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HomeMy WebLinkAbout2016-06-28; City Council; 22338; REFUNDING OF THE COMMUNITY FACILITIES DISTRICT NO. 3 IMPROVEMENT AREA NO. 1 BOND ISSUE AND APPROVING THE FORM OF VARIOUS RELATED DOCUMENTSCITY OF CARLSBAD-AGENDA BILL AB# 22 338 REFUNDING OF THE COMMUNITY FACILITIES DEPT. DIRECTOR <.M.. MTG. 06/28/2016 DISTRICT NO. 3 IMPROVEMENT AREA NO. 1 CITY ATTORNEY ffJ DEPT. ASD BOND ISSUE AND APPROVING THE FORM OF CITY MANAGER VARIOUS RELATED DOCUMENTS bvt_..- RECOMMENDED ACTION: Adopt a Resolution of the City Council of the City of Carlsbad, Acting as the Legislative Body of the City of Carlsbad Community Facilities District No. 3, authorizing the issuance of its 2016 Special Tax Refunding Bonds (Improvement Area 1) in a principal amount not to exceed nine million dollars ($9,000,000) and approving certain documents and taking certain other actions in connection therewith. ITEM EXPLANATION: Periodically the city has issued tax exempt bonds through community facilities districts to finance the construction of public infrastructure such as roadways, utilities, and other appurtenances in certain areas of the city. Each bond issue was priced and sold at the most favorable interest rates available at the time the bonds were taken to market. As interest rates rise and fall in the general economy, they also rise and fall in the public finance market. When interest rates fall sufficiently below the rates at which a bond issue was originally sold, it may be in the best interest of the city and property owners to refinance the applicable bond issues through a refunding. A refunding is similar to refinancing a home in that the old debt is paid off and the new loan, with its lower interest rates and annual debt service payments, is carried forward (though the maturity date is not extended). There are currently two debt issues which are good candidates for refunding due to decreases in interest rates: 1. Community Facility District No. 3, Improvement Area 1, and 2. Community Facility District No. 3, Improvement Area 2. At this time only Community Facilities District No.3, Improvement Area 1 is being refunded. Due to property characteristics in Community Facilities District No. 3, Improvement Area 2, there is some additional work which must be performed prior to refunding the bonds. Staff anticipates returning to Council on July 26, 2016 with Community Facility District No. 3, Improvement Area 2 for Council consideration. The potential savings by refunding Community Facility District No. 3, Improvement Area 1 will be discussed in the Fiscal Impact Section below. Actual savings will be dependent on market conditions when the refunding bonds are issued. DEPARTMENT CONTACT: Aaron Beanan 760-602-2414 aaron.beanan@carlsbadca.gov FOR SECRETARY USE. ~ BOARD ACTION: APPROVED CONTINUED TO DATE SPECIFIC 0 DENIED 0 CONTINUED TO DATE UNKNOWN 0 CONTINUED 0 RETURNED TO STAFF 0 WITHDRAWN 0 OTHER-SEE MINUTES 0 AMENDED 0 REPORT RECEIVED 0 Item No. 16 - AB #22,338 June 28, 2016 Page 1 of 87 CFO No. 3, IA 1 Bond Refunding June 28, 2016 Page2 of 3 Council, acting as the legislative body of Community Facilities District No. 3 (the "CFD11 ), is being asked to authorize the issuance of the refunding bonds, approve the form of the refunding documents, and allow staff to proceed with the sale of the refunding bonds. Some of the more important documents Council is being asked to approve are as follows: • Preliminary Official Statement -This is the document, prepared by Stradling Vacca Carlson & Rauth, which will be provided to prospective buyers of the bonds to provide information about Improvement Area No. 1 of the community facilities district, the refunding bonds, the city, and other information necessary to make an informed investment decision. • Bond Purchase Agreement -This agreement specifies the conditions under which the underwriter, Stifel, will purchase the refunding bonds from the CFD. • Continuing Disclosure Agreement -This agreement spells out the CFD1s ongoing responsibility to provide information to investors. • Bond Indenture -This agreement identifies the ongoing responsibilities of the CFD and its trustee, The Bank of New York Mellon Trust Company, N.A., with regard to holding and distributing the proceeds of the refunding bonds. • Escrow Agreement -This agreement provides instructions to the CFD1s escrow agent, The Bank of New York Mellon Trust Company, N.A., with regard to holding and distributing the proceeds of the refunding bonds. According to the current refunding schedule, .final bond pricing will occur in mid-July, 2016, and closing will occur in late July, 2016. Staff recommends that Council adopt the attached resolution which will allow the sale of refunding bonds by the CFD on behalf of Improvement Area 1. Adopting the resolution will also enable surplus construction funds in Improvement Area 1 to be applied as a credit towards the refunding bonds. Using the surplus construction funds towards the refunding decreases the amount of refunding bonds necessary to refund the existing Improvement Area 1 bonds. These actions will save affected property owners money each year over the life of the refunding bonds. FISCAL IMPACT: Pursuant to Government Code 53362.5 and 53363.2(e) of the Mello-Roos Community Facilities Act of 1982, the issuance of refunding bonds is contingent on satisfaction of the following requirements: • The total interest cost plus principal to maturity on the refunding bonds may not exceed the total interest cost plus principal to maturity on the bonds being refunded (i.e. the total debt service has to be less); and • The number of years to maturity of all refunding bonds is not more than the number of years to the last maturity of the bonds being refunded (i.e. the maturity date isn1t increased). An analysis performed by Fieldman Rolapp & Associates indicates the estimated total debt service of the refunding bonds will be less than the existing debt service. The estimated net present value ("NPV') savings are projected to be approximately 16 percent. However, adverse movements in 2 Item No. 16 - AB #22,338 June 28, 2016 Page 2 of 87 CFO No. 3, IA 1 Bond Refunding June 28, 2016 Page3 of 3 the bond market could affect the city's ability to satisfy the first requirement of the refunding: total debt service has to be less. As such, the resolution for Council's consideration contains a clause which indicates the refunding bonds will not be issued unless a minimum of 3 percent NPV savings can be achieved. Staff recommends approval ofthe attached resolution. Refunding the Community Facility District No. 3, Improvement Area 1 bonds will lower the annual cost to property owners beginning in Fiscal Year 2016-17. The analysis performed by Fieldman Rolapp & Associates projects annual savings for Improvement Area 1 of approximately $200,000, which equates to NPV savings (aggregated annual savings in today's dollars) of approximately $1.5 million, or approximately 16 percent, of the bonds being refunded. The estimated per parcel savings shown in Table 1 are derived from an average interest rate of 3.33 percent. This is consistent with current market rates as of May 2016. TABLE 1-Estimated Annual Savings Ranges for Property Owners1 District Minimum2 Maximum2 Average CFD No. 3, Improvement Area 1 $335 $16,631 $2,926 1. The estimated numbers shown in the table are based on the following information/assumptions: A) The amounts shown in the table do not include administrative costs of-$11 for comparison purposes; BJ Numbers have been rounded to the nearest whole dollar; and C) The FY 15-16 levy amounts were compared with the "typical estimated levy" in the proposed refunded district. 2. There is a large range in estimated savings because the parcels are not uniform in size and the tax is acreage based. Actual savings will be dependent on market conditions when the refunding bonds are issued. The city is not obligated in any manner to pay any costs related to the refunding bonds. Costs of issuance are contingent on the sale of the refunding bonds and will be paid as part of the proceeds from the sale of refunding bonds. The obligation for the repayment of debt service on the refunding bonds rests solely with the property owners within Community Facility District No. 3, Improvement Area 1. ENVIRONMENTAL IMPACT: Pursuant to Public Resources Code section 21065, this action does not constituted a "project" within the meaning of CEQA in that it has no potential to cause either a direct physical change in the environment, or a reasonably foreseeable indirect physical change in the environment, and therefore does not require environmental review. EXHIBITS: 1. Resolution of the City Council of the City of Carlsbad, Acting as the Legislative Body of the City of Carlsbad Community Facilities District No. 3, authorizing the issuance of its 2016 Special Tax Refunding Bonds (Improvement Area 1) in a principal amount not to exceed nine million dollars ($9,000,000} and approving certain documents and taking certain other actions in connection therewith. 2. Location Map. 3. Preliminary Official Statement including Continuing Disclosure Agreement. 4. Refunding Documents are on file with the City Clerk: a. Indenture; b. Escrow Agreement; and c. Bond Purchase Agreement. 3 Item No. 16 - AB #22,338 June 28, 2016 Page 3 of 87 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 RESOLUTION NO. 2016-139 RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CARLSBAD, ACTING AS THE LEGISLATIVE BODY OF CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO. 3, AUTHORIZING THE ISSUANCE OF ITS 2016 SPECIAL TAX REFUNDING BONDS {IMPROVEMENT AREA 1) IN A PRINCIPAL AMOUNT NOT TO EXCEED NINE MILLION DOLLARS ($9,000,000) AND APPROVING CERTAIN DOCUMENTS AND TAKING CERTAIN OTHER ACTIONS IN CONNECTION THEREWITH WHEREAS, the City Council of the City of Carlsbad, located in San Diego County, California (hereinafter sometimes referred to as the "legislative body of the District"), has heretofore undertaken proceedings and declared the necessity of City of Carlsbad Community Facilities District No. 3 (the "District") to issue bonds pursuant to the terms and provisions of the Mello-Roos Community Facilities Act of 1982, as amended, being Chapter 2.5, Part 1, Division 2, Title 5 of the Government Code of the State of California (the "Act") up to the amount of $14,000,000 for Improvement Area 1 of the District; and WHEREAS, pursuant to Resolution Nos. 2005-301 and 2005-302 adopted by the legislative body of the District on October 4, 2005, certain bond propositions were submitted to the qualified electors within the District, and were approved by more than two-thirds of the votes cast at the elections held within the District on November 8, 2005; and WHEREAS, pursuant to the Act, the District previously issued its $11,490,000 2006 Special Tax Bonds (Improvement Area 1) (the "2006 Bonds"), on May 11, 2006; and WHEREAS, the District desires to refund the 2006 Bonds if such refunding results in net present value savings to the District of at least 3%; and WHEREAS, in order to accomplish the refunding of the 2006 Bonds, the District desires to issue bonds in an aggregate principal amount not to exceed $9,000,000 designated as the "City of Carlsbad Community Facilities District No. 3 2016 Special Tax Refunding Bonds {Improvement Area 1)" (the "Bonds"); and Item No. 16 - AB #22,338 June 28, 2016 Page 4 of 87 1 WHEREAS, in order to effect the issuance of the Bonds, the legislative body of the 2 District desires to approve the form of a Preliminary Official Statement for the Bonds and to 3 approve the forms of and authorize the execution and delivery of a Bond Indenture, a Purchase 4 Contract, an Escrow Agreement {2006 Bonds), and a Continuing Disclosure Agreement for the 5 Bonds, the forms of which are on file with the City Clerk; and 6 WHEREAS, to assist in issuing the Bonds, the legislative body of the District desires to 7 retain Stradling Yocca Carlson & Rauth, a Professional Corporation, to act as Bond Counsel and 8 Disclosure Counsel to the District, and Fieldman, Rolapp & Associates, to act as financial advisor 9 to the District; and 10 WHEREAS, the legislative body of the District has determined in accordance with 11 Government Code Section 53360.4 that a negotiated sale of the Bonds to Stifel, Nicolaus & 12 Company, Incorporated (the "Underwriter"), in accordance with the terms of the Purchase 13 Contract for the Bonds to be entered into by the District and the Underwriter (the "Purchase 14 Contract") will result in a lower overall cost to the District than a public sale; and 15 WHEREAS, the legislative body of the District has determined that it is prudent in the 16 management of its fiscal affairs to issue the Bonds; and 17 WHEREAS, the aggregate assessed value of the real property in Improvement Area 1 of 18 the District that is subject to the special tax to pay debt service on the Bonds is not less than 19 three times the principal amount of the Bonds and the principal amount of all other bonds 20 outstanding that are secured by a special tax levied pursuant to the Act or a special assessment 21 levied on property within Improvement Area 1 of the District, which fact is required as a 22 precondition to the issuance of the Bonds; and 23 NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Carlsbad, acting as 24 the legislative body of City of Carlsbad Community Facilities District No. 3, as follows: 25 1. Each of the above recitals is true and correct and is adopted by the legislative 26 body of the District. 27 28 2 Item No. 16 - AB #22,338 June 28, 2016 Page 5 of 87 1 2. If the District is able to realize at least 3% net present value savings by refunding 2 the 2006 Bonds, the issuance of the Bonds pursuant to the Act in a principal amount not to 3 exceed $9,000,000 is hereby authorized, with the exact principal amount of the Bonds to be 4 determined by the official signing the Purchase Contract in accordance with Section 5 below. 5 The legislative body of the District hereby determines that it is prudent in the management of 6 its fiscal affairs to issue the Bonds. In satisfaction of the requirements contained in Section 7 53363.2 of the Act, the legislative body of the District hereby determines that: 8 (a) it is anticipated that the purchase of the Bonds will occur on or about July 28, 9 2016 and that the refunding of the 2006 Bonds will occur on September 1, 2016, or as soon 10 thereafter as practicable and permitted by the terms of the 2006 Bonds (subject to change at 11 the discretion of any of the Authorized Officers (as such term is defined herein)); 12 (b) the Bonds shall be dated their date of issuance, and be in the denominations, 13 have the maturity dates (which do not exceed the latest maturity date of the 2006 Bonds being 14 refunded), and be payable at the place and be in the form specified in the Purchase Contract to 15 be executed on behalf of the District in accordance with Section 5 hereof; 16 (c) the aggregate principal amount of Bonds shall not exceed $9,000,000; 17 (d) the Bonds shall not have a final maturity date later than September 1, 2036; 18 19 (e) (f) the Bonds will bear interest at the minimum rate of 0.05% per annum; the Underwriter's discount for the Bonds shall not exceed 2.00% of the 20 aggregate principal amount thereof; 21 (g) the 2006 Bonds shall be payable at the place specified in the Escrow Agreement 22 (2006 Bonds); and 23 (h) the designated cost of issuing the Bonds being used to refund the 2006 Bonds, as 24 defined by Section 53363.8 of the Act, shall include all of the costs specified in Section 25 53363.8(a), (b)(2) and (c). 26 3. The Bonds shall be governed by the terms and conditions of the Bond Indenture, 27 dated as of July 1, 2016, by and between the District and The Bank of New York Mellon Trust 28 3 Item No. 16 - AB #22,338 June 28, 2016 Page 6 of 87 1 Company, N.A., as trustee, relating to the Bonds. The Bond Indenture shall be prepared by 2 Bond Counsel to the District and executed by any one of the Mayor, City Manager, Assistant 3 City Manager, Administrative Services Director or City Treasurer, or the written designee of one 4 of the foregoing (collectively the "Authorized Officers"), substantially in the form presented at 5 this meeting, with such additions thereto and changes therein as the officer or officers 6 executing the same deem necessary to cure any ambiguity or defect therein if such addition or 7 change does not materially alter the substance or content thereof, to insert the offering 8 price(s), interest rate(s), selling compensation, principal amount per maturity, redemption 9 · dates and prices and such other related terms and provisions as limited by Section 5 hereof, or 10 to conform any provisions therein to the Purchase Contract and the Official Statement 11 delivered to the purchasers of the Bonds. Approval of such changes shall be conclusively 12 evidenced by the execution and delivery of the Bond Indenture by any one of the Authorized 13 Officers. Capitalized terms used in this Resolution which are not defined herein have the 14 meanings ascribed to them in the Bond Indenture. 15 4. The Bonds shall be executed on behalf of the District by the manual or facsimile 16 signature of an Authorized Officer and the seal of the District or the City, or a facsimile thereof, 17 shall be impressed or imprinted thereon and attested with the manual or facsimile signature of 18 the City Clerk. The Bank of New York Mellon Trust Company, N.A., is hereby appointed to act as 19 trustee for the Bonds. 20 5. The covenants set forth in the Bond Indenture, to be executed in accordance 21 with Section 3 above, are hereby approved, shall be deemed to be covenants of the legislative 22 body of the District and shall be complied with by the District and its officers. 23 6. The form of the Purchase Contract presented at this meeting is hereby approved, 24 and any one of the Authorized Officers is hereby authorized to execute the Purchase Contract, 25 with such additions thereto and changes therein relating to dates and numbers as are 26 necessary to conform the Purchase Contract to the dates, amounts and interest rates applicable 27 to the Bonds as of the sale date. Approval of such additions and changes shall be conclusively 28 4 Item No. 16 - AB #22,338 June 28, 2016 Page 7 of 87 1 evidenced by the execution and delivery of the Purchase Contract; provided, however, that the 2 Purchase Contract shall be signed only if the Bonds are purchased by the Underwriter at a true 3 interest cost that does not exceed 5.00%, the refunding of the 2006 Bonds results in net 4 present value savings to the District of at least 3.00% of the 2006 Bonds to be refunded 5 (including the costs of issuing the Bonds), the interest rate on the Bonds is such that the 6 principal and total interest cost to maturity of the Bonds is less than the principal and total 7 interest cost to maturity of the 2006 Bonds, the last maturity date of the Bonds is not later than 8 the last maturity date of the 2006 Bonds and the discount paid to the Underwriter (exclusive of 9 original issue discount) does not exceed 2.00% of the principal amount of the Bonds. Each of 10 the Authorized Officers is authorized to determine the day on which the Bonds are to be priced 11 in order to attempt to produce the lowest borrowing cost for the District and may reject any 12 terms presented by the Underwriter if determined not to be in the best interest of the District. 13 7. The form of the Continuing Disclosure Agreement presented at this meeting is 14 hereby approved, and any one of the Authorized Officers is hereby authorized and directed to 15 execute the Continuing Disclosure Agreement in the form hereby approved, with such additions 16 therein and changes thereto as the Authorized Officer or Authorized Officers executing the 17 same deem necessary to cure any defect or ambiguity therein if such change does not 18 materially alter the substance or content thereof, with such approval to be conclusively 19 evidenced by the execution and delivery of the Continuing Disclosure Agreement. 20 8. The form of the Escrow Agreement {2006 Bonds) presented at this meeting is 21 hereby approved and any one of the Authorized Officers is hereby authorized and directed to 22 execute the Escrow Agreement (2006 Bonds) in the form hereby approved, with such additions 23 therein and changes thereto as the Authorized Officer or Authorized Officers executing the 24 same deem necessary to cure any defect or ambiguity therein if such change does not 25 materially alter the substance or content thereof, with such approval to be conclusively 26 evidenced by the execution and delivery of the Escrow Agreement {2006 Bonds). The Bank of 27 28 5 Item No. 16 - AB #22,338 June 28, 2016 Page 8 of 87 1 New York Mellon Trust Company, N.A., is hereby appointed to act as escrow agent under the 2 Escrow Agreement (2006 Bonds). 3 9. The form of the Preliminary Official Statement presented at this meeting is 4 hereby approved, and the Underwriter is hereby authorized to distribute the Preliminary 5 Official Statement to prospective purchasers of the Bonds in the form hereby approved, 6 together with such additions thereto and changes therein as are determined to be necessary by 7 any one of the Authorized Officers to make the Preliminary Official Statement final as of its 8 date. Each of the Authorized Officers is hereby authorized and directed to execute and deliver 9 a certificate deeming the Preliminary Official Statement final as of its date in accordance with 10 Rule 15c2-12 promulgated under the Securities Exchange Act of 1934. Each of the Authorized 11 Officers is hereby authorized to execute a final Official Statement in the form of the Preliminary 12 Official Statement, together with such changes as are determined necessary by the Authorized 13 Officer executing the Official Statement to make such Official Statement complete and accurate 14 as of its date. The Underwriter is further authorized to distribute the final Official Statement 15 for the Bonds and any supplement thereto to the purchasers thereof upon its execution on 16 behalf of the District as described above. 17 10. In accordance with the requirements of Section 53345.8 of the Act, the 18 legislative body of the District hereby determines that the aggregate assessed value of the real 19 property in Improvement Area 1 of the District that is subject to the special tax to pay debt 20 service on the Bonds is not less than three times the principal amount of the Bonds and the 21 principal amount of all other bonds outstanding that are secured by a special tax levied 22 pursuant to the Act or a special assessment levied on property within Improvement Area 1 of 23 the District. This determination is based on the assessed value of the real property within 24 Improvement Area 1 of the District as set forth in the fiscal year 2015-16 County Assessor's roll. 25 11. Each of the Authorized Officers is authorized to provide for all services necessary 26 to effect the issuance of the Bonds. Such services shall include, but not be limited to, obtaining 27 legal services, trustee services, special tax consultant services and any other services deemed 28 6 Item No. 16 - AB #22,338 June 28, 2016 Page 9 of 87 1 appropriate by an Authorized Officer. Any one of the Authorized Officers is authorized to pay 2 for the cost of such services, together with other Costs of Issuance (as such term is defined in 3 the Bond Indenture) from Bond proceeds. Without further approval of the legislative body of 4 the District, the total amount disbursed by the Authorized Officers for Costs of Issuance, 5 exclusive of Underwriter's discount, shall not exceed 3% of the principal amount of the Bonds, 6 inclusive of net premium. 7 12. The Authorized Officers are authorized to execute contracts with Stradling Yocca 8 Carlson & Rauth, a Professional Corporation, to act as Bond Counsel and Disclosure Counsel to 9 the District, and Fieldman, Rola pp & Associates, to act as financial advisor to the District. 10 13. Each of the Authorized Officers and the other officers and staff of the City of 11 Carlsbad and the District who are responsible for the fiscal affairs of the District are hereby 12 authorized and directed to take any actions and to execute and deliver any and all documents 13 as are necessary to accomplish the issuance, sale and delivery of the Bonds in accordance with 14 the provisions of this Resolution, and the fulfillment of the purposes of the Bonds as described 15 in the Bond Indenture, including, but not limited to, providing certificates as to the accuracy of 16 any information relating to the District which is included in the Official Statement and 17 amendments to the Bond Indenture. Any document authorized herein to be signed by the City 18 Clerk may be signed by a duly appointed deputy clerk. 19 20 21 22 23 24 25 26 27 28 7 Item No. 16 - AB #22,338 June 28, 2016 Page 10 of 87 1 PASSED, APPROVED AND ADOPTED at a Regular Meeting of the City Council of the City 2 of Carlsbad on the 28th day of June, 2016, by the following vote to wit: 3 4 5 AYES: Hall, Wood, Schumacher, Blackburn, Packard. 6 NOES: None. 7 ABSENT: None. 8 9 10 11 12 13 14 (SEAL) 15 16 17 18 19 20 21 22 23 24 25 26 27 28 8 Item No. 16 - AB #22,338 June 28, 2016 Page 11 of 87 EXIIlBIT 2 Zone B Document Path: J:\RequestsMarch2015\Finance\00019396_ 16\CFD3lmprovementArea1 RoadMap.mxd Community Facilities District No. 3 Improvement Area No. 1 · Zone A & Zone B Item No. 16 - AB #22,338 June 28, 2016 Page 12 of 87 EXIIlBIT 3 Stradling Yocca Carlson & Rauth Draft of 6/16/16 PRELIMINARY OFFICIAL STATEMENT DATED JUNE_, 2016 NEW ISSUE -BOOK-ENTRY ONLY UNRATED In the opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Bond Counsel, under existing statutes, regulations, rulings and judicial decisions, and assuming the accuracy of certain representations and compliance with certain covenants and requirements described in this Official Statement, interest ( and original issue discount) on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and corporations. In the farther opinion of Bond Counsel, interest (and original issue discount) on the Bonds is exempt from State of California personal income tax. See the caption "TAX EXEMPTION " County of San Diego Dated: Date of Delivery $8,210,000* CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO. 3 2016 SPECIAL TAX REFUNDING BONDS (IMPROVEMENT AREA 1) State of California Due: September 1, as shown on the inside front cover page The City of Carlsbad Community Facilities District No. 3 2016 Special Tax Refunding Bonds (Improvement Area 1) are being issued: (i) to refund all of the City of Carlsbad Community Facilities District No. 3 2006 Special Tax Bonds (Improvement Area I), which are currently outstanding in the aggregate principal amount of$9,615,000; (ii) to fund a deposit to the Reserve Account; and (iii) to pay the costs of issuance of the Bonds. City of Carlsbad Community Facilities District No. 3 has been formed by and is located in the City of Carlsbad, California. The.Bonds are authorized to be issued pursuant to the Mello-Roos Community Facilities Act of 1982, as amended (Sections 53311 et seq. of the Government Code of the State of California), and pursuant to a Bond Indenture, dated as of July 1, 2016, by and between the District and The Bank of New York Mellon Trust Company, N.A., as trustee. The Bonds are special obligations of the District and are payable solely from revenues derived from certain annual Special Taxes to be levied on and collected from the owners of certain taxable land within Improvement Area 1 of the District and from certain other funds pledged under the Indenture, all as further described in this Official Statement. The Special Taxes are to be levied according to the rate and method of apportionment approved by the City Council of the City and the qualified electors within the District. See the caption "SOURCES OF PAYMENT FOR THE BONDS-Special Taxes." The City Council of the City is the legislative body of the District. The Bonds are issuable in fully registered form and when issued will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York. Individual purchases may be made in integral multiples of $5,000 and will be in book-entry form only. Purchasers of the Bonds will not receive certificates representing their beneficial ownership in the Bonds but will receive credit balances on the books of their respective nominees. The Bonds will not be transferable or exchangeable except for transfer to another nominee of DTC or as otherwise described in this Official Statement. Interest on the Bonds will be payable on each March 1 and September 1, commencing March 1, 2017. Principal of and interest on the Bonds will be paid by the Trustee to DTC for subsequent disbursement to DTC Participants, who are obligated to remit such payments to the Beneficial Owners of the Bonds. See the captions "THE BONDS-General Provisions" and "THE BONDS-Book-Entry Only System." Neither the faith and credit nor the taxing power of the City of Carlsbad, the County of San Diego, the State of California or any political subdivision of the State other than the District is pledged to the payment of the Bonds. Except for the Net Taxes, no other taxes are pledged to the payment of the Bonds. The Bonds are limited obligations of the District payable solely from Net Taxes and certain other amounts held under the Indenture, as more fully described in this Official Statement. The Bonds are subject to optional redemption, mandatory sinking fund redemption and extraordinary redemption from Special Tax Prepayments prior to maturity. See the caption "THE BONDS-Redemption." CERTAIN EVENTS COULD AFFECT THE ABILITY OF THE DISTRICT TO PAY THE PRINCIPAL OF AND INTEREST ON THE BONDS WHEN DUE. THE PURCHASE OF THE BONDS INVOLVES SIGNIFICANT INVESTMENT RISKS, AND THE BONDS ARE NOT SUITABLE INVESTMENTS FOR MANY INVESTORS. SEE THE CAPTION "SPECIAL RISK FACTORS" FOR A DISCUSSION OF CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED, IN ADDITION TO THE OTHER MATTERS SET FORTH IN TIDS OFFICIAL STATEMENT, IN EVALUATING THE INVESTMENT QUALITY OF THE BONDS. This cover page contains certain information for general reference only. It is not intended to be a summary of the security or terms of this issue. Investors are advised to read the entire Official Statement to obtain information essential to the making of an informed investment decision. MATURITY SCHEDULE (See Inside Cover Page) The Bonds are offered when, as and if issued and accepted by the Underwriter, subject to approval as to their legality by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Bond Counsel, and subject to certain other conditions. Stradling Yocca Carlson & Rauth, a Professional Corporation, is serving as Disclosure Counsel with respect to the Bonds. Certain legal matters will be passed on for the City and the District by the City Attorney, for the Underwriter by Jones Hall, A Professional Law Corporation, San Francisco, California, and for the Trustee by its counsel. It is anticipated that the Bonds in book-entry form will be available for delivery in book-entry form through the facilities of DTC on or about July__, 2016. [STIFEL LOGO] Dated: July_, 2016 * Preliminary, subject to change. Item No. 16 - AB #22,338 June 28, 2016 Page 13 of 87 $8,210,000* CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO. 3 2016 SPECIAL TAX REFUNDING BONDS (IMPROVEMENT AREA 1) Maturity Date (September 1) $ Principal Amount MATURITY SCHEDULE Base CUSIPt Interest Rate Yield Price cus1pt % % $ ____ % Tenn Bond due September 1, 20 _ -Yield __ %, Price: __ , CUSIPt: _ 'Preliminary, subject to change. t CUSJI'® is a registered trademark of the American Bankers Association. CUSIP Global Services (CGS) is managed on behalf of the American Bankers Association by S&P Capital IQ. Copyright° 2016 CUSIP Global Services. All rights reserved. CUSIP® data herein is provided by CUSIP Global Services. This data is not intended to create a database and does not serve in any way as a substitute for the CGS database. CUSIF® numbers are provided for convenience of reference only. Neither the District nor the Underwriter takes any responsibility for the accuracy of such numbers. Item No. 16 - AB #22,338 June 28, 2016 Page 14 of 87 CITY OF CARLSBAD, CALIFORNIA CITY COUNCIL Matt Hall, Mayor Lorraine Wood, Mayor Pro Tern Mark Packard, Council Member Keith Blackburn, Council Member Michael Schumacher, Council Member CITY STAFF Kevin Crawford, City Manager Gary Barberio, Assistant City Manager, Special Projects Clay Phillips, Interim Assistant City Manager, Community Services Chuck McBride, Administrative Services Director Celia Brewer, City Attorney Barbara Engleson, City Clerk Craig Lindholm, City Treasurer SPECIAL SERVICES Bond Counsel and Disclosure Counsel Stradling Y occa Carlson & Rauth, a Professional Corporation Newport Beach, California Financial Advisor Fieldman, Rolapp & Associates Irvine, California Special Tax Consultant NBS Temecula, California Trustee and Escrow Bank The Bank of New York Mellon Trust Company, N.A. Los Angeles, California Verification Agent Grant Thornton LLP Minneapolis, Minnesota Item No. 16 - AB #22,338 June 28, 2016 Page 15 of 87 Except where otherwise indicated, all information contained in this Official Statement has been provided by the District and the City. No dealer, broker, salesperson or other person has been authorized by the District or the City to give any information or to make any representations in connection with the offer or sale of the Bonds other than those contained in this Official Statement and, if given or made, such other information or representations must not be relied upon as having been authorized by the District or the City. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the Bonds by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale. The information contained in this Official Statement has been obtained from sources that are believed to be reliable, but this information is not guaranteed as to accuracy or completeness. The Underwriter has provided the following sentence for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of this information. Certain statements included or incorporated by reference in this Official Statement constitute "forward-looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27 A of the United States Securities Act of 1933, as amended. Such statements are generally identifiable by the terminology used such as "plan," "expect," "estimate," "project," "budget," "believe," "anticipate" or other similar words. Such forward-looking statements include, but are not limited to, certain statements contained in the information under the caption "THE DISTRICT." The achievement of certain results or other expectations contained in such forward-looking statements involves known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements described in this Official Statement to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The City does not plan to issue any updates or revisions to the forward-looking statements set forth in this Official Statement. In evaluating such statements, potential investors should specifically consider the various factors that could cause actual events or results to differ materially from those indicated by such forward-looking statements. In connection with the offering of the Bonds, the Underwriter may overallot or effect transactions that stabilize or maintain the market price of the Bonds at a level above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. The Underwriter may offer and sell the Bonds to certain dealers and dealer banks and banks acting as agent and others at prices lower than the public offering prices stated on the inside cover page of this Official Statement, and the Underwriter may change those public offering prices from time to time. The Bonds have not been registered under the Securities Act of 1933, as amended, in reliance upon an exemption contained in such act, and have not been registered or qualified under the securities laws of any state. The City maintains a website. However, the information presented on such website is not a part of this Official Statement and should not be relied upon in making an investment decision with respect to the Bonds. Item No. 16 - AB #22,338 June 28, 2016 Page 16 of 87 TABLE OF CONTENTS INTRODUCTION ................................................. 1 General ............................................................... I The District ........................................................ 1 Sources of Payment for the Bonds ..................... 2 Description of the Bonds .................................... 3 Tax Matters ........................................................ 4 Professionals Involved in the Offering .............. 4 Continuing Disclosure ....................................... 4 Bond Owners' Risks .......................................... 4 Other Information .............................................. 5 THE REFUNDING PLAN .................................... 5 General. .............................................................. 5 Verification of Mathematical Computations ...... 5 Estimated Sources and Uses of Funds ............... 6 THEBONDS ......................................................... 6 General Provisions ............................................. 6 Book-Entry Only System ................................... 7 Authority for Issuance ........................................ 7 Redemption ........................................................ 7 Registration, Transfer and Exchange ................. 9 Debt Service Schedule ..................................... 10 SOURCESOFPAYMENTFORTHE BONDS ............................................................... 10 Limited Obligations ......................................... 10 Special Taxes ................................................... 11 Reserve Account of the Special Tax Fund ....... 16 No Issuance of Parity Bonds Except for Refunding ......................................................... 17 No Acceleration ............................................... 17 THE IMPROVEMENT AREA ........................... 17 General Description ......................................... 17 Property Ownership ......................................... 18 Estimated Direct and Overlapping Indebtedness ..................................................... 22 Estimated Assessed Value-to-Lien Ratio ......... 23 Development Status ......................................... 26 Delinquency History ........................................ 26 SPECIAL RISK FACTORS ................................ 27 Concentration of Ownership ............................ 28 Limited Obligations ......................................... 28 Insufficiency of Special Taxes ......................... 28 Failure to Develop Properties .......................... 29 Endangered Species ......................................... 30 Natural Disasters .............................................. 30 Hazardous Substances ...................................... 31 Shapiro Decision .............................................. 31 Parity Taxes and Special Assessments ............. 32 Disclosures to Future Purchasers ..................... 32 Special Tax Delinquencies ............................... 33 Non-Cash Payments of Special Taxes ............. 33 Payment of the Special Tax is not a Personal Obligation of the Owners ................................ .34 Land Values ...................................................... 34 Potential Early Redemption of Bonds from Prepayments .................................................... .34 Billing of Special Taxes .................................. .34 Value-to-Lien Ratios ....................................... .35 IRS Audit of Tax-Exempt Bond Issues ........... .35 FDIC/Federal Government Interests in Properties ......................................................... .3 5 Bankruptcy and Foreclosure ............................ .37 No Acceleration Provision ............................... .38 Loss of Tax Exemption ................................... .38 Limitations on Remedies ................................. .38 Limited Secondary Market .............................. .39 Proposition 218 ................................................ .39 Ballot Initiatives .............................................. .40 CONTINUING DISCLOSURE .......................... .40 District : ............................................................ .40 [Property Owners] ........................................... .41 LEGAL MATTERS ............................................ .41 TAX EXEMPTION ............................................ .41 LITIGATION ....................................................... 43 NO RATING ........................................................ 43 UNDERWRITING ............................................. .43 FINANCIAL ADVISOR .................................... .44 FINANCIAL INTERESTS ................................. .44 PENDING LEGISLATION ................................ .44 ADDITIONAL INFORMATION ....................... .44 APPENDIX A RATE AND METHOD OF APPORTIONMENT OF SPECIAL TAX ........................... A-1 APPENDIX B SUPPLEMENTAL INFORMATION CONCERNING THE CITY OF CARLSBAD AND THE COUNTY OF SAN DIEGO ......... B-1 APPENDIX C SUMMARY OF INDENTURE ... C-1 APPENDIX D-1 FORM OF DISTRICT CONTINUING DISCLOSURE AGREEMENT ......................... D-1-1 APPENDIX D-2 FORM OF PROPERTY OWNER CONTINUING DISCLOSURE CERTIFICATED-2-1 APPENDIX E FORM OF OPINION OF BOND COUNSEL ....................... E-1 APPENDIXF BOOK-ENTRYONLY SYSTEM ...................................... F-1 Item No. 16 - AB #22,338 June 28, 2016 Page 17 of 87 [INSERT REGIONAL/LOCAL MAPS AND AERIAL PHOTO OF IA l] Item No. 16 - AB #22,338 June 28, 2016 Page 18 of 87 General $8,210,000* CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO. 3 2016 SPECIAL TAX REFUNDING BONDS (IMPROVEMENT AREA 1) INTRODUCTION The purpose of this Official Statement, which includes the front cover page, the inside front cover page, the table of contents and the attached appendices ( collectively, the "Official Statement"), is to provide certain information concerning the issuance of the $8,210,000* City of Carlsbad Community Facilities District No. 3 2016 Special Tax Refunding Bonds (Improvement Area 1) (the "Bonds"). The proceeds of the Bonds will be used: (i) to refund all of the City of Carlsbad Community Facilities District No. 3 2006 Special Tax Bonds (Improvement Area 1) (the "2006 Bonds"), which are currently outstanding in the aggregate principal amount of $9,615,000; (ii) to fund a deposit to the Reserve Account; and (iii) to. pay the costs of issuance of the Bonds. See the captions "THE REFUNDING PLAN," "ESTIMATED SOURCES AND USES OF FUNDS" and "SOURCES OF PAYMENT FOR THE BONDS-Reserve Account of the Special Tax Fund." This introduction is not a summary of this Official Statement. It is only a brief description of and guide to, and is qualified by, more complete and detailed information contained in the entire Official Statement, including the appendices, and the documents summarized or described in this Official Statement. A full review should be made of the entire Official Statement. The sale and delivery of Bonds to potential investors is made only by means of the entire Official Statement. All capitalized terms used in this Official Statement and not defined have the meanings set forth in Appendix C. The Bonds are authorized to be issued pursuant to the Mello-Roos Community Facilities Act of 1982, as amended (Sections 53311 et seq. of the Government Code of the State of California) (the "Act"), and a Bond Indenture dated as of July 1, 2016 (the "Indenture") by and between City of Carlsbad Community Facilities District No. 3 (the "District") and The Bank of New York Mellon Trust Company, N.A., as trustee (the "Trustee"). The Bonds are secured under the Indenture by a pledge of and lien upon certain Net Taxes (as such term is defined in this Official Statement) and all moneys in the Special Tax Fund ( other than the Administrative Expenses Account) as described under the Indenture. The District Formation Proceedings. The District was formed by the City of Carlsbad (the "City") pursuant to the Act. The Act was enacted by the State of California (the "State") Legislature to provide an alternative method of financing certain public capital facilities and services, especially in developing areas of the State. Any local agency (as such term is defined in the Act) may establish a district to provide for and finance the cost of eligible public facilities and services. Generally, the legislative body of the local agency that forms a district acts on behalf of such district as its legislative body. Subject to approval by two-thirds of the votes cast at an election and compliance with the other provisions of the Act, a legislative body of a local agency may issue bonds for a district and may levy and collect a special tax within such district to repay such indebtedness. Pursuant to the Act, the City Council adopted the necessary resolutions stating its intent to establish the District, to authorize the levy of Special Taxes (as such term is defined in this Official Statement) on 'Preliminary, subject to change. 1 Item No. 16 - AB #22,338 June 28, 2016 Page 19 of 87 taxable property within the boundaries of the District, and to have the District incur bonded indebtedness. Following public hearings conducted pursuant to the provisions of the Act, the City Council adopted resolutions establishing the District and calling special elections to submit the authorization of the levy of the Special Taxes and the incurring of bonded indebtedness to the qualified voters of the District, including: (i) Resolution No. 2005-329 adopted by the City Council of the City on November 8, 2005, pursuant to which the City formed the District and designated Improvement Area 1 (the "Resolution of Formation"); and (ii) Ordinance No. NS-777 adopted by the legislative body of the District on November 15, 2005, providing for the levying of the Special Taxes (the "Ordinance"). On November 8, 2005, at' elections held pursuant to the Act, the landowners who comprised the qualified voters of the District authorized the District to incur bonded indebtedness in an aggregate principal amount not to exceed $14,000,000 and approved the rate and method of apportionment of the Special Taxes (the "Rate and Method") for the District to pay the principal of and interest on the bonds of the District. See the caption "THE BONDS-Authority for Issuance." The City Council of the City acts as the legislative body of the District. Description of the City, the District and Improvement Area 1. The City is located in northern San Diego County (the "County") approximately 30 miles north of downtown San Diego. The City is bordered by the Pacific Ocean to the west, the City of Oceanside to the north, the Cities of Vista and San Marcos to the east, and the City of Encinitas to the south. See Appendix B for general information relating to the City. No funds of the City are available for payment of the Bonds. The District, which is located entirely within the City, consists of Improvement Area 1 and Improvement Area 2. Special taxes or other moneys derived from Improvement Area 2 of the District are not available for payment of the Bonds. Improvement Area 1 of the District consists of approximately 217 .1 gross acres, of which approximately 71.4 acres have been improved, approximately 66.4 acres remain unimproved and approximately 79.3 acres have been set aside for open space and public areas. Improvement Area 1 has two tax zones under the Rate and Method, Zone A and Zone B ( each, a "Zone"). Both Zones are primarily improved with industrial, office and research and development properties. The property owners within Improvement Area 1 are referred to in this Official Statement as the "Property Owners." See the caption "THE IMPROVEMENT AREA-General Description." Improvement Area 1 is located north of Palomar Airport Road and east of Melrose Drive. Sources of Payment for the Bonds Special Taxes. As used in this Official Statement, the term "Special Taxes" means the taxes authorized to be levied by the District on property within Improvement Area 1 in accordance with the Ordinance, the Resolution of Formation, the Act and the voter approval obtained at the November 8, 2005 election in Improvement Area 1, including any scheduled payments and any Prepayments ( as such term is defined in the Indenture) of Special Taxes, and the net proceeds of the redemption or sale of property sold as a result of foreclosure of the lien of the Special Taxes to the amount of said lien and penalties and interest on such Special Taxes. See the caption "SOURCES OF PAYMENT FOR THE BONDS-Special Taxes" and Appendix A. Under the Indenture, the District has pledged to repay the Bonds from: (i) the "Net Taxes," which consist of the Special Taxes less amounts set aside to pay Administrative Expenses not to exceed $10,000 (the "Administrative Expenses Cap"); and (ii) amounts in the Special Tax Fund ( other than the Administrative Expenses Account) established under the Indenture. 2 Item No. 16 - AB #22,338 June 28, 2016 Page 20 of 87 The Net Taxes are the primary security for the repayment of the Bonds. In the event that the Special Taxes are not paid when due, the only sources of funds available to pay the debt service on the Bonds are amounts held by the Trustee in the Special Tax Fund, including amounts held in the Reserve Account. See the caption "SOURCES OF PAYMENT FOR THE BONDS-Reserve Account of the Special Tax Fund." Foreclosure Proceedings. The District has covenanted for the benefit of the Owners of the Bonds that it will (i) commence judicial foreclosure proceedings against parcels with delinquent Special Taxes in excess of $8,000 by the October 1 following the close of each fiscal year of the District ending June 30 ( each, a "Fiscal Year") in which such Special Taxes were due; (ii) commence judicial foreclosure proceedings against all parcels with delinquent Special Taxes by the October 1 foHowing the close of each Fiscal Year in which it receives Special Taxes in an amount which is less than 95% of the total Special Tax levied and the amount on deposit in the Reserve Account is at less than the Reserve Requirement; and (iii) diligently pursue such foreclosure proceedings until the delinquent Special Taxes are paid. See the caption "SOURCES OF PAYMENT FOR THE BONDS-Special Taxes-Proceeds of Foreclosure Sales." There is no assurance that the property within the District can be sold for the assessed values described in this Official Statement, or for a price sufficient to pay the delinquent Special Taxes (plus related penalties and interest) in the event of a default in payment of Special Taxes by the current or future landowners within the District. See the caption "SPECIAL RISK FACTORS-Land Values." Neither the faith and credit nor the taxing power of the City, the State or any political subdivision of the State other than the District is pledged to the payment of the Bonds or any Parity Bonds (as such term is defined in this Official Statement). Except for the Net Taxes, no other taxes are pledged to the payment of the Bonds or any Parity Bonds. The Bonds and any Parity Bonds are neither general or special obligations of the City nor general obligations of the District, but are limited obligations of the District payable solely from certain amounts deposited by the District in the Special Tax Fund (exclusive of the Administrative Expenses Account), as more fully described in this Official Statement. No Issuance of Parity Bonds Except for Refunding. The District may, without the consent of the Owners of the Bonds, issue additional indebtedness secured by the Net Taxes on a parity with the Bonds ("Parity Bonds"), but only for the purpose ofrefunding all or a portion of the Bonds or any Parity Bonds then Outstanding. See the caption "SOURCES OF PAYMENT FOR THE BONDS-Issuance of Parity Bonds for Refunding." Other taxes and/or special assessments with liens that are equal in priority to the continuing lien of the Special Taxes have been levied as described under the captions "THE DISTRICT-Estimated Direct and Overlapping Indebtedness" and "THE DISTRICT-Expected Tax Burden." Additional other taxes and/or special assessments may also be levied in the future on the property within the District, which could adversely affect the willingness of the Property Owners to pay the Special Taxes when due. See the caption "SPECIAL RISK FACTORS-Parity Taxes and Special Assessments." Description of the Bonds The Bonds will be issued and delivered as fully registered Bonds, registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ("DTC"), and will be available to actual purchasers of the Bonds (the "Beneficial Owners") in the integral multiples of $5,000, under the book- entry system maintained by DTC, only through brokers and dealers who are or act through DTC Participants as described in this Official Statement. Beneficial Owners will not be entitled to receive physical delivery of the Bonds. In the event that the book-entry only system described in this Official Statement is no longer used with respect to the Bonds, the Bonds will be registered and transferred in accordance with the Indenture. See AppendixC. 3 Item No. 16 - AB #22,338 June 28, 2016 Page 21 of 87 Principal of, premium, if any, and interest on the Bonds is payable by the Trustee to DTC. Disbursement of such payments to DTC Participants is the responsibility of DTC and disbursement of such payments to the Beneficial Owners is the responsibility of DTC Participants. In the event that the book-entry only system is no longer used with respect to the Bonds, the Beneficial Owners will become the registered owners of the Bonds and will be paid principal and interest by the Trustee, all as described in this Official Statement. See Appendix F. The Bonds are subject to optional redemption, mandatory sinking fund redemption and extraordinary redemption from Special Tax Prepayments as described under the caption "THE BONDS-Redemption." For a more complete description of the Bonds and the basic documentation pursuant to which they are being sold and delivered, see the caption "THE BONDS" and Appendix C. Tax Matters In the opinion of Stradling Y occa Carlson & Rauth, a Professional Corporation, Newport Beach, California ("Bond Counsel"), based on existing statutes, regulations, rulings and judicial decisions and assuming compliance with certain covenants and requirements described in this Official Statement, interest (and original issue discount) on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and corporations. It is the further opinion of Bond Counsel that interest (and original issue discount) on the Bonds is exempt from State personal income tax. See the caption "TAX EXEMPTION." Professionals Involved in the Offering The Bank of New York Mellon Trust Company, N.A. will act as Trustee under the Indenture. NBS ("NBS") has acted as Special Tax Consultant to the District. Stifel, Nicolaus & Company, Incorporated is the Underwriter of the Bonds. Certain proceedings in connection with the issuance and delivery of the Bonds are subject to the approval of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, as Bond Counsel and Disclosure Counsel to the District. Fieldman, Rolapp & Associates is acting as Financial Advisor to the District in connection with the Bonds. Certain legal matters will be passed on for the City and the District by the City Attorney, for the Underwriter by Jones Hall, A Professional Law Corporation, San Francisco, California, and for the Trustee by its counsel. For information concerning the respects in which certain of the above-mentioned professionals, advisors, counsel and agents may have a financial or other interest in the offering of the Bonds, see the caption "FINANCIAL INTERESTS." Continuing Disclosure The District and certain Property Owners have agreed to provide, or cause to be provided, to the Municipal Securities Rulemaking Board certain annual financial information and operating data and notice of certain enumerated events. These covenants have been made in order to assist the Underwriter in complying with the Securities and Exchange Commission's Rule 15c2-12 ("Rule 15c2-12"). See the caption "CONTINUING DISCLOSURE" and Appendices D-1 and D-2 for a description of the specific nature of the annual reports and notices of enumerated events to be filed by the District and such Property Owners. Bond Owners' Risks Certain events could affect the timely repayment of the principal of and interest on the Bonds when due. See the caption "SPECIAL RISK FACTORS" for a discussion of certain factors that should be considered, in addition to other matters set forth in this Official Statement, in evaluating an investment in the Bonds. The purchase of the Bonds involves significant investment risks, and the Bonds are not suitable investments for many investors. 