NEW ISSUE - FULL BOOK-ENTRY RATINGS: Moody's: "Aa2NMIG-1" Standard & Poor's: "AA-/A-1+" (See "RATINGS") In the opinion of Nixon Peabody LLP, Bond Counsel, under existing law and assuming compliance with the tax covenants described herein and the accuracy of certain representations and certifications made by the Agency and the Borrowers and described herein, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, as amended (the "Code"), except that no opinion is expressed as to the exclusion of interest from gross income for any period during which any Bond is held by a person who, within the meaning ofSection 147( a) of the Code, is a "substantial user" ofthe facilities financed with proceeds of the Bonds or a "related person". Bond Counsel is further of the opinion that interest on the Bonds is treated as an item of tax preference for purposes of calculating the federal alternative minimum tax that may be imposed on individuals and corporations. Bond Counsel is further of the opinion that under existing law interest on the Bonds is exempt from California personal income taxes. See "TAX MATTERS" regarding certain other tax considerations. Redevelopment Agency of the City of San Jose Merged Area Redevelopment Project Subordinate Housing Set-Aside Tax Allocation Variable Rate Demand Bonds (AMT) $33,075,000 $33,075,000 Tax-Exempt Tax Allocation Bonds Tax-Exempt Tax Allocation Bonds Series 2005C (AMT) Series 20050 (AMT) Dated: Date of Delivery Price: 100% Due: August 1, 2035 This cover page contains certain information for general reference only. It is not intended to be a summary of the security or terms of this issue. Potential investors are advised to read the entire Official Statement to obtain information essential to the making of an informed investment decision. Capitalized terms used on this cover page not otherwise defined shall have the meanings set forth herein. The Redevelopment Agency of the City of San Jose (the "Agency") is issuing both series of bonds captioned above (the "Series 2005C Bonds" and the "Series 2005D Bonds" and, collectively, the "Bonds") in accordance with a Fiscal Agent Agreement, dated as of May 1, 2002 (the "Original Fiscal Agent Agreement"), as amended and supplemented by that certain First Supplemental Agreement, dated as of June 1, 2005 (the "First Supplemental Agreement," and collectively with the Original Fiscal Agent Agreement, the "Fiscal Agent Agreement"), each by and between the Agency and Wells Fargo Bank, National Association, as fiscal agent (the "Fiscal Agent"). See "THE BONDS -Authority for Issuance". The proceeds of the Bonds will be (i) used by the Housing Department of the City of San Jose, California (the "City") to finance and refinance affordable housing projects within the City, including by refunding a portion of the Agency's Merged Area Redevelopment Project Housing Set-Aside Taxable Revenue Bonds, Series 2002G and Series 2002H, and (ii) used to pay certain costs relating to the issuance of the Bonds. The Bonds of each Series will be issued initially in denominations of $100,000 or any integral multiple of $5,000 in excess of $100,000. The Bonds will be issued as fully registered Bonds and, when delivered, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ("DTC"). DTC will act as securities depository for the Bonds. Individual purchases of interests in the Bonds will be made in book-entry form only. Principal of, premium, if any, and interest on the Bonds is payable by the Fiscal Agent directly to DTC, which will in tum remit those payments to the DTC Participants for subsequent disbursement to the Beneficial Owners of the Bonds. See "THE BONDS - Book-Entry System". Initially, each Series of Bonds will bear interest at a Weekly Rate. For so long as a Series of Bonds bears interest at a Weekly Rate, interest on that Series of Bonds will be paid on the first Business Day of each month, commencing August 1, 2005, as well as on the maturity date and on certain dates on which Bonds of that Series are subject to mandatory tender for purchase. See "THE BONDS - Variable Interest Rates". At the option of the Agency, each Series of Bonds may also be converted to bear interest at a Daily Rate, a Monthly Rate, a Semiannual Rate, a Flexible Rate, a Long Rate or a Fixed Rate in accordance with the Fiscal Agent Agreement, and will be subject to mandatory tender at the time of each such conversion. The Fiscal Agent Agreement allows one Series of Bonds to be converted to a different interest rate mode than the other Series of Bonds at any time. The Maximum Rate on the Bonds may not exceed the lesser of 12% or such other rate as may be specified for either Series of Bonds by the Agency in accordance with the Fiscal Agent Agreement. See "THE BONDS - Determination of Variable Interest Rates," "- Conversions Between Variable Rates" and"- Fixed Rate Conversion". Payment of principal of and interest on each Series of the Bonds is supported by a separate, irrevocable direct-pay letter of credit (each a "Letter of Credit") issued in favor of the Fiscal Agent for the benefit of the registered owners of the related Series of Bonds by The Bank of New York (the "Credit Provider").

BANK NEWYOfUC

Each Letter of Credit will terminate with respect to its respective Series of Bonds on June 29, 2010, unless extended by the Credit Provider, or earlier upon the occurrence of the events set forth in each Letter of Credit. See "SECURITY AND SOURCES OF PAYMENT FOR THE BONDS - The Credit Facility". During the period that Bonds of either Series bear interest at a Daily Rate, a Weekly Rate or a Monthly Rate, Owners of Bonds of that Series will have the right to have their Bonds purchased on demand upon providing irrevocable notice in the manner set forth in the Fiscal Agent Agreement. The Bonds are also subject to mandatory tender prior to maturity. See "THE BONDS - Tender of Bonds at Option of Owner" and"- Mandatory Tender of Bonds". Citigroup Global Markets Inc. will serve as remarketing agent for the Series 2005C Bonds and Banc of America Securities LLC will serve as remarketing agent for the Series 2005D Bonds. Prior to the expiration of a Letter of Credit for a Series of Bonds, the Credit Provider is obligated under that Letter of Credit to fund the purchase price of all Bonds of that Series tendered for purchase and not remarketed. See "THE BONDS - The Remarketing Agents". The Bonds are subject to optional and mandatory redemption prior to maturity as described in this Official Statement. See "THE BONDS - Redemption". THE BONDS ARE SPECIAL LIMITED OBLIGATIONS OF THE AGENCY AND ARE PAYABLE, AS TO INTEREST THEREON AND PRINCIPAL THEREOF, EXCLUSIVELY FROM SUBORDINATE HOUSING SET-ASIDE AMOUNTS, AND THE AGENCY IS NOT OBLIGATED TO PAY THEM EXCEPT FROM SUBORDINATE HOUSING SET-ASIDE AMOUNTS. ALL OF THE BONDS ARE EQUALLY SECURED BY A PLEDGE OF AND CHARGE AND LIEN UPON, ALL OF THE SUBORDINATE HOUSING SET-ASIDE AMOUNTS, AND THE SUBORDINATE HOUSING SET-ASIDE AMOUNTS CONSTITUTE A TRUST FUND FOR THE SECURITY AND PAYMENT OF THE INTEREST ON, THE PRINCIPAL OF AND PREMIUM, IF ANY, OF THE BONDS AND ANY OTHER PARITY DEBT (AS DEFINED HEREIN) ISSUED BY THE AGENCY IN ACCORDANCE WITH THE FISCAL AGENT AGREEMENT. THE BONDS ARE NOT A DEBT OF THE CITY, THE STATE OF CALIFORNIA (THE "STATE") OR ANY OF ITS POLITICAL SUBDIVISIONS OTHER THAN THE AGENCY, AND NEITHER THE CITY, THE STATE NOR ANY OF ITS POLITICAL SUBDIVISIONS OTHER THAN THE AGENCY IS LIABLE THEREFOR, NOR IN ANY EVENT SHALL THE BONDS BE PAYABLE OUT OF ANY FUNDS OR PROPERTIES OTHER THAN THE SUBORDINATE HOUSING SET-ASIDE AMOUNTS OF THE AGENCY AS PROVIDED IN THE FISCAL AGENT AGREEMENT. THE BONDS DO NOT CONSTITUTE AN INDEBTEDNESS WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION. The Bonds are offered, when, as and if issued and accepted by the Underwriters, subject to the approval as to legality by Nixon Peabody LLP, San Francisco, California, Bond Counsel, and to certain other conditions. Certain legal matters will be passed upon for the Agency by its General Counsel and by Nixon Peabody LLP, as Disclosure Counsel, for the Credit Provider by Sidley Austin Brown & Wood LLP, Los Angeles, California and for the Underwriters by Hawkins Delafield & Wood LLP, Los Angeles, California. It is expected that the Bonds in definitive form will be available for delivery to DTC in New York, New York on or about June 30, 2005. Series 2005C Bonds Series 20050 Bonds CITIGROUP BANC OF AMERICA SECURITIES LLC Dated: June 24, 2005 GENERAL INFORMATION ABOUT THIS OFFICIAL STATEMENT

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

Use of this Official Statement. This Official Statement is submitted in connection with the sale of the Bonds described herein and may not be reproduced or used, in whole or in part, for any other purpose. This Official Statement does not constitute a contract between any Bond owner and the Agency or the Underwriters.

Preparation of this Official Statement. The information contained in this Official Statement has been obtained from sources that are believed to be reliable, but this information is not guaranteed as to accuracy or completeness. The Underwriters have provided the following sentence for inclusion in this Official Statement: The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. Copies of documents referred to herein and information concerning the Bonds are available prior to August 8, 2005 from David Baum, Director of Finance and Administration, Redevelopment Agency of the City of San Jose, 50 West San Fernando Street, Suite 900, San Jose, California 95113, telephone 408.794.1120 and after August 8, 2005, from David Baum, Director of Finance and Administration, Redevelopment Agency of the City of San Jose, 200 East Santa Clara Street, San Jose, California 95113, telephone 408.535.8500. The Agency may impose a charge for copying, mailing and handling.

Estimates and Forecasts. When used in this Official Statement and in any continuing disclosure made by the Agency, 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.

This Official Statement speaks only as of its date, and the information and expressions of opinion contained in this Official Statement are subject to change without notice. Neither the delivery of this Official Statement nor any sale of the Bonds will, under any circumstances, create any implication that there has been no change in the affairs of the Agency, the other parties described in this Official Statement, since the date of this Official Statement.

Document Summaries. All summaries of the Fiscal Agent Agreement or other documents contained in this Official Statement are made subject to the provisions of such documents and do not purport to be complete statements of any or all such provisions. All references in this Official Statement to the Fiscal Agent Agreement and such other documents are qualified in their entirety by reference to such documents, which are on file with the Agency.

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

No Registration with the SEC. The issuance and sale of the Bonds have not been registered under the Securities Act of 1933 or the Securities Exchange Act of 1934, both as amended, in reliance upon exemptions provided thereunder by Sections 3(a)(2) and 3(a)(l2), respectively, for the issuance and sale of municipal securities.

Public Offering Prices. The Underwriters may offer and sell the Bonds to certain dealers and dealer banks and banks acting as agent at prices lower than the public offering prices stated on the cover page of this Official Statement, and the Underwriters may change those public offering prices from time to time. REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

REDEVELOPMENT AGENCY BOARD AND CITY COUNCIL

Ron Gonzales, Chair and Mayor Linda J. LeZotte, Member, District 1 Forrest Williams, Member, District 2 Cindy Chavez, Member, District 3, and Vice Mayor Chuck Reed, Member, District 4 Nora Campos, Member, District 5 Ken Yeager, Member, District 6 (District 7 position currently vacant) David D. Cortese, Member, District 8 Judy Chirco, Member, District 9 Nancy Pyle, Member, District 10 AGENCY STAFF Harry S. Mavrogenes, Executive Director Richard Doyle, General Counsel Sharon L. Landers, Assistant Executive Director David C. Baum, Director ofFinance and Administration I Chief Financial Officer Abraham M. Andrade, Assistant Director ofFinance and Administration Patricia A. Deignan, Chief Deputy General Counsel CITY STAFF Del D. Borgsdorf, City Manager Richard Doyle, City Attorney Scott P. Johnson, Director ofFinance Leslye Corsiglia, Director ofHousing Julia H. Cooper, Deputy Director ofFinance Ed Moran, Senior Deputy City Attorney

PROFESSIONAL SERVICES

BOND COUNSEL AND DISCLOSURE COUNSEL Nixon Peabody LLP San Francisco, California

FINANCIAL ADVISOR Ross Financial San Francisco, California

FISCAL CONSUL TANT Urban Analytics, LLC San Francisco, California

FISCAL AGENT Wells Fargo Bank, National Association Los Angeles, California REGIONAL MAP TABLE OF CONTENTS

INTRODUCTION ...... 1 PLAN OF FINANCING ...... 2 ESTIMATED SOURCES AND USES OF FUNDS ...... 3 THEBONDS ...... 3 Authority for Issuance ...... 3 Bond Terms ...... 4 Book-Entry System ...... 5 Variable Interest Rates ...... 6 Determination of Variable Interest Rates ...... 9 Conversions Between Variable Rates ...... 9 Fixed Rate Conversion ...... 11 Redemption ...... 12 Tender of Bonds at Option of Owner ...... 15 Mandatory Tender of Bonds ...... 17 The Remarketing Agents ...... 19 The Tender Agent ...... 19 SECURITY AND SOURCES OF PAYMENT FOR THE BONDS ...... 20 Pledge of Subordinate Housing Set-Aside Amounts ...... 21 Subordination to Senior Obligations ...... 22 Flow of Funds ...... 23 Issuance of Senior Obligations ...... 25 Parity Debt ...... 26 The Credit Facility ...... 27 The Reimbursement Agreements ...... 31 THE CREDIT PROVIDER ...... 33 FACTORS AFFECTING TAX ALLOCATION FINANCING ...... 33 Property Tax Collection Procedures ...... 33 Property Tax Limitations: Article XIIIA of the California Constitution ...... 3 5 Article XIIIB of the California Constitution ...... 36 Articles XIIIC and XIIID of the California Constitution ...... 36 Proposition 87 ...... 36 Unitary Property ...... 3 7 Tax Increment Revenue Limitation ...... 37 Redevelopment Time Limits ...... 38 THE REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE ...... 39 The City and the Agency ...... 39 Agency Powers and Duties ...... 39 Agency Financial Statements ...... 39 Fiscal Consultant's Report ...... 39 Merged Area Redevelopment Project ...... 39 Land Use within the Merged Project Area ...... 42 Tax Rates ...... 42 Historic Assessed Value and Housing Set-Aside Amounts ...... 43 Twenty Largest Taxpayers ...... 43 Assessment Appeals and Assessor Reductions ...... 44 Debt Secured by Housing Set-Aside Amounts ...... 46 Projected Debt Service Coverage ...... 4 7 SPECIAL RISK FACTORS ...... 49 Tax Increment Revenue Limitation ...... 49 Reduction in Taxable Value ...... 49 Risks to Real Estate Market ...... 5 0 Local Economy ...... 50 Assessment Appeals and Assessor Reductions to Assessed Value ...... 50 Levy and Collection of Taxes ...... 51 Personal Property on the Unsecured Tax Roll ...... 51 State Budget Deficits ...... 51 Reductions in Inflationary Rate ...... 52 Statement of Indebtedness ...... 52 Bankruptcy and Foreclosure ...... 52 Estimated Revenues ...... 52 Earthquake Risk ...... 53 Hazardous Substances ...... 53 Changes in the Law ...... 53 Federal Tax-Exempt Status of the Bonds ...... 53 THE COOPERATION AGREEMENT AND CITY OF SAN JOSE DEPARTMENT OF HOUSING ...... 54 Cooperation Agreement ...... 54 City of San Jose Department of Housing ...... 54 TAX MATTERS ...... 54 Federal Income Taxes ...... 54 State Taxes ...... 55 Certain Federal Tax Information ...... 55 UNDERWRITING ...... 56 CONTINUING DISCLOSURE ...... 56 LITIGATION ...... 56 APPROVAL OF LEGALITY ...... 57 RATINGS ...... 57 FINANCIAL ADVISOR ...... 58 MISCELLANEOUS ...... 58

APPENDIX A THE CITY OF SAN JOSE: DEMOGRAPHIC AND ECONOMIC INFORMATION ...... A-1 APPENDIXB AUDITED FINANCIAL STATEMENTS OF THE AGENCY FOR FISCAL YEAR ENDED JUNE 30, 2004 ...... B-1 APPENDIXC SUMMARY OF THE FISCAL AGENT AGREEMENT ...... C-1 APPENDIXD REPORT OF FISCAL CONSULTANT...... D-1 APPENDIXE PROPOSED FORM OF BOND COUNSEL OPINION...... E-1 APPENDIXF DTC AND BOOK-ENTRY SYSTEM ...... F-1

11 OFFICIAL STATEMENT Redevelopment Agency of the City of San Jose Merged Area Redevelopment Project Subordinate Housing Set-Aside Tax Allocation Variable Rate Demand Bonds (AMT) $33,075,000 $33,075,000 Tax-Exempt Tax Allocation Bonds Tax-Exempt Tax Allocation Bonds Series 2005C (AMT) Series 20050 (AMT)

INTRODUCTION

The purpose of this Official Statement, which includes the cover page, table of contents and Appendices hereto ( collectively, the "Official Statement"), is to provide certain information concerning the Redevelopment Agency of the City of San Jose (the "Agency") and the issuance of the bonds captioned above (the "Series 2005C Bonds" and the "Series 2005D Bonds" and, collectively, the "Bonds"). This Introductory Statement is subject in all respects to the more complete information included and referred to elsewhere in this Official Statement, and the offering of the Bonds to potential investors is made only by means of the entire Official Statement.

Terms used but not defined in this Official Statement have the meanings set forth in the Fiscal Agent Agreement. See APPENDIX C - "SUMMARY OF THE FISCAL AGENT AGREEMENT".

Issuance and Purpose of Bonds. The Bonds are being issued pursuant to a Fiscal Agent Agreement, dated as of May 1, 2002 (the "Original Fiscal Agent Agreement"), as amended and supplemented by that certain First Supplemental Agreement, dated as of June 1, 2005 (the "First Supplemental Agreement," and collectively with the Original Fiscal Agent Agreement, the "Fiscal Agent Agreement"), each by and between the Agency and Wells Fargo Bank, National Association, as fiscal agent (the "Fiscal Agent"). See "THE BONDS -Authority for Issuance".

The proceeds of the Bonds will be (i) used by the Housing Department of the City of San Jose, California (the "City") to finance and refinance affordable housing projects within the City, including by refunding a portion of the Agency's Merged Area Redevelopment Project Housing Set-Aside Taxable Revenue Bonds, Series 2002G and Series 2002H (respectively, the "Series 2002G Bonds" and the "Series 2002H Bonds" and collectively, the "Refunded Bonds"), and (ii) used to pay certain costs relating to the issuance of the Bonds. See "ESTIMATED SOURCES AND USES OF FUNDS".

Bond Terms. The Bonds will be issued in fully registered form, and, when issued, will be registered in the name of Cede & Co. ("Cede"), as nominee for The Depository Trust Company, New York, New York ("DIC"), which will act as securities depository for the Bonds.

The Bonds initially will be issued in denominations of $100,000 or any integral multiple of $5,000 in excess of $100,000. The Bonds will be dated as of the date of delivery and will mature (subject to prior redemption) on August 1, 2035.

Each Series of Bonds will bear interest at a Variable Rate or a Fixed Rate determined by the Remarketing Agent for that Series of Bonds from time to time in accordance with the provisions of the Fiscal Agent Agreement. Initially, all of the Bonds will be issued and bear interest at a Weekly Rate. The Fiscal Agent Agreement does not require both Series of Bonds to be in the same interest rate mode. See "THE BONDS- Bond Terms".

Optional and Mandatory Tender. While a Series of Bonds bears interest at a Daily Rate, Weekly Rate or Monthly Rate, the Owner of any Bond of that Series may require the Fiscal Agent to purchase such Bond at certain times and under certain circumstances for a price equal to the principal amount of such Bond plus unpaid accrued interest to the date of purchase. See "THE BONDS - Tender of Bonds at Option of Owner". The Bonds are also subject to mandatory tender as described in this Official Statement. See "THE BONDS - Mandatory Tender of Bonds". Wells Fargo Bank, National Association, will serve as tender agent (the "Tender Agent") for the Bonds.

Remarketing of Bonds. Citigroup Global Markets Inc. will serve as remarketing agent for the Series 2005C Bonds, and Banc of America Securities LLC will serve as remarketing agent for the Series 2005D Bonds ( collectively, the "Remarketing Agents"). Each Remarketing Agent is required to remarket Bonds of its respective Series tendered for purchase during Daily, Weekly and Monthly Rate periods upon the demand of Owners of the Bonds and tendered for purchase due to certain mandatory tenders for purchase, as described herein. See "THE BONDS - The Remarketing Agents".

Security and Sources of Payment for the Bonds. The Bonds are special obligations of the Agency entitled, ratably and equally, to the benefits of the Fiscal Agent Agreement and are payable solely from and secured by a pledge of the Subordinate Housing Set-Aside Amounts (as hereinafter defined) and all moneys and investments ( excluding moneys on deposit in the Subordinate Housing Set-Aside Rebate Fund) held from time to time by the Fiscal Agent under the Fiscal Agent Agreement. See "SECURITY AND SOURCES OF PAYMENT FOR THE BONDS" and APPENDIX c - "SUMMARY OF THE FISCAL AGENT AGREEMENT". The Agency has no taxing power.

The payment of debt service on the Bonds is subordinate, with respect to the application of the housing set-aside portions of tax increment received by the Agency, to the payment of debt service on certain obligations of the Agency which are secured by the Housing Set-Aside Amounts on a basis senior to the payment of debt service on the Bonds (the "Senior Obligations"), which upon the issuance of the Bonds and the refunding of the Senior Obligations to be refunded simultaneously therewith, will be outstanding in the aggregate principal amount of $212,525,000. See "SECURITY AND SOURCES OF PAYMENT FOR THE BONDS - Subordination to Senior Obligations".

As credit support for each Series of Bonds, the Agency will cause The Bank of New York (the "Credit Provider"), to issue an irrevocable direct-pay letter of credit with respect to the Series 2005C Bonds and an irrevocable direct-pay letter of credit with respect to the Series 2005D Bonds ( each a "Letter of Credit" and, collectively, the "Credit Facility") pursuant to two Reimbursement Agreements, each dated as of June 1, 2005 ( each, a "Reimbursement Agreement" and, collectively, the "Reimbursement Agreements"), among the Credit Provider, the City and the Agency. Each Letter of Credit will terminate with respect to its respective Series of Bonds on June 29, 2010, unless extended by the Credit Provider, or earlier upon the occurrence of the events set forth in the Credit Facility. The Agency will agree in each Reimbursement Agreement to reimburse the Credit Provider for draws under the related Letter of Credit and to make certain other payments to the Credit Provider. See "SECURITY AND SOURCES OF PAYMENT FOR THE BONDS- The Credit Facility".

PLAN OF FINANCING

Issuance of the Bonds. The Bonds are being issued by the Agency to finance and refinance affordable housing projects in the City, including by refunding a portion of the Refunded Bonds and to pay costs of issuance of the Bonds. Proceeds of the Refunded Bonds were used to fund loans for the purpose of increasing, improving and/or preserving the supply of very low, low and moderate income housing in the City.

Issuance of Senior Bonds. Simultaneously with the issuance of the Bonds, the Agency intends to issue two series of bonds in the combined aggregate principal amount of $129,720,000, which will be secured by the Housing Set-Aside Amounts on a basis senior to the payment of debt service on the Bonds (the "Senior Bonds"). Upon the issuance of these two series of Senior Bonds and the refunding of the Senior Obligations to be refunded simultaneously therewith, the Agency will have outstanding $212,525,000 of its Merged Project Area Redevelopment Project Housing Set-Aside Tax Allocation Bonds secured on a basis senior to the payment of debt service on the Bonds.

2 Plan of Refunding. A portion of the proceeds of the Bonds will be used by the Housing Department of the City to finance and refinance affordable housing projects within the City, including by funding loans to various developers (the "Borrowers") of low and moderate income housing projects within the City, repaying certain amounts outstanding under a line of credit (the "Line of Credit") maintained by the Agency with The Bank of New York and refunding a portion of the Refunded Bonds. See "THE REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE - Debt Secured by Housing Set-Aside Amounts".

Simultaneously with issuance of the Bonds, the fiscal agent for the Series 2002G Bonds and the Series 2002H Bonds will draw on the letter of credit currently in effect with respect to the Series 2002G Bonds and the letter of credit currently in effect with respect to the Series 2002H Bonds, respectively, in the amount necessary to redeem in full the Series 2002G Bonds and the Series 2002H Bonds, respectively, and will apply such amounts to the redemption in full of the Series 2002G Bonds and the Series 2002H Bonds, respectively. A portion of the proceeds of the sale of the Bonds, together with a portion of the proceeds of the sale of the Senior Bonds, will be applied to reimburse The Bank of New York, as issuer of such letters of credit (the "2002 Letter of Credit Bank"), for such draws.

ESTIMATED SOURCES AND USES OF FUNDS

The estimated sources and uses of funds for the Bonds are as follows:

Series 2005C Series 2005D Bonds Bonds Total Estimated Sources Par amount $33,075,000.00 $33,075,000.00 $66,150,000.00 TOTAL $33,075,000.00 $33,075,000.00 $66)50,000.00 Estimated Uses Series 2005 Subordinate Housing Set-Aside Project Loan Account $17,623,780.16 $17,623,780.16 $35,247,560.32 Repayment of Line of Credit 11,274,777.97 11,274,777.96 22,549,555.93 Reimbursement to 2002 Letter of Credit Bank (1) 4,000,000.00 4,000,000.00 8,000,000.00 Costs of Issuance (2) 117,650.58 117,650.59 235,301.17 Underwriters' Discount 58,791.29 58,791.29 117,582.58 TOTAL $33,075,000.00 $33,075,000.00 $66)50,000.00

1 To be applied to repay certain amounts outstanding under the Line of Credit. 2 Includes the Agency's and the City's expenses, fiscal agent, letter of credit and letter of credit counsel fees, ratings, financial advisory and legal fees and expenses and other miscellaneous expenses associated with the issuance of the Bonds.

THE BONDS

AUTHORITY FOR ISSUANCE

The Agency is duly organized under the Community Redevelopment Law of the State of California (Health and Safety Code Section 33000 et seq.) (the "Redevelopment Law"). The Bonds are being issued in accordance with the Redevelopment Law and pursuant to the Fiscal Agent Agreement, Resolution No. 72689 adopted by the City on May 24, 2005, and Resolution No. 5608 adopted by the Agency on May 24, 2005.

3 BOND TERMS

Independent Interest Rate Modes. Each Series of Bonds may bear interest at a Daily Rate, a Monthly Rate, a Semiannual Rate, a Flexible Rate, a Long Rate or a Fixed Rate in accordance with the Fiscal Agent Agreement. The Fiscal Agent Agreement does not require both Series of Bonds to bear the same interest rate, and allows one Series of Bonds to be converted to a different interest rate mode than the other Series of Bonds at any time. The descriptions of interest rate modes and other related terms of the Bonds contained in this Official Statement apply to each Series of Bonds independently, and may be different for each Series of Bonds at any time following the issuance of the Bonds.

Denominations. The Bonds will be issued without coupons in any of the following denominations ( each an "Authorized Denomination"):

(i) during any period while the Bonds bear interest at a Variable Rate other than a Long Rate, the amount of $100,000 or any integral multiple of $5,000 in excess of $100,000, and

(ii) during any period while the Bonds bear interest at a Long Rate or a Fixed Rate, the amount of $5,000 or any integral multiple of $5,000.

Initial Interest Rate Mode. Initially, each Series of Bonds will be issued and bear interest at a Weekly Rate, until converted to bear interest at another Variable Rate or the Fixed Rate.

Calculation of Interest. Each Series of Bonds will bear interest at interest rates to be determined by its respective Remarketing Agent in accordance with the provisions of the Fiscal Agent Agreement. Except as provided below, the rate of interest on each Series of Bonds will be calculated at a Variable Rate prior to the Fixed Rate Date, and at the Fixed Rate thereafter.

The rate of interest on any Bonds purchased with amounts drawn on the Credit Facility in accordance with the Fiscal Agent Agreement and owned by the Credit Provider or its transferees ( other than pursuant to a remarketing of such Bonds) (the "Bank Bonds") will be calculated at the rate per annum at which interest accrues on unreimbursed drawings on the Credit Facility, as set forth in the Reimbursement Agreement (the "Bank Rate"). Owners other than the Credit Provider ( or its transferees) are only entitled to the applicable Variable Rate or the applicable Fixed Rate. At any point in time, all of the Bonds of a Series will be subject to the same Rate Period, but Bonds of one Series may be subject to a different Rate Period than Bonds of the other Series.

The amount of interest payable on any Interest Payment Date will be computed as follows:

(i) on the basis of a 365 or 366 day year, as applicable, for the number of days actually elapsed during a Daily Rate Period, a Weekly Rate Period, a Monthly Rate Period, a Flexible Rate Period or a Semiannual Rate Period; and

(ii) on the basis of a 360 day year consisting of twelve 30-day months during a Long Rate Period and on and after the Fixed Rate Date.

Interest on the Bonds is payable from the Interest Payment Date next preceding its date of authentication unless (i) a Bond is authenticated following a Record Date and on or before the next succeeding Interest Payment Date, in which event interest thereon will be payable from such Interest Payment Date, or (ii) a Bond is authenticated on or before the first Record Date, in which event interest thereon will be payable from the Closing Date, or (iii) interest on any Bond is in default as of the date of authentication thereof, in which event interest thereon will be payable from the date to which interest has been paid in full. Interest will be paid on each Interest Payment Date and redemption date to the persons in whose names the ownership of the Bonds is registered at the close of business on the immediately preceding Record Date, except as provided below.

4 The Variable Rate may not exceed the lesser of 12% per annum and such other rate as may be specified for either Series of Bonds by the Agency in writing to the Fiscal Agent in accordance with the provisions of the Fiscal Agent Agreement (the "Maximum Interest Rate").

Payment of Interest. Interest on the Bonds will be paid on the following dates ( each an "Interest Payment Date"):

(i) for Bonds bearing interest at a Daily Rate, a Weekly Rate or a Monthly Rate, the first Business Day of each month, commencing August 1, 2005, and the maturity date of those Bonds;

(ii) for Bonds bearing interest at a Daily Rate or a Weekly Rate, any date on which those Bonds are subject to mandatory tender for purchase on a Conversion Date or the date of delivery of an Alternate Credit Facility;

(iii) for Bonds bearing interest at a Flexible Rate, the Business Day following each Rate Period and, if applicable, the maturity date of those Bonds;

(iv) for Bonds bearing interest at a Semiannual Rate, a Long Rate or a Fixed Rate, semiannually on February 1 and August 1 of each year commencing on the first February 1 or August 1 which is at least two months after the applicable Conversion Date and, if applicable, the maturity date of those Bonds.

Interest on any Bond which is not punctually paid or duly provided for when due is payable to the person in whose name the ownership of such Bond is registered at the close of business on a Special Record Date for the payment of such defaulted interest to be fixed by the Fiscal Agent, notice of which will be given to such Owner not less than 10 days prior to such Special Record Date.

Interest will be paid by check of the Fiscal Agent mailed by first class mail, postage prepaid, on each Interest Payment Date to each person in whose name the ownership of a Bond is registered as of the immediately preceding Record Date, at the respective addresses shown on the registration books as of the immediately preceding Record Date; provided, however, that at the written request of any Owner of Bonds in an aggregate principal amount of at least $1,000,000, which written request must be on file with the Fiscal Agent as of the Record Date immediately preceding any Interest Payment Date, interest on such Bonds will be payable on such Interest Payment Date by wire transfer to such account within the United States as may be specified (to the satisfaction of the Fiscal Agent) in such written request.

The principal of the Bonds ( other than principal payable as the purchase price of tendered Bonds) is payable by check in lawful money of the United States of America upon surrender thereof at the principal corporate trust office of the Fiscal Agent in Los Angeles, California.

BOOK-ENTRY SYSTEM

The Bonds will be issued in fully registered form only and will be registered initially in the name of "Cede & Co.," as nominee of The Depository Trust Company, New York, New York ("DIC"), which has been appointed as securities depository for the Bonds, and registered ownership may not be transferred thereafter except as provided in the Fiscal Agent Agreement. Purchasers will not receive certificates representing their interests in the Bonds. Principal of and interest on the Bonds will be paid by the Fiscal Agent to DIC, which in turn is obligated to remit such principal and interest to its Participants for subsequent disbursement to beneficial owners of the Bonds as described herein. See APPENDIX F - "DTC AND BOOK­ ENTRY SYSTEM".

The Agency cannot and does not give any assurance that DTC will distribute to DTC Participants or that DTC Participants or others will distribute to the beneficial owners payments of

5 principal of and interest and premium, if any, on the Bonds or any redemption or other notices, or that they will do so on a timely basis or will serve and act in the manner described in this Official Statement. The Agency is not responsible or liable for the failure of DTC or any DTC Participant or DTC Indirect Participant to make any payments or give any notice to a beneficial owner with respect to the Bonds or any error or delay relating thereto.

VARIABLE INTEREST RATES

The interest rates on each Series of Bonds will be calculated at a Variable Rate prior to the Fixed Rate Date as determined by the Agency. The determination of the various Variable Rates during the various Variable Rate Periods for each Series of Bonds is described below. Bonds of one Series may be converted to a different Rate Period than Bonds of the other Series.

Daily Rates

Rate Period. Daily Rate Periods commence on each Business Day (the first such Business Day being the Daily Rate Conversion Date) and extend to, but do not include, the next succeeding Business Day.

Determination Time. The Remarketing Agent for a Series of Bonds will determine the Daily Rate for its respective Series of Bonds not later than 9:30 a.m., New York City time, on the commencement date of the Daily Rate Period to which it relates.

Weekly Rates

Rate Period. Weekly Rate Periods commence on Wednesday of each week and end on Tuesday of the following week, except as follows:

(i) in the case of a conversion to a Weekly Rate from a different Variable Rate, the initial Weekly Rate Period for such Bonds commences on the Weekly Rate Conversion Date and ends on the next succeeding Tuesday, and

(ii) in the case of a conversion from a Weekly Rate to a different Variable Rate or to the Fixed Rate, the last Weekly Rate Period prior to conversion ends on the last day immediately preceding the Conversion Date.

Determination Time. The Remarketing Agent for a Series of Bonds will determine the Weekly Rate for its respective Series of Bonds not later than 9:30 a.m., New York City time, on the commencement date of the Weekly Rate Period to which it relates or, if such date is not a Business Day, on the succeeding Business Day; except that in the case of a Weekly Rate established automatically upon the expiration of a Flexible Rate Period or a Long Rate Period, the Weekly Rate Period determination will be made not later than 4:00 p.m., New York City time, on the Business Day immediately preceding the commencement of the applicable Weekly Rate Period.

Monthly Rates

Rate Period. Monthly Rate Periods commence on the Monthly Rate Conversion Date, which is the first Business Day of a calendar month, subject to the provisions described under the caption "- Conversions between Variable Rates" below, and end on the day immediately preceding the first Business Day of the next calendar month.

Determination Time. The Remarketing Agent for a Series of Bonds will determine the Monthly Rate for its respective Series of Bonds not later than 4:00 p.m., New York City time, on a Business Day not earlier

6 than the 15th day of the month preceding the commencement of the Monthly Rate Period, nor later than the last Business Day immediately preceding the commencement of the Monthly Rate Period.

Flexible Rates

Rate Period. The Agency will determine the length of any Flexible Rate Period, which will be a period of not less than 1 day nor more than 270 days. Flexible Rate Periods commence on the Flexible Rate Conversion Date, which is the first Business Day of a calendar month, subject to the provisions described under the caption "- Conversions Between Variable Rates" below, and end on the last day of the Flexible Rate Period.

Determination Time. The Remarketing Agent for a Series of Bonds will determine the Flexible Rate for its respective Series of Bonds by not later than 9:30 a.m., New York City time, on the commencement date of the Flexible Rate Period.

Semiannual Rates

Rate Period. Semiannual Rate Periods commence initially on the Semiannual Rate Conversion Date, which will be a February 1 or August 1, whether or not a Business Day, subject to the provisions described under the caption "- Conversions between Variable Rates" below, and on each February 1 or August 1 thereafter; and end on the July 31 following such February 1, or the January 31 following such August 1, as the case may be.

Determination Time. The Remarketing Agent for a Series of Bonds will determine the Semiannual Rate for its respective Series of Bonds not later than 4:00 p.m., New York City time, on a Business Day not earlier than 35 days preceding the commencement of the Semiannual Rate Period nor later than the last Business Day immediately preceding the commencement date of the Semiannual Rate Period.

Long Rates

Rate Period. The Agency will determine the length of any Long Rate Period, which will be a period of one year or more. Long Rate Periods commence initially on the Long Rate Conversion Date, which will be the first Business Day of a calendar month, subject to the provisions described under the caption "­ Conversions between Variable Rates" below, and end on a January 31 or July 31. Subsequent Long Rate Periods will begin on a February 1 or August 1, whether or not a Business Day, and will be for a term of one year or any integral multiple of six months in excess of one year.

Determination Time. The Remarketing Agent for a Series of Bonds will determine the Long Rate for its respective Series of Bonds not more than 35 days nor less then 5 days preceding the commencement date of the Long Rate Period.

Variable Rate Terms Summary Table

The following table summarizes, among other things, the Interest Payment Dates, the date of interest rate determination, the Rate Period and its commencement and time requirements for the optional tender of Bonds, with respect to each Variable Rate. The information in the table is provided for the convenience of the Bondholders and is not meant to be comprehensive. Additional information on the Variable Rate Bonds follows the table.

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7 INTEREST RATE AND OPTIONAL TENDER SUMMARY TABLE FOR VARIABLE RATE BONDS

DAILY WEEKLY MONTHLY SEMIANNUAL LONG FLEXIBLE RATE RATE RATE RATE RATE RATE Interest First Business Day of First Business Day of First Business Day of February 1 and February 1 and First Business Day Payment Date each month, any date each month, any date each month, and the August 1 of each year August 1 of each year following Flexible on which Bonds are on which Bonds are maturity date commencing on the commencing on the Rate Period, and the subject to mandatory subject to mandatory first of those dates first of those dates maturity date tender for purchase, tender for purchase, occurring at least two occurring at least two and the maturity date and the maturity date months after the months after the Conversion Date Conversion Date Interest From the first Business From the first Business From the first From each Interest From each Interest From each Interest Payment Period Day of each month Day of each month Business Day of each Payment Date through Payment Date through Payment Date through through the day before through the day before month through the the day before the the day before the the day before the the first Business Day the first Business Day day before the first following Interest following Interest following Interest of the next month of the next month Business Day of the Payment Date Payment Date Payment Date next month Record Date Close of business on Close of business on Close of business on 15th day of the month 15th day of the month Close of business on the last day of the the last day of the the last day of the next preceding each next preceding each the last day of the Interest Payment Interest Payment Period Interest Payment Interest Payment Date Interest Payment Date Interest Payment Period before each before each Interest Period before each Period before each Interest Payment Date Payment Date Interest Payment Interest Payment Date Date Interest 3651366-day year, as 3651366-day year, as 3651366-day year, as 3651366-day year, as 360-day year, 3651366-day year, as Calculation applicable applicable applicable applicable consisting of twelve applicable Basis 30-day months Time and Date Not later than 9:30 Not later than 9:30 a.m. Not later than 4:00 Not later than 4:00 Not more than 35 Not later than 9:30 of Interest Rate a.m. on the on the commencement p.m. on the Business p.m. on a Business days nor less than 5 a.m. on the Determination commencement date of date of the Weekly Day not earlier than Day not earlier than days preceding the commencement date the Daily Rate Period Rate Period to which it the 15th day nor later 35 days nor later than commencement of the of a Flexible Rate to which it relates relates, or if not a than the last Business the last Business Day Long Rate Period Period Business Day, the Day of the month immediately following Business Day immediately preceding the preceding the commencement of the commencement of Semiannual Rate the Monthly Rate Period Period Rate Period Each Business Day Wednesday of each First Business Day of February 1 or August A period of one year A period not less than week through Tuesday a calendar month 1 through the or more as determined one day nor more than of the following week through the day following July 31 and by the Agency, 270 days as immediately January 31, initially commencing determined by the preceding the first respectively on the first Business Agency, commencing Business Day of the Day of a calendar on the first Business next calendar month month and ending on Day of a calendar a January 31 or month July 31, as the case maybe Commencemen Each Business Day Initially the Closing Initially, the first day On Conversion to a On Conversion to a Initially the first day t of Rate Period Date, and on each following the prior Semiannual Rate and Long Rate and following the prior Wednesday thereafter, Interest Payment thereafter on the next thereafter on the Interest Payment and following Period, and on the succeeding February 1 February 1 or August Period, and on the conversion from first Business Day of or August 1 1 immediately first Business Day of another Variable Rate, each calendar month succeeding the prior a calendar month the first day following thereafter Long Rate Period thereafter the prior Interest Payment Period, Optional Any Business Day Any Business Day The commencement NIA NIA NIA Tender Date date of the next succeeding Rate Period Notice Period Telephone or written Written notice not later Written notice not NIA NIA NIA for Optional notice by 11 :00 a.m. than 4:00 p.m. on any later than 4:00 p.m. Tender on purchase date Business Day not less on any Business Day than seven calendar not less than seven days prior to the calendar days prior to purchase date the purchase date Payment Time Not later than Not later than 3 :30 p.m. Not later than NIA NIA NIA and Date for 3:30 p.m. on the on the Purchase Date 3:30 p.m. on the Tendered Purchase Date Purchase Date Bonds Note: All time references given above refer to New York City time.

8 DETERMINATION OF VARIABLE INTEREST RATES

Each Remarketing Agent will determine the interest rate applicable to its respective Series of Bonds during any Variable Rate Period, and will give notice of each interest rate, as follows:

(i) The Remarketing Agent will determine the interest rate for such Variable Rate Period on the date or dates and at the time or times described in the preceding table, whichever is applicable, which will be effective for the applicable Rate Period.

(ii) The interest rate to be determined will be the lowest rate of interest not in excess of the Maximum Interest Rate that, in the judgment of the Remarketing Agent, would cause its respective Series of Bonds to have a market value equal to the principal amount thereof, plus accrued interest, under prevailing market conditions as of the date of determination. If the Remarketing Agent fails for any reason to determine or notify the Fiscal Agent of the interest rate for any Variable Rate Period when required under the Fiscal Agent Agreement, or if any interest rate for any Variable Rate Period is determined by a court of competent jurisdiction to be invalid or unenforceable, and if the Variable Rate Period for which that interest rate is to be in effect is less than or equal to six months, then the interest rate for that Variable Rate Period will equal the One-Month LIBOR on the date immediately preceding the date of determination (the "Reference Rate"). If no Reference Rate has been published at such time, or the Variable Rate Period to be in effect is for more than six months, the interest rate for such Variable Rate Period will be the same interest rate as was in effect for the immediately preceding Variable Rate Period.

(iii) The Fiscal Agent will inform the Owners of the Bonds and the Credit Provider of the rates determined upon request.

(iv) All determinations of interest rates are conclusive and binding upon the Agency, the Fiscal Agent, the Credit Provider and the Owners of the Bonds. The Agency, the Fiscal Agent, the Credit Provider and each Remarketing Agent will not be liable to any Owners for failure to give any notice described above or for failure of any Owners to receive any such notice.

CONVERSIONS BETWEEN VARIABLE RATES

At the option of the Agency, a Series of Bonds may be converted from one Variable Rate to another, as follows.

Variable Rate Conversion Date. Each Variable Rate Conversion Date will be the first day following an Interest Payment Period for the Variable Rate from which the Series of Bonds is to be converted. Interest will accrue on the Bonds at the new interest rate commencing on the Variable Rate Conversion Date, whether or not a Business Day. Any action required to be taken on the Variable Rate Conversion Date, if such day is not a Business Day, may be taken on the next succeeding Business Day.

Notice of Variable Rate Conversion. The Agency will give written notice of its intent to convert the Bonds between Variable Rates to the applicable Remarketing Agent, the Tender Agent, the Fiscal Agent and the Credit Provider not fewer than 30 nor more than 45 days before the proposed Conversion Date.

Not less than 15 days before the proposed Conversion Date, the Fiscal Agent will mail (by first class mail) a written notice of the proposed conversion to the Owners of the Bonds at their addresses as they appear on the registration books of the Fiscal Agent on the day on which notice is received by the Fiscal Agent from the Agency.

9 If the Agency does not elect in a timely fashion a new Variable Rate for a Series of Bonds, the Variable Rate then in effect for that Series will be deemed to be the Weekly Rate determined pursuant to the terms of the Fiscal Agent Agreement until changed by timely notice.

Conditions to Variable Rate Conversions. Any Variable Rate conversion (other than a conversion from a Daily Rate to a Weekly Rate and from a Weekly Rate to a Daily Rate) is subject to the following conditions:

(i) on or prior to the proposed Conversion Date, the Agency must deliver to the Fiscal Agent, the Credit Provider and the applicable Remarketing Agent an Opinion of Bond Counsel to the effect that the conversion is authorized under the Fiscal Agent Agreement,

(ii) in the case of conversions of a Series of Bonds to a Variable Rate for which the Required Stated Amount of the Credit Facility is greater than the Required Stated Amount for the Variable Rate in effect prior to the conversion, on or prior to the proposed Conversion Date, the Agency must deliver to the Fiscal Agent an Alternate Credit Facility in the Required Stated Amount as of the Conversion Date or written evidence that the stated amount of the Credit Facility has been increased to the new Required Stated Amount as of the Conversion Date,

(iii) in the case of conversions to a Flexible Rate, a Semiannual Rate or a Long Rate, on or prior to the proposed Conversion Date, the Agency must deliver to the Fiscal Agent written evidence from each Rating Agency then rating any Bonds that such ratings will not be lowered or withdrawn due to the conversion, and

(iv) in the case of conversions to a Flexible Rate, the Agency shall either (a) deliver to the Fiscal Agent written evidence from DIC to the effect that DIC will hold Bonds bearing interest at a Flexible Rate or (b) make arrangements to have new Bonds prepared and executed and registered in such names as shall be specified by DIC.

Automatic Conversion to Weekly Rate. If on the 35th day before the end of any Flexible Rate Period or Long Rate Period, the Agency has failed to specify a new Flexible Rate Period or a new Long Rate Period, as the case may be, or to exercise its option to convert the rate of interest on the applicable Series of Bonds to another Variable Rate, such Series of Bonds will be converted to bear interest at a Weekly Rate.

Cancellation of Noticed Conversion; Conversion to Weekly Rate. Notwithstanding the Agency's delivery of notice of the exercise of its option to effect a Variable Rate conversion, conversion to another Variable Rate shall not take effect if any of the following events occur:

(i) The Agency withdraws its notice of Variable Rate conversion not later than the Business Day preceding the date on which the interest rate at such Variable Rate is to be determined. The Agency is required to give notice of any withdrawal of a conversion to the Fiscal Agent, the applicable Remarketing Agent and the Credit Provider, by telephone, promptly confirmed in writing.

(ii) The applicable Remarketing Agent fails to determine the interest rate at such Variable Rate.

(iii) The notice to Owners required by the Fiscal Agent Agreement is not given when required.

(iv) The Agency fails to deliver to the Fiscal Agent, the Credit Provider and the applicable Remarketing Agent the opinion or information referred to in the Fiscal Agent Agreement.

(v) The applicable Remarketing Agent is the Beneficial Owner of any Bonds that are to be converted at the time of determination of the new Variable Rate.

10 (vi) The Agency fails to obtain a firm underwriting commitment with respect to a conversion to a Long Rate.

In any of such events, the interest on the Bonds will be converted to a Weekly Rate; however, the mandatory tender for purchase pursuant to the provisions of the Fiscal Agent Agreement will nevertheless be carried out if notice of the conversion has been given to the Owners. No cancellation of a conversion will constitute an Event of Default under the Fiscal Agent Agreement.

FIXED RA TE CONVERSION

At the option of the Agency (provided that a firm underwriting commitment for such Bonds has been obtained), a Series of Bonds may be converted to be payable at the Fixed Rate until final maturity or earlier redemption, as follows:

Fixed Rate Conversion Date. The Fixed Rate Date shall be an Interest Payment Date for the Variable Rate last in effect prior to the conversion to a Fixed Rate.

Notice of Fixed Rate Conversion. The Agency is required to give written notice of any such conversion to the Fiscal Agent, the applicable Remarketing Agent, the Tender Agent and the Credit Provider not fewer than 45 days prior to the proposed Fixed Rate Date. Such notice will specify the proposed Fixed Rate Date.

The Fiscal Agent is required to give notice of conversion and mandatory tender not less than 15 days before the proposed Fixed Rate Date by first class mail to the Owners of all outstanding Bonds of such Series at their addresses as they appear on the registration books of the Fiscal Agent on the date the Fiscal Agent receives the notice referred to in the immediately preceding paragraph.

Determination of Fixed Rate. Not more than 35 days nor less than 5 days before the Fixed Rate Date, the applicable Remarketing Agent will determine the Fixed Rate for the applicable Series of Bonds to be converted to the Fixed Rate and provide the Fixed Rate to the Fiscal Agent.

The Fixed Rate will be the rate of interest on a Series of Bonds on and after the Fixed Rate Date and will be the lowest rate of interest (not in excess of the maximum interest rate permitted by law) that, in the judgment of the applicable Remarketing Agent as of the date of determination and under prevailing market conditions, would cause such Series of Bonds to have a market value equal to the principal amount thereof plus interest accrued thereon to such date. The Fixed Rate determination will be conclusive and binding upon the Agency, the Fiscal Agent, the Credit Provider, the applicable Remarketing Agent and the Owners of the Bonds.

Cancellation of Noticed Fixed Rate Conversion; Conversion to Weekly Rate. Notwithstanding the Agency's delivery of notice of the exercise of its option to effect a Fixed Rate conversion, conversion to a Fixed Rate will not take effect if any of the following events occur:

(i) The Agency withdraws such notice of conversion not later than the Business Day preceding the date on which the Fixed Rate is to be determined. The Agency is required to give notice of the withdrawal of any conversion to the Fiscal Agent, the applicable Remarketing Agent, the Tender Agent and the Credit Provider, by telephone, promptly confirmed in writing.

(ii) The applicable Remarketing Agent fails to determine the Fixed Rate.

(iii) The notice to Owners required by the Fiscal Agent Agreement is not given when required.

11 (iv) The applicable Remarketing Agent is the Beneficial Owner of any Bonds that are to be converted to a Fixed Rate at the time of determination of the Fixed Rate.

(v) The Agency fails to deliver to the Fiscal Agent, the Credit Provider and such Remarketing Agent on the Fixed Rate Date (a) an Opinion of Bond Counsel to the effect that the conversion is authorized under the Fiscal Agent Agreement, and (b) written evidence from each Rating Agency then rating any Bonds that such ratings will not be lowered or withdrawn due to the convers10n.

In any of such events, such Bonds will be converted to bear interest at a Weekly Rate; however, the mandatory tender for purchase pursuant to the provisions of the Fiscal Agent Agreement will nevertheless be carried out if notice of conversion to the Fixed Rate has been given to the Owners. No cancellation of conversion to the Fixed Rate will constitute an Event of Default under the Fiscal Agent Agreement.

Unavailability of Credit Facility Following Fixed Rate Conversion. Unless the Agency and the Credit Provider otherwise agree in writing, from and after the Fixed Rate Date, the Letter of Credit will cease to be available with respect to any Series of Bonds converted to Fixed Rate.

REDEMPTION

Optional Redemption.

Daily or Weekly Rate. While any Daily Rate or Weekly Rate is in effect, the Bonds bearing interest at either rate are subject to optional redemption by the Agency from Available Moneys (but only with the consent of the Credit Provider if the source of Available Moneys is to be a draw on the Credit Facility), as a whole or in part on any Business Day, at a price equal to the principal amount thereof, plus accrued interest to the date fixed for redemption, without premium.

Monthly, Flexible or Semiannual Rate. While any Monthly, Flexible or Semiannual Rate is in effect, the Bonds bearing interest at such rates are subject to optional redemption by the Agency from Available Moneys (but only with the consent of the Credit Provider if the source of Available Moneys is to be a draw on the Credit Facility), as a whole on any date or in part on any Interest Payment Date, at a price equal to the principal amount thereof, plus accrued interest to the date fixed for redemption, without premium.

Long Rate and Fixed Rate. While any Long Rate is in effect and also after the Fixed Rate Date, the Bonds bearing interest at such rates are subject to optional redemption by the Agency from Available Moneys upon expiration of the applicable call protection period described below, as a whole on any Business Day or in part on any Interest Payment Date, at the redemption prices ( expressed as percentages of the principal amount) set forth below, declining by 0.5% on every Interest Payment Date after the initial redemption date until the redemption price equals 100% (but not less than 100% ), plus accrued interest to the date fixed for redemption:

12 Length of Long Rate in Initial Redemption Dates Years, or Years Remaining to ( anniversary of Long Rate Initial Redemption Maturity as of Fixed Rate Date Conversion Date or Fixed Rate Date) Price

Equal to or greater than 13 8th anniversary 102.0% but less than 30

Equal to or greater than 10 5th anniversary 101.5% but less than 13

Equal to or greater than 7 3rd anniversary 101.0% but less than 10

Equal to or greater than 4 3rd anniversary 100.5% but less than 7

Less than 4 Non-callable NIA

Notwithstanding the foregoing, upon any conversion of a Series of Bonds to a Long Rate or the Fixed Rate, the Agency may establish a different schedule of dates and prices for optional redemption.

Sinking Fund Redemption. The Series 2005C Bonds are subject to mandatory redemption from Sinking Account Payments, by lot, from a draw on the Credit Facility so long as there is a Credit Facility then in effect, and otherwise from available Subordinate Housing Set-Aside Amounts, on August 1 in each of the years and in the respective amounts as set forth below, at a redemption price equal to the principal amount thereof to be redeemed (without premium), together with interest accrued thereon to the date fixed for redemption, as set forth in the following schedule:

Series 2005C

Principal Amount Principal Amount Redemption Date to be Redeemed Redemption Date to be Redeemed

2006 $ 830,000 2021 $1,430,000 2007 860,000 2022 1,355,000 2008 895,000 2023 1,405,000 2009 930,000 2024 1,455,000 2010 960,000 2025 1,510,000 2011 1,000,000 2026 1,565,000 2012 1,035,000 2027 1,255,000 2013 1,070,000 2028 1,280,000 2014 1,115,000 2029 1,050,000 2015 1,155,000 2030 1,090,000 2016 1,195,000 2031 1,135,000 2017 1,240,000 2032 730,000 2018 1,285,000 2033 755,000 2019 1,340,000 2034 665,000 2020 1,385,000 2035t 100,000 t Maturity

The Series 2005D Bonds are subject to mandatory redemption from Sinking Account Payments, by lot, from a draw on the Credit Facility so long as there is a Credit Facility then in effect, and otherwise from available Subordinate Housing Set-Aside Amounts, on August 1 in each of the years and in the respective

13 amounts as set forth below, at a redemption price equal to the principal amount thereof to be redeemed (without premium), together with interest accrued thereon to the date fixed for redemption, as set forth in the following schedule:

Series 20050

Principal Amount Principal Amount Redemption Date to be Redeemed Redemption Date to be Redeemed

2006 $ 830,000 2021 $1,440,000 2007 860,000 2022 1,355,000 2008 890,000 2023 1,405,000 2009 930,000 2024 1,455,000 2010 960,000 2025 1,515,000 2011 995,000 2026 1,570,000 2012 1,030,000 2027 1,255,000 2013 1,075,000 2028 1,280,000 2014 1,110,000 2029 1,055,000 2015 1,150,000 2030 1,090,000 2016 1,190,000 2031 1,130,000 2017 1,245,000 2032 735,000 2018 1,285,000 2033 760,000 2019 1,330,000 2034 670,000 2020 1,380,000 2035t 100,000 t Maturity

Redemption at the Direction of a Credit Provider. For so long as a Credit Facility is in effect with respect to a Series of Bonds and the Credit Provider is not in default under the Credit Facility, that Series of Bonds is subject to redemption in whole, but not in part, at a redemption price equal to 100% of the principal amount thereof plus interest accrued to the date fixed for redemption, without premium, from a draw on the Credit Facility on the earliest Business Day for which notice of redemption can be timely given under the Fiscal Agent Agreement. This redemption will occur solely at the written direction of the Credit Provider upon the occurrence of an event of default under the Reimbursement Agreement.

Purchase ofBonds to be Redeemed. At any time prior to giving notice of redemption as provided in the Fiscal Agent Agreement, the Fiscal Agent may ( and is required to, upon receipt of a Request of Agency to such effect) apply Available Moneys on deposit in the Subordinate Housing Set-Aside Principal Account, or any other Available Moneys of the Agency, to the purchase of Bonds subject to mandatory redemption from Sinking Account Payments on the next succeeding Principal Payment Date. This purchase will be made at public or private sale, as and when and at such prices (including brokerage and other charges) as the Agency may in its discretion determine, except that the purchase price ( excluding accrued interest) may not exceed the principal amount of such Bonds subject to Sinking Account Payments on such Principal Payment Date.

Selection of Bonds for Redemption. Whenever less than all of the Bonds of a Series are called for redemption, the Fiscal Agent will select the Bonds to be redeemed from all Bonds of such Series or such given portion thereof in Authorized Denominations not previously called for redemption by lot in any manner that the Fiscal Agent in its sole discretion deems appropriate and fair; provided, however, that Bonds in any Series will be redeemed in the following order of priority (and by lot within each priority): first, any Bank Bonds; second, any Bonds that have been tendered to the Tender Agent on the date fixed for redemption, the notice of which tender is given to the Fiscal Agent prior to the selection of Bonds for such redemption; and third, any other Bonds of such Series.

14 Notice of Redemption. The Fiscal Agent will mail notice of redemption by first class mail, postage prepaid, not less than 15 calendar days ( 5 calendar days for a redemption at the direction of the Credit Provider) nor more than 60 calendar days before the redemption date, to (i) each of the Securities Depositories and the Information Services, (ii) the respective Owners of any Bonds designated for redemption at their addresses appearing on the Registration Books, (iii) the Credit Provider and (iv) the Remarketing Agent for the Bonds being redeemed.

Neither the failure to receive any redemption notice so mailed nor any defect in any redemption notice so mailed will affect the sufficiency of the proceedings for the redemption of Bonds or the cessation of accrual of interest thereon from and after the date fixed for redemption. Neither the Agency nor the Fiscal Agent will have any responsibility for any defect in the CUSIP number that appears on any Bond, check, advice of payment or redemption notice, and any such document may contain a statement to the effect that CUSIP numbers have been assigned by an independent service for convenience of reference and that neither the Agency nor the Fiscal Agent are liable for any inaccuracy in such numbers.

Rescission of Redemption. The Agency may rescind any optional redemption by written notice to the Fiscal Agent and the Credit Provider on or prior to the date fixed for redemption. Any notice of redemption ( other than a notice of sinking fund redemption or redemption at the direction of a Credit Provider) will be cancelled and annulled if for any reason funds are not available on the date fixed for redemption for the payment in full of the Bonds then called for redemption, or if the Credit Provider has not consented to such redemption if consent of the Credit Provider is required under the Fiscal Agent Agreement. Such cancellation will not constitute an event of default under the Fiscal Agent Agreement. The Fiscal Agent will mail notice of rescission of redemption in the same manner notice of redemption was originally provided.

Effect of Redemption. If notice of redemption is duly given as described above, and moneys for payment of the redemption price (including accrued interest to the redemption date) of the Bonds or portions thereof called for redemption are held by the Fiscal Agent on the redemption date, the Bonds or portions thereof called for redemption will become due and payable, interest on the Bonds called for redemption will cease to accrue, the Bonds or portions thereof called for redemption will cease to be entitled to any benefit or security under the Fiscal Agent Agreement, and the Owners of the Bonds called for redemption will have no rights in respect thereof except to receive payment of said redemption price (including accrued interest to the redemption date).

TENDER OF BONDS AT OPTION OF OWNER

Optional Tender for Purchase. The Beneficial Owners of Bonds of a Series bearing interest at a Daily Rate, a Weekly Rate or a Monthly Rate ( other than Bonds purchased with funds on deposit in a Credit Facility Proceeds Account of the Purchase Fund) may elect to have their Bonds, or portions thereof in amounts equal to Authorized Denominations (so long as any untendered portion is also an Authorized Denomination), purchased at a purchase price equal to the principal amount of such Bonds ( or portions thereof), plus accrued interest, if any, payable in immediately available funds, on the purchase dates and upon the giving of the notices set forth below for the various Bonds. (See also the table above entitled "Interest Rate and Optional Tender Summary Table of Variable Rate Bonds".)

Purchase Dates and Notice Requirements. Bonds tendered for purchase may be purchased on the following purchase dates and upon the giving of the following telephonic notice, confirmed in writing, or written notices meeting the further requirements described below:

Daily Rate. Variable Rate Bonds with interest payable at a Daily Rate may be tendered for purchase on any Business Day on or prior to conversion from a Daily Rate to a different Variable Rate, upon delivery of an irrevocable telephonic notice, confirmed in writing, or written notice of tender given to the Tender Agent, the Fiscal Agent and the applicable Remarketing Agent not later than 11 :00 a.m., New York City time, on the designated purchase date.

15 Weekly Rate. Variable Rate Bonds with interest payable at a Weekly Rate may be tendered for purchase on any Business Day on or prior to conversion from a Weekly Rate to a different Variable Rate, upon delivery of an irrevocable written notice of tender to the Tender Agent, the Fiscal Agent and the applicable Remarketing Agent not later than 4:00 p.m., New York City time, on a Business Day not less than seven calendar days prior to the designated purchase date, which date will be set forth in the tender notice.

Monthly Rate. Variable Rate Bonds with interest payable at a Monthly Rate may be tendered for purchase on the commencement date of the next succeeding Rate Period for such Bonds upon delivery of an irrevocable written notice of tender to the Tender Agent, the Fiscal Agent and the applicable Remarketing Agent not later than 4:00 p.m., New York City time, on a Business Day not less than seven calendar days prior to the designated purchase date.

Notice of Optional Tender. The following requirements apply to each notice of optional tender:

(i) If written, the notice must be delivered by the Owner to the Tender Agent and the applicable Remarketing Agent at their respective principal office and be in form satisfactory to the Tender Agent.

(ii) Whether delivered in writing or by telephone, each notice must state, (a) the principal amount of the Bond to which the notice relates and the CUSIP number of such Bond, (b) that the Beneficial Owner irrevocably demands purchase of such Bond or a specified portion thereof in an amount equal to an Authorized Denomination, ( c) the date on which such Bond or portion is to be purchased, and ( d) payment instructions with respect to the purchase price.

(iii) Whether delivered in writing or by telephone, each notice will automatically constitute the following:

(a) an irrevocable offer to sell the Bond ( or portion thereof) to which such notice relates on the purchase date to any purchaser selected by the Remarketing Agent, at a price equal to the principal amount of such Bond ( or portion thereof) plus any interest thereon accrued and unpaid as of the purchase date,

(b) an irrevocable authorization and instruction to the Tender Agent to effect transfer of such Bond ( or portion thereof) upon payment of such price to the Tender Agent on the purchase date,

( c) an irrevocable authorization and instruction to the Tender Agent to effect the exchange of the Bond to be purchased in whole or in part for other Bonds in an equal aggregate principal amount so as to facilitate the sale of such Bond ( or portion thereof to be purchased), and

( d) an acknowledgment that such Beneficial Owner will have no further rights with respect to such Bond ( or portion thereof) upon deposit of an amount equal to the purchase price thereof with the Tender Agent on the purchase date, except for the right of such Beneficial Owner, subject to the notice requirements of the Fiscal Agent Agreement, to receive such purchase price on the purchase date.

The determination of the Tender Agent or the applicable Remarketing Agent as to whether a notice of tender has been properly delivered pursuant to the Fiscal Agent Agreement will be conclusive and binding upon the Beneficial Owner. The Tender Agent or the applicable Remarketing Agent may waive any irregularity or nonconformity in any tender.

16 Delivery of Notices While Bonds Are in Book-Entry Form. During any period that the Bonds are issued in book entry only form,

(i) any notice of tender delivered pursuant to the Fiscal Agent Agreement must also (A) provide a written certification to the Tender Agent that the party delivering the notice is the Beneficial Owner of the Bonds referred to in the notice, and (B) if the Beneficial Owner is other than a Participant, identify the Participant through whom the Beneficial Owner will direct the transfer referred to below,

(ii) on or before the purchase date, the Beneficial Owner must direct ( or if the Beneficial Owner is not a Participant, cause its Participant to direct) the transfer of such Bonds on the records of DIC to the account of, or as directed by, the Fiscal Agent, and

(iii) it is not necessary for Bonds to be delivered on the date specified for purchase thereof, but such purchase will be made as if such Bonds had been so delivered, and the purchase price thereof will be paid to DIC.

See"- Book-Entry System" above and APPENDIX F - "DTC AND BOOK-ENTRY SYSTEM".

MANDATORY TENDER OF BONDS

Events Giving Rise to Mandatory Tender. All of the Bonds of a Series are subject to mandatory tender in whole at a purchase price equal to the principal amount thereof, plus accrued interest, if any, to the purchase date, under the following circumstances and on any of the following dates ( each a "Mandatory Tender Date"):

(i) on any Conversion Date (which includes, with respect to a Flexible Rate Period, a Semiannual Rate Period or a Long Rate Period, the first day that a particular Flexible Rate, Semiannual Rate or Long Rate becomes effective), other than on a Conversion Date on which the interest rate on the Bonds is converting from a Daily Rate to a Weekly Rate or from a Weekly Rate to a Daily Rate;

(ii) on any date the Agency delivers an Alternate Credit Facility;

( iii) on the 10th day ( or if such day is not a Business Day, on the immediately preceding Business Day) following receipt by the Fiscal Agent of written notice from the Credit Provider stating that either (a) an event of default has occurred under the Reimbursement Agreement and requesting that the Bonds be purchased under the Fiscal Agent Agreement, or (b) the stated interest portion of the Credit Facility has not been reinstated to the full stated amount thereof following a draw thereon to pay interest on the Bonds; and

(iv) on the last Business Day that is not less than 10 days before the Stated Expiration Date of any Credit Facility if an irrevocable commitment to provide an Alternate Credit Facility is not delivered to the Fiscal Agent on or prior to the Stated Expiration Date.

Neither the Bondholders nor the Beneficial Owners will have any right to elect to retain any Bonds subject to mandatory tender. The applicable Remarketing Agent shall offer for sale and use its best efforts to find purchasers for Bonds subject to mandatory tender; provided that any such remarketing following mandatory tender described in clause (iii) above will be undertaken only with the consent of the Credit Provider. The terms of any sale by such Remarketing Agent will provide for the payment of the purchase price of the tendered Bonds by the Remarketing Agent to the Tender Agent in immediately available funds at or before 10:30 a.m., New York City time, on the relevant purchase date. Notice of a mandatory tender will be given as set forth in the Fiscal Agent Agreement.

17 Purchase Fund. The Tender Agent will establish and maintain a special fund (the "Purchase Fund") and within that fund two separate accounts for each Series of Bonds designated as follows:

Series 2005C Credit Facility Proceeds Account Series 2005C Remarketing Proceeds Account Series 2005D Credit Facility Proceeds Account Series 2005D Remarketing Proceeds Account

The money in the Purchase Fund will be held in trust and applied solely as described in the Fiscal Agent Agreement. The Tender Agent will deposit all moneys (other than proceeds of drawings upon the Credit Facility) delivered to it for the purchase of Bonds into the respective Remarketing Proceeds Account for such Series of Bonds and hold all such moneys in trust for the exclusive benefit of the persons that have so delivered such moneys until the Bonds purchased with such moneys are delivered to it for the account of such persons and, thereafter, for the benefit of the Holders tendering such Bonds.

The Tender Agent will deposit all moneys delivered to it under the Fiscal Agent Agreement from drawings under the Credit Facility for the purchase of Bonds into the respective Credit Facility Proceeds Account and hold all such moneys in trust for the exclusive benefit of the Bondholders, who will deliver Bonds to it for purchase until the Bonds purchased with such moneys are delivered to it for the account of the Credit Provider.

Moneys in the Purchase Fund may not be commingled with other funds held by the Tender Agent and must remain uninvested. The Agency will not have any right, title or interest in or to any moneys held in the Purchase Fund or held by the Remarketing Agents.

Payment ofPurchase Price. At or before 3:30 p.m., New York City time, on the date set for purchase of tendered Bonds and upon receipt by the Tender Agent of 100% of the aggregate purchase price of the tendered Bonds, the Tender Agent will pay in immediately available funds, the purchase price of such Bonds to the Owners thereof at its principal office or by bank wire transfer. The Tender Agent will apply in order (i) moneys paid to it by the applicable Remarketing Agent as proceeds of the remarketing of such Bonds by the Remarketing Agent and (ii) moneys furnished to the Tender Agent by the Fiscal Agent and derived from drawings under the Credit Facility. If at 3:30 p.m. New York City time on any date of purchase of Bonds, any balance remains in the applicable Credit Facility Proceeds Account of the Purchase Fund in excess of any unsatisfied purchase obligation, such excess will be promptly returned to the Credit Provider. If the funds available for purchases of Bonds pursuant to the Fiscal Agent Agreement are inadequate for the purchase of all Bonds tendered on any purchase date, no purchase will be consummated and the Tender Agent will (a) return all tendered Bonds to the Holders thereof, and (b) return all moneys received for the purchase of such Bonds to the persons providing such moneys.

Delivery of Bonds. Subject to the procedures set forth in the Fiscal Agent Agreement, all Bonds to be purchased on any Optional Tender Date or Mandatory Tender Date are required to be delivered to the Principal Office of the Tender Agent at or before 12:00 noon, New York City time, on such purchase date.

If the Holder of any Bond ( or portion thereof) that is subject to purchase pursuant to this section fails to deliver such Bond to the Tender Agent for purchase on such purchase date, and if the Tender Agent is in receipt of the purchase price therefor, such Bond ( or portion thereof) will nevertheless be deemed purchased on the day fixed for purchase thereof and ownership of such Bond ( or portion thereof) will be transferred to the purchaser thereof as described below. Any Owner who fails to deliver such Bond for purchase will have no further rights thereunder except the right to receive the purchase price thereof upon presentation and surrender of said Bond to the Tender Agent. The Tender Agent will, as to any tendered Bonds that have not been delivered to it, (i) promptly notify the applicable Remarketing Agent of such nondelivery and (ii) instruct the Fiscal Agent to place a stop transfer against an appropriate amount of Bonds registered in the name of such Owner(s) on the Bond registration books. The Fiscal Agent will place such stop(s) commencing with the

18 lowest serial number Bond registered in the name of such Owner(s) until stop transfers have been placed against an appropriate amount of Bonds until the appropriate tendered Bonds are delivered to the Fiscal Agent. Upon such delivery, the Fiscal Agent will make any necessary adjustments to the Bond registration books.

On the date of purchase, the Fiscal Agent will direct the Tender Agent to authenticate and deliver all Bonds purchased on any purchase date as follows: (i) Bonds purchased and remarketed by the applicable Remarketing Agent will be registered in the name of DIC ( or its Nominee) or as otherwise directed by such Remarketing Agent and delivered to the Nominee for the account of the purchasers of such Bonds by 2:30 p.m., New York City time, in accordance with the instructions of such Remarketing Agent; and (ii) Bonds purchased with amounts furnished under the Credit Facility, if any, will be registered in the name of the Credit Provider.

Limitations on Purchases and Sales. No Bonds owned by or for the account of the Agency may be purchased from the proceeds of a Credit Facility, nor may a Remarketing Agent sell any Bonds to the Agency or any other obligor on the Bonds. The Agency agrees in the Fiscal Agent Agreement that it will not purchase any Bonds from a Remarketing Agent or otherwise. If an event of default under the Fiscal Agent Agreement occurs and is continuing, purchases of Bonds will be made only with the proceeds from a drawing under the Credit Facility and there may be no sales of Bonds. A Remarketing Agent will not sell Bonds if that Remarketing Agent receives written notice from the Credit Provider stating that an event of default under the Reimbursement Agreement has occurred and is continuing and requesting such Remarketing Agent not to remarket Bonds.

If Bonds purchased with the proceeds of a drawing on the Credit Facility are remarketed by a Remarketing Agent on behalf of the Credit Provider, the Fiscal Agent will re-register such Bonds in the name of or at the direction of the purchaser thereof only upon receipt from the Credit Provider of written notification that the principal and interest components of the Credit Facility have been reinstated to an amount equal to the aggregate principal amount of Bonds outstanding (less the principal amount of any Bank Bonds still being retained by the Credit Provider) plus an amount equal to interest on such Bonds (computed at the Maximum Interest Rate) for the period set forth in the Credit Facility.

THE REMARKETING AGENTS

The Agency has appointed Citigroup Global Markets Inc. as the initial Remarketing Agent for the Series 2005C Bonds and Banc of America Securities LLC as the initial Remarketing Agent for the Series 2005D Bonds. Each Remarketing Agent will enter into a separate Remarketing Agreement with the Agency, each dated as of June 1, 2005 (collectively, the "Remarketing Agreements"), which sets forth the respective duties of each Remarketing Agent.

Any Remarketing Agent appointed under the Fiscal Agent Agreement is required to be a commercial bank or trust company or a member of the National Association of Securities Dealers, Inc., and authorized by law to perform all the duties imposed upon it by the Fiscal Agent Agreement and its applicable Remarketing Agreement.

THE TENDER AGENT

Under the Fiscal Agent Agreement, the Tender Agent is required to agree, among other things, to:

(1) hold all Bonds delivered to it for purchase under the Fiscal Agent Agreement in trust for the exclusive benefit of the respective Owners that deliver such Bonds until moneys representing the purchase price of such Bonds are delivered to or for the account of or to the order of such Owners;

19 (2) hold all moneys, other than proceeds of drawings upon the Credit Facility, delivered to it under the Fiscal Agent Agreement for the purchase of Bonds in trust for the exclusive benefit of the persons that deliver such moneys until the Bonds purchased with such moneys are delivered to it for the account of such persons and, thereafter, for the benefit of the Owners tendering such Bonds;

(3) hold all moneys delivered to it under the Fiscal Agent Agreement from drawings under the Credit Facility for the purchase of Bonds in trust for the exclusive benefit of the Bondholders who deliver Bonds to it for purchase until the Bonds purchased with such moneys are delivered to the Tender Agent for the account of the Credit Provider;

(4) keep such books and records as is consistent with prudent industry practice and to make such books and records available at reasonable times and upon reasonable notice for inspection by the Agency, the Fiscal Agent, the Remarketing Agent, and the Credit Provider; and

( 5) to deliver Bonds registered in the name of the Credit Provider in accordance with written instructions received from the Credit Provider.

Any successor Tender Agent must be a commercial bank with trust powers or trust company duly organized under the laws of the United States of America or any state or territory thereof, having a combined capital stock, surplus and undivided profits of at least $10,000,000, and authorized by law to perform all duties imposed upon it under the Fiscal Agent Agreement. Each Tender Agent must have an office, agency or affiliate in New York, New York.

A Tender Agent may at any time resign and be discharged of its duties and obligations by giving at least 60-days notice to the Agency, the Fiscal Agent, the Credit Provider, the Remarketing Agents and all Owners of Variable Rate Bonds then outstanding. Any Tender Agent may be removed at any time by the Agency with the prior written approval of the Credit Provider, which approval will not be unreasonably withheld, upon notice to the Fiscal Agent and the Remarketing Agents. Any such resignation or removal will not take effect until the appointment of a successor Tender Agent, and the acceptance of such appointment by the successor Tender Agent. Successor Tender Agents may be appointed from time to time by the Agency with the prior written approval of the Credit Provider, which approval will not be unreasonably withheld. The Fiscal Agent will provide notice of such successor Tender Agent to all Owners of the Bonds. Upon the resignation or removal of a Tender Agent, such Tender Agent will deliver any Bonds and moneys held by it in such capacity to its successor. The Tender Agent may act through agents and affiliates in the performance of its duties and responsibilities under the Fiscal Agent Agreement.

SECURITY AND SOURCES OF PAYMENT FOR THE BONDS

GENERAL Tax Allocation Generally. The Redevelopment Law provides a means for financing redevelopment projects based upon an allocation of taxes collected within a project area. The taxable valuation of a project area last equalized prior to adoption of the redevelopment plan, or base roll, is established in the base year. Thereafter, except for any period during which the taxable valuation drops below the base year level, the taxing bodies receive the taxes produced by the levy of the then-current tax rate upon the base roll. Taxes collected upon any increase in taxable valuation over the base roll (with the exception of taxes derived from increases in the tax rate imposed by taxing agencies to support new bonded indebtedness) are allocated to the redevelopment agency and may be pledged to the repayment of any indebtedness incurred in financing or refinancing redevelopment. Redevelopment agencies themselves have no authority to levy property taxes and must look exclusively to such allocation of taxes. The Agency's ability to collect tax increment under the Redevelopment Law is limited not only by the time limits on the repayment of debt, but also by the cap on total tax increment to be received from the Merged Project Area.

20 As provided in the redevelopment plans, as amended, of certain of the project areas composing the Merged Project Area ( collectively referred to herein as the "Merged Project Area"; see "THE REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE - Merged Area Redevelopment Project"), and pursuant to Article 6 of Chapter 6 of the Redevelopment Law ( commencing with Section 33670) and Section 16 of Article XVI of the California Constitution, taxes ( other than taxes imposed by taxing agencies for the purpose of paying for bonded indebtedness approved by the voters after January 1, 1989) levied upon taxable property in the Merged Project Area each year by or for the benefit of the State of California and any city, county, city and county or other public corporation for fiscal years beginning after the effective dates of each of the respective redevelopment projects, are divided for each project area as follows:

(1) Taxing agencies: The portion equal to the amount of those taxes that have been produced by the current tax rate, applied to the taxable valuation of such property in the redevelopment project area as last equalized prior to the establishment of the redevelopment project, or base roll, is paid into the funds of those respective taxing agencies as taxes by or for said taxing agencies; and

(2) The Agency: The portion of said levied taxes each year in excess of the amount referred to in (1) above is allocated to, and when collected, is paid into the Special Fund of the Agency. Such excess is referred to as "Gross Tax Allocations".

Section 33677 of the Redevelopment Law provides that the calculation of the amount of tax revenues will be made separately for each of the project areas composing the Merged Project Area. As a result, a reduction in assessed value of property within any project area below the base year value for that project area will not cause a reduction in the tax revenues eligible for allocation to the Agency from any of the other project areas.

The Bonds are secured from the housing set-aside portions of tax increment received by the Agency on a subordinate basis to certain Senior Obligations of the Agency, as more fully described below.

PLEDGE OF SUBORDINATE HOUSING SET-ASIDE AMOUNTS

Subordinate Housing Set-Aside Amounts. The Bonds are special obligations of the Agency entitled to the benefits of the Fiscal Agent Agreement and are payable from and secured by a pledge of the "Subordinate Housing Set-Aside Amounts" received by the Agency and held by the City on behalf of the Agency, which will be irrevocably pledged to the punctual payment of the interest on and principal of and redemption premiums, if any, on the Bonds and any Parity Debt (as defined herein), and to the payment of all amounts owing to the Credit Provider. The Subordinate Housing Set-Aside Amounts and such other moneys held under the Fiscal Agent Agreement ( except as otherwise provided in the Fiscal Agent Agreement) may not be used for any other purpose while any of the Bonds remain outstanding, or any amount remains owing to any Credit Provider. This pledge constitutes a first lien on the Subordinate Housing Set-Aside Amounts and such other moneys held under the Fiscal Agent Agreement for the payment of the Bonds and any Parity Debt, and to the payment of all amounts owing to the Credit Provider.

The term "Subordinate Housing Set-Aside Amounts" means all of the following:

(i) prior to the discharge of the Senior Obligations in accordance with the Senior Lien Fiscal Agent Agreement, all amounts permitted to be released to the Agency from the lien of or the Housing Special Fund established by the Senior Lien Fiscal Agent Agreement,

(ii) following the discharge of the Senior Obligations in accordance with the Senior Lien Fiscal Agent Agreement, all Housing Set-Aside Amounts and all interest, profits and other income received from the investment of Housing Set-Aside Amounts,

21 (iii) all interest, profits and other income received from the investment of amounts held by the Fiscal Agent under the Fiscal Agent Agreement ( other than amounts in the Subordinate Housing Set­ Aside Rebate Fund) and

(iv) all other legally available revenues of the Agency.

Special Obligation of the Agency. THE BONDS ARE SPECIAL LIMITED OBLIGATIONS OF THE AGENCY AND ARE PAYABLE, AS TO INTEREST THEREON AND PRINCIPAL THEREOF, EXCLUSIVELY FROM SUBORDINATE HOUSING SET-ASIDE AMOUNTS, AND THE AGENCY IS NOT OBLIGATED TO PAY THEM EXCEPT FROM SUBORDINATE HOUSING SET-ASIDE AMOUNTS. ALL OF THE BONDS ARE EQUALLY SECURED BY A PLEDGE OF AND CHARGE AND LIEN UPON, ALL OF THE SUBORDINATE HOUSING SET-ASIDE AMOUNTS, AND THE SUBORDINATE HOUSING SET-ASIDE AMOUNTS CONSTITUTE A TRUST FUND FOR THE SECURITY AND PAYMENT OF THE INTEREST ON, THE PRINCIPAL OF AND PREMIUM, IF ANY, OF THE BONDS AND ANY OTHER PARITY DEBT ISSUED BY THE AGENCY IN ACCORDANCE WITH THE FISCAL AGENT AGREEMENT. THE BONDS ARE NOT A DEBT OF THE CITY, THE STATE OF CALIFORNIA (THE "STATE") OR ANY OF ITS POLITICAL SUBDIVISIONS OTHER THAN THE AGENCY, AND NEITHER THE CITY, THE STATE NOR ANY OF ITS POLITICAL SUBDIVISIONS OTHER THAN THE AGENCY IS LIABLE THEREFOR, NOR IN ANY EVENT SHALL THE BONDS BE PAYABLE OUT OF ANY FUNDS OR PROPERTIES OTHER THAN THE SUBORDINATE HOUSING SET-ASIDE AMOUNTS OF THE AGENCY AS PROVIDED IN THE FISCAL AGENT AGREEMENT. THE BONDS DO NOT CONSTITUTE AN INDEBTEDNESS WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION.

SUBORDINATION TO SENIOR OBLIGATIONS

The payment of debt service on the Bonds is subordinate, with respect to the housing set-aside portion of tax increment received by the Agency, to the payment of debt service on the Senior Obligations of the Agency that will be outstanding upon the issuance of the Bonds and the refunding of the Senior Obligations to be refunded simultaneously therewith, which will consist of the following:

(i) the Housing Set-Aside Tax Allocation Bonds, Series 1997E, issued in the principal amount of $17,045,000, of which $17,045,000 will remain outstanding; and

(ii) the Housing Set-Aside Taxable Tax Allocation Bonds, Series 20031, issued in the principal amount of $55,265,000, of which $52,930,000 will remain outstanding; and

(iii) the Housing Set-Aside Tax Allocation Bonds, Series 2003K, issued in the principal amount of $13,760,000, of which $12,830,000 will remain outstanding;

(iv) the Housing Set-Aside Tax-Exempt Refunding Tax Allocation Bonds, Series 2005A, which are expected to be issued in the principal amount of $10,445,000 simultaneously with the issuance of the Bonds; and

(v) the Housing Set-Aside Taxable Refunding Tax Allocation Bonds, Series 2005B, which are expected to be issued in the principal amount of $119,275,000 simultaneously with the issuance of the Bonds.

The Agency also has issued bonds and incurred other obligations payable from the tax increment it receives that is not required to be deposited in the Agency's low and moderate income housing fund. These other bonds and other obligations are not secured by, and are not payable from, the 20% of tax increment revenues required to be deposited in the Agency's low and moderate income housing fund.

22 For a further discussion of the outstanding debt of the Agency see "THE REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE".

FLOW OF FUNDS

Subordinate Housing Special Fund. The Fiscal Agent Agreement creates the Subordinate Housing Set-Aside Special Fund, to be held by the City on behalf of the Agency. For each Series of Bonds, three special trust accounts will be established and maintained in trust by the Fiscal Agent: the Subordinate Housing Set-Aside Interest Account, the Subordinate Housing Set-Aside Principal Account, and the Subordinate Housing Set-Aside Reserve Account.

The City ( on behalf of the Agency) is required to deposit all Subordinate Housing Set-Aside Amounts (and other moneys identified in the Fiscal Agent Agreement) in the Subordinate Housing Set-Aside Special Fund promptly upon receipt. (However, the total amount of Subordinate Housing Set-Aside Amounts deposited with the Fiscal Agent may not exceed the amount which, together with all moneys then on deposit with the Fiscal Agent, is sufficient to discharge all outstanding Bonds as provided in the Fiscal Agent Agreement, and to pay all amounts owing to all Credit Providers.)

Flow of Funds While Credit Facility is in Effect. Prior to the Stated Expiration Date of each Letter of Credit or earlier termination of a Letter of Credit, the Fiscal Agent will draw on each Letter of Credit in an amount and at such time as is required to pay in full when due, from such drawing, the principal of and interest on the related Series of Bonds on each Interest Payment Date, maturity date, Sinking Account Payment Date, other redemption date, upon the defeasance of such Bonds, and any date on which such Bonds are declared due and payable due to the occurrence of an event of default under the Fiscal Agent Agreement.

Prior to the Stated Expiration Date or earlier termination of a Letter of Credit, the Fiscal Agent will pay the principal of and interest on the related Series of Bonds when due and payable solely from moneys drawn under such Letter of Credit. The Fiscal Agent will also draw moneys under the Credit Facility for the purpose of paying the purchase price of any Bonds purchased pursuant to an optional or mandatory tender.

The Fiscal Agent will deposit moneys drawn under a Letter of Credit in the Credit Facility Bond Payment Account for the related Series of Bonds, which the Fiscal Agent will establish within the Credit Facility Fund. The Fiscal Agent will have the exclusive and sole right of withdrawal from the Credit Facility Fund and the accounts therein for the exclusive benefit of the Owners of the Bonds with respect to which such drawing is made. The Fiscal Agent will deposit all amounts to be deposited in the Credit Facility Fund in the applicable Series-designated Credit Facility Bond Payment Account to the extent such amounts are required to pay debt service on the related Series of Bonds (but only if a Credit Facility is then in effect with respect to such Bonds). Moneys in a Series-designated Credit Facility Bond Payment Account may be used only to pay debt service on the related Series of Bonds. Moneys in the Credit Facility Fund will be held in cash and shall not be invested.

Any amounts remaining on deposit in the Credit Facility Fund and not required for the purpose for which drawn will be promptly repaid to the applicable Credit Provider.

Flow of Funds Absent Credit Facility. The City ( on behalf of the Agency) will transfer moneys accumulated in the Subordinate Housing Set-Aside Special Fund to the Fiscal Agent for deposit in the following accounts in the following priority; provided, however, that to the extent that deposits have been made in any of these accounts from the proceeds of the sale of Bonds or otherwise, the deposits below need not be made:

Subordinate Housing Set-Aside Interest Accounts. The City ( on behalf of the Agency) will transfer funds from the Subordinate Housing Set-Aside Special Fund to the Fiscal Agent for deposit in the Subordinate Housing Set-Aside Interest Account for each Series on or before the Business Day next preceding each Interest

23 Payment Date, so that the balance in each Account equals the aggregate amount of interest becoming due and payable on the then outstanding Bonds in each related Series on the next succeeding Interest Payment Date.

The Fiscal Agent will use moneys in each Subordinate Housing Set-Aside Interest Account for the payment of interest on the related Series of Bonds as it becomes due and payable (including accrued interest on any Bonds purchased or redeemed prior to maturity) or to reimburse the related Credit Provider for drawings under its Credit Facility to pay interest on such Bonds, and to reimburse the related Credit Provider for interest accrued on any unreimbursed drawings on such Credit Facility to pay principal of or interest on Bonds, which reimbursements will be made after receipt by the Fiscal Agent of funds from drawings on such Credit Facility. The Fiscal Agent will also, if so directed in a Request of the Agency, use amounts on deposit in a Subordinate Housing Set-Aside Interest Account to pay the related Credit Provider any fees owed under the related Reimbursement Agreement. Any moneys in a Subordinate Housing Set-Aside Interest Account not then required for the payment or reimbursement of interest on the next succeeding Interest Payment Date or redemption date will be carried forward and applied to the payment of interest on any subsequent Interest Payment Date.

Subordinate Housing Set-Aside Principal Accounts. After the deposits have been made to each Subordinate Housing Set-Aside Interest Account, and on or before the Business Day next preceding each August 1, the City (on behalf of the Agency) shall transfer funds from the Subordinate Housing Set-Aside Special Fund to the Fiscal Agent for deposit in the Subordinate Housing Set-Aside Principal Account for each Series so that the balance in each Account equals the principal and sinking fund payments coming due on the then outstanding Bonds in each related Series on the next succeeding August 1.

The Fiscal Agent will use moneys in each Subordinate Housing Set-Aside Principal Account for the payment of principal and sinking fund payments on the related Series of Bonds as they become due, or to reimburse the related Credit Provider for drawings under the related Credit Facility to pay such principal or mandatory Sinking Account Payments on the Bonds, which reimbursements will be made after receipt by the Fiscal Agent of funds from drawings on such Credit Facility. Any moneys in a Subordinate Housing Set­ Aside Principal Account not then required for the payment of principal on any Principal Payment Date or Sinking Account Payment Date will be carried forward and applied to the payment of principal on any subsequent Principal Payment Date or Sinking Account Payment Date.

Subordinate Housing Set-Aside Reserve Accounts. On or before each Interest Payment Date, after making all required deposits into each Subordinate Housing Set-Aside Interest Account and each Subordinate Housing Set-Aside Principal Account, the City (on behalf of the Agency) will transfer, from available Subordinate Housing Set-Aside Amounts, to the Fiscal Agent for deposit to the Subordinate Housing Set­ Aside Reserve Account each Series of Bonds an amount, if necessary, in order to cause the amount on deposit in each account to equal the Reserve Requirement for the related Series of Bonds. The Reserve Requirement for the Bonds prior to the Fixed Rate Date is $0.

Substitution of Surety. In lieu of funding a Subordinate Housing Set-Aside Reserve Account with cash or Permitted Investments, the Agency, at its option, may fund all or any portion of the related Reserve Requirement by providing to the Fiscal Agent a Subordinate Housing Set-Aside Reserve Account Credit Facility, which is defined in the Fiscal Agent Agreement as (a) a letter of credit or line of credit provided by any entity which maintains a rating of Al or better from Moody's and a rating of A+ or better from S&P, or (b) an insurance policy, surety bond or other credit source provided by an entity which maintains a rating of Aa or better from Moody's and AA or better from S&P. Any Subordinate Housing Set-Aside Reserve Account Credit Facility must be approved in writing by the Credit Provider for the Series of Bonds to which the Subordinate Housing Set-Aside Reserve Account relates.

Use of Subordinate Housing Set-Aside Reserve Accounts. The Fiscal Agent will withdraw amounts in a Subordinate Housing Set-Aside Reserve Account solely for the purpose of (i) paying the principal (whether at maturity or upon prior redemption) of and interest on the related Bonds when due and payable to

24 the extent that moneys deposited in the related Subordinate Housing Set-Aside Interest Account or the Subordinate Housing Set-Aside Principal Account, respectively, are not sufficient for such purpose, or to reimburse the applicable Credit Provider for drawings under the related Credit Facility to pay the principal of and interest on the related Bonds, to the extent that moneys deposited in the Subordinate Housing Set-Aside Interest Account or the Subordinate Housing Set-Aside Principal Account, respectively, are not sufficient for such purpose; and (ii) making the final payment of principal of and interest on the related Bonds, or reimbursing the applicable Credit Provider for a draw under the related Credit Facility to make such final payment after receipt by the Fiscal Agent of funds from a drawing on such Credit Facility. Provided that no event of default has occurred under the Fiscal Agent Agreement or under any Reimbursement Agreement, any portion of a Subordinate Housing Set-Aside Reserve Account which is in excess of the Reserve Requirement for the related Bonds will, semiannually on or after February 1 and August 1 of each year, be transferred by the Fiscal Agent to the City on behalf of the Agency to be used for affordable housing projects.

On the date on which all Bonds of a Series are retired or provision made therefor pursuant to the Fiscal Agent Agreement, the Fiscal Agent will withdraw all moneys then on deposit in the related Subordinate Housing Set-Aside Reserve Account and pay them to the related Credit Provider in an amount (if any) then due and owing under the applicable Reimbursement Agreement to the extent certified by such Credit Provider to the Fiscal Agent, and will pay any remaining balance ( after payment of amounts due the Fiscal Agent under the Fiscal Agent Agreement) to the Agency.

Suspension of Subordinate Housing Set-Aside Deposits. The City, at the direction of the Agency, may cease its deposit of any additional Subordinate Housing Set-Aside Amounts during any Bond Year until commencement of the next Bond Year, and any moneys then on deposit in the Subordinate Housing Set-Aside Special Fund may be used in any manner provided by law for the purpose of aiding in financing one or more Housing Projects (including early redemption or purchase of Bonds) as permitted by the Law, if during any Bond Year all of the following conditions are met:

(i) Subordinate Housing Set-Aside Amounts remain in the Subordinate Housing Set-Aside Special Fund after providing ( or otherwise reserving) for all required deposits into each Subordinate Housing Set-Aside Interest Account and each Subordinate Housing Set-Aside Principal Account with respect to such Bond Year,

(ii) the amounts on deposit in the Subordinate Housing Set-Aside Reserve Accounts equal or exceed the related Reserve Requirements,

(iii) any Qualified Surety Bonds used to fund the Subordinate Housing Set-Aside Reserve Accounts are fully replenished and all interest on amounts advanced under such Qualified Surety Bonds has been paid to the provider thereof, and

(iv) the Agency is not in default under the Fiscal Agent Agreement.

ISSUANCE OF SENIOR 0BLIGA TIONS

The Fiscal Agent Agreement pursuant to which Senior Obligations of the Agency are issued (the "Senior Fiscal Agent Agreement") provides that the Agency may issue Senior Obligations if, among other conditions, the Agency delivers to the Fiscal Agent a certificate showing (i) Maximum Annual Debt Service with respect to the Senior Obligations reasonably expected to be outstanding, including the Senior Obligations then being delivered; (ii) for the then current Bond Year, the Housing Set-Aside Amounts to be received by the Agency based upon the most recent taxable valuation of property in the Merged Project Area provided by the appropriate officer of the County, plus supplemental assessments for projects that have been completed and will be reflected on the tax roll for the next succeeding Bond Year and projects the ownership of which has changed, all as confirmed by the appropriate officer of the County; and (iii) that Housing Set-Aside Amounts

25 referred to in clause (ii) above, are at least 1.15 times the Maximum Annual Debt Service referred to in clause (i).

PARITY DEBT

The Agency will covenant in the Fiscal Agent Agreement, so long as any of the Bonds are or any "Parity Debt" (as defined below) is outstanding, not to incur any liabilities or obligations or issue any obligations or securities payable in whole or in part from Subordinate Housing Set-Aside Amounts except the following:

Parity Debt. The Fiscal Agent Agreement defines "Parity Debt" as any indebtedness, installment sale obligation, lease obligation or other obligation of the Agency having an equal lien and charge upon the Subordinate Housing Set-Aside Amounts and therefore payable on a parity with the Bonds ( or any other outstanding Parity Debt), or an obligation of the Agency the regularly scheduled payments of which are payable on a parity with the Bonds ( or any other outstanding Parity Debt) (whether or not any Bonds are outstanding). The Agency may issue Parity Debt only if the conditions listed below are satisfied.

(1) The Parity Debt has been duly and legally authorized for any lawful purpose.

(2) The Parity Debt must be on such terms and conditions as may be set forth in a fiscal report agreement or similar agreement or resolution, which may be a Supplemental Agreement, which shall provide for Bonds substantially in accordance with the Fiscal Agent Agreement.

(3) No event of default under the Fiscal Agent Agreement may have occurred and then be continuing, as evidenced in a Certificate of the Agency filed with the Fiscal Agent.

(4) Unless such Parity Debt is for the refunding purposes specified in the Fiscal Agent Agreement, the Agency must obtain and place on file with the Fiscal Agent a Certificate of the Agency, upon which the Fiscal Agent may conclusively rely, certifying ( on the basis of calculations as of the date of delivery of such Parity Debt) that the following debt service coverage requirements will be met after the issuance of such Parity Debt: the amount of Housing Set-Aside Amounts, based upon the County's certified assessed valuation of property within the Project Area allocable to the Agency for the then current Fiscal Year in which such Parity Debt will become outstanding plus any Additional Housing Set-Aside Amounts based on a Consultant's Report must have been at least equal to 1.15 times the sum of (i) the amount of Maximum Annual Debt Service on all Senior Obligations (as determined pursuant to the Senior Lien Fiscal Agent Agreement), and (ii) Maximum Annual Debt Service on all Bonds then outstanding and the Parity Debt then proposed to be issued. For purposes of such determination, if the interest rate on the Bonds or the proposed Parity Debt is not fixed to maturity, the calculation of Maximum Annual Debt Service on the Bonds or the proposed Parity Debt shall be made at the end of the week immediately preceding the date of sale of the proposed Parity Debt.

For purposes of these conditions to issuing Parity Debt, outstanding Senior Obligations, Bonds or Parity Debt will not include any Senior Obligations, Bonds or Parity Debt proceeds of which are deposited in an escrow fund held by the Fiscal Agent, provided that the indenture or fiscal agent agreement authorizing the issuance of such Senior Obligations, Bonds or Parity Debt provides that: (i) such proceeds will be deposited or invested with or secured by an institution rated "AA-" or higher by S&P and "Aa3" or higher by Moody's at a rate of interest which, together with amounts made available by the agency from such Senior Obligations, Bonds or Parity Debt proceeds or otherwise, is at least sufficient to pay annual debt service on the foregoing respective Senior Obligations, Bonds or Parity Debt; (ii) moneys may be transferred from said escrow fund only if the requirements of the preceding paragraph will be met with respect to all outstanding respective Senior Obligations, Bonds or Parity Debt less a principal amount of such Senior Obligations, Bonds or Parity Debt which is equal to moneys on deposit in said escrow fund after each such transfer; and (iii) the respective

26 Senior Obligations, Bonds or Parity Debt will be redeemed from moneys remaining on deposit in said escrow fund at the expiration of a specified escrow period in such manner as may be determined by the Agency.

(5) The Agency must file with the Fiscal Agent an Opinion of Bond Counsel to the effect that such Parity Debt has been duly authorized in accordance with law.

(6) The Fiscal Agent must be designated as paying agent or trustee for such Parity Debt, if appropriate, and the Agency must deliver to the Fiscal Agent a transcript of the proceedings providing for the execution and delivery of such Parity Debt (but the Fiscal Agent will not be responsible for the validity or sufficiency of such proceedings or such Parity Debt).

(7) A certificate of the Agency that upon delivery of such Parity Debt the aggregate principal amount of Senior Obligations, the Bonds and Parity Debt then outstanding will not exceed the amount permitted by law or the Redevelopment Plans.

(8) Written evidence from each Rating Agency then rating any Bonds that such ratings will not be lowered or withdrawn due to the issuance of such Parity Debt.

Subordinate Debt. The Agency may issue obligations which are junior and subordinate to the payment of the principal, premium, interest and reserve fund requirements for the Bonds and any Parity Debt, and which subordinated obligations are payable as to principal, premium, interest and reserve fund requirements, if any, only out of Subordinate Housing Set-Aside Amounts after the prior payment of all amounts then required to be paid hereunder from Subordinate Housing Set-Aside Amounts for principal, premium, interest and reserve fund requirements for the Bonds and any Parity Debt, as the same become due and payable and at the times and in the manner as required in the Fiscal Agent Agreement. The Line of Credit qualifies as subordinate debt under the Fiscal Agent Agreement.

Refunding Bonds. The Agency may issue Refunding Bonds to refund all or a portion of the Bonds or any Parity Debt in accordance with the Fiscal Agent Agreement. See APPENDIX C - "Summary of the Fiscal Agent Agreement".

Obligations to Credit Providers. The Fiscal Agent Agreement specifically authorizes the Agency's obligations to the Credit Provider under the Reimbursement Agreements as Parity Debt.

THE CREDIT FACILITY

General. The Credit Facility initially delivered will consist of the Letters of Credit, which will be two irrevocable direct-pay letters of credit issued by the Credit Provider. For a description of the Credit Provider, see "THE CREDIT PROVIDER" below.

Each Letter of Credit will contain substantially the same terms and provisions as the other Letter of Credit but will secure only the Series of Bonds for which it is issued. Unless otherwise indicated, references under this heading to the "Bonds" means the Series of Bonds to which a Letter of Credit relates and to the "Letter of Credit" means the Letter of Credit issued for that Series of Bonds. References to other defined terms means those terms as they relate to that Series of Bonds and that Letter of Credit. The following is a brief summary of certain provisions of the initial Letter of Credit and does not purport to be comprehensive or definitive. All references herein to the Letter of Credit are qualified in their entirety by reference to the initial Letter of Credit.

27 Principal and Interest Coverage. Each Letter of Credit is an irrevocable direct-pay obligation of the Credit Provider. Each Letter of Credit permits the Fiscal Agent to draw up to an aggregate amount of $33,444,716 (the "Face Amount") as follows:

(i) in an amount not exceeding $33,075,000 with respect to the payment of the unpaid principal amount of the related Series of Bonds and

(ii) an amount not exceeding $369,716, which may be drawn with respect to the payment of accrued interest on the related Series of Bonds representing interest accruing during a period of 34 days on the principal amount of such Bonds (based on a 365-day year for actual days elapsed), at an interest rate up to 12% per annum.

Upon the request of the Fiscal Agent in connection with a conversion of the rate at which a Series of Bonds bears interest to a Daily Rate, Monthly Rate, Semiannual Rate, Flexible Rate or Long Rate, the Credit Provider will increase the interest coverage of the applicable Letter of Credit to a number of days, and based on a year of either 365 days and actual days elapsed or a year of 360 days consisting of twelve 30-day months, all as determined by Moody's Investors Service, Inc. ("Moody's") or, if Moody's no longer maintains a rating on the applicable Series of Bonds, such other nationally recognized rating service then maintaining a rating on that Series of Bonds, at a rate ofup 12% per annum.

The Fiscal Agent may make successive requests for changes in the interest coverage of the Letter of Credit, with the length of the accrual period depending on the rate at which the Bonds bear interest.

Permitted Letter of Credit Draws. The Fiscal Agent may draw upon the Letter of Credit to pay the following amounts:

(i) scheduled interest on the Bonds,

(ii) the principal of the Bonds at maturity, on any Sinking Account Payment Date or upon acceleration or defeasance,

(iii) the purchase price of Bonds tendered at the option of the holder thereof and not remarketed (see "THE BONDS - Tender of Bonds at Option of Owner") and

(iv) the purchase price of Bonds required to be tendered by the holder thereof in connection with the conversion of the interest rate on the Bonds and the failure to remarket such Bonds,

Notwithstanding the foregoing, the Fiscal Agent cannot draw funds under the Letter of Credit to pay principal of or interest on Bonds held by the Credit Provider or its transferees or Bonds held by the Agency.

Reductions in Face Amount; Reinstatement.

(i) Interest. After any drawing by the Fiscal Agent under the Letter of Credit to pay interest on the Bonds, the Interest Portion of the Letter of Credit will be reduced by the amount of such drawing. The Interest Portion of the Face Amount of the Letter of Credit will be automatically reinstated as of the close of business in New York, New York on the day of such drawing; provided, however, that such reinstatement shall not limit the Credit Provider's right to subsequently deliver to the Agency a notice that an Event of Default (as defined in the Reimbursement Agreement) has occurred and is continuing under the Reimbursement Agreement.

(ii) Principal. After any drawing by the Fiscal Agent under the Letter of Credit to pay principal on the Bonds, the Face Amount of the Letter of Credit will be automatically and permanently reduced by an amount equal to the sum of (a) the amount so drawn with respect to the payment of principal of

28 the Bonds, plus (b) an amount equal to the interest accruing on such amount at an interest rate of 12% per annum during (i) the Short-Term Period, if the Bonds so paid were at the time of payment bearing interest at Daily Rates, Weekly Rates or Monthly Rates, or (ii) the Long-Term Period, if the Bonds so paid were, at the time of payment, bearing interest at Flexible Rates, Semiannual Rates or Long Rates.

(iii) Optional Tender Purchase Price. After any drawing by the Fiscal Agent under the Letter of Credit to pay the purchase price of Bonds upon optional tender by the holder thereof, the Face Amount of the Letter of Credit will be automatically reduced by an amount equal to the sum of (a) the amount so drawn with respect to the payment of principal of the Bonds plus (b) an amount equal to the interest accruing on such amount at an interest rate of 12% per annum during (i) the Short-Term Period, if the Bonds so purchased were at the time of purchase bearing interest at Daily Rates, Weekly Rates or Monthly Rates or (ii) the Long-Term Period, if the Bonds so purchased were, at the time of purchase, bearing interest at Flexible Rates, Semiannual Rates or Long Rates.

The Face Amount will automatically be reinstated by an amount equal to the sum of (a) the principal amount of Bonds remarketed following a purchase with the proceeds of the draw on the Letter of Credit, and the Credit Provider's receipt of payment therefor, plus (b) an amount equal to interest, accruing on such amount at an interest rate of 12% per annum during (i) the Short-Term Period, if the Bonds so remarketed were at the time of purchase bearing interest at Daily Rates, Weekly Rates or Monthly Rates, or (ii) the Long-Term Period, if the Bonds so remarketed were, at the time of purchase, bearing interest at Flexible Rates, Semiannual Rates or Long Rates.

(iv) Mandatory Tender Purchase Price. After any drawing by the Fiscal Agent under the Letter of Credit for the purchase price of Bonds following a mandatory tender in connection with the conversion of the interest rate, the Face Amount of the Letter of Credit will be automatically reduced by an amount equal to the sum of (a) the amount so drawn with respect to the payment of principal of the Bonds plus (b) an amount equal to the interest accruing on such amount at an interest rate of 12% per annum during (i) the Short-Term Period, if the Bonds so purchased were bearing interest at the time of purchase at Daily Rates, Weekly Rates or Monthly Rates, or (ii) the Long-Term Period, if the Bonds so purchased were bearing interest at the time of purchase at Flexible Rates, Semiannual Rates or Long Rates.

The Face Amount will automatically be reinstated by an amount equal to (a) the principal amount of Bonds remarketed following a purchase with the proceeds of an the draw on the Letter of Credit, and the Credit Provider's receipt of payment therefor, plus (b) an amount equal to interest accruing on such amount at an interest rate of 12% per annum during (i) the Short-Term Period, if the Bonds so remarketed bear interest at the time of remarketing at Daily Rates, Weekly Rates or Monthly Rates, or (ii) the Long-Term Period, if the Bonds so remarketed bear interest at the time of remarketing at Flexible Rates, Semiannual Rates or Long Rates.

Only the Fiscal Agent can make a drawing under the Letter of Credit.

Expiration Date. Each Letter of Credit will expire on the earliest of:

(i) June 29, 2010, unless extended by the Credit Provider,

(ii) the date on which the Credit Provider honors a drawing which when added to all other drawings honored under the Letter of Credit and not subject to reinstatement in the aggregate equals the Face Amount (a "Final Payment Drawing"),

(iii) the day which is five days after the date of the Credit Provider's receipt of a certificate of the Fiscal Agent surrendering the Letter of Credit,

29 (iv) the day the Credit Provider delivers a certificate stating that the Credit Provider has purchased all Bonds required to be purchased following the mandatory tender of Bonds pursuant to the Fiscal Agent Agreement, and that an Event of Default (as defined in the Reimbursement Agreement) has occurred and that the Letter of Credit has expired, or

(v) the date on which the Fiscal Agent surrenders the Letter of Credit for cancellation.

Substitution of Alternate Credit Facility. The Fiscal Agent Agreement defines "Alternate Credit Facility" as any letter of credit, committed line of credit, bond purchase agreement, surety bond, bond insurance policy or other instrument, or any combination thereof, under the terms of which the Fiscal Agent is authorized to receive payment of an amount sufficient to pay when and as due under the Fiscal Agent Agreement (a) the principal of the Bonds of any Series, (b) the interest on the Bonds of any Series, and ( c) the purchase price of the Bonds of any Series upon the optional or mandatory tender thereof, including the principal amount and accrued interest thereon to the purchase date to the extent required to be paid under the Fiscal Agent Agreement. The general unsecured obligations of the financial institution or institutions which issues any Alternate Credit Facility (i) for any Series of Bonds, must have a short-term rating which is in the highest rating category (without regard to any modifier) of S&P or of Moody's and a long-term rating of A+ or better from S&P or of Al or better from Moody's, and (ii) for any other Series of Bonds, must have a short term rating which is in at least the second highest rating category (without regard to any modifier) of S&P or of Moody's and a long-term rating of A- or better from S&P or A3 or better from Moody's; provided, however, that neither such ratings shall be required to be better than the respective ratings then held by the general unsecured obligations of the related Credit Provider whose Credit Facility is then in effect with respect to such Series of Bonds.

The Agency may, at its option, provide for the delivery to the Fiscal Agent of an Alternate Credit Facility in substitution for the Credit Facility then in effect for any Series of Bonds at any of the following times:

(i) at any time with respect to Bonds of any Series bearing interest at a Weekly Rate or a Daily Rate,

(ii) on any Interest Payment Date with respect to Bonds of any Series bearing interest at a Monthly Rate, a Flexible Rate or a Semiannual Rate, and

(iii) on any Conversion Date with respect to any Series of Bonds.

The Agency will give written notice of its intention to exercise such option to the Fiscal Agent, the Remarketing Agent and the then-current related Credit Provider at least 45 days before the proposed effective date of such Alternate Credit Facility and the Fiscal Agent will give written notice of such intention to the Holders of such Bonds no less than 30 days before the proposed effective date of such Alternate Credit Facility.

On or before the date of the delivery of an Alternate Credit Facility to the Fiscal Agent, the Agency will furnish to the Fiscal Agent the following:

(i) an Opinion of Bond Counsel substantially to the effect that the delivery of such Alternate Credit Facility to the Fiscal Agent is authorized under the Fiscal Agent Agreement and complies with the terms of the Fiscal Agent Agreement,

(ii) an Opinion of Counsel addressed to the Fiscal Agent stating that the delivery of such Alternate Credit Facility will not adversely affect the exemption of any Bonds from registration under the Securities Act of 1933, as amended, or that the Bonds have been so registered,

30 (iii) an Opinion of Counsel addressed to the Fiscal Agent to substantially the same effect as the opinion delivered by counsel to the applicable Credit Provider in connection with the delivery of such Credit Facility being replaced, and

(iv) written direction to the Fiscal Agent to give notice to the Bondholders of mandatory tender on the proposed date of delivery of the Alternate Credit Facility in accordance with the procedures specified in the Fiscal Agent Agreement.

Such substitution may be made only if the related Credit Provider agrees that such Credit Facility may be drawn upon, or if such Credit Facility by its terms may be drawn upon, to pay the purchase price of the Bonds that will be tendered. The purchase price of Bonds tendered pursuant to a mandatory tender in connection with any such substitution will be paid from proceeds of a draw or draws on the Credit Facility being replaced, which Credit Facility will not be surrendered until such draw or draws, the proceeds of which are to be applied to pay such purchase price, has been honored.

Not fewer than 30 days prior to the proposed mandatory tender date, the Fiscal Agent will mail (by first class mail) a written notice thereof to the Holders of the related Bonds at their addresses as they appear on the registration books of the Fiscal Agent on the day on which notice is received by the Fiscal Agent from the Agency as provided above. The Fiscal Agent will also cause notice to be delivered to the Holders as soon as is practicable upon delivery of an Alternate Credit Facility under circumstances not requiring a mandatory tender, stating that a substitution has been effected and identifying the provider of such Alternate Credit Facility.

THE REIMBURSEMENT AGREEMENTS

Certain provisions of the Reimbursement Agreements are summarized below, and apply equally to the Reimbursement Agreement for the Series 2005C Bonds and the Reimbursement Agreement for the Series 2005D Bonds. This summary does not purport to be complete or definitive and is qualified in its entirety by reference to the full terms of each Reimbursement Agreement.

Reimbursement and Other Payments. Under each Reimbursement Agreement, the Agency agrees to reimburse the Credit Provider for all amounts drawn under the related Letter of Credit. In addition, the Agency will agree under each Reimbursement Agreement to pay the Credit Provider certain other amounts, including without limitation, a Credit Facility commission, Credit Facility drawing fees, transfer fees, increased costs, certain costs related to the preparation of the Reimbursement Agreement, Credit Facility and amendments and waivers thereof. Moreover, the Agency agrees to pay interest on all amounts unpaid when due under each Reimbursement Agreement.

Events of Default. The occurrence and continuance of the following events constitute "events of default" under each Reimbursement Agreement:

(1) the Agency fails to pay, when due, any amount payable under either Reimbursement Agreement; or

(2) the Agency fails to pay when due any amount payable under any Senior Obligation or Parity Debt; or

(3) the Agency or the City fails to observe or perform certain of the covenants contained in the Reimbursement Agreement (which include affirmative covenants relating to maintenance of existence, providing notices of default and material events, compliance with the act, and all negative covenants contained in the Reimbursement Agreement); or

(4) the Agency or the City fails to observe or perform any of its other covenants, agreements or obligations contained in the Reimbursement Agreement ( other than those covered in

31 paragraphs 1, 2 or 3 above) or in any Related Document or in any other document executed in connection with the Reimbursement Agreement for 30 days after the Credit Provider has given the Agency and the City written notice of such failure; or

(5) any representation, warranty, certification or statement made by the Agency or the City in the Reimbursement Agreement, any Related Document or in any report, certificate, financial statement, document or other instrument provided pursuant to the Reimbursement Agreement or any Related Document, at the time when made proves, in the judgment of the Credit Provider, to have been inaccurate and misleading in any material respect; or

(6) any of certain specified bankruptcy or insolvency events occur with respect to the Agency or the City; or

(7) any default or event of default occurs and continues under any agreement evidencing indebtedness of the Agency secured by a pledge of Tax Revenues and such default or event of default continues beyond any applicable grace period provided in any such agreement; or

(8) an event of default occurs under any of the Related Documents; or

(9) an event of default occurs under any other agreement between the Credit Provider and the Agency or the City; or

(10) a withdrawal or downgrade of the rating assigned to any Senior Obligations of the Agency by Standard & Poor's, Moody's or Fitch, as applicable, to BB+, Bal or BB+ respectively, or lower; or

(11) (i) the Reimbursement Agreement or any Related Document, or any material provision hereof or thereof, for any reason, ceases to be valid and binding on the Agency or the City, or in full force and effect, or is declared to be null and void by a final nonappealable judgment of court of competent jurisdiction, or the validity or enforceability of any such document or provision is contested by the Agency or the City or the Agency or the City denies that it has any or further liability or obligation under the Reimbursement Agreement or any Related Document, or (ii) the validity or enforceability of any such document or provision is contested by any governmental agency or authority having jurisdiction over the Agency or the City, as applicable, unless the Agency or the City, as applicable, is challenging such contest in good faith and by appropriate proceedings; or

(12) any pledge or security interest created by the Reimbursement Agreement or the Fiscal Agent Agreement to secure any amount due under the Reimbursement Agreement or under any Bonds fails to be fully enforceable with the priority required under the Reimbursement Agreement or the Fiscal Agent Agreement by reason of a final, nonappealable judgment of a court of competent jurisdiction; or

(13) a final non-appealable judgment or court order for the payment of money from any Housing Set-Aside Amounts is rendered against the Agency, and is not covered by insurance and continues unsatisfied and in effect for a period of 60 consecutive days without being vacated, discharged, satisfied, or stayed or bonded pending appeal.

Remedies. Upon the occurrence of an "event of default" under a Reimbursement Agreement, the Credit Provider may take the following actions:

(i) by notice to the Agency and the City declare all of the Agency's obligations due and payable, except that defaults arising out of the events described in paragraph ( 6) above shall occur automatically without action on the part of the Credit Provider,

32 (ii) exercise any rights and remedies available to the Credit Provider at law, equity or under the Reimbursement Agreement, any Related Document or other agreement,

(iii) by notice to the Fiscal Agent, require the Fiscal Agent to redeem all outstanding bonds, or

(iv) by notice to the Fiscal Agent and the Remarketing Agent, require the Fiscal Agent to purchase all outstanding Bonds and instruct the remarketing agent to cease remarketing the Bonds until further notice from the Credit Provider.

THE CREDIT PROVIDER

THE INFORMATION CONTAINED IN THIS SECTION HAS BEEN PROVIDED BY THE CREDIT PROVIDER AND HAS NOT BEEN REVIEWED BY THE AGENCY, THE CITY OR THE UNDERWRITERS, OR ANY OF THEIR COUNSELS. NEITHER THE AGENCY, THE CITY NOR THE UNDERWRITERS, NOR ANY OF THEIR COUNSELS, MAKE ANY REPRESENTATIONS AS TO THE ACCURACY OR SUFFICIENCY OF THIS INFORMATION.

The Credit Provider is the principal subsidiary of The Bank of New York Company, Inc. (NYSE: BK), a financial holding company (the "Company"). The Company provides a complete range of banking and other financial services to corporations and individuals worldwide through its basic businesses, namely, Securities Servicing and Global Payment Services, Private Client Services and Asset Management, Corporate Banking, Global Market Services, and Retail Banking.

The Credit Provider was founded in 1784 by Alexander Hamilton and is the nation's oldest bank. The Credit Provider is a state chartered New York banking corporation and a member of the Federal Reserve System. Its business is subject to examination and regulation by federal and state banking authorities.

The Credit Provider has long-term senior debt ratings of "AA-"/"Aa2" and short-term ratings of "Al +"/"Pl" from Standard & Poor's Ratings Services and Moody's Investors Service, Inc., respectively.

The Credit Provider's principal office is located at One Wall Street, New York, New York 10286. A copy of the most recent annual report and 10-K of the Company may be obtained from the Credit Provider's Public Relations Department, One Wall Street, 31st Floor, (212) 635-1569.

FACTORS AFFECTING TAX ALLOCATION FINANCING

PROPERTY TAX COLLECTION PROCEDURES

Classifications. In California, property which is subject to ad valorem taxes is classified as "secured" or "unsecured". Secured and unsecured property are entered on separate parts of the assessment roll maintained by the county assessor. The secured classification includes property on which any property tax levied by a county becomes a lien on that property. A tax levied on unsecured property does not become a lien against the unsecured property, but may become a lien on certain other property owned by the taxpayer. Every tax which becomes a lien on secured property has priority over all other liens on the secured property, regardless of the time of the creation of such other liens.

Generally, ad valorem taxes are collected by a county (the "Taxing Authority") for the benefit of the various entities ( cities, school districts and special districts) that share in the ad valorem tax ( each a taxing entity) and redevelopment agencies eligible to receive tax increment revenues.

Collections. Secured and unsecured property are entered on separate parts of the assessment roll maintained by the county assessor. The method of collecting delinquent taxes is substantially different for the two classifications of property. The taxing authority has three ways of collecting unsecured personal property

33 taxes: (1) a civil action against the taxpayer; (2) filing a certificate in the office of the county clerk specifying certain facts in order to obtain a lien on certain property of the taxpayer; and (3) seizure and sale of the personal property, improvement or possessory interests belonging or assessed to the assessee. The exclusive means of enforcing the payment of delinquent taxes with respect to property on the secured roll is the sale of property securing the taxes to the State for the amount of taxes which are delinquent.

Penalty. A 10% penalty is added to delinquent taxes which have been levied with respect to property on the secured roll. In addition, on or about June 30 of the fiscal year, property on the secured roll on which taxes are delinquent is declared in default by operation of law and declaration of the tax collector. Such property may thereafter be redeemed by payment of the delinquent taxes and a delinquency penalty, plus a redemption penalty of 1.5% per month to the time of redemption. If taxes are unpaid for a period of five years or more, the property is subject to sale by the county tax collector. A 10% penalty also applies to delinquent taxes on property on unsecured roll, and further, an additional penalty of 1.5% per month accrues with respect to such taxes beginning on varying dates related to the tax bill mailing date. It is the County's practice to retain all such penalties and interest.

Delinquencies. The County currently allocates property taxes to the Agency based on 100% of the tax levy, notwithstanding any delinquencies. However, there can be no assurance the County will continue such practice.

The valuation of property is determined as of the January 1 lien date as equalized in August of each year and equal installments of taxes levied upon secured property become delinquent on the following December 10 and April 10. Taxes on unsecured property are due March 1 and become delinquent August 31.

Supplemental Assessments. A bill enacted in 1983, Senate Bill ("SB") 813 (Statutes of 1983, Chapter 498), provides for the supplemental assessment and taxation of property upon the occurrence of a change in ownership or completion of new construction. Previously, statutes enabled the assessment of such changes only as of the next tax lien date following the change and thus delayed the realization of increased property taxes from the new assessments. As enacted, Chapter 498 allows for increased revenue to redevelopment agencies to the extent that supplemental assessments of new construction or changes of ownership occur within the boundaries of redevelopment projects subsequent to the January l lien date, as equalized in August. To the extent such supplemental assessments occur within the Merged Project Area, Agency tax increment revenues may mcrease.

Property Tax Administrative Costs. In 1990, the Legislature enacted SB 2557 (Statutes of 1990, Chapter 466) which allows counties to charge fees to local jurisdictions (including redevelopment agencies) for the cost of preparing and overseeing the tax roll. For Fiscal Year 2004-05 the estimated administrative fees being charged to the Agency by the County for such services is $1.7 million, which is approximately 1.13% of the total Gross Tax Allocations for the Merged Project Area. These fees are not payable from and do not reduce the Subordinate Housing Set-Aside Amounts pledged to the payment of the Bonds.

Statutory Pass-through Payments. In adopting the provisions of AB 1342 extending the time limit on debt incurrence (see "REDEVELOPMENT TIME LIMITS" below), the Agency triggered statutory tax sharing, commencing with Fiscal Year 2002-03, with those taxing entities that do not have tax sharing agreements with the Agency. As the County is the only taxing entity that has a tax sharing agreement with the Agency, all of the Agency's tax-sharing entities except the County will receive statutory pass-through payments.

Statutory tax sharing will be calculated based on the increase in assessed valuation after the year in which the limitation would otherwise have become effective, and, unless subordinated by the entities receiving the tax sharing payments, is senior to the obligations of a redevelopment agency with respect to bonded indebtedness. The Agency has not obtained, and does not expect to obtain, the subordination of such statutory tax sharing payments to the Agency's obligations with respect to the Bonds. Based on calculations performed by the County and Urban Analytics, LLC, the Agency's fiscal consultant (the "Fiscal Consultant"), the

34 Agency's pass-through payment obligation to the taxing entities eligible for statutory payments for Fiscal Year 2004-05 is expected to be approximately $664,000. Pursuant to the formulas under AB 1342, statutory pass­ through payments will increase in future years.

Because the Housing Set-Aside Amounts represent 20% of the Agency's Gross Tax Allocations, the amount of Subordinate Housing Set-Aside Amounts should not be affected by any increase in statutory pass­ through payments.

Filing of Statement of Indebtedness. Under the Redevelopment Law, the Agency must file with the County a statement of indebtedness for the Merged Project Area by October 1 of each year. As described below, the statement of indebtedness controls the amount of Tax Increment Revenue that will be paid to the Agency in each fiscal year. Each statement of indebtedness is filed on a form prescribed by the State Controller and specifies, among other things: (i) the total amount of principal and interest payable on all loans, advances or indebtedness (including the Bonds and all Parity Debt) (the "Debt"), both over the life of the Debt and for the current fiscal year, and (ii) the amount of "available revenue" as of the end of the previous fiscal year. "Available Revenue" is calculated by subtracting the total payments on Debt during the previous fiscal year from the total revenues (both Tax Increment Revenues and other revenues) received during the previous fiscal year, plus any carry forward from the prior fiscal year.

The County may pay Tax Increment Revenue to the Agency in any fiscal year only to the extent that the total remaining principal and interest on all Debt exceeds the amount of available revenues as shown on the statement of indebtedness. The statement of indebtedness constitutes prima facie evidence of the indebtedness of the Agency; however, the County may dispute the statement of indebtedness in certain cases within certain time limits established under State law. Any such dispute may be adjudicated in court, but only the amount of the Debt - not its validity (or any related contract or expenditures) - may be contested. No challenge can be made to payments to a trustee or fiscal agent in connection with a bond issue or payments to a public agency in connection with payments by that public agency with respect to a lease or a bond issue.

PROPERTY TAX LIMITATIONS: ARTICLE XIIIA OF THE CALIFORNIA CONSTITUTION

California voters, on June 6, 1978, approved an amendment ( commonly known as both Proposition 13 and the Jarvis-Gann Initiative) to the California Constitution. This amendment, which added Article XIIIA to the California Constitution, among other things affects the valuation of real property for the purpose of taxation in that it defines the full cash property value to mean "the county assessor's valuation of real property as shown on the 1975-76 tax roll under 'full cash value', or thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment". The full cash value may be adjusted annually to reflect inflation at a rate not to exceed 2% per year, or reduction in the consumer price index or comparable local data at a rate not to exceed 2% per year, or reduced in the event of declining property value caused by damage, destruction or other factors including a general economic downturn. The amendment further limits the amount of any ad valorem tax on real property to one percent of the full cash value except that additional taxes may be levied to pay debt service on indebtedness approved by the voters prior to July 1, 1978, and bonded indebtedness for the acquisition or improvement of real property approved on or after July 1, 1978 by two-thirds of the votes cast by the voters voting on the proposition.

Both the United States Supreme Court and the California Supreme Court have upheld the validity of Article XIIIA. While it appears that the constitutional challenges to Article XIIIA are exhausted, the Agency cannot predict what impact any future developments might have on the Agency's receipt of tax increment revenues.

In the general election held November 4, 1986, voters of the State approved two measures, Propositions 58 and 60, which further amended Article XIIIA. Proposition 58 amended Article XIIIA to provide that the terms "purchase" and "change of ownership", for the purposes of determining full cash value of property under Article XIIIA, do not include the purchase or transfer of (1) real property between spouses

35 and (2) the principal residence and the first $1,000,000 of other property between parents and children. This amendment to Article XIIIA may reduce the rate of growth of local property tax revenues.

Proposition 60 amended Article XIIIA to permit the Legislature to allow persons over the age of 55 who sell their residence and buy or build another of equal or lesser value within two years in the same county, to transfer the old residence assessed value to the new residence. As a result of the Legislature's action, the growth of property tax revenues may decline.

Legislation enacted by the Legislature to implement Article XIIIA provides that all taxable property is shown at full assessed value as described above. In conformity with this procedure, all taxable property value included in this Official Statement is shown at 100% of assessed value and all general tax rates reflect the $1 per $100 of taxable value (except as noted). Tax rates for voter-approved bonded indebtedness and pension liabilities are also applied to 100% of assessed value.

ARTICLE XIIIB OF THE CALIFORNIA CONSTITUTION

On November 6, 1979, California voters approved Proposition 4, the Gann Initiative, which added Article XIIIB to the California Constitution. The principal effect of Article XIIIB is to limit the annual appropriations of the State and any city, county, school district, authority or other political subdivision of the State to the level of appropriations for the prior fiscal year, as adjusted for changes in the cost of living, population and services rendered by the government entity. The starting point for establishing such appropriation limit is fiscal year 1978-79 and the limit is to be adjusted annually to reflect changes in population, consumer prices and certain increases in the cost of services provided by these public agencies.

Appropriations subject to Article XIIIB include generally the proceeds of taxes levied by the State or other entity of local government, exclusive of certain State subventions, refunds of taxes, benefit payments from retirement, unemployment insurance and disability insurance funds.

Effective September 30, 1980, the Legislature added Section 33678 to the Redevelopment Law which provides that the allocation of taxes to a redevelopment agency for the purpose of paying principal of, or interest on, loans, advances, or indebtedness will not be deemed the receipt by the agency of proceeds of taxes levied by or on behalf of the agency within the meaning of Article XIIIB or any statutory provision enacted in implementation thereof.

The constitutionality of Section 33678 has been upheld by the Second and Fourth District Courts of Appeal in two decisions: Bell Redevelopment Agency v. Woosely and Brown v. the Redevelopment Agency of the City ofSanta Ana.

ARTICLES XIIIC AND XIIID OF THE CALIFORNIA CONSTITUTION

At the election held on November 5, 1996, Proposition 218 was passed by the voters of California. The initiative added Articles XIIIC and XIIID to the California Constitution. Provisions in the two articles affect the ability of local government to raise revenues. The Bonds are secured by sources of revenues that are not subject to limitation by Proposition 218.

PROPOSITION 87

On November 8, 1988, the voters of the State approved Proposition 87, which amended Article XVI, Section 16 of the California Constitution to provide that property tax revenue attributable to the imposition of taxes on property within a redevelopment project area for the purpose of paying debt service on bonded indebtedness issued by a taxing entity (not the Agency) and approved by the voters of the taxing entity after January 1, 1989 will be allocated solely to the payment of such indebtedness and not to redevelopment agencies. Because this provision is not retroactive, such bonded indebtedness approved prior to January 1,

36 1989 will continue to provide tax overrides to the Agency so long as such indebtedness remains outstanding. See "THE REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE - Tax Rates".

UNITARY PROPERTY

Assembly Bill ("AB") 2890 (Statutes of 1986, Chapter 1457) provides that, commencing with fiscal year 1988-89, assessed value derived from State-assessed unitary property (consisting mostly of operational property owned by utility companies) is to be allocated county-wide as follows: (i) each tax rate area will receive that same amount from each assessed utility received in the previous fiscal year unless the applicable county-wide values are insufficient to do so, in which case values will be allocated to each tax rate area on a pro-rata basis; and (ii) if values to be allocated are greater than in the previous fiscal year, each tax rate area will receive a pro-rata share of the increase from each assessed utility according to a specified formula. Additionally, the lien date on State-assessed property is changed from March 1 to January 1.

AB 454 (Statutes of 1987, Chapter 921) further modifies chapter 1457 regarding the distribution of tax revenues derived from property assessed by the State Board of Equalization. Chapter 921 provides for the consolidation of all State-assessed property, except for regulated railroad property, into a single tax rate area in each county. Chapter 921 further provides for a new method of establishing tax rates on State-assessed property and distribution of property tax revenue derived from State-assessed property to taxing jurisdictions within each county in accordance with a new formula. Railroads will continue to be assessed and revenues allocated to all tax rate areas where railroad property is sited.

Chapters 1457 and 921 provide for redevelopment agencies to receive their appropriate share of revenue generated from the property assessed by the State Board of Equalization. The Agency's collection of tax increment revenue from such State-assessed property for Fiscal Year 2003-04 was approximately $3.7 million. The Agency is estimating approximately $2.3 million in unitary taxes in Fiscal Year 2004-05.

TAX INCREMENT REVENUE LIMITATION

The Agency was required in 1986 to adopt a limit on the amount of tax increment revenue the Agency may receive with respect to the Merged Project Area. The maximum amount of tax increment revenue the Agency may receive from the Merged Project Area was set at $7.6 billion. Based on Agency records, as of June 30, 2004, the Agency has received approximately $1.9 billion of tax increment revenue from the Merged Project Area. The Agency expects to receive approximately $150 million in additional increment by June 30, 2005. Depending on the growth rate of assessed value of property in the Merged Project Area, the Merged Project Area may reach its tax increment revenue limitation before the Bonds mature. The Fiscal Consultant has prepared a tax increment projection and sensitivity analysis that projects the Agency's Merged Project Area tax increment revenues over time, assuming various increment growth rates. With increment projected using an annual growth rate of two percent, the projection shows that the Agency would reach its tax increment cap in Fiscal Year 2039-40. With increment projected using an annual growth rate of five percent, the projection shows that the Agency would reach its tax increment cap in Fiscal Year 2026-27. With increment projected using an annual growth rate of seven percent, the projection shows that the Agency would reach its tax increment cap in Fiscal Year 2023-24. See APPENDIX D - "REPORT OF FISCAL CONSULTANT - Tax Increment Cap" and "- Tax Increment Projection and Sensitivity Analysis".

In the event that the Agency reaches its tax increment cap, it would not collect any additional tax increment to pay debt service on the Bonds. However, in the Senior Fiscal Agent Agreement, the Agency covenants, commencing December 1, 2005, to calculate annually the remaining amount available under its tax increment revenue limitation and the amount of obligations that exist to be paid from tax increment revenue, including obligations payable from the Housing Set-Aside Amounts. If, based on such review, the allocation of Housing Set-Aside Amounts to the Agency in any of the next three succeeding fiscal years will cause an amount equal to 90% of the Housing Set-Aside Amounts remaining to be allocated under the Merged Project Area Redevelopment Plans to fall below the obligations payable from the Housing Set-Aside Amounts, the

37 Agency will be obligated either to use Housing Set-Aside Amounts not needed to pay such obligations to retire or defease Senior Obligations or to adopt a plan approved by a qualified redevelopment consultant which demonstrates the Agency's continuing ability to pay debt service on the Senior Obligations.

REDEVELOPMENT TIME LIMITS

In 1993, the State Legislature passed AB 1290, which, among other things, required redevelopment agencies to adopt time limits in each redevelopment plan specifying: (1) the last date to incur debt for a redevelopment project; (2) the last date to undertake redevelopment activity within a project area; and (3) the last date to collect tax increment revenue from a project area to repay debt. Pursuant to AB 1290, which took effect January 1, 1994, the San Jose City Council adopted ordinances amending each redevelopment plan in the Merged Project Area to impose limits on plan activity in each area, as well as a date past which tax increment revenue could not be collected.

In 2001, the California Legislature enacted SB 211, Chapter 741, Statutes 2001, effective January 1, 2002 ("SB 211 "), which authorized, among other things, the deletion by ordinance of the legislative body of the AB 1290 limitation on incurring indebtedness contained in a redevelopment plan adopted prior to January 1, 1994. On November 5, 2002, the City Council adopted an ordinance, pursuant to the authorization contained in SB 211, deleting the limit on the Agency's authority to incur loans, advances and indebtedness with respect to the Merged Project Area for redevelopment plans adopted prior to January 1, 1994.

Senate Bill 1045, Chapter 260, Statutes 2003, effective September 1, 2003 ("SB 1045") provides, among other things, that, for the purpose of determining whether the limit on the tax increment revenue that may be allocated to the Agency has been reached, the aggregate amount of Education Revenue Augmentation Fund payments made by the Agency in prior Fiscal Years from tax increment revenue may be deducted from the amount of tax increment revenue deemed to have been received by the Agency. SB 1045 also permits the redevelopment plan to be amended to add one year to the duration of the plan and to the period for collection of tax increment revenues and the repayment of debt. The San Jose City Council has amended each of the redevelopment plans within the Merged Project Area to add one year to each of the redevelopment plans' effectiveness dates and tax increment collection dates.

Legislation passed in 2004 (SB 1096) permits redevelopment agencies to extend their ability to collect tax increment in certain project areas by one year for each ERAF payment made in 2004-05 and 2005-06. The extensions apply by right to plans with existing limits on the effectiveness of the plan that are less than 10 years from the last day of the fiscal year in which the ERAF payment is made. Plans that have effective dates expiring between 10 and 20 years from the last day of the fiscal year of the ERAF payment may also be extended by one year, but only if certain findings are made by the City Council. Those findings are: (1) Compliance with the 20% Housing Set-Aside requirements; (2) Compliance with the Implementation Plan requirements of the Redevelopment Law; (3) Compliance with the inclusionary housing and replacement housing requirements of the Redevelopment Law; and (4) that the Agency is not subject to sanctions for having an excess surplus in the 20% Housing Set-Aside Fund. All Agency tax increment-producing plans, with the exception of Almaden Gateway and Monterey Corridor, qualify for the extension. On March 29, 2005, the City Council approved ordinances necessary to extend the qualifying plans by one year for the 2004- 05 ERAF payment. Final adoption of the ordinances occurred on April 5, 2005 and became effective on May 5, 2005. The Agency plans to submit identical ordinances in 2005-06 for City Council approval of another one-year extension as permitted under SB 1096.

With the ERAF-related extensions, the plan expiration dates for the Merged Project Area range from January 1, 2011 (Park Center Plaza and San Antonio Plaza) to April 7, 2029 (Almaden Gateway). The Agency can repay indebtedness with tax increment in each of the sub-areas for ten years after the plan termination dates, with the exception of Monterey Corridor. Adopted after January 1, 1994, Monterey Corridor is subject to a statutory limit of 45 years from the plan adoption date for the repayment of indebtedness. As noted above,

38 the Merged Project Area has a tax increment cap of $7.6 billion that may take effect prior to the time limit on the repayment of indebtedness.

The time limits apply individually to each plan within the Merged Project Area, as well as individually to specific territory added by amendments to redevelopment plans. See Table 1 for information on tax increment revenue collection termination dates.

THE REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

THE CITY AND THE AGENCY

The City of San Jose (the "City") covers nearly 178 square miles and is the county seat of Santa Clara County. The City has a population of 944,857 estimated by the California Department of Finance as of January 1, 200 5, and is the nation's 11th largest city and California's third largest city ( after Los Angeles and San Diego). The City is at the southern end of San Francisco Bay (see "REGIONAL MAP").

Having originated as a Spanish pueblo established in 1777, the City is the oldest city in California. From a former rich agricultural setting, San Jose has become the capital of the innovative, high-technology based Silicon Valley - so named for the principal material used in producing semiconductors. During the 1980's and 1990's the City experienced an economic resurgence with expansion in manufacturing, service, retail and tourist industries. However, the recent national economic slowdown and the retraction in the telecommunications and technology industries have caused a decline in economic activity in the City.

Established in 1956 under State law, the Agency is one of the largest redevelopment agencies in the State, both in terms of project area size and in tax increment revenue generated. The City Council serves as the Agency's governing board, with the Mayor as Chair.

AGENCY POWERS AND DUTIES

All powers of the Agency are vested in its eleven members. The Agency exercises all of the governmental functions authorized under the Redevelopment Law and has, among other powers, the authority to acquire, administer, develop and sell or lease property, including the right of eminent domain, and the right to issue bonds and expend the proceeds. The Agency can clear buildings and other improvements, can develop as a building site any real property owned or acquired, and in connection with such development can cause streets, highways and sidewalks to be constructed or reconstructed and public utilities to be installed.

AGENCY FINANCIAL STATEMENTS

The Agency's Audited Financial Statements for Fiscal Year 2003-04 attached as APPENDIX B to this Official Statement have been audited by Macias, Gini & Company LLP, independent auditors. Macias, Gini & Company LLP has not been requested to consent to the use or to the inclusion of its report in this Official Statement and has not reviewed this Official Statement.

FISCAL CONSULTANT'S REPORT

In connection with the issuance of the Bonds, the Agency has engaged Urban Analytics, LLC, San Francisco, California (the "Fiscal Consultant") to prepare a Fiscal Consultant Report dated June 7, 2005. See APPENDIX D - "REPORT OF FISCAL CONSULTANT".

MERGED AREA REDEVELOPMENT PROJECT

The Merged Area Redevelopment Project was formed in 1981 from the merger of existing Agency project areas. Other project areas have been subsequently established and added to the Merged Project Area.

39 The Agency has designated 21 redevelopment project areas that have been merged for the purpose of allocating certain tax revenues of the Agency. However, only 16 of these 21 project areas are authorized to generate tax increment revenue. These 16 project areas are collectively referred to herein as the "Merged Project Area".

Table 1 below sets forth the 16 existing project areas that generate tax increment revenue within the Merged Project Area and estimates this Fiscal Year's tax increment revenue, the approximate size of each project area, and the last date on which the Agency can repay debt from tax increment revenue generated by each project area. The Agency's bond issues have been structured to take these termination dates into account.

Table 1 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE MERGED PROJECT AREA REDEVELOPMENT PROJECT Project Area Acreage, Debt Termination, Tax Increment Revenue and Other Information

Plan Plan Debt Repayment 2004-05 Sub-Area AcresCa) Adopted On Terminates On(h) DeadlineCh) Tax Increment Park Center 61 7/24/1961 1/1/2011 1/1/2021 $ 4,976,525 San Antonio Plaza 50 1/3/1968 1/1/2011 1/1/2021 4,387,109 Rincon Original 1,872 7/16/1974 7/16/2016 7/16/2026 25,758,548 Pueblo Uno 12 7/8/1975 7/8/2017 7/8/2027 1,617,396 Julian Stockton 330 7/15/1976 7/15/2018 7/15/2028 4,149,935 Olinder 158 7/15/1976 7/15/2018 7/15/2028 2,013,544 Edenvale 1,050 7/15/1976 7/15/2018 7/15/2028 13,062,179 Rincon Expansion 1,224 7/3/1979 7/3/2021 7/3/2031 32,083,713 Edenvale East 995 9/1/1981 9/1/2023 9/1/2033 8,373,179 Rincon North 1,699 6/8/1982 6/8/2024 6/8/2034 32,449,430 Rincon South(c) 6/8/1982 6/8/2024 6/8/2034 10,693,475 Guadalupe Auzerais 73 5/19/1983 5/19/2025 5/19/2035 2,929,757 Market Gateway 32 11/8/1983 11/8/2025 11/8/2035 454,267 Century Center 18 11/8/1993 11/8/2025 11/8/2035 1,264,121 Almaden Gateway 21 4/7/1988 4/7/2029 4/7/2039 798,229 Monterey Corridor 515 12/13/1994 12/13/2025 12/13/2040 1,455,791

(a) Acreages reflect an in-depth GIS analysis of the tax generating project areas as of December 21, 2004. (b) Reflects extensions as permitted under SB 1045 and SB 1096. (c) Acreage combined for Rincon South/Rincon North. Source: The Agency

The Agency's project areas can be grouped into three categories: Downtown, Neighborhoods and Industrial. These categories are described below.

Downtown. Eight project areas form the 369-acre core of downtown San Jose, both geographically and culturally: Almaden Gateway, Pueblo Uno, Century Center, Park Center, San Antonio Plaza, Guadalupe­ Auzerais, Market Gateway and Civic Plaza (a non-tax increment revenue generating area formed in 1999).

Neighborhood Business Districts. The Agency started its Neighborhood Business District ("NBD") program in 1982 to revitalize older commercial areas that had become blighted. Six non-tax increment revenue generating NBDs have become project areas since 1988: East Santa Clara Street, Alum Rock Avenue, West San Carlos Street, The Alameda, Story Road and Japantown. These districts represent historically active

40 commercial centers of the City, and all serve as gateways to downtown San Jose with the exception of Story Road, which supports major residential areas to the east and south of downtown.

In 2001, the Agency adopted the Neighborhood Business Clusters Redevelopment Project Area, which, like the NBD program, does not generate tax increment revenue. This project area is comprised of six non-contiguous business clusters located throughout the City, and they are referred to as Bascom Station, Fruitdale Station, Union and Foxworthy, Union and Camden, White and Quimby, and Monterey and Roeder.

Historically, the Agency's primary redevelopment focus has been on downtown San Jose, major commercial corridors, and industrial areas. In recent years, Agency Board and public interest has been growing in the preservation and revitalization of the older residential neighborhoods in the City. The Strong Neighborhoods Initiative ("SNI") is a partnership of the City, the Agency and the community to revitalize and redevelop neighborhoods in a new project area (the "SNI Project Area") with public improvement projects such as streetscape improvements, traffic calming, transit and parking improvements and community based projects such as community centers, libraries, public schools, open space and recreational facilities. In total, the SNI Project Area encompasses approximately 9,865 acres and consists of 22 neighborhoods grouped within six non-contiguous sub-areas. The SNI Project Area consists predominantly of residential land uses. The remainder of the SNI Project Area is developed with a mixture of commercial, industrial, public/quasi­ public, open space/recreation, agricultural and vacant land uses. The redevelopment plan for the SNI Redevelopment Project Area was adopted in June 2002. The SNI Project Area is a non-tax increment-revenue­ generating redevelopment project.

Industrial. Five project areas are in this category:

Rincon de los Esteros has four components comprising a total of 4,795 acres and is zoned primarily for industrial park uses. Approximately 24 7 acres are currently undeveloped. Also known as the "Innovation Triangle", this area contains one of Silicon Valley's largest concentrations of businesses including research and development, office, manufacturing, light industrial, and warehouse uses. The Agency estimates that more than 1,200 businesses employing more than 54,000 people are located in the area. Major employers include Cisco Systems, Agilent, Analog Devices, Brocade, Siemens, Novellus, Sony America, Cypress Semiconductors, eBay, BEA, Samsung, Sanmina, Canon, Philips Components, Atmel, Altera, Cadence Design and KLA Tencor. The Agency has invested more than $172 million since 1977 in infrastructure improvements in this industrial project area. The area is adjacent to the Norman Y. Mineta San Jose International Airport and is bounded by Routes 237, U.S. 101 and Interstate 880. It is served by the Light Rail Transit System and other public transportation facilities and is connected to the downtown by Route 87.

Edenvale has two components totaling 2,045 acres and is zoned primarily for light industrial uses, including research and development, office and manufacturing uses. Approximately 300 acres remain undeveloped. Located 10 miles south of downtown, it is currently home to approximately 300 firms employing approximately 13,000 people. Major employers include Hitachi, IBM, IDT, Electroglas, Northrop Grumman, Solectron, M/A-Com, Tyco Electronics, Clinimetrics, Power Integration, Stryker Endoscopy, Western Digital, Jabil Circuits, Helio Solutions and Ionics. The Agency has invested nearly $90 million in infrastructure improvements to prepare the area for industrial development. The widening of U.S. 101, the extension of light rail transit and the opening of Route 85 provide greater accessibility to the industrial park.

Julian-Stockton, in the older portion of the central business district at the northern entrance to the downtown area, is an area where current uses are primarily light manufacturing, warehousing, small office and commercial. The area is home to approximately 330 employers with approximately 2,500 employees. Three major public projects in this area include the HP Pavilion at San Jose, the Guadalupe Parkway (Route 87) and the Guadalupe River Park. Major employers in the area include PG&E, Gandiff Industries, Fire Clay Tile, Comerica Bank, Aramark and Milligan News. The Agency has invested nearly $14 million in infrastructure improvements since 1977.

41 Olinder is an older light industrial area at the intersection of U.S. 101 and Route 280 just south of downtown. This area has approximately 83 employers with approximately 1,425 employees. Major employers include Air Systems, Jennings Technology and Sal J. Acosta Sheetmetal. The Agency has invested over $1. 5 million in infrastructure improvements in this project area.

Monterey Corridor was established in 1994. There are more than 286 employers with approximately 6,728 employees in the area. Major employers include US Healthworks, Office Records Management, Simsmetal USA, Southern Lumber and San Jose Mailing. The Agency has invested over $14 million in infrastructure improvements in this project area.

The industrial project areas expanded rapidly in terms of job growth and leaseable research and development, industrial, warehouse and office space during the technology boom leading up to the year 2000. The occupancy rate for leaseable space peaked in the first quarter of 2000 at approximately 98% (i.e., a vacancy rate of 2%). Since this peak, the technology sector has contracted, and as of the fourth quarter of 2004, the occupancy rate in these industrial project areas has dropped to approximately 80% (i.e., a vacancy rate of approximately 20%). Job loss has also been significant in these areas during the same period.

LAND USE WITHIN THE MERGED PROJECT AREA

The following Table 2 sets forth the various land uses within the Merged Project Area by assessed valuation as of Fiscal Year 2004-05.

Table 2 LAND USE WITHIN THE MERGED PROJECT AREA

Secured Percentage of Total Number of Percentage of Land Use Assessed Valuation Assessed Valuation Parcels Total Parcels Industrial $5,576,937,352 50.75% 918 17.53% Commercial 3 ,200,222,3 72 29.12 651 12.43 Residential 1,628,401,079 14.82 2,959 56.49 Vacant 380,772,970 3.47 339 6.47 Other Urban 160,854,256 1.46 345 6.59 Agricultural 41,504,604 0.38 26 0.50 Totals $10,988,692,633 100.00% 5,238 100.00% Note: Assessed valuation includes homeowner's exemptions. Sources: County of Santa Clara; Urban Analytics, LLC.

TAX RATES

The difference between the actual tax rate and the 1.00% rate established by Article XIIIA of the California Constitution is attributable to the tax rates levied to service debt approved by the voters. The estimated "tax override rate" for representative tax rate areas ("IRAs") for the past fiscal year is set forth in Table 3. IRAs shown in Table 3 have been selected by the Fiscal Consultant as representative of the tax rates prevailing in the areas comprising the Merged Project Area. Except with respect to the County retirement levy, the "tax override rates" will be reduced as the debt supported by such tax override rates is retired. Tax override rates for debt issued on or after January 1, 1989, are not taken into account in determining the amount of tax increment revenue allocable to the Agency. See "FACTORS AFFECTING TAX ALLOCATION FINANCING- Proposition 87".

42 Table 3 TAX LEVIES IN REPRESENTATIVE TAX RATE AREAS MERGED PROJECT AREA, FISCAL YEAR 2004-05Ca) (Levies in Percentages) (Levies in Percentages) Oak Grove Tax Rate County School District Total Levy Santa Clara Valley Sub Area Area Code(h) Basic Levy Retirement Levy Levy All Rolls Water Distric{c) Rincon 17-065 1.00000 0.03880 0.00000 1.03880 0.0092 San Antonio Plaza 17-101 1.00000 0.03880 0.00000 1.03880 0.0092 Edenvale 17-060 1.00000 0.03880 0.03440 1.07320 0.0092 Olinder 17-029 1.00000 0.03880 0.00000 1.03880 0.0092

(a) Excludes debt service levies not allocated to the Agency. (b) Tax rate area codings were consolidated by the County for the Fiscal Year 2002-03. (c) Santa Clara Valley Water District levy applies to land and improvements assessed value only. Total levy excludes 0.008% for State and Local Water Project indebtedness assessed on land and improvement value only. Sources: Santa Clara County Controller; Urban Analytics, LLC.

HISTORIC ASSESSED VALUE AND HOUSING SET-ASIDE AMOUNTS

Table 4 below sets forth historical information on assessed value, tax increment revenues and Housing Set-Aside Amounts for the Merged Project Area through Fiscal Year 2004-05.

Table 4 ACTUAL ASSESSED VALUE AND HOUSING SET-ASIDE AMOUNTS FROM FISCAL YEAR 1995-96 THROUGH FISCAL YEAR 2004-05

Assessed Value a) Percentage Supplemental Gross Tax Fiscal Year Change Tax Increment Assessments Revenues(h) 1995-96 $ 7,016,990 3.70% $ 67,878 $ 355 $ 68,233 1996-97 7,680,818 6.70 74,372 1,650 76,022 1997-98 9,292,365 21.00 91,113 5,100 96,213 1998-99 11,228,356 20.80 106,298 5,918 112,216 1999-00 12,382,598 10.30 119,982 9,699 129,681 2000-01 13,761,356 11.10 134,649 7,502 142,151 2001-02 17,886,814 29.80 175,926 12,533 188,459 2002-03 18,732,944 4.90 187,448 10,578 198,026 2003-04 16,962,642 -9.50 168,015 2,193 170,208 2004-05 15,040,831 -11.33 148,767 1,506 150,272 Note: all dollar amounts in thousands. (a) Total assessed value for the Merged Project Area. Tax increment revenue calculated on incremental assessed value, after subtracting base year assessed value from total assessed value. The Merged Project Area's current base year value is $1,097,107,127. (b) Includes unitary roll revenue. Source: The Agency; Urban Analytics, LLC.

TWENTY LARGEST T Ax.PAYERS

Table 5 lists the twenty largest taxpayers in the Merged Project Area and each property owner's percentage of the total assessed value in the Merged Project Area (which is $15,040,831,200 for Fiscal Year 2004-05).

43 Table 5 1 TWENTY LARGEST TAXPAYERS FOR FISCAL YEAR 2004-05( )

Taxpayer Secured and Utility Unsecured Total Percentage Cisco Systems, Inc. $ 586,080,294 $1,374,074,207 $ 1,960,154,501 13.03% 2 Hitachi Global Storage Techs Inc. ( ) 564,124,875 564,124,875 3.75 Spieker Properties 343,409,999 343,409,999 2.28 Irvine Community Development Company 295,897,364 295,897,364 1.97 Sobrato Companies 252,206,379 252,206,379 1.68 Adobe Systems Inc. 201,865,514 49,631,151 251,496,665 1.67 Carramerica Realty Corp. 241,461,735 91,055 241,552,790 1.61 Agilent Technologies, Inc. 181,177,885 16,810 181,194,695 1.20 Novellus Systems Inc. 169,477,488 169,477,488 1.13 Los Esteros Critical Energy Facility 168, 103 ,298 168, 103 ,298 1.12 ABN AMRO Leasing Inc. 146, 696, 145 146,696,145 0.98 ebay Inc. 126,534,093 14,196,975 140,731,068 0.94 Maxim Integrated Products Inc. 128,319,157 128,319,157 0.85 KLA Instruments Corp. 110,432,108 17,035,613 127,467,721 0.85 Cadence Design Systems Inc. 109,698,766 16,088,850 125,787,616 0.84 Mission West Properties LP 123,509,995 123,509,995 0.82 Sony Corporation America 121,959,958 121,959,958 0.81 Shea River Oaks Associates LP 119,666,429 208,798 119,875,227 0.80 WXI/ZAN Real Estate LP 111,453,227 111,453,227 0.74 Peery Richard 109,524,865 109,524,865 0.73 Top 20 Totals $ 4,042,122,086 $1,640,820,947 $ 5,682,943,033 37.78% Agency Totals $11,197,792,219 $3,843,038,981 $15,040,831,200 100.00% (1) Combined secured and unsecured rolls. (2) Historically, IBM has been among the top twenty taxpayers in the Merged Project Area, but it recently sold a large site within the Merged Project Area to Hitachi. Source: County ofSanta Clara; Urban Analytics, LLC.

Cisco Systems, Inc. ("Cisco"), the largest taxpayer in the Merged Project Area, manufactures and sells networking and communications products and provides services associated with that equipment and its use. The company reports more than 34,000 employees worldwide and Fiscal Year 2004 revenue of approximately $22 billion. The company has been headquartered in San Jose since 1994 and employs approximately 16,000 people in the City. Cisco has been the largest property owner in the Project Area since Fiscal Year 1999-2000. Cisco's assessed value has increased from approximately $1.03 billion in Fiscal Year 2000-01 to approximately $1.96 billion in Fiscal Year 2004-05. However, Cisco has filed an appeal as to the assessed value of its properties in each of the past three fiscal years. See Tables 8 and 10 of the Fiscal Consultant's Report for Cisco's assessed value in the Project Area over the five most recent fiscal years.

ASSESSMENT APPEALS AND ASSESSOR REDUCTIONS

Pursuant to California law, a property owner may apply for a reduction of the property tax assessment for such owner's property by filing a written application, in the form prescribed by the State Board of Equalization, with the appropriate county assessment appeals board (a "Proposition 8" appeal). In addition to reductions in assessed value resulting from Proposition 8 appeals, Proposition 8 also allows assessors to reduce assessed value unilaterally to reflect reductions in market value.

In Santa Clara County (the "County"), a property owner desiring to reduce the assessed value of such owner's property in any one year must submit an application to the Santa Clara County Assessment Appeals Board (the "Appeals Board"). Applications for any tax year must be submitted by September 15 of such tax year. Following a review of the application by the County Assessor's Office (the "Assessor"), the Assessor may offer to the property owner to stipulate to a reduced assessment, or may confirm the assessment. If no

44 stipulation is agreed to, and the applicant elects to pursue the appeal, the matter is brought before the Appeals Board for a hearing and decision.

The Appeals Board generally is required to determine the outcome of appeals within two years of each appeals filing date. Any reduction in the assessment ultimately granted applies only to the year for which application is made and during which written application is filed. The assessed value increases to its pre­ reduction level for fiscal years following the year for which the reduction application is filed. However, if the taxpayer establishes through proof of comparable values that the property continues to be overvalued (known as "ongoing hardship"), the Assessor has the power to grant a reduction not only for the year for which application was originally made, but also for the then current year as well. In a similar manner, the Assessor may reassert the pre-appeal level of assessed value depending on the Assessor's determination of current value.

Appeals of property value assessments by property owners in the Merged Project Area and unilateral reductions by the Assessor can result in reductions in assessed valuations that affect the Agency's collection of tax increment revenues. The County calculates and pays the Agency tax increment revenue based on the full enrolled valuation at the beginning of the fiscal year and makes no adjustment to the Agency's revenue from roll changes occurring during the year. Successful appeals resulting in refunds to property owners have not been charged back to the Agency. The Agency cannot give any assurances that the County will continue this practice. Thus far, the one exception to this practice occurred in Fiscal Year 1992-93 when the Agency reimbursed the County for the successful appeal by a consortium of computer companies of unsecured property. See "SPECIAL RISK FACTORS - Reduction in Taxable Value" and " - Appeals and Assessor Reductions to Assessed Value".

Table 6 lists the assessment appeal results with respect to the Merged Project Area for Fiscal Years 1997-98 through 2004-05.

Table 6 ASSESSMENT APPEAL RESULTS, MERGED PROJECT AREA FISCAL YEARS 1997-98 THROUGH 2004-05 Percentage of Resolved County Applicant Opinion Final Roll Value Fiscal Year Appeals Roll Value of Value Roll Value Retained 1997-98 432 $ 4,719,044,470 $ 2,305,728,402 $ 4,667,854,026 98.92% 1998-99 412 5,211,724,489 2,551,114,193 5,161,069,366 99.03 1999-00 307 5,085,715,521 3,005,096,188 5,072,465,716 99.74 2000-01 310 4,605,431,994 2,503,024,064 4,567,651,347 99.18 2001-02 412 4, 719, 15 5, 099 2,338,646,428 4,608,744,830 97.66 2002-03 556 6,816,695,553 3,715,681,272 6,435,619,457 94.41 2003-04 294 3,256,337,761 1,786,860,581 3,023,282,401 92.84 2004-05 10 201,979,404 118,010,102 200,541,940 99.29 Total 2,733 $ 34,616,084,291 $ 18,324,161,230 $ 33,737,229,083 97.46% Source: County ofSanta Clara, Urban Analytics, LLC

Based on records provided by the County and compiled by the Fiscal Consultant, there are 782 appeals currently pending within the Merged Project Area as of June 7, 2005 (i.e., the date of the Fiscal Consultant Report), with a combined valuation in dispute of approximately $4.7 billion. Among these are 124 appeals filed by large property owners in the Merged Project Area for Fiscal Year 2004-05 with an aggregate disputed value differential ("ADVD") of $950.6 million; 66 large-owner properties pending appeal for Fiscal Year 2003-04 with an ADVD of $662.1 million; and 45 large-owner properties pending appeal for Fiscal Year 2002-03 with an ADVD of $380.2 million. For the eight fiscal years ending with Fiscal Year 2004-05, a total of 2, 733 appeals have been resolved, with a cumulative taxable value retention on the tax rolls of 97.46%. The

45 resolved appeals involved ADVD of $16.3 billion, but the net cumulative reduction in taxable value on resolved appeals was $878.9 million. For additional information on assessment appeals in the Merged Project Area, see APPENDIX D- "REPORT OF FISCAL CONSULTANT-Assessment Appeals".

The future success of appeals and resulting reductions in the Merged Project Area taxable valuation may vary from past averages, and no assurance is given that any past rate of value retention will be similar to any future rate. Successful appeals and changes in County practices could adversely affect the available Subordinate Housing Set-Aside Amounts to pay debt service on the Bonds and Parity Debt.

In addition to reductions in assessed value resulting from Proposition 8 appeals, California law also allows assessors to reduce assessed value unilaterally. For example, in Fiscal Year 2003-04 the County Assessor reduced assessed values county-wide by a cumulative amount of approximately $8 billion (approximately $2.3 billion in the Merged Project Area) and in Fiscal Year 2004-05 by a cumulative amount of $10.6 billion ($2.9 billion in the Merged Project Area). The County Assessor's Office notes that Proposition 8 reductions are temporary and are expected to be eliminated under Proposition 13 if and when market conditions improve; however, no assurance is given that such reductions will be eliminated. See "THE REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE - Assessment Appeals and Assessor Reductions" and APPENDIX D- "REPORT OF FISCAL CONSULTANT-Assessment Appeals" (including Tables 9 and 10 therein).

In a media release dated May 26, 2005 (the "Release"), the County Assessor's Office stated that the market value of commercial and industrial properties in the County remained essentially unchanged from that of last year, while the market value of residential properties rose substantially over last year's value. The Release further stated that the number of commercial and industrial properties countywide eligible for temporary property tax relief due to declines in the marketplace is expected to remain the same as last year at 1,500 properties, while the number of residential properties eligible for temporary property tax relief has dropped from 23,000 to 3,000. According to information provided by the County Assessor's Office subsequent to the Release, the total countywide reduction from base year assessed value for land and improvements continues to be approximately $9.5 billion, of which approximately $8.6 billion represents reductions in the assessed value of commercial and industrial properties (personal property is not subject to such temporary property tax relief). The Release does not indicate what portion of the reductions are for properties within the Project Area. The information set forth in the Release is preliminary. The final assessed values for 2005-06 have yet to be released. No assurance can be given that the actual final assessed values for 2005-06 will not reflect information that differs substantially from the information set forth in the Release. See "PROJECTED DEBT SERVICE COVERAGE" below and "SPECIAL RISK FACTORS- Reduction in Taxable Value" and " - Assessment Appeals and Assessor Reductions to Assessed Value".

DEBT SECURED BY HOUSING SET-ASIDE AMOUNTS

Senior Bonds. Simultaneously with the issuance of the Bonds, the Agency intends to issue two series of Senior Bonds in the combined aggregate principal amount of $129,720,000, which will be secured by the Housing Set-Aside Amounts on a basis senior to the payment of debt service on the Bonds. Upon the issuance of these two series of Senior Bonds and the refunding of the Senior Obligations to be refunded simultaneously therewith, the Agency will have outstanding $212,525,000 of its Merged Project Area Redevelopment Project Housing Set-Aside Tax Allocation Bonds secured on a basis senior to the payment of debt service on the Bonds. All of this debt is fixed rate.

Line of Credit Agreement. The Agency and the City have entered into a Line of Credit Agreement with The Bank of New York, dated as of March 1, 2003 (the "Line of Credit Agreement") under which the Agency has a revolving line of credit (the "Line of Credit") in an amount not to exceed $50,000,000, to provide interim funding for acquisition, construction and rehabilitation of low and moderate income housing projects. The Agency's repayment obligations under the Line of Credit Agreement are secured by the 20%

46 housing set-aside tax increment revenues on a basis subordinate to the Senior Bonds, the Series 2002 Bonds and the Subordinate Bonds.

PROJECTED DEBT SERVICE COVERAGE

Table 7 sets forth estimated Housing Set-Aside Amounts and projected annual debt service on the Subordinate Bonds and Senior Bonds. Debt service coverage is based on estimates of Fiscal Year 2004-05 Housing Set-Aside Amounts held constant for the future while taking into account termination of tax revenue collection in certain project areas. Assuming and no growth in assessed valuation and including the budgeted reduction in valuation for 2005-06 of approximately 1.6%, debt service coverage on the Bonds is approximately 1.51 to 1 for the next 30 years (through the Bond Year ending August 1, 2035). Through the Bond Year ending August 1, 2035, the lowest projected debt service coverage ratio for the Bonds will be not less than approximately 1.51 to 1.

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47 Table 7 PROJECTED DEBT SERVICE COVERAGE

Estimated Projected Debt Service Total Senior Coverage Estimated Bond Year Housing Set- Prior Bonds on the Obligations Debt Service on Senior Combined Ending Aside Debt Senior Debt on the Total Obligations Coverage 2 August 1 Amounts(l) Service Bonds Service BondsC ) Debt Service (times) (times)

2005 $29,753,334 $7,004,928 $ 7,004,928 $ 214,580 $ 7,219,507 4.25x 4.12x 2006 29,393,009 7,008,928 $ 8,199,052 15,207,980 4,107,550 19,315,529 l.93x l.52x 2007 29,393,009 7,011,528 8,197,364 15,208,892 4,106,130 19,315,022 l.93x l.52x 2008 29,393,009 7,013,048 8,193,872 15,206,920 4,110,689 19,317,608 l.93x l.52x 2009 29,393,009 7,014,618 8,190,346 15,204,964 4,113,337 19,318,301 l.93x l.52x 2010 29,393,009 7,011,243 8,196,712 15,207,954 4,107,625 19,315,579 l.93x l.52x 2011 29,393,009 7,010,036 8,193,875 15,203,911 4,111,585 19,315,496 l.93x l.52x 2012 29,393,009 5,830,436 9,376,259 15,206,695 4,110,584 19,317,279 l.93x l.52x 2013 29,393,009 5,842,573 9,365,292 15,207,865 4,108,657 19,316,521 l.93x l.52x 2014 29,393,009 5,838,566 9,365,512 15,204,078 4,112,000 19,316,078 l.93x l.52x 2015 29,393,009 5,849, 159 9,355,740 15,204,898 4,109,675 19,314,573 l.93x l.52x 2016 29,393,009 5,846,761 9,362,120 15,208,881 4,106,758 19,315,639 l.93x l.52x 2017 29,393,009 5,856,641 9,347,910 15,204,551 4,113,898 19,318,450 l.93x l.52x 2018 29,393,009 5,847,734 9,359,775 15,207,509 4,109,200 19,316,709 l.93x l.52x 2019 29,393,009 5,865,080 9,339,025 15,204,105 4,114,110 19,318,215 l.93x l.52x 2020 29,393,009 5,859,870 9,347,035 15,206,905 4,112,173 19,319,078 l.93x l.52x 2021 29,393,009 5,868,663 9,339, 190 15,207,853 4,111,303 19,319, 155 l.93x l.52x 2022 27,500,238 4,190,283 10,038,328 14,228,611 3,846,825 18,075,436 l.93x l.52x 2023 27,500,238 4, 192,473 10,032, 189 14,224,662 3,846,555 18,071,217 l.93x l.52x 2024 27,500,238 4,206,065 10,021,314 14,227,379 3,843,870 18,071,249 l.93x l.52x 2025 27,500,238 4,345,128 9,880,176 14,225,304 3,848,779 18,074,082 l.93x l.52x 2026 27,500,238 4,357,574 9,868,423 14,225,997 3,847,990 18,073,987 l.93x l.52x 2027 22,223,175 4,362,445 7,136,784 11,499,229 3,106,995 14,606,224 l.93x l.52x 2028 21,897,303 479,375 10,849,274 11,328,649 3,064,819 14,393,468 l.93x l.52x 2029 17,980,874 480,125 8,821,094 9,301,219 2,513,841 11,815,060 l.93x l.52x 2030 17,980,874 9,303,909 9,303,909 2,511,520 11,815,429 l.93x l.52x 2031 17,980,874 9,300,314 9,300,314 2,515,860 11,816,174 l.93x l.52x 2032 11,638,679 6,019,333 6,019,333 1,632,285 7,651,618 l.93x l.52x 2033 11,638,679 6,023,689 6,023,689 1,627,695 7,651,384 l.93x l.52x 2034 9,954,588 5,147,484 5, 147,484 1,391,795 6,539,279 l.93x l.52x 2035 1,420,137 732,947 732,947 207,400 940,347 l.94x l.5lx TOTAL $770,257,851 $134, 193,275 $255,904,336 $390,097,611 $103,786,082 $493,883,692 1 The Projected Housing-Set Aside Amounts include a budgeted reduction of approximately 1.6% in valuation in 2005-06 and no growth thereafter. The projections also include nineteen properties identified by the Agency as having sold in the Project Area since January 1, 2004, the lien date for the 2004-05 roll. These properties are expected to add $67.3 million in new valuation to the 2005-06 roll. 2 Assuming an interest rate of 3. 7%.

48 SPECIAL RISK FACTORS

The following information should be considered by prospective investors in evaluating the Bonds. However, this is not an exclusive listing of risks and other considerations that may be relevant to investing in the Bonds, and the order in which the following information is presented is not intended to reflect the relative importance of any such risks and considerations.

The various legal opinions to be delivered concurrently with the issuance of the Bonds will be qualified as to the enforceability of the various legal instruments by limitations imposed by State and federal laws, rulings and decisions affecting remedies, and by bankruptcy, reorganization or other laws of general application affecting the enforcement of creditors' rights, including equitable principles.

TAX INCREMENT REVENUE LIMITATION

The Agency's ability to collect tax increment is limited not only by the time limits on the repayment of debt, but also by the cap on total tax increment to be received from the Merged Project Area. The cumulative tax increment that the Agency may receive from the Merged Project Area is capped at $7.6 billion. The total amount of tax increment received by the Agency through June 30, 2004 is approximately $1.9 billion. The Agency expects to receive approximately $150 million in additional increment by June 30, 2005. Depending upon the rate of growth in tax increment received from the Merged Project Area, it is possible that the Agency may reach its overall tax increment cap prior to reaching the time limits on the repayment of debt and/or prior to the final maturity of the Bonds. The Fiscal Consultant has prepared a tax increment projection and sensitivity analysis that projects the Agency's Merged Project Area tax increment revenues over time, assuming various increment growth rates. With increment projected using an annual growth rate of two percent, the projection shows that the Agency would reach its tax increment cap in Fiscal Year 2041-42. With increment projected using an annual growth rate of five percent, the projection shows that the Agency would reach its tax increment cap in Fiscal Year 2026-27. With increment projected using an annual growth rate of seven percent, the projection shows that the Agency would reach its tax increment cap in Fiscal Year 2023-24. See APPENDIX D - "REPORT OF FISCAL CONSULTANT - Tax Increment Cap" and"- Tax Increment Projection and Sensitivity Analysis".

In the event that the Agency reaches its tax increment cap, it would not collect any additional tax increment to pay debt service on the Bonds. However, in the Senior Fiscal Agent Agreement, the Agency covenants, commencing December 1, 2005, to calculate annually the remaining amount available under its tax increment revenue limitation and the amount of obligations that exist to be paid from tax increment revenue, including obligations payable from the Housing Set-Aside Amounts. If, based on such review, the allocation of Housing Set-Aside Amounts to the Agency in any of the next three succeeding fiscal years will cause an amount equal to 90% of the Housing Set-Aside Amounts remaining to be allocated under the Merged Project Area Redevelopment Plans to fall below the obligations payable from the Housing Set-Aside Amounts, the Agency will be obligated either to use Housing Set-Aside Amounts not needed to pay such obligations to retire or defease Senior Obligations or to adopt a plan approved by a qualified redevelopment consultant which demonstrates the Agency's continuing ability to pay debt service on the Senior Obligations.

REDUCTION IN TAXABLE VALUE

Tax increment revenue allocated to the Agency is determined by the amount of incremental taxable value in the Merged Project Area and the current rate or rates at which property in the Merged Project Area is taxed. The reduction of taxable values of property in the Merged Project Area caused by economic factors beyond the Agency's control, such as relocation out of the Merged Project Area by one or more major property owners, sale of property to a non-profit corporation exempt from property taxation, or the complete or partial destruction of such property caused by, among other eventualities, earthquake or other natural disaster, could cause a reduction in the Subordinate Housing Set-Aside Amounts that secure the Bonds. Such reduction of

49 Subordinate Housing Set-Aside Amounts could have an adverse effect on the Agency's ability to make timely payments of principal of and interest on the Bonds.

As described in greater detail under "FACTORS AFFECTING TAX ALLOCATION FINANCING - Property Tax Limitations: Article XIIIA of the California Constitution", Article XIIIA provides that the full cash value base of real property used in determining taxable value may be adjusted from year to year to reflect the inflation rate, not to exceed a two percent increase for any given year, or may be reduced to reflect a reduction in the consumer price index, comparable local data or any reduction in the event of declining property value caused by damage, destruction or other factors (as described above). Such measure is computed on a calendar year basis. Any resulting reduction in the full cash value base over the term of the Bonds could reduce Subordinate Housing Set-Aside Amounts securing the Bonds.

In addition to the other limitations on and State-required set-asides of tax increment revenue described herein under "FACTORS AFFECTING TAX ALLOCATION FINANCING", the State electorate or Legislature could adopt a constitutional or legislative property tax reduction with the effect of reducing tax increment revenues payable to the Agency and thus available Subordinate Housing Set-Aside Amounts. There is no assurance that the State electorate or Legislature will not at some future time approve additional limitations that could reduce the tax increment revenue and adversely affect the security of the Bonds.

RISKS TO REAL ESTATE MARKET

The Agency's ability to make payments on the Bonds will be dependent upon the economic strength of the Merged Project Area. The general economy of the Merged Project Area will be subject to all of the risks generally associated with real estate markets. Real estate prices and development may be adversely affected by changes in general economic conditions, fluctuations in the real estate market and interest rates, unexpected increases in development costs and by other similar factors. Further, real estate development within the Merged Project Area could be adversely affected by limitations of infrastructure or future governmental policies, including governmental policies to restrict or control development. In addition, if there is a decline in the general economy of the Merged Project Area, the owners of property within the Merged Project Area may be less able or less willing to make timely payments of property taxes or may petition for reduce assessed valuation causing a delay or interruption in the receipt of tax increment revenue by the Agency from the Merged Project Area. See "LOCAL ECONOMY" below.

LOCAL ECONOMY

The technology business sector contributes significantly to the Silicon Valley economy, including property values within the Merged Project Area. The recent contraction of the technology business sector has led to significant reductions in property values both in Silicon Valley and in the Merged Project Area. While improvement in this business sector may lead to increased property values, the continued importance of technology business to the area economy may continue to affect property values.

ASSESSMENT APPEALS AND ASSESSOR REDUCTIONS TO ASSESSED VALUE

Pursuant to California law, a property owner may apply for a reduction of the property tax assessment for such owner's property by filing a written application, in the form prescribed by the State Board of Equalization, with the appropriate county assessment appeals board (a "Proposition 8" appeal). In addition to reductions in assessed value resulting from Proposition 8 appeals, Proposition 8 also allows assessors to reduce assessed value unilaterally. To the extent assessed values are reduced through the assessment appeal or unilateral reduction process, tax increment revenue securing the Bonds will be reduced. A reduction in taxable values within the Merged Project Area and the refund of taxes which may arise out of successful appeals by property owners or unilateral reduction by the County Assessor will affect the amount of Housing Set-Aside Amounts available/or payment of the Bonds. See "THE REDEVELOPMENT AGENCY OF

50 THE CITY OF SAN JOSE - Assessment Appeals and Assessor Reductions" and APPENDIX D - "REPORT OF FISCAL CONSULTANT -Assessment Appeals".

LEVY AND COLLECTION OF TAXES

The Agency has no power to levy or collect property taxes. Any reduction in the tax rate or the implementation of any constitutional or legislative property tax decrease could reduce the Subordinate Housing Set-Aside Amounts, and accordingly, could have an adverse effect on the ability of the Agency to pay debt service on the Bonds. Likewise, delinquencies in the payment of property taxes and the impact of bankruptcy proceedings on the legal ability to collect property taxes could have an adverse effect on the Agency's ability to make timely debt service payments. However, since 1993 the County's practice has been to allocate to the Agency its proportionate share of property taxes collected Countywide regardless of delinquencies, but the County could discontinue this practice at any time.

PERSONAL PROPERTY ON THE UNSECURED TAX ROLL

Approximately $3.8 billion (about 25%) of the assessed value for Fiscal Year 2003-04 in the Merged Project Area is personal property that is on the unsecured tax roll. In general, the assessed value of this type of personal property has been and may be subject to a high degree of fluctuation. Factors contributing to fluctuations include relocation of personal property out of the Merged Project Area, obsolescence and rapid depreciation. See "FACTORS AFFECTING TAX ALLOCATION FINANCING - Property Tax Collection Procedures".

STATE BUDGET DEFICITS

In approving recent budgets, the State Legislature has enacted legislation which, among other things, reallocated funds from redevelopment agencies to school districts by shifting a portion of each redevelopment agency's tax increment, net of amounts due to other taxing agencies, to school districts for such Fiscal Years for deposit in the Education Revenue Augmentation Fund ("ERAF"). The amount required to be paid by a redevelopment agency was apportioned based on tax increment collected.

In approving the budget for Fiscal Year 2003-04, the Legislature fixed the aggregate ERAF transfer for the year at $135 million, of which the Agency paid approximately $10.1 million as its allocated share. In connection with its approval of the budget for Fiscal Year 2004-05, the Legislature fixed the ERAF transfer at $250 million each for Fiscal Year 2004-05 and 2005-06. The Agency's Fiscal Year 2004-05 share is approximately $18.6 million. In so doing, the Legislature also authorized redevelopment agencies to extend the effective dates of their redevelopment plans. These transfers are not payable from Subordinate Housing Set-Aside Amounts. The amounts paid into ERAF are deducted from the cumulative tax increment revenue receipts applied to the tax increment cap. See "FACTORS AFFECTING TAX ALLOCATION FINANCING - Redevelopment Time Limits" above.

The State's projected budget deficits continue to be substantial and may lead to subsequent ERAF transfers or other actions which might reduce the Agency's available Subordinate Housing Set-Aside Amounts and the Agency's ability to pay principal and interest on the Bonds and Parity Debt. Prospective purchasers of the Bonds may wish to review information presented by the State at www.dof.ca.gov (maintained by the State Department of Finance) and www.lao.ca.gov (analysis by the State Office of the Legislative Analyst). The Agency does not prepare such information and cannot assume any responsibility for its accuracy, completeness or timeliness ( or the continued accuracy of internet address information). Whether or not this information is accurate, complete or timely, prospective purchasers of the Bonds should observe that the posting or release of such information may change the perceived outlook for the Agency's continued receipt of Subordinate Housing Set-Aside Amounts and thus the market price for the Bonds.

51 The State's budget deficit has yet to be resolved, and litigation is pending to challenge some of the measures already taken to reduce the deficit. Future legislation, litigation and other measures affecting the Agency's receipt of Subordinate Housing Set-Aside Amounts in connection with the State budget situation cannot be predicted and may materially and adversely affect the Agency's ongoing ability to pay principal and interest on the Bonds and Parity Debt.

REDUCTIONS IN INFLATIONARY RA TE

As described in greater detail herein, Article XIIIA of the California Constitution provides that the full cash value base of real property used in determining taxable value may be adjusted from year to year to reflect the inflationary rate, not to exceed a 2% increase for any given year, or may be reduced to reflect a reduction in the consumer price index or comparable local data. Such measure is computed on a calendar year basis. Decreases in property values could cause a reduction in tax increment revenue received by the Agency. The inflation rate applicable to the assessment roll in Fiscal Year 1999-00 was 1.853%, the rate for Fiscal Year 2000-01 was 2%, the rate for Fiscal Year 2001-02 was also 2%, the rate for Fiscal Year 2002-03 was 2%, the rate for Fiscal Year 2003-04 was 2%, the rate for Fiscal Year 2004-05 is 1.867% and the rate for Fiscal Year 2005-06 will be 2.0%. See "FACTORS AFFECTING TAX ALLOCATION FINANCING".

STATEMENT OF INDEBTEDNESS

Under Redevelopment Law, the Agency must file with the County a statement of indebtedness for the Merged Project Area by October 1, each year. The statement of indebtedness controls the amount of tax increment revenue that will be paid to the Agency in each fiscal year. See "FACTORS AFFECTING TAX ALLOCATION FINANCING - PROPERTY TAX COLLECTION PROCEDURES - Filing of Statement of Indebtedness". In the event the Agency were to fail to file an annual statement of indebtedness, tax increment revenue available to the Agency could be adversely affected.

BANKRUPTCY AND FORECLOSURE

The payment of the tax increment revenue and the ability of the County to foreclose the lien of a delinquent unpaid tax may be limited by bankruptcy, insolvency, or other laws generally affecting creditors' rights or by the laws of the State relating to judicial foreclosure. The various legal opinions to be delivered concurrently with the delivery of the Bonds (including Bond Counsel's approving legal opinion) will be qualified as to the enforceability of the various legal instruments by bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting creditors' rights, by the application of equitable principles and by the exercise of judicial discretion in appropriate cases.

Although bankruptcy proceedings would not cause the liens to become extinguished, bankruptcy of a property owner could result in a delay in prosecuting superior court foreclosure proceedings. Such delay would increase the likelihood of a delay or default in payment of the principal of and interest on the Bonds and the possibility of delinquent tax installments not being paid in full.

ESTIMATED REVENUES

In estimating that Subordinate Housing Set-Aside Amounts will be sufficient to pay debt service on the Bonds, the Agency has made certain assumptions with regard to present and future assessed valuation in the Merged Project Area, future tax rates and percentage of taxes collected. The Agency believes these assumptions to be reasonable, but there is no assurance these assumptions will be realized and to the extent that the assessed valuation and the tax rates are less than expected, the Subordinate Housing Set-Aside Amounts available to pay debt service on the Bonds will be less than those projected and such reduced Subordinate Housing Set-Aside Amounts may be insufficient to provide for the payment of principal of, premium (if any) and interest on the Bonds.

52 EARTHQUAKE RISK

The City is located within ten miles of the San Andreas Fault, the Hayward Fault and the Calaveras Fault, each known to be active faults. The City has experienced earthquakes with a Richter magnitude of 6.0 or greater and with the epicenter being within the San Francisco Bay Area. Widespread earthquake damage in the Merged Project Area would adversely affect assessed valuation and therefore the Subordinate Housing Set­ Aside Amounts available to pay debt service on the Bonds.

HAZARDOUS SUBSTANCES

An additional environmental condition that may result in the reduction in the assessed value of property would be the discovery of a hazardous substance that would limit the beneficial use of taxable property within the Merged Project Area. In general, the owners and operators of a property may be required by law to remedy conditions of the property relating to releases or threatened releases of hazardous substances. The owner or operator may be required to remedy a hazardous substance condition of property whether or not the owner or operator has anything to do with creating or handling the hazardous substance. If this situation were to occur with property within the Merged Project Area, the costs of remedying it could reduce the marketability and taxable value of the property.

CHANGES IN THE LAW

There can be no assurance that the California electorate will not at some future time adopt initiatives or that the Legislature will not enact legislation that will amend the Redevelopment Law or other laws or the Constitution of the State resulting in a reduction of Subordinate Housing Set-Aside Amounts, which could have an adverse effect on the Agency's ability to pay debt service on the Bonds. In the event of an amendment or revision to the Redevelopment Law that would allow the Agency to set aside less than the Subordinate Housing Set-Aside Amounts required to be set aside by the Agency as of the date of execution of the Agreement, the Agency has covenanted that it will continue to set aside a sufficient amount of Tax Increment Revenues to pay the Annual Debt Service on the Bonds and Parity Debt and to make deposits to the Reserve Account as required by the Agreement. See "SECURITY AND SOURCES OF PAYMENT FOR THE BONDS - Pledge of Subordinate Housing Set-Aside Amounts".

FEDERAL TAX-EXEMPT STATUS OF THE BONDS

Tax-Exempt Status of Interest on the Bonds. The Internal Revenue Code of 1986, as amended (the "Code") imposes a number of requirements that must be satisfied for interest on state and local obligations, such as the Bonds, to be excludable from gross income for federal income tax purposes. These requirements include limitations on the use of Bond proceeds, limitations on the investment earnings of Bond proceeds prior to expenditure, a requirement that certain investment earnings on Bond proceeds be paid periodically to the United States and a requirement that the issuers file an information report with the Internal Revenue Service (the "IRS"). The Agency has covenanted in certain of the documents referred to herein that they will comply with such requirements. Failure to comply with the requirements stated in the Code and related regulations, rulings and policies may result in the treatment of interest on the Bonds as taxable, retroactively to the date of issuance of such Bonds.

Audit. In December 1999, as a part of a larger reorganization of the IRS, the IRS commenced operation of its Tax Exempt and Government Entities Division (the "TE/GE Division"), as the successor to its Employee Plans and Exempt Organizations division. The new TE/GE Division has a subdivision that is specifically devoted to tax-exempt bond compliance. Public statements by IRS officials indicate that the number of tax-exempt bond examinations is expected to increase significantly under the new TE/GE Division. There is no assurance that an IRS examination of the Bonds will not adversely affect the market value of such Bonds. See "TAX MATTERS".

53 THE COOPERATION AGREEMENT AND CITY OF SAN JOSE DEPARTMENT OF HOUSING

COOPERATION AGREEMENT

Pursuant to the Redevelopment Law, Housing Set-Aside Amounts shall be utilized to increase, improve and/or preserve the supply of low and moderate income housing (the "20% Housing Program"). In order to provide for unified administration of various housing programs within the City, the Agency delegated to the City its obligation and authority to administer the 20% Housing Program and to distribute Housing Set­ Aside Amounts, pursuant to a cooperation agreement entered into in 1987, which agreement is currently embodied in the Cooperation Agreement dated as of September 28, 1990, as amended (the "Cooperation Agreement"). This delegation of authority includes the obligations to adopt or amend, from time to time, any 20% Housing Program policies, guidelines or procedures, consistent with the requirements of the Redevelopment Law, as may be necessary or convenient to achieve the ultimate purposes of the 20% Housing Program. The delegation also includes the authority to take any action or make any findings on behalf of the Agency with regard to the administration of the 20% Housing Program as required or permitted by law; provided, however, that Agency has retained the authority to issue or to approve the issuance of any bonds or other indebtedness secured by Housing Set-Aside Amounts.

CITY OF SAN JOSE DEPARTMENT OF HOUSING

The City of San Jose Department of Housing (the "Department") was established in late 1987 and was charged with the mission of preserving and improving the City's supply of decent, safe and sanitary housing affordable to low and moderate income households and, where appropriate, to ensure the long-term affordability of such housing and contribute to neighborhood revitalization. The Department was also given the responsibility to carry out the authority delegated under the Cooperation Agreement.

Leveraging funds from a variety of federal, State, local and private sources, the Department administers a two-pronged approach to achieve City housing goals. First, it implements a number of comprehensive financial and technical assistance programs, all designed to increase and preserve the supply of decent, safe and sanitary housing affordable to low and moderate income households. These programs involve a wide array of activities that include rehabilitation of owner-occupied and rental properties, predevelopment assistance, property acquisition, new construction financing and second mortgage loans to qualified first-time homebuyers. The second prong to this approach involves following an agenda of policy initiatives identified to complement City production goals. These activities include policy research and development, legislative analysis and strategic planning.

TAX MATTERS

FEDERAL INCOME TAXES

The Internal Revenue Code of 1986, as amended (the "Code"), imposes certain requirements that must be met subsequent to the issuance and delivery of the Bonds for interest thereon to be and remain excluded from gross income for Federal income tax purposes. Noncompliance with such requirements could cause the interest on the Bonds to be included in gross income for Federal income tax purposes retroactive to the date of issue of the Bonds. Pursuant to the Fiscal Agent Agreement and other instruments, the Agency and the Borrowers have covenanted to comply with the applicable requirements of the Code in order to maintain the exclusion of the interest on the Bonds from gross income for Federal income tax purposes pursuant to Section 103 of the Code. In addition, the Agency and the Borrowers have made certain representations and certifications in the Fiscal Agent Agreement and other instruments. Bond Counsel will not independently verify the accuracy of those representations and certifications.

54 In the opinion of Nixon Peabody LLP, Bond Counsel, under existing law and assuming compliance with the aforementioned covenant, and the accuracy of certain representations and certifications made by the Agency and the Borrowers described above, interest on the Bonds is excluded from gross income for Federal income tax purposes under Section 103 of the Code, except that no opinion is expressed as to the exclusion of interest on any Bond from gross income for any period during which any such bond is held by a person who, within the meaning of Section 147(a) of the Code, is a "substantial user" of the facilities financed with proceeds of the Bonds or a "related person". Bond Counsel is also of the opinion that interest on the Bonds is treated as an item of tax preference for purposes of calculating the alternative minimum tax that may be imposed under the Code with respect to individuals and corporations.

STATE TAXES

Bond Counsel is also of the opinion that interest on the Bonds is exempt from California personal income taxation.

CERTAIN FEDERAL TAX INFORMATION

General. The following is a discussion of certain additional tax matters under existing statutes. It does not purport to deal with all aspects of Federal taxation that may be relevant to particular investors. Prospective investors, particularly those who may be subject to special rules, are advised to consult their own tax advisors regarding the Federal tax consequences of owning and disposing of the Bonds, as well as any tax consequences arising under the laws of any state or other taxing jurisdiction.

Social Security and Railroad Retirement Payments. The Code provides that interest on tax-exempt obligations is included in the calculation of modified adjusted gross income in determining whether a portion of Social Security or railroad retirement benefits received are to be included in taxable income.

Branch Profits Tax. The Code provides that interest on tax-exempt obligations is included in effectively connected earnings and profits for purposes of computing the branch profits tax on certain foreign corporations doing business in the United States.

Borrowed Funds. The Code provides that interest paid ( or deemed paid) on borrowed funds used during a tax year to purchase or carry tax-exempt obligations is not deductible. In addition, under rules used by the Internal Revenue Service for determining when borrowed funds are considered used for the purpose of purchasing or carrying particular assets, the purchase of obligations may be considered to have been made with borrowed funds even though the borrowed funds are not directly traceable to the purchase of such obligations.

Property and Casualty Insurance Companies. The Code contains provisions relating to property and casualty insurance companies whereunder the amount of certain loss deductions otherwise allowed is reduced (in certain cases below zero) by a specified percentage of, among other things, interest on tax-exempt obligations acquired after August 7, 1986.

Financial Institutions. The Code provides that commercial banks, thrift institutions and other financial institutions may not deduct the portion of their interest expense allocable to tax-exempt obligations acquired after August 7, 1986, other than certain "qualified" obligations. The Bonds are not "qualified" obligations for this purpose.

S Corporations. The Code imposes a tax on excess net passive income of certain S corporations that have subchapter C earnings and profits. Interest on tax-exempt obligations must be included in passive investment income for purposes of this tax.

Earned Income Credit. For any taxable year beginning after December 31, 1995, the Code denies the earned income credit to persons otherwise eligible for it if the aggregate amount of disqualified income of the

55 taxpayer for the taxable year exceeds $2,200, subject to adjustment for inflation for taxable years beginning after December 31, 1996. Interest on the Bonds will constitute disqualified income for this purpose.

Changes in Federal Tax Law and Post-Issuance Events. From time to time proposals are introduced in Congress that, if enacted into law, could have an adverse impact on the potential benefits of the exclusion from gross income for Federal income tax purposes of the interest on the Bonds, and thus on the economic value of the affected series of Bonds. This could result from reductions in Federal income tax rates, changes in the structure of the Federal income tax rates, changes in the structure of the Federal income tax or its replacement with another type of tax, repeal of the exclusion of the interest on the Bonds from gross income for such purposes, or otherwise. It is not possible to predict whether any legislation having an adverse impact on the tax treatment of holders of the Bonds may be proposed or enacted.

Bond Counsel has not undertaken to advise in the future whether any events after the date of issuance and delivery of the Bonds may affect the tax status of interest on the Bonds. Bond Counsel expresses no opinion as to any Federal, State or local tax law consequences with respect to the Bonds, or the interest thereon, if any action is taken with respect to the Bonds or the proceeds thereof upon the advice or approval of other counsel.

UNDERWRITING

The Series 2005C Bonds will be sold by the Agency to the City of San Jose Financing Authority (the "Authority") and concurrently resold by the Authority to Citigroup Global Markets Inc. at a price of $33,016,208.71, representing the principal amount of the Series 2005C Bonds less an underwriter's discount of $58,791.29.

The Series 2005D Bonds will be sold by the Agency to the Authority and concurrently resold by the Authority to Banc of America Securities LLC at a price of $33,016,208.71, representing the principal amount of the Series 2005D Bonds less an underwriter's discount of $58,791.29.

The Bond Purchase Agreements pursuant to which each Underwriter will purchase the applicable Series of Bonds provide that the Underwriter will purchase all of such Bonds if any are purchased. The obligation of each Underwriter to make such purchase is subject to certain terms and conditions.

Each Underwriter may offer and sell the Bonds to certain dealers and others at prices different from the prices stated on the cover page of the Official Statement. The Underwriters may change these offering prices from time to time.

CONTINUING DISCLOSURE

The Bonds are not subject to the continuing disclosure requirements of Securities and Exchange Commission Rule 15c2-12 (the "Rule") during any Variable Rate Period, other than a Long Period. Accordingly, the Agency is not initially obligated to comply with any continuing disclosure requirements under the Rule. Upon the Conversion of the interest rate on any Bonds to a Long Rate or a Fixed Rate, such Bonds will become subject to the Rule, and the Agency has agreed to enter into an undertaking to satisfy the Rule's continuing disclosure requirements at such time.

The Agency filed its annual disclosure report due February 1, 2003 relating to certain of its outstanding bonds on or about May 30, 2003. Other than this late filing, the Agency has never failed to comply in all material respects with its previous undertakings to provide annual reports or notices of material events.

56 LITIGATION

Other than as described below, there is no pending or, to the best knowledge of the Agency, threatened litigation seeking to restrain or enjoin the issuance, sale, execution or delivery of the Bonds, or in any way contesting or affecting the validity of the Bonds or any proceeding of the Agency taken with respect to the issuance or sale thereof, the pledge or application of any moneys or security provided for the payment of the Bonds, or existence or powers of the Agency, or the authority of the Agency to enter into any document relating to the Fiscal Agent Agreement or the Bonds.

In August 2004, the City and the Agency filed a lawsuit seeking a judicial determination as to whether the County had breached an agreement entered into among the parties in May 2001 (the "2001 Agreement"). The 2001 Agreement included provisions regarding redevelopment tax increment allocation and the application of land use procedures in County territory within the San Jose urban service area. The City and the Agency contend that under the 2001 Agreement, the County was required to abide by City land use procedures before it entered into agreements with private entities for the development of a theater on the County Fairgrounds.

In April 2005, the County filed a cross complaint against the City and the Agency alleging, among other things, breach of the 2001 Agreement, breach of the 2001 Agreement's implied covenant of good faith and fair dealing, and intentional interference with prospective economic relations. The County's cross complaint alleges no specific amount of damages and seeks damages and restitution according to proof. However, the County also alleges, without explanation, that an assessment by Harvey Rose Corporation indicates that the amounts of the County's loss are in excess of $2 .1 billion.

To the knowledge of the City Attorney and the Agency General Counsel, the only Harvey Rose assessment regarding tax increment is a report to the County Finance Committee, dated February 1, 2005, which concluded that over the past 10 years, the tax increment collected by all nine redevelopment agencies in the County was approximately $2.1 billion. The report does not address any damages suffered by the County as a result of the causes of action alleged in the County's cross complaint.

If the County were to prevail in this cross complaint, the City and the Agency are unable to predict the nature or amount of the damages that can be proven.

APPROVAL OF LEGALITY

Certain legal matters incident to the issuance of the Bonds have been or will be approved by Nixon Peabody LLP, San Francisco, California, as Bond Counsel. Certain legal matters incident to the issuance of the Bonds will be passed upon for the Agency by its General Counsel and by Nixon Peabody LLP, as Disclosure Counsel, for the Credit Provider by Sidley Austin Brown & Wood LLP, Los Angeles, California and for the Underwriters by their counsel, Hawkins Delafield & Wood LLP, Los Angeles, California. Neither Bond Counsel nor Disclosure Counsel undertakes any responsibility to the purchasers of the Bonds for the accuracy, completeness or fairness of this Official Statement.

RATINGS

The Bonds have been rated "Aa2/VMIG-l" by Moody's Investors Service and "AA-/A-1+" by Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. ( collectively, the "Rating Agencies"), in each case with the understanding that the Credit Provider will issue the Credit Facility with respect to the Bonds at Closing. These ratings, if and when assigned to the Bonds, will reflect only the views of the Rating Agencies and any desired explanation of the significance of this rating should be obtained from the Rating Agencies. There is no assurance that any ratings will continue for any given period of time or will not be revised downward or withdrawn entirely by the Rating Agencies, if in the judgment of the Rating

57 Agencies, circumstances so warrant. Any such downward revision or withdrawal of any ratings may have an adverse effect on the market price of the Bonds.

FINANCIAL ADVISOR

The Agency has retained the services of Ross Financial, as Financial Advisor. Payment of fees to the Financial Advisor is contingent upon issuance of the Bonds.

MISCELLANEOUS

The summaries or description of provisions in the Agreement contained herein and all references to other materials not purporting to be quoted in full are only brief outlines of certain provisions thereof and do not constitute complete statements of such provisions and do not summarize all the pertinent provisions of such documents. For further information, reference should be made to the complete documents, copies of which will be on file at the offices of the Underwriters prior to the delivery of the Bonds and thereafter at the designated office of the Fiscal Agent for examination.

All projections, forecasts and other information in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the Agency and the purchasers or holders of any of the Bonds.

The attached APPENDICES A through F are integral parts of this Official Statement and must be read together with all of the foregoing statements.

REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

By: /s/ David C. Baum Chief Financial Officer

58 APPENDIX A

THE CITY OF SAN JOSE: DEMOGRAPHIC AND ECONOMIC INFORMATION

General Description

The City is the eleventh largest city in the United States and the third largest city in California (the "State") with a January 1, 2005 population estimated at 944,857, according to the California Department of Finance. The territory of the City encompasses approximately 177.7 square miles. Located at the southern end of the San Francisco Bay, the City is the county seat of the County of Santa Clara (the "County").

Having originated as a Spanish pueblo established in 1777, the City is the oldest city in the State. From a former rich agricultural setting, San Jose has become the capital of the innovative, high-technology based Silicon Valley - so named for the principal material used in producing semiconductors. During the 1980's and 1990's the City experienced an economic resurgence with expansion in manufacturing, service, retail and tourist industries. However, the more recent national economic slowdown and the contraction in the telecommunications and technology industries have caused a decline in economic activity in the City.

San Jose Municipal Government

The City is governed by the City Council, consisting of a Mayor and ten other council members ( one council seat is currently vacant). The Mayor is elected at large for a four-year term. Council members are elected by district for staggered four-year terms. The Mayor and the council members are limited to two consecutive four-year terms. The City is a charter city, which means the City, through its charter (the "Charter"), may regulate municipal affairs, subject only to restrictions and limitations provided in the Charter; in matters other than municipal affairs, the City is subject to State law.

The City Council appoints the City Manager who is responsible for the operation of all municipal functions except the offices of City Attorney, City Clerk, City Auditor and Independent Police Auditor. The officials heading these offices are appointed by the City Council and carry out the policies set forth by the City Council.

The City provides a full range of services contemplated by statute or charter, including those functions delegated to cities under State law. These services include public safety, sanitation and health, environmental enforcement, recreational and cultural activities, public improvements, planning, zoning and general administrative services.

Demographic and Economic Information

Introduction

The demographic and economic information provided below has been collected from sources that the City has determined to be reliable. Because it is difficult to obtain complete and timely regional economic and demographic information, the City's economic condition may not be fully apparent in all of the publicly available regional economic statistics provided herein.

A-1 Population

City residents account for approximately half of the population of the County, which is the most populous of the San Francisco Bay Area counties. While the period from 1960 to 1980 was characterized by extremely rapid population growth in both the City and County, the last two decades reflect a trend of slower but steady growth. Table 1 below shows the population of the City, the County and the State according to the U.S. Census for the years 1960, 1970, 1980, 1990 and 2000 and the California Department of Finance for 2001 through 2005.

Table 1 CITY, COUNTY AND STATE POPULATION STATISTICS City of County of State of San Jose Santa Clara California 1960 ...... 204,196 642,315 15,717,204 1970 ...... 459,913 1,064,714 19,953,134 1980 ...... 629,442 1,295,071 23,667,902 1990 ...... 782,248 1,497,577 29,760,021 2000 ...... 894,943 1,682,585 33,871,648 2001 ...... 905,522 1,701,060 34,441,561 2002 ...... 915,761 1,715,051 35,088,671 2003 ...... 923,368 1,726,628 35,691,442 2004 ...... 931,232 1,740,699 36,271,091 2005 ...... 944,857 1,759,585 36,810,358 Source: US. Census (1960-2000), California Department ofFinance (2001-2005).

Employment

Table 2 on the next page sets forth employment figures for the City and the County and unemployment rates for the City, the State and the United States for the five most recent years. The City's unemployment rate rose sharply after 2000 as a result of the contraction in the telecommunications and technology industries that dominate the City's employment base. Although the City's unemployment rate decreased from 9.9% in 2002 to 5.8% as of April 2005, the labor force in Santa Clara County during the same period declined by 128,000, or 13.6%.

A-2 Table 2 SANTA CLARA COUNTY ESTIMATED AVERAGE ANNUAL EMPLOYMENT AND UNEMPLOYMENT OF RESIDENT LABOR FORCE

Civilian Labor Force (in thousands) 2001 2002 2003 2004 2005Cl) City of San Jose Employed ...... 481 436 415 401 400 Unemployed ...... 27 48 44 31 25 2 TotaIC ) ...... 508 484 459 432 424 County of Santa Clara Employed ...... 952 863 821 775 772 Unemployed ...... 46 80 74 54 43 2 TotaIC ) ...... 998 943 895 829 815 Unemployment Rates City ...... 5.4% 9.9% 9.6% 7.2% 5.8% County ...... 4.6 8.5 8.2 6.6 5.3 State ...... 5.4 6.7 6.7 6.2 5.2 United States ...... 4.7 5.8 6.0 5.5 4.9

(I) Preliminary, not seasonally adjusted, data are for April 2005. 2 C ) Totals may not add due to independent rounding. Source: California Employment Development Department, Labor Market Information Division; US. Bureau ofLabor Statistics.

The City occupies the geographic center of Silicon Valley. The high technology industry component of the City's economy is diversified in research, development, manufacturing, marketing and management. Development of high technology has been supported by the area's proximity to Stanford University, San Jose State University, Santa Clara University and other institutions of higher education, and such research and development facilities as SRI International (formerly the Stanford Research Institute), the Stanford Linear Accelerator Center and Ames Research Center (NASA).

While the County is known worldwide as "Silicon Valley," the silicon-based semiconductor industry is only a part of the industrial picture. Other industries include information systems, computers, peripherals, instruments, software and a wide array of communication electronics. These industries have all seen contractions in employment beginning in year 2000 and continuing through today.

Table 3 displays the composition of employment in the San Jose Metropolitan Area by general category for the most recent three years available.

A-3 Table 3 SAN JOSE METROPOLITAN STATISTICAL AREA EMPLOYMENT BY CATEGORY ANNUAL AVERAGES (in thousands) Percent Percent Percent of 2002 of Total 2003 of Total 2004 Total Farm 6,900 0.75% 6,600 0.75% 6,700 0.77% Natural Resources & Mining 200 0.02 200 0.02 200 0.02 Construction 43,500 4.71 40,700 4.65 41,700 4.81 Manufacturing 203,600 22.07 177,800 20.31 170,100 19.63 Wholesale Trade 36,200 3.92 34,100 3.89 34,400 3.97 Retail Trade 85,500 9.27 83,100 9.49 82,100 9.47 Transport., Warehousing, Utilities 15,200 1.65 14,300 1.63 13,600 1.57 Information 34,300 3.72 31,400 3.59 32,800 3.78 Financial Activities 35,400 3.84 34,900 3.99 35,000 4.04 Professional & Business Services 173,800 18.84 166,900 19.06 166,000 19.15 Educational & Health Services 91,700 9.94 93,500 10.68 94,600 10.91 Leisure & Hospitality 68,800 7.46 69,000 7.88 69,800 8.05 Other Services 26,400 2.86 25,300 2.89 25,000 2.88 Government 101,100 10.96 97,800 11.17 94,700 10.93 Total Cl) 922,600 875,600 866,700

(1) Totals may not add due to independent rounding. Source: California Employment Development Department, Labor Market Information Division.

Maior Employers

Table 4 shows fifteen selected major employers in San Jose, ranked by the number of their employees, estimated as of November 2004.

Table 4 SELECTED MAJOR SAN JOSE EMPLOYERS Number of Company/Organization Type of Industry Employees 1. Cisco Systems Computer Equipment 16,000 2. Santa Clara County Government 15,000 3. IBM Corporation Computer Equipment 8,400 4. City of San Jose Government 6,800 5. San Jose State University Education 5,760 6. San Jose Unified School District Education 3,360 7. Hitachi Storage Software 2,900 8. Agilent Technologies Communications/ Life Sciences 2,880 9. Novellus Systems Semiconductor Equipment 2,700 10. Xilinx Semiconductor 2,600 11. eBay On-Line Auction 2,000 12. Adobe Systems Inc. Computer Software 2,000 13. Good Samaritan Health System Health Care 1,850 14. KLA Tencor Instruments Optical Inspection 1,850 15. Cadence Design Systems Inc. Computer Software 1,700 Source: City ofSan Jose Office ofEconomic Development, as ofNovember 2004.

A-4 Effective Buying Income

"Effective Buying Income" ("EBI"), also referred to as "disposable" or "after tax" income, consists of personal income less personal tax and certain non-tax payments. Personal income includes wages and salaries, other labor-related income (such as employer contributions to private pension funds), and certain other income (e.g. proprietor's income, rental income, dividends and interest, pensions, and welfare assistance). Deducted from this total are personal taxes (federal, state and local), certain non-tax payments (e.g. fines, fees and penalties), and personal contributions to a retirement program. Table 5 shows the top ten metropolitan markets ( as defined by Sales and Marketing Management Magazine) in median EBI for 2003, among which the San Jose Metropolitan Area ranked second.

Table 5 2003 TOP TEN METROPOLITAN AREAS MEDIAN HOUSEHOLD EFFECTIVE BUYING INCOME Los Alatnos, New Mexico ...... $65,663 San Jose-Sunnyvale-Santa Clara, California ...... 62,138 Bridgeport-Stamford-Norwalk, Connecticut ...... 56,743 Juneau, Alaska ...... 55,478 San Francisco-Oakland-Fremont, California ...... 53,820 Washington-Arlington-Alexandria, D. C. -Virginia-Maryland-West Virginia ...... 53,275 Edwards, Colorado ...... 52,497 Oxnard-Thousand Oaks-Ventura, California ...... 51,433 Boulder, Colorado ...... 50,267 Anchorage, Alaska ...... 49,953

U.S. Median ...... $38,201 Source: Sales & Marketing Management Magazine, "2004 Survey ofBuying Power and Media Markets, "published 2004.

Retail Sales

Table 6 on the next page sets forth a history of taxable sales for the City from calendar year 2000 through 2003. A comparison of the total taxable sales in the City between the first two quarters of 2003 and the first two quarters of 2004 (the most recent data available) shows an increase of approximately $272 million, or 5.4%.

A-5 Table 6 CITY OF SAN JOSE TAXABLE SALES (in thousands) 1999 2000 2001 2002 2003 Apparel stores ...... $ 277,068 $ 318,569 $ 334,087 $ 344,800 $ 372,107 General merchandise stores ...... 1,171,342 1,272,431 1,213,970 1,147,174 1,145,069 Food stores ...... 379,619 408,354 417,951 406,783 397,685 Eating and drinking establishments ...... 797,736 892,796 896,298 868,944 898,859 Home furnishings and appliances ...... 369,109 423,728 376,544 351,613 336,072 Building materials and farm implements ...... 622,043 728,725 726,447 732,972 737,588 Auto dealers and auto supplies...... 1,497,093 1,779,967 1,582,391 1,442,279 1,463,891 Service stations...... 601,391 782,781 763,075 654,091 744,517 Other retail stores ...... _. __l,~5_89~,_4_78_ 1,879,859 1,617,105 1,410,114 1,362,282 Retail Stores Total...... $ 7 ,304,879 $ 8,487,210 $ 7,927,868 $ 7,358,770 $ 7,458,070 All other outlets...... 4,012,234 5,123,559 4,426,922 3,328,201 3,373,127 TOTAL ALL OUTLETS .... $11,317,113 $13,610,769 $12,354,790 $10,686,971 $10,831,197

Source: California State Board ofEqualization.

Construction Activity

A history of construction valuation and new dwelling units for the most recent five calendar years appears in Table 7 below.

Table 7 CITY OF SAN JOSE CONSTRUCTION VALUATION AND NEW DWELLING UNITS (valuation in thousands (l) 2000 2001 2002 2003 2004 2 Valuation:< ) Residential ...... $ 678,358 $ 456,009 $ 378,779 $ 630,681 $ 476,060 Non-Residential .. 1,154,153 918,885 531,862 298,250 318,431 TOTAL $1,832,511 $1,374,894 $ 910,641 $ 928,931 $ 794,492

New Dwelling Units: Single Family ...... 1,328 659 621 887 960 Multi-Family ...... 3,131 2,710 1,863 3,631 2,017

TOTAL 4,459 3,369 2,484 4,518 2,977

(I5 Totals may not add due to independent rounding. 2 C ) Valuation figures are adjusted to 2004 dollars per Bureau of Labor Statistics Consumer Price Index, San Jose-San Francisco, Oakland, all items index. Source: City of San Jose, Department ofBuilding, Planning and Code Enforcement, January 2005.

A-6 Education

For the school year 2004-2005, there were an estimated 253,090 students were enrolled in the County's 233 elementary schools; 58 middle schools and junior high schools; 40 high schools; 57 community, alternative, special education, continuation and juvenile hall schools; and 19 charter schools. In addition, there are a number of private schools serving the residents of the County. The County has seven community colleges (within four community college districts: Foothill-DeAnza, Gavilan Joint, San Jose­ Evergreen, and West Valley-Mission). Major universities in the County include Stanford University, Santa Clara University, and San Jose State University.

The City is served by 18 of the 32 public school districts in the County. These school districts cross municipal boundaries. Principal public school systems serving the City are the San Jose Unified School District (grades K-12), with an estimated enrollment for school year 2004-2005 of 31,874, and the East Side Union High School District with an estimated enrollment of 25,496.

Transportation

The San Jose area is served by a network of freeways providing regional, national and international access. U.S. 101, a major north-south highway between San Francisco and Los Angeles, provides access to the deepwater seaports at San Francisco and Redwood City, and to air passenger and cargo facilities at Norman Y. Mineta San Jose International Airport (the "Airport") and San Francisco International Airport. Interstate 880 connects San Jose with the Oakland International Airport and the Port of Oakland. Interstates 280 and 680 provide access to the peninsula and eastern regions of the San Francisco Bay Area, respectively, and State Route 17 serves to connect San Jose with the Pacific Coast at Santa Cruz. Additional freeways serving the local area are State Routes 85, 87 and 237. During the past two decades, approximately $1. 8 billion has been invested by the State and the County to expand and improve the area freeway system. The Santa Clara Valley Transportation Authority (VTA) has begun improvements to the Coleman/880 interchange adjacent to the Airport. The project is estimated to cost $81 million. Construction began in March 2004 and is expected to be completed in September 2006.

The VT A provides public transit service throughout Santa Clara County. Transit services are readily accessible to residents of San Jose, as most residences and businesses in the city are within a quarter mile of bus or light rail service. VTA's bus network is made up of 69 bus routes and over 4,300 bus stops. The backbone of the bus network is Line 22, which operates between Eastridge Shopping Center in San Jose and the Menlo Park Caltrain Station, and carries almost six million passengers per year. Express routes offer a commute alternative to employment centers located throughout the County. The Guadalupe Light Rail Line runs 26.6 miles of service from the residential neighborhoods of south San Jose, through Downtown San Jose, the high technology employment centers in north San Jose, Milpitas, and serves residences in East San Jose. The Tasman Light Rail Line extends the light rail system another 10.3 miles from the Baypointe Station in North San Jose, servicing stations in Sunnyvale and Mountain View, and connecting with Caltrain commuter rail service at the Mountain View Caltrain Station. The 5.3-mile Vasona Light Rail Line is currently under construction from Downtown San Jose to Downtown Campbell and Winchester Boulevard. The Vasona Light Rail Line is scheduled to open in August 2005. VTA also partners with Altamont Commuter Express and Caltrain to provide commuter rail service, and with Santa Cruz Metro to provide regional bus service from Santa Cruz to Downtown San Jose.

In the November 2000 election, the voters of the County approved a 30-year, half-cent sales tax to commence collection in 2006 upon the expiration of the current one-half cent sales tax. This sales tax will finance various transit projects, including the possible extension of the Bay Area Rapid Transit

A-7 (BART) system to the City. BART is a heavy rail rapid transit system currently serving Alameda, Contra Costa, and San Francisco Counties and portions of San Mateo County.

The main coast line of the Union Pacific Railroad traverses the City, providing connections to San Francisco, Oakland, Sacramento and Los Angeles. Commuter rail service operates on this line between Gilroy and San Francisco. The Union Pacific Railroad also operates a branch line in the City serving heavy industry.

The Airport is located on approximately 1,000 acres of land approximately two miles north of Downtown San Jose, between the Bayshore Freeway (Highway 101) and Interstate 880. The Airport is a commercial service and general aviation airport and is classified by the FAA as a "medium hub" ( an airport that enplanes at least O.25% but less than 1. 0% of the total number of passenger boardings at all commercial service airports in the United States).

During fiscal year 2003-04, the Airport served approximately 5.5 million enplaned passengers and accommodated 197,756 operations (takeoffs and landings). According to preliminary traffic statistics by the Airports Council International-North America ("ACI-NA"), in calendar year 2004 the Airport was the 37th busiest airport in North America in terms of total passengers and the 44th busiest in terms of total cargo.

The City has a foreign trade zone that is located near the Airport in an approximately 3 74-acre business park. Foreign and domestic merchandise may be moved into the zone for storage, exhibition, manipulation, manufacturing or other processing without payment of federal duties or excise taxes until the goods leave the zone.

Property Taxes and Assessed Valuations

The assessed valuation of property is established by the County Assessor, and reported at 100% of the full cash value as of January 1, except for public utility property, which is assessed by the State Board of Equalization.

The County collects the ad valorem property taxes. Taxes ansmg from the one percent levy are apportioned among local taxing agencies on the basis of a formula established by State law in 1979. Under this formula, the City receives a base year allocation plus an allocation on the basis of growth in assessed value ( consisting of new construction, change of ownership and inflation). Taxes relating to voter-approved indebtedness are allocated to the relevant taxing agency. Beginning in FY 1990-91 (with the adoption of new State legislation), the County deducts the pro-rata cost of collecting property taxes from the City's allocation.

The California Community Redevelopment Law authorizes redevelopment agencies to receive the allocation of tax revenues resulting from increases in assessed valuations of properties within designated project areas. In effect, the other local taxing authorities realize tax revenues from such properties only on the base year valuations which are frozen at the time a redevelopment project area is created. The tax revenues which result from increases in assessed valuations flow to the redevelopment areas. The City has created redevelopment project areas pursuant to California law. Generally, funds must be spent within the redevelopment areas in which the tax increment revenues were generated, and may only be spent on projects which qualify under California redevelopment law.

Table 8 below sets forth a ten-year history of the City's assessed valuation.

A-8 Table 8 CITY OF SAN JOSE HISTORICAL ASSESSED VALUE OF PROPERTY (in thousands) Gross Assessed Percentage Fiscal Year Valuation Change 1994-95 ...... $46,074,404 (0.62)% 1995-96 ...... 47,400,940 2.88 1996-97 ...... 49,441,848 4.31 1997-98 ...... 53,669,515 8.55 1998-99 ...... 59,777,691 11.38 1999-00 ...... 65,316,993 9.27 2000-01 ...... 72,432,107 10.89 2001-02 ...... 83,699,432 15.56 2002-03 ...... 88,634,267 5.90 2003-04 ...... 92,414,521 4.27 Sources: City ofSan Jose Comprehensive Annual Financial Reports for FY 1994-95 through FY 2003-04.

Property Tax receipts collected for the City by the County are set forth in Table 9. Under current County policy, the City's allocation of total ad valorem taxes is received in approximately the following cumulative percentages: 40% by mid-December, 50% by the first week of January, 85% by the third week of April, 90% by the end of April and 100% by the end of June.

The County Board of Supervisors approved the implementation of an alternative method of distribution of tax levies and collections and of tax sale proceeds (a "Teeter Plan"), as provided for in Section 4701 et seq. of the California Revenue and Taxation Code. Under the Teeter Plan, the County apportions secured property taxes on an accrual basis when due (irrespective of actual collections) to its local political subdivisions, including the City, for which the County acts as the tax-levying or tax-collecting agency. The County then receives all future delinquent payments, penalties and interest. The Teeter Plan was effective in the County beginning the fiscal year commencing July 1, 1993.

The Teeter Plan is applicable to all tax levies for which the County acts as the tax-levying or tax­ collecting agency, or for which the County treasury is the legal depository of tax collections. As adopted by the County, the Teeter Plan excludes Mello-Roos Community Facilities Districts and special assessment districts that provide for accelerated judicial foreclosure of property for which special taxes or assessments are delinquent.

The Teeter Plan is to remain in effect unless the County Board of Supervisors orders its discontinuance or unless, prior to the commencement of any fiscal year of the County ( which commences on July 1), the Board of Supervisors receives a petition for its discontinuance joined in by resolutions adopted by at least two-thirds of the participating revenue districts in the County, in which event the Board of Supervisors is to order discontinuance of the Teeter Plan effective at the commencement of the subsequent fiscal year. The Board of Supervisors may, by resolution adopted no later than July 15 of the fiscal year for which it is to apply, after holding a public hearing on the matter, discontinue the procedures under the Teeter Plan with respect to any political subdivision in the County if the rate of secured property tax delinquency in that political subdivision in any year exceeds three percent (3%) of the total of all taxes and assessments levied on the secured rolls for that political subdivision. If the Teeter Plan is discontinued subsequent to its implementation, only those secured property taxes actually collected would be allocated to political subdivisions (including the City) for which the County acts as the tax-levying or tax-collecting agency.

A-9 Table 9 CITY OF SAN JOSE PROPERTY TAX RECEIPTS (in thousands) Percentage of Property Tax General Fund Fiscal Year Receipts Revenues 2001-02 $ 88,286 15.1% 2002-03 93,592 17.0 2003-04 95,649 17.1 1 2004-05 Modified Budget as of 3/31/05( ) 136,215 23.6 2005-06 Proposed BudgetCl) 143,996 25.5

(1) Includes motor vehicle license fee (MVLF) property tax replacement revenue, less $11.1 million in each year reflecting the impact of the State's 2004-05 Budget Act and the anticipated impact of the State's 2005-06 Budget Act. Sources: Annual Reports, City Manager's Office, for FY 2001-02 to FY 2002-03; FY 2005-06 Proposed Operating Budget for FY 2003-04 through FY 2005-06.

Property Tax receipts collected for the City by the County are set forth in Table 9 above. In preparing its budget, the City forecasts property taxes based on each of the specific categories of receipts (secured and unsecured, current and delinquent receipts, supplemental, and State replacement funds). Current receipts are based on the County Assessor's estimate of growth in assessed valuation, adjusted for estimates in growth for redevelopment project areas. Estimates of other property tax receipts are primarily based on historical collections.

Total Property Tax receipts in the FY 2004-05 Modified Budget are approximately $136.2 million, representing 23.6% of General Fund revenue and a 42.4% increase from FY 2003-04. Total Property Tax receipts in the FY 2005-06 Proposed Budget are approximately $144.0 million, representing 25.5% of budgeted General Fund revenues and a 5.7% increase from FY 2004-05. Both the 2004-05 Modified Budget and the 2005-06 Proposed Budget amounts include motor vehicle license fee (MVLF) property tax replacement revenue, less $11.1 million in each year reflecting the impact of the State's 2004-05 Budget Act and the anticipated impact of the State's 2005-06 Budget Act.

According to the County Assessor's 2004-2005 Annual Report, the assessed values of 10,877 properties located in the City of San Jose were reduced by the Assessor's Office, as of the lien date January 1, 2004, to reflect changes in market conditions for a total reduction of $4.11 billion. This represents a 28.74% decline from what would have been the assessed value of these properties had the market value not declined below the Proposition 13 protected assessed value. Countywide, almost 95% of properties with such reductions were residential, but over 75% of the reduced value came from commercial, industrial and office properties.

Investment Policy and Practices of the City

The City and its related entities are required to invest all funds under the Director of Finance's control funds in accordance with principles of sound treasury management and in accordance with the provisions of the California Government Code, the Charter of the City of San Jose, the City Municipal Code and the City Investment Policy (the "Policy"). The Policy was originally adopted by the City Council in its present format on April 2, 1985 (Resolution No. 58200) and is reviewed annually by the City Council. The City Council most recently amended the Policy on December 14, 2004. The Policy has been certified by the Association of Public Treasurers of the United States and Canada.

A-10 The primary objectives of the Policy, in their order of priority, are to (1) provide for the safe preservation of principal, (2) ensure that there is sufficient liquidity for operating needs, and (3) attain the maximum yield possible as long as investment practices are consistent with the first two stated objectives.

Current Investment Portfolio

As of April 30, 2005, the book value of the City's pooled investment fund was $1,038,612,054, while the market value was $1,028,415,811. The fund is classified by different types of investment securities. The composition of the fund, including the weighted average days to maturity and yield, is provided in Table 10 shown below. General Fund moneys invested in the fund represented approximately 14.99% of the fund.

Table 10 CITY OF SAN JOSE POOLED INVESTMENT FUND GENERAL POOL INVESTMENTS 1 As of April 30, 2005< ) Weighted Percent Average Weighted of Days to Average Book Value Portfolio Market Value Maturity Yield U.S. Treasury Bills and Notes ... $ 79,871,957 7.7% $ 79,220,793 482 2.793% Federal Agency Securities ...... 803,474,917 77.4 793,638,344 610 3.143 Medium Term Notes (corp.) ...... 0 0.0 0 0 0.000 Bankers Acceptance ...... 14,389,397 1.4 14,455,863 71 2.870 Commercial Paper ...... 49,476,783 4.8 49,701,812 16 2.790 Repurchase Agreements ...... 48,000,000 4.6 48,000,000 6 3.772 Money Market Mutual Fund ...... 0 0.0 0 0 0.000 2 State of California LAIF< ) ...... 43,399,000 4.2 43,399,000 1 2.720

$1,038,612,054 100.0% $1,028,415,811 511 3.107%

(1) Totals may not round due to independent rounding. 2 ( ) Estimated based upon City's participation in the Local Agency Investment Fund (LAIF). Weighted average yield for LAIF is based upon the most recently reported quarterly earnings rate. Source: City ofSan Jose Finance Department.

A-11 (THIS PAGE INTENTIONALLY LEFT BLANK) APPENDIXB AUDITED FINANCIAL STATEMENTS OF THE AGENCY FOR FISCAL YEAR ENDED JUNE 30, 2004

B-1 (THIS PAGE INTENTIONALLY LEFT BLANK) The Board of Directors Redevelopment Agency of the City of San Jose, California

INDEPENDENT AUDITOR S REPORT

We have audited the accompanying financial statements of the governmental activities and each major fund of the Redevelopment Agency of the City of San Jose, California (Agency), a component unit of the City of San Jose, California, as of and for the fiscal year ended June 30, 2004, which collectively comprise the Agency s basic financial statements as listed in the accompanying table of contents. These financial statements are the responsibility of the Agency s management. Our responsibility is to express opinions on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions.

In our opinion, the financial statements referred to in the first paragraph present fairly, in all material respects, the respective financial position of the governmental activities and each major fund of the Agency as of June 30, 2004, and the respective changes in financial position for the fiscal year then ended in conformity with accounting principles generally accepted in the United States of America.

In accordance with Government Auditing Standards, we have also issued our report dated September 3, 2004, on our consideration of the Agency s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit.

11 The managements discussion and analysis and budgetary comparison information, as listed in the accompanying table of contents, are not a required part of the basic financial statements but are supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it.

Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Agency s basic financial statements. The information identified in the accompanying table of contents as the introductory, other supplementary information, and statistical sections is presented for purposes of additional analysis and is not a required part of the basic financial statements. The other supplementary information identified in the accompanying table of contents has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. The introductory and statistical sections have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we express no opinion on them.

11:<\~.jl,.j,,ij.·~~,, Certified Pub I ic Accountants

Walnut Creek, California September 3, 2004

12

REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Management's Discussion and Analysis June 30, 2004

As management of the Redevelopment Agency of the City of San Jose (the Agency), we offer readers of the Agency's basic financial statements this narrative overview and analysis of the financial activities of the Agency for the fiscal year ended June 30, 2004. We encourage readers to consider the information presented here in conjunction with additional information that we have furnished in our letter of transmittal, which can be found beginning on page 1 of this report.

FINANCIAL HIGHLIGHTS

Liabilities of the Agency exceeded its assets in governmental activities at the close of fiscal year 2004 by $1,443,046,000 (net deficit). Of this amount, $7,008,000 represents investment in capital assets, and $38,040,000 represents resources restricted for debt service payment and low/moderate income housing activities. The remaining negative amount of $1,488,094,000 represents the accumulated unrestricted deficit at the close of fiscal year 2004.

Total revenues in the governmental activities decreased by $114,022,000 or 34% from last year. The decrease is attributable to the decline in tax increment revenue by $27 ,818,000 and capital grants and contributions by $79,576,000.

Total expenses in governmental activities were $139,851,000 (change in net assets) more than the $219,565,000 total revenues generated during the current year. Compared to last year, total expenses in governmental activities decreased by $176,953,000 or by 33%. The decline in expenses is attributable to the $152,960,000 or 46% decrease in community development improvement projects.

At the close of the current fiscal year, the Agency's governmental funds reported combined ending fund balances of $263,561,000, an increase of $65,333,000 in comparison to the prior year. Of the combined fund balance, $144,107,000 or 55% is available for redevelopment projects at the discretion of the Agency Board/(Council).

The general fund reported an increase in fund balance by $1,457,000 mainly due to a $4,350,000 or 17% decrease in general and administrative expenditures.

13 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Management's Discussion and Analysis (Continued) June 30, 2004

OVERVIEW OF THE FINANCIAL STATEMENTS

This discussion and analysis is intended to serve as an introduction to the Agency's basic financial statements. The Agency's basic financial statements comprise three components: 1) government-wide financial statements, 2) fund financial statements, and 3) notes to the basic financial statements. This report also contains required and other supplementary information in addition to the basic financial statements themselves.

Government-wide Financial Statements

The Government-wide Financial Statements are designed to provide readers with a broad overview of the Agency's finances, in a manner similar to a private-sector business.

The statement o{net assets reports all financial and capital resources of the Agency. The Agency presents the statement in a format that displays assets less liabilities equal net assets/( deficit). Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the Agency is improving or deteriorating.

The statement of activities presents information showing how the Agency's net assets changed during the most recent fiscal year. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing ofrelated cash flows. Thus, revenues and expenses are reported in this statement for some items that will result in cash flows in future fiscal periods such as revenues pertaining to uncollected taxes and earned but unused vacation and sick leave.

The governmental activities of the Agency include general government, community development, housing, and debt service. The government-wide financial statements can be found on pages 26 and 2 7 of this report.

Fund Financial Statements

Fund Financial Statements are designed to report information about groupings (funds) of related accounts, which are used to maintain control over resources that have been segregated for specific activities or objectives. The Agency, like other state and local governments, uses fund accounting to ensure and demonstrate finance-related legal compliance. Allfunds of the Agency are categorized as governmental funds.

Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, unlike the government-wide financial statements, governmental fund financial statements focus on

14 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Management's Discussion and Analysis ( continued) June 30, 2004

near-term inflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of the fiscal year. Such information may be useful in determining what financial resources are available in the near future to finance the Agency's redevelopment programs.

Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government­ wide financial statements. By doing so, readers may better understand the long-term impact of the government's near-term financing decisions. Both the governmental fund balance sheet and the governmental fund statement of revenues, expenditures and changes in fund balances provide a reconciliation to facilitate this comparison between governmental funds and governmental activities.

The Agency maintains several individual governmental funds created according to their purpose. The individual fund information is presented separately in the governmental fund balance sheet (page 28) and in the governmental fund statement of revenues, expenditures and changes in fund balances (page 30) for all the Agency's governmental funds.

Notes to the Basic Financial Statements

Notes to the Basic Financial Statements provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. The notes to the financial statements can be found on pages 33 to 57 of this report.

Other Information

In addition to the basic financial statements and accompanying notes, this report also presents required supplementary information concerning the Agency's budgetary comparison for certain governmental funds - general fund and special revenue fund (pages 58to61).

15 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Management's Discussion and Analysis ( continued) June 30, 2004

GOVERNMENT-WIDE FINANCIAL ANALYSIS

As noted earlier, net assets may serve over time as a useful indicator of a government's financial position. In the case of the Agency, it is also an important determinant of its ability to finance current and future redevelopment projects.

At the close of fiscal year 2004, the Agency has a net deficit of $1,443,046,000. Of this amount, $7,008,000 is invested in capital assets, $37,849,000 is restricted for debt service, and $191,000 for low and moderate-income housing. The remaining balance of ($1,488,094,000) represents a deficit, which will be covered from collection of future tax increment and other revenues. The largest portion of the Agency's deficit is caused by the outstanding long-term obligations of $2,085,325,000. Traditionally, the Agency carries a deficit to collect tax increment as mentioned earlier in the letter of transmittal. This is primarily due to the nature of tax increment financing method allowed under California law whereby a redevelopment agency issues bonds or incurs long-term debt to finance its redevelopment projects by pledging future tax increment revenues.

The Agency uses debt proceeds to finance its redevelopment projects which include land, commercial and retail buildings, housing, public parking, street improvements, park improvements, transportation improvements, cultural facilities, and community centers. Once redevelopment projects that are public facilities are completed by the Agency, the responsibilities for their continued maintenance and operations are transferred to the City of San Jose including the capitalized redevelopment project costs. To date, such public facilities include: • San Jose McEnery Convention Center, • Children's Discovery Museum, • San Jose Museum of Art, • HP Pavilion at San Jose (Arena), • Tech Museum of Innovation, • Mexican Heritage Plaza, • Guadalupe River Park and Gardens, • Washington United Youth Center and Biblioteca LatinoAmericana, • San Jose Repertory Theater, • 4th Street Parking Garage, and • Alum Rock Youth Center.

In addition, completed Joint Agency-Private Partnership projects with private developers are also transferred to the developers in accordance with the Development and Disposition Agreements. Although completed public facilities and Joint Agency-Private Partnership

16 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Management's Discussion and Analysis ( continued) June 30, 2004

projects are transferred to the City of San Jose and private developers, respectively, the related debt remains with the Agency.

Shown below is a comparative schedule that summarizes the Agency's net assets (net deficit):

Agency's Net Assets (Deficit) Governmental Activities As of June 30, 2004 and 2003 (In thousands)

2004 2003

Current and other assets $ 369,898 $ 328,553 Accumulated redevelopment project costs 360,217 391,039 Capital assets, net 7,008 6,125 Total assets 737,123 725,717

Long-term liabilities 2,085,325 1,901,738 Other liabilities 94,844 127,174 Total liabilities 2,180,169 2,028,912

Net assets: Invested in capital assets 7,008 6,125 Restricted net assets 38,040 80,481 Unrestricted net assets (deficit) (1,488,094) (1,389,801)

Total Net Assets $(1,443,046) $(1,303, 195)

The Agency uses its accumulated redevelopment project costs and capital assets of $367,225,000 (see page 37 for additional information) to provide community development services to the citizens of the City of San Jose. These assets are not available for future spending and cannot be used to liquidate the Agency's debt since the resources needed to repay the debt will be provided primarily from collections of future tax increments and other revenues.

17 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Management's Discussion and Analysis ( continued) June 30, 2004

Governmental activities. Overall the Agency's financial position decreased from the prior year. Under the governmental activities, the Agency's net deficit increased by $139,851,000 from the previous fiscal year. The increase accounts for 9.7 percent of the accumulated deficit.

Key elements of the changes in net assets of the governmental activities are presented below:

Agency's Changes in Net Assets (Deficit) For the Fiscal Years Ended June 30, 2004 and 2003 (In Thousands)

2004 2003 Revenues: Program revenues: Operating grants and contributions $ 24,172 $ 25,093 Capital grants and contributions 18,114 97,690 General revenues: Tax increment 170,208 198,026 Unrestricted investment earnings 4,331 7,513 Miscellaneous 2,740 5,265 Total revenues 219,565 333,587

Expenses: General government 22,270 26,903 Community development 181,384 334,344 Housing 61,678 82,227 Debt service 94,084 92,895 Total expenses 359,416 536,369

Change in net assets (139,851) (202,782)

Net assets/(deficit) - beginning of year (1,303,195) (1,100,413)

Net assets/(deficit) - end of year $(1,443,046) $(1,303,195)

18 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Management's Discussion and Analysis ( continued) June 30, 2004

• Tax increment, which represents approximately 78% of total revenues, decreased from last year by $27,818,000 or 14%. The decrease was down from the 5% growth reported in the previous year due to the effects of the continuing weak local economy that triggered a rise in assessment appeals from property owners, declining value of R&D/office property in redevelopment project areas, and declining real estate transactions.

• Capital grants and contributions under program revenues decreased by $79,576,000 from last year. Last year's amount was higher due mainly to the reimbursement from City of San Jose of the costs of the site assembly for the City Hall building project, including interest, in compliance with the settlement agreement on the Ruffo case.

Revenues by Source - Governmental Activities Fiscal Year 2004

• Community development expenses of $181,384,000, which represent approximately 51 % of Agency's total governmental expenses (see graph on page 20), decreased by $152,960,000 or 46%. The decrease is mainly due to deferral of several redevelopment projects during the year.

19 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Management's Discussion and Analysis ( continued) June 30, 2004

• Housing expenses decreased by $20,549,000 from last year. This is due to the decline in payments made to the City for housing projects, resulting from lower draws on housing bond proceeds ($14,991,000) and less housing set-aside money ($5,558,000) during the year.

Expenses Governmental Activities Fiscal Year 2004

• Total general government expenses of $22,270,000 decreased by $4,634,000 or 18% from last year. Of this amount, $1,120,000 represents a decrease in salaries, wages and benefits, and a $3,514,000 decrease in non-personnel services. The decrease was a result of cost cutting measures initiated by the Agency during the year, including reduction of Agency positions, no cost-of-living adjustments, no merit allowances, no health and dental benefit increases, and reduction in the use of outside consulting services.

20 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Management's Discussion and Analysis (continued) June 30, 2004

FINANCIAL ANALYSIS OF THE AGENCY'S FUNDS

As noted earlier, the Agency uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements.

Governmental funds. The focus of the Agency's governmental funds is to provide information on near-term inflows, outflows, and balances of resources that are available for spending. Such information is useful in assessing the Agency's financial requirements. In particular, unreserved fund balance may serve as a useful measure of a government's net resources available for spending at the end of the fiscal year. Individual fund information of governmental funds reported by the Agency includes general fund, special revenue fund, housing debt service fund, merged debt service fund, and capital projects fund, which are all considered major funds.

At the end of the current fiscal year, the Agency's governmental funds reported combined fund balances of $263,561,000, an increase of $65,333,000 in comparison with the prior year. Of this total amount, $144,107,000 constitutes unreserved fund balance, which is available for redevelopment spending at the discretion of the Agency Board. The remainder of the fund balance is reserved to indicate that it is not available for new spending because it has been committed: 1) to pay debt service ($76,545,000), 2) to reflect the amount of assets that are long-term in nature and thus do not represent available spendable resources ($3,910,000), 3) to pay for low and moderate-income housing projects ($191,000), and 4) to liquidate contractual commitments of the period ($38,808,000).

General fund. The Agency's general fund is used to account for the general and administrative expenditures. At the end of this fiscal year, the unreserved fund balance of the general fund was $5,243,000 while total fund balance was $6,706,000. Fund transfers from the capital projects fund are made to the general fund as general and administrative expenditures are incurred and deemed necessary.

Special revenue fund. The special revenue fund is used to account for the portion of tax increment revenue designated for low and moderate-income housing. As required by the California Community Redevelopment Law, the Agency allocated 20 percent ($34,042,000) of the tax increment received during the year for low and moderate-income housing projects. At the end of the current year, the fund balance of the special revenue fund was zero, as the entire 20% tax increment housing set aside was transferred to the City of San Jose's Housing Project Fund.

21 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Management's Discussion and Analysis (continued) June 30, 2004

Debt service funds. The debt service funds have a total fund balance of $76,737,000 representing Housing Debt ($191,000) and Merged Debt ($76,546,000). The total fund balance in the Agency's debt service funds decreased by $1 7 ,694,000 from the previous year mainly from the release of the $25,873,000 debt service cash reserve fund, which was replaced by an insurance policy. The funds will be used for redevelopment projects.

Capital projects fund. The fund balance in the Agency's capital projects fund had a net increase of $81,675,000 from last fiscal year as the result of total revenues and other fund financing sources ($279,845,000) being higher than the aggregate expenditures and other fund financing uses ($198,170,000).

Total capital outlay expenditures of $107 ,533,000, which represents around 55% of the overall expenditures and other financing uses, decreased by $159,367,000 or around 60%. When compared to last year's capital activity increase of $26,954,000 or 11 %, this year's decline is the result of deferral of several capital project activities due to the declining tax increment revenues caused by a downturn in the economy.

General Fund Budgetary Highlights

As previously mentioned the general fund only accounts for the Agency's general and administrative expenditures. During the year, changes to the general fund original budget were approved by the Board, as follow:

• Decrease in personnel budget by $426,900. • Decrease in non-personnel budget by $2,383,287. • Decrease in City Support Services by $720,539.

Total actual expenditures on budgetary basis of $23.6 million were lower by $3.9 million from the original budgeted amount of $27.5 million as a result of cost cutting measures, such as elimination of a number of positions and reduction in consultant contracts not related to contractually obligated projects, initiated throughout the year. During the year, actual budgetary expenditures exceeded actual budgetary revenues by $22.5 million, which triggered the fund transfers from capital projects fund to the general fund.

22 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Management's Discussion and Analysis (continued) June 30, 2004

Accumulated Redevelopment Project Costs and Capital Assets

Accumulated Redevelopment Project Costs

The Agency's investment in properties for redevelopment projects for its governmental activities as of June 30, 2004 amounted to $360,217,000. This is comprised of 61 % land and 39% construction in progress.

Major events during the current fiscal year included the following:

• Construction in progress of $141 million decreased from last year by $16 million due to the deferral of several capital project activities, as stated earlier. During the year, charges to construction projects include the following: $24 million for Fox Theater, $5.6 million for 4th/San Fernando Street Garage Parking, $3.4 million for Dr. Martin Luther King, Jr. Library, $2.5 million for Alum Rock Youth Center and $2. 7 million for other public projects. • Parcels of land were acquired for eventual use for redevelopment projects at a cost of $25 million. Costs of land associated with 4th/San Fernando Street Garage Parking of $9 million, and San Jose Repertory Theatre of $3.2 million were transferred to the City, including $3.8 million costs of land that was transferred to private developers in accordance with Disposition and Development Agreements. • Costs of completed construction projects aggregating to $52.3 million were transferred to the City of San Jose. These are 4th/San Fernando Street Garage Parking ($46.6 million) and Alum Rock Youth Center ($5.7 million)

At June 30, 2004, the Agency had contract commitments of $37 million for redevelopment projects.

Additional information about the Agency's accumulated redevelopment project costs capital assets can be found on pages 3 7, 43 and 44 of notes to the financial statements.

Capital Assets

For the government-wide financial statement presentation, depreciable capital assets were depreciated from acquisition date to the end of the current fiscal year using the straight-line method. The Agency's capital assets consist of the parking garage ($10 million) located beneath the Fairmont Plaza Hotel in downtown San Jose with net book value of $5,875,000 at June 30, 2004. During the year, improvement of retail site at Fairmont Plaza

23 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Management's Discussion and Analysis ( continued) June 30, 2004

Hotel - Annex amounting to $1,156,000 was capitalized; fund financial statements record capital asset purchases as expenditures. Additional information about the Agency's capital assets can be found on pages 3 7 and 44 of notes to the financial statements.

Debt Administration

At June 30, 2004, the Agency had long-term bonds and notes outstanding aggregating to $2,085,140,000. Of this amount, $1,854,480,000 represents bonds backed by tax increment revenues. The remainder of the Agency's debt represents other bonds and notes secured by tax increment and other revenues such as developer payments, interest earnings and other sources.

Merged Area Tax Allocation Bonds (TABs) $ 1,524,705,000 Housing Set-aside bonds 210,775,000 Merged Area Revenue Bonds 119,000,000 Sub Total 1,854,480,000 Convention Center Lease Revenue Bonds 181,390,000 4th/San Fernando Parking Revenue Bonds Pledge Obligation 45,145,000 HUD Section 108 Loans 4,125,000 Total Debt $ 2,085, 140,000

During the year, the Agency issued the following bonds: 1. 2004A Merged Refunding Bonds for $281,985,000. 2. 2003 Merged Tax allocation Bonds for $135,000,000. 3. 2003 Merged Revenue Bond Series A for $45,000,000 and Series B for $15,000,000. 4. 2003 Housing Set Aside Bonds Series J for $55,265,000 and Series K for $13, 735,000.

The ratings on Tax Allocation Bonds (TABs) with bond insurance are "AAA" by the rating agencies - Standard and Poor' s, Moody's, and Fitch. Without bond insurance, the ratings are "A" by Standard Poor's, "A3" by Moody's, and "A" by Fitch. The Housing Set-aside Bonds, comprised of various issues, are rated "A" to "AAA" except for the $70 million variable rate bonds which are rated "VMIG 1" - the highest short term rating from Moody's. The Agency's $11 million Merged Area Revenue Bonds are rated "A+ 1" - the highest short term rating from Standard & Poor's. All other bonds are rated "AAA."

24 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Management's Discussion and Analysis ( continued) June 30, 2004

Additional information about the Agency's long-term obligations can be found on pages 45 to 50 in the notes to the financial statements.

ECONOMIC FACTORS AND NEXT YEAR'S BUDGET

The Agency Board (Council) considers many factors when setting redevelopment project priorities and the budget for the ensuing year. Below are significant factors in considering the Agency's budget for the fiscal year 2004-2005:

• 12% decline of total assessed values of property in the redevelopment areas at January 1, 2004. • Vacancy rate, according to Colliers Parrish International, for office property in Downtown San Jose was approximately 23%. Vacancy rate of R&D/office property in the Agency's Industrial Redevelopment Areas ranges from 21 % to 22%. • Economic outlook and budget deficit of the State of California, in particular the redevelopment agencies' share in the State's Educational Revenue Augmentation Fund (ERAF). The Agency is expected to contribute approximately $18. 7 million in the next fiscal year. • Unemployment rate of 7.4% at July 2004 in San Jose/Silicon Valley as reported by California Employment Development Department, a decrease from the 9.8% rate at June 30, 2003. This compares unfavorably to the State's unemployment rate of 6.5% and national average rate of 5. 7% for the same period.

REQUEST FOR INFORMATION

This financial report is designed to provide our citizens, taxpayers, customers, investors and creditors with a general overview of the Agency's finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the Director of Finance and Administration/Chief Financial Officer, 50 West San Fernando Street, Suite 900, San Jose, CA 95113. Additional financial data may also be found on the Agency's website (www.sjredevelopment.org).

25 THIS PAGE INTENTIONALLY LEFT BLANK

REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE Statement of Net Assets Governmental Activities June 30, 2004

ASSETS Cash and investments (Note II.A) $ 164,982,397 Receivables (net): Accrued interest 594,707 Due from the City of San Jose (Note III.C) 20,022,217 Other 1,407,831 Advances to the City of San Jose (Note III.C) 580,362 Loans receivable, net (Note II.B) 35,829,490 Deposits 62,491 Deferred charges, net 16,518,629 Restricted assets: Cash and investments (Note II.A) 129,742,802 Accrued interest receivable 157,338 Accumulated redevelopment project costs (Note ILE): Land held for redevelopment 219,087,017 Construction in progress 141,129,685 Capital assets, depreciable (Note II.F) 7,007,978 Total assets 737,122,944

LIABILITIES Accounts payable and accrued liabilities (Note II.G) 6,629,774 Deferred revenue (Note II.C) 3,952,454 Due to the City of San Jose (Note III.C) 9,403,274 Due to the County of Santa Clara (Note III.D) 15,479,470 Liabilities payable from restricted assets: Deposits, retentions and other payables 20,682,496 Accrued interest payable 38,696,149 Noncurrent liabilities (Note II.H) Due within one year 30,928,512 Due in more than one year 2,054,396,343 Total liabilities 2,180,168,472

NET ASSETS Investment in capital assets 7,007,978 Restricted for: Debt Service 37,849,359 Low and moderate income housing activities 191,312 Unrestricted deficit (1,488,094,177) Total net deficit $ (1,443,045,528)

See Accompanying Notes to the Financial Statements

26 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE Statement of Activities Governmental Activities For the Fiscal Year Ended June 30, 2004

General Community Debt Total Government Development Housing Service

Expenses: Salaries, wages and benefits $ 13,633,606 $ 13,633,606 $ $ $ Materials, supplies and other services 8,635,884 8,635,884 Other project expenses 242,789,357 181,110,699 61,678,658 Depreciation 273,122 273,122 Interest on debt 94,083,642 94,083,642 Total expenses 359,415,611 22,269,490 181,383,821 61,678,658 94,083,642

Program revenues: Operating grants and contributions 24,172,462 12,704,293 11,468,169 Capital grants and contributions 18,113,528 18,113,528 Net program expense (317,129,621) $ (22,269,490) $ (150,566,000) $ (50,210,489) $ (94,083,642)

General revenues: Tax increment 170,208,035 Unrestricted investment earnings 4,330,557 Miscellaneous 2,740,425 Total general revenues 177,279,017 Change in net assets (139,850,604) Net deficit, beginning of year (1,303,194,924) Net deficit, end of year $ (1,443,045,528)

See Accompanying Notes to the Financial Statements

27 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE Balance Sheet Governmental Funds June 30, 2004

Special Debt Service Capital General Revenue Housing Merged Projects Total ASSETS Cash and investments (Note II.A) $ 7,460,647 $ $ $ $ 157,521,750 $ 164,982,397 Receivables (net): Accrued interest 12,321 582,386 594,707 Due from the City of San Jose (Note III.C) 4,500 16,200,000 3,817,717 20,022,217 Other 117,408 1,290,423 1,407,831 Advances to the City of San Jose (Note 111.C) 580,362 580,362 Loans receivable, net (Note II.B) 35,829,490 35,829,490 Deposits 42,241 20,250 62,491 Restricted assets: Cash and investments (Note II.A) 191,265 76,388,217 53,163,320 129,742,802 Accrued interest 47 157,291 157,338 TOTAL ASSETS $ 7,637,117 $ 16,200,000 $ 191,312 $ 76,545,508 $ 252,805,698 $ 353,379,635

LIABILITIES AND FUND BALANCES Liabilities: Accounts payable and accrued liabilities (Note ILG) $ 879,728 $ $ $ $ 5,750,046 $ 6,629,774 Deferred revenue (Note II.C) 37,623,420 37,623,420 Due to the City of San Jose (Note 111.C) 24,874 9,378,400 9,403,274 Due to the County of Santa Clara (Note III.D) 15,479,470 15,479,470 Deposits, retentions, and other payables 27,009 16,200,000 4,455,487 20,682,496 Total liabilities 931,611 16,200,000 72,686,823 89,818,434 Fund balances: Reserved for: Long-term receivables 3,266,938 3,266,938 Advances and deposits 42,241 600,612 642,853 Debt service 76,545,508 76,545,508 Low and moderate income housing activities 191,312 191,312 Encumbrances 1,420,481 37,387,130 38,807,611 Unreserved, designated for redevelopment activities 5,242,784 138,864,195 144,106,979 Total fund balances 6,705,506 191,312 76,545,508 180, 118,875 263,561,201

TOTAL LIABILITIES AND FUND BALANCES $ 7,637,117 $ 16,200,000 $ 191,312 $ 76,545,508 $ 252,805,698 $ 353,379,635

See Accompanying Notes to the Financial Statements

28 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Assets of Governmental Activities June 30, 2004

Amount reported for governmental activities in the statement of net assets are different because:

Fund balances of all governmental funds (Page 28) $ 263,561,201

Capital assets used in governmental activities are not spendable current financial resources and, therefore, are not reported in the balance sheet of governmental funds. 7,007,978

Accumulated redevelopment costs are capitalized costs that will be transferred to the City and/or developers upon project completion. These costs are not spendable current financial resources and, therefore, are not reported in the balance sheet of the governmental funds. 360,216,702

Long-term receivables, included in loans receivable, are not available to pay for current period expenditures and, therefore, are deferred on the modified accrual basis of accounting. 33,670,966

Bond issuance costs are expended in governmental funds when paid, and are capitalized and amortized over the life of the corresponding bonds for purposes of the statement of net assets. Deferred charges, net of accumulated amortization 16,518,629

Long-term liabilities are not due and payable in the current period and, therefore, are not reported in the balance sheet of governmental funds. Tax allocation bonds $ (1,735,480,000) Revenue bonds (119,000,000) Convention Center refunding revenue bonds, net (181,390,000) Pledge obligation ( 4th St./San F enrando Parking Revenue Bonds) (45,145,000) HUD Section 108 loans (4,125,000) Unamortized premiums and discounts on bonds (19,262,656) Unamortized deferred amount on refunding 20,020,496 Compensated absences (942,695) (2,085,324,855)

Interest payable on long-term debt does not require the use of current financial resources and, therefore, interest payable is not accrued as a liability in the balance sheet of governmental funds. (38,696,149)

Net deficit of governmental activities (Page 26) $ (1,443,045,528)

See Accompanying Notes to the Financial Statements

29 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE Statement of Revenues, Expenditures and Changes in Fund Balances Governmental Funds For the Fiscal Year Ended June 30, 2004

Special Debt Service Capital General Revenue Housing Merged ~ects Total REVENUES: Tax increment $ $ 34,041,607 $ $ 103,365,087 $ 32,801,341 $ 170,208,035 Intergovernmental 11,468,169 26,939,071 38,407,240 Investment income 62,586 161,583 663,103 3,443,285 4,330,557 Developer contributions 2,147,682 2,147,682 Grant revenue 1,731,068 1,731,068 Rent 697,928 300,528 998,456 Other 369,224 1,527,220 1,896,444 Total revenues 1,129,738 34,041,607 11,629,752 104,028,190 68,890,195 219,719,482 EXPENDITURES: General government 16,538,394 16,538,394 Intergovernmental: Payments to the City of San Jose (Note III. C) 5,634,573 34,147,232 27,531,426 23,097,939 90,411,170 Payments to the County of Santa Clara (Note 111.D) 25,399,196 25,399,196 Payments to other governmental agencies 2,922,408 2,922,408 Capital outlay: Project expenditures 59,136,015 59,136,015 Payments to the City of San Jose (Note 111.C) 32,396,996 32,396,996 Payments to the County of Santa Clara (Note 111.D) 16,000,000 16,000,000 Debt service: Principal repayment 33,860,000 33,860,000 Interest and other charges 7,362,083 84,166,568 91,528,651 Payments to refunded bond escrow agent 4,160,960 7,790,702 11,951,662 Bond issuance costs 1,157,545 7,709,884 8,867,429 Total expenditures 22,172,967 34,147,232 40,212,014 133,527,154 158,952,554 389,011,921 DEFICIENCY OF REVENUES UNDER EXPENDITURES (21,043,229) (105,625) (28,582,262) (29,498,964) (90,062,359) (169,292,439) OTHER FINANCING SOURCES (USES): Tax allocation bonds issued 14,006,209 120,993,791 135,000,000 Premium on tax allocation bonds 1,423,919 1,423,919 Revenue bonds issued 399,300 59,600,700 60,000,000 Refunding bonds issued 69,000,000 281,985,000 350,985,000 Premium on refunding tax allocation bonds 15,300,851 15,300,851 Payment to refunded bond escrow agent (40,471,506) (292,099, 726) (332,571,232) Sale of capital assets 4,486,433 4,486,433 Transfers in 22,500,000 16,717,071 25,873,646 65,090,717 Transfers out (348) (25,873,298) (39,217,071) (65,090,717) Total other fmancing sources (uses) 22,500,000 28,528,146 11,859,326 171,737,499 234,624,971 NET CHANGE IN FUND BALANCES 1,456,771 (105,625) (54,116) (17,639,638) 81,675,140 65,332,532 FUND BALANCES, BEGINNING OF YEAR 5,248,735 105,625 245,428 94,185,146 98,443,735 198,228,669 FUND BALANCES, END OF YEAR $ 6,705,506 $ $ 191,312 $ 76,545,508 $ 180,118,875 $ 263,561,201

See Accompanying Notes to the Financial Statements 30 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities of Governmental Activities For the Fiscal Year Ended June 30, 2004

Amounts reported for governmental activities in the statement of activities are different because:

Net change in fund balances of all governmental funds (Page 30) $ 65,332,532

Governmental funds report capital outlays as expenditures. However, in the statement of activities the cost of these assets is either allocated over their estimated useful lives and reported as depreciation expense or accumulated as redevelopment project costs and transferred to the City or developers upon project completion. The components of capital outlay related costs not reported in the statement of activites for the current period are as follows: Costs capitalized related to accumulated redevelopment projects costs $ 63,175,689 Costs capitalized related to capital assets 1,156,100 Costs related to completed projects transferred to the City and developers (93,998,298) Depreciation expense (273,122) (29,939,631)

Revenues and loans repayments recognized in the governmental funds that were earned and recognized in previous years and are reported as beginning net assets in the statement of activites: Loan repayments received (154,475) New loans given during the fiscal year 3,646,535 3,492,060

Compensated absenses reported in the statement of activities do not require the use of current financial resources and, therefore, are not reported as expenditures in governmental funds. (96,524)

Bond issuance costs are expended in governmental funds when paid, however, are capitalized and amortized over the life of the corresponding bonds for the purposes of the statement of activities: Bond issuance costs 8,867,429 Amortization of bond issuance costs (624,603) 8,242,826

Repayment of long-term debt principal is reported as an expenditure in governmental funds and, thus, has the effect of reducing fund balance because current financial resources have been used. However, the principal payments reduce the liabilities in the statement of net assets and do not result in an expense in the statement of activities. The Agency's long-term debt was reduced because principal payments were made to bond holders and HUD: Tax allocation bonds 28,395,000 Convention Center refunding revenue bonds 4,050,000 Pledge obligation (4th St/San Fernando Parking Revenue Bonds) 1,225,000 HUD Section 108 loans 190,000 Payment to refunded bond escrow agent 344,522,894 378,382,894

(Continued on next page)

See Accompanying Notes to the Financial Statements

31 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities of Governmental Activities For the Year Ended June 30, 2004

(Continued from previous page)

Accrued interest expense on long-term debt is reported in the statement of activities, but does not require the use of current financial resources. Amortization of bond premiums, discounts and deferred amounts on refunding should be expensed as a component of interest expense on the statement of activities. This amount represents the net accrued interest expense and the Amortization of bond premiums, discounts and deferred amounts on refunding not reported in governmental funds: Increase in accrued interest expense (2,619,676) Amortization of bond premiums and discounts 362,271 Amortization of deferred amounts on refunding (297,586) (2,554,991)

Bonds proceeds are reported as financing sources in governmental funds and thus contribute to the change in fund balance. In the government-wide statements, however, issuing debt increases long-term liabilities in the statement of net assets and does not affect the statement of activities. Proceeds were received from: Tax allocation bonds (136,423,919) Proceeds from revenue bonds (60,000,000) Proceeds from refunding bonds (366,285,851) (562,709,770)

Change in net assets of governmental activities (Page 27) $ (139,850,604)

See Accompanying Notes to the Financial Statements

32 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to the Basic Financial Statements June 30, 2004

I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The basic financial statements of the Redevelopment Agency of the City of San Jose (the Agency) have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) as applicable to governmental units. The Governmental Accounting Standards Board (GASB) is the accepted standard-setting body for establishing governmental accounting and financial reporting principles. The more significant accounting policies of the Agency are described below:

A. Reporting Entity

The Agency was established in 1956 by the San Jose City Council as a public entity legally separate from the City of San Jose (the City). In 1975, the City Council declared itself the Agency Board, replacing a separate board. The Agency has the broad authority to acquire, rehabilitate, develop, administer, and sell or lease property in a "Redevelopment Area." Redevelopment projects may be developed in cooperation with private developers. Redevelopment projects are also developed under cooperation agreements between the Agency and the City. The cooperation agreements call for the City to provide general, administrative, and other services in exchange for amounts paid by the Agency.

The Agency generally finances redevelopment projects through the issuance of tax allocation bonds. These bonds are payable from the incremental portion of property taxes collected within a project area relating to the increase in assessed valuation resulting from redevelopment. The County of Santa Clara (the County) collects these incremental tax revenues on behalf of the Agency. The Agency has a tax sharing agreement with the County that requires sharing of incremental tax revenues with the County.

The Agency has merged all of its redevelopment areas into a single "Merged Project Area" in order to combine tax increment revenues to obtain greater financing power through issuance of tax allocation bonds.

Under GASB Statement No. 14, The Financial Reporting Entity, the Agency is considered a component unit of the City since the Agency Board consists exclusively of the Mayor and the ten members of the City Council. Consequently, the Agency's financial statements are blended in the City's basic financial statements.

B. Measurement Focus, Basis of Accounting and Basis of Presentation

Government-wide Financial Statements

The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting. Revenues are recognized when earned and expenses are recorded when a liability is incurred regardless of the timing of related cash flows. N onexchange transactions, in which the Agency gives ( or receives) value without directly receiving ( or giving) equal

33 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to the Basic Financial Statements (Continued) June 30, 2004 value in exchange, include property tax increment, grants, and donations. On an accrual basis, revenue from property tax increment is recognized in the fiscal year for which the taxes are levied.

Other revenues such as grants and similar items are recognized in the fiscal year in which all eligible requirements have been satisfied.

The statement of net assets and statement of activities display information about the Agency as a whole and, accordingly, eliminations have been made to remove interfund activities.

The statement of activities presents a comparison between direct expenses and program revenues for activities of the Agency. Direct expenses are those that are specifically associated with a program or function and, therefore, are clearly identifiable to a particular program or function. Program revenues include 1) charges paid by the recipients of goods or services offered by the programs and 2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular program. Revenues that are not classified as program revenues, including all taxes, are presented instead as general revenues.

When both restricted and unrestricted net assets are available, unrestricted resources are used only after the restricted resources related to grants are depleted.

Fund Financial Statements

The accounts of the Agency are organized and operated on the basis of funds. A fund is an independent fiscal and accounting entity with a self-balancing set of accounts. Fund accounting segregates funds according to their intended purpose and is used to aid management in demonstrating compliance with finance-related legal and contractual provisions. The minimum number of funds is maintained consistent with legal and managerial requirements.

Governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Under this method, revenues are recognized as soon as they are measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the Agency considers revenues to be available if they are collected within 60 days after the end of the current fiscal period. The primary revenue sources susceptible to accrual are property tax increment, intergovernmental and grant revenues, investment income, developer contributions, and rent. Expenditures are generally recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures, as well as expenditures related to compensated absences and claims and judgments are recorded only when payment is due. General capital assets acquisitions are reported as expenditures in governmental funds. Proceeds of long-term debt and capital leases are reported as other financing sources.

The fund financial statements provide information about the Agency's funds. The emphasis of fund financial statements is on major governmental funds, each displayed in a separate column.

34 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to the Basic Financial Statements (Continued) June 30, 2004

The Agency reports the following major governmental funds:

The General Fund is used to account for the Agency's general and administrative expenditures.

The Special Revenue Fund is used to account for revenue sources that are legally restricted to expenditures for specified purposes. The purpose of this fund is to account for that portion of tax increment revenue designated for low and moderate-income housing.

The Housing Debt Service Fund was established to account for the payment of interest and principal on the Agency's merged area housing tax allocation bonds. The primary source of revenue for this fund is intergovernmental revenue from the City of San Jose Housing Department representing tax increment pledged per housing bond indentures.

The Merged Debt Service Fund was established to account for the payment of interest and principal on the Agency's merged area tax allocation bonds, revenue bonds, refunding revenue bonds, and HUD Section I 08 loan. The primary source of revenue for this fund is the incremental property tax revenues.

The Capital Projects Fund accounts for all revenues and costs of implementing the redevelopment projects in accordance with the California Community Redevelopment Law including acquisition of properties, cost of site improvements, and other costs that benefit the projects.

C. Assets, Liabilities and Equity

1. Investments

The Agency records investment transactions on the trade date. Investments in marketable securities, which have a remaining maturity at time of purchase of one year or less, are reported at amortized cost. All other investments are reported at fair value in accordance with GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools. Fair value is defined as the amount that the Agency could reasonably expect to receive for an investment in a current sale between a willing buyer and seller and is generally measured by quoted market prices. Investment income, including unrealized gains and losses, is recognized as revenue in both government-wide and fund financial statements.

2. Property Tax Increment Revenues

Incremental property tax revenues represent taxes collected in the merged redevelopment project area from the excess of taxes levied and collected over that amount which was levied and collected in the base year (the inception year ofredevelopment project areas) property tax assessment.

35 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to the Basic Financial Statements (Continued) June 30, 2004

Under California Proposition 13, the 1975-1976 regular roll value serves as the original base value of the property. Thereafter, changes to the assessment on real property value or a portion thereof, caused by new construction or changes in ownership create the base year value used in establishing the full cash value. The full cash value is the amount of cash or equivalent value of property if exposed for sale in the open market. The full cash value may be adjusted annually to reflect inflation at a rate not to exceed 2% per year, or reduction in the consumer price index or comparable local data at a rate not to exceed 2% per year, or reduced in the event of declining property values caused by damage, destruction or other factors, including a general economic downturn. The maximum basic property tax rate is I% of the net taxable value of the property. The total tax rate may be higher for various properties because of voter-approved general obligation bonds that are secured by property taxes for the annual payment of principal and interest.

The County of Santa Clara assesses properties, bills, and collects property taxes, as follows:

Secured Unsecured

~~~~~~~~~~~~~~~ Valuation/lien dates January 1 January 1 Levy dates October 1 July 1 Due dates (delinquent as of) 50% on November 1 (December 10) July 1 (August 31) 50% on February 1 (April 10)

Taxes are secured by liens on the property being taxed. The term "unsecured" refers to taxes on property other than land and buildings. Supplemental property taxes are levied based on changes in assessed values between the date of real property sales and construction and the next normal assessment date.

The County bills and collects property taxes and remits to the Agency its share of the amount levied. The County allocates property taxes to the Agency based on 100% of the tax levy, notwithstanding any delinquencies. Revenue is recognized when it is levied and received from the County, as discussed under section of Basis of Accounting.

3. Restricted Assets

Assets that are restricted for specified uses by bonded debt requirements, grant provisions or other requirements are classified as restricted because they are maintained in separate bank accounts or by fiscal agents, and their use is limited by applicable bond covenants or agreements. Liabilities payable from such restricted assets are separately classified.

36 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to the Basic Financial Statements (Continued) June 30, 2004

4. Accumulated Redevelopment Project Costs

Accumulated redevelopment project costs consist of costs associated with land acquisition and construction in progress for redevelopment projects that will be transferred to the City or a developer (i.e. title and ownership of the assets will be given to the City or a developer) in accordance with development agreements. Because these assets will not be used in the Agency's operations, the accumulated redevelopment project costs are not considered capital assets.

5. Capital Assets

The Agency defines capital assets as assets used in redevelopment operations with an initial individual cost of at least $5,000 and an estimated useful life in excess of one year. The capital assets consist of the parking garage located beneath the Fairmont Plaza Hotel and certain improvements to the Fairmont Annex retail space. The capital assets are recorded in the government-wide financial statements at historical cost and are being depreciated using the straight-line method over a 40-year and a 25-year estimated useful life, respectively.

Maintenance and repairs are charged to operations when incurred. Betterments and major improvements, which significantly increase values, change capacities, or extend useful lives, are capitalized. Upon sale or retirement of capital assets, the cost and related accumulated depreciation are removed from the respective accounts and any resulting gain or loss is included in the statement of activities. However, the proceeds from the sale of capital assets are recorded as other financing sources in the governmental fund statement of revenues, expenditures and changes in fund balances.

6. Compensated Absences (Accrued Vacation and Sick Leave)

As part of the employees' compensation package, the Agency provides benefits to its employees by establishing a Paid Time Off (PTO) and Extended Sick Leave (ESL) benefit program. Under this program, employees are permitted to accumulate earned PTO and ESL benefits. Vested or accumulated PTO and ESL are reported as a long-term liability on the statement of net assets and are paid out of the General Fund. All regular employees scheduled to work 20 hours or more per week are entitled to the PTO and ESL benefits. The amount of PTO earned each year is based on employees' continuous length of service, measured from the date of employment. The maximum PTO annual accrual per employee may not exceed 400 hours at the end of the fiscal year. ESL hours are credited at the rate of 40 hours per fiscal year for all regular employees regardless of length of service. Upon termination, payouts of PTO and ESL are calculated as earned on a bi-weekly accrual schedule. Earned and unused PTO is paid in full while only 25% of earned but unused ESL is paid out.

37 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to the Basic Financial Statements (Continued) June 30, 2004

7. Bond Issuance Costs, Original Issue Discounts, Premiums, and Deferred Gains or Losses on Refundings

In the government-wide financial statements, long-term debt and other long-term obligations are reported as liabilities in the statement of net assets. Bond issuance costs, premiums, discounts, and gains or losses occurring from refundings are deferred and amortized over the life of the bonds. Bond issuance costs are reported as deferred charges and are amortized into the appropriate functional expense category. Bonds payable are reported net of the applicable bond premiums, discounts, and deferred amounts on refunding and are amortized as a component of interest expense.

In the fund financial statements, bond issuance costs, premiums, and discounts are recognized at the time bonds are issued. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures and all other amounts are reported as other financing sources or uses.

8. Interfund Transactions

Interfund transactions are reflected either as loans, services provided, reimbursements or transfers in the government fund financial statements. Loans between funds are reported as receivables and payables as appropriate and are subject to elimination upon consolidation and are referred to as either "due to/from other funds" (i.e. the current portion of interfund loans) or "advances to/from other funds" (i.e. the noncurrent portion of interfund loans).

Services provided, deemed to be at market or near market rates, are treated as revenues and expenditures/expenses. Reimbursements are recorded when one fund incurs a cost, charges the appropriate benefiting fund, and reduces its related cost as a reimbursement. All other interfund transactions are treated as transfers. Transfers between governmental funds are netted as part of the reconciliation to the government-wide presentation.

9. Use of Estimates

The preparation of the basic financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the basic financial statements, and the reported amounts of revenues and expenditures/expenses during the reporting period. Actual results could differ from those estimates.

38 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to the Basic Financial Statements (Continued) June 30, 2004

II. DETAILED NOTES ON ALL FUNDS

A. Cash and Investments

The Agency's cash and investments consist of the following at June 30, 2004:

Unrestricted cash and investments $ 164,982,397 Restricted cash and investments 129,742,802 Total cash and investments $ 294,725,199

Deposits

At year-end, the carrying amount of the Agency's cash and cash deposits was $55,373,198 and the bank balance was $56,502,576. The difference between the bank balance and the carrying amount represents outstanding checks and deposits in transit. Of the bank balance, $300,000 was covered by federal depository insurance and $56,202,576 was collateralized by the pledging financial institutions as required by Section 53652 of the California Government Code. Such collateral is held by the pledging financial institutions' trust department or agent in the Agency's name.

Under the California Government Code, a financial institution is required to secure deposits in excess of $100,000 made by state or local governmental units by pledging securities held in the form of an undivided collateral pool. The market value of the pledged securities in the collateral pool must equal at least 110% of the total amount deposited by the public agencies. California law also allows financial institutions to secure public deposits by pledging first trust deed mortgage notes having a value of 150% of those deposits. The collateral must be held at the pledging bank's trust department or other bank, acting as the pledging bank's agent, in the Agency's name.

Investments

As permitted by the California Government Code, bond indentures, and contracts and agreements, the Agency is permitted to invest in the City's cash and investment pool, obligations of the U.S. Treasury or its agencies, certificates of deposits, mutual funds invested in U.S. Government securities, and other permitted investments.

The Agency maintains all of its unrestricted investments in the City's cash and investment pool. It is not possible to disclose relevant information about the Agency's separate portion of the investment pool. Information regarding the characteristics of the entire investment pool can be found in the City's June 30, 2004 basic financial statements. A copy of that report may be obtained by contacting the City's Finance Department, 801 North First Street, Room 110, San Jose, CA, 95110 or can be found at the City's Finance Department Web Site at http://www.csjfinance.org/. As of June 30, 2004, the Agency's share of the City's cash and investment pool totaled $162,951,562 and $594,707 in accrued interest. Of the Agency's $12,301,000 investment in the State of California Local Agency Investment

39 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to the Basic Financial Statements (Continued) June 30, 2004

Fund (LAIF) held by a fiscal agent at June 30, 2004, the Agency's proportionate share of structured notes and asset-backed securities was $198,046 or 1.61 %. The Local Investment Advisory Board (Board) has oversight responsibility for LAIF. The Board consists of five members as designated by state statute. The value of the pool shares in LAIF, which may be withdrawn upon request, is determined on an amortized cost basis, which is different from the fair value of the Agency's position in the pool.

Income earned or losses arising from investments in the City's cash and investment pool are allocated on a monthly basis to the appropriate funds based on the average weekly cash balance of such funds.

For financial reporting purposes, investments are categorized to give an indication of the level of custodial credit risk assumed by the Agency at year-end. Custodial credit risks are: Category I includes investments that are insured or registered, or for which the securities are held by the Agency or its agents in the Agency's name; Category 2 includes uninsured and unregistered investments for which securities held by the counterparty's trust department or agent in the Agency's name; and Category 3 includes uninsured and unregistered investments for which the securities are held by the Agency's counterparty, or by its trusts or agent, but not in the Agency's name. During the year, the Agency does not have any investments that are subject to categorization.

A summary of the Agency's investments at June 30, 2004 is as follows: Fair Value Uncategorized investments: City of San Jose cash and investment pool $ 162,951,562 State of California Local Agency Investment Fund 12,301,000 Money market mutual funds 64,099,439 Total investments $ 239,352,001

Restricted Investments in the Debt Service Funds

Under the provisions of the bond indentures, certain accounts with trustees were established for repayment of debt and to set aside amounts required to be held in reserve. These accounts are reported in debt service funds. As of June 30, 2004, the amounts held by the trustees aggregated $76,579,482, which is in compliance with amounts required to be held by the trustee at that date. All restricted investments held by trustees as of June 30, 2004 were invested in U.S. government securities, money market mutual funds and LAIF, and were in compliance with the bond indentures.

40 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to the Basic Financial Statements (Continued) June 30, 2004

Restricted Deposits in the Capital Projects Fund

Pursuant to contracts and agreements made by the Agency, certain funds are required to be held in escrow accounts that remain the property of the Agency; however, their use is restricted for a particular purpose. The program and projects for which these funds are restricted at June 30, 2004 are as follows:

Montgomery Hotel $ 213,685 CIM Soil Remediation 850,000 HUD Section I 08 funds (Eu Building) 1,861,996 Redevelopment Projects and Programs 25,873,298 Fountain Alley (purchase option on parking) 1,812,483 California Theatre 20,544,186 Others 2,007,672 Total restricted deposits $ 53,163,320

B. Loans Receivable

Over the years, parcels of land have been sold to commercial real estate developers in exchange for various interest bearing loans. Such loans have terms ranging from 16 to 40 years, with interest rates ranging from 2% to I 0%, after interest free periods of up to IO years, and call for principal and interest payments monthly or annually over the remaining life of the loans. The recognition of revenue from the sale of the land has been deferred in the governmental fund financial statements on such loans until they are repaid since the amounts do not meet the availability criteria. As of June 30, 2004, the amount due from developers was approximately $10,986,000.

In 1997, the Agency extended loans to developers using funds obtained from the U.S. Department of Housing and Urban Development Section I 08 loan proceeds. These loans have a 20-year repayment schedule, bear interest at an annual rate of 3%, and require principal and interest payments to the Agency on a monthly basis. As of June 30, 2004, the amount due from the developers was approximately $3,227,000.

In 1998, construction was completed on a housing project, resulting in a loan receivable from the developer for amounts previously expensed by the Agency and advanced to the developer. This loan is for 30 years and bears interest at an annual rate of 2%, with annual payments to the Agency based upon the net cash flow of the project each year. The recognition of revenue from the loan receivable has been deferred in the government fund financial statements on such loans until payments are received. As of June 30, 2004, the amount due from the developer was approximately $11,287,000.

In 1999, the Agency extended a loan to a developer which consolidated all existing amounts owed the Agency and paid-off a loan due to a commercial bank. This loan has a 7-year graduated repayment schedule bearing interest at an annual rate of 4%, and requires principal and interest payments to the Agency on a monthly basis, commencing March 1, 2001. As of June 30, 2004, the amount due from the developer was approximately $1,661,000.

41 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to the Basic Financial Statements (Continued) June 30, 2004

In 1999, the Agency extended a loan to a developer for rehabilitation of an apartment complex. The loan to the developer has a 19-year repayment schedule, bears interest at an annual rate of 3%, and requires principal and interest payments to the Agency on a monthly basis. As of June 30, 2004, the amount due from the developer was approximately $759,000.

The Agency relocated historic single-family homes to vacant lots in downtown San Jose. These homes were provided to families and a non-profit agency, which provided the interior and exterior improvements. The loans are to be paid only in the event of non-compliance with the terms and conditions of the agreement. At the time residential occupancy of the house ceases or the property is transferred to anyone other than the owner by any method other than inheritance, the unamortized portion of the loan shall become due and payable in full. Unpaid principal shall bear an interest rate of 8% per annum. The total loans of approximately $3,372,000 have been offset with a 100% provision for doubtful accounts as it is anticipated that these loans will be forgiven.

The Agency extended various bank-assisted loans to aid first-time homebuyers and to aid with the rehabilitation of homes. The loans accrue interest at various interest rates and are due when the related properties are sold. As of June 30, 2004, the amount due from such loans was approximately $326,000, which is net of an allowance for doubtful accounts of $73,600 recorded on both the governmental funds balance sheet and the government-wide statement of net assets.

Rehabilitation loans were extended to property owners for the rehabilitation and improvements of commercial buildings. The loans accrue interest at various interest rates and are due within 60 to 240 months. At June 30, 2004, the amount due from such loans was approximately $4, 148,000.

In 2004, commercial loans were extended to two developers for improvements of downtown buildings. The loans accrue interest at 3% and are due in 10 and 20 years, respectively. At June 30, 2004, the amount due from such loans was approximately $3,436,000.

C. Deferred Revenue

At June 30, 2004, the various components of deferred revenue reported in the Capital Projects Fund and governmental activities were as follows:

Amount Amounts considered unavailable related to receivables $ 33,670,966 Amounts considered unearned related to developer contributions 3,952,454 Total deferred revenue $ 37,623,420

42 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to the Basic Financial Statements (Continued) June 30, 2004

D. Interfund Transactions

The composition of fund transfers for the fiscal year ended June 30, 2004 is as follows:

Transfer-out Fund Transfer-in Fund Amount

Merged Debt Service Capital Projects $ 25,873,298 Capital Projects General Fund 22,500,000 Capital Projects Merged Debt Service 16,717,071 Housing Debt Service Capital Projects 348 Total $ 65,090,717

The $25,873,298 amount represents balances transferred from the 2002 Bonds reserve account, which upon purchase of a surety bond resulted in the release of the former cash reserve. The $22,500,000 amount represents a transfer of funds necessary to cover the general and administrative expenditures of the Agency. The $16,717,071 amount represents transfers necessary to make required debt service payments.

E. Accumulated Redevelopment Project Costs

For the fiscal year ended June 30, 2004, the change in accumulated redevelopment project costs consisted of the following (in thousands):

Transfers, Deletions and July 1, 2003 Additions Adjustments June 30, 2004 Land held for Redevelopment $ 233,488 $ 24,957 $ (39,358) $ 219,087 Construction in Progress 157,551 38,219 (54,640) 141,130 Total $ 391,039 $ 63,176 $ (93,998) $ 360,217

During the year, the Agency transferred to the City of San Jose land costing approximately $12,627,000 (mainly involving the 4th Street Parking Garage of $9 million) and costs of completed construction projects ( 4th Street Parking Garage and Alum Rock Youth Center) aggregating $52,301,000. Approximately $3,780,000 ofland costs was transferred to developers in accordance with Disposition and Development Agreements. An adjustment was recorded to land held for redevelopment account amounting to $22,951,000 due to refunds of condemnation deposits made in prior years.

43 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to the Basic Financial Statements (Continued) June 30, 2004

Construction in progress as of June 30, 2004 consisted of the following (in thousands):

Dr. Martin Luther King, Jr. Library $ 62,700 4th Street Parking Garage 599 Civic Plaza Streetscape 933 California Theatre 62,927 Billy DeFrank Center 1,057 Jose Theatre 7,156 Bellevue Park 2,486 Other projects 3,272 Total construction in progress $ 141,130

F. Capital Assets

A summary of changes in the Agency's capital assets for the fiscal year ended June 30, 2004 is as follows (in thousands):

Balance Balance July 1, 2003 Additions June 30, 2004 Parking/Building Improvements $ 10,000 $1,156 $ 11,156 Less accumulated depreciation (3,875) (273) (4,148) $ 6,125 $ 883 $ 7,008

The capital assets consist of the parking garage located beneath the Fairmont Plaza Hotel, which was constructed in 1987, and certain improvements to the Fairmont Annex retail space, which were completed in 2004.

G. Payables

Agency accounts payable and accrued liabilities at June 30, 2004 are as follows:

Payables - General Capital Governmental Activities: Fund Projects Total Accounts payable $ 562,074 $ 5,750,046 $ 6,312,120 Accrued salaries and related payroll liabilities 317,654 317,654 Total $ 879,728 $ 5,750,046 $ 6,629,774

44 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to the Basic Financial Statements (Continued) June 30, 2004

H. Debt

Long-term Debt

The following is a summary of long-term debt of the Agency as of June 30, 2004 (in thousands):

Outstanding Original Final Range Annual Principal at June 30, Type oflndebtedness Purpose Issue Amount Issue Date Maturity Interest Rate Installments 2004

Tax Allocation Bonds: 1993 Merged Area Refunding Advanced refunding $692,075 12/1/93 8/1/24 4.20-6.00% $10,115-117,320 $ 323,175 1993 Housing, Series D Low-moderate income housing 10,525 12/1/93 8/1/24 5.75% $10,525 10,525 1997 Housing, Series E Low-moderate income housing 17,045 6/21/97 8/1/27 5.75-5.85% $2,420-14,625 17,045 2000 Housing, Series F Low-moderate income housing 44,205 12/13/00 8/1/30 7.70-7.80% $4,935-30,720 44,205

2002 Housing, Series G & H Low-moderate income housing 70,000 5/29/02 8/1/30 Variable $2,000-6,800 70,000

2003 Housing, Series J & K Low-moderate income housing 69,000 7/10/03 8/1/29 2.00-525% $230- 2,480 69,000 1997 Merged Merged Area projects 106,000 3/27/97 8/1/28 5.38-5.63% $1,850-24,135 85,780 1998 Merged Merged Area projects 175,000 3/19/98 8/1/29 4.50-5.25% $1,010-72,905 169,545 1999 Merged Merged Area projects 240,000 1/6/99 8/1/31 4.75-5.00% $3,275-55,310 225,985 2002 Merged Merged Area projects 350,000 1/24/02 8/1/32 3.00-5.00% $6,925-75,030 309,225 2003 Merged Merged Area projects 135,000 12/22/03 8/1/33 3.00-5.00% $25 - 27,135 129,010 2004 A Merged Refunding Refund portion of Merged Bonds 281,985 5/27/04 8/1/19 2.00- 5.25% $250 - 31,900 281,985

Total Tax Allocation Bonds 1,735,480

Other Long-term Debt: 1996 Merged Area Revenue, Seri~ A/B Merged area projects 59,000 6/27/96 7/1/26 Variable $700-1,700 59,000 2003 Merged Area Revenue, Series A/B Merged area projects 60,000 8/27/03 8/1/30 Variable $500- 3,900 60,000 Pledge obligation - 4th/San F emando Parking Revenue 4th/San Fernando parking facility Bonds project 48,675 3/10/01 9/1/26 Variable $1,130-8,310 45,145 2001 Convention Center Convention Center refunding refunding Bonds, Series F project 190,730 7/1/01 9/1/22 4.00-5.21% $710-14,730 181,390 HUD Section 108 Loans Merged area projects 5,200 2/11/97 8/01/16 Variable Various 4,125

Total Other Long-term Debt 349,660

Total Long-term Debt $2,085,140

45 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to the Basic Financial Statements (Continued) June 30, 2004

A summary of the changes in long-term debt during the fiscal year ended June 30, 2004 follows (in thousands):

Balance Payments/ Balance Amount Due in July 1, 2003 Additions Re fundings June 30, 2004 One Year Tax allocation bonds: 1993 Merged Area Refunding $ 576,400 $ ($ 253,225) $ 323,175 $ 5,845 1993 Housing, Series A 14,430 (14,430) 1993 Housing, Series B 7,555 (7,555) 1993 Housing, Series C 19,615 (19,615) 1993 Housing, Series D 10,525 10,525 1997 Housing, Series E 17,045 17,045 2000 Housing, Series F 44,205 44,205 2002 Housing, Series G & H 70,000 70,000 2003 Housing, Series J & K 69,000 69,000 3,240 1997 Merged 95,725 (9,945) 85,780 2,525 1998 Merged 170,720 (1,175) 169,545 1,225 1999 Merged 229,705 (3,720) 225,985 3,870 2002 Merged 350,000 (40,775) 309,225 7,140 2003 Merged 135,000 (5,990) 129,010 2004 A Merged Refunding 281,985 281,985

Total tax allocation bonds 1,605,925 485,985 (356,430) 1,735,480 23,845 Other long-term debt: 1996 Merged Area Revenue, Series A/B 59,000 59,000 1,400 2003 Merged Area Revenue, Series A/B 60,000 60,000 Pledge obligation- 4th/San Fernando parking revenue bonds 46,370 (1,225) 45,145 1,275 2001 Convention Center Refunding Bonds, Series F 185,440 (4,050) 181,390 4,540 HUD Section 108 loans, variable rate loans 4,315 (190) 4,125 205 Total other long-term debt 295,125 60,000 (5,465) 349,660 7,420 Total long-term debt, before issuance discount and premiums and deferred amount on refunding 1,901,050 545,985 (361,895) 2,085,140 31,265 Unamortized issuance premium 3,376 16,725 (662) 19,439 1,229 Unamortized issuance discount (182) 6 (176) (6) Unamortized deferred amount on refunding (3,352) (16,966) 297 (20,021) (1,644)

Total long-term debt payable 1,900,892 545,744 (362,254) 2,084,382 30,844 Compensated absences 846 184 (87) 943 85 Total long-term obligations $ 1,901,738 $ 545,928 ($362,340) $ 2,085,325 $ 30,929

The Merged Tax Allocation Bonds are senior debt and are repaid with the tax increment. The Housing Bonds are repaid with the Housing Set-Aside Amounts. The Merged Revenue Bonds are repaid with subordinated revenues. The remaining long-term debt is repaid with other revenues.

46 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to the Basic Financial Statements (Continued) June 30, 2004

2003 Housing Bonds

In July 2003, the Agency issued Housing Set-aside Taxable Tax Allocation Bonds, Series J and Housing Set-aside Tax Exempt Tax Allocation Bonds, Series 2003K aggregating to $69,000,000. The bonds were issued for the purpose of increasing, improving, and preserving the supply of very low to moderate income housing and to refund the Housing Bonds Series 1993A, Series 1993B and Series l 993C. Part of the proceeds were also used to repay the amount drawn from a bank line of credit that was used for low to moderate housing in the City of San Jose and to purchase bond insurance and surety bonds for the reserve account for Series J and K. The bonds are equally and ratably secured by the pledge and lien of the Housing Set-aside Amounts under the Fiscal Agent Agreement dated as of February 1, 1993 between the Agency and the Fiscal Agent.

Proceeds of $40,471,506 and residual cash balances of $4,160,960 provided by the old debt were placed in an irrevocable trust with an escrow agent to provide for debt service payments on the old debt as per the Indenture Agreement. As a result, the debt mentioned above is considered defeased and the liabilities have been removed from the financial statements. The defeased bonds had no outstanding balance as of June 30, 2004.

Although the refunding resulted in the accounting recognition of a deferred loss of $3,032,466 for the fiscal year ended June 30, 2004, the Agency in effect reduced its aggregate debt service payments by approximately $5,219,000 over the next 18 years and obtained a net economic gain (difference between the present values of the old and new debt service payments) of $5,190,000.

In connection with the issuance of the 2003 Housing Bonds Series J and K, the Agency obtained a surety bond for the Reserve Account in the amount of $6, 177 ,000 to satisfy bond indenture requirements of the Housing Bonds, Series J and K. In addition, the payment of principal and interest of the 2003 Housing Bonds, Series J and K is insured by a municipal bond and reserve insurance policies over the life of the issue.

2003 Tax Allocation Revenue Bonds

In August 2003, the Agency issued Merged Area Taxable Revenue Bonds Series 2003A and Merged Area Revenue Bonds Series 2003B totaling $60,000,000. The proceeds of the bonds were used mainly to finance redevelopment projects within the Merged Area. The 2003 Tax Revenue Bonds are ratably and equally secured by a pledge of the subordinated revenues and subordinate to the debt service payment of Senior Obligations of the Agency. The 2003 Tax Revenue Bonds are supported by two direct-pay letters of credit, which will terminate on August 27, 2006, unless extended by the credit provider.

The 2003 Tax Revenue Bonds have a variable rate of interest at a weekly rate, until converted to bear interest at another variable rate or fixed rate at the option of the Agency. The weekly rates are the rates that result in the market value of the bonds being equal to I 00% of the outstanding principal and accrued interest. For the year ended June 30, 2004, the average weekly interest rate for the 2003 bonds was 1.10%. 2003 Tax Allocation Bonds

47 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to the Basic Financial Statements (Continued) June 30, 2004

In December 2003, the Agency issued Tax Exempt Merged Area Tax Allocation Bonds, Series 2003 totaling $135,000,000. The proceeds of the bonds are used mainly to finance redevelopment projects within the Merged Area. The 2003 Tax Allocation Bonds are issued in parity with other outstanding Tax Allocation Bonds issued by the Agency and are secured primarily by a pledge of tax revenues, consisting of a portion of all taxes levied upon all taxable properties in the Merged Redevelopment Area.

In connection with the 2003 Tax Allocation Bonds, a Bond Reserve Fund was cash funded in the amount of 125% of average annual debt service or $12,442,828 for the benefit of the bond owners. The Agency may at any time post surety bond insurance policy or letter of credit in lieu of cash funding the reserve account.

2004A Tax Allocation Refunding Bonds

In May 2004, the Agency issued $281,985,000 in 2004 Merged Area Redevelopment Project Tax Allocation Refunding Bonds, Series A. The net proceeds of $292,921,482, which included a premium of $15,300,851 and $4,364,369 payment for the underwriter's discount and costs of issuance, were used to refund a portion of Merged Area Tax Allocation Bonds - 1993 Series Bonds ($239,050,000), 1997 Series Bonds ($7,545,000), 2002 Series Bonds ($33,850,000), and 2003 Series Bonds ($5,990,000). Proceeds in the amount of $292,099,726 and residual cash balances of $7,790,702 provided by the old debt were placed in an irrevocable trust with an escrow agent to provide for future debt service payments on the old debt as per the Indenture Agreement. As a result, the debt mentioned above is considered defeased and the liabilities have been removed from the financial statements. Cumulatively, the defeased bonds had an outstanding balance of $286,435,000 as of June 30, 2004.

Although the refunding resulted in the accounting recognition of a deferred loss of $13,933,331 for the fiscal year ended June 30, 2004, the Agency in effect reduced its aggregate debt service payments by approximately $12,044,204 over the next 15 years and obtained a net economic gain (difference between the present values of the old and new debt service payments) of $10,407,236.

In connection with the issuance of the 2004 Refunding Bonds, a surety bond for approximately $63,387,458 was purchased pursuant to the requirements of the bond agreement. In addition, the payment of principal and interest is insured with a financial guaranty insurance policy over the life of the issue. The 2004 Refunding Bonds are secured primarily by a pledge of tax revenues, consisting of all taxes levied upon all taxable properties within the Merged Redevelopment Area and are secured in parity with other outstanding Merged Area Redevelopment Project Tax Allocation Bonds.

48 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to the Basic Financial Statements (Continued) June 30, 2004

Convention Center Refunding

In July 2001, the City of San Jose Financing Authority (the Authority) - a Joint Powers Authority authorized pursuant to a Joint Exercise of Powers Agreement between the City and the Agency to borrow money for the purpose of financing the acquisition and construction of assets of the City and the Agency, of which a portion of the debt issued by the Authority is reflected as debt of the Agency - issued the Convention Center Lease Revenue Refunding Bonds, Series 2001F (Tax Exempt) and Series 2001G (taxable) amounting to $186,150,000 and $4,580,000, respectively. In connection with the issuance of the 200 I Convention Center Refunding Bonds, the Agency and the City entered into the Second Amended and Restated Reimbursement Agreement under which the Agency is obligated to use tax increment to reimburse the City for lease payments made to the Authority for the project. Interest rates range from 4.0% to 5.21 % for the Series 2001F (non-taxable) and 4.45% to 4.60% for the Series 2001G (taxable). The Series 2001F bonds (non-taxable) mature in 2022 and the Series 2001G bonds (taxable) matured in 2002. The bonds were issued to refund the 1993 Revenue Bonds, Series C (1993 Bonds). The net proceeds were placed in an irrevocable trust to provide future debt service payment on the refunded bonds. There were no defeased bonds outstanding as of June 30, 2004.

4th and San Fernando Streets Parking Facility

In March 2001, the City of San Jose Financing Authority (the Authority) issued Revenue Bonds, Series 2001A in the amount of $48,675,000 to finance the construction of the 4th & San Fernando Parking Facility Project. The Agency entered into the Agency Pledge Agreement with the Authority, whereby Agency payments are payable from and secured by surplus Agency Revenues. Agency payments are limited in each year to an amount equal to the annual debt service due on the bonds minus surplus revenues generated by the garage. Surplus Agency Revenues consist of (i) estimated tax increment revenues, which are pledged to the payment of the Agency's outstanding tax allocation bonds and deemed to be "Surplus" in the current fiscal year in accordance with the resolution or indenture pursuant to which the outstanding tax allocation bonds were issued, plus (ii) all legally available revenues of the Agency.

HUD Section 108 Loans The Agency received loan proceeds of $5,200,000 under the provisions of the U.S. Department of Housing and Urban Development (HUD) Section 108. Approximately $1,862,000 for principal and interest reserves is included in the Capital Projects Fund as restricted cash and investments. The proceeds are used to finance certain projects in the Merged Project Area. At June 30, 2004, the Agency has outstanding loans due from developers of approximately $3,227,000. The notes payable to HUD mature annually through August 2016 and bear interest at 20 basis points above the LIBOR index.

49 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to the Basic Financial Statements (Continued) June 30, 2004

Debt Service Requirements The debt service requirements for all debt are based upon a fixed rate of interest, except the 1996 Series A and B Bonds, 2003 Series A and B Bonds, 2002 Series G and H Bonds and the HUD Section 108 loans, which bear interest at variable rates. Interest on the 1996 Series A and B Bonds, 2003 Series A and B Bonds, and the 2002 Series G and H Bonds may be set at different interest rate calculation modes, including daily, monthly and fixed rates. On June 30, 2004, all the variable rate bonds were set in weekly modes. Interest on the HUD Section 108 loan is adjusted monthly on the first day of each month to a variable interest rate equal to 20 basis points above the applicable LIBOR rate. For purposes of calculating the annual debt service requirements as of June 30, 2004, assumed effective rates of 1.03%, 1.02%, 1.10%, 1.04%, 1.20%, 1.18% and 1.51 % at June 30, 2004 have been used for the 1996 Series A and B Bonds, 2003 Series A and B Bonds, 2002 Series G and H bonds, and the HUD Section 108 loan, respectively. The annual requirements to amortize unmatured tax allocation bonds and other long-term debt outstanding as of June 30, 2004, including mandatory sinking fund payments, are as follows (in thousands):

Merged Housing Tax Allocation Bonds Tax Allocation Bonds Other Revenue Bonds Other Obligations Year Ending June 30 Principal Interest Principal Interest Principal Interest Principal Interest 2005 $ 20,605 $ 85,834 $ 3,240 $ 8,614 $ 5,940 $ 9,740 $ 1,480 $ 2,154 2006 28,960 87,871 3,300 8,549 6,450 9,533 1,540 2,100 2007 33,560 86,104 3,370 8,482 8,085 9,306 1,610 2,044 2008 35,285 84,074 3,440 8,404 8,845 9,045 1,680 1,986 2009 37,170 81,562 3,530 8,310 9,560 8,742 1,750 1,928 2010-2014 216,820 362,940 23,500 39,341 60,010 38,067 10,025 8,620 2015-2019 276,590 274,202 38,620 33,089 78,180 25,280 11,710 6,462 2020-2024 326,550 178,166 55,555 22,883 84,420 8,683 13,215 3,609 2025-2029 325,765 94,148 60,795 9,877 24,400 1,454 6,260 473 2030-2034 223,400 48,928 15,425 3,137 14,500 751 Subtotal 1,524,705 1,383,829 210,775 150,686 300,390 120,601 49,270 29,376 Less: Unamortized discount (176) Unamortized deferred amount on refunding (16,844) (3, 177) Add: Unamortized premium 18,585 854

Total $ 1,526,446 $1,383,829 $ 210,599 $150,686 $ 298,067 $120,601 $ 49,270 $ 29,376

Bond Limitations and Restrictions

There are a number of limitations and restrictions contained in the various bond indentures. The Agency believes it is in compliance with all significant limitations and restrictions contained in the indentures.

Conduit Debt

50 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to the Basic Financial Statements (Continued) June 30, 2004

In April 1998, the Agency served as the conduit issuer of $38,000,000 in Multifamily Housing Revenue Bonds in order to provide funds for a mortgage loan to finance the acquisition and construction of a multifamily residential project in the Century Center Redevelopment Project Area. The Agency has no obligation for these bonds, as they will be payable solely from and secured to the extent provided in the indenture by a pledge of certain revenues and other amounts to be received by the Agency under the Loan Agreement. A developer has arranged for an initial irrevocable direct-pay letter of credit to be issued in favor of the trustee. As of June 30, 2004, there have been no principal retire men ts.

In August 1997, the Agency served as the conduit issuer of $10,595,000 in Multifamily Housing Revenue Bonds in order to provide funds for a mortgage loan to finance a multifamily rental housing project in the Japantown Redevelopment Project Area. The Agency has no obligation for these bonds as they are secured primarily by fully modified pass-through mortgage-backed securities guaranteed as to timely payment of principal and interest by the Government National Mortgage Association. The bonds were issued for the purpose of expanding the community's supply of low to moderate­ income housing, and to construct a community center and retail space. The loan is secured on a nonrecourse basis and is insured by the Federal Housing Authority pursuant to and in accordance with the provisions of Section 22l(d) (4) of the National Housing Act and applicable regulations thereunder. At June 30, 2004, the outstanding balance was $10,237,228.

In October 1993, the Agency served as the conduit issuer of $11,700,000 Multifamily Housing Revenue Refunding Bonds in connection with the refunding of the 1983 Floating Rate Monthly Demand Multi-Family Housing Revenue Bonds that were used to finance the acquisition and construction of a multifamily rental housing project known as the Colonade Apartments. The Agency has no obligation for these bonds, as they are payable solely from revenues and property pledged to the extent provided in the indenture. As of June 30, 2004, there have been no principal retirements.

I. Net Assets/Fund Balances

The government-wide financial statements utilize a net assets presentation. Net assets are categorized as follows:

• Invested in Capital Assets - This category groups all capital assets into one component of net assets. The balance is the net of accumulated depreciation; however, all bond proceeds associated with the acquisition have been repaid and, therefore, do not reduce the net asset position of the capital assets.

• Restricted Net Assets - This category presents external restrictions imposed by creditors, grantors, contributors or laws or regulations of other governments and restrictions imposed by law through constitutional provisions or enabling legislation. • Unrestricted Net Assets (Deficit) - This category represents net assets (deficit) of the Agency, not restricted for any project or other purpose.

51 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to the Basic Financial Statements (Continued) June 30, 2004

Fund balances consist of reserved and unreserved amounts. Reserved fund balance represents that portion of the fund balances which is not appropriated for expenditure or is legally segregated for a specific future use. The remaining portion is unreserved fund balance that is designated to indicate tentative plans for financial resource utilization in a future period, such as for general contingencies or other capital projects.

As of June 30, 2004, reservations of fund balance are described below:

• Long-term receivables - to reflect the amount due from developers related to the HUD Section 108 loan. Such amounts do not represent available spendable resources.

• Advances and deposits - to reflect the amount due from other funds that are long-term in nature and amounts deposited with third parties. Such amounts do not represent available spendable resources.

• Debt service - to reflect the funds held by trustees or fiscal agents for future payment of bond principal, interest, and reserve accounts. These funds are legally restricted for repayment of debt.

• Low and moderate-income housing activities - to reflect the amounts required by state law to be used for low and moderate-income housing activities.

• Encumbrances - to reflect the outstanding contractual obligations for which goods and services have not yet been received.

As of June 30, 2004, the designations of fund balance in the General Fund and Capital Projects Fund reflect management's intent to expend certain funds solely for planned redevelopment activities.

J. Excess of expenditures over appropriations

For the year ended June 30, 2004, expenditures exceeded appropriations by $547,232 in the Special Revenue Fund for low and moderate housing projects. The expenditures were made to the City based upon a formula of 20% of tax increment. Since the tax increment revenue was greater than projected, the 20% set-aside amount was equally greater, on a pro rata basis.

52 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to the Basic Financial Statements (Continued) June 30, 2004

III. OTHERINFORMATION

A. Contingencies

Risk Management

The Agency is exposed to various risks of loss related to torts, theft, damage to and destruction of assets, errors and omissions, general liability, workers' compensation, and unemployment claims for which the Agency carries commercial insurance policies. The premiums are paid from the General Fund. For the fiscal year ended June 30, 2004 and 2003, there were no claims or liabilities required to be recognized. Claim expenditures and liabilities are reported when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated using actuarial methods or other estimating techniques. During the past three years, there have been no instances where the amount of claim settlements exceeded insurance coverage, nor have there been any significant reductions of insurance coverage.

Eminent Domain Proceedings

The Agency is involved in eminent domain proceedings for the acquisition of certain properties required for redevelopment projects. As part of these proceedings, the Agency obtains appraisals of the property values and makes condemnation deposits with the court of jurisdiction associated with such properties. As of June 30, 2004, the Agency had $42,000 outstanding in condemnation deposits with the Santa Clara County Clerk and $1,011,423 deposited with the State of California Condemnation Deposit Fund. These deposits are treated as project expenditures in the fund financial statements and capitalized as accumulated redevelopment project costs in the government-wide financial statements.

Litigation

The Agency is subject to various claims and from time to time is involved in lawsuits in which damages are sought. As litigation is subject to many uncertainties and as the outcome of litigated matters cannot be predicted with certainty, it is reasonably possible that some of these legal actions could be decided unfavorably against the Agency.

As the potential outcome or total amount of liability as of June 30, 2004 with respect to the above matters cannot be fully ascertained, the Agency's management believes that any liability that might result from these matters would not have a material effect on the basic financial statements as of June 30, 2004.

53 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to the Basic Financial Statements (Continued) June 30, 2004

B. Commitments

Capital Expenditure Projections

On June 17, 2003, the Agency Board adopted the Capital and Operating Budgets for FY 2003- 2004 and Capital Improvement Program for FY 2004-2008. The adopted budgets reflect the amount of $531 million to be spent on capital projects for the next five years. However, due to the decline in anticipated property tax increment revenues and the impact of the State mandated payment of Educational Revenue Augmentation Fund (ERAF), the Agency Board amended on September 16, 2003 the adopted budget through a Budget Rebalancing Plan and decreased the amount of the capital improvement program for fiscal year 2004-2008 to $278 million.

At June 30, 2004, the Agency had $37,387,130 in encumbrances in its Capital Project Fund, which represent contract commitments on redevelopment projects.

Defined Contribution Retirement Plan

In January 1995, the Agency Board adopted a defined contribution retirement plan, the Redevelopment Agency of the City of San Jose Retirement Plan (the Plan), which provides pension benefits for its employees. For eligible employees who contribute 3.5% of their annual base salary, the Agency contributes approximately 9.0%. Agency contributions are based on a formula taking into account employee annual base salary and length of service. The Agency's contributions for each employee (and interest allocated to the employee's account) are fully vested after three years of continuous service from the original date of employment. Agency contributions and interest forfeited by employees who leave employment before vesting occurs may be used to reduce the Agency's contribution requirement or to offset the plan's operating expenses. Three Agency employees are co-trustees of the Plan. The Agency contracts with an advisor to manage the Plan with all assets being held in trust by a third party custodian in the name of each of the Plan's participants. Each of the Plan's participants directs the investments of their separate account. The Agency Board must authorize changes to the Plan.

The total payroll in fiscal year 2003-2004 for the Agency's direct employees was approximately $8,667,600. Both the Agency and the participating employees made contributions to the Plan amounting to approximately $772,043 and $287,579, respectively.

Line of Credit

In March 2003, the Agency entered into a line of credit agreement with a bank for an amount not to exceed $50,000,000 to provide interim funding for various housing projects. The line of credit is secured by the 20% tax increment housing money, which bears interest at an annual rate of LIBOR plus 0.75%, and is available until April 1, 2005. The entire principal amount then outstanding shall be repaid in quarterly installments over five years and shall bear interest at annual rates ranging from LIBOR plus 1.35% to LIBOR plus 3.35%. While the agreement provides for long term repayment, the amount outstanding is reflected as a fund liability because historically the balance owing has been repaid with subsequent bond issues. As of June 30, 2004, the outstanding balance is $16,200,000.

54 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to the Basic Financial Statements (Continued) June 30, 2004

Leases

A schedule by years of future mm1mum rental payments required under the Agency's noncancellable operating leases for office facilities, business equipment, and land as of June 30, 2004 (net of income from subleases) is as follows (in thousands):

Minimum Income from Net Minimum Year Ending June 30 Payments Subleases Payments 2005 $ 3,554 $ (301) $ 3,253 2006 1,699 (98) 1,601 2007 782 782 2008 605 605 2009 556 556 2010-2014 2,987 2,987 2015-2019 3,463 3,463 Total minimum payments required $ 13,646 $ (399) $13,247

The total net rent expense for operating leases in fiscal year 2003-2004 was approximately $4,119,300.

C. Related Party Transactions with the City of San Jose

Amounts Received from and Payments to the City

The Agency is required by the California Community Redevelopment Law to designate 20% of all incremental property tax revenues for low and moderate-income housing activities (the Special Revenue Fund). In addition, in fiscal 1992, the Agency elected to designate 20% of County supplemental assessment revenues for those purposes. The City's Housing Department administers funds so designated. During fiscal year 2003-2004, the Agency transferred to the City's Housing Department approximately $34,147,000 of property taxes in the Special Revenue Fund.

Annually, the City's Housing Department makes payments to the Agency for the repayment of debt service on the Housing Bonds, Series A through K. Approximately $11,468,000 of such payments was made during fiscal year 2003-2004. Also during fiscal year 2003-2004, the Agency transferred to the City's Housing Department approximately $27,531,000, representing the balance of net proceeds from the 2003 Housing Set Aside Tax Allocation Bonds, Series J and K issued in July 2003.

As part of the pledge agreement entered by the Agency and the City of San Jose Financing Authority on the 4th/San Fernando Garage Parking Revenue Bond - Series 2002A, the Agency transferred during the year the total amount of $3,366,000 representing principal and interest due on the bonds in the subsequent year.

55 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to the Basic Financial Statements (Continued) June 30, 2004

In April 2002, the City, Agency, and the plaintiffs in the Ruffo case (a lawsuit arising out of the proposed relocation of the San Jose City Hall to the Civic Plaza Redevelopment Area in downtown San Jose) entered into a Settlement Agreement under which the parties agreed that the City would repay the Agency's site assembly costs with interest. In July 2002, the City and Agency entered into a Transfer Agreement whereby the City agreed to reimburse the Agency's costs including interest. As of June 30, 2004, the Agency has recognized a due from the City in the amount of $3,668,000.

In addition, other payments are made to and received from the City. The following significant transactions were made during the year: I) the Agency paid from its General Fund approximately $5,635,000 for City support services, 2) a payment made by the City to the Agency in the amount of $12,704,000 and reimbursed by the Agency pursuant to the Second Amended and Restated Reimbursement Agreement for the Convention Center Refunded Bonds, 3) Repayment of the ERAF loan of $10,078,000 to the City, and 4) the payments related to the San Jose Arena management agreement are paid from the Agency's Capital Projects Fund and totaled $316,000 for fiscal year 2003-2004. The City owed the Agency approximately $595,000 for accrued investment earnings at June 30, 2004.

In the past, the Agency advanced a portion of a loan made by the City's Housing Department to a third party providing shelter for women. The advance is recorded at its net realizable value of $580,000 and will be repaid when the loan is collected by the City's Housing Department.

Cooperation Agreements with the City

The Agency enters into Cooperation Agreements to assist in funding various projects constructed on its behalf by the City and to reimburse the City for the actual salaries and fringe benefits of City employees who work under the supervision of the Agency's Executive Director or designee, including other City staff in providing support services to the Agency. These agreements state the Agency's commitment for a one-year period consistent with the Agency's capital and operating budgets and are renewed on an annual basis.

The agreement further calls for the Agency to submit a Project Service Memorandum (PSM) to the appropriate City Department prior to the start of the construction project. Funds are transferred to the City to cover the costs of completing the project including reasonable related administrative costs. After a PSM is approved by the Agency and agreed upon by the City, the Agency shall have no additional obligation relating to the agreed costs of the project except as may be agreed to in writing by the Agency and City. Any surplus funds in the project account are returned to the Agency. The agreement also states that the Agency may cancel the project and any unused funds shall be returned by the City to the Agency.

The amounts paid for construction projects and City's personnel costs in connection with these Cooperation Agreements during fiscal year 2003-2004 totaled $32,397,000 and $5,635,000, respectively.

56 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to the Basic Financial Statements (Continued) June 30, 2004

During the year, the City paid approximately $1,514,000 to the Agency for its share of the cost of several projects and returned approximately $922,000 of unused construction money on capital projects funded by the Agency per the Cooperation Agreement.

D. Tax Sharing Agreement and Other Payments to the County of Santa Clara

Tax Sharing

In 1983, the Agency and the County of Santa Clara (the County) entered into a tax sharing agreement under which the Agency would pay a portion of tax increment revenue generated in the Merged Area and part of the Rincon de los Esteros Project Area (the County Pass-Through Payment). On December 16, 1993, the Agency, the County, and the City entered into a Settlement Agreement, which continued the County Pass-Through Payment.

On May 22, 2001, the County, the City, and the Agency approved an Amended and Restated Agreement (the "Amended Agreement"). In addition to the continued Pass-Through Payment, the Amended Agreement delegated to the County the authority to undertake redevelopment projects in or of benefit to the Merged Area, and requires the Agency to transfer funds to the County to pay for such projects (the "Delegated Payment"). Until June 30, 2004, the Delegated Payment is equal to the County Pass-Through Payment. After January 1, 2004, 20% of the proceeds of any debt secured by the Agency's Tax Revenues ( excluding refunding bonds) must be paid to the County as the Delegated Payment.

For the fiscal year 2003-04, the Pass-Through Payment totaled $15.5 million and the Delegated Payment totaled $14.4 million.

ERAF Payment

In compliance with the State mandated contribution to the Educational Revenue Augmentation Fund (ERAF) to alleviate a state budget deficit, the Agency paid $10,078,000 during the year.

E. Subsequent Events

ERAF Payment

On August 5, 2004, SB 1096 was signed into law requiring redevelopment agencies statewide to shift for the next two years (2004-2006) the amount $250 million of property tax increment revenues to the State's Educational Revenue Augmentation Fund (ERAF) as a way to reduce the State's 2004-2006 budget deficit. The Agency's share of this revenue shift is approximately $18.7 million for each year and payments are not expected until May 10, 2005 and May 10, 2006.

57

REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE Schedule of Revenues, Expenditures and Changes in Fund Balance Budget and Actual on a Budgetary Basis - General Fund For the Fiscal Year Ended June 30, 2004

Actual Amounts Budgetary Basis Actual Variance with Amounts Budgetary Actual Budgeted Amounts Final Budget Budgetary to GAAP Amounts Original Final Over (Under) Basis Differences GAAP Basis Revenues: Investment income $ 62,586 $ 62,586 $ $ 62,586 $ $ 62,586 Rent 697,928 697,928 697,928 697,928 Other 369,224 369,224 369,224 369,224 Total revenues 1,129,738 1,129,738 1,129,738 1,129,738

Expenditures: Current: General government: Personnel services 14,002,567 13,575,667 38,585 13,537,082 13,537,082 Non-personnel services 7,111,034 4,727,747 305,955 4,421,792 (1,420,480) 3,001,312 Intergovernmental: Payments to the City of San Jose 6,355,881 5,635,342 769 5,634,573 5,634,573 Total expenditures 27,469,482 23,938,756 345,309 23,593,447 (1,420,480) 22,172,967

Excess (deficiency) ofrevenues over (under) expenditures (26,339,744) (22,809,018) 345,309 (22,463,709) 1,420,480 (21,043,229)

Other financing sources (uses): Transfers in 22,500,000 22,500,000 22,500,000 22,500,000 Net change in fund balance (3,839,744) (309,018) 345,309 36,291 1,420,480 1,456,771 Fund balance, beginning of year 5,248,735 5,248,735 5,248,735 5,248,735

Fund balance, end of year $ 1,408,991 $ 4,939,717 $ 345,309 $ 5,285,026 $1,420,480 $ 6,705,506

See Accompanying Notes to Other Required Supplementary Information

58 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE Schedule of Revenues, Expenditures and Changes in Fund Balance Budget and Actual on a Budgetary Basis - Special Revenue Fund For the Fiscal Year Ended June 30, 2004

Actual Amounts Budgetary Basis Actual Variance with Amounts Budgetary Actual Budgeted Amounts Final Budget Budgetary to GAAP Amounts Original Final Over (Under) Basis Differences GAAP Basis Revenues: Tax increment $ 37,642,938 $ 33,600,000 $ 441,607 $ 34,041,607 $ $ 34,041,607

Expenditures: Intergovernmental: Payments to the City of San Jose 37,642,938 33,600,000 (547,232) 34,147,232 34,147,232

Net change in fund balance (105,625) (105,625) (105,625) Fund balance, beginning of year 105,625 105,625 105,625 105,625

Fund balance, end of year $ 105,625 $ 105,625 $ (105,625) $ $ $

See Accompanying Notes to Other Required Supplementary Information

59 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to Other Required Supplementary Information June 30, 2004

STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY

A. Budget Information

The budget of the Agency is an operating plan that identifies estimated costs and results in relation to estimated revenues. Budgets are prepared according to the following guidelines for the General and Special Revenue Funds:

General Fund

The operating expenditures are budgeted by appropriation according to type of expenditures, categorized as personnel and non-personnel.

Special Revenue Fund

Twenty percent of the tax increment revenues are budgeted by the Board for payment to the low and moderate-income housing program of the City of San Jose.

During the fiscal year, the procedures followed to establish the budgetary data reflected in the accompanying budget to actual schedules were as follows:

Original Budget

Prior to the beginning of the budget year, the Executive Director of the Agency presents to the Board the fiscal budget for the ensuing year. The budget is prepared on a budgetary basis, which does not conform with GAAP, as encumbrances are included as expenditures. Revenue estimates are presented to the Agency Board in total and are approved by revenue resolution.

Prior to June 30 of each year, the annual budget is finalized through passage of the annual appropriation resolution and an annual revenue resolution by the Agency Board, which is the legal authority for enactment of the budget. Management allocates budgeted revenue to the Special Revenue Fund based on priorities established by the California Community Redevelopment Law, bond indentures, and other legal agreements.

The annual appropriation resolution adopts the expenditure budget at the appropriation level (project, personnel, and non-personnel). Accordingly, the lowest level of budgetary control exercised by the Agency Board is the appropriation level. Management can transfer budgeted amounts between project activities included in each appropriation without the approval of the Agency's Board.

60 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to Other Required Supplementary Information June 30, 2004

Final Budget

Supplemental appropriations may be approved during the budget year if there are funds available in the capital reserve. Appropriations lapse at the close of the fiscal year to the extent that they have not been expended or encumbered. No expenditures may be made in excess of amounts appropriated by the Agency Board.

The Agency Board approves changes to the revenue estimates by adoption of a supplemental revenue resolution. The budgetary data presented in the accompanying budget to actual schedules includes all revisions approved by the Agency Board.

B. Budgetary Results Reconciled To GAAP

The budgetary process is based upon accounting for certain transactions on a basis other than GAAP. The results of operations are presented in the budget and actual comparison statement in accordance with the budgetary process (budgetary basis) to provide a meaningful comparison with the budget.

The only difference between the budgetary basis actual and GAAP basis is that the year-end encumbrances are recognized as the equivalent of expenditures in the budgetary basis schedules, while encumbered amounts are not recognized as expenditures on the GAAP basis statements until recorded as actual expenditures.

C. Special Revenue Fund Expenditures in Excess of Budget

The special revenue fund's expenditures exceeded the budgeted amount by $547,232. This amount represents additional payment to the City of San Jose for the 20% low and moderate housing projects, as a result of a modest increase of the Agency's budgeted tax increment revenues during the year.

61

REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE Schedule of Revenues, Expenditures and Changes in Fund Balance Budget and Actual on a Budgetary Basis - Housing Debt Service Fund For the Fiscal Year Ended June 30, 2004

Actual Amounts Budgetary Basis Actual Variance with Amounts Budgetary Actual Budgeted Amounts Final Budget Budgetary to GAAP Amounts Original Final Over (Under) Basis Differences GAAP Basis Revenues: Intergovernmental $ 11,468,169 $ 11,468,169 $ $11,468,169 $ $ 11,468,169 Investment income 161,583 161,583 161,583 161,583 Total revenues 11,629,752 11,629,752 11,629,752 11,629,752

Expenditures: Intergovernmental: Payments to the City of San Jose 27,531,426 27,531,426 27,531,426 27,531,426 Debt service: Interest 7,362,083 7,362,083 7,362,083 7,362,083 Payments to refunded bond escrow agent 4,160,960 4,160,960 4,160,960 4,160,960 Bond issuance costs 1,157,545 1,157,545 1,157,545 1,157,545 Total expenditures 40,212,014 40,212,014 40,212,014 40,212,014

Excess (deficiency) ofrevenues over (under) expenditures (28,582,262) (28,582,262) (28,582,262) (28,582,262)

Other financing sources (uses): Refunding bonds issued 69,000,000 69,000,000 69,000,000 69,000,000 Payment to refunded bond escrow agent (40,471,506) (40,471,506) (40,471,506) (40,471,506) Transfers out (348) (348) (348) (348) Total other financing sources 28,528,146 28,528,146 28,528,146 28,528,146

Net change in fund balance (54,116) (54,116) (54,116) (54,116) Fund balance, beginning of year 245,428 245,428 245,428 245,428

Fund balance, end of year $ 191,312 $ 191,312 $ $ 191,312 $ $ 191,312

See Accompanying Notes to the Supplementary Information

62 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE Schedule of Revenues, Expenditures and Changes in Fund Balance Budget and Actual on a Budgetary Basis - Merged Debt Service Fund For the Fiscal Year Ended June 30, 2004

Actual Amounts Budgetary Basis Actual Variance with Amounts Budgetary Actual Budgeted Amounts Final Budget Budgetary to GAAP Amounts Original Final Over (Under) Basis Differences GAAP Basis Revenues: Tax increment $103,365,087 $103,365,087 $ $103,365,087 $ $ 103,365,087 Investment income 663,103 663,103 663,103 663,103 Total revenues 104,028,190 104,028, 190 104,028,190 104,028,190

Expenditures: Debt service: Principal repayment 33,860,000 33,860,000 33,860,000 33,860,000 Interest 54,280,651 84,166,568 84,166,568 84,166,568 Payments to refunded bond escrow agent 7,790,702 7,790,702 7,790,702 Bond issuance costs 7,709,884 7,709,884 7,709,884 Total expenditures 88,140,651 133,527,154 133,527,154 133,527,154 Excess (deficiency) ofrevenues over (under) expenditures 15,887,539 (29,498,964) (29,498,964) (29,498,964)

Other financing sources (uses): Tax allocations bonds issued 15,430,128 15,430,128 15,430,128 15,430,128 Revenue bonds issued 399,300 399,300 399,300 399,300 Proceeds from refunding bonds 297,285,851 297,285,851 297,285,851 297 ,285 ,851 Payment to refunded bond escrow agent (292,099, 726) (292,099, 726) (292,099, 726) (292,099, 726) Transfers in 16,717,071 16,717,071 16,717,071 16,717,071 Transfers out (25,873,298) (25,873,298) (25,873,298) (25,873,298) Total other financing sources 11,859,326 11,859,326 11,859,326 11,859,326

Net change in fund balance 27,746,865 (17,639,638) (17,639,638) (17,639,638)

Fund balance, beginning of year 94,185,146 94,185,146 94,185,146 94,185,146

Fund balance, end of year $121,932,011 $ 76,545,508 $ $ 76,545,508 $ $ 76,545,508

See Accompanying Notes to the Supplementary Information

63 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE Schedule of Revenues, Expenditures and Changes in Fund Balance Budget and Actual on a Budgetary Basis - Capital Projects Fund For the Fiscal Year Ended June 30, 2004

Actual Amounts Budgetary Basis Actual Variance with Amounts Budgetary Actual Budgeted Amounts Final Budget Budgetary to GAAP Amounts Original Final Over (Under) Basis Differences GAAP Basis Revenues: Tax increment $ 47,206,666 $ 31,034,913 $ 1,766,428 $ 32,801,341 $ $ 32,801,341 Intergovernmental 26,939,071 26,939,071 26,939,071 26,939,071 Investment income 5,062,384 2,642,728 800,557 3,443,285 3,443,285 Developer contributions 5,974,000 5,424,000 (3,276,318) 2,147,682 2,147,682 Grant revenue 2,300,000 2,393,973 (662,905) 1,731,068 1,731,068 Rent 81,072 199,832 100,696 300,528 300,528 Other 1,333,775 1,657,418 (130,198) 1,527,220 1,527,220 Total revenues 88,896,968 70,291,935 (1,401,740) 68,890,195 68,890,195

Expenditures: Intergovernmental: Payments to the City of San Jose 13,005,588 23,083,598 (14,341) 23,097,939 23,097,939 Payments to the County of Santa Clara 20,819,785 25,399,196 25,399,196 25,399,196 Payments to other governmental agencies 2,353,235 2,374,859 (547,549) 2,922,408 2,922,408 Capital outlay: Project expenditures 286,583, 745 190,181,307 93,658,162 96,523,145 (37,387,130) 59,136,015 Payments to the City of San Jose 27,954,346 27,954,346 27,954,346 4,442,650 32,396,996 Payments to the County of Santa Clara 16,000,000 16,000,000 16,000,000 16,000,000 Total expenditures 366, 716,699 284,993,306 93,096,272 191,897 ,034 (32,944,480) 158,952,554 Excess (deficiency) of revenues over (under) expenditures (277,819, 731) (214,701,371) 91,694,532 (123,006,839) 32,944,480 (90,062,359)

Other financing sources (uses): Tax allocations bonds issued 104,807,929 107,930,891 13,062,900 120,993, 791 120,993,791 Revenue bonds issued 59,600,700 59,600,700 59,600,700 59,600,700 Sale of capital assets 14,210,000 4,210,000 276,433 4,486,433 4,486,433 Transfers in 25,873,646 25,873,646 25,873,646 25,873,646 Transfers out (39,217,071) (39,217,071) (39,217,071) (39,217,071) Total other financing sources 165,275,204 158,398,166 13,339,333 171,737,499 171,737,499

Net change in fund balance (112,544,527) ( 56,303 ,205) 105,033,865 48,730,660 32,944,480 81,675,140 Fund balance, beginning of year 98,443,735 98,443,735 98,443,735 98,443,735

Fund balance, end of year $ (14, 100, 792) $ 42,140,530 $ 105,033,865 $147,174,395 $ 32,944,480 $180,118,875

See Accompanying Notes to the Supplementary Information

64 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to the Supplementary Information June 30, 2004

STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY

A. Budget Information

The budget process for the Housing Debt Service Fund, Merged Debt Service Fund, and Capital Projects Fund followed the same procedures to establish the budgetary data for the General Fund and Special Revenue Fund, which can be found in the Notes to Other Required Supplementary Information on pages 60-61.

Housing and Merged Debt Service Funds

Expenditures are budgeted according to bond indenture requirements. Appropriations for Housing and Merged Debt Service Funds were implicitly adopted by the Agency Board when the formal bond resolutions were approved.

Capital Projects Fund

Capital Projects Fund expenditures are budgeted by project, on a project-length basis. Annual appropriations include items such as direct project payments, land acquisition, payments to the City under cooperation agreements, and other expenditures.

B. Budgetary Results Reconciled To GAAP

The budgetary process is based upon accounting for certain transactions on a basis other than GAAP. The results of operations are presented in the budget and actual comparison schedule in accordance with the budgetary process (budgetary basis) to provide a meaningful comparison with the budget.

The major difference between the budgetary basis actual and GAAP basis is that the year-end encumbrances are recognized as the equivalent of expenditures in the budgetary basis basic financial statements, while encumbered amounts are not recognized as expenditures on the GAAP basis until recorded as actual expenditures. In addition, certain expenditures recorded for GAAP purposes may be budgeted in a different fiscal year.

65 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Notes to the Supplementary Information June 30, 2004

A summary of the adjustments necessary to reconcile the results of operations on a budgetary basis to the results of operations on a GAAP basis are as follows:

Capital Projects Expenditures per statement of revenues, expenditures and changes in fund balances (GAAP basis) $ 158,952,554 GAAP basis expenditures to be budgeted in subsequent periods (4,442,650) Encumbrances 37,387,130

Expenditures - budgetary basis $ 191,897,034

C. Capital Project Fund Expenditures in Excess of Budget

The capital project fund's expenditures exceeded the budgeted amount by a total amount of $561,890. This amount represents $14,341 additional San Jose Arena pass through payment to the City of San Jose and $547,549 increase in revenue pass through payment to the County of Santa Clara, as a result of a modest increase of the budgeted tax increment revenues during the year.

66 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE Capital Assets Used in the Operation of Governmental Funds Comparative Schedule By Source June 30, 2004 and 2003

(Dollars expressed in thousands)

2004 2003

Governmental funds capital assets: Structures and improvements $ 11,156 $ 10,000

Changes in governmental funds capital assets: Capital projects fund $ 11,156 $ 10,000

67 REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE Capital Assets Used in the Operation of Governmental Funds Comparative Schedule By Function and Activity, and Changes By Function and Activity As of and for the Fiscal Year Ended June 30, 2004 and 2003 (Dollars expressed in thousands)

Function and Activity - Community Development 2004 2003

Governmental funds capital assets: Structures and improvements $ 11, 156 $ 10,000

Changes in governmental funds capital assets: July 1, 2003 $ 10,000 $ 10,000 Additions 1,156 June 30, 2004 $ 11, 156 $ 10,000

68 (THIS PAGE INTENTIONALLY LEFT BLANK) APPENDIXC SUMMARY OF CERTAIN PROVISIONS OF THE FISCAL AGENT AGREEMENT

The following is a summary of certain provisions of the Fiscal Agent Agreement. This summary does not purport to be complete or definitive and is qualified in its entirety by reference to the full terms of the Fiscal Agent Agreement which is available from the Agency upon request. Capitalized terms not defined in this Official Statement shall have the meaning set forth in the Fiscal Agent Agreement.

Definitions

''Additional Housing Set-Aside Amounts" means, as of the date of calculation, the amount of Housing Set-Aside Amounts which, as shown in a Consultant's Report, are estimated to be receivable by the Agency within the Fiscal Year following the Fiscal Year in which such calculation is made as a result of increases in the assessed valuation of taxable property in the Project Area due to either (a) construction which has been completed and for which a certificate of occupancy has been issued by the City but which is not then reflected on the tax rolls, or (b) transfer of ownership or any other interest in real property which has been recorded but which is not then reflected on the tax rolls. For purposes of this definition, the term "increases in the assessed valuation" means the amount by which the assessed valuation of taxable property in the Project Area is estimated to increase above the assessed valuation of taxable property in the Project Area ( as evidenced in the written records of the County) as of the date on which such calculation is made.

"Agency" means the Redevelopment Agency of the City of San Jose, a public body, corporate and politic, duly organized and existing under the laws of the State of California.

''Alternate Credit Facility" means any letter of credit, committed line of credit, bond purchase agreement, surety bond, bond insurance policy or other instrument, or any combination thereof, under the terms of which the Fiscal Agent is authorized to receive payment of an amount sufficient to pay when and as due under the Fiscal Agent Agreement (a) the principal of the Bonds of any Series, (b) the interest on the Bonds of any Series, and ( c) the purchase price of the Bonds of any Series upon the optional or mandatory tender thereof, including the principal amount and accrued interest thereon to the purchase date to the extent required to be paid under the Fiscal Agent Agreement. The general unsecured obligations of the financial institution or institutions which issues any Alternate Credit Facility (i) for any Series of Tax-Exempt Bonds, must have a short-term rating which is in the highest rating category (without regard to any modifier) of S&P or of Moody's and a long-term rating of A+ or better from S&P or of Al or better from Moody's, and (ii) for any other Series of Bonds, must have a short term rating which is in at least the second highest rating category (without regard to any modifier) of S&P or of Moody's and a long-term rating of A- or better from S&P or A3 or better from Moody's; provided, however, that neither such ratings shall be required to be better than the respective ratings then held by the general unsecured obligations of the related Credit Provider whose Credit Facility is then in effect with respect to such Series of Bonds.

''Annual Debt Service" means, with respect to Bonds then Outstanding, for each twelve-month period ending on a Principal Payment Date, the sum of (1) the interest falling due on the Outstanding Bonds ( assuming that during any Variable Rate Period for which the interest rate on the Bonds has not been determined, (i) for Tax-Exempt Bonds, a rate equal to the average of the Revenue Bond Index published by The Bond Buyer over the twelve month period preceding the date of calculation of Annual Debt Service will be in effect during such twelve month period or, if such index is not then published, a comparable weekly average selected by the Agency and approved by the Credit Provider will be in effect, and (ii) for all other Bonds, a rate equal to the average annual yield on the 10-year U.S. Treasury for the twelve month period preceding the date of calculation, plus 250 basis points, and assuming further that the Outstanding Bonds are retired as scheduled, whether by maturity or by Sinking Account Payment); and (2) the principal amount or accreted value of the Outstanding Bonds, if any, falling due by their terms in such twelve month period, whether by maturity or by Sinking Account Payment.

C-1 ''Authorized Denomination" means, with respect to each Series of Bonds, during any period while the Bonds of such Series bear interest at a Variable Rate other than a Long Rate, $100,000 or any integral multiple of $5,000 in excess thereof, and during any period while the Bonds of such Series bear interest at a Long Rate or a Fixed Rate, $5,000 or any integral multiple thereof.

''Available Moneys" means (1) moneys derived from payments under the Credit Facility and not commingled with any other funds; (2) moneys which have been held by the Fiscal Agent for at least one hundred and twenty-three (123) days and not commingled with any moneys so held for less than said period and during which period no petition in bankruptcy has been filed by or against, and no receivership, insolvency, assignment for the benefit of creditors or other similar proceeding has been commenced by or against the Agency, unless such petition or proceedings have been dismissed and all applicable appeal periods have expired without an appeal having been filed; (3) moneys as to which the Fiscal Agent has received an opinion of bankruptcy counsel acceptable to the Agency and the Rating Agency to the effect that the contemplated disbursement thereof pursuant to the Fiscal Agent Agreement will not be recoverable under Section 547 or 550 of the Bankruptcy Code; or ( 4) if a Credit Facility is not then in effect, any legally available funds of the Agency. The Agency shall provide a Certificate to the Fiscal Agent, upon which it may conclusively rely, that such funds constitute Available Moneys.

"Bank Bonds" means Bonds purchased with amounts drawn on a Credit Facility pursuant to the Fiscal Agent Agreement and owned by the related Credit Provider or its transferees or nominees; following the remarketing of such Bonds to a Bondholder other than a Credit Provider, such Bonds shall no longer be Bank Bonds.

"Bank Rate" means, with respect to each Series of Bonds, the rate or rates per annum set forth in the Reimbursement Agreement for such Series at which interest accrues on unreimbursed drawings on the related Credit Facility or on Bank Bonds. The daily basis upon which the Bank Rate with respect to a Series of Bonds is calculated shall be as set forth in the related Reimbursement Agreement.

"Beneficial Owner" means the beneficial owner of Bonds held in book-entry form or the registered owner of Bonds held in certificated form.

"BNY'' means The Bank of New York.

"Bondowner," "Owner," "Holder" or "Bondholder" means, with respect to a Bond, the person in whose name such Bond shall be registered.

"Bonds" means, collectively, the Series 2005 Subordinate Bonds and any Parity Debt issued under the Fiscal Agent Agreement.

"Business Day" means any day other than (i) a Saturday or a Sunday, (ii) a day on which commercial banks located in New York City, in the city in which the office of a Credit Provider where draws on a Credit Facility are made is located or in the city in which the Principal Office of the Fiscal Agent is located are authorized or required by law to close, or (iii) a day on which the New York Stock Exchange is closed.

"Certificate" or "Certificate of the Agency," "Statement" or "Statement of the Agency," "Request" or "Request of the Agency" and "Requisition" or "Requisition of the Agency" mean, respectively, a written certificate, statement, request or requisition signed in the name of the Agency by its Chairperson, Vice Chairperson, Executive Director, Assistant Executive Director or Director of Finance and Administration, or such other person as may be designated in writing by the Chairperson, Vice Chairperson, Executive Director or Assistant Executive Director to the Fiscal Agent and the Credit Provider and authorized to sign for the Agency. Any such instrument and supporting opinions or representations, if any, may be, but need not be, combined in a single instrument with any other instrument, opinion or representation, and the two or more so combined shall be read and construed as a single instrument.

C-2 Any Certificate or Statement of the Agency may be based, insofar as it relates to legal or accounting matters, upon the opinion or representation of counsel or accountants, unless the officer signing such certificate or statement knows, or in the exercise of reasonable care should have known, that the opinion or representation with respect to the matters upon which such certificate or statement may be based, as aforesaid, is erroneous. The same officer of the Agency, or the same counsel or accountant, as the case may be, need not certify to all of the matters required to be certified under any provision of the Fiscal Agent Agreement, but different officers, counsel or accountants may certify to different facts.

"City" means the City of San Jose, a charter city and municipal corporation duly organized and existing under and by virtue of its charter and the Constitution of the State of California.

"Closing Date" means, with respect to any Series of Bonds, the date on which the Bonds of such Series are delivered to the original purchasers thereof.

"Code" means the Internal Revenue Code of 1986 and the regulations of the United States Department of Treasury issued thereunder, and in this regard reference to any particular section of the Code shall include reference to all successors to such section of the Code, when appropriate.

"Consultant's Report" means, a report signed by an Independent Redevelopment Consultant, as may be appropriate to the subject of the report, and including:

(1) a statement that the person of firm making or g1vmg such report has read the pertinent provisions of the Senior Lien Fiscal Agent Agreement and the Fiscal Agent Agreement to which the report relates;

(2) a brief statement as to the nature and scope of the examination or investigation upon which the report is based; and

(3) a statement that, in the opinion of such person or firm, sufficient examination or investigation was made as is necessary to enable said Independent Redevelopment Consultant to express an informed opinion with respect to the subject matter referred to in the report.

"Conversion Date" means, with respect to each Series of Bonds, the applicable (i) Variable Rate Conversion Date and (ii) Fixed Rate Date.

"Cooperation Agreement" means the Cooperation Agreement, dated September 28, 1990, by and between the City and the Agency, as amended by the First Amendment to the Cooperation Agreement, dated December 28, 1990, and Second Amendment to the Cooperation Agreement, dated August 20, 1992, which Agreement is an extension of the 1987 delegation of authority by the Agency to the City to administer the Agency's Low and Moderate Income Housing Fund.

"Costs ofIssuance" means all items of expense directly or indirectly payable by or reimbursable to the Agency and related to the authorization, issuance, sale and delivery of the Bonds, including but not limited to advertising and printing costs, costs of preparation and reproduction of documents, filing and recording fees, fees and charges of the Fiscal Agent, legal fees and expenses of the Fiscal Agent, legal fees and charges, fees and disbursements of consultants and professionals retained by or on behalf of the Agency, initial fees and charges of each Credit Provider, legal fees and expenses of counsel to each Credit Provider, rating agency fees, and fees and charges for preparation, execution, transportation and safekeeping of the Bonds.

"County" means the County of Santa Clara.

C-3 "Credit Agreement" means the Line of Credit Agreement, dated as of March 1, 2003 by and among the City, the Agency and the Credit Bank, as amended and supplemented from time to time pursuant to its terms.

"Credit Bank" means The Bank of New York.

"Credit Facility" means, with respect to Bonds of any Series, the letter of credit then in effect with respect to such Series, or any Alternate Credit Facility issued with respect to such Series. There may at any one time be one Credit Facility in effect with respect to one or more Series of Bonds, a separate Credit Facility in effect with respect to each Series of Bonds, or any combination thereof. The initial Credit Facility with respect to the Series 2005 Subordinate Bonds shall be irrevocable direct pay letters of credit delivered by BNY.

"Credit Facility Bond Payment Account" means each account by that name created pursuant to the Fiscal Agent Agreement.

"Credit Facility Fund'' means the fund by that name established pursuant to the Fiscal Agent Agreement and held by the Fiscal Agent.

"Credit Facility Proceeds Account" means each account by that name created pursuant to the Fiscal Agent Agreement.

"Credit Provider" means, with respect to any Series of Bonds, (i) the institution issuing a Credit Facility or an Alternate Credit Facility then in effect for such Series. All references to a Credit Provider in the Fiscal Agent Agreement shall be of no force and effect whatsoever during any period of time during which (a) the related Credit Facility shall have expired in accordance with its terms and been returned to such Credit Provider for cancellation, or the Fiscal Agent shall have otherwise released such Credit Provider from liability thereunder, and, in each case, all of the reimbursement obligations of the Agency shall have been paid under and as defined in the related Reimbursement Agreement and no other amounts shall be due and payable to such Credit Provider under such Reimbursement Agreement, or (b) such Credit Provider shall have wrongfully dishonored a draw on the related Credit Facility.

"Daily Rate" means, with respect to any Series of Bonds, an interest rate that is determined for such Series of Bonds on each Business Day pursuant to the Fiscal Agent Agreement.

"Daily Rate Conversion Date" means, with respect to any Series of Bonds, the day on which interest on such Series of Bonds begins to accrue at a Daily Rate following conversion from a different Variable Rate pursuant to the Fiscal Agent Agreement.

"Daily Rate Period'' means, with respect to any Series of Bonds, each period during which interest on such Series of Bonds is payable or is accrued at a Daily Rate.

"Default Rate" means (a) prior to the Fixed Rate Date for a Series of Bonds, the rate per annum set forth in the Reimbursement Agreement for such Series at which interest accrues on delinquent payments; and (b) from and after the Fixed Rate Date for a Series of Bonds, the net effective rate of interest per annum borne by the Bonds of such Series, as applicable.

"Depository" means any securities depository appointed to act as Depository under the Fiscal Agent Agreement.

"Fiscal Agent" means the Fiscal Agent under the Fiscal Agent Agreement with the duties and powers in the Fiscal Agent Agreement prescribed, its successors and assigns and any other corporation or association which may at any time be substituted in its place as provided in the Fiscal Agent Agreement.

C-4 "Fiscal Agent Agreement" means the Fiscal Agent Agreement as originally executed or as it may from time to time be supplemented or amended pursuant to the provisions thereof.

"Fiscal Year" means the period beginning July 1 of each year and ending on the next succeeding June 30.

"Fixed Rate" means the interest rate borne by the Bonds of a Series from and after the applicable Fixed Rate Date for such Series and determined in accordance with the Fiscal Agent Agreement.

"Fixed Rate Bonds" means Bonds of a Series bearing interest at the Fixed Rate for such Series.

"Fixed Rate Date" means the date on which Bonds of a Series begin to bear interest at the Fixed Rate for such Series.

"Flexible Rate" means, with respect to any Series of Bonds, an interest rate that is determined for such Series of Bonds pursuant to the Fiscal Agent Agreement.

"Flexible Rate Conversion Date" means the day on which interest on Bonds of a Series begin to accrue at a Flexible Rate for such Series following conversion from a different Variable Rate pursuant to the Fiscal Agent Agreement.

"Flexible Rate Period' means, with respect to any Series of Bonds, each period during which interest on the Bonds of such Series is payable or is accrued at a Flexible Rate for such Series.

"Government Obligations" means and includes any of the following securities, if and only if and to the extent the same are investments permitted by the City's Investment Policy: cash; State and Local Government Series notes issued by the United States Treasury; United States Treasury bills, notes and bonds as traded on the open market; zero coupon United States Treasury bonds; and interest strips of the Resolution Funding Corporation for which separation of principal and interest is made by a Federal Reserve Bank in book-entry form.

"Housing Project" means those projects approved and assisted by the City under the Cooperation Agreement, which increase, improve and/or preserve the supply of low and moderate income housing within the City and such other uses as may lawfully be expended in accordance with the Law.

"Housing Set-Aside Amounts" means the portion of Tax Increment Revenues required to be set-aside and deposited in the Low and Moderate Income Housing Fund pursuant to Section 33334.2, 33334.6 or 33487 of the Law or such greater amount of Tax Increment Revenues as provided by the Fiscal Agent Agreement, but in any event an amount equal to 20% of the Tax Increment Revenues.

"Independent Public Accountant" means any certified public accountant or public accountant or firm of such accountants retained and paid by the Agency or the City, and who, or each of whom:

(1) is in fact independent, and not under domination of the Agency or the City;

(2) does not have any substantial financial interest, direct or indirect, with the Agency, other than in connection with providing services to the Agency; and

(3) is not connected with the Agency or the City as a board member of the Agency or as a member of the City Council of the City, or as an officer or employee of the Agency or the City, but who may be regularly retained to make annual or similar audits of any of the books of the Agency or the City.

C-5 "Independent Redevelopment Consultant" means a consultant or firm of such consultants generally recognized to be well qualified in the field of consulting relating to tax allocation bond financing by California redevelopment agencies, appointed and paid by the Agency, and who, or each of whom:

(1) is in fact independent, and not under domination of the Agency or the City;

(2) does not have any substantial financial interest, direct or indirect, with the Agency, other than in connection with providing services to the Agency; and

(3) is not connected with the Agency as a member, officer or employee of the Agency, but who may be regularly retained to make annual or other reports to the Agency.

"Information Services" means Financial Information, Inc. 's "Daily Called Bond Service," 30 Montgomery Street, 10th Floor, Jersey City, New Jersey 17302, Attention: Editor; Kenny Information Services' "Called Bond Service," 55 Broad Street, 28th Floor, New York, New York 10004; Moody's "Municipal and Government," 99 Church Street, 8th Floor, New York, New York 10007, Attention: Municipal News Reports; and S&P's "Called Bond Service," 25 Broadway, 3rd Floor, New York, New York 10004; or, in accordance with the then current guidelines promulgated by the Securities and Exchange Commission, such other addresses and/or such other information services providing information with respect to called bonds as the Agency may designate in a Certificate of the Agency delivered to the Fiscal Agent.

"Interest Payment Date" for any Series of Bonds means (i) when used with respect to a Series of Bonds bearing interest at a Daily Rate, a Weekly Rate or a Monthly Rate, the first Business Day of each month, commencing August 1, 2005, and the maturity date thereof and, with respect to a Series of Bonds bearing interest at a Daily Rate or a Weekly Rate, any date on which Bonds of such Series are subject to mandatory tender for purchase pursuant to the Fiscal Agent Agreement; (ii) when used with respect to any Series of Bonds bearing interest at a Flexible Rate, the Business Day following each Rate Period and, if applicable, the maturity date thereof; (iii) when used with respect to any Series of Bonds bearing interest at a Semiannual Rate, a Long Rate or a Fixed Rate, August 1 and February 1 of each year, commencing on the first February 1 or August 1 which is at least two months after the applicable Conversion Date and, if applicable, the maturity date thereof; and (iv) when used with respect to Bank Bonds, any date on which any interest on such Bank Bonds is due under the applicable Reimbursement Agreement.

"Interest Payment Period'' means, (i) with respect to a Series of Bonds bearing interest at a Daily Rate, Weekly Rate or Monthly Rate, the period from and including the first Business Day of each month (with the exception of the first Interest Payment Period following the Closing Date or conversion of a Series of Bonds to a Daily Rate, Weekly Rate or Monthly Rate, which commences on the Closing Date or Conversion Date, as applicable) to and including the day before the first Business Day of the next month ( except in the event of a change to a Semiannual Rate, a Long Rate or a Fixed Rate, in which event to and including the last day of such month); (ii) with respect to a Series of Bonds bearing interest at a Flexible Rate, Semiannual Rate, Long Rate or Fixed Rate, the period from and including each Interest Payment Date (with the exception of the first Interest Payment Period following the Closing Date or conversion from a Daily Rate, Weekly Rate, Monthly Rate or Flexible Rate, which commences on the Closing Date or the Conversion Date, as applicable) to and including the day immediately preceding the next succeeding Interest Payment Date; and (iii) with respect to Bank Bonds of any Series, the interest periods identified as such in the related Reimbursement Agreement.

"Investment Policy" means the City's Investment Policy, as previously adopted and as most recently amended by the City Council prior to the date of the issuance and delivery of the Series 2005 Subordinate Bonds, and as it may hereafter be amended.

"Law" means the Community Redevelopment Law (being Division 24 of the Health and Safety Code) of the State of California, as amended.

C-6 "Long Rate" means, with respect to any Series of Bonds, an interest rate that is determined for such Series of Bonds on the basis of a term of one year or more pursuant to the Fiscal Agent Agreement.

"Long Rate Conversion Date" means the day on which interest on the Bonds of a Series begins to accrue at a Long Rate for such Series following conversion from a different Variable Rate pursuant to the Fiscal Agent Agreement.

"Long Rate Period' means, with respect to any Series of Bonds, each period during which interest on the Bonds of such Series is payable or is accrued at a Long Rate for such Series.

"Low and Moderate Income Housing Fund' means the Low and Moderate Income Housing Fund established with respect to the Merged Area Redevelopment Project all in accordance with Section 33334.2, 33334.6 or 33487 of the Law.

''Mandatory Tender Date" means the date on which Bonds of a Series are subject to mandatory tender for purchase pursuant to the Fiscal Agent Agreement.

''Mandatory Tender Notice" means notice of any mandatory tender of Bonds pursuant to and satisfying the requirements of the Fiscal Agent Agreement.

''Maximum Annual Debt Service" means, with respect to any Series or any combination of Series of Bonds, the largest Annual Debt Service during the period from the date of such determination through the final maturity date of such Bonds.

''Maximum Interest Rate" means, with respect to Bonds other than Bank Bonds, the lesser of (i) twelve percent (12%) per annum or (ii) such other rate as may be specified for any Series of Bonds by the Agency in writing to the Fiscal Agent accompanied by (1) written confirmation from the related Credit Provider that the amount available to be drawn under the related Credit Facility is at least equal to the related Required Stated Amount calculated after such change in the Maximum Interest Rate, and (2) an Opinion of Bond Counsel to the effect that the proposed change in the Maximum Interest Rate will not adversely affect the exclusion of interest on such Bonds from gross income for federal income tax purposes or exceed the maximum interest rate permitted by law.

''Monthly Rate" means, with respect to any Series of Bonds, an interest rate that is determined for the Bonds of such Series on a monthly basis pursuant to the Fiscal Agent Agreement.

''Monthly Rate Conversion Date" means the day on which interest on the Bonds of a Series begins to accrue at a Monthly Rate for such Series following conversion from a different Variable Rate pursuant to the Fiscal Agent Agreement.

"Monthly Rate Period' means, with respect to any Series of Bonds, each period during which interest on the Bonds of a Series is payable or is accrued at a Monthly Rate for such Series.

''Moody's" means Moody's Investors Service, a corporation duly organized and existing under and by virtue of the laws of the State of Delaware, and its successors and assigns, except that if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, then the term "Moody's" shall be deemed to refer to any other nationally recognized securities rating agency selected by the Agency and approved by each of the Credit Providers, which approval shall not unreasonably be withheld.

"Nominee" means the nominee of the Depository as determined from time to time in accordance with the Fiscal Agent Agreement.

C-7 "One-Month LIBOR" means the rate of interest per annum equal to the rate per annum at which United States dollar deposits having a maturity of one month are offered to prime banks in the London interbank market which appear on Telerate Page 3750 as of approximately 11:00 am, London time, on such day. If at least two such quotations appear, "One-Month LIBOR" shall be the arithmetic mean (rounded upward, if necessary, to the nearest one-hundredth of one percent) of such offered rates. If such rate does not appear on Telerate page 3750, the rate for that day will be determined on the basis of the Reuters Screen LIBOR Page. If at least two such quotations appear, "One-Month LIBOR" shall be the arithmetic mean (rounded upward, if necessary, to the nearest one-hundredth of one percent) of such offered rates. If fewer than two such quotes appear, "One-Month LIBOR" with respect to such Interest Period shall be determined at approximately 11 :00 am, London time, on such day on the basis of the rate at which deposits in United States dollars having a maturity of one month are offered to prime banks in the London interbank market by four major banks in the London interbank market selected by the Auction Agent and in a principal amount of not less than U.S. $1,000,000 and that is representative for a single transaction in such market at such time. The Auction Agent will request the principal London office of each of such banks to provide a quotation of its rate. If at least two quotations are provided, "One-Month LIBOR" shall be the arithmetic mean (rounded upward, if necessary, to the nearest one-hundredth of one percent) of such offered rates. If fewer than two quotations are provided, "One-Month LIBOR" shall be the arithmetic mean (rounded upward, if necessary to the nearest one­ hundredth of one percent) of the rates quoted at approximately 11 :00 am, New York City time, on such day by three major banks in New York, New York selected by the Auction Agent for loans in United States dollars to leading European banks having a maturity of one month, three months, six months or one year, respectively, and in a principal amount equal to an amount of not less than U.S. $1,000,000 and that is representative for a single transaction in such market at such time; provided, however, that if the banks selected as aforesaid are not quoting as mentioned in this sentence, "One-Month LIBOR" shall be One-Month LIBOR as was in effect under the foregoing provisions for the immediately preceding Interest Period.

"Opinion of Bond Counsel" means a written opinion of an attorney-at-law, or a firm of such attorneys, of nationally recognized standing in matters pertaining to the exclusion from gross income for federal income tax purposes of interest on obligations issued by states and their political subdivisions, duly admitted to the practice of law before the highest court of any state of the United States of America.

"Opinion of Counsel" means a written opinion of the Agency's General Counsel or other counsel retained by the Agency. Any Opinion of Counsel may be based, insofar as it relates to factual matters, upon information which is in the possession of the Agency, upon a certificate or opinion of, or representation by, an officer or officers of the Agency, unless such counsel knows, or in the exercise of reasonable care should have known, that the certificate or opinion or representation with respect to the matters upon which his or her opinion maybe based is erroneous.

"Optional Tender Date" means any date on which a Bond is to be purchased pursuant to the Fiscal Agent Agreement.

"Optional Tender Notice" means written irrevocable notice from the Owner of any Bond meeting the requirements of the Fiscal Agent Agreement.

"Outstanding," when used as of any particular time with reference to Bonds, means (subject to the provisions of the Fiscal Agent Agreement) all Bonds theretofore executed, issued and delivered by the Agency under the Fiscal Agent Agreement except:

(1) Bonds theretofore canceled by the Fiscal Agent or surrendered to the Fiscal Agent for cancellation;

(2) Bonds for the payment or redemption of which funds in the necessary amount shall have been deposited theretofore with the Fiscal Agent (whether upon or prior to the maturity or redemption date of such Bonds), provided, that if such Bonds are to be redeemed prior to the maturity

C-8 thereof, notice of such redemption shall have been given as provided in the Fiscal Agent Agreement or some other provision satisfactory to the Fiscal Agent shall have been made for the giving of such notice;

(3) Untendered Bonds; and

(4) Bonds in lieu of or in substitution for which other Bonds shall have been executed, issued and delivered by the Agency pursuant to the Fiscal Agent Agreement.

"Parity Debt" means any indebtedness, installment sale obligation, lease obligation or other obligation of the Agency incurred pursuant to the Fiscal Agent Agreement of the Fiscal Agent Agreement and having an equal lien and charge upon the Subordinate Housing Set-Aside Amounts and therefore payable on a parity with the Series 2005 Subordinate Bonds or an obligation of the Agency the regularly scheduled payments of which are payable on a parity with the Series 2005 Subordinate Bonds (whether or not any Series 2005 Subordinate Bonds are Outstanding).

"Participants" means those broker-dealers, banks and other financial institutions from time to time for which the Depository holds Bonds as a securities depository.

"Permitted Investments" means any of the following which at the time acquired or made are legal investments for the Agency, under applicable State of California laws (including the Investment Policy, unless compliance with the Investment Policy is waived by resolution of the Agency), for the moneys held under the Fiscal Agent Agreement then proposed to be invested therein:

(i) Government Obligations;

(ii) bonds debentures and notes of the Federal Home Loan Mortgage Corporation ( excluding stripped coupon obligations), participation certificates which guarantee timely payment of principal and interest of obligations of the Federal Home Loan Mortgage Corporation (excluding stripped mortgage securities) and consolidated system-wide bonds and notes of the Farm Credit System;

(iii) mortgage backed securities ( excluding stripped coupon obligations) and senior debt obligations of the Federal National Mortgage Association;

(iv) demand deposits or time deposits or deposit accounts with, or certificates of deposit issued by, the Fiscal Agent, or any of its affiliates, or any bank organized under the laws of the United States or any state or the District of Columbia, (x) whose long-term obligations are rated A-1 or better by Moody's and A+ or better by S&P, or (y) which deposits are fully insured by the Federal Deposit Insurance Corporation;

(v) federal funds, certificates of deposit, time deposits and bankers' acceptances (having maturities at the time of purchase of not more than six months) of any bank which maintains a rating for its short-term unsecured debt obligations in the highest rating category for short-term unsecured debt obligations of each Rating Agency;

(vi) repurchase agreements with a maturity of not to exceed ten days with any institution which maintains a rating in the highest rating category for long-term unsecured debt obligations of each Rating Agency;

(vii) units of a taxable government money market fund (including any fund for which the Fiscal Agent or any its affiliates maintains or acts as sponsor or advisor) comprised of United States

C-9 government obligations and repurchase agreements fully collateralized by such obligations and that are assigned a rating of Aaa by Moody's and AAAm or AAAm-g by S&P;

(viii) Local Agency Investment Fund (LAIF);

(ix) the City's investment pool; or

(x) upon resolution of the Agency waiving compliance with the Investment Policy, a guaranteed investment contract or agreement with a financial institution or insurance company which has, at the date of execution thereof, an outstanding issue of unsecured, uninsured and unguaranteed obligations or a claims paying ability rated not lower than Aa3 by Moody's and AA- by S&P. For purposes of this definition, "highest rating category" with respect to those obligations rated by Moody's and S&P shall mean a rating of at least Pl from Moody's and A-1+ from S&P for obligations with less than one year maturity; a short term rating of Pl from Moody's and A-1+ from S&P and a long term rating of at least Aa3 from Moody's and AA- from S&P for obligations with a maturity of one year or greater but less than three years; and at least Aaa from Moody's and AAA from S&P for obligations with a maturity of three years or greater.

Each Permitted Investment described under (i) above ( other than Permitted Investments purchased and held in accordance with the Fiscal Agent Agreement) shall mature on or before the earlier of (a) five years, (b) the date the Agency reasonably expects it will need the proceeds of such Permitted Investment or ( c) the final maturity date of the Bonds; provided, that if the Agency or the Fiscal Agent, at the direction of the Agency, has, with the consent of the Credit Provider, entered into a contract with a financial institution which maintains a rating of Aaa from Moody's and AAA from S&P obligating such financial institution to purchase a Permitted Investment described under clause (i) above and on deposit in the Series 2005C Subordinate Housing Set-Aside Reserve Account or the Series 2005D Subordinate Housing Set-Aside Reserve Account, as applicable, on any Interest Payment Date at a price resulting at such time in a yield equal to the yield to maturity of such Permitted Investment at the time of its original purchase, and, provided further, that such contract provides for the posting of collateral sufficient in amount and at such times as would be necessary for the Bonds to obtain or maintain a rating of Aaa from Moody's and AAA from S&P (regardless of the actual rating on the Bonds or the existence of any Credit Facility), such Permitted Investment may have any maturity. Prior to entering into any such agreement, or entering into or acquiring any Permitted Investment described in (vi) above, the Agency shall notify each Rating Agency in writing and shall provide each Rating Agency with a copy of the contract or agreement that the Agency or the Fiscal Agent will enter into with the financial institution providing the put or liquidity feature described above.

"Person" means an individual, corporation, firm, association, partnership, limited liability company, trust, or other legal entity or group of entities, including a governmental entity or any agency or political subdivision thereof.

"Principal Office" when used with respect to the Fiscal Agent means the corporate trust office of the Fiscal Agent at 707 Wilshire Blvd., 17th Floor, Los Angeles, CA 90017, provided, however, that for purposes of payment, registration, surrender, exchange, or transfer of any Bonds, means the corporate trust office of the Fiscal Agent at 6th & Marquette, Minneapolis, MN 554 79 or such other office designated by the Fiscal Agent from time to time; and (b) when used with respect to the Tender Agent means the corporate trust office of the Tender Agent at 707 Wilshire Blvd., 1ih Floor, Los Angeles, CA 90017, provided, however, that for purposes of payment, registration, surrender, exchange, or transfer of any Bonds, means the corporate trust office of the 1 Tender Agent at 6 h & Marquette, Minneapolis, MN 55479 or such other address designated by the Tender Agent from time to time.

"Principal Payment Date" means any August 1 on which the principal of Bonds is scheduled to be paid, whether at maturity or pursuant to sinking account payments.

C-10 "Project Area" means the territory comprising the Agency's Merged Area Redevelopment Project, as described in the Redevelopment Plans.

"Purchase Fund' means the fund by that name created pursuant to the Fiscal Agent Agreement and held by the Tender Agent.

"Rate Period' means the period during which a particular rate of interest determined for a Series of Variable Rate Bonds is to remain in effect pursuant to the Fiscal Agent Agreement.

"Rating Agency" means Moody's and S&P so long as it is maintaining a rating on the Bonds.

"Record Date" for the Bonds means the close of business on (i) the last day (whether or not a Business Day) of the Interest Payment Period next preceding each Interest Payment Date with respect to Bonds bearing interest at a Daily, Weekly, Monthly or Flexible Rate, and (ii) the fifteenth (15th) day (whether or not a Business Day) of the month immediately preceding each Interest Payment Date with respect to Bonds bearing interest at a Semiannual, Long or Fixed Rate.

"Redemption Fund' means the fund by that name established pursuant to the Fiscal Agent Agreement.

"Redevelopment Plans" means the redevelopment plans adopted for each of the project areas composing the Project Area, as they maybe amended from time to time.

"Reference Rate" means, on any date of determination, (i) with respect to Tax-Exempt Bonds of any Series, a rate equal to the Bond Market Association's Municipal Swap Index then in effect; and (ii) with respect to Bonds of any Series that are not Tax-Exempt Bonds, the One-Month LIBOR.

"Refunding Bonds" means Bonds issued pursuant to and in conformance with the provisions of the Fiscal Agent Agreement.

"Reimbursement Agreement" means, with respect to each Series of Bonds, the Reimbursement Agreement providing for the issuance of the Credit Facility for such Series of Bonds, or any similar agreement provided with respect to any Alternate Credit Facility for such Series of Bonds, in each case as such agreement is originally executed or as it may from time to time be supplemented, modified or amended in accordance with its terms, and with respect to the Series 2005 Subordinate Bonds, means the Reimbursement Agreements (one for each Series of Series 2005 Subordinate Bonds), each dated as of June 30, 2005, between the Agency andBNY.

"Remarketing Agent" means, with respect to a Series of Bonds, the remarketing agent named in the related Remarketing Agreement.

"Remarketing Agreement" means, with respect to a Series of Bonds, the remarketing agreement providing for the remarketing of such Bonds upon tender thereof pursuant to the terms of the Fiscal Agent Agreement.

"Remarketing Proceeds Account" means each account by that name created pursuant to the Fiscal Agent Agreement.

"Required Stated Amount" means, with respect to a Credit Facility, at any time of calculation, an amount equal to the aggregate principal amount of all related Variable Rate Bonds then Outstanding secured by such Credit Facility together with interest accruing thereon ( assuming an annual rate of interest equal to the related Maximum Interest Rate) for a period (i) of 34 days with respect to a Series of Bonds bearing interest at a Daily, Weekly or Monthly Rate and, (ii) the number of days required by the Rating Agency at the time rating

C-11 such Bonds with respect to any Bonds which are converted to bear interest at a Flexible Rate, a Semiannual Rate or a Long Rate.

"Reserve Requirement" means, with respect to each Series of Bonds, (a) prior to the Fixed Rate Date with respect to such Series of Bonds, an amount equal to $0, and (b) after the Fixed Rate Date with respect to such Series, an amount determined by the related Remarketing Agent to be required to remarket such Bonds bearing interest at a Fixed Rate at par and certified to the Agency and the Fiscal Agent, provided that such amount does not exceed the lesser of Maximum Annual Debt Service on the Outstanding Bonds of such Series, 10% of the proceeds (within the meaning of Section 148 of the Code of the Bonds of such Series), or (c) 125% of average Annual Debt Service on the Outstanding Bonds of such Series ( calculated, in the case of (i) and (iii), based on the actual interest rates to be in effect with respect to such Bonds after the Fixed Rate Date with respect to such Series).

"S&P" means Standard & Poor's Rating Services, a division of McGraw-Hill, a corporation duly organized and existing under and by virtue of the laws of the State of New York, and its successors and assigns, except that if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, then the term "S&P" shall be deemed to refer to any other nationally recognized securities rating agency selected by the Agency.

"Securities Depositories" means: The Depository Trust Company, 55 Water Street, 50th Floor, New York, New York 10041-0099, Fax (212) 855-7232; or, in accordance with the then current guidelines promulgated by the Securities and Exchange Commission at such other addresses and/or to such other securities depositories as the Agency may designate in a Request of the Agency delivered to the Fiscal Agent and approved by each Credit Provider, which approval shall not be unreasonably withheld.

"Semiannual Rate Conversion Date" means the day on which interest on a Series of Bonds begins to accrue at a Semiannual Rate for such Series following conversion from a different Variable Rate pursuant to the Fiscal Agent Agreement.

"Semiannual Rate Period' means, with respect to any Series of Bonds, each period during which interest on the Bonds of such Series is payable or is accrued at a Semiannual Rate for such Series.

"Semiannual Rate" means, with respect to any Series of Bonds, an interest rate that is determined for such Series of Bonds on a semiannual basis pursuant to the Fiscal Agent Agreement.

"Senior Lien Fiscal Agent Agreement" means the fiscal agent agreement, dated as of February 1, 1993, by and between the Agency and Wells Fargo Bank, National Association, as successor fiscal agent thereunder, as supplemented and amended pursuant to any supplements and amendments thereto.

"Senior Lien Fiscal Agent" means Wells Fargo Bank, National Association, as successor fiscal agent under the Senior Lien Fiscal Agent Agreement, or any successor fiscal agent appointed in accordance the Senior Lien Fiscal Agent Agreement.

"Senior Obligations" means upon the issuance of the Series 2005 Subordinate Bonds and the refunding of the Senior Obligations to be refunded simultaneously therewith, the Agency's Housing Set-Aside Tax Allocation Bonds, Series 1997E, in the principal amount of $17,045,000, the Agency's Housing Set-Aside Taxable Tax Allocation Bonds, Series 20031, in the principal amount of $52,930,000, the Agency's Housing Set-Aside Taxable Tax Allocation Bonds, Series 2003K, in the principal amount of $12,830,000, the Agency's Housing Set-Aside Taxable Tax Allocation Bonds, Series 2005A, which are expected to be issued in the principal amount of $10,445,000 simultaneously with the issuance of the Series 2005 Subordinate Bonds and the Agency's Housing Set-Aside Taxable Refunding Tax Allocation Bonds, Series 2005B, which are expected to be issued in the principal amount of $119,275,000 simultaneously with the issuance of the Series 2005 Subordinate Bonds.

C-12 "Senior Parity Debt" means any indebtedness, installment sale obligation, lease obligation or other obligation of the Agency issued as parity debt under and in accordance with the Senior Lien Fiscal Agent Agreement.

"Series," whenever used in the Fiscal Agent Agreement with respect to Bonds, means all of the Bonds designated as being of the same series, authenticated and delivered in a simultaneous transaction, regardless of variations in maturity, interest rate, redemption and other provisions, and any Bonds thereafter authenticated and delivered upon transfer or exchange of or in lieu of in substitution for (but not to refund) such Bonds as in the Fiscal Agent Agreement provided.

"Series 2005 Subordinate Bonds" means, collectively, the Series 2005C Bonds and the Series 2005D Bonds.

"Series 2005C Bonds" means the $33,075,000 principal amount Redevelopment Agency of the City of San Jose Merged Area Redevelopment Project Housing Set-Aside Taxable Revenue Bonds, Series 2005C.

"Series 2005D Bonds" means the $33,075,000 principal amount Redevelopment Agency of the City of San Jose Merged Area Redevelopment Project Housing Set-Aside Taxable Revenue Bonds, Series 2005D.

"Sinking Account Payment" means, with respect to a Series of Bonds, the principal amount of such Series of Bonds required to be redeemed pursuant to the Fiscal Agent Agreement on any Sinking Account Payment Date for such Series.

"Sinking Account Payment Date" means each August 1 (i) commencing August 1, 2006 and ending on August 1, 2035, with respect to the Series 2005 Subordinate Bonds, and (ii) with respect to the Bonds of any Series, as set forth in the documents pursuant to which such Series is issued.

"Special Record Date" means the date established by the Fiscal Agent pursuant to the Fiscal Agent Agreement as a record date for the payment of defaulted interest on the Bonds.

"Stated Expiration Date" means, with respect to each Credit Facility, the date upon which such Credit Facility is scheduled to expire (taking into account any extensions of such Stated Expiration Date) in accordance with its terms without regard to any early termination thereof.

"Subordinate Housing Set-Aside Costs of Issuance Fund'' means the fund created pursuant to the Fiscal Agent Agreement and held by the Fiscal Agent.

"Subordinate Housing Set-Aside Interest Account" means each account by that name, as modified by Series designation, created pursuant to the Fiscal Agent Agreement and held by the Fiscal Agent.

"Subordinate Housing Set-Aside Principal Account" means each account by that name, as modified by Series designation, created pursuant to the Fiscal Agent Agreement and held by the Fiscal Agent.

"Subordinate Housing Set-Aside Rebate Fund'' means the Fund by that name established pursuant to the Fiscal Agent Agreement and held by the Fiscal Agent.

"Subordinate Housing Set-Aside Rese-rve Account" means each account by that name, as modified by Series designation, created pursuant to the Fiscal Agent Agreement and held by the Fiscal Agent.

"Subordinate Housing Set Aside Amounts" means (i) prior to the discharge of the Senior Obligations in accordance with the Senior Lien Fiscal Agent Agreement, all amounts which are permitted to be released to the Agency from the lien of and/or the Housing Special Fund established by the Senior Lien Fiscal Agent Agreement, (ii) following the discharge of the Senior Obligations in accordance with the Senior Lien Fiscal

C-13 Agent Agreement, all Housing Set-Aside Amounts and all interest, profits and other income received from the investment of Housing Set-Aside Amounts, (iii) all interest, profits and other income received from the investment of amounts held by the Fiscal Agent under the Fiscal Agent Agreement ( other than amounts in the Subordinate Housing Set-Aside Rebate Fund) and (iv) all other legally available revenues of the Agency.

"Subordinate Housing Set-Aside Special Fund'' means the fund by that name created pursuant to the Fiscal Agent Agreement and held by the Fiscal Agent.

"Subordinate Housing Set Aside Reserve Account Credit Facility" means any letter of credit, line of credit, insurance policy, surety bond or other credit source deposited with the Fiscal Agent pursuant to the Fiscal Agent Agreement. Any Subordinate Reserve Account Credit Facility in the form of a letter of credit or line of credit shall be provided by any entity which maintains a rating of Al or better from Moody's and a rating of A+ or better from S&P, and any Subordinate Reserve Account Credit Facility in the form of an insurance policy, surety bond or other credit source shall be provided by an entity which maintains a rating of Aa or better from Moody's and AA or better from S&P. Any Subordinate Reserve Account Credit Facility must be approved in writing by the related Credit Provider.

"Tax Certificate" means a Tax Certificate and Agreement dated as of the date of issuance and delivery of any Series of Tax-Exempt Bonds, executed by the Agency.

"Tax-Exempt Bonds" means Bonds the interest on which is exempt from federal income taxation.

"Tax Increment Revenues" means all taxes allocated and paid to the Agency pursuant to Article 6 of Chapter 6 of the Law and Section 16 of Article XVI of the Constitution of the State of California, and as provided in the Merged Area Redevelopment Plans, including all payments and reimbursements, if any, to the Agency specifically attributable to ad valorem taxes lost by reason of tax exemptions and tax rate limitations.

"Tender Agent" means Wells Fargo Bank, National Association, acting on its own behalf or through an agent, and any successor appointed pursuant hereto.

"Term Bonds" means Bonds payable at or before their specified maturity date or dates from Sinking Account Payments established for that purpose and calculated to retire such Bonds on or before their specified maturity date or dates.

"Treasury Rate" means the interest rate (bond equivalent yield) applicable to 13-week United States Treasury bills determined by the Remarketing Agent on the basis of the average per annum discount rate at which such 13-week Treasury bills shall have been sold at the most recent United States Treasury auction.

"Untendered Bond'' means any Bond which is subject to optional or mandatory tender pursuant to the Fiscal Agent Agreement but which is not tendered for purchase on or before the applicable Optional Tender Date or Mandatory Tender Date, as the case may be.

"Variable Rate" means, as the context requires, a Daily Rate, Weekly Rate, Monthly Rate, Flexible Rate, Semiannual Rate or Long Rate.

"Variable Rate Bonds" means the Bonds of any Series bearing interest at a Variable Rate m accordance with the terms of the Fiscal Agent Agreement.

"Variable Rate Conversion Date" means (i) the day on which interest on the Bonds of a Series begins to accrue at a Variable Rate other than the Variable Rate previously borne by such Bonds following conversion from such previous Variable Rate ( e.g., the Interest Payment Date on which such Bonds begin to bear interest at a Long Rate following a Weekly Rate Period); and (ii) with respect to a Flexible Rate Period, a Semiannual

C-14 Rate Period or a Long Rate Period, the first day that a particular Flexible Rate, Semiannual Rate or Long Rate becomes effective.

"Variable Rate Period' means each period during which interest on a Series of Bonds is payable at a specific Variable Rate.

"Weekly Rate" means, with respect to any Series of Bonds, an interest rate that is determined for such Series of Bonds on a weekly basis pursuant to the Fiscal Agent Agreement.

"Weekly Rate Conversion Date" means the day on which interest on the Bonds of a Series begins to accrue at a Weekly Rate following conversion from a different Variable Rate pursuant to the Fiscal Agent Agreement.

"Weekly Rate Period' means, with respect to any Series of Bonds, the period during which interest on the Bonds of such Series is payable or is accrued at a Weekly Rate.

Low and Moderate Income Housing Fund

Pursuant to the Cooperation Agreement, a special fund called the "City of San Jose, California, Merged Area Low and Moderate Income Housing Fund" (hereinafter sometimes called the "Low and Moderate Income Housing Fund") is continued with the City, on behalf of the Agency, with a special account established and contained therein and known as the "Subordinate Housing Set-Aside Subaccount of the Low and Moderate Income Housing Fund," and, within such account, a subaccount known as the "Series 2005 Subordinate Housing Set-Aside Subaccount of the Low and Moderate Income Housing Fund."

Moneys deposited in the Subordinate Housing Set-Aside Subaccount of the Low and Moderate Income Housing Fund shall remain therein until from time to time expended solely for the purpose of financing or refinancing certain programs to increase, improve and/or preserve the supply of low and moderate income housing in the City, and any Costs of Issuance not paid by the Fiscal Agent pursuant to the Fiscal Agent Agreement.

If any sum remains in the Subordinate Housing Set-Aside Subaccount of the Low and Moderate Income Housing Fund after the full accomplishment of the objects and purposes for which the Bonds were issued, said sum shall be deposited by the City on behalf of the Agency in the Subordinate Housing Set-Aside Special Fund. The City shall expend the moneys deposited in the Subordinate Housing Set-Aside Subaccount of the Low and Moderate Income Housing Fund in compliance with the Law.

Limitations on the Issuance of Obligations Payable from Subordinate Housing Set-Aside Amounts

The Agency will not, so long as any of the Bonds are Outstanding, incur any liabilities or obligations or issue any obligations or securities, howsoever denominated, payable in whole or in part from Subordinate Housing Set-Aside Amounts except the following:

(a) Parity Debt payable on a parity with the Bonds and which will have, when issued, an equal lien and charge upon the Subordinate Housing Set-Aside Amounts, provided that the following conditions to the issuance of such Parity Debt are satisfied:

(1) Such Parity Debt has been duly and legally authorized for any lawful purpose;

(2) The Parity Debt shall be on such terms and conditions as maybe set forth in a fiscal agent agreement or similar agreement or resolution, which may be a Supplemental

C-15 Agreement, which shall provide for Bonds substantially in accordance with the Fiscal Agent Agreement;

(3) No event of default pursuant to the Fiscal Agent Agreement shall have occurred and then be continuing, as evidenced in a Certificate of the Agency filed with the Fiscal Agent;

(4) Unless such Parity Debt is for the refunding purposes specified in the Fiscal Agent Agreement, the Agency shall have obtained and placed on file with the Fiscal Agent a Certificate of the Agency, upon which the Fiscal Agent may conclusively rely, certifying ( on the basis of calculations as of the date of delivery of such Parity Obligations) that the following debt service coverage requirements will be met after the issuance of such Parity Debt: the amount of Housing Set-Aside Amounts, based upon the County's certified assessed valuation of property within the Project Area allocable to the Agency for the then current Fiscal Year in which such Parity Debt will become outstanding, plus any Additional Housing Set-Aside Amounts based on a Consultant's Report, shall have been at least equal to 1.15 times the sum of (i) the amount of Maximum Annual Debt Service on all Senior Obligations (as determined pursuant to the Senior Lien Fiscal Agent Agreement), and (ii) Maximum Annual Debt Service on all Bonds then Outstanding and the Parity Debt then proposed to be issued. For purposes of such determination, if the interest rate on the Bonds, or the proposed Parity Debt is not fixed to maturity, the calculation of Maximum Annual Debt Service on the Bonds, or the proposed Parity Debt shall be made at the end of the week immediately preceding the date of sale of the proposed Parity Debt.

For purposes of this paragraph, outstanding Senior Obligations, Bonds or Parity Debt shall not include any Senior Obligations, Bonds or Parity Debt the proceeds of which are deposited in an escrow fund held by the Fiscal Agent, provided that the Fiscal Agent Agreement authorizing the issuance of such Senior Obligations, Bonds or Parity Debt provides that: (i) such proceeds shall be deposited or invested with or secured by an institution rated "AA-" or higher by S&P and "Aa3" or higher by Moody's at a rate of interest which, together with amounts made available by the Agency from such Senior Obligations, Bonds or Parity Debt proceeds or otherwise, is at least sufficient to pay annual debt service on the foregoing respective Senior Obligations, Bonds or Parity Debt; (ii) moneys may be transferred from said escrow fund only if the requirements of the preceding paragraphs of this paragraph (4) will be met with respect to all outstanding respective Senior Obligations, Bonds or Parity Debt less a principal amount of such Senior Obligations, Bonds or Parity Debt which is equal to moneys on deposit in said escrow fund after each such transfer; and (iii) the respective Senior Obligations, Bonds or Parity Debt shall be redeemed from moneys remaining on deposit in said escrow fund at the expiration of a specified escrow period in such manner as may be determined by the Agency;

(5) The Agency shall have filed with the Fiscal Agent an Opinion of Bond Counsel to the effect that such Parity Debt has been duly authorized in accordance with law;

(6) The Fiscal Agent shall be designated as paying agent or Fiscal Agent for such Parity Debt, if appropriate, and the Agency shall deliver to the Fiscal Agent a transcript of the proceedings providing for the execution and delivery of such Parity Debt (but the Fiscal Agent shall not be responsible for the validity or sufficiency of such proceedings or such Parity Debt); and

(7) A certificate of the Agency that upon delivery of such Parity Debt, the aggregate principal amount of Senior Obligations, the Bonds and Parity Debt then Outstanding will not exceed the amount permitted by law or the Redevelopment Plans.

C-16 (b) Obligations which are junior and subordinate to the payment of the principal, premium, interest and reserve fund requirements for the Bonds and which subordinated obligations are payable as to principal, premium, interest and reserve fund requirements, if any, only out of Subordinate Housing Set-Aside Amounts after the prior payment of all amounts then required to be paid under the Fiscal Agent Agreement from Subordinate Housing Set-Aside Amounts for principal, premium, interest and reserve fund requirements for the Bonds, as the same become due and payable and at the times and in the manner as required in the Fiscal Agent Agreement.

( c) Refunding Bonds authorized pursuant to the Fiscal Agent Agreement.

(d) The Agency's obligations to the Credit Providers under the Reimbursement Agreements.

Issuance of Refunding Bonds

Bonds ("Refunding Bonds") may be authorized and issued by the Agency without compliance with the provisions of the Fiscal Agent Agreement to refund all or a portion of the Bonds; provided that Maximum Annual Debt Service on all Bonds Outstanding following the issuance of such Refunding Bonds is less than or equal to Maximum Annual Debt Service on all Bonds Outstanding prior to the issuance of such Refunding Bonds. Such Refunding Bonds may be issued in an aggregate principal amount sufficient (together with any additional funds available or to become available) to provide funds for the payment of all of the following:

(a) The principal or redemption price of the Outstanding Bonds to be refunded.

(b) All expenses incident to the calling, retiring or paying of such Outstanding Bonds and the costs of issuance of such Refunding Bonds.

( c) Interest on all Outstanding Bonds to be refunded to the date such Bonds will be called for redemption or paid at maturity.

( d) Interest on the Refunding Bonds from the date thereof to the date of payment or redemption of the Bonds to be refunded.

Before such Refunding Bonds shall be issued and delivered, the Agency shall file the following documents with the Fiscal Agent (upon which documents the Fiscal Agent may conclusively rely m determining whether the conditions precedent to the issuance of such Refunding Bonds have been satisfied):

(a) An Opinion of Bond Counsel to the effect that the execution of the Fiscal Agent Agreement authorizing such Refunding Bonds has been authorized by the Agency in accordance with the Fiscal Agent Agreement; and that such Refunding Bonds, when duly executed by the Agency and authenticated and delivered by the Fiscal Agent, will be valid and binding limited obligations of the Agency.

(b) If any of the Bonds to be refunded are to be redeemed prior to their stated maturity dates, irrevocable instructions to the Fiscal Agent to give the applicable notice of redemption or a waiver of the notice of redemption signed by the Owners of all or the portion of the Bonds to be redeemed, or proof that such notice has been given by the Agency; provided, however, that in lieu of such instructions or waiver or proof of notice of redemption, the Agency may cause to be deposited with the Fiscal Agent all of the Bonds proposed to be redeemed (whether canceled or uncanceled) with irrevocable instructions to the Fiscal Agent to cancel said Bonds so to be redeemed upon the exchange and delivery of said refunding Bonds; and provided further that no provision of the Fiscal Agent Agreement shall be construed to require the redemption of Bonds prior to their respective maturity dates in connection with the refunding thereof.

C-17 ( c) A Certificate of the Agency certifying ( on the basis of calculations as of the date of sale of such Refunding Bonds) that Maximum Annual Debt Service on all Bonds Outstanding following the issuance of such Refunding Bonds is less than or equal to the Maximum Annual Debt Service on all Bonds Outstanding prior to the issuance of the Refunding Bonds.

( d) A Certificate of the Agency that upon delivery of such Refunding Bonds, the aggregate principal amount of Senior Obligations then outstanding and Bonds will not exceed the amount permitted by law or the Redevelopment Plans.

The proceeds of the sale of the Refunding Bonds shall be applied by the Fiscal Agent according to the written direction of the Agency to the retirement of the Outstanding Bonds for the refunding of which said Refunding Bonds are to be issued. All Bonds purchased, redeemed or retired by use of funds received from the sale of Refunding Bonds, and all Bonds surrendered to the Fiscal Agent against the issuance of Refunding Bonds, shall be forthwith canceled and shall not be reissued.

Pledge of Subordinate Housing Set-Aside Amounts; Subordinate Housing Set-Aside Special Fund

There is created a special fund called "City of San Jose, California, Subordinate Housing Set-Aside Project Special Fund" (the "Subordinate Housing Set-Aside Special Fund"), to be held by the City on behalf of the Agency. For each Series of Bonds issued under the Fiscal Agent Agreement, three special trust accounts shall be established and maintained in trust by the Fiscal Agent designated as the " Subordinate Housing Set-Aside Interest Account," the " Subordinate Housing Set-Aside Principal Account," and the " Subordinate Housing Set-Aside Reserve Account" (inserting therein the Series designation of such Bonds).

The Subordinate Housing Set-Aside Amounts received by the Agency and held by the City on behalf of the Agency on or after the date of issue of the Series 2005 Subordinate Bonds, as provided in the Fiscal Agent Agreement, are irrevocably pledged to the punctual payment of the interest on and principal of and redemption premiums, if any, on the Bonds and any Parity Debt and to the payment of all amounts owing to each Credit Provider. The Subordinate Housing Set-Aside Amounts and such other moneys held under the Fiscal Agent Agreement, unless as otherwise provided in the Fiscal Agent Agreement, shall not be used for any other purpose while any of the Bonds remain Outstanding or any amount remains owing to any Credit Provider. This pledge shall constitute a first lien on the Subordinate Housing Set-Aside Amounts and such other moneys held under the Fiscal Agent Agreement for the payment of the Bonds and any Parity Debt and to the payment of all amounts owing to each Credit Provider, all in accordance with the terms thereof.

Subordinate Housing Set-Aside Special Fund and Trust Accounts

All Subordinate Housing Set-Aside Amounts, and other moneys identified in the Fiscal Agent Agreement, received in any Bond Year shall be deposited in the Subordinate Housing Set-Aside Special Fund in accordance with the provisions of the Fiscal Agent Agreement promptly upon receipt thereof by the City on behalf of the Agency. Notwithstanding the foregoing, there shall not be deposited with the Fiscal Agent any Subordinate Housing Set-Aside Amounts eligible for allocation to the Agency pursuant to the Law in an amount in excess of that amount which, together with all moneys then on deposit with the Fiscal Agent, shall be sufficient to discharge all Outstanding Bonds as provided in the Fiscal Agent Agreement and to pay all amounts owing to all Credit Providers.

Moneys accumulated in the Subordinate Housing Set-Aside Special Fund shall be transferred by the City on behalf of the Agency to the Fiscal Agent for deposit in the following accounts in the following priority; provided, however, that to the extent that deposits have been made in any of the accounts referred to below from the proceeds of the sale of Bonds or otherwise, the deposits below need not be made:

C-18 (a) Subordinate Housing Set-Aside Interest Accounts. Transfers shall be made by the City on behalf of the Agency to the Fiscal Agent from the Subordinate Set-Aside Housing Special Fund for deposit in each Series-designated Subordinate Housing Set-Aside Interest Account on or before the Business Day next preceding each Interest Payment Date, so that the balance in said Account on said date shall be equal to the aggregate amount of interest becoming due and payable on the then Outstanding related Bonds on the next succeeding Interest Payment Date. Moneys in a Subordinate Housing Set-Aside Interest Account shall be used by the Fiscal Agent for the payment of interest on the related Series of Bonds, including Bank Bonds, as it shall become due and payable (including accrued interest on any Bonds purchased or redeemed prior to maturity pursuant to the Fiscal Agent Agreement) or to reimburse the related Credit Provider for drawings under its Credit Facility to pay interest on such Bonds pursuant to the Fiscal Agent Agreement, and to reimburse the related Credit Provider for interest accrued on any unreimbursed drawings on such Credit Facility to pay principal of or interest on Bonds pursuant to the Fiscal Agent Agreement, which reimbursements shall be made after receipt by the Fiscal Agent of funds from drawings on such Credit Facility. The Fiscal Agent shall also, if so directed in a Request of the Agency, use amounts on deposit in a Subordinate Housing Set-Aside Interest Account to pay the related Credit Provider any fees owed under the related Reimbursement Agreement. Any moneys in a Subordinate Housing Set-Aside Interest Account not then required for the payment or reimbursement of interest on the next succeeding Interest Payment Date or redemption date shall be carried forward and applied to the payment of interest on any subsequent Interest Payment Date.

(b) Subordinate Housing Set-Aside Principal Accounts. After the deposits have been made pursuant to subparagraph (a) above and on or before the Business Day next preceding each August 1, transfers shall be made by the City on behalf of the Agency to the Fiscal Agent from the Subordinate Housing Set-Aside Special Fund for deposit in each Series-designated Subordinate Housing Set-Aside Principal Account so that the balance in said Accounts on said date shall be equal to the principal and sinking fund payments coming due on the then Outstanding related Series of Bonds on the next succeeding August 1. Moneys in a Subordinate Housing Set-Aside Principal Account shall be used by the Fiscal Agent for the payment of principal and sinking fund payments on the related Bonds as they become due, or to reimburse the related Credit Provider for drawings under the related Credit Facility to pay such principal or mandatory Sinking Account Payments on the Bonds pursuant to the Fiscal Agent Agreement, which reimbursements shall be made after receipt by the Fiscal Agent of funds from drawings on such Credit Facility. Any moneys in a Subordinate Housing Set-Aside Principal Account not then required for the payment of principal on any Principal Payment Date or Sinking Account Payment Date shall be carried forward and applied to the payment of principal on any subsequent Principal Payment Date or Sinking Account Payment Date.

(c) Subordinate Housing Set-Aside Reserve Accounts. On or before each Interest Payment Date, after making all deposits required by subsections (a) and (b) above, the City on behalf of the Agency shall from available Subordinate Housing Set-Aside Amounts, transfer to the Fiscal Agent for deposit to each Series-designated Subordinate Housing Set-Aside Reserve Account an amount, if necessary, in order to cause the amount on deposit therein to equal the related Reserve Requirement.

All amounts in a Subordinate Housing Set-Aside Reserve Account shall be used and withdrawn by the Fiscal Agent solely for the purpose of (i) paying the principal (whether at maturity or upon prior redemption) of and interest on the related Bonds when due and payable to the extent that moneys deposited in the related Subordinate Housing Set-Aside Interest Account or the Subordinate Housing Set-Aside Principal Account, respectively, are not sufficient for such purpose, or to reimburse the applicable Credit Provider for drawings under the related Credit Facility to pay the principal of and interest on the related Bonds, to the extent that moneys deposited in the Subordinate Housing Set-Aside Interest Account or the Subordinate Housing Set-Aside Principal Account, respectively, are not sufficient for such purpose; and (ii) making the final payment of principal of and

C-19 interest on the related Bonds, or reimbursing the applicable Credit Provider for a draw under the related Credit Facility to make such final payment after receipt by the Fiscal Agent of funds from a drawing on such Credit Facility. Provided that no event of default has occurred under the Fiscal Agent Agreement or under any Reimbursement Agreement, any portion of a Subordinate Housing Set-Aside Reserve Account which is in excess of the Reserve Requirement for the related Bonds shall, semiannually on or after February 1 and August 1 of each year, be transferred by the Fiscal Agent to the City on behalf of the Agency to be used for any Housing Project. On the date on which all Bonds of a Series shall be retired under the Fiscal Agent Agreement or provision made therefor pursuant to Article X, all moneys then on deposit in the related Subordinate Housing Set-Aside Reserve Account shall be withdrawn by the Fiscal Agent and paid to the related Credit Provider in an amount (if any) then due and owing under the applicable Reimbursement Agreement to the extent certified by such Credit Provider to the Fiscal Agent, and any remaining balance shall, after payment of amounts due the Fiscal Agent under the Fiscal Agent Agreement, be paid to the Agency.

Notwithstanding anything in the Fiscal Agent Agreement to the contrary, at the option of the Agency, and with the consent of the applicable Credit Provider, amounts required to be held in a Subordinate Housing Set-Aside Reserve Account may be substituted, in whole or in part, by the deposit of a Subordinate Housing Set-Aside Reserve Account Credit Facility with the Fiscal Agent upon a Request of the Agency to the Fiscal Agent; provided that with respect to any such substitution, (i) such substitution shall not result in the reduction or withdrawal of any ratings by the Rating Agency with respect to the Bonds ( and the Agency shall notify the Rating Agency prior to making any such substitution), and (ii) the Fiscal Agent shall receive prior to any such substitution becoming effective an Opinion of Bond Counsel addressed to the Fiscal Agent stating that such substitution will not adversely affect the exclusion from gross income for Federal income tax purposes of interest on the related Bonds. Amounts on deposit in a Subordinate Housing Set-Aside Reserve Account for which a Subordinate Housing Set-Aside Reserve Account Credit Facility has been substituted shall be released to or at the written direction of the Agency.

(d) On or after each May 31, commencing May 31, 2003, the Agency shall (i) determine the amount on deposit in the Subordinate Housing Set-Aside Special Fund at such time and (ii) calculate the amount required to pay the principal of (including Sinking Account Payment) and interest on the Bonds of each Series and to maintain the amount on deposit in each related Subordinate Housing Set-Aside Reserve Account at an amount equal to the related Reserve Requirements through and including the next succeeding January 1 assuming (a) in the case of Bonds bearing interest at a Variable Rate ( other than a Semiannual Rate or a Long Rate), that the rate on the Bonds shall be six percent from the period commencing on the date of such calculation to the next succeeding January 1, (b) in the case of Bonds bearing interest at a Semiannual Rate or a Long Rate, that the interest rate on the Bonds shall be the greater of six percent or the actual interest rate then in effect on the Bonds from the period commencing on the first day for which the interest rate on the Bonds has not yet been determined to the next succeeding January 1, and ( c) in the case of Bonds bearing interest at a Fixed Rate, that the interest rate on the Bonds shall be the Fixed Rate determined for the Bonds; provided, however, that in making the calculation set forth in clause (ii) above, the Agency shall use the actual interest rate on the Bonds for any period for which it has been determined. The Fiscal Agent shall, upon receipt of a Certificate of the Agency setting forth the remainder obtained by subtracting the amount calculated pursuant to clause (ii) above from the amount determined pursuant to clause (i) above, immediately remit such amount, if positive, to the Agency, and the Agency may use such amount for any lawful purpose.

Notwithstanding the preceding paragraph if at any time there are insufficient amounts on deposit in the Subordinate Housing Set-Aside Special Fund to make the transfers required by the Fiscal Agent Agreement, the Agency shall immediately transfer to the Fiscal Agent for deposit in the Subordinate Housing Set-Aside Special Fund any available Subordinate Housing Set-Aside Amounts in the amounts and at the times necessary such that there are no longer any insufficiencies in amounts

C-20 on deposit in the Subordinate Housing Set-Aside Special Fund. Additionally, if at any time after the Fiscal Agent has remitted moneys to the Agency in accordance with the preceding paragraph, the actual interest rate on the Bonds exceeds the interest rates which were assumed in making the calculations set forth in clause (ii) of the preceding paragraph, the Agency shall immediately calculate and deposit with the Fiscal Agent all amounts necessary to ensure that sufficient amounts are on deposit in the Subordinate Housing Set-Aside Special Fund to make the transfers required by the Fiscal Agent Agreement through the next succeeding January 1; provided that in determining the amounts required to be so deposited by the Agency with the Fiscal Agent, the Agency shall utilize the interest rate assumptions set forth in clause (ii) in the preceding paragraph for any period with respect the interest rate on the Bonds has not yet been determined.

Investment of Moneys in Funds

Any moneys in any of the funds established by the Fiscal Agent pursuant to the Fiscal Agent Agreement ( other than the Credit Facility Fund, amounts in which shall be held in cash and not invested), upon the Request of the Agency, as directed by the City, shall be invested in Permitted Investments.

Covenants of the Agency

Punctual Payment. The Agency will pay or cause to be paid the principal, purchase price and the interest (and premium, if any) to become due in respect of every Bond issued under the Fiscal Agent Agreement at the times and places and in the manner provided in the Fiscal Agent Agreement and in the Bonds. When and as paid in full, all Bonds shall be canceled by the Fiscal Agent, and thereafter they shall be destroyed, and the Fiscal Agent shall, upon written request of the Agency, deliver to the Agency a certificate of destruction.

Extension or Funding of Claims for Interest. In order to prevent any claims for interest after maturity, the Agency will not extend or assent directly or indirectly to the extension of time for the payment of any claim for interest on any of the Bonds, and will not be a party to or approve any such arrangement directly or indirectly by purchasing or funding such claims or in any other manner. In case any such claim for interest shall be extended or funded, whether or not with the consent of the Agency, such claim for interest so extended or funded shall not be entitled, in case of default under the Fiscal Agent Agreement, to the benefits of the Fiscal Agent Agreement, except subject to the prior payment in full of the principal of all of the Bonds then Outstanding and of all claims for interest which shall not have been so extended or funded.

Against Encumbrances. The Agency will not create or suffer to exist any pledge, lien or charge upon any of the Subordinate Housing Set-Aside Amounts having priority over or having parity with the lien of the Bonds except only as permitted in the Fiscal Agent Agreement.

Waiver of Laws. The Agency will not at any time insist upon or plead in any manner whatsoever, or claim or take the benefit or advantage of, any stay or extension of any law now or at any time hereafter in force that may affect the covenants and agreements contained in the Fiscal Agent Agreement or in the Bonds, and all benefit or advantage of any such law or laws is expressly waived by the Agency to the extent permitted by law.

Further Assurances. The Agency will make, execute and deliver any and all such instruments and assurances as may be reasonably necessary or proper or carry out the intention or to facilitate the performance of the Fiscal Agent Agreement and for the better assuring and confirming unto the owners of the Bonds of the rights and benefits provided in the Fiscal Agent Agreement.

Use of Proceeds. The Agency covenants and agrees that the proceeds of the sale of the Bonds will be deposited and used as provided in the Fiscal Agent Agreement.

C-21 No Priority. The Agency covenants and agrees that it will not issue any obligations payable, either as to principal or interest, from the Subordinate Housing Set-Aside Amounts which have, or purport to have, any lien upon the Subordinate Housing Set-Aside Amounts prior or superior to the lien of the Bonds or the lien of the Credit Providers and the Agency represents that it does not have outstanding any indebtedness which is secured by a lien on the Subordinate Housing Set-Aside Amounts of the Agency superior to or on a parity with the lien of the Bonds on the Subordinate Housing Set-Aside Amounts, except for the lien of any Credit Provider. Except as permitted by the Fiscal Agent Agreement, it will not issue any obligations payable as to principal or interest, from the Subordinate Housing Set-Aside Amounts, which have, or purport to have, any lien upon the Subordinate Housing Set-Aside Amounts on a parity with the Bonds in the Fiscal Agent Agreement authorized. Notwithstanding the foregoing, nothing in the Fiscal Agent Agreement shall prevent the Agency or the City (i) from issuing and selling pursuant to law, refunding obligations payable from and having any lawful parity lien upon the Subordinate Housing Set-Aside Amounts, if such refunding obligations are issued for the purpose of, and are sufficient for the purpose of, refunding all or any portion of the Outstanding Bonds, or (ii) from issuing and selling obligations which have, or purport to have, any lien upon the Subordinate Housing Set-Aside Amounts which is junior to the Bonds and the obligations to the Credit Provider or (iii) from issuing and selling bonds or other obligations which are payable in whole or in part from sources other than the Subordinate Housing Set-Aside Amounts. As used in the Fiscal Agent Agreement, "obligations" shall include, without limitation, bonds, notes, interim certificates, debentures or other obligations.

Complete Redevelopment Project; Amendment to Redevelopment Plans. The Agency covenants and agrees that it will diligently carry out, the Merged Area Redevelopment Project in accordance with the Law and the Redevelopment Plans and in a sound and economical manner. The Redevelopment Plans may be amended as provided in the Law but no amendment shall be made unless it will not substantially impair the security of the Bonds or the rights of the Bondholders.

Tax Revenue Statement of Indebtedness. The Agency shall comply with all requirements of the Law to insure the allocation and payment to it of the Tax Increment Revenues and the allocation and payment to the City of the Housing Set-Aside Amounts pursuant to the Cooperation Agreement. The Agency shall also timely file with appropriate officials of the County or the State, as the case may be, any necessary statements of indebtedness or other filings, including but not limited to those necessary statements of indebtedness required to be filed under Sections 33080 to 33080.6, Section 33675, Section 33334.2 and Section 33334.6 of the Law. In the event that the Agency elects to make the findings provided in Sections 33334.2 or 33334.6 of the Law and reduce the Housing Set-Aside Amounts used for Housing Projects in any Bond Year, the Agency shall provide that any such finding is expressly subordinate to the pledge of the Subordinate Housing Set­ Aside amounts made under the Fiscal Agent Agreement. The Agency expressly finds and determines that the pledge, payment and setting aside of Subordinate Housing Set-Aside Amounts as provided for in the Fiscal Agent Agreement is not subject to any limitation contained in Article XIII B of the Constitution of the State of California.

Protection of Security and Rights of Bondholders. The Agency covenants and agrees to preserve and protect the security of the Bonds and the rights of the Bondholders and the security for the obligations to the Credit Providers and the right of the Credit Providers and to defend their rights under all claims and demands of all persons. Without limiting the generality of the foregoing, the Agency covenants and agrees to contest by court action or otherwise (a) the assertion by any officer of any government unit or any other person whatsoever against the Agency that (i) the Law is unconstitutional or (ii) that the Subordinate Housing Set­ Aside Amounts pledged under the Fiscal Agent Agreement cannot be paid by the Agency for the debt service on the Bonds, or (b) any other action affecting the validity of the Bonds or diluting the security therefor. The Agency covenants and agrees to take no action which, in the Opinion of Counsel would result in the Subordinate Housing Set-Aside Amounts being withheld unless the withholding thereof is being contested in good faith. In the event of an amendment or revision to the Law which would allow the Agency to set-aside less than the Subordinate Housing Set-Aside Amounts required to be set-aside by the Agency as of the date of execution of the Fiscal Agent Agreement, the Agency covenants with the Holders of the Bonds and the Credit

C-22 Provider that it shall continue to set-aside a sufficient amount of its Tax Increment Revenues to pay the Annual Debt Service and make the deposits to the Subordinate Housing Set-Aside Reserve Accounts as required by the Fiscal Agent Agreement, and notwithstanding any such change or revision to the Law, such Tax Increment Revenue required to be so deposited shall be deemed to be Subordinate Housing Set-Aside Amounts under the Fiscal Agent Agreement and shall be subject to the first lien and pledge created under the Fiscal Agent Agreement.

Payment of Claims. The Agency will pay and discharge any and all lawful claims for labor, materials or supplies which, if unpaid, might become a lien or charge upon the properties owned by the Agency or upon the Subordinate Housing Set-Aside Amounts or any part thereof, or upon any funds in the hands of the Fiscal Agent, or which might impair the security of the Bonds or the Credit Providers; provided that nothing in the Fiscal Agent Agreement contained shall require the Agency to make any such payments so long as the Agency in good faith shall contest the validity of any such claims.

Payment of Taxes and Other Charges. Subject to the provisions of the Fiscal Agent Agreement, the Agency will pay and discharge all taxes, service charges, assessments and other governmental charges which may hereafter be lawfully imposed upon the Agency or any properties owned by the Agency in the Project Area, or upon the revenues therefrom, when the same shall become due; provided that nothing in the Fiscal Agent Agreement contained shall require the Agency to make any such payments so long as the Agency in good faith shall contest the validity of any such taxes, service charges, assessments or other governmental charges.

Taxation of Leased Prooertv. Whenever any property in the Project Area is redeveloped by the Agency and thereafter is leased by the Agency to any person or persons, or whenever the Agency leases any real property in the Project Area to any person or persons for redevelopment, the property shall be assessed and taxed in the same manner as privately-owned property (in accordance with the Law), and the lease or contract shall provide (1) that the lessee shall pay taxes upon the assessed value of the entire property and not merely upon the assessed value of the leasehold interest, and (2) that if for any reason the taxes paid by the lessee on such property in any year during the term of the lease shall be less than the taxes that would have been payable upon the entire property if the property were assessed and taxed in the same manner as privately-owned property, the lessee shall pay such difference to the Agency within thirty (30) days after the taxes for such year become payable, and in any event prior to the delinquency date of such taxes established by law, which such payments shall be treated as Housing Set-Aside Amounts and shall be transferred by the Agency to the Senior Lien Fiscal Agent to be deposited by the Senior Lien Fiscal Agent in the Special Fund established under the Senior Lien Fiscal Agent Agreement.

Disposition of Property in Project Area. Except as provided below, the Agency will not authorize the disposition of any real property in the Project Area to anyone which will result in such property becoming exempt from taxation because of public ownership or use or otherwise ( except for public ownership or use contemplated by the Redevelopment Plans in effect on the date of execution and delivery of the Fiscal Agent Agreement, or property to be used for public streets or public off-street parking facilities or easements or rights of way for public utilities, or other similar uses) if such dispositions, together with all similar prior dispositions on or subsequent to the effective date of the Fiscal Agent Agreement, shall comprise more than ten per cent (10%) of the land area in the Project Area. If the Agency proposes to make any such disposition which, together with all similar dispositions on or subsequent to the effective date of the Fiscal Agent Agreement, shall comprise more than ten per cent ( 10%) of the land area in the Project Area, it shall cause to be filed with the Fiscal Agent a Consultant's Report on the effect of such proposed disposition. If such Consultant's Report concludes that the Subordinate Housing Set-Aside Amounts will not be materially reduced by such proposed disposition and the Agency provides a certificate to the Fiscal Agent and the Credit Provider to the effect that the Agency will still satisfy the 1.15 to 1 debt service coverage test set forth in the Fiscal Agent Agreement, the Agency may proceed with such proposed disposition. If such Consultant's Report concludes that Subordinate Housing Set-Aside Amounts will be materially reduced by such proposed disposition, or that the 1.15 to 1 debt service coverage test set forth in the Fiscal Agent Agreement will not be satisfied, the Agency

C-23 shall not proceed with such proposed disposition unless, as a condition precedent to such proposed disposition, the Agency shall require that such new owner or owners either:

(i) Pay to the Agency, so long as any of the Bonds are Outstanding or any amount remains owing to any Credit Provider, an amount equal to the amount that would have been received by the Agency as Subordinate Housing Set-Aside Amounts if such property were assessed and taxed in the same manner as privately-owned non-exempt property, which payment shall be made within thirty (30) days after taxes for each year would become payable to the taxing agencies for non-exempt property and in any event prior to the delinquency date of such taxes established by law; or

(ii) Pay to the Agency a single sum equal to the amount estimated and certified to the Agency by an Independent Redevelopment Consultant to be receivable from taxes on such property from the date of such payment to the last maturity date of all Outstanding Bonds, less a reasonable discount value.

All such payments to the Agency in lieu of taxes shall be treated as Subordinate Housing Set-Aside Amounts and shall be transferred by the Agency to the Senior Lien Fiscal Agent to be deposited by the Senior Lien Fiscal Agent in the Special Fund established under the Senior Lien Fiscal Agent Agreement.

Amendment of Redevelopment Plans. If the Agency proposes to amend any of the Redevelopment Plans, it shall cause to be filed with the Fiscal Agent a report of an Independent Redevelopment Consultant on the effect of such proposed amendment. If such report concludes that Subordinate Housing Set-Aside Amounts will not be materially reduced by such proposed amendment, and the Agency provides a certificate to the Fiscal Agent and the Credit Providers to the effect that the Agency will still satisfy the 1: 15 to 1 debt service coverage test set forth in the Fiscal Agent Agreement, the Agency may adopt such amendment. If such report concludes that Subordinate Housing Set-Aside Amounts will be materially reduced by such proposed amendment or that the 1: 15 to I debt service coverage test set forth in the Fiscal Agent Agreement will not be satisfied, the Agency shall not adopt such proposed amendment. The Fiscal Agent shall be entitled to rely upon any said report and shall have no duty to verify the information or statements set forth therein.

Subordinate Housing Set-Aside Amounts. The Agency shall comply with all requirements of the Law to insure the allocation and payment to it of the Subordinate Housing Set-Aside Amounts, including without limitation the timely filing of any necessary statements of indebtedness with appropriate officials of the County.

Agreements with Other Taxing Agencies. So long as any Bonds are Outstanding, the Agency shall not enter into any agreement or amend any existing agreement with any other taxing agency (i) entered into pursuant to Section 33401 of the Law or (ii) which operates as a waiver of the Agency's right to receive Subordinate Housing Set-Aside Amounts under the Redevelopment Plans, unless the Agency's obligations under such agreement are made expressly subordinate and junior to the Agency's obligations under the Fiscal Agent Agreement, the Bonds and the Reimbursement Agreements.

(b) Eminent Domain. Unless the Agency certifies to the Fiscal Agent that the failure to do so will not substantially impair the Bondholders' rights, the Agency covenants and agrees that if all or any part of the Project Area should be taken from it without its consent, by eminent domain proceedings or other proceedings authorized by law, for any public or other use under which the property will be tax-exempt, the Agency will use its best efforts to have the base assessment roll reduced by the amount of the assessment of said property as shown on said base assessment roll.

Events of Default and Acceleration of Maturities

If one or more of the following events (in the Fiscal Agent Agreement called "events of default") shall happen,

C-24 (a) if default shall be made in the due and punctual payment of the principal or purchase price of, or premium (if any) on, any Bond of any Series when and as the same shall become due and payable, whether at maturity as therein expressed, by proceedings for redemption, by declaration or otherwise;

(b) if default shall be made in the due and punctual payment of any installment of interest on any Bond of any Series when and as such interest installment shall become due and payable;

( c) if there shall be any default in connection with any Senior Obligations;

( d) if default shall be made by the Agency in the observance of any of the covenants, agreements or conditions on its part in the Fiscal Agent Agreement or in the Bonds contained ( other than those described in clauses (a), (b) and ( c) above) and such default shall have continued for a period of sixty (60) days after written notice thereof, specifying such default and requiring the same to be remedied, shall have been given to the Agency by the Fiscal Agent, or to the Agency and the Fiscal Agent by the Owners of not less than twenty-five percent (25%) in aggregate principal amount of the Bonds at the time Outstanding, provided that such sixty (60) day period shall be extended to one hundred twenty (120) days in the event the Agency is not able to cure such default within a sixty (60) day period but commenced a good faith effort to cure immediately upon receipt of notice as described above; or

( e) if there shall be a filing by the Agency of a petition or answer seeking reorganization or arrangement under the federal bankruptcy laws or any other applicable law, or if a court of competent jurisdiction shall approve a petition, filed with or without the consent of the Agency, seeking reorganization under the federal bankruptcy laws or any other applicable law, or if, under the provisions of any other law for the relief or aid of debtors, any court of competent jurisdiction shall assume custody or control of the Agency or of the whole or any substantial part of its property;

then, and in each and every such case during the continuance of such event of default, the Fiscal Agent shall be entitled to, upon receiving the written approval of the Credit Providers, and shall, upon receiving written direction from the Credit Providers and upon notice in writing to the Agency, and shall immediately, without notice in the case of an event of default under ( e) above, declare the principal of all the Bonds then Outstanding, or in the case of a default under (a) or (b) above, all of the principal of the Bonds of such Series with respect to which such event of default relates, and the interest accrued thereon, to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable.

This provision, however, is subject to the condition that if, at any time after the principal of the Bonds of a Series shall have been so declared due and payable, the Agency shall pay to or shall deposit with the Fiscal Agent a sum sufficient to pay all principal of the Bonds of such Series maturing prior to such declaration and all matured installments of interest (if any) upon all the Bonds of such Series and the fees and expenses of the Fiscal Agent, its agent and counsel, and any and all other defaults known to the Fiscal Agent ( other than in the payment of principal of and interest on the Bonds of such Series due and payable solely by reason of such declaration) shall have been made good or cured to the satisfaction of the Fiscal Agent, or provision deemed by the Fiscal Agent to be adequate shall have been made therefor, and, if such Bonds are, at such time, Variable Rate Bonds, a Credit Facility is in full force and effect and the Fiscal Agent has received from the related Credit Provider written notice to the effect that such Credit Facility has been reinstated in full, then, and in every such case, the Fiscal Agent, on behalf of the Owners of all of the Bonds of a Series, shall rescind and annul such declaration and its consequences; but no such rescission and annulment shall extend to or shall affect any subsequent default, or shall impair or exhaust any right or power consequent thereon.

C-25 Application of Funds Upon Acceleration

All of the Subordinate Housing Set-Aside Amounts and all sums in the Subordinate Housing Set­ Aside Special Fund upon the date of the declaration of acceleration, as provided in the Fiscal Agent Agreement and all sums thereafter received by the Fiscal Agent under the Fiscal Agent Agreement shall be applied by the Fiscal Agent in the following order upon presentation of the several Bonds, and the stamping thereon of the payment if only partially paid, or upon the surrender thereof if fully paid:

First, to the payment of the costs and expenses of the Fiscal Agent and then of the Bondowners in declaring such event of default, and including reasonable compensation to its or their agents, attorneys and counsel;

Second, to the payment of the whole amount then owing and unpaid upon the Bonds for principal and interest, with interest, to the extent permitted by law, on the overdue principal and installments of interest at the rate equal to the rate per annum on such Bonds (but such interest on overdue installments of interest shall be paid only to the extent funds are available therefor following payment of principal and interest and interest on overdue principal, as aforesaid), and in case such moneys shall be insufficient to pay in full the whole amount so owing and unpaid upon the Bonds, then to the payment of such principal and interest without preference or priority of principal over interest, or of interest over principal or of any installment of interest over any other installment of interest, ratably to the aggregate of such principal and interest; and

Third, to each Credit Provider in an amount identified, in a written notice filed with the Fiscal Agent by such Credit Provider, to be due and owing to such Credit Provider under the applicable Reimbursement Agreement.

Amendments Permitted

The Fiscal Agent Agreement and the rights and obligations of the Agency and of the Owners of the Bonds may be modified or amended at any time by a supplement or amendment hereto which shall become effective when the written consents of the Credit Providers and of the Owners of at least sixty percent (60%) in aggregate principal amount of the Bonds then Outstanding, exclusive of Bonds disqualified as provided in the Fiscal Agent Agreement, shall have been filed with the Fiscal Agent. No such supplement or amendment shall (1) extend the fixed maturity of any Bonds or reduce the interest rate thereon or extend the time of payment of interest, or reduce the amount of principal thereof or reduce any premium payable upon the redemption thereof, without the express consent of the Owner of such Bond, or (2) reduce the percentage of Bonds required for the affirmative vote or written consent to an amendment or modification of the Fiscal Agent Agreement, (3) modify any of the rights or obligations of the Fiscal Agent without the written consent thereto of the Fiscal Agent, or ( 4) modify any of the rights or obligations of the Tender Agent without the written consent thereto of the Tender Agent.

The Fiscal Agent Agreement and the rights and obligations of the Agency and of the Owners of the Bonds may also be modified or amended at any time, without the consent of any Bondowners, but only with the written consent of the Credit Providers and to the extent permitted by law and only for any one or more of the following purposes:

(a) to add to the covenants and agreements of the Agency in the Fiscal Agent Agreement contained, other covenants and agreements thereafter to be observed, or to surrender any right or power in the Fiscal Agent Agreement reserved to or conferred upon the Agency which in either case shall not adversely affect the interests of the Owners of the Bonds;

(b) to cure, correct or supplement any ambiguous or defective provision contained in the Fiscal Agent Agreement or in regard to questions arising under the Fiscal Agent Agreement, as the

C-26 Agency may deem necessary or desirable and not inconsistent with the Fiscal Agent Agreement, and which shall not adversely affect the interests of the Owners of the Bonds;

(c) to modify, amend or supplement the Fiscal Agent Agreement in such manner as to permit the qualification of the Fiscal Agent Agreement under the Trust Indenture Act of 1939, as amended, or any similar federal statute hereafter in effect, and to add such other terms, conditions and provisions as may be permitted by said Act or similar federal statute, and which shall not materially adversely affect the interests of the Owners of the Bonds;

( d) to maintain the exclusion of interest on the Bonds from gross income for Federal income tax purposes;

( e) to obtain a rating on the Bonds;

(f) to comply with the requirements of a provider of a Subordinate Reserve Account Credit Facility, provided that such modifications shall not have a material adverse effect on the interests of the Owners of the Bonds;

(g) to comply with the requirements of a provider of an Alternate Credit Facility, provided that such modifications shall not have a material adverse effect on the interests of the Owners of the Bonds;

(h) while the Bonds of all Series then Outstanding bear interest at a Daily Rate or a Weekly Rate, for any reason, but only if the Owners of the Bonds are given at least 30 days' notice of the applicable modification or amendment and have the right or the obligation to tender their Bonds for purchase pursuant to the Fiscal Agent Agreement prior to the effectiveness of such modification or amendment;

(i) to modify, amend or supplement the Fiscal Agent Agreement in any other way which (1) does not materially adversely affect the interests of the Owners of the Bonds or (2) receives the consent of each Credit Provider then providing credit support for one or more Series of Bonds; or

(j) to modify any of the provisions of the Fiscal Agent Agreement in any other manner, including in connection with the delivery of an Alternate Credit Facility as set forth in the Fiscal Agent Agreement or on any Conversion Date which is a Mandatory Tender Date, provided that such modifications shall not have a material adverse effect on the interests of the Owners of the Bonds.

Defeasance

Discharge of Fiscal Agent Agreement. If the Agency shall pay and discharge the entire indebtedness on all Bonds Outstanding in any one or more of the following ways:

(a) by well and truly paying or causing to be paid the principal of (including redemption premiums, if any) and interest on all Bonds Outstanding, as and when the same become due and payable;

(b) following the Fixed Rate Date for each Series of Bonds Outstanding, by depositing with the Fiscal Agent, in trust, at or before maturity, money in the necessary amount to pay or redeem all Bonds Outstanding;

( c) by delivering to the Fiscal Agent, for cancellation by it, all Bonds Outstanding; or

C-27 ( d) following the Fixed Rate Date for each Series of Bonds Outstanding by depositing with the Fiscal Agent, in trust, Government Obligations not subject to call prior to the date they would be used to pay the Bonds in such amount as will, together with the income or increment to accrue thereon, be fully sufficient, in the opinion of an Independent Public Accountant, to pay and discharge the indebtedness on all Bonds at or before their respective maturity dates; and if the Agency shall also pay or cause to be paid (i) all other sums payable under the Fiscal Agent Agreement by the Agency including, without limitation, all amounts due the Fiscal Agent, including reasonable attorneys' fees, and (ii) all sums owing to the Credit Providers under the Reimbursement Agreements following the termination of the Credit Facilities, then and in that case, at the election of the Agency ( evidenced by a Certificate of the Agency signifying its intention to pay and discharge all such indebtedness and that the Fiscal Agent Agreement and all other obligations of the Agency under the Fiscal Agent Agreement shall cease and terminate, which shall be filed with the Fiscal Agent), and notwithstanding that any Bonds shall not have been surrendered for payment, the pledge of the Subordinate Housing Set-Aside Amounts provided for in the Fiscal Agent Agreement and all other obligations of the Agency under the Fiscal Agent Agreement shall cease and terminate, except as otherwise provided in the Fiscal Agent Agreement and except for the obligation of the Agency to pay or cause to be paid to the Owners of the Bonds not so surrendered and paid all sums due thereon. The discharge of the obligations of the Agency under the Fiscal Agent Agreement shall be without prejudice to the rights of the Fiscal Agent to charge for and be reimbursed by the Agency for any expenditures which it may thereafter incur in connection herewith.

The Agency may at any time surrender to the Fiscal Agent for cancellation by it any Bonds previously issued and delivered, which the Agency may have acquired in any manner whatsoever, and such Bonds, upon such surrender and cancellation, shall be deemed to be paid and retired.

Discharge of Liability on Bonds. Upon the deposit with the Fiscal Agent, in trust, at or before maturity, of money or Government Obligations in the necessary amount to pay or redeem Outstanding Bonds (whether upon or prior to their maturity or the redemption date of such Bonds), provided that if such Bonds are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as provided in the Fiscal Agent Agreement or provisions satisfactory to the Fiscal Agent shall have been made for the giving of such notice, all liability of the Agency in respect of such Bonds shall cease, terminate and be completely discharged and the Owners thereof shall thereafter be entitled only to payment out of the money or Government Obligations deposited with the Fiscal Agent as aforesaid for their payment, subject, however, to the provisions of the Fiscal Agent Agreement.

Payment of Bonds After Discharge of Fiscal Agent Agreement. Notwithstanding any provisions of the Fiscal Agent Agreement, any moneys deposited with the Fiscal Agent in trust for the payment of the principal of, or interest or premium on, any Bonds and remaining unclaimed for two years after the principal of all the Outstanding Bonds has become due and payable (whether at maturity or upon call for redemption or by declaration as provided in the Fiscal Agent Agreement) shall then be repaid to the Agency upon a Request of the Agency, and the Owners of such Bonds shall thereafter be entitled to look only to the Agency for payment thereof, and all liability of the Fiscal Agent with respect to such moneys shall thereupon cease; provided, however, that before the repayment of such moneys to the Agency as aforesaid, the Fiscal Agent shall, at the direction of the Agency cause to be mailed to the registered Owners of such Bonds at their addresses as they appear on the registration books of the Fiscal Agent, a notice, in such form as may be deemed appropriate by the Fiscal Agent, with respect to the Bonds so payable and not presented and with respect to the provisions relating to the repayment to the Agency of the moneys held for the payment thereof. In the event of the repayment of any such moneys to the Agency as aforesaid, the Owners of the Bonds in respect of which such moneys were deposited shall thereafter be deemed to be general creditors of the Agency for amounts equivalent to the respective amounts deposited for the payment of such Bonds and so repaid to the Agency (without interest thereon).

C-28 Amounts Remaining in Funds and Accounts. Notwithstanding any other provision of the Fiscal Agent Agreement, it is agreed by the parties hereto that after payment in full of (i) the Bonds, or after provision for such payment shall have been made as provided in the Fiscal Agent Agreement, (ii) the fees, charges and expenses and other amounts due the Fiscal Agent and the Tender Agent in accordance with the Fiscal Agent Agreement, (iii) all other amounts required to be paid under the Fiscal Agent Agreement, and (iv) all amounts owing to the Credit Providers under the Reimbursement Agreements any amounts remaining in any fund or account held by the Fiscal Agent under the Fiscal Agent Agreement ( other than amounts held in the Subordinate Housing Rebate Fund) shall belong to the Agency, and shall be paid to the Agency by the Fiscal Agent.

C-29 (THIS PAGE INTENTIONALLY LEFT BLANK) APPENDIXD REPORT OF FISCAL CONSULTANT

D-1 (THIS PAGE INTENTIONALLY LEFT BLANK) FISCAL CONSULTANT REPORT FOR THE REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE MERGED AREA REDEVELOPMENT PROJECT HOUSING SET-ASIDE TAX ALLOCATION BONDS 2005 SERIES A, B, C AND D

JUNE 7, 2005

Urban An a 1y tic s, LLC June 7, 2005

INTRODUCTION

In connection with the issuance of the Merged Area Redevelopment Project Housing Set­ Aside Tax Allocation Bonds Series 2005 A, B, C and D (the Bonds), the Redevelopment Agency of the City of San Jose (the Agency) has retained Urban Analytics (the Consultant) as fiscal consultant to evaluate available tax revenue and provide a Fiscal Consultant Report (this Report).

The Report provides a review of various matters affecting the Agency's receipt of tax increment in the Merged Area Redevelopment Project (the Project Area). The Bonds are to be secured by the Agency's Low and Moderate Income Housing Fund (the Housing Fund).

The Report also presents projections of the Housing Fund set-aside over the life of the Project Area. This projection incorporates the varying termination dates of the Project Area's constituent sub-areas, the tax increment cap on the Project Area as a whole and the assessed valuation growth within the Project Area at no growth, two percent, five percent and seven percent growth rates. The Project Area consists of multiple sub-areas comprising an 8, 110-acre project area within the City of San Jose.

This Report is based in part on assessed valuation information provided by the County of Santa Clara (the County); on the County's assessment and apportionment practices; on base year assessed valuation for the Project Area as reported by the County; and on information regarding redevelopment plan terms provided by Agency staff.

SUMMARY OF FINDINGS

The Project Area is expected to generate $148,766,598 in gross tax increment in 2004-05, with $29,753,334 in housing set-aside property tax increment available for debt service, prior to payment of existing debt service. The Agency's ability to collect tax increment throughout the term of the Bonds may be affected by the Project Area's tax increment cap which limits the Agency's receipt of tax increment revenues to $7,600,000,000. Whether or not the Agency reaches that cap during the term of the Bonds depends on the rate of tax increment growth in the Project Area. With a 2% average rate of growth, the cap is not expected to be reached during the Bond term. If a 7% average growth rate is experienced, the Agency's cap will be reached in fiscal year 2023-24.

THE ALLOCATION OF TAX INCREMENT REVENUE TO THE AGENCY

Under California redevelopment law, the County allocates to the Agency all locally assessed secured and unsecured property tax revenue and state-assessed utility revenue collected within the Project Area above the base year assessed valuations of the constituent sub­ areas. The base year assessed valuations were established as the assessed valuation in the year each redevelopment plan was adopted (the Agency also has several project areas that do not generate tax increment; these areas are not included in this Report).

This incremental revenue, or tax increment, is subject to certain constraints contained in the individual redevelopment plans. A minimum of twenty percent of the tax increment received by the Agency is required, under California redevelopment law, to be utilized to increase, improve and preserve the community's supply of very low, low and moderate

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income housing. The Agency deposits twenty percent of its tax increment to the Low and Moderate Income Housing Fund.

Secured and unsecured properties are assessed annually for the value of their land, improvements and personal property. Under Proposition 13, the assessed valuation of land and improvements is subject to an inflationary adjustment of, at most, two percent per year from their 1975-76 value, the value at the time of the most recent sale, or the value following new construction on the property. Personal property is not subject to Proposition 13 limits. It is, however, subject to depreciation and is assessed on the basis of its current depreciated value.

The County also apportions to the Agency a share of state-assessed unitary revenue. This property tax revenue, generally from utility companies, is collected on a county-wide basis and distributed to redevelopment agencies and taxing entities under an apportionment formula set out in AB454, the 1986 legislation which established the unitary tax mechanism. Unitary tax revenue, being tax increment, is counted against the tax increment cap for the Project Area and is apportioned to the Housing Fund.

The Agency receives property tax revenue from supplemental assessments on properties in the Project Area. These assessments occur upon a sale of or new construction on a property and represent the difference between the current assessed valuation of the property on the annual tax roll and the new value after the sale or new construction. The change in assessed valuation is generally incorporated into the annual tax roll in the year following the sale or new construction. Property taxes from supplemental assessments are a variable revenue source and are not included in the calculations used in this report. Since they represent tax increment revenue they are counted against the tax increment cap.

Tax revenue deriving from the base year assessed valuation is distributed to all other taxing jurisdictions within the tax rate areas comprising the Project Area. The distribution of the base year tax revenue is accomplished using the same AB8 apportionment factors used to allocate property tax revenue in non-redevelopment tax rate areas. The taxing entities in the Project Area are shown in Table 1 below, together with their apportionment factors. The factors shown are weighted averages across the entire Project Area; the actual factors are determined by the County on an individual tax rate area code basis. Local school districts receive approximately 36% of tax revenue from the base assessed valuation in the Project Area (exclusive of ERAF funding); community college districts and the office of education receive another 13%.

Tax revenue derived from assessed valuation in the Project Area in excess of the base year assessed valuation is allocated to the Agency under a method of distribution known as the 'Teeter Plan'. The Santa Clara County Controller determines the amount of valuation in excess of the base year at the beginning of the fiscal year and distributes the resultant revenue in several installments during the year.

The Teeter Plan (Section 4701 et seq. of the California Revenue and Taxation Code) allows the County to distribute secured property tax revenue to all jurisdictions, including the Agency, without regard to delinquencies. This mechanism allows the County to maintain a reserve fund to cover delinquencies and allocate revenue based on the original secured roll, retaining all delinquent tax payments and penalties. Consequently, the Agency is not affected by delinquent tax payments.

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Revenue from the secured roll is distributed to the Agency in ten payments, five occurring between November and January based on December tax collections and five occurring between March and June from April collections. Revenue from the unsecured roll is distributed in October and April. The unitary roll revenue is paid in two installments in January and June. Tax revenue from supplemental assessments in the Project Area is separately distributed in monthly payments to the Agency.

The County Controller's Office reports that payments to the Agency are not adjusted during the year as new revenue attributable to the Project Area is received, such as from unsecured personal property not reported to the assessor in prior years and (once identified) added to the current roll as 'escape' assessments, and as payments are made to taxpayers in the Project Area (for example, tax refunds due to assessment appeals). According to the Controller's staff, it is the County's intention to make such annual adjustments to the tax increment for all redevelopment agencies at some point in the future. In an analysis of the potential net impact such a change would have on the Agency's tax increment it was found that the gains from the receipt of unsecured escape assessments would exceed losses from the reimbursement of assessment appeal refunds in many years. Overall, the net effect to the Agency is expected to be minor.

Table 1 Taxing Entities In the Merged Area Redevelopment Project

Taxing Entity Proportionate Share of Tax Revenue County General 0.2977520 County Library 0.0000044 San Jose City 0.1819498 Franklin McKinley Elementary 0.0085996 Oak Grove Elementary 0.0292347 Orchard Elementary 0.0239275 San Jose Unified 0.0808741 Santa Clara Unified 0.1403888 Eastside High 0.0811717 West Valley Community College 0.0449181 San Jose Community College 0.0460259 County School Service 0.0350537 Central Fire 0.0000153 SCV Water District Central 0.0104637 SCV Water District East 1 0.0067368 SCV Water District 0.0022192 Bay Area Air Quality Mgmt 0.0022996 Guadalupe-Coyote Resource Conservation District 0.0000589 SCV Water District St Water Proj 0.0066039 SCV Water District Zone W-4 0.0017022 Total 1.0000000

Source: County of Santa Clara; Urban Analytics

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The allocation of tax increment to redevelopment agencies is predicated on a showing by each agency that it requires the tax increment to repay its indebtedness, as demonstrated in an annual Statement of Indebtedness filed by all agencies with their County Controller. The Agency reports that it regularly files the Statement of Indebtedness and that it has shown sufficient debt to claim its full amount of tax increment.

The State Board of Equalization-assessed non-unitary railroad properties in the Project Area total $196,499,689 in assessed valuation in 2004-05.

The County charges an administration fee to recover property tax administration costs from the Agency and other jurisdictions under the Revenue and Taxation Code, Section 95.3. The fee is based on County costs that vary from year to year so that the amount charged to each jurisdiction annually is variable. The administration fee is estimated to amount to $1.7 million in fiscal year 2004-05, or approximately 1.13% of the tax increment revenue from the Project Area. Payment of this amount is made from the Agency's redevelopment fund and does not affect the Housing Fund.

Tax increment calculations made in this Report use revenue from the secured, unsecured, utility and unitary rolls. As noted, supplemental roll revenues are considered when calculating cumulative tax increment caps.

HOUSING SET-ASIDE FUND

California redevelopment law requires that agencies maintain a low-moderate income housing fund and deposit into the fund a minimum of twenty percent of gross tax increment revenues annually. This fund is maintained by the City of San Jose with funds paid to it by the Agency. The Agency uses its 80% redevelopment fund, not the Housing Fund, to meet its program needs, its pass-through payment obligations, its obligation to the Educational Revenue Augmentation Fund (ERAF) and other payment obligations.

THE REDEVELOPMENT PLANS

The Project Area is comprised of sixteen tax increment-producing sub-areas, shown in Table 2 below. Park Center Plaza, the first sub-area, was established in January 1962 and will cease generating tax increment in January 2020. The most recent sub-area, Monterey Corridor, was established in 1994 and will terminate in December 2040. Almaden Gateway was originally established as a non-tax increment generating sub-area; the plan was amended in 1996 to collect tax increment from the area. The Agency has several other sub­ areas that do not generate tax increment but have been established to allow for the expenditure of tax increment funds in those areas.

Plan Limits The Agency cannot receive tax increment or repay indebtedness beyond certain dates, set forth in the redevelopment plans and their amendments and shown in Table 2 below.

Under AB1290, redevelopment plans were required to include a final date for both the establishment of debt and for the repayment of debt. These were tied either to the dates on which the plans were originally adopted or when the sub-area was merged into the Project Area by amendment.

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Through an ordinance adopted by the City Council on November 5, 2002, utilizing legislation passed in 2001 (SB211), the Agency deleted the time limit on incurring indebtedness for sub-areas whose redevelopment plans were adopted prior to January 1, 1994. Redevelopment plans adopted after that date have a statutory limit on incurring indebtedness of twenty years from the plan adoption date, unless amended. Under redevelopment law, the elimination of the debt incurrence limit required that the Agency commence making statutory pass-through payments on revenue above that received in the year the debt incurrence limits were originally to expire, or 2001-02. The pass-through payments are made to all taxing entities that did not already have a contractual agreement to receive pass-through payments from the Agency; the County is the only taxing entity with such a fiscal agreement and it will continue to receive pass-through payments under that agreement. The Agency began making the statutory pass-through payments, referred to as AB1290 payments, to the non-County taxing entities from 2002-03 onwards. Such payments are made exclusively from 80% funds and do not affect the Housing Fund.

Legislation passed in 2004 (SB1096) permits redevelopment agencies to extend their ability to collect tax increment by one year for each ERAF payment made in 2004-05 and 2005-06. The extensions apply only to plans with existing limits on the effectiveness of the plan that are less than 20 years from the last day of the fiscal year in which the ERAF payment is made; all Agency plans with the exception of Almaden Gateway and Monterey Corridor qualify for the extension. The City Council adopted on March 29, 2005 the ordinance necessary to extend the qualifying plans by one year for the 2004-05 ERAF payment The Agency plans to submit an identical ordinance in 2005-06 for Board approval of another one-year extension based on the 2005-06 payment. The one-year extension is in addition to the one-year extension granted under previous legislation for the 2003-04 ERAF payment. The combined two-year extension to the receipt of tax increment, corresponding to the 2003-04 and 2004-05 ERAF payments, is included in Table 2.

With the ERAF-related extensions, the plan expiration dates for the Project Area range from January 1, 2011 (Park Center Plaza and San Antonio Plaza) to April 7, 2029 (Almaden Gateway). The Agency can repay indebtedness with tax increment in each of the sub-areas for ten years after the plan termination dates, with the exception of Monterey Corridor. Adopted after January 1, 1994, Monterey Corridor is subject to a statutory limit of 45 years from the plan adoption date for the repayment of indebtedness, plus one year under the ERAF-related extension. As noted below, the Project Area has a tax increment cap of $7.6 billion that may take effect prior to the time limit on the repayment of indebtedness.

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Table 2 Project Area Acreage and Key Dates by Sub-Area

Plan Plan Last Date to Adoption Termination Repay Debt, 2004-05 Sub-Area Acreage Date Date, With Extensions With Extensions Tax Increment Park Center Plaza 61 7/24/1961 1/1/2011 1/1/2021 $ 4,976,525 San Antonio Plaza 50 l /3/1968 1/1/2011 1/1/2021 4,387, l 09 Rincon Original 1,872 7/16/1974 7/16/2016 7/16/2026 25,758,548 Pueblo Uno 12 7 /8/1975 7 /8/2017 7/8/2027 1,617,396 Eden vale 1,050 7 /1 5/1976 7/15/2018 7/15/2028 13,062, l 79 Julian Stockton 330 7 /1 5/1976 7/15/2018 7/15/2028 4, 149,935 Olinder 158 7 /1 5/1976 7/15/2018 7/15/2028 2,013,544 Rincon Expansion 1,224 7 /3/1979 7/3/2021 7/3/2031 32,083,713 Edenvale East 995 9/1/1981 9/1/2023 9/1/2033 8,3 73, l 79 Rincon North 1,699 6/8/1982 6/8/2024 6/8/2034 32,449,430 Rincon South 6/8/1982 6/8/2024 6/8/2034 l 0,693,475 Guadalupe Auzerais 73 5/19/1983 5/19/2025 5/19/2035 2,929, 75 7 Century Center 18 11 /8/1983 11/8/2025 11/8/2035 1,264, 121 Market Gateway 32 11 /8/1983 11/8/2025 11/8/2035 454,267 Monterey Corridor 515 l 2/13/1994 12/13/2025 12/13/2040 1,455,791 Almaden Gatewa}'.'. 21 4/7/1988 4/7/2029 4/7/2039 798,229 8,110 $146,467, 198

Note: Acreage combined for Rincon South/Rincon North

Source: The Agency

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Table 3 Land Use Within the Project Area

Secured Pct of Total Number Pct of Land Use Assessed Valuation Assessed Valuation of Parcels Total Parcels Industrial 5,576,937,352 50.75% 918 17.53% Commercial 3,200,222,3 72 29.12% 651 12.43% Residential 1,628,401,079 14.82% 2,959 56.49% Vacant 380,772,970 3.47% 339 6.47% Other Urban 160,854,256 1.46% 345 6.59% Agricultural 41,504,604 0.38% 26 0.50% Totals: l 0,988,692,633 l 00.00% 5,238 l 00.00%

Note: Assessed valuation includes homeowner's exemptions. Source: County of Santa Clara; Urban Analytics

Tax Increment Cap Under California redevelopment law, redevelopment plans adopted prior to January 1, 1995 were required to contain a limitation on the total amount of tax increment revenue the Agency could collect over the life of the redevelopment plan. Although AB1290 eliminated this requirement for plans adopted after that date in favor of time limits on the collection of tax increment, the redevelopment plans for all tax increment-producing sub-areas remain subject to the tax increment cap requirement. An exception is allowed for agencies with unmet housing obligations, which can continue to collect tax increment until those specific obligations are met; the Agency does not foresee having any unmet housing obligations.

At the time the Agency first merged its project areas in 1981 it also established a cap on tax increment to be received from the Merged Project Area. This cap of $7.6 billion represents the cumulative limit on tax increment that may be received by the Agency in the Project Area even if the Plan's time limits have not been reached. This cap is incorporated into all projections used in this report.

The total amount of tax increment received through 2003-04 is $1.9 billion, based on information provided by the Agency. Projected annual tax increment is added to this historical figure to obtain a cumulative total of tax increment projected to be collected throughout the life of the redevelopment plans. Under recent ERAF-related legislation (SB1045 and 881096), the Agency's ERAF payments in 2002-03, 2003-04, 2004-05 and 2005-06 may be deducted from the revenue applied to the cap. The cumulative tax increment amount reflects the deduction of $53 million in ERAF payments by the Agency.

The Agency's ability to collect tax increment is limited by a combination of the cap on tax increment and by the time limits on the repayment of debt (described further in the following section). With a two percent rate of tax increment growth, the Agency is expected to reach time limits on debt repayment in all of the sub-areas prior to reaching the overall tax increment cap.

Applying a growth rate of seven percent, the Agency may reach its tax increment cap in fiscal year 2023-24, prior to reaching the time limits on repayment of debt in most of the sub-areas. The Project Area's annual average growth since 1995 has been nine percent, while over the past five years it has been four percent.

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TAX-SHARING AGREEMENTS

Overview Under redevelopment law at the time of the adoption of most sub-areas within the Project Area, taxing jurisdictions that would experience a fiscal burden caused by the existence of the redevelopment plan could enter into fiscal agreements with redevelopment agencies to alleviate that burden. Such agreements, known as fiscal agreements or pass-through agreements and authorized under Section 33401 of the Health and Safety Code, generally provide that redevelopment agencies pay to a taxing entity some or all of that entity's share of the tax increment received by the agency. The agreements were the product of negotiations between the taxing entities and a redevelopment agency. Taxing entities could separately receive their share of the growth in valuation due to inflation, known as Section 33676 payments or the 2% payments.

Under the 1994 amendments to redevelopment law known as AB1290, these fiscal agreements were eliminated for all new plans in favor of a statutory payment schedule. The new schedule also applies to any extension of certain fiscal limits in those existing plans without fiscal agreements. As noted above, all of the sub-areas are subject to the statutory pass-through payments, to be made by the Agency from the 80% portion of tax increment revenues. These payments do not affect the Housing Fund.

Fiscal Agreements The Agency has entered into a pass-through agreement under Section 33401 with the County of Santa Clara. The terms of the fiscal agreement require the Agency to make an annual payment to the County based on a formula contained in the agreement. All payments under the agreement are made by the Agency from 80% funds and are not taken from the Housing Fund.

Section 33676 Payments For plans adopted between January 1, 1985 and December 31, 1993, all affected taxing entities could elect to receive a payment equal to the increase in tax increment revenue attributable to inflationary adjustments under Proposition 13. These payments are not considered tax increment and, where they occur, are deducted from redevelopment agency revenue prior to apportionment to the agency.

The Agency has identified all of its tax increment-generating plans as having been adopted either prior to January 1, 1985 or after December 31, 1993 and does not make any such payments to taxing entities. Almaden Gateway, although originally adopted in April 1988, did not receive tax increment until 2001-02 and is now subject to the AB1290 pass­ through payments.

Following a recent court decision in Orange County, the Santa Clara County controller's office is deducting the 2% pass-through amount from tax increment for school districts and community college districts in those project areas adopted between the dates noted above. The court decision held that those taxing entities were required to receive the 2% payment whether they elected to or not. The Agency does not believe it will be subject to these automatic deductions by the Controller in any of its sub-areas.

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The Agency previously had an agreement with the Santa Clara Unified School District under which the Agency was to make a 2% pass-through payment to the District. That agreement is no longer in effect, as the District agreed instead to receive a statutory pass­ through payment under AB1290.

Proportionate Shares and ERAF Since 1993-94, the Educational Revenue Augmentation Fund (ERAF) has significantly affected non-redevelopment jurisdictions that receive an apportionment of property tax revenue. This fund, established by the state to alleviate a budget crisis, receives a percentage of the revenue of several jurisdictions in the County.

Although redevelopment agencies were not required to pay into ERAF from 1994-95 to 2001-02, the State again directed agencies to make payments into ERAF for the 2002-03, 2003-04, 2004-05 and 2005-06 fiscal years. The 2004-05 payments, calculated by the State Department of Finance for each agency, are $250 million in total statewide; the Agency's total for 2004-05 is $18,626,954. The payments are to be made from the 80% portion of Agency revenue and do not affect the amount deposited in the Housing Fund. However, the amounts paid into ERAF are deducted from the cumulative tax increment revenue receipts applied to the tax increment cap.

LEGISLATION

Among the recent legislation relating to redevelopment, SB211 (effective January 1, 2002)permits redevelopment agencies to extend the time limit on their receipt of tax increment by ten years. This applies to project areas formed before 1994, and requires agencies extending time limits to meet certain requirements. The bill also permits agencies, after January 1, 2002, to eliminate the time limit on the establishment of indebtedness. The Agency adopted ordinance 26765 on November 5, 2002, eliminating the time limit on the establishment of indebtedness in the Project Area.

Other recently enacted legislation which may apply to the Agency includes AB637, which makes several changes to the housing requirements of redevelopment law regarding replacement housing and low-moderate income housing production, and SB975, expanding the types of redevelopment agency assistance that trigger prevailing wage requirements. AB 1786 contained the requirement that the Agency contribute to ERAF in fiscal year 2002- 03, which, as noted previously, affects the 80% portion of tax increment revenue and not the 20% Housing Fund. As noted previously, SB1045 permits an extension by one year of the effectiveness of plans and the collection of tax increment for each of the ERAF payments made in 2004-05 and 2005-06, conditional upon the time remaining on the plans.

TAX RATES

The tax rate applicable to redevelopment incremental assessed valuation includes the basic one percent levy. In addition, redevelopment agencies receive tax revenue from debt service override levies except those that were imposed to repay indebtedness approved by voters on or after January 1, 1989.

The County of Santa Clara imposes one pre-1989 levy, for a retirement fund, in most tax rate areas comprising the Project Area. That levy accrues to the Agency and is applied to

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the full tax roll. An additional pre-1989 levy, for an indebtedness of the Oak Grove School District, is imposed in certain tax rate areas within the Edenvale and Edenvale East sub­ area and is paid to the Agency. The Santa Clara Valley Water District levies a pre-1989 rate, against land and improvements only, that also accrues to the Agency. The tax levies in several representative tax rate areas within the Project Area are shown in Table 4 below.

Table 4 Tax Levies in Representative Tax Rate Areas Merged Project Area, Fiscal Year 2004-05 (In Percent)

Tax SCVWD Levy, Rate County Oak Grove SD Land and Area Basic Retirement Retirement Total Levy, Improvements Sub-Area Code Levy Levy Levy All Rolls Only Rincon 17-065 1.00000 0.03880 0.00000 1.03880 0.0092 San Antonio Plaza 17-101 1.00000 0.03880 0.00000 1.03880 0.0092 Eden vale 17-060 1.00000 0.03880 0.03440 1.07320 0.0092 Olinder 17-029 1.00000 0.03880 0.00000 1.03880 0.0092 Source: Santa Clara County Controller

The most significant debt service levy that accrues to the Agency is the County retirement fund levy, which has remained at 0.0388%. This levy, the Water District levy on land and improvements and the basic 1 % levy, are shown in Table 5 for recent years.

Table 5 Tax Rate Levies, Merged Project Area Additional Levy on Land and Fiscal Year Full Tax Levy Improvements Only 2004-05 1.0388% 0.0092% 2003-04 1.0388% 0.0087% 2002-03 1.0388% 0.0072% 2001-02 1.0364% 0.0062% 2000-01 1.0356% 0.0075% 1999-00 1.0319% 0.0085% 1998-99 1.0388% 0.0082% Source: Santa Clara County Controller

The Controller's staff expects these levies to remain in effect throughout the life of the Project Area. The tax increment calculations prepared for this Report assume that the full roll levies and the Water District levies remain constant throughout the projection period.

The current-year levies are applied to the secured and utility rolls. Tax revenue derived from the unsecured roll is calculated, under Revenue and Taxation Code Section 2905, using the tax rate applied to the prior year's secured roll.

The Agency has no power to levy a property tax itself, has no control over the override levy, and will not receive tax revenue from any future levy for voter-approved indebtedness.

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HISTORIC AND CURRENT ASSESSED VALUATION

The County Controller annually reports roll valuations and tax increment in the Project Area, shown in Table 7. Total assessed valuation increased in the Project Area from 7 billion in 1995-96 to 15 billion in 2004-05, an overall increase of 114% and an average annual growth of nine percent. Project Area growth over the past five years has been, on average, four percent. Gross tax increment increased over the period from $68.2 million to $150.3 million, a gain of 120%. As shown on Table 7, gross tax increment includes revenue from supplemental assessments.

The Project Area has experienced declines in assessed valuation over the past two years due to the effects of the continuing weak local economy. The Project Area's 2 billion (11.3%) decline in valuation between 2003-04 and 2004-05 was attributable in large part to reductions in unsecured personal property value, coupled with unilateral assessment reductions for R&D and office properties by the Assessor, under Proposition 8, in recognition of ongoing economic weakness. Current and historic assessed valuations are shown in Table 6 for the Project Area.

Unsecured personal property valuations for Cisco Systems decreased by 223 million, contributing to the overall decline, as did the transfer of 98 million in valuation owned by Abovenet from the unsecured to the unitary roll. As noted in the Tax Increment Projections below, the Agency has budgeted for a further reduction in valuation for 2005-06 of 1.6%, reflecting continued weakness in the economy; its budget also anticipates valuation growth from 2006-07.

The secured roll accounted for 73% of the total valuation in the Project Area in 2004-05. Commercial and industrial properties account for approximately 80% of the total secured valuation in the Project Area (see Table 3 above), while residential properties account for 56% of the number of parcels in the Project Area and 15% of the assessed valuation. The unsecured roll comprised 26% of the Project Area's total valuation in 2004-05, with 36% of the unsecured valuation deriving from properties owned by Cisco Systems and located on Cisco-owned parcels. The non-unitary utility roll accounts for approximately one percent of Project Area valuation.

The tax increment, shown in Table 7, includes the one percent levy applied to the incremental assessed valuation plus the additional debt service levy, also applied to the incremental assessed valuation.

Supplemental assessments are assessments of properties for which new construction or sales occurred during a tax year. The assessments are for the pro-rated portion of the remaining tax year and, if the construction or sale occurs after the January 1 lien date, for full value of the property during the subsequent tax year. The revenues from supplemental assessments are shown in Table 7. Although supplemental revenue is a variable revenue source and is not included in the calculation of tax increment available for bonding, it is included in the calculation of the tax increment cap.

In addition to tax revenue from the incremental secured, unsecured and utility roll values the Agency receives revenue from the unitary roll (AB454 revenue). This amount, not shown separately in Table 7, is estimated to be $2.3 million in 2004-05 and is included in other calculations contained in this report.

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Table 6 Historic Assessed Valuations in the Merged Project Area

Roll 2000-01 2001-02 2002-03 2003-04 2004-05 Secured - Land 3,071,617,118 3,858,862, 750 4,487,859,597 3,988,091,253 4,080,066,02 7 - Improvements 6,3 79,659,504 7,500, 182,336 7,816, 158,817 7,066, 199,3 73 6,398, 763, 798 - Personal Property l, 118,206,088 l, 173,657,584 l, 154,570, 157 689,3 79, 787 810,278,827 - Exemptions 241,226,354 254, 196,683 219,744,901 233,951, 746 287,816, 122 Secured Total l 0,328,256,356 12,278,505,987 13,238,843,6 70 11,509,718,667 11,001,292,530

Unsecured - Land 17, l 04,755 26, 792,81 7 21,429,509 39,227,354 45, 138,746 - Improvements 681,449,844 1,296,057,258 1,237, l 01,462 l, 171,922,253 877,804,526 - Personal Property 2, 764,806, 121 4,306,409,988 4,285, 705,082 4, 118,244,824 3,055,528,500 - Exem~tions 42,910,079 45,811,596 77,612,455 52,284,285 135,432,791 Unsecured Total 3,420,450,641 5,583,448,46 7 5,466,623,598 5,277,110,146 3,843,038,981

Utility - Land 22,586,091 14,821,222 22,492,270 49,810,239 51,599,990 - Improvements 4,414,938 2, 124,472 4,373,185 125,305,093 144,029, 11 5 - Personal Property 634,549 694,715 610,935 697,693 870,584 - Exemptions 0 0 0 0 0 Utility Total 27,635,578 17,640,409 27,476,390 175,813,025 196,499,689

Totals: 13, 776,342,5 75 17,879,594,863 18, 732,943,658 16,962,641,838 15,040,831,200

Table 7 Assessed Valuations and Tax Increment Revenues, Fiscal Years 1995-96 through 2004-05 Merged Area Redevelopment Project (x 1,000)

Tax Gross Fiscal Percentage Increment Supplemental Tax Percentage Year Assessed Value (l) Change (2) Assessments Revenues Change 1995-96 7,016,990 3.7% 67,878 355 68,233 2.9% 1996-97 (3) 7,680,818 6.7% 74,372 1,650 76,022 11.4% 1997-98 9,292,365 21.0% 91, 113 5, l 00 96,213 26.6% 1998-99 11,228,356 20.8% l 06,298 5,918 112,216 16.6% 1999-00 12,382,598 10.3% 119,982 9,699 129,681 15.6% 2000-01 13,776,343 11.3% 134,649 7,502 142, 151 9.6% 2001-02 17,879,595 29.8% 175,448 13,011 188,459 32.6% 2002-03 18,732,944 4.8% 187,448 l 0,578 198,026 5.1% 2003-04 16,962,642 -9.5% 168,015 2, 193 l 70,208 -14.0% 2004-05 15,040,831 -11.3% 148,767 1,506 150,272 -11.7% (1) Total assessed value for the Merged Area. Tax increment revenue calculated on incremental assessed value, after subtracting base year assessed value from total assessed value. The Merged Area's current base year value is 1,097, l 07, 127. (2) Includes unitary roll revenue. (3) Includes Park Center, which was merged in 1996. Source: Redevelopment Agency, Urban Analytics.

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LARGEST ASSESSEES

The twenty largest assessees in the Merged Area Project are shown in Table 8 for 2004-05. These twenty owners comprise 37.8% of the total valuation in the project area. Approximately 26 percent of the assessed valuation for the largest assessees is on the unsecured roll.

Cisco Systems is the largest property owner in the Project Area with a total property valuation of 2.0 billion. The assessor maintains valuations for the company on both the secured and unsecured rolls, with land and improvements assigned to the secured roll and personal property to the unsecured. However, in most cases both secured and unsecured assessments are located on the same Cisco-owned parcel. This differs from the Assessor's general practice of classifying property as unsecured only when the assessee owns no other land in the County, and may be attributable to the fact that in prior years Cisco's land has been held by separate leasing companies, Cisco Systems accounts for most of the unsecured valuation in the Project Area. Historic valuations for Cisco Systems in the Merged Project Area are shown in Table 9.

The portion of the company's assessed valuation that is classified as secured totals 586 million and is located on 38 parcels largely in the Rincon North sub-area. The unsecured properties total 1.4 billion on 46 parcels. Of this, 843 million in valuation is located on a parcel at 190 West Tasman Drive that is also owned by the company.

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Table 8 Twenty Largest Assessees in the Merged Area Project, 2004-05

Secured Pct of Pro~ert:r Owner and Utilit:t: Unsecured Total Total Land Use Cisco Systems, Inc 586,080,294 1,374,074,207 1,960,154,501 13.03% Comm'l/lnd. Hitachi Global Storage Techs Inc 564,124,875 564,124,875 3.75% Comm'l/lnd. Spieker Properties 343,409,999 343,409,999 2.28% Comm'l/lnd. Irvine Community Devel Co 295,897,364 295,897,364 1.97% Multi-Family Sobrato Companies 252,206,379 252,206,379 1.68% Comm'l/lnd. Adobe Systems Inc 201,865,514 49,631,151 251,496,665 1.67% Comm'I Office Carramerica Realty Corp 241,461,735 91,055 241,552,790 1.61 % Comm'l/lnd. Agilent Technologies, Inc 181,177,885 16,810 181,194,695 1.20% Comm'l/lnd. Novellus Systems Inc 169,477,488 169,477,488 1.13% Comm'l/lnd. Los Esteros Critical Energy Facility 168,103,298 168,103,298 1.12% Utility Abn Amro Leasing Inc 146,696,145 146,696,145 0.98% Comm'l/lnd. EBay Inc 126,534,093 14,196,975 140,731,068 0.94% Comm'l/lnd. Maxim Integrated Products Inc 128,319,157 128,319,157 0.85% Comm'l/lnd. KLA Instruments Corp 110,432,108 17,035,613 127,467,721 0.85% Comm'l/lnd. Cadence Design Systems Inc 109,698,766 16,088,850 125,787,616 0.84% Comm'l/lnd. Mission West Props LP 123,509,995 123,509,995 0.82% Comm'l/lnd. Sony Corporation America 121,959,958 121,959,958 0.81 % Comm'l/lnd. Shea River Oaks Asses LP 119,666,429 208,798 119,875,227 0.80% Multi-Family WXI/ZAN Rea I Est LP 111,453,227 111,453,227 0.74% Comm'l/lnd. Peery Richard 109,524,865 109,524,865 0.73% Comm'l/lnd. Totals, Top Twenty: 4,042, 122,086 1,640,820,947 5,682,943,033 37.78%

Totals for the Agency: 11,197,792,219 3,843,038,981 15,040,831,200 100.00%

Source: County of Santa Clara; Urban Analytics

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Table 9 Historic Assessed Valuations For Cisco Systems, Inc in the Merged Project Area

Roll 2000-01 2001-02 2002-03 2003-04 2004-05 Secured - Land 176,604,210 180,612,946 196,901,189 206,161,515 208,459,078 - Improvements 644,109,163 694,855,780 745,946,885 504,866,058 377,621,216 - Personal Property 0 0 0 0 0 - Exemptions 0 0 0 0 0 Secured Total 820,713,373 875,468,726 942,848,074 711,027,573 586,080,294

Unsecured - Land 1,687,654 1,682,783 1,714,568 1,808,670 1,822,895 - Improvements 110,634,355 206,014,380 205,016,667 158,121,314 138,832,204 - Personal Property 742,282,123 1,380,254,732 1,381,658,914 1,457,103,985 1,233,419,108 - Exemptions 0 0 0 0 0 Unsecured Total 854,604,132 1,587,951,895 1,588,390,149 1,617,033,969 1,374,074,207

Totals: 1,675,317,505 2,463,420,621 2,531,238,223 2,328,061,542 1,960,154,501

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ASSESSMENT APPEALS

Appeals of assessments by property owners in the Project Area can result in future reductions in assessed valuations that affect the Agency. It has been the practice of the County of Santa Clara not to deduct current appeal refunds from redevelopment agency tax increment; these refunds are instead apportioned to other taxing entities using the normal apportionment mechanism. As noted earlier in this Report, this practice has been under review by the County for several years and may change; however, the County also has not allocated revenue to the Agency from prior year's escape assessments on the unsecured roll This is expected to offset potential reductions from appeals.

The most common type of appeal filed is known as a Proposition 8 appeal, in which the property owner seeks a reduction in a particular year's secured assessment based on the current economic value of the property (the assessor may also adjust valuations based on Proposition 8 criteria). Assessment reductions under Proposition 8 are generally temporary in nature and are usually restored as economic conditions improve.

Property owners may also appeal the Proposition 13 base assessment of a property. Although less frequently filed, such appeals, if successful, can permanently reduce the enrolled valuation of a property and consequently affect the Agency's annual revenue. The annual filing period for all appeals extends from July 2 to September 15.

On June 3, 2004, the County Assessor announced a net reduction in countywide roll value under Proposition 8 of $10 billion, following a countywide reduction in 2003-04 of $8 billion. Commercial and industrial properties received reductions in valuation, reflecting economic conditions. The reduced valuations for 2004-05 are reflected in the roll totals included in this report. The Assessor also noted that while 9,500 residential properties were restored to their full roll value after previously receiving Proposition 8 reductions, 23,000 residential properties maintained their previously-lowered roll values.

In a media release dated May 26, 2005 (the "Release"), the County Assessor's Office stated that the market value of commercial and industrial properties in the County remained essentially unchanged from that of last year, while the market value of residential properties rose substantially over last year's value. The Release further stated that the number of commercial and industrial properties countywide eligible for temporary property tax relief due to declines in the marketplace is expected to remain the same as last year at 1,500 properties, while the number of residential properties eligible for temporary property tax relief has dropped from 23,000 to 3,000. According to information provided by the Assessor's Office subsequent to the Release, the total countywide reduction from base year assessed value for land and improvements continues to be approximately $9.5 billion, of which approximately $8.6 billion represents reductions in the assessed value of commercial and industrial properties (personal property is not subject to such temporary property tax relief). The Release does not indicate what portion of the reductions are for properties within the Project Area. The information set forth in the Release is preliminary. The final assessed values for 2005-06 have yet to be released. No assurance can be given that the actual final assessed values for 2005-06 will not reflect information that differs substantially from the information set forth in the Release.

Table 10 presents the totals for resolved assessment appeals over the past six years in the Project Area. With the inclusion of pending appeals (not shown on Table 10), the number of appeals filed in the Project Area in 2004-05 is 375, down from 667 in 2002-03. The

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assessment appeals information presented in Table 10 and following tables is based on the most current information made available to the Agency by the County.

The last column in Table 10 shows the percentage of the original roll valuation retained after resolution of the appeal. The retention percentage in the Project Area has ranged from 93% to 99% during the period shown.

Table 10 Assessment Appeal Results, Merged Project Area Fiscal Years 1997 -98 through 2004-05 Pct of Roll Resolved Applicant Opinion Value Fiscal Year Appeals County Roll Value of Value Final Roll Value Retained 1997-98 432 4,719,044,470 2,305,728,402 4,667,854,026 98.92% 1998-99 412 5,211,724,489 2,551,114,193 5,161,069,366 99.03% 1999-00 307 5,085,715,521 3,005,096,188 5,072,465,716 99.74% 2000-01 310 4,605,431,994 2,503,024,064 4,567,651,347 99.18% 2001-02 412 4,719,155,099 2,338,646,428 4,608,744,830 97.66% 2002-03 556 6,816,695,553 3,715,681,272 6,435,619,457 94.41% 2003-04 294 3,256,337,761 1,786,860,581 3,023,282,401 92.84% 2004-05 10 201,979,404 118,010,102 200,541,940 99.29% Total 2,733 34,616,084,291 18,324, 161,230 33,737,229,083 97.46%

Source: County of Santa Clara, Urban Analytics

The assessor's office has identified 782 appeals currently pending within the Project Area, with a combined valuation in dispute of 4.7 billion. Among these are 124 appeals filed by large property owners in the Project Area on 2004-05 assessments, shown in Table 11, involving 951 million in contested valuation. Sixty-six large owners also have appeals pending from 2003-04 roll valuations with 662 million in contested valuation; in many cases the same properties are appealed in both years. Cisco Systems has appeals pending from 2002-03 roll valuations, for 380 million in contested valuation.

Many appellants file repeatedly in consecutive years for the same property. Cisco Systems, for example, has a pending 2004-05 appeal for 843 million in unsecured assessments located at the firm's 190 West Tasman Drive site. The firm also has pending appeals for the 2003-04 and 2002-03 assessments of property at the same location. The three appeals for the same property account for one-third of the disputed valuation pending in the Project Area over the three years.

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Table 11 Pending Assessment Appeals for Large Property Owners in the Merged Project Area

Number of Properties Applicant On Opinion of County Roll Net Value A~~ellant Appeal Value Value Difference Roll Year 2004-05: ABN AMRO LEASING INC 3 30,700,000 40,071,720 9,371,720 ADOBE SYSTEMS INC l 54,627,400 86,679,931 32,052,531 AGILENT TECHNOLOGIES, INC 3 54,348,400 181,177,885 126,829,485 CADENCE DESIGN SYSTEMS INC 6 28,165,941 71,424,993 43,259,052 CARRAMERICA REAL TY CORP 16 116,750,000 233,501,204 116,751,204 CISCO SYSTEMS, INC 40 1,062,892,531 1,371,474,229 308,581,698 EBAY INC l 6,976,643 14,196,975 7,220,332 IRVINE COMMUNITY DEVEL CO 5 123,000,000 144,726,352 21,726,352 KLA INSTRUMENTS CORP l O 84,016,996 120,921,673 36,904,677 MAXIM INTEGRATED PRODUCTS INC 2 97,000,000 128,319,157 31,319,157 MISSION WEST PROPS LP 10,773,240 17,000,000 6,226,760 NOVELLUS SYSTEMS INC 12 79,617,006 169,468,105 89,851,099 PEERY RICHARD 2 11,735,000 24,044,490 12,309,490 SOBRATO COMPANIES 6 89,810,229 126,445,508 36,635,279 SONY CORPORATION AMERICA 2 89,070,000 121,959,958 32,889,958 SPIEKER PROPERTIES 14 304,739,000 343 ,409, 999 38,670,999 Totals for 2004-05 Roll Year (124 properties): 2,244,222,386 3,194,822,179 950,599,793

Roll Year 2003-04: AGILENT TECHNOLOGIES, INC 3 57,322,016 229,288,059 171,966,043 CADENCE DESIGN SYSTEMS INC 6 42,585,000 74,796,347 32,211,347 CARRAMERICA REAL TY CORP 3 24,669,606 49,062,483 24,392,877 CISCO SYSTEMS, INC 38 1,280,741,989 1,567,451,913 286,709,924 IRVINE COMMUNITY DEVEL CO 7 122,066,341 168,990,253 46,923,912 MISSION WEST PROPS LP 3 39,818,500 61,000,000 21,181,500 PEERY RICHARD 2 3,267,000 6,794,691 3,527,691 SOBRATO COMPANIES 2 62,048,760 76,155,642 14,106,882 SONY CORPORATION AMERICA 2 61,105,777 122,212,219 61,106,442 Totals for 2003-04 Roll Year (66 properties): 1,693,624,989 2,355,751,607 662, l 26,61 8

Roll Year 2002-03: CISCO SYSTEMS INC 45 1,140,482,382 1,520,638,167 380,155,785 Totals for 2003-04 Roll Year ( 45 properties): l, 140,482,382 1,520,638, 167 380,155,785

Source: County of Santa Clara, Urban Analytics

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TAX INCREMENT REVENUE ESTIMATE

The tax increment revenue estimate for 2004-05 is presented in Table 12. The Gross Tax Increment from the Project Area, shown below and including secured, unsecured and utility valuations, is $148,766,598 (supplemental assessments are not included in this total as they are a highly variable revenue source and not subject to precise calculation; they are separately estimated and included in the calculation of the tax increment cap). The 2004- 05 Agency obligation to the 20% Housing Fund is $29,753,320.

Table 12 Merged Area Redevelopment Project Tax Increment Calculation, 2004-05

Secured AV 11,001,292,530 Unsecured AV 3,843,038,981

SBE-Assessed Utilities l ~§,4~~,§?~

Total AV 15,040,831,200 Less: Base Year AV -1,097,l 07,127

Incremental AV 13,943,724,073

Secured Tax Rate 1.0526% Unsecured Tax Rate 1.0444%

Tax Increment 146,46 7, l 98 Plus: Unitary Roll Revenue (est.) 2,299,400 Gross Tax Increment 148,766,598

20% Housing Fund 29,753,320

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TAX INCREMENT PROJECTION AND SENSITIVITY ANALYSIS

The twenty percent set-aside for the Housing Fund is projected over the duration of the Project Area, as shown in Table 14 using no growth, two percent, five percent and seven percent growth rates. The projections illustrate the interactions of the tax increment cap and plan limits at various levels of growth.

Under two percent growth, the Agency is projected to collect tax increment and contribute to the Housing Fund in the Project Area until reaching the last dates to collect tax increment under the constituent redevelopment plans. At two percent growth the final year of tax increment collection occurs in 2039-40.

With a five percent rate of growth, the Agency is projected to reach the tax increment cap in the Project Area by 2026-27, prior to reaching the time limits on tax increment collection in many of the redevelopment plans. At a seven percent growth rate the tax increment cap is reached in 2023-24.

The projections include a reduction of 1.6% in 2004-05, consistent with the Agency's growth projections, to account for continued weakness in the regional economy. The projections also include nineteen properties identified by the Agency as having sold in the Project Area since January 1, 2004, the lien date for the 2004-05 roll. These properties, shown in Table 13, are expected to add 67.3 million in new valuation to the 2005-06 roll.

Table 13 Properties Sold In Project Area Since January 1, 2004 2004-05 Assessed Estimated Change Parcel Number Recording Date Sale Price Value in Valuation 097-12-127 5/28/2004 5, 130,000 3,432,552 1,697,448 230-29-079 2/24/2004 3,065,000 3,234,277 -169,277 235-05-017 7/1/2004 6, 150,000 4,419,002 1,730,998 237-17-136 l 0/26/2004 28,250,000 840,000 27,410,000 23 7-20-095 7 /27 /2004 l, 159,000 341,545 817,455 259-28-004 6/1 /2004 3,348,000 83,164 3,264,836 259-40-043 6/18/2004 2,000,000 0 2,000,000 259-40-087 6/3/2004 64,000,000 44,055,439 19,944,561 455-04-023 8/6/2004 7,750,000 4,700,000 3,050,000 467-22-038 11 /9/2004 1,275,000 203,984 1,071,016 467-23-039 3/12/2004 1,300,000 639,529 660,471 467-23-089 5/11/2004 5,800,000 2,246, 140 3,553,860 472-26-036 3/5/2004 1,400,000 612,580 787,420 477-06-046 3/24/2004 2,494,500 1,529,284 965,216 477-08-014 5/26/2004 1,200,000 542,934 657,066 477-26-051 4/2/2004 1,250,000 570,000 680,000 477-27-018 10/25/2004 4,750,000 4,918,642 -168,642 455-04-030 1/22/2004 1,506,000 1,738, 110 -232, 110 477-27-003 3/17/2004 3,200,000 3,583,680 -383,680 l 9 Properties 145,027,500 77,690,862 67,336,638

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Table 14 Housing Set-Aside Projections at Varying Growth Rates Merged Area Redevelopment Project

Fiscal Two Percent Growth Five Percent Growth Seven Percent Growth Year Zero Percent Growth 2004/05 29,753,334 29,753,334 29,753,334 29, 753,334 2005/06 29,393,009 29,393,009 29,393,009 29,393,009 2006/07 29,393,009 30,01 7,933 30,955,319 31,580,243 2007 /08 29,393,009 30,655,355 32,595,744 33,920,583 2008/09 29,393,009 31,305,526 34,318, 191 36,424,747 2009/10 29,393,009 31,968,701 36, 126, 760 39, l 04,203 2010/11 29,393,009 32,645, 138 38,025,758 41,971,221 2011/12 29,393,009 33,33 5, l 05 40,019,705 45,038,930 2012/13 29,393,009 34,038,871 42, 113,350 48,321,3 78 2013/14 29,393,009 34,756,712 44,311,677 51,833,598 2014/15 29,393,009 35,488,910 46,619,921 55,591,674 2015/16 29,393,009 36,23 5, 752 49,043,577 59,612,814 2016/17 29,393,009 36,997,531 51,588,415 63,915,435 2017/18 29,393,009 37,774,546 54,260,495 68,519,239 2018/19 29,393,009 38,567, l 00 57,066,180 73,445,309 2019/20 29,393,009 39,375,506 60,012, 148 78,716,204 2020/21 29,393,009 40,200,080 63,105,415 84,356,062 2021/22 27,500,238 38,447,404 62,236,346 84,827, 170 2022/23 27,500,238 39,253,664 65,441,443 90,895,664 2023/24 27,500,238 40,076,050 68,806,796 90, 123,910 2024/25 27,500,238 40,914,883 72,340,416 0 2025/26 27,500,238 41,770,492 76,050,717 0 2026/27 22,223, l 75 34,604,077 58,222, l 06 0 2027/28 21,897,303 34,81 5,596 0 0 2028/29 17,980,874 28,999,679 0 0 2029/30 17,980,874 29,602,056 0 0 2030/31 17,980,874 30,216,481 0 0 2031/32 11,638,679 20, 198,341 0 0 2032/33 11,638,679 20,623,750 0 0 2033/34 9,954,588 18, 133,874 0 0 2034/35 1,420, 137 3, 126,012 0 0 2035/36 486,2 75 1,430, l 73 0 0 2036/37 486,2 75 1,472,318 0 0 2037/38 486,2 75 1,515,306 0 0 2038/39 486,2 75 1,559, 153 0 0 2039/40 290, 174 1,032,356 0 0 2040/41 0 0 0 0 2041/42 0 0 0 0 2042/43 0 0 0 0 Total 772,493, 122 1,010,300,776 l, 142,406,823 l, 137,344,727

Tax increment collection is assumed to cease in the prior fiscal year in sub-areas with last dates to repay indebtedness from July through December, while sub-areas with last dates to repay indebtedness from January through June are assumed to collect tax increment during their last fiscal year.

Source: Urban Analytics

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LIMITATIONS OF REPORT

The calculation of assessed valuations and tax increment shown in this Report are based on information believed to be complete, current and reliable at the time of this Report. Projections of tax increment are based on reasonable assumptions and may not reflect actual future revenue received by the Agency. Information regarding the practices and methods used by the County in assessing and allocating property tax revenue has been obtained from County staff and analysis of County records, while information concerning the Project Area, redevelopment plans, amendments and pass-through agreements has been obtained through discussions with Agency staff and through review of the plan documents made available to the Consultant.

While the Consultant has made a reasonable effort to verify the accuracy of the figures and information presented in this Report and presumes that the information relied upon is correct, the Consultant makes no warranty as to its accuracy.

Fiscal Consultant Report Page 23 (THIS PAGE INTENTIONALLY LEFT BLANK) APPENDIXE PROPOSED FORM OF BOND COUNSEL OPINION

___,2005

Redevelopment Agency of the City of San Jose San Jose, California

Redevelopment Agency of the City of San Jose Merged Area Redevelopment Project Subordinate Housing Set-Aside Tax Allocation Variable Rate Demand Bonds (AMT) $33,075,000 $33,075,000 Tax-Exempt Tax Allocation Bonds Tax-Exempt Tax Allocation Bonds Series 2005C (AMT) Series 20050 (AMT)

Ladies and Gentlemen:

We have acted as bond counsel in connection with the issuance of $33,075,000 principal amount of Merged Area Redevelopment Project Subordinate Housing Set-Aside Tax-Exempt Tax Allocation Bonds, Series 2005C (AMT) and $33,075,000 principal amount of Merged Area Redevelopment Project Subordinate Housing Set-Aside Tax-Exempt Tax Allocation Bonds, Series 20050 (AMT) (collectively, the "Bonds") of the Redevelopment Agency of the City of San Jose (the "Agency"), a public body, corporate and politic, duly organized and existing under and pursuant to the laws of the State of California. The Bonds are issued under the provisions of the Community Redevelopment Law of the State of California (being Part 1 ( commencing with Section 33000) of Division 24 of the Health and Safety Code of the State of California, as amended), and Section 5900 et seq. of the California Government Code (collectively, the "Law"), and pursuant to the provisions of that certain Fiscal Agent Agreement, dated as of May 1, 2002 (the "Original Fiscal Agent Agreement"), by and between the Agency and Wells Fargo Bank, National Association, as fiscal agent (the "Fiscal Agent"), as supplemented by a First Supplemental Agreement, dated as of June 1, 2005 (the "First Supplemental Agreement" and, collectively with the Original Fiscal Agent Agreement, the "Agreement"), by and between the Agency and the Fiscal Agent. Capitalized terms not otherwise defined herein shall have the meanings set forth in the Agreement.

In connection with such, we have examined a record of proceedings submitted to us relating to the issuance of the Bonds and such other documents and records of the City of San Jose (the "City"), the City of San Jose Financing Authority (the "Authority") and the Agency as we have deemed necessary for the purpose of this opinion. As to questions of fact material to our opinion, we have relied upon representations of the Agency, the Authority and the City contained in the record of proceedings and other certifications of public officials furnished to us, without undertaking to verify the same by independent investigation.

E-1 The opinions expressed herein are based upon 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 undertaken neither to determine, nor to inform any person, whether any such actions are taken or omitted or events do occur or whether any other matters come to our attention after the date hereof We call attention to the fact that the rights and obligations under the Bonds, the Agreement and the Tax Certificate relating to the Bonds may be subject to bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other 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 contained in applicable law regarding legal remedies against the Agency. 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 have been duly and validly authorized and issued in accordance with the Law and the Agreement, and the Bonds constitute valid and binding special limited obligations of the Agency, enforceable in accordance with their terms, payable solely from the Subordinate Housing Set-Aside Amounts (as such term is defined in the Agreement) and monies in certain funds and accounts as specified in the Agreement, subject to the limitations set forth therein.

2. The Agency has the right and power under the Law to execute and deliver the Agreement, and the Agreement has been duly and validly executed and delivered by the Agency and, assuming due authorization, execution and delivery by the Fiscal Agent, is in full force and effect and is valid and binding upon the Agency and enforceable in accordance with its terms. No other authorization for such Agreement ( other than the approval of the City, which has been obtained) is required. The Agreement creates the valid pledge which it purports to create of the Subordinate Housing Set-Aside Amounts and other amounts as provided in the Agreement.

3. The Bonds are not a debt of the City, the State of California, or any of its political subdivisions (other than the Agency), and neither the City, the State of California, nor any of its political subdivisions ( other than the Agency) is liable for them, nor in any event shall the Bonds be payable out of any funds or properties other than those of the Agency as set forth in the Agreement.

4. The Internal Revenue Code of 1986, as amended (the "Code"), imposes certain requirements that must be met subsequent to the issuance and delivery of the Bonds for interest thereon to be and remain excluded from gross income for Federal income tax purposes. Noncompliance with such requirements could cause the interest on the Bonds to be included in gross income for Federal income tax purposes retroactive to the date of issuance of the Bonds. Pursuant to the Agreement and the Tax Certificate, the Agency and certain entities whose loans are being financed or refinanced with the Bonds (the "Borrowers") have covenanted to comply with the applicable requirements of the Code in order to maintain the exclusion of the interest on the Bonds from gross income for Federal income tax purposes pursuant to Section 103 of the Code. In addition, the Agency and the Borrowers have made certain representations and certifications in the Agreement and the Tax Certificate. We have not and will not independently verify the accuracy of those representations and certifications.

E-2 Under existing law and assuming compliance with the aforementioned covenant and the accuracy of the aforementioned representations and certifications, interest on the Bonds is excluded from gross income for Federal income tax purposes under Section 103 of the Code, except that no opinion is expressed as to the exclusion of interest from gross income for any period during which such Bond is held by a person who, within the meaning of Section 147(a) of the Code, is a "substantial user" of the facilities financed with proceeds of the Bonds or a "related person".

5. Interest on the Bonds is treated as a tax preference item for purposes of calculating the alternative minimum tax imposed under the Code with respect to individuals and corporations.

6. Interest on the Bonds is exempt from California personal income taxes.

Except as stated in the preceding four paragraphs, we express no opinion as to any Federal or state tax consequences of the ownership or disposition of the Bonds. Furthermore, we express no opinion as to any Federal, state or local tax law consequences with respect to the Bonds, or the interest thereon, if any action is taken with respect to the Bonds or the proceeds thereof upon the advice or approval of other counsel.

Respectfully submitted,

E-3 (THIS PAGE INTENTIONALLY LEFT BLANK) APPENDIXF DTC AND BOOK-ENTRY SYSTEM

The information in this Appendix concerning The Depository Trust Company ("DTC ''), New York, New York, and DTC 's book-entry system has been obtained from DTC and the Agency takes no responsibility for the completeness or accuracy thereof The Agency cannot and does not give any assurances that DTC, DTC Participants or Indirect Participants will distribute to the Beneficial Owners (a) payments of interest, principal or premium, if any, with respect to the Bonds, (b) certificates representing ownership interest in or other confirmation or ownership interest in the Bonds, or (c) redemption or other notices sent to DTC or Cede & Co., its nominee, as the registered owner of the Bonds, or that they will so do on a timely basis, or that DTC, DTC Participants or DTC Indirect Participants will act in the manner described in this Appendix. The current "Rules" applicable to DTC are on file with the Securities and Exchange Commission and the current "Procedures" ofDTC to be followed in dealing with DTC Participants are on file with DTC.

The DIC will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DIC. One fully-registered security certificate will be issued for each maturity of each Series of the Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DIC.

DIC 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 17 A of the Securities Exchange Act of 1934. DIC 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 DIC. DIC 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. DIC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC, in turn, is owned by a number of Direct Participants of DIC and Members of the National Securities Clearing Corporation, Government Securities Clearing Corporation, MBS Clearing Corporation, and Emerging Markets Clearing Corporation, (respectively, "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 DIC 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"). DIC has Standard & Poor's highest rating: AAA. The DIC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DIC can be found at www.dtcc.com.

Purchases of the Bonds under the DIC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC's records. The ownership interest of each actual purchaser of each Security ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DIC of their purchase.Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Bonds, except in the event that use of the book-entry system for the Bonds is discontinued.

F-1 To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DIC 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 DIC. The deposit of the Bonds with DIC and their registration in the name of Cede & Co. or such other DIC nominee do not effect any change in beneficial ownership. DIC has no knowledge of the actual Beneficial Owners of the Bonds; DTC's records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DIC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of the Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Security documents. For example, Beneficial Owners of the Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them.

Redemption notices shall be sent to DIC. The conveyance of notices and other communications by DIC to DIC Participants, by DIC Participants to Indirect Participants and by DIC 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. Any failure of DIC to advise any DIC Participant, or of any DIC Participant or Indirect Participant to notify a Beneficial Owner, of any such notice and its content or effect will not affect the validity of the redemption of the Bonds called for redemption or of any other action premised on such notice. Redemption of portions of the Bonds by the Agency will reduce the outstanding principal amount of Bonds held by DIC. In such event, DIC will implement, through its book­ entry system, a redemption by lot of interests in the Bonds held for the account of DIC Participants in accordance with its own rules or other agreements with DIC Participants and then DIC Participants and Indirect Participants will implement a redemption of the Bonds for the Beneficial Owners. Any such selection of Bonds to be redeemed will not be governed by the Indenture and will not be conducted by the Agency or the Fiscal Agent.

Neither DIC nor Cede & Co. (nor any other DIC nominee) will consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures, DIC 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 the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Payments of principal of, premium, if any, and interest evidenced by the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DIC. DTC's practice is to credit Direct Participants' accounts upon DIC' s receipt of funds and corresponding detail information from the Agency or the Fiscal Agent, 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 "street name," and will be the responsibility of such Participant and not of DIC (nor its nominee), the Fiscal Agent, or the Agency, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal of, premium, if any, and interest evidenced by the Bonds to Cede & Co. ( or such other nominee as may be requested by an authorized representative of DIC) is the responsibility of the Agency or the Fiscal Agent, disbursement of such payments to Direct Participants will be the responsibility of DIC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

F-2 NEITHER THE AGENCY NOR THE FISCAL AGENT WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO DIC PARTICIPANTS, INDIRECT PARTICIPANTS OR BENEFICIAL OWNERS WITH RESPECT TO THE PAYMENTS OR THE PROVIDING OF NOTICE TO DIC PARTICIPANTS, INDIRECT PARTICIPANTS OR BENEFICIAL OWNERS OR THE SELECTION OF BONDS FOR PREPAYMENT.

Neither the Agency nor the Fiscal Agent can give any assurances that DIC, DIC Participants, Indirect Participants or others will distribute payments of principal of, premium, if any, and interest on the Bonds paid to DIC or its nominee, as the registered Owner, or any redemption or other notice, to the Beneficial Owners or that they will do so on a timely basis or that DIC will serve and act in a manner described in this Official Statement.

DIC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to the Agency or the Fiscal Agent. Under such circumstances, in the event that a successor depository is not obtained, security certificates are required to be printed and delivered.

The Agency may decide to discontinue use of the system of book-entry transfers through DIC ( or a successor securities depository). In that event, bond certificates will be printed and delivered.

In the event that the book-entry system is discontinued as described above, the requirements of the Indenture will apply. The foregoing information concerning DIC concerning and DTC's book-entry system has been provided by DIC, and none of the Agency or the Fiscal Agent take any responsibility for the accuracy thereof.

The Agency and the Underwriters do not give any assurances that DIC, the Participants or others will distribute payments of principal, interest or premium, if any, evidenced by the Bonds paid to DIC or its nominee as the registered owner, or will distribute any redemption notices or other notices, to the Beneficial Owners, or that they will do so on a timely basis or will serve and act in the manner described in this Official Statement. Neither the Agency nor the Underwriters is responsible or liable for the failure of DIC or any Participant to make any payment or give any notice to a Beneficial Owner with respect to the Bonds or an error or delay relating thereto.

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