City shall cause to be withdrawn from the Reserve Fund, to the extent of any funds therein, the amount of such insufficiency, and cause such amount to be transferred to the Redemption Fund. Amounts so withdrawn from the Reserve Fund and deposited to the Redemption Fund shall be applied to the payment of the Bonds. If, after the foregoing transfers, there are insufficient funds in the Redemption Fund to make the payments to the Bondowners, the available funds shall be applied by the Fiscal Agent as directed by the Treasurer.

Reserve Fund

A reserve fund (the "Reserve Fund") will be established and maintained by the Fiscal Agent and shall constitute a trust fund for the benefit of the holders of the Bonds. At the time of issuance of the Bonds, the City shall, from the proceeds of the sale of the Bonds, transfer to the Fiscal Agent for deposit in said fund an amount which is equal to the "Reserve Requirement" which is defined in the Fiscal Agent Agreement to be, as of any date of calculation, an amount equal to the least of (a) ten percent of the original principal amount of the Bonds, of (b) the maximum Debt Service payable under the Fiscal Agent Agreement in the current or any future Bond Year or (c) 125% of average Debt Service payable under the Fiscal Agent Agreement in the current and in all future Bond Years, all as determined by the City under the Code and specified in writing to the Fiscal Agent, provided that such requirement ( or any portion thereof) may be satisfied by the provision of one or more policies of municipal bond insurance or surety bonds issued by a municipal bond insurer or by a letter of credit issued by a bank, the obligations insured by which insurer or issued by which bank, as the case may be, having ratings at the time of issuance of such policy or surety bond or letter of credit equal to II AAA" or higher assigned by Fitch or "Aaa" or higher assigned by Moody's or "AAA" or higher assigned by Standard & Poor's. The amount in the Reserve Fund shall be maintained at the Reserve Requirement.

In the event unpaid Assessments are paid in cash prior to their final due date, the City shall transfer such payments to the Fiscal Agent and the Fiscal Agent shall transfer no earlier than fifteen (15) days after the receipt of such payment from the Reserve Fund for deposit in the Redemption Fund an amount equal to the ratio of the total amount initially provided for in the Reserve Fund to the total amount originally assessed in the proceedings for the Bonds multiplied by the reduction in said assessments, which shall be calculated by the City and which such calculation shall be set forth in writing delivered to the Fiscal Agent. After each such transfer, the Reserve Requirement shall be reduced by the amount of such transfer.

-12- In the event Assessments are prepaid, in whole or in part, the Assessment thus prepaid shall be reduced by an amount equal to the ratio of the total amount of cash initially provided for the Reserve Fund to the total amount originally assessed in the proceedings for the issuance of the Bonds, multiplied by the total amount of the Assessments to be prepaid, and the amount thus determined shall be transferred from the Reserve Fund to the Prepayment Account of the Redemption Fund.

If at any time the amount of interest earned by the investment of any portion of the Reserve Fund, together with the principal amount in the Reserve Fund, shall exceed the Reserve Requirement, such excess shall at the written direction of the City be transferred by the Fiscal Agent to the Redemption Fund and shall be credited by the City upon the unpaid assessments in the manner set forth in Section 10427.1 of the Streets and Highways Code.

Whenever the balance in the Reserve Fund is sufficient to retire all the remaining outstanding Bonds, the Fiscal Agent shall transfer at the written direction of the City the balance in the Reserve Fund to the Redemption Fund and the City shall cease the collection of the principal and interest on the unpaid assessments. In such case, the City shall credit such balance against the assessments remaining unpaid in the manner set forth in the Bond Law, with the amount apportioned to each unpaid assessment credited against the last unpaid assessment installment; and if the amount apportioned to each parcel exceeds the amount of said last installment, then such excess shall be credited against the next preceding unpaid assessment installment or installments until exhausted. In the event that the balance in the Reserve Fund at the time of such transfer exceeds the amount required to retire all outstanding Bonds, then such excess shall at the written direction of the City be transferred to the City to be apportioned by the City to each parcel upon which an individual assessment remained unpaid at the time the balance in the Reserve Fund was sufficient to retire all outstanding Bonds, and such payments shall be made by the City in cash to the respective owners of the parcels, except that if such excess is not greater than one thousand dollars ($1,000), such excess shall be applied as directed by the City.

Any moneys held by the Fiscal Agent in the Reserve Fund shall be invested upon written request of the City in Permitted Investments specified in the Fiscal Agent Agreement, which will mature not later than five years from the date of purchase, or final maturity date, whichever is earlier.

Covenant to Commence Superior Court Foreclosure

The City covenants in the Fiscal Agent Agreement it will determine, no later than February 15 and June 15 of each year, whether or not any owners of property in the District are delinquent in the payment of Assessments. If so, the City will order and cause to be commenced no later than April 1 (with respect to a February 15 determination) or August 1 (with respect to a June 15 determination) and thereafter diligently prosecute an action in the superior court to foreclose the lien of any Assessments or installment thereof not paid when due, provided, however, that the City will not be required to order the commencement of foreclosure proceedings if (i) the total Assessment delinquency in the District for such fiscal Year is less than three percent (3.0%) of the total Assessments levied in such fiscal year, and (ii) the Reserve Fund remains at the Reserve Requirement. Not withstanding the foregoing, if the City determines that any single property owner in the District is delinquent in excess of $2,000 in the payment of Assessments, then it will diligently institute, prosecute and pursue foreclosure proceedings against such property owner.

-13- Teeter Plan; Contra Costa County Tax Loss Reserve

The County of Contra Costa and its subsidiary political subdivisions operate under the provisions of Sections 4701 through 4717, inclusive, of the Revenue and Taxation Code of the State of California, commonly referred to as the "Teeter Plan," with respect to property tax and special assessment collection and disbursement procedures. These sections provide an alternative method of apportioning secured taxes and special assessments whereby agencies levying taxes and special assessments through the County roll may receive from the County 100% of their taxes and special assessments at the time they are levied. The County treasury's cash position (from taxes) is insured by a special tax losses reserve fund (the "Tax Losses Reserve Fund") accumulated from delinquent penalties. Pursuant to the Teeter Plan, each taxing entity in the County may draw on the amount of uncollected taxes and assessments credited to its fund, in the same manner as if the amount credited had been collected. The tax losses reserve fund is used exclusively to cover losses occurring in the amount of tax and assessment liens as a result of sales of tax-defaulted property. Moneys in this fund are derived from delinquent tax penalty collections.

This method of apportioning taxes extends to all assessments collected on the County tax roll. Although a local agency currently receives the total levy for its special assessments without regard to actual collections, the basic legal liability for assessment deficiencies at all times remains with the sponsoring agency and, therefore, the alternative method of tax apportionment only assists the agency in the current financing of the maturing debt service requirements.

The Board of Supervisors may discontinue the procedures under the Teeter Plan altogether, or with respect to any tax or assessment levying agency in the County, if the rate of secured tax and assessment delinquency in that agency in any year exceeds 3% of the total of all taxes and assessments levied on the secured rolls for that agency.

The Assessment installments with respect to the Bonds will be collected pursuant to the procedures described above. Thus, so long as the County maintains its policy of collecting Assessments pursuant to said procedures and the City meets the Teeter Plan requirements, the City will receive 100% of the annual assessment installments levied without regard to actual collections in the District. There is no assurance, however, that the County Board of Supervisors will maintain its policy of apportioning assessments pursuant to the aforementioned procedures.

Priority of Lien

The Assessments and each installment thereof and any interest an penalties thereon constitutes a lien against each parcel on which it was imposed until the same is paid. Such lien is subordinate to all fixed special assessment lien previously imposed upon the same property, but has priority over all private liens, including the lien of any mortgage or deed of trust, and over all fixed special assessment liens which may thereafter be created against the property. Such lien is co-equal to and independent of the lien for general property taxes and liens previously or subsequently imposed pursuant to the Mello-Roos Community Facilities Act of 1982.

The City will use a portion of the proceeds of the Bonds to prepay certain reassessments levied on the parcels in the District and thereby release a prior lien with respect thereto, and the City is not aware of any other fixed assessment lien on the parcels in the District that is superior to or on a parity with the lien of the Assessments. See "THE DISTRICT-Direct and Overlapping Bonded Indebtedness; LLA District." See also "BONDOWNERS' RISKS-Parity Taxes and Special Assessments" herein.

-14- The City does, however, intend to form a landscape and lighting assessment district (the "LLA District") under the provisions of the California Streets and Highways Code to include the parcels in the District, to provide funds to maintain certain streets, lighting and landscaping, and a riparian corridor. See "THE DISTRICT-Direct and Overlapping Bonded Indebtedness; LLA District." The annual assessments levied by any such district will be secured by liens on the parcels in the District on a parity basis with the liens that secure the Assessments.

Agreement to Sell Agency-Owned Parcel

One of the parcels in the District, consisting of approximately 1.87 acres of land (and subject to an Assessment lien in the amount of $236,928), is owned by the Redevelopment Agency of the City of Hercules (the "Agency"). On June 28, 2005, the Agency adopted a resolution wherein the Agency agreed and determined that, in the event the Agency is delinquent in the payment of the Assessment installments as levied by the City on the Agency owned parcel, the Agency will (i) cure such delinquency within 30 days after notice from the City or the Fiscal Agent, or (ii) proceed promptly to sell the Agency-owned parcel and prepay the entire Assessment on such parcel out of the sale proceeds. The intent of the Agency's agreement is to avoid any need for the City to foreclose upon the Agency-owned parcel in the event that the Agency does not otherwise have sufficient funds to pay the Assessments levied on such parcel.

Sales of Tax-Defaulted Property Generally

Property securing delinquent Assessment Installments which is not sold pursuant to the judicial foreclosure proceedings described above may be sold, subject to redemption by the property owner, in the same manner and to the same extent as real property sold for nonpayment of general County property taxes. On or before June 30 of the year in which such delinquency occurs, the property becomes tax-defaulted. This initiates a five-year period during which the property owner may redeem the property. At the end of the five-year period the property becomes subject to sale by the County Treasurer and Tax Collector. Except in certain circumstances, as provided in the Bond Law, the purchaser at any such sale takes such property subject to all unpaid Assessments, interest and penalties, costs, fees and other charges which are not satisfied by application of the sales proceeds and subject to all public improvement Assessments which may have priority. See "SECURITY FOR THE BONDS-Foreclosure Covenant" for the circumstances under which the City is required to take action to foreclose the lien of delinquent Assessments.

Delinquency Resulting in Ultimate or Temporary Default on Bonds

If a temporary deficiency occurs in the Redemption Fund with which to pay Bonds which have matured, past due interest or the principal and interest on Bonds coming due during the current tax year, but it does not appear to the Treasurer that there will be an ultimate loss to the Bondholders, the Treasurer shall, pursuant to the Bond Law, pay the principal of Bonds which have matured as presented and make interest payments on the Bonds when due as long as there are available funds in the Redemption Fund, in the following order of priority:

(a) All matured interest payments shall be made before the principal of any Bonds is paid.

(b) Interest on Bonds of earlier maturity shall be paid before interest on Bonds of later maturity.

-15- (c) Within a single maturity, interest on lower-numbered Bonds shall be paid before interest on higher-numbered Bonds.

(d) The principal of Bonds shall be paid in the order in which the Bonds are presented for payment. Any Bond which is presented but not paid shall be assigned a serial number according to the order of presentment and shall be returned to the Bondholder.

When funds become available for the payment of any Bond which was not paid upon presentment, the Treasurer shall notify the registered owner of such Bond by registered mail to present the Bond for payment. If the Bond is not presented for payment within ten (10) days after the mailing of the notice, interest shall cease to run on the Bond.

If it appears to the Treasurer that there is a danger of an ultimate loss accruing to the Bondholders for any reason, he or she is required pursuant to the Bond Law to withhold payment on all matured Bonds and interest on all Bonds and report the facts to the City Council so that the City Council may take proper action to equitably protect all Bondholders.

Upon the receipt of such notification from the Treasurer, the City Council is required to fix a date for a hearing upon such notice. At the hearing the City Council shall determine whether in its judgment there will ultimately be insufficient money in the Redemption Fund to pay the principal of the unpaid Bonds and interest thereon.

If the City Council determines that in its judgment there will ultimately be a shortage in the Redemption Fund to pay the principal of the unpaid Bonds and interest thereon (an "Ultimate Default"), the City Council shall direct the Treasurer to pay to the owners of all outstanding and unpaid Bonds such proportion thereof as the amount of funds on hand in the Redemption Fund bears to the total amount of the unpaid principal of the Bonds and interest which has accrued or will accrue thereon. Similar proportionate payments shall thereafter be made periodically as monies come into the Redemption Fund.

Upon the determination by the City Council that an Ultimate Default will occur, the Treasurer shall notify all Bondholders to surrender their Bonds to the Treasurer for cancellation. Upon cancellation of the Bonds, the Bondholder shall be credited with the principal amount of the Bond so canceled. The Treasurer shall then pay by warrant the proportionate amount of principal and accrued interest due on the Bonds of each Bondholder as may be available from time to time out of the money in the Redemption Fund. Interest shall cease on principal payments made from the date of such payment, but interest shall continue to accrue on the unpaid principal at the rate specified on the Bonds until payment thereof is made. No premiums shall be paid on payments of principal on Bonds made in advance of the maturity date thereon.

If Bonds are not surrendered for registration and payment, the Treasurer shall give notice to the Bondholder by registered mail, at the Bondholder's last address as shown on the registration books maintained by the Registrar, of the amount available for payment. Interest on such amount shall cease as of ten days from the date of mailing of such notice.

If the City Council determines that in its judgment there will not be an Ultimate Default, it shall direct the Treasurer to pay matured Bonds and interest as long as there is available money in the Redemption Fund.

-16- DEBT SERVICE SCHEDULE

The table below sets forth the scheduled annual debt service payments on the Bonds, assuming no optional redemption of the Bonds.

Year Ending September 2 Principal* Interest Total 2006 $ 75,345 $ 342,295.32 $ 417,640.32 2007 115,000 309,705.00 424,705.00 2008 120,000 306,082.50 842,345.32 2009 125,000 302,002.50 427,002.50 2010 125,000 297,502.50 422,502.50 2011 130,000 292,815.00 849,505.00 2012 135,000 287,745.00 422,745.00 2013 145,000 282,277.50 427,277.50 2014 150,000 276,187.50 850,022.50 2015 155,000 269,737.50 424,737.50 2016 160,000 262,917.50 422,917.50 2017 170,000 255,717.50 847,655.00 2018 175,000 247,897.50 422,897.50 2019 185,000 239,672.50 424,672.50 2020 195,000 230,792.50 847,570.00 2021 205,000 221,335.00 426,335.00 2022 215,000 211,085.00 426,085.00 2023 225,000 200,335.00 852,420.00 2024 235,000 189,085.00 424,085.00 2025 245,000 177,335.00 422,335.00 2026 260,000 165,085.00 846,420.00 2027 270,000 152,085.00 422,085.00 2028 285,000 138,585.00 423,585.00 2029 300,000 124,335.00 845,670.00 2030 315,000 109,335.00 424,335.00 2031 330,000 93,585.00 423,585.00 2032 350,000 76,755.00 847,920.00 2033 365,000 58,905.00 423,905.00 2034 385,000 40,290.00 425,290.00 2035 405.000 20,655.00 849.195.00 Totals $6 550 345 $6,182,137.82 $12 732 482.82

*Includes mandatory sinking fund installments.

-17- ESTIMATED SOURCES AND USES OF FUNDS

The estimated sources and uses of the proceeds of the Bonds are set forth below.

Estimated Sources of Funds Principal Amount of the Bonds $6,550,345.00 Less: Underwriter's Discount (131,006.90) Less: Net Original Issue Discount (78.175.75) Total Sources of Funds $6.341162.35

Estimated Uses of Funds Deposit to Construction Account of Improvement Fund (1) $4,980,707.40 Deposit to Acquisition Account of Improvement Fund (2) 639,042.00 Deposit to Costs of Issuance Fund (3) 186,003.45 Deposit to Reserve Fund (4) 427,277.50 Payment of Existing Assessment Liens (5) 108.132.00 Total Uses of Funds $6.341.162.35

(1) To be used to pay costs of the improvements to be financed by the District. See "THE DISTRICT-Improvements to be Financed." (2) To be used to purchase improvements already completed. See "THE DISTRICT-Improvements to be Financed." (3) To be used to costs of issuance of the Bonds, including Bond Counsel and Disclosure Counsel fees and expenses, Fiscal Agent fees, printing costs and other costs of issuance. (4) Equal to the initial Reserve Requirement. See "SECURITY FOR THE BONDS-Establishment of Funds and Accounts-Reserve Fund." (5) Represents amounts necessary to pay in full outstanding reassessment liens on parcels in the District levied by the City's Alfred Nobel Reassessment District No. 01-1. See "THE DISTRICT-Direct and Overlapping Bonded Indebtedness."

THE DISTRICT

General Description of the District

The District is a special assessment district formed by the City Council under the 1913 Act under proceedings taken pursuant to a resolution of intention adopted by the City Council on November 23, 2004 for the purpose of providing a portion of the costs of certain public improvements more fully described below. A public hearing and assessment ballot proceeding with respect to the establishment of the District and the levy of the Assessments was held by the City Council of the City on January 25, 2005, and all of the ballots cast were in favor of the District and the Assessments. On June 28, 2005, the City Council adopted a resolution authorizing the issuance of the Bonds.

The District includes approximately 51.7 acres located in the western portion of the City. The parcels in the District are characterized by three distinct components: a detached, single family residential component incorporating 335 partially improved single-family residential lots covering approximately 32.56 acres, a commercial component encompassing 17.27 acres of land, and a proposed mixed-use affordable housing component with ground floor retail encompassing 1.87 acres of land.

The property in the District was originally part of a larger, 105 acre parcel, that is subject to a Development Agreement, entered into as of November 14, 2003 (the "Development Agreement"), among the City, the Agency and Lewis-Hercules, LLC, a Delaware limited liability company (the "Master Developer"). The Development Agreement vests certain development entitlements for the property in the District, including the right to develop up to 239 single family detached and 96 duet residential units (the "Residential Component"), up to

-18- 60 residential units and up to 26,825 square feet of commercial use (the "PCR Component"), and up to 167,700 square feet of commercial building square feet (the "Commercial Component"). The Master Developer sold the land for the Residential Component on February 15, 2004 to William Lyon Homes Inc. ("William Lyon") as to 17.98 acres, and to WL Homes, LLC (otherwise known as John Laing Homes, and referred to herein as "John Laing") as to 14.58 acres; has transferred the land for the PCR Component to the Agency; and has transferred the land for the Commercial Component to its affiliates, LDC Cougar, LLC and LHN Cougar, LLC (collectively, the "Lewis Entities") who hold title to such land as tenants in common. See "THE DISTRICT-The Primary Landowners."

The Master Developer has represented that the property in the District has received all relevant land use approvals and environmental approvals for development in accordance with the Development Agreement, including U.S. Army Corps of Engineers, California Water Resources Control Board and California Department of Fish and Game permits, and a vesting tentative map has been recorded for the property. Further development is subject to the issuance of building permits and, as to the Commercial Component, specific site approvals. All necessary public utilities, including water and sewer service, are available to the land in the District.

William Lyon reports that it expects to construct 172 dwelling units on the property in the District that it owns, including some attached units, in two communities to be known as Seagate at Bayside and Wavecrest at Bayside. William Lyon has stated that, as of June 21, 2005, infrastructure improvements for its developments are 90% complete, that it has been issued building permits by the City for 46 of the 172 lots in the developments, and that construction has commenced on structures on 46 of the 172 lots. Sales of units has commenced and construction and sales of units are expected to be completed by the end of 2006. No assurance can be given that construction and sales will occur as expected.

John Laing reports that, as of June 8, 2005, it has obtained building permits from the City for 72 of the 163 lots on the property that it owns in the District, and has commenced construction of 48 dwelling units on those lots. John Lang has indicated that infrastructure improvements for its property will be completed by the end of August of 2005, and that it expects to have construction of homes on all of the 163 lots on the property it owns in the District completed, and all of the homes sold, by the end of 2006. No assurance can be given that construction and sales will occur as expected.

The Lewis Entities report that they have submitted a site plan to the City for the development of the Commercial Component and expect that the City will conduct hearings on the relevant approvals needed for construction in the Fall of 2005. The site plan calls for the construction of a 167,700 square foot retail center on the 17.27 acres owned by the Lewis Entities in the District, including 140,000 square feet for a major retail tenant. Development is subject to updates to traffic and environmental studies, in addition to relevant City approvals. The Lewis Entities have advised that, in any event, development of the Commercial Component is not expected to commence until, at the earliest, the first quarter of 2006. No assurance can be given that any such approvals will be given, and there is already some public opposition to the proposed major retail tenant.

The Development Agreement required that the Master Developer post a letter of credit with the City in the amount of $2,000,000 to ensure timely development of the Commercial Component. The Development Agreement provides that the City may draw on the letter of credit in specified amounts if the certain development milestones are not satisfied, including the application by the property owner for building permits (i) for 20,000 square feet of retail development in the Commercial Component on or prior to December 31, 2005, (ii) for a cumulative of 40,000 square feet of retail development in the Commercial Component by

-19- December 31, 2006, and (iii) for a cumulative of 60,000 square feet of retail development in the Commercial Component by December 31, 2007. Any such draws are subject to various conditions set forth in the Development Agreement, and the Development Agreement can be amended at any time by the parties thereto without any requirement for notice to or the consent of the Bondowners.

The parcel for the PCR Component was conveyed by the Master Developer to the Agency. The Agency currently plans to construct a commercial/residential development on this parcel, which would include 26,825 square feet of ground floor retail development and 35 affordable multifamily housing units above the retail development. While the Agency expects to commence construction by 2006, no assurance can be given as to when such construction will commence or be completed.

The following page contains a copy of the boundary map for the District.

-20- SHEET 1 OF 1

F'ILED IN ll-!( omCE OI' ll1E CITY ClfRK lt!IS dJJ:i/. DAY OF :::f)0u10·1kiR I 2004. Jt~,~UD CITY CLERK ClrY Of" HEl

I HEREBY C!:RTIFY THAT ll1E VIITHIN PROPOSED 80UN0it.RY i,IAI' Of it.SSESSMENT OiSlRICT NO. 200,-1 (JOHN MUIR PAR~W4Y), CITY OF HERCULES, COUNTY or COHl'RA COSTA, STAl'E OF CALIFORNIA, w•S APPROVED OYq1.~J1Y COUN%0f' THE CITY or HERCIJLES AT ... REGIJLAR ~~~cTI;;::~:or, H£lfs3"-111:£n O~l OF Ost 11 hu, 2004, av ITS

&$\. " \..~d:u..u.c. CITY Cl.ERK Ci TY Of" HERCULES

F'IL.Ell. lHIS ]iJ:)_ 0A'1' Of ~p~_ , 2004, AT ll-

I N THE LINES "NO OIMOARCtl.S USfEO.

TH£ CONlRA COSTA COUNTY ASSESSOR'S M,.PS SH...U. GOVERN FOR AU. OETAH.S CONCERNING THE LINES mo DIMENSIONS (}F SUCH LO"T'S OR PARCELS.

FOR OETAILS ON UTIU!l(S, REF'ER TO TJ;E UTIUrY Pl»IS OH fll.E i11Ttt CITY Of HERCIJILS.

I it.St.Ir I · -;.;ss.:sSOR·s l L s~- i ~~~~~~~~~o I ! 2 I 40~0W-019 I LEGEND I ! I ~!=g~~=g~~ ::::l PROPOSED DISTRICT 90UNOAR'1'

0 it.SSESSMENT NUMBER PROPOSED BOUNDARY MAP OF MuniFinancial ASSESSMENT DISTRICT NO. 2005-1 ~ 2'i'3e8 Via lnd.UI uia ( JOHN MUIR PARKWAY) Suite 110 Temecula, Calltamia 92500-3661 ~oo· 250· o· ~· Pboo.e (9111) 587-MOO f'll:a: (061) M?-3610 CITY OF HERCULES sc...u:; 1· -~ ~· COUNTY OF CONTRA COSTA STATE OF CALIFORNIA (04-109A) N0',Uo8ER 100~ Improvements to be Financed

The District is authorized to finance road, bridge, storm drain, sewer, water, and miscellaneous improvements to John Muir Parkway generally located from Alfred Nobel Drive on the east westerly to Bayfront Boulevard in the City. The general description of work consists of the installation of new pavement, bridges and base, curbs and gutters, traffic signals, street lights, landscaping and irrigation systems, sanitary sewer system, water, local storm drain collection system within City right-of-way, including appurtenances and the acquisition of necessary public right-of-way or public easement areas related thereto. The design and construction of the following miscellaneous improvements including but not limited to clear and grub existing vegetation, signing and striping, temporary barricades, erosion control, landscaping and irrigation creek grading and mitigation, split rail fence, bridge crossings at John Muir and Bayfront Boulevard.

The total cost of construction of the Improvements is estimated in the Engineer's Report for the District to be $4,978,262, not including assessment bond costs in the amount of $1,572,083. The cost of the Improvements as set forth in the Engineer's Report is summarized as follows:

Street Improvements- John Muir Parkway $ 925,840 Storm Drain Improvements 179,896 Sewer Improvements 402,625 Joint Trenching 426,500 Water Improvements 342,950 Bridge Crossings 888,885 Landscaping and Irrigation 147,000 Miscellaneous (including traffic signals) 466,250 Civil, Soils and Utility Engineering/Staking 318,017 Plan Check/Inspection Fees 159,141 Contingency 511,221 General Incidentals Costs 98,500 Existing Assessment District Payoff 111.411 Total Project and General Incidental Costs $4.978.262

The Engineer's Report for the District also provides for the funding of capitalized interest for the Bonds and certain other costs; however, it is not expected that Bond proceeds will be used for capitalized interest and such other costs so that approximately $641,000 of Bond proceeds allocated to such purposes will be available to finance costs of the Improvements, in addition to the amounts set forth in the table above. Most of the Improvements have not been the subject of construction bids, and are not expected to be bid out until, at the earliest, the Spring of 2006, so the City has included such additional amount in the Bond issue to cover possible construction costs in excess of the Engineer's estimates. Such additional amount, if not needed to pay costs of the Improvements, will be credited to the Assessments or otherwise disposed of as provided in the Fiscal Agent Agreement. The Bond Law allows any such funds to be used to maintain the Improvements or to call Bonds for redemption.

The Improvements are to be constructed by the City, except that the construction of certain sanitary sewer line and lift station improvements, and Refugio Creek Bridge design and permitting tasks included as part of the Improvements (collectively, the "Developer Improvements") have been undertaken by Lewis-Hercules, LLC, the Master Developer, pursuant to a Funding, Acquisition and Disclosure Agreement (the "Funding Agreement") with the City, dated as of June 28, 2005. The Funding Agreement obligates Lewis-Hercules, LLC to pay all costs of the Developer Improvements in excess of a budgeted amount of $639 ,042, as set forth in the Funding Agreement. Lewis-Hercules, LLC has represented that the Developer

-22- Improvements are substantially complete. The City expects that the construction of the remainder of the Improvements will commence in the second quarter of 2006, and that those Improvements will be substantially completed approximate]y twelve months after construction commences. However, the design of some of such Improvements has not been completed and none of such Improvements have been the subject of construction bids, so no assurance can be given that the construction of the Improvements will commence or be completed as expected.

Land Values

Set forth below is a table which sets forth certain information regarding each parcel within the District. The value to lien ratios presented are based upon the values for the parcels in the Appraisal.

APPRAISED VALUES OF CERTAIN PARCELS IN THE DISTRICT

Assessment County Assessor's Assessment Appraised Value to Lien Number(l) Landowner(2) Parcel No. Amount(l) Value(3) Ratio(4) 1 John Laing 404020080 $1,847,273 $23 ,620 ,000 12.8:1 2 William Lyon 404020079 2,278,050 24,920,000 10.9:1 3 Lewis Entities 404020076 2,188,094 6,770,000 3.1:1 4 Agency 404020082 236,928 2,560,000 10.8:1

(1) From the Engineer's Report for the District. (2) See "THE DISTRICT-General Description of the District" and "THE DISTRICT-The Primary Landowners." (3) From the Appraisal. See APPENDIX A-THE APPRAISAL. (4) Ratio of Appraised Value to Assessment Amount.

See "BONDOWNERS' RISKS" herein for a description of circumstances that may affect the value of the parcels in the District. Assessed values may not reflect the true value of the parcels in the District. The City makes no representation as to the accuracy or completeness of the Appraisal.

Direct and Overlapping Bonded Indebtedness; LLA District

The ability of an owner of land within the District to pay the Assessments could be affected by the existence of other taxes and assessments imposed upon the property. In addition to the Bonds, other public agencies whose boundaries overlap those of the District could, without the consent of the City, and in certain cases without the consent of the owners of the land within the District, impose additional taxes or assessment liens on the property within the District in order to finance public improvements to be located inside of or outside of such area. The lien created on the property within the District through the levy of such additional taxes or assessments may be on a parity with the lien of the Assessments. See "BONDOWNERS' RISKS-Parity Taxes and Special Assessments" below.

Set forth below is a direct and overlapping debt report prepared by California Municipal Statistics, Inc. as of June 24, 2005. The debt report is included for general information purposes only. The City has not independently verified the debt report and makes no representations as to its completeness or accuracy.

-23- DIRECT AND OVERLAPPING INDEBTEDNESS CITY OF HERCULES ASSESSMENT DISTRICT NO. 2005-1

2004-05 Local Secured Assessed Valuation: $18,385,346

DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable Debt 711 /05 Bay Area Rapid Transit District 0.005% $ 4,985 Contra Costa Community College District 0.016 14,441 West Contra Costa Unified School District 0.093 355,739 West Contra Costa Healthcare District Parcel Tax Obligations 0.192 49,920 East Bay Municipal Utility District 0.014 417 East Bay Regional Park District 0.007 10,487 City of Hercules Assessment District No. 2005-1 100. ___- (1) TOTAL GROSS DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $435,989 Less: East Bay Municipal Utility District (100% self-supporting) ___il_Z TOTAL NET DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $435,572

OVERLAPPING GENERAL FUND OBLIGATION DEBT: % Applicable (2) Debt 7 /1/05 Contra Costa County General Fund Obligations 0.001% $ 1,869 Contra Costa County Pension Obligations 0.001 3,285 Contra Costa County Board of Education Certificates of Participation 0.001 10 Contra Costa Community College District General Fund Obligations 0.001 8 West Contra Costa Unified School District Certificates of Participation 0.004 371 City of Hercules General Fund Obligations 0.036 5,730 Contra Costa County Mosquito Abatement District Certificates of Participation 0.001 __2 TOTAL OVERLAPPING GENERAL FUND OBLIGATION DEBT $11,275

GROSS COMBINED TOTAL DEBT $447,264 (3) NET COMBINED TOT AL DEBT $446,847

Ratios to 2004-05 Local Secured Assessed Valuation: Direct Debt...... - o/o (1) Total Gross Direct and Overlapping Tax and Assessment Debt ...... 2.37% Total Net Direct and Overlapping Tax and Assessment Debt ...... 2.37% Gross Combined Total Debt ...... 2.43% Net Combined Total Debt ...... 2.43%

(1) Excludes limited obligation improvement bonds to be sold and existing assessment district liens to be discharged. (2) Based on 2004-05 all property assessed valuation of $615,156, which excludes the redevelopment incremental valuation. (3) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and tax allocation bonds and non-bonded capital lease obligations.