4 Item No. 16 - AB #22,338 June 28, 2016 Page 22 of 87 Other Information This Official Statement speaks only as of its date, and the information contained in this Official- Statement is subject to change. Brief descriptions of the Bonds and the Indenture are included in this Official Statement. Such descriptions and information do not purport to be comprehensive or definitive. All references to the Indenture, the Bonds and the Constitution and laws of the State as well as the proceedings of the City Council, acting as the legislative body of the District, are qualified in their entirety by references to such documents, laws and proceedings, and with respect to the Bonds, by reference to the Indenture. Copies of the Indenture, the Continuing Disclosure Agreement, the Escrow Agreement and other documents and information referred to in this Official Statement are available for inspection and (upon request and payment to the City of a charge for copying, mailing and handling) for delivery from the City at the Office of the City Clerk at 1200 Carlsbad Village Drive, Carlsbad, California 92008, Attention: City Clerk. THE REFUNDING PLAN General The 2006 Bonds were issued pursuant to a Fiscal Agent Agreement, dated as of May 1, 2006 (the "2006 Fiscal Agent Agreement"), by and between the City, for and on behalf of the District, and The Bank of New York Mellon Trust Company, N.A., formerly known as The Bank of New York Trust Company, N.A., as fiscal agent (the "2006 Fiscal Agent"). The 2006 Bonds are subject to optional redemption on September 1, 2016. Concurrently with the issuance of the Bonds, the District will cause a portion of the proceeds of the sale of the Bonds to be deposited into an escrow fund (the "Escrow Fund") established under the Escrow Agreement (2006 Bonds), dated as of July 1, 2016 (the "Escrow Agreement"), by and between the District and The Bank of New York Mellon Trust Company, N.A., as escrow bank and as 2006 Fiscal Agent (the "Escrow Bank"), to be applied, together with moneys that are held in the funds and accounts established in connection with the 2006 Bonds, to the payment and redemption of the 2006 Bonds. A portion of the amounts in the Escrow Fund will be invested in Defeasance Securities ( as such term is defined in the 2006 Fiscal Agent Agreement). From the maturing principal of the Defeasance Securities and related investment income and any uninvested moneys on deposit in the Escrow Fund, the Escrow Bank will pay: (i) the principal of and interest on the 2006 Bonds maturing on September 1, 2016; and (ii) the principal of the 2006 Bonds maturing after September 1, 2016, plus interest accrued to such date, without premium. Sufficiency of the deposits in the Escrow Fund for such purposes will be verified by Grant Thornton LLP, Minneapolis Minnesota (the "Verification Agent"). Assuming the accuracy of such computations, as a result of the deposit and application of funds as provided in the Escrow Agreement, the 2006 Bonds will be defeased pursuant to the provisions of the 2006 Fiscal Agent Agreement as of the date of issuance of the Bonds. The amounts held by the Escrow Bank in the Escrow Fund are pledged solely to the payment of the 2006 Bonds and will not be available for the payments on the Bonds. Verification of Mathematical Computations Upon the issuance of the Bonds, the Verification Agent will deliver a report on the mathematical accuracy of certain computations based upon certain information and assertions provided to it by the Underwriter relating to: (a) the adequacy of the moneys deposited in the Escrow Fund to pay the redemption price of the 2006 Bonds; and (b) the computations of yield of the Series Bonds which support Bond Counsel's opinion that the interest on the Bonds is excluded from gross income for federal income tax purposes. 5 Item No. 16 - AB #22,338 June 28, 2016 Page 23 of 87 Estimated Sources and Uses of Funds The following table sets forth the expected sources and uses of Bond proceeds: Sources of Funds(!) Principal Amount of Bonds Plus/Less Net Original Issue Premium/Discount Plus Available FundsC2l TOTAL SOURCES Uses of Funds(I) $ $ Transfer to Escrow Bank for Deposit in Escrow Fund $ Deposit in Reserve Account Deposit in Costs of Issuance FundC3l TOTAL USES (I) Amounts rounded to the nearest dollar. <2) Reflects moneys held in funds and accounts established for the 2006 Bonds. (3) Includes fees for the Trustee, the Escrow Bank and the Verification Agent, legal fees, the fees and reimbursement of expenses to the Financial Advisor, printing costs, Underwriter's discount and other costs of delivery. THE BONDS General Provisions The Bonds will be dated their date of delivery and will bear interest at the rates per annum set forth on the inside front cover page of this Official Statement, payable semiannually on each March 1 and September 1, commencing on March 1, 2017 (each, an "Interest Payment Date"), and will mature in the amounts and on the dates set forth on the· inside cover page of this Official Statement. The Bonds will be issued in fully registered form in integral multiples of $5,000. Interest will be calculated on the basis of a 360-day year comprised of twelve 30-day months. Interest on any Bond will be payable from the Interest Payment Date next preceding the date of authentication of such Bond, unless: (i) such date of authentication is an Interest Payment Date, in which event interest will be payable from such date of authentication; (ii) the date of authentication is after a Record Date but prior to the immediately succeeding Interest Payment Date, in which event interest will be payable from the Interest Payment Date immediately succeeding the date of authentication; or (iii) the date of authentication is prior to the close of business on the first Record Date, in which event interest will be payable from the dated date of the Bonds; provided, however, that if at the time of authentication of a Bond, interest is in default, interest on such Bond will be payable from the last Interest Payment Date to which the interest has been paid or made available for payment or, if no interest has been paid or made available for payment on such Bond, interest on such Bond will be payable from its dated date. The term "Record Date" is defined to mean the fifteenth day of the month preceding an Interest Payment Date, regardless of whether such day is a Business Day. Interest on any Bond will be paid to the person whose name appears as its owner in the registration books held by the Trustee on the close of business on the Record Date. Interest will be paid by check of the Trustee mailed by first class mail, postage prepaid, to the Owner at its address on the registration books. Pursuant to a written request prior to the Record Date of an Owner of at least $1,000,000 in aggregate principal amount of Bonds, payment will be made by wire transfer in immediately available funds to a designated account in the United States. Principal of the Bonds and any premium due upon redemption is payable upon presentation and surrender of the Bonds at the principal corporate trust office of the Trustee in Los Angeles, California. 6 Item No. 16 - AB #22,338 June 28, 2016 Page 24 of 87 Book-Entry Only System The Bonds are issued as fully registered bonds and will be registered in the name of Cede & Co., as nominee of DTC. DTC will act as securities depository of the Bonds. Ownership interests in the Bonds may be purchased in book-entry form only in integral multiples of $5,000. The Trustee will make payments due with respect to the Bonds to DTC but assumes no responsibility for DTC's disbursement of funds to its principals. See Appendix F. Authority for Issuance The Bonds are issued pursuant to the Act and the Indenture. As.required by the Act, the City Council of the City has taken the following actions with respect to establishing the District and the Bonds: Resolutions of Intention. On October 4, 2005 the City Council adopted Resolution No. 2005-301 stating its intention to establish the District, including Improvement Area 1, and to authorize the levy of a special tax in the District, including Improvement Area 1. On October 4, 2005, the City Council adopted Resolution No. 2005-302 stating its intention to incur bonded indebtedness in the District, including an amount not to exceed $14 million in Improvement Area 1. Resolution of Formation. Following a noticed public hearing on November 8, 2005, the City Council, acting as legislative body of the District, adopted the Resolution of Formation, which established the District, including Improvement Area 1, and authorized the levy of a special tax within the District. Resolution of Necessity. On November 8, 2005, the City Council adopted Resolution No. 2005-330, declaring the necessity to incur bonded indebtedness in an aggregate amount not to exceed $14 million within Improvement Area 1. Landowner Election and Declaration of Results. On November 8, 2005, an election was held within each improvement area of the District in which the then-qualified electors within Improvement Area 1 approved a ballot proposition authorizing the improvement area to incur bonded indebtedness, including an amount not to exceed $14 million in Improvement Area 1, to finance the acquisition and construction of various road and other public capital improvements, the levy of a special tax and the establishment of an appropriations limit for Improvement Area 1. On November 8, 2005, the City Council adopted Resolution No. 2005-331 pursuant to which the City Council, acting as the legislative body of the District, approved the canvass of the votes and declared Improvement Area 1 to be fully formed with the authority to levy Special Taxes, to incur bonded indebtedness and to maintain an appropriations limit. Ordinance Levying Special Taxes. On November 15, 2005, the City Council, acting as legislative body of the District, adopted the Ordinance levying the Special Tax within Improvement Area 1 in accordance with the Rate and Method beginning with Fiscal Year 2006-07. Special Tax Lien and Levy. A Notice of Special Tax Lien encumbering property in Improvement Area 1 was recorded in the real property records of the County on November 17, 2005 as Document No. 2005-0998003. Resolution of Issuance. On June 28, 2016, the City Council of the City, acting as legislative body of the District, adopted a resolution authorizing the issuance of the Bonds for the purpose of refunding the 2006 Bonds for debt service savings. Redemption Optional Redemption. The Bonds maturing on or after September 1, 20_ may be redeemed, at the option of the District, from any source of funds on __ 1, 20 _ or any date thereafter, in whole, or in part by 7 Item No. 16 - AB #22,338 June 28, 2016 Page 25 of 87 lot, at a redemption price equal to the principal amount to be redeemed, together with accrued interest to the date of redemption, without premium. Mandatory Sinking Fund Redemption. The Bonds maturing on September 1, 20_ (the "Term Bonds") will be called before maturity and redeemed, from the Sinking Fund Payments that have been deposited into the Redemption Account, on September 1, 20 _, and on each September 1 thereafter prior to maturity, in accordance with the schedule of Sinking Fund Payments set forth below. The Term Bonds so called for redemption will be selected by the Trustee by lot and will be redeemed at a redemption price for each redeemed Term Bond equal to the principal amount thereof, plus accrued interest to the redemption date, without premium, as follows: TERM BONDS MATURING SEPTEMBER 1, 20_ Redemption Date (September 1) Principal Amount $ If, during the Fiscal Year immediately preceding one of the redemption dates specified above, the District purchases Bonds, at least 45 days prior to the redemption date the District will notify the Trustee as to the principal amount purchased and the amount of Bonds so purchased will be credited at the time of purchase, to the extent of the full principal amount thereof, to reduce such upcoming Sinking Fund Payment for the Bonds so purchased. All Bonds purchased pursuant to the foregoing sentence will be cancelled pursuant to the Indenture. In the event of a partial optional redemption or extraordinary redemption of the Bonds, each of the remaining Sinking Fund Payments for such Bonds, · as described above, will be reduced, as nearly as practicable, on a pro rata basis, in integral multiples of $5,000, as directed by the District. Extraordinary Redemption. The Bonds are subject to extraordinary redemption as a whole, or in part by lot, on any Interest Payment Date, and will be redeemed by the Trustee, from amounts paid by the District to the Trustee and designated by the District as a prepayment of Special Taxes for one or more parcels in Improvement Area 1 made in accordance with the Rate and Method ("Prepayments") deposited to the Redemption Account, plus amounts transferred from the Reserve Account, at the following redemption prices, expressed as a percentage of the principal amount to be redeemed, together with accrued interest to the redemption date: Redemption Date Any Interest Payment Date through __ 1, 20 _ __ 1, 20_ and __ 1, 20_ __ 1, 20_and __ l,20_ __ 1, 20 _ and any Interest Payment Date thereafter Redemption Price 103% 102 101 100 Notice of Redemption. So long as the Bonds are held in book-entry form, notice of redemption will be mailed by the Trustee to DTC and not to the Beneficial Owners of the Bonds under the DTC book-entry only system. Neither the District nor the Trustee is responsible for notifying the Beneficial Owners, who are to be notified in accordance with the procedures in effect for the DTC book-entry system. See Appendix F. The Trustee shall give notice, in the name of the District, of the redemption of Bonds; provided, however, that a notice of a redemption to be made from other than from Sinking Fund Payments will be 8 Item No. 16 - AB #22,338 June 28, 2016 Page 26 of 87 conditioned on there being on deposit on the redemption date sufficient money to pay the redemption price of the Bonds to be redeemed. Such notice ofredemption will: (a) specify the CUSIP numbers (if any), the bond numbers and the maturity date or dates of the Bonds selected for redemption, except that where all of the Bonds are subject to redemption, or all of the Bonds of one maturity, are to be redeemed, the bond numbers of such issue need not be specified; (b) state the date fixed for redemption and surrender of the Bonds to be redeemed; ( c) state the redemption price; ( d) state the place or places where the Bonds are to be redeemed; ( e) in the case of Bonds to be redeemed only in part, state the portion of such Bond that is to be redeemed; (f) state the date of issue of the Bonds as originally issued; (g) state the rate of interest borne by each Bond being redeemed; and (h) state any other descriptive information needed to identify accurately the Bonds being redeemed as specified by the Trustee. Such notice will further state that on the date fixed for redemption, there will become due and payable on each Bond or portion thereof called for redemption, the principal thereof, together with any premium, and interest accrued to the redemption date, and that from and after such date, interest thereon will cease to accrue and be payable. At least 30 days but no more than 45 days prior to the redemption date, the Trustee will mail a copy of such notice, by first class mail, postage prepaid, to the respective Owners thereof at their addresses appearing on the Bond Register. The actual receipt by the Owner of any Bond or the original purchaser of any Bond of notice of such redemption is not a condition precedent to redemption, and neither the failure to receive nor any defect in such notice will affect the validity of the proceedings for the redemption of such Bonds, or the cessation of interest on the redemption date. A certificate by the Trustee that notice of such redemption has been given as provided in the Indenture will be conclusive as against all parties, and the Owner will not be entitled to show that he or she failed to receive notice of such redemption. In addition to the foregoing notice, further notice will be given by the Trustee as set out below, but no defect in said further notice nor any failure to give all or any portion of such further notice will in any manner defeat the effectiveness of a call for redemption if notice thereof is given as above prescribed. In addition to providing any notice of redemption to the Owners, if the Bonds are held in book-entry form, each further notice of redemption will be sent not later than the date that notice of redemption is mailed to the Owners by registered or certified mail or overnight delivery service to the Depository and by electronic notice to the Municipal Securities Rulemaking Board. Upon the payment of the redemption price of any Bonds being redeemed, each check or other transfer of funds issued for such purpose will to the extent practicable bear the CUSIP number (if any) identifying, by issue and maturity, the Bonds being redeemed with the proceeds of such check or other transfer. With respect to any notice of optional redemption or extraordinary redemption of Bonds, such notice will state that such redemption will be conditional upon the receipt by the Trustee on or prior to the date fixed for such redemption of moneys sufficient to pay the principal of, premium, if any, and interest on such Bonds to be redeemed and that, if such moneys have not been so received, said notice will be of no force and effect and the Trustee will not be required to redeem such Bonds. In the event that such notice of redemption contains such a condition and such moneys are not so received, the redemption will not be made, and the Trustee will within a reasonable time thereafter give notice, in the manner in which the notice of redemption was given, that such moneys were not so received. Registration, Transfer and Exchange Registration. The Trustee will keep sufficient books for the registration and transfer of the Bonds. The ownership of the Bonds will be established by the Bond registration books held by the Trustee. Transfer or Exchange. The registration of any Bond may, in accordance with its terms, be transferred upon the Bond registration books by the person in whose name it is registered, in person or by his or her duly authorized attorney, upon surrender of such Bond for cancellation at the Principal Office of the Trustee, accompanied by delivery of a written instrument of transfer in a form acceptable to the Trustee and duly executed by the Owner or his or her duly authorized attorney. 9 Item No. 16 - AB #22,338 June 28, 2016 Page 27 of 87 Bonds may be exchanged at the Principal Office of the Trustee for a like aggregate principal amount of Bonds for other authorized denominations of the same maturity and issue. The Trustee will not collect from the Owner any charge for any new Bond issued upon any exchange or transfer, but will require the Owner requesting such exchange or transfer to pay any tax or other governmental charge required to be paid with respect to such exchange or transfer. Whenever any Bonds are surrendered for registration of transfer or exchange, the District will execute and the Trustee will authenticate and deliver a new Bond or Bonds, as applicable, of the same issue and maturity, for a like aggregate principal amount; provided that the Trustee is not required to register transfers or make exchanges of: (a) Bonds for a period of 15 days next preceding any selection of the Bonds to be redeemed; or (b) any Bonds chosen for redemption. Debt Service Schedule The following table presents the annual debt service on the Bonds (including sinking fund redemptions), assuming that there are no optional redemptions. See the caption "-Redemption." Date (September 1) 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 Total Principal $ $ Interest $ $ $ $ SOURCES OF PAYMENT FOR THE BONDS Limited Obligations Total The Bonds are special, limited obligations of the District payable only from amounts pledged under the Indenture and from no other sources. The Net Taxes are the primary security for the repayment of the Bonds. Under the Indenture, the District has pledged to repay the Bonds and any Parity Bonds from the Net Taxes (which are Special Taxes less amounts set aside to pay Administrative Expenses not to exceed the Administrative Expenses Cap ( as such term is defined in Appendix C)). Special Tax revenues include the proceeds of the taxes authorized to be levied by the District on property within Improvement Area 1 in accordance with the Ordinance, the Resolution of Formation, the Act and the voter approval obtained at the November 8, 2005 election in 10 Item No. 16 - AB #22,338 June 28, 2016 Page 28 of 87 Improvement Area 1, including any scheduled payments and any Prepayments of Special Taxes, and the net proceeds of the redemption or sale of property sold as a result of foreclosure of the lien of the Special Taxes to the amount of said lien and penalties and interest on such Special Taxes. In the event that the Special Tax revenues are not received when due, the only sources of funds available to pay the debt service on the Bonds and any Parity Bonds are amounts held by the Trustee in the Special Tax Fund ( other than the Administrative Expenses Account), including amounts held in the Reserve Account, for the exclusive benefit of the Owners of the Bonds and any Parity Bonds. Neither the faith and credit nor the taxing power of the City, the State or any political subdivision of the State other than the District is pledged to the payment of the Bonds or any Parity Bonds. Except for the Net Taxes, no other taxes are pledged to the payment of the Bonds or any Parity Bonds. The Bonds and any Parity Bonds are neither general or special obligations of the City nor general obligations of the District, but are limited obligations of the District payable solely from certain amounts deposited by the District in the Special Tax Fund ( exclusive of the Administrative Expenses Account), as more fully described in this Official Statement. Special Taxes Authorization and Pledge. In accordance with the provisions of the Act, the City Council established the District on November 8, 2005 for the purpose of financing the acquisition, construction and installation of various public improvements required in connection with the proposed development within the District. At a special election held on November 8, 2005, the owners of the property within Improvement Area 1 authorized the District to incur indebtedness in an amount not to exceed $14 million for Improvement Area 1, and approved the Rate and Method, which authorized the Special Tax to be levied to repay District indebtedness, including the Bonds. The District has covenanted in the Indenture that, beginning in Fiscal Year 2016-1 7 and continuing so long as any Bonds or Parity Bonds issued under the Indenture are Outstanding, the legislative body of the District will levy the Special Tax in an amount sufficient, together with other amounts on deposit in the Special Tax Fund and available for such purpose, to pay: (i) the principal of and interest on the Bonds and any Parity Bonds when due; (ii) the Administrative Expenses; and (iii) any amounts required to replenish the Reserve Account of the Special Tax Fund to the Reserve Requirement. The District has further covenanted in the Indenture that it will take no actions that would discontinue or cause the discontinuance of the Special Tax levy or the District's authority to levy the Special Tax for so long as the Bonds and any Parity Bonds are Outstanding. See the caption "-Special Taxes-Collection and Application of Special Taxes." The Special Taxes levied in any fiscal year may not exceed the maximum rates authorized pursuant to the Rate and Method. See Appendix A. There is no assurance that the Net Taxes will, in all circumstances, be sufficient to pay the principal of and interest on the Bonds and any Parity Bonds when due. See the caption "SPECIAL RISK FACTORS-Insufficiency of Special Taxes." Rate and Method of Apportionment of Special Taxes. The Special Taxes will be levied in accordance with the terms of the Rate and Method, the text of which is set forth in Appendix A. All capitalized terms used in this section shall have the meaning set forth in Appendix A. This section provides only a summary of the Rate and Method, and is qualified by more complete and detailed information contained in the entire Rate and Method. Assignment to Land Use Categories. Prior to the beginning of each Fiscal Year, all property within Improvement Area 1 will be classified as either Taxable Property or Exempt Property. Taxable Property will be further classified as Final Map Property or Developable Property. 11 Item No. 16 - AB #22,338 June 28, 2016 Page 29 of 87 Maximum Special Tax. The Annual Maximum Special Tax per Acre for Fiscal Year 2016-17 for all Taxable Property is $15,241 for Zone A and $7,265 for Zone B. Each Fiscal Year, the Annual Maximum Special Tax will escalate at the applicable Index, i.e., the lesser of: (a) the annual percentage increase, if any, in the "Construction Cost Index for ENR 20 Cities" for the City of Los Angeles as published in the "Engineering News Record" for the twelve-month period ending with the month of March preceding each Fiscal Year; or (b) 3%. The escalation will cease in the Fiscal Year following the earlier of: (1) the completion of the construction and acquisition of all of the Improvements pursuant to the Acquisition Agreement; or (2) the sale of the final series of Bonds (as such term is defined in the Rate and Method alone). Method of Apportionment of the Special Tax. For each Fiscal Year, the CFD Administrator will determine the Special Tax Requirement. After the issuance of Bonds, the Special Tax will be levied on each Assessor's Parcel of Taxable Property to fund the Special Tax Requirement as follows: First: The Special Tax will be levied in equal percentages on each Assessor's Parcel of Taxable Property, exclusive of Open Space Property and Public Property, up to 100% of the applicable Annual Maximum Special Tax. Second: If additional Special Taxes are needed after the first step, the Special Tax will be levied in equal percentages on each remaining Assessor's Parcel of Taxable Property (i.e., Open Space Property and Public Property which is not exempt from the Special Tax), up to 100% of the applicable Annual Maximum Special Tax. Exemptions. The CFD Administrator will classify the following as Exempt Property: (i) Public Property; (ii) Open Space; and (iii) Assessor's Parcels with public or utility easements making impractical their utilization for other than the purposes set forth in the easement; provided however, that no such classification will reduce the sum of all Taxable Property to less than 46.35 Acres for Zone A and 77.49 Acres for Zone B. Assessor's Parcels that cannot be classified as Exempt Property because such classification would reduce the Acreage of all Taxable Property to less than the amounts stated above will be classified as Taxable Property and will be taxed. The Annual Maximum Special Tax obligation for any property that would be classified as Public Property upon its transfer or dedication to a public agency but which is classified as Taxable Property pursuant to the preceding paragraph will be prepaid in full by the seller prior to the transfer/dedication of such property to such public agency. Until the Annual Maximum Special Tax obligation for any such Public Property is prepaid, the property will continue to be subject to the levy of the Special Tax as Taxable Property. If the use of an Assessor's Parcel of previously classified Exempt Property changes so that such Assessor's Parcel is no longer classified as Exempt Property, such Assessor's Parcel will cease to be classified as Exempt Property and will be deemed to be Taxable Property. Prepayment of Special Taxes. The Annual Maximum Special Tax for any Assessor's Parcel may be prepaid and permanently satisfied as described in the Rate and Method, provided that a prepayment may be made only if at the time of the prepayment there are no delinquent Special Taxes with respect to such Assessor's Parcel and all other Assessor's Parcels which are under the same ownership and located within Improvement Area 1. Each Prepayment will be an amount equal to the sum of: (1) Principal; (2) Premium; (3) Defeasance; (4) Fees; and (5) Unfunded Improvements; less (6) the Reserve Fund Credit. The foregoing terms are defined as follows: 12 Item No. 16 - AB #22,338 June 28, 2016 Page 30 of 87 (1) "Principal" means the principal amount of Bonds to be redeemed from the proceeds of such Prepayment and equals the quotient derived by dividing: (a) the applicable Annual Maximum Special Tax (or, in the case of a partial prepayment, the portion of the applicable Annual Maximum Special Tax) for the Assessor's Parcel intending to prepay; by (b) the expected aggregate Annual Maximum Special Taxes for all Taxable Property within Improvement Area 1 (and excluding from (b) any Annual Maximum Special Taxes for Assessor's Parcels that have fully prepaid the Annual Maximum Special Tax), and multiplying the quotient by the portion of the principal amount of Bonds outstanding. (2) "Premium" means an amount equal to the Principal multiplied by the applicable redemption premium, if any, for the Bonds established pursuant to the Indenture so redeemed with the proceeds of any such Prepayment. See the caption "THE BONDS-Redemption-Extraordinary Redemption." (3) "Defeasance" means an amount equal to the amount needed to pay interest on the Principal to be redeemed until the earliest redemption date for the outstanding Bonds permitted under the Indenture less the amount of earnings estimated to be received from the reinvestment of the Prepayment and the Fees to such date. Credit will also be given for any Special Tax paid and received by the City that has not yet been utilized to pay the Special Tax Requirement or which is remaining after having paid the Special Tax Requirement. ( 4) "Fees" means the fees and expenses of the District directly related to the Prepayment. (5) "Unfunded Improvements" means an amount equal to the estimated cost of the unfunded Improvements authorized to be financed from the proceeds of the Bonds or Special Taxes allocable to the Assessor's Parcel for which the Prepayment is being calculated and is computed by multiplying the quotient calculated when determining Principal by the Improvement Costs allocable to Improvement Area 1, as set forth in the Acquisition Agreement, less the estimated cost of any Improvements financed by previously issued Bonds or the proceeds of Special Taxes. Unfunded Improvements will equal zero following the issuance of all of the Bonds. (6) "Reserve Fund Credit" means the lesser of: (a) the expected reduction in the Reserve Requirement ( as such term is defined in the Indenture), if any, following the redemption of Bonds from proceeds of the Prepayment; or (b) the amount derived by subtracting the new Reserve Requirement in effect after the redemption of Bonds from the balance in the Reserve Account ( as such term is defined in the Indenture) on the prepayment date, but in no event will such amount be less than zero. The Reserve Fund Credit will apply only when the amount in the Reserve Fund for the Bonds at least equals the Reserve Requirement. The Annual Maximum Special Tax for any Assessor's Parcel may be prepaid in part as described above, provided that such a partial prepayment may be made only if at the time of the prepayment there are no delinquent Special Taxes with respect to such Assessor's Parcel and all other Assessor's Parcels that are under the same ownership and located within Improvement Area 1. Notwithstanding the foregoing, no prepayment will be allowed unless the amount of Annual Maximum Special Taxes that may be levied in Improvement Area 1 pursuant to the Rate and Method after the proposed prepayment is at least the sum of: (i) the estimated Administrative Expenses; and (ii) 110% of the maximum annual debt service for the Bonds, taking into account the Bonds to remain outstanding after such prepayment. Collection and Application of Special Taxes. The Special Taxes are levied and collected by the Treasurer-Tax Collector of the County in the same manner and at the same time as ad valor em property taxes. The District may, however, collect the Special Taxes at a different time or in a different manner if necessary to meet its financial obligations. 13 Item No. 16 - AB #22,338 June 28, 2016 Page 31 of 87 The District has made certain covenants in the Indenture for the purpose of ensuring that the current Maximum Special Tax rates and method of collection of the Special Taxes are not altered in a manner that would impair the District's ability to collect sufficient Special Taxes to pay debt service on the Bonds, any Parity Bonds and Administrative Expenses when due. In particular, the District has covenanted that it will not initiate proceedings to reduce the maximum Special Tax rates for the District, unless, in connection therewith: (i) the District receives a certificate from one or more Independent Financial Consultants which, when taken together, certify that, on the basis of the parcels of land and improvements existing in the District as of the July 1 preceding the reduction, the maximum amount of the Special Tax which may be levied on then-existing Taxable Property (as such term is defined in the Rate and Method) in each Bond Year for any Bonds and Parity Bonds Outstanding will equal at least 110% of the sum of the estimated Administrative Expenses and gross debt service in each Bond Year on all Bonds and Parity Bonds to remain Outstanding after the reduction is approved; (ii) the District finds that any reduction made under such conditions will not adversely affect the interests of the Owners of the Bonds and Parity Bonds; and (iii) the District is not delinquent in the payment of the principal of or interest on the Bonds or any Parity Bonds. For purposes of estimating Administrative Expenses for the foregoing calculation, the Independent Financial Consultants will compute the Administrative Expenses for the current Fiscal Year and escalate such amount by 2% in each subsequent Fiscal Year. See the captions "SPECIAL RISK FACTORS-Proposition 218" and "SPECIAL RISK FACTORS- Non-Cash Payments of Special Taxes." Although the Special Taxes constitute liens on taxable parcels within the District, they do not constitute a personal indebtedness of the owners of property within the District. Moreover, other liens for taxes and assessments already exist on the property located within the District and others could come into existence in the future in certain situations without the consent or knowledge of the City, the District or the Property Owners. See the captions "SPECIAL RISK FACTORS-Parity Taxes and Special Assessments." Under the teryns of the Indenture, all Special Tax revenues received by the District are to be deposited in the Special Tax Fund. Special Tax revenues deposited in the Special Tax Fund each Fiscal Year are to be applied by the Trustee under the Indenture in the following order of priority: (i) to deposit an amount up to the Administrative Expenses Cap in the Administrative Expense Fund to pay Administrative Expenses (although a greater amount may be deposited in the Administrative Expense Fund if necessary to collect Delinquent Special Taxes); (ii) to pay the interest on, the principal of and redemption premium on the Bonds and any Parity Bonds when due; (iii) to replenish the Reserve Account to the Reserve Requirement; (iv) to make any required transfers to the Rebate Fund; (v) to pay Administrative Expenses of the District above the Administrative Expenses Cap referenced in clause (i) above; and (vi) for any other lawful purpose of the District. See Appendix C. Debt Service Coverage from Net Special Taxes. Table 1 below shows the estimated debt service coverage on the Bonds. Bond Year Ending September 1 TABLE 1 ESTIMATED DEBT SERVICE COVERAGE CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO. 3 IMPROVEMENT AREA 1 Special Tax Revenues(!) Annual Administrative ExpensesCZ) Net Special Tax Revenues Bond Debt Service* * Preliminary, subject to change. 14 Debt Service Coverage' Item No. 16 - AB #22,338 June 28, 2016 Page 32 of 87 2016 $ $ $ $ % 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 <1> Amounts for the Bond Year ending September 1, 2016, are based on actual amounts levied for Fiscal Year 2015-16. Amounts for the Bond Years ending September 1, 2017, and thereafter are based on the projected Fiscal Year 2016-17 Special Tax levy. The amounts shown reflect the assumption that all property within hnprovement Area 1 is classified as Taxable Property, as such term is defined in the Rate and Method. <2> Based on the Administrative Expenses Cap of$10,000. Source: [Stifel, Nicolaus & Company, Incorporated]. Covenant to Foreclose; Proceeds of Foreclosure Sales. The net proceeds received following a judicial foreclosure sale ofland within the District resulting from a Property Owner's failure to pay the Special Taxes when due are included within the Net Taxes pledged to the payment of principal of and interest on the Bonds under the Indenture. Pursuant to Section 53356.1 of the Act, in the event of any delinquency in the payment of any Special Tax or receipt by the District of Special Taxes in an amount which is less than the Special Tax levied, the City Council, as the legislative body of the District, may order that Special Taxes be collected by a superior court action to foreclose the lien within specified time limits. In such an action, the real property subject to the unpaid amount may be sold at a judicial foreclosure sale. Under the Act, the commencement of judicial foreclosure following the nonpayment of a Special Tax is not mandatory. However, the District has covenanted for the benefit of the Owners of the Bonds and any Parity Bonds that it will: (i) commence judicial foreclosure proceedings against parcels with delinquent Special Taxes in excess of $8,000 by the October 1 following the close of each Fiscal Year in which such Special Taxes were due; (ii) commence judicial foreclosure proceedings against all parcels with delinquent Special Taxes by the October 1 following the close of each Fiscal Year in which it receives Special Taxes in an amount which is less than 95% of the total Special Tax levied and the amount on deposit in the Reserve Account is at less than the Reserve Requirement; and (iii) diligently pursue such foreclosure proceedings until the delinquent Special Taxes are paid. The District covenants that it will deposit the net proceeds of any foreclosure to the Special Tax Fund and will apply such proceeds remaining after the payment of Administrative Expenses to make current payments of principal of and interest on the Bonds and any Parity Bonds, to bring the amount on deposit in the Reserve Account up to the Reserve Requirement and to pay any delinquent installments of principal or interest due on the Bonds and any Parity Bonds. If foreclosure is necessary and other funds (including amounts in the Reserve Account) have been exhausted, debt service payments on the Bonds could be delayed until the foreclosure proceedings have ended with the receipt of any foreclosure sale proceeds. Judicial foreclosure actions are subject to the normal delays associated with court cases and may be further slowed by bankruptcy actions, involvement by agencies of the 15 Item No. 16 - AB #22,338 June 28, 2016 Page 33 of 87 federal government and other factors beyond the control of the City and the District. See the captions "SPECIAL RISK FACTORS-Bankruptcy and Foreclosure" and "SPECIAL RISK FACTORS- FDIC/Federal Government Interests in Properties." Moreover, no assurances can be given that the real property that is subject to foreclosure and sale at a judicial foreclosure sale will be sold or, if sold, that the proceeds of such sale will be sufficient to pay any delinquent Special Tax installment. See the caption "SPECIAL RISK FACTORS-Land Values." Although the Act authorizes the District to cause such an action to be commenced and diligently pursued to completion, the Act does not impose on the District or the City any obligation to purchase or acquire any lot or parcel of property sold at a foreclosure sale if there is no other purchaser at such sale. Moreover, if the District chooses to purchase the property sold at foreclosure using a "credit bid" (where the District submits a bid crediting all or part of the amount required to satisfy the judgment for the delinquent amount of the Special Tax), as permitted under Section 53356.5 of the Act, the District must pay the amount of its credit bid into the redemption fund established for the Bonds, but this payment may be made up to 24 months after the date of the foreclosure sale. The Act provides that, in the case of a delinquency, the Special Tax will have the same lien priority as is provided for ad valorem taxes. See the caption "SPECIAL RISK FACTORS-Parity Taxes and Special Assessments." Because the County has not elected to follow the procedures of the "Teeter Plan" (which is the Alternative Method of Distribution of Tax Levies and Collections and of Tax Sale Proceeds, as provided for in Section 4701 et seq. of the Revenue and Taxation Code of the State of California) with respect to special taxes, collections of Special Taxes will reflect actual delinquencies. ·Reserve Account of the Special Tax Fund In order to secure further the payment of principal of and interest on the Bonds and any Parity Bonds, the District will maintain in the Reserve Account an amount equal to the least of: (a) Maximum Annual Debt Service (as such term is defined in Appendix C) on the Bonds and any Parity Bonds; (b) 125% of average Annual Debt Service (as such term is defined in Appendix C) on the then-Outstanding Bonds and any Parity Bonds; or (c) 10% of the initial outstanding principal amount of the Bonds and any Parity Bonds (the "Reserve Requirement"). The initial Reserve Requirement is $ __ · . Moneys in the Reserve Account will be used solely for the purpose of paying the principal of, including Sinking Fund Payments, and interest on the Bonds and any Parity Bonds when due in the event that the moneys in the Interest Account and the Principal Account of the Special Tax Fund are insufficient therefor or moneys in the Redemption Account of the Special Tax Fund are insufficient to make a Sinking Fund Payment when due, and for the purpose of making any required transfer to the Rebate Fund pursuant to the Indenture upon written direction from the District. If the amounts in the Interest Account, the Principal Account or the Redemption Account of the Special Tax Fund are insufficient to pay the principal of, including Sinking Fund Payments, or interest on any Bonds and Parity Bonds when due, or amounts in the Special Tax Fund are insufficient to make transfers to the Rebate Fund when required, the Trustee will withdraw from the Reserve Account for deposit in the Interest Account, the Principal Account or the Redemption Account of the Special Tax Fund or the Rebate Fund, as applicable, moneys necessary for such purposes. Whenever moneys are withdrawn from the Reserve Account, after making the required transfers to the Administrative Expenses Account, the Interest Account, the Principal Account or the Redemption Account of the Special Tax Fund, the Trustee will transfer to the Reserve Account from available moneys in the Special Tax Fund, or from any other legally available funds that the District elects to apply to such purpose, the amount needed to restore the amount of such Reserve Account to the Reserve Requirement. Moneys in the Special Tax Fund will be deemed available for transfer to the Reserve Account only if the Trustee determines that such amounts will not be needed to make the deposits required to be made to the Administrative Expenses Account, the Interest Account, the Principal Account or the Redemption Account of the Special Tax Fund on or before the next September 1. If amounts in the Special Tax Fund, together with any other amounts 16 Item No. 16 - AB #22,338 June 28, 2016 Page 34 of 87 transferred to replenish the Reserve Account, are inadequate to restore the Reserve Account to the Reserve Requirement, then the District will include the amount necessary fully to restore the Reserve Account to the Reserve Requirement in the next annual Special Tax levy to the extent of the maximum permitted Special Tax rates. In connection with an optional redemption of Bonds or Parity Bonds, an extraordinary redemption of Bonds or Parity Bonds from Prepayments or a partial defeasance of Bonds or Parity Bonds, amounts in the Reserve Account may be applied to such redemption or partial defeasance so long as the amount on deposit in the Reserve Account following such redemption or partial defeasance equals the Reserve Requirement. The District will set forth in a Certificate of an Authorized Representative the amount in the Reserve Account to be transferred to the Redemption Account on a redemption date or to be transferred to partially defease Bonds, and the Trustee will make such transfer on the applicable redemption or defeasance date, subject to the limitation in the preceding sentence. To the extent that the Reserve Account is at the Reserve Requirement as of the first day of the final Bond Year for the Bonds or an issue of Parity Bonds, amounts in the Reserve Account may be applied to pay the principal of and interest due on the Bonds and Parity Bonds, as applicable, in the final Bond Year for such issue. Moneys in the Reserve Account in excess of the Reserve Requirement that are not transferred in accordance with the preceding provisions will be withdrawn from the Reserve Account on the Business Day before each March 1 and September 1 and transferred to the Interest Account of the Special Tax Fund. The Reserve Requirement may be satisfied in whole or part by the deposit of a reserve fund surety policy or similar instrument therein. No Issuance of Parity Bonds Except for Refunding Subject to the limitations set forth in the Indenture, the District may, at any time after the issuance and delivery of the Bonds, and without the consent of the Owners of the Bonds, issue Parity Bonds payable from the Net Taxes and other amounts deposited in the Special Tax Fund (other than in the Administrative Expenses Account therein) and secured by a lien and charge upon such amounts equal to the lien and charge securing the Outstanding Bonds and any other Parity Bonds theretofore issued pursuant to the Indenture or under any Supplemental Indenture; provided, however, that Parity Bonds may only be issued for the purpose ofrefunding all or a portion of the Bonds or any Parity Bonds then Outstanding. See Appendix C under the caption "DEFEASANCE AND PARITY BONDS-Conditions for the Issuance of Parity Bonds and Other Additional Indebtedness" for the conditions that must be met in order for the District to issue Parity Bonds. No Acceleration The principal of and interest on the Bonds are not subject to acceleration under the Indenture in the event of a default relating to the Bonds. See Appendix C under the caption "EVENTS OF DEFAULT- Remedies of Owners" for a description of remedies that are available to the Bond Owner if the District defaults under the Indenture. THE IMPROVEMENT AREA General Description The District, which is located entirely within the City, consists of Improvement Area 1 and Improvement Area 2. Special taxes or other moneys derived from the City or Improvement Area 2 are not available for payment of the Bonds. Improvement Area 1 of the District consists of approximately 217 .1 gross acres, of which approximately 71.4 acres have been improved, approximately 66.4 acres remain unimproved and 17 Item No. 16 - AB #22,338 June 28, 2016 Page 35 of 87 approximately 79.3 acres have been set aside for open space and public areas. Improvement Area 1 has two tax zones under the Rate and Method, Zone A and Zone B. Both Zones are primarily improved and contain a total of approximately 842,000 square feet of industrial, office and research and development properties. Improvement Area 1 is located north of Palomar Airport Road and east of Melrose Drive. Property Ownership General. Except as otherwise noted, the table below identifies the ten largest Property Owners within Improvement Area 1 as of January 1, 2015. See the caption "---Development Status" for summary information about the number of parcels that constitute improved and unimproved property for Fiscal Year 2016-17. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 18 Item No. 16 - AB #22,338 June 28, 2016 Page 36 of 87 Parcels Owner Owned Palomar Melrose LLC 5 Fenton Raceway LLC 6 Greyhawk Associates 3 ROF II Concourse LLC 1 HR Melrose LLC 1 SR 27 3193 Lionshead LLC 1 3209 Lionshead LLC 1 Ninos I Burke Lane LLC 1 Aethercomm Inc. 1 Vagha Development LLC -2 Subtotal: 22 All Others 46 Totals: 68 TABLE2 TEN LARGEST PROPERTY OWNERS CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO. 3 IMPROVEMENT AREA 1 Tota/Bonds Total and Structure Overlapping Overlapping Land ValueC0 ValueC1J Total ValueC1J Bonds' Debf.2l Debf.2l' $ 7,390,169 $ 11,921,000 $ 19,311,169 $ 2,342,316 $ 175,861 $ 2,518,176 7,991,588 0 7,991,588 1,594,369 150,889 1,745,258 5,239,000 2,000,600 7,239,600 660,277 94,613 754,890 5,099,900 7,241,858 12,341,758 464,035 112,392 576,428 3,893,007 7,951,725 11,844,732 370,204 138,816 509,021 2,451,810 4,193,197 6,645,007 230,059 77,877 307,936 3,135,308 4,258,793 7,394,101 224,149 86,656 310,805 2,936,475 0 2,936,475 203,465 34,414 237,879 2,000,000 6,660,982 8,660,982 160,408 136,974 297,382 1519587 0 1 519 587 157 875 28 681 186 556 $ 41,656,844 $ 44,228,155 $ 85,884,999 $6,407,156 $ 1,037,175 $ 7,444,331 23 743 825 40 173 687 63917512 1802844 825 209 2,628,053 $ 65,400,669 $ 84,401,842 $149,802,511 $ 8,210,000 $ 1,862,384 $ 10,072,384 Estimated Projected % of Projected Assessed Fiscal Year Fiscal Year Value-to-2016-17 2016-17 Lien Special Tax Special !ax Ratio(2J' Levy(3l Levy 7.67:1 $ 164,137 28.53% 4.58:1 111,725 19.42 9.59:1 46,269 8.04 21.41:1 32,517 5.65 23.27:1 25,942 4.51 21.58:1 16,121 2.80 23.79:1 15,707 2.73 12.34:1 14,258 2.48 29.12:1 11,241 1.95 8.15:1 11 063 1.92 11.54:1 $ 448,979 78.04 24.32:1 126 333 21.96 14.87:1 $ 575,312 100.00% (1) Assessed valuations are based on County secured roll data as of January 2016, reflecting assessed valuations as of January 1, 2015. The data does not reflect any appeals or other changes to value that may have been updated after January 1, 2015. (2) Total Bonds and Overlapping Debt includes the Bonds and overlapping debt information provided by California Municipal Statistics, Inc. on May 27, 2016, based upon assessed values from County secured roll data as of January 1, 2015 for taxable parcels within Improvement Area 1. (3) The amounts shown reflect the assumption that all property within Improvement Area 1 is classified as Taxable Property, as such term is defined in the Rate and Method. Source: NBS. 'Preliminary, subject to change. 19 Item No. 16 - AB #22,338 June 28, 2016 Page 37 of 87 Palomar Melrose LLC/Greyhawk Associates. The table below contains detailed information about Palomar Melrose LLC, the largest Property Owner within Improvement Area 1 based upon the projected Fiscal Year 2016-17 Special Tax levy. See the caption "SPECIAL RISK FACTORS- Concentration of Ownership." Assessor's Parcel Number Owner Name Palomar Melrose 221-014-01-00 LLC Palomar Melrose 221-014-02-00 LLC Palomar Melrose 221-014-03-00 LLC Palomar Melrose 221-014-04-00 LLC Palomar Melrose 221-014-06-00 LLC Total TABLE3 SUMMARY OF PARCELS OWNED BY LARGEST PROPERTY OWNER CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO. 3 IMPROVEMENT AREA 1 Estimated Building Fiscal Year Maximum Development Square 2016-17 Special Land Status Footage<1J Levy<1J Tax Bonds* Value<3l Improved Final Map Property 67,962 $ 34,255 $ 84,130 $ 488,831 $ 1,709,000 Unimproved Final Map Property 0 27,987 68,737 399,389 1,275,170 Unimproved Final Map Property 0 48,093 118,118 686,312 2,035,999 Improved Final Map Property 90,910 42,074 103,334 600,412 1,870,000 Unimproved Final Map Property 0 11,728 28,805 167,372 500,000 158,872 $ 164,137 $403,124 $2,342,316 $ 7,390,169 Structure Total Value<3l Value<3J $ 4,941,000 $ 6,650,000 0 1,275,170 0 2,035,999 6,980,000 8,850,000 0 500,000 $ 11,921,000 $ 19,311,169 (I) Building square footages are based on County secured roll data as of January 2016, reflecting assessed valuations as of January 1, 2015. The data does not reflect any appeals or other changes to square footages that may have been updated after January 1, 2015. (2) The amounts shown reflect the assumption that all property within Improvement Area 1 is classified as Taxable Property, as such term is defined in the Rate and Method. (3) Assessed valuations are based on County secured roll data as of January 2016, reflecting assessed valuations as of January 1, 2015. The data does not reflect any appeals or other changes to value that may have been updated after January 1, 2015. Source: NBS. * Preliminary, subject to change. 20 Item No. 16 - AB #22,338 June 28, 2016 Page 38 of 87 Palomar Melrose LLC and Greyhawk Associates, which owns [three] parcels in Improvement Area 1, are a California limited liability company and a California corporation, respectively. Each entity is part of the Davis Partners family of companies. Davis Partners, which was established in 1972, is a privately-held commercial real estate investment company based in Newport Beach, California. Davis Partners manages 93 projects that collectively comprise approximately 16 million square feet of commercial, industrial and office property in California [and_]. Over 2,100 tenants are based in Davis Partners-managed properties. Davis Partners has also developed over 6.5 million square feet of commercial, industrial and office space. Davis Partners reports that its entities: (i) have not defaulted to any material extent in the payment of special taxes or assessments in connection with the District or other community facilities districts or assessment districts in the State within the past five years; (ii) are not currently in default on any loans, lines of credit or other obligations, the result of which could materially adversely affect the development or sale of property owned by Davis Partners entities in Improvement Area 1; (iii) are solvent and no bankruptcy proceedings are pending or threatened with respect thereto; and (iv) are not engaged in any litigation or administrative proceeding which, if successful, would materially adversely affect the ability of the Davis Partners entities to pay the Special Taxes or ordinary ad valorem property tax obligations when due on their property within Improvement Area 1. As of July 1, 2016, Palomar Melrose LLC or Greyhawk Associates own the following lots within Improvement Area 1: Lots 1, 2, 3, 6, 7, 8 and portions of Lot 5. [SPECIAL TAXES PREPAID?] [Lots 1, 2 and 8 collectively comprise approximately 20.4 acres. Davis Partners has constructed five buildings on these lots that include a total of approximately 169,000 square feet of commercial/industrial space; the buildings are approximately [_]% leased. Davis Partners is currently constructing four additional buildings on these lots that are expected to include a total of approximately 112,000 square feet of commercial/industrial space. Construction is expected to be completed by December 2016. All entitlements and building permits have been received for these improvements. Davis Partners, through a property management partner, has entered into lease commitments with respect to approximately LJ% of the square footage on the buildings that are under construction, with initial occupancy expected in 201 7.] Lot 3 comprises approximately 7.6 acres. No buildings have been constructed on this lot, but sheet grading and sewer, water, storm drain and dry utility hookups have been completed and the lot is ready for vertical construction. Davis Partners is currently exploring potential development, sale and ground lease opportunities with respect to Lot 3, which is entitled for business park/industrial uses, but does not currently have any plans to build improvements thereon or to sell Lot 3. Lot 5 comprises approximately 13.5 acres. Several buildings have been constructed on this lot that include a total of approximately 208,000 square of commercial/industrial space in 28 separate units. 26 of the units have been sold to individual occupants and Davis Partners owns the two remaining units. Davis Partners is currently exploring potential lease opportunities with respect to the two remaining units. Lots 6 and 7 comprises approximately 5.9 acres. No buildings have been constructed on these lots, but sheet grading and sewer, water, storm drain and dry utility hookups have been completed and the lot is ready for vertical construction. The lots are currently listed for sale. [Palomar Melrose LLC and Greyhawk Associates will enter into a Property Owner Disclosure Certificate in substantially the form set forth in Appendix D-2. See the caption "CONTINUING DISCLOSURE-Property Owners."] Other Property Owners. Fenton Raceway LLC is a California limited liability company that is part of the HG Fenton family of companies. [CONFIRM UPON CLOSING] [In June 2016, Fenton Raceway LLC sold two parcels in Improvement Area 1 that collectively consist of approximately 18.42 acres]. Fenton 21 Item No. 16 - AB #22,338 June 28, 2016 Page 39 of 87 Raceway LLC currently owns four parcels in Improvement Area 1, consisting of a total of approximately 19.35 acres with a total assessed valuation of approximately $4,398,543 as of January 1, 2015. The four parcels are currently unimproved. Infrastructure has been completed and the parcels are entitled for industrial/business park uses. Fenton Raceway LLC is currently exploring potential development and ground lease opportunities with respect to the parcels but does not currently have any plans to build improvements thereon. [Fenton Raceway LLC will enter into a Property Owner Disclosure Certificate in substantially the form set forth in Appendix D-2. See the caption "CONTINUING DISCLOSURE-Property Owners."] ROF II Concourse LLC owns one parcel in Improvement Area 1 consisting of approximately 5.24 acres with an assessed valuation of approximately $12,341,758 as of January 1, 2015. Such parcel has been improved with approximately 77,666 square feet of industrial space. HR Melrose LLC owns one parcel in Improvement Area 1 consisting of approximately 8.77 acres with an assessed valuation of approximately $11,844,732 as of January 1, 2015. Such parcel has been improved with approximately 103,547 square feet of industrial space. Estimated Direct and Overlapping Indebtedness Numerous local agencies provide public services within Improvement Area 1 's boundaries. Some of these local agencies have outstanding bonds that are secured by taxes and assessments on the parcels within Improvement Area 1 and others have authorized but unissued bonds that, if issued, will be secured by taxes and assessments levied on parcels within Improvement Area 1. The approximate amount of the direct and overlapping debt secured by such taxes and assessments on the parcels within Improvement Area 1 for Fiscal Year 2016-17 is shown in the table below. At present, all overlapping debt is general obligation debt. As such, increases in assessed valuations in Improvement Area 1 relative to assessed valuations in the overlapping jurisdiction can increase the tax levy on Improvement Area 1 parcels; similarly, a decrease in assessed valuations in Improvement Area 1 relative to assessed valuations in the overlapping jurisdiction can decrease the tax levy on Improvement Area 1 parcels. 