$4,830,000 CITY OF LINCOLN COMMUNITY FACILITIES DISTRICT NO (LAKESIDE) IMPROVEMENT AREA NO. 1 SPECIAL TAX BONDS, SERIES 2013

Transcription

1 NEW ISSUE BOOK-ENTRY ONLY NOT RATED In the opinion of Orrick, Herrington & Sutcliffe llp, Bond Counsel to the City, based upon an analysis of existing laws, regulations, rulings and court decisions and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. In the further opinion of Bond Counsel, interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. Bond Counsel expresses no opinion regarding any other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest on, the Bonds. See TAX MATTERS herein. $4,830,000 CITY OF LINCOLN COMMUNITY FACILITIES DISTRICT NO (LAKESIDE) IMPROVEMENT AREA NO. 1 SPECIAL TAX BONDS, SERIES 2013 Dated: Date of Delivery Due: September 1, as shown below The City of Lincoln Community Facilities District No (Lakeside) Improvement Area No. 1 Special Tax Bonds, Series 2013 (the Bonds ) are being issued under the Mello-Roos Community Facilities Act of 1982 (the Act ) to (a) fund certain public infrastructure and the payment of certain PFE Fees necessary for the development of the City of Lincoln Community Facilities District No (Lakeside) Improvement Area No. 1 (the Improvement Area ) designated within the City of Lincoln Community Facilities District No (Lakeside) (the District ), (b) make a deposit to the Bond Reserve Fund, and (c) pay the costs of issuing the Bonds. See ESTIMATED SOURCES AND USES OF FUNDS herein. Bonds may be purchased in the principal amount of $5,000 or integral multiples thereof. Interest is payable semiannually on March 1 and September 1 of each year, commencing March 1, The Bonds are being issued as fully registered bonds in book-entry only form, initially registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ). Purchasers will not receive certificates representing their interest in the Bonds. See Appendix F BOOK-ENTRY SYSTEM. The Bonds are subject to redemption prior to maturity as described herein. See THE BONDS Redemption herein. The Bonds are secured by a pledge of and are payable from the Net Special Tax Revenues (as defined herein), consisting primarily of Special Taxes (as defined herein) to be levied on certain real property within the Improvement Area, net of Priority Administrative Expenses, but including any prepayments thereof and any amounts received, net of costs of collection, as a result of foreclosure or other actions by the City of Lincoln (the City ) to collect delinquent Special Taxes, and amounts held in certain funds pursuant to the Indenture (as defined herein). See SECURITY FOR THE BONDS. THE PRINCIPAL OF AND INTEREST AND REDEMPTION PREMIUMS, IF ANY, ON THE BONDS ARE LIMITED OBLIGATIONS PAYABLE SOLELY FROM THE NET SPECIAL TAX REVENUES. THE CITY IS NOT OBLIGATED TO PAY THE BONDS EXCEPT FROM THE NET SPECIAL TAX REVENUES. THE GENERAL FUND OF THE CITY IS NOT LIABLE AND THE FULL FAITH AND CREDIT OF THE CITY IS NOT PLEDGED FOR THE PAYMENT OF THE PRINCIPAL OF OR INTEREST OR REDEMPTION PREMIUMS, IF ANY, ON THE BONDS. NO TAX OR ASSESSMENT OTHER THAN THE SPECIAL TAX SHALL EVER BE LEVIED OR COLLECTED TO PAY THE PRINCIPAL OF OR INTEREST OR REDEMPTION PREMIUMS, IF ANY, ON THE BONDS. THE BONDS ARE NOT SECURED BY A LEGAL OR EQUITABLE PLEDGE OF OR CHARGE, LIEN OR ENCUMBRANCE UPON ANY OF THE PROPERTY OF THE CITY OR ANY OF ITS INCOME OR RECEIPTS EXCEPT THE MONEY HELD IN THE SPECIAL TAX FUND PURSUANT TO THE INDENTURE. NEITHER THE PAYMENT OF THE PRINCIPAL OF OR THE INTEREST OR REDEMPTION PREMIUMS, IF ANY, ON THE BONDS IS A GENERAL DEBT, LIABILITY OR OBLIGATION OF THE CITY. MATURITY SCHEDULE $840,000 Serial Bonds Maturity Date (September 1) Principal Amount $45,000 10,000 15,000 20,000 25,000 35,000 40,000 Interest Rate 1.00% Price or Yield 0.85% Maturity Date (September 1) Principal Amount $50,000 55,000 65,000 75,000 85,000 95, , ,000 Interest Rate 4.10% Yield 100% $805, % Term Bonds Maturing September 1, 2033, Price 100% $1,275, % Term Bonds Maturing September 1, 2038, Price 100% $1,910, % Term Bonds Maturing September 1, 2043, Price 100% Investment in the Bonds involves risks which may not be appropriate for some investors. See SPECIAL RISK FACTORS for a discussion of certain risk factors that should be considered, in addition to the other matters set forth herein, in evaluating the investment quality of the Bonds. This cover page contains information for general reference only. It is not a complete summary of the Bonds. Investors should read the entire Official Statement to obtain information essential to the making of an informed investment decision. The Bonds are offered when, as and if issued and delivered to the Underwriter, subject to the approval as to their validity and certain other legal matters by Orrick, Herrington & Sutcliffe llp, Bond Counsel to the City, and subject to certain other conditions. Orrick, Herrington & Sutcliffe llp has also served as Disclosure Counsel to the City. Certain legal matters will be passed upon for the City by Kronick Moskovitz Tiedemann & Girard, Sacramento, California, City Attorney, and for the Underwriter by Jones Hall, A Professional Corporation. It is anticipated that the Bonds will be available for delivery in book-entry form through the facilities of DTC on or about October 16, This Official Statement is dated October 2, 2013.

2 No dealer, broker, salesperson or other person has been authorized by the City or the Underwriter to give any information or to make any representations with respect to the City, the District, the Improvement Area or the Bonds other than the information contained herein and, if given or made, such other information or representation must not be relied upon as having been authorized by the City 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. Certain of the information set forth herein has been obtained from sources which the City believes to be reliable, but such information is not guaranteed as to accuracy or completeness. All summaries of the Indenture or other documents are made subject to the provisions thereof and do not purport to be complete statements of any or all of such provisions. Reference is hereby made to such documents on file with the City for further information in connection therewith. This Official Statement is submitted in connection with the sale of the Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose. Certain statements included or incorporated by reference in this Official Statement constitute forward-looking statements. Such statements are generally identifiable by the terminology used such as plan, expect, estimate, budget or similar words. 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 Underwriter has provided the following sentence for inclusion in this Official Statement. The Underwriter has reviewed the information in this Official Statement in accordance with, and as a part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE UNDERWRITER MAY OFFER AND SELL THE BONDS TO CERTAIN DEALERS AND DEALER BANKS AND BANKS ACTING AS AGENT AT PRICES LOWER THAN THE PUBLIC OFFERING PRICES STATED ON THE COVER PAGE HEREOF AND SUCH PUBLIC OFFERING PRICES MAY BE CHANGED FROM TIME TO TIME BY THE UNDERWRITER. PIPER JAFFRAY & CO. SINCE MEMBER SIPC AND NYSE.

3 CITY OF LINCOLN, CALIFORNIA CITY COUNCIL Stan Nader Mayor Gabriel Hydrick Mayor Pro Tem Paul Joiner Councilmember Peter Gilbert Councilmember Spencer Short Councilmember CITY STAFF Jim Estep City Manager Steve Ambrose Financial Analyst Mark Miller Director of Community Development Patricia Avila City Clerk PROFESSIONAL SERVICES Trustee U.S. Bank National Association San Francisco, California Financial Advisor Public Financial Management, Inc. San Francisco, California Special Tax Consultant General Government Management Services Rancho Mirage, California Appraiser Seevers, Jordan, Ziegenmeyer Rocklin, California Bond and Disclosure Counsel Orrick, Herrington & Sutcliffe LLP

4 [THIS PAGE INTENTIONALLY LEFT BLANK]

5 TABLE OF CONTENTS Page INTRODUCTION... 1 THE BONDS... 7 Description of the Bonds... 7 Redemption... 7 Transfer and Exchange of Bonds Debt Service Schedule ESTIMATED SOURCES AND USES OF FUNDS THE DEVELOPER THE DISTRICT AND THE IMPROVEMENT AREA General Formation of District, Designation of the Improvement Area and Levy of Special Taxes Plan of Development Ownership of Property Public Infrastructure Developer s Estimated Plan of Finance Development Entitlements Permits, Approvals and Environmental Issues Water Supply Wastewater Treatment Capacity Competing Developments Property Values Direct and Overlapping Debt Expected Tax Burden Other Potential Debt Property Tax Status Estimated Value-to-Bond Debt Ratio PUBLIC INFRASTRUCTURE IMPROVEMENTS Acquisition Agreement PFE Fees Summary of Cost and Status of Improvements SECURITY FOR THE BONDS General The Special Taxes Rate and Method of Apportionment of Special Tax City Policy Regarding Assessments and Special Taxes Mandatory Partial Prepayment of Special Tax Funds and Accounts; Flow of Funds No Issuance of Additional Parity Bonds Covenant for Superior Court Foreclosure SPECIAL RISK FACTORS... 35

6 Risks of Real Estate Secured Investments Generally Maximum Special Tax Rates Insufficiency of Special Taxes Limited Obligation To Pay Bonds Non-Recourse Obligation to Pay Special Taxes Special Tax Delinquencies Failure to Develop Construction Risk Concentration of Ownership and Risks Relating to Future Owners Appraisal Risks Bankruptcy Disclosures to Future Purchasers Billing of Special Taxes Endangered and Threatened Species Natural Disasters Hazardous Substances Payments by FDIC Parity Taxes and Special Assessments Value-to-Bond Debt Ratio Limitations on Remedies Right to Vote on Taxes Act Loss of Tax Exemption IRS Audit of Tax-Exempt Bond Issues FINANCIAL ADVISOR LITIGATION CONTINUING DISCLOSURE LEGAL OPINIONS TAX MATTERS UNDERWRITING NO RATINGS MISCELLANEOUS APPENDIX A APPRAISAL APPENDIX B RATE AND METHOD OF APPORTIONMENT OF SPECIAL TAX APPENDIX C PROPOSED FORM OF OPINION OF BOND COUNSEL APPENDIX D SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE APPENDIX E FORMS OF CONTINUING DISCLOSURE UNDERTAKINGS APPENDIX F BOOK-ENTRY SYSTEM

7 OFFICIAL STATEMENT $4,830,000 CITY OF LINCOLN COMMUNITY FACILITIES DISTRICT NO (LAKESIDE) IMPROVEMENT AREA NO. 1 SPECIAL TAX BONDS, SERIES 2013 INTRODUCTION The purpose of this Official Statement, including the cover, table of contents and the Appendices, is to provide certain information concerning the $4,830,000 aggregate principal amount of City of Lincoln Community Facilities District No (Lakeside) Improvement Area No. 1 Special Tax Bonds, Series 2013 (the Bonds ). This introduction is not a summary of this Official Statement. It is only a brief description of and guide to, and is qualified by, the more complete and detailed information contained in the entire Official Statement, including the cover page and Appendices hereto, and the documents summarized or described herein. Investors should review the entire Official Statement. The sale and delivery of the Bonds to investors is made only by means of the entire Official Statement. The Bonds are being issued under the Mello-Roos Community Facilities Act of 1982 (the Act ) to (a) fund certain public infrastructure and the payment of certain PFE Fees necessary for the development of the City of Lincoln Community Facilities District No (Lakeside) Improvement Area No. 1 (the Improvement Area ) designated within the City of Lincoln Community Facilities District No (Lakeside) (the District ), (b) make a deposit to the Bond Reserve Fund, and (c) pay the costs of issuing the Bonds. See ESTIMATED SOURCES AND USES OF FUNDS herein. Bonds may be purchased in principal amounts of $5,000 or integral multiples thereof. Interest is payable semiannually on March 1 and September 1 of each year, commencing March 1, The Bonds are being issued as fully registered bonds in book-entry only form, initially registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ). Purchasers will not receive certificates representing their interest in the Bonds. See Appendix F BOOK ENTRY SYSTEM. The Bonds are subject to redemption prior to maturity as described herein. See THE BONDS Redemption herein. The Bonds will be issued in accordance with the provisions of an indenture, dated as of October 1, 2013 (the Indenture ). The City of Lincoln (the City ) has authorized the issuance of special tax bonds for the Improvement Area in an aggregate principal amount not to exceed $5,000,000. Following the issuance of the Bonds, no additional bonds are permitted under the existing bond authorization for the Improvement Area, other than refunding bonds. See SECURITY FOR THE BONDS Additional Bonds. The District encompasses all of the master-planned community known as Lakeside Six, consisting of approximately 90 gross acres of property located in the City. The District consists of the Improvement Area and the City of Lincoln Community Facilities District No (Lakeside) Improvement Area No. 2 ( Improvement Area 2 ). Any lien of special taxes imposed on property within the Improvement Area 2 will not secure or be available to pay debt service on the Bonds. All 149 units within the Improvement Area are anticipated to be subject to Special Taxes. See THE DISTRICT AND THE IMPROVEMENT AREA General. John Mourier Construction, Inc., a 1

8 California corporation, is the owner of the land within the Improvement Area (the Developer ). See THE DEVELOPER. The Developer plans to develop approximately 149 low-density homes on its fully improved residential lots within the Improvement Area. The City of Lincoln currently owns approximately 13.7 acres of unimproved single-family residential-zoned property to the west of the Improvement Area that was previously planned as a city park site. Although the City currently expects to sell the property, there can be no assurances that such sale will take place in a timely manner. In addition, the Developer is actively developing City of Lincoln Community Facilities District No (Lakeside) Improvement Area No. 2, which consists of 257 single family lots. As of July 2013, the Developer has built and closed escrow with homebuyers on 131 of the 154 detached low-density residential units and all of the 103 mid density residential units in Improvement Area No. 2. Maps showing the general location of the City, the District and the Improvement Area in particular appear on the pages following this introduction. For additional information concerning the Improvement Area and its development, see THE DISTRICT AND THE IMPROVEMENT AREA. Pursuant to the Act, the qualified electors are the owners of all taxable land within the Improvement Area and have approved the levy of a special tax (the Special Tax ) on certain real property within the boundaries of the Improvement Area. See THE DISTRICT AND THE IMPROVEMENT AREA Formation of District, Designation of Improvement Area and Levy of Special Taxes. The Bonds are limited obligations payable solely from and secured by a pledge of Net Special Tax Revenues, and amounts held in certain funds pursuant to the Indenture. See SECURITY FOR THE BONDS. Net Special Tax Revenues is defined in the Indenture as proceeds of the Special Taxes received by or on behalf of the Improvement Area, including any prepayments thereof, interest and penalties thereon and proceeds of the redemption or sale of property sold as a result of foreclosure of the lien of the Special Taxes, net of any costs of collection and enforcement, and net of the Priority Administrative Expenses. The Bonds will be further secured by amounts on deposit in a Bond Reserve Fund. See SECURITY FOR THE BONDS Bond Reserve Fund. THE PRINCIPAL OF AND INTEREST AND REDEMPTION PREMIUMS, IF ANY, ON THE BONDS ARE LIMITED OBLIGATIONS PAYABLE SOLELY FROM THE NET SPECIAL TAX REVENUES. THE CITY IS NOT OBLIGATED TO PAY THE BONDS EXCEPT FROM THE NET SPECIAL TAX REVENUES. THE GENERAL FUND OF THE CITY IS NOT LIABLE AND THE FULL FAITH AND CREDIT OF THE CITY IS NOT PLEDGED FOR THE PAYMENT OF THE PRINCIPAL OF OR INTEREST OR REDEMPTION PREMIUMS, IF ANY, ON THE BONDS. NO TAX OR ASSESSMENT OTHER THAN THE SPECIAL TAX SHALL EVER BE LEVIED OR COLLECTED TO PAY THE PRINCIPAL OF OR INTEREST OR REDEMPTION PREMIUMS, IF ANY, ON THE BONDS. THE BONDS ARE NOT SECURED BY A LEGAL OR EQUITABLE PLEDGE OF OR CHARGE, LIEN OR ENCUMBRANCE UPON ANY OF THE PROPERTY OF THE CITY OR ANY OF ITS INCOME OR RECEIPTS EXCEPT THE MONEY HELD IN THE SPECIAL TAX FUND PURSUANT TO THE INDENTURE. NEITHER THE PAYMENT OF THE PRINCIPAL OF OR THE INTEREST OR REDEMPTION PREMIUMS, IF ANY, ON THE BONDS IS A GENERAL DEBT, LIABILITY OR OBLIGATION OF THE CITY. Certain risk factors should be considered, in addition to other matters set forth herein, in evaluating the investment quality of the Bonds. See SPECIAL RISK FACTORS. Brief descriptions of the Bonds, the Indenture, the security for the Bonds, the District, the Improvement Area, the status of development within the Improvement Area and certain other information are included in this Official Statement. Such descriptions and information do not purport to be comprehensive or definitive. The descriptions herein of the Bonds, the Indenture and other documents are qualified in their entirety by reference to the complete terms thereof. Capitalized terms used but not defined herein have the meanings given in the Indenture, certain provisions of which, including certain 2

9 definitions, are summarized in Appendix D hereto. Copies of the Indenture and such other documents may be obtained from the office of the City Clerk of the City of Lincoln, City Hall, 600 Sixth Street, Lincoln, California [Remainder of Page Intentionally Left Blank] 3

10 Regional Map Nicolaus Rd. N Y ROSEVILLE SACRAMENTO 4

11 BOOK l OF COMMUNITY FACILITIES DISTRICTS, PAGE sq PROPOSED BOUNDARIES OF CITY of LINCOLN COMMUNITY FACILITIES DISTRICT No. 200G?-1 (LAKESIDE) CITY OF LINCOLN, COUNTY OF PLACER, STATE OF CALIFORNIA r DISTRICT BOUNDARY A PORTION OF SECTION B, T. 12 N., R. ~ E., M.D.M., BEING LOTS I, 3, 4, 5, ~ AND LOT 'A' AS SI-jONN ON BOOK AA OF MAPS, AT PAGE %, PLACER COUNTy RECORDS AND ALL OF TI-jAT CERTAIN "RESULTANT PARCEL", DESCRIBED IN DOCUMENT BB OFFICIAL RECORDS OF PLACER COUNTy, AND ALL OF TI-jAT CERTAIN PARCEL 'A' AS DESCRIBED IN DOCUMENT 20~ B, OFFICIAL RECORDS OF PLACER COUNTY, CITY OF LINCOLN, COUNTY OF PLACER, STATE OF CALIFORNIA r DISTRICT BOUNDARY SEPTEMBER, 2CJ06 LAND DEVELOPMENT SERVICES, INC, ROCKLlN I CALIFORNIA 5 ", '...:. ~ ':'..:.: "i- "i- "i-"i- "i- "i- J"i-"i- "i- "i- ~"i- "i- "i- "i-"i- "i- "i- "i-"i- "i-"i-"i- "i-"i-"i-"i- "'.. " '. -;.'. "i-"i-... "i-"i-"i- PROPOSED..."i- "i- J LOT 4... "i- "i- '''ANNEXATION'~'>... "i- "i- (AA ~APS 36) ~"i- "i-"i- "i- i. AREA No.,,, +IMPROVEMENT AREAlji'~#~~,':',:,:',:~,O~?',', '..,,:>... _... ::;.' ::-:"'-',,' '~. :-;:.:>,.,:-,,-.'~ ': :"", =fz~~ ~ "..:v- J-II"" 1 tl ~~ / IMPROVEMENT AREA No.2 ~ LOT 3 (M MAPS 36) <;j\'!// ~/- ~ [2:J [,'>:>1 ~ DISTRICT BOUNDARY PROPOSED -ANNEXATION-. AREA No TAX ZONE A of IMPROVEMENT AREA No.2 (LOT 3' 0) TAX ZONE B of IMPROVEMENT AREA No. 2 (LOT 4) IMPROVEMENT AREA No. I BOUNDARY TAX ZONE C, PROPOSED ANNEXATiON AREA No. of IMPROV'EMENT AREA No. (RESULTANT PARCEL 'A' DOC. :IOQj; ) TAX ZONE D, PROPOSED ANNEXATION AREA No, 2 of IMPROVEMENT AREA No. 2 (RE5ULTAIfT PARCa, DOC. 200;-7328/1) LOT 1 (AA MAPS 36) AssE55QR PARCEl NUMBERS lmprq,lfmfnt AREA Nq D:21-56I-07Q IMPROVEMENT AgEA Nq 021-5' ' '-Hl '-1-0&3 02'-5' ' '-I-oe<. PRQPQ5FD ANNEXATICt.t$ tq IMPROVEMENT AREA Nq (No. t).and all of that certain Percel la' CI9 described in Doeur-nent ~ &~ Official Records of Placer CotKlty, Clty of Lincoln, County of Placer, State of California ('*'. 2) 021-5' CITY CI ERK'S STATEMENT ~""~Ir,~ DAlE CITY CI ERK CERTIFICATION I HEREBY CERTIFY THAT THIS MAP... S APPROVED BY THE CIT'( COUNCIL ~ET~~~~ O:;INCOL.!!ll+~rf~EETI,~~~'ITSHELD ON R 5CLUTION 1-1:). '2C12!!O.- "2.0/ ~~l~~~ DAlE RECORDER'S STATEMENT F'LED THIS J.S#' DAY OF ()Cjr;},q-, AT THE HOUR OF J~:.3l O'CLOCK L.M. IN BOOK L OF MAPS OF ASSESSMENT AND COMMUNITY FACILITIES DISTRICTS AT PAGE ;}.!L IN THE OFFICE OF THE COUNTY RECORDER OF THE COUNTY OF PLACER, STATE OF CALIFORNIA DOC..p.).Mft- DJN /lb FEE, ~ JIM McCAULEY PLACER COUN I Y REWRDER BY, c!. faxv DEPUTY sheet I of I

12 6

13 THE BONDS Description of the Bonds The Bonds will be issued pursuant to the Act and the Indenture as fully registered Bonds without coupons in denominations of $5,000, or any integral multiple of $5,000 (not exceeding the principal amount maturing at any one time). The Bonds will be issued in book-entry only form. The Depository Trust Company, New York, New York will act as securities depository for the Bonds. So long as the Bonds are held in book-entry only form, principal of and interest on the Bonds will be paid directly to DTC for distribution to the beneficial owners of the Bonds in accordance with DTC s procedures. See Appendix F BOOK ENTRY SYSTEM. The Bonds will be dated the date of delivery and will mature on September 1 in the years and in the principal amounts shown on the cover of this Official Statement. The Bonds will bear interest at the per annum rates shown on the cover of this Official Statement. Such interest will be payable semiannually on March 1 and September 1 of each year, commencing March 1, 2014 (each, an Interest Payment Date ) and will be computed on the basis of a 360-day year consisting of twelve 30-day months. Each Bond will bear interest from the Interest Payment Date next preceding the date of authentication thereof, unless (i) they are authenticated on a day during the period from the sixteenth (16th) day of the calendar month next preceding an Interest Payment Date to such Interest Payment Date, both days inclusive, in which event they will bear interest from such Interest Payment Date, or (ii) they are authenticated on a day on or before the fifteenth (15th) day of the month preceding the first Interest Payment Date, in which event they will bear interest from their dated date. Interest and redemption premiums, if any, on, and the principal of, the Bonds will be payable in lawful money of the United States of America at the principal corporate trust office of the Trustee. Payment of interest on the Bonds due on or before the maturity or prior redemption thereof will be made only to the person named in the Trustee s registration books as the registered owner thereof at the close of business on the 15th day of the month next preceding the Interest Payment Date. Interest will be paid by check mailed by first class mail to the registered owner at the address appearing in such registration books, except that a registered owner of $1,000,000 or more in principal amount of Bonds then Outstanding may elect to receive payment on any Interest Payment Date by wire transfer of immediately available funds to an account in a bank or trust company or savings bank that is a member of the Federal Reserve System and that is located in the United States of America by delivering written instructions to the Trustee at least 15 days before each such Interest Payment Date. Payment of the principal of and redemption premium, if any, on the Bonds shall be made only to the person named in such registration books as the registered owner thereof. Principal and redemption premiums, if any, will be paid only on the surrender of the Bonds at the principal corporate trust office of the Trustee at maturity or on redemption prior to maturity. So long as Cede & Co. is the registered owner of the Bonds, payments of the principal of, premium, if any, and interest on the Bonds will be made directly to DTC, or its nominee, Cede & Co., by the Trustee. Disbursements of such payments to DTC s Participants is the responsibility of DTC and disbursements of such payments to the Beneficial Owners is the responsibility of DTC s Participants and Indirect Participants, as more fully described herein. See Appendix F BOOK ENTRY SYSTEM, herein. Redemption Extraordinary Redemption from Prepayment of Special Tax. The Bonds are subject to extraordinary redemption by the City prior to their respective maturity dates as a whole or in part on any Interest Payment Date solely from money derived by the City from prepayments of the Special Tax under the Law at the following redemption prices (computed upon the principal amount of the Bonds or 7

14 portions thereof called for redemption), together with accrued interest to the date fixed for redemption, as set forth as follows: 103% if redeemed on any Interest Payment Date between March 1, 2014, and March 1, 2021, inclusive; 102% if redeemed on September 1, 2021, or March 1, 2022; 101% if redeemed on September 1, 2022, or March 1, 2023; 100% if redeemed on September 1, 2023 or any Interest Payment Date thereafter. Transfers of property ownership and certain other circumstances could result in prepayments of the Special Tax. Such prepayments would result in redemption of all or a portion of the Bonds prior to their stated maturity, at the redemption prices corresponding to the redemption dates as shown above, and would thus cause a proportionate reduction of the amount on deposit in the Bond Reserve Fund. See SECURITY FOR THE BONDS Funds and Accounts; Flow of Funds herein. Optional Redemption. The bonds maturing before September 1, 2019, are not subject to redemption at the option of the City. The Bonds maturing on or after September 1, 2019, are subject to optional redemption by the City prior to their respective maturity dates as a whole or in part on any Interest Payment Date on or after September 1, 2018, from money derived by the City from any source other than Mandatory Sinking Account Payments (defined herein) or prepayments of the Special Tax (described above), at the following redemption prices (computed upon the principal amount of the Bonds or portions thereof called for redemption), together with accrued interest to the date fixed for redemption, as set forth as follows: 103% if redeemed on any Interest Payment Date between September 1, 2018, and March 1, 2021, inclusive; 102% if redeemed on September 1, 2021, or March 1, 2022; 101% if redeemed on September 1, 2022, or March 1, 2023; 100% if redeemed on September 1, 2023 or any Interest Payment Date thereafter. Mandatory Redemption. The City will establish and maintain with the Trustee the 2033 Sinking Account in the Redemption Fund for the Bonds maturing on September 1, 2033 (the 2033 Term Bonds ), to receive payments (the 2033 Mandatory Sinking Account Payments ) for the mandatory redemption of the 2033 Term Bonds. The 2033 Term Bonds are subject to mandatory redemption by the City prior to their maturity date in part on any September 1 on and after September 1, 2029, at the principal amount thereof together with accrued interest thereon to the date fixed for redemption, solely from 2033 Mandatory Sinking Account Payments deposited into the 2033 Term Bonds Sinking Account, as follows: Mandatory Sinking Account Payment Date (September 1) 2033 Term Bonds Maturing September 1, 2033 Mandatory Sinking Account Payment 2029 $130, ,000 8

15 Mandatory Sinking Account Payment Date (September 1) Mandatory Sinking Account Payment , , * 195,000 *Maturity Date. The City will establish and maintain with the Trustee the 2038 Sinking Account in the Redemption Fund for the Bonds maturing on September 1, 2038 (the 2038 Term Bonds ), to receive payments (the 2038 Mandatory Sinking Account Payments ) for the mandatory redemption of the 2038 Term Bonds. The 2038 Term Bonds are subject to mandatory redemption by the City prior to their maturity date in part on any September 1 on and after September 1, 2034, at the principal amount thereof together with accrued interest thereon to the date fixed for redemption, solely from 2038 Mandatory Sinking Account Payments deposited into the 2038 Term Bonds Sinking Account, as follows: Mandatory Sinking Account Payment Date (September 1) 2038 Term Bonds Maturing September 1, 2038 Mandatory Sinking Account Payment 2034 $ 215, , , , * 300,000 *Maturity Date. The City will establish and maintain with the Trustee the 2043 Sinking Account in the Redemption Fund for the Bonds maturing on September 1, 2043 (the 2043 Term Bonds ), to receive payments (the 2043 Mandatory Sinking Account Payments ) for the mandatory redemption of the 2043 Term Bonds. The 2043 Term Bonds are subject to mandatory redemption by the City prior to their maturity date in part on any September 1 on and after September 1, 2039, at the principal amount thereof together with accrued interest thereon to the date fixed for redemption, solely from 2043 Mandatory Sinking Account Payments deposited into the 2043 Term Bonds Sinking Account, as follows: Mandatory Sinking Account Payment Date (September 1) 2043 Term Bonds Maturing September 1, 2043 Mandatory Sinking Account Payment , , , , * 445,000 *Maturity Date. 9

16 Selection of Bonds for Redemption. If less than all the Outstanding Bonds are to be redeemed at the option of the City or from prepayments of the Special Tax, the City will select the maturity dates from which the Bonds shall be redeemed, and if less than all the Outstanding Bonds of any one maturity are to be redeemed at any one time, the Trustee will select the Bonds of such maturity or the portions thereof to be redeemed in integral multiples of five thousand dollars ($5,000) by lot in any manner that it deems appropriate. Notice of Redemption. The Trustee will mail a notice of redemption to the registered owners of the Bonds selected for redemption, at the addresses appearing on the registration books, at least 30 days but not more than 60 days prior to the date fixed for redemption; however, neither the failure to receive a notice of redemption nor any immaterial defect therein shall affect the sufficiency or validity of the redemption proceedings. A notice of optional redemption or extraordinary redemption may be rescinded upon notice of rescission given in the same manner prior to the date fixed for redemption. So long as the Bonds are held in book-entry only form, the Trustee will send notices of redemption exclusively to DTC, as registered owner of the Bonds, and will not send any such notices to any beneficial owners. DTC is to distribute such notices to the beneficial owners of the Bonds in accordance with its procedures. See Appendix F BOOK-ENTRY SYSTEM. Effect of Redemption of Bonds. If notice of redemption has been duly given and has not been rescinded as described in the preceding paragraph, and the Trustee holds money for the payment of the principal of and redemption premiums, if any, together with interest to the redemption date on, the Bonds to be redeemed, then on the redemption date such Bonds to be redeemed shall become due and payable, and from and after the redemption date interest on the Bonds to be redeemed will cease to accrue and the Holders of such Bonds shall have no rights except to receive payment of principal, redemption premiums, if any, and interest accrued to the redemption date. Such Bonds are required to be surrendered on the redemption date at the address or addresses of the Trustee so designated. If any Bond chosen for redemption will not be redeemable in whole, upon presentation of such Bond for redemption there will be issued in lieu of the unredeemed portion of principal thereof a new Bond or Bonds of the same maturity date, of authorized denominations equal in aggregate principal amount to such unredeemed portion. Transfer and Exchange of Bonds So long as DTC or Cede & Co. is the registered owner of the Bonds, transfers of beneficial interests in the Bonds shall be according to the DTC book-entry system, as more fully described herein. See Appendix F BOOK-ENTRY SYSTEM. The Indenture provides that the Trustee will keep at its Principal Corporate Trust Office sufficient books for the transfer and exchange of the Bonds, which books at all times during normal business hours with reasonable prior notice shall be open to inspection by the City or by any Owner. Any Bond may, in accordance with its terms, be transferred or exchanged on such books by the person in whose name it is registered, in person or by his or her duly authorized attorney, upon payment by the Owner requesting such transfer or exchange of any tax or other governmental charge required to be paid with respect to such transfer or exchange, and upon surrender of such Bond for cancellation accompanied by delivery of a duly executed written instrument of transfer or exchange in a form approved by the Trustee. Whenever any Bond or Bonds shall be surrendered for transfer or exchange, the City shall execute and the Trustee shall authenticate and deliver a new Bond or Bonds of the same maturity date and of authorized denominations for the same aggregate principal amount, except that neither the City nor the Trustee shall be required (i) to transfer or exchange any Bonds during the 15-day period prior to the selection of any Bonds for redemption, or (ii) to transfer or exchange any Bond which has been selected for redemption in whole or in part, except the unredeemed portion of such Bond selected for redemption in part, from and after the day that such Bond has been selected for redemption in whole or in part. 10

