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HomeMy WebLinkAbout1988-06-07; City Council; 9468; Hosp Grove Debt IssueOF CARLSBAD — AGENf BILL AB#_ MTG._ DEPT. FIN TITLE: HOSP GROVE DEBT ISSUE o z3 Oo RECOMMENDED ACTION: Adopt Resolution No. S^~J^7 authorizing and directing execution of certain lease financing documents and purchase agreement, and approving a preliminary official statement and directing certain actions with respect thereto. ITEM EXPLANATION On May 3 , 1988 , the City Council directed staff to proceed with the issue of long term debt to finalize the acquisition of Hosp Grove. Toward that end Council is being asked to take two actions. The first action will be to adopt the attached resolution authorizing or approving the following documents: 1 . Approve Lease Agreement with the Carlsbad Public Improvement Corporation for the lease of the Hosp Grove property. 2. Approve the Trust Agreement with Bank of California, the trustee for this COP issue. 3 . Approve the Agency Agreement between the City and the Carlsbad Public Improvement Corporation to allow the City to act as the agent for the Corporation in the construction of the street and storm drains. 4 . Approve the Purchase Agreement with the underwriter setting the underwriter's commission and maximum cost of the bond issue. 5 . Approve the preliminary Official Statement describing the issue and the covenants made by the various parties to the transaction. Council will then adjourn the City Council meeting and convene the first meeting of the Carlsbad Public Improvement Corporation to take a series of actions. A separate agenda and agenda bill has been prepared for this meeting. This Corporation is similar in concept to the Building Authority which was formed in the mid 1960 's to assist building this City Hall. The Corporation acts as the issuer of debt which is then repaid through a lease agreement with the City. The lease payments made to the Corporation are passed on to the Certificate of Participation (COP) holders. The Articles of Incorporation before the Council were drafted by our Bond Council, Bill Madison of Jones Hall Hill and White, and have been reviewed by the City Attorney. Following these actions, the City staff and financing team will push the debt issue along to a June 28 closing date. At that time the underwriter, Rauscher £. Pierce Refsnes, will transfer funds to the City. On June 30 the short term note sold last July will be paid off. The first payment of interest on the COP will be due in February 1989 . Page Two of ABfl FISCAL IMPACT The documents before the Council tonight do not set the exact interest rate on this COP issue, therefore, the final cost of the issue is not yet known. The pricing of the OOP's will be done at the time of the pre-closing, June 27, 1988. The underwriter's fee is set in the purchase contract at 1.5% of the issue, or $15 for every $1,000 of bonds sold. This price was negotiated as part of the package short term note/long terra debt underwriting agreement one year ago. Although underwriter's fees differ on various types of debt issues, the fee of 1.5% for this issue is not unreasonable. In addition, the resolution sets maximum limits on interest rates and annual debt service payments which limit the City's exposure to market changes. Should the underwriter be unable to provide a bid at or below these limits, further Council action would be required. At the last Council meeting the annual debt service cost of this issue was estimated to be close to $800,000 per year. Although the market is changing constantly, this estimate is still realistic. (This debt service cost represents the net cost to the City after considering interest earnings on the debt service reserve funds held by the bank.) Recent market movements have been in the wrong direction with rising interest rates on government bonds. The 1988-89 Budget includes $400,000 for the payment of the first installment on the debt service. EXHIBITS 1. Resolution No,&&~W}authorizing and directing the execution of certain lease financing documents and purchase agreement, and approving the preliminary official statement and authorizing and directing certain actions with respect thereto. 2. Lease Agreement 3. Trust Agreement 4. Agency Agreement 5. Purchase Agreement 6. Preliminary Official Statement EXHIBIT 1 13061-03 JHHW:WHM:pch 05/13 M6700 pch 05/20/8S pch 05/26/88 CITY OF CARLSBAD RESOLUTION NO. 88-187 A RESOLUTION APPROVING, AUTHORIZING AND DIRECTING EXECUTION OF CERTAIN LEASE FINANCING DOCUMENTS, AUTHORIZING AND DIRECTING EXECUTION OF A PURCHASE AGREEMENT, APPROVING A PRELIMINARY OFFICIAL STATEMENT AND AUTHORIZING AND DIRECTING CERTAIN ACTIONS WITH RESPECT THERETO RESOLVED, by the City Council of the City of Carlsbad (the "City"): WHEREAS, the City has issued notes (the "Notes") in the principal amount of $6,555,000 to acquire approximately 52 acres of a eucalyptus grove commonly known as "Hosp Grove" for general municipal purposes and presently zoned open space; and WHEREAS, the Notes mature on June 30, 1988, and the City wishes to complete permanent financing for Hosp Grove and improvements to be made thereon; and WHEREAS, the City and the City of Carlsbad Public Improvement Corporation (the "Corporation") propose to enter into a lease agreement, dated as of June 1, 1988, (the "Lease Agreement"), whereby the City will lease Hosp Grove (the "Site") to the Corporation, and the Corporation has agreed to construct certain improvements to the Site (the "Project"), and will lease the Project and the Site to the City, and the City will lease the Project and the Site from the Corporation; and WHEREAS, for the purpose of obtaining the moneys required to be deposited by it with the Trustee to pay the Notes at maturity and to pay for financing the construction of the Project, the Corporation proposes to assign and transfer certain of its rights under the Lease Agreement to the Trustee, and in consideration of such assignment and the execution of the Trust Agreement, the Trustee has agreed to execute and deliver certificates of participation, each evidencing a fractional interest in the lease payments made by the City under the Lease Agreement, to provide the moneys required herein to be deposited by the Corporation; WHEREAS, in connection therewith, it is in the public interest and for the public benefit that the City authorize and direct execution of the Lease Agreement and certain other financing documents in connection therewith; and WHEREAS, pursuant to the City's authorization, Rauscher Pierce Refsnes, Inc. (the "Underwriter") proposes to underwrite the financing and has prepared and presented to the City a form of preliminary official statement containing information material to the offering and sale of the certificates of participation described below (the "Preliminary Official Statement"); and WHEREAS, the documents below specified have been filed with the City, and the members of the City Council, with the aid of its staff, have reviewed said documents; NOW, THEREFORE, it is hereby ORDERED and DETERMINED, as follows: SECTION 1. The below-enumerated documents be and are hereby approved, and the Mayor, the City Manager and the Finance Director are hereby separately authorized and directed to execute said documents, with such changes, insertions and omissions as may be approved by such official, and the City Clerk is hereby authorized and directed to attest to such official's signature: (a) a lease agreement, relating to the Site and the Project, between the Corporation, as lessor, and the City, as lessee (the "Lease Agreement"), so long as the stated term of the Lease Agreement does not extend beyond August 1, 2008, so long as the principal amount of the Lease Agreement does not exceed $9,000,000 and so long as the lease payments payable by the City under the Lease Agreement in any twelve-month period, beginning on August 2 and ending on the succeeding August 1, do not exceed $980,000; (b) a trust agreement, by and among the Corporation, the City and The Bank of California, National Association, San Francisco, California, as trustee (the "Trustee"), relating to the financing and the execution and delivery of certificates of participation evidencing the fractional interests of the owners thereof in lease payments to be made by the City under the Lease Agreement (the "Certificates of Participation"); and (c) an Agency agreement, by and between the Corporation and the City, pursuant to which the Corporation will appoint the City to act as its agent for the purposes of the construction of the Project. SECTION 2. A purchase agreement by and between the Underwriter and the City relating to the purchase by the Underwriter of the Certificates of Participation, be and is hereby approved, and the Mayor, the City Manager and the Finance Director are hereby separately authorized and directed to execute said agreement, with such changes, insertions and omissions as may be approved by such official, so long as the interest rate with respect to the Certificates of Participation will not produce annual lease payments payable under the Lease Agreement in any twelve-month period, beginning on August 2 and ending on the succeeding August 1, in excess of $980,000, so long as the principal amount of the Certificates of Participation will not exceed $9,000,000 and so long as the Underwriter's discount with respect to the Certificates does not exceed 1.5%. SECTION 3. The Mayor, the City Manager, the Finance Director, or any deputy or assistant of the City Manager designated by the City Manager, the City Clerk and other officials of the City are hereby authorized and directed to execute such other -2- agreements, documents and certificates as may be necessary to effect the purposes of this resolution and the lease financing herein authorized. SECTION 4. To the best of the City's knowledge, information and belief, the Preliminary Official Statement contains no untrue statement of a material fact with respect to the City or omits to state a material fact with respect to the City required to be stated where necessary to make any statement made therein not misleading in the light of the circumstances under which it was made. SECTION 5. The Preliminary Official Statement is approved for distribution in connection with the offering and sale of the Certificates of Participation. SECTION 6. The Mayor, the City Manager or the Finance Director is authorized to approve corrections and additions to the Preliminary Official Statement by supplement or amendment thereto, or otherwise as appropriate, provided that any such corrections or additions shall be necessary to cause the information contained therein to conform with facts material to the Certificates of Participation, or to the proceedings of the City or such corrections or additions are in form rather than in substance. SECTION 7. The Mayor, the City Manager and the Finance Director are separately authorized and directed to cause the Preliminary Official Statement to be brought into the form of a final official statement (the "Final Official Statement") and to execute said Final Official Statement, dated as of the date of the sale of the Certificates of Participation, and the City Manager is authorized and directed to execute a statement that the facts contained in the Final Official Statement, and any supplement or amendment thereto (which shall be deemed an original part thereof for the purpose of such statement) were, at the time of sale of the Certificates of Participation, true and correct in all material respects and that the Final Official Statement did not, on the date of sale of the Certificates of Participation, and does not, as of the date of delivery of the Certificates of Participation, contain any untrue statement of a material fact with respect to the City or omit to state material facts with respect to the City required to be stated where necessary to make any statement made therein not misleading in the light of the circumstances under which it was made. The Mayor, the City Manager or the Finance Director, shall take such further actions prior to the signing of the Final Official Statement as are deemed necessary or appropriate to verify the accuracy thereof. SECTION 8. The Final Official Statement, when prepared, is approved for distribution in connection with the offering and sale of the Certificates of Participation. -3- I hereby certify that the foregoing resolution was duly adopted at a meeting of the City Council of the City of Carlsbad duly held on the 7th day of June, 1988, by the following vote: AYES, and in favor of: Council Members Lewis, Kulchin, Pettine, Mamaux and Larson NOES: None ABSENT: City Clerk -4- 13061-03 JHHW:WHM:pch 05/12/PS- — M6694pch 05/20, EXHIBIT 2 LEASE AGREEMENT Dated as of June 1, 1988 by and between the CITY OF CARLSBAD PUBLIC IMPROVEMENT CORPORATION, as Lessor and the CITY OF CARLSBAD, as Lessee (HOSP GROVE PROJECT) M6694 TABLE OF CONTENTS AETICLE I DEFINITIONS AND EXHIBITS Section 1.1. Section 1.2. Definitions Exhibits.... 2 2 ARTICLE II REPRESENTATIONS, COVENANTS AND WARRANTIES Section 2.1. Representations, Covenants and Warranties of the City Section 2.2. Representations, Covenants and Warranties of Corporation 3 3 ARTICLE HI DEPOSIT OF MONEYS; ACQUISITION AND CONSTRUCTION OF THE PROJECT Section 3.1. Deposit of Moneys , Section 3.2. Acquisition and Construction of Project Section 3.3. Payment of Acquisition and Construction Costs Section 3.4. Payment of Delivery Costs Section 3.5. Unexpended Moneys 5 5 6 6 6 ARTICLE IV AGREEMENT TO LEASE; TERM OF THIS LEASE AGREEMENT; LEASE PAYMENTS Section 4.1. Section 4.2. Section 4.3. Section 4.4. Section 4.5. Section 4.6. Section 4.7. Lease Term of Agreement... Possession Lease Payments Quiet Enjoyment Title Additional Payments. 7 7 7 7 9 9 9 ARTICLE V MAINTENANCE; TAXES; INSURANCE; USE LIMITATIONS AND OTHER MATTERS Section 5.1. Maintenance, Utilities, Taxes and Assessments 10 Section 5.2. Modification of Project and Site 10 Section 5.3. Public Liability and Property Damage Insurance 11 Section 5.4. Rental Interruption Insurance 11 Section 5.5. Title Insurance 12 Section 5.6. Insurance Net Proceeds; Form of Policies 12 Section 5.7. Advances 12 Section 5.8. Installation of City's Equipment 12 Section 5.9. Liens 13 Section 5.10. Private Business Use Limitation 13 Section 5.11. Private Loan Use Limitation 13 Section 5.12. Federal Guarantee Prohibition 13 ARTICLE VI DAMAGE, DESTRUCTION AND EMINENT DOMAIN; USE OF NET PROCEEDS Section 6.1. Eminent Domain 15 Section 6.2. Application of Net Proceeds 15 Section 6.3. Abatement of Lease Payments in the Event of Damage or Destruction 15 ARTICLE VII DISCLAIMER OF WARRANTIES; ACCESS Section 7.1. Disclaimer of Warranties 16 Section 7.2. Access to the Site and the Project 16 Section 7.3. Release and Indemnification Covenants 16 ARTICLE VIE ASSIGNMENT, SUBLEASING AND AMENDMENT Section 8.1. Assignment by the Corporation 17 Section 8.2. Assignment and Subleasing by the City 17 Section 8.3. Amendment of this Lease Agreement 17 ARTICLE K EVENTS OF DEFAULT AND REMEDIES Section 9.1. Events of Default Defined 18 Section 9.2. Remedies on Default 18 Section 9.3. No Remedy Exclusive 20 Section 9.4. Agreement to Pay Attorneys' Fees and Expenses 20 Section 9.5. No Additional Waiver Implied by One Waiver 20 Section 9.6. Application of Proceeds 20 Section 9.7. Trustee and Certificate Owners to Exercise Rights 20 ARTICLE X PREPAYMENT OF LEASE PAYMENTS Section 10.1. Security Deposit 21 Section 10.2. Purchase Option 21 Section 10.3. Mandatory Prepayment From Net Proceeds of Insurance or Eminent Domain 22 Section 10.4. Credit for Amounts on Deposit 23 ARTICLE XI MISCELLANEOUS Section 11.1. Notices 24 Section 11.2. Binding Effect 24 Section 11.3. Severability 24 Section 11.4. Net-net-net Lease 24 Section 11.5. Further Assurances and Corrective Instruments 24 Section 11.6. Execution in Counterparts 25 Section 11.7. Applicable Law 25 Section 11.8. Corporation and City Representatives 25 Section 11.9. Captions 25 EXHIBIT B - DESCRIPTION OF THE SITE EXHIBIT C - DESCRIPTION OF THE PROJECT EXHIBIT D - SCHEDULE OF LEASE PAYMENTS LEASE AGREEMENT THIS LEASE AGREEMENT (the "Lease Agreement"), dated for convenience as of June 1, 1988, by and between the CITY OF CARLSBAD PUBLIC IMPROVEMENT CORPORATION, a nonprofit public benefit corporation organized and existing under the laws of the State of California, as lessor (the "Corporation"), and the CITY OF CARLSBAD, a municipal corporation and general law city organized and existing under the laws of the State of California, as lessee (the "City"); WITNESSETH: WHEREAS, the City has issued notes (the "Notes") in the principal amount of $6,555,000 to acquire approximately 52 acres of a eucalyptus grove commonly known as "Hosp Grove" for general municipal purposes and is currently zoned open space; and WHEREAS, the Notes mature on June 30, 1988, and the City wishes to complete permanent financing for Hosp Grove and improvements to be made thereon; and WHEREAS, pursuant to a Lease Agreement the City will agree to lease Hosp Grove (the "Site") to the Corporation, and the Corporation has agreed to construct certain improvements to the Site (the "Project"), and to lease the Project and the Site to the City, and the City will agree to lease the Project and the Site from the Corporation; and WHEREAS, for the purpose of obtaining the moneys required to be deposited by it with the Trustee to pay the Notes at maturity and to pay for financing the construction of the Project, the Corporation proposes to assign and transfer certain of its rights under the Lease Agreement to the Trustee, and in consideration of such assignment and the execution of the Trust Agreement, the Trustee has agreed to execute and deliver certificates of participation, each evidencing a fractional interest in the lease payments made by the City under the Lease Agreement, to provide the moneys required herein to be deposited by the Corporation; and NOW, THEREFORE, in consideration of the above premises and of the mutual covenants hereinafter contained and for other and valuable consideration, the parties hereto agree as follows: ARTICLE I DEFINITIONS AND EXHIBITS Section 1.1. Definitions. The terms defined in Exhibit A attached hereto and by this reference incorporated herein, as used and capitalized herein, shall, for all purposes of this Lease Agreement, have the meanings ascribed to them in said Exhibit A unless the context clearly requires some other meaning. Section 1.2. Exhibits. The following exhibits are attached to, and by this reference made a part of, this Lease Agreement: Exhibit A: Definitions. Exhibit B: The description of the real property constituting the Site. Exhibit C: The description of the Project. Exhibit D: The schedule of Lease Payments to be paid by the City hereunder with respect to the Site and the Project, showing the date and amount of each such Lease Payment. -2- ARTICLE II REPRESENTATIONS, COVENANTS AND WARRANTIES Section 2.1. Representations, Covenants and Warranties of the City. The City represents, covenants and warrants to the Corporation as follows: (a) Due Organization and Existence. The City is a municipal corporation and general law city duly organized and existing under the laws of the State. (b) Authorization. The laws of the State authorize the City to enter into this Lease Agreement, the Agency Agreement and the Trust Agreement and to enter into the transactions contemplated by and to carry out its obligations under all of the aforesaid agreements, and the City has duly authorized and executed all of the aforesaid agreements. (c) No Violations. Neither the execution and delivery of this Lease Agreement, the Agency Agreement or the Trust Agreement, nor the fulfillment of or compliance with the terms and conditions hereof or thereof, nor the consummation of the transactions ^contemplated hereby or thereby, conflicts with or results in a breach of the terms, ^conditions or provisions of any restriction or any agreement or instrument to which the City is now a party or by which the City is bound, or constitutes a default under any of the foregoing, or results in the creation or imposition of any lien, charge or encumbrances whatsoever upon any of the property or assets of the City, or upon the Site or the Project, except Permitted Encumbrances. (d) Execution and Delivery. The City has duly authorized and executed this Lease Agreement in accordance with the laws of the State. Section 2.2. Representations, Covenants and Warranties of Corporation. The Corporation represents, covenants and warrants to the City as follows: (a) Due Organization and Existence. The Corporation is a nonprofit public benefit corporation duly organized and existing under and by virtue of the laws of the State; has power to enter into this Lease Agreement, the Agency Agreement, the Assignment Agreement and the Trust Agreement; is possessed of full power to own and hold, improve and equip real and personal property, and to lease and sell the same; and has duly authorized the execution and delivery of all of the aforesaid agreements. (b) No Encumbrances. The Corporation will not pledge the Lease Payments or other amounts derived from the Project or the Site and from its other rights under this Lease Agreement, and will not mortgage or encumber the Project or the Site, except as provided under the terms of this Lease Agreement and the Trust Agreement. (c) No Violations. Neither the execution and delivery of this Lease Agreement, the Agency Agreement, the Assignment Agreement or the Trust Agreement, nor the fulfillment of or compliance with the terms and conditions hereof or thereof, nor the consummation of the transactions contemplated hereby or thereby, conflicts with or results in a breach of the terms, conditions or provisions of any restriction or any -3- agreement or instrument to which the Corporation is now a party or by which the Corporation is bound, or constitutes a default under any of the foregoing, or results in the creation or imposition of any lien, charge or encumbrance whatsoever upon any of the property or assets of the Corporation, or upon the Project or the Site, except Permitted Encumbrances. (d) No Assignments. Except as provided herein, the Corporation will not assign this Lease Agreement, its right to receive Lease Payments from the City, or its duties and obligations hereunder to any other person, firm or corporation so as to impair or violate the representations, covenants and warranties contained in this Section 2.2. (e) Execution and Delivery. The Corporation has duly authorized and executed this Lease Agreement in accordance with the laws of the State. -4- ARTICLE m DEPOSIT OF MONEYS; ACQUISITION AND CONSTRUCTION OF THE PROJECT Section 3.1. Deposit of Moneys. On the Closing Date, the Corporation shall cause to be deposited with the Trustee the proceeds of sale of the Certificates, including accrued interest. Pursuant to Section 2.07 of the Trust Agreement, the Reserve Requirement shall be deposited with the Trustee in the Reserve Fund, a portion of the Lease Payments payable by the City hereunder from June 1, 1988 to June 28, 1988, shall be deposited with the Trustee in the Lease Payment Fund, an amount necessary to pay the principal of and interest on the Notes at maturity shall be deposited in the Escrow Fund, amounts estimated to be required to pay Delivery Costs shall be deposited in the Delivery Costs Fund, and the remaining balance of said amount shall be deposited in the Acquisition and Construction Fund. Section 3.2. Acquisition and Construction of Project. The Corporation agrees to acquire and construct the Project pursuant to the plans and specifications after the same are submitted to and approved by the City. The Corporation shall appoint the City as- its £gent for the purposes of acquisition and construction of the Project and in furtherance •fhereof the Corporation and the City have entered into the Agency Agreement. The City, as agent of the Corporation, shall cause the acquisition and construction of the street and storm drain improvements, to be performed diligently to the end that the Project will be 'substantially completed in accordance with the aforesaid plans and specifications on or prior to the Completion Date. The City may change the specifications of the Project, so long as such change does not reduce the value of the Project or substantially alter the nature of the Project, and that any increase in Acquisition and Construction Costs shall qttot result from such change, unless the City deposits in the Acquisition and Construction 'Fund an amount sufficient to pay such increase. In addition, in the event that the costs of constructing, acquiring, delivering and installing the Project are greater than the amount of money deposited in or transferred to the Acquisition and Construction Fund, together with investment earnings thereon, the City agrees to deposit into the Acquisition and Construction Fund an amount of money necessary to pay such increased Acquisition and Construction Costs, but only from funds arising in the fiscal year in which the City has entered into this Lease Agreement. The City agrees that upon substantial completion of any portion of the Project it will take possession of that portion of the Project under the terms and provisions of this Lease Agreement. No changes shall be made in such plans and specifications unless such changes are approved in writing by the City. Upon completion of acquisition and construction of the Project, the City shall deliver to the Trustee, as assignee of the Corporation, a Certificate of Completion thereof executed by a City Representative. If the (Corporation, for any reason whatsoever, cannot deliver possession of the completed Project to the City by the Completion Date, this Lease Agreement shall not be void or voidable, nor shall the Corporation be liable to the City for any loss or damage resulting therefrom; but in such event the remaining Lease Payments pertaining to the Project shall be abated, in the proportion that the Acquisition and Construction Cost of -5- the portion of the Project not available for use by the City bears to the total Acquisition and Construction Costs, with respect to the period between the Completion Date, and the time when the Corporation is able to use such portion of the Project. Section 3.3. Payment of Acquisition and Construction Costs. Payment for the acquisition and construction of the Project, as well as all other Acquisition and Construction Costs, shall be made from the moneys deposited in the Acquisition and Construction Fund as provided in the Trust Agreement, which moneys shall be disbursed for such purpose in accordance and upon compliance with Section 3.02 of the Trust Agreement. Section 3.4. Payment of Delivery Costs. Payment of Delivery Costs shall be made from the moneys deposited with the Trustee in the Delivery Costs Fund, which moneys shall be disbursed for such purpose in accordance and upon compliance with Section 3.04 of the Trust Agreement. Section 3.5. Unexpended Moneys. The Corporation and the City acknowledge that the Acquisition and Construction Fund and the Delivery Costs Fund have been created for the benefit of the City. All unexpended moneys remaining in the Acquisition and Construction Fund and not required for payment of Acquisition and Construction Costs shall, on the Completion Date be transferred by the Trustee to the Lease Payment Fund and credited to the Lease Payments as the same shall become due and payable. -6- ARTICLE IV AGREEMENT TO LEASE; TERM OF THIS LEASE AGREEMENT; LEASE PAYMENTS Section 4.1. Lease. The City hereby leases the Site to the Corporation, and the Corporation hereby leases the Project and the Site back to the City, and the City hereby leases the Project and the Site from the Corporation, upon the terms and conditions set forth in this Lease Agreement. Section 4.2. Term of Agreement. The Term of the Lease Agreement shall commence on the date of recordation hereof, and shall end on August 1, 2008, unless such term is extended as hereinafter provided. If on August 1, 2008, the Trust Agreement shall not be discharged by its terms, or if the Lease Payments payable hereunder shall have been abated at any time and for any reason, then the Term of the Lease Agreement shall be extended until there has been deposited with the Trustee an amount sufficient to pay obligations due under the Lease Agreement, but in no event shall the Term of the Lease Agreement extend beyond August 1^ 2018. If prior to August 1, 2008, the Trust Agreement shall be discharged by its terms, the Term of the Lease Agreement shall thereupon end. Section 4.3. Possession. The City has taken possession of the Site and agrees to take possession of the Project on the Completion Date, and the first Lease Payment shall be due on January 15, 1989. Section 4.4. Lease Payments. (a) Obligation to Pay. Subject to the provisions of Articles VI and X hereof, the City agrees to pay to the Corporation, its successors and assigns, as rental for the use and occupancy of the Project and the Site during each Rental Period, the Lease Payments (denominated into components of principal and interest) for the Project and the Site in the respective amounts specified in Exhibit D hereto, to be due and payable on the respective Lease Payment Dates specified in Exhibit D hereto. Any amount held in the Lease Payment Fund on any Lease Payment Date (other than amounts resulting from the prepayment of the Lease Payments in part but not in whole pursuant to Article X hereof and other than amounts required for payment of past due principal or interest represented by any Certificates not presented for payment) shall be credited towards the Lease Payment then due and payable; and no Lease Payment need be made on any Lease Payment Date if the amounts then held in the Lease Payment Fund are at least equal to the Lease Payment then required to be paid. The Lease Payments for the Project and the Site payable in any Rental Period shall be for the use of the Project and the Site for such Rental Period. (b) Effect of Prepayment. In the event that the City prepays all remaining Lease Payments in full pursuant to Article X hereof, the City's obligations under this Lease Agreement shall thereupon cease and terminate, including but not limited to the City's obligation to pay Lease Payments under this Section 4.4; subject however, to the provisions of Section 10.1 hereof in the case of prepayment by application of a security deposit. In the event that the City prepays the Lease Payments in part but not in whole -7- pursuant to Section 10.2 hereof, pursuant to Section 10.3 hereof as a result of any insurance or condemnation award with respect to any portion of the Site or the Project, or pursuant to Section 10.4 hereof as a result of excess funds in the Acquisition and Construction Fund, such prepayment shall be credited entirely towards the prepayment of the Lease Payments as follows: (i) the principal components of each remaining such Lease Payments shall be reduced on a pro rata basis in integral multiples of $5,000 (in inverse order of payment date in the case of a prepayment pursuant to Section 10.4 hereof); and (ii) the interest component of each remaining such Lease Payments shall be reduced by the aggregate corresponding amount of interest which would otherwise be payable with respect to the Certificates thereby redeemed pursuant to Sections 4.01(a), (b) or (c), as the case may be, of the Trust Agreement. (c) Rate on Overdue Payments. In the event the City should fail to make any of the payments required in this Section 4.4, the payment in default shall continue as an obligation of the City until the amount in default shall have been fully paid, and the City agrees to pay the same with interest thereon, to the extent permitted by law, from the date of default to the date of payment at the rate of twelve percent (12%) per annum. Such interest, if received, shall be deposited in the Lease Payment Fund. (d) Fair Rental Value. The Lease Payments for the Project and the Site for each Rental Period shall constitute the total rental for the Project and the Site for each Rental Period and shall be paid by the City in each Rental Period for and in consideration of the right of the use and occupancy of, and the continued quiet use and enjoyment of, the Project and the Site during each Rental Period. The parties hereto have agreed and determined that the total Lease Payments for the Project and the Site represent the fair rental value of the Project and the Site. In making such determination, consideration has been given to the obligations of the parties under the Lease Agreement, the uses and purposes which may be served by the Project and the Site and the benefits therefrom which will accrue to the City and the general public. «; (e) Budget and Appropriation. The City covenants to take such action as may be necessary to include all Lease Payments due hereunder in each of its budgets during the Term of this Lease Agreement and to make the necessary annual appropriations for all such Lease Payments. The covenants on the part of the City herein contained shall be deemed to be and shall be construed to be duties imposed by law and it shall be the duty of each and every public official of the City to take such action and do such things as are required by law in the performance of the official duty of such officials to enable the City to carry out and perform the covenants and agreements in this Lease Agreement agreed to be carried out and performed by the City. (f) Assignment. The City understands and agrees that all Lease Payments have been assigned by the Corporation to the Trustee in trust, pursuant to the Assignment Agreement, for the benefit of the Owners of the Certificates, and the City hereby assents to such assignment. The Corporation hereby directs the City, and the City hereby agrees to pay to the Trustee at the Principal Corporate Trust Office of the Trustee, all payments payable by the City pursuant to this Section 4.4 and all amounts payable by the City pursuant to Article X hereof. -8- Section 4.5. Quiet Enjoyment. During the Term of the Lease Agreement, the Corporation shall provide the City with quiet use and enjoyment of the Project and the Site, and the City shall, during such Term, peaceably and quietly have and hold and enjoy the Project and the Site without suit, trouble or hindrance from the Corporation, except as expressly set forth in this Lease Agreement. The Corporation will, at the request of the City and at the City's cost, join in any legal action in which the City asserts its right to such possession and enjoyment to the extent the Corporation may lawfully do so. Notwithstanding the foregoing, the Corporation shall have the right to inspect the Project and the Site as provided in Section 7.2. hereof. Section 4.6. Title. During the Term of the Lease Agreement, the Corporation shall hold fee title to the Project and any and all additions which comprise fixtures, repairs, replacements or modifications to the Project or the Site, except for those fixtures, repairs, replacements or modifications which are added to the Project or the Site by the City at its own expense and which may be removed without damaging the Project and except for any items added to the Project or the Site by the City pursuant to Section 5.9 hereof. If the City prepays the Lease Payments in full pursuant to Article X hereof or makes the security deposit permitted by Section 10.1 hereof, or pays all Lease Paymentstaring the Term of the Lease Agreement as the same become due and payable, all right, tie and interest of the Corporation in and to the Project and the Site shall be transferred to and vested in the City. The Corporation agrees to take any and all steps and execute and record any and all documents reasonably required by the City to consummate any such transfer of title. a-V I Section 4.7. Additional Payments. In addition to the Lease Payments, the City §hall pay when due all costs and expenses incurred by the Corporation to comply with the provisions of the Trust Agreement, including without limitation all Delivery Costs (to file extent not paid from amounts on deposit in the Delivery Costs Fund), compensation due to the Trustee and all costs and expenses of auditors, engineers and accountants. -9- ARTICLE V MAINTENANCE; TAXES; INSURANCE; USE LIMITATIONS AND OTHER MATTERS Section 5.1. Maintenance, Utilities, Taxes and Assessments. Throughout the Term of this Lease Agreement, as part of the consideration for the rental of the Project and the Site, all improvement, repair and maintenance of the Project and the Site shall be the responsibility of the City and the City shall pay for or otherwise arrange for the payment of all utility services, if any, supplied to the Project and the Site which may include, without limitation, power, gas, telephone, light, heating, water and all other utility services, and shall pay for or otherwise arrange for the payment of the cost of the repair and replacement of the Project and the Site resulting from ordinary wear and tear or want of care on the part of the City or any assignee or sublessee thereof. In exchange for the Lease Payments herein provided, the Corporation agrees to provide only the Project and the Site, as hereinbefore more specifically set forth. The City waives the benefits of subsections 1 and 2 of Section 1932 of the California Civil Code, but such waiver shall not limit any of the rights of the City under the terms of this Lease Agreement. The City shall also pay or cause to be paid all taxes and assessments of any type or nature, if any, charged to the Corporation or the City affecting the Project and the Site or the respective interests or estates therein; provided that with respect to special assessments or other governmental charges that may lawfully be paid in installments over a period of years, the City shall be obligated to pay only such installments as are required to be paid during the Term of the Lease Agreement as and when the same become due. ~- The City may, at the City's expense and in its name, in good faith contest any such taxes, assessments, utility and other charges and, in the event of any such contest, may permit the taxes, assessments or other charges so contested to remain unpaid during the period of such contest and any appeal therefrom unless the Corporation shall notify the City that, in the opinion of Independent Counsel, by nonpayment of any such items, the interest of the Corporation in the Project and the Site will be materially endangered or the Project or any part thereof will be subject to loss or forfeiture, in which event the City shall promptly pay such taxes, assessments or charges or provide the Corporation with full security against any loss which may result from nonpayment, in form satisfactory to the Corporation and the Trustee. Section 5.2. Modification of Project and Site. The City shall, at its own expense, have the right to remodel the Project and the Site or to make additions, modifications and improvements to the Project and the Site. All additions, modifications and improvements to the Project, but not any additional buildings or improvements, shall thereafter comprise part of such Project and Site and be subject to the provisions of this Lease Agreement. Such additions, modifications and improvements shall not in any way damage the Project and the Site or cause them to be used for purposes other than those authorized under the provisions of State and federal law; and the Project and the Site, upon completion of any additions, modifications and improvements made thereto pursuant to this Section 5.2, shall be of a value which is not substantially less than the -10- value of the Project and the Site immediately prior to the making of such additions, modifications and improvements. The City will not permit any mechanic's or other lien to be established or remain against the Project or the Site for labor or materials furnished in connection with any remodeling, additions, modifications, improvements, repairs, renewals or replacements made by the City pursuant to this Section 5.2; provided that if any such lien is established and the City shall first notify or cause to be notified the Corporation of the City's intention to do so, the City may in good faith contest any lien filed or established against the Project or the Site, and hi such event may permit the items so contested to remain undischarged and unsatisfied during the period of such contest and any appeal therefrom and shall provide the Corporation with full security against any loss or forfeiture which might arise from the nonpayment of any such item, in form satisfactory to the Corporation. The Corporation will cooperate fully in any such contest, upon the request and at the expense of the City. Section 5.3. Public Liability and Property Damage Insurance. The City shall maintain or cause to be maintained, throughout the Term of the Lease Agreement during the time the Project is under construction or is completed (but during the period of construction of the Project only if such insurance is not provided by a Contractor), insurance policies, including a standard comprehensive genferal insurance policy or policies in protection of the City, the Corporation and the Trustee, including their respective members, officers, agents and employees. Said policy or policies shall provide for indemnification of said parties against direct or contingent loss or liability for damages for bodily and personal injury, death or property damage occasioned by reason of the construction or operation of the Project and the Site. Said policy or policies shall provide coverage hi the minimum liability limits of $1,000,000 for personal injury or death of each person and $3,000,000 for personal injury or deaths of two or more persons in each accident or event, and in a minimum amount of $100,000 (subject to a deductible clause of not to exceed $5,000) for damage to property resulting from each accident or event. Such public liability and property damage insurance may, however, be in the form jiff a single limit policy in the amount of $3,000,000 covering all such risks. Such liability insurance may be maintained as part of or in conjunction with any other liability insurance coverage carried by the City, and may be maintained in the form of self- insurance by the City. The Net Proceeds of such liability insurance shall be applied toward extinguishment or satisfaction of the liability with respect to which the insurance proceeds shall have been paid. Section 5.4. Rental Interruption Insurance. The City shall procure, and maintain through the Term of the Lease Agreement during the time the Project is under construction or is completed, rental interruption or use and occupancy insurance to cover loss, total or partial, of the use of any structures constituting any part of the Project during the Term of the Lease Agreement as a result of any earthquake or earth movement, in an amount at least equal to Lease Payments attributable to the Project for a period of eighteen months. The Net Proceeds of such insurance shall be paid to the Trustee and deposited hi the Lease Payment Fund, and shall be credited towards the payment of the Lease Payments in the order in which such Lease Payments come due and payable. The City shall be permitted to self-insure for rental interruption or use and occupancy insurance required above, so long as: -11- (1) the City segregates within its funds an amount designated as a reserve for such loss; and (2) the City's liability under such self-insurance is limited to amounts on hand in such segregated reserve; and (3) the combined coverage under such self-insurance program and any other rental interruption or use and occupancy insurance are equal to the miniumum insurance coverage indicated above. Section 5.5. Title Insurance. The City shall provide, at its own expense, on or before the Closing Date, a CLTA title insurance policy in the amount of not less than dollars ($ ), insuring the City's leasehold estate in the Project and the Site, subject only to Permitted Encumbrances. All Net Proceeds received under said policy shall be deposited with the Trustee in the Lease Payment Fund and shall be credited towards the prepayment of the remaining Lease Payments pursuant to Section 10.3 hereof. Section 5.6. Insurance Net Proceeds; Form of Policies. The policy of insurance required by Section 5.4 hereof shall provide that all proceeds thereunder shall be payable to the Trustee and applied as provided in Section 6.2 hereof. On or before July 1 of each year, the City shall certify to the Trustee that all policies of insurance and any statements of self-insurance are in conformance with the requirements of this Lease Agreement. The City shall have the adequacy of any insurance reserves reviewed at least annually by the City's risk manager or an independent insurance consultant and shall maintain reserves in accordance therewith. The City shall pay or cause to be paid when due the premiums for all insurance policies required by this Lease Agreement. All such policies shall provide that the Trustee shall be given thirty (30) days' notice of each expiration, any intended cancellation thereof or reduction of the coverage provided thereby. The Trustee shall not be responsible for the sufficiency or adequacy of any insurance herein required and shall be fully protected in accepting payment on account of such insurance or any adjustment, compromise or settlement of any loss agreed to by the Trustee. Section 5.7. Advances. If the City shall fail to perform any of its obligations under this Article V the Corporation may, but shall not be obligated to, take such action as may be necessary to cure such failure, including the advancement of money, and the City shall be obligated to repay all such advances as soon as possible, with interest at the rate of twelve percent (12%) per annum from the date of the advance to the date of repayment. Section 5.8. Installation of City's Equipment. The City may at any time and from time to time, in its sole discretion and at its own expense, install or permit to be installed items of equipment or other personal property in or upon any portion of the Project and the Site. All such items shall remain the sole property of the City, in which neither the Corporation nor the Trustee shall have any interest, and may be modified or removed by the City at any time provided that the City shall repair and restore any and all damage to the Project or the Site resulting from the installation, modification or removal of any such items. Nothing in this Lease Agreement shall prevent the City from purchasing or leasing items to be installed pursuant to this Section 5.8 under a lease or conditional sale -12- agreement, or subject to a vendor's lien or security agreement, as security for the unpaid portion of the purchase price thereof, provided that no such lien or security interest shall attach to any part of the Project or the Site. Section 5.9. Liens. The City shall not, directly or indirectly, create, incur, assume or suffer to exist any mortgage, pledge, lien, charge, encumbrance or claim on or with respect to the Project or the Site, other than the respective rights of the Corporation and the City as provided herein and Permitted Encumbrances. Except as expressly provided in this Article V, the City shall promptly, at its own expense, take such action as may be necessary to duly discharge or remove any such mortgage, pledge, lien, charge, encumbrance or claim, for which it is responsible, if the same shall arise at any time. The City shall reimburse the Corporation for any expense incurred by it in order to discharge or remove any such mortgage, pledge, lien, charge, encumbrance or claim. Section 5.10. Private Business Use Limitation. The City shall assure that (i) not in excess of ten percent (10%) of the Net Proceeds of the Certificates is used for Private Business Use if, in addition, the payment of more than ten percent (10%) of the principal or ten percent (10%) of the interest components of Lease Payments due during the Term of the Lease Agreement is, under the terms of this Lease Agreement or any underlying arrangement, directly or indirectly, secured by any interest in property used or to be used for a Private Business Use or in payments in respect of property used or to be used for a Private Business Use or is to be derived from payments, whether or not to the City, in respect of property or borrowed money used or to be used for a Private Business Use; and (ii) and that, in the event that both (A) in excess of five percent (5%) of the Net Proceeds of the Certificates are used for a Private Business Use, and (B) an amount in excess of five percent (5%) of the principal or five percent (5%) of the interest components of Lease Payments due during the Term of the Lease Agreement is, under the terms of this Lease Agreement or any underlying arrangement, directly or indirectly, secured by any interest |n property used or to be used for said Private Business Use or in payments in respect of property used or to be used for said Private Business Use or is to be derived from payments, whether or not to the City, in respect of property or borrowed money used or to be used for said Private Business Use, then said excess over said five percent (5%) of Net Proceeds of the Certificates used for a Private Business, Use shall be used for a Private Business Use related to the governmental use of the Project. Section 5.11. Private Loan Use Limitation. The City shall assure that not hi excess of five percent (5%) of the Net Proceeds of the Certificates is used, directly or indirectly, to make or finance a loan (other than loans constituting Nonpurpose Obligations or assessments) to persons other than state or local government units. Section 5.12. Federal Guarantee Prohibition. The City shall not take any action or permit or suffer any action to be taken if the result of the same would be to cause the Lease Payments to be "federally guaranteed" within the meaning of section 149(b) of the Code and Regulations promulgated thereunder. -13- ARTICLE VI DAMAGE, DESTRUCTION AND EMINENT DOMAIN; USE OF NET PROCEEDS Section 6.1. Eminent Domain. If all of the Project and the Site shall be taken permanently under the power of eminent domain or sold to a government threatening to exercise the power of eminent domain, the Term of this Lease Agreement shall cease as of the day possession shall be so taken. If less than all of the Project and the Site shall be taken permanently, or if all of the Project or the Site or any part thereof shall be taken temporarily under the power of eminent domain, (1) this Lease Agreement shall continue in full force and effect and shall not be terminated by virtue of such taking and the parties waive the benefit of any law to the contrary, and (2) there shall be a partial abatement of Lease Payments as a result of the application of the Net Proceeds of any eminent domain award to the prepayment of the Lease Payments hereunder, in an amount to be agreed upon by the City and the Corporation such that the resulting Lease Payments represent fair consideration for the use and occupancy of the remaining usable portion of the Project and the Site. Section 6.2. Application of Net Proceeds. (a) From Insurance Award. The Net Proceeds of any insurance award resulting from any damage to or destruction of any portion of the Project by fire or other casualty shall be paid by the City to the Trustee, as assignee of the Corporation under the Assignment Agreement, and deposited in the Insurance and Condemnation Fund by the Trustee and applied as set forth in Section 7.01 of the Trust Agreement. (b) From Eminent Domain Award. The Net Proceeds of any eminent domain award resulting from any event described in Section 6.1 hereof shall be paid by the City to the Trustee, as assignee of the Corporation under the Assignment Agreement, and deposited in the Insurance and Condemnation Fund and applied as set forth in Section 7.02 of the Trust Agreement. Section 6.3. Abatement of Lease Payments in the Event of Damage or Destruction. The amount of Lease Payments shall be abated, during any period in which by reason of damage or destruction (other than by eminent domain which is hereinbefore provided for) there is substantial interference with the use and occupancy by the City of the Project (other than any portions of the Project described in Section 5.2 hereof) or the Site or any portion thereof. The amount of such abatement shall be agreed upon by the City and the Corporation such that the resulting Lease Payments represent fair consideration for the use and occupancy of the portions of the Project and the Site not damaged or destroyed. Such abatement shall continue for the period commencing with such damage or destruction and ending with the substantial completion of the work of repair or reconstruction. In the event of any such damage or destruction, this Lease Agreement shall continue in full force and effect and the City waives any right to terminate this Lease Agreement by virtue of any such damage and destruction. Notwithstanding the foregoing, there shall be no abatement of Lease Payments under this Section 6.3 to the extent that the proceeds of rental interruption insurance or amounts in the Reserve Fund are available to pay Lease Payments which would otherwise be abated under this Section 6.3, it being hereby declared that such proceeds and amounts constitute special funds for the payment of the Lease Payments. -14- ARTICLE VII DISCLAIMER OF WARRANTIES; ACCESS Section 7.1. Disclaimer of Warranties. The Corporation makes no warranty or representation, either express or implied, as to the value, design, condition, merchantibility or fitness for any particular purpose or fitness for the use contemplated by the City of the Project or the Site, or any other representation or warranty with respect to the Project or the Site. In no event shall the Corporation be liable for incidental, indirect, special or consequential damages in connection with or arising out of this Lease Agreement, the Agency Agreement or the Trust Agreement for the existence, furnishing, functioning or the City's use of the Project or the Site. Section 7.2. Access to the Site and the Project. The City agrees that the Corporation and any Corporation Representative, and the Corporation's successors or assigns, shall have the right at all reasonable times to enter upon and to examine and inspect the Project and the Site. The City further agrees that the Corporation, any Corporation Representative, and the Corporation's successors pr assigns shall have such rights of access to the Project and the Site as may be reasonably necessary to cause the |proper maintenance of the Project and the Site in the event of failure by the City to perform its obligations hereunder. Section 7.3. Release and Indemnification Covenants. The City shall and hereby agrees to indemnify and save the Corporation and its officers, agents, successors and I assigns harmless from and against all claims, losses and damages, including legal fees :>and expenses, arising out of (i) the use, maintenance, condition or management of, or from any work or thing done on the Project or the Site by the City, (ii) any breach or ^default on the part of the City in the performance of any of its obligations under this |Lease Agreement, (iii) any act or negligence of the City or of any of its agents, contractors, servants, employees or licensees with respect to the Project or the Site, (iv) any act or negligence of any sublessee of the City with respect to the Project or the Site, or (v) the acquisition and construction of the Project or the authorization of payment of the Acquisition and Construction Costs and Delivery Costs by the Corporation. No indemnification is made under this Section 7.3 or elsewhere in this Lease Agreement for willful misconduct, negligence, or breach of duty under this Lease Agreement by the Corporation, its officers, agents, employees, successors or assigns. -15- ARTICLE ASSIGNMENT, SUBLEASING AND AMENDMENT Section 8.1. Assignment by the Corporation. The Corporation's rights under this Lease Agreement, including the right to receive and enforce payment of the Lease Payments to be made by the City under this Lease Agreement have been assigned to the Trustee pursuant to the Assignment Agreement. Section 8.2. Assignment and Subleasing by the City. This Lease Agreement may not be assigned by the City. The City may sublease the Project and the Site or any portion thereof, but only with the written consent of the Corporation and subject to all of the following conditions: (i) This Lease Agreement and 'the obligation of the City to make Lease Payments hereunder shall remain obligations of the City; and (ii) The City shall, within thirty (30) days after the delivery thereof, furnish or cause to be furnished to the Corporation and the Trustee a true and complete copy of such sublease; and (iii) No such sublease by the City shall cause the Project or the Site to be used for a purpose other than as may be authorized under the provisions of the Constitution and laws of the State; and (iv) The City shall furnish the Corporation and the Trustee with a written opinion of nationally recognized bond counsel, which shall be an Independent Counsel, stating that such sublease does not cause the interest components of the Lease Payments to become subject to federal income taxes or State personal income taxes. Section 8.3. Amendment of this Lease Agreement. Without the prior written consent of the Trustee, the City will not alter, modify or cancel, or agree or consent to alter, modify or cancel this Lease Agreement, excepting only such alteration or modification as may be permitted by Article X of the Trust Agreement. -16- ARTICLE IX EVENTS OF DEFAULT AND REMEDIES Section 9.1. Events of Default Defined. The following shall be "events of default" under this Lease Agreement and the terms "events of default" and "default" shall mean, whenever they are used in this Lease Agreement, with respect to the Project or the Site, any one or more of the following events: (i) Failure by the City to pay any Lease Payment or other payment required to be paid hereunder at the time specified herein. (ii) Failure by the City to observe and perform any covenant, condition or agreement on its part to be observed or performed, other than as referred to in clause (i) of this Section 9.1, for a period of thirty (30) days after written notice specifying such failure and requesting that it be remedied has been given to the City by the Corporation, the Trustee, or the Owners of not less than five percent (5$>) in aggregate principal amount of Certificates then outstanding; provided, however, if the failure stated in the Jnotice can be corrected, but not within the applicable period, the Corporation, the Trustee ibid such Owners shall not unreasonably withhold their consent to an extension of such tune if corrective action is instituted by the City within the applicable period and diligently pursued until the default is corrected. (iii) The filing by the City of a voluntary petition in bankruptcy, or failure by the ;City promptly to lift any execution, garnishment or attachment, or adjudication of the 'City as a bankrupt, or assignment by the City for the benefit of creditors, or the entry by the City into an agreement of composition with creditors, or the approval by a court of competent jurisdiction of a petition applicable to the City in any proceedings instituted under the provisions of the Federal Bankruptcy Act, as amended, or under any similar acts which may hereafter be enacted. Section 9.2. Remedies on Default. Whenever any event of default referred to in Section 9.1 hereof shall have happened and be continuing, it shall be lawful for the Corporation to exercise any and all remedies available pursuant to law or granted pursuant to this Lease Agreement; provided, however, that notwithstanding anything herein or in the Trust Agreement to the contrary, there shall be no right under any circumstances to accelerate the Lease Payments or otherwise declare any Lease Payments not then in default to be immediately due and payable. Each and every covenant hereof to be kept and performed by the City is expressly made a condition and upon the breach thereof the Corporation may exercise any and all rights of entry and re- entry upon the Project and the Site, and also, at its option, with or without such entry, may terminate this Lease Agreement; provided, that no such termination shall be effected either by operation of law or acts of the parties hereto, except only in the manner herein expressly provided. In the event of such default and notwithstanding any re-entry by the Corporation, the City shall, as herein expressly provided, continue to remain liable for the payment of the Lease Payments and/or damages for breach of this Lease Agreement and the performance of all conditions herein contained and, in any event such rent and/or -17- damages shall be payable to the Corporation at the time and in the manner as herein provided, to wit: (a) In the event the Corporation does not elect to terminate this Lease Agreement in the manner hereinafter provided for in subparagraph (b) of this Section 9.2, the City agrees to and shall remain liable for the payment of all Lease Payments and the performance of all conditions herein contained and shall reimburse the Corporation for any deficiency arising out of the re-leasing of the Project and the Site, or, in the event the Corporation is unable to re-lease the Project and the Site, then for the full amount of all Lease Payments to the end of the Term of the Lease Agreement, but said Lease Payments and/or deficiency shall be payable only at the same time and in the same manner as hereinabove provided for the payment of Lease Payments hereunder, notwithstanding such entry or re-entry by the Corporation or any suit in unlawful detainer, or otherwise, brought by the Corporation for the purpose of effecting such re- entry or obtaining possession of the Project and the Site or the exercise of any other remedy by the Corporation. The City hereby irrevocably appoints the Corporation as the agent and attorney-in-fact of the City to enter upon and re-lease the Project and the Site in the event of default by the City in the performance of any covenants herein contained to be performed by the City and to remove all personal property whatsoever situated upon the Project and the Site to place such property in storage or other suitable place in the County of San Diego, for the account of and at the expense of the City, and the City hereby exempts and agrees to save harmless the Corporation from any costs, loss or damage whatsoever arising or occasioned by any such entry upon and re-leasing of the Project and the Site and the removal and storage of such property by the Corporation or its duly authorized agents in accordance with the provisions herein contained. The City hereby waives any and all claims for damages caused or which may be caused by the Corporation in re-entering and taking possession of the Project and the Site as herein provided and all claims for damages that may result from the destruction of or injury to the Site or the Project and all claims for damages to or loss of any property belonging to the City that may be in or upon the Project and the Site. The City agrees that the terms of this Lease Agreement constitute full and sufficient notice of the right of the Corporation to re-lease the Project and the Site in the event of such re-entry without effecting a surrender of this Lease Agreement, and further agrees that no acts of the Corporation in effecting such re-leasing shall constitute a surrender or termination of this Lease Agreement irrespective of the term for which such re-leasing is made or the terms and conditions of such re-leasing, or otherwise, but that, on the contrary, in the event of such default by the City the right to terminate this Lease Agreement shall vest in the Corporation to be effected in the sole and exclusive manner hereinafter provided for in subparagraph (b) hereof. The City further waives the right to any rental obtained by the Corporation hi excess of the Lease Payments and hereby conveys and releases such excess to the Corporation as compensation to the Corporation for its services in re- leasing the Project and the Site. (b) In an event of default hereunder, the Corporation at its option may terminate this Lease Agreement and re-lease all or any portion of the Project and the Site. In the event of the termination of this Lease Agreement by the Corporation at its option and in the manner hereinafter provided on account of default by the City (and notwithstanding any re-entry upon the Project or the Site by the Corporation in any manner whatsoever or the re-leasing or sale of the Project or the Site), the City nevertheless agrees to pay to the Corporation all costs, loss or damages howsoever arising or occurring payable at the -18- same time and in the same manner as is herein provided in the case of payment of Lease Payments. Any surplus received by the Corporation from such re-leasing shall be the absolute property of the Corporation and the City shall have no right thereto, nor shall the City be entitled to any credit in the event of a deficiency in the rentals received by the Corporation from the Project and/or the Site. Neither notice to pay rent or to deliver up possession of the premises given pursuant to law nor any proceeding in unlawful detainer taken by the Corporation shall of itself operate to terminate this Lease Agreement, and no termination of this Lease Agreement on account of default by the City shall be or become effective by operation of law, or otherwise, unless and until the Corporation shall have given written notice to the City of the election on the part of the Corporation to terminate this Lease Agreement. The City covenants and agrees that no surrender of the Project and/or the Site or of the remainder of the Term of this Lease Agreement or any termination of this Lease Agreement shall be valid in any manner or for any purpose whatsoever unless stated or accepted by the Corporation by such written notice. Section 9.3. No Remedy Exclusive. No remedy herein conferred upon or reserved to the Corporation is intended to be exclusive and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Lease Agreement or now or hereafter existing at law or in equity. No delay or omission to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver thereof, but any such right and power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Corporation to exercise any remedy reserved to it in this Article IX it shall not be necessary to give any notice, other than such notice as may be required in this Article DC or by law. Section 9.4. Agreement to Pay Attorneys' Fees and Expenses. In the event either party to this Lease Agreement should default under any of the provisions hereof and the nondefaulting party should employ attorneys or incur other expenses for the collection of |noneys or the enforcement or performance or observance of any obligation or agreement on the part of the defaulting party herein contained, the defaulting party agrees that it will on demand therefor pay to the nondefaulting party the reasonable fees of such attorneys and such other expenses so incurred by the nondefaulting party. Section 9.5. No Additional Waiver Implied by One Waiver. In the event any agreement contained in this Lease Agreement should be breached by either party and thereafter waived by the other party, such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other breach hereunder. Section 9.6. Application of Proceeds. All net proceeds received from the re-lease or other disposition of the Project and the Site under this Article DC, and all other amounts derived by the Corporation or the Trustee as a result of an event of default hereunder, shall be transferred to the Trustee promptly upon receipt thereof and shall be deposited by the Trustee in the Lease Payment Fund to be applied to the Lease Payments in order of payment date. ^>-•*Section 9.7. Trustee and Certificate Owners to Exercise Rights. Such rights and remedies as are given to the Corporation under this Article DC have been assigned by the Corporation to the Trustee under the Trust Agreement, to which assignment the City hereby consents. Such rights and remedies shall be exercised by the Trustee and the Owners of the Certificates as provided in the Trust Agreement. -19- ARTICLE X PREPAYMENT OF LEASE PAYMENTS Section 10.1. Security Deposit. Notwithstanding any other provision of this Lease Agreement, the City may on any date secure the payment of all or a portion of the Lease Payments remaining due by a deposit with an escrow holder under an escrow deposit and trust agreement as referenced in Section 14.01(b) of the Trust Agreement, of: (a) in the case of a security deposit relating to all Lease Payments, either (i) an amount which, together with amounts on deposit in the Lease Payment Fund, the Insurance and Condemnation Fund and the Reserve Fund, is sufficient to pay all unpaid Lease Payments, including the principal and interest components thereof, in accordance with the Lease Payment schedule set forth in Exhibit D, or (ii) Federal Securities specified in clause (A) of the definition thereof, together with cash, if required, in such amount as will, in the opinion of an independent certified public accountant, together with interest to accrue thereon and, if required, all or a portion of moneys or Federal Securities specified in clause (A) of the definition thereof then on deposit and interest earnings thereon in the Lease Payment Fund, the Insurance and Condemnation Fund and the Reserve Fund, be fully sufficient to pay all unpaid Lease Payments on their respective Interest Payment Dates; or (b) in the case of a security deposit relating to a portion of the Lease Payments, a certificate executed by a City Representative designating the portion of the Lease Payments to which the deposit pertains, and either (i) an amount which is sufficient to pay the portion of the Lease Payments designated in such City Representative's certificate, including the principal and interest components thereof, or (ii) Federal Securities, together with cash, if required, in such amount as will, together with interest to be received thereon, if any, in the opinion of an independent certified public accountant, be fully sufficient to pay the portion of the Lease Payments designated in the aforesaid City Representative's certificate. In the event of a deposit pursuant to this Section 10.1 as to all Lease Payments, all obligations of the City under this Lease Agreement shall cease and terminate, excepting only the obligation of the City to make, or cause to be made, all payments from the deposit made by the City pursuant to this Section 10.1, and title to the Project shall vest in the City on the date of said deposit automatically and without further action by the City or the Corporation. Said deposit and interest earnings thereon shall be deemed to be and shall constitute a special fund for the payments provided for by this Section 10.1 and said obligation shall thereafter be deemed to be and shall constitute the installment purchase obligation of the City for the Project. Upon said deposit, the Corporation will execute or cause to be executed any and all documents as may be necessary to confirm title to the Project in accordance with the provisions hereof. In addition, the Corporation hereby appoints the City as its agent to prepare, execute and file or record, in appropriate offices, such documents as may be necessary to place record title to the Project in the City. Section 10.2. Purchase Option. The Corporation hereby grants an option to the City to prepay the principal component of the Lease Payments in full, by paying the stipulated value of the Project set forth in Exhibit D hereto, or hi part, but not in an amount of less than $20,000, together, -20- in any event, with a percentage of the portion of such principal component of Lease Payments prepaid equal to the percentages set forth below: Prepayment Period Premium July 15, 1998 through July 14, 1999 2.0% July 15, 1999 through July 14, 2000 1.5 July 15, 2000 through July 14, 2001 1.0 July 15, 2001 through July 14, 2002 0.5 July 15, 2002 and thereafter 0 Said option may be exercised with respect to Lease Payments in whole at any time or in part on any Lease Payment Date commencing July 15, 1998. Said option shall be exercised by the City by giving written notice to the Corporation and the Trustee of the exercise of such option at least forty-five (45) days prior to said Lease Payment Date. Such option shall be exercised in the event of prepayment in full, by depositing with said notice cash in an amount, which, together with amounts then on deposit in the Reserve Fund, the Insurance and Condemnation Fund and the Lease Payment Fund, will be sufficient to pay the stipulated value of the Project and the Site on said Lease Payment Date as set forth in Exhibit D hereto, together with any Lease Payments then due but unpaid, or, in the event of prepayment in part, by depositing with said notice an amount divisible by $5,000 equal to the amount desired to be prepaid (but not less than $20,000) together with any Lease Payments then due but unpaid. In the event of prepayment in part, the partial prepayment shall be applied against Lease Payments in inverse order of their Interest Payment Date. Lease Payments due after any such partial prepayment shall be in the amounts set forth in a revised Lease Payment schedule which shall be provided by, or caused to be provided by, the Trustee to the City pursuant to Section 4.01(d) of the Trust Agreement and which shall represent an adjustment to the schedule set forth in Exhibit D attached hereto taking into account said partial prepayment. Section 10.3. Mandatory Prepayment From Net Proceeds of Insurance or Eminent Domain. The City shall be obligated to prepay the Lease Payments allocable to the Project and the Site, in whole on any date or hi part on any Lease Payment Date, from and to the extent of any Net Proceeds of an insurance or condemnation award with respect to the Project or the Site theretofore deposited in the Lease Payment Fund for such purpose pursuant to Article VI hereof and Article VII of the Trust Agreement. The City and the Corporation hereby agree that such Net Proceeds, to the extent remaining after payment of any delinquent Lease Payments, shall be credited towards the City's obligations under this Section 10.3. Section 10.4. Credit for Amounts on Deposit. In the event of prepayment of the principal components of the Lease Payments in full under this Article X, such that the Trust Agreement shall be discharged by its terms as a result of such prepayment, all amounts then on deposit in the Lease Payment Fund, the Acquisition and Construction Fund or the Reserve Fund shall be credited towards the amounts then required to be so prepaid. -21- ARTICLE XI MISCELLANEOUS Section 11.1. Notices. All notices, certificates or other communications hereunder shall be sufficiently given and shall be deemed to have been received 48 hours after deposit in the United States mail in first class form with postage fully prepaid: If to the City: City of Carlsbad 1200 Elm Avenue Carlsbad, California 92008 Attention: City Manager If to the Corporation: City of Carlsbad Public Improvement Corporation 1200 Elm Avenue Carlsbad, California 92008 Attention: President If to the Trustee: The Bank of California 400 California Street San Francisco, California 94107 Attention: Vice President The Corporation, the City and the Trustee, by notice given hereunder, may designate different addresses to which subsequent notices, certificates or other communications will be sent. Section 11.2. Binding Effect. This Lease Agreement shall inure to the benefit of and shall be binding upon the Corporation and the City and their respective successors and assigns. Section 11.3. Severability. In the event any provision of this Lease Agreement shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof. Section 11.4. Net-net-net Lease. This Lease Agreement shall be deemed and construed to be a "net-net-net lease" and the City hereby agrees that the Lease Payments shall be an absolute net return to the Corporation, free and clear of any expenses, charges or set-offs whatsoever. Section 11.5. Further Assurances and Corrective Instruments. The Corporation and the City agree that they will, from time to time, execute, acknowledge and deliver, or cause to be executed, acknowledged and delivered, such supplements hereto and such further instruments as may reasonably be required for correcting any inadequate or incorrect description of the Project or the Site hereby leased or intended so to be or for carrying out the expressed intention of this Lease Agreement. -22- Section 11.6. Execution in Counterparts. This Lease Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. Section 11.7. Applicable Law. This Lease Agreement shall be governed by and construed in accordance with the laws of the State. Section 11.8. Corporation and City Representatives. Whenever under the provisions of this Lease Agreement the approval of the Corporation or the City is required, or the Corporation or the City is required to take some action at the request of the other, such approval or such request shall be given for the Corporation by an Corporation Representative and for the City by a City Representative, and any party hereto shall be authorized to rely upon any such approval or request. Section 11.9. Captions. The captions or headings in this Lease Agreement are for convenience only and in no way define, limit or describe the scope or intent of any provisions or Section of this Lease Agreement. -23- IN WITNESS WHEREOF, the Corporation has caused this Lease Agreement to be executed in its corporate name by its duly authorized officers and sealed with its corporate seal; and the City has caused this Lease Agreement to be executed in its name by its duly authorized officers and sealed with its corporate seal, as of the date first above written. CITY OF CARLSBAD PUBLIC IMPROVEMENT CORPORATION, as Lessor President (SEAL) Attest: Secretary CITY OF CARLSBAD, as Lessee By, Mayor (SEAL) Attest: City Clerk -24- EXHIBIT A DEFINITIONS "Acquisition and Construction Costs" means all costs of payment of, or reimbursement for, acquisition and construction of the Project, including but not limited to, architect and engineering fees, construction contractor payments, costs of feasibility and other reports, inspection costs, performance bond premiums and permit fees. "Acquisition and Construction Fund" means the fund by that name established and held by the City pursuant to Article III of the Trust Agreement. "Agency Agreement" means that certain Agency Agreement, dated as of June 1, 1988, by and between the Corporation and the City. "Assignment Agreement" means the Assignment Agreement, dated as of June 1, 1988, by and between the Corporation and the Trustee, together with any duly Authorized and executed amendments thereto. "Business Day" means a day which is not a Saturday, Sunday or legal holiday on which banking institutions in the State are closed or are required to close or a day on which the New York Stock Exchange is closed. >: "Certificate of Completion" means the certificate of a City Representative certifying that the Project has been acquired and constructed by the City and that all Acquisition and Construction Costs have been paid. "Certificates" means the $ aggregate principal amount of certificates of participation to be executed and delivered pursuant to the Trust Agreement. "City" means the City of Carlsbad, a municipal corporation and general law city organized and existing under the laws of the State. "City Representative" means the City Manager of the City or any other person authorized by resolution of the City Council of the City to act on behalf of the City under or with respect to the Lease Agreement, the Trust Agreement and the Corporation Agreement. "Closing Date" means the date upon which there is an exchange of the Certificates for the proceeds representing the purchase of the Certificates by the Original Purchaser. "Code* means the Internal Revenue Code of 1986. "Completion Date" means the earlier of (i) the date of substantial completion of acquisition and construction of the Project as evidenced by the filing with the Trustee of a Certificate of Completion, and (ii) June 1, 1991. "Contractor" means the contractor(s) or vendor(s) from whom the Corporation or the City on behalf of the Corporation has ordered or caused to be ordered or with whom the Corporation or the City on behalf of the Corporation has contracted or caused to be contracted for the acquisition and construction of the Project. "Corporation" means the City of Carlsbad Public Improvement Corporation, a nonprofit public benefit organized and existing under and by virtue of the laws of the State. "Corporation Representative" means the President of the Corporation, or any other person authorized by resolution of the Corporation to act on behalf of the Corporation under or with respect to the Lease Agreement, the Trust Agreement, the Agency Agreement and the Assignment Agreement. "Debt Service" means the scheduled principal and interest components of Lease Payments, payable during the period of computation, excluding amounts scheduled during such period which relate to principal which has been retired before the beginning of such period. "Delivery Costs" means all items of expense directly or indirectly payable by or reimbursable to the City or the Corporation relating to the execution and delivery of the Lease Agreement, the Trust Agreement, the Agency Agreement and the Assignment Agreement or the execution, sale and delivery of the Certificates, including but not limited to filing and recording costs, settlement costs, printing costs, reproduction and binding costs, initial fees and charges of the Trustee, financing discounts, legal fees and charges, insurance fees and charges, financial and other professional consultant fees, costs of rating agencies for credit ratings, fees for execution, transportation and safekeeping of the Certificates and charges and fees in connection with the foregoing. "Delivery Costs Fund" means the fund by that name established and held by the Trustee pursuant to Article in of the Trust Agreement. "Escrow Fund" means the fund by that name established and held by the Trustee pursuant to Section 6.06 of the Trust Agreement "Event of Default" means an event of default under the Lease Agreement, as defined in Section 9.1 thereof. "Federal Securities" means any of the following which are noncallable and which at the tune of investment are legal investments under the laws of the State for trust funds held by the Trustee: (a) direct general obligations of (including obligations issued or held in book entry form on the books of the Department of the Treasury of the United States of America), or obligations the payment of principal of and interest on which are guaranteed by, the United States of America; or Exhibit A Page 2 (b) any of the following obligations of the following agencies of the United States of America: (i) direct obligations of the Export-Import Bank; (ii) certificates of beneficial ownership issued by the Farmers Home Administration; (iii) participation certificates issued by the General Services Administration; (iv) mortgage-backed bonds or pass- through obligations issued and guaranteed by the Government National Mortgage Association; (v) project notes issued by the United States Department of Housing and Urban Development; and (vi) public housing notes and bonds guaranteed by the United States of America. "Fiscal Year" means the twelve-month period beginning on July 1 of any year and ending on June 30 of the next succeeding year, or any other twelve-month period selected by the City as its fiscal year. "Gross Proceeds" means the sum of the following amounts: (a) original proceeds, namely, net amounts (after payment of all expenses of executing and delivering the Lease Agreement and the Certificates) received by or for the City as a result of the sale of the Certificates, excluding original proceeds which become transferred proceeds (determined in accordance with applicable Regulations) of obligations issued to refund in whole or in part the Lease Payments; ":'*' (b) investment proceeds, namely, amounts received at any time by or for the City, such as interest and dividends, resulting from the investment of any original proceeds (as referenced in paragraph (a) above) or investment proceeds (as referenced in this [paragraph (b)) in Nonpurpose Obligations, increased by any profits and decreased (if necessary, below zero) by any losses on such investments, excluding investment proceeds which become transferred proceeds (determined in accordance with applicable Regulations) of obligations issued to refund in whole or in part the Lease Payments; •V** (c) sinking fund proceeds, namely, amounts, other than original proceeds or investment proceeds (as referenced in paragraphs (a) and (b) above) of the Certificates, which are held in any Lease Payment Fund and any other fund to the extent that the City reasonably expects to use such other fund to pay Lease Payments; (d) amounts in the Reserve Fund and in any other fund established as a reasonably required reserve or replacement fund; (e) Investment Property pledged as security for payment of Lease Payments by an ultimate obligor or a related person or by the City; (f) amounts, other than as specified in this definition, used to pay Lease Payments; and (g) amounts received as a result of investing amounts described in this definition. "Independent Counsel" means an attorney duly admitted to the practice of law before the highest court of the state in which such attorney maintains an office and who is not an employee of the Corporation, the Trustee or the City. Exhibit A PageS "Information Services" means Financial Information, Inc.'s "Daily Called Bond Service," 30 Montgomery Street, 10th Floor, Jersey City, New Jersey 07302, Attention: Editor; Kenny Information Services' "Called Bond Service," 55 Broad Street, 28th Floor, New York, New York 10004; Moody's "Municipal and Government," 99 Church Street, 8th Floor, New York, New York 10007, Attention: Municipal News Reports; and Standard & Poor's "Called Bond Record," 25 Broadway, 3rd Floor, New York, New York 10004; or to such other addresses and/or such other national information services providing information or disseminating notices of redemption of obligations such as the Certificates. "Insurance and Condemnation Fund" means the fund by that name established and held by the Trustee pursuant to Section 7.01 of the Trust Agreement. "Interest Payment Date" means the first day of each February and August, commencing February 1, 1989, so long as any Certificates are Outstanding. "Investment Property" means any security (as said term is defined in section 165(g)(2)(A) or (B) of the Code), obligation, annuity or investment-type property, excluding, however, obligations the interest on which is exempt from income tax under section 103 of the Code. "Lease Agreement" means the Lease Agreement, dated as of June 1, 1988, by and between the Corporation and the City, together with any duly authorized and executed amendments thereto. "Lease Payments" means all payments required to be paid by the City pursuant to Section 4.4 of the Lease Agreement, including any prepayment thereof pursuant to Article X of the Lease Agreement, which payments consist of an interest component and a principal component. • "Lease Payment Date" means the fifteenth (15th) day of July and January in each year during the Term of the Lease Agreement, commencing January 15, 1989. "Lease Payment Fund" means the fund by that name established and held by the Trustee pursuant to Section 5.02 of the Trust Agreement. "Moody's" means Moody's Investors Service, or its successors. "Net Proceeds," when used with respect to insurance or condemnation proceeds, means any insurance proceeds or condemnation award paid with respect to the Project or the Site, to the extent remaining after payment therefrom of all expenses incurred in the collection thereof. "Net Proceeds," when used with reference to the Certificates, means the face amount of the Certificates, plus accrued interest and premium, if any, less original issue discount and less proceeds deposited in the Reserve Fund. "Nonpurpose Obligation" means any Investment Property which is acquired with the proceeds of the Certificates and is not acquired in order to carry out the governmental purpose of the Lease Agreement. "Notes" means the Notes of the City issued on July 16, 1987 in the principal amount of $6,555,000, and maturing June 30, 1988. Exhibit A Page 4 "Original Purchaser" means Rauscher Pierce Refsnes, Inc., as original purchaser of the Certificates. "Outstanding", when used as of any particular time with respect to Certificates, means (subject to the provisions of Section 10.03 of the Trust Agreement) all Certificates theretofore executed and delivered by the Trustee under the Trust Agreement except - (a) Certificates theretofore cancelled by the Trustee or surrendered to the Trustee for cancellation; (b) Certificates for the payment or redemption of which funds or Federal Securities in the necessary amount shall have theretofore been deposited with the Trustee (whether upon or prior to the maturity or redemption date of such Certificates), provided that, if such Certificates are to be redeemed prior to maturity, notice of such redemption shall have been given as provided in Section 4.03 of the Trust Agreement or provision satisfactory to the Trustee shall have been made for the giving of such notice; and (c) Certificates in lieu of or in exchange for which other Certificates shall have been executed and delivered by the Trustee pursuant to Section 2.09 of the Trust Agreement. "Owner" or "Certificate Owner" or "Owner of a Certificate", or any similar term, when used with respect to a Certificate means the person in whose name such Certificate shall be registered. "Permitted Encumbrances" means, as of any particular time: (a) liens for general ad valorem taxes and assessments, if any, not then delinquent, or which the City may, pursuant to provisions of Article V of the Lease Agreement, permit to remain unpaid; (b) the Assignment Agreement; (c) the Lease Agreement; (d) any right or claim of any mechanic, laborer, materialman, supplier or vendor not filed or perfected in the manner prescribed by law; (e) easements, rights of way, mineral rights, drilling rights and other rights, reservations, covenants, conditions or restrictions which exist of record as of the Closing Date and which the City certifies in writing will not materially impair the use of the Site for the Project; and (f) easements, rights of way, mineral rights, drilling rights and other rights, reservations, covenants, conditions or restrictions established following the date of recordation of the Lease Agreement and to which the Corporation and the City consent in writing. "Permitted Investments" means any of the following which at the time of investment are legal investments under the laws of the State for the moneys proposed to be invested therein: (a) Federal Securities; (b) Any of the following obligations of federal agencies not guaranteed by the United States of America: (i) debentures issued by the Federal Housing Administration; (ii) participation certificates or senior debt obligations of the Federal Home Loan Mortgage Corporation or Farm Credit Banks (consisting of Federal Land Banks, Federal Intermediate Credit Banks, or Banks for Cooperatives); (iii) mortgage-backed securities Exhibit A PageS or senior debt obligations of the Federal National Mortgage Association; or (iv) credit- backed or senior debt obligations of the Student Loan Marketing Association. (c) interest-bearing demand or time deposits (including certificates of deposit) in federal or State chartered savings and loan associations or in federal or State banks (including the Trustee), provided that (i) the obligations of such savings and loan association or bank or the obligations of the holding company of such savings and loan association or bank carry one of the three highest Rating Categories by Moody's and S&P, or (ii) such deposits are insured by the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation; (d) obligations issued by any corporation organized and operating within the United States of America having assets in excess of $500,000,000, which obligations carry one of the three highest long-term Rating Categories provided by Moody's and S&P; (e) repurchase agreements with any bank, savings institution or trust company (including the Trustee) which is insured by the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation, or with any broker-dealer with retail customers which falls under Securities Investors Protection Corporation protection, provided that such repurchase agreements are fully secured by Federal Securities or obligations of any agency or instrumentality of the United States of America, and provided further that (i) such collateral is held by the Trustee or any agent acting solely for the Trustee during the term of such repurchase agreement, (ii) such collateral is not subject to liens or claims of third parties, (iii) such collateral has a market value (determined at least once every 30 days) at least equal to the amount invested hi the repurchase agreement, (iv) the Trustee has a perfected first security interest in the collateral, (v) the agreement shall be for a term not longer than 180 days and (vi) the failure to maintain such collateral at the level required in (iii) above will require the Trustee to serve notice to the other party to correct such deficiency. If such deficiency is not corrected, the Trustee is directed to liquidate the collateral; (f) money market funds comprised exclusively of Federal Securities; (g) commercial paper having original maturities of not more than 180 days and rated hi the highest Rating Category by Moody's and S&P; (h) bills of exchange or time drafts drawn on and accepted by a commercial bank, otherwise known as bankers acceptances, which have a maturity of not more than 270 days and which are eligible for purchase by the Federal Reserve System and the obligations of which commercial bank or the obligations of the holding company of which carry one of the three highest long-term Rating Categories by Moody's and S&P; and (i) tax-exempt obligations rated in one of the three highest rating categories by Moody's and S&P. "Principal Corporate Trust Office" means the corporate trust office of the Trustee at 400 California Street, San Francisco, California, or at such other address designated by the Trustee in written notice filed with the City and the Corporation in writing. Exhibit A Page6 "Private Business Use" means use directly or indirectly in a trade or business carried on by a natural person or in any activity carried on by a person other than a natural person, excluding, however, use by a governmental unit and use as a member of the general public. "Project" means the improvements to be constructed on the Site, all as more particularly described in Exhibit C attached to the Lease Agreement. "Rating Category" means, with respect to any Permitted Investment, one or more of the generic categories of rating by Moody's or S&P applicable to such Permitted Investment, without regard to any refinement or graduation of such rating category by a plus or minus sign. "Registration Books" means the records maintained by the Trustee pursuant to Section 2.12 of the Trust Agreement for registration of the ownership and transfer of ownership of the Certificates. "Regular Record Date" means the close of business on the fifteenth (15th) day of the month preceding each Interest Payment Date, whether or not such fifteenth (15th) day is a Business Day. "Regulations" means temporary and permanent regulations promulgated under the Code. "Rental Period" means each twelve-month period during the Term of the Lease Agreement commencing on August 2 in any year and ending on August 1 in the next succeeding year except that the first Rental Period shall mean the period starting on June 1, 1988 and ending on August 1, 1989. "Reserve Fund" means the fund by that name established and held by the Trustee pursuant to Section 6.01 of the Trust Agreement. "Reserve Requirement" means an amount equal to $ . "S&P" means Standard & Poor's Corporation, of New York, New York, or its successors. "Securities Depositories" means The Depository Trust Company, 711 Stewart Avenue, Garden City, New York 11530, Fax-(516) 227-4039 or 4190; Midwest Securities Trust Company, Capital Structures-Call Notification, 440 South LaSalle Street, Chicago, Illinois 60605, Fax-(312) 663-2343; Philadelphia Depository Trust Company, Reorganization Division, 1900 Market Street, Philadelphia, Pennsylvania 19103, Attention: Bond Department, Dex-(215) 496-5058; or to such other addresses and/or such other registered securities depositories holding substantial amounts of obligations of types comprising the Certificates. "Site" means all of that certain real property located in the City described in Exhibit B to the Lease Agreement, on which the Project is to be constructed. "State" means the State of California. Exhibit A Page? "Term of the Lease Agreement" means the time during which the Lease Agreement is in effect, as provided in Section 4.2 of the Lease Agreement. "Trust Agreement" means the Trust Agreement, dated as of June 1, 1988, by and among the City, the Corporation and the Trustee, together with any duly authorized amendments thereto. "Trustee" means The Bank of California, N.A., or any successor thereto, acting as Trustee pursuant to this Trust Agreement. Exhibit APageS EXHIBITS DESCRIPTION OF THE SITE Situated in the City of Carlsbad, County of San Diego, State of California, and described as follows: [TO COME] Exhibit B EXHIBIT C DESCRIPTION OF THE PROJECT [TO COME] Exhibit C EXHIBIT D SCHEDULE OF LEASE PAYMENTS SEMI-ANNUAL ANNUAL S TIPULATED DATE PRINCIPAL INTEREST TOTAL TOTAL VALUE 01/15/89 07/15/89 01/15/90 07/15/90 01/15/91 07/15/91 01/15/92 07/15/92 01/15/93 07/15/93 01/15/94 07/15/94 01/15/95 07/15/95 01/15/96 07/15/96 01/15/97 07/15/97 01/15/98 07/15/98 01/15/99 07/15/99 01/15/00 07/15/00 01/15/01 07/15/01 01/15/02 07/15/02 01/15/03 07/15/03 01/15/04 07/15/04 01/15/05 07/15/05 01/15/06 07/15/06 01/15/07 07/15/07 01/15/08 07/15/08 Exhibit D 13061-03 JHHW:WHM:pch 05/1: M6696 pch 05/20;^ EXHIBIT 3 TRUST AGREEMENT Dated as of June 1, 1988 by and among THE BANK OF CALIFORNIA, NATIONAL ASSOCIATION, as Trustee, the CITY OF CARLSBAD PUBLIC IMPROVEMENT CORPORATION and the CITY OF CARLSBAD (HOSP GROVE PROJECT) M6696 TABLE OF CONTENTS ARTICLE I DEFINITIONS Section 1.01. Definitions 2 Section 1.02. Authorization 2 Section 1.03. Exhibits 2 ARTICLE H • •>«• THE CERTIFICATES OF PARTICIPATION tSection 2.01. Authorization 3 Section 2.02. Date; Payment of Interest 3 Section 2.03. Maturity; Interest Rates 3 Section 2.04. Form of Certificates; Interest 4 Section 2.05. Form 4 Section 2.06. Execution 4 Section 2.07. Application of Proceeds 4 -Section 2.08. Transfer and Exchange 5 (Section 2.09. Certificates Mutilated, Lost, Destroyed or Stolen... 5 ^Section 2.10. Payment 5 ^Section 2.11. Execution of Documents and Proof of Ownership 6 Section 2.12. Registration Books 6 ARTICLE IE ACQUISITION AND CONSTRUCTION FUND; DELIVERY COSTS FUND Section 3.01. Acquisition and Construction Fund 7 Section 3.02. Payment of Acquisition and Construction Costs 7 Section 3.03. Delivery Costs Fund 8 Section 3.04. Payment of Delivery Costs 8 Section 3.05. Transfers of Unexpended Proceeds 8 ARTICLE IV REDEMPTION OF CERTIFICATES Section 4.01. Redemption 10 Section 4.02. Selection of Certificates for Redemption 11 Section 4.03. Notice of Redemption 11 Section 4.04. Partial Redemption of Certificate 12 Section 4.05. Purchase of Certificates 12 Section 5.01. Section 5.02. Section 5.03. Section 5.04. Section 5.05. ARTICLE V LEASE PAYMENTS; LEASE PAYMENT FUND Assignment of Rights in Lease Agreement 13 Establishment of Lease Payment Fund 13 Deposits 13 Application of Moneys 13 Surplus 13 ARTICLE VI RESERVE FUND; ESCROW FUND Section 6.01. Establishment of Reserve Fund 14 Section 6.02. Deposit 14 Section 6.03. Transfers of Excess 14 Section 6.04. Application in Event of Deficiency in Lease Payment Fund 14 Section 6.05. Transfer To Make All Lease Payments 14 Section 6.06. Establishment of Escrow Fund 14 Section 6.07. Deposit 15 Section 6.08. Payment of the Notes 15 Section 6.09. Transfer of Excess 15 Section 6.10. Investment of Escrow Fund 15 ARTICLE VH INSURANCE AND CONDEMNATION FUND; INSURANCE; EMINENT DOMAIN Section 7.01. Establishment of Insurance and Condemnation Fund; Application of Net Proceeds of Insurance Award 16 Section 7.02. Application of Net Proceeds of Eminent Domain Award 16 Section 7.03. Cooperation 17 11 ARTICLE VHI MONEYS IN FUNDS; INVESTMENT; REBATE Section 8.01. Held in Trust 18 Section 8.02. Investments Authorized 18 Section 8.03. Accounting 18 Section 8.04. Allocation of Earnings 18 Section 8.05. Valuation and Disposition of Investments 19 Section 8.06. No Arbitrage 19 Section 8.07. Application of Investment Earnings; Rebate of Excess Investment Earnings to United States 19 ARTICLE DC THE TRUSTEE Section 9.01. Appointment of Trustee 22 Section 9.02. Acceptance of Trusts 22 Section 9.03. Fees, Charges and Expenses of Trustee 24 Section 9.04. Notice to Certificate Owners of Default 24 Section 9.05. Intervention by Trustee 25 Section 9.06. Removal of Trustee 25 Section 9.07. Resignation by Trustee 25 Section 9.08. Appointment of Successor Trustee 25 Section 9.09. Merger or Consolidation 25 Section 9.10. Concerning any Successor Trustee 26 ARTICLE X MODIFICATION OR AMENDMENT OF AGREEMENTS Section 10.01. Amendments Permitted 27 Section 10.02. Procedure for Amendment with Written Consent of Certificate Owners 27 Section 10.03. Disqualified Certificates 28 Section 10.04. Effect of Supplemental Agreement 28 Section 10.05. Endorsement or Replacement of Certificates Delivered After Amendments 29 Section 10.06. Amendatory Endorsement of Certificates 29 ARTICLE XI COVENANTS; NOTICES Section 11.01. Compliance With and Enforcement of Lease Agreement 30 Section 11.02. Observance of Laws and Regulations 30 Section 11.03. Prosecution and Defense of Suits 30 Section 11.04. Recordation and Filing 30 Section 11.05. City Budgets 30 Section 11.06. Further Assurances 31 ill ARTICLE XH LIMITATION OF LIABILITY Section 12.01. Limited Liability of City 32 Section 12.02. No Liability of City or Corporation for Trustee Performance 32 Section 12.03. Indemnification of Trustee 32 Section 12.04. Limitation of Rights to Parties and Certificate Owners 32 ARTICLE XHI EVENTS OF DEFAULT AND REMEDIES OF CERTIFICATE OWNERS Section 13.01. Assignment of Rights 33 Section 13.02. Remedies 33 Section 13.03. Application of Funds 33 Section 13.04. Institution of Legal Proceedings 34 Section 13.05. Non-waiver 34 Section 13.06. Remedies Not Exclusive 34 Section 13.07. Power of Trustee to Control Proceedings 34 Section 13.08. Limitation on Certificate Owners' Right to Sue 34 ARTICLE XIV MISCELLANEOUS Section 14.01. Defeasance 36 Section 14.02. Records 36 Section 14.03. Notices 36 Section 14.04. Governing Law 37 Section 14.05. Binding Effect; Successors 37 Section 14.06. Execution in Counterparts 37 Section 14.07. Delivery of Cancelled Certificates 37 Section 14.08. Headings 37 Section 14.09. Waiver of Notice 37 Section 14.10. Separability of Invalid Provisions 37 EXHIBIT A - Definitions EXHIBIT B - Form of the Certificates IV TRUST AGREEMENT THIS TRUST AGREEMENT, made and entered into as of June 1, 1988, by and among THE BANK OF CALIFORNIA, NATIONAL ASSOCIATION, a national banking association organized and existing under the laws of the United States of America (the "Trustee"), the CITY OF CARLSBAD PUBLIC IMPROVEMENT CORPORATION, a nonprofit public benefit corporation organized and existing under the laws of the State of California (the "Corporation"), and the CITY OF CARLSBAD, a municipal corporation and general law city organized and existing under the laws of the State of California (the "City"), WITNESSETH: WHEREAS, the City has issued notes (the "Notes") in the principal amount of $6,555,000 to acquire approximately 52 acres of a eucalyptus grove commonly known as "Hosp Grove" for general municipal purposes and presently zoned open space; and % WHEREAS, the Notes mature on June 30, 1988, and the City wishes to complete permanent financing for Hosp Grove and improvements to be made thereon; and WHEREAS, the City and the Corporation have entered into a lease agreement |Jated as of the date hereof (the "Lease Agreement"), whereby the City has agreed to lease flosp Grove (the "Site") to the Corporation, and the Corporation has agreed to construct certain improvements to the Site (the "Project"), and to lease the Project and the Site to the City, and the City has agreed to lease the Project and the Site from the Corporation; and WHEREAS, for the purpose of obtaining the moneys required to be deposited by it with the Trustee to pay the Notes at maturity and to pay for financing the construction of the Project, the Corporation proposes to assign and transfer certain of its rights under the Lease Agreement to the Trustee, and in consideration of such assignment and the execution of this Trust Agreement, the Trustee has agreed to execute and deliver certificates of participation, each evidencing a fractional interest in the lease payments made by the City under the Lease Agreement, to provide the moneys required herein to be deposited by the Corporation; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS Section 1.01. Definitions. The terms defined in Exhibit A attached hereto and by this reference incorporated herein, as used and capitalized herein, shall, for all purposes of this Trust Agreement, have the meanings ascribed to them in said Exhibit A unless the context clearly requires some other meaning. Section 1.02. Authorization. Each of the parties hereby represents and warrants that it has full legal authority and is duly empowered to enter into this Trust Agreement, and has taken all actions necessary to authorize the execution of this Trust Agreement by the officers and persons signing it. Section 1.03. Exhibits. The following exhibits are attached to, and by reference made a part of, this Trust Agreement: Exhibit A: Definitions. Exhibit B: Form of the Certificates. -2- ARTICLE H THE CERTIFICATES OF PARTICIPATION Section 2.01. Authorization. The Trustee is hereby authorized and directed upon written request from the Corporation to prepare, execute and deliver, to the Original Purchaser, Certificates in an aggregate principal amount of dollars ($ ) evidencing undivided fractional interests of the Owners thereof hi the Lease Payments. Section 2.02. Date; Payment of Interest. Each Certificate shall be dated as of June 1, 1988. Interest with respect thereto shall be payable from the Interest Payment Date next preceding the date of execution thereof, unless: (i) it is executed as of an Interest Payment Date, in which event interest with respect thereto shall be payable from such Interest Payment Date; or (ii) it is executed after a Regular Record Date and before the following Interest Payment Date, in which event interest with respect thereto shall be payable from such Interest Payment Date; or (iii) it is executed on or before January 15, 1989, in which event interest with respect thereto shall be payable from June 1, 1988; provided, however, that if, as of the date of any Certificate, interest is in default with Respect to any Outstanding Certificates, interest represented by such Certificate shall be payable from the Interest Payment Date to which interest has previously been paid or l&ade available for payment with respect to the Outstanding Certificates. ? Section 2.03. Maturity; Interest Rates. The Certificates shall mature on August 1 in each of the respective years, and in the respective amounts, and interest represented ^hereby shall be computed at the respective rates, as follows: !'. ?; Maturity Date Principal Interest (August 1) Amount Rate 1989 $ % 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2008 -3- Section 2.04. Form of Certificates; Interest. The Certificates shall be delivered hi the form of fully registered Certificates without coupons in the denomination of $5,000 or any integral multiple thereof, except that no Certificate may have principal maturing in more than one year. The Certificates shall be assigned such alphabetical and numerical designation as shall be deemed appropriate by the Trustee. Interest represented by the Certificates shall be payable on each Interest Payment Date to and including the date of maturity or redemption, whichever is earlier, as provided in Section 2.10 hereof. Said interest shall represent the portion of Lease Payments designated as interest and coming due during the six-month period preceding each Interest Payment Date with respect to the Certificates. The fractional share of the portion of Lease Payments designated as interest with respect to any Certificate shall be computed by multiplying the portion of Lease Payments designated as principal with respect to such Certificate by the rate of interest applicable to such Certificate (on the basis of a 360-day year of twelve 30-day months). Section 2.05. Form. The Certificates shall be substantially in the form set forth in Exhibit B attached hereto and by this reference incorporated herein. Section 2.06. Execution. The Certificates shall be executed by and in the name of the Trustee by the manual signature of an authorized officer of the Trustee. If any officer whose signature appears on any Certificate ceases to be such officer before the date of delivery of said Certificate, such signature shall nevertheless be as effective as if the officer had remained in office until such date. Section 2.07. Application of Proceeds. The proceeds received by the Trustee from the sale of the Certificates, including accrued interest, in the aggregate amount of $ shall forthwith be set aside by the Trustee in the following respective funds and accounts: (a) The Trustee shall deposit in the Lease Payment Fund an amount equal to $ , representing accrued interest in the amount of $ , from June 1, 1988 to the Closing Date, plus capitalized interest for Lease Payments attributable to the Project in the amount of $ from the Closing Date to (b) The Trustee shall deposit in the Escrow Fund an amount equal to $_ representing the amount necessary to pay the principal of and interest of the Notes at maturity. (c) The Trustee shall deposit in the Reserve Fund an amount equal to $ (the Reserve Requirement). (d) The Trustee shall deposit in the Delivery Costs Fund an amount equal to (e) The Trustee shall deposit the remainder of said proceeds in an amount equal to $ , in the Acquisition and Construction Fund. -4- Section 2.08. Transfer and Exchange. (a) Transfer of Certificates. The registration of any Certificate may, in accordance with its terms, be transferred upon the Registration Books by the person in whose name it is registered, in person or by his attorney duly authorized in writing upon surrender of such Certificate for cancellation at the corporate trust office of the Trustee, accompanied by delivery of a written instrument of transfer in a form approved by the Trustee, duly executed. Whenever any Certificate or Certificates shall be surrendered for registration of transfer, the Trustee shall execute and deliver a new Certificate or Certificates for like aggregate principal amount. (b) Exchange of Certificates. Certificates may be exchanged at the Principal Corporate Trust Office of the Trustee for a like aggregate principal amount of Certificates of other authorized denominations of the same maturity. The Trustee may require the payment by the Certificate Owner requesting such exchange of any tax or other governmental charge required to be paid with respect to such exchange. Section 2.09. Certificates Mutilated, Lost, Destroyed or Stolen. If any Certificate shall become mutilated, the Trustee, at the expense of the Owner of said Certificate, shall execute and deliver a new Certificate of like tenor, maturity and number in exchange and Substitution for the Certificate so mutilated, but only upon surrender to the Trustee of |pe Certificate so mutilated. Every mutilated Certificate so surrendered to the Trustee sliall be cancelled by it and redelivered by the Trustee to the City. If any Certificate shall be lost, destroyed or stolen, evidence of such loss, destruction or theft shall be submitted to the Trustee, and, if such evidence is satisfactory to the Trustee and if an indemnity satisfactory to the Trustee shall be given, the Trustee, at the expense of the Certificate 0wner, shall execute and deliver a new Certificate of like tenor and maturity and numbered as the Trustee shall determine in lieu of and in substitution for the Certificate so lost, destroyed or stolen. The Trustee may require payment of the expenses which iaay be incurred by the Trustee in carrying out the duties under this Section 2.09. Any Certificate executed and delivered under the provisions of this Section 2.09 in lieu of any Certificate alleged to be lost, destroyed or stolen shall be equally and fractionally entitled to the benefits of this Trust Agreement with all other Certificates secured by this Trust Agreement. The Trustee shall not be required to treat both the original Certificate and any replacement Certificate as being Outstanding for the purpose of determining the principal amount of Certificates which may be executed and delivered hereunder or for the purpose of determining any percentage of Certificates Outstanding hereunder, but both the original and replacement Certificate shall be treated as one and the same. Notwithstanding any other provision of this Section 2.09, in lieu of delivering a new Certificate which has been mutilated, lost, destroyed or stolen, and which has matured or has been called for redemption, the Trustee may make payment with respect to such Certificate. Section 2.10. Payment. Payment of interest due with respect to any Certificate on any Interest Payment Date shall be made to the person appearing on the Registration Books as the, Owner thereof as of the Regular Record Date immediately preceding such Interest Payment Date, such interest to be paid by check or draft mailed to such Owner at his address as it appears on the Registration Books or at such other address as he may have filed with the Trustee for that purpose or by wire transfer to the Owners of $1,000,000 or more in principal amount of the Certificates. The principal, interest and -5- redemption price with respect to the Certificates at maturity or upon prior redemption shall be payable in lawful money of the United States of America upon surrender of the Certificates at the Principal Corporate Trust Office of the Trustee. Section 2.11. Execution of Documents and Proof of Ownership. Any request, direction, consent, revocation of consent, or other instrument in writing required or permitted by this Trust Agreement to be signed or executed by Certificate Owners may be in any number of concurrent instruments of similar tenor, and may be signed or executed by such Owners in person or by their attorneys or agents appointed by an instrument in writing for that purpose, or by any bank, trust company or other depository for such Certificates. Proof of the execution of any such instrument, or of any instrument appointing any such attorney or agent, and of the ownership of Certificates shall be sufficient for any purpose of this Trust Agreement (except as otherwise herein provided), if made in the following manner: (a) The fact and date of the execution by any Owner or his attorney or agent of any such instrument and of any instrument appointing any such attorney or agent, may be proved by a certificate, which need not be acknowledged or verified, of an officer of any bank or trust company located within the United States of America, or of any notary public, or other officer authorized to take acknowledgments of deeds to be recorded in such jurisdictions, that the persons signing such instruments acknowledged before him the execution thereof. Where any such instrument is executed by an officer of a corporation or association or a member of a partnership on behalf of such corporation, association or partnership, such certificate shall also constitute sufficient proof of his authority. (b) The fact of the ownership of Certificates by any person and the amount, the maturity and the numbers of such Certificates and the date of his holding the same shall be proved by the Registration Books. Nothing contained in this Article II shall be construed as limiting the Trustee to such proof, it being intended that the Trustee may accept any other evidence of the matters herein stated which the Trustee may deem sufficient. Any request or consent of the Owner of any Certificate shall bind every future Owner of the same Certificate hi respect of anything done or suffered to be done by the Trustee in pursuant of such request or consent. Section 2.12. Registration Books. The Trustee shall keep or cause to be kept, at its Principal Corporate Trust Office, sufficient records for the registration and registration of transfer of the Certificates, which shall at all reasonable times be open to inspection by the City and the Corporation; and, upon presentation for such purpose, the Trustee shall, under such reasonable regulations as it may prescribe, register or transfer or cause to be registered or transferred, on the Registration Books, Certificates as hereinbefore provided. -6- ARTICLE HI ACQUISITION AND CONSTRUCTION FUND; DELIVERY COSTS FUND Section 3.01. Acquisition and Construction Fund. The Trustee shall establish a special fund designated as the "Acquisition and Construction Fund"; shall keep such fund separate and apart from all other funds and moneys held by it; and shall administer such fund as provided herein and in the Lease Agreement. There shall be deposited in the Acquisition and Construction Fund from the proceeds of sale of the Certificates required to be deposited therein pursuant to Section 2.07(e) hereof and any other funds from time to time deposited with the Trustee for such purpose. Section 3.02. Payment of Acquisition and Construction Costs. (a) Amounts in the Acquisition and Construction Fund shall be disbursed for Acquisition and Construction Costs. Disbursements from the Acquisition and Construction Fund shall be made by the Trustee upon receipt of a sequentially numbered requisition requesting disbursement executed or approved by a City Representative. Subject to subsections (b) and (c) hereof, each such certificate shall: (i) set forth the amounts to be disbursed for payment or reimbursement of previous payments of Acquisition and Construction Costs and the person or persons to whom said amounts are to be disbursed; I'$•> (ii) state that the amounts to be disbursed constitute Acquisition and f Construction Costs, that said amounts are required to be disbursed pursuant to a ' contract entered into therefor by or on behalf of the Corporation or the City, or i were necessarily and reasonably incurred; and that said amounts are not being paid in advance of the time, if any, fixed for payment; (iii) state that no amount set forth in the certificate was included in any certificate requesting disbursement previously filed with the Trustee pursuant to this Section 3.02; (iv) state the portion, if any, of the Net Proceeds of the Certificates to be used for a Private Business Use or to make or finance a loan (other than a loan constituting a Nonpurpose Obligation or assessment) to other than a state or local governmental unit; (v) state that there has been compliance with sections 5.11 and 5.12 of the Lease Agreement relating to the Private Business Use limitation and the private loan limitation; and (vi) state that the amount remaining in the Acquisition and Construction Fund, together with interest earnings thereon or deposited therein, will, after payment of the amount set forth in the certificate requesting disbursement, be sufficient to pay all remaining Acquisition and Construction Costs as then estimated. -7- (b) Each certificate requesting disbursement which is submitted pursuant to subsection (a) and which relates to disbursement for a construction portion of the Project shall be accompanied by the certificate of an architect or engineer employed by the City approving the certificate requesting disbursement and certifying that (i) insofar as such certificate relates to payment for work, materials, equipment or supplies, such work was actually performed, or such materials, equipment or supplies were actually installed in furtherance of the construction of the Project or delivered to the appropriate site for such purpose, or delivered for storage or fabrication at a place approved by the City, and (ii) as of the date of said certificate requesting disbursement an identified percentage of the Project has been completed. (c) Each certificate requesting disbursement which is submitted pursuant to subsection (a) and which relates to payment to a Contractor shall be accompanied by a certificate of said Contractor stating that no liens have been imposed on the Project as a result of said construction except liens that have not yet ripened or that would attach by operation of law. Section 3.03. Delivery Costs Fund. The Trustee shall establish a special fund designated as the "Delivery Costs Fund"; shall keep such fund separate and apart from all other funds and moneys held by it; and shall administer such fund as provided herein and in the Lease Agreement. There shall be deposited in the Delivery Costs Fund the proceeds of sale of the Certificates required to be deposited therein pursuant to Section 2.07(c) hereof and any other funds from time to time deposited with the Trustee for such purpose. Section 3.04. Payment of Delivery Costs. The moneys in the Delivery Costs Fund shall be disbursed to pay the Delivery Costs, upon the written order of a City Representative executed and delivered to the Trustee directing such disbursements. The Trustee shall disburse moneys in the Delivery Costs Fund only upon a receipt of a sequentially numbered requisition signed by a City Representative setting forth the amounts to be disbursed for payment or reimbursement of Delivery Costs and the name and address of the person or persons to whom said amounts are to be disbursed, stating that the amounts to be disbursed are for Delivery Costs properly chargeable to the Delivery Costs Fund. The Trustee shall be responsible for the safekeeping and investment of the moneys held in the Delivery Costs Fund, the payment thereof hi accordance with this Section 3.04, but the Trustee shall not be responsible for such requisitions. Upon payment of all Delivery Costs, but in no event later than October 1, 1988, the Trustee shall transfer any moneys then remaining in the Delivery Costs Fund to the Acquisition and Construction Fund, the Delivery Costs Fund shall be closed and the Trustee shall no longer be obligated to make payments from such fund. Section 3.05. Transfers of Unexpended Proceeds. The Trustee is hereby directed to transfer all unexpended moneys remaining in the Acquisition and Construction Fund and not required for payment of Acquisition and Construction Costs on the Completion Date to the Lease Payment Fund, to be credited to the Lease Payments as the same shall become due and payable. -8- I -9- ARTICLE IV REDEMPTION OF CERTIFICATES Section 4.01. Redemption. (a) Optional Redemption. The Certificates maturing on and after August 1, 1999, are subject to redemption in whole at any time or in part on any Interest Payment Date (but not in a total redemption amount of less than $20,000 at any one time) in inverse order of maturity and by lot within a maturity on or after August 1, 1998, at the principal amount with respect thereto, together with the premium set forth below (expressed as a percentage of the total amount redeemed), and accrued interest to the date fixed for redemption, from the proceeds of optional prepayments of Lease Payments made by the City pursuant to the Lease Agreement: Redemption Period Premium August 1, 1998 through July 31, 1999 2% August 1, 1999 through July 31, 2000 1.5 August 1, 2000 through July 31, 2001 1.0 August 1, 2001 through July 31, 2002 0.5 August 1, 2002 and thereafter 0 Ob) Redemption From Net Proceeds of Insurance and Condemnation. The Certificates are subject to mandatory redemption in whole on any date, or in part on any Interest Payment Date among maturities such that approximately equal annual Lease Payments prevail following such redemption and by lot within a maturity, from the net proceeds of insurance or condemnation credited towards the prepayment of the Lease Payments by the City pursuant to Section 10.3 of the Lease Agreement, at a redemption price equal to the principal amount thereof to be redeemed together with accrued interest to the date fixed for redemption, without premium. (c) Mandatory Redemption. The Certificates maturing on August 1, 2008, are subject to mandatory redemption on August 1 in each year on or after August 1, 1998, from the principal components of the Lease Payments required to be paid by the City pursuant to the Lease Agreement with respect to each such redemption date, at a redemption price equal to the principal amount thereof to be redeemed together with accrued interest thereon to the date fixed for redemption, without premium, as follows: Principal Amount Redemption Date of Certificates (August 1) to be Redeemed 1998 1999 2000 2001 2002 2003 -10- 2004 2005 2006 2007 2008 (Maturity) In the event that the Trustee shall redeem Certificates in part but not in whole pursuant to subsections (a) or (b) of this Section 4.01, the amount of the Certificates to be redeemed in each subsequent year pursuant to this subsection (d) shall be reduced to correspond to the principal components of the Lease Payments prevailing following such redemption as determined pursuant to Section 4.4(b) of the Lease Agreement. (d) Redemption Fund. Moneys to be used for redemption of Certificates shall be deposited in a Redemption Fund, which shall be a special fund to be held in trust by the Trustee, separate and apart from all other funds and accounts. Said moneys shall be set aside in the Redemption Fund solely for the purpose of redeeming the Certificates in advance of their maturity and shall be applied on or after the date designated for redemption to the payment of principal and interest with respect to the Certificates to be redeemed upon presentation and surrender of such Certificates. Section 4.02. Selection of Certificates for Redemption. Whenever provision is made in this Trust Agreement for the redemption of Certificates and less than all putstanding Certificates are called for redemption, the Trustee shall select Certificates ffor redemption from the Outstanding Certificates not previously called for redemption feuch that the scheduled payments of principal represented by the Certificates in each ^Rental Period corresponds to the scheduled payments of the principal components of the |Lease Payments following the corresponding prepayment of the Lease Payments pursuant ;to Sections 10.2, 10.3 or 10.4 of the Lease Agreement, as determined pursuant to Section ?4.4(b) of the Lease Agreement. The Trustee shall select Certificates for redemption within a maturity by lot or in any other manner which the Trustee shall, in its sole discretion, deem appropriate and fair. For the purposes of such selection, Certificates shall be deemed to be composed of $5,000 portions, and any such portion may be separately redeemed. The Trustee shall promptly notify the City and the Corporation in writing of the Certificates so selected for redemption. Section 4.03. Notice of Redemption. Unless waived by any Owner of Certificates to be redeemed, official notice of any such redemption shall be given by the Trustee on behalf of the City by mailing a copy of an official redemption notice by first class mail at least thirty (30) days and not more than sixty (60) days prior to the date fixed for redemption to the Owner of the Certificate or Certificates to be redeemed at the address shown on the Registration Books or at such other address as is furnished in writing by such Owner to the Trustee. All official notices of redemption shall be dated and shall state: (i) the redemption date, (ii) the redemption price, (iii) if less than all Outstanding Certificates are to be redeemed, the identification (and, in the case of partial redemption, the respective principal amounts) of the Certificates to be redeemed, (iv) that on the redemption date the redemption price will become due and payable upon each such Certificate or portion thereof called for redemption, and that interest with respect thereto shall cease to accrue from and after said date, and (v) the place where such Certificates are to be surrendered -11- for payment of the redemption price, which place of payment shall be the Principal Corporate Trust Office of the Trustee. Prior to any redemption date, the City shall deposit, or cause to be deposited, with the Trustee an amount of money sufficient to pay the redemption price of all the Certificates or portions of Certificates which are to be redeemed on that date. Official notice of redemption having been given as aforesaid, the Certificates or portions of Certificates so to be redeemed shall, on the redemption date, become due and payable at the redemption price therein specified, and from and after such date (unless the City shall default in the payment of the redemption price) interest with respect to such Certificates or portions of Certificates shall cease to be payable. Upon surrender of such Certificates for redemption in accordance with said notice, such Certificates shall be paid by the Trustee at the redemption price. Installments of interest due on or prior to the redemption date shall be payable as herein provided for payment of interest. Upon surrender for any partial redemption of any Certificate, there shall be prepared for the Owner a new Certificate or Certificates of the same maturity in the amount of the unpaid principal. All Certificates which have been redeemed shall be cancelled and destroyed by the Trustee and shall not be reissued. Failure by any Owner to receive notice as hereinabove provided shall not affect the validity of any such redemption. Section 4.04. Partial Redemption of Certificate. Upon surrender of any Certificate redeemed in part only, the Trustee shall execute and deliver to the Owner thereof, at the expense of the City, a new Certificate or Certificates of authorized denominations equal in aggregate principal amount to the unredeemed portion of the Certificate surrendered and of the same interest rate and the same maturity. Section 4.05. Purchase of Certificates. In lieu of redemption of Certificates as provided in this Article TV, amounts held by the Trustee for such redemption shall also be used at any time, upon the written request of a City Representative, for the purchase of Certificates at public or private sale as and when and at such prices (including brokerage, accrued interest and other charges) as the City may in its discretion direct, but not to exceed the redemption price which would be payable if such Certificates were redeemed. The aggregate principal amount of Certificates of the same maturity purchased in lieu of redemption pursuant to this Section 4.06 shall not exceed the aggregate principal amount of Certificates of such maturity which would otherwise be subject to such redemption. Remaining moneys, if any, shall be deposited in the Lease Payment Fund. -12- ARTICLE V LEASE PAYMENTS; LEASE PAYMENT FUND Section 5.01. Assignment of Rights in Lease Agreement. The Corporation has, in the Assignment Agreement, transferred, assigned and set over to the Trustee certain of its rights and duties in the Lease Agreement, including but not limited to all of the "Corporation's rights to receive and collect all of the Lease Payments and all other amounts required to be deposited in the Lease Payment Fund pursuant to the Lease Agreement or pursuant hereto. All Lease Payments and such other amounts to which the Corporation may at any time be entitled shall be paid directly to the Trustee and all of the Lease Payments collected or received by the Corporation shall be deemed to be held and to have been collected or received by the Corporation as the agent of the Trustee, and if received by the Corporation at any time shall be deposited by the Corporation with the Trustee within one Business Day after the receipt thereof, and all such Lease Payments and such other amounts shall be forthwith deposited by the Trustee upon the receipt thereof in the Lease Payment Fund (except as provided in Section 6.04 hereof). •*:• Section 5.02. Establishment of Lease Payment Fund. The Trustee shall establish |a special fund designated as the "Lease Payment Fund". All moneys at any time ^deposited by the Trustee in the Lease Payment Fund shall be held by the Trustee in trust tfbr the benefit of the Owners of the Certificates. So long as any Certificates are ^Outstanding, neither the City nor the Corporation shall have any beneficial right or Interest in the Lease Payment Fund or the moneys deposited therein, except only as ^provided in this Trust Agreement, and such moneys shall be used and applied by the •(Trustee as hereinafter set forth. W- I Section 5.03. Deposits. There shall be deposited in the Lease Payment Fund all I/ease Payments received by the Trustee (except as provided in Section 6.04 hereof), including any moneys received by the Trustee for deposit therein pursuant to Sections 2.07(a), 4.01, 5.01 or Article VII hereof, or Article X of the Lease Agreement, and any other moneys required to be deposited therein pursuant to~ the Lease Agreement or pursuant to this Trust Agreement. Section 5.04. Application of Moneys. All amounts in the Lease Payment Fund shall be used and withdrawn by the Trustee solely for the purpose of paying the principal, interest and redemption premiums (if any) with respect to the Certificates as the same shall become due and payable, in accordance with the provisions of Article II and Article IV hereof. Section 5.05. Surplus. Any surplus remaining in the Lease Payment Fund, after redemption and payment of all Certificates, including premiums and accrued interest (if any) and payment of any applicable fees and expenses to the Trustee, or provision for such redemption or payment having been made to the satisfaction of the Trustee, shall be withdrawn by the Trustee and remitted to the City. -13- ARTICLE VI RESERVE FUND; ESCROW FUND Section 6.01. Establishment of Reserve Fund. The Trustee shall establish a special fund designated as the "Reserve Fund". All moneys at any time on deposit in the Reserve Fund shall be held by the Trustee in trust for the benefit of the Owners of the Certificates, and applied solely as provided herein. Section 6.02. Deposit. There shall be deposited in the Reserve Fund an amount equal to the Reserve Requirement, in accordance with Section 2.07(c). Moneys in the Reserve Fund shall be held in trust as a reserve for the payment when due of all the Lease Payments to be paid pursuant to the Lease Agreement. Section 6.03. Transfers of Excess. On or before January 15 and July 15 in each year, the Trustee shall transfer any moneys in the Reserve Fund then in excess of the Reserve Requirement prior to the Completion Date, to the Acquisition and Construction Fund, and thereafter to the Lease Payment Fund to be credited to the Lease Payments next coming due and payable. Section 6.04. Application hi Event of Deficiency in Lease Payment Fund. If on any Interest Payment Date the moneys available in the Lease Payment Fund do not equal the amount of the principal and interest and redemption premiums (if any) with respect to the Certificates then coming due and payable, the Trustee shall apply the moneys available in the Reserve Fund to make delinquent Lease Payments on behalf of the City by transferring the amount necessary for this purpose to the Lease Payment Fund. Upon receipt of any delinquent Lease Payment with respect to which moneys have been advanced from the Reserve Fund, such Lease Payment shall be deposited in the Reserve Fund to the extent of such advance. Section 6.05. Transfer To Make All Lease Payments. If on any Interest Payment Date the moneys on deposit in the Reserve Fund and the Lease Payment Fund (excluding amounts required for payment of principal, interest and redemption premium, if any, with respect to Certificates not presented for payment) are sufficient to pay all Outstanding Certificates, including all principal, interest and redemption premiums (if any), the Trustee shall, upon the written direction of a City Representative, transfer all amounts then on deposit in the Reserve Fund to the Lease Payment Fund to be applied to the payment of the Lease Payments on behalf of the City, and such moneys shall be distributed to the Owners of Certificates in accordance with Article n of this Trust Agreement. Any amounts remaining in the Reserve Fund upon payment in full of all Outstanding Certificates, or upon provision for such payment as provided in Section 14.01, shall be withdrawn by the Trustee and paid to the City. Section 6.06. Establishment of Escrow Fund. The Trustee shall establish a special fund designated as the "Escrow Fund". All moneys at any time on deposit in the Escrow Fund shall be held by the Trustee in trust for the holders of the Notes, and applied solely as provided herein. -14- Section 6.07. Deposit. There shall be deposited in the Escrow Fund an amount equal to the amount necessary to pay the principal of and interest on the Notes at maturity, as provided in Section 2.07(b). Section 6.08. Payment of the Notes. The Trustee shall transfer to the Paying Agent, on or before the maturity date of the Notes (June 30, 1988), an amount equal to the principal of and interest on the Notes, in order to fully discharge the City's payment obligation on the Notes. Section 6.09. Transfer of Excess. The Trustee shall, after making the payment referenced in Section 6.08, transfer any monies remaining in the Escrow Fund to the Lease Payment Fund, and shall thereupon close the Escrow Fund. Section 6.10. Investment of Escrow Fund. All monies held in the Escrow Fund shall, until used for payment of the Notes, be invested in Permitted Investments described in paragraph (f) of the definition thereof. -15- ARTICLE VH INSURANCE AND CONDEMNATION FUND; INSURANCE; EMINENT DOMAIN Section 7.01. Establishment of Insurance and Condemnation Fund; Application of Net Proceeds of Insurance Award. Any Net Proceeds of insurance against accident to or destruction of any part of the Project collected by the City in the event of any such accident or destruction shall be paid to the Trustee by the City pursuant to Section 6.2(a) of the Lease Agreement and deposited by the Trustee promptly upon receipt thereof in a special fund designated as the "Insurance and Condemnation Fund". If the City determines and notifies the Trustee in writing of its determination, within ninety (90) days following the date of such deposit, that the replacement, repair, restoration, modification or improvement of the Project is not economically feasible or in the best interest of the City, then such Net Proceeds shall be promptly transferred by the Trustee to the Lease Payment Fund and applied to the prepayment of Lease Payments pursuant to Section 10.3 of the Lease Agreement; provided, however, that in the event of damage or destruction of the Project in full, such Net Proceeds may be transferred to the Lease Payment Fund only if sufficient, together with other moneys available therefor, to cause the prepayment of the principal components of all unpaid Lease Payments allocable to the Project and the Site pursuant to Section 10.3 of the Lease Agreement. All Net Proceeds deposited in the Insurance and Condemnation Fund and not so transferred to the Lease Payment Fund shall be applied to the prompt replacement, repair, restoration, modification or improvement of the damaged or destroyed portions of the Project by the City, upon receipt of requisitions satisfactory to the Trustee signed by a City Representative stating with respect to each payment to be made (i) the requisition number, (ii) the name and address of the person, firm or corporation to whom payment is due, (iii) the amount to be paid and (iv) that each obligation mentioned therein has been properly incurred, is a proper charge against the Insurance and Condemnation Fund, has not been the basis of any previous withdrawal, and specifying in reasonable detail the nature of the obligation, accompanied by a bill or a statement of account for such obligation. Any balance of the Net Proceeds remaining after such work has been completed shall be paid to the City. Section 7.02. Application of Net Proceeds of Eminent Domain Award. If all or any part of the Project or the Site shall be taken by eminent domain proceedings (or sold to a government threatening to exercise the power of eminent domain) the Net Proceeds therefrom shall be deposited with the Trustee in the Insurance and Condemnation Fund pursuant to Section 6.2(b) of the Lease Agreement and shall be applied and disbursed by the Trustee as follows: (a) If the City has given written notice to the Trustee of its determination that (i) such eminent domain proceedings have not materially affected the operation of the Project or the ability of the City to meet any of its obligations with respect to the Project and the Site under the Lease Agreement, and (ii) that such proceeds are not needed for repair or rehabilitation of the Project, the City shall so certify to the Trustee and the City has given written notice to the Trustee of such determination, the Trustee, at the City's request, shall transfer such proceeds to the Lease Payment Fund to be credited towards the prepayments of the Lease Payments pursuant to Section 10.3 of the Lease Agreement -16- and applied to the redemption of Certificates in the manner provided in Section 4.01(b) hereof. (b) If the City has given written notice to the Trustee of its determination that (i) such eminent domain proceedings have not materially affected the operation of the Project or the ability of the City to meet any of its obligations with respect to the Project and the Site under the Lease Agreement, and (ii) such proceeds are needed for repair, rehabilitation or replacement of the Project, the City shall so certify to the Trustee and the Trustee, at the City's request, shall pay to the City, or to its order, from said proceeds such amounts as the City may expend for such repair or rehabilitation, upon the filing with the Trustee of requisitions of the City Representative in the form and containing the provisions set forth in Section 7.01. (c) If (i) less than all of the Project or the Site shall have been taken in such eminent domain proceedings or sold to a government threatening the use of eminent domain powers, and if the City has given written notice to the Trustee of its determination that such eminent domain proceedings have materially affected the operation of the Project or the ability of the City to meet any of its obligations with respect to the Project and the Site under the Lease Agreement or (ii) all of the Project and the Site shall have been taken in such eminent domain proceedings, then the Trustee shall transfer such proceeds to the Lease Payment Fund to be credited toward the ^repayment of the Lease Payments pursuant to Section 10.3 of the Lease Agreement and applied to the redemption of Certificates in the manner provided in 4.01(b) hereof. (d) In making any determination under this Section 7.02, the City may obtain, but shall not be required to obtain, at its expense, the report of an independent engineer or ftther independent professional consultant, a copy of which shall be filed with the Trustee. Any such determination by the City shall be final. I Section 7.03. Cooperation. The Corporation and the Trustee shall cooperate fully with the City at the expense of the City in filing any proof of loss with respect to any insurance policy maintained pursuant to Article V of the Lease Agreement and in the prosecution or defense of any prospective or pending condemnation proceeding with respect to the Project or the Site or any portion thereof. -17- ARTICLE MONEYS IN FUNDS; INVESTMENT; REBATE Section 8.01. Held in Trust. The moneys and investments held by the Trustee under this Trust Agreement are irrevocably held in trust for the benefit of the Owners of the Certificates and for the purposes herein specified, and such moneys, and any income or interest earned thereon, shall be expended only as provided in this Trust Agreement, and shall not be subject to levy or attachment or lien by or for the benefit of any creditor of the Corporation, the Trustee, the City or any Owner of Certificates. Section 8.02. Investments Authorized. Moneys held by the Trustee hereunder may, and upon written order of a City Representative shall, be invested and reinvested by the Trustee, to the maximum extent practicable, in Permitted Investments. If a City Representative shall fail to so direct investments, the Trustee shall invest the affected moneys in Federal Securities or, to the extent such investment is not possible, in Permitted Investments described in paragraph (f) of the definition thereof. A City Representative may, by written order filed with the Trustee, direct such investment of moneys held by the Trustee in specific Permitted Investments. Such investments, if registrable, shall be registered in the name of and held by the Trustee. The Trustee may purchase or sell to itself or any affiliate, as principal or agent, investments authorized by this Section 8.02. Such investments and reinvestments shall be made giving full consideration to the time at which funds are required to be available. The Trustee may act as purchaser or agent in the making or disposing of any investment. Section 8.03. Accounting. The Trustee shall furnish to the City, not less than monthly, an accounting of all investments made by the Trustee. The Trustee shall not be responsible or liable for any loss suffered in connection with any investment of funds made by it in accordance with Section 8.02 hereof. Section 8.04. Allocation of Earnings. Subject to Section 8.07 hereof, all interest or income received by the Trustee on investment of the Lease Payment Fund hereof shall, prior to the Completion Date, be transferred to the Acquisition and Construction Fund and thereafter shall be retained in the Lease Payment Fund and be applied to the payment of delinquent payments due with respect to the Certificates, if any, and otherwise as set forth herein. Subject to Section 8.07 hereof, all interest or income received by the Trustee on investment of the Reserve Fund shall be retained in the Reserve Fund in the event that amounts on deposit in the Reserve Fund are less than the Reserve Requirement. Pursuant to Section 6.04 hereof, in the event that amounts then on deposit in the Reserve Fund exceed the Reserve Requirement, such excess shall, prior to the Completion Date, be transferred to the Acquisition and Construction Fund and thereafter shall be transferred to the Lease Payment Fund. Transfers to the Lease Payment Fund from the Reserve Fund shall be made by the Trustee on or prior to each Lease Payment Date. Amounts retained or deposited in the Lease Payment Fund pursuant to this Section 8.04 shall be applied as a credit against the Lease Payment due by the City pursuant to the Lease Agreement on the Lease Payment Date following the date of deposit. Subject to Section 8.07 hereof, all interest or income in the Acquisition and Construction Fund shall be retained hi the Acquisition and Construction Fund until the Acquisition and Construction Fund is closed pursuant to Section 3.05 hereof. Subject -18- to Section 8.07 hereof, all interest or income in the Delivery Costs Fund shall be retained in the Delivery Costs Fund until the Delivery Costs Fund is closed pursuant to Section 3.04 hereof. Section 8.05. Valuation and Disposition of Investments. For the purpose of determining the amount in any fund, all Permitted Investments credited to such fund shall be valued by the Trustee at lower of cost or market (exclusive of accrued interest). The Trustee may sell at the best price obtainable, or present for redemption, any Permitted Investment so purchased by the Trustee whenever it shall be necessary in order to provide moneys to meet any required payment, transfer, withdrawal or disbursement from the fund to which such Permitted Investment is credited, and the Trustee shall not be liable or responsible for any loss resulting from any such Permitted Investment. Section 8.06. No Arbitrage. The City shall not take, or permit or suffer to be taken by the Trustee or otherwise, any action with respect to the proceeds of the Certificates which if such action had been reasonably expected to have been taken, or had been deliberately and intentionally taken, on the Closing Date would have caused the Lease Agreement to be an "arbitrage bond" within the meaninj| of section 148(a) of the Code and Regulations promulgated thereunder. •• i Section 8.07. Application of Investment Earnings; Rebate of Excess Investment Earnings to United States. *' I (A) Creation of Accounts. There are hereby created, to be held by the | Trustee as separate accounts distinct from all other funds and accounts held by f the Trustee under this Trust Agreement, the Investment Earnings Account and the Excess Investment Earnings Account. All interest earnings and profits on amounts in all funds and accounts established under this Trust Agreement, other ,1 than interest earnings on the Lease Payment Fund if such earnings hi any $ Certificate Year are less than $100,000, shall, upon receipt by the Trustee, be deposited in the Investment Earnings Account. Annually, within 30 days of the last day of each Certificate Year the Trustee shall transfer from the Investment Earnings Account to the Excess Investment Earnings Account for purposes of ultimate rebate to the United States an amount equal to Excess Investment Earnings, all as more particularly described in this Section. Following the transfer referenced in the preceding sentence, the Trustee shall transfer all amounts remaining in the Investment Earnings Account to the following funds and accounts in the following order: (i) to the Acquisition and Construction Fund if the Trustee has not received the Certificate of Completion with respect to the Project, (ii)(l) to the Reserve Fund to the extent necessary to increase the amount on deposit in the Reserve Fund to equal the Reserve Requirement, and (2) to the Lease Payment Fund to be used for the payment of Lease Payments on the next Payment Date, and for such purpose Lease Payments due from the City on such date shall be credited by an amount equal to the amount so transferred. (B) Definition of Excess Investment Earnings. The Trustee shall calculate Excess Investment Earnings in accordance with subsection (C) and to pay an amount equal to Excess Investment Earnings to the United States in accordance -19- with subsection (D). The term "Excess Investment Earnings" means an amount equal to the sum of: (i) the excess of (a) the aggregate amount earned from the date of delivery of the Certificates on all Nonpurpose Obligations in which Gross Proceeds of the Certificates are invested (other than amounts attributable to an excess described hi this paragraph (i)), over (b) The amount that would have been earned if the Yield on such Nonpurpose Obligation (other than amounts attributable to an excess described in this paragraph (i)) had been equal to the Yield on the Certificates, plus (ii) any income attributable to the excess described in paragraph (i). (C) Calculation of Excess. Within 30 days of the last day of the first Certificate Year, the Trustee shall calculate the Excess Investment Earnings referenced in paragraph (i) of section (B). Thereafter, within 30 days of the last day of each Certificate Year and within thirty days after the payment in full of the Certificates, the Trustee shall calculate the amount of excess Investment Earnings referenced in paragraphs (i) and (ii) of subsection (B). (D) Payment to the United States. The City shall direct the Trustee to pay from the Excess Investment Earnings Account an amount equal to Excess Investment Earnings to the United States in installments with the first payment to be made no later than thirty (30) days after the end of the fifth Certificate Year and with subsequent payments to be made not later than five (5) years after the preceding payment was due. The City shall assure that each such installment is an amount equal to at least 90 percent of the Excess Investment Earnings with respect to the Certificates as of the close of the computation period. Not later than sixty (60) days after the payment in full of the Lease Payments, the City shall direct the Trustee to pay from the Excess Investment Earnings Account to the United States 100 percent of the theretofore unpaid Excess Investment Earnings. If there are any amounts remaining in the Excess Investment Earnings Account following the payment required by the preceding sentence, the Trustee shall transfer said amounts to the City to be used for any lawful purpose of the City. The City or the Trustee shall remit payments to the United States at the address prescribed by such Regulations. If, for any reason, amounts in the Excess Investment Earnings Accounts are insufficient to make the payments to the United States which are required by this subsection (D), the City shall assure that such payments are made to the United States, on a timely basis, from any funds lawfully available therefor. (E) Further Obligation of the City. The City shall assure that Excess Investment Earnings are not paid or disbursed except as required in this Section. To that end the City shall assure that investment transactions are on an arm's- length basis. In the event that Nonpurpose Investments consist of certificates of -20- deposit or investment contracts, investment in such Nonpurpose Investments shall be made in accordance with the procedures described in applicable Regulations as from time to time in effect. (F) Maintenance of Records. The Trustee shall keep, and retain for a period of six (6) years following the payment in full of the Certificates, such records of the determinations made pursuant to this Section 8.07 as are required under Section 148(f) of the Code. (G) Independent Consultants. In order to provide for the administration of this Section 8.07, the City and the Trustee may provide for the employment of independent attorneys, accountants and consultants compensated on such reasonable basis as the City or the Trustee may deem appropriate and the Trustee may rely conclusively upon and shall be fully protected from all liability in relying on the opinions, calculations, determinations, directions and advice of such attorneys, accountants and consultants employed hereunder. (H) Fees and Expenses. The City shall be responsible for the payment of any fees and expenses incurred by the Trustee or the City under or pursuant to this Section 8.07. (I) Administration. The City hereby appoints the Trustee to administer the provisions of this Section 8.07 and the Trustee hereby accepts such appointment, subject to the provisions of paragraph (G) above. -21- ARTICLE IX THE TRUSTEE Section 9.01. Appointment of Trustee. The Bank of California, National Association, a national banking association organized and existing under and by virtue of the laws of the United States of America with its principal corporate trust office in San Francisco, California, is hereby appointed Trustee by the Corporation and the City for the purpose of receiving all moneys required to be deposited with the Trustee hereunder and to allocate, use and apply the same as provided in this Trust Agreement. The Corporation and the City agree that they will maintain a Trustee having a principal corporate trust office in Los Angeles or San Francisco, California, with a combined capital and surplus of at least fifty million dollars ($50,000,000), and subject to supervision or examination by federal or State authority, so long as any Certificates are Outstanding. If such bank or trust company publishes a report of condition at least annually pursuant to law or to the requirements of any supervising or examining authority above referred to then for the purpose of this Section 9.01, the combined capital and surplus of such bank or trust company shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. The Trustee is hereby authorized to redeem the Certificates when duly presented for payment at maturity, or on redemption, or on purchase by the Trustee prior to maturity in accordance with Section 4.06 hereof, and to cancel all Certificates upon payment thereof. The Trustee shall keep accurate records of all funds administered by it and of all Certificates paid and discharged. The Trustee shall be compensated for its services rendered pursuant to the provisions of this Trust Agreement. Section 9.02. Acceptance of Trusts. The Trustee hereby accepts the trusts imposed upon it by this Trust Agreement, and agrees to perform said trusts, but only upon and subject to the following express terms and conditions: The Trustee, prior to the occurrence of an Event of Default and after curing of all Events of Default which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Trust Agreement. In case an Event of Default has occurred (which has not been cured or waived) the Trustee may exercise such of the rights and powers vested in it by this Trust Agreement, and shall use the same degree of care and skill in their exercise, as a prudent and reasonable man would exercise or use under the circumstances in the conduct of his own affairs. No provision in this Trust Agreement shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers. The Trustee may execute any of the trusts or powers hereof and perform the duties required of it hereunder by or through attorneys, agents, or receivers and the Trustee shall not be responsible for any misconduct or negligence on the part of any attorney, agent or receiver appointed in accordance with the standard specified above, and shall be entitled to advice of counsel concerning all matters of trust and its duty hereunder. -22- The Trustee shall not be responsible for any recital herein, or in the Certificates, or for any of the supplements thereto or instruments of further assurance, or for the sufficiency of the security for the Certificates delivered hereunder or intended to be secured hereby and the Trustee shall not be bound to ascertain or inquire as to the observance or performance of any covenants, conditions or agreements on the part of the Corporation or the City under the Lease Agreement. The Trustee shall not be responsible or liable for any loss suffered in connection with any investment of funds made by it in accordance with Article VIII of this Trust Agreement. The Trustee shall not be accountable for the use of any Certificates delivered hereunder. The Trustee may become the Owner of Certificates secured hereby with the same rights which it would have if not the Trustee; may acquire and dispose of other bonds or evidence of indebtedness of the City with the same rights it would have if it were not the Trustee; and may act as a depositary for and permit any of its officers or directors to act as a member of, or in any other capacity with respect to, any committee formed to protect the rights of Owners of Certificates, whether or not such committee shall represent the Owners of the majority in principal amount of the Certificates then Outstanding. In the absence of bad faith on its part, the Trustee shall be protected in acting upon any notice, request, consent, certificate, order, affidavit, letter, telegram or other paper or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons. Any action taken or omitted to be taken by the Trustee in good faith pursuant to this Trust Agreement upon the request or authority or consent of any person who at the time of making such request or giving such authority or consent is the Owner of any Certificate, shall be conclusive and binding upon all future Owners of the same Certificate and upon Certificates executed and delivered in exchange therefor or in place thereof. The Trustee shall not be bound to recognize any person as an Owner of any Certificate or to take any action at his request unless such Certificate shall be deposited with the Trustee or satisfactory evidence of the ownership of such Certificate shall be furnished to the Trustee. As to the existence or non-existence of any fact or as to the sufficiency or validity of any instrument, paper or proceeding, the Trustee shall be entitled to rely upon a certificate signed by an Corporation Representative or a City Representative as sufficient evidence of the facts therein contained and prior to the occurrence of an Event of Default of which the Trustee has been given notice or is deemed to have notice, shall also be at liberty to accept a similar certificate to the effect that any particular dealing, transaction or action is necessary or expedient, but may at its discretion secure such further evidence deemed by it to be necessary or advisable, but shall in no case be bound to secure the same. The Trustee may accept a certificate of an Corporation Representative or a City Representative to the effect that an authorization in the form therein set forth has been adopted by the Corporation or the City, as the case may be, as conclusive evidence that such authorization has been duly adopted, and is in full force and effect. The permissive right of the Trustee to do things enumerated in this Trust Agreement shall not be construed as a duty and it shall not be answerable for other than its negligence or willful default. The immunities and exceptions from liability of the Trustee shall extend to its officers, directors, employees and agents. -23- The Trustee shall not be required to take notice or be deemed to have notice of any Event of Default hereunder except failure by the City to make any of the Lease Payments to the Trustee required to be made by the City pursuant to the Lease Agreement or failure by the Corporation or the City to file with the Trustee any document required by this Trust Agreement or the Lease Agreement to be so filed subsequent to the delivery of the Certificates, unless the Trustee shall be specifically notified in writing of such default by the Corporation, the City or by the Owners of at least five percent (5%) in aggregate principal amount of Certificates then Outstanding and all notices or other instruments required by this Trust Agreement to be delivered to the Trustee must, in order to be effective, be delivered at the Principal Corporate Trust Office of the Trustee, and in the absence of such notice so delivered the Trustee may conclusively assume there is no Event of Default except as aforesaid. The Trustee shall not be required to give any bond or surety in respect of the execution of the said trusts and powers or otherwise in respect of the premises. Notwithstanding anything elsewhere in this Trust Agreement with respect to the execution of any Certificates, the withdrawal of any cash, the release of any property, or any action whatsoever within the purview of this Trust Agreement, the Trustee shall have the right, but shall not be required, to demand any showings, certificates, opinions, appraisals or other information, or corporate action or evidence thereof, in addition so that by the terms hereof required as a condition of such action, by the Trustee deemed desirable for the purpose of establishing the right of the City to the withdrawal of any cash, or the taking of any other action by the Trustee. All moneys received by the Trustee shall, until used or applied or invested as herein provided, be held in trust for the purposes for which they were received but need not be segregated from other funds except to the extent required by law. The Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Owners of a majority in aggregate principal amount of the Outstanding Certificates relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Trust Agreement. Before being required to take any action, the Trustee may require an opinion of Independent Counsel acceptable to the Trustee, which opinion shall be made available to the other parties hereto upon request, which counsel may be counsel to any of the parties hereto, or a verified certificate of any party hereto, or both, concerning the proposed action. If it does so in good faith, the Trustee shall be absolutely protected in relying thereon. Section 9.03. Fees, Charges and Expenses of Trustee. The Trustee shall be entitled to payment and reimbursement for reasonable fees for its services rendered hereunder and all advances, counsel fees (including expenses) and other expenses reasonably and necessarily made or incurred by the Trustee in connection with such services. Section 9.04. Notice to Certificate Owners of Default. If an Event of Default occurs of which the Trustee has been given or is deemed to have notice, then the Trustee -24- shall promptly give written notice thereof by first class mail to the Owner of each Certificate, unless such Event of Default shall have been cured before the giving of such notice; provided, however that unless such Event of Default consists of the failure by the City to make any Lease Payment when due, the Trustee may elect not to give such notice if and so long as the Trustee in good faith determines that it is in the best interests of the Certificate Owners not to give such notice. Section 9.05. Intervention by Trustee. In any judicial proceeding to which the Corporation or the City is a party which, in the opinion of the Trustee and its counsel, has a substantial bearing on the interests of Owners of the Certificates, the Trustee may intervene on behalf of the Certificate Owners, and shall do so if requested in writing by the Owners of at least five percent (5%) of the aggregate principal amount of Certificates then Outstanding. The rights and obligations of the Trustee under this Section 9.05 are subject to the approval of a court of competent jurisdiction. Section 9.06. Removal of Trustee. The City may, with the consent of the Corporation, remove the Trustee initially appointed, and any successor thereto, by an instrument or concurrent instruments in writing delivered to the Trustee and the Corporation, and may appoint a successor or successors thereto; provided that any such successor shall be a bank or trust company meeting the requirements set forth in Section 9.01 hereof. | k Section 9.07. Resignation by Trustee. The Trustee and any successor Trustee may, at any time, resign by giving thirty (30) days' written notice by registered or Certified mail to the City and the Corporation. Upon receiving such notice of resignation, Jhe City shall promptly appoint a successor Trustee. Any resignation or removal of the jjFrustee and appointment of a successor Trustee shall become effective upon acceptance of Appointment by the successor Trustee. Upon such acceptance, the City shall mail notice |hereof to the Certificate Owners at their respective addresses set forth on the Jjegistration Books. V,' Section 9.08. Appointment of Successor Trustee. In the event of the removal or resignation of the Trustee pursuant to Sections 9.06 or 9.07 hereof, respectively, the City shall promptly appoint a successor Trustee. In the event the City shall, for any reason whatsoever, fail to appoint a successor Trustee within thirty (30) days following the delivery to the Trustee of the instrument described in Section 9.06 hereof or within thirty (30) days following the receipt of notice by the City pursuant to Section 9.07 hereof, the Trustee may apply to a court of competent jurisdiction for the appointment of a successor Trustee meeting the requirements of Section 9.01 hereof. Any such successor Trustee appointed by such court shall become the successor Trustee hereunder notwithstanding any action by the City purporting to appoint a successor Trustee following the expiration of such thirty (30) day period. Section 9.09. Merger or Consolidation. Any company or association into which the Trustee may be merged or converted or with which it may be consolidated or any company resulting from any merger, conversion or consolidation to which it shall be a party or any company or association to which the Trustee may sell or transfer all or substantially all of its corporate trust business, provided that such company or association shall be eligible under Section 9.01 hereof, shall be the successor to the Trustee and vested with all of the title to the trust estate and all of the trusts, powers, -25- discretions, immunities, privileges and all other matters as was its predecessor, without the execution or filing of any paper or further act, anything herein to the contrary notwithstanding. Section 9.10. Concerning any Successor Trustee. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to its or his predecessor and also the Corporation and the City an instrument in writing accepting such appointment hereunder and thereupon such successor, without any further act, deed or conveyance, shall become fully vested with all the estates, properties, rights, powers, trusts, duties and obligations of its predecessors; but such predecessor shall, nevertheless, on the written request of the City, or of its successor, execute and deliver an instrument transferring to such successor all the estates, properties, rights, powers and trusts of such predecessor hereunder; and every predecessor Trustee shall deliver all securities and moneys held by it as the Trustee hereunder to its successor. Should any instrument in writing from the City be required by any successor Trustee for more fully and certainly vesting in such successor the estate, rights, powers and duties hereby vested or intended to be vested in the predecessor, any and all such instruments in writing shall, on request, be executed, acknowledged and delivered by the City. The resignation of any Trustee and the instrument or instruments removing any Trustee and appointing a successor hereunder, together with all other instruments provided for in this Article IX, shall be filed or recorded by the successor Trustee in each recording office where the Assignment Agreement shall have been filed or recorded. -26- ARTICLE X MODIFICATION OR AMENDMENT OF AGREEMENTS Section 10.01. Amendments Permitted. This Trust Agreement and the rights and obligations of the Owners of the Certificates and the Lease Agreement and the rights and obligations of the parties thereto, may be modified or amended at any time by a Supplemental agreement which shall become effective when the written consents of the Owners of a majority percent in aggregate principal amount of the Certificates then Outstanding, exclusive of Certificates disqualified as provided in Section 10.03 hereof, shall have been filed with the Trustee. No such modification or amendment shall (1) extend or have the effect of extending the fixed maturity of any Certificate or reducing the interest rate with respect thereto or extending the time of payment of interest, or reducing the amount of principal thereof or reducing any premium payable upon the redemption thereof, without the express consent of the Owner of such Certificate, or (2) reduce or have the effect of reducing the percentage of Certificates required for the affirmative vote or written consent to an amendment or modification of the Lease Agreement, or (3) modify any of the rights or obligations of the Trustee without its written assent thereto. Any such supplemental agreement shall become effective as provided in Section 10.02 hereof. II This Trust Agreement and the rights and obligations of the Owners of the Certificates and the Lease Agreement and the rights and obligations of the respective Mmrties thereto, may be modified or amended at any tune by a supplemental agreement, Jwtithout the consent of any such Owners, but only to the extent permitted by law and Ipnly (1) to add to the covenants and agreements of any party, other covenants to be jbbserved, or to surrender any right or power herein reserved to the Corporation or the City, (2) to cure, correct or supplement any ambiguous or defective provision contained herein or therein and which shall not, in the opinion of nationally recognized bond counsel, adversely affect the interests of the Owners of the Certificates, (3) in regard to questions arising hereunder or thereunder, as the parties hereto or thereto may deem necessary or desirable and which shall not, in the opinion of nationally recognized bond counsel, adversely affect the interests of the Owners of the Certificates, (4) to modify the legal description either of the Site to conform to the requirements of title insurance or otherwise to add or delete property descriptions to reflect accurately the description of the parcels intended to be included therein; or (5) to make such additions, deletions or modifications as may be necessary to assure exclusion from gross income for purposes of Federal income taxation of the interest component of Lease Payments. Any such supplemental agreement shall become effective upon execution and delivery by the parties hereto or thereto, as the case may be. Section 10.02. Procedure for Amendment with Written Consent of Certificate Owners. This Trust Agreement and the Lease Agreement may be amended by supplemental agreement as provided in this Section 10.02 in the event the consent of the Owners of the Certificates is required pursuant to Section 10.01 hereof. A copy of such supplemental agreement, together with a request to the Certificate Owners for their consent thereto, shall be mailed by the Trustee to each Owner of a Certificate at his address as set forth on the Registration Books, but failure to mail copies of such -27- supplemental agreement and request shall not affect the validity of the supplemental agreement when assented to as in this Section 10.02 provided. Such supplemental agreement shall not become effective unless there shall be filed with the Trustee the written consents of the Owners of sixty percent (60%) in aggregate principal amount of the Certificates then Outstanding (exclusive of Certificates disqualified as provided in Section 10.03 hereof) and a notice shall have been mailed as hereinafter in this Section 10.02 provided. Each such consent shall be effective only if accompanied by proof of ownership of the Certificates for which such consent is given, which proof shall be such as is permitted by Section 2.11 hereof. Any such consent shall be binding upon the Owner of the Certificate giving such consent and on any subsequent Owner (whether or not such subsequent Owner has notice thereof) unless such consent is revoked in writing by the Owner giving such consent or a subsequent Owner by filing such revocation with the Trustee prior to the date when the notice hereinafter in this Section 10.02 provided for has been mailed. After the Owners of the required percentage of Certificates shall have filed their consents to such supplemental agreement, the Trustee shall mail a notice to the Owners of the Certificates in the manner hereinbefore provided in this Section 10.02 for the mailing of such supplemental agreement of the notice of adoption thereof, stating in substance that such supplemental agreement has been consented to by the Owners of the required percentage of Certificates and will be effective as provided in this Section 10.02 (but failure to mail copies of said notice shall not affect the validity of such supplemental agreement or consents thereto). A record, consisting of the papers required by this Section 10.02 to be filed with the Trustee, shall be conclusive proof of the matters therein stated. Such supplemental agreement shall become effective upon the mailing of such last-mentioned notice, and such supplemental agreement shall be deemed conclusively binding upon the parties hereto and the Owners of all Certificates at the expiration of sixty (60) days after such filing, except in the event of a final decree of a court of competent jurisdiction setting aside such consent in a legal action or equitable proceeding for such purpose commenced within such sixty (60) day period. Section 10.03. Disqualified Certificates. Certificates owned or held by or for the account of the City or by any person directly or indirectly controlled or controlled by, or under direct or indirect common control with the City (except any Certificates held in any pension or retirement fund) shall not be deemed Outstanding for the purpose of any vote, consent, waiver or other action or any calculation of Outstanding Certificates provided for in this Trust Agreement, and shall not be entitled to vote upon, consent to, or take any other action provided for in this Trust Agreement. Section 10.04. Effect of Supplemental Agreement. From and after the tune any supplemental agreement becomes effective pursuant to this Article X, this Trust Agreement or the Lease Agreement, as the case may be, shall be deemed to be modified and amended in accordance therewith, the respective rights, duties and obligations of the parties hereto or thereto and all Owners of Certificates Outstanding, as the case may be, shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modification and amendment, and all the terms and conditions of any supplemental agreement shall be deemed to be part of the terms and conditions of this Trust Agreement or the Lease Agreement, as the case may be, for any and all purposes. -28- Each Certificate Owner shall certify to the Trustee whether the Certificates as to which such consent is given are disqualified as provided in Section 10.03 hereof. Section 10.05. Endorsement or Replacement of Certificates Delivered After Amendments. The Trustee may determine that Certificates delivered after the effective date of any action taken as provided in this Article X shall bear a notation, by endorsement or otherwise, in form approved by the Trustee, as to such action. In that case, upon demand of the Owner of any Certificate Outstanding at such effective date and presentation of his Certificate for the purpose at the Principal Corporate Trust Office of the Trustee, a suitable notation shall be made on such Certificate. The Trustee may determine that the delivery of substitute Certificates, so modified as in the opinion of the Trustee is necessary to conform to such Certificate Owners' action, which substitute Certificates shall thereupon be prepared, executed and delivered. In that case, upon demand of the Owner of any Certificate then Outstanding, such substitute Certificate shall be exchanged at the Principal Corporate Trust Office of the Trustee, without cost to such Owner, for a Certificate of the same character then Outstanding, upon surrender of such Outstanding Certificate. Section 10.06. Amendatory Endorsement of Certificates. The provisions of this Article X shall not prevent any Certificate Owner from accepting any amendment as to jthe particular Certificates held by him, provided that proper notation thereof is made on luch Certificates. -29- ARTICLE XI COVENANTS; NOTICES Section 11.01. Compliance With and Enforcement of Lease Agreement. The City covenants and agrees with the Owners of the Certificates to perform all obligations and duties imposed on it under the Lease Agreement. The Corporation covenants and agrees with the Owners of the Certificates to perform all obligations and duties imposed on it under the Lease Agreement. The City will not do or permit anything to be done, or omit or refrain from doing anything, in any case where any such act done or permitted to be done, or any such omission of or refraining from action, would or might be a ground for cancellation or termination of the Lease Agreement by the Corporation thereunder. The Corporation and the City, immediately upon receiving or giving any notice, communication or other document in any way relating to or affecting their respective estates, or either of them, in the Site, which may or can in any manner affect such estate of the City, will deliver the same, or a copy thereof, to the Trustee. Section 11.02. Observance of Laws and Regulations. The City will well and truly keep, observe and perform all valid and lawful obligations or regulations now or hereafter imposed on it by contract, or prescribed by any law of the United States, or of the State, or by any officer, board or commission having jurisdiction or control, as a condition of the continued enjoyment of any and every right, privilege or franchise now owned or hereafter acquired by the City, including its right to exist and carry on business as a municipal corporation, to the end that such rights, privileges and franchises shall be maintained and preserved, and shall not become abandoned, forfeited or in any manner impaired. Section 11.03. Prosecution and Defense of Suits. The City shall promptly, upon request of the Trustee or any Certificate Owner, from time to time take such action as may be necessary or proper to remedy or cure any defect in or cloud upon the title to the Project and the Site, whether now existing or hereafter developing and shall prosecute all such suits, actions and other proceedings as may be appropriate for such purpose and shall indemnify and save the Trustee and every Certificate Owner harmless from all loss, cost, damage and expense, including attorneys' fees, which they or any of them may incur by reason of any such defect, cloud, suit, action or proceeding. Section 11.04. Recordation and Filing. The City shall record and file the Lease Agreement (or a memorandum thereof), the Assignment Agreement and all such documents as may be required by law (and shall take all further actions which may be necessary or be reasonably required by the Trustee), all in such manner, at such tunes and in such places as may be required by law in order fully to preserve, protect and perfect the security of the Trustee and the Certificate Owners. Section 11.05. City Budgets. The City shall supply to the Trustee, on or about July 1 in each year a written determination by a City Representative that the City has made adequate provision in its proposed annual budget for the payment of Lease Payments due under the Lease Agreement in the fiscal year covered by such budget. -30- Such determination shall be made as soon as practicable after the first publication of any notice of public hearing upon the proposed budget of the City and shall be made, in any event, not later than the date fixed for any public hearing on the proposed budget. The determination given by the City to the Trustee shall be that the amounts so budgeted are fully adequate for the payment of all Lease Payments due under the Lease Agreement in the annual period covered by such budget. If the amounts so budgeted are not at least equal to the amount of the Lease Payments coming due and payable under the Lease Agreement, the City will take such action as may be necessary to cause such annual budget to be amended, corrected or augmented so as to include therein the amounts required to be raised by the City in such period for the payment of Lease Payments coming due and payable under the Lease Agreement and will notify the Trustee of the proceedings then taken or proposed to be taken by the City. The City will keep the Trustee advised of all budgetary proceedings thereafter taken by the City. Section 11.06. Further Assurances. The Corporation and the City will make, execute and deliver any and all such further resolutions, instruments and assurances as may be reasonably necessary or proper to carry out the intention or to facilitate the performance of this Trust Agreement and the Lease Agreement, or as may be requested by the Trustee and for the better assuring and confirming .unto the Owners of the Certificates and the Trustee the rights and benefits provided herein. Iv -31- ARTICLE XH LIMITATION OF LIABILITY Section 12.01. Limited Liability of City. Except for the payment of Lease Payments when due in accordance with the Lease Agreement and the performance of the other covenants and agreements of the City contained in the Lease Agreement and this Trust Agreement, the City shall have no pecuniary obligation or liability to any of the other parties or to the Owners of the Certificates with respect to this Trust Agreement or the terms, execution, delivery or transfer of the Certificates, or the distribution of Lease Payments to the Owners by the Trustee, except as expressly set forth herein. Section 12.02. No Liability of City or Corporation for Trustee Performance. Neither the City nor the Corporation shall have any obligation or liability to any of the other parties or to the Owners of the Certificates with respect to the performance by the Trustee of any duty imposed upon it under this Trust Agreement. Section 12.03. Indemnification of Trustee. The City shall indemnify and save the Trustee harmless from and against all claims, losses, costs, expenses, liability and damages, including legal fees and expenses, arising out of (i) the use, maintenance, condition or management of, or from any work or thing done on, the Project by the Corporation or the City, (ii) any breach or default on the part of the Corporation or the City in the performance of any of their respective obligations under this Trust Agreement and any other agreement made and entered into for purposes of the Project, (iii) any act of negligence of the Corporation or the City or of any of their respective agents, contractors, servants, employees, licensees with respect to the Project, (iv) any act of negligence of any assignee of, or purchaser from the Corporation or the City or of any of its or their respective agents, contractors, servants, employees or licensees with respect to the Project, (v) the authorization of payment or Delivery Costs or Acquisition and Construction Costs, (vi) the actions of any other party, including but not limited to the ownership, operation or use of the Project by the Corporation or the City, or (vii) the Trustee's exercise and performance of its powers and .duties hereunder. No indemnification will be made under this Section 12.03 or elsewhere in this Trust Agreement for willful misconduct or negligence under this Trust Agreement by the Trustee, its officers, agents, employees, successors or assigns. The City's obligations hereunder shall remain valid and binding notwithstanding maturity and payment of the Certificates. Section 12.04. Limitation of Rights to Parties and Certificate Owners. Nothing in this Trust Agreement or in the Certificates expressed or implied is intended or shall be construed to give any person other than the City, the Corporation, the Trustee and the Owners of the Certificates, any legal or equitable right, remedy or claim under or in respect of this Trust Agreement or any covenant, condition or provision hereof; and all such covenants, conditions and provisions are and shall be for the sole and exclusive benefit of the City, the Corporation, the Trustee and said Owners. -32- ARTICLE EVENTS OF DEFAULT AND REMEDIES OF CERTIFICATE OWNERS Section 13.01. Assignment of Rights. Pursuant to the Assignment Agreement, the Corporation has transferred, assigned and set over to the Trustee all of the Corporation's rights and duties in and to the Lease Agreement (excepting only the Corporation's rights under Sections 5.8, 7.3 and 9.4 thereof), including without limitation all of the Corporation's rights to exercise such rights and remedies conferred on the Corporation pursuant to the Lease Agreement as may be necessary or convenient (i) to enforce payment of the Lease Payments and any other amounts required to be deposited in the Lease Payment Fund or the Insurance and Condemnation Award Fund, and (ii) otherwise to exercise the Corporation's rights and take any action to protect the interests of the Trustee or the Certificate Owners in an Event of Default. Section 13.02. Remedies. If an Event of Default shall happen, then and in each and every such case during the continuance of such Event of Default, the Trustee may, and upon request of the Owners of a majority in aggregates principal amount of the Certificates then Outstanding shall, exercise any and all remedies available pursuant to law or granted pursuant to the Lease Agreement; provided, however, that Notwithstanding anything herein or in the Lease Agreement to the contrary, there shall |e no right under any circumstances to accelerate the maturities of the Certificates or otherwise to declare any Lease Payment not then in default to be immediately due and payable. In the event the City has defaulted under the Lease Agreement and the Trustee |ias elected to sublease the Project and Site on behalf of the City or terminate the Lease Agreement, the Trustee shall, to the extent reasonably possible, lease or sublease the Site and the Project to the State of California or a political subdivision thereof. £, Section 13.03. Application of Funds. All moneys received by the Trustee pursuant to any right given or action taken under the provisions of this Article XIII or Article DC of the Lease Agreement shall be applied by the Trustee in the order following upon presentation of the several Certificates, and the stamping thereon of the payment if only partially paid, or upon the surrender thereof if fully paid - First, to the payment of the costs and expenses of the Trustee and of the Certificate Owners hi declaring such Event of Default, including reasonable compensation to its or their agents, attorneys and counsel, including all fees and expenses past due; and Second, to the payment of the whole amount then owing and unpaid with respect to the Certificates for principal and interest, with interest on the overdue principal and installments of interest at the rate of twelve percent (12%) per annum (but such interest on overdue installments of interest shall be paid only to the extent funds are available therefor following payment of principal and interest and interest on overdue principal, as aforesaid), and in case such moneys shall be insufficient to pay in full the whole amount so owing and unpaid with respect to the Certificates, then to the payment of such principal and interest without preference or priority of principal over interest, or of interest over principal, or of -33- any installment of interest over any other installment of interest, ratably to the aggregate of such principal and interest. Section 13.04. Institution of Legal Proceedings. If one or more Events of Default shall happen and be continuing, the Trustee in its discretion may, and upon the written request of the Owners of a majority in principal amount of the Certificates then Outstanding, and upon being indemnified to its satisfaction therefor, shall, proceed to protect or enforce its rights or the rights of the Owners of Certificates by a suit in equity or action at law, either for the specific performance of any covenant or agreement contained herein, or in aid of the execution of any power herein granted, or by mandamus or other appropriate proceeding for the enforcement of any other legal or equitable remedy as the Trustee shall deem most effectual in support of any of its rights or duties hereunder. Section 13.05. Non-waiver. Nothing in this Article XIII or in any other provision of this Trust Agreement or in the Certificates, shall affect or impair the obligation of the City to pay or prepay the Lease Payments as provided in the Lease Agreement, or affect or impair the right of action, which is absolute and unconditional, of the Certificate Owners to institute suit to enforce and collect such payment. No delay or omission of the Trustee or of any Owner of any of the Certificates to exercise any right or power arising upon the happening of any Event of Default shall impair any such right or power or shall be construed to be a waiver of any such Event of Default or an acquiescence therein, and every power and remedy given by this Article XIII to the Trustee or to the Owners of Certificates may be exercised from time to time and as often as shall be deemed expedient by the Trustee or the Certificate Owners. Section 13.06. Remedies Not Exclusive. No remedy herein conferred upon or reserved to the Trustee or to the Certificate Owners is intended to be exclusive of any other remedy, and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing, at law or in equity or by statute or otherwise. Section 13.07. Power of Trustee to Control Proceedings. In the event that the Trustee, upon the happening of an Event of Default, shall have taken any action, by judicial proceedings or otherwise, pursuant to its duties hereunder, whether upon its own discretion or upon the request of the Owners of a majority in principal amount of the Certificates then Outstanding, it shall have full power, in the exercise of its discretion for the best interests of the Owners of the Certificates, with respect to the continuance, discontinuance, withdrawal, compromise, settlement or other disposal of such action; provided, however, that the Trustee shall not discontinue, withdraw, compromise or settle, or otherwise dispose of any litigation pending at law or in equity, without the consent of a majority in aggregate principal amount of the Certificates Outstanding. Section 13.08. Limitation on Certificate Owners' Right to Sue. No Owner of any Certificate issued hereunder shall have the right to institute any suit, action or proceeding at law or in equity, for any remedy under or upon this Trust Agreement, unless (a) such Owner shall have previously given to the Trustee written notice of the occurrence of an Event of Default hereunder; (b) the Owners of at least twenty-five percent (25%) in aggregate principal amount of all the Certificates then Outstanding shall have made written request upon the Trustee to exercise the powers hereinbefore granted -34- or to institute such action, suit or proceeding in its own name; (c) said Owners shall have tendered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; and (d) the Trustee shall have refused or omitted to comply with such request for a period of sixty (60) days after such written request shall have been received by, and said tender of indemnity shall have been made to, the Trustee. Such notification, request, tender of indemnity and refusal or omission are hereby declared, in every case, to be conditions precedent to the exercise by any Owner of Certificates of any remedy hereunder; it being understood and intended that no one or more Owners of Certificates shall have any right in any manner whatever by his or their action to enforce any right under this Trust Agreement, except in the manner herein provided, and that all proceedings at law or in equity with respect to an Event of Default shall be instituted, had and maintained hi the manner herein provided and for the equal benefit of all Owners of the Outstanding Certificates. The right of any Owner of any Certificate to receive payment of said Owner's fractional interest in the Lease Payments as the same become due, or to institute suit for the enforcement of such payment, shall not be impaired or affected without the consent of such Owner, notwithstanding the foregoing provisions of this Section 13.05 or any other provision of this Trust Agreement. -35- AKTICLE XIV MISCELLANEOUS Section 14.01. Defeasance. If and when all Outstanding Certificates shall be paid and discharged in any one or more of the following ways - (a) by well and truly paying or causing to be paid the principal, and interest and redemption premiums (if any) with respect to all Certificates Outstanding, as and when the same become due and payable; or (b) by depositing with an escrow holder security for the payment of Lease Payments as more particularly described in Section 10.1 of the Lease Agreement, to be applied to pay the Lease Payments as the same become due and payable and prepay the Lease Payments in full on any prepayment date, pursuant to Section 10.1 of the Lease Agreement - then, notwithstanding that any Certificates shall not have been surrendered for payment, all obligations of the Corporation, the Trustee and the City with respect to -all Outstanding Certificates shall cease and terminate, except only the obligation of the City to pay or cause to be paid, from Lease Payments paid by or on behalf of the City from funds deposited pursuant to paragraph (b) of this Section 14.01, to the Owners of the Certificates not so surrendered and paid all sums due with respect thereto, and in the event of deposits pursuant to paragraph (b), the Certificates shall continue to represent direct and fractional interests of the Owners thereof in Lease Payments under the Lease Agreement. Any funds held by the Trustee, at the time of one of the events described in paragraphs (a) or (b) of this Section 14.01, which are not required for the payment to be made to Owners, shall be paid over to the City. Section 14.02. Records. The Trustee shall keep complete and accurate records of all moneys received and disbursed under this Trust Agreement, which shall be available for inspection by the City, the Corporation, and any Owner, or the agent of any of them, at any time during regular business hours. Section 14.03. Notices. All written notices to be given under this Trust Agreement shall be given by mail or personal delivery to the party entitled thereto at its address set forth below, or at such address as the party may provide to the other party in writing from time to time. Notice shall be effective upon deposit in the United States mail, postage prepaid or, in the case of personal delivery, upon delivery to the address set forth below: If to the City: City of Carlsbad 1200 Elm Avenue Carlsbad, California 92008 Attention: City Manager -36- If to the Corporation: Public Improvement Corporation of the City of Carlsbad 1200 Elm Avenue Carlsbad, California 92008 Attention: Executive Director If to the Trustee: The Bank of California 400 California Street San Francisco, California 94107 Attention: Vice President Section 14.04. Governing Law. This Trust Agreement shall be construed and governed in accordance with the laws of the State. Section 14.05. Binding Effect; Successors. This Trust Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Whenever in this Trust Agreement the Corporation, the City or the Trustee is named or referred to, such reference shall be deemed to include the successors or assigns thereof, and all the covenants and agreements in this Trust Agreement contained by or on behalf of the Corporation, the City or the Trustee shall bind and inure to the benefit of the respective successors and assigns thereof whether so expressed or not. Section 14.06. Execution in Counterparts. This Trust Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same agreement. Section 14.07. Delivery of Cancelled Certificates. Whenever in this Trust Agreement provision is made for the surrender to or cancellation by the Trustee of any Certificates, the Trustee shall deliver such cancelled Certificates to the City for destruction or storage. Section 14.08. Headings. The headings or titles of the several Articles and Sections hereof, and any table of contents appended to copies hereof, shall be solely for convenience of reference and shall not affect the meaning, construction or effect of this Trust Agreement. All references herein to "Articles," "Sections," and other subdivisions are to the corresponding Articles, Sections or subdivisions of this Trust Agreement; and the words "herein," "hereof," "hereunder" and other words of similar import refer to this Trust Agreement as a whole and not to any particular Article, Section or subdivision hereof. Section 14.09. Waiver of Notice. Whenever in this Trust Agreement the giving of notice by mail or otherwise is required, the giving of such notice may be waived in writing by the person entitled to receive such notice and in any case the giving or receipt of such notice shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. Section 14.10. Separability of Invalid Provisions. In case any one or more of the provisions contained in this Trust Agreement or in the Certificates shall for any reason be held to be invalid, illegal or unenforceable in any respect, then such invalidity, illegality or unenforceability shall not affect any other provision of this Trust Agreement, -37- and this Trust Agreement shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein. The parties hereto hereby declare that they would have entered into this Trust Agreement and each and every other section, paragraph, sentence, clause or phrase hereof and authorized the delivery of the Certificates pursuant thereto irrespective of the fact that any one or more sections, paragraphs, sentences, clauses or phrases of this Trust Agreement may be held illegal, invalid or unenforceable. -38- IN WITNESS WHEREOF, the parties hereto have executed this Trust Agreement as of the date and year first above written. THE BANK OF CALIFORNIA, N.A., as Trustee By Authorized Officer (SEAL) Attest: (SEAL) Attest: Secretary City Clerk CITY OF CARLSBAD PUBLIC IMPROVEMENT CORPORATION By President CITY OF CARLSBAD By Mayor -39- EXHIBIT A DEFINITIONS "Acquisition and Construction Costs" means all costs of payment of, or reimbursement for, acquisition, construction, installation and equipping of the Project, including but not limited to, architect and engineering fees, construction contractor payments, costs of feasibility and other reports, inspection costs, performance bond premiums and permit fees. "Acquisition and Construction Fund" means the fund by that name established and held by the City pursuant to Article III of the Trust Agreement. "Agency Agreement" means that certain Agency Agreement, dated as of June 1, 1988, by and between the Corporation and the City. "Assignment Agreement" means the Assignment Agreement, dated as of June 1, 1988, by and between the Corporation and the Trustee, together with any duly authorized and executed amendments thereto. "Business Day" means a day which is not a Saturday, Sunday or legal holiday on which banking institutions in the State are closed or are required to close or a day on which the New York Stock Exchange is closed. "Certificate of Completion" means the certificate of a City Representative certifying that the Project has been acquired, constructed, installed and equipped by the City and that all Acquisition and Construction Costs have been paid. "Certificates" means the $ aggregate principal amount of certificates of participation to be executed and delivered pursuant to the Trust Agreement. "Certificate Year" means the twelve month period beginning on the anniversary of the Closing Date in each year and ending on the day prior to the anniversary date of the Closing Date in the following year except that the first Certificate Year shall begin on the Closing Date. "City" means the City of Carlsbad, a municipal corporation and general law city organized and existing under the laws of the State. "City Representative" means the City Manager of the City or any other person authorized by resolution of the City Council of the City to act on behalf of the City under or with respect to the Lease Agreement, the Trust Agreement and the Corporation Agreement. "Closing Date" means the date upon which there is an exchange of the Certificates for the proceeds representing the purchase of the Certificates by the Original Purchaser. "Code" means the Internal Revenue Code of 1986, as amended. "Completion Date" means the earlier of (i) the date of substantial completion of acquisition, construction, installation and equipping of the Project as evidenced by the filing with the Trustee of a Certificate of Completion, and (ii) June 1, 1991. "Contractor" means the contractor(s) or vendor(s) from whom the Corporation or the City on behalf of the Corporation has ordered or caused to be ordered or with whom the Corporation or the City on behalf of the Corporation has contracted or caused to be contracted for the acquisition and construction of the Project. "Corporation" means the City of Carlsbad Public Improvement Corporation, a nonprofit public benefit corporation organized and existing under and by virtue of the laws of the State. "Corporation Representative" means the President of the Corporation, or any other person authorized by resolution of the Corporation to act on behalf of the Corporation under or with respect to the Lease Agreement, the Trust Agreement, the Agency Agreement and the Assignment Agreement. | "Debt Service" means the scheduled principal and interest components of Lease IPayments, payable during the period of computation, excluding amounts scheduled Curing such period which relate to principal which has been retired before the beginning jpf such period. Ij "Delivery Costs" means all items of expense directly or indirectly payable by or reimbursable to the City or the Corporation relating to the execution and delivery of the Lease Agreement, the Trust Agreement, the Agency Agreement and the Assignment JjAgreement or the execution, sale and delivery of the Certificates, including but not limited to filing and recording costs, settlement costs, printing costs, reproduction and binding costs, initial fees and charges of the Trustee, financing discounts, legal fees and charges, insurance fees and charges, financial and other professional consultant fees, costs of rating agencies for credit ratings, fees for execution, transportation and safekeeping of the Certificates and charges and fees in connection with the foregoing. "Delivery Costs Fund" means the fund by that name established and held by the Trustee pursuant to Article III of the Trust Agreement. "Escrow Fund" means the fund by that name established and held by the Trustee pursuant to Section 6.06 of the Trust Agreement "Event of Default" means an event of default under the Lease Agreement, as defined in Section 9.1 thereof. "Excess Investment Earnings Account" means the account by that name established pursuant to Section 8.07 of this Trust Agreement. "Federal Securities" means any of the following which are noncallable and which at the time of investment are legal investments under the laws of the State for trust funds held by the Trustee: Exhibit A Page 2 (a) direct general obligations of (including obligations issued or held in book entry form on the books of the Department of the Treasury of the United States of America), or obligations the payment of principal of and interest on which are guaranteed by, the United States of America; or (b) any of the following obligations of the following agencies of the United States of America: (i) direct obligations of the Export-Import Bank; (ii) certificates of beneficial ownership issued by the Farmers Home Administration; (iii) participation certificates issued by the General Services Administration; (iv) mortgage-backed bonds or pass- through obligations issued and guaranteed by the Government National Mortgage Association; (v) project notes issued by the United States Department of Housing and Urban Development; and (vi) public housing notes and bonds guaranteed by the United States of America. "Fiscal Year" means the twelve-month period beginning on July 1 of any year and ending on June 30 of the next succeeding year, or any other twelve-month period selected by the City as its fiscal year. "Gross Proceeds" means the sum of the following amounts: (a) original proceeds, namely, net amounts (after payment of all expenses of executing and delivering the Lease Agreement and the Certificates) received by or for the City as a result of the sale of the Certificates, excluding original proceeds which become transferred proceeds (determined in accordance with applicable Regulations) of obligations issued to refund in whole or in part the Lease Payments; (b) investment proceeds, namely, amounts received at any time by or for the City, such as interest and dividends, resulting from the investment of any original proceeds (as referenced in paragraph (a) above) or investment proceeds (as referenced in this paragraph (b)) in Nonpurpose Obligations, increased by any profits and decreased (if necessary, below zero) by any losses on such investments, excluding investment proceeds which become transferred proceeds (determined in accordance with applicable Regulations) of obligations issued to refund in whole or in part the Lease Payments; (c) sinking fund proceeds, namely, amounts, other than original proceeds or investment proceeds (as referenced in paragraphs (a) and (b) above) of the Certificates, which are held in any Lease Payment Fund and any other fund to the extent that the City reasonably expects to use such other fund to pay Lease Payments; (d) amounts in the Reserve Fund and in any other fund established as a reasonably required reserve or replacement fund; (e) Investment Property pledged as security for payment of Lease Payments by an ultimate obligor or a related person or by the City; (f) amounts, other than as specified in this definition, used to pay Lease Payments; and (g) amounts received as a result of investing amounts described in this definition. Exhibit A Page 3 "Independent Counsel" means an attorney duly admitted to the practice of law before the highest court of the state in which such attorney maintains an office and who is not an employee of the Corporation, the Trustee or the City. "Information Services" means Financial Information, Inc.'s "Daily Called Bond Service," 30 Montgomery Street, 10th Floor, Jersey City, New Jersey 07302, Attention: Editor; Kenny Information Services' "Called Bond Service," 55 Broad Street, 28th Floor, New York, New York 10004; Moody's "Municipal and Government," 99 Church Street, '8th Floor, New York, New York 10007, Attention: Municipal News Reports; and Standard & Poor's "Called Bond Record," 25 Broadway, 3rd Floor, New York, New York 10004; or to such other addresses and/or such other national information services providing information or disseminating notices of redemption of obligations such as the Certificates. "Insurance and Condemnation Fund" means the fund by that name established and held by the Trustee pursuant to Section 7.01 of the Trust Agreement. "Interest Payment Date" means the first day of each February and August, commencing February 1, 1989, so long as any Certificates are Outstanding. "Investment Earnings Account" means the account by that name established .pursuant to Section 8.07 of this Trust Agreement. "Investment Property" means any security (as said term is defined in section 165(g)(2)(A) or (B) of the Code), obligation, annuity or investment-type property, excluding, however, obligations the interest on which is exempt from income tax under {section 103 of the Code. .•{, "Lease Agreement" means the Lease Agreement, dated as of June 1, 1988, by and between the Corporation and the City, together with any duly authorized and ^executed amendments thereto.i' "Lease Payments" means all payments required to be paid by the City pursuant to Section 4.4 of the Lease Agreement, including any prepayment thereof pursuant to Article X of the Lease Agreement, which payments consist of an interest component and a principal component. "Lease Payment Date" means the fifteenth (15th) day of March and September in each year during the Term of the Lease Agreement, commencing September 15, 1988. "Lease Payment Fund" means the fund by that name established and held by the Trustee pursuant to Section 5.02 of the Trust Agreement. "Moody's" means Moody's Investors Service of New York, New York, or its successors. "Net Proceeds," when used with respect to insurance or condemnation proceeds, means any insurance proceeds or condemnation award paid with respect to the Project or the Site, to the extent remaining after payment therefrom of all expenses incurred in the collection thereof. "Net Proceeds," when used with reference to the Certificates, means Exhibit A Page 4 the face amount of the Certificates, plus accrued interest and premium, if any, less original issue discount and less proceeds deposited in the Reserve Fund. "Nonpurpose Obligation" means any Investment Property which is acquired with the proceeds of the Certificates and is not acquired in order to carry out the governmental purpose of the Lease Agreement. "Notes" means the Notes of the City issued on July 16, 1987 in the principal amount of $6,555,000, and maturing June 30, 1988. "Original Purchaser" means Rauscher Pierce Refsnes, Inc., as original purchaser of the Certificates. "Outstanding", when used as of any particular time with respect to Certificates, means (subject to the provisions of Section 10.03 of the Trust Agreement) all Certificates theretofore executed and delivered by the Trustee under the Trust Agreement except - (a) Certificates theretofore cancelled by the Trustee or surrendered to the Trustee for cancellation; (b) Certificates for the payment or redemption of which funds or Federal Securities in the necessary amount shall have theretofore been deposited with the Trustee (whether upon or prior to the maturity or redemption date of such Certificates), provided that, if such Certificates are to be redeemed prior to maturity, notice of such redemption shall have been given as provided in Section 4.03 of the Trust Agreement or provision satisfactory to the Trustee shall have been made for the giving of such notice; and (c) Certificates in lieu of or in exchange for which other Certificates shall have been executed and delivered by the Trustee pursuant to Section 2.09 of the Trust Agreement. "Owner" or "Certificate Owner" or "Owner of a Certificate", or any similar term, when used with respect to a Certificate means the person in whose name such Certificate shall be registered. "Permitted Encumbrances" means, as of any particular time: (a) liens for general ad valorem taxes and assessments, if any, not then delinquent, or which the City may, pursuant to provisions of Article V of the Lease Agreement, permit to remain unpaid; (b) the Assignment Agreement; (c) the Lease Agreement; (d) any right or claim of any mechanic, laborer, materialman, supplier or vendor not filed or perfected in the manner prescribed by law; (e) easements, rights of way, mineral rights, drilling rights and other rights, reservations, covenants, conditions or restrictions which exist of record as of the Closing Date and which the City certifies in writing will not materially impair the use of the Site for the Project; and (f) easements, rights of way, mineral rights, drilling rights and other rights, reservations, covenants, conditions or restrictions established following the date of recordation of the Lease Agreement and to which the Corporation and the City consent in writing. Exhibit A Page 5 "Permitted Investments" means any of the following which at the time of investment are legal investments under the laws of the State for the moneys proposed to be invested therein: (a) Federal Securities; (b) Any of the following obligations of federal agencies not guaranteed by the United States of America: (i) debentures issued by the Federal Housing Administration; (ii) participation certificates or senior debt obligations of the Federal Home Loan Mortgage Corporation or Farm Credit Banks (consisting of Federal Land Banks, Federal Intermediate Credit Banks, or Banks for Cooperatives); (iii) mortgage-backed securities or senior debt obligations of the Federal National Mortgage Association; or (iv) credit- backed or senior debt obligations of the Student Loan Marketing Association. (c) interest-bearing demand or time deposits (including certificates of deposit) in federal or State chartered savings and loan associations or in federal or State banks (including the Trustee), provided that (i) the obligations of such savings and loan association or bank or the obligations of the holding company of such savings and loan association or bank carry one of the three highest Rating Categories by Moody's and S&P, or (ii) such deposits are insured by the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation; (d) obligations issued by any corporation organized and operating within the United States of America having assets in excess of $500,000,000, which obligations carry one of the three highest long-term Rating Categories provided by Moody's and S&P; (e) repurchase agreements with any bank, savings institution or trust company (including the Trustee) which is insured by the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation, or with any broker-dealer with retail customers which falls under Securities Investors Protection Corporation protection, provided that such repurchase agreements are fully secured by Federal Securities or obligations of any agency or instrumentality of the United States of America, and provided further that (i) such collateral is held by the Trustee or any agent acting solely for the Trustee during the term of such repurchase agreement, (ii) such collateral is not subject to liens or claims of third parties, (iii) such collateral has a market value (determined at least once every 30 days) at least equal to the amount invested in the repurchase agreement, (iv) the Trustee has a perfected first security interest in the collateral, (v) the agreement shall be for a term not longer than 180 days and (vi) the failure to maintain such collateral at the level required in (iii) above will require the Trustee to serve notice to the other party to correct such deficiency. If such deficiency is not corrected, the Trustee is directed to liquidate the collateral; (f) money market funds comprised exclusively of Federal Securities; (g) commercial paper having original maturities of not more than 180 days and rated in the highest Rating Category by Moody's and S&P; (h) bills of exchange or time drafts drawn on and accepted by a commercial bank, otherwise known as bankers acceptances, which have a maturity of not more than 270 Exhibit A Page 6 days and which are eligible for purchase by the Federal Reserve System and the obligations of which commercial bank or the obligations of the holding company of which carry one of the three highest long-term Rating Categories by Moody's and S&P; and (i) tax-exempt obligations rated in one of the three highest rating categories by Moody's and S&P. "Principal Corporate Trust Office" means the corporate trust office of the Trustee at 400 California Street, San Francisco, California, or at such other address designated by the Trustee in written notice filed with the City and the Corporation in writing. "Private Business Use" means use directly or indirectly in a trade or business carried on by a natural person or in any activity carried on by a person other than a natural person, excluding, however, use by a governmental unit and use as a member of the general public. "Project" means the improvements to be constructed on the Site, all as more particularly described in Exhibit C attached to the Lease Agreement. "Rating Category" means, with respect to any Permitted Investment, one or more of the generic categories of rating by Moody's or S&P applicable to such Permitted Investment, without regard to any refinement or graduation of such rating category by a plus or minus sign. "Registration Books" means the records maintained by the Trustee pursuant to Section 2.12 of the Trust Agreement for registration of the ownership and transfer of ownership of the Certificates. "Regular Record Date" means the close of business on the fifteenth (15th) day of the month preceding each Interest Payment Date, whether or not such fifteenth (15th) day is a Business Day. "Regulations" means temporary and permanent regulations promulgated under the Code. "Rental Period" means each twelve-month period during the Term of the Lease Agreement commencing on June 2 in any year and ending on June 1 in the next succeeding year. "Reserve Fund" means the fund by that name established and held by the Trustee pursuant to Section 6.01 of the Trust Agreement. "Reserve Requirement" means an amount equal to $ . "S&P" means Standard & Poor's Corporation, of New York, New York, or its successors. "Securities Depositories" means The Depository Trust Company, 711 Stewart Avenue, Garden City, New York 11530, Fax-(516) 227-4039 or 4190; Midwest Securities Exhibit A Page 7 Trust Company, Capital Structures-Call Notification, 440 South LaSalle Street, Chicago, Illinois 60605, Fax-(312) 663-2343; Philadelphia Depository Trust Company, Reorganization Division, 1900 Market Street, Philadelphia, Pennsylvania 19103, Attention: Bond Department, Dex-(215) 496-5058; or to such other addresses and/or such other registered securities depositories holding substantial amounts of obligations of types comprising the Certificates. "Site" means all of that certain real property located in the City described in Exhibit B to the Lease Agreement, on which the Project is to be constructed. "State" means the State of California. "Term of the Lease Agreement" means the time during which the Lease Agreement is in effect, as provided in Section 4.2 of the Lease Agreement. "Trust Agreement" means the Trust Agreement, dated as of June 1, 1988, by and among the City, the Corporation and the Trustee, together with any duly authorized amendments thereto. "Trustee" means , or any successor thereto, acting as Trustee pursuant to this Trust Agreement. "Yield" means that yield which, when used in computing the present worth of all payments of principal and interest (or other payments in the case of Nonpurpose Obligations which require payments in a form not characterized as principal and interest) on a Nonpurpose Obligation or on the Lease Payments produces an amount equal to the Purchase Price of such Nonpurpose Obligation or the Certificates, all computed as prescribed in applicable Regulations. Exhibit A PageS EXHIBIT B FORM OF THE CERTIFICATES CERTIFICATE OF PARTICIPATION (Hbsp Grove Project) Evidencing an Undivided Fractional Interest of the Owner Hereof in Lease Payments to be Made by the CITY OF CARLSBAD, CALIFORNIA As the Rental for Certain Property Pursuant to a Lease Agreement With the City of Carlsbad Public Improvement Corporation NUMBER R- RATE OF INTEREST MATURITY DATE DATED DATE CUSIP June 1, 1988 REGISTERED OWNER: PRINCIPAL AMOUNT: DOLLARS THIS IS TO CERTIFY THAT the registered owner identified above, or registered assigns (the "Owner"), as the registered owner of this Certificate of Participation (the "Certificate"), is the owner of an undivided, fractional interest in the right to receive certain Lease Payments under and defined in that certain Lease Agreement (the "Lease Agreement"), dated as of June 1, 1988, by between the Public Improvement Corporation of the City of Carlsbad, a public body corporate and politic organized and existing under the laws of the State of California (the "Corporation"), and the City of Carlsbad, California, a municipal corporation and general law city organized and existing under the laws of the State of California (the "City"), which Lease Payments, prepayments and certain other rights and interests under the Lease Agreement have been assigned to The Bank of California, N.A., as trustee (the "Trustee"), having its corporate trust office in San Francisco, California. The Owner of this Certificate is entitled to receive, subject to the terms of the Lease Agreement, on the Maturity Date identified above, the Principal Amount identified above, representing a portion of the Lease Payments designated as principal, and to receive on August 1 and February 1 of each year, commencing February 1, 1989 (each, a "Payment Date"), until payment in full of said Principal Amount, the Owner's fractional share of the Lease Payments designated as interest coming due during the six months immediately preceding each of the Payment Dates; provided that interest represented hereby shall be payable from the Payment Date next preceding the date of execution of this Certificate unless (i) this Certificate is executed on a Payment Date, in which event interest shall be payable from such Payment Date, or (ii) this Certificate is executed after the close of business on the fifteenth day of the month immediately preceding a Payment Date, and prior to such Payment Date, in which event interest shall be payable from such Payment Date, or (iii) unless this Certificate is executed on or before January 15, 1989, in which event interest shall be payable from June 1, 1988. Said fractional share of the portion of the Lease Payments designated as interest is the result of the multiplication of the aforesaid portion of the Lease Payments designated as principal by the Rate of Interest per annum identified above. Interest represented hereby is payable in lawful money of the United States of America by check or draft of the Trustee mailed to the Owner hereof at his address as it appears on the registration books of the Trustee, as of the close of business on the fifteenth (15) day preceding each Payment Date, or at such other address as the Owner may have filed with the Trustee for that purpose. Principal represented hereby is payable upon presentation and surrender hereof at the corporate trust office of the Trustee in San Francisco, California. This Certificate has been executed and delivered by the Trustee pursuant to the terms of a Trust Agreement by and among the Trustee, the Corporation and the City, dated as of June 1, 1988 (the "Trust Agreement"). The City is authorized to enter into the Lease Agreement and the Trust Agreement under the laws of the State of California. Reference is hereby made to the Lease Agreement and the Trust Agreement (copies of which are on file at the corporate trust office of the Trustee) for a description of the terms on which the Certificates are delivered, the rights thereunder of the owners of the Certificates, the rights, duties and immunities of the Trustee and the rights and Obligations of the City under the Lease Agreement, all of the provisions of which the Owner of this Certificate, by acceptance hereof, assents and agrees. REFERENCE IS HEREBY MADE TO THE FURTHER PROVISIONS OF THIS CERTIFICATE SET FORTH ON THE REVERSE HEREOF WHICH FURTHER PROVISIONS SHALL, FOR ALL PURPOSES, HAVE THE SAME EFFECT AS IF SET FORTH IN THIS PLACE. The Trustee has no obligation or liability to the registered owners of the Certificates to make payments of principal or interest with respect to the Certificates. The Trustee's sole obligations are to administer, for the benefit of the registered owners of the Certificates, the various funds and accounts established under the Trust Agreement. The City has certified, recited and declared that all acts, conditions and things required by the constitution and statutes of the State of California, the Lease Agreement and the Trust Agreement to exist, to have happened and to have been performed precedent to and in the delivery of this Certificate, do exist, have happened and have been performed in due time, form and manner as required by law. Exhibit B Page 2 IN WITNESS WHEREOF, this Certificate has been executed by , as trustee, acting pursuant to the Trust Agreement. Date of Execution: , as Trustee By Authorized Signatory Exhibit B PageS (FORM OF REVERSE OF CERTIFICATE) The City is obligated under the Lease Agreement to pay Lease Payments from any source of legally available funds and the City has covenanted in the Lease Agreement to make the necessary annual appropriations therefor. The obligation of the City to pay the Lease Payments does not constitute an obligation of the City for which the City is obligated to levy or pledge any form of taxation or for which the City has levied or pledged any form of taxation. The obligation of the City to pay Lease Payments does not constitute an indebtedness within the meaning of any constitutional or statutory debt limitation or restriction. To the extent and in the manner permitted by the terms of the Trust Agreement, the provisions of the Trust Agreement may be amended by the parties thereto with the written consent of the owners of at least a majority percent in aggregate principal amount of the Certificates then outstanding, and may be amended without such consent under certain circumstances; provided that no such amendment shall impair the right of any owner to receive, in any case, such owner's fractional share of any Lease Payment or prepayment thereof in accordance with such owner's Certificate, without the consent of such owner. This Certificate is transferable by the Owner hereof, in person or by his attorney duly authorized in writing, at the corporate trust office of the Trustee, but only in the manner, subject to the limitations and upon payment of any charges provided in the Trust Agreement and upon surrender and cancellation of this Certificate. Upon such transfer, a new Certificate or Certificates of authorized denomination or denominations for the same aggregate principal amount will be delivered to the transferee in exchange herefor. The City, the Corporation and the Trustee may treat the Owner hereof as the absolute owner hereof for all purposes, whether or not the payments represented by this Certificate shall be overdue and the City, the Corporation and the Trustee shall not be affected by any notice to the contrary. The Certificates maturing on and after August 1, 1999, are subject to redemption in whole at any time or in part on any Payment Date (but not in a total redemption amount of less than $20,000 at any one time) in inverse order of maturity, and by lot within a maturity, on or after August 1, 1999, at the principal amount thereof together with the premium set forth below (expressed as a percentage of the total amount to be redeemed), from the proceeds of optional prepayments of Lease Payments made by the City pursuant to the Lease Agreement: Redemption Period Premium August 1, 1998 through July 31, 1999 2.0% August 1, 1999 through July 31, 2000 1.5 August 1, 2000 through July 31, 2001 1.0 August 1, 2001 through July 31, 2002 0.5 August 1, 2002 and thereafter 0 The Certificates are subject to mandatory redemption in whole on any date, or in part on any Payment Date, among maturities such that approximately equal annual Lease Payments prevail following such redemption and by lot within a maturity, from the Exhibit B Page 4 net proceeds of an insurance or condemnation award credited towards the prepayment of the Lease Payments by the City pursuant to the Lease Agreement, at a redemption price equal to the principal amount thereof to be redeemed, without premium. The Certificates maturing on August 1, 2008 are subject to mandatory redemption on August 1 in each year on or after August 1, 1998, by lot, from the principal components of the Lease Payments required to be paid by the City pursuant to the Lease Agreement with respect to each such redemption date, at a redemption price equal to the principal amount thereof to be redeemed, without premium, as follows: Principal Amount of Certificates Redemption Date to be Redeemed (August 1) 1998 $ 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 (Maturity) $ Notice of redemption, unless waived, is to be given by the Trustee by mailing an official redemption notice by first class mail at least thirty (30) days and not more than sixty (60) days prior to the date fixed for redemption to the registered owner of the Certificate or Certificates to be redeemed at the address shown on the Certificate registration books maintained by the Trustee or at such other address as is furnished in writing by such registered owner to the Trustee. Notice of redemption having been given as aforesaid, the Certificates or portions of Certificates so to be redeemed shall, on the redemption date, become due and payable at the redemption price therein specified, and from and after such date (unless the City shall default in the payment of the redemption price) interest with respect to such Certificates or portions of Certificates shall cease to be payable. Exhibit B Page 5 ASSIGNMENT For value received the undersigned do(es) hereby sell, assign and transfer unto (Name, Address and Tax Identification Number of Assignee) the within registered Certificate and hereby irrevocably constitute(s) and appoint(s) attorney, to transfer the same on the Certificate register of the Trustee with full power of substitution in the premises. Dated: Signature: Note: The signature(s) on this Assignment must correspond with the name(s) as written on the face of the within registered Certificate in every particular without alteration or enlargement or any change whatsoever. Signature Guaranteed: Note: Signature(s) must be guaranteed by a member firm of the New York Stock Exchange or a commercial bank, or trust company. Exhibit B Page6 13061-03 JHHW:WHM:ct 05/13/8. M6699 ct 05/20/86 pch 05/26/8B EXHIBIT 4 AGENCY AGREEMENT by and between the CITY OF CARLSBAD PUBLIC IMPROVEMENT CORPORATION and the CITY OF CARLSBAD Dated as of June 1, 1988 (HOSP GROVE PROJECT) AGENCY AGREEMENT THIS AGENCY AGREEMENT, made and entered into as of June 1, 1988, by and between the CITY OF CARLSBAD PUBLIC IMPROVEMENT CORPORATION, a public body corporate and politic organized and existing under the laws of the State of California (the "Corporation"), and the CITY OF CARLSBAD, a municipal corporation and general law city organized and existing under the laws of the State of California (the "City"); WITNESSETH: WHEREAS, the Corporation and the City have entered into a Lease Agreement, dated as of the date hereof (the "Lease Agreement"), whereby the Corporation agrees to lease certain improvements to Hosp Grove (the "Project") more particularly described in Exhibit C attached to the Lease Agreement, to the City, and the City agrees to lease the Project from the Corporation; WHEREAS, it is in the interest of the Corporation and the City that the Corporation appoint the City as its agent for the purposes of acquisition and construction of the Project, and the Corporation has agreed in the Lease Agreement to appoint the City as its agent for said purposes; NOW, THEREFORE, in the joint and mutual exercise of their powers, and in consideration of the above premises and of the mutual covenants herein contained and for other valuable consideration, the parties hereto DO HEREBY AGREE as follows: Section 1. Definitions. The terms capitalized in this Agency Agreement shall have the meanings ascribed to them in the Lease Agreement and in the Trust Agreement, dated as of the date hereof, among the Corporation, the City and The Bank of California, National Association, as trustee (the "Trust Agreement"). Section 2. Appointment of City. The Corporation hereby appoints the City as its agent to carry out all phases of the acquisition and construction of the Project, and the City, as agent of the Corporation, assumes all rights, duties, responsibilities and liabilities of the Corporation regarding supervision, acquisition and construction of the Project, except as limited herein. Section 3. Contracts, Bids and Payments. The City, as agent of the Corporation, may enter into any purchase order, agreement or contract required for acquisition and construction of the Project upon being assured that moneys sufficient for the payment thereof are then on deposit in the Acquisition and Construction Fund created pursuant to the Trust Agreement. The benefits of all bids received by the City for the Project shall be and shall be deemed to be assigned by the City to the Corporation. Section 4. Project Description. The City, as agent of the Corporation, shall have the right to make any changes in the description of the Project or of any component thereof whenever the City deems such changes to be necessary and appropriate; provided, however, that the amounts in the Acquisition and Construction Fund are sufficient to pay Acquisition and Construction Costs resulting from such changes. Section 5. Supervision of Acquisition, Construction, Equipping and Installation. The City, as agent of the Corporation, shall have sole responsibility for, and shall supervise, acquisition and construction of the Project. The City shall monitor the performance by any contractor to the extent the City deems appropriate. The City shall permit the Corporation or its assignee to inspect the Project at any and all reasonable times which are deemed appropriate by the Corporation or its assignee. Section 6. Enforcement of Contracts. The Corporation hereby assigns to the City all rights and powers to enforce and execute in its own name or the name of the Corporation such purchase orders or contracts as are required for the Project which enforcement may be at law or in equity; provided, however, that the assignment made by the Corporation herein shall not prevent the Corporation or its assignee from asserting said rights and powers in its own behalf following written notice to the City. Section 7. Fixed Price. The Corporation shall not be responsible for payment of, nor shall it pay nor permit to be paid by the Trustee pursuant to the Trust Agreement, any amount for the Project in excess of the amount available therefor in the Acquisition and Construction Fund held by Trustee pursuant to the Trust Agreement. The City shall pay said excess amount to the extent of lawfully available funds. Section 8. Inspection of Records. The Corporation shall have the right to inspect periodically the books and records of the City relating to the Project, and the City shall permit the Corporation to make such inspections thereof at all reasonable times as the City shall deem appropriate. Section 9. Time of Completion. The acquisition and construction of the Project shall be completed by the Completion Date. Section 10. Specifications. The City agrees that it will assure that the Project will be acquired, constructed and installed in accordance with final plans and specifications approved by the City. Upon completion of acquisition and construction of the Project, the City will assure that there is filed with the Trustee a certificate executed by an Authorized Officer of the City and stating that such acquisition and construction of the Project has been completed in accordance with specifications therefor approved by the City. Section 11. Performance Security. The City may, if it deems appropriate, require the provision of bid bonds or performance bonds in such percentage of the bid or contract price as it deems desirable in advertising for and in awarding contracts or making purchase orders. -2- IN WITNESS WHEREOF, the Corporation and the City have caused this Agency Agreement to be executed in their respective names by their duly authorized officers, all as of the date first above written. CITY OF CARLSBAD PUBLIC IMPROVEMENT CORPORATION By President Attest Secretary CITY OF CARLSBAD By Mayor Attest City Clerk -3- EXHIBIT 5 Certificates of Participation (Hosp Grove Project) Evidencing the Undivided Fractional Interests of the Owners Thereof in Lease Payments to be made by the CITY OF CARLSBAD, CALIFORNIA As Rental for Certain Property Pursuant to a Lease Agreement with the CITY OF CARLSBAD PUBLIC IMPROVEMENTS CORPORATION PURCHASE CONTRACT June , 1988 City of Carlsbad, California 1200 Elm Avenue Carlsbad, California 92008 Ladies and Gentlemen: The undersigned (the "Underwriter") hereby offers to enter into this Purchase Contract (the "Purchase Contract") with you, the City of Carlsbad, California (the "City"), for the purchase by the Underwriter and execution and delivery to be caused by you and The Bank of California, N.A., as trustee (the "Trustee") under the Trust Agreement, dated as of June 1, 1988 between the City, the City of Carlsbad Public Improvements Corporation (the "Corporation") and the Trustee (the "Trust Agreement") of the Certificates of Participation described herein. This offer is made subject to acceptance by you prior to 11:00 o'clock p.m., California time, on the date hereof. If this offer is not so accepted, this offer will be subject to withdrawal by the Underwriter upon notice delivered to you at any time prior to acceptance. Upon acceptance, this Purchase Contract shall be in full force and effect in accordance with its terms and shall be binding upon the City and the Underwriter. 1739043/2 1. Purchase, Sale and Delivery of the Certificates. (a) Subject to the terras and conditions and in reliance upon the representations, warranties and agreements set forth herein, the Underwriter hereby agrees to purchase and the City agrees to cause the Trustee to execute and deliver to the Underwriter all (but not less than all) of the Certificates of Participation (Hosp Grove Project) (the "Certificates") in aggregate principal amount of $ , each evidencing undivided fractional interests of the registered owners ("the Owners") thereof in lease payments (the "Lease Payments") to be made by the City pursuant to, and as defined in, the Lease Agreement entered into as of June 1, 1988 (the "Lease Agreement"), between the City and the Corporation, as the rental for certain public facilities as more fully described and defined in the Lease Agreement. The proceeds of the Certificates will be used to pay on June 30, 1988 the principal and interest due and payable on the City's $6,555,000 1987 Notes and to construct street improvements to certain thoroughfares in the City and corresponding storm drains. The Corporation will assign certain of its interests in the Lease Agreement, including the right to receive Lease Payments, to the Trustee pursuant to the Assignment Agreement, dated as of June 1, 1988 (the "Assignment Agreement"), between the Corporation and the Trustee. The City and the Corporation will enter into an Agency Agreement, dated as of June 1, 1988, pursuant to which the City will construct, or cause to be constructed, those portions of the Project to be constructed (the "Agency Agreement"). The aggregate purchase price for the Certificates shall be par less $ ( %) underwriting discount and $ original issue discount plus accrued interest to the Closing Date (as hereinafter defined). The Certificates shall be substantially in the form described in, and shall be executed, delivered and secured under and pursuant to, and shall be payable and subject to redemption as provided in, the Trust Agreement. The Certificates will represent the payment of principal and interest components of Lease Payments due under the Lease Agreement from June l, 1988, with such interest payable semiannually on February 1 and August l in each year commencing on February 1, 1989. A Preliminary Official Statement dated June , 1988 (including the cover page and all appendices, exhibits and statements thereon or attached thereto being herein called the "Preliminary Official Statement," and, with such 1739043/2 changes as are accepted by the Underwriter being herein called the "Official Statement") has been delivered to us in connection with the Certificates. The Certificates, the Trust Agreement and the Assignment Agreement shall be collectively referred to herein as the "Financing Documents," and the Financing Documents and the Lease Agreement and the Agency Agreement shall be collectively referred to herein as the "Legal Documents." (b) At 8:00 o'clock A.M., California time, on June 28, 1988, or at such other time or on such other date as we mutually agree upon (the "Closing Date"), the Trustee will deliver or cause to be delivered to the Underwriter or its representative, at a location or locations to be designated by the Underwriter in New York, New York, the Certificates in definitive form (all of the Certificates to be lithographed with steel engraved borders and to bear CUSIP numbers), duly executed, together with the other documents mentioned herein. The Underwriter will accept such delivery and pay the purchase price of the Certificates as set forth in subparagraph (a) above by wire transfer or by certified or official bank check or checks payable in federal funds (such delivery and payment being herein referred to as the "Closing") to the order of the Trustee on behalf of the City in an amount equal to the purchase price. The Certificates will be made available to the Underwriter for inspection and packaging, at an office which we may mutually agree upon, not less than two business days prior to the Closing. The Certificates shall be delivered as fully registered Certificates in such denominations and registered in such names as the Underwriter shall request by written notice not later than four business days prior to the Closing Date. (c) The Underwriter agrees to make a bona fide public offering of the Certificates at the initial offering prices set forth in the Official Statement, which prices may be changed from time to time by the Underwriter after such offering. 2. Representations, Warranties and Agreements of the City. The City hereby represents, warrants and agrees with the Underwriter as follows: (a) both at the date hereof and at the date of Closing, the statements and information contained in the Official Statement pertaining to the City are and will be 1739043/2 true, correct and complete in all material respects and the Official Statement does not and will not omit any statement or information pertaining to the City which is necessary to make the statements and information therein, in the light of the circumstances under which they were made, not misleading in any material respect; (b) the City is and will be on the Closing Date a municipal corporation and general law city of the State of California organized and operating pursuant to the Constitution and laws of the State of California with the full power and authority to execute and deliver the Official Statement, and to enter into the Legal Documents to be executed by it and this Purchase Contract; (c) by official action of the City prior to or concurrently with the acceptance hereof, the City has duly approved, ratified and confirmed the distribution of the Preliminary Official Statement and the execution, delivery and distribution of the Official Statement, and has duly authorized and approved the execution and delivery of, and the performance by the City of the obligations on its part contained in, the Legal Documents and the consummation by it of all other transactions contemplated by the Official Statement and this Purchase Contract; (d) the execution and delivery of the Legal Documents to be executed by the City, this Purchase Contract and the Official Statement, and compliance with the provisions on the City's part contained herein and therein, will not in any material respect conflict with or constitute a breach of or default under any law, administrative regulation, judgment, decree, loan agreement, indenture, bond, note, resolution, agreement or other instrument, which the City is a party or is otherwise subject, nor will any such execution, delivery, adoption or compliance result in the creation or imposition of any lien, charge or other security interest or encumbrance of any nature whatsoever upon any of the properties or assets of the City under the terms of any such law, administrative regulation, judgment, decree, loan agreement, indenture, bond, note, resolution, agreement or other instrument, except as provided in the Legal Documents; (e) the City is not in any material respect in breach of or default under any applicable law or administrative regulation of the State of California or the United States or any applicable judgment or decree or any loan agreement, indenture, bond, note, resolution, agreement or other instrument to which the City is a party or is otherwise 1739043/2 subject, and no event has occurred and is continuing which, with the passage of time or the giving of notice or both, would constitute a default or an event of default under any such instrument; (f) there is no known action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, governmental agency, public board or body, pending or threatened against the City in any material respect affecting the existence of the City or the titles of its officers to their respective offices or seeking to prohibit, restrain or enjoin the sale, execution or delivery of the Certificates or the payment of Lease Payments or in any way contesting or affecting the validity or enforceability of the Certificates, the Legal Documents or this Purchase Contract or contesting the powers of the City or its authority to enter into, adopt or perform its obligations under any of the foregoing, or contesting in any way the completeness or accuracy of the Preliminary Official Statement or the Official Statement, or any amendment or supplement thereto, wherein an unfavorable decision, ruling or finding would materially adversely affect the validity or enforceability of the Legal Documents or this Purchase Contract; (g) the City will furnish such information, execute such instruments and take such other action in cooperation with the Underwriter as the Underwriter may reasonably request in order (i) to qualify the Certificates for offer and sale under the Blue Sky or other securities laws and regulations of such states and other jurisdictions of the United States as the Underwriter may designate and (ii) to determine the eligibility of the Certificates for investment under the laws of such states and other jurisdictions, and will use its best efforts to continue such qualification in effect so long as required for distribution of the Certificates; provided, however, that in no event shall the City be required to take any action which would subject it to general or unlimited service of process in any jurisdiction in which it is not now so subject; (h) if between the date hereof and the date of the Closing an event occurs, of which the City has knowledge, which might or would cause the information contained in the Official Statement, as then supplemented or -amended, to contain an untrue statement of a material fact or to omit to state a material fact required to be stated therein or necessary to make such information therein, in the light of the circumstances under which it was presented, not 1739043/2 misleading, the City will notify the Trustee, the Underwriter and the Corporation, and, if in the opinion of the City, the Trustee, Underwriter or the Corporation, or their respective counsel, such event requires the preparation and publication of a supplement or amendment to the Official Statement, the City will cooperate in the preparation of an amendment or supplement to the Official Statement in a form and manner approved by the Underwriter, and shall pay all expenses thereby incurred; (i) if the information contained in the Official Statement is amended or supplemented pursuant to paragraph (h) hereof, at the time of each supplement or amendment thereto and (unless subsequently again supplemented or amended pursuant to such subparagraph) at all times subsequent thereto up to and including the Closing Date, the portions of the Official Statement so supplemented or amended (including any financial and statistical data contained therein) will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make such information therein, in the light of the circumstances under which it was presented, not misleading; and (j) the City shall indemnify and hold harmless the Underwriter and employees and each person who controls the Underwriter within the meaning of Section 15 of the Securities Act of 1933, as amended (such Act being herein called the "Act" and any such person being herein sometimes called an "Indemnified Party"), against any and all losses, claims, damages or liabilities, joint or several, to which such Indemnified Party may become subject under any statute or at law or in equity or otherwise arising out of this transaction, and shall reimburse any such Indemnified Party for any legal or other expenses incurred by it in connection with investigating any claims against it and defending any actions, insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon (i) an allegation or determination that the Certificates should have been registered under the Act or the Trust Agreement should have been qualified under the Trust Indenture Act of 1939, as amended, or (ii) any untrue statement or alleged untrue statement of a material fact contained in the Official Statement (including the Appendices thereto), or any amendment thereof or supplement thereto, or the omission or alleged omission to state therein a material fact necessary to make the statements therein not misleading; provided, however, that the City shall not be liable in any such case to the extent that any 1739043/2 such loss, claim, damage, liability or action arises out of, or is based upon, any untrue statement or alleged untrue statement of a material fact contained in that particular part of the Official Statement, or any amendment thereof or supplement thereto, under the caption "underwriting" (in the case of the Underwriter), or the omission or alleged omission to state under any of such captions a material fact necessary to make the respective statements therein not misleading. This indemnity agreement shall not be construed as a limitation on any other liability which the City may otherwise have to any Indemnified Party; An Indemnified Party shall, promptly after the receipt of notice of the commencement of any action against such Indemnified Party in respect of which indemnification may be sought against the City, notify the City in writing of the commencement thereof, but the omission to notify the City of any such action shall not relieve the City from any liability which it may have to such Indemnified Party otherwise than under the indemnity agreement contained herein. In case any such action shall be brought against an Indemnified Party and such Indemnified Party shall notify the City of the commencement thereof, the City may, or if so requested by such Indemnified Party shall, participate therein or assume the defense thereof, with counsel satisfactory to such Indemnified Party, and after notice from the City to such Indemnified Party of an election so to assume the defense thereof, the City will not be liable to such Indemnified Party under this paragraph for any legal or other expenses subsequently incurred by such Indemnified Party in connection with the defense thereof other than reasonable costs of investigation. If the City shall not have employed counsel to have charge of the defense of any such action or if an Indemnified Party shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to the City (in which case the City shall not have the right to direct the defense of such action on behalf of such Indemnified Party), such Indemnified Party shall have the right to retain legal counsel of its own choosing and legal and other expenses incurred by such Indemnified Party shall be borne by the City; The City shall not be liable for any settlement of any such action effected without its consent by any Indemnified Party, but if settled with the consent of the City or if there be a final judgment or award for the plaintiff in any such action against the City or any Indemnified Party, with 1739043/2 or without the consent of the City, the City agrees to indemnify and hold harmless such Indemnified Party for the amount of any such settlement, final judgment or award; In order to provide for just and equitable contribution in circumstances in which indemnification hereunder is for any reason held to be unavailable from the City, the City and the Underwriter shall contribute to the aggregate losses, claims, damages and liabilities (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claims asserted, to which the City and the Underwriter may be subject) in such proportion so that the Underwriter is responsible for that portion represented by the percentage that the underwriting discount set forth in the Official Statement bears to the public offering price appearing thereon and the City is responsible for the balance; provided, however, that no person guilty of fraudulent misrepresentation (within the meaning of Section ll(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this paragraph, each person, if any, who controls the Underwriter within the meaning of the Act shall have the same rights to contribution as the Underwriter. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties under this paragraph, notify such party or parties from whom contribution may be sought, but the omission to so notify such party from whom contribution may be sought shall not relieve the party or parties from whom contribution may be sought from any other obligation it or they may have hereunder or otherwise than under this paragraph. No party shall be liable for contribution with respect to any action or claim settled without its consent. 3. Conditions to the Obligations of the Underwriter. The Underwriter hereby enters into this Purchase Contract in reliance upon the representations and warranties of the City contained herein and the representations and warranties to be contained in the documents and instruments to be delivered at the Closing and upon the performance by the City, the Corporation and the Trustee of their obligations- both on and as of the date hereof and as of the Closing Date. Accordingly, the Underwriter's obligations under this Purchase Contract to purchase, to accept delivery of and to pay for the Certificates shall be subject, at the option of the Underwriter, to the 1739043/2 accuracy in all material respects of the representations and warranties of the City contained herein as of the date hereof and as of the Closing Date, to the accuracy in all material respects of the statements of the officers and other officials of the Trustee and the City made in any certificate or other document furnished pursuant to the provisions hereof, to the performance by the City, the Corporation and the Trustee of their respective obligations to be performed hereunder and under the Legal Documents as herein defined at or prior to the Closing Date, and also shall be subject to the following additional conditions: (a) The representations and warranties of the City contained herein shall be true, complete and correct on the date hereof and on the Closing Date, as if made on and at the Closing; (b) At the Closing, the Legal Documents shall have been duly authorized, executed and delivered by the respective parties thereto, and the Official Statement shall have been duly authorized, executed and delivered by the City, all in substantially the forms heretofore submitted to the Underwriter, with only such changes as shall have been agreed to in writing by the Underwriter, and shall be in full force and effect; and there shall be in full force and effect such resolution or resolutions of the City as, in the opinion of Jones Hall Hill & White, A Professional Law Corporation ("Special Counsel"), shall be necessary or appropriate in connection with the transactions contemplated hereby; (c) Between the date hereof and the Closing Date, the market price or marketability, at the initial offering price set forth in the Official Statement, of the Certificates or the market price generally of obligations of the general character of the Certificates shall not have been materially adversely affected, in the reasonable judgment of the Underwriter (evidenced by a written notice to the City, the Corporation and the Trustee terminating the obligation of the Underwriter to accept delivery of and make any payment for the Certificates), by reason of any of the following statements of fact, regardless of whether the statements of fact were in existence or known on the date of this Purchase Contract: (1) legislation shall have been introduced in or enacted by the Congress of the United States or enacted by the Stare, or legislation pending in the Congress of the United States shall have been amended, or legislation shall have been recommended to the 1739043/2 Congress of the United States or otherwise endorsed for passage (by press release, other form of notice or otherwise) by the President of the United States, the Treasury Department of the United States, the Internal Revenue Service or the Chairman or ranking minority member of the Committee on Finance of the United States Senate or the Committee on Ways and Means of the United States House of Representatives, or legislation shall have been proposed for consideration by either such Committee by any member thereof or presented as an option for consideration by either such Committee by the staff of such Committee or by the staff of the Joint Committee on Taxation of the Congress of the United States, or legislation shall have been favorably reported for passage to either House of the Congress of the United States by a Committee of such House to which such legislation has been referred for consideration, or a decision shall have been rendered by a court of the United States or the State, including the Tax Court of the United States, or a ruling shall have been made or a regulation shall have been proposed or made or a press release or other form of notice shall have been issued by the Treasury Department of the United States, or the Internal Revenue Service or other authority of the United States or the State, with respect to Federal taxation or taxation by the State upon revenues or other income of the general character to be derived by the City or by any similar body, or upon interest on obligations of the general character of the Certificates, which may have the purpose or effect, directly or indirectly, of affecting the tax status of the City, its property or income, its securities (including the Certificates) or the interest thereon, or any tax exemption granted or authorized by legislation of the State; (2) the declaration of war or engagement in major military hostilities by the United States or the occurrences of any other national emergency or calamity relating to the effective operation of the government of or the financial community in the United States; (3) the declaration of a general banking moratorium by federal, New York or California authorities, or the general suspension of trading on any national securities exchange; 10 1739043/2 (4) the imposition by the New York Stock Exchange or other national securities exchange, or any governmental authority, of any material restrictions not now in force with respect to the Certificates or obligations of the general character of the Certificates or securities generally, or the material increase of any such restrictions now in force, including those relating to the extension of credit by, or the charge to the net capital requirements of, the Underwriter; (5) legislation enacted (or resolution passed) by or introduced or pending legislation amended in the Congress or recommended for passage by the President of the United States, or an order, decree or injunction issued by any court of competent jurisdiction, or an order, ruling, regulation (final, temporary or proposed) or press release issued or made by or on behalf of the Securities and Exchange Commission, or any other governmental agency having jurisdiction of the subject matter, to the effect that obligations of the general character of the Certificates, or the Certificates, including any or all underlying arrangements, are not exempt from registration under the Securities Act of 1933, as amended, or that the Trust Agreement is not exempt from qualification under the Trust Indenture Act of 1939, as amended, or that the issuance, offering or sale of obligations of the general character of the Certificates, or of the Certificates, including any or all underlying arrangements, as contemplated hereby or by the Official Statement, otherwise is or would be in violation of the federal securities laws as amended and then in effect; (6) the withdrawal or downgrading of any rating of the Certificates by a national rating agency; or (7) any event occurring, or information becoming known which, in the judgment of the Underwriter, makes untrue in any material respect any statement or information contained in the Official Statement, or has the effect that the Official Statement contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and 11 1739043/2 (d) At or prior to the Closing Date, the Underwriter shall have received the following documents, in each case satisfactory in form and substance to the Underwriter: (1) The Legal Documents, each duly executed and delivered by the respective parties; (2) The approving opinion, dated the Closing Date and addressed to the City, of Special Counsel in substantially the form attached hereto as Exhibit A, and a letter of such counsel, dated the Closing Date and addressed to the Underwriter and to the Trustee, to the effect that such opinion may be relied upon by the Underwriter and the Trustee to the same extent as if such opinion were addressed to them; (3) The supplemental opinion, dated the 'Closing Date and addressed to the Underwriter, of Special Counsel, substantially to the effect that (i) the Official Statement has been duly approved by the City and the Purchase Contract has been duly authorized, executed and delivered by the City; (ii) the statements contained in the Official Statement on the cover and under the captions "Introduction", "The Certificates", "Security for the Certificates", "Certificate Owners' Risk", and "Approval of Legal Proceedings", and in Appendix B "Summary of Principal Legal Documents", insofar as such statements purport to summarize certain provisions of the Certificates, the Lease Agreement, the Trust Agreement, the Assignment Agreement and State of California law, and under the caption "Tax Exemption", insofar as such statements purport to summarize the opinion of Special Counsel and Federal tax law, present an accurate summary of such provisions; (iii) nothing came to such counsel's attention that would lead them to believe that the Official Statement, as of the date thereof or the Closing, contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (except such counsel need express no view as to financial statements and the statistical data contained in the Official Statement); and (iv) except as described in the Official Statement, no authorization, approval, consent, or other order of the State of California or any other governmental authority or agency within the State of California having jurisdiction over the City is required for the valid authorization, execution, 12 1739043/2 delivery and performance by the City of the Legal Documents to which the City is a party, the Official Statement or the Purchase Contract or for the adoption of the Resolutions which has not been obtained. (4) The opinion of the City Attorney of the City, dated the Closing Date and addressed to the Underwriter, to the effect that (i) the City is a municipal corporation and general law city of the State of California; (ii) the resolution or resolutions of the City approving and authorizing the execution and delivery by the City of the Legal Documents to which the City is a party, the Purchase Contract and the Official Statement (the "Resolutions") were duly adopted at meetings of the City Council of the City which were called and held pursuant to law and with all public notice required by law and at which a quorum was present and acting throughout; (iii) there is no action, suit, proceeding, inquiry or investigation at law or in equity before or by any court, governmental agency, public board or body, pending or threatened against the City, to restrain or enjoin the Lease Payments under the Lease Agreement, or in any way contesting the validity of the Certificates, the Legal Documents or the Purchase Contract; (iv) the execution and delivery of the Legal Documents to which the City is a party, the Purchase Contract and the Official Statement, the adoption of the Resolutions, and compliance by the City with the provisions of the foregoing, under the circumstances contemplated thereby, do not and will not in any material respect conflict with or constitute on the part of the City a breach or default under any agreement or other instrument to which the City is a party or by which it is bound; (v) the Official Statement has been duly authorized, executed and delivered; (vi) the Legal Documents to which the City is a party and the Purchase Contract have been duly authorized, executed and delivered by the City and, assuming due authorization, execution and delivery by the other parties thereto, constitute legal, valid and binding agreements of the City enforceable in accordance with their respective terms, subject to laws relating to bankruptcy, insolvency or other laws affecting the enforcement of creditors' rights genera-lly and the application of equitable principles if equitable remedies are sought; and (vii) the statements contained in the Official Statement under the captions "The Project", "City Financial Information", "General 13 1739043/2 City Information", "Economic Profile of the City" and "Absence of Litigation" are true and correct in all material respects; (5) The opinion, dated the Closing Date and addressed to the Underwriter, of Counsel to the Trustee, in substantially the form of Exhibit B hereto, together with an unqualified opinion of such counsel, dated the Closing Date and addressed to the City, to the effect that such opinion may be relied upon by the City to the same extent as if such opinion were addressed to the City; (6) The opinion of counsel to the Corporation, dated the Closing Date and addressed to the City and the Underwriter, to the effect that (i) the Corporation is a nonprofit public benefit Corporation organized and validly existing pursuant to the laws of the State of California; (ii) the resolution or resolutions of the Corporation (the "Corporation Resolution") approving and authorizing the execution and delivery by the Corporation of the Legal Documents to which it is a party were duly adopted at meetings of the Corporation which were called and held pursuant to law and with all public notice required by law and at which a quorum was present and acting throughout; (iii) the Legal Documents to which the Corporation is a party have been duly authorized, executed and delivered by the Corporation; (iv) there is no action, suit, proceeding, inquiry or investigation at law or in equity before or by any court, governmental agency, public board or body, pending or threatened against the Corporation in any way contesting the validity of the Legal Documents; and (v) the execution and delivery of the Legal Documents to which the Corporation is a party, the adoption of the Corporation Resolution and compliance by the Corporation with the provisions of the foregoing, under the circumstances contemplated thereby, do not and will not in any material respect conflict with or constitute on the part of the Corporation a breach or default under any agreement or other instrument to which the Corporation is a party or by which it is bound. (7) The opinion, dated the Closing Date and addressed to the Underwriter on behalf of the Underwriter, of Brown & Wood, San Francisco, California, counsel for the Underwriter ("Underwriter's Counsel") to the effect that (a) the 14 1739043/2 Certificates are exempt from registration under the Securities Act of 1933, as amended, and the Trust Agreement is exempt from qualification under the Trust Indenture Act of 1939, as amended; and (b) based upon the information made available to them in the course of their participation in the preparation of the Official Statement as counsel for the Underwriter and without having undertaken to determine independently, and acknowledging that the limitations inherent in their examination and in the knowledge available to them renders them unable to assume, and therefore without assuming, any responsibility for, the accuracy, completeness or fairness of the statements contained in the Official Statement, nothing has come to their attention which would lead them to believe that the Official Statement (excluding therefrom financial statements and the statistical data included in the Official Statement, as to which no opinion need be expressed) contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (8) A certificate or certificates, dated the Closing Date, signed by a duly authorized official of the City satisfactory to the Underwriter, in form and substance satisfactory to the Underwriter, to the effect that (a) the representations and warranties of the City contained in the Purchase Contract are true and correct in all material respects on and as of the Closing Date with the same effect as if made on the Closing Date; (b) no litigation is pending or threatened (i) to restrain or enjoin the execution, sale or delivery of any of the Certificates or the Lease Payments under the Lease Agreement, (ii) in any way contesting or affecting the validity of the Certificates, the Purchase Contract, or the Legal Documents to which the City is a party, or (iii) in any way contesting the existence or powers of the City; and (c) no event affecting the City has occurred since the date of the Official Statement which either makes untrue or incorrect in any material respect as of the Closing Date any statement or information contained in the Official Statement relating to the City or is not reflected in the Official Statement but should be reflected therein in order to make the statements and information therein relating to the City not misleading in any material respect; 15 1739043/2 (9) A certificate or certificates, dated the Closing Date, signed by a duly authorized official of the Corporation satisfactory to the Underwriter, in form and substance satisfactory to the Underwriter, to the effect that (a) no litigation is pending or threatened in any way contesting or affecting the validity of the Purchase Contract or the Legal Documents to which the Corporation is a party, (b) no event affecting the Corporation has occurred since the date of the Official Statement which either makes untrue or incorrect in any material respect as of the Closing Date any statement or information contained in the Official Statement relating to the Corporation or is not reflected in the Official Statement but should be reflected therein in order to make the statements and information therein relating to the Corporation not misleading in any material respect; and (c) the execution and delivery of the Assignment Agreement by the Corporation is effective and sufficient to transfer, for the benefit of the Owners, its right (i) to receive and collect Lease Payments, (ii) to receive and collect proceeds of condemnation of, and insurance on the Project, and (iii) to enforce payment of amounts due under the Lease Agreement upon default by the City, and such transfer is perfected against and is not subject to the claims of any person claiming by or through the Corporation or of present or future creditors of the Corporation; (10) A certificate, dated the date of Closing, signed by a duly authorized official of the Trustee, satisfactory in form and substance to the Underwriter, to the effect that: (a) the Trustee is a national banking association duly organized and existing under and by virtue of the laws of the United States of America; (b) the Trustee is duly authorized to enter into and perform its duties under the Trust Agreement and the Assignment Agreement and to acknowledge the Purchase Contract and to execute and deliver the Certificates to the Underwriter pursuant to the Trust Agreement; (c) when delivered to and paid fo-r by the Underwriter at the Closing, the Certificates will have been duly executed and delivered by the Trustee; 16 1739043/2 (d) the execution and delivery of the Financing Documents to which the Trustee is a party, and compliance with the provisions on the Trustee's part contained therein, will not conflict with or constitute a breach of or default under any law, administrative regulation, judgment, decree, loan agreement, indenture, bond, note, resolution, agreement or other instrument to which the Trustee is a party or is otherwise subject (except that no representation, warranty or agreement is made with respect to any federal or state securities or blue sky laws or regulations), nor will any such execution, delivery, adoption or compliance result in the creation or imposition of any lien, charge or other security interest or encumbrance of any nature whatsoever upon any of the properties or assets held by the Trustee pursuant to the lien created by the Trust Agreement under the terms of any such law, administrative regulation, judgment, decree, loan agreement, indenture, bond, note, resolution, agreement or other instrument, except as provided by the Trust Agreement; (e) the Trustee has no knowledge of any action, suit, proceeding, inguiry or investigation, at law or in equity, before or by any court, governmental agency, public board or body, pending or threatened against the Trustee, as such but not in its individual capacity, affecting the existence of the Trustee, or the titles of its officers to their respective offices or seeking to prohibit, restrain or enjoin the execution and delivery of the Certificates or the collection of revenues pledged or to be pledged to pay the principal, premium, if any, and interest with respect to the Certificates, or the pledge thereof, or in any way contesting or affecting the validity or enforceability of the Financing Documents, or contesting the powers of the Trustee or its authority to enter into, adopt or perform its obligations under any of the foregoing, wherein an unfavorable decision, ruling or finding would materially adversely affect the validity or enforceability of the Financing Documents; and (f) subject to the provisions of the Trust Agreement and applicable law, the Trustee will apply the proceeds from the Certificates to the purposes specified in the Trust Agreement; 17 1739043/2 (11) Two copies of the Legal Documents duly executed and delivered by the parties thereto; (12) Two copies of the Official Statement, executed on behalf of the City by an authorized representative of the City; (13) Two certified copies of the general resolution of the Trustee authorizing the execution and delivery of the Legal Documents to which the Trustee is a party; (14) Two certified copies of the resolutions of the City authorizing the execution and delivery of the Legal Documents to which the City is a party, the Official Statement and the Purchase Contract; (15) Two certified copies of the resolutions of the Corporation authorizing the execution and delivery of the Legal Documents to which the Corporation is a party; (16) Evidence that any ratings described in the Official Statement are in full force and effect as of the Closing Date; (17) Two copies of the Blue Sky Memorandum with respect to the Certificates, prepared by Underwriter's Counsel; (18) A certificate, dated the date of Closing, signed by a duly authorized official of the City concerning "No-arbitrage" in form satisfactory to Special Counsel; (19) Such additional legal opinions, certificates, proceedings, instruments, title insurance, other insurance policies or evidences thereof and other documents as the Underwriter, Underwriter's Counsel or Special Counsel may reasonably reguest to evidence the truth and accuracy, as of the date hereof and as of the Closing Date, of the representations of the City and the Corporation herein and of the statements and information contained in the Official Statement, and the due performance or satisfaction by the Trustee, the City and the Corporation at or prior to the Closing of all agreements then to be performed and all conditions then to be satisfied by any of them in connection with the transactions contemplated hereby and by the Legal Documents. 18 1739043/2 If the conditions to the Underwriter's obligations contained in this Purchase Contract are not satisfied or if the Underwriter's obligations shall be terminated for any reason permitted herein, all obligations of the Underwriter hereunder may be terminated at, or at any time prior to, the Closing Date by written notice to the City, the Corporation and the Trustee. 4. Expenses. All expenses and costs incident to the authorization, execution, delivery and sale of the Certificates to the Underwriter, including the costs of printing and preparation of the Certificates, the Preliminary Official Statement, the Official Statement and the Blue Sky Memorandum and Legal Investment Survey, the word processing fees and distribution expenses of Underwriter's Counsel with respect to the preparation of the Preliminary Official Statement and the Official Statement, the cost of duplicating the Legal Documents, the fees of accountants, consultants and rating agencies, the Underwriter's computer fees, federal funds interest expense and out-of-state travel expense incurred in conjunction with presentations to rating agencies, the initial fee of the Trustee and its counsel in connection with the sale of the Certificates and the fees and expenses of Special Counsel and Counsel for the Trustee, the City and the Corporation and insurance premiums associated with the procurement of title insurance and any other insurance required in the financing shall be paid from the proceeds of the Certificates. In the event that the Certificates for any reason are not executed and delivered, or to the extent proceeds of the Certificates are insufficient or unavailable therefor, any fees, costs and expenses owed by the City or the Trustee, which otherwise would have been paid from the proceeds of the Certificates, shall be paid by the City. All out-of-pocket expenses of the Underwriter, including in-state travel and other expenses, and the fees and expenses of Underwriter's Counsel and California Debt Advisory Commission reporting fees, shall be paid by the Underwriter. 5. Notices. Any notice or other communication to be given to the Trustee, the Corporation, the City or the Underwriter under this Purchase Contract may be given by delivering the same in writing to the respective party at the following address: Underwriter: Rauscher Pierce Refsnes, Inc. One California Street, #2630 San Francisco, CA 94111 19 1739043/2 Trustee: Corporation: City: City of Carlsbad 1200 Elm Avenue Carlsbad, California 92008 Attention: City Manager The Bank of California, N.A. 400 California Street San Francisco, California 94107 City of Carlsbad Public Improvements Corporation c/o City of Carlsbad 1200 Elm Avenue Carlsbad, California 92008 Attention: City Manager 6. Survival of Representations and Warranties. The representations and warranties of the City set forth in or made pursuant to this Purchase Contract shall not be deemed to have been discharged, satisfied or otherwise rendered void by reason of the Closing or termination of this Purchase Contract and regardless of any investigations or statements as to the results thereof made by or on behalf of the Underwriter and regardless of delivery of and payment for the Certificates. 8. Effectiveness. 1739043/2 20 This Purchase Contract shall become effective and binding upon the respective parties hereto upon the execution of the acceptance hereof by duly authorized officers of the City and the acknowledgement hereof by the duly authorized officer of the Trustee and shall be valid and enforceable as of the time of such acceptance. Very truly yours, RAUSCHER PIERCE REFSNES, INC. By: Virginia L. Horler, Vice President ACCEPTED: CITY OF CARLSBAD, CALIFORNIA By: 21 1739043/2 ACKNOWLEDGEMENT The undersigned hereby acknowledges receipt of an executed copy of the Purchase Contract, dated , and agrees that, upon the execution and delivery of the Trust Agreement and its acceptance of the appointment of Trustee thereunder, it shall execute and deliver the Certificates in accordance with the terms of such Purchase Contract to the extent such terms are consistent with the terms of the Trust Agreement. THE BANK OF CALIFORNIA, N.A., as Trustee By:Authorized Officer 22 1739043/2 EXHIBIT A [FORM OF FINAL OPINION OF SPECIAL COUNSEL] [Closing Date] City Council City of Carlsbad 1200 Elm Avenue Carlsbad, CA 92008 OPINION: Certificates of Participation (Hosp Grove Project) Representing Fractional Interests of the Owners thereof in Lease Payments to be made by the City of Carlsbad as the Rental of Certain Property Pursuant to a Lease Agreement with the City of Carlsbad Public Improvements Corporation Members of the City Council: We have acted as special counsel in connection with the delivery by the City of Carlsbad (the "City") of the $ Lease Agreement, dated June 1, 1988, between the City of Carlsbad Public Improvements Corporation (the "Lessor") and the City (the "Lease Agreement") pursuant to Section 37350 of the California Government -Code. The Lessor has, pursuant to the Assignment Agreement, dated June l, 1988 (the "Assignment Agreement"), between the Lessor and The Bank of California, N.A., as trustee (the "Trustee"), assigned certain of its rights under the Lease Agreement, including the right to receive lease payments made by the City thereunder (the "Lease Payments"), to the Trustee. Pursuant to the Trust Agreement, dated June 1, 1988, among the Trustee, the Lessor and the City (the "Trust Agreement"), the Trustee has executed and delivered certificates of participation (the "Certificates") evidencing fractional interests of the owners thereof in Lease Payments. We have examined the law and such certified proceedings and other papers as we deem necessary to render this opinion. As to questions of fact material to our opinion, we have relied upon representations of the City contained in the Lease Agreement, the Trust Agreement and the certified proceedings and certifications of public officials and others furnished to us, without undertaking to verify the same by independent investigation. A-l 1739043/2 Based upon the foregoing, we are of the opinion, under existing law, as follows: 1. The City is duly created and validly existing as a municipal corporation and general law city with the power to enter into the Lease Agreement and the Trust Agreement and to perform the agreements on its part contained therein. 2. The Lease Agreement has been duly authorized, executed and delivered by the City and is an obligation of the City valid, binding and enforceable against the City in accordance with its terms. 3. The Trust Agreement and the Assignment Agreement are valid, binding and enforceable in accordance with their terms. 4. Subject to the terms and provisions of the Lease Agreement, the Lease Payments are payable from general funds of the City lawfully available therefor. By virtue of the Assignment Agreement, the owners of the Certificates are entitled to receive their fractional share of the Lease Payments in accordance with the terms and provisions of the Trust Agreement. 5. The portion of the Lease Payments designated as and comprising interest and received by the owners of the Certificates is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations; it should be noted, however, that, for the purpose of computing the alternative minimum tax imposed on such corporations (as defined for federal income tax purposes), such interest is taken into account in determining adjusted net book income (adjusted current earnings for taxable years beginning after December 31, 1989). The opinions set forth in the preceding sentence are subject to the condition that the City comply with all requirements of the Internal Revenue Code of 1986 that must be satisfied subsequent to the delivery of the Lease Agreement in order that such interest be, or continue to be, excluded from gross income for federal income tax purposes. The City has covenanted to comply with each such requirement. Failure to comply with certain of such requirements may cause the inclusion of such interest in gross income for federal income tax purposes to be retroactive to the date of delivery of the Lease Agreement. We express no opinion regarding other federal tax consequences arising with respect to the Lease Agreement and the Certificates. A-2 1739043/2 6. The portion of the Lease Payments designated as and comprising interest and received by the owners of the Certificates is exempt from personal income taxation imposed by the State of California. The rights of the owners of the Certificates and the enforceability of the Lease Agreement, the Trust Agreement and the Assignment Agreement may be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights heretofore or hereafter enacted and may also be subject to the exercise of judicial discretion in appropriate cases. Respectfully submitted, A Professional Law Corporation A-3 1739043/2 EXHIBIT B FORM OF TRUSTEE COUNSEL'S OPINION Re: City of Carlsbad, California Certificates of Participation (Hosp Grove Project) Ladies and Gentlemen: We have acted as special counsel to The Bank of California, N.A. (the "Bank"), in connection with the Trust Agreement, dated as of June 1, 1988, between the City of Carlsbad, California (the "City"), the City of Carlsbad Public Improvements Corporation (the "Corporation") and the Bank, as Trustee (the "Trust Agreement"), and the Assignment Agreement dated as of June l, 1988, between the Corporation and the Bank (the "Assignment Agreement"), and the execution and delivery of Certificates of Participation (Hosp Grove Project) (the "Certificates"). This opinion is rendered pursuant to the Purchase Contract, dated , 1988, by and between the City and Rauscher Pierce Refsnes, Inc. (the "Underwriter") (the "Purchase Contract"). In connection therewith, we have examined and reviewed such documents, and certificates of public officials, officers of the Bank and others as we have deemed necessary for the purposes of this opinion. In all such examinations, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original and certified documents of all copies submitted to us as conformed or photostatic copies, and the authenticity of the originals of all such latter documents. As to various questions of fact material to this opinion, we have relied, to the extent that we deemed such reliance proper, upon such certificates of officers of the Bank. We have examined an executed counterpart of each of the Trust Agreement, the Assignment Agreement and the Purchase Contract and have assumed the power, municipal or corporate, as the case may be, and the legal authority to execute and deliver the same of the other parties thereto and the due authorization, execution and delivery thereof by the other parties thereto. Based upon the foregoing, we are of the opinion that: 1. The Bank is a national banking association organized and existing under and by virtue of the laws of United States of America, having duly authorized, executed and delivered the Trust Agreement and the Assignment Agreement; B-l 1739043/2 2. The Trust Agreement and the Assignment Agreement constitute legally valid and binding agreements of the Bank, enforceable against the Bank in accordance with their terms; 3. The Certificates have been validly authorized, executed and delivered by the Bank and are legally valid and binding obligations, enforceable in accordance with their terms; 4. The execution and delivery of the Financing Documents, and compliance with the provisions on the Trustee's part contained therein, will not conflict with or constitute a breach of or default under any law, administrative regulation, judgment, decree, loan agreement, indenture, bond, note, resolution, agreement or other instrument to which the Trustee is a party or is otherwise subject (except that no representation, warranty or agreement is made with respect to any federal or state securities or Blue Sky laws or regulations), nor will any such execution, delivery, adoption or compliance result in the creation or imposition of any lien, charge or other security interest or encumbrance of any nature whatsoever upon any of the properties or assets held by the Trustee pursuant to the lien created by the Trust Agreement under the terms of any such law, administrative regulation, judgment, decree, loan agreement, indenture, bond, note, resolution, agreement or other instrument, except as provided by the Trust Agreement; and 5. There is no action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, governmental agency, public board or body, pending or threatened against the Trustee, as such but not in its individual capacity, affecting the existence of the Trustee, or the titles of its officers to their respective offices or seeking to prohibit, restrain or enjoin the execution and delivery of the Certificates or the collection of revenues pledged or to be pledged to pay the principal, premium, if any, and interest with respect to the Certificates, or the pledge thereof, or in any way contesting or affecting the validity or enforceability of the Financing Documents, or contesting the powers of the Trustee or its authority to enter into, adopt or perform its obligations under any of the foregoing, wherein an unfavorable decision, ruling or finding would materially adversely affect the validity or enforceability of the Financing Documents; Our opinion with respect to the foregoing documents is qualified by (i) the application of bankruptcy, insolvency, reorganization, arrangement, moratorium or similar laws of general application affecting creditors' rights; or (ii) the discretion of any court to refuse to order equitable relief, B-2 1739043/2 including specific performance of any clause of any such documents, whether such enforceability is considered in a proceeding in equity or at law. We express no opinion as to the applicability or effect of federal or state securities or tax laws on the Certificates or the interest payments made with respect thereto. This opinion is furnished by us to you solely for your benefit and we are not assuming any professional responsibility to any other person whomsoever. This opinion is not to be used, circulated, quoted or otherwise referred to for any other purpose. Very truly yours, B-3 1739043/2 EXHIBIT C CERTIFICATE PAYMENT SCHEDULE Payment Dates (August 1) Principal Amount Interest Rate Price $ % % C-l 1739043/2 EXHIBIT 6 PRELIMINARY OFFICIAL STATEMENT DATED MAY , 1988 NEW ISSUE In the opinion of Jones Hall Hill & White, A Professional Law Corporation, San Francisco, California, Special Counsel, subject, however to certain qualifications described herein, under existing law, the portion of Lease Payments designated as and comprising interest and received by the owners of the Certificates is excluded from gross income for federal income tax purposes, such interest is not an item of tax preference for purposes of the federal individual and corporate alternative minimum taxes, although it is included in adjusted net book income and current earnings in computing the alternative minimum tax imposed on certain corporations. In the further opinion of Special Counsel, such interest is exempt from California personal income taxes. See "TAX EXEMPTION" herein. $ Certificates of Participation (Hosp Grove Project) Evidencing the Undivided Fractional Interests of the Owners Thereof in Lease Payments to be Made by the CITY OF CARLSBAD, CALIFORNIA As Rental For Certain Property Pursuant to a Lease Agreement with the CITY OF CARLSBAD PUBLIC IMPROVEMENT CORPORATION Dated: June 1, 1988 Due: August 1, as shown below The Certificates are being executed and delivered to finance the payment of the principal and interest due and payable on June 30, 1988 with respect to the $6,555,000 City of Carlsbad 1987 Notes, issued in connection with the financing of the purchase by the City of Carlsbad (the "City") of Hosp Grove, and the construction of street improvements to thoroughfares adjacent to Hosp Grove and corresponding storm drains (Hosp Grove and the aforementioned street improvements and storm drains are herein collectively referred to as the "Project"). The City of Carlsbad (the "City") will lease the Project from the City of Carlsbad Public Improvement Corporation (the "Corporation") pursuant to a Lease Agreement, dated as of June 1, 1988, by and between the City and the Corporation (the "Lease Agreement"). 1739043/1 The Certificates are deliverable in fully registered form in the denomination of $5,000 or any integral multiple thereof. Principal and premium, if any, represented by the Certificates will be payable at the principal corporate trust office of The Bank of California, N.A., the trustee and registrar of the Certificates, in San Francisco, California. Interest represented by the Certificates is payable semiannually on each February 1 and August I, commencing February 1, 1989. Payment of interest represented by the Certificates shall be made by check or draft mailed to the registered owners at their addresses appearing on the Certificate registration books as of the 15th day of the month preceding each Interest Payment Date, except that in the case of an owner of $1,000,000 or greater in principal amount of outstanding Certificates, such payment may, at such owner's option, be made by wire transfer of immediately available funds in accordance with instructions provided by such owner. The Certificates are subject prior to maturity to optional redemption, mandatory redemption and special redemption, as described herein. The City has covenanted in the Lease Agreement that as long as the Project is available for the City's possession, it will take such action as may be necessary to include and maintain all Lease Payments for the Project in its annual budgets, and to make the necessary annual appropriations therefor. The obligation of the City to make Lease Payments under the Lease Agreement does not constitute an obligation of the City for which the City is obligated to levy or pledge any form of taxation. Neither the Certificates nor the obligation of the City to make Lease Payments constitute an indebtedness of the State of California, the City or any other political subdivision of the State of California, within the meaning of the Constitution of the State of California or otherwise. MATURITY SCHEDULE* $ Certificates Maturity Principal Interest Maturity Principal Interest (August 1) Amount Rate Price (August 1) Amount Rate Pric 1989 $ ?. % 1994 % % 1990 1995 1991 1996 1992 1997 1993 1998 $ % Certificates Due August 1, 2008 - Price % (Plus Accrued Interest) 1739043/1 The Certificates are offered when, as and if sold, executed and delivered, subject to the approval as to their legality by Jones Hall Hill & White, A Professional Law Corporation, San Francisco, California, Special Counsel. Certain legal matters will be passed upon for the Underwriter by Brown & Wood, San Francisco, California. It is anticipated that the Certificates in definitive form, will be available for delivery in New York, New York, on or about June 28, 1988. RAUSCHER PIERCE REFSNES, INC. Dated: June , 1988 Preliminary, subject to change. 1739043/1 CITY OF CARLSBAD, CALIFORNIA City Council Claude A. Lewis, Mayor Ann J. Kulchin, Mayor Pro Tempore Eric Larson John J. Mamaux Mark V. Pettine City of Carlsbad Public Improvement Corporation Board of Directors Claude A. Lewis, Chairman Ann J. Kulchin Eric Larson John J. Mamaux Mark V. Pettine City Officials Raymond R. Patchett, City Manager Frank N. Mannen, Assistant City Manager James F. Elliott, Finance Director Martin Orenyak, Community Development Director Vincent F. Biondo, Jr., City Attorney Aletha L. Rautenkranz, City Clerk Special Counsel Jones Hall Hill & White, A Professional Law Corporation San Francisco, California Trustee The Bank of California, N.A. San Francisco, California 1739043/1 No dealer, broker, salesperson or other person has been authorized by the City or the Corporation, to give any information or to make any representations other than those contained herein and, if given or made, such other information or representation must not be relied upon as having been authorized by the City, the Corporation, 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 Certificates 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 Certificates. 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 hot to be construed as a representation of facts. The information set forth herein has been obtained from official sources which are believed to be reliable but it is not guaranteed as to accuracy or completeness. The information and expression of opinions herein are subject to change without notice and neither delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Corporation or the City since the date hereof. All summaries of the Lease Agreement, Trust Agreement, or other documents, are made subject to the provisions of such documents respectively and do not purport to be complete statements of any or all of such provisions. Reference is hereby made to such documents on file with the City for further information in connection therewith. IN CONNECTION WITH THE OFFERING OF THE CERTIFICATES, THE UNDERWRITER MAY EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. ll 1739043/1 TABLE OF CONTENTS Introduction 1 The Project 3 Estimated Sources and Uses of Proceeds 3 The Certificates 4 Security for the Certificates 7 Certificate Owners' Risks 10 The Corporation 11 City Financial Information 12 General City Information 23 Economic Profile of the City 25 Tax Exemption 31 Approval of Legal Proceedings 32 Absence of Litigation 32 Rating 33 Underwriting 33 Miscellaneous 34 Appendix A - Excerpts of the 1986/87 Audited Financial Statements of the City A-l Appendix B - Summary of Principal Documents B-l Appendix C - Proposed Form of Legal Opinion C-l 111 1739043/1 (map of Carlsbad to be inserted here) IV 1739043/1 $ * CERTIFIGATES OF PARTICIPATION (Hosp Grove Project) Evidencing the Undivided Fractional Interests of the Owners Thereof in Lease Payments to be Made by the CITY OF CARLSBAD, CALIFORNIA As Rental For Certain Property Pursuant to a Lease Agreement with the CITY OF CARLSBAD PUBLIC IMPROVEMENT CORPORATION INTRODUCTION This Official Statement provides certain information concerning the sale and delivery of Certificates of Participation (Hosp Grove Project) (the "Certificates"), in the aggregate principal amount of $ *, which are to be executed and delivered for the purpose of financing the payment of the principal and interest due and payable on June 30, 1988 with respect to the $6,555,000 City of Carlsbad 1987 Notes issued in connection with the financing of the purchase by the City of Carlsbad, California (the "City") of Hosp Grove, approximately 52 acres of land located within the City to be held by the City for general municipal purposes and which is currently zoned open space ("Hosp Grove"), and the construction of street improvements to the thoroughfares adjacent to Hosp Grove and corresponding storm drains (Hosp Grove and the street improvements and storm drains are herein collectively referred to as the "Project"). The Certificates represent undivided fractional interests of the owners thereof in certain Lease Payments to be made by the City of Carlsbad, California (the "City"), for the possession of the Project pursuant to a Lease Agreement, dated as of June 1, 1988 (the "Lease Agreement"), between the City and City of Carlsbad Public Improvement Corporation (the "Corporation"), a nonprofit public benefit corporation duly organized and existing under the laws of the State of California. The Certificates are being executed and delivered pursuant to a Trust Agreement, dated as of June 1, 1988 (the "Trust Agreement"), by and among the City, the Corporation and The Bank of California, N.A., San Francisco, California (the * Preliminary, subject to change, 1739043/1 "Trustee"). The Certificates evidence the undivided fractional interests of the owners thereof in Lease Payments payable by the City, as lessee, to the Corporation, as lessor, for the possession of the Project. Pursuant to an Agency Agreement, dated as of June 1, 1988, by and between the Corporation and the City (the "Agency Agreement"), the City, as agent for the Corporation, has agreed to construct those portions of the Project to be constructed. Pursuant to an Assignment Agreement, dated as of June 1, 1988 (the "Assignment Agreement"), the Corporation will assign to the Trustee for the benefit of the owners of the Certificates all its rights to receive amounts payable by the City under the Lease Agreement ("Lease Payments") and its rights to enforce payment of all amounts due in the event of a default by the City. The City is required under the Lease Agreement to make Lease Payments from any source of legally available' funds in each year the City has possession of the Project. The Lease Payments are designed to be sufficient in both time and amount to pay, when due, the principal and interest represented by the Certificates. The City has covenanted in the Lease Agreement to take such action as may be necessary to include the Lease Payments in its annual budgets and has further covenanted to make the necessary annual appropriations for all such Lease Payments. The amount of Lease Payments which the City is obligated to pay under the Lease Agreement will be adjusted or abated during any period in which by reason of damage or destruction or eminent domain proceedings, there is interference with the City's possession of the Project. Such adjustment or abatement will end with the substantial completion of repair, replacement or reconstruction of the Project. The obligation of the City to make Lease Payments does not constitute an obligation of the City for which the City is obligated to levy or pledge any form of taxation or for which the City has levied or pledged any form of taxation. The obligation of the City to make Lease Payments does not constitute a debt of the City, the Corporation, the State of California, or any of its political subdivisions, and does not constitute an indebtedness within the meaning of any constitutional or statutory debt limitation or restriction. For certain financial information with respect to the City, see "CITY FINANCIAL INFORMATION" herein and "APPENDIX A - Excerpts of the 1986/87 Audited Financial Statements of the City" attached hereto. For a discussion of certain amendments to the Constitution of the State of California and their impact on the City, see heading "CITY FINANCIAL INFORMATION-Constitutional Amendments Affecting City Revenues" herein. 1739043/1 Brief descriptions of the security for the Certificates, the Corporation, the City and the Project are included in this Official Statement together with summaries of the Lease Agreement, the Assignment Agreement, the Agency Agreement and the Trust Agreement. Such descriptions do not purport to be comprehensive or definitive. All references herein to the Lease Agreement, the Assignment Agreement, the Agency Agreement and the Trust Agreement are qualified in their entirety by reference to such documents and references herein to the Certificates are qualified in their entirety by reference to the form thereof included in the Trust Agreement, copies of all of which are available for inspection at the principal corporate trust office of the Trustee. THE PROJECT On June 1, 1987 the City acquired with the proceeds of a Note in the amount of $6,459,384 to the order of San Diego Trust and Savings Bank (the "Temporary Note") approximately 52 acres of land located within the City, known as Hosp Grove, which land is to be held by the City for general municipal purposes which is currently zoned open space. On July 16, 1987 the City issued its 1987 Notes in the principal amount of $6,555,000 (the "Notes") the proceeds of which were used to retire the Temporary Note and pay interest due thereon and to pay costs of issuance incurred in connection with the issuance of the Notes. The principal of the Notes and the interest accrued thereon is due and payable on June 30, 1988. The City has determined that certain improvements to the thoroughfares adjacent to Hosp Grove are needed to improve the flow of traffic in that area and storm drains will be constructed to enclose a currently open drainage channel. ESTIMATED SOURCES AND USES OF PROCEEDS The proceeds of the sale of the Certificates are expected to be comprised of and to be applied as follows: Estimated Sources: Principal Amount of Certificates $ Accrued Interest Total Sources $ 1739043/1 Estimated Uses: Escrow Fund Acquisition and Construction Fund Lease Payment Fund(l) Reserve Fund (2) Delivery Costs Fund Underwriter's Discount Original Issue Discount Total Uses (1) Interest due with respect to the Certificates from June 1, 1988 through , including $ of accrued interest and $ of capitalized interest from Certificate proceeds. (2) Equal to maximum annual principal and interest payments with respect to the Certificates. THE CERTIFICATES The Certificates will be sold, executed and delivered in the aggregate principal amount of $ .* Each Certificate shall be dated as of June 1, 1988 and interest represented thereby shall be payable at the rates set forth on the cover page hereof from the Interest Payment Date (defined below) next preceding the date of execution thereof, unless: (i) it is executed as of an Interest Payment Date, in which event interest represented thereby shall be payable from the date thereof; or (ii) it is executed after the close of business on the fifteenth day of the month preceding each Interest Payment Date (the "Record Date"), in which event interest represented thereby shall be payable from such Interest Payment Date; or (iii) it is executed on or before January 15, 1989, in which event interest represented thereby shall be paid from June 1, 1988. The Interest Payment Dates are February 1, 1989 and the first day of each August and February thereafter as long as any Certificates are outstanding. The Record Date is the 15th day of the month preceding each Interest Payment Date. The Certificates will mature on August 1 in each year of the designated years and in the principal amounts set forth on the cover page hereof. * Preliminary, subject to change. 1739043/1 The Certificates will be executed and delivered in fully registered form without coupons, in the denomination of $5,000 or any integral multiple thereof. Principal and premium, if any, represented by the Certificates will be payable at the principal corporate trust office of the Trustee in San Francisco, California. Payment of interest represented by the Certificates shall be made by check or draft mailed to the registered owner as of the Record Date, except that in the case of an registered owner of $1,000,000 or greater in principal amount of outstanding Certificates, such payment may, at such owner's option, be made by wire transfer of immediately available funds in accordance with instructions provided by such owner. Optional Redemption The Certificates maturing on or after August 1, 1999 are subject to optional redemption prior to maturity on or after August 1, 1998 at the option of the City, as a whole or in part (but not in a total redemption amount of less than $20,000 at any one time), in inverse order of maturity and by lot within a maturity, on any Interest Payment Date from amounts deposited by the City in accordance with its option to prepay Lease Payments, from any available source of funds therefor in inverse order of maturity in multiples of $5,000 at the following redemption prices expressed as percentages of the principal amount to be redeemed plus accrued interest to the redemption date: Date of Redemption Redemption Price August 1, 1998 through July 31, 1999 102 % August 1, 1999 through July 31, 2000 101% August 1, 2000 through July 31, 2001 101 August 1, 2001 through July 31, 2002 100% August 1, 2002 and thereafter 100 Special Redemption The Certificates are subject to special redemption in whole on any date, or in part on any Interest Payment Date, among maturities, and by lot within a maturity, such that equal annual Lease Payments prevail following such redemption, and by lot within a maturity at a redemption price equal to the principal amount thereof plus accrued interest, without premium, upon a prepayment of Lease Payments made by the City if any of the Project is damaged, destroyed or taken in eminent domain proceedings, from all net insurance or condemnation proceeds if the City elects not to repair or replace such Project or portion thereof. 1739043/1 Mandatory Redemption The Certificates maturing on August 1, 2008, are subject to mandatory redemption on August 1 in each year on or after August 1, 1999, by lot, from the principal components of the Lease Payments required to be paid by the City pursuant to the Lease Agreement with respect to each such redemption date, at a redemption price equal to the principal amount thereof to be redeemed, together with accrued interest thereon to the date fixed for redemption, without premium, as follows: Redemption Redemption Date Principal Date Principal (August 1) Amount (August 1) Amount 1999 $ 2004 $ 2000 2005 2001 2006 2002 2007 2003 2008* * Maturity Other Redemption Provisions In the event that less than all of the remaining Lease Payments are prepaid, the Trustee shall select Certificates for redemption among maturities on a pro rata basis in multiples of $5,000 and from within each maturity by lot, in any manner which the Trustee deems fair and appropriate. When redemption is authorized or required, the Trustee shall give to the owners of the Certificates notice, at the expense of the City, of the redemption of the Certificates. Such notice shall specify: (a) that the whole or a designated portion thereof (in the case of redemption of a Certificate in part but not in whole) are to be redeemed and the identification thereof, (b) the date of redemption and redemption price, (c) the place or places where the redemption will be made, (d) that on the redemption date, the redemption price will become due and payable upon each such Certificate or portion thereof called for redemption, and interest with respect thereto shall cease to accrue from and after said date, and (e) the place where such Certificates are to be surrendered for payment of the redemption price. Notice of redemption shall be given by certified or registered mail to the respective owners of any Certificates designated for redemption at their addresses appearing on the 1739043/1 Certificate registration books, at least thirty (30) days but not more than sixty (60) days prior to the redemption date and to all securities depositories and to one or more information service by telecopy, registered, certified or overnight mail at least thirty-five (35) days prior to the redemption date; provided that neither the failure to receive such notices nor any immaterial defect in any notice so mailed shall affect the sufficiency of the proceedings for the redemption of Certificates. SECURITY FOR THE CERTIFICATES Each Certificate represents an undivided fractional interest in Lease Payments made by the City under the Lease Agreement. The Corporation, pursuant to the Assignment Agreement, will assign certain of its rights, under the Lease Agreement to the Trustee for the benefit of the owners of the Certificates, including its right to receive Lease Payments and insurance and condemnation proceeds thereunder and its rights to exercise all the rights and remedies conferred on the Corporation under the Lease Agreement. The obligation of the City to make Lease Payments is payable from annual appropriations of the City from funds lawfully available therefor. Neither the full faith and credit nor the taxing power of the City, the State of California or any of its political subdivisions is pledged to make Lease Payments under the Lease Agreement. The Lease Payments are calculated to be sufficient to pay, when due, the principal and interest represented by the Certificates. The Lease Agreement provides that the City shall take action each year as may be necessary to include all Lease Payments in its annual budgets and to make annual appropriations therefor. As provided in the Lease Agreement, the covenants of the City thereunder shall be deemed by the City to be and shall be ministerial duties imposed by law. It shall be the duty of each and every public official of the City to take such action and to do such things as are required by law in the performance of the official duty of such officials to enable the City to carry out and perform the covenants and agreements in the Lease. Under California law, even though the Lease Agreement becomes effective as of the date thereof, the obligation of the City to make Lease Payments with regard to the portion of the Project to be constructed (other than to the extent that funds to make Lease Payments are available in the Lease Payment Fund or the Reserve Fund) may be abated in whole or in part if the City does not have full possession of such portion of the Project due construction delay. In the case of partial abatement, the City's obligation to make Lease Payments for other portions of the Project for which it does have possession shall continue unabated. 7 1739043/1 A Reserve Fund is established by the Trust Agreement in an amount equal to the Reserve Requirement, as defined in the Trust Agreement. Except to the extent amounts in the Reserve Fund exceed the Reserve Requirement, such funds are to be used only for the payment of Lease Payments to the extent amounts in the Lease Payment Fund are insufficient therefor. Any amounts remaining in the Reserve Fund upon payment in full of all outstanding Certificates, or upon providing for such payment pursuant to the terms of the Trust Agreement, will be withdrawn by the Trustee and paid to the City. Lease Payments The Lease Agreement requires the City to deposit with the Trustee as assignee of the Corporation, on each January 15 and July 15, commencing on January 15, 1989 ("Lease Payment Dates") an amount equal to the aggregate Lease Payment coming due and payable on the next Interest Payment Date. The Lease Payments payable for the possession of the Project for the annual rental period commencing on August 2 of each year and terminating on the following August I are payable in two installments, such that the payment made on or before July 15 of each year represents the principal and interest payable with respect to the Certificates on the succeeding August 1, and the payment made on or before each January 15 represents the interest payable with respect to the Certificates on the succeeding February 1. The City shall receive a credit towards payment of Lease Payments for amounts on deposit in the Lease Payment Fund on each Lease Payment Date. The Lease Agreement provides that Lease Payments shall be abated for any period during which there is substantial interference with the possession of the Project by the City due to damage, destruction or taking in eminent domain proceedings. During such a period, however, the Trustee may pay amounts relating to principal and interest represented by the Certificates from other sources, such as the Reserve Fund, the proceeds of rental interruption insurance or, if self-insured for rental interruption, amounts reserved by the City for such purpose, or amounts on deposit in the Insurance and Condemnation Fund. Lease Payments with respect to the portions of the Project not damaged, destroyed or condemned shall continue unabated. The City will obtain rental interruption insurance, or will self-insure for rental interruption and reserve, in an amount equal to to insure against an interruption in Lease Payments because of damage to the Project. See "APPENDIX B - Summary of Principal Documents - Lease Agreement" attached hereto. 8 1739043/1 The Lease Agreement requires that Lease Payments be deposited in the Lease Payment Fund maintained by the Trustee. On each Interest Payment Date, the Trustee will withdraw from the Lease Payment Fund the aggregate amount of such Lease Payments and will apply such amounts to make principal and interest payments represented by the Certificates, sufficient to meet the following annual amortization schedule. Such amounts shall be modified by the Trustee to reflect a partial redemption of Lease Payments under the Lease Agreement. Annual Lease Payments For the Year Ending Portion of Lease Payment Representing Total Lease Augus t 1 Principal Interest Payments 1989 . 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008* * Final Maturity Sources of Lease Payments Lease Payments made by the City to the Corporation are payable from any revenues generally available to the City except certain special fund revenues which are legally restricted as to use. However, the City is obligated to make Lease Payments from any lawfully available funds-. 1739043/1 CERTIFICATE OWNERS' RISKS Lease Payments The Lease Payments are not secured by any pledge of or lien on taxes or other revenues of the City, but are payable from all funds lawfully available to the City. The City has the capacity to enter into other obligations which may constitute additional charges against its revenues. In the event the City's revenue sources are less than its total obligations, the City could choose to fund other municipal services before making Lease Payments. The same result could occur if, because of state constitutional limits on expenditures, the City is not permitted to appropriate and spend all of its available revenues. However, the City has covenanted in the Lease Agreement to budget for, appropriate and make the Lease Payments in each year it has possession of the Project.' The obligation of the City to pay the Lease Payments does not constitute an obligation of the City for which the City is obligated to levy or pledge any form of taxation or for which the City has levied or pledged any form of taxation. The obligation of the City to pay Lease Payments does not constitute a debt of the City, the Corporation, the State of California or any of its political subdivisions, and does not constitute an indebtedness within the meaning of any constitutional or statutory debt limitation or restriction. Construction If the City for any reason cannot take possession of such portions of the Project to be constructed as scheduled, a portion of the Lease Payments payable under the Lease Agreement will be abated during the period between the expected delivery date and the time when the Corporation delivers possession in an amount equal to the proportion which the construction costs of the part or parts of the Project not yet delivered to the City bears to the construction cost of all such portions of the Project expected to be constructed. In the event that the costs of constructing those portions of the Project to be constructed are greater that the amount made available from the proceeds of the Certificates for such purpose, the City has agreed in the Lease Agreement to provide amounts necessary to complete such portions of the Project to be constructed, but only from funds available to the City in the fiscal year in which the City has entered into the Lease Agreement. 10 1739043/1 Limited Recourse on Default If the City defaults on its obligations to make Lease Payments and the Trustee elects to terminate the Lease Agreement, the Trustee may re-let the Project provided, the Trustee shall re-let to a political subdivision of the State so as to preserve the tax-exempt nature of the interest component of the Lease Payments represented by the Certificates to the extent possible. In the event of a default, there is no remedy of acceleration of any Lease Payments which have not come due and payable in accordance with the Lease Agreement. The City will continue to be liable for Lease Payments as they become due and payable in accordance with the Lease Agreement, and the Trustee is required to seek a separate judgment each year for that year' s defaulted Lease Payments. Any such suit for money damages would be subject to limitations on legal remedies against cities in California, including a limitation on enforcement of judgments against funds needed to serve the public welfare and interest. Interruption of Possession for Extended Period The amount of Lease Payments due under the Lease Agreement will be adjusted or abated during any period in which by reason of damage, destruction, eminent domain or otherwise there is substantial interference with the possession of the Project such that the resulting Lease Payments for the remaining portions of the Project represent fair consideration therefor. Such adjustment or abatement will end with the substantial completion or replacement, repair or reconstruction of the Project. If proceeds of the City's rental interruption insurance, or amounts reserved under a self-insurance plan, and moneys in the Reserve Fund are insufficient to pay all principal and interest represented by the Certificates during the period of repair or reconstruction or during eminent domain proceedings, the City will have no obligation to make Lease Payments to cover such deficiency and no remedy for nonpayment will be available to the Trustee or the Certificate Owners against the City under the Lease Agreement or Trust Agreement (see "APPENDIX B - Summary of Principal Documents - Lease Agreement - Insurance" attached hereto). THE CORPORATION Organization The City of Carlsbad Public Improvement Corporation is a non-profit public benefit corporation organized and existing under the laws of the State of California for the purpose of assisting the City in financing public projects. 11 1739043/1 CITY FINANCIAL INFORMATION Ad Valorem Property Taxation City property taxes are assessed and collected by the County of San Diego (the "County"), at the same time and on the same rolls as the County and special district property taxes. The valuation of secured property is established as of March 1 and is subsequently equalized in August, and is payable in two installments of taxes due November 1 and February 1, respectively. Taxes become delinquent on December 10 and April 10 for each respective installment. Taxes on unsecured property (personal property and leasehold) are due on August 31 of each year based on the preceding fiscal year's secured tax rate. State law exempts $7,000 of the full cash value of an owner-occupied dwelling, but this exemption does not result in any loss of revenue to local agencies, since the State reimburses local agencies for the value of the exemptions. Assessed Valuations The State Board of Equalization assesses all property using 100% of value as defined by Article XIIIA of the State Constitution. State law provides exemptions from ad valorem property taxation for certain classes of property such as churches, colleges, non-profit hospitals, and charitable institutions. The following table sets forth the five-year history of assessed valuations for the City: CITY OF CARLSBAD ASSESSED VALUATIONS Fiscal Before Redevelopment After Redevelopment Year Adjustment Adjustment 1983/84 2,252,921,234 2,242,525,629 1984/85 2,548,132,552 2,534,352,353 1985/86 2,951,163,070 2,917,119,901 1986/87 3,517,751,761 3,458,390,377 1987/88 4,096,874,876 4,014,899,876 Source: County of San Diego Property Tax Services. 12 1739043/1 Tax Levies, Collections and Delinquencies Taxes are levied for each fiscal year on taxable real and personal property which is situated in the City as of the preceding March 1. A supplemental roll is developed when property changes hands which produces additional revenue. For assessment and collection purposes, property is classified as either "secured" or "unsecured" and is listed accordingly on separate parts of the assessment roll. The "secured roll" is that part of the assessment roll containing State-assessed property and real property having a tax lien which is sufficient, in the opinion of the assessor, to secure payment of the taxes. Unsecured property comprises all property not attached to land such as personal property or business property. Boats and airplanes are examples of unsecured property. Unsecured property is assessed on the "unsecured roll." There is a ten percent penalty on any delinquent payment of secured roll taxes. In addition, property on the secured roll with respect to which taxes are delinquent becomes tax-defaulted. Such property may thereafter be redeemed by payment of the delinquent taxes and the delinquency penalty, plus a redemption penalty to the time of redemption. If taxes are unpaid for a period of five years or more, the property is subject to auction sale by the County Tax Collector. In the case of unsecured property taxes, a 10% penalty attaches to delinquent taxes on property on the unsecured roll, and an additional penalty of 1.5% per month begins to accrue beginning November 1st of the fiscal year and a lien is recorded against the assessee. The taxing authority has four ways of collecting unsecured personal property taxes: (1) a civil action against the taxpayer; (2) filing a certificate in the office of the County Clerk specifying certain facts in order to obtain a judgment lien on specific property of the taxpayer; (3) filing a certificate of delinquency for record in the County Recorder's Office in order to obtain a lien on specified property of the taxpayer; and (4) seizure and sale of personal property, improvements or possessory interests belonging or assessed to the assessee. Each county levies (except for levies to support prior voter-approved indebtedness) and collects all property taxes for property falling within that county's taxing boundaries. The secured tax levy and year-end delinquencies for 1983/84 through 1986/87 are shown on the following table: 13 1739043/1 CITY OF CARLSBAD SECURED TAX CHARGES AND DELINQUENCIES Secured Tax Amount Delinquent % Delinquent Charge June 30 June 30 1983/84 $ 4,129,204 $158,975 3.9 1984/85 4,720,080 183,873 3.9 1985/86 5,570,339 220,109 4.0 1986/87 8,989,953 324,829 3.6 1987/88(1) 10,243,777 409,751 4.0 (1) Estimate. Source: County of San Diego Property Tax Services. Budget Process Development of an annual budget typically begins six months prior to the fiscal year under consideration. Budgeting is a continuing process involving the presentation of budget estimates by all departments, review of requests by the City Manager and referral of a preliminary budget to the City Council for consideration. After the City Council review and public hearing on the proposed budget, approval of the budget for the forthcoming year is enacted by resolution of the City Counc i1. 14 1739043/1 The following table reflects the City's General Fund revenues and expenditures by major category for fiscal years ended June 30, 1986 through June 30, 1989. CITY OF CARLSBAD GENERAL FUND REVENUES AND EXPENDITURES by Major Category FISCAL YEARS ENDED JUNE 30, 1986 THROUGH JUNE 30, 1989 REVENUES Source Taxes Licenses & Permits Charges for Services Fines Interest Other Total Revenue Gas Tax funds available to support a portion of Street Maintenance costs Total Available Revenue 1985-86 $14,851,803 ,996,864 ,870,965 288,055066,441 1.234.824 $24,308,952 1986-87 Actual $17,025,712 4,348,903 2,606,776 366,597 ,149,488 943.282 1. $26,440,758 44P. 1987-88 Estimate (1> $18,889,000 3,602,000 1,846,000 393,000 800,000 185.000 $25,715,000 700.500 1988-89 Budget (2) $20,859,000 3,418,000 2,278,900 393,000 600,000 414.000 $27,962,900 760.000 t?ft 7?? qnn EXPENDITURES (3) _ Type _ General Goverment Public Safety Public Works Culture & Recreation Total Expenditures $4,120,270 7,851,268 5,734,750 3.539.015 (1) (2) $5,639,077 9,452,556 4,067,420 4.190.635 $5,210,434 9,773,838 6,342,079 4.841.872 $76 ififl ??"* Estimated revenues and expenditures Data from preliminary budget presented to the City Council 5/24/88. Subject to change before adoption on 6/12/88. $5,897,308 11,505,764 6,927,265 5.414.334 $?Q 744.671 15 1739043/1 Comparative Financial Statements The following tables reflect the City's general fund revenues, expenditures and fund balance for the fiscal years ended June 30, 1985, 1986 and 1987 and general fund balance sheet at June 30, 1985, 1986 and 1987. This information has been derived from the audited financial statements of the City for such fiscal years and should be read in conjunction with "APPENDIX A - Excerpts of the 1986/87 Audited Financial Statements of the City" attached hereto. CITY OF CARLSBAD GENERAL FUND REVENUES, EXPENDITURES AND FUND BALANCE, FISCAL YEARS ENDED JUNE 30, 1985 THROUGH JUNE 30, 1987 June 30, 1985 June 30, 1986 June 30, 1987 REVENUES: Taxes License and Permits Fines and Forfeitures Use of Money and Property Revenue from Current Svcs. Transfers In Miscellaneous TOTAL REVENUES EXPENDITURES: General Government Public Safety Public Works Cultural and Recreation Transfers Out TOTAL EXPENDITURES REVENUES OVER (UNDER) EXPENDITURES FUND EQUITY JUNE 30 $12,828,834 3,470,656 345,750 1,088,532 2,415,554 578,000 120,051 $20,847,377 $3,004,590 7,020,105 2,516,105 3,072,810 210,000 $15,824,011 $14,851,803 3,996,864 288,055 1,066,441 2,870,965 707,754 1,234,824 $25,016,706 $4,120,270 7,851,268 5,734,750 3,539,015 3,272.322 $24,972,625 $17,025,712 4,348,903 366,591 1,149,488 2,606,776 270,275 943,282 $26,711,033 $5,639,077 9,452,556 4,067,556 4,190,635 853,034 $24,202,742 $ 5,023,366 $ 44,081 $ 2,508,291 $ 2.250.175 $ 2.294.256 $ 4.802.547 Source: City of Carlsbad. 1739043/1 16 CITY OF CARLSBAD GENERAL FUND BALANCE SHEETS JUNE 30, 1985, 1986 and 1987 ASSETS: Cash and Investments Receivables: Taxes Accounts Accrued interest Due from other funds Due from other governments Advances to other funds Inventory, at cost Prepaid costs TOTAL ASSETS June 30. 1985 $1,641,161 473,694 150,383 358,679 912,542 12,288 43,500 $3.592.247 June 30, 1986 $1,494,284 657,010 31,021 110,364 23,615 1,369,618 14,069 79,500 $3.779.481 June 30, 1987 $2,096,962 1,005,471 77,936 150,759 416,194 3,915 2,827,702 24,216 79,500 $6.682.655 LIABILITIES Accounts payable $328,519 $397,925 $ 510,553 Accrued wages payable 907,652 1,076,001 1,304,586 Due to Other Funds 105,901 11,299 Payable from restricted assets: Accrued interest payable - - 64,969 TOTAL LIABILITIES $1.342.072 $1.485.225 $1.880.108 FUND EQUITY Fund balances - reserved $2,250,175 $2,294,256 $4,792,585 Fund balances - unreserved - - 9,962 TOTAL FUND EQUITY $2,250,175 $2,294,256 $4,802,547 TOTAL LIABILITIES AND FUND EQUITY $3.592.247 $3.779.481 $6.682.655 Source: City of Carlsbad Financial and Accounting Information The accounts of the City are organized on the basis of funds and account groups, each of which is considered a separate accounting entity. The operations of each fund are accounted for with a separate set of self-balancing accounts that comprise its assets, liabilities, fund equity, revenues, and expenditures, or expenses, as appropriate. Government resources are allocated to and accounted for in individual 1739043/1 17 funds based upon the purposes for which they are to be spent and the means by which spending activities are controlled. The various funds are grouped into eight generic fund types and three broad fund categories as follows: Government Funds: General Fund - The general fund is the general operating fund of the City. It is used to account for all financial resources except those required to be accounted for in another fund. Special Revenue Funds - Special revenue funds are used to account for the proceeds of specific revenue sources (other than special assessments, expendable trusts, or major capital projects) that are legally restricted to expenditures for specified purposes. Debt Service Funds - Debt service funds are used to account for the accumulation of resources for, and the payment of, the principal of and interest on general long-term debt, and related costs. Capital Projects Fund - Capital projects funds are used to account for financial resources to be used for the acquisition or construction of major capital facilities (other than those financed by proprietary funds, special assessment funds, and trust funds). Special Assessment Funds - Special assessment funds are used to account for the financing of public improvements or services deemed to benefit the properties against which special assessments are levied. Proprietary Funds: Enterprise Funds - Enterprise funds are used to account for operations (a) that are financed and operated in a manner similar to private enterprises where the intent of the governing body is that the costs (expenses, including depreciation) of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges; or (b) where the governing body has decided that periodic determination of revenues earned, expenses incurred, and/or net income is appropriate for capital maintenance, public policy, management control, accountability, or other purposes. 18 1739043/1 Internal Service Funds - Internal service funds are used to account for the financing of goods or services provided by one department or agency to other departments or agencies of the City, or to other governments, on a cost-reimbursement basis. Fiduciary Funds: Trust and Agency Funds - Trust and agency funds are used to account for assets held by the City in a trustee capacity or as an agent for individuals, private organizations, other governments and/or other funds. For the year ended June 30, 1985, the City was holding only agency funds due, for the most part, to other funds and other agencies. Agency funds are custodial in nature (assets equal liabilities) and do not involve measurement of results of operations. All government funds are accounted for using the modified accrual basis of accounting. Their revenues are recognized when they become measurable and available as net current assets. Taxpayer-assessed income, gross receipts, and other taxes are considered "measurable" when in the hands of intermediary collecting governments and are recognized as revenue at that time. Anticipated refunds of such taxes are recorded as liabilities and reductions of revenue when they are measurable and their validity seems certain. Expenditures are generally recognized under the modified accrual basis of accounting when the related fund liability is incurred. Exceptions to this general rule include: (1) accumulated unpaid vacation, sick pay, and other employee amounts which are not accrued; and (2) principal and interest on general long-term debt which is recognized when due. All proprietary funds are accounted for using the accrual basis of accounting. Their revenues are recognized when they are earned, and their expenses are recognized when they are incurred. City Debt Structure Short-Term - Other than the Refunded Note, the City has no outstanding short-term indebtedness. Long-Term - The City has never defaulted on the payment of principal or interest on any of its indebtedness. As of June 30, 1987, the City had outstanding $3,045,000 principal amount of bonds serviced by the City's Debt Service Fund, of which $670,000 principal amount represented general obligation 19 1739043/1 bonds of the City and $2,375,000 principal amount represented revenue bond obligations of the City's Parking Authority and Building Authority. See "Appendix A - Excerpts of the 1986/87 Audited Financial Statements of the City" attached hereto. Lease Obligations - In 1981, the City entered into an agreement with the City of Oceans ide to lease the public parking area surrounding a regional shopping area. Under the terms of the Agreement, the City has agreed to pay an aggregate amount of $700,040 including interest of 10%. The annual principal and interest payments are to be $70,000 through 1991 and $1 annually for each of the remaining years of the fifty year lease. In May, 1986, the City entered into a lease for the building at 2075 Las Palmas Drive. The City uses this building for the Community Development Center. The lease had a purchase option that the City exercised on July 31, 1987, purchasing the building for $1,602,160. Subseguently,' the City entered into a ten-year sale leaseback agreement, commencing August 20, 1987, with annual payments of $234,529. The first payment was made February 20, 1988. The following is a summary of future annual minimum lease payments to be paid from the City's General Fund under existing leases as of December 31, 1987: Year Ending Annual Minimum June 30 Lease Payments 1988 $304,529 1989 304,529 1990 304,529 1991 304,529 1992 234,530 Thereafter 1,172,685 Direct and Overlapping Debt Contained within the City are numerous overlapping local agencies providing public services. These local agencies have outstanding bonds issued in the form of general obligation, lease revenue and special assessment bonds. The direct and overlapping debt of the City is shown in the following table: 20 1739043/1 CITY OF CARLSBAD STATEMENT OF DIRECT AND OVERLAPPING DEBT 1987-88 Assessed Valuation: $4,014,899,694 (after deducting $81,975,182 redevelopment tax allocation increment) DIRECT AND OVERLAPPING BONDED DEBT: % Applicable Debt 6/1/88 San Diego County Building Authorities 4.444% $11,923,474 San Diego County Water Authority 4.601 1,300,013 San Diego County Water Authority Certificate of Participation 4.601 4,601,000 Metropolitan Water District 0.765 4,020,534 Carlsbad Unified School District (Various issues) 96.051-96.056 525,555 Carlsbad Unified School District 96.025 6,049,575 San Marcos Unified School District 22.781 375,285 San Dieguito Union High School District 9.042 298,386 Encintas Union School District 24.212 332,915 Encintas Union School District Authority 24.212 277,227 Other School Districts Various 8,564 Tri-City Hospital District 33.828 696,856 Palomar Pomerado Hospital District & Authority 0.745 116,369 Leucadia County Water District and I.D. #1 49.258 & 3.370 333,462 San Marcos County Water & I.D.'s #1,2,6 6.259-10.847 164,344 Costa Real Municipal Water District Certificates of Participation 99.060 11,887,200 Costa Real Municipal Water District, Improvement Districts #1,2,3,4 98.106-99.054 894,429 Olivenbain Municipal Water District I.D. #1 30.829 439,313 City of Carlsbad 100. 550,000(1) City of Carlsbad Building Authorities 100. 2,215,000 City of Carlsbad 1915 Act Bonds 100. 9,570,000 City of Carlsbad Public Improvement Corporation (2) 100. 8,500,000 TOTAL DIRECT AND OVERLAPPING BONDED DEBT $65,079,501 (1) Excludes tax and revenue anticipation notes and tax allocation bonds. (2) Represents $8,500,000 certificates of participation to be sold. Ratios to Assessed Valuation: Directed Debt ($11.265.000) 0.28% Total Debt 1.62% SHARE OF AUTHORIZED AND UNSOLD BONDS: Metropol i tan Water Di stri ct $2,027,250 Costa Real Municipal Water District, I.A. #1 $ 98,329 Costa Real Municipal Water District, I.A. #3 $ 196,212 STATE SCHOOL BUILDING AID REPAYABLE AS OF 6/30/87: $ 297,938 21 1739043/1 Constitutional Amendments Affecting City Revenues On June 6, 1978, California voters approved Proposition 13, a statewide initiative relating to the taxation of real property which added Article XI HA to the California Constitution. Among other things, the Proposition: (a) limits ad valorem property taxes on all real property to 1 percent of the full cash value of the property; (b) exempts existing voter approved bonded indebtedness from the 1 percent limitation; (c) defines "full cash value" as the Assessor's appraised value of real property as of March 1, 1975, adjusted by changes in the Consumer Price Index—not to exceed 2 percent per year; (d) permits establishment of new "full cash value" when there is new construction or a change in ownership; (e) permits the reassessment, up to the March 1, 1975 value, of property which was not current on the 1975-1976 assessment roll; (f) requires counties to collect the 1 percent property tax" and to "apportion according to law to the districts within the counties"; (g) prohibits new ad valorem taxes on real property, or sales taxes, or transaction taxes, on the sale of real property; (h) permits the imposition of special taxes by local agencies, other than those prohibited, by a two-thirds (2/3) vote of the "qualified electors" of such agencies; and (i) requires a two-thirds (2/3) vote of all members of both houses of the Legislature for any changes in State taxes which would result in increased revenues. An initiative constitutional amendment entitled "Limitation of Government Appropriations" was approved by California voters on November 6, 1979. Under the amendment, which adds Article XIIIB to the California Constitution, state and local government agencies are subject to an annual "appropriations limit," and are prohibited from spending "appropriations subject to limitation" above that limit. "Appropriations subject to limitation" consist of "tax revenues," state subventions, and certain other funds (together herein referred to as proceeds of taxes). The amendment does not affect the appropriation of money excluded from the definition of "appropriations subject to limitation," such as debt service on indebtedness existing or authorized by January 1, 1979 or subsequently authorized by the voters and appropriations mandated by the court. The amendment also excludes from limitation the appropriation of proceeds from regulatory licenses, user charges, or other fees to the extent that such proceeds equal "the costs reasonably borne by such entity in providing the regulation, product, or service." • In general terms, the amendment provides that the appropriations limit will be based on certain 1978/79 expenditures and will be adjusted annually to reflect changes 22 1739043/1 in cost of living, population, and transfer of financial responsibility of providing services from one governmental unit to another. The amendment also provides that if an agency's revenues in any year exceed the amount which is appropriated by such agency in compliance with the initiative, the excess must be returned during the next two fiscal years by revising tax rates or fee schedules. The State mandated limit for the City in 1987/88 was $31,936,660 and estimated 1987/88 appropriations subject to the limit were $23,149,900. Another initiative was approved by the voters in November, 1986 which (i) requires that any tax for general governmental purposes imposed by local governmental entities such as the City be approved by resolution or ordinance adopted by a two-thirds vote of the governmental entity's legislative body and by a majority vote of the electorate of the governmental entity, (ii) requires that any special tax (defined as taxes levied for other than general governmental purposes) imposed by a local governmental entity by approved by a two-thirds vote of the voters within that jurisdiction, (iii) restricts the use of revenues from a special tax to the purposes or for the service for which the special tax was imposed, (iv) prohibits the imposition of ad valorem taxes on real property by local governmental entities except as permitted by Article XIIIA, (v) prohibits the imposition of transaction taxes and sales taxes on the sale of real property by local governmental entities, and (vi) requires that any tax imposed by a local government entity on or after August 1, 1985 be ratified by a majority vote of the electorate within two years of the adoption of the initiative or be terminated by November 15, 1988. The City does not anticipate any potential adverse financial impact or a result of the adoption of this initiative. GENERAL CITY INFORMATION Introduction The City was incorporated July 16, 1952. It is a general law city with a council/manager form of government. The City encompasses 39 square miles and is located approximately 35 miles north of the City of San Diego. 23 1739043/1 CITY OF CARLSBAD COUNTY OF SAN DIEGO POPULATION ESTIMATES Year City County 1970 14,944 1,357,854 1975 19,200 1,560,700 1980 35,490 1,861,846 1981 35,600 1,895,200 1982 37,650 1,944,000 1983 39,200 1,988,600 1984 40,650 2,041,400 1985 44,950 2,102,500 1986 48,850 2,165,500 1987 55,300 2,240,700 1988 58,900 2,327,700' Sources: 1970 and 1980: U.S. Census. 1975, 1981-1988: State of California Department of Finance. Labor Relations The City has 431 full-time permanent employees and five representation units, as follows: CITY OF CARLSBAD LABOR RELATIONS No. of Contract Expiration Representation Unit Employees Date Carlsbad Police Officers' Assoc. 72 June 15, 1988 Carlsbad Fireman's Assoc. 52 Carlsbad City Employees' Assoc. 231 Carlsbad Police Management 7 (1) City Management 69 (1) (1) Ongoing contracts without expiration dates. Source: City of Carlsbad. 24 1739043/1 Retirement Programs All permanent employees of the City are covered under the Public Employees' Retirement System (PERS) of the State, a defined benefit plan. Pension costs are funded by monthly contributions from the City and covered employees. Contributions by the City during 1987/88 are estimated to be $2,781,996 and are expected to be $2,784,112 for 1988/89. Contribution rates are determined by PERS and are calculated to include unfunded prior service costs amortized through the year 2000. The Public Employees Retirement System actuary estimates the plan's unfunded liability as of June 30, 1987 to be $16,606. The City contributes to PICA only for Medicare benefits for employees hired after April 1, 1986. The amount for 1987/88 is estimated to be $39,105 and $85,000 is expected to be contributed in 1988/89. ECONOMIC PROFILE OF THE CITY Employment As of May 1, 1987 the civilian labor force for the City was 22,580, of which 21,826 were employed. The unadjusted unemployment rate as of decreased to percent from the rate of percent. 25 1739043/1 Largest Employers The following table sets forth the largest employers in the City: CITY OF CARLSBAD SCHEDULE OF PRINCIPAL EMPLOYERS 1986-87 Firm Manufacturing; Hughes Aircraft Company Taylor Made Golf Eaton-Leonard Corporation Beckman Instruments Dyna Industries Incorporated Watkins Manufacturing Corp. Sierracin-Mangnedyne, Inc. Sargent Industries Non-Manufacturing; Plaza Camino Real La Costa Hotel and Spa Car Country Carlsbad City of Carlsbad Carlsbad Unified School District San Diego Gas Sc Electric Farmers Insurance Group Pea Soup Andersen's Daniel's Cablevision Product/Service Electronic Components Golf Equipment Vending Machines Microbics Operation Medical Products Portable Spas Electronic Motors Industrial Seals Shopping Center Hotel/Health Spa Car Dealership Government Education Electricity and Gas Insurance Restaurant/Hotel Cable TV Number of Employees 1,500 280 275 240 195 185 162 150 1,000 1,000 500 (est.) 435 425 414 320 200 90 Source: City of Carlsbad Chamber of Commerce. 26 1739043/1 The following table presents the annual average wage and salary employment figures by industry classification for San Diego County for the years 1983 through 1987. SAN DIEGO COUNTY WAGE AND SALARY BY INDUSTRY ANNUAL AVERAGES (In Thousands) Agriculture Mining Construction Manufacturing Transportation, Public Utilities Wholesale Trade Retail Trade Finance, Insurance, Real Estate Services Government TOTAL (2) 1983 29.8 28.3 131.6 45.8 163.5 139.5 1984 1985 13.6 0.5 31.6 106.9 12.3 0.6 41.4 116.0 11.9 0.8 47.5 121.6 30.5 31.0 142.4 48.5 181.3 141.8 31.6 33.6 153.3 52.0 197.9 145.7 1986 1987 (1) 11.8 0.8 50.9 121.8 32.3 35.2 161.1 56.6 211.1 149.9 691.0 745.8 795.7 831.5 12.0 0.8 55.9 122.4 33.6 38.0 168.2 60.6 227.6 155.8 874.9 (1) Forecast (2) Totals may not add due to independent rounding. Source: State Department of Employment Development. The following table presents annual labor force and employment data for San Diego County, the State of California and the United States for the years 1980 through 1987. As shown in the table, unemployment rates in San Diego County have been lower than those in California and the nation as a whole. 27 1739043/1 COUNTY OF SAN DIEGO Labor Force, Employment and Unemployment Yearly Average for Years 1980 through 1987 Year and Area 1980 San Diego County Cal i fornia United States 1981 San Diego County Cal ifornia United States 1982 San Diego County Cal i fornia , United States , 1983 San Diego County Cali fornia United States 1984 San Diego County .... Cal i fornia United States 1985 San Diego County Cal i fornia United States 1986 San Diego County .... Cali fornia United States 1987 San Diego County .... California < 1 ) United States Civil ian Labor Force 774,500 11,581,000 .... 106,940,000 797,300 11,799,900 ... 108,670,000 834,000 12,189,000 110,204,000 877,100 12,281,000 111,551,000 915,300 12,619,000 113,544,000 967,200 12,937,000 .... 115,462,000 1,010,900 13,365,000 .... 117,834,000 1,058,800 13,976,000 , .. 119,865,000 Employment 723,300 10,791,100 99,303,000 740,500 10,907,800 100,397,000 756,800 10,978,000 99,526,000 805,100 11,095,000 100,834,000 860,800 11,638,000 105,005,000 915,900 12,007,000 107,150,000 960,500 12,473,000 109,597,000 1,011,000 13,272,000 112,440,000 Unemployment 52,700 789,900 7,637,000 55,000 872,100 8,273,000 77,200 1,211,000 10,678,000 72,000 1,187,000 10,717,000 54,500 981,000 8,539,000 51,300 931,000 8,312,000 50,400 892,000 8,237,000 47,800 704,000 7,425,000 Rate 6.8% 6.8 7.1 6.9 7.4 7.6 9.3 9.9 9.7 8.2 9.7 9.5 6.0 7.8 7.5 5.3 7.2 7.1 5.0 6.7 7.0 4.5 5.0 6.2 (1) As of March, 1988, seasonally adjusted. Source: California Employment Development Department. 28 1739043/1 Commercial Activity Taxable sales in the City have increased at an annual rate of 12.3% during the five-year period 1982 through 1986. A five-year history of taxable sales is shown in the following table: CITY OF CARLSBAD TAXABLE TRANSACTIONS (in Thousands of Dollars) Retail Stores Year 1982 1983 1984 1985 1986 Total All Outlets No. of Taxable No. of Taxable Permits Transactions Permits Transactions 422 436 468 470 522 $327,174 369,888 439,885 483,798 503,109 1 1 1 1. 121 169 304 417 1,612 $359,774 407,933 482,963 542,677 571,855 Source: California State Board of Equalization. 29 1739043/1 Construction Activity The following table shows construction activity in the City for the past five years. CITY OF CARLSBAD BUILDING PERMIT VALUATION (In Thousands of Dollars) Residential 1983 1984 1985 1986 1987 New single housing $ 63,870 $ 86,482 $122,340 $185,433 $ 74,859 New multi-dwelling 36,767 44,152 77,129 96,803 20,963 Additions, alterations 2,231 2,670 3,261 3,809 5.464 Total Residential $102,868 $133.304 $202,730 $286.045 $101,286 Non-Residential New commercial $ 5,921 $ 22,243 $ 31,921 $ 33,934 $11,199 New industrial 8,407 1,481 745 2,509 13,726 Other 2,794 6,522 17,072 5,444 1,985 Additions, alterations 7,736 7.140 18.994 12,280 13.540 Total non-residential $ 24,858 $ 37,386 $ 68,732 $ 54,167 $ 40,450 Total Valuation $127,726 $170.690 $271.462 $340T212 $141T736 Number of new dwelling units Single dwelling 782 933 1,267 1,779 523 Multi-dwelling 817 907 1.528 1,338 287 Total Units 1,599 1,840 2,795 3,117 810 Source: Security Pacific Bank, California Construction Trends, and Economic Sciences Corporation for calendar year 1987. Transportation Excellent land, sea and air transportation facilities serve the City. Major road service is provided by Interstate 5 (north/south) and State Highway 78 (east/west). Mainline service of AMTRAK and the Santa Fe Railway is available to the City. More than 100 trucking and moving/storage firms serve North San Diego County, with overnight delivery service to Arizona, Los Angeles, San Diego, 30 1739043/1 San Francisco and intermediate points. Local bus service is provided by North County Transit District; interurban and regional bus service is provided by Greyhound and Trailways. McClellan-Palomar Airport is located in the City and can accommodate private and light commercial aircraft. Oceanside Municipal Airport is located 8 miles north in Oceanside, California. Lindbergh Field (San Diego International Airport) is 30 miles south, and John Wayne Airport in Irvine, California is 45 miles to the north. Deepwater general cargo and bulk service is provided by the Port of San Diego, located 37 miles to the south. TAX EXEMPTION In the opinion of Jones Hall Hill & White, A Professional Law Corporation, San Francisco, California, Special Counsel, subject, however, to the qualifications set forth below, under existing law, the portion of the Lease Payments designated as and comprising interest and received by the owners of the Certificates is excluded from gross income for federal income tax purposes, such interest is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, provided, however, that, for the purpose of computing the alternative minimum tax imposed on corporations (as defined for federal income tax purposes), such interest is taken into account in determining adjusted net book income (adjusted current earnings for taxable years beginning after December 31, 1989). The opinions set forth in the preceding paragraph are subject to the condition that the City comply with all requirements of the Internal Revenue Code of 1986, as amended (the "Code"), that must be satisfied subsequent to the delivery of the Lease Agreement in order that such interest be, or continue to be, excluded from gross income for federal income tax purposes. The City has covenanted to comply with each such requirement. Failure to comply with certain of such requirements may cause the inclusion of such interest in gross income for federal income tax purposes to be retroactive to the date of delivery of the Lease Agreement. Special Counsel expresses no opinion regarding other federal tax consequences arising with respect to the Lease Agreement and the Certificates. Prospective purchasers of the Certificates should be aware that (i) with respect to insurance companies subject to the tax imposed by section 831 of the Code, section 832(b)(5)(B)(i) 31 1739043/1 reduces the deduction for loss reserves by 15 percent of the sum of certain items, including interest payable with respect to the Certificates, (ii) for taxable years beginning before January 1, 1992, interest payable with respect to the Certificates earned by some corporations could be subject to the environmental tax imposed by section 59A of the Code, (iii) interest payable with respect to the Certificates earned by certain foreign corporations doing business in the United States could be subject to a branch profits tax imposed by section 884 of the Code, (iv) passive investment income, including interest payable with respect to the Certificates, may be subject to federal income taxation under section 1375 of the Code for Subchapter S corporations that have Subchapter C earnings and profits at the close of the taxable year if greater than 25 percent of the gross receipts of such Subchapter S corporation is passive investment income and (v) section 86 of the Code requires recipients of certain Social Security and certain Railroad Retirement benefits to take into account, in determining the taxability of such benefits, receipts or accruals of interest payable with respect to the Certificates. In the further opinion of Special Counsel, interest payable with respect to the Certificates is exempt from California personal income taxes. APPROVAL OF LEGAL PROCEEDINGS The legality of the sale, execution and delivery of the Certificates is subject to the approval of Jones Hall Hill & White, A ' Professional Law Corporation, San Francisco, California, acting as Special Counsel. A copy of such legal opinion will be printed on each Certificate. Certain matters will be passed upon for the Underwriter by Brown & Wood, San Francisco, California. ABSENCE OF LITIGATION At the time of delivery of and payment for the Certificates, the Corporation and the City will certify that there is no action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court or regulatory agency, against the Corporation or the City affecting their existence or the titles of their respective off-ices or seeking to restrain or to enjoin the sale or delivery of the Certificates, the application of the proceeds thereof in accordance with the Trust Agreement, or in any way contesting or affecting the validity or enforceability of the 32 1739043/1 Certificates, the Trust Agreement, the Lease Agreement or the Assignment Agreement, or any action of the Corporation or City contemplated by any of said documents, or in any way contesting the completeness or accuracy of this Official Statement or any amendment or supplement thereto, or contesting the powers of the Corporation or City or their authority with respect to the Certificates or any action of the Corporation or City contemplated by any of said documents, nor, to the knowledge of the Corporation or City, is there any basis therefor. RATING Moody's Investors Service and Standard & Poor's Corporation have given the Certificates the rating of " " and " "., respectively. These ratings reflect only the view of such organizations and an explanation of the significance of such ratings may be obtained from them as follows: Moody's Investors Service, 99 Church Street, New York, New York 10007, (212) 553-0337; and Standard & Poor's Corporation, 25 Broadway, New York, New York 10004, (212) 248-2525. There is no assurance that the ratings will continue for any given period of time or that they will not be revised downward or withdrawn entirely by the rating agencies that issued them, if, in the judgment of such rating agencies, circumstances so warrant. Any such downward revisions or withdrawals of such ratings may have adverse effects on the market price of the Certificates. UNDERWRITING The Certificates will be purchased from the Trustee by Rauscher Pierce Refsnes, Inc. (the "Underwriter"), under a Purchase Contract, dated June , 1988 (the "Purchase Contract"), pursuant to which the Underwriter agrees to purchase all of the Certificates at an aggregate purchase price of $ plus accrued interest to the date of delivery of the Certificates for reoffering by the Underwriter. The obligation of the Underwriter to accept delivery of the Certificates is subject to various conditions contained in the Purchase Contract. The initial public 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 Certificates to certain dealers (including dealers depositing Certificates into investment trusts), dealer banks, banks acting as agents and others at prices lower than said public offering prices. 33 1739043/1 MISCELLANEOUS Insofar as any statements made in this Official Statement involve matters of opinion or of estimates, whether or not expressly stated, they are set forth as such and not as representations of fact. No representation is made that any of such statements made will be realized. Neither this Official Statement nor any statement which may have been made verbally or in writing is to be construed as a contract with the owners of the Certificates. The execution and delivery of this Official Statement have been duly authorized by the City. CITY OF CARLSBAD By 34 1739043/1 .- e' *- \ & I 1 b ~~ ~ b