22 Item No. 16 - AB #22,338 June 28, 2016 Page 40 of 87 TABLE4 DIRECT AND OVERLAPPING DEBT CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO. 3 IMPROVEMENT AREA 1 2015-16 Local Secured Assessed Valuation: $149,802,511 (Land and Improvements) DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: Metropolitan Water District Palomar Community College District Carlsbad Unified School District San Marcos Unified School District San Marcos Unified School District School Facilities Improvement District Vista Unified School District Palomar Pomerado Health Systems City of Carlsbad Community Facilities District No. 3 (Improvement Area 1) TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT OVERLAPPING GENERAL FUND DEBT: San Diego County General Fund Obligations San Diego County Pension Obligations San Diego County Superintendent of Schools Mira Costa Community College District Certificates of Participation Palomar Community College District General Fund Obligations Carlsbad Unified School District Certificates of Participation San Marcos Unified School District General Fund Obligations Vista Unified School District Certificates of Participation TOTAL OVERLAPPING GENERAL FUND DEBT COMBINED TOTAL DEBT Ratios to 2015-16 Assessed Valuation: Direct Debt ($9,615,000) ...................................................... 6.42°/o Total Direct and Overlapping Tax and Assessment Debt... ... 7.66% Combined Total Debt ............................................................ 8.02% <1l Reflects the 2006 Bonds. Excludes the Bonds. % Applicable 0.006% 0.087 0.307 0.091 0.099 0.504 0.022 100.000 0.034% 0.034 0.034 0.066 0.087 0.307 0.091 0.504 Debt 6/1/16 $ 5,710 447,265 536,450 251,532 3,520 515,312 102,595 9,615,000(l) $11,477,384 $ 104,831 221,309 4,528 876 3,345 142,481 49,224 16 511 $ 543,105 $12,020,489<2) (Z) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and non-bonded capital lease obligations. Source: California Municipal Statistics, Inc. Estimated Assessed Value-to-Lien Ratio The projected assessed value net of exemptions of the land within Improvement Area 1 for Fiscal Year 2016-17 is $149,802,511. Dividing this projected assessed value by $10,072,384,* representing the sum of the $8,210,000* principal amount of the Bonds and the $1,862,384 amount of additional direct and overlapping debt (all general obligation bond debt) that is payable from taxes and assessments levied on the property within the District (as set forth under the caption "-Estimated Direct and Overlapping Indebtedness"), results in an estimated assessed value-to-lien ratio of approximately 14.87* to 1. The tables below set forth a summary of historical assessed values in Improvement Area 1, the estimated assessed value-to-lien ratio within Improvement Area 1 with reference to the Bonds based on the projected Fiscal Year 2016-17 Special Tax levy and the estimated assessed value-to-lien ratio within Improvement Area 1 with reference to all direct and overlapping debt based on the projected Fiscal Year 2016-17 Special Tax levy. The projected Special Tax levy for Fiscal Year 2016-17 is $575,312. 'Preliminary, subject to change. 23 Item No. 16 - AB #22,338 June 28, 2016 Page 41 of 87 TABLES SUMMARY OF HISTORICAL ASSESSED V ALUESC1) CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO. 3 IMPROVEMENT AREA 1 Total Assessed % Change in Total Fiscal Year Land ValueC2) Structure ValueC2) ValueC2) Assessed Value 2011-12 $66,122,240 $79,861,978 $145,984,218 --% 2012-13 63,931,247 83,946,655 147,877,902 1.30 2013-14 58,790,876 87,053,586 145,844,462 (1.38) 2014-15 58,242,223 88,487,104 146,729,327 0.61 2015-16 65,400,669 84,401,842 149,802,511 2.09 (JJ Assessed valuations are provided for each parcel that was subject to the Special Tax levy in each Fiscal Year. C2J Assessed valuations are based on County secured roll data as of January 2016, reflecting assessed valuations as of January 1, 2015. The data does not reflect any appeals or other changes to value that may have been updated after January 1, 2015. Source: NBS. TABLE6 DIRECT DEBT ASSESSED VALUE-TO-LIEN RATIO CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO. 3 IMPROVEMENT AREA 1 Projected Fiscal Estimated Assessed Number Total Year 2016-17 Value-to-Lien Ratio of Parcels Assessed ValueOl Bonds' Special Tax LevyC2l Less than 1.00:1 0 $ 0 $ 0 $ 0 1.00 to 2.99:1 2 2,535,999 853,683 59,822 3.00 to 4.99:1 3 4,868,215 1,176,945 82,474 5.00 to 9.99:1 7 9,818,130 1,500,713 105,162 Greater than 10.00: 1 ~ 132,580,167 4 678 659 327,855 Total 68 $ 149,802,511 $ 8,210,000 $ 575,312 % of Projected Fiscal Year 2016-17 Special Tax Levy * 0.00% lQ.40 14.34 18.28 56.99 100.00% (JJ Assessed valuations are based on County secured roll data as of January 2016, reflecting assessed valuations as of January 1, 2015. The data does not reflect any appeals or other changes to value that may have been updated after January 1, 2015. C2J The amounts shown reflect the assumption that all property within Improvement Area 1 is classified as Taxable Property, as such term is defined in the Rate and Method. Source: NBS. • Preliminary, subject to change. 24 Item No. 16 - AB #22,338 June 28, 2016 Page 42 of 87 Number Estimated Assessed of Value-to-Lien Ratio Parcels Less than 1.00: 1 0 1.00 to 2.99:1 2 3.00 to 4.99:1 6 5.00 to 9.99:1 4 Greater than 10. 00: 1 2Q Total 68 TABLE7 OVERLAPPING DEBT ASSESSED VALUE-TO-LIEN RATIO CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO. 3 .IMPROVEMENT AREA 1 Total Total Bonds and Total Assessed Overlapping Overlapping Value<1l Bonds* Debt2l Debt2l* $ 0 $ 0 $ 0 $ 0 2,535,999 853,683 23,095 876,778 7,702,145 1,724,864 144,165 1,869,029 6,984,200 952,794 82,534 1,035,328 132,580,167 4,678,659 1,612,591 6,291,249 $ 149,802,511 $ 8,210,000 $ 1,862,384 $ 10,072,384 Projected Fiscal % of Projected Year 2016-17 Fiscal Year Special Tax 2016-17 Special Levy<3l Tax Levy • $ 0 0.00% 59,822 10.40 120,869 21.01 66,767 11.61 327,855 56.99 $ 575,312 100.00% (I) Assessed valuations are based on County secured roll data as of January 2016, reflecting assessed valuations as of January 1, 2015. The data does not reflect any appeals or other changes to value that may have been updated after January 1, 2015. <2J Total Bonds and Overlapping Debt includes the Bonds and overlapping debt information provided by California Municipal Statistics, Inc. on May 27, 2016, based upon assessed values from County secured roll data as of January 1, 2015 for taxable parcels within Improvement Area 1. (3l The amounts shown reflect the assumption that all property within Improvement Area 1 is classified as Taxable Property, as such term is defined in the Rate and Method, and that such property will be levied up to 100% of the Maximum Special Tax, as such term is defined in the Rate and Method. Source: NBS. 'Preliminary, subject to change. 25 Item No. 16 - AB #22,338 June 28, 2016 Page 43 of 87 From 2008 to 2015, assessed values net of exemptions on 15 parcels in Improvement Area 1 were reduced by an aggregate of $11,719,917, which represents a decrease of approximately 24.60%, without a change in ownership. Although neither the City nor the District have any knowledge with respect to the reasons for such reductions in assessed values, it is likely that some of such reductions are the result of Proposition 8 or other property tax appeals. Reduced assessed values in the District would not affect the amount of Special Taxes that can be levied under the Rate and Method but may alter the amount of overlapping general obligation bond tax levies. Development Status The table below summarizes the development status of property within Improvement Area 1. Under the Rate and Method, all property within Improvement Area 1 is Taxable Property that is subject to the Special Taxes up to the Annual Maximum Special Tax amount except Open Space Property and Public Property (primarily, dedicated easements). Property may be either "Final Map Property" (Taxable Property that is included within a Final Subdivision Map that is approved by City Council prior to March 1 of each Fiscal Year) or "Developable Property" (Taxable Property other than Final Map Property). Currently, all Taxable Property within Improvement Area 1 is Final Map Property. As shown below, based on development status as of March 1, 2016, approximately 54.51 % of the Special Taxes that are expected to be levied in Fiscal Year 2016-17 will be levied on improved Final Map Property. TABLES DEVELOPMENT STATUS CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO. 3 IMPROVEMENT AREA 1 Projected Fiscal Number Year 2016-17 of Total Assessed Maximum Special Tax Development Status Parcels Value(!l Special Tax LeryC2J Improved Final Map Property 55 $ 129,643,692 $ 770,204 $ 313,597 Unimproved Final Map Property ...Ll. 20,158,819 642 779 261,715 Total 68 $ 149,802,511 $1,412,983 $575,312 % of Projected Fiscal Year 2016-17 Special TaxLery 54.51% 45.49 100.00% (JJ Assessed valuations are based on County secured roll data as of January 2016, reflecting assessed valuations as of January 1, 2015. The data does not reflect any appeals or other changes to value that may have been updated after January 1, 2015. (Zl The amounts shown reflect the assumption that all property within Improvement Area 1 is classified as Taxable Property, as such term is defined in the Rate and Method. Source: NBS. Delinquency History Under the provisions of the Act, the Special Taxes, from which funds necessary for the payment of principal of, and interest on, the Bonds are derived, will be billed to the Property Owners on their regular property tax bills. Such Special Tax installments are due and payable, and bear the same penalties and interest for non-payment, as do regular property tax installments. Special Tax installment payments cannot generally be made separately from property tax payments. Therefore, the unwillingness or inability of a property owner to pay regular property tax bills as evidenced by property tax delinquencies may also indicate an unwillingness or inability to make regular property tax payments and Special Tax installment payments in the future. See the caption "SPECIAL RISK FACTORS-Special Tax Delinquencies." 26 Item No. 16 - AB #22,338 June 28, 2016 Page 44 of 87 The tables below show the Special Tax levy and the percentages of delinquent Special Taxes for the last five Fiscal Years, as well as historical tax collection information. Fiscal Year 2011-12 2012-13 2013-14 2014-15 2015-16 TABLE9 DELINQUENCY HISTORY(!) CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO. 3 IMPROVEMENT AREA 1 Amount Amount Number of Number of Levie<f,-2) Delinquent Parcels Levied Parcels Delinquent $770,602.36 $ 0.00 68 0 770,665.02 0.00 68 0 770,497.66 0.00 68 0 774,112.12 0.00 68 0 772,946.53 1,319.33 68 1 (I) As of May 12, 2016. %of Amount Delinquent 0.00% 0.00 0.00 0.00 0.17 <2) The amounts shown are higher than the projected Fiscal Year 2016-17 Special Tax levy of $575,312 because such amounts were levied to pay the 2006 Bonds. The District expects to achieve debt service savings from the refunding of the 2006 Bonds and the issuance of the Bonds and, consequently, a reduction in the Special Tax that will be levied to pay the Bonds. See the caption "THE REFUNDING PLAN." Source: NBS. See the caption "SOURCES OF PAYMENT FOR THE BONDS-Special Taxes-Covenant to Foreclose; Proceeds of Foreclosure Sales" for a discussion of the provisions that apply, and procedures that the District is obligated to follow, in the event of delinquency in the payment of Special Tax installments. TABLE 10 HISTORICAL SPECIAL TAX COLLECTIONS AS OF JUNE 30 EACH FISCAL YEAR CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO. 3 IMPROVEMENT AREA 1 %of Amount Amount Number of Number of Amount Fiscal Year Levie<f--2) Delinquent Parcels Levied Parcels Delinquent Delinquent 2011-12 $770,602.36 $7,064.37 68 4 0.92% 2012-13 770,665.02 7,227.12 68 3 0.94 2013-14 770,497.66 0.00 68 0 0.00 2014-15 774,112.12 0.00 68 0 0.00 2015-16(2) 772,946.53 1,319.33 68 1 0.17 (I) The amounts shown are higher than the projected Fiscal Year 2016-17 Special Tax levy of $575,312 because such amounts were levied to pay the 2006 Bonds. The District expects to achieve debt service savings from the refunding of the 2006 Bonds and the issuance of the Bonds and, consequently, a reduction in the Special Tax that will be levied to pay the Bonds. See the caption "THE REFUNDING PLAN." (2) As of May 12, 2016. Source: NBS. SPECIAL RISK FACTORS The following is a discussion of certain risk factors that should be considered, in addition to other matters set forth in this Official Statement, in evaluating the investment quality of the Bonds. This discussion does not purport to be comprehensive or definitive. In addition, the order in which the following information 27 Item No. 16 - AB #22,338 June 28, 2016 Page 45 of 87 is presented is not intended to reflect the relative importance of any such risks. The occurrence of one or more events discussed below could adversely affect the value of the property in Improvement Area 1. Moreover, the occurrence of one or more of the events discussed below could adversely affect the ability or willingness of property owners in the District to pay their Special Taxes when due. Such a failure to pay Special Taxes could result in the inability of the District to make full and punctual payments on the Bonds. Concentration of Ownership Improvement Area 1 has a significant concentration of ownership. As of the date of this Official Statement, the top ten Property Owners within Improvement Area 1 own property that is subject to approximately 78.0% of the Special Taxes that are expected to be levied in Fiscal Year 2016-17, and the top property owner, Palomar Melrose LLC, is expected to be responsible for approximately 28.53% of the annual Special Tax levy in Fiscal Year 2016-17. An affiliated entity, Greyhawk Associates, is expected to be responsible for an additional approximately 8.04% of the annual Speciaf Tax levy in Fiscal Year 2016-17. In addition, there a total of fewer than 50 Property Owners within Improvement Area 1, and the District understands that many Property Owners are related corporate entities. See the caption "THE IMPROVEMENT AREA-Property Ownership." Failure of the Property Owners, or any successor, to pay the annual Special Taxes when due could result in a default in payments of the principal of, and interest on, the Bonds, when due. None of the Property Owners is obligated in any manner to continue to own, or to develop, any of such property. The Special Taxes are not a personal obligation of the owners of the property on which such Special Taxes are levied, and no assurances can be given that the current Property Owners within Improvement Area 1 will be financially able to pay the Special Taxes levied on such property or that they will choose to pay even if financially able to do so. See the caption "-Payment of the Special Tax is not a Personal Obligation of the Owners." Such risk is greater and its consequence more severe when ownership is concentrated and may be expected to decrease when ownership is diversified. Limited Obligations The Bonds are revenue bonds, payable exclusively from Net Taxes and other funds provided in the Indenture. The Bonds are not payable from the general funds or other moneys of the City or moneys derived from Improvement Area 1 of the District. Except with respect to the Net Taxes from Improvement Area 1, neither the credit nor the taxing power of the District or the City is pledged for the payment of the Bonds or the interest on the Bonds, and, except as provided in the Indenture, no Owner of the .Bonds may compel the exercise of any taxing power by the District or the City or force the forfeiture of any City or District property. The principal of, premium, if any, and interest on the Bonds are not a debt of the City or a legal or equitable pledge, charge, lien or encumbrance upon any of the City's or the District's property or upon any of the City's or the District's income, receipts or revenues, except the Net Taxes and other amounts pledged under the Indenture. See the caption "SOURCES OF PAYMENT FOR THE BONDS-Limited Obligations." Insufficiency of Special Taxes Based on current projections, the maximum Special Taxes that may be levied within Improvement Area 1 are equal to at least 110% of Maximum Annual Debt Service on the Bonds plus the Administrative Expenses Cap. Notwithstanding the fact that the maximum Special Taxes that may be levied in Improvement Area 1 exceed debt service on the Bonds, the Special Taxes collected could be inadequate to make timely payment of debt service either because of nonpayment or, as described under the caption "SOURCES OF PAYMENT FOR THE BONDS-Special Taxes-Rate and Method of Apportionment of Special Taxes," because property becomes exempt from taxation. The Special Taxes will be billed to the properties within the District on the ad valorem property tax bills sent to owners of such properties. The Act provides that such Special Tax installments are due and 28 Item No. 16 - AB #22,338 June 28, 2016 Page 46 of 87 payable, and bear the same penalties and interest for non-payment, as do ad valorem property tax installments. Significant delinquencies in the payment of Special Tax installments, or delays in the prosecution of foreclosure proceedings to collect such Special Taxes, could result in depletion of the Reserve Account and a default in the payment of the Bonds. See the caption "SOURCES OF PAYMENT FOR THE BONDS- Special Taxes---Covenant to Foreclose; Proceeds of Foreclosure Sales" for a discussion of the provisions that apply, and the procedures that the District has covenanted to follow, in the event of delinquencies in the payment of Special Taxes. See the captions "-FDIC/Federal Government Interests in Properties" and "- Bankruptcy and Foreclosure" for a discussion of the policy of the Federal Deposit Insurance Corporation (the "FDIC") regarding the payment of special taxes and assessments and limitations on the District's ability to foreclose on the lien of the Special Taxes in certain circumstances. The annual levy of the Special Tax is subject to the maximum tax rates authorized. The levy cannot be made at a higher rate even if the failure to do so means that the estimated proceeds of the levy and collection of the Special Tax, together with other available funds, will not be sufficient to pay debt service on the Bonds. Other funds that might be available include moneys and reserve fund surety policies or similar instruments deposited in the Reserve Account, funds derived from the payment of penalties on delinquent Special Taxes and funds derived from the tax sale or foreclosure and sale of parcels on which levies of the Special Tax are delinquent. The levy of the Special Tax will rarely, if ever, result in a uniform relationship between the value of particular property and the amount of the levy of the Special Tax against such property. Thus, there will rarely, if ever, be a uniform relationship between the value of such property and the proportionate share of debt service on the Bonds, and certainly not a direct relationship. Public Property, Open Space and Assessor's Parcels (as such terms are defined in the Rate and Method) with public· or utility easements making impractical their utilization for other than the purposes set forth in the easement are currently exempt from Special Taxes. The Act provides that if any property within the District that is not otherwise exempt from the Special Tax is acquired by a public entity through a negotiated transaction, or by gift or devise, the Special Taxes will continue to be levied on and enforceable against the public entity that acquired the property. In addition, the Act provides that if property that is subject to the Special Tax is acquired by a public entity through eminent domain proceedings, the obligation to pay the Special Tax with respect to such property is to be treated as if it were a special assessment and paid from the eminent domain award. The constitutionality and operative effect of these provisions has not been tested in the courts. If for any reason property subject to the Special Tax becomes exempt from taxation by reason of ownership by a nontaxable entity such as the federal government, or another public agency that asserts immunity from the Special Tax, subject to the limitation of the maximum Special Tax rates, the Special Taxes will be reallocated to the remaining properties within the District. This would result in the owners of such properties paying a greater amount of the Special Tax and could have an adverse effect on the timely payment of the Special Tax. Due to the problems associated with collecting taxes from public agencies, if a substantial portion of land within the District were to become owned by public agencies, collection of the Special Tax might become more difficult and could result in collections of the Special Tax which might not be sufficient to pay principal of and interest on the Bonds when due, and a default could occur with respect to the payment of such principal and interest. Failure to Develop Properties As of January 1, 2015, approximately 66.42 acres within Improvement Area 1 remained in an unimproved state. Unimproved or partially improved land is inherently less valuable than land with improvements on it, especially if there are restrictions on development, and provides less security to the Owners should it be necessary for the District to foreclose on the property due to the nonpayment of Special Taxes. Any delays in 29 Item No. 16 - AB #22,338 June 28, 2016 Page 47 of 87 developing unimproved property, or the decision not to construct improvements on such property, may affect the willingness and ability of the owners of property within Improvement Area 1 to pay the Special Taxes when due. Land development is subject to comprehensive federal, State and local regulations. Approval is required from various agencies in connection with the layout and design of developments, the nature and extent of improvements, construction activity, land use, zoning, school and health requirements, as well as numerous other matters. There is always the possibility that such approvals will not be obtained or, if obtained, will not be obtained on a timely basis. Failure to obtain any such agency approval or to satisfy such governmental requirements could adversely affect planned land development. In addition, there is a risk that future governmental restrictions, including, but not limited to, governmental policies restricting or controlling development within the District, will be enacted, and a risk that future voter approved land use initiatives could add more restrictions and requirements on development within the District. Moreover, there can be no assurance that the means and incentive to conduct land development operations within the District will not be adversely affected by a deterioration of the real estate market and economic conditions or future local, State and federal governmental policies relating to real estate development, the income tax treatment of real property ownership or the national economy. The Property Owners who own unimproved property are likely to need continued financing to complete the development of the property within Improvement Area 1. No assurance can be given that the required funding will be secured or that the proposed development will be partially or fully completed, and it is possible that cost overruns will be incurred that will require additional funding beyond what the Property Owners have projected, which may or may not be available. Owners of the Bonds should assume that any event that significantly impacts the ability to complete the development of the land in Improvement Area 1 would cause the property values within Improvement Area 1 to decrease substantially and could affect the willingness and ability of the Property Owners to pay the Special Taxes when due. Endangered Species In recent years, there has been an increase in activity at the State and federal level related to the possible listing of certain plant and animal species found in the Southern California area as endangered or threatened species. An increase in the number of endangered or threatened species is expected to curtail development in a number of areas. At present, none of the unimproved property within Improvement Area 1 is known to be inhabited by any plant or animal species that any State or federal agency has listed or has proposed for listing on the endangered or threatened species lists. The City is not aware of the current existence of any endangered species within Improvement Area 1. Notwithstanding this fact, new species are proposed to be added to the State and federal protected lists on a regular basis. Any action by the State or federal government to protect species located on or adjacent to the property within Improvement Area 1 could have an adverse effect on the ability of the owners of unimproved property to construct improvements on such property. Any such action could reduce the likelihood of timely payment of the Special Taxes which might be levied upon such property and would likely reduce the market value of such property and, therefore, the potential revenues available at foreclosure sales for delinquent Special Tax installments. See the caption "- Land Values." Natural Disasters The District, like all California communities, may be subject to unpredictable seismic activity, drought, fires, high winds, landslides, floods or other natural disasters. Southern California is a seismically active area. Although no known active faults underlie the District, seismic activity represents a potential risk 30 Item No. 16 - AB #22,338 June 28, 2016 Page 48 of 87 for damage to buildings, roads, bridges and property within the District. In addition, land susceptible to seismic activity may be subject to liquefaction during the occurrence of such event. North San Diego County, in which the District is located, has previously experienced large scale wildfires that resulted in the destruction of homes and businesses, most recently in 2007 and 2014; however, no property in Improvement Area 1 has been damaged as the result of such wildfires. In the event of a natural disaster, there may be significant damage to both property and infrastructure in Improvement Area 1. As a result, a substantial portion of the Property Owners may be unable or unwilling to pay the Special Taxes when due. In addition, the value of land in the District could be diminished in the aftermath of such a natural disaster, reducing the resulting proceeds of foreclosure sales in the event of delinquencies in the payment of the Special Taxes. Hazardous Substances The presence of hazardous substances on a parcel may result in a reduction in the value of a parcel. In general, the owners and operators of a parcel may be required by law to remedy conditions of the parcel relating to releases or threatened releases of hazardous substances. The Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, sometimes referred to as "CERCLA" or the "Superfund Act," is the most well-known and widely applicable of these laws, but State laws with regard to hazardous substances are also stringent and similar. Under many of these laws, the owner or operator is obligated to remedy a hazardous substance condition of property whether or not the owner or operator had anything to do with creating or handling the hazardous substance. The effect, therefore, should any of the taxed parcels be affected by a hazardous substance, is to reduce the marketability and value of the parcel by the costs of remedying the condition, because the purchaser, upon becoming owner, will become obligated to remedy the condition just as is the seller. The District has not independently verified, but is not aware, that any owner (or operator) of any of the parcels within Improvement Area 1 has a liability related to hazardous substances with respect to any such parcel. However, it is possible that such liabilities do currently exist and that the District is not aware of them. Further, it is possible that liabilities may arise in the future with respect to any of the parcels within Improvement Area 1 resulting from the existence; currently, on the parcel of a substance that is presently classified as hazardous but which has not been released or the release of which is not presently threatened, or may arise in the future resulting from the existence, currently, on the parcel of a substance that is not presently classified as hazardous but which may in the future be so classified. Further, such liabilities may arise not simply from the existence of a hazardous substance but from the method of handling it. Any of these possibilities could significantly affect the willingness or ability of the owner of any parcel to pay the Special Taxes or the value of a parcel that is realizable upon a delinquency. Shapiro Decision On August 1, 2014, the California Court of Appeal, Fourth Appellate District, Division One (the "Court"), issued its opinion in City of San Diego v. Melvin Shapiro, et al. (D063997). The case involved a Convention Center Facilities District (the "CCFD") established by the City of San Diego. The CCFD was a financing district established under the City of San Diego's charter (the "Charter") and was intended to function much like a community facilities district established under the provisions of the Act. The CCFD was comprised of all of the real property in the entire City of San Diego. However, the special tax to be levied within the CCFD was to be levied only on properties improved with a hotel located within the CCFD. At the election to authorize such special tax, the Charter proceeding limited the electorate to owners of hotel properties and lessees of real property owned by a governmental entity on which a hotel is located. Thus, the election was an election limited to owners and lessees of properties on which the special tax would be 31 Item No. 16 - AB #22,338 June 28, 2016 Page 49 of 87 levied, and not a registered voter election. Such approach to determining who would constitute the qualified electors of the CCFD was based on Section 53326(c) of the Act, which generally provides that, if a special tax will not be apportioned in any tax year on residential property, the legislative body may provide that the vote will be by the landowners of the proposed district whose property would be subject to the special tax. The Court held that the CCFD special tax election did not comply with applicable requirements of Article XIIIA, Section 4, and Article XIIIC, Section 2, of the State Constitution, or with applicable provisions of the City of San Diego's Charter, because the electors in such an election were not the registered voters residing within the district. In the case of the CCFD, at the time of the election there were several hundred thousand registered voters within the CCFD (viz., all of the registered voters in the City of San Diego). In the case oflmprovement Area 1, there were no registered voters within Improvement Area 1 at the time of the elections to authorize the special tax levy for Improvement Area 1. In City of San Diego, the Court expressly stated that it was not addressing the validity of landowner voting to impose special taxes pursuant to the Act in situations where there are fewer than 12 registered voters. Thus, by its terms, the Court's holding does not apply to the special tax election in Improvement Area 1. Moreover, Section 53341 of the Act provides that any "action or proceeding to attack, review, set aside, void or annul the levy of a special tax ... shall be collllllenced within 30 days after the special tax is approved by the voters." Similarly, Section 53359 of the Act provides that any action to determine the validity of bonds issued pursuant to the Act or the levy of special taxes authorized pursuant to the Act be brought within 30 days of the voters approving the issuance of such bonds or the special tax. Voters approved the Special Tax and the issuance of bonds for Improvement Area 1 in compliance with all applicable requirements of the Act at the time of formation of the District in 2005. Therefore, under the provisions of Sections 53341 and 53359 of the Act, the statute of limitations period to challenge the validity of the Special Tax for Improvement Area 1 has expired. Parity Taxes and Special Assessments Property within the District is subject to taxes and assessments imposed by other public agencies that have jurisdiction over the land within the District. See the caption "THE IMPROVEMENT AREA- Estimated Direct and Overlapping Indebtedness." The Special Taxes and any penalties thereon constitute a lien against the lots and parcels of land on which they have been levied. Such lien is on a parity with all special taxes and special assessments levied by the City and other agencies and is co-equal to and independent of the lien for general property taxes, regardless of when they are imposed upon the same property. The Special Taxes have priority over all existing and future private liens imposed on the property except, possibly, for liens or security interests held by the Federal Deposit Insurance Corporation and other federal government entities. See the captions "-Bankruptcy and Foreclosure" and "-FDIC/Federal Government Interests in Properties" below. Neither the City nor the District has control over the ability of other entities and districts to issue indebtedness secured by special taxes, ad valorem taxes or assessments that are payable from all or a portion of the property within the District. In addition, the Property Owners within the District may, without the consent or knowledge of the District, petition other public agencies to issue public indebtedness secured by special taxes, ad valorem taxes or assessments. Any such special taxes, ad valorem taxes or assessments may have a lien on such property on a parity with the Special Taxes and could reduce the estimated value-to-lien ratios for property within the District or the willingness of property owners to pay the Special Tax. Disclosures to Future Purchasers The willingness or ability of an owner of a parcel to pay the Special Tax even if the value of the parcel is sufficient may be affected by whether or not the owner was given due notice of the Special Tax authorization when the owner purchased the parcel, was informed of the amount of the Special Tax on the 32 Item No. 16 - AB #22,338 June 28, 2016 Page 50 of 87 parcel should the Special Tax be levied at the maximum tax rate and the risk of such a levy, and, at the time of such a levy, has the ability to pay it as well as pay other expenses and obligations. The District has caused a notice of the Special Tax lien to be recorded in the Office of the Recorder for the County against each parcel. While title companies normally refer to such notices in title reports, there can be no guarantee that such reference will be made or, if made, that a prospective purchaser or lender will consider such Special Tax obligation in the purchase of a property within the District or lending of money secured by such property. The Act requires the subdivider ( or its agent or representative) of a subdivision to notify a prospective purchaser or long-term lessor of any lot, parcel, or unit that is subject to a Mello-Roos special tax of the existence and maximum amount of such special tax using a statutorily prescribed form. California Civil Code § 1102.6b requires that in the case of transfers other than those covered by the above requirement, the seller must at least make a good faith effort to notify the prospective purchaser of the special tax lien in a format prescribed by statute. Failure by an owner of the property to comply with the above requirements, or failure by a purchaser or lessor to consider or understand the nature and existence of the Special Tax, could adversely affect the willingness and ability of the purchaser or lessor to pay the Special Tax when due. Special Tax Delinquencies Under provisions of the Act, the Special Taxes, from which funds necessary for the payment of principal of and interest on the Bonds and any Parity Bonds are derived, are customarily billed to the properties within the District on the ad valorem property tax bills sent to owners of such properties. The Act currently provides that such Special Tax installments are due and payable, and bear the same penalties and interest for non-payment, as do ad valorem property tax installments. Significant delinquencies in the payment of annual Special Tax installments, or delays in the prosecution of foreclosure proceedings to collect such Special Taxes, could result in default in depletion of the Reserve Account and default in payment of debt service on the Bonds. See the caption "SOURCES OF PAYMENT FOR THE BONDS-Special Taxes-Covenant to Foreclose; Proceeds of Foreclosure Sales" for a discussion of the provisions that apply, and the procedures that the District is obligated to follow under the Indenture, in the event of delinquencies in the payment of Special Taxes. See the captions "-FDIC/Federal Government Interests in Properties" and "-Bankruptcy and Foreclosure" for a discussion of the policy of the FDIC and the rights of federal government entities regarding the payment of special taxes and assessment and limitations on the District's ability to foreclosure on the lien of the Special Taxes in certain circumstances. Non-Cash Payments of Special Taxes Under the Act, the City Council, as the legislative body of the District, may reserve to itself the right and authority to allow the owner of any taxable parcel to tender a Bond or Parity Bond in full or partial payment of any installment of the Special Taxes or the interest or penalties thereon. A Bond or Parity Bond so tendered is to be accepted at par and credit is to be given for any interest accrued thereon to the date of the tender. Thus, if Bonds or Parity Bonds can be purchased in the secondary market at a discount, it may be to the advantage of an owner of a taxable parcel to pay the Special Taxes applicable thereto by tendering a Bond or Parity Bond. Such a practice would decrease the cash flow available to the District to make payments with respect to other Bonds or Parity Bonds then outstanding; and, unless the practice was limited by the District, the Special Taxes paid in cash could be insufficient to pay the debt service due with respect to such other Bonds or Parity Bonds. In order to provide some protection against the potential adverse impact on cash flows that might be caused by the tender of Bonds or Parity Bonds in payment of Special Taxes, the Indenture includes a covenant pursuant to which the District will not adopt any policy pursuant to Section 53341.1 of the Act permitting the tender of Bonds or Parity Bonds in full payment or partial payment of any Special Taxes unless the District has first received a certificate :from an Independent Financial Consultant that the acceptance of such a tender will 33 Item No. 16 - AB #22,338 June 28, 2016 Page 51 of 87 not result in the District having insufficient Special Tax revenues to pay the principal of and interest on the Bonds and Parity Bonds when due. Payment of the Special Tax is not a Personal Obligation of the Owners The obligation to pay Special Taxes levied within Improvement Area 1 does not constitute a personal obligation of the current or subsequent owners of the property in Improvement Area 1. Enforcement of Special Tax payment obligations by the District is limited to judicial foreclosure in the County Superior Court. See the caption "SOURCES OF PAYMENT FOR THE BONDS-Special Taxes-Covenant to Foreclose; Proceeds of Foreclosure Sales." There is no assurance that any current or subsequent owner of a parcel subject to Special Taxes will be able to pay the Special Taxes, or that such owner will choose to pay such installments even though financially able to do so. Land Values The value of the property within the District is a critical factor in determining the investment quality of the Bonds. If a property owner is delinquent in the payment of Special Taxes, the District's only remedy is to commence foreclosure proceedings against the delinquent parcel in an attempt to obtain funds to pay the Special Taxes. Reductions in property values due to a downturn in the economy, natural disasters, stricter land use regulations, delays in development or other events could adversely impact the security underlying the Special Taxes. See the caption "THE IMPROVEMENT AREA-Estimated Assessed Value-to-Lien Ratios" herein. The assessed values set forth in this Official Statement do not represent market values arrived at through an appraisal process and generally reflect only the sales price of a parcel when acquired by its current owner, adjusted annually by an amount determined by the County Assessor, generally not to exceed an increase of more than 2% per fiscal year, and value increases attributable to new construction. In the last several years such upward adjustment has been less than 2% annually and in certain years, the assessed value for specific parcels within Improvement Area 1 may have been revised downwards. In recent years, many counties in the State, including the County, have reassessed certain properties acquired in recent years at the peak of the real estate market. The District cannot predict whether the County will reduce assessed values within Improvement Area 1 in future years. If the County did decide to broadly reassess assessed valuations in the County, it is possible that in future years the assessed values shown in this Official Statement could be adjusted downward from the values reflected in this Official Statement. Prospective purchasers of the Bonds should not assume that the property within Improvement Area 1 could be sold for the assessed values described in this Official Statement at a foreclosure sale for delinquent Special Taxes or for an amount adequate to pay delinquent Special Taxes. No assurance can be given that any bid will be received for a parcel with delinquent Special Taxes offered for sale at foreclosure or, if a bid is received, that such bid will be sufficient to pay all delinquent Special Taxes. See the caption "SOURCES OF PAYMENT FOR THE BONDS-Special Tax-Covenant to Foreclose; Proceeds of Foreclosure Sales." Potential Early Redemption of Bonds from Prepayments Property owners within Improvement Area 1 are permitted to prepay their Special Taxes at any time. Such prepayments will result in a redemption of Bonds. See the caption "THE BONDS-Redemption- Extraordinary Redemption." Billing of Special Taxes A special tax formula can result in a substantially heavier property tax burden being imposed upon properties within a community facilities district than elsewhere in a city or county, and this in tum can lead to 34 Item No. 16 - AB #22,338 June 28, 2016 Page 52 of 87 problems in the collection of the special tax. In some community facilities districts, taxpayers have refused to pay the special tax and have commenced litigation challenging the special tax, the community facilities district and bonds issued by the community facilities district. Under provisions of the Act, the Special Taxes are to be billed to the properties within Improvement Area 1 that were entered on the Assessment Roll of the County Assessor by January 1 of the previous Fiscal Year. Such Special Tax installments are due and payable, and bear the same penalties and interest for non- payment, as do regular property tax installments. These Special Tax installment payments cannot be made separately from property tax payments. Therefore, the unwillingness or inability of a property owner to pay regular property tax bills may also indicate an unwillingness or inability to make regular property tax payments and installment payments of Special Taxes in the future. See the caption "SOURCES OF PAYMENT FOR THE BONDS-Special Taxes-Covenant to Foreclose; Proceeds of Foreclosure Sales" for a discussion of the provisions that apply, and that procedures that the District is obligated to follow, in the event of delinquency in the payment of installments of Special Taxes. Value-to-Lien Ratios The estimated value-to-lien ratios set forth under the caption "THE IMPROVEMENT AREA- Estimated Assessed Value-to-Lien Ratio" are based on the assessed values of property in Improvement Area 1 and the direct and overlapping debt currently allocable to such property, as of January 1, 2015. No assurance can be given that such value-to-lien ratios will be maintained over time. As discussed herein, many factors that are beyond the control of the City and the District could adversely affect the property values within Improvement Area 1. Neither the City nor the District has any control over the amount of additional indebtedness that may be issued by other public agencies, the payment of which, through the levy of a tax or an assessment, is on a parity with the Special Taxes. See the captions "-Parity Taxes and Special Assessments" and "THE IMPROVEMENT AREA-Estimated Direct and Overlapping Indebtedness." A decrease in the property values in Improvement Area 1 or an increase in the parity liens on property in Improvement Area 1, or both, could result in a lowering of the value-to-lien ratios of the property in Improvement Area 1. IRS Audit of Tax-Exempt Bond Issues The Internal Revenue Service (the "IRS") has initiated an expanded program for the auditing of tax-exempt bond issues, including both random and targeted audits. It is possible that the Bonds will be selected for audit by the IRS. It is also possible that the market value of the Bonds might be affected as a result of such an audit ( or by an audit of similar bonds or securities). FDIC/Federal Government Interests in Properties General. The ability of the District to collect the Special Taxes and interest and penalties specified by State law, and to foreclose the lien of delinquent Special Taxes, may be limited in certain respects with regard to properties in which the FDIC, the Federal National Mortgage Association ("FNMA"), the IRS, the Drug Enforcement Administration or other similar federal governmental agencies has or obtains an interest. Federal courts have held that, based on the supremacy clause of the United States Constitution ("this Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, anything in the Constitution or Laws of any State to the contrary notwithstanding"), in the absence of Congressional intent to the contrary, a state or local agency cannot foreclose to collect delinquent taxes or assessments if foreclosure would impair the federal government's interest. This means that, unless the United States Congress has otherwise provided, if a federal government entity owns a parcel of taxable property but does not pay taxes (including Special Taxes) and 35 Item No. 16 - AB #22,338 June 28, 2016 Page 53 of 87 assessments levied on the parcel, the applicable state and local governments cannot foreclose on the parcel to collect the delinquent taxes and assessments. Moreover, unless the United States Congress has otherwise provided, if the federal government has a mortgage interest in the parcel and the District wishes to foreclose on the parcel as a result of delinquent Special Taxes, the property cannot be sold at a foreclosure sale unless it can be sold for an amount that is sufficient to pay delinquent taxes and assessments on a parity with the Special Taxes and preserve the federal government's mortgage interest. In Rust v. Johnson, 597 F.2d 174 (9th Cir. 1979), the United States Court of Appeal, Ninth Circuit (the "Ninth Circuit"), held that FNMA is a federal instrumentality for purposes of this doctrine, and not a private entity, and that, as a result, an exercise of state power over a mortgage interest held by FNMA constitutes an exercise of state power over property of the United States. For a discussion of risks associated with taxable parcels within the District becoming owned by the federal government, federal government entities or federal government sponsored entities, see the caption "-Insufficiency of Special Taxes." The District has not undertaken to determine whether any federal governmental entity currently has, or is likely to acquire, any interest (including a mortgage interest) in any of the parcels subject to the Special Taxes, and therefore expresses no view concerning the likelihood that the risks described above will materialize while the Bonds are outstanding. FDIC. In the event that any financial institution making any loan which is secured by real property within the District is taken over by the FDIC, and prior thereto or thereafter the loan or loans go into default, resulting in ownership of the property by the FDIC, then the ability of the District to collect interest and penalties specified by State law and to foreclose the lien of delinquent unpaid Special Taxes may be limited. On June 4, 1991, the FDIC issued a Statement of Policy Regarding the Payment of State and Local Property Taxes (the "1991 Policy Statement"). The 1991 Policy Statement was revised and superseded by new Policy Statement effective January 9, 1997 (the "Policy Statement"). The Policy Statement provides that real property that is owned by the FDIC is subject to state and local real property taxes only if those taxes are assessed according to the property's value, and that the FDIC is immune from real property taxes assessed on any basis other than property value. According to the Policy Statement, the FDIC will pay its property tax obligations when they become due and payable and will pay claims for delinquent property taxes as promptly as is consistent with sound business practice and the orderly administration of the institution's affairs, unless abandonment of the FDIC's interest in the property is appropriate. The FDIC will pay claims for interest on delinquent property taxes owed at the rate provided under state law, to the extent that the interest payment obligation is secured by a valid lien. The FDIC will not pay any amounts in the nature of fines or penalties and will neither pay nor recognize liens for such amounts. If any property taxes (including interest) on FDIC-owned property are secured by a valid lien (in effect before the property became owned by the FDIC), the FDIC will pay those claims. The Policy Statement further provides that no property of the FDIC is subject to levy, attachment, garnishment, foreclosure or sale without the FDIC's consent. In addition, the FDIC will not permit a lien or security interest held by the FDIC to be eliminated by foreclosure without the FDIC's consent. The Policy Statement states that the FDIC generally will not pay non-ad valorem taxes, including special assessments, on property in which it has a fee interest unless the amount of tax is fixed at the time that the FDIC acquires its fee interest in the property, nor will it recognize the validity of any lien to the extent that such lien purports to secure the payment of any such amounts. Special taxes imposed under the Act and a special tax formula that determines the special tax due each year are specifically identified in the Policy Statement as being imposed each year and therefore covered by the FDIC's federal immunity. The Ninth Circuit issued a ruling on August 28, 2001 in which it determined that the FDIC, as a federal agency, is exempt from special taxes under the Act. With respect to property in the State owned by the FDIC on January 9, 1997 and that was owned by the Resolution Trust Company (the "RTC") on December 31, 1995, or that became the property of the FDIC through foreclosure of a security interest held by the RTC on that date, the FDIC will continue the RTC's prior practice of paying special taxes imposed pursuant to the Act if the taxes were 36 Item No. 16 - AB #22,338 June 28, 2016 Page 54 of 87 imposed prior to the RTC's acquisition of an interest in the property. All other special taxes may be challenged by the FDIC. The City and the District are unable to predict what effect the FDIC's application of the Policy Statement would have in the event of a delinquency on a parcel within the District in which the FDIC has an interest, although prohibiting the lien of the FDIC to be foreclosed at a judicial foreclosure sale would reduce or eliminate the persons willing to purchase a parcel at a foreclosure sale. Owners of the Bonds should assume that the District will be unable to foreclose on any parcel owned by the FDIC. Such an outcome could cause a draw on the Reserve Account and perhaps, ultimately, a default in payment on the Bonds. Bankruptcy and Foreclosure The various legal opinions to be delivered concurrently with the delivery of the Bonds (including Bond Counsel's approving legal opinion) will be qualified, as to the enforceability of the various legal instruments, by bankruptcy, reorganization, insolvency, or other similar laws affecting the rights of creditors generally. The payment of Special Taxes and the ability of the District to foreclose the lien of a delinquent Special Tax may be limited by bankruptcy, insolvency or other laws generally affecting creditors' rights or by the laws of the State relating to judicial foreclosure. Bankruptcy, insolvency and other laws generally affecting creditors' rights could adversely impact the interests of owners of the Bonds in at least two ways. First, the payment of property owners' taxes and the ability of the District to foreclose the lien of delinquent unpaid Special Taxes pursuant to its covenant to pursue judicial foreclosure proceedings may be limited by bankruptcy, insolvency or other laws generally affecting creditors' rights (such as the Soldiers' and Sailors' Relief Act of 1940 discussed below) or by the laws of the State relating to judicial foreclosure. See the caption "SOURCES OF PAYMENT FOR THE BONDS-Special Taxes----Covenant to Foreclose; Proceeds of Foreclosure Sales." In addition, the prosecution of a foreclosure could be delayed for many reasons, including crowded local court calendars or lengthy procedural delays. Second, the United States Bankruptcy Code might prevent moneys on deposit in the Special Tax Fund from being applied to pay interest on the Bonds and/or to redeem Bonds if bankruptcy proceedings were brought by or against a landowner in the District and if the court found that any of such landowners had an interest in such moneys within the meaning of Section 541 ( a)(l) of the United States Bankruptcy Code. Although bankruptcy proceedings would not cause the Special Taxes to become extinguished, the amount and priority of any lien on property securing the payment of delinquent Special Taxes could be reduced or modified if the value of the property were determined by the bankruptcy court to have become less than the amount of the lien, and the amount of the delinquent Special Taxes in excess of the reduced lien would then be treated as an unsecured claim by the court. Further, bankruptcy of a property owner could result in an unwillingness to pay Special Taxes, a stay or other delay in prosecuting Superior Court foreclosure proceedings. Such a delay would increase the likelihood of a delay or default in payment of the principal of, and interest on, the Bonds and the possibility of delinquent Special Tax installments not being paid in full. On July 30, 1992, the Ninth Circuit issued its opinion in a bankruptcy case entitled In re Glasply Marine Industries ("Glasply"). In that case, the court held that ad valorem property taxes levied by Snohomish County in the State of Washington after the date that the property owner filed a petition for bankruptcy were not entitled to priority over a secured creditor with a prior lien on the property. Although the court upheld the priority of unpaid taxes imposed before the bankruptcy petition, unpaid taxes imposed after the filing of the bankruptcy petition were declared to be "administrative expenses" of the bankruptcy estate, payable after all secured creditors. As a result, the secured creditor was able to foreclose on the property and retain all the proceeds of the sale except the amount of the pre-petition taxes. 37 Item No. 16 - AB #22,338 June 28, 2016 Page 55 of 87 The Bankruptcy Reform Act of 1994 included a provision which excepts from the United States Bankruptcy Code's automatic stay provisions, "the creation of a statutory lien for an ad valorem property tax imposed by . . . a political subdivision of a state if such tax comes due after the filing of the petition [by a debtor in bankruptcy court]." This amendment effectively makes the Glasply holding inoperative as it relates to ad valorem real property taxes. However, it is possible that the original rationale of the Glasply ruling could still result in the treatment of post-petition special taxes as "administrative expenses," rather than as tax liens secured by real property, at least during the pendency of bankruptcy proceedings. According to the court's ruling, as administrative expenses, post-petition taxes would be paid, assuming that the debtor had sufficient assets to do so. In certain circumstances, payment of such administrative expenses may be allowed to be deferred. Once the property is transferred out of the bankruptcy estate (through foreclosure or otherwise), it would at that time become subject to current ad valorem taxes. The Act provides that the Special Taxes are secured by a continuing lien which is subject to the same lien priority in the case of delinquency as ad valorem taxes. No case law exists with respect to how a bankruptcy court would treat the lien for Special Taxes levied after the filing of a petition in bankruptcy. Glasply is controlling precedent on bankruptcy courts in the State. If the Glasply precedent was applied to the levy of the Special Taxes, the amount of Special Taxes received from parcels whose owners declare bankruptcy could be reduced. Other laws generally affecting creditors' rights or relating to judicial foreclosure may affect the ability to enforce payment of Special Taxes or the timing of enforcement of Special Taxes. For example, the Soldiers and Sailors Civil Relief Act of 1940 affords protections such as a stay in enforcement of the foreclosure covenant, a six-month period after termination of military service to redeem property sold to enforce the collection of a tax or assessment and a limitation on the interest rate on the delinquent tax or assessment to persons in military service if a court concludes that the ability to pay such taxes or assessments is materially affected by reason of such service. No Acceleration Provision The Bonds do not contain a provision allowing for the acceleration of the Bonds in the event of a payment default or other default under the Bonds or the Indenture. See Appendix C under the caption "EVENTS OF DEFAULT-Remedies of Owners" for a description of remedies that are available to the Bond Owner if the District defaults under the Indenture. Loss of Tax Exemption As dis<mssed under the caption "TAX EXEMPTION," the interest on the Bonds could become includable in gross income for federal income tax purposes retroactive to the date of issuance of the Bonds as a result of a failure of the District to comply with certain provisions of the Internal Revenue Code of 1986, as amended, or certain legislative changes that occur subsequent to the issuance of the Bonds. Should such an event oftaxability occur, the Bonds are not subject to early redemption and will remain outstanding to maturity or until redeemed under the redemption provisions of the Indenture. Limitations on Remedies Remedies available to the owners of the Bonds may be limited by a variety of factors and may be inadequate to assure the timely payment of principal of and interest on the Bonds or to preserve the tax-exempt status of the Bonds. Bond Counsel has limited its opinioll' as to the enforceability of the Bonds and of the Indenture to the extent that enforceability may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium, or other similar laws affecting generally the enforcement of creditors' rights, by 38 Item No. 16 - AB #22,338 June 28, 2016 Page 56 of 87 equitable principles and by the exercise of judicial discretion. The lack of availability of certain remedies or the limitation of remedies may entail risks of delay, limitation or modification of the rights of the owners of the Bonds. Limited Secondary Market There can be no guarantee that there will be a secondary market for the Bonds or, if a secondary market exists, that such Bonds can be sold for any particular price. Although the District has committed to provide certain financial and operating information on an annual basis, there can be no assurance that such information will be available to Owners of the Bonds on a timely basis. See the caption "CONTINUING DISCLOSURE." The failure to provide the required annual financial information does not give rise to monetary damages but merely an action for specific performance. Occasionally, because of general market conditions, lack of current information, or because of adverse history or economic prospects connected with a particular issue, secondary marketing practices in connection with a particular issue are suspended or terminated. Additionally, prices of issues for which a market is being made will depend upon then prevailing circumstances. Such prices could be substantially different from the original purchase price. Proposition 218 An initiative measure, Proposition 218, which is commqnly referred to as the "Right to Vote on Taxes Act" (the "Initiative") was approved by the voters of the State at the November 5, 1996 general election. The Initiative added Articles XIIIC and XIIID to the State Constitution. According to the "Title and Summary" of the Initiative prepared by the State Attorney General, the Initiative limits "the authority of local governments to impose taxes and property-related assessments, fees and charges." The provisions of the Initiative have not yet been interpreted by the courts, although several lawsuits have been filed requesting that the courts interpret various aspects of the Initiative. The Initiative could potentially impact the Special Taxes available to the District to pay the principal of and interest on the Bonds as described below. Among other things, Section 3 of Article XIIIC states that " ... the initiative power shall not be prohibited or otherwise limited in matters of reducing or repealing any local tax, assessment, fee or charge." The Act provides for a procedure which includes notice, hearing, protest and voting requirements to alter the rate and method of apportionment of an existing special tax. However, the Act prohibits a legislative body from adopting any resolution to reduce the rate of any special tax or terminate the levy of any special tax pledged to repay any debt incurred pursuant to the Act unless such legislative body determines that the reduction or termination of the special tax would not interfere with the timely retirement of that debt. On July 1, 1997, a bill was signed into law by the Governor of the State enacting Government Code Section 5854, which states that: "Section 3 of Article XIIIC of the California Constitution, as adopted at the November 5, 1996, general election, shall not be construed to mean that any owner or beneficial owner of a municipal security, purchased before or after that date, assumes the risk of, or in any way consents to, any action by initiative measure that constitutes an impairment of contractual rights protected by Section 10 of Article I of the United States Constitution." Accordingly, although the matter is not free from doubt, it is likely that the Initiative has not conferred on the voters the power to repeal or reduce the Special Taxes if such reduction would interfere with the timely retirement of the Bonds. The provisions of the Initiative relating to the exercise of the initiative power have not been interpreted by the courts, and no assurance can be given as to the outcome of any such litigation. It may be possible, however, for voters or the City Council, acting as the legislative body of the District, to reduce the Special Taxes in a manner that does not interfere with the timely repayment of the Bonds, but which does reduce the maximum amount of Special Taxes that may be levied in any year below the existing levels. Furthermore, no assurance can be given with respect to the future levy of the Special Taxes in 39 Item No. 16 - AB #22,338 June 28, 2016 Page 57 of 87 amounts greater than the amount necessary for the timely retirement of the Bonds. Therefore, no assurance can be given with respect to the levy of Special Taxes for Administrative Expenses. Nevertheless, to the maximum extent that the law permits it to do so, the District has covenanted that it will not initiate proceedings to reduce the maximum Special Tax rates for the District, unless, in connection therewith: (i) the District receives a certificate from one or more Independent Financial Consultants which, when taken together, certify that, on the basis of the parcels of land and improvements existing in the District as of the July 1 preceding the reduction, the maximum amount of the Special Tax which may be levied on then-existing Taxable Property ( as such term is defined in the Rate and Method) in each Bond Year for any Bonds and Parity Bonds Outstanding will equal at least 110% of the sum of the estimated Administrative Expenses and gross debt service in each Bond Year on all Bonds and Parity Bonds to remain Outstanding after the reduction is approved; (ii) the District finds that any reduction made under such conditions will not adversely affect the interests of the Owners of the Bonds and Parity Bonds; and (iii) the District is not delinquent in the payment of the principal of or interest on the Bonds or any Parity Bonds. For purposes of estimating Administrative Expenses for the foregoing calculation, the Independent Financial Consultants will compute the Administrative Expenses for the current Fiscal Year and escalate such amount by 2% in each subsequent Fiscal Year. However, no assurance can be given as to the enforceability of the foregoing covenants. The interpretation and application of Articles XIIIC and XIIID will ultimately be determined by the courts with respect to a number of the matters discussed above, and it is not possible at this time to predict with certainty the outcome of such determination or the timeliness of any remedy afforded by the courts. See the caption "-Limitations on Remedies." Ballot Initiatives Article XIIIC was adopted pursuant to a measure that qualified for the ballot pursuant to the State's Constitutional initiative process, and the State Legislature has in the past enacted legislation that has altered the spending limitation or established minimum funding provisions for particular activities. On March 6, 1995, in the case of Rossi v. Brown, the State Supreme Court held that an initiative can repeal a tax ordinance and prohibit the imposition of further such taxes and that the exemption from the referendum requirements does not apply to initiative. From time to time, other initiative measures could be adopted by State voters or legislation enacted by the State Legislature. The adoption of any such initiative or enactment of legislation might place limitations on the ability of the State, the County or local districts to increase revenues or appropriations or on the ability of a property owner to complete the development of property within the District. CONTINUING DISCLOSURE District Pursuant to a Continuing Disclosure Agreement, dated as of July 1, 2016 (the "District Disclosure Agreement"), the District has agreed to provide, or cause to be provided, to the Municipal Securities Rulemaking Board's Electronic Municipal Market Access ("EMMA") system certain annual financial information and operating data concerning the District and notice of certain enumerated events (the "District Annual Report"). The District Annual Report is to be filed not later than March 31 of each year, beginning March 31, 2017, and is to include audited financial statements of the City. The requirement that the City file its audited financial statements as a part of the District Annual Report has been included in the District Disclosure Agreement solely to satisfy the provisions of Rule 15c2-12. The inclusion of this information does not mean that the Bonds are secured by any resources or property of the City. See the captions "SOURCES OF PAYMENT FOR THE BONDS" and "SPECIAL RISK FACTORS-Limited Obligations." [DISCLOSURE RE PAST COMPLIANCE AND REMEDIAL MEASURES TO COME]. 40 Item No. 16 - AB #22,338 June 28, 2016 Page 58 of 87 Except as described above, the [District] has not previously failed to comply with any previous undertakings under Rule 15c2-12 to provide District Annual Reports or notices of enumerated events. The proposed form of the District Disclosure Agreement is set forth in Appendix D-1. Property Owners Pursuant to separate continuing disclosure certificates, dated as of July 1, 2016 (the "Property Owner Disclosure Certificates"), certain Property Owners listed under the caption "THE IMPROVEMENT AREA- Property Ownership" have agreed to provide, or cause to be provided, to the EMMA system certain annual financial information and operating data concerning such Property Owners and the parcels that they own within Improvement Area 1 and notice of certain enumerated events (the "Property Owner Annual Reports"). Each Property Owner Annual Report is to be filed not later than March 31 of each year, beginning March 31, 2017. The obligations under each Property Owner Disclosure Certificate will terminate upon the earlier of: (i) legal defeasance, prior redemption or payment in full of all of the Bonds; (ii) the date on which the applicable Property Owner's property in Improvement Area 1 is no longer responsible for 10% or more of the annual Special Tax levy; (iii) the date on which the applicable Property Owner prepays in full all of the Special Taxes that are attributable to its property in Improvement Area 1; or (iv) the date on which: (A) the Property Owner's property in Improvement Area 1 is responsible for between 10% and 25% of the annual Special Tax levy in Improvement Area 1; (B) the Property Owner has completed construction of all buildings to be constructed within property it owns in Improvement Area 1; and (C) each such building constructed by the Property Owner and intended for lease by the Property Owner has been, since completion of construction, at least 80% occupied at one time or another. [DISCLOSURE RE PAST COMPLIANCE AND REMEDIAL MEASURES TO COME]. Except as described above, the Property Owners that are executing Property Owner Disclosure Certificates have not previously failed to comply with any previous undertakings under Rule 15c2-12 to provide Property Owner Annual Reports or notices of enumerated events. The proposed form of the Property Owner Disclosure Certificate is set forth in Appendix D-2. LEGAL MATTERS The validity of the Bonds and certain other legal matters are subject to the approving opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Bond Counsel. The form of Bond Counsel's opinion with respect to the Bonds is set forth in Appendix E. In addition to serving as Bond Counsel in connection with the issuance and sale of the Bonds, Stradling Yocca Carlson & Rauth, a Professional Corporation, has served as Disclosure Counsel to the District. Certain legal matters will be passed on for the City and the District by the City Attorney, for the Underwriter by Jones Hall, A Professional Law Corporation, and for the Trustee by its counsel. TAX EXEMPTION In the opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Bond Counsel, under existing statutes, regulations, rulings and judicial decisions, and assuming the accuracy of certain representations and compliance with certain covenants and requirements described in this Official Statement, interest ( and original issue discount) on the Bonds is excluded from gross income for federal income tax purposes, and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and corporations. In the further opinion of Bond Counsel, interest (and original issue discount) on the Bonds is exempt from State of California personal income tax. 41 Item No. 16 - AB #22,338 June 28, 2016 Page 59 of 87 Bond Counsel notes that, with respect to corporations, interest on the Bonds may be included as an adjustment in calculation of alternative minimum taxable income, which may affect the alternative minimum tax liability of such corporations. Bond Counsel's opinion as to the exclusion from gross income for federal income tax purposes of interest (and original issue discount) on the Bonds is based upon certain representations of fact and certifications made by the District, the Underwriter and others and is subject to the condition that the District complies with all requirements of the Internal Revenue Code of 1986, as amended (the "Code") that must be satisfied subsequent to the issuance of the Bonds to assure that interest (and original issue discount) on the Bonds will not become ineluctable in gross income for federal income tax purposes. Failure to comply with such requirements of the Code might cause interest (and original issue discount) on the Bonds to be included in gross income for federal income tax purposes retroactive to the date of issuance of the Bonds. The District will covenant to comply with all such requirements. In the opinion of Bond Counsel, the difference between the issue price of a Bond (the first price at which a substantial amount of the Bonds of a maturity is to be sold to the public) and the stated redemption price at maturity of such Bond constitutes original issue discount. Original issue discount accrues under a constant yield method, and original issue discount will accrue to a Beneficial Owner before receipt of cash attributable to such excludable income. The amount of original issue discount deemed received by a Beneficial Owner will increase the Beneficial Owner basis in the applicable Bond. The amount of original issue discount that accrues to the Beneficial Owner of a Bond is excluded from the gross income of such Beneficial Owner for federal income tax purposes, is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, and is exempt from State of California personal income tax. The amount by which an Owner's original basis for determining loss on sale or exchange in the applicable Bond (generally, the purchase price) exceeds the amount payable on maturity ( or on an earlier call date) constitutes amortizable bond premium, which must be amortized under Section 171 of the Code; such amortizable bond premium reduces the Owner's basis in the applicable Bond (and the amount of tax-exempt interest received), and is not deductible for federal income tax purposes. The basis reduction as a result of the amortization of bond premium may result in an Owner realizing a taxable gain when a Bond is sold by the Owner for an amount equal to or less (under certain circumstances) than the original cost of the Bond to the Owner. Purchasers of the Bonds should consult their own tax advisors as to the treatment, computation and collateral consequences of amortizable bond premium. The IRS has initiated an expanded program for the auditing of tax-exempt bond issues, including both random and targeted audits. It is possible that the Bonds will be selected for audit by the IRS. It is also possible that the market value of the Bonds might be affected as a result of such an audit of the Bonds ( or by an audit of similar municipal obligations). No assurance can be given that in the course of an audit, as a result of an audit, or otherwise, Congress or the IRS might not change the Code ( or interpretation thereof) subsequent to the issuance of the Bonds to the extent that it adversely affects the exclusion from gross income of interest (and original issue discount) on the Bonds or their market value. SUBSEQUENT TO THE ISSUANCE OF THE BONDS, THERE MIGHT BE FEDERAL, STATE OR LOCAL STATUTORY CHANGES (OR JUDICIAL OR REGULATORY INTERPRETATIONS OF FEDERAL, STATE OR LOCAL LAW) THAT AFFECT THE FEDERAL, STATE OR LOCAL TAX TREATMENT OF THE INTEREST ON THE BONDS OR THE MARKET VALUE OF THE BONDS. LEGISLATIVE CHANGES HA VE BEEN PROPOSED IN CONGRESS, WHICH, IF ENACTED, WOULD RESULT IN ADDITIONAL FEDERAL INCOME TAX BEING IMPOSED ON CERTAIN OWNERS OF TAX-EXEMPT STATE OR LOCAL OBLIGATIONS, SUCH AS THE BONDS. THE INTRODUCTION OR ENACTMENT OF ANY OF SUCH CHANGES COULD ADVERSELY AFFECT THE MARKET VALUE OR LIQUIDITY OF THE BONDS. NO ASSURANCE CAN BE GIVEN THAT, SUBSEQUENT TO THE ISSUANCE OF THE BONDS, SUCH CHANGES (OR OTHER CHANGES) WILL NOT BE 42 Item No. 16 - AB #22,338 June 28, 2016 Page 60 of 87 INTRODUCED OR ENACTED OR THAT SUCH INTERPRETATIONS WILL NOT OCCUR. BEFORE PURCHASING ANY OF THE BONDS, ALL POTENTIAL PURCHASERS SHOULD CONSULT THEIR TAX ADVISORS REGARDING POSSIBLE STATUTORY CHANGES OR JUDICIAL OR REGULATORY CHANGES OR INTERPRETATIONS, AND THEIR COLLATERAL TAX CONSEQUENCES RELATING TO THE BONDS. Bond Counsel's opinion may be affected by actions taken (or not taken) or events occurring (or not occurring) after the date hereof. Bond Counsel has not undertaken to determine, or to inform any person, whether any such actions or events are taken or do occur. The Indenture and the Tax Certificate relating to the Bonds permit certain actions to be taken or to be omitted if a favorable opinion of Bond Counsel is provided with respect thereto. Bond Counsel expresses no opinion as to the effect on the exclusion from gross income for federal income tax purposes of interest (and original issue discount) with respect to any Bond if any such action is taken or omitted based upon the advice of counsel other than Stradling Y occa Carlson & Rauth, a Professional Corporation. Although Bond Counsel will render an opinion that interest (and original issue discount) on the Bonds is excluded from gross income for federal income tax purposes provided that the District continues to comply with certain requirements of the Code, the accrual or receipt of interest (and original issue discount) on the Bonds may otherwise affect the tax liability of certain persons. Bond Counsel expresses no opinion regarding any such tax consequences. Accordingly, before purchasing any of the Bonds, all potential purchasers should consult their tax advisors with respect to collateral tax consequences relating to the Bonds. A copy of the proposed form of opinion of Bond Counsel for the Bonds is set forth in Appendix E. LITIGATION At the time of delivery of and payment for the Bonds, the District will certify that there is no action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, regulatory agency, public board or body, pending or, to the knowledge of the District, threatened against the District affecting the existence of the District or the titles of its directors or officers to their respective offices or seeking to restrain or to enjoin the sale or delivery of the Bonds, the application of the proceeds thereof in accordance with the Indenture, or in any way contesting or affecting the validity or enforceability of the Bonds, the Indenture, or any action of the District 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 District or its authority with respect to the Bonds or any action of the District contemplated by any of said documents, nor to the knowledge of the District, is there any basis therefor. NO RATING The Bonds have not been rated by any credit rating agency. UNDERWRITING The Bonds are being purchased by Stifel, Nicolaus & Company, Incorporated (the "Underwriter"). The Underwriter has agreed to purchase the Bonds at a price of $__ (being $ aggregate principal amount of the Bonds, less Underwriter's discount of$ __ and plus/less a net original issue premium of$ ___J. The purchase agreement relating to the Bonds provides that the Underwriter will purchase all of the Bonds if any are purchased. The obligation to make such purchase is subject to certain terms and conditions set forth in such purchase agreement, the approval of certain legal matters by counsel and certain other conditions. The initial offering prices stated on the inside front cover page of this Official Statement may be changed from time to time by the Underwriter. The Underwriter may offer and sell the Bonds to certain 43 Item No. 16 - AB #22,338 June 28, 2016 Page 61 of 87 dealers (including dealers depositing Bonds into investment trusts), dealer banks, banks acting as agent and others at prices lower than said public offering prices. FINANCIAL ADVISOR The District has retained Fieldman, Rolapp & Associates, Irvine, California, as financial advisor (the "Financial Advisor") in connection with the sale of the Bonds. The Financial Advisor is not obligated to undertake, and has not undertaken to make, an independent verification or to assume any responsibility for the accuracy, completeness or fairness of the information contained in this Official Statement. The Financial Advisor is an independent advisory firm and is not engaged in the business of underwriting, trading or distributing municipal or other public securities. FINANCIAL INTERESTS The fees being paid to the Financial Advisor, the Underwriter, Underwriter's Counsel and Bond Counsel/Disclosure Counsel are contingent upon the issuance and delivery of the Bonds. From time to time, Bond Counsel represents the Underwriter on matters unrelated to the Bonds. PENDING LEGISLATION The District is not aware of any significant pending legislation that would have material adverse consequences on the Bonds or the ability of the District to pay the principal of and interest on the Bonds when due. ADDITIONAL INFORMATION The purpose of this Official Statement is to supply information to prospective buyers of the Bonds. Quotations and summaries and explanations of the Bonds and documents contained in this Official Statement do not purport to be complete, and reference is made to such documents for full and complete statements and their provisions. This Official Statement is submitted only in connection with the sale of the Bonds by the District. This Official Statement does not constitute a contract with the purchasers of the Bonds. The execution and delivery of this Official Statement by the City Manager of the City has been duly authorized by the City Council, acting in its capacity as the legislative body of the District. CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO. 3 By: City Manager 44 Item No. 16 - AB #22,338 June 28, 2016 Page 62 of 87 APPENDIX A RATE AND METHOD OF APPORTIONMENT OF SPECIAL TAX A-1 Item No. 16 - AB #22,338 June 28, 2016 Page 63 of 87 APPENDIXB SUPPLEMENTAL INFORMATION CONCERNING THE CITY OF CARLSBAD AND THE COUNTY OF SAN DIEGO Set forth below is certain demographic information regarding the City of Carlsbad (the "City"), the County of San Diego (the "County') and the State of California (the "State'). This information is provided for informational purposes only and general background. The information set forth herein has been obtained from third party sources believed to be reliable, but such information is not guaranteed by the City or the District as to accuracy or completeness. Neither the delivery of this Official Statement nor any sale therecifter of the securities offered hereby shall under any circumstances create any implication that there has been no change in any information contained in this Appendix since the date of the Official Statement. The Bonds are payable solely from the Net Taxes as described in the Official Statement. The information and data within this Appendix is the latest data available; however, the current state of the economy at City, County, State and national levels may not be reflected in the data discussed below because more up-to-date publicly available information is not available to the City. General Information The City is located on the coast of southern California approximately 3 5 miles north of the City of San Diego and 86 miles south of the City of Los Angeles. It is· bordered by two lagoons, Buena Vista and Batiquitos, on the north and south respectively. City limits cover approximately 42 square miles and the City's estimated population was 112,930 as of January 1, 2016. Municipal Government The City, a general law city with the council-manager form of government, was incorporated July 16, 1952. A five-member City Council is elected at large for four-year alternating terms at elections held every two years. The mayor is the presiding officer of the City Council and also is elected to serve a four-year term. The city manager, appointed by the council, acts as chief executive officer in carrying out City Council policies. The City provides a full range of services, including police, fire, parks and recreation, library, planning and zoning, building and engineering, various maintenance services and administration. The City provides water and sewer services through the Carlsbad Municipal Water District ("CMWD"), a subsidiary district of the City. Solid waste collection is provided through a :franchise arrangement with a local refuse collection service. The City operates a housing authority that provides low and moderate income families with housing assistance. Climate and Topography The City has mild summers with a mean temperature for the month of July of 73 degrees and moderate winters with an average winter temperature of 58 degrees. The relative humidity is low. Average rainfall, which occurs generally in the period between October and February, is less than 9 inches. The City is located on the Pacific Ocean at an altitude of sea level to 585 feet above sea level. B-1 Item No. 16 - AB #22,338 June 28, 2016 Page 64 of 87 Population The following table provides a comparison of population growth for the City and the County between the years 2012 and 2016. TABLEB-1 CITY OF CARLSBAD AND COUNTY OF SAN DIEGO POPULATION Year San Diego (January 1) Carlsbad County 2012 107,958 3,153,951 2013 109,614 3,194,778 2014 111,210 3,230,278 2015 111,939 3,263,848 2016 112,930 3,288,612 Source: State of California, Department of Finance, E-4 Population Estimates for Cities, Counties and the State, 2011-2016, with 2010 Census Counts, Sacramento, CA, May 2016, Sacramento, CA. B-2 Item No. 16 - AB #22,338 June 28, 2016 Page 65 of 87 Employment and Industry The following table summarizes the civilian labor force, civilian employment and civilian unemployment figures over the years 2011 through 2015 in the City, the County, the State and the United States. TABLE B-2 CITY OF CARLSBAD, COUNTY OF SAN DIEGO, STATE OF CALIFORNIA AND UNITED STATES LABOR FORCE, EMPLOYMENT AND UNEMPLOYMENT (YEARL YA VERA GE) Civilian Labor Civilian Civilian Year and Area Force EmploymenfJ) Unemploymenf2> 2011 Carlsbad 52,200 47,300 4,900 San Diego County 1,524,600 1,367,200 157,300 California 18,415,100 16,258,100 2,157,000 United StatesC4l 153,617,000 139,869,000 13,747,000 2012 Carlsbad 53,000 48,600 4,400 San Diego County 1,542,800 1,402,000 140,800 California 18,551,400 16,627,800 1,923,600 United StatesC4l 154,975,000 142,469,000 12,506,000 2013 Carlsbad 53,500 49,700 3,800 San Diego County 1,547,000 1,425,900 121,100 California 18,670,100 17,001,000 1,669,000 United States 155,389,000 143,929,000 11,460,000 2014 Carlsbad 53,400 50,300 3,100 San Diego County 1,549,800 1,450,300 99,500 California 18,827,900 17,418,000 1,409,900 United States 155,922,000 146,305,000 9,617,000 2015 Carlsbad 54,000 51,400 2,500 San Diego County 1,563,800 1,482,500 81,300 California 18,981,800 17,798,600 1,183,200 United States 157,130,000 148,834,000 8,296,000 Note: Data is not seasonally adjusted. (!) Includes persons involved in labor-management trade disputes. (2) Includes all persons without jobs who are actively seeking work. Civilian Unemployment RateC3l 9.4% 10.3 11.7 8.9 8.3% 9.1 10.4 8.1 7.1% 7.8 8.9 7.4 5.8% 6.4 7.5 6.2 4.7% 5.2 6.2 5.3 (3) The unemployment rate is computed from unrounded data; therefore, it may differ from rates computed from rounded figures in this table. (4) Not strictly comparable with data for prior years. Source: California Employment Development Department and U.S. Department of Labor, Bureau of Labor Statistics. B-3 Item No. 16 - AB #22,338 June 28, 2016 Page 66 of 87 The following table sets forth the industry employment and the labor force estimates for the years 2011 through 2015 for the San Diego-Carlsbad Metropolitan Statistical Area. Annual industry employment information is not compiled by sector for the City. Note: TABLEB-3 SAN DIEGO-CARLSBAD METROPOLITAN STATISTICAL AREA INDUSTRY EMPLOYMENT & LABOR FORCE -BY ANNUAL AVERAGE 2011 2012 2013 2014 2015 Civilian Labor Force 1,524,600 1,542,800 1,547,000 1,549,800 1,563,800 Civilian Employment 1,367,200 1,402,000 1,425,900 1,450,300 1,482,500 Civilian Unemployment 157,300 140,800 121,100 99,500 81,300 Civilian Unemployment Rate 10.3% 9.1% 7.8% 6.4% 5.2% Total Farm 9,800 9,800 9,800 9,400 9,100 Total Nonfarm 1,252,000 1,284,500 1,317,700 1,346,500 1,386,400 Total Private 1,023,100 1,056,700 1,088,200 1,114,600 1,150,600 Goods Producing 151,600 155,100 160,300 165,800 175,200 Mining and Logging 400 400 400 400 400 Construction 55,200 57,000 60,900 63,800 69,500 Manufacturing 96,000 97,800 99,000 101,600 105,300 Service Providing 1,100,400 1,129,400 1,157,400 1,180,700 1,211,200 Trade, Transportation & 201,000 208,000 212,400 215,000 219,000 Utilities Wholesale Trade 41,500 43,500 43,900 43,700 44,000 Retail Trade 133,400 137,200 141,300 144,300 146,800 Transportation, Warehousing 26,100 27,300 27,200 27,000 28,200 & Utilities Information 24,200 24,500 24,300 24,400 23,900 Financial Activities 67,400 69,700 70,800 69,400 71,400 Professional & Business 207,700 213,900 221,600 224,900 230,900 Services Educational & Health 167,900 174,500 181,000 186,000 193,200 Services Leisure and Hospitality 155,600 161,700 168,600 177,000 184,000 Other Services 47,700 49,200 49,300 52,000 53,000 Government 229,000 227,800 229,500 231,900 235,900 Total, All Industries 1,261,800 1,284,500 1,327,500 1,355,900 1,395,500 Does not include proprietors, self-employed, unpaid volunteers or family workers, domestic workers in households and persons involved in labor-management trade disputes. Employment reported by place of work. Items may not add to total due to independent rounding. The "Total, All Industries" data is not directly comparable to the employment data found in this Appendix. Source: State of California, Employment Development Department, San Diego-Carlsbad MSA Industry Employment & Labor Force -by Annual Average, March 2015 Benchmark. B-4 Item No. 16 - AB #22,338 June 28, 2016 Page 67 of 87 The major employers operating within the City and their respective number of employees as of June 30, 2015 are as follows: TABLEB-4 CITY OF CARLSBAD LARGEST EMPLOYERS 2011 2012 2013 2014 2015 Civilian Labor Force 1,524,600 1,542,800 1,547,000 1,549,800 1,563,800 Civilian Employment 1,367,200 1,402,000 1,425,900 1,450,300 1,482,500 Civilian Unemployment 157,300 140,800 121,100 99,500 81,300 Civilian Unemployment Rate 10.3% 9.1% 7.8% 6.4% 5.2% Total Farm 9,800 9,800 9,800 9,400 9,100 Total Nonfarm 1,252,000 1,284,500 1,317,700 1,346,500 1,386,400 Total Private 1,023,100 1,056,700 1,088,200 1,114,600 1,150,600 Goods Producing 151,600 155,100 160,300 165,800 175,200 Mining and Logging 400 400 400 400 400 Construction 55,200 57,000 60,900 63,800 69,500 Manufacturing 96,000 97,800 99,000 101,600 105,300 Service Providing 1,100,400 1,129,400 1,157,400 1,180,700 1,211,200 Trade, Transportation & 201,000 208,000 212,400 215,000 219,000 Utilities Wholesale Trade 41,500 43,500 43,900 43,700 44,000 Retail Trade 133,400 137,200 141,300 144,300 146,800 Transportation, 26,100 27,300 27,200 27,000 28,200 Warehousing & Utilities Information 24,200 24,500 24,300 24,400 23,900 Financial Activities 67,400 69,700 70,800 69,400 71,400 Professional & Business 207,700 213,900 221,600 224,900 230,900 Services Educational & Health 167,900 174,500 181,000 186,000 193,200 Services Leisure and Hospitality 155,600 161,700 168,600 177,000 184,000 Other Services 47,700 49,200 49,300 52,000 53,000 Government 229,000 227,800 229,500 231,900 235,900 Total, All Industries 1,261.800 1,284.500 1,327.500 1,355.900 1,395.500 Source: City of Carlsbad, Comprehensive Annual Financial Report for Fiscal Year Ended June 30, 2015. B-5 Item No. 16 - AB #22,338 June 28, 2016 Page 68 of 87 Income The following table summarizes per capita personal income for the County, the State and the United States for the years 2010 through 2014. TABLEB-5 COUNTY OF SAN DIEGO, STATE OF CALIFORNIA AND UNITED STATES PER CAPITA PERSONAL INCOME Year San Diego County State of California United States 2010 $44,563 $42,282 $40,144 2011 47,095 44,749 42,332 2012 48,990 47,505 44,200 2013 49,907 48,434 44,765 2014 51,459 49,985 46,049 Source: U.S. Department of Commerce, Bureau of Economic Analysis. Commercial Activity Table B-6 summarizes the volume of retail sales and taxable transactions (in thousands) for the City for the years 2010 through 2014. * TABLEB-6 CITY OF CARLSBAD TOTAL TAXABLE TRANSACTIONS Total Taxable Retail Sales Retail Sales Transactions Issued Sales Year $(000's) Permits $(000's) Permits 2010 $1,623,453 2,433 $2,191,041 3,888 2011 1,785,316 2,444 2,407,247 3,915 2012 1,941,876 2,472 2,557,381 3,955 2013 2,047,743 2,626 2,711,152 4,087 2014* 1,562,052 2,696 2,120,177 4,185 * Through third quarter of 2014. Source: California State Board of Equalization, Taxable Sales in California (Sales and Use Tax). B-6 Item No. 16 - AB #22,338 June 28, 2016 Page 69 of 87 Building Activity The following table summarizes building activity valuations for the City for the years 2011 through 2015. TABLE B-7 CITY OF CARLSBAD BUILDING ACTIVITY AND VALUATION 2011 2012 2013 2014 2015 Residential $ 84,067,062 $ 127,935,441 $ 71,834,597 $ 102,726,371 $ 105,676,912 Non-Residential 66,816,284 61,710,777 60,691,889 112,545,825 81,496,376 Total Valuation $ 150,883.346 $ 189,646.218 $ 132,526.486 $ 215,272.196 $ 187,173.288 Total Permits 317 402 200 252 224 Source: Construction Industry Research Board. Transportation Centrally located in southern California, the City is accessible to major transportation resources, surrounded by Interstates 5 and State Route 78 and served by Amtrak and Coaster rail lines. The City is approximately 35 miles north of San Diego International Airport and facilities at San Diego harbor. Public transportation through the City and surrounding communities is provided by the Metropolitan Transit System, a network of several agencies that provide bus and train services within the County. Within the City, North Coast Transit District ("NCTD") operates the Breeze, gas-powered buses which provide transportation linking the greater north County area. NCTD buses stop in multiple points within the City, including Carlsbad Village and Plaza Camino Real. NCTD also operates the Coaster, a commuter train which travels north along the coast line to Oceanside and south to downtown San Diego. In addition, McClellan-Palomar Airport, a small commercial and private airport, is located within the City. Education Carlsbad is located near four major universities and two community colleges. Portions of the City are located within one unified school district, two high school districts and two elementary school districts. Utilities San DiegoGas & Electric provides electric power and natural gas in the City and to most communities in the County. Telephone service is provided by Cox Communications and SBC Communications Inc. CMWD, a subsidiary district of the City, provides water to approximately 85 percent of the City, an area of about 32 square miles. Residents of the City who are not served by CMWD, receive water service from the Olivenhain Municipal Water District or the Vallecitos Water District. Community Facilities and Recreation The City is a beach community fronted by over six miles of coastline from Buena Vista Lagoon in the north to Batiquitos Lagoon in the south. Throughout the year, residents and tourists enjoy swimming, surfing, B-7 Item No. 16 - AB #22,338 June 28, 2016 Page 70 of 87 fishing, diving, jogging and relaxing at the City's beaches. The mile-long Carlsbad seawall is a popular location for such activities. The City's lagoons also include ecosystems that provide bird watching and nature walks as well as water sports such as non-motorized boating. The City is home to many parks, which offer a variety of leisure activities, including softball, volleyball and soccer in addition to providing playground equipment and picnic tables. Jazz concerts in the park have become a summer tradition in the City. Every Friday evening a thousand or more jazz enthusiasts bring their picnic baskets and chairs to enjoy a free concert under the stars at one of Carlsbad's community parks. The City is also known for its golf facilities. The City is home to two world-class golf resorts and more than 30 golf industry businesses. Attractions within the City include Legoland California. Legoland is a Lego-based theme park with over 50 rides, shows and attractions catering to children from ages two to twelve and their families. The Flower Fields, located at Carlsbad Ranch, is a commercial ranunculus field open to the public with over 50 acres of giant tecolote ranunculus, a garden of miniature roses, Ecke poinsettias and a tractor tour that has been in operation for over 50 years. Also located within the City is the Museum of Making Music. The museum curates public exhibits that relate to the history of American popular music, the manufacture and retail of musical instruments and the history of the music products industry from 1890's to the present day. The museum's galleries consist of more than 450 vintage instruments and artifacts on display, hundreds of audio samples of popular music and an area for visitors to interact with a variety of live, hands-on instruments. The museum also organizes public events, performances and lectures whose purpose is to entertain, educate and inform audiences of the benefits and heritage of making music. B-8 Item No. 16 - AB #22,338 June 28, 2016 Page 71 of 87 APPENDIXC SUMMARY OF BOND INDENTURE The following is a summary of certain provisions of the Indenture that are not described elsewhere. This summary does not purport to be comprehensive and reference should be made to the Indenture for a full and complete statement of the provisions thereof [TO COME] C-1 Item No. 16 - AB #22,338 June 28, 2016 Page 72 of 87 APPENDIX D-1 FORM OF DISTRICT CONTINUING DISCLOSURE AGREEMENT Upon issuance of the Bonds, the District proposes to enter into a Continuing Disclosure Agreement in substantially the following form: [TO BE INSERTED] D-1-1 Item No. 16 - AB #22,338 June 28, 2016 Page 73 of 87 APPENDIX D-2 FORM OF PROPERTY OWNER CONTINUING DISCLOSURE CERTIFICATE Upon issuance of the Bonds, certain Property Owners propose to enter into a Continuing Disclosure Certificate in substantially the following form: [TO BE INSERTED] D-2-1 Item No. 16 - AB #22,338 June 28, 2016 Page 74 of 87 APPENDIXE FORM OF OPINION OF BOND COUNSEL Uppn issuance of the Bonds, Stradling Yocca Carlson & Rauth, a Professional Corporation, Bond Counsel, proposes to render its final approving opinions with respect to the Bonds in substantially the following form: July_, 2016 City of Carlsbad Community Facilities District No. 3 Carlsbad, California Re: $ City of Carlsbad Community Facilities District No. 3 2016 Special Tax Refunding Bonds (Improvement Area 1) Ladies and Gentlemen: We have examined the Constitution and the laws of the State of California (the "State"), a certified record of the proceedings of the City of Carlsbad (the "City") taken in connection with the formation of City of Carlsbad Community Facilities District No. 3 (the "District") and the authorization and issuance of the District's 2016 Special Tax Refunding Bonds (Improvement Area 1) in the aggregate principal amount of $ (the "Bonds") and such other information and documents as we consider necessary to render this opinion. In rendering this opinion, we have relied upon certain representations of fact and certifications made by the City, the District, the initial purchasers of the Bonds and others. We have not undertaken to verify through independent investigation the accuracy of the representations and certifications relied upon by us. The Bonds have been issued pursuant to the Mello-Roos Community Facilities Act of 1982, as amended ( comprising Chapter 2.5 of Part 1 of Division 2 of Title 5 of the Government Code of the State of California), and a Bond Indenture dated as of July 1, 2016 (the "Indenture"), by and between the District and The Bank of New York Mellon Trust Company, N.A., as trustee (the "Trustee"). All capitalized terms not defined herein have the meanings set forth in the Indenture. The Bonds are dated their date of delivery and mature on the dates and in the amounts set forth in the Indenture. The Bonds bear interest payable semiannually on each March 1 and September 1, commencing on _._ 1, 20_, at the rates per annum set forth in the Indenture. The Bonds are registered Bonds in the form set forth in the Indenture, redeemable in the amounts, at the times and in the manner provided for in the Indenture. Based upon our examination of the foregoing, and in reliance thereon and on all matters of fact as we deem relevant under the circumstances, and upon consideration of applicable laws, we are of the opinion that: (1) The Bonds have been duly and validly authorized by the District and are legal, valid and binding limited obligations of the District, enforceable in accordance with their terms and the terms of the Indenture, except as the same may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other similar laws affecting creditors' rights generally, by the exercise of judicial discretion in accordance with general principles of equity or otherwise in appropriate cases and by the limitations on legal remedies against public agencies in the State. The Bonds are limited obligations of the District but are not a debt of the City, the State or any other political subdivision thereof within the meaning of any constitutional or statutory limitation, and, except for the Special Taxes, neither the faith and credit nor the taxing power of the City, the State or any of its political subdivisions is pledged for the payment thereof. D-2-1 Item No. 16 - AB #22,338 June 28, 2016 Page 75 of 87 (2) The execution and delivery of the Indenture has been duly authorized by the District, and the Indenture is valid and binding upon the District and is enforceable in accordance with its terms, except to the extent that enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other similar laws affecting creditors' rights generally, by the exercise of judicial discretion in accordance with general principles of equity or otherwise in appropriate cases and by the limitations on legal remedies against public agencies in the State; provided, however, that we express no opinion as to the enforceability of the covenant of the District contained in the Indenture to levy Special Taxes for the payment of Administrative Expenses or as to any indemnification, penalty, choice of law, choice of forum or waiver provisions contained therein. (3) The Indenture creates a valid pledge of that which the Indenture purports to pledge, subject to the provisions of the Indenture, except to the extent that enforceability of the Indenture may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other similar laws affecting creditors' rights generally, by the exercise of judicial discretion in accordance with general principles of equity or otherwise in appropriate cases and by the limitations on legal remedies against public agencies in the State of California. (4) Under existing statutes, regulations, rulings and judicial decisions, interest (and original issue discount) on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and corporations; however, it should be noted that, with respect to corporations, such interest ( and original issue discount) may be included as an adjustment in the calculation of alternative minimum taxable income, which may affect the alternative minimum tax liability of corporations. (5) Interest (and original issue discount) on the Bonds is exempt from State personal income tax. (6) The difference between the issue price of a Bond (the first price at which a substantial amount of the Bonds of a maturity is to be sold to the public) and the stated redemption price at maturity with respect to such Bond constitutes original issue discount. Original issue discount accrues under a constant yield method, and original issue discount will accrue to a Bond owner before receipt of cash attributable to such excludable income. The amount of original issue discount deemed received by a Bond owner will increase the Bond owner's basis in the applicable Bond. The amount of original issue discount that accrues to the Bond owner is excluded from the gross income of such owner for federal income tax purposes, is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals or corporations and is exempt from State personal income tax. (7) The amount by which a Bond owner's original basis for determining loss on sale or exchange in the applicable Bond (generally the purchase price) exceeds the amount payable on maturity (or on an earlier call date) constitutes amortizable Bond premium which must be amortized under Section 171 of the Internal Revenue Code of 1986, as amended (the "Code"); such amortizable Bond premium reduces the Bond owner's basis in the applicable Bond (and the amount of tax-exempt interest received), and is not deductible for federal income tax purposes. The basis reduction as a result of the amortization of Bond premium may result in a Bond owner realizing a taxable gain when a Bond is sold by the owner for an amount equal to or less (under certain circumstances) than the original cost of the Bond to the owner. Purchasers of the Bonds should consult their own tax advisors as to the treatment, computation and collateral consequences of amortizable bond premium. The opinions expressed in paragraphs (4) and (6) above as to the exclusion from gross income for federal income tax purposes of interest (and original issue discount) on the Bonds are based upon certain representations of fact and certifications made by the District and are subject to the condition that the District comply with certain covenants and all requirements of the Code that must be satisfied subsequent to the issuance of the Bonds to assure that such interest ( and original issue discount) will not become includable in gross income for federal income tax purposes. Failure to comply with such covenants and requirements of the E-2 Item No. 16 - AB #22,338 June 28, 2016 Page 76 of 87 Code may cause interest (and original issue discount) on the Bonds to be included in gross income for federal income tax purposes retroactive to the date of issuance of the Bonds. The District has covenanted to comply with all such requirements. Except as set forth in paragraphs (4), (5), (6) and (7) above, we express no opinion as to any tax consequences related to the Bonds. The opinions expressed herein are based upon our analysis and interpretation of existing laws, regulations, rulings and judicial decisions and cover certain matters not directly addressed by such authorities. We call attention to the fact that the rights and obligations under the Indenture and the Bonds are subject to bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other similar laws affecting creditors' rights, to the application of equitable principles if equitable remedies are sought, to the exercise of judicial discretion in appropriate cases and to limitations on legal remedies against public agencies in the State. Our opinion is limited to matters governed by the laws of the State of California and federal law. We assume no responsibility with respect to the applicability or the effect of the laws of any other jurisdiction and express no opinion as to the enforceability of the choice of law provisions contained in the Indenture. We express no opinion herein as to the accuracy, completeness or sufficiency of the Official Statement relating to the Bonds or other offering material relating to the Bonds and expressly disclaim any duty to advise the owners of the Bonds with respect to matters contained in the Official Statement. Certain requirements and procedures contained or referred to in the Indenture and Tax Certificate may be changed, and certain actions may be taken or omitted, under the circumstances and subject to the terms and conditions set forth in the Indenture and Tax Certificate relating to the Bonds, upon the advice or with the approving opinion of counsel nationally recognized in the area of tax-exempt obligations. We express no opinion as to the effect on the exclusion from gross income for federal income tax purposes of the interest ( and original issue discount) on any Bonds if any such change occurs or action is taken or omitted upon the advice or approval of counsel other than Stradling Y occa Carlson & Rauth, a Professional Corporation. We call attention to the fact that the foregoing opinions may be affected by actions taken ( or not taken) or events occurring (or not occurring) after the date hereof. We have not undertaken to determine, or to inform any person, whether such actions or events are taken ( or not taken) or do occur ( or do not occur). Our engagement as bond counsel to the District terminates upon the issuance of the Bonds. Respectfully submitted, E-3 Item No. 16 - AB #22,338 June 28, 2016 Page 77 of 87 APPENDIXF BOOK-ENTRY ONLY SYSTEM The information in this Appendix concerning DTC and DTC 's book-entry only system has been obtained from sources that the District and the Underwriter believe to be reliable, but neither the District nor the Underwriter takes any responsibility for the completeness or accuracy thereof The following description of the procedures and record keeping with respect to beneficial ownership interests in the Bonds, payment of principal, premium, if any, accreted value and interest on the Bonds to DTC Participants or Beneficial Owners, corifirmation and transfers of beneficial ownership interests in the Bonds and other related transactions by and between DTC, the DTC Participants and the Beneficial Owners is based solely on information provided by DTC. The Depository Trust Company ("DTC"), New York, NY, will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered bond will be issued for each annual maturity of the Bonds, each in the aggregate principal amount of such annual maturity, and will be deposited with DTC. DTC, the world's largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17 A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has a Standard & Poor's rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com. Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC's records. The ownership interest of each actual purchaser of each Bond ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Bonds, except in the event that use of the book-entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual F-1 Item No. 16 - AB #22,338 June 28, 2016 Page 78 of 87 Beneficial Owners of the Bonds; DTC's records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Bonds within a maturity are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Bonds unless authorized by a Direct Participant in accordance with DTC's MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Authority as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds, distributions, and dividend payments on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative ofDTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detail information from the Authority or the Trustee, on payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC, the Trustee, or the Authority, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. ( or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Authority or the Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. A Bond Owner shall give notice to elect to have its Bonds purchased or tendered, through its Participant, to the Trustee, and shall effect delivery of such Bonds by causing the Direct Participant to transfer the Participant's interest in the Bonds, on DTC's records, to the Trustee. The requirement for physical delivery of Bonds in connection with an optional tender or a mandatory purchase will be deemed satisfied when the ownership rights in the Bonds are transferred by Direct Participants on DTC's records and followed by a book-entry credit of tendered Bonds to the Trustee's DTC account. DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to the Authority or the Trustee. Under such circumstances, in the event that a successor depository is not obtained, physical certificates are required to be printed and delivered. The Authority may decide to discontinue use of the system of book-entry only transfers through DTC (or a successor securities depository). In that event, bonds will be printed and delivered to DTC. THE TRUSTEE, AS LONG AS A BOOK-ENTRY ONLY SYSTEM IS USED FOR THE BONDS, WILL SEND ANY NOTICE OF REDEMPTION OR OTHER NOTICES TO OWNERS ONLY TO DTC. ANY FAILURE OF DTC TO ADVISE ANY DTC PARTICIPANT, OR OF ANY DTC PARTICIPANT TO NOTIFY ANY BENEFICIAL OWNER, OF ANY NOTICE AND ITS CONTENT OR EFFECT WILL NOT AFFECT THE VALIDITY OF SUFFICIENCY OF THE PROCEEDINGS RELATING TO THE REDEMPTION OF THE BONDS CALLED FOR REDEMPTION OR OF ANY OTHER ACTION PREMISED ON SUCH NOTICE. F-2 Item No. 16 - AB #22,338 June 28, 2016 Page 79 of 87 EXHIBIT3 Stradling Yocca Carlson & Rauth Draft of 6/16/16 CONTINUING DISCLOSURE AGREEMENT This Continuing Disclosure Agreement, dated as of July 1, 2016 (the "Disclosure Agreement") is executed and delivered by City of Carlsbad Community Facilities District No. 3 (the "Issuer") in connection with the issuance of the Issuer's $ __ 2016 Special Tax Refunding Bonds (Improvement Area 1) (the "Bonds"). The Bonds are being issued pursuant to a Bond Indenture, dated as of July 1, 2016 (the "Bond Indenture"), by and between the Issuer and The Bank of New York Mellon Trust Company, N.A. The Issuer covenants as follows: SECTION 1. Purpose of the Disclosure· Agreement. This Disclosure Agreement is being executed and delivered by the Issuer for the benefit of the Owners and Beneficial Owners of the Bonds and in order to assist the Underwriter in complying with the Rule. SECTION 2. Definitions. In addition to the definitions set forth in the Bond Indenture, which apply to any capitalized term used in this Disclosure Agreement unless otherwise defined in this Section, the following capitalized terms shall have the following meanings: "Annual Report" shall mean any Comprehensive Annual Financial Report provided by the Issuer pursuant to, and as described in, Sections 3 and 4 of this Disclosure Agreement. "Beneficial Owner" shall mean any person which: (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Bonds (including persons holding Bonds through nominees, depositories or other intermediaries); or (b) is treated as the owner of any Bonds for federal income tax purposes. "City" shall mean the City of Carlsbad, California. "Disclosure Representative" shall mean the City Manager of the City, the Assistant City Manager of the City, the Director of Finance of the City, or the designee thereof, or such other officer or employee as the Issuer shall designate in writing from time to time. "Dis.semination Agent" shall mean, initially, the Issuer, or any successor Dissemination Agent designated in writing by the Issuer and which has filed with the Issuer a written acceptance of·· such designation. "Fiscal Year" shall mean the period from July 1 to June 30, or any other period selected by the Issuer as its fiscal year. "Improvement Area" shall mean Improvement Area 1 of the Issuer. "Listed Events" shall mean any of the events listed in Section 5(a) and (b) of this Disclosure Agreement. "MSRB" shall mean the Municipal Securities Rulemaking Board, which has been designated by the Securities and Exchange Commission as the sole repository of disclosure information for purposes of the Rule, or any other repository of disclosure information that may be designated by the Securities and Exchange Commission as such for purposes of the Rule in the future. Item No. 16 - AB #22,338 June 28, 2016 Page 80 of 87 "Official Statement" shall mean the Official Statement relating to the Bonds, dated July_, 2016. "RMA" shall mean the Rate and Method of Apportionment of Special Tax approved by the qualified electors of the Improvement Area. "Rule" shall mean Rule 15c2-12 adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time. "State" shall mean the State of California. "Underwriter" shall mean the original underwriters of the Bonds that are required to comply with the Rule in connection with the offering of the Bonds. SECTION 3. Provision of Annual Reports. (a) The Issuer shall, or, upon delivery of the Annual Report to the Dissemination Agent (if other than the Issuer), shall cause the Dissemination Agent to, not later than March 31 of each year, commencing March 31, 2017, provide to the MSRB an Annual Report that is consistent with the requirements of Section 4 of this Disclosure Agreement. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may cross- reference other information as provided in Section 4 of this Disclosure Agreement; provided that the audited financial statements of the Issuer may be submitted separately from the balance of the Annual Report and later than the date required above for the filing of the Annual Report if they are not available by that date. If the Issuer's Fiscal Year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 5(a). (b) Not later than fifteen (15) business days prior to each March 31, the Issuer shall provide the Annual Report to the Dissemination Agent (if other than the Issuer). ff the Issuer is unable to provide to the MSRB an Annual Report by the date required in subsection (a), the Issuer shall send a notice to the MSRB in substantially the form attached as Exhibit A. (c) The Dissemination Agent shall: (i) determine each year prior to March 31 the then-applicable rules and electronic format prescribed by the MSRB for the filing of annual continuing disclosure reports; and (ii) if the Dissemination Agent is other than the Issuer, certify to the Issuer that the Annual Report has been filed with the MSRB pursuant to this Disclosure Agreement, and stating, to the extent that it can confirm such filing of the Annual Report, the date that it was filed. SECTION 4. Content of Annual Reports. The Issuer's Annual Report shall contain or include by reference the following: (a) The City's audited financial statements, prepared in accordance with generally accepted auditing standards for municipalities in the State of California. If the City's audited financial statements are not available by the time that the Annual Report is required to be filed pursuant to Section 3(a), the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the final Official Statement, and the audited 2 Item No. 16 - AB #22,338 June 28, 2016 Page 81 of 87 financial statements shall be filed in the same manner as the Annual Report when they become available. THE CITY'S AUDITED FINANCIAL STATEMENTS ARE PROVIDED SOLELY TO COMPLY WITH THE SECURITIES EXCHANGE COMMISSION STAFF'S INTERPRETATION OF THE RULE. NO FUNDS OR ASSETS OF THE CITY ARE REQUIRED TO BE USED TO PAY DEBT SERVICE ON THE BONDS, AND THE CITY IS NOT OBLIGATED TO ADVANCE AVAILABLE FUNDS TO COVER ANY DELINQUENCIES. INVESTORS SHOULD NOT RELY ON THE FINANCIAL CONDITION OF THE CITY IN EVALUATING WHETHER TO BUY, HOLD OR SELL THE BONDS. (b) to subsection (a): To the extent not contained in the audited financial statements filed pursuant (i) The total assessed value (per the San Diego County Assessor's records) of all parcels currently subject to the Special Tax within the Improvement Area, showing the total assessed valuation for all land and the total assessed valuation for all improvements within the Improvement Area and distinguishing between the assessed value of improved and unimproved parcels. Parcels are considered improved if there is an assessed value for the improvements in the San Diego County Assessor's records. (ii) The total dollar amount of delinquencies in the Improvement Area as of each August 1 preceding to the March 31 Annual Report due date and, in the event that the total delinquencies within the Improvement Area as of such August 1 in any year exceed 5% of the Special Tax for the previous year, delinquency information for each parcel, including the amounts of delinquencies, length of delinquency and status of any foreclosure of each such parcel. (iii) The amount of prepayments of the Special Tax with respect to the Improvement Area for the prior Fiscal Year. (iv) A land ownership summary listing property owners responsible for more than 5% of the annual Special Tax levy, as shown on the San Diego County Assessor's last equalized tax roll prior to each September preceding the March 31 Annual Report due date. (v) The principal amount of the Bonds outstanding and the balance in the Reserve Fund (along with a statement of the Reserve Requirement) as of each September 30 preceding the March 31 Annual Report due date. (vi) An updated table in substantially the form of the table in the Official Statement entitled "Direct Debt Assessed Value-to-Lien Ratio" based upon the most recent information available, provided that assessed values shown on the San Diego County Assessor's most recent equalized tax roll prior to each September preceding the March 31 Annual Report due date may be substituted for appraised values. (vii) Any changes to the RMA since the filing of the prior Annual Report. (viii) A copy of the annual information required to be filed by the City with the California Debt and Investment Advisory Commission pursuant to the Mello-Roos Community 3 Item No. 16 - AB #22,338 June 28, 2016 Page 82 of 87 Facilities Act of 1982, as amended and relating generally to outstanding Issuer bond amounts, fund balances, assessed values, special tax delinquencies and foreclosure information. (ix) In addition to any of the information expressly required to be provided under paragraphs (i) through (viii) of this Section, the Issuer shall provide such further information, if any, as may be necessary to make the specifically required statements, in the light of the circumstances under which they are made, not misleading. Any or all of the items listed above may be included by specific reference to other documents, including official statements for debt issues of the Issuer or related public entities, which have been submitted to the MSRB or the Securities and Exchange Commission. If the document included by reference is a final official statement, it must be available from the MSRB. The Issuer shall clearly identify each such other document so included by reference. SECTION 5. Reporting of Significant Events. (a) Pursuant to the provisions of this Section 5, the Issuer shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Bonds in a timely manner not more than ten (10) Business Days after the event: (i) Principal and interest payment delinquencies. (ii) Unscheduled draws on debt service reserves reflecting financial difficulties. (iii) Unscheduled draws on credit enhancements reflecting financial difficulties. (iv) Substitution of credit or liquidity providers, or their failure to perform. (v) Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations oftaxability or Notices of Proposed Issue (IRS Form 5701 TEB). (vi) Tender offers. (vii) Defeasances. (viii) Rating changes. (ix) Bankruptcy, insolvency, receivership or similar proceedings. Note: For the purposes of the event identified in subparagraph (ix), the event is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for an obligated person in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the obligated person, or if such jurisdiction has been assumed by leaving the existing governmental body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority 4 Item No. 16 - AB #22,338 June 28, 2016 Page 83 of 87 having supervision or jurisdiction over substantially all of the assets or business of the obligated person. (b) Pursuant to the provisions of this Section 5, the Issuer shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Bonds, if material, in a timely manner not more than ten (10) Business Days after occurrence: (i) Unless described in Section 5(a)(v), other notices or determinations by the Internal Revenue Service with respect to the tax status of the Bonds or other events affecting the tax status of the Bonds. (ii) Modifications to the rights of Bondholders. (iii) Optional, unscheduled or contingent Bond calls. (iv) Release, substitution or sale of property securing repayment of the Bonds. (v) Non-payment related defaults. (vi) The consummation of a merger, consolidation or acquisition involving the Issuer or the sale of all or substantially all of the assets of the Issuer, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms. (vii) Appointment of a successor or additional trustee or the change of the name of a trustee. ( c) If the Issuer determines that knowledge of the occurrence of a Listed Event under subsection (b) would be material under applicable federal securities laws, and if the Dissemination Agent is other than the Issuer, the Issuer shall promptly notify the Dissemination Agent in writing. Such· notice shall instruct the Dissemination Agent to file a notice of such occurrence with the MSRB in an electronic format as prescribed by the MSRB in a timely manner not more than ten (10) Business Days after the event. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(vii) and (b)(iii) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to Owners of affected Bonds pursuant to the Bond Indenture. ( d) If the Issuer determines that a Listed Event under subsection (b) would not be material under applicable federal securities laws and if the Dissemination Agent is other than the Issuer, the Issuer shall so notify the Dissemination Agent in writing and instruct the Dissemination Agent not to report the occurrence. ( e) The Issuer hereby agrees that the undertaking set forth in this Disclosure Agreement is the responsibility of the Issuer and, if the Dissemination Agent is other than the Issuer, the·Dissemination Agent shall not be responsible for determining whether the Issuer's instructions to the Dissemination Agent under this Section 5 comply with the requirements of the Rule. SECTION 6. Termination of Reporting Obligation. The Issuer's obligations under this Disclosure Agreement shall terminate upon the legal defeasance, prior redemption or payment in full 5 Item No. 16 - AB #22,338 June 28, 2016 Page 84 of 87 of all of the Bonds. If such termination occurs prior to the final maturity of the Bonds, the Issuer shall give notice of such termination in the same manner as for a Listed Event under Section 5(a). SECTION 7. Dissemination Agent. The Issuer may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Agreement, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. The Dissemination Agent shall not be responsible in any manner for the form or content of any notice or report prepared by the Issuer pursuant to this Disclosure Agreement. The Dissemination Agent may resign by providing thirty days' written notice to the Issuer and the Trustee. The Dissemination Agent shall not be responsible for the content of any report or notice prepared by the Issuer and shall have no duty to review any information provided to it by the Issuer. The Dissemination Agent shall have no duty to prepare any information report, nor shall the Dissemination Agent be responsible for filing any report not provided to it by the Issuer in a timely manner and in a form suitable for filing. SECTION 8. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement, the Issuer may amend this Disclosure Agreement, and any provision of this Disclosure Agreement may be waived, provided that, in the opinion of nationally recognized bond counsel, such amendment or waiver is permitted by the Rule, and provided further that the Dissemination Agent shall have first consented to any amendment that modifies or increases its duties or obligations hereunder. In the event of any amendment or waiver of a provision of this Disclosure Agreement, the Issuer shall describe such amendment in the next Annual Report, and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type ( or in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by the Issuer. In addition, if the amendment relates to the accounting principles to be followed in preparing financial statements: (a) notice of such change shall be given in the same manner as for a Listed Event under Section 5(a); and (b) the Annual Report for the year in which the change is made shall present a comparison (in narrative form and also, if feasible, in quantitative form) between the financial statements as prepared on the basis of the new accounting principles·and those prepared on the basis of the former accounting principles. SECTION 9. Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent the Issuer from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Agreement. If the Issuer chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Agreement, the Issuer shall have no obligation under this Disclosure Agreement to update such information or to include it in any future Annual Report or notice of occurrence of a Listed Event. SECTION 10. Default. In the event of a failure by the Issuer to comply with any provision of this Disclosure Agreement, any Owner or Beneficial Owner of the Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the Issuer to comply with its obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed an Event of Default under the Bond Indenture, and the sole remedy under this Disclosure Agreement in the event of any failure of the Issuer or the Dissemination Agent to comply with this Disclosure Agreement shall be an action to compel performance. 6 Item No. 16 - AB #22,338 June 28, 2016 Page 85 of 87 No Owner or Beneficial Owner may institute such action, suit or proceeding to compel performance unless they shall have first delivered to the Issuer satisfactory written evidence of their status as such, and a written notice of and request to cure such failure, and the Issuer shall have refused to comply therewith within a reasonable time. SECTION 11. Duties, Immunities and Liabilities of Dissemination Agent. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Agreement, and the Issuer agrees, to the extent permitted by law, to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorney's fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent's negligence or willful misconduct. The Dissemination Agent shall be paid compensation by the Issuer for its services provided hereunder in accordance with its schedule of fees as amended from time to time and all expenses, legal fees and advances made or incurred by the Dissemination Agent in the performance of its duties hereunder. In performing its duties hereunder, the Dissemination Agent shall not be deemed to be acting in any fiduciary capacity for the Issuer, the Owners, or any other party. The obligations of the Issuer under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Bonds. SECTION 12. Notices. Any notices or communications to or among any of the parties to this Disclosure Agreement may be given to the Dissemination Agent (if other than the Issuer) at such address provided by the Dissemination to the Issuer, and to the Issuer as follows: Disclosme Representative: City of Carlsbad 1635 Faraday Avenue Carlsbad, California 92008 Attention: Administrative Services Director SECTION 13. Beneficiaries. This Disclosure Agreement inures solely to the benefit of the Issuer, the Dissemination Agent, the Underwriter and the Owners and Beneficial Owners from time to time of the Bonds, and shall create no rights in any other person or entity. SECTION 14. Signature. This Disclosure Agreement has been executed by the undersigned on the date hereof, and such signature binds the Issuer to the undertaking herein provided. CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO. 3 By: Its: City Manager of the City of Carlsbad 7 Item No. 16 - AB #22,338 June 28, 2016 Page 86 of 87 EXHIBIT A NOTICE TO REPOSITORIES OF FAILURE TO FILE ANNUAL REPORT Name oflssuer: City of Carlsbad Community Facilities District No. 3 Name oflssue: 2016 Special Tax Refunding Bonds (Improvement Area 1) Date oflssuance: July_, 2016 NOTICE IS HEREBY GIVEN that the Issuer has not provided an Annual Report with respect to the above-named Bonds as required by the Continuing Disclosure Agreement executed by the Issuer on the date of issuance of the Bonds. The Issuer anticipates that the Annual Report will be filed by _____ _ Dated: ____ _ Dissemination Agent By: _____________ _ A-1 Item No. 16 - AB #22,338 June 28, 2016 Page 87 of 87 EXHIBIT4 Stradling Yucca Carlson & Rauth Drajt of 6/16116 BOND INDENTURE By and Between CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO.3 and THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee Relating to $ ___ _ CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO. 3 2016 SPECIAL TAX REFUNDING BONDS (IMPROVEMENT AREA 1) Dated as of July 1, 2016 BOND INDENTURE THIS BOND INDENTURE, dated as of July 1, 2016 (the ·'Indenture"), by and between CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO. 3 (the ''District") and THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as trustee (the "Trustee'"), governs the terms of the 2016 Special Tax Refunding Bonds (Improvement Area 1) and any Parity Bonds issued in accordance herewith from time to time. RECITALS A. The City Council of the City of Carlsbad, located in San Diego County, California (the "legislative body of the District" or the "City"), as the legislative body of the District has previously undertaken proceedings and declared the necessity for the District to issue bonds pursuant to the terms and provisions of the Mello-Roos Community Facilities Act of 1982, as amended, being Chapter 2.5, Part I, Division 2, Title 5, of the Government Code of the State of California (the "Act'} B. Based upon certain resolutions adopted by the legislative body of the District and an election held on November 8, 2005 authorizing the levy of a special tax and the issuance of bonds by the District on behalf of Improvement Area 1 of the District (''Improvement Area 1"), the District on behalf of Improvement Area 1 was authorized to issue bonds for one or more series, pursuant to the Act, in an aggregate principal amount not to exceed $14,000,000. C. On behalf of the District, the City issued the $11,490,000 City of Carlsbad Community Facilities District No. 3 2006 Special Tax Bonds (Improvement Area I) (the ''2006 Bonds") for the purpose of financing certain public facilities within Improvement Area I. D. The legislative body of the District has determined to redeem the outstanding 2006 Bonds through the issuance of the $ Community Facilities District No. 3 2016 Special Tax Refunding Bonds (Improvement Area 1) (the ''Bonds"). E. The District has determined that all requirements of the Act for the issuance of the Bonds have been satisfied. In order to establish the terms and conditions upon and subject to which the Bonds are to be issued, and in consideration of the promises and the mutual covenants contained herein and the purchase and acceptance of the Bonds by the Owners thereof, and for other valuable consideration, the receipt of which is hereby acknowledged, the District does hereby covenant and agree, for the benefit of the Owners of the Bonds and any Parity Bonds (as such term is defined herein) which may be issued hereunder from time to time, as follows: ARTICLE I DEFINITIONS Unless the context otherwise requires, the following terms shall have the following meamngs: ''Account" means any account created pursuant to this Indenture. "'Act" means the Mello-Roos Community Facilities Act of 1982, as amended, being Sections 53311 et seq. of the California Government Code. "'Administrative Expenses'' means the administrative costs with respect to the calculation and collection of the Special Taxes, including all attorneys' fees and other costs related thereto, the fees and expenses of the Trustee, any fees and related costs for credit enhancement for the Bonds or any Parity Bonds which are not otherwise paid as Costs of Issuance, any costs related to the District's compliance with state and federal laws requiring continuing disclosure of information concerning the Bonds and the District, and any other costs otherwise incurred by the City staff on behalf of the District in order to carry out the purposes of the District as set forth in the Resolution of Formation and any obligation ofthe District hereunder. "Administrative Expenses Account" means the account by that name created and established in the Special Tax Fund pursuant to Section 3.1. ·'Administrative Expenses Cap'' means an amount equal to $1 0,000 per Bond Year, or such lesser amount as may be designated in written instructions from an Authorized Representative of the District. "'Alternative Penalty Account" means the account by that name created and established in the Rebate Fund pursuant to Section 3.1. "'Annual Debt Service" means the principal amount of any Outstanding Bonds or Parity Bonds payable in a Bond Year either at maturity or pursuant to a Sinking Fund Payment and any interest payable on any Outstanding Bonds or Parity Bonds in such Bond Year, if the Bonds and any Parity Bonds are retired as scheduled. "'Authorized Representative of the City'' means the Mayor of the City, the City Manager of the City, the Assistant City Manager of the City, the Administrative Services Director of the City or the City Treasurer, or any other person or persons designated by the Mayor, the City Manager, the Assistant City Manager, the Administrative Services Director or the City Treasurer by a written certificate signed by the Mayor, the City Manager, the Assistant City Manager, the Administrative Services Director or the City Treasurer and containing the specimen signature of each such person. "'Authorized Representative of the District" means the Mayor of the City, the City Manager of the City, the Assistant City Manager of the City, the Administrative Services Director of the City or the City Treasurer, or any other person or persons designated by the Mayor, the City Manager, the Assistant City Manager, the Administrative Services Director or the City Treasurer by a written certificate signed by the Mayor, the City Manager, the Assistant City Manager, the Administrative Services Director or the City Treasurer and containing the specimen signature of each such person, acting on behalf of the District. "Bond Counsel" means an attorney at law or a firm of attorneys selected by the District of nationally recognized standing in matters pertaining to the tax-exempt nature of interest on bonds issued by states and their political subdivisions duly admitted to the practice of law before the highest court of any state of the United States of America or the District of Columbia. "Bond Register" means the books which the Trustee shall keep or cause to be kept on which the registration and transfer of the Bonds and any Parity Bonds shall be recorded. 2 ''Bondowner" or ''Owner" means the person or persons in whose name or names any Bond or Parity Bond is registered on the Bond Register. "Bonds'' means the City of Carlsbad Community Facilities District No. 3 2016 Special Tax Refunding Bonds (Improvement Area I) issued under this Indenture. ''Bond Year" means the twelve month period commencing on September 2 of each year and ending on September I of the following year, except that the first Bond Year for the Bonds or an issue of Parity Bonds shall begin on the Delivery Date and end on the first September I which is not more than 12 months after the Delivery Date. ''Business Day" means a day which is not a Saturday or Sunday or a day of the year on which banks in New York, New York, Los Angeles, California, or the city where the corporate trust office of the Trustee is located are not required or authorized to remain closed. ''Certificate of an Authorized Representative" means a written certificate executed by an Authorized Representative of the City or and Authorized Representative of the District, as applicable. ''City" means the City of Carlsbad, California. "Code" means the Internal Revenue Code of 1986, as amended, and any Regulations, rulings, judicial decisions, and notices, announcements, and other releases of the United States Treasury Department or Internal Revenue Service interpreting and construing it. ''Continuing Disclosure Agreement" means the Continuing Disclosure Agreement, dated as of the date of this Indenture, by and between the District and the Dissemination Agent named therein, as amended. ''Costs of Issuance'' means the costs and expenses incurred in connection with the issuance and sale of the Bonds or any Parity Bonds, including the acceptance and initial annual fees and expenses of the Trustee, legal fees and expenses, costs of printing the Bonds and Parity Bonds and the preliminary and final official statements for the Bonds and Parity Bonds, fees of financial consultants and all other related fees and expenses, as set forth in a Certificate of an Authorized Representative ofthe City. ''Costs of Issuance Fund" means the fund by that name established pursuant to Section 3.\. ''Delivery Date" means, with respect to the Bonds and each issue of Parity Bonds, the date on which the bonds of such issue were issued and delivered to the initial purchasers thereof ''Depository" means The Depository Trust Company, New York, New York, and its successors and assigns as securities depository for the Bonds, or any other securities depository acting as Depository under Article II. "District'" means City of Carlsbad Community Facilities District No. 3 established pursuant to the Act and the Resolution of Formation. "Escrow Agent" means The Bank of New York Mellon Trust Company, N.A., as escrow agent under the Escrow Agreement. 3 ''Escrow Agreement" means the Escrow Agreement (2006 Bonds), dated as of the date of this Indenture, by and between the Escrow Agent and the District. "Escrow Fund" means the fund by that name established under the Escrow Agreement. "Event of Default" means an event described in Section 8.1. ''Federal Securities" means any of the following: (a) Treasuries; (b) evidence of ownership of proportionate interests in future interest and principal payments on Treasuries held by a bank or trust company as custodian, under which the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor and the underlying Treasuries are not available to any person claiming through the custodian or to whom the custodian may be obligated; and (c) pre-refunded municipal obligations rated AAA and Aaa by Standard & Poor's and Moody's, respectively (or any combination thereof). "Fiscal Year" means the period beginning on July I of each year and ending on June 30 of the following year. "Governmental Authority" means any governmental or quasi-governmental entity, including any court, department, commission, board, bureau, agency, administration, central bank, service, district or other instrumentality of any governmental entity or other entity exercising executive, legislative, judicial, taxing, regulatory, fiscal, monetary or administrative powers or functions of or pertaining to government, or any arbitrator, mediator or other person with authority to bind a party at law. ''Improvement Area 1'' means Improvement Area I of the District as designated by the legislative body ofthe District in the Resolution of Formation. ''Independent Financial Consultant'' means a financial consultant or firm of such consultants generally recognized to be well qualified in the financial consulting field, appointed and paid by the District, who, or each of whom: (a) is in fact independent and not under the domination of the District; (b) does not have any substantial interest, direct or indirect, in the District; and (c) is not connected with the District as a member, officer or employee of the District, but who may be regularly retained to make annual or other reports to the District. ''Indenture" means this Bond Indenture, together with any Supplemental Indenture approved pursuant to Article 6. "Interest Account" means the account by that name created and established in the Special Tax Fund pursuant to Section 3.1. "Interest Payment Date" means each March 1 and September 1, commencing __ 1, 20 I_; provided, however, that, if any such day is not a Business Day, interest up to the Interest Payment Date will be paid on the following Business Day. ''Maximum Annual Debt Service" means the maximum sum obtained for any Bond Year prior to the final maturity of the Bonds and any Parity Bonds by adding the following for each Bond Year: (a) the principal amount of all Outstanding Bonds and Parity Bonds payable in such Bond Year either at maturity or pursuant to a Sinking Fund Payment; and (b) the interest payable on the 4 aggregate principal amount of all Bonds and Parity Bonds Outstanding in such Bond Year if the Bonds and Parity Bonds are retired as scheduled. ''Moody's" means Moody's Investors Service, Inc., and its successors and assigns. ''Net Taxes'' means Special Taxes less amounts set aside to pay Administrative Expenses not to exceed the Administrative Expenses Cap. "Nominee" means the nominee of the Depository, which may be the Depository, as determined from time to time pursuant to Article II. ·'Ordinance'' means Ordinance No. NS-777 adopted by the legislative body of the District on November 15, 2005, providing for the levying of the Special Tax. "Outstanding" or "Outstanding Bonds and Parity Bonds" means all Bonds and Parity Bonds theretofore issued by the District, except: (a) Bonds and Parity Bonds cancelled or surrendered for cancellation in accordance with Section I 0.1; (b) Bonds and Parity Bonds for the payment or redemption of which moneys shall have been deposited in trust (whether upon or prior to the maturity or the redemption date of such Bonds or Parity Bonds), provided that, if such Bonds or Parity Bonds are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as provided in this Indenture or any applicable Supplemental Indenture for Parity Bonds; and (c) Bonds and Parity Bonds that have been surrendered to the Trustee for transfer or exchange pursuant to Section 2. 9 or for which a replacement has been issued pursuant to Section 2.1 0. ·'Parity Bonds" means all bonds, notes or other similar evidences of indebtedness hereafter issued, payable out of the Net Taxes and which, as provided in this Indenture or any Supplemental Indenture, rank on a parity with the Bonds. ·'Participants" means those broker-dealers, banks and other financial institutions from time to time for which the Depository holds Bonds or Parity Bonds as securities depository. ''Permitted Investments'' means: (a) Federal Securities; (b) Bonds, debentures, notes or other evidence issued or guaranteed by any of the following federal agencies and provided such obligations are backed by the full faith and credit of the United States of America (stripped securities are only permitted if they have been stripped by the agency itself): (i) U.S. Export-Import Bank (Direct obligations or fully guaranteed certificates of beneficial ownership); (ii) Farmers Home Administration (Certificates of beneficial ownership); (iii) Federal Financing Bank; (iv) Federal Housing Administration Debentures; (v) General Services Administration Participation certificates; (vi) Government National Mortgage Association (guaranteed mortgage-backed bonds or guaranteed pass-through obligations); (vii) U.S. Maritime Administration (Guaranteed Title XI financing); and (viii) U.S. Department of Housing and Urban Development (Project Notes, Local Authority Bonds, New Communities Debentures-United States government guaranteed debentures and U.S. Public Housing Notes and Bonds -United States government guaranteed public housing notes and bonds); (c) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following non-full faith and credit United States government agencies 5 (stripped securities are only permitted if they have been stripped by the agency itself): (i) Federal Home Loan Bank System (Senior debt obligations); (ii) Federal Home Loan Mortgage Corporation (Participation Certificates and Senior debt obligations); (iii) Federal National Mortgage Association (Mortgage-backed securities and senior debt obligations); (iv) Student Loan Marketing Association (Senior debt obligations); (v) Resolution Funding Corporation obligations; and (vi) Farm Credit System (Consolidated systemwide bonds and notes); (d) Money market funds that constitute "Government Funds" under Rule 2a-7 promulgated by the Securities and Exchange Commission and that are registered under the Federal Investment Company Act of 1940 the shares of which are registered under the Federal Securities Act of 1933, and which a rating by Standard & Poor's of AAAm-G, AAA-m or AA-m and, if rated by Moody's, a rating Aaa, Aa1 or Aa2 by Moody's, with a minimum of $500 million in assets under management, including funds for which the Trustee or its affiliates provide investment or other advisory services; (e) Certificates of deposit secured at all times by collateral described in clauses (a) and/or (b) above. Such certificates must be issued by commercial banks, savings and loan associations or mutual savings banks of which the short-term obligations are rated A-1 or better and PI or better by Moody's or Standard & Poor's, respectively. The collateral must be held by a third party and the Trustee on behalf of the Owners of the Bonds must have a perfected first security interest in the collateral; (f) Certificates of deposit, savings accounts, deposit accounts or money market deposits which are fully insured by Federal Deposit Insurance Corporation, including BIF and SAIF; (g) Investment agreements with domestic or foreign banks, insurance companies other than a life or property casualty insurance company, or corporations the long-term debt or claims paying ability of which or, in the case of a guaranteed corporation, the long-term debt of the guarantor, or, in the case of a mono line financial guaranty insurance company, claims paying ability or financial strength, of the guarantor is rated in at least the AA category by Standard & Poor's and Moody's; provided that, by the terms of the investment agreement: (i) interest payments are to be made to the Trustee at times and in amounts as necessary to pay debt service on the Bonds (if the funds invested pursuant to the investment agreement are from the Reserve Fund); (ii) the invested funds are available for withdrawal without penalty or premium, upon not more than seven (7) days' prior notice; (iii) the investment agreement shall provide that it is the unconditional and general obligation of, and is not subordinated to any other obligation of, the provider thereof; (iv) the District and the Trustee receive the opinion of domestic counsel (which opinion shall be addressed to the District) that such investment agreement is legal, valid, binding and enforceable upon the provider in accordance with its terms and of foreign counsel (if applicable) in form and substance acceptable, and addressed to, the District; 6 (v) the investment agreement shall provide that if during its term: (I) the provider's rating by either Standard & Poor's or Moody's falls below AA-or Aa3, respectively, the provider shall, at its option, within ten ( 1 0) business days after the provider's receipt of a written request from the Trustee to satisfy the foregoing, either: (I) collateralize the investment agreement by delivering or transferring in accordance with the applicable state and federal laws (other than by means of entries on the provider's books) to the District, the Trustee or a third party acting solely as agent therefor (the "Holder of the Collateral'') collateral free and clear of any third-party liens or claims, the market value of which collateral is maintained at one hundred five percent (I 05%) of securities identified in clauses (a) and (b) of this definition; or (II) assign the investment agreement and all of its obligations thereunder to, or enter into a repurchase agreement or such other agreement with, a financial institution mutually acceptable to the provider and the District which is rated either in the first or second highest category by Standard & Poor's and Moody's; and (2) the provider's rating by either Standard & Poor's or Moody's is withdrawn or suspended or falls below A-or A3, respectively, the provider must, at the direction of the District or the Trustee, within ten ( 1 0) days of receipt of such direction, repay the principal of and accrued but unpaid interest on the invested funds, in either case with no penalty or premium to the District or the Trustee; (vi) the investment agreement shall provide and an opinion of counsel shall be rendered, in the event that collateral is required to be pledged by the provider under the terms of the investment agreement at the time such collateral is delivered, that the Holder of the Collateral has a perfected first priority security interest in the collateral, any substituted collateral and all proceeds thereof (in the case of bearer securities, this shall mean the Holder of the Collateral is in possession of such collateral); and (vii) the investment agreement shall provide that if during its term: (1) the provider shall default in its payment obligations, the provider's obligations under the investment agreement shall, at the direction of the District or the Trustee, be accelerated and amounts invested and accrued but unpaid interest thereon shall be paid to the District or the Trustee, as appropriate; and (2) the provider shall become insolvent, not pay its debts as they become due, be declared or petition to be declared bankrupt, etc., the provider's obligations shall automatically be accelerated and amounts invested and accrued but unpaid interest thereon shall be paid to the District or the Trustee, as appropriate; (h) Commercial paper rated, at the time of purchase, Prime - 1 by Moody's and A-1 or better by Standard & Poor's having original maturity of not more than 180 days issued by a domestic corporation having assets in excess of $500 million; (i) Bonds or notes issued by any state or municipality which are rated by Moody's and Standard & Poor's in one of the two highest rating categories assigned by them; U) Federal funds or bankers acceptances with a maximum term of 270 days of any bank which has an unsecured, uninsured and unguaranteed obligation rating of Prime -I or A3 or better by Moody's and A-l or better by Standard & Poor's; (k) Repurchase agreements that satisfy the following criteria: (i) Repurchase agreements must be between the District or the Trustee and a dealer bank or securities firm which is: (I) A primary dealer on the Federal Reserve reporting dealer list which is rated A or better by two of the following Standard & Poor's, Moody's, or Fitch 7 Ratings; or (2) A domestic bank or a domestic branch of a foreign bank rated A or above by two of the following: Standard & Poor's, Moody's or Fitch Ratings; or (3) Corporations the long-term debt or claims paying ability of which, or in the case of a guaranteed corporation, the long-term debt of the guarantor, or, in the case of a monoline financial guaranty insurance company, claims paying ability or financial strength, is rated in at least the double A category by Standard & Poor's and Moody's; and (ii) The written agreement must include the following: (I) Securities which are acceptable for transfer are: (I) direct obligations of the United States government; or (II) obligations of federal agencies backed by the full faith and credit of the United States of America (or the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation; (2) The collateral must be delivered to the Trustee (if the Trustee is not supplying the collateral) or a third party acting as agent for the Trustee (if the Trustee is supplying the collateral) before or simultaneous with payment (perfection by possession of certificated securities); and (3) (I) The securities must be valued weekly, marked-to-market at current market price plus accrued interest; (II) The value of the collateral must be at least equal to one hundred five percent (I 05%) of the amount of money transferred by the Trustee to the dealer, bank or security firm under the agreement plus accrued interest. If the value of the securities held as collateral is reduced below one hundred five percent (I 05%) of the value of the amount of money transferred by the Trustee, then additional acceptable securities and/or cash must be provided as collateral to bring the value of the collateral to one hundred five percent (I 05% ); provided, however, that if the securities used as collateral are those of the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation, then the value ofthe collateral must be at least equal to one hundred five percent (105%) ofthe amount of money transferred by the Trustee; and (III) A legal opinion must be delivered to the District and the Trustee that the repurchase agreement meets the requirements of California law with respect to the investment of public funds; and (IV) Should the provider's rating by either Standard & Poor's or Moody's be withdrawn or suspended or fall below A-or A3, respectively, the provider must, at the direction of the District or the Trustee, within ten (I 0) days of receipt of such direction, repay the principal of and accrued but unpaid interest on the invested funds, in either case with no penalty or premium to the District or the Trustee; (I) the Local Agency Investment Fund in the State Treasury of the State of California as permitted by the State Treasurer pursuant to Section 16429.1 of the California Government Code; (m) forward delivery agreements or forward purchase and sale agreements with a domestic or foreign bank or corporation the long-term debt or claims paying ability of which, or in the case of a guaranteed corporation, the long-term debt of the guarantor, or, in the case of a monoline financial guaranty insurance company, claims paying ability or financial strength, of the guarantor is rated at least in the A category by Standard & Poor's and Moody's; provided that, by the terms of the agreement; the underlying investment property consists of those investments which are listed in (a), (b), (c) and (h) above; and (n) the City's pooled investment fund invested pursuant to the City's investment policy. ·'Person" means natural persons, firms, corporations, partnerships, associations, trusts, public bodies and other entities. 8 ''Prepayments" means any amounts paid by the District to the Trustee and designated by the District as a prepayment of Special Taxes for one or more parcels in Improvement Area 1 made in accordance with the Rate and Method. "Principal Account" means the account by that name created and established in the Special Tax Fund pursuant to Section 3.1. "'Principal Office of the Trustee'' means the office of the Trustee located in Los Angeles, California, or such other office or offices as the Trustee may designate from time to time, or the office of any successor Trustee where it principally conducts its business of serving as trustee under indentures pursuant to which municipal or governmental obligations are issued. "Project" means those public facilities described in the Resolution of Formation which were acquired or constructed within and outside of Improvement Area 1 with the proceeds of the 2006 Bonds, including all engineering, planning and design services and other incidental expenses related to such facilities and other facilities, if any, authorized by the qualified electors within Improvement Area 1 from time to time. ·'Rate and Method" means the document by such name attached to the Resolution of Formation. ·'Rating Agency" means Moody's and Standard & Poor's, or both, as the context requires. ·'Rebate Account'' means the account by that name created and established in the Rebate Fund pursuant to Section 3.1. "Rebate Fund" means the fund by that name established pursuant to Section 3.1 in which there are established the Accounts described in Section 3.1. "'Rebate Regulations" means any final, temporary or proposed Regulations promulgated under Section 148( f) of the Code. ·'Record Date'' means the fifteenth day of the month preceding an Interest Payment Date, regardless of whether such day is a Business Day. ·'Redemption Account" means the account by that name created and established m the Special Tax Fund pursuant to Section 3.1. "'Regulations" means the regulations adopted or proposed by the Department of Treasury from time to time with respect to obligations issued pursuant to Section 103 of the Code. "Representation Letter" means the Blanket Representation Letter from the District to the Depository as described in Article II. "Reserve Account" means the account by that name created and established in the Special Tax Fund pursuant to Section 3.1. "Reserve Requirement" means, as of the date of calculation, an amount equal to the least of: (a) Maximum Annual Debt Service; (b) 125% of average Annual Debt Service on the 9 then-Outstanding Bonds and any Parity Bonds; or (c) ten percent (1 0%) of the initial outstanding principal amount of the Bonds and any Parity Bonds. "Resolution of Formation" means Resolution No. 2005-329 adopted by the City Council of the City on November 8, 2005, pursuant to which the City formed the District and designated Improvement Area 1. "Sinking Fund Payment" means the annual payment to be deposited in the Redemption Account to redeem a portion of the Term Bonds in accordance with the schedules set forth in Section 4.1 (b) and any annual sinking fund payment schedule to retire any Parity Bonds that are designated as Term Bonds. "Six-Month Period" means the period of time beginning on the Delivery Date of each issue of Bonds or Parity Bonds, as applicable, and ending six consecutive months thereafter, and each six-month period thereafter until the latest maturity date of the Bonds and the Parity Bonds (and any obligations that refund an issue of the Bonds or Parity Bonds). "Special Tax Fund" means the fund by that name created and established pursuant to Section 3 .I. ''Special Taxes" means the taxes authorized to be levied by the District on property within Improvement Area I in accordance with the Ordinance, the Resolution of Formation, the Act and the voter approval obtained at the November 8, 2005 election in Improvement Area 1, including any scheduled payments and any Prepayments thereof~ and the net proceeds of the redemption or sale of property sold as a result of foreclosure ofthe lien of the Special Taxes to the amount of said lien and penalties and interest thereon. ''Standard & Poor~s" means S&P Global Ratings, a Standard & Poor's Financial Services LLC business, and its successors and assigns. ''Supplemental Indenture" means any supplemental indenture amending or supplementing this Indenture. "Surplus Fund'' means the fund by that name created and established pursuant to Section 3.1. "Tax Certificate" means the certificate by that name to be executed by the District on a Delivery Date to establish certain facts and expectations and which contains certain covenants relevant to compliance with the Code. ''Tax-Exempt" means, with reference to a Permitted Investment, a Pennitted Investment the interest earnings on which are excludable from gross income for federal income tax purposes pursuant to Section 1 03(a) of the Code, other than one described in Section 57(a)(5)(C) of the Code. ''Term Bonds" means the Bonds maturing on September I, 20_, and any term maturities of an issue of Parity Bonds as specified in a Supplemental Indenture. ''Treasuries" means non-callable direct obligations of the United States of America, including United States Treasury Notes, Certificates and Bonds and State and Local Government Series. 10 "'Trustee" means The Bank ofNew York Mellon Trust Company, N.A., a national banking association duly organized and existing under and by virtue of the laws ofthe United States, having a principal corporate trust office in Los Angeles, California, and its successors or assigns, or any other bank, national banking association or trust company which may at any time be substituted in its place as provided in Sections 7.2 or 7.3 and any successor thereto. "'2006 Bonds" means the Community Facilities District No. 3 2006 Special Tax Bonds (Improvement Area l) issued on May 11, 2006 in the aggregate principal amount of $11,490,000. ARTICLE II GENERAL AUTHORIZATION AND BOND TERMS Section 2.1. Amount, Issuance, Purpose and Nature of Bonds and Parity Bonds. Under and pursuant to the Act, the Bonds in the aggregate principal amount of$ shall be issued for the purpose of refunding the 2006 Bonds, funding a reserve fund for the Bonds and paying Costs of Issuance. The Bonds and any Parity Bonds shall be and are limited obligations of the District and shall be payable as to the principal thereof and interest thereon and any premiums upon the redemption thereof solely from the Net Taxes and the other amounts in the Special Tax Fund (other than amounts in the Administrative Expenses Account of the Special Tax Fund). The aggregate principal amount of the Bonds and any Parity Bonds shall not exceed the total indebtedness presently authorized or subsequently authorized by the qualified electors of the District in accordance with the Act. Section 2.2. Type and Nature of Bonds and Parity Bonds. Neither the faith and credit nor the taxing power of the City, the State of California or any political subdivision thereof other than the District is pledged to the payment of the Bonds or any Parity Bonds. Except for the Net Taxes, no other taxes are pledged to the payment of the Bonds or any Parity Bonds. The Bonds and any Parity Bonds are neither general or special obligations of the City nor general obligations of the District, but are limited obligations of the District payable solely from certain amounts deposited by the District in the Special Tax Fund (exclusive of the Administrative Expenses Account), as more fully described herein. The District's limited obligation to pay the principal of, premium, if any, and interest on the Bonds and any Parity Bonds from amounts in the Special Tax Fund (exclusive of the Administrative Expenses Account) is absolute and unconditional, free of deductions and without any abatement, offset, recoupment, diminution or set-off whatsoever. No Owner ofthe Bonds or any Parity Bonds may compel the exercise of the taxing power by the District (except as pertains to the Special Taxes) or the City or the forfeiture of any of their property. The principal of and interest on the Bonds and any Parity Bonds and premiums upon the redemption thereof, if any, are not a debt of the City, the State of California or any of its political subdivisions within the meaning of any constitutional or statutory limitation or restriction. The Bonds and any Parity Bonds are not a legal or equitable pledge, charge, lien or encumbrance upon any of the District's property, or upon any of its income, receipts or revenues except the Net Taxes and other amounts in the Special Tax Fund (exclusive of the Administrative Expenses Account) which are, under the terms of this Indenture and the Act, set aside for the payment of the Bonds, any Parity Bonds and interest thereon. Neither the members of the legislative body of the District or the City Council of the City nor any persons executing the Bonds or any Parity Bonds are liable personally on the Bonds or any Parity Bonds by reason of their issuance. II Notwithstanding anything to the contrary contained in this Indenture, the District shall not be required to advance any money derived from any source of income other than the Net Taxes for the payment of the interest on or the principal of the Bonds and any Parity Bonds, or for the performance of any covenants contained herein. The District may, however, advance funds for any such purpose, provided that such funds are derived from a source legally available for such purpose. Section 2.3. Equality of Bonds and Parity Bonds and Pledge of Net Taxes. Pursuant to the Act and this Indenture, the Bonds and any Parity Bonds shall be equally payable from and secured by a pledge and lien upon the Net Taxes and other amounts in the Special Tax Fund (exclusive of the Administrative Expenses Account), without priority for number, date of the Bonds or Parity Bonds, date of sale, date of execution or date of delivery, and the payment of the interest on and principal of the Bonds and any Parity Bonds and any premiums upon the redemption thereof shall be exclusively paid from the Net Taxes and other amounts in the Special Tax Fund (exclusive of the Administrative Expenses Account), which are hereby set aside for the payment of the Bonds and any Parity Bonds. Amounts in the Special Tax Fund (other than the Administrative Expenses Account therein) shall constitute a trust fund held for the benefit of the Owners to be applied to the payment of the interest on and principal of the Bonds and any Parity Bonds; and, so long as any of the Bonds and any Parity Bonds or interest thereon remains Outstanding, amounts in the Special Tax Fund shall not be used for any other purpose, except as permitted by this Indenture or any Supplemental Indenture. Notwithstanding any provision contained in this Indenture to the contrary, Net Taxes deposited in the Rebate Fund and the Surplus Fund shall no longer be considered to be pledged to the Bonds or any Parity Bonds, and none ofthe Rebate Fund, the Surplus Fund, the Costs of Issuance Fund or the Administrative Expenses Account of the Special Tax Fund shall be construed as a trust fund held for the benefit of the Owners. Nothing in this Indenture or any Supplemental Indenture shall preclude: (a) subject to the limitations contained hereunder, the redemption prior to maturity of any Bonds or Parity Bonds subject to call and redemption, and the payment of said Bonds or Parity Bonds from proceeds of refunding bonds issued under the Act as the same now exists or as hereafter amended, or under any other law of the State of California; or (b) the issuance, subject to the limitations contained herein, of Parity Bonds which shall be payable from Net Taxes. Section 2.4. Description of Bonds; Interest Rates. The Bonds and any Parity Bonds shall be issued in fully registered form in denominations of $5,000 or any integral multiple thereof. The Bonds and any Parity Bonds shall be initially issued in the form of a single certificated fully registered bond for each maturity. 