17 Debt Service Schedule The debt service schedule for the Bonds is set forth as follows: Year Ending September 1 Principal Interest Debt Service 2014 $45,000 $227, $272, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,000 90, , ,000 70, , ,000 48, , ,000 25, ,

18 ESTIMATED SOURCES AND USES OF FUNDS table: The estimated sources and uses of funds with respect to the Bonds are set forth in the following Sources: Principal Amount of Bonds $4,830, Plus: Original Issue Premium Total Sources 4,830, Uses: Deposit to Improvement Area Acquisition Fund $4,051, Deposit Bond Reserve Fund 448, Costs of Issuance (1) 330, Total Uses 4,830, (1) Includes issuance fees and expenses, legal fees, underwriter's discount, financial advisory fees, printing costs and other issuance costs. THE DEVELOPER The information in this section has been provided by the Developer. The City and the Underwriter believe this information to be reliable, but can give no assurances that it is accurate or complete. As of September 1, 2013, John Mourier Construction, Inc., a California corporation, is the owner of all of the land within the Improvement Area (the Developer ). The Developer has been doing business in the greater Sacramento area as a homebuilder since The Developer has averaged annual new home sales volume in excess of $140 million for the past five years and is currently ranked as the 118 th largest homebuilder by Professional Builder magazine. The Developer has completed approximately 3,000 homes for the ten year period ended December 31, 2012 and, in recent years, has built new homes per year. The Developer initially acquired the land within the Improvement Area in May In April 2009, the Developer sold the property to an unrelated third party subject to an option re-purchase agreement. In March 2010, the Developer exercised its option and re-acquired the property. All of the 149 single family homes planned for the Improvement Area are expected to be built by the Developer. The Developer has an initial release of 16 single family homes currently under construction with an estimated completion date of October As of September 26, 2013, 50% of the homes are substantially complete and 50% of the homes require up to 45 days for substantial completion. Three homes have sold with one already having closed escrow and the remaining two expected to close escrow on or before October 7, Three additional homes have been sold and close of escrow is expected later in fall In August, 2013, the Developer released an additional 10 single family homes currently under construction with an estimated completion date of February The Developer is also actively building homes in the City of Lincoln Community Facilities District No (Lakeside) Improvement Area No. 2, Phases 3-5, which are located just west of the Improvement Area and consist of 257 single family lots. As of July 2013, Developer has built and closed escrow with homebuyers on 131 of the 154 detached low-density residential units and all of the 103 mid density residential units within Improvement Area No

19 As of July 2013, the largest projects completed or under construction by the Developer in northern California in the past 5 years include the following: Project Name Location No. of Lots Status The Vineyard County of Placer 139 Four model homes are open to the public and a first release consisting of 16 homes is under construction of which 4 homes have been sold but have not yet closed escrow. The Villages at Crocker Ranch North City of Roseville 155 (87 finished lots and 68 lots currently under development) 32 homes have closed escrow, 35 homes have been sold but have not closed escrow and five model homes are open to the public. The remaining 68 lots under development are scheduled for completion in fall The Orchard Yuba County 237 (118 finished lots and 119 unimproved/ partially improved lots) 71 homes have closed escrow, 8 homes have been sold but have not closed escrow and four model homes are open to the public Meadowood City of Roseville 144 The project was completed and all homes sold and closed by September 2012 The following table shows similar developments completed or under construction by the developer as of July Project Name Location No. of Lots Status Mira Bella/Sevilla at Crocker Ranch North City of Roseville homes have been sold and closed escrow and another 13 homes have sold but not yet closed escrow. Two model homes are open to the public. Lakeside 1 Units, 3, 4 & 5 City of Lincoln homes have been sold and closed escrow and another 5 homes have sold but not yet closed escrow. Three model homes are open to the public. Longmeadow Casa Bella at Crocker Ranch North City of Roseville City of Roseville 400 The project was completed and all homes sold and closed by March homes have been sold and closed escrow and one home has been sold but has not yet closed escrow. 13

20 History of Property Tax Payments; Loan Defaults; Bankruptcy. The Developer will certify to the following representations at the Closing: Neither the Developer nor any of its affiliates has ever defaulted to any material extent in the payment of special taxes or assessments in connection with the Improvement Area or any other community facilities districts or improvement areas or assessment districts in California within the past five years. Neither the Developer nor any of its affiliates is currently in default on any loans, lines of credit or other obligation, the result of which could materially adversely affect the development of the property owned by the Developer in the Improvement Area. The Developer is solvent and no proceedings are pending or, to the actual knowledge of the Developer, threatened in which the Developer may be adjudicated as bankrupt or become the debtor in a bankruptcy proceeding, or discharged from all of its debts or obligations, or granted an extension of time to pay its debts or a reorganization or readjustment of its debts. There is no litigation or administrative proceeding of any nature in which the Developer has been served, or to the Developer s actual knowledge, is pending or threatened against the Developer which, if successful, would materially adversely affect the ability of the Developer to complete the development and sale of its property within the Improvement Area, or to pay the Special Taxes or ordinary ad valorem property tax obligations when due on its property within the Improvement Area, or which challenges or questions the validity or enforceability of the Bonds, the Resolution of Issuance, the Indenture or the Bond Purchase Contract. The Developer is not aware of any material failures to comply with previous undertakings by it or its affiliates to provide periodic continuing disclosure reports or notices of material events in California within the past five years. General THE DISTRICT AND THE IMPROVEMENT AREA The District is located in the City, approximately 18 miles northeast of downtown Sacramento. The cities of Rocklin, Loomis and Roseville are within a six-mile radius of the District. A regional map showing the location of the City appears above under the caption INTRODUCTION. The Improvement Area is a planned residential development of approximately 30.6 acres. Upon projected build out, the Improvement Area will contain 149 low-density, detached single family homes. A local area map showing the boundaries of the Improvement Area also appears above under the caption INTRODUCTION. Formation of District, Designation of the Improvement Area and Levy of Special Taxes On November 28, 2006, the City Council adopted a resolution establishing the District and designating the Improvement Area. At a special election held on the same date, the owners of the property within the boundaries of the Improvement Area authorized the Improvement Area to incur a bonded indebtedness in an amount not to exceed $5,000,000 and approved a rate and method of apportioning the Special Taxes to pay the principal of and interest on the Bonds. See SECURITY FOR THE BONDS Rate and Method of Apportionment of Special Tax, herein. 14

21 Plan of Development The information in this section has been provided by the Developer. The City and the Underwriter believe this information to be reliable, but can give no assurances that the Improvement Area will be developed in the manner or within the time periods described in this section. All acreage and residential unit figures herein are estimates deemed to be reasonable based on approved development plans, but are subject to change as development progresses. No assurance can be given that such figures will in fact be achieved upon full build out of the Improvement Area. General. The Improvement Area is located in a portion of a master-planned community commonly known as Lakeside 6 and includes areas designated as Phase 1 consisting of 149 fully improved single-family lots and associated roadways encompassing an area of approximately 30.6 gross acres of land. The Developer plans to construct and sell all 149 low-density detached single-family homes within the Improvement Area. The Developer has an initial release of 16 single family homes currently under construction with an estimated completion date of October As of September 26, 2013, 50% of the homes are substantially complete and 50% of the homes require up to 45 days for substantial completion. Three homes have sold with one already having closed escrow and the remaining two expected to close escrow on or before October 7, The property within the Improvement Area has undergone development related to the public facilities of city-wide benefit required to be constructed to support the development contemplated by the General Plan. The PFE improvements (the PFE Facilities ), offsite improvements, park improvements, and all in-tract improvements have been completed. See PUBLIC INFRASTRUCTURE IMPROVEMENTS Summary of Cost and Status of Improvements herein. The City of Lincoln currently owns approximately 13.7 acres of unimproved single-family residential-zoned property to the west of the Improvement Area that was previously planned as a city park. Although the City currently expects to sell the property, there can be no assurances that such sale will take place in a timely manner. In addition, the Developer is actively constructing homes in the City of Lincoln Community Facilities District No (Lakeside) Improvement Area No. 2 ( Improvement Area 2 ) that includes areas designated as Phases 3, 4, and 5 which consist of 257 single family lots. As of July 2013, Developer has built and closed escrow with homebuyers on 131 of the 154 detached lowdensity residential units, and all of the 103 mid-density residential units in Improvement Area 2. Any lien of special taxes imposed on property within Improvement Area 2 will not secure or be available to pay debt service on the Bonds. Low-Density Residential. The Improvement Area has a final map recorded for a total of 149 detached low-density residences on approximately 30.6 gross acres that includes intract streets and other acreage dedicated to the City. Minimum lot sizes are approximately 55 feet wide and approximately 105 feet deep, with an average lot size of approximately 6,713 square feet. The Developer intends to market the Property as a continuation of its Lakeside Executive Series project located in Improvement Area 2 which is just west of the Property. The existing model home complex located in Improvement Area 2 consists of three model homes, and the Developer is building two additional model homes which should be scheduled for completion in October The Lakeside Executive Series currently offers four house plans ranging in size from 1,915-2,866 square feet with sales prices ranging from $379,990-$439,990. The Developer has an initial release of 16 single family homes currently under construction with an estimated completion date of October As of September 26, 2013, 50% of the homes are substantially complete and 50% of the homes require up to 45 days for substantial completion. Three homes have sold with one already having closed escrow and the remaining two expected to close escrow on or before October 7, Three additional homes have been sold and close of escrow is expected later in fall In August, 2013, the Developer released an additional 10 single family homes currently under construction with an estimated completion date of February

22 Description Summary. The following table summarizes the plan of development for the Improvement Area. No. of Lots Table 1 City of Lincoln Community Facilities District No (Lakeside) Improvement Area No. 1 Plan of Development Average Lot Size (sq. ft.) Actual Home Construction Actual Initial Home Sales Expected First Home Closing House Plan Size (sq. ft.) Price Range Low-Density Residential: Phase ,913 March 2013 Summer 2013 Fall ,765-3,927 $380, ,000 Source: The Developer. Projected Absorption. The following table lists the Developer s current projected absorption schedule for the lots within the Improvement Area. Table 2 City of Lincoln Community Facilities District No (Lakeside) Improvement Area No. 1 Projected Absorption Year Expected Lot Releases Expected Absorption of Homes (1) Per Year Cumulative Ownership of Property (1) The first house to close in the Improvement Area is expected in October 2013, followed by closings through the end of Source: The Developer. The information in this section has been provided by the Developer. The City and the Underwriter believe this information to be reliable, but can give no assurance that the events described in this section will occur, or that such events will occur in the manner described herein. The Developer currently owns substantially all of the taxable land within the Improvement Area (the Taxable Property ) and has advised the City that it currently expects to develop and sell all of the 149 low-density units within the Improvement Area. The Developer has an initial release of 16 single family homes currently under construction with an estimated completion date of October As of September 26, 2013, 50% of the homes are substantially complete and 50% of the homes require up to 45 16

23 days for substantial completion. Three homes have sold with one already having closed escrow and the remaining two expected to close escrow on or before October 7, Three additional homes have been sold and close of escrow is expected later in fall In August, 2013, the Developer released an additional 10 single family homes currently under construction with an estimated completion date of February See THE DISTRICT AND THE IMPROVEMENT AREA Plan of Development. The following table reflects property ownership as of September 1, 2013, and does not reflect close of escrow on the three homes described above. Table 3 City of Lincoln Community Facilities District No (Lakeside) Improvement Area No. 1 Property Ownership as of September 1, 2013 Owner: Annual Levy % Annual Levy Assessed Value % of Assessed Value # of Parcels % of Parcels John Mourier Construction $308, $5,957, Individual Homeowners Total: $308, $5,957, (1) Rounded. (2) Source: General Government Management Services. Unpaid Special Taxes do not constitute a personal indebtedness of the owners of the parcels within the Improvement Area, and the owners have made no commitment to pay the principal of or interest on the Bonds or to support payment of the Bonds in any manner. There is no assurance that the owners have the ability to pay the Special Taxes or that, even if they have the ability, they will choose to pay such Special Taxes. An owner may elect not to pay the Special Taxes when due and cannot be legally compelled to do so. Neither the City nor any Bondholder will have the ability at any time to seek payment from the owners of property within the Improvement Area of any Special Tax or any principal or interest due on the Bonds, or the ability to control who becomes a subsequent owner of any property within the Improvement Area. The City s only remedy for the failure of a landowner to pay Special Taxes on a parcel of land within the Improvement Area is to foreclose on such parcel. See SECURITY FOR THE BONDS Covenant for Superior Court Foreclosure and SPECIAL RISK FACTORS Non-Recourse Obligation to Pay Special Taxes and Special Tax Delinquencies. Public Infrastructure The Improvement Area includes public infrastructure to support the residential development described in the preceding section, including infrastructure for water supply, wastewater service, roadways and other public facilities. All of the required public infrastructure improvements are complete. See PUBLIC INFRASTRUCTURE IMPROVEMENTS, herein, for a description of such infrastructure. Developer s Estimated Plan of Finance The information in this section has been provided by the Developer. The City and the Underwriter believe this information to be reliable, but can give no assurances that the Improvement Area will be financed in the manner described in this section. 17

24 Private Sources of Funds. The Developer financed the original acquisition of the partially improved land in 2007 with the assumption of two purchase-money notes which were fully paid off in Intract and all infrastructure improvements were completed by the Developer and funded by the Developer s available cash reserves. In April 2009, the Developer sold the Property to an unrelated third party subject to a re-purchase option agreement. In 2010, the Developer exercised its option and reacquired the Property with its available cash reserves. The Project is not encumbered by any indebtedness and, with the exception of the Bonds, the Developer does not intend to finance the land or development in the Improvement Area and anticipates using its available cash reserves to pay for all future development. Pursuant to California law, the Special Taxes have priority over all existing and future private liens imposed on property subject to the lien of the Special Taxes. See SECURITY FOR THE BONDS Direct and Overlapping Debt. Bond Proceeds. A portion of the proceeds of the Bonds will be used to reimburse the Developer for the costs of the public infrastructure required to support the residential development planned in the Improvement Area as well as the payment of certain Public Facilities Element ( PFE ) Fees. See ESTIMATED SOURCES AND USES OF FUNDS and PUBLIC INFRASTRUCTURE IMPROVEMENTS. The estimated sources and uses of funds for the Developer s plan of finance are set forth in the following table. This table does not reflect the proceeds of future home sale proceeds to be used in connection with the development of the Improvement Area. Table 4 City of Lincoln Community Facilities District No (Lakeside) Improvement Area No. 1 Developer s Estimated Plan of Finance (1) Estimated Sources: Bond Proceeds $4,052,000 Developer Contribution (2) 566,000 Total Sources $4,618,000 Estimated Uses: Hard and Soft Construction Costs (3) $2,303,000 Development Impact Fees 2,315,000 Total Uses $4,618,000 (1) Rounded. (2) Authorized public improvements and development impact fees (net of PFE fee credits discussed herein) not reimbursed by Bond proceeds are expected to be funded by Developer contributions from its internally available cash balances and cash flows from its operations. Potential future Net Special Tax Revenues in excess of (i) debt service on the Bonds, (ii) the amount necessary, if any, to replenish the Bond Reserve Fund to an amount equal to the Required Bond Reserve and (iii) all current Expenses (the Available Net Special Tax Revenues ) are expected to be available to the City to reimburse the Developer by purchase of certain completed Improvements at agreed upon prices, including the advance funding or reimbursement of certain development impact fees, as specified in the Acquisition Agreement. Includes $5,000 of estimated interest earnings related to the investment of cash balances held in the Improvement Area Acquisition Fund. (3) Hard costs include PFE improvements, infrastructure, and off-site improvements. Soft costs include design and staking, project management, plan check, inspections and other development-related items. Source: The Developer, except as noted. 18

25 Development Entitlements Pursuant to the documents described herein, certain approvals and certain vested development rights with respect to the Improvement Area have been received. General Plan. The Lincoln General Plan (the General Plan ) was adopted by the City Council in 1988 and amended in October 2004 with respect to the District. The amendment designated approximately 90 acres for Low-to-Mid-Density Residential and approximately 13 acres for High-Density Residential. Zoning. The Improvement Area is zoned for single family residential use. General Development Plan. The City Council adopted a General Development Plan for the development of the District in October 2004 (the General Development Plan ). The purpose of the General Development Plan is to provide the zoning regulations which implement the General Plan, establish development standards and streamline the development process and environmental analysis of subsequent development requests. Subsequent development requests within the General Development Plan area, if consistent with the General Plan and determined to be within the scope of the final EIR prepared for the General Development Plan area, would not be subject to further environmental analysis. No assurance can be given that any or all such requests will receive such determination. Final Subdivision Maps. The City has approved and recorded a large lot final map legally subdividing the District into the Improvement Area and Improvement Area 2. The small-lot final maps for the Improvement Area and Improvement Area 2 were recorded on August 8, 2006, and July 6, 2006, respectively. Any lien of special taxes imposed on property within Improvement Area 2 will not secure or be available to pay debt service on the Bonds. Subdivision Agreement. The Developer is obligated under a subdivision agreement with the City, approved by the City on April 11, 2006, in accordance with applicable state and local codes (the Subdivision Agreement ). The Subdivision Agreement obligates the Developer to construct all public improvements that are a requirement of the tentative subdivision maps and to secure such construction with performance and payment bonds guaranteeing such construction. The Subdivision Agreement creates a binding contract between the City and the Developer and their assigned successors in interest, identifying the infrastructure improvements and setting forth the security for the completion of the Improvements, insurance and indemnification requirements, timing for completing the Improvements and other specific performance obligations of the City and the Developer. The Subdivision Agreement runs with the property, and may be modified only by the mutual consent of the City and the Developer and in a manner consistent with City land use requirements. With the Subdivision Agreement in place, subject to compliance with the terms of the Subdivision Agreement, the final subdivision maps were approved and recorded and lots were created and construction of homes within the District may occur upon issuance of building permits. The Subdivision Agreement is binding on the Developer and all successor ownerdevelopers of property in the District. The Subdivision Agreement also sets forth the responsibility of the Developer and its successors for the costs of the public improvements required for development. Funding of the Improvements and PFE Fees with Bond proceeds will satisfy a portion, but not all, of the relevant obligations of the Developer for infrastructure improvements required by the Agreement. The improvements not financed from Bond proceeds or any amount of Special Taxes generated by the Developed Property (as defined herein) in excess of the amounts to pay (i) debt service on the Bonds, (ii) the amount, if any, necessary to replenish the Bond Reserve Fund to an amount equal to the Required Bond Reserve for the Bonds and 19

26 (iii) all current Expenses for the Improvement Area (the Available Net Special Tax Revenues ) will be funded by the Developer. See PUBLIC INFRASTRUCTURE IMPROVEMENTS herein. Credit Reimbursement Agreement. In October 2006, the City and the Developer entered into a credit reimbursement agreement (the Credit Reimbursement Agreement ) to (i) provide for the timely construction and completion of certain PFE Facilities (as defined herein) and park improvements (collectively, the Required Improvements ), (ii) ensure that construction of the Required Improvements is undertaken as if the Required Improvements were constructed under the direction and authority of the City, (iii) provide a means by which the Developer s costs for construction of the Required Improvements is funded by Bond proceeds and is offset against the Developer s obligation to pay the applicable fees that cover the Developer s fair share of the costs to construct the Required Improvements that help mitigate the impact the Improvement Area will have on the city (the PFE Fees ) and (iv) provide a means for the Developer to be reimbursed to the extent the actual and authorized costs for construction of the Required Improvements exceeds the amount the Developer is obligated to pay in PFE Fees, as agreed upon by the City and the Developer. See PUBLIC INFRASTRUCTURE IMPROVEMENTS PFE Fees. Permits, Approvals and Environmental Issues In March 1983, after statutorily required public notice, hearing and comment, the City Council certified as adequate and complete a final Environmental Impact Report (an EIR ) for the development of the Improvement Area and, in March 1986, certified as adequate and complete a supplemental EIR for the Improvement Area. To address certain environmental impacts caused by the Improvement Area, the City Council also adopted mitigation measures, binding itself, the Developer and their successors and assigns to implement the mitigation measures identified therein. All required environmental permits related to the development in the Improvement Area have been received and, in October 2004, the City Council certified a Mitigated Negative Declaration related to the Improvement Area. The Improvement Area is located in a portion of a single-family residential development commonly known as Lakeside 6. See THE DISTRICT AND THE IMPROVEMENT AREA Plan of Development herein. Lakeside 6 is a small piece of a larger tract of land, commonly known as the Lincoln Air Center, that is subject to the Department of the Army Corps of Engineers (the Corps ) Permit No (the Permit ) issued to Buzz Oates Enterprises. A large portion of the Lincoln Air Center has been developed by Buzz Oates Enterprises, including the construction of infrastructure, the building of industrial buildings and the leasing of such buildings to operating businesses. On February 22, 2005, Buzz Oates Enterprises received a letter from the Department indicating that the Permit was in noncompliance (the Letter ). Specifically, the focus of the noncompliance raised in the Letter relates to the Lincoln Air Center Preservation Area, which is not located on or contiguous to the Improvement Area. On May 4, 2005, the City responded to the Letter, indicating that mitigating measures had been taken to cure the noncompliance (the City s Response ). Neither the City nor the Developer have received, nor is the City or the Developer aware of, any further correspondence from the Corps related to the noncompliance issues following the City s Response. As the Lincoln Air Center Preservation Area is not located on or contiguous to the Improvement Area, the Developer does not anticipate that this issue will have any material impact on the Developer s ability to build homes or the required infrastructure within the Improvement Area. Further, while there can be no assurance that the Corps will not require additional mitigating measures for the Permit that could impact the Developer s cost of development within the Improvement Area and neither the Developer or the City can predict the costs that would arise should the Department require additional mitigation measures, the Developer does not anticipate that such action would adversely affect its ability to build homes or the required infrastructure within the Improvement Area. 20

27 Water Supply The City is the retail water supplier for the Improvement Area, and generally purchases all of its treated water from the Placer County Water Agency ( PCWA ) pursuant to an agreement between the City and PCWA. PCWA acquires surface water from the Yuba, Bear and American Rivers, which PCWA then treats at its Foothill Water Treatment Plant and transports to the City through a pipeline. Under its agreement with PCWA, the City has the necessary water rights to supply domestic water to the Improvement Area, and will use connection fees received from developers to purchase additional surface water as needed to serve new development. Although PCWA has adopted a Master Plan that takes into account and plans for the impact of new development on the domestic water needs of the region, it is possible that the City s ability to obtain additional water supplies for the Improvement Area could be delayed due to an unexpected number of requests from other purchasers of PCWA surface water, or due to unexpected delays in the completion of PCWA infrastructure needed to serve the growing regional demand, or both. During the pendency of any delay in receiving sufficient additional PCWA water, the City intends to use groundwater from the City s system of wells on an interim basis to provide for the uninterrupted issuance of water connections for and water supply to the Improvement Area. It is expected that any such interim groundwater supply would convert to PCWA surface water upon the resolution of any delays in the receipt of sufficient PCWA water. Wastewater Treatment Capacity Existing capacity at the City s Wastewater Treatment and Reclamation Facility is sufficient to meet the needs of the project. The Developer s obligations are limited to the payment of the related PFE Fees, net of credits earned for the construction of the Nicolaus Road lift station and force main. Competing Developments The vicinity surrounding the Improvement Area includes several other master-planned residential communities. Depending on the level of overall housing demand in the region and other factors, the success of these competing projects could have an adverse effect on the pace of development and the taxable value of property within the Improvement Area. See the Appraisal (as defined herein) contained in Appendix A for a description of competing developments and other supply factors in the regional housing market. Property Values Seevers, Jordan, Ziegenmeyer, Rocklin, California (the Appraiser ), has prepared an appraisal of the Taxable Property within the Improvement Area, dated September 5, 2013, which estimates the value of the Taxable Property as of August 9, 2013 (the Appraisal ). The Appraisal is attached to this Official Statement as Appendix A. The Appraisal estimates only the value of existing parcels which are to be subject to the lien of Special Taxes on the County of Placer s assessment roll (collectively, the Appraised Parcels ). The Appraisal is based on a number of assumptions and limiting conditions, including (i) the Appraised Parcels are free and clear of any or all liens or encumbrances unless otherwise stated, (ii) the Appraised Parcels are in full compliance with all applicable federal, state and local environmental regulations and laws unless otherwise stated and (iii) the Appraised Parcels conform to all applicable zoning and use regulations and restrictions unless otherwise stated. Using these assumptions and others described in the Appraisal, the Appraiser estimates that the market value of the Appraised Parcels is estimated to be $28,410,000 as of the valuation date of the Appraisal. 21

28 The assessed value for the Improvement Area as shown on the Fiscal Year equalized assessment roll is $5,957,319. Assessed values do not necessarily reflect actual market values and generally are not adjusted to market values unless the property is sold or there is new construction activity on the property The complete Appraisal, including all attachments and addenda, is reproduced in Appendix A. The information contained herein is only a summary of certain information contained in the Appraisal, and such information is qualified in its entirety by the complete Appraisal. See SPECIAL RISK FACTORS Appraisal Risks. Direct and Overlapping Debt The principal of and interest on the Bonds are payable from the Special Tax authorized to be collected within the Improvement Area, and payment of the Special Tax is secured by a lien on certain real property within the Improvement Area. Such lien is co-equal to and independent of the lien for general taxes and any other liens imposed under the Law, regardless of when they are imposed on the property in the Improvement Area. The imposition of additional special taxes, assessments and general property taxes will increase the amount of independent and co-equal liens which must be satisfied in foreclosure. The City, the County and certain other public agencies are authorized by the Law to form other community facilities districts and improvement areas and, under other provisions of State law, to form special assessment districts, either or both of which could include all or a portion of the land within the Improvement Area. The following table, prepared by California Municipal Statistics Inc., sets forth the existing authorized indebtedness payable from taxes and assessments that may be levied on real property within the Improvement Area. In certain cases, the percentages of debt calculations are based on assessed values, which are expected to change significantly as development within the Improvement Area progresses. [Remainder of Page Intentionally Left Blank] 22

29 Table 5 City of Lincoln Community Facilities District No (Lakeside) Improvement Area No. 1 Direct and Overlapping Indebtedness as of September 16, 2013 CITY OF LINCOLN LAKESIDE COMMUNITY FACILITIES DISTRICT NO , I.A. No Local Secured Assessed Valuation: $5,957,319 DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable (1) Debt 9/1/13 Western Placer Unified School District General Obligation Bonds 0.094% $3,780 City of Lincoln Lakeside Community Facilities District No , I.A. No (2) TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $3,780 OVERLAPPING GENERAL FUND DEBT: Placer County Certificates of Participation 0.011% $ 4,780 Placer County Office of Education Certificates of Participation Sierra Joint Community College District Certificates of Participation Western Placer Unified School District Certificates of Participation ,472 City of Lincoln General Fund Obligations ,532 Placer Mosquito and Vector Control District Certificates of Participation TOTAL OVERLAPPING GENERAL FUND DEBT $151,316 COMBINED TOTAL DEBT $155,096 (3) (1) Based on ratios. (2) Excludes Mello-Roos Act bonds to be sold. (3) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and non-bonded capital lease obligations. Ratios to Local Secured Assessed Valuation: Direct Debt... - % Total Direct and Overlapping Tax and Assessment Debt % Combined Total Debt % Source: California Municipal Statistics, Inc. Property in the Improvement Area is also subject to a Placer County Mosquito Abatement direct levy of $13.78 per residential lot and the lien of the City of Lincoln Landscape and Lighting Assessment District established in 2006 which imposed an annual assessment of $ per residential lot, subject to annual increases equal to the February CPI for the San Francisco Bay Area Urban Wage Earners. Prior to Fiscal Year , developed property in the Improvement Area is also subject to the lien of the City s Community Facilities District No that funded the construction of PFE Facilities and payment of other costs related to the Lincoln Airpark Center. The maximum annual special tax rate of $0.167 per building square foot was based on the building square footage of existing buildings at the formation of the City s Community Facilities District No The maximum annual special tax rate is recalculated annually, but the highest amount of maximum annual special tax revenue that can be levied for the City s Community Facilities District No is $315,695. Such special taxes are in 23

30 addition to the Special Taxes for the Improvement Area, and will be secured on a parity with the Special Taxes for the Improvement Area. Other than as described herein, the property in the Improvement Area is not subject to any other bonded special tax or assessment liens (other than the lien of the Special Tax). There can be no assurance that the Developer, its affiliates or any subsequent owner will not petition for the formation of other community facilities districts and improvement areas or for a special assessment district or districts and that parity special taxes or special assessments will not be levied by the County or some other public agency to finance additional public facilities, however no other special districts are currently contemplated by the City or the Developer. Private liens, such as deeds of trust securing loans obtained by the Developer, may be placed upon property in the Improvement Area at any time. Under California law, the Special Taxes have priority over all existing and future private liens imposed on property subject to the lien of the Special Taxes. See THE DISTRICT AND THE IMPROVEMENT AREA Developer s Estimated Plan of Finance. Expected Tax Burden The following table sets forth an estimated property tax bill for the developed property in the Improvement Area. The actual amounts charged may vary and may increase in future years. Assumptions Table 6 City of Lincoln Community Facilities District No (Lakeside) Improvement Area No. 1 Fiscal Year Sample Tax Bill Lowest Expected Price (1) Highest Expected Price (1) Estimated Appraised Value $379, $529, Homeowner s Exemption (7,000.00) (7,000.00) Net Taxable Value: $372, $522, Ad Valorem Taxes Rate Amount Amount 0001 General Tax 1.000% $3, $5, W. Placer Unified Total Ad Valorem Taxes: 1.026% $3, $5, Direct Charges CFD Imp Area 1 Lakeside MR $2, $2, $2, City of Lincoln LLD Placer Mosquito & Vector Control Total Direct Charges: $2, $2, Total Taxes and Direct Charges: $6, $7, Percentage of Total Appraised Value: 1.671% 1.486% (1) Highest and lowest expected prices based on the Appraisal. Source: General Government Management Services. 24

31 Other Potential Debt The City has no control over the amount of additional debt payable from taxes or assessments levied on all or a portion of the property within the Improvement Area which may be incurred in the future by other governmental agencies having jurisdiction over all or a portion of the property within the Improvement Area. Furthermore, nothing prevents the owners of property within the Improvement Area from consenting to the issuance of additional debt which would be secured by taxes or assessments on a parity with the Special Taxes. To the extent such indebtedness is payable from assessments, other special taxes levied pursuant to the Act or ad valorem taxes, such assessments, special taxes and ad valorem taxes will be secured by liens on the property within the Improvement Area on a parity with the lien of the Special Taxes. Accordingly, the debt on the property within the Improvement Area could increase, without any corresponding increase in the value of the property therein, and thereby reduce the estimated value to bond debt ratio that exists at the time the Bonds are issued. The imposition of such additional indebtedness could also reduce the willingness and ability of the property owners within the Improvement Area to pay the Special Taxes when due. See SPECIAL RISK FACTORS Parity Taxes and Special Assessments. However, the Developer (or any successor builder) must partially prepay the aggregate lien of the Special Tax on a new home to the extent necessary to reduce the total property tax burden on the home buyer to 2% of the sale price of the home. See SECURITY FOR THE BONDS Mandatory Partial Prepayment of Special Tax. Property Tax Status There are currently no delinquencies on the payment of Special Taxes billed for the tax year on any property within the District. Estimated Value-to-Bond Debt Ratio The appraised value of the property in the Improvement Area subject to the lien of the Special Taxes, as estimated by the Appraiser as of August 9, 2013, subject to the methodology and assumptions contained in the Appraisal, is $28,410,000 which is approximately 5.88 times the aggregate principal amount of the Bonds. The following tables show the appraised values of the property and the value-tobond debt ratio based on the development status of the property within the District as of September 1, [Remainder of Page Intentionally Left Blank] 25

32 Table 7 City of Lincoln Community Facilities District No (Lakeside) Improvement Area No. 1 Projected Special Taxes and Value-to-Bond Ratios Based Upon Current Development Number of Parcels Projected Tax Levy Fiscal Year Percentage of Total Debt Lien Per Category (4) Appraised Value Value-to- Bond Debt Ratio Completed Homes 0 $ - 0% $ - $ - Lots with Building Permits 26 $ 53, (1) 18% $ 842,819 $ 4,470, Recorded Map Lots 123 $ 250, (2) 82% $ 3,987,181 $ 23,940, Undeveloped Property 0 $ - 0% $ - $ - Grand Total 149 $ 304, % $ 4,830,000 $ 28,410, Actual Levy $ 308, (3) 100% $ 4,830,000 $ 28,410, (1) As of September 1, 2013, 26 Building Permits have been issued. (2) Final Map Lot Special Tax Revenue shown is either the lesser of the Final Map Lot Rate or the Developed Rate per Parcel. (3) Maximum Special Tax for is higher than what was levied and is based on the status of development of June 30, 2013, 16 Developed Parcels (consisting of lots for which Building Permits have been issued) and 133 Final Map Parcels. (4) Reflects only the Bonds. Does not include any overlapping debt. See Table 5 City of Lincoln Community Facilities District No (Lakeside) Improvement Area No. 1 Direct and Overlapping Indebtedness as of September 16, Source: General Government Management Services and Piper Jaffray & Co. No assurance can be given that the foregoing value-to-bond debt ratio will be maintained during the period of time that the Bonds are Outstanding. The City has no control over future property values or the amount of additional indebtedness that may be issued in the future by other public agencies, the payment of which, through the levy of a tax or an assessment, is on a parity with the Special Taxes. See SPECIAL RISK FACTORS Appraisal Risks and Value-to-Bond Debt Ratio. Acquisition Agreement PUBLIC INFRASTRUCTURE IMPROVEMENTS To assist the Developer in satisfying its obligation to finance and construct certain public infrastructure necessary to support the Improvement Area (the Improvements ), including storm drain facilities, wastewater treatment and transmission facilities, water supply, storage and transmission facilities, and other miscellaneous public facilities and appurtenances needed to serve the Improvement Area, the Developer and the City have entered into an Acquisition, Funding and Disclosure Agreement (the Acquisition Agreement ) pursuant to which the City will purchase certain completed Improvements from the Developer at agreed upon priority, times and prices, including the advance funding or reimbursement of certain PFE Fees, but solely from the net proceeds of the Bonds, certain investment earnings thereon or any amount of Net Special Tax Revenues in excess of the amounts to pay (i) debt service on the Bonds, (ii) the amount necessary, if any, to replenish the Bond Reserve Fund to an amount equal to the Required Bond Reserve and (iii) all current Expenses (the Available Net Special Tax Revenues ). The net proceeds of the Bonds will be sufficient to fund a portion, but not all of the Improvements. The Developer is required to finance the cost of the remaining required Improvements not paid through net proceeds of the Bonds, certain investment earnings thereon or Available Net Special Tax Revenues through private sources and equity. 26

33 PFE Fees In addition to the Required Improvements, the Developer is also required to pay certain PFE Fees. Under the General Plan, the City has identified the PFE Facilities (as defined herein). To pay for the allocable costs of such PFE Facilities, the City charges PFE Fees to all developers as a condition to the issuance of a building permit. Under the Credit Reimbursement Agreement, the Developer has agreed to design and construct certain PFE Facilities to be financed with Bond proceeds, and will receive a credit against the PFE Fees in an amount equal to the actual cost of such improvements. These PFE Fees include community service fees, water connection fees, sewer connection fees, drainage fees, traffic mitigation fees and other City fees related to the Required Improvements. The Developer will pay for all PFE Fees (net of PFE Fee Credits) not financed with Bond proceeds and will be reimbursed with Available Net Special Tax Revenues. See Table 8 herein. Summary of Cost and Status of Improvements The following table summarizes the estimated cost, funding source and projected completion of the public infrastructure required as a condition to the development of the Improvement Area. All of the Improvements are complete. [Remainder of Page Intentionally Left Blank] 27

34 Table 8 City of Lincoln Community Facilities District No (Lakeside) Improvement Area No. 1 Estimated Public Infrastructure Requirements and Projected Sources of Funding (1) Estimated Bond Available Net Special Developer Description Cost Proceeds Tax Revenues (2) Contribution (3) PFE Improvements: (4) PFE 16 water line improvements (COA No. 9) $ 248,102 $ (248,102) Upgrade 16 DIP to 18 DIP (COA No. 9) 1,491 (1,491) Extend 18 pipe along McClain to Future (COA No. 9) 26,098 (26,098) Nicolaus Rd. lift station & Force Main (COA No. 14) 631,803 (631,803) 907,494 (907,494) - - Offsite Improvements: (4)(5) Infrastructure PG&E fee 49,797 (49,797) Lakeside Drive 383,120 (263,576) $ (119,544) McClain Drive 280,143 (280,143) Venture Overlay 180,141 (180,141) Venture McClain 18 water non PFE 3,184 (3,184) Storm drainage 27,517 (27,517) Offsite Improvements (change orders) 98,417 (98,417) Masonry wall McClain 53,144 (53,144) Masonry wall Venture 41,837 (41,837) Masonry wall - Lakeside Phase 1 79,053 (79,053) Masonry wall - Lakeside Phase 5 22,029 (22,029) Pilasters at Bridge 7,082 (7,082) 1,225,464 (1,105,920) - (119,544) Park Improvements: (4) Venture Drive trail system 18,962 (18,962) Easterly trail and crossing 33,452 (33,452) CS-Parks -.77 Acre park 117,891 (117,891) 170,305 (170,305) - - Development Impact Fees: Drainage North of Auburn Ravine 160,539 (138,990) (21,549) Transportation 417,771 (361,694) (56,077) Water Connection, net of credits 725,614 (617,752) (107,862) Park Facilities, net of credits 328,882 (251,202) (77,680) Sewer Connection, net of credits 207,588 (87,908) (119,680) Community Service Infrastructure 474,118 (410,478) (63,640) 2,314,512 (1,868,024) - (446,488) Available Net Special Tax Revenues Reimbursements $ (561,032) 561,032 Totals $ 4,617,775 $ (4,051,743) $ (561,032) $ (5,000) (1) Rounded. (2) Available Net Special Tax Revenues (as defined herein) will be used to reimburse the Developer for certain authorized public improvements and development impact fees (net of PFE Fee credits discussed herein) not reimbursed by Bond proceeds. (3) Developer contribution is anticipated to be funded from internal available cash balances and cash flows from operations. Includes $5,000 of estimated interest earnings related to the investment of cash balances held in the Improvement Area Acquisition Fund. (4) Includes soft costs for design and staking, project management, plan check, inspections and other development-related items. (5) If actual Bond proceeds exceed the estimate of such proceeds provided herein, the additional Bond proceeds will be used to reimburse the Developer for remaining unpaid Improvements pursuant to the Acquisition Agreement. Source: The Developer, except as noted. 28

35 SECURITY FOR THE BONDS General The Bonds are authorized pursuant to the Act and are issued under the Indenture and a resolution of the City Council of the City. The Act was enacted by the California Legislature to provide an alternate method of financing certain essential public capital facilities and services, especially in developing areas of the State. Once established, a community facilities district is a legally constituted governmental entity within defined boundaries, with the governing board or legislative body of the City establishing the district and acting on its behalf. Subject to approval by a two-thirds vote of qualified electors and compliance with the provisions of the Act, a legislative body of a City may issue bonds for a community facilities district and may levy and collect a special tax within such district to repay such indebtedness. THE BONDS ARE SPECIAL TAX OBLIGATIONS OF THE CITY, AND THE INTEREST ON, PRINCIPAL OF AND REDEMPTION PREMIUM, IF ANY, ON THE BONDS ARE PAYABLE SOLELY FROM THE PROCEEDS OF NET SPECIAL TAX REVENUES AND AMOUNTS IN CERTAIN FUNDS AND ACCOUNTS ESTABLISHED IN THE INDENTURE. NEITHER THE FULL FAITH AND CREDIT NOR THE GENERAL TAXING POWER OF THE CITY, THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE BONDS OR THE INTEREST THEREON. THE BONDS DO NOT CONSTITUTE AN INDEBTEDNESS OF THE CITY WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION. Although the Special Tax will constitute a lien on taxable real property in the Improvement Area, it will not constitute a personal indebtedness of the owners of such property. There is no assurance that the owners will be financially able to pay the annual Special Tax or that they will pay such tax even if financially able to do so. The risk of nonpayment by property owners is more fully described in SPECIAL RISK FACTORS Non-Recourse Obligation to Pay Special Taxes. The Special Taxes In accordance with the provisions of the Act, the City Council established the District and designated the Improvement Area on November 28, 2006 for the purpose of providing for the financing of certain public facilities and payment of certain fees for the Improvement Area, funding the Bond Reserve Fund and the capitalized interest and paying certain costs of issuance of the Bonds. At an election conducted on November 28, 2006, the qualified electors within the Improvement Area authorized the issuance of not to exceed $5,000,000 principal amount of special tax bonds for the purpose of financing such public facilities and the annual levy of the Special Tax in the Improvement Area to be used for the purpose, among others, of paying the interest on and principal of and redemption premiums, if any, on such bonds (the Rate and Method ). Principal of and interest on the Bonds is payable from Net Special Tax Revenues consisting primarily of Special Taxes to be levied and collected on Taxable Property within the Improvement Area. Net Special Tax Revenues means proceeds of the Special Taxes received by or on behalf of the Improvement Area, including any prepayments thereof, interest and penalties thereon and proceeds of the redemption or sale of property sold as a result of foreclosure of the lien of the Special Taxes, net of any costs of collection and enforcement, and net of the Priority Administrative Expenses. The amount of Special Taxes that the Improvement Area may levy in any year is strictly limited by the maximum rates approved by the qualified electors within the Improvement Area. Net Special Tax Revenues, all funds and accounts established under the Indenture (other than the Rebate Fund) and any 29

36 interest earned thereon are pledged to the payment of and constitute a trust fund for the principal of and interest on such bonds. So long as the principal of and interest on such bonds remains unpaid, Net Special Tax Revenues, such funds and accounts and investment earnings thereon shall not be used for any other purpose, except as permitted by the Indenture, and shall be held in trust for the benefit of the owners thereof and shall be applied pursuant to the Indenture and any authorized supplement thereto. Pursuant to the Indenture, so long as any Bonds are outstanding, the City is required annually to levy the Special Tax against all Taxable Property (as defined in Appendix B, RATE AND METHOD OF APPORTIONMENT OF SPECIAL TAX ) in the Improvement Area and make provision for the collection of the Special Tax in amounts which will be sufficient, after making reasonable allowances for contingencies and errors in the estimates, to yield proceeds equal to the amounts required for compliance with the agreements, conditions, covenants and terms contained in the Indenture, and which in any event will be sufficient to pay the interest on, principal (including Mandatory Sinking Account Payments, if any) and redemption premiums, if any, on all Outstanding Bonds as they become due and payable, and to pay all current Expenses for the Bonds as they become due and payable. The Special Tax is to be levied and collected against all Taxable Property within the Improvement Area in accordance with the Rate and Method. A copy of the Rate and Method is summarized herein and attached as Appendix B. The Rate and Method annually allocates the Special Tax required among the Taxable Property in the Improvement Area based upon the relative stage of development and the type of use thereon (residential or non-residential), subject to the maximum annual tax that may be levied against each category. As of Fiscal Year the Maximum Special Tax that may be levied in any Fiscal Year on any Residential Property is $2, per dwelling unit. Such amount shall increase each Fiscal Year by two percent (2.0%). The Special Tax on a Parcel of Developed Property within the Improvement Area shall not be levied after the earlier of (a) the first Fiscal Year in which all Authorized Bonds are no longer outstanding or (b) Fiscal Year Although the County of Placer (the County ) currently distributes general property tax revenues in accordance with the Teeter Plan, the County does not apply the Teeter Plan method to community facilities districts such as the District. Although the Special Taxes will be levied against, and constitute a lien against, Taxable Property within the Improvement Area, the Special Taxes do not constitute personal indebtedness of the respective property owners. There is no assurance that the property owners will be financially able to pay the annual Special Taxes or that they will pay such taxes even if financially able to do so. See SPECIAL RISK FACTORS Special Tax Delinquencies. Rate and Method of Apportionment of Special Tax General. The City has covenanted to cause the levy of the Special Taxes in an amount determined according to a methodology, i.e. the Rate and Method, which the City Council and the qualified electors of the Improvement Area have approved. The Rate and Method apportions the total amount of Special Taxes to be collected among the taxable parcels in the Improvement Area as more particularly described herein. Capitalized terms not otherwise defined herein shall have the meaning given such terms in Appendix B, RATE AND METHOD OF APPORTIONMENT OF SPECIAL TAX. Further, the foregoing summary of the Rate and Method is qualified in all respects by the full text thereof, set forth in Appendix B hereto. Parcels subject to the Special Tax. On or about July 1 of each year, but in any event in sufficient time to include the levy of the Special Taxes on the County s secured tax roll, the City s Director of Administrative Services or designee (collectively, the CFD Administrator ) shall determine for each Lot 30

37 or Parcel or portion thereof or Condominium Unit that is within the boundaries of the Improvement Area shown on an official map of the Assessor of the County (each, a Parcel ) whether it is all real property within the boundaries of the District, if and to the extent allocable to the Improvement Area, except that the following Parcels shall not be taxed: any land owned, conveyed or irrevocably offered for dedication to a public agency; any land which is a public right of way or which is an unmanned utility easement making impractical its utilization for other than the purpose set forth in the easement; and/or any Parcel used exclusively by a homeowners association ( Taxable Property ), and, if so, whether such Parcel is a Parcel for which a building permit for new construction was issued as of June 30 of the prior Fiscal Year ( Developed Property ), a final tract map, parcel map, lot line adjustment or functionally equivalent map that creates individual building sites or Condominium Units, or equivalent, recorded with the County Recorder s Office (a Final Map Lot ), or a Parcel of Taxable Property not classified as a Developed Property or a Final Map Lot ( Undeveloped Property ). Each Parcel of Developed Property shall be further assigned to a Special Tax category set forth in the Rate and Method. Parcels subject to levy shall be determined based upon the latest equalized roll of the County Assessor for such Fiscal Year. Method of Apportionment. The CFD Administrator shall then determine the Special Tax Liability for the Fiscal Year commencing such July 1, and levy Special Taxes as follows until the amount of the Special Taxes levied equals the Special Tax Liability, provided that Final Map Lots and Undeveloped Property are not levied Special Taxes for the purpose of direct payment for the cost of acquiring authorized facilities of the Improvement Area: Step 1: Levy Special Taxes on Developed Properties as needed to satisfy the Special Tax Liability, pro rata up to 100% of the Developed Property Maximum Special Tax. Step 2: If additional funds are needed after the first step has been calculated to satisfy the Special Tax Liability, in addition to the levy of the prior step, levy Special Taxes on all Parcels designated as Final Map Lots on a pro rata basis at up to 100% of the Final Map Lot Maximum Special Tax as needed. Step 3: If additional funds are needed after the second step has been calculated to satisfy the Special Tax Liability, in addition to the levy of all prior steps, levy Special Taxes on all Undeveloped Property on a pro rata basis at up to 100% of the Undeveloped Property Maximum Special Tax as needed. Under no circumstances will the Special Taxes levied against any Parcel used as a private residence be increased as a consequence of delinquency or default by the owner of any other Parcel or Parcels within the Improvement Area by more than ten (10) percent of the Special Tax that would be levied in that Fiscal Year, if there were no delinquencies, pursuant to California Government Code Section 53321(d), as in effect on the date of formation of the Improvement Area and designation of the Improvement Area. City Policy Regarding Assessments and Special Taxes In 1987, the City adopted its Local Goals and Policies Concerning the Use of the Mello-Roos Community Facilities Act of 1982 (the City Policy ). The City Council amended the City Policy in As amended, the City Policy requires an overall value to bond debt ratio of 4:1 for special taxes and total property taxes (including ad valorem property taxes, authorized but unlevied property taxes, special assessments, special taxes and other charges on the property tax bill) not to exceed 2% of the anticipated home sale price. The City expects to remain in full compliance with the City Policy after the levy of the Special Taxes for the Improvement Area and the issuance of all Bonds. See SECURITY FOR THE BONDS Mandatory Partial Prepayment of Special Tax and Estimated Value-to-Bond Debt Ratio. 31

38 Mandatory Partial Prepayment of Special Tax Prior to the close of escrow for the first transfer of title of any Parcel of Developed Property after the date on which a Certificate of Occupancy for such Parcel was issued by the City, the Maximum Special Tax shall be subject to mandatory partial prepayment in a amount necessary to bring the Total Property Tax Burden for the then-current Fiscal Year to an amount less than or equal to 2% of the sale price of the Parcel. The amount required shall be due and payable upon transfer of title. No prepayment shall be required if the Total Property Tax Burden is not in excess of the 2% limit. The Builder shall notify the CFD Administrator in writing of the mandatory partial prepayment requirement at least 30 days prior to close of escrow. The CFD Administrator shall calculate and determine the prepayment amount using the methodology for a partial prepayment herein, except that the partial prepayment shall be in the exact percentage required for a Total Property Tax Burden not in excess of the 2% limit. See Appendix B RATE AND METHOD OF APPORTIONMENT OF SPECIAL TAX Mandatory Partial Prepayment. Funds and Accounts; Flow of Funds All proceeds of the Special Taxes (including any prepayments thereof and including all amounts, net of any costs of collection and enforcement, received as a result of foreclosure of the lien securing the Special Taxes or other options by the City to collect delinquent special taxes, but excluding amounts held in the Rebate Fund), are required to be deposited into the Special Tax Fund held by the City and are pledged to the payment of the Bonds; provided that any Available Net Special Tax Revenues (as defined herein) may be used by the City to purchase certain completed Improvements from the Developer at agreed upon prices in addition to the advanced funding of PFE Fees or the reimbursement to the Developer for PFE Fees. Priority of Deposits. All money in the Special Tax Fund is required to be transferred by the City to the Trustee for deposit, or in the case of the Prepayment Fund and the Improvement Area Fund (which are held by the City) deposited, in the following funds in the following order of priority: (1) Expense Fund; (2) Redemption Fund; (3) Bond Reserve Fund; (4) Prepayment Fund; and (5) Improvement Area Fund. Expense Fund. On or before March 1 and September 1 of each year, the City is required to transfer from the proceeds of the Special Taxes to the Trustee for deposit into the Expense Account a sum equal to the amount required by the City for the payment of budgeted Expenses (the Priority Administrative Expenses ) during the six-month period commencing on such date, or to reimburse the City for payment of unbudgeted Expenses during the prior six-month period. Redemption Fund. At least three (3) Business Days prior to each March 1 and September 1 of each year, the City is required to transfer from the money in the Special Tax Fund to the Trustee for deposit into the Redemption Fund an amount equal to the aggregate amount of interest becoming due and payable on all Outstanding Bonds on such dates; and at least three Business Days prior to September 1 of each year, the Trustee is required to deposit into the Redemption Fund an amount of money equal to the 32

39 aggregate amount of principal becoming due and payable on all Outstanding Serial Bonds and the Mandatory Sinking Account Payment due on such date. Bond Reserve Fund. To provide funds for payment of the Bonds and the interest thereon as a result of any delinquent installments, the City will establish a Bond Reserve Fund to be held by the Trustee. There shall be maintained in the Bond Reserve Fund an amount equal to the Required Bond Reserve. The term Required Bond Reserve is defined as, as of any date of calculation, the least of (a) ten percent (10%) of the original principal amount of the Bonds, or (b) the Maximum Annual Debt Service, or (c) one hundred twenty-five percent (125%) of the Average Annual Debt Service, all as computed by the City under the Code and specified in writing by the Trustee. On the delivery date, proceeds of the Bonds in the amount of $448, will be deposited in the Bond Reserve Fund, the Required Bond Reserve for the Bonds. The Trustee is responsible for valuation of all investments in the Bond Reserve Fund on February 15 and August 15 of each year. Such investments shall be valued at the face value thereof if such investments mature within twelve (12) months from the date of valuation, or if such investments mature more than twelve (12) months after the date of valuation, at the price at which such investments are redeemable by the Trustee at his option, if so redeemable, or if not so redeemable, at the lesser of (i) the cost of such investments plus the amortization of any premium or minus the amortization of any discount; or (ii) the market value of such investments, and for this latter purpose, market value on any such date shall mean the last reported transaction price of such investments or, if not reported, the mean of the closing bid and asked prices of such investments on the next preceding Business Day as reported in The Wall Street Journal (or, if such publication is unavailable, in such other financial publication of national standing as may be selected by the Trustee), except that as to any investments the bid and asked prices of which are not published on a regular basis in The Wall Street Journal, market value shall mean the average bid price at such time of determination for such investments by any two nationally recognized government securities dealers (selected by the Trustee in his sole discretion) at the time making a market in such investments or the bid price published by a nationally recognized pricing service. Prepayment Fund. The City shall transfer all money received from prepayments of the Special Tax (including any prepayments of the Special Tax pursuant to Section of the Act) from the Special Tax Fund to the Prepayment Fund and such amounts are required to be used and withdrawn by the City solely as provided in the applicable provisions concerning the use of such prepayments in the Rate and Method. Improvement Area Fund. All money remaining in the Special Tax Fund on September 1 of each year after making the foregoing deposits is required to be withdrawn by the City from the Special Tax Fund and deposited into the Improvement Area Fund held by the City. All moneys in the Improvement Area Fund are required to be used by the City to construct or acquire Improvements for the benefit of the Improvement Area, including the use by the City to reimburse the Developer for certain PFE Fees. No Issuance of Additional Parity Bonds After the issuance of the Bonds, the City will not issue additional bonds secured by Special Taxes on a parity with the Bonds, except that the City may issue additional bonds secured by the Special Taxes for the purpose of refunding all or a portion of the Bonds then Outstanding if the issuance of such refunding Bonds does not result in an increase in the remaining aggregate Debt Service on all Bonds Outstanding. See Appendix D SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE Authorization and Issuance of Bonds. 33

40 Covenant for Superior Court Foreclosure The Indenture provides that the Special Tax is to be collected by the City. Except as provided in the special covenant for foreclosure described herein and in the Act, the Special Taxes are subject to the same penalties and the same procedure, sale, and lien priority in case of delinquency as is provided for ad valorem property taxes. Pursuant to Section of the Act, in the event of any delinquency in the payment of the Special Tax, the City may order the institution of a Superior Court action to foreclose the lien therefor within specified time limits. In such an action, the real property subject to the unpaid amount may be sold at a judicial foreclosure sale. Such judicial foreclosure action is not mandatory. However, the City has covenanted for the benefit of the Owners of the Bonds that it will annually, on or before September 1 of each year, review the public records of the County relating to the collection of the Special Tax in order to determine the amount of the Special Tax collected in the prior Fiscal Year, and on the basis of such review the City shall, not later than December 1 of such year, institute foreclosure proceedings as authorized by the Law (i) against all Taxable Parcels (or individual property owners if they own more than one Taxable Parcel) that are delinquent in the payment of $3,900 or more of Special Taxes and (ii) against all Taxable Parcels with delinquent Special Taxes by September 1 following the close of each Fiscal Year in which the CFD receives Special Taxes in an amount less than 95% of the total Special Tax levied for such Fiscal Year, in either case in order to enforce the lien of all such delinquent installments of such Special Tax, and will diligently prosecute and pursue such foreclosure proceedings to judgment and sale; provided that any actions taken to enforce delinquent Special Tax liens shall be taken only consistent with Sections through , both inclusive, of the Government Code of the State of California; and provided further, that the City shall not be obligated to enforce the lien of any delinquent installment of the Special Tax for any Fiscal Year in which the City shall have received one hundred percent (100%) of the amount of such installment from the County of Placer pursuant to the so-called Teeter Plan. Although the County currently distributes general property tax revenues in accordance with the Teeter Plan, the County does not currently apply the Teeter Plan method to community facilities districts. In the event that sales or foreclosures of property are necessary, there could be a delay in payments to Owners of the Bonds (if the Bond Reserve Fund has been depleted) pending such sales or the prosecution of such foreclosure proceedings and receipt by the City of the proceeds of sale. However, within the limits of the Special Tax, the City may adjust the Special Tax levied on Taxable Property in the Improvement Area, subject to the limitation on the Maximum Special Tax, to provide an amount required to pay interest on, principal of, and redemption premiums, if any, on the Bonds, and the amount, if any, necessary to replenish the Bond Reserve Fund to an amount equal to the Required Bond Reserve for the Bonds and to pay all current Expenses for the Improvement Area. There is, however, no assurance that the total amount of the Special Tax that could be levied and collected against Taxable Property in the Improvement Area will be at all times sufficient to pay the amounts required to be paid by the Indenture, even if the Special Tax is levied at the Maximum Special Tax rates. See SPECIAL RISK FACTORS. No assurance can be given that the real property subject to sale or foreclosure will be sold, or if sold, that the proceeds of sale will be sufficient to pay any delinquent installments of the Special Tax. The Act does not require the City to purchase or otherwise acquire any lot or parcel of property to be sold if there is no other purchaser at such sale. The Act and the Indenture do specify that the Special Tax will have the same lien priority as for ad valorem property taxes in the case of delinquency. Section of the Act requires that property sold pursuant to foreclosure under the Act be sold for not less than the amount of judgment in the foreclosure action, plus post judgment interest and authorized costs, unless the consent of the owners of 75% of the Outstanding Bonds is obtained. 34

41 After the City has ordered a foreclosure action, it shall dismiss the action before judgment if the owner of the subject property (or any other person) pays all of the following amounts: the delinquent Special Tax on the subject property and all penalties, interests and costs accrued; costs of the foreclosure action; authorized attorneys fees; and the tax collector s authorized costs. SPECIAL RISK FACTORS The following is a discussion of certain risk factors which should be considered, in addition to other matters described in this Official Statement, in evaluating the investment quality of the Bonds. This discussion does not purport to be comprehensive or definitive. The occurrence of one or more events discussed herein could adversely affect the value of the property in the Improvement Area, or could adversely affect the ability or willingness of property owners in the Improvement Area to pay Special Taxes when due. A failure to receive Special Taxes could result in the inability of the City to pay debt service on the Bonds when due. Risks of Real Estate Secured Investments Generally Bondholders will be subject to the risks generally incident to an investment secured by real estate, including, without limitation, (a) adverse changes in local market conditions, such as changes in the market value of real property in the vicinity of the Improvement Area, the supply of or demand for competitive properties in such area, and the market value of homes or institutional facilities and/or sites in the event of sale or foreclosure, (b) changes in real estate tax rates, governmental rules (including, without limitation, zoning laws) and fiscal policies, and (c) natural disasters (including, without limitation, earthquakes, fires and floods), which may result in uninsured losses. Maximum Special Tax Rates Within the limits of the Rate and Method, the City may adjust the Special Tax levied on all property within the Improvement Area to provide the amount required each year to pay Debt Service and to replenish the Reserve Fund to an amount equal to the Reserve Requirement. However, the amount of the Special Tax that may be levied against particular categories of property within the Improvement Area is subject to the maximum tax rates set forth in the Rate and Method. In the event of significant Special Tax delinquencies, there is no assurance that said maximum tax rates would be sufficient to pay the amounts required to be paid by the Indenture. See SECURITY FOR THE BONDS The Special Taxes and APPENDIX A RATE AND METHOD OF APPORTIONMENT OF SPECIAL TAX. Insufficiency of Special Taxes Under the Rate and Method, the annual amount of Special Tax to be levied on each parcel in the Improvement Area is to be based on whether such parcel constitutes Taxable Property and, if so, whether such parcel is a Developed Property, Final Map Lot or Undeveloped Property. See SECURITY FOR THE BONDS Rate and Method of Apportionment of Special Tax. Under the Developer s plan of development, Taxable Property within the Improvement Area has progressed or is expected to progress from Final Map Lots to Developed Property. All of the Undeveloped Property within the Improvement Area has already progressed to Final Map Lots. As such progression occurs, the ratio of value to bond debt of the Taxable Property is expected to increase, as is the landowner s incentive to keep property taxes (including Special Taxes) current. No assurance can be given with respect to continued progress in developing the Improvement Area. Other factors may also affect a landowner s willingness and ability to keep Special Taxes current. See SECURITY FOR THE BONDS Rate and Method of Apportionment of Special Tax herein for a description of Taxable Property. See SPECIAL RISK FACTORS 35

42 Failure to Develop, herein for a discussion of the risks associated with development of the Improvement Area. Upon full build out, approximately seven acres of the Improvement Area will remain as streets and other rights of way. These seven acres will not constitute Taxable Property and, thus, will be exempt from the Special Tax. The Act provides that if any property within the Improvement Area not otherwise exempt from the Special Tax is acquired by a public entity through a negotiated transaction, or by gift or devise, the Special Taxes will continue to be levied on and enforceable against the public entity that acquired the property. In addition, the Act provides that if property subject to the Special Tax is acquired by a public entity through eminent domain proceedings, the obligation to pay the Special Tax with respect to that property is to be treated as if it were a special assessment and be paid from the eminent domain award. The constitutionality and operative effect of these provisions have not been tested in the courts. If for any reason property subject to the Special Tax becomes exempt from taxation by reason of ownership by a nontaxable entity such as the federal government, or another public agency, subject to the limitation of the maximum Special Tax Rates specified in the Rate and Method, the Special Taxes are to be reallocated to the remaining taxable parcels within the Improvement Area. This would result in the owners of such properties paying a greater amount of the Special Tax and could have an adverse effect on the full and timely collection of the Special Tax. Pursuant to Section of the Act as applied to the Improvement Area, under no circumstances will the special tax levied in any fiscal year against any parcel used for private residential purposes be increased as a consequence of delinquency or default by the owner or owners of any other parcel or parcels within the Improvement Area by more than 10% above the amount that would have been levied in that fiscal year had there never been any such delinquencies or defaults. For such purposes, a parcel will be considered used for private residential purposes not later than the date on which an occupancy permit for private residential use is issued. See SPECIAL RISK FACTORS Insufficiency of Special Taxes. Limited Obligation To Pay Bonds Funds for the payment of the principal of and interest on the Bonds are derived from Special Taxes levied against certain property in the Improvement Area. The Special Taxes collected could be insufficient to pay debt service on the Bonds due to delinquencies, non-payment or the failure to receive timely and sufficient proceeds from foreclosure proceedings. The City s obligation with respect to delinquent Special Taxes is limited to the institution of judicial foreclosure proceedings under the circumstances described in the Indenture. The City has no obligation to make any payment on the Bonds except from Special Tax revenues and the other sources pledged under, and subject to the limitations provided in, the Indenture. See SECURITY FOR THE BONDS Covenant for Superior Court Foreclosure. Non-Recourse Obligation to Pay Special Taxes The obligation to pay Special Taxes levied within the Improvement Area does not constitute a personal obligation of the current or subsequent owners of the property in the Improvement Area. Enforcement of Special Tax payment obligations is limited to judicial foreclosure in the Placer County Superior Court. See SECURITY FOR THE BONDS Covenant for Superior Court Foreclosure. If the proceeds of any foreclosure sale are insufficient to satisfy the applicable Special Tax lien, the City is not entitled to the deficiency from the landowner. There is no assurance that any current or subsequent owner of a parcel subject to Special Taxes will be able to pay the Special Taxes, or that such owner will choose to pay such installments even if otherwise able to do so. 36

43 The Developer is the current owner of all Taxable Property within the Improvement Area, though it has sold six single family homes and close of escrow is expected in the fall The Developer is a special purpose entity with limited assets other than property within the Improvement Area and related assets. Although bondholders should not look to the assets or credit of the Developer as a source of payment for the Bonds, the Developer s ability to pay Special Taxes and to develop the Improvement Area is subject to the financial resources available to it. See THE DISTRICT AND THE IMPROVEMENT AREA Developer s Plan of Finance for a description of the financial resources available to the Developer. The members of the Developer have no obligation to contribute additional capital to the Developer in the event of a shortfall of other resources, and the City can give no assurance that any such additional capital contributions will occur. Special Tax Delinquencies The Tax Collector of the County will include the Special Taxes on the ad valorem property tax bills sent to owners of properties within the Improvement Area. Such Special Tax installments will be due and payable and bear the same penalties and interest for non-payment as ad valorem property tax installments. Significant delinquencies in the payment of annual Special Tax installments or delays in foreclosure proceedings to collect such Special Taxes could result in the depletion of the Bond Reserve Fund and adversely affect the ability to pay debt service on the Bonds when due. See SECURITY FOR THE BONDS Covenant for Superior Court Foreclosure, for a discussion of the provisions that apply, and the procedures that the Improvement Area is obligated to follow, under the Indenture in the event of delinquencies in the payment of Special Taxes. See SPECIAL RISK FACTORS Payments by FDIC and Bankruptcy herein, for a discussion of the policy of the Federal Deposit Insurance Corporation regarding the payment of special taxes and limitations on the Improvement Area s ability to foreclose on the lien of the Special Taxes in certain circumstances. Although the County currently distributes general property tax revenues in accordance with the Teeter Plan, the County does not apply the Teeter Plan method to community facilities districts such as the District. Failure to Develop Land development operations are subject to comprehensive federal, State of California and local regulations. Approval is required from various agencies in connection with the layout and design of developments, the nature and extent of improvements, construction activity, land use, zoning, school and health requirements, as well as numerous other matters. It is possible that the approvals necessary to complete development of all Taxable Property within the Improvement Area are not obtained on a timely basis. Failure to obtain any such agency approval or satisfy any such government requirement could adversely affect land development operations. In addition future governmental restrictions, including, but not limited to, governmental policies restricting or controlling development within the Improvement Area, could be enacted, and future land use initiatives approved by the voters in the City could add more restrictions and requirements on development within the Improvement Area. Moreover, there can be no assurance that the means and incentive to conduct land development operations within the Improvement Area will not be adversely affected by a deterioration of the real estate market or economic conditions generally, future local, State and federal governmental policies relating to real estate development, the income tax treatment of real property ownership, acts of war or terrorism, or other factors. 37

44 The Taxable Property in the Improvement Area is undergoing active development. Undeveloped property is less valuable per acre than developed property, especially if there are no plans to develop such property or if there are severe restrictions on the development of such property, and therefore provides less security to the Owners of the Bonds should it be necessary for the City to foreclose due to the nonpayment of the Special Taxes. Furthermore, an inability to develop the land within the Improvement Area as currently proposed would result in slower rates of diversification of property ownership within the Improvement Area. Concentration of ownership increases the risk of a failure to collect sufficient Special Taxes to pay debt service on the Bonds, all other things being equal. The timely payment of Special Taxes levied on undeveloped property depends primarily upon the ability and willingness of owners of such property to pay such taxes when due. A slowdown in or cessation of the development of land within the Improvement Area could reduce the ability and willingness of such owners to make Special Tax payments, and could greatly reduce the value of such property in the event it has to be foreclosed upon to collect delinquent special taxes. See SPECIAL RISK FACTORS Bankruptcy herein for a discussion of certain limitations on the ability of the Improvement Area to pursue judicial foreclosure proceedings with respect to taxpayers with delinquent Special Taxes. Construction Risk Further development of property within the Improvement Area is subject to a number of risks, including, without limitation, inclement weather, shortages of or other supply problems relating to labor and materials, design or construction defects, and other risks. The realization of one or more of such risks could result in delays or a failure to develop the Improvement Area. See SPECIAL RISK FACTORS Failure to Develop, above. Cost overruns for public infrastructure to be constructed by the Developer are generally the responsibility of the Developer. The ability to pay for such cost overruns and to complete the applicable construction project is dependent on the availability of funding sources to the Developer. No assurances can be given that the Developer will obtain any such funding in a manner timely enough to avoid delays to the development of the Improvement Area as described herein. Concentration of Ownership and Risks Relating to Future Owners Generally, the risk of delinquency or nonpayment of Special Taxes at levels which do not permit the timely payment of principal of and interest on the Bonds is inversely correlated to the diversity of ownership of Taxable Property within the Improvement Area. The Developer is currently the owner of all of the Taxable Property within the Improvement Area. The Developer has an initial release of 16 single family homes currently under construction with an estimated completion date of October As of September 26, 2013, 50% of the homes are substantially complete and 50% of the homes require up to 45 days for substantial completion. Three homes have sold with one already having closed escrow and the remaining two expected to close escrow on or before October 7, Three additional homes have been sold and close of escrow is expected later in fall In August, 2013, the Developer released an additional 10 single family homes currently under construction with an estimated completion date of February The ultimate construction and sale of residences to individual homeowners will diversify ownership of real property within the Improvement Area. See THE DISTRICT AND THE IMPROVEMENT AREA Plan of Development and Ownership of Property. Although it has no current plans to do so, the Developer may sell or any part of its real property holdings in the Improvement Area to another developer. No representation is made as to the experience, abilities or financial resources of any future owner of property in the Improvement Area, or the likelihood that any such future owner will be successful in developing property within the Improvement Area 38

45 beyond the stage of development reached by the Developer. The City has not made any investigation of or imposed any restrictions on any prospective owner of property in the Improvement Area. Appraisal Risks The Appraiser has estimated the market value of the property in the Improvement Area on the basis of certain assumptions which the Appraiser believes to be reasonable under the circumstances. See the Appraisal included in Appendix A hereto. However, certain of the events assumed by the Appraiser have not yet occurred as of the date of this Official Statement or may prove to be untrue. Although the City believes that the Appraiser s methodology and assumptions are reasonable under the circumstances, the Appraiser s hypothetical market value conclusions are expressions of professional opinion only. No assurance can be given that the market values of property in the Improvement Area are equal to or greater than the Appraiser s estimated hypothetical market value, nor can any assurance be given that such market values will not decline during the period of time the Bonds are Outstanding. The market values of the property in the Improvement Area can be adversely affected by a variety of factors, including, but not limited to, the occurrence of one or more of the special risk events discussed herein. A decline in the market value of a parcel in the Improvement Area could lower the ability or willingness of the owner of such parcel to pay Special Taxes when due and would decrease the amount recoverable at a foreclosure sale of such parcel. See SECURITY FOR THE BONDS Property Values for a further discussion of estimated property values in the Improvement Area. Bankruptcy The payment of Special Taxes and the ability of the City to foreclose the lien of a delinquent Special Tax may be limited by bankruptcy, insolvency, or other laws generally affecting creditors rights or by the laws of the State relating to judicial foreclosure. The various legal opinions to be delivered concurrently with the delivery of Bonds (including Bond Counsel s approving legal opinion) will be qualified, as to the enforceability of the various legal instruments, by bankruptcy, reorganization, insolvency, or other similar laws affecting the rights of creditors generally. Although bankruptcy proceedings would not cause the Special Taxes to become extinguished, the amount of any lien on property securing the payment of delinquent Special Taxes could be reduced if the value of the property were determined by the bankruptcy court to have become less than the amount of the lien, and the amount of the delinquent Special Taxes in excess of the reduced lien would then be treated as an unsecured claim by the court. Further, bankruptcy of a property owner could result in a delay in prosecuting superior court foreclosure proceedings. Such a delay could adversely affect the payment of the principal of, and interest on, the Bonds when due. The prosecution of foreclosure proceedings could also be delayed by other factors affecting the prosecution of lawsuits generally. Disclosures to Future Purchasers A Notice of Special Tax Lien, as amended, will be recorded in the Office of the County Recorder pursuant to the Act. While title companies normally refer to such notices in title reports, there can be no guarantee that such reference will be made or, if made, that a prospective homebuyer or lender will consider such obligation for Special Taxes in the purchase of a home or the lending of money thereon. Failure to disclose the existence of the Special Taxes or the full amount of the pro rata share of debt on 39

46 the land in the Improvement Area may affect the willingness and ability of future owners of land within the Improvement Area to pay the Special Taxes when due. Billing of Special Taxes A special tax formula can result in a substantially heavier property tax burden being imposed upon properties within a community facilities district than elsewhere in a city or county, and this in turn can lead to problems in the collection of the special tax. In some community facilities districts, taxpayers have refused to pay the special tax and have commenced litigation challenging the special tax, the community facilities district and the bonds issued by or on behalf of the district. Under provisions of the Act, the Special Taxes are to be billed to the properties within the Improvement Area which were entered on the assessment roll of the County Assessor by January 1 of the previous fiscal year on the regular property tax bills sent to owners of such properties. Such Special Tax installments are due and payable, and bear the same penalties and interest for non-payment, as regular property tax installments. These Special Tax installment payments cannot be made separately from property tax payments. Therefore, the unwillingness or inability of a property owner to pay regular property tax bills as evidenced by property tax delinquencies may also indicate an unwillingness or inability to make regular property tax payments and installment payments of Special Taxes in the future. See SECURITY FOR THE BONDS Covenant for Superior Court Foreclosure, for a discussion of the provisions which apply, and procedures which the City is obligated to follow, in the event of delinquency in the payment of installments of Special Taxes. Although the County currently distributes general property tax revenues in accordance with the Teeter Plan, the County does not apply the Teeter Plan method to community facilities districts such as the District. Endangered and Threatened Species It is illegal to harm or disturb any plants or animals in their natural habitats that have been listed as endangered species by the United States Fish & Wildlife Service under the Federal Endangered Species Act or by the California Fish & Game Commission under the California Endangered Species Act without a permit. Thus, the presence of an endangered plant or animal could delay development of vacant property in the Improvement Area or reduce the value of undeveloped property. Failure to develop the vacant property in the Improvement Area as planned, or substantial delays in the completion of the planned development of the property may increase the amount of Special Taxes to be paid to the owners of undeveloped property and affect the willingness and ability of the owners of the property within the Improvement Area to pay the Special Taxes when due. Although the EIR identified several plant and animal species with special status that would suffer population or habitat degradation or losses as a result of the Improvement Area, in each instance the City Council concluded either (i) that the implementation of feasible mitigation measures would reduce the impacts to a level that is less than significant, or (ii) that any significant and unavoidable impacts are outweighed by economic, legal and social considerations. Accordingly, the presence of any rare, endangered or sensitive species in the Improvement Area is not expected to interfere with the proposed development in the Improvement Area. Natural Disasters In the future, the Improvement Area could be subject to earthquakes, fires, flooding, acts of terrorism or war, or other calamities or natural disasters. The occurrence of such a calamity or disaster in 40

47 or around the Improvement Area could result in damage to properties in the Improvement Area or could otherwise reduce the value of such properties and affect the ability or willingness of the property owners to pay Special Taxes when due. According to Federal Emergency Management Act maps, the buildable property within the Improvement Area is located outside of the 500-year flood plain. Flood insurance will not be required as a condition to obtaining a home loan in the Improvement Area. According to the Seismic Safety Commission of the State of California, the Improvement Area, like most of the metropolitan Sacramento area, is located in a Seismic Zone 3, and can expect lower levels of ground shaking. Local building codes take into account the likely severity of any seismic activity. Hazardous Substances The market value of the property in the Improvement Area could decrease if a hazardous substance is discovered or released in the vicinity of the Improvement Area. In general, the owners and operators of a parcel may be required by law to remedy conditions relating to releases or threatened releases of hazardous substances. The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, sometimes referred to as CERCLA or the Superfund Act, is the most well known and widely applicable of these laws, but California laws with regard to hazardous substances are also stringent and similar. Under many of these laws, the owner (or operator) is obligated to remedy a hazardous substance condition of property whether or not the owner (or operator) had anything to do with creating or handling the hazardous substance. Should any of the parcels be affected by a hazardous substance, the value of such parcels could decline, because the purchaser, upon becoming the owner, will become obligated to remedy the condition. The estimated value of the property within the Improvement Area, as set forth in the Appraisal, assumes there are no hazardous substances and that there is no liability to remedy a hazardous substance condition of the property. Although the City has made no independent investigation as to the environmental condition of the Improvement Area, the Improvement Area has never been previously developed, and the City is not aware of the presence of any hazardous substance liabilities with respect to the Improvement Area. However, it is possible that such liabilities do currently exist and that the City is not aware of them. Further, it is possible that liabilities may arise in the future with respect to any of the land within the Improvement Area resulting from the present or future existence of a substance classified as a hazardous substance under the federal or State environmental laws. Any of these possibilities could adversely affect the value of a parcel and the willingness or ability of the owner of any parcel to pay the Special Tax when due. Payments by FDIC The ability of the City to collect interest and penalties specified by the Act and to foreclose the lien of delinquent Special Taxes may be limited in certain respects with regard to parcels in which the Federal Deposit Insurance Corporation (the FDIC ), or other federal government entities such as Fannie Mae or Freddie Mac, has or obtains an interest. In the case of the FDIC, in the event that any financial institution making a loan which is secured by parcels is taken over by the FDIC and the applicable Special Tax is not paid, the remedies available to the City may be constrained. The FDIC s policy statement regarding the payment of state and local real property taxes (the Policy Statement ) provides that taxes other than ad valorem taxes which are secured 41

48 by a valid lien in effect before the FDIC acquired an interest in a property will be paid unless the FDIC determines that abandonment of its interests is appropriate. The Policy Statement provides that the FDIC generally will not pay installments of non-ad valorem taxes which are levied after the time the FDIC acquires its fee interest, nor will the FDIC recognize the validity of any lien to secure payment except in certain cases where the Resolution Trust Corporation had an interest in property on or prior to December 31, Moreover, the Policy Statement provides that, with respect to parcels on which the FDIC holds a mortgage lien, the FDIC will not permit its lien to be foreclosed out by a taxing authority without its specific consent, nor will the FDIC pay or recognize liens for any penalties, fines or similar claims imposed for the non payment of taxes. The FDIC has taken a position similar to that expressed in the Policy Statement in legal proceedings brought against Orange County, California, in United States Bankruptcy Court and in Federal District Court. The Bankruptcy Court issued a ruling in favor of the FDIC on certain of such claims. Orange County appealed that ruling, and the FDIC cross-appealed. On August 28, 2001, the Ninth Circuit Court of Appeals issued a ruling favorable to the FDIC except with respect to the payment of prereceivership liens based upon delinquent property tax. The City is unable to predict what effect the application of the Policy Statement would have in the event of a delinquency with respect to parcels in which the FDIC has or obtains an interest, although prohibiting the lien of the FDIC to be foreclosed out at a judicial foreclosure sale would prevent or delay the foreclosure sale. In the case of Fannie Mae and Freddie Mac, in the event a parcel of taxable property is owned by a federal government entity or federal government sponsored entity, such as Fannie Mae or Freddie Mac, or in the event a private deed of trust secured by a parcel of taxable property is owned by a federal government entity or federal government sponsored entity, such as Fannie Mae or Freddie Mac, the ability to foreclose on the parcel or to collect delinquent Special Taxes may be limited. Federal courts have held that, based on the supremacy clause of the United States Constitution, in the absence of Congressional intent to the contrary, a state or local agency cannot foreclose to collect delinquent taxes or assessments if foreclosure would impair the federal government interest. This means that, unless Congress has otherwise provided, if a federal government entity owns a parcel of taxable property but does not pay taxes and assessments levied on the parcel (including Special Taxes), the applicable state and local governments cannot foreclose on the parcel to collect the delinquent taxes and assessments. Moreover, unless Congress has otherwise provided, if the federal government has a mortgage interest in the parcel and the City wishes to foreclose on the parcel as a result of delinquent Special Taxes, the property cannot be sold at a foreclosure sale unless it can be sold for an amount sufficient to pay delinquent taxes and assessments on a parity with the Special Taxes and preserve the federal government s mortgage interest. The City s remedies may also be limited in the case of delinquent Special Taxes with respect to parcels in which other federal agencies (such as the Internal Revenue Service and the Drug Enforcement Administration) have or obtain an interest. The City is unable to predict what effect the FDIC s application of the Policy Statement would have in the event of a delinquency on a parcel within the Improvement Area in which the FDIC has an interest, although prohibiting the lien of the FDIC to be foreclosed at a judicial foreclosure sale would reduce or eliminate the persons willing to purchase a parcel at a foreclosure sale. Owners of the Bonds should assume that the City will be unable to foreclose on any parcel owned by the FDIC. As of September 1, 2013, no property in the Improvement Area was owned by the FDIC. 42

49 Parity Taxes and Special Assessments The Special Taxes constitute a lien against the parcels of land on which they have been levied. Such lien is on a parity with all special taxes levied by the City or other agencies and is co-equal to and independent of the lien for general property taxes, regardless of when they are imposed upon the same property. The City does not have control over the ability of other entities to issue indebtedness secured by ad valorem taxes, special taxes or assessments payable from all or a portion of the property within the Improvement Area. In addition, the owners of property within the Improvement Area may, without the consent or knowledge of the City, petition other public agencies to issue public indebtedness secured by ad valorem taxes, special taxes or assessments. Any such special taxes may have a lien on such property on a parity with the lien of the Special Taxes. See SECURITY FOR THE BONDS Other Potential Debt. Value-to-Bond Debt Ratio The estimated value-to-bond debt ratio set forth herein under the caption SECURITY FOR THE BONDS Estimated Value-to-Bond Debt Ratio are based on the appraised values of property in the Improvement Area as of August 9, No assurance can be given that such value-to-bond debt ratio will be maintained over time. As discussed herein, many factors which are beyond the control of the City could adversely affect the property values within the Improvement Area. The City also has no control over the amount of additional indebtedness that may be issued by other public agencies, the payment of which, through the levy of a tax or an assessment, is on a parity with the Special Taxes. See SPECIAL RISK FACTORS Parity Taxes and Special Assessments and SECURITY FOR THE BONDS Other Potential Debt. A decrease in the property values in the Improvement Area or an increase in bond debt liens on property in the Improvement Area, or both, could result in a lowering of the value-to-bond debt ratio of the property in the Improvement Area. Limitations on Remedies The Indenture does not permit the acceleration of the Bonds in the event of a payment default or other default under the terms of the Bonds or the Indenture. Generally, remedies are limited to legal actions to compel the City to perform under the Bonds and the Indenture, to enjoin acts which are unlawful or violate the rights of the Holders, or to account as the trustee of an express trust. See Appendix D SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE Remedies of Holders. Remedies available to the Owners may be inadequate to assure the timely payment of principal of and interest on the Bonds or to preserve the tax-exempt status of the Bonds. The lack of availability of certain remedies or the limitation of remedies may entail risks of delay, limitation or modification of the rights of the Owners. Bond Counsel has limited its opinion as to the enforceability of the Bonds and of the Indenture to the extent that enforceability may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium, or others similar laws affecting generally the enforcement of creditor s rights, by equitable principles, by the exercise of judicial discretion and by limitations on remedies against public agencies in the State of California. Right to Vote on Taxes Act Article XIIIC and Article XIIID to the California Constitution, enacted in 1996, limit the authority of local governments to impose taxes and property-related assessments, fees and charges. Many 43

50 provisions of Articles XIIIC and XIIID have not yet been interpreted by the courts, although a number of lawsuits have been filed requesting the courts to interpret various aspects thereof. Among other things, Section 3 of Article XIIIC states that... the initiative power shall not be prohibited or otherwise limited in matters of reducing or repealing any local tax, assessment, fee or charge. The Act provides for a procedure, which includes notice, hearing, protest and voting requirements to alter the rate and method of apportionment of an existing special tax. However, the Act prohibits a legislative body from adopting any resolution to reduce the rate of any special tax or terminate the levy of any special tax pledged to repay any debt incurred pursuant to the Act unless such legislative body determines that the reduction or termination of the special tax would not interfere with the timely retirement of that debt. Although the matter is not free from doubt, it is likely that the exercise by the voters of the initiative power referred to in Article XIIIC to reduce or terminate a Special Tax is subject to the same restrictions as are applicable to the City Council, as the legislative body of the District, pursuant to the Act. Accordingly, although the matter is not free from doubt, it is likely that Articles XIIIC and XIIID have not conferred on the voters the power to repeal or reduce the Special Taxes if such reduction would interfere with the timely retirement of the Bonds. It may be possible, however, for voters or the Improvement Area to reduce the Special Taxes in a manner which does not interfere with the timely repayment of the Bonds, but which does reduce the maximum amount of Special Taxes that may be levied in any year below the existing levels. Therefore, no assurance can be given with respect to the levy of Special Taxes for administrative expenses. Furthermore, no assurance can be given with respect to the future levy of the Special Taxes in amounts greater than the amount necessary for the timely retirement of the Bonds. The interpretation and application of Articles XIIIC and XIIID will ultimately be determined by the courts with respect to a number of the matters discussed above, and it is not possible at this time to predict with certainty the outcome of such determination or the timeliness of any remedy afforded by the courts. See SPECIAL RISK FACTORS Limitations on Remedies. Loss of Tax Exemption As discussed under the caption TAX MATTERS, interest on the Bonds could become includable in gross income for purposes of federal income taxation retroactive to the date the Bonds were issued, as a result of acts or omissions of the City in violation of the Code. Should such an event occur, the Bonds are not subject to redemption and will remain Outstanding until maturity or until redeemed under the optional redemption or mandatory sinking fund redemption provisions of the Indenture. IRS Audit of Tax-Exempt Bond Issues The Internal Revenue Service has initiated an expanded program for the auditing of tax-exempt bond issues, including both random and targeted audits. It is possible that the Bonds will be selected for audit by the Internal Revenue Service. It is also possible that the market value of the Bonds might be affected as a result of such an audit of the Bonds (or by an audit of similar bonds or securities). FINANCIAL ADVISOR The City has retained Public Financial Management, Inc., of San Francisco, California, as financial advisor (the Financial Advisor ) in connection with the issuance of the Bonds. The Financial Advisor is not obligated to undertake, and has not undertaken to make, an independent verification or assume responsibility for the accuracy, completeness, or fairness of the information contained in this 44

51 Official Statement. The Financial Advisor is an independent financial advisory firm and is not engaged in the business of underwriting, trading or distributing municipal securities or other public securities. LITIGATION At the time of delivery of and payment for the Bonds, the City will certify that there is no action, suit, litigation, inquiry or investigation before or by any court, governmental agency, public board or body served, or to the best knowledge of the City threatened, against the City in any material respect affecting the existence of the Improvement Area or the titles of the City s officers to their respective offices or seeking to prohibit, restrain or enjoin the sale, execution or delivery of the Bonds or challenging directly or indirectly the proceedings to levy the Special Taxes or issue the Bonds. CONTINUING DISCLOSURE The City has covenanted for the benefit of the Owners of the Bonds to provide, each year for so long as the Bonds are Outstanding, certain financial information and operating data relating to the Bonds, the Improvement Area, ownership of the property in the Improvement Area that is subject to the Special Tax, the occurrence of delinquencies in payment of the Special Tax, and the status of foreclosure proceedings, if any, respecting Special Tax delinquencies (the Improvement Area Disclosure Report ), and to provide notices of the occurrence of certain enumerated events. The financial information and operating data will be provided annually on or before March 31 for the twelve-month period ending on the preceding June 30, commencing March 31, A form of the City s undertaking is included in Appendix E FORMS OF CONTINUING DISCLOSURE UNDERTAKINGS. The Improvement Area Disclosure Reports are to be filed by the City with the Municipal Securities Rulemaking Board s Electronic Municipal Market Access website ( EMMA ). These covenants have been made in order to assist the Underwriter in complying with Securities and Exchange Commission Rule 15c2-12(b)(5). Though the City has regularly filed Annual Reports City recently discovered that it had failed to file its financial statements, certain material events notices relating to insurer downgrades, and certain financial and operating data with respect to certain of its bond issues. The City expects corrections to such reports to be filed by October 1, The City has not otherwise in the past five years failed to materially comply under any prior agreement entered into pursuant Rule 15c2-12. Pursuant to a certificate of the Developer (the Developer Continuing Disclosure Certificate ), the Developer has covenanted for the benefit of the Owners of the Bonds to provide certain financial information and operating data relating to the Developer, its development plan and its financing plan (the Developer Disclosure Report ), and to provide notices of the occurrence of certain enumerated events, if material, until the Property is developed to the planned development stage or until the Developer s obligation to so provide such information, data and notices is otherwise terminated in accordance with the provisions of the Developer Continuing Disclosure Certificate. A form of the Developer Continuing Disclosure Certificate is included in Appendix E FORMS OF CONTINUING DISCLOSURE UNDERTAKINGS. Such information is to be provided by the Developer semiannually not later than June 30 for the six-month period ending on the prior December 31, and not later than December 31 for the six-month period ending the prior June 30, commencing with the Semiannual Report for the six-month period ending June 30, The Developer Disclosure Reports are to be filed by the Developer with EMMA. These covenants have been made in order to assist the Underwriter in complying with Securities and Exchange Commission Rule 15c2-12(b)(5). The Developer has not failed to comply under any prior agreement entered into pursuant Rule 15c2-12 to provide periodic continuing disclosure reports or notices of material events. 45

52 LEGAL OPINIONS The validity of the Bonds and certain other legal matters are subject to the approving opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the City ( Bond Counsel ). Bond Counsel has not undertaken any responsibility for the accuracy, completeness or fairness of this Official Statement and expresses no opinion as to the matters set forth herein. A complete copy of the proposed form of Bond Counsel opinion is contained in Appendix C hereto. Orrick, Herrington & Sutcliffe LLP has also served as Disclosure Counsel to the City. Certain legal matters will be passed upon for the City by Kronick, Moskovitz, Tiedemann & Girard, Sacramento, California, City Attorney and for the Underwriter by Jones Hall, A Professional Corporation. TAX MATTERS In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the City, based upon an analysis of existing laws, regulations, rulings, and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 (the Code ) and is exempt from State of California personal income taxes. Bond Counsel is of the further opinion that interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. A complete copy of the proposed form of opinion of Bond Counsel is set forth in Appendix C attached hereto. To the extent the issue price of any maturity of the Bonds is less than the amount to be paid at maturity of such Bonds (excluding amounts stated to be interest and payable at least annually over the term of such Bonds), the difference constitutes original issue discount, the accrual of which, to the extent properly allocable to each beneficial owner thereof, is treated as interest on the Bonds which is excluded from gross income for federal income tax purposes and State of California personal income taxes. For this purpose, the issue price of a particular maturity of the Bonds is the first price at which a substantial amount of such maturity of the Bonds is sold to the public (excluding bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). The original issue discount with respect to any maturity of the Bonds accrues daily over the term to maturity of such Bonds on the basis of a constant interest rate compounded semiannually (with straightline interpolations between compounding dates). The accruing original issue discount is added to the adjusted basis of such Bonds to determine taxable gain or loss upon disposition (including sale, redemption, or payment on maturity) of such Bonds. Beneficial owners of the Bonds should consult their own tax advisors with respect to the tax consequences of ownership of Bonds with original issue discount, including the treatment of beneficial owners who do not purchase such Bonds in the original offering to the public at the first price at which a substantial amount of such Bonds is sold to the public. Bonds purchased, whether at original issuance or otherwise, for an amount higher than their principal amount payable at maturity (or, in some cases, at their earlier call date) ( Premium Bonds ) will be treated as having amortizable bond premium. No deduction is allowable for the amortizable bond premium in the case of bonds, like the Premium Bonds, the interest on which is excluded from gross income for federal income tax purposes. However, the amount of tax-exempt interest received, and a beneficial owner s basis in a Premium Bond, will be reduced by the amount of amortizable bond premium properly allocable to such beneficial owner. Beneficial owners of Premium Bonds should consult their own tax advisors with respect to the proper treatment of amortizable bond premium in their particular circumstances. 46

53 The Code imposes various restrictions, conditions and requirements relating to the exclusion from gross income for federal income tax purposes of interest on obligations such as the Bonds. The City has made certain representations and covenanted to comply with certain restrictions, conditions and requirements designed to ensure that interest on the Bonds will not be included in federal gross income. Inaccuracy of these representations or failure to comply with these covenants may result in interest on the Bonds being included in gross income for federal income tax purposes, possibly from the date of original issuance of the Bonds. The opinion of Bond Counsel assumes the accuracy of these representations and compliance with these covenants. Bond Counsel has not undertaken to determine (or to inform any person) whether any actions taken (or not taken) or events occurring (or not occurring), or any other matters coming to Bond Counsel s attention 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. Although Bond Counsel is of the opinion that interest on the Bonds is excluded from gross income for federal income tax purposes and is exempt from State of California personal income taxes, the ownership or disposition of, or the accrual or receipt of interest on, the Bonds may otherwise affect a beneficial owner s federal, state or local tax liability. The nature and extent of these other tax consequences will depend upon the particular tax status of the beneficial owner or the beneficial owner s other items of income or deduction. Bond Counsel expresses no opinion regarding any such other tax consequences. Current and future legislation proposals, if enacted into law, or clarification of the Code, or court decisions, may cause interest on the Bonds to be subject, directly or indirectly, in whole or in part, to federal income taxation or to be subject to or exempted from state income taxation, or otherwise prevent Beneficial Owners from realizing the full current benefit of the tax status of such interest. As one example, the Obama Administration s proposed 2014 budget includes a legislative proposal which, for tax years beginning after December 31, 2013, would limit the exclusion from gross income of interest on obligations like the Bonds to some extent for taxpayers who are individuals and whose income is subject to higher marginal income tax rates. The introduction or enactment of any such legislative proposals or clarification of the Code or court decisions may also affect, perhaps significantly, the market price for, or marketability of, the Bonds. Prospective purchasers of the Bonds should consult their own tax advisors regarding the potential impact of any pending or proposed federal or state tax legislation, regulations or litigation, as to which Bond Counsel is expected to express no opinion. The opinion of Bond Counsel is based on current legal authority, covers certain matters not directly addressed by such authorities, and represents Bond Counsel s judgment as to the proper treatment of the Bonds for federal income tax purposes. It is not binding on the Internal Revenue Service ( IRS ) or the courts. Furthermore, Bond Counsel cannot give and has not given any opinion or assurance about the future activities of the City, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the enforcement thereof by the IRS. The City has covenanted, however, to comply with the requirements of the Code. Bond Counsel s engagement with respect to the Bonds ends with the issuance of the Bonds, and, unless separately engaged, Bond Counsel is not obligated to defend the City or the beneficial owners regarding the tax-exempt status of the Bonds in the event of an audit examination by the IRS. Under current procedures, parties other than the City and their appointed counsel, including the beneficial owners, would have little, if any, right to participate in the audit examination process. Moreover, because achieving judicial review in connection with an audit examination of tax-exempt bonds is difficult, obtaining an independent review of IRS positions with which the City legitimately disagrees, may not be practicable. Any action of the IRS, including but not limited to selection of the Bonds for audit, or the course or result of such audit, or an audit of bonds presenting similar tax issues may affect the market 47

54 price for, or the marketability of, the Bonds, and may cause the City or the beneficial owners to incur significant expense. UNDERWRITING The Bonds are being purchased by Piper Jaffray & Co. (the Underwriter ). Pursuant to a Bond Purchase Contract between the Underwriter and the City (the Purchase Contract ), the Underwriter has agreed to purchase all of the Bonds for an aggregate purchase price of $4,783,932.00, subject to certain conditions set forth in the Purchase Contract. The purchase price reflects an underwriter s discount of $46,126.50, and original issue premium of $ The initial offering prices stated on the cover of this Official Statement may be changed from time to time by the Underwriter. The Underwriter may offer and sell the Bonds to certain dealers (including dealers depositing Bonds into investment trusts), dealer banks, banks acting as agent and others at prices lower than said public offering prices. The Underwriter and Persing LLC, a subsidiary of The Bank of New York Mellon Corporation, entered into an agreement (the Agreement ) which enables Pershing LLC to distribute certain new issue municipal securities underwritten by or allocated to the Underwriter, including the Bonds. Under the Agreement, the Underwriter will share with Pershing LLC a portion of the fee or commission paid to the underwriter. NO RATINGS The City has not made, and does not contemplate making, application to any rating agency for the assignment of a rating to the Bonds. MISCELLANEOUS The quotations from, and the summaries and explanations of the Indenture and other statutes and documents contained herein do not purport to be complete, and reference is made to such documents and statutes for the full and complete statements of their respective provisions. This Official Statement is submitted only in connection with the initial offering of the Bonds by the City, and is not to be used for any other purpose. This Official Statement does not constitute a contract with the purchasers of the Bonds. Any statements made in this Official Statement involving matters of opinion or of estimates, whether or not so expressly stated, are set forth as such and not as representations of fact, and no representation is made that any of the estimates will be realized. The execution and delivery of this Official Statement has been duly authorized by the City. CITY OF LINCOLN By: /s/ Jim Estep City Manager 48

55 APPENDIX A APPRAISAL

56 [THIS PAGE INTENTIONALLY LEFT BLANK]

57 Self-Contained Appraisal Report City of Lincoln Community Facilities District No (Lakeside) Improvement Area No. 1 Lincoln, CA Date of Report: September 5, 2013 Prepared For: Mr. Jim Estep, City Manager City of Lincoln th Street Lincoln, California Prepared By: Kevin K. Ziegenmeyer, Appraiser Jarrod E. Hodgson, Appraiser

58 September 5, 2013 Mr. Jim Estep, City Manager City of Lincoln th Street Lincoln, California RE: City of Lincoln Community Facilities District No (Lakeside) Improvement Area No. 1 Lincoln, CA Dear Mr. Estep: At your request and authorization, Seevers Jordan Ziegenmeyer has prepared an appraisal of the property within City of Lincoln Community Facilities District (the CFD ) No (Lakeside) Improvement Area No. 1 (the Improvement Area ), under the assumptions and conditions contained in this report. The attached Self-Contained Appraisal Report was prepared in compliance with the reporting requirements set forth under Standards Rule 2-2(a) of the Uniform Standards of Professional Appraisal Practice (USPAP) and the Appraisal Standards for Land Secured Financing, published by the California Debt and Investment Advisory Commission. The subject property is a planned 149-unit project, consisting of 133 vacant finished single-family residential lots and 16 partially completed single-family homes (under construction) located within the Improvement Area. The property is located in the northwestern area of the city of Lincoln, Placer County, California. All infrastructure, offsite and in-tract development is complete. The property is owned by John Mourier Construction Inc (doing business as JMC Homes), which is hereinafter referred to as the Developer of the subject property. After a period of decline, residential market conditions in the area have improved and the sector appears to be entering an expansionary period. Prices have increased and new projects have opened. The Developer began home construction in early 2013 and plans to have the first homes completed in September We provide a more detailed description of the subject property within the attached report. The market value estimated herein is based on a hypothetical condition. USPAP defines a hypothetical condition as a condition, directly related to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results, but is used for the purpose of the analysis. Certain of the proceeds from the Bonds will be used to generate fee credits applicable to fees ordinarily paid at the time building permits are pulled for new construction. The market value estimated herein is based on the hypothetical condition the subject property has said fee credits. As a result of our analysis, it is our opinion that the market value, in accordance with the extraordinary assumptions, hypothetical conditions, significant factors, general assumptions and limiting conditions set forth on pages 9 through 11 of this report, and based on an effective date of value of August 9, 2013, which was our date of inspection, is not less than TWENTY EIGHT MILLION FOUR HUNDRED TEN THOUSAND DOLLARS $28,410, Atherton Road, Suite 500 Rocklin, CA Phone: Fax:

59 Mr. Jim Estep September 5, 2013 Page 2 The estimate of value provided herein represents a not-less-than estimate, since the partially completed single-family residences are valued based on the smallest floor plan under construction. Further, the values are not-less-than because no consideration is given to lot premiums or home upgrades (the homes are valued assuming a base amenity level). The estimate of market value provided assumes a transfer would reflect a cash transaction or terms considered to be equivalent to cash. The estimate is also premised on an assumed sale after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with buyer and seller each acting prudently, knowledgeably, for their own self interest and assuming neither is under duress. The estimate of market value accounts for the impact of the lien of the Special Taxes securing the Bonds. Note that in this report, the term finished lot means all site development is completed, final map has recorded, and all development fees due at final map have been paid. A finished lot does not include fees due at building permit, since these items are associated with home construction. The definition of finished lot utilized in this report is shared by market participants in the Northern California region. We hereby certify the property has been inspected and have impartially considered all data collected in the investigation. Further, we have no past, present or anticipated future interest in the property. This letter must remain attached to the report, which contains 91 pages, plus related exhibits and Addenda, in order for the value opinions set forth herein to be considered valid. The subject property does not have any significant natural, cultural, recreational or scientific value. The appraisers certify this appraisal assignment was not based on a requested minimum valuation, a specific valuation or the approval of a loan. This appraisal has been performed in accordance with the requirements of USPAP and the Code of Professional Ethics and the Standards of Professional Practice of the Appraisal Institute. Additionally, this valuation is offered in accordance with the limiting conditions and assumptions set forth in this report. Thank you for the opportunity to work with your office on this assignment. Sincerely, Kevin K. Ziegenmeyer, Appraiser Jarrod E. Hodgson, Appraiser State Certification No.: AG State Certification No.: AG Expiration Date: June 4, 2013 Expiration Date: June 8, 2014 /jab

60 Transmittal Letter Table of Contents TABLE OF CONTENTS Summary of Important Facts and Conclusions 1 Introduction Market Area Property Description and History 3 Type and Definition of Value 5 Client, Intended User and Intended Use of the Appraisal 6 Property Rights Appraised 6 Appraisal Report Format 6 Dates of Inspection, Value and Report 6 Scope of Work 6 Extraordinary Assumptions, Hypothetical Conditions and Significant Factors 9 General Assumptions and Limiting Conditions 10 Certification Statement(s) 12 South Placer County Regional Overview 14 Neighborhood Overview 19 Residential Market Overview 24 Subject Property Property Identification and Legal Data 41 Site Description 46 Improvement Description 48 Facilities to be Financed by the District 51 Subject Photographs 52 Highest and Best Use Analysis 54 Valuation Analysis Addenda Approaches to Value 56 Appraisal Methodology 59 Sales Comparison Approach 60 Extraction Analysis 74 Valuation of Partially Completed Production Homes 78 Market Value of the Subject Property in Bulk 89 Conclusion of Value 90 Exposure Time 91 Readdressing/Reassigning Appraisal Reports Glossary of Terms Qualifications of Appraiser(s)

61 SUMMARY OF IMPORTANT FACTS AND CONCLUSIONS Property: Location: The subject property is a planned 149-unit project, consisting of 133 vacant finished single-family residential lots and 16 partially completed singlefamily homes (under construction) located within City of Lincoln Community Facilities District No (Lakeside) Improvement Area No. 1. The subject is a portion of a development area identified as Lakeside 6. Improvement Area No. 1 is located within the northwest area of the city of Lincoln, east of the municipal airport, in the city of Lincoln, Placer County, California Specifically, Improvement Area No. 1 is situated along the east side of Lakeside Drive, north of Venture Drive. Census Tract Number: Assessor Parcel Number: through through through -052 The partially completed homes are located on APNs through -012, and -016 through Final subdivision maps have recorded. Individual Assessor parcel numbers have been assigned to each lot. Lot Sizes: Ownership: Property Rights Appraised: Zoning: Entitlements: Lots range in size from 5,663 to 17,945 square feet, with a typical lot size of 5,940 square feet. John Mourier Construction Inc. Fee Simple Interest RD-5, which is a single-family residential land use designation with a maximum density of five units per acre. The subject project received approval of final subdivision map in August The subject is not encumbered by an affordable housing requirement. Flood Zone: Zone X areas outside the 100-year and 500-year floodplain Seevers Jordan Ziegenmeyer 1

62 Earthquake Zone: Highest and Best Use: Zone 3 Moderate seismic activity (not located in a Fault-Rupture Hazard Zone) Homes: Completion of construction for near term sale to individual buyers Lots: Near-term single-family residential development Exposure: 12 months Date of Inspection: August 9, 2013 Effective Date of Value: August 9, 2013 Conclusion of Not-Less-Than Market Value Subject to a Hypothetical Condition: $28,410,000 The market value estimated herein is based on a hypothetical condition. USPAP defines a hypothetical condition as a condition, directly related to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results, but is used for the purpose of the analysis. Certain of the proceeds from the Bonds will be used to generate fee credits applicable to fees ordinarily paid at the time building permits are pulled for new construction. The market value estimated herein is based on the hypothetical condition the subject property has said fee credits. The value is subject to the extraordinary assumptions, hypothetical conditions, significant factors, general assumptions and limiting conditions referenced on pages 9 through 11 of this report. Seevers Jordan Ziegenmeyer 2

63 INTRODUCTION Property Description and History Southeasterly view of the subject. Boundaries indicated are approximate. The subject property is a planned 149-unit project, consisting of 133 vacant finished single-family residential lots and 16 partially completed single-family homes (under construction) located within City of Lincoln Community Facilities District (the CFD ) No (Lakeside) Improvement Area No. 1 (the Improvement Area ). The property is located in the northwestern area of the city of Lincoln, Placer County, California. All infrastructure, offsite and in-tract development is complete. The financing provided by the CFD No Improvement Area No. 1 Special Tax Bonds (the Bonds ) will be used for reimbursement of local and regional infrastructure improvements. These improvements include but are not limited to roadways, drainage systems, sewer systems, and water systems. The reimbursement is anticipated to occur in part via credits on fees otherwise paid at building permit for local and regional infrastructure. Payments of principal and interest on the Bonds will be paid by a Special Tax levied against the developable property within the Improvement Area (the subject property ). The market value estimated herein accounts for the lien of the Special Taxes securing the Bonds. The subject property is owned by John Mourier Construction Inc (doing business as JMC Homes), which is hereinafter referred to as the Developer of the subject property. After a period of decline, Seevers Jordan Ziegenmeyer 3

64 residential market conditions in the area have improved and the sector appears to be entering an expansionary period. Prices have increased and new projects have opened. The Developer began home construction in early 2013 and plans to have the first homes completed in September The Improvement Area represents a portion of the Lakeside 6 residential project, which is planned for more than 700 single-family residential lots. Improvement Area No. 2 is located immediately west of the subject and is mostly built out. Improvement Area No. 2 was also developed by JMC Homes and featured two distinct typical lot sizes (6,600 and 3,600 square feet) in two separate product lines (The Executive Series and The Premier Series). The Developer is extending The Executive Series product line onto the subject property. Homes are proposed to range in size from 1,915 to 3,927 square feet. Preliminary base pricing ranges from $379,900 to $529,990. Of the 16 homes under construction, six are pre-sold. Three Year Sales History The Developer initially acquired the land within the Improvement Area in May In April 2009, the Developer sold the property to an unrelated third party (Pac Capital LLC) subject to an option purchase agreement. In March 2010, the Developer exercised its option and re-acquired the subject property for $5,683,327. This was an arm s-length transaction with no unusual contingencies. Based on other sales around the same point in time, it appears the sale price was below market. Further, since the sale date, land prices have increased and the Developer anticipates to obtain fee credits (from completed site improvements and anticipated bond proceeds). These factors explain the difference between the prior sale price and the value estimated in this report. Besides ongoing home sales, the subject property has not been involved in any other transactions within the last three years. To the best of our knowledge, the subject property is not being marketed for sale in bulk. A list of the pending prices (before upgrades) and units under contract is provided below. Final prices will be determined when buyers determine and finalize upgrades. Lot Number Living Area (Square Price Feet) 20 2,797 $419, ,075 $379, ,075 $399, ,075 $ ,866 $409, ,797 $409,990 Seevers Jordan Ziegenmeyer 4

65 Project History The Developer acquired the subject property from Hidden Oaks Holdings, LLC and Five Stones Holdings, LLC (collectively doing business Premier Homes), but the specific sale date and terms are not reflected by public records and additional information is not available. Premier Homes acquired the subject property as 149 unimproved lots on 31 gross acres for $9,685,000 on July 20, The seller was the Buzz Oates Charitable Foundation and the sale was non-arm s-length. Even so, the sale price at the time reflected market pricing. After acquiring the property in 2005, Premier Homes completed approximately $9.1 in infrastructure and in-tract development. Premier Homes planned to offer six floor plans ranging in size from 1,414 to 2,916 square feet, but construction never occurred due to declines in residential market conditions, which began to erode drastically in The subject property received tentative subdivision map approval for 149 single-family lots in October The final subdivision map recorded in August Type and Definition of Value The purpose of this appraisal is to estimate the not-less-than market value of the subject property, based on a hypothetical condition, as of the date of inspection, August 9, Market value is defined as follows: Market value: The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently 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: (1) Buyer and seller are typically motivated; (2) Both parties are well informed or well advised, and acting in what they consider their own best interests; (3) A reasonable time is allowed for exposure in the open market; (4) Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. 1 The market value estimated herein is based on a hypothetical condition. USPAP defines a hypothetical condition as a condition, directly related to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results, but is used for the purpose of the analysis. Certain of the proceeds from the Bonds will be used to generate fee 1 Code of Federal Regulations, Title 12, Section (55 Federal Register 34696, Aug. 24, 1990; as amended at 57 Federal Register 12202, Apr. 9, 1992; 59 Federal Register 29499, June 7, 1994). Seevers Jordan Ziegenmeyer 5

66 credits applicable to fees ordinarily paid at the time building permits are pulled for new construction. The market value estimated herein is based on the hypothetical condition the subject property has said fee credits. The estimate of value provided herein represents a not-less-than estimate, since the partially completed single-family residences are valued based on the smallest floor plan under construction. Further, the values are not-less-than because no consideration is given to lot premiums or home upgrades (the homes are valued assuming a base amenity level). Please refer to the Glossary of Terms in the Addenda to this report for a definition of value as is. Client, Intended User and Intended Use of the Appraisal The client and intended user of the report is the City of Lincoln, legal counsel and underwriter. It is our understanding the report will be used for bond financing purposes. Property Rights Appraised The following real property rights have been appraised in this report: Fee Simple Estate: absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat. 2 The rights appraised are also subject to the extraordinary assumptions, significant factors, general assumptions and limiting conditions contained in this report, as well as any exceptions, encroachments, easements and rights-of-way recorded. Appraisal Report Format This report is a Self-Contained Appraisal Report, which is intended to comply with the reporting requirements set forth under Standards Rule 2-2(a) of the Uniform Standards of Professional Appraisal Practice (USPAP). Dates of Inspection, Value and Report An inspection of the subject property was completed on August 9, 2013, which represents the effective date of value. This appraisal report was completed and assembled on September 5, Scope of Work This appraisal report has been prepared in accordance with the Uniform Standards of Professional Appraisal Practice (USPAP). This analysis is intended to be an appraisal assignment, as defined by 2 The Dictionary of Real Estate Appraisal, 5 th ed. (Chicago: Appraisal Institute, 2010), 78. Seevers Jordan Ziegenmeyer 6

67 USPAP; the intention is the appraisal service be performed in such a manner that the result of the analysis, opinions, or conclusion be that of a disinterested third party. We researched and documented several legal and physical aspects of the subject property. A physical inspection was completed that serves as the basis for the site description contained in this report. Entitlement and planning information was obtained from the City of Lincoln. The subject s sales history was verified by public records (Realquest.com). The subject s earthquake zone, flood zone and utilities were verified with applicable public agencies. Property tax information for the current tax year was obtained from the Placer County Treasurer-Tax Collector s Office. We analyzed and documented data relating to the subject s neighborhood and surrounding market areas. This information was obtained through personal inspections of portions of the neighborhood and market areas, newspaper articles, real estate conferences and interviews with various market participants, including property owners, property managers, brokers, developers and local government agencies. We also relied on comparable information (sales, costs, permits and fees) that we had retained in our appraisal files and which may have resulted from prior interviews with market participants. In this appraisal, we determined the highest and best use of the subject property as though vacant based on the four standard tests (legal permissibility, physical possibility, financial feasibility and maximum productivity). As will be shown in the Highest and Best Use Analysis section, the highest and best use of the subject property is (1) completion of construction of the partially completed homes for the near term sale to individuals and (2) near term development of the vacant singlefamily lots with single-family residential homes (production homes). In the valuation of the subject lots, we utilized the sales comparison approach and extraction analysis. In the sales comparison approach, we adjusted the prices of comparables in the region based on differences between the subject and comparables, and reconciled the prices of the comparable data into an opinion of value. As support for the sales comparison approach, we utilized an extraction analysis, where home construction and site development costs were deducted from an estimate of current home price to determine the underlying land value. The subject s partially completed homes were valued in bulk using a discounted cash flow analysis where projected home prices were reflected over a sell-off period, with costs such as marketing, sales, taxes and remaining construction costs deducted. The net income was discounted to yield the value in bulk. Our analysis of the lots excluded a typical income capitalization approach and cost approach, since the subject property represents vacant land with limited extended income potential. As noted, Seevers Jordan Ziegenmeyer 7

68 however, we did utilize an extraction analysis, where home construction costs were taken into account. The individuals involved in the preparation of this appraisal included Kevin K. Ziegenmeyer and Jarrod Hodgson, Appraisers. Mr. Hodgson inspected the subject property; collected and confirmed data related to the subject property, comparables and the neighborhood/market area; analyzed market data; and prepared a draft report with a preliminary estimate of value. Mr. Ziegenmeyer inspected the subject, reviewed the draft report and made necessary revisions. Seevers Jordan Ziegenmeyer 8

69 EXTRAORDINARY ASSUMPTIONS, HYPOTHETICAL CONDITIONS AND SIGNIFICANT FACTORS It is noted the use of an extraordinary assumption or hypothetical condition may have affected the results of the appraisal. Extraordinary Assumptions None Hypothetical Conditions 1. The market value estimated herein is based on a hypothetical condition. USPAP defines a hypothetical condition as a condition, directly related to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results, but is used for the purpose of the analysis. Certain of the proceeds from the Bonds will be used to generate fee credits applicable to fees ordinarily paid at the time building permits are pulled for new construction. The market value estimated herein is based on the hypothetical condition the subject property has said fee credits. Significant Factors 1. It is presumed there are no adverse soil conditions, toxic substances or other environmental hazards that may interfere or inhibit development of the subject property. If, at some future date, items are discovered that are determined to have a detrimental impact on value, the appraiser reserves the right to amend the opinion of value stated herein. 2. This report utilizes lot sizes and configurations as reflected by Assessor parcel maps. Seevers Jordan Ziegenmeyer 9

70 GENERAL ASSUMPTIONS AND LIMITING CONDITONS This appraisal report is subject to the following general assumptions and limiting conditions: 1. No responsibility is assumed for the legal description provided or for matters pertaining to legal or title considerations. Title to the property is assumed to be good and marketable unless otherwise stated. 2. No responsibility is assumed for matters of law or legal interpretation. 3. The property is appraised free and clear of any or all liens or encumbrances unless otherwise stated. 4. The information and data furnished by others in preparation of this report is believed to be reliable, but no warranty is given for its accuracy. 5. It is assumed there are no hidden or unapparent conditions of the property, subsoil, or structures that render it more or less valuable. No responsibility is assumed for such conditions or for obtaining the engineering studies that may be required to discover them. 6. It is assumed the property is in full compliance with all applicable federal, state, and local environmental regulations and laws unless the lack of compliance is stated, described, and considered in the appraisal report. 7. It is assumed the property conforms to all applicable zoning and use regulations and restrictions unless nonconformity has been identified, described and considered in the appraisal report. 8. It is assumed all required licenses, certificates of occupancy, consents, and other legislative or administrative authority from any local, state, or national government or private entity or organization have been or can be obtained or renewed for any use on which the value estimate contained in this report is based. 9. It is assumed the use of the land and improvements is confined within the boundaries or property lines of the property described and there is no encroachment or trespass unless noted in the report. 10. Unless otherwise stated in this report, the existence of hazardous materials, which may or may not be present on the property, was not observed by the appraiser. The appraiser has no knowledge of the existence of such materials on or in the property. The appraiser, however, is not qualified to detect such substances. The presence of substances such as asbestos, ureaformaldehyde foam insulation and other potentially hazardous materials may affect the value of the property. The value estimated is predicated on the assumption there is no such material on or in the property that would cause a loss in value. No responsibility is assumed for such conditions or for any expertise or engineering knowledge required to discover them. The intended user of this report is urged to retain an expert in this field, if desired. 11. The Americans with Disabilities Act (ADA) became effective January 26, I (we) have not made a specific survey or analysis of this property to determine whether the physical aspects of the improvements meet the ADA accessibility guidelines. Since compliance matches each owner s financial ability with the cost-to cure the property s potential physical characteristics, the real estate appraiser cannot comment on compliance with ADA. A brief summary of the subject s physical aspects is included in this report. It in no way suggests ADA compliance by Seevers Jordan Ziegenmeyer 10

71 the current owner. Given that compliance can change with each owner s financial ability to cure non-accessibility, the value of the subject does not consider possible non-compliance. Specific study of both the owner s financial ability and the cost-to-cure any deficiencies would be needed for the Department of Justice to determine compliance. 12. The appraisal is to be considered in its entirety and use of only a portion thereof will render the appraisal invalid. 13. Possession of this report or a copy thereof does not carry with it the right of publication nor may it be used for any purpose by anyone other than the client without the previous written consent of Seevers Jordan Ziegenmeyer. 14. Neither all nor any part of the contents of this report (especially any conclusions as to value, the identity of the appraiser, or the firm with which the appraiser is connected) shall be disseminated to the public through advertising, public relations, news, sales, or any other media without the prior written consent and approval of Seevers Jordan Ziegenmeyer. Seevers Jordan Ziegenmeyer authorizes the reproduction of this document to aid in bond underwriting and in the issuance of bonds. 15. The liability of Seevers Jordan Ziegenmeyer and its employees/subcontractors for errors/ omissions, if any, in this work is limited to the amount of its compensation for the work performed in this assignment. 16. Acceptance and/or use of the appraisal report constitutes acceptance of all assumptions and limiting conditions stated in this report. 17. An inspection of the subject property revealed no apparent adverse easements, encroachments or other conditions, which currently impact the subject. However, the exact locations of typical roadway and utility easements, or any additional easements, which would be referenced in a preliminary title report, were not provided to the appraiser. The appraiser is not a surveyor nor qualified to determine the exact location of easements. It is assumed typical easements do not have an impact on the opinion (s) of value as provided in this report. If, at some future date, these easements are determined to have a detrimental impact on value, the appraiser reserves the right to amend the opinion (s) of value. 18. This appraisal report is prepared for the exclusive use of the appraiser s client. No third parties are authorized to rely upon this report without the express consent of the appraiser. 19. The appraiser is not qualified to determine the existence of mold, the cause of mold, the type of mold or whether mold might pose any risk to the property or its inhabitants. Additional inspection by a qualified professional is recommended. Seevers Jordan Ziegenmeyer 11

72 I certify that, to the best of my knowledge and belief: CERTIFICATION STATEMENT 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 performed no services, as an appraiser or in any other capacity, regarding the property that is the subject of this report within the three-year period immediately preceding acceptance of this assignment. I have no bias with respect to the property that is the subject of this report or to the parties involved with this assignment. My engagement in this assignment was not contingent upon developing or reporting predetermined results. My compensation for completing this assignment is not contingent upon the development or reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this appraisal. My analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice. The appraisal assignment was not based on a requested minimum valuation, a specific valuation, or the approval of a loan. The reported analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Code of Professional Ethics and Standards of Professional Appraisal Practice of the Appraisal Institute. I have made a personal inspection of the property that is the subject of this report. Jarrod Hodgson, Appraiser, provided significant real property appraisal assistance to the person signing this certification. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. I certify that my State of California real estate appraiser license has never been revoked, suspended, cancelled, or restricted. I have the knowledge and experience to complete this appraisal assignment. Please see the Qualifications of Appraiser(s) portion of the Addenda to this report for additional information. As of the date of this report, I have completed the Standards and Ethics Education Requirement of the Appraisal Institute for Associate Members. KEVIN K. ZIEGENMEYER, APPRAISER DATE: September 5, 2013 State Certification No.: AG (June 4, 2013) Seevers Jordan Ziegenmeyer 12

73 CERTIFICATION STATEMENT I certify that, 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 performed no services, as an appraiser or in any other capacity, regarding the property that is the subject of this report within the three-year period immediately preceding acceptance of this assignment. I have no bias with respect to the property that is the subject of this report or to the parties involved with this assignment. My engagement in this assignment was not contingent upon developing or reporting predetermined results. My compensation for completing this assignment is not contingent upon the development or reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this appraisal. My analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice. The appraisal assignment was not based on a requested minimum valuation, a specific valuation, or the approval of a loan. The reported analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Code of Professional Ethics and Standards of Professional Appraisal Practice of the Appraisal Institute. I have made a personal inspection of the property that is the subject of this report. Kevin Ziegenmeyer, Appraiser, provided significant real property appraisal assistance to the person signing this certification. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. I certify that my State of California real estate appraiser license has never been revoked, suspended, cancelled, or restricted. I have the knowledge and experience to complete this appraisal assignment. Please see the Qualifications of Appraiser(s) portion of the Addenda to this report for additional information. As of the date of this report, I have completed the Standards and Ethics Education Requirement of the Appraisal Institute for Associate Members. JARROD E. HODGSON, APPRAISER DATE: September 5, 2013 State Certification No.: AG (June 8, 2014) Seevers Jordan Ziegenmeyer 13

74 SOUTH PLACER COUNTY REGIONAL OVERVIEW Introduction South Placer County is the southernmost component of Placer County, commonly referred to as the Valley. The remainder of Placer County is divided into the Gold Country, where parts of Auburn and Colfax are located, and the High Country, which encompasses Tahoe City and Kings Beach along Lake Tahoe. South Placer is comprised of the cities of Auburn, Colfax, Lincoln, Rocklin and Roseville; the town of Loomis; and a number of unincorporated communities, such as Granite Bay, Foresthill, Penryn and Newcastle. South Placer County encompasses approximately 260 square miles, from the Placer County line bordering Sacramento, Sutter and Yuba Counties to the city of Auburn. It lies in the north-central part of California, approximately 420 miles north of Los Angeles, 250 miles south of Oregon, 100 miles northeast of San Francisco, 80 miles west of Lake Tahoe, and 100 miles southwest of Reno. In the southern portion of the region is Roseville, the county s largest city, which encompasses about 31.6 square miles. Elevations range from 165 feet above sea level in Roseville to 10,000 feet above sea level at the summit of the Sierra Nevada Mountains. South Placer is developed with a mix of urban and rural uses. The larger cities, namely Roseville and Rocklin, are mostly urban, while the smaller communities, such as Loomis and Newcastle, have Seevers Jordan Ziegenmeyer 14

75 remained rural. Auburn and Lincoln both exhibit a combination of urban and rural settings. However, in recent years the city of Lincoln has experienced dramatic growth and development, and has become one of the fastest-growing cities in California. Population South Placer County has experienced strong growth in the last decade. The primary points of origin for in-migration to the region are the Bay Area, other parts of the Sacramento region, and Southern California. The state s population data indicate a strong pattern of movement by residents from highcost, high-density Bay Area counties to inland areas in Northern California. Following is a table depicting the population change in Placer County and its component cities over the past few years. POPULATION TRENDS City %/Yr Auburn 13,079 13,232 13,307 13,378 13,473 13, % Colfax 1,822 1,843 1,946 1,966 1,977 1, % Lincoln 40,726 41,787 42,589 43,144 43,587 43, % Loomis 6,385 6,416 6,427 6,460 6,502 6, % Rocklin 54,561 55,566 56,720 57,767 58,316 58, % Roseville 111, , , , , , % Unincorporated 105, , , , , , % Total 333, , , , , , % Source: California Department of Finance As indicated in the previous table, Placer County has experienced a strong average rate of annual growth of 1.4% over the past five years. The city of Roseville is the fastest growing part of the region. Auburn, Loomis and the unincorporated communities have had relatively little growth. Over the past decade, Placer County has been the fastest-growing county within the four-county Sacramento MSA (which also includes Sacramento, El Dorado and Yolo Counties). It is projected this trend will continue for the near future. Employment & Economy The California Employment Development Department has reported the following employment data for Placer County over the past several years. Seevers Jordan Ziegenmeyer 15

76 EMPLOYMENT TRENDS Labor Force 172, , , , , ,800 Employment 164, , , , , ,000 Job Growth n/a 1,400 (4,800) (4,500) 2,200 3,200 Unemployment Rate 4.7% 6.4% 10.4% 11.5% 10.7% 9.4% Source: California Employment Development Department The unemployment rate in Placer County was 7.5% in June 2013, which compares to rates of 8.5% for California and 7.6% for the U.S. Most areas within the state and nation, including Placer County, saw declining unemployment rates in 2004 through 2006, increases from 2007 to 2010, and declines in 2011 through Although many residents commute to employment centers in Sacramento, South Placer offers thousands of jobs and attracts workers from the local area as well as reverse commuters from Sacramento and residents of outlying areas such as Marysville/ Yuba City to the north. The largest employers in the county, according to the Sacramento Business Journal Book of Lists 2012, are Kaiser Permanente (3,702 employees in the county), Hewlett-Packard (3,200), Placer County (2,240), Sutter Health (2,205), Thunder Valley Casino Resort (2,000), and Union Pacific Railroad (2,000). Household Income Median household income represents a broad statistical measure of well-being or standard of living in a community. The median income level divides households into two equal segments with one half of households earning less than the median and the other half earning more. The median income is considered to be a better indicator than the average household income as it is not dramatically affected by unusually high or low values. In the year 2011 (most recent data available from the U.S. Census Bureau), Placer County s median household income was $69,581, which was higher than the state of California s median income of $57,275. Transportation A significant advantage of the South Placer area is its central location with respect to transportation systems. Interstate 80, State Highway 65 and State Highway 193 are the major routes traversing the region. Major urban arterials include Douglas Boulevard, Sierra College Boulevard, Roseville Parkway, Pleasant Grove Boulevard, Sunrise Avenue, Auburn-Folsom Road and Foothills Boulevard. In 2005, a major public improvement project was completed at the Douglas Boulevard/ Sunrise Avenue/ Interstate 80 intersection. The project added new lanes, new on/off ramps and a tunnel that have greatly improved traffic flow in the area. Seevers Jordan Ziegenmeyer 16

77 In addition to roadways within the county limits, South Placer enjoys proximity to many of the Sacramento region s freeways that provide access to the San Francisco Bay Area to the west, Central and Southern California to the south, Northern California and Oregon to the north, and Nevada to the east. South Placer is proximate to Sacramento International Airport, which is situated about 10 miles west of the county border. A smaller private airport, Lincoln Regional Airport, is located in the city of Lincoln. The region has good railroad service, including the transcontinental Union Pacific Railroad and Amtrak. The Capital Corridor system provides high-speed commuter rail service from Roseville to San Jose. Other modes of transportation in and out of South Placer include Greyhound bus lines and numerous trucking lines. Recent growth in South Placer has fueled demand for a new transportation artery in the region. Plans are in the works for a four to six-lane expressway, referred to as Placer Parkway, which would extend from Highway 99 in the west to Highway 65 in the east, north of Roseville and south of Lincoln. This roadway is years away from being built, but is expected to eventually ease congestion on Interstate 80. Recreation & Community Services South Placer County has ample community services and recreational opportunities. The County, cities and various park districts operate numerous public parks, golf courses, aquatic centers, libraries and community centers. Many private golf courses are located in the region, and several ski resorts are located in the mountains. Within the county lies a portion of the Folsom Lake State Recreation Area, a boating, fishing, and swimming retreat. In terms of higher education, South Placer County is home to Sierra College in Rocklin, a two-year community college offering a wide range of day and evening classes serving over 25,000 students. Heald College, a business and technology vocational school, is located in Roseville, as is an extension campus for Sierra College, located at the old Sutter Hospital on Sunrise Avenue. In 2004, William Jessup University, a private Christian college, moved from San Jose to a new facility in Rocklin. South Placer County has an excellent network of health services, including hospitals and medical office facilities. Two hospitals are located in Roseville the Sutter Roseville Medical Center and Kaiser Permanente, both of which have recent or current expansion projects. The city of Auburn is home to Sutter Auburn Faith Hospital, Sutter Medical Center-Auburn, UC Davis Medical Center, Foundation Medical Clinic and Heritage Medical Center Complex. The city of Lincoln contains medical offices/clinics operated by Sutter, UC Davis, Kaiser and Catholic Healthcare West. In addition to these institutional health care facilities, South Placer is home to a large and growing number of private physicians, dentists, clinics and other medical specialists. Seevers Jordan Ziegenmeyer 17

78 The city of Roseville is South Placer s hub for fine dining and entertainment. Several upscale restaurants are situated along Eureka Road, Roseville Parkway and Galleria Boulevard. Roseville contains two multi-screen movie theatres on Eureka Road. Another theatre recently opened in Rocklin. Shopping centers are widespread, the largest of which is the Galleria at Roseville, a regional shopping mall that opened in 2000 and was expanded in The mall is anchored by Nordstrom, Macy s, Sears and JC Penney. Conclusion South Placer County is a diverse area, with growing cities, small towns and rural areas, and an abundance of open space. The cities of Roseville, Rocklin and Lincoln have experienced strong growth in population and development over the past several years. Placer County is one of the most affluent in the greater Sacramento region in terms of household income levels. The area has a number of positive attributes, including seismic stability, a well-educated work force, good transportation systems, relative affordability and availability of housing compared to the Bay Area, and an excellent level of community services. The long-term outlook for the region is very good. Seevers Jordan Ziegenmeyer 18

79 NEIGHBORHOOD OVERVIEW Subject Property Introduction This section of the report provides an analysis of the observable data that indicate patterns of growth, structure and/or change that may enhance or detract from property values. For the purpose of this analysis, a neighborhood is defined as a group of complementary land uses; a congruous grouping of inhabitants, buildings or business enterprises. 3 Neighborhood Boundaries The boundaries of a neighborhood identify the physical area that influences the value of the subject property. These boundaries may coincide with observable changes in prevailing land use or occupant characteristics. Physical features such as the type of development, street patterns, terrain, vegetation and parcel size tend to identify neighborhoods. Roadways, waterways and changing elevations can also create neighborhood boundaries. The subject is located at the northwestern edge of the city of Lincoln. The neighborhood boundaries can generally be described as Wise Road to the north, Fiddyment Road to the west, Athens Road to the south and the Markham Ravine/Lincoln Boulevard (Old State Highway 65) to the east. The 3 The Dictionary of Real Estate Appraisal, 5 th ed. (Chicago: Appraisal Institute, 2010), 133. Seevers Jordan Ziegenmeyer 19

80 neighborhood does not include southeast Lincoln, which comprises the Del Webb age-restricted community and the Twelve Bridges master planned community. Demographics According to the 2010 Census, in 2010 the neighborhood boundaries contained 23,926 people and 7,551 households, which equates to an average household size of 3.2. The median age is 31.0 years. The three primary age groups are 25 to 34 years (18.0% of total), 35 to 44 (16.2% of total) and 45 to 54 years (11.7% of total). Certain data is not yet available from the 2010 Census. According to Site To Do Business Online, which makes projections based on prior Census, Department of Finance and other data sources, the 2010 median household income for the neighborhood is $63,298. Of the population at least 25 years of age, 80.5% have at least a high school diploma or equivalent, and 9.1% have a Bachelor s degree or higher. Of the population at least 15 years of age, 25.4% have never been married, 59.3% are married, and 15.3% are divorced or widowed. The average travel time to work is approximately 28.6 minutes, with 69.2% of the commuting workforce having a travel time to work of 34 minutes or less. Of the total housing units, 65.6% are detached, 29.7% are attached and 4.4% are mobile homes (not 0.3% of housing units are classified as other ). Also, owners occupy 68.9% of the units and renters occupy 25.0%. The remaining units (6.1%) stand vacant or are unrented secondary residences. Housing units in the neighborhood by year built are summarized below. As shown, more than half the housing units in the neighborhood were constructed between 2000 and The neighborhood is an expanding suburban area. Year Built Number Percentage of Total Pre % % % Census % 2000 Census Thru 2010 Census 5, % Total 8, % Source: STDB Online; 2000 Census; 2010 Census Seevers Jordan Ziegenmeyer 20

81 Transportation The subject property has frontage and access along Venture Drive, which, just east of the subject property, becomes Joiner Parkway. This primary neighborhood roadway leads to Nicolaus Road approximately ½ mile to the southeast, which leads to State Highway 65 and the downtown area of Lincoln. In general, downtown Lincoln is located approximately one mile southeast of the subject. In 2012, construction of the State Highway 65 Bypass was completed. This project re-routed Highway 65 west of downtown Lincoln. The 11.7 mile bypass begins at Industrial Boulevard near the southern city limits, and moves traffic west of downtown, before connecting back to the local Highway 65 near Sheridan, north of the city limits. As a result of the completed bypass construction, accessibility to the subject is improved. The bypass is located approximately one mile south of the subject and is accessed via Venture Drive to Airport Boulevard to Nelson Lane. State Highway 65 leads south into the Roseville area before intersecting with Interstate 80. Interstate 80 is a major east-west freeway that extends across the United States. Roseville is a major economic center in south Placer County and is located approximately 10 to 15 minutes south of the subject. Many Roseville area workers choose to live in Lincoln due to its relative affordability. Via State Highway 65 and Interstate 80, downtown Sacramento is located approximately 40 minutes southwest of the subject. However, travel times to/from downtown Sacramento may take up to an hour during heavy commute periods. Seevers Jordan Ziegenmeyer 21

82 Surrounding Land Uses Improvement Area 2 Highway 65 Municipal Airport Gladden-McBean Plant Single-family development School and Regional Park Downtown Lincoln Highway Bypass Access A mix of land uses is located near the subject. West of the subject is Improvement Area 2 that makes up the balance of the Lakeside project (including the subject, more than 700 units are planned). JMC Homes is continuing to market homes for sale, and the project is approaching build out. Further west is the Lincoln Municipal airport, which does not negatively impact the subject. South of the subject is the Foskett Ranch project, which consists primarily of single-family homes. This development has newer construction (generally 10 years of age) and is built out. Northeast of the subject is vacant agricultural (grazing) land and State Highway 65. As noted, the State Highway 65 Bypass project was recently completed, with regional traffic re-routed to the west of the subject. The section of State Highway 65 northeast of the subject, after the completion of the bypass, is limited to mostly local traffic. Access to the State Highway 65 Bypass is located approximately one mile southwest of the subject, where Nelson Lane intersects with the bypass. East of the subject is Foskett Ranch Elementary School and Foskett Ranch Regional Park (soccer and baseball/softball fields). Supporting commercial development is located in downtown Lincoln (generally local retail and office development) and approximately two miles south for larger projects. At State Highway 65 and Ferrari Ranch Road, the Lincoln Crossing Marketplace features Home Depot, Target, Staples, Petsmart and inline uses. To the south is the Sterling Pointe shopping center, located at State Highway 65 and Sterling Parkway. This center is anchored by a Raley s supermarket and has other tenants such as Wells Fargo Bank, Chase Bank, Bank of America, fast-food restaurants, and strip retail buildings. Seevers Jordan Ziegenmeyer 22

83 Community Uses Lincoln offers a range of community uses, including schools, churches and recreational and cultural facilities. Numerous golf courses are located in the area. The Lincoln Hills Golf Course is located two miles east of the subject, within the Sun City development. The Catta Verdera Country Club is located approximately four miles southeast. Turkey Creek Golf Course is located three miles to the east, just north of the city limits. The subject property is within the Western Placer Unified School District which consists of seven elementary schools, two middle schools and two high schools. Conclusion The subject property is located in an area that experienced strong growth over the expansionary period. While growth slowed dramatically amid residential declines that occurred after 2006, the population within Lincoln still grew approximately 280% between 2000 and As will be discussed later in this report, after a period of decline, the residential sector appears to be entering an expansionary period. New and resale prices at certain locations have increased. Meanwhile, the number of foreclosures and notices of default have also lessened. Numerous builders have acquired lots in south Placer County in recent months, and some of these transactions consisted of unimproved lots. Residential land values in the near term are stable to increasing. Seevers Jordan Ziegenmeyer 23

84 RESIDENTIAL MARKET OVERVIEW Market Definition The subject property is located on the northwestern edge of the city of Lincoln. The subject is adjacent to newer home construction and has good transportation linkages. The neighborhood is characterized as a suburban, quasi-commuter area. The subject site would appeal to either first-time or move-up buyers, as there is demand for both in the area. However, most projects in vicinity of the subject with similar lot sizing have targeted move-up buyers. Single-Family Building Permits Single-family building permits for Roseville/Rocklin/Lincoln areas of South Placer County are shown below. These areas represent the three largest areas of the subject s region (South Placer County). Area Ten Year Totals: Roseville 1,467 1, , ,468 Rocklin ,265 Lincoln 1,817 2,099 2, ,391 Totals 3,751 3,585 3,787 1,945 1,680 1, ,124 Percentage Change: -18.8% -4.4% 5.6% -48.6% -13.6% -39.3% -9.1% -8.6% -30.9% 62.9% Average per Year: 2,014 Source: SOCDS The number of single-family permits declined from 2006 through 11, but increased significantly in In 2012, single-family permits increased 62.9% over the prior year. For January through May of 2013 (the most recent data available), 455 single-family permits were pulled in Roseville, Rocklin and Lincoln. This amount is a 177% increase over the same period of time in 2012 (164 permits). Median Prices New and Resale Prices Combined According to DataQuick, the median price in Lincoln (resale and new homes) as of June 2013 was up 38.8% year-over year. The median price has increased year-over-year in each of the last 12 months. Seevers Jordan Ziegenmeyer 24

85 Month LINCOLN - MEDIAN PRICES (NEW AND RESALE COMBINED) July 2011 Thru June 2012 July 2012 Thru June Month Percentage Change (per month) July $242,500 $260, % 0.6% August $228,500 $269, % 1.5% September $255,000 $273, % 0.6% October $220,000 $270, % 1.9% November $230,000 $273, % 1.6% December $223,000 $270, % 1.8% January $237,250 $277, % 1.4% February $240,750 $270, % 1.0% March $242,000 $305, % 2.2% April $250,000 $320, % 2.3% May $253,000 $326, % 2.4% June $258,000 $358, % 3.2% 6-Month Percentage Change 15.7% 32.3% (per month) 2.6% 5.4% Source: DataQuick Below we compare median prices in Lincoln, Roseville and Rocklin. Median Prices (New and Resale Combined) $500,000 $450,000 $400,000 Median Price $350,000 $300,000 $250,000 $200,000 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Lincoln Roseville Rocklin Source: Dataquick Seevers Jordan Ziegenmeyer 25

86 Historical New Home Pricing and Sales A table and chart depicting the pricing of active detached single-family residential projects in Lincoln (excluding Del Webb and Twelve Bridges) since the First Quarter of 2005 are provided below and on the following page. The data indicated in the table like much of the data presented in this section of the report was collected by The Gregory Group, a firm that publishes new home prices and absorption statistics. Net Average Price % Change Net Average Price - 12 Month Moving Average Quarter Average Price Average Incentive % Change Net Average Price Average Home Size 1Q 2005 $593,116 $587,620 $5, % - 2, Q 2005 $589,296 $584,134 $5, % - 2, Q 2005 $590,361 $584,179 $6, % - 2, Q 2005 $586,594 $576,066 $10, % 0.9% 2, Q 2006 $567,046 $553,594 $13, % -1.5% 2, Q 2006 $563,326 $545,337 $17, % -1.7% 2, Q 2006 $570,710 $551,414 $19, % -1.4% 2, Q 2006 $571,184 $544,170 $27, % -1.4% 2, Q 2007 $559,600 $538,032 $21, % -0.7% 2, Q 2007 $552,959 $526,897 $26, % -0.8% 2, Q 2007 $534,652 $506,373 $28, % -2.1% 2, Q 2007 $523,214 $494,566 $28, % -2.4% 2, Q 2008 $484,229 $467,216 $17, % -3.5% 2, Q 2008 $461,695 $448,000 $13, % -4.0% 2, Q 2008 $447,731 $436,468 $11, % -3.6% 2, Q 2008 $437,906 $428,442 $9, % -3.5% 2, Q 2009 $423,458 $412,598 $10, % -3.1% 2, Q 2009 $405,777 $392,037 $13, % -3.3% 2, Q 2009 $397,768 $384,680 $13, % -3.1% 2, Q 2009 $397,769 $386,380 $11, % -2.5% 2, Q 2010 $388,643 $377,824 $10, % -2.2% 2, Q 2010 $378,617 $370,168 $8, % -1.4% 2, Q 2010 $363,239 $355,741 $7, % -1.9% 2, Q 2010 $363,410 $355,756 $7, % -2.0% 2, Q 2011 $322,065 $314,438 $7, % -4.4% 2, Q 2011 $320,557 $312,944 $7, % -4.0% 2, Q 2011 $319,851 $312,332 $7, % -3.1% 2, Q 2011 $317,791 $310,244 $7, % -3.2% 2, Q 2012 $328,501 $320,496 $8, % 0.5% 2, Q 2012 $332,799 $325,457 $7, % 1.0% 2, Q 2012 $344,841 $336,804 $8, % 1.9% 2, Q 2012 $346,863 $339,114 $7, % 2.3% 2, Q 2013 $364,167 $357,847 $6, % 2.8% 2, Q 2013 $405,214 $400,670 $4, % 5.4% 2, Number of Projects Source: The Gregory Group Seevers Jordan Ziegenmeyer 26

87 Detached Pricing and Incentives $650,000 $35,000 $600,000 $30,000 $550,000 $25,000 Pricing $500,000 $450,000 $20,000 Incentives $400,000 $15,000 $350,000 $10,000 $300,000 $5,000 $250,000 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q $0 Average Price Net Average Price Average Incentive Source: The Gregory Group Net base prices began declining in this submarket after the First Quarter of The Second Quarter 2013 net base price is 31.8% lower than the First Quarter of 2005, but has increased for six consecutive quarters. The chart below shows the percentage change in the net base price since the Fourth Quarter of As shown, prices increases have accelerated in recent quarters. 15.0% Percentage Change - Net Base Price 10.0% 5.0% Percentage Change 0.0% 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q % -10.0% -15.0% % Change Net Average Price - 12 Month Moving Average % Change Net Average Price Source: The Gregory Group Seevers Jordan Ziegenmeyer 27

88 As another indication of market conditions, the pro-rata absorption rate per project (total sales divided by total number of projects), which assumes each project captures its fair share of units, has increased in recent months and is now ranging between three and four sales per month. Over the last 12 months, projects have averaged 3.1 units per month. During the Second Quarter of 2013, projects also averaged 3.1 sales per month (down slightly for 3.7 sales per month for the prior quarter). Quarterly Pro-Rata Sales vs. 12-Month Moving Average Pro-Rata Sales Units Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q Quarter Sold Per Project Per Month 12-Month Pro-Rata Moving Average Source: The Gregory Group Active Projects, Current New Home Pricing and Absorption The projects closest to the subject are The Executive Series and The Premier Series (both by JMC Homes and within Improvement Area 2). Sierra Vista (by KB Homes) is located approximately three miles to the east. Sorrento and The Collection are located approximately three miles to the south. Equinox and Meridian are also located approximately three miles to the south but are higher density projects that are less comparable to the subject. Summaries of these projects are provided on the following pages. We do not discuss the one active project in the Twelve Bridges master planned community of Lincoln (which is superior to the subject) and the one active project located within the Del Webb active adult community. Seevers Jordan Ziegenmeyer 28

89 PROJECTS MAP Subject Property Sierra Vista The Executive Series & The Premier Series Sorrento Equinox & Meridian The Collection Seevers Jordan Ziegenmeyer 29

90 THE EXECUTIVE SERIES AT LAKESIDE The Executive Series at Lakeside by JMC Homes is located north of Venture Drive, just west of the subject and east of the Lincoln Airpark. The project offers five floor plans that range from 1,765 to 2,866 square feet in living area. The typical lot size is 6,600 square feet. The project opened in 2007 and has been slowly building over the last few down-market years due to diminished absorption rates. The project is planned for 116 units. As of the Second Quarter 2013, 116 units had been offered for sale and 110 units had sold. This product line will be continued on the subject property. THE PREMIER SERIES AT LAKESIDE The Premier Series (also by JMC Homes) at Lakeside is located adjacent to The Executive Series at Lakeside. The project contains 120 units with traditional lot configurations and a typical lot size of 3,600 square feet. Similar to The Executive Series, this project opened in The project sold out during the First Quarter of Homes range in size from 1,053 to 1,962 square feet. Seevers Jordan Ziegenmeyer 30

91 THE LINCOLN CROSSING The Collection at Lincoln Crossing by The New Home Company opened in February 2011 and sold out during the First Quarter of The project is located in the southwestern area of Lincoln and contains 27 units. Lots are designed with a traditional configuration and have a typical size of 7,000 square feet. Homes range in size from 1,948 to 2,350 square feet. SIERRA VISTA Sierra Vista by KB Homes is a planned 180-unit project. As of the Second Quarter 2013 survey date, 148 of the 155 units offered for sale had sold. The project is located in the northeastern area of Lincoln and is adjacent to an elementary school. The typical lot size is 3,500 square feet and lots have a traditional design. Homes range from 1,628 to 2,597 square feet. Home construction quality is average. Seevers Jordan Ziegenmeyer 31

92 SORRENTO Sorrento by Meritage Homes re-opened as a new project during the Second Quarter of The property is part of the Sorrento master plan and is located just north of the Lincoln Crossing community. The project is planned for 72 units with a typical lot size of 7,000 square feet. The first construction phase contains 21 homes, and of these, 16 are pre-sold. Homes range in size from 2,169 to 2,984 square feet and represent average construction quality. LINCOLN CROSSING Equinox at Lincoln Crossing by Standard Pacific Homes is located south of Joiner Parkway and north of Groveland Lane, adjacent to Highway 65/Lincoln Boulevard. The project offers three floor plans that range from 1,413 to 1,542 square feet. The lots are designed in six-pack configurations, with a typical lot size of approximately 3,000 square feet (including shared driveway area). Home quality is average for the area. The project opened in 2010, after Standard Pacific Homes acquired the lots (along the Meridian below) in a distressed sale. Since, the project has been slowly building over the last few down-market years due to diminished absorption rates. The project is planned for 79 units. As of the Second Quarter 2013 survey date by The Gregory Group, 70 of the 79 units offered for sale had sold. Seevers Jordan Ziegenmeyer 32

93 LINCOLN CROSSING The Meridian at Lincoln Crossing by Standard Pacific Homes is located adjacent to Equinox at Lincoln Crossing. The project is planned for 79 units with a typical lot size of 3,000 square feet. Similar to Equinox, lots are designed in six-pack configurations and opened in As of the Second Quarter of 2013, 62 of the 75 units offered for sale had sold. Homes range in size from 1,656 to 2,204 square feet and represent average construction quality. $450,000 Net Base Price vs. Living Area (SF) $400,000 Net Base Price $350,000 $300,000 $250,000 $200,000 $150,000 1,000 1,500 2,000 2,500 3,000 3,500 Living Area (SF) Equinox (Lot Size of 3,000 SF) Sierra Vista (Lot Size of 3,500 SF) The Executive Series (Lot Size of 6,600 SF) Meridian (Lot Size of 3,000 SF) Sorrento (Lot Size of 7,000 SF) Source: The Gregory Group The lowest priced projects are the projects with the smallest typical lot sizes (which range from 3,000 to 3,600 square feet). Sorrento and The Executive Series have generally similar lot sizes Seevers Jordan Ziegenmeyer 33

94 (7,000 SF and 6,600 SF) and have generally similar pricing. Below we tabulate their prices for select floor plan sizes and consider their respective bond encumbrances. Sorrento The Executive Series (Improvement Area No. 2) Lot Size (Square Feet) 7,000 SF 6,600 SF Floor Plan Square Footage (Living Area) 2,169 SF 2,075 SF Base Price $354,950 $399,990 Incentive $5,000 $5,000 Net Base Price $349,950 $394,990 Special Tax (Approx.) $1,875 $1,800 Bond Encumbrance (est. as present Value of Special Tax at 5% over Remaining Term) Unencumbered Price (Net Base Price + Bond Encumbrance) Unencumbered Price Per Square Foot of Living Area $28,823 (30 Years Remaining) $24,279 (23 Years Remaining) $378,773 $419,269 $174.63/SF $202.06/SF Considering Sorrento is a new project with initial project pricing, as well as the fact that The Executive Series is adjacent to the subject, we estimate an unencumbered price per square foot of approximately $188/SF (middle of the indicators), which, for an average-sized 2,200 SF home (typical for the area based on the subject s lot sizes), equates to a total unencumbered price of $413,600, or $415,000 (rounded). Absorption Absorption rates at competitive projects over the last four quarters are summarized in the following table. As shown, over the last four quarters the average absorption rate is 2.9 sales per project per project. The average absorption rate by quarter has ranged from 1.4 to 3.9 sales per project per month. The average absorption rate over the last 12 months (by project) has ranged from 0.8 to 7.4 sales per month. Overall an absorption rate of 3.0 units per month is estimated for the subject property. Project Builder Avg. Home Price (2Q 13 Only) Avg. Home Size Lot Size or Type 2Q Q Q Q Month Total Average Per Quarter Average Per Month Lincoln Crossing Standard Pacific Homes $271,667 1,471 3, Lincoln Crossing Standard Pacific Homes $295,745 2,009 3, Sierra Vista KB Homes $349,400 2,042 3, Sorrento Meritage $381,450 2,526 7, The Lincoln Crossing The New Home Company $312,200 2,138 7, The Executive Series at Lakeside JMC Homes $403,990 2,283 6, The Premier Series at Lakeside JMC Homes $221,133 1,497 3, Total No. of Active Projects Quarterly Pro-Rata Monthly Pro-Rata Average Monthly Pro-Rata Seevers Jordan Ziegenmeyer 34

95 Resale Pricing Resale prices in the region tend to be higher than asking prices, with significant demand for homes priced under $350,000 in the region. Additionally, short sales and REOs still represent a significant number of all transactions, albeit these types of sales are lessening. Resale prices for June 1, 2013 June 30, 2013 involving homes built in 2005 or later on lots containing at least 4,000 SF but less than 8,000 SF for Lincoln (excluding Twelve Bridges and Del Webb) are shown below and on the following page. JUNE 1, 2013 JUNE 30, 2013 MLS SALES Road Living Area (SF) Sale Price Last List Price Sale Price/SF Sale/List Year Built Days on Market Lot Size Comment 1265 White Pine Lane 1,991 $339,500 $339,500 $ % ,362 New Home 580 Mazzolo Drive 2,775 $359,900 $359,900 $ % , Flora Court 2,279 $365,000 $349,900 $ % , Mazzolo Drive 2,775 $370,000 $369,000 $ % , Lohse Lane 2,806 $382,500 $389,900 $ % , Corcoran Ct 2,740 $390,000 $375,000 $ % , La Guardia Circle 2,866 $435,000 $439,000 $ % , Wortell Drive 3,226 $440,000 $440,000 $ % , Stoney Cross Lane 1,805 $231,000 $230,000 $ % ,750 REO 1444 Regent Circle 1,752 $235,000 $235,000 $ % ,881 REO 1455 Stoney Cross Lane 1,807 $235,500 $235,500 $ % ,098 REO 980 Silverton Circle 2,302 $270,000 $250,000 $ % , Devonshire Lane 1,842 $280,000 $284,900 $ % , Callan Court 1,995 $299,900 $299,900 $ % , Hamersley Lane 3,070 $304,200 $285,000 $ % ,057 Short Sale 302 Dorinda Court 2,802 $310,000 $334,900 $ % , Seaforth Court 2,775 $340,000 $334,900 $ % , Seymour Circle 2,650 $355,000 $355,000 $ % , Hamersly Lane 3,374 $386,000 $399,000 $ % ,192 Total Sales 19 2, , , % ,846 (avg.) (avg.) (avg.) (avg.) (avg.) (avg.) (avg.) (avg.) Source: MLS Seevers Jordan Ziegenmeyer 35

96 $500,000 Sale Price vs. Living Area (SF) $450,000 $400,000 Sale Price $350,000 $300,000 $250,000 $200,000 $150,000 1,500 1,700 1,900 2,100 2,300 2,500 2,700 2,900 3,100 3,300 3,500 Living Area Source: MLS MLS data suggests that resale prices have fluctuated over the past few quarters between $88 and $129 per square foot. Average days on the market have decreased from 52 days on the market during the First Quarter of 2012 to 21 days during the Second Quarter of The approximate resale price per square foot (average sale price divided by average home size) is tabulated and charted in the following table. Note average price per average square foot has increased for five consecutive quarters, with a significant increase during the First Quarter of Seevers Jordan Ziegenmeyer 36

97 Quarter Total Sales Avg. Home Size Avg. Price Avg. Price/Avg. SF Avg. Days on Market Mar ,683 $280,457 $ Jun ,609 $273,743 $ Sep ,621 $265,340 $ Dec ,657 $269,472 $ Mar ,428 $251,502 $ Jun ,716 $268,171 $ Sep ,523 $247,420 $98 81 Dec ,710 $253,176 $93 80 Mar ,590 $236,562 $91 78 Jun ,565 $231,543 $90 67 Sep ,569 $225,996 $88 81 Dec ,449 $222,806 $91 86 Mar ,585 $227,905 $88 52 Jun ,486 $233,965 $94 62 Sep ,601 $249,854 $96 59 Dec ,825 $281,793 $ Mar ,468 $278,754 $ Jun ,474 $317,924 $ Source: MLS $140 Avg. Price/Avg. SF $130 $120 $110 $100 $90 $80 Jun-08 Dec-08 Jul-09 Jan-10 Aug-10 Feb-11 Sep-11 Apr-12 Oct-12 May-13 Nov-13 Source: MLS Notices of Default/Foreclosures Dataquick has released the following information for notices of default and foreclosures for the four county Sacramento area (Sacramento, Placer, El Dorado, Yolo): Seevers Jordan Ziegenmeyer 37

98 12,000 Foreclosures and Notices of Default Sacramento Region (Four-County) 10,000 9,437 9,928 9,605 8,811 8,584 8,000 7,324 7,261 7,016 7,384 6,708 6,633 6,000 5,536 5,681 5,870 5,724 5,531 6,109 5,314 4,000 3,236 4,798 3,985 3,603 3,952 4,475 4,480 3,842 4,695 4,269 3,317 4,824 4,425 4,282 3,910 4,816 3,012 3,031 4,501 3,978 3,099 2,000 2,141 2,084 2,189 1,995 1,382 1, Q 20071Q 20082Q 20083Q 20084Q 20081Q 20092Q 20093Q 20094Q 20091Q 20102Q 20103Q 20104Q 20101Q 20112Q 20113Q 20114Q 20111Q 20122Q 20123Q 20124Q 20121Q 20132Q 2013 Source: DataQuick NOD Foreclosures Mirroring the state-wide trend, notices of defaults increased during the Second Quarter while the number of foreclosures decreased. Notices of defaults decreased strongly during the First Quarter of 2013 as new state foreclosure laws the Homeowner Bill of Rights took effect. In California and other states, foreclosure activity has sometimes decreased temporarily after new laws kick in and the industry adjusts. Foreclosures continued their downward trend during the Second Quarter of 2013, the result of rising home values, an improving economy and a shift toward short sales. Statewide, foreclosure resales properties foreclosed on in the prior 12 months accounted for 11.6% of all resale activity during the quarter. This is down from 17.1% the prior quarter and 27.8% a year ago. Short sale transactions made up 16.6% of resale transactions during the Second Quarter of 2013, which is down from 21.4% of the prior quarter and 24.0% of a year ago. According to Dataquick president John Walsh, "At this point in the cycle, it's fairly straightforward to see what's going on. Just do the math - it's not calculus, it's 4th grade arithmetic. A foreclosure only makes sense when the home is worth less than what is owed on it. As home values rise, fewer homeowners owe more on their homes than the homes are worth. Seevers Jordan Ziegenmeyer 38

99 While most of the loans that went into default last quarter were originated during the period, the median origination quarter for defaulted loans remained third-quarter That has been the case for four years, indicating that weak underwriting standards peaked around this time. Market Participant Interviews We frequently interview market participants about supply and demand conditions in general. Within the last four weeks we have interviewed multiple land brokers and builder land acquisition agents. The consensus is near-term land pricing has taken a step upward amid increased builder speculation that home price increases are on the horizon. This speculation has been driven by continued declines in resale inventory and recent slight price increases at select new home projects with desirable characteristics (location, product type, etc.). Also, the supply of finished lots in the region continues to decline. After years of limited unimproved lot transactions, builders have acquired unimproved lots in recent months. Meritage Homes and KB Homes both have acquired more than 200+ unimproved lots in bulk transactions in S. Placer County within the last three months. Both projects are planned for near term development. Media Excerpts From an article titled Home builders resume land development in Sacramento region, Sacramento Bee, July 15, 2013: With home building companies growing more confident in the resurgent housing market, land development activity is back in the suburban areas of Roseville, Lincoln, Elk Grove and El Dorado Hills. Experts call it a major step in the evolution of the housing recovery. The fact that builders are willing to invest in the development of infrastructure is an incredibly strong signal to the market that we feel housing is back, said Chris Cady, president of KB Home s Central California division Barry Grant, Meritage s [Homes] Northern California division president, said the reason for the new site work is simple: the supply of ready-tobuild lots dried up. New home prices in the region have risen by double-digit percentages in the past year. Sales have increased, but the market has been crimped by lack of inventory. On October , Land Advisors (a national land brokerage firm), stated the following on their company website regarding the Sacramento region: These past few months have been eye opening on the residential land front. Just when folks were beginning to write the rest of 2012 off as another down and out year like 2011, someone poked the bear and got things moving again. The past few months in Sacramento have been on fire with the builders knocking down the door trying to grab land positions in core markets. With the finished lot inventories drying up, everything from paper to finished lots have been targets for both public and private builders. It is reminiscent of the bump we saw in 2009 and 2010, but with the pipeline of finished lots dwindling, REO product drying up and interest rates in the cellar, this party may be just getting started. Seevers Jordan Ziegenmeyer 39

100 From an article titled Companies bulk up as homebuilding begins to rise, Sacramento Business Journal, October 5, 2012: Perhaps the biggest impact is being felt on land prices, which according to land specialist Pete Nixon at CBRE in Sacramento, have climbed 30 percent in some places over the last four months. Builders have to plan three or four years out, so they are trying to anticipate future needs. Analysts say many of the best lots, which are ready for development, are dwindling fast, so they are starting to turn their attention to partially completed lots and to raw land that is approved for development. Most of the low-hanging fruit is gone. They may have to develop their own sites in a phased approach, said Jim Radler of Land Advisors Organization in Sacramento. Homebuilders are finding it a challenge to bring new homes and new projects on the market fast enough to meet the demand; they simply cannot find enough lots to satisfy that anticipated demand, said Greg Paquin of The Gregory Group, which tracks new-home activity. Conclusion The following are key points from this section that are restated, in summary. New and resale prices have strengthened in recent months. Absorption rates have strengthened and are currently between three and four units per month per project. Builders are acquiring unimproved lots at A-locations for near term site development and construction due to a limited supply of finished lots. The inventory of available finished lots in the region at A-locations is decreasing. Builders are looking for unimproved lots for near term site development and home construction. Competition for lots is fierce and builders are speculating on home price increases in their land purchases in order to secure lot inventory. Meanwhile, the number of distressed sales in the region is lessening, albeit market distress remains well above average. Prices and absorption rates are anticipated to be steady to increasing over the next 12 months. Seevers Jordan Ziegenmeyer 40

101 PROPERTY IDENTIFICATION AND LEGAL DATA Location The Improvement Area is located along the east side of Lakeside Drive, north of Venture Drive, within the city of Lincoln, Placer County, California. Assessor Parcel Numbers through through through -052 The partially completed homes are located on APNs through -012, and -016 through Final subdivision maps have recorded. Individual Assessor parcel numbers have been assigned to each lot. Owner of Record John Mourier Construction Inc. Property Taxes The property tax system in California was amended in 1978 by Article XIII to the State Constitution, commonly referred to as Proposition 13. It provides for a limitation on property taxes and for a procedure to establish the current taxable value of real property by reference to a base year value, which is then modified annually to reflect inflation (if any). Annual increases cannot exceed 2% per year. The base year was set at or any year thereafter in which the property is substantially improved or changes ownership. When either of these two conditions occurs, the property is to be reappraised at market value, which becomes the new base year assessed value. Proposition 13 also limits the maximum tax rate to 1% of the value of the property, exclusive of bonds and supplemental assessments. Bonded indebtedness approved prior to 1978, and any bonds subsequently approved by a two-thirds vote of the district in which the property is located, can be added to the 1% tax rate. The subject is located in Tax Rate Area of Placer County. On the following page we provide a summary of the 2012/2013 property tax bill for one of the subject parcels (which is generally representative of the subject property overall). Seevers Jordan Ziegenmeyer 41

102 APN: Assessed Land Value $39,051 Assessed Improvement Value $0 Total Assessed Value $39,051 Tax Rate (Area ): % Taxes on Assessed Value $ Direct Levies: Placer Mosquito & Vector Control $16.56 City of Lincoln LLD $ $ Property taxes are due in two installments (December and April). Both installments for the 2012/2013 tax year were paid. There are no outstanding tax balances or default taxes from prior tax years. The property tax bill for the 2013/2014 tax year is not yet available. The Developer is proposing to seek reimbursement for certain infrastructure improvements and facilities through the City s formation of a community facilities district and related issuance of the Bonds; namely, the Developer will receive payment (or fee credits) from the City for expenses incurred in relation to public improvements and fees for facilities. At the time of formation, the maximum annual Special Tax for developed residential property was established at $1,800 per year per lot, and that amount escalated at 2% year. The Special Tax was established to pay the principal and interest on the Bonds. With seven years of escalation, the maximum annual Special Tax for the subject is estimated at $2,068 per lot. The Bonds are not anticipated to include capitalized interest. Homeowner s Association None Total 2012/2013 Property Taxes $ Conditions of Title A preliminary title report for the subject was not provided. It is assumed no adverse conditions have been recorded. The appraiser accepts no responsibility for matters pertaining to title. Zoning & Entitlements RD-5, which is a single-family residential land use designation with a maximum density of five units per acre. The subject project received approval of final subdivision maps in August Seevers Jordan Ziegenmeyer 42

103 The subject is not encumbered by an affordable housing requirement. Flood Zone Source : Flood Zone: First American Flood Data Services X Areas outside the 100-year and 500-year floodplain Map Panel: F Panel Date: June 8, 1998 Flood Insurance: Flood insurance is not required. Earthquake Zone According to the Seismic Safety Commission, the subject property is located within Zone 3, areas of moderate seismic activity. Zone 3 is considered to be the lowest risk zone in California. In addition, the subject is not located within a Fault-Rupture Hazard Zone (formerly referred to as an Alquist- Priolo Special Study Zone), as defined by Special Publication 42 of the California Department of Conservation, Division of Mines and Geology. Easements Our inspection revealed no apparent adverse easements, encroachments or other conditions that currently impact the subject. The appraiser is not a surveyor nor qualified to determine the exact location of easements. It is assumed the easements noted in any title document do not have an impact on the opinion(s) of value provided in this report. If, at some future date, these easements are determined to have a detrimental impact on value, the appraiser reserves the right to amend the opinion(s) of value. Seevers Jordan Ziegenmeyer 43

104 Assessor Parcel Maps Source: Placer County Assessor Book 319, Page 18 Source: Placer County Assessor Book 319, Page 19 Seevers Jordan Ziegenmeyer 44

105 Source: Placer County Assessor Book 319, Page 20 Seevers Jordan Ziegenmeyer 45

106 SITE DESCRIPTION The subject property is a planned 149-unit project, consisting of 133 vacant finished single-family residential lots and 16 partially completed single-family homes (under construction) located within the Improvement Area. The Improvement Area is located along the east side of Lakeside Drive, north of Venture Drive, within the city of Lincoln, Placer County, California. A complete site description of the subject property follows. Acreage: Lot Sizes: Topography: Views: Access/Frontage: Soils: Environmental Issues: Prior to subdivision, the subject project consisted of approximately 31 gross acres. Lots range in size from 5,663 to 17,945 square feet, with a typical lot size of 5,940 square feet. Generally level Limited/local The subject has access/frontage along the east side of Lakeside Drive. There are two entrances into the project from Lakeside Drive. Interior streets provide access throughout the subject to each lot. The subject has no access points along Venture Drive. A narrow landscape/open space/pedestrian path separates the subject from Venture Drive. As noted, access to the State Highway 65 Bypass is approximately one mile to the southwest at Nelson Lane. Overall accessibility is average for residential development. The appraiser has not been provided a soils report to determine the load bearing capacity of the subject property. Based on the surrounding improvements, no adverse subsoil conditions are apparent. The soils appear to be similar to other local parcels that, to the best of our knowledge, have been improved with no adverse effects. At the time of inspection, the appraiser did not observe the existence of hazardous material, which may or may not be present on the properties. The appraiser has no knowledge of the existence of such materials on the properties. However, the appraiser is not qualified to detect such substances. The presence of potentially hazardous materials could affect the value of the properties. The value estimate is predicated on the assumption there is no such material on or in the properties that would cause a loss in value. No responsibility is assumed for any such conditions, or for any expertise or engineering Seevers Jordan Ziegenmeyer 46

107 knowledge required to discover them. The client is urged to retain an expert in the field if desired. Drainage: Adjacent Uses: North South East West Utilities: In-tract Improvements Backbone Infrastructure and Offsite Improvements: Remaining Site Development Costs: It is assumed the site improvements completed (which include storm drains) provide adequate drainage. Vacant agricultural (grazing) land Single-family residential development Vacant agricultural (grazing) land Single-family residential development Public utilities, including electricity, telephone, cable, public water and sewer, have been extended to each subject lot. Public water/sewer systems have allotted capacity for the subject. Complete. Interior streets are paved, and street lights, curbs, gutters and sidewalks are in place. All infrastructure and offsite improvements are complete. None Permits and Fees Due at Building Permit: The CFD is anticipated to generate a construction fund of approximately $3.7 million, of which approximately $2.3 million will be reimbursed to the Developer directly and $1.4 million ($9,396/lot) will be reimbursed via fee credits. A budget of permits and fees due at building permits provided indicates that for proposed home sizes of 1,915 to 3,927 SF, and net of approximately $9,396/lot in anticipated fee credits from the CFD, permits and fees due at building permit will range from $39,631 to $51,466/lot. For a 2,200 SF home, we estimate permits and fees would total approximately $43,000/lot. This fee estimate will be utilized in the analysis of the subject lots. Functional Utility: Conclusion: Overall functional utility is considered good. The subject appears functional in terms of its size, topography, shape and overall location. Seevers Jordan Ziegenmeyer 47

108 IMPROVEMENT DESCRIPTION The Developer is extending its The Executive Series product line onto the subject property. This same product line was constructed on Improvement Area No. 2, but that area is approaching buildout. Homes are proposed to range in size from 1,915 to 3,927 square feet. Preliminary base pricing for the subject ranges from $379,900 to $529,990. Of the 16 homes under construction, six are presold. The subject product line represents average quality move-up homes. A description of the improvements (base amenity level) is noted below. Plan Living Area (SF) Stories Number of Bedrooms Number of Bathrooms Garage Size 1 1,915 One car w/ storage 2 2,075 One car 3 2,797 Two car 4 2,866 Two car tandem 5 3,927 Two car Floor Plan Description Foundation: Structure: Exterior Walls: Roof: Reinforced concrete with conventional footings Wood framing Variety of painted and textured stucco with stone accents Concrete tile roof with rain gutters around the perimeter Patio: Covered rear patio (with option for conversion to convert to extra room) Doors/Windows: Fiberglass main entry door. Flush steel service door. Dual-pane windows with vinyl framing. Flooring: Concrete tile floors at entry. Vinyl floors in kitchen and bathrooms. Average quality wall-to-wall carpeting in the balance of the living areas. Flooring in the garage will consist of exposed concrete. Seevers Jordan Ziegenmeyer 48

109 Closets: Walk-in closets for all master bedrooms and certain secondary bedrooms, by plan. All other bedrooms have sliding door closets. Electrical: HVAC: Appliances: Water Heater: Lighting: Kitchen/Bathroom/Laundry Fixtures: The electrical system and related components will be adequate for residential usage. The homes will be prewired for security systems and satellite TV. Central HVAC system with thermostats All kitchens include standard appliances, such as a stove/oven, dishwasher, garbage disposal and microwave/hood. Garage door openers included in garages. 50-gallon water heaters A complete lighting package is standard, including recessed fluorescent can lights, ceiling fan (family room), lighting fixtures (flush mount/lamp) and exterior porch lights. Ceramic tile countertop in kitchen. Cultured marble countertops in bathrooms. Oak cabinetry throughout with melamine interiors and hidden hinges. Laundry room with cabinets. Walls: Ceilings: Electrical: Taped, textured and painted drywall partitioning (including garage). Knockdown texturing and two-tone paint scheme within living areas. Rounded drywall corners.. 9 foot ceilings Standard electrical throughout. Alarm pre-wire at exterior doors and most windows. Phone, cable and data wiring to master closet. Fireplace: Gas Porches: Landscaping and Fencing: Covered entry and rear porches, per plan Front yard landscaping with sod lawns, automatic sprinkler systems, shrubs and trees, as well as side and rear yard fencing. Downspouts connected to underground drainage. Seevers Jordan Ziegenmeyer 49

110 Hose Bibs: Concrete Flatwork: Chronological Age: Effective Age: Functional Obsolescence: Condition: Quality: Three Broom-finished driveways and walkways to the front door. New (upon completion) New None determined Good (upon completion) Average Home Pricing Plan Living Area (SF) Base Price Incentive Net Price Price Per SF 1 1,915 $379,990 $5,000 $374,990 $ ,075 $399,990 $5,000 $394,990 $ ,075 $429,990 $5,000 $424,990 $ ,797 $429,990 $5,000 $424,990 $ ,927 $529,990 $5,000 $524,990 $ Conclusion The subject s floor plans are considered to be of average quality construction for move-up quality homes. Seevers Jordan Ziegenmeyer 50

111 FACILITIES TO BE FINANCED BY THE DISTRICT Principal and interest on the Bonds will be paid by a Special Tax levied against the developable (residential) properties within the Improvement Area. As of the date of value, August 9, 2013, infrastructure improvements eligible for financing by Bonds were complete. The Bonds will reimburse for local and regional infrastructure improvements, the costs associated with the design and implementation of the construction of improvements and the costs associated with the formation of the related Community Facilities District and the designation of the Improvement Area. Specifically, the primary facilities authorized for construction with the Bonds include: (1) roadway improvements, (2) wastewater system improvements, (3) water system improvements and (4) storm drain sewer improvements. Further, the proposed facilities include incidental expenses associated with the formation of the related Community Facilities District and designation of the Improvement Area pursuant to the Mello-Roos Community Facilities Act of 1982, including but not limited to the cost of planning, engineering, and designing the facilities; issuance of the Bonds; and any other expenses incidental to the construction, completion, and inspection of the facilities. The reimbursement is anticipated to occur in part via credits on fees otherwise paid at building permit for local and regional infrastructure. Seevers Jordan Ziegenmeyer 51

112 SUBJECT PHOTOGRAPHS Looking south across the subject View of project sign Looking north along Lakeside Drive Looking east along Venture Drive Looking east across the subject View of completed in-tract improvements Seevers Jordan Ziegenmeyer 52

113 SUBJECT PHOTOGRAPHS View of partially completed homes Partially completed home, est. 75% complete Partially completed home, est. 60% complete Partially completed home, 50% complete Seevers Jordan Ziegenmeyer 53

114 HIGHEST AND BEST USE ANALYSIS The term highest and best use, as used in this report, is defined as follows: The reasonably probable and legal use of vacant land or an improved property 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. Alternatively, the probable use of land or improved property specific with respect to the user and timing of the use that is adequately supported and results in the highest present value. 4 Two analyses are typically required for highest and best use. The first analysis is highest and best use of the land as though vacant, and the second analysis is the highest and best use as improved. (Definitions of these terms are provided in the Glossary of Terms in the Addenda to this report.) Highest and Best Use as though Vacant In accordance with the definition of highest and best use, it is appropriate to analyze the subject property as though vacant as it relates to legal permissibility, physical possibility, financial feasibility and maximum productivity. The legal factors influencing the highest and best use of the subject property are primarily government regulations, such as zoning and building codes. The subject parcel is zoned for single-family development, as described in the Property Identification and Legal Data section. The legally permissible use is limited to single-family development. The property has been graded with in-tract development completed. There are no site characteristics that would preclude development. Single-family residential development is physically possible. With respect to financial feasibility, builders have acquired unimproved lots in south Placer County (including Lincoln) for near term construction, and there are two active projects in the area (by JMC Homes in Improvement Area 2, just west of the subject) that reflect a willingness by buyers for new homes in this area under the current residential market. As shown by the extraction analysis (rooftop down analysis), development is financially feasible (the analysis yields a positive value, which shows anticipated revenues exceed anticipated costs). Overall, the maximally productive use of the subject, and its highest and best use, is for near term single-family residential development. The probable buyer of the subject is a production homebuilder intending to build either entry-level or first-time move-up homes. Highest and Best Use as Improved Highest and best use of the property as improved pertains to the use that should be made in light of its current improvements. In the case of subdivision land under development, consideration must be 4 The Dictionary of Real Estate Appraisal, 5 th ed. (Chicago: Appraisal Institute, 2010), 93. Seevers Jordan Ziegenmeyer 54

115 given to whether it makes sense to demolish existing improvements (either on-site or off-site improvements) for replacement with another use. The time and expense to demolish existing improvements, re-grade, reroute utilities or re-map must be weighed against alternative uses. If the existing or proposed improvements are not performing well, then it may produce a higher return to demolish existing improvements, if any, and re-grade the site for development of an alternative use. In the case of subdivision land not yet under development, consideration must be given to existing uses (e.g. rural residential, agricultural buildings, etc.). The use that maximizes a property s value, consistent with required rates of return and profit requirements, is the highest and best use as improved. The subject property includes 133 vacant and finished single-family lots and 16 partially completed single-family homes. We have considered the four use alternatives (renovation, expansion, demolition, conversion). The value of the subject as improved exceeds its value as vacant less demolition costs. The highest and best use of the subject, as improved, is (1) to complete construction of the partially completed homes for the near term sale to individual homebuyers, and (2) the near term development of production single-family homes on the 133 vacant finished lots. The probable buyer of the subject in an as improved would most likely be (1) individual buyers for completed homes, and (2) a merchant homebuilder for vacant finished lots. For partially completed homes in bulk, the probable buyer would be an investor/builder that would complete construction and then sell units to individual buyers. Seevers Jordan Ziegenmeyer 55

116 APPROACHES TO VALUE The valuation process is a systematic procedure used in the valuation of real property. 5 This process involves the investigation, organization and analysis of pertinent market data and other related factors that affect the market value of real estate. The market data is analyzed in terms of any one or all of the three traditional approaches to estimating real estate value. These are the cost, sales comparison and income capitalization approaches. Two additional approaches extraction and discounted cash flow analysis are also applicable. Each approach to value is briefly discussed and defined as follows: Cost Approach The cost approach is based on the premise that no prudent buyer would pay more for a particular property than the cost to acquire a similar site and construct improvements of equivalent desirability and utility. Thus, this approach to value relates directly to the economic principle of substitution, as well as supply and demand. The cost approach is most applicable when valuing properties where the improvements are new or suffer only a minor amount of accrued depreciation, and is especially persuasive when the site value is well supported. The cost approach is also highly relevant when valuing special-purpose or specialty properties and other properties that are not frequently exchanged in the market. The definition of the cost approach is offered as follows: A set of procedures through which a value indication is derived for the fee simple interest in a property by estimating the current cost to construct a reproduction of (or replacement for) the existing structure, including an entrepreneurial incentive, deducting depreciation from the total cost, and adding the estimated land value. Adjustments may then be made to the indicated fee simple value of the subject property to reflect the value of the property interest being appraised. 6 Sales Comparison Approach The sales comparison approach is based on the premise that the value of a property is directly related to the prices being generated for comparable, competitive properties in the marketplace. Similar to the cost approach, the economic principles of substitution, as well as supply and demand are basic to the sales comparison approach. This approach has broad applicability and is particularly persuasive when there has been an adequate volume of recent, reliable transactions of similar properties that indicate value patterns or trends in the market. When sufficient data are available, this approach is the most direct and systematic approach to value estimation. Typically, the sales comparison approach is most pertinent when valuing land, single-family homes and small, owner-occupied commercial and office properties. 5 The Dictionary of Real Estate Appraisal, 5 th ed. (Chicago: Appraisal Institute, 2010), The Dictionary of Real Estate Appraisal, 47. Seevers Jordan Ziegenmeyer 56

117 The definition of the sales comparison approach is offered as follows: The process of deriving a value indication for the subject property by comparing market information for similar properties with the property being appraised, identifying appropriate units of comparison, and making qualitative comparisons with or quantitative adjustments to the sale prices (or unit prices, as appropriate) of the comparable properties based on relevant, market-derived elements of comparison. 7 Income Capitalization Approach The income capitalization approach is based on the premise that income-producing real estate is typically purchased as an investment. From an investor s point of view, the potential earning power of a property is the critical element affecting value. The concepts of anticipation and change, as they relate to supply and demand issues and substitution, are fundamental to this valuation approach. These concepts are important because the value of income-producing real estate is created by the expectation of benefits (income) to be derived in the future, which is subject to changes in market conditions. Value may be defined as the present worth of the rights to these future benefits. The validity of the income capitalization approach hinges upon the accuracy of which the income expectancy of a property can be measured. Within the income capitalization approach there are two basic techniques that can be utilized to estimate market value. These techniques of valuation are direct capitalization and yield capitalization. Direct Capitalization: A method used to convert an estimate of a single year s income expectancy into an indication of value in one direct step, either by dividing the net income estimate by an appropriate capitalization rate or by multiplying the income estimate by an appropriate factor. Direct capitalization employs capitalization rates and multipliers extracted or developed from market data. Only a single year s income is used. Yield and value changes are implied but not identified. 8 Yield Capitalization: A method used to convert future benefits into present value by 1) discounting each future benefit at an appropriate yield rate, or 2) developing an overall rate that explicitly reflects the investment s income pattern, holding period, value change, and yield rate. 9 The definition of the income capitalization approach is offered as follows: A set of procedures through which an appraiser derives a value indication for an incomeproducing property by converting its anticipated benefits (cash flows and reversion) into property value. This conversion can be accomplished in two ways. One year s income 7 The Dictionary of Real Estate Appraisal, 5 th ed. (Chicago: Appraisal Institute, 2010), The Dictionary of Real Estate Appraisal, The Dictionary of Real Estate Appraisal, 211. Seevers Jordan Ziegenmeyer 57

118 expectancy can be capitalized at a market-derived capitalization rate or at a capitalization rate that reflects a specified income pattern, return on investment, and change in the value of the investment. Alternatively, the annual cash flows for the holding period and the reversion can be discounted at a specified yield rate. 10 Extraction The definition of the extraction is offered as follows: A method of estimating land value in which the depreciated cost of the improvements on the improved property is estimated and deducted from the total sale price to arrive at an estimated sale price for the land. 11 Discounted Cash Flow (DCF) Analysis A discounted cash flow analysis is a procedure in which a discount rate is applied to a set of projected income streams and a reversion. The analyst specifies the quantity, variability, timing and duration of the income streams as well as the quantity and timing of the reversion and discounts each to its present value at a specified yield rate. DCF analysis can be applied with any yield capitalization technique and may be performed on either a lease-by-lease or aggregate basis. 12 In the case of subdivision land, there is no reversion. The four main components of a discounted cash flow analysis are listed as follows: Revenue the total gross income derived from the disposition of the subject components. Absorption Analysis the time frame required to sell-off the components. Of primary importance in this analysis is the allocation of the revenue over the absorption period including the estimation of an appreciation factor (if any). Expenses the expenses associated with the sell-off of the components are calculated in this section including administration, marketing and commission costs and property taxes. Discount Rate the appropriate discount rate is derived in this portion of the analysis employing a variety of data. 10 The Dictionary of Real Estate Appraisal, 5 th ed. (Chicago: Appraisal Institute, 2010), The Dictionary of Real Estate Appraisal, The Dictionary of Real Estate Appraisal, 59. Seevers Jordan Ziegenmeyer 58

119 APPRAISAL METHODOLOGY In the valuation of the subject lots, we utilize the sales comparison approach and extraction analysis. In the sales comparison approach, we adjust the prices of comparables in the region based on differences between the subject and comparables, and reconcile the prices of the comparable data into an opinion of value. As support for the sales comparison approach, we utilize an extraction analysis, where home construction and site development costs are deducted from an estimate of current home price to determine the underlying land value. The subject s partially completed homes are valued in bulk using a discounted cash flow analysis where projected home prices are reflected over a sell-off period, with costs such as marketing, sales, taxes and remaining construction costs deducted. The net income is discounted to yield the value in bulk. Our analysis of the lots does not include a typical income capitalization approach and cost approach, since the subject property represents vacant land with limited extended income potential. As noted, however, we utilize an extraction analysis, where home construction costs were taken into account. Seevers Jordan Ziegenmeyer 59

120 SALES COMPARISON APPROACH In this section of the report, we will utilize the sales comparison approach to estimate the market value of the subject. This value estimate assumes the subject property would sell on a bulk, or wholesale, basis. That is, it would transfer in one transaction to a single buyer. This approach is based on the economic principle of substitution. According to The Appraisal of Real Estate, 13 th Edition (Chicago: Appraisal Institute, 2008), The principle of substitution holds that the value of property tends to be set by the price that would be paid to acquire a substitute property of similar utility and desirability within a reasonable amount of time. The principle implies that the reliability of the sales comparison approach is diminished if substitute properties are not available in the market (p. 298). The proper application of this approach requires obtaining recent sales data for comparison with the subject property. In order to assemble the comparable sales, we searched public records and other data sources for leads, then confirmed the raw data obtained with parties directly related to the transactions (primarily brokers, buyers and sellers). On the following page, we have arrayed comparable sales that have occurred in the region. The summary table is accompanied by a map and followed by details of each comparable. The basis of analysis is price per lot. Because the availability of finished lots for sale has decreased in recent months, builders have sought to acquire unimproved lots. The comparable data reflects unimproved lot transactions (which are the most recent and comparable to the subject), with adjustments made for remaining site development costs and profit (and other factors) to reflect equivalent finished lot prices. Seevers Jordan Ziegenmeyer 60

121 COMPARABLE DATA No. Location Buyer/Builder Sale Sale No. of Typical Lot Sale Price Date Price Lots Size (SF) Per Lot 1 Stanford Ranch - Parcel 69 JMC Homes May-13 $7,590, ,000 $82,500 West side of Wildcat Boulevard, north of Stanford Ranch Unimproved Lot Rocklin, Placer County 2 Westpark - Village 15A, 15B and 15C Meritage May-13 $20,000, ,135 $89,286 North side of Pleasant Grove Boulevard, east of Westbrook Bl (avg. typical) Unimproved Lot Roseville, Placer County 3 Westpark - Village 13A, 13B, 13C and 13D KB Home May-13 $34,000, ,500 $110,032 North side of Pleasant Grove Boulevard, west of Westbrook Bl (avg. typical) Unimproved Lot Roseville, Placer County 4 Fiddyment Ranch - Village F-15A, 15B, 15C JMC Homes May-13 $19,372, ,300 $116,000 East side of Fiddyment Road, north of Blue Oaks Bl Unimproved Lot Roseville, Placer County 5 Fiddyment Ranch - Village F-16A and F-16B Lennar Jun-13 $13,125, ,775 $119,318 East side of Fiddyment Road, north of Blue Oaks Boulevard Unimproved Lot Roseville, Placer County COMPARABLES MAP Seevers Jordan Ziegenmeyer 61

122 COMPARABLE 1 Property Identification Project Name Stanford Ranch Parcel 69 Location West of Wildcat Drive, north of Stanford Ranch Road APN City Rocklin County Placer County Sale Data et al Grantor Stanford Ranch I LLC Grantee John Mourier Homes Contract Date November 2012 Closing Date 5/29/2013 Deed Book Page Property Rights Conveyed Fee Simple Conditions of Sale Market Financing Terms Cash Equivalent Sale Price $7,590,000 Special Taxes per Lot $839 (est. anticipated) Land Data Zoning Single-family Topography Rolling Utilities All available Number of Lots 92 Land Area (Acres) Density (Units per Acre) 3.7 Development Status at Sale Unimproved Lots Typical Lot Size (SF) 7,000 Indicators Lot Price $82,500 Site Development Cost (Per Lot) $40,000 (net of CFD reimbursement) Permits and Fees (Per Lot) $58,000 Remarks This comparable represents the sale of 92 unimproved lots in Rocklin. The contract was negotiated in late 2012 and the sale was contingent on procurement of site improvement plans by the seller. While offsites to the property are in place, onsite backbone infrastructure (as well as in-tracts) is needed. The property is located within an existing Community Facilities District, and was rezoned recently to allow for single-family residential development. A condition of tentative map approval for this property requires annexation into the CFD. A reimbursement of approximately $10,000 per lot was anticipated by the buyer. Seevers Jordan Ziegenmeyer 62

123 COMPARABLE 2 Property Identification Project Name Westpark Village 15A, 15B and 15C Location North side of Pleasant Grove Boulevard, east of Westbrook Boulevard APN et al City Roseville County Placer County Sale Data Grantor WP3 Capital Partners Grantee Meritage Homes Contract Date N/A Closing Date 5/10/2013 Deed Book Page Property Rights Conveyed Fee Simple Conditions of Sale Market Financing Terms Cash Equivalent Sale Price $20,000,000 Annual Special Assessments per Lot $2,440 (anticipated) Land Data Zoning Single-family Topography Generally level Utilities All available Number of Lots 224 Land Area (Acres) Density (Units per Acre) 4.7 Development Status at Sale Unimproved Lots Typical Lot Size (SF) 5,135 SF (average typical) Indicators (per Lot) Sale Price $89,286 Site Development Costs $58,014 Permits and Fees $52,000 (includes final map fees) Remarks The comparable represents the sale of 224 unimproved lots from a developer/investor. The property has a higher offsite obligation ($5,770,000) than some other properties in the area, which is why its site development costs are above average. The typical lot sizes of the three villages are 5,500 SF (83 lots), 3,600 SF (72 lots, high density SFR) and 6,300 square feet (69 lots), but the weighted average typical lot size is approximately 5,135 square feet. Special Taxes are anticipated to be increased as site development is completed. The Special Taxes above are approximated based on existing homes in Westpark. Seevers Jordan Ziegenmeyer 63

124 COMPARABLE 3 Property Identification Project Name Westpark Village 13A, 13B, 13C and 13D Location North side of Pleasant Grove Boulevard, west of Westbrook Boulevard APN et al City Roseville County Placer County Sale Data Grantor WP3 Capital Partners Grantee KB Home Sacramento Inc Contract Date N/A Closing Date 5/17/2013 Deed Book Page Property Rights Conveyed Fee Simple Conditions of Sale Market Financing Terms Cash Equivalent Sale Price $34,000,000 Annual Special Assessments per Lot $2,440 (anticipated) Land Data Zoning Single-family Topography Generally level Utilities All available Number of Lots 309 Land Area (Acres) 69.2 Density (Units per Acre) 4.5 Development Status at Sale Unimproved Lots Typical Lot Size (SF) 5,500 SF (average typical) Indicators (per Lot) Sale Price $110,032 Site Development Costs $37,672 Permits and Fees $56,000 (includes final map fees) Remarks The comparable represents the sale of 309 unimproved lots from a developer/investor. The acreage acquired included a 4.7 acre park site. The typical lot sizes of the four villages are 5,500 SF (74 lots), 6,000 SF (60 lots), 6,825 SF (87 lots) and 4,275 square feet (88 lots, high density SFR), but the weighted average typical lot size is approximately 5,500 square feet. Special Taxes are anticipated to be increased as site development is completed. The Special Taxes above are approximated based on existing homes in Westpark. Seevers Jordan Ziegenmeyer 64

125 COMPARABLE 4 Property Identification Project Name Fiddyment Ranch Village F-15A, 15B, and 15C Location East side of Fiddyment Road, north of Blue Oaks Boulevard APN et al et al City Roseville County Placer County Sale Data Grantor ATC Realty One LLC (Wells Fargo Bank) Grantee John Mourier Construction Contract Date N/A Closing Date 5/31/2013 Deed Book Page Property Rights Conveyed Fee Simple Conditions of Sale See Remarks/Market Financing Terms Cash Equivalent Sale Price $19,372,000 Annual Special Assessments per Lot $1,600 Land Data Zoning Single-family Topography Generally level Utilities All available Number of Lots 167 Land Area (Acres) 41.3 Density (Units per Acre) 4.0 Development Status at Sale Unimproved Lots Typical Lot Size (SF) 6,300 SF Indicators (per Lot) Sale Price $116,000 Site Development Costs $42,000 Permits and Fees $58,000 (includes final map fees) Remarks The comparable represents the sale of 167 lots. This was an REO transaction, but the sale price reflected market pricing. Seevers Jordan Ziegenmeyer 65

126 COMPARABLE 5 Property Identification Project Name Fiddyment Ranch Village F-16A and 16B Location East side of Fiddyment Road, north of Blue Oaks Boulevard APN et al City Roseville County Placer County Sale Data Grantor ATC Realty One LLC (Wells Fargo Bank) Grantee Lennar Contract Date N/A Closing Date 6/19/13 Deed Book Page Property Rights Conveyed Fee Simple Conditions of Sale See Remarks/Market Financing Terms Cash Equivalent Sale Price $13,125,000 Annual Special Assessments per Lot $1,600 Land Data Zoning Single-family Topography Generally level Utilities All available Number of Lots 110 Land Area (Acres) 27.8 Density (Units per Acre) 3.96 Development Status at Sale Unimproved Lots Typical Lot Size (SF) 5,775 SF Indicators (per Lot) Sale Price $119,318 Site Development Costs $43,000 Permits and Fees $58,000 (includes final map fees) Remarks The comparable represents the sale of 110 lots. This was an REO transaction, but the sale price reflected market pricing. Seevers Jordan Ziegenmeyer 66

127 Adjustments The comparable transactions are adjusted based on the profile of the subject property with regard to categories that affect market value. This report relies on quantitative adjustments. For certain adjustments such as site development cost, permits and fees and Special Taxes, adjustments are made using actual or estimated (present value) dollar amounts. Other adjustments may be categories as either superior or inferior, with percentage adjustments applied accordingly. If a comparable has an attribute considered superior to that of the subject, it is adjusted downward to negate the effect the item has on the price of the comparable. The opposite is true of categories considered inferior to the subject. The adjustments are made in consideration of paired sales, the appraiser s experience and knowledge and interviews with market participants. At a minimum, the appraiser considers the need to make adjustments for the following items: Expenditures after Sale (i.e. site development costs, permits and fees, bond encumbrance and atypical carrying costs such as Homeowner s Association fees) Property rights conveyed Financing terms Conditions of sale (motivation) Market conditions (time) Location Physical features A detailed analysis involving the adjustment factors is presented below. Expenditures After Sale For subdivision land, expenditures after sale typically include site development costs, permits and fees, bond encumbrance and unique holding costs such as HOA fees. For subdivisions where site development is complete and final subdivision map has recorded, adjustments for remaining site development costs do not apply. Loaded Lot Analysis Since each comparable has the same highest and best use as the subject property near term singlefamily residential development we apply adjustments for remaining site development costs (if any) and permits and fees on a dollar-for-dollar basis. That is, the comparables are analyzed on a loadedlot-basis, where any remaining site development costs and permits and fees due at building permit are added to the lot price to yield a price that reflects the total consideration. After all other adjustments are applied (market conditions, physical characteristics, etc.), we deduct the subject s remaining permits and fees to determine the subject s lot value. Seevers Jordan Ziegenmeyer 67

128 Adjustments for Bond Encumbrance We consider the Special Taxes of the comparables and their remaining bond terms to estimate a remaining principal bond balance. While bond interest rates may vary somewhat, for approximation purposes, we utilized a 5% discount rate. The estimated bond encumbrances are added to the loaded lot prices on a dollar-for-dollar basis. Adjustments for Holding Costs The subject and comparables do not have HOA fees. Adjustments for this item do not apply. Property Rights Conveyed In transactions of real property, the rights being conveyed vary widely and have a significant impact on the sales price. As previously noted, the opinion of value in this report is based on a fee simple estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power and escheat, as well as non-detrimental easements, community facility districts and conditions, covenants and restrictions (CC&Rs). All the comparables represent fee simple estate transactions. Therefore, adjustments for property rights are not necessary. Financing Terms In analyzing the comparables, it is necessary to adjust for financing terms that differ from market terms. Typically, if the buyer retained third party financing (other than the seller) for the purpose of purchasing the property, a cash price is presumed and no adjustment is required. However, in instances where the seller provides financing as a debt instrument, a premium may have been paid by the buyer for below-market financing terms or a discount may have been demanded by the buyer if the financing terms were above market. The premium or discounted price must then be adjusted to a cash equivalent basis. The comparable sales were cash to the seller transactions and do not require adjustments. Conditions of Sale Adverse conditions of sale can account for a significant discrepancy from the sales price actually paid compared to that of the market. This discrepancy in price is generally attributed to the motivations of the buyer and the seller. Certain conditions of sale are considered to be non-market and may include the following: a seller acting under duress, a lack of exposure to the open market, an inter-family or inter-business transaction for the sake of family or business interest, an unusual tax consideration, Seevers Jordan Ziegenmeyer 68

129 a premium paid for site assemblage, a sale at legal auction, or an eminent domain proceeding. Comparables 4 and 5 were REO transactions, but both properties were adequately marketed and their sale prices reflected market pricing. Adjustments for conditions of sale do not apply. Moreover, Comparables 1, 2 and 3 did not involve any non-market conditions of sale and do not require adjustments. Market Conditions Market conditions vary over time, but the date of this appraisal is for a specific point in time. In a dynamic economy one that is undergoing changes in the value of the dollar, interest rates and economic growth or decline extra attention needs to be paid to assess changing market conditions. Significant monthly changes in price levels can occur in several areas of a city, while prices in other areas remain relatively stable. Although the adjustment for market conditions is often referred to as a time adjustment, time is not the cause of the adjustment. Comparable 1 was negotiated for sale in late 2012 (with close of escrow occurring a few months later). Since this date, lot pricing has increased significantly amid strong builder speculation that the residential sector is entering an expansionary phase where home prices and sales rates are anticipated to increase. This comparable requires a significant upward adjustment. Comparables 2, 3, 4 and 5 reflect current market conditions and do not require adjustments. Physical Characteristics The physical characteristics of a property can impact the selling price. Those that may impact value include the following: Location Like the subject, all of the comparables are located in the south Placer County area and are located in Roseville or Rocklin (none of the comparables are located in Lincoln). Roseville is the primary economic hub for the area and offers the largest concentration of jobs. Rocklin is located just north of Roseville, and Lincoln is north of Rocklin. Comparables 1, 4 and 5 are located in either Rocklin or northwest Roseville, which are superior locations. These comparables receive downward adjustments. Comparables 2 and 3 are located in west Roseville, which is a similar location to Lincoln. These comparables do not require location adjustments. Seevers Jordan Ziegenmeyer 69

130 Community Appeal The subject and most of the comparables feature average community appeal. Adjustments for this factor do not apply. Number of Lots Generally, there is an inverse relationship between the number of lots and price per lot such that larger projects (with a greater number of lots) achieve a lower price per lot. However, market participants indicate that due to extreme builder demand and limited lot inventory, builders are not offering discounted prices for more lots that will yield several years of supply. In fact, properties containing 200+ lots that will provide for multiple years of inventory are achieving premiums. To justify sale prices for these large purchases, builders are trending home prices upward in their cash flow models. For this reason, Comparables 2 and 3, which contain 224 and 309 lots, respectively, receive 10% downward adjustments. Comparables 1, 4 and 5, with 92 lots, 167 lots and 110 lots, do not require adjustments. Lot Size (Typical) Adjustments for differences in lot size between the comparables and subject are estimated by applying lot size adjustment factors to difference in lot size. We have considered paired sales to assist with the determination of a lot size adjustment factor, as well as market participant interviews. We estimate a lot size adjustment factor of $5.00 per square foot, which is applied to the differences in lot size between the comparables and subject; subsequently, the products are divided by the interim adjusted sale prices to yield percentage adjustments, which is why comparables with the same lot size may have different adjustments. Site Utility Differences in contour, drainage, soil conditions, as well as project design, can affect the utility and, therefore, the market value of the properties. The subject property and comparables are planned for traditional single-family lots and all have average site utility. Adjustments for this factor do not apply. Lot Premiums The subject and comparables are anticipated to achieve a similar level of lot premiums (cul-de-sac, corner, inverted corner). None of the comparables benefit from view or significant open space premiums. Adjustments for this factor do not apply. Seevers Jordan Ziegenmeyer 70

131 Zoning and Entitlements The subject and comparables have either approved tentative subdivision maps or recorded final maps. Adjustments for this factor do not apply. Lot Condition Builders are willing to pay more for finished lots than for the combined sum of unimproved lots and site development costs due to the time, risk, carrying cost and profit associated with completing site development. The subject consists of finished lots, while all of the comparables are unimproved lots. Each comparable receives a 3% upward adjustment. Deductions for Remaining Permits and Fees and Remaining Site Costs As stated, the comparables are analyzed on a loaded lot basis. After applying all adjustments, we deduct the subject s permits and fees due at building permit ($43,000 per lot, net of credits) to yield lot prices reflective of finished lots. Adjustment Grid The grid on the following page reflects the afore-discussed adjustments. Seevers Jordan Ziegenmeyer 71

132 ADJUSTMENT GRID Site Characteristics: Subject Lot Price $82,500 $89,286 $110,032 $116,000 $119,318 Remaining Site Development Costs $0 $40,000 $58,014 $37,672 $42,000 $43,000 Permits and Fees $43,000 $58,000 $52,000 $56,000 $58,000 $58,000 Loaded Lot Price (Lot Price + Site Costs + Fees) $180,500 $199,300 $203,704 $216,000 $220,318 Special Taxes $839 $2,440 $2,440 $1,600 $1,600 Approx. Remaining Term (Years Until Maturity) Bond Encumbrance (Present Value at 5%) $12,897 $32,912 $32,912 $21,582 $21,582 Adjusted Price $193,397 $232,212 $236,616 $237,582 $241,900 Homeowner's Association Carrying Costs $0 $0 $0 $0 $0 $0 Anticipated Home Building Period (3 Years, Typical) Total HOA Carrying Cost (Present Value at 5%) $0 $0 $0 $0 $0 Adjusted Price $193,397 $232,212 $236,616 $237,582 $241,900 Elements of Comparison: Property Rights Conveyed Fee Simple Fee Simple Fee Simple Fee Simple Fee Simple Fee Simple Adjustment Adjusted Price $193,397 $232,212 $236,616 $237,582 $241,900 Financing Terms Cash Equiv. Similar Similar Similar Similar Similar Adjustment Adjusted Price $193,397 $232,212 $236,616 $237,582 $241,900 Sale Conditions Market Similar Similar Similar REO/Market REO/Market Adjustment Adjusted Price $193,397 $232,212 $236,616 $237,582 $241,900 Market Conditions Aug-13 Nov-12/May-13 May-13 May-13 May-13 Jun-13 Adjustment (Appraisal) 30.0% Adjusted Price $251,417 $232,212 $236,616 $237,582 $241,900 Physical Characteristics: Location Lincoln Rocklin W. Roseville W. Roseville NW Roseville NW Roseville Adjustment -10% -10% -10% Community Appeal Average Similar Similar Similar Similar Similar Adjustment Number of Lots Adjustment -10% -10% Lot Size (Typical) 5,940 8,000 5,135 5,500 6,300 5,775 Adjustment (approx.) -4.1% 1.7% 0.9% -0.8% 0.3% Topography/Utility Average Similar Similar Similar Similar Similar Adjustment Lot Premiums/Discounts Average Similar Similar Similar Similar Similar Adjustment Zoning/Entitlements Approved Similar Similar Similar Similar Similar Adjustment Other - Lot Condition Finished Unimproved Unimproved Unimproved Unimproved Unimproved Adjustment 3% 3% 3% 3% 3% Number of Adjustments (excl. P & F, Special Taxes) Gross Adjustments 47% 15% 14% 14% 13% Net Adjustments for Physical Characteristics -11% -5% -6% -8% -7% Degree of Similarity Fair Average Average Average Average Adjusted Loaded Lot Value $223,518 $219,982 $222,253 $219,151 $225,792 Less: Subject's Permits and Fees $43,000 ($43,000) ($43,000) ($43,000) ($43,000) ($43,000) Unencumbered Finished Lot Value $180,518 $176,982 $179,253 $176,151 $182,792 Seevers Jordan Ziegenmeyer 72

133 Conclusion The comparables reflect an unadjusted range of $82,500 to $119,318 per lot. The wide disparity in the unadjusted range is attributable to the varying remaining site costs and permits and fees of each comparable, as well as the fact that the unadjusted prices did not include the remaining bond balances. After adjustments (including accounting for remaining site development costs and bond balances), the comparables exhibit an adjusted range of $176,151 to $182,792 per lot. Comparable 1 received a larger combination of adjustments and deserves less reliance. With more consideration to the adjusted prices of Comparables 2 through 5, we esitmate an unencumbered finished lot value of $180,000 for the subject property. Extending this estimate to 133 vacant finished lots, the market value for this subject component equates to $23,940,000. Seevers Jordan Ziegenmeyer 73

134 EXTRACTION ANALYSIS As support for the estimate of finished lot value concluded in the sales comparison approach, we utilize an extraction (residual) analysis that takes into account home prices, direct and indirect construction costs, accrued depreciation and developer s incentive in order to arrive at an estimate of finished lot value. The elements of the extraction technique are discussed below. Revenue In the Residential Market Overview section of this report, we analyzed area home prices and concluded an average home price of $415,000 is reasonable for a 2,200 square foot home on the subject property (average quality construction). Expense Projections General and Administrative These expenses consist of management fees, liability and fire insurance, inspection fees, appraisal fees, legal and accounting fees and copying or publication costs. This expense category typically ranges from 2.5% to 4.0%, depending on length of project and if all of the categories are included in a builder s budget. We have used 3.00% for general and administrative expenses. Marketing and Sale These expenses typically consist of advertising and promotion, closing costs, sales operations, and sales commissions. The expenses are expressed as a percentage of the gross sales revenue. The range of marketing and sales expenses typically found in projects within the subject s market area is 5.0% to 6.5%. A figure of 6.0%, or 3.0% for marketing and 3.0% for sales, is estimated in the marketing and sales expense category. Direct and Indirect Construction Costs Construction costs are generally classified into direct and indirect costs. Direct costs reflect the cost of labor and materials to build the project. Direct costs generally are lower per square foot for larger floor plans, all else being equal, due to economies of scale. Indirect items are the carrying costs and fees incurred in developing the project and during the construction cycle. Construction quality and market-segment are significant factors that affect direct construction costs. In addition, national/public builders, which are able to achieve lower costs due to the larger scale in which orders are placed, routinely achieve lower direct costs. Seevers Jordan Ziegenmeyer 74

135 The subject property is profiled as a likely move-up quality project with average quality interior and exterior amenities (assumed). In addition, the subject would appeal to national or regional merchant builders. JMC Homes indicates its proposed 2,075 SF plan has a budgeted direct cost of approximately $61 per square foot, but this plan is smaller than 2,200 square feet. It s reasonable to assert that direct costs per square foot for a 2,200 square foot plan (which is larger) would be less. Below we present direct cost comparables. Project Effective Floor Plan Direct Costs Direc Cost Location Builder Type Date (SF) per SF Comment Adjustment (Adjusted) Dixon, Solano County National (Public Builder) ,225 $55.00 Move Up,Average Quality $55.00 West Sacramento, Yolo County Regional Merchant Builder ,025 $62.00 Move Up, Above Average Quality -5% $58.90 Brentwood, Contra Costa County Regional Merchant Builder ,225 $60.00 Move Up, Above Average Quality -5% $57.00 West Sacramento, Yolo County Regional Merchant Builder ,825 $48.50 Entry Level, Average Quality 5% $50.93 Roseville, Placer County Regional Merchant Builder ,000 $50.25 Move Up, Average Quality $50.25 Elk Grove, Sacramento County Regional Merchant Builder ,000 $53.75 Move Up, Above Average Quality -5% $51.06 Based on the cost comparables, an estimate of $55.00/SF, or $121,000 based on 2,200 SF, is considered reasonable. This estimate is toward the middle of the range indicated above. Regarding indirect costs, the following list itemizes some of the typical components that generally comprise indirect costs: Architectural and engineering fees for plans, plan checks, surveys and environmental studies Appraisal, consulting, accounting and legal fees The cost of carrying the investment in land and contract payments during construction. If the property is financed, the points, fees or service charges and interest on construction loans are considered All-risk insurance The cost of carrying the investment in the property after construction is complete, but before sell-out is achieved Developer fee earned by the project coordinator Interest reserve Conversations with homebuilders indicate the indirect costs generally range anywhere from 10% to 15% of the direct costs (excluding marketing, sales, general and administrative expenses, taxes, which are accounted for separately). An estimate of 12% is considered reasonable for the subject. Permits and Fees As noted, permits and fees due at building permit are projected to total $43,000 per lot (net of fee credits), on average. Seevers Jordan Ziegenmeyer 75

136 Accrued Depreciation For new construction on the subject, an allocation for deprecation (physical, functional, or economic) is not applicable. Developer s Incentive According to industry sources, developer s incentive (profit) historically has ranged anywhere from 5% to 25%. Profit is based on the perceived risk associated with the development. Under the existing market conditions, low profit expectations are the result of the market s focus on more affordable projects with faster sales rates. Higher profit expectations are common in projects with more risk such as developments where sales rates are slower, project size produces an extended holding period or the product type is considered weak or untested. Elements affecting profit include location, supply/demand, anticipated risk, construction time frame and project type. Another element considered in profit expectations is for the development stage of a project. First phases typically generate a lower profit margin due to cautious or conservative pricing, as new subdivisions in competitive areas must become established to generate a fair market share. Additionally, up front development costs on first phases can produce lower profit margins. Positive attributes of the subject property include: Approved entitlements and completed site development. Desirable regional location (South Placer County) Good transportation linkages with proximity to the State Highway 65 Bypass Initial signs of price increases and strengthening absorption Negative subject characteristics include: Macroeconomic factors Possibility the residential sector will lose steam in 12 to 24 months if regional economic conditions (employment, etc.) does not improve Move-up product with lesser absorption rates than entry-level product A survey of profit expectations is presented on the following page. Seevers Jordan Ziegenmeyer 76

137 Data Profit Source Expectations Josh Roden - Meritage (2013) 8% to 10% net profit, regardless on product type, market area or lot condition Jeb Elmore - Lewis Operating Corp (2013) 8% to 10%, with better located projects with less uncertainty regarding pricing and absorption at the lower end of the range and higher risk projects nearer the high end of the range. Dustin Barker - Lennar (2011) 10% to 15% Greg Ackerman - Pulte (2010) 9% profit, 18+% gross margin (5% for marketing/sales, 4% for G&A) Tulare Windmill Ventures, LLC (2007) 15% typical profit factor for single-family subdivisions Mike Grant - Premier Homes (2007) 12% static profit John Bacigalupi - Beazer Homes (2007) Static profit expectation was 20% during the period of expansion ( ), but it is now 10% to 15% given the recent moderation/stabilization in the residential market David Jacobsen - Ridgecrest Homes (2007) 10% for typical single-family projects, up to a maximum of 35% Mike Winn - Reynen & Bardis (2005) 12% to 25% profit pre-tax; typical development timeline of 5 to 8 years Doug Eikenbary - William Lyon Homes (2005) 8% to 10% target profit for both single-family subdivisions and master-planned communities; typical development timeline of 1 to 2 years Based on the preceding discussion and developer surveys, we have concluded an estimate of 8.0% for developer s incentive. Conclusion Our estimate of finished lot value via the extraction analysis is presented below. EXTRACTION ANALYSIS Revenue Average Floor Plan Size 2,200 SF Typical Home Price $415,000 (Unencumbered Retail) Expense Projections G & A 3.0% of Retail Value $12, % of Retail Value $24,900 Average Direct $55.00 /SF $121,000 Indirect 12.0% of Direct Cost $14,520 Permits and Fees Due at BP $43,000 Per Lot $43,000 Developer's Incentive* 8% of home price $33,200 $249,070 Residual Finished Lot Value: $165,930 Reconciliation of Finished Lot Value The estimate of residual value above ($165,930) is within 7.8% of the sales comparison approach estimate ($180,000). The extraction analysis is generally supportive of the sales comparison approach. Seevers Jordan Ziegenmeyer 77

138 VALUATION OF PARTIALLY COMPLETED PRODUCTION HOMES In this section, the not-less-than aggregate value of the 16 partially completed single-family residences will be estimated. We utilize the sales comparison approach to determine the market value of the smallest base floor plan under construction (1,915 square feet), which is extended to 16 homes for an estimate of total revenue. This revenue is incorporated into a discounted cash flow analysis where the remaining construction costs, as well as holding costs and indirect costs, are considered over a projected sell-off period. SALES COMPARISON APPROACH The comparables used in the following analysis were obtained from new home projects and resales in the area. COMPARABLES MAP Seevers Jordan Ziegenmeyer 78

139 COMPARABLE PHOTOGRAPHS Comparable 1 (under construction) 2436 Lincoln Airpark Drive Subject home by JMC Homes Comparable Lindbergh Court Built by JMC Homes Comparable 3 (Resale) 1758 Benvenito Lane Built by Signature Properties Seevers Jordan Ziegenmeyer 79

140 Discussion of Adjustments In order to estimate the market values for the subject floor plan (the smallest floor plan under construction within the subject property), the comparable transactions were adjusted to reflect the subject with regard to categories that affect market value. If a comparable has an attribute considered superior to that of the subject, it is adjusted downward to negate the effect the item has on the price of the comparable. The opposite is true of categories that are considered inferior to the subject and are adjusted upward. At a minimum, the appraiser considers the need to make adjustments for the following items: Property rights conveyed Financing terms Conditions of sale (motivation) Market conditions (time) Location Physical features A paired sales analysis is performed in a meaningful way when the quantity and quality of data are available. Even so, many of the adjustments require the appraiser s experience and knowledge of the market and information obtained from those knowledgeable and active in the marketplace. A detailed analysis involving each of these factors and the value conclusion for each unit follows. Upgrades and Incentives The subject floor plans are appraised with the average quality standard features. The objective of the analysis is to estimate the base price per floor plan, exclusive of incentives. Incentives can take the form of direct price reductions or non-price incentives such as upgrades or non-recurring closing costs. Comparable 1 is a pending new home sale with base amenities not yet selected by the buyer; thus, no deductions for upgrades apply. Comparable 2 is a closed new home sale, and Comparable 3 is a resale. Comparables 2 and 3 included upgraded amenities. We ve applied 5% downward adjustments to each to reflect base pricing. Property Rights Conveyed In transactions of real property, the rights being conveyed vary widely and have a significant impact on the sales price. As previously noted, the opinion of value in this report is based on a fee simple estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power and escheat, as well as non-detrimental easements, community facility districts and conditions, covenants and restrictions (CC&Rs). All of the comparables represent fee simple estate transactions. Therefore, adjustments for this factor are not necessary. Seevers Jordan Ziegenmeyer 80

141 Financing Terms In analyzing the comparables, it is necessary to adjust for financing terms that differ from market terms. If the seller provides incentives in the form of paying for closing costs or an interest rate buy down, a discount has been obtained by the buyer for financing terms. This discount price must then be adjusted to a cash equivalent basis. Some comparables received incentives applicable toward closing costs, which are reflected in the incentives adjustments previously considered. Conditions of Sale Adverse conditions of sale can account for a significant discrepancy from the sales price actually paid compared to that of the market. This discrepancy in price is generally attributed to the motivations of the buyer and the seller. Certain conditions of sale are considered to be non-market and may include the following: a seller acting under duress, a lack of exposure to the open market, an inter-family or inter-business transaction for the sake of family or business interest, an unusual tax consideration, a premium paid for site assemblage, a sale at legal auction, or an eminent domain proceeding The comparables did not involve atypical conditions of sale. Adjustments for this factor do not apply. Market Conditions (Date of Sale, Phase Adjustment) The market conditions vary over time, but the date of this appraisal is for a specific point in time. In a dynamic economy one that is undergoing changes in the value of the dollar, interest rates and economic growth or decline extra attention needs to be paid to assess changing market conditions. Significant monthly changes in price levels can occur in several areas of a city, while prices in other areas remain relatively stable. Although the adjustment for market conditions is often referred to as a time adjustment, time is not the cause of the adjustment. Prices have increased significantly in recent months, with prices only recently beginning to level off somewhat. In light of rising prices and strengthening market conditions, we apply market conditions adjustments based on the date of contract. Comparable 3 was negotiated in June 2013 and receives a 5% upward adjustment, and Comparable 2 was negotiated for April 2013 and receives a 15% upward adjustment. Comparable 1 is a recent pending sale and does not require adjustment. Seevers Jordan Ziegenmeyer 81

142 Location The comparables have locations that are similar to the subject homes. Location adjustments do not apply. Community Appeal The comparable exhibit similar community appeal and do not require adjustments for this factor. Special Taxes/Assessment Liens We have estimated the remaining bond encumbrance for each comparable and reflected these amounts as upward adjustments. Lot Size Lot size adjustments are applied to the comparables for differences relative to the subject typical lot size (5,940 SF) using a lot size adjustment factor of $5.00/SF. Lot Premiums Properties sometimes achieve premiums for corner, cul-de-sac positioning or open space positioning. The comparables do not feature lot premiums. Adjustments for this factor do not apply. Design and Appeal/Quality of Construction Design and appeal of a floor plan is consumer specific. One exterior may appeal to one buyer, while another appeals to a different buyer. These types of features for new homes with similar functional utility are not typically noted in the base sales prices. The comparables are similar to the subject in regard to design and appeal. Construction quality can differ from slightly to substantially between projects and is noted in the exterior and interior materials and design features of a standard unit. In terms of quality of construction, the comparables represent average quality construction like the subject and do not require adjustments. Age/Condition The subject homes represent new construction. Comparables 1 and 2 are similar to the subject and do not require adjustments. Comparable 3 has an effective age of 5% and receives a 10% upward adjustment. Seevers Jordan Ziegenmeyer 82

143 Functional Utility The subject homes and comparables represent traditional detached single-family residential construction on standard lots. Adjustments for this factor do not apply. Room Count For similar size units the differences between room count is a buyer preference. One buyer might prefer two bedrooms and a den versus a three-bedroom unit. Extra rooms typically result in additional building area and are accounted for in the size adjustment. Therefore, no adjustments are made for number of total rooms or bedrooms. Because bathrooms are a functional item for each floor plan and add substantial cost due to the number of plumbing fixtures, an adjustment is made for the difference in the number of fixtures between the subject and the comparable sales. The adjustment is based on an amount of $5,000 per fixture (or half-bath) and is supported by cost estimates for a good quality home in the Residential Cost Handbook, published by the Marshall and Swift Corporation. Considering the fact that plumbing upgrades for existing bathrooms generally range from $1,000 to over $10,000 for the various fixtures, the $5,000 per fixture, or half-bath, is supported. Consequently, a factor of $10,000 per full bath is also applied in our analysis. Unit Size/Living Area Units similar (in the same development), except for size, were compared to derive the applicable adjustment for unit size. Those used for comparison purposes, are units within similar projects. Units within the same project were used since they have a high degree of similarity in quality, workmanship, design and appeal. Other items such as a single level or two-story designs, number of bathrooms and number of garage spaces were generally similar in these comparisons, in order to avoid other influences in price per square foot. Where differences exist, they are minor and do not impact the overall range or average concluded. The range indicated by the paired units in this analysis generally demonstrated a value range from approximately $40 to in excess of $100 per square foot. Considering the information cited above, a factor of $65 per square foot is concluded to be appropriate and reasonable for the difference in living area between the subject and the comparables, given the quality of the product. Number of Stories The comparables and subject represent one story plans. Adjustments for this factor do not apply. Seevers Jordan Ziegenmeyer 83

144 Parking/Garage The subject base floor plan features a two car garage with a storage area, which is generally similar to a three-car tandem garage. Our survey of local real estate professionals indicates a premium value of approximately $10,000 for a full garage space and $5,000 per tandem garage space. Adjustments are applied to the comparables relative to the subject, accordingly. Landscaping Comparables 2 and 3 has landscaping included, but separate adjustments for upgrades (which included landscaping) were previously accounted. Adjustments for this factor do not apply. Conclusion An adjustment grid reflecting the aforementioned adjustments is presented on the following page. Seevers Jordan Ziegenmeyer 84

145 1,915 SF - Min. Home Size of The Executive Series by JMC Homes Project Information: Subject Property Comparable No. 1 Comparable No. 2 Comparable No. 3 Project Name The Executive Series The Executive Series (Imp. Area 1) The Executive Series (Imp. Area 2) Resale (Sorrento) Plan 1,915 SF 2,075 SF 1,915 SF 2,077 SF Address/Lot Number N/Ap 2436 Lincoln Airpark Drive 2500 Lindbergh Ct 1758 Benvenito Lane City/Area Lincoln Lincoln Lincoln Lincoln Price N/Ap $399,990 $349,990 $335,000 Price Per SF N/Ap $ $ $ Data Source MLS MLS MLS Incentives N/Ap Yes ($5,000) No ($5,000) No $0 Upgrades Base Upgrades Upgrades (est. 5%) ($17,500) Upgrades (est. 5%) ($16,750) Effective Base Sales Price $394,990 $327,491 $318,250 Adjustments: Factor Description +/(-) Description +/(-) Description +/(-) Property Rights Fee Simple Similar Similar Similar Financing Terms Cash Equivelant Similar Similar Similar Conditions of Sale Market Market Market Market Market Conditions Date of Sale N/Ap 7/13 Pending Sale 6/13 COE, 4/13 contract, 15% $49,124 7/13 COE, 6/13 contract, 5% $15,913 Phase Adjustment N/Ap New Incentive Adjustment N/Ap Project Location Lincoln Lincoln Lincoln Lincoln Special Taxes (PV at 5% over Remaining Term) $2,068 $31,790 $1,800 $24,279 $2,000 $30,745 Lot Size $5.00 5,940 5,940 $0 6,214 ($1,370) 7,610 ($8,350) Lot Premium None - Base Lot No Similar Similar Design and Appeal Average Similar Similar Similar Quality of Construction Average Similar Similar Similar Age New Similar Similar 5 Years, 10% $31,825 Condition Good Similar Similar Similar Functional Utility Good Similar Similar Similar Room Count Bedrooms Baths $10, ($10,000) 2 2 Living Area (SF) $65 1,915 2,075 ($10,400) 1,915 $0 2,077 ($10,530) Number of Stories One One One One Heating/Cooling Central/Forced Similar Similar Similar Garage 2 car w/ storage 3 car ($5,000) 3 car ($5,000) 2 car $5,000 Landscaping Front Similar Similar Similar Pool/Spa None Similar Similar Similar Patios/Decks None Similar Similar Similar Fencing Rear Similar Similar Similar Fireplace(s) Yes Similar Similar Similar Kitchen Equipment Range/Oven, Diswasher, Microwave Similar Similar Similar Community Appeal Average Similar Similar Similar Other Gross Adjustments $57,190 $79,773 $102,362 Net Adjustments $6,390 $67,033 $64,602 Adjusted Base Retail Value $401,380 $394,524 $382,852 Concluded Base Retail Value $400,000 Indicated Value Per SF $ DISCOUNTED CASH FLOW ANALYSIS In this section we utilize a discounted cash flow analysis to determine the market value in bulk of the 16 partially completed homes. The four components of discounted cash flow analysis are revenue, absorption, expenses and discount rate, which are discussed below. The discounted cash flow analysis is conducted on a monthly basis. Revenue The revenue is the total not-less-than aggregate value of the 16 homes as if complete. With an estimated value of $400,000 for a 1,915 SF base subject plan, we estimate revenue would total $6,400,000. Seevers Jordan Ziegenmeyer 85

146 Absorption As discussed in the Residential Market Overview, competitive projects are generally capturing three to four sales per month. We estimate an absorption rate of three sales per month, with sales beginning in Period 1 and the first closings beginning in Period 2. The last sale occurs in Period 7. Expenses Most expenses for the sell-off of the completed homes are the same as indicated in the Extraction section of this report. General and administrative expenses are estimated at 3.0% (spread evenly over the disposition period), while sales and marketing costs are anticipated to total 6.0%. No deductions for permits and fees are necessary, since these fees have been paid. Annual ad valorem taxes are estimated at % of the estimated bulk market value (divided over the number of homes). As noted, the 16 homes are partially complete, so remaining costs must be deducted. We estimate remaining home construction on the following page using the Developer s direct cost for the smallest plan, as well as the estimated percentage complete. These remaining costs are spread over the seven periods based on the percentage of construction incurred each period. REMAINING HOME CONSTRUCTION COSTS Total Direct Cost Indirect Cost at 12% Assessor Parcel Number Plan (Smallest Assumed) Total Direct and Indirect Percent Complete Percent Remaining Total Remaining ,915 $120,909 $12,091 $133,000 75% 25% $33, ,915 $120,909 $12,091 $133,000 60% 40% $53, ,915 $120,909 $12,091 $133,000 60% 40% $53, ,915 $120,909 $12,091 $133,000 75% 25% $33, ,915 $120,909 $12,091 $133,000 60% 40% $53, ,915 $120,909 $12,091 $133,000 60% 40% $53, ,915 $120,909 $12,091 $133,000 75% 25% $33, ,915 $120,909 $12,091 $133,000 60% 40% $53, ,915 $120,909 $12,091 $133,000 60% 40% $53, ,915 $120,909 $12,091 $133,000 75% 25% $33, ,915 $120,909 $12,091 $133,000 75% 25% $33, ,915 $120,909 $12,091 $133,000 60% 40% $53, ,915 $120,909 $12,091 $133,000 50% 50% $66, ,915 $120,909 $12,091 $133,000 50% 50% $66, ,915 $120,909 $12,091 $133,000 50% 50% $66, ,915 $120,909 $12,091 $133,000 50% 50% $66,500 $804,649 Seevers Jordan Ziegenmeyer 86

147 Discount Rate/Profit Profit rates were discussed in detail within the Extraction section of this report. For the bulk sale of 16 partially completed homes with a relatively short disposition period, which is a situation that rarely occurs in the market, participants likely would rely on static profit expectations rather than an IRR or discount rate expectation. For this reason, for the bulk valuation of 16 partially completed homes, a static profit expectation somewhat less than utilized in the Extraction section (8.00%), or 6.0%, will be utilized. Using this expected static profit (as well as an 8.00% cost of funds), the corresponding IRR (that yields the target profit) is 30.10% (the discount rate is skewed upward by the short sell-off period). Conclusion The table on the following pages incorporates the preceding factors in estimating the market value of 16 partially completed homes in bulk. Seevers Jordan Ziegenmeyer 87

148 MARKET VALUE OF 16 PARTIALLY COMPLETED HOMES IN BULK REVENUE Aggregate Retail Proceeds $6,400,000 Total Units 16 Revenue Per Unit $400,000 EXPENS ES General and Administrative 3.00% Marketing and Commissions 6.0% Ad Valorem Taxes per Home $2,867 Direct Levies per Home $319 Special Taxes per Home $2,068 Remaining Home Construction Costs $804,649 ABSORPTION Month Total Sales - Detached Unsold Inventory Close of Escrow (COE) Unclosed Inventory Total Revenue $0 $1,200,000 $1,200,000 $1,200,000 $1,200,000 $1,200,000 $400,000 $6,400,000 EXPENS ES Month Total General and Administrative ($27,429) ($27,429) ($27,429) ($27,429) ($27,429) ($27,429) ($27,429) ($192,000) Marketing and Sales $0 ($72,000) ($72,000) ($72,000) ($72,000) ($72,000) ($24,000) ($384,000) Ad Valorem Real Estate Taxes ($3,823) ($3,823) ($3,106) ($2,389) ($1,672) ($956) ($239) ($16,007) Direct Levies ($425) ($425) ($346) ($266) ($186) ($106) ($27) ($1,781) Special Taxes ($2,757) ($2,757) ($2,240) ($1,723) ($1,206) ($689) ($172) ($11,546) Remaining Home Construction Costs ($192,155) ($192,155) ($156,126) ($120,097) ($84,068) ($48,039) ($12,010) ($804,649) Total Expenses ($226,589) ($298,589) ($261,246) ($223,904) ($186,561) ($149,219) ($63,876) ($1,409,984) Net Income Before Developer's Incentive ($226,589) $901,411 $938,754 $976,096 $1,013,439 $1,050,781 $336,124 $4,990,016 DISCOUNT RATE (IRR) Discount Rate (IRR) 30.20% Discounted Cash Flow ($221,026) $857,697 $871,301 $883,720 $895,004 $905,202 $282,448 $4,474,346 NET PRESENT VALUE $4,474,346 Rounded: $4,470,000 PROFIT ESTIMATION Developer's Incentive 6.00% $0 $72,000 $72,000 $72,000 $72,000 $72,000 $24,000 $384,000 Net Income (Before Discounting) ($226,589) $829,411 $866,754 $904,096 $941,439 $978,781 $312,124 $4,606,016 DISCOUNTED RATE (COSTS OF BORROWED FUNDS) Discount Rate (Cost of Borrowed Funds, SFR) 8.00% Discounted Cash Flow ($225,088) $818,462 $849,647 $880,384 $910,676 $940,528 $297,939 NET PRESENT VALUE $4,472,547 Seevers Jordan Ziegenmeyer 88

149 MARKET VALUE OF THE SUBJECT PROPERTY IN BULK Subject to the hypothetical condition of this report, previously we estimated component bulk market values of the subject s 133 vacant finished lots (in bulk) at $23,940,000, and the 16 partially completed homes (in bulk) at $4,470,000. The bulk market value of the subject property overall is the sum of the two component values, which equates to $28,410,000. Given each component is a bulk value and there are only two components, no further discounting is necessary. Note that this estimate is a not-less-than estimate. Seevers Jordan Ziegenmeyer 89

150 CONCLUSION OF VALUE As a result of our analysis, it is our opinion the market value of the subject property, based on a hypothetical condition and as of the date of inspection, August 9, 2013, and in accordance with the extraordinary assumptions, significant factors, general assumptions and limiting conditions set forth on pages 9 through 11 of the attached document, is not less than: TWENTY EIGHT MILLION FOUR HUNDRED TEN THOUSAND DOLLARS $28,410,000 The market value estimated herein is based on a hypothetical condition. USPAP defines a hypothetical condition as a condition, directly related to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results, but is used for the purpose of the analysis. Certain of the proceeds from the Bonds will be used to generate fee credits applicable to fees ordinarily paid at the time building permits are pulled for new construction. The market value estimated herein is based on the hypothetical condition the subject property has said fee credits. Seevers Jordan Ziegenmeyer 90

151 EXPOSURE TIME Exposure time is the period a property interest would have been offered on the market prior to the hypothetical consummation of a sale at market value on the effective date of the appraisal. For a complete definition of exposure time, please reference the Glossary of Terms in the Addenda. In attempting to estimate a reasonable exposure time for the subject property, we looked at both the historical exposure times of a number of sales, as well as current economic conditions. With competitive pricing, transfers of similar properties in the region were typically occurring within 6 to 12 months of exposure. At the concluded value and as of the date of value, it is estimated that the transfer of the subject property would have occurred within 12 months of initial exposure. Seevers Jordan Ziegenmeyer 91

152

153

154

155

156

157

158

159

160

161

162

163

164

165

166

167

168

169

170