Certain parcels in the District are located within the boundaries of the City's Alfred Nobel Reassessment District No. 01-1 (the "Reassessment District"), and are subject to reassessments ( the "Reassessments") levied by the City for the Reassessment District. On the date of issuance of the Bonds, approximately $108,132 of Bond proceeds will be used by the City to prepay the Reassessments and thereby release any liens imposed on parcels in the District with respect to the Reassessment District and the Reassessments. Proceeds of the prepayment of the Reassessments will be used to call bonds issued for the Reassessment District on September 2, 2005.

The City has the right, under a development agreement that pertains to the property in the District (see "THE DISTRICT-General Description of the District"), to form a landscape and lighting assessment district with the power to levy assessments or parcels on the District in perpetuity (the "LLA District"). The assessments to be levied by the LLA District will be used to provide for the long-term operation and maintenance of the on-site streets, lighting and landscaping to be maintained by the City, and to maintain the riparian corridor which runs through the middle of the District to be dedicated to the City. The LLA District will not incur bonded indebtedness, but is expected to have annual assessment levies on property in the

-24- District in amounts sufficient to fund the above-described maintenance services, which amounts are unknown at this time. The liens securing any annual assessments levied for the LLA District, when and if it is created by the City, will be on a parity with the liens securing the unpaid Assessments. See "BONDOWNER'S RISKS-Parity Taxes and Special Assessments."

The Primary Landowners

Information under this subheading is included because it may be considered relevant by some investors to an informed evaluation and analysis of the parcels within the District subject to the Assessments and any existing or future improvements thereon as security for the Bonds. The information contained below does not guarantee that property ownership will not change or that the current or any subsequent property owners will pay the Assessment Installments when due. The Assessments will constitute liens on the respective parcels within the District and not a personal indebtedness of the owners of property within the District. The information below has been provided by the Primary Landowner, and neither the City nor the Underwriter can ensure, and do not ensure, its completeness or accuracy.

Williams Lyon Homes (sometimes referred to herein as "William Lyon") and subsidiaries are primarily engaged in designing, constructing and selling single family detached and attached homes in California, Arizona and Nevada. Since the 1950's, the Company has sold over 100,000 homes. The Company conducts its homebuilding operations through five geographic divisions (Southern California, San Diego, Northern California, Arizona and Nevada) including both wholly-owned projects and projects being developed in unconsolidated joint ventures. The Company believes that it is one of the largest homebuilders in California in terms of both sales and homes. A majority of the Company's home closings were derived from its California operations. See William Lyon Homes website at http:/ /www.lyonhomes.com for more information regarding William Lyon Homes, Inc. Information provided on such website shall not be deemed to be incorporated by reference into, and shall not be considered a part of, this Official Statement. No representation is made in this Official Statement as to the accuracy or adequacy of the information contained on the Internet site.

WL Homes, LLC (sometimes referred to herein as "John Laing") conveyed the property it owned in the District to a financing entity, which has given options to purchase all 163 lots in this part of the District back to WL Homes, LLC. WL Homes, LLC and related entities conduct business under the name John Laing Homes ("JLH"). JLH exercises the options to repurchase the lots in the District from the financing entity as it develops the lots. JLH entered the United States homebuilding market in 1984. WL Homes LLC was formed in April 1998 when John Laing Homes merged with Watt Homes, becoming one of the nation's largest homebuilders. Watt Homes, formerly headquartered in Encino, California, was one of the premier homebuilders in the western United States. Today, WL Homes LLC operates eight divisions in California and Colorado -tm,@er the name John Laing Ho~es. See JLH' s website at http:/ /www.johnlainghomes.com for more information regarding JLH. Information provided on such website shall not be deemed to be incorporated by reference into, and shall not be considered a part of, this Official Statement. No representation is made in this Official Statement as to the accuracy or adequacy of the information contained on the Internet site.

LDC Cougar, LLC and LHN Cougar, LLC (sometimes referred to herein as the "Lewis Entities") are Delaware limited liability companies whose sole manager is Lewis Operating Corporation, a California Corporation ("LOC"). LOC, as well as Lewis-Hercules, LLC (sometimes referred to herein as the "Master Developer"), are members of the Lewis Group of Companies ("Lewis"). Lewis is one of the nation's largest privately held real estate development companies. Lewis focuses on developing mixed-use planned communities and residential subdivisions in California and Nevada, as well as building multifamily communities, shopping

-25- centers, office parks, and industrial space. Since 1955, Lewis has developed new communities in California, Nevada, Arizona, and Utah totaling in excess of 22,000 acres including more than 56,000 homes, 9,000 apartments and 7 million square feet of retail, office, and industrial space. See the Lewis website at http:/ /www.lewisop.com for more information regarding the Lewis Group of Companies. Information provided on such website shall not be deemed to be incorporated by reference into, and shall not be considered a part of, this Official Statement. No representation is made in this Official Statement as to the accuracy or adequacy of the information contained on the Internet site. ·· "'J

The Redevelopment Agency of the City of Hercules (sometimes referred to herein as the "Agency") is a California redevelopment agency. The City Councilmembers comprise the members of the governing board of the Agency.

BONDOWNERS' RISKS

The following information should be considered by prospective investors in evaluating the investment quality of the Bonds. The information below, however, does not purport to be an exhaustive listing of risks and other considerations that may be relevant to a decision to invest in the Bonds. Furthermore, the order in which the following information is presented is not intended to reflect the rel&iive importance of any such rbi

General

Under the provisions of Bond Law, Assessment Installments, from which funds for the payment of annual installments of principal of and interest on the Bonds are derived, will be billed to properties against which there are unpaid Assessments on the regular ad valorem property tax bills sent to owners of such properties. Such Assessment Installments are due and payable at the same times, and bear the same penalties and interest for non-payment as do regular property tax installments. A property owner cannot pay the County tax collector less than the full amount due on the tax bill, however it is possible to pay Assessment Installments directly to the City in satisfaction of the obligation to pay that Assessment without paying property taxes also then due. It should also be noted that the unwillingness or inability of a property owner to pay regular property tax bills as evidenced by property tax delinquencies may also indicate an unwillingness or inability to make regular property tax payments and Assessment Installment payments in the future.

Unpaid Assessments do not constitute a personal indebtedness of the owners of the lots and parcels within the District and the owners have made no commitment to pay the principal of or interest on the Bonds or to support payment of the Bonds in any manner. Accordingly, in the event of delinquency, proceedings may be conducted only against the real property securing the delinquent Ass~~::~2nt. Thus, the value of the rea~· /~. perty within the District is a critical factor in determining the investment quality of the Bonds. There is no assurance any owner will be able to pay the Assessment Installments or that they will pay such installments even though financially able to do so.

In order to pay debt service on the Bonds, it is necessary that unpaid installments of Assessments on land within the District are paid in a timely manner. Should the Assessment Installments not be paid on time, the City has established a Reserve Fund to cover delinquencies. The Assessments are secured by a lien on the parcels within the District and the City has covenanted to institute foreclosure proceedings to sell parcels with delinquent Assessment Installments for amounts sufficient to cover such delinquent installments in order to obtain funds to pay debt service on the Bonds.

-26- Failure by any owner of a parcel in the District to pay Assessments Installments when due, depletion of the Reserve Fund, delay in foreclosure proceedings, or the inability of the City to sell parcels which have been subject to foreclosure proceedings for amounts sufficient to cover the delinquent Assessment Installments levied against such parcels may result in the inability of the City to make full or punctual payment of debt service on the Bonds and Bondowners would therefore be adversely affected.

Collection of the Assessments

The Assessment Installments are to be collected in the same manner as ordinary ad valorem real property taxes are collected and, except as provided in the special covenant for foreclosure in the Fiscal Agent Agreement, 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 real property taxes. Pursuant to these procedures, if taxes are unpaid for a period of five years or more, the property may be deeded to the State and then is subject to sale by the County.

According to the Contra Costa County Assessor, at this time there are no outstanding delinquencies in the payment of property taxes levied on parcels within the District. It should not be assumed, however, that this payment information forecasts the Assessment paying ability of the landowners in the District now or in the future.

The County of Contra Costa has adopted the Teeter Plan (see "SECURITY FOR THE BONDS-Teeter Plan; Contra Costa Tax Loss Reserve"). The Teeter Plan provides for payments of taxes and assessments to local agencies in the full levied amounts without regard to delinquencies. Consequently, so long as the District is subject to the Teeter Plan, the receipt of Assessments by the District will not be affected by any delinquencies in the collection of the Assessments.

Pursuant to the Bond Law, in the event any delinquency in the payment of an Assessment Installment occurs, the City may commence an action in superior court to foreclose the lien therefor within the 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. Amendments to the Bond Law enacted in 1988 and effective January 1, 1989 provide that under certain circumstances property may be sold upon foreclosure at a lesser Minimum Price or without a Minimum Price. "Minimum Price" as used in the Bond Law is the amount equal to the delinquent installments of principal or interest of the assessment or reassessment, together with all interest penalties, costs, fees, charges and other amounts more fully detailed in the Bond Law. The court may authorize a sale at less than the Minimum Price if the court determines that sale at less than Minimum Price will not result in an ultimate loss to the Bondowners or, under certain circumstances, if owners of 75% or more of the outstanding Bonds consent to such sale. See "SECURITY FOR THE BONDS-Sales of Tax Defaulted Property," and "-Delinquency Resulting in Ultimate Loss or Temporary Default on Bonds."

There can be no assurance that foreclosure proceedings will occur in a timely manner so as to avoid a delay in payments of debt service on the Bonds. The City has covenanted for the benefit of the owners of the Bonds that the City will commence foreclosure upon the occurrence of a delinquency as provided in the Fiscal Agent Agreement, and thereafter diligently prosecute, an action in the superior court to foreclose the lien of the delinquent installments of the Assessment against parcels of land in the District for which such installment has been billed but has not been paid, and will diligently prosecute and pursue such foreclosure proceedings to judgment and sale, all as provided in the Fiscal Agent Agreement. See "SECURITY FOR THE BONDS-Foreclosure Covenant." In the event that sales or foreclosure of property are necessary, there could be a delay in payments to holders of the Bonds pending such sales or the prosecution of foreclosure proceedings and receipt by the City of the proceeds of sale if the

-27- other sources of payment for the Bonds, as set forth in the Fiscal Agent Agreement, are depleted. See "BONDOWNERS' RISKS-Foreclosure."

Risks Associates with Real Estate Secured Investments

Owners of the Bonds will be subject to the risks generally incident to an investment secured by real estate, including, without limitation, (a) adverse changes in local market conditions, such as changes in the market value of real property in and in the vicinity of the District, the supply of or demand for competitive properties in such area, and the market value of property or buildings and/ or sites in the event of sale or foreclosure; (b) changes in real estate tax rate and other operating expenses, governmental rules (including, without limitation, zoning laws and laws relating to endangered species and hazardous materials) and fiscal policies; and (c) natural disasters (including, without limitation, earthquakes and floods), which may result in uninsured losses.

Availability of Funds to Pay Delinquent Assessment Installments

Upon receipt of the proceeds from the sale of the Bonds, the City will initially establish the Reserve Fund in an amount of the "Reserve Requirement." The monies in the Reserve Fund constitute a trust fund for the benefit of the Owners of the Bonds, will be held by the Fiscal Agent and administered by the Fiscal Agent in accordance with and pursuant to the provisions of the Fiscal Agent Agreement. If a deficiency occurs in the Redemption Fund for payment of interest on or principal of the Bonds, the Fiscal Agent will transfer into such funds an amount out of the Reserve Fund needed to pay debt service on the Bonds. There is no assurance that the balance in the Reserve Fund will always be adequate to pay the debt service on the Bond in the event of delinquent Assessment installments.

If, during the period of delinquency, there are insufficient funds in the Reserve Fund to pay the principal of and interest on the Bonds as it becomes due, a delay may occur in payments of principal and/ or interest to the owners of the Bonds.

Owner Not Obligated to Pay Bonds or Assessments

Unpaid Assessments do not constitute a personal indebtedness of the owner of parcels within the District and the property owners have made no commitment to pay the principal of or interest on the Bonds or to support payment of the Bonds in any manner. There is no assurance that the property owners have the ability to pay the Assessment Installments or that, even if they have the ability, they will choose to pay such installments. An owner may elect to not pay the Assessments when due and cannot be legally compelled to do so. If an owner decides it is not economically feasible to develop or to continue owning its property encumbered by the lien of the Assessment, or decides that for any other reason it does not want to retain title to the property, such owner may choose not to pay Assessments and to allow the property to be foreclosed. Such a choice may be made due to a decrease in the market value of the property. A foreclosure of the property will result in such owner's interest in the property being transferred to another party. Neither the City nor any Bondholder will have the ability at any time to seek payment directly from any owner of property within the District of any Assessment or any principal or interest due on the Bonds, or the ability to control who becomes a subsequent owner of any property within the District.

Land Values

The value of property in the District is a critical factor in determining the investment quality of the Bonds. If a property owner defaults in the payment of the Assessments, the City's only remedy is to foreclose on the delinquent property in an attempt to obtain funds with which

-28- to pay the delinquent Assessments. Land values could be adversely affected by economic factors beyond the City's control, such as relocation of employers out of the area, stricter land use regulations, the absence of water, or destruction of property caused by, among other eventualities, earthquake, flood or other natural disaster, or by environmental pollution or contamination.

Parity Taxes and Special Assessments

The ability or willingness of a property owner in the District to pay the Assessments could be affected by the existence of other taxes and assessments imposed upon the property. The Assessments and any penalties thereon constitute a lien against the lots and parcels of land on which they have been levied until they are paid. Such lien is on a parity with all special taxes and special assessments levied by other agencies and is co-equal to and independent of the lien for general property taxes and other special assessments regardless of when they are imposed upon the same property. The Assessments have priority over all existing and future private liens imposed on the property. In addition, other public agencies whose boundaries overlap those of the District could, with or in some circumstances without the consent of the owners of the land in the District, impose additional taxes or assessment liens on the property in the District in order to finance public improvements to be located inside or outside of the District.

The City intends to form a landscape and lighting assessment district (the "LLA District") to include the parcels in the District, which will levy annual assessment, secured by liens on the parcels in the District that will be on a parity with the liens securing the Assessments. See "THE DISTRICT-Direct and Overlapping Bonded Indebtedness; LLA District." Also, the City has no control over the ability of other entities and districts to issue indebtedness secured by special taxes or assessments payable from all or a portion of the property in the District. Moreover, the City is not prohibited itself from establishing assessment districts (in addition to the LLA District), community facilities districts or other districts which might impose assessments or taxes against property in the District. The imposition of additional liens on a parity with the Assessments could reduce the ability or willingness of the owners of parcels in the District to pay the Assessments and increases the possibility that foreclosure proceeds will not be adequate to pay delinquent Assessments or the principal of and interest on the Bonds when due. See "THE DISTRICT-Direct and Overlapping Bonded Indebtedness."

Foreclosure

The payment of the Assessments and the ability of the City to foreclose the lien of a delinquent unpaid Assessment, as discussed in "SECURITY FOR THE BONDS-Foreclosure Covenant," 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. In addition, the prosecution of a foreclosure action could be delayed due to crowded local court calendars or delays in the legal process. 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.

Regardless of the priority of the assessment securing the Bonds over non-governmental liens the exercise by the City of the foreclosure and sale remedy or by the county of the tax sale remedy may be forestalled or delayed by bankruptcy, reorganization, insolvency or other similar proceedings affecting the owner of a parcel. The federal bankruptcy laws provide for an automatic stay of foreclosure and sale or tax sale proceedings thereby delaying such proceedings perhaps for an extended period. Delay in exercise of remedies, especially if the owner owns a parcel the Assessments on which are significant or if bankruptcy proceedings are

-29- instituted with respect to a number of owners owning parcels the Assessments on which are significant, may result in periodic assessment installment collections which, even in conjunction with the Reserve Fund, may be insufficient to pay the debt service on the Bonds as it comes due. Further, should remedies be exercised under the bankruptcy law against the parcels, payment of installments of the Assessments may be subordinated to bankruptcy law priorities. Therefore, certain claims may have priority over the Assessment lien, even though they would not were the bankruptcy law not applicable.

On July 30, 1992 the United States Court of Appeals for the Ninth Circuit issued an opinion in a bankruptcy case entitled In re Glasply Marine Industries holding that ad valorem property taxes levied by a county in the State of Washington after the date that the property owner filed a petition for bankruptcy would not be entitled to priority over the claims of a secured creditor with a prior lien on the property. 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).

Glasply was controlling precedent on bankruptcy courts in the State of California for several years subsequent to the date of the Ninth Circuit's holding. Pursuant to state law, the lien date for general ad valorem property taxes levied in the State of California is the January 1 preceding the fiscal year for which the taxes are levied. Under the Glasply holding, a bankruptcy petition filing would have prevented the lien for general ad valorem property taxes levied in fiscal years subsequent to the filing of a bankruptcy petition from attaching and becoming a lien so long as the property was a part of the estate in bankruptcy. However, the Glasply holding was for the most part subsequently rendered inoperative with respect to the composition of a lien for and the collection of ad valorem taxes by amendments to the federal Bankruptcy Code (Title 11 U.S.C.) which were part of the Bankruptcy Reform Act of 1994 (the "Bankruptcy Reform Act") passed by Congress during the later part of 1994. The Bankruptcy Reform Act added a provision to the automatic stay section of the Bankruptcy Code which, pursuant to Section 362(b)(l8) thereof, excepts from the Bankruptcy Code's automatic stay provisions, "the creation of a statutory lien for an ad valorem property tax imposed by ... a political subdivision of a state, if such tax comes due after the filing of the petition" by a debtor in bankruptcy court. The effect of this provision is to continue the secured interest of ad valorem taxes on real property (i.e., post-petition taxes) in effect during the period following the filing of a bankruptcy petition, including during the period bankruptcy proceedings are pending. Assessments are considered to be levied on the date the assessment was confirmed. However, because assessments are not ad valorem taxes, it is unclear how a bankruptcy court would treat assessments in light of Glasply and 11 U.S.C. §362(b )(18).

Without further clarification by the courts or Congress, the original rationale of the Glasply holding could, however, still result in the treatment of post-petition assessments as "administrative expenses," rather than as tax liens secured by real property, at least during the pendency of bankruptcy proceedings. First, assessments have a different lien date than the lien date for general ad valorem taxes in the State of California noted above. Thus, in deciding whether the original Glasply ruling is applicable to a bankruptcy proceeding involving assessments rather than general ad valorem property taxes, a court might consider the differences in the statutory provisions for creation of the applicable lien in determining whether

-30- there is a basis for post-petition assessments to be entitled to a lien on the property during pending bankruptcy proceedings. If a court were to apply Glasply to eliminate the priority of the assessment lien as a secured claim against property with respect to post petition levies of the Assessments made against property owners within the District who file for bankruptcy, collections of the Assessments from such property owners could be reduced as the result of being treated as "administrative expenses" of the bankruptcy estate. Second, and most importantly, is the fact that the original holding in Glasply and the mitigation of that holding by the Bankruptcy Reform Act of 1994 both appear to be applicable only to general ad valorem taxes, and, therefore, the exemption from the automatic stay in Section 362(b )(18) discussed above may not be applicable to assessments since they were not expressly mentioned or provided for in this section, nor defined to be included within the term" ad valorem taxes."

Any prohibition of the enforcement of the Assessment lien, or any such non-payment or delay would increase the likelihood of a delay or default in payment of the principal of and interest on the Bonds. Because a substantial portion of the taxable property in the District is owned by a single property owner, the payment of Assessments and the ability of the District to foreclose the lien of a delinquent unpaid Assessment could be substantially curtailed by bankruptcy, insolvency, or other laws generally affecting creditors' rights or by the laws of the State relating to judicial foreclosure.

Subordinate Debt; Payments by FDIC and other Federal Agencies

Portions of the property with the District may now or in the future secure loans. Any such loan is subordinate to the lien of the Assessments. However, (a) in the event that any of the financial institutions making any loan that is secured by real property within the District is taken over by the Federal Deposit Insurance Corporation ("FDIC"t (b) the FDIC or another federal entity acquires a parcel or parcels of land in the District, or (c) if a lien is imposed on the property by the Drug Enforcement Agency, the Internal Revenue Service or other similar federal governmental agency, and, prior thereto or thereafter, the loan or loans go into default, the ability of the City to collect interest and penalties specified by state law and to foreclosure the lien of a delinquent unpaid Assessment may be limited.

Specifically, with respect to the FDIC, on June 4, 1991, the FDIC issued a Statement of Policy Regarding the Payment of State and Local Real Property Taxes. The 1991 Policy Statement was revised and superseded by a new Policy Statement effective January 9, 1997 (the "Policy Statement"). The Policy Statement provides that real property owned by the FDIC is subject to state and local real property taxes only if those taxes are assessed according to the property's value, and that the FDIC is immune from real property taxes assessed on any basis other than property value. According to the Policy Statement, the FDIC will pay its proper tax obligations when they become due and payable and will pay claims for delinquent property taxes as promptly as is consistent with sound business practice and the orderly administration of the institution's affairs, unless abandonment of the FDIC's interest in the property is appropriate. The FDIC will pay claims for interest on delinquent property taxes owed at the rate provided under state law, to the extent the interest payment obligation is secured by a valid lien. The FDIC will not pay any amounts in the nature of fines or penalties and will not pay nor recognize liens for such amounts. If any property taxes (including interest) 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. The Policy Statement further provides that no property of the FDIC is subject to levy, attachment, garnishment, foreclosure or sale without the FDIC's consent. In addition, the FDIC will not permit a lien or security interest held by the FDIC to be eliminated by foreclosure without the FDIC's consent.

Under the Policy Statement, it is unclear whether the FDIC considers the Assessments, such as those levied by the City, to be "real property taxes" which they intend to pay. The

-31- Policy Statement provides: "The FDIC is only liable for state and local taxes which are based on the value of the property during the period for which the tax is imposed, notwithstanding the failure of any person, including prior record owners, to challenge an assessment under the procedures available under state law. In the exercise of its business judgment, the FDIC may challenge assessments which do not conform with the statutory provisions, and during the challenge may pay tax claims based on the assessment level deemed appropriate, provided such payment will not prejudice the challenge. The FDIC will generally limit challenges to the current and immediately preceding taxable year and to the pursuit of previously filed tax protests. However, the FDIC may, in the exercise of its business judgment, challenge any prior taxes and assessments provided that (1) the FDIC's records (including appraisals, offers or bids received for the purchase of the property, etc.) indicate that the assessed value is clearly excessive, (2) a successful challenge will result in a substantial savings to the FDIC, (3) the challenge will not unduly delay the sale of the property, and (4) there is a reasonable likelihood of a successful challenge".

However, the Resolution Trust Corporation (which dissolved at the end of 1995 and transferred all of its assets to the FDIC), which adopted a similar policy, stated in a letter dated July 2, 1993 to the Honorable Lucille Roybel-Allard, member of the United States House of Representatives from the State of California, that it " ... will pay Mello-Roos special taxes and other special assessment and related interest where those taxes and assessments were imposed prior to receivership. However, Mello-Roos special taxes and other special assessments that are imposed on property when the institution owning the property is in receivership will not be paid."

The City is unable to predict what effect the application of the Policy Statement would have in the event of a delinquency with respect to an Assessment on a parcel in which the FDIC has an interest, although prohibiting the lien of the FDIC to be foreclosed on at a judicial foreclosure sale would likely reduce the number of or eliminate the persons willing to purchase such a parcel at a foreclosure sale. Owners of the Bonds should assume that the City will be unable to foreclose on any parcel owned by the FDIC. Such an outcome would cause a draw on the Reserve Fund and perhaps, ultimately, a default in payment of the Bonds. The City has not undertaken to determine whether the FDIC currently has, or is likely to acquire, any interest in any of the parcels in the District, and therefore expresses no view concerning the likelihood that the risks described above will materialize while the Bonds are outstanding.

Concentration of Ownership

The Landowners (other than the Agency) currently own parcels with the responsibility for payment of approximately 96.4% of the unpaid Assessments. Because of the existing concentration of ownership of land in the District, the timely payment of the Bond depends upon the willingness and ability of the Landowners to pay the Assessments on their property when due. The only assets of the property owners in the District with unpaid Assessments which constitute security for the Bonds are the real property holdings of the property owners located within the District that are encumbered by the Assessment liens. See also "BONDOWNERS' RISKS-Foreclosure" and "SECURITY FOR THE BONDS-Foreclosure Covenant."

Limited City Obligation Upon Delinquency

Pursuant to the Bond Law, the City has elected not to be obligated to advance funds from the treasury of the City for the payment of delinquent Assessment installments. The only obligation of the City with respect to such delinquencies is to transfer amounts available in the Reserve Fund to the Redemption Fund. Thus, the City's obligation to advance money to pay Bond debt service on the Bonds in the event of delinquent Assessment installments is limited to

-32- the balance in the Reserve Fund. The City has no obligation to replenish the Reserve Fund except to the extent that delinquent Assessments are paid or proceeds from foreclosure sales are realized. There is no assurance that the balance in the Reserve Fund will always be adequate to pay all delinquency installments and, if during the period of delinquency there are insufficient funds in the Reserve Fund, a delay may occur in payments to the owners of the Bonds. Notwithstanding the above, the City may, at its sole option and in its sole discretion, elect to advance available surplus funds of the City to pay for any delinquent property. However, Bondowners should not rely upon the City to advance monies to the Redemption Fund if the Reserve Fund is ever depleted.

Price Realized Upon Foreclosure

The Bond Law provides that, under certain circumstances, property subject to delinquent Assessment Installments may be sold upon foreclosure at less than the Minimum Price or without a Minimum Price upon petition by the City. "Minimum Price" is the amount equal to the delinquent installments of principal and interest on the assessment or reassessment, together with all interest, penalties, costs, fees, charges and other amounts more fully detailed in the Bond Law. The court may authorize a sale at less than the Minimum Price if the court determines, based on the evidence introduced at the required hearing, any of the following:

(a) Sale at the lesser Minimum Price or without a Minimum Price will not result in an ultimate loss to the owners of the Bonds.

(b) Owners of 75% or more of the outstanding Bonds, by principal amount, have consented to such petition by the City and the sale will not result in an ultimate loss to the non-consenting Bondowners.

(c) Owners of 75% or more of the outstanding Bonds, by principal amount, have consented to the petition and all of the following apply: (i) by reason of determination pursuant to the Bond Law, the City is not obligated to advance funds to cure a deficiency; (ii) no bids equal to or greater than the Minimum Price have been received at the foreclosure sale; (iii) no funds remain in the Reserve Fund; (iv) the City has reasonably determined that a reassessment and refunding proceeding is not practicable, or has in good faith endeavored to accomplish a reassessment and refunding and has not been successful, or has completed a reassessment and refunding arrangement which will, to the maximum extent feasible, minimize the ultimate loss to the Bondowners; and (v) no other remedy acceptable to owners of 75% or more of the outstanding Bonds, by principal amount, is reasonably available.

The Assessment lien upon property sold pursuant to this procedure at a lesser price than the Minimum Price will be reduced by the difference between the Minimum Price and the sale price. In addition, the court shall permit participation by the Bondowners in its consideration of the petition as necessary to its determinations.

Implementation of the above-described Minimum Price provision by the court upon foreclosure could result in nonpayment of the full principal and interest due on the Bonds. Reference should be made to the Bond Law for the complete provisions of this portion of the Bond Law.

Investors should also note that, if the Reserve Fund is depleted, there could be a default or a delay in payments to the owners of the Bonds pending prosecution of foreclosure proceedings and receipt by the District of foreclosure sale proceeds.

-33- Refunding Bonds

Pursuant to the Refunding Act of 1984 for 1915 Improvement Act Bonds (Division 11.5 of the California Streets and Highways Code), the City may issue refunding bonds for the purpose of redeeming the Bonds. After the making of certain required findings by the City Council, the City may issue and sell refunding bonds without giving notice to and conducting a hearing for the owners of property in the assessment district, or giving notice to the owners of the Bonds. See "THE BONDS-Refunding Bonds" herein. Upon issuing refunding bonds, the City Council could require that the Bonds be exchanged for refunding bonds on any basis which the City Council determines is for the City's benefit, if the Bondowners consent to the exchange. As an alternative to exchanging the refunding bonds for the Bonds, the City could sell the refunding bonds and use the proceeds to pay the principal of and interest and redemption premium, if any, on the Bonds as they become due, or advance the maturity of the Bonds and pay the principal of and interest and redemption premium thereon. See "THE BONDS-Optional Redemption."

Hazardous Materials

While government taxes, assessments and charges are a common claim against the value of an assessed parcel, other less common claims may be relevant. One of the most serious in terms of the potential reduction in the value that may be realized to pay the Assessment on a parcel is a claim with regard to a hazardous substance. In general, the owners and operators of an assessed parcel may be required by law to remedy conditions of the parcel relating to releases or threatened releases of hazardous substances. The federal Comprehensive Environmental Response, Compensation and Liability Act of 1989, sometimes referred to as "CERCLA" or "Superfund Act," is a well known one of these laws, but California laws with regard to hazardous substances are also stringent and somewhat similar. Under many of these laws, the owner (or operator) is obligated to remediate hazardous substances on, under or about the property whether or not the owner (or operator) has anything to do with creating or handling the hazardous substance; however, an owner (or operator) who is not at fault may seek recovery of its damages from the actual wrongdoer. The effect, therefore, should any of the assessed parcels be affected by a hazardous substance, may be to reduce the marketability and value of the parcel, because the purchaser, upon becoming an owner, may become obligated to remedy the condition just as is the seller.

The appraised value of some of the parcels in the District referred to in this Official Statement does not take into account the possible reduction in marketability and value of any of the assessed parcels by reason of the possible liability of the owner (or operator) for the remedy of a hazardous substance condition of the parcel.

Geologic, Topographic and Climatic Conditions

The value of the property in the District in the future can be adversely affected by a variety of additional factors, particularly those which may affect infrastructure and other public improvements and private improvements on property and the continued habitability and enjoyment of such private improvements. Such additional factors include, without limitation, geologic conditions such as earthquakes, topographic conditions such as earth movements, landslides and floods and climatic conditions such as droughts. Because of its proximity to the San Andreas Fault system, the Contra Costa County area is considered to be one of the most seismically active regions in the United States. The occurrence of seismic activity in the District could result in substantial damage to properties in the District which, in turn, could substantially reduce the value of such properties and could affect the ability or willingness of the property owners to pay the assessments on their property.

-34- Loss of Tax Exemption

As discussed in the section herein entitled "LEGAL MATTERS-Tax Matters," interest on the Bonds could become includable in gross income for purposes of federal income taxation, retroactive to the date of issuance of the Bonds, as a result of acts or omissions of the City subsequent to issuance in violation of the City's covenants applicable to the Bonds. Should interest become includable in gross income, the Bonds are not subject to redemption by reason thereof and may remain outstanding.

Limitations on Remedies

Remedies available to the owners of the Bonds may be limited by a variety of factors and may be inadequate to assure the timely payment of principal of and interest on the Bonds or to preserve the tax-exempt status of the Bonds.

Bond Counsel has limited its opinion as to the enforceability of the Bonds and of the Fiscal Agent Agreement to the extent that enforceability may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium, or other similar laws affecting generally the enforcement of creditors' rights, by equitable principles and by the exercise of judicial discretion. The lack of availability of certain remedies or the limitation of remedies may entail risks of delay, limitation or modification of the rights of the owners of the Bonds.

Secondary Markets and Prices

The Underwriter will not be obligated to repurchase any of the Bonds, and no representation is made concerning the existence of any secondary market for the Bonds. No assurance can be given that any secondary market will develop following the completion of the offering of the Bonds, and no assurance can be given that the initial offering prices for the Bonds will continue for any period of time.

No Acceleration Provision

The Bonds do not contain a provision allowing for the acceleration of the unpaid principal of the Bonds in the event of a payment default or other default under the terms of the Bonds or the Fiscal Agent Agreement.

CONCLUDING INFORMATION

Legal Matters

The validity of the Bonds and certain other legal matters related to the District are subject to the approving legal opinion of Orrick, Herrington & Sutcliffe LLP, San Francisco, California, Bond Counsel. A copy of the proposed form of Bond Counsel opinion is contained in Appendix D hereto, and the final opinion will be made available to the owners of the Bonds at the time of delivery. Certain legal matters will be passed upon for the City by the Law Offices of Pelletreau, Alderson & Cabral, Richmond, California, in their capacity as City Attorney, and certain legal matters will be passed upon for the City by Quint & Thimmig LLP, San Francisco, California, in its capacity as Disclosure Counsel to the City for the Bonds. Payment of the fees of Bond Counsel and Disclosure Counsel are contingent upon the issuance of the Bonds.

-35- Tax Matters

In the opinion of Orrick, Herrington & Sutcliffe LLP, San Francisco, California, Bond Counsel, based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 (the "Code") and is exempt from State of California personal income taxes. Bond Counsel is also of the opinion that such interest is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observe that such interest is included in adjusted current earnings in calculating corporate alternative minimum taxable income. A complete copy of the proposed opinion of Bond Counsel is set forth in APPENDIX D hereto.

To the extent the issue price of any maturity of the Bonds is less than the amount to be paid at maturity of such Bonds (excluding amounts stated to be interest and payable at least annually over the term of such Bonds), the difference constitutes "original issue discount," the accrual of which, to the extent properly allocable to each owner thereof, is treated as interest on the Bonds which is excluded from gross income for federal income tax purposes and State of California personal income taxes. For this purpose, the issue price of a particular maturity of the Bonds is the first price at which a substantial amount of such maturity of the Bonds is sold to the public (excluding bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). The original issue discount with respect to any maturity of the Bonds accrues daily over the term to maturity of such Bonds on the basis of a constant interest rate compounded semiannually (with straight-line interpolations between compounding dates). The accruing original issue discount is added to the adjusted basis of such Bonds to determine taxable gain or loss upon disposition (including sale, redemption, or payment on maturity) of such Bonds. Owners of the Bonds should consult their own tax advisors with respect to the tax consequences of ownership of Bonds with original issue discount, including the treatment of purchasers who do not purchase such Bonds in the original offering to the public at the first price at which a substantial amount of such Bonds is sold to the public.

Bonds purchased, whether at original issuance or otherwise, for an amount higher than their principal amount payable at maturity (or, in some cases, at their earlier call date) ("Premium Bonds") will be treated as having amortizable bond premium. No deduction is allowable for the amortizable bond premium in the case of bonds, like the Premium Bonds, the interest on which is excluded from gross income for federal income tax purposes. However, the amount of tax-exempt interest received, and a purchaser's basis in a Premium Bond, will be reduced by the amount of amortizable bond premium properly allocable to such purchaser. Owners of Premium Bonds should consult their own tax advisors with respect to the proper treatment of amortizable bond premium in their particular circumstances.

The Code imposes various restrictions, conditions and requirements relating to the exclusion from gross income for federal tax purposes of interest on obligations such as the Bonds. The City has covenanted to comply with certain restrictions designed to ensure that interest on the Bonds will not be included in federal gross income. Failure to comply with these covenants may result in interest on the Bonds being included in gross income for federal income tax purposes, possibly from the date of issuance of the Bonds. The opinion of Bond Counsel assumes compliance with these covenants. Bond Counsel has not undertaken to determine (or to inform any person) whether any actions taken ( or not taken) or events occurring (or not occurring) after the date of issuance of the Bonds may adversely affect the value of, or the tax status of interest on the Bonds.

-36- Certain requirements and procedures contained or referred to in the Fiscal Agent Agreement, the Tax Certificate and other relevant documents may be changed and certain actions (including, without limitation, defeasance of the Bonds) may be taken or omitted under the circumstances and subject to the terms and conditions set forth in such documents. Bond Counsel expresses no opinion as to any Bond or the interest thereon if any such change occurs or action is taken or omitted upon the advice or approval of bond counsel other than Orrick, Herrington & Sutcliffe LLP.

Although Bond Counsel is of the opinion that interest on the Bonds is excluded from gross income for federal income tax purposes and is exempt from State of California personal income taxes, the ownership or disposition of, or the accrual or receipt of interest on, the Bonds may otherwise affect a Bondowner's federal or state tax liability. The nature and extent of these other tax consequences will depend upon the particular tax status of the Bondowner or the Bondowner's other items of income or deduction. Bond Counsel expresses no opinion regarding any such other tax consequences.

Future legislation, if enacted into law, or clarification of the Code may cause interest on the Bonds to be subject, directly or indirectly, to federal income taxation, or otherwise prevent Bondowner's from realizing the full current benefit of the tax status of such interest. The introduction or enactment of any such future legislation or clarification of the Code may also affect the market price for, or marketability of, the Bonds. Prospective purchasers of the Bonds should consult their own tax advisers regarding any pending or proposed federal tax legislation. as to which Bond Counsel expresses no opinion.

The opinion of Bond Counsel is based on current legal authority, covers certain matters not directly addressed by such authorities, and represents Bond Counsel's judgment as to the proper treatment of the Bonds for federal income tax purposes. It is not binding on the internal Revenue Service ("IRS") or the courts. Furthermore. Bond Counsel cannot give and has not given any opinion or assurance about the future activities of the City, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the enforcement thereof by the IRS. The City has covenanted, however, to comply with the requirements of the Code.

Bond Counsel's engagement with respect to the Bonds ends with the issuance of the Bonds, and, unless separately engaged, Bond Counsel is not obligated to defend the City or the Bondowners regarding the tax-exempt status of the Bonds in the event of an audit examination by the IRS. Under current procedures, parties other than the City and its appointed counsel, including the Bondowners, would have little, if any, right to participate in the audit examination process. Moreover, because achieving judicial review in connection with an audit examination of tax-exempt bonds is difficult, obtaining an independent review of IRS positions with which the City legitimately disagrees, may not be practicable. Any action of the IRS, including but not limited to selection of the Bonds for audit or the course or result of such audit, or an audit of bonds presenting similar tax issues may affect the market price for, or the marketability of, the Bonds, and may cause the City or the Bondowners to incur significant expense.

Absence of Litigation

At the time of delivery of and payment for the Bonds, the City will certify that there is no action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court or regulatory agency, public board or body pending or threatened against the City affecting its existence, or the titles of its officers, or seeking to restrain or to enjoin the issuance, sale or delivery of the Bonds, the application of the proceeds thereof in accordance with the Fiscal Agent Agreement, or the collection or levy of the Assessments to pay the principal of and

-37- interest on the Bonds, or in any way contesting or affecting the validity or enforceability of the Bonds, the Fiscal Agent Agreement, an agreement entered into between the City and the Underwriter (the "Bond Purchase Agreement"), or any other applicable agreements or any action of the City contemplated by any of said documents, or in any way contesting the completeness or accuracy of this Official Statement or any amendment or supplement thereto, or contesting the powers of the City or its authority with respect to the Bonds or any action of the City contemplated by any of said documents.

No Rating

The City has not made and does not contemplate making an application to any rating agency for the assignment of a rating to the Bonds. There can be no guarantee that there will be a secondary market for the Bonds or, if a secondary market exists, that such Bonds can be sold for any particular price. Occasionally, because of general market conditions or because of adverse history or economic prospects connected with a particular issue, secondary marketing practices in connection with a particular issue are suspended or terminated. Additionally, prices of issues for which a market is being made will depend upon then prevailing circumstances. Such prices could be substantially different from the original purchase price.

Underwriting

The Underwriter, Kinsell, Newcomb & De Dios, Inc., has purchased all of the Bonds at a price equal to $6,341,162.35, consisting of the par amount of $6,550,345, less a net original issue discount of $78,175.75, and less an Underwriter's discount of $131,006.90. The obligation of the Underwriter to effect the purchase of the Bonds is subject to certain terms and conditions set forth in a bond purchase contract entered into between the Underwriter and the City.

Continuing Disclosure

The City has covenanted for the benefit of the Owners to provide certain financial information and operating data relating to the Bonds by not later than eight months following the end of the City's fiscal year, commencing with the report for the 2004-2005 Fiscal Year (the uCity Annual Report"), and to provide notices of the occurrence of certain enumerated events, if material. The City Annual Report will be filed with each Nationally Recognized Municipal Securities Information Repository. The notices of material events will be filed with the Municipal Securities Rulemaking Board. The specific nature of the information to be contained in the Annual Report or the notices of material events is contained within Appendix C-Forms of Continuing Disclosure Certificates.

The three primary Landowners each have covenanted for the benefit of the Bondowners to provide certain information relating to the parcels owned by it in the District by not later than 90 days following the end of the respective owner's fiscal year, and to provide notices of the occurrence of certain enumerated events, if material. The property owner Annual Reports will be filed by the property owner with each Nationally Recognized Municipal Securities Information Repository. The notices of material events will be filed by the property owners with the Municipal Securities Rulemaking Board. The specific nature of the information to be contained in the Annual Report or the notices of material events is contained within Appendix C-Forms of Continuing Disclosure Certificates. The obligation of the primary Landowners under their respective Continuing Disclosure Certificate-Landowner is subject to termination upon the occurrence of certain events specified therein, which include termination following the date on which the Landowners and all Affiliates (as defined therein) own, in the aggregate, land in the District that is subject to less than twenty percent (20%) of the then unpaid Assessments.

-38- The covenants of the City and the Landowners in their respective Continuing Disclosure Certificates have been made in order to assist the Underwriter in complying with S.E.C. Rule 15c2-12(b)(5). A failure by the City or a Landowner to comply with its respective continuing disclosure obligations will not subject them to monetary liability and will not constitute a default under the Fiscal Agent Agreement. The City has never failed to comply with any undertaking by the City under the Rule, and the Landowners have advised the City that they have either never failed to comply with, or have never had, any prior undertaking under the Rule.

The Landowners have agreed to use commercially reasonable efforts to obtain an assumption of their respective continuing disclosure obligations by any single entity which acquires land in the District that is subject to over twenty percent (20%) of the unpaid Assessments. No assurance can be given that such entity will assume the obligations of a Landowner under the applicable Continuing Disclosure Certificate or that it will comply with any obligations so assumed.

Miscellaneous

This Official Statement is not to be construed as a contract or agreement between the City and the purchasers of the Bonds. Any statements made in this Official Statement involving matters of opinion or of estimates, whether or not so expressly stated, are set forth as such and not as representations of fact, and no representation is made that any of the estimates will be realized. The information and expressions of opinion herein are subject to change without notice and neither the delivery of the Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the City or the District since the date hereof.

References are made herein to certain documents and reports which are brief summaries thereof which do not purport to be complete or definitive and reference is made to such documents and reports for full and complete statements of the contents thereof. Copies of such documents and reports are available for inspection at the office of the Fiscal Agent.

The execution and delivery of the Official Statement by the City have been duly authorized by the City Council of the City of Hercules.

CITY OF HERCULES

By Is I Michael A. Sakamoto City Manager

-39- THIS PAGE INTENTIONALLY LEFT BLANK APPENDIX A

THE APPRAISAL

A-1 THIS PAGE INTENTIONALLY LEFT BLANK Complete Appraisal Self-Contained Report

Properties within City of Hercules Assessment District No. 2005-1 (John Muir Parkway) Hercules, California

Date of Report: May 20, 2005

Prepared For:

Mr. Mike Sakamoto, City Manager City of Hercules 111 Civic Drive Hercules, California 9454 7

Prepared By:

P. Richard Seevers, MAI Eric A. Segal, Appraiser

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3825 Atherton Road• Suite 500 • Rocklin, CA 95765 • 916.435.3883 • Fax: 916.435.4774 3825 Atherton Road • Suite 500 • Rocklin, CA 95765 • 916.435.3883 • Fax 916.435.4774

Real Estate Appraisal & Consultation Seevers Jordan Ziegenmeyer

May 20, 2005

Mr. Mike Sakamoto, City Manager City of Hercules 111 Civic Drive Hercules, California 94547

RE: City of Hercules Assessment District No. 2005-1 (John Muir Parkway) Hercules, California

Dear Mr. Sakamoto:

At your request and authorization, Seevers • Jordan • Ziegenmeyer has analyzed market data for the purpose of estimating the cumulative, or aggregate, value (fee simple estate) of the properties within City of Hercules Assessment District No. 2005-1 (John Muir Parkway), under the conditions and assumptions set forth in the attached report.

The appraisal report has been conducted in accordance with appraisal standards and guidelines found in the Uniform Standards of Professional Appraisal Practice (USPAP) and the Appraisal Standards for Land Secured Financing published by the California Debt and Investment Advisory Commission ( 1994 ). This document is presented in a self-contained report format, which is intended to comply with the reporting requirements set forth under Standards Rule 2-2( a) of USP AP.

The appraised properties, which represent the land areas situated within the proposed boundaries of City of Hercules Assessment District No. 2005-1 (John Muir Parkway), are situated within the western portion of the city of Hercules. Specifically, the appraised properties are located along the north and south line of the proposed western extension of John Muir Parkway, north of Sycamore A venue (proposed extension).

The City of Hercules Assessment District No. 2005-1 (John Muir Parkway) bond issuance is scheduled to fund certain portions of the public improvements required for the development of 51. 7 acres. The subject properties are characterized by three distinct components: a detached, single-family residential component incorporating 335 partially improved single-family residential lots covering approximately 32.56 acres, a commercial component encompassing 17.27 acres of land, and a proposed mixed-use affordable housing component with ground floor retail encompassing 1.87 acres of land. The general description of the improvements to be financed by the proposed bond district include road, bridge, storm drain, sewer, water and miscellaneous improvements to John Muir Parkway generally located from Alfred Noble Drive on the east westerly to Bayfront Boulevard. Mr. Mike Sakamoto May 20, 2005 Page2

The value estimates assume a transfer that reflects a cash transaction or terms considered to be equivalent to cash. The estimates are also premised on an assumed sale after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with buyer and seller each acting prudently, knowledgeably, for their own self interest and assuming neither is under duress. The value estimates assume the completion of the public facilities to be financed by the City of Hercules Assessment District No. 2005-1 (John Muir Parkway) bond issuance and account for the impact of the Assessment Lien securing the bonds.

It is noted the sum of the hypothetical market values, by ownership, represents the cumulative, or aggregate, value of the District, which is NOT equivalent to the market value of the District as a whole.

The effective date of value denoted below is May 19, 2005. As a result of our analysis, it is our opinion the hypothetical market value, by ownership, and cumulative, or aggregate, value of the subject properties, in accordance with the definitions, certifications, assumptions and significant factors set forth in the attached document (please refer to pages 6 through 8), is ...

Ownership Component Value WL Homes Bayside LLC $23,620,000 William Lyon Homes, Inc. $24,920,000 Lewis-Hercules, LLC $2,560,000 LDC Couger, LLC and LHN Cougar, LLC $6,770,000 Hypothetical Cumulative (A22re2ate) Value $57 ,870,000

This letter must remain attached to the report, which contains 79 pages plus related tables, exhibits and Addenda, in order for the value opinion set forth herein to be considered valid.

We hereby certify the properties have been inspected and we have impartially considered all data collected in the investigation. Further, we have no interest in the properties, and the appraisal has been made in accordance with the professional standards of the Appraisal Institute.

Thank you for the opportunity to work with your office on this assignment. Sincerely,

P. Richard Seevers, MAI Eric A. Segal State Cert. No. AGOOl 723 State Cert. No. AG026558 Exp. Date: August 12, 2006 Exp. Date: February 18, 2007

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05-244 TABLE OF CONTENTS

Transmittal Letter

Table of Contents

Summary of Important Facts and Conclusions 1

Introduction Property Description 3 Type and Definition of Value 3 Client, Intended User and Intended Use of the Appraisal 3 Property Rights Appraised 4 Type of Appraisal and Report Format 4 Dates of Inspection, Value and Report 4 Scope of Work 4 Extraordinary Assumptions and Hypothetical Conditions 6 General Assumptions and Limiting Conditions 7 Certifications of Value 9

Market Area Contra Costa County Regional Overview 11 Neighborhood Characteristics 24 Housing Market Overview 29 Oakland-East Bay Retail Market Overview 34

Subject Property Property Identification and Legal Data 37 Site Description 41 Facilities to be Funded by the District 44 Time to Complete 45 Subject Photographs 46 Highest and Best Use Analysis 49

Valuation Analysis Approaches to Value 54 Valuation 56 Component Valuation- Single-Family Residential Land 56 Component Valuation- Mixed-Use Commercial/Residential Land 70 Component Valuation - Commercial Land 71 Summary and Conclusion 77 Exposure Time 78 Sales History 79 Addenda

Engineer's Report Developer's Costs Preliminary Title Reports Glossary of Terms Qualifications of Appraiser( s) SUl\ilMARY OF IMPORTANT FACTS AND CONCLUSIONS

Project Name: The appraised properties comprise the land areas situated within the boundaries of the City of Hercules Assessment District No. 2005-1 (John Muir Parkway), and represent only non-public use parcels.

Property Type: The land areas comprising the subject properties represent unimproved and partially improved land that is proposed and partially improved for single-family residential development, commercial development and a proposed mixed-use commercial/residential (affordable) development.

Assessor's Parcel Numbers/ Ownership Entities: The subject properties, all parcels within the boundaries of City of Hercules Assessment District No. 2005-1 (John Muir Parkway), are owned by the following entities:

APN Ownership 404-020-07 6 LDC Cougar, LLC and LHN Cougar, LLC 404-020-079 William Lyon Homes, Inc. 404-020-080 WL Homes Bayside LLC 404-020-082 Lewis-Hercules LLC

Property Rights Appraised: Fee simple estate

Location: The appraised properties, which represent the land areas situated within the proposed boundaries of City of Hercules Assessment District No. 2005-1 (John Muir Parkway), are situated within the western portion of the city of Hercules. Specifically, the appraised properties are located along the north and south line of the proposed western extension of John Muir Parkway, north of Sycamore Avenue (proposed extension), Hercules, Contra Costa County, California.

Land Use: The various land components representing the subject properties include single-family residential, commercial and proposed mixed-use commercial/residential (affordable) land use designations. For a description of these zoning ordinances, please refer to the Property Identification and Legal Data section of this report.

Earthquake Zone: According to the Seismic Safety Commission the subject parcels are located within Zone 3, which is considered to be the lowest risk zone in California. There are only two zones in California. Zone 4 is assigned to areas of major faults. Zone 3 is assigned to

-----Seevers • Jordan • Ziegenmeyer----- 1 areas with more moderate seismic activity. In addition, the subject is not located within a Fault-Rupture Hazard Zone (formerly referred to as an Alquist-Priolo Special Study Zone), as defined by Special Publication 42 ( revised January 1994) of the California Department of Conservation, Division of Mines and Geology.

Current Use: Single-family residential (partially improved), commercial land and proposed mixed-use commercial/residential (affordable) land, with complimentary public land uses.

Highest and Best Use: Single-family residential development with supporting commercial development consistent with the Central Hercules Plan

Date of Value: May 19, 2005

Date of Report: May 20, 2005

Prepared For: Mr. Mike Sakamoto, representing the City of Hercules

Prepared By: P. Richard Seevers, MAI Eric A. Segal, Appraiser

Conclusion of Values: Ownership Component Value WL Homes Bayside LLC $23,620,000 William Lyon Homes, Inc. $24,920,000 Lewis-Hercules, LLC $2,560,000 LDC Couger, LLC and LHN Cougar, $6,770,000 LLC Hypothetical Cumulative $57 ,870,000 (A22regate) Value

The value conclusion reported above is subject to the assumptions, significant factors and limiting conditions set forth in this document (please refer to pages 6 through 8). Further, the estimate of cumulative, or aggregate, value is NOT equivalent to the market value of the property which comprises the district.

-----Seevers • Jordan • Ziegenmeyer----- 2 INTRODUCTION

Property Description

The appraised properties comprise the land areas situated within the boundaries of City of Hercules Assessment District No. 2005-1 (John Muir Parkway), located along the north and south line of the proposed western extension of John Muir Parkway, north of Sycamore A venue (proposed extension), Hercules, Contra Costa County, California, and comprise unimproved and partially improved land proposed and partially improved with single-family residential development, commercial development and a proposed mixed-use commercial/residential (affordable) development.

Type and Definition of Value

The purpose of this appraisal is to estimate the hypothetical market value, by ownership, and cumulative, or aggregate, value of the fee simple interest in the subject properties, assuming the completion of the public facilities to be financed by the City of Hercules Assessment District No. 2005- 1 (John Muir Parkway) bond issuance and account for the impact of the Assessment Lien securing the bonds. The effective date of value is May 19, 2005. Market value is defined as follows:

Market value: The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: buyer and seller are typically motivated; both parties are well informed or well advised, and acting in what they consider their own best interests; a reasonable time is allowed for exposure in the open market; payment is made in terms of cash in United States Dollars or in terms of financial arrangements comparable thereto; and the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. 1

Client, Intended User and Intended Use of the Appraisal

The client and intended user of this appraisal report is the City of Hercules. The appraisal report is intended for use as an aid in bond undenvriting.

1 Federal Register, vol. 55, no. 163, August 22, 1990, pp. 34228 and 34229. ~----Seevers • Jordan • Ziegenmeyer----- 3 Property Rights Appraised

The value estimates derived herein are for the fee simple estate, defined as follows:

Fee Simple Estate: absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat.2

The rights appraised are also subject to the General and Extraordinary Assumptions, Limiting Conditions and Significant Factors contained in this report and to any exceptions, encroachments, easements and rights-of-way recorded. Primary among the assumptions in this analysis is the premise the value estimates reflect the completion of public facilities to be financed by Bonds and account for the impact of the Assessment Lien securing the Bonds.

Type of Appraisal and Report Format

This report documents a Complete Appraisal of the subject properties. It is presented in a Self Contained Appraisal Report, which is intended to comply with the reporting requirements set forth under Standards Rule 2-2(a) of the Uniform Standards of Professional Appraisal Practice (USP AP).

Dates of Inspection, Value and Report

An inspection of the subject properties was completed on May 2, 2005. The effective date of hypothetical value is May 19, 2005. This appraisal report was completed and assembled on May 20, 2005.

Scope of Work

This appraisal report has been prepared in accordance with the Uniform Standards of Professional Appraisal Practice (USP AP). This analysis is intended to be an "appraisal assignment," as defined by USPAP; the intention is the appraisal service be performed in such a manner that the result of the analysis, opinions, or conclusion be that of a disinterested third party.

The appraiser researched and documented several legal and physical aspects of the subject properties. A physical inspection of the properties was completed and serves as the basis for the site description contained in this report. The sales histories were verified by consulting public records. We contacted the City of Hercules Planning Department regarding zoning and entitlements. The subjects' earthquake zones, flood zones and utilities were verified with the applicable public agencies. Property tax information for the current tax year was obtained from the Contra Costa County Tax Collector's Office.

2 The Dictionary of Real Estate Appraisal, 4th ed. (Chicago: Appraisal Institute, 2002), 113. -----Seevers • Jordan • Ziegenmeyer----- 4 The appraiser has also analyzed and documented data relating to the subjects' neighborhood and surrounding market area. This information was obtained through personal inspections of portions of the neighborhood and market area; newspaper articles; real estate conferences; and interviews with various market participants, including property owners, property managers, brokers, developers and local government agencies.

In this appraisal, we have determined the highest and best use of the subject properties as though vacant and as improved, based on the four standard tests (legal permissibility, physical possibility, financial feasibility and maximum productivity). In addition, we have estimated a reasonable exposure time associated with the market value estimates.

The appraised properties consist of all the real property within City of Hercules Assessment District No. 2005-1 (John Muir Parkway). The estimate ofhypothetical market value, by ownership, and cumulative, or aggregate, value for the designated parcels reflects the sum of the values for the subject properties, which are characterized by three distinct components: a detached, single-family residential component incorporating 335 partially improved single-family residential lots covering approximately 32.56 acres, a commercial component encompassing 17.27 acres of land, and a proposed mixed-use affordable housing component with ground floor retail encompassing 1.87 acres of land, which will be valued consistent with the highest and best economic use derived herein, or single-family residential development. The valuation of the various components comprising the subject properties will be based on the sales comparison approach to value. The single-family residential component of the subject properties will also rely upon the extraction technique to value, which will be reconciled with the sales comparison approach to estimate the hypothetical market value per loaded lot. It is noted the sum of the hypothetical values indicates the cumulative, or aggregate, value of the District, which is NOT equivalent to the market value of the District as a whole.

The individuals involved in the preparation of this appraisal include P. Richard Seevers, MAI; Eric A. Segal, Appraiser; and Sean C. Lim, Research Analyst. Mr. Segal and Mr. Lim inspected the subject properties; collected and confirmed data related to the subject properties, comparables and the neighborhood/ market area; analyzed market data; and prepared a draft report with a preliminary estimate of value. Mr. Seevers inspected the properties, offered professional guidance and instruction, reviewed the draft report and made necessary revisions.

-----Seevers• Jordan • Ziegenmeyer----- 5 EXTRAORDINARY ASSUMPTIONS AND HYPOTHETICAL CONDITIONS

1. The portions ofthe City ofHercules Assessment District No. 2005-1 (John Muir Parkway) designated for public and quasi-public purposes are not subject to the City ofHercules Assessment District No. 2005-1 (John Muir Parkway) Assessment Lien; therefore, these land areas are excluded from this valuation.

2. The value conclusions contained in this report are based, in part, on development cost information provided by the developers. Any significant change in these cost projections could have a direct impact on the value estimates concluded in this report. The appraisers specifically assume the cost information provided is accurate.

-----Seevers• Jordan• Ziegenmeyer----- 6 GENERAL ASSUMPTIONS AND LIMITING CONDITIONS

1. No responsibility is assumed for the legal description provided or for matters pertaining to legal or title considerations. Title to the property is assumed to be good and marketable unless othenvise stated.

2. No responsibility is assumed for matters of law or legal interpretation.

3. The property is appraised free and clear ofany or all liens or encumbrances unless othenvise stated. 4. The information and data furnished by others in preparation ofthis report is believed to be reliable, but no warranty is given for its accuracy. 5. It is assumed there are no hidden or unapparent conditions ofthe property, subsoil, or structures that render it more or less valuable. No responsibility is assumed for such conditions or for obtaining the engineering studies that may be required to discover them. 6. It is assumed the property is in full compliance with all applicable federal, state, and local environmental regulations and laws unless the lack ofcompliance is stated, described, and considered in the appraisal report. 7. It is assumed the property conforms to all applicable zoning and use regulations and restrictions unless a nonconformity has been identified, described and considered in the appraisal report. 8. It is assumed 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 renewedfor any use on which the value estimate contained in this report is based. 9. It is assumed the use of the land and improvements is confined within the boundaries or property lines of the property described and there is no encroachment or trespass unless noted in the report.

10. Unless othenvise stated in this report, the existence of hazardous materials, which may or may not be present on the property, was not observed by the appraiser. The appraiser has no knowledge ofthe existence ofsuch materials on or in the property. The appraiser, however, is not qualified to detect such substances. The presence ofsubstances such as asbestos, urea- formaldehyde foam insulation, and other potentially hazardous materials may affect the value of the property. The value estimated is predicated on the assumption there is no such material on or in the property that would cause a loss in value. No responsibility is assumed for such conditions or for any expertise or engineering knowledge required to discover them. The intended user of this report is urged to retain an expert in this field, if desired.

11. The Americans with Disabilities Act (ADA) became effective January 26, 1992. I (we) have not made a specific survey or analysis ofthis property to determine whether the physical aspects of the improvements meet the ADA accessibility guidelines. Since compliance matches each owner's financial ability with the cost-to cure the property's potential physical characteristics, the real estate appraiser cannot comment on compliance with ADA. A briefsummary of the subject's physical aspects is included in this report. It in no way suggests ADA compliance by the current owner. Given that compliance can change with each owner's financial ability to cure

-----Seevers• Jordan• Ziegenmeyer----- 7 non-accessibility, the value ofthe subject does not consider possible non-compliance. Specific study of both the owner's financial ability and the cost-to-cure any deficiencies would be needed for the Department ofJustice to determine compliance.

12. The appraisal is to be considered in its entirety and use of only a portion thereof will render the appraisal invalid.

13. Possession of this report or a copy thereof does not carry with it the right ofpublication nor may it be used for any purpose by anyone other than the client without the previous written consent of Seevers • Jordan • Ziegenmeyer.

14. Neither all nor any part of the contents of this report (especially any conclusions as to value, the identity ofthe appraiser, or the firm with which the appraiser is connected) shall be disseminated to the public through advertising, public relations, news, sales, or any other media without the prior written consent and approval ofSeevers • Jordan • Ziegenmeyer. Seevers • Jordan • Ziegenmeyer authorizes the reproduction of this report in its entirety for bond proposes.

15. The liability ofSeevers • Jordan • Ziegenmeyer and its employees/subcontractors for errors/ omissions, if any, in this work is limited to the amount of its compensation for the work performed in this assignment.

16. Acceptance and/or use of the appraisal report constitutes acceptance ofall assumptions and limiting conditions stated in this report.

17. An inspection ofthe subject properties revealed no apparent adverse easements, encroachments or other conditions, which currently impact the subject. However, the exact locations of typical roadway and utility easements, or any additional easements, which would be referenced in a preliminary title report, were not provided to the appraiser. The appraiser is not a surveyor nor qualified to determine the exact location of easements. It is assumed typical easements do not have an impact on the opinion (s) ofvalue as provided in this report. If, at some future date, these easements are determined to have a detrimental impact on value, the appraiser reserves the right to amend the opinion (s) of value.

18. This appraisal report is prepared for the exclusive use of the appraiser's client. No third parties are authorized to rely upon this report without the express consent ofthe appraiser.

19. The appraiser is not qualified to determine the existence ofmold, cause of mold, type ofmold or whether mold might pose any risk to the property or its inhabitants. Additional inspection by a qualified professional is recommended.

-----Seevers• Jordan• Ziegenmeyer 8 Certification of Value

I certify to the best of my knowledge and belief:

• The statements of fact contained in this report are true and correct;

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

• I have no present or prospective interest in the property that is the subject of this report, and no personal interest with respect to the parties involved;

• I have no bias with respect to the property that is the subject of this report or to the parties involved with this assignment;

• My engagement in this assignment was not contingent upon developing or reporting predetermined results;

• 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;

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

• I have made an inspection of the property that is the subject of this report;

• Eric A. Segal, Appraiser, and Sean C. Lim, Research Analyst, also inspected the subject property and provided significant professional assistance in the preparation of this report. This assistance included the collection and confirmation of data, and the analysis necessary to prepare a draft report with a preliminary estimate(s) of value;

• The reported analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the requirements of the Code of Professional Ethics and the Standards of Professional Practice of the Appraisal Institute;

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

• I certify my State of California general real estate appraiser certificate has never been revoked, suspended, cancelled, or restricted;

• I have the knowledge and experience to complete this appraisal assignment and have appraised similar properties in the past. Please see the Qualifications of Appraiser portion of the Addenda to this report for additional information; and

• As of the date of this report, I, P. Richard Seevers, MAI, have completed the requirements under the continuing education program of the Appraisal Institute. <7 15:'>- ,d I} J/ ,.., - {.c>:~k~ .· ~ ~ ;-·f , /t)->~... J._y, ..> .}-.J \ _ __....,......

P. RICHARD SEEVERS, MAI State Certification No.: AGOO 1723 (Expires: August 12, 2006)

------Seevers • Jordan • Ziegenmeyer------9 Certification of Value

I certify to the best of my knowledge and belief:

• The statements of fact contained in this report are true and correct;

• I have no present or prospective interest in the property that is the subject of this report, and no personal interest with respect to the parties involved;

• I have no bias with respect to the property that is the subject of this report or to the parties involved with this assignment;

• My engagement in this assignment was not contingent upon developing or reporting predetermined results;

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

• I have made a personal inspection of the property that is the subject of this report;

• P. Richard Seevers, MAI, reviewed this report;

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

• I certify that my State of California general real estate appraiser certificate has never been revoked, suspended, cancelled, or restricted; and

ERIC A. SEGAL, APPRAISER State Certification No.: AG026558 (Exp.: 02/18/05)

------Seevers• Jordan• Ziegenmeyer------10 CONTRA COSTA COUNTY REGIONAL OVERVIEW

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Contra Costa County spans nearly 800 square miles, extending from the eastern shore of the San Francisco Bay approximately 50 miles inland. The county is situated between Suisun and San Pablo Bays to the north, San Joaquin County to the east, Alameda County to the south and the San Francisco Bay to the west. Located in what is referred to as the East Bay region, Contra Costa County belongs to one of the nation's largest urban centers, the San Francisco Bay Area. Surrounding counties include Marin, Napa, San Francisco, San Mateo, Santa Clara, Solano and Sonoma.

Areas of rapid economic growth and development mark the county, but it still has maintained large portions of land dedicated to rural, recreational and industrial uses. Most land use is regionally clustered, with the western and northern shorelines being highly industrialized and the interior sections of the county predominantly exhibiting residential and commercial development. Nearly 85% of the county's 1,003,900 residents reside within incorporated cities. The largest of those urban areas, which will be profiled later in this overview, are Concord (124,900 residents), Richmond (101,700), Antioch (100,600) and Walnut Creek (66,000). The city of Martinez, located near the Carquinez Straits to the north of Contra Costa County, houses the county's governmental offices.

History

Much of the county's current social and economic situation can be best understood in the context of its recent history. As the main point of entry into the Western United States, the city of San

------Seevers • Jordan • Ziegenmeyer------11 Francisco, located directly across the bay from Contra Costa County, served as the region's central hub during the early 19th century. When the gold rush of 1848 began in Northern California, both San Francisco and the neighboring community of Oakland skyrocketed in growth. As time went along, and the two cities became increasingly populated, surrounding areas served as repositories for the overflow surge of residents entering the region.

When the gold rush bubble burst, the area's new residents were forced to look to other enterprises. Many relocated in Contra Costa County, turning to agricultural and commercial endeavors. Population growth in the county was further aided during the mid-20th century, as the Bay Area began a period of decentralization. With a decreased emphasis on the regional hub of San Francisco and an increased value placed on proximity to residential communities, cities in the county witnessed unprecedented increases in population.

This decentralization set the tone for the most recent socio-economic shockwave, the technology boom of the mid-1980's and its resurgence ten years later. The county added approximately 115,000 new jobs during the 1980's, a 56% growth rate and more than twice the rate for the Bay Area as a whole. Through the recession of the early 1990's the county continued on a growth trend, albeit at a more gradual rate, and regained momentum in the late 1990 's as the Bay Area became the most dynamic economic growth region in the nation.

Today, Contra Costa County continues to see a steady influx of both new jobs and residents. Growth is particularly strong in the eastern portion of the county, where the cities of Antioch, Brentwood and Clayton are seeing the greatest increases in population. Projections indicate the county will continue to experience higher than average population growth over the next twenty years, ensuring Contra Costa County will maintain its position as a regional leader well into the 21st century.

Economy & Employment

The growth and stability of a regional economy is best examined by first determining the basic industries within the area and then analyzing the growth trends of each basic industry. The basic industries are the economic core of the region, bringing income into the local economy from outside the area. This positive importation of capital is what defines a region's economic health, as a greater ratio of incoming capital yields a stronger local economy.

-----Seevers • Jordan • Ziegenmeyer----- 12 The employment growth of these basic industries tends to have a multiplier effect, increasing employment in service and supporting industries.

One of the most positive economic indicators for Contra Costa County is its Contra Costa County Employment by Industry remarkably low unemployment rate. As of 2000 Annual Average March 2005, the reported unemployment Finance, Insurance & Transportation & Public rate in Contra Costa County was 4. 9%, R~I Estate Util~ies

below the statewide average of 5.4%. Services Although not completely unscathed, the Wiolesale Trade

Government county has remained largely insulated Construction & Mining----' from the recent technology sector fallout Agriculture__: that has significantly hampered growth in other Bay Area counties. Largely to thank for this stability is the county's diversified economic base. One third of all employment is concentrated in the services sector, but as the chart indicates, the bulk of the remaining labor pool is primarily distributed amongst retail trade, government, finance, transportation and manufacturing.

An ideal economic base includes a variety of Industry Percent sector economies with good growth prospects. Services 32.5% Conversely, an economy that is dominated by one Retail Trade 18.0% Government 14.5% industry is exposed to a high degree of risk. With Finance, Insurance & Real Estate 8.7% Contra Costa County's balanced industry Construction & 1vfining 8.1% Manufacturing 7.5% distribution, which will be discussed in the Transportation & Public Utilities 6.1% following sections, the county is positioned to Wholesale Trade 3.7% experience solid economic gain in the near future. Agriculture 0.4% Overall, growth projections indicate that nearly 70,000 new jobs will be added to the county through 2010. A look at a few of the largest industry sectors begins below.

Services

This rather broad category of employment, describing any job fimction that supports enterprising endeavors, ranges from janitorial services to chief executives. Containing 32.5% of all jobs in the county, the services industry is expected to add over 35,000 jobs by 2010, an increase of nearly 27% over year 2000 totals. Of that amount, business services are expected to grow even more dramatically, with a projected increase of 39% over the same 10-year period. These projections indicate that the services sector will drive economic growth for the county, surpassing all other industries in both total jobs provided and percentage increase.

-----Seevers• Jordan• Ziegenmeyer----- 13 Retail Trade

In 2000, retail trade was responsible for employing 67,160 people in Contra Costa County. Primary job duties in this category are retail salespersons, cashiers, restaurant servers and the like. Virtually all manner of retail development currently exists in the county, including a number of regional shopping malls and large retail centers. When compared to the other industry sectors in the county, retail trade expects to see moderate growth through 2010, increasing approximately 12.8%. With an average wage lower than that of the services industry, this modest growth is another positive indicator that Contra Costa County is well positioned to improve its economic health over the next several years.

Percent Growth by Industry 2000-2010

30.0%

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%-c QJ .Q "' g, "C ~ QJ '§ g, "C ~ t ~ ·2: ·c I- c 0 "' QJ ~ tl ~ (/J I- ,!!! ~ ~ 5 o(l u:: ~ ~ ct::~ ~ ra I- :1:

Source: ABAG, Projections 2000

Government

The government sector, centered in the county seat of Martinez, provided 25,210 jobs in 2000. Given the low volatility of the sector, growth is only expected to be at 7% through 2010.

Transportation and Public Utilities

The most aggressively booming industry in the county is projected to be the transportation and public utility sector. Many of the jobs in this category are related to the multiple forms of transportation readily available to the county, including Bay Area Rapid Transit (BART), commercial water transport, and railroad services. Approximately 7,500 new jobs are expected to be added to this sector through 2010.

Major Employers

-----Seevers• Jordan • Ziegenmeyer----- 14 The county is host to a number of major corporations, employing tens of thousands of East Bay residents. Two of the most significant contributors, Kaiser Permanente Medical Center and Longs Drugs, are headquartered in Walnut Creek and employ 4, 730 and 2,900 people, respectively. Other primary employers include SBC Communications, Contra Costa Newspapers, Tosco and Shell Martinez Refining Company.

Economic Base Summary

The greater the percentage of income coming from outside the region the more economically prosperous the region becomes. In addition to this fact, when a region shifts its industry base towards higher wage occupations, it also realizes significant economic benefits. Both of these trends are occurring in Contra Costa County, as its urban centers are becoming major business hubs for the entire Bay Area. Most indicators suggest a positive economic outlook for Contra Costa County over the next several years.

Population

The population in Contra Costa County reached 1,003,900 in 2004, making it the third most populated county in the Bay Area behind Santa Clara and Alameda Counties. The county's population growth has mirrored its economic progression, as the number of residents grew by 22% in the 1980's, and continued to increase at a reduced rate through the early 1990's. There were also higher marginal gains between 1998 and 2003. The following table illustrates the population growth for each of the cities within Contra Costa County between 1998 and 2004.

POPULATION TRENDS

Area 1999 2000 2001 2002 2003 2004 Antioch 86,500 90,532 93,200 96,700 99,100 100,600 Brentwood 19,000 23,302 25,100 29,650 33,000 37,050 Clayton 10,500 10,762 10,950 11,000 10,950 10,950 Concord 120,400 121, 780 123,300 123,900 124,700 124,900 Danville 40,750 41,715 42,700 43,000 43,100 43,250 El Cerrito 23,100 23,171 23,400 23,500 23,500 23,400 Hercules 19,050 19,488 19,850 20,150 20,450 21,700 Lafayette 23,800 23,908 24,150 24,400 24,350 24,300 Martinez 35,400 35,866 36,300 36,700 36,800 36,800 Moraga 16,050 16,290 16,450 16,500 16,500 16,450 Oakley N/Av 25,619 26,000 26,150 26,950 27,550

-----Seevers• Jordan• Ziegenmeyer----- 15 Area 1999 2000 2001 2002 2003 2004 Orinda 17A50 17,599 17,800 17,850 17,800 17, 750 Pinole 18,900 19,039 19,350 19,450 19,500 19,550 Pittsburg 54,800 56,769 58,000 59,900 60,900 61,500 Pleasant Hill 32,500 32,837 33,200 33,350 33,600 33,600 Riclunond 97,800 99,216 100,400 101, 100 101,100 101,700 San Pablo 29,650 30,215 30,550 30,900 30,750 31,050 San Ramon 43,550 44,722 45,900 46,250 46,950 48,600 Walnut Creek 63,400 64,296 65,600 65,900 65,800 66,000 Unincorporated 175~800 151 ~690 153~100 155~200 156~900 157AOO County Total 928,500 948,816 965,300 981,550 992,700 1,003,900 Source: California Department of Finance

Cities expected to see the most growth over the next several years are San Ramon, Pittsburg and Brentwood. A significant contributing factor to the growth of these cities is their proximate location to the county's existing population hubs. In comparison to overall county growth, the primary cities listed above are projected to experience a more rapid rate of growth, indicating that urbanization is increasing in the county. It is also noted that much of the population growth is occurring in the eastern portion of the county, an area that has undergone a transformation from rural and agricultural predominance to a suburban residential region.

Income

Per capita income is the single broadest statistical measure of well-being or standard of living in the county. Real per capita income tends to follow the business cycle, rising in the peaks and falling in the troughs. It can also be used to measure the amount of funding a county will be eligible to receive from certain grant making organizations. Simplified, per capita income equates to the total personal income divided by total population. It represents the amount each person would earn if income were distributed evenly among the population. The following table details the change in per capita income for Contra Costa County and the State of California from 2001 to 2003, the latest data provided by the United States Department of Commerce (DOC), Bureau of Economic Analysis.

PER CAPITA INCOME Area 2001 2002 2003 Contra Costa County $44,501 $43,712 $43,957 California $32,877 $32,845 $33,415 Source: U.S. Bureau of Economic Analysis

-----Seevers • Jordan • Ziegenmeyer----- 16 As the table illustrates, Contra Costa County has outpaced the rest of California for the past several years in terms of per capita income. In fact, the county ranks fifth throughout the entire state in per capita income. A number of contributing factors exist, including the predominance of business service sector jobs. Projections indicate that per capita income will likely remain at least stable or increase in the near to mid term.

Transportation

The East Bay is an integral part of California's transportation infrastructure. From the region, it is possible to ship freight by highway, air, rail and sea, which provide direct access to many of the world's most lucrative markets. The economic developments that occur in Contra Costa County are aided by its highly integrated transportation system, which ranks among the best in the country. Highway transportation is provided by State Highway 4, which connects the cities of Pittsburg, Brentwood, Oakley and Antioch to Interstates 680 and 80 to the west. Interstate 80 connects Richmond with Oakland to the south and Sacramento to the north. It also connects with the Bay Bridge, providing access to San Francisco. Interstate 680 links with State Highway 4 near Concord, providing access to the cities of Concord, Pleasant Hill and Walnut Creek.

The state freeways and county highways are supplemented by the rapid-transit systems, BART (Bay Area Rapid Transit), and AC (Alameda/Contra Costa) Transit bus service. Amtrak trains provide service to Contra Costa County and run northward to Sacramento and the Pacific Northwest, southward to San Jose/Silicon Valley and Los Angeles, and eastward to the eastern United States. Freight transportation is aided by the Santa Fe and Union Pacific Railroads, whose main lines serve both the industrial coastal areas as well as the inland farm region.

Several ports, including facilities in Richmond, Crockett and Martinez, lie along the county's major adjacent bodies of water: Suisun Bay, San Pablo Bay, and the channel that connects them, the Carquinez Straits. These waterways provide ocean transport service and terminals, which give local industry access to markets in the Far and Middle East as well as Central and Latin America. The Contra Costa Counties public airport, Buchanan Field, located in Concord, offers cargo service, in addition to limited commuter passenger service. This service is further supplemented by the international passenger capabilities of both the Oakland and San Francisco International airports.

Government

The governmental considerations pertaining to the area's real estate market are basically comprised of three categories: local property taxes, development regulation through land use control (specifically zoning), and the availability and quality of public services. The following discussion addresses the trends and impact of these governmental considerations.

-----Seevers• Jordan• Ziegenmeyer----- 17 State Law regulates local real estate property taxes in California. In 1978, the California electorate voted to adopt Proposition 13. This proposition limits real property taxes in California to one percent of market value of the property, as of the specified base year. The actual tax rate for a property will vary depending on the jurisdiction, as well as location within the jurisdiction. The amount of taxes for properties can vary considerably because of their different assessed values and any special assessments.

The impact of Proposition 13 has been detrimental to local government and school districts. Faced with rising operating costs due to population expansion and general inflation, most public entities have had to cut back on services because Proposition 13 has limited their tax revenue source.

The Contra Costa County government, seated in Martinez, has the largest impact on development and business trends outside of unincorporated areas. An elected board of supervisors whose policy is executed by an appointed county administrator heads the county government.

Currently, 18 cities in Contra Costa County are incorporated and have their own local governing body: Antioch, Brentwood, Clayton, Concord, Danville, El Cerrito, Hercules, Lafayette, Martinez, Moraga, Orinda, Pinole, Pittsburg, Pleasant Hill, Richmond, San Pablo, San Ramon and Walnut Creek. The largest of these cities will be discussed later in this overview.

Environment

As is typical with any major metropolitan area, the number one environmental concern in Contra Costa County involves air quality and pollution. The county's social and economic positioning makes it more susceptible to pollution, as it is home to both heavy industry in the north and large amounts of commuter traffic in the central and southern portions. This tendency toward more pollution is reflected in its third place ranking among all California counties in terms of total environmental pollution. On the positive side, however, a significant amount of public and private funding has been dedicated to the removal and reduction of pollutants throughout the Bay Area, the results of which are starting to be seen. According to the Contra Costa Times, a study indicated that various counties throughout the region have experienced upwards of a 96% reduction in pollution over the past several years, with Contra Costa County experiencing a lesser, yet positive reduction. A large portion of this trend can also be attributed to the area's migration from heavy industry to technology and services.

Another environmental issue in the county is flood control. With nearly 50% of its borders along large bodies of water, and several additional creeks, streams and rivers inland, the threat of flooding is always a concern. Existing reservoirs handle a majority of the excess water, including San Pablo Reservoir near El Cerrito and Briones Reservoir in the central Contra Costa County region. Private

-----Seevers • Jordan • Ziegenmeyer----- 18 environmental groups also participate in land purchases designed to reduce development and preserve flood-prone areas as open space.

Social Considerations

From a social perspective, the technology bubble of the late 1990s has lent considerable help in defining Contra Costa County. With a heavy push from surrounding, higher cost-of-living counties, Contra Costa saw a rapid influx of new single-family homes and residential communities, resulting in more residents and greater home values. Average home prices have indeed risen substantially over the past few years, ascending to approximately $733,106 for a new single-family residence.

AVERAGE NEW HOME PRICES CONTRA COSTA COUNTY Year Median Base Price % Increase 1998 $269,950 1999 $303,425 12.4% 2000 $362,604 19.4% 2001 $463,571 27.8% 2002 $469,499 1.3% 2003 $578,971 23.3% 2004 $705,008 21.8% lQ-2005 $733,106 4.0% Source: Meyers Group, Contra Costa County 1998-2000; The Gregory Group, Contra Costa County 2001-2005

While the county's average home price is higher than California as a whole, within the Bay Area, Contra Costa County is still considered a reasonably priced market.

Recreational activities, while limited when compared to surrounding counties, can still be found readily. The county is home to several regional parks and three state parks. Franks Tract State Recreation Area is a water-accessible only area located north of the county and utilized by anglers and waterfowl hunters; the John Marsh State Park is located near Brentwood; and a pristine ecological treasure, Mount Diab lo State Park is in central Contra Costa County. Two national historic sites can also be found in the county, the home of Nobel Prize winner Eugene O'Neill in Danville and the former residence of famous naturalist John Muir in Martinez. And as with virtually all American metropolitan areas, a multitude of health clubs and golf courses can be found scattered throughout the county.

~----Seevers• Jordan• Ziegenmeyer----- 19 Contra Costa County provides higher education to its residents via three junior colleges, Contra Costa College, Diablo Valley College and Los Medanos College. The county is also host to a handful of private, four-year institutions, foremost of which being Saint Mary's College in Moraga, enrolling over 4,000 students annually. K-12 education is segmented into eight school districts throughout the county, offering services to nearly 200,000 youth.

-----Seevers • Jordan • Ziegenmeyer----- 20 Primary City Ovenriews

Antioch

Located along the northern border of Contra Costa Population 100,600 County, Antioch is home to over 100,600 people. The Median Household Income $63,200 city's median household income of $63,200 lies below % of County Population 10.0% the county average of $79,000, but is projected to grow by over 11 % through 2005. That level of expected growth places Antioch at the top of the list among all other cities in the county. Antioch is one of California's oldest cities, founded in 1849 by brothers William and Joseph Smith. The town is located at a convenient cross-section between the East Bay and the Sacramento Valley.

The service industry provides the greatest number of jobs in Antioch, responsible for employing 7,250 people. Additionally, the retail sector employs 5,820 people while manufacturing and wholesale jobs employ 1,910. Primary employers in the city include the Antioch Unified School District (1,860 employees), Sutter Delta Medical Center (700), Kaiser Permanente (600) and Walmart (375).

The city houses several retail and business centers, including the Delta Business Park in northwest Antioch, the County East Mall and the downtown riverfront district. Community uses include 23 neighborhood parks, the Antioch Marina, Lone Tree Golf Course and Contra Loma Regional Park.

Concord

The city of Concord was first incorporated in 1905, at Population 124,900 the time only a tiny farming community of some 700 Median Household Income $73,500 residents. Since then, Concord has burgeoned into % of County Population 13.0% Contra Costa County's largest city, boasting over 120,000 residents. The city is located in the central portion of the county, approximately five miles inland from Suisun Bay.

Median household income weighs in at $73,500, similar to the county median, and household income is projected to increase over the near term. Leading employers in Concord include Bank of America, Wells Fargo, Siemans and Systron Donner.

Multitudes of community uses exist, including a water theme park, Mt. Diablo State Park and the Chronicle Pavilion. Concord has a thriving downtown area, attracting over 100,000 guests annually

-----Seevers• Jordan• Ziegenmeyer----- 21 for activities. Retail development is substantial as well, as residents can enjoy the Sunvalley Mall, the Willows Shopping Center and the Expo Design Center, among others.

Richmond

Richmond is located on the most westerly portion of Population 101,700 Contra Costa County, claiming over 32 miles of Median Household Income $53,000 shoreline bordering San Francisco and San Pablo % of County Population 10.1% Bays. The city was incorporated in 1905, and now encompasses 56 square miles. Richmond is the second-most populous city in the county, with their 101, 700 residents trailing only Concord in population. That figure is expected to jump to almost 120,000 by 2010, giving it a 20% growth rate over that 10-year period.

Median household income for the city is $53,000, considerably lower than the county average. This is due primarily to the more industrial nature of Richmond, which is consistent with the other industrial-oriented cities along the San Pablo and Suisun Bays. A survey of the largest employers confirms this notion, as Chevron Refinery and Chevron Research & Technology employ almost 3,000 people, far and away the largest employers in Richmond.

The city is home to several regional parks, including the 2,428-acre Wildcat Canyon Regional Park, the Sobrante Ridge Regional Preserve, and the 2,315-acre Point Pinole Regional Shoreline. The Richmond Redevelopment Agency is currently working on a number of projects, including the West Shore Commercial Area, the Marina Center and Terminal One- South Shore, aimed at converting former industrial property to commercial, retail and recreational uses.

Walnut Creek

The city of Walnut Creek is situated in the central Population 66,000 portion of Contra Costa County and is home to 66,000 Median Household Income $81,100 people. The city spans 19.45 square miles, and is % of County Population 6.6% directly accessible via Interstate 680, just south of Concord. Walnut Creek became the eighth incorporated city in the county in 1914 and with an expected growth rate of over 26% through 2010, looks to grow in prominence within the region.

Median household income is above the county median, at $81,100. A low unemployment rate of 3. 7% contributes significantly to the above average income figure. A number of community uses can be found in the city, including the Dean Lescher Regional Center for the Arts, the Bedford Gallery, Shell Ridge Open Space, Boundary Oak Golf Course and 17 neighborhood parks. Walnut Creek has become a shopping destination for many people in the East Bay area. In fact, shopping in Walnut

-----Seevers • Jordan • Ziegenmeyer----- 22 Creek includes the Broadway Plaza with stores such as Nordstrom, Pottery Barn, Restoration Hardware and William Sonoma, as well as a significant number of boutiques and designer shops. The Plaza also offers dining destinations that include PF Changs and 11 Fomaio restaurants for fine dining.

Summary

Contra Costa County has experienced rapid growth, both in population and economy, over the past several years. This boom has been punctuated in recent years with an increased migration of business and residence from surrounding Bay Area counties. As a result, the county's economic base has grown substantially and is well positioned to become one of the preeminent regional economies in California. The housing market continues to grow, adding new residential communities and maintaining a very low vacancy rate across the county while continuing to see an aggressive increase in median home price. Working to temper the growth in Contra Costa County is a recent rise in unemployment, a trend seen throughout the Bay Area. However, the county seems to be weathering the storm with much greater success than its regional counterparts, thanks in large part to the county's diverse industry base. Given the positive economic indicators, combined with promising housing and social demographics and favorable geographical factors, Contra Costa County looks to continue through the next decade as a strong contributor to the regional economy.

-----Seevers • Jordan • Ziegenmeyer----- 23 NEIGHBORHOOD CHARACTERISTICS

DONALD

Introduction

The city of Hercules is located along the Interstate-SO corridor in the western portion of Contra Costa County, one of the nine counties comprising the San Francisco Bay Area. San Francisco is approximately 25 miles to the west and Sacramento 65 miles to the east. Hercules stretches from San Pablo Bay inland to the rolling coastal hills. The climate is described as Mediterranean, with cool summer breezes and relatively warm winter days that rarely fall much below 50 degrees Fahrenheit. No known active earthquake faults are located in Hercules. The city is located over two miles northeast of the Hayward Fault Zone, and about 21 miles northeast of the San Andreas Fault Zone.

Hercules began as the California Powder Works company town in 1881, and became the largest producer of TNT in the country by World War I. During the 1960s, the plant made the transition from the production of black powder to fertilizer. Because buffer zones were no longer needed for dynamite production, the company decided to create a new city on the land outside of the plant. After two years of working with consultants and holding numerous public meetings, a general plan for a city of 22,000 residents by the year 2000 was adopted by the City Council. The plant was sold to Valley Fertilizer, Inc. in 1976 and closed permanently in 1977 due to economic factors. It remained idle until 1979 when it was purchased by a group of investors called Hercules Properties, Ltd. A multitude of development options are now being considered on the historic waterfront property. Meanwhile, the city of Hercules has grown up around the site and is creating its own legacy as a legendary city in its own right.

------Seevers • Jordan • Ziegenmeyer------24 The city of Hercules is comprised of several themed developments, as shown in the following map:

THE NE16HBORHOODS OF HERCULES

Transportation

Hercules is located along Interstate 80, the principal east/west highway route in Northern California. State Highway 4 intersects Interstate 80 at Hercules and runs east through Concord, before heading through Stockton and the foothills of the Sierra Nevada Mountains. Freeway connections can easily be made to Sacramento, San Jose, the Central Valley and Los Angeles.

Bus service in Hercules is provided by WestCAT, which operates local fixed routes, express routes and Para transit within its service area. Express buses are timed to connect to BART (Bay Area Rapid Transit) trains at El Cerrito del Norte Station, providing convenient access to San Francisco and other traffic-congested areas. Hercules residents also enjoy the benefits of the Martinez Link, a W estCA T weekday service connecting W estem Contra Costa with the county seat in Martinez.

In terms of rail transportation, two transcontinental rail lines, as well as Amtrak, serve Hercules. There are over 100 shipping companies in the West Contra Costa region. Hercules has been selected as the site for a new rail station to be located on the waterfront. This station will lie on the main rail line from San Francisco/Berkeley to Sacramento and points east. It will also serve as a focal point for development of a marina and related shops and activities.

Air transportation is available via a regional executive airport in Concord, and international airports in San Francisco, Oakland and Sacramento. The city also has good access to international water transportation, with deep-water terminals at the Ports of Richmond and Oakland.

-----Seevers• Jordan• Ziegenmeyer----- 25 Demographics

As of January 2004, the city of Hercules had an estimated population of 21,700 persons. As of the 2000 Census, the city of Hercules had an estimated population of 19,488 persons, which indicates an average annual growth rate of 2.3%. In terms of race/ethnicity, 42.7% ofresidents were Asian, 28.0% White and 18.8% African-American. The average household size was 3.03 persons, and the median age was 36. 7 years. The median household income of $75, 195 was significantly higher than the state and national medians of $47,493 and $41,994, respectively. Of the city's 6,423 total occupied housing units, 84.4% were owner-occupied and 15.6% renter-occupied.

The following table shows population trends in recent years for the city of Hercules, as well as Contra Costa County and the state of California.

POPULATION TRENDS % Change Area 2000 2001 2002 2003 2004 2000-2004 City of Hercules 19,488 19,818 20,116 20,450 21,700 11.4% Contra Costa Co. 948,816 964,478 980,851 992,700 1,003,900 5.8% State of California 33,873,086 34,430,528 35,048,666 35,612,000 36,144,000 6.7% Source: California Department of Finance

As shown in the table above, Hercules has experienced a higher population growth rate over the past five years, compared to Contra Costa County and the state of California.

Employment & Economy

The following table highlights labor market data as of April 2005 for Hercules, as well as Contra Costa County and the state of California.

LABOR MARKET DATA (APRIL 2005) Labor Unemployment Area Force Employment Unemployment Rate City of Hercules 11,200 10,800 400 3.2% Contra Costa Co. 509,200 484,200 25,000 4.9% State of California 17,625,800 16,629,800 996,000 5.7% Source: California Employment Development Department

The city of Hercules has a relatively low unemployment rate compared to Contra Costa County and the state of California, as well as the nation, which has an estimated unemployment rate of 5.4% as of April 2005.

-----Seevers • Jordan • Ziegenmeyer----- 26 Detailed employment data, such as employment by industry and largest local employers, is not available for the city of Hercules specifically. Within the Oakland Primary Metropolitan Statistical Area (PMSA), which includes Contra Costa and Alameda Counties, the largest employment industries are Trade, Transportation and Utilities (19.5% of total employment), Government (17.7%), and Professional and Business Services (14.5%). Please refer to the Contra Costa County Regional Overview for more information.

Local Businesses

The Sycamore Place center on Sycamore Avenue is home to several medical/dental offices, including Hercules Medical Group, as well as financial and insurance businesses. The Creekside Center on Sycamore A venue is a large shopping center with restaurants, medical and dental offices, retail stores and personal services. Notable tenants include Rite Aid, Taco Bell and Round Table Pizza. Also on Sycamore A venue is Park Lake Plaza, which is anchored by Albertson's and is also home to Wells Fargo Bank, McDonald's, Subway and other retailers. Additional retail development is situated along Willow A venue and San Pablo Avenue.

Alfred Nobel Drive is home to several industrial/office businesses. Companies in this area include Radstons Office Plus, Mechanics Bank, California State Lands Commission, Caltrans, District Council Iron Workers, Bio-Rad Diagnostic Instrument, Bio-Rad Laboratories, Martech International, B D Swan & Company, Inc., A & B Diecast, and Benda Tool & Model. Businesses on Linus Pauling Drive include the Social Service Department, AC Paper and Supplies, Hall Fabrication & Racing, Inc., Northview Laboratories, Murigenics, Inc. and Bay Bioanalytical Laboratory.

Government

The city of Hercules, incorporated in 1900, is a General Law City and is governed by a council of five members elected at large for four-year overlapping terms. Hercules' mayor is one of the five council members. It is a rotating, appointed position based on seniority and/or a vote by the council members. The council meets twice a month, on the second and fourth Tuesday. Sessions are attended by appropriate city staff, including the City Manager, and are broadcast on cable channel 25. Citizens are encouraged to attend and to speak their minds regarding pending and important issues.

The city's goal is to provide a desirable lifestyle that is supported in part by a well-planned community, which balances housing, employment and environmental needs to maintain and improve the quality of life in Hercules.

Recreation

-----Seevers• Jordan• Ziegenmeyer----- 27 The city of Hercules maintains an abundance of open space areas and trails throughout the community, providing the opportunity for spotting various types of wildlife and views of the bay. The nearest golf course is Franklin Canyon Golf Course along State Highway 4. Community events include the annual Cultural Festival, Fourth of July Parade and Holiday Tree Lighting ceremony.

The City of Hercules Recreation and Community Services Department offers several services, including childcare programs, after-school programs, senior services and programs, recreation classes and sports leagues. The Hercules Community/Swim Center accommodates many of these activities. Parks operated by the city include a community park, Refugio Valley Park and five neighborhood parks. Refugio Valley Park, a 66-acre park situated at the comer of Refugio Valley Road and Pheasant Drive, offers picnic tables, BBQ pits, tennis courts, a jogging trail, a lake, restrooms, a par course, multi-use field and children's tot lot.

Public Services

Water service in Hercules is provided by East Bay Municipal Utility District (EBMUD). Richmond Sanitary Services provides curbside garbage collection. Pacific Gas and Electric Company (PG&E) provides electricity and gas service to Hercules residences and businesses. SBC (Pacific Bell) offers telephone and DSL Internet connections. AT&T offers cable services and Internet access. The daily newspaper for Hercules is the West Contra Costa Times. Hercules has a Police Department and is served by the Rodeo-Hercules Fire Protection District.

The city of Hercules is located at the border of two school districts: West Contra Costa Unified School District and John Swett Unified School District. The majority of residents are within the West Contra Costa Unified School District boundary. Residents that reside on the border of Hercules and Rodeo are within the John Swett Unified School District boundary.

Summary

The city of Hercules is located along Interstate 80 in the San Francisco Bay Area, and possesses excellent access to transportation systems. The climate is moderate and seismic conditions are relatively stable compared to other locations within the Bay Area. The city is growing at an annual average rate of about 2.3%, which is slightly faster than the surrounding county and state. The median income in the city is much higher than the state and national medians. The city offers a good level of public services to its residents. Overall, the city of Hercules represents a growing area and property values for most types of properties are expected to be stable to rising into the foreseeable future.

-----Seevers• Jordan• Ziegenmeyer----- 28 HOUSING MARKET OVERVIEW

The regional area housing information is an important part of the appraisal report because it provides a macro observation of the community and forms the basis upon which various conclusions are made. The characteristics of the region's residential real estate market influence the economic viability of the area, including the subject property. In order to familiarize the reader with the specifics of the West Contra Costa County new home market, some general information regarding supply and demand, current trends in the overall market, plus some detailed data regarding the subject's specific area, will be discussed.

Over the recent past, the residential market in California has experienced a dramatic upward movement in the majority of cities and towns with any type of nearby employment base. Some cities simply serve as bedroom communities that have benefited from escalating prices in metropolitan areas. This upward trend in housing prices has driven many buyers, particularly first-time buyers, to seek more affordable locations with longer commuting distances. This is one factor leading to the popularity of Contra Costa County as a whole. Cities such as Hercules, Richmond, Brentwood and Antioch have been growing due to the lack of affordable homes in the remainder of the Bay Area. Some of these cities have also strengthened and diversified their economic base, as companies are moving some operations inland to accommodate and attract lower wage earners.

Contra Costa County can be divided into three distinct regions, each with distinct characteristics. West Contra Costa County, containing communities along Interstate 80 such as El Cerrito, Richmond, San Pablo, Pinole and Hercules, possesses a number of industrial uses. Central and Southern Contra Costa County is located along the Interstate 680 corridor and contains the cities of Concord, Walnut Creek, Pleasant Hill, Danville, Alamo and San Ramon. This area provides most of the county's commercial production. East Contra Costa County, extending east of Concord to the San Joaquin County border, has developed into a primarily residential and service-oriented region, displaying the county's densest population of new homes. The primary cities in this market include Antioch, Brentwood, Pittsburg and Oakley.

The natural expansion of the Bay Area coming in tandem with the economic boom of the late 1990s has led to tremendous growth in housing in outlying areas previously dedicated to agricultural uses or undeveloped land. One of the most readily accessible of these areas has been Contra Costa County, which continues to foster the construction of new housing.

Housing Stock

Contra Costa County has grown significantly over the past decade, with the eastern portion of the county posting the highest rates of growth. The entire Contra Costa County area has been one of the

-----Seevers• Jordan• Ziegenmeyer----- 29 top selling markets throughout the Bay Area for the past several years. This is mainly due to the more reasonable cost of housing and the proximate location to the major East Bay commercial centers. The region should continue to exhibit an above average housing stock. According to the California Department of Finance, Contra Costa County has experienced an average annual population growth rate of 1.5% since 2000. During this same period, the city of Hercules (where the subject is located) averaged a relatively high growth rate of 2.3% per year.

As reported by The Gregory Group, an enterprise that tracks the trends of the local and regional housing market, there was only one subdivision actively marketing new, detached homes in Hercules during the First Quarter of 2005. As such, we will supplement our housing market overview by also including active projects from the neighboring city of Richmond. New home prices in Hercules and Richmond generally range from the mid-$500,000's to the low-$900,000's, although some custom homes are being sold for prices well above this range. According to The Gregory Group Report, as of the First Quarter 2005, the average base price for the active subdivision marketing homes in these cities was $758,875. The following table summarizes First Quarter 2005 sales statistics in Hercules and Richmond.

Base Price Range $549,990 - $914,950 Average Base Price $758,875 Size Range (SF) 1,427 - 3,650 SF Average Size (SF) 2,522 Price/SF Range $230.98 - $399.87 Average Price/SF $311.94

Housing Permits

As previously noted, Contra Costa County represents a rapidly growing residential market within the Bay Area. According to the U.S. Department of Housing and Urban Development's (HUD's) Building Permits Database, the number of single-family permits issued in Contra Costa County has increased every year for the past several years. In 2004, 5,562 single-family permits were issued countywide. The city of Hercules has also experienced strong growth in housing permits, with 108 in 2001, 310 in 2002, 611 in 2003 and 325 in 2004. Variations in building permits over the past several years are primarily attributable to inventory constraints of residential land in Hercules.

The West Contra Costa County market retains its identity as one of the Bay Area's more affordable markets, yet housing prices continue to expand at unprecedented rates. The average sale price during the First Quarter 2005 for new homes in Hercules and Richmond was $758,875, up from $650,485 in the Fourth Quarter 2004. For the entire Contra Costa County, the average sale price as of the First Quarter 2005 was $733, 106, up from $602, 107 a year ago. These prices are still relatively affordable

-----Seevers • Jordan • Ziegenmeyer----- 30 compared to more central San Francisco Bay Area locations. With the steady increase in building permits issued and competitive pricing, the housing market in West Contra Costa County looks to be strong through the next several quarters.

Supply and Demand

The following table summarizes all of the active subdivisions within West Contra Costa County. Each project's total weekly sales rate is shown in the table, which represents a good indication of demand for new homes in the market area. These projects are located in Hercules and Richmond. Following the summary table is a discussion of the active single-family, detached residential subdivisions in West Contra Costa County. The data is taken from The Gregory Group housing report for the First Quarter 2005.

Typical Total Avg. Average Lot Size Weekly Home Base Project Builder City (SF) Sales Size (SF) Price Hawthorne at Victoria by Santa Clara Valley Hercules 4,000 1.16 2,375 $778,750 The Bay Housing Group Fairways at Country Club Santa Clara Valley Richmond 2,500 1.48 1,586 $600,240 Vista Housing Group Seacliff at Point Richmond Toll Brothers Richmond 3,500 1.11 2,415 $820,225 Augusta at Country Club Santa Clara Valley Richmond 4,000 1.07 3,291 $872,450 Vista Housing Group The Summit Warmington Homes Richmond 8,000 0.88 2,980 $717,740

Hawthorne at Victoria by the Bay (Santa Clara Valley Housing Group)

Beginning sales in July 2003, this project offers four floor plans ranging from 2,123 to 2,700 square feet, with base prices from $748,950 to $825,950. The standard lot size in the development, which is located in Hercules, is approximately 4,000 square feet. The total weekly sales rate averaged 1.16 units, which equates to approximately 5.0 sales per month. This project is encumbered by a special tax in the amount of $39 per unit, per month, and a monthly HOA fee of $61 per unit. As of the First Quarter 2005, the project has sold 103 of the 170 total units planned.

Fairways at Country Club Vista (Santa Clara Valley Housing Group)

This project is located in Richmond and commenced sales in April 2004. The four floor plans within this project range from 1,427 to 1,720 square feet, with corresponding base prices from $549,990 to $634,990. The typical lot measures 2,550 square feet. The total weekly sales rate averaged 1.48 units, or approximately 6.4 units per month. This project is encumbered by a special tax of $20 and an HOA fee of $125 per unit, per month. As of the First Quarter 2005, the project had sold 77 of 79 units offered.

-----Seevers • Jordan • Ziegenmeyer----- 31 Seacliff at Point Richmond (Toll Brothers)

Commencing sales in November 2003, this project is located in Richmond. The development has four floor plans ranging from 2,230 to 2,620 square feet, with corresponding base prices ranging from $787,975 to $859,975. The typical lot size within this development is approximately 3,500 square feet. This project contains a monthly HOA fee of$150 per unit. As of the First Quarter 2005, the total weekly sales rate for the project averaged 1.11 units, indicating an absorption rate of about 4.8 sales per month. As of the First Quarter 2005, the project had sold 81 of 149 units planned.

Augusta at Country Club Vista (Santa Clara Valley Housing Group)

This project commenced sales in March 2003 and offers four separate floor plans. The floor plans range in size from 2,978 to 3,650 square feet. As of the First Quarter 2005, base prices within the project range from $814,950 to $914,950. Furthermore, the typical lot size within this development is approximately 4,000 square feet. The total sales rate in the First Quarter 2005 was 1.07 sales per week, or approximately 4.6 sales per month. There are 210 total units planned in the development; as of the First Quarter 2005, 113 have been sold. This project is encumbered by a monthly special tax of $129 per unit and has a monthly HOA fee of $61 per unit.

The Summit (Warmington Homes)

This development is located in Richmond and began sales in February 2004. The five floor plans within this project range from 2,739 to 3,247 square feet, with corresponding base prices from $659,990 to $749,990. The typical lot measures 8,000 square feet. The total weekly sales rate averaged 0.88 sales, or approximately 3.8 units per month. This project is encumbered by a special tax of$210 per unit, per month and an HOA fee of$66 per unit, per month. During the First Quarter 2005, this project reached sell-out.

Absorption Conclusion

The absorption statistics reported reflect the cumulative data observed at the respective projects since opening for sale. According to The Gregory Group, the most recent absorption statistics generally reveal stable to increasing absorption rates compared to the rates reported for earlier quarters. The table on the following page summarizes the absorption statistics previously discussed.

-----Seevers• Jordan• Ziegenmeyer----- 32 ABSORPTION (As of 1st Quarter 2005) Monthly Total Sales Absorption Project per Week (Approx.) Hawthorne at Victoria by The 1.16 units 5.0 units Bay Fairways at Country Club Vista 1.48 units 6.4 units Seacliff at Point Richmond 1.11 units 4.8 units Augusta at Country Club Vista 1.07 units 4.6 units The Summit 0.88 units 3.8 units

Overall, the trends and statistics indicate a strong residential market for West Contra Costa County. The one active subdivision in Hercules (Hawthorne at Victoria by The Bay) exhibits an absorption rate toward the upper end of the comparable range, indicating housing demand in the area is strong. With sales increasing over the past several years, developers have also been able to achieve higher sale prices. Based on the limited inventory of available residential land in the East Bay, the supply of new product still remains well below demand. The San Francisco Bay Area remains a prominent employment region in which a lack of developable land and affordable housing exists. For these reasons, the current upward market trends relating to price increases and absorption rates are expected to continue.

-----Seevers • Jordan • Ziegenmeyer----- 33 OAKLAND-EAST BAY RETAIL MARKET OVERVIEW

Introduction

As of the First Quarter 2005, the retail market in the Oakland-East Bay market area remained strong, with decreasing vacancy, increasing rents and positive net absorption. In this analysis, we will rely on data from the First Quarter 2005 MetroTrend report for the Oakland-East Bay Retail market compiled by REIS, a commercial real estate information service company. The overall vacancy rate for neighborhood and community shopping centers was 2.5% in the First Quarter 2005, which was down slightly in comparison to the Fourth Quarter 2004. Lease rates for neighborhood and community shopping centers increased approximately 1.0% from the Fourth Quarter 2004 through the First Quarter 2005 in the region. Based on the First Quarter 2005 statistics, the average asking lease rates in the Oakland-East Bay area range from $26.06 - $26.46 per square foot annually, triple net, for neighborhood and community shopping centers. At the end of the First Quarter 2005 there were 25 new construction listings (neighborhood, community and mixed use shopping centers) throughout the Oakland-East Bay market area. This new development is concentrated primarily in eastern Contra Costa County (Brentwood and Antioch), central/northern Alameda County (Alameda, Oakland and Emeryville) and East Alameda (Livermore and Dublin). Net absorption of neighborhood and community shopping centers remained positive in the First Quarter 2005, with a total net absorption rate of 67,000 square feet. Overall, the First Quarter 2005 was stable to strong for anchor and non-anchor retail properties in all submarkets of the Oakland-East Bay market area, and is expected to experience steady growth over the near term.

Lease Rates

Lease rates increased slightly for most product types during First Quarter 2005. In 2004, the overall average lease rate increased approximately 4.6% from 2003, with an average lease rate of $25.98 per square foot for neighborhood and community shopping centers. Average rental rates for inline retail space in the region ranged from $23.66 per square foot annually in south Alameda County to $29.69 per square foot annually in central Contra Costa County, with no more than two months of free rent offered. It is anticipated lease rates will increase about 4.0% through the end of 2005.

Vacancy

The overall retail market vacancy rate in the Oakland-East Bay market area as of the First Quarter 2005 for neighborhood and community shopping centers was 2.5%, down slightly from 2.8% in the Fourth Quarter 2004. The submarkets with the lowest vacancy rates were south Alameda County at 0.5% for anchored retail centers and 2.8% for non-anchored retail centers and east Alameda County at 2.4% for anchored retail centers and 1.5% for non-anchored retail centers. Developers have been

-----Seevers • Jordan • Ziegenmeyer----- 34 quick to respond to these extremely low vacancy rates, with new construction planned or underway in most of these areas.

Taxable Retail Sales

To provide an indication of the trend in retail sales volume and possible future demand levels, we have presented the following table of the total taxable sales for "Retail Stores" for Hercules. By way of comparison, we have also included retail sales for Contra Costa County and neighboring Alameda County. The most recent statistics available are from the 2003 calendar year as published by the California State Board of Equalization. The following table provides year-to year annual sales comparisons for the most recent years.

TAXABLE RETAIL SALES ($000's) Area 1999 2000 2001 2002 2003 % Change 1999-2003 City of Hercules $63,066 $72,472 $80,482 $88,473 $76,716 21.6% Contra Costa $11,114,476 $12,330,560 $12,256, 721 $12,159,424 $12,223,295 10.0% County Alameda County $20,672,287 $23,763,516 $22, 758,085 $21,264,629 $21,3 75,029 3.4% Source: California Board of Equalization

The sales figures exhibit strong increases in retail sales in Hercules, which has experienced a much higher growth rate in recent years compared to Contra Costa County as a whole and neighboring Alameda County. As more residential development is completed in Hercules, the demand for supporting commercial development and the amount of annual taxable retail sales should increase.

Hercules Submarket

The Sycamore Place center on Sycamore Avenue is home to several medical/dental offices, as well as financial and insurance businesses. Tenants include Hercules Medical Group, Huntingon Leaming Center, Alcibades Abad CPA, Ian A. Blackett Insurance Agency, Sunflower Bakery, RSM Oriental Food Mart/Restaurant, John Wayland DDS, Hercules Dental Care, Beverly Scherf MD and Hercules Realty & Financial.

The Creekside Center on Sycamore A venue is a large shopping center with restaurants, medical and dental offices, retail stores and personal services. Notable tenants include Rite Aid, Taco Bell, Round Table Pizza and H & R Block Tax Services. Other businesses include Creekside Family Dentistry, Hercules Pet Clinic, Vi's Nails, Creekside Cleaners, Hercules Florist and Gifts, Curves for Women, Richard's Place, Family Hair Cutlery, Cigarettes Cheaper, Diamond Video, Dragon

-----Seevers• Jordan• Ziegenmeyer----- 35 Terrace, Drs. Frank & Katerina Zisman, Hercules Chiropractic Center, Sycamore Medical Group, Hercules Cleaners, Creekside Cafe, Betty Fong DDS and Stylistic Beauty Supply.

Also on Sycamore A venue is Park Lake Plaza, which is anchored by Albertson's and is also home to Wells Fargo Bank, McDonald's, Subway, L & L Hawaiian Barbecue, Park Lake Cleaner, Marylou's Homemade Delights and Park Lake Family Dentistry.

Additional retail development is situated along Willow A venue and San Pablo A venue. Businesses in these areas include Circle K Stores, Jack in the Box, Shell, Starbucks, Radio Shack and Washington Mutual.

Summary

In conclusion, Contra Costa County, as well as the city of Hercules, represents a strong and growing retail market. Businesses are continuing to relocate to this area. The region's future prosperity will be tied to the availability of developable land and the affordability of housing. Population and economic growth is expected to continue into the foreseeable future. It is projected occupancy levels will remain strong and rental rates will be stable to rising for most types of retail properties. While average retail center vacancy rates are expected to trend upward in the future as a result of new construction coming on line, vacancy rates are expected to remain stable over the near term.

-----Seevers • Jordan • Ziegenmeyer----- 36 PROPERTY IDENTIFICATION AND LEGAL DATA

Location

The appraised properties, which represent the land areas within the proposed boundaries of City of Hercules Assessment District No. 2005-1 (John Muir Parkway), reside within the western portion of the city of Hercules. Specifically, the appraised properties are located along the north and south line of the proposed western extension of John Muir Parkway, north of Sycamore Avenue (proposed extension), Hercules, Contra Costa County, California.

Assessor's Parcel Number(s)/Owner of Record

The subject properties, all parcels within the boundaries of City of Hercules Assessment District No. 2005-1 (John Muir Parkway), are identified and owned by the following entities:

APN Ownership 404-020-076 LDC Cougar, LLC and LHN Cougar, LLC 404-020-079 William Lyon Homes, Inc. 404-020-080 WL Homes Bayside LLC 404-020-082 Lewis-Hercules LLC

------Seevers • Jordan • Ziegenmeyer------37 Legal Description

A legal description of the assessor's parcels comprising the subject properties is included in the preliminary title reports, which are reproduced and included in the Addenda to this report.

Property Taxes

The property tax system in California was amended in 1978 by Article XIII to the State Constitution, commonly referred to as Proposition 13. It provides for a limitation on property taxes and for a procedure to establish the current taxable value of real property by reference to a base year value, which is then modified annually to reflect inflation (if any). Annual increases cannot exceed 2% per year.

The base year was set at 1975-76, or any year thereafter in which the property is substantially improved or changes ownership. When either of these two conditions occur, the property is to be re appraised at market value, which becomes the new base year assessed value. Proposition 13 also limits the maximum tax rate to 1% of the value of the property, exclusive of bonds and supplemental assessments. Bonded indebtedness approved prior to 1978, and any bonds subsequently approved by a two-thirds vote of the district in which the property is located, can be added to the 1% tax rate.

Tax rates are determined annually and are based upon $100 of assessed value. The subject properties are located in tax code area 04-008, which includes additional forms of indebtedness, authorized by the voters increasing the total ad valorem tax rate to 1.1252% for the 2004/05 tax year.

The existing ad valorem taxes are of nominal consequence in this appraisal, primarily due to the fact these taxes will be adjusted substantially as the remaining infrastructure and property improvements are completed and in consideration of the definition of market value employed in this appraisal, which assumes a sale of the appraised properties.

Assessment Bonds and Special Assessments

The subject properties are proposed to be included within an Assessment District identified as City of Hercules Assessment District No. 2005-1 (John Muir Parkway), with the following proposed Assessment Liens:

APN Ownership Assessment Lien 404-020-07 6 LDC Cougar, LLC and LHN Cougar, LLC $2,202,628 404-020-079 William Lyon Homes, Inc. $2,293,182 404-020-080 WL Homes Bayside LLC $1,859,544 404-020-082 Lewis-Hercules LLC $238,501

-----Seevers• Jordan• Ziegenmeyer----- 38 The appraised properties are also subject to a number of direct levies, which in total represent only nominal assessments. The bond indebtedness and these direct levies will be considered in the valuation portions of this analysis.

Conditions of Title

Preliminary title reports prepared by Chicago Title Company and dated September 7, 2004 (APN: 404- 020-076), February 17, 2004 (APN: 404-020-079) and February 18, 2004 (APN: 404-020-080) were provided for use in this appraisal and are included in the Addenda to this report. While the appraisers have reviewed the conditions of title and have determined no adverse impact on value, the appraisers assume no negative title restrictions have been recorded since the date of the preliminary title reports. The appraiser accepts no responsibility for matters pertaining to title.

Zoning

Source: City of Hercules Planning Department

Zoning: According to the City of Hercules Planning Department, the subject properties are situated within the Central Hercules Plan, and are encumbered by the PC-R, planned commercial residential mixed use district land use designation.

Use: The specific purposes of the planned commercial residential mixed use district are to provide the opportunity to accommodate both residential and commercial uses in a well planned, mixed use development; provide the opportunity for an integrated mixture of residential and commercial employment generating uses within the same structure or site; allow lower cost live-work opportunities for start-up commercial enterprises and other smaller scale point of sale enterprises that are compatible with the residential and commercial uses within the building or site; provide the opportunity for upper floor residential over ground floor commercial uses; encourage mixed use development that could minimize vehicle use.

Conclusion: The subjects' primary uses are for single-family residential and commercial development.

Earthquake Zone

According to the Seismic Safety Commission, the subject site is located within Zone 3, which is considered to be the lowest risk zone in California. There are only two zones in California: Zone 4, which is assigned to areas near major faults; and Zone 3, which is assigned to all other areas of more moderate seismic activity. In addition, the subject is not located in a Fault-Rupture Hazard Zone (formerly referred to as an Alquist-Priolo Special Study Zone), as defined by Special Publication 42

-----Seevers • Jordan • Ziegenmeyer----- 39 (revised January 1994) of the California Department of Conservation, Division of Mines and Geology.

Easements

An inspection of the subject properties revealed no apparent adverse easements, encroachments or other conditions currently impacting the subject properties. According to the preliminary title reports provided for this appraisal (see Addenda), the subject properties contain easements for roadways and public utilities. However, these easements are typical for the area and are not considered to adversely affect the value or marketability of the subject properties. The appraiser is not a surveyor nor qualified to determine the exact location of any easements. It is assumed any easements do not have an impact on the opinion(s) of value set forth in this report. If, at some future date, any easements are determined to have a detrimental impact on value, the appraiser reserves the right to amend the opinion( s) of value contained herein.

-----Seevers• Jordan • Ziegenmeyer----- 40 SITE DESCRIPTION

Size and Shape: In total, the land areas comprising the City of Hercules Assessment District No. 2005-1 (John Muir Parkway) contain a gross land area of approximately 51. 7 acres. The noncontiguous, combined area of the District is irregularly shaped, but not so irregular so as to inhibit development.

Subdivision: When completed, the two single-family residential subdivisions will comprise a total of 163 (John Laing Homes) and 172 (William Lyon Homes) single-family residential lots, for a combined total of 335 residential lots. Included within the 172 lots comprising the William Lyon Homes subdivision are 96 attached single-family residential lots identified as the Seagate residential project.

Topography: Generally level

Drainage: Based on the development plan, our physical inspection of the subject properties and assuming typical grading and paving work will be completed, upon completion of the proposed and partially improved developments, adequate drainage will be provided.

-----Seevers • Jordan • Ziegenmeyer----- 41 FrontageNisibility: The subject properties have frontage and visibility along either the north line of Sycamore Avenue (Parcels 1, 2 and 4) or the north line of the proposed extension of John Muir Parkway (Parcel 3). Additionally, the single-family residential lots will, upon completion of site development, have frontage along a network of interior streets, including North and South Front Street, Drake Lane, Tsushima Street, Lewis Street, Clark Street, Central Street, Cabrillo Lane, De Anza Lane and Serra Lane, all of which are partially improved.

Access: The subject properties have good access from San Pablo A venue, which intersects with both John Muir Parkway and Sycamore Avenue just east of the subject properties. John Muir Parkway, which represents the western terminus of State Highway 4, provides immediate access to Interstate 80.

Utilities: All public utilities and services are available to the subject properties. Services are furnished by the following providers:

Water: East Bay Municipal Utility District (EBMUD) Sewer: City of Hercules Drainage: City of Hercules Electricity: PG&E Gas: PG&E Refuse: Richmond Sanitary Service Telephone: Pacific Bell

Soil: Based on the existence of both single-family residences and commercial structures on surrounding and nearby parcels, it appears the subject properties possess adequate load-bearing capacity for development.

Environmental Issues: At the time of inspection, the appraiser did not observe the existence of hazardous material, which may or may not be present, on the properties. The appraiser has no knowledge of the existence of such materials on the properties. However, the appraiser is not qualified to detect such substances. The presence of potentially hazardous materials could affect the value of the properties. The value estimate is predicated on the assumption there is no such material on or in the properties that would cause a loss in value. No responsibility is assumed for any such conditions, or for any expertise or engineering knowledge required to discover them. The client is urged to retain an expert in the field if desired.

Offsite/Onsite Improvements: As of the date of value, May 19, 2005, no offsite improvements were in place, and only a portion of the in-tract improvements complete.

-----Seevers • Jordan • Ziegenmeyer----- 42 Adjacent Uses: North North Shore Business Park South Vacant land/Single-family residences East Open Space/San Pablo A venue West Vacant land/Single-family residences

Functional Adequacy: The future infrastructure improvements to serve the various components comprising City of Hercules Assessment District No. 2005-1 (John Muir Parkway), from a conceptual standpoint, will facilitate the flow of traffic both to and from employment. John Muir Parkway forms the western terminus of State Highway 4, which provides immediate access to Interstate 80, the primary transportation route into the Bay Area, and will link Central Hercules with the San Pablo Bay waterfront.

Development of the residential subdivisions will require interior street systems to serve all of the various components of the subject properties, which will be accessible from both John Muir Parkway and Sycamore A venue. Based upon this premise, overall functional utility is considered to be good.

Conclusion: The configuration and size of the subject properties are considered adequate for development.

-----Seevers • Jordan • Ziegenmeyer----- 43 FACILITIES TO BE FUNDED BY THE DISTRICT

As previously indicated, this report will address the hypothetical market values, by ownership, and the cumulative, or aggregate, value of the subject properties comprising City ofHercules Assessment District No. 2005-1 (John Muir Parkway). The improvements to be funded by the District are detailed in the Engineer's Report for Assessment District No. 2005-1, dated November 23, 2004, a copy of which is included in the Addenda to this report. The primary facilities authorized to be constructed with the bond proceeds include: ( 1) street, bridge and traffic signal improvements, (2) storm drain improvements, (3) sewer improvements, (4) water improvements and ( 5) landscaping and irrigation improvements. Bond proceeds from the District will also be used to fund the costs associated with the design and implementation of the construction of improvements and the costs associated with the formation of the District.

i··:l>'i· .:, 1,-:;:.x.v.,:$-:W ~•-\L, :.,:(,J '\.,..•. ~7?h ~:::i.i- ·,, ,.~_ _-;:;:s'3'~-~·s.

~ .t:Ci >t. :;,:,;:.!-, ~-~~~'' >'..::.~!~;.~ »µ<;, .T>-,.:l.. :.1)'.tR'f· ·~ :,,., :'!...:-.l.:c:'<"·~>.f; 1'<•: ~M'S .r.:-( ')-~~· "$-V,;i '(..:' ~<;(- ;.::n; ;;;:, "•::~·:1~,.

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ASSESSMENT DIAGRAM OF ~ MuniFinancial ASSESSMENT DISTRICT NO. 2005-1 '""' ...... ,- ..,. .._ *~ (JOHN MUIR PARKWAY) •~u, ~ tnN-31111. ~)-ru(IIMI""_.... :_->);'.; ~~t. ::: ;:)'.>' -.:;.:·;..:1 ·· .. ~ ;,w

The cited list of facilities are proposed to include incidental expenses associated with the formation of the Assessment District, including - but not limited to - the cost of planning, engineering and designing the facilities, the cost associated with the creation of the District, the issuance of bonds thereof, the determination of the amount of the assessment, the collection of the assessment, the payment of the assessment or costs otherwise incurred in order to carry out the authorized purposes of the District and any other expenses incidental to the construction, completion and inspection of the facilities.

-----Seevers• Jordan • Ziegenmeyer----- 44 TIME TO COMPLETE

According to the City of Hercules Engineering Division, it is estimated the improvements to be financed by the City of Hercules Assessment District No. 2005-1 (John Muir Parkway) bond issuance will be complete by September 2006.

-----Seevers • Jordan • Ziegenmeyer----- 45 SUBJECT PHOTOGRAPHS

Looking East along Sycamore A venue (proposed)

Looking North across Parcel 1 along a proposed street

-----Seevers• Jordan• Ziegenmeyer----- 46 Looking West across Parcel 1 from John Muir Parkway (proposed extension)

Looking West across Parcel 2 from John Muir Parkway (proposed extension)

-----Seevers • Jordan • Ziegenmeyer----- 47 View of Subject Property (Parcel 3) from John Muir Parkway (proposed extension)

Looking West along John Muir Parkway (proposed extension)

-----Seevers • Jordan • Ziegenmeyer----- 48 IDGHEST AND BEST USE ANALYSIS

The term "highest and best use," as used in this report, is defined as follows:

The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasibility and maximum productivity.3

Two analyses are typically required for highest and best use. The first analysis is highest and best use of the land as though vacant. The second analysis is the highest and best use of the land as improved. (Definitions of these terms are provided in the Glossary of Terms in the Addenda to this report.)

Highest and Best Use as though Vacant

In accordance with the definition of highest and best use, it is appropriate to analyze the subject site as though vacant as it relates to legal permissibility, physical possibility, financial feasibility and maximum productivity.

Legally Permissible

The legal factors influencing the highest and best use of the subject properties are primarily government regulations such as zoning and building codes. According to the City of Hercules Planning Department, the subject properties are zoned planned commercial/residential under the Central Hercules Plan. Under the City of Hercules Zoning Code, a planned development plan is required to be submitted for consideration, from which a conceptual plan is approved, followed by an initial plan and the final plan, each providing additional layers of entitlements. Consequently, it is legally permissible to develop the subject properties consistent with the underlying commercial/residential land use designation.

The area encompassing the subject properties has undergone extensive planning and review as part of the Central Hercules Plan, which was drafted in December 2000; zoning modifications are highly unlikely. Based on the applicable ordinances, and considering the approval status of the subject properties, the legally permissible use is limited to single-family residential development, commercial development, or a combination thereof. Based on the Central Hercules Plan, the subject properties (Parcels 1 and 2) are designated for single-family residential uses, commercial use (Parcel 3) and mixed-use commercial/residential (affordable) development (Parcel 4). The City of Hercules intends to satisfy Inclusionary Housing Requirements through designation of Parcel 4 as a mixed-use

3 The Dictionary of Real Estate Appraisal, 4th ed. (Chicago: Appraisal Institute, 2002), 135. ~----Seevers• Jordan • Ziegenmeyer----- 49 development of retail and either for sale or for rent affordable housing units. However, the highest and best economic use of the subject property (Parcel 4) is for assemblage with the adjacent properties (Parcels 1 and 2) for development as single-family residential lots, which is legally permissible under the commercial/residential land use designation.

Physical Possibility

The physical characteristics of the properties including shape, size, topography, accessibility and availability of utilities were all given consideration. The sites' physical orientation was also considered. At this point in the analysis the physical characteristics are examined to see if they are suited for the legally permissible uses.

Based on our physical inspection of the subject properties, we know ofno reason why the properties would not support any legal development. The property is not located within a Fault-Rupture Hazard Zone. Evidence of residential and commercial construction in the immediate area provides additional support for the possibility of development. Typical roadway and utility easements exist, or will exist upon completion of site development, but are not known to be unusual in any way. It is assumed any easements do not adversely affect the subjects' potential for development.

It should be noted at the time of inspection, the appraiser did not observe the existence of hazardous material, which may or may not be present on the properties. The appraiser has no knowledge of the existence of such materials on the properties. However, the appraiser is not qualified to detect such substances. The presence of potentially hazardous materials could affect the value of the properties. The value estimate herein is predicated on the assumption that there is no material on or in the properties that would cause a loss of value. No responsibility is assumed for any such conditions or for any expertise or engineering knowledge required to discover them. The client is urged to retain an expert in the field if desired.

In conclusion, it appears as if the legally permissible uses of the subject properties are physically possible.

Financial Feasibility

The feasibility of the allowable uses is dependent on the supply and demand conditions, which could influence the competitive position of each proposed type of property use comprising the subject properties.

-----Seevers• Jordan • Ziegenmeyer----- 50 The feasibility of singe-family developments is dependent on the regional supply and demand conditions. Sales of new homes in the subjects' market area have improved during the past few years.

The subject properties are situated within the Central Hercules Plan area, and designated for commercial residential development. The demand for developable single-family residential land in the subjects' East Bay market area is evident by the number of bulk lot sales occurring within the last two years, as well as the gradual improving market conditions for single-family residential product, as detailed in the Housing Market Overview section of this report. The subject properties, which comprise the develop able land areas situated within the boundaries of City of Hercules Assessment District No. 2005-1 (John Muir Parkway), are bisected by the proposed western extension of John Muir Parkway, separating the residential and proposed mixed use commercial/residential developments from the 17.2-acre commercial designated parcel, located adjacent to the North Shore Business Park. Further, the southern, residential components of the District are adjacent to existing and developing single-family residential developments. Given the demand for single-family residential product in the subjects' market area, coupled with the City of Hercules Central Hercules Plan for future growth and development, the single-family residential component of the subject properties is considered financially feasible. Further, given the demand for developable single-family residential lots, the financially feasible use of Parcel 4 of the subject properties is for assemblage with the adjoining Parcels 1 and 2 for development of single-family residential units. As demand for developable single-family lots in the area increases, the demand for complementary land uses within the area should also increase. We expect the subject properties to be competitive with the other area developments, and with other similar developments located elsewhere in the East Bay market.

Maximum Productivity - Conclusion

Legal, physical and market conditions have been analyzed to evaluate the highest and best use of the subject properties. The analysis is presented to evaluate the type of use(s) that will generate the greatest level of future benefits possible to the properties. Based on the residential zoning ordinance of the subject properties, single-family residential and commercial development are the only land uses that are legally permissible, physically possible and financially feasible. Therefore, considering the subjects' specific characteristics, the maximally productive use is to develop the land consistent with the Central Hercules Plan, for a mix of commercial and residential land uses.

Probable Buyer

The most probable buyer of the subject properties is a merchant builder and/or developer familiar with the local market area and who wants sites in near-ready condition.

-----Seevers• Jordan• Ziegenmeyer----- 51 Highest and Best Use as Improved (Proposed and Partially Improved)

If the value of the property as improved is greater than the value of the site as partially improved, the highest and best use is the use of the property as improved. If the value of the vacant land exceeds the value of the property as improved, the highest and best use becomes the value of the land as if vacant.

Highest and best use of the property as improved pertains to the use that should be made in light of its current improvements. In the case of subdivision land, consideration must be given to whether it makes sense to demolish existing improvements (either on-site or off-site improvements) for replacement with another use. The time and expense to demolish existing improvements, re-grade, reroute utilities or re-map must be weighed against alternative uses. If the existing or proposed improvements are not performing well, then it may produce a higher return to demolish existing improvements, if any, and re-grade the site for development of an alternative use.

The use that maximizes a property's value, consistent with required rates of return and profit requirements, is the highest and best use as improved.

Legally Permissible

As previously stated, the legally permitted use of the subject properties is for detached single-family residential, mixed-use commercial/residential and commercial development. The existing and proposed uses comply with current zoning and use regulations; thus, they are legally permissible.

Physically Possible

The subject properties are being partially developed with two single-family production subdivisions and a proposed mixed-use commercial/residential (affordable) development. Based on the highest and best use as vacant discussion, development of the smaller, proposed mixed-use development with single-family residential uses is physically possible and an appropriate use of the land. It is noted there are currently no plans submitted for development of the 17 .2-acre commercially zoned parcel or the 1.87-acre mixed-use commercial residential parcel.

Financially Feasible

The valuation analysis conducted herein proves development of the subject properties consistent with the underlying land use designations is financially feasible.

-----Seevers• Jordan• Ziegenmeyer----- 52 Maximum Productivity

The single-family residential projects proposed, and partially improved, on the subject properties are physically possible, legally permissible and financially feasible. No more productive land use is apparent at this time. Overall, the project is anticipated to enjoy its fair share of the market.

Conclusion

The existing projects meet the four criteria of highest and best use as proposed. Thus, the highest and best uses, as proposed, are to complete the development of the projects, or some similar unit mix of single-family residential development with complementary commercial development.

-----Seevers • Jordan • Ziegenmeyer----- 53 APPROACHES TO VALUE

The valuation process is a systematic procedure employed to provide the answer to a client's question about the value of real property.4 This process involves the investigation, organization and analysis of pertinent market data and other related factors that affect the market value of real estate. The market data is analyzed in terms of any one or all of the three traditional approaches to estimating real estate value. These are the cost, sales comparison, and income capitalization approaches. Each approach to value is briefly discussed and defined as follows:

Cost Approach

The cost approach is based on the premise that no prudent buyer would pay more for a particular property than the cost to acquire a similar site and construct improvements of equivalent desirability and utility. Thus, this approach to value relates directly to the economic principle of substitution, as well as supply and demand. The cost approach is most applicable when valuing properties where the improvements are new or suffer only a minor amount of accrued depreciation, and is especially persuasive when the site value is well supported. The cost approach is also highly relevant when valuing special-purpose or specialty properties and other properties that are not frequently exchanged in the market.

The definition of the cost approach is offered as follows:

A set of procedures through which a value indication is derived for the fee simple interest in a property by estimating the current cost to construct a reproduction of ( or replacement for) the existing structure, including an entrepreneurial incentive, deducting depreciation from the total cost, and adding the estimated land value. Adjustments may then be made to the indicated fee simple value of the subject property to reflect the value of the property interest being appraised. 5

Sales Comparison Approach

The sales comparison approach is based on the premise that the value of a property is directly related to the prices being generated for comparable, competitive properties in the marketplace. Similar to the cost approach, the economic principles of substitution, as well as supply and demand are basic to the sales comparison approach. This approach has broad applicability and is particularly persuasive when there has been an adequate volume of recent, reliable transactions of similar properties that indicate value patterns or trends in the market. When sufficient data are available, this approach is the most direct and systematic approach to value estimation. Typically, the sales comparison approach is most pertinent when valuing land, single-family homes and small, owner-occupied commercial and office properties.

4 The Dictionary of Real Estate Appraisal. 4th ed (Chicago: Appraisal Institute, 2002), 305. 5 The Dictionary of Real Estate Appraisal, 67. -----Seevers• Jordan• Ziegenmeyer----- 54 The definition of the sales comparison approach is offered as follows:

A set of procedures in which a value indication is derived by comparing the property being appraised to similar properties that have been sold recently, then applying appropriate units of comparison and making adjustments to the sale prices of the comparables based on the elements of comparison. The sales comparison approach may be used to value improved properties, vacant land, or land being considered as though vacant; it is the most common and preferred method of land valuation when an adequate supply of comparable sales are available. 6

Income Capitalization Approach

The income capitalization approach is based on the premise that income-producing real estate is typically purchased as an investment. From an investor's point of view, the potential earning power of a property is the critical element affecting value. The concepts of anticipation and change, as they relate to supply and demand issues and substitution, are fundamental to this valuation approach. These concepts are important because the value of income-producing real estate is created by the expectation of benefits (income) to be derived in the future, which is subject to changes in market conditions. Value may be defined as the present worth of the rights to these future benefits. The validity of the income capitalization approach hinges upon the accuracy of which the income expectancy of a property can be measured.

Within the income capitalization approach there are two basic techniques that can be utilized to estimate market value. These techniques of valuation are direct capitalization and yield capitalization.

Direct capitalization is a method used to convert an estimate of a single year's income expectancy into an indication of value in one direct step, either by dividing the income estimate by an appropriate rate or by multiplying the income estimate by an appropriate factor. 7

Yield capitalization is the capitalization method used to convert future benefits into present value by discounting each future benefit at an appropriate yield rate or by developing an overall rate that explicitly reflects the investment's income pattern, value change, and yield rate. 8

The definition of the income capitalization approach is offered as follows:

A set of procedures through which an appraiser derives a value indication for an income producing property by converting its anticipated benefits ( cash flows and reversion) into property value. This conversion can be accomplished in two ways. One year's income expectancy can be capitalized at a market-derived capitalization rate or at a capitalization rate that reflects a specified income pattern, return on investment, and change in the value of the investment. Alternatively, the annual cash flows for the holding period and the reversion can be discounted at a specified yield rate.9

6 The Dictionary of Real Estate Appraisal, 4th ed. (Chicago: Appraisal Institute. 2002), 255. 7 The Dictionary of Real Estate Appraisal, 88. 8 The Dictionary of Real Estate Appraisal, 315. 9 The Dictionary of Real Estate Appraisal, 143. -----Seevers • Jordan • Ziegenmeyer----- 55 COMPONENT VALUATION - SINGLE-FAMILY RESIDENTIAL LAND

Sales Comparison Approach

In this section we will estimate the value of the single-family residential lots by analyzing bulk sales of similar finished residential lots in comparable areas. Included in our analysis of comparable market transactions are recent sales within the East Bay market area.

In the sales comparison approach, the market value of the subjects' residential lots is estimated by a comparison to similar properties that have recently sold, are listed for sale or are under contract. The underlying premise of the sales comparison approach is the market value of a property is directly related to the price of comparable, competitive properties in the marketplace.

This approach is based on the economic principle of substitution. According to The Appraisal of Real Estate, 12th Edition, published by the Appraisal Institute, 2001 - "The principle of substitution holds that the value ofa property tends to be set by the price that would be paid to acquire a substitute property ofsimilar utility and desirability within a reasonable amount oftime. The principle implies that the reliability of the sales comparison approach is diminished ifsubstitute properties are not available in the market."

The proper application of this approach requires obtaining recent sales data for comparison with the subject properties. In order to assemble the comparable sales, we searched public records and other data sources for leads, then confirmed the raw data obtained with parties directly related to the transactions (primarily brokers, buyers and sellers).

In the case of land used for production oriented residential development, this process typically entails the analysis of an entitled site on a finished, or fully improved, lot basis. Bulk sales of final mapped and fully improved lots, as well as tentatively mapped unimproved lots, will be analyzed. Many merchant builders compare properties based on a finished lot basis. However, two similar properties may possess different finished lot prices due to dissimilar permit and fee structures. Lots possessing permits and fees relatively lower than similar comparable lots will have a higher finished lot price, all else being equal. Thus, in the following analysis we analyze sales comparables on a loaded lot basis. Loaded lot values incorporate the paper lot price, site development costs, permits and fees and any bond encumbrances per lot.

After deriving a loaded lot indicator for the subject properties from comparable sales data, the permits and fees for a typical lot within the subject properties, as well as any remaining site development costs per lot, will be subtracted from the derived loaded lot indicator. As of the date of our inspection, residential lots within the subject properties were partially improved with in-tract

-----Seevers • Jordan • Ziegenmeyer----- 56 development underway. To adequately value lots within the subject properties, site development costs per lot must also be subtracted from the loaded lot indicator. The site development costs per lot quantifies the amount of development needed to transform unimproved, or paper, lots currently existing within the subject properties into improved lots. Improved lot status includes the completion of in-tract development. The values derived specifically assume the improvements to be financed by City of Hercules Assessment District No. 2005-1 (John Muir Parkway) bond proceeds are in place and available for use.

A survey of recent transactions revealed six comparables believed to be reasonable indicators of market value of the subjects' detached residential lots. The sales cover the period of December 2002 to the present and range in quantity from 5 3 to 172 lots.

Due to the differences in building permit costs and special taxes, all comparables have been compared to the subject with these corresponding items taken into account. Permits and fees for a typical lot in the Bayside development equate to approximately $23,310 per lot, which will be the basis for comparison with the transactions considered relevant to this analysis. It should also be noted when the principal bond balance was not available for a comparable we capitalized the annual debt service payments based on current rates and terms.

The sales relied upon in this analysis are summarized within the chart on the following page, with a location map.

-----Seevers• Jordan • Ziegenmeyer----- 57 BULK LOT SALES SUMMARY

No.. Permits Costs Finished Grantor/ Sale Sale or and to Loaded Typical No. Location Grantee Date Price Lots SILot Bonds Fees Co..,.....te Loi Value Lot Size

1 Bayside(portlon) Lewis ~ating Co!I!!!ration Feb-04 $19,048,000 172 $110,744 $13,332 $23,310 $46,802 $194,189 1.850 NIL Sycamore Ave . =st of San Pablo Ave. William Lyon Homes Inc (average) Hercules, Cootra Costa County, California

2 Bayside (portion) Lewis Q£fil:l!!!!la Co!I!!!ration Feb-04 $16,267,500 163 $99,801 $13,513 $23,310 $46,802 $183,426 1,850 N/L Sycamore Ave , west of San Pablo Ave WL Homes Bayside LLC (average) Hercules, Contra Costa County, California

3 Victona By The Bav Hercules Victona (LLq Jan-03/ $13,649,930 80 $170,624 $0 $30,000 $45,000 $245,624 6,000 SWC San Pablo Avenue and Victoria Cres William Lyon Homes Inc. Nov-01 Hercules. Contra Costa County, California

4 Victoria By The Bay Hercules Victona (LLq Jan-03/ $17, 700,892 110 $160,917 $0 $30,000 $35,000 $225,917 5,000 SWC San Pablo Avenue and Victona Cres William Lyon Homes Inc Nov-01 Hercules, Contra Costa County, California

5 Victoria By The Bay Hercules Victoria l],Lq Jan-03 $18,069,380 !33 $135,860 $0 $30,000 $50,000 $215,860 4.000 SWC San Pablo Avenue and Victoria Cres William Lyon Homes Inc Hercules. Contra Costa County, California

6 Victoria By The Bay Hercules Victona l],Lq Dec-02 $5,163,426 53 $97,423 $0 $30,000 $44,000 $171,423 3,375 NEC San Pablo Avenue and Victoria Cres Santa Oara Houslilll Gmup, Inc Hercules, Contra Costa County, California

; 11\ ! ci \ -o-"fll

------Seevers• Jordan • Ziegenmeyer------58 Improved Lot Sale Analysis and Conclusion

The preceding sales indicate the following: 1) there have been a number of improved lot sales during the past two years reflecting an active market for residential land throughout the subjects' market area, and 2) there is a direct relationship between the typical lot size and the sales price per lot. This is to say that as the typical lot size within a subdivision increases, the sales price per lot also increases.

The density or typical lot size is an important factor considered in this analysis.

Onsite/Offsite Development

The comparables will be analyzed on a loaded lot basis, which includes sufficient water rights, roadways and utilities available to the perimeter (off-tract improvements), and with all in-tract work completed. Thus, no adjustments are necessary.

Building Permits and Fees

To account for any potential differences in building permit costs, all transactions are typically analyzed with these costs taken into account. As previously indicated, permits and fees for a typical lot in the subjects' Bayside development equate to approximately $23,310 per lot, which will be the basis for comparison with the transactions considered relevant to this analysis.

Bonds and Assessments

The land sale comparables are adjusted based on the impact of bond indebtedness on value (included in the loaded lot indicators).

Additional Adjustments

In order to value the subject property, the comparable transactions were adjusted based on the profile of the subject sites with regard to categories that affect market value. If a comparable has an attribute that is considered superior to that of the subject, it is adjusted downward to negate the effect the item has on the price of the comparable. The opposite is true of categories that are considered inferior to the subject and are adjusted upward. In order to isolate and quantify the adjustments on the comparable sales data, percentage or dollar adjustments are considered appropriate.

At a minimum, the appraiser considers the need to make adjustments for the following items:

• Property Rights Conveyed • Financing Terms

-----Seevers • Jordan • Ziegenmeyer----- 59 • Conditions of Sale (motivation) • Market Conditions (time) • Location • Physical Features

A paired sales analysis is performed in a meaningful way when the quantity and quality of data are available. However, it is very rare that any two sales are similar in all characteristics except one, and as a result, many of the adjustments require the appraiser's experience and knowledge of the market and information obtained from those knowledgeable and active in the marketplace. A detailed analysis involving each of these factors and the value conclusion for the subject properties is as follows.

Property Rights Conveyed

The subject and all the comparables represent fee simple estate transactions. Therefore, adjustments for this factor are not necessary.

Financing Terms

In analyzing the comparables, it is necessary to adjust for financing terms that differ from market terms. Typically, if the buyer retained third party financing ( other than the seller) for the purpose of purchasing the property, a cash price is presumed and no adjustment is required. However, in instances where by the seller provides financing as a debt instrument, a premium may have been paid by the buyer for below market financing terms or a discount may have been demanded by the buyer if the financing terms were above market. The premium or discounted price must then be adjusted to a cash equivalent basis.

All of the comparable sales were cash to the seller transactions and, therefore, do not require adjustments for financing.

Conditions of Sale (motivation)

Adverse conditions of sale can account for a significant discrepancy from the sales price actually paid compared to that of the market. This discrepancy in price is generally attributed to the

-----Seevers• Jordan • Ziegenmeyer----- 60 motivations of the buyer and the seller. Certain conditions of sale are considered to be non-market and may include the following:

• a seller acting under duress, • a lack of exposure to the open market, • an inter-family or inter-business transaction for the sake of family or business interest, • an unusual tax consideration, • a premium paid for site assemblage, • a sale at legal auction, or • an eminent domain proceeding.

All of the comparable transactions were arms-length market transactions and do not require an adjustment for conditions of sale.

Market Condition (time)

The market condition generally changes over time, but the date of this appraisal is for a specific time. Therefore, in an unstable economy, one that is undergoing changes in the value of the dollar, interest rates and economic growth or decline, extra attention needs to be paid to assess changing market conditions. Significant monthly changes in price levels can occur in several areas of a municipality, while prices in other areas remain relatively stable. Although the adjustment for market conditions is often referred to as a "time adjustment," time is not the cause of the adjustment.

In evaluating market conditions, changes between the dates of the comparable sales and the effective date of this appraisal may warrant adjustment; however, if market conditions have not changed, then no time adjustment is required. All of the comparable sales occurred after December 2002, since which time market conditions have continued to improve. As a result, all the comparables with contract sale dates greater than 12 months prior to the date of value (May 19, 2005) are adjusted upward for improving market conditions.

Location

The subject properties' location in the West Contra Costa County market area is considered good. All of the comparable sales are situated in the West Contra Costa County market area and, as such, no adjustments are warranted for location.

Physical Features

The physical characteristics of a property can impact the selling price. Those that may impact value include the following:

-----Seevers • Jordan • Ziegenmeyer----- 61 Number of Lots

There is a difference in the number of lots transferring between the sales. The sales range in size from 53 to 172 lots. Appropriate adjustments were made, if warranted, for the difference in the number of lots ( due to economies of scale) compared to the number of lots contained in the subject subdivisions. Conversations with merchant builders indicate lot transactions with less than 40 lots do not achieve economies of scale in terms of development costs and indirect costs; thus, in the case of the comparable sales, no adjustment is necessary.

Lot Sizes

In the following analysis, the sales are adjusted upward for inferior (smaller) lot sizes and downward for superior (larger) lot sizes compared to the subjects' 1,850 square foot typical lot size category. The degree of adjustment is dependent on the size disparity between the comparable and the subjects' typical lot sizes.

Zoning

All of the sales have similar zoning allowing for development with single-family residences. Thus, no adjustments are necessary for zoning.

Density

Any variances in density are addressed in the lot size adjustments.

Entitlements/Stage of Development

All of the sales had either tentative map approval or final map approval. For those comparables at the tentative map stage, we have adjusted for the cost to complete the site development costs. Consequently, no adjustment is warranted for either entitlements or site condition.

Lot Premiums

As previously mentioned, this analysis is concerned with the bulk value of the subject properties. As such, premiums that would be achieved on an individual retail basis have been considered based upon their influence on the value of the property in bulk. The subject, as well as the comparables, are considered to contain lots with a generally similar percentage of premium lots ( cul-de-sac lots, etc). Thus, no adjustment is necessary.

-----Seevers• Jordan• Ziegenmeyer----- 62 Topography/Functional Utility

Differences in contour grade, drainage, or soil conditions can affect the utility and, therefore, the market value of the lots. The comparable properties all offer terrain with similar utility. No adjustments are required for topography or functional utility.

Conclusion

In comparison to the subjects' 1,850 square foot lots, which form the basis of our analysis, the data set required adjustments for discrepancy in typical lot size, larger than 1,850 square feet. Significant interest in developable residential land both within, and in proximity to, the Bay Area has occurred during the past few years. Consequently, upward adjustments to account for improvements in market conditions were applied to the comparable sales.

In light of these adjustments, Sales #1 and #2, representing the recent purchase of the subject properties, are the best indicators of value within the comparable data set. Considering these sales and other adjustments, an overall conclusion of$205,000 per loaded lot is considered reasonable for the subjects' 1,850 square foot lots.

-----Seevers• Jordan• Ziegenmeyer----- 63 Extraction Technique

As support for the estimate of loaded lot values yielded via the sales comparison approach, we will present a residual analysis that takes into account home prices, direct and indirect construction costs, accrued depreciation and developer's incentive in order to arrive at an estimate ofloaded lot value. The elements of the extraction technique are discussed below.

Typical Home Price

The typical home price is estimated based on a recently sold out residential project located adjacent to the subject properties. Taylor Woodrow Homes, an international development company with homebuilding operations in the United Kingdom, United States, Canada, Spain and Gibraltar, reached sell out of Haywood, a 78-lot subdivision situated immediately west of the subject properties, in the First Quarter of 2005. Haywood has five floor plans similar to that proposed for the subject properties, townhouse-style, detached single-family residences ranging from 1,469 to 1,979 square feet on typical lot sizes of 2, 100 square feet. Based on the Baywood subdivision, we have profiled a likely new production home for a standard lot size (1,850 square feet) within the subject properties. Considering the sale prices achieved by the Baywood subdivision, a sale price of $545,000 is concluded for the subject.

Direct and Indirect Costs

The initial step in the improvement cost analysis is a determination of the quality of construction for the subject homes. An examination of both materials and workmanship is fundamental when determining the overall quality of construction.

Construction costs are generally classified into two groups, direct and indirect costs. Direct costs reflect the cost oflabor and materials to build the project.

Direct Costs

Estimates of construction costs for potential production homes to be constructed on the subject properties were not available for this analysis. As a result, we surveyed projects throughout Northern California to determine an estimate of construction cost for a hypothetical 1,850 square foot home. The table on the following page details cost estimates reported from other projects.

-----Seevers• Jordan • Ziegenmeyer----- 64 CONSTRUCTION COSTS IN THE SACRAMENTO AND CENTRAL VALLEY REGIONS Nelson Ranch 1 Floor Plans Antioch 1,979 SF 2,157 SF 2,322 SF 2,614 SF Direct Costs $115,758 $125,257 $143A88 $153,990 Per Square Foot $58.49 $58.07 $61.80 $58.91 Vintage Oaks Floor Plans Roseville 1,625 SF 2,165 SF 2,260 SF 2,635 SF Direct Costs $93.450 $113.410 $129,382 $149,434 Per Square Foot $57.51 $52.38 $57.25 $56.71 Nelson Ranch 2 Floor Plans Antioch 2,430 SF 2,780 SF 3,173 SF 3,422 SF Direct Costs $143,370 $164,020 $184,552 $201,308 Per Square Foot $59.00 $59.00 $58.16 $58.83 Ross Estates Floor Plans Napa 2,989 SF 3,275 SF 3,748 SF Direct Costs $224,041 $240,707 $269,606 Per Square Foot $74.96 $73.50 $71.93 The Promontory, Village 3 Floor Plans El Dorado Hills 2,709 SF 2,912 SF 3,036 SF 3,218 SF 3,837 SF Direct Costs $199,084 $205,645 $221,567 $228,060 $246,067 Per Square Foot $73.49 $70.62 $72.98 $70.87 $64.13 Camden Estates Floor Plans Elk.Grove 1,976 SF 2,957 SF 3,195 SF 4,192 SF Direct Costs $160289 $200,190 $214,054 $100,279 Per Square Foot $81.12 $67.70 $67.00 $63.79 Mossdale Landing, Vil. 2 Floor Plans Lathrop 2,005 SF 2,289 SF 2,542 SF 2,836 SF 3,015 SF Direct Costs $150,495 $160,482 $170,924 $181,362 $191,272 Per Square Foot $75.06 $70.11 $67.24 $63.95 $63.44

Based on the cost comparables presented, and given the location of the subject properties in the East Bay area, a construction cost estimate of $138,750, or $75 per square foot, is considered reasonable for a hypothetical 1,850 square foot plan.

Indirect Costs

Indirect items are the carrying costs and fees incurred in developing the project and during the construction cycle. The following list itemizes some of the typical components, which generally comprise indirect costs:

- Architectural and engineering fees for plans, plan checks, surveys and environmental studies - Appraisal, consulting, accounting and legal fees - The cost of carrying the investment in land and contract payments during construction. If the property is financed, the points, fees or service charges on construction loans are considered - All-risk insurance

-----Seevers • Jordan • Ziegenmeyer----- 65 - The cost of carrying the investment after construction is complete, but before sell-out is achieved - Marketing, sales commissions or title transfers - Developer fee earned by the project coordinator

Conversations with local homebuilders indicate the cost items, which comprise the indirect cost category, can range anywhere from 20% to 30% of the direct costs. To substantiate this range, we relied on construction budgets kept in our appraiser files. The table below shows indirect costs as a percentage of direct costs for various subdivisions in Northern California.

INDIRECT COSTS AS A PERCENTAGE OF DIRECT COSTS IN NORTHERN CALIFORNIA Project Percentage Whitney Oaks - Units 39 and 44 34% Rocklin, Placer County, CA Promontory Pointe 29% Roseville, Placer County, CA Bridge Street Estates 21% Yuba City, Sutter County, CA The Meadows 26% Elk Grove. Sacramento County. CA

The indirect costs presented above are generally consistent with the range indicated by local builders. Based on the experience of other similar projects in the subjects' market area and the developer's information, a factor of 30% of direct costs will be utilized to account for the indirect items.

Accrued Depreciation

Depreciation is of a physical, functional or economic nature. A physical loss results from the normal aging process of a structure as well as wear and tear on the improvements. A functional loss results from an inefficient or super adequate design of the improvements. Economic depreciation is the result of an adverse influence that exists beyond the property's boundaries. Since the homes are proposed construction, functional in design and in a viable location for a single-family subdivision, no deductions for depreciation are considered necessary in this analysis.

Developer's Incentive

According to industry sources, developer's incentive (profit) historically has ranged anywhere from 5% to 30%. Profit is based on the perceived risk associated with the development. Under the existing market conditions, low profit expectations are the result of the market's focus on more affordable projects with faster sales rates. Higher profit expectations are common in projects with more risk

-----Seevers • Jordan • Ziegenmeyer----- 66 such as developments where sales rates are slower, project size produces an extended holding period or the product type is considered weak or untested.

Elements affecting profit include location, supply/demand, anticipated risk, construction time frame and project type. Another element considered in profit expectations is for the development stage of a project. First phases typically generate a lower profit margin due to cautious or conservative pricing, as new subdivisions in competitive areas must become established to generate a fair market share. Additionally, up front development costs on first phases can produce lower profit margins.

Recent developer surveys conducted during this real estate cycle elicited the following responses:

John Johnson of Pulte Homes indicated they used a 7% static profit for starter homes in affordable markets but quickly moved into higher ranges for areas with entitlement risk.

Michael Courtney of Standard Pacific indicated 8% static profits were tolerable for starter homes and a 10% figure would be required for high-end homes, even for fast moving markets and product types.

Beck Properties indicated a total profit margin of 10.4% to 11. 7% calculated as gross sales less project costs for several products in the community of Brentwood.

A source at Lennar, who requested anonymity, indicated standard subdivision static profits are in the 8% range for strong selling products in accepted, non-pioneering locations. IRR's are commonly as low as the low 20% range in the absence of price trending.

Based on current market conditions and the limited inventory of developable residential land in Hercules, a profit margin of 30% of the indicated retail value is considered reasonable for a hypothetical 1,850 square foot plan.

-----Seevers• Jordan• Ziegenmeyer----- 67 Conclusion

The following cost estimates are based upon the parameters previously discussed and are summarized below. Typical Lot Size of 1,850 Square Feet

Sale Price Bonds Total Consideration $558,332

Less: Direct Costs of Building 1,850 SF @ $75.00/SF Indirect costs @ 30% of direct costs Developer's profit@ 30% of sales price Loaded Lot Value $214,457

Rounded $210,000

As discussed under the highest and best use section, the subject properties are considered most profitable as new home production developments, geared towards a range of new home buyers that would target first and second time move-up buyers. Correspondingly, the extraction procedure performed in this analysis does not require an absorption analysis or any further discounting. The extraction technique would be similar to an analysis performed by a merchant builder.

Reconciliation of Lot Value - Standard/Base Interior Lot

The value estimates derived for the predominant, typical lot of the subject properties via the extraction technique and the sales comparison approach are presented below.

Sales Extraction Description Comparison Technique Average lot size of 1,850 square feet $205,000 $210,000

Generally, the sales comparison approach is judged to be the overall best method to employ in the valuation of vacant land. The extraction technique was employed as the supporting indication of value. Under this premise the land value of the subject properties is derived as a remainder amount based on the most likely end product. In the instance of the subject properties, the end product could be a variety of products at more than one range of values. As illustrated above, the value indicator derived via the extraction technique is supportive of the value concluded via the sales comparison approach.

-----Seevers• Jordan • Ziegenmeyer----- 68 Considering the information cited, we have concluded the value estimated via the sales comparison approach is the best overall indicator of the subjects' current market value as a loaded lot and more accurately depicts the nuances typically observed with residential lot transfers. Therefore, utilizing the indications of the data set, and considering the similarities and dissimilarities between the data set and the subject properties previously discussed; namely, improvements in market conditions and discrepancies in typical lot size, a loaded lot indicator of $205,000 per lot, for the standard 1,850 square foot lots offered by the subject properties, is concluded. The estimate of market value is inclusive of permits and fees and costs to complete. According to the William Lyon Homes, the developer installing the infrastructure improvements, approximately $3,348,532, or $9,996 per lot, has been spent on site improvements. Total costs to complete are reported at $46,802 per lot. Thus, remaining costs to complete are $36,806 ($46,802 - $9,996) per lot. The lot values for the subject properties are as concluded in the chart on the following page.

Parcel Remaining Typical Loaded Lot Permits & Costs to Residual Lots Lot Size Indicator Fees Complete Lot Indicator 1 163 1,850 sf $205,000 ($23,310) ($36,806) $144,884 2 172 1,850 sf $205,000 ($23,310) ($36,806) $144,884 Total 335

Component Valuation - WL Homes Bayside LLC {Parcel 1)

Using the residual lot indicator above, the hypothetical market value of the component of the subject properties held by WL Homes Bayside LLC (John Laing Homes) is estimated as follows:

163 lots x $144,884 per lot= $23,616,092 Rd. $23,620,000

Component Valuation - William Lyon Homes Inc. (Parcel 2)

Using the residual lot indicator above, the hypothetical market value of the component of the subject properties held by William Lyon Homes Inc. is estimated as follows:

172 lots x $144,884 per lot = $24,920,048 Rd. $24,920,000

-----Seevers • Jordan • Ziegenmeyer----- 69 COMPONENT VALUATION - MIXED-USE COMMERCIAL/RESIDENTIAL LAND

In this section we will estimate the value of the 1.87-acre proposed mixed-use commercial residential (affordable) parcel situated within the boundaries of the District. Consistent with the highest and best use analysis presented earlier, the subject property will be valued as single-family residential lots offering a comparable density to that on the adjoining parcels, between 9.6 and 11.2 lots per acre. With a density between the range, or 10 lots per acre, the subject property could yield approximately 19 lots. Using the loaded lot indicator derived in the previous valuation section, $205,000, and deducting for development costs and typical permits and fees, the subject property is valued as follows:

Loaded Lot Indicator $205,000 Less: Permits and Fees - $23,310 Site Development Costs -$46,802 Unimproved Lot Value $134,888

19 lots x $134,888 per lot = $2,562,872 Rd. $2,560,000

-----Seevers • Jordan • Ziegenmeyer----- 70 COMPONENT VALUATION - COMMERCIAL LAND

Sales Comparison Approach

In this section we will estimate the value of the 17.27-acre commercial parcel situated within the boundaries of the District by analyzing sales of similar commercial land in comparable areas. Included in our analysis of comparable market transactions are recent sales within the East Bay market area.

In the sales comparison approach, the market value of the subject property is estimated by a comparison to similar properties that have recently sold, are listed for sale or are under contract. We will compare the recent land sales to the subjects' 17.27-acre site. The underlying premise of the sales comparison approach is the market value of a property is directly related to the price of comparable, competitive properties in the marketplace.

To restate, this approach is based on the economic principle of substitution. According to The Appraisal of Real Estate, 12th Edition, published by the Appraisal Institute, 2001 - "'The principle of substitution holds that the value ofa property tends to be set by the price that would be paid to acquire a substitute property ofsimilar utility and desirability within a reasonable amount of time. The principle implies that the reliability ofthe sales comparison approach is diminished ifsubstitute properties are not available in the market."

The proper application of this approach requires obtaining recent sales data for comparison with the subject property. In order to assemble the comparable sales, we searched public records and other data sources for leads, then confirmed the raw data obtained with parties directly related to the transactions (primarily brokers, buyers and sellers).

Consideration is given to factors such as property rights conveyed, financing, conditions of sale, and market appreciation or depreciation since the date of sale. Differences in physical characteristics, such as location, parcel size, visibility/accessibility, comer orientation and topography/shape are considered in the analysis. The entire data set will then be used to value the subject's parcel.

The market data investigation considers land sales within the East Bay market area. Six sales have been identified as being representative of the market and pertinent to the valuation of the subject land. The data from the comparable sales is summarized in the table on the following page, with a location map.

-----Seevers • Jordan • Ziegenmeyer----- 71 COMMERCIAL LAND SALE COMP ARABLES

Sale Grantorl Sale Sale Price Parcel Size Price per

NEC Lone Tree Way & Hillcrest Avenue ___....;.W.:....:in=oo:;..;F=-o::..:o::..;;d;.;;;sa..;In=c.'---- May-04 $6,185,674 17.32 $8.20 A-2, Co=ercial Antioch, Contra Costa County, California N/Av 754,459 APN: 056-012-024-8, 037-0, 025-5

2200 Jeffrey Way Gregory N. Bell Ministries Apr-04 $1,425,000 __s__ . __13 ___ _ $6.38 PD-48 Brentwood, Contra Costa County, California Marcotte Development Company 223,463 APN 019-032-001

Sycamore Avenue, east of Interstate 80 Pacific Investors Group Apr-03 $3,371,000 9.26 $8.36 C-R Hercules, Contra Costa County, California Home Depot USA, Inc. 403,366 APN: 406-140-007, 013

4 1400-1410 Balfour Road Balfour Properties LLC Nov-02 $3,608,508 8.72 $9.50 PD Brentwood, Contra Costa County, California McViking, LLC 379,843 APN: 010-030-029 (portion)

SEC Lone Tree Way & State Hwy 4 Bypass Eli Reinhard 2002 $3,833,280 11.00 $8.00 Co=ercial Brentwood, Contra Costa County, California Home Depot 479,160 APN: 019-020-036 (portion)

6 NWC Hegenberger Road & Interstate 880 ____P=-o"-"rt""'""'"'of=-O=akl=anc..::d--- ___ May-02 $14,500,000 ----=2=2=.5=2 __ $14.78 C-36-S4/M-40 Oakland, Alameda County, California Simeon 980,971 APN: 042-4425-010-04 and 05

El veunof ·;, ·.. ~~~om81 ,.,:,,..... ·-~,~...... , · · IITlote Four C"';1::erisf.c ..~i~e~rg

------Seevers• Jordan • Ziegenmeyer------72 Analysis and Conclusion

The preceding sales indicate there have been few comparable commercial land sales during the past four years reflecting a moderate market for commercial land throughout the East Bay market area.

In order to value the subject site, the comparable transactions were adjusted based on the profile of the subject site with regard to categories that affect market value. If a comparable has an attribute that is considered superior to that of the subject, it is adjusted downward to negate the effect the item has on the price of the comparable. The opposite is true of categories that are considered inferior to the subject and are adjusted upward.

In order to isolate and quantify the adjustments on the comparable sales data, percentage or dollar adjustments are considered appropriate. At a minimum, the appraiser considers the need to make adjustments for the following items:

• Property Rights Conveyed • Financing Terms • Conditions of Sale (motivation) • Market Conditions (time) • Location • Physical Features

A paired sales analysis is performed in a meaningful way when the quantity and quality of data are available. However, as a result of the limited data present in the market, many of the adjustments require the appraiser's experience and knowledge of the market and information obtained from those knowledgeable and active in the marketplace. A detailed analysis involving each of these factors and the value conclusion for the subject is presented below.

Property Rights Conveyed

In transactions of real property, the rights being conveyed vary widely and have a significant impact on the sales price. As previously noted, the opinion of value in this report is based on a fee simple estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat; as well as non-detrimental easements, and conditions, covenants and restrictions (CC&Rs). As noted on the previous page, the impact of bond indebtedness, community facility districts and assessment districts, is considered in our analysis. The subject and all the comparables represent fee simple estate transactions. Therefore, adjustments for this factor are not necessary.

-----Seevers• Jordan• Ziegenmeyer----- 73 Financing Terms

In analyzing the comparables, it is necessary to adjust for financing terms that differ from market terms. Typically, if the buyer retained third party financing (other than the seller) for the purpose of purchasing the property, a cash price is presumed and no adjustment is required. However, in instances where by the seller provides financing as a debt instrument, a premium may have been paid by the buyer for below market financing terms or a discount may have been demanded by the buyer if the financing terms were above market. The premium or discounted price must then be adjusted to a cash equivalent basis. The comparable sales were cash to the seller transactions and therefore, do not require adjustments.

Conditions of Sale (motivation)

Adverse conditions of sale can account for a significant discrepancy from the sales price actually paid compared to that of the market. This discrepancy in price is generally attributed to the motivations of the buyer and the seller. Certain conditions of sale are considered to be non-market and may include the following:

All of the comparable transactions were arms-length market transactions and do not require a condition of sale adjustment.

Market Condition (time)

Market conditions generally change over time, but the date of this appraisal is for a specific point in time. Therefore, in an unstable economy, one that is undergoing changes in the value of the dollar, interest rates and economic growth or decline, extra attention needs to be paid to assess changing market conditions. Significant monthly changes in price levels can occur in several areas of a municipality, while prices in other areas remain relatively stable. Although the adjustment for market conditions is often referred to as a time adjustment, time is not the cause of the adjustment.

In evaluating market conditions, changes between the comparable sales date and the effective date of this appraisal may warrant adjustment; however, if market conditions have not changed, then no time

-----Seevers• Jordan• Ziegenmeyer----- 74 adjustment is required. In analyzing the six sales that comprise the data set, all of the comparables were completed or negotiated since May 2002. Based on the data set presented, an appreciation of value due to changes in market conditions is warranted.

Location

All of the comparables are located within the East Bay market area, including Alameda and Contra Costa Counties. Based on proximities to major employment centers, the comparable located in Alameda County, specifically Comparable 6, is judged to offer superior locational attributes and, as such, warrants a downward adjustment when compared to the subject property. Conversely, Comparables 1, 2, 4 and 5 are situated in eastern Contra Costa County, in the cities of Antioch and Brentwood, which is considered inferior to the western Contra Costa County market area of Hercules. Therefore, upward adjustments are warranted. Comparable 3 represents the April 2003 transfer of a commercial site just east of the subject property, in Hercules, and, as such, does not warrant a location adjustment.

Physical Features

The physical characteristics of a property can impact the selling price. Those that may impact value include the following:

Land Area

The comparables represent transfers of commercial sites between 5.13 acres and 22.52 acres. The subject property is 17.27 acres ofland. Based on the discrepancies in parcel size, an adjustment for land area is warranted and is applied to the datum.

Visibility/Accessibility

The visibility and accessibility of a property can have a direct impact on value. For example, a property with limited access is considered to be an inferior position compared to a property with open accessibility. Conversely, if a property has freeway visibility, or is situated in proximity to major linkages, this is considered to be a superior site amenity in comparison to a property with limited visibility and positioning. Each of the comparable sales, with the exception of Comparable 2, has similar visibility and accessibility characteristics as the subject; thus, no adjustments are required. However, Comparable 2 offers inferior accessibility compared to the subject, in its hypothetical condition, which assumes all facilities ( John Muir Parkway) to be financed by the proposed City of Hercules Assessment District No. 2005-1 (John Muir Parkway) bonds are in place and available for use. Thus, an upward adjustment for inferior accessibility is warranted.

-----Seevers • Jordan • Ziegenmeyer----- 75 Offsite Improvements

The subject property, in its hypothetical condition, has all offsite improvements in place. Comparables #1 and #3 - #6 possessed similar offsite improvements; thus, an adjustment for offsite improvements is not necessary. Whereas, Comparable #2 had minimal offsite improvements in place; thus, an upward adjustment is required.

Topography

Differences in contour, drainage or soil conditions can affect the utility and, therefore, the market value of a property. The comparable properties are considered to offer terrain with similar utility. No adjustments are required for topography or functional utility.

Conclusion of Hypothetical Market Value - Component Valuation (LDC Cougar LLC)

The unadjusted value range presented by the comparables sales is $6.38 to $14. 78 per square foot, with the data requiring adjustments for location, size, and accessibility/visibility when compared to the subject property. Based on our analysis of the sales data, we have concluded a per square foot value indicator for the subject site of $9.00 (inclusive of bond indebtedness), which is near the midpoint of the range. As a result, the value of the subject site is calculated as follows:

17.27 acres x 43,560 sf/acre x $9.00 psf= $6,770,531 $6,770,000 (Rd.)

-----Seevers• Jordan• Ziegenmeyer----- 76 SUMMARY AND CONCLUSION

The value conclusions reported in the preceding sections of this report form the basis of our conclusion of value for the subject properties.

The purpose of this appraisal has been to estimate the hypothetical cumulative, or aggregate, value (fee simple estate) of the subject properties comprising the land areas situated within the boundaries of City of Hercules Assessment District No. 2005-1 (John Muir Parkway), located south of the proposed western extension of John Muir Parkway, north of Sycamore Avenue (proposed extension), Hercules, Contra Costa County, California, and comprise unimproved and partially improved land proposed and partially improved for single-family residential development, commercial development and a proposed mixed-use commercial/residential (affordable) development.

The appraised properties consist of all the real property within City of Hercules Assessment District No. 2005-1 (John Muir Parkway). The estimate of hypothetical market value, by ownership, and cumulative, or aggregate, value for the designated parcels reflects the sum of the values for the subject properties, which are characterized by three distinct components: a detached, single-family residential component incorporating 335 partially improved single-family residential lots covering approximately 32.56 acres, a commercial component encompassing 17.27 acres of land, and a proposed mixed-use affordable housing component with ground floor retail encompassing 1.87 acres of land, which was valued consistent with the highest and best economic use derived herein, or single-family residential development. The valuation of the various components comprising the subject properties was based on the sales comparison approach to value. The single-family residential component of the subject properties also relied upon the extraction technique to value, which was reconciled with the sales comparison approach to estimate the hypothetical market value per loaded lot. It is noted the sum of the hypothetical values indicates the cumulative, or aggregate, value of the District, which is NOT equivalent to the market value of the District as a whole.

The effective date of value denoted below is May 19, 2005. As a result of our analysis, it is our opinion the hypothetical cumulative, or aggregate, value of the subject properties, in accordance with the definitions, certifications, assumptions and significant factors set forth in the attached document (please refer to pages 6 through 8), is ...

Value $23,620,000 William Lyon Homes, Inc. $24,920,000 Lewis-Hercules, LLC $2,560,000 $6,770,000 $57 ,870,000

-----Seevers• Jordan• Ziegenmeyer----- 77 EXPOSURE TIME

Exposure time and marketing time may or may not be similar depending on whether market activity in the immediate future continues in the same manner as in the immediate past. Indications of the exposure time associated with the market value estimate are provided by the marketing times of sale comparables, interviews with participants in the market, and analysis of general economic conditions. Estimation of a future marketing time is more difficult, requiring forecasting and analysis of trends.

Exposure Time is defined as the length of time that a property would have been offered on the market prior to the hypothetical consummation of a sale at market value. It is a retrospective estimate of time based on an analysis of past events assuming a competitive and open market. The residential market began improving in 1998. Interest in developable land was beginning to improve in 1997 and increased through, and beyond, 1998. Currently, the residential market continues to see steady activity. The bulk transfer of residential and commercial land in the East Bay Market Area typically occurs within six to 12 months of exposure. It is estimated the exposure time for the subject properties would be less than 12 months on a wholesale (bulk) basis.

-----Seevers • Jordan • Ziegenmeyer----- 78 SALES ffiSTORY

APN Ownership 404-020-076 LDC Cougar, LLC and LHN Cougar, LLC 404-020-079 William Lyon Homes, Inc. 404-020-080 WL Homes Bayside LLC 404-020-082 Lewis-Hercules LLC

The subject properties, and other land, comprise the above assessor's parcels. Assessor's parcel 404- 020-076 (LDC Cougar, LLC and LHN Cougar, LLC) has not been involved in an arm's-length transfer of ownership within the last three years, nor has assessor's parcel 404-020-082. William Lyon Homes, Inc. acquired assessor's parcel 404-020-079 from The Lewis Corporation on February 17, 2004 for $19,048,000, or approximately $110,744 per single-family residential lot, in an all cash transaction with no known unusual contingencies. WL Homes Bayside LLC (John Laing Homes) purchased assessor's parcel 404-020-080 from The Lewis Corporation on February 17, 2004 for $12,267,500, or approximately $99,801 per single-family residential lot, in an all cash transaction with no known unusual contingencies. To the best of our knowledge the subject properties are not currently being marketed for sale. Substantial on-site, off-site and in-tract development has been completed since the original transfer of the subject properties. As such, the original purchase prices are not considered to reflect the current market value of the subject lots.

-----Seevers• Jordan• Ziegenmeyer----- 79 APPENDIXB

GENERAL INFORMATION CONCERNING THE CITY OF HERCULES

This appendix sets forth general information about the City of Hercules (the "City"). The following information is included only for general background purposes. It is not intended to suggest that the Bonds are payable from any source other than Assessments and amounts pledged therefor under the Fiscal Agent Agreement.

Location

The City of Hercules ("Hercules" or the "City") is located along the I-80 corridor in the western portion of Contra Costa County, one of the nine counties comprising the San Francisco Bay Area. The City occupies 7.6 square miles, stretching from San Pablo Bay inland to the rolling coastal hills, and is located about 40 minutes from San Francisco and about one hour from Sacramento. The City's climate can best be described as Mediterranean, meaning that it experiences cool summer breezes and winter days which rarely fall far below 50° Fahrenheit. There is an abundance of open space areas and trails throughout the community providing the opportunity for spotting various types of wildlife and offering dazzling views of the bay.

As a newly developing city, Hercules offers residents a high standard of living with relatively new streets and other infrastructure, a design award-winning community park and a high level of city services.

Organization

The City was incorporated on December 15, 1900 under the general laws of the State of California and enjoys all the rights and privileges pertaining to "general law" cities. The City operates under the council/manager form of government. The five Council Members, including the Mayor, are elected at large for four-year overlapping terms. The City Council hires the City Manager, who is then responsible for all management functions of the City, including preparation of the budget, delivery of services, hiring of personnel and implementation of capital projects.

Population

Beginning in the mid 1970's and continuing through the present, population growth in the City has been rapid. Between 1980 and 1990, the City's population grew 196%, jumping from 5,963 in 1980 to 16,928 in 1990. Since 1999, the City's population has grown by a compound annual rate of 7.6%. In 1999, the City's population was 19,050 compared to the 2003 figure of 20,500. Table 1 sets forth total population statistics for the City and Contra Costa County for the last five years.

B-1 TABLE 1 CITY OF HERCULES AND COUNTY OF CONTRA COSTA Population

Percent County of Percent Year Hercules Change Contra Costa Change 2000 19,867 966,859 2001 20,169 1.5 983,418 1.7 2002 20,515 1.7 996,211 1.3 2003 21,814 6.3 1,008,944 1.3 2004 23,360 7.1 1,020,898 1.2

Source: 2000-2004 California Department of Finance for January l; 2000 DRU Benchmark

Employment

An unemployment rate history is set forth below. The unemployment rate in the City has been consistently lower than in Contra Costa County, the State of California and the United States, over the last five years.

TABLE2 CITY OF HERCULES Comparative Unemployment Statistics Unemployment Rate Annual Averages(%)

Contra Costa State of Year Hercules County California United States 2000 2.3% 3.6% 4.9% 4.0% 2001 2.6 4.0 5.4 4.8 2002 3.8 5.7 6.7 6.1 2003 4.0 6.1 7.1 6.5 2004 3.6 5.5 6.2 5.5

Source: California Employment Development Department, Labor Market Information, March 2004 Benchmark; Bureau of Labor Statistics,

Commercial Activity

Trade outlet and retail sales activity are summarized in Tables 3 and 4, which are based upon reports of the California State Board of Equalization.

TABLE3 CONTRA COSTA COUNTY 2003 Taxable Sales By Jurisdiction (In Thousands)

Jurisdiction Retail Stores Totals All Other Outlets Total Hercules $ 40,271 Not available $ 76,716 Contra Costa County 9,025,114 2,686,041 12,223,295

Source: California State Board of Equalization, Taxable Sales in California.

B-2 TABLE4 CONTRA COSTA COUNTY 2003 Taxable Sales By Type Of Business

Type of Business Permits Taxable Transactions Retail Stores Apparel stores group 728 $ 377,751 General merchandise group 415 1,720,973 Specialty stores group 5,563 1,241,320 Food stores group 565 589,826 Eating and drinking group 1,855 928,874 Household group 900 477,315 Building material group 270 925,708 Automotive group 851 2,515,146 All other retail stores group ~ 248.381 Retail stores total 11,575 9,025,114 Business and personal services 2,852 512,140 All other outlets 8.826 2.686.041 Total all outlets 23,253 $12,223,295

Source: California State Board of Equalization, Taxable Sales in California.

The following table reflects the City's sales tax revenue for the past five years.

TABLES CITY OF HERCULES Sales Tax Fiscal Year Ended June 30

Year Sales Tax 2000 838,951 2001 837,588 2002 997,649

Source: City of Hercules

Building Activity

The following table summarizes the building activity for 2003 and 2004 in the City.

TABLE6 CITY OF HERCULES Building Permits And Valuation 2003 And 2004

2003 2004 Valuation ($000): Residential $187,136 $76,190 Non-residential 41,730 14.574 Total $228.866 $90.764

Residential Units: Single family 594 267 Multiple family _21 ...n Total 668 344

Source: Construction Industry Research Board

B-3 Utilities

Pacific Gas and Electric Company (PG&E) provides electricity and gas service to most City residences and businesses. SBC Pacific Bell offers telephone and DSL Internet connections. Comcast offers cable services and internet access. Water service is provided by East Bay Municipal Utility District (EBMUD).

The construction of the Hercules Municipal Utility (the "Utility") facilities will establish the City as a provider of electric service to retail end-user customers located within the City, and to the waste water treatment plant jointly owned by the cities of Hercules and Pinole, located in Pinole near the border between the two cities. The overall build-out of the utility is forecast to take eight or nine years. Rates for the utility are expected to be at or below the rates of PG&E. The Utility is currently serving over 200 customers.

Transportation

The City is located on Interstate 80, the principal transcontinental route in Northern California. State Highway 4 intersects Interstate 80 in the City and runs east through Concord and to Stockton and beyond. Freeway connections can easily be made to San Francisco, Sacramento, San Jose, the Central Valley, and Los Angeles.

Bus service in the City is provided by WestCAT, which operates local fixed routes, Express routes and Paratransit within its service area. Express buses are timed to connect to BART (Bay Area Rapid Transit) trains at the Richmond and El Cerrito Del Norte stations, located nine miles southwest of the City.

Two transcontinental rail lines and Amtrak serve the City. There are 133 shipping companies in the West Contra Costa region. Nevada, warehouse capital of the West, is about four hours away by truck.

A regional executive airport in Concord, and international airports in San Francisco, Oakland and Sacramento are an easy drive from the City.

Deep water terminals at the Ports of Richmond and Oakland offer access to international markets.

Education

The City is located at the border of two school districts: West Contra Costa Unified School District and John Swett Unified School District. The majority of residents are within the West Contra Costa Unified School District boundary and are served by three elementary schools and one middle/high school. Residents that reside on the border of the City and the City of Rodeo are within the John Swett Unified School District boundary and are served by a head start program, one elementary school, one middle school and one high school.

Community Facilities

The City has two community and five neighborhood parks. Refugio Valley Park comprises 66.26 acres and includes the City's Swim Center. The planned Waterfront Park encompasses 7,014 acres, and includes the recently restored Historic Clubhouse community building. The five neighborhood parks contain about 32 acres. The City also has approximately 950 acres of open space areas and trails distributed throughout the community. Together the

B-4 open space areas and City parks account for approximately 1/3 of the total land area within the City.

Hercules also offers residents an unusually high level of other municipal services. The City provides a full range of recreational programs including youth, teen, adult activities, year round child care, and two major community events which attract visitors from the regional area as well as the local citizens. The City's Senior Center provides daily senior programs and activities and sponsors special community events and trips.

B-5 THIS PAGE INTENTIONALLY LEFT BLANK APPENDIXC

FORMS OF CONTINUING DISCLOSURE CERTIFICATES

CONTINUING DISCLOSURE CERTIFICATE OF THE CITY

This Continuing Disclosure Certificate of the City (the "Disclosure Certificate") is executed and delivered by the City of Hercules (the "City"), in connection with the issuance by the City of its $6,550,345 City of Hercules Assessment District No. 2005-1 Oohn Muir Parkway) Limited Obligation Improvement Bonds (the "Bonds"). The Bonds are being issued pursuant to a Fiscal Agent Agreement, dated as of July 1, 2005 (the "Fiscal Agent Agreement"), between the City and The Bank of New York Trust Company, N.A., as fiscal agent (the "Fiscal Agent").

The City hereby covenants and agrees as follows:

Section l. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the City 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 in the Fiscal Agent Agreement, 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" shall mean any Annual Report provided by the City pursuant to, and as described in, Sections 3 and 4 of this Disclosure Certificate.

"Dissemination Agent" shall mean NBS Government Finance Group, or any successor Dissemination Agent designated in writing by the City and which has filed with the City and the Fiscal Agent a written acceptance of such designation.

"Listed Events" shall mean any of the events listed in Section S(a) of this Disclosure Certificate.

"National Repository" shall mean any Nationally Recognized Municipal Securities Information Repository for purposes of the Rule.

"Official Statement" shall mean the Official Statement relating to the Bonds.

"Participating Underwriter" shall mean Kinsell, Newcomb & De Dios, Inc., the original underwriter of the Bonds.

"Repository" shall mean each National Repository and each State Repository.

"Rule" shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time.

"State Repository" shall mean any public or private repository or entity designated by the State of California as a state repository for the purpose of the Rule and recognized as such by the Securities and Exchange Commission. As of the date of this Disclosure Certificate, there is no State Repository.

C-1 Section 3. Provision of Annual Reports.

(a) The City shall, or shall cause the Dissemination Agent to, not later than eight months after the end of the City's fiscal year, commencing with the report for the 2004-2005 fiscal year, provide to the Participating Underwriter and each Repository an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Certificate. Not later than fifteen (15) business days prior to said date, the City shall provide the Annual Report to the Dissemination Agent (if other than the City). 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 City 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 City's fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 5(c).

(b) If the City is unable to provide to the Repositories an Annual Report by the date required in subsection (a), the City shall send a notice to the Municipal Securities Rulemaking Board in substantially the form attached hereto as Exhibit A.

(i) determine each year prior to the date for providing the Annual Report the name and address of each National Repository and each State Repository, if any; and

(ii) if the Dissemination Agent is other than the City, file a report with the City certifying that the 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 Annual Reports. The City's Annual Report shall contain or incorporate by reference the following:

(a) Audited Financial Statements of the City prepared in accordance with generally accepted accounting principles as promulgated to apply to governmental entities from time to time by the Governmental Accounting Standards Board. If such audited financial statements are not available by the time the Annual Report is required to be filed pursuant to Section 3(a), the Annual Report shall contain unaudited financial statements, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available.

(b) Unless otherwise provided in the audited financial statements filed on or prior to the annual filing deadline for the Annual Reports provided for in Section 3 above, financial information and operating data with respect to the District for the preceding fiscal year, substantially similar to that provided in any corresponding tables and charts in the Official Statement for the Bonds (if applicable), as follows:

(i) Principal amount of the Bonds then outstanding as of the end of the Fiscal year covered by the respective Annual Report.

(ii) Balances in the Improvement Fund, the Redemption Fund and the Reserve Fund created pursuant to the Fiscal Agent Agreement as of the end of the Fiscal year covered by the respective Annual Report.

C-2 (iii) Total aggregate assessed value (per the Contra Costa County records) of all parcels currently subject to the assessments within the Assessment District, showing the total aggregate assessed valuation for all land and the total aggregate assessed valuation for all improvements within the Assessment District.

(iv) In the event that the total delinquencies within the Assessment District as of August 1 in any year exceed 5% of the assessments for the previous year, delinquency information, including a list of all parcels delinquent in the payment of the assessments, amounts of delinquencies, length of delinquency and status of any foreclosure for each parcel listed (including results of foreclosure sales).

(v) A land ownership summary listing property owners (and the assessed values of their property) responsible for more than five percent (5%) of the annual assessments within the Assessment District, as shown on the Contra Costa County Assessor's last equalized tax roll covered by the respective Annual Report.

(vi) The number of building permits issued for property in the Assessment District since the date of the last Annual Report (or since the date of issuance of the Bonds, in the case of the first Annual Report).

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 City, 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 City shall clearly identify each such other document so included by reference.

(c) In addition to any of the information expressly required to be provided under paragraphs (a) and (b) of this Section, the City 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.

Section 5. Reporting of Significant Events.

(a) Pursuant to the provisions of this Section 5, the City shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Bonds, if material:

(i) Principal and interest payment delinquencies. (ii) Non-payment related defaults. (iii) Unscheduled draws on debt service reserves reflecting financial difficulties. (iv) Unscheduled draws on credit enhancements reflecting financial difficulties. (v) Substitution of credit or liquidity providers, or their failure to perform. (vi) Adverse tax opinions or events affecting the tax-exempt status of the security. (vii) Modifications to rights of security holders. (viii) Contingent or unscheduled bond calls. (ix) Defeasances. (x) Release, substitution, or sale of property securing repayment of the securities. (xi) Rating changes.

(b) Whenever the City obtains knowledge of the occurrence of a Listed Event, the City shall as soon as possible determine if such event would be material under applicable Federal securities law.

C-3 (c) If the City determines that knowledge of the occurrence of a Listed Event would be material under applicable Federal securities law, the City shall promptly file a notice of such occurrence with the Municipal Securities Rulemaking Board and each State Repository. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(viii) and (ix) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to holders of affected Bonds pursuant to the Fiscal Agent Agreement.

Section 6. Termination of Reporting Obligation. The City'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 City shall give notice of such termination in the same manner as for a Listed Event under Section S(c).

Section 7. Dissemination Agent. The City 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 initial Dissemination Agent shall be NBS Government Finance Group.

The Dissemination Agent may at any time resign by providing thirty days written notice to the City and the Fiscal Agent. Upon receiving notice of such resignation, the City shall promptly appoint a successor Dissemination Agent by an instrument in writing, delivered to the Fiscal Agent. If no appointment of a successor Dissemination Agent shall be made the City shall act as the Dissemination Agent.

Section 8. Amendment: Waiver. Notwithstanding any other provision of this Disclosure Certificate, the City may amend this Disclosure Certificate, 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 S(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;

(c) the proposed amendment or waiver either (i) is approved by holders of the Bonds in the manner provided in the Fiscal Agent Agreement for amendments to the Fiscal Agent Agreement with the consent of holders, or (ii) does not, in the opinion of the City or nationally recognized bond counsel, materially impair the interests of the holders or beneficial owners of the Bonds; and

(d) no amendment increasing or affecting the obligations or duties of the Dissemination Agent or the Fiscal Agent shall be made without the consent of either such party.

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.

C-4 If an amendment is made to the undertaking specifying the accounting principles to be followed in preparing financial statements, the annual financial information for the year in which the change is made shall present a comparison between the financial statements or information prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. The comparison shall include a qualitative discussion of the differences in the accounting principles and the impact of the change in the accounting principles on the presentation of the financial information, in order to provide information to investors to enable them to evaluate the ability of the City to meet its obligations. To the extent reasonably feasible, the comparison shall be quantitative. A notice of the change in the accounting principles shall be sent to the Repositories in the same manner as for a Listed Event under Section S(c).

Section 9. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the City 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 that which is required by this Disclosure Certificate. If the City 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 City 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 10. Default. In the event of a failure of the City to comply with any provision of this Disclosure Certificate, the Fiscal Agent may (and, at the request of any Participating Underwriter or the holders of at least 25% aggregate principal amount of Outstanding Bonds and upon receipt of indemnification satisfactory to it, shall), 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 City to comply with its obligations under this Disclosure Certificate. Notwithstanding the foregoing, a default under this Disclosure Certificate shall not be, or be deemed to be, a default under the Fiscal Agent Agreement or the Bonds, and the sole remedy under this Disclosure Certificate in the event of any failure of the City 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 City agrees to indemnify and save the Dissemination Agent (if other than the City), its officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent's negligence or willful misconduct. The Dissemination Agent shall be paid compensation by the City for its services provided hereunder in accordance with its schedule of fees as amended from time to time and all expenses, legal fees and advances made or incurred by the Dissemination Agent in the performance of its duties hereunder. The Dissemination Agent shall have no duty or obligation to review any information provided to it by the City and shall not be deemed to be acting in any fiduciary capacity for the City, the Bondholders or any other party. The obligations of the City 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 business shall be the successor to the Dissemination Agent hereunder without the execution or filing of any paper or further act

C-5 Section 12. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the City, the Dissemination Agent, the Participating Underwriter and holders and beneficial owners from time to time of the Bonds, and shall create no rights in any other person or entity.

Section 13. Alternative Filing Location. Any filing under this Disclosure Certificate may be made solely by transmitting such filing to the Texas Municipal Advisory Council (the "MAC") as provided at http:/ /www.disclosureusa.org, unless the United States Securities and Exchange Commission has withdrawn the interpretive advice in its letter to the MAC dated September 7, 2004.

Date: July_, 2005 CITY OF HERCULES

By:~~~~~~~~~~~~- Its: ------The undersigned hereby agrees to act as Dissemination Agent pursuant to the foregoing Continuing Disclosure Certificate of the City

NBS Government Finance Group

By:~~~~~~~~~~~~- Its: ------

C-6 EXHIBIT A

NOTICE OF FAILURE TO FILE ANNUAL REPORT

Name of Issuer: City of Hercules, California

Name of Bond Issue: $6,550,345 City of Hercules Assessment District No. 2005-1 (John Muir Parkway) Limited Obligation Improvement Bonds

Date of Issuance: July_, 2005

NOTICE IS HEREBY GIVEN that the City of Hercules (the "City") has not provided an Annual Report with respect to the above-named Bonds as required by that certain Continuing Disclosure Certificate dated July_, 2005 with respect to the Bonds. The City anticipates that the Annual Report will be filed by ____

Dated: ______

CITY OF HERCULES

By: ______Its: ______cc: The Bank of New York Trust Company, N.A. Corporate Trust Services MAC #E2818-176 700 South Flower Street, Suite 500 Los Angeles, CA 90017

NBS Government Finance Group 41661 Enterprise Circle North, Suite 225 Temecula, CA 92590

C-7 FORM OF CONTINUING DISCLOSURE CERTIFICATE OF THE LANDOWNERS

This Continuing Disclosure Certificate of the Landowner (the uDisclosure Certificate") is executed and delivered by (the "Owner") in connection with the issuance of $6,550,345 City of Hercules Assessment District No. 2005-1 (John Muir Parkway) Limited Obligation Improvement Bonds (the "Bonds"). The Bonds are being issued pursuant to a Fiscal Agent Agreement, dated as of July 1, 2005 (the "Fiscal Agent Agreement"), between the City of Hercules (the "City") and The Bank of New York Trust Company, N.A., as fiscal agent (the "Fiscal Agent").

The Owner covenants and agrees as follows:

Section l. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the Owner for the benefit of the owners 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). However, this Disclosure Certificate shall not create any monetary liability on the part of the Owner, the City, the Dissemination Agent (as defined below) or the Fiscal Agent, including any liability to the registered owners or beneficial owners of the Bonds. The sole remedy in the event of any failure of the Owner, the Dissemination Agent or the Fiscal Agent to comply with this Disclosure Certificate shall be an action to compel performance of any act required hereunder, as further specified in Section 11 below.

"Affiliate" of another Person means (a) a Person directly or indirectly owning, controlling, or holding with power to vote, 5% or more of the outstanding voting securities of such other Person, (b) any Person 5% or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by such other Person, (c) any Person directly or indirectly controlling such other Person, and (d) with respect to any general partner of a partnership or member of a limited liability company for purposes hereof, control means the power to exercise a controlling influence over the management or policies of a Person, unless such power is solely the result of an official position with such Person.

"Annual Report" shall mean any Annual Report provided by the Owner pursuant to, and as described in, Sections 3 and 4 of this Disclosure Certificate.

"Assessments" means the assessments levied by the City on the land within the District.

"Assumption Agreement" means an agreement between a landowner in the District, or an Affiliate thereof, and the Dissemination Agent containing terms substantially similar to this Disclosure Certificate, whereby such landowner or Affiliate agrees to provide annual reports and notices of significant events to the Dissemination Agent of the character described in Sections 3 and 4 hereof, with respect to the portion of the Property owned by such landowner and its Affiliates and which contains an assumption provision of the character set forth in Section 6 hereof to be applicable to sales of Property by such landowner.

"City" means the City of Hercules.

C-8 "Disclosure Representative" means , or his designee, or such other officer, employee or agent as the Owner shall designate in writing to the Dissemination Agent and the City from time to time.

"Dissemination Agent" shall mean NBS Government Finance Group, or any successor Dissemination Agent designated in writing by the City and which has filed with the Owner, the City and the Fiscal Agent a written acceptance of such designation.

"District" means the City's Assessment District No. 2005-1 Gohn Muir Parkway).

"Event of Bankruptcy" means, with respect to a Person, that such Person files a petition or institutes a proceeding under any act or acts, state or federal, dealing with or relating to the subject or subjects of bankruptcy or insolvency, or under any amendment of such act or acts, either as a bankrupt or as an insolvent, or as a debtor, or in any similar capacity, wherein or whereby such Person asks or seeks or prays to be adjudicated a bankrupt, or is to be discharged from any or all of such Person's debts or obligations, or offers to such Person's creditors to effect a composition or extension of time to pay such Person's debts or asks, seeks or prays for reorganization or to effect a plan of reorganization, or for a readjustment of such Person's debts, or for any other similar relief, or if any such petition or any such proceedings of the same or similar kind or character is filed or instituted or taken against such Person, or if a receiver of the business or of the property or assets of such Person is appointed by any court, or if such Person makes a general assignment for the benefit of such Person's creditors.

"Fiscal Year" shall mean the Owner's fiscal year for its financial accounting purposes.

11 Listed Events" shall mean any of the events listed in Section S(a) of this Disclosure Certificate.

"National Repository" shall mean any Nationally Recognized Municipal Securities Information Repository for purposes of the Rule.

"Participating Underwriter" shall mean Kinsell, Newcomb & De Dios, 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 real property owned by the Owner or any Affiliate thereof within the boundaries of the District on which Assessments have been levied, and which Assessments have not been prepaid in full.

"Property Owner" means any Person that owns a fee interest in any Property.

"Repository" shall mean each National Repository and each State Repository.

"Rule" shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time.

"State Repository" shall mean any public or private repository or entity designated by the State of California as a state repository for the purpose of the Rule and recognized as such by

C-9 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) Until this Disclosure Certificate terminates in accordance with Section 7 below, the Owner shall, or upon written request shall cause the Dissemination Agent to, not later than 90 days after the end of the Fiscal Year, commencing with the report for the Fiscal Year which first ends after the date of issuance of the Bonds, provide to each Repository an Annual Report which is consistent with the requirements of Section 4(a) of this Disclosure Certificate, with a copy to the City, the Participating Underwriter and the Fiscal Agent. Not later than fifteen (15) business days prior to said date, the Owner shall provide the Annual Report to the Dissemination Agent. The Owner shall provide a written certification with each Annual Report furnished to the Dissemination Agent, the City, the Participating Underwriter and the Fiscal Agent to the effect that such Annual Report constitutes the Annual Report required to be furnished by the Owner hereunder. The Dissemination Agent, the City and the Fiscal Agent may conclusively rely upon such certification of the Owner, and shall have no duty or obligation to review such Annual Report. 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. If the Owner's fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 5(c).

(b) If the Owner is unable to provide to the Repositories an Annual Report by the date required in subsection (a), the Owner shall send a notice to the Municipal Securities Rulemaking Board in substantially the form attached as Exhibit A.

(i) determine each year prior to the date for providing the Annual Report the name and address of each National Repository and each State Repository, if any;and

(ii) to the extent the Annual Report has been provided to the Dissemination Agent, file a report with the Owner, the City (if the Dissemination Agent is other than the City) and the Fiscal Agent certifying that the 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 Annual Reports. The Owner's Annual Report shall contain or incorporate by reference the following:

(a) A description of any material changes to the improvements on the Property (the "Improvements") during the Fiscal Year covered by the Report, including a description of any new Improvements.

(b) A description of how many acres of Property were owned by the Owner or any Affiliate thereof as of the end of the Fiscal Year covered by such Annual Report, along with a description of any sales or long term leases by the Owner or any Affiliate thereof of material portions of the Property during the Fiscal Year covered by such Annual Report, including the identification of each material purchaser, and the number of acres sold.

C-10 (c) Any delinquency in the payment of Assessments by the Owner or any Affiliate thereof during the Fiscal Year to which the Annual Report pertains, and a statement as to whether or not any such delinquency has been cured.

(d) Any pending litigation which would adversely affect the ability of the Owner or any Affiliate thereof to pay Assessments levied on the Property, or any legislative, or administrative challenges to the operation of the Improvements as known to the Owner.

(e) Any material change in the structure or ownership of the Owner.

(f) Material amendments to land use entitlements for the Property known to the Owner.

(g) The assumption of any obligations by a landowner pursuant to Section 6.

In addition to any of the information expressly required to be provided as described above, the Owner 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.

Any or all of the items listed above may be included by specific reference to other documents which have been submitted to each of the Repositories or the Securities and Exchange Commission. If the document included by reference is a final official statement, it must be available from the Municipal Securities Rulemaking Board. The Owner shall clearly identify each such other document so included by reference.

Section 5. Reporting of Significant Events.

(a) Pursuant to the provisions of this Section 5, the Owner shall give, or cause to be given, notice of the occurrence of any of the following events, if material:

(i) failure by the Owner or any Affiliate thereof to pay any real property taxes, or Assessments levied on Property located within the District, (ii) material damage to or destruction of any of the Improvements, and (iii) The occurrence of an Event of Bankruptcy with respect to the Owner or any Affiliate thereof.

(b) Whenever the Owner obtains knowledge of the occurrence of a Listed Event, the Owner shall as soon as possible determine if such event would be material under applicable Federal securities law.

(c) If the Owner determines that knowledge of the occurrence of a Listed Event would be material under applicable Federal securities law, the Owner shall promptly file a notice of such occurrence with the Municipal Securities Rulemaking Board and each State Repository, with a copy to the City, the Participating Underwriter and the Fiscal Agent.

Section 6. Assumption of Obligations. If a portion of the Property owned by the Owner, or any Affiliate of the Owner, is to be conveyed to a Person that, upon such conveyance, will, together with any Affiliates of such Person, own land in the District that is subject to over twenty (20%) of the then unpaid Assessments levied in the District, the Owner shall use

C-11 commercially reasonable efforts to include a provision in the conveyance agreement for a Person to agree to execute an Assumption Agreement following the closing of escrow for the conveyance.

The Owner shall use commercially reasonable efforts to enter into an Assumption Agreement with any landowner described in the preceding paragraph, which Assumption Agreement shall be in form and substance satisfactory to the City, or the landowner shall otherwise enter into an agreement with Dissemination Agent in form substantially identical to this Disclosure Certificate (except for the identity of the "Owner" therein). From and after the date on which an Assumption Agreement (or replacement agreement in form equivalent to this Disclosure Certificate) is executed with respect to Property, the Owner shall no longer be required to take such Property into account in connection with any Annual Report required under Sections 3 and 4 hereof; provided however that if, following a conveyance by the Owner of the character described in the first sentence of this Section 6, an Assumption Agreement (or replacement agreement in form equivalent to this Disclosure Certificate) is not executed (other than by reason of the willful misconduct of the Dissemination Agent), the Owner shall continue to include such Property in its Annual Reports and, for purposes of Section 3, the term "Owner" shall include, in addition to the Owner, the Person to whom the Property has been conveyed. In such event, the information regarding the conveyed Property shall be provided by the Owner only to the knowledge of the Owner with no duty investigate.

Section 7. Termination of Reporting Obligation. The Owner's obligations under this Disclosure Certificate shall terminate upon the earliest to occur of: (a) the legal defeasance, prior redemption or payment in full of all the Bonds, (b) the date on which the Owner and all Affiliates of the Owner own, in the aggregate, land in the District that is subject to less than twenty percent (20%) of the then unpaid Assessments levied in the District, (c) the date on which all Assessments on the Property owned by the Owner and its Affiliates are paid or prepaid in full, and (d) the date on which the Owner delivers to the City and the Dissemination Agent an opinion of a nationally-recognized bond counsel acceptable to the City to the effect that the continuing disclosure provided for in this Disclosure Certificate is no longer required under the Rule to allow the Participating Underwriter to deal in the Bonds. If such termination occurs prior to the final maturity of the Bonds, the Owner shall give notice of such termination in the same manner as for a Listed Event under Section S(c).

Section 8. Dissemination Agent. The City may, from time to time, appoint or engage a Dissemination Agent to act as such under this Disclosure Certificate, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. The initial Dissemination Agent shall be NBS Government Finance Group.

The Dissemination Agent may at any time resign by providing thirty days written notice to the City, the Owner and the Fiscal Agent. Upon receiving notice of such resignation, the City shall promptly appoint a successor Dissemination Agent by an instrument in writing, delivered to the Fiscal Agent and the Owner. If no appointment of a successor Dissemination Agent shall be made the City shall act as the Dissemination Agent. The City shall provide the Owner and the Fiscal Agent with written notice of the identity of any successor Dissemination Agent appointed or engaged by the City.

Section 9. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Certificate, the Owner may amend this Disclosure Certificate, 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, 4 or S(a), it may only be made in connection with a change in circumstances that arises from a

C-12 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;

(c) the proposed amendment or waiver either (i) is approved by owners of the Bonds in the manner provided in the Fiscal Agent Agreement for amendments to the Fiscal Agent Agreement with the consent of owners, or (ii) does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the owners or beneficial owners of the Bonds; and

(d) no amendment increasing or affecting the obligations or duties of the City, the Dissemination Agent or the Fiscal Agent shall be made without the consent of such party.

Section 10. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the 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 Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Certificate. If the Owner 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 Owner 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 Owner to comply with any provision of this Disclosure Certificate, the Participating Underwriter, the City or any owner 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 Owner to comply with its obligations under this Disclosure Certificate. A default under this Disclosure Certificate shall not be deemed a default under the Fiscal Agent Agreement, and the sole remedy under this Disclosure Certificate in the event of any failure of the Owner to comply with this Disclosure Certificate shall be an action to compel performance.

Section 12. Duties, Immunities and Liabilities of Dissemination Agent. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Certificate. The Dissemination Agent shall be paid compensation by the City for its services provided hereunder. The Dissemination Agent shall have no duty or obligation to review any information provided to it by the Owner and shall not be deemed to be acting in any fiduciary capacity for the Owner, the Bondholders, or any other party. The obligations of the 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 Dissemination Agent hereunder without the execution or filing of any paper or further act.

C-13 Section 13. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the City, the Owner, the Fiscal Agent, the Dissemination Agent, the Participating Underwriter and the owners and beneficial owners from time to time of the Bonds, and shall create no rights in any other person or entity.

Section 14. Alternative Filing Location. Any filing under this Disclosure Certificate may be made solely by transmitting such filing to the Texas Municipal Advisory Council (the "MAC") as provided at http:/ /www.disclosureusa.org, unless the United States Securities and Exchange Commission has withdrawn the interpretive advice in its letter to the MAC dated September 7, 2004.

Dated: July_, 2005 [PROPERTY OWNER]

By: ______Its: ______

NBS Government Finance Group agrees to act as Dissemination Agent pursuant to the foregoing Continuing Disclosure Certificate of the Landowner

By: ______

Its:------

C-14 EXHIBIT A

NOTICE TO MUNICIPAL SECURITIES RULEMAKING BOARD OF FAILURE TO FILE ANNUAL REPORT

Name of Issuer: City of Hercules

Name of Bond Issue: $6,550,345 City of Hercules Assessment District No. 2005-1 Gohn Muir Parkway) Limited Obligation Improvement Bonds

Date of Issuance: July_, 2005

NOTICE IS HEREBY GIVEN that (the "Owner") has not provided an Annual Report with respect to the above-named Bonds as required by Section 3 of the Continuing Disclosure Certificate of the Landowner dated July_, 2005 executed by the Owner for the benefit of the owners and beneficial owners of the above-referenced bonds. The Owner anticipates that the Annual Report will be filed by ______

Dated: ______

[PROPERTY OWNER]

By:~~~~~~~~~~~~ Its: ______cc: City of Hercules 111 Civic Drive Hercules, California 94547 Attention: Director of Finance

The Bank of New York Trust Company, N.A. 700 South Flower Street, Suite 500 Los Angeles, California 90017

NBS Government Finance Group 41661 Enterprise Circle North, Suite 225 Temecula, California 92590

Kinsell, Newcomb & De Dios, Inc. 462 Stevens A venue, Suite 308 Solana Beach, California 92075

C-15 THIS PAGE INTENTIONALLY LEFT BLANK APPENDIXD

FORM OF OPINION OF BOND COUNSEL

July 27, 2005

City of Hercules Hercules, California

City of Hercules Assessment District No. 2005-1 (John Muir Parkway) Limited Obligation Improvement Bonds (Final Opinion)

Ladies and Gentlemen:

We have acted as bond counsel in connection with the issuance by the City of Hercules (the "Issuer") of $6,550,345 aggregate principal amount of the City of Hercules Assessment District No. 2005-1 (John Muir Parkway) Limited Obligation Improvement Bonds (the "Bonds") pursuant to the provisions of the Municipal Improvement Act of 1913 and the Improvement Bond Act of 1915 and a Fiscal Agent Agreement by and between the Issuer and The Bank of New York Trust Company, N.A., as fiscal agent (the "Fiscal Agent"), dated as of July 1, 2005 (the ''Fiscal Agent Agreement"). Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Fiscal Agent Agreement.

In such connection, we have reviewed the Fiscal Agent Agreement, the Tax Certificate of the Issuer dated the date hereof (the "Tax Certificate"), an opinion of counsel to the Issuer, certifications of the Issuer and others and such other documents, opinions and matters to the extent we deemed necessary to render the opinions set forth herein.

Certain agreements, requirements and procedures contained or referred to in the Fiscal Agent Agreement, the Tax Certificate and other relevant documents may be changed and certain actions (including, without limitation, defeasance of the Bonds) may be taken or omitted under the circumstances and subject to the terms and conditions set forth in such documents. No opinion is expressed herein as to any Bond or the interest thereon if any such change occurs or action is taken or omitted upon the advice or approval of counsel other than ourselves.

The opinions expressed herein are based on an analysis of existing laws, regulations, rulings and court decisions and cover certain matters not directly addressed by such authorities. Such opinions may be affected by actions taken or omitted or events occurring after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions are taken or omitted or events do occur or any other matters come to our attention after the date hereof. Our engagement with respect to the Bonds has concluded with their issuance, and we disclaim any obligation to update this letter. We have assumed the genuineness of all documents and signatures presented to us (whether as originals or copies) and the due and legal execution and delivery thereof by, and validity against, any parties other than the Issuer. We have

D-1 assumed, without undertaking to verify, the accuracy of the factual matters represented, warranted or certified in the documents, and of the legal conclusions contained in the opinions, referred to in the second paragraph hereof. Furthermore, we have assumed compliance with all covenants and agreements contained in the Fiscal Agent Agreement and the Tax Certificate, including (without limitation) covenants and agreements compliance with which is necessary to assure that future actions, omissions or events will not cause interest on the Bonds to be included in gross income for federal income tax purposes. In addition, we call attention to the fact that the rights and obligations under the Bonds, the Fiscal Agent Agreement and the Tax Certificate and their enforceability may be subject to bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other similar laws relating to or affecting creditors' rights, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases and to the limitations on legal remedies against cities in the State of California. We express no opinion with respect to any indemnification, contribution, penalty, choice of law, choice of forum, waiver or severability provisions contained in the foregoing documents, nor do we express any opinion on the plans, specifications, maps and other engineering details of the proceedings, or upon the validity of the individual separate assessments securing the Bonds which validity depends, in addition to the legal steps required, upon the accuracy of certain of the engineering details. Finally, we undertake no responsibility for the accuracy, completeness or fairness of the Official Statement or other offering material relating to the Bonds and express no opinion with respect thereto.

Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, we are of the following opinions:

1. The Bonds constitute valid and binding special assessment obligations of the Issuer, payable solely from and secured by the unpaid assessments and certain funds held under the Fiscal Agent Agreement.

2. The Fiscal Agent Agreement has been duly adopted and constitutes a valid and binding obligation of the Issuer.

3. Interest on the Bonds is excluded from gross income for federal income tax purposes under section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. Interest on the Bonds is not a specific preference item for purposes of federal individual or corporate alternative minimum taxes, although we observe that it is included in adjusted current earnings in calculating corporate alternative minimum taxable income. We express no opinion regarding other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest on, the Bonds.

Faithfully yours,

ORRICK, HERRINGTON & SUTCLIFFE LLP

per

D-2 APPENDIXE

THE BOOK ENTRY SYSTEM

The information in this Appendix E has been provided by The Depository Trust Company ("DTC" ), New York, NY,for use in securities offering documents, and the City takes no responsibility for the accuracy or completeness thereof. The City cannot and does not give any assurances that DTC, OTC Participants or Indirect Participants will distribute the Beneficial Owners either (a) payments of interest, principal or premium, if any, with respect to the Bonds or (b) certificates representing ownership interest in or other confirmation of ownership interest in the Bonds, or that they will so do on a timely basis or that DTC, DTC Direct Participants or DTC Indirect Participants mill act in the manner described in this Official Statement.

1. DTC will act as securities depository for the Bonds (referred to in this Appendix E as the "Securities"). The Securities will be issued as fully-registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Security certificate will be issued for each maturity of the Securities, in the aggregate principal amount of such issue, and will be deposited with DTC.

2. DTC, the world's largest depository, is a limited purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. 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 DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. 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, Government Securities Clearing Corporation, MBS Clearing Corporation, and Emerging Markets Clearing Corporation, (NSCC, GSCC, MBSCC, and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants''). DTC has Standard & Poor's highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com.

3. Purchases of Securities under the DTC system must be made by or through Direct Participants, which will receive a credit for the Securities 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 DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner

E-1 entered into the transaction. Transfers of ownership interests in the Securities 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 Securities, except in the event that use of the book-entry system for the Securities is discontinued.

4. To facilitate subsequent transfers, all Securities deposited by Direct Participants with DTC 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 DTC. The deposit of Securities with DTC 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 Securities; DTC's records reflect only the identity of the Direct Participants to whose accounts such Securities are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

5. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

6. Redemption notices shall be sent to DTC. If less than all of the Securities 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.

7. Neither DTC nor Cede & Co. (nor any other OTC nominee) will consent or vote with respect to Securities 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 rights to those Direct Participants to whose accounts Securities are credited on the record date (identified in a listing attached to the Omnibus Proxy).

8. Redemption proceeds, distributions, and interest payments on the Securities 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 paying agent or bond trustee, on payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in Hstreet name," and will be the responsibility of such Participant and not of OTC nor its nominee, the paying agent or bond trustee, or the issuer, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the issuer or the paying agent or bond trustee, disbursement of such payments to Direct Participants will be the responsibility of OTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

9. DTC may discontinue providing its services as depository with respect to the Securities at any time by giving reasonable notice to the issuer or the paying agent or bond fiscal agent. Under such circumstances, in the event that a successor depository is not obtained, Security certificates are required to be printed and delivered.

E-2 10. The City may decide to discontinue use of the system of book-entry transfers through DIC (or a successor securities depository). In that event, Security certificates will be printed and delivered in accordance with the provisions of the Fiscal Agent Agreement.

11. As long as a book-entry system is used, the Beneficial Owners of the Bonds or of interests in the Bonds will not receive or have the right to receive physical delivery of the Bonds, and will not be or be considered to be registered owners under the Fiscal Agent Agreement. The Fiscal Agent, the City and the Underwriter have no responsibility or liability for any aspects of the records relating to or payments made on account of beneficial ownership, or for maintaining, supervising or reviewing any records relating to beneficial ownership of the Bonds.

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