12 The Bonds shall be designated "Community Facilities District No. 3 2016 Special Tax Refunding Bonds (Improvement Area I).'' The Bonds shall be dated as of their Delivery Date and shall mature and be payable on September 1 in the years and in the aggregate principal amounts and shall be subject to and shall bear interest at the rates set forth in the table below payable on each Interest Payment Date: Maturity Date (September I) 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 Principal Amount $ Interest Rate % The District and the Trustee may treat and consider the person in whose name each Bond is registered in the Bond Register as the holder and absolute owner of such Bond for the purpose of payment of principal, premium, if any, and interest on such Bond, for the purpose of giving notices of redemption and other matters with respect to such Bond, for the purpose of registering transfers with respect to such Bond, and for all other purposes whatsoever. The Trustee shall pay all principal of, premium, if any, and interest on the Bonds only to or upon the order of the respective Owners or their respective attorneys duly authorized in writing, and all such payments shall be valid and effective to fully satisfy and discharge the District's obligations with respect to payment of principal of, premium, if any, and interest on the Bonds to the extent of the sum or sums so paid. No person other than an Owner shall receive a certificated Bond evidencing the obligation of the District to make payments of principal, premium, if any, and interest pursuant to this Indenture. Interest shall be payable on each Bond and Parity Bond from the date established in accordance with Section 2.5 below on each Interest Payment Date thereafter until the principal sum of such Bond or Parity Bond has been paid; provided, however, that if at the maturity date of any Bond or Parity Bond (or if the same is redeemable and shall be duly called for redemption, then at the date fixed for redemption) funds are available for the payment or redemption thereof in full, in accordance with the terms of this Indenture, such Bonds and Parity Bonds shall then cease to bear 13 interest. Interest due on the Bonds and Parity Bonds shall be calculated on the basis of a 360-day year comprised of twelve 30-day months. Section 2.5. Place and Form of Payment. The Bonds and Parity Bonds shall be payable both as to principal and interest, and as to any premiums upon the redemption thereof, in lawful money of the United States of America. The principal of the Bonds and Parity Bonds and any premiums due upon the redemption thereof shall be payable upon presentation and surrender thereof at the Principal Office of the Trustee, or at the designated office of any successor Trustee. Interest on any Bond or Parity Bond shall be payable from the Interest Payment Date next preceding the date of authentication of such Bond or Parity Bond, unless: (a) such date of authentication is an Interest Payment Date, in which event interest shall be payable from such date of authentication; (b) the date of authentication is after a Record Date but prior to the immediately succeeding Interest Payment Date, in which event interest shall be payable from the Interest Payment Date immediately succeeding the date of authentication; or (c) the date of authentication is prior to the close of business on the first Record Date occurring after the issuance of such Bond or Parity Bond, in which event interest shall be payable from the dated date of such Bond or Parity Bond, as applicable; provided, however, that if at the time of authentication of such Bond or Parity Bond, interest is in default, interest on such Bond or Parity Bond shall be payable from the last Interest Payment Date to which the interest has been paid or made available for payment or, if no interest has been paid or made available for payment on such Bond or Parity Bond, interest on such Bond or Parity Bond shall be payable from its dated date. Interest on any Bond or Parity Bond shall be paid to the person whose name shall appear in the Bond Register as the Owner of such Bond or Parity Bond as of the close of business on the Record Date. Such interest shall be paid by check of the Trustee mailed on the applicable Interest Payment Date by first class mail, postage prepaid, to such Bondowner at his or her address as it appears on the Bond Register. In addition, upon a request in writing received by the Trustee on or before the applicable Record Date from an Owner of $1,000,000 or more in principal amount of the Bonds or of any issue of Parity Bonds, payment shall be made on the Interest Payment Date by wire transfer in immediately available funds to an account designated by such Owner. Section 2.6. Form of Bonds and Parity Bonds. The definitive Bonds may be printed from steel engraved or lithographic plates or may be typewritten. The Bonds and the certificate of authentication shall be substantially in the form set forth in Exhibit A, which form is hereby approved and adopted as the form of such Bonds and of the certificate of authentication. Each issue of Parity Bonds and the certificate of authentication therefor shall be in the form provided in the Supplemental Indenture for such issue of Parity Bonds. Until definitive Bonds or Parity Bonds, as applicable, are prepared, the District may cause to be executed and delivered in lieu of such definitive Bonds or Parity Bonds temporary bonds in typed, printed, lithographed or engraved form and in fully registered form, subject to the same provisions, limitations and conditions as are applicable in the case of definitive Bonds or Parity Bonds, except that they may be in any denominations authorized by the District. Until exchanged for definitive Bonds or Parity Bonds, as applicable, any temporary bond shall be entitled and subject to the same benefits and provisions of this Indenture as definitive Bonds and Parity Bonds. If the District issues temporary Bonds or Parity Bonds, it shall execute and furnish definitive Bonds or Parity Bonds. as applicable, without unnecessary delay and thereupon any temporary Bond or Parity Bond may be surrendered to the Trustee at its office, without expense to the Owner, in exchange for a definitive Bond or Parity Bond ofthe same issue, maturity, interest rate and principal amount in any authorized denomination. All temporary Bonds or Parity Bonds so surrendered shall be cancelled by the Trustee and shall not be reissued. 14 Section 2.7. Execution and Authentication. The Bonds and Parity Bonds shall be signed on behalf of the District by the manual or facsimile signature of the Mayor of the City and countersigned by the manual or facsimile signature of the City Clerk of the City, or any duly appointed deputy City Clerk, in their capacity as officers of the District, and the seal of the District (or a facsimile thereof) may be impressed, imprinted, engraved or otherwise reproduced thereon, and attested by the signature of the City Clerk of the City Council. In case any one or more of the officers who shall have signed or sealed any of the Bonds or Parity Bonds shall cease to be such officer before the Bonds or Parity Bonds so signed and sealed have been authenticated and delivered by the Trustee (including new Bonds or Parity Bonds delivered pursuant to the provisions hereof with reference to the transfer and exchange of Bonds or Parity Bonds or to lost, stolen, destroyed or mutilated Bonds or Parity Bonds), such Bonds and Parity Bonds shall nevertheless be valid and may be authenticated and delivered as herein provided, and may be issued as if the person who signed or sealed such Bonds or Parity Bonds had not ceased to hold such office. Only the Bonds that bear a certificate of authentication in the form set forth in Exhibit A shall be entitled to any right or benefit under this Indenture, and no Bond shall be valid or obligatory for any purpose until such certificate of authentication shall have been duly executed by the Trustee. Section 2.8. Bond Register. The Trustee will keep or cause to be kept, at its office, sufficient books for the registration and transfer of the Bonds and any Parity Bonds which shall upon reasonable prior notice be open to inspection by the District during all regular business hours, and, subject to the limitations set forth in Section 2.9 below, upon presentation for such purpose, the Trustee shall, under such reasonable regulations as it may prescribe, register, transfer or cause to be transferred on said Bond Register, Bonds and any Parity Bonds as herein provided. The District and the Trustee may treat the Owner of any Bond or Parity Bond whose name appears on the Bond Register as the absolute Owner thereof for any and all purposes, and the District and the Trustee shall not be affected by any notice to the contrary. The District and the Trustee may rely on the address of the Bondowner as it appears in the Bond Register for any and all purposes. It shall be the duty of the Bondowner to give written notice to the Trustee of any change in the Bondowner's address so that the Bond Register may be revised accordingly. Section 2.9. Registration of Exchange or Transfer. Subject to the limitations set forth in the following paragraph, the registration of any Bond or Parity Bond may, in accordance with its terms, be transferred upon the Bond Register by the person in whose name it is registered, in person or by his or her duly authorized attorney, upon surrender of such Bond or Parity Bond for cancellation at the Principal Office of the Trustee, accompanied by delivery of a written instrument of transfer in a form acceptable to the Trustee and duly executed by the Bondowner or his or her duly authorized attorney. Bonds or Parity Bonds may be exchanged at the Principal Office of the Trustee for a like aggregate principal amount of Bonds or Parity Bonds for other authorized denominations of the same maturity and issue. The Trustee shall not collect from the Owner any charge for any new Bond or Parity Bond issued upon any exchange or transfer, but shall require the Bondowner requesting such exchange or transfer to pay any tax or other governmental charge required to be paid with respect to such exchange or transfer. Whenever any Bonds or Parity Bonds shall be surrendered for registration of transfer or exchange, the District shall execute and the Trustee shall authenticate and deliver a new Bond or Bonds or a new Parity Bond or Parity Bonds, as applicable, of the same issue and maturity, for a like aggregate principal amount; provided that the Trustee shall not be required to register 15 transfers or make exchanges of: (a) Bonds or Parity Bonds for a period of 15 days next preceding any selection of the Bonds or Parity Bonds to be redeemed; or (b) any Bonds or Parity Bonds chosen for redemption. Section 2.10. Mutilated, Lost, Destroyed or Stolen Bonds or Parity Bonds. If any Bond or Parity Bond shall become mutilated, the District shall execute, and the Trustee shall authenticate and deliver, a new Bond or Parity Bond of like tenor, date, issue and maturity in exchange and substitution for the Bond or Parity Bond so mutilated, but only upon surrender to the Trustee of the Bond or Parity Bond so mutilated. Every mutilated Bond or Parity Bond so surrendered to the Trustee shall be cancelled by the Trustee pursuant to Section 1 0.1. If any Bond or Parity Bond is lost, destroyed or stolen, evidence of such loss, destruction or theft may be submitted to the Trustee and, if such evidence is satisfactory to the Trustee and, if any indemnity satisfactory to the Trustee shall be given, the District shall execute and the Trustee shall authenticate and deliver a new Bond or Parity Bond, as applicable, of like tenor, maturity and issue, numbered and dated as the Trustee shall determine in lieu of and in substitution for the Bond or Parity Bond so lost, destroyed or stolen. Any Bond or Parity Bond issued in lieu of any Bond or Parity Bond alleged to be mutilated, lost, destroyed or stolen, shall be equally and proportionately entitled to the benefits hereof with all other Bonds and Parity Bonds issued hereunder. The Trustee shall not treat both the original Bond or Parity Bond and any replacement Bond or Parity Bond as being Outstanding for the purpose of determining the principal amount of Bonds or Parity Bonds which may be executed, authenticated and delivered hereunder or for the purpose of determining any percentage of Bonds or Parity Bonds Outstanding hereunder, but both the original and replacement Bond or Parity Bond shall be treated as one and the same. Notwithstanding any other provision of this Section, in lieu of delivering a new Bond or Parity Bond which has been mutilated, lost, destroyed or stolen, and which has matured, the Trustee may make payment with respect to such Bonds or Parity Bonds. Section 2.11. Validity of Bonds and Parity Bonds. The validity of the authorization and issuance of the Bonds and any Parity Bonds shall not be affected in any way by any defect in any proceedings taken by the District for the refunding of the 2006 Bonds, or by the invalidity, in whole or in part, of any contracts made by the District in connection therewith, and shall not be dependent upon the completion of the refunding of the 2006 Bonds or upon the performance by any Person of such Person's obligation with respect to the Project, and the recital contained in the Bonds or any Parity Bonds that the same are issued pursuant to the Act and other applicable laws of the State of California shall be conclusive evidence of their validity and of the regularity oftheir issuance. Section 2.12. Book Entry System. (a) Election of Book Entry System. Prior to the issuance of the Bonds and any Parity Bonds, the District may provide that such Bonds and Parity Bonds shall be initially issued as book entry bonds. If the District shall elect to deliver any Bonds or Parity Bonds in book entry form, then the District shall cause the delivery of a separate single fully registered bond (which may be typewritten) for each maturity date of such Bonds or Parity Bonds in an authorized denomination corresponding to that total principal amount of the Bonds or Parity Bonds designated to mature on such date. Upon initial issuance, the ownership of each such Bond or Parity Bond shall be registered in the Bond Register in the name of the Nominee, as nominee of the Depository, and ownership of the Bonds or Parity Bonds, or any portion thereof may not thereafter be transferred except as provided in subsection (e). 16 With respect to book entry Bonds or Parity Bonds, the District and the Trustee shall have no responsibility or obligation to any Participant or to any person on behalf of which such a Participant holds an interest in such book entry bonds. Without limiting the immediately preceding sentence, the District and the Trustee shall have no responsibility or obligation with respect to: (i) the accuracy of the records of the Depository, the Nominee, or any Participant with respect to any ownership interest in book entry bonds; (ii) the delivery to any Participant or any other person, other than an Owner as shown in the Bond Register, of any notice with respect to book entry bonds, including any notice of redemption; (iii) the selection by the Depository and its Participants of the beneficial interests in book entry bonds to be redeemed in the event that the District redeems the Bonds or Parity in part; or (iv) the payment by the Depository or any Participant or any other person, of any amount of principal of, premium, if any, or interest on book entry bonds. The District and the Trustee may treat and consider the person in whose name each book entry bond is registered in the Bond Register as the absolute Owner of such book entry bond for the purpose of payment of principal of, premium and interest on such Bond or Parity Bond, for the purpose of giving notices of redemption and other matters with respect to such Bond or Parity Bond, for the purpose of registering transfers with respect to such Bond or Parity Bonds, and for all other purposes whatsoever. The Trustee shall pay all principal of, premium, if any, and interest on the Bonds or Parity Bonds only to or upon the order of the respective Owner, as shown in the Bond Register, or such Owner's respective attorney duly authorized in writing, and all such payments shall be valid and effective to fully satisfy and discharge the District's obligations with respect to payment of principal of, premium, if any, and interest on the Bonds or Parity Bonds to the extent of the sum or sums so paid. No person other than an Owner, as shown in the Bond Register, shall receive a Bond or Parity Bond evidencing the obligation to make payments of principal of, premium, if any, and interest on the Bonds or Parity Bonds. Upon delivery by the Depository to the District and the Trustee, of written notice to the effect that the Depository has determined to substitute a new nominee in place of the Nominee, and subject to the provisions herein with respect to Record Dates, the word Nominee in the Indenture shall refer to such nominee ofthe Depository. (b) Delivery of Representation Letter. In order to qualify the book entry bonds for the Depository's book entry system, the District and the Trustee (if required by the Depository) shall execute and deliver to the Depository a Representation Letter. The execution and delivery of a Representation Letter shall not in any way impose upon the District or the Trustee any obligation whatsoever with respect to persons having interests in such book entry bonds other than the Owners, as shown on the Bond Register. By executing a Representation Letter, the Trustee shall agree to take all action necessary at all times so that the Trustee will be in compliance with all representations of the Trustee in such Representation Letter. In addition to the execution and delivery of a Representation Letter, the District and the Trustee shall take such other actions, not inconsistent with the Indenture, as are reasonably necessary to qualify book entry bonds for the Depository's book entry program. (c) Selection of Depository. In the event that: (i) the Depository determines not to continue to act as securities depository for book entry bonds; or (ii) the District determines that continuation of the book entry system is not in the best interest of the beneficial owners of the Bonds, the Parity Bonds or the District, then the District will discontinue the book entry system with the Depository. If the District determines to replace the Depository with another qualified securities depository, the District shall prepare or direct the preparation of a new single, separate, fully registered bond for each of the maturity dates of such book entry bonds, registered in the name of such successor or substitute qualified securities depository or its Nominee as provided in subsection (e). If the District fails to identify another qualified securities depository to replace the Depository, 17 then the Bonds or Parity Bonds shall no longer be restricted to being registered in such Bond Register in the name of the Nominee, but shall be registered in whatever name or names the Owners transferring or exchanging such Bonds or Parity Bonds shall designate, in accordance with the provisions ofthis Indenture. (d) Payments To Depository. Notwithstanding any other provision of the Indenture to the contrary, so long as all Outstanding Bonds or Parity Bonds are held in book entry form and registered in the name of the Nominee, all payments of principal of, redemption premium, if any, and interest on such Bonds or Parity Bonds and all notices with respect thereto shall be made and given, respectively to the Nominee, as provided in the Representation Letter or as otherwise instructed by the Depository and agreed to by the Trustee notwithstanding any inconsistent provisions herein. (e) Transfer of Bonds to Substitute Depository. ( l) The Bonds shall be initially issued as provided in Section 2.1. Registered ownership of such Bonds, or any portions thereof, may not thereafter be transferred except: (i) to any successor of the Depository or its nominee, or of any substitute depository designated pursuant to clause (ii) below (a "Substitute Depository"); provided that any successor of the Depository or Substitute Depository shall be qualified under any applicable laws to provide the service proposed to be provided by it; (ii) to any Substitute Depository, upon: (I) the resignation of the Depository or its successor (or any Substitute Depository or its successor) from its functions as depository; or (II) a determination by the District that the Depository (or its successor) is no longer able to carry out its functions as depository; provided that any such Substitute Depository shall be qualified under any applicable laws to provide the services proposed to be provided by it; or (iii) to any person as provided below, upon: (I) the resignation of the Depository or its successor (or any Substitute Depository or its successor) from its functions as depository; or (II) a determination by the District that the Depository or its successor (or Substitute Depository or its successor) is no longer able to carry out its functions as depository. (2) In the case of any transfer pursuant to clauses (i) or (ii) of subsection (1 ), upon receipt of all Outstanding Bonds by the Trustee, together with a written request of the District to the Trustee designating the Substitute Depository, a single new Bond, which the District shall prepare or cause to be prepared, shall be issued for each maturity of Bonds then Outstanding, registered in the name of such successor or such Substitute Depository or their Nominees, as the case may be, all as specified in such written request of the District. In the case of any transfer pursuant to clause (iii) of subsection (I), upon receipt of all Outstanding Bonds by the Trustee, together with a written request of the District to the Trustee, new Bonds, which the District shall prepare or cause to be prepared, shall be issued in such denominations and registered in the names of such persons as are requested in such written request of the District, subject to the limitations of Section 2.1; provided that the Trustee shall not be required to deliver such new Bonds within a period of less than sixty ( 60) days from the date of receipt of such written request from the District. (3) In the case of a partial redemption or an advance refunding of any Bonds evidencing a portion of the principal maturing in a particular year, the Depository or its 18 successor (or any Substitute Depository or its successor) shall make an appropriate notation on such Bonds indicating the date and amounts of such reduction in principal, in form acceptable to the Trustee, all in accordance with the Representation Letter. The Trustee shall not be liable for such Depository's failure to make such notations or errors in making such notations and the records of the Trustee as to the Outstanding principal amount of such Bonds shall be controlling. (4) The District and the Trustee shall be entitled to treat the person in whose name any Bond is registered as the Owner thereof for all purposes of the Indenture and any applicable laws, notwithstanding any notice to the contrary received by the Trustee or the District; and the District and the Trustee shall not have responsibility for transmitting payments to, communicating with, notifying, or otherwise dealing with any beneficial owners of the Bonds. Neither the District nor the Trustee shall have any responsibility or obligation, legal or otherwise, to any such beneficial owners or to any other party, including the Depository or its successor (or Substitute Depository or its successor), except to the Owner of any Bonds, and the Trustee may rely conclusively on its records as to the identity of the Owners of the Bonds. Section 2.13. Initial Depository and Nominee. The initial Depository under this Article shall be The Depository Trust Company, New York, New York. The initial Nominee shall be Cede & Co., as Nominee ofThe Depository Trust Company, New York, New York. ARTICLE III CREATION OF FUNDS AND APPLICATION OF PROCEEDS Section 3.1. Creation of Funds; Application of Proceeds. (a) There are hereby created and established and shall be maintained by the Trustee the following funds and accounts: (I) The City of Carlsbad Community Facilities District No. 3 2016 Special Tax Refunding Bonds (Improvement Area l) Special Tax Fund (the ''Special Tax Fund") (in which there shall be established and created an Interest Account, a Principal Account, a Redemption Account, a Reserve Account and an Administrative Expenses Account). (2) The City of Carlsbad Community Facilities District No.3 2016 Special Tax Refunding Bonds (Improvement Area 1) Rebate Fund (the "Rebate Fund'') (in which there shall be established a Rebate Account and an Alternative Penalty Account). (3) The City of Carlsbad Community Facilities District No.3 2016 Special Tax Refunding Bonds (Improvement Area I) Costs of Issuance Fund (the ''Costs of Issuance Fund''). (4) The City of Carlsbad Community Facilities District No.3 2016 Special Tax Refunding Bonds (Improvement Area 1) Surplus Fund (the "Surplus Fund''). The amounts on deposit in the foregoing funds, accounts and subaccounts shall be held by the Trustee and the Trustee shall invest and disburse the amounts in such funds, accounts and subaccounts in accordance with the provisions of this Article 3 and shall disburse investment earnings thereon in accordance with the provisions of Section 3.10 hereof. The Trustee may, in its discretion, establish temporary funds or accounts in its books and records to facilitate such transfers. 19 In connection with the issuance of any Parity Bonds, the Trustee, at the direction of an Authorized Representative of the District, may create new funds, accounts or subaccounts, or may create additional accounts and subaccounts within any of the foregoing funds and accounts for the purpose of separately accounting for the proceeds of the Bonds and any Parity Bonds. (b) The proceeds of the sale of the Bonds shall be received by the Trustee on behalf of the District and deposited and transferred as follows: (I) $~~ shall be transferred to the Costs of Issuance Fund to pay the Costs of Issuance ofthe Bonds; (2) $~~ shall be transferred to the Reserve Account of the Special Tax Fund to fund the Reserve Requirement; and (3) $~~ shall be transferred to the Escrow Agent for deposit in the Escrow Fund. The Trustee may, in its discretion, establish temporary funds or accounts in its books and records to facilitate such transfers. Section 3.2. Deposits to and Disbursements from Special Tax Fund. (a) Except for the portion of any Prepayment to be deposited in the Redemption Account as specified in a Certificate of an Authorized Representative, the Trustee shall, on each date on which the Special Taxes are received from the District, deposit the Special Taxes in the Special Tax Fund to be held in trust for the Owners. The Trustee shall transfer the Special Taxes on deposit in the Special Tax Fund on the dates and in the amounts set forth in the following Sections, in the following order ofpriority, to: (I) the Administrative Expenses Account ofthe Special Tax Fund; (2) the Interest Account of the Special Tax Fund; (3) the Principal Account of the Special Tax Fund; (4) the Redemption Account ofthe Special Tax Fund; (5) the Reserve Account of the Special Tax Fund; (6) the Rebate Fund; and (7) the Surplus Fund. (b) Upon the maturity of all of the Bonds and Parity Bonds and, after all principal and interest then due on the Bonds and Parity Bonds then Outstanding has been paid or provided for and any amounts owed to the Trustee have been paid in full, moneys in the Special Tax Fund and any accounts therein may be used by the District for any lawful purpose. Section 3.3. Administrative Expenses Account of the Special Tax Fund. The Trustee shall transfer from the Special Tax Fund and deposit in the Administrative Expenses Account of the 20 Special Tax Fund from time to time amounts necessary to make timely payment of Administrative Expenses as set forth in a Certificate of an Authorized Representative of the District; provided, however, that, except as set forth in the following sentence, the total amount transferred in a Bond Year shall not exceed the Administrative Expenses Cap until such time as there has been deposited to the Interest Account and the Principal Account an amount, together with any amounts already on deposit therein, that is sufficient to pay the interest and principal on all Bonds and Parity Bonds due in such Bond Year and to restore the Reserve Account to the Reserve Requirement, all as determined by the District. Notwithstanding the foregoing, amounts in excess of the Administrative Expenses Cap may be transferred to the Administrative Expenses Account to the extent necessary to collect delinquent Special Taxes, as directed in writing by an Authorized Representative of the District. Moneys in the Administrative Expenses Account of the Special Tax Fund may be invested in any Permitted Investments as directed in writing by an Authorized Representative of the District and shall be disbursed as directed in a Certificate of an Authorized Representative. Section 3.4. Interest Account and Principal Account of the Special Tax Fund. The principal of (including any Sinking Fund Payment) and interest due on the Bonds and any Parity Bonds until maturity, other than principal due upon redemption under Sections 4.1(a) and (c), shall be paid by the Trustee from the Principal Account and the Interest Account of the Special Tax Fund, respectively. For the purpose of assuring that the payment of principal of (including any Sinking Fund Payment) and interest on the Bonds and any Parity Bonds will be made when due, after making the transfer required by Section 3.3, at least one Business Day prior to each March 1 and September I, the Trustee shall make the following transfers from the Special Tax Fund first to the Interest Account and then to the Principal Account; provided, however, that to the extent that deposits have been made in the Interest Account or the Principal Account from the proceeds of the sale of an issue of the Bonds, any Parity Bonds, or otherwise, the transfer from the Special Tax Fund need not be made; and provided, further, that, if amounts in the Special Tax Fund (exclusive of the Reserve Account) are inadequate to make the foregoing transfers, then any deficiency shall be made up by an immediate transfer from the Reserve Account: (a) To the Interest Account, an amount such that the balance in the Interest Account one Business Day prior to each Interest Payment Date shall be equal to the installment of interest due on the Bonds and any Parity Bonds on said Interest Payment Date and any installment of interest due on a previous Interest Payment Date that remains unpaid. Moneys in the Interest Account shall be used for the payment of interest on the Bonds and any Parity Bonds as the same become due. (b) To the Principal Account, an amount such that the balance in the Principal Account one Business Day prior to September I of each year shall equal the principal payment (including any Sinking Fund Payment) due on the Bonds and any Parity Bonds maturing on such September I and any principal payment due on a previous September 1 which remains unpaid. Moneys in the Principal Account shall be used for the payment of the principal (including any Sinking Fund Payment) of such Bonds and any Parity Bonds as the same become due at maturity. Section 3.5. Redemption Account of the Special Tax Fund. (a) After making the deposits to the Administrative Expenses Account, the Interest Account and the Principal Account of the Special Tax Fund pursuant to Sections 3.3 and 3.4, or to call Parity Bonds for optional redemption as set forth in any Supplemental Indenture for Parity Bonds, the Trustee shall transfer from the Special Tax Fund and deposit in the Redemption Account moneys available for the purpose and sufficient to pay the principal and the premiums, if any, 21 payable on the Bonds or Parity Bonds called for optional redemption; provided, however, that amounts in the Special Tax Fund (other than the Administrative Expenses Account therein) may be applied to optionally redeem Bonds and Parity Bonds only if immediately following such redemption the amount in the Reserve Account will equal the Reserve Requirement, as determined by the District. (b) Prepayments deposited to the Redemption Account shall be applied on the redemption date established pursuant to Section 4.1 (c) for the use of such Prepayments to the payment of the principal of, premium, and interest on the Bonds and Parity Bonds to be redeemed with such Prepayments. (c) Moneys set aside in the Redemption Account shall be used solely for the purpose of redeeming Bonds and Parity Bonds, shall be applied on or after the redemption date to the payment of principal of and premium, if any, on the Bonds or Parity Bonds to be redeemed upon presentation and surrender (if required) of such Bonds or Parity Bonds and, in the case of an optional redemption or an extraordinary redemption from Prepayments, to pay the interest thereon; provided, however, that in lieu or partially in lieu of such call and redemption, moneys deposited in the Redemption Account may be used to purchase Outstanding Bonds or Parity Bonds in the manner hereinafter provided. Purchases of Outstanding Bonds or Parity Bonds may be made by the District at public or private sale as and when and at such prices as the District may in its discretion determine, but only at prices (including brokerage or other expenses) not more than par plus accrued interest, plus, in the case of moneys set aside for an optional redemption or an extraordinary redemption, the premium applicable at the next following call date according to the premium schedule established pursuant to Sections 4.1 (a) or 4.1 (d), as applicable, or in the case of Parity Bonds the premium established in any Supplemental Indenture. Any accrued interest payable upon the purchase of Bonds or Parity Bonds may be paid from the amount reserved in the Interest Account of the Special Tax Fund for the payment of interest on the next following Interest Payment Date. Section 3.6. Reserve Account of the Special Tax Fund. There shall be maintained in the Reserve Account of the Special Tax Fund an amount equal to the Reserve Requirement. If funded, the amounts in the Reserve Account shall be applied as follows: (a) Moneys in the Reserve Account shall be used solely for the purpose of paying the principal of, including Sinking Fund Payments, and interest on the Bonds and any Parity Bonds when due in the event that the moneys in the Interest Account and the Principal Account of the Special Tax Fund are insufficient therefor or moneys in the Redemption Account of the Special Tax Fund are insufficient to make a Sinking Fund Payment when due, and for the purpose of making any required transfer to the Rebate Fund pursuant to Section 3.7 upon written direction from the District. If the amounts in the Interest Account, the Principal Account or the Redemption Account of the Special Tax Fund are insufficient to pay the principal of, including Sinking Fund Payments, or interest on any Bonds and Parity Bonds when due, or amounts in the Special Tax Fund are insutlicient to make transfers to the Rebate Fund when required, the Trustee shall withdraw from the Reserve Account for deposit in the Interest Account, the Principal Account or the Redemption Account of the Special Tax Fund or the Rebate Fund, as applicable, moneys necessary for such purposes. (b) Whenever moneys are withdrawn from the Reserve Account, after making the required transfers referred to in Sections 3.3, 3.4 and 3.5, the Trustee shall transfer to the Reserve Account from available moneys in the Special Tax Fund, or from any other legally available funds that the District elects to apply to such purpose, the amount needed to restore the amount of such 22 Reserve Account to the Reserve Requirement. Moneys in the Special Tax Fund shall be deemed available for transfer to the Reserve Account only if the Trustee determines that such amounts will not be needed to make the deposits required to be made to the Administrative Expenses Account, the Interest Account, the Principal Account or the Redemption Account of the Special Tax Fund on or before the next September l. If amounts in the Special Tax Fund, together with any other amounts transferred to replenish the Reserve Account, are inadequate to restore the Reserve Account to the Reserve Requirement, then the District shall include the amount necessary fully to restore the Reserve Account to the Reserve Requirement in the next annual Special Tax levy to the extent ofthe maximum permitted Special Tax rates. (c) In connection with a redemption of Bonds pursuant to Section 4.1 (a) or (c) or Parity Bonds in accordance with any Supplemental Indenture, or a partial defeasance of Bonds or Parity Bonds in accordance with Section 9.1, amounts in the Reserve Account may be applied to such redemption or partial defeasance so long as the amount on deposit in the Reserve Account following such redemption or partial defeasance equals the Reserve Requirement. The District shall set forth in a Certificate of an Authorized Representative the amount in the Reserve Account to be transferred to the Redemption Account on a redemption date or to be transferred pursuant to Section 9.1 (c) to partially defease Bonds, and the Trustee shall make such transfer on the applicable redemption or defeasance date, subject to the limitation in the preceding sentence. (d) To the extent that the Reserve Account is at the Reserve Requirement as of the first day of the final Bond Year for the Bonds or an issue of Parity Bonds, amounts in the Reserve Account may be applied to pay the principal of and interest due on the Bonds and Parity Bonds, as applicable, in the final Bond Year for such issue. Moneys in the Reserve Account in excess of the Reserve Requirement that are not transferred in accordance with the preceding provisions of this section shall be withdrawn from the Reserve Account on the Business Day before each March I and September I and shall be transferred to the Interest Account of the Special Tax Fund. (e) The Reserve Requirement may be satisfied in whole or part by the deposit of a reserve fund surety policy or similar instrument therein. Section 3.7. Rebate Fund. (a) The Trustee shall establish and maintain a fund separate from any other fund established and maintained hereunder designated as the Rebate Fund and shall establish a separate Rebate Account and Alternative Penalty Account therein. All money at any time deposited in the Rebate Account or the Alternative Penalty Account of the Rebate Fund shall be held by the Trustee in trust, for payment to the United States Treasury. A separate subaccount of the Rebate Account and the Alternative Penalty Account shall be established for the Bonds and each issue of Parity Bonds the interest on which is excluded from gross income for federal income tax purposes. All amounts on deposit in the Rebate Fund with respect to the Bonds or an issue of Parity Bonds shall be governed by this Section 3.7 and the Tax Certificate for such issue, unless the District obtains an opinion of Bond Counsel that the exclusion from gross income for federal income tax purposes of interest payments on the Bonds and Parity Bonds will not be adversely affected if such requirements are not satisfied. 23 (1) Rebate Account. The following requirements shall be satisfied with respect to each subaccount ofthe Rebate Account: (i) Annual Computation. Within 55 days of the end of each Bond Year, the District shall calculate or cause to be calculated the amount of rebatable arbitrage for the Bonds and each issue of Parity Bonds to which this Section 3.7 is applicable, in accordance with Section 148(f)(2) of the Code and Section 1.148-3 of the Rebate Regulations (taking into account any applicable exceptions with respect to the computation of the rebatable arbitrage described in the Tax Certificate for each issue~' the temporary investments exceptions of Section 148(f)(4)(B) and (C) of the Code), and taking into account whether the election pursuant to Section 148(f)(4)(C)(vii) of the Code (the "'Biz% Penalty") has been made), for this purpose treating the last day of the applicable Bond Year as a computation date, within the meaning of Section 1.148-1 (b) of the Rebate Regulations (the "Rebatable Arbitrage"). The District shall obtain expert advice as to the amount ofthe Rebatable Arbitrage to comply with this Section. (ii) Annual Transfer. Within 55 days of the end of each Bond Year for which Rebatable Arbitrage must be calculated as required by the Tax Certificate for each issue, upon the written direction of an Authorized Representative of the District, an amount shall be deposited to each subaccount of the Rebate Account by the Trustee from any funds so designated by the District if and to the extent required, so that the balance in the Rebate Account shall equal the amount of Rebatable Arbitrage so calculated by or on behalf of the District in accordance with subsection (a)(l )(i) with respect to the Bonds and each issue of Parity Bonds to which this Section 3.7 is applicable. In the event that immediately following any transfer required by the previous sentence, or the date on which the District determines that no transfer is required for such Bond Year, the amount then on deposit to the credit of the applicable subaccount of the Rebate Account exceeds the amount required to be on deposit therein, upon written instructions from an Authorized Representative of the District, the Trustee shall withdraw the excess from the appropriate subaccount of the Rebate Account and then credit the excess to the Special Tax Fund. (iii) Payment to the Treasury. The Trustee shall pay, as directed in writing by an Authorized Representative of the District, to the United States Treasury, out of amounts in each subaccount of the Rebate Account: (X) not later than 60 days after the end of: (A) the fifth Bond Year for the Bonds and each issue of Parity Bonds to which this Section 3.7 is applicable; and (B) each applicable fifth Bond Year thereafter, an amount equal to at least 90% of the Rebatable Arbitrage calculated as of the end of such Bond Year for the Bonds and each issue of Parity Bonds, as applicable; and (Y) not later than 60 days after the payment or redemption of all of the Bonds or an issue of Parity Bonds, as applicable, an amount equal to I 00% of the Rebatable Arbitrage calculated as of the end of such applicable Bond Year, and any income attributable to the Rebatable Arbitrage, computed in accordance with Section 148(f) ofthe Code. In the event that, prior to the time that any payment is required to be made from the Rebate Account, the amount in the Rebate Account is not sufficient to make such payment when such payment is due, the District shall calculate or cause to be calculated the amount of such deficiency and deposit an amount received from any legally available source equal to such deficiency prior to the time such payment is due. Each payment required to be made pursuant to this subsection (a)(l) shall be made to the Internal Revenue Service Center, Ogden, Utah 84201 on or before the date on which such payment is due, and shall be accompanied by Internal Revenue Service Form 8038-T, or shall be made in such other manner as provided under the Code. 24 (2) Alternative Penalty Account. (i) Six-Month Computation. If the 1 Yz% Penalty has been elected for the Bonds or an issue of Parity Bonds, within 85 days of each particular Six-Month Period, the District shall determine or cause to be determined whether the 1\12% Penalty is payable (and the amount of such penalty) as of the close of the applicable Six-Month Period. The District shall obtain expert advice in making such determinations. (ii) Six-Month Transfer. Within 85 days of the close of each Six-Month Period, the Trustee, at the written direction of an Authorized Representative of the District, shall deposit an amount in the appropriate subaccounts of the Alternative Penalty Account from any source of funds held by the Trustee pursuant to this Indenture and designated by the District in such written directions or provided to it by the District, if and to the extent required, so that the balance in each subaccount of the Alternative Penalty Account equals the amount of I WYo Penalty due and payable to the United States Treasury determined as provided in subsection (a)(2)(i). In the event that immediately following any transfer provided for in the previous sentence, or the date on which the District determines that no transfer is required for such Bond Year, the amount then on deposit in a subaccount of the Alternative Penalty Account exceeds the amount required to be on deposit therein to make the payments required by subsection (a)(2)(iii), the Trustee, at the written direction of an Authorized Representative of the District, may withdraw the excess from the applicable subaccount of the Alternative Penalty Account and credit the excess to the Special Tax Fund. (iii) Payment to the Treasury. The Trustee shall pay, as directed in writing by an Authorized Representative of the District, to the United States Treasury, out of amounts in a subaccount of the Alternative Penalty Account, not later than 90 days after the close of each Six-Month Period the I \12% Penalty, if applicable and payable, computed with respect to the Bonds and any issue of Parity Bonds in accordance with Section 148(f)(4) of the Code. In the event that, prior to the time that any payment is required to be made from a subaccount of the Alternative Penalty Account, the amount in such subaccount is not sufficient to make such payment when such payment is due, the District shall calculate the amount of such deficiency and direct the Trustee. in writing, to deposit an amount equal to such deficiency into such subaccount of the Alternative Penalty Account from any funds held by the Trustee pursuant to this Indenture and designated by the District in such written directions prior to the time such payment is due. Each payment required to be made pursuant to this subsection (a)(2) shall be made to the Internal Revenue Service, Ogden, Utah 8420 I on or before the date on which such payment is due, and shall be accompanied by Internal Revenue Service Form 8038-T or shall be made in such other manner as provided under the Code. (b) Disposition of Unexpended Funds. Any funds remaining in the Accounts of the Rebate Fund with respect to the Bonds or an issue of Parity Bonds after redemption and payment of such issue and after making the payments described in subsections (a)( I )(iii) or (a)(2)(iii) (whichever is applicable), may be withdrawn by the Trustee at the written direction of the District and utilized in any manner by the District. (c) Survival of Defeasance and Final Payment. Notwithstanding anything in this Section or this Indenture to the contrary, the obligation to comply with the requirements of this Section shall survive the defeasance and final payment of the Bonds and any Parity Bonds with respect to which an Account has been created in the Rebate Fund. 25 (d) Amendment Without Consent of Owners. This Section 3.7 may be deleted or amended in any manner without the consent of the Owners, provided that prior to such event there is delivered to the District an opinion of Bond Counsel to the effect that such deletion or amendment will not adversely affect the exclusion from gross income for federal income tax purposes of interest on the Bonds and any issue of Parity Bonds issued on a tax-exempt basis. Section 3.8. Surplus Fund. After making the transfers required by Sections 3.3, 3.4, 3.5, 3.6 and 3. 7, as soon as practicable after each September 1, and in any event prior to each October 1, the Trustee shall transfer all remaining amounts in the Special Tax Fund to the Surplus Fund, unless on or prior to such date, it has received a Certificate of an Authorized Representative of the District directing that certain amounts be retained in the Special Tax Fund because the District has included such amounts as being available in the Special Tax Fund in calculating the amount of the levy of Special Taxes for such Fiscal Year pursuant to Section 5.2(b ). Moneys deposited in the Surplus Fund will be transferred by the Trustee at the direction of an Authorized Representative of the District: (a) to the Interest Account, the Principal Account or the Redemption Account of the Special Tax Fund to pay the principal of, including Sinking Fund Payments, premium, if any, and interest on the Bonds and any Parity Bonds when due in the event that moneys in the Special Tax Fund and the Reserve Account of the Special Tax Fund are insufficient therefor; (b) to the Reserve Account in order to replenish the Reserve Account to the Reserve Requirement; (c) to the Administrative Expenses Account of the Special Tax Fund to pay Administrative Expenses to the extent that the amounts on deposit in the Administrative Expenses Account of the Special Tax Fund are insufficient to pay Administrative Expenses; or (d) for any other lawful purpose ofthe District. The amounts in the Surplus Fund are not pledged to the repayment of the Bonds or the Parity Bonds and may be used by the District for any lawful purpose. In the event that the District reasonably expects to use any portion of the moneys in the Surplus Fund to pay debt service on any Outstanding Bonds or Parity Bonds, the District will notify the Trustee in a Certificate of an Authorized Representative and the Trustee will segregate such amount into a separate subaccount and the moneys on deposit in such subaccount of the Surplus Fund shall be invested at the written direction of the District in Permitted Investments the interest on which is excludable from gross income under Section 103 of the Code (other than bonds the interest on which is a tax preference item for purposes of computing the alternative minimum tax of individuals and corporations under the Code) or in Permitted Investments at a yield not in excess of the yield on the issue of Bonds or Parity Bonds to which such amounts are to be applied, unless, in the opinion of Bond Counsel, investment at a higher yield will not adversely affect the exclusion from gross income for federal income tax purposes of interest on the Bonds or any Parity Bonds which were issued on a tax-exempt basis for federal income tax purposes. Section 3.9. Costs of Issuance Fund. The moneys in the Costs of Issuance Fund shall be disbursed by the Trustee pursuant to a Certificate of an Authorized Representative of the District, and any balance therein shall be transferred by the Trustee to the Interest Account as directed in writing by an Authorized Representative of the District or 90 days following the issuance of the Bonds, whichever is earlier. The Costs of Issuance Fund shall thereafter be closed. Section 3.10. Investments. Moneys held in any of the funds, Accounts and subaccounts under this Indenture shall be invested at the written direction of the District in accordance with the limitations set forth below only in Permitted Investments which shall be deemed at all times to be a part of such funds, Accounts and subaccounts. Any loss resulting from such Permitted Investments shall be credited or charged to the fund, Account or subaccount from which such investment was 26 made, and any investment earnings on a fund, Account or subaccount shall be applied as follows: (i) investment earnings on all amounts deposited in the Costs of Issuance Fund, the Special Tax Fund, the Surplus Fund and the Rebate Fund and each Account therein (other than the Reserve Account of the Special Tax Fund) shall be deposited in those respective funds and Accounts; and (ii) investment earnings on all amounts deposited in the Reserve Account shall be deposited therein to be applied as set forth in Section 3.6. Moneys in the funds, Accounts and subaccounts held under this Indenture may be invested by the Trustee as directed in writing by the District, from time to time, in Permitted Investments subject to the following restrictions: (a) Moneys in the Costs of Issuance Fund and the Interest Account, the Principal Account and the Redemption Account of the Special Tax Fund shall be invested only in Permitted Investments which will by their terms mature, or in the case of an investment agreement are available for withdrawal without penalty, on such dates so as to ensure the payment of principal of, premium, if any, and interest on the Bonds and any Parity Bonds as the same become due. (b) Moneys in the Reserve Account of the Special Tax Fund may be invested only in Permitted Investments which, taken together, have a weighted average maturity not in excess of five years; provided that such amounts may be invested in an investment agreement to the later of the final maturity of the Bonds or any Parity Bonds so long as such amounts may be withdrawn at any time, without penalty, for application in accordance with Section 3.6; and provided that no such Permitted Investment of amounts in the Reserve Account allocable to the Bonds or an issue of Parity Bonds shall mature later than the respective final maturity date of the Bonds or the issue of Parity Bonds, as applicable. (c) Moneys in the Rebate Fund shall be invested only in Permitted Investments of the type described in clause (a) of the definition thereof which by their terms will mature, as nearly as practicable, on the dates such amounts are needed to be paid to the United States Government pursuant to Section 3.7, or in Permitted Investments of the type described in clause (g) of the definition thereof. (d) In the absence of written investment directions from the District, the Trustee shall hold such moneys uninvested. The Trustee shall sell, or present for redemption, any Permitted Investment as directed in writing by the District whenever it may be necessary to do so in order to provide moneys to meet any payment or transfer to such funds and Accounts or from such funds and Accounts. For the purpose of determining at any given time the balance in any such funds and Accounts, any such investments constituting a part of such funds and Accounts shall be valued at their cost, except that amounts in the Reserve Account shall be valued at the market value thereof at least semiannually on or before each Interest Payment Date. In making any valuations hereunder, the Trustee may utilize such computerized securities pricing services as may be available to it, including, without limitation, those available through its regular accounting system, and conclusively rely thereon. Notwithstanding anything herein to the contrary, the Trustee shall not be responsible for any loss from investments, sales or transfers undertaken in accordance with the provisions of this Indenture. The Trustee or an affiliate may act as principal or agent in the making or disposing of any investment and shall be entitled to its customary fee for such investment. The Trustee may sell, or present for redemption, any Permitted Investment so purchased whenever it shall be necessary to provide moneys to meet any required payment, transfer, withdrawal or disbursement from the fund or 27 account to which such Permitted Investment is credited, and, subject to the provisions of Section 7.4, the Trustee shall not be liable or responsible for any loss resulting from such investment. For investment purposes, the Trustee may commingle the funds and accounts established hereunder, but shall account for each separately. The District acknowledges that, to the extent that regulations of the Comptroller of the Currency or other applicable regulatory entity grant the District the right to receive brokerage confirmations of security transactions as they occur, the District specifically waives receipt of such confirmations to the extent permitted by law. The Trustee will furnish the District periodic cash transaction statements which include detail for all investment transactions made by the Trustee hereunder. ARTICLE IV REDEMPTION OF BONDS AND PARITY BONDS Section 4.1. Redemption of Bonds. (a) Optional Redemption. The Bonds maturing on or after September I, 20 _ may be redeemed, at the option of the District, from any source of funds on ~~ I, 20_ or any date thereafter, in whole, or in part by lot, at a redemption price equal to the principal amount to be redeemed, together with accrued interest to the date of redemption, without premium. In the event that the District elects to redeem Bonds as provided above, the District shall, at least 45 days prior to the redemption date, give written notice to the Trustee of its election to so redeem, the redemption date and the principal amount ofthe Bonds to be redeemed. In the event of redemption pursuant to Section 4.l(a) or (c), the District shall provide the Trustee with a revised sinking fund schedule giving effect to the redemption so completed. (b) Mandatory Sinking Fund Redemption. The Term Bonds shall be called before maturity and redeemed, from the Sinking Fund Payments that have been deposited into the Redemption Account, on September I, 20_, and on each September I thereafter prior to maturity, in accordance with the schedule of Sinking Fund Payments set forth below. The Term Bonds so called for redemption shall be selected by the Trustee by lot and shall be redeemed at a redemption price for each redeemed Term Bond equal to the principal amount thereof, plus accrued interest to the redemption date, without premium, as follows: TERM BONDS MATURING SEPTEMBER 1, 20 Redemption Date (September 1) Principal Amount $ If, during the Fiscal Year immediately preceding one of the redemption dates specified above, the District purchases Bonds, at least 45 days prior to the redemption date the District shall notify the Trustee as to the principal amount purchased and the amount of Bonds so purchased shall 28 be credited at the time of purchase, to the extent of the full principal amount thereof, to reduce such upcoming Sinking Fund Payment for the Bonds so purchased. All Bonds purchased pursuant to this subsection shall be cancelled pursuant to Section 1 0.1. In the event of a partial optional redemption or extraordinary redemption of the Bonds, each of the remaining Sinking Fund Payments for such Bonds, as described above, will be reduced, as nearly as practicable, on a pro rata basis, in integral multiples of $5,000, as directed by the District. (c) Extraordinary Redemption. The Bonds are subject to extraordinary redemption as a whole, or in part by lot, on any Interest Payment Date, and shall be redeemed by the Trustee, from Prepayments deposited to the Redemption Account pursuant to Section 3.5(b), plus amounts transferred from the Reserve Account pursuant to Section 3.6(c), at the following redemption prices, expressed as a percentage of the principal amount to be redeemed, together with accrued interest to the redemption date: Redemption Date Any Interest Payment Date through __ 1, 20_ 1, 20 and I, 20 1, 20_ and 1, 20 _ __ I, 20_ and any Interest Payment Date thereafter Redemption Price 103% 102 101 100 The District shall notify the Trustee of any extraordinary prepayment at least 45 days prior to the Interest Payment Date on which such prepayment shall occur. (d) The redemption provisions for Parity Bonds shall be set forth in a Supplemental Indenture. Section 4.2. Selection of Bonds and Parity Bonds for Redemption. If less than all of the Bonds or Parity Bonds Outstanding are to be redeemed, the portion of any Bond or Parity Bond of a denomination of more than $5,000 to be redeemed shall be in the principal amount of $5,000 or an integral multiple thereof. The Trustee shall promptly notify the District in writing of the Bonds or Parity Bonds, or portions thereof, selected for redemption. Section 4.3. Notice of Redemption. When Bonds or Parity Bonds are due for redemption under Section 4.1 or the terms of a Supplemental Indenture, respectively, the Trustee shall give notice, in the name of the District, of the redemption of such Bonds or Parity Bonds; provided, however, that a notice of a redemption to be made from other than from Sinking Fund Payments shall be conditioned on there being on deposit on the redemption date sufficient money to pay the redemption price of the Bonds or Parity Bonds to be redeemed. Such notice of redemption shall: (a) specify the CUSIP numbers (if any), the bond numbers and the maturity date or dates of the Bonds or Parity Bonds selected for redemption, except that where all of the Bonds or all of an issue of Parity Bonds are subject to redemption, or all of the Bonds or Parity Bonds of one maturity, are to be redeemed, the bond numbers of such issue need not be specified; (b) state the date fixed for redemption and surrender of the Bonds or Parity Bonds to be redeemed; (c) state the redemption price; (d) state the place or places where the Bonds or Parity Bonds are to be redeemed; (e) in the case of Bonds or Parity Bonds to be redeemed only in part, state the portion of such Bond or Parity Bond that is to be redeemed; (f) state the date of issue of the Bonds or Parity Bonds as originally issued; (g) state the rate of interest borne by each Bond or Parity Bond being redeemed; and (h) state 29 any other descriptive information needed to identify accurately the Bonds or Parity Bonds being redeemed as shall be specified by the Trustee. Such notice shall further state that on the date fixed for redemption, there shall become due and payable on each Bond, Parity Bond or portion thereof called for redemption, the principal thereof, together with any premium, and interest accrued to the redemption date, and that from and after such date, interest thereon shall cease to accrue and be payable. At least 30 days but no more than 45 days prior to the redemption date, the Trustee shall mail a copy of such notice, by first class mail, postage prepaid, to the respective Owners thereof at their addresses appearing on the Bond Register. The actual receipt by the Owner of any Bond or Parity Bond or the original purchaser of any Bond or Parity Bond of notice of such redemption shall not be a condition precedent to redemption, and neither the failure to receive nor any defect in such notice shall affect the validity of the proceedings for the redemption of such Bonds or Parity Bonds, or the cessation of interest on the redemption date. A certificate by the Trustee that notice of such redemption has been given as herein provided shall be conclusive as against all parties, and the Owner shall not be entitled to show that he or she failed to receive notice of such redemption. In addition to the foregoing notice, further notice shall be given by the Trustee as set out below, but no defect in said further notice nor any failure to give all or any portion of such further notice shall in any manner defeat the effectiveness of a call for redemption if notice thereof is given as above prescribed. In addition to providing any notice of redemption to the Bondowners, if the Bonds are held in book-entry form, each further notice of redemption shall be sent not later than the date that notice of redemption is mailed to the Bondowners by registered or certified mail or overnight delivery service to the Depository and by electronic notice to the Municipal Securities Rulemaking Board. Upon the payment of the redemption price of any Bonds and Parity Bonds being redeemed, each check or other transfer of funds issued for such purpose shall to the extent practicable bear the CUSIP number (if any) identifying, by issue and maturity, the Bonds and Parity Bonds being redeemed with the proceeds of such check or other transfer. With respect to any notice of optional redemption or extraordinary redemption of Bonds or Parity Bonds, such notice shall state that such redemption shall be conditional upon the receipt by the Trustee on or prior to the date fixed for such redemption of moneys sufficient to pay the principal ot: premium, if any, and interest on such Bonds or Parity Bonds to be redeemed and that, if such moneys shall not have been so received, said notice shall be of no force and effect and the Trustee shall not be required to redeem such Bonds or Parity Bonds. In the event that such notice of redemption contains such a condition and such moneys are not so received, the redemption shall not be made, and the Trustee shall within a reasonable time thereafter give notice, in the manner in which the notice of redemption was given, that such moneys were not so received. Section 4.4. Partial Redemption of Bonds or Parity Bonds. Upon surrender by the Owner of a Bond, at the option of such Owner, for mandatory redemption at the Principal Office of the Trustee, payment of such mandatory redemption of the principal amount of a Bond will be paid to such Owner. Upon surrender of any Bond or Parity Bond to be redeemed in part only, the District shall execute and the Trustee shall authenticate and deliver to the Bondowner, at the expense of the District, a new Bond or Bonds or a new Parity Bond or Parity Bonds of authorized denominations equal in aggregate principal amount to the unredeemed portion of the Bonds surrendered, with the same interest rate and the same maturity or, in the case of surrender of a Parity Bond, a new Parity Bond or Parity Bonds subject to the foregoing limitations. Such mandatory redemption shall be valid 30 upon payment of the amount thereby required to be paid to such Owner, and the District and the Trustee shall be released and discharged from all liability to the extent of such payment. Section 4.5. Effect of Notice and Availability of Redemption Money. Notice of redemption having been duly given, as provided in Section 4.3, and the amount necessary for the redemption having been made available for that purpose and being available therefor on the date fixed for such redemption: (a) the Bonds and Parity Bonds, or portions thereof, designated for redemption shall, on the date fixed for redemption, become due and payable at the redemption price thereof as provided in this Indenture or in any Supplemental Indenture with respect to any Parity Bonds, anything in this Indenture or in the Bonds or the Parity Bonds to the contrary notwithstanding; (b) upon presentation and surrender thereof at the Principal Office of the Trustee, the redemption price of such Bonds and Parity Bonds shall be paid to the Owners thereof; (c) as of the redemption date, the Bonds or the Parity Bonds, or portions thereof so designated for redemption shall be deemed to be no longer Outstanding and such Bonds or Parity Bonds, or portions thereof, shall cease to bear further interest; and (d) as of the date fixed for redemption, no Owner of any of the Bonds, Parity Bonds or portions thereof so designated for redemption shall be entitled to any of the benefits of this Indenture or any Supplemental Indenture, or to any other rights, except with respect to payment of the redemption price and interest accrued to the redemption date from the amounts so made available. ARTICLE V COVENANTS AND WARRANTY Section 5.1. Security. The District shall preserve and protect the security pledged hereunder to the Bonds and any Parity Bonds against all claims and demands of all persons. Section 5.2. Covenants. So long as any of the Bonds or Parity Bonds issued hereunder are Outstanding and unpaid, the District makes the following covenants with the Bondowners under the provisions of the Act and this Indenture (to be performed by the District or its proper officers, agents or employees), which covenants are necessary and desirable to secure the Bonds and Parity Bonds and tend to make them more marketable; provided, however, that said covenants do not require the District to expend any funds or moneys other than the Special Taxes and other amounts deposited to the Special Tax Fund: (a) Punctual Payment; Against Encumbrances. The District covenants that it will receive all Special Taxes in trust for the Owners and will instruct the City Treasurer to deposit all Special Taxes with the Trustee immediately upon their apportionment to the District, and the District shall have no beneficial right or interest in the amounts so deposited except as provided by this Indenture. All such Special Taxes shall be disbursed, allocated and applied solely to the uses and purposes set forth herein, and shall be accounted for separately and apart from all other money, funds, accounts or other resources ofthe District. 31 The District covenants that it will duly and punctually pay or cause to be paid the principal of and interest on every Bond and Parity Bond issued hereunder, together with the premium, if any, thereon on the date, at the place and in the manner set forth in the Bonds and the Parity Bonds and in accordance with this Indenture to the extent that Net Taxes and other amounts pledged hereunder are available therefor, and that the payments into the funds and Accounts created hereunder will be made, all in strict conformity with the terms of the Bonds, any Parity Bonds, this Indenture and any Supplemental Indenture, and that it will faithfully observe and perform all of the conditions, covenants and requirements of this Indenture and all Supplemental Indentures and of the Bonds and any Parity Bonds issued hereunder. The District will not mortgage or otherwise encumber, pledge or place any charge upon any of the Net Taxes except as provided in this Indenture, and will not issue any obligation or security having a lien or charge upon the Net Taxes superior to or on a parity with the Bonds, other than Parity Bonds. Nothing herein shall prevent the District from issuing or incurring indebtedness that is payable from a pledge ofNet Taxes which is subordinate in all respects to the pledge ofNet Taxes to repay the Bonds and the Parity Bonds. (b) Levy of Special Tax. Beginning in Fiscal Year 2016-17 and continuing so long as any Bonds or Parity Bonds issued under this Indenture are Outstanding, the legislative body of the District covenants to levy the Special Tax in an amount sufficient, together with other amounts on deposit in the Special Tax Fund and available for such purpose, to pay: (i) the principal of and interest on the Bonds and any Parity Bonds when due; (ii) the Administrative Expenses; and (iii) any amounts required to replenish the Reserve Account of the Special Tax Fund to the Reserve Requirement. The District further covenants that it will take no actions that would discontinue or cause the discontinuance of the Special Tax levy or the District's authority to levy the Special Tax for so long as the Bonds and any Parity Bonds are Outstanding. (c) Commence Foreclosure Proceedings. The District covenants for the benefit of the Owners of the Bonds and any Parity Bonds that it will: (i) commence judicial foreclosure proceedings against parcels with delinquent Special Taxes in excess of $8,000 by the October I following the close of each Fiscal Year in which such Special Taxes were due; (ii) commence judicial foreclosure proceedings against all parcels with delinquent Special Taxes by the October 1 following the close of each Fiscal Year in which it receives Special Taxes in an amount which is less than 95% of the total Special Tax levied and the amount on deposit in the Reserve Account is at less than the Reserve Requirement; and (iii) diligently pursue such foreclosure proceedings until the delinquent Special Taxes are paid. The District covenants that it will deposit the net proceeds of any foreclosure to the Special Tax Fund and will apply such proceeds remaining after the payment of Administrative Expenses to make current payments of principal of and interest on the Bonds and any Parity Bonds, to bring the amount on deposit in the Reserve Account up to the Reserve Requirement and to pay any delinquent installments of principal or interest due on the Bonds and any Parity Bonds. (d) Payment of Claims. The District will pay and discharge any and all lawful claims for labor, materials or supplies which, if unpaid, might become a lien or charge upon the Net Taxes or other funds in the Special Tax Fund (other than the Administrative Expenses Account therein), or which might impair the security of the Bonds or any Parity Bonds then Outstanding; provided, however, that nothing herein contained shall require the District to make any such payments so long as the District in good faith shall contest the validity of any such claims. 32 (e) Books and Accounts. The District will keep proper books of records and accounts, separate from all other records and accounts of the District, in which complete and correct entries shall be made of all transactions relating to the Project, the levy of the Special Tax and the deposits to the Special Tax Fund. Such books of records and accounts shall at all times during business hours be subject to the inspection of the Trustee, the Owners of not less than 10% of the principal amount of the Bonds or the Owners of not less than 10% of any issue of Parity Bonds then Outstanding or their representatives authorized in writing. (f) Federal Tax Covenants. Notwithstanding any other provision of this Indenture, absent an opinion of Bond Counsel that the exclusion from gross income of interest on the Bonds and any Parity Bonds issued on a tax-exempt basis for federal income tax purposes will not be adversely affected for federal income tax purposes, the District covenants to comply with all applicable requirements of the Code necessary to preserve such exclusion from gross income and specifically covenants, without limiting the generality of the foregoing, as follows: ( 1) Private Activity. The District will take no action or refrain from taking any action or make any use of the proceeds of the Bonds or any Parity Bonds or of any other moneys or property which would cause the Bonds or any Parity Bonds issued on a tax-exempt basis for federal income tax purposes to be "private activity bonds" within the meaning of Section 141 of the Code; (2) Arbitrage. The District will make no use of the proceeds of the Bonds or any Parity Bonds or of any other amounts or property, regardless of the source, or take any action or refrain from taking any action which will cause the Bonds or any Parity Bonds issued on a tax- exempt basis for federal income tax purposes to be "arbitrage bonds'' within the meaning of Section 148 ofthe Code; (3) Federal Guaranty. The District will make no use ofthe proceeds ofthe Bonds or any Parity Bonds or take or omit to take any action that would cause the Bonds or any Parity Bonds issued on a tax-exempt basis for federal income tax purposes to be "federally guaranteed'' within the meaning of Section 149(b) of the Code; · ( 4) Information Reporting. The District will take or cause to be taken all necessary action to comply with the informational reporting requirement of Section 149( e) of the Code; (5) Hedge Bonds. The District will make no use of the proceeds ofthe Bonds or any Parity Bonds or any other amounts or property, regardless of the source, or take any action or refrain from taking any action that would cause the Bonds or any Parity Bonds issued on a tax- exempt basis for federal income tax purposes to be considered "hedge bonds" within the meaning of Section 149(g) of the Code unless the District takes all necessary action to assure com pi iance with the requirements of Section 149(g) of the Code to maintain the exclusion from gross income for federal income tax purposes of interest on the Bonds and any applicable Parity Bonds; (6) Miscellaneous. The District will take no action or refrain from taking any action inconsistent with its expectations stated in the Tax Certificate executed on the Delivery Date by the District in connection with the Bonds and any issue of Parity Bonds and will comply with the covenants and requirements stated therein and incorporated by reference herein; 33 (7) Other Tax-Exempt Issues. The District will not use proceeds of other tax-exempt secunt1es to redeem any Bonds or Parity Bonds without first obtaining the written opinion of Bond Counsel that doing so will not impair the exclusion from gross income for federal income tax purposes of interest on the Bonds and any Parity Bonds issued on a tax-exempt basis; and (8) Subsequent Opinions. If the District obtains a subsequent opinion of Bond Counsel other than Stradling Yocca Carlson & Rauth, a Professional Corporation ("SYCR"), where such opinion is required in connection with a change or amendment to this Indenture or the procedures set forth in the Tax Certificate, it will obtain an opinion substantially to the effect originally delivered by SYCR that interest on the Bonds and Parity Bonds which are the subject of such change or amendment is excluded from gross income for federal income tax purposes. (g) Reduction of Maximum Special Taxes. The District hereby finds and determines that, historically, delinquencies in the payment of special taxes authorized pursuant to the Act in community facilities districts in Southern California have from time to time been at levels that required the levy of special taxes at the maximum authorized rates in order to make timely payment of principal of and interest on the outstanding indebtedness of such community facilities districts. For this reason, the District hereby determines that a reduction in the maximum Special Tax rates authorized to be levied on parcels in the District below the levels provided in this Section 5.2(g) would interfere with the timely retirement of the Bonds and Parity Bonds. The District determines it to be necessary in order to preserve the security for the Bonds and Parity Bonds to covenant, and, to the maximum extent that the law permits it to do so, the District hereby does covenant, that it shall not initiate proceedings to reduce the maximum Special Tax rates for the District, unless. in connection therewith: (i) the District receives a certificate from one or more Independent Financial Consultants which, when taken together, certify that, on the basis of the parcels of land and improvements existing in the District as of the July I preceding the reduction, the maximum amount of the Special Tax which may be levied on then-existing Taxable Property (as such term is defined in the Rate and Method then in effect in the District) in each Bond Year for any Bonds and Parity Bonds Outstanding will equal at least II 0% of the sum of the estimated Administrative Expenses and gross debt service in each Bond Year on all Bonds and Parity Bonds to remain Outstanding after the reduction is approved; (ii) the District finds that any reduction made under such conditions will not adversely affect the interests of the Owners of the Bonds and Parity Bonds; and (iii) the District is not delinquent in the payment of the principal of or interest on the Bonds or any Parity Bonds. For purposes of estimating Administrative Expenses for the foregoing calculation, the Independent Financial Consultants shall compute the Administrative Expenses for the current Fiscal Year and escalate that amount by two percent (2%) in each subsequent Fiscal Year. (h) Covenants to Defend. The District covenants that, in the event that any initiative is adopted by the qualified electors in the District which purports to reduce the maximum Special Tax below the levels specified in Section 5.2(g) above or to limit the power of the District to levy the Special Taxes for the purposes set forth in Section 5.2(b) above, it will commence and pursue legal action in order to preserve its ability to comply with such covenants. (i) Limitation on Right to Tender Bonds. The District hereby covenants that it will not adopt any policy pursuant to Section 53341.1 of the Act permitting the tender of Bonds or Parity Bonds in full payment or partial payment of any Special Taxes unless the District shall have first received a certificate from an Independent Financial Consultant that the acceptance of such a tender will not result in the District having insufficient Special Tax revenues to pay the principal of and interest on the Bonds and Parity Bonds when due. 34 U) Continuing Disclosures. The District covenants to comply with the terms of the Continuing Disclosure Agreement and with the terms of any continuing disclosure agreement executed by the District with respect to any Parity Bonds in order to assist the underwriter thereof in complying with Rule 15(c)2-12 adopted by the Securities and Exchange Commission. (k) Further Assurances. The District shall make, execute and deliver any and all such further agreements, instruments and assurances as may be reasonably necessary or proper to carry out the intention or to facilitate the performance of this Indenture and for the better assuring and confirming unto the Owners of the Bonds and any Parity Bonds ofthe rights and benefits provided in this Indenture. ARTICLE VI AMENDMENTS TO INDENTURE Section 6.1. Supplemental Indentures or Orders Not Requiring Bondowner Consent. The District may from time to time, and at any time, without notice to or consent of any of the Bondowners, adopt Supplemental Indentures for any of the following purposes: (a) to cure any ambiguity, to correct or supplement any provisions herein which may be inconsistent with any other provision herein, or to make any other provision with respect to matters or questions arising under this Indenture or in any additional resolution or order, provided that such action is not materially adverse to the interests of the Bondowners; (b) to add to the covenants and agreements of and the limitations and the restrictions upon the District contained in this Indenture, other covenants, agreements, limitations and restrictions to be observed by the District which are not contrary to or inconsistent with this Indenture as theretofore in effect or which further secure Bond or Parity Bond payments; (c) to provide for the issuance of any Parity Bonds, and to provide the terms and conditions under which such Parity Bonds may be issued, subject to and in accordance with the provisions ofthis Indenture; (d) to modify, amend or supplement this Indenture in such manner as to permit the qualification hereof under the Trust Indenture Act of 1939, as amended, or any similar federal statute hereafter in effect, or to comply with the Code or regulations issued thereunder, and to add such other terms, conditions and provisions as may be permitted by said act or similar federal statute, and which shall not materially adversely affect the interests of the Owners of the Bonds or any Parity Bonds then Outstanding; (e) subject to the provisions of Section 5.2(g), to modify, alter or amend the Rate and Method in any manner so long as such changes do not reduce the maximum Special Taxes that may be levied in each year on property within Improvement Area I of the District to an amount which is less than II 0% of the principal and interest due in each corresponding future Bond Year with respect to the Bonds and Parity Bonds Outstanding as of the date of such amendment; or (f) to modify, alter, amend or supplement this Indenture in any other respect which is not materially adverse to the Bondowners. 35 Section 6.2. Supplemental Indentures or Orders Requiring Bondowner Consent. Exclusive of the Supplemental Indentures described in Section 6.1, the Owners of not less than a majority in aggregate principal amount of the Bonds and Parity Bonds Outstanding shall have the right to consent to and approve the adoption by the District of such Supplemental Indentures as shall be deemed necessary or desirable by the District for the purpose of waiving, modifying, altering, amending, adding to or rescinding, in any particular, any of the terms or provisions contained in this Indenture; provided, however, that nothing herein shall permit, or be construed as permitting: (a) an extension of the maturity date of the principal, or the payment date of interest on, any Bond or Parity Bond; (b) a reduction in the principal amount of, or redemption premium on, any Bond or Parity Bond or the rate of interest thereon; (c) a preference or priority of any Bond or Parity Bond over any other Bond or Parity Bond; or (d) a reduction in the aggregate principal amount of the Bonds and Parity Bonds the Owners of which are required to consent to such Supplemental Indenture, without the consent of the Owners of all Bonds and Parity Bonds then Outstanding. If at any time the District shall desire to adopt a Supplemental Indenture, which pursuant to the terms of this Section shall require the consent of the Bondowners, the District shall so notify the Trustee and shall deliver to the Trustee a copy of the proposed Supplemental Indenture. The Trustee shall, at the expense of the District, cause notice of the proposed Supplemental Indenture to be mailed, by first class mail, postage prepaid, to all Bondowners at their addresses as they appear in the Bond Register. Such notice shall briefly set forth the nature ofthe proposed Supplemental Indenture and shall state that a copy thereof is on file at the Principal Oftice of the Trustee for inspection by all Bondowners. The failure of any Bondowners to receive such notice shall not affect the validity of such Supplemental Indenture when consented to and approved by the Owners of not less than a majority in aggregate principal amount of the Bonds and Parity Bonds Outstanding as required by this Section. Whenever at any time within one year after the date of the first mailing of such notice, the Trustee shall receive an instrument or instruments purporting to be executed by the Owners of not less than a majority in aggregate principal amount ofthe Bonds and Parity Bonds Outstanding, which instrument or instruments shall refer to the proposed Supplemental Indenture described in such notice, and shall specifically consent to and approve the adoption thereof by the District substantially in the form of the copy referred to in such notice as on file with the Trustee, such proposed Supplemental Indenture, when duly adopted by the District, shall thereafter become a part of the proceedings for the issuance of the Bonds and any Parity Bonds. In determining whether the Owners of a majority of the aggregate principal amount of the Bonds and Parity Bonds have consented to the adoption of any Supplemental Indenture, Bonds or Parity Bonds that are owned by the District, or by any person directly or indirectly controlling or controlled by or under the direct or indirect common control with the District, shall be disregarded and shall be treated as though they were not Outstanding for the purpose of any such determination. Upon the adoption of any Supplemental Indenture and the receipt of consent to any such Supplemental Indenture from the Owners of not less than a majority in aggregate principal amount of the Outstanding Bonds and Parity Bonds in instances where such consent is required pursuant to the provisions ofthis Section, this Indenture shall be, and shall be deemed to be, modified and amended in accordance therewith, and the respective rights, duties and obligations under this Indenture of the District and all Owners of Outstanding Bonds and Parity Bonds shall thereafter be detennined, exercised and enforced hereunder, subject in all respects to such modifications and amendments. Section 6.3. Notation of Bonds or Parity Bonds; Delivery of Amended Bonds or Parity Bonds. After the effective date of any action taken as hereinabove provided, the District may determine that the Bonds or any Parity Bonds may bear a notation. by endorsement in form approved 36 by the District, as to such action, and in that case upon demand of the Owner of any Outstanding Bond or Parity Bond at such effective date and presentation of his Bond or Parity Bond for the purpose at the Principal Office of the Trustee or at such additional offices as the Trustee may select and designate for that purpose, a suitable notation as to such action shall be made on such Bonds or Parity Bonds. If the District shall so determine, new Bonds or Parity Bonds so modified as, in the opinion of the District, shall be necessary to conform to such action shall be prepared and executed, and in that case upon demand of the Owner of any Outstanding Bond or Parity Bond at such effective date such new Bonds or Parity Bonds shall be exchanged at the Principal Office of the Trustee or at such additional offices as the Trustee may select and designate for that purpose, without cost to each Owner of Outstanding Bonds or Parity Bonds, upon surrender of such Outstanding Bonds or Parity Bonds. ARTICLE VII TRUSTEE Section 7.1. Trustee. The Bank of New York Mellon Trust Company, N .A., shall be the Trustee for the Bonds and any Parity Bonds unless and until another Trustee is appointed by the District hereunder. The District may, at any time, appoint a successor Trustee satisfying the requirements of Section 7.2 for the purpose of receiving all money that the District is required to deposit with the Trustee hereunder and to allocate, use and apply the same as provided in this Indenture. The Trustee is hereby authorized to and shall mail by first class mail, postage prepaid, or wire transfer in accordance with Section 2.5, interest payments to the Bondowners, to select Bonds and Parity Bonds for redemption, and to maintain the Bond Register. The Trustee is hereby authorized to pay the principal of and premium, if any, on the Bonds and Parity Bonds when the same are duly presented to it for payment at maturity or on call and redemption, to provide for the registration of transfer and exchange of Bonds and Parity Bonds presented to it for such purposes, to provide for the cancellation of Bonds and Parity Bonds and to provide for the authentication of Bonds and Parity Bonds, and shall perform all other duties assigned to or imposed on it as provided in this Indenture. The Trustee shall keep accurate records of all funds administered by it and all Bonds and Parity Bonds paid, discharged and cancelled by it. The Trustee is hereby authorized to redeem the Bonds and Parity Bonds when duly presented for payment at maturity, or on redemption prior to maturity. The Trustee shall cancel all Bonds and Parity Bonds upon payment thereof in accordance with the provisions of Section 1 0.1. The District shall from time to time, subject to any agreement between the District and the Trustee then in force, pay to the Trustee compensation for its services, reimburse the Trustee for all of its advances and expenditures, including, but not limited to, advances to and fees and expenses of independent accountants or counsel employed by it in the exercise and performance of its powers and duties hereunder, and indemnify and save the Trustee, its officers, directors, employees and agents, harmless against costs, claims, expenses and liabilities, including, without limitation, fees and expenses of its attorneys, not arising from its own negligence or willful misconduct which it may incur in the exercise and performance of its powers and duties hereunder. The foregoing obligation of the District to indemnify the Trustee shall survive the removal or resignation of the Trustee or the discharge of the Bonds. 37 Section 7.2. Removal of Trustee. The District may at any time at its sole discretion, and shall at the direction of a majority of the Owners, remove the Trustee initially appointed, and any successor thereto, by delivering to the Trustee a written notice of its decision to remove the Trustee. The District shall appoint a successor or successors thereto, provided that any such successor shall be a bank, national banking association or trust company having a combined capital (exclusive of borrowed capital) and surplus of at least $100,000,000, and subject to supervision or examination by federal or state authority. If any bank, national banking association or trust company appointed as a successor 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 purposes of this Section the combined capital and surplus of such bank, national banking association 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. Any removal of the Trustee and appointment of a successor Trustee shall become effective only upon acceptance of appointment by the successor Trustee and notice being sent by the successor Trustee to the Bondowners of the successor Trustee's identity and address. Section 7.3. Resignation of Trustee. The Trustee may at any time resign by g1vmg written notice to the District and by giving to the Owners notice of such resignation, which notice shall be mailed to the Owners at their addresses appearing in the registration books at the Principal Office of the Trustee. Upon receiving such notice of resignation, the District shall promptly appoint a successor Trustee satisfying the criteria in Section 7.2 by an instrument in writing. Any resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon acceptance of appointment by the successor Trustee. If no successor Trustee shall have been appointed and have accepted appointment within 45 days of giving notice of removal or notice of resignation as aforesaid, the resigning Trustee or any Bondowner (on behalf of itself and all other Bondowners) may petition any court of competent jurisdiction for the appointment of a successor Trustee, and such court may thereupon, after such notice (if any) as it may deem proper, appoint such successor Trustee. Section 7.4. Liability of Trustee. The recitals of fact and all promises, covenants and agreements contained herein and in the Bonds and any Parity Bonds shall be taken as statements, promises, covenants and agreements of the District, and the Trustee assumes no responsibility for the correctness of the same and makes no representations as to the validity or sufficiency of this Indenture, the Bonds or any Parity Bonds, and shall incur no responsibility in respect thereat~ other than in connection with its duties or obligations specifically set forth herein, in the Bonds and any Parity Bonds, or in the certificate of authentication assigned to or imposed upon the Trustee. The Trustee shall be under no responsibility or duty with respect to the issuance of the Bonds or any Parity Bonds for value. The Trustee shall not be liable in connection with the performance of its duties hereunder, except for its own negligence or willful misconduct. The Trustee shall be protected in acting upon any notice, resolution, request, consent, order, certificate, report, Bond, Parity Bond, facsimile transmission, electronic mail or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. The Trustee may consult with counsel, who may be counsel to the District, with regard to legal questions, and the opinion of such counsel shall be full and complete authorization and protection in respect of any action taken or suffered hereunder in good faith and in accordance therewith. 38 The Trustee shall not be bound to recognize any person as the Owner of a Bond or Parity Bond unless and until such Bond or Parity Bond is submitted for inspection, if required, and title thereto is satisfactorily established, if disputed. Whenever in the administration of its duties under this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action hereunder, such matter (unless other evidence in respect thereof is specifically prescribed herein) may, in the absence of bad faith on the part of the Trustee, be deemed to be conclusively proved and established by a written certificate of the District, and such certificate shall be full warrant to the Trustee for any action taken or suffered under the provisions of this Indenture upon the faith thereo[ but in its discretion the Trustee may, in lieu thereof, accept other evidence of such matter or may require such additional evidence as to it may seem reasonable. The Trustee shall have no duty or obligation whatsoever to enforce the collection of Special Taxes or other funds to be deposited with it hereunder, or as to the correctness of any amounts received, but its liability shall be limited to the proper accounting for such funds as it shall actually receive. No provision in this Indenture 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 its rights or powers. The Trustee shall not be deemed to have knowledge of any default or Event of Default until an officer at the Trustee's corporate trust office who is responsible for the administration of its duties hereunder shall have actual knowledge thereof or the Trustee shall have received written notice thereof at its corporate trust office. The Trustee shall not be considered in breach of or in default in its obligations hereunder or progress in respect thereto in the event of enforced delay ("unavoidable delay'') in the performance of such obligations due to unforeseeable causes beyond its control and without its fault or negligence, including, but not limited to, Acts of God or of the public enemy or terrorists, acts of a government, acts of the other party, fires, floods, epidemics, quarantine restrictions, strikes, freight embargoes, earthquakes, explosion, mob violence, riot, inability to procure or general sabotage or rationing of labor, equipment, facilities, sources of energy, material or supplies in the open market, litigation or arbitration involving a party or others relating to zoning or other governmental action or inaction pertaining to the Project, malicious mischief, condemnation, and unusually severe weather or delays of suppliers or subcontractors due to such causes or any similar event and/or occurrences beyond the control of the Trustee. The Trustee shall have the right to accept and act upon instructions, including funds transfer instructions ("'Instructions") given pursuant to this Indenture and delivered using Electronic Means. ("Electronic Means" shall mean the following communications methods: S.W.I.F.T., e-mail, facsimile transmission, secure electronic transmission containing applicable authorization codes, passwords and/or authentication keys issued by the Trustee, or another method or system specified by the Trustee as available for use in connection with its services hereunder). The District shall provide to the Trustee an incumbency certificate listing officers with the authority to provide such Instructions ("Authorized Officers'') and containing specimen signatures of such Authorized Officers, which incumbency certificate shall be amended by the District whenever a person is to be added or deleted from the listing. If the District elects to give the Trustee Instructions using Electronic Means and the Trustee in its discretion elects to act upon such Instructions, the Trustee's understanding of such Instructions shall be deemed controlling. The District understands and agrees 39 that the Trustee cannot determine the identity of the actual sender of such Instructions and that the Trustee shall conclusively presume that directions that purport to have been sent by an Authorized Officer listed on the incumbency certificate provided to the Trustee have been sent by such Authorized Officer. The District shall be responsible for ensuring that only Authorized Officers transmit such Instructions to the Trustee and that the District and all Authorized Officers are solely responsible to safeguard the use and confidentiality of applicable user and authorization codes, passwords and/or authentication keys upon receipt by the District. The Trustee shall not be liable for any losses, costs or expenses arising directly or indirectly from the Trustee's reliance upon and compliance with such Instructions notwithstanding such directions conflict or are inconsistent with a subsequent written instruction. The District agrees: (i) to assume all risks arising out of the use of Electronic Means to submit Instructions to the Trustee, including without limitation the risk of the Trustee acting on unauthorized Instructions, and the risk of interception and misuse by third parties; (ii) that it is fully informed of the protections and risks associated with the various methods of transmitting Instructions to the Trustee and that there may be more secure methods of transmitting Instructions than the method(s) selected by the District; (iii) that the security procedures (if any) to be followed in connection with its transmission of Instructions provide to it a commercially reasonable degree of protection in light of its particular needs and circumstances; and (iv) to notify the Trustee immediately upon learning of any compromise or unauthorized use of the security procedures. The permissive right of the Trustee to do things enumerated in this Indenture shall not be construed as a duty and it shall not be answerable for other than its negligence or willful misconduct. All immunities, indemnifications and releases from liability granted herein to the Trustee will extend to the directors, employees, officers and agents thereof. The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Owners pursuant to the provisions of this Indenture unless such Owners shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby. The Trustee shall not be responsible for or accountable to anyone for the subsequent use or application of any moneys which shall be released or withdrawn in accordance with the provisions hereof. The Trustee may execute any of the trusts or powers hereof and perform the duties required of it hereunder either directly or by or through attorneys or agents, shall not be liable for the acts or omissions of such attorneys or agents appointed with due care, and shall be entitled to rely on advice of counsel concerning all matters of trust and its duty hereunder. The Trustee, prior to the occurrence of an Event of Default and after the 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 Indenture. In case an Event of Default has occurred (which has not been cured) the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. The Trustee shall have no responsibility or liability with respect to any information, statements or recital in any offering memorandum or other disclosure material prepared or distributed with respect to the issuance of these Bonds. 40 The Trustee shall not be required to determine the legality of any investments. Section 7.5. Merger or Consolidation. Any company 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 to which the Trustee may sell or transfer all or substantially all of its corporate trust business, shall be the successor to the Trustee without the execution or filing of any paper or further act, anything herein to the contrary notwithstanding. ARTICLE VIII EVENTS OF DEFAULT; REMEDIES Section 8.1. Events of Default. Any one or more of the following events shall constitute an "'Event of Default'': (a) default in the due and punctual payment of the principal of or redemption premium, if any, on any Bond or Parity Bond when and as the same shall become due and payable, whether at maturity as therein expressed, by declaration or otherwise; (b) default in the due and punctual payment of the interest on any Bond or Parity Bond when and as the same shall become due and payable; or (c) except as described in (a) or (b), default shall by the District in the observance of any of the agreements, conditions or covenants on its part contained in this Indenture, the Bonds or any Parity Bonds, and such default shall have continued for a period of 30 days after the District shall have been given notice in writing of such default by the Trustee or the Owners of 25% in aggregate principal amount of the Outstanding Bonds and Parity Bonds; provided, however, that such default shall not constitute an Event of Default hereunder if the District shall commence to cure such default within said 30-day period and thereafter diligently and in good faith proceed to cure such default within a reasonable period of time not to exceed 90 days after such notice. The Trustee agrees to give notice to the Owners as soon as practicable upon the occurrence of an Event of Default under (a) or (b) above and within 30 days ofthe Trustee's knowledge of an event of default under (c) above. Section 8.2. Remedies of Owners. Upon the occurrence of an Event of Default, the Trustee may pursue any available remedy at law or in equity to enforce the payment of the principal of, premium, if any, and interest on the Outstanding Bonds and Parity Bonds, and to enforce any rights of the Trustee under or with respect to this Indenture, including: (a) by mandamus or other suit or proceeding at law or in equity to enforce the Trustee's rights against the District and any of the members, officers and employees of the District. and to compel the District or any such members, officers or employees to perform and carry out their duties under the Act and their agreements with the Owners as provided in this Indenture; (b) by suit in equity to enjoin any actions or things which are unlawful or violate the rights ofthe Owners; or 41 (c) by a sutt m equity to require the District and its members, officers and employees to account as the trustee of an express trust. If an Event of Default shall have occurred and be continuing and if requested so to do by the Owners of at least twenty-five percent (25%) in aggregate principal amount of Outstanding Bonds and Parity Bonds and if indemnified to its satisfaction, the Trustee shall be obligated to exercise such one or more of the rights and powers conferred by this Article VIII, as the Trustee, being advised by counsel, shall deem most expedient in the interests of the Owners of the Bonds and Parity Bonds. No remedy herein conferred upon or reserved to the Trustee or to the Owners is intended to be exclusive of any other remedy. 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, and may be exercised without exhausting and without regard to any other remedy conferred by the Act or any other law. Section 8.3. Application of Revenues and Other Funds After Default. All amounts received by the Trustee pursuant to any right given or action taken by the Trustee under the provisions of this Indenture relating to the Bonds and Parity Bonds shall be applied by the Trustee in the following order upon presentation of the several Bonds and Parity Bonds: First, to the payment of the fees, costs and expenses of the Trustee in declaring such Event of Default and in carrying out the provisions of this Article VIII, including reasonable compensation to its agents, attorneys and counsel, and to the payment of all other outstanding fees and expenses of the Trustee; and Second, to the payment ofthe whole amount of interest on and principal of the Bonds and Parity Bonds then due and unpaid, with interest on overdue installments of principal and interest to the extent permitted by law at the net effective rate of interest then borne by the Outstanding Bonds and Parity Bonds; provided, however, that in the event that such amounts shall be insufficient to pay the full amount of such interest and principal, then such amounts shall be applied in the following order of priority: (a) first to the payment of all installments of interest on the Bonds and Parity Bonds then due and unpaid on a pro rata basis based on the total amount then due and owing, (b) second, to the payment of all installments of principal, including Sinking Fund Payments, of the Bonds and Parity Bonds then due and unpaid on a pro rata basis based on the total amount then due and owing; and (c) third, to the payment of interest on overdue installments of principal and interest on the Bonds and Parity Bonds on a pro rata basis based on the total amount then due and ow mg. Section 8.4. 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 twenty-five percent (25%) in aggregate principal amount of the Bonds and Parity Bonds then Outstanding, it shall have full power, in the exercise of its discretion for the best interests of the Owners of the Bonds and Parity Bonds, with respect to the continuance, discontinuance, 42 withdrawal, compromise, settlement or other disposal of such action; provided, however, that the Trustee shall not, unless there no longer continues an Event of Default, discontinue, withdraw, compromise or settle, or otherwise dispose of any litigation pending at law or in equity, if at the time there has been filed with it a written request signed by the Owners of a majority in aggregate principal amount of the Outstanding Bonds and Parity Bonds hereunder opposing such discontinuance, withdrawal, compromise, settlement or other such litigation. Any suit, action or proceeding that any Owner of Bonds or Parity Bonds shall have the right to bring to enforce any right or remedy hereunder may be brought by the Trustee for the equal benefit and protection of all Owners of Bonds and Parity Bonds similarly situated and the Trustee is hereby appointed (and the successive respective Owners of the Bonds and Parity Bonds issued hereunder, by taking and holding the same, shall be conclusively deemed so to have appointed it) the true and lawful attorney in fact of the respective Owners of the Bonds and Parity Bonds for the purposes of bringing any such suit, action or proceeding and to do and perform any and all acts and things for and on behalf of the respective Owners of the Bonds and Parity Bonds as a class or classes, as may be necessary or advisable in the opinion of the Trustee as such attorney-in-fact. Section 8.5. Appointment of Receivers. Upon the occurrence of an Event of Default hereunder, and upon the filing of a suit or other commencement of judicial proceedings to enforce the rights of the Trustee and of the Owners of the Bonds and Parity Bonds under this Indenture, the Trustee shall be entitled, as a matter of right, to the appointment of a receiver or receivers of the Net Taxes and other amounts pledged hereunder, pending such proceedings, with such powers as the court making such appointment shall confer. Section 8.6. Non-Waiver. Nothing in this Article VIII or in any other provision of this Indenture, or in the Bonds or the Parity Bonds, shall affect or impair the obligation of the District, which is absolute and unconditional, to pay the interest on and principal of the Bonds and Parity Bonds to the respective Owners ofthe Bonds and Parity Bonds at the respective dates of maturity, as herein provided, out of the Net Taxes and other moneys herein pledged for such payment. A waiver of any default or breach of duty or contract by the Trustee or any Owners shall not affect any subsequent default or breach of duty or contract, or impair any rights or remedies on any such subsequent default or breach. No delay or omission of the Trustee or any Owner of any of the Bonds or Parity Bonds 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 of any such default or an acquiescence therein; and every power and remedy conferred upon the Trustee or the Owners by the Act or by this Article VIII may be enforced and exercised from time to time and as often as shall be deemed expedient by the Trustee or the Owners, as the case may be. Section 8.7. Limitations on Rights and Remedies of Owners. No Owner of any Bond or Parity Bond 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 Indenture, unless: (a) such Owner shall have previously given to the Trustee written notice of the occurrence of an Event of Default; (b) the Owners of a majority in aggregate principal amount of all the Bonds and Parity Bonds then Outstanding shall have made written request upon the Trustee to exercise the powers hereinbefore granted or to institute such action, suit or proceeding in its own name; (c) said Owners shall have tendered to the Trustee indemnity reasonably acceptable to the Trustee 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. 43 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 Bonds and Parity Bonds of any remedy hereunder; it being understood and intended that no one or more Owners of Bonds and Parity Bonds shall have any right in any manner whatever by their action to enforce any right under this Indenture, except in the manner herein provided, and that all proceedings at law or in equity to enforce any provision of this Indenture shall be instituted, had and maintained in the manner herein provided and for the equal benefit of all Owners of the Outstanding Bonds and Parity Bonds. The right of any Owner of any Bond and Parity Bond to receive payment of the principal of and interest and premium (if any) on such Bond and Parity Bond as herein provided or to institute suit for the enforcement of any such payment, shall not be impaired or affected without the written consent of such Owner, notwithstanding the foregoing provisions of this Section or any other provision ofthis Indenture. Section 8.8. Termination of Proceedings. In case the Trustee shall have proceeded to enforce any right under this Indenture by the appointment of a receiver or otherwise, and such proceedings shall have been discontinued or abandoned for any reason, or shall have been determined adversely, then and in every such case, the District, the Trustee and the Owners shall be restored to their former positions and rights hereunder, respectively, with regard to the property subject to this Indenture, and all rights, remedies and powers of the Trustee shall continue as if no such proceedings had been taken. ARTICLE IX DEFEASANCE AND PARITY BONDS Section 9.1. Defeasance. If the District shall pay or cause to be paid, or there shall otherwise be paid, to the Owner of an Outstanding Bond or Parity Bond the interest due thereon and the principal thereof, at the times and in the manner stipulated in this Indenture or any Supplemental Indenture, then the Owner of such Bond or Parity Bond shall cease to be entitled to the pledge of Net Taxes, and, other than as set forth below, all covenants, agreements and other obligations of the District to the Owner of such Bond or Parity Bond under this Indenture and any Supplemental Indenture relating to such Parity Bond shall thereupon cease, terminate and become void and be discharged and satisfied. In the event of a defeasance of all Outstanding Bonds and Parity Bonds pursuant to this Section, the Trustee shall execute and deliver to the District all such instruments as may be desirable to evidence such discharge and satisfaction, and the Trustee shall pay over or deliver to the District's general fund all money or securities held by it pursuant to this Indenture which are not required for the payment of the principal of, premium, if any, and interest due on such Bonds and Parity Bonds. Any Outstanding Bond or Parity Bond shall be deemed to have been paid within the meaning expressed in the first paragraph of this Section if such Bond or Parity Bond is paid in any one or more of the following ways: (a) by paying or causing to be paid the principal of, premium, if any, and interest on such Bond or Parity Bond, as and when the same become due and payable; (b) by depositing with the Trustee, in trust, at or before maturity, money which, together with the amounts then on deposit in the Special Tax Fund (exclusive of the Administrative Expenses 44 Account) and available for such purpose, is fully sufficient to pay the principal of, premium, if any, and interest on such Bond or Parity Bond, as and when the same shall become due and payable; or (c) by depositing with the Trustee or another escrow bank appointed by the District, in trust, Federal Securities, in which the District may lawfully invest its money, in such amount as will be sufficient, together with the interest to accrue thereon and moneys then on deposit in the Special Tax Fund (exclusive of the Administrative Expenses Account) and available for such purpose, together with the interest to accrue thereon, to pay and discharge the principal of, premium, if any, and interest on such Bond or Parity Bond, as and when the same shall become due and payable. If paid as provided above, then, at the election of the District, and notwithstanding that any Outstanding Bonds and Parity Bonds shall not have been surrendered for payment, all obligations of the District under this Indenture and any Supplemental Indenture with respect to such Bond or Parity Bond shall cease and terminate, except for the obligation of the Trustee to pay or cause to be paid to the Owners of any such Bond or Parity Bond not so surrendered and paid, all sums due thereon and except for the covenants of the District contained in Section 5.2(f) or any covenants in a Supplemental Indenture relating to compliance with the Code. Notice of such election shall be filed with the Trustee not less than ten days prior to the proposed defeasance date, or such shorter period of time as may be acceptable to the Trustee. In connection with a defeasance under clauses (b) or (c) above, there shall be provided to the District a verification report from an independent nationally recognized certified public accountant stating its opinion as to the sufficiency of the moneys or securities deposited with the Trustee or the escrow bank to pay and discharge the principal of, premium, if any, and interest on all Outstanding Bonds and Parity Bonds to be defeased in accordance with this Section, as and when the same shall become due and payable, and an opinion of Bond Counsel (which may rely upon the opinion ofthe certified public accountant) to the effect that the Bonds or Parity Bonds being defeased have been legally defeased in accordance with this Indenture and any applicable Supplemental Indenture. Upon a defeasance, the Trustee, upon request of the District, shall release the rights of the Owners of such Bonds and Parity Bonds that have been defeased under this Indenture and any Supplemental Indenture and execute and deliver to the District all such instruments as may be desirable to evidence such release, discharge and satisfaction. In the case of a defeasance hereunder of all Outstanding Bonds and Parity Bonds, the Trustee shall pay over or deliver to the District any funds held by the Trustee at the time of a defeasance that are not required for the purpose of paying and discharging the principal of or interest on the Bonds and Parity Bonds when due. The Trustee shall, at the written direction of the District, mail, first class, postage prepaid, a notice to the Bondowners whose Bonds or Parity Bonds have been defeased, in the form directed by the District, stating that the defeasance has occurred. Section 9.2. Conditions for the Issuance of Parity Bonds and Other Additional Indebtedness. The District may at any time after the issuance and delivery of the Bonds hereunder issue Parity Bonds payable from the Net Taxes and other amounts deposited in the Special Tax Fund (other than in the Administrative Expenses Account therein) and secured by a lien and charge upon such amounts equal to the lien and charge securing the Outstanding Bonds and any other Parity Bonds theretofore issued hereunder or under any Supplemental Indenture; provided, however, that Parity Bonds may only be issued for the purpose of refunding all or a pot1ion of the Bonds or any Parity Bonds then Outstanding. Parity Bonds may be issued subject to the following additional specific conditions, which are hereby made conditions precedent to the issuance of any such Parity Bonds: 45 (a) The District shall be in compliance with all covenants set forth in this Indenture and any Supplemental Indenture then in effect, and a certificate of the District to that effect shall have been filed with the Trustee; provided, however, that Parity Bonds may be issued notwithstanding the fact that the District is not in compliance with all such covenants so long as immediately following the issuance of such Parity Bonds the District will be in compliance with all such covenants. (b) The issuance of such Parity Bonds shall have been duly authorized pursuant to the Act and all applicable laws, and the issuance of such Parity Bonds shall have been provided for by a Supplemental Indenture duly adopted by the District which shall specify the following: ( l) the purpose for which such Parity Bonds are to be issued and the fund or funds into which the proceeds thereof are to be deposited, including a provision requiring the proceeds of such Parity Bonds to be applied solely for the purpose of refunding any Outstanding Bonds or Parity Bonds, including payment of all costs and the funding of all reserves incidental to or connected with such refunding; (2) the authorized principal amount of such Parity Bonds; (3) the date and the maturity date or dates of such Parity Bonds; provided that: (i) each maturity date shall fall on a September I; (ii) all such Parity Bonds of like maturity shall be identical in all respects, except as to number; and (iii) fixed serial maturities or Sinking Fund Payments, or any combination thereof, shall be established to provide for the retirement of all such Parity Bonds on or before their respective maturity dates; (4) the description of the Parity Bonds, the place of payment thereof and the procedure for execution and authentication; (5) the denominations and method of numbering of such Parity Bonds; (6) the amount and due date of each mandatory Sinking Fund Payment, if any, for such Parity Bonds; (7) the amount, if any, to be deposited from the proceeds of such Parity Bonds in the Reserve Account of the Special Tax Fund to increase the amount therein to the Reserve Requirement; (8) (9) with this Indenture. the form of such Parity Bonds; and such other provisions as are necessary or appropriate and not inconsistent (c) The Trustee shall have received the following documents or money or securities, all of such documents dated or certified, as the case may be, as of the Delivery Date of such Parity Bonds by the Trustee (unless the Trustee shall accept any of such documents bearing a prior date): (1) a certified copy of the Supplemental Indenture authorizing the issuance of such Parity Bonds; (2) a written request of the District as to the delivery of such Parity Bonds; 46 (3) an opinion of Bond Counsel to the effect that: (i) the District has the right and power under the Act to adopt this Indenture and the Supplemental Indentures relating to such Parity Bonds, and this Indenture and all such Supplemental Indentures have been duly and lawfully adopted by the District, are in full force and effect and are valid and binding upon the District and enforceable in accordance with their terms (except as enforcement may be limited by bankruptcy, insolvency, reorganization and other similar laws relating to the enforcement of creditors' rights); (ii) this Indenture creates the valid pledge which it purports to create of the Net Taxes and other amounts as provided in this Indenture, subject to the application thereof to the purposes and on the conditions permitted by this Indenture; and (iii) such Parity Bonds are valid and binding limited obligations of the District, enforceable in accordance with their terms (except as enforcement may be limited by bankruptcy, insolvency, reorganization and other similar laws relating to the enforcement of creditors' rights) and the terms of this Indenture and all Supplemental Indentures thereto and entitled to the benefits of this Indenture and all such Supplemental Indentures, and such Parity Bonds have been duly and validly authorized and issued in accordance with the Act (or other applicable laws) and this Indenture and all such Supplemental Indentures; and a further opinion of Bond Counsel to the effect that, assuming compliance by the District with certain tax covenants, the issuance of the Parity Bonds will not adversely affect the exclusion from gross income for federal income tax purposes of interest on the Bonds and any Parity Bonds theretofore issued on a tax-exempt basis, or the exemption from State of California personal income taxation of interest on any Outstanding Bonds and Parity Bonds theretofore issued; ( 4) a certificate of the District containing such statements as may be reasonably necessary to show compliance with the requirements of this Indenture; (5) as to Parity Bonds that are issued to refund the Bonds or other Parity Bonds, a certificate of an Independent Financial Consultant certifying that in each Bond Year the Annual Debt Service on the Bonds and Parity Bonds to remain Outstanding following the issuance of the Parity Bonds proposed to be issued is less than the Annual Debt Service on the Bonds and Parity Bonds Outstanding prior to the issuance of such Parity Bonds; (6) as to Parity Bonds that are being issued other than to refund the Bonds or other Parity Bonds, a certificate of the Special Tax administrator for the District certifying that: (i) the maximum Special Taxes that may be levied in each Fiscal Year are not less than 110% of the Annual Debt Service in the Bond Year that begins in such Fiscal Year; and (ii) the value of District property is not less than four ( 4) times the sum of direct debt for District property plus overlapping debt allocable to all property in the District that is subject to the Special Tax. For purposes of the foregoing certificate of the Special Tax administrator of the District, all calculations shall consider the Parity Bonds proposed to be issued to be Outstanding; and (7) such further documents, money and secunttes as are required by the provisions of this Indenture and the Supplemental Indenture providing for the issuance of such Parity Bonds. ARTICLE X MISCELLANEOUS Section 10.1. Cancellation of Bonds and Parity Bonds. All Bonds and Parity Bonds surrendered to the Trustee for payment upon maturity or for redemption shall be upon payment 47 therefor, and any Bond or Parity Bond purchased by the District as authorized herein and delivered to the Trustee for such purpose shall be, cancelled forthwith and shall not be reissued. The Trustee shall destroy such Bonds and Parity Bonds, as provided by law, and, upon request of the District, furnish to the District a certificate of such destruction. Section 10.2. Execution of Documents and Proof of Ownership. Any request, direction, consent, revocation of consent, or other instrument in writing required or permitted by this Indenture to be signed or executed by Bondowners 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 appointed by an instrument in writing for that purpose, or by the bank, trust company or other depository for such Bonds. Proof of the execution of any such instrument, or of any instrument appointing any such attorney, and of the ownership of Bonds or Parity Bonds shall be sufficient for the purposes of this Indenture (except as otherwise herein provided), if made in the following manner: (a) The fact and date of the execution by any Owner or his or her attorney of any such instrument and of any instrument appointing any such attorney, may be proved by a signature guarantee of any bank or trust company located within the United States of America. 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 signature guarantee shall also constitute sufficient proof of his authority. (b) As to any Bond or Parity Bond, the person in whose name the same shall be registered in the Bond Register shall be deemed and regarded as the absolute owner thereof for all purposes, and payment of or on account of the principal of any such Bond or Parity Bond, and the interest thereon, shall be made only to or upon the order of the registered Owner thereof or his or her legal representative. All such payments shall be valid and effectual to satisfy and discharge the liability upon such Bond or Parity Bond and the interest thereon to the extent of the sum or sums to be paid. Neither the District nor the Trustee shall be affected by any notice to the contrary. Nothing contained in this Indenture shall be construed as limiting the Trustee or the District to such proof, it being intended that the Trustee or the District may accept any other evidence of the matters herein stated which the Trustee or the District may deem sufficient. Any request or consent of the Owner of any Bond or Parity Bond shall bind every future Owner of the same Bond or Parity Bond in respect of anything done or suffered to be done by the Trustee or the District in pursuance of such request or consent. Section 10.3. Unclaimed Moneys. Anything in this Indenture to the contrary notwithstanding, any money held by the Trustee in trust for the payment and discharge of any of the Outstanding Bonds and Parity Bonds that remains unclaimed for two years after the date when such Outstanding Bonds or Parity Bonds have become due and payable, if such money was held by the Trustee at such date, or for two years after the date of deposit of such money if deposited with the Trustee after the date when such Outstanding Bonds or Parity Bonds become due and payable, shall be repaid by the Trustee to the District as its absolute property free from trust, and the Trustee shall thereupon be released and discharged with respect thereto and the Owners shall look only to the District for the payment of such Outstanding Bonds or Parity Bonds; provided, however, that, before being required to make any such payment to the District, the Trustee, at the expense of the District, shall cause to be mailed by first-class mail, postage prepaid, to the registered Owners of such Outstanding Bonds or Parity Bonds at their addresses as they appear on the registration books of the Trustee a notice that said money remains unclaimed and that, after a date named in said notice, which 48 date shall not be less than 30 days after the date of the mailing of such notice, the balance of such money then unclaimed will be returned to the District. Section 10.4. Provisions Constitute Contract. The provisiOns of this Indenture shall constitute a contract between the District and the Bondowners and the provisions hereof shall be construed in accordance with the laws of the State of California. In case any suit, action or proceeding to enforce any right or exercise any remedy shall be brought or taken and, should said suit, action or proceeding be abandoned, or be determined adversely to the Bondowners or the Trustee, then the District, the Trustee and the Bondowners shall be restored to their former positions, rights and remedies as if such suit, action or proceeding had not been brought or taken. After the issuance and delivery of the Bonds this Indenture shall be irrepealable, but shall be subject to modifications to the extent and in the manner provided in this Indenture, but to no greater extent and in no other manner. Section 10.5. Future Contracts. Nothing herein contained shall be deemed to restrict or prohibit the District from making contracts or creating bonded or other indebtedness payable from a pledge of the Net Taxes which is subordinate to the pledge hereunder, or which is payable from the general fund of the District or from taxes or any source other than the Net Taxes and other amounts pledged hereunder. Section 10.6. Further Assurances. The District will adopt, make, execute and deliver any and all such further resolutions, instruments and assurances as may be reasonably necessary or proper to carry out the intention or to facilitate the performance of this Indenture, and for the better assuring and confirming unto the Owners of the Bonds or any Parity Bonds the rights and benefits provided in this Indenture. Section 10.7. Severability. If any covenant, agreement or provision, or any portion thereof, contained in this Indenture, or the application thereof to any person or circumstance, is held to be unconstitutional, invalid or unenforceable, the remainder of this Indenture and the application of any such covenant, agreement or provision, or portion thereot to other persons or circumstances, shall be deemed severable and shall not be affected thereby, and this Indenture, the Bonds and any Parity Bonds issued pursuant hereto shall remain valid and the Bondowners shall retain all valid rights and benefits accorded to them under the laws oft he State of California. Section 10.8. Notices. Any notices required to be given to the District with respect to the Bonds or this Indenture shall be mailed, first class, postage prepaid, or personally delivered to the Administrative Services Director of the City of Carlsbad, 1635 Faraday A venue, Carlsbad, California 92008, and all notices to the Trustee in its capacity as Trustee shall be mailed, first class, postage prepaid, or personally delivered to The Bank ofNew York Mellon Trust Company, N.A., 400 South Hope Street, Suite 400, Los Angeles, California 90071; Attention: Corporate Trust Department. 49 IN WITNESS WHEREOF, the District has caused this Indenture to be signed by the Mayor of the City, acting as the legislative body of the District and attested thereto by the City Clerk of the City, and the Trustee, in token of its acceptance of the trust created hereunder, has caused this Indenture to be signed in its corporate name by its officer identified below, all as of the day and year first above written. ATTEST: CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO. 3 By: May0t·'.·qf.:. the City Jt· Carlsbad, California, acting as the legislative body of City of Carlsbad Community Facilities District No. 3 City Clerk of the of the City of Carlsbad, California, acting as the legislative body of City of Carlsbad Community Facilities District No.3 THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee By: Its: Authorized Officer S-1 R-1 EXHIBIT A FORM OF 2016 SPECIAL TAX REFUNDING BOND $ ___ _ UNLESS THIS BOND IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY (AS SUCH TERM IS DEFINED IN THE INDENTURE) TO THE BOND REGISTRAR FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY BOND ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. UNITED STATES OF AMERICA STATE OF CALIFORNIA COUNTY OF SAN DIEGO CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO.3 2016 SPECIAL TAX REFUNDING BONDS (IMPROVEMENT AREA 1) INTEREST RATE MATURITY DATE DATED DATE CUSIP % September I, 20 _ July_, 2016 REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: MILLION THOUSAND DOLLARS AND NO/I 00 DOLLARS CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO.3 (the "'District") which was formed by the City of Carlsbad (the "City") and is situated in the County of San Diego, State of California, FOR VALUE RECEIVED, hereby promises to pay, solely from certain amounts held under the Indenture (as such term is defined herein), to the Registered Owner named above, or registered assigns, on the Maturity Date set forth above, unless redeemed prior thereto as hereinafter provided, the Principal Amount set forth above, and to pay interest on such Principal Amount from the Interest Payment Date (as such term is defined herein) next preceding the date of authentication hereoC unless: (i) the date of authentication is an Interest Payment Date, in which event interest shall A-I be payable from such date of authentication; (ii) the date of authentication is after a Record Date (as such term is defined herein) but prior to the immediately succeeding Interest Payment Date, in which event interest shall be payable from the Interest Payment Date immediately succeeding the date of authentication; or (iii) the date of authentication is prior to the close of business on the first Record Date in which event interest shall be payable from the Dated Date set forth above. Notwithstanding the foregoing, if at the time of authentication of this Bond interest is in default, interest on this Bond shall be payable from the last Interest Payment Date to which the interest has been paid or made available for payment or, if no interest has been paid or made available for payment, interest on this Bond shall be payable from the Dated Date set forth above. Interest will be paid semiannually on each March 1 and September 1 (each, an "Interest Payment Date"), commencing __ 1, 20 _, at the Interest Rate set forth above, until the Principal Amount hereof is paid or made available for payment. The principal of and premium, if any, on this Bond are payable to the Registered Owner hereof in lawful money of the United States of America upon presentation and surrender of this Bond at the Principal Office of the Trustee, initially The Bank of New York Mellon Trust Company, N .A. (the "Trustee"). Interest on this Bond shall be paid on each Interest Payment Date by check of the Trustee mailed by first class mail, postage prepaid, or in certain circumstances described in the Indenture by wire transfer to an account within the United States of America, to the Registered Owner hereof appearing on the registration books maintained by the Trustee as of the close of business on the fifteenth day of the month preceding the month in which the Interest Payment Date occurs (the "Record Date") at such Registered Owner's address as it appears on the registration books maintained by the Trustee. Capitalized terms used herein and not defined shall have the meanings given them in the Indenture. This Bond is one of a duly authorized issue of "City of Carlsbad Community Facilities District No. 3 2016 Special Tax Refunding Bonds (Improvement Area 1 )" (the "Bonds") issued in the aggregate principal amount of$ pursuant to the Mello-Roos Community Facilities Act of 1982, as amended, being Sections 53311, et seq., of the California Government Code (the ''AcC) for the purpose of refunding the District's outstanding 2006 Special Tax Bonds (Improvement Area 1 ), funding a reserve account and paying certain costs related to the issuance of the Bonds. The issuance of the Bonds and the terms and conditions thereof are provided for by a resolution adopted by the City Council of the City, acting in its capacity as the legislative body of the District (the ''Legislative Body") on ___ , 2016 and a Bond Indenture dated as of July I, 2016, by and between the District and the Trustee executed in connection therewith (the "Indenture"), and this reference incorporates the Indenture herein, and by acceptance hereof the Registered Owner of this Bond assents to said terms and conditions. The Indenture is executed under and this Bond is issued under, and both are to be construed in accordance with, the laws ofthe State of California. Pursuant to the Act and the Indenture, the principal of, premium, if any, and interest on this Bond are payable solely from the portion of the annual special taxes authorized under the Act to be levied and collected within Improvement Area 1 of the District (the "Special Taxes'') and certain other amounts pledged to the repayment of the Bonds as set forth in the Indenture. Any amounts for the payment hereof shall be limited to the Special Taxes pledged and collected or foreclosure proceeds received following a default in payment of the Special Taxes and other amounts deposited to the Special Tax Fund (other than the Administrative Expenses Account therein) established under A-2 the Indenture, except to the extent that other provision for payment has been made by the Legislative Body, as may be permitted by law. The District has covenanted for the benefit of the owners of the Bonds that under certain circumstances described in the Indenture it will commence and diligently pursue to completion foreclosure proceedings in the event of delinquencies of Special Tax installments levied for payment of principal and interest on the Bonds. The Bonds may be redeemed, at the option of the District from any source of funds on any date on or after __ I, 20_, in whole or in part by lot, at a redemption price equal to the principal amount thereof, together with accrued interest to the date of redemption, without premium. The Term Bonds maturing on September I, 20_ shall be called before maturity and redeemed, from Sinking Fund Payments that have been deposited into the Redemption Account, on September I, 20 _, and on each September I thereafter prior to maturity, in accordance with the schedule of Sinking Fund Payments set forth in the Indenture at a redemption price equal to the principal amount thereof, plus accrued interest to the redemption date, without premium. The Bonds are subject to extraordinary redemption as a whole, or in part by lot, on any Interest Payment Date, and shall be redeemed by the Trustee, from prepayments of Special Taxes deposited to the Redemption Account plus amounts transferred from the Reserve Account in connection with such transfers, at the following redemption prices expressed as a percentage of the principal amount to be redeemed, together with accrued interest to the redemption date: Redemption Date Any Interest Payment Date through I, 20 I, 20 and I, 20 I, 20 and I, 20 __ I, 20_ and any Interest Payment Date thereafter Redemption Price 103% 102 I 01 100 Notice of redemption with respect to the Bonds to be redeemed shall be mailed to the registered owners thereof not less than 30 nor more than 45 days prior to the redemption date by first class mail, postage prepaid, to the addresses set forth in the registration books. Neither a failure of the Registered Owner hereof to receive such notice nor any defect therein will affect the validity of the proceedings for redemption. All Bonds or portions thereof so called for redemption will cease to accrue interest on the specified redemption date, provided that funds for the redemption are on deposit with the Trustee on the redemption date. Thereafter, the registered owners of such Bonds shall have no rights except to receive payment of the redemption price upon the surrender of the Bonds. This Bond shall be registered in the name of the Registered Owner hereof, as to both principal and interest, and the District and the Trustee may treat the Registered Owner hereof as the absolute owner for all purposes and shall not be affected by any notice to the contrary. The Bonds are issuable only in fully registered form in the denomination of $5,000 or any integral multiple thereof and may be exchanged for a like aggregate principal amount of Bonds of other authorized denominations of the same issue and maturity, all as more fully set forth in the Indenture. This Bond is transferable by the Registered Owner hereof, in person or by his attorney duly authorized in writing, at the Principal Office of the Trustee, but only in the manner, subject to A-3 the limitations and upon payment of the charges provided in the Indenture, upon surrender and cancellation of this Bond. Upon such transfer, a new registered Bond of authorized denomination or denominations for the same aggregate principal amount of the same issue and maturity will be issued to the transferee in exchange therefor. Notwithstanding the foregoing, an Owner may only transfer the Bonds so long as all Outstanding Bonds are transferred together to a new Owner who has delivered an Investor Letter to the District. The Trustee shall not be required to register transfers or make exchanges of: (i) any Bonds for a period of 15 days next preceding any selection of the Bonds to be redeemed; or (ii) any Bonds chosen for redemption. The rights and obligations of the District and of the registered owners of the Bonds may be amended at any time, and in certain cases without notice to or the consent of the registered owners, to the extent and upon the terms provided in the Indenture. THE BONDS DO NOT CONSTITUTE OBLIGATIONS OF THE CITY OF CARLSBAD OR OF THE DISTRICT FOR WHICH THE CITY OF CARLSBAD OR THE DISTRICT IS OBLIGATED TO LEVY OR PLEDGE, OR HAS LEVIED OR PLEDGED, GENERAL OR SPECIAL TAXES, OTHER THAN THE SPECIAL TAXES REFERENCED HEREIN. THE BONDS ARE LIMITED OBLIGATIONS OF THE DISTRICT PAY ABLE FROM THE PORTION OF THE SPECIAL TAXES AND OTHER AMOUNTS PLEDGED UNDER THE INDENTURE BUT ARE NOT A DEBT OF THE CITY OF CARLSBAD, THE STATE OF CALIFORNIA OR ANY OF ITS POLITICAL SUBDIVISIONS WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY LIMITATION OR RESTRICTION. This Bond shall not become valid or obligatory for any purpose until the certificate of authentication and registration hereon endorsed shall have been dated and signed by the Trustee. IT IS HEREBY CERTIFIED, RECITED AND DECLARED that all acts, conditions and things required by law to exist, happen and be performed precedent to and in the issuance of this Bond do exist, have happened and have been performed in due time, form and manner as required by law, and that the amount of this Bond, together with all other indebtedness of the District, does not exceed any debt limit prescribed by the laws or Constitution of the State of California. IN WITNESS WHEREOF, the District has caused this Bond to be dated as of the Dated Date, to be signed on behalf of the District by the Mayor of the City by his facsimile signature and attested by the facsimile signature of the City Clerk of the City. ATTEST: A-4 Mayor' ~--the C1ty of Carlsbad, California, acting as the legislative body of City of Carlsbad Community Facilities District No.3 City Clerk of the City of Carlsbad, California, acting in its capacity as the legislative body of City of Community Facilities District No. 3 A-5 [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION AND REGISTRATION] This is one ofthe Bonds described in the within-defined Indenture. Dated: July_, 2016 THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee By: Its: Authorized Signatory [FORM OF LEGAL OPINION] The following is a true copy ofthe opinion rendered by Stradling Yocca Carlson & Rauth, a Professional Corporation, in connection with the issuance of, and dated as ofthe date of the original delivery of, the Bonds. A signed copy is on file in my office. City Clerk of the City of Carlsbad, California, acting in its capacity as the legislative body of City of Community Facilities District No. 3 A-6 [FORM OF ASSIGNMENT] For value received the undersigned hereby sells, assigns and transfers unto (Name, Address, and Tax Identification or Social Security Number of Assignee) the within-mentioned Bond and hereby irrevocably constitute(s) and appoint(s) __________________________________ attorney, to transfer the same on the Registration Books of the Trustee with full power of substitution in the premtses. Dated: Signature Guaranteed: Note: Signature(s) must be guaranteed by an eligible guarantor institution. Note: The signature(s) on this Assignment must correspond with the name(s) as written on the face ofthe within Bond in every particular without alteration or enlargement or any change whatsoever. A-7 Section 2.1. Section 2.2. Section 2.3. Section 2.4. Section 2.5. Section 2.6. Section 2. 7. Section 2.8. Section 2.9. Section 2.1 0. Section 2.11. Section 2.12. Section 2.13. Section 3.1. Section 3.2. Section 3.3. Section 3.4. Section 3.5. Section 3.6. Section 3.7. Section 3.8. Section 3.9. Section 3.1 0. Table of Contents ARTICLE I DEFINITIONS Unless the context otherwise requires, the following terms shall have the following meanings: ...................................................................................................... I ARTICLE II GENERAL AUTHORIZATION AND BOND TERMS Amount, Issuance, Purpose and Nature of Bonds and Parity Bonds .......................... II Type and Nature of Bonds and Parity Bonds .............................................................. II Equality of Bonds and Parity Bonds and Pledge ofNet Taxes ................................... l2 Description of Bonds; Interest Rates ........................................................................... 12 Place and Form of Payment ........................................................................................ 14 Form of Bonds and Parity Bonds ................................................................................ 14 Execution and Authentication ..................................................................................... 15 Bond Register .............................................................................................................. 15 Registration of Exchange or Transfer ......................................................................... 15 Mutilated, Lost, Destroyed or Stolen Bonds or Parity Bonds ..................................... 16 Validity of Bonds and Parity Bonds ............................................................................ 16 Book Entry System ..................................................................................................... 16 Initial Depository and Nominee .................................................................................. 19 ARTICLE III CREATION OF FUNDS AND APPLICATION OF PROCEEDS Creation of Funds; Application of Proceeds ............................................................... 19 Deposits to and Disbursements from Special Tax Fund ............................................. 20 Administrative Expenses Account ofthe Special Tax Fund ....................................... 20 Interest Account and Principal Account of the Special Tax Fund .............................. 21 Redemption Account ofthe Special Tax Fund ........................................................... 21 Reserve Account ofthe Special Tax Fund .................................................................. 22 Rebate Fund ................................................................................................................ 23 Surplus Fund ............................................................................................................... 26 Costs of Issuance Fund ................................................................................................ 26 Investments ................................................................................................................. 26 ARTICLE IV REDEMPTION OF BONDS AND PARITY BONDS Section 4.1. Redemption of Bonds .................................................................................................. 28 Section 4.2. Selection of Bonds and Parity Bonds for Redemption ................................................ 29 Section 4.3. Notice of Redemption ................................................................................................. 29 Section 4.4. Section 4.5. Table of Contents (continued) Partial Redemption of Bonds or Parity Bonds ............................................................ 30 Effect ofNotice and Availability of Redemption Money ........................................... 31 ARTICLE V COVENANTS AND WARRANTY Section 5 .1. Security ....................................................................................................................... 31 Section 5.2. Covenants .................................................................................................................... 31 ARTICLE VI AMENDMENTS TO INDENTURE Section 6.1. Supplemental Indentures or Orders Not Requiring Bondowner Consent ................... 35 Section 6.2. Supplemental Indentures or Orders Requiring Bondowner Consent.. ........................ 36 Section 6.3. Notation of Bonds or Parity Bonds; Delivery of Amended Bonds or Parity Bonds .......................................................................................................................... 36 ARTICLE VII TRUSTEE Section 7.1. Trustee ......................................................................................................................... 37 Section 7 .2. Removal of Trustee ..................................................................................................... 3 8 Section 7.3. Resignation of Trustee ................................................................................................ 38 Section 7.4. Liability ofTrustee ...................................................................................................... 38 Section 7.5. Merger or Consolidation ............................................................................................ .41 Section 8.1. Section 8.2. Section 8.3. Section 8.4. Section 8.5. Section 8.6. Section 8.7. Section 8.8. ARTICLE VIII EVENTS OF DEFAULT; REMEDIES Events of Default. ........................................................................................................ 41 Remedies of Owners ................................................................................................... 41 Application of Revenues and Other Funds After Default.. ........................................ .42 Power of Trustee to Control Proceedings .................................................................. .42 AppointJnent of Receivers ........................................................................................... 43 Non-Waiver ................................................................................................................. 43 Limitations on Rights and Remedies of Owners ........................................................ .43 Termination of Proceedings ........................................................................................ 44 ARTICLE IX DEFEASANCE AND PARITY BONDS Section 9.1. Defeasance .................................................................................................................. 44 11 Table of Contents (continued) Section 9.2. Conditions for the Issuance of Parity Bonds and Other Additional Indebtedness ................................................................................................................ 45 ARTICLE X MISCELLANEOUS Section 1 0.1. Cancellation of Bonds and Parity Bonds ................................................................... .4 7 Section 1 0.2. Execution of Documents and Proof of Ownership ...................................................... 48 Section 1 0.3. Unc1ai1ned Moneys ..................................................................................................... 48 Section 1 0.4. Provisions Constitute Contract.. ................................................................................. .49 Section 10.5. Future Contracts .......................................................................................................... 49 Section I 0.6. Further Assurances ...................................................................................................... 49 Section I 0.7. Severability ................................................................................................................. 49 Section 1 0.8. Notices ........................................................................................................................ 49 EXHIBIT A FORM OF 2016 SPECIAL TAX REFUNDING BOND .......................................... A-1 Ill EXHIBIT4 Stradling Yocca Carlson & Rauth Draft of61 I 61! 6 ESCROW AGREEMENT (2006 BONDS) THIS ESCROW AGREEMENT (2006 BONDS), dated as of July 1, 2016 (the ''Agreement"), by and between City of Carlsbad Community Facilities District No. 3 (the "District") and The Bank ofNew York Mellon Trust Company, N.A., as escrow agent (the ''Escrow Agent") and as 2006 Fiscal Agent (as such term is defined herein), is entered into in accordance with Resolution No. _ of the District adopted on June 28, 2016 and a Fiscal Agent Agreement, dated as of May 1, 2006 (the "2006 Fiscal Agent Agreement"), by and between the City of Carlsbad (the "City"), for and on behalfofthe District, and The Bank ofNew York Mellon Trust Company, N.A., formerly known as The Bank of New York Trust Company, N.A., as fiscal agent (the "2006 Fiscal Agent''), to refund the outstanding 2006 Special Tax Bonds (Improvement Area I) (the "2006 Bonds"). RECITALS A. Pursuant to the 2006 Fiscal Agent Agreement, the District has previously caused the 2006 Bonds to be issued in the aggregate principal amount of $11,490,000, of which $9,615,000 is currently outstanding. B. The District has determined that a portion of the proceeds of the $ __ aggregate principal amount of the 2016 Special Tax Refunding Bonds (Improvement Area I) (the "Bonds") issued pursuant to a Bond Indenture, dated as of July I, 2016, by and between the District and The Bank ofNew York Mellon Trust Company, N.A., as trustee (the "Trustee"), will be used to provide a portion of the funds to pay all regularly scheduled payments of principal of and interest on the 2006 Bonds on September I, 2016, and to pay on September I, 2016 the principal of the 2006 Bonds maturing after September 1, 2016, plus interest thereon accrued to such date, without premium (the ''Redemption Price"). C. The District will irrevocably deposit moneys with the Escrow Agent (as permitted by, in the manner prescribed by and all in accordance with the 2006 Fiscal Agent Agreement), which moneys will be used to [purchase the securities] that are described on Schedule A (the ''Federal Securities''). Such Federal Securities constitute "Defeasance Securities" that satisfy the criteria set forth in Section 9.03 of the 2006 Fiscal Agent Agreement, and the principal of and interest on such Federal Securities when paid will provide money which, together with the moneys deposited with the Escrow Agent at the same time pursuant to this Agreement, will be fully sufficient to pay and discharge the 2006 Bonds. AGREEMENT SECTION I. Deposit of Moneys. The District hereby instructs the Escrow Agent to deposit $ __ received from the Trustee from the net proceeds of the Bonds in the Escrow Fund established hereunder. The District hereby further instructs the 2006 Fiscal Agent to transfer to the Escrow Agent$ __ , constituting certain amounts on deposit in the funds and accounts established under the 2006 Fiscal Agent Agreement, which amount the District instructs the Escrow Agent to deposit in the Escrow Fund. The Escrow Agent shall hold all such amounts in irrevocable escrow separate and apart from other funds of the District and the Escrow Agent in a fund hereby created and established to be known as the "Escrow Fund" and to be applied solely as provided in this Agreement. The District represents that the moneys set forth above are at least equal to an amount sufficient to purchase the Federal Securities listed on Schedule A, and to hold$ __ uninvested as cash. SECTION 2. Investment of Moneys. The Escrow Agent acknowledges receipt of the moneys described in Section 1 and agrees immediately to invest such moneys in the Federal Securities listed on Schedule A and to deposit such Federal Securities in the Escrow Fund. The Escrow Agent shall be entitled to rely upon the conclusion of Grant Thornton LLP, Minneapolis, Minnesota (the "Verification Agent"), that the Federal Securities listed on Schedule A mature and bear interest payable in such amounts and at such times as, together with cash on deposit in the Escrow Fund, will be sufficient to pay all regularly scheduled payments of principal of and interest on the 2006 Bonds on September I, 2016, and to pay on September I, 2016 the Redemption Price of the 2006 Bonds maturing after September 1, 2016. [NOTE: VERIFICATION NOT REQUIRED IF FUNDS NOT INVESTED]. SECTION 3. Investment of Any Remaining Moneys. At the written direction of the District, the Escrow Agent shall reinvest any other amount of principal and interest, or any portion thereof, received from the Federal Securities prior to the date on which such payment is required for the purposes set forth herein, in noncallable Federal Securities maturing not later than the date on which such payment or portion thereof is required for the purposes set forth in Section 5, at the written direction of the District, as verified in a report prepared by an independent certified public accountant or firm of certified public accountants of favorable national reputation experienced in the refunding of obligations of political subdivisions to the effect that the reinvestment described in said report will not adversely affect the sufficiency of the amounts of securities, investments and money in the Escrow Fund to pay all regularly scheduled payments of principal of and interest on the 2006 Bonds on September 1, 2016, and to pay on September 1, 2016 the Redemption Price of the 2006 Bonds maturing after September I, 2016, and provided that the District has obtained and delivered to the Escrow Agent an unqualified opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, that such reinvestment will not adversely affect the exclusion from gross income for federal income tax purposes of interest on the 2006 Bonds or the Bonds. Any interest income resulting from investment or reinvestment of moneys pursuant to this Section 3 which are not required for the purposes set forth in Section 5, as verified in the letter of the Verification Agent originally obtained by the District with respect to the refunding of the 2006 Bonds or in any other report prepared by an independent certified public accountant or firm of certified public accountants of favorable national reputation experienced in the refunding of tax-exempt obligations of political subdivisions, shall be paid to the District promptly upon the receipt of such interest income by the Escrow Agent. The determination of the District as to whether an accountant qualifies under this Escrow Agreement shall be conclusive. SECTION 4. Substitution of Securities. Upon the written request of the District, and subject to the conditions and limitations herein set forth and applicable governmental rules and regulations, the Escrow Agent shall sell, redeem or otherwise dispose of the Federal Securities, provided that there are substituted therefor from the proceeds of the Federal Securities other Federal Securities, but only after the District has obtained and delivered to the Escrow Agent: (i) an unqualified opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, to the effect that the substitution of securities is permitted under the legal documents in effect with respect to the 2006 Bonds and that such reinvestment will not adversely affect the exclusion from gross income for federal income tax purposes of interest on the 2006 Bonds or the Bonds; and (ii) a report by a firm of independent certified public accountants to the effect that the reinvestment described in said report 2 will not adversely affect the sufficiency of the amounts of securities, investments and money in the Escrow Fund to pay all regularly scheduled payments of principal of and interest on the 2006 Bonds on September 1, 2016, and to pay on September l, 2016 the Redemption Price of the 2006 Bonds maturing after September 1, 2016. The Escrow Agent shall not be liable or responsible for any loss resulting from any reinvestment made pursuant to this Agreement and in full compliance with the provisions hereof. SECTION 5. Payment of2006 Bonds. (a) Payment. From the maturing principal of the Federal Securities and the investment income and other earnings thereon and other moneys on deposit in the Escrow Fund, the Escrow Agent shall, on September 1, 2016, apply the amounts on deposit in the Escrow Fund to pay: (i) all regularly scheduled payments of principal of and interest on the 2006 Bonds on September I, 2016; and (ii) the Redemption Price ofthe 2006 Bonds maturing after September 1, 2016. (b) Irrevocable Instructions to Provide Notice. The forms of the notices required to be mailed pursuant to Sections 2.03(F) and 9.03 of the 2006 Fiscal Agent Agreement are substantially in the forms attached hereto as Exhibits A and ~-The District hereby irrevocably instructs the Escrow Agent to mail a notice of redemption and a notice of defeasance of the 2006 Bonds in accordance with Sections 2.03(F) and 9.03, respectively, of the 2006 Fiscal Agent Agreement, as required to provide for the redemption of the 2006 Bonds in accordance with this Section 5. (c) Unclaimed Moneys. Any moneys in the Escrow Fund which remain unclaimed for two years after September 1, 2016 shall be repaid by the Escrow Agent to the District. (d) Priority of Payments. The owners of the 2006 Bonds shall have a first and exclusive lien on all moneys and securities in the Escrow Fund until such moneys and such securities are used and applied as provided in this Agreement. (e) Tennination of Obligation. As provided in the 2006 Fiscal Agent Agreement, upon the deposit of moneys with the Escrow Agent in the Escrow Fund as set forth in Section I and the purchase of the various Federal Securities as provided in Section 2, the pledge of the Special Tax Revenues (as such term is defined in the 2006 Fiscal Agent Agreement) and other funds provided for in the 2006 Fiscal Agent Agreement and all other obligations of the City and the District under the 2006 Fiscal Agent Agreement with respect to the 2006 Bonds shall cease and terminate, except as set forth in the 2006 Fiscal Agent Agreement. SECTION 6. Application of Certain Terms ofthe 2006 Fiscal Agent Agreement. All ofthe terms of the 2006 Fiscal Agent Agreement relating to the making of payments of principal and interest with respect to the 2006 Bonds and relating to the exchange or transfer of the 2006 Bonds are incorporated in this Agreement as if set forth in full herein. The procedures set forth in Article VII of the 2006 Fiscal Agent Agreement relating to the resignation, removal and merger of the 2006 Fiscal Agent under the 2006 Fiscal Agent Agreement are also incorporated in this Agreement as if set forth in full herein and shall be the procedures to be followed with respect to any resignation or removal of the Escrow Agent hereunder. 3 SECTION 7. Performance of Duties. The Escrow Agent agrees to perform only the duties set forth herein and shall have no responsibility to take any action or omit to take any action not set forth herein. SECTION 8. Escrow Agent's Authority to Make Investments. Except as provided in Section 2 hereof, the Escrow Agent shall have no power or duty to invest any funds held under this Agreement or to sell, transfer or otherwise dispose of the moneys or Federal Securities held hereunder. SECTION 9. Indemnity. The District hereby assumes liability for, and hereby agrees (whether or not any of the transactions contemplated hereby are consummated) to indemnify, protect, save and keep harmless the Escrow Agent and its respective successors, assigns, agents, employees and servants, from and against any and all liabilities, obligations, losses, damages, penalties, claims, actions, suits, costs, expenses and disbursements (including reasonable legal fees and disbursements) of whatsoever kind and nature that may be imposed on, incurred by or asserted against the Escrow Agent at any time (whether or not also indemnified against the same by the District or any other person under any other agreement or instrument, but without double indemnity) in any way relating to or arising out of the execution, delivery and performance of this Agreement, the establishment hereunder of the Escrow Fund, the acceptance of the funds and securities deposited therein, the retention of the proceeds thereof and any payment, transfer or other application of moneys or securities by the Escrow Agent in accordance with the provisions of this Agreement; provided, however, that the District shall not be required to indemnify the Escrow Agent against the Escrow Agent's own negligence or willful misconduct, the negligence or willflil misconduct of the Escrow Agent's respective employees or the willful breach by the Escrow Agent of the terms of this Agreement. In no event shall the District or the Escrow Agent be liable to any person by reason of the transactions contemplated hereby other than to each other as set forth in this Section. The indemnities contained in this Section shall survive the termination ofthis Agreement. SECTION I 0. Responsibilities of Escrow Agent. The Escrow Agent and its agents and servants shall not be held to any personal liability whatsoever, in tort, contract, or otherwise, in connection with the execution and delivery of this Agreement, the establishment of the Escrow Fund, the acceptance of the moneys or securities deposited therein, the retention of the Federal Securities or the proceeds thereof, the sufficiency of the Federal Securities to pay the 2006 Bonds or any payment, transfer or other application of moneys or obligations by the Escrow Agent in accordance with the provisions of this Agreement or by reason of any non-negligent act, non-negligent omission or non-negligent error of the Escrow Agent made in good faith in the conduct of its duties. The recitals of fact contained herein shall be taken as the statements of the District, and the Escrow Agent assumes no responsibility for the correctness thereof. The Escrow Agent makes no representation as to the sufficiency of the proceeds to accomplish the reflinding of the 2006 Bonds or to the validity of this Agreement as to the District and, except as otherwise provided herein, the Escrow Agent shall incur no liability in respect thereof. The Escrow Agent shall not be liable in connection with the performance of its duties under this Agreement except for its own negligence, willful misconduct or default, and the duties and obligations of the Escrow Agent shall be determined by the express provisions of this Agreement. The Escrow Agent may consult with counsel, who may or may not be counsel to the District, and in reliance upon the written opinion of such counsel shall have full and complete authorization and protection in respect of any action taken, suffered or omitted by it in good faith in accordance therewith. Whenever the Escrow Agent shall deem it necessary or desirable that a matter be proved or established prior to taking, suffering, or omitting any action under this 4 Agreement, such matter may be deemed to be conclusively established by a certificate signed by an officer of the District. The District acknowledges that to the extent that regulations of the Comptroller of the Currency or other applicable regulatory entity grant the District the right to receive brokerage confirmations of security transactions as they occur, the District specifically waives receipt of such confirmations to the extent permitted by law. The Escrow Agent will furnish the District with periodic transaction statements which include detail for all investment transactions made by the Escrow Agent hereunder; provided that the Escrow Agent is not obligated to provide an accounting for any fund or account that: (a) has a balance of$0.00; and (b) has not had any activity since the last reporting date. The Escrow Agent may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, attorneys, custodians or nominees appointed with due care, and shall not be responsible for any willful misconduct or negligence on the part of any agent, attorney, custodian or nominee so appointed. If the Escrow Agent learns that the Department of the Treasury or the Bureau of Public Debt will not, for any reason, accept a subscription of Federal Securities that is to be submitted pursuant to this Agreement, the Escrow Agent shall promptly request alternative written investment instructions from the District with respect to escrowed funds which were to be invested in Federal Securities. The Escrow Agent shall follow such instructions and, upon the maturity of any such alternative investment, the Escrow Agent shall hold funds uninvested and without liability for interest until receipt of further written instructions from the District. In the absence of investment instructions from the District, the Escrow Agent shall not be responsible for the investment of such funds or interest thereon. The Escrow Agent may conclusively rely upon the District's selection of an alternative investment as a determination of the alternative investment's legality and suitability and shall not be liable for any losses related to the alternative investments or for compliance with any yield restriction applicable thereto. The Escrow Agent shall have the right to accept and act upon instructions, including funds transfer instructions ("'Instructions") given pursuant to this Agreement and delivered using Electronic Means. ("Electronic Means" shall mean the following communications methods: S. W.I.F.T., e-mail, facsimile transmission, secure electronic transmission containing applicable authorization codes, passwords and/or authentication keys issued by the Escrow Agent, or another method or system specified by the Escrow Agent as available for use in connection with its services hereunder). The District shall provide to the Escrow Agent an incumbency certificate listing officers with the authority to provide such Instructions ("Authorized Officers") and containing specimen signatures of such Authorized Officers, which incumbency certificate shall be amended by the District whenever a person is to be added or deleted from the listing. Ifthe District elects to give the Escrow Agent Instructions using Electronic Means and the Escrow Agent in its discretion elects to act upon such Instructions, the Escrow Agent's understanding of such Instructions shall be deemed controlling. The District understands and agrees that the Escrow Agent cannot determine the identity of the actual sender of such Instructions and that the Escrow Agent shall conclusively presume that directions that purport to have been sent by an Authorized Officer listed on the incumbency certificate provided to the Escrow Agent have been sent by such Authorized Officer. The District shall be responsible for ensuring that only Authorized Officers transmit such Instructions to the Escrow Agent and that the District and all Authorized Officers are solely responsible to safeguard the use and confidentiality of applicable user and authorization codes, passwords and/or authentication 5 keys upon receipt by the District. The Escrow Agent shall not be liable for any losses, costs or expenses arising directly or indirectly from the Escrow Agent's reliance upon and compliance with such Instructions notwithstanding such directions conflict or are inconsistent with a subsequent written instruction. The District agrees: (i) to assume all risks arising out of the use of Electronic Means to submit Instructions to the Escrow Agent, including without limitation the risk of the Escrow Agent acting on unauthorized Instructions, and the risk of interception and misuse by third parties; (ii) that it is fully informed of the protections and risks associated with the various methods of transmitting Instructions to the Escrow Agent and that there may be more secure methods of transmitting Instructions than the method(s) selected by the District; (iii) that the security procedures (if any) to be followed in connection with its transmission of Instructions provide to it a commercially reasonable degree of protection in light of its particular needs and circumstances; and (iv) to notify the Escrow Agent immediately upon learning of any compromise or unauthorized use of the security procedures. SECTION II. Amendments. This Agreement is made for the benefit of the District and the owners from time to time of the 2006 Bonds and it shall not be repealed, revoked, altered or amended without the written consent of all such owners, the Escrow Agent and the District; provided, however, that the District and the Escrow Agent may, without the consent of, or notice to, such owners, amend this Agreement or enter into such agreements supplemental to this Agreement as shall not adversely affect the rights of such owners and as shall not be inconsistent with the terms and provisions of this Agreement, the Act (as such term is defined in the 2006 Fiscal Agent Agreement), or the 2006 Fiscal Agent Agreement, for any one or more of the following purposes: (i) to cure any ambiguity or formal defect or omission in this Agreement; (ii) to grant to, or confer upon, the Escrow Agent for the benefit of the owners of the 2006 Bonds any additional rights, remedies, powers or authority that may lawfully be granted to, or conferred upon, such owners or the Escrow Agent; and (iii) to include under this Agreement additional funds. The Escrow Agent shall be entitled to rely conclusively upon an unqualified opinion of Stradling Yocca Carlson & Rauth, A Professional Corporation, with respect to compliance with this Section, including the extent, if any, to which any change, modification, addition or elimination affects the rights of the owners of the various 2006 Bonds or that any instrument executed hereunder complies with the conditions and provisions of this Section. SECTION 12. Notice to Rating Agencies. In the event that this agreement or any provision thereof is severed, amended or revoked, the Escrow Agent shall provide written notice of such severance, amendment or revocation to the rating agencies then rating the 2006 Bonds. SECTION 13. Term. This Agreement shall commence upon its execution and delivery and shall terminate on the later to occur of either: (i) the date upon which the 2006 Bonds have been paid in accordance with this Agreement; or (ii) the date upon which no unclaimed moneys remain on deposit with the Escrow Agent pursuant to Section 5(c) of this Agreement. SECTION 14. Compensation. The Escrow Agent shall receive its reasonable fees and expenses as previously agreed to by the Escrow Agent and the District and any other reasonable fees and expenses of the Escrow Agent approved by the District; provided, however, that under no circumstances shall the Escrow Agent be entitled to any lien or assert any lien whatsoever on any moneys or obligations in the Escrow Fund for the payment of fees and expenses for services rendered or expenses incurred by the Escrow Agent under this Agreement. 6 SECTION 15. Severability. If any one or more of the covenants or agreements provided in this Agreement on the part of the District or the Escrow Agent to be performed should be determined by a court of competent jurisdiction to be contrary to law, such covenants or agreements shall be null and void and shall be deemed separate from the remaining covenants and agreements contained herein and shall in no way affect the validity ofthe remaining provisions of this Agreement. SECTION 16. Counterparts. This Agreement may be executed in several counterparts, all or any of which shall be regarded for all purposes as an original but all of which shall constitute and be but one and the same instrument. SECTION 17. Governing Law. THIS AGREEMENT SHALL BE CONSTRUED UNDER THE LAