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15-0701_MILLENNIUM HOUSING, LLC._Preliminary Official Statement PRELIMINARY OFFICIAL STATEMENT DATED JULY 8, 2015 NEW ISSUE (BOOK-ENTRY ONLY) Ratings: S&P “A” (See “Ratings” herein.) In the opinion of Bond Counsel to the Authority, based on existing laws, regulations, rulings and court decisions and assuming, among other matters, the accuracy of certain certifications and compliance with certain covenants, interest on the Bonds is excludable from gross income for federal income tax purposes. Interest on the Bonds is not a specific preference item for purposes of the federal individual and corporate alternative minimum taxes but such interest is included in adjusted current earnings in computing the federal alternative minimum taxes imposed on certain corporations. Bond Counsel is also of the opinion based on existing laws of the State of California as enacted and construed that interest on the Bonds is exempt from State of California personal income taxes. Bond Counsel expresses no opinion regarding any other tax consequences relating to the ownership or disposition of, or the accrual or receipt of interest on, the Bonds. See “TAX MATTERS” herein. $36,675,000* INDEPENDENT CITIES FINANCE AUTHORITY MOBILE HOME PARK REVENUE REFUNDING BONDS (SAN JUAN MOBILE ESTATES) SERIES 2015 Dated: Date of Delivery Due: As shown on inside page The Bonds, defined below, are being issued pursuant to an Indenture of Trust, dated as of July 1, 2015 (the “Indenture”), between the Independent Cities Finance Authority (the “Authority”) and MUFG Union Bank, N.A., as trustee (the “Trustee”). The proceeds of the Bonds are to be used primarily to fund a loan to Millennium Housing, LLC, a California limited liability company (the “Borrower”), to, along with other funds available to the Borrower, (i) refund in full certain Prior Bonds issued to finance the acquisition and improvement of the San Juan Mobile Estates located in the City of San Juan Capistrano, California (the “Project”), (ii) fund the Debt Service Reserve Fund, (iii) fund the Repair and Replacement Fund and the Rental Assistance Fund and (iv) make deposits to the Cost of Issuance Fund established under the Indenture. The Bonds will be delivered in fully registered form only and, when issued, will be registered in the name of Cede & Co. as nominee of The Depository Trust Company, New York, New York (“DTC”). DTC will act as securities depository of the Bonds. Ownership interests in the Bonds may be purchased in denominations of $5,000, or any integral multiple thereof, in book-entry form only as described herein. Upon receipt of payments of principal of, premium, if any, and interest on the Bonds, DTC will in turn remit such principal, premium, if any, and interest to the participants in DTC (as described herein) for subsequent disbursement to the beneficial owners of the Bonds. Interest on the Bonds is payable semiannually on February 15 and August 15 of each year, commencing February 15, 2016.* The Bonds are subject to optional, mandatory and special redemption prior to their respective maturity dates as described herein. The Bonds are special limited obligations of the Authority, payable solely from Pledged Revenues and secured as to the payment of the interest on and the principal of the Bonds in accordance with their terms and the terms of the Indenture from Pledged Revenues and other funds and a first lien deed of trust on the Project, all as provided therefor in the Indenture. Pledged Revenues consist of Revenues, except for amounts on deposit in the Unrestricted Account of the Repair and Replacement Fund, the Administration Fund, the Rental Assistance Fund and the Rebate Fund created under the Indenture. Revenues consist of Operating Revenues, Prepayments, the proceeds of certain insurance required to be maintained under the Loan Agreement, the amounts of the funds and accounts held by the Trustee under the Indenture, all proceeds of rental interruption insurance policies, if any, required to be maintained under the Loan Agreement, any proceeds derived from the exercise of remedies under the Deed of Trust and any additional property that may be subjected to the lien of the Indenture by the Authority, all as more fully set forth in the Indenture. This cover page contains certain information for general reference only. It is not intended as a summary of this transaction. Investors are advised to read the entire Official Statement to obtain information essential to making an informed investment decision with respect to the Bonds. Maturity Schedule PLEASE SEE THE INSIDE COVER HEREOF The Bonds are offered when, as and if executed and delivered, subject to the approval as to their legality of Ballard Spahr LLP, Bond Counsel to the Authority, and certain other conditions. Certain legal matters will be passed upon for the Authority by Best Best & Krieger LLP, Los Angeles, California, Authority Counsel, and Ballard Spahr LLP, as Bond Counsel to the Authority, and for the Borrower by Goldfarb & Lipman LLP, Oakland, California and Charles, Kane & Dye, LLP, Newport Beach, California. It is anticipated that the Bonds will be available for delivery through the facilities of DTC in New York, New York on or about July __, 2015. ! The date of this Official Statement is July __, 2015. * Preliminary, subject to change. Th i s P r e l i m i n a r y O f f i c i a l S t a t e m e n t a n d t h e i n f o r m a t i o n c o n t a i n e d h e r e i n a r e s u b j e c t t o c o m p l e t i o n o r a m e n d m e n t . T h e s e s e c u r it i e s m a y n o t b e s o l d n o r m a y o f f e r s t o b u y b e a c c e p t e d p r i o r t o t h e t i m e t h e Of f i c i a l S t a t e m e n t i s d e l i v e r e d i n f i n a l f o r m . U n d e r n o c i r c u m s t a nc e s s h a l l t h i s P r e l i m i n a r y O f f i c i a l S t a t e m e n t c o n s t i t u t e a n o f f e r t o s e l l o r a s o l i c i t a t i o n o f a n o f f e r t o b u y n o r s h a l l t h e r e b e a n y s a l e o f th e s e s e c u r i t i e s i n a n y j u r i s d i c t i o n i n w h i c h s u c h o f f e r , s o l i c i t a t i o n o r sa l e w o u l d b e u n l a w f u l p r i o r t o r e g i s t r a t i o n o r q u a l i f i c a t i o n u n d e r t h e s e c ur i t i e s l a w s o f a n y s u c h j u r i s d i c t i o n . NEWCOMB WILLIAMS FINANCIAL GROUP Securities oered through Stinson Securities, LLC MATURITY SCHEDULE* $36,675,000 INDEPENDENT CITIES FINANCE AUTHORITY MOBILE HOME PARK REVENUE REFUNDING BONDS (SAN JUAN MOBILE ESTATES) $5,455,000 Serial Bonds Principal Maturity Interest Amount Date Rate Yield Price CUSIP(1) $390,000 8/15/2016 470,000 8/15/2017 485,000 8/15/2018 505,000 8/15/2019 530,000 8/15/2020 555,000 8/15/2021 585,000 8/15/2022 615,000 8/15/2023 645,000 8/15/2024 675,000 8/15/2025 $3,885,000 – _____% Term Bonds due August 15, 2030, Price – _____%; CUSIP(1) ________ $4,755,000 – _____% Term Bonds due August 15, 2035, Price – _____%; CUSIP(1) ________ $5,840,000 – _____% Term Bonds due August 15, 2040, Price – _____%; CUSIP(1) ________ $7,345,000 – _____% Term Bonds due August 15, 2045, Price – _____%; CUSIP(1) ________ $9,395,000 – _____% Term Bonds due August 15, 2050, Price – _____%; CUSIP(1) ________ (1) CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein are provided by Standard & Poor’s CUSIP Service Bureau, a division of The McGraw-Hill Companies, Inc., and are provided for convenience of reference only. Neither the Authority nor the Underwriter assumes any responsibility for the accuracy of these CUSIP data. NEITHER THE AUTHORITY, ANY OF ITS MEMBERS (THE “MEMBERS”), NOR ANY PERSON EXECUTING THE BONDS IS LIABLE PERSONALLY ON THE BONDS OR SUBJECT TO ANY PERSONAL LIABILITY OR ACCOUNTABILITY BY REASON OF THEIR ISSUANCE. THE BONDS ARE SPECIAL LIMITED OBLIGATIONS OF THE AUTHORITY AND ARE NOT A DEBT, NOR A PLEDGE OF THE FULL FAITH AND CREDIT, OF THE STATE OF CALIFORNIA OR ANY OF ITS POLITICAL SUBDIVISIONS, AND NEITHER ARE THEY LIABLE ON THE BONDS, NOR ARE THE BONDS PAYABLE OUT OF ANY FUNDS OR PROPERTIES OTHER THAN THE PLEDGED REVENUES AND FUNDS PLEDGED UNDER THE INDENTURE FOR THE PAYMENT THEREOF. THE ISSUANCE OF THE BONDS DOES NOT DIRECTLY OR INDIRECTLY OR CONTINGENTLY OBLIGATE THE AUTHORITY, THE MEMBERS, THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF TO LEVY OR TO PLEDGE ANY FORM OF TAXATION THEREFOR OR TO MAKE ANY APPROPRIATION FOR THEIR PAYMENT. THE AUTHORITY HAS NO TAXING POWERS. * Preliminary, subject to change. INDEPENDENT CITIES FINANCE AUTHORITY GOVERNING BOARD MEMBERS: Baldwin Park, Compton, Huntington Park, Lynwood, San Fernando, South Gate, Vernon ASSOCIATE MEMBERS: Alhambra, Apple Valley, Azusa, Barstow, Bell, Bellflower, Brea, Capitola, Carpinteria, Carson, Chino, Claremont, Colton, Commerce, Covina, Downey, Duarte, El Monte, Fairfield, Fontana, Fresno, Gardena, Garden Grove, Glendale, Glendora, Hawaiian Gardens, Hawthorne, Indio, Inglewood, La Habra, La Puente, Lakewood, Lancaster, Lawndale, Long Beach, Los Angeles, Monrovia, Montclair, Montebello, Monterey Park, Morgan Hill, Norwalk, Oceanside, Palmdale, Palm Springs, Paramount, Pico Rivera, Planada Community Services District, Pomona, Rancho Cucamonga, Rialto, Riverside, Rohnert Park, Salinas, San Bernardino, San Bernardino County, San Diego County, San Juan Capistrano, San Marcos, San Mateo County, Santa Clarita, Santa Rosa, Signal Hill, Vista, West Covina, Whittier, Yucaipa AUTHORITY OFFICERS W. Michael McCormick, President (City of Vernon) Deborah J. Smith, Secretary and Executive Director SPECIAL SERVICES Financial Advisor to the Authority Wolf & Company Inc. Los Angeles, California Authority Counsel Best Best & Krieger LLP Los Angeles, California Bond Counsel Ballard Spahr LLP Trustee MUFG Union Bank, N.A. Los Angeles, California Underwriter Newcomb Williams Financial Group, Securities offered through Stinson Securities, LLC Carlsbad, California No broker, dealer, salesman or other person has been authorized by the Authority or the Underwriter to give any information or to make any representations in connection with the offer or sale of the Bonds other than as set forth herein and, if given or made, such information or representation must not be relied upon as having been authorized by the Authority or the Underwriter. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the Bonds by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale. This Official Statement is not to be construed as a contract with the purchasers of the Bonds. Statements contained in this Official Statement which involve estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as a representation of facts. The information set forth in this Official Statement has been obtained from sources which are believed to be reliable, but it is not guaranteed as to its accuracy or completeness, and is not to be construed as a representation by the Borrower or the Authority. Except for the information contained under the captions “THE AUTHORITY” AND “LITIGATION—The Authority,” the Authority neither has nor will assume any responsibility as to the accuracy or completeness of the information in this Official Statement. The information and expressions of opinion stated herein are subject to change without notice. Neither the delivery of this Official Statement nor the sale of any of the Bonds implies that the information herein is correct as of any time subsequent to the date hereof. The delivery of this Official Statement shall not, under any circumstances, create any implication that there has been no change in the affairs of the Authority, the Borrower, or the major participants in the Project. All summaries of the Bonds, the resolution authorizing their issuance, the Indenture and the other documents discussed herein are made subject to the provisions of such documents and do not purport to be complete statements of any or all of the provisions thereof. Reference is hereby made to the Bonds, said resolution, the Indenture and such other documents on file with the Trustee for further information. The Underwriter has provided the following sentence for inclusion in this Official Statement. The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. 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 Bonds have not been registered under the Securities Act of 1933, as amended, in reliance upon an exemption contained in such act. The Bonds have not been registered or qualified under the securities laws of any state. These securities have not been approved or disapproved by the Securities and Exchange Commission or any State Securities Commission nor has the Securities Exchange Commission or any State Securities Commission passed upon the accuracy or adequacy of this Official Statement. Any representation to the contrary is a criminal offense. i TABLE OF CONTENTS Page Page INTRODUCTION .......................................... 1! Forward Looking Statements ...................... 3! THE PLAN OF FINANCING ........................ 3! ESTIMATED SOURCES AND USES OF FUNDS ........................................................... 4! DEBT SERVICE REQUIREMENTS* ........... 4! THE BONDS .................................................. 7! General ........................................................ 7! Redemption ................................................. 7! Purchase of Bonds ..................................... 11! Book-Entry System ................................... 11! SECURITY FOR THE BONDS ................... 13! Net Operating Revenues ........................... 13! Pledge ........................................................ 14! The Loan Agreement and the Note ........... 14! Borrower Obligations Non-Recourse ........ 15! Reserve Fund ............................................ 15! Subordination Agreement ......................... 15! THE INDENTURE ....................................... 15! Application of Bond Proceeds .................. 16! Project Fund .............................................. 16! Cost of Issuance Fund ............................... 16! Deposits ..................................................... 17! Revenue Fund ........................................... 17! Debt Service Fund ..................................... 18! Redemption Fund ...................................... 19! Debt Service Reserve Fund ....................... 20! Rebate Fund .............................................. 20! Administration Fund ................................. 21! Repair and Replacement Fund .................. 21! Surplus Fund ............................................. 22! Rental Assistance Fund ............................. 22! Investment and Deposit of Funds .............. 22! Covenants of the Authority ....................... 24! Supplemental Indentures ........................... 28! Powers of Amendment .............................. 29! Events of Default ...................................... 29! Remedies ................................................... 30! Priority of Payments After Event of Default ............................................... 30! Limitations of Rights of Bondowners ....... 31! Remedies Not Exclusive ........................... 32! Limited Liability of the Authority............. 32! THE LOAN AGREEMENT ......................... 33! Amount and Source of Loan ..................... 33! Loan Repayment ....................................... 33! Nature of the Borrower’s Obligations ....... 34! Borrower Not to Dispose of Assets; Conditions Under Which Exceptions Permitted ........................ 35! Cooperation in Enforcement of Regulatory Agreement ...................... 35! Additional Instruments ............................. 35! Books and Records; Annual Reports ........ 36! Notice of Certain Events ........................... 37! Consent to Assignment ............................. 37! Title to the Project .................................... 37! Operation of the Project ............................ 37! Continuing Disclosure .............................. 37! Minimum Rents; Coverage Requirement Certificate .......................................... 38! Public Liability and Workers’ Compensation Insurance ................... 38! Casualty Insurance .................................... 39! Rental Interruption Insurance ................... 39! Title Insurance .......................................... 39! Repair and Replacement ........................... 40! Other Debt, No Recourse Debt ................. 41! Replenishment of Debt Service Reserve Fund .................................................. 41! Project Management Agreements ............. 41! Operating Fund ......................................... 41! Events of Default Under the Loan Agreement ......................................... 41! Remedies .................................................. 42! Beneficiaries ............................................. 44! THE REGULATORY AGREEMENT ......... 44! Residential Rental Property; Qualified Residents ........................................... 44! Authority Requirements ............................ 45! Qualified Residents ................................... 46! Sale or Transfer of the Project .................. 48! Term .......................................................... 48! Enforcement .............................................. 48! THE SUPPLEMENTAL REGULATORY AGREEMENT .............................................. 49! Rental Assistance Fund ............................. 49! Management and Operation of Project ..... 50! Qualified Residents ................................... 50! Other Covenants ....................................... 52! Sale or Transfer of the Project; Option to Purchase ............................................ 52! Term .......................................................... 53! THE SUBORDINATION AGREEMENT ... 53! Page Page ii THE BORROWER ....................................... 54! Organization .............................................. 55! Operations ................................................. 57! THE PROJECT ............................................. 58! Mobile Home Park Overview ................... 58! Vicinity Description .................................. 59! The Project ................................................ 59! Maps .......................................................... 59! Environmental Site Assessment ................ 62! Physical Needs Assessment ...................... 62! Historical Operating Results ..................... 63! Other Mobile Home Parks ........................ 64! Rent Control Ordinance ............................ 66! Management Agreement and Qualifications of Manager ................. 66! Rents/Occupancy ...................................... 68! Projected Operating Results ...................... 68! Oversight Agent ........................................ 70! THE AUTHORITY ...................................... 71! RISK FACTORS .......................................... 71! Bonds Are Limited Obligations of the Authority ........................................... 71! Loan Payments Non-Recourse .................. 71! Loan Payments Not Preference Proof ....... 72! Restrictions Under the Regulatory Agreement and the Supplemental Regulatory Agreement ...................... 72! Risk of Taxability ..................................... 72! Conditions Which May Affect Borrower’s Ability to Pay ................. 73! Value of Project; Economic Feasibility .... 75! Competing Facilities ................................. 75! Risks of Ownership of Real Property ....... 75! Environmental Risks ................................. 76! Insufficient Insurance and Sale Proceeds Relating to the Project ....................... 77! Enforceability and Bankruptcy ................. 77! Anti-Deficiency Laws of the State of California .......................................... 77! Forward-Looking Statements ................... 79! Limited Secondary Market ....................... 79! TAX MATTERS .......................................... 79! LEGAL OPINIONS ..................................... 81! CONTINUING DISCLOSURE .................... 81! Continuing Disclosure Agreement............ 81! Previous Undertakings .............................. 82! LITIGATION ............................................... 82! The Authority............................................ 82! The Borrower ............................................ 82! RATINGS ..................................................... 82! FINANCIAL ADVISOR .............................. 83! UNDERWRITING ....................................... 83! MISCELLANEOUS ..................................... 84! Appendix A - Definitions .......................................................................................................................... A-1 Appendix B - Form of Opinion of Bond Counsel ..................................................................................... B-1 Appendix C - Appraisal ............................................................................................................................ C-1 Appendix D - Form of Continuing Disclosure Agreement ....................................................................... D-1 OFFICIAL STATEMENT $36,675,000* INDEPENDENT CITIES FINANCE AUTHORITY MOBILE HOME PARK REVENUE REFUNDING BONDS (SAN JUAN MOBILE ESTATES) SERIES 2015 INTRODUCTION This Official Statement, including the cover page and Appendices hereto, provides certain information concerning the sale and delivery by the Independent Cities Finance Authority (the “Authority”) of its Mobile Home Park Revenue Refunding Bonds (San Juan Mobile Estates) Series 2015 (the “Bonds”) in the initial aggregate principal amount of $36,675,000.* THE BONDS ARE SUBJECT TO CERTAIN RISKS, INCLUDING THE RISK THAT THE PROJECT MAY NOT GENERATE NET OPERATING REVENUES SUFFICIENT TO PAY THE PRINCIPAL OF AND INTEREST ON THE BONDS. SEE THE SECTION HEREIN ENTITLED “RISK FACTORS” FOR A DISCUSSION OF SPECIAL RISK FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING THE INVESTMENT QUALITY OF THE BONDS. The Authority previously issued its Mobile Home Park Revenue Bonds (San Juan Mobile Estates) Series 2006A, its Mobile Home Park Subordinate Revenue Bonds (San Juan Mobile Estates) Series 2006B and its Mobile Home Park Subordinate Revenue Bonds (San Juan Mobile Estates) Taxable Series 2006C (collectively, the “Prior Bonds”) pursuant to an Indenture of Trust, dated as of May 1, 2006 (the “Prior Indenture”), between the Authority and MUFG Union Bank, N.A. (formerly known as Union Bank of California, N.A.), in such capacity (the “Prior Trustee”), and loaned the proceeds of the Prior Bonds (the “Prior Loan”) to Millennium Housing Corporation, a California nonprofit public benefit corporation (the “Prior Borrower”), in order to provide financing with respect to the acquisition and improvement of a mobilehome park with 312 total spaces known as San Juan Mobile Estates (the “Project”) located at 32302 Alipaz Street, in the city of San Juan Capistrano, California (the “City”). The Bonds will be issued by the Authority pursuant to an Indenture of Trust, dated as of July 1, 2015 (the “Indenture”), between the Authority and MUFG Union Bank, N.A., as trustee (the “Trustee”). The proceeds of the sale of the Bonds will be used to fund a loan (the “Loan”) to Millennium Housing, LLC, a California limited liability company (the “Borrower”), pursuant to a Loan Agreement, dated as of July 1, 2015 (the “Loan Agreement”) among the Authority, the Borrower and the Trustee. The Borrower will use the proceeds of the Loan, along with other funds available to the Borrower, to (i) refund the Prior Bonds in full and (ii) make deposits to various Accounts and Funds established under the Indenture. Specifically, the proceeds of the Bonds and other funds available to the Borrower will be used to make deposits to the Project Fund, the Costs of Issuance Fund, the Debt Service Reserve Fund, the Repair and Replacement Fund and the Rental Assistance Fund. See “THE PLAN OF FINANCING” and “ESTIMATED SOURCES AND USES OF FUNDS.” In connection with the issuance of the Bonds and the repayment of the Prior Bonds, Millennium Housing Corporation will transfer the Project to the Borrower. * Preliminary, subject to change. 2 Other than the Project and revenues received by virtue of its ownership of the Project, the Borrower currently has no other property or sources of revenues that are available or that have been pledged to repay its obligations under the Loan Agreement. See “THE BORROWER —Operations.” The Bonds are special limited obligations of the Authority, payable solely from and secured as to the payment of the interest on and the principal of and the redemption premium, if any, from Pledged Revenues (as hereinafter defined) and other funds and property including the Deed of Trust (as defined herein) as provided therefor in the Indenture. “Pledged Revenues,” in turn, consist primarily of the Operating Revenues of the Project, the principal source of which is the monthly rental income for mobile home spaces (the “Spaces”) within the Project and certain other required deposits under the Indenture. See “SECURITY FOR THE BONDS” and “THE PROJECT” herein. THE BONDS ARE NOT A DEBT OF THE AUTHORITY, MEMBERS OF THE AUTHORITY, THE STATE OF CALIFORNIA OR ANY OF ITS POLITICAL SUBDIVISIONS FOR PURPOSES OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION, NOR IN ANY EVENT SHALL THE BONDS BE PAYABLE OUT OF FUNDS OR PROPERTIES OTHER THAN AS PLEDGED PURSUANT TO THE INDENTURE. Pursuant to the Loan Agreement, the Authority will agree to loan the proceeds of the Bonds to the Borrower (the “Loan”) by causing such proceeds to be deposited with the Trustee and applied in accordance with the Indenture. Under the Loan Agreement, the Borrower is obligated to make payments to the Trustee at such times and in such amounts as are required to enable the Trustee to pay the principal and premium, if any, of and interest on the Bonds. The obligations of the Borrower under the Loan Agreement and the Note are limited recourse obligations of the Borrower secured by a first lien deed of trust on the Project (the “Deed of Trust”). See “THE LOAN AGREEMENT” and “SECURITY FOR THE BONDS” herein. The Project has been appraised by John P. Neet, MAI as of January 23, 2015 at a market value of $45,000,000, which appraised market value is more than the initial amount of the Bonds. Further, the appraisal estimates the “value in use” of the Project to a 501(c)(3) non-profit corporation to be $48,200,000 (see “THE PROJECT” and “APPENDIX C—Appraisal” herein). The Authority, the Borrower and the Trustee will enter into a Regulatory Agreement and Declaration of Restrictive Covenants dated as of July 1, 2015 (the “Regulatory Agreement”) with respect to the operation of the Project. Under the Regulatory Agreement, the Borrower is to rent at least 20% of the Spaces in the Project to Very Low Income Residents (all as defined in the Regulatory Agreement). In connection with the issuance of the Prior Bonds, the Prior Borrower agreed to certain restrictions running with the land as set forth in that certain Supplemental Regulatory Agreement and Declaration of Restrictive Covenants dated as of May 1, 2006 (the “Supplemental Regulatory Agreement”) between the City and the Prior Borrower. In connection with the transfer of the Project from the Prior Borrower to the Borrower, the Borrower has agreed to assume the obligations of the Prior Borrower under the Supplemental Regulatory Agreement pursuant to an Assignment, Assumption and Modification Agreement among the City, the Borrower and the Prior Borrower. Under the Supplemental Regulatory Agreement the Borrower is required to rent at least 20% of the Spaces to Very Low Income Residents and an additional 30% of the Spaces to Lower Income Residents. Spaces set-aside in accordance with the terms of the Supplemental Regulatory Agreement will, upon satisfaction of the provisions of the Regulatory Agreement, also be counted as qualifying Spaces under the Regulatory Agreement. The monthly rental rate which the Borrower may charge some of the Very Low Income Residents and Lower Income Residents is restricted by the Regulatory Agreement and the Supplemental Regulatory Agreement, as discussed herein. See “THE 3 REGULATORY AGREEMENT,” “THE SUPPLEMENTAL REGULATORY AGREEMENT” and “RISK FACTORS—Value of Project, Economic Feasibility” herein. Pursuant to a Subordination Agreement dated as of the Closing Date (the “Subordination Agreement”) between the City and the Trustee, the City will unconditionally subordinates the lien or charge upon the Project of the Supplemental Regulatory Agreement to the lien or charge of the Deed of Trust and the Regulatory Agreement. See “THE SUBORDINATION AGREEMENT” herein. The summaries and references to documents, statutes, reports and other instruments referred to herein do not purport to be complete, comprehensive or definitive, and each such summary and reference is qualified in its entirety by reference to each document, statute, report or instrument. Capitalized terms not defined elsewhere in this Official Statement or in Appendix A hereto have the meanings assigned to such terms in the Indenture. 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 “plan,” “expect,” “estimate,” “project,” “budget” or other similar words. Such forward-looking statements include, but are not limited to, certain statements contained in the information under the caption “THE PROJECT—Projected Operating Results.” 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. The Borrower does not plan to issue any updates or revisions to those forward-looking statements if or when its expectations, or events, conditions or circumstances on which such statements are based occur, other than as described under “CONTINUING DISCLOSURE” herein. THE PLAN OF FINANCING The proceeds of the Bonds will be used to fund the Loan to the Borrower pursuant to the Loan Agreement. The proceeds of the Loan, along with other funds available to the Borrower, will be used by the Borrower to refund in full the Prior Bonds, to make certain improvements to the Project and to make certain deposits required under the Indenture. The Project consists of certain real property and title to certain Improvements thereon (which consist of the structures, site improvements, facilities and fixtures at the Project), commonly known as the San Juan Mobile Estates located in the City of San Juan Capistrano, California. The Project does not include the mobile homes located on the Project site, and such mobile homes are not security for the Bonds. See “THE PROJECT.” 4 ESTIMATED SOURCES AND USES OF FUNDS* Following are the estimated sources and uses of funds for the financing. Bonds Transfers from Prior Indenture Totals Sources:* Principal Amount of Bonds $36,675,000.00 $36,675,000.00 Net Original Issue Premium $1,536,828.30 $1,536,828.30 Transfers from Prior Indenture $3,363,128.03 $3,363,128.03 Total Sources of Funds $38,211,828.30 $3,363,128.03 $41,574,956.33 Uses:* Underwriter’s Discount $550,125.00 $550,125.00 Advance Refund Prior Bonds $33,913,349.99 $2,527,949.39 $36,441,299.38 Debt Service Reserve Fund(1) $2,150,750.00 $2,150,750.00 Cost of Issuance Fund(2) $214,111.57 $41,988.43 $256,100.00 Repair and Replacement Fund $910,141.74 $793,190.21 $1,703,331.95 Rental Assistance Fund $400,000.00 $400,000.00 Issuer’s Fee $73,350.00 $73,350.00 Total Uses of Funds $38,211,828.30 $3,363,128.03 $41,574,956.33 (1) Established solely for the security of the Bonds in an amount equal to the initial Debt Service Reserve Fund Requirement. (2) Includes Trustee, legal, financial advisory, printing and other miscellaneous costs of issuing the Bonds. DEBT SERVICE REQUIREMENTS* The following table sets forth the semi-annual debt service requirements for the Bonds on February 15 and August 15 of each year, assuming no redemptions other than sinking fund redemptions. Debt Service Schedule Date Principal Interest 2/15/2016 8/15/2016 2/15/2017 8/15/2017 2/15/2018 8/15/2018 2/15/2019 8/15/2019 2/15/2020 8/15/2020 2/15/2021 8/15/2021 2/15/2022 8/15/2022 2/15/2023 8/15/2023 2/15/2024 * Preliminary, subject to change. 5 Date Principal Interest 8/15/2024 2/15/2025 8/15/2025 2/15/2026 8/15/2026 2/15/2027 8/15/2027 2/15/2028 8/15/2028 2/15/2029 8/15/2029 2/15/2030 8/15/2030 2/15/2031 8/15/2031 2/15/2032 8/15/2032 2/15/2033 8/15/2033 2/15/2034 8/15/2034 2/15/2035 8/15/2035 2/15/2036 8/15/2036 2/15/2037 8/15/2037 2/15/2038 8/15/2038 2/15/2039 8/15/2039 2/15/2040 8/15/2040 2/15/2041 8/15/2041 2/15/2042 8/15/2042 2/15/2043 8/15/2043 2/15/2044 8/15/2044 2/15/2045 8/15/2045 2/15/2046 8/15/2046 2/15/2047 8/15/2047 2/15/2048 8/15/2048 6 Date Principal Interest 2/15/2049 8/15/2049 2/15/2050 8/15/2050 [Remainder of Page Intentionally Left Blank] 7 THE BONDS General The Bonds will be delivered in fully registered form only and, when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York (“DTC”). DTC will act as securities depository for the Bonds. Ownership interests in the Bonds may be purchased, in book entry form only, initially in denominations of $5,000 or any integral multiple thereof. See “THE BONDS - Book-Entry System.” The Bonds will mature on the respective dates and in the respective principal amounts, and will bear interest at the respective rates, all as set forth on the inside cover page of this Official Statement. The Bonds will be dated their date of delivery. Interest on the Bonds will be computed on the basis of a 360-day year consisting of twelve 30-day months and will be payable semiannually on February 15 and August 15 of each year, commencing February 15, 2016* (each such date an “Interest Payment Date”), by check or draft mailed on such Interest Payment Date to the Owners of Bonds as they appear on the registration books of the Trustee, or, upon the written request of a Bondowner of at least $500,000 in principal amount of Bonds received by the Trustee not later than fifteen days prior to the Record Date for such payment, by wire transfer to an account in the United States designated by such Bondowner. Each Bond will bear interest from the Interest Payment Date next preceding the date of authentication thereof to which interest has been duly paid or provided for, unless a Bond is authenticated before the first Record Date, in which case interest will accrue from the Closing Date, or unless authenticated as of a date during the period from the Record Date to and including the next Interest Payment Date, in which case it shall bear interest from such Interest Payment Date. Each Bond shall bear interest on overdue principal at the rate then in effect on such Bond. In the event of any default in the payment of interest, such defaulted interest shall be payable to the Bondowner of such Bond on a special Record Date for the payment of such defaulted interest, which date shall be established by the Trustee, in accordance with the Indenture. Principal and premium, if any, due on the Bonds shall be paid only upon surrender of such Bond at the office designated by the Trustee. Redemption Optional Redemption. The Bonds maturing on or after August 15, 2026* are subject to optional redemption by the Authority, at the request of the Borrower, prior to the stated maturities thereof as may be directed by the Authority in whole, or in part from among maturities as may be directed by the Authority, at the request of the Borrower, on any date on or after August 15, 2025* at a Redemption Price equal to the principal amount to be redeemed, subject to the availability of funds for such purpose on the redemption date, plus accrued interest thereon to the date fixed for redemption, without premium. Such redemption will be effective only if, on the date of redemption, the Trustee holds money in accordance with requirements of the Indenture sufficient to pay the principal of and accrued interest on all Outstanding Bonds to be redeemed. * Preliminary, subject to change. 8 Special Redemption Generally. In accordance with and for purposes of the Indenture, the Bonds shall be subject to mandatory redemption, at the option of the Authority, at the request of the Borrower, prior to the stated maturities thereof on a pro rata basis, in whole or in part at any time, on the earliest practicable date for which notice of redemption can be given as provided in the Indenture at a Redemption Price equal to 100% of the Principal Amount of such Bonds or portions thereof to be redeemed, together with accrued interest, thereon to the date of redemption, without premium, in a Principal Amount having an aggregate Redemption Price equal to the amount of moneys which are deposited in or transferred to the Redemption Fund, (x) from any Net Proceeds or any prepayment made by the Borrower in order to fully retire the Loan in connection with a condemnation or casualty loss which results in Net Proceeds, and (y) from excess amounts in the Debt Service Reserve Fund resulting from a reduction in the Debt Service Reserve Fund Requirement after giving effect to any special redemption under the aforementioned provisions of the Indenture. The Trustee shall apply any such amounts described above in accordance with applicable provisions of the Indenture from time to time as directed by a certificate of a Borrower’s Representative, with notice to the Authority; provided, however, that (i) such amount to be applied to such redemption shall be rounded to the next lower authorized denomination, and (ii) unless otherwise directed by a certificate of a Borrower’s Representative, with notice to the Authority, no such redemption of Bonds shall be effected unless the total amount to be applied to redeem Bonds on such date shall be at least $25,000. Mandatory Sinking Fund Redemption.* The Bonds maturing on August 15 in each of the years 2030, 2035, 2040, 2045 and 2050 are subject to mandatory sinking fund redemption by application of the Sinking Fund Installments as provided in the Indenture, commencing on the respective dates set forth below, at a Redemption Price equal to 100% of the Principal Amount of each such Bond or portion thereof to be redeemed, plus accrued interest to the date of redemption thereof, without premium, on the respective dates and in the amounts set forth in the following tables: Bonds Maturing on August 15, 2030 Principal Amount Sinking Fund Redemption Date To Be Redeemed 2/15/2026 8/15/2026 2/15/2027 8/15/2027 2/15/2028 8/15/2028 2/15/2029 8/15/2029 2/15/2030 (maturity) Bonds Maturing on August 15, 2035 Principal Amount Sinking Fund Redemption Date To Be Redeemed 2/15/2031 8/15/2031 2/15/2032 * Preliminary, subject to change. 9 8/15/2032 2/15/2033 8/15/2033 2/15/2034 8/15/2034 2/15/2035 (maturity) Bonds Maturing on August 15, 2040 Principal Amount Sinking Fund Redemption Date To Be Redeemed 2/15/2036 8/15/2036 2/15/2037 8/15/2037 2/15/2038 8/15/2038 2/15/2039 8/15/2039 2/15/2040 (maturity) Bonds Maturing on August 15, 2045 Principal Amount Sinking Fund Redemption Date To Be Redeemed 2/15/2041 8/15/2041 2/15/2042 8/15/2042 2/15/2043 8/15/2043 2/15/2044 8/15/2044 2/15/2045 (maturity) Bonds Maturing on August 15, 2050 Principal Amount Sinking Fund Redemption Date To Be Redeemed 2/15/2046 8/15/2046 2/15/2047 8/15/2047 2/15/2048 8/15/2048 2/15/2049 10 8/15/2049 2/15/2050 (maturity) Redeemed Bonds as Satisfaction of Sinking Fund Installments. Upon any purchase or redemption of Term Bonds (other than by application of Sinking Fund Installments) an amount equal to the applicable Redemption Prices thereof shall be credited towards a part of all of any one or more of the above-listed Sinking Fund Installments, as directed by a certificate of a Borrower Representative, with a copy to the Authority or, failing such direction by August 1 of each year, toward such Sinking Fund Installments pro rata. Such applicable Redemption Prices shall be the respective Redemption Prices which would be applicable upon the redemption of such Bonds from the respective Sinking Fund Installments on the due dates thereof. The portion of any such Sinking Fund Installment remaining after the deduction of any such amounts credited toward the same (or the original amount of any such Sinking Fund Installment if no such amounts shall have been credited toward the same) shall constitute the unsatisfied balance of such Sinking Fund Installment for the purpose of the calculation of Principal Installments due on a future date. Selection of Bonds to be Redeemed by Lot. Except as may be otherwise provided in the Indenture, in the event of redemption of less than all of the Outstanding Bonds of like maturity, the Trustee shall assign to each such Outstanding registered Bond of the maturity to be redeemed a distinctive number for each $5,000 of the Principal Amount of such Bond and shall select by lot, using such method of selection as it shall deem proper in its discretion, from the numbers assigned to such Bonds as many numbers as, at $5,000 for each number, shall equal the Principal Amount of such Bonds to be redeemed. The Bonds to be redeemed shall be the Bonds to which were assigned numbers so selected; provided, however, that only so much of the Principal Amount of each such registered Bond of a denomination of more than $5,000 shall be redeemed as shall equal $5,000 for each number assigned to it and so selected. For purposes of this paragraph, Bonds which have theretofore been selected by lot for redemption shall not be deemed Outstanding. Notice of Redemption. When the Trustee receives notice from the Authority of its election or direction to redeem Bonds pursuant to the Indenture, and when redemption of Bonds is required pursuant to the Indenture, the Trustee shall give notice, which notice shall specify the maturities of the Bonds to be redeemed, the redemption date and the place or places where amounts due upon such redemption will be payable, whether such redemption is conditioned upon the availability of funds for such purpose on the redemption date (in the case of optional redemption and special redemption pursuant to the Indenture) and, if less than all of the Bonds of any maturity are to be redeemed, the letters and numbers or other distinguishing marks of such Bonds so to be redeemed, and, in the case of Bonds to be redeemed in part only, such notice shall also specify the respective portions of the Principal Amount thereof to be redeemed. Such notice shall further state that on such date there shall become due and payable upon each Bond to be redeemed the Redemption Price thereof, or the Redemption Price of the specified portion of the Principal Amount thereof in the case of Bonds to be redeemed in part only, together with interest accrued on such Bonds to the redemption date, and that from and after such date interest on such Bonds shall cease to accrue and be payable; provided, that, if the redemption is conditioned upon funds being available therefor no later than the opening of business on the Business Day prior to the redemption date, the notice shall so state. The Trustee shall mail a copy of such notice, by first class mail, postage prepaid, not less than thirty (30) days nor more than forty-five (45) days before the redemption date), to the Owners of any Bonds or portions of Bonds which are to be redeemed, at their last addresses, if any, appearing upon the registration book. Failure to give such notice with respect to any Bonds, or any defect therein, shall not affect the validity of the proceedings for redemption of any other Bonds. 11 Purchase of Bonds In lieu of redemption of Bonds as provided in the Indenture, amounts held by the Trustee for such redemption will, at the written request of the Borrower set forth in a certificate of a Borrower Representative, with a copy to the Authority, received by the Trustee prior to the selection of Bonds for redemption, be applied by the Trustee to the purchase of Bonds at public or private sale as and when and at such prices (including brokerage, accrued interest and other charges) as the Borrower may in its discretion direct, but not to exceed the redemption price which would be payable if such Bonds were redeemed. The aggregate principal amount of Bonds of the same maturity purchased in lieu of redemption may not exceed the aggregate principal amount of Bonds of such maturity which would otherwise be subject to such redemption. Book-Entry System The Bonds will be initially delivered in the form of one fully registered Bond for each of the maturities of the Bonds, each Bond registered in the name of Cede & Co., as nominee of DTC, as registered owner of all the Bonds. The Bonds will be retained and immobilized in the custody of DTC. So long as the Bonds are held in book-entry only form, all references herein to the holders or owners of the Bonds shall mean DTC, and shall not mean beneficial owners of the Bonds. DTC, the world’s largest depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments from over 100 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 is the holding company of DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. 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 a Standard & Poor’s rating of AA+. The rules applicable to DTC and its Participants are on file with the Securities and Exchange Commission. Purchases of the Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC’s records. The ownership interest of each actual purchaser of each Bond (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Bonds, except in the event that use of the book-entry system for the Bonds is discontinued. 12 To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of the Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of the Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Bonds within an issue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. THE AUTHORITY, THE TRUSTEE AND THE UNDERWRITER HAVE NO RESPONSIBILITY OR LIABILITY FOR ANY ASPECTS OF THE RECORDS RELATING TO OR PAYMENTS MADE ON ACCOUNT OF BENEFICIAL OWNERSHIP, OR FOR MAINTAINING, SUPERVISING OR REVIEWING ANY RECORDS RELATING TO BENEFICIAL OWNERSHIP, OF INTERESTS IN THE BONDS. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Bonds unless authorized by a Direct Participant on accordance with DTC’s Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Authority as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds and distributions on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from the Authority or Paying Agent, on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners are 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, Paying Agent, or Authority, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds and distributions to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Authority or the Paying Agent, and disbursement of such payments to Direct Participants shall be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners shall be the responsibility of Direct and Indirect Participants. 13 THE AUTHORITY, THE TRUSTEE AND THE UNDERWRITER CANNOT AND DO NOT GIVE ANY ASSURANCES THAT DTC WILL DISTRIBUTE PAYMENTS TO DTC PARTICIPANTS, OR THAT PARTICIPANTS OR OTHERS WILL DISTRIBUTE PAYMENTS WITH RESPECT TO THE BONDS RECEIVED BY DTC OR ITS NOMINEES AS THE REGISTERED OWNER, ANY REDEMPTION NOTICES OR OTHER NOTICES TO THE BENEFICIAL OWNERS, OR THAT THEY WILL DO SO ON A TIMELY BASIS, OR THAT DTC WILL SERVICE AND ACT IN THE MANNER DESCRIBED IN THIS OFFICIAL STATEMENT. DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to the Authority or the Paying Agent. Under such circumstances, in the event that a successor depository is not obtained, Bond certificates are required to be printed and delivered. In the event the Authority and the Trustee determine not to continue the DTC book-entry only system or DTC determines to discontinue its services with respect to the Bonds and the Authority does not select another qualified securities depository, the Authority and the Trustee will deliver one or more Bonds in such principal amount or amounts, in denominations permitted under the Indenture, and registered in whatever name or names, as DTC shall designate. In such event, transfers and exchanges of Bonds will be governed by the provisions of the Indenture. The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that the Authority and the Underwriter believe to be reliable, but they take no responsibility for the accuracy thereof. SECURITY FOR THE BONDS The Bonds are special limited obligations of the Authority, payable solely from Pledged Revenues (as hereinafter defined) and secured as to the payment of the interest on and the principal of and the redemption premiums, if any, on the Bonds in accordance with their terms and the terms of the Indenture, from Pledged Revenues and other funds and the Deed of Trust, as provided therefor in the Indenture. The Bonds are not a debt of the Authority, members of the Authority, the State of California or any of its political subdivisions, for purposes of any constitutional or statutory debt limitation or restriction, nor in any event shall the Bonds be payable out of funds or properties other than as described in the preceding sentence. Net Operating Revenues The Bonds are secured by a pledge of Pledged Revenues (as defined below) and are payable principally from Operating Revenues of the Project. “Operating Revenues” include all rents, income, receipts and other revenues derived by the Borrower arising from the operation of the Project, including rental income from mobile home spaces and rental assistance provided to project tenants, determined in accordance with Generally Accepted Accounting Principles, interest earnings in funds held by the Trustee and all other money howsoever derived by the Borrower from the operation of the Project or arising from the Project, but not including resident security deposits. In the manner described herein, the Borrower will deposit to the Trustee “Net Operating Revenues” which include Operating Revenues less Operation and Maintenance Costs, consisting of the reasonable and necessary costs and expenses of operating the common areas of the Project and of managing and repairing and other expenses necessary to maintain and preserve the common areas of the Project in good repair and working order, determined in accordance with Generally Accepted Accounting Principles. See “APPENDIX A—Definitions.” Under the Regulatory Agreement, the Borrower is to rent at least 20% of the Spaces in the Project to Very Low Income Residents. Under the Supplemental Regulatory Agreement the Borrower is required 14 to rent at least 20% of the Spaces to Very Low Income Residents and an additional 30% of the Spaces to Lower Income Residents. Spaces set-aside in accordance with the terms of the Supplemental Regulatory Agreement will, upon satisfaction of the provisions of the Regulatory Agreement, also be counted as qualifying Spaces under the Regulatory Agreement. The monthly rental rate which the Borrower may charge some of the Very Low Income Residents and Lower Income Residents is restricted by the Regulatory Agreement and the Supplemental Regulatory Agreement, as discussed herein. See “THE REGULATORY AGREEMENT,” “THE SUPPLEMENTAL REGULATORY AGREEMENT” and “RISK FACTORS—Value of Project, Economic Feasibility” herein. These provisions may limit the Net Operating Revenues available to pay debt service on the Bonds. See “RISK FACTORS” herein. Pledge Pursuant to the Indenture, the following are pledged to the payment of the principal of, Redemption Price, if any, and interest on the Bonds: (i) the Pledged Revenues, and (ii) the rights, title and interest of the Authority in the Loan, the Loan Agreement (other than certain specified rights reserved by the Authority) and the Deed of Trust, all Funds and Accounts created under the Indenture for the benefit of the Bonds, and any other property pledged to the payment of the Bonds in the granting clauses of the Indenture. Pursuant to the “granting clauses” referred to in the Indenture, the Authority pledges and assigns to the Trustee, for the benefit of the Bonds, the “Trust Estate,” which consists of all proceeds, Funds, Accounts, Revenues, Prepayments, the Loan, the Loan Agreement (other than certain rights to fees and indemnity reserved by the Authority), the Deed of Trust, rights, interests, collections, and other property pledged to the payment of the Bonds pursuant to the Indenture. “Pledged Revenues” by definition consist of the Revenues, but excluding therefrom amounts on deposit in the Unrestricted Account of the Repair and Replacement Fund, the Administration Fund , the Rental Assistance Fund and the Rebate Fund. “Revenues,” in turn, by definition consist of: (i) Operating Revenues; (ii) Prepayments; (iii) the proceeds of any insurance, including the proceeds of any self- insurance covering loss relating to the Project provided, however, that the Net Proceeds of any public liability insurance, casualty insurance or title insurance required to be maintained pursuant to the Loan Agreement will be applied as specified in the Loan Agreement and the Indenture; (iv) all amounts on hand from time to time in the funds and accounts established by the Trustee under the Indenture; (v) all proceeds of rental interruption insurance policies, if any, carried with respect to the Project pursuant to the Loan Agreement; (vi) any proceeds derived from the exercise of remedies under the Deed of Trust; and (vii) any additional property that may from time to time, by delivery or by writing of any kind, be subjected to the lien of the Indenture by the Authority or by anyone on its behalf, subject only to the provisions of the Indenture. In the event that the Borrower acquires additional assets not subject to the liens and pledges described in the Indenture (“Other Assets”), such Other Assets will not be pledged to the payment of the Bonds. To the extent that Bondowners are deemed to have any interest in the Borrower’s Other Assets, the Bondowners agree that their interest in those Other Assets is subordinate to the claims or rights of other lenders or creditors, as applicable. The Loan Agreement and the Note Pursuant to the Loan Agreement, the Authority will make the Loan for the benefit of the Borrower in an amount equal to the aggregate principal amount of the Bonds. The Borrower’s obligation to repay the Loan will be evidenced by the Note. The Borrower is obligated under the Loan Agreement, notwithstanding the schedule of payments under the Loan Agreement and the Note, to make such 15 payments at such times as shall be sufficient, when added to the amounts otherwise available under the Indenture, to pay the principal and premium, if any, of and interest on the Bonds when due, whether at maturity, by optional or mandatory redemption or by acceleration. Under the Loan Agreement the Borrower agrees to pay to the Trustee (i) on or prior to the thirteenth (13th) day of each month, commencing in August 2015, from budgeted Net Operating Revenues from the prior month, amounts sufficient to make the monthly deposits required by paragraphs (a) through (e) under the heading “THE INDENTURE—Revenue Fund” herein and (ii) on or prior to the date that is 45 days following the end of each Bond Year, all remaining budgeted Net Operating Revenues from such prior Bond Year. As security for the repayment of the Loan, the Borrower grants the Authority a security interest in the Project pursuant to the terms of the Deed of Trust relating to the Project. See “THE LOAN AGREEMENT” herein. The Project has been appraised by John P. Neet, MAI as of January 23, 2015 at a market value of $45,000,000, which appraised market value is more than the initial amount of the Bonds. Further, the appraisal estimates the “value in use” of the Project to a 501(c)(3) non-profit corporation to be $48,200,000 (see “THE PROJECT” and “APPENDIX C—Appraisal” herein). Borrower Obligations Non-Recourse None of the Borrower’s members, officers, employees or agents has or is intended to have any liabilities under or in respect of the Loan Agreement, the Indenture, the Note, the Deed of Trust, the Regulatory Agreement, or any of the other documents or transactions contemplated by any of them. See “RISK FACTORS.” Reserve Fund For a discussion of the reserve funds, see “THE INDENTURE—Debt Service Reserve Fund.” The moneys held in the Debt Service Reserve Fund may be invested in a guaranteed investment contract or other investment which satisfies the requirements of clause (j) of the definition “Qualified Investments” in the Indenture. See “APPENDIX A—Definitions.” Subordination Agreement Pursuant to the terms of the Subordination Agreement, the City will unconditionally subordinate the lien or charge of the Supplemental Regulatory Agreement upon the Project to the lien or charge of the Deed of Trust and the Regulatory Agreement. In the event that the Trustee delivers to the Borrower a notice of default under the Loan Documents, the Trustee shall deliver to the City a copy of said notice concurrently with delivery to the Borrower, and the City shall have the right (but not the obligation) to cure any or all defaults specified in said notice for a period of ninety (90) days after the date of such notice. See “THE SUBORDINATION AGREEMENT” herein. THE INDENTURE The following is a summary of certain provisions of the Indenture relevant to the Bonds. The summary does not purport to be complete and is qualified in its entirety by reference to the Indenture which is available from the Trustee upon request, and to Appendix A for the definition of certain terms used herein. Any capitalized terms not otherwise defined herein or in Appendix A are as defined in the Indenture. 16 Application of Bond Proceeds On the Closing Date, the Authority will cause the proceeds of the sale of the Bonds (less underwriter’s discount) to be deposited with the Trustee in the Project Fund. The proceeds of the Bonds on deposit in the Project Fund will be disbursed in accordance with the Indenture and the Loan Agreement as follows: (a) the Trustee will deposit the amount of $__________ in the Debt Service Reserve Fund; (b) the Trustee will deposit the amount of $__________ in the Cost of Issuance Fund; (c) the Trustee will deposit the amount of $__________ in the Restricted Account of Repair and Replacement Fund; (d) the Trustee will deposit the amount of $__________ in the Rental Assistance Fund; and (e) the balance of $__________ will be held in the Project Fund until disbursed in accordance with the Indenture and the Loan Agreement ($__________ of such amount to be transferred to the escrow agent to defease and advance refund the Prior Bonds). On the Closing Date, funds available to the Borrower shall be transferred from the Prior Indenture to be deposited as follows: (a) the Trustee will deposit the amount of $__________ in the Cost of Issuance Fund; and (b) the Trustee will deposit the amount of $__________ in the Unrestricted Repair and Replacement Fund. Project Fund The Authority will establish and maintain a special fund designated as the Independent Cities Finance Authority San Juan Mobile Estates Project Fund (the “Project Fund”), which shall be held by the Trustee. Amounts in the Project Fund will be expended and applied to fund the Loan which will allow the Borrower to finance the Project. See “Application of Bond Proceeds,” above. On the Closing Date, the Trustee will pay out moneys in the Project Fund for the purpose of making the Loan, upon receipt by the Trustee of a written direction of the Authority signed by an Authorized Officer. Cost of Issuance Fund The Trustee will establish, maintain and hold in trust a separate fund designated as the “Cost of Issuance Fund.” Moneys in the Cost of Issuance Fund shall be applied to the payment of Cost of Issuance, upon receipt of an Officer’s Certificate stating the person to whom and the purpose for which each payment is to be made, and the amount of such payment. Upon receipt of an Officer’s Certificate stating that the Cost of Issuance have been fully paid and in any event within six months of the Closing Date, the Trustee shall transfer any remaining balance to the Revenue Fund and such Fund shall be closed. 17 Deposits Pursuant to the Loan Agreement, the Authority is to cause the Borrower to collect and deposit or cause to be collected and deposited with the Trustee, (i) on or prior to the thirteenth (13th) day of each month, commencing in August 2015, from budgeted Net Operating Revenues from the prior month, amounts sufficient to make the monthly deposits required by paragraphs (a) through (e) under the heading “THE INDENTURE—Revenue Fund” herein and (ii) on or prior to the date that is 45 days following the end of each Bond Year, all remaining budgeted Net Operating Revenues from such prior Bond Year. The Trustee shall notify the Authority and the Oversight Agent in the event that Net Operating Revenues sufficient to make the monthly deposits required by paragraphs (a) through (e) under the heading “THE INDENTURE—Revenue Fund” herein have not been deposited by the thirteenth (13th) day of each month. The Trustee shall be accountable only for moneys actually so deposited or held. All Net Operating Revenues received by the Trustee shall be deposited for credit to the Revenue Fund to be held by the Trustee. All Prepayments and Net Proceeds with respect to the Loan shall be separately identified by the Borrower to the Trustee and shall be deposited in the Redemption Fund for the benefit of the Owners of Bonds. Revenue Fund The Revenue Fund shall be held by the Trustee for the benefit of the Bonds. All interest and other income from time to time received from the deposit of moneys in the Revenue Fund shall be retained in such fund and applied pursuant to the Indenture. On or before the Business Day preceding the fifteenth (15th) day of each month, the Trustee shall provide a written notice or electronic notice to the Authority and the Oversight Agent of the amount deposited in the Revenue Fund. Except as otherwise set forth below, on the Business Day preceding the fifteenth (15th) day of each month, commencing August 15, 2015, the Trustee shall withdraw from the Revenue Fund and transfer to the following funds the amounts indicated in the following tabulation, in the following order of priority, or so much thereof as remains after first making all prior transfers: (a) into the Debt Service Fund, (i) commencing on the Business Day preceding August 15, 2015*, an amount equal to one-sixth (one-seventh on or prior to February 15, 2016) of the interest due on the Bonds on the next Interest Payment Date, (ii) commencing on the Business Day preceding August 15, 2015* to and including the Business Day preceding August 15, 2025*, an amount equal to one-twelfth (one-thirteenth on or prior to August 15, 2016) of the principal coming due, if any, on the Bonds on the next Principal Payment Date, and commencing on the Business Day preceding August 15, 2025* and thereafter, an amount equal to one-sixth of the principal coming due, if any, on the Bonds on the next Principal Payment Date, and (iii) an amount due on the next redemption date on the Bonds to be redeemed (other than pursuant to mandatory sinking fund redemption), provided that such payments may be net of accrued interest on investments of funds held under the Indenture; (b) into the Debt Service Reserve Fund, the amount, if any, required by the Loan Agreement; (c) into the Rebate Fund, the amount, if any, required to be deposited therein pursuant to the Indenture; (d) commencing on the Business Day preceding August 15, 2016, into the General Account of the Administration Fund, (i) the amount, if any, necessary to pay or provide for one-twelfth of the Trustee Fee, including expenses in connection with the purchase or redemption of any Bonds, all as * Preliminary, subject to change. 18 provided and contemplated in the annual budget filed by the Borrower pursuant to the Loan Agreement and specified by the Borrower in writing to the Trustee, (ii) the amount, if any, necessary to pay or provide for one-twelfth of the annual Oversight Agent Fee, and (iii) the amount, if any, necessary to pay or provide for one-twelfth of the other Fees and Charges, if any, all as provided and contemplated in the annual budget filed by the Borrower pursuant to the Loan Agreement and specified by the Borrower in writing to the Trustee (any fees and expenses of the Fiduciaries above and beyond the amount contemplated in the annual budget filed by the Borrower pursuant to the Loan Agreement shall be paid from the Surplus Fund); (e) commencing on the Business Day preceding August 15, 2016, into the General Account of the Administration Fund, the amount, if any, necessary to pay or provide for one-twelfth of the Authority Annual Fee (not including the amount, if any, due to the Authority for certain audit costs as set forth in the Regulatory Agreement); (f) into the Borrower Administration Fee Account of the Administration Fund an amount equal to the Borrower Administration Fee as such amount is set forth in writing from the Borrower to the Trustee, which Borrower Administration Fee is authorized under the Indenture, plus any amounts for previous periods not paid to the Borrower. Any such amounts so deposited to be paid to Millennium Housing Corporation, the sole member of the Borrower, on the last day of each month; (g) only on the 45th day following the end of a Bond Year, to the extent of available budgeted Net Operating Revenues from such prior Bond Year, into the unrestricted Repair and Replacement Fund, the amount, if any, necessary to bring the aggregate amount on deposit in both the restricted and unrestricted Repair and Replacement Fund to at least $150,000; and (h) only on the 60th day following the end of a Bond Year, after making all of the foregoing transfers, into the Surplus Fund, the amount, if any, remaining in the Revenue Fund from the preceding Bond Year. Notwithstanding the foregoing, so long as the Borrower has monthly Net Operating Revenues that are at least equal to said month’s portion of items (a) through (e) above, then the Borrower may retain from Net Operating Revenues for such month the Borrower Administration Fee for such month, in accordance with the annual budget filed with the Trustee, to be paid by the Borrower to Millennium Housing Corporation, the sole member of the Borrower. Notwithstanding the foregoing paragraphs (d) and (e) above, the Borrower may at any time elect to deposit additional amounts, including, without limitation, transfers from the Surplus Fund, into the General Account of the Administration Fund. No additional deposits to the General Account of the Administration Fund shall be required under paragraphs (d) and (e) above if, on the Business Day preceding the fifteenth (15th) day of any month, sufficient funds have previously been deposited into such account. Debt Service Fund The Debt Service Fund will be held by the Trustee. The Trustee will withdraw from the Debt Service Fund, on or prior to each Interest Payment Date, an amount equal to the unpaid interest due on the Bonds on that date and shall cause it to be applied to the payment of such interest when due. If the withdrawals required in the previous sentence on the same and every prior Interest Payment Date have been made, the Trustee will withdraw from the Debt Service Fund, on or prior to each Principal Payment Date, an amount equal to the Principal Amount of the Outstanding Bonds, if any, maturing on that date and will cause it to be applied to the payment of the principal of the Bonds when due. Each withdrawal 19 from the Debt Service Fund as described above will be made on or immediately prior to the Interest Payment Date or Principal Payment Date to which it relates, and the amount so withdrawn shall be deemed to be part of the Debt Service Fund until such Interest Payment Date or Principal Payment Date. In the event that amounts on deposit in the Debt Service Fund are insufficient to make transfers under the foregoing sentences when required, the Trustee will transfer to the Debt Service Fund, the amount of such insufficiency first from the Surplus Fund and then from the Debt Service Reserve Fund. The Trustee shall apply money in the Debt Service Fund to the purchase or the redemption of the Term Bonds in the manner provided in the Indenture, provided that no such Bonds shall be so purchased in lieu of redemption during the period of 45 days next preceding each Sinking Fund Installment due date established for such Term Bonds. The price paid by the Trustee (including any brokerage and other charges) for any Term Bond purchased pursuant to this paragraph will not exceed the Redemption Price applicable on the next date on which such Term Bond could be redeemed in accordance with its terms as part of a Sinking Fund Installment. Subject to the limitations set forth and referred to in the Indenture, the Trustee shall purchase Term Bonds at such times, for such prices, in such manner (whether after advertisement for tenders or otherwise) as the Trustee will be directed by a certificate of a Borrower Representative, with a copy to the Authority, and as may be possible with the amount of money available in the Debt Service Fund therefor. As soon as practicable after the 45th day but not later than the 30th day prior to the due date of any Sinking Fund Installment, the Trustee will proceed pursuant to the Indenture to call for redemption on that date a Principal Amount of Term Bonds subject to such Sinking Fund Installment in such amount as shall be necessary to complete the retirement of the Principal Amount of the Term Bonds of such maturity specified for such Sinking Fund Installment. The Trustee will withdraw from the Debt Service Fund, on or prior to the due date of the next Sinking Fund Installment, an amount equal to the Principal Amount of the Term Bonds called for redemption on such date pursuant to this paragraph, and will cause it to be applied to the payment of the Redemption Price thereof to such date. If, by application of moneys in the Debt Service Fund, the Trustee will purchase in any Bond Year Term Bonds subject to redemption from moneys in the Debt Service Fund in excess of the aggregate Sinking Fund Installment in respect of such Term Bonds for such Bond Year, the Trustee shall file with the Authority and the Borrower not later than the 20th day preceding the close of such Bond Year, a statement identifying such Term Bonds purchased and called for redemption during such Bond Year. The Borrower will thereafter cause a certificate of a Borrower Representative, with a copy to the Authority, to be filed with the Trustee not later than the 10th day preceding the close of such Bond Year setting forth with respect to the amount of such excess the years in which Sinking Fund Installments are to be reduced and the respective amounts by which such Sinking Fund Installments are to be reduced; provided that such reduction shall be as nearly as practicable pro rata among remaining Sinking Fund Installments so as to be in increments of $5,000. All interest and other income from time to time received from the deposit and investment of moneys in the Debt Service Fund will be transferred upon receipt to the Revenue Fund. Redemption Fund The Redemption Fund shall be held by the Trustee. The Trustee shall deposit into the Redemption Fund any Prepayments or Net Proceeds pursuant to the Indenture. Any moneys on deposit in the Redemption Fund shall be used and applied as soon as practicable following the receipt thereof, but not later than twelve months after such receipt, for either or both of the following purposes: (a) to the redemption of Bonds as may be designated in an Officer’s Certificate; or (b) the purchase of Bonds at a price specified by the Borrower, but only upon receipt of a certificate of a Borrower Representative, with 20 a copy to the Authority, stating the Principal Amounts and maturities of the Bonds to be purchased; provided that no such purchase shall be made at a price in excess of the Redemption Price applicable on the next ensuing redemption date, and that no such purchase shall be made during the period of 45 days next preceding a redemption date from moneys to be applied pursuant to clause (a) above to the redemption of Bonds on such date. All interest and other income from time to time received from the deposit and investment of moneys in the Redemption Fund shall be transferred upon receipt to the Revenue Fund. Debt Service Reserve Fund The Debt Service Reserve Fund shall be held by the Trustee. If available moneys in the Debt Service Fund shall be insufficient to pay in full the interest on and principal of any Bonds becoming due on any Interest Payment Date, Principal Payment Date or any date on which Bonds have been called for redemption, the Trustee shall transfer an amount equal to the deficiency from the Debt Service Reserve Fund to the Debt Service Fund for such purpose unless the Authority shall, by an Officer’s Certificate delivered to the Trustee prior to the Interest Payment Date, designate one or more Funds or Accounts from which an amount equal to the deficiency in the Debt Service Fund is required to be transferred to the Debt Service Fund. All interest and other income from time to time received from the deposit and investment of moneys in the Debt Service Reserve Fund shall be transferred upon receipt to the Revenue Fund. If, on or before an Interest Payment Date the amount in the Debt Service Reserve Fund exceeds the Debt Service Reserve Fund Requirement, the Trustee shall withdraw the amount therein in excess of the Debt Service Reserve Fund Requirement and transfer such amount to the Revenue Fund. Whenever the Authority shall receive a Prepayment or Net Proceeds and shall transfer the proceeds thereof to the Redemption Fund, which in any such case would result in the reduction of the Debt Service Reserve Fund Requirement upon application of the moneys so transferred to the purchase or redemption of Bonds, the Trustee shall, immediately prior to and in connection with each such purchase or redemption, withdraw from the Debt Service Reserve Fund and deposit in the Redemption Fund an amount of moneys equal to the reduction of the Debt Service Reserve Fund Requirement which would result upon the purchase or redemption of such Bonds (including the purchase or redemption of such Bonds utilizing the moneys being transferred from the Debt Service Reserve Fund and deposited in the Redemption Fund pursuant to the provisions of this paragraph), but only to the extent that any such withdrawal would not reduce the amount of the Debt Service Reserve Fund below the Debt Service Reserve Fund Requirement. The amount of moneys to be withdrawn from the Debt Service Reserve Fund in each instance pursuant to the provisions of this paragraph shall be as determined by a certificate of a Borrower Representative, with a copy to the Authority. Rebate Fund The Rebate Fund will be administered in accordance with the provisions of the Indenture. The Rebate Fund will not be subject to the lien or encumbrance of the Indenture and will be held in trust by the Trustee for the benefit of the United States of America. The amounts deposited in the Rebate Fund will be subject to the claim of no other person, including that of the Trustee and Bondowners. Moneys transferred to the Rebate Fund pursuant to the Indenture will be used for no other purpose than to make payments to the United States Treasury, at the time and manner and in the amount and as more fully provided in the Indenture. 21 The Trustee will be deemed conclusively to have complied with the provisions of the Indenture and the Tax Certificate related to Rebatable Arbitrage if it follows the directions of the Borrower, and the Trustee will have no independent responsibility to, or liability resulting from its failure to, enforce compliance by the Borrower or the Authority with the provisions of the Indenture and the Tax Certificate with respect to Rebatable Arbitrage. Administration Fund The Trustee shall establish the Administration Fund and establish therein the General Account and the Borrower Administration Fee Account. Moneys deposited in the Accounts of the Administration Fund shall be held therein in segregated Accounts until disbursed. Moneys deposited in the General Account of the Administration Fund shall be applied by the Trustee to the Authority Annual Fee (payable on a monthly basis to the Authority; provided that amounts, if any, due to the Authority for certain audit costs as set forth in the Regulatory Agreement shall be payable upon receipt of an invoice from the Authority) and the Oversight Agent Fee, and from time to time as directed by a certificate of a Borrower Representative, with a copy to the Authority, to the payment of ordinary fees and expenses of Fiduciaries, including expenses of purchase or redemption of Bonds. Any fees and expenses of the Fiduciaries and amounts payable to the Authority above and beyond the amount contemplated in the final annual budget prepared by the Borrower shall be paid from the Surplus Fund, or if the Surplus Fund is insufficient, shall be paid by the Borrower. Moneys deposited in the Borrower Administration Fee Account of the Administration Fund shall be applied by the Trustee, on a monthly basis, to the payment of the Borrower Administration Fee. All interest and other income from time to time received from the deposit and investment of moneys in the Accounts of the Administration Fund shall be transferred upon receipt to the Revenue Fund. The Borrower may at any time elect to deposit additional amounts, including, without limitation, transfers from the Surplus Fund, into the Accounts of the Administration Fund. Repair and Replacement Fund The Trustee shall establish and hold the Repair and Replacement Fund for the financial benefit of the Project and shall deposit therein the amounts provided in the Indenture. Moneys deposited in the Repair and Replacement Fund shall be held therein segregated from other funds held by the Trustee until disbursed for the purposes provided in the Indenture. Expenditures from the Repair and Replacement Fund which are not included in the annual budget and Exhibit C of the Loan Agreement shall be subject to the Oversight Agent’s approval. Disbursements from the Restricted Account of the Repair and Replacement Fund shall be made upon the written request of the Borrower and approved in writing by the Oversight Agent solely for the purpose of funding capital improvements to the Project, including certain of the items set forth in Exhibit C to the Loan Agreement and capital improvements to the Project identified in the annual budget filed by the Borrower pursuant to the Loan Agreement, or to redeem Bonds. Disbursements from the Unrestricted Account of the Repair and Replacement Fund shall be made upon the written request of the Borrower for the purpose of effecting the remaining items set forth in Exhibit C to the Loan Agreement or for any other purpose for the benefit of the Project in accordance with the annual budget filed by the Borrower pursuant to the Loan Agreement or for such other similar purposes which the Oversight Agent shall reasonably direct, including maintenance costs, replacement of machinery and appliances and including, if necessary, making payments for debt service on the Bonds. Moneys in the Repair and Replacement Fund shall be disbursed upon the written request of the Borrower 22 in accordance with the provisions of the Loan Agreement. Interest earnings on moneys in the Repair and Replacement Fund will be deposited to the Revenue Fund. The Trustee shall also accept for deposit into the Unrestricted Account of the Repair and Replacement Fund, any other moneys delivered from time to time by the Borrower, including, without limitation, transfers from the Surplus Fund, with directions for deposit to such account of the Repair and Replacement Fund. Surplus Fund The Surplus Fund shall be held by the Trustee. The Trustee shall deposit into the Surplus Fund the amounts specified in the Indenture. Annually, following computation and deposit of the Rebatable Arbitrage for the preceding Bond Year (if required for such Bond Year under the Indenture) in the Rebate Fund and provided there is no deficiency in the Debt Service Fund, the Debt Service Reserve Fund, the Rebate Fund, the Administration Fund, or the Repair and Replacement Fund, any moneys in the Surplus Fund shall be released from the lien of the Indenture, not less frequently than annually, upon delivery to the Trustee of the semi-annual Coverage Requirement Certificate and provided no Event of Default has been declared under the Indenture or pursuant to the Loan Agreement, and the amounts on deposit in the Surplus Fund as of the conclusion of the immediately preceding Bond Year shall, at the written direction of a Borrower Representative, remain on deposit in the Surplus Fund, be transferred to the Borrower or be transferred to any other party at the direction of the Borrower for use for any lawful purpose relating to the Project. If, at any time, there is a deficiency in the Debt Service Fund, the Debt Service Reserve Fund, the Rebate Fund, the Administration Fund or the Repair and Replacement Fund, the Trustee shall withdraw from the Surplus Fund and deposit in such Fund, in the order set forth for disposition of Revenues generally under the Indenture, the amount necessary to remedy such deficiency and shall give written notice to the Authority of such withdrawal. All interest and other income from time to time received from the deposit and investment of moneys in the Surplus Fund shall be transferred upon receipt to the Revenue Fund. Rental Assistance Fund The Rental Assistance Fund shall be held by the Trustee. The Trustee shall deposit into the Rental Assistance Fund the amounts set forth in the Indenture and any additional amounts provided to the Trustee by the Borrower from time to time for deposit into such Fund. Moneys in the Rental Assistance Fund shall be expended and/or invested in accordance with the instruction of the Borrower. Funds deposited into the Rental Assistance Fund are not Pledged Revenues and are not pledged to the payment of the Bonds. Investment and Deposit of Funds The Trustee will keep all money held by it, as continuously as reasonably possible, invested and reinvested in Qualified Investments maturing at the times and in the amounts required by the Indenture, all as instructed in writing by a Borrower Representative and subject to the specific requirements of the Indenture. In the event that written investment instructions of a Borrower Representative are not received by the Trustee in a timely manner, the Trustee shall hold the amounts deposited in the Funds and Accounts uninvested. Except for Investment Agreements, Repurchase Agreements and Forward Delivery/Forward Purchaser Agreements described in clauses (j), (k) and (l) of the definition of “Qualified Investments” in the Indenture all investments made by the Trustee shall provide for payment of principal and interest which will be payable no later than the earlier to occur of six (6) months from the 23 date of investment or the date on which it is estimated that such moneys will be required by the Trustee. See “APPENDIX A—DEFINITIONS.” Moneys in any Fund or Account created and established by, or maintained, pursuant to, the Indenture and held by a Fiduciary may be invested in common with moneys held in any other such Fund or Account; provided, however, that the common investments with such other moneys constitute Qualified Investments and provided, further, that such investments are held by the same Fiduciary acting in the same capacity. Obligations purchased as an investment of moneys in any Fund or Account held by a Fiduciary under the Indenture shall be deemed at all times to be a part of such Fund or Account and the income or interest earned by, or incremented to, any such Fund or Account due to the investment and reinvestment thereof shall be retained in such Fund or Account as part thereof, except as otherwise provided in the Indenture and subject to the required transfer thereof from such Fund or Account pursuant to the Indenture. A Fiduciary shall sell in any commercially reasonable name, or present for redemption, any obligation purchased by it as an investment whenever it shall be necessary in order to provide moneys to meet any payment or transfer from the Fund or Account for which such investment was made; provided, however, that in lieu of liquidating any such investment obligations and transferring the proceeds thereof, the Trustee may transfer investment obligations which will mature and the proceeds of which will be available on or before the date such proceeds are required for the purposes of the Indenture. Each Fiduciary shall advise the Authority and the Borrower in writing, on or before the fifteenth (15th) day of each calendar month, of the details of all investments held for the credit of each Account in its custody under the provisions of the Indenture as of the end of the preceding month. The Trustee shall furnish the Authority and the Borrower periodic cash transaction statements which include detail for all investment transactions effected by the Trustee or brokers selected by the Borrower. Upon the Authority’s or the Borrower’s election, such statements will be delivered to that party via the Trustee’s online service and upon electing such service, paper statements will be provided only upon request. The Authority and the Borrower (by executing the Loan Agreement) each waives the right to receive brokerage confirmations of security transactions effected by the Trustee as they occur, to the extent permitted by law. The Authority and the Borrower further understand that trade confirmations for securities transactions effected by the Trustee will be available upon request and at no additional cost and other trade confirmations may be obtained from the applicable broker. In computing the amount in any Fund or Account held by a Fiduciary or the Trustee under the provisions of the Indenture, the Trustee will value obligations purchased as an investment of moneys therein as of the end of each month, calculated as follows: (a) as to investments the bid and asked prices of which are published on a regular basis in The Wall Street Journal (or, if not there, then in the New York Times), the average of the bid and asked prices for such investments so published on or most recently prior to such time of determination; (b) as to investments the bid and asked prices of which are not published on a regular basis in The Wall Street Journal or The New York Times, the average bid price at such price at such time of determination for such investments by any two nationally recognized governmental securities dealers (selected by the Trustee in its absolute discretion) at the time making a market in such investments or the bid price published by a nationally recognized pricing service; (c) as to certificates of deposit and bankers acceptances, the face amount thereof, plus accrued interest; and (d) as to any investment not specified above, the value thereof established by prior agreement among the Borrower and the Trustee. As an alternative to any of the foregoing, the value of any investment may be determined as of the end of each month by the manner currently employed by the Trustee or any other manner consistent with industry standard, including, without limitation, use of any computer pricing serve selected by the Trustee. Notwithstanding the foregoing, the Trustee shall determine the value of the Debt 24 Service Reserve Fund investments no less frequently than semiannually (and monthly from the date of any deficiency until such deficiency is cured). No Fiduciary shall be liable or responsible for making or failing to make any investment authorized by the provisions of the Indenture, in the manner provided in the Indenture, or for any loss resulting from any such investment so made or failure to so make, except for its own negligence. The Trustee may deem investments directed as provided in the Indenture as Qualified Investments without independent investigation thereof. Covenants of the Authority Payment of Bonds. The Authority will duly and punctually pay or cause to be paid, but solely from the Trust Estate, the principal or Redemption Price, if any, of every Bond and the interest thereon, at the dates and places and in the manner provided in the Bonds according to the true intent and meaning thereof. Offices for Payment and Registration of Bonds. The Authority may designate an additional Paying Agent located within or out of the State where Bonds may be presented for payment. Further Assurances. At any and all times the Authority will, so far as it may be authorized or permitted by law, pass, make, do, execute, acknowledge and deliver, all and every such further resolution, acts, deeds, conveyances, assignments, transfers and assurances as may be necessary or desirable for the better assuring, conveying, granting, assigning, confirming and effecting all and singular the proceeds, moneys, rights, interests and collections in the Indenture pledged or assigned or intended so to be, or which the Authority may hereafter become bound to pledge or assign. Power to Issue Bonds and Make Pledges. The Authority is duly authorized pursuant to law to authorize and issue the Bonds and to adopt the Indenture and to pledge the Trust Estate in the manner and to the extent provided in the Indenture. The Trust Estate is and will remain free and clear of any pledge, lien, charge or encumbrance thereon or with respect thereto prior to, or of equal rank with, the pledge created by the Indenture. The Bonds and the provisions of the Indenture are and will be the valid and legally enforceable obligations of the Authority in accordance with the terms of the Indenture. The Authority will at all times, to the extent permitted by law, defend, preserve and protect said pledge of the Trust Estate, and all the rights of the Bond Owners under the Indenture against all claims and demands of all persons whomsoever. Use of Proceeds. The Authority will use and apply the proceeds of Bonds, to the extent not otherwise required by the Indenture to make the Loan for the purposes specified in the Act and the Indenture, and will do all such acts and things necessary to receive and collect when due, all Revenues, and will diligently enforce, and take all steps, actions and proceedings reasonably necessary in the judgment of the Authority for the enforcement of all terms, covenants and conditions of the Loan. The Loan will be made by the Authority from the proceeds of the Bonds concurrently with the issuance of the Bonds and the Deed of Trust securing the Loan will have been executed and recorded either concurrently or prior to the issuance and delivery of the Bonds; provided that: (a) the Deed of Trust will constitute and create a mortgage lien on the Project subject only to Permitted Encumbrances, which further provides a valid security interest in the personal property acquired with proceeds of the Loan and attached to or used or to be used in connection with the operation of the Project, and in all rents, revenues, receipts, income and other moneys received by or payable to the Borrower; and 25 (b) the Borrower shall have marketable title in fee simple to the Property, free and clear of all liens and encumbrances, other than Permitted Encumbrances, which would materially affect the value or usefulness of such Property, as set forth in the policy of title insurance delivered in connection therewith and in a form which is satisfactory to the Authority. Fees and Charges. The Authority shall review and approve such Fees and Charges as it shall deem appropriate to pay each Fiduciary acting in connection with the Indenture and the Bonds. Subject to prior review by the Authority or its Oversight Agent on the Authority’s behalf, the Borrower shall provide the Trustee with a schedule of the Fees and Charges to be paid by the Borrower and of each revision of such schedule, and shall require the Borrower to make payment of such Fees and Charges directly to the Trustee. The Trustee shall promptly deposit all such Fees and Charges so collected in the Administration Fund. The Trustee shall promptly advise the Authority of each and every failure of the Borrower to make payment of Fees and Charges when due. Modification of the Terms of Deed of Trust. The Authority will not consent to the modification of, or modify, the rate or rates of interest of, or the amount or time of payment of any installment of principal of or interest on the Loan on the Project, or the amount or time of payment of any Fees and Charges payable with respect to such Loan, or the security for or any terms or provisions of the Loan on the Project or the Deed of Trust securing the same in a manner detrimental to the Trustee or the Bondowners. Prepayments. The Authority shall not accept, nor permit the Trustee to accept a Prepayment from the Borrower, unless a Coverage Requirement Certificate is provided to the Trustee which, in addition to containing the requirements of the Loan Agreement, also shows that the proceeds of such prepayment received by the Authority shall be in an amount not less than the aggregate of (i) the amount to be prepaid; (ii) any interest and Fees and Charges on the Loan accrued through the date of receipt of the proceeds of the Prepayment remaining unpaid; (iii) to the extent not otherwise paid by the Borrower, the interest that would accrue on the Bonds of such maturity or maturities as are to be designated by the Authority pursuant to the Indenture to be purchased or redeemed with the proceeds of such Prepayment from the date of receipt thereof by the Authority until the applicable optional redemption date of the Bonds so to be purchased or redeemed; (iv) the redemption premium payable on the next applicable optional redemption date on the Bonds so to be purchased or redeemed, if any; and (v) the costs and expenses of the Authority in effecting the purchase or redemption of such Bonds, less the sum of (A) the amount of applicable moneys available for withdrawal from the Debt Service Reserve Fund and the Debt Service Fund with respect to the application to the purchase or redemption of such Bonds in accordance with the terms and provisions of the Indenture, as determined by the Authority, and (B) the amount of any other legally available funds of the Authority transferred or directed by the Authority to be transferred to the Redemption Fund in connection with such purchase or redemption. Disposition of Net Proceeds and Prepayments. Net Proceeds constituting proceeds of a condemnation award, sale of land, or casualty insurance claim with respect to the Project shall be deposited in a special restoration account to be established and held by the Trustee for the Project and the Trustee upon receipt of Net Proceeds shall give written notice to the Authority of such event. Such amounts shall either be applied to the redemption of Bonds or the repair, replacement, restoration or rebuilding of the Project or part thereof as determined in accordance with the Indenture. Prior to the receipt of Net Proceeds by the Trustee, the Trustee will first receive a written direction from the Borrower as to whether such proceeds shall be used to redeem the Bonds or to rebuild the Project as set forth in the Loan Agreement. Upon receipt of such written direction from the Borrower that such Net Proceeds will be used to redeem the Bonds, the Trustee will notify the Authority and the Borrower shall cause the Net Proceeds to be paid to the Trustee no more than 30 days from the date that such Net Proceeds will be used to redeem the Bonds. 26 Amounts in the special restoration account described above shall be applied to the repair, replacement, restoration or rebuilding of the Project if the Borrower will deliver or cause to be delivered to the Trustee within ninety (90) days or such longer period as approved by the Authority of the event giving rise to the Net Proceeds written notice of its determination that such proceeds may be applied to the repair, replacement, restoration or rebuilding of the Project or part thereof in an economical manner, and that such proceeds shall be sufficient, together with any other moneys deposited into such special restoration account for such purpose together with (1) evidence of the Authority’s written consent thereto, and (2) with a report of a management consultant to the effect that following such repair or restoration, the tests set forth in the Loan Agreement with respect to coverage levels in the Coverage Requirement Certificate will be met. Upon compliance with these conditions, the Trustee shall disburse the moneys so deposited for such repair, replacement, restoration or rebuilding, but not in an aggregate amount exceeding the cost thereof, upon receipt of a certificate of a Borrower Representative approved by the Oversight Agent, with a copy to the Authority, stating (i) the amount to be paid, (ii) the name of the person to which payment is to be made, and (iii) that such amount, together with all prior payments from such account, do not exceed the cost of such repair, replacement, restoration or rebuilding; provided that prior to making any such payments, the Trustee shall first have received a certificate of a Borrower Representative approved by the Oversight Agent, with copies to the Authority, stating (i) the estimated cost of such repair, replacement, restoration or rebuilding, (ii) that such repair, replacement, restoration or rebuilding is, in the signer’s opinion, economically practicable with the proceeds of such condemnation award, sale of land or hazard insurance claim, and other moneys, if any, deposited in such account, and (iii) that the plans and specifications, if any, prepared for such repair, replacement, restoration and rebuilding have been approved by the Authority. All disbursements made by the Trustee pursuant to such Borrower’s Certificate shall be presumed to be made properly, and the Trustee shall not be required to see to the application of any payments so made or inquire into the purposes for which such disbursements are made. Any amounts remaining in a special restoration account and not required for the repair, replacement, restoration or rebuilding of the Project, all other Net Proceeds and Prepayments, less the cost and expenses of the Authority incurred in collecting the same and in effecting the purchase or redemption of the Bonds to be purchased or redeemed, shall be deposited in the Redemption Fund and shall be applied to the purchase, payment, retirement or redemption of the Bonds all in accordance with the provisions of the Indenture, provided, however, that any portion of such Net Proceeds or Prepayment which represents due and unpaid principal of, or interest on, or Fees and Charges with respect to, the Loan in each case as determined by the Authority in an Officer’s Certificate delivered to the Trustee, shall be deposited in the Revenue Fund in such amount, if any, as shall be set forth in such Certificate. Enforcement and Foreclosure of Deed of Trust. The Authority will cooperate with the Trustee in connection with the enforcement of all terms, covenants and conditions of the Deed of Trust, including the prompt payment of Revenues. Whenever it shall be necessary in order to protect and enforce the rights of the Authority under the Deed of Trust securing the Loan and to protect and enforce the rights and interest of Bondowners under the Indenture, the Trustee shall commence foreclosure proceedings or pursue other appropriate remedies against the Borrower in default under the provisions of the Deed of Trust and, in protection and enforcement of its rights under the Deed of Trust, may bid for and purchase the Project at any foreclosure or other sale thereof and pursuant thereto or otherwise acquire and take possession of the Project. The Authority (and the Trustee, if acting in enforcing the Deed of Trust) shall be entitled to payment of all of its costs incurred in connection with enforcement of the Deed of Trust, including, but not limited to, legal fees and expenses, from Revenues prior to the use of Revenues for any other purpose under the Indenture. 27 It is expressly understood and acknowledged that, since the Note and Deed of Trust are assigned to the Trustee under the Indenture, it is not intended that the Authority will have any responsibility for foreclosure proceedings. Rather, foreclosure proceedings will be conducted by the Trustee. Any and all liability of the Authority under the Indenture is expressly limited as set forth in the Indenture. Accounts and Reports. The Trustee will keep, or cause to be kept, proper books of record and account in which complete and correct entries shall be made of its transactions and all Funds and Accounts established by or maintained pursuant to the Indenture, which will at all times during normal business hours and upon reasonable notice, be subject to inspection by the Authority, the Trustee, the Borrower and the Owners of an aggregate of not less than five percent (5%) in Principal Amount of the Bonds then Outstanding or their agents or representatives duly authorized in writing. The Authority, or the Oversight Agent on behalf of the Authority, shall, upon receipt from the Borrower of sufficient moneys to provide the same, furnish, without charge, upon written request of any Bondowner, to such Bondowner, (i) a report showing, for the Fiscal Year, with respect to the Bonds, outstanding balances by maturity, redemption history including redemption dates, amount, source of funds, and distribution of the call to the maturities, (ii) a report showing the current status of insurance coverages with respect to the Project, and (iii) the most currently available annual report submitted by the Borrower. For the purposes of this paragraph, “Bondowner” shall mean, in addition to the registered owner of any Bond, any person or entity that claims in writing to the reasonable satisfaction of the Authority to be a beneficial holder of Bonds and specifically requests that reports be sent to it. Creation of Liens. The Authority will not issue any bonds or other evidences of indebtedness, other than the Bonds, secured by a pledge of the proceeds, moneys, rights, interests and collections pledged or held aside by the Authority or by a Fiduciary under the Indenture and, except as may be otherwise provided in the Indenture or a Supplemental Indenture with respect to any supplemental security, shall not create or cause to be created any lien or charge on proceeds, moneys, rights, interests and collections or such moneys on a subordinate, parity or senior basis to the lien created by the Indenture for the benefit of the Bonds; provided, however, that nothing in the Indenture will prevent the Authority from issuing evidences of indebtedness secured by a pledge of such proceeds, moneys, rights, interests and collections to be derived on and after such date as the Trust Estate shall be discharged and satisfied as provided in the Indenture or from issuing notes or bonds of the Authority secured by assets and revenues of the Authority other than the Trust Estate. Tax Covenants. The Authority covenants that it will at all times do and perform all acts and things permitted by law and necessary or desirable in order to assure that interest paid on the Bonds be and remain excluded from gross income for federal income tax purposes. The Authority covenants and agrees that it will not make or permit any use of the proceeds of the Bonds or other funds of the Authority which would cause the Bonds to be “arbitrage bonds” within the meaning of Section 148(a) of the Code, and further covenants that it will observe and not violate the requirements of Sections 145 and 148 of the Code. The Trustee will be entitled to receive and to rely upon a Counsel’s Opinion as to the conformity of any use or proposed use of the proceeds of the Bonds with the requirements of said Sections 145 and 148 of the Code. Arbitrage Covenants; Rebate Fund. Moneys and securities held by the Trustee in the Rebate Fund are not pledged or otherwise subject to any security interest in favor of the Trustee to secure the Bonds or any other payments required to be made under the Indenture or any other document executed and delivered in connection with the issuance of the Bonds. 28 Moneys in the Rebate Fund shall be held separate and apart from all other Funds and Accounts established under the Indenture and shall be separately invested and reinvested by the Trustee, solely at the written direction of the Borrower, in Qualified Investments. The interest accruing thereon and any profit realized therefrom shall be credited to the Rebate Fund, and any loss resulting therefrom shall be charged to the Rebate Fund. The Trustee shall sell and reduce to cash a sufficient amount of such Qualified Investments whenever the cash balance in the Rebate Fund is insufficient for its purposes. Absent a Counsel’s Opinion that the exclusion from gross income for federal income tax purposes of interest on the Bonds will not be adversely affected, the Authority shall cause the Borrower to deposit in the Rebate Fund such amounts as are required to be deposited therein pursuant to the Indenture and the Tax Certificate. All money at any time deposited in the Rebate Fund shall be held by the Trustee in trust for payment to the United States Treasury. In order to provide for the administration of the Arbitrage Covenants of the Indenture, the Borrower shall provide for the employment of independent attorneys, accountants and consultants (the “Rebate Analyst”) compensated on such reasonable basis as the Borrower may deem appropriate and in addition and without limitation of the provisions of the Indenture, the Trustee and the Authority may rely conclusively upon and be fully protected from all liability in relying upon the opinions, determinations, calculations and advice of such Rebate Analyst employed under the Indenture. Supplemental Indentures The Authority may adopt, without the consent of or notice to Bondowners, at any time or from time to time Supplemental Indentures for any one or more of the following purposes, and any such Indenture or Supplemental Indenture will become effective in accordance with its terms upon the filing with the Trustee of a copy thereof certified by an Authorized Officer: (1) to add additional covenants and agreements of the Authority for the purpose of further securing the payment of the Bonds, provided such additional covenants and agreements are not contrary to or inconsistent with the covenants and agreements of the Authority contained in the Indenture; (2) to prescribe further limitations and restrictions upon the issuance of Bonds and the incurring of indebtedness by the Authority; (3) to surrender any right, power or privilege reserved to or conferred upon the Authority by the terms of the Indenture, provided that no such surrender is contrary to or inconsistent with the covenants and agreements of the Authority contained in the Indenture; (4) to confirm as further assurance any pledge under, and the subjection to any lien, claim or pledge created or to be created by, the provisions of the Indenture; (5) to modify any of the provisions of the Indenture or any previously adopted Supplemental Indenture in any other respects, provided that such modifications shall not be effective until after all Bonds Outstanding as of the date of adoption of such Indenture or Supplemental Indenture shall cease to be Outstanding, and all Bonds issued after the date of adoption of such Indenture shall contain a specific reference to the modifications contained in such Indenture; (6) to amend the Indenture to add such provisions as may be necessary or advisable in connection with the substitution of any additional security; provided that any such modification does not materially adversely affect interests of any Bondholders; (7) to amend the Indenture in any and all respects as may be necessary or advisable to implement any amendment of the Code or the provision of any tax legislation enacted in place thereof; (8) to make such amendments to add such other provisions in regard to matters or questions arising out of the Indenture which shall not materially adversely affect the interests of the Owners of the Bonds affected thereby; or (9) to cure any ambiguity or defect or inconsistent provision in the Indenture or to insert such provisions clarifying matters or questions arising under the Indenture as are necessary or desirable; provided that any such modifications do not materially adversely affect the interests of any Bondowners. 29 Powers of Amendment Any modification or amendments of the Indenture and of the rights and obligations of the Authority and of the Owners of the Bonds in any particular may be made by a Supplemental Indenture with, except as set forth in the preceding section entitled “Supplemental Indentures,” the written consent required by the Indenture, of the Owners of at least two-thirds in Principal Amount of the Bonds Outstanding at the time such consent is given; provided, however, that if any such modification or amendment will, by its terms, not take effect so long as any Bonds of any maturity remain Outstanding, the consent of the Owners of such Bonds and maturity shall not be required and such Bonds shall not be deemed to be Outstanding for the purpose of any calculation of the Principal Amount of Outstanding Bonds under the Indenture. In the event that the Supplemental Indenture shall contain provisions which affect the rights and interest of one series of Bonds (but not the others), then the Owners of not less than two-thirds of the Principal Amount of the series of Bonds which are affected by such changes shall have the right from time to time to consent to and approve the execution by the Authority of any Supplemental Indenture deemed necessary or desirable by the Authority for the purposes of modifying, altering, amending, supplementing or rescinding, in any particular, any of the terms or provisions contained in the Indenture and affecting only the Bonds of such series; provided, however, unless approved by the Owners of all of the Bonds of all affected series then Outstanding, nothing therein shall permit or be construed as permitting such items as further provided in the Indenture. No such modification or amendment shall permit a change in the terms of redemption or maturity of the principal of any Outstanding Bond or of any installment of interest thereon or a reduction in the Principal Amount or the Redemption Price thereof or in the rate of interest thereon without the consent of the owner of such Bond, or shall reduce the percentages of Bonds the consent of the Owners of which is required to effect any such modification or amendment. The Trustee may in its discretion determine whether or not in accordance with the foregoing provisions Bonds of any particular maturity would be affected by any modification or amendment of the Indenture and any such determination shall be binding and conclusive on the Authority and all Owners of Bonds. The Trustee may receive an opinion of counsel, including a Counsel’s Opinion, as conclusive evidence as to whether Bonds of any particular maturity would be so affected by any such modification or amendment of the Indenture. Events of Default Each of the following events is declared under the Indenture to be an “Event of Default,” that is to say; if (a) the Authority shall fail to make payment of the principal or Redemption Price of, or Sinking Fund Installment on, any Bond from the Trust Estate after the same shall become due, whether at maturity or upon call for redemption, or otherwise; or (b) the Authority shall fail to make payment of interest on any Bond from the Trust Estate when and as the same will become due; or (c) the Authority shall default in the performance or observance of any other of the covenants, agreements or conditions on its part in the Indenture, any Supplemental Indenture, or in the Bonds contained, and such default shall continue for a period of ninety (90) days after written notice thereof by the Trustee or the Owners of not less than five percent (5%) in Principal Amount of the Outstanding Bonds. 30 Remedies Upon the happening and continuance of any Event of Default, then, and in each such case, subject in any event to the provisions set forth in the paragraph entitled “Enforcement and Foreclosure of Deed of Trust under the Section entitled “Covenants of the Authority,” the Trustee may proceed, and upon the written request of the Owners of not less than twenty-five percent (25%) in Principal Amount of the Outstanding Bonds shall, subject to the Indenture, proceed in its own name, to protect and enforce its rights and the rights of the Bondowners by such of the following remedies as the Trustee shall deem most effectual to protect and enforce such rights: (a) by suit, action or proceeding, enforce all rights of the Bondowners, including the right to require the Borrower to receive and collect Pledged Revenues adequate to carry out the covenants and agreements as to, and pledge of, such Pledged Revenues, and to require the Borrower to carry out any other covenant or agreement with Bondowners and to perform its duties under the Loan Agreement; (b) by bringing suit upon the Bonds; (c) by action or suit, require the Borrower to account as if the Borrower were the trustee of an express trust for the Owners of the Bonds; or (d) by action or suit, enjoin any acts or things which may be unlawful or in violation of the rights of the Owners of the Bonds. Upon the happening and continuance of any Event of Default specified in clause (a) or (b) under the heading “Events of Default” above, then, and in each such case, subject in any event to the provisions set forth in the paragraph entitled “Enforcement and Foreclosure of Deed of Trust under the Section entitled “Covenants of the Authority,” the Trustee may, and upon the written request of the Owners of not less than twenty-five percent (25%) in Principal Amount of the Outstanding Bonds, shall declare all Bonds due and payable, and if all defaults shall be made good, then, with the written consent of the Owners of not less than twenty-five percent (25%) in Principal Amount of the Outstanding Bonds, annul such declaration and its consequences. Priority of Payments After Event of Default In the event that the funds held by the Trustee and Paying Agent will be insufficient for the payment of principal or Redemption Price of and interest then due on the Bonds, such funds (other than funds held for the payment or redemption of particular Bonds which have theretofore become due at maturity or by call for redemption) and any other moneys received or collected by the Trustee acting pursuant to the Indenture, after making provision for the payment of any expenses necessary in the opinion of the Trustee or the Authority to protect the interests of the Owners of the Bonds, and for the payment of the fees, charges and expenses and liabilities incurred and advances made by the Trustee or the Authority in the performance of their duties under the Indenture, including reasonable attorneys’ fees, will be applied as follows: (a) Unless the principal of all the Bonds shall not have become or have been declared due and payable, First: To the payment to the persons entitled thereto of all installments of interest then due on the Bonds in the order of the maturity of such installments, and, if the amount available shall not be sufficient to pay in full any installment, then to the payment thereof ratably, according to the amounts due on such installment, to the persons entitled thereto, without any discrimination or preference; and Second: To the payment to the persons entitled thereto of the unpaid Principal Amounts or Redemption Price of any Bonds which shall have become due, whether at maturity or by call for redemption, in the order of their due dates and, if the amounts available shall not be sufficient to pay in full all the Bonds due on any date, then to the payment thereof ratably, according to the 31 amounts of Principal Amounts or Redemption Price due on such date, to the persons entitled thereto, without any discrimination or preference. (b) If the principal of all of the Bonds shall have become or have been declared due and payable, to the payment of the principal of and interest then due and unpaid upon the Bonds without preference or priority of principal over interest or of interest over principal, or of any installment of interest over any other installment of interest, or of any Bond over any other Bond, ratably, according to the amounts due respectively for principal and interest, to the persons entitled thereto without any discrimination or preference except as to any difference in the respective rates of interest specified in the Bonds. Money to be applied by the Trustee as set forth above shall be applied at such times as the Trustee shall determine. Limitations of Rights of Bondowners The Owners of a majority in Principal Amount of the Bonds shall have the right, by an instrument or concurrent instruments in writing executed and delivered to the Trustee, to direct the method of conducting all remedial proceedings to be taken by the Trustee under the Indenture, provided that such direction shall not be otherwise than in accordance with law or the provisions of the Indenture and that the Trustee shall have the right to decline to follow any directions which in the opinion of the Trustee would be unjustly prejudicial to Bondowners not parties to such direction. No Owner of any Bond will have any right to institute any suit, action or other proceedings under the Indenture, or for the protection or enforcement of any right under the Indenture or any right under law, unless such Owner will have given to the Trustee written notice of the Event of Default or breach of duty on account of which suit, action or proceeding is to be taken, and unless the Owners of not less than twenty-five percent (25%) in Principal Amount of the Bonds of the series affected then Outstanding shall have made written request of the Trustee after the right to exercise such powers or right of action, as the case may be, will have accrued, and will have afforded the Trustee a reasonable opportunity either to proceed to exercise the powers in the Indenture granted or granted under law or to institute such action, suit or proceeding in its name and unless, also, there shall have been offered to the Trustee reasonable security and indemnity against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee shall have refused or neglected to comply with such request within a reasonable time; and such notification, request and offer of indemnity are in every such case at the option of the Trustee conditions precedent to the execution of the powers under the Indenture or for any other remedy under the Indenture or under law. It is understood and intended that no one or more Owners of the Bonds secured under the Indenture shall have any right in any manner whatever by his or their action to affect, disturb or prejudice the security of the Indenture, or to enforce any right under the Indenture or under law with respect to the Bonds or the Indenture, except in the manner therein provided, and that all proceedings shall be instituted, had and maintained in the manner herein provided and for the benefit of all Owners of the Outstanding Bonds. The obligation of the Authority shall be absolute and unconditional to pay the principal and Redemption Price of and interest on the Bonds to the respective Owners thereof at the respective due dates thereof, and nothing in the Indenture will affect or impair the right of action, which is absolute and unconditional, of such Owners to enforce such payment. 32 Remedies Not Exclusive No remedy conferred upon or reserved to the Trustee or to the Owners of the Bonds under the Indenture is intended to be exclusive of any other remedy or remedies, and each and every such remedy shall be cumulative and shall be in addition to any other remedy given under the Indenture or now or hereafter existing at law or in equity or by statute. Limited Liability of the Authority The obligations of the Authority with respect to the Bonds and under the Indenture, the Loan Agreement and the Regulatory Agreement are not general obligations of the Authority or its members but are special, limited obligations of the Authority payable by the Authority solely from the Trust Estate and are not a debt, nor a loan of the credit, of the State or any of its political subdivisions, and the Bonds shall not be construed to create any moral obligation on the part of the Authority, members of the Authority, the State or any political subdivision thereof with respect to the payment thereof. The Bonds do not constitute an indebtedness within the meaning of any constitutional or statutory debt limitation, and the issuance of the Bonds shall not directly or indirectly or contingently obligate the Authority, members of the Authority, the State or any political subdivision thereof to levy or to pledge any form of taxation whatever therefor or to make any appropriation for their payment, and no Bondholder has the right to compel any exercise of any taxing power of the Authority, members of the Authority or the State. Nothing contained in the Bonds or in the Indenture shall be considered as assigning or pledging any funds or assets of the Authority other than the Trust Estate; and neither the faith and credit of the Authority, members of the Authority, the State nor of any other political subdivision of the State are pledged to the payment of the principal of or interest on the Bonds. No failure of the Authority to comply with any term, condition, covenant or agreement in the Indenture or in any document executed by the Authority in connection with the Project, or the issuance, sale and delivery of the Bonds shall subject the Authority to liability for any claim for damages, costs or other charge except to the extent that the same can be paid or recovered from the Trust Estate. The Authority shall not be required to advance any moneys derived from any source other than the Trust Estate for any of the purposes of the Indenture, the Loan Agreement or the Regulatory Agreement, whether for the payment of the principal or redemption price of, or interest on, the Bonds, the payment of any fees or administrative expenses or otherwise. Neither the Borrower, the Trustee nor any Bondholder shall look to the Authority or members of the Authority for damages as a result of the failure of the Authority to perform any covenant, undertaking or obligation under the Indenture, the Loan Agreement, the Regulatory Agreement, the Bonds or any of the other documents, or as a result of the incorrectness of any representation made by the Authority in any of such documents, nor for any other reason. Although such documents shall not give rise to any pecuniary liability of the Authority, an action or proceeding (other than a claim for monetary damages) may be brought against the Authority or any of its officers or employees to enforce the provisions of any such documents which the Authority is obligated to perform and the performance of which the Authority has not assigned to the Trustee or another person. As a condition precedent to the Authority proceeding pursuant to the provisions under this heading, the Authority shall have received satisfactory indemnification. All covenants, stipulations, promises, agreements and obligations of the Authority contained in the Indenture shall be deemed to be those of the Authority and not of any board member, director, agent, officer or employee of the Authority in its governmental or his or her individual capacity, and no recourse shall be had for the payment of the principal or Redemption Price of or interest on the Bonds or for any 33 claim based thereon or on the Indenture against any board member, director, agent, officer or employee of the Authority or any person executing the Bonds. THE LOAN AGREEMENT The following is a summary of the Loan Agreement relating to the Loan. This summary does not purport to be complete and is qualified in its entirety by reference to the Loan Agreement, which is available from the Trustee upon request, and to Appendix A for the definition of certain terms used herein. Any capitalized terms not otherwise defined herein or in Appendix A are as defined in the Indenture, the Loan Agreement or the Regulatory Agreement. Amount and Source of Loan The Authority makes to the Borrower and agrees to fund, and the Borrower accepts from the Authority, upon the terms and conditions set forth in the Loan Agreement and in the Indenture, the Loan in an amount equal to the principal amount of the Bonds and agrees that the proceeds of the Loan will be applied and disbursed in accordance with the Indenture and written instructions of the Authority provided to the Trustee on the Closing Date and when the Trustee acknowledges receipt of the proceeds of the Bonds and the conditions specified in the Loan Agreement and in the Indenture have been satisfied. Loan Repayment The Loan will be evidenced by the Note which shall be executed by the Borrower in the form attached to the Loan Agreement. The Borrower agrees to pay to the Trustee, on behalf of the Authority, the principal of, premium (if any) and interest on the Loan at the times, in the manner, in the amount and at the rates of interest provided in the Note and the Loan Agreement. To secure its obligations to repay the Loan, the Borrower will grant the Authority a security interest in the Project pursuant to the terms of the Deed of Trust and will take all actions necessary to perfect such security interests in the Project. In order to satisfy its obligations under the Loan Agreement, the Borrower agrees to pay to the Trustee (i) on or prior to the thirteenth (13th) day of each month, commencing in August 2015, from budgeted Net Operating Revenues from the prior month, amounts sufficient to make the monthly deposits required by paragraphs (a) through (e) under the heading “THE INDENTURE—Revenue Fund” herein and (ii) on or prior to the date that is 45 days following the end of each Bond Year, all remaining budgeted Net Operating Revenues from such prior Bond Year. The Borrower agrees to pay, in repayment of the Loan, the amounts set forth above to the Trustee for the account of the Authority until the principal of, premium (if any) and interest on the Bonds shall have been paid or provision for payment shall have been made in accordance with the Indenture, in federal or other immediately available funds at the corporate trust office designated by the Trustee, and to cause the Trustee to apply such amounts to pay (i) the interest on the Bonds as it becomes due and (ii) the principal of and redemption premium, if any, on the Bonds as it becomes due (whether at maturity, by prior redemption or otherwise) in accordance with the terms of the Indenture. The Borrower may remit such funds net of accrued interest on investments on the funds and accounts held under the Indenture. In addition, the Borrower agrees to repay the principal of the Loan, plus interest accrued thereon until the date fixed for redemption of the Bonds to be redeemed with such repayment, in the amounts and at the times specified in the Loan Agreement. The Borrower further agrees to pay or cause to be paid all taxes and assessments, general or special, including, without limitation, all ad valorem taxes, concerning or in any way related to the Project, or any part thereof, and any other governmental charges and impositions whatsoever, foreseen or unforeseen, and all utility and other charges and assessments; provided, however, that the Borrower 34 reserves the right to contest in good faith the legality of any tax or governmental charge concerning or in any way related to the Project. The Borrower agrees to timely pay the premiums or other amounts required to maintain the insurance specified in the Loan Agreement. The Borrower further agrees to pay, until the principal of and interest on all Outstanding Bonds shall have been fully paid, to the Trustee for deposit in the Accounts of the Administration Fund established by the Indenture such amounts as the Trustee may from time to time request for the fees and ordinary expenses of the Trustee and the Paying Agent, the annual fees and expenses of the Oversight Agent as provided in the Administration Agreement, and into the Borrower Administration Fee Account of the Administration Fund the Borrower Administration Fee, pursuant to the Indenture; provided that the Trustee fees and expenses incurred in connection with the enforcement of the Regulatory Agreement and reasonable compensation or reimbursement for extraordinary services, indemnification and expenses of the Trustee, as required by the Indenture, shall be paid upon demand of the Trustee. The Borrower agrees to pay the cost of any Rebate Analyst in connection with the calculation of rebate (within the meaning of Section 148(f) of the Code) and to pay to the Trustee all amounts required to be remitted to the United States. The Borrower agrees to the establishment of the Repair and Replacement Fund and the Surplus Fund. Amounts deposited in the Surplus Fund shall be used to make the deposits to remedy deficiencies in the Debt Service Fund, the Debt Service Reserve Fund, the Rebate Fund, the Administration Fund and the Repair and Replacement Fund. Nature of the Borrower’s Obligations The Borrower shall repay the Loan pursuant to the terms of the Note irrespective of any rights of set-off, recoupment or counterclaim the Borrower might otherwise have against the Authority, the Trustee or any other person. The Borrower will not suspend, discontinue or reduce any such payment or (except as expressly provided in the Loan Agreement) terminate the Loan Agreement for any cause, including, without limiting the generality of the foregoing, (i) any delay or interruption in the operation of the Project; (ii) the failure to obtain any permit, order or action of any kind from any governmental agency relating to the Loan or the Project; (iii) any event constituting force majeure; (iv) any acts or circumstances that may constitute commercial frustration of purpose; (v) the termination of the Loan Agreement; (vi) any change in the laws of the United States of America, the State or any political subdivision thereof; or (vii) any failure of the Authority to perform or observe any covenant whether expressed or implied, or to discharge any duty, liability or obligation arising out of or connected with the Note, the Loan Agreement, the Regulatory Agreement or any other contract with the Borrower; it being the intention of the parties that, as long as the Note or any portion thereof remains outstanding and unpaid, the obligation of the Borrower to repay the Loan and provide such moneys shall continue in all events. The provisions of Loan Agreement summarized in this paragraph shall not be construed to release the Authority from any of its obligations under the Loan Agreement, the Trustee from any of its obligations under the Indenture, or, except as provided in the Loan Agreement, to prevent or restrict the Authority from asserting any rights which it may have against the Borrower under the Note or the Deed of Trust or under any provision of law or to prevent or restrict the Borrower, at its own cost and expense, from prosecuting or defending any action or proceeding by or against the Authority or the Trustee or taking any other action to protect or secure its rights. 35 Borrower Not to Dispose of Assets; Conditions Under Which Exceptions Permitted The Borrower agrees that during the term of the Loan Agreement it will not dispose of all or substantially all of its assets nor consolidate with nor merge into any entity unless: (i) the acquirer of its assets or the entity with which it shall consolidate or into which it shall merge shall be (A) an organization described in Section 501(c)(3) of the Code that agrees to operate the Project in a manner that does not constitute an unrelated trade or business of such organization or a governmental unit (as described in Section 145 of the Code) or (B) an entity that will not, in the opinion of Bond Counsel, adversely affect the exclusion of interest on the Bonds from the gross income of the owners of the Bonds for purposes of federal income taxation and is permissible under State law; (ii) such acquiring or remaining entity shall assume in writing all of the obligations of the Borrower under the Loan Agreement, the Regulatory Agreement, the Continuing Disclosure Agreement, the Note and the Deed of Trust; (iii) the Authority, after having consulted with such counsel or advisor as deemed by the Authority to be necessary, shall have consented in writing to such transfer, such consent not to be unreasonably withheld; and (iv) the written instrument or instruments evidencing such assumption are promptly provided to the Trustee and the Authority. In no event shall the Borrower sell the Project for an amount that, when added to the amount of all moneys held in the funds and accounts established under the Indenture that are legally available to redeem Outstanding Bonds, is less than the sum of one-hundred percent (100%) of the Outstanding principal amount of the Bonds plus accrued interest, unless the Borrower obtains and provides to the Trustee the written consent to such sale of one-hundred percent (100%) of the Owners of the Outstanding Bonds. This provision shall not be amended without the written approval of one-hundred percent (100%) of the Owners of the Outstanding Bonds. Cooperation in Enforcement of Regulatory Agreement The Borrower covenants and agrees as follows: (a) to comply with all provisions of the Regulatory Agreement; (b) to advise the Authority, the Trustee and the Oversight Agent in writing promptly upon learning of any default with respect to the covenants, obligations and agreements of the Borrower set forth in the Regulatory Agreement; (c) upon written direction by the Authority, the Oversight Agent or the Trustee, to cooperate fully and promptly with the Authority, the Oversight Agent and the Trustee in enforcing the terms and provisions of the Regulatory Agreement; and (d) to file in accordance with the time limits established by the Regulatory Agreement all reports and certificates required thereunder. Neither the Trustee nor the Authority shall incur any liability in the event of any breach or violation of the Regulatory Agreement by the Borrower, and the Borrower agrees to indemnify and hold harmless the Authority and the Trustee from any claim or liability, joint or several, for such breach pursuant to the Loan Agreement. Additional Instruments The Borrower covenants to execute and deliver such additional instruments and to perform such additional acts as may be necessary, in the opinion of the Authority or the Trustee, to carry out the intent of the Loan and the Note or to perfect or give further assurances of any of the rights granted or provided for in the Loan and the Note. 36 Books and Records; Annual Reports The Borrower covenants to grant the Authority, the Oversight Agent and the Trustee or their duly authorized representatives, access to the books and records of the Borrower pertaining to the Loan and the Project during normal business hours and upon prior notice, and to make such books and records available for audit and inspection to the Authority, the Oversight Agent, the Trustee and their duly authorized representatives at reasonable times and under reasonable conditions. Prior to the delivery date and at least 60 days prior to the beginning of each fiscal year of the Borrower, the Borrower shall prepare an annual budget and submit such budget for approval by the Authority and the Oversight Agent. Such annual budget shall provide for Net Operating Revenues, including projected interest income on the Debt Service Reserve Fund, at least equal to (i) 1.30 times scheduled debt service on the Bonds and (ii) 1.00 times the sum of (A) the scheduled debt service on the Bonds in such fiscal year, (B) the annual fees of the Trustee and the Oversight Agent for such fiscal year, (C) amounts necessary to replenish the amount on deposit in the Repair and Replacement Fund to the amount required by the Indenture, (D) amounts necessary to replenish any withdrawal from the Debt Service Reserve Fund, and (E) an amount sufficient to pay the Authority Annual Fee and the fees and expenses of the Fiduciaries. Within 20 days of receiving such annual budget, the Authority, and the Oversight Agent shall provide comments (not inconsistent with the requirements of the Loan Agreement and the Regulatory Agreement), if any (including any suggested changes acceptable to the Oversight Agent), in writing to the Borrower. The Borrower shall attempt in good faith to address comments and concerns of the Authority in its final budget. The Borrower shall prepare a revised annual budget and provide such revised budget to the Authority and the Oversight Agent for their review and comment. The Borrower shall provide a copy of the final annual budget to the Authority and the Oversight Agent prior to the beginning of the Borrower’s fiscal year. In the event the annual budget as adopted does not provide for the coverage set forth in the second sentence of this paragraph, then in the case of a failure to meet the coverage requirement set forth in subsection (i) of said sentence, the Owners of a majority in Outstanding Principal Amount of the Bonds each shall have the right, in addition to all other rights provided under this Loan Agreement and the Indenture, to direct the Borrower to remove the Project Manager and appoint a Project Manager acceptable to the Authority and such Owners. Within 20 days after the last day of each quarter, the Borrower shall prepare a statement for the immediately preceding quarter for review by the Authority and the Oversight Agent, which will include statement of income, balance sheet, cashflow, budget variances, occupancy rates, rental activity and rental rates for the Project. Within 60 days after the last day of each fiscal year of the Borrower, the Borrower will provide a certificate to the Authority and the Oversight Agent, that the Borrower has made a review of its activities during the preceding fiscal year for the purpose of determining whether or not the Borrower has complied with all of the terms, provisions and conditions of the Loan Agreement, the Regulatory Agreement and the Deed of Trust and will certify that the Borrower has kept, observed, performed and fulfilled each and every covenant, provision and condition of the Loan Agreement, the Regulatory Agreement and the Deed of Trust on its part to be performed and is not in default in the performance or observance of any of the terms, covenants, provisions or conditions thereof, or if the Borrower shall be in default then such certificate shall specify all such defaults and the nature thereof. All affordability restrictions required under the Regulatory Agreement shall be subject to review by the Oversight Agent, and the Authority. The Borrower also agrees that Bondholders, upon written request, may receive information on the Project and the Borrower, including audited financial statements, from the Oversight Agent. 37 Notice of Certain Events The Borrower covenants to advise the Authority, the Oversight Agent and the Trustee promptly in writing of the occurrence of any Event of Default under the Loan Agreement or any event which, with the passage of time or service of notice, or both, would constitute an Event of Default under the Loan Agreement, specifying the nature and period of existence of such event and the actions being taken or proposed to be taken with respect thereto. In addition, the Borrower covenants to advise the Authority, the Oversight Agent and the Trustee promptly in writing of the occurrence of any default under the Loan Agreement or of the occurrence of an Act of Bankruptcy. Consent to Assignment The Authority has made an assignment to the Trustee under the Indenture for the benefit of the Owners of the Bonds of all rights and interest of the Authority in and to the Loan Agreement (except its rights under the Loan Agreement to be provided certain information with respect to the Project, to be indemnified and to be paid its fees and expenses), the Note, and the Deed of Trust; and the Borrower consents to all such assignments. Title to the Project The Borrower has fee title to the Property and title to the Improvements free and clear of any lien or encumbrance except for (i) liens for non-delinquent assessments and taxes not yet due or which are being contested in good faith by appropriate proceedings; (ii) the Regulatory Agreement; (iii) the Deed of Trust; (iv) the Assignment and Assumption Agreement, (v) the Supplemental Regulatory Agreement (vi) the Subordination Agreement and (vii) any other Permitted Encumbrances. On or prior to the Closing Date as required by the Loan Agreement, the Borrower shall cause to be delivered to the Trustee and the Authority one or more ALTA title policies, insuring the lien interests of the Authority and the Trustee as the insureds, as their respective interests may appear under the Deed of Trust. Operation of the Project The operation of the Project in the manner contemplated on the Closing Date and as described in the Loan Agreement do not conflict with any zoning, water or air pollution or other ordinance, order, law or regulation applicable thereto; the Borrower will cause the Project to be operated in accordance with all applicable federal, state and local law or ordinances (including rules and regulations) relating to zoning, building, safety, and environmental quality and will obtain and maintain in effect any licenses, permits, franchises or other governmental authorizations necessary for the operation of the Project. Continuing Disclosure The Borrower 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 Loan Agreement, failure of the Borrower to comply with the Continuing Disclosure Agreement shall not be considered an Event of Default under the Indenture or the Loan Agreement; however, the Trustee may (and, at the request of any Participating Underwriter (as defined in the Continuing Disclosure Agreement), or the holders of at least 25% in aggregate principal amount of Outstanding Bonds, subject to the payment of its fees and expenses, including reasonable attorneys’ fees, shall), or any Bondholder may, take such actions as may be necessary and appropriate, including seeking specific performance by court order, to cause the Borrower to comply with its continuing disclosure obligations under the Continuing Disclosure Agreement. 38 Minimum Rents; Coverage Requirement Certificate The Borrower shall, at all times while any of the Bonds remain outstanding, fix, prescribe and collect rents, fees and charges in connection with the Project, so as to yield Net Operating Revenues, including any earnings on the Debt Service Reserve Fund, for the immediately preceding 12 month period that will result in a Coverage Ratio at least equal to 1.30 (rounded up to the nearest hundredth) with respect to the Bonds debt service. The Borrower shall file with the Authority, the Oversight Agent and the Trustee and S&P (if S&P is then rating the Bonds), a Coverage Requirement Certificate demonstrating compliance with the Loan Agreement: (i) within 60 days of the last day of the first six months of each fiscal year based on unaudited financial statements, and (ii) within 100 days of the last day of each fiscal year beginning with fiscal year 2016 based on audited financial statements. In the event such coverage requirements are not satisfied, then the Authority shall have the right to direct the Borrower to remove and replace the Project Manager in the same manner as set forth in the Loan Agreement. Public Liability and Workers’ Compensation Insurance Public Liability Insurance. The Borrower shall maintain or cause to be maintained so long as Bonds are Outstanding under the Indenture, a commercial general liability coverage, including products, completed operations, contractual, bodily injury, personal injury, and property damage in the amount of at least Five Million Dollars ($5,000,000) combined single limits, naming the Authority, members of the Authority, the Trustee and their members, officers, officials, employees, volunteers, agents, and representatives as additional insureds. All such insurance (i) shall be primary insurance and not contributory with any other insurance which the Authority, the Trustee or their members, officers, officials, employees, volunteers, agents, or representatives may have; (ii) shall contain no special limitations on the scope of protection afforded to the Authority, the Trustee and their members, officers, officials, employees, volunteers, agents, and representatives; (iii) shall be “per occurrence” rather than “claims made” insurance (in the event the Borrower is unable to obtain such policy, or believes that such policy’s premium is not reasonable, the Borrower shall submit proof of such contention to the Authority, upon which event the Authority may, after review of such information, authorize a “claims made” policy for the Project); (iv) shall apply separately to each insured against whom claim is made or suit is brought, except with respect to the limits of the insurer’s liability; (v) shall provide that the policy will not be canceled or limited in scope by the insurer or the Borrower’s contractor unless there is a minimum of thirty (30) days prior written notice by certified mail, return receipt requested to the Authority and the Oversight Agent; (vi) shall be written by an insurer with a Best rating of not less than B+; and (vii) shall be endorsed to state that any failure to comply with the reporting provisions of the policies shall not affect coverage provided to the Authority and its members, officers, officials, employees, volunteers, agents and representatives. None of the above-described policies shall include a deductible or self-insured retention amount of more than Ten Thousand Dollars ($10,000) unless approved in writing by an authorized representative of the Authority upon the advice of the Oversight Agent. Such insurance may be maintained as part of or in conjunction with any other insurance coverage carried by the Borrower. The Net Proceeds of such liability insurance shall be applied by the Borrower toward extinguishment or satisfaction of the liability with respect to which the Net Proceeds of such insurance shall have been paid. Workers’ Compensation Insurance. The Borrower shall maintain or cause to be maintained to the extent required by law so long as Bonds are Outstanding under the Indenture, workers’ compensation insurance, including Employer’s Liability Coverage, with limits not less than $1,000,000 per accident, 39 issued by a responsible carrier authorized under the laws of the State to insure employers against liability for compensation under the Labor Code of the State, or any act enacted as an amendment or supplement thereto or in lieu thereof, such workers’ compensation insurance to cover all persons (if any) employed by the Borrower in connection with the Project and to cover full liability for compensation under such act. Such insurance shall be endorsed to include a waiver of subrogation rights against the Authority and its members, officers, officials, employees, volunteers, agents and representatives. Such insurance shall be underwritten by California licensed insurers with A.M. Best ratings of not less than B+. Such insurance may be maintained as part of or in conjunction with any other insurance coverage carried by Borrower. Casualty Insurance The Borrower will procure and maintain, or cause to be procured and maintained, so long as Bonds are Outstanding under the Indenture, all risk property and casualty insurance against loss or damage to the Improvements located on the Project, in an amount at least equal to one hundred percent (100%) of the replacement value of the Improvements. Such insurance will, as nearly as practicable, cover loss or damage by explosion, windstorm, riot, aircraft, vehicle damage, smoke, fire, and such other hazards (excluding earthquake and flood coverage) as are normally covered by such insurance. Such insurance will be subject to such deductibles as are customarily maintained by municipalities with respect to works and properties of a like character, but in any case will not exceed $100,000. Such insurance may be maintained as part of or in conjunction with any other insurance coverage carried by the Borrower. Any insurer providing such insurance must be rated at least “B+” by A.M. Best. Such insurance shall be reviewed by an independent insurance consultant retained by the Borrower at least once every other year, and shall be maintained as recommended by the consultant as customarily obtained by similarly situated entities. The Net Proceeds of such insurance will be applied as provided in the Indenture. Any such insurance policy shall provide that it shall not be changed, modified, amended or cancelled without at least 30 days written notice to the Borrower and the Trustee. Rental Interruption Insurance The Borrower will procure and maintain, or cause to be procured and maintained, so long as Bonds are Outstanding under the Indenture, rental interruption or use and occupancy insurance to cover the Borrower’s loss, total or partial, of payments for the Loan resulting from the loss, total or partial, of the use of the Improvements located on the Project as a result of any of the hazards covered in the insurance required by the Loan Agreement, in an amount at least equal to the sums of (i) Maximum Annual Debt Service on the Bonds and (ii) budgeted Operation and Maintenance Costs coming due and payable during the current Fiscal Year; provided, however, that with respect to budgeted Operation and Maintenance Costs, in the first Fiscal Year such amount will be as agreed to by the Borrower and the Oversight Agent and that in any future Fiscal Year such amount will be the greater of the budgeted Operation and Maintenance Costs or the prior Fiscal Year’s actual Operation and Maintenance Costs. Such insurance may be maintained as part of or in conjunction with any other insurance coverage carried by the Borrower. Any insurer providing such insurance must be rated at least “B+” by A.M. Best. The Net Proceeds of such insurance, if any, will be paid to the Trustee and deposited in the Debt Service Fund under the Indenture, and will be credited towards the payment of the Bonds as the same become due and payable in accordance with the Indenture. Any such insurance policy shall provide that it shall not be changed, modified, amended or cancelled without at least 30 days written notice to the Borrower and the Trustee. Title Insurance On or before the Closing Date, the Borrower shall, at its expense (a) cause the Deed of Trust to be recorded in the Office of the Orange County Recorder, and (b) obtain an ALTA title insurance policy 40 naming the Trustee as its interests may appear under the Deed of Trust and insuring the Borrower’s fee simple title to the Project, subject only to Permitted Encumbrances, in an amount at least equal to the aggregate principal amount of the Bonds. All Net Proceeds received under any such title insurance policy shall be deposited with the Trustee, as assignee of the Borrower under the Indenture, and applied as set forth in the Indenture. Repair and Replacement The Borrower agrees to cause to be performed a preliminary inspection by a consultant experienced in mobilehome parks, selected by the Borrower and approved by the Authority, of the Project at such time or times as the Oversight Agent may reasonably determine to be necessary based on information with respect to the Project available to the Oversight Agent, and, if it is determined that further inspection is needed after a preliminary inspection, such further inspection, providing a report of a licensed contractor qualified to do the type of work proposed to be performed to identify any repairs, replacements or capital improvements required to maintain the Project as a safe and sanitary mobile home park in accordance with the Loan Agreement, the Regulatory Agreement and all associated agreements. Any such inspections shall be at the expense of the Borrower. All such repairs, replacements or capital improvements and costs of inspections will be paid for from moneys on deposit in the Repair and Replacement Fund to the extent of the moneys deposited in such Fund. In the event that expenses are incurred, or in the opinion of the Borrower ought properly be incurred for replacement or additional improvements on the Project, for other capital facilities which may be of direct or indirect benefit to the Project which are not identified in a report of a licensed contractor qualified to do the type of work proposed to be performed (pursuant to the Loan Agreement), beyond ordinary and necessary maintenance and repairs which are paid as part of the Operation and Maintenance Expenses, the Borrower shall submit to the Oversight Agent a request for payment or reimbursement of such costs. The request shall (a) identify the total amount of such costs to be paid pursuant to such requisition, including all items of cost in such detail as may be available to the Borrower, (b) state with respect to such disbursement (i) the amount to be disbursed for payment of such costs, and (ii) that each item of costs identified therein has been properly incurred and has not been the basis of any previous disbursement; and (c) be accompanied by an invoice, if any. Upon approval by the Oversight Agent of such a request from the Borrower, the Oversight Agent shall submit or cause to be submitted the request to the Trustee pursuant to the Indenture for payment of such costs from the Repair and Replacement Fund. Moneys deposited in the Restricted Account of the Repair and Replacement Fund on the Closing Date, if any, shall be applied to pay for or reimburse the Borrower for initial capital improvements, if any, to the Project as set forth in Exhibit C to the Loan Agreement, as said Exhibit C may be amended from time to time with the approval of the Borrower and the Oversight Agent, or as described in the preceding paragraph. Moneys deposited in the Unrestricted Account of the Repair and Replacement Fund may be used for any expense described in the preceding paragraphs. With respect to each expenditure from the Repair and Replacement Fund, the Borrower will file a requisition with the Oversight Agent. The requisition shall (a) identify the total amount of such costs to be paid pursuant to such requisition, including all items of cost in such detail as may be available to the Borrower, (b) state with respect to such disbursement (i) the amount to be disbursed for payment of such costs, and (ii) that each item of costs identified therein has been properly incurred and has not been the basis of any previous disbursement, and (c) be accompanied by an invoice, if any. Upon approval by the Oversight Agent of such a requisition from the Borrower, the Oversight Agent shall submit or cause to be submitted the request to the Trustee pursuant to the Indenture for payment of such costs from the Repair and Replacement Fund. 41 If requested by the Oversight Agent pursuant to the Loan Agreement, the Borrower shall cause an updated report with respect to the physical needs of the Project (the “Updated Physical Assessment Report”) to be prepared by a qualified professional approved by the Oversight Agent and a copy of said Updated Physical Assessment Report shall be filed with the Oversight Agent and the Authority. Thereafter, to the extent specified in the Updated Physical Assessment Report, the Borrower shall cause to be deposited into the Repair and Replacement Fund pursuant to the Indenture the amount specified in said Updated Physical Assessment Report. Other Debt, No Recourse Debt The Borrower represents, covenants and warrants that: (a) other than the Loan and the Other Borrower Obligations, there are no other debt obligations of the Borrower with a maturity of greater than one year; (b) the Borrower is not a debtor, guarantor or otherwise an obligor under any loan arrangement, promissory note or other evidence of indebtedness that is a recourse obligation against the Borrower; and (c) the Borrower shall not incur any recourse debt nor shall the Borrower act as guarantor or enter into any other arrangement if by doing so would subject the Borrower to recourse liability. Replenishment of Debt Service Reserve Fund The Borrower agrees to make payments sufficient to restore the Debt Service Reserve Fund to the Debt Service Reserve Fund Requirement (a) in 12 consecutive equal monthly installments beginning in the month following any withdrawal from the Debt Service Reserve Fund which causes the amount therein to be less than the Debt Service Reserve Fund Requirement, or (b) in four consecutive equal monthly installments beginning in the month following any calculation of the value of the Debt Service Reserve Fund at an amount less than the Debt Service Reserve Fund Requirement. Project Management Agreements Any project management agreement shall permit the Borrower to remove the Project Manager (without penalty) for nonperformance or if the Borrower fails to meet the ratio covenant set forth in the Section entitled “Minimum Rents; Coverage Requirement Certificate” (unless it could be established that causes outside the operator’s control were causing the ratio covenant violation). If the Borrower removes the Project Manager, the Borrower shall promptly appoint a replacement Project Manager acceptable to the Oversight Agent and the Authority, and pending such appointment, may act as Project Manager on a temporary basis. Operating Fund The Borrower shall have an operating cash balance for the Project equal to at least 15 days of annual budgeted Operation and Maintenance Costs as of the Closing Date and as of the last day of each fiscal year (such cash balance shall be exclusive of any amounts in the funds and accounts held by the Trustee or funds representing resident security deposits). Events of Default Under the Loan Agreement Each of the following is an “Event of Default” under the Loan Agreement. (a) The Borrower shall fail to pay when due the amounts required to be paid under the Loan Agreement or the Note when the same shall become due and payable in accordance with the terms of the Loan Agreement or the Note, including a failure to repay any amounts which have been previously paid 42 but are recovered, attached or enjoined pursuant to any insolvency, receivership, liquidation or similar proceedings; or (b) The Borrower shall fail to perform or observe any of its covenants or agreements contained in the Loan Agreement, the Regulatory Agreement, the Indenture, the Note or the Deed of Trust, other than as specified in paragraph (a) above, and such failure shall continue during and after the period specified below; or (c) Any representation or warranty of the Borrower shall be determined by the Trustee or the Authority to have been false in any material respect when made; or (d) The Borrower shall generally not pay its debts as they become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors or shall institute any proceeding or voluntary case seeking to adjudicate it a bankrupt or insolvent or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief or protection of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property; or the Borrower shall take any action to authorize any of the actions described above in this paragraph (d), or any proceeding shall be instituted against the Borrower seeking to adjudicate it a bankrupt or insolvent or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief or protection of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property, and, if such proceeding is being contested by the Borrower in good faith, such proceeding shall remain undismissed or unstayed for a period of 60 days; or (e) An event of default shall have occurred under the Indenture and the Bonds have been declared due and payable pursuant to the Indenture. No default under paragraph (b) above shall constitute an Event of Default until: (i) The Trustee, by registered, certified or overnight mail, shall give notice to the Borrower of such default specifying the same and stating that such notice is a “Notice of Default”; and (ii) The Borrower shall have 60 days after receipt of such notice to correct the default and shall not have corrected it; provided, however, that if the default stated in the notice is of such a nature that it cannot be corrected within 60 days, such default shall not constitute an Event of Default under the Loan Agreement so long as (a) the Borrower institutes corrective action within said 60 days and diligently pursues such action until the default is corrected, and (b) in the opinion of Bond Counsel, the failure to cure said default within 60 days will not adversely affect the exclusion from gross income for federal income tax purposes of interest on the Bonds. Remedies Whenever any Event of Default under the Loan Agreement shall have happened and be continuing, the following remedial steps shall be taken: (a) Immediately upon the occurrence of any Event of Default under the Loan Agreement the Trustee shall declare all amounts due under the Loan Agreement and the Note to be immediately due and payable; provided, however, that in the case of an Event of Default described in (b), (c) or (d) above, the 43 amounts due under the Loan Agreement and the Note shall not be accelerated unless the Trustee receives either (i) written notice from the Authority to accelerate the Loan and declare all amounts due under the Loan Agreement and the Note or (ii) an opinion of Bond Counsel that the failure to accelerate the Loan under such circumstances will adversely affect the exclusion from gross income for federal income tax purposes of interest on the Bonds; (b) Subject to the provisions of the Indenture, the Trustee shall take whatever action at law or in equity may appear necessary or desirable to collect the payments required to be made by the Borrower under the Loan Agreement, the Deed of Trust, and the Note, or to enforce performance and observance of any obligation or agreement of the Borrower under the Loan Agreement, the Note, the Deed of Trust or the Regulatory Agreement, but in no event shall the Trustee be obligated to take any such action which in its opinion will or might cause it to expend time or money or otherwise incur liability unless and until an indemnity bond satisfactory to it has been furnished to it; (c) The Authority may, upon consultation with the Oversight Agent, terminate the Project Manager and shall upon the recommendation of the Oversight Agent or such other advice as the Authority deems appropriate, select a new Project Manager; (d) Upon an Event of Default under the Loan Agreement, either the Authority may operate and administer, or cause to be operated and administered, the Project in the place and stead of the Borrower and in the manner required by the terms and provisions of the Regulatory Agreement. In so doing, the Authority or such party as it may appoint to operate and administer the Project, to the extent it may have moneys available under the Loan Agreement for such purposes, shall complete the rehabilitation and equipping of any incomplete component of the Project to be funded with proceeds of the Bonds, and shall pay from the Operating Revenues received with respect to the Project (to the extent available) the Loan Repayments and Fees and Charges, if any, which the Borrower was obligated to pay pursuant to the terms and provisions of the Loan Agreement and the Deed of Trust. The Trustee or other depository shall be authorized to pay the Authority or its designee as directed by an Officer’s Certificate any moneys on deposit in the Project Fund to the extent that the Authority shall certify in writing that such moneys are required by the Authority or its designee to pay any items that would have been included in the cost of the Project had the Authority or its designee not acquired the same; (e) The Authority may, upon the recommendation of the Oversight Agent or such other advice as it may deem appropriate, commence foreclosure proceedings as set forth in the Indenture; and (f) Upon an Event of Default and continuing until at least one year after all Events of Default have been cured, all Operating Revenues then on hand and thereafter received by the Borrower or otherwise shall be delivered to the Trustee, for deposit to a depository account for the benefit of the Bond Owners to be applied by the Trustee first to the payment of debt service on the Bonds, and then to the payment of reasonable and necessary Operation and Maintenance Costs, with any remaining amounts used as provided in the Indenture. Any amounts collected as payments made on the Note, or applicable to such payments, and any other amounts which would be applicable to payment of principal of, premium, if any, and interest on the Bonds collected pursuant to action taken under the foregoing provisions under this heading shall be applied in accordance with the provisions of the Indenture. Upon payment in full of all amounts owing under the Indenture, including all fees and expenses of the Trustee, the Oversight Agent and the Authority, the Authority and the Trustee shall transfer any remaining right, title or interest that each has in the Indenture, the Loan Agreement, the Note and the Deed of Trust to the Borrower, except any rights to receive payment of fees and expenses and to be indemnified, as provided for in the Loan Agreement and the Indenture. 44 Beneficiaries So long as any of the Bonds are Outstanding and the Note has not been paid-in-full, the Authority shall be an intended third party beneficiary of the Loan Agreement. THE REGULATORY AGREEMENT The following is a summary of certain provisions of the Regulatory Agreement and does not purport to be complete. Reference is hereby made to the Regulatory Agreement which is available from the Trustee upon request, and to Appendix A for the definition of certain terms used herein. Any capitalized terms not otherwise defined herein or in Appendix A are as defined in the Regulatory Agreement. Residential Rental Property; Qualified Residents The Borrower represents, as of the date of the Regulatory Agreement, and warrants, covenants and agrees as follows: (a) The Project is being owned and operated for the purpose of providing qualified residential rental housing, consisting of one mobile home Space for each household, together with facilities which are Functionally Related and Subordinate to such Spaces. (b) All of the mobile homes in the Project will contain separate facilities for living, sleeping, eating, cooking and sanitation, including a sleeping area, bathing and sanitation facilities and cooking facilities equipped with a cooking range, refrigerator and sink. (c) All of the Spaces in the Project will be available for rental on a continuous basis to members of the general public during the Qualified Project Period, and the Borrower will not give preference to any particular class or group in renting the Spaces in the Project, except to the extent that Spaces are required to be leased or rented to Qualified Residents. (d) The Project comprises a single geographically and functionally integrated project for residential rental property, as evidenced by the ownership, management, accounting and operation of the Project. (e) No part of the Project will at any time be owned or used as a condominium or by a cooperative housing corporation, and the Borrower shall not take any steps toward such conversion without an opinion of Bond Counsel that interest on the Tax-Exempt Bonds will not thereby become includable in gross income for federal income tax purposes. (f) Should involuntary noncompliance with the provisions of the Regulatory Agreement be caused by fire, seizure, requisition, foreclosure, transfer of title by deed in lieu of foreclosure, change in a federal law or an action of a federal agency after the Closing Date which prevents the Authority from enforcing the requirements of the Regulations, or condemnation or similar event, the Borrower covenants that, within a “reasonable period” determined in accordance with the Regulations, it will either prepay the Note or apply any proceeds received as a result of any of the preceding events to reconstruct the Project to meet the requirements of the Regulatory Agreement. (g) There shall be no discrimination against or segregation of any person or group of persons on account of race, color, religion, sex, marital status, ancestry, national origin, source of income (e.g. AFDC (or its successor program, if any) or SSI) or disability in the sale, lease, sublease, transfer, use, 45 occupancy, tenure or enjoyment of the Project nor shall the transferee or any person claiming under or through the transferee, establish or permit any such practice or practices of discrimination or segregation with reference to the selection, location, number, use or occupancy of tenants, lessees, subtenants, sublessees or vendees of the Project. (h) The Very Low Income Spaces shall be intermingled with, and shall be of comparable quality to, all other Spaces in the Project. Tenants in all Spaces shall have equal access to and enjoyment of all common facilities of the Project. (i) In the aggregate, no more than two persons per bedroom, plus one person shall occupy any Space in the Project not including children born after the date of initial occupancy by a household. For example, with respect to a two bedroom mobile home, maximum occupancy shall be 5 persons. (j) None of the Spaces in the Project shall at any time be utilized on a transient basis; none of the residents of the Project are residing at the Project for any ancillary purpose unrelated to housing; except as set forth in the Tax Certificate, none of the Spaces in the Project are being leased or rented to a person or person who does not occupy such Space; and neither the Project nor any portion thereof shall be used as a hotel, motel, dormitory, fraternity house, sorority house, rooming house, hospital, nursing home, retirement home, sanitarium, rest home, or by a cooperative housing corporation (as defined in Section 216(b)(1) of the Code). (k) Substantially all (i.e. not less than 95%) of the Project shall consist of proximate structures located on one or more contiguous tracts of land which have similarly constructed Spaces financed pursuant to a common plan together with Functionally Related and Subordinate facilities, all of which shall be owned by the same “person” (as such term is used in the Treasury Regulations) for federal tax purposes. Authority Requirements The following provisions shall apply during the term of the Regulatory Agreement, irrespective of whether any Bonds are outstanding. (a) The Borrower shall notify the Authority and the Oversight Agent of the operations/management company it will employ for the Project no less than 30 days prior to the signing of a contract with any such entity. Qualifications of the firm(s) shall also be provided at that time and the Authority shall have the right to submit comments on the qualifications of the firm, which shall be considered by Borrower prior to execution of a contract. (b) The Borrower is responsible for all management functions with respect to the Project including the selection of tenants, certification and recertification of household size and income, evictions, collection of rents and deposits, maintenance, landscaping, routine and extraordinary repairs, replacement of capital items, and security. The Authority shall have no responsibility over management of the Project. In no instance shall the Borrower delegate or forego its responsibility to operate the Project in the manner set forth in the Regulatory Agreement and the Loan Agreement. (c) The Authority through its Authorized Officer, reserves the right to conduct on or about August 15 of each year, commencing August 15, 2016, an annual (or more frequently, if deemed necessary by the Authority) review of the management practices and financial status of the Project. The purpose of each periodic review will be to enable the Authority to determine if the Project is being operated and managed in accordance with the requirements and standards of the Regulatory Agreement. 46 The Borrower shall cooperate with the Authority in such reviews, including but not limited to making its books and records regarding the Project available for inspection by the Authority. (d) The Borrower agrees, for the entire term of the Regulatory Agreement, to maintain all common area interior and exterior improvements on the Project (exclusive of the mobile homes and tenant spaces), including landscaping and common buildings on the Project in good condition and repair (and, as to landscaping, in a healthy condition) and in accordance with all applicable laws, rules, ordinances, orders and regulations of all federal, state, county, municipal, and other governmental agencies and bodies having or claiming jurisdiction and all their respective departments, bureaus, and officials. (e) The Borrower agrees to comply with the provisions of the City Law. (f) The Borrower agrees to comply with the terms of the Supplemental Regulatory Agreement. (g) The Authority places prime importance on quality maintenance to ensure that all Authority-assisted affordable housing projects are not allowed to deteriorate due to below-average maintenance. Normal wear and tear of the Project will be acceptable to the Authority assuming the Borrower agrees to provide all necessary improvements to assure the Project is maintained in good condition. The Borrower shall make all repairs and replacements necessary to keep the Project in good condition and repair. (h) In the event that the Borrower breaches any of the covenants contained in the Regulatory Agreement and such default continues for a period of 10 days after written notice from the Authority with respect to graffiti, debris, waste material, and general maintenance or 30 days after written notice from the Authority with respect to landscaping and building improvements, then the Authority may enter upon the Project and perform or cause to be performed all work necessary to cure the default. Pursuant to such right of entry, the Authority shall be permitted (but is not required) to enter upon the Project and perform all work necessary to protect, maintain, and preserve the improvements and landscaped areas on the Project, and to attach a lien on the Project, or to assess the Project, in the amount of its expenditures, including a 15% administrative charge. Qualified Residents Pursuant to the requirements of the Code and the Act, the Borrower covenants and agrees as follows: (a) During the Qualified Project Period: not less than twenty percent (20%) of the Spaces in the Project shall be continuously occupied by Very Low Income Residents. The monthly rent charged for one-half of such Very Low Income Spaces (i.e., not less than 10% of the Spaces in the Project) shall be not greater than as follows: (A) where a Very Low Income Resident is both the registered and legal owner of the mobile home and is not making mortgage payments for the purchase of that mobile home, the total rental charge for occupancy of the Space (excluding a reasonable allowance for other related housing costs determined at the time of acquisition of the Project by the Borrower and excluding any supplemental rental assistance from the State, the federal government, or any other public agency to the Very Low Income Resident or on behalf of the Space and the mobile home) shall not exceed one-twelfth of 30 percent of 50 percent of Median Income for the Area, adjusted for household size in the manner set forth below. 47 (B) where a Very Low Income Resident is the registered owner of the mobile home and is making mortgage payments for the purchase of that mobile home, the total rental charge for occupancy of the Space (excluding any charges for utilities and storage and excluding any supplemental rental assistance from the State, the federal government, or any other public agency to the Very Low Income Resident or on behalf of the Space and mobile home), shall not exceed one-twelfth of 15 percent of 50 percent of Median Income for the Area, as adjusted for household size in the manner set forth below. (C) where a Very Low Income Resident rents both the mobile home and the Space occupied by the mobile home, the total rental payments paid by the Very Low Income Resident on the mobile home and the Space occupied by the mobile home (excluding any supplemental rental assistance from the State, the federal government, or any other public agency to that Very Low Resident or on behalf of that Space and mobile home) shall not exceed one-twelfth of 30 percent of 50 percent of Median Income for the Area adjusted for household size in the manner set forth below. In adjusting rent for household size, it shall be assumed that one person will occupy a recreational vehicle, two persons will occupy a single-wide mobile home and three persons will occupy a multi-sectional mobile home; or as permitted under Section 52102(a) of the California Health and Safety Code, it shall be assumed that one person will occupy a studio unit, two persons will occupy a one-bedroom unit, three persons will occupy a two-bedroom unit, four persons will occupy a three-bedroom unit, and five persons will occupy a four-bedroom unit. (b) Reserved. (c) In the event a recertification of such tenant’s income in accordance with paragraph (e) below demonstrates that such tenant no longer qualifies as a Qualified Resident, the Space occupied by such Resident shall continue to be treated as a Qualified Space unless and until any Space in the Project thereafter is occupied by a new tenant other than a Qualified Resident of the applicable category. Moreover, a Space previously occupied by a Qualified Resident and then vacated shall be considered occupied by a Qualified Resident of the applicable category until reoccupied, other than for a temporary period, at which time the character of the Space shall be redetermined. In no event shall such temporary period exceed thirty one (31) days. Notwithstanding anything to the contrary, if at any time the number of Qualified Residents falls below the number required by the Regulatory Agreement, the next available vacant Space shall be rented to a Qualified Resident of the applicable category. (d) Immediately prior to a Qualified Resident’s occupancy of a Qualified Space (or prior to the Closing Date with respect to Spaces previously occupied), the Borrower will obtain and maintain on file an Income Certification form from each Qualified Resident occupying a Qualified Space, dated immediately prior to the initial occupancy of such Qualified Resident in the Project (or prior to the Closing Date in the case of existing Qualified Residents). In addition, the Borrower will provide such further information as may be required in the future by the State of California, and by the Act, as the same may be amended from time to time as requested by the Authority or the Oversight Agent. The Borrower shall verify the income provided by an applicant with respect to a Space to be occupied after the Closing Date in the manner described by the Regulatory Agreement. (e) Annually, the Borrower shall recertify the income of the occupants of such Qualified Spaces by obtaining a completed Income Certification based upon the current income of each occupant of the Space. In the event the recertification demonstrates that such household’s income exceeds 140% of the income at which such household would qualify as a Qualified Resident of the applicable category, such household will no longer qualify as a Qualified Resident of the applicable category, and the 48 Borrower either (i) will designate another Qualified Resident and Space in the Project as a Qualified Resident of the applicable category, and a Qualified Space of the applicable category, respectively, or (ii) will rent the next available vacant Space to one or more Qualified Residents of the applicable category. (f) Each lease or rental agreement pertaining to a Qualified Space occupied after the Closing Date will contain a provision to the effect that the Borrower has relied on the Income Certification and supporting information supplied by the Qualified Resident in determining qualification for occupancy of the Qualified Space, and that any material misstatement in such certification (whether or not intentional) may be cause for immediate termination of such lease. Each lease or rental agreement will also contain a provision that failure to cooperate with the annual recertification process reasonably instituted by the Borrower pursuant to paragraph (e) above will disqualify the Space as a Qualified Space and provide grounds for termination of the lease. The Borrower agrees to provide the Oversight Agent and the Authority a copy for the form of application and lease to be provided to prospective Qualified Residents and any amendments thereto. (g) In the event, despite Borrower’s exercise of best efforts to comply with the foregoing provisions of the Regulatory Agreement, the Borrower shall have been out of compliance with any of the restrictions of the foregoing provisions of the Regulatory Agreement relative to Qualified Residents for a period in excess of six months, then at the sole option of the Authority the terms of the Regulatory Agreement shall be automatically extended for the period of non-compliance upon written notice to the Borrower, the Trustee and the Oversight Agent from the Authority, such extension to relate to the Qualified Spaces and Qualified Residents as to which such noncompliance relates. Sale or Transfer of the Project The Borrower intends to hold the Project for its own account and has no current plans to sell, transfer or otherwise dispose of the Project, and covenants and agrees not to sell, transfer or otherwise dispose of the Project, or any portion thereof (other than for individual tenant use as contemplated under the Regulatory Agreement), without obtaining the prior consent of the Authority and upon satisfaction of the other requirements of the Regulatory Agreement and the Loan Agreement. Term The Regulatory Agreement and all and several of the terms will become effective upon its execution and delivery and will remain in full force and effect during the Qualified Project Period, it being expressly agreed and understood that the provisions are intended to survive the retirement of the Bonds and expiration of the Indenture, the Loan Agreement and the Note. Enforcement If the Borrower defaults in the performance or observance of any covenant, agreement or obligation of the Borrower set forth in the Regulatory Agreement, and if such default remains uncured for a period of 60 days after notice thereof shall have been given by the Authority or the Trustee to the Borrower (provided, however, that the Authority may at its sole option extend such period if the Borrower provides the Authority with an opinion of Bond Counsel to the effect that such extension will not adversely affect the exclusion from gross income for federal income tax purposes of interest on the Tax- Exempt Bonds, and provided further, in the event any default relates to Section 5 of the Regulatory Agreement and the Borrower is exercising best efforts to comply with such restrictions as determined by the Authority in its sole discretion, then the cure period described above shall be 6 months and the Qualified Project Period shall be extended for a like period as provided in the Regulatory Agreement). If the Borrower fails to cure within the specified period then the Trustee, subject to the provisions of the 49 Regulatory Agreement and acting on its own behalf or on behalf of the Authority, shall declare an “Event of Default” to have occurred, and, at its option, may take any one or more of the following steps: (i) by mandamus or other suit, action or proceeding at law or in equity, require the Borrower to perform its obligations and covenants under the Regulatory Agreement or enjoin any acts or things which may be unlawful or in violation of the rights of the Authority or the Trustee under the Regulatory Agreement; (ii) have access to and inspect, examine and make copies of all of the books and records of the Borrower pertaining to the Project; and (iii) take such other action at law or in equity as may appear necessary or desirable to enforce the obligations, covenants and agreements of the Borrower under the Regulatory Agreement. In addition to the enforcement remedies set forth above, upon the Borrower’s default under the Regulatory Agreement, the Authority will have the right (but not the obligation) to lease up to 20% of the Spaces in the Project for a rental of $1 per Space per year. The Authority shall sublease such units to Qualified Residents to the extent necessary to comply with the provisions of the Regulatory Agreement. Any rent paid under such a sublease shall be paid to the Borrower after the Authority has been reimbursed for any expenses incurred by them in connection with the sublease; provided that, if the Borrower is in default under the Loan, such rent shall be used to make payments under the Loan. The Trustee shall have the right, in accordance with the Regulatory Agreement and the provisions of the Indenture, without the consent or approval of the Authority, to exercise any or all of the rights or remedies of the Authority under the Regulatory Agreement; provided that prior to taking any such act the Trustee shall give the Authority written notice of its intended action. All fees, costs and expenses of the Trustee, the Authority and the Oversight Agent (including, without limitation, reasonable attorneys’ fees) reasonably incurred in taking any action pursuant to the Regulatory Agreement shall be the sole responsibility of the Borrower; provided the Trustee will not be obligated to take any action under the Regulatory Agreement that results in expenses or liability to the Trustee unless it is compensated and reimbursed for its expenses, including reasonable attorneys’ fees, and indemnified to its satisfaction against liability. After the Indenture has been discharged, or if the Trustee fails to act under the Regulatory Agreement, the Authority may act in its own behalf to declare an “Event of Default” to have occurred and to take any one or more of the steps specified above to the same extent and with the same effect as if taken by the Trustee. THE SUPPLEMENTAL REGULATORY AGREEMENT The following is a summary of certain provisions of the Supplemental Regulatory Agreement and does not purport to be complete. Reference is hereby made to the Supplemental Regulatory Agreement which is available from the Trustee upon request, and to Appendix A for the definition of certain terms used herein. Any capitalized terms not otherwise defined herein or in Appendix A are as defined in the Supplanted Regulatory Agreement. Rental Assistance Fund The Borrower agrees in the Supplemental Regulatory Agreement to establish with the Trustee the Rental Assistance Fund pursuant to the Indenture. After initial funding of the Rental Assistance Fund, the 50 Borrower shall thereafter fund additional deposits to the Rental Assistance Fund from moneys in the Surplus Fund under the Indenture so as to maintain sufficient moneys in the Rental Assistance Fund to meet the Borrower’s obligations under the Supplemental Regulatory Agreement. Management and Operation of Project The Borrower acknowledges in the Supplemental Agreement that there exists a Residents Association for the Project and a governing board thereof (the “Resident Association Board”). The Borrower agrees that the Resident Association Board may provide tenant comment and input to the Borrower in the management and operation of the Project. The Borrower or its representative or agent agrees to meet with any such Resident Association Board at least twice a year, or at such other frequency as agreed by the City and the Borrower, to receive comments and recommendations with respect to Project operation and management. The Borrower further agrees to provide regular reports (at least quarterly, or at such other intervals as directed by the City) relating to the operation of the Project to the Resident Association Board. While the Resident Association Board shall have no decision-making authority with respect to the management and operation of the Project, the Borrower agrees to use its best efforts to implement recommendations of the Resident Association Board that can reasonably be implemented by the Borrower and that will not cause the Borrower, in its reasonable judgment, to be unable to perform its obligations under the Supplemental Regulatory Agreement, the Regulatory Agreement, the Loan Agreement and the Deed of Trust. The Borrower further agrees that it shall not refuse any good-faith request by the Resident Association Board for the addition, deletion or amendment of a Project rule or regulation absent a good-faith, business reason for doing so. The Borrower may request all residents of the Project to vote on any such addition, deletion or amendment. The Borrower further agrees to review and take such action as it determines to be appropriate with respect to any documented complaints about Project management presented to it by the Resident Association Board. Qualified Residents The Borrower represents, as of the date of the Supplemental Regulatory Agreement, and warrants, covenants and agrees as follows: (a) During the Project Requirement Period (a) not less than twenty percent (20%) of the Spaces in the Project shall be designated as Very Low Income Spaces and shall be continuously occupied by Very Low Income Residents; and (b) not less than thirty percent (30%) of the Spaces in the Project shall be designated as Lower Income Spaces and shall be continuously occupied by Lower Income Residents. The monthly rent charged for one-half of the Very Low Income Spaces shall be as follows; (A) where a Very Low Income Resident is both the registered and legal owner of the mobile home and is not making mortgage payments for the purchase of that mobile home, the total rental charge for occupancy of the Space (excluding a reasonable allowance for other related housing costs determined at the time of acquisition of the Project by the Borrower and excluding any supplemental rental assistance from the State, the federal government, or any other public agency to the Very Low Income Resident, on behalf of the Space and the mobile home) shall not exceed one-twelfth of 30 percent of 50 percent of Median Income for the Area, adjusted for household size in the manner set forth in the Supplemental Regulatory Agreement. (B) where a Very Low Income Resident is the registered owner of the mobile home and is making mortgage payments for the purchase of that mobile home, the total rental charge for occupancy of the Space (excluding any charges for utilities and storage and excluding any supplemental rental 51 assistance from the State, the federal government, or any other public agency to the Very Low Income Resident, or on behalf of the Space and mobile home), shall not exceed one-twelfth of 15 percent of 50 percent, of Median Income for the Area, as adjusted for household size in the manner set forth below. (C) where a Very Low Income Resident rents both the mobile home and the Space occupied by the mobile home, the total rental payments paid by the Very Low Income Resident on the mobile home and the Space occupied by the mobile home (excluding any supplemental rental assistance from the State, the federal government, or any other public agency to that Very Low Resident or on behalf of that Space and mobile home) shall not exceed one-twelfth of 30 percent of 50 percent, of Median Income as established by the U.S. Department of Housing and Urban Development for the Area adjusted for household size in the manner set forth below. In adjusting rent for household size, it shall be assumed that two persons will occupy a single- wide mobilehome and three persons will occupy a multisectional mobilehome; provided that if the multisectional mobilehome has three or more bedrooms, then it shall be assumed that four persons shall occupy a three-bedroom unit and five persons will occupy a four-bedroom unit. (b) In the event a recertification of the income of a Very Low Income Resident or a Lower Income Resident, as applicable, in accordance with paragraph (d) below demonstrates that such tenant no longer qualifies as a Very Low Income Resident or a Lower Income Resident, as applicable, the Space occupied by such tenant shall continue to be treated as a Very Low Income Space or a Lower Income Space, as applicable, unless and until any Space in the Project thereafter is occupied by a new tenant other than a Very Low Income Resident or a Lower Income Resident, as applicable. Moreover, a Space previously occupied by a Very Low Income Resident, or a Lower Income Resident, as applicable, and then vacated shall be considered occupied by a Qualified Resident until reoccupied, other than for a temporary period, at which time the character of the Space shall be redetermined. Notwithstanding anything herein to the contrary, if at any time the number of Qualified Residents falls below the number required by paragraph (a) above, the next available vacant Space shall be rented to a Qualified Resident. (c) Annually, the Borrower will obtain and maintain on file an Income Certification form from each Qualified Resident occupying a Qualified Space, dated immediately prior to the initial occupancy of such Qualified Resident in the Project. In addition, the Borrower will provide such further information as may be required in the future by the State of California, as requested by the City or the Oversight Agent. The Borrower shall verify that the income provided by an applicant with respect to a Space to be occupied is accurate by taking one or more of the following steps as a part of the verification process: (1) obtain a federal income tax return for the most recent tax year, (2) obtain a written verification of income and employment from applicant's current employer such as a current pay stub or W-2 form, (3) if an applicant is unemployed or did not file a tax return for the previous calendar year, obtain other verification of such applicant's income reasonably satisfactory to the Oversight Agent or (4) such other information as may be reasonably requested by the Oversight Agent. Within ten days of the last day of each calendar quarter during the term of the Supplemental Regulatory Agreement, the Borrower shall advise the Oversight Agent or in the absence of an Oversight Agent, the City, of the status of the occupancy of the Project by delivering to the Oversight Agent a Certificate of Continuing Program Compliance; provided, however, with the prior written approval of the Oversight Agent or the City, as the case may be, such Certificate need be filed only semi-annually. Copies of the most recent Income Certifications for Qualified Residents commencing or continuing occupancy of a Qualified Space shall be made available to the City or Oversight Agent upon request. (d) Annually, the Borrower shall recertify the income of the occupants of such Very Low Income Spaces and Lower Income Spaces, as applicable, by obtaining a completed Income Certification 52 based upon the current income of each occupant of the unit. In the event the recertification demonstrates that such household's income exceeds the income at which such household would qualify as Very Low Income Residents or Lower Income Residents, as applicable, such household will no longer qualify as a Very Low Income Resident or a Lower Income Resident, as applicable, and the Borrower either (i) will designate another qualifying Tenant and Space in the Project as a Very Low Income Resident or a Lower Income Resident, as applicable and a Very Low Income Space or a Lower Income Space, as applicable, respectively, or (ii) will rent the next available vacant Space to one or more Very Low Income Residents or Lower Income Residents, as applicable. (e) The Borrower will maintain complete and accurate records pertaining to the Qualified Spaces, and will permit any duly authorized representative of the Agency or the Oversight Agent to inspect during normal business hours and with prior notice the books and records of the Borrower pertaining to the Project, including those records pertaining to the occupancy of the Qualified Spaces. (f) Each lease or rental agreement pertaining to a Qualified Space shall contain a provision to the effect that the Borrower has relied on the Income Certification and supporting information supplied by the Qualified Resident in determining qualification for occupancy of the Qualified Space, and that any material misstatement in such certification (whether or not intentional) may be cause for immediate termination of such lease. Each lease will also contain a provision that failure to cooperate with the annual recertification process reasonably instituted by the Borrower pursuant to paragraph (d) above will disqualify the Space as a Qualified Space and provide grounds for termination of the lease. The Borrower agrees to provide to the Oversight Agent and the Agency, a copy of the form of application and lease or rental agreement to be provided to prospective Qualified Residents and any amendments thereto. (g) In the event, despite the Borrower's exercise of best efforts to comply with the provisions of the Supplemental Regulatory Agreement, the Borrower shall have been out of compliance with any of the such restrictions relative to Qualified Residents, for a period in excess of six months, then at the sole option of the City the term of the Supplemental Regulatory Agreement shall be automatically extended for the period of non-compliance upon written notice to the Borrower and the Oversight Agent from the City, such extension to relate to the Qualified Spaces and Qualified Residents as to which such noncompliance relate. Other Covenants The Borrower further covenants and agrees to comply with the provisions of Title 2, Chapter 2, Article 9 of the City Municipal Code relating to rent review (the “Rent Control Ordinance”), notwithstanding any legal challenges to the Rent Control Ordinance, and further agrees that it shall at all times abide by and follow the terms and provisions of the Rent Control Ordinance, and shall not in any manner challenge said provisions. Sale or Transfer of the Project; Option to Purchase (a) The Borrower intends to hold the Project for its own account, has no current plans to sell, transfer or otherwise dispose of the Project, and covenants and agrees not to sell, transfer or otherwise dispose of the Project, or any portion thereof (other than for individual tenant use as contemplated under the Supplemental Regulatory Agreement), without obtaining the prior written consent of the City and upon receipt by the City of (i) reasonable evidence satisfactory to the City that the Borrower's purchaser or transferee has assumed in writing and in full, the Borrower's duties and obligations under the Supplemental Regulatory Agreement, (ii) an opinion of counsel for the transferee that the transferee has duly assumed the obligations of the Borrower under the Supplemental Regulatory Agreement, and that such obligations and this Supplemental Regulatory Agreement are binding on the transferee, (iii) the City 53 receives evidence acceptable to the City that either (A) the transferee has experience in the ownership, operation and management of comparable projects without any record of material violations of discrimination restrictions or other state or federal laws or regulations applicable to such projects, or (B) the transferee agrees to retain a property management firm with the experience and record described in subparagraph (A) above and in either case, at its option, the City may cause the Oversight Agent to provide on-site training in program compliance if the City determines such training is necessary and (iv) the City receives evidence that the purchaser is a not for-profit organization. It is expressly stipulated and agreed that any sale, transfer or other disposition of the Project in violation of the Supplemental Regulatory Agreement shall be null, void and without effect, shall cause a reversion of title to the Borrower, and shall be ineffective to relieve the Borrower of its obligations under the Supplemental Regulatory Agreement. Not less than 30 days prior to consummating any sale, transfer or disposition of any interest in the Project, the Borrower shall deliver to the City and the Oversight Agent a notice in writing explaining the nature of the proposed transfer. (b) Notwithstanding the provisions of paragraph (a) above, the Borrower shall grant to the San Juan Capistrano Residents Association, an entity to be formed consisting of the Residents (the "Homeowners Association"), an option, to purchase the Project from the Borrower under a written option agreement, subject to the conditions and on the terms set forth in the Supplemental Regulatory Agreement. Term The Supplemental Regulatory Agreement and all and several of the terms thereof shall become effective upon its execution and delivery and shall remain in full force and effect during the Project Restriction Period, it being expressly agreed and understood that the provisions thereof are intended to survive the retirement of the Bonds. Notwithstanding any other provisions of the Supplemental Regulatory Agreement to the contrary, the entire Supplemental Regulatory Agreement, or any of the provisions or sections hereof, may be terminated upon agreement by the City and the Borrower. The terms of the Supplemental Regulatory Agreement to the contrary notwithstanding, the Supplemental Regulatory Agreement, and all and several of the terms hereof, shall terminate and be of no further force and effect in the event of (i) a foreclosure or delivery of a deed in lieu of foreclosure whereby the Bondowners or a third party shall take possession of the Project, or (ii) involuntary non- compliance with the provisions of this Supplemental Regulatory Agreement caused by fire, seizure, requisition, change in a federal law or an action of a federal agency after the date hereof which prevents the City from enforcing the provisions hereof, or (iii) condemnation or a similar event and the payment in full and retirement of the Bonds theretofore or within a reasonable period thereafter. Upon the termination of the terms of the Supplemental Regulatory Agreement, the parties thereto agree to execute, deliver and record appropriate instruments of release and discharge of the terms hereof; provided, however, that the execution and delivery of such instruments shall not be necessary or a prerequisite to the termination of the Supplemental Regulatory Agreement in accordance with its terms. THE SUBORDINATION AGREEMENT The following is a summary of certain provisions of the Subordination Agreement and does not purport to be complete. Reference is hereby made to the Subordination Agreement which is available from the Trustee upon request, and to Appendix A for the definition of certain terms used herein. Any capitalized terms not otherwise defined herein or in Appendix A are as defined in the Subordination Agreement. 54 Under the terms of the Subordination Agreement, the City, among other things, agrees for the benefit of the Trustee as follows: The Deed of Trust and the Regulatory Agreement and any modifications, renewals or extensions thereof, shall unconditionally be and at all times remain a lien or charge on the Property prior and superior to the Supplemental Regulatory Agreement (the “Subordinate Document”). The City intentionally and unconditionally subordinates the lien or charge upon the Property of the Subordinate Document to the lien or charge of the Deed of Trust and the Regulatory Agreement upon the Property and understands that in reliance upon, and in consideration of, this subordination, specific loans and advances are being and will be made by the Trustee and, as part and parcel thereof, specific monetary and other obligations are being and will be entered into which would not be made or entered into but for said reliance upon the subordination. The City agrees not to exercise or attempt to exercise any remedy under the Subordinate Document due to or as a remedy for any breach of, or default or event of default thereunder, unless, prior to such exercise or attempted exercise, a breach of, or a default or event of default under the terms of the Loan Documents shall have occurred and be continuing and the Trustee or the Bondowners shall have commenced exercising remedies under the Loan Documents. In the event that the Trustee delivers to the Borrower a notice of default under the Loan Documents, the Trustee shall deliver to the City a copy of said notice concurrently with delivery to the Borrower, and the City shall have the right (but not the obligation) to cure any or all defaults specified in said notice for a period of ninety (90) days after the date of such notice. If, prior to any foreclosure sale of the Property under the Deed of Trust, the City takes title to or possession of the Property and cures the outstanding defaults under the Loan, if any, the Trustee herby agrees not to exercise any rights it may have to declare a default and accelerate its Loan by reason of the transfer of title or possession to the City, or if acceleration has already occurred, the Trustee hereby agrees that it will reinstate the Loan at that time; and agrees that it will recognize the City as borrower under the Loan under the same terms and conditions of said Loan, if the City agrees to assume and perform the Borrower's obligations under said Loan, subject to the written approval of a majority of the Bondowners. If the City takes title to the Property and cures the outstanding defaults under the Loan Documents, if any, the City shall have the right to transfer the Property to another nonprofit 50l(c)(3) tax- exempt housing developer reasonably approved in writing by the Trustee, the Authority and the Bondowners. In connection with any such transfer approved by the Trustee, the Bondowners and the Authority, the Trustee agrees that such transfer shall not constitute a default under the Loan Documents and the Trustee shall not exercise any rights it may have to accelerate the Loan as a result of such transfer. THE BORROWER Neither the Authority nor the Underwriter have made any independent investigation of the information presented herein as to the Borrower. Such information has been provided solely by the Borrower, and neither the Authority nor the Underwriter have verified the accuracy or completeness of such information, nor do they assume any responsibility or liability therefor. 55 Organization The Borrower is a California limited liability company. The Borrower has been formed for the purpose of owning the Project and other similar mobile home parks. The current owner of the Project is Millennium Housing Corporation. The Project will be transferred to the Borrower on the Closing Date. Millennium Housing Corporation, a California nonprofit public benefit corporation, the sole member of the Borrower, is organized exclusively under the California Nonprofit Public Benefit Corporation Law for charitable purposes. Its specific purpose is to encourage, preserve, rehabilitate, develop, operate, and maintain decent, safe, sanitary and affordable housing for very low, low and moderate income persons in the State of California. The Internal Revenue Service for federal tax purposes establishes the tax-exempt status of the Borrower based on the tax-exempt status of its sole member, Millennium Housing Corporation. Based on the foregoing, the Borrower is considered by the Internal Revenue Service to be tax-exempt under Section 501(c)(3) of the Tax Code. Millennium Housing Corporation was created to provide affordable housing through the acquisition and rehabilitation of mobilehome and apartment communities. Millennium Housing Corporation’s goals are to encourage and empower its residents to take an active role in budget and management decisions, provide enhanced maintenance and services; and to ensure that its communities remain valuable sources of quality affordable housing. Millennium Housing Corporation received a determination letter from the Internal Revenue Service as to its status as an organization described in Section 501(c)(3) of the Code on July 2, 2001, and a letter from the State of California Franchise Tax Board confirming its exemption from State franchise or income tax on March 24, 2000. Millennium Housing Corporation has agreed to maintain its Section 501(c)(3) status and its exemption from federal income taxation under the Code. The Borrower received a letter from the State of California Franchise Tax Board dated June 25, 2012 confirming its tax-exemption from the California franchise or income tax as stated in Section 23701(h) of the Revenue and Taxation Code. The Borrower and Millennium Housing Corporation each currently own other mobile home parks in addition to the Project. None of the other mobile home parks owned by the Borrower or by Millennium Housing Corporation are pledged as security for the Bonds and the Bondholders have no lien or claim on those parks or their revenues. Either the Borrower or Millennium Housing Corporation may purchase other mobile home parks in the future, none of which will be pledged as security for the Bonds and the Bondholders will have no lien or claim on such parks or their respective revenues. The current Board of Directors of Millennium Housing Corporation, the sole member of the Borrower, is as follows: Board of Directors Jon M. Kmett, Director, Chairman Gregory B. Barber, Director, Vice Chairman Kathy Weaver, Director 56 Nick Sanchez, Director Robert F. Bagby, Director Jon M. Kmett, Director. For the past 20 years, Jon M. Kmett has been President of Stern Fisher Edwards, Inc., a local investment advisory and securities brokerage firm specializing in wealth management for individuals and charitable endowments. Prior to this, Mr. Kmett was a Partner of Edward T. Bergin & Co., CPAs and provided consulting and tax services to small businesses and individuals. Mr. Kmett serves on various associations including Catholic Big Brothers, Inc., a not-for-profit organization serving at risk children of all faiths and cultures through mentor relationships and Ability First, a not-for-profit organization providing life span services to children and adults with disabilities. Mr. Kmett is a Registered Investment Advisor, Options Principal, Financial and Operations Principal, Certified Public Accountant, Real Estate Broker and holds a Bachelor of Science degree in Business Administration from the University of Southern California. Gregory B. Barber, Director. Gregory Barber is head of the mobilehome park sales and acquisitions department at Barker & Associates Real Estate, Inc. For the past nine years, Mr. Barber has also worked with California Southwestern Insurance insuring mobilehome parks throughout California. Mr. Barber has over 18 years of experience in the mobilehome park industry, as a park owner, mobilehome park broker and insurance agent. Mr. Barber is a licensed California Real Estate Agent and Insurance Agent. Kathy Weaver, Director. Prior to her retirement in 2005, Kathy Weaver served as the Manager of Technical Services of the Capistrano Unified School District, the eleventh largest school district in California. In this capacity, Kathy supervises all computer software, installation, maintenance, support and training throughout the District. Ms. Weaver also served on the Emergency Operations Center Committee for the District, which is responsible for getting the Emergency Center operational in the event of a crisis. Ms. Weaver was also President of the GSMOL (Golden State Mobilehome Owners League - a statewide mobilehome residents’ association) Chapter in her mobilehome community and played an active role in local organizations, primarily those involving at-risk youth and seniors. Nick Sanchez, Director. As an attorney at Stephen, Oringher, Richman & Theodora, P.C., Nick J.G. Sanchez specializes in Business Law. He is the co-author of CEB’s California Business Litigation. Mr. Sanchez’s prior work includes serving as a law clerk in the California Governor’s Office, Legal Affairs Unit. Mr. Sanchez is a member of the Beverly Hills Bar Association, Orange County Bar Association, Association of Business Trial Lawyers, Hispanic Bar Association, and the Yale Alumni Club. Mr. Sanchez earned his B.A. from Yale University, where he played quarterback on the Bulldog’s varsity football team. He received his J.D. from the University of Southern California. While attending USC, Mr. Sanchez co-founded “Project Pears,” a non-profit organization that provided college preparatory training for economically disadvantaged high school students. 57 Robert F. Bagby, Director. Robert F. “Bob” Bagby was the President of California Suncoast Homes, a Manufactured Home Dealership, with locations in El Cajon and Chula Vista, California. Prior to forming California Suncoast Homes, Mr. Bagby held the position of Vice President of Southern California for Dupar and Angel, which at one time controlled over 20 mobile home dealerships in California. Mr. Bagby has also owned and operated several mobile home parks and self storage facilities with various investors over the past 14 years. Mr. Bagby served for seven years on the Board of Canning Hunger, a 501(c)(3) charity that serves Orange County’s needy families. He has also served on steering committees for the Relay Run for Hungry Children and the Noelle Hermes Foundation. Mr. Bagby is a graduate of the University of Alberta in Edmonton, Alberta. Operations The day to day operations of the Borrower are conducted by its President, George Turk, its Vice President and Chief Operating Officer, Lori Carraway and its Project Manager Diana Welsh. Mr. Turk, Ms. Carraway and Ms. Welsh are also involved in the day to day operation/administration of seventeen other mobilehome communities owned by affiliated non-profit corporations. George Turk, President. Prior to forming Millennium Housing Corporation, Mr. Turk formed The Westridge Group, where he created the Mobilehome Community Affordable Housing Program to convert Mobile Home Parks to non-profit ownership. As a consultant to cities, resident groups, owners and non-profits, Mr. Turk has assisted in most of the non-profit mobilehome park acquisitions in California during the past several years. Mr. Turk remains active in the mobilehome park industry. He is a member of the California Mobilehome Parkowners Alliance and the Western Manufactured Housing Communities Association and formerly served on the California Redevelopment Association Housing Task Force. Mr. Turk’s previous experience includes three years as Chief Financial Officer of a mobile home park investment and management firm and ten years in commercial development with a major shopping center developer. Mr. Turk holds a Bachelor of Science Degree in Business from the University of Southern California, was a Certified Public Accountant and is a licensed Real Estate Broker. Lori Carraway, Vice President and Chief Operating Officer. Ms. Carraway co-founded the Mobilehome Community Affordable Housing Program in 1996. From 1989 - 1996 Ms. Carraway served as project manager for a firm that specialized in acquiring and managing mobilehome communities. As Vice President and Chief Operating Officer of Millennium Housing Corporation, Ms. Carraway is responsible for project acquisition including due diligence, management interface, and escrow and bond closings. Ms. Carraway also oversees the management companies who are responsible for the day-to-day operation of the communities and monitors the monthly financial reporting for all Millennium Housing communities. In addition, she is responsible for all bond compliance reporting relating to the project financings. Ms. Carraway brings to Millennium Housing Corporation a thorough knowledge of mobilehome community management and budgeting, the Mobilehome Residency Law and resident relations. Her expertise with tax-exempt bond documents, Title 25 regulations, trustee accounting, regulatory agreements and bond compliance reporting are essential to the success of Millennium’s Mobilehome Community Affordable Housing Program. 58 Diana Welsh, Project Manager. Prior to joining Millennium Housing Corporation in 2001, Ms. Welsh worked as a loan administrator for a lender specializing in conduit lending for Mobilehome Communities. Ms. Welsh’s background also includes Human Resources where she was involved in the start up of employee volunteer programs, and community service activities. As Project Manager, Ms. Welsh is responsible for interfacing with the on-site community managers, resident relations, community magazine development and research, website design and management, as well as general public relations. Ms. Welsh assists with project acquisition, works with counties on property tax welfare exemptions, and is responsible for affordable housing compliance reporting. In addition, Ms. Welsh manages all the Corporation’s community rental assistance programs. The Borrower’s legal counsel for general matters related to the acquisition of the Project is Charles, Kane & Dye LLP, Irvine, California, a leading Irvine law firm in the field of real estate law, with special strengths in affordable housing, redevelopment and municipal law. Goldfarb & Lipman LLP, Oakland, California, a law firm specializing in affordable housing, redevelopment and land use, is providing an opinion regarding the tax exempt status of the Borrower. Vavrinek, Trine, Day & Co., LLP, a Rancho Cucamonga accounting firm with an emphasis on non-profit and municipal work, provides audit and general accounting services for the Borrower and Millennium Housing Corporation. The Borrower has no substantial assets available to pay debt service on the Bonds beyond its investment in the Project. The Loan is a limited recourse obligation of the Borrower, secured by the Deed of Trust. In the event of financial difficulties of the Project, there can be no assurance that the Borrower will have any financial resources available to contribute to the Project. THE PROJECT Neither the Authority nor the Underwriter has made any independent investigation of the information presented herein as to the Project. Such information has been provided solely by the Borrower and certain professionals as specifically noted, and neither the Authority nor the Underwriter has verified the accuracy or completeness of such information, nor do they assume any responsibility or liability therefor. Mobile Home Park Overview General. Mobile homes are sometimes referred to as an intermediate step between apartments and owner occupied housing (condominiums and detached homes). At the same time, those with sufficient income and cash for down payments typically prefer to buy a traditional home, rather than rent space in a mobile home park. Thus, the space rent plus the mobile home (coach) mortgage payment must generally be less than the mortgage payment on traditional housing in the area. Increasing land values near urban areas (especially during the 1980’s) significantly curtailed the development of new parks. Also affecting new park construction was the advent of rent control during the 1980’s. Many cities throughout the State have enacted rent control ordinances as a result of previous rent increases. Because of the lack of supply and a growing demand for affordable housing in urban areas, mobile home parks were able to steadily increase space rents even during the recession years of the early 1990’s. While rents for most types of real estate in California dropped during the recession, mobile home 59 park rents have continued to rise, although not at their historic rates. No assurance can be given that such trends will continue. Stable Resident Base. Residents of mobile home parks are homeowners and make significant investments in their homes and in on-site improvements. Moving a mobile home from one community to another requires substantial cost and effort and often requires abandonment of on-site improvements such as landscaping, decks and carports. Because of the loss of equity in site improvements, the high cost of moving and the limited availability of vacant mobile home park spaces, mobile homes are seldom moved from their original locations. Instead, mobile homes are usually sold in place when the homeowner wants to move. The high costs associated with moving a mobile home also serve to reduce rent delinquencies and collection losses. Pursuant to Section 798 et seq. of the California Civil Code (the “Mobile Home Residency Law”), a mobile home park owner (after complying with the notice, cure period and other procedural requirements of the Mobile Home Residency Law) has the right to cause the removal of a mobile home if a resident fails to pay rent. Since the loss in value caused by the removal of the mobile home would usually far exceed the amount of the rent delinquency the mobile home owner, or the holder of a lien on the mobile home, has a strong incentive to cure the rent default. Vicinity Description The Project is located in the City of San Juan Capistrano, California. San Juan Capistrano is located in southern Orange County. General information regarding the City of San Juan Capistrano and the surrounding area can be found in the Appraisal attached to this Official Statement. See “APPENDIX C—Appraisal.” The Project The San Juan Mobile Estates mobile home park comprises approximately 38.2 acres and is located at 32302 Alipaz Street, San Juan Capistrano, California. It consists of 312 mobile home spaces. Most of the spaces are double wide spaces. The Project has a recreation center with assembly room, kitchen, game room, billiards room, fitness center, indoor spa, pool, sauna, shuffleboard and horseshoe pit. Individual tenants have two parking spaces available at their units. Guest parking is also available. Maps The following pages contain maps of the Project. 60 Regional Map Neighborhood Map _____________________ Source: Real Estate Appraisal Report for San Juan Mobile Estates prepared by John P. Neet, MAI as of January 23, 2015. 61 Satellite Map of Neighborhood Satellite Map of Project Source: Real Estate Appraisal Report for San Juan Mobile Estates prepared by John P. Neet, MAI as of January 23, 2015. 62 Environmental Site Assessment A Phase I Environmental Site Assessment (the “Assessment”) of the Project, dated March 24, 2006, was completed by ADR Environmental Group, Inc. in connection with the issuance of the Prior Bonds. The Assessment identified no evidence of recognized environmental conditions in connection with the Project, with the possible exception of asbestos or lead containing building materials used in certain buildings on the site. A copy of the Assessment is available upon request to the Borrower or the Underwriter. No additional environmental assessments of the Project have been completed. Physical Needs Assessment According to a Physical Needs Assessment Report prepared by Meterman, Inc., dated January 12, 2015 (the “Needs Assessment”), the Project will need a total of $30,000.00 of repairs within one year from the date of the Needs Assessment, and $2,269,500.00 in additional repairs within a longer time frame, as summarized in the following table: Table 1 Physical Needs Assessment Estimated Cost Summary Description Immediate Mid-Term Long Term Sites: Year (1) Years (2-10) (Years 11-40) 1 Asphalt re-paving/slurry at various locations $31,000.00 $350,000.00 2 Replacement of Gas valves, risers, regulators $75,000.00 3 Replacement main isolation water valves $76,000.00 4 Replacement of main electrical switch board and transformers (Phase 1) $650,000.00 5 Replacement of electrical pedestals and new underground wire (phase 2) $1,000,000.00 6 Sewer – sp239/240 belly $40,000.00 7 Pool Equipment $14,000.00 8 Install new linoleum flooring at clubhouse $30,000.00 9 South laundry building renovation $10,000.00 10 Paint inside of club house and laundry building $23,500.00 Estimated Total Costs $30,000.00 $797,000.00 $1,472,500.00 _____________________ Source: Needs Assessment These capital improvements will be funded from the initial deposit from proceeds of the Bonds to the Repair and Replacement Fund on the Closing Date and from subsequent deposits to such Fund from surplus cash flow from the Project. 63 Historical Operating Results The following table summarizes the historical operating results for the Project for the three fiscal years ended June 30, 2012, 2013 and 2014. The results shown below are in conformance with the definitions of Operating Revenues, Operation and Maintenance Costs and Net Operating Revenues contained in the Indenture. Table 2 San Juan Mobile Estates Summary of Historical Operating Results For Three Years ended June 30, 2012, 2013 and 2014 Fiscal Year Ending Fiscal Year Ending Fiscal Year Ending June 30, 2012 June 30, 2013 June 30, 2014 Income Rental Income $3,226,940.78 $3,286,119.39 $3,340,485.18 Employee Housing (36,794.54) (40,297.61) (42,634.61) Vacancies/Delinquencies 0.00 0.00 0.00 Total Rental Income 3,190,146.24 3,245,821.78 3,297,850.57 Interest Income - GIC 129,695.79 128,824.53 127,733.15 Electric Income 223,657.52 235,362.63 227,873.73 Gas Income 127,460.58 118,118.91 122,429.05 Trash Income 71,270.62 72,348.93 73,697.18 Water Income 116,842.99 123,557.41 121,251.11 Sewer Income 46,550.44 53,816.91 54,783.90 RV Parking 35,130.00 36,728.07 36,100.06 Laundry Income 1,172.52 1,628.92 1,830.28 Late Fees/Misc. 4,510.00 4,932.64 6,100.00 Total Other Income 756,290.46 775,318.95 771,798.46 Total Gross Income 3,946,436.70 4,021,140.73 4,069,649.03 Expenses Accounting 15,058.71 15,247.78 15,335.93 manager auto mileage reimb 485.81 676.03 503.79 Dues and Subscriptions 1,136.82 1,112.00 1,162.00 Insurance 15,194.50 15,318.48 16,282.53 Landscaping 34,139.72 28,279.37 15,791.86 Landscaping-tree trimming 13,025.00 13,810.00 17,095.00 Legal 275.00 155.00 1,544.58 64 License and Permits 3,146.00 3,268.90 5,625.20 Maintenance and Repairs 55,280.37 42,429.44 48,949.04 Management Fee 81,276.00 82,368.00 84,012.00 Office Supplies 3,786.23 2,968.82 5,244.25 Pool/Spa 9,624.30 6,297.52 9,087.70 Property Taxes 68,297.72 72,288.00 96,474.96 Salaries 72,156.00 100,691.00 105,585.11 Salaries - Bonus 150.00 400.00 1,100.00 Payroll Taxes 6,914.40 10,030.84 10,065.42 Worker's Comp Ins. 6,234.00 11,454.15 14,186.37 Telephone 3,168.60 3,588.31 3,490.53 Tenant Activities 4,344.00 5,616.00 5,616.00 Title Search/Credit Reports 504.00 662.63 573.00 Utilities - Electric 196,943.65 221,090.90 205,423.34 Utilities - Cable 746.25 781.19 842.88 Utilities - Gas 85,892.56 82,782.64 84,246.39 Utilities - Trash 73,330.99 75,300.57 76,741.50 Utilities - Sewer 46,737.60 54,425.28 55,186.56 Utilities - Water 111,403.44 121,463.64 125,339.41 Total Expenses $909,251.67 $972,506.49 $1,005,505.35 Net Operating Income $3,037,185.03 $3,048,634.24 $3,064,143.68 Source: Borrower Other Mobile Home Parks The following table prepared by the Appraiser compares certain characteristics of the Project and several other mobile home parks. 65 Table 3 San Juan Mobile Estates and Other Mobile Home Parks Comparable Attributes - As of January 23, 2015 SALE # SUBJECT 1 2 3 4 5 PROPERTY San Juan Mobile Estates Friendly Village Mobile Home Community Pacific Mobile Home Park La Maria MHP Terry's MHP Reseda Mobile Estates ADDRESS 32302 Alipaz Street, San Juan Capistrano 5450 North Paramount Boulevard, Long Beach 80 Huntington Ave., Huntington Beach 1701 S. Thornburg Street, Santa Maria 677 G Street, Chula Vista 6545 Wilbur Avenue, Reseda COUNTY Orange County, CA Los Angeles County, CA Orange County, CA Santa Barbara, CA San Diego Co., CA Los Angeles County, CA APN 121-171-29 7157-006-008 024-291-16 117-330-063 567-090-28, 31 2128-003-017 DATE SOLD Feb-14 Jun-13 Jun-13 Dec-12 Feb-14 GRANTOR Friendly Village Mobile Associates LP Legacy 42680 Holdings, LLC, Foothill to Summit Properties, LLC, and Sizable Properties, LLC Mancinelli Terry Enterprises LLC Reseda Mobile Associates LP GRANTEE Friendly Village MHP Associates LP 80 Huntington ! LLC, et al Palos Verdes Medical Center LLC 411 Quail Run Ptrs & Kleege Reseda MHP Associates LLC SOURCE L. Kort (Buyer) J. Saunders (Buyer), Documents T. Wynne (Buyer) R. Morgan (Broker), B. Kleege (Buyer) M. Scott (Buyer), B. Barbier (Broker) DOCUMENT NO. 129488 368964 40846 819411 178399 PRICE $23,000,000 $46,400,000 $11,256,000 $14,600,000 $13,100,000 TERMS Cash to seller. Buyer obtained new loan from institutional lender at market. Cash to seller. Buyer obtained new loan of $41,000,000 at marekt rate and terms. Cash to seller. Buyer obtained new 1st TD of $8,050,000 at market rate and terms. Cash to seller. Buyer obtained $10,950,000 1st TD from Union Bank at market rate and terms Cash to seller. 44% down. Buyer assumed existing note of $6.4M and borrowed 2nd TD of $1,043,000 from lender in 1st position. Blended interest rate at 5.5%, which is above current market levels. CASH EQUIV. $23,000,000 $46,400,000 $11,256,000 $14,600,000 $13,100,000 $/UNIT $125,000 $181,250 $71,241 $74,490 $121,296 AGE 45 43 60 41 57 54 QUALITY Good Good Average Good Average-Good Average CONDITION Good Good Average-Good Good Average-Good Average-Good SITE AREA (ac) 38.16 18.72 18.22 19.20 15.48 8.57 NO. UNITS 312 184 256 158 196 108 DENSITY 8.18 9.83 14.05 8.23 12.66 12.60 AVG. RENT $907.53 $922.17 $1,081.41 $546.04 $511.67 $858.72 POT. GR. INC. $4,067,310 $2,376,315 $3,644,080 $1,092,669 $1,400,040 $1,334,851 EFF. GR. INC. $4,033,332 $2,335,404 $3,544,417 $1,068,055 $1,363,964 $1,307,438 EXPENSES $1,446,739 $890,502 $1,206,012 $372,905 $574,176 $513,801 NOI $2,586,593 $1,444,902 $2,338,406 $695,150 $789,788 $793,637 NOI/UNIT $8,290 $7,853 $9,134 $4,400 $4,030 $7,348 OAR 6.28% 5.04% 6.18% 5.41% 6.06% 66 MARKET TIME >30 Days Off Market Sale Off Market Sale 90 days >30 days COMMENTS Stabilized occupancy, well maintained. Built on former landfill. Park has historically had moderate settlement issues with streets and flatwork. 16 community owned homes included in sale. High density. Beach location. Rents average $300 under market. High density community located one block from breach near city center. Negotiated transaction. Age Restricted. 98% occupancy at sale. No Rent Control. Attractive park in healthy senior market. Mix includes 194 MH sites & 2 apts. Mild rent control (Chula Vista), age restricted community. Broker proforma adjusted to include Reserves and Professional Management. Well maintained 1960's vintage community in San Fernando Valley. Low risk property, moderate rent controls. Fully occupied at sale. No COH rentals. Source: Real Estate Appraisal Report for San Juan Mobile Estates prepared by John P. Neet, MAI as of January 23, 2015. Rent Control Ordinance Pursuant to Title 2, Chapter 2, Article 9 of the Municipal Code of the City of San Juan Capistrano (the “City Law”), the City Council of the City of San Juan Capistrano has established rules and procedures governing rent increases for mobilehome spaces. Among other things, the City Law permits a choice of annual CPI increase (100%) or an operating expense based increase in which the operating expenses for 12 months preceding the adjustment may be multiplied by the CPI index, and divided by the number of spaces to determine the maximum allowed increase. The owner of a mobile home park may petition for a greater increase based on capital improvements, government mandated improvements, increases in expenses, return on investments, and other factors. See “RISK FACTORS – Conditions Which May Affect Borrower’s Ability to Pay” herein. Management Agreement and Qualifications of Manager The Project will be managed by Bessire & Casenhiser, Inc. (“B&C”) pursuant to a Property Management Agreement (the “Management Agreement”) between the Borrower and B&C. The term of the Management Agreement is for the period of one year, and thereafter for annual periods unless on or before sixty days prior to the expiration of any such period, either party shall notify the other in writing of its intention to terminate the Management Agreement in which case the Management Agreement shall be terminated at the end of such one year period. Either party may terminate the management Agreement upon thirty days’ written notice. Pursuant to the Management Agreement, B&C will be paid an amount equal to approximately $7,170 per month (subject to increase over time as set forth in the Management Agreement) for the Project for its property management services. The following paragraphs provide background information regarding the qualifications of B&C; however, no assurance can be given that B&C will continue to manage the Project during the term of the Bonds. With over 30 years of business experience, B&C manages properties in California, Colorado, Idaho, Wisconsin and Iowa. Clients include individuals, partnerships, corporations and syndications. B&C employees are active in major industry organizations: The Western Manufactured Housing Communities Association (WMA), the nation’s largest trade association of community owners and operators; Manufactured Housing Educational Trust (MHET) of Orange County and Inland Empire of California; California Manufactured Housing Institute (CMHI) and the Idaho Manufactured Housing Association (IMHA). As a broker, the company has participated in the acquisition and disposition of communities valued in excess of $200 million. The officers and key personnel of B&C are: R.C. “Dick” Bessire – President, Director. Dick is now in his 54th year of industry experience, beginning with physical operations and onsite management. Prior to founding B & C, he was a Regional 67 Vice President of Fox and Carskadon, managing 30 communities in the Western United States. His projects included apartment complexes, shopping centers and mobilehome parks. Dick was a long time member of WMA’s Board of Directors, elected two terms as its vice president and as chair of WMA committees. He is a popular speaker at seminars and local chapters. State legislators and officials rely on Dick’s expertise in drafting laws and regulations on industry issues. Park owners have used Dick to negotiate leases with residents or testify before rent review boards. His innovative design of new communities and vision for re-planning existing communities has won praise from industry and governmental leaders. WMA’s most prestigious honor, the Wallace E. Carr Award, was conferred upon Dick in 1990 for service to the industry. Mr. Bessire is a licensed real estate salesman and an active property manager. Keith Casenhiser – Executive Vice President, Director. Keith has been in the real estate business since 1971, beginning as a property manager for a Southern California developer. He managed mobilehome parks, apartment complexes and shopping centers for Fox and Carskadon Management in the 1970’s. Keith is the 2012 President of the Western Manufactured Housing Communities Association (WMA) and served several terms as a Board Member for WMA, OC MHET and IMHA. He has been a featured speaker for management education seminars and conventions. Mr. Casenhiser is a graduate of the University of California at Riverside and a licensed real estate broker. He continues to supervise properties in California, Idaho, Iowa and Colorado. Scott Bessire – Regional Property Manager. Scott joined Bessire & Casenhiser, Inc. in 1995. His career in the mobilehome industry includes extensive experience in onsite management, physical operations, construction and contracting. He supervises eleven properties in Southern California. Scott is a California licensed real estate salesperson and serves as the Bessire & Casenhiser, Inc. Safety Officer overseeing Worker’s Comp claims and Employee Safety Training. Marta Webb – Regional Property Manager. Marta has worked for Bessire & Casenhiser, Inc. since 1985. Before assuming her current position, she was our Accounts Payable Supervisor. She supervises a portfolio of properties extending from Orange County to Bakersfield, California. Marta is a California licensed real estate salesperson. Mark Bessire – Regional Property Manager. Mark joined the property management team in 2004 after several years of on site management. He is responsible for properties in the counties of Los Angeles, Riverside and San Bernardino. He also assists on our premiere properties in Orange County, Newport Beach area. Mark is a licensed real estate salesperson. Chad Casenhiser – Regional Property Manager. Chad started with the company in 2005. He currently supervises properties in Southern California and in Idaho. His Idaho responsibilities include mobilehome parks, a warehouse and an office building. Chad is a graduate of the University of Colorado at Boulder and a licensed real estate broker. 68 Doug Grass – Regional Property Manager. Doug Grass (CPM) joined the Bessire & Casenhiser, Inc. property management team in 2006 and has been working out of the Sacramento area. Doug has 20 years’ experience as a Regional Property Manager and is currently responsible for northern California and Colorado properties. Doug holds a Bachelor’s Degree in Business Administration with a concentration in Real Estate and Land Use Affairs and a Master’s Degree from California State University, Sacramento. Doug is a Certified Property Manager (CPM) through the Institute of Real Estate Management and holds a California Real Estate Sales License. During his career, Doug has been responsible for the daily operations and overall management of manufactured home communities and RV resorts located in California, Washington, Iowa, Minnesota, Texas, Georgia and Oregon. Rheannon Arciniega – Regional Property Manager. Rheannon started with Bessire & Casenhiser, Inc. in the Accounting Department. She has acquired a California Real Estate Salesperson License and a Public Notary Certification. Charolette Sears – Regional Property Manager. Charolette started as an onsite Resident Manager for B & C in a mobilehome community located in the Sacramento area and went back to real estate school to get her California Real Estate License. She is now a Regional Property Manager with Bessire & Casenhiser, Inc. while still serving as a resident manager. Rents/Occupancy The average monthly rent per space in the Project was $889.74 in 2015 and $889.74 in 2014. The current occupancy rate for the Project is 100%. Projected Operating Results Set forth below is a table which projects income and expenses for the Project and provides estimated debt service coverage for the next five years. Table 4 San Juan Mobile Estates Projected Operating Results Year 1 2 3 4 5 Income: Rental Income (0%) (1.1% CPI) 3,384,037 3,451,717 3,520,752 3,591,167 3,662,990 Employee Rent Allowance (48,000) (48,960) (49,939) (50,938) (51,957) Delinquencies (1) (10,846) (11,063) (11,284) (11,510) (11,740) Total Rent Income 3,325,190 3,391,694 3,459,528 3,528,719 3,599,293 Other Income R.V. Storage 37,200 37,944 38,703 39,477 40,266 Laundry Income 2,000 2,040 2,081 2,122 2,165 Gas Income 109,800 111,996 114,236 116,521 118,851 Electric Income 260,630 265,843 271,159 276,583 282,114 Water Income (7% increase) 86,900 88,638 90,411 92,219 94,063 69 Sewer Income(13.42/sp/mo) 49,800 50,796 51,812 52,848 53,905 Trash Income 74,400 75,888 77,406 78,954 80,533 Misc. Income/Late Fees 5,640 5,753 5,868 5,985 6,105 Total: Other Income: 626,370 638,897 651,675 664,709 678,003 Eff. Gross Income: 3,951,560 4,030,592 4,111,204 4,193,428 4,277,296 Expenses Accounting 9,400 9,588 9,780 9,975 10,175 Accounting - data processing 8,400 8,568 8,739 8,914 9,092 Accounting - Title Search / Credit Check 622 634 647 660 673 Auto/Vehicle/golf cart 891 909 927 946 964 Dues & Subscriptions / Edu & Seminars 1,370 1,397 1,425 1,454 1,483 Insurance - property liab./auto/DIC 17,716 18,070 18,431 18,800 19,176 Landscaping 22,200 22,644 23,097 23,559 24,030 Tree Trimming 13,200 13,464 13,733 14,008 14,288 Legal 4,000 4,080 4,162 4,245 4,330 License and Permits 3,290 3,356 3,423 3,491 3,561 Maintenance & Repairs 41,670 42,503 43,353 44,220 45,104 M/R - street sweeping 3,240 3,305 3,371 3,438 3,507 Management Fee (1.3%) 86,040 87,761 89,516 91,307 93,133 Office Supplies & Postage. 5,000 5,100 5,202 5,306 5,412 Pool & Spa 10,708 10,922 11,141 11,363 11,591 Property Taxes (76% exemption) 90,192 91,996 93,836 95,712 97,627 Repair and Replacement Fund Deposit ** 0 0 0 0 0 Salaries (3%) 102,429 104,478 106,567 108,698 110,872 Salaries - Bonus 1,200 1,224 1,248 1,273 1,299 Salaries - Health Insurance 13,680 13,954 14,233 14,517 14,808 Salaries - Payroll Taxes (11%) 11,399 11,627 11,860 12,097 12,339 Salaries - Workers' Compensation (11.61%) 12,031 12,272 12,517 12,768 13,023 Telephone/Answ Service 4,800 4,896 4,994 5,094 5,196 Tenant Activities ($1.5/space) 5,616 5,728 5,843 5,960 6,079 Utilities - Cable 960 979 999 1,019 1,039 Utilities - Gas 72,260 73,705 75,179 76,683 78,217 Utilities - Electric 245,980 250,900 255,918 261,036 266,257 Utilities - Water () 101,000 103,020 105,080 107,182 109,326 Utilities - Sewer ($13.42/sp/mo) 50,244 51,249 52,274 53,319 54,386 Utilities - Trash 77,700 79,254 80,839 82,456 84,105 Above the Line R & R 7,993 7,993 7,993 7,993 7,993 Total Expenses 1,025,231 1,045,576 1,066,327 1,087,494 1,109,084 Net Opt. Income: 2,926,329 2,985,016 3,044,876 3,105,933 3,168,212 Series 2015A Debt Service 2,147,754 2,145,744 2,146,644 2,147,244 2,146,994 Coverage 1.36 1.39 1.42 1.45 1.48 Cashflow after Series A Debt Service 778,576 839,272 898,232 958,690 1,021,218 Trustee 0 5,000 5,000 5,000 5,000 Program Administrator/Oversight 0 5,000 5,000 5,000 5,000 Rating Agency Fee 0 5,000 5,000 5,000 5,000 Cashflow 778,576 824,272 883,232 943,690 1,006,218 70 Issuer Fee 36,675 36,285 35,815 35,330 Asset Management Fee 168,500 171,870 175,307 178,814 182,390 Cashflow before Repair & Replacement and Rental Assistance 610,076 615,727 671,640 729,061 788,498 Beginning Balance of Repair and Replacement 1,700,000 1,600,000 1,500,000 1,398,500 1,295,478 Estimated R & R Expenditures (Below the line) 100,000 100,000 101,500 103,023 104,568 Balance after Expenditures 1,600,000 1,500,000 1,398,500 1,295,478 1,190,910 Replenish R & R to $150,000 0 0 0 0 0 Cashflow before Rental Assistance 610,076 615,727 671,640 729,061 788,498 Beginning Balance of Rental Assistance Fund 400,000 350,000 350,000 350,000 350,000 Estimated Rental Assistance Expenditures 350,000 322,000 296,240 272,541 250,738 Balance after Expenditures 50,000 28,000 53,760 77,459 99,262 Replenish Rental Assistance Fund 300,000 322,000 296,240 272,541 250,738 Net Cashflow 310,076 293,727 375,400 456,520 537,761 Source: Newcomb Williams Financial Group. The projected operating results in the table above were prepared by the Underwriter based on financial information provided by the Borrower. Neither the Authority nor the Underwriter have verified such financial information or the underlying assumptions and no assurance can be given as to the accuracy of such information or as to the ability of the Project to achieve the projected operating levels assumed thereby. Oversight Agent The Authority has engaged Wolf & Company Inc. (“Wolf”) to serve as the Oversight Agent under the Indenture, the Loan Agreement and the Regulatory Agreement. Wolf is a housing, financial and insurance advisory firm that provides services to state and local governments, insurance companies, mortgage bankers, investment bankers and institutional investors in the areas of affordable housing programs, with a specialized emphasis on program administration, compliance and oversight agent services. Wolf is the Oversight Agent on forty (40) mobile home parks backed by revenue bonds in California. Wolf provides administration/oversight agent duties for the City of La Verne, Marineland Mobile Home Park in Hermosa Beach, CA and 21 parks for Independent Cities Finance Authority financed parks located in the Cities of Carpinteria, Capitola, Fresno (2), Montclair (3), Morgan Hill, Palm Springs, Rohnert Park (2), Salinas, San Marcos (3), San Juan Capistrano, Santa Rosa, Yucaipa (3) and the County of San Mateo, and 17 parks for California Municipal Finance Authority financed parks located in the Cities of Brea, Lancaster (4), Vista (2), Garden Grove (2), Newcastle, Palmdale, Rohnert Park, Vacaville, Yucaipa, Towns of Windsor and Yucca Valley and Lakeport, CA. Wolf is also the program administrator/compliance agent on the County of San Bernardino’s 1997, 2000, 2001, 2002 Single Family Mortgage Revenue Bond Programs. The Oversight Agent will have general oversight responsibility, including monitoring the Borrower’s performance under the Indenture, Loan Agreement and the Regulatory Agreement. 71 THE AUTHORITY The Independent Cities Finance Authority is a joint powers authority created pursuant to a joint exercise of powers agreement, dated May 5, 1988, as amended, and the joint exercise of powers law of the State of California. The Authority has 7 members and 67 associate members. The Authority is authorized under the Act to issue the Bonds as provided in the Indenture and to loan the proceeds of the Bonds to the Borrower, as provided in the Loan Agreement. The Bonds are not a debt of the Authority, members of the Authority, the State of California or any of its political subdivisions for purposes of any constitutional or statutory debt limitation or restriction, nor in any event shall the Bonds be payable out of funds or properties other than as pledged pursuant to the Indenture. The Authority has not assumed responsibility for any information in this Official Statement, except for the information under this caption and the caption “LITIGATION—The Authority.” RISK FACTORS The following factors, which represent major risk factors that have been identified at this time, should be considered along with all other information in this Official Statement by potential investors in evaluating the Bonds. There can be no assurance made that other major risk factors will not become evident at any future time. Potential investors are advised to consider the following factors along with all other information in this Official Statement in evaluating the investment quality of the Bonds. Bonds Are Limited Obligations of the Authority The Bonds are special limited obligations of the Authority, payable solely from and secured as to the payment of the interest on, and the principal of, and the redemption premiums, if any, in accordance with their terms and the terms of the Indenture, from Pledged Revenues and other funds as provided therefor in the Indenture. The Bonds are not a debt of the Authority, members of the Authority, the State or any of its political subdivisions within the meaning of any constitutional or statutory debt limitation, nor in any event shall the Bonds be payable out of funds or properties other than as described in the preceding sentence. Pledged Revenues consist primarily of payments to be made by the Borrower under the Loan Agreement and Note. The obligations of the Borrower (or any future owner of the Project) under the Loan Agreement and Note, are not enforceable personally against the Borrower and such obligations are secured only by the properties and liens specifically conveyed or encumbered as security therefor, consisting of the Project. No representation or assurance can be given that the Project will generate sufficient revenues to enable the Borrower to meet its payment obligations under the Loan Agreement and Note. In the event that the Borrower defaults in its obligations, payment of the principal of and interest on the Bonds will be payable from amounts on deposit in the Debt Service Reserve Fund and from amounts, if any, available in certain other funds held by the Trustee. See “THE INDENTURE” herein. Loan Payments Non-Recourse The Borrower agrees to repay the Loan from Net Operating Revenues. The Loan is secured by a pledge of Operating Revenues and a security interest in the Project pursuant to the terms of the Deed of Trust. Neither the Borrower’s members, officers, employees and agents, nor any of its other affiliates, has or is intended to have any liabilities under or in respect of the Loan Agreement, the Indenture, the 72 Note, the Deed of Trust, the Regulatory Agreement or any of the other documents or transactions contemplated by any of them. Loan Payments Not Preference Proof Payments by the Borrower on the Loan are not subject to aging requirements for purposes of satisfying the preference-proofing requirements of federal bankruptcy laws. In the event of bankruptcy of the Borrower, payments to Bondholders within 123 days (one year in certain cases) prior to the date of such bankruptcy may be subject to disgorgement and other preference restrictions. Restrictions Under the Regulatory Agreement and the Supplemental Regulatory Agreement Under the Regulatory Agreement, the Borrower is to rent at least 20% of the Spaces in the Project to Very Low Income Residents (all as defined in the Regulatory Agreement). Under the Supplemental Regulatory Agreement the Borrower is required to rent at least 20% of the Spaces to Very Low Income Residents and an additional 30% of the Spaces to Lower Income Residents. Spaces set-aside in accordance with the terms of the Supplemental Regulatory Agreement will, upon satisfaction of the provisions of the Regulatory Agreement, also be counted as qualifying Spaces under the Regulatory Agreement. The monthly rental rate which the Borrower may charge some of the Very Low Income Residents and Lower Income Residents is restricted by the Regulatory Agreement and the Supplemental Regulatory Agreement, as discussed herein. See “THE REGULATORY AGREEMENT” and “THE SUPPLEMENTAL REGULATORY AGREEMENT” herein. These provisions may limit the Net Operating Revenues available to pay debt service on the Bonds. These restrictions have the effect of limiting the market for restricted Spaces in the Project in that certain otherwise eligible tenants are excluded on the basis of the restrictions, and also limit the monthly rental and rental increases which may be charged for restricted Spaces. In the event of an economic downturn, the “Median Income for the Area,” on the basis of which certain rent ceilings are to be calculated, is likely to decline, causing a decline in the monthly rental which the Project is able to realize for certain restricted Spaces. See “THE REGULATORY AGREEMENT” and “THE SUPPLEMENTAL REGULATORY AGREEMENT” herein. Risk of Taxability The failure of the Borrower or the Management Agent to abide by the covenants and conditions of either the Regulatory Agreement or the Loan Agreement may cause the interest on the Bonds to become includable for federal income tax purposes in the gross income of holders of such Bonds, in some cases retroactive to the date of issuance of the Bonds. There is no provision in the Bonds or the Indenture for an acceleration of the Bonds or the payment of additional interest in the event interest becomes so includable, and the Authority is not liable for any claims or damages resulting from any such includability in gross income. While failure to comply with the tax covenants of the Loan Agreement and the Regulatory Agreement is an event of default which will entitle the Authority to accelerate the Borrower’s indebtedness and commence foreclosure proceedings, pursuit of such remedies is subject to delays as a result of bankruptcy, limits on creditor’s remedies and other practical considerations. There can be no assurance that such remedies will be achieved or proceeds of such remedies will be adequate to fund a redemption of all or part of the Bonds following the Borrower’s noncompliance with such tax covenants, or that the Authority will be able to compel compliance in a timely manner to avoid an event of taxability described above. See “THE REGULATORY AGREEMENT” and “TAX MATTERS” herein. In the event of foreclosure and sale of the Project, there can be no assurance that the purchaser thereof will not render the Bonds ineligible for tax-exempt status. 73 Conditions Which May Affect Borrower’s Ability to Pay Numerous conditions, which are not accurately predictable, could have an impact upon the revenues and expenses of the Borrower and, as a result, upon its ability to make timely payment under the Loan Agreement and the Note. In particular, the ability of the Project to generate revenues and sufficient rental income to pay all interest on and principal of the Bonds as due will depend on maintaining a high occupancy rate, and sustaining the rental rates, in the Project. Factors that may affect the ability of the Borrower to lease the mobile home sites of the Project and thus generate sufficient income include the demand for mobile home facilities in the market area, the availability and costs of other competing housing facilities and the ability of potential residents to meet payments. The ability of the Borrower to generate sufficient income in the future will also depend upon other factors which cannot be predicted with any assurance. Such factors include general and local economic conditions which may affect demand for mobile home units. Units such as those which form the Project are subject to rising operating costs, fluctuating occupancy levels, adverse economic conditions and changes in neighborhood preferences. The ability of the Borrower to generate sufficient income will depend on its ability to lease the Project units promptly and maintain occupancy. The Appraisal. The Appraisal is based upon certain assumptions, limiting conditions, certifications and definitions set forth therein. An appraisal is only an estimate as to value as of the specific date stated therein. As an estimate, an appraisal is not a measure of realizable value and may not reflect the amount which would be received if the property which is the subject of the appraisal is sold. The Appraisal should be read in its entirety for an understanding of the assumptions and rationale which underlie its conclusions. Appendix C hereto contains a copy of the Appraisal without the complete addenda thereto. The Appraisal with the complete addenda is available upon request from the Borrower or the Underwriter. Leasing and Income Risks. The availability of sufficient operating income to pay the obligation of the Borrower with respect to the Loan Agreement is subject to the ability of the Borrower to establish appropriate rental rates for, and the continuing ability to rent units in, the Project, subject to the limitations of the Regulatory Agreement. Any constraint on rental increases due to regulatory (including, but not limited to, rent control) or market demand factors that inhibit annual rent increases may adversely affect the Borrower’s ability to cover expenses and financing costs of the Project. Projected Operating Results of the Project. The cash flow projections of the Project (see “THE PROJECT – Projected Operating Results” herein) are based upon certain assumptions, limiting conditions, certifications and definitions as set forth under such captions. There can be no assurance that the projected results contained therein will approximate actual results or that any projected results will continue beyond the projection period. Operation of the Project. The primary source of payment of the Loan is the Project revenues available after payment of operating expenses of the Project. Accordingly, the Bondholders are exposed to the risk that, if the expected operating cash flow is not achieved, actual payments of the Borrower pursuant to the Loan Agreement may be insufficient to timely pay all amounts due on the Loan. In the event that interest and principal are not paid with respect to the Loan Agreement, or only partially paid, there will be insufficient Revenues to make scheduled principal and interest payments to Bondholders. The Trustee may be required to draw on amounts in the Debt Service Reserve Fund to make up such deficiencies. Once amounts in the Debt Service Reserve Fund have been depleted, estimated payments of principal and interest on the Bonds may be delayed or unpaid. 74 The availability of revenues of the Project to make payments under the Loan could be adversely affected by a failure or inability to (i) continue to rent or lease the Project at the rental rates expected by the Borrower, and (ii) to maintain the operating expenses and capital expenses at or below the level expected by the Borrower. Risks Associated with Operating Expenses. The Borrower’s ability to raise rents is limited under the Regulatory Agreement. An extended period of inflation may cause the rate of increases in operating expenses to outpace the ability to raise rents. See “THE REGULATORY AGREEMENT” herein. In addition, any underestimation by the Borrower in the operating expenses of the Project may materially affect its projections of the operating income of the Project. The consequences of this risk are similar to a deterioration in the base rental income and would adversely affect Project revenues. The Borrower has committed no other resources outside of the revenues generated from the Project to repay the Loan and to pay increased operating expenses. Additionally, the cost of electricity in the State of California has risen and is expected to rise over the course of the next few years. Electricity is a cost that is paid directly by the tenants in the Project. The increasing cost of electricity is likely to result in the increased operating costs of the Project to the Borrower. Property reserves are an important consideration for long-term borrowers who will have to replace major capital items to maintain the quality of the property over time. See “THE INDENTURE- Revenue Fund” and “THE LOAN AGREEMENT-Repair and Replacement” herein. The deterioration and replacement of capital items is not predictable with certainty, and real estate properties such as the Project may encounter a periodic need for capital for replacement and repair of capital items in excess of budgeted amounts. In the event that additional capital is needed for the replacement of capital items, it is likely that the Borrower will either have to seek additional debt capital from third party lenders or pay for such capital replacement and improvement out of residual cash flow from the Project, if any. The Authority has no obligation with respect to any operating, reserve or capital expenses of the Project and no assurance can be given that such moneys will be obtained. If not, the viability of the Project may be adversely affected over time. Risks Associated with Other Expenses. To the extent there are any expenditures required to maintain the Project that are not foreseen by the Borrower, any uninsured losses, or additional property taxes due on the Project as a result of a change in the law, regulation or interpretation of a court of competent jurisdiction, the only source of moneys to pay such expenses would be additional resources available to the Borrower. The Borrower has pledged no assets, other than the revenues of the Project, to make debt service payments and to pay for operating expenses. Accordingly, the Borrower may be unwilling or unable to pay for such additional expenditures. Risks Associated with the Management of the Project. A disruption in management continuity may temporarily impact the operations of the Project. In addition, a new manager of the Project may not have the same ability to realize rental increases or to contain operating expenses as the current manager. If authorized compensation to the management agent proves to be inadequate, the Borrower may have difficulty securing quality management. If no other money than approved amounts are available to pay such increased costs, the quality and revenues of the Project could be adversely affected. The Deed of Trust. The Borrower has executed the Deed of Trust for the Project in favor of the Authority and the Trustee to secure the Borrower’s obligations under the Loan Agreement. Because the Borrower may have limited financial assets, and because the Borrower is not personally liable for the 75 amounts owing under the Loan Agreement (other than the indemnity and for certain fees as provided thereunder), if there is a default under the Loan Agreement, the primary remedy of the Trustee and the Authority is to foreclose on the real and personal property security granted pursuant to the Deed of Trust and related documents. All amounts collected upon foreclosure of the Project pursuant to the Deed of Trust will be used to pay amounts owing under the Loan Agreement pursuant to the provisions of the Deed of Trust and, under the Indenture, will be applied to the payment of the Bonds. Value of Project; Economic Feasibility The economic feasibility of the Project depends in large part upon its being substantially occupied. The Borrower is required by the Regulatory Agreement, among other things, to have at least 20% of the Spaces in the Project occupied (or treated as occupied) by persons whose income for federal tax law purposes does not exceed 50% of area median gross income adjusted for family size, as published by HUD. Under the Supplemental Regulatory Agreement the Borrower is required to rent at least 20% of the Spaces to Very Low Income Residents and an additional 30% of the Spaces to Lower Income Residents. Spaces set-aside in accordance with the terms of the Supplemental Regulatory Agreement will, upon satisfaction of the provisions of the Regulatory Agreement, also be counted as qualifying Spaces under the Regulatory Agreement. The monthly rental rate which the Borrower may charge the residents of the Project is also restricted by the Regulatory Agreement and the Supplemental Regulatory Agreement, as discussed herein. See “THE REGULATORY AGREEMENT” and “THE SUPPLEMENTAL REGULATORY AGREEMENT” herein. There can be no assurance that the Borrower will be able to rent units to comply with these requirements or at rentals which will enable it to make timely payments under the Loan Agreement and the Note. There can be no assurance that the appraised value would be realized upon sale of the Project. In any event, the appraised market value of the Project set forth in the appraisal of John P. Neet, MAI as of January 23, 2015 is more than the initial principal amount of the Bonds (see “APPENDIX C— Appraisal”). In the event of a forced sale of the Project due to economic distress, the amount realized upon such distress sale would likely be less than the fair market value. Furthermore, there can be no assurance that funds sufficient to pay the principal amount of the Bonds at maturity or earlier redemption could be obtained through the sale or refinancing of the Project. The Borrower believes that proceeds from the foreclosure of the Project would be sufficient to pay the principal of and interest on the Bonds. Such payments will, however, be additionally secured by the Debt Service Reserve Fund, with respect to the Bonds and by certain other funds held by the Trustee, if available. Competing Facilities The Authority may finance other facilities and other facilities may be financed, developed, constructed and operated by any party that could compete with the Project for tenants. The existence of competing facilities could adversely affect occupancy and revenues of the Project. Risks of Ownership of Real Property The Bondholders will be subject to the risks generally incident to an investment in real estate, including, without limitation: (i) the uncertainty that the Project will produce sufficient revenues to enable 76 the Borrower to make timely payments pursuant to the terms of the Loan Agreement; (ii) adverse changes in local market conditions, such as changes in the market value of real property in the vicinity of the Project, the supply of or demand for competitive properties in such area, and the market value of the Project in the event of sale or foreclosure; (iii) changes in interest rates and the availability of financing moneys that may render any refinancing or sale of the Project difficult, unattractive, or impossible; (iv) changes in real estate tax rates and other operating expenses, governmental rules (including, without limitation, zoning laws) and fiscal policies; and (v) natural disasters (including, without limitations, earthquakes and floods), which may result in uninsured losses. The Bondholders will be subject to the risk that the Project will be unable to attract and retain tenants as a result of adverse changes affecting the Project, the local real estate market or other factors, including the restrictions on the Project imposed under the Regulatory Agreement and the Supplemental Regulatory Agreement. Such inability to attract and retain tenants would result in a decline in rental income and may affect the ability and willingness of the Borrower to make timely payments due with respect to the Loan Agreement. There can be no assurance that the Project will generate sufficient revenue to cover operating expenses and meet required payments due under the Loan Agreement. Residential real estate, including the Project, can be subject to adverse housing pattern changes and uses, vandalism (resulting in extra security costs), vacancies, rent controls, rising operating costs, and adverse changes in local market conditions, such as a decrease in demand for residential housing due to a decline of the local economy and a decrease in employment. Rationing or other restrictions with respect to the availability or use of utilities could significantly affect the profitability of operating the Project. Similarly, governmental or administrative entities may impose restrictions requiring structural alterations of or capital improvements to residential buildings, resulting in significant additional costs to the Borrower that the Borrower may be unwilling or unable to finance, and which would significantly impact the Project cash flow. If the local regulatory bodies having jurisdiction over the Project restrict or limit rent increases imposed by the Borrower to offset increased costs, the Project cash flow may be reduced. Any future organization of the tenants of the Project could also result in resistance against rent increases, in the form of rent strikes, litigation or other action. If rental receipts after operating expenses (other than debt service) are insufficient to service the debt with respect to the Loan, foreclosure and sale of the Project is possible. Some of the risks mentioned in this subsection are more particularly described in the following subsections. Environmental Risks The Borrower knows of no environmental problems or liabilities in or on the real property or on adjacent properties which would adversely affect the value of the Project as security. Since certain environmental problems are hidden by time, nature, or both, it is possible that there could exist soil or other groundwater contamination on site, which at some point in time might require remediation. In the event the Project is determined at some future time to require any further environmental remediation, the result could be a substantial or total loss of market value. Further, under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), the owner or operator of property is potentially liable for the full amount of the costs of cleanup of hazardous substances, and, in certain cases, secured creditors can incur liability as an operator by participating or having the capacity to participate in the management of a facility prior to foreclosure, and after foreclosure may have absolute liability as an owner. 77 Insufficient Insurance and Sale Proceeds Relating to the Project The Indenture requires that in the event of damage to, destruction of or a title defect relating to the Project and the Improvements which the Borrower determines not to repair or replace, the Borrower will notify the Trustee of such events and the Trustee shall promptly exercise its remedies under the Deed of Trust and as soon as practicable, sell the real property and title to personal property acquired through or in lieu of such exercise. The proceeds together with any Net Proceeds are to be used to redeem all or a pro rata share of the Bonds, as described in the Indenture. The Borrower is required to maintain casualty insurance only in the amount equal to the replacement value of the Improvements (see the discussion under the heading “THE LOAN AGREEMENT”). In addition, the Borrower could violate its covenant to maintain insurance by allowing the insurance on the Project to lapse, or an insurance company providing such insurance could become insolvent or otherwise not honor claims on policies. In such event, if such a loss occurs, a default in payment of the Bonds would almost certainly result and, if such loss is substantial, a non-payment of all or a portion of the Bonds could occur. Based on current value of the real property comprising the Project, the Borrower expects that there would be sufficient revenues available from the sale of the real and personal property and Net Proceeds to redeem the Bonds; however, if real property values decline, or the Project cannot be sold at an adequate price, the Net Proceeds may not be sufficient to redeem Bonds in a principal amount sufficient to reduce debt service to a level that can be supported by the Revenues from the remaining Project and Improvements. Enforceability and Bankruptcy The remedies available upon a default are in many respects dependent upon regulatory and judicial actions which are often subject to discretion and delay. Under existing laws and judicial decisions, the remedies provided under the financing documents described herein may not readily be available or may be limited. Recent revisions of the federal bankruptcy laws may have an adverse effect on the ability of the Trustee to enforce its claim to the security granted by the Deed of Trust. The bankruptcy court may also have the power to invalidate certain provisions of the Loan Agreement and the Deed of Trust that make bankruptcy and related proceedings by the Borrower an event of default thereunder. The various legal opinions to be delivered concurrently with the delivery of the Bonds and the aforesaid documents will be qualified to the extent that the enforceability of certain rights related to the Bonds are subject to limitations imposed by bankruptcy, reorganization, insolvency or other similar laws affecting the rights of creditors generally and by equitable remedies and proceedings generally. Anti-Deficiency Laws of the State of California Section 726 of the California Code of Civil Procedure provides (among other matters) essentially that any suit to recover a debt or to assert other rights secured by a trust deed on real property must be an action to foreclose that trust deed, thus prohibiting a direct action on the debt or the exercise of other rights by the holder of that trust deed (commonly called the “one form of action rule”). This section has been interpreted by the California courts to require a lender to exhaust all collateral security on a debt in a single action and to limit a lender’s right to set-off. This section also specifies the procedures for the sale of the encumbered property, the application of proceeds, the availability in certain cases of a deficiency judgment, the limitation on the amount thereof, and other related matters. In the event of an action in violation of the one form of action rule, it is virtually certain that the benefit of the real property security would be lost. Further, in the event that an action were taken by the Trustee with regard to funds or other security other than with regard to the application of funds pursuant to the Indenture other than the real property security prior to a “trustee’s sale” of the real property security 78 (as discussed below) it is possible that the sanctions contained in the one form of action rule would thereby be incurred. Sections 2924 and 2924(c) of the California Civil Code require the following of certain procedures by the holder of a trust deed or mortgage before exercising a power of sale included under a trust deed or mortgage, which procedures are designed to protect the rights of the borrower and certain other persons and under certain circumstances to reinstate the obligations secured by such trust deed. Section 2924(c) of the California Civil Code provides that whenever the maturity of an obligation secured by a trust deed is accelerated by reason of a default in the payment of interest or of any installment of principal or other sum secured thereby, the trustor and certain other entitled persons have the right, at any time within the period remaining with the date of recordation of the notice of default until five business days prior to the date of sale set forth in the notice of default if the power of sale under such trust deed is to be exercised or, otherwise, at any time prior to the entry of the decree of foreclosure, to cure such default by paying the entire amount then due (including certain reasonable costs and expenses incurred in enforcing such obligations, but excluding any amount that would not otherwise be due but for such acceleration) and thereby reinstate such trust deed and the obligations secured thereby to the same effect as if no such acceleration had occurred. The instance of multiple securities to a creditor is also subject to the one form of action rule, thus requiring that creditor to foreclose on all security in a single action. If this procedure is not followed, and any part of the security is omitted in the foreclosure action, the debtor may treat the omitted security as freed from the encumbrance once any judgment has been taken on the debt. Walter v. Community Bank (1974). Under the terms of the Indenture, the Trustee has been instructed to cause a foreclosure action to be filed on the Deed of Trust in the event of default under the Deed of Trust. California Code of Civil Procedure Section 580(d) prohibits the rendering of any deficiency judgment after a trustee’s sale. Paradoxically, California Civil Procedure Section 580(a) essentially limits the amount of a deficiency judgment after a trustee’s sale to the difference between the appraised value of the secured property sold and the sales price at the trustee’s sale. Although on their face these Code sections do not limit the Trustee’s rights to recover a deficiency under the Note, at least with respect to the Borrower, since the Loan is non-recourse, these Code sections could limit or hamper the enforcement of certain rights of the Bondholders since the combined effect of these Code sections has been held to cut off the subrogation rights of guarantors. Therefore, in effect, California courts have refused to enforce guarantees where guarantors have lost their rights of subrogation through the secured party’s conduct of a trustee’s sale. Under California law, guarantees by corporate shareholders may not be given effect if the corporation is found to be a mere instrumentality or “alter ego.” However, the mere fact that guarantors are shareholders, officers or directors will not be grounds for applying anti-deficiency protections absent a showing that adherence to a separate existence would promote an injustice or fraud. Section 9501 of the Uniform Commercial Code as adopted in California is intended to facilitate the employment of remedies permitted under the Uniform Commercial Code with regard to personal property used as security for a debt also secured by real property. Such remedies would include a deficiency judgment after the sale of personal property security and multiple, as opposed to unitary sales of security. It is the opinion of leading California legal scholars that the employment of Uniform Commercial Code Section 9501 is subject to a commercial reasonableness test which could impair a creditor’s right to proceed against real property security after a sale or other action under the Uniform Commercial Code. Therefore, prudence dictates that all collateral be sold in a single sale when a debt is secured by mixed 79 collateral. Any other course of action, such as a sale of personal property or seizure of funds or the use of an offset of funds, might invoke the sanctions of Civil Code Section 726. The Deed of Trust provides for an absolute assignment of rents to the Trustee as the assignee thereunder. Although these provisions are absolute in form, until the assignee perfects its assignment by taking possession pursuant to the Indenture or by receivership, it may have no claim to the rents as against either the Borrower or a junior lien or with a similar assignment of rents clause who earlier perfected its own lien through possession or receivership. Further, it is probable that a judgment appointing a receiver to enforce a rents and profits clause or the use of such proceeds to service or satisfy a debt would invoke the sanctions of the one form of action rule. The provisions for penalties, late charges or additional interest in the event of a default by the Borrower under the Loan Documents will be subject to factual determinations required under California law in the evaluation of late payments and liquidated damages provisions. Forward-Looking Statements Certain statements included or incorporated by reference in this Official Statement constitute “forwardlooking 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 “plan,” “expect,” “estimate,” “project,” “budget” or other similar words. Such forward-looking statements include, but are not limited to, certain statements contained in the information under the caption “THE PROJECT – Projected Operating Results.” 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. The Borrower does not plan to issue any updates or revisions to those forward-looking statements if or when its expectations, or events, conditions or circumstances on which such statements are based occur, other than as described under “CONTINUING DISCLOSURE” herein. Limited Secondary Market Prices of bond 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. No assurance can be given that the market price for the Bonds will not be affected by the introduction or enactment of any future legislation (including without limitation amendments to the Internal Revenue Code), or changes in interpretation of the Internal Revenue Code, or any action of the Internal Revenue Service, including but not limited to the publication of proposed or final regulations, the issuance of rulings, the selection of the Bonds for audit examination, or the course or result of any Internal Revenue Service audit or examination of the Bonds or obligations that present similar tax issues as the Bonds. TAX MATTERS In the opinion of Bond Counsel to the Authority, based on existing laws, regulations, rulings and court decisions and assuming, among other matters, the accuracy of certain certifications and compliance with certain covenants, interest on the Bonds is excludable from gross income for federal income tax purposes. Interest on the Bonds is not a specific preference item for purposes of the federal individual and corporate alternative minimum taxes but such interest is included in adjusted current earnings in 80 computing the federal alternative minimum taxes imposed on certain corporations. Bond Counsel is also of the opinion based on existing laws of the State of California as enacted and construed that interest on the Bonds is exempt from State of California personal income taxes. Bond Counsel expresses no opinion regarding any other tax consequences relating to the ownership or disposition of, or the accrual or receipt of interest on, the Bonds. The Code establishes certain requirements which must be met on a continuing basis subsequent to the delivery of the Bonds for interest on the Bonds to be excludable from gross income for federal income tax purposes. The Authority and the Borrower have covenanted in the Indenture and the Loan Agreement to take all reasonable steps to comply with all of the requirements of the Code so that interest on the Bonds will be excludable from gross income for federal income tax purposes. Bond Counsel has assumed continuing compliance by the Authority and the Borrower with the above covenants and procedures in rendering their opinion with respect to the interest on the Bonds being excludable from gross income for federal income tax purposes. Failure to comply with certain tax requirements may cause interest on the Bonds to be included in gross income for federal income tax purposes retroactive to the date of issuance of such bonds. To the extent that the opinions rendered by Bond Counsel are dependent on the organization and operation of the Borrower as an organization described in Section 501(c)(3) of the Code and exempt from tax under Section 501(a) of the Code, no part of the net earnings of which inures to the benefit of any person, Bond Counsel is relying on the representations of the Borrower and the opinion of the Borrower’s counsel dated as of the date of issuance of the Bonds. Bond Counsel’s engagement with respect to the Bonds ends with the issuance of the Bonds. Bond Counsel has not undertaken to determine (or to inform any person) whether any actions taken (or not taken) or events occurring (or not occurring) or any other matters coming to the attention of Bond Counsel after the date of issuance of the Bonds may adversely affect the value of, or the tax status of interest on, the Bonds. Accordingly, the opinion of Bond Counsel is not intended to, and may not, be relied upon in connection with any such actions, events or matters. Future legislative proposals, if enacted into law, clarification of the Code or court decisions may cause interest on the Bonds to be subject directly or indirectly, to federal income taxation or interest on Bonds to be subject to or exempted from state income taxation, or otherwise prevent bondholders from realizing the full current benefit of the tax status of such interest. The introduction or enactment of any such future legislative proposals, clarification of the Code or court decisions may also affect the market price for, or marketability of, the Bonds. Prospective purchasers of the Bonds should consult their own tax advisors regarding any pending or proposed federal or state tax legislation, regulations or litigation, as to which Bond Counsel expresses no opinion. The opinion of Bond Counsel is based on current legal authority, covers certain matters not directly addressed by such authorities, and represents Bond Counsel’s judgment as to the proper treatment of the Bonds for federal income tax purposes. It is not binding on the Internal Revenue Service (“IRS”) or the courts. Furthermore, Bond Counsel cannot give and has not given any opinion or assurance about the future activities of the Authority or the Borrower or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the enforcement thereof by the IRS. Although Bond Counsel expects to render an opinion that interest on the Bonds is excludable from gross income for federal income tax purposes, the ownership or disposition of, or the accrual or receipt of interest on, such bonds may otherwise affect a bondholder’s federal or state tax liability. The nature and extent of these other tax consequences will depend upon a bondholder’s particular tax status and the bondholder’s other items of income or deduction. Bond Counsel expresses no opinion regarding any such other tax consequences. 81 A form of the proposed opinion of Bond Counsel to the Authority is attached as “APPENDIX B—FORM OF OPINION OF BOND COUNSEL.” LEGAL OPINIONS The opinion of Ballard Spahr LLP, Bond Counsel to the Authority, approving the validity of the Bonds and stating that interest on the Bonds is excludable from gross income under Section 103 of the Code and that interest on the Bonds is exempt from personal income taxes of the State of California, will be rendered simultaneously with the issuance of the Bonds, in substantially the form shown in Appendix B hereto. The legal opinion is not intended to be nor is it to be interpreted or relied upon as a disclosure document or an express or implied recommendation as to the investment quality of the Bonds. Certain matters will be passed upon for the Authority by Authority Counsel, Best Best & Krieger LLP, Los Angeles, California, and by Ballard Spahr LLP; and for the Borrower by Charles, Kane & Dye LLP, Irvine, California and Goldfarb & Lipman LLP, Oakland, California. Compensation for the services of Bond Counsel is contingent upon the sale and delivery of the Bonds. CONTINUING DISCLOSURE Continuing Disclosure Agreement Pursuant to a Continuing Disclosure Agreement between the Borrower and Wolf & Company Inc., acting as dissemination agent thereunder (the “Disclosure Agreement”), the Borrower, as an “obligated person” under paragraph (f)(10) of SEC Rule 15c2-12 (the “Rule”), has agreed to provide, or cause to be provided, its audited financial statements by transmitting such filing to the Municipal Securities Rulemaking Board pursuant to its Electronic Municipal Market Access (“EMMA”) system as provided at http:/www.emma.msrb.org. In addition, the Borrower has agreed to provide, or cause to be provided, to EMMA in a timely manner notice of the following “Listed Events”: (1) principal and interest payment delinquencies; (2) non-payment related defaults, if material; (3) modifications to rights of Owners of Bonds, if material; (4) Bond calls, if material and tender offers; (5) defeasances; (6) rating changes; (7) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material events adversely affecting the tax-exempt status of the Bonds; (8) unscheduled draws on the Debt Service Reserve Fund reflecting financial difficulties; (9) unscheduled draws on credit enhancements reflecting financial difficulties; (10) substitution of credit or liquidity providers, or their failure to perform; (11) release, substitution or sale of property securing repayment of the Bonds, if material; (12) bankruptcy, insolvency, receivership or similar event of the Borrower; (13) consummation of a merger, consolidation or acquisition involving the Borrower or the sale of all or substantially all of the assets of the Borrower, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (14) appointment of a successor or additional trustee or the change of name of a trustee, if material. These covenants have been made in order to assist the Underwriter in complying with paragraph (b)(5) of the Rule. The Borrower may amend the Disclosure Agreement, and waive any provision thereof, by written agreement of the parties, subject to the provisions of Section 8 of the Disclosure Agreement. In addition, the Borrower’s obligations under the Disclosure Agreement will terminate upon the defeasance or payment in full of all of the Bonds. The provisions of the Disclosure Agreement are intended to be for the benefit of the Owners of the Bonds and are enforceable by the Trustee on behalf of such Owners, 82 provided that any enforcement action by any such person shall be limited to a right to obtain specific enforcement of the Borrower’s obligations under the Disclosure Agreement and any failure by the Borrower to comply with the provisions thereof shall not be an event of default under the Indenture or the Loan Agreement. The form of the Disclosure Agreement is attached hereto as Appendix D. Previous Undertakings The Borrower and its affiliates have previously entered into continuing disclosure undertakings in connection with the issuance of other bonds. In certain limited instances, information required under such undertakings was not provided to EMMA in a timely manner. In 2012, the Borrower and its affiliates provided the dissemination agent with audited financial statements and additional project information required under such undertakings. The dissemination agent submitted the audited financial statements to EMMA but failed to submit the additional project information. Upon discovering that such project information had not been timely submitted, the Borrower directed the dissemination agent to submit the information to EMMA. In addition, the Borrower and its affiliates have, in certain instances, failed to provide EMMA with event notices relating to ratings upgrades, bond redemptions and bond defeasances in a timely manner. To the Borrower’s knowledge, information with respect to such ratings upgrades, bond redemptions and bond defeasances has been publicly available to investors. The Borrower and its affiliates have revised their disclosure procedures to ensure future compliance with their continuing disclosure undertakings. LITIGATION The Authority To the knowledge of the Authority, there is not now pending or threatened any proceeding or litigation against the Authority seeking to restrain or enjoin the issuance or delivery of the Bonds or questioning or affecting the validity of the Bonds or the proceedings and authority under which they are to be issued. Neither the creation, organization nor the existence of the Authority is being contested. The Borrower To the knowledge of the Borrower, there is not now pending or threatened any proceeding or litigation against the Borrower affecting the ability of the Borrower to enter into or deliver the Loan Agreement, the Note, the Deed of Trust or the Regulatory Agreement, or contesting the existence or powers of the Borrower with respect to the transactions described in this Official Statement. RATINGS Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc. (“S&P”), has assigned its rating of “A” to the Bonds. Such rating reflects only the views of the rating agency, and an explanation of the significance of such rating may be obtained from Standard & Poor’s Ratings Services, 55 Water Street, New York, New York 10041-0003. There is no assurance that such rating will continue for any given period or that it will not be revised downward or withdrawn entirely by S&P if, in their judgment, circumstances so warrant. The Authority and the Trustee undertake no responsibility either to notify the owners of the Bonds of any revision or withdrawal of the rating or to oppose any such revision or withdrawal. Any such downward revision or withdrawal of such rating may have an adverse effect on the market price of the Bonds. 83 FINANCIAL ADVISOR Wolf & Company Inc., Los Angeles, California, has served as financial advisor ("Financial Advisor") to the Authority in connection with the Bonds. The Financial Advisor is not obligated to undertake, and has not undertaken to make, an independent verification or to assume responsibility for the accuracy, completeness or fairness of the information contained in this Official Statement. The Financial Advisor is an independent advisory firm and is not engaged in the business of underwriting, trading or distributing municipal or other public securities. UNDERWRITING The Bonds are to be purchased by Newcomb Williams Financial Group, Securities offered through Stinson Securities, LLC, (the “Underwriter”) at a purchase price equal to the principal amount of the Bonds less an Underwriter’s discount of $__________. The purchase agreement pursuant to which the Bonds are being purchased provides that the Underwriter will purchase all of the Bonds if any are purchased, the obligation to make such purchase being subject to certain terms and conditions set forth in the purchase agreement, to the approval of certain legal matters by counsel and to certain other conditions. The Underwriter may offer and sell Bonds to certain dealers, banks and others at a price lower than the offering price stated on the cover page hereof. The offering prices may be changed from time to time by the Underwriter. 84 MISCELLANEOUS All of the summaries of the Indenture and other agreements and documents contained herein are made subject to the provisions of such documents respectively and do not purport to be complete statements of any or all such provisions. Reference is hereby made to such documents on file with the Authority for further information in connection therewith. Any statements made in the Official Statement involving matters of opinion or estimates, whether or not expressly stated, are set forth as such and not as representations of fact, and no representation is made that any of the estimates will be realized. The preparation and distribution of this Official Statement have been authorized by the Authority. INDEPENDENT CITIES FINANCE AUTHORITY Executive Director A-1 APPENDIX A DEFINITIONS The following are definitions of certain terms contained in the Indenture, the Loan Agreement, the Regulatory Agreement and the Supplemental Regulatory Agreement and used in this Official Statement. “Account” shall mean an Account created and established by the Indenture. “Accountant’s Certificate” shall mean a certificate or opinion signed by an independent certified public accountant of recognized national standing or a firm of accountants of recognized national standing, selected by the Authority upon consultation with the Borrower, who may be the accountant or firm of accountants who regularly audit the books of the Authority. “Act” shall mean Chapter 8 of Part 5 of Division 31 of the Health and Safety Code of the State of California (commencing with Section 52100), as amended and supplemented from time to time. “Adjusted Income” shall mean the anticipated total annual income of the individuals or family who intend to occupy a Space, determined in a manner consistent with determinations of lower income families by the Secretary of Housing and Urban Development under Section 8 of the United States Housing Act of 1937, as amended (or, if such program is terminated, under such program as in effect immediately before such termination). Subsection (g) and (h) of the Code section 7872 shall not apply in determining income under the Regulatory Agreement. “Administration Agreement” shall mean the Administration and Oversight Agreement, dated as of July 1, 2015, among the Authority, the Borrower and the Oversight Agent. “Administration Fund” shall mean the Administration Fund created and established pursuant to the Indenture. “Area” shall mean the Los Angeles-Long Beach-Santa Ana, CA MSA or such other area as may be designated by HUD in which the Project is located. “Assignment and Assumption Agreement” means the Assignment, Assumption and Modification Agreement among the City, the Borrower and the Prior Borrower pursuant to which the Borrower will assume the obligations of the Prior Borrower under the Supplemental Regulatory Agreement. “Authority Annual Fee” shall mean an amount equal to 1/10 of one percent of the outstanding principal amount of the Bonds payable to the Authority 1/12 of such amount monthly, on the 15th day of each month, from the General Account of the Administration Fund, commencing August 15, 2016 and ending with the end of the term of the Regulatory Agreement. In addition, the Borrower agrees to reimburse the Authority up to $3,000 per year for costs, if any, incurred by the Authority for any audit report relating to the Bonds, such amount to be paid from amounts in the General Account of the Administration Fund promptly upon receipt by the Borrower and the Trustee of an invoice detailing the costs incurred by the Authority. “Authorized Denominations” shall mean $5,000 or any integral multiple thereof. A-2 “Authorized Officer” shall mean the Executive Director of the Authority or any person designated in writing by the Executive Director of the Authority to act as an Authorized Officer under the Indenture. “Bond Counsel” shall mean (i) Ballard Spahr LLP, or (ii) any nationally recognized law firm specializing in the area of tax exempt municipal finance acceptable to the Authority. “Bondowner” or “Owner” or “Owner of Bonds” or “Holder” or “Bondholder” or any similar term (when used with respect to Bonds) shall mean the registered owner of any Outstanding Bond or Bonds. “Bond Register” shall mean the registration books of the Trustee with respect to the Bonds. “Bonds” shall mean the Independent Cities Finance Authority Mobile Home Park Revenue Refunding Bonds (San Juan Mobile Estates) Series 2015, originally issued in the principal amount of $36,675,000*. “Bond Year” shall mean a twelve month period ending on August 15, except that the first Bond Year shall begin on the date on which the Bonds are initially delivered and end on the next succeeding August 15. “Borrower” shall mean Millennium Housing, LLC, a California limited liability company, and permitted successors and assigns. “Borrower Administration Fee” shall mean an amount equal to $14,040 per month, such amount to be increased at the start of Borrower’s fiscal year, commencing July 1, 2016, to reflect 100% of any increase in the Consumer Price Index All Urban Consumers for the California CMSA in which the Project is located (base year 1982-1984=100), published by the United States Department of Labor, Bureau of Labor Statistics (“BLS”). If the base is changed, the CPI used shall be converted according to the conversion factor provided by the BLS. “Borrower Representative” shall mean the person or persons at the time designated by the Borrower to act on the behalf of the Borrower by written certificate furnished to the Oversight Agent, the Authority and the Trustee containing the specimen signatures of such person or persons and signed by the Borrower Representative. Such certificate may designate an alternate or alternates. “Business Day” shall mean a day, other than a Saturday, Sunday, legal holiday or day on which the New York Stock Exchange is closed, on which banking institutions are not closed in the State of California, or in any state in which the Principal Office of the Trustee is located. “City” shall mean the City of San Juan Capistrano, California. “City Law” shall mean Title 2, Chapter 2, Article 9 of the Municipal Code of the City of San Juan Capistrano. “Closing Date” shall mean July __, 2015, being the date when the Bonds were delivered to the Underwriter. “Code” shall mean the Internal Revenue Code of 1986, as amended, and the regulations in effect thereunder. A-3 “Continuing Disclosure Agreement” shall mean that certain Continuing Disclosure Agreement between the Borrower and the Dissemination Agent named therein dated as of the Closing Date as originally executed and as it may be amended from time to time in accordance with the terms thereof. “Cost of Issuance” shall mean items of expense payable or reimbursable directly or indirectly by the Authority and related to the authorization, issuance and sale of Bonds, which expenses shall include, but not be limited to, printing costs, costs of reproducing documents, filing and recording fees, initial fees and charges of the Trustee and other Fiduciaries, legal fees and disbursements, professional consultants fees and disbursements, reimbursements to the Authority and its agents for administrative, travel and overhead expenses, bond discount, underwriting fees and other financing costs (if not otherwise provided for), fees and charges for execution, transportation and safekeeping of Bonds and all other costs, charges, fees and expenses in connection with the foregoing. “Cost of Issuance Fund” shall mean the Cost of Issuance Fund established pursuant to the Indenture. “Cost of Project” shall mean, to the extent authorized by the Code, the Regulations and the Act, any and all costs incurred by the Borrower with respect to the acquisition and rehabilitation of the Project, including, without limitation, costs for the acquisition, repair and rehabilitation of property and all costs of financing, including, without limitation, the cost of consultant, accounting and legal services, other expenses necessary or incident to determining the feasibility of the Project, contractors’ and developers’ overhead and supervisors’ fees and costs directly allocable to the Project, administrative and other expenses necessary or incident to the Project and the financing thereof. “Coverage Ratio” shall mean, for any period of time, the ratio derived by dividing the sum of the Net Operating Revenues received by the Borrower plus the earnings accruing to the Debt Service Reserve Fund by the annual debt service payable on the Bonds in the applicable fiscal year. “Coverage Requirement Certificate” shall mean the certificate filed by the Borrower as required by the Loan Agreement. “Counsel’s Opinion” shall mean an opinion signed by an attorney or firm of attorneys acceptable to the Authority. Any such attorney may be in the regular employment of the Authority. “Debt Service Fund” shall mean the Debt Service Fund created and established by the Indenture. “Debt Service Requirement” shall mean, as of any date of calculation with respect to the Bonds, the sum of (i) all interest due or to become due on such date on all Outstanding Bonds plus (ii) all Principal Installments due or to become due on such date on all Outstanding Bonds or, if no Principal Installment is due and payable on such date on any Outstanding Bonds, one-half of the Principal Installments, if any, due and payable on all Outstanding Bonds on the next succeeding Interest Payment Date. “Debt Service Reserve Fund” shall mean the Debt Service Reserve Fund created and established by the Indenture. “Debt Service Reserve Fund Requirement” shall mean, as of any date of determination, an amount equal to the least of: (a) Maximum Annual Debt Service with respect to the Bonds, (b) ten percent (10%) of the initial principal amount of the Bonds, or (c) one hundred twenty five percent (125%) of the average annual debt service on the Bonds in each remaining Bond Year. As of the Closing Date, the Debt Service Reserve Fund Requirement is $__________. A-4 “Deed of Trust” shall mean the Deed of Trust with Absolute Assignment of Leases and Rents, Security Agreement and Fixture Filing pertaining to San Juan Mobile Estates, executed as of July 1, 2015 by the Borrower, which secures the Borrower’s obligation to repay the Loan and constitutes a lien on real property referenced therein. “Depository” shall mean (a) initially, DTC, and (b) any other Securities Depository acting as Depository under the Indenture. “Depository System Participant” shall mean any participant in the Depository’s book entry system. “DTC” shall mean The Depository Trust Company, New York, New York, and its successors and assigns. “Event of Default” shall have the meaning set forth in the Indenture. “Fees and Charges” shall mean all fees and charges authorized to be received by the Authority from the Borrower pursuant to the terms and provisions of the Loan Agreement for the purpose of paying the Authority Annual Fee and the fees and expense of the Fiduciaries. “Fiduciary” shall mean the Trustee, each Paying Agent, the Rebate Analyst and the Oversight Agent. “Fiscal Year” or “fiscal year” shall mean (a) with respect to the Authority, each twelve month period ending June 30 or such other fiscal year of the Authority which may be adopted and (b) with respect to the Borrower, each twelve month period ending June 30 or such other fiscal year of the Borrower which may be adopted. “Functionally Related and Subordinate” shall mean facilities for use exclusively by tenants, for example, swimming pools, other recreational facilities, parking areas and other facilities which are reasonably required for the Project, for example, heating and cooling equipment, trash disposal equipment and units for resident managers or maintenance personnel; provided that the same are of a character and size commensurate with the character and size of the Project and, as to size, does not exceed that necessary to service the requirements of the residents of the Project. “Fund” shall mean a fund created and established by the Indenture. “Generally Accepted Accounting Principles” or “GAAP” shall mean the uniform accounting and reporting procedures set forth in publications of the American Institute of Certified Public Accountants or its successor and the Governmental Accounting Standards Board or its successor, or by any other generally accepted authority on such procedures, and includes, as applicable, the standards set forth by the Financial Accounting Standards Board or its successor. “Government Obligations” shall mean bonds or other obligations which as to principal and interest constitute direct obligations of the United States of America and which are not subject to redemption prior to their maturity at the option of any person other than the holder thereof. “Improvements” shall mean, as of the Closing Date or at any time thereafter, any structures (other than mobile homes not owned by the Borrower), site improvements, facilities and fixtures located on the Property. A-5 “Income Certification” shall mean the Income Computation and Certification attached to the Regulatory Agreement. “Indenture” shall mean the Indenture of Trust as from time to time amended or supplemented by Supplemental Indentures in accordance with the terms and provisions of the Indenture. “Interest Payment Date” shall mean February 15 and August 15 of each year, commencing February 15, 2016.* “Loan” shall mean the loan made by the Authority, pursuant to the Loan Agreement, to the Borrower to finance the Project. “Loan Agreement” shall mean the Loan Agreement dated as of July 1, 2015, by and among the Borrower, the Authority and the Trustee. “Loan Documents” shall mean the Loan Agreement, the Note and the Deed of Trust, as each item may be amended and supplemented from time to time. “Lower Income Residents” shall mean an individual or family household that, on the later of (i) the date of the Supplemental Regulatory Agreement, or (ii) the date of the Lower Income Resident’s initial occupancy of the park, has an Adjusted Income that does not exceed the qualifying limits for lower income households, adjusted for actual household size, as established and amended from time to time pursuant to Section 8 for the United States Housing Act of 1937, and as published by the State of California Department of Housing and Community Development. “Lower Income Spaces” means the Spaces in the Project designated for occupancy by Lower Income Residents pursuant to the Supplemental Regulatory Agreement. “Maximum Annual Debt Service” shall mean at any point in time, with respect to the Bonds then Outstanding, the maximum amount of principal (assuming sinking fund payments) and interest becoming due in the then current or any future Bond Year on such Bonds. “Median Income for the Area” shall mean as of any date, the median gross income for the Area as most recently determined by the Secretary of Housing and Urban Development under Section 8 of the United States Housing Act of 1937, as amended (or if such program is terminated, under such program as in effect immediately before such termination). Except for any HUD Hold Harmless Impacted Project, as defined in Code section 142(d)(2)(E)(iv), any determination of Median Income for the Area with respect to the Project for any calendar year after 2008 shall not be less than the Median Income for the Area determined with respect to the Project for the calendar year preceding the calendar year for which such determination is made. Special rules for determining the Median Income for the Area for calendar years after 2008 for HUD Hold Harmless Impacted Projects are set forth in Code section 142(d)(2)(E)(iv). “members of the Authority” shall mean members and associate members of the Authority. “Millennium Housing Corporation” means Millennium Housing Corporation, a California nonprofit public benefit corporation. “Net Operating Revenues” shall mean Operating Revenues, less the Operation and Maintenance Costs during such fiscal year or period. * Preliminary, subject to change. A-6 “Net Proceeds” shall mean any proceeds resulting from the Authority’s enforcement of its rights under the Deed of Trust, insurance or condemnation proceeds paid with respect to the Project which are available after payment therefrom of all expenses incurred in the collection thereof. “Note” shall mean the promissory note executed by the Borrower in accordance with the Loan Agreement. “Officer’s Certificate” shall mean a certificate executed by an Authorized Officer. “Operating Revenues” shall mean, for any fiscal year or other period, all rents, income, receipts and other revenues derived by the Borrower arising from the operation of the Project, including rental income from mobile home spaces and rental assistance provided to project tenants, determined in accordance with Generally Accepted Accounting Principles, interest earnings in funds held by the Trustee and all other money howsoever derived by the Borrower from the operation of the Project or arising from the Project, but not including resident security deposits. “Operation and Maintenance Costs” means, for any fiscal year or other period, the reasonable and necessary costs and expenses of operating the common areas of the Project and of managing and repairing and other expenses necessary to maintain and preserve the common areas of the Project in good repair and working order, calculated in accordance with Generally Accepted Accounting Principles, including but not limited to (a) utility services supplied to the common areas of the Project, which may include, without limitation, janitor service, security, power, gas, telephone, light, heating, water and all other utility services, (b) compensation to the management agent, salaries and wages of employees, payments to employee retirement systems, fees of auditors, accountants, attorneys or engineers, (c) monthly deposits to the Repair and Replacement Fund pursuant to the Indenture, and (d) all other reasonable and necessary costs of the Borrower or charges required to be paid by it related to the operation and maintenance of the common areas of the Project, including, but not limited to, costs of insurance and property taxes, if any, but excluding in all cases (i) depreciation, replacement and obsolescence charges or reserves therefor, (ii) amortization of intangibles or other bookkeeping entries of a similar nature, (iii) costs of capital additions, replacements, betterments, extensions or improvements to the common areas of the Project, which under Generally Accepted Accounting Principles are chargeable to a capital account or to a reserve for depreciation, (iv) debt service on the Loan, (v) the amount deposited in the Administration Fund, and (vi) expenses paid from the Repair and Replacement Fund, Surplus Fund or other Project reserves. “Other Borrower Obligations” means, collectively, the Borrower’s obligations under the Loan Agreement dated as of July 1, 2011, among the Borrower, the Authority and Union Bank, N.A., as trustee, relating to the Castle Mobile Estates mobile home park in Capitola, California, the Loan Agreement dated as of April 1, 2012 among the Borrower, the Authority and Union Bank, N.A., as trustee, relating to the Sahara Mobile Home Park located in Palm Springs, California, the Loan Agreement dated as of October 1, 2012 among the Borrower, the Authority and Union Bank, N.A., as trustee, relating to the Rancho Feliz Mobile Home Park and Las Casitas de Sonoma Mobile Home Park located in Rohnert Park, California, the Loan Agreement dated as of April 1, 2013 among the Borrower, the Authority and Union Bank, N.A., as trustee, relating to the Rancho Vallecitos Mobile Estates located in San Marcos, California, the Loan Agreement dated as of September 1, 2013 among the Borrower, the Authority and Union Bank, N.A., as trustee, relating to the Vista de Santa Barbara Mobilehome Park located in Carpinteria, California, the Loan Agreement dated as of June 1, 2014 among the Borrower, the City of La Verne and Union Bank, N.A., as trustee, relating to the Copacabana Mobilehome Park located in La Verne, California and the Loan Agreement dated as of November 1, 2014 among the Borrower, the Authority and MUFG Union Bank, N.A., as trustee, relating to the Hacienda Valley Estates located in Morgan Hill, California. A-7 “Outstanding” when used with reference to an applicable series of Bonds, shall mean, as of any date, Bonds of such series theretofore or then being delivered under the provisions of the Indenture, except: (i) any Bonds of such series cancelled by the Trustee or any Paying Agent at or prior to such date, (ii) Bonds of such series for the payment or redemption of which moneys equal to the Principal Amount or Redemption Price thereof, as the case may be, with interest to the date of maturity or redemption date, shall be held by the Trustee or the Paying Agent in trust (whether at or prior to the date of maturity or redemption date), provided that if such Bonds are to be redeemed, notice of such redemption shall have been given as in the Indenture provided or provision satisfactory to the Trustee shall have been made for the giving of such notice, (iii) Bonds of such series in lieu of or in substitution for which other Bonds shall have been delivered pursuant to the Indenture, and (iv) Bonds deemed to have been paid as provided in the Indenture. “Oversight Agent” shall mean Wolf & Company Inc., and any successor thereto appointed by the Authority, which entity shall act as the initial Oversight Agent under the Administration Agreement. “Oversight Agent Fee” shall mean an amount equal to $6,000 per year. “Participants” shall mean those broker dealers, banks and other financial institutions from time to time for which DTC holds Bonds as securities depository. “Participating Underwriter” shall have the meaning ascribed thereto in the Continuing Disclosure Agreement. “Paying Agent” shall mean the Trustee, acting as paying agent, or any other bank, trust company or national banking association designated or appointed pursuant to the Indenture to act as a paying agent for the Bonds, and each successor or successors and any other bank, trust company or national banking association at any time substituted in its place pursuant to the Indenture. “Permitted Encumbrances” shall mean, as of any particular time: (i) liens for general ad valorem taxes and assessments, if any, not then delinquent; (ii) the Regulatory Agreement; (iii) the Deed of Trust; (iv) the Assignment and Assumption Agreement; (v) the Supplemental Regulatory Agreement, (vi) the Subordination Agreement, (vii) any right or claim of any mechanic, laborer, materialman, supplier or vendor filed or perfected in the manner prescribed by law after the Closing Date; (viii) easements, rights of way, mineral rights, drilling rights and other rights, reservations, covenants, conditions or restrictions which exist of record as of the Closing Date and which, in the opinion of the Oversight Agent, will not materially impair the use of the Project as contemplated in the Regulatory Agreement; and (ix) easements, rights of way, mineral rights, drilling rights and other rights, reservations, covenants, conditions or restrictions established following the date of recordation of the Deed of Trust and to which the Authority and the Trustee consent in writing. “Pledged Revenues” shall mean the Revenues but excluding therefrom, amounts on deposit in the Unrestricted Account of the Repair and Replacement Fund, the Administration Fund, the Rental Assistance Fund and the Rebate Fund. “Prepayment” shall mean any moneys received or recovered by the Authority representing any voluntary payment of principal of or interest (including any penalty, fee, premium, or other additional charge for Prepayment which may be provided by the terms of the Deed of Trust) on the Loan prior to the scheduled payments of principal and interest called for by such Loan. “Principal Amount” shall mean, with respect to any Bond and at any date of computation, the stated principal amount thereof. A-8 “Principal Installment” shall mean, as of any date of computation, the amount payable in any Bond Year on account of: (i) the Principal Amount of Bonds of a particular series maturing in such Bond Year net of the aggregate of Sinking Fund Installments, if any, established and paid for in the prior Bond Years with respect to the Bonds of such series; plus (ii) the amount of any Sinking Fund Installments due in such Bond Year with respect to Bonds of such series. “Principal Office” shall mean with respect to the Trustee, its corporate trust office in Los Angeles, California, or such other office hereafter so designated by the Trustee. “Principal Payment Date” shall mean August 15 in each year commencing August 15, 2016 to and including August 15, 2025, and February 15 and August 15 in each year commencing February 15, 2026 and thereafter. * “Prior Bonds” means, collectively, the Authority’s Mobile Home Park Revenue Bonds (San Juan Mobile Estates) Series 2006A, its Mobile Home Park Subordinate Revenue Bonds (San Juan Mobile Estates) Series 2006B and its Mobile Home Park Subordinate Revenue Bonds (San Juan Mobile Estates) Taxable Series 2006C. “Prior Borrower” means Millennium Housing Corporation, a California nonprofit public benefit corporation. “Prior Indenture” means the Indenture of Trust, dated as of May 1, 2006, between the Authority and the Prior Trustee. “Prior Loan” means the loan of the proceeds of the Prior Bonds to the Prior Borrower. “Prior Trustee” means MUFG Union Bank, N.A. (formerly known as Union Bank of California, N.A.) as trustee under the Prior Indenture. “Project” shall consist of the Property and the Improvements. “Project Fund” shall mean the Project Fund established pursuant to the Indenture. “Project Requirement Period” means the period ending July __, 2050. “Property” shall mean the real property commonly known as the San Juan Mobile Estates located in the City of San Juan Capistrano, California, all as more particularly described in the Regulatory Agreement. “Qualified Investments” shall mean and include any of the following (including any funds comprised of the following, which may be funds maintained or managed by the Trustee and its affiliates): (a) Cash deposits (insured at all times by the Federal Deposit Insurance Corporation). (b) Direct obligations of (including obligations issued or held in book entry form on the books of the Department of Treasury) the United States of America. In the event these securities are used for defeasance, they shall be noncallable and nonprepayable. (c) Obligations of the following federal agencies so long as such obligations are backed by the full faith and credit of the United States of America: * Preliminary, subject to change. A-9 (i) Resolution Funding Corporation. (ii) U.S. Department of Housing and Urban Development (PHAs). (iii) Small Business Administration. (iv) Government National Mortgage Association (GNMA). (v) Federal Housing Administration. (vi) Farm Credit System Financial Assistance Corporation. (d) Direct obligations of any of the following federal agencies which obligations are not fully guaranteed by the full faith and credit of the United States of America: (i) Senior debt obligations rated no lower than the current rating on the Bonds by S&P issued by the Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC). (ii) Senior debt obligations of the Federal Home Loan Bank System. (iii) Senior debt obligations of other Government Sponsored Agencies. (e) U.S. dollar denominated deposit accounts, certificates of deposit, time deposits, federal funds and bankers’ acceptances with domestic commercial banks which either (i) have a rating on their short-term certificates of deposit on the date of purchase by S&P that is no lower than the correlating long-term current rating on the Bonds or (ii) are insured at all times by the Federal Deposit Insurance Corporation. (Ratings on holding companies are not considered as the rating of the bank). (f) Commercial paper which is rated at the time of purchase no lower than the correlating long-term current rating on the Bonds by S&P and which matures not more than 270 days after the date of purchase. (g) Investments in (i) money market funds rated in the highest rating category by S&P (including any such funds for which the Trustee or an affiliate may be acting as an investment advisor or providing other services) and (ii) public sector investment pools operated pursuant to SEC Rule 2a7 in which the issuer’s deposit shall not exceed 5% of the aggregate pool balance at any time and such pool is rated no lower than the current rating on the Bonds by S&P. (h) Prerefunded municipal obligations defined as follows: 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, (i) which are rated, based on an irrevocable escrow account or fund (the “escrow”), no lower than the current rating on the Bonds by S&P; or (ii) (A) which are fully secured as to principal and interest and redemption premium, if any, by an escrow consisting only of cash or direct obligations of the United States of America, which escrow may be applied only to the payment of such principal of and interest and redemption premium, if A-10 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 (B) which escrow is sufficient, as verified by a nationally recognized independent certified public accountant, 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, and (C) which escrow is held by an escrow agent or trustee that maintains a rating by S&P that is no lower than the current rating on the Bonds. (i) General obligations of states with a rating no lower than the current rating on the Bonds by S&P. In the event such obligations are variable rate obligations, the interest rate on such obligations must be reset not less frequently than annually. (j) Investment agreements with a domestic or foreign bank or corporation or insurance company the long-term debt of which, or claims paying ability, or, in the case of a guaranteed corporation the long-term debt, or, in the case of monoline financial guaranty insurance company, claims paying ability, of the guarantor is rated at least “BBB-” by S&P (provided that the investment of moneys deposited in the Debt Service Fund shall require a rating by S&P that is no lower than one category below the then current rating on the Bonds). (k) Repurchase agreements with financial institutions, banks or broker dealers the long-term debt of which, or, in the case of a guaranteed corporation the long-term debt, or, in the case of a monoline financial guaranty insurance company, claims paying ability, of the guarantor is rated no lower than the current rating on the Bonds by S&P; provided, that (a) the over-collateralization is at least one hundred two percent (102%), computed weekly, consisting of such securities as described in this section, items (a) through (d); (b) a third-party custodian, the Trustee or the Federal Reserve Bank shall have possession of such obligations; (c) the Trustee shall have perfected a first priority security interest in such obligations; and (d) failure to maintain the requisite collateral percentage will require the Trustee to liquidate the collateral. (l) Forward delivery or forward purchase agreements, provided by financial institutions, banks or broker dealers the long-term debt of which, or, in the case of a guaranteed corporation the long- term debt, or, in the case of a monoline financial guaranty insurance company, claims paying ability, of the guarantor is rated no lower than the current rating on the Bonds by S&P, with underlying securities of the types outlined in (a), (b), (c), (d) and (f) above. “Qualified Project Period” shall mean the period beginning on the later of (i) the Closing Date of the Bonds or (ii) the first date on which at least 10% of all of the Spaces in the Project are first occupied and ending on the latest of (w) the date which is 15 years after the later of the Closing Date of the Bonds or the date on which at least 50% of the Spaces in the Project are first occupied, (x) the first day on which no tax-exempt private activity bond issued with respect to the Project is outstanding, (y) the date on which any assistance provided with respect to the Project under Section 8 of the United States Housing Act of 1937 terminates, or (z) the date which is 30 years after the Closing Date; provided such period is subject to extension in accordance with the Regulatory Agreement. “Qualified Residents” shall mean Lower Income Residents or Very Low Income Residents, as applicable. “Qualified Space” shall mean a Lower Income Space or a Very Low Income Space, as applicable. A-11 “Rating Agencies” shall mean any of Fitch, Inc., Standard & Poor’s Ratings Services, a division of McGraw Hill Companies, Inc. or Moody’s Investors Service, Inc., and such others as may be designated by the Authority from time to time. “Rebatable Arbitrage” shall mean the amount (determinable as of the last day of each fifth Bond Year and upon retirement of the last Bond Outstanding) of arbitrage profits payable to the United States at all times and in the amounts specified in Section 148(f) of the Code and any applicable Regulations. “Rebate Analyst” shall mean the entity engaged by the Borrower or the Authority to compute the Rebatable Arbitrage annually pursuant to the Indenture. “Rebate Fund” shall mean the Rebate Fund created and established by the Indenture. “Rebate Regulations” shall mean those final, temporary, and proposed Treasury Regulations promulgated under Section 148(f) of the Code. “Record Date” shall mean the first (1st) day (whether or not a business day) of the calendar month in which an Interest Payment Date occurs. “Redemption Fund” shall mean the Redemption Fund created and established by the Indenture. “Redemption Price” shall have the meaning attributable to such term in the Indenture. “Regulations” shall mean the Income Tax Regulations promulgated or proposed under the Code by the Department of the Treasury, as the same may hereafter be amended, including regulations promulgated by the Department of the Treasury to implement the requirements of Section 148 of the Code. “Regulatory Agreement” shall mean the Regulatory Agreement and Declaration of Restrictive Covenants, dated as of July 1, 2015, by and among the Authority, the Trustee and the Borrower relating to the San Juan Mobile Estates. “Rental Assistance Fund” shall mean the Rental Assistance Fund created and established pursuant to the Indenture. “Repair and Replacement Fund” shall mean the Repair and Replacement Fund established pursuant to the Indenture. “Representation Letter” shall mean the representation letter from the Authority to DTC. “Required Rebate Deposit” shall mean an amount determinable as of the end of each fifth Bond Year and as of the date of retirement of the last Bond, which when added to amounts then on deposit in the Rebate Fund, if any, equals the aggregate amount of Rebatable Arbitrage for the Bonds less the amount of Rebatable Arbitrage theretofore paid to the United States with respect to the Bonds, if any. “Restricted Account of the Repair and Replacement Fund” shall mean the Restricted Account established within the Repair and Replacement Fund pursuant to the Indenture. “Revenue Fund” shall mean the Revenue Fund created and established by the Indenture. “Revenues” shall mean (i) Operating Revenues; (ii) Prepayments; (iii) the proceeds of any insurance, including the proceeds of any self insurance covering the loss relating to the Project; provided, A-12 however, that the Net Proceeds of any public liability insurance, casualty insurance or title insurance required to be maintained pursuant to the Loan Agreement shall be applied as specified in the Loan Agreement and the Indenture; (iv) all amounts on hand from time to time in the funds and accounts established by the Trustee under the Indenture; (v) all proceeds of rental interruption insurance policies, if any, carried with respect to the Project pursuant to the Loan Agreement; (vi) any proceeds derived from the exercise of remedies under the Deed of Trust; and (vii) any additional property that may from time to time, by delivery or by writing of any kind, be subjected to the lien of the Indenture by the Authority or by anyone on its behalf, subject only to the provisions of the Indenture. “S&P” shall mean Standard & Poor’s Rating Service, a division of McGraw-Hill Companies, Inc. “Securities Depositories” shall mean The Depository Trust Company, 711 Stewart Avenue, Garden City, New York 11530, Fax (516) 227 4039 or 4190; and, in accordance with then current guidelines of the Securities and Exchange Commission, such other addresses and/or such other securities depositories as the Authority may designate in a written request of the Authority delivered to the Trustee. “Serial Bonds” shall mean all Bonds not constituting Term Bonds. “Sinking Fund Installment” shall mean the amount required to be applied by the Authority to the payment of the principal portion of the Redemption Price of Term Bonds (other than at the option or election of the Authority) on any one date as specified in the Indenture. “Space” shall mean a mobile home space within the Project upon which a mobile home may be placed. “State” shall mean the State of California. “Subordination Agreement” means the Subordination Agreement dated as of the Closing Date between the City and the Trustee relating to the subordination of the Supplemental Regulatory Agreement. “Supplemental Indenture” shall mean an indenture supplemental to or amendatory of the Indenture adopted by the Authority in accordance with the Indenture. “Supplemental Regulatory Agreement” shall mean the Supplemental Regulatory Agreement and Declaration of Restrictive Covenants dated as of May 1, 2006 between the City and the Prior Borrower and subsequently assumed by the Borrower. “Surplus Fund” shall mean the Surplus Fund created and established by the Indenture. “Tax Certificate” shall mean that certain Tax Certificate and Agreement executed on the Closing Date with respect to the Bonds. “Tax-exempt Bonds” shall mean the Bonds. “Term Bonds” shall mean the Bonds maturing on August 15 in the years 2030, 2035, 2040, 2045 and 2050.* “Treasury Regulations” shall mean the regulations of the Department of the Treasury, Internal Revenue Service under Section 142(d) of the Code or predecessor Code sections, including, Regulation Section 1.103-8(b). A-13 “Trustee” shall mean the bank or trust company or national banking association appointed pursuant to the Indenture to act as trustee, and its successor or successors and any other bank or trust company or national banking association at any time substituted in its place pursuant to the Indenture. “Trustee Fee” shall mean, the amount payable to the Trustee in accordance with the written agreement in effect from time to time between the Trustee and the Borrower or such other amount as may be approved by the Authority. “Trust Estate” shall mean all proceeds, Funds, Accounts, Revenues, Prepayments, the Loan, the Loan Agreement (other than the rights of the Authority under the Indenture, which are reserved by the Authority as set forth in the Indenture), the Deed of Trust, rights, interests, collections, and other property pledged to the payment of any Bonds pursuant to the Indenture and in the granting clauses thereof. “Underwriter” shall mean Newcomb Williams Financial Group, Securities offered through Stinson Securities, LLC. “Unrestricted Account of the Repair and Replacement Fund” shall mean the Unrestricted Account established within the Repair and Replacement Fund pursuant to the Indenture. “Very Low Income Residents” shall mean individuals or families whose Adjusted Income does not exceed the qualifying limits for very low income families (currently 50% or less of the Median Income for the Area), adjusted for actual household size, as established and amended from time to time pursuant to Section 8 for the United States Housing Act of 1937, and as published by the State of California Department of Housing and Community Development. If all occupants of a Space are or will be full-time students during five calendar months of the calendar year at an educational institution (other than a correspondence school) with regular faculty and students, such occupants shall not be considered to be Very Low Income Residents unless all such students are either (i) married and eligible to file a joint federal income tax return or (ii) single parents and their children and such parents and children are not dependents of another individual or (ii) receiving assistance under Title IV of the Social Security Act (including AFDC/TANF ) or the Job Training Partnership Act or under similar Federal, State, or local laws, or were previously under the care and placement responsibility of the State agency responsible for administering a plan under Part B or part E of Title IV of the Social Security Act (foster care assistance). For purposes of determining Very Low Income Residents the combined Adjusted Income of all occupants of a Space, whether or not legally related, shall be utilized. “Very Low Income Spaces” shall mean the Spaces in the Project occupied by Very Low Income Residents pursuant to the Regulatory Agreement. THIS PAGE INTENTIONALLY LEFT BLANK B-1 APPENDIX B FORM OF OPINION OF BOND COUNSEL We have acted as bond counsel to the Independent Cities Finance Authority (the “Authority”) in connection with the issuance of its Mobile Home Park Revenue Refunding Bonds (San Juan Mobile Estates) Series 2015 (the “Bonds”). The Bonds are being issued pursuant to: (i) Chapter 8 of Part 5 of Division 31 of the Health and Safety Code of the State of California, as amended (the “Act”); (ii) a resolution adopted by the Authority (the “Resolution”); and (iii) an Indenture of Trust dated as of July 1, 2015 (the “Indenture”) between the Authority and MUFG Union Bank, N.A., as trustee (the “Trustee”). Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Indenture. In such connection, we have reviewed the following: the Act, an executed copy of the Indenture, an executed copy of the Loan Agreement (the “Loan Agreement”) dated as of July 1, 2015 among the Authority, the Trustee and Millennium Housing, LLC, a California limited liability company (the “Borrower”), the Regulatory Agreement and Declaration of Restrictive Covenants dated as of July 1, 2015 among the Authority, the Trustee and the Borrower (the “Regulatory Agreement”), the Tax Certificate and Agreement (the “Tax Certificate”) dated the date hereof between the Authority and the Borrower, an opinion of counsel to the Authority, opinions of counsel to the Borrower, certificates of the Authority, the Borrower and others and such other documents, instruments, proceedings and opinions as we have deemed relevant in rendering this opinion. The opinions expressed herein are based on an analysis of existing laws, regulations, rulings and court decisions and cover certain matters not directly addressed by such authorities. Such opinions may be affected by actions taken or omitted or events occurring after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions or events are taken or do occur. We disclaim any obligation to update this letter. We have assumed the genuineness of all documents and signatures presented to us (whether as originals or as copies) and the due and legal execution and delivery thereof by any parties other than the Authority. We have not undertaken to verify independently, and have assumed, the accuracy of the factual matters represented, warranted or certified in the documents and of the legal conclusions contained in the opinions referred to herein. To the extent that the opinions rendered herein are dependent on the organization and operation of the Borrower as an organization described in Section 501(c)(3) of the Code and exempt from tax under Section 501(a) of the Code, no part of the net earnings of which inures to the benefit of any person, we are relying on the representations of the Borrower and the opinion of the Borrower’s counsel dated the date hereof. Furthermore, we have assumed compliance with the covenants and agreements contained in the Indenture, the Loan Agreement, the Regulatory Agreement and the Tax Certificate, including (without limitation) covenants and agreements, compliance with which is necessary to assure that future actions, omissions or events will not cause interest on the Bonds to be includable in gross income for federal income tax purposes. We call attention to the fact that the rights and obligations of the Authority under the Bonds, the Indenture, the Loan Agreement, the Regulatory Agreement and the Tax Certificate may be subject to bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors’ rights heretofore or hereafter enacted to the extent constitutionally applicable, to the application of equitable principles and to the exercise of judicial discretion in appropriate cases. We express no opinion with respect to any indemnification, contribution, choice of law, choice of forum or waiver provisions contained in the foregoing documents. Finally, we undertake no responsibility for the accuracy, completeness or fairness of any offering material relating to the Bonds and express no opinion with respect thereto. Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, it is our opinion that: B-2 1. The Authority is a joint powers authority organized and existing under the laws of the State of California with the power to enter into and perform its obligations under the Indenture, the Loan Agreement and the Regulatory Agreement and to issue the Bonds. 2. The Indenture, the Loan Agreement and the Regulatory Agreement have been duly authorized, executed and delivered by the Authority and, assuming due authorization, execution and delivery by the other parties thereto, are valid and binding obligations of the Authority. The Indenture creates a valid lien on the rights of the Authority under the Loan Agreement (except for certain rights of the Authority reserved therein). 3. The Bonds are valid and binding special obligations of the Authority payable solely from the revenues and other assets pledged therefor under the Indenture and from the enforcement of the security provided therefor and do not constitute a general obligation debt or liability of the Authority, the State of California or any political subdivision thereof. 4. Based on existing laws, regulations, rulings and court decisions and assuming, among other matters, the accuracy of certain certifications and compliance with certain covenants, interest on the Bonds is excludable from gross income for federal income tax purposes. Interest on the Bonds is not a specific preference item for purposes of the federal individual and corporate alternative minimum taxes, but such interest is included in adjusted current earnings in computing the federal alternative minimum taxes imposed on certain corporations. 5. Under the laws of the State of California as enacted and construed on the date hereof, interest on the Bonds is exempt from State of California personal income taxes. Although we have rendered an opinion that interest on the Bonds is excludable from gross income for federal income tax purposes, the accrual or receipt of interest on such bonds may otherwise affect a bondholder’s federal, state or local tax liability. The nature and extent of these other tax consequences will depend upon the bondholder’s particular tax status and the bondholder’s other items of income or deduction. We express no opinion regarding any such other such tax consequences. C-1 APPENDIX C APPRAISAL The following is a copy of the Appraisal as of January 23, 2015 of the San Juan Mobile Estates, without the complete addenda thereto. The Appraisal with the complete addenda is available upon request to the Borrower or the Underwriter. THIS PAGE INTENTIONALLY LEFT BLANK REAL ESTATE APPRAISAL REPORT SAN JUAN MOBILE ESTATES 32302 ALIPAZ STREET SAN JUAN CAPISTRANO, CA AS OF JANUARY 23, 2015 PREPARED FOR: MILLENNIUM HOUSING JOHN P. NEET, MAI JOHN P. NEET, MAI APPRAISAL & CONSULTING SERVICES FOR MANUFACTURED HOUSING COMMUNITIES AND RV PARKS 26845 JEFFERSON AVENUE, SUITE A MURRIETA, CA 92562 (951) 461-7755-VOICE WWW.johnneet.com (951) 346-3558-FAX appraisals@johnneet.com February 3, 2015 Ms. Lori Carraway Millennium Housing 20 Pacifica, Suite 1470 Irvine, CA 92618 Re: San Juan Mobile Estates, 32302 Alipaz Street, San Juan Capistrano, CA 92675 Ms. Carraway: As requested and authorized by the letter of engagement dated January 13, 2015, I have appraised the captioned property for the purposes of expressing my opinion of its market value as defined herein. The interests appraised are those of the Fee Simple estate. As a result of my investigation and analysis, it is my conclusion that the market value of the subject property, as of January 23, 2015, and subject to the assumptions, certification, and limiting conditions stated herein, was FORTY FIVE MILLION DOLLARS $45,000,000 Further, I have estimated the “value in use” to a non-profit 501C3 corporation based on the parameters used by this market sector. Based on this analysis, the value in use under these considerations is estimated, as of the same date and subject to similar considerations, to be FORTY EIGHT MILLION TWO HUNDRED THOUSAND DOLLARS $48,200,000 This appraisal and report is intended to comply with the following standards and agreements: The Scope of Work agreement between the appraiser and the client The Standards of Professional Practice and Code of Ethics of the Appraisal Institute The Uniform Standards of Professional Appraisal Practice (USPAP) This letter is part of the attached appraisal report which contains descriptions of the subject property, factual data, and my analysis of that data upon which the value conclusion is predicated in line with the scope of work agreed to. A summary of the scope of work is included on Pages 5 and 6. Please refer to the limiting conditions, certification, and assumptions contained on Pages 9 through 13. The purpose, function, and intended use of this appraisal are described on Page 5. Respectfully submitted, John P. Neet, MAI California General Appraisal Certificate No. AG003494; Certified through 3/14/2016 JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 3 Table of Contents Summary of Facts & Conclusions ................................................................................................................................. 4 Property Identification ................................................................................................................................................... 5 Purpose of the Appraisal ................................................................................................................................................ 5 Property Rights Appraised ............................................................................................................................................. 5 Function of the Appraisal .............................................................................................................................................. 5 Client and Intended Users .............................................................................................................................................. 5 Scope of Work ............................................................................................................................................................... 5 Unit Type Conventions Used In Report ........................................................................................................................ 6 Appraisal Record Dates ................................................................................................................................................. 6 Property Ownership ....................................................................................................................................................... 6 Recent Property History ................................................................................................................................................ 6 Real Estate Taxes........................................................................................................................................................... 7 Exposure Time ............................................................................................................................................................... 7 Marketing Time ............................................................................................................................................................. 7 Personal Property ........................................................................................................................................................... 8 Appraiser Qualifications and Competence .................................................................................................................... 8 Assumptions & Limiting Conditions ............................................................................................................................. 9 Specific Assumptions & Notices ................................................................................................................................. 11 Definitions ................................................................................................................................................................... 12 Certification ................................................................................................................................................................. 13 General Regional Economic Conditions ...................................................................................................................... 14 Southern California Region ......................................................................................................................................... 16 Community Description .............................................................................................................................................. 19 Neighborhood Description........................................................................................................................................... 20 MHC Market Overview and Analysis © ..................................................................................................................... 22 Site Description ........................................................................................................................................................... 30 Description of Improvements ...................................................................................................................................... 31 Replacement Cost & Insurable Value .......................................................................................................................... 33 Highest And Best Use .................................................................................................................................................. 34 Valuation Process ........................................................................................................................................................ 36 Cost Approach ............................................................................................................................................................. 37 Income Approach ........................................................................................................................................................ 38 Sales Comparison Approach........................................................................................................................................ 54 Reconciliation of Value Indications ............................................................................................................................ 59 Supplemental Analysis - Use Value to 501C3 Non-Profit Corporation ...................................................................... 60 Appendix 1- Rent Roll Analysis .................................................................................................................................. 62 ADDENDA Location Maps & Photographs of Subject and Comparables Excerpts from Preliminary Title Report/Complete Legal Description Assessors Records (RealQuest) Flood Zone Provided Rent Roll, Income and Expense Records Copy of Rent Control Ordinance Demographics Authorization Appraiser Qualifications (CV) JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 4 Summary of Facts & Conclusions LOCATION AND FEATURES LOCATION: 32302 Alipaz Street, San Juan Capistrano Orange County, CA CENSUS TRACT: 423.10 ASSESSORS PARCEL IDENTIFICATION: 121-‐171-‐29 121-‐171-‐30 RECORD DATES: Effective Date of Appraisal-‐ January 23, 2015 Date of Inspection-‐ January 23, 2015 Date of Report-‐ February 3, 2015 SITE AREA: 38.2 Acres (per Assessor) 1,662,250 SF (per Assessor) ZONING: MHP FLOOD HAZARD ZONE (FEMA): AE SEISMIC HAZARD ZONE (USGS): 4 PRINCIPAL IMPROVEMENTS: Number of Units (Total)-‐ 312 Year Built-‐ 1970 Amenities and Service-‐ Recreation Center with assembly room, service kitchen, game room, billiards room, fitness center, indoor spa, pool, shuffleboard, and horseshoe pits. Other Facilities-‐ 2 Laundry rooms, 2 Car Washes, Storage Quality Rating-‐ Good Overall Condition Rating-‐ Good Remaining Economic Life-‐ 45 AGE RESTRICTION: Unrestricted Age INTEREST CONSIDERED: Fee Simple ASSUMPTIONS AND CONCLUSIONS: HIGHEST AND BEST USE As Though Vacant: Development. See text for specifics. As Is: Continue present use EST. EXPOSURE TIME: 6 months or less EST. MARKETING TIME: 6 months or less SPECIAL CONSIDERATIONS: See Pages 3-‐9. Reference made to interest appraised, approaches to value considered reliable, information not available to appraiser, assumptions made in analysis. VALUE CONCLUSIONS As-‐Is (Current Conditions) INCOME & RATES: MH Sites Market Rental Rate (/Unit/Mo.) $889.74 MH Sites Avg. Contract Rental Rate (/Unit/Mo.) $889.74 MH Sites Projected Avg. Rental Rate (/Unit/Mo.) $907.53 Potential Gross Income: $4,067,310 Effective Gross Income: $4,033,332 Operating Expenses: $1,446,739 NOI: $2,586,593 Overall Capitalization Rate (Applied): 5.75% Overall Capitalization Rate (Implied): 5.75% INDICATED VALUES: Cost Approach Not Considered Income Approach (Direct Capitalization) $45,000,000 Sales Comparison Approach $44,000,000 ESTIMATED MARKET VALUE: $45,000,000 REPLACEMENT COST NEW OF IMPROVEMENTS: $5,451,271 REPLACEMENT COST NEW OF BUILDINGS: $1,139,271 INSURABLE VALUE: $1,446,000 EST. USE VALUE TO 501C3 CORPORATION $48,200,000 CONTRIBUTORY VALUE OF NON REALTY ITEMS: Nominal JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 5 Property Identification The property that is the subject of this report is a mobile home park located at 32302 Alipaz Street, San Juan Capistrano, Orange County, California. A precise legal description is included in the Addenda. Refer to the preliminary title report. Purpose of the Appraisal The purpose of this appraisal is to estimate the market value of the subject property as defined on the Definitions page below. Property Rights Appraised The purpose of this appraisal is to estimate the market value, as defined herein, of the Fee Simple interest in the subject property subject to the current rental contracts and rent control ordinance. In defining the relationship between space tenant and park owner, it should be noted that manufactured housing communities typically combine features of both fee simple and leased fee interests. While rental agreements between the homeowner and park owner are often made on a month–to-month basis, tenancies commonly last for many years making the relationship between lessor and lessee long term in nature. State laws and local ordinances also formalize the relationship beyond the month-to-month term. In addition, investors typically rely on contract rent as the basis for valuation. As a result, while this valuation is based on the fee simple interest, elements of the analysis of leased fee interests also affect the valuation. Function of the Appraisal It is my understanding that the appraisal is to be used to determine the adequacy of collateral for loan underwriting purposes. The use of this appraisal is invalid for any other purpose. Client and Intended Users This report is intended for use only by Millennium Housing. Use of the report by others not named above is not intended by the appraiser or the client. Scope of Work The scope of this appraisal assignment involved the inspection of the subject property by Matthew Conklin and John P. Neet, MAI, interviews with the property owner and responsible parties, the collection and analysis of pertinent market data and other information, and the completion of the valuation analysis contained herein. Matthew Conklin and John P. Neet, MAI collected factual data utilized herein. John P. Neet, MAI, completed the appraisal analysis and the opinions stated herein are solely those of John P. Neet, MAI. The data collected and considered as well as the process of my reasoning is described throughout the report. This appraisal meets the requirements of USPAP Standard No. 1, and the report complies with the requirements of USPAP Standard No. 2. This appraisal is intended to be a Complete Appraisal under generally accepted standards of appraisal, although this is not a USPAP defined term. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 6 As an additional part of the scope of work, I have formed an opinion of the use value to a specific market participant, a non-profit 501[c]3 corporation. The conclusions of the appraisal are reported in this written appraisal report, under USPAP Standard 2. 1 Unit Type Conventions Used In Report The subject, like a number of properties of this type, has income producing units that are comprised of a variety of types. These may include mobile/manufactured home sites, recreational vehicle sites, site- built units (apartments, detached residences), or commercial units. Analysis of these various types of units requires the units to sometimes be analyzed as individual components and sometimes as the total number of units. In this report, the term units speaks to the aggregate number, while descriptions or analysis of the individual unit types considers only the number of units included in the specific category. In the subject property, there are 312 mobile/manufactured home sites. This results in a total of 312 income producing units. By industry convention, other income producing land divisions (such as rustic or group campsites or vehicle storage spaces) are not included in the total number of units as described above. Appraisal Record Dates The appraisal record dates are stated in the Summary of Facts and Conclusions on Page 3. Property Ownership According to documents available to the appraiser, as of the date of the appraisal, the owner of the subject property was Millennium Housing Corp. See Preliminary Title Report for full vesting information. Recent Property History The existing primary improvements were reportedly constructed in 1970, according to the property manager. According to information provided, there have been no open market transactions involving the subject property within the mandatory three-year reporting period. The property is not now offered for sale, and has not been offered for sale recently, according to the owner of the property. No other transactions regarding the subject property are known. 1 The 2014-15 Edition of the Uniform Standards of Professional Appraisal Practice has eliminated the terms “Summary” and “Self Contained” as descriptions of the written appraisal report. This report is intended to meet the current standard (termed “Appraisal Report”) and the scope of work as agreed to by the appraiser and the client. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 7 Real Estate Taxes Current real estate taxes for the subject are reported as follows: Assessor's Parcel No. Assessed Value Tax Rate Area Tax Rate Ad Valorem Taxes Direct Assessments Total Taxes 121-‐171-‐29 $3,417,027 23-‐007 1.04967% $35,867.51 $299.24 $36,166.75 121-‐171-‐30 $2,936,753 23-‐007 1.04967% $30,826.22 $293.29 $31,119.51 Totals $6,353,780 $66,693.72 $592.53 $67,286.25 Under California law, the property will be reassessed to current market value upon sale. The estimated tax expense used in the Income Approach is based upon the presumed reassessment to the value estimated in the Income Approach. Exposure Time Exposure time is defined as that period of time that the subject is offered for sale prior to sale at the value estimated in this appraisal. Exposure time, by definition, predates the appraisal date stated above. A reasonable projection requires the assumption that the property is properly priced and positions, professionally marketed, and has transferrable title. The following information is considered in the projection of exposure time x A review of the mobile home park sales contained within my sales database that sold within the past 3 years indicates that the vast majority of mobile home parks sell within 180 days. Less than 3% of the sales within the database report marketing times of more than 180 days, and a significant majority report marketing times of less than 120 days. x Interviews with industry specific brokers indicate projections of 30-120 days if the property is appropriately priced and widely marketed. However, it is common for more attractive properties to be narrowly marketed to a target group, with time limits on offers and limited time frames for due diligence prior to the offer. These types of marketing generally result in an accepted offer within 30 days or less. Completion of the sale typically takes 30-60 days beyond the contract date, according to brokers. x The marketing time for the properties used as sales comparables in this appraisal are reported in the Sales Comparison Approach. These are the most similar properties to the subject and are weighted heavily in the projection. The market value estimated herein is based on an exposure time of 6 months or less, which appears to be a reasonable conclusion based on the data considered. Marketing Time Marketing time differs from exposure time, in that this is the period of time following the appraisal date that the property might take to sell if offered for sale at approximately the level of the market value estimated. The same data considered in the exposure time analysis is considered here, but it must be realized that events in the future may change and alter the estimated marketing period from that currently expected. However, it appears that the condition of the market in the next several months will not change significantly. A marketing time of 6 months or less is considered a well-supported conclusion based on current market conditions. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 8 Personal Property Personal property necessary to achieve the net income projected for the subject includes maintenance and office equipment, recreation center furnishings and other minor items. Specifically, this does not include community owned homes, if any, which are outside of the scope of the valuation. The contributory value of this personal property to the whole is considered nominal in light of the estimated market value of the property. A rough estimate the contributory value of this personal property to the market value estimated herein is noted in the Summary of Facts and Conclusions on Page 3. This is based on the salvage value of the items. According to information provided, there are three community-owned2 mobile/manufactured homes in the park. These are not considered in the appraisal. Appraiser Qualifications and Competence The principal appraiser holds general appraiser certificates in this and other states, and is the holder of the MAI designation, indicating the base qualifications needed to appraise properties of this level of complexity. As pertaining to this property type, the principal appraiser has performed valuation and counseling assignments involving over 4,500 manufactured housing communities, mobile home parks and RV parks, and as a result of this experience is qualified to complete this valuation assignment. Please refer to the appraiser’s qualification statement in the Addenda. 2 For purposes of the appraisal, community owned homes are defined as mobile/manufactured homes that are owned by the park owner or related/affiliated parties as opposed to homes that are owned by the site tenant. Not included are homes for which title is held by the owner or an affiliated party as security for a note payable by the site tenant. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 9 Assumptions & Limiting Conditions The Code of Professional Ethics and Standards of Professional Practice of the Appraisal Institute requires the appraiser to “clearly and unequivocally set forth all facts, assumptions, and conditions upon which the appraisal is based.” In compliance with this requirement, and to assist the reader in interpreting this report, the general assumptions and limiting conditions are set forth as follows: 1. The date to which the conclusions and opinions expressed in the report apply is set forth in the body of this report. Further, the dollar amount of any opinion herein rendered is based upon the purchasing power of the American dollar as of that date. 2. The information furnished by others is believed to be reliable, however, no warranty is given for its accuracy. Any income and expense records relating to the subject property that has been provided is assumed to be accurate as presented. 3. I reserve the right to make such adjustments to the analyses, opinions, and conclusions set forth in this report as may be required by consideration of additional data or more reliable data that may become available. 4. No opinion as to the validity of the title is rendered. Title is assumed to be marketable, free and clear of all liens and encumbrances, easements and restrictions, except those specifically discussed in the report. 5. The property is appraised assuming that is under responsible ownership and competent management. 6. All engineering is assumed to be correct. The illustrative material in this report is included only to assist the reader in visualizing the property. 7. It is assumed that there are no hidden or unapparent conditions of the property, the subsoil, or structures that render it more or less valuable. No responsibility is assumed for such conditions or for arranging the engineering studies that may be required to discover such conditions. 8. It is assumed that there is full compliance with all applicable federal, state, and local environmental regulations and laws unless non-compliance is stated, defined, and considered in the appraisal report. 9. It is assumed that all zoning and use regulations and restrictions have been complied with, unless non- conformity is stated, defined, and considered in the appraisal report. 10. It is assumed that all licenses, certificates of occupancy, consents or other legislative or administrative authority from any national, state, or local government or private entity or organization have been or can be obtained for any use upon which the value estimate contained in this report is based. 11. It is assumed that the utilization of land and improvements is within the boundaries or property lines of the land described and that there is no trespass or encroachment except as noted in the report. 12. No opinion is expressed as to the value of the subsurface oil, gas, or mineral rights or whether the property is subject to surface entry for the exploration or removal of such materials, except as expressly stated. 13. No opinion is expressed for matters that require legal, engineering, or other specialized knowledge beyond that customarily employed by real estate appraisers. 14. No responsibility is assumed for determining the effect of possible natural disasters or other such occurrences upon the individual property. 15. The distribution, if any, of the total valuation in this report between land and improvements applies only under the stated program of utilization. The separate allocations for land and buildings must not be used in conjunction with any other appraisal and are invalid if so used. 16. I am not required to give further consultation, testimony, or to be in attendance in court with reference to the property in question unless arrangements have been previously made. The client is notified that any such further consultation, testimony, or attendance in court will be at my discretion and will be predicated upon the payment of an additional fee. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 10 17. No testing or inquiry was made regarding the existence of lead based paint, asbestos containing materials, or termite infestation or damage. These areas are beyond the appraiser’s expertise. Consultation with appropriate experts is recommended. 18. No consideration has been given to the value of any personal property located upon the subject property, except as otherwise stated in the report. 19. The plans and specifications, upon which this valuation is predicated, are assumed to show the intent of the builder, but I assume no responsibility for the correctness, or for any undisclosed modifications. 20. The issue of compliance with the ADA (Americans with Disabilities Act) is beyond the scope of this appraisal. It is my recommendation that the client retain the services of a qualified expert in the field of ADA compliance to determine if the property conforms to the requirements of the ADA, and to determine the impact of noncompliance upon the use and utility of the subject improvements. The appraiser assumes the compliance of the subject property to the ADA, as such knowledge is beyond my knowledge and expertise. 21. ENVIRONMENTAL HAZARDS DISCLAIMER-The following disclaimer is made in accordance with Guide Note 8 adopted by the Governing Council of the American Institute of Real Estate Appraisers on May 3, 1989 and Advisory Opinion G-9 issued by the Appraisal Standards Board of the Appraisal Foundation on December 8, 1992; and is intended to provide notice to the client of my lack of knowledge and expertise in the area of environmental hazards. Unless otherwise stated in this report, the existence of hazardous substances, including without limitation asbestos, polychlorinated biphenyl’s, petroleum leakage, or agricultural chemicals, which may or may not be present on the property, or other environmental conditions, were not called to the attention of nor did I become aware of such during the inspection. I have no knowledge of the existence of such materials on or in the property unless otherwise stated. I am not qualified to test such substances or conditions. It is recommended that the client consult with an environmental hazard expert before making any decision regarding this property. The value estimated is predicated upon the assumption that there is no such condition on or in the property or in such proximity thereto that would cause a loss in value. No responsibility is assumed for any such conditions, nor for any expertise of knowledge required to discover them. The appraiser is not an expert in the field of hazardous materials. This appraisal does not constitute an expert inspection of the property for environmental or health hazards. The only way to be certain as to the condition of the property with respect to “environmental hazards” is to have an expert in the field inspect the property. This appraisal should not be relied upon as to whether environmental hazards exist on or near the property. It is the appraiser’s recommendation that a Phase 1 Environmental Assessment be obtained on this or any other property prior to making any monetary decision involving the property to determine the potential for environmental hazards. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 11 Specific Assumptions & Notices 1. The site valuation has not been included in the appraisal due to the limited market data available concerning sales of sites zoned for mobile home park usage or purchased for mobile home park development and the limited development of mobile home parks over the past decade in the state of California. 2. The Cost Approach has not been included for several reasons including general unreliability in the valuation of mobile home parks, the age of the improvements, lack of market use, and other factors, which are discussed in the appropriate section of the appraisal report. 3. In defining the relationship between space tenant and park owner, it should be noted that manufactured housing communities typically combine features of both fee simple and leased fee interests. While rental agreements between the homeowner and park owner are often made on a month–to-month basis, tenancies commonly last for many years making the relationship between lessor and lessee long term in nature. State laws and local ordinances also formalize the relationship beyond the month-to-month term. In addition, investors typically rely on contract rent as the basis for valuation. As a result, while this valuation is based on the fee simple interest, elements of the analysis of leased fee interests also affect the valuation. 4. Information regarding zoning, entitlements, land use issues, non-conformities, local rebuilding policies, and other legal restrictions is obtained from public records or by short interviews with municipal representatives. The scope of this appraisal does not include an in-depth document search or review. The future ability of the property to continue to be utilized for the purposes outlined in the appraisal or to be rebuilt to its current use and specification may be affected by changes in governmental policy or regulation, or by interpretations of existing rules. For greater clarity and understanding of the municipal policies and regulations that affect the subject property, or for assurances as to the future ability of the property to be used for any particular purpose, consultation with legal professionals is recommended. 5. The appraisal has been prepared using a variety of available software, including Microsoft Word, Microsoft Excel, Adobe Acrobat, and Argus by Realm. The reader should be aware that the calculating conventions regarding rounding iterations used by Excel and Argus differ from that of other software and handheld calculators. As a result, attempts to verify the mathematical calculations using other devices and software may yield slightly different results than stated herein. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 12 Definitions3 Market Value4- 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. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: x Buyer and seller are typically motivated; x Both parties are well informed or well advised, and acting in what they considers their best interests; x A reasonable time is allowed for exposure in the open market; x Payment is made in cash in United States dollars or in terms of financial arrangements comparable thereto; and x The price represents a normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. Market Value As-Is-Estimate of market value in the condition observed upon inspection and as it physically and legally exists without hypothetical conditions, assumptions, or qualifications as of the appraisal date. Fee Simple- An absolute fee; a fee without limitations to any particular class of heirs, or restrictions, but subject to the limitations of eminent domain, escheat, police power, and taxation; an inheritable estate. Leased Fee- An ownership interest, held by a landlord, with the right of use and occupancy conveyed by lease to others; usually consists of the right to receive rent and the right to possession of the property following the expiration of the lease. Leasehold- A property held under the tenure of a lease. The right of use and occupancy of real property by virtue of a lease agreement; the right of a lessee to use and enjoy real estate for a stated term and upon certain conditions, such as payment of rent. Transfer Rental Rate-Rental rate charged to new tenant purchasing existing manufactured home in park. New Move-In Rate-Rental rate charged for space that is vacant or for new unit being moved in to park. Manufactured Home-Factory built home, constructed since 1974 in compliance with regulations promulgated by the United States Department of Housing and Urban Development (HUD); also known as a HUD code home. Mobile Home-Factory built home, constructed prior to the 1974 HUD code requirement. RV (Recreational Vehicle)-One of several alternative units designed for vacation use; includes Class A RV’s (bus chassis), Class C RV’s (van chassis), trailers (designed to be pulled behind powered vehicle), and park model RV’s (see below). Park Model RV-RV unit designed for permanent or semi-permanent placement; resembles a HUD code home in appearance, but is less than 400 SF in size, and is not in compliance with HUD code. Also known as Park Model Trailer. Community Owned Home (COH)-A manufactured, mobile, or trailer owned by the owner of the property that is either held for rental purposes or is offered for sale. Alternative term: POC (Park-Owned Coach). Use Value-The value a specific property has for a specific use. In estimating use value, the appraiser focuses on the value the real estate contributes to the enterprise of which it is a part, without regard to the highest and best use of the property or the monetary amount that might be realized from its sale. In the MHP/MHC context, Use Value is based upon the amount of debt that the property could support under 501C3 corporation management and ownership. 3 Definitions from the Appraisal of Real Estate, 13th Edition published by the Appraisal Institute and paraphrased and other sources. 4 Source: Office of Controller of the Currency (OCC) , 12 CFR, Part 34, Subpart C-Appraisals, 34.42 Def. (g); FIRREA Title XI, Section 34.42 (f) ; and Federal Deposit Insurance Corporation (FDIC) Final Rules, 12, CFR Part 323.2(f)) JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 13 Certification I certify to the best of my knowledge and belief: The statements of fact contained in this report are true and correct. The reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions, and are my personal, impartial, and unbiased professional analyses, opinions, and conclusions. I have no present or prospective interest in the property that is the subject of this report, and no personal interest with respect to the parties involved. I have no bias with respect to the property that is the subject of this report or to the parties involved with this assignment. My engagement in this assignment was not contingent upon developing or reporting predetermined results. My compensation for completing this assignment is not contingent upon the development or reporting of a predetermined value or direction in value that favors the cause of a client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this appraisal. My analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the requirements of the Code of Professional Ethics and the Standards of Professional Practice of the Appraisal Institute, the Uniform Standards of Appraisal Practice (USPAP), and if applicable, the requirements of Title XI of FIRREA (Federal Financial Institutions Reform, Recovery, and Enforcement Act of 1989). I have made a personal inspection of the property that is the subject of this report. No one provided significant real property appraisal assistance to the person signing this certification. As reported in the Scope of the Appraisal, Matthew Conklin assisted in the collection and verification of factual data, but did not participate in the analysis or the forming of the real property appraisal opinions stated herein. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. As of the date of this report I, have completed continuing education program of the Appraisal Institute. As required by Title XI, 34.44 (a)(10), the following statement is included: The appraisal assignment was not based on a requested minimum valuation, a specific valuation, or the approval of a loan. The requirements of the competency provision of USPAP are met for the purposes of this appraisal assignment. I have performed no services as an appraiser or in other capacity regarding the property that is the subject of this report within the three year period immediately preceding acceptance of this assignment. John P. Neet, MAI California General Appraisal Certificate No. AG003494; Certified through 3/14/2016 JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 14 General Regional Economic Conditions The following excerpt from the Federal Reserve Board “Beige Book5” provides a current overview of the overall economic condition of the western United States: Economic activity in the Twelfth District continued to improve moderately during the reporting period of mid-‐November through late December 2014. Overall price and wage inflation remained modest. Retail sales and demand for business and consumer services increased moderately. Overall manufacturing activity picked up, while agricultural conditions were mixed. Real estate activity advanced, mainly in the commercial construction sector. Lending activity was mixed. Prices and Wages Overall price inflation remained modest during the reporting period. In general, input costs were fairly stable. However, increases in the cost of various construction materials were widespread. Shortages of truck drivers contributed to increases in shipping costs in some areas, even amid fuel price declines. Supply constraints boosted wholesale prices of produce and meat. Effects on retail prices tended to be minimal, but selected areas saw significant jumps. Wholesale prices of agricultural commodities, such as grains, were stable or declined. Oil price declines contributed to a drop in prices in the energy-‐intensive aluminum production sector. Vigorous online competition exerted downward price pressures in selected retail clothing segments. In general, wages continued to increase at a modest pace during the reporting period. Several contacts reported that wages were flat or had increased at about the rate of price inflation in their area. Labor shortages boosted wages of truck drivers, aerospace engineers, and construction machinists and framers. Regarding total compensation, some contacts noted that increases in employee medical insurance premiums tended to offset any increases in wages and salaries. Retail Trade and Services Overall retail sales activity grew moderately during the reporting period. Holiday spending tended to be higher than in recent years and notably so in some areas. Sales met most expectations, with few reports of excess inventories. Higher-‐priced items, electronics, men's and women's clothing, cosmetics, and accessories sold well. Online sales growth exceeded in-‐store growth. Auto sales were robust in some areas, but came in somewhat below expectations in other regions. Contacts attributed stronger overall holiday sales to continued improvement in employment conditions and decreases in gas prices. Many contacts are optimistic that these developments will continue to spur retail spending in 2015. Demand for business and consumer services grew moderately during the reporting period. Demand for cloud computing services continued to increase. Sales in the limited service segment of the restaurant sector slowed a bit in November but ticked back up as the holiday season progressed. Holiday spending in this segment was higher than in 2013, and contacts expect that lower gas prices will continue to boost customer traffic in the new year. Travel and tourism to Southern California grew substantially in 2014, and contacts expect this trend to continue into 2015. In particular, travel from China grew rapidly in 2014, and new extended visa rules for Chinese visitors should encourage even more tourism. Improved snow conditions and declines in gas prices contributed to a year-‐over-‐year increase in skier visits to the eastern Sierra Nevada’s during the reporting period. Spending per visitor at ski destinations also increased. Manufacturing Overall District manufacturing activity grew moderately during the reporting period. Contacts reported that energy demand from manufacturers was solid. Biotechnology and pharmaceutical manufacturing earnings were healthy. Semiconductor producers reported year-‐to-‐date worldwide sales increased 10 percent from the same period a year earlier, while U.S. sales were up 12 percent. Commercial aircraft production was strong. Order backlogs remained sizable, but contacts were somewhat concerned that the 5 Prepared at the Federal Reserve Bank based on information collected before January 5, 2015. This document summarizes comments received from businesses and other contacts outside the Federal Reserve and is not a representation of the views of Federal Reserve officials. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 15 decline in oil prices may cause airlines to start deferring purchases of more fuel-‐efficient planes. Sequestration continued to erode revenues and capacity utilization in the defense aerospace sector, as the rate of new program starts declined. Increases in the pace of commercial construction boosted domestic demand for recycled steel and metals. However, the stronger dollar and weaker foreign demand reduced exports of these materials. Agriculture and Resource-‐Related Industries Agricultural conditions in the District were mixed during the reporting period. Declines in petroleum prices contributed to reductions in the cost of gas and fertilizer. However, some farmers also faced lower prices for their commodities. In some areas, restaurants purchased fewer vegetables. Dairy farm profits increased significantly over the past year, but milk futures prices declined recently. Uncertainty regarding future water availability in California slowed new plantings of permanent crops. Declines in demand from Japan and China contributed to a reduction in exports of logs. However, modest increases in the pace of new home construction in some areas slightly elevated domestic demand for logs. Real Estate and Construction Real estate activity advanced during the reporting period. The pace of new single-‐family home construction increased modestly in some areas of the District, with relatively more activity in urban areas than in rural areas. However, some contacts cited increasing costs of materials and labor and a shortage of available lots in some areas in their projections that the pace of new construction will fall back in 2015. Indeed, these contacts reported that the pace of construction permit issuance has declined. A few contacts indicated that home sales picked up a bit in December, but some contacts reported that insufficient inventory is damping the pace of sales. Multifamily residential real estate construction activity was strong in many areas of the District during the reporting period. Retail, office, industrial, or infrastructure projects also were widespread. Most contacts viewed the pace of construction as healthy. However, one contact reported that some investors are concerned that, given planned construction, there soon will be an excess supply of multifamily units in their area. Financial Institutions Lending activity in the District was mixed during the reporting period. Some contacts reported a significant increase in loan demand, mostly in the construction segment. Other contacts reported that overall loan demand remained somewhat weak. In some areas, businesses with sufficient cash turned towards internal financing. Deposit growth was strong in many areas, and banks have ample liquidity. Stiff competition for high-‐quality borrowers exerted downward pressure on loan interest rates, and declines in net interest margins were widespread. Some contacts reported that compressed margins contributed to increased acquisitions as smaller banks combined in order to reduce operating costs. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 16 Southern California Region Location and Climate The Southern California market area, which includes Los Angeles, Orange, Ventura, San Bernardino, San Diego, and Riverside Counties, is located in the southwestern portion of the state. This economic region encompasses much of Southern California, with the exception of Imperial County located on the Arizona/Mexico border, and includes an area with an interdependent economy that stretches from the Pacific Ocean to the Arizona border. Population Trends Population growth within most of the Southern California region has been fairly flat for the past decade, with the fastest growing counties including Los Angeles, San Diego, and Riverside, and growth for Ventura, Orange, and San Bernardino have been flatter. Year over year growth is shown in the following table. Population Growth Trend County July 1, 2010 July 1, 2011 July 1, 2012 July 1, 2013 Jan. 1, 2014 Los Angeles 9,825,077 9,860,904 9,945,031 10,019,365 10,041,797 Orange 3,017,299 3,046,783 3,074,546 3,104,680 3,113,191 Riverside 2,191,930 2,220,390 2,249,773 2,267,760 2,279,967 San Bernardino 2,038,546 2,053,155 2,064,118 2,076,399 2,085,669 San Diego 3,102,852 3,125,810 3,153,877 3,182,072 3,194,362 Ventura 825,061 830,164 833,366 840,320 842,967 Economic Base Both the Los Angeles (including L.A., Orange, Riverside, and San Bernardino Counties) and San Diego regions have become highly diversified postindustrial economic centers. While there is still a great deal of rivalry and competition between the two metro areas, it has become increasingly apparent that the economies are becoming more intertwined. Recent growth in southern Orange and Riverside Counties and in northern San Diego County has had a blurring effect on many of the differences. Predominant industries in the area include business and financial services, tourism, aerospace, telecommunications, medical technology, wholesale trade and distribution, health services, international trade, entertainment, the garment industry, and construction. The local economy was considered a mirror reflection of the national economy in terms of diversification, and has been historically thought to be highly resistant to downturns. Employment Unemployment rates have fallen from the peak in 2010 in all of the Counties in Southern California, as shown in the following graphic, but are still higher than pre-recession levels. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 17 Outlook for Orange County6 Introduction In the 1950’s Orange County began the process of transforming its economy from one based on orange groves and oil to an economy characterized by the aerospace, life sciences, financial services, and tourism industries. Facilitating this transformation was Orange County’s success in attracting a highly skilled workforce. Nearly 90% of the adult population in Orange County has a high school diploma and roughly 35% has a bachelor’s degree or higher. Quality of life is another attribute in which Orange County ranks high among regions of the U.S. The unemployment rate in Orange County peaked at 9.5% in 2010, but fell to an average annual rate of 6.0% in 2013. By July 2014, the unemployment rate in Orange County stood at 5.7%, the lowest in Southern California (fifth lowest in the state) and one of the lowest in the nation. The LAEDC forecasts the unemployment rate will average 5.2% in 2014 and 4.8% in 2015. At its lowest point, Orange County total nonfarm employment fell 6.2% below the peak reached in 2006. In 2014, employment is projected to improve but will still fall 2.2% short of where it was 2006. The LAEDC forecasts Orange County payrolls will increase by roughly 30,500 jobs (2.1%) this year. The largest gains are expected to be in construction (7,700 jobs), professional, scientific and technical services (5,200 jobs), healthcare and social assistance (4,600 jobs), leisure and hospitality (4,100 jobs), and manufacturing (3,100 jobs). In 2015, total nonfarm employment is expected to reach 1.52 million, finally exceeding 2006 levels. Trends in Major Industries Real Estate and Construction-‐ Orange County’s residential real estate market continues to improve, but it will be some time before a full recovery can be declared. Sales of existing homes have declined on year-‐ over-‐year basis in each month of 2014. Median prices on the other hand, have risen year-‐over-‐year for 28 6 LAEDC Kyser Center for Economic Research Economic Forecast, October 2014 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 LA Metro Inland Emp. San Diego JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 18 consecutive months (through August 2014). According to the California Association of Realtors the median price of an existing single-‐family home in Orange County was $699,430 in August 2014, up by 5.2% compared with the median price a year ago. New home building slowed this year. Permits issued for new home construction are expected to be down by 12.0% compared with 2013, but stronger economic growth and demographic pressures should push permits up by 15.2% in 2015. Local commercial real estate has also improved. Office and industrial vacancy rates are declining and lease rates have stabilized. The office vacancy rate fell to 14.8% in the second quarter of 2014 and net absorption was 405,572 square feet. The industrial vacancy rate dropped to 3.7% in the second quarter of 2014. This is the lowest vacancy rate recorded since the third quarter of 2008 when it was 3.5%. Net absorption in the second quarter was 110,923 square feet. Non-‐residential building permits were up by 41.6% (projected), but are coming off of very low levels of new construction. Leasing fundamentals should continue to strengthen the rest of this year, paving the way for additional gains in new non-‐residential construction next year. Leisure and Hospitality -‐ Tourism is one of Orange County’s most important industries. The Orange County Visitor and Convention Bureau reported that over 44 million people (including 3.7 million international travelers) visited Orange County and spent in excess of $9.5 billion in 2013. Attractions like Disneyland and South Coast Plaza help to draw increasing numbers of international visitors, particularly Chinese tourists. In the lodging sector, occupancy rates are down and average daily room rates are up. After achieving record high employment levels in 2013, leisure and hospitality jobs in Orange County continued to increase through July of this year. Employment in 2014 is projected to reach 191,900 workers, increasing again in 2015 to 194,500 workers. Manufacturing and Exports-‐ Orange County has a strong high tech manufacturing sector that includes computer and related electronic products, aerospace parts and products, and medical device manufacturers. These sectors rely on Orange County’s highly skilled workforce. Manufacturing employment accounts for about 11% of total nonfarm jobs in Orange County with 73% of the total concentrated in durable goods (e.g. computers, machinery, and transportation equipment). The balance of manufacturing workers produces nondurable goods such as apparel and food. In 2014, manufacturing jobs in Orange County are expected to increase by 2.0% to 161,000 workers, and to 163,000 in 2014. Orange County’s manufacturing firms also generate significant export revenues. In 2013, export revenues totaled approximately $25 billion, or 26% of the total for the Los Angeles MSA. Looking Ahead Orange County’s economy continued to expand this year with additional gains expected in 2015. Initially lagging behind the national recovery, Orange County quickly gathered strength. Population growth is expected to accelerate in the near-‐term, while gains in both employment and personal income, along with improvements in the housing market all point to stronger consumer spending this year and next. The opportunities afforded by Orange County’s thriving high tech industries, quality of life and congenial climate are magnets for attracting and retaining a talented and highly skilled workforce, which in turn, enhances the vitality of the regional economy. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 19 Community Description Community Location-The subject property is located in southern Orange County, near the boundary with San Diego County. The location is less than two miles inland from the Pacific Ocean, 62 miles south of Los Angeles and 65 miles north of San Diego. This is a small city from a geographic perspective, containing a total land area of 13.6 square miles. Surrounding cities and communities include Laguna Niguel to the west, Mission Viejo to the north, unincorporated County areas to the east, and Dana Point and San Clemente to the south. Community Population-The current population of San Juan Capistrano is 35,852. This represents a 3.2% increase from the 2010-reported population of 34,709 and a 4.9% increase from the 2000 reported population of 34,100. The population of the community has shown steady growth over the past several decades, but is much slower than other areas of the County, primarily due to the small physical size of the community and limited encouragement of residential growth Transportation-Access to the regional transportation system is provided by the San Diego (I-5) Freeway, which bisects the city on a north/south plane and provides several access points within the city limits. Additional major highways include SH74, which extends to southwestern Riverside County to the east and SH1, the surface coastal highway serving Southern California. An Amtrak passenger rail terminal is located near the geographic center of the community, providing access to both Los Angeles and San Diego hubs. The nearest scheduled air services are located at John Wayne/Orange County International Airport, approximately 25 minutes to the north. Economic Base and Trends-Like most communities in South Orange County, San Juan Capistrano contains a large number of residents who commute to jobs in other portions of the region. There is a small base of local jobs, mostly in small businesses. Local businesses include resident services, a small light industrial component, and some tourist oriented businesses. The tourist businesses are generally located along the freeway and in an older downtown district which is constructed around the Mission San Juan Capistrano. Employment Trends-According to published records, the following trends are noted: Employment and Unemployment Rate Jurisdiction: San Juan Capistrano Nov-‐14 Change Nov-‐13 Labor Force: 18,118 1.6% 17,827 Employed Persons: 17,316 2.3% 16,920 Unemployed Persons: 802 -‐13.1% 907 Unemployment Rate: 4.40% -‐15.9% 5.10% Source: Bureau of Labor Standards This data indicates that the employment picture in the local economy is improving. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 20 Residential Development Trends-Reported building permit totals for the community are reported as follows. REPORTED BUILDING PERMIT ACTIVITY San Juan Capistrano 2013 2014 Classification Units Permitted Construction Cost Average Const. Cost Units Permitted Construction Cost Average Const. Cost Single Family 102 $33,522,459 $328,652 59 $26,096,912 $442,321 Two Family 0 #DIV/0! 0 #DIV/0! 3-‐4 Family 0 #DIV/0! 0 #DIV/0! Five Units or More 0 #DIV/0! 0 #DIV/0! Total 102 $33,522,459 $328,652 59 $26,096,912 $442,321 Source: U.S. Census Bureau In this community, detached residential development has been limited to single-family residences. This is due to market preferences, the general unavailability of larger tracts of land, and the near full build-out of the community. Neighborhood Description Neighborhood Location-The subject is located one block west of City Hall. Neighborhood boundaries are generally fluid in this part of the city, but in general may be described as Del Obispo Street to the north and west, Stonehill Drive to the south, the 5 freeway to the east. Mobile home parks competitive to the subject are found in other neighborhoods and market areas. Transportation-The neighborhood is served by the 5 Freeway, which is located east from the subject. Major surface streets in the neighborhood include Del Obispo Street and Camino Capistrano (north-south) and Camino Del Avion and Stonehill Drive (east-west). The nearest access to rail based transportation is less than one mile south from the subject, and this has a positive impact on the neighborhood. Scheduled bus service is available in the immediate neighborhood of the subject. Neighborhood Land Uses-This is predominantly a residential use neighborhood, with other land uses consisting of light industrial and agricultural. Most of the residential aspect of the neighborhood are 30-40 years and consist of mobile home parks, apartments and condominiums. A light industrial park is located immediately south. Trends-The neighborhood is essentially fully developed and no significant changes in the current land use patterns are foreseen in the near future. Neighborhood Demographics-According to information provided by the Census Bureau, this is a middle-income neighborhood. The specific demographic data are shown in the following charts: NEIGHBORHOOD INCOME CHARACTERISTICS Income Level Rating Middle Neighborhood Median Family Income $82,667 MSA Median Family Income $84,900 Neighborhood/MSA Income Comparison (%) 97% Households Below Poverty Line 10% Source: U.S. Census Bureau, FFIEC JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 21 Neighborhood Housing Supply-The characteristics of the neighborhood housing supply are shown in the following chart, based on data from the U.S. Census Bureau. NEIGHBORHOOD HOUSING CHARACTERISTICS Total Housing Units 3,105 1-‐4 Family Units 2,755 Median Age of Housing (Years) 33 Owner Occupied Units 2,296 Renter Occupied Units 681 Percentage Owner Occupied 74% Source: U.S. Census Bureau, FFIEC Housing Prices-Public information sources report the following housing price trends for apartments and single family residences in the subject market area: Apartment Rental Rate Ranges Size Rate Range 1 Bedroom $1,427 to $2,145 2 Bedroom $1,900 to $2,300 3 Bedroom $2,260 to $3,440 Source: http://www.apartments.com Median Housing Prices Dec-‐14 $662,500 Dec-‐13 $745,250 Change: -‐11% Source: Dataquick/Zillow Adjacent Land Uses-The subject is surrounded by a variety of land uses, including: North- +/-30 year old condominium development. South- Small industrial park to the southwest portion of the park; +/- 5 year old tract built homes to the southeast portion of the park East- East- Trabuco Creek, a concrete lined flood control channel. West- Alipaz Street, with apartments located beyond, to the northeast of the subject; Rancho Alipaz Mobile Home Park located to the southeast of the subject. The surrounding development appears compatible with the present use of the subject. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 22 MHC Market Overview and Analysis ©7 Manufactured Home Shipment Trends-Shipments of new manufactured homes are not a significant consideration in the valuation of mobile home parks. Investors rely on cash flow from existing tenants, not sales of new homes, to determine investment desirability and price. Sales of new manufactured homes do tend to show directional trends over the long term, and for this reason provide some level of insight into future industry-wide trends. Shipments of new manufactured homes have fallen in California over the past 7 years but have rebounded slightly in 2013, but it must be noted that the following table reflects all shipments of all manufactured homes, not just placements on leased homesites. The Manufactured Housing Institute estimates that only approximately 25% of manufactured homes are placed in land lease communities. New Mfg. Home Shipments 2007 2008 2009 2010 2011 2012 2013 California 4,769 2,856 1,569 1,420 1,380 1,442 2,160 United States 95,752 81,907 49,717 50,046 51,618 51,401 60,228 Manufactured homes remain a less costly alternative to site-built homes. According to the National Association of Home Builders, the average cost of a manufactured home (sited and set-up) was $75,500 as compared to the average site built price of $223,085. This explains the continued popularity of manufactured homes as an alternative to site built homes where cost is a significant issue. However, the cost saving benefits for the consumer disappear when manufactured homes are sited on leased land, and the interest rate differentials between conventional, real estate mortgages and chattel mortgages take up the difference, and the savings in construction costs are not able to be passed along to the consumer in the form of lower housing payments. These trends are not a significant consideration in the investment market being considered in this appraisal. While it may seem counter-intuitive to outsiders, investors also recognize that while new homes improve the physical appearance of the park, they also increase risk by a modest amount since newer homes tend to have higher monthly mortgage payments (limiting the tenants ability to pay higher site rents) and introduce a somewhat greater risk of foreclosure by the lender, potentially resulting in added capital expenditures to purchase the home to keep it from being removed from the park. California MHC/MHP Investment Market Overview-Typically, the best of these properties are in high demand relative to other investments for a variety of reasons. The most salient of those reasons includes the stable nature of the investment, the predictability of future cash flows, and strong demand for affordable housing throughout the western United States. Mobile Home Parks and Manufactured Housing Communities are widely perceived to have limited downside risk. Possible negative issues include the potential for rent control in any community in California, aging infrastructure in many parks, and price competition with other forms of housing that make the filling of vacancies and the sale of existing homes more difficult. However, mobile home parks have remained a more stable investment property than other forms of investment real estate since the major market disruptions in the fall of 2008, and have remained attractive investment vehicles for a variety of large and small investors. Many investors see this property type as a defensive hedge in the current economic downturn. Interviews with investors, brokers, lenders, and other market participants indicate that there are a substantial number of investors active in the market. Investors are tending to place significant reliance on current occupancy and historically proven income, and the practice of projecting upside into the price willing to be paid has become very limited as of late. 7 This article represents original research and analysis by the author. Reproduction without permission is strictly prohibited. This article may be reproduced only as a part of this appraisal report when the appraisal report is published in its entirety. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 23 This trend has begun to change in the latter part of 2011 as commercial interest rates fell and as more lenders began to enter the market. x Since 2008, the most stable, well-located, and well-occupied mobile home parks have been able to be financed with FNMA financing, which lacked flexibility compared to the conduit loans of the 2005-2007 era, but offered far lower interest rates for parks that would qualify. This financing option continues to be the most attractive for parks that quality, but recently, competition from life insurance companies re-entering the market has been noted for low leverage loans. The investment market impact has been nominal, with the lesser amounts of available leverage adding 50 to 100 basis points to the overall capitalization rates for these high-end parks. x Secondary level parks (high singlewide count, location in troubled residential market areas, older parks, etc.) saw all sources of financing dry up, from the CMBS conduit loans to the local and regional banks that targeted this property type. Recently, the door has opened slightly, with commercial banks and CMBS conduits re-entering the market and offering financing to parks that will not qualify for FNMA due to high singlewide counts, community owned rental homes, or locations in secondary markets. x Tertiary level parks (old travel trailer parks, parks with high vacancy and/or many park owned mobile home rentals, parks with deferred maintenance, fair to poor quality parks) have been most affected. The few lenders that aggressively pursued this market in the 2004-2007 eras have long exited this market, and those who have begun to return are looking more to the secondary level parks for loan collateral. This may be a segment that may have to return to the financing tools of the past (pre-2000) including seller financing and all cash purchases. Most of the troubled loans and foreclosures that have occurred in the mobile home park universe have fallen into this category. Investors continue to project income on a fairly conservative basis, except perhaps at the top end of the property desirability list, where upside is still a discussion point. In properties where vacancy exists in any significant amount, investors are prone to capitalize income at current occupancy levels, recognizing that the costs associated with the placement of homes on vacant sites to be rented or sold are limiting factors in increasing occupancy levels in the short term. The size of the market and the motivation of participants have seen significant changes over the past several years. Resident owner groups, non-profit organizations, and in some cases municipal agencies have all competed with typical investors for the purchase of many parks in California, and all have made successful purchases. There has been a modest expansion beyond California. The stalling of the subdivision trend has reignited interest in 501C3 purchases and resident co-op ownership. Municipal agencies have become less a factor (and the few that own parks are tending to divest their mobile home park investments. In the current financing environment, 501C3 corporations are have greater ability to compete than in the previous market, especially for parks that will not easily qualify for GSE financing. Market Velocity-California has noted the following trend of sales over the past several years. Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 No. Transactions 81 64 51 40 22 24 30 55 28 The market is expected to pick up in the near future, as the capital markets continue to improve access to funds, and properties that have been held off the market by potential sellers are placed on the market to sell. In fact, the last quarter of 2012 saw a flurry of buyer activity in California, much of it the result of anticipated loss of tax benefits in 2013, which did not occur. Investment Parameters-By comparison to alternative investments (apartments, office, retail), mobile home parks tend to offer more stable and predictable income streams over time, with lower risk but lesser potential for spectacular income growth. The following chart indicates the overall rate trend reported for California sales from January 2008 to December 2013. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 24 While there is substantial variance from transaction to transaction, the linear trend line indicates a generally flat trend over the past 5 years. The prospects for this investment class for the next several years appear to be good in relation to other investment property classes. Investment performance is likely to be stable at worst, with little potential for significant declines in income collected from operations, modest potential for increases in operating expenses, and limited potential for changes in the perception of this asset class as an investment relative to other forms of investment real estate. Potential enhancements in value are possible as a result of a subdivision conversion trend. Infrastructure Issues-A significant issue in many parks going forward, especially those built in the 1970’s and before, is the adequacy and condition of the utility service systems where these are community owned. Prudent investors are tending to take a harsh look at the condition and adequacy of utility infrastructure, and some brokers report that that investors are looking more carefully at parks with septic systems and/or water wells to determine the suitability of those systems for long term usage. A generally positive trend is the conversion to solar panel generated electricity for parks that have submetered electricity. While the cost of electricity to the tenants does not change and is still governed by PUC regulations in California, any savings in the cost of electricity flow to the NOI line. To this point in time, most of the communities that have installed solar systems have purchased the system (rather than leasing the system) and have used available rebates and tax credits to offset part of the installation cost. Over the long term, this is expected to become a more pronounced trend as the state has clarified rules that prevent jurisdictions with rent controls from requiring the community owner to pass the benefits of solar power to the tenants and because the PUC continues a trend of allowing utility providers to reduce the discount to park owners relative to the amount allowed to be billed. Community Ownership of Homes (COH)-The holding of park owned homes for rental purposes has been a minor trend for a number of years, owing to necessity (purchase of homes from departing tenants to keep homes from being removed from the park, limited financing for tenant purchases), rent control strategies in California (sites may be subject to rent controls, homes are generally not), and generation of additional income for the ownership. In the past two years, operators in some markets have embarked on a strategy of having both tenant owned and tenant rented homes in parks. The newer trend is the result of more recent influences, including increasing demand from potential residents who perceive rental apartments as a competitive choice (instead of single family residences), a severely constricted market for third party financing of mobile and manufactured homes, and concerns among park owners regarding the manner in which banking reform laws (primarily Dodd-Frank and SAFE Act) restricts the ability of the park owner to act as lender of purchase money funds for mobile homes. 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00% Ja n -‐08 Ma y -‐09 Se p -‐10 Fe b -‐12 Ju n -‐13 JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 25 This trend originated with owners who are largely financed by private equity (due to lesser restrictions on usage of borrowed or invested capital), but has extended to well-capitalized individual owners. Owners with limited equity and cash find it difficult to follow this trend due to the amount of capital tied up. There are two significant challenges to this trend. First, the ownership of rental homes ties up capital that cannot be financed conventionally and second, lenders tend to look negatively at parks with more than a very few park owned rentals. This is beginning to change to some degree, as some lenders are beginning to understand that the flexibility of this practice helps to improve the financial performance in well managed communities. Lenders fear that in future disputes with the borrower, borrower control over a significant number of homes in the community will result in lender concessions to the borrower downstream that would not otherwise be agreed to. At this time, lenders and the MHC industry are trying to find ways to alleviate these concerns, generally by the use of some yet-to-be-devised security agreement. Market conditions will continue to encourage this trend in situations where it provides strong, positive income generation in spite of the concern of lenders. Some unregulated lenders (primarily conduits and private equity) are beginning to recognize this as a legitimate market trend, but combinations of real and personal property, release issues, and difficulty in adapting underwriting standards to this practice will continue to restrict this process, as well as the inability of owners to recognize the positive factors in this trend. Investment Market Overview Conclusion Investment market conditions will continue to be strongly and directly influenced by the availability of debt capital. Many traditional sources of mortgage capital (regional and national banks, securitized conduits, and thrifts) have tentatively returned to the market, while a few others (local lenders, GSE’s) are continuing to offer financing. The number of transactions slowed substantially, but there is no indication of a wholesale decline in property values as indicated by significantly higher overall rates or lower prices per unit, except at the lower ends of the pricing spectrum where financing has become very scarce. For mid-range parks, the key has been whether or not financing can be found; and values have tended to hold for mid-range properties that meet GSE guidelines (or can obtain waivers of specific guidelines). For upper tier investment communities, buyers have been aggressive, and multiple offers or simultaneous negotiations are common. In 2014, it is widely anticipated that market conditions will improve for properties that are not in the top tier. More conventional lenders are entering or re-entering the market, and the acceptance of CMBS bond sales in 2012 sends encouraging notes to the market. At this point, CMBS lenders have been inconsistent in funds availability, but are starting to become more consistent as the CMBS auctions have been more consistent in meeting the expectations of the originators. Conversion to Resident Ownership-Conversion of parks to subdivided individual ownership has become a recognizable trend, but is not yet impacting the investment market in a manner similar to way in which the apartment market was driven by condominium conversion. In 2002 a court decision clarified the right of mobile home park owners to subdivide the parks for sale to the residents and other buyers. Unlike apartment conversions, mobile home park converters cannot relocate residents who do not wish to purchase their unit (homesite) following the subdivision. Tenants are allowed to remain as tenants, but local rent control ordinances are replaced with a state scheme that allows rents to rise to market levels over 4 years for most tenants, and for lower income tenants there are additional protections that limit rent increases to the change in the CPI. Residents and local government had varied responses, ranging from enthusiastic acceptance as a long term benefit to the residents to accusations of “sham” conversions completed only to bypass rent controls8. Some cities refused to approve the subdivision maps and in two cases, the conversions were 8 The “sham” conversion theory posited that the community owner would subdivide the park, sell one lot to a confederate, and then be allowed to bypass local rent controls. While this accusation was leveled in numerous times by residents, residents JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 26 stopped by the California Coastal Commission. The trend to subdivision conversions slowed substantially as a result of the collapse of the capital markets in 2008 and the resulting decline in residential property values statewide. Some owners completed the process and have decided not to sell homesites until the residential market improves. Others abandoned the process mid-completion. Difficulties in obtaining financing by and for the residents purchases have been widely reported as well. In 2013, California enacted legislation that gives local agencies a veto power over conversions that are not approved by the majority of residents, which will likely have a significant chilling effect on conversions to resident ownership. At this time, the resident conversion market is stalled due to a combination of limited financing for purchases of properties to be converted, limited willingness of existing mortgage lenders to allow partial releases when units are sold, and residential capital market conditions which make financing of individual home/site combinations difficult for park residents. The recent changes in state law, combined with these, will tend to discourage most park owners from pursuing subdivision maps for their properties. Redevelopment Trends- Historically, potential conversion (to more intensive land uses) value has been of limited importance to community owners in California. The demand for affordable housing and the willingness of local governments to respond to the demands of tenants wishing to maintain “affordable” housing limits the potential for conversion to other uses. State law and many city ordinances have addressed this issue, generally with the intent of discouraging the closure of mobile home parks for redevelopment. In the past few years, a nascent trend has been noted in high housing cost market areas as multifamily and mixed-use product developers are seeking land for development. At this time, the length and complication of the park closure process has limited the scope of this trend to a very few properties urban markets with very high housing costs in Los Angeles and San Diego Counties and in the Bay Area, this trend may become more significant given the restrictions on conversion of mobile home parks to subdivided resident ownership and the continued enforcement of rent controls that maintain rents at submarket levels. Rent Controls in California-Rent controls affecting manufactured housing communities are common in the state of California and are found in more than 100 different jurisdictions in the state. Each ordinance is unique. Characteristics of rent control ordinances generally address the following areas of operations: Annual rent increases are often limited to no more than 50% to 100% of the change in the local CPI index, but in some jurisdictions, park owners are required to seek approval through a public hearing process for any increase. Alternatively, there are a few ordinances that do not limit increases but allow tenants to challenge proposed increases in rent. Both state and federal courts have allowed cities and counties wide latitude in these limitations. Increases in rent upon a change in tenancy are allowed under some, limited under a few, and forbidden under many ordinances. Some ordinances allow the park more leeway in increasing rents when spaces become physically vacant. In high housing cost areas, the ability to transfer rent control advantages to a successor tenant has allowed departing residents to sell mobile/manufactured homes for prices reflecting the creation of a quasi-leasehold interest9. Both California and federal courts have upheld ordinances that allow full or partial vacancy or transfer control of rental rates. counsel, and city officials, I am aware of no instances in the dozens of processed subdivisions where this actually occurred, and even in the cities with the most onerous rent controls, there were no instances of conversions of this type. 9 This is usually noted in the sales prices of new manufactured homes and used mobile homes. New manufactured homes rarely cost a consumer more than $60,000 (single section home) to $100,000 (high-end two section home) delivered and set-up. When sales prices of older mobile homes are reported at near this level or above, or when new manufactured homes are reported to sell for prices far above the retail price range noted above, it becomes apparent that an additional interest has been created. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 27 Long-term leases are generally exempt from rent controls under state law. Spaces constructed after 1990 are generally exempt from rent controls as well. Most ordinances have a process for park owners to request increases based on the need to make capital improvements, the cost of unexpected and major repairs, and inadequate return on investment. Park owners report varying results when utilizing these appeal processes. There are other controls that are subtler than actual ordinances, but impact the ability to increase rents as well. In some cities, park owners have reached agreements with local authorities to voluntarily limit increases in rent in exchange for the city’s promise not to impose a rent control ordinance. In some regions of the state, rent controls are nearly universal, and many park owners in cities that are surrounded by other cities with controls will often moderate increases to limit the potential for an ordinance to be imposed. It is not uncommon to find rental rates in cities without rent controls to be similar to adjacent cities with rent controls due to this chilling effect caused by the threat of rent control. A consensus of investor attitudes towards rent controls are stated as generally negative, but based on reviews of sales, impacts on overall capitalization rates and other projected rates of return are limited. There are several reasons for this, including: Submarket rents and the creation of quasi-leasehold interest limit the potential for vacancy and collection loss, resulting in slightly lesser downside investment risk. Submarket rents create upside potential. The ordinance may not allow that potential to be achieved at this time, but future court and/or political decisions may result in significant potential increases. Some owners become experts in working within the ordinance (usually by purchasing homes from departing tenants) to bring rents to market levels. Sales prices of mobile home parks are negatively impacted to the degree that rents are restricted. In many instances this reduces asking prices to levels that appear to be a relative bargain in comparison to perceived pricing relationships. Analyzing the impact of rent controls within the appraisal context presents some valuation issues. Market participants generally rely on contract rather than market rents, but do consider upside potential. Estimating true market rent, defined as the rent that would result in an open negotiation between landlord and tenant, becomes effectively impossible if there are no transactions that meet this definition. Rent controls are likely to remain a contentious issue in this market for the foreseeable future, and will have a continuing impact on the market as the potential for rent controls exists in virtually any part of the state. The City of San Juan Capistrano has a rent control ordinance at this time. A copy of the ordinance is reproduced in the Addenda. Local Market Characteristics-According to the Census Bureau, the following mix of housing is found in the local market area. Housing Types and Reported Occupancy Levels (ACS) Jurisdiction: S J Capistrano, CA Total Housing Units: 12,048 Occupied (per ACS): 11,473 Occupancy Rate (per ACS): 95.20% Housing Mix: Number Penetration Detached SFR: 6,226 51.7% Attached SFR: 2,284 19.0% Multifamily Residences: 2,162 17.9% Mobile Home: 1,376 11.4% Boat, RV, Etc. 0 0.0% Source: U. S. Census Bureau JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 28 By comparison, the market penetration for the United States is reported to be 6.6% and for the state of California, the market penetration for mobile homes is 3.9% The rent survey conducted for this appraisal reveals the following rental rate and occupancy data regarding the properties that are considered most comparable to the subject. Local Market Summary Spaces Surveyed: 1,312 Vacant Spaces: 1 Occupancy Rate: 100% High Rent: $1,260.00 Low Rent: $400.00 Median Rent $889.74 The rent survey conducted for this appraisal reveals that local market conditions are stable. Reported vacancies are less than 1%, indicating good demand for affordable housing in this market. The parks surveyed report a broad range of rental rates. This broad range is the result of rent controlled spaces and quality and condition differences of the various parks. The trend of rental rates is considered to be increasing, based on reports from managers that rents are generally increased annually as allowed and demand is strong. Alternative Housing Costs-As a part of the residential market, manufactured housing communities do compete with other housing. The following grid compares housing prices and housing costs for the several alternatives available in this market: Alternative Housing Cost Comparison Median Priced Detached Home Used Mfg/Mobile. Home in Park New Mfg. Home in Park (Chattel Financing) Two Bedroom Apt. Three Bedroom Apt. Purchase Price $662,500 $90,000 $170,000 Loan Amount $629,375 $72,000 $153,000 Interest Rate 5.00% 12.00% 9.00% Amortization (Months) 360 180 360 Monthly P&I Cost $3,378.62 $864.12 $1,231.07 Rent (Land/Apt.) $890 $890 $2,100 $2,850 Monthly Cost (1) $3,379 $1,754 $2,121 $2,100 $2,850 Down Payment $33,125 $18,000 $17,000 $0 $0 Required Income (2) $162,174 $84,185 $101,799 $100,800 $136,800 Med. H'hold Inc. $82,667 (1) Monthly Equivalent Housing Cost does not include taxes, insurance, utilities, maintenance. (2) Based on 25% maximum housing cost as a percentage of total household income. Market Positioning of Subject-The mobile home park market does not exist in a vacuum, and potential residents will choose from alternative housing types (detached residences, rental apartments) as well. Most residents select mobile home parks as an option due to affordability. In general, living in a mobile home park must be more affordable than living in an owned detached residence and cost competitive to apartments of similar size and utility in order for sufficient demand to exist. In this market area, the relationship involving the purchase of a new manufactured home or older mobile home suggests the following: The typical household will find the purchase of a detached residence to be generally unaffordable. This price/income relationship determines the manner in which market participants will perceive the alternatives of apartment or land lease housing. New manufactured homes on leased land have a lower monthly housing cost relative to detached residences. Generally, a significant price advantage is necessary to support strong demand for new manufactured housing on leased homesites. In this market, the difference is significant. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 29 This indicates that new manufactured homes on leased land will likely have good demand in the market. Typically priced used mobile homes have a lower monthly housing cost as compared to detached residences and a lower monthly housing cost relative to apartment rentals. This indicates that demand for used mobile homes should be strong. This market is characterized by strong rent controls that provide tenants with a quasi-leasehold interest that is able to be passed to successor tenants. This influences the market prices of used homes upward, and also increases the cost of a new manufactured home since the acquisition of a site for the placement of a new manufactured home requires the purchase of an older unit to be removed at a price that reflects the quasi-leasehold interest being transferred. These relationships suggest that there is likely to be good demand for new manufactured homes and strong demand for older mobile homes on rented or leased home sites, a finding that is confirmed by interviews with local managers conducted during the local market survey. Development Trends-There has been very limited development of mobile home parks throughout California, Washington, Oregon, Arizona, and Nevada since 1990, following a flurry of development activity (mostly in outlying suburban and small community areas) in the late 1980’s. In urbanized areas where manufactured housing in land lease communities offers competitive price advantages to other housing, there has been virtually no development activity since the early 1980’s, owing to high land prices and the availability of more alternative development plans that are perceived to be more profitable. Even during the recession, there was a sufficient level of demand for housing to maintain site price levels above the levels at which mobile home park development was feasible. As there is very little vacant land that is actually zoned for mobile home park use exclusively, there are usually more profitable developments available as alternatives. The desire of cities to promote affordable housing by encouraging manufactured housing community development is tempered by the policies of the same communities to encourage “upscale” developments and to pass along the costs of growth to new developments. Architectural requirements to limit density and improve appearance of communities and to cover the cost of growth push space rents and manufactured housing unit placement costs to a level at which the alternative becomes less attractive to home purchasers owing to the typically higher interest costs associated with mortgages on homes located on leased land. Development of manufactured housing communities have also been limited by the fees imposed on new developments. While apartment and detached residential developments are able to spread these fees across the land and improvements, manufactured housing communities have a much lower base over which to spread the costs, since the costs are imposed prior to the placement of manufactured housing units. Successful new developments of manufactured housing communities have been responses to specific localized demand generators, not general market trends for the reasons noted above. The most active development markets in the west have been in Arizona, where new developments have been constructed in rural and border areas with immediate demand for affordable housing and senior restricted enclaves for winter residents. According to the Planning Department of San Juan Capistrano, there are no manufactured housing communities currently planned or formally proposed to be located in the community. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 30 Site Description SITE FEATURES Location-‐ East of Alipaz Street, south of Del Obispo Street. Street Frontage-‐ Approximately +/-‐917' along Alipaz Street. Size-‐ 38.16 Acres Source: Assessors Records 1,662,250 SF Dimensions-‐ Refer to Assessors Plat Map in Addenda Shape-‐ Irregular Topography/Drainage-‐ Site is level at street grade. Drainage appears adequate. Utilities Supplied to Site-‐ Public Service Available Connected Provider/Source Electricity: Yes Yes Public Natural Gas: Yes Yes Public Water: Yes Yes Public Sewer: Yes Yes Public Comments: The utility service is presumed to be adequate to serve the highest and best use of the site. Street Access-‐ Provided by Alipaz Street, an approximate 104' wide thoroughfare improved with asphalt paving, concrete curbs, gutters and sidewalks. Flood Hazard Zone-‐ AE Seismic Zone Designation (USGS)-‐ 4 Easements/Restrictions-‐ A review of the Preliminary Title Report indicates that there are the following easements and restrictions on the property: 1) Access and/or utility easements were noted. The location of these easements could not be determined from the available information. The existing development indicates that these easements are not substantially restrictive. Functional Utility-‐ Adequate size, developable shape and topography noted. Site appears to have adequate to good functional utility for many uses. ZONING, LAND USE RESTRICTIONS Current Zoning Designation MHP Permitted Uses Under Zoning: Mobile Home Park Intended Use Policy Under Zoning: To provide a district for the establishment and regulation of mobilehome parks, planned, developed, and maintained as an integral unit and incorporating utilities, landscaping, recreation facilities, and other amenities. Conformity of Current Use: Permitted Allowable Density Under Zoning: 3.5 to 8 du/acre Non Conforming Use Rebuild Policy With the exception of a multifamily residence, if seventy-‐five percent (75%) or less of the value of a nonconforming building above its foundation is damaged by fire, flood, explosion, wind, earthquake, war, riot or other calamity or act of God, it may be restored, reconstructed or used as before; provided, that such reconstruction shall be started within six (6) months of such happening and prosecuted to completion within one (1) year of such happening. (Note: The preceding information is obtained through public information sources and is not a substitute for a "rebuild letter" from appropriate municipal authorities. Refer to Specific Assumptions and Notices of the Appraisal.) Specific Use Requirements For Manufactured Housing Communities: Maximum Density-‐ 8 du/acre Min. Development Site Size-‐ 5 Acres Minimum Individual Site Size-‐ Per CUP SF Maximum Structure Height-‐ Per CUP Feet C.U.P. Required? Yes Parking Requirement-‐ There shall be two (2) parking spaces for every mobile home; one (1) additional parking space per two (2) mobile homes shall be provided for guest parking, and shall be dispersed throughout the park JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 31 Description of Improvements Overview Project Type: Mobile Home Park Total Number of Sites: 312 Number of Other Dwelling Units: 0 Total Number of Units: 312 Density (du/acre): 8.18 Year Constructed: 1970 Overall Quality: Good Amenities: Recreation Center with assembly room, service kitchen, game room, billiards room, fitness center, indoor spa, pool, shuffleboard, horseshoe pits. Perimeter Fencing Materials: Concrete Block Security Gates: None Interior Street Surface: Asphalt Curbing: Concrete Roll-‐Up Laundry Facilities: 2 No. of Washers: 8 No. of Dryers: 4 Utility Metering Electricity: Submetered Electric Service to Sites: 100 Amp Service Reported Natural Gas: Submetered Water: Submetered Sewer: Not Metered Cable TV: Direct Metered Mobile/Manufactured Home Sites Typical Widths: 48' to 50' Typical Depths: 68' to 75' Singlewide Sites 0 Multisection Sites: 312 Note: Placement restrictions per park management. Typically, a 38' wide site is needed to accommodate a modern, 24' wide multisection manufactured home in a conventional arrangement. However, smaller multisection units (18-‐20' wide) and rearrangement of parking will often allow a narrower site to accommodate a modern multisection manufactured home. Total 312 JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 32 Mobile/Manufactured Homes and RV's Vacant Sites 0 Travel Trailers/RV's 0 Park Model RV Units 0 Single Section Units 0 Multi-‐Section Units 312 MH Age Range, Predominant: 1 to 44, 30 years Typical Price of Used MH: $90,000 Typical Price of New MH: $170,000 Buildings Clubhouse Assembly room, service kitchen, library, game room, billiards room, fitness room, spa room, restrooms, saunas, management offices. GBA: 9,840 Laundry 1 Laundry room, maintenance room, restrooms GBA: 576 Laundry 2 Laundry room, maintenance room, restrooms GBA: 576 Parking Spaces on Individual Sites: 2 Conforms to Code Requirement: Conforming Guest Parking Spaces 80 Conforms to Code Requirement: Conforming Vehicle Storage Spaces: 51 Storage Type: Open, Paved Conforms to Code Requirement: No Requirement No. Stg. Spaces Currently Occupied: 51 Physical and Functional Ratings Physical Condition Rating: Good Comments: The asphalt streets were recently resurfaced. The spa was refurbished within the past three years and the pool was being resurfaced at time of inspection. All other improvements are in good condition, with no deferred maintenance noted. Functional Utility: Good Age Restrictions: Unrestricted Age Rules Enforcement: Good. No significant deferred maintenance or other negative issues noted on individual homesites. Effective Age (Years): 30 Total Economic Life: 75 Remaining Economic Life: 45 JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 33 Replacement Cost & Insurable Value REPLACEMENT COST NEW, INSURABLE VALUE Clubhouse 9,840 SF @ $ 108.74 /SF = $1,070,002 Laundry 1 576 SF @ $ 60.13 /SF = $34,635 Laundry 2 576 SF @ $ 60.13 /SF = $34,635 Total Replacement Cost of Buildings (RCN) $1,139,271 Infrastructure, Paving, Fencing, Etc. 312 Units @ $ 12,000 /Sp. = $3,744,000 Gas, Electric, Water Distribution System Allowance 312 Units @ $ 1,500 /Sp. = $468,000 Other Improvements, Recreational Amenities (Allowance) $100,000 Replacement Cost New $5,451,271 Insurable Value Of Improvements $1,446,000 INSURABLE VALUE CALCULATIONS Item Gas, Electric, Water Distribution System Allowance Clubhouse Laundry 1 Laundry 2 Replacement Cost New of Improvements $468,000 $1,070,002 $34,635 $34,635 Add: Furniture, Fixtures, Equipment $0 $0 $0 $0 Approximate Coverage Requirement 90% 90% 90% 90% Estimated Insurable Value $421,200 $963,001 $31,171 $31,171 Rounded $421,000 $963,000 $31,000 $31,000 JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 34 Highest And Best Use A primary consideration in estimating the market value of a property is the highest and best use of that property. Highest and best use, as applied in this appraisal, is defined as follows: "The reasonably probable and legal use of the vacant land or an improved property that is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum productivity" 10 The market value of a property, whether vacant or improved, is based upon the assumption that potential buyers will pay prices that reflect the most profitable use of that property. The existing improvements may or may not represent the highest and best use of the site. For this reason, I have considered the highest and best use of the site both as vacant, and as currently improved. The extent of the highest and best use analysis is contingent upon several factors, including the potential for a change in the current land use, economic or other conditions that might encourage or discourage such a change in land use, and the considerations made by market participants in the establishment of value for the property type considered. Highest and best use is seldom a consideration in the valuation of manufactured housing communities. Many properties are found on sites that were given use-exclusive zoning after the development of the property to discourage conversion. This limits the ability to determine legally permissible uses outside of this genre. The closure of a manufactured housing community is an expense, and potentially high risk enterprise, and it is seldom contemplated by most market participants. As a result, the Highest and Best Use analysis employed in this appraisal is limited in its scope due to the relative unimportance of its considerations to the valuation. This does not limit the scope of the appraisal. The determination of the highest and best use of a property is based on an analysis of the subject property, the neighborhood, and the community. Considered are the history, development trends, zoning, and current market conditions relating to the property and its environment. The four primary criteria that determine highest and best use are as follows: 1) Physically Possible, 2) Legally Permissible, 3) Financially Feasible, and 4) Maximally Productive. As Vacant Legally Permissible-Legally permissible uses of the site include are limited to mobile home park uses under the current zoning. Generally, MHP specific zoning classifications are put into place following development of a mobile home park to discourage attempts at redevelopment to more intensive uses. If the site were vacant, it is likely that the zoning would be broader and allow a wider variety of residential uses. It is assumed that residential uses offering similar density to the subject would be allowed if the site were vacant. Physically Possible-The physical characteristics of the site make the site adaptable to a variety of uses. Physically possible uses include a wide variety of land uses, including virtually any use that could be accommodated on a site of the subject’s size. There are no significant physical impediments to development that are immediately recognizable. Physical constraints do not significantly narrow the list of uses from the first category. 10 Source: The Dictionary of Real Estate Appraisal Fifth Edition, Published by the Appraisal Institute, 2010 JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 35 Financially Feasible- A number of tools may be utilized to determine uses that are financially feasible. A detailed highest and best use study would typically establish feasibility comparing cost and value of several legally permissible and physically possible uses. The completion of such a study is beyond the scope of this appraisal, and is not considered especially relevant to the valuation of the subject, as the site is currently improved. For the purposes of this analysis, the following information is considered in the establishment of financial feasibility. There have been no new mobile home parks developed in this market area for the past decade or more, indicating that the market sees limited financial feasibility in the development of new mobile home parks. The Building Permit report for this market area indicates that developers are confident in the feasibility of residential developments in this market area. There is limited apparent development occurring in the immediate market area, but there is limited available vacant land for new developments due to the near full build-out of the area. The holding of the site for future development is considered a financially feasible use. This indicates that the market considers current or near term development to be financially feasible. Maximum Productivity-A limited scope review of the financially feasible alternatives indicates that the most feasible alternative is improve the site with a residential development to the highest density possible. While a detailed highest and best use study is beyond the scope of this assignment, it is my preliminary opinion that development of a residential project, built to the maximum reasonable density, would most likely reflect the highest and best use of the site. No survey has been conducted to measure the optimum size, quality, or other features of this hypothetical project. As Improved The subject site is improved with an existing residential development. These existing improvements are compatible with the surrounding development and the apparent trends of the area. The improvements do not exhibit extreme amounts of physical deterioration or functional obsolescence. The same four tests are applied to the property as currently improved. Legally Permissible-The existing use represents as legally permissible use of the site. Physically Possible-It is physically possible to raze the existing improvements to provide a vacant site for an alternative use. This filter would not significantly limit the choices indicated by the first category. Financially Feasible- While it is physically possible for the subject to be converted to vacant land for some other form of development, the cost to do so would likely entail the mandatory payment of substantial relocation benefits and subsidies to the existing tenants, which would drive the cost of conversion to vacant land up substantially, and would also extend the time needed for the conversion substantially. For this reason, this market rarely purchases mobile home parks on the basis of a proposed change in use. Accordingly, the redevelopment of the site to another use does not appear to be financially feasible at this time. Maximally Productive-The maximally productive use of the site, based on the preceding analysis, is to continue the present use for the foreseeable future for the reasons stated above. Based upon my analysis of the overall area, surrounding land uses, and the current improvements; it is my opinion that the existing improvements represent the highest and best use of the property as defined. Further, I expect that the current improvements will continue to represent the highest and best use of the property into the foreseeable future. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 36 Valuation Process Appraisers typically utilize one or more of the three generally accepted appraisal techniques to develop a reasonable opinion of value. Essentially, the three approaches to value adapt the principle of substitution, reasoning that a reasonable and prudent purchaser will not pay more for a property than the cost of acquiring a substitute, whether the substitute be constructed, purchased as built, or consisting of a different type of investment vehicle. The three approaches are: Cost Approach- The reproduction or replacement cost new of the improvements is estimated and reduced by the various forms of obsolescence (physical deterioration, functional obsolescence, and economic or external obsolescence). The depreciated reproduction cost of the improvements is added to the estimated market value of the site, as though vacant and able to be put to its highest and best use, to estimate the market value of the property. In most cases, this approach is only marginally useful, and is not typically employed as a primary tool by most market participants. It is useful in the valuation of relatively new improvements that conform to the highest and best use of the site if vacant. Income Approach- This approach measures value from the standpoint of an investor rather than a user. It is the measure of the present worth of the future income (property income from rental and eventual sale) expected from the subject property. The net income is capitalized, generally using a market derived overall rate, to arrive at an indicated market value for the property. An alternative application of this approach is the use of a discounted cash flow, in which the net rental income and the eventual sales price of the property are projected and considered as individual cash flows, discounted at a rate that recognizes the cost of capital, and the risk and illiquidity of a real property investment. The net present value of the periodic cash flows represents the market value of the property as derived by this approach. This approach is most widely used by investors active in long term leased investments or multi-tenant properties. Sales Comparison Approach- This technique compares the subject property to other, similar properties that have recently sold. Comparison may be on a physical basis, such as price per square foot or unit, or on an income producing potential basis, such as by use of a gross or net income multiplier. Physical comparisons are not typically given much weight by the investor market (for leased or multi-tenant properties), but are considered relevant by the owner-user market (for single tenant properties). By the same token, income based comparisons are a form of secondary analysis widely used by investors, but virtually ignored by the owner-user market. The applicability of this approach is highly dependent upon the market in which the property competes, as well as the quality and quantity of market data available for comparison. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 37 Cost Approach The Cost Approach is a three-step method. First, the value of the site, assumed to be vacant and able to be put to its highest and best use, is estimated. Second, the reproduction or replacement cost new of the improvements is estimated. These costs include all direct and indirect construction costs, as well as entrepreneurial profit. The third step is the estimation of accrued depreciation from all sources. The estimated accrued depreciation is then deducted from the replacement or the reproduction cost of the improvements. The estimated value of the site is then added to the depreciated cost of the improvements, resulting in an indication of market value for the subject property as derived by the Cost Approach. Applicability and Reliability-In order for the Cost Approach to provide a meaningful and reliable indication of market value, certain conditions must be present. These include the following: The existing use must approximate the highest and best use of the site as though vacant. If the highest and best use of the site has been determined to include a holding period, and/or current development is not the highest and best use, then this approach is less than useful because the Cost Approach always assumes feasibility of development as its basis. An active land market involving sites purchased for similar uses must exist. The improvements must be relatively new. The market must see the construction of a new development similar to the subject as a viable alternative to the purchase of an existing property like the subject. If these conditions are not present, then the existing improvements will typically suffer from substantial obsolescence, the amount of which cannot be reasonably estimated from within this approach. Input would be required from other approaches (Income, Sales Comparison) to estimate the accrued obsolescence attributable to the improvements. This would destroy the integrity of this approach as a stand-alone value indication, and render the value indication provided as simply a restatement of the other approaches. In this valuation, the conditions for a meaningful Cost Approach to value are not present. This approach would not provide an independent value indication apart from the other approaches. The Uniform Standards allow for the non-consideration of this approach under these circumstances without limiting the scope or reliability of the appraisal. Accordingly, the Cost Approach has not been included in this appraisal analysis. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 38 Income Approach Market Rental Survey The following chart summarizes the findings of the rental survey. Quantitative adjustments are made for the differences in the provision of utilities and other services, while differences in quality, appeal, amenities, and other qualitative differences are discussed following. RENTAL DATA NO. 1 (Subject) 2 3 4 5 PARK NAME San Juan Mobile Estates Rancho Alipaz MHP Capistrano Terrace Laguna Hills Estates Forest Gardens Community ADDRESS, CITY 32302 Alipaz Street, San Juan Capistrano 32371 Alipaz Street, San Juan Capistrano 32802 Valle Road, San Juan Capistrano 23301 Ridge Route Drive, Laguna Hills 24001 Muirlands Boulevard, Lake Forest NO. SPACES 312 132 152 252 464 APPROX. AGE 45 43 60 44 42 AGE RESTRICTION Unrestricted Age Senior (55+) Unrestricted Age Unrestricted Age 55+ SINGLEWIDE SPACES (%) 0% 5% 60% 0% 0% SINGLEWIDE UNITS (%) 0% 5% 70% 0% 0% OCCUPANCY 100% 100% 100% 100% 100% FEATURES & AMENITIES Pool, Spa, Saunas, Clubhouse Pool, Spa, Clubhouse Pool, Clubhouse, Playground Pool, Spa, Clubhouse Pool, Spa, Clubhouse, Tennis VEHICLE STORAGE FEE $60.00 $50.00 N/A N/A $60.00 RENTAL RATES: RENT RANGE-‐LOW $889.74 $720.00 $400.00 $1,260.00 $950.00 RENT RANGE-‐HIGH $889.74 $850.00 $917.00 $1,260.00 $980.00 APPROX. AVG. RENT $889.74 $750.00 $700.00 $1,260.00 $950.00 TRANSFER RATE-‐LOW $889.74 $720.00 $400.00 $1,260.00 $950.00 TRANSFER RATE-‐HIGH $889.74 $850.00 $917.00 $1,260.00 $980.00 NEW MOVE-‐IN RATE-‐LOW $889.74 $720.00 $400.00 $1,260.00 $950.00 NEW MOVE-‐IN RATE-‐HIGH $889.74 $850.00 $917.00 $1,260.00 $980.00 LESSOR PAID SERVICES None None None None None ADJUSTMENT $0.00 $0.00 $0.00 $0.00 $0.00 SERVICE ADJUSTED RATES: RENT RANGE-‐LOW $889.74 $720.00 $400.00 $1,260.00 $950.00 RENT RANGE-‐HIGH $889.74 $850.00 $917.00 $1,260.00 $980.00 APPROX. AVG. RENT $889.74 $750.00 $700.00 $1,260.00 $950.00 TRANSFER RATE-‐LOW $889.74 $720.00 $400.00 $1,260.00 $950.00 TRANSFER RATE-‐HIGH $889.74 $850.00 $917.00 $1,260.00 $980.00 NEW MOVE-‐IN RATE-‐LOW $889.74 $720.00 $400.00 $1,260.00 $950.00 NEW MOVE-‐IN RATE-‐HIGH $889.74 $850.00 $917.00 $1,260.00 $980.00 RENTAL AGREEMENT MtM MtM MtM 5 yr lease 10 & 15 year leases INCREASES 8/1/13: 2% 2014: 2% 7/14: 3% Unknown 2014: $19 RENT CONTROL Yes Yes Yes No No QUALITY Good Good Average Good Good CONDITION Good Good Average Good Good COMMENTS 501C3 Owned Source of Data-The data reported above was obtained from telephonic or in-person interviews with park management personnel during the month of January, 2015. Comments on Data-The data selected represents a cross-section of the available alternatives within the subject’s market area. Although the subject is an unrestricted age park, a majority of the residents are 55 and over. Therefore due to tenant base and limited number of similar unrestricted age parks in this market area, some comparisons were chosen from 55+ age restricted parks. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 39 Qualitative Considerations-Rental Data Nos. 2 and 3 are from within the City of San Juan Capistrano. Data No. 2 is a smaller, 55+ age restricted development, but is very similar in quality and condition and is located across the street from the subject. Data No. 3 is inferior in quality and condition, but is unrestricted as to age. This development is in the final stages of transition to resident owned status. Data No. 4 is a similar unrestricted age park located in nearby Laguna Hills, a community without rent controls. Data No. 5 is a larger, superior 55+ age restricted park from nearby Lake Forest, also an area without rent controls. The comparable rental data suggests a market rental rate in the range of $900 to $1,200. Recent Rental Transactions in Subject-The most recent rental transactions that have been reported11 in the subject include the following: Space No. Date of Transaction Reported Rental Rate Sales Price of Home 275 1/14/15 $889.74 $87,000 221 1/12/15 $889.74 $120,000 65 1/7/15 $889.74 $139,900 7 1/7/15 $889.74 $155,000 26 12/26/14 $889.74 $167,500 These transactions occurred under the restrictions of the local rent control ordinance (summarized below) that does not allow decontrol on transfer. For this reason these rents are not considered indicative of market rental transactions. Rental rates resulting from these types of transactions are often at or below market, seldom above market. The market data taken from the most recent transaction in the subject provides an indication of market rent in the range of $900. Conclusion of Market Rental Rates-The estimate of market rent reached by this analysis is not true market rent, as there is significant influence of rent controls in the rates. As a result, conclusions made by analysis of survey-produced data should be considered as “rent control influenced market rent”. Based on this market data and analysis, I have concluded that a market rental rate opinion of $1,100.00 per month is appropriate for the subject. See Projected Base Rental Income below. Rental Agreements-According to information provided, all tenants occupy spaces on month-to-month rental agreements. The terms of the offered agreements are summarized below Short Term (Month-‐to-‐Month) Rental Agreement Synopsis Type of Agreement: Month to Month Rental Agreement Term of Typical Agreement: 30 days, automatically renewing. Permitted Rent Increases: Not Stated Rent Control Exclusion: No Utilities Included in Rent: None Utilities Paid By Tenant: Water and Sewer, Trash, Natural Gas, Electricity, Cable TV. Transferability: Incoming tenant to sign new agreement. Additional Charges: Use of all common area amenities and facilities except RV storage included in monthly charge. 11 Data reported by owner and confirmed with available information from provided rent roll. Independent review of rental agreement not made. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 40 Rent Control Ordinance The provisions of a municipal rent control ordinance govern the subject property. The basic terms of this ordinance are synopsized below. Rent Control Ordinance Synopsis12 Jurisdiction: City of San Juan Capistrano Affects: All spaces on month-‐to-‐month agreements, spaces on long term lease agreements without qualifying language. Note: Spaces constructed after 1990 are exempt under state law. Permitted Increases: Choice of annual CPI increase (100%) or an operating expense based increase in which the operating expenses for 12 months preceding the adjustment may be multiplied by the CPI index, and divided by the number or spaces to determine the maximum allowable increase Appeals Mechanism: The owner may petition for a greater increase based on capital improvements, government mandated improvements, increases in expenses, return on investment, and other factors. Transfer Decontrol: None Vacancy Decontrol: None Revision Date: 3/1/05 In comparison to other ordinances in California, this particular ordinance is considered stringent in that rent increases are limited to the rate of general inflation and there is no ability to bring rent levels to market when vacancies or transfers occur. Projected Base Rental Income In the valuation of manufactured housing communities, the participants in the market typically base purchase and sale decisions on contract or actual rent as rent control, long term rental agreements and the financial condition of the tenants generally limit the ability of the park to increase submarket rents to market levels in a short period of time. Alternatively, park management is generally unwilling to reduce rents if market rent levels have fallen below contract rents, as the reduced rents will be more difficult to raise towards market levels when that becomes possible. There is a strong influence of inertia in the existing rents in the community, and rental rates are typically less responsive to short term fluctuations in market conditions than are other residential properties (such as apartments) due to the tenant ownership of the home that is occupying the rented site. The inertia is created because the park owner cannot raise rents without consideration of the economic condition of the tenants, and the tenants cannot express dissatisfaction by moving out of the community. Consideration of significant upside potential in the projection of space rental income is usually limited to parks where rents are significantly below market and there are no structural, legal, or contractual impediments to increasing rents. Consideration of downside risk to above-market rents is also tempered by the inertia factor. Demand levels among existing tenants tend to be relatively inelastic. Rent increases that have been noticed and have a confirmed starting date are generally considered in the projection of rents for existing tenants, considered appropriate due to the inertial factors. For the subject, the following considerations lead to the current rental PGI. 12 This synopsis provides a broad outline of the terms of the ordinance. Refer to the reproduced copy of the ordinance included in the Addenda for a complete listing of the terms of the ordinance. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 41 i For occupied sites, the rent is projected at contract rent levels as reported. i For sites improved with community owned homes (COH), market space rent is also projected as the contribution of the site portion of the total rental amount (if it is a rental COH) based on an allocation of market site rent to the site, and any marginal rent to the home. If the COH is inventory held for sale, potential rent is projected at market or offering rate levels. Rent Changes in the Forecast Year Market participants generally consider the normal increases that occur as a result of annual rent increases, projected turnover, and other factors that will occur in the forecast year. One measure of the probable increase is a comparison of the reported change in rental income over the past several years. Based on the information able to be obtained from the operator of the subject, the following trends are noted: Income YE 6/30/12 Trend YE 6/30/13 Trend YE 6/30/14 Trend 2014 MH Space Rental Income $3,190,146 2% $3,245,822 2% $3,297,851 1% $3,314,476 Additional considerations in projecting the probable space rental income over the projection year include the following: i Restrictions under the rent control ordinance indicate that rents will likely rise by a maximum of 2-3% in the next year. i Housing price inflation over the next year is expected to be moderate, initiating upward pressure on rents. i The current relationship between contract and market rents indicates that there is significant upside in the current rent profile, but the rent control ordinance would preclude near term catch- up. i The most recent increase was report to be been imposed in August 2013 (2%), and another general rent increase would have to comply with the ordinance. Based on a review of all available information, projected space rental income is likely to increase by 2% over the next year as compared to the collections reported in the utilized rent roll RENT ROLL SUMMARY Rent Roll Reported by Owner (1) Site Rentals Only (2) Reconciled Current Site Rent (3) Projected Site Rent in Forecast Year (4) High Rent $1,450.38 $889.74 $889.74 Low Rent $889.74 $889.74 $889.74 Average Rent $893.27 $889.74 $889.74 $907.53 Monthly PGI $278,700 $274,930 $277,599 $283,151 Annual PGI $3,344,394 $3,299,156 $3,331,187 $3,397,810 Spaces Reported 312 309 312 312 Current Physical Occupancy: 312 Occupancy Rate: Physical-‐ 100.00% Revenue Producing-‐ 100.00% No. of Community Owned Homes 3 Percent of Total-‐ 0.96% Projected Rental Income Growth (See Text): 2.000% Current Market Rent (See Text): $1,100 Projected Rent for Non-‐Revenue Producing Sites (See Text): $889.74 Date of Provided Rent Roll: 1/13/2015 Notes: (1) Actual rent roll provided. See Addenda for copy (2) Park owned rental homes & vacant sites, if any, not included (3) Contract rent for rented homesites, market rent for vacant sites & sites occupied by park owned rental homes (4) Incorporates foreseen changes to rent in projection year, Space Rental PGI. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 42 The concluded rents are summarized in the above chart. The provided and adjusted rent rolls upon which this summary is based are included as Appendix 1. Note that the quantity and site location of community owned homes (or lack of) is based on owner or owner representative provided information, and was not confirmed with independent documentation. Ownership records were not provided. Summary of Historic Financial Records The following is a summary of historic income and expenses, based on information provided by the park owner and restated to common income and expense categories. Common adjustments to the provided income and expense amounts include the following. i Income items not specifically derived from the operation of the property are excluded. Included in this category are such items as interest income, mobile home sale or rental income, or one time refunds or adjustments. i Payroll expenses have been apportioned between On-Site Management and Maintenance/Repairs based on information provided or concluded from analysis of available information. This allocation is made in response to two commonly used management models. Some owners use employees for many maintenance tasks (the handyman model) and some use subcontractors (landscape maintenance companies, licensed plumbers and electricians). The industry standard, which is not universally followed, is to allocate these costs to the appropriate cost center, and following this practice allows the operating expenses to be compared and analyzed on a common basis using the expense comparable data that follows the common basis. The allocation of payroll costs to on-site management and maintenance cost centers is shown in the Operating Expense Analysis (below), and may compared to total payroll expenses as reported in the books and records by adding the On-Site Management expense to the payroll component of the Repairs & Maintenance Expense. i To the extent that such items can be discerned from the provided data, significant capital expenditures are either eliminated or further analyzed to determine if inclusion is appropriate. i Also, dependent on the level of detail in the provided financial statements, expenses related to the ownership (as opposed to park operations) are not considered. Included in this category are such items as LLC registration fees, attorneys and accountants fees for the ownership (trust advice or setup, partnership or corporate tax preparations, educational seminars, dues and publications, or similar items that benefit the owner of the property, not specifically the park. For most stabilized properties, marketing and advertising expenses are not included as these are generally tied to the sale of homes by the park (an income item that is not included in the real estate derived income) rather than to drive traffic for site rentals. i The provided financial statements include a partial year report. The reported amounts for the partial year have been annualized on a straight-line basis. This may distort some of the individual income and expense items due to seasonal influences or irregular timing of payments (common for some line items such as taxes and insurance). For this reason, the appraisal relies less on the partial year reports for those items that may be distorted by these factors. The ability to discern such items in the provided financial statements is necessary for such analysis to be made. Poorly detailed books and records are not able to be analyzed to the same extents as more detailed or professional prepared statements. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 43 SUMMARY OF HISTORIC FINANCIAL STATEMENTS Income YE 6/30/12 Trend YE 6/30/13 Trend YE 6/30/14 Trend 2014 MH Space Rental Income $3,190,146 2% $3,245,822 2% $3,297,851 1% $3,314,476 Per Unit/Portion of EGI $10,224.83 84% $10,403.28 83% $10,570.04 84% $10,623.32 84% Submetered Electricity Inc. $223,658 5% $235,363 -‐3% $227,874 35% $307,426 Per Unit/Portion of EGI $716.85 6% $754.37 6% $730.37 6% $985.34 8% Submetered Gas Inc. $127,461 -‐7% $118,119 4% $122,429 -‐34% $80,888 Per Unit/Portion of EGI $408.53 3% $378.59 3% $392.40 3% $259.26 2% Submetered Water Inc. $116,843 6% $123,557 -‐2% $121,251 -‐22% $94,988 Per Unit/Portion of EGI $374.50 3% $396.02 3% $388.63 3% $304.45 2% Sewer Pass Through Inc. $46,550 16% $53,817 2% $54,784 -‐7% $50,752 Per Unit/Portion of EGI $149.20 1% $172.49 1% $175.59 1% $162.67 1% Trash Pass Through Inc. $71,271 2% $72,349 2% $73,697 2% $74,830 Per Unit/Portion of EGI $228.43 2% $231.89 2% $236.21 2% $239.84 2% Storage Income $35,130 5% $36,728 -‐2% $36,100 -‐1% $35,758 Per Unit/Portion of EGI $112.60 1% $117.72 1% $115.71 1% $114.61 1% Laundry Income $1,173 39% $1,629 12% $1,830 24% $2,274 Per Unit/Portion of EGI $3.76 0% $5.22 0% $5.87 0% $7.29 0% Late/NSF Charges, Other Income $4,510 9% $4,933 24% $6,100 3% $6,300 Per Unit/Portion of EGI $14.46 0% $15.81 0% $19.55 0% $20.19 0% Collected Income $3,816,742 2% $3,892,317 1% $3,941,916 1% $3,967,692 Per Unit/Portion of EGI $12,233.15 100% $12,475.38 100% $12,634.35 100% $12,716.96 100% Expenses YE 6/30/12 Trend YE 6/30/13 Trend YE 6/30/14 Trend 2014 Taxes $68,298 6% $72,288 33% $96,475 -‐15% $82,416 Per Unit/Portion of EGI $218.90 2% $231.69 2% $309.21 2% $264.15 2% Prof. Mgmt. $81,276 1% $82,368 2% $84,012 1% $84,936 Per Unit/Portion of EGI $260.50 2% $264.00 2% $269.27 2% $272.23 2% On-‐Site Mgmt. Payroll $64,128 44% $92,032 7% $98,477 2% $100,627 Per Unit/Portion of EGI $205.54 2% $294.97 2% $315.63 2% $322.52 3% Insurance $15,195 1% $15,318 6% $16,283 16% $18,872 Per Unit/Portion of EGI $48.70 0% $49.10 0% $52.19 0% $60.49 0% Electricity Expense $196,944 12% $221,091 -‐7% $205,423 41% $289,628 Per Unit/Portion of EGI $631.23 5% $708.63 6% $658.41 5% $928.29 7% Natural Gas Expense $85,893 -‐4% $82,783 2% $84,246 -‐38% $52,018 Per Unit/Portion of EGI $275.30 2% $265.33 2% $270.02 2% $166.72 1% Water Expense $111,403 9% $121,464 3% $125,339 -‐17% $103,610 Per Unit/Portion of EGI $357.06 3% $389.31 3% $401.73 3% $332.08 3% Sewer Expense $46,738 16% $54,425 1% $55,187 -‐7% $51,068 Per Unit/Portion of EGI $149.80 1% $174.44 1% $176.88 1% $163.68 1% Trash Expense $73,331 3% $75,301 2% $76,742 0% $77,032 Per Unit/Portion of EGI $235.04 2% $241.35 2% $245.97 2% $246.90 2% Repairs/Maintenance $136,709 -‐15% $116,384 2% $118,473 8% $127,451 Per Unit/Portion of EGI $438.17 4% $373.03 3% $379.72 3% $408.50 3% Administrative/Misc. $33,888 -‐2% $33,358 26% $41,884 27% $53,170 Per Unit/Portion of EGI $108.62 1% $106.92 1% $134.24 1% $170.42 1% Reserves $0 $0 $0 $0 Per Unit/Portion of EGI $0.00 0% $0.00 0% $0.00 0% $0.00 0% Total Expenses $913,803 6% $966,812 4% $1,002,541 4% $1,040,828 Per Unit/Portion of EGI $2,928.86 24% $3,098.76 25% $3,213.27 25% $3,335.99 26% NOI $2,902,939 1% $2,925,505 0% $2,939,375 0% $2,926,864 Per Unit/Portion of EGI $9,304.29 76% $9,376.62 75% $9,421.07 75% $9,380.97 74% Partial Year Basis: 6 Mos. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 44 Other Income Sources Utility Income-Payments for utilities provided to the tenants are made by one of three methods. 1. Utilities are purchased from the provider and submetered to the tenants. The price that the park can charge for the utilities is usually determined by state or local regulatory authorities, and there is usually little opportunity for the park operator to vary from historic reported income. 2. The utilities are metered directly from the utility provider. 3. Utilities are included as a part of the rent payment. It is not uncommon for water, sewer, and/or trash pickup to be included in the rent although the current trend is to meter water use and to pass through sewer and trash collection expense. Income to the park for utilities is only available under the first alternative. There has been a trend towards the elimination of utilities provided under the first and third option noted above in favor of direct service from the providing utility, but this is a costly conversion for many parks and it is not currently a significant trend. Generally, there is little incentive to complete such a conversion as the utilities will not generally accept a utility system “donation” unless the system has been certified to meet current codes. The rates charged both to and by the park for submetered utilities may be subject to regulation by the California Public Utilities Commission (for investor owned suppliers such as PGE, SCE or Sempra) or by the individual utilities (for government owned suppliers). Generally, this applies to submetered electricity, natural gas, and occasionally water. If the specific utility is not regulated by the CPUC or the local government agency with oversight responsibilities, the general rule is that the rates charged by the park are similar to the rates charged for residential users in the same geographic area. Most parks retain the services of a billing contractor who determines the appropriate rate as part of the tenant billing services. The appraisal assumes that the park management is in compliance with all applicable laws regarding billing, and that the historic operating statements reflect compliance. It is common for the CPUC or the utility to allow a moderate to significant margin to the park owner to allow the owner to recoup the costs of system maintenance. This margin is often sufficient to cover common area expenses as well as to provide income to the park, and in some instances the margin is significant. Because these margins are generally determined by an outside authority, sustainability is assumed by market participants where the billing is completed by competent 3rd party providers. In the projection of income, consideration is given to the historic trends and amounts received, as well as the historic relationship between income and expenses, as are able to be determined from the historic income and expense reports provided. Expense comparable data is not considered in the projection of income from utilities as experience has shown this income to be highly variable based on economic and financial factors specific to a location, climate, and government policies. The following chart summarizes historic income from these sources and concludes a projection of future income. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 45 Submetered Electricity Inc. YE 6/30/12 YE 6/30/13 YE 6/30/14 2014 Projection Annual $223,658 $235,363 $227,874 $307,426 $250,000 Per Unit $716.85 $754.37 $730.37 $985.34 Margin over (under) expense 12% 6% 10% 6% 10% Comment/Analysis: State authority regulates income from this source. The trend of income has been consistent over the period reported, but limited weight is given to the partial year due to seasonal influences. Stabilized annual income is estimated based on a projection of the trend shown. Submetered Gas Inc. YE 6/30/12 YE 6/30/13 YE 6/30/14 2014 Projection Annual $127,461 $118,119 $122,429 $80,888 $125,000 Per Unit $408.53 $378.59 $392.40 $259.26 Margin over (under) expense 33% 30% 31% 36% 32% Comment/Analysis: State authority regulates income from this source. The trend of income has been consistent over the period reported, but limited weight is given to the partial year due to seasonal influences. Stabilized annual income is estimated based on a projection of the trend shown. Submetered Water Inc. YE 6/30/12 YE 6/30/13 YE 6/30/14 2014 Projection Annual $116,843 $123,557 $121,251 $94,988 $125,000 Per Unit $374.50 $396.02 $388.63 $304.45 Margin over (under) expense 5% 2% -‐3% -‐9% 0% Comment/Analysis: Depending on the provider, this utility may or may not be regulated by state authorities. The trend of income has been consistent over the period reported, but limited weight is given to the partial year due to seasonal issues. Stabilized annual income is estimated based on a projection of the trend shown. Sewer Pass Through Inc. YE 6/30/12 YE 6/30/13 YE 6/30/14 2014 Projection Annual $46,550 $53,817 $54,784 $50,752 $50,000 Per Unit $149.20 $172.49 $175.59 $162.67 Margin over (under) expense 0% -‐1% -‐1% -‐1% -‐2% Current Monthly Charge: $13.42 Annual PGI: $50,244 Comment/Analysis: The current monthly charge provides an estimate that is reasonable relative to the historic collections. Stabilized annual income is estimated based on a projection of the trend shown and considers the current charge adjusted for vacancy and collection losses. Trash Pass Through Inc. YE 6/30/12 YE 6/30/13 YE 6/30/14 2014 Projection Annual $71,271 $72,349 $73,697 $74,830 $75,500 Per Unit $228.43 $231.89 $236.21 $239.84 Margin over (under) expense -‐3% -‐4% -‐4% -‐3% -‐3% Current Monthly Charge: $20.55 Annual PGI: $76,939 Comment/Analysis: The current monthly charge provides an estimate that is reasonable relative to the historic collections. Stabilized annual income is estimated based on a projection of the trend shown and considers the current charge adjusted for vacancy and collection loss. These items are included as income to the park, and the cost of utilities is considered under expenses. The reader should be aware that the market value estimated in this appraisal is based upon the assumption that the current utilities arrangement will continue, and that the sale of the utilities to the provider may change the income estimate and the value estimate. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 46 Additional Income-The following sources of additional income have been identified: Storage Income YE 6/30/12 YE 6/30/13 YE 6/30/14 2014 Projection Annual $35,130 $36,728 $36,100 $35,758 $36,000 Per Unit $112.60 $117.72 $115.71 $114.61 Current Monthly Charge: $60.00 Annual PGI: $36,720 No. Spaces Occupied: 51 Annual EGI: $36,720 Comment/Analysis: Projected income is based on based on a projection of the trend shown. Laundry Income YE 6/30/12 YE 6/30/13 YE 6/30/14 2014 Projection Annual $1,173 $1,629 $1,830 $2,274 $2,000 Per Unit $3.76 $5.22 $5.87 $7.29 Comment/Analysis: Projected income is based on the trend reported. Income is consistent over time, and falls into the same range as other developments in this market area. Income not reported separate from other sources. A nominal amount of income is projected, consistent with other mobile home parks of similar size, age, and location. Late/NSF Charges, Other Income YE 6/30/12 YE 6/30/13 YE 6/30/14 2014 Projection Annual $4,510 $4,933 $6,100 $6,300 $6,000 Per Unit $14.46 $15.81 $19.55 $20.19 Comment/Analysis: Included are minor and recurring charges to tenants (late fees, nsf charges, service fees). Projected income is based on the reported trend. Market participants typically rely most heavily on past experience as the basis for the projection of future income from these sources unless there is some reason to expect future income to be substantially different. No reason to expect substantially different income levels in the future was apparent. The projections are based on a trending of past income reports, except as noted above. Vacancy and Collection Loss In most stabilized MHC/MHP properties, vacancy and collection loss tends to be minimal. Vacancy losses are limited due to the cost of removing a home from the park and the limited amount of alternative spaces for the homes to move into. Most parks maintain some restrictions on the age of move-ins, limiting the spaces available for the placement of older homes. Transfer and rebuilding costs can also be substantial, and for many older homes, approach or exceed the market value. Predominantly, mobile and manufactured homes will tend to remain in the park until such time as the unit reaches the end of its economic lifetime. However, occasional vacancies occur as the result of several causes, including actions taken by the homeowner/tenant (removal for placement on fee owned land) or the owner of the community (forced removal due to age or condition). A less beneficial trend for the individual community is the sale of the home from the tenant to an outsider (owner of a different MHC/MHP or a dealer). The outsider will remove the home for placement elsewhere, leaving a vacant site. Park owners have become more proactive in the purchase of homes from departing tenants in order to limit vacant sites that are difficult or expensive to fill. Collection loss is also limited due to the ability of the park owner to place a lien against the home for unpaid rent. This cushion against loss has become thinner in communities where the homes are older and have limited appeal, or in communities where the home prices have fallen below the level of existing liens. However, it is still a level of protection that is not afforded owners of other investment properties, especially apartments, and generally can restrict or eliminate losses from tenants who depart the property with unpaid debt. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 47 Vacancy and collection loss has increased slightly in the past several years in selected markets that are characterized by lesser levels of demand, which generally result from pricing disparities and the inability to obtain competitively price financing for manufactured or mobile homes on rented or leased homesites. Local Market Summary Spaces Surveyed: 1,312 Vacant Spaces: 1 Occupancy Rate: 100% At the present time, the physical vacancy in the subject amounts to 0%. Economic vacancy (the percentage of sites not producing income) currently amounts to 0%. By comparison to the neighborhood occupancy rate reported in the rental survey, it appears that the subject is performing at the level of the local market. Other potential influences on future vacancy and collection loss include the following: Limited availability of affordable housing in this market area will maintain strong demand for the units in the subject. In the medium to long term, the need to replace the aging mobile homes in the subject will lead to greater vacancy loss as units are replaced. While some residents will choose to replace their own unit (limiting or eliminating lost income during the transition), there is likely to be some depreciated units abandoned which will have to be replaced by the park owner. Community acquisition of homes for resale (or removal and replacement) will lead to short term losses during the period of community ownership. This has become a more common source of short term losses, as park owners have become more proactive and have tended to purchase homes that might otherwise be purchased by owners of other communities and removed from the park. Reliance on income from community owned mobile/manufactured home rental units will lead to higher levels of vacancy and collection loss for the units rented, similar to the experience of apartment rentals. Based on this analysis, a vacancy and collection loss rate of 2% is well supported for the subject on a going forward basis. This allowance is applied against income from space rents only, as the other income items are estimated based on historic receipts, which equate to effective gross income. Concessions Rent concessions to facilitate occupancy increases are not a significant factor in the MHC market. The vast majority of sites in an MHC property are tenant occupied. When the existing tenant desires to move out of the community, it is normally the tenant’s responsibility to find a replacement tenant who will purchase the departing tenants home and take over the responsibility for paying rent on the site. Normally, there is no lag time between tenants, and no reason for the community owner to offer incentives. Occasionally, an incoming tenant who is purchasing or moving a new home to a currently vacant site will be granted a short period of free rent (1-2 months typically) for the manufacture and placement period. Community owners are generally amenable to this type of short term concession as the loss of 1-2 months’ rent is more than compensated by the future, uninterrupted rental stream that will continue for as much as 30-40 years. In a few circumstances, a longer period of free or discounted rent may be offered, but the impact is nominal over time due to the decades of uninterrupted rent that will follow. Neither the subject nor the rental comparables is currently offering any concessions. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 48 Effective Gross Income The projected EGI is compared to the historic report in the following table: YE 6/30/12 YE 6/30/13 YE 6/30/14 2014 Projection Annual $3,816,742 $3,892,317 $3,941,916 $3,967,692 $4,033,332 Per Unit $12,233 $12,475 $12,634 $12,717 $12,927 Change Rate 1.98% 1.27% 0.65% 1.65% Change Rate from Most Recent Complete Year 2.32% By comparison to reported total collections of the past 3+ years, this projected EGI appears to be reasonable and well supported given the minor changes between the manner in which income is reported by the owner and projected in this appraisal. Operating Expense Analysis The estimate of expenses is derived from a variety of sources, including a review of expense statements from comparable projects, historical data maintained in my files, and historical information provided to the appraisers by the subject’s management.13 Much of the comparison made with other sources of data is based on a cost per unit analysis, as compared to a percentage of collected income basis. The latter is not considered as reliable as the former for several reasons: 1) Operating expenses are predominantly fixed and not subject to fluctuation based on rental income, and properties with higher rents typically have lower costs as a percentage of income; 2) operating expenses are not significantly affected by occupancy levels; and 3) market participants have a strong tendency not to utilize percentage based comparisons. Likewise, total expense ratios have limited applicability for these reasons as well as the complicating factors of submetered or provided utilities, which distorts the total ratio due to the significant cost of utilities and the high level of reimbursements where applicable. The following table provides expense comparable data from 10 mobile home parks from 2012 and 2013, the most recent years for which a full year of data is available. This data is unfiltered, that is it has not been adjusted to delete items that are not considered in my projections for the subject (expensed capital expenditures, higher than typical payroll expenses, use or lack of use of professional management services, etc.). The data does demonstrate the significant variability from project to project, and indicates the need to rely on multiple sources of data and analysis to support projections of future expense for the subject. COMPARABLE EXPENSE DATA SUMMARY No. Units 228 161 44 133 143 451 367 43 173 78 2012 Taxes $201 $371 $1,022 $209 $998 $203 $606 $162 $101 $186 Prof. Mgmt. $305 $170 $662 $414 $622 $187 $196 $231 $289 Owner On-‐Site Mgmt. $546 $303 $225 $847 $228 $127 $250 $435 $280 $104 Insurance $80 $54 $126 $169 $83 $66 $216 $137 $46 $81 Repairs/Maint. $438 $585 $128 $463 $367 $563 $643 $227 $309 $765 Admin./Misc. $196 $270 $440 $485 $296 $82 $148 $87 $196 $256 2013 Taxes $238 $362 $1,045 $211 $1,014 $207 $628 $164 $97 $114 Prof. Mgmt. $307 $146 $501 $532 $608 $249 $196 $231 $293 Owmer On-‐Site Mgmt. $555 $342 $295 $1,109 $323 $171 $242 $462 $286 $102 Insurance $57 $58 $167 $143 $113 $61 $235 $218 $45 $104 Repairs/Maint. $411 $701 $243 $705 $381 $717 $545 $427 $344 $323 Admin./Misc. $207 $200 $307 $281 $306 $117 $226 $198 $198 $286 13 The reader should be aware that there are no reliable institutional data sources that report statistics on operating expenses for this property type such as exist for other, more commonly held investment properties, such as BOMA for office properties and similar source for other property types. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 49 2 Year Average Taxes $220 $367 $1,034 $210 $1,006 $205 $617 $163 $99 $150 Prof. Mgmt. $306 $158 $582 $473 $615 $218 $196 $231 $291 Owner On-‐Site Mgmt. $551 $323 $260 $978 $276 $149 $246 $449 $283 $103 Insurance $69 $56 $147 $156 $98 $64 $226 $178 $46 $93 Repairs/Maint. $425 $643 $186 $584 $374 $640 $594 $327 $327 $544 Admin./Misc. $202 $235 $374 $383 $301 $100 $187 $143 $197 $271 Analysis of Sample-‐2 Year Average Low Value High Value Mean Median Mean-‐80% Conf. Taxes $99 $1,034 $407 $215 $367 Prof. Mgmt. $158 $615 $341 $291 $328 On-‐Site Mgmt. $103 $978 $362 $279 $317 Insurance $46 $226 $113 $95 $107 Repairs/Maint. $186 $643 $464 $484 $477 Admin./Misc. $100 $383 $239 $218 $239 Expense Projections The data considered is summarized in the following spreadsheets, which report the data from the subject (filtered), the comparable data (unfiltered), and explanatory comments as to the projections made. Taxes YE 6/30/12 YE 6/30/13 YE 6/30/14 2014 Comparable Data ($/U) Projection Low High Mean Annual $68,298 $72,288 $96,475 $82,416 $1,516 /U Per Unit $218.90 $231.69 $309.21 $264.15 $99 $1,034 $367 Current Taxes/Assessments-‐ $67,286 Note: If taxes are reported from any year based on the straight line annualization, the total reported in the historic record may be distorted due to the typically uneven payment pattern (two payments per year in most jurisdictions). Comment/Analysis: The taxes estimated in the expense statement have been calculated to assume a sale of the subject property within a reasonable range of the value estimated herein, and using the current tax rates as specified elsewhere in the report. Direct Assessments are added to the tax estimated. Historic real estate tax expenses are considered irrelevant to the projection due to the requirements of Proposition 13. Prof. Mgmt. YE 6/30/12 YE 6/30/13 YE 6/30/14 2014 Comparable Data ($/U) Projection Low High Mean Annual $81,276 $82,368 $84,012 $84,936 $323 /U Per Unit $260.50 $264.00 $269.27 $272.23 $158 $615 $328 Concluded Prof. Mgmt Charge as percentage of Eff. Gr. Rental Income: 3.0% $100,915 Comment/Analysis: This expense includes general and administrative costs, supervision of on-‐site personnel, preparation of reports, overseeing of investment. It is typically reported on a percentage basis and applied to effective gross rental income (not to ancillary income such as reimbursements or laundry income). The above charges are based on a third party contract with a professional management company, and are considered indicative of the charges typically experienced for this service. Professional management charges are estimated as a means of separating the value of the real estate from the value of the owner’s investment of time and management expertise. Typically, this expense ranges from 3% to 6% of collected rents, with minimum charges typically in the $6,000 per year range (for a minimal package of services in a smaller property), and totals generally in the $12,000 to $60,000 range (for medium to large properties with sufficient income to support the expense). The reported expense rarely falls below 3% of effective gross site rental income. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 50 On-‐Site Mgmt. Payroll YE 6/30/12 YE 6/30/13 YE 6/30/14 2014 Comparable Data ($/U) Projection Low High Mean Annual $64,128 $92,032 $98,477 $100,627 $325 /U Per Unit $205.54 $294.97 $315.63 $322.52 $103 $978 $317 Share of Reported Payroll Cost 75% 75% 75% 75% Note: Share of Reported Payroll Cost based on percentage allocations reported by property manager. Comment/Analysis: On-‐site management consists of all payroll related expenses for the on-‐site management personnel, and includes salary, rent rebates, payroll taxes, workman’s compensation, and fringe benefits. In the projection, on-‐site management payroll is not allocated between salary and rent, and the projected amount represents a cost that may be allocated between salary and rent rebates in any manner The historic expense is reasonable in light of available market data. The projection is sufficient to provide for 2 full time 2 management employees, considered sufficient for a property of this size and complexity. Insurance YE 6/30/12 YE 6/30/13 YE 6/30/14 2014 Comparable Data ($/U) Projection Low High Mean Annual $15,195 $15,318 $16,283 $18,872 $65 /U Per Unit $48.70 $49.10 $52.19 $60.49 $46 $226 $107 Comment/Analysis: Insurance expense covers fire, all risk property damage, and public liability. The historic costs are reasonable in relation to the expense comparable data. The projection is based on the historic trend. Electricity Expense YE 6/30/12 YE 6/30/13 YE 6/30/14 2014 Comparable Data ($/U) Projection Low High Mean Annual $196,944 $221,091 $205,423 $289,628 $225,000 Per Unit $631.23 $708.63 $658.41 $928.29 See Comments Income margin 12% 6% 10% 6% 10% Comment/Analysis: This expense includes submetered tenant use and park area expenses. Lesser weight is given to the partial year report due to seasonal influences. Projected expense is based on the trend indicated by the historic expense, as market participants tend to look at actual experience in the projection of all utility expenses. Natural Gas Expense YE 6/30/12 YE 6/30/13 YE 6/30/14 2014 Comparable Data ($/U) Projection Low High Mean Annual $85,893 $82,783 $84,246 $52,018 $85,000 Per Unit $275.30 $265.33 $270.02 $166.72 See Comments Income margin 33% 30% 31% 36% 32% Comment/Analysis: This expense includes submetered tenant use and park area expenses. Lesser weight is given to the partial year report due to seasonal influences. Projected expense is based on the trend indicated by the historic expense, as market participants tend to look at actual experience in the projection of all utility expenses. Water Expense YE 6/30/12 YE 6/30/13 YE 6/30/14 2014 Comparable Data ($/U) Projection Low High Mean Annual $111,403 $121,464 $125,339 $103,610 $125,000 Per Unit $357.06 $389.31 $401.73 $332.08 See Comments Income margin 5% 2% -‐3% -‐9% 0% Comment/Analysis: This expense includes submetered tenant use and park area expenses. Lesser weight is given to the partial year report due to seasonal influences. Projected expense is based on the trend indicated by the historic expense, as market participants tend to look at actual experience in the projection of all utility expenses. Sewer Expense YE 6/30/12 YE 6/30/13 YE 6/30/14 2014 Comparable Data ($/U) Projection Low High Mean Annual $46,738 $54,425 $55,187 $51,068 $51,000 Per Unit $149.80 $174.44 $176.88 $163.68 See Comments Income margin 0% -‐1% -‐1% -‐1% -‐2% Comment/Analysis: This expense includes reimbursed tenant use and park area expenses. Projected expense is based on the trend indicated by the historic expense, as market participants tend to look at actual experience in the projection of all utility expenses. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 51 Trash Expense YE 6/30/12 YE 6/30/13 YE 6/30/14 2014 Comparable Data ($/U) Projection Low High Mean Annual $73,331 $75,301 $76,742 $77,032 $78,000 Per Unit $235.04 $241.35 $245.97 $246.90 See Comments Income margin -‐3% -‐4% -‐4% -‐3% -‐3% Comment/Analysis: This expense includes reimbursed tenant use and park area expenses. Projected expense is based on the trend indicated by the historic expense, as market participants tend to look at actual experience in the projection of all utility expenses. Repairs/Maintenance YE 6/30/12 YE 6/30/13 YE 6/30/14 2014 Comparable Data ($/U) Projection Low High Mean Annual $136,709 $116,384 $118,473 $127,451 $400 /U Per Unit $438.17 $373.03 $379.72 $408.50 $186 $643 $477 Share of Reported Payroll Cost 25% 25% 25% 25% Projected R/M payroll costs based on projection of current payroll practices: $25,183 Repairs/Maintenance Payroll $21,326 $30,544 $32,459 $16,405 $81 /U All Other R & M Expenses $319 /U Note: Share of Reported Payroll Cost based on percentage allocations reported by property manager. Operational practices vary between properties, with some developments utilizing employees and some utilizing contractors for routine maintenance and repairs. Projected maintenance/repair expenses do not differentiate between payroll and non-‐payroll expenses, and is based on market expectations for the total expense. The allocation of R&M Expenses into Payroll and Non-‐Payroll components is based on the historic utilization reported for this property and is not considered to be a universal or market standard. The appraisal relies on the total projected costs, and changes in the manner in which management uses employees or subcontractors will not generally affect the total R&M Expense. Comment/Analysis: This expense category covers such items as private street and parking area clean-‐up and repair, periodic clean-‐up of common areas. Non-‐recurring expenses are not considered in projecting future expenses. The projection is made on the basis of a typical annual expense, and actual annual expenses will tend to fluctuate significantly about this estimate due to the inclusion of capital expenditures in this category. Based on comparisons with the expense comparables, the annual report from the subject is at the lower end of the typical range. Greatest consideration is given to both historic and market trends. Administrative/Misc. YE 6/30/12 YE 6/30/13 YE 6/30/14 2014 Comparable Data ($/U) Projection Low High Mean Annual $33,888 $33,358 $41,884 $53,170 $150 /U Per Unit $108.62 $106.92 $134.24 $170.42 $100 $383 $239 Comment/Analysis: Included in this category are minor and recurring costs such as business license taxes, municipal operating permit expenses, directory listings, legal and accounting expenses, office supplies, and other similar expenditures. Typically, this is a nominal expense. The major expense fluctuation is in local permit fees, which can vary considerably from city to city; and in legal fees for parks that have significant eviction activity or rent control challenges. For the subject, greatest consideration is given to the historic trend due to its reasonableness in light of market standards. Reserves YE 6/30/12 YE 6/30/13 YE 6/30/14 2014 Comparable Data ($/U) Projection Low High Mean Annual $0 $0 $0 $0 $50 /U Per Unit $0.00 $0.00 $0.00 $0.00 See Comments Comment/Analysis: An allowance for reserves is included to provide for the replacement of these items that have an economic life of shorter duration than the improvements as a whole. Typically, these items include street paving and short lived items in the buildings and amenities. Few property owners typically include this expense item, and the historic Repair/Maintenance expenses likely include replacement costs for some items for which reserves are projected. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 52 Market Derived Overall Rate Analysis and Selection In this market, the most widely used method of converting the estimated net operating income to an indication of value is direct capitalization by market derived overall rate. Market participants rely heavily upon this method. Overall capitalization rates are derived from the sale of similar properties. The rate is extracted from the sale data by dividing the net income from the sale property by its sales price. The overall rates extracted from the sales described in the Sales Comparison Approach are briefly outlined below: OVERALL CAPITALIZATION RATE ANALYSIS SALE # SUBJECT 1 2 3 4 5 PROPERTY San Juan Mobile Estates Friendly Village Mobile Home Community Pacific Mobile Home Park La Maria MHP Terry's MHP Reseda Mobile Estates ADDRESS 32302 Alipaz Street, San Juan Capistrano 5450 North Paramount Boulevard, Long Beach 80 Huntington Ave., Huntington Beach 1701 S. Thornburg Street, Santa Maria 677 G Street, Chula Vista 6545 Wilbur Avenue, Reseda COUNTY Orange County, CA Los Angeles County, CA Orange County, CA Santa Barbara, CA San Diego Co., CA Los Angeles County, CA DATE SOLD Jan-‐00 Feb-‐14 Jun-‐13 Jun-‐13 Dec-‐12 Feb-‐14 SALES PRICE $0 $23,000,000 $46,400,000 $11,256,000 $14,600,000 $13,100,000 $/UNIT $0 $125,000 $181,250 $71,241 $74,490 $121,296 NO. UNITS 312 184 256 158 196 108 OAR 6.28% 5.04% 6.18% 5.41% 6.06% In comparing the above sales to the subject property, consideration is given to certain influencing factors including financing, the level of reported rents relative to economic rents, and physical comparability. The analysis of these factors, and how these factors compare to the subject property, is analyzed in the Sales Comparison Approach. Briefly, Sale No. 1 is the recent sale of a stabilized mobile home park in southwestern Los Angeles County. The park was a stabilized occupancy at the time of sale, and rents were approximately $50 below market. The development is located on a former landfill and has had settlement issues. No toxic issues were reported from the land fill underneath the development. Sale No. 2 is a recent sale involving a large, high density mobile home park located one block from the beach near the city center. Rents were +/-$300 below market at the time of sale, and there 4 vacant sites and 16 community owned units held for resale, all included. Most COH were older and offered little value. This is an older park, well maintained, and offered reliable current cash flow and long term upside from repositioning of park. Sale No. 3 represents the sale of a good quality, well maintained and age restricted community in Santa Barbara County. There is no rent control in this Santa Maria, and the park was stabilized at market level rents. Demand from retiring seniors remains strong and the buyer believed that there was good upside from increased demand as retiring seniors in northwestern Los Angeles suburbs are able to sell their homes and move to the Central Coast. Sale No. 4 reflects the sale of an existing, senior restricted mobile home park in San Diego. The park was subject to mild rent controls, but rents were near market levels. The buyer was a knowledgeable MHC investor with strong presence in San Diego. Overall, this is a market transaction involving a well positioned property in a market with strong demand for affordable housing. Sale No. 5 is a recent sale involving an older, well maintained community in the San Fernando Valley. The property was stabilized at sale, and the buyer assumed the existing loan with a small second TD provided by the existing lender. The interest rates were above market at the time of sale, influencing the JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 53 OAR upwards from where it might have fallen if cash to seller. Existing loan only had one year remaining, indicating discount to be nominal. The subject would be considered a very attractive property to the investment market. Positive features include high demand for affordable housing in this market, high barriers to competitive entry, and the well maintained condition of the property. Negative features affecting the perception of the property as an investment include the local rent control ordinance. Based on my analysis of the above data and its relation to the income stream and the physical characteristics of the subject, an appropriate capitalization rate of 5.75% is considered to be well supported for the income stream produced by the subject. The Reconstructed Operating Statement and Capitalization of the subjects estimated net operating income is shown below. Reconstructed Operating Statement and Capitalization of Income Gross Potential Income: MH Space Rental Income $908 Per Space Per Mo. 83.5% $3,397,810 Income Subject to Vacancy/Collection Loss Allowance: $3,397,810 Less Vacancy/Collection Loss: 1.00% $33,978 Effective Gross Income (Subtotal): $3,363,832 Effective Gross Income Projections: Utility/Service Income Submetered Electricity Inc. $801 Per Unit (Total) 6.1% $250,000 Submetered Gas Inc. $401 Per Unit (Total) 3.1% $125,000 Submetered Water Inc. $401 Per Unit (Total) 3.1% $125,000 Sewer Pass Through Inc. $160 Per Unit (Total) 1.2% $50,000 Trash Pass Through Inc. $242 Per Unit (Total) 1.9% $75,500 Storage Income $115 Per Unit (Total) 0.9% $36,000 Laundry Income $6 Per Unit (Total) 0.0% $2,000 Late/NSF Charges, Other Income $19 Per Unit (Total) 0.1% $6,000 Subtotal: $669,500 Effective Gross Income (All Sources): $4,033,332 Projected Expenses: Taxes $1,513.95 Per Unit $472,352 Direct Assessments $1.90 Per Unit $593 Professional Management 3.00% of Rent EGI $100,915 On-‐Site Mgmt./Service Payroll $325.00 Per Unit $101,400 Insurance $65.00 Per Unit $20,280 Utilities Expense Electricity Expense $721 Per Unit $225,000 Natural Gas Expense $272 Per Unit $85,000 Water Expense $401 Per Unit $125,000 Sewer Expense $163 Per Unit $51,000 Trash Expense $250 Per Unit $78,000 Total Utility Expenses $1,808 Per Unit $564,000 Repairs & Maintenance R & M Payroll $81 Per Unit $25,200 All Other R & M Expense $319 Per Unit $99,600 Total Repairs & Maintenance $400 Per Unit $124,800 Administrative/Misc. $150 Per Unit $46,800 Reserves $50 Per Unit $15,600 Total Expenses: $4,637 Per Unit $2,829 /U W/O Utilities $1,446,739 Net Operating Income: $2,586,593 Overall Capitalization Rate: 5.75% Indicated Value: $44,984,229 rounded to $45,000,000 Indicated Value Per Unit: $144,231 JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 54 Sales Comparison Approach SALE # SUBJECT 1 2 3 4 5 PROPERTY San Juan Mobile Estates Friendly Village Mobile Home Community Pacific Mobile Home Park La Maria MHP Terry's MHP Reseda Mobile Estates ADDRESS 32302 Alipaz Street, San Juan Capistrano 5450 North Paramount Boulevard, Long Beach 80 Huntington Ave., Huntington Beach 1701 S. Thornburg Street, Santa Maria 677 G Street, Chula Vista 6545 Wilbur Avenue, Reseda COUNTY Orange County, CA Los Angeles County, CA Orange County, CA Santa Barbara, CA San Diego Co., CA Los Angeles County, CA APN 121-‐171-‐29 7157-‐006-‐008 024-‐291-‐16 117-‐330-‐063 567-‐090-‐28, 31 2128-‐003-‐017 DATE SOLD Jan-‐00 Feb-‐14 Jun-‐13 Jun-‐13 Dec-‐12 Feb-‐14 GRANTOR 0 Friendly Village Mobile Associates LP Legacy 42680 Holdings, LLC, Foothill to Summit Properties, LLC, and Sizable Properties, LLC Mancinelli Terry Enterprises LLC Reseda Mobile Associates LP GRANTEE 0 Friendly Village MHP Associates LP 80 Huntington ! LLC, et al Palos Verdes Medical Center LLC 411 Quail Run Ptrs & Kleege Reseda MHP Associates LLC SOURCE Files, Documents L. Kort (Buyer) J. Saunders (Buyer), Documents T. Wynne (Buyer) R. Morgan (Broker), B. Kleege (Buyer) M. Scott (Buyer), B. Barbier (Broker) DOCUMENT NO. 129488 368964 40846 819411 178399 PRICE $0 $23,000,000 $46,400,000 $11,256,000 $14,600,000 $13,100,000 TERMS Cash to seller. Buyer obtained new loan from institutional lender at market. Cash to seller. Buyer obtained new loan of $41,000,000 at marekt rate and terms. Cash to seller. Buyer obtained new 1st TD of $8,050,000 at market rate and terms. Cash to seller. Buyer obtained $10,950,000 1st TD from Union Bank at market rate and terms Cash to seller. 44% down. Buyer assumed existing note of $6.4M and borrowed 2nd TD of $1,043,000 from lender in 1st position. Blended interest rate at 5.5%, which is above current market levels. CASH EQUIV. $23,000,000 $46,400,000 $11,256,000 $14,600,000 $13,100,000 $/UNIT $0 $125,000 $181,250 $71,241 $74,490 $121,296 AGE 45 43 60 41 57 54 QUALITY Good Good Average Good Average-‐Good Average CONDITION Good Good Average-‐Good Good Average-‐Good Average-‐Good SITE AREA (ac) 38.16 18.72 18.22 19.20 15.48 8.57 NO. UNITS 312 184 256 158 196 108 DENSITY 8.18 9.83 14.05 8.23 12.66 12.60 AVG. RENT $907.53 $922.17 $1,081.41 $546.04 $511.67 $858.72 POT. GR. INC. $4,067,310 $2,376,315 $3,644,080 $1,092,669 $1,400,040 $1,334,851 EFF. GR. INC. $4,033,332 $2,335,404 $3,544,417 $1,068,055 $1,363,964 $1,307,438 EXPENSES $1,446,739 $890,502 $1,206,012 $372,905 $574,176 $513,801 NOI $2,586,593 $1,444,902 $2,338,406 $695,150 $789,788 $793,637 NOI/UNIT $8,290 $7,853 $9,134 $4,400 $4,030 $7,348 OAR #DIV/0! 6.28% 5.04% 6.18% 5.41% 6.06% MARKET TIME >30 Days Off Market Sale Off Market Sale 90 days >30 days COMMENTS Stabilized occupancy, well maintained. Built on former landfill. Park has historically had moderate settlement issues with streets and flatwork. 16 community owned homes included in sale. High density. Beach location. Rents average $300 under market. High density community located one block from breach near city center. Negotiated transaction. Age Restricted. 98% occupancy at sale. No Rent Control. Attractive park in healthy senior market. Mix includes 194 MH sites & 2 apts. Mild rent control (Chula Vista), age restricted community. Broker proforma adjusted to include Reserves and Professional Management. Well maintained 1960's vintage community in San Fernando Valley. Low risk property, moderate rent controls. Fully occupied at sale. No COH rentals. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 55 Income Based Comparisons Several income-based comparison tools are available for the analysis of the comparable sales and the manner in which relative rental, gross, and net income measures influence value. These include x Effective Gross Income Multiplier (EGIM)-The multiplier expresses the relationship between Effective Gross Income (Potential Gross Income less Vacancy and Collection Loss) and price or value. This measure tends to be most well supported when the income profile for the comparable properties are similar. This is complicated by a varying level of pass through and direct reimbursements in this property class, as well as income/expense ratios that do not generally vary directly with income. x Space Rent Multiplier-This is a simple analysis in which based on a monthly contract space rent multiplier. This method is not widely used by market participants, but has been shown to be fairly reliable based on a consistent pattern shown in a large number of test examples. Space rent is typically the largest contributor to the income for the property, and this simple analysis avoids the complications of a gross income analysis that includes the other sources of income and is complicated by the various ways in which utility income is reported in different parks. It also avoids issues associated with expense estimates, providing a value indication that is not dependent upon the data and analysis utilized in the Income Approach. As such, this method may be considered oversimplified, but is considered to be a good check against the NOI based analyses below, which rely on a more complex estimate of operating expenses to be reliable. The most significant correlations are occupancy levels, the relationship between contract and market rents for the particular comparable, and the absolute rent. x Net Operating Income Per Unit-The NOI per unit is compared in a bracketing analysis, based on the expectation that there is a direct relationship between the level of NOI and price/value. x Income Disparity Analysis- This analysis is made by comparing the ratio between the net operating income of the subject and of each of the comparables sales in an NOI Disparity Analysis. The ratio that is derived by the subjects NOI divided by each of the comparables NOI (both expressed on a per space basis) is multiplied by the sales price per space of each of the comparables to derive an indicated value per space of the subject. It should be noted that there is some controversy over this method, as it may be correctly pointed out that this is a restatement of the Direct Capitalization, broken down to the unit level of comparison. While this is a valid characterization, the strength of this analysis is that it allows investment oriented properties to be compared on a basis that reflects the reasons for the ownership of this type of property, which is its ability to provide net income to the ownership position. This analysis is not given primary importance in this approach; as to do so would render the Sales Comparison Approach as a restatement of the Income Approach. It is included in this approach primarily as a check on the other analyses utilized. Each of these analyses provide insight into the varying relationships between price and income based on a more nuanced comparison than available in the Direct Capitalization formulation of the Income Approach by isolating the various comparisons. These relationships are analyzed in the following spreadsheets. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 56 EFFECTIVE GROSS INCOME (EGI) MULTIPLIER SALE # SUBJECT 1 2 3 4 5 EFF. GR. INC. $4,033,332 $2,335,404 $3,544,417 $1,068,055 $1,363,964 $1,307,438 OCCUPANCY 100% 100% 97% 98% 99% 100% EGIM 0.0 9.8 13.1 10.5 10.7 10.0 EXPENSE RATIO 36% 38% 34% 35% 42% 39% INDICATED VALUE $0 $39,721,875 $52,800,387 $42,506,397 $43,173,170 $40,412,357 IND. VALUE/UNIT $0 $127,314 $169,232 $136,238 $138,376 $129,527 RANGE OF INDICATIONS: $127,314 to $169,232 Avg./Mean: $140,137 AVERAGE SPACE RENT MULTIPLIER SALE # SUBJECT 1 2 3 4 5 AVG. RENT $907.53 $922.17 $1,081.41 $546.04 $511.67 $858.72 OCCUPANCY 100% 100% 97% 98% 99% 100% MULTIPLIER 0.0 135.6 167.6 130.5 145.6 141.3 EXPENSE RATIO 36% 38% 34% 35% 42% 39% INDIC. VALUE $0 $123,016 $152,108 $118,403 $132,121 $128,191 RANGE OF INDICATIONS: $118,403 to $152,108 Avg./Mean: $130,768 NOI PER UNIT BRACKETING COMPARISON SALE # SUBJECT 1 2 3 4 5 NOI/UNIT $8,290 $7,853 $9,134 $4,400 $4,030 $7,348 $/UNIT $0 $125,000 $181,250 $71,241 $74,490 $121,296 RANGE OF INDICATIONS: $125,000 to $181,250 COMMENTS: The comparable sales with the most similar levels of NOI on a per space basis as compared to the subject are Sale Nos. 1 and 2, which bracket the subject. NOI PER UNIT DISPARITY ANALYSIS SALE # SUBJECT 1 2 3 4 5 NOI/UNIT $8,290 $7,853 $9,134 $4,400 $4,030 $7,348 NOI/U RATIO 1.00 1.06 0.91 1.88 2.06 1.13 IND. VALUE/UNIT $0 $131,966 $164,502 $134,239 $153,255 $136,843 RANGE OF INDICATIONS: $131,966 to $164,502 Avg./Mean: $144,161 JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 57 Physical Comparisons SALES COMPARISON ADJUSTMENT GRID SALE # SUBJECT 1 2 3 4 5 PROPERTY San Juan Mobile Estates Friendly Village Mobile Home Community Pacific Mobile Home Park La Maria MHP Terry's MHP Reseda Mobile Estates ADDRESS 32302 Alipaz Street, San Juan Capistrano 5450 North Paramount Boulevard, Long Beach 80 Huntington Ave., Huntington Beach 1701 S. Thornburg Street, Santa Maria 677 G Street, Chula Vista 6545 Wilbur Avenue, Reseda COUNTY Orange County, CA Los Angeles County, CA Orange County, CA Santa Barbara, CA San Diego Co., CA Los Angeles County, CA $/UNIT $0 $125,000 $181,250 $71,241 $74,490 $121,296 AVG. RENT $908 $922 $1,081 $546 $512 $859 RATIO 0 136 168 130 146 141 COMPARISONS: Property Rights Fee Fee Fee Fee Fee Fee Comparison Similar Similar Similar Similar Similar Adjustment-‐ 0% 0% 0% 0% 0% Conditions of Sale Market Market Market Market Market Market Comparison: Similar Similar Similar Similar Similar Adjustment-‐ 0% 0% 0% 0% 0% Market Conditions Current Feb-‐14 Jun-‐13 Jun-‐13 Dec-‐12 Feb-‐14 Comparison Similar Similar Similar Similar Similar Adjustment-‐ 0% 0% 0% 0% 0% Supply/Demand Balance Balance Balance Balance Balance Balance Comparison Similar Similar Similar Similar Similar Adjustment-‐ 0% 0% 0% 0% 0% Local Housing Cost $662,500 $421,200 $630,200 $255,000 $301,000 $399,000 Location Comparison Inferior Similar Inferior Inferior Inferior Adjustment-‐ 20% 0% 35% 30% 20% Density (du/ac) 8.18 9.83 14.05 8.23 12.66 12.60 Comparison Similar Inferior Similar Inferior Inferior Adjustment-‐ 0% 5% 0% 3% 3% Design/Quality/Appeal Good Good Average Good Average-‐Good Average Comparison Similar Inferior Similar Inferior Inferior Adjustment-‐ 0% 4% 0% 2% 4% Amenities Pool, Spa, Saunas, Clubhouse Clubhouse, Pool, Spa Pool, Spa, Clubhouse Pool, Spa, Recreation Center Pool, Clubhouse Pool, Spa, 2 Clubhouses Comparison Similar Similar Similar Similar Similar Adjustment-‐ 0% 0% 0% 0% 0% Occupancy 100% 100% 98% 98% 99% 100% Comparison Similar Similar Similar Similar Similar Adjustment-‐ 0% 0% 0% 0% 0% Single/RV Spaces Mix 0% 0% 2% 0% 19% 0% Comparison Similar Similar Similar Similar Similar Adjustment-‐ 0% 0% 0% 0% 0% Physical Condition Good Good Average-‐Good Good Average-‐Good Average-‐Good Comparison Similar Inferior Similar Inferior Inferior Adjustment-‐ 0% 2% 0% 2% 2% Rent Control Yes No No No Yes Yes Adjustment-‐ -‐20% -‐20% -‐20% 0% 0% Note: Rent control adj. based on impact on reported rents; i.e.: the difference between reported and market rents for the comparable relative to the impact on the subject where affected. Cumulative Adj. 0% -‐9% 15% 37% 29% Indicated Value/Unit $125,000 $164,938 $81,927 $102,051 $156,472 CONCLUDED RANGE OF INDICATIONS: $81,927 to $164,938 Avg./Mean: $126,077 The use of dollar or percentage adjustments in an adjustment grid format is not considered a very reliable method of comparison for properties that are typically purchased by the investor market. This type of analysis is considered to be an ill-supported analysis that does not reflect the actions of the marketplace. This method has significant weakness', including the fact that individual adjustments for physical differences are seldom supportable by "matched pair comparison" or other means to eliminate the JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 58 arbitrary nature of most adjustments. The breakdown of the subject and comparable properties into individual components for an adjustment grid analysis also denies the compounding effect of various combinations of physical features, in which certain combinations of positive or negative features create value adjustments in excess of the contributory value that might be added for the individual feature. In addition, the application of specific adjustments to this process of comparison creates the impression of extreme levels of precision or accuracy in valuation, a situation that simply does not exist in the marketplace. Most importantly, participants in the market do not employ this method of valuation. However unreliable, an adjustment grid is an expectation of many readers of appraisal reports, and was included for this reason. Reconciliation The comparisons utilized provide the following ranges of indicated values: SUMMARY OF COMPARISONS-‐PER UNIT BASIS Low Indication Mean High Indication AVG. SP. RENT MULT. $118,403 $130,768 $152,108 EFF. GR. INC. MULT. $127,314 $140,137 $169,232 NOI/UNIT COMPARISON $125,000 $181,250 INCOME DISPARITY $131,966 $144,161 $164,502 PHYSICAL COMPARISON $81,927 $126,077 $164,938 ABS. VALUE RANGE/UNIT $81,927 $181,250 AVG. VALUE RANGE/UNIT $116,922 $135,286 $166,406 IND. VALUE RANGE/UNIT $135,000 to $150,000 VALUE RANGE $42,120,000 $42,210,000 $46,800,000 CONCLUDED VALUE $44,000,000 Appraisal theory, and current interpretations of USPAP, recognizes that the income-based comparisons are less independent indicators than the physical feature based comparison due to the linking of the income based comparisons to the methodology employed and its basis in the Income Approach. For this reason, strong reliance in this approach is placed upon the value range indicated by the bracketing methodology involving physical features is reported above14. In general, the income based comparisons generally support the value indications provided by the physical bracketing comparison. The area of convergence between the disparate indicators is shown in the table above. This is concluded to provide an appropriate range of indications for the subject using this approach. 14 This is not to say that the physical feature based comparisons provide a more reliable indication of value, only one that is independent of the analysis contained in a different approach. The relative reliability of the two approaches is analyzed in the Final Reconciliation. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 59 Reconciliation of Value Indications Three approaches to value are typically considered in the appraisal process. The Cost Approach was not considered to have sufficient support to be included as a reliable approach to value for this property type. The Income Approach is considered to be a reliable indicator of value for properties that are typically investor owned and leased. The subject is in this category. Five rental comparables were analyzed to estimate the economic income levels for the subject. Contract income is considered in the projection of income due to market preferences for capitalizing proven income. Expense data was felt to be reliable. In the Direct Capitalization, five sales of similar properties were analyzed to provide a market derived overall capitalization rate. The indication of value is well supported by the comparable sales. Overall, the data used in the Income Approach was considered to be reliable and applicable to the subject property. The Sales Comparison Approach is considered to represent a reliable method of valuation when the physical descriptions and the characteristics of the income streams of the comparable sales and the subject property are similar. The subject and the comparable sales are somewhat varied as to location, physical description, income earning potential, and expense characteristics. This approach is useful as an indication of the prices that the market has been willing to pay for manufactured housing communities, but due to the limited reliance placed by this market on physical features as a determinant of value, the Sales Comparison Approach is limited to a supporting role in the valuation of manufactured housing communities. The income-based comparisons provide the best indications of value from within this approach, but since there is crossover between these analyses and the Income Approach, the independence of the most reliable comparisons is limited. In summary, I have placed the greatest level of reliance on the Income Approach, with secondary support from the Sales Comparison Approach. The following conclusions are considered well supported as the market value indication the subject property. Reconciliation of Approaches Cost Approach Not Considered Income Approach $45,000,000 Sales Comparison Approach $44,000,000 Estimated Market Value $45,000,000 Effective Date of Appraisal January 23, 2015 JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 60 Supplemental Analysis - Use Value to 501C3 Non-Profit Corporation A market trend that has become common in California is market participation by non-profit corporations who purchase mobile home parks to assist local government to help maintain the supply of affordable housing in the community. Several non-profit groups are currently participating in this market, and the number of parks purchased has become a small, but notable part of the mobile home park purchase market. Local government agencies assist the non-profit by granting concessions, providing subsidies, and government bond financing. Further, the non-profit agency is typically exempt from many real estate taxes (but not direct assessments), with the reduction based on the number of park residents who meet certain income qualification standards. Since these agencies are by definition non-profit, the manner in which these market participants value the parks becomes a significant consideration in the valuation of this product. This value is intended to indicate the price that a non-profit 501c3 corporation would pay by simulating the analysis that is used by these purchasers to determine price. The non-profit reports slightly different operating expenses than do typical investors. The non-profit does not pay the full amount of real estate taxes that would be charged following a Proposition 13 sale adjustment (typically), but does usually pay all direct assessments. The discount is based on the percentage of residents who meet target income levels established by the State of California. The claim must be supported by evidence taken from the residents as to their family income levels. For this property, the managers report that 76% of the residents will meet that threshold, resulting in a 76% reduction in the ad valorem taxes from the amount that would result from a Proposition 13 sale readjustment. If this estimate were to be incorrect, the “value in use” estimated herein could change significantly. In addition, management fees tend to be higher, and typically include a fee to the non-profit for its costs in managing the program and overseeing the professional management of the park. These fees are often subordinate to other operating expenses or debt, and in some instances the 501c3 corporation will only charge the fee when there is sufficient cash flow after operating expenses and debt coverage to pay the fee. For this reason, it is often not collected in the early years of non-profit ownership. Because the non- profit management fee is cash flow dependent, it is not considered as an operating expense. These changes are noted in the NOI calculations shown below. The method of processing this into an indication of the price that the non-profit is willing to pay is based upon debt coverage, not income capitalization. The debt coverage ratio is reported to range from a low of 1.05 to 1.30, as reported by the analysts for several non-profits who were interviewed. I have used 1.15 in this analysis. The supportable debt is based on approximate current terms for this type of a purchase money mortgage bonds (35 year amortization, 3.837% blended interest cost) that are typically used to support these acquisitions, at 100% of the acquisition price. There are additional expenses associated with the purchase and bond issuance that are usually added to the purchase price. These costs include bond counsel fees, underwriting fees, due diligence costs, third party reports (appraisal, environmental, title, engineering, etc.) that must be deducted from the bond amount to reach a purchase price that the non-profit can afford to pay. These costs can typically range from $300,000 to $500,000 depending on the size and complexity of the property and the price, but are statutorily limited to 2% of the transaction cost, which is the amount considered in the appraisal. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 61 The restated operating statement and debt calculations are shown below: 501C3 Corporation Valuation Analysis Effective Gross Income (All Sources): (From Income Projections) $4,033,332 Total Expenses: (From Income Projections) $1,446,739 Net Operating Income to Investor Owner $2,586,593 Add: Property Tax Reduction-‐Estimated Credit: 76.0% $358,987 NOI to 501C3 Corporation $2,945,580 Projected Debt Coverage Ratio 1.15 NOI Available for Debt Repayment $2,561,374 Projected Interest Rate on Bonds 3.80% Amortization Period (Years) 35 Mortgage Constant 0.05213170 Supportable Debt $49,132,754 Less Transaction Costs (2%) $963,387 Indicated Value in Use to Non-‐Profit 501C3 Corporation $48,169,366 rounded to $48,200,000 Indicated OAR 6.12% This is not an estimate of market value, but the value indicated has become increasingly important in this particular property type due to the large number of transactions that are being seen utilizing this form of ownership. In California today, 501C3 corporations compete directly with other, more typical buyers to purchase mobile home parks that are offered for sale, indicating the influential nature of these transactions in the market as a whole, and demonstrating that such purchasers are a significant part of the market for mobile home parks. JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 62 Appendix 1- Rent Roll Analysis Space Count Space Nos. Phys. Occ. Space Park Owned Unit Provided Rent Roll Physically Occupied Delete Park Owned Units Comment PGI from Rents (Current) 1 1 1 $889.74 $889.74 $889.74 $889.74 2 2 1 $889.74 $889.74 $889.74 $889.74 3 3 1 $889.74 $889.74 $889.74 $889.74 4 4 1 $889.74 $889.74 $889.74 $889.74 5 5 1 $889.74 $889.74 $889.74 $889.74 6 6 1 $889.74 $889.74 $889.74 $889.74 7 7 1 $889.74 $889.74 $889.74 $889.74 8 8 1 $889.74 $889.74 $889.74 $889.74 9 9 1 $889.74 $889.74 $889.74 $889.74 10 10 1 $889.74 $889.74 $889.74 $889.74 11 11 1 $889.74 $889.74 $889.74 $889.74 12 12 1 $889.74 $889.74 $889.74 $889.74 13 13 1 $889.74 $889.74 $889.74 $889.74 14 14 1 $889.74 $889.74 $889.74 $889.74 15 15 1 $889.74 $889.74 $889.74 $889.74 16 16 1 $889.74 $889.74 $889.74 $889.74 17 17 1 $889.74 $889.74 $889.74 $889.74 18 18 1 $889.74 $889.74 $889.74 $889.74 19 19 1 $889.74 $889.74 $889.74 $889.74 20 20 1 $889.74 $889.74 $889.74 $889.74 21 21 1 $889.74 $889.74 $889.74 $889.74 22 22 1 $889.74 $889.74 $889.74 $889.74 23 23 1 $889.74 $889.74 $889.74 $889.74 24 24 1 $889.74 $889.74 $889.74 $889.74 25 25 1 $889.74 $889.74 $889.74 $889.74 26 26 1 $889.74 $889.74 $889.74 $889.74 27 27 1 $889.74 $889.74 $889.74 $889.74 28 28 1 $889.74 $889.74 $889.74 $889.74 29 29 1 $889.74 $889.74 $889.74 $889.74 30 30 1 $889.74 $889.74 $889.74 $889.74 31 31 1 $889.74 $889.74 $889.74 $889.74 32 32 1 $889.74 $889.74 $889.74 $889.74 33 33 1 $889.74 $889.74 $889.74 $889.74 34 34 1 $889.74 $889.74 $889.74 $889.74 35 35 1 $889.74 $889.74 $889.74 $889.74 36 36 1 $889.74 $889.74 $889.74 $889.74 37 37 1 $889.74 $889.74 $889.74 $889.74 38 38 1 $889.74 $889.74 $889.74 $889.74 39 39 1 $889.74 $889.74 $889.74 $889.74 40 40 1 $889.74 $889.74 $889.74 $889.74 41 41 1 $889.74 $889.74 $889.74 $889.74 42 42 1 $889.74 $889.74 $889.74 $889.74 43 43 1 $889.74 $889.74 $889.74 $889.74 44 44 1 $889.74 $889.74 $889.74 $889.74 45 45 1 $889.74 $889.74 $889.74 $889.74 46 46 1 $889.74 $889.74 $889.74 $889.74 47 47 1 $889.74 $889.74 $889.74 $889.74 48 48 1 $889.74 $889.74 $889.74 $889.74 49 49 1 $889.74 $889.74 $889.74 $889.74 50 50 1 $889.74 $889.74 $889.74 $889.74 51 51 1 $889.74 $889.74 $889.74 $889.74 52 52 1 $889.74 $889.74 $889.74 $889.74 53 53 1 $889.74 $889.74 $889.74 $889.74 JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 63 54 54 1 1 $1,429.74 $1,429.74 POC $889.74 55 55 1 $889.74 $889.74 $889.74 $889.74 56 56 1 $889.74 $889.74 $889.74 $889.74 57 57 1 $889.74 $889.74 $889.74 $889.74 58 58 1 $889.74 $889.74 $889.74 $889.74 59 59 1 $889.74 $889.74 $889.74 $889.74 60 60 1 $889.74 $889.74 $889.74 $889.74 61 61 1 $889.74 $889.74 $889.74 $889.74 62 62 1 $889.74 $889.74 $889.74 $889.74 63 63 1 $889.74 $889.74 $889.74 $889.74 64 64 1 $889.74 $889.74 $889.74 $889.74 65 65 1 $889.74 $889.74 $889.74 $889.74 66 66 1 $889.74 $889.74 $889.74 $889.74 67 67 1 $889.74 $889.74 $889.74 $889.74 68 68 1 $889.74 $889.74 $889.74 $889.74 69 69 1 $889.74 $889.74 $889.74 $889.74 70 70 1 $889.74 $889.74 $889.74 $889.74 71 71 1 $889.74 $889.74 $889.74 $889.74 72 72 1 $889.74 $889.74 $889.74 $889.74 73 73 1 $889.74 $889.74 $889.74 $889.74 74 74 1 $889.74 $889.74 $889.74 $889.74 75 75 1 $889.74 $889.74 $889.74 $889.74 76 76 1 1 $889.74 $889.74 Manager $889.74 77 77 1 $889.74 $889.74 $889.74 $889.74 78 78 1 $889.74 $889.74 $889.74 $889.74 79 79 1 $889.74 $889.74 $889.74 $889.74 80 80 1 $889.74 $889.74 $889.74 $889.74 81 81 1 $889.74 $889.74 $889.74 $889.74 82 82 1 $889.74 $889.74 $889.74 $889.74 83 83 1 $889.74 $889.74 $889.74 $889.74 84 84 1 $889.74 $889.74 $889.74 $889.74 85 85 1 $889.74 $889.74 $889.74 $889.74 86 86 1 $889.74 $889.74 $889.74 $889.74 87 87 1 $889.74 $889.74 $889.74 $889.74 88 88 1 $889.74 $889.74 $889.74 $889.74 89 89 1 $889.74 $889.74 $889.74 $889.74 90 90 1 $889.74 $889.74 $889.74 $889.74 91 91 1 $889.74 $889.74 $889.74 $889.74 92 92 1 $889.74 $889.74 $889.74 $889.74 93 93 1 $889.74 $889.74 $889.74 $889.74 94 94 1 $889.74 $889.74 $889.74 $889.74 95 95 1 $889.74 $889.74 $889.74 $889.74 96 96 1 $889.74 $889.74 $889.74 $889.74 97 97 1 $889.74 $889.74 $889.74 $889.74 98 98 1 $889.74 $889.74 $889.74 $889.74 99 99 1 $889.74 $889.74 $889.74 $889.74 100 100 1 $889.74 $889.74 $889.74 $889.74 101 101 1 $889.74 $889.74 $889.74 $889.74 102 102 1 $889.74 $889.74 $889.74 $889.74 103 103 1 $889.74 $889.74 $889.74 $889.74 104 104 1 $889.74 $889.74 $889.74 $889.74 105 105 1 $889.74 $889.74 $889.74 $889.74 106 106 1 $889.74 $889.74 $889.74 $889.74 107 107 1 $889.74 $889.74 $889.74 $889.74 108 108 1 $889.74 $889.74 $889.74 $889.74 109 109 1 $889.74 $889.74 $889.74 $889.74 110 110 1 $889.74 $889.74 $889.74 $889.74 111 111 1 $889.74 $889.74 $889.74 $889.74 112 112 1 $889.74 $889.74 $889.74 $889.74 JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 64 113 113 1 $889.74 $889.74 $889.74 $889.74 114 114 1 $889.74 $889.74 $889.74 $889.74 115 115 1 $889.74 $889.74 $889.74 $889.74 116 116 1 $889.74 $889.74 $889.74 $889.74 117 117 1 $889.74 $889.74 $889.74 $889.74 118 118 1 $889.74 $889.74 $889.74 $889.74 119 119 1 $889.74 $889.74 $889.74 $889.74 120 120 1 $889.74 $889.74 $889.74 $889.74 121 121 1 $889.74 $889.74 $889.74 $889.74 122 122 1 $889.74 $889.74 $889.74 $889.74 123 123 1 $889.74 $889.74 $889.74 $889.74 124 124 1 $889.74 $889.74 $889.74 $889.74 125 125 1 $889.74 $889.74 $889.74 $889.74 126 126 1 $889.74 $889.74 $889.74 $889.74 127 127 1 $889.74 $889.74 $889.74 $889.74 128 128 1 $889.74 $889.74 $889.74 $889.74 129 129 1 $889.74 $889.74 $889.74 $889.74 130 130 1 $889.74 $889.74 $889.74 $889.74 131 131 1 $889.74 $889.74 $889.74 $889.74 132 132 1 $889.74 $889.74 $889.74 $889.74 133 133 1 $889.74 $889.74 $889.74 $889.74 134 134 1 $889.74 $889.74 $889.74 $889.74 135 135 1 $889.74 $889.74 $889.74 $889.74 136 136 1 $889.74 $889.74 $889.74 $889.74 137 137 1 $889.74 $889.74 $889.74 $889.74 138 138 1 $889.74 $889.74 $889.74 $889.74 139 139 1 $889.74 $889.74 $889.74 $889.74 140 140 1 $889.74 $889.74 $889.74 $889.74 141 141 1 $889.74 $889.74 $889.74 $889.74 142 142 1 $889.74 $889.74 $889.74 $889.74 143 143 1 $889.74 $889.74 $889.74 $889.74 144 144 1 $889.74 $889.74 $889.74 $889.74 145 145 1 $889.74 $889.74 $889.74 $889.74 146 146 1 $889.74 $889.74 $889.74 $889.74 147 147 1 $889.74 $889.74 $889.74 $889.74 148 148 1 $889.74 $889.74 $889.74 $889.74 149 149 1 $889.74 $889.74 $889.74 $889.74 150 150 1 $889.74 $889.74 $889.74 $889.74 151 151 1 $889.74 $889.74 $889.74 $889.74 152 152 1 $889.74 $889.74 $889.74 $889.74 153 153 1 1 $1,450.38 $1,450.38 POC $889.74 154 154 1 $889.74 $889.74 $889.74 $889.74 155 155 1 $889.74 $889.74 $889.74 $889.74 156 156 1 $889.74 $889.74 $889.74 $889.74 157 157 1 $889.74 $889.74 $889.74 $889.74 158 158 1 $889.74 $889.74 $889.74 $889.74 159 159 1 $889.74 $889.74 $889.74 $889.74 160 160 1 $889.74 $889.74 $889.74 $889.74 161 161 1 $889.74 $889.74 $889.74 $889.74 162 162 1 $889.74 $889.74 $889.74 $889.74 163 163 1 $889.74 $889.74 $889.74 $889.74 164 164 1 $889.74 $889.74 $889.74 $889.74 165 165 1 $889.74 $889.74 $889.74 $889.74 166 166 1 $889.74 $889.74 $889.74 $889.74 167 167 1 $889.74 $889.74 $889.74 $889.74 168 168 1 $889.74 $889.74 $889.74 $889.74 169 169 1 $889.74 $889.74 $889.74 $889.74 170 170 1 $889.74 $889.74 $889.74 $889.74 171 171 1 $889.74 $889.74 $889.74 $889.74 JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 65 172 172 1 $889.74 $889.74 $889.74 $889.74 173 173 1 $889.74 $889.74 $889.74 $889.74 174 174 1 $889.74 $889.74 $889.74 $889.74 175 175 1 $889.74 $889.74 $889.74 $889.74 176 176 1 $889.74 $889.74 $889.74 $889.74 177 177 1 $889.74 $889.74 $889.74 $889.74 178 178 1 $889.74 $889.74 $889.74 $889.74 179 179 1 $889.74 $889.74 $889.74 $889.74 180 180 1 $889.74 $889.74 $889.74 $889.74 181 181 1 $889.74 $889.74 $889.74 $889.74 182 182 1 $889.74 $889.74 $889.74 $889.74 183 183 1 $889.74 $889.74 $889.74 $889.74 184 184 1 $889.74 $889.74 $889.74 $889.74 185 185 1 $889.74 $889.74 $889.74 $889.74 186 186 1 $889.74 $889.74 $889.74 $889.74 187 187 1 $889.74 $889.74 $889.74 $889.74 188 188 1 $889.74 $889.74 $889.74 $889.74 189 189 1 $889.74 $889.74 $889.74 $889.74 190 190 1 $889.74 $889.74 $889.74 $889.74 191 191 1 $889.74 $889.74 $889.74 $889.74 192 192 1 $889.74 $889.74 $889.74 $889.74 193 193 1 $889.74 $889.74 $889.74 $889.74 194 194 1 $889.74 $889.74 $889.74 $889.74 195 195 1 $889.74 $889.74 $889.74 $889.74 196 196 1 $889.74 $889.74 $889.74 $889.74 197 197 1 $889.74 $889.74 $889.74 $889.74 198 198 1 $889.74 $889.74 $889.74 $889.74 199 199 1 $889.74 $889.74 $889.74 $889.74 200 200 1 $889.74 $889.74 $889.74 $889.74 201 201 1 $889.74 $889.74 $889.74 $889.74 202 202 1 $889.74 $889.74 $889.74 $889.74 203 203 1 $889.74 $889.74 $889.74 $889.74 204 204 1 $889.74 $889.74 $889.74 $889.74 205 205 1 $889.74 $889.74 $889.74 $889.74 206 206 1 $889.74 $889.74 $889.74 $889.74 207 207 1 $889.74 $889.74 $889.74 $889.74 208 208 1 $889.74 $889.74 $889.74 $889.74 209 209 1 $889.74 $889.74 $889.74 $889.74 210 210 1 $889.74 $889.74 $889.74 $889.74 211 211 1 $889.74 $889.74 $889.74 $889.74 212 212 1 $889.74 $889.74 $889.74 $889.74 213 213 1 $889.74 $889.74 $889.74 $889.74 214 214 1 $889.74 $889.74 $889.74 $889.74 215 215 1 $889.74 $889.74 $889.74 $889.74 216 216 1 $889.74 $889.74 $889.74 $889.74 217 217 1 $889.74 $889.74 $889.74 $889.74 218 218 1 $889.74 $889.74 $889.74 $889.74 219 219 1 $889.74 $889.74 $889.74 $889.74 220 220 1 $889.74 $889.74 $889.74 $889.74 221 221 1 $889.74 $889.74 $889.74 $889.74 222 222 1 $889.74 $889.74 $889.74 $889.74 223 223 1 $889.74 $889.74 $889.74 $889.74 224 224 1 $889.74 $889.74 $889.74 $889.74 225 225 1 $889.74 $889.74 $889.74 $889.74 226 226 1 $889.74 $889.74 $889.74 $889.74 227 227 1 $889.74 $889.74 $889.74 $889.74 228 228 1 $889.74 $889.74 $889.74 $889.74 229 229 1 $889.74 $889.74 $889.74 $889.74 230 230 1 $889.74 $889.74 $889.74 $889.74 JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 66 231 231 1 $889.74 $889.74 $889.74 $889.74 232 232 1 $889.74 $889.74 $889.74 $889.74 233 233 1 $889.74 $889.74 $889.74 $889.74 234 234 1 $889.74 $889.74 $889.74 $889.74 235 235 1 $889.74 $889.74 $889.74 $889.74 236 236 1 $889.74 $889.74 $889.74 $889.74 237 237 1 $889.74 $889.74 $889.74 $889.74 238 238 1 $889.74 $889.74 $889.74 $889.74 239 239 1 $889.74 $889.74 $889.74 $889.74 240 240 1 $889.74 $889.74 $889.74 $889.74 241 241 1 $889.74 $889.74 $889.74 $889.74 242 242 1 $889.74 $889.74 $889.74 $889.74 243 243 1 $889.74 $889.74 $889.74 $889.74 244 244 1 $889.74 $889.74 $889.74 $889.74 245 245 1 $889.74 $889.74 $889.74 $889.74 246 246 1 $889.74 $889.74 $889.74 $889.74 247 247 1 $889.74 $889.74 $889.74 $889.74 248 248 1 $889.74 $889.74 $889.74 $889.74 249 249 1 $889.74 $889.74 $889.74 $889.74 250 250 1 $889.74 $889.74 $889.74 $889.74 251 251 1 $889.74 $889.74 $889.74 $889.74 252 252 1 $889.74 $889.74 $889.74 $889.74 253 253 1 $889.74 $889.74 $889.74 $889.74 254 254 1 $889.74 $889.74 $889.74 $889.74 255 255 1 $889.74 $889.74 $889.74 $889.74 256 256 1 $889.74 $889.74 $889.74 $889.74 257 257 1 $889.74 $889.74 $889.74 $889.74 258 258 1 $889.74 $889.74 $889.74 $889.74 259 259 1 $889.74 $889.74 $889.74 $889.74 260 260 1 $889.74 $889.74 $889.74 $889.74 261 261 1 $889.74 $889.74 $889.74 $889.74 262 262 1 $889.74 $889.74 $889.74 $889.74 263 263 1 $889.74 $889.74 $889.74 $889.74 264 264 1 $889.74 $889.74 $889.74 $889.74 265 265 1 $889.74 $889.74 $889.74 $889.74 266 266 1 $889.74 $889.74 $889.74 $889.74 267 267 1 $889.74 $889.74 $889.74 $889.74 268 268 1 $889.74 $889.74 $889.74 $889.74 269 269 1 $889.74 $889.74 $889.74 $889.74 270 270 1 $889.74 $889.74 $889.74 $889.74 271 271 1 $889.74 $889.74 $889.74 $889.74 272 272 1 $889.74 $889.74 $889.74 $889.74 273 273 1 $889.74 $889.74 $889.74 $889.74 274 274 1 $889.74 $889.74 $889.74 $889.74 275 275 1 $889.74 $889.74 $889.74 $889.74 276 276 1 $889.74 $889.74 $889.74 $889.74 277 277 1 $889.74 $889.74 $889.74 $889.74 278 278 1 $889.74 $889.74 $889.74 $889.74 279 279 1 $889.74 $889.74 $889.74 $889.74 280 280 1 $889.74 $889.74 $889.74 $889.74 281 281 1 $889.74 $889.74 $889.74 $889.74 282 282 1 $889.74 $889.74 $889.74 $889.74 283 283 1 $889.74 $889.74 $889.74 $889.74 284 284 1 $889.74 $889.74 $889.74 $889.74 285 285 1 $889.74 $889.74 $889.74 $889.74 286 286 1 $889.74 $889.74 $889.74 $889.74 287 287 1 $889.74 $889.74 $889.74 $889.74 288 288 1 $889.74 $889.74 $889.74 $889.74 289 289 1 $889.74 $889.74 $889.74 $889.74 JOHN P. NEET, MAI File No. 15-‐005/San Juan ME/San Juan Capistrano, CA/Millenium Housing 67 290 290 1 $889.74 $889.74 $889.74 $889.74 291 291 1 $889.74 $889.74 $889.74 $889.74 292 292 1 $889.74 $889.74 $889.74 $889.74 293 293 1 $889.74 $889.74 $889.74 $889.74 294 294 1 $889.74 $889.74 $889.74 $889.74 295 295 1 $889.74 $889.74 $889.74 $889.74 296 296 1 $889.74 $889.74 $889.74 $889.74 297 297 1 $889.74 $889.74 $889.74 $889.74 298 298 1 $889.74 $889.74 $889.74 $889.74 299 299 1 $889.74 $889.74 $889.74 $889.74 300 300 1 $889.74 $889.74 $889.74 $889.74 301 301 1 $889.74 $889.74 $889.74 $889.74 302 302 1 $889.74 $889.74 $889.74 $889.74 303 303 1 $889.74 $889.74 $889.74 $889.74 304 304 1 $889.74 $889.74 $889.74 $889.74 305 305 1 $889.74 $889.74 $889.74 $889.74 306 306 1 $889.74 $889.74 $889.74 $889.74 307 307 1 $889.74 $889.74 $889.74 $889.74 308 308 1 $889.74 $889.74 $889.74 $889.74 309 309 1 $889.74 $889.74 $889.74 $889.74 310 310 1 $889.74 $889.74 $889.74 $889.74 311 311 1 $889.74 $889.74 $889.74 $889.74 312 312 1 $889.74 $889.74 $889.74 $889.74 RENT CONTROL ORDINANCE Article 9. Mobile Home Rent Control Sec. 2-2.901. Findings. The Council finds and determines that: (a) There is presently, within the City and the surrounding areas, a shortage of spaces for the location of mobile homes, resulting in a low vacancy rate and rising space rents. (b) Mobile home owners have invested substantial sums in their mobile homes and appurtenances. (c) Alternative sites for the relocation of mobile homes are difficult to find, and the moving and installation of mobile homes are expensive, with possibilities of damage to the units. The Council, accordingly, does find and declare that it is necessary to protect the residents of mobile homes from unreasonable space rent increases, recognizing the need of mobile home park owners to receive a fair, just, and reasonable return. (§ 1, Ord. 795) Sec. 2-2.902. Definitions. For the purposes of this article, unless otherwise apparent from the context, certain words and phrases used in this article are defined as follows: (a) “Assessment” shall mean the entire allocation of the cost of installing, improving, repairing, or maintaining any capital improvement benefiting the resident. (b) “Committee” shall mean the Housing Advisory Committee established under Title 2, Chapter 2, Article 2 of this Code. (c) “Consumer Price Index” shall mean the Consumer Price Index for all urban consumers (CPI-U) published for the Los Angeles-Long Beach-Anaheim area. (d) “Maximum allowable increase” shall mean the maximum allowable increase in mobile home space rent an owner may charge, unless a higher increase is approved by the City after a petition and hearing as provided in this article. The maximum allowable increase shall be provided in this subsection (d) and shall be determined by either of the following formulae an owner may choose to apply: (1) Take the operating expenses of the park for the twelve (12) month period immediately preceding the date upon which notification of any rent increase is to be made; multiply that sum by the percentage of increase in the CPI-U appearing in the latest published Consumer Price Index to arrive at the maximum allowable annual increase in rent for the entire park; and divide the number of units in the park to compute the maximum allowable annual rent increase (in dollars) for each space; or (2) Secure the percentage of annual increase in the CPI-U for the calendar year immediately preceding the one in which the rental adjustment is being made; multiply that figure by the rent to be adjusted to arrive at the maximum allowable rent increase percentage per year; and apply that product to each space rent. (3) Effective April 1, 1988, the maximum allowable increase for rental adjustments occurring under this subsection shall be based upon the percentage of annual rise in the CPI-U for the previous calendar year. Any rental increase occurring between October 1, 1987 and March 31, 1988 shall be subject to the maximum allowable increase computed with the annual rise of the CPI-U for the 1986 calendar year. (4) The percentage increase computed by either of the methods set forth in this subsection shall be applied to each space and shall not be applied to the park’s mean rent. Moreover, there shall be no more than one increase in space rents within a park during any twelve (12) month period without the prior approval of the City. (5) The occurrence of a vacancy in either a space within a park or a mobile home unit on a space within a park shall not result in a space rental increase in excess of the percentage increase allowed once during any twelve (12) month period by this subsection, unless it results from a petition duly heard and approved pursuant to Section 2-2.903 (e) “Owner” shall mean the owner, lessor, or designated agent of a park. (f) “Park” shall mean a mobile home park which rents spaces for mobile home dwelling units. (g) “Rent” shall mean the consideration charged solely for the use and occupancy of a mobile home space in a park and shall not include any amount paid for the use of the mobile home dwelling unit or for facilities or amenities in a park, other than a mobile home space, or any other fees or charges regulated by a governmental agency and charged to residents on an actual usage and/or cost basis. (h) “Resident” shall mean any person entitled to occupy a mobile home dwelling unit pursuant to the ownership thereof or a rental or lease arrangement with the owner of the subject dwelling unit. (§ 1, Ord. 795) Sec. 2-2.903. Petition and hearing process regarding rent increases. (a) Petition and hearing procedure. Upon the filing with the secretary of a written petition concerning a proposed or actual increase in rent filed by an owner or by residents who reside in and represent more than fifty (50) percent of the inhabited spaces within a park, excluding management, a hearing thereon shall be conducted by a Hearing Officer within sixty (60) calendar days, or as soon thereafter as is reasonably practicable, after the filing of the petition. In the event that the park owner has proposed a rent increase for one or more residents (e.g., based upon one year anniversary dates) but less than the total number of residents in the park, then only one hearing process shall be conducted by the same hearing officer where the rent increases proposed for all residents in the park for that year is based upon the same factual justification. Any such rent increase shall be subject to a protest petition when filed by a majority of total park residents. The filing of one petition protest shall be sufficient to place all similar rent increases for that year at issue under the hearing review process. The hearing shall be conducted only in the event the petition is filed with the secretary thirty (30) calendar days following the effective date of the rent increase which is the subject of the petition. The Hearing Officer shall be chosen and a hearing conducted in accordance with the Hearing Officer procedure established by the Council. (b) Purpose of hearings. At the hearing on such petition, the Hearing Officer shall conduct an investigation to determine if the rent increase in question exceeds the maximum allowable increase as defined in subsection (d) of Section 2-2.902 of this article. If the Hearing Officer concludes that the rent increase exceeds the maximum allowable increase, the Hearing Officer shall then continue the hearing by receiving all relevant evidence for the purpose of rendering findings and conclusions as to the propriety of the rent increase in accordance with the criteria set forth in subsection (g) of this section. The Hearing Officer may require either party to a hearing on the petition to provide any books, records, and papers deemed pertinent, in addition to that information previously set forth by the parties. (c) Hearing Officer recommendations. Within thirty (30) days after concluding the hearing, the Hearing Officer shall render written findings and conclusions as to the propriety of the rent increase to the Housing Advisory Committee. The Hearing Officer recommendations shall not be binding. (d) Committee reviews of Hearing Officer findings. The Housing Advisory Committee shall review the findings and conclusions of the Hearing Officer at its next available meeting. Its scope of review shall be limited to the written record consisting of the evidence received by the Hearing Officer, written arguments of the parties, findings of the Hearing Officer, other relevant matters as compiled by the secretary of the Committee, and additional oral or written arguments the parties may wish to make. However, the Committee shall not receive or consider any additional evidence. The Housing Advisory Committee shall give ten (10) days prior written notice of its meeting to the parties. (e) Council reviews. The Council shall review the findings of the Hearing Officer and the recommendations of the Housing Advisory Committee as soon as reasonably practicable. The Council shall not reopen the hearing held by the Hearing Officer for the purpose of receiving new evidence unless, in the discretion of the Council, it is necessary to do so. The Council may affirm, modify, or reverse the rent increase in question, but in no case require a reduction lower than the maximum allowable increase. The Council shall render written findings in support of its conclusions within thirty (30) days after its meeting, and the decision of the Council shall be final. (f) Return of excess rents collected. Any rent increases which are collected by an owner pursuant to an increase which is the subject of a petition for hearing, and which later is determined by the Council to exceed the maximum allowable increase, or such greater increase as the Council approves, shall be either returned to the residents or credited to future space rents; provided, however, no increase collected prior to December 5, 1980, shall be returned. (g) Criteria to be utilized in rent increase reviews. (1) Purpose of reviews. The Hearing Officer, the Housing Advisory Committee, and the Council shall review the rent increase to determine whether the increase is, or is not, fair and reasonable. Such review shall be conducted by applying the nonexclusive criteria set forth in subsection (g)(2) of this section to the facts submitted to the Hearing Officer. (2) Nonexclusive criteria. The Hearing Officer, the Committee, and the Council shall consider all relevant factors, including, but not limited to, increased or decreased costs to the mobile home park owner attributable to utility rates, property taxes, insurance, advertising, governmental assessments, cost-of-living increases attributable to incidental services, normal repairs and maintenance, capital improvements, except those defined in subsection (h) of this section, the upgrading and addition of amenities for services, except as defined in subsection (h) of this section, and a fair rate of return on the property. (3) Fair rate of return on property criteria. The Council finds and declares that the following principles shall be applied in utilizing the fair rate of return on property standard as a criterion in the review process: (i) All the provisions of this article shall be applied with the overall purpose of eliminating the imposition of excessive rents while at the same time providing park owners with a just and reasonable return on property. (ii) The reasonableness of rent increases is not to be determined solely by the application of a fixed or mechanical accounting formula, such as “return on investment” or “return on market value” of the property; in particular, recent court decisions have discouraged the use of a “return on market value” test. (iii) The fair rate of return on property is but one of a number of nonexclusive factors to be taken into account in reviewing the fairness of rent increases; it is to be given weight, but not to dominate other relevant criteria in arriving at a final determination. (iv) The Hearing Officer, the Committee, and the Council shall impartially consider all relevant evidence in relation to the application of the nonexclusive criteria. The extent to which the criteria are considered in the review process, that is, the amount of weight given to any one of the several criteria, ultimately falls within the wisdom and best judgment of said three (3) bodies. (v) In conducting the entire process, guidance should be taken from leading California case law decisions dealing with rent control issues and in particular, rent control in mobile home parks. Such cases include: Birkenfeld v. City of Berkeley (1976), 17 C.3d 165; Gregory v. City of San Juan Capistrano (1983), 142 C.A.3d 8; Cotati Alliance for Better Housing v. Cotati (1983), 143 C.A.3d 296; Palisades Shores v. City of Los Angeles (1983), 143 C.A.3d 369; Oceanside Mobile Home Park Owners Association v. City of Oceanside (1984), 157 C.A.3d 887; and Carson Mobile Home Park Owners Association v. City of Carson (1983), 35 C.3d 184. (h) Rent increases and capital improvement upgrade costs. (1) Capital improvement upgrade costs. Only those capital improvement costs incurred to upgrade through additions, alterations or replacements, park facilities, assets, or amenities, shall not be recouped from residents through rent increases, or any other special assessment, unless the following procedure is first followed: (i) The park owner shall first inform by first-class mail all park residents of the exact nature, approximate cost, billing method, and billing duration of the proposed capital improvement upgrade by written notice. (ii) After allowing the residents a reasonable period of time (of not less than thirty (30) days) to consider whether the capital improvement cost is one the residents believe is necessary and desirable, the park owner shall then obtain formal written consent on a form approved by the City from a simple majority of the total number of residents in the park. The simple majority shall be calculated on the basis of one vote per coach space. (iii) The costs of the capital improvement upgrade shall be prorated and billed in a method mutually acceptable to the park owner and the residents. For the purposes of this subsection, “to upgrade” shall mean to raise to a substantially higher quality, or to substantially improve, the existing level of service. Examples of capital improvement upgrades include, but are not limited to, swimming pools, spas, tennis courts, clubhouses, clubhouse additions, fencing, children’s play equipment, and other similar improvements. (2) Exceptions for governmentally mandated costs. Capital improvement upgrade costs incurred because of the application of current day Building Codes, such as, but not limited to, City Building Codes, Health and Safety Codes, and State, Federal, and Fire Codes, shall be exempted from the resident consent provision set forth in subsection (h)(1) of this section. The park owner shall obtain a written statement from the Building Official verifying that the subject capital improvement upgrade arose from the more stringent current day Building Code requirements before the exception set forth in this subsection may be utilized by the park owner. (i) Leasehold agreement exemptions. Notwithstanding any provision of this article to the contrary, leasehold agreements (that is, leases other than tenancies at will or month-to- month) entered into between mobile home park owners and their residents shall be exempted from the operation of the petition and hearing review process. (ii) Forms. The City Manager is authorized and directed to develop and require the completion of forms by interested parties at the time a petition is received by the secretary. Until such forms are completed to the satisfaction of the City Manager, or his designated representative, the petition and hearing process shall proceed no further. (§ 1, Ord. 795, as amended by § 1, Ord. 902) Sec. 2-2.904. Hearing Officer costs: Fee reimbursement. (a) Administrative fee. There is hereby instituted a one thousand dollar ($1,000.00) fee to be paid to the City for costs incurred in invoking the Hearing Officer procedure set forth in Section 2-2.903 (b) Five hundred dollar ($500.00) deposit. At the time the park residents file a petition in protest of a proposed increase, the petitioners shall simultaneously post a five hundred dollar ($500.00) deposit with the Secretary to the Housing Advisory Committee. The Secretary shall find that the petition is incomplete if the five hundred dollar ($500.00) deposit is not posted. Further, the statute of limitation period of thirty (30) days from the effective date of a rent increase shall continue to run in the event that the petition has been found to be incomplete. If the petition is in order and the deposit has been posted, the City shall promptly notify the park owner that the hearing procedure will be invoked and that the park owner shall, within ten (10) days of receipt of notice, post a five hundred dollar ($500.00) deposit equal to the petitioners’ deposit. Should the park owner not post the five hundred dollar ($500.00) deposit within the ten (10) day time limit, the residents shall be under no legal obligation to pay the proposed rent increase. (c) Responsibility for payment of administrative fee. At the conclusion of the administrative hearing, the Hearing Officer, as a part of his responsibility to make findings, shall make a recommendation as to the percentage that each party is to pay in satisfying the one thousand dollar ($1,000.00) administrative fee. The City Council shall make a final decision regarding the Hearing Officer’s determination based upon the final rent award. (d) Remedies for nonpayment of administrative fee. Should any party refuse to pay his portion of the required administrative fee, the City may pursue any civil remedy available, or in the alternative, refuse to process a future petition by the same petitioners. In the case of park owner nonpayment, park tenants shall not be obligated to pay proposed rent increases until the administrative fee debt has been satisfied. (§ 1, Ord. 795) THIS PAGE INTENTIONALLY LEFT BLANK D-1 APPENDIX D FORM OF CONTINUING DISCLOSURE AGREEMENT This Continuing Disclosure Agreement (the “Disclosure Agreement”) is executed and delivered as of July 1, 2015 by Millennium Housing, LLC, a California limited liability company (the “Company”), and Wolf & Company Inc. (the “Dissemination Agent”), in connection with the delivery of $36,675,000* Independent Cities Finance Authority Mobile Home Park Revenue Refunding Bonds (San Juan Mobile Estates) Series 2015 (the “Bonds”). The Bonds are being issued pursuant to an Indenture of Trust dated as of July 1, 2015 (the “Indenture”), by and between the Independent Cities Finance Authority (the “Issuer”) and MUFG Union Bank, N.A., as trustee (the “Trustee”). The Company and the Dissemination Agent covenant and agree as follows: 1. Purpose of the Disclosure Agreement. This Disclosure Agreement is being executed and delivered by the Company and the Dissemination Agent for the benefit of the holders and Beneficial Owners of the Bonds and in order to assist the Participating Underwriter in complying with the Rule (defined below). The Company and the Dissemination Agent acknowledge that the Issuer has undertaken no responsibility with respect to any reports, notices or disclosures provided or required under this Disclosure Agreement, and has no liability to any Person, including the Participating Underwriter and any holder or Beneficial Owner of the Bonds, with respect to the Rule. 2. Definitions. In addition to the definitions set forth in the Indenture, which apply to any capitalized term used in this Disclosure Agreement unless otherwise defined in this Section, the following capitalized terms shall have the following meanings when used in this Disclosure Agreement: “Annual Report” shall mean any Annual Report provided by the Company pursuant to, and as described in, Sections 3 and 4 of this Disclosure Agreement. “Beneficial Owner” shall mean any Person which (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Bonds (including Persons holding Bonds through nominees, depositories or other intermediaries), or (b) is treated as the owner of any Bonds for federal income tax purposes. “Company” shall mean Millennium Housing, LLC, a California limited liability company, and any of its successors, or any other Person responsible for repaying the Loan under the Loan Agreement. “Disclosure Representative of the Company” shall mean the President of the Company or his or her designee, or such other Person as the Company shall designate in writing to the Dissemination Agent and the Issuer from time to time. “Dissemination Agent” shall mean Wolf & Company Inc., acting in its capacity as Dissemination Agent hereunder, or any successor Dissemination Agent designated in writing by the Company. “Fiscal Year” means the Fiscal Year of the Company, as identified to the Issuer, the Trustee and the Dissemination Agent by the Company in writing. “Listed Events” shall mean any of the events listed in Section 5(a) of this Disclosure Agreement. “Participating Underwriter” shall mean the original underwriter of the Bonds required to comply with the Rule in connection with offering of the Bonds. D-2 “Person” means an individual, corporation, partnership, association, joint stock company, limited liability company, trust, any unincorporated organization, or a government or political subdivision thereof, or any other governmental or nongovernmental entity. “Repository” shall mean the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access (EMMA) system. “Rule” shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time. “State” shall mean the State of California. 3. Provision of Annual Reports. a. The Company shall, or shall upon written direction to the Dissemination Agent and the furnishing of the Annual Report to the Dissemination Agent, cause the Dissemination Agent to, not later than one hundred twenty (120) days after the end of each Fiscal Year, commencing with the Fiscal Year ending June 30, 2016, provide to the Repository and the Participating Underwriter an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Agreement. In each case, the Annual Report may be submitted as a single document or as separate documents comprising a package, and may include by reference other information as provided in Section 4 of this Disclosure Agreement; provided that the audited financial statements of the Company may be submitted later than the date required above for the filing of the Annual Report if they are not available by that date. If the Company’s fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 5(f) of this Disclosure Agreement. b. Not later than fifteen (15) days prior to the date specified in subsection (a) of this Section 3 for providing the Annual Report to the Repository, the Company shall provide the Annual Report to the Dissemination Agent. If by such date the Dissemination Agent has not received a copy of the Annual Report, the Dissemination Agent shall notify the Company, the Participating Underwriter, the Issuer and the Oversight Agent (as defined in the Indenture) of such failure to receive the report. The Company shall provide a written certification with each Annual Report to the effect that such Annual Report constitutes the Annual Report required to be furnished by it hereunder. The Issuer and the Dissemination Agent may conclusively rely upon such certification of the Company and shall have no duty or obligation to review such Annual Report. c. If the Dissemination Agent is unable to verify that an Annual Report has been provided to the Repository by the date required in subsection (a) of this Section 3, the Dissemination Agent shall send a notice to the Repository and the Municipal Securities Rulemaking Board in substantially the form attached as Exhibit A. d. The Dissemination Agent shall upon compliance by the Company and to the extent known to the Dissemination Agent file a report with the Company, the Issuer, the Participating Underwriter, the Oversight Agent and (if the Dissemination Agent is not the Trustee) the Trustee certifying that the Annual Report has been provided pursuant to this Disclosure Agreement and stating the date it was provided to the Repository. e. On or about the date specified in subsection (a) of this Section 3 for providing the Annual Report to the Repository, the Oversight Agent shall perform a search of the Repository and, if necessary, contact the Company and the Dissemination Agent, to confirm that an Annual Report has been provided to the Repository. D-3 4. Content of Annual Reports. The Annual Report shall contain or include by reference the audited financial statements of the Company (or, if consolidated statements are prepared for the Company and related entities, such consolidated financial statements) for the prior fiscal year, prepared in accordance with generally accepted accounting principles. If the Company’s audited financial statements are not available by the time the Annual Report is required to be filed pursuant to Section 3(a) of this Disclosure Agreement, the Annual Report shall contain unaudited financial statements, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available. 5. Reporting of Significant Events. a. Pursuant to the provisions of this Section 5, the Company shall give, or cause to be given, notice to the entities set forth in subsection (f) of this Section 5, of the occurrence of any of the following events with respect to the Bonds: i. principal and interest payment delinquencies; ii. non-payment related defaults, if material; iii. modifications to rights of Bondholders, if material; iv. (1) bond calls, if material and (2) tender offers; v. defeasances; vi. rating changes; vii. adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the Bonds or other material events affecting the tax status of the Bonds; viii. unscheduled draws on debt service reserves reflecting financial difficulties; ix. unscheduled draws on credit enhancements reflecting financial difficulties; x. substitution of credit or liquidity providers, or their failure to perform; xi. release, substitution or sale of property securing repayment of the Bonds, if material; xii. bankruptcy, insolvency, receivership or similar event of the Company; xiii. consummation of a merger, consolidation or acquisition involving the Company or the sale of all or substantially all of the assets of the Company, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and xiv. appointment of a successor or additional trustee or the change of name of a trustee, if material. D-4 b. The Dissemination Agent shall, within five (5) Business Days of obtaining actual knowledge of the occurrence of any of the Listed Events, contact the Disclosure Representative of the Company, inform such Person of the event, and request that the Company promptly notify the Dissemination Agent in writing whether or not to report such event pursuant to subsection (f) of this Section 5. For purposes of this Disclosure Agreement, “actual knowledge” of the occurrence of such Listed Events shall mean actual knowledge by the officer of the Dissemination Agent with regular responsibility for the administration of matters related to this Agreement. The Dissemination Agent shall have no responsibility for the determination of the materiality of any such Listed Events. c. Whenever the Company obtains knowledge of the occurrence of a Listed Event, because of a notice from the Dissemination Agent or the Trustee pursuant to subsection (b) of this Section 5 or otherwise, the Company shall promptly determine if such event would be material under applicable federal securities laws; provided, however, that any listed event under subsections (a)(i), (iv)(2), (v), (vi), (vii), (viii), (ix), (x) and (xii) will always be deemed to be material. d. If the Company has determined that knowledge of the occurrence of a Listed Event would be material under applicable federal securities laws, the Company shall promptly notify the Dissemination Agent in writing. Such notice shall instruct the Dissemination Agent to report the occurrence pursuant to subsection (f) of this Section 5. e. If in response to a request under subsection (b) of this Section 5, the Company determines that the Listed Event would not be material under applicable federal securities laws, the Company shall so notify the Dissemination Agent in writing and instruct the Dissemination Agent not to report the occurrence pursuant to subsection (f) of this Section 5. f. If the Dissemination Agent has been instructed by the Company to report the occurrence of a Listed Event, the Dissemination Agent shall promptly file a notice of such occurrence with the Municipal Securities Rulemaking Board and the Repository with a copy to the Participating Underwriter, the Issuer and the Oversight Agent. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(iv) and (a)(v) of this Section 5 need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to the Owners of affected Bonds pursuant to the Indenture, and the Dissemination Agent shall, with or without direction from the Company, promptly file with the Repository a copy of any such notice that is delivered by the Trustee to such Owners of affected Bonds. 6. Termination and Assumption of Reporting Obligation. The Company’s obligations under this Disclosure Agreement shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Bonds, or upon the assignment of the Company’s obligations under the Loan Agreement. The Company, including any successor in interest to the Company, shall not transfer its obligations under the Loan Agreement to any Person unless such Person first assumes in writing the obligations of the Company under this Disclosure Agreement. If such termination or assumption occurs prior to the final maturity of the Bonds, the Company shall give notice of such termination or assumption in the same manner as for a Listed Event under Section 5(f) of this Disclosure Agreement. 7. Dissemination Agent. The Company may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Agreement, and may discharge any such Agent, with or without appointing a successor Dissemination Agent. The Dissemination Agent shall not be responsible in any manner for the content of any notice or report prepared by the Company pursuant to this Disclosure Agreement. If at any time there is not any other designated Dissemination Agent, or if the Dissemination Agent so appointed is unwilling or unable to perform the duties of Dissemination Agent hereunder, the Company shall be the Dissemination Agent. D-5 The initial Dissemination Agent shall be Wolf & Company Inc. The Dissemination Agent may resign by providing thirty (30) days written notice to the Trustee, the Authority and the Company. The Dissemination Agent shall be paid compensation by the Company for its services provided hereunder in accordance with its schedule of fees as agreed to between the Dissemination Agent and the Company from time to time and all reasonable expenses, legal fees and advances made or incurred by the Dissemination Agent in the performance of its duties hereunder. Any company succeeding to all or substantially all of the Dissemination Agent’s corporate trust business shall be the successor to the Dissemination Agent hereunder without the execution or filing of any paper or any further act. The Dissemination Agent shall not be responsible for the content of any report or notice prepared by the Company. The Dissemination Agent shall have no duty to prepare any information report nor shall the Dissemination Agent be responsible for filing any report not provided to it by the Company in a timely manner and in a form suitable for filing. 8. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement, the Company and the Dissemination Agent may amend this Disclosure Agreement (and the Dissemination Agent shall agree to any amendment so requested by the Company), provided, however, that the Dissemination Agent shall not be obligated to enter into any such amendment that modifies or increases its duties or obligations hereunder. Any provision of this Disclosure Agreement may be amended or 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) of this Disclosure Agreement, 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 the type of business conducted; b. The Disclosure Agreement, as amended or taking into account such waiver, would, in the opinion of nationally recognized bond counsel hired by the Issuer, have complied with the requirements of the Rule at the time of the original issuance of the Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and c. The amendment or waiver either (i) is approved by the Owners of the Bonds in the same manner as provided in the Indenture for amendments to the Indenture with the consent of Owners, or (ii) does not, in the opinion of nationally recognized bond counsel hired by the Issuer, materially impair the interests of the Owners or Beneficial Owners of the Bonds. In the event of any amendment or waiver of a provision of this Disclosure Agreement, the Company shall describe such amendment in the next Annual Report, and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type (or, in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by the Company. In addition, if the amendment relates to the accounting principles to be followed in preparing financial statements, (i) notice of such change shall be given in the same manner as for a Listed Event under Section 5(f) of this Disclosure Agreement, and (ii) the Annual Report for the year in which the change is made should present a comparison (in narrative form and also, if feasible, in quantitative form) between the financial statements as prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. 9. Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent the Company from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Agreement. If the Company chooses to include any information in any D-6 Annual Report or notice of occurrence of a Listed Event, in addition to that which is specifically required by this Disclosure Agreement, the Company shall have no obligation under this Agreement to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event. 10. Default. In the event of a failure of the Company or the Dissemination Agent to comply with any provision of this Disclosure Agreement, any Participating Underwriter, the Issuer or any Beneficial Owner or holder of the Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, but expressly excluding any action for money damages, to cause the Company or the Dissemination Agent, as the case may be, to comply with its obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed an Event of Default under the Indenture or the Loan Agreement, and the sole remedy under this Disclosure Agreement in the event of any failure of the Company or the Dissemination Agent to comply with this Disclosure Agreement shall be an action to compel performance. 11. Duties, Immunities and Liabilities of Trustee and Dissemination Agent. Article VIII of the Indenture is hereby made applicable to this Disclosure Agreement as if this Disclosure Agreement were (solely for this purpose) contained in the Indenture and the Dissemination Agent shall be entitled to the same protections, limitations from liability and indemnities afforded the Trustee thereunder. The Dissemination Agent (if other than the Trustee or the Trustee in its capacity as Dissemination Agent) shall have only such duties as are specifically set forth in this Disclosure Agreement, and the Company 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 misconduct. The Dissemination Agent and the Trustee shall have no duty or obligation to review any information provided to them hereunder and shall not be deemed to be acting in any fiduciary capacity for the Company, the Bondowners, or any other party. The obligations of the Company under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Bonds. 12. Notices. All notices, certificates or other communications required by this Disclosure Agreement shall be in writing and shall be sufficiently given and sent by: (i) mailed by certified mail, return receipt requested, postage prepaid; (ii) personal delivery, overnight delivery by a recognized courier or delivery service; or (iii) electronic transmission, which includes fax machine, email with an imaged or scanned attachment (such as a .pdf) or other similar electronic transmission, with confirmation of receipt of such transmission and shall be deemed given on the second day following the date on which the same have been personally delivered or mailed or when delivered when sent by electronic transmission to the addresses set forth below:: To the Issuer: Independent Cities Finance Authority Post Office Box 6740 Lancaster, California 93539-6740 Attention: Executive Director To the Company: Millennium Housing, LLC 20 Pacifica, Suite 1470 Irvine, CA 92618 Attention: President To the Dissemination Agent: Wolf & Company Inc. 1100 S. Flower Street, Suite 3300 Los Angeles, California 90015 D-7 Attention: Wesley R. Wolf To the Oversight Agent: Wolf & Company Inc. 1100 S. Flower Street, Suite 3300 Los Angeles, California 90015 Attention: Wesley R. Wolf To the Participating Underwriter: Newcomb Williams Financial Group 6842 Embarcadero Lane Carlsbad, California 92011 Attention: Pamela Newcomb To the Trustee: MUFG Union Bank, N.A. 120 S. San Pedro Street, 4th Floor Los Angeles, CA 90012 Attention: Corporate Trust Department Email: Timothy.Miller@unionbank.com and AccountAdministration-CorporateTrust@unionbank.com Any Person may, by written notice to the other Persons listed above, designate a different address or telephone number(s) to which subsequent notices or communications should be sent. 13. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of the Issuer, the Company, the Trustee, the Dissemination Agent, the Participating Underwriter, and Owners and Beneficial Owners from time to time of the Bonds, and shall create no rights in any other Person. 14. Counterparts. This Disclosure Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. 15. Severability. No provision of this Disclosure Agreement that is held to be inoperative, unenforceable or invalid shall affect the remaining provisions, and to this end all provisions hereof are hereby declared to be severable. 16. Binding Effect; Successors. This Disclosure Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their successors and assigns. Reference to any party herein shall be deemed to include such party’s successors and assigns, and all covenants and agreements contained in this Disclosure Agreement by or on behalf of any party hereto shall bind and inure to the benefit of such party’s successors and assigns whether so expressed or not. 17. Entire Agreement. This Disclosure Agreement constitutes the entire agreement between the parties and supersedes all prior agreements and understandings relating to the subject matter hereof. 18. Governing Law. This Disclosure Agreement shall be governed according to the laws of the State of California applicable to contracts made and performed in California. 19. Non-Assignment. No party hereto may assign its rights and benefits hereunder or delegate its duties hereunder to any other Person, except as may be provided herein. D-8 IN WITNESS WHEREOF, the parties hereto have executed this Continuing Disclosure Agreement as of the date first above written. Millennium Housing, LLC, a California limited liability company Millennium Housing Corporation, a California nonprofit public benefit corporation, its sole member By: President Wolf & Company Inc., as Dissemination Agent By: Authorized Officer D-9 EXHIBIT A NOTICE OF FAILURE TO FILE ANNUAL REPORT Name of Obligated Party: Millennium Housing, LLC (the “Company”) Name of Bonds: $36,675,000* Independent Cities Finance Authority Mobile Home Park Revenue Refunding Bonds (San Juan Mobile Estates) Series 2015 Date of Delivery: July __, 2015 NOTICE IS HEREBY GIVEN that the Company has not provided an Annual Report with respect to the above-named Bonds as required by Section 3 of the Continuing Disclosure Agreement dated as of July 1, 2015 between the Company and Wolf & Company Inc.. The Company anticipates that the Annual Report will be filed by ______________________. Dated:______________________ By: Wolf & Company Inc., as Dissemination Agent, on behalf of the Company cc: Millennium Housing, LLC Independent Cities Finance Authority THIS PAGE INTENTIONALLY LEFT BLANK