NEW ISSUE- BOOK-ENTRY ONLY NOT RATED In the opinion of Quint & Thimmig LLP, San Francisco, California, Bond Counsel, subject, however to certain qualifications described herein, under existing law, the interest on the Bonds is excluded from gross income for federal income tax purposes and such interest is not an item of tax preference for purposes of the federal alternativeminimum tax imposed on individuals and corporations, although for the purpose of computing the alternative minimum tax imposed on certain corporations, such interest is taken into account in determining certain income and earnings. In the further opinion of Bond Counsel, such interest is exempt from Californiapersonal income taxes. See "LEGAL MATIERS -TaxExemption" herein.

$12,500,000 CITYOF·� CITYOF SAN JOSE COMMUNITY FACILffiES DISTRICT NO. 10 SANJOSE (HASSLER - SILVER CREEK) CAPITAL OF SILICON VALLEY SPECIAL TAX BONDS, SERIES 2003 Dated: Date of Delivery Due: September 1, as shown below

The Special Tax Bonds, Series 2003 (the "Bonds") are being issued pursuant to the City of San Jose Community Facilities District Financing Procedure (the "Law"} and a Fiscal Agent Agreement, dated as of July 1, 2003 (the "Fiscal Agent Agreement"}, by and between the City of San Jose (the "City"} and U.S. Bank National Association, San Francisco, California, as fiscal agent (the "Fiscal Agent"), and are payable from proceeds of Special Taxes (as defined herein) levied on property within the City of San Jose Community Facilities District No. 10 (Hassler-Silver Creek) (the "District") according to the rate and method of apportionment of special tax approved by the qualified electors of the District and by the City Council of the City, as legislative body of the District. The Bonds are being issued to (i) finance the acquisition of certain roadway improvements (the "Facilities") necessitated by development in the District, (ii) fund a reserve fund for the Bonds, and (iii} pay the costs of issuing the Bonds. See "ESTIMATED SOURCES AND USES OF FUNDS" herein. Interest on the Bonds is payable on March 1, 2004 and semiannually thereafter on each March 1 and September 1. The Bonds will be issued in denominations of $5,000 or integral multiples thereof. The Bonds, when delivered, will be initially registered in the name of Cede & Co., as nominee of The Depository Trust Company ("OTC"), New York, New York. DTC will act as securities depository for the Bonds as more fully described herein. See APPENDIX I -BOOK ENTRY SYSTEM herein. The Bonds are subject to optional and mandatory redemption as describedherein. See "THE BONDS -Redemption" herein. THE BONDS, THE INTEREST THEREON, AND ANY PREMIUMS PAYABLE ON THE REDEMPTION OF ANY OF THE BONDS, ARE NOT AN INDEBTEDNESS OF THE STATE OF CALIFORNIA (THE "STATE") OR ANY OF ITS POLITICAL SUBDIVISIONS (OTHER THAN THE CITY, TO THE LIMITED EXTENT SET FORTH IN THE FISCAL AGENT AGREEMENT}, AND NEITHER THE CITY (EXCEPT TO THE LIMITED EXTENT DESCRIBED HEREIN), NOR THE STATE NOR ANY OF ITS POLITICAL SUBDIVISIONS rs LIABLE ON THE BONDS. NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE CITY (EXCEPT TO THE LIMITED EXTENT DESCRIBED HEREIN) OR THE STATE OR ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE BONDS. OTHER THAN THE SPECIAL TAXES, NO TAXES ARE PLEDGED TO THE PAYMENT OF THE BONDS. THE BONDS ARE NOT A GENERAL OBLIGATION OF THE CITY, BUT ARE LIMITED OBLIGATIONS OF THE CITY FOR THE DISTRICT PAYABLE SOLELY FROM AMOUNTS IN THE BOND FUND UNDER THE FISCAL AGENT AGREEMENT AS MORE FULLY DESCRIBED HEREIN.

The following firm, serving as financial advisor, has structured this issue. KELLING, NORTHCROSS & NOBRIGA A Division of Zums First Natic,nal Bank

This cover page contains certain information for quick reference only. It is not a summary of the issue. Potential investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision with respect to the Bonds. Investment in the Bonds involves risks which may not be appropriate for some investors. See "BONDOWNERS' RISKS" herein for a discussion of certain special risk factors that should be considered in evaluating the investment quality of the Bonds. MATURITY SCHEDULE Maturity Date Principal Interest Price or Maturity Date Principal Interest Price or (September 1) Amount Rate Yield CUSIP (September 1) Amount Rate Yield CUSIP 2004 $365,000 3.300% 1.500% 798142CS2 2014 $610,000 4.400% 4.500% 798142DC6 2005 435,000 3.300 2.000 798142CTO 2015 635,000 4.600 4.650 798142DD4 2006 450,000 3.300 2.500 798142CU7 2016 665,000 4.750 4.800 798142DE2 2007 465,000 3.400 2.900 798142CV5 2017 700,000 4.875 4.900 798142DF9 2008 480,000 3.500 3.300 798142CW3 2018 735,000 5.000 5.000 798142DG7 2009 500,000 3.800 3.750 798142CX1 2019 770,000 5.000 5.100 798142DH5 2010 515,000 4.100 4.000 798142CY9 2020 810,000 5.100 5.200 798142DJ1 2011 540,000 4.200 4.200 798142CZ6 2021 850,000 5.125 5.250 798142DK8 2012 560,000 4.250 4.300 798142DAO 2022 890,000 5.250 5.300 798142DL6 2013 585,000 4.375 4.400 798142DB8 2023 940,000 5.250 5.350 798142DM4

The Bonds will be offered to the public when, as and if issued by the City for the District, subject to the approval as to their legality by Quint & Thimmig LLP, San Francisco, California, Bond Counsel. Certain legal matters will be passed upon for the District and the City by the City Attorney,and by Quint & Thimmig LLP in its capacity as Disclosure Counsel to the City. It is anticipated that the Bonds will be delivered in book­ entry form through OTC on or about July 23, 2003.

Dated: July 10, 2003 TO WHOM IT MAY CONCERN:

The purpose of this Official Statement is to supply information to prospective purchasers of the City of San Jose Community Facilities District No. 10 Hassler - Silver Creek) Special Tax Bonds, Series 2003 (the "Bonds") issued by the City of San Jose (the "City") pursuant to the City of San Jose Community Facilities District Financing Procedure (the "Law").

The information set forth herein has been furnished by the City and by sources which are believed to be accurate and reliable but is not guaranteed as to accuracy or completeness by the City. This Official Statement is not to be construed as a contract with the purchasers of the Bonds. Statements contained in this Official Statement which involve estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as representations of fact. The information and expressions of opinions herein are subject to change without notice, and neither delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the City or the landowners in the District since the date hereof. This Official Statement, including any supplement or amendment hereto, is intended to be deposited with one or more repositories.

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

The information and expressions of opinion herein are subject to change without notice and neither the delivery of this Official Statement, nor any sale hereunder, shall under any circumstances create an implication that there has been no change in the affairs of the City, the landowners or any other matter described herein since the date hereof. The information set forth herein is not guaranteed as to accuracy or completeness by the Fiscal Agent and the Fiscal Agent makes no representation concerning the issuance or validity of the Bonds or the tax exemption with respect to interest thereon.

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

The summaries and references to the Law, the Fiscal Agent Agreement, the Bonds, certain resolutions and to other statutes and documents referred to herein do not purport to be comprehensive or definitive, and are qualified in their entireties by reference to each such statute and document. All capitalized terms used herein, unless noted otherwise, will have the meanings given them in the Fiscal Agent Agreement.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE UNDERWRITER MAY OFFER AND SELL THE 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 HEREOF AND SUCH PUBLIC OFFERING PRICES MAY BE CHANGED FROM TIME TO TIME BY THE UNDERWRITER.

-i- THE CITY OF SAN JOSE

MAYOR AND OTY COUNOL Ron Gonzales, Mayor District 1: Linda J. LeZotte, Member District 2: Forrest Williams, Member District 3: Cindy Chavez, Member District 4: Chuck Reed, Member District 5: Nora Campos, Member District 6: Ken Yeager, Member District 7: Terry 0. Gregory, Member District 8: David D. Cortese, Member District 9: Judy Chirco, Member District 10: Pat Dando, Vice Mayor /Member

OTY OFFICIALS Del D. Borgsdorf, City Manager Richard Doyle, City Attorney Patricia L. O'Heam, City Clerk Scott P. Johnson, Directorof Finance Katy Allen, Director of Public Works

CITY STAFF Julia H. Cooper, Deputy Director of Finance, Debt and Risk Management David Persselin, Debt Administrator Gerry F. DeGuzman, Project Engineer Tom Borden, PrincipalEngineering Technician Danielle Kenealey, Senior Deputy City Attorney

PROFESSIONAL SERVICES

Financial Advisor Kelling, Northcross & Nobriga A Division of Zions First National Bank Oakland, California

Appraiser Hulberg & Associates, Inc. San Jose, California

Bond and Disclosure Counsel Quint & Thimmig LLP San Francisco, California

Special Tax Consultant Francisco & Associates, Inc. San Ramon, California

Fiscal Agent U.S. Bank National Association San Francisco, California

-ii- CITY OF SANJOSE CAPITAL Of SILICON VALLEY

-iii- TABLE OF CONTENTS

INTRODUCTION ...... 1 Direct and Overlapping Governmental ESTIMATED SOURCES AND USES OF Obligations ...... 26 FUNDS ...... 3 Property Tax Status ...... 27 THE BONDS ...... 3 BONDOWNERS' RISKS ...... 27 General Provisions ...... 3 Limited Obligation Of the City to Pay Authority for Issuance ...... 4 Debt Service ...... 27 Debt Service Schedule ...... 5 Appraised Values ...... 27 Redemption ...... 5 Other Possible Claims Upon the Value of Registration, Transfer and Exchange ...... 7 Taxable Parcels ...... 28 SECURITY FOR THE BONDS ...... 7 Disclosure to Future Purchasers ...... 29 General ...... 7 Endangered and Threatened Species ...... 29 Special Taxes ...... 8 Hazardous Substances ...... 29 Rate and Method ...... 8 Levy and Collection of the Special Tax ...... 30 Proceeds of Foreclosure Sales ...... 10 Exempt Properties ...... 31 No Additional Bonds ...... 11 Depletion of Reserve Fund...... 31 ESTABLISHMENT OF SPECIAL FUNDS Concentration of Property Ownership ...... 32 AND ACCOUNTS ...... 11 Bankruptcy Proceedings ...... 32 Improvement Fund ...... 12 Payment of Special Tax not a Personal Costs of Issuance Fund ...... 12 Obligation of the Property Owners ...... 33 Special Tax Fund ...... 12 Factors Affecting Parcel Values and Bond Fund ...... 12 Aggregate Value ...... 33 Reserve Fund ...... 13 No Acceleration Provisions ...... 34 Administrative Expense Fund ...... 14 Loss of Tax Exemption ...... 34 Rebate Fund ...... 14 Proposition 218 ...... 35 Investment of Moneys in Funds ...... 14 Limitations on Remedies ...... 36 THE DISTRICT ...... 14 Limited Secondary Market...... 36 Location of the District...... 14 FDIC/Federal Government Interests in Description of the District ...... 15 Properties ...... 36 Land Use Contemplated Within the Forward Looking Statements ...... 37 District...... 15 CONTINUING DISCLOSURE ...... 37 Zoning ...... 15 City Continuing Disclosure Obligation ...... 37 Environmental Review ...... 17 Landowner Continuing Disclosure Prior Litigation ...... 17 Obligation ...... 38 Availability of Public Utilities ...... 18 LEGAL MATTERS ...... 39 THE FACILITIES ...... 19 Legal Opinion ...... 39 Authorized Facilities ...... 19 Tax Exemption...... 39 Acquisition Agreement ...... 19 No Litigation ...... 39 PROPERTY OWNERSHIP ...... 20 NO RATINGS ...... 39 Property Ownership and Development...... 20 FINANCIAL ADVISOR ...... 39 Appraisal of Property in the District ...... 24 UNDERWRITING ...... 40 Appraised Value-to-Burden Ratio ...... 25 PROFESSIONAL FEES ...... 40 MISCELLANEOUS ...... 41

APPENDIX A THE CITY OF SAN JOSE: ECONOMIC AND FINANCIAL INFORMATION APPENDIX B RA TE AND METHOD OF APPORTIONMENT OF SPECIAL TAX APPENDIX C BOUNDARIES OF THE COMMUNITY FACILITIES DISTRICT APPENDIX D THE APPRAISAL REPORT APPENDIX E SUMMARY OF FISCAL AGENT AGREEMENT APPENDIX F FORM OF CITY DISCLOSURE CERTIFICATE APPENDIX G FORM OF PROPERTY OWNER DISCLOSURE CERTIFICATE APPENDIX H FORM OF OPINION OF BOND COUNSEL APPENDIX I BOOK ENTRY SYSTEM

-iv- -v- OFFICIAL STATEMENT relating to: $12,500,000 CITY OF SAN JOSE COMMUNITY FACILITIBS DISTRICT NO. 10 (HASSLER-SILVER CREEK) SPECIAL TAX BONDS , SERIES 2003

This Official Statement, including the cover page and appendices hereto, is provided to furnish information regarding the $12,500,000 principal amount of City of San Jose Community Facilities District No. 10 (Hassler-Silver Creek) Special Tax Bonds, Series 2003 (the "Bonds"). INTRODUCTION

The City of San Jose Community Facilities District No. 10 (Hassler-Silver Creek) (the "District") was established by the City on April 1, 2003 pursuant to the City of San Jose Community Facilities District Financing Procedure (the "Law"), following a public hearing and a landowner election at which the qualified electors of the District, by a 100% vote, authorized the District to incur bonded indebtedness in the maximum aggregate principal amount of $15,000,000 and approved the levy of special taxes (the "Special Taxes") on real property in the District. The Law incorporates the Mello-Roos Community Facilities Act of 1982, as amended, (California Government Code Section 53311 et seq.) with certain modifications.

The District's boundaries encompass approximately 580 acres of a proposed residential community known as The Ranch on Silver Creek (the "Development"). The Development is located in the eastern foothills of the City and is part of a larger, 3;075 acre area known as the Silver Creek Planned Residential Community. The Development is expected to include (i) approximately 154 acres divided into eight (8) different tracts to be improved with up to 538 single family dwelling units comprised of detached homes, duet style condominiums and townhome style condominiums; (ii) approximately 13 acres to be improved as Hassler Parkway; and (iii) approximately 413 acres of open space, including approximately 166 acres of private open space that will be improved, with an 18 hole, championship­ caliber golf course, approximately 240 acres that will be maintained as a conservation area and approximately 7 acres of public open space to be an extension of an existing linear City park. See "THE DISTRICT - Land Use Contemplated Within theDistrict" herein.

The master developer for the Development is William Lyon Homes, Inc. (the "Master Developer"). The. land for the Development was initially acquired by an affiliate of the Master Developer, Cerro Plata Associates, LLC, which has transferred the ownership of certain lots in the Development to the Master Developer and to other related and unrelated limited liability companies (and, as to lots on which model homes are being constructed, an independent financing company), in conjunction with construction occurring in the Development. The Master Developer owns or has an option to purchase all of the lots in the Development. It is expected that most, if not all, of the homes in the Development will be constructed by the Master Developer. See "PROPERTY OWNERSHIP" herein.

As of May 22, 2003, the Development site has been graded to rough graded lots, the major roadway through the Development, Hassler Parkway, has been paved with several other interior streets completed and paved, five (5) model home complexes are under construction in four (4) of the eight (8) tracts and several holes of the golf course have been completed. Construction work is ongoing. See "PROPERTY OWNERSHIP - Property Ownership and Development - Status of Development" herein.

The Bonds are issued pursuant to the Law, Resolution No. 71641 adopted by the City Council on June 17, 2003 (the "Resolution of Issuance"), and a Fiscal Agent Agreement, dated as of July 1, 2003 (the "Fiscal Agent Agreement"), by and between the City, for and on behalf of the District, and U.S. Bank National Association, as fiscal agent (the "Fiscal Agent"). See "THE BONDS" herein. The Bonds represent the only series of bonds being issued under the District's bonded indebtedness authorization.

-1- Proceeds of the Bonds will be used to finance the acquisition of certain roadway improvements (the "Facilities") necessitated by development occurring in the District. See "THE FACILITIES" herein.

The Bonds are secured by and payable from a pledge of "Special Tax Revenues," consisting primarily of the proceeds of the Special Taxes received by the City (other than penalties collected with respect to delinquent Special Taxes). "Special Taxes" are defined in the Fiscal Agent Agreement as the special taxes levied by the City on taxable property within the District under the Law, the Ordinance and the Fiscal Agent Agreement (as all terms are defined herein). See "SECURITY FOR THE BONDS" herein.

Pursuant to the Law, the Resolution of Formation and the Fiscal Agent Agreement, so long as any Bonds are outstanding, the City will annually levy the Special Taxes under a rate and method of apportionment of special taxes for the District adopted in accordance with the proceedings for the authorization and issuance of the Bonds (the "Rate and Method"). The Special Taxes will be levied on all land within the District taxable under the Rate and Method (the "Taxable Parcels"). The City will make provision for the collection of the Special Tax in amounts which will be sufficient to pay interest on, principal of and redemption premium (if any) on the Bonds as such becomes due and payable, to replenish the Reserve Fund (as defined herein) as necessary to maintain an amount equal to the Reserve Requirement (as defined herein) on deposit in the Reserve Fund, and to pay the administrative expenses of the District. See "SECURITY FOR THE BONDS - Special Taxes" herein.

The City has also covenanted to cause foreclosure proceedings to be commenced and prosecuted in certain circumstances against certain parcels with delinquent installments of the Special Tax. For a description of the foreclosure covenant see "SECURITY FOR THE BONDS - Proceeds of Foreclosure Sales."

The value of the real property in the District is an important consideration with respect to an investment in the Bonds. In connection with the establishment of the District and the issuance of the Bonds, the City ordered preparation of an appraisal of the tracts within the Development dated May 31, 2003 (the "Appraisal") by Hulberg & Associates, Inc. of San Jose, California (the Appraiser"), with a valuation date of April 18, 2003. The Appraisal, the complete text of which containedII in Exhibit D hereto, is intended for limited purposes only, and should be read in its entirety by those interested in purchasing the Bonds. See "PROPERTY OWNERSHIP - Appraisal of Property in the District" herein.

See the section of this Official Statement entitled "BONDOWNERS' RISKS" for a discussion of certain factors which should be considered, in addition to the other matters set forth herein, in considering the investment quality of the Bonds. THE BONDS ARE NOT GENERAL OBLIGATIONS OF THE CITY, BUT ARE LIMITED OBLIGATIONS PAYABLE SOLELY FROM THE REVENUES AND FUNDS PLEDGED THEREFOR UNDER THE FISCAL AGENT AGREEMENT. SEE "SECURITY FOR THE BONDS" HEREIN. NEITHER THE FAITH AND CREDIT OF THE CITY OR THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE BONDS.

-2- ESTIMATED SOURCES AND USES OF FUNDS

The proceeds from the sale of the Bonds will be deposited into the respective funds established by the City under the Fiscal Agent Agreement, as follows:

SOURCES

Principal Amount of Bonds $12,500,000.00 Less Original Issue Discount (16,182.85) Less Underwriter's Discount (233.817.15)

Total Sources $12,250,000.00

Deposit to Improvement Fund $10,655,355.00 Deposit to Reserve Fund0> 991,197.50 Deposit to Costs of Issuance Fund(2J 603,447.50

Total Uses $12,250,000.00

(1) Equal to the initial Reserve Requirement with respect to the Bonds. (2) To be used to pay initial Fiscal Agent fees, Bond Counsel and Special Tax Consultant fees, Financial Advisor fees, Appraisal expenses, City Administration Fee and other costs of issuance of the Bonds.

THE BONDS

General Provisions

The Bonds will be dated as of their date of delivery, and will bear interest at the rates per annum set forth on the cover page hereof, payable semiannually on each March 1 and September l, commencing on March 1, 2004 (each, an "Interest Payment Date") and will mature in the amounts and on the dates set forth on the cover page hereof. The Bonds will be issued in fully registered form in denominations of $5,000 each or any integral multiple thereof.

Interest will be calculated on the basis of a 360-day year composed of twelve 30-day months. Each Bond will bear interest from the Interest Payment Date next preceding the date of authentication thereof unless (i) it is authenticated on an Interest Payment Date, in which event it will bear interest from such date of authentication, or (ii) it is authenticated prior to an Interest Payment Date and after the close of business on the Record Date preceding such Interest Payment Date, in which event it will bear interest from such Interest Payment Date, or (iii) it is authenticated prior to the Record Date preceding the first Interest Payment Date, in which event it will bear interest from its dated date; provided, however, that if at the time of authentication of a Bond, interest is in default thereon, such Bond will bear interest from the Interest Payment Date to which interest has previously been paid or made available for payment thereon. "Record Date" is defined in the Fiscal Agent Agreement as the 15th day of the month next preceding the month in which the applicable Interest Payment Date occurs, whether or not such day is a Business Day.

Principal of and interest on the Bonds (including the final interest payment upon maturity or earlier redemption), is payable by check of the Fiscal Agent mailed by first class mail on the applicable Interest Payment Date to the registered Owner thereof at such registered Owner's address as it appears on the registration books maintained by the Fiscal Agent at the close of business on the Record Date preceding the Interest Payment Date, or by wire transfer made on such Interest Payment Date upon written instructions of any Owner of $1,000,000 or more in aggregate principal amount of Bonds delivered to the Fiscal Agent prior to the applicable Record Date, which instructions will continue in effect until revoked in writing, or until such Bonds are transferred to a new Owner. The principal of the

-3- Bonds and any premium on the Bonds are payable in lawful money of the United States of America upon surrender of the Bonds at the Principal Office of the Fiscal Agent in San Francisco, California.

So long as the Bonds are in book-entry only form, OTC, as the nominee for The Depository Trust Company, will be the sole registered owner of the Bonds, and all payments on the Bonds will be made to OTC for distribution to beneficial owners as described in APPENDIX I - BOOK-ENTRY SYSTEM he rein. All references in this Official Statement to the owners or holders of the Bonds mean OTC, so long as the Bonds are in book-entry only form, and not the beneficial owners of the Bonds.

Authority for Issuance

The Bonds are issued pursuant to the Law, the Resolution of Issuance and the Fiscal Agent Agreement. As required by the Law (which incorporates the Mello-Roos Community Facilities Act of 1982, with certain exceptions), the City Council of the City has taken the following actions with respect to establishing the District and authorizing issuance of the Bonds:

Resolution of Intention: On February 18, 2003, the City Council adopted a resolution entitled, "A Resolution of the City Council of the City of San Jose Declaring Its Intention to Establish a Community Facilities District and to Authorize the Levy of Special Taxes Pursuant to the City of San Jose Community Facilities District Financing Procedure", and a resolution entitled "A Resolution of the City Council of the City of San Jose Declaring Its Intention to Incur Bonded Indebtedness of the Proposed City of San Jose Community Facilities District No. 10 Hassler - Silver Creek) Pursuant to the City of San Jose Community Facilities District Financing Procedure" (collectively, the "Resolution of Intention"), stating its intention to form the District, to authorize the levy of a special tax and to incur bonded indebtedness in an amount not to exceed $15,000,000 within the District for the purpose of financing the Facilities. See "THE FACILITIES" herein.

Resolution of Formation: Subsequent to a noticed public hearing on April 1, 2003, the City Council adopted a resolution entitled "A Resolution of the City Council of the City of San Jose of Formation of City of San Jose Community Facilities District No. 10 Hassler - Silver Creek), Authorizing the Levy of a Special Tax Within the District, Preliminarily Establishing an Appropriations Limit for the District and Submitting Levy of the Special Tax and the Establishment of the Appropriations Limit to the Qualified Electors of the District" (the "Resolution of Formation") which established the District and authorized the levy of a special tax within the District.

Resolution of Necessity: On April 1, 2003, the City Council adopted a resolution entitled A

Resolution of the City Council of the City of San Jose Determining the Necessity to Incur BondedII Indebtedness Within City of San Jose Community Facilities District No. 10 Hassler - Silver Creek) and Submitting the Proposition to the Qualified Electors of the District," which determined the necessity to incur bonded indebtedness in an amount not to exceed $15,000,000 within the District and called for an election on that proposition.

Resolution Calling Election: On April 1, 2003, the City Council adopted a resolution entitled A

Resolution of the City Council of the City of San Jose Calling Special Election Within CommunityII Facilities District No. 10 Hassler - Silver Creek)," pursuant to which it called an election for April 1, 2003 on the issues of the levy of the Special Tax, the incurring of bonded indebtedness and the establishment of an appropriations limit for the District.

Landowner Election and Declaration of Results: On April 1, 2003, an election was held within the District in which the owners of land subject to the levy of the Special Taxes, being the qualified electors within the District, approved a ballot proposition by a 100 percent "yes" vote authorizing the issuance of up to $15,000,000 in bonds to finance the acquisition of the Facilities, the levy of the Special Tax and the establishment of an appropriations limit for the District. On April 1, 2003, the City Council adopted a resolution entitled A Resolution of the City Council of the City of San Jose Declaring Results of

Special Election and DirectingII Recording of Notice of Special Tax Lien," pursuant to which the City Council approved the canvass of the votes and declared the District to be fully formed with the

-4- authority to levy the Special Taxes, to incur the bonded indebtedness and to have the established appropriations limit.

Ordinance Levying Special Taxes: On April 1, 2003, the City Council introduced and adopted an ordinance entitled "An Ordinance of the City of San Jose Levying Special Taxes Within City of San Jose Community Facilities District No. 10 (Hassler-Silver Creek)" (the "Ordinance"). A Notice of Special Tax Lien was subsequently recorded in the real property records of Santa Clara County.

Resolution Authorizing Issuance of the Bonds: On June 17, 2003, the City Council adopted a resolution approving issuance of the Bonds, the Fiscal Agent Agreement, this Official Statement, and other documents and actions incident to the issuance of the Bonds.

Debt Service Schedule

The following table presents the scheduled annual debt service on the Bonds, assuming that there are no optional redemptions or any mandatory redemptions from Special Tax prepayments. Year Ended September 1 Principal Interest Total 2004 $ 365,000.00 $ 623,543.01 $ 988,543.01 2005 435,000.00 551,963.76 986,963.76 2006 450,000.00 537,608.76 987,608.76 2007 465,000.00 522,758.76 987,758.76 2008 480,000.00 506,948.76 986,948.76 2009 500,000.00 490,148.76 990,148.76 2010 515,000.00 471,148.76 986,148.76 2011 540,000.00 450,033.76 990,033.76 2012 560,000.00 427,353.76 987,353.76 2013 585,000.00 403,553.76 988,553.76 2014 610,000.00 377,960.00 987,960.00 2015 635,000.00 351,120.00 986,120.00 2016 665,000.00 321,910.00 986,910.00 2017 700,000.00 290,322.50 990,322.50 2018 735,000.00 256,197.50 991,197.50 2019 770,000.00 219,447.50 989,447.50 2020 810,000.00 180,947.50 990,947.50 2021 850,000.00 139,637.50 989,637.50 2022 890,000.00 96,075.00 986,075.00 2023 940,000.00 49,350.00 989,350.00 Totals $12,500,000.00 $7,268,029.35 $19,768,029.35

Redemption

Optional Redemption. The Bonds maturing on and after September 1, 2009 are subject to optional redemption prior to their stated maturities from any source of available funds, on any Interest Payment Date on or after September 1, 2008, in whole, or in part among maturities of the Bonds so as to maintain substantially level debt service on the Bonds, and by lot within a maturity, at a redemption price (expressed as a percentage of the principal amount of the Bonds to be redeemed) as set forth below, together with accrued interest thereon to the date fixedfor redemption:

Redemption Date Redemption Price September 1, 2008 and March 1, 2009 102% September 1, 2009 and March 1, 2010 101 September 1, 2010 and any Interest 100 Payment Date thereafter

Mandatory Redemption From Special Tax Prepayments. The Bonds are subject to mandatory redemption in part, among maturities so as to maintain substantially level debt service on the Bonds

-5- and by lot within a maturity, on the next Interest Payment Date for which notice of redemption can timely be given, from Special Tax Prepayments received by the City and corresponding transfers from the Reserve Fund to the Bond Fund, at a redemption price (expressed as a percentage of the principal amount of the Bonds to be redeemed) as set forth below, together with accrued interest to the date fixed for redemption:

Redemption Date Redemption Price any Interest Payment Date from March 1, 2004 103% to and including March 1, 2008 September 1, 2008 and March 1, 2009 102 September 1, 2009 and March 1, 2010 101 September 1, 20 10 and any Interest Payment 100 Date thereafter

See "SECURITY FOR THE BONDS - Rate and Method - Maximum Special Tax," and "- Prepayment of Special Tax" herein, as well as APPENDIX B - RATE AND METHOD OF APPORTIONMENT OF SPECIAL TAX, for a description of the circumstances and manner in which the Special Tax to be levied in the District may be required or permitted to be prepaid, resulting in a redemption of the Bonds as described above.

Purchase In Lieu of Redemption. Moneys in the Bond Fund may be used and withdrawn by the Fiscal Agent for purchase of Outstanding Bonds in lieu of redemption, at public or private sale as and when, and at such prices (including brokerage and other charges) as the City may request, but in no event may Bonds be purchased at a price in excess of the principal amount thereof, plus interest accrued to the date of purchase and any premium which would otherwise be due if such Bonds were to be redeemed in accordance with the Fiscal Agent Agreement.

Notice of Redemption. The Fiscal Agent will cause notice of any redemption to be mailed by first class mail, postage prepaid, at least thirty (30) days but not more than sixty (60) days prior to the date fixed for redemption, to the original purchaser of the Bonds, to the Securities Depositories, to one or more Information Services, and to the respective registered Owners of any Bonds designated for redemption at their addresses appearing on the Bond registration books in the Principal Office of the Fiscal Agent; but such mailing is not a condition precedent to such redemption and failure to mail or to receive any such notice, or any defect therein, will not affect the validity of the proceedings for the redemption of such Bonds.

The redemption notice will state the redemption date and the redemption price and, if less than all of the then Outstanding Bonds are to be called for redemption will state as to any Bond called in part the principal amount thereof to be redeemed, and will require that such Bonds be then surrendered at the Principal Office of the Fiscal Agent for redemption at the said redemption price, and will state that further interest on such Bonds will not accrue from and after the redemption date. The cost of mailing any such redemption notice and any expenses incurred by the Fiscal Agent in connection therewith will be paid by the City.

Partial Redemption. Whenever provision is made in the Fiscal Agent Agreement for the redemption of less than all of the Bonds of any maturity or any given portion thereof, the Fiscal Agent will select the Bonds to be redeemed, from all Bonds or such given portion thereof not previously called for redemption, among maturities so as to maintain substantially level debt service on the Bonds as directed by the City's Director of Finance, and by lot within a maturity, such selection within a maturity to be done in any manner which the Fiscal Agent in its sole discretion deems appropriate.

Effect of Redemption. From and after the date fixed for redemption, if funds available for the payment of the principal of, and interest and any premium on, the Bonds so called for redemption will have been deposited in the Bond Fund, such Bonds so called will cease to be entitled to any benefit under the Fiscal Agent Agreement other than the right to receive payment of the redemption price, and no interest will accrue thereon on or after the redemption date specified in the notice of redemption.

-6- Registration, Transfer and Exchange

Registration. The Fiscal Agent will keep, or cause to be kept, at its Principal Office, sufficient books for the registration and transfer of the Bonds. Such books will show the series number, date, amount, rate of interest and last known owner of each Bond and will at all times be open to inspection by the City during regular business hours upon reasonable notice. The City and the Fiscal Agent will treat the Owner of any Bond whose name appears on the Bond register as the absolute Owner of such Bond for any and all purposes, and the City and the Fiscal Agent will not be affected by any notice to the contrary. The City and the Fiscal Agent may rely on the address of the Owner as it appears in the Bond register for any and all purposes.

Transfer and Exchange. The Bonds will initially be registered in the name of OTC as the nominee for The Depository Trust Company, and transfers of beneficial interests in the Bonds will be accomplished as described in APPENDIX I - BOOK-ENTRY SYSTEM herein. If the City ever elects to discontinue the book-entry only registration of the Bonds, the registration and transfer of individual ownership interests in the Bonds will occur as set forth in the next paragraph.

Any Bond may, in accordance with its terms, be transferred, upon the registration books maintained by the Fiscal Agent by the person in whose name it is registered, in person or by such person's duly authorized attorney, upon surrender of such Bond for cancellation, accompanied by delivery of a duly written instrument of transfer in a form acceptable to the Fiscal Agent. Bonds may be exchanged at the Fiscal Agent's Principal Office solely for a like aggregate principal amount of Bonds of authorized denominations and of the same maturity. The cost for any services rendered or any expenses incurred by the Fiscal Agent in connection with any such transfer or exchange will be paid by the City. The Fiscal Agent will collect from the Owner requesting such transfer or exchange any tax or other governmental charge required to be paid with respect to such transfer or exchange. Whenever any Bond or Bonds will be surrendered for transfer or exchange, the City will execute and the Fiscal Agent will authenticate and deliver a new Bond or Bonds, for a like aggregate principal amount. No transfers or exchanges of Bonds will be required to be made (i) fifteen days prior to the date established by the Fiscal Agent for selection of Bonds for redemption or (ii) with respect to a Bond after such Bond has been selected for redemption; or (iii) between a Record Date and the succeeding Interest Payment Date.

SECURITY FOR THEBONDS

General

The Bonds are secured by and payable from a first pledge of the Special Tax Revenues received by the City. Pursuant to the Law, the Resolution of Formation and the Fiscal Agent Agreement, the City will annually levy the Special Taxes in an amount sufficient to pay the principal of and interest on the Bonds, to replenish the Reserve Fund to the amount of the Reserve Requirement, and to pay the administrative expenses of the District. The Bonds are further secured by a first pledge on all moneys deposited in the Bond Fund and the Reserve Fund and, until disbursed as provided in the Fiscal Agent Agreement, the Special Tax Fund. The Special Tax Revenues and all moneys deposited into said funds are pledged to the payment of the principal of, and interest and any premium on, the Bonds as provided in the Fiscal Agent Agreement and iri the Law until all of the Bonds have been paid and retired or until moneys or Federal Securities (as defined in the Fiscal Agent Agreement) have been set aside irrevocably for that purpose.

Amounts in the Costs of Issuance Fund, the Administrative Expense Fund, the Rebate Fund and the Improvement Fund established under the Fiscal Agent Agreement are not pledged to the repayment of the Bonds. The Facilities are not in any way pledged to pay the debt service on the Bonds. Any proceeds of condemnation, destruction or other disposition of any Facilities are not pledged to pay the debt service on the Bonds and are free and clear of any lien or obligation imposed under the Fiscal Agent Agreement.

-7- Special Taxes

The City has covenanted in the Fiscal Agent Agreement to comply with all requirements of the Law so as to assure the timely collection of Special Tax Revenues, including without limitation, the enforcement of delinquent Special Taxes. The Fiscal Agent Agreement provides that the Special Taxes will be payable and be collected in the same manner and at the same time and in the same installment as the general taxes on real property are payable, and have the same priority, become delinquent at the same times and in the same proportionate amounts and bear the same proportionate penalties and interest after delinquency as do the general taxes on real property.

Notwithstanding the foregoing, the Director of Finance of the City may in his or her discretion cause the collection of any Special Taxes by direct, first class mail billing to the then owner of each parcel in the District in lieu of billing for such Special Taxes in the same manner as general taxes as aforesaid. Such direct mail billing will be made not later than November 1 of the Fiscal Year and will direct the owner of the property affected to pay the Special Taxes directly to the Director of Finance in two equal installments, the first of which will be due and delinquent if not paid on December 10 and the second of which may be paid with the first and which, in any event, will be due and delinquent if not paid on April 10 of the Fiscal Year. Any such Special Taxes so billed will have the same priority and bear the same proportionate penalties and interest after delinquency as do the ad valorem taxes on real property.

Because the annual Special Tax levy is limited to the maximum annual Special Tax rates set forth in the Rate and Method, no assurance can be given that, in the event of Special Tax delinquencies, the receipts of Special Taxes will, in fact, be collected in sufficient amounts in any given year to pay the scheduled debt service on the Bonds and the administrative expenses of the District.

Rate and Method

General. The Special Tax is to be levied and collected according to the rate and method of apportionment of special taxes for the District, a copy of which is set forth in APPENDIX B - Rate and Method of Apportionment of Special Tax (the "Rate and Method"). Capitalized terms used in the following paragraphs but not defined herein have the meanings given them in the Rate and Method. The qualified electors of the District and the City Council of the City, as the legislative body for the District, approved the Rate and Method of Apportionment of Special Taxes for the District on April 1, 2003.

The Rate and Method provides the means by which the City determines the amount of the Special Taxes to annually levy on each County Assessor's parcel of real property in the District which is not an Exempt Parcel or with respect to which the owner has not theretofore prepaid the applicable Special Tax lien ("Taxable Parcels"), up to the applicable Maximum Annual Special Tax per Taxable Parcel that applies to the respective parcel. Annually, at the time of levying the Special Tax for the District, the CFO Administrator (being an official of the City or designee thereof) will determine the amount of money to be collected from Taxable Parcels in the District (the "Annual Special Tax Requirement"). Such amount will include the amount necessary in any Fiscal Year to (i) pay principal and interest on the Bonds due in the calendar year which commences in such Fiscal Year, (ii) to create or replenish reserve funds, (iii) to cure any delinquencies in the payment of principal or interest on indebtedness of the District which have occurred in the prior Fiscal Year (based on delinquencies in the payment of Special Taxes which have already taken place) or are expected to occur in the Fiscal Year in which the Special Tax will be collected, and (iv) to pay Annual Administrative Costs of the District. Annual Administrative Costs include, among other costs described in the Rate and Method, the costs of computing and collecting the Special Taxes and preparing the annual Special Tax collection schedules; the costs of administering the Fiscal Agent Agreement and the Bonds; the costs of complying with arbitrage rebate and disclosure requirements; and the City's annual administration fees and third party expenses.

-8- Maximum Special Tax. The Rate and Method has been established based, in part, on the assumed number of Taxable Parcels to be included within each tract of the development (each a "Taxable Tract"), a specified aggregate maximum annual special tax to be collected from each Taxable Tract, and a maximum annual special tax to be levied on any specific Taxable Parcel in each Taxable Tract. Under the Rate and Method, if a property owner remaps a Taxable Tract, and the remapping results in fewer Taxable Parcels within that Taxable Tract, the property owner will be required to prepay the Special Tax for any Taxable Parcel that is eliminated. Any such prepayment would result in a mandatory redemption of a portion of the Bonds. See "THE BONDS - Redemption - Mandatory Redemption From Special Tax Prepayments" herein.

The Maximum Annual Special Tax per Taxable Parcel may not exceed the maximum amount fo r parcels in the corresponding tract within the District as set forth in Table I below.

Table No. 1 City of San Jose Community Facilities District No. 10 (Hassler-Silver Creek) Maximum Annual Special Tax Per Taxable Parcel

MaximumAnnual Taxable Special Tax No. of Tract eer Taxable Parcel Taxable Parcels 9164a $1,665 78 9164b 1,665 61 9165 1,665 56 9166 1,665 44 9167 2,115 74 9168 2,115 54 9169 3,415 33 9170a 2,670 47 9170b 2,990 44 9171 2,670 47

The Annual Special Tax Requirement for each Taxable Parcel may not in any event exceed the Maximum Annual Special Tax per Taxable Parcel set forth in the preceding table and under no circumstances will the Special Tax levied against any Assessor's Parcel used for private residential purposes be increased by more than ten percent as a consequence of delinquency or default by the owner of any other parcel within the District.

The Rate and Method assumes that the following maximum aggregate Special Taxes will be collected from each Taxable Tract based upon the maximum tax rates and the assumed number of parcels in the respective Taxable Tracts as shown in Table 1 above.

Table No. 2 City of San Jose Community Facilities District No. 10 (H9-ssler-S ilver Creek) Maximum Annual Special Tax Per Taxable Tract

Maximum Taxable Annual Special Tax per Tract Taxable Tract 9164a $129,870 9164b 101,565 9165 93,240 9166 73,260 9167 156,510 9168 114,210 9169 112,695 9170a 125,490 9170b 131,560 9171 125,490

-9- The Special Tax Consultant has estimated that the Special Tax, if levied at the maximum rates permitted under the Rate and Method, and not taking into account any additional available revenues that may arise from earnings on amounts in the Reserve Fund or any deduction from revenues for Administrative Expenses of the District, will result in revenues that are approximately 113% of the annual debt service on the Bonds (assuming such annual debt service is approximately $1,029,645, which amount is subject to change upon final pricing of the Bonds).

Method of Apportionment of Special Tax. The Rate and Method provides that each year, the City will coordinate with the Santa Clara County Auditor's office to have the Annual Special Tax for each applicable Taxable Parcel placed on the property tax roll, or will effect a direct billing of the Annual Special Tax to the Property Owners of the Taxable Parcels. The Special Tax will be calculated as follows:

(1) Each year on July 1 determine the Annual Special Tax Requirement for the current Fiscal Year.

(2) Each year on July 1 prorate the Annual Special Tax Requirement identified in Step No. 1 above to each Taxable Tract within the boundaries of the CFD up to their respective Maximum Annual Special Tax per Taxable Tract.

(3) Each Year on July 1 determine which Taxable Tracts have subdivided into individual Taxable Parcels.

(4) For each Taxable Tract that has been subdivided into Taxable Parcels, pro-rate the Annual Special Tax Requirement calculated in Step No. 2 above to each Taxable Parcel located within the respective Taxable Tract equally up to the Maximum Annual Special Tax per Taxable Parcel as specified in Table No. 1 above.

(5) If a Taxable Tract has not subdivided into Taxable Parcels then the Annual Special Tax Requirement for the Taxable Tract as calculated in Step No. 2 above will be levied upon the underlying Assessor Parcel(s) representing the Taxable Tract.

See "PROPERTY OWNERSHIP - Property Ownership and Development - Property Ownership" herein for a discussion of the landowners in the District as of April 1, 2003, and the expected manner in which ownership will change until the dwelling units to be constructed in the Development are sold to the public.

Prepayment of Special Tax. In addition to any mandatory prepayment of the Special Tax due to reduced Taxable Parcels in a Taxable Tract as described above, the Rate and Method does allow for property owners to prepay the Special Taxes for any Taxable Parcel in the District pursuant to a detailed methodology set forth in the Rate and Method. Any such prepayment of Special Taxes will result in a mandatory partial redemption of the Bonds. For the detailed method of computing prepayment amounts, see Exhibit B hereto, and see "THE BONDS - Redemption - Mandatory Redemption From Special Tax Prepayments" herein for a description of the applicable redemption provisions of the Bonds.

Proceeds of Foreclosure Sales

Pursuant to the Law, in the event of any delinquency in the payment of the Special Tax, the City may order the institution of a Superior Court action to foreclose the lien therefore within specified time limits. In such an action, the real property subject to the unpaid amount may be sold at judicial foreclosure sale. Such judicial foreclosure action is not mandatory.

The City has covenanted for the benefit of the owners of the Bonds that it will order, and cause to be commenced and thereafter diligently prosecute to judgment (unless such delinquency is theretofore brought current), an action in the superior court to foreclose the lien of any Special Tax or installment thereof not paid when due as provided in the following paragraph. The Director of Finance

-10- will notify the City Attorney of any such delinquency of which the Director of Finance is aware, and the City Attorney will commence, or cause to be commenced, such proceedings.

On or before November 1 in each Fiscal Year, the Director of Finance shall compare the amount of Special Taxes theretofore levied in the District to the amount of Special Tax Revenues theretofore received by the City, and:

(i) Individual Delinquencies. If the Dir�ctor of Finance determines that any single parcel subject to the Special Tax in the District is delinquent in the payment of more than one years Special Tax levy on such parcel, then the Director of Finance shall send or cause to be sent a notice of delinquency (and a demand for immediate payment thereof) to the property owner within 45 days of such determination, and (if the delinquency remains uncured) foreclosure proceedings shall be commenced by the City within 90 days of such determination. Notwithstanding the foregoing, the Director of Finance may defer such action if the amount in the Reserve Fund is at least equal to the Reserve Requirement.

(ii) Aggregate Delinquencies. If the Director of Finance determines that (a) the total amount of delinquent Special Tax for the prior Fiscal Year for the entire District, (including the total of delinquencies under subsection (i) above), exceeds 5% of the total Special Tax due and payable for the prior Fiscal Year, or (b) there are ten (10) or fewer owners of real property within the District, determined by reference to the latest available secured property tax roll of the County, the Director of Finance shall notify or cause to be notified property owners who are then delinquent in the payment of Special Taxes (and demand immediate payment of the delinquency) within 45 days of such determination, and the City shall commence foreclosure proceedings within 90 days of such determination against each parcel of land in the District with a Special Tax delinquency.

In the event that foreclosure proceedings are commenced, such foreclosure proceedings could be stayed by the commencement of bankruptcy. proceedings by or against the owner of, or any other person claiming an interest in, the property being foreclosed. See "BONDOWNERS' RISKS - Bankruptcy Proceedings" herein.

If foreclosure is necessary and other funds (including amounts in the Reserve Fund) have been exhausted, debt service payments on the Bonds could be delayed until the foreclosure proceedings have ended with the receipt of any foreclosure sale proceeds. Judicial foreclosure actions are subject to the normal delays associated with court cases and may be further slowed by bankruptcy actions, involvement by agencies of the federal government and other·factors beyond the control of the City. Moreover, no assurances can be given that the real property subject to foreclosure and sale at a judicial foreclosure sale will be sold or, if sold, that the proceeds of such sale will be sufficient to pay any delinquent Special Tax installment. See "BONDOWNERS' RISKS - Factors Affecting Parcel Values and Aggregate Value" herein. Although the Law authorizes the City to cause such an action to be commenced and diligently pursued to completion, the Law does not impose on the District or the City any obligationto purchase or acquire any lot or parcel of property sold at a foreclosure sale if there is no other purchaser at such sale. The Law provides that, in the case of a delinquency, the Special Tax will have the same lien priority as is provided for ad valorem taxes.

No Additional Bonds

The Fiscal Agent Agreement does not provide for the issuance of any parity bonds or bonded indebtedness, other than the Bonds, of the District.

ESTABLISHMENT OF SPECIAL FUNDS AND ACCOUNTS

The City will establish seven funds under thi Fiscal Agent Agreement as described below and to be known as the Improvement Fund, the Costs of Issuance Fund, the Bond Fund, the Special Tax Fund, the Administrative Expense Fund, the Rebate Fund, and the Reserve Fund. All of these funds except

-11- the Administrative Expense Fund and the Special Tax Fund will be held by the Fiscal Agent. Only amounts in the Bond Fund, the Reserve Fund and the Special Tax Fund are pledged to the repayment of the Bonds.

Improvement Fund

A portion of the proceeds of the sale of the Bonds will be deposited in the Improvement Fund to be held by the Fiscal Agent. Amounts in the Improvement Fund are not pledged as security for the Bonds. Disbursements from the Improvement Fund will be made by the Fiscal Agent upon receipt of an Officer's Certificate signed by an authorized officer of the City to pay the acquisition cost of the Facilities in accordance with the Acquisition Agreement. See "THE FACILITIES - Acquisition Agreement" herein. Upon the filing of an Officer's Certificate stating that the Project has been completed and that all costs of the Project have been paid, or that any such costs are not required to be paid from the Improvement Fund, the Fiscal Agent will transfer the amounts, if any, remaining in the Improvement Fund to the Bond Fund to be used to pay debt service on the Bonds on the next Interest Payment Date following such transfer.

Costs of Issuance Fund

A portion of the proceeds of the Bonds will be deposited in the Costs of Issuance Fund to pay the issuance costs of the Bonds. Amounts in the Costs of Issuance Fund are not pledged as security for the Bonds. The Fiscal Agent will disburse monies from this fund at the request of an authorized officer of the City to pay Costs of Issuance. The Fiscal Agent will maintain the Costs of Issuance Fund until directed by the Director of Finance to close such fund and then will transfer any moneys remaining therein, including any investment earnings thereon, to the Improvement Fund or, if the Improvement Fund has been closed, to the Bond Fund.

Special Tax Fund

There is established pursuant to the Fiscal Agent Agreement a separate Special Tax Fund to be held by the Director of Finance of the City, to the credit of which the Director of Finance is required to deposit, as soon as practicable following receipt, all Special Tax Revenues received by the City; provided that any prepayments of Special Taxes will be deposited directly to the Special Tax Prepayment Account of the Bond Fund. Moneys in the Special Tax Fund will be held by the Director of Finance for the benefit of the City and the Owners of the Bonds, will be disbursed as described below and, pending any disbursement, will be subject to a lien in favor of the Owners of the Bonds and the City.

From time to time as needed to pay the obligations of the District, but no later than the Business Day before each Interest Payment Date, the Director of Finance will withdraw from the Special Tax Fund and transfer the following amounts in the following order of priority (i) to the Bond Fund an amount, taking into account any amounts then on deposit in the Bond Fund and any expected transfers from the Improvement Fund, the Reserve Fund and the Special Tax Prepayments Account to the Bond Fund pursuant to the Fiscal Agent Agreement, such that the amount in the Bond Fund equals the principal, premium, if any, and interest due on the Bonds on the next Interest Payment Date, and (ii) to the Reserve Fund an amount, taking into account amounts then on deposit in the Reserve Fund, such that the amount in the Reserve Fund is equal to the Reserve Requirement. Amounts then in the Special Tax Fund will also be transferred from time to time by the Director of Finance to the Administrative Expense Fund as necessary to pay Administrative Expenses, but any such transfers will not exceed, in any Fiscal Year, the amount included in the Special Tax levy for such Fiscal Year for Administrative Expenses.

Bond Fund

There is established pursuant to the Fiscal Agent Agreement a separate Bond Fund, to the credit of which deposits will be made as required by the Fiscal Agent Agreement or the Law. There is also created in the Bond Fund a separate account to be held by the Fiscal Agent consisting of the Special Tax

-12- Prepayments Account, to the credit of which Special Tax Prepayments will be deposited as provided in the Fiscal Agent Agreement. Moneys in the Bond Fund and the Special Tax Prepayments Account therein will be held in trust by the Fiscal Agent for the benefit of the Owners of the Bonds, will be disbursed for the payment of the principal of, and interest and any premium on, the Bonds as provided below, and, pending such disbursement, will be subject to a lien in favor of the Owners of the Bonds.

Bond Fund Disbursements. On each Interest Payment Date, the Fiscal Agent will withdraw from the Bond Fund and pay to the Owners of the Bonds the principal, and interest and any premium, then due and payable on the Bonds, including any amounts due on the Bonds by reason of a redemption of the Bonds required by the Fiscal Agent Agreement.

In the event that amounts in the Bond Fund on any Interest Payment Date are insufficient to make all payments then due on the Bonds, the Fiscal Agent will withdraw from the Reserve Fund to the extent of any funds therein an amount necessary to cover the amount of such Bond Fund insufficiency. Amounts so withdrawn from the Reserve Fund will be deposited in the Bond Fund.

If, after the foregoing transfers, there are insufficient funds in the Bond Fund to make all payments then due on the Bonds, the Fiscal Agent will apply the available funds first to the payment of interest on the Bonds, and then to payment of principal due on the Bonds.

Special Tax Prepayments Account Disbursements. Moneys in the Special Tax Prepayments Account will be transferred by the Fiscal Agent to the Bond Fund on the next date for which notice of redemption of Bonds can timely be given under the Fiscal Agent Agreement, and will be used (together with any amounts transferred from the Reserve Fund in conjunction with the Special Tax Prepayment pursuant to the Fiscal Agent Agreement) to redeem Bonds on the redemption date selected in accordance with the Fiscal Agent Agreement.

Reserve Fund

There is established pursuant to the Fiscal Agent Agreement a separate Reserve Fund to be held by the Fiscal Agent, to the credit of which a deposit will be made from the proceeds of the Bonds equal to the Reserve Requirement as of the Closing Date, and deposits will be made from the Special Tax Fund as provided in the Fiscal Agent Agreement. Moneys in the Reserve Fund will be held in trust by the Fiscal Agent for the benefit of the Owners of the Bonds as a reserve for the payment of the principal of, and interest and any premium on, the Bonds and will be subject to a lien in favor of the Owners of the Bonds. The Reserve Requirement is defined in the Fiscal Agent Agreement to mean an amount equal to the least of (i) Maximum Annual Debt Service on the Outstanding Bonds, (ii) 125 percent of average Annual Debt Service on the Outstanding Bonds, and (iii) 10 percent of the initial principal amount of the Bonds.

Except as otherwise described below, all amounts deposited in the Reserve Fund will be used and withdrawn by the Fiscal Agent solely for the purpose of making transfers to the Bond Fund in the event of any deficiency at any time in the Bond Fund of the amount then required for payment of the principal of, and interest and any premium on, the Bonds or, in accordance with the provisions of the Fiscal Agent Agreement, for the purpose of redeeming Bonds from the Bond Fund.

Whenever, on the Business Day prior to any Interest Payment Date, or on any other date at the request of the Director of Finance, the amount in the Reserve Fund exceeds the Reserve Requirement, the Fiscal Agent will provide written notice to the Director of Finance of the amount of the excess and will transfer an amount equal to the excess from the Reserve Fund to the Bond Fund to be used for the payment of interest on the Bonds on the next Interest Payment Date.

Whenever the balance in the Reserve Fund equals or exceeds the amount required to redeem or pay the Outstanding Bonds, including interest accrued to the date of payment or redemption and premium, if any, due upon redemption, the Fiscal Agent will upon the written direction of the Director of Finance transfer the amount in the Reserve Fund to the Bond Fund to be applied, on the next succeeding Interest Payment Date to the payment and redemption, in accordance with the Fiscal Agent

-13- Agreement, of all of the Outstanding Bonds. In the event that the amount so transferred from the Reserve Fund to the Bond Fund exceeds the amount required to pay and redeem the Outstanding Bonds, the balance in the Reserve Fund will be transferred to the City to be used for any lawful purpose of the City.

Whenever Special Taxes are prepaid and Bonds are to be redeemed with the proceeds of such prepayment pursuant to the Fiscal Agent Agreement, a proportionate amount in the Reserve Fund (determined on the basis of the principal of Bonds to be redeemed, and the original principal of the Bonds) will be transferred on the Business Day prior to the redemption date by the Fiscal Agent to the Bond Fund to be applied to the redemption of the Bonds; provided that the amount so transferred shall not in any event reduce the amount remaining on deposit in the Reserve Fund following the transfer to less than the Reserve Requirement in effect following the redemption of the Bonds.

Amounts in the Reserve Fund may at any time be used, at the written direction of an Authorized Officer, for purposes of paying any rebate liability under the Fiscal Agent Agreement.

Administrative Expense Fund

The Administrative Expense Fund is established as a separate fund to be held by the Director of Finance. Amounts in the Administrative Expense Fund are not pledged to the payment of the Bonds. Moneys deposited in the Administrative Expense Fund are for the benefit of the City and will be disbursed for the payment or reimbursement of the administrative costs of the City, including the costs of collecting the Special Taxes, of registering and paying the Bonds, and of complying with federal arbitrage requirements and continuing disclosure requirements. Annually, on the last day of each Fiscal Year commencing with the last day of Fiscal Year 2003-04, the Director of Finance will withdraw any amount then remaining in the Administrative Expense Fund in excess of $20,000 (and that otherwise has not been allocated to pay Administrative Expenses incurred but not yet paid, and which is not otherwise encumbered), and transfer such amount to the Special Tax Fund.

Rebate Fund

The Rebate Fund is established as a separate fund to be held by the Fiscal Agent. Amounts in the Rebate Fund are not pledged to the payment of the Bonds. All money deposited in the Rebate Fund will be held by the Fiscal Agent in trust, (i) to the extent required to satisfythe Rebate Requirement (as defined in the Tax Certificate), for payment to the federal government of the United States of America; or (ii) for transfer to the Administrative Expense Fund if not needed for such purpose, and no other person will have any rights in or claim to such money.

Investment of Moneys in Funds

Moneys in any fund or account created or established by the Fiscal Agent Agreement and held by the Fiscal Agent or the Director of Finance will be invested by the Fiscal Agent or the Director of Finance, respectively, in Permitted Investments, as directed by the City, that mature prior to the date on which such moneys are required to be paid out under the Fiscal Agent Agreement. In the absence of any direction from the City, the Fiscal Agent will invest any such moneys held by it in money market funds as described in the Fiscal Agent Agreement. See APPENDIX E - SUMMARY OF FISCAL AGENT AGREEMENT for the definition of "Permitted Investments."

THE DISTRICT Location of the District

The District is located in the eastern foothills of the City, east of U.S. Highway 101, southwest of Yerba Buena Road, west of Silver Creek Valley Road and east of Dove Road. This area is part of the Silver Creek Planned Residential Community consisting of a total of 3,075 acres. Surrounding land uses

-14- include single-family residential to the north and east, vacant hillside to the south, and single-family residential to the west across U.S. Highway 101.

Description of theDistrict

The District encompasses a proposed residential community of approximately 580 acres known as The Ranch on Silver Creek and referred to in this Official Statement as the "Development." The area, prior to the start of grading for the Development, was a steeply sloped hillside with elevations from 200 to 690 feet above sea level. The upper elevations offer impressive views to the north, northeast and west. Silver Creek runs near the northeastern boundary of the District.

Land Use Contemplated Within the District

The land within the District includes (i) approximately 154 acres containing eight (8) different tracts to be improved with up to 538 single family detached homes, duet style condominiums or townhome style condominiums; (ii) approximately 13 acres to be improved as Hassler Parkway; and (iii) approximately 413 acres of open space, including approximately 166 acres of private open space that will be improved with an 18 hole, championship-caliber golf course, approximately 240 acres that will be maintained as a conservation area and approximately 7 acres of public open space to be an extension of an existing linear City park. Only the lots within the Development on which the residential units are being constructed will be subject to the levy of Special Taxes. The property in the District originally consisted of five (5) separate Santa Clara County Assessor's Parcels, but the Master Developer has recorded tract maps subdividing several of the original parcels, and it is expected that, upon completion of the Development, there will be a separate County Assessor's Parcel for each of the 538 dwelling units, and other separate parcels will be established for the public and private open space areas.

Zoning

The Development is located in an area of the City that is zoned "A(PD) - Planned Development." This is a "planned unit development" zoning designation that allows for development standards of a project to be tailored to the specific size, shape and topography of the site. The Development also lies within the boundaries of the Silver Creek Planned Residential Community, and its General Plan designation is Integrated Residential/Recreation. This designation allows for the development of up to 550 dwelling units in combination with an 18-hole public golf course. The stated intention of the zoning is to integrate residential and recreation uses while preserving the natural hillside character of the site. In the case of the Development, the Planned Development Zoning was first approved by the City Council on October 5, 1993 for 550 single-family units and an 18-home golf course (PDC91-05-039). The property was subsequently sold to an affiliate of the Master Developer who secured a related Planned Development Permit (PD98-05-028) six years later in 1999. At that time, the approved site design was modified to incorporate environmental mitigation measures to improve sensitivity to and avoidance of biotic habitat, as previously identified in the Final Environmental Impact Report for the Development. According to City Staff, this project was carefully coordinated with other governmental resource agencies, particularly the U.S. Fish and Wildlife Service. See "BONDOWNERS' RISKS - Endangered and Threatened Species" for a discussion regarding endangered species of animals and plants that have been identified as occupying or potentially occupying the Development site and the measures taken in response thereto.

-15- CITY OF SANJOSE C:APJ'IAL Of: SILICON VALLEY THE RAN CH ON SILVER CREEK N

- Provence - Portofino - Hacienda -Tesoro - Esperanza - Montesa - Casa Bella - Mariposa - Siena

Map no1 to $cale. CITY OF SANJOSE CAPITAL OF SILICON VALLEY On February 29, 2000, a new Conforming Planned Development Zoning (PDC99-07-058) for the Development was approved by the City Council to allow a slight modification to the setbacks in order to better address grading design issues. This modification did not create any substantial changes to the previous approval. The new zoning retained all previous development standards and environmental mitigation measures.

On June 18, 2002, the City Council approved a subsequent Conforming Planned Development Zoning (PDC02-011) to accommodate the reconfiguration of the Development's lots to avoid the on-site relocation of two high-tension overhead power lines and a high-pressure natural gas pipeline. Under the earlier approval, the property owner had intended to move the utility lines. However, internal financial difficulties within Pacific Gas and Electric made gaining the final approval and cooperation of the utility problematic. Therefore, to allow the Development to proceed, the property owner sought the change to the Planned Development Zoning which adjusted the range of lot sizes in certain tracts from 8,000 to 10,000 square feet to a mix of 6,000, 5,800 and 3,800-square foot lots. This change accommodated the utilities, thereby allowing them to remain in their current locations.

On February 18, 2003, the City Council approved another Conforming Planned Development Zoning (PDC03-003), which functioned as an "amendment" to the previous Planned Development Zoning in that it only allowed for minor setback changes and clarification of previously approved setbacks. This conforming rezoning did not create any substantive changes to the previous approval. All previously approved development standards and environmental mitigation measures were retained.

During the course of the zoning and approval process for the Development, the total number of approved units was reduced from 550 to 538.

Environmental Review

A Final Environmental Impact Report (the "Final EIR") for the land within the Development was certified by the City in October of 1993. An addendum to the Final EIR was certified by the City in January of 1999 in response to minor changes in the proposed Development, including changes to the site and grading plan, updated information regarding sensitive plant and animal species on the site, reduction in impacts to wetland areas, and the proposed relocation of electrical transmission power lines. A second addendum to the Final EIR was certified by the City in June of 2002, as other minor changes to the Development were proposed relating to elimination of the relocation of electrical power and high pressure natural gas transmission lines from the Development, changes to the site and grading plans and to changes in the location of golf course improvements related to such elimination, updated information regarding sensitive plant and animal species on the site and updated mitigation requirements and plans related thereto.

The Final EIR, as supplemented and amended by the two addendums thereto, required that substantial environmental mitigation measures be undertaken in conjunction with the Development, including the acquisition of off-site habitat, as well as funding of conservation of non-disturbed onsite habitats. The Master Developer has funded or is undertaking efforts to fund all required mitigation measures. See BONDOWNERS' RISKS - Endangered and Threatened Species" herein.

0 Prior Litigation

On July 21, 1999, the Guadalupe-Coyote Resource Conservation District ("Guadalupe") and the Center for Biological Diversity ("CBD") (collectively, the "Plaintiffs") filed a complaint (the "Complaint") in United States District Court for the Northern District of California for injunctive and declaratory relief against the Master Developer and the United States Army Corps of Engineers (the "Corps") (collectively, the "Defendants"). The Complaint alleged that (i) by issuing the "Nationwide Permits" for fill of 0.43 acres of wetlands at the Development (0.25 acres had already been filled at the time of the filing of the Complaint) without first engaging in a consultation (a "Section 7 Consultation") under Section 7 of the United States Endangered Species Act (the "ESA") with the United States Fish

-17- and Wildlife Service (the ,,Service"), the Corps violated its obligations under the ESA and other acts and regulations, and (ii) by issuing the Nationwide Permits, and not individual permits, the Corps violated the National Environmental Protection Act. The Complaint alleged harm or injury to certain named animal and plant species, including the Bay Checkerspot Butterfly, the California Tiger Salamander, the California Red-legged Frog, the Metcalf Canyon Jewelflower, and the Santa Clara Valley Dudleya (collectively, the "Sensitive Species"). The parties' litigation involving the Complaint culminated, on May 1, 2000, in the Court granting the Plaintiffs' Renewed Motion for Preliminary Injunction (the "Order"), which provided, that: (i) pending trial of the present action and until further order of the Court, the Master Developer was preliminarily enjoined from any further development of the Development; and (ii) the Master Developer and I or the Corps could seek dissolution of the preliminary injunction at any time upon a showing that the Corps had complied with its obligations under applicable statutes and regulations.

On or about August of 2000, the Master Developer formally requested the Corps to initiate a Section 7 Consultation with the Service with respect to the Nationwide Permits issued by the Corps. By a letter from the Corps to the Service dated August 22, 2000, the Corps initiated the Section 7 Consultation.

While the Section 7 Consultation was underway, on or about mid-September of 2000, the parties stipulated to attempt in good faith to resolve the litigation through a pre-trial disposition and requested that the Court enter a proposed order dissolving the preliminary injunction, on the grounds that it was unnecessary in view of the initiation of the Section 7 Consultation and pursuant to Section 7(d) of the ESA. On or about October 2, 2000, the Court entered an order that dissolved the preliminary injunction.

About early October of 2000, the Section 7 Consultation was concluded. On or about October 12, 2000, the Service issued to the Corps its formal "Biological Opinion," a letter document consisting of approximately fifty pages of text and eleven pages of drawings and text exhibits, and providing a "not likely to jeopardize" finding for the Development and an ,,incidental take statement" for the Bay Checkerspot Butterfly and the California Red-legged Frog. On or about November 9, 2000, the Corps reinstated or reissued modified Nationwide Permits to cover the 0.25 acres of wetlands which had already been filled by the Master Developer prior to the previous suspension of those Nationwide Permits, specifically providing that the permits' authorization was conditional upon the Master Developer's compliance with the non-discretionary mitigation measures set forth in the Biological Opinion. The parties resolved the final aspects of the litigation by entering into a Settlement Agreement on or about January 24, 2001, fully and finally resolving all claims among them. The litigation was subsequently dismissed on or about February 26, 2001 by a stipulation and order by the Court dismissing all claims with prejudice. See "BONDOWNERS' RISKS - Endangered and Threatened Species" for information regarding mitigation measures being taken with respect to the Sensitive Species.

Availability of Public Utilities

The District is currently served by the following public utilities:

Electricity: Pacific Gas & Electric Company Natural Gas: Pacific Gas & Electric Company Telephone Service: SBC Water: San Jose Municipal Water Co. Sewer Collection and Treatment: City of San Jose Garbage and Recycling: N orcal Waste Systems Green Team of San Jose Green Waste Recovery

-18- THE FACILITIES

Authorized Facilities

The District was formed for the purpose of financing a portion of the costs of the construction of certain roadway improvements (the "Facilities") which include the following.

• Hassler Parkway, consisting of a two-lane road, generally 40 feet in width from curb to curb, within a 60 foot right-of-way. There are additional lanes and width at major intersections. The road extends from Silver Creek Valley Road at the eastern boundary of the Ranch on Silver Creek project site to Dove Road at the western boundary, a total length of approximately 9,000 feet. The parkway passes over Silver Creek via a vehicular bridge elevated above the creek corridor. Public utilities within the right of way include storm drainage, and sanitary sewer. The foregoing improvements include, without limitation, the installation of related curbs, gutters, sidewalks and street lights.

• Public streets located in the CFD within generally 40 to 52 foot wide rights of way together with all included storm drainage and sewer improvements. Such streets are located within Tracts 9170 and 9171 with respect to which maps have been recorded, and within Tracts 9167, 9168, and 9169, the maps for which are in process and expected to be recorded in 2003. The foregoing improvements include, without limitation, the installation of related curbs, gutters, sidewalks and street lights.

The Facilities will include the costs of permitting, bonding, insurance, legal and administrative costs (but any such costs for project management, construction management or supervision or administrative personnel of the owners of land in the District or any party related to the owners of land in the District will not exceed five percent (5%) of the third-party hard construction costs of the related facility), site investigation, engineering, architectural and other design and consulting costs, contractor, inspection, safety, signage, security and other costs directly related to the construction of the facilities identified above.

Acquisition Agreement

The City, for itself and on behalf of the District, has entered into an Acquisition Agreement dated December 17, 2002 (the "Acquisition Agreement"), with Cerro Plata Associates, LLC and 242 Cerro Plata LLC, affiliates of the Master Developer. The Acquisition Agreement sets forth the process by which completed roadway improvements will be paid for with Bond proceeds deposited to the Improvement Fund established under the Fiscal Agent Agreement. Amounts in the Improvement Fund are not expected to be sufficient to reimburse the affiliates of the Master Developer for all costs related to the Facilities, and the Acquisition Agreement obligates Cerro Plata Associates, LLC to pay all costs of the Facilities in excess of the moneys available in the Improvement Fund. The Acquisition Agreement is subject to amendment by the parties thereto, without any requirement for notice to or the consent of the Fiscal Agent or theBondowne rs.

Cerro Plata Associates, LLC has entered intoConstruction Agreements with the City whereby it is obligated to complete the construction of the streets in several of the tracts in the Development, as well as Hassler Parkway running through the Development. Hassler Parkway, and several other roadways in the Development, have been completed and are paved, but have not yet been accepted by the City. It is expected that, shortly after the issuance of the Bonds, a substantial portion of the Bond proceeds deposited to the Improvement Fund will be disbursed under the Acquisition Agreement to fund the acquisition of most of the completed Facilities. Amounts in the Improvement Fund, and Facilities acquired with amounts disbursed therefrom, are not pledged as security for the repayment of the Bonds.

-19- PROPERTY OWNERSHIP

Property Ownership and Development

The information in this section regarding the owners of the property in the District and the status of the Development was provided by the Master Developer. Although the City believes that such information is accurate, the City has not independently verified the accuracy of such information and makes no representation or warranty regarding its accuracy. See "BONDOWNERS' RISKS" for certain risks relating to ownership of property in the District.

Propertu Ownersh ip. All of the property in the District was purchased approximately four years ago in an undeveloped, raw land state, by an entity related to the Master Developer, Cerro Plata Associates, LLC, a Delaware limited liability company ("Cerro Plata Associates"), of which the Master Developer is the managing member. Various financial entities are also members of Cerro Plata Associates. In connection with financing activities related to the Development, Cerro Plata Associates has subsequently transferred portions of the land in the Development to the Master Developer, 242 Cerro Plata, LLC ("242"), San Jose Ranch 44, LLC ("SJR44") and, as to lots on which model homes are being constructed, to GMAC Model Home Finance, Inc. ("GMAC"). The Master Developer is the managing member of 242 with a financial entity as the other member. SJR44 is owned by an unrelated, third-party financial entity. The Master Developer has option agreements with Cerro Plata Associates, 242, SJR44 and GMAC that entitles the Master Developer to purchase from such entities all of the residential lots and the golf course in the Development, and the Master Developer has leased back from GMAC all of the lots conveyed to GMAC.

According to the Master Developer, lots within the Development are transferred to various financing entities as the need for development capital arises, but the Master Developer currently retains the right to repurchase all of the lots in the Development. As home construction proceeds, the Master Developer repurchases lots and constructs homes on those lots, and sells the homes to the public. No assurance can be given that the Master Developer will continue to operate in the manner described in this paragraph, and lots could be sold at any time to entities wholly unrelated to the Master Developer.

Based upon the ownership of the property in the District as of April 1, 2003, the five owners of land in the District that would be responsible for payment of annual Special Taxes are as set forth in the following table:

Table No. 3 City of San Jose Community Facilities District No. 10 (Hassler - Silver Creek) Special Tax Summary by Owner

Potential Percent of Total Maximum Units 2 Maximum <1l < > <3 Owner Owned Special Tax l Special Tax Cerro Plata Associates, LLC4J 252 $ 582,165 50.02% 242 Cerro Plata LLc<4J 181 326,490 28.05 William Lyon Homes, Inc. 54 112,020 9.62 San Jose Ranch 44, LLC 41 122,590 10.53 GMAC Model Home Finance, Inc. 10 20,625 1.77 Total 538 $1,163,890 100.00%(SJ

(1} Based upon ownership as of April 1, 2003. (2) Based upon lots owned, and the expected number of taxable parcels in suchtracts. See "SECURITY FOR THE BONDS - Rate and Method- Maximum Special Tax" herein. (3) As computed by the Special Tax Consultant based upon the Rate and Method. (4) The Master Developer, William Lyon Homes, Inc., is the managing member of these two entities. (5) Figures in this column do not add to this total due to rounding. Source: Francisco & Associates, Inc.

-20- As described above, it is expected that the ownership of the land in the District will continue to. change as portions of tracts are developed, by conveyance to investment entities or to the Master Developer, and then to individual owners of dwelling units as such units are sold to the public.

The Master Developer. The Master Developer is primarily engaged in the design, construction and sale of single family detached and attached homes in California, Arizona and Nevada. Since the founding of its predecessor company in 1956, on a combined basis the Master Developer reports that it has sold over 56,000 homes. The Master Developer believes that it is one of the largest homebuilders in California in terms of both sales and homes delivered on a combined basis in 2002. Homebuilding operations are conducted through five geographic divisions: Southern California, San Diego, Northern California, Arizona and Nevada. The Master Developer reports that for the year ended December 31, 2002, on a combined basis it had revenues from home sales of $956.5 million and delivered 2,522 homes. For the same period, its consolidated earnings before interest, taxes and depreciation allowance, which includes cash distributions of income from unconsolidated joint ventures, was $94.1 million.

The Master Developer reports that it considers itself to be an opportunistic niche builder with expertise in all aspects of the homebuilding industry. It designs, constructs and sells a wide range of homes designed to meet the specific needs of each of its markets. It primarily emphasizes sales to entry­ level and move-up home buyers and believes that this diversified product strategy enables it to best serve a wide range of buyers and adapt quickly to a variety of market conditions. The Master Developer reports that as of December 31, 2002, it marketed homes through 36 sales locations in both its wholly­ owned projects and projects being developed in unconsolidated joint ventures. For the year ended December 31, 2002, the average sales price for homes delivered on a combined basis was $379,200, with base sales prices ranging from $110,000 to $1,035,000 and with square footage ranging from 1,183 to 4,695.

The Master Developer reports that its land acquisition strategy, as a merchant homebuilder, is to undertake projects with life-cycles of 24-36 months, in order to reduce development and market risk. The Master Developer reports that its inventory of owned lots is adequate to supply its homebuilding operations at current levels for approximately two years. As of December 31 , 2002, on a combined basis, the Master Developer represents that it controlled 13,723 lots, of which 6,110 were owned by the Master Developer.

The Master Developer reports that for the year ended December 31, 2002, on a combined basis it generated 2,607 net new home orders, a 3% increase over the 2,541 net new home orders generated for the year ended December 31, 2001. The dollar amount of its backlog of homes sold but not closed as of December 31, 2002 was reported to be $259.1 million, a 47% increase over the $176.5 million as of December 31, 2001.

The Master Developer is subject to the information reporting requirements of the United States Securities Exchange Act of 1934. Its reports and other filings may be read at the Securities and Exchange Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The site's address is http:/ /www.sec.gov. Investors may request copies of documents filed with the SEC by the Master Developer, by writing or telephoning William Lyon Homes, Inc. as follows: Corporate Secretary, William Lyon Homes, 4490 Von Karman Avenue, Newport Beach, California 92660, telephone (949) 833-3600. The Master Developer's internet address is www.lyonhomes.com. Information provided on such website shall not be deemed to be incorporated by reference into, and shall not be considered a part of, this Official Statement.

Status of Development. As of May 22, 2003, the Development site has been rough graded, the major roadway through the Development, Hassler Parkway, has been paved with several other interior streets completed and paved, model homes are under construction in four (4) of the eight (8) tracts and several holes of the golf course have been completed. Construction work is ongoing.

-21- The homes to be constructed in the Development, and which will be built on the parcels subject to the levy of Special Taxes (the "Taxed Parcels"), will be located in eight (8) different tracts that both surround and are interspersed within the golf course. Each tract is briefly described below. The lot size categories and classifications conform to the Master Developer's product typing. Specific lots sizes vary.

Tract 9164 (Siena and Mariposa). This tract is located in the northwesterly section of the Development site. This tract is expected to have two product types: 61 single-family homes 53 of which will be constructed on small lots of approximately 3,800 square feet and 8 of which will be constructed on 6,000 square foot lots; and 78 duet units on 39 lots (two units per lot that lie side­ by-side sharing a common wall). The single family home product type will be the same for the 3,800 square foot lots and the 6,000 square foot lots. All streets within this tract are expected to be private.

The duet units are arranged in a semi-circular pattern and line both side of Thornbury Lane, a collector street. The units on the easterly side of the street back up to the small-lot, single-family product which have adjoining rear yards. However, the units on the westerly side of the street will be buffered by a strip of open space to the west and, as a result, are afforded more privacy. The duet units in this tract will have three separate floorplans. Average unit size is projected at 2,400 square feet, encompassing 3 or 4 bedrooms and 3 bathrooms. Each unit will have a 2-car garage. Home construction is anticipated to occur in four phases, and construction of the first phase has begun. Pricing is projected to be in the mid- to high- $600,000's. Two model homes are under construction. Sites and roads are graded.

The single-family units in this tract will have three floorplans. Average unit size is projected at 2,400 square feet, encompassing 3 or 4 bedrooms and 2 or 3 bathrooms. Each unit will have a 2-car garage. Pricing is projected to be in the high $600,000's to low $700,000's. Construction on these units is anticipated to occur in three phases, and construction of the first phase has begun.

Tract 9165 (Casa Bella). Immediately south of the duet units in Tract 9164, is the Casa Bella neighborhood. For this tract, a 56-unit townhouse neighborhood is planned on 14 lots. These units are to be constructed on seven "blocks" that are separated by a network of internal private access roads. The townhouses will have four floorplans. Average unit size is projected at 2,400 square feet, priced from the low $600,000's. Each unit will feature 3 or 4 bedrooms and 2-1/2 to 3-1/2 bathrooms and a 2-car garage. Home construction is anticipated to occur in three phases. Roads are in and sites are rough graded. One model is currently under construction.

Tract 9166 (Tesoro). Immediately northeast of the Esperanza tract described below is a planned 22-lot, 44-unit duet subdivision. Oriented around two cul de sacs, this subdivision has an open-space buffer that surrounds the rear of virtually all the lots in the subdivision. Many of the lots will have views. The tract's streets will be private. The site is rough graded but a final map has not yet been recorded. The tract is expected to have homes with three different floorplans that will be built in two phases, commencing in the Fall of 2003. Average unit size is projected at 2,600 square feet. Each unit will contain 4 or 5 bedrooms, 3 or 4 bathrooms, and a 2 car garage. Pricing is projected in the low $700,000's.

Tract 9167 (Esperanza). Immediately east of the Casa Bella townhouse tract is a neighborhood planned for development with 74 single-family detached homes on lots of approximately 5,800 square feet. These lots are to be arranged in blocks that front four private streets. The lots that run along the tract's perimeter to the east, west and south will have rear yards that adjoin open space, affording their occupants an element of privacy. The seven lots of the tract's westernmost interior block are also buffered by a strip of open space located on its west side. The lots of the easterly interior block, however, have adjoining rear yards and have no open space buffer. The site has been graded, but a final map has not yet been recorded. The homes in this tract are expected to have three different floorplans that will be released four phases, with construction of homes expected to commence in the Fall of 2003. The average units

-22- size is projected at 2,600 square feet, encompassing 3 to 5 bedrooms, 3 to 4 baths, and a 3 car garage. The units are expected to be priced in the mid $700,000' s to mid $800,000' s.

Tract 9168 (Montesa). Immediately north of the Esperanza neighborhood, on the north side of the Development's central parkway, a 54-lot subdivision with lots of around 6,000 square feet is planned. It is expected that all but four of the lots in this tract will be placed along public streets in such a way so that all rear yards abut open space buffers. The lots on the subdivision's two westernmost streets face out to the rear-yard buffers of the lots to the east. This tract has been rough graded, but a final map has not yet been recorded, and streets have not yet been improved or dedicated. The subdivision is expected to have three models that will be released in four phases, with construction of homes expected to commence in the Fall of 2003. The average unit size is projected at 2,900 square feet, containing 4 to 5 bedrooms, 3 to 4 bathrooms and a 3 car garage. Pricing is projected in the mid $800,000's to low $900,000's.

Tract 9169 (Hacienda). This subdivision is expected to consist of 33 lots in the range of approximately 12,000 square feet. It lies immediately adjacent and southwest of Tract 9170 described below. All but 10 of the lots are expected to have non-adjoining rear yards buffered by open space. While this tract has predominantly valley views, it's access and topography are such that it has a feeling of a private enclave directly below the golf course clubhouse, above golf course holes 1 through 6. This tract is expected to have public streets, but they have not yet been dedicated or improved. There are expected to be three models and three phases, likely released toward the end of the overall completion of the Development, with construction of homes currently estimated to commence no earlier than late Spring of 2004. Average units size is projected at 4,500 square feet, encompassing 4 to 5 bedrooms, 4 to 5 bathrooms, extras such as den and library and 4 car garages. Pricing is expected to be $1.3 million or more.

Tract 9170 (Portofino and Provence). Located in the center of the Development, the Portofino subdivision is a tract of 44 lots. Each lot is around 10,000 square feet in size. With the exception of five lots located in the tract's western area, each homesite will have a rear yard buffered from its nearest neighbor. This tract features some of the best views in the Development. The tract is planned to have three models that will be released in three phases, with the first phase currently under construction. The average unit size is projected at 4,100 square feet, encompassing 4 or 5 bedrooms, plus den or library, 3-1 I 2 to 4-1 I 2 bathrooms, and a 3 or 4 car garage. Pricing is projected at $1.2 million and above.

Immediately adjacent to the Portofino development and within the same tract is a 47-lot subdivision with lots in the range of 8,000 square feet (Provence), which is a continuation of the development described for Tract 9171 below. Some of the lots within this neighborhood will have open space to the rear. These homes are to be released as the third, fourth and fifth phases of the Provence development, with the construction of homes estimated to commence in Spring of 2004. Average unit size is projected at 3,800 square feet, containing 4 and 5 bedrooms and 3- 1/2 to 4-1 I 2 bathrooms, library and I or den, and a 3-car garage. Pricing is projected from the low $1 million's.

Sites in this tract have been graded to rough graded condition. Streets are completed, models are under construction and construction of the first phase of each of the Portofino and Provence subdivisions has begun. Most lots have either valley or golf course views.

Tract 91 71 (Provence). This tract also is expected to consist of 47 lots in the range of 8,000 square feet. Oriented around five cul de sacs, the subdivision is expected to have ample open space that will also serve as a rear-yard buffer for each lot. These lots will be released in the first, second and sixth phases of the Provence Development's 8,000-square-foot lots. Many of the lots have views to downtown San Jose. Unlike the other tracts in the Development, this tract is located some distance away from the Development's other subdivisions. It also lies immediately south of holes 12-17 of the golf course. The Provence development will have four model homes. Units are the same as those described above for the 8,000 square foot lots in Tract 9170. Home

-23- sites have been graded to rough graded lot condition in this tract. Streets have been completed, models are under construction, and construction of the first phase has begun. No assurance can be given that changes will not occur with respect to product type, location or the composition of the homes to be constructed in any tract described above.

The timing of any construction of homes within any of the tracts described above that has not yet commenced will be subject to market conditions. Although the Master Developer reports that there is significant interest among homebuyers for the pu rchase of homes in the Development, no assurance can be given that such interest will result in home sales, or that the Master Developer's expectation as to the commencement of home construction in any specific tract in the Development as described above will be met. See "BONDOWNER'S RISKS- Land Development" herein.

Financil!� Plan. To date, the Master Developer and its affiliates have expended in excess of $96,000,000 on land acquisition and site development. The Master Developer reports that the budget for the residential portion of the Development for site acquisition, entitlement and infrastructure improvements, including the acquisition of the Development site, construction of streets, bridges, storm drains, sanitary sewer and utilities, and landscaping and environmental mitigation, is slightly over $127,000,000, with an additional $33,000,000 budgeted for in-tract site development costs. The Master Developer has indicated that over $70,000,000 of infrastructure improvements have been completed and paid for, primarily with equity contributions by the Master Developer or from financial entities that own or have interests in the ownership of portions of the Development. Some of the Master Developer's costs for in-tract improvements and construction of residences have been funded through use of the Master Developer's existing revolving lines of credit.

Th e Master Developer estimates that an additional $59,500,000 will be spent completing land development and in-tract improvements. As of May 31, 2003, the land in the Development owned by the Master Developer is subject to deeds of trust securing revolving lines of credit from California Bank and Trust, Guaranty Bank, and RFC Construction Funding Corp. Funds necessary to complete the Development are expected to be derived from a combination of financing sources, including additional equity, additional participation from affiliates, and additional use of secured lines of credit.

Appraisal of Property in the District

In connection with the establishment of the District and the issuance of the Bonds, the City ordered preparation of an appraisal of the properties within the District dated May 31, 2003 (the "Appraisal") by Hulberg & Associates, Inc., San Jose, California (the "Appraiser"). The purpose of the Appraisal was to ascertain the market value of the properties in the District as of April 18, 2003.

The Appraisal estimates the bulk sale value of the lots created by the tentative maps in each neighborhood. The Appraisal includes consideration of the land use approvals granted to date, as well as the infrastructure in place and required, both privately funded and funded by the District. As described above and discussed further in the Appraisal, the tracts vary in status, from raw land with tentative map approvals, to rough graded lots and internal streets and utilities in place. Some of the models in the tracts are under construction. The Appraisal does not reflect the contributory value of any building improvements in place.

The Appraisal does not value the proposed golf course and country club improvements or operations, or the open space and mitigation sites not included in the individual tracts. The Appraisal does consider the value that the proposed amenities would typically contribute to residential land.

The Appraisal does not address the aggregate retail value for the entire Development, or the bulk sale value as if the entire Development were sold to one buyer in a single transaction. It is the opinion of the Appraiser, as expressed in the Appraisal, that the highest and best use of the site is the bulk sale of individual tracts, given the construction and approvals in place.

-24- In considering the values estimated by the Appraisal, it should be noted that the Appraisal is based upon a number of standard and special assumptions which affect the value estimates. The Appraisal specifically lists as a special assumption and limiting condition the assumed completion of the Facilities. The City makes no representation as to the accuracy or completeness of the Appraisal. See APPENDIX D hereto for the complete text of the Appraisal. See also "BONDOWNERS' RISKS."

Appraised Value-to-Burden Ratio

Value to burden ratios have traditionally been used in land-secured bond issues as a measure of the "collateral" supporting the willingness of property owners to pay their special taxes and assessments (and, in effect, their general property taxes as well). The value to burden ratio is mathematically a fraction, the numerator of which is the value of the property (in this case, the fair market value determined by the Appraiser) and the denominator of which is the "burden" of the Special Taxes. The Appraisal determined an estimate of value for each tract of land in the District.

Table 4 below presents the value to burden ratio for each tract within the District, with an allocation of the principal amount of the Bonds to each respective tract based upon the expected number of dwelling units to be constructed in the tract and the maximum annual Special Taxes for each such tract as a percentage of the aggregate maximum annualSpecial Tax for the District. The table does not take into account any direct and overlapping indebtedness that may be applicable to the land in each tract (see "PROPERTY OWNERSHIP - Direct and Overlapping GovernmentOb ligations" below).

Table No. 4 City of San Jose Community Facilities District No. 10 (Hassler - Silver Creek) Maximum Special Tax and Estimated Value-to-Lien Ratios

Percent of Approved Maximum Total Single-family Special Tax Maximum Allocation of Appraised Value-to-Lien Tract Units0l FY 2003-04(2) Special Tax Bond Debt(3l Value<4l Ratio(s) 916416) 139 $231,435 19.89% $2,485,577 $18,000,000 7.24 9165 56 93,240 8.01 1,001,383 7,000,000 6.99 9166 44 73,260 6.29 786,801 2,600,000 3.30 9167 74 156,510 13.45 1,680,893 7,500,000 4.46 9168 54 114,210 9.81 1,226,598 5,500,000 4.48 9169 33 112,695 9.68 1,210,327 9,500,000 7.85 9170(6) 91 257,050 22.09 2,760,678 34,500,000 12.50 9171 47 125,490 10.78 1,347,743 15,500,000 11.50 Totals 538 $1,163,890 100.00 $12,500,000 $100,100,000

(1) Number of single-family units expected pursuant to the Master Developers' development plans. (2) Represents the Maximum Special Tax for the respective tract. (3) Determined by multiplying the initial total principal amount of the Bonds (being $12,500,000) by the percentage of Maximum Special Tax. (4) See APPENDIX D and "SECURITY FOR THE BONDS - Property Values." (5) Appraised Value divided by Allocation of Bond Debt. (6) Maximum Special Tax FY 2003-04 as shown for these Tracts is the sum of the Maximum Annual Special Tax per Taxable Tract for subtracts a and b of these Tracts in Table 2 under the heading "SECURITY FOR THE BONDS - Rate and Method" herein. Sources: Francisco & Associates, Inc. and theAppraiser.

In comparing the aggregate appraised value of the real property within the District and the principal amount of the Bonds, it should be noted that only the real property upon which there is a delinquent Special Tax can be foreclosed upon, and the real property within a tract or the District cannot be foreclosed upon as a whole to pay delinquent Special Taxes of the owners of such parcels within the District unless all of the property in the tract or the District, respectively, is subject to a delinquent Special Tax. In any event, individual parcels may be foreclosed upon to pay delinquent installments of the Special Taxes levied against such parcels.

-25- In addition, a property owner may obtain construction loans in order to complete its development. The deeds of trust securing such debt on the property within the District take a junior position to the lien of the Special Tax.

Other public agencies whose boundaries overlap those of the District could, without the consent of the City and in certain cases without the consent of the owners of the land within the District, impose additional taxes or assessment liens on the land within the District. The purpose would be to finance additional regional or local public improvements or services. The lien created on the land within the District through the levy of such additional taxes or assessments may be on a parity with the lien of the Special Tax.

Direct and Overlapping Governmental Obligations

Overlapping local agencies provide public services within the District, and such agencies have issued general obligation bonds and other types of indebtedness. Direct and overlapping governmental obligations as of May 28, 2003 are shown in the following table:

Table No. 5 City of San Jose Community Facilities District No. 10 (Hassler-Silver Creek)

Direct and Overlapping Governmental Obligations

2002-03 Local Secured Assessed Valuation: $24,719,149

DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable Debt 7 /16/03 Santa Clara County Flood Control and Water Conservation District, Zone W-1 0.016% $ 1, 126 San Jose-Evergreen Community College District 0.034 41,976 East Side Union High School District 0.060 159,558 Evergreen School District 0.281 210,215 City of San Jose 0.029 53,569 City of San Jose Community Facilities District No. 10 100. - (1) Santa Clara Valley Water District Flood Control Benefit Assessment District 0.014 28,514 TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $494,958

OVERLAPPING GENERAL FUND OBLIGATION DEBT: Santa Clara County General Fund Obligations 0.014% $ 84,849 Santa Clara County Board of Education Certificates of Participation 0.014 2,663 San Jose-Evergreen Community College District Certificates of Participation 0.034 4,332 City of San Jose General Fund Obligations 0.036 272,152 TOT AL GROSS OVERLAPPING GENERAL FUND OBLIGATION DEBT $363,996 Less: City of San Jose self-supporting obligations 66,758 TOTAL NET OVERLAPPING GENERAL FUND OBLIGATION DEBT $297,238

GROSS COMBINED TOTAL DEBT $858,954 (2) NET COMBINED TOTAL DEBT $792,196

(1) Excludes Mello-Roos Act bonds to be sold. (2) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and tax allocation bonds and non­ bonded capital lease obligations.

Ratios to 2002-03 Assessed Valuation: Direct Debt...... - % Total Direct and Overlapping Tax and Assessment Debt ...... 2.00% Gross Combined Total Debt ...... 3.47% Net Combined Total Debt ...... 3.20%

STATE SCHOOL BUILDING AID REPAYABLE AS OF 6/30 I 02: $0

Source: California Municipal Statistics, Inc.

-26- Property Tax Status

Property taxes on all of the parcels in the District were paid current through and inclusive of the second installment for the 2002-03 tax year.

BONDOWNERS' RISKS The purchase of the Bonds described in this Official Statement involves a degree of risk that may not be appropriate for some :investors. The following includes a discussion of some of the risks which should be considered before making an investment decision. However, the following does not purport to be an exhaustive listing of risks and other considerations which may be relevant to investing in the Bonds. In addition, the following presentation is in no particular order of importance. Limited Obligation Of the City to Pay Debt Service

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

The Appraisal included in Appendix D hereto estimates the market value of the tracts within the Development in an as-is condition, but assuming that the Special Tax lien and the Facilities are in place. This market value is merely the present opinion of the Appraiser, and is qualified by the Appraiser as stated in the Appraisal. The City has not sought the present opinion of any other appraiser of the value of the tracts within the Development. A different present opinion of such value might be rendered by a different appraiser.

The opinion defines "market value" as "the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus." Consequently, the opinion is of limited use in predicting the selling price at a foreclosure sale, because the sale is forced and the buyer may not have thebenefit of full information.

In addition, the opinion appraises the property based on its highest and best, or most probable use, which must be reasonable, probable and proximate, considering what is physically possible, legally permissible, financially feasible and maximally productive. Thus, it is based upon future facts and circumstances. Differing facts and circumstances may lead to differing opinions of value. The appraised value is not evidence of future value because future facts and circumstances may differ significantly from the present.

No assurance can be given that any of the tracts within the Development could be sold for the estimated value contained in the Appraisal if that property should become delinquent in the payment of Special Taxes and be foreclosed upon. Land Development

A major risk to the Bondholders is that development in the District may be subject to unexpected delays, disruptions and changes which may affect the willingness and ability of the property owners to pay Special Taxes when due. For example, proposed development within the District could be adversely affected by unfavorable economic conditions, competing development projects, an inability of the current owners or future owners of the parcels to obtain financing, fluctuations in the real estate market or interest rates, unexpected increases in development costs, changes in federal, state or local governmental policies relating to the ownership of real estate or the appearance of previously unknown

-27- environmental impacts necessitating preparation of a supplemental environmental impact report and by other similar factors. There can be no assurance that land development operations within the District will not be adversely affected by the factors described above.

In addition, partially developed land is less valuable than developed land and provides less security for the Bonds (and therefore to the owners of the Bonds) should it be necessary for the City to foreclose on undeveloped property due to the nonpayment of Special Taxes. Moreover, failure to complete future development on a timely basis could adversely affect the land values of those parcels which have been completed. Lower land values result in less security for the payment of principal of and interest on the Bonds and lower proceeds from any foreclosure sale necessitated by delinquencies in the payment of the Special Taxes.

The City Council has not evaluated these risks, and further, is not aware of any evaluation of these risks by the Property Owners. Since these are largely business risks of the type that landowners customarily evaluate individually, and inasmuch as changes in land ownership may well mean changes in the evaluation with respect to any particular taxed parcel, the City Council has undertaken financing of the acquisition and construction of the Facilities without regard to any such evaluation, as an incident to the orderly, planned development of the City. Thus, formation of the District by the City Council in no way implies that the City Council has evaluated these risks or the reasonableness of these risks, but to the contrary, the City Council has made no such evaluation and is undertaking acquisition and construction of the Facilities even though such risks may be serious and may ultimately halt or slow the progress of land development and forestall the realization of taxed parcel values.

Other Possible Oaims Upon the Value of Taxable Parcels

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

The table in "THE DISTRICT - Direct and Overlapping Governmental Obligations" states the presently outstanding amount of governmental obligations (with stated exclusions) the tax or assessment for which is or may become an obligation of one or more of the parcels of Taxable Parcels and furthermore states the additional amount of general obligation bonds the tax for which, if and when issued, may become an obligation of one or more of the parcels of Taxable Parcels. The table does not specifically identify which of the governmental obligations are secured by liens on one or more of the parcels of Taxable Parcels.

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

In general, as long as the Special Tax is collected on the county tax roll, the Special Tax and all other taxes, assessments and charges also collected on the tax roll are on a parity. Questions of priority become significant when collection of one or more of the taxes, assessments or charges is sought by some other procedure, such as foreclosure and sale. In the event of proceedings to foreclose for delinquency of Special Taxes securing the Bonds, the Special Tax will be subordinate only to existing prior governmental liens, if any. Otherwise, in the event of such foreclosure proceedings, the Special Taxes will generally be on a parity with the other taxes, assessments and charges. Although the Special Taxes will generally have priority over non-governmental liens on a parcel of Taxable Parcels, regardless of whether the non-governmental liens were in existence at the time of the levy of the Special Tax or not, this result may not apply in the case of bankruptcy. The County operates on a Teeter Plan whereby taxing entities, including the City, receive 100% of its tax levy collected by the County. However, assessments and special taxes are not included in the Teeter Plan.

-28- While governmental taxes, assessments and charges are a common claim against the value of a parcel of Taxable Parcels, other less common claims may be relevant. One of the most serious in terms of the potential reduction in the value that may be realized to pay the Special Tax is a claim with regard to a hazardous substance. See "BONDOWNERS' RISKS - Hazardous Substances" herein.

Disclosure to Future Purchasers

The City has recorded a Notice of the Special Tax Lien in the Office of the Santa Clara County Recorder. While title companies normally refer to such notices in title reports, there can be no guarantee that such reference will be made or, if made, that a prospective purchaser or lender will consider such Special Tax obligation in the purchase of a parcel of land or a home in the District or the lending of money thereon. The Law requires the subdivider (or its agent or representative) of a subdivision to notify a prospective purchaser or long-term lessor of any lot, parcel, or unit subject to a community facility district special tax of the existence and maximum amount of such special tax using a statutorily prescribed form. California Civil Code Section 1102.6b requires that in the case of transfers other than those covered by the above requirement, the seller must at least make a good faith effort to notify the prospective purchaser of the special tax lien in a format prescribed by statute. Failure by an owner of the property to comply with the above requirements, or failure by a purchaser or lessor to consider or understand the nature and existence of the Special Tax, could adversely affect the willingness and ability of the purchaser or lessor to pay the Special Tax when due.

Endangered and Threatened Species

It is illegal to harm or disturb any animals in their habitat that have been listed as an endangered species by the United States Fish & Wildlife Service under the Federal Endangered Species Act or by the California Fish & Game Commission under the California Endangered Species Act without a permit. Thus, the presence of an endangered plant or animal could delay development of vacant property in the District or reduce the value of undeveloped property. Failure to develop the vacant property in the District as planned, or substantial delays in the completion of the planned development of the property may increase the amount of Special Taxes to be paid by the owners of undeveloped property and effect the willingness and ability of the owners of property within the District to pay the Special Taxes when due.

In the course of obtaining land use entitlements for the Development, five "Special Status" species, including endangered species of animals and plants, were identified as occupying or potentially occupying the Development site. These include the Bay Checkerspot Butterfly, the California Tiger Salamander, the Red-legged Frog, the Metcalf Canyon Jewelflower, and the Santa Clara Valley Dudleya. In order to develop the property, a "consultation" between the United States Army Corps of Engineers and the United States Fish and Wildlife Service (the "Service") was conducted under Section 7 of the U.S. Endangered Species Act. A "Biological Opinion" and "Incidental Take Statement" were issued by the Service, allowing the Development to proceed. Modifications to the plan of development and mitigation measures that resulted from these consultations and documents included a reduction of the footprint of the Development, placement of perpetual conservation easements .on lands not needed for the developed portions of the Development, restoration of these lands following completion of the Development, funding of an endowment to provide for the long term management of the conservation easement areas by a third party, and the purchase and preservation of 75 acres of offsite habitat. The offsite habitat has been acquired and preserved, conservation easements have been recorded against the onsite habitat in favor of an entity approved by the Service, and the required restoration process is underway and is now approximately 40% complete. Based on the foregoing, the Master Developer believes that all required mitigation measures will be satisfied and the continued development of the land in the District will proceed as anticipated. See also "THE DISTRICT - Prior Litigation" and "PROPERTY OWNERSHIP" herein.

Hazardous Substances

While governmental taxes, assessments, and charges are a common claim against the value of a taxed parcel, other less common claims may be relevant. One of the most serious in terms of the

-29- potential reduction in the value that may be realized to pay the Special Tax is a claim with regard to hazardous substances. In general, the owners and operators of parcels within the District may be required by law to remedy conditions of the parcels related to the releases or threatened releases of hazardous substances. The federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980, sometimes referred to as "CERCLA" or the "Superfund Act," is the most well­ known and widely applicable of these laws, but California laws with regard to hazardous substances are also stringent and similar. Under many of these laws, the owner (or operator) is obligated to remedy a hazardous substances condition of a property whether or not the owner (or operator) has anything to do with creating or handling the hazardous substance. The effect, therefore, should any parcel within the District be affected by a hazardous substance, would be to reduce the marketability and value of the parcel by the costs of remedying the condition, because the owner is obligated to remedy the condition. Further, such liabilities may arise not simply from the existence of a hazardous substance but from the method of handling it. All of these possibilities could significantly affect the financial and legal ability of a property owner to develop the affected parcel or other parcels, as well as the value of the property that is realizable upon a delinquency and foreclosure.

The Master Developer has provided the City's Disclosure Counsel with a copy of a Phase One Environmental Site Assessment, dated August 6, 1997 and revised on October 2, 1997, of Engeo Incorporated with respect to the property in the Development (the "Phase One Report"). The Phase One Report notes that some minor hazardous material storage was noted on portions of the Development site, and some of the then existing site structures may contain asbestos building materials, but no other contaminated facilities that could be expected to impact the property were identified. The Master Developer has removed the stored materials noted in the Phase One Report.

It should be noted that there is the presence of asbestos which naturally occurs in the soil of the Development site. (The Developer believes that aforementioned Phase One Report did not identify the presence of asbestos because it occurs naturally on the site, and natural materials are not the subject of such environmental reports.) The Master Developer is taking action to mitigate the asbestos so that the Development may proceed.

The appraised values set forth in the Appraisal hereto do not, unless expressly noted, take into account the possible reduction in marketability and value of any of the parcels of Taxable Parcels by reason of the possible liability of the owner (or operator) for the remedy of a hazardous substance condition of the parcel. The City is not aware that the owner (or operator) of any of the taxed parcels has such a current liability with respect to any of the parcels of Taxable Parcels, except as expressly noted. However, it is possible that such liabilities do currenHy exist and that the City is not aware of them. The City has not conducted any independent investigation of the properties within the District.

Further, it is possible that liabilities may arise in the future with respect to any of the parcels of Taxable Parcels resulting from the existence, currently, on the parcel of a substance presently classified as hazardous but which has not been released or the release of which is not presently threatened, or may arise in the future resulting from the existence, currently, on the parcel of a substance not presently classified as hazardous but which may in the future be so classified. Further, such liabilities may arise not simply from the existence of a hazardous substance but from the method of handling it. All of these possibilities could significantly affect the value of a taxed parcel that is realizable upon a delinquency.

Levy and Collection of the SpecialTax

The principal source of payment of principal of and interest on the Bonds is the proceeds of the annual levy and collection of the Special Tax against Taxable Parcels within the District. The annual levy of the Special Tax is subject to the maximum tax rates authorized. The levy cannot be made at a higher rate even if the failure to do so means that the estimated proceeds of the levy and collection of the Special Tax, together with other available funds, will not be sufficient to pay debt service on the Bonds. Other funds which might be available include funds derived from the payment of delinquent special taxes and funds derived from the tax sale or foreclosure and sale of Taxable Parcels on which levies of the Special Tax are delinquent.

-30- The levy of the Special Tax will rarely, if ever, result in a uniform relationship between the value of particular Taxable Parcels and the amount of the levy of the Special Tax against such Taxable Parcels. Thus, there will rarely, if ever, be a uniform relationship between the value of such Taxable Parcels and the proportionate share of Debt Service on the Bonds, and certainly not a direct relationship.

The Special Tax levied in any particular tax year on a Taxable Parcels is based upon the revenue needs and application of the Rate and Method. Application of the Rate and Method will, in turn, be dependent upon certain development factors with respect to each Taxable Parcel by comparison with similar development factors with respect to the other Taxable Parcels within the District. Thus, in addition to annual variations of the revenue needs from the Special Tax, the following are some of the factors which might cause the levy of the Special Tax on any particular Taxable Parcel to vary .from the Special Tax that might otherwise be expected:

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

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

Except as set forth above under "SECURITY FOR THE BONDS - Special Taxes" and "- Rate and Method" herein, the Fiscal Agreement provides that the Special Tax is to be collected in the same manner as ordinary ad valorem property taxes are collected and, except as provided in the special covenant for foreclosure described below and in the Law, is to be subject to the same penalties and the same procedure, sale and lien priority in case of delinquency as is provided for ad valorem property taxes. Pursuant to these procedures, if taxes are unpaid for a period of five years or more, the property is deeded to the State and then is subject to sale by theCounty.

In the event that sales or foreclosures of property are necessary, there could be a delay in payments to owners of the Bonds pending such sales or the prosecution of foreclosure proceedings and receipt by the City of the proceeds of sale if the Reserve Fund is depleted. (See "SECURITY FOR THE BONDS - Proceeds of Foreclosure Sales.")

Exempt Properties

The Law provides that properties or entities of the state, federal or local government ("Public Property") are exempt from the Special Tax; provided, however, that property acquired by a public entity through a negotiated transaction or by gift or devise, which is not otherwise exempt from the Special Tax, will be subject to the Special Tax. It is possible that property in the District will be acquired by a public entity following a tax sale or foreclosure based upon failure to pay taxes, or by gift or dedication. In addition, property in the District could be acquired by a public entity pursuant to the power of eminent domain. Although the Law provides that the Special Tax may be enforced upon the public entity, and in the case of eminent domain, the obligation to pay the Special Tax with respect to that property is to be treated as if it were a special assessment, the constitutionality and operation of these provisions of the Law have not been tested.

Depletion of Reserve Fund

The Reserve Fund is to be maintained at an amount equal to the Reserve Requirement. Funds in the Reserve Fund may be used to pay principal of and interest on the Bonds in the event the proceeds of the levy and collection of the Special Tax against property within the District are insufficient. If funds in the Reserve Fund for the Bonds are depleted, thefunds can be replenished from the proceeds of the levy and collection of the Special Tax that are in excess of the amount required to pay all amounts to be paid

-31- pursuant to the Fiscal Agent Agreement. However, no replenishment from the proceeds of a Special Tax levy can occur as long as the proceeds that are collected from the levy of the Special Tax against property within the District at the maximum tax rates, together with other available funds, remains insufficient to pay all such amounts. Thus it is possible that the Reserve Fund will be depleted and not be replenished by the levy of the Special Tax.

Concentration of Property Ownership

Current ownership of the real property within the District is concentrated among five property owners, four of which are affiliated with the Master Developer. See "PROPERTY OWNERSHIP." Failure of the property owners to pay installments of the Special Tax when due could result in the depletion of the Reserve Fund prior to reimbursement from the resale of foreclosed property or payment of the delinquent Special Tax and, consequently, an insufficiency of Special Tax proceeds to meet obligations under the Fiscal Agent Agreement. In that event, there could be a delay or failure in payments of the principal of and interest on the Bonds.

Bankruptcy Proceedings

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

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

On July 30, 1992, the United States Court of Appeals for the Ninth Circuit issued its opinion in a bankruptcy case entitled In re Glasply Marine Industries. In that case, the court held that ad valorem property taxes levied by Snohomish County in the State of Washington after the date that the property owner filed a petition for bankruptcy were not entitled to priority over a secured creditor with a prior lien on the property. Although the court upheld the priority of unpaid taxes imposed before the bankruptcy petition, unpaid taxes imposed after the filing of the bankruptcy petition were declared to be "administrative expenses" of the bankruptcy estate, payable after all secured creditors. As a result, the secured creditor was able to foreclose on the property and retain all the proceeds of the sale except the amount of the pre-petition taxes.

According to the court's ruling, as administrative expenses, post-petition taxes would have to be paid, assuming that debtor had sufficient assets to do so. In certain circumstances, payment of such administrative expenses may be allowed to be deferred. Once the property is transferred out of the bankruptcy estate (through foreclosure or otherwise) it would at that time become subject to current ad valorem taxes.

On October 22, 1994, the Glasply decision was overturned. Accordingly, it does not apply to bankruptcy petitions filed on or after that date and such bankruptcy petition filing would not prevent the lien for ad valorem property taxes to attach and such lien will be treated as secured. However, any

-32- foreclosure or other collection action will be stayed during the pendency of the bankruptcy in accordance with bankruptcy laws.

Payment of Special Tax not a Personal Obligation of the PropertyOwners

An owner of Taxable Parcels is not personally obligated to pay the Special Tax. Rather, the Special Tax is an obligation only against the parcels of Taxable Parcels. If the value of the parcels of Taxable Parcels is not sufficient, taking into account other obligations also payable thereby to fully secure the Special Tax, the City has no recourse against the owner.

Factors Affecting Parcel Values and Aggregate Value

Geologic, Topographic and Climatic Conditions. The value of the Taxable Parcels in the District in the future can be adversely affected by a variety of additional factors, particularly those which may affect infrastructure and other public improvements and private improvements on the Taxable Parcels and the continued habitability and enjoyment of such private improvements. Such additional factors include, without limitation, geologic conditions such as earthquakes and volcanic eruptions, topographic conditions such as earth movements, landslides and floods and climatic conditions such as droughts and tornadoes. It can be expected that one or more of such conditions may occur and may result in damage to improvements of varying seriousness, that the damage may entail significant repair or replacement costs and that repair or replacement may never occur either because of the cost or because repair or replacement will not facilitate habitability or other use, or because other considerations preclude such repair or replacement. Under any of these circumstances, the value of the Taxable Parcels may well depreciate or disappear.

Seismic Conditions. The City is located in an area of high seismic activity. The active major fault systems in the vicinity are: 1) the San Andreas Fault, 2) the Calaveras Fault, and 3) the Hayward Fault. In addition there are smaller local faults.

The Development is located in a City Geologic Hazard Zone. The Silver Creek Fault is mapped within the northeastern boundary of the Development site, along Silver Creek Road. Silver Creek is designated a Quaternary fault (one that moved between 200 and 2 million years ago), the classification changes to pre-Quaternary" to the north of the subject. The Silver Creek Fault is not zoned by the California Division of Mines and Geology under the provisions of the Alquist-Prioio Special Studies Zones Act of11 1972. The nearest designated Special Studies fault is a short portion of the Evergreen fault, approximately 1.5 miles northeast of the Development. Other potentially active faults mapped within the Development vicinity include the Piercy fault (1 /2 mile southwest), the Quimby fault (2.5 miles northeast) and the Hayward fault (3 miles to the northeast). The Hayward fault is considered capable of causing the strongest ground shaking at the Development site. According to attenuation relationships by Blake (1996), the Hayward fault is capable of producing a maximum earthquake magnitude of 7.0. The active San Andreas fault is mapped about 14 miles to the west. Therefore, strong ground shaking from an earthquake within the design life of the homes being constructed in the Development should be expected.

The area near the Silver Creek fault has the potential for ground rupture. The southwestern slope has a high potential for seismically induced landslides. The northern and eastern slopes of the Development are within a zone having moderate landslide potential. The ridgetop is in a zone with low landslide potential.

The seismic risks to a structure are dependent upon several factors, including: the distance of the structure from the fault, the character of the earthquake, the nature of construction, and the geologic conditions underlying a structure. Ground surface rupture tends to occur along lines of previous faulting, where fault displacement intersects the ground surface. Displacement may either occur suddenly during an earthquake or it may occur slowly as the fault "creeps" over a long period of time. Due to close proximity to the above faults, the District would be subject to strong ground shaking in the event of a large-magnitude earthquake on any of the major faults. The City has experienced earthquakes with a Richter magnitude of 6.0 or greater with an epicenter within the San Francisco Bay

-33- area including the Loma Prieta earthquake on October 17, 1989, which measured 7.1 magnitude. Some potential for ground rupture exists in the District along the potentially active Silver Creek, Coyote Creek and Piercy faults which are adjacent to the area in the District.

According to the Seismic Hazard Zone Map on file with the City, two zones of potential earthquake-induced soil liquefaction are identified along Silver Creek and the entrance to Hellyer Canyon. Liquefaction is a phenomenon in which saturated cohesionless soils are subject to a temporary, but essentially total, loss of shear strength because of pore pressure build-up under the reversing cyclic shear stresses associated with earthquakes.

As discussed in three reports by Engeo Incorporated regarding the Development (Supplemental Geotechnical Review dated September 16, 1998; Addendum to Supplemental Geotechnical Review dated April 28, 1999; and Supplemental Geotechnical Exploration dated November 13, 2000), prior studies identified site soils consisting of silty clay to silty sand underlain by bedrock. No loose saturated sand was found in the borings, including the borings situated within the proposed vehicular bridge crossing at Silver Creek and those along Hellyer Canyon. Based upon the density and fines content of the on-site materials, Engeo Incorporated concluded that the potential for liquefaction of the on-site soils is very low to negligible.

A soils report, including subsurface site exploration completed by a licensed geotechnical engineer, is required by the City before a grading permit is issued for site development. If the site conditions are found to include materials that will affect the development, the geotechnical engineer will provide appropriate mitigation measures that will be incorporated into the design of the structure. General mitigation includes modification of foundation design or building placement in non-liquefiable areas.

Flooding. According to the National Flood Insurance Rate Map, the majority of the parcels in the District are located in Flood Zone D, an area of undetermined but possible flood hazard. There can be no assurances that parcels in this area will not be negatively impacted during periods of unusually heavy rain.

Legal Requirements. Other events which may affect the value of a parcel of Taxable Parcels in the District include changes in the law or application of the law. Such changes may include, without limitation, local growth control initiatives, local utility connection moratoriums and local application of statewide tax and governmental spending limitation measures.

No Acceleration Provisions

The Bonds do not contain a provision allowing for the acceleration of the Bonds in the event of a payment default or other default under the terms of the Bonds or the Fiscal Agent Agreement. Pursuant to the Fiscal Agent Agreement, a bondholder is given the right for the equal benefit and protection of all Bondholders similarly situated to pursue certain remedies described in APPENDIX E - SUMMARY OF THE FISCAL AGENT AGREEMENT. So long as the Bonds are in book-entry form, DTC will be the sole bondholder and will be entitled to exercise all rights and remedies of bondholders.

Loss of Tax Exemption

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

-34- Proposition 218

Under the California Constitution, the power of initiative is reserved to the voters for the purpose of enacting statutes and constitutional amendments. Over the past 18 years, the voters have exercised this power through the adoption of Proposition 13 and similar measures, including Proposition 218 approved in the general election held on November 5, 1996.

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

Proposition 218 added Articles XIIIC and XIIID to the California Constitution, imposing certain vote requirements and other limitations on the imposition of new or increased taxes, assessments and property-related fees and charges. Proposition 218 states that all taxes imposed by local governments will be deemed to be either general taxes or special taxes. Special purpose districts, including assessment districts, have no power to levy general taxes. No local government may impose, extend or increase any general tax unless and until such tax is submitted to the electorate and approved by a majority vote. No local government may impose, extend or increase any special tax unless and until such tax is submitted to the electorate and approved by a two-thirds vote.

Proposition 218 also provides that no tax, assessment, fee or charge will be assessed by any agency upon any parcel of property or upon any person as an incident of property ownership except: (i) the ad valorem property tax imposed pursuant to Article XIII and Article XIIIA of the California Constitution, (ii) any special tax receiving a two-thirds vote pursuant to the California Constitution, and (iii) assessments, fees and charges for property related services as provided in Proposition 218. Proposition 218 then goes on to add voter requirements for assessments and fees and charges imposed as an incident of property ownership, other than fees and charges for sewer, water, and refuse collection services. In addition, all assessments and fees and charges imposed as an incident of property ownership, including sewer, water, and refuse collection services, are subjected to various additional procedures, such as hearings and stricter and more tndividualized benefit requirements and findings. The effect of such new provisions will presumably be to increase the difficulty a local agency will have in imposing, increasing or extending such assessments, fees and charges.

Proposition 218 also provides that the constitutional initiative power will not be prohibited or otherwise limited in matters of reducing or repealing any local taxes, assessments, fees and charges. This provision with respect to the initiative power is not limited to taxes imposed on or after November 6, 1996, the effective date of Proposition 218, and could result in retroactive repeal or reduction in any existing taxes, assessments, fees and charges, subject to overriding federal constitutional principles relating to the impairments of contracts.

The Special Taxes and the Bonds were each authorized by not less than a two-thirds vote of the landowners within the District who constituted thequalified electors of the District at the time of such voted authorization. The City believes, therefore, that issuance of the Bonds does not require the conduct of further proceedings under the Law or Proposition 218.

Like its antecedents, Proposition 218 is likely to undergo both judicial and legislative scrutiny before its impact on the City and its obligations can be determined. Certain provisions of Proposition 218 may be examined by the courts for their constitutionality under both State and federal constitutional law. The City is not able to predict the outcome of any such examination.

The foregoing discussion of Proposition 218 should not be considered an exhaustive or authoritative treatment of the issues. The City does not expect to be in a position to control the consideration or disposition of these issues and cannot predict the timing or outcome of any judicial or legislative activity in this regard. Interim rulings, final decisions, legislative proposals and legislative enactments may all affect the impact of Proposition 218 on the Bonds as well as the market for the

-35- Bonds. Legislative and court calendar delays and other factors may prolong any uncertainty regarding the effects of Proposition 218.

Limitations on Remedies

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

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

Limited Secondary Market

There can be no guarantee that there will be a secondary market for the Bonds or, if a secondary market exists, that such Bonds can be sold for any particular price. Although the City and the Master Developer each has committed to provide certain statutorily-required financial and operating information, there can be no assurance that such information will be available to Bondowners on a timely basis. See "CONTINUING DISCLOSURE." The failure to provide the required annual financial information does not give rise to monetary damages but merely an action for specific performance. Occasionally, because of general market conditions, lack of current information, or because of adverse history or economic prospects connected with a particular issue, secondary marketing practices in connection with a particular issue are suspended or terminated. Additionally, prices of issues for which a market is being made will depend upon then prevailing circumstances. Such prices could be substantially different from the original purchase price.

FDIC/Federal Government Interests in Properties

The ability of the City to foreclose the lien of delinquent unpaid Special Tax installments may be limited with regard to properties in which the Federal Deposit Insurance Corporation (the "FDIC") has an interest. In the event that any financial institution making any loan which is secured by real property within the District is taken over by the FDIC, and prior thereto or thereafter the loan or loans go into default, then the ability of the City to collect interest and penalties specified by State law and to foreclose the lien of delinquent unpaid Special Taxes may be limited.

The FDIC' s policy statement regarding the payment of state and local real property taxes (the "Policy Statement") provides that property owned by the FDIC is subject to state and local real property taxes only if those taxes are assessed according to the property's value, and that the FDIC is immune from real property taxes assessed on any basis other than property value. According to the Policy Statement, the FDIC will pay its property tax obligations when they become due and payable and will pay claims for delinquent property taxes as promptly as is consistent with sound business practice and the orderly administration of the institution's affairs, unless abandonment of the FDIC's interest in the property is appropriate. The FDIC will pay claims for interest on delinquent property taxes owed at the rate provided under state law, to the extent the interest payment obligation is secured by a valid lien. The FDIC will not pay any amounts in the nature of fines or penalties and will not pay nor recognize liens for such amounts. If any property taxes (including interest) on FDIC-owned property are secured by a valid lien (in effect before the property became owned by the FDIC), the FDIC will pay those claims. The Policy Statement further provides that no property of the FDIC is subject to levy, attachment, garnishment, foreclosure or sale without the FDIC's consent. In addition, the FDIC will not permit a lien or security interest held by the FDIC to be eliminated by foreclosure without the FDIC's consent.

-36- The Policy Statement states that the FDIC generally will not pay non-ad valorem taxes, including special assessments, on property in which it has a fee interest unless the amount of tax is fixed at the time that the FDIC acquires its fee interest in the property, nor will it recognize the validity of any lien to the extent it purports to secure the payment of any such amounts. Special taxes imposed under the Law and a special tax formula which determines the special tax due each year are specifically identified in the Policy Statement as being imposed each year and therefore covered by the FDIC's federal immunity.

The United States Court of Appeals for the Ninth Circuit has recently issued an opinion regarding claims filed by the FDIC in the Orange County, California Chapter 9 bankruptcy proceedings seeking refunds of real property tax penalties for properties which were the subject of FDIC receiverships (In re: County of Orange Debtor, Federal Deposit Insurance Corporation, Appellant­ Cross-Appellee v. County of Orange, Appellee-Cross-Appellant, 262 F.3d 1014). The court affirmed a decision of the Bankruptcy Appellate Panel that the FDIC could not avoid pre-receivership liens for these penalties but that the FDIC is not liable for penalties that are not secured by liens both before and after the receivership or for post-receivership special taxes levied pursuant to the Act. This opinion is binding on federal courts in California. The Policy Statement is consistent with this opinion.

The City is unable to predict what effect the application of the Policy Statement would have in the event of a delinquency in the payment of Special Taxes on a parcel within the District in which the FDIC has or obtains an interest, although prohibiting the lien of the FDIC to be foreclosed out at a judicial foreclosure sale could reduce or eliminate the number of persons willing to purchase a parcel at a foreclosure sale.

Forward Looking Statements

Certain statements included or incorporated by reference in this Official Statement constitute "forward-looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended. Such statements are generally identifiable by the terminology used such as a "plan," "expect," "estimate," "project," "budget" or similar words. Such forward-looking statements include, but are not limited to certain statements contained in the information under the captions "THE DISTRICT" and "PROPERTY OWNERSHIP."

The achievement of certain results or other expectations contained in such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Neither the District nor the City plans to issue any updates or revisions to the forward-looking statements set forth in this Official Statement.

CONTINUING DISCLOSURE

City Continuing Disclosure Obligation

The City has covenanted for the benefit of holders and beneficial owners of the Bonds to provide certain financial information and operating data relating to the District and the Bonds by not later than 180 days after the end of City's fiscal year, commencing with the 2002-03 fiscal year (the "City Annual Report"), and to provide notices of the occurrence of certain enumerated events, if material.

The City Annual Report and any notice of a material event will be filed by the Fiscal Agent, acting as dissemination agent, with each Nationally Recognized Municipal Securities Information Repository, and with the appropriate State depository, if any (the "Repositories"). The specific nature of the information to be contained in the City Annual Report or any notice of a material event is set forth in the City Continuing Disclosure Certificate, the form of which is set forth in APPENDIX F - FORM OF CITY CONTINUING DISCLOSURE CERTIFICATE (the "City Continuing Disclosure

-37- Certificate"). The covenants of the City in the City Continuing Disclosure Certificate have been made in order to assist the Underwriter in complying with Securities and Exchange Commission Rule 15c2- 12(b)(5); provided however a default under the City Continuing Disclosure Certificate will not, in itself, constitute a default under the Fiscal Agent Agreement, and the sole remedy under the City Continuing Disclosure Certificate in the event of any failure of the City or the Dissemination Agent to comply with the City Continuing Disclosure Certificate will be an action to compel specific performance. The City has never failed to comply, in all material respects, with an undertaking under the Rule. However, in a number of instances the City did not file reports with a dissemination agent by the date required for the City to make such filings under the terms of the applicable continuing disclosure agreements, but the reports were filed with the dissemination agent prior to the date on which the information was due to be filed with the Repositories. In such instances, the dissemination agent, in turn, failed to timely disseminate the information in accordance with the requirements of these prior continuing disclosure agreements.

Landowner Continuing Disclosure Obligation

The Master Developer, as one of the owners of property in the District and on behalf of certain "affiliated" entities that own property in the District, has covenanted for the benefit of holders and beneficial owners of the Bonds to annually provide certain information the "Property Owner Annual Report" relating to property within the District which is owned by the Master Developer or any entity for which it acts as manager member or is otherwise affiliated as described in further detail in the Continuing Disclosure Certificate - Landowner discussed below, by not later than the date which is four months after the end of the Master Developer's fiscal year, and to provide notices of the occurrence of certain enumerated events, but only until the earlier of (a) the legal defeasance, prior redemption or payment in full of all the Bonds, (b) the date on which the Master Developer and its affiliates own, in the aggregate, land in the District on which less than twenty percent (20%) of the aggregate Special Taxes most recently levied in the District were apportioned, (c) the date on which all Special Taxes on the property owned by the Master Developer and its affiliates are paid or prepaid in full (as evidenced by the recording of a Notice of Cancellation of Special Tax Lien by the City with respect to such property), and (d) the date on which the Master Developer delivers to the City and the Dissemination Agent an opinion of bond counsel acceptable to the City to the effect that the continuing disclosure provided for in the Continuing Disclosure Certificate - Landowner is no longer required under the Rule to allow the Participating Underwriter to deal in the Bonds. The Property Owner Annual Report and any notice of a material event will be filed by the Dissemination Agent on behalf of the Master Developer and its affiliates with the Repositories. The specific nature of the information to be contained in the Property Owner Annual Report or the notices of material events is set forth in the Continuing Disclosure Certificate - Landowner, the form of which is set forth in APPENDIX G - FORM OF CONTINUING DISCLOSURE CERTIFICATE - LANDOWNER. The covenants contained in the Continuing Disclosure Certificate - Landowner have been made in order to assist the Underwriter in complying with the Rule; provided however a default under the Continuing Disclosure Certificate - Landowner will not, in itself, constitute a default under the Fiscal Agent Agreement, and the sole remedy under the Continuing Disclosure Certificate - Landowner in the event of any failure of the Master Developer or the Dissemination Agent to comply with the Continuing Disclosure Certificate - Landowner will be an action to compel specific performance.

The Master Developer has also agreed in the Continuing Disclosure Certificate - Landowner to provide certain limited information in mid-year reports. See APPENDIX G - FORM OF CONTINUING DISCLOSURE CERTIFICATE - LANDOWNER. The Master Developer has informed the City that it has not failed to comply in all material respects with any previous undertaking under Securities and Exchange Commission Rule 15c2-12(b)(5). The City has no responsibility or obligation whatsoever with respect to the enforcement of the Continuing Disclosure Certificate - Landowner, or for any information provided thereunder.

-38- LEGAL MATTERS

Legal Opinion

The legal opinion of Quint & Thimmig LLP, San Francisco, California, Bond Counsel, approving the validity of the Bonds will be made available to purchasers at the time of original delivery and is attached hereto as Exhibit H. The City Attorney, and Quint & Thimmig LLP, acting as Disclosure Counsel to the City, will pass upon certain legal matters for the City and the District. Payment of the fees and expenses of Bond Counsel and Disclosure Counsel is contingent upon the sale and delivery of the Bonds.

Tax Exemption

In the opinion of Quint & Thimmig LLP, San Francisco, California, Bond Counsel, subject, however to the qualifications set forth below, under existing law, the interest on the Bonds is excluded from gross income for federal income tax purposes and such interest is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, provided, however, that, for the purpose of computing the alternative minimum tax imposed on corporations (as defined for federal income tax purposes), such interest is taken into account in determining certain income and earnings.

The opinions set forth in the preceding paragraph are subject to the condition that the City comply with all requirements of the Internal Revenue Code of 1986 (the "Code") that must be satisfied subsequent to the issuance of the Bonds in order that such interest be, or continue to be, excluded from gross income for federal income tax purposes. The City has covenanted to comply with each such requirement. Failure to comply with certain of such requirements may cause the inclusion of such interest in gross income for federal income tax purposes to be retroactive to the date of issuance of the Bonds.

In the further opinion of Bond Counsel, interest on the Bonds is exempt from California personal income taxes.

Owners of the Bonds should also be aware that the ownership or disposition of, or the accrual or receipt of interest on, the Bonds may have federal or state tax consequences other than as described above. Bond Counsel expresses no opinion regarding any federal or state tax consequences arising with respect to the Bonds other than as expressly described above.

No Litigation

There is no action, suit, or proceeding which has been served upon the City and is known by the City to be pending or threatened at the present time restraining or enjoining the delivery of the Bonds or the collection of Special Taxes levied by the City in the District or in any way contesting or affecting the validity of the Bonds, the Fiscal Agent Agreement, or any proceedings of the City taken with respect to the execution or delivery thereof.

NO RATINGS

The Bonds have not been rated by any securities ratingagency.

FINANCIAL ADVISOR

Kelling, Northcross & Nobriga, A Division of Zions First National Bank, Oakland, California, has served as Financial Advisor to the City with respect to the sale of the Bonds. The Financial Advisor has assisted in various matters relating to the planning, structuring and issuance of the Bonds. The Financial Advisor has not independently verified any of the data contained in this Official Statement or

-39- conducted a detailed investigation of the affairs of the City to determine the accuracy or completeness of this Official Statement. Because of its limited participation, the Financial Advisor assumes no responsibility for the accuracy or completeness of any of the information contained in this Official Statement.

UNDERWRITING

The Bonds were purchased at a competitive bid sale on July 10, 2003 by Citigroup Global Markets Inc. (the "Underwriter"). The Underwriter has agreed to purchase the Bonds from the City at the purchase price of $12,250,000.00 (represents the $12,500,000.00 initial aggregate principal amount of the Bonds, less an underwriter's discount of $233,817.15 and less an original issue discount of $16,182.85). The Underwriter is committed to purchase all (but not less than all) of the Bonds.

The Underwriter intends to offer the Bonds to the public at the offering prices set forth on the cover page of this Official Statement. The Underwriter may offer and sell to certain dealers and others at a price lower than the offering prices stated on the cover page hereof. The offering price may be changed from time to time by the Underwriter.

PROFESSIONAL FEES

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

• Citigroup Global Markets Inc., as Underwriter;

• Quint & Thimmig LLP, as Bond Counsel and Disclosure Counsel;

• Kelling, Northcross & Nobriga, A Division of Zions First National Bank, as Financial Advisor; and

• U.S. Bank National Association, as Fiscal Agent for the Bonds.

-40- MISCELLANEOUS

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

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

All information contained in this Official Statement pertaining to the City has been furnished by the City and the execution and delivery of this Official Statement has been duly authorized by the City.

CITYOF SAN JOSE

By: Is Scott P. Johnson I Director of Finance

By: Isl KatyAllen Director of Public Works

-41- CITY OF SANJOS� CA PITAL Of SILICON VA LLEY APPENDIX A THE CITY OF SAN JOSE: ECONOMIC AND FINANCIAL INFORMATION

The fo llowing information regarding the City and the surrounding area is presented as general background data. The Bonds are payable solely from thesou rces described haein (see "SECURITY FOR THE BONDS"). Neither the fa ith and credit nor the taxing power of the City of San Jose, the County of Santa Clara, the State of California or any political subdivision thereof is pledged to the payment of the Bonds. See the information under the caption "THE BONDS."

General Description

The City of San Jose (the "City") is the eleventh largest city in the United States and the third largest city in California with a January 1, 2003, population estimated at 925,000, according to the California Department of Finance. The territory of the City encompasses approximately 176.6 square miles. Located at the southernend 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 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 more recent national economic slowdown and the retraction in the telecommunications and technology industries have caused a decline in economic activity in the City.

Form of Government

Under the California Constitution, charter cities are generally independent of the State legislature in matters relating to municipal affairs. The City was incorporated on March 27, 1850 and operates as a charter city, having had its first charter granted by the State in 1897. In 1916, another charter was adopted enabling the City to institute the council-manager form of government, making it one of the first cities in the nation to take this step. The present charter became effective on May 4, 1965.

San Jose is governed by the City Council. TheCity Council consists of a Mayor and ten other council members. 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 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, Independent Police Auditor, and the Redevelopment Agency (the "Agency"). The officials heading these offices are appointed by and carry out the policies set forth by the City Council (and for the Agency, by the Agency Board).

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 environmental health enforcement, recreational and cultural activities, public improvements, planning, zoning and general administrative services.

Economic and Demographic Information

Introduction

The economic and demographic 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

A-1 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. 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, 2002 and 2003.

Table 1 CITY, COUNTY AND STATE POPULATION STATISTICS City of San County of State of Jose Santa Oara 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 ...... 903,800 1,697,800 34,385,000 2002 ...... 918,000 1,719,600 35,037,000 2003 ...... 925,000 1,729,900 35,591,000

So11rcc: U.S. Ce11s11s (1960-2000), California Dpartmcnt of Finance (2001-2003).

Employment

Table 2 below sets forth employment figures for the City and the County and unemployment rates for the City, the State and the United States. Data for the City, the County and the State are not seasonally adjusted. The City's unemployment rate has risen sharply since 2000 as a result of the retraction in the communications and high technology industries that dominate the City's employment base.

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

Civilian Labor Force (in thousands) 1998 1999 2000 2001 2002 2003 (I) City of San Jose Employed ...... 469 473 496 485 444 425 Unemployed ...... 19 18 12 27 48 44 Total ...... 488 491 508 512 492 469 County of Santa Clara Employed ...... 928 936 982 960 879 842 Unemployed ...... 31 29 20 46 81 73 Total ...... 959 965 1,002 1,006 960 915 Unemployment Rates City ...... 3.8% 3.6% 2.3% 5.4% 9.8% 9.4% County ...... 3.2 3.0 2.0 4.6 8.4 8.0 State ...... 5.9 5.2 4.9 5.4 6.6 6.6 United States ...... 4.5 4.2 4.0 4.7 5.8 6.4 iiiCity data is preliminary as of May 2003, County and State data as of May 2003 and US data as of June 2003. Sources: Cal(forniaEmplo yment Development Department, Labor Market Jnfonnation Division; U.S. Department of Labor. Bureau of Labor Statistics.

A-2 The City occupies the geographic center of Silicon Valley. Most of the industrial land available for development in the County lies within City limits. The City economy is diversified in high technology industry 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 retractions in employment since 2000 and continuing through today.

Table 3 shows the fifteen largest employers in San Jose, estimated as of July 2002, ranked by the number of their employees.

Table 3 MAJOR SAN JOSE EMPLOYERS Number of Com.pany/Orpn'Atlon Typeof Inclultry Bmployees 1. . Santa Clara County Government 15,900 2. Cisco Systems Computer Equipment 13,500 3. IBM Corporation Computer Equipment 8,550 4. City of San Jose Government 6,600 5. San Jose State University Education 5,760 6. Agilent Technologies Communications I Life Sciences 3,750 7. San Jose Unified School District Education 3,360 8. Hitachi Storage Software 2,900 9. Sanmina-SCI Circuit Board Manufacturers 2,240 10. Seagate Technology Computer Equipment 2,100 11. Adobe Systems Inc. Computer Software 2,000 12. Good Samaritan Health System Health Care 1,850 13. KLA Tencor Instruments Optical Inspection 1,850 14. Novellus Systems Semiconductor Equipment 1,780 15. Cadence Design Systems Inc. Computer Software 1,760 Source: City ofSan Jose Office of Economic Development.

"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 contribution. Table 4 shows the top ten metropolitan markets (as defined by Sales and Market Management Magazine) in median EBI for 2001, among which the San Jose Metropolitan Area ranked first.

A-3 Table 4 2001 TOP TEN METROPOLITAN AREAS MEDIAN HOUSEHOLD EFFECTIVE BUYING INCOME

San Jose ...... $67,504 Bridgeport-Stamford-Norwalk-Danbury ...... 65,033 Middlesex-Somerset-Hunterdon ...... 58,635 Anchorage ...... 58,342 San Francisco ...... 57,494 Nassau-Suffolk ...... 56,280 Seattle-Bellevue-Everett...... 56,057 Oakland ...... 55,273 Washington ...... 55,163 Santa Cruz - Watsonville ...... 53,459

U.S. Median ...... $38,365

Source: Sales & Marketing Management Magazine "2001 Sr1rvc11 of Bin1i11g Power", p11blished September 2002.

Retail Sales

Table 6 sets forth a history of taxable sales for the City from 1998 through June 2002. When comparing taxable sales in first and second quarter 2001 (not shown) to first and second quarter 2002, it appears that taxable sales are tracking at a declining rate of approximately 18%. This decline is a result of the continued retraction in high technology industries and sustained low consumer confidence.

Table 5 CITY OF SAN JOSE TAXABLE SALES (i n thousands)

1998 1999 2000 2001 2002 (I) Apparel stores ...... $ 261 ,962 $ 277,068 $ 318,569 $ 334,087 $ 154.483 General merchandise stores 1,106,393 1,171,342 1,272,43 1 1,213,970 515,072 Food stores ...... 359,640 379,619 408,354 417,95 1 197,590 Eating and drinking establishments ...... 746,376 797,736 892,796 896,298 440,091 Home furnishings and appliances ...... 329,625 369,109 423,728 376,544 164,700 Building materials and farm implements ...... 582,593 622,043 728,725 726,447 356,337 Auto dealers and auto supplies ...... 1,333,336 1,497,093 1,779,967 1,582,391 711,15 6 Service stations...... 436,628 601,391 782,781 763,075 310,063 Other retail stores ...... 1,345,824 1,589,478 1,879,859 1,617, 105 675,445 Retail Stores Total...... $6,502,377 $7,304,879 $8,487,2 10 $7,927,868 $3,524,937 All other outlets 3,682,589 4,012,234 5,123,559 4,426,922 1,701 ,724 TOTAL ALL OUTLETS .... $10,184,966 $11,317, 113 $13,610,769 $12,354,790 $5,226,661 m ThroughJune 30, 2002. Source: California State Board of Equalization.

A-4 Construction Activity

A five-year history of construction valuation and new dwelling units appears in Table 6 below.

Table 6 CITY OF SAN JOSE CONSTRUCTION VALUATION AND NEW DWELLING UNITS (valuation in thousa11ds) 1999 2000 2001 2002 2003 Valuation:(!) Residential ...... $ 582,000 $ 600,000 $ 513,000 $ 420,779 $ 541,114 Non- 768,000 778,000 1,178,000 573,516 383,560 Residential ...... TOTAL $1,350,000 $1,378,000 $1,691,000 $994,295 $924,674 New Dwelling Units: Single Family .... 1,838 1,302 1,053 604 577 Multi-Family ..... 1,783 3,169 3,053 2,374 2,934

TOTAL 3,621 4,471 4,106 2,978 3,511 ( 11 Valuation figuresexcept 2003, including new construction and alterations, are adjusted to 2001 dollars (SJ-SF-OAK CPI). Source: Citv ofSan Jose Department ofPla nning. Building and Code Enforcement. Building Division.

Education

For the school year 2002-2003, there were an estimated 250,435 students enrolled in the County's 246 elementary schools, 58 middle schools and junior high schools, 43 high schools, 40 community, alternative, special education, continuation and juvenile hall schools, and 7 charter schools. In addition, there are a number of private schools serving the residents of the County. The County has seven community colleges.

The City is served by approximately 11 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 2002-2003 of 32,612 and the East Side Union High School District with an estimated enrollment of 24,409. Major universities in the County include Stanford University, Santa Clara University, and San Jose State University.

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, $1.8 billion has been invested by the State and the County to expand and improve the area freeway system.

. A light rail transit system, connecting the northern and southern areas of the City, opened in 1989. During 1999 the light rail line was expanded towards the North to serve the cities of Santa Clara, Sunnyvale, and Mountain View. Adding to theexisting 30.5-mile light rail system, several expansions to the system are under construction and planned for completion within three years. In particular, service along the 6.4-mile Tasman East/Capitol Light Rail Extension from the I-880/Milpitas station in

A-5 Milpitas to east San Jos is anticipated to begin in the Summer of 2004. Also, the 5.3-mile Vasona Light Rail Extension is anticipated to begin service between Downtown San Jos and Downtown Campbell in January 2006. Both projects are funded by a nine-year, half-cent sales tax approved by voters of Santa Clara County in 1996. Pending additional funding, a second phase of the Vasona Light Rail Extension would add 1.5 miles of trackway and provide service into Los Gatos.

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 extension of the Bay Area Rapid Transit (BART) system to the City. BART is a heavy rail 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.

During fiscal year 2001-02, the Airport served 5,832,481 enplaned passengers and accommodated approximately 224,344 operations (takeoffs and landings). According to information published in 2003 by the Airports Council International - North America ("ACI-NA"), in calendar year 2002 the Airport was the 36th busiest airport in North America in terms of total passengers and the 37th busiest in terms of total cargo.

The City has a foreign trade zone that is located near the Airport in an approximately 374-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.

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.

Table 7 sets forth a ten-year history of the City's assessed valuation.

Table 7 CITY OF SAN JOSE ASSESSED VALUE OF PROPERTY (in th ousands) Gross Asaeaaed. Valaatlon 1993-94 ...... 46,361,472 4.72 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

Source: Department of Finance, Co untv of Santa Clara.

A-6 Property tax receipts collected for the City by the County are set forth in Table 8. The County operates on a Teeter Plan whereby taxing entities, including the City, receives 100% of its tax levy collected by the County, excluding special taxes and assessments.

Table 8 CITY OF SAN JOSE PROPERTY TAX RECEIPTS (in thousands) Property Percentage of Tax General Fund Fiscal Year Receipts Revenues 1999-00 71,971 13.7 2000-01 80,694 13.5 2001-02 88,286 15.1 2002-03 (Modified Budget as of March 31, 2003) 91,444 16.6 2003-04 (Adopted Operating Budget 2003-04 as of June 17, 2003) 92,438 16.7 Sources: Annual Report, City Manager 's Ojj ice, fo r FY 1999-00 to FY2001-02; Proposed Operating Budget 2003-04.for FY 2002-03; Citv Manaaer 's Office for FY 2003-04.

A-7 CITY OF SANJOSE C:Arrr AL Of Sf LICON VALLEY APPENDIX B

RATE AND METHOD OF APPORTIONMENT OF SPECIAL TAX

A Special Tax shall be levied on all Taxable Parcels within Community Facilities District No. 10 (Hassler - Silver Creek) (the "CFD"), and collected according to the Rate and Method of Apportionment of Special Taxes described herein.

All Annual Special Tax Requirements shall be collected by the Santa Clara County Auditor's office by means of inclusion on the annual ad-valorem property tax billings or in such other manner (including by means of direct billing of the affected Property Owners) as the City Council or its designee shall determine.

DEFINITIONS Act: Means the San Jose City Charter and Chapter 14.27 of the San Jose Municipal Code, which incorporates and modifies the Mello-Roos Community Facilities Act of 1982, as amended.

Annual Administrative Cost: Means the following actual or reasonably estimated costs directly related to the administration of the CFD, as determined by the Finance Director of the City or its designee: the costs of computing the Special Taxes and preparing the annual Special Tax collection schedules (whether by the City or designees thereof or both); the costs of collection of the Special Taxes (whether by the County or otherwise); the costs of remitting the Special Taxes to the Fiscal Agent; the costs of the Fiscal Agent (including its legal counsel) in the discharge of the duties required of it under the Fiscal Agent Agreement; the costs to the City, the CFO, or any designees thereof of complying with arbitrage rebate requirements, including without limitation, rebate liability costs and periodic rebate calculations; the costs to the City, the CFO, or obligated persons of complying with disclosure requirements associated with applicable federal and state securities laws and of the Act; the costs of any State reporting requirements; the costs associated with preparing Special Tax disclosure statements and responding to public inquiries regarding theSpecial Taxes; the costs of the City, the CFO, or any designee thereof related to an appeal of the Special Tax; and the City's annual administration fees and third party expenses. Administrative costs shall also include amounts estimated or advanced by the City or the CFO for any other administrative purposes of the CFO, including attorney's fees and other costs related to commencing and pursuing to completion any foreclosure of delinquent Special Taxes.

Annual Special Tax Requirement: Means the amount necessary in any Fiscal Year to (i) pay principal and interest on the Bonds due in the Calendar Year which commences in such Fiscal Year, (ii) to create or replenish reserve funds, (iii) to cure any delinquencies in the payment of principal or interest on indebtedness of the CFO which have occurred in the prior Fiscal Year (based on delinquencies in the payment of Special Taxes which have already taken place) or are expected to occur in the Fiscal Year in which the Special Tax will be collected, {iv) to pay Annual Administrative Costs of the CFO, and (v) make credits from available monies from sources identified in the Fiscal Agent Agreement, such as, without limitation to, excess interest earningsin the reserve fund.

Assessor Parcel: Means the Assessor Parcel referenced by the Assessor parcel number assigned by the Santa Clara County Assessor's office for each Taxable Parcel or for the Taxable Tract as the case may be, within the boundaries of theCFO.

Bonds: Means any bonds or otherindebtedness of the CFO issued under the Act.

B-1 Calendar Year: Means January 1 through December 31.

City: Means the City of San Jose.

City Council: Means the City Council of the City, in its capacity, as legislative body of the CFD.

CFD: Means the City of San Jose Community Facilities District No. 10 (Hassler - Silver Creek).

Exempt Parcels: Means all parcels: (1) owned or proposed to be owned by the State, Federal or other governmental entity, including, but not limited to, any parcel or portion thereof dedicated to or proposed to be dedicated to a public agency for right-of-way, open space, green belts, easements, etc., or {2) used or proposed to be used for a golf course, or (3) owned or proposed to be owned by a home owners association.

Facilities: Means the facilities the District is authorized to fund.

Fiscal Agent: Means the fiscal agent or trustee under the Fiscal Agent Agreement.

Fiscal Agent Agreement: Means the indenture, fiscal agent agreement, resolution or other instrument pursuant to which Bonds are issued, as modified, amended and I or supplemented from time to time, and any instrument replacing or supplementing the same.

Fiscal Year: Means the period starting on July 1 and ending the following June 30.

Maximum Annual Special Tax per Taxable Parcel: Means the Maximum Annual Special Tax per Taxable Parcel as shown in Table No. 1 below.

Table No. 1 Maximum Annual Special Tax Per Taxable Parcel

Maximum Annual Special Tax No. of Taxable per Taxable Taxable Tract Parcel Parcels 9164a $1,665 78 9164b $1,665 61 9165 $1,665 56 9166 $1,665 44 9167 $2,115 74 9168 $2,115 54 9169 $3,415 33 9170a $2,670 47 9170b $2,990 44 9171 $2,670 47

Maximum Annual Special Tax per Taxable Tract: Means the Maximum Annual Special Tax per Taxable Tract as shown in Table No. 2 below. The location of each Taxable Tract is referenced on the map entitled "Proposed Boundaries of Community Facilities District No. 10 (Hassler - Silver Creek)", which is on file in the office of the City of SanJose City Clerk.

B-2 Table No. 2 Maximum Annual Special Tax Per Taxable Tract

Maximum Annual Taxable Special Tax per Tract Taxable Tract 9164a $129,870 9164b $101,565 9165 $93,240 9166 $73,260 9167 $156,510 9168 $114,210 9169 $112,695 9170a $125,490 9170b $131,560 9171 $125,490 $1,163,890

Property Owner: The Property Owner as shown on the records in the Santa Clara County Assessor's office for a Taxable Parcel, or if more accurate and updated information is known then that information would supercede the records in the Santa Clara County Assessor's office.

Special Tax: The annual amount of tax each Taxable Parcel pays based upon the Rate and Method of Apportionment of Special Taxes. Taxable Parcel: Means an Assessor Parcel within the boundaries of the CFO that is not classified as an Exempt Parcel.

Taxable Tract: Means the following Taxable Tracts; 9164 (consists of 9164a and 9164b), 9165, 9166, 9167, 9168, 9169, 9170 (consists of 9170a and 9170b) and 9171. In the event that one of these Taxable Tracts is renumbered or redrawn the renumbered or redrawn tract will supercede the previous Taxable Tract and become a new Taxable Tract. ASSIGNMENT OF SPECIAL TAXES

The Special Taxes will be assigned to all Taxable Parcels based upon the Calculation of Special Taxes described below.

CALCULATION OF SPECIAL TAXES

1) Each year on July 1 determine theArmual Special Tax Requirement for the current Fiscal Year.

2) Each year on July 1 prorate the Armual Special Tax Requirement identified in Step No. 1 above to each Taxable Tract within the boundaries of the CFO up to their . respective Maximum Annual Special Tax per Taxable Tract.

B-3 3) Each Year on July 1 determine which Taxable Tracts have subdivided into individual Taxable Parcels.

4) For each Taxable Tract that has been subdivided into Taxable Parcels, pro-rate the Annual Special Tax Requirement calculated in Step No. 2 above to each Taxable Parcel located within the respective Taxable Tract equally up to the Maximum Annual Special Tax per Taxable Parcel as specified in Table No. 1.

5) If a Taxable Tract has not subdivided into Taxable Parcels then the Annual Special Tax Requirement for the Taxable Tract as calculated in Step No. 2 above will be levied upon the underlying Assessor Parcel(s) representing the Taxable Tract.

The Annual Special Tax Requirement for each Taxable Parcel may not exceed the Maximum Annual Special Tax per Taxable Parcel and under no circumstances will the Special Tax levied against any Assessor's Parcel used for private residential purposes be increased by more than ten percent as a consequence of delinquency or default by the owner of any other parcel within the District.

SAMPLE CALCULATION OF SPECIAL TAXES

Assume that the Annual Special Tax Requirement for Fiscal Year 2003-04 is $1,050,600.

1) Each Taxable Tract's proportionate share of the Fiscal Year 2003-04 Annual Special Tax Requirement ($1,050,600) is shown in Table No. 3 below:

Table No. 3 Sample Tax Spread Per Taxable Tract

Maximum Annual FY 2003-04 Taxable Special Tax Special Tax Tract Payment Payment 9164a $129,870 $117,228.79 9164b $101,565 $91,678.93 9165 $93,240 $84,164.26 9166 $73,260 $66,129.06 9167 $156,510 $141,275.74 9168 $114,210 $103,093.10 9169 $112,695 $101,725.56 9170a $125,490 $113,275.13 9170b $131,560 $118,754.30 9171 $125,490 $113,275 .13 $1,163,890 $1,050,600.00

2) Each Taxable Tract's FY 2003-04 Special Tax Requirement obligation calculated in Step No. 1 is spread equally to each Taxable Parcel within their respective Taxable Tract as shown in Table No. 4 below.

B-4 Table No. 4 Sample Special Tax Spread Per Taxable Parcel

FY 2003-04 FY 2003-04 No. of Special Tax Special Tax Taxable Taxable Payment Payment Tract Parcels per Tract per Parcel 9164a 78 $117,228.79 $1,502.93 9164b 61 $91,678.93 $1,502.93 9165 56 $84,164.26 $1,502.93 9166 44 $66,129.06 $1,502.93 9167 74 $141,275.74 $1,909.13 9168 54 $103,093.10 $1,909.13 9169 33 $101,725.56 $3,082.59 9170a 47 $113,275.13 $2,410.11 9170b 44 $118,754.30 $2,698.96 9171 47 $113,275.13 $2,410.11 Total 538 $1,050,600.00

COLLECTION OF THE ANNUAL SPEOAL TAX Each year, the City will coordinate with the Santa Clara County Auditor's office to have the Annual Special Tax for each applicable Taxable Parcel placed on the property tax roll, or will effect a direct billing of the Annual Special Tax to the Property Owners of the Taxable Parcel.

TERMOF SPECIAL TAX

The Special Tax shall be levied for a period not to exceed thirty (30) years commencing with Fiscal Year 2003-04.

PROPERTY OWNER APPEALS OF SPEOAL TAX LEVIES Any Property Owner claiming that the amount or application of the Special Tax is not correct and requesting a refund may file a written notice of appeal and refund to that effect with the City Finance Director not later than one calendar year after having paid the Special Tax that is disputed. The City Finance Director shall promptly review the appeal, and if necessary, meet with the Property Owner, consider written and oral evidence regarding the amount of the Special Tax, and decide the appeal. If the City Finance Director's decision requires that the Special Tax be modified or changed in favor of the Property Owner, a cash refund shall not be made (except for the last year of levy), but an adjustment shall be made to the next Special Tax levy. Any dispute over the decision of the City Finance Director shall be referred to the City Council and the decision of the City Council shall be final. This procedure shall be exclusive and its exhaustion by any Property Owner shall be a condition precedent to any legal action by such owner.

MANDATORY PROPERTY OWNER BUY DOWN

In the event a Property Owner requests to remap or eliminate a Taxable Tract from the City and the remapping will result in fewer Taxable Parcels within that Taxable Tract as shown in Table No. 1, the Property Owner will be responsible for prepaying the Special Tax associated with the number of Taxable Parcels which were not mapped in the revised Taxable Tract. The prepayment calculation for the Taxable Parcels will be calculated

B-5 pursuant to the section entitled "Prepayment Calculation of Special Taxes For A Taxable Parcel After Bonds Are Issued".

PREPAYMENT CALCULATION OF SPECIAL TAXES FOR A TAXABLE PARCEL AFTER BONDS ARE ISSUED

The Special Tax obligation for a Taxable Parcel may be prepaid after Bonds have been issued if the Taxable Parcel is not delinquent in their Special Tax payments based upon the following formula. The Property Owner requesting the prepayment must provide the City a minimum of 75 days notice prior to the redemption date of the Bonds to be redeemed with the proceeds of the prepaid Special Taxes. The prepayment must be received by the City's Finance Director forty five (45) days prior to the redemption date.

1) Determine the Maximum Annual Special Tax for the Taxable Parcel which is proposed to be prepaid. 2) Determine the total Maximum Annual Special Taxes for all Taxable Parcels within the boundaries of the CFO which have not prepaid their Special Taxes. 3) Determine the Taxable Parcel's pro-rata share of the prepayment obligation by dividing the Maximum Annual Special Tax for the Taxable Parcel which is proposed to be prepaid by the Total Maximum Annual Special Taxes for all Taxable Parcels within the boundaries of the CFO which have not prepaid their Special Taxes (refer to Table No. 1 and Table No. 2). 4) Calculate the total amount of outstanding unpaid principal of the Bonds. 5) Determine the Taxable Parcel's pro-rata share of the outstanding unpaid principal of the Bonds by multiplying the Taxable Parcel's pro-rata share of prepayment obligation as calculated in Step No. 3 by the total amount of outstanding unpaid principal of the Bonds. 6) Calculate the total amount of interest due at the next interest payment date for the Bonds. 7) Determine the Taxable Parcel's pro-rata share of the interest due at the next interest payment date for the Bonds by multiplying the Taxable Parcel's pro-rata share of prepayment obligation as calculated in Step No. 3 by the total amount of interest due at the next interestpayment date. 8) Calculate the redemption premium on the outstanding unpaid principal of the Taxable Parcel's pro-rata share of the Bonds pursuant to the terms and conditions in the Fiscal Agent Agreement for the Bonds, if any. 9) Calculate the total amount of revenue in the Reserve Fund established under the Fiscal Agent Agreement for the Bonds. If the amount of revenue in the Reserve Fund is equal to or in excess of the amount required to fully fund the Reserve Fund per the Fiscal Agent Agreement for the Bonds, proceed to Step No. 10 below. If the amount of revenue in the Reserve Fund is less than the amount required to fully fund the Reserve Fund per the Fiscal Agent Agreement for the Bonds, proceed to Step No. 11 below. 10) Multiply the Taxable Parcel's pro-rata share of prepayment obligation as calculated in Step No. 3 by the total amount of revenue in the Reserve Fund. 11) Calculate the City administrative fee for the prepayment of Special Taxes. 12) Calculate the prepayment of Special Taxes after Bonds are issued for each Taxable Parcel as follows:

The Taxable Parcel's pro-rata share of the outstanding unpaid principal of the Bonds as calculated in Step No. 5, plus,

B-6 The Taxable Parcel's pro-rata share of the interest due at the next interest payment date as calculated in Step No. 7, plus,

The Taxable Parcel's pro-rata share of the redemption premium due on the outstanding unpaid principal of theBonds as calculated in Step No. 8, less,

The Taxable Parcel's pro-rata share of the Reserve Fund as calculated in Step No. 10, if the amount of revenue in the Reserve Fund is equal to or in excess of the amount required to fully fund the Reserve Fund per the Fiscal Agent Agreement for the Bonds, plus,

A City administrative processing fee for calculating and administering the prepayment, including any filing costs or other out of pocket costs for removing the lien as determined by the City's Finance Director, to reasonably reflect the City's cost for performing these tasks. The City's administrative processing fees may include any outside consulting or administrative fees associated with the pre­ payment.

In addition, the City's Finance Director has the authority to adjust the prepayment amount per Taxable Parcel calculated above if the Property Owner has paid a portion or all of their current property tax bill and the portion attributable to the payment of Special Taxes has not been used to make an interest and/ or principal payment on th�Bonds.

PARTIAL PREPAYMENT CALCULATION OF SPECIAL TAXES FOR A TAXABLE TRACT AFTER BONDS ARE ISSUED

The Special Tax obligation for a Taxable Tract may be partially prepaid after Bonds have been issued under the following conditions: 1) the Property Owner is not delinquent on any Special Tax payments within the boundaries of the CFD, 2) the partial prepayment is made prior to the close of escrow on the sale of the first residential unit within the Taxable Tract to the end user, 3) the partial prepayment is made on the entire Taxable Tract resulting in all Taxable Parcels within that Taxable Tract being reduced by the same amount, 4) the partial prepayment on a Taxable Tract does not result in lowering the Maximum Special Tax per Taxable Parcel within that Taxable Tract to less than the Maximum Special Tax per Taxable Parcel within another Taxable Tract that has a lower average residential sales price, (for example, Taxable Tract No. 9168 cannot have its Maximum Special Tax Per Taxable Parcel reduced less than Taxable Tract No. 9166's Maximum Special Tax Per Taxable Parcel), 5) the Property Owner requesting the partial prepayment provides the City a minimum of 75 days notice prior to the redemption date of the Bonds to be redeemed with the proceeds of the partial prepayment of the Special Taxes, and 6) the partial prepayment of the Special Taxes for a Taxable Tract is based upon the following formula:

1) Determine the amount of reduction proposed by the Property Owner to the Maximum AnnualSpecial Tax per Taxable Parcel within theTaxable Tract. 2) Determine the reduction in the Maximum Annual Special Tax per Taxable Tract by multiplying the number of Taxable Parcels within the Taxable Tract by the proposed reductionto the Maximum AnnualSpecial Tax per Taxable Parcel. 3) Determine the total Maximum Annual Special Taxes for all Taxable Parcels within the boundaries of the CFD which have not prepaid their Special Taxes. 4) Determine the Taxable Tract's pro-rata share of the partial prepayment obligation by dividing the partial prepayment amount calculated in Step No. 2 above by the Total

B-7 Maximum Annual Special Taxes for all Taxable Tracts within the boundaries of the CFO which have not prepaid their Special Taxes (refer to Table No. 1 and Table No. 2). 5) Calculate the total amount of outstanding unpaid principal of the Bonds. 6) Determine the partial prepayment portion of the Taxable Tract's pro-rata share of the outstanding unpaid principal of the Bonds by multiplying the Taxable Tract's pro­ rata share of partial prepayment obligation as calculated in Step No. 4 by the total amount of outstanding unpaid principal of the Bonds. 7) Calculate the total amount of interest due at the next interest payment date for the Bonds. 8) Determine the partial prepayment portion of the Taxable Tract's pro-rata share of the interest due at the next interest payment date for the Bonds by multiplying the Taxable Tract's pro-rata share of partial prepayment obligation as calculated in Step No. 4 by the total amount of interest due at the next interest payment date. 9) Calculate the redemption premium on the outstanding unpaid principal of the partial prepayment portion of the Taxable Tract's pro-rata share of the Bonds pursuant to the terms and conditions in the Fiscal Agent Agreement for the Bonds, if any. 10) Calculate the total amount of revenue in the Reserve Fund established under the Fiscal Agent Agreement for the Bonds. If the amount of revenue in the Reserve Fund is equal to or in excess of the amount required to fully fund the Reserve Fund per the Fiscal Agent Agreement for the Bonds, proceed to Step No. 11 below. If the amount of revenue in the Reserve Fund is less than the amount required to fully fund the Reserve Fund per the Fiscal Agent Agreement for the Bonds, proceed to Step No. 12 below. 11) Multiply the partial prepayment portion of the Taxable Tract's pro-rata share of partial prepayment obligation as calculated in Step No. 4 by the total amount of revenue in the Reserve Fund. 12) Calculate the City administrativefee for the partial prepayment of Special Taxes. 13) Calculate the partial prepayment of Special Taxes for a Taxable Tract after Bonds the are issued as follows:

The Taxable Tract's pro-rata share of the outstanding unpaid principal of the Bonds as calculated in Step No. 6, plus,

The Taxable Tract's pro-rata share of the interest due at the next interest payment date as calculated in Step No. 8, plus,

The Taxable Tract's pro-rata share of the redemption premium due on the outstanding unpaid principal of the Bonds as calculated in Step No. 9, less,

The Taxable Tract's pro-rata share of the Reserve Fund as calculated in Step No. 11, if the amount of revenue in the Reserve Fund is equal to or in excess of the amount required to fully fund the Reserve Fund per the Fiscal Agent Agreement for the Bonds, plus,

A City administrative processing fee for calculating and administering the partial prepayment, including any filing costs or other out of pocket costs for removing the lien as determined by the City's Finance Director to reasonably reflect the City's cost for performing these tasks. The City's administrative processing fees may include any outside consulting or administrative fees associated with the pre-payment.

B-8 In addition, the City's Finance Director has the authority to adjust the partial prepayment amount per Taxable Tract calculated above if the Property Owner has paid a portion or all of their current property tax bill and the portion attributable to the payment of Special Taxes has not been used to make an interest and I or principal payment on the Bonds.

B-9 (]TY OF SANJOSE Ci\ PITAL OF SI LICON VA. LLEY r------· .. CERTIFICATION ed

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········-·------•... COMMUNITY FACILITIES' CITY OF COUNTY OF r--= SAN JOSE, SANTA CLARA ST OF DISTRICT BOUNDARY ATE CALlfOA'JIA ! ?ROPOSF.D Of -. :\�·-.,,:_W I 30UNDAP.leS ---- TRACT BOUNDARIES : - COMMUNITY FACILITIES DISTRICT NO. 10 -- ············ ·--..·· ···· J -- I I SAN OSE- : "" ! I NOT TO SCALE �1' ·� ;i..1fi' �t.'BLIC WOijkS OEPARTMFNT '\ --=" 1 REFERENCE NUMBER IHASSLUl-SIL'JER CREEK) , . ( "'�•· w,wu.,N•••• FISCAl Ai1 :?Q(l?-?.003 ,_j Yf 1 . .

------_____L_ CITY OF SANJOSE C/\PrIAL Of SILICON VA LLEY APPENDIX D THE APPRAISAL REPORT

D-1 CITY OF SANJOSE C;\Prli\LOb S[LICON VALLEY APPRAISAL REPORT HASSLER-SILVER CREEK COMMUNITY FACILITIES DISTRICTNO. 10

The Ranch on Silver Creek Silver Creek Valley Road, Hellyer Avenue and Dove Road San Jose, California

VALUATION DATE: April 18, 2003

APPRAISIDFOR: City of San Jose

APPRAISED BY: Hulberg & Associates, Inc.

OUR FILE NUMBER: 9064 SC ,;j HULBERG & ASSOCIATES c

REAL ESTATE APPRAISERS

Norman C. Hulberg, MAI Walter D. Camey, MAI June 2, 2003 Stephen D. Kuhnhoff, MAI, ASA

Paul M. U,vinitka , MAI Ms. Julia H. Cooper Claudia B. Carleton, MAJ Deputy Director of Finance Charles R. Marqueling, ASA, SRA Finance Department Janis A. Lassoer, SRA Yvonne J. Broszus City of San Jose Robert D. Hensley, MAI 801 North First Street, Room 110 Larry W. Hulberg San Jose, CA 9 5110 John D. Phillips, ASA Rebecca J. Gattey Judie A. Poston Re: The Ranch on Silver Creek Kristin M. Davidson Hassler-Silver Creek Maria Aji Community Facilities District No. 10 George A. Comttos Dear Ms. Cooper: Silicon Valley Office One Almaden Blvd.. S1e. 700 At your request, we have appraised the land comprising the proposed tracts of San Jose. CA 951 13-2214 (408) 279-1520 The Ranch on Silver Creek (the "Subject Property'' or "Development"). This (408) 279-3428 (fax) appraisal report is intended to be included in the Preliminary and Final Official E-mail: [email protected] Statements prepared by the City of San Jose ("City) in connection with the sale

East Bay Office and issuance by the City of special tax bonds for the City of San Jose, 3160 Crow Canyon Place. Ste. 150 Community Facilities District No. 10 (Hassler- Silver Creek) (alternatively, the San Ramon, CA 94583- 1338 "CFD" or the "District"). The Subject Property comprises the taxable land (925) 327-1660 (925) 327-1696 (fax) located within the District. The special tax bonds will be secured by the E-mail: [email protected] Subject Property.

The Subject Property a master-planned development consisting of eight proposed residential neighborhoods (tracts). It is located in the eastern foothills of the city of San Jose, California. The larger site from which the individual tracts are being subdivided consists of approximately 580 acres lying east of U. S. Highway 101, southwest of Yerba Buena Road, west of Silver Creek Valley Road and east of Dove Road.

The pmpose of this appraisal is to estimate the market value of the property, based on it's as- is condition, but subject to the proposed special tax lien The report estimates the bulk sale value of the lots created by the tentative or final maps in each tract The appraisal report includes consideration of the approvals granted to date, as well as the infrastructure in place and required, both privately funded and funded by the District. As discussed further in the report, the tracts vary in status, from raw land with tentative map approvals, to "super lot" tracts with graded pads and internal streets and utilities in place. Some of the models in the tracts are under construction. The appraisal does not reflectthe contributory value of any building improvements in place.

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek, Hassler-Silver CreekCFO #10. File #9064 SC Page 2

Ms. Julia Cooper City of San Jose June 2, 2003

The appraisal does not value the proposed golf course and country club improvements or operations, or the open space and mitigation sites not included in the individual tracts. The appraisal does consider the value that the proposed amenities would typical1y contribute to residential land.

The reportdoes not address the aggregate retail value for the entiredeve lopment or the bulk sale value as if the entire development were sold to one buyer in a single transaction. It is our opinion that the highest and best use of the site is the bulk sale of individual tracts, given the construction and approvals in place.

This is intended to be a complete appraisal presented in a self-contained report in accordance with the Uniform Standards of Professional Appraisal Practice and the California Debt Advisory Commission's Appraisal Standards forLan d-Secured Financings.

The property rights appraised are those of the fee simple interest. We have appraised the property assuming it to be free and clear of liens andencumbrances, such as mortgages or assessments outstanding, but subject to both the existing special assessment and the proposed CFD #10 special tax lien. In a typical market transaction involving a property with significant assessments, the buyer assumes the assessments and pays a price representative of unencumbered market va]ue and the assessment amount, or the value net of assessments. In this case, however, since the purpose of the appraisal is to support the value ratio forthe CFD #10 special tax lien, the reportestima tes the gross value, inclusive of proposed CFD # 10 special tax lien.

Based on ourresearch and analysis, as described in the attached report, it is our opinion that the market value of the fee simple interest in the Subject Property, as of April 18, 2003, is:

ONE HUNDRED MILLION ONEHUNDRED THOUSAND DOLLARS ($100,100,000)

This conc1usion is subject to the assumptions and 1imiting conditions set forth in the Addenda of the attached appraisal. The conclusion is alsoassociated with an estimated exposure period of six months as developed in the report.

Respectfullysubmitted,

�� ;� fJorman C. Hull)#g, MAI Certified-GeneralAppr aiser #AG003542 (!( Ct.-u�jCidr-- Claudia B. Carleton, MAI Certified-General Appraiser #AG003579

HULBERG & ASSOCIATES. INC. The Ranch on Silver Creek Hassler-Silver Creek CFO #1 0 File #9064 SC Page 3

TABLE OF CONTENTS

Letter of Transmittal ...... 1 Summary of Salient Facts ...... 4

SECTION I - INTRODUCTION ...... 6 Purpose Of Appraisal ...... 7 Property Rights Appraised ...... 7 Valuation And Inspection Dates ...... 7 Intended Use And User Of Appraisal ...... 8 Property Identification And Legal Description...... 8 Ownership And History Of Conveyances ...... 9 Appraisal Development And Reporting Process ...... IO

SECTION II - DESCRIPTIVE INFORMATION ...... 11 Regional Overview ...... 12 Local Area Analysis ...... 12 Residential Real Estate Market ...... 15 Exposure Period ...... 23 Property Taxes And Assessments ...... 23 Overview Of The Ranch On Silver Creek ...... 24 Zoning And Approvals ...... 28 Description Of The Tracts ...... 29 Highest And Best Use ...... 34

SECTION III - VALUATION ...... 36 Discounted Cash Flow Valuation ...... 38 Reconciliation Of The Value Estimates ...... 61 Statement Of Value ...... 63

ADDENDA Photographs of Subject Property Qualifications of Norman C. Hulberg, MAI Qualifications of Claudia B. Carleton, MAI Assumptions and Limiting Conditions Certification of Appraisal

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek Hassler-Silver Creek CFD #10 File #9064 SC Page 4

SUMMARY OF SALIENT FACTS

Development Name: The Ranch on Silver Creek

Address: 4341-4342 Silver Creek Road 4160 Dove Hill Road San Jose, California95 1 38-2409

Tract Identification: Tract Assessor Number Parcel Number(s) 9164a 679-38-009 thru 679-38-023 679-39-001 thru 679-39-024 9164b 679-38-001 thru 679-38-008 679-38-024 thru 679-38-053 679-39-025 thru 679-39-047 9165 679-35-001 thru 679-35-014 9166 Portion of 679- 15-004 9167 Portion of 679- 15-004 9168 Portion of 679- 15-004 9169 Portion of 679-15-006 9170a 679-37-001 thru 679-37-047 9170b 679-37-048 thru 679-37-059 679-36-001 thru 679-36-032 9171 679-34-001 thru679-34-0 47

Property Rights Appraised: Fee Simple

Zoning: A(PD)

General Plan: Integrated Residential/Recreation

Highest and Best Use: Residential Subdivision

Date of Inspection: April 18, 2003

Valuation Date: April 18, 2003

Date of Report Preparation: June 2, 2003

Estimated Exposure Time: 6months

Appraised Value : $100,100,000

Special Assumptions and Limiting Conditions: None

HULBERG & ASSOCIATES, INC. -I (1)�

OJ;:o ::, � 0 C)::, (/) < � () VALUATION SUMMARY (1)al As of April 18, 2003 '?"' The Ranch on Silve, c,eek Fin,11 OJ:::c C/1 Trnct No. Nmne No. Lots No. Units Prod11ci Tn1ti St.ltus Sales Compilrison A1,1111rnch Discounted C.ish Flow Estimilted V,1lue C/1 CD "i' 9164 Sienna and Mariposa 53 53 s.f iots Map recorded. Private streets 8 8 6,000 s.f lots graded but no paving or curb, � . CD::!! . 9.167 Esperanza 74 74 5,800 s.f lots Rough graded Private streets =!:I: (0 not yet improved Map not yet 0 recorded. $9 ,250,000 $7, 100,000 $7.500.000 """0) (/) 9166 Montesa 5.t 5J 6,000 s.f. lots Rough graded. Public streets () not yet improved or dedicated. $5 ,940,000 $5,180 ,000 $5.500.000

Public streets not yet dedicated 9169 H,1ciend,1 33 33 12,000 s.f lots or improved Graded. $1 I ,220 ,000 $8,940,000 $9.500,000

I 9170 Portoflno an1J Provence 47 47 8,000 sf lots Map recorded Streets c: !! 10,000 sf lots improved cor 44 m I 91 91 $39 ,375 ,000 $32 , 140 ,000 $34.500.000 Map recorded Streets !l

SECTION I - INTRODUCTION

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek Hassler-Silver Creek CFO #10. File #9064 SC Page 7

PURPOSE OF APPRAISAL The purpose of this appraisal is to estimate the market value of the Subject Property.

"Market Value," as used in this appraisal, is defined as 11the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition are consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

>- Buyer and seller are typically motivated;

>- Both parties are well informed or well advised, and acting in what th ey consider their best interests;

>- A reasonable tim e is allo wed fo r exposure in the op en market;

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

>- The price represents the normal consideration fo r the property sold unaffe cted by sp ecial or creative financing or sales concessions granted by anyone associated with the sale. ,,1_

Our appraisal of the Subject Property is based on cash equivalent financial arrangements.

PROPERTY RIGHTS APPRAISED The property rights appraised are those of the fee simple interest. Fee simple is defined as:

"absolute ownership unencumbered by any other interest or estate; subj ect only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat. "2

The property is appraised assuming it to be free and clear of liens and encumbran:es, such as mortgages and assessments outstanding, but subject to the special assessments existing and the special tax lien proposed.

VALUATION AND INSPECTION DATES The date of valuation is April 18, 2003, which in this case, is the date of physical inspection.

The effective date of the report is June 2, 2003.

I Uniform Standards of ProfessionalApprai sal Practice, 2003 Edition.

2 The Dictionaryof Real Estate Appraisa� Third Edition, the Appraisal Institute, 2003, p. 204. HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek. Hassler-Silver Creek CFD #1 0, File #9064 SC Page 8

INTENDED USE AND USER OF APPRAISAL This appraisal report has been prepared at the request of and for the sole use of the client to whom it is addressed.

It is our understanding that this report will be used by the City of San Jose in securing the bond financing for the District. It is our understanding that the City will use the appraisal in its Preliminary and Final Official Statements forthe District.

PROPERTY IDENTIFICATION AND LEGAL DESCRIPTION The Subject Property is located within the city limits and urban service area of the City of San Jose, County of Santa Clara, State of California. The larger site from which the individual tracts are being subdivided consists of approximately 580 acres lying east of U. S. Highway 101, southwest of Yerba Buena Road, west of Silver Creek Valley Road and east of Dove Road.

The tracts have either tentative or final tract maps. Because all of the tract maps have not been recorded, the reader is referred to the tract maps for the applicable legal descriptions. For those tract maps which have not yet been recorded, the tract is a portion of an existing assessor's and legal parcel. The tracts are identified as follows:

CFD No. 10 Assessor's Parcel Breakdown per Tract

Assessor Tract Parcel Number Number(s)

9164a 679-38-009 thru 679-38-023 679-39-001 thru679-3 9-024 9164b 679-38-001 thru679-38-008 679-38-024 thru679-38-053 679-39-025 thru 679-39-047 9165 679-35-001 thru 679-35-014 9166 Portion of 679-15-004 9167 Portion of 679-15-004 9168 Portionof 679-15-004 9169 Portionof 679-15-005 9170a 679-37-001 thru 679-37-047 9170b 679-37�048 thru 679-37-059 679-36-001 thru679-36-032 9171 679-34-001 thru 679-34-047

The mailing address for the property has historically been 4341-4342 Silver Creek Road and 4160 Dove Hill Road, San Jose, California95 13 8-2409.

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek Hassler-Silver Creek CFO #1 0 File #9064 SC Page 9

OWNERSHIPAND HIS TORY OF CONVEYANCES According to information provided by Mr. Gregory N. Mix of William Lyon Hornes, Inc., all of the property in the District was purchased approximately four years ago in an undeveloped, raw land state, by an entity related to the Master Developer, Cerro Plata Associates, LLC, a Delaware limited liability company ("Cerro Plata Associates''), of which the Master Developer is the managing member. The property was reportedly purchased without approvals for $22 million, almost entirely financed.

In connection with financing activities related to the Development, Cerro Plata Associates has subsequently transferred portions of the land in the Development to the Master Developer and other limited liability companies (and, as to lots on which model homes are being constructed, to GMAC Model Home Finance, Inc., which has leased such lots back to the Master Developer).

According to the Master Developer, lots within the Development are transferred to various financing entities as the need for development capital arises, but the Master Developer currently retains the right to repurchase all of the lots in the Development. As home construction proceeds, the Master Developer repurchases lots and constructs homes on those lots, and sells the homes to the public. No assurance can be given that the Master Developer will continue to operate in the manner described in this paragraph, and lots could be sold at any time to entities wholly unrelated to the Master Developer.

Based upon the ownership of the property in the District as of April 1, 2003, the five owners of land in the District would be responsible for payment of annual Special Taxes are as set forth in the followingta ble:

Table No. 3 City of San Jose Community Facilities District No. 10 (Hassler - Silver Creek) Special Tax Summaryby Owner

POTENTIAL Percent of Total Maximum 1 UNITS 2 3 Maximum Ownef ) OWNED< > Special Ta£ > Special Tax Cerro Plata Associates, LLC4J 252 $ 582,165 50.02% 4 242 Cerro Plata LLd l 181 326,490 28.05 William Lyon Homes, Inc. 54 112,020 9.62 San Jose Ranch 44, LLC 41 122,590 10.53 GMAC Model Home Finance, Inc. 10 20,625 1.77 5 Total 538 $1,163,890 100.00%1 )

There are no arm' s-length transfers of record to unrelated third parties, within three years of the valuation date. According to the owner's representative, Mr. Greg Mix, the property is not under contract, nor is it listed for sale.

O) Based upon ownership as of April 1, 2003.

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek Hassler-Silver Creek CFD #10, File #9064 SC Page 10

USPAP COMPETENCY PROVISION We have appraised this type of property before and believe that we have the qualifications and experience necessary to performthe assignment in a competent manner. Please see the summary of qualifications in the Addenda of this report.

APPRAISALDEVELO PMENT AND REPORTING PROCESS The scope of the appraisal encompasses the necessary research and analyses to prepare a full narrative appraisal report in accordance with the intended use, the Standards of Professional Practice of the Appraisal Institute, the Uniform Standards of Professional Appraisal Practice of the Appraisal Foundation, and FIRREA as we understand them. This is a complete appraisal presented in a self-contained report. No departures from Standard I of the Uniform Standards of Professional Appraisal Practice were invoked.

With regard to the Subject Property, our work included the following:

1. The property was inspected and photographed on the date( s) identified.

2. Regional, city, neighborhood and market data were compiled based on our tract inspection, information from local governments, local market knowledge, and Hulberg & Associates' appraisal data base. A source list is available upon request.

3. Information on title, zoning, General Plan, flood hazard, and other pertinent governmental restrictions were obtained from appropriate sources.

4. In developing the approaches to value, the market data used was collected and verified. Sources included Hulberg & Associates' data files, 1:rokers and agents, property owners, and other knowledgeable market participants. Data is believed reliable but not guaranteed.

5. In forming an opinion of highest and best use, we considered the information obtained in Steps 1-4 above, with emphasis on market conditions and trends. Noted easements and encumbrances were considered.

6. After assembling and analyzing the data outlined above, a final estimate of value was made.

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek, Hassler-Silver Creek CFO #10, File #9064 SC Page 11

SECTION II - DESCRIPTIVE INFORMATION

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek Hassler-Silver Creek CFO #10 File #9064 SC Page 12

REGIONAL OVERVIEW The Subj ect Property is located in the San Francisco Bay Region, an area with a population of approximately 6.6 million, which is comprised of the nine counties bordering San Francisco Bay. The San Francisco Bay Area is characterized by a moderate climate, vibrant economy and one of the highest standards of living in the United States.

While San Francisco is the historical center of the region, phenomenal growth over the past three decades has led to the emergence of several distinct geographic and economic sub­ regi.ons. The area north of San Francisco (Marin, Napa and Sonoma counties) is noted for its rural charm and numerous wineries, many of which have acquired world renown status. San Francisco, which is both a city and county, has a reputation as a city of romance, culture arxl scenic beauty. The Golden Gate Bridge, Nob Hill, Golden Gate Park and the Army Presidio are just a few noted attractions.

LOCAL AREA ANALYSIS The Subject Property is located within the City of SanJose. San Jose, incorporated on March 2 7, 1850, is located at the easterly side of the Santa Clara Valley. San Jose is the I Ith largest city in the United States and the third largest in California with a population of roughly 925,000. The climate in San Jose is of a typical Mediterranean type, modified slightly by marine breezes from the PacificOcean. San Jose is located in a region of very high seismic activity and geotechnical instability. The major earthquake faults in the region are the San Andreas near the crest of the Santa Cruz Mountains and the Hayward and Calaveras fault systems in the Diablo range.

Throughout the first half of the 20th century, agriculture and the fruit and vegetable packing industry provided much of San Jose's economic base. For the next f01.r decades, booming subdivisions expanded San Jose's boundaries, while high technology factories spread south from Palo Alto through San Jose and beyond. This vast concentration of hundreds of technology­ based businesses became known as "Silicon Valley," mmed forthe principal material used in the semiconductors. Agriculture-related industries lost their dominance as the new companies grew innovative ideas instead of foodstuffs .

Today, San Jose's revitalized downtown core has evolved into a financial, office, cultural, and entertainment center. Since 1984, more than $1 billion has been invested in downtown San Jose's renaissance. Among the notable improvements are the $140 million San Jose McEnery Convention Center; a transit mall that is the focal point of the new, ultra- modern, 20-mile long Light Rail System; the largest children's museum on the West Coast; and, the HP Pavilion, completed in September 1993. Outside the downtown core area, commercial development exists in the form of tract and community commercial centers, strip commercial developments along arterial streets, and regional shopping centers.

Industrial development in San Jose is distributed along the First Street/Monterey Highway axis through the city. Administrative offices, research and development, and light manufacturing activities are the primary uses in new industrial areas, replacing the manufacturing and heavy industrial uses that historically characterized the central city industrial areas. In fact, some of the older, heavy industrial development is being rehabilitated and converted to new, high technology

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek. Hassler-Silver Creek CFD #1 0. File #9064 SC Page 13 uses. The dispersal of industrial development indicates that firms are following the labor force in the same way that retail establishments were attracted to the population growth on the fringe of the city. Most of San Jose's industrial development has a low profile, landscaped industrial park character.

...... , ......

,

Silver Creek Planned Residential Community The Subject Property is located within the boundaries of the Silver Creek Planned Residential Community (''SCRPC"), which encompasses 3,075 acres of land at the northerly extension of the Silver Creek hills in the southeast area of San Jose. As the Silver Creek Planned Residential Community is the dominant land use overlay in the area, a discussion of its characteristics is warranted. Two ridge linesare contained within the Silver Creek Hills, with the west ridge being most prominent in terms of scale, topographic relief and visibility. The easterly ridge exhibits more gently sloping characteristics and is significantlylower in elevation than the western ridge. Separating these ridges is a small valley through which Silver Creek makes its northward flowto the Santa Clara Valley floor.

The SCPRC plan utilizes primarily the lowest density residential land use categories, locating the various densities according to the ability of the topography to support development. A summary of the Land Use Designations is presented in the table below.

Silver Creek Planned Community Land Use Designations (DU = Dwelling Unit Ac. = Acre) Non- Pub. Estate Rural Urban Integrated Park/Open 8/Ac . 5/Ac . 3/Ac . Residential Residential Hillside Res./Rec. Space Totals 32 Acr. 30 Ac. 41 9 Ac . 881 Ac. 446 Ac. 619Ac. 571 Ac. 77 Ac. 3075 Ac. 21 0 DU 138 DU 259 DU 878 DU 93 DU 32 DU 550 DU 3160 DU

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek Hassler-S ilver Creek CFD #10 File #9064 SC Page 14

While the overall character of the Silver Creek Planned Residential Community is low-density and rural in nature, all of the major urban services necessary to support residential development were required. The major services that required extension and upgrading to serve the Planned Residential Community include: transportation, storm and sanitary sewer, domestic water, fire and police.

In the cases of transportation, storm and sanitary sewers and water supply, extensive capital improvements have been necessary to provide service to this area. Consistent with city policy, new development has been required to financethese capital improvements.

Development in he Planned Residential Community is subject to all other city development policies and controls. Specifically, this includes conformance to the Evergreen Development Policy.

The Evergreen Development Policy (EDP) is a separate policy document adopted by the City Council to address traffic congestion and flooding problems in the Evergreen area, including the Silver Creek Planned Residential Community. The EDP was originally adopted on July 2, 1991, and was revised as a part of the process that created the Evergreen Specific Plan (ESP). The last revision was approved May 9, 1995. The focus of the revision was the identification of appropriate traffic mitigation measures to implement the land use plan of the ESP and to allow other existing vacant residential land in the area to develop.

The establishment of a low density residential community in this area with primarily rural land use densities on the hillsides is intended to preservethe basic character of the area by minimizing the grading necessaryfor development. In the portions of the Silver Creek Valley, which are less constrained by topography, development is typified by large single-family lots. In steeper hillside areas, clustering of dwellings and other innovative hillside development techniques are encouraged. The restrictions on development of the western slope facing the floor of the Santa Clara Valley and the low intensity of development proposed throughout the hillside areas within the Planned Residential Community (the "PRC") are necessary in order to preserve and protect the view- shed and watershed characteristics of the hillsides. Other critical design criteria, which control the extent andform of ultimate development of the area, include the soils, geologic and seismic hazards known to exist in the area. Each development is required to perform an in-depth analysis to address the potential negative impacts of the development on adjacent properties.

In order to enhance the suburban nature of the low density residential development proposed in this area, the use of rural improvement standards which generally reflect the large lot "estate" concept, such as reduced street rights-of-way, alternative sidewalk standards, and reduced street lighting levels, are appropriate. Public and private improvements reinforce the semi-rural character of the PRC and maintain and encourage high quality improvements through a uniform design program that ensures the consistent treatment of noise attenuation walls, landscaping, lighting, and other improvements.

Silver Creek Valley, San Felipe and Yerba Buena Roads are designated as Rural Scenic Corridors. The Rural Scenic Corridor designation requires careful consideration be given to the "preservation of attractive environmental and scenic qualities adjacent to and within immediate view of scenic roads."

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek Hassler-Silver Creek CFD #1 0 File #9064 SC Page 15

In addition to the tract commercial uses, other forms of commercial and recreational enterprises will be allowed where they are designed as an integral part of the Planned Residential Community, including golf and tennis clubs and resort and lodging facilities. The transfer of residential densities from property utilized for such norrresidential land uses will be allowed, consistent with the goals and objectives of the PRC.

Immediate Environs The past three years have seen significant new construction act1v1ty in the area, with new subdivisions along Yerba Buena Road, Silver Creek Valley Road, San Felipe Road and Nieman Boulevard . The vast majority of recent market activity has been for homes priced from $500,000 to $2,000,000. The market area has evolved into an upscale community of relatively expensive homes catering to the move-up buyer. The Evergreen school district is viewed favorably by the community, so Evergreen appeals to both professionals and families. Evergreen Community College is 3 miles east of the Subject Property. A typical employment commute is 15 to 20 miles.

The Subject Property is well located with regard to tract shopping and services, with larger retail/commercial centers anchoring the four comers of the intersection of Aborn/San Felipe/White Roads two miles northeast of the Subj ect Property. More recently, the Canyon Creek Plaza Shopping Center, anchored by a Cosentino's market, recently opened on Silver Creek Valley Road east of the Subj ect Property.

An 11- lot new subdivision, "Silver Vista Estates," is under construction to the east of the Subj ect Property. Northwest between Silver Creek and Silver Creek Valley Road is another recently completed development, "Ponderosa Ridge." To the north lies "Hillstone," "Montecity" and "Carnelian Heights." The Highway 101Nerba Buena Road interchange is about one-half mile west.

RESIDENTIAL REAL ESTATE MARKET Overview The year 2002 was a tale of two markets. The first six months of the year were characterized by robust sales activity, reaching a peak in April 2002, when total sales volume was up 73 percent from the same month in 2001. After a difficult 2001, home buyers were lured back into the market by favorable interest rates, a sense that the bottom of the downward cycle had been reached, and a sense of optimism about the resiliency of the economy in the long term.

Economists generally agree that consumer spending, which accounts fortwo -thirds of American economic activity, sustained the U.S. economy in 2002. Some of the lowest interest rates in more than a generation, have spurred that spending, which has gone most notably to buy new cars and homes.

During 2002, the strength of consumer demand forhousin g showed initial signs of a slowdown toward the end of May. Sales activity and traffic through the new home subdivisions steadily decreased into July. By August, any momentum generated by the first half of the year \irtually disappeared.

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek, Hassler-Silver Creek CFO #10 File #9064 SC Page 16

The remainder of the year, formany developers, was spent simply replacing sales due to contract fall-out, so that net new activity was minimal. Developers were living on cash flow generated by sales of homes from the first half of the year, which were built and delivered in the second half of the year. But with so few sales in the second half of the year, there was little momentum leading into 2003.

Business Environment Economically, Santa Clara County is experiencing a difficult time. By the end of November 2002 there was 55 million square feet ofvacant commercial space, including offices, R&D, and warehouses, according to BT Commercial Real Estate numbers. That does not include so-called "phantom" or "shadow" space, or commercial space leased by companies but not really in use and not on the market for lease or sublease. Estimates of how much space exists ranges from 5 percent to the extreme of 15 to 20 percent of the underlying commercial inventory above arrl beyond what is counted.

Unemployment in Santa Clara County was in the 7 to 8 percent range during most of 2002. In January 2003, Santa Clara County's unemployment rate hit 8.6 percent, which was the highest unemployment rate of the six immediate Bay Area counties. In April, the rate declined slightly to 8.3 percent. However, this is still above the 8.03 percent recorded a year ago. Santa Clara County's rate was also significantlyhigher than the statewide jobless rate of 6.6 percent, and the nationwide jobless rate of 5.8 percent during the same period, according to California's Employment Development Department.

As Silicon Valley businesses struggle to recover from the latest boom-and-bust cycle, software has become the driving economic source of jobs in the region, the prominence of employment in the computer and related hardware sector has declined, and the biomedical industry has emerged as a growth opportunity, according to Joint Venture, Silicon Valley Network's Index of Silicon Valley 2003, in a report released in late January 2003. The technology shift is the latest chapter in the economic history of Silicon Valley - the move from the defense industry to integrated circuits in the 1970's to personal computers in the 1980's, and to the Internet in the 1990's. The Index suggests that the Valley's economic recovery depends on finding "new means of wealth generation through innovation and entrepreneurship" and strengthening the region's global competitive advantage through greater productivity to offset the high costs of doing business in the region.

Accompanying the economic transition, the Valley's population has become more diverse, more international, and more educated. Migration patternshave helped raise the region's educational level. According to the Index, San Jose is the country's third most educated area as measured by share of college graduates.

The national and local recoveries are proceeding at vastly different rates. At a recent forum entitled "Bay Area Council's Business Outlook Conference 2003", Mr. David Hale, global chief economist for Zurich Financial, noted that while the threat of war with Iraq, a weak world economy and the declining value of the dollar are (were) concerns, the gross domestic product grew at a respectable 3 percent in 2002. Mr. Hale suggested that the economy should continue on the road to recovery in 2003, stating, "It will be a challenge, but the underlying economic factors favor growth," according to the article "Economist: Factors Favor Economic Recovery In 2003"publis�d in the Silicon Valley/San Jose Business Journa� January 17, 2003.

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek Hassler-Silver Creek CFO #10 File #9064 SC Page 17

Mr. Stephen Levy, director and senior economist for the Palo Alto based Center for Continuing Study of the CaliforniaEconomy, was more cautious in his assessment. Mr. Levy's prescription forthe local ailing economy is to focus on increasing the region's housing stock. Speaking at the Silicon Valley/San Jose Business Journal sponsored event entitled "Real Estate Trends: Nowhere to Go But Up", Mr. Levy opined that the price of housing is the "number-one barrier" to the technology industry's recovery. He also said that housing is the key to providing the customer base for the hoped-for retail expansion in downtown San Jose and to generate the sales tax local governments need to continue to provide services.

The housing market has shown recovering strength froma relatively dramatic correction in 2001, ranging from 10 to 30 percent. While the first half of 2002 was good, the second half was better. Also emerging is a split personality in the housing market, where there is good demand for product priced under $1 million, but over $1 million demand is tepid, and above $2 million it is moribund. Product perceived to be overpriced is not selling.

Residential Land Market Residential land i; a dwindling commodity in the central Bay Area and in Silicon Valley in particular. Over the past 20 years, while there have been larger new developments of previously agricultural or unimproved land, the vast majority of the development s are as a result of infill redevelopment.

In the Housing Element of the 2020 General Plan, the City identifies 2,220 acres of vacant residential land within the Urban Service Area, as of 1999. This acreage represents about 19,875 dwelling units (2,810 single-family and 17,065 multi- family), assuming that development occurs at average densities reflective of past development (8.95 dwelling units per acre - "du/a'} Additional residential development can result from the application of the Discretionary Alternate Use Policies.

Summarized in the chart below is historic information from the City regarding the absorption of vacant land, as reported in the City's Vacant Land Inventory as of July 2002 ("2002 Inventory"). The 2002 Inventory finds that:

"the rate of absorption of vacant residential land in the City of San Jose experienced a high degree of volatility over the past two decades, averaging about 340 acres/year but sometimes varied by as much as 50%-100% or more in consecutive years. This volatility was attributed to rapid changes in the pace of construction of low-density, single-family detached homes (followingthe ups and downs of the local economy), which housing type historically comprised close to half of all new housing units."

The cycle is mirrored also by the City's issuance of building permits. In 1990, San Jose authorized building permits for 2,087 dwelling units, 85 percent of which were multi- family. As the economy hit a recession from 1991 through 1995, building permits authorized averaged only 2,000 dwelling units per year. Housing production increased sharply in 1996 and remained steady through 2000, averaging 4,250 dwelling units per year. More recently, San Jose saw the number of building permits issued for single-family homes in March decline sharply from 203 the year before to 174 in 2003, according to the California Building Industry Association, The

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek Hassler-Silver Creek CFD #10 File #9064 SC Page 18 opposite trend was seen in multi-family housing, with 549 building permits issued in March 2003, as compared to just 24 the year before.

Historical Vacant Land Absorption by Land Use: FY 80/81 to FY 01/02

i 600.0 .;,,,,..;,�:-"""""'...;,.,;,,....,;._.,� 0 �· 500.0 �...... �� ... as 400.0

�c. 300.0 �0 200.0 � 100.0 �-- 0.0 +-���-

O:, ">.) Vj �">.::>� ,t}> �Vj i). _,!b �o.,' -� .o. & f.>O;, _cl.,;:,;' � � � � � � �- � �� � � Fiscal Year

The 2002 Inventory continues:

"The current availability of vacant residential land is approximately 2,000 acres, two-thirds of which is found in the Edenvale or Evergreen planning areas. Given this limited supply, the future rate of land absorption is expected to be much slower and more stable than in the past (FY 01/02 180.2 acres). However, slower land absorption will not necessarily translate into= a reduced supply of new housing units. This is because development is now commonly occurring on lands with prior improvements and residential densities are increasing. For example, while land absorption in FY O 1/02 hit a twenty-year low, new housing was nearly double the average annual unit count over the 1990-95 time period. Today, only about one-quarter of SanJose 's new housing is made up of single-family detached units, with the large majority being higher-density apartments, condominiums, and townhomes."

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek. Hassler-Silver Creek CFD #10, File #9064 SC Page 19

Vacant Residential Land Supply by Planning Area: As of Fiscal Year 01 /02

Almaden Alum Rock Alviso Berryessa 204. ro Cambrian/Pioneer Central 0, Coyote c Edenvale 733.7 c a.. eve rgreen 465.4 North 54. South 226.5 West Valley Willow Gten 24.6

0 100/ 200 300 400 500 600 700 BOO Vacant Land (acres)

By farthe largest availabilities and the largest developments are located in the South San Jose, Evergreen and lilenvale (The Subject Property's) Planning Areas. This is because these areas contain the few last major master-planned developments within the Urban Service Area, in Silvercreek, Evergreen, and Communications Hill. The Subj ect Property represents over half the remaining vacant land in its area, and about 25 percent of the total.

A commentary regarding land available for development would not be complete without a comment regarding the approval process. While the City of San Jose has worked to streamline the approval process, particularly forresidential development s, it nonetheless can be an onerous and daunting process. The value of approvals is estimated by market participants to be in the range of 20 to 30 percent of finished site value, but can be much higher. In particular, hillside sites like the Subj ect Property have significant environmental, neighbor, and infrastructure challenges. The pre-development costs and time required can be significant and sometimes cannot be achieved. Indeed, the Subj ect Property has been in pre-development forover 10 years.

Based on these factors, the Subject Property is a large, substantially entitled and desirable property with limited potential competition.

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek Hassler-Silver Creek CFD #10, File #9064 SC Page 20

New Housing Market The themes yielded from the above discussion are as follows:

• Santa Clara County is entering its third year of recession.

• The commercial real estate market is stagnant.

• The employment emphasis is shifting from the hardware sector to the software sector in the technology realm.

• Local influxof highly educated, diverse international population.

• Need foraffordab le housing to hold local industry talent.

• Lingering unease regarding national and international geopolitical uncertainty in light of the Silicon Valley's participation in the world economy.

The National Association of Realtors noted that while the national economy grew at an annual rate of 3 percent in 2002, the California economy grew at the rate of only 1.7 percent. Further, the San Francisco Bay Area declined by 3 percent. These factors are reflected in a slowed, but perhaps surprisingly strong, local housing market.

In the fourth quarter of 2002, the average new detached single-familyhome price was $766,687. By comparison, in the fourth quarter of 2000, the average new detached single-family home price was $921,652. This represents a decline of 17 percent during the last two-year period. In terms of acceptable pricing categories, the fourth quarter yielded the following statistics, according to the Residential Transitions Report prepared by S. L. State and Associates, a regional consulting firm:

Price Distribution Total % of Sales $500,000 - $600,000 15% $600,000 -$700,000 30% $700,000 - $850,000 30% Above $850,000 25%

The sales are essentially arrayed at above andbelow the $700,000 price point. Of the 10 top selling subdivisions in Santa Clara County (those absorbing at 8 or more units per month), six were priced exclusively below $700,000, while only two were priced exclusively above $700,000.

Unlike the first quarter of 2002, the first quarter of 2003 was characterized more by steady momentum than overheated frenzy. Overall average absorption was 1.0 unit per week, up from 0.88 units per week in the third quarter of 2002. Additionally, 54 percent of all new single­ family detached homes that were offered for sale in the fourthqua rter of 2002 sold, compared to 46 percent in the third quarter.

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek. Hassler-Silver Creek CFD #10 File #9064 SC Page 21

In the first quarter of 2003, developers were lowering prices on new homes. In 2002, this also occurred; however, it was done in the form of individual sales concessions and "free" upgrades. In this way, developers were able to hold buyers to sale contracts. Once these units closed, developers could simply lower base prices. Concessions also disappeared with lower prices. As we saw in 1996/1997, buyers are purchasing homes at prices below what they can afford, as a cushion to possible job loss.

In the attached new housing market, the distribution of sales during the fourth quarter of 2002 was as follows:

Price Distribution % of Total Sales $350,000 - $450,000 22% $450,000 - $550,000 50% Above $550,000 28%

There were no sales below $350,000.

The rise and fall of sales activity in attached housing is largely driven by product pricing in detached housing.

As a practical demonstration, from the second to fourth quarters of 2002, the average volume of weekly sales in new attached housing communities declined from 1.8 units to 1.3 units in the third quarter, and to 0. 7 units in the fourth quarter. What these statistics suggest is that given a choice, new home buyers still preferdetached single-family living, but will buy attached housing if they are cons trained by price.

Resale Housing According to statistics provided by Data Quick Information Services, for 2002 as a whole, the median single-family home price in Santa Clara County was $492,000, up 4 percent from 2001. The total sales volume was 17,207, up strongly from a lackluster 13,112 sales in 2001, but down slightly from the year 2000 figure of 17,614. As of March i, 2003, there were 5,72 1 homes (attached and detached combined) listed for sale in Santa Clara County.

During the first quarter of 2003, 2,451 detached single-family homes and 985 attached single­ family homes have sold in Santa Clara County as shown in the tables on the following page. This information is taken from the Santa Clara County Multiple Listing Service ("MLS ") and includes primarily existing homes.

These numbers indicate that there is ample choice in the market. This factor is likely to exert downward pressure on, or at least a stabilizing influence on, home prices into the foreseeable future.

DataQuick, which tracks the housing market slightly differently, reports that 1,450 homes (attached and detached) were sold in Santa Clara County in February, down 15 percent from 1,705 a year ago. The median price was up slightly, however, to $456,000 from $436,000, a 4.6 percent change. This information is more general than that provided by the MLS, but consistent in its indication.

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek. Hassler-Silver Creek CFD #10 File #9064 SC Page 22

DETACHED SINGLE-FAMILY 2003 2002 2001 #of Total #of Total # of Total Month Sales Volume Sales Volume Sales Volume January 787 $487,384,285 944 $578,448,066 599 $456,347,644 February 698 $442,749,836 1,049 $676,719,748 571 $407,318,945 March 966 $630,210,565 1,340 $876,576,023 843 $648,359,211 April 1,104 $737,649,936 1,492 $1,008,843, 143 682 $468,649,919 May 1,418 $991 , 168,637 770 $509,437,287 June 1,186 $8 10,219,418 998 $686,278,744 July 1,064 $729, 706, 165 928 $599,035,998 Auqust 942 $6 18,723,754 1,028 $672,636,541 September 879 $580, 1 64,723 797 $483,067,534 October 996 $637,515,013 741 $450,589, 993 November 856 $549,265,687 757 $466,354,630 December 935 $613, 1 14,928 888 $534,740,913

ATTACHED SINGLE-FAMILY 2003 2002 2001 #of Total #of Total #of Total Month Sales Volume Sales Volume Sales Volume January 296 $11 0,064,813 329 $11 4,090,889 250 $ 85,016,688 February 306 $1 12,024,076 398 $141,121 ,549 236 $105, 192,514 March 383 $140,690,839 501 $180,993,084 322 $133,966,202 April 389 $145,444, 724 535 $194,727,841 286 $ 95,304,950 May 612 $225,966, 176 236 $ 88,497 ,666 June 443 $166,802,290 322 $11 7,894,961 July 444 $169,039,264 286 $103,800, 109 August 424 $157,210,118 378 $136,058,683 September 343 $126,371 ,748 247 $ 87 ,888,267 October 418 $156,018,938 238 $ 82,001, 148 November 324 $121 ,325,974 277 $ 95,615, 136 December 325 $11 8,954,737 197 $ 66,952,234

According to an article published March 14, 2003 in the San Jose Mercury News, in Santa Clara County, there are nearly 6,000 homes currently on the market. Last year at this time, only 3,772 properties were on the market. In January 2001, there were 2,703 on the market. Generally, as inventory rises, prices fall,as long as other factors remain constant.

698 single-family homes were sold in February, down from 1,049 in February 2002. Condominium and townhome sales were slightly stronger, with 306 properties changing hands, about 100 fewer than last year but roughly equal to historic activity during the month.

Perhaps more telling, however, is the fact that the aggregate value of home, condominium and townhome sales fell in February by 32 percent to $554 million from a year earlier. Santa Clara Countyhome sales have numbered under 1 ,000 forevery month but one since the end of the year 2000. In contrast, from 1998 to 2000, sales regularly exceeded 1,200 per month and occasionally topped 1,400. Monthly sales revenues routinely exceeded $600 million for single­ familyhomes alone, and sometimes topped $900 million.

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek Hassler-Silver Creek CFD #10, File #9064 SC Page 23

What all this means is that there are ample choices in the market. Inventory is up 59 percent over last February. There are currently 179.6 days of inventory for single-family homes and 151.2 for attached homes. Inventory is at its highest point since July 2002. While sales prices are up slightly, marketing periods/days on the market have lengthened. Demand is adequate under $1 million and anemic over $2 million. In order to compete with existing inventory, new homes need to be appropriately priced and professionally marketed. Larger developments need to segment the market in order to achieve an economic absorption rate.

Conclusion Despite the struggling local economy, including the office and industrhl real estate markets, the residential market is showing emerging strength. Unemployment remains relatively high and homebuyers are not buying all that they can afford. Demand is strongest for finished homes priced under $1 million. Although the number of transactions is down, volume is up, and there have been some price gains. Transaction volume appears to be picking up as we approach the summer, traditionally a strong season forhome buying.

There is a dwindling supply of residential land for development in Santa Clara County, and the costs and time-lines needed before building are often significant. The Subj ect Property is a large development, with substantial entitlements and a segmented product mix. These factors point to the potential for success, with appropriate pricing and marketing. An absorption analysis and further information concerningcompetitive development s is presented later in the report.

EXPOSURE PERIOD The term exposure period means the amount of time necessary to achieve an open market sale of the property under current market conditions, assuming normal market exposure and the consununation of a sale consistent with the terms and conditions of our definition of market value. Exposure period is a retrospective period associated with the consummation of a hypothetical transaction at the appraised value as of the valuation date.

There is very good demand, relative to supply, for approved subdivision land in Santa Clara County at this time. Developers generally approach each other directly when land is sold with this level of entitlements. In essence, then, the marketing period is nominal (zero). Even without entitlements, land suited for residential development within a reasonable time frame generally has a handful of large developer/builders competing for it. While there is reduced volume of housing transactions, the values estimated in this report are predicated on current absorption and pricing, as we would expect a potential purchaser's offer to be. Based on a consideration of these factors, we estimate the exposure period for the Subject Property at six months or less. This assumes normal market factors and the absence of any duress, and pricing consistent with our opinion of value.

PROPERTY TAXES AND ASSESSMENTS As a result of the passage of Proposition 13 by California voters in 1978, assessed values were rolled back to 1974- 1975 levels. Subsequent increases in the enrolled value are limited to the cost of living, with a maximum of 2 percent per year, absent transfer or new construction. Property is enrolled at 100 percent of market value as determined by the Assessor, upon transfer of ownership or significant new construction. The maximum tax rate cannot exceed 1 percent of

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek, Hassler-Silver Creek CFO #10 File #9064 SC Page 24 the enrolled value, plus direct and special assessment bonds and fees either approved by the voters or imposed in accordance with special benefit assessment district procedures.

Accordingly, assessed values and tax liability throughout California vary greatly, even among similar properties, depending on how recent is the last transfer of ownership. Tax burdens frequently bear little relation to property value and may often be expected to increase substantially followinga transfer of ownership: By definition, market value hypothesizes a sale, which would trigger a reassessment for tax purposes. In our appraisal of the Subject Property, we have based our property tax estimate on our opinion of value, the current tax rate and assessment amounts. Current tax info�ation on the larger Subject Property from which the individual tracts are being subdivided is as follows:

Current Tax Rate: 1.1626% (not including existing assessments)

ASSESSED VALUE AND TAXES APN La nd Improvements Total Taxes (including. Asse ssments.) 679-08-001 $2,209,776 0 $2,209, 776.00 $25,997.04 679-09-007 $1,053,589 0 $1,053,589.00 $12,285.14 679-1 5-001 $4, 164,058 0 $4, 164,058.00 $48,522.48 679-1 5-002 $16,891,652 0 $16,891 ,652.00 $210,314.98 679-1 6-010 $400,074 0 $400,074.00 $4,706.76 Total $24,719,149.00 0 $24,719,149.00 $301,826.40

EXISTING ASSESSMENTS Flood Clean Safe SJ Open Vector SJ Maint. APN Control Creeks Library Space Control Dist. # 15 Total 679-08-001 $98.20 $147.72 $25.00 $30.20 $5.08 $306.20 679-09-007 $10.20 $15.20 0 0 $10.74 $36.14 679-1 5-00 1 $40.32 $60.10 0 0 $10.74 $1 11.16 679-1 5-002 $163.58 $243.78 0 0 $10.74 $13,514.56 $13,932.66 679-16-010 $13.60 $20.60 $6.24 $10.00 $5.08 $55.52 Total $325.90 $487.40 $31.24 $40.20 $42.38 $13,514.56 $14,441 .68

Note that these parcel numbers and figures are from the current tax roll. They do not reflect dedications and the recorded tract maps forseveral of the tracts. They also include the land to be occupied by the clubhouse and golf course. They are included here to identify the existing special assessment, direct assessments, and tax rate.

Property tax payments are current as of the appraisal date. Currenttaxes are low relative to those which would result froma transfersuch as that hypothesized by the definition of market value.

OVERVIEW OF THE RANCHON SILVER CREEK The Development is located within the city limits andurb an service area of the City of San Jose, County of Santa Clara, State of California. The larger site from which the individual tracts of The Ranch on Silver Creek are being subdivided consists of approximately 580 acres lying east of Highway 101, southwest of Verba Buena Road, west of Silver Creek Valley Road and east of

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek Hassler-Silver Creek CFD #10 File #9064 SC Page 25

Dove Road. Photographs are included in the Addenda. An aerial map is presented on the next page.

The Development encompasses a proposed residential community of approximately 580 acres. Land uses within the Development include (i) approximately 154 acres containing eight (8) different tracts to be improved with up to 538 single-family detached homes, duet style condominiums or townhome style condominiums; (ii) approximately 13 acres to be improved as Hassler Parkway; and (iii) approximately 413 acres of open space, including approximately 166 acres of private open space that will be improved with an 18 hole, championship-caliber golf course, approximately 240 acres that will be maintained as a conservation area and approximately 7 acres of public open space to be ai extension of an existing linear City park. Only the lots within the Development on which the residential units are being constructed will be subj ect to the levy of Special Taxes, and so these are the only lots appraised. The property in the District originally consisted of five (5) separate Santa Clara County Assessor's Parcels, but the Master Developer has recorded tract maps subdividing several of the original parcels, and it is expected that, upon completion of the Development, there will be a separate County Assessor's Parcel for each of the 538 dwelling units, and other separate parcels will be established for the public and private open space areas.

The tracts have either tentative or final tract maps. Because all of the tract maps have not been recorded, the reader is referred to the tract maps for the applicable egal descriptions. For those tract maps which have not yet been recorded, the tract is a portion of an existing assessor's and legal parcel. The tracts are identified as follows:

CFD No. 10 Assessor's Parcel Breakdown per Tract

Assessor Tract Parcel Number Number(s)

9164a 679-38-009 thru 679-38-023 679-39-001 thru 679-39-024 9164b 679-38-001 thru 679-38-008 679-38-024 thru 679-38-053 679-39-025 thru 679-39-047 9165 679-35-001 thru679- 35-014 9166 Portion of679- 15-004 9167 Portion of 679-15-004 9168 Portion of 679-1 5-004 9169 Portion of 679-1 5-005 9170a 679-37-001 thru 679-37-047 9170b 679-37-048 thru 679-37-059 679-36-001 thru 679-36-032 9171 679-34-001 thru 679-34-047

The mailing address for the property has historically been 4341 -4342 Silver Creek Road and 4160 Dove Hill Road, San Jose, California 519 3 8-2409.

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek, Hassler-Silver Creek CFD #10, File #9064 SC Page 26

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek, Hassler-S ilver Creek CFD #10. File #9064 SC Page 27

The larger Subject Property site is a complex development which has, through the approval process, solved a number of issues related to topography and soils, habitat and easements. The reader is referred to the following documents, together with their supporting documentation, for additional information:

• Final Enviromnental Impact Report for the Cerro Plata Residential & Golf Course Development, prepared for the City of San Jose, dated October 1993,

• Addendum to the Cerro Plata Final Environmental Impact Report for the Ranches at Silver Creek, prepared for the City of San Jose, dated January 1999, and

• Second Addendum to the Cerro Plata Final Environmental Impact Report for the Ranch at Silver Creek Development, prepared for the City of San Jose, dated June 2002.

Following is a summary of the primary issues affecting the development of the Subject Property.

The Development required substantial grading and construction. The area, prior to the start of grading for the Development, was a steeply sloped hillside with elevations from 200 to 690 feet above sea level. Silver Creek runs near the northeastern boundary of the District. The upper elevations offer impressive views to the north, northeast and west.

In general, development is set somewhat below the ridgelines to protect view corridors. Vegetation generally consists of grasses along the ridgelines, with some native trees and bushes in the ravines and valleys.

Bedrock in the area is of the Franciscan Complex. Soils on the site primarily consist of the Montara Rocky Clay Loam. Serpentine outcroppings are present toward the northerly site boundary. Serpentine rock occurs widely throughout the State, Bay Area, and Santa Clara County. Asbestifo rm minerals canoccur in serpentine. The development site includes areas of serpentine rock that imy contain naturally" occurring chrysotile asbestos. It is our understanding that the grading of the lots has been done in such a way as to effectively encapsulate any asbestos.

The Development is located in a City of San Jose Geologic Hazard Zone. The Silver Creek Fault is mapped within the northeasternboundary of the site, along Silver Creek Road. Silver Creek is designated a Quaternary fault ( one that moved between 200 and 2 million years ago), the classification changes to "pre-Quaternary" to the north of the Subject Property. The Silver Creek Fault is not zoned by the CaliforniaDivision of Mines and Geology under the provisions of the Alquist-Priolo Special Studies Zones Act of 1972. The nearest designated Special Studies fault is a short portion of the Evergreen fault, approximately 1.5 miles northeast of the site. Other potentially active faults mapped within the vicinity of the Development include the Piercy fault (1/2 mile southwest) and the Quimby fault (2.5 miles northeast). The area near the Silver Creek fault has the potential for ground rupture. The southwestern slope has a high potential for seismically induced landslides. The northern and eastern slopes of the site are within a zone having moderate landslide potential. The ridge-top is in a zone with low landslide potential. The proposed development incorporates the fault setback line and is not considered to have more potential for seismic impact than competing property.

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek. Hassler-Silver Creek CFD #10 File #9064 SC Page 28

Appropriate habitat for five special status plants and 18 special status animals was identified on the site. As part of the conditions of approval, the developer is acquiring offsite habitat, as well as funding conservation of non-disturbed onsite habitats, at a significant cost, currently budgeted at a total of approximately $5 million From the perspective of a prospective resident, the open space and habitat is an amenity, reasonably typical of other development s in Silver Creek.

The site is crossed by two major power transmission lines. These lines are not uncommon in the area, but does project a visual nuisance. Lots near individual towers would be expected to have lesser marketability than lots not so affected. However, there is a segment of the market to which this would be acceptable.

Access to the site is available from Dove Road and Silver Creek Valley Road. A major connector, HasslerPark way, has been constructedbetween Dove and Silver Creek Valley Roads as part of the Development. This "back bone" provides access to the Subject Property tracts.

ZONING AND APPROVALS The Subject Property is located in the City of San Jose and is zoned "A(PD)---Planned Development." This is a "planned unit development" zoning designation that allows for development standards of a development to be tailored to the specific size, shape and topography of the site. The development standards for such zoning districts are usually part and parcel of the zoning, and any changes to the site require a change in the zoning. The Subject Property also lies within the boundaries of the Silver Creek Planned Residential Community, and its General Plan designation is Integrated Residential/Recreation. This designation allows for the development of up to 5 50 dwelling units in combination with an 18-hole public golf course. The intention of the zoning is to integrate residential and recreation uses while preserving the natural hillside character of the site.

In the case of the Subj ect Property, the Planned Development Zoning was first approved by the City Council on October 5, 1993 for 550 single-family units and an 18-home golf course (PDC9 1 -05-039). The rroperty was subsequently sold to an affi liate of the Master Developer who secured a related Planned Development Permit (PD98-05-028) six years later in 1999. At that time, the approved site design was modified to incorporate environmental mitigation measures to improve sensitivity to and avoidance of biotic habitat, as had been previously identified in the development's Final Environmental Impact Report.

On February29, 2000, a new Conforming Planned Development Zoning (PDC99-07-058) was approved by the City Council to allow a slight modification to the setbacks in order to better address grading design issues. This modification did not create any substantial changes to the previous approval. The new zoning retained all previous development standards and environmental mitigation measures.

On June 18, 2002, the City Council approved a subsequent Conforming Planned Development Zoning (PDC02-0l l) to accommodate the reconfiguration of the Development 's lots to avoid the on-site relocation of two high-tension overhead power lines and high-pressure natural gas pipeline. Under the earlier approval, the property owner had intended to move the utility lines. However, according to the San Jose Staff Report, internal financial difficulties within Pacific Gas and Electric made gaining the final approval and cooperation of the utility problematic.

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek Hassler-Silver Creek CFD #1 0 File #9064 SC Page 29

Therefore, to allow the Development to proceed, the developer sought the change to the P tanned Development Zoning which adjusted the range of lot sizes in development Neighborhoods "C" and "D" from 8,000 to 10,000 square feet toa mix of 6,000, 5,800, and 3,800-square foot lots. This change accommodated the utilities, thereby allowing them to remain in their current locations. On February 18, 2003, the City Council approved another Conforming Planned Development Zoning (PDC03-003), which functioned as an "amendment" to the previous Planned Development Zoning in that it only allowed for minor setback changes and clarification of previously approved setbacks. This conforming rezoning did not create any substantive changes to the previous approval. All previously approved development standards and environmental mitigation measures were retained. Also according to the San Jose Planning Department StaffReport on the development for the June 18, 2002 City Council hearing, this development was carefully coordinated with other governmental resource agencies, particularly the U.S. Fish and Wildlife Service. During the course of the zoning and approval process, the total number of approved units was reduced from 550 to 538.

Conclusion The Subject Property has a "custom" planned development designation which essentially makes the design of the proposed golf course and 538-unit residential development part and parcel of the zoning. The zoning is in conformance with the General Plan's Silver Creek Planned Residential Community designation of Integrated ResidentiaVRecreation. However, any further changes to the development 's site plan, lot configuration and street plan would require a change in the zoning.

DESCRIPTION OF THE TRACTS The reader is encouraged to view the Conceptual Site Plan reproduced on the next page IB an orientation to the tracts of The Ranch on Silver Creek.

As indicated previously, The Ranch on Silver Creek has experienced a complicated entitlement process that has lasted well in excess of 10 years. Construction of the development entails significant infrastructure improvements with a budget of slightly over $97 million as of March 31, 2003. This does not include in-tract site development costs, which are budgeted at slightly over $3 3 million Included in the general infrastructure figure are streets, bridges, storm drains, sanitary sewer, utilities, and landscaping. One unusual item is the $675,000 cost required to restore the Hassler Barn. All but $2,948 of this had been spent as of March 31, 2003. Also included are about $5.4 million for right of way acquisitions, mitigation land acquisitions and management/restoration of environmentally sensitive lands. According to Mr. Greogry Mix, these latter two items may be spread over as much as 10 years. Thisis a projection based in part, on mitigation lands potentially required to be acquired, as well as management contracts forthe mitigation lands adjacent to the Subject Property. According to Mr. Mix, because these projections are "worst case" and made with incomplete information about what ultimately will be needed to be done over time, there is the potential for some reductions.

The Hassler - Silver Creek Community Facilities District is funding $10 million of the required infrastrocture, as identified by Exhibit A of the Acquisition Agreement. At the City's discretion, the improvements being fundedare associated with roads, as identifiedon the next two pages:

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek, Hassler-Silver Creek CFO #10, File #9064 SC Page 30

''FACILITIES TO BE ACQUIRED BY THE DISTRICT Hassler Parkway, consisting of a two-lane road, generally 40 fe et in width from curb to curb, within a 60 foot right-of-way. There are additional lanes and width at major intersections. The road extends from Silver Creek Valley Road at the eastern boundary of the Ranch on Silver Creek development site to Dove Road at the western boundary, a total length of approximately 9,000 feet. The parkway passes over Silver Creek via a vehicular bridge elevated above the creek corridor. Public utilities within the right of way include storm drainage and sanitary sewer. The foregoing improvements include, without limitation, the installation of related curbs, gutters, sidewalks and streetligh ts.

.�-:I...,,

l::j JI �-.. :1 �1 ,_:itj; j 161�I ii ,J! I:!:•

HULBERG & ASSOCIATE:S, INC. The Ranch on Silver Creek Hassler-Silver Creek CFD #10 File #9064 SC Page 31

Public streets located in the CFD within generally 40 to 52 foot wide rights of way together with all included storm drainage and sewer improvements. Such streets are located within Tracts 91 70 and 9171, with respect to which maps have been recorded and within Tracts 9167, 9168, and 9169, the maps for which are in process and expected to be recorded in 2003. The foregoing improvements include, without limitation, the installation of related curbs, gutters, sidewalks and street lights.

The Facilities will include the costs of permitting, bonding, insurance, legal and administrative costs (but any such costs for development management, construction management or supervision or administrative personnel of the owners of land in the District or any party related to the owners of land in the District will not exceed five percent �%) of the third-party hard construction costs of the related facility), site investigation, engineering, architectural and other design and consulting costs, contractor, inspection, safety, signage, security and other costs directly related to the construction of the facilities identified above.

While Hassler Parkway was substantially complete as of the date of value, not all of the in-tract public streets had been constructed. However, over $69 million of infrastructure improvements had been completed and paid for, and an additional over $13 million of in-tract improvements had been completed and paid for as of this writing. Additional work not yet booked had also been completed.

The development 's product types will include "duet-style condominiums", townhouse-style condominiums and single-family detached homes. Lot sizes range from 3,800 square feet to 12,000 square feet. Base pricing is projected to range from the low $600,000's to over $1,000,000, as described further below. Approximately 80 percent of the lots will have views, which, according to the developer's representative, are expected to command premiums of 15 to 20 percent.

While the developer, William Lyon Homes, Inc., plans to construct all of the ho�s and sell them at retail, there is no reason that individual tracts could not be sold in bulk.

The homes are to be located in eight different "neighborhoods" or tracts that both surround and are interspersed within the golf course. Each is briefly described below. The lot size categories and classifications conformto the developer's product typing. Specific lots sizes vary.

Status of Development: As of May 22, 2003, the Development site has been rough graded to final homesite pads, the major roadway through the Development, Hassler Parkway, has been paved with several other interior streets completed and paved, model homes are under construction in four (4) of the eight (8) tracts and several greens of the golf course have been completed. Construction work is ongoing.

The homes to be constructed in the Development, and \\hich will be built on the parcels subject to the levy of Special Taxes (the "Taxed Parcels"), will be located in eight (8) different tracts that both surround andare interspersed within the golf course. Each tract is briefly described below. The lot size categories and classifications conform to the Master Developer's product typing with one exception in Tract 9164, discussed furtherbelow. Specific lots sizes vary.

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Tra ct 9164 (Siena and Mariposa): These neighborhoods are located in the northwesterly section of the Development site. This tract is expected to have two product types: 61 single­ family homes 53 of which will be constructed on small lots of approximately 3,800 square feet and 8 of which will be constructed on 6,000 square foot lots; and 78 duet style condominium units on 39 lots (two units that lie side-by- side sharing a common wall). The single- family home product type will be the same for the 3,800 square foot lots and the 6,000 square footlots. All internal streets within this neighborhood are expected to be private.

The duet style condominium units are arranged in a semi-circular pattern and line both side of Thornbury Lane, a collector street. The units on the easterly side of the street back lp to the small- lot, single-family product which have adjoining rear yards. However, the units on the westerly side of the street will be buffered by a strip of open space to the west and, as a result, are afforded more privacy. The duet style condominium units in these neighborhoods will have three separate floorplans. Average unit size is projected at 2,400 square feet, encompassing 3 or 4 bedrooms and 3 bathrooms. Each unit will have a 2-car garage. Home construction is anticipated to occur in four phases, and construction of the first phase has begun. Pricing is projected to be in the mid- to high- $600,000's. Two model homes are under construction. Sites and roads are graded.

The single-family units in these neighborhoods will have three floorplans. Average unit size is proj ected at 2,400 square feet, encompassing 3 or 4 bedrooms and 2 or 3 bathrooms. Each unit will have a 2- car garage. Pricing is projected to be in the high $600,000's to low $700,000's. Construction on these units is anticipated to occur in three phases, and construction of the first phase has begun.

Tract 9165 (Casa Bella) : Immediately south of the duet units in Tract 9164, is the Casa Bella neighborhood. For this tract, a 56-unit townhouse style condominium neighborhood is planned on 14 lots. These units are to be constructed on seven "blocks" that are separated by a network of internal private access roads. The townhouse style condominiums will have four floorplans. Average unit size is projected at 2,400 square feet, priced from the low $600,000's. Each unit will feature 3 or 4 bedrooms and 2-1/2 to 3-1/2 bathrooms and a 2-car garage. Home construction is anticipated to occur in three phases. One model is currently under construction.

Tract 9166 (Tesoro): Immediately northeast of the Esperanza tract described below is a planned 22-lot, 44-unit duet style condominium subdivision. Oriented around two cul-de-sacs, this subdivision has an open-space buffer that surrounds the rear of virtually all the development's lots. Many of the lots will have views. The tract's streets will be private. The site is rough graded but a fm al map has not yet been recorded. In San Jose, trere is not a major distinction between tentative and final map, since fm al approval generally entails only the payment of fees. The developer is currently planning to bring this tract to the market near the end of the overall Development ; however, a prospective purchaser would most likely simply pay the fees and build. The tract is expected to have homes with three different floorplans that will be built in two phases, commencing in the Fall of 2003. Average unit size is projected at 2,600 square feet. Each unit will contain 4 or 5 bedrooms, 3 or 4 bathrooms, and a 2 car garage. Pricing is projected in the low $700,000's.

Tract 9167 (Esperanza): Immediately east of the Casa Bella townhouse tract is a neighborhood planned for development with 74 single-family detached homes on lots of approximately 5,800

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek Hassler-Silver Creek CFO #10 File #9064 SC Page 33 square fe et. These lots are to be arranged in blocks that front fourprivate streets. The lots that run along the tract's perimeter to the east, west and south will have rear yards that adjoin open space, affordingtheir occupants an element of privacy. The seven lots of the tract's westernmost interior block are also buffered by a strip of open space located on its west side. The lots of the easterly interior block, however, have adjoining rear yards and have no open space buffer. The site has been graded, but a final map ms not yet been recorded. The homes in this tract are expected to have three different floorplans that will be released four phases, with construction of homes expected to commence in the Fall of 2003. The average units size is projected at 2,600 square feet, encompassing 3 to 5 bedrooms, 3 to 4 baths, and a 3 car garage. The units are expected to be priced in the mid $700,000's to mid $800,000's.

Tract 9168 (Montesa): Immediately north ofthe Esperanza neighborhood, on the north side of the Developmen:'scentral parkway, a 54-lot subdivision with lots of around 6,000 square feet is planned. It is expected that all but four ofthe lots in this tract will be placed along public streets in such a way so that all rear yards abut open space buffers. The bts on the subdivision's two westernmost streets face out to the rear-yard buffers of the lots to the east. This tract has been rough graded, but a final map has not yet been recorded, and streets have not yet been improved or dedicated. The subdivision is expected to have three models that will be released in four phases, with construction of homes expected to commence in the Fall of 2003. The average unit size is proj ected at 2,900 square feet, containing 4 to 5 bedrooms, 3 to 4 bathrooms and a 3 car garage. Pricing is projected in the mid $800,000's to low $900,000's.

Tract 9169 (Hacienda): This subdivision is expected to consist of 33 lots in the range of approximately 12,000 square feet. It lies immediately adjacent and southwest of Tract 9170 described below. All but 10 of the lots are expected to have non-adjoining rear yards buffered by open space. While this tract has predominantly valley views, it's access and topography are such that it has a feeling of a private enclave directly below the golf course clubhouse, above golf course greens 1 through 6. This tract is expected to have public streets, but they have not yet been dedicated or improved. There are expected to be three models and three phases, likely released toward the end of the overall completion of the Development, with construction of homes currently estimated to commence no earlier than late Spring of 2004. Average units size is projected at 4,500 square fe et, encompassing 4 to 5 bedrooms, 4 to 5 bathrooms, extras such as den and library and 4 car garages. Pricing is expected to be $1.3 million or more.

Tract 91 70 (Portofino and Provence): Located in the center of the Development, the Portofino subdivision is a tract of 44 lots. Each lot is around 10,000 square feet in size. With the exception of five lots located in the tract's western area, each homesite will have a rear yard buffered from its nearest neighbor. This tract features some of the best views in the Development. The tract is planned to have three models that will be released in three phases, with the first phase currently under construction. The average unit size is projected at 4, 100 square feet, encompassing 4 or 5 bedrooms, plus den or library, 3-1/2 to 4- 1/2 bathrooms, and a 3 or 4 car garage. Pricingis projected at $1.2 million and above.

Immediately adjacent to the Portofino development and within the same tract is a 47-lot subdivision with lots in the range of 8,000 square feet (Provence), which is a continuation of the development described for Tract 9171 below. Some of the lots within this neighborhood will have open space to the rear. These homes are to be released as the third, fourth and fifth phases of the Provence development, with the construction of homes estimated to commence in Spring

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek Hassler-Silver Creek CFO #10, File #9064 SC Page 34 of 2004. Average unit size is projected at 3,800 square feet, containing 4 and 5 bedrooms and 3- 1/2 to 4- 1/2 bathrooms, library and/or den, and a 3-car garage. Pricing is projected from the low $1 million's.

Sites in this tract have been rough graded. Streets are completed, models are under construction and construction of the first phase of each of the two neighborhoods has begun. Most lots have either valley or golf course views.

Tract 91 71 (Provence): This tract also is expected to consist of 47 lots in the range of 8,000 square feet. Oriented around five cul-de-sacs, the subdivision is expected to have ample open space that will also serve as a rear-yard buffer for each lot. These lots will be released in the first, seco:rrl and sixth phases of the Provence Development's 8,000-square-foot lots. Many of the lots have views to downtown San Jose. Unlike the other neighborhoods in the Development, this tract is located some distance away from the Development's other subdivisions. It also lies immediately south of greens 12-17 of the golf course. The Provence development will have four model homes. Units are the same as those described above for the 8,000 square foot lots in Tract 9170. Home sites have been graded to rough graded lot condition in this tract. Streets have been completed, models are under construction, andconstruction of the firstphase has begun.

HIGHEST AND BEST USE One major objective of property analysis is to develop a conclusion about the highest and best, or most probable, use of a property which yields its highest present value. Highest and best use must be reasonable, probable, and proximate (likely to occur soon, if not immediately).

It is not speculative or conjectural. The fourconsid erations of highest and best use are that it be physically possible, legally permissible, financiallyfeasible, and maximally productive.

Valuation is highly dependent upon the conclusions set forth in this analysis. The fourtests for highest and best use are analyzed as follows:

• Legal Permissibility: The City of San Jose's current planning goals for the Subject Property are to see it developed residentially at a density of no more than one dwelling unit per acre. The Subject Property is entitled, with either approved tentative or finalmaps after a lengthy process. At this point, there is no logically supported alternate use that would differ significantly from that which is allowed.

• Physical Possibility: The Subj ect Property's rolling to level topography and existing infrastructure support, plus the predominant land use in the area, make residential development physically possible.

• Financial Feasibility. As discussed in the Location Description section of this report, Evergreen has evolved as an q,scale community for families, largely driven by the physical beauty of the environment and the excellent school district. The median income for Evergreen is considerably higher than San Jose as a whole. The absorption statistics presented in the market overview section and the specificdevelopment comparables presented later in the report

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support the fact that there is adequate demand for the Subj ect Property's lots. The Subj ect Property's actual costs may not prove feasible, but are atypical and based on some unusual factors, including several starts and stops in construction.

• Maximal Profitability. Clearly, among the possible legal uses which will produce a net return and/or create value to the site, residential development is that use.

• Therefore, in view of the above factors, residential subdivision development is considered the highest and best use of the site. Residential development is physically possible due to site configuration and characteristics, legally pennissible under the currert General Plan, and maximally profitable in terms of immediate return on investment to the developer.

Highest and Best Use Conclusion Based on our analysis, we conclude that the highest and best use of the Subject Property site, as vacant and available fordevelopment, is forreside ntial subdivision development.

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SECTION III - VALUATION

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APPROACH TO APPRAISAL The estimation of a real property's market value involves a systematic process in which the problem is defined and the data required is gathered, arnlyzed and interpreted into an estimate of value.

Three methods of valuation are applied to the appraisal of vacant land. The most often used approach is the Direct Sales Comparison Approach. This method involves the comparison of the Subject Property with recent sales of comparable properties on the basis of sale price per square foot or sale price per acre. Adjustments are made for differences in time, location, topography, etc., as necessary.

A second method of land appraisal is the Land Development Approach. This approach involves estimating the development costs of installing all utilities and off-sites. These costs can be subtracted from a known improved lot value ( established by sales comparison) to arrive at an estimate of raw land value or added to the known raw land value to arrive at the value of an improved site.

The third method employed is an Income Residual Method. An estimate is made of the potential net income which can be earned from the site improved with buildings. The cost of trese improvements is estimated to determine the portion of the income needed to supply a fair return on these costs. The residual income is available for a return on the land. Therefore, this income is capitalized into an indicated land value.

Generally, the Sales Comparison Approach is the preferred method for estimating the value of land. This is because it is directly supported from the market with actual sales data.

In estimating market value, we have followed the guidelines set forth by the State of California Debt Advisory Commission in the publication dated May 1994, entitled "Appraisal Standards for Land Secured Financings."

In this appraisal, we are estimating the bulk value of the individual tracts, assuming completion of the CFO-fundedimpr ovements. The tracts are in various states of completion and encompass several distinct product types. Data availability differs fordiff ering product types. For example, while there is market data available to support individual finished lot sales of 8,000 square fe et, individual townhouse lots simply do not transact in the market. Bulk sales information, however, was available for most product types.

A bulk sale incorporates the concept of selling multiple lots to a single purcraser in bulk, in a single transaction. Bulk sales are limited in the Bay Area because the profit from building product on a lot has always been very good relative to the profitfrom ju st entitling or developing the land. Typically, a bulk sale involves a discount from the retail value of the product being purchased. The discounts can range from 5 to 50 percent, depending on factors such as the size of the development, anticipated risk, and the strength of the market.

Bulk Sales Values were estimated through a residual method using a discounted cash flow technique (DCF). Average finished retail lot values were based either upon the Sales Comparison or Cost Approach to value. Adjustments were made forstage of completion in each

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek Hassler-Silver Creek CFD #10 File #9064 SC Page 38 tract. Marketing and selling costs, profit andtaxes were reflected. The discount rate reflectsthe estimated absorptionperiod, projected profit, and relative risk of the forecast.

The following two sections present 1) The data and assumptions supporting the Discounted Cash Flow Valuations, and 2) The data supporting the Bulk Sale Valuations. Following that discussion, we will apply both methods to each tract in The Ranch on Silver Creek.

DISCOUNTED CASH FLOW VALUATION Retail Lot Valuation The Sales Comparison method is the most common way of estimating market value for land. This method hypothesizes that a prospective purchaser would pay no more for a given property than the amount for which he could purchase another, substitute property, of equal utility. Viewed as substitute properties, sales comparables are first selected, then they are compared to the property being appraised (the Subject Property).

The sales comparison approach involves comparison of the Subject Propertyto similar properties that have sold or that are offered for sale. These sales are reviewed for differences from the Subject Property and the comparable in the date of sale, location, physical characteristics, and other factors. The comparable properties are then adjusted to the Subject Property in order to formulate a value estimate.

The reliability of the approach depends on: 1) the availability of comparable sales; 2) the degree of similarity the sales and listings have to the property being appraised; and 3) the verification and accuracy of the sales data.

In the comparison of the most relevant sales to the Subj ect Property, there are nine basic elements to be considered:

1) the property rights conveyed 2) the financingterms of sale 3) the conditions of sale 4) market conditions (time) 5) location 6) physical characteristics 7) economic characteristics 8) use 9) any no1rrealty components of value

As indicated previously, most developers find it more profitable to build and sell the houses, rather than just the finished lots. For_ this reason, sales of finished lots in new subdivisions in the area are virtually no1rexistent. Our extensive researchyielded the sales presented in the table on the next page as the most relevant available data. We have grouped the sales in rough parallel to the Subj ect Property's product types. The discussion will proceed from largest to smallest lots.

Discussion of General Adjustments The sales properties were adjusted to reflectdiff erences from the Subject Property, resulting in both positive and negative adjustment.

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COMPARABLE FINISHED LOT SALES Sale Size Sale Price N APN Da e Per F 8,000 to 12,000 s.f. lots Silver Creek San Jose 5620 Country Club Parkway May-02 0.34 985,000 $66.51 680-14-019

2 5674 Country Club Parkway Apr-02 0.27 964.000 $81.96 680-16-024

3 1691 Marseilles Ct. Mar-00 0.39 750,000 $44.12 680-14-030

4 5751 Poppy Hills Pl. Mar-98 0.28 400,000 $32.79 680-34-009

5 5494 Morningside Dr. May-98 0.34 415.500 $28.06 680-33-053

6 17415 Wedgewood Avenue Mar-03 0.20 545.000 $62.56 Los Gatos 409-15-001

7 12623 Quito Road Apr-03 0.23 409,000. $40.90 Saratoga 386-12-068

8 1556 Walters Avenue Jul-02 0.21 47 5,000 $51 .92 Campbell 403-18-1 19

9 20305 Sea Gull Way Feb-03 0.25 785,000 $72.35 Saratoga 386-52-020

10 22551 Ricardo Road Feb-03 0.26 $71 .47 Cupertino 356-01-054

11 20903 Hanford Drive Dec-02 0.22 $74.87 Cupertino 326-30-078

12 22345 McClellan Road Nov-02 0.23 too,ooo $70.00 Cupertino 357-05-005

5, 800 to 6,000 s.f. Jots 13 824 Inwood Drive Mar-02 0.14 $57.42 Campbell 403-08-1 06

14 16394 BennettWay May-02 0.15 $56.82 Los Gatos 424-07-034

15 1216 Sherwood Avenue Apr-02 0.16 $36.11 Santa Clara 230-1 6-031

16 177 Loma Alta Avenue Mar-02 0.14 $100.00 Los Gatos 532-29-038

17 123 Austin Ct. Jun-01 0.1 1 $37.50 San Jose 434-23-020

18 900 Pershing Avenue May-01 0.12 \ 325;0C>D $63. 11 San Jose 261-04-049

HULBERG & ASSOCIATES, INC.

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Appreciation was not supported going forward given the uncertain economic climate. Most market participants are not expecting price increases with new releases. Retrospectively, downward adjustment for market conditions was needed for the oldest sales, reflecting the more sober market today, as opposed to 2000. Size adjustments were warranted. Other adjustments would be for characteristics such as location, utility, view amenities, topography, school districts, etc.

Intrinsic in the location adjustment for the Subject Property is the fact that the Subject Property lots are part ofa larger residential development, and as such, benefit from a sense of community that will, to a certain degree, insulate the development from external influences. The development is large enough to create its own ambience and therefore the location adjustment must first look at the Subj ect Property's tract-comparedto that of the comparable sale, then, also consider the Subj ect Property's development influence as part of a larger development. The lot location within a master-planned community with access to a golf course will influence marketability and is expected to have positive impact on the sales pace of the development. The open space created by the golf course, development landscaping, and open space preserves will enhance privacy and aesthetics for the prospective buyer.

The view amenity is one of the more subjective adj ustments. The market recognizes that view bring a premium to a property versus a comparable lot without a view. The size of the premium is dependent upon the quality of the view andthe requirements of the buyer. Market participants with whom we spoke suggested a premium of 5 to 8 percent.

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10.000 and 12.000 square footlots Finished Lot Sales 1 through 5 are the most recent available information from within the gated Silver Creek Country Club community. While the Subject Property does have a distinct sense of presence and community, a slight downward adjustment is needed from this gated community.

Finished Lot Sale 1, at $985,000, is a larger lot of 14,810 square feet which sold in May 2002. Included in the price were $30,000 worth of plans and engineering drawings for a 6,000 square foot home. This lot has outstanding views of the golf course and city lights. Based on size, plans, the lack of a gated community, and outstanding view for Finished Lot Sale 1, the average lot at the Subj ect Property would command a lower price.

Finished Lot Sale 2, at $964,000, closed escrow in April 2002. This level lot backs to greenbelt areas, as will most of the Subject Property lots. This lot, at 11,761 square feet, is most directly comparable with the largest lots planned forthe Subj ect Property. The comparable is perched at the highest point of Country Club Parkway and has one of the best views in the development, th overlooking the 9 fairway, with city lights in the distarre. Again, based on view and lack of a gated community, a lower price is indicated for most of the Subj ect Property's similarly sized lots.

Finished Lot Sale 3, at $750,000, is a larger lot of 17,000 square feet, which closed escrow in early 2000. The site has a comer location in a cul-de-sac, backing to a greenbelt area. The site has valley views, with city lights in the distance. In relation to the Subject Property, downward adjustments are needed for size and lack of a gated community. This site sold previously in February 1996 for $233,000, indicating an annual appreciation rate of 55 percent.

Finished Lot Sales 4 and 5, at $400,000 and $41 5,500, respectively, are 12,197- and 14,810- square foot lots. Both sold in 1998, requiring an upward adjustment fortime of sale. Both sites are essentially level and back to greenbelt areas, as will many of the Subject Property lots. In relation to the Subject Property, Sales 4 and 5 would be adjusted downward for larger lot size and superior location inside the Country Club.

The remaining finishedlot sales are generally redevelopment sites within existing tracts .

Finished Lot Sale 7, at $409,000, is the very recent sale of a comer lot of 10,000 square feet, located in Saratoga. This is a less desirable part of Saratoga, and a busy street. The site was sold by the lender, as-is, with no contingencies and limited disclosures. The site was vacant and partially finished at time of sale. Overall, based on amenities and specific location, as well as conditions of sale, a higher price is indicated for the Subject Property lots of similar size.

Finished Lot Sale 8, at $475,000, reflects a July 2002 sale of a lot containing 9,148 square feet. The site is located in Campbell in an older area between Pollard Road and Hacienda Avenue that was originally developed in the county. Curbs, gutters and sidewalks are required. The purchase was originally structured at $500,000, but was reduced to $475,000 forthe off-sites and 2 percent to reflectthe absence of commission (buyer represented himself). Although conceptual plansfor a 3,000 square foot plans were drawn, there were no approvals, and the plans were given no value. In relation to the subject, we adjust upward for off-sites and amenities. Location is judged similar. A higher price is indicated on average forthe Subj ect Property.

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Finished Lot Sale 9, at $785,000, is another extremely recent sale involving a 10,850 square foot lot located in Saratoga. The site is affected by a nearby rail line and, to a lesser extent, traffic noise from Saratoga-Sunnyvale Road. The site was improved with an Eichler house in poor condition that was given no value. The site is level and typically improved. In relation to the Subject Property, downward adjustment is needed for location, but upward adjustment is needed for amenities. On balance, a lower lot value is indicated for similarly sized sites.

Finished Lot Sale 10, at $815,000, is a slightly sloping lot of 11,404 square feet located in the Monta Vista area of Cupertino. It is part of a new 4-lot subdivision that was just taken back by the lender. The seller reduced the price by $35,000 to reflect the needed offsite improvements. This lot has a city light view which the listing agent believed contributed $50,000 to the price. In relation to the Subj ect Property, the primary adjustments needed are downward for location and upward forame nities and off-sites. On balance, a lower lot value is indicated.

Finished Lot Sale 11, at $730,000, is a recent sale involving a lot of 9, 750 square feet located in Cupertino in a tract located off Stelling Road, north of Stevens Creek Boulevard. The area is upgrading, with a number of homes priced over $1 million. The site was improved with a 1,000 square foot structure which the listing agent characterized as a "tear down." The site was originally listed at $795,000; the agent believed that it most likely would sell in the $700,000 range. In relation to the Subj ect Property, downward adjustment is needed for location, upward for amenities. On balance, a slightly lower price is indicated.

Conclusion - 10,000 and 12,000 square fo ot lots While most of the Subj ect Property's 10,000 square foot lots have outstanding views, the 12,000 square foot lotsdo not, and are impacted by the transmission lines. We believe that these factors are largely offsetting and that the lots will command similar prices., We have estimated the average price of this lot product at $600,000.

8,000 square footlots Finished Lot Sale 6, at $545,000, is an extremely recent sale involving an 8,712 square foot lot located on Wedgewood Avenue in Los Gatos. This tract was built in the county about 50 years ago and does not have modem infrastructure. The site was improved with a small house and granny unit, neither of which had benefit of permits. The listing agent indicated that the buyer planned to demolish the existing improvements. The site is level and overlooks La Rinconada golf course. In relation to the Subj ect Property's 8,000 square foot lots, downward adjustment is needed for the Los Gatos location. Upward adjustment is needed for superior infrastructure, amenities, and tract homogeneity. On balance a slightly lowerprice per lot is indicated.

Finished Lot Sale 12, at $700,000, involved a lot of 9,000 square feet (after required dedications). It is located in Cupertino above the Deep Cliffgolf course. The site is level and improved with a house built in the l 920's. The buyer intended to either rent out the existing house until redevelopment plans were approved, or to proceed immediately with demolition. The site has city light views, but is located on a fairly busy street. The site was originally listed at $899,000. The agent felt that it would have sold from $800,000 to $1,000,000 were it not for the traffic influence. In relation to the Subj ect Property, downward adjustment is needed for location and size, upward for amenities and lack of traffic. On balance, a lower price is indicated.

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Co nclusion-8,000 square fo ot lots We found comparatively few sales that involved 8,000 square foot lots. However, those available are supported by the larger and smaller lots presented elsewhere. Considering the available evidence, the layout and amenities of the subject's 8,000 square foot lots, we have concluded an average finished lot price of $450,000 per lot

5,800 to 6.000 square footlots Finished Lot Sale B, at $350,000, is an early 2002 sale involving a vacant, level site in Campbell not far from Comparable 9. This is a smaller lot of just 6,095 square feet. The price included plans and permits, the foundation and some subflooring for a house of 2,200 to 2,300 square fe et. The listing agent estimated the contributory value of these items at $100,000, so the price for the finished lot itself is $250,000. The agent reported a list price of $320,000 and multiple offers resulting in the higher sales price. From the price paid for the lot only, upward adjustment is needed for amenites, suggesting a higher lot price for the Subj ect Property' s similarly sized lots.

Finished Lot Sale 14, at $375,000, is a lot of 6,600 square feet located in Los Gatos. This street lies between two new office buildings on Los Gatos Boulevard. Access is awkward. The street is improved with an orchard and several houses which appea' r to have been designed for farm workers. The site was improved with a small 680 square foot house that was given "no value whatsoever." The buyer, a builder, has put up a pre- fab house. In relation to the Subj ect Property, downward adjustment is needed for location, but upward for amenities, access and externalities.

Finished Lot Sale 15 at $250,000, is a lot of 6,923 square feet located in San Jose just off the Alameda near Santa Clara University. The overall location would be considered similar in appeal. This small site was vacant with off-sites in place at time of sale. Based primarily on the amenities of The Ranch on Silver Creek, a slightly higher price per lot is indicated for the Subject Property.

Finished Lot Sale 16,, at $625,000, is a small lot of 6,250 square feet, located on a highly desirable street near downtown Los Gatos. Significant downward adjustment is needed for location. The site was improved with a small home at time of sale, which the purchaser has subsequently demolished. The site was level with all utilities in place. The site sold in 74 days at a price approximately 4 percent over the listing price. Based primarily on the downward adjustment for location, a lower lot value is indicated for the Subj ect Property.

Finished Lot Sale 17, at $180,000, is a small 4,800 square foot lot located in San Jose in an older tract just south of Alma A venue. The site was vacant at time of sale. The buyer planned a new 4/2 home of 1,550 square feet. Upward adjustment is needed for location and amenities in relation to the Subject Property.

Finished Lot Sale 18, at $325,000, is a small lot of 5, 150 square feet, located just off the Alameda in San Jose near Santa Clara University. The price included building plans and permits. The primary adjustment needed in relation to the Subject Property is downward for plans and permits. A lower price is indicated forthe Subject Property.

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Conclusion - 5,800 and 6, 000 square fo ot lots Based on the foregoing analysis, we have concluded that a finished lot value of $325,000 is best supported forthe Subj ect Property's5, 800 and 6,000 square foot lots.

Townhome, Duet and 31800 square footlots As indicated previously, townhome and duet lots do not sell individually in this market. Nor were we able to find any lot sales under 4,800 square feet. ln estimating finished lot value for the townhouse, duet, and 3,800 square foot lots, then, we considered the bulk sales of such lots presented in the next section, the pattern of lot prices established by the larger lots, and the typical relationship of finished lot value to improved property value (generally 35 to 42%).

Conclusion - Townhome, Duet, and 3,800 square fo ot lots There is little competitive product in this size category. We would expect good demand at this location from both empt�nesters and professionals. Based on projected pricing, the duet lots could command about $227,000 to $294,000 per unit, the townhouses, $21 0,000 to $252,000, and the 3,800 square foot lots $236,000 to $302,400. Clearly, attached product is less desirable than detached, and a 3,800 square foot lot less desirable thana 6,000 square foot lot.

We have estimated finished lot value at $175,000 per unit or $700,000 per lot for the townhouse lots. Duet unit finished lots were estimated at $200,000 per unit or $400,000 per lot. The 3,800 square foot lots are estimated at $250,000. This pattern reflects the superior desirability of the detached units, and fallsbeneath the range forthe single-family lots when considered on a per unit basis, as one would expect.

Absorption Discussion Prior to discussing absorption, it is necessary for the reader b understand that subdivision lots are not sold on a retail basis in this market. Therefore, we will base our absorption estimate on the housing market in general.

The major factors in any market analysis are the components of supply and demand. By far, the most significant and most numerous factors in local market analysis are those generally labeled economic. The prices at which competing units are available on the market and the quantity, in which they are available, will influence the asking prices of those attempting to sell. Demand represents the quantity of housing of a particulartype that will be taken offthe market at a given price level.

Market demand and absorption rates depend upon the design of the development, layout, location, quality of construction, and the economy. Seasonality of the real estate market must also be considered a factor in a good marketing program and absorption rate estimate. Spring and summer months are still the most active in the Subject Property's market area as well as Santa Clara County as a whole. Therefore, the absorption rate for an individual property generally depends upon its marketing and selling price relative to its competition. From the latter part of 2001 through the first half of 2002, the re appeared to be a lack of seasonality as buyers swarmed on the housing market attempting to purchase a home before pricing went up again. However, in the second half of 2002, thefrenzy disappeared. It has continued to remain that way, indicating a market that has reverted back to some aspect of normalcy. While absorption at the beginning of the year was hampered by the uncertainty of war, recent weeks have seen a resurgence of consumer confidence.

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek, Hassler-S ilver Creek CFD #10, File #9064 SC Page 45

Subject PropertyCo mpetition There is only one development looming in the near future that might provide some competition for the Subject Property development. "Silver Vista Estates," m 11-lot subdivision located adjacent to the Subject Property, is currently in the building process. This is a relatively small development without the amenities of the Subj ect Property.

In the future, particularly with San Jose's Greenline Boundary and the prevention of most development above the 15 percent slope line, the majority of development will be in infill sites where existing infrastructure is in place. The Coyote Valley looms in the future, but it will likely be another decade beforea new Specific Plan is approved to develop both the Coyote Valley and Almaden Valley urban reserves. New Cities Development, Inc. has most of the Almaden urban reserve tied up and Shapell, Shea and Citation, among others, are already land-banking in Coyote Valley. Residential development in Coyote Valley will require a master plan, to be created after certain commerciaVindustrial development hurdles are met. In 2000, Coyote Valley Research Park LLC ("CVRP), an owner of a large parcel in the Coyote Valley designated for office development, joined forces with Cisco System's, one of San Jose's largest employers, to plan a 600,000 square foot office/industrial campus for Cisco in Coyote Valley. This large development, together with certainjo bs creation, economic, and City budget goals are precedent, under the General Plan, to any residential development in Coyote Valley. However, with Cisco's exponential growth and space needs, those benchmarks seemed imminent. Of course, in 200 l, this all changed. While CVRP is moving ahead with offsite infrastructure improvements, based on campus office space currently available for lease and sublease in San Jose, it is clear that no building will happen until the office/industrial market regains equilibrium, which most market participants believe will not be until at least the end of 2004.

The Subject Property, then, has great value as a diminishing resource. Large multi-phase developments, at least forthe next few years, will likely be unavailable because the land to build them on is unavailable.

Market Support The finished lot sales presented earlier in this report evidence marketing times of 7 to 130 days, with most falling in the range of 30 days. Not surprisingly, the lowest priced lots had the shortest marketing periods, often IO days or less with multiple offers.

To provide additional support, we surveyed new home subdivisions in the general area that would be considered representative of the Subj ect Property's proposed product types. This information is summarized as shown by the table on the following page.

Pricing and product type show a distinct absorptionpattern. It appears that the higher the price, the lower the overall absorption. This may be overly simplistic, but if all other elements were comparable, and the market in balance, the higher priced lots would not sell as rapidly as the lower priced lots. The upscale market is still showing good demand, but there is some slowness at homes priced above $750,000, according to market participants interviewed.

Projects 1 through 3 are offering 3,000 to 4,000 square foot homes on 8,000 to 12,000-square foot lots, competitive with the larger lots in the Subject Property. They are reporting some concessions on their most recent sales, but no cancellations and consistent traffic of 50 to 75 potential buyers per week, which is considered slow.

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek Hassler-Silver Creek CFD #10 File #9064SC Page 46

SURVEY OF COMPARABLE PROJECTS No. Project Name Average No. Opening No. Units Base Sales Price Absorption Lot Size lS.F) Units Date Sold Per Month (Units) 1 Kenwood Estates 8,000 40 10/13/2001 34 $1.063,000 to $1, 180,000 2.0

2 Silver Oak Estates 12,000 33 817/2000 33 $1 ,050,000 to $1, 175,000 1.1

3 Mezzamonte 12,000 46 10/13/2001 28 $985,950 to $1,039,950 1.6

4 Heritage Collection 6,800 129 7/22/2000 121 $669,900 to $877,725 3.8

5 Ponderosa Highland� 5,500 82 3/1 0/2001 40 $809,900 to $853,900 1.7

6 Ponderosa Crest 5,000 58 9/23/2001 51 $620,900 to $690,900 2.8

7 Madison 6,000 100 2/5/2002 81 $915,000 to $925,900 6.2

8 Bella Monte 2,500 72 9/1/2002 12 $525,000 to $600,000 2.0

9 Classics Landmark 2 800 217 7/29/2000 123 $474 900 to $574,900 3.8

Projects 4 through 7 are most relevant to the predominant Subject Property lots, 5,800 to 6,000 square feet insize.

The agent for Project 4 indicated that prices were reduced $60,000 to $75,000 in January. No concessions or upgrades are being given. Traffic is 50 to 60 potential buyers per week, versus a goal of I 00. In 2002 there was a 48 percent cancellation rate due to job losses. Two more reservations were expected during the upcoming week ofMarch31, 2003.

Project 5 reported trafficat 70 per week and just a couple of cancellations. Project 6 is a recently released development reporting traffic of 37 to 45 potential buyers per week. No upgrades or concessions are offered. There have been onlya couple of cancellations.

Project 7 is offering small upgrades, such as cabinets or tubs. Traffic is averaging 80 to 90 potential buyers per week. There have been 2 cancellations, generally transferring to another model.

Project 8 offers patio homes on small lots. This is most relevant to the 3,800 and duet product.

Project 9 is a luxury townhome development within the Evergreen area. The agent reports no change in prices since the beginning of the year. Upgrades are being given on a case-by-case basis.

Absorption Rate Analysis Conclusion Based on the available evidence, we have concluded absorption rates for the Subject Property' s product types as follows:

I 0,000 and 12,000 square foot lots 1.5 units/month or 4 units/quarter 8,000 square foot lots 2 units/month or 6 units/quarter 5,800 and 6,000 square foot lots 3 units/month or 9 units/quarter 3,800 square foot lots 3 units/month or 9 units/quarter

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek Hassler-Silver Creek CFO #1 0 File #9064 SC Page 47

Absorption forthe townhouse and duet lots is substantially the same as that for the 3,800 square foot lots. However, because the townhouse and duet lots support multiple units, the 9 units per quarter is equivalent to 4 duet lots and 2 townhouse lots per quarter.

Our absorption rate is based on our estimated lot values for the Subject Property. Higher prices would reduce the absorption rate; lower prices would increase it.

Discounted Cash Flow Models Sales of lots are forecast based on the absorption, finished lot values, and lack of appreciation developed previously.

Costs to complete each of the tracts were furnishedand allocated by the developer.

The developer's profit and overhead expenses have been included at 5 to 8 percent of net sales proceeds, based largely on the absorption period (risk) and the complexity of the tract (number of product types). The developer's normal functions include site selection, development of plans in conjunction with an architect, site and planning approvals, financing arrangements, negotiations forconstruction contract, and supervision of the entire development.

Marketing and sales expenses have been calculated at 3 percent of the total sale price. This expense figure includes allocations for sales commissions and media support. Expenses for closing costs are calculated at 2 percent of gross sales proceeds.

The discount rate selected needs to reflecta competitive rate of return on investment. While real estate is secured by an asset, the investment tends to be illiquid, location-sens itive, and characterized by the need for specialized expertise. Therefore, real estate generally commands a premium in yield relative to other investments.

RealtyRates.com performs a quarterly Developer Survey. This survey tracks, actual and pro fonna, discount rates on 22 sell-out property types, including residential subdivisions and PUD's. For the first quarter of 2003, the survey found pro- fonna discount rates ranging from 13.2 to 40. 13 percent for site-built residential developments. The rates for California and the Pacific Islands were somewhat lower, at 13.71 to 27.88 percent for tracts of less than 100 units, averaging 13.15 percent (actual). The pro fonna rates, perhaps not surprisingly were higher, at 13.16 to 31.05 percent, averaging 20.48 percent. These rates incorporate developer's profit.

The Korpacz Investor Survey for the Fourth Quarter 2002 found discount rates, including developer's profit, forthe National Land Market, ranging from 11 to 35 percent, and averaging 20.21 percent. The Korpacz rates also incorporate developer's profit.

We also considered our experience with the actual pro formas of developments in the area, based on our ongoing subdivision appraisal work. Typically, discount rates are in the range of 11 to 12 percent, exclusive of profit.

Based on the affluence of the area, continued strong demand, dwindling supply of land, limited competition, and the amenities of the development, and the fact that we have treated developer's profit as a separate line item, a discount rate at the lower end of the range is supported.

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek, Hassler-Silver Creek CFD #10, File #9064 SC Page 48

Based on the foregoingdiscussion, discount rates of 11 to 12 percent were used in our analysis.

Discounted cash flow models for the Subj ect Property's 8 tracts are presented below and on the following pages. The value indicated for the Subject Property by the Discounted Cash Flow Technique is the sum of the indications given by these models, or $94,180,000 (rounded).

SUBDIVISION DEVELOPMENT ANALYSIS

...... ,,. .., '' ,,,. , ...... PROPERTY: The Ranch at SilverCreek Tract 91 64

. I Assumptions· Number or Lots Ave.rage Sale Price­ Absorp1ion Rat e: 3,800 s r $3 $250.000 Pe, Lot . . 9 Lots pe1 Period 6,COO s.f. s $825.000 '_Pe r_Lo_t . . . r d ...... �... L��s p� . ���-� Duie-t � $400.000 Per Duet Lot 4 Lots per Penod Toi al 100

Sale$ Periods per Year 4• (Quarterlr) Commissions Closing Cost$ Developer's Profit Tax Rate Discounl Rate Price Esca!a,1ionper 01Ji:1!1er

2 ,6 '''? . 8 9 10 T

No. of Lots Sold 9 8 53 �-e��!�i.f!.9. N�:... o(�� � 44 35_ 0 0 0

�"9 9.�!es !=:'.�.�� $250 ,000 $250,000 $250,000 . µsll.000 $250.000 1250,QOO 1250,000 $250,000 $250,tXIJ $250,000 To!al Sales. 12,250 ,000 $2,250,000 . $2,250,000 $2,250,000 $2,250,00J IO $0 IO 113;250,000 . NO ..o'f iO'tS �foiCi " 8 'ci 8 R��a.1�1n9 ��:_of. Lots· . . 0 .o 9. ... 0 0 $()

.'!11.J��le�__ f:'.� c.e. $325 ,000 $325,llll $325 ,0)'.) $�,(µ) $325.000 $325,000 $3?5 ,00J 1325 ,0CO $325,00J $325,(0) $325 ,00) T olal · Sales: $:i,,;oo:@ 16 $0 IO: 10 IO IQ $0 12,600.coo .. . ii No oiLots sofo """4 4 4 4 4 4 3 39 R_ema1�1n9 No _of Lo�s· 35 31 27 15; $()11 7 3 0 ... ' A�· �ales. �rice $400 .i:oo $400,0CO $400,i:m S4iiiim $400.0XI $400,000 $4Cll,OOJ 1400,000 $400,000 $400,000 $400,000 Total Sales: $1 ,Em,COO $1 ,600,000 $1 ,600,r»J si.i;ci),ooo si&'oo.cm $1 ,600,000 11 ,600,000 $1,600,000 $1 ,Em.OOJ Sl ,200,00J $15,600,000 . } ...... 16.451.i.cob $3,850,000 53,850.criJ .. ,$3 650,OOJ $3i50 ,000 $3,600,000 11 .600,000 $1 ,600,000 $1 ,600,00J 51 ,200,000 $31 ,450,000

LESS EXPENSES; .. Cos! to Complete 6,261 ,867 6,261 ,867 Home01NJ1e1sAssociation Dues 94,059 79.674 68.817 ??.� 1 36,246 . .25,830 18.9-42 12.054 5,166 445.851 .�r. w ... E.siimat0d Bo�d· Cost� {nl;a�imum) 57,859 47,453 40,376 _33,lOO; 26224 19,148 12.488 9,158 5.828 2.498 254.329 Commi-ssions 115,500 1 943,500 .. 1!l} ,50Q ...... 115,500 15,£00 115,500 108,000 48,000 48,000 48,000 36,000 "ciOS.�i COStS 129,000 77,000 iifjjj n.oco 77,000 . 72,000 32:irii 32,000 32.000 24,000 62!i:ooo RE Tax-es 346,600 287,744 228,887 170 030 111,174 46,504 0 0 0 0 1,190,938 T01ai ex·penses 7,082 ,8'35 607,370 530,500 ' 453,790 377Jm 281,1391l 118,318 100,100 97,882 67,664 9,725,485

LESS PROFIT peveloper·� r:'rofil .631 259.410 265,554 265.446 113.535 119,352 120,169 90,587 1.737,961 Nel Property Value [582,254) 2.983.220 3,053,866 3,052,654 1.363,148 1,372,546 1 ,381 ,949 1,041,750 19,986.554 . . 09709 09426 . ii.9 151 0.8885 , · o:ei626·· o.6375 · o.s131 o ,894 0.1664 0.1441 � � •·1�:�:$1:)t·,;2:�NY A•i�1,1s:ftt�J? />:?t,. • )W�:$!i...... , :t ;� '.'il:�$,61J2 ,. 1 ;059;1 49 ... 7?5:1liP · t1;tt>,6... 'lll! 2I

. A.... ���9�..... Efil.LQ!' . Sales. ''J.6ia!_. . . _$31 ..450,IXll 1(0.0% $31 4,500 E�PenSBS. (W25.ifi5) �; l?la! J'.!et Proceeds $21 ,724,515 ' 69.1% 1217,245 Developer's Pro-fil . (ll.Zfillil) ·= . (siz.iaof �el .Y�!.�.�-- . $19,966.!R,I 63 6<:.. . !1.� ..� PresentValue $1 7.166.382 64.6% $323.705 !

HULBERG & ASSOCIATE S. INC.

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek. Hassler-Silver Creek CFD #1 0 File #9064 SC Page 49

; SUBDIVISION DEVELOPMENT ANALYSIS

:PROPERTY: The Ranch at Silver Creek Tract 91 65 l 1. Assumi;itions Number of Units 14 Ave rage Sale P11ce $700,000 Per Townhouse Lot Sales Pe11ods per Year 4 (Quarterly) Absorption Rate 2 Lots per Period Commissions 3.00% ofTotal Sales : Closing Costs: 2.00% ofTotal Sales Developer's Profit 500% Tao Rate 1.162600% ; Discount Rate 11.00% Pnce Escala1ion per Quarter 0.00%

11. Discounted Cash Flow Anal)'.sis

!sales Period (Quarterly) 1 2 3 4 5 6 7 Total

!No of Lots Sold 2 2 2 2 2 2 2 14 1Rema1ning No. of Lots 12 10 8 6 4 2 0

!Avg Sales Price $700,000 $700.000 $700,000 $700 ,000 $700 ,000 $700,000 $700 ,000 $700,000 [Total Sales $1 .400,000 $1 ,400,000 $1 ,400,000 $1 .400 ,000 $1 ,400 ,000 $1,400,000 $1 ,400 ,000 $9,800 ,000

'LESS EXPENSES Cost to Complete 1,141,551 1,141 ,551 Homeowner's Association Dues 16,072 13.776 11.480 9,184 6,888 4,592 2,296 64 ,288 Estimated Bond Cost (max1mun 23,310 19,980 16,650 13,320 9,990 6,660 3,330 93,240 Commissions 42,000 42,000 42 ,000 42,000 42 ,000 42 ,000 42,000 294 ,000 Closing Costs 28,000 28,000 28,000 26,000 28,000 28 ,000 28,000 196,000 R.E Taxes 28.484 24 .415 :0,346 16,276 12,207 8,138 4,069 113,935 · Total Expenses 1,279.417 128,171 118 .476 108.780 99,085 89 ,390 79,695 1,903 ,014

Net Sales Proceds 120.583 •1.271 .829 L281 Jj25 L29L220 1;300�91 5 LSl0.61 0 l ,320.305 7.896.986

LESS PROFIT Deve loper's Profit 6,029 63,591 64 ,076 64,561 65,046 65,530 66,015 394 ,849 Net Property Value 114,554 1.208,238 1,217 .448 1,226,659 1,235,869 1,245,079 1,254 ,290 7,502,137

P. V Factor 0.9732 0.9472 0.9218 0.8972 0.8732 0.8498 0.8270 Present Value: l l1A88 .1.l.4 4.429 1;122.290 '1.100.516 1.079.1(14 l.Oo3.050 1J)37.349 6.653.226 '

:' 111. Summa!}':

Average . Total ec[ I!l!i:::.?obcu�eI at Sales $9,800,000 100.0% $700 ,000 :Expenses (SJ 903 OJ�) � ,Total Net Proceeds $7,896,986 80.6% $564 ,070 Developer's Profi1 ·5 Q% .Net Value $7,502 ,137 75.6% $535,867

�. �.· . Present Value $6.653.226 67 .9% $475.230

Rounded: $6.65o�ooc,·. I

. HULBERG & ASSOCIATES, INC.

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek Hassler-Silver Creek CFD #10 File #9064 SC Page 50

SUBDIVISION DEVELOPMENT ANALYSIS

' PROPERTY: The Ranch9166 at Silver Creek IL Tract Assumptions: i Number of Units: 22 I ...... Average Sale Price: $400,()00 Per Duet Lot ! 4 (Quarterly) I Sales Periods per Year: .A.bsorpt1on Rate: 4 . Lots per Period I Commissions: 3.00% ofTotal Sales Closing Cosls: 2.00% of Total Sales I Developer's Profit: 5.00% I . Tax Rate:. 1.1 62600% . Discount Rate: 11.00% Price Escalation per Quarter 0.00%

I ILDiscounted Cash Flow Analysis 4 5 6. 'TQ1a{ Sales Perio

No. of Lots Sold: 4 ..4:. r··· ...... 4 4 4 2 22 Remaining. No_. of _Lots: 18 . '14'. . 16 6 2 0 4 4 ...... 60 Avg(l Sales Price: $ 00,000 $400 ,00 0 ' .. $400,000 $400 ,ODO $4006 ,000 $400,000 $ 00,000 · 'f tal !:::al�s: · $1 J3cio,ocici ··· $1 ,600.ooo_! -- -$1 ,600 :000 . · $1 , 9,ooff, $1 , 00,000 $800 ,000 $8 ,800 ,000

• • • • • ,., .,.,.,,. o,m.,,:.,.,, •..,. ""' """""'° ' LESS EXPENSES: . 1 ····i::'ost tci ·· ··A:�2i3 .s"s7 24Joo . 4,826,597 . Homeownerciimi:ii'eies Association Dues 37 ,884 30 ,996 , 10,332 3,444 ''''''12{984 . . Estimated Bond Cost (maximurr 18,315 14,98f[ ·:. 1{655000 4,995 1,665 59,940 Commissions . 32,ocici'48,000 48 :oooJ,ODO i _48 , •...... A8,0DD ...... 2416,000,cifo ' . 264,000176,0cici Closing Costs 32 ii2i : ······ .... 32 ,ODO 32 ,000 RE. Taxes 25,577 "20 . 16 276. · . 6,976 2,325 83 ,707 Total Expenses . 4 ,_988 ,373 146,908 1: 132 ,039 102 ,303 47 ,434 5,534,228_

LESS PROFIp T: .. bevei r's Profit 169,419 ._,.,__,.. _ ...... �T""�,...... ,,..,,,_., 1 .. ,...,,, ....,, �. 74 ,141; 74,885 37 ,628 163,289 Net Propero e ty Value (3,218,955), 1 ,380 ,438 , ,394 ,563 1,408,688 1,422,813 714 ,938 3,102,483

P. V. Factor: o.9732 o.9472 ; o.9218 · · ci.ifan o.8732 o.8498 :����JJtY:�U:e:t::t:.• :ii!(�i;�:$2i80.i¥t1 +�

...... l...... �1113 !"9� Total . -.· 1_0Q:g�&f.l Per:: Duet:H®::@ Lot __· Sales ss:000.000534 226) ElCpenses ($5 1 __j$25l 556) �, Total Ne1 Proceeds $3,265,772 37. %1 $148 ,444 Developer's Profit . ($1631 289J4 . 1 1 Net Value �?, 9�, �} .. 3=�o�r:5.3%! ···-·:-$:,41$t12h,022 . $2.573.996 r- ....29.2%...... 1, ...s11Yo...... oo...... Present Value ...... ! .....

HULBERG & ASSOCIATES, INC.

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek. Hassler-Silver Creek CFO #10 File #9064 SC Page 51

-- �U-� -··-

SUBDIVISION DEVELOPMENT ANALYSIS �.�.4 ·�-

PROPERTY: The Ranch at Silver Creek Tract 91 67 :1 A�sum12tions· Number of Unrts 74 A..,.e,age Sale Pnce $825.000 Per Unit Sales Periods per Year 4 (Quarterl ) )' ; Ab-sorp11on Rate 9 Lots per Period C.ornm1ss1ons 300% ofT01al Sales Clos1r19 Costs 2 00% oi Tolal Sales [reveloper's Profit 800% Ta:i: Rale 1 162600% Discount Rate 12 00% P11ce Escalat1on per Quarter 0.00%

11. Discounted Cash Flow Anal;tsis

Sales Period (Quarterly; 1 2 3 4 5 6 7 8 9 Ti.>tai

No of Lots Sold 9 9 9 9 9 9 9 9 2 74 Rernairi1ngNo of Lots 65 55 47 38 29 20 11 2 0

A"'iJ Sal�; Pnte rn5.0CIJ $325 ,000 $325,000 S325,00J 1325,000 rn5,ooo $325,000 $325,000 $325 ,000 !325,000 Total Sates $2,925,0CIJ $2,925 .000 $2,925 ,000 $2,925,(0J $2,925,000 $2,925,000 $2,925,000 12,925,000 1650,COO $24 ,050,000

LESS EXPENSES Cost to Complete 12,066,493 12,066 ,493 Homeov,mer"s Assoc1::il1onDue'.: 28,194 16,510 14.224 11,938 9,552 7 ,365 5,000 2,79<1 9l3 96 ,266 Estimated Bernd Cost trna-x1mw 39,128 34.369 29 ,610 24 .851 20,093 15,334 10.575 5,816 1.058 180,833 Commissions. 87,750 87,750 87,750 87,750 87,750 87 ,750 87,750 87,750 19,500 721 ,500 Closing Costs 58,ffi:J 58,50J 58,500 58,500 58,500 58,500 58,500 58,500 13,000 48i°,OOJ RE Taxes 69,9Jl 61 .400 52 .898 44.397 35,895 27 ,394 16,892 10.391 1.88'.l 323,057 Total E:xpenses 12 ,349 ,'?66 258.529 242 ,982 227,436 211,SSO 196 ,344 180.797 165251 35 .955 13.869,149

Net Sales Proceds (9.424;966} 2.666;471 2'.682,018 2.697.564 2'.713.110 2.728.666 2.744.203 2;759.749 61 4.046 10.180,861

LESS PROFIT Developer's Profi1 213,318 214,561 215,fflS 217,049 218 ,293 219,536 220,780 49.124 814 468 (753,

P. V. Factor 0.9709 0.9426 0.9151 0.8865 0.8626 0.8375 0.8131 0.7894 0.7664 Present Value: (8.418Al6) · 2.312,333. 2.258.072 2.206.01 1 2;i 53;124 2J02,390 2.062.785 · 2.004.286 432.96.6 7.102.550

Ill �l![Dlll,l[)".' Average Total Per Lot ·Sales $24,050,0CO 11):J.0% $325 ,000 :Expenses ::SZ..lli To1al Net Proceeds �$10,180,851 42.3% $137 ,579 ;Developer's Profit (1fil..illB) =8.11.% Net Value $9,366,383 38.9% $126,573

Present Value $7.1 02.550 29.5% $95.980

Rounded; •. ·. $7,1 00J)OO .I HULBERG & ASSOCIATES, INC.

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek, Hassler-Silver Creek CFD #10, File #9064 SC Page 52

SUBDIVISION DEVELOPMENT ANALYS IS

I PROPERTY: The Ranch at Silver Creek

! . .. Tract 91 68 ...... • ...... JI:_ Assumptions: .. "54! ] Number of Units: j ... Ave rage _Sale Price: '�er Unit Sales Periods per Year }?2$'.q_q§A: (Quarterly}per t Absorption Rate: $ ,Lots Period Commissions: 3.00% · of Total Sales Closing Costs: 2.00% ofTotal Sales Developer's Profit: . i :162600%5.00% :, Tax Rate: ...... Discount Rate: 11.00% Price Escalation per Quarter 0.00% 111. Discounted Cash Flow Analysis Isales {Quarteity: Total Period 6 6

I No. of Lots Sold: 9 9: 9 99 9 54 Reniaining No. of Lots: 45 ... 36; 18 0 I Avg Sales Price: $325,000 2$32592 ,000 : . $325 ,000 : $325 ,000 $325,000 $325,000 $$ 325,000 Total Sales: $:2,925 .000 $ , §,Q()JJ j . .. J?.�??.Q()Q :_ $?,�2§ ,000 $2 ,925,000 $2 ,925,000 1],§50,0()0 ...... LESS EXPENSES: 9 . Cost to t::onipl�te 17545! · 1a.2ai· ,653,1949 Homeowner'. s Association Due� 6,9 858 3,429 72,003 Estirnated Elond Cost (rn aximur . �Tl®]23 ,794 : 14.276 ,518 4,759 99,9 4 Commissions 5 87,750 87 ,750 87,750 526,500 Closing costs 58 , 00 ' ·--·-- 58,5 0 58,500:• 513,500 58 ,500 . :351 ,000 R.E. Taxes 42 ,508 : 34 ,006 925,505 179,003629 8,5023 178 ,53:i Total Expiinses 1 6,31? . 17 , : 162,9 9 10,881)69

LESS pROFiT: 3 3 3 3 3 ·- . ·· ·.·· · · . Developer's Profit 8,729 134,765 . - 135,600 i . 1 6:434 1 7,269 1 8,10 3:3,442 Net Pr�p9.rty.Y<1lu_e_ ...... @ .§?!>..�!>.1 L. . 9 :Wt�s��P. V. Factor:!���� .�;t �.. :r.· .: (§,�14!!1eJ§t0.9732 �� ?�;f�0.9I:472:· : 0.9218 -- : �f§iei0.8i!?:§72, ft6l?:7?,?75,0.8732 2.2z�<0.884980Qb !SC!>r!:§"�!?!1§

111. Summar:y: ...... A��r�g-� ·-····

Total : Per Lot : saies $17,550,!JOD 100.0%i �,a,$325,000 sa111 '.. Expenses ($l0 88J ]69) ::62J1%r··········· Toial Net Proceeds $6,668,831 38.0%�5rj%i · ·········· $123,(�ij]:i!i)497 ..· Developer's Profit ($33333 442) 3 Net Val ue . 6 ...... � . �.�90 ' §.1 %.r :.: .. ,.1.17.,�?? .· +······ Present Value $5.184.564 29.6%1.. $96.( )1 0

.. ...-_!..·-····· HULBERG & ASSOCIATES, INC.

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek Hassler-Silver Creek CFO #10 File #9064 SC Page 53

------·---· ·-- - SUBDIVISION DEVELOPMENT ANALYSIS

PROPERTY The Ranch at Silver Creek Tract 91 69 I A55umptions Number of LJl)1ts 33 A�·erage Sc1le Price $600.000 Per Unr! Sales Pe�1ods per Y e-ar 4 (Quarterly; At.sorpt1on Rate 4 Lots per Period Comm1ss1ons 300% oiTolal Sales Closing Costs 200% oiTolal Sales [1e,.,-eloper's Profit 800% Ta1. Ra1e 1 162600% 01scour1t Rale 1200% Price Escalation per C!uarte1 0 00%

II Qi�i;oun!!!'d Cash Flgw Anal)".llis

Sales Period (Quarterly 1 2 3 4 5 6 7 8 9 Total

No of Lots Sold 4 4 4 4 4 4 4 4 1 33 Rema1n1ng No of Lois 29 25 21 17 13 9 5 1 0

A�-g Sales Price $WJ,OOJ $600,000 $300,000 $600,000 $600,000 $600,000 $600,000 $600,000 1600.000 $600,000 Tot.3! Sales $2,400,000 $2.400 ,000 $2,400,000 12 .400.000 12.400,000 $2.400.000 $2.400.000 $2 _4[(1,000 1600.000 119.800 000

LESS EXPENSES Cost to Complete 6,502,885 6,502.886 Homeovme1's Assoi::1at1on Due· 12,5?3 11,04 9 9,525 8.())1 6,477 4,953 3,429 1,905 381 58.293 Estimated Bond Cost (ma)1mu 28.173 24 .753 21 ,344 17.929 14.5U 11.()99 7 ,684 4_269 854 1JJ,622 Comm1ss1ons 72.000 72 ,000 72,000 72,000 72.000 72.000 72,000 72,00D 18,000 594.000 Closing Costs 48.(l)) 48,000 48,000 48,000 48,o:io· 48.000 48 ,000 48,000 12.0[(1 396.000 RE Taxes 57,549 50 ,573 43,596 36,622 29,646 22,671 15,695 8.720 1.744 266,617 To1a! Expenses 6,721,181 :>ai,381 194,466 182,551 170,637 158,722 146,808 134.893 32,979 7 ,948,618

NetSales Proceds (4.321.181) 2.1 93.619 2.205.534 2.21 7.449 .. 2.229.363 2.241.278 2.253.192 2.265.107 567.021 11.861.382

LESS PROFIT Developer's Profit (345 ,694 ) 175 400 176.443 177,396 178,349 179,302 100.255 181 .209 45.362 948.111 Net Property Value (3,975,467) 2,018,130 2,029.091 2,040,053 2.061 .ou 2,061 .975 2,072.937 2.083.898 521 ,660 10,003,272

P V Factor 0 9700 09426 0.9151 08885 0 8326 08375 0.8131 0 7894 0.7664 Present Value: (3;859.696) 1.902.281 1.856.906 1.812.660 l.769;223 1.726.872 .1.685.487 1.645.049 399.809 8:988.491

1 111 S11mmal'.)'. Ave rage Efil..LQ! Sales $19,fill,OOO 100 0% WJO,())) Expenses Total Net Proceeds $11.�851 ,382 �59 9% $359 .133 Developer's P1of1t (lli.a.lll) Ne1 Value $10,9J3,272 551�% $330,402

Present Value $8.938.491 45.1% $270.863

· Rounded: $8s940Jl00 I HULBERG & ASSOCIATES. INC. --··

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek, Hassler-Silver Creek CFO #10. File #9064 SC Page 54

SUBDIVISION DEVELOPMENT ANALYSIS ...... - .

PROPERTY The Ranch al SilverCreek Tract 91 70 I As:mmpiioos· Number ofUni1s Jwerag.;- S�le Pnc e Absorp11cn Rale 8.(00 :SI :S 450.000 6;L01$ Per PeJ1od lO.OCO�f X 600.000 4-L�s.fe� Peru)d Tc,t,;il

Sales Periods per Year 4 (Quarterly) (Gmfll1SSIQO-S 3.00'% of Tot.al. s.�.1�.�- Clos•ng Cost:. 2.00�� 'lf Tolal Sales De-w..lo;:,�fs P,ofi-t a oo:,,; TJo ��!e 1 162600'.l'; 01scount Ra11: ,-2.00:, Pnce Es.ca!a1ionp,er Ouar1e, ow,

II Pisco11oted Gash Flow Analyci:IS ,·1; 2 10 11 Total

t�o. of Lob SolU 6 6 b I 0 " Rerr',;l;:�;11,;iN<'.I. of.l!'.1!; " 35 29 5 Sale,s P11c.;­ 450,000 I 450.000 s 450 0)) I 450,000 5 493.� 450.000 I !50 ,000 otal Sales $2,700,00fJ :$2,700/JOO $2.700,0)J $1,600,000 S4SO,OOJ $[' f0 S.::?1 ,1ro,OOO

4 No of L�ts Sole 4 4 • ' ' $!�).000 r� �ma1n:r,9 1110· 01ioiS 40 35 3'2 20 16 12 8 0

A.\'9 S�la; Pnc;;i roJ,OOJ s 600,000 s e� s �.000 1 �.000 1 �,:00 1 =ooo s �.000 1 ow 000.0(0 s f£(1,0004 $1:ill,000 Tota!Sala� $2,400,:00 -$2,400,00".J $2,(00,000 $2,AOO,IXO $2,400,000 52,A00,000 S2.400.00) $2.400.(0J �.40C: .(OC· 1,2.40Ci,Of:.::.. 12,40:J,OOO S:::!6.400,(00

Total Gross Sales Prciceeds l'i,100.0C,) $5,100,000 $,S,100,00'.I SS,100,000 $5-,100,000 $5 100 00) S4.20J.O}j $:_>850.00,: $1,.400,000 $.17.55C.O:tl

LESS EXPEI-.ISES 3,158 SS4 (:osltoComplele S5,10J,3.158:5OOJ54 1-:-.ioo.oo:, . Homeo,vner's A-s soc1at1on. Does" 3,1/;71 30,661 11.611 8.001 4.953 3,046 i,524 160,213 Eslim.itt:d Bond Co,;t (mai:imum) 64,263 5?;>68 22.ID 15.293 9.S3; 5.,9:30 2.m 33G,850 Comm1s.sions 153,000 153,000 153.(00 126.000 85,s:J) 72 ,000 mm Clcs1ng Cost; 102.000 102.000 102,(0) SHOO 57.(0) -18:.000 -18,00J 951,COO RE. Taxes 1:e;.>0-4 12,,381 34,442 22"3$ 13951 6:,370 733,746 24.J.442 133,951 6.358 733 "!"��IE�per ,s�� 1£..1,735 126.976 l,426,500.

4!;1,265 3�955Jilre .2Jl86.26t :1.266,049 41 ,W1.o.2af 30A)f,5 LESS PROFIT .-'.f?.218.9�4 , Oevelop:er"s Prof,! 38365'3 316.'45 214.811 181,284 . 181,842 3,294,501 tJt>t �roper1yYalue 4 ..412_ o76 3.639.113 2_470,.u.t 1.004.765 2.00� .1?? _37.�.?�.. 0789-1 07664 0 744� 0.7721. _,2'.l!JI!.�� 1JJ93L$9_0 l.651 .261_ ilJ,H>,llf!.,s.!,,it.?;()ll§_;.

Ill ?;iumroary Average fill.Ql . Sales "1ciJ.iJ% $522�27 . Expenses :lllli Total Nel Proceeds. ffi6% $.452;541 oeveloper"s Prof,1 = (tlu..Zll.l) tJH Vali.Je 79.7% S.416,338

PresentValue $32.142.065 67 6% $353.210 Rounded: HULBERG & ASSOCIATES, INC.

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek Hassler-Silver Creek CFD #1 0 File #9064 SC Page 55

- ·------·-- �-�------

-·· SUBDIVISION DEVELOPMENT ANALYSIS ·--- ·- -· ·-- -··-

PROPERTY: The Ranch at Silver Creek Tract 9171 I. As5umi;1tions: Numbe, of Units �7 Average Sale Price $450 000 Pe, Unit Sales Period": per Year 4 (Q,1arterlyj A.b sorp11on Rate 6 Lots pe, Period Comm1ss1ono 3 00�6 of Total Sales Closing Cost-: 200% of Total Sales Deveioper's Profit 800% Tax Rate i .162600% Discount Rate 12.00% Price Esc.alat1on per Quarter o oo�c;

II Qi�c2unted Ca:;b Elow 8!)al)'.si:;

Sales Period (Quarterly) 1 2 s 4 6 6 7 8 . Total

No of Lots Sold 6 6 6 6 6 6 6 5 47 Remaining No of Lots 41 35 29 23 1 7 11 5 0

Avg Sales Pnce µso.om $450,000 $450,000 $450,000 $450,000 $450.0CIO $450.000 $450,000 $450,000 Total Sales $2,700,000 $2,700,000 $2,700,000 $2,700,000 $2,700,000 $2,700,000 $2,700,000 $2.250,000 $21 ,150,000

LESS EXPENSES Cost lo Complete 1,567,79 1 1,567 ,791 Homeovmer'$ Association Dues 17,907 15,621 13,335 11,049 8,763 6,477 4,191 1,905 79 .248 Estima1ed Bond Cos� (m.ax1murr 31,373 27,358 23,353 19,358 15,353 11,348 7,343 3,338 138,840 Commissions 81,000 61 ,000 81 ,000 81 ,000 81,000 81 ,000 81 .000 67 ,500 634 ,500 Closing Costs 54,000 54,000 54,000 54 ,000 54,000 54 DOO 54 ,000 45,000 423.000 R.E Taxes 61 ,472 53,625 45,777 37,93) 3:J,082 22 ,235 14,387 6,540 272.048 Total Expenses 1,813,543 231 ,613 217,475 203,336 189,198 175,059 160,921 124,282 3,115,427

· Net Sales Proceds 886.457 2.468.387 2.482.525 2.496.664 2"510.8()2 2.524.941 :t539.079 2;126�718 1$.034�673

'LESS PROFIT Developer's Profit 70,917 197,471 198,602 199,733 200 864 201 ,995 203,126 170,057 1,442.766 Net Property Value 815,540 2,270,916 2,283,923 2]96,931 2,309,938 2,322 ,946 2,335,953 1,955,650 16,591 ,807

P. V Factor 0.9709 0.9426 09151 0 8885 08626 0.8375 08131 0 7894 PresentValue: 791.787 2.1 40.656 2,090.1 1$ 2.040;793 1.992.573 1;945.430 · 1;899,344 l.643.816 14.444.412

Ill. Summa[)'. .A."8 rage Total Per Lot Sales $21 ,150 :iJOO 100 0% $450,000 ·Expenses (llill.ill). ::l.il% ·Total Net Proceeds $18,034,573 85 3% $383,714 Developer's Profit ::ll.Jl1;, Net VJlue $16,�591 ,807 78 4% $353,017

· Present Value $1 4.444.412 68_3% $307.328

Rounded: $14.440.000 I

HULBERG & ASSOCIATES. INC.

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek Hassler-Silver Creek CFD #10 File #9064 SC Page 56

BULK SALES VALUATION An investigation was made for sales and offerings of comparable sites in the general area of the Subject Property. It is rare in the current market for bulk finished lots to be available for sale, and especially in upscale areas like Silver Creek. In our research for comparables, we focused on recent bulk sales of residential lots. We have included sales which are similar in location, sales which are similar in certain products types. Not surprisingly, no single sale was highly similar in all respects to the Subj ect Property.

The sales summarized on the following page were selected as most meaningful and relevant to our valuation of the Subject Property site. A Sales Location Map follows the summary.

In an escalating or fast-paced market, the discount for a bulk purchase of multiple units of realty, particularly finished residential lots, decreases substantially. In specifically looking at the Subject Property, the mathematical calculation to a bulk value would involve discounting at less conservative rates than a typical cash flow residual to a raw land value. This is because there would exist a strong market, in our opinion, for the Subject Property lots on an individual basis, so there would be less motivation forthe seller to discount lots substartiallyin order to sell them all to a single buyer. Our sales analysis will demonstrate the market demand forsubd ivision-size finished and paper lots in San Jose.

COMPARABLEBULK LAND SALES

L 8,000 to 12, 000 s.f. tots 1 4973 San Felipe Road Mar-01 7.7 5.21 19,545,000 $ San Jose

2 Silver Creek Road SeJH)() 155.4 0.41 20,800,000 $ San Jose

3 SilverCreek Road SeJH)() 155.4 0.53 35,260,000 $ San Jose

4 4100 - 4190 San FelipeRoad Feb-01 37.1 3.77 51,a56,000 $ 6.5% of the lots delivered finished at $488,625/lot;balance paper. San Jose

5 5400San Felipe Road May-99 23.6 1.40 10,1388,000 $ Paper lots. Site dev. C-OSts approx. $60,000/lot San Jose

6 19160 AlmadenRoad Mar-00 3.2 3.72 4,500,000 $ · Raw land. utilities available. San Jose

7 Metcalf Road In escrow 260.0 0.82 27,920,000 $ . Tentative map San Jose Jun-03

Smaller lots 8 4390 NarvaezAvenue Oct-02 0.6 7.73 750,000 $ ·. \entative map. Small detachedsini:ile family lots. San Jose

9 DelmasAvenue at Willow St. Nov-01 1.79 20.11 5,100,000 $ Previously improved finishedsite. Site devel. costs= $20,000/lot San Jose

10 Seagull Way, E of Saratoga-SunnyvaleRd. Mar-01 2.63 7.60 6�.000 $ Conceptbut not project approvals included. Saratoga

11 E klerberryLane and Belief lower Lane Feb-02 5.70 7.19 9,400,000 $ FinshedsinQle family lots average 3,500 s.f. House plansincluded. Union City

12 Wayne Way Sep-00 2.00 20.00 11,250,000 $ 129.13 ownhome lots. Price includes approved plans. San Mateo

HULBERG &ASSOCIATES, INC.

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek Hassler-Silver Creek CFD #10 File #9064 SC Page 57

______i ____ ..:.. "'-,;:

G) t\ /;hitas

\ ,/'

?-

Comparable Bulk Land Sales 1 through 7 are most relevant to the Subject Property's 8,000 to 12,000 square foot lots.

Comparable Land Sales 1 through 5 are some of the most dated comparables included, but they are all located within the Silver Creek PRC.

Comparable Bulk Land Sale Number I, at $488,625 per lot, is the bulk purchase of 40 finished single-family lots within the Brookfield Madison subdivision, located at the northern end of Silver Creek. Lots were level and range from 8,004 to 9,054 square feet. In relation to the subject's 8,000 �uare foot lot tracts, upward adjustment for views and location are warranted, balanced by downward adjustment for market conditions.

Comparable Bulk Land Sale Number 2, at $325,000 per lot, represents a bulk sale of 64 finished single-family lots within the Silver Ridge subdivision. Topography is slightly hilly, with the upper elevations affording northerly valley views toward downtown. Lot sizes range from 4,000 to 19,000 square feet, but most are in the range of 4,000 to 6,000 square feet. In relation to the Subj ect Property's average 6,000 square foot lots, this comparable is quite similar, requiring little adjustment. A similarunit value is indicated.

Comparable Bulk Land Sale Number 3, at $430,000 per lot, represents a bulk sale of 82 finishedsingle- family lots within the Silver Ridge subdivision. Topography is moderately hilly. Lots range in size from 5,387 to 21,05 1 square feet. The lots are larger and view amenities superior to Comparable Lani Sale Number 2. The best lots in this subdivision offer amenities approaching those of the Subject Property's larger lots. On average, a higher unit value is indicated for the Subj ect Property' s largest lots.

HULBERG & ASSOCIATES, INC. The Ra nch on Silver Creek. Hassler-Silver Creek CFO #10 File #9064 SC Page 58

Comparable Bulk Land Sale Number 4, at $366,829 per lot, is a bulk sale of 140 lots ranging in size from 8,000 to 14,206 square feet. Forty of the lots (46.5%) were delivered finished, with the balance paper. The sale was contingent upon receipt of final map. The site is mostly level. Site development costs were $59,500 per lot. In relation to the Subject Property, upward adjustment is needed to finished lot status,offset by a slight downward adjustment for time. In other respects, this comparable is fairly similar to the Subject Property's larger lots. The value of the Subject Property's similarly sized lots is expected to be higher than the nominal price indicated by this sale, based primarily on the magnitude of the upward adjustment to finished lot status.

Comparable Bulk Land Sale Number 5, at $329,939 per lot, represents a bulk sale of 33 paper lots in the Silver Oak Estates subdivision. Lots range in size from 10,487 to 30,607 square feet. Topography is gently rolling. Site development costs were approximately $60,000 per lot. The property was purchased with final subdivision map approval. The buyer, Braddock & Logan, planned 3,450 to 3,972 square foot homes priced above $1,000,000. In relation to the Subject Property, upward adjustment is needed for site development costs and amenities. On balance, a . higher price · is indicated for the Subject Property's lots of similar size.

Comparable Bulk Land Sale Number 6, $375,000 per unit, is an assemblage of two parcels located on Almaden Road in the Almaden Valley. The property was purchased without development approvals, a; raw land, but on a per lot basis. The property is situated on the southeasterly cornerof (Old) Almaden Road and Scaletta Lane. The location of this comparable is superior to the Subject. Average lot size is 8,780 square feet. The buyer intends to build 12 single-family units with two floor plans. Plan 1 will be 3,325 square feet and Plan 2 will be 3,455 square feet. These floor plans are based on the units built for the "San Michele" subdivision in Danville. The average lot size is 8, 780 square feet. Utilities are available at the site. There were threeexisting single- family residences at time of sale which will be demolished, at a cost estimate of $75,000. Total site development costs are $650,000, or $54,167 per lot. In comparison to the Subj ect Property, this comparable would be adjusted upward for the Subject Property's level of entitlements and anticipated site development costs. Ihwnward adjustment is needed to reflect the larger average lot size, superior Almaden Valley location, and lesser risk associated with developing a small 12-unit development. Balancing these considerations, a fairly similar lot value is indicated for the Subject Property.

Comparable Bulk Land Sale Number 7, at $131,080 per lot, is a bulk sale of approximately 213 paper lots located adjacent to Highway 101 north of Metcalf Road. The purchase is currently in escrow, scheduled to close in June 2003, subject to receipt of tentative map approval. The site is affected by freeway noise and is traversed by faults andma jor transmission lines. Finished lot costs and entitlement feesare estimated at $47,600 and$49,600 per lot, respectively. In relation to the Subject Property, upward jusad tment is needed for level of improvements, access, location. This is also a much larger sale than any of the subject's individual tracts. Overall, then, a higher price per lot is indicated forthe subject

Comparable Bulk Land Sales 8 through 12 are most relevant to the Subject Property's smaller lots.

Comparable Bulk Land Sale Number 8, at $150,000 per paper lot, is a small site on Narvaez Avenue near Curtner Avenue and Capitol Expressway that is being developed with five 2,300

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek. Hassler-Silver Creek CFD #10 F.ile#9064 SC Page 59 square foot homes on small 3,600 square foot lots. Demolition of small existing homes and a daycare center were estimated at $25,000 to $30,000. Site development costs were estimated at $25,000, but were actually $50,000, or $10,000 per lot. This site fronts to an elevated Highway 87. While the Subj ect Property's tracts are larger, location and amenities are superior. Overall,balancing size against location, amenities, and site development costs, a higher lot value is indicated forthe Subject Property.

Comparable Bulk Land Sale Nu mber 9, at $141,667 per paper lot, is a previously developed site in Willow Glen, purchased to construct 36 townhouse units. Density is much higher than the subject, at nearly 20 units to the acre. The close of escrow was contingent on tentative map approvals. Site development costs and demolition were estimated at just $20,000 per unit. Adjusting upward to finished lot condition and to reflect the Subject Property's lower density, then, a higher price is indicated forthe Subject Property's townhouse lots.

Comparable Bulk Land Sale Nu mber 10, at $3 14,500 per paper lot, is a 20-unit detached development located on Seagull Way, just east of Saratoga-Sunnyvale Road. The site adjoins commercial property, experiences noise from Saratoga-Sunnyvale Road, and abuts a rail line. Nonetheless, downward adjustment for location is needed. Upward adjustment for amenities is also warranted. Information on anticipated site development costs was unavailable, but apparently fairly minor and primarily onsite. The site has been developed with houses of 1,574 to l ,895square feet on lots of 3,485 to 6.534square feet, averaging about 4,000. On balance, a lower lot value is indicated forthe Subj ect Property.

Comparable Bulk Land Sale Number 11, at $229,268 per unit, is a bulk sale of 41 finished average 3,500 square foot single-family lots in Union City. The Subject Property location is considered superior. Included in the sales prices were all furnishings and furniture in the sales office and models and all sales materials and plans, with an estimated value of $400,000. The adjusted unit value is $219,512 per lot. Bl.lancing location against furnishings, a similar lot value is indicated for the Subj ect Property's lots if finished.

Comparable Bulk Land Sale Number 12, at $281,250 per lot, is a bulk sale of 40 paper townhome lots in the Bay Meadows redevelopment. Density is lower than the Subject Property's, at just 7.2 dwelling units per acres. The purchase price includes house plans. Onsite costs are estimated at $21,981 per lot. No off-sites were anticipated. The site adjoins Highway 101 and suffers noise as a result. In relation to the Subject Property, downward adjustment is needed fordensity, plans and location; upward adjustment is needed foramen ities. On balance, a lower lot value is indicated forthe Subj ect Property.

The sales analyzed support bulk values for finished lots supporting a single unit (the market convention) inthe Subj ect Property's size category as follows:

Product Type Supported Range Per Unit 10,000 to 12,000 square footlots $375,000 to $490,000 + 8,000 square foot lots $370,000 to $420,000 5,800 and 6,000 square foot lots $325,000 to $390,000 3,800 square foot lots $165,000 to $220,000 Duets and Townhouses $160,000 to $190,000

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek, Hassler-Silver Creek CFD #1 O File #9064 SC Page 60

We note that the Subject Property's duet units support two units each, while its townhouse lots support 4 units each.

In the past, we have analyzed the relationship between aggregate retail finished lot value and the bulk sale of finished retail lots, and found just a 5 to 12 percent discount. The bulk sales are consistent in their support for the finishedlot value estimates derived previously.

The final step in analyzing these bulk sales is to adjust for the costs tobring the Subject Property lots to finished lot status. Generally, in this market there is no premium added to the estimated costs, because of the strong competition for residential land. The estimated constn..ction costs to bring the individual tractsto finishedlot status are summarized as follows:

CONSTRUCTION COMPLETION COSTS

Tract No. No. Lots Cost to Complete Cost Per Lot Cost Per Unit 9164 100 $ 6,261,867 $ 62,619 $ 45,049 9165 14 $ 1,141 ,551 $ 81,539 $ 20,385 9166 22 $ 4,826,597 $ 219,391 $ 109,695 9167 74 $ 12,066,493 $ 163,061 $ 163,061 9168 54 $ 9,653,194 $ 178,763 $ 178,763 9169 33 $ 6,502,886 $ 197,057 $ 197,057 9170 91 $ 3,1 76, 157 $ 34,903 $ 34,903 9171 47 $ 1584 649 $ 33 716 $ 33 716

Because it is better supported by the data, we have reconciled to a unit value estimate, and, where necessary, for the multi-family product, converted this estimate to a per lot figure. Our conclusion of bulk sale value is summarized in the table below.

AS-IS BULK VALUE CONCLUSIONS VIA SALES COMPARISON APPROACH As-is Tract Product No. Lots Bulk Value/Lot Subtotal Total

9164 3,800 53 $ 175,000 $ 9,275,000 6,000 8 245,000 $ 1,960,000 Duet 39 240,000 $ 9,360,000 $ 20,595,000 9165 TH 14 565,000 $ 7,910,000 9166 Duet 22 130,000 $ 2,860,000 9167 5,800 74 125,000 $ 9,250,000 9168 6,000 54 110,000 $ 5,940,000 9169 1 2,000 33 340,000 $ 11,220,000 9170 8,000 47 365,000 $ 17,155,000 10,000 44 505,000 $ 22,220,000 $ 39,375,000

9171 8,000 47 365,000 i 171 1551000 $ 114,305,000

HULBERG & ASSOCIATES, INC. The Ranch on Silver Creek Hassler-Silver Creek CFO #1 0 File #9064 SC Page 61

RECONCILIATION OF THE VALUE ESTIMATES The market value of the fe e simple interest in the Subject Property has been estimated via two applicable appraisal techniques. The indications given by each for each neighborhood are summarized as follows:

Discounted Cash Flow Technique $ 94,290,000

Sales Comparison Approach, Bulk Land Sales $114,305,000

To determine our final opinion of value, we considered the reliability and re levance of each value indicator, based on the quality and the supporting data and the appropriateness of the assumptions undergirding the approach to this specific appraisalproblem.

The discounted cash flow method is generally preferred for bond financing appraisals. We developed adequate information from the larger market on retail finished lot sales and absorption rates for competitive developments. Expenses were based on actual budgeted costs, a relatively high proportion of which has already been expended. Other expenses were fairly minimal. The support for the selection of an appropriate discount rate was considered good.

A number of bulk sales transactions were foundthat were both recent and relevant. However, the Subject Property is a unique development, as were each of these comparables, requiring significant adjustments for site development costs and specific site attributes.

The t\vo ind ications of value fall within 20 percent of one another, which is a reasonably wide range. The Discounted Cash Flow method was somewhat conservative in that certain environmental remediation costs were expensed in year one, despite the fact that they will probably be spread over IO years, and that some of the budgeted costs may not be incurred at all. The Discounted Cash Flow model was also conservative in that no price appreciation was projected, despite absorption periods ranging from 6 to 12 quarters. Finally, the Discounted Cash Flow model was conservative in that a small profit was deducted; in our experience, many developers feel that this allowance cannot be made if a prospective purchaser is to be competitive.

On the other hand, the Sales Comparison Approach using the Bulk Land Sales was somewhat optimistic, since no additional entrepreneurial incentive was deducted, above the budgeted cost to complete. Given the size, complexity, and sensitivity of the Subject Project, some additional incentive may be appropriate.

While the Discounted Cash Flow model is emphasized, based on its appropriateness to the appraisal problem, its specific market support, and its verisimilitude to the actions of market participants, we have tempered it upward slightly based on the Sales Comparison Approach and the considerations outlined above. We have concluded values for each tract as summarized in the table presented on the next page.

HULBERG & ASSOCIATES, INC. -l CD� :::0 Ill :::, � 0 C):::, en VALUATION SUMMARY As of April 18, 2003 The Ranch on Silver Creek CD I I�CD T I 9164 Sienna and Mariposa 53 53 3,800 s.f. lots Map recorded. Private streets Ill 8 8 6,000 s.f. lots graded but no paving or curb, 39 78 duet lots gutteror sidewalk. ro (I)"i' 100 139 $20,595,000 $17,160,000 $18,000,00 (I)w. CD< 9165 Casa Bella 14 56 Townhouse lots Map recorded. Private streets ., graded but no paving or curb, 0 !'.!Utter or sidewalk. $7,910,000 $6,650,000 $7,000,00 CDcil ;,;- 9166 Tesoro 22 44 Duet lots Rough graded. Private streets 0 not yet improved. Map not yet "T1 recorded. $2,860,000 $2,570,000 $2,600,00 Cl ...... =t:I: 9167 Esperanza 74 74 5,800 s.f. lots Rough graded. Private streets not yet improved. Map not yet 9 recorded. $9,250,000 $7,100,000 $7,500,00 ro::!! 9168 Montesa 54 54 6,000 s.f. lots Rough graded. Public streets 0rt not vet improved or dedicated. $5,940.000 $5,180,000 $5,500,00 i en Public streets not yet dedicated ,0 9169 Hacienda 33 33 12,000 s.f. lots or improved. Graded. $11,220,000 $8,940,000 $9,500,00 I c 9170 Portoflno and Provence 47 47 8,000 s.f. lots Map recorded. Streets improved. r 44 10,000 s.f. lots OJ � m 91 91 $39.375.000 $32. 140,000 $34,500,00 :::0 G'.l s;,o 9171 Provence AZ ll 8,000 s.f. lots Map recorded. Streets improved. $17,155,000 $14,440,000 6i otal 435 538 $114,305,000 $94,180,000 0en 0 m� Ill sn CD z (CN

9 Cl) The Ranch on Silver Creek, Hassler-Silver Creek CFO #1 O File #9064 SC Page 63

STATEMENT OF VALUE Based on our investigation and analysis, it is our opinion that the market value of the fe e simple interest in the Subj ect Property, as of April 18, 2003, is:

ONE HUNDRED MILLION ONE HUNDRED THOUSAND DOLLARS ($100,100,000)

This conclusion is subj ect to the Assumptions and Limiting Conditions set forth in the Addenda of this ap praisal and associated with an exposure period of six months as developed previously.

HULBERG & ASSOCIATES, INC. ADDENDA PHOTOGRAPHS OF SUBJECT PROPERTY I. View looking southwest fromWhitetail Ln. to Hillyer Rd. entrance and barn.

2. View from Whitetail Ln. showing golf course and tract 9171. 3. View from Whitetail Ln. looking toward downtown. Note transmission line at ridge.

4. Hellyer Rd. entrance to project. 5. Project sales office.

6. Tract 9171. 7. Tract 9170.

8. Tract 9169. 8. Tract 9166.

9. Tract 9167. I 0. 9168-duet lots.

11. Tract91 68. 12. Tract 9168-6,000-square-foot lots.

13. Tract 9164. 14. Tract 9165. QUALIFICATIONS OF APPRAISER(S), ASSUMPTIONS AND LIMITING CONDITIONS, AND CERTIFICATION OF APPRAISAL NORMAN C. HULBERG, MAI QUALIFICA TION STA TEMENT

EXPERIENCE Mr. Hulberg is president of Hulberg & Associates, Inc. With offices in Silicon Valley (San Jose) and East Bay (San Ramon), Hulberg & Associates is the largest commercial appraisal firm in Northern California. Since 1975, the firm has appraised over $82 billion in real estate.

Independent real estate appraiser and consultant since 1975.

Served as chairman of the Admissions Committee of the Northern California Chapter of the Appraisal Institute. Served on Board of Directors.

ED UCA TION Masters of Business Administration from San Jose State University.

Bachelor of Science from San Jose State University. Major in Real Estate. Graduated with honors.

Continuing education courses taken through the Appraisal Institute and other real estate organizations.

PR OFESSIONAL LICENSE Member, Appraisal Institute, Number 6468 (MAI) Member, International Right of Way Association Member, Urban Land Institute State of California11 Certified-General" Appraiser Certificate No. AG003542

APPRAISAL ASSIGNMENTS Emp loyed in all phases of real estate consulting and appraisal. Some of the types of properties appraised are outlined below:

Residential: Single- family, condominium, apartments, land, mobile home parks.

Commercial: Office buildings, hotels/motels, service stations, retail, vacant land.

Industrial: Industrial plants, research and development, warehouses, vacant land.

Other: Undivided interest valuations, contaminated properties, special purpose properties, feasibility studies, market studies, condemnation, litigation support, mediations, arbitrations and review appraisals.

Qualified as an expert witness in the Counties of Santa Clara, San Mateo, Alameda, Santa Cruz, Stanislaus, and in the U.S. Tax Court in the U.S. District Courts in San Jose, San Francisco, Oakland, and Las Vegas. Provided testimony on over 50 occasions. QUALIFICA TION STA TEMENT, NORMAN C.HU LBERG, MA I- Continued

SPEAKING ENGA GEMENTS

InternationalRight of Way Association, February 1999 "Valuing Benefits after MTA v. Continental"

International Right of Way Association, September 1998 "Dealing with Contaminated Property"

Appraisal Institute, Fall Conference, October 1997 "Current Issues in the Profession "

Certified Public Accountants, San Jose Chapter, November 1996 "The Perils of Expert Testimony"

Appraisal Institute, Sacramento, California; September 1996 "Introduction to Eminent Domain"

CertifiedPublic Accountants, California Society, August 1996 "Discounting Undivided In terests"

Appraisal Institute; April 1995 "Valuation of Contaminated Property"

Appraisal Institute; November 1994 "Litigation Wo rkshop"

TEA CHING ASSIGNMENTS

Appraisal Institute; Concord, California: May 1996 "Beginning Eminent Domain "

Appraisal Institute; May 1996 "Condemnation and Court Testimony"

CaliforniaRedevelopment Association; Concord, California, January 1995 "PropertyAcqui sition "

Urban Land Institute; San Francisco, California,June 1993 "A sset Management" QUALIFICA TION STA TEMENT, NORMAN C. HULBER G, MA I - Continued

CLIENTS Clients of Hulberg & Associates, Inc. include banks, savings and loans, insurance companies, attorneys, public agencies and individuals. A partial list of past clients includes:

Acacia Capital Corporation Home Savings of America Advanced Micro Devices Hopkins & Carley Aldrich, Eastman & Waltch Housing Capital Company Alza Corporation Howard, Rice, Nemerovski, Canady, American Savings Bank Robertson, Faulk & Rabkin Apple Computer, Inc. IBM Amelie, Hastie, McGee, Willis & Greene Intel Corporation Bank of America Internal Revenue Service Bank of the West The Koll Company Barry Swenson Builder Landals, Ripley, Diamond Berliner-Cohen Larwin Homes Blickman-Turkus, Inc. Lehmann Brothers Brobeck, Phleger & Harrison Lincoln Property Co. Caltran s McDonald's Corporation Castle & Cook, Inc. Merrill Lynch Century Partners Metropolitan Life Insurance Co. Champion International Murray & Murray Chevron U.S.A., Inc. Orchard Properties City of Fremont Prudential Insurance Company of America City of Milpitas Richmond American Homes City of San Jose Rolm Corporation City of Santa Clara Ryland Homes Coast Counties Truck & Equipment Co. Sanwa Bank Comerica Bank-California Shea Homes County of Santa Clara Shell Oil Company Cox, Castle & Nicholson Sheppard, Mullin, Richter & Hampton Dai-Ichi Kangyo Bank Sobrato Development Co. Dept. Of Housing and Urban Devt. South Bay Construction & Devt. Co. Federal Home Loan Bank Board Sumitomo Bank Federal Home Loan Mortgage Corp. Tandem Computer Co. Ferrari, Olson, Ottoboni & Bebb United States Postal Service Fireman's Fund Insurance Co. Wells Fargo Bank Gray, Carey, Ware & Freiderich Griffinger, Levinson, Freed & Heineman Goldfarb & Lipman CLAUDIA B. CARLETON,MAI QUALIFICA TION STATEMENT

EMPLOYMENT EXPERIENCE

Vice President, Hulberg & Associates, Inc., real estate appraisers (June 2002 - present).

Regional Manager, Curtis-Rosenthal, LLC, a real estate appraisal and consulting firm (2001- 2002)

Senior Appraiser, Hulberg & Associates, Inc. (1984-2001).

Commercial real estate appraiser, BA Appraisals, Inc., a subsidiary of Bank of America (1983-1 984) .

Vice President and Investor Representative, Fox & Carskadon Financial Corporation (1979-1982).

PortfolioAnalyst, Bank of America Realty Services, Inc. (1978)

Loan Processor, Mason McDuffie Co. (1977)

PROFESSIONAL AFFILIA TIONS AND LICENSE The Appraisal Institute, Member (MAI) #11893 State of California"Ce rtified-General" Appraiser Certificate No. AG003579 Member, International Right of Way Association National Network of Commercial Real Estate Women

ED UCA TION Master of Business Administration, University of California at Berkeley. Emphasis in both real estate and finance.

Bachelor of Arts, University of Pacific, Stockton, California. Double major in English .and French. Cum Laude. Valedictorian

Continuing education courses and seminars fromthe Appraisal Institute and others including:

Legal Aspects of Real Estate Real Estate Practice Real Estate Principles Escrows Federal and State Laws & Regulations Americans with Disabilities Act Commercial Construction forToda y's Aooraiser Environmental Riskand the Aooraisal Process Understanding and Using DCF Software Valuation of Detrimental Conditions Vineyard Valuation Dvnamicsof Office Building Valuation Eminent Domain Valuation of Partial Interests Pro-Ject Plus Anrus Attacking & Defendingan Appraisal in IRWA - The Appraisal of Partial A�quisitions Litigation Dale Carneghie Sales Advantage Course QUALIFICA TION STA TEMENT - CLA UDIA B. CARLETON, MA I - continued

BOARD EXPERIENCE The Appraisal Institute Chair, Fall Conference Committee, 1996 Chair, Seminars Committee, 1997-2001 Board of Directors Member, 1995, 1998-2003 Regional Representative 1999-2003 Leadership Development and Advisory Council, 2000, 2002 National Network of Commercial Real Estate Women Board of Directors Member, 1995-1998 National Delegate, 1998- 1 999 Santa Clara County Property Tax Assessment Appeals Board, 2001 -2004

APPRAISAL ASSIGNMENTS

Commercial: Offices: professional and medical/dental; suburban and high­ rise. Shopping centers: community, specialty, neighborhood, strip. Mixed-use projects. Showrooms. Condominiums. Vacant land.

Residential: Apartments, condominiums, subdivisions, vacant land.

Industrial: Light industrial, manufacturing, and research and development buildings. Condominiums, warehouses, lofts, and vacant land. Wafer fabrication, biotech, and other specialized technology facilities.

Other: Market, feasibility and highest .and best use studies. Arbitration. Pre-development analyses for approval negotlat10n. Special purpose properties. Condemnation. Historic valuations. Cost allocation studies. Easements. Partial interests. Contaminated properties. Litigation support. ASSUMPTIONS AND LIMITING CONDITIONS

The appraisal is subject to the followingass umptions and limiting conditions:

We believe the information furnished by others in this report to be reliable, but we assume no responsibility forits accuracy.

The legal description furnished us is assumed to be correct. We assume no responsibility for matters legal in character nor do we render any opinion as to the title, which is assumed to be good. All existing liens and encumbrances have been disregarded and the property is appraised as though free and clear under responsible ownership and competent management.

We have made no survey of the propertyand assume no responsibility in connection with such matters. The sketch in this report is included to assist the reader to visualize the property. Stable soil conditions are assumed. Water and mineral rightshave not been valued, unless noted.

If this appraisal contains a valuation relating to a portion of a larger parcel of real estate, the value reported for such portion relates the portion only. It should not be construed as applying with equal validity to other portions of the larger parcel.

Any structure( s) is assumed by the appraiser to have been constructed in accordance with applicable building code requirements. Any use of the structure(s) is assumed to be in conformance with applicable zoning ordinances, unless otherwise noted in the appraisal. No specific investigation of these issues has been undertaken by the appraiser. It is recommended that the client secure appropriate legal opinions if these issues pose anyconcern.

The Americans with Disabilities Act ("ADA") became effective January26, 1992. The appraisers have not made a specificcompliance survey and analysis of this property to determine whether or not it is in conformity with the various detailed requirements of the ADA. It is possible that a compliance survey of the property, together with a detailed analysis of the requirements of the ADA, could reveal that the property is not in compliance with one or more of the requirements of the Act. If so, this fact could have a negative effect upon the value of the property. Since the appraisers have no direct evidence relating to this issue, possible noncompliance with the requirements of ADA in estimating the value of the property has not been considered.

Unless otherwise stated in this report, the existence of hazardous materials, which may or may not be present on the property, was not observed by the appraiser. The appraiser has no knowledgeof the existence of such materials on or in the property. The appraiser is not qualified to detect such substances. The presence of substances such as asbestos, urea-formaldehyde foam insulation, or other potentially hazardous materials may affect the value of the property. The value estimate is predicated on the assumption thatthere is no such material on or in the property that would cause a loss in value. No responsibility is assumed forany such conditions, or forany expertise or engineering knowledge required to discover them. The client is urged to retain an expert in this field, if desired.

This appraisal shall be used only forthe function outlined in the attached report, unless expressly authorized by Hulberg & Associates, Inc. The format and value reported may or may not be valid for other purposes. Assumptions and Limiting Conditions - ( continued)

Distribution of this report is at the sole discretion of the client and we will make no distribution without the specificdirect ion of the client.

If the client provides copies of this report to third parties, the client shall ensure that the report is copied in its entirety.

The liability of Hulberg & Associates, Inc., and its employees is limited to the client only and to the fee actually received by the appraiser (total per appraisal). Further, Hulberg & Associates, Inc., assumes no obligation, liability, or accountability to any third party. Client agrees to hold Hulberg & Associates, Inc. and its employees harmless in the event of lawsuit brought by any other party. If this report is placed in the hands of anyone but the client, client shall make such party aware of all the assumptions and limiting conditions of the assignment. The appraiser is in no way responsible for costs incurred to discover or correct any deficiencies of any type present in the property, physically, financially, and/or legally. The client also agrees that in case of lawsuit arising from or in any way involving this appraisal assignment (brought by lender, partner or part owner in any form of ownership, tenancy or any other party), client will hold appraisers harmless from and against any liability, loss, cost or expense incurred or suffered by appraiser in such action, regardless of its outcome.

The appraisers cannot be held responsible for unforeseeable events that alter market conditions prior to the effective date of any prospective value.

This appraisal assumes workmanlike completion of construction, including tenant improvements funded by the District.

The value or values presented in this report are based on the premises outlined herein and are valid for the purpose stated.

Any projections of income and expenses in this report are not predictions of the future. Instead, they are an estimate or current thinking of market participants of what future income and expenses will be. No warranty or representation is made that these projections will materialize.

We were not provided with a soils, environmental, or geotechnical report. The appraisal therefore contains the assumption that there are no soils, environmental, or geological conditions that would adversely impact the marketability or value of the Subject Property. CERTIFICATION OF APPRAISAL

The undersigned does hereby certifythat, except as otherwise noted in this appraisalreport : 1. I have no present or contemplated future interest in the real estate that is the subject of this appraisal. 2. I have no personal interest or bias with respect to the subject matter of this appraisal report or the parties involved. The appraisal has not been based on a requested minimum valuatio� specificvaluation or the approval of a loan. 3. My compensation is not contingent upon the reporting of a predetermined value or direction in value that favors the cause ofthe client, the amount of the value estimate, the attainment of a stipulated result, or the occurrenceof a subsequent event. 4. To the best of my knowledge and belief: the statements of facts contained in this appraisal report, upon which the analysis, opinions, andconclusions expressed herein are based, are true and correct. 5. This appraisal report sets forthall of the limiting conditions (imposed by the terms of my assignment or by the undersigned) affecting the analysis, opinions, and conclusions contained in this report. 6. Our analyses, opinions, and conclusions were develope� and this report has been prepared in conformity with the Appraisal Institute and the Uniform Standards of Professional Appraisal Practice of the Appraisal Foundation and the Appraisal Institute. 7. ClaudiaB. Carleton; MAI, inspected the property. NormanC. Hulberg, MAI,did not inspect the property but each contributed to the analysis and conclusions of the report. 8. No one other than the undersigned prepared the analysis, conclusions, and opinions concerningreal estate that areset forthin this appraisal report. 9. Members of the Appraisal Institute are required to meet certain continuing education requirements. Asof the date ofthis report, Ms. Claudia B. Carleton and Mr. Norman Hulberg have completed the requirementsof the continuing education programof the Appraisal Institute. I 0. I certify that the use of this report is subject to the requirements of the Appraisal Instituterela ting to review by its duly authorized representatives.

Claudia B. Carleto°' MAI Certified-GeneralApprai ser #AG003579 CITY OF SANJOSE Ci\ Prl!\LCH .; SILICON VA. LLEY APPENDIX E SUMMARY OF THE FISCAL AGENT AGREEMENT

The following is a brief summary of certain provisions of the Fiscal Agent Agreement not otherwise described in the text of this Official Statement. Such summary is not intended to be definitive, and reference is made to the entire text of the Fiscal Agent Agreement for the complete terms thereof.

Definitions

Except as otherwise defined in this Summary, the terms previously defined in this Official Statement have the respective meanings previously given. In addition, the following terms have the following meanings when used in this Summary:

"Act" means the Mello-Roos Community Facilities Act of 1982, as amended, being Sections 53311 et seq. of the California Government Code.

"Administrative Expenses" means costs directly related to the administration of the District consisting of the costs of computing the Special Taxes and preparing the annual Special Tax collection schedules (whether by the Director of Finance or designee thereof or both) and the costs of collecting the Special Taxes (whether by the County or otherwise); the costs of remitting the Special Taxes to the Fiscal Agent; fees and costs of the Fiscal Agent (including its legal counsel) in the discharge of the duties required of it under this Agreement; the costs of the City or its designee of complying with the disclosure provisions of the Act, the Continuing Disclosure Agreement and the Fiscal Agent Agreement, including those related to public inquiries regarding the Special Tax and disclosures to Bondowners and the Original Purchaser; the costs of the City or its designee related to an appeal of the Special Tax; any amounts required to be rebated to the federal government in order for the City to comply with Section 5.13; an allocable share of the salaries of the City staff directly related to the foregoing and a proportionate amount of City general administrative overhead related thereto; and all fees and costs related to the administration of the Bonds and Bond proceeds, with respect to the investment and disbursement of funds, the calculation of any amounts owing regarding rebate or otherwise to comply with the Code, and any continuing disclosure certificates related to the Bonds. Administrative Expenses shall also include amounts advanced by the City for any administrative purpose of the District, including costs related to prepayments of Special Taxes, recordings related to such prepayments and satisfaction of Special Taxes, amounts advanced to ensure compliance the Fiscal Agent Agreement, and the costs of commencing foreclosure of delinquent Special Taxes.

"Administrative Expense Fund" means the fund by that name established by the Fiscal Agent Agreement.

"Agreement" means the Fiscal Agent Agreement, as it may be amended or supplemented from time to time by any Supplemental Agreement adopted pursuant to the provisions of the Fiscal Agent Agreement.

"Annual Debt Service" means, for each Bond Year, the sum of (i) the interest due on the Outstanding Bonds in such Bond Year, assuming that the Outstanding Bonds are retired as scheduled, and (ii) the principal amount of the Outstanding Bonds due in such Bond Year.

"Auditor" means the auditor I controller of the County of Santa Clara.

"Authorized Officer" means the City Manager, the City's Director of Finance, the City's Deputy Director of Finance, Debt and Risk Management, the City Clerk or any other officer or employee authorized by the City Council of the City or by an Authorized Officer to undertake the action referenced in the Fiscal Agent Agreement as required to be undertaken by an Authorized Officer.

E-1 "Authorized Representative of the Department of Public Works" means the Director of Public Works.

"Bond Counsel" means (i) Quint & Thimmig LLP, or (ii) any other attorney or firm of attorneys acceptable to the City and nationally recognized for expertise in rendering opinions as to the legality and tax-exempt status of securities issued by public entities.

"Bond Fund" means the fund by that name established by the Fiscal Agent Agreement.

"Bond Register" means the books for the registration and transfer of Bonds maintained by the Fiscal Agent under the Fiscal Agent Agreement.

"Bond Year" means (i) the one-year period beginning September 2nd in each year and ending on September 1st in the following year (except that the first Bond Year shall begin on the Closing Date and end on September 1, 2003), or (ii) such other one-year period as shall be selected by the Director of Finance for purposes of compliance with the Code, as applicable.

"Bonds" means the City of San Jose Community Facilities District No. 10 (Hassler - Silver Creek) Special Tax Bonds, Series 2003 at any time Outstanding under this Agreement or any Supplemental Agreement.

"Business Day" means any day other than (i) a Saturday or a Sunday or (ii) a day on which banking institutions in the state in which the Fiscal Agent has its principal corporate trust office are authorized or obligated by law or executive order to be closed.

"City" means the City of San Jose, California, and any successor thereto.

"City Attorney" means any attorney or firm of attorneys employed by the City in the capacity of city attorney.

"Closing Date" means the date upon which there is a physical delivery of the Bonds in exchange for the amount representing the purchase price of the Bonds by the Original Purchaser.

"Code" means the Internal Revenue Code of 1986 as in effect on the date of issuance of the Bonds or (except as otherwise referenced herein) as it may be amended to apply to obligations issued on the date of issuance of the Bonds, together with applicable proposed, temporary and final regulations promulgated, and applicable official public guidance published, under the Code.

"Continuing Disclosure Agreement" shall mean that certain Continuing Disclosure Certificate executed by the City and the Fiscal Agent, acting as dissemination agent thereunder, dated the Closing Date, as originally executed and as it may be amended from time to time in accordance with the terms thereof.

"Costs of Issuance" means items of expense payable or reimbursable directly or indirectly by the City and related to the authorization, sale and issuance of the Bonds, which items of expense shall include, but not be limited to, printing costs, costs of reproducing and binding documents, closing costs, filing and recording fees, initial fees and charges of the Fiscal Agent including its first annual administration fee, fees and expenses incurred by the City in connection with the issuance of the Bonds and the establishment of the District, special tax consultant fees and expenses, preliminary engineering fees and expenses, Bond (underwriter's) discount, legal fees and charges, including bond counsel, financial consultants' fees, charges for execution, transportation and safekeeping of the Bonds and other costs, charges and fees in connectionwith the foregoing.

"Costs of Issuance. Fund" means the fund by that name established by the Fiscal Agent Agreement.

"County" means the County of Santa Clara, California.

E-2 "OTC" means the Depository Trust Company, New York, New York, and its successors and assigns.

"Debt Service" means the scheduled amount of interest and amortization of principal payable on the Bonds during the period of computation, excluding amounts scheduled during such period which relate to principal which has been retired before the beginningof such period.

"Depository" means (a) initially, DTC, and (b) any other Securities Depository acting as Depository pursuant the Fiscal Agent Agreement.

"Director of Finance" means the Director of Finance of the City or such other officer or employee of the City performing the functions of the chief financial officerof the City.

"Director of Public Works" means the Director of Public Works of the City, or his/ her designee as specified by the Director of Public Works of the City in writing for the Director of Finance and the City's Deputy Director of Finance, Debt and Risk Management.

"District" means the City of San Jose Community Facilities District No. 10 (Hassler - Silver Creek), formed by the City under the Law and the Resolution of Formation.

"Fair Market Value" means the price at which a willing buyer would purchase the investment from a willing seller in a bona fide, arm's length transaction (determined as of the date the contract to purchase or sell the investment becomes binding) if the investment is traded on an established securities market (within the meaning of section 1273 of the Code) and, otherwise, the term "Fair Market Value" means the acquisition price in a bona fide arm's length transaction (as referenced above) if (i) the investment is a certificate of deposit that is acquired in accordance with applicable regulations under the Code, (ii) the investment is an agreement with specifically negotiated withdrawal or reinvestment provisions and a specifically negotiated interest rate (for example, a guaranteed investment contract, a forward supply contract or other investment agreement) that is acquired in accordance with applicable regulations under the Code, (iii) the investment is a United States Treasury Security--State and Local Government Series that is acquired in accordance with applicable regulations of the United States Bureau of Public Debt, or (iv) the investment is the Local Agency Investment Fund of the State of California but only if at all times during which the investment is held its yield is reasonably expected to be equal to or greater than the yield on a reasonably comparable direct obligation of the United States.

"Federal Securities" means any of the investments described in clauses (a), (b), (c), (d) or (k) of the definition of Permitted Investments in the Fiscal Agent Agreement.

"Fiscal Agent" means the Fiscal Agent appointed by the City and acting as an independent fiscal agent with the duties and powers provided in the Fiscal Agent Agreement, its successors and assigns, and any other corporation or association which may at any time be substituted in its place, as provided in the Fiscal Agent Agreement.

"Fiscal Year" means any twelve-month period extending from July 1 in a calendar year to June 30 of the succeeding year, both dates inclusive.

"Improvement Fund" means the fund by that name created by and held by the Fiscal Agent pursuant to the Fiscal Agent Agreement.

"Independent Financial Consultant" means any consultant or firm of such consultants appointed by the City Manager or the City's Director of Finance, and who, or each of whom: (i) is judged by the City's Director of Finance to have experience in matters relating to the issuance and I or administration of bonds under the Act; (ii) is in fact independent and not under the domination of the City; (iii) does not have any substantial interest, direct or indirect, with or in the City, or any owner of real property in the District, or any real property in the District; and (iv) is not connected with the City as an officer or employee of the City,but who may be regularly retained to make reports to the City.

E-3 "Information Services" means Financial Information, Inc.' s "Daily Called Bond Service", 30 Montgomery Street, 10th Floor, Jersey City, New Jersey 07302, Attention: Editor; Kenny Information Services' "Called Bond Service", 65 Broadway, 16th Floor, New York, New York 10006; Moody's Investors Service "Municipal and Government", 99 Church Street, New York, New York 10007, Attention: Municipal News Reports; Standard & Poor's Corporation "Called Bond Record", 25 Broadway, 3rd Floor, New York, New York 10004; and, in accordance with then current guidelines of the Securities and Exchange Commission, such other addresses and / or such services providing information with respect to called bonds as the City may designate in an Officer's Certificate delivered to the Fiscal Agent.

"Interest Payment Dates" means March 1 and September 1 of each year, commencing March 1, 2004.

"Investment Agreement" means:

(a) an uncollateralized investment agreement that is provided by (i) a domestic FDIC- insured commercial bank or a US branch of a foreign bank, rated at least "Aa2" by Moody's and "AA" by Standard & Poor' s; (ii) a domestic insurance company rated "Aaa" by Moody's and "AAA" by Standard & Poor's; (iii) a domestic structured investment company rated "Aaa" by Moody's and "AAA" by Standard & Poor's; or (iv) a guaranteed corporation or a monoline financial guaranty insurance company, provided that the long-term debt or claims-paying ability rating of the company or the guarantor is "Aaa" by Moody's and "AAA" by Standard & Poor' s; and

(b) a collateralized investment agreement that is provided by (i) a registered broker/ dealer subject to SPIC jurisdiction rated "Al" or better by Moody's and "A+" or better by Standard & Poor's; (ii) a domestic FDIC-insured commercial bank or a US branch of a foreign bank, rated at least " Al" by Moody's and "A+" by Standard & Poor's; (iii) a domestic insurance company rated at least "Al" by Moody's and "A+" by Standard & Poor's; (iv) a domestic structured investment company rated "Aaa" by Moody's and "AAA" by Standard & Poor's; or (v) a guaranteed corporation or a monoline financial guaranty insurance company, provided that the long-term debt or claims-paying ability rating of the company or the guarantor is "Aaa" by Moody's and "AAA" by Standard & Poor' s.

"Law" means the City of San Jose Community Facilities District Financing Procedure, constituting Chapter 14.27 of the City's Municipal Code, as in effect on the Closing Date. The Law incorporates by reference, with certain modifications, the Act.

"Maximum Annual Debt Service" means the largest Annual Debt Service for any Bond Year after the calculation is made through the final maturity date of any Outstanding Bonds.

"Moody's" means Moody's Investors Service, and any successor thereto.

"Officer's Certificate" means a written certificate of the City signed by an Authorized Officer of the City.

"Ordinance" means any ordinance of the City levying the Special Taxes.

"Original Purchaser" means Citigroup Global Markets Inc., the first purchaser of the Bonds from the City.

"Outstanding," when used as of any particular time with reference to Bonds, means (subject to the provisions of the Fiscal Agent Agreement disqualifying Bonds owned by or for the City in certain circumstances) all Bonds except: (i) Bonds theretofore canceled by the Fiscal Agent or surrendered to the Fiscal Agent for cancellation; (ii) Bonds paid or deemed to have been paid within the meaning of the Fiscal Agent Agreement; and (iii) Bonds in lieu of or in substitution for which other Bonds shall have been authorized, executed, issued and delivered by the City pursuant to the Fiscal Agent Agreement or any Supplemental Agreement.

E-4 "Owner" or "Bondowner" means any person who shall be the registered owner of any Outstanding Bond.

"Participating Underwriter" shall have the meaning ascribed thereto in the Continuing Disclosure Agreement.

"Permitted Investments" means any of the following, but only to the extent that the same are acquired at Fair Market Value and only to the extent permitted by the City's Investment Policy, as amended from time to time by the City Council:

(a) Cash (insured at all times by the Federal Deposit Insurance Corporation or otherwise collateralized with obligations described under subsection (b) below).

(b) Direct obligations of the United States of America (including obligations issued or held in book-entry form on the books of the Department of the Treasury, and CATS and TIGRS) or obligations the principal of and interest on which are unconditionally guaranteed by the United States of America.

(c) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following federal agencies and provided such obligations are backed by the full faith and credit of the United States of America:

1. U.S. Export-Import Bank (Eximbank); 2. Farmers Home Administration(FmHA); 3. Federal Financing Bank; 4. Federal Housing Administration Debentures (FHA); 5. General Services Administration; 6. Government National Mortgage Association (GNMA or "Ginnie Mae"); 7. U.S. Maritime Administration;and 8. U.S. Department of Housing and Urban Development (HUD).

(d) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following non-full faith and credit U.S. government agencies:

1. Federal Home Loan Bank System; 2. Federal Home Loan Mortgage Corporation (FHLMC or "Freddie Mac"); 3. Federal National Mortgage Association (FNMA or "Fannie Mae"); 4. Student Loan MarketingAssociation (SLMA or "Sallie Mae"); 5. Resolution Funding Corp. (REFCORP) obligations; and 6. Farm Credit System.

(e) Money market funds registered under the Federal Investment Company Act of 1940, whose shares are registered under the Federal Securities Act of 1933, and rated " AAAm­ G," "AAA-m" or better by Standard & Poor's Corporation and the equivalent by Moody's, and including funds for which the Fiscal Agent and its affiliates provide investment advisory or other management services.

(f) Certificates of deposit secured at al! times by collateral described in subsections (b) or (c) above. Such certificates must be issued by commercial banks, savings and loan associations or mutual savings banks. The collateral must be held by a third party and the Fiscal Agent or the Bondowners must have a perfected first security interest in the collateral.

(g) Certificates of deposit, savings accounts, deposit accounts or money market deposits which are fullyinsured by FDIC, including BIF and SAIF.

E-5 (h) Commercial paper rated, at the time of purchase, "Prime-1" by Moody's and "A- l" or better by Standard & Poor's.

(i) Bonds or notes issued by any state or municipality which are rated by Moody's and Standard & Poor's in one of the two highest rating categories assigned by such agencies.

(j) Federal funds or bankers acceptances with a maximum term of one year of any bank which has an unsecured, uninsured and unguaranteed obligation rating of "Prime - 1" or "A3" or better by Moody's and " A-1" or " A" or better by Standard & Poor's.

(k) Pre-refunded Municipal Obligations.

(]) The Local Agency Investment Fund of the State of California.

(m) Investment Agreements.

(n) Repurchase Agreements.

(o) The City's investment pool.

"Pre-refunded Municipal Obligations" means any bonds or other obligations of any state of the United States of America or of any agency, instrumentality or local governmental unit of any such state which are not callable at the option of the obligor prior to maturity or as to which irrevocable instructions have been given by the obligor to call on the date specified in the notice; and

(1) which are rated, based on an irrevocable escrow account or fund, in the highest rating category by S&P and Moody's; or

(2) (i) which are fully secured as to principal and interest and redemption premium, if any, by an escrow consisting only of cash or obligations described under paragraph (b) of the definition of Permitted Investments herein, which escrow may be applied only to the payment of such principal of and interest and redemption premium, if any, on such bonds or other obligations on the maturity date or dates thereof or the specified redemption date or dates pursuant to such irrevocable instructions, as appropriate, and (ii) which escrow is sufficient, as verified by a nationally recognized independent certified public accountant or Bond Counsel, to pay principal of and interest and redemption premium, if any, on the bonds or other obligations described in this paragraph on the maturity date or dates specified in the irrevocable instructions referred to above, as appropriate.

"Principal Office" means the principal corporate trust office of the Fiscal Agent set forth in the Fiscal Agent Agreement, except for the purpose of maintenance of the registration books and presentation of Bonds for payment, transfer or exchange, such term shall mean the office at which the Fiscal Agent conducts its corporate agency business, or such other or additional offices as may be designated by the Fiscal Agent.

"Project" means the facilities more particularly described in the Resolution of Formation.

"Rebate Fund" means the fund by that name established pursuant to the Fiscal Agent Agreement.

"Record Date" means the fifteenth day of the month next preceding the month of the applicable Interest Payment Date, whether or not such day is a Business Day.

"Repurchase A�reement" means a repurchase agreement with:

(a) a primary dealer on the Federal Reserve reporting dealer list which is rated "A" or better by Standard & Poor's and Moody's, or

E-6 (b) a bank rated "A" or better by Standard & Poor' s and Moody's, or

(c) a domestic structured investment company rated "Aaa" by Moody's and "AAA" by Standard and Poor' s; or

(d) a guaranteed corporation or a monoline financial guaranty insurance company, provided that the long-term debt or claims-paying ability rating of the company or the guarantor is "Aaa" by Moody's and "AAA" by Standard & Poor' s, that require the delivery of investments described in clauses (b), (c), (d)(l), (d)(2), (d)(3) or (d)(6) of the definition of Permitted Investments herein. Such collateral must be delivered to the City, the Fiscal Agent (if the Fiscal Agent is not supplying the collateral) or a third party acting as agent for the Fiscal Agent (if the Fiscal Agent is supplying the collateral) before or simultaneously with payment (perfection by possession of certificated securities). Such collateral must be valued weekly, marked-to-market at current market price plus accrued interest. The value of such collateral must equal 104% of the amount of cash transferred by the City or the Fiscal Agent to the counterparty under the repurchase agreement, plus accrued interest. If the value of such collateral is at any time below 104% of the value of the cash transferred by the City or the Fiscal Agent, then additional cash and I or acceptable collateral must be provided. Notwithstanding the foregoing, if the securities provided as collateral are investments described in clauses (d)(l), (d)(2), (d)(3) or (d)(6) of the definition of Permitted Investments herein, then the value of such collateral must equal 105%.

"Reserve Fund" means the fund by that name established pursuant to the Fiscal Agent Agreement.

"Reserve Requirement" means, as of any date of calculation, an amount equal to the lesser of (i) the then Maximum Annual Debt Service, (ii) one hundred twenty-five percent (125%) of the then average Annual Debt Service, or (iii) ten percent (10%) of the initial principal amount of the Bonds issues under the Fiscal Agent Agreement.

"S&P" or "Standard & Poor's" means Standard & Poor's Ratings Service, a division of McGraw­ Hill, and any successor thereto.

"Securities Depositories" means The Depository Trust Company, 711 Stewart Avenue, Garden City, New York 11530, Fax-(516)227-4039 or -4190; Ph_iladelphia Depository Trust Company, Reorganization Division, 1900 Market Street, Philadelphia, Pennsylvania 19103, Attention: Bond Department, Tel-(215)496-5058; and, in accordance with then current guidelines of the Securities and Exchange Commission, such other addresses and/ or such other securities depositories as the City may designate in an Officer's Certificate delivered to the Fiscal Agent.

"Special Tax Fund" means the fund by thatname established by the Fiscal Agent Agreement.

"Special Tax Prepayments" means the proceeds of any Special Tax prepayments received by the City, as calculated pursuant to the Rate and Method of Apportionment of the Special Taxes for the District, less any administrative fees or penalties collected as part of any such prepayment.

"Special Tax Prepayments Account'' means the account by that name established by the Fiscal Agent Agreement.

"Special Tax Revenues" means the proceeds of the Special Taxes received by the City, including any scheduled payments and any prepayments thereof, interest thereon and proceeds of the redemption or sale of property sold as a result of foreclosure of the lien of the Special Taxes to the amount of said lien and interest thereon. "Special Tax Revenues" does not include any penalties collected in connection with delinquent Special Taxes.

E-7 "Special Taxes" means the special taxes levied within the District pursuant to the Law, the Ordinance and the Fiscal Agent Agreement.

"Supplemental Agreement" means an agreement the execution of which is authorized by a resolution which has been duly adopted by the City under the Law and which agreement is amendatory of or supplemental to the Fiscal Agent Agreement, but only if and to the extent that such agreement is specifically authorized under the Fiscal Agent Agreement.

"Tax Consultant" means any independent financial or tax consultant retained by the City for the purpose of computing the Special Taxes.

Funds and Accounts

The Fiscal Agent Agreement provides for the funds and accounts, and such funds and accounts are administered, as described in the text of this Official Statement under the heading "Establishment of Funds and Accounts."

Covenants of the City

The City will punctually pay or cause to be paid the principal of, and interest and any premium on, the Bonds when and as due in strict conformity with the terms of the Fiscal Agent Agreement and any Supplemental Agreement, and it will faithfully observe and perform all of the conditions, covenants and requirements of the Fiscal Agent Agreement, all Supplemental Agreements and of the Bonds.

The Bonds are limited obligations of the City on behalf of the District and are payable solely from and secured solely by the Special Tax Revenues and the amounts in the Bond Fund (including the Special Tax Prepayment Account therein), the Reserve Fund and the Special Tax Fund created under the Fiscal Agent Agreement.

In order to prevent any accumulation of claims for interest after maturity, the City may not, directly or indirectly, extend or consent to the extension of the time for the payment of any claim for interest on any of the Bonds and may not, directly or indirectly, be a party to the approval of any such arrangement by purchasing or funding said claims for interest or in any other manner. In case any such claim for interest shall be extended or funded, whether or not with the consent of the City, such claim for interest so extended or funded shall not be entitled, in case of default under the Fiscal Agent Agreement, to the benefits of the Fiscal Agent Agreement, except subject to the prior payment in full of the principal of all of the Bonds then Outstanding and of all claims for interest which shall not have been so extended or funded.

The City will not encumber, pledge or place any charge or lien upon any of the Special Tax Revenues or other amounts pledged to the Bonds superior to or on a parity with the pledge and lien under the Fiscal Agent Agreement for the benefit of the Bonds, except as permitted by the Fiscal Agent Agreement.

The City will keep, or cause to be kept, proper books of record and accounts, separate from all other records and accounts of the City, in which complete and correct entries are made of all transactions relating to the expenditure of amounts disbursed from the Administrative Expense Fund, the Special Tax Fund and to the Special Tax Revenues. Such books of record and accounts will at all times during business hours be subject to the inspection of the Fiscal Agent and the Owners of not less than ten percent (10%) of the principal amount of the Bonds then Outstanding, or their representatives duly authorized in writing.

The Fiscal Agent will keep, or cause to be kept, proper books of record and accounts, separate from all other records and accounts of the Fiscal Agent, in which complete and correct entries must be made of all transactions relating to the expenditure of amounts disbursed from the Bond Fund (including the Special Tax Prepayments Account therein), the Improvement Fund, the Reserve Fund,

E-8 the Rebate Fund and the Costs of Issuance Fund. Such books of record and accounts must at all times during business hours be subject to the inspection of the City and the Owners of not less than ten percent (10%) of the principal amount of the Bonds then Outstanding, or their representatives duly authorized in writing.

The City will preserve and protect the security of the Bonds and the rights of the Owners, and will warrant and defend their rights against all claims and demands of all persons. From and after the delivery of any of the Bonds by the City, the Bonds shall be incontestable by the City.

The City will comply with all applicable provisions of the Law in completing the construction and acquisition of the Project.

The City shall comply with all requirements of the Law so as to assure the timely collection of Special Tax Revenues, including without limitation, the enforcement of delinquent Special Taxes.

On or within five (5) Business Days of each June 1, the Fiscal Agent is required provide the Director of Finance with a notice stating the amount then on deposit in the Bond Fund and the Reserve Fund, and informing the City that the Special Taxes may need to be levied pursuant to the Ordinance as necessary to provide for Annual Debt Service and Administrative Expenses and replenishment (if necessary) of the Reserve Fund so that the balances therein equal the Reserve Requirement. The receipt of or failure to receive such notice by the Director of Finance shall in no way affect the obligations of the Director of Finance under the following two paragraphs, and the Fiscal Agent shall not be responsible for any inability or failure to provide such notice. Upon receipt of such notice, the Director of Finance shall communicate with the Auditor to ascertain the relevant parcels on which the Special Taxes are to be levied, taking into account any parcel splits dur•ing the preceding and then current year . The Director of Finance shall effect the levy of the Special Taxes each Fiscal Year in accordance with the Ordinance by each August 1 that the Bonds are outstanding, or otherwise such that the computation of the levy is complete before the final date on which Auditor will accept the transmission of the Special Tax amounts for the parcels within the District for inclusion on the next real property tax roll. Upon the completion of the computation of the amounts of the levy, the Director of Finance shall prepare or cause to be prepared, and shall transmit to the Auditor, such data as the Auditor requires to include the levy of the Special Taxes on thenext real property tax roll.

The Director of Finance shall fix and levy the amount of Special Taxes within the District required for the payment of principal of and interest on any outstanding Bonds of the District becoming due and payable during the ensuing year, including any necessary replenishment or expenditure of the Reserve Fund for the Bonds and an amount estimated to be sufficient to pay the Administrative Expenses (including amounts necessary to discharge any obligation under the Fiscal Agent Agreement) during such year, taking into account the balances in such funds and in the Special Tax Fund. The Special Taxes so levied shall not exceed the authorized amounts as provided in the proceedings pursuant to the Resolution of Formation.

The Special Taxes shall be payable and be collected in the same manner and at the same time and in the same installment as the general taxes on real property are payable, and have the same priority, become delinquent at the same time and in the same proportionate amounts and bear the same proportionate penalties and interest after delinquency as do the ad valorem taxes on real property.

Notwithstanding the foregoing, the Director of Finance may in his or her discretion cause the collection of any Special Taxes by direct, first class mail billing to the then owner of each parcel in the District in lieu of billing for such Special Taxes in the same manner as general taxes as aforesaid. Such direct mail billing shall be made not later than November 1 of the Fiscal Year and shall direct the owner of the property affected to pay the Special Taxes directly to the Director of Finance in two equal installments, the first of which shall be due and delinquent if not paid on December 10 and the second of which may be paid with the first and which, in any event, shall be due and delinquent if not paid on April 10 of the Fiscal Year. Any such Special Taxes so billed shall have the same priority and bear the same proportionate penalties and interest after delinquency as do the ad valorem taxes on real property.

E-9 The City covenants with and for the benefit of the owners of the Bonds that it will order, and cause to be commenced as provided in the Fiscal Agent Agreement, and thereafter diligently prosecute to judgment (unless such delinquency is theretofore brought current), an action in the superior court to foreclose the lien of any Special Tax or installment thereof not paid when due as provided in the following paragraph. The Director of Finance shall notify the City Attorney of any such delinquency of which it is aware, and the City Attorney shall commence, or cause to be commenced, such proceedings, including collection actions preparatory to the filing of any complaint.

On or before November 1 in each Fiscal Year, the Director of Finance shall compare the amount of Special Taxes theretofore levied in the District to the amount of Special Tax Revenues theretofore received by the City, and:

(a) Individual Delinguencies. If the Director of Finance determines that any single parcel subject to the Special Tax in the District is delinquent in the payment of more than one years' Special Tax levy on such parcel, then the Director of Finance shall send or cause to be sent a notice of delinquency (and a demand for immediate payment thereof) to the property owner within 45 days of such determination, and (if the delinquency remains uncured) foreclosure proceedings shall be commenced by the City within 90 days of such determination. Notwithstanding the foregoing, the Director of Finance may defer such action if the amount in the Reserve Fund is at least equal to the Reserve Requirement.

(b) Aggregate Delinquencies. If the Director of Finance determines that (i) the total amount of delinquent Special Tax for the prior Fiscal Year for the entire District, (including the total of delinquencies under subsection (a) above), exceeds 5% of the total Special Tax due and payable for the prior Fiscal Year, or (ii) there are ten (10) or fewer owners of real property within the District, determined by reference to the latest available secured property tax roll of the County, the Director of Finance shall notify or cause to be notified property owners who are then delinquent in the payment of Special Taxes (and demand immediate payment of the delinquency) within 45 days of such determination, and the City shall commence foreclosure proceedings within 90 days of such determination against each parcel of land in the District with a Special Tax delinquency.

The Director of Finance and the City Attorney, as applicable, are authorized in the Fiscal Agent Agreement to employ counsel to conduct any such foreclosure proceedings. The fees and expenses of any such counsel (including a charge for City staff time) in conducting foreclosure proceedings shall be an Administrative Expense under the Fiscal Agent Agreement.

The City will adopt, make, execute and deliver any and all such further resolutions, instruments and assurances as may be reasonably necessary or proper to carry out the intention or to facilitate the performance of the Fiscal Agent Agreement, and for the better assuring and confirming unto the Owners of the rights and benefits provided in the Fiscal Agent Agreement.

The City shall assure that the proceeds of the Bonds are not so used as to cause the Bonds to satisfy the private business tests of section 141(b) of the Code or the private loan financing test of section 141(c) of the Code.

The City shall not take any action or permit or suffer any action to be taken if the result of the same would be to cause the Bonds to be "federally guaranteed" within the meaning of Section 149(b) of the Code.

The City shall take any and all actions necessary to assure compliance with section 148(f) of the Code, relating to the rebate of excess investment earnings, if any, to the federal government, to the extent that such section is applicable to the Bonds. If necessary, the City may use amounts in the Reserve Fund, amounts on deposit in the Administrative Expense Fund, and any other funds available to the District, including amounts advanced by the City, in its sole discretion, to be repaid by the District as soon as practicable from amounts described in the preceding clauses, to satisfy its rebate

E-10 obligations. Upon a determination that an amount is subject to payment to the United States, the Director of Finance shall withdraw such amount from the Administrative Expense Fund (or, if necessary, shall direct the Fiscal Agent to withdraw such amount from the Reserve Fund) and shall remit the amount so withdrawn to the Fiscal Agent for deposit to the Rebate Fund.

The City shall not take, or permit or suffer to be taken by the Fiscal Agent or otherwise, any action with respect to the proceeds of the Bonds which, if such action had been reasonably expected to have been taken, or had been deliberately and intentionally taken, on the date of issuance of the Bonds would have caused the Bonds to be "arbitrage bonds" within the meaning of section 148 of the Code.

The City shall take all actions necessary to assure the exclusion of interest on the Bonds from the gross income of the Owners of the Bonds to the same extent as such interest is permitted to be excluded from gross income under the Code as in effect on the date of issuance of the Bonds.

The City covenants and agrees that it will comply with and carry out all of the provisions of the Continuing Disclosure Agreement. Notwithstanding any other provision of the Fiscal Agent Agreement, failure of the City to comply with the Continuing Disclosure Agreement shall not be considered a default under the Fiscal Agent Agreement; however, any Participating Underwriter or any holder or beneficial owner of the Bonds may take such actions as may be necessary and appropriate to compel performance by the City of its obligations thereunder, including seeking mandate or specific performance by court order.

The City shall have no obligation whatsoever with respect to any continuing disclosure certificate or agreement executed by any owner or lessee of property in the District.

The City covenants and agrees to not consent or conduct proceedings with respect to a reduction in the maximum Special Taxes that may be levied in theDistrict below an amount, for any Fiscal Year, equal to 110% of the aggregate of the debt service due on the Bonds in such Fiscal Year, plus a reasonable estimate of Administrative Expenses for such Fiscal Year; however, the City may at any time reduce the maximum Special Taxes to the extent they are in excess of such amount. It is acknowledged in the Fiscal Agent Agreement that Bondowners are purchasing the Bonds in reliance on the foregoing covenant, and that said covenant is necessary to assure the full and timely payment of the Bonds.

The City covenants not to exercise its rights under the Law to waive delinquency and redemption penalties related to the Special Taxes or to declare Special Tax penalties amnesty program if to do so would materially and adversely affect the interests of the owners of the Bonds and further covenants not to permit the tender of Bonds in payment of any Special Taxes except upon receipt of a certificate of an Independent Financial Consultant that to accept such tender will not result in the City having insufficient Special Tax revenues to pay the principal of and interest on the Bonds that will remain Outstanding following such tender.

The City will not issue any additional bonds payable from the Special Taxes, other than refunding bonds permitted under the provisions of the Law.

Investments

Moneys in any fund or account created or established by the Fiscal Agent Agreement and held by the Fiscal Agent is required to be invested by theFiscal Agent in Permitted Investments, as directed pursuant to an Officer's Certificate filed with the Fiscal Agent at least two (2) Business Days in advance of the making of such investments. In the absence of any such Officer's Certificate, the Fiscal Agent shall invest to the extent reasonably practicable any such moneys in the Permitted Investments described in clause (e) of the definition thereof in the Fiscal Agent Agreement. Moneys in any fund or account created or established by the Fiscal Agent Agreement -and held by the Director of Finance shall be invested by the Director of Finance in any Permitted Investment, which in any event by its terms matures prior to the date on which such moneys are required to be paid out. Obligations purchased as an investment of moneys in any fund shall be deemed to be part of such fund or account, subject, however, to the requirements of the Fiscal Agent Agreement for transfer of interest earnings and profits

E-11 resulting from investment of amounts in funds and accounts. Whenever in the Fiscal Agent Agreement any moneys are required to be transferred by the City to the Fiscal Agent, such transfer may be accomplished by transferring a like amount of Permitted Investments.

The Fiscal Agent and its affiliates or the Director of Finance may act as sponsor, advisor, depository, principal or agent in the acquisition or disposition of any investment. Neither the Fiscal Agent nor the Director of Finance shall incur any liability for losses arising from any investments made pursuant to the Fiscal Agent Agreement. The Fiscal Agent will not be required to determine the legality of any investments.

Except as otherwise provided in the next sentence, all investments of amounts deposited in any fund or account created by or pursuant to the Fiscal Agent Agreement, or otherwise containing gross proceeds of the Bonds (within the meaning of Section 148 of the Code) shall be acquired, disposed of, and valued (as of the date that valuation is required by the Fiscal Agent Agreement or the Code) at Fair Market Value. Investments in funds or accounts (or portions thereof) that are subject to a yield restriction under the applicable provisions of the Code and (unless valuation is undertaken at least annually) investments in the Reserve Fund shall be valued at their present value (within the meaning of section 148 of the Code). The Fiscal Agent shall not be liable for verification of the application of such sections of the Code.

Investments in any and all funds and accounts may be commingled in a separate fund or funds for purposes of making, holding and disposing of investments, notwithstanding provisions herein for transfer to or holding in or to the credit of particular funds or accounts of amounts received or held by the Fiscal Agent or the Director of Finance, provided that the Fiscal Agent or the Director of Finance, as applicable, shall at all times account for such investments strictly in accordance with the funds and accounts to which they are credited and otherwise as provided in the Fiscal Agent Agreement. The Fiscal Agent or the Director of Finance, as applicable, shall sell at Fair Market Value, or present for redemption, any investment security whenever it shall be necessary to provide moneys to meet any required payment, transfer, withdrawal or disbursement from the fund or account to which such investment security is credited and neither the Fiscal Agent nor the Director of Finance shall be liable or responsible for any loss resulting from the acquisition or disposition of such investment security in accordance with the Fiscal Agent Agreement.

Liability of the City

The City shall not incur any responsibility in respect of the Bonds or the Fiscal Agent Agreement other than in connection with the duties or obligations explicitly therein or in the Bonds assigned to or imposed upon it. The City shall not be liable in connection with the performance of its duties under the Fiscal Agent Agreement, except for its own negligence or willful default. The City shall not be bound to ascertain or inquire as to the performance or observance of any of the terms, conditions, covenants or agreements of the Fiscal Agent in the Fiscal Agent Agreement or of any of the documents executed by the Fiscal Agent in connection with the Bonds, or as to the existence of a default or event of default thereunder.

In the absence of bad faith, the City, including the Director of Finance, may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the City and conforming to the requirements of the Fiscal Agent Agreement. The City, including the Director of Finance, shall not be liable for any error of judgment made in good faith unless it shall be proved that it was negligent in ascertaining the pertinent facts.

No provision of the Fiscal Agent Agreement shall require the City to expend or risk its own general funds or otherwise incur any financial liability (other than with respect to the Special Tax Revenues) in the performance of any of its obligations under the Fiscal Agent Agreement, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it.

E-12 The City and the Director of Finance may rely and shall be protected in acting or refraining from acting upon any notice, resolution, request, consent, order, certificate, report warrant, bond or other paper or document believed in good faith by it to be genuine and to have been signed or presented by the proper party or proper parties. The City may consult with counset who may be the City Attorney, with regard to legal questions, and the opinion of such counsel shall be full and complete authorization and protection in respect of any action taken or suffered by it under the Fiscal Agent Agreement in good faith and in accordance therewith.

The City shall not be bound to recognize any person as the Owner of a Bond unless and until such Bond is submitted for inspection, if required, and his title thereto satisfactory established, if disputed.

Whenever in the administration of its duties under the Fiscal Agent Agreement the City or the Director of Finance shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action under the Fiscal Agent Agreement, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of willful misconduct on the part of the City, be deemed to be conclusively proved and established by a certificate of the Fiscal Agent, an Independent Financial Consultant or a Tax Consultant, and such certificate shall be full warrant to the City and the Director of Finance for any action taken or suffered under the provisions of the Fiscal Agent Agreement or any Supplemental Agreement upon the faith thereof, but in its discretion the City or the Director of Finance may, in lieu thereof, accept other evidence of such matter or may require such additional evidence as to it may seem reasonable.

In order to perform its duties and obligations under the Fiscal Agent Agreement, the City may employ such persons or entities as it deems necessary or advisable. The City shall not be liable for any of the acts or omissions of such persons or entities employed by it in good faith under the Fiscal Agent Agreement, and shall be entitled to rely, and shall be fully protected in doing so, upon the opinions, calculations, determinations and directions of such persons or entities.

The Fiscal Agent

The Fiscal Agent undertakes to perform such duties, and only such duties, as are specifically set forth in the Fiscal Agent Agreement, and no implied covenants or obligations shall be read into the Fiscal Agent Agreement against the Fiscal Agent.

Any company into which the Fiscal Agent may be merged or converted or with which it may be consolidated or any company resulting from any merger, conversion or consolidation to which it shall be a party or any company to which the Fiscal Agent may sell or transfer all or substantially all of its corporate trust business, provided such company shall be eligible under the following paragraph, shall be the successor to such Fiscal Agent without the execution or filing of any paper or any further act.

Upon thirty (30) day prior written notice, the City may remove the Fiscal Agent initially appointed, and any successor thereto, and may appoint a successor or successors thereto, but any such successor shall be a bank, corporation or trust company having a combined capital (exclusive of borrowed capital) and surplus of at least Fifty Million Dollars ($50,000,000), and subject to supervision or examination by federal or state authority. If such bank, corporation or trust company publishes a report of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority above referred to, then the combined capital and surplus of such bank or trust company shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published.

The Fiscal Agent may at any time resign by giving written notice to the City and by giving to the Owners notice by mail of such resignation. Upon receiving notice of such resignation, the City shall promptly appoint a successor Fiscal Agent by an instrument in writing. Any resignation or removal of the Fiscal Agent shall become effective upon acceptance of appointment by the successor Fiscal Agent. If no appointment of a successor Fiscal Agent shall be made within sixty (60) days after the Fiscal Agent shall have given to the City written notice or after a vacancy in the office of the Fiscal Agent shall have

E-13 occurred by reason of its inability to act, the Fiscal Agent or any Owner may apply to any court of competent jurisdiction to appoint a successor Fiscal Agent. Said court may thereupon, after such notice, if any, as such court may deem proper, appoint a successor Fiscal Agent.

If, by reason of the judgment of any court, or reasonable agency, the Fiscal Agent is rendered unable to perform its duties under the Fiscal Agent Agreement, all such duties and all of the rights and powers of the Fiscal Agent thereunder shall be assumed by and vest in the Director of Finance of the City in trust for the benefit of the Owners. The City covenants for the direct benefit of the Owners that its Director of Finance in such case shall be vested with all of the rights and powers of the Fiscal Agent under the Fiscal Agent Agreement, and shall assume all of the responsibilities and perform all of the duties of the Fiscal Agent thereunder, in trust for the benefit of the Owners of the Bonds. In such event, the Director of Finance may designate a successor Fiscal Agent qualified to act as Fiscal Agent thereunder.

The recitals of facts, covenants and agreements in the Fiscal Agent Agreement and in the Bonds contained shall be taken as statements, covenants and agreements of the City, and the Fiscal Agent assumes no responsibility for the correctness of the same, or makes any representations as to the validity or sufficiency of the Fiscal Agent Agreement or of the Bonds, or shall incur any responsibility in respect thereof, other than in connection with the duties or obligations in the Fiscal Agent Agreement or in the Bonds assigned to or imposed upon it. The Fiscal Agent shall not be liable in connection with the performance of its duties under the Fiscal Agent Agreement, except for its own negligence or willful default. The Fiscal Agent assumes no responsibility or liability for any information, statement or recital in any offering memorandum or other disclosure material prepared or distributed with respect to the issuance of the Bonds.

In the absence of bad faith, the Fiscal Agent may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Fiscal Agent and conforming to the requirements of the Fiscal Agent Agreement; but in the case of any such certificates or opinions by which any provision of the Fiscal Agent Agreement are specifically required to be furnished to the Fiscal Agent, the Fiscal Agent shall be under a duty to examine the same to determine whether or not they conform to the requirements of the Fiscal Agent Agreement. Except as provided above in this paragraph, the Fiscal Agent shall be protected and shall incur no liability in acting or proceeding, or in not acting or not proceeding, in good faith, reasonably and in accordance with the terms of the Fiscal Agent Agreement, upon any resolution, order, notice, request, consent or waiver, certificate, statement, affidavit, or other paper or document which it shall in good faith reasonably believe to be genuine and to have been adopted or signed by the proper person or to have been prepared and furnished pursuant to any provision of the Fiscal Agent Agreement, and the Fiscal Agent shall not be under any duty to make any investigation or inquiry as to any statements contained or matters referred to in any such instrument.

The Fiscal Agent shall not be liable for any error of judgment made in good faith unless it shall be proved that the Fiscal Agent was negligent in ascertaining the pertinent facts. No provision of the Fiscal Agent Agreement shall require the Fiscal Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties under the Fiscal Agent Agreement, or in the exercise of any of its rights or powers.

The Fiscal Agent shall be under no obligation to exercise any of the rights or powers vested in it by the Fiscal Agent Agreement at the request or direction of any of the Owners pursuant to the Fiscal Agent Agreement unless such Owners shall have offered to the Fiscal Agent reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction.

The Fiscal Agent may become the owner of the Bonds with the same rights it would have if it were not the Fiscal Agent.

The Fiscal Agent may rely and shall be protected in acting or refraining from acting upon any notice, resolution, request, consent, order, certificate, report, warrant, bond or other paper or document

E-14 believed in good faith by it to be genuine and to have been signed or presented by the proper party or proper parties. The Fiscal Agent may consult with counsel, who may be counsel to the City, with regard to legal questions, and the opinion of such counsel shall be full and complete authorization and protection in respect of any action taken or suffered by it under the Fiscal Agent Agreement in good faith and in accordance therewith.

The Fiscal Agent shall not be bound to recognize any person as the Owner of a Bond unless and until such Bond is submitted for inspection, if required, and his title thereto satisfactorily established, if disputed.

Whenever in the administration of its duties under the Fiscal Agent Agreement the Fiscal Agent shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action under the Fiscal Agent Agreement, such matter (unless other evidence in respect thereof be in the Fiscal Agent Agreement specifically prescribed) may, in the absence of willful misconduct on the part of the Fiscal Agent, .be deemed to be conclusively proved and established by an Officer's Certificate, and such certificate shall be full warrant to the Fiscal Agent for any action taken or suffered under the provisions of the Fiscal Agent Agreement or any Supplemental Agreement upon the faith thereof, but in its discretion the Fiscal Agent may, in lieu thereof, accept other evidence of such matter or may require such additional evidence as to it may seem reasonable.

Amendment of the Fiscal Agent Agreement

The Fiscal Agent Agreement and the rights and obligations of the City and of the Owners of the Bonds may be modified or amended at any time by a Supplemental Agreement pursuant to the affirmative vote at a meeting of Owners, or with the written consent without a meeting, of the Owners of at least sixty percent (60%) in aggregate principal amount of the Bonds then Outstanding, exclusive of Bonds disqualified as provided in the Fiscal Agent Agreement. No such modification or amendment shall (i) extend the maturity of any Bond or reduce the interest rate thereon, or otherwise alter or impair the obligation of the City to pay the principal of, and the interest and any premium on, any Bond, without the express consent of the Owner of such Bond, or (ii) permit the creation by the City of any pledge or lien upon the Special Taxes superior to or on a parity with the pledge and lien created for the benefit of the Bonds (except as otherwise: permitted by the Law, the laws of the State of California or the Fiscal Agent Agreement), or (iii) reduce the percentage of Bonds required for the amendment of the Fiscal Agent Agreement. Any such amendment may not modify any of the rights or obligations of the Fiscal Agent without its written consent.

The Fiscal Agent Agreement and the rights and obligations of the City and of the Owners may also be modified or amended at any time by a Supplemental Agreement, without the consent of any Owners, only to the extent permitted by law and only for any one or more of the following purposes:

(A) to add to the covenants and agreements of the City in the Fiscal Agent Agreement contained, other covenants and agreements thereafter to be observed, or to limit or surrender any right or power in the Fiscal Agent Agreement reserved to or conferred upon the City;

(B) to make modifications not adversely affectingany outstanding series of Bonds of the City in any material respect;

(C) to make such provisions for the purpose of curing any ambiguity, or of curing, correcting or supplementing any defective provision contained in the Fiscal Agent Agreement, or in regard to questions arising under the Fiscal Agent Agreement, as the City or the Fiscal Agent may deem necessary or desirable and not inconsistent with the Fiscal Agent Agreement, and which shall not adversely affect the rights of the Owners of the Bonds; and

(D) to make such additions, deletions or modifications as may be necessary or desirable to assure exemption from gross federal income taxation of interest on the Bonds.

E-15 Discharge of the Bonds and the Fiscal Agent Agreement

The City shall have the option to pay and discharge the entire indebtedness on all or any portion of the Bonds Outstanding in any one or more of the following ways:

(A) by well and truly paying or causing to be paid the principal of, and interest and any premium on, such Bonds Outstanding, as and when the same become due and payable;

(B) by depositing with the Fiscal Agent, in trust, at or before maturity, money which, together with the amounts then on deposit in the Bond Fund and the Reserve Fund as provided in the Fiscal Agent Agreement is fully sufficient to pay such Bonds Outstanding, including all principal, interest and redemption premiums; or

(C) by irrevocably depositing with the Fiscal Agent, in trust, cash and Federal Securities in such amount as the City shall determine as confirmed by Bond Counsel or an independent certified public accountant will, together with the interest to accrue thereon and moneys then on deposit in the Bond Fund and the Reserve Fund, be fully sufficient to pay and discharge the indebtedness on such Bonds (including all principal, interest and redemption premiums) at or before their respective maturity dates.

If the City shall have taken any of the actions specified in (A), (B) or (C) above, and if such Bonds are to be redeemed prior to the maturity thereof notice of such redemption shall have been given as in the Fiscal Agent Agreement provided or provision satisfactory to the Fiscal Agent shall have been made for the giving of such notice, then, at the election of the City, and notwithstanding that any Bonds shall not have been surrendered for payment, the pledge of the Special Taxes and other funds provided for in the Fiscal Agent Agreement and all other obligations of the City under the Fiscal Agent Agreement with respect to such Bonds Outstanding shall cease and terminate. Notice of such election shall be filed with the Fiscal Agent. Notwithstanding the foregoing, the obligation of the City to pay or cause to be paid to the Owners of the Bonds not so surrendered and paid all sums due thereon, all amounts owing to the Fiscal Agent pursuant to the Fiscal Agent Agreement, and otherwise to assure that no action is taken or failed to be taken if such action or failure adversely affects the exclusion of interest on the Bonds from gross income for federal income tax purposes, shall continue in any event.

Upon compliance by the City with the foregoing with respect to all Bonds Outstanding, any funds held by the Fiscal Agent after payment of all fees and expenses of the Fiscal Agent, which are not required for the purposes of the preceding paragraph, shall be paid over to the City and any Special Taxes thereafter received by the City shall not be remitted to the Fiscal Agent but shall be retained by the City to be used for any purpose permitted under the Law.

E-16 APPENDIX F

FORM OF CITY CONTINUING DISCLOSURE CERTIFICATE

This Continuing Disclosure Certificate (the "Disclosure Certificate") is executed and delivered by the City of San Jose (the "City") in connection with the issuance of $12,500,000 City of San Jose Community Facilities District No. 10 (Hassler - Silver Creek) Special Tax Bonds, Series 2003 (the "Bonds"). The Bonds are being issued pursuant to a Fiscal Agent Agreement, dated as of July 1, 2003 (the "Fiscal Agent Agreement"), between the City, for and on behalf of the City of San Jose Community Facilities District No. 10 (Hassler - Silver Creek) (the "District"), and U.S. Bank National Association, as fiscal agent (the "Fiscal Agent"). The City covenants and agrees as follows:

Section 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the City for the benefit of the holders and beneficial owners of the Bonds and in order to assist the Participating Underwriter in complying with S.E.C. Rule 15c2-12(b)(5).

Section 2. Definitions. In addition to the definitions set forth in the Fiscal Agent Agreement, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section, the following capitalized terms shall have the following meanings:

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

"Dissemination Agent" shall mean U.S. Bank National Association, or any successor Dissemination Agent designated in writing by the City and which has filed with the City and the Fiscal Agent a written acceptance of such designation. It is expressly acknowledged that the City can designate itself as the Dissemination Agent, in its sole discretion.

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

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

"Participating Underwriter" shall mean Citigroup Global Markets Inc., the original underwriter of the Bonds required to comply with the Rule in connection with offering of the Bonds.

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

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

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

Section 3. Provision of Annual Reports.

(a) The City shall, or upon written request shall cause the Dissemination Agent to, not later than 180 days after the end of the City's fiscal year, commencing with the report for the 2002-2003 fiscal year, provide to each Repository an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Certificate, with a copy to the Fiscal Agent. Not later than fifteen (15) Business Days prior to said date, the City shall provide the Annual Report to the Dissemination Agent. The City shall provide a written certification with each Annual Report furnished to the Dissemination Agent and the Fiscal Agent to the effect that such Annual Report constitutes the Annual Report required to be furnished by the City hereunder. The Dissemination Agent and the Fiscal Agent may conclusively rely upon such certification of the City, and shall have no duty or obligation to review such Annual Report.

F-1 The Annual Report may be submitted as a single document or as separate documents comprising a package, and may cross-reference other information as provided in Section 4 of this Disclosure Certificate; provided that the audited financial statements of the City may be submitted separately from the balance of the Annual Report, and not later than the date required above for the filing of the Annual Report if not available by that date. If the City's fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under Section S(c).

Once the City submits an Annual Report to the Dissemination Agent (with a copy to the Fiscal Agent), the City's obligations with respect to such Annual Report shall be fully discharged, and the City shall have no obligation to monitor or enforce the obligations of the Dissemination Agent hereunder with respect to such Annual Report.

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

(c) The Dissemination Agent shall:

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

(ii) to the extent the Annual Report has been provided to the Dissemination Agent, file a report with the City and the Fiscal Agent (if the Dissemination Agent is other than the Fiscal Agent) certifying that the Annual Report has been provided pursuant to this Disclosure Certificate, stating the date it was provided and listing all the Repositories to which it was provided.

Section 4. Content of Annual Reports. The City's Annual Report shall contain or incorporate by reference the following:

(a) The City's audited financial statements prepared in accordance with generally accepted accounting principles as promulgated to apply to governmental entities from time to time by the Governmental Accounting Standards Board, and as further modified according to applicable State law.

(b) The following additional items as of June 30 of each year:

1. Principal amount of Bonds outstanding.

2. Balance in the improvement fund for the Bonds.

3. Balance in the reserve fund for the Bonds.

4. Total assessed value of all parcels subject to the Special Taxes and the current year's assessed value for the District.

5. Special Tax and property tax delinquency rate for parcels in the District for the most recent year.

6. Concerningdeli nquent parcels:

• number of parcels delinquent in payment of Special Tax, • amount of total delinquency and as a percentage of total Special Tax levy, and • status of the City's actions on covenants to pursue foreclosure proceedings upon delinquent properties.

F-2 7. Identity of any delinquent tax payer obligated for more than 5% of the annual Special Tax levy and:

• assessed value of applicable properties, and • summary of results of foreclosure sales, if available.

Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the City or related public entities, which have been submitted to each of the Repositories or the Securities and Exchange Commission. If the document included by reference is a final official statement, it must be available from the Municipal Securities Rulemaking Board. The City shall clearly identify each such other document so included by reference.

Section 5. Reportin� of Significant Events.

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

(1) Principal and interest payment delinquencies. (2) Non-payment related defaults. (3) Unscheduled draws on debt service reserves reflecting financial difficulties. (4) Unscheduled draws on credit enhancements reflecting financial difficulties. (5) Substitution of credit or liquidity providers, or their failure to perform. (6) Adverse tax opinions or events affecting the tax-exempt status of the security. (7) Modifications to rights of security holders. (8) Bond calls. (9) Defeasances. (10) Release, substitution, or sale of property securing repayment of the securities. (11) Rating changes.

(b) Whenever the City obtains knowledge of the occurrence of a Listed Event, the City shall as soon as possible, but in no event later than ten (10) business days after the occurrence thereof, determine if such event would be material under applicable Federal Securities law.

(c) If the City determines that knowledge of theoccurrence of a Usted Event would be material under applicable Federal securities law, the City shall promptly file a notice of such occurrence with the Municipal Securities Rulemaking Board and each State Repository, with a copy to the Fiscal Agent. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(8) and (9) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to owners of affected Bonds pursuant to theFiscal Agent Agreement.

Section 6. Termination of Reporting Obligation. The City's obligations under this Disclosure Certificate shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Bonds. If such termination occurs prior to the final maturity of the Bonds, the City shall give notice of such termination in the same manner as for a Listed Event under Section S(c).

Section 7. Dissemination Agent. The City may, from time to time, appoint or engage a Dissemination Agent to act as such under this Disclosure Certificate, and may (with or without cause on thirty days prior written notice) discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. The initial Dissemination Agent shall be U.S. Bank National Association. The Dissemination Agent may at any time resign by providing sixty days written notice to the City and the Fiscal Agent, such resignation to become effective upon acceptance of appointment by a successor Dissemination Agent. Upon receiving notice of such resignation, the City shall promptly appoint a successor Dissemination Agent by an instrument in writing, delivered to the Fiscal Agent. If no appointment of a successor Dissemination Agent shall be made pursuant to the forgoing provisions of this Section within sixty (60) days after the Dissemination Agent shall have given to the City and the Fiscal Agent written notice of its resignation, the Dissemination Agent may apply to any court of competent jurisdiction to appoint a successor Dissemination Agent. Said court may thereupon, after

F-3 such notice, if any, as such court may deem proper, appoint a successor Dissemination Agent. The City shall provide the Fiscal Agent with written notice of the identity of any successor Dissemination Agent appointed or engaged by the City.

Section 8. Amendment; Waiver. Notwithstanding any other prov�s�on of this Disclosure Certificate, the City may amend this Disclosure Certificate, and any prov1s10n of this Disclosure Certificate may be waived, provided that the following conditions are satisfied:

(a) the amendment or waiver, if it relates to annual or event information to be provided, is made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identify, nature, or status of the City, or type of business conducted;

(b) the undertakings herein, as proposed to be amended or waived, would, in the opinion of nationally recognized bond counsel have complied with the requirements of the Rule at the time of the primary offering of the Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances;

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

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

If the annual financial information or operating data to be provided in the Annual Report is amended pursuant to the provisions hereof, the first annual financial information containing the amended operating data or financial information shall explain, in narrative form, the reasons for the amendment and the impact of the change in the type of operating data or financial information being provided.

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

Section 9. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the City from disseminating any other information, using the means of dissemination set forth in this Disclosure Certificate or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Certificate. If the City chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Certificate, the City shall have no obligation under this Disclosure Certificate to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event.

Section 10. Default. In the event of a failure of the City to comply with any provision of this Disclosure Certificate any Participating Underwriter or any holder or beneficial owner of the Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the City to comply with its obligations under this Disclosure Certificate. A default under this Disclosure Certificate shall not be deemed a default under the Fiscal

F-4 Agent Agreement, and the sole remedy under this Disclosure Certificate in the event of any failure of the City to comply with this Disclosure Certificate shall be an action to compel performance.

Section 11. Duties, Immunities and Liabilities of Dissemination Agent. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Certificate, and the City agrees to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent's negligence or willful misconduct. The Dissemination Agent shall be paid compensation by the City for its services provided hereunder in accordance with its schedule of fees as amended from time to time and all expenses, legal fees and advances made or incurred by the Dissemination Agent in the performance of its duties hereunder. The Dissemination Agent shall have no duty or obligation to review any information provided to it by the City and shall not be deemed to be acting in any fiduciary capacity for the City, the Bondholders or any other party. The obligations of the City and the District under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Bonds. Any company succeeding to all or substantially all of the Dissemination Agent's corporate trust business shall be the successor to the Dissemination Agent hereunder without the execution or filing of any paper or further act.

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

Section 13. Notices. Any notice or demand which by any provision of this Disclosure Certificate is required or permitted to be given or served to or on the City may be given or served by being deposited postage prepaid in a post office letter box addressed (until another address is filed by the City with the Dissemination Agent and the Fiscal Agent) as follows:

City of San Jose Finance Department 801 North First Street, Room 110 San Jose, CA 95110 Attention: Deputy Director, Debt and Risk Management

Any notice or demand which by any provision of this Agreement is required or permitted to be given or served to or on the Fiscal Agent or the Dissemination Agent may be given or served by being deposited postage prepaid in a post office letter box addressed (until another address is filed by the Fiscal Agent or the Dissemination Agent with the City) as follows (provided that any such notice shall not be effective until actually received by the Fiscal Agent):

U.S. Bank National Association One California Street, Suite 2550 San Francisco, CA 94111 Attention: Corporate Trust Department Reference: San Jose/ Hassler-Silver Creek

F-5 Section 14. Administrative Expense. Notwithstanding any other provision of this Disclosure Certificate any cost or expense incurred by the City hereunder shall be an Administrative Expense, payable from any legally available funds of the District.

Dated: July 23, 2003

CITY OF SAN JOSE

By: ______Scott P. Johnson, Director of Finance

Approved as to form:

By: ______Danielle Kenealey Senior Deputy City Attorney

The undersigned hereby agrees to act as Dissemination Agent pursuant to the foregoing Continuing Disclosure Certificate

U.S. BANK NATIONAL ASSOCIATION

By: ______Its: ------

F-6 EXHIBIT A

NOTICE TO MUNICIPAL SECURITIES RULEMAKING BOARD OF FAILURE TO FILE ANNUAL REPORT

Name of Issuer: City of San Jose, California

Name of Bond Issue: City of San Jose Community Facilities District No. 10 (Hassler -Silver Creek) Special Tax Bonds, Series 2003

Date of Issuance: July 23, 2003

NOTICE IS HEREBY GIVEN that the City of San Jose (the "City") has not provided an Annual Report with respect to the above-named Bonds as required by Section 3 of the Continuing Disclosure Certificate dated July 23, 2003 executed by the City for the benefit of the owners and beneficial owners of the above-referenced bonds. The City anticipates that the Annual Report will be filed by

Dated: ------

CITY OF SAN JOSE

By: ______Its: ______cc: U.S. Bank National Association One California Street, Suite 2550 San Francisco, CA 94111

F-7 CITY OF SANJOSE CAPITAL Of SI LICON VALLEY APPENDIX G FORM OF CONTINUING DISCLOSURE CERTIFICATE - LANDOWNER

This Continuing Disclosure Certificate-Landowner (the "Disclosure Certificate") is executed and delivered by William Lyon Homes, Inc., a California corporation (the "Owner"), on behalf of itself and its Affiliates (as defined in Section 1 below), in connection with the issuance of $12,500,000 City of San Jose Community Facilities District No. 10 (Hassler - Silver Creek) Special Tax Bonds, Series 2003 (the "Bonds"). The Bonds are being issued pursuant to a Fiscal Agent Agreement, dated as of July 1, 2003 (the "Fiscal Agent Agreement"), between the City of San Jose (the "City"), for and on behalf of the City of San Jose Community Facilities District No. 10 (Hassler - Silver Creek) (the "District"), and U.S. Bank National Association, as fiscal agent (the "Fiscal Agent''). The Owner covenants and agrees as follows:

Section 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the Owner for the benefit of the owners and beneficial owners of the Bonds and in order to assist the Participating Underwriter in complying with S.E.C. Rule 15c2-12(b )(5).

Section 2. Definitions. In addition to the definitions set forth in the Fiscal Agent Agreement, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section, the following capitalized terms shall have thefollowing meanings:

"Affiliate" of another Person means (a) a Person directly or indirectly owning, controlling, or holding with power to vote, 5% or more of the outstanding voting securities of such other Person, (b) any Person 5% or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by such other Person, (c) any Person directly or indirectly controlling such other Person, and (d) any general partner of a partnership for purposes hereof, control means the power to exercise a controlling influence over the management or policies of a Person, unless such power is solely the result of an official position with such Person. With respect to the Owner, "Affiliate" also means any entity (a) for which the Owner acts as the managing member (if a limited liability company) or managing general partner (if a partnership), or (b) that has entered into a written agreement with the Owner pursuant to which the Owner has the right to purchase land in the District from such entity. As of the date of this Disclosure Certificate, the following entities are "Affiliates" of the Owner under the provisions of the preceding two sentences: Cerro Plata Associates, LLC, 242 Cerro Plata Associates LLC, San Jose Ranch 44, LLC and GMAC Model Home Finance, Inc.

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

"Disclosure Representative" means the Richard S. Robinson, Senior Vice President of the Owner, or his or her designee, or such other officer, employee or agent as the Owner shall designate in writing to the Dissemination Agent and the City from time to time.

"Dissemination Agent" shall mean U.S. Bank National Association, or any successor Dissemination Agent designated in writing by the City and which has filed with the Owner, the City and the Fiscal Agent a written acceptance of such designation. It is expressly acknowledged that the City can designate itself as the Dissemination Agent, in its sole discretion.

G-1 "Event of Bankruptcy" means, with respect to a Person, that such Person files a petition or institutes a proceeding under any act or acts, state or federal, dealing with or relating to the subject or subjects of bankruptcy or insolvency, or under any amendment of such act or acts, either as a bankrupt or as an insolvent, or as a debtor, or in any similar capacity, wherein or whereby such Person asks or seeks or prays to be adjudicated a bankrupt, or is to be discharged from any or all of such Person's debts or obligations, or offers to such Person's creditors to effect a composition or extension of time to pay such Person's debts or asks, seeks or prays for reorganization or to effect a plan of reorganization, or for a readjustment of such Person's debts, or for any other similar relief, or if any such petition or any such proceedings of the same or similar kind or character is filed or instituted or taken against such Person, or if a receiver of the business or of the property or assets of such Person is appointed by any court, or if such Person makes a general assignment for the benefit of such Person's creditors.

"Fiscal Year" shall mean the fiscal year used by the Owner for its financial accounting purposes. As of the date of this Disclosure Certificate, the Owner's Fiscal Year begins each January 1 and ends each December 31.

"Listed Events" shall mean any of the events listed in Section 5(a) of this Disclosure Certificate.

"Mid-Year Report" shall mean any Semiannual Report provided by the Owner pursuant to, and as described in, Sections 3(b) and 4(b) of this Disclosure Certificate.

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

"Participating Underwriter" shall mean Citigroup Global Markets Inc., the original underwriter of the Bonds required to comply with the Rule in connection with offering of the Bonds.

"Person" means an individual, a corporation, a partnership, an association, a joint stock company, a trust, any unincorporated organization or a government or political subdivision thereof.

"Property" means the real property within the boundaries of the District on which special taxes have been levied by the District.

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

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

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

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

Section 3. (a) Provision of Annual Reports.

(i) Until this Disclosure Certificate terminates in accordance with Section 7 below, the Owner shall, or upon written request shall cause the Dissemination Agent to, not later than four months after the end of the Owner's Fiscal Year, commencing with the report for the Fiscal Year which first ends after the date of issuance of the Bonds, provide to each Repository an Annual Report which is consistent with the requirements of Section 4(a) of this Disclosure Certificate, with a copy to the City, the Participating Underwriter and the Fiscal Agent. Not later than fifteen (15) Business Days prior to said date, the Owner shall provide the Annual Report to the Dissemination Agent. The Owner shall provide a written certification with each Annual Report furnished to the Dissemination Agent, the City and the Fiscal Agent to the effect that such Annual Report constitutes the Annual Report required to be furnished by the Owner hereunder. The Dissemination Agent, the City and the Fiscal Agent may conclusively rely upon such

G-2 certification of the Owner, and shall have no duty or obligation to review such Annual Report. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may include by reference other information as provided in Section 4(a) of this Disclosure Certificate; provided that any audited financial statements of the Owner may be submitted separately from the balance of the Annual Report, and later than the date required above for the filing of the Annual Report if not available by that date. If the Owner's Fiscal Year changes, it shall give notice of such change in the same manner as for a Listed Event under Section S(c).

Once the Owner submits an Annual Report to the Dissemination Agent (with a copy to the City, the Participating Underwriter and the Fiscal Agent), the Owner's obligations under this Section 3(a)(i) with respect to such Annual Report shall be fully discharged, and the Owner shall have no obligation to monitor or enforce the obligations of the Dissemination Agent hereunder with respect to such Annual Report.

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

(iii) The Dissemination Agent shall:

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

(B) to the extent the Annual Report has been provided to the Dissemination Agent, file a report with the Owner, the City and the Fiscal Agent (if the Dissemination Agent is other than the Fiscal Agent) certifying that the Annual Report has been provided pursuant to this Disclosure Certificate, stating the date it was provided and listing all the Repositories to whichit was provided.

(b) Provision of Mid-Year Reports.

(i) Until this Disclosure Certificate terminates in accordance with Section 7 below, the Owner shall, or upon written request shall cause the Dissemination Agent to, not later than forty-five (45) days after the six month anniversary of the first day of the Owner's fiscal year, commencing with the report for the first such six-month anniversary that occurs after the date of issuance of the Bonds, provide to each Repository a Mid-Year Report which is consistent with the requirements of Section 4(b) of this Disclosure Certificate, with a copy to the City, the Participating Underwriter and the Fiscal Agent. Not later than fifteen (15) Business Days prior to said date, the Owner shall provide the Mid-Year Report to the Dissemination Agent. The Owner shall provide a written certification with each Mid-Year Report furnished to the Dissemination Agent, the City and the Fiscal Agent to the effect that such Mid-Year Report constitutes the Mid-Year Report required to be furnished by the Owner hereunder .. The Dissemination Agent, the City and the Fiscal Agent may conclusively rely upon such certification of the Owner, and shall have no duty or obligation to review such Mid-Year Report. The Mid-Year Report may be submitted as a single document or as separate documents comprising a package, and may include by reference other information as provided in Section 4(b) of this Disclosure Certificate.

Once the Owner submits an Mid-Year Report to the Dissemination Agent (with a copy to the City, the Participating Underwriter and the Fiscal Agent), the Owner's obligations under this Section 3(b)(i) with respect to such Mid-Year Report shall be fully discharged, and the Owner shall have no obligation to monitor or enforce the obligations of the Dissemination Agent hereunder with respect to such Mid-Year Report.

G-3 (ii) The Dissemination Agent shall:

(A) determine each year prior to the date for providing the Mid-Year Report the name and address of each National Repository and each State Repository, if any; and

(B) to the extent the Mid-Year Report has been provided to the Dissemination Agent, file a report with the Owner, the City and the Fiscal Agent (if the Dissemination Agent is other than the Fiscal Agent) certifying that the Mid-Year Report has been provided pursuant to this Disclosure Certificate, stating the date it was provided and listing all the Repositories to which it was provided.

Section 4. (a) Content of Annual Reports. The Owner's Annual Report shall contain or incorporate by reference the following:

(i) Financial statements prepared in accordance with generally accepted accounting principles for the Owner, or, in the event that no such statements are prepared for the Owner, such annual financial statements as are so prepared.

(ii) A description of the number of building permits and completed (i.e., closed) sales of lots to homebuyers by the Owner or any Affiliate since the date of the information in the last Annual Report, including the identification of each lot or County Assessor's parcel (and the applicable tract) for which a building permit has been issued or a completed sale has occurred, along with an identification of the aggregate building permits issued and sales that have closed to date.

(iii) A description of how many of the remaining lots on the Property were owned by the Owner and all Affiliates as of the end of the Fiscal Year covered by such Annual Report, the expected type of housing product to be constructed on such lots, and the tracts in which such lots are located.

(iv) Any delinquency in the payment of Special Taxes by the Owner, or by any Affiliate.

(v) Any pending litigation which would adversely affect the ability of the Owner and its Affiliates to develop Property owned by the Owner or any Affiliate or to pay Special Taxes levied on Property owned by the Owner or any Affiliate.

(vi) Status of completion of the improvements, public and private, being constructed by the Owner located within the District (the "Improvements"), including but not limited to the homes and the golf course to be constructed on the Property.

(vii) Status of any financing with respect to the Improvements, including a description of any lots transferred to any existing or new Affiliate and the name of any such new Affiliate. A certificate as to the sufficiency of available funds to complete the Improvements as contemplated.

(viii) Significant amendments to land use entitlements for the Improvements. Status of building permits issued for the Improvements.

(ix) Status of any legislative, administrative, and judicial challenges to the construction of the Improvements as known to the Owner.

(x) The assumption of any obligations by a landowner pursuant to Section 6.

In addition to any of the information expressly required to be provided as described above, the Owner shall provide such further information, if any, as may be necessary to make the specifically required statements, in the light of the circumstances under which they are made, not misleading.

G-4 Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the Owner or related public entities, which have been submitted to each of the Repositories or the Securities and Exchange Commission. If the document included by reference is a final official statement, it must be available from the Municipal Securities Rulemaking Board. The Owner shall clearly identify each such other document so included by reference.

(b) Content of Mid-Year Reports. The Owner's Mid-Year Report shall contain or incorporate by reference the following information as of the date which is six months after the first day of each Fiscal Year:

(i) A description of any material changes to the plan of finance or the plan of development of the Improvements from that shown in the Official Statement for the Bonds, which has occurred since the date of the information in the last Annual Report, including a description of each then Affiliate (by name) and the number of lots and the tracts in which those lots are located that are owned by each Affiliate.

(ii) A description of the status of the financing with respect to the Improvements, including a certificate as to the sufficiency of available funds to complete the Improvements as described in the Official Statement, which sets forth in summary fashion the expected sources and uses of funds.

(iii) A description of the number of building permits and completed (i.e., closed) sales of lots to homebuyers by the Owner or any Affiliate since the date of the information in the last Annual Report, including the identification of each lot or County Assessor's parcel (and the applicable tract) for which a building permit has been issued or a completed sale has occurred, along with an identification of the aggregate building permits issued and sales that have closed to date.

Section 5. Reporting of Significant Events.

(a) Pursuant to the provisions of this Section 5, the Owner shall give, or cause to be given, notice of theoccurrence of any of the following events, if material:

(i) failure by the Owner or any Affiliate to pay any real property taxes (including any Special Taxes) levied within the District, (ii) material damage to or destruction of any of the Improvements, (iii) default by the Owner or any Affiliate on any loan with respect to the construction of the Improvements, and (iv) The occurrence of an Event of Bankruptcy with respect to the Owner or any Affiliate.

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

(c) If the Owner determines that knowledge of the occurrence of a Listed Event would be material under applicable Federal securities law, the Owner shall promptly file a notice of such occurrence with the Municipal Securities Rulemaking Board and each State Repository, with a copy to the City and the Fiscal Agent.

Section 6. Assumption of Obligations. If a portion of the Property owned by the Owner, or any Affiliate of the Owner, is to be conveyed to a Person that, upon such conveyance, will, together with any Affiliates of such Person, own in the aggregate land in the District on which more than twenty percent (20%) of the aggregate Special Taxes most recently levied in the District were apportioned, the

G-5 Owner shall include a provision in the conveyance agreement for a Person to agree to execute an Assumption Agreement following the closing of escrow for the conveyance.

The Owner shall enter into an Assumption Agreement with any landowner described in the preceding paragraph, which Assumption Agreement shall be in form and substance satisfactory to the City, or the landowner shall otherwise enter into an agreement with Dissemination Agent in form substantially identical to this Disclosure Certificate (except for the identity of the "Owner" therein). From and after the date on which an Assumption Agreement (or replacement agreement in form equivalent to this Disclosure Certificate) is executed with respect to Property, the Owner shall no longer be required to take such Property into account in connection with its Annual Report and Mid-Year Reports required under Sections 3 and 4 hereof; provided however that if, following a conveyance by the Owner of the character described in the first sentence of this Section 6, an Assumption Agreement (or replacement agreement in form equivalent to this Disclosure Certificate) is not executed (other than by reason of the willful misconduct of the Dissemination Agent), the Owner shall continue to include such Property in its Annual Reports and Mid-Year Reports and, for purposes of Section 3, the term "Owner" shall include, in addition to Owner, the Person to whom the Property has been conveyed.

Section 7. Termination of Reporting Obligation. The Owner's obligations under this Disclosure Certificate shall terminate upon the earliest to occur of: (a) the legal defeasance, prior redemption or payment in full of all the Bonds, (b) the date on which the Owner and all Affiliates of the Owner own, in the aggregate, land in the District on which less than twenty percent (20%) of the aggregate Special Taxes most recently levied in the District were apportioned (subject, however, to the last paragraph of Section 6 above), (c) the date on which all Special Taxes on the Property owned by the Owner and its Affiliates are paid or prepaid in full (as evidenced by the recording of a Notice of Cancellation of Special Tax Lien by the City with respect to such property), and (d) the date on which the Owner delivers to the City and the Dissemination Agent an opinion of bond counsel acceptable to the City to the effect that the continuing disclosure provided for in this continuing Disclosure Certificate is no longer required under the Rule to allow the Participating Underwriter to deal in the Bonds. If such termination occurs prior to the final maturity of the Bonds, the Owner shall give notice of such termination in the same manner as for a Listed Event under Section S(c).

Section 8. Dissemination Agent. The City may, from time to time, appoint or engage a Dissemination Agent to act as such under this Disclosure Certificate, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. The initial Dissemination Agent shall be U.S. Bank National Association. The Dissemination Agent may at any time resign by providing sixty days written notice to the City, the Owner and the Fiscal Agent, such resignation to become effective only upon acceptance of appointment by a successor Dissemination Agent. Upon receiving notice of such resignation, the City shall promptly appoint a successor Dissemination Agent by an instrument in writing, delivered to the Fiscal Agent and the Owner. If no appointment of a successor Dissemination Agent shall be made pursuant to the foregoing provisions of this Section within sixty days after the Dissemination Agent shall have given to the City, the Owner and the Fiscal Agent written notice of its resignation, the Dissemination Agent may apply to any court of competent jurisdiction to appoint a successor Dissemination Agent. Said court may thereupon after such notice, if any, as such court may deem proper, appoint a successor Dissemination Agent. The City shall provide the Owner and the Fiscal Agent with written notice of the identity of any successor Dissemination Agent appointed or engaged by the City.

Section 9. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Certificate, the Owner may amend this Disclosure Certificate, and any provision of this Disclosure Certificate may be waived, provided that the following conditions are satisfied:

(a) if the amendment or waiver relates to the provisions of sections 3(a), 4 or 5(a), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature, or status of an obligated person with respect to the Bonds, or type of business conducted;

G-6 (b) the undertakings herein, as proposed to be amended or waived, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the primary offering of the Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances;

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

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

If the annual financial information or operating data to be provided in the Annual Report is amended pursuant to the provisions hereof, the first annual financial information filed pursuant hereto containing the amended operating data or financial information shall explain, in narrative form, the reasons for the amendment and the impact of the change in the type of operating data or financial information being provided.

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

Section 10. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the Owner from disseminating any other information, using the means of dissemination set forth in this Disclosure Certificate or any other means of communication, or including any other information in any Annual Report, Mid-Year Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Certificate. If the Owner chooses to include any information in any Annual Report, Mid-Year Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Certificate, the Owner shall have no obligation under this Disclosure Certificate to update such information or include it in any future Annual Report, Mid-Year Report or notice of occurrence of a Listed Event.

Section 11. Default. In the event of a failure of the Owner to comply with any provision of this Disclosure Certificate any Participating Underwriteror any owner or beneficial owner of the Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the Owner to comply with its obligations under this Disclosure Certificate. A default under this Disclosure Certificate shall not be deemed a default under the Fiscal Agent Agreement, and the sole remedy under this Disclosure Certificate in the event of any failure of the Owner to comply with this Disclosure Certificate shall be an action to compel performance.

Section 12. Duties, Immunities and Liabilities of Dissemination Agent. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Certificate, and the Owner agrees to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent's negligence or willful misconduct. The Dissemination Agent shall be paid compensation by the City for its services provided hereunder in accordance with its schedule of fees as

G-7 amended from time to time and all expenses, legal fees and advances made or incurred by the Dissemination Agent in the performance of its duties hereunder. The Dissemination Agent shall have no duty or obligation to review any information provided to it by the Owner and shall not be deemed to be acting in any fiduciary capacity for the Owner, the Bondholders, or any other party. The obligations of the Owner and the City under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Bonds. Any company succeeding to all or substantially all of the Dissemination Agent's corporate trust business shall be the successor to the Dissemination Agent hereunder without the execution or filing of any paper or further act.

Section 13. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the City, the Owner (its successors and assigns), the Fiscal Agent, the Dissemination Agent, the Participating Underwriter and the owners and beneficial owners from time to time of the Bonds, and shall create no rights in any other person or entity.

Section 14. Notices. Any notice or demand which by any provision of this Disclosure Certificate is required or permitted to be given or served to or on the City may be given or served by being deposited postage prepaid in a post office letter box addressed (until another address is filed by the City with the Owner, the Dissemination Agent and the Fiscal Agent) as follows:

City of San Jose Finance Department 801 North First Street, Room 110 San Jose, CA 95110 Attention: Deputy Director, Debt and Risk Management

Any notice or demand which by any provision of this Agreement is required or permitted to be given or served to or on the Fiscal Agent or the Dissemination Agent may be given or served by being deposited postage prepaid in a post office letter box addressed (until another address is filed by the Fiscal Agent or the Dissemination Agent with the City and the Owner) as follows (provided that any such notice shall not be effective until actually received by the Fiscal Agent):

U.S. Bank National Association One California Street, Suite 2550 San Francisco, CA 94111 Attention: Corporate Trust Department Reference: San Jose I Hassler-Silver Creek

Any notice or demand which by any provision of this Disclosure Certificate is required or permitted to be given or served to or on the Owner may be given or served by being deposited postage prepaid in a post office letter box addressed (until another address is filed by the Owner with the City, the Dissemination Agent and the Fiscal Agent) as follows:

William Lyon Homes, Inc. 4490 Von Karman A venue Newport Beach, CA 92660-2000 Attention: Richard S. Robinson, Senior Vice President Phone: (949) 833-3600 Fax: (949) 476-2178

G-8 Section 15. Administrative Expense. Notwithstanding any other provision of this Disclosure Certificate any cost or expense incurred by the City hereunder shall be an Administrative Expense, payable from any legally available funds of the District.

Dated: July 23, 2003 WILLIAM LYON HOMES, INC., a Californiacorporation

Richard S. Robinson, Senior Vice President

The undersigned hereby agrees to act as Dissemination Agent pursuant to the foregoing Continuing Disclosure Certificate-Landowner

U.S. BANK NATIONAL ASSOCIATION

By: ������������- Its: ------

G-9 EXHIBIT A

NOTICE TO MUNICIPAL SECURITIES RULEMAKING BOARD OF FAILURE TO FILE ANNUAL REPORT

Name of Issuer: City of San Jose, California

Name of Bond Issue: City of San Jose Community Facilities District No. 10 (Hassler - Silver Creek) Special Tax Bonds, Series 2003

Date of Issuance: July 23, 2003

NOTICE IS HEREBY GIVEN that William Lyon Homes, Inc., a California corporation (the "Owner") has not provided an Annual Report with respect to the above-named Bonds as required by Section 3 of the Continuing Disclosure Certificate-Landowner dated July 23, 2003 executed by the Owner for the benefit of the owners and beneficial owners of the above-referenced bonds. The Owner anticipates th at the Annual Report will be filed by ______

Dated: ------WILLIAM LYON HOMES, INC., a California corporation

By:�������������� Its: ------cc: City of San Jose Finance Department 801 North First Street, Room 110 San Jose, CA 95110

U.S. Bank National Association One California Street, Suite 2550 San Francisco, CA 94111

G-10 APPENDIX H

FORM OF OPINION OF BOND COUNSEL

July _, 2003

City Council City of San Jose 801 North First Street San Jose, California 95110

$12,500,000 City of San Jose Community Facilities District No. 10 (Hassler - Silver OPINION: Creek) Special Tax Bonds, Series 2003

Members of the City Council:

We have acted as bond counsel in connection with the issuance by the City of San Jose (the "City") of its $12,500,000 City of San Jose Community Facilities District No. 10 Hassler - Silver Creek) Special Tax Bonds, Series 2003 (the "Bonds") pursuant to the City of San Jose Community Facilities District Financing Procedure, constituting Chapter 14.27 of the City's Municipal Code (the "Law"), a Fiscal Agent Agreement, dated as of July 1, 2003 (the "Fiscal Agent Agreement"), by and between the City, for and on behalf of the City of San Jose Community Facilities District No. 10 Hassler - Silver Creek), and U.S. Bank National Association, as fiscal agent, and Resolution No. 71641 adopted by the City Council of the City on June 17, 2003 (the "Resolution"). We have examined the law and such certified proceedings and other documents as we deem necessary to render this opinion.

As to questions of fact material to our opinion, we have relied upon representations of the City contained in the Resolution and in the certified proceedings and certifications of public officials and others furnished to us, without undertaking to verifythe same by independent investigation.

Based upon the foregoing, we are of the opinion, under existing law, as follows:

1. The City is duly created and validly existing as a charter city and municipal corporation, with the power to adopt the Resolution, enter into the Fiscal Agent Agreement and perform the agreements on its part contained therein and issue theBonds.

2. The Fiscal Agent Agreement has been duly entered into by the City and constitutes a valid and binding obligation of the City enforceable upon the City in accordance with its terms.

3. Pursuant to the Law, the Fiscal Agent Agreement creates a valid lien on the funds pledged by the Fiscal Agent Agreement for the security of the Bonds.

4. The Bonds have been duly authorized, executed and delivered by the City and are valid and binding limited obligati�ns of the City, payable solely from the sources provided therefore in the Fiscal Agent Agreement.

5. The interest on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations; it should be noted, however, that, for the purpose of computing the alternative minimum tax imposed on corporations (as defined for federal income tax purposes), such

H-1 interest is taken into account in determining certain income and earnings. The opinions set forth in the preceding sentence are subject to the condition that the City comply with all requirements of the Internal Revenue Code of 1986 that must be satisfied subsequent to the issuance of the Bonds in order that the interest thereon be, or continue to be, excluded from gross income for federal income tax purposes. The City has covenanted to comply with each such requirement. Failure to comply with certain of such requirements may cause the inclusion of interest on the Bonds in gross income for federal income tax purposes to be retroactive to the date of issuance of the Bonds. We express no opinion regarding other federal tax consequences arising with respect to the Bonds.

6. The interest on the Bonds is exempt from personal income taxation imposed by the State of California.

The rights of the owners of the Bonds and the enforceability of the Bonds, the Resolution and the Fiscal Agent Agreement may be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights heretofore or hereafter enacted and also may be subject to the exercise of judicial discretion in appropriate cases.

Respectfully submitted,

H-2 APPENDIX I

BOOK ENTRY SYSTEM

The information in this Appendix I has been provided by The Depository Trust Company ("DTC"), New York, NY, fo r use in securities offering documents, and neither the City nor the District take responsibility fo r the accuracy or completeness thereof The City and the District cannot and do not give any assurances that DTC, DTC Participants or Indirect Participants will distribute the Beneficial Owners either (a) payments of interest, principal or premium, if any, with respect to the Bonds or (b) certificates representing ownership interest in or other confirmation of ownership interest in the Bonds, or that they will so do on a timely basis or that DTC, DTC Direct Participants or DTC Indirect Participants mill act in the manner described in this Offi cial Statement.

1. DTC will act as securities depository for the Bonds (referred to in this Appendix I as the "Securities"). The Securities will be issued as fully-registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Security certificate will be issued for each maturity of the Securities, in the aggregate principal amount of such issue, and will be deposited with DTC.

2. DTC, the world's largest depository, is a limited purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of theFedera l Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 2 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments from over 85 countries that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC, in turn, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Government Securities Clearing Corporation, MBS Clearing Corporation, and Emerging Markets Clearing Corporation, (NSCC, GSCC, MBSCC, and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard & Poor's highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com.

3. Purchases of Securities under the DTC system must be made by or through Direct Participants, which will receive a credit for the Securities on DTC' s records. The ownership interest of each actual purchaser of each Security ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of thetransaction, as well as periodic statements

I-1 of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Securities are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Securities, except in the event that use of the book-entry system for the Securities is discontinued.

4. To facilitate subsequent transfers, all Securities deposited by Direct Participants with OTC are registered in the name of DTC's partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Securities with OTC and their registration in the name of Cede & Co. or such other OTC nominee do not effect any change in beneficial ownership. OTC has no knowledge of the actual Beneficial Owners of the Securities; OTC' s records reflect only the identity of the Direct Participants to whose accounts such Securities are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

5. Conveyance of notices and other communications by OTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

6. Redemption notices shall be sent to DTC. If less than all of the Securities within an issue are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.

7. Neither OTC nor Cede & Co. (nor any other OTC nominee) will consent or vote with respect to Securities unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures, OTC mails an Omnibus Proxy to the issuer as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts Securities are credited on the record date (identified in a listing attached to the Omnibus Proxy).

8. Redemption proceeds, distributions, and interest payments on the Securities will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of OTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detail information from the issuer or the paying agent or bond trustee, on payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC nor its nominee, the paying agent or bond trustee, or the issuer, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the issuer or the paying agent or bond trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will .be the responsibility of Direct and Indirect Participants.

9. DTC may discontinue providing its services as depository with respect to the Securities at any time by giving reasonable notice to the issuer or the paying agent or bond fiscal agent. Under such circumstances, in the event that a successor depository is not obtained, Security certificates are required to be printed and delivered.

I-2 10. The City may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Security certificates will be printed and delivered in accordance with theprovi sions of the Fiscal Agent Agreement.

1-3 CITY OF SANJOSE CJ\PnAL OF SILICON V.A.LLEY

CITY OF SANJOSE CAPITAL OF SILICON VA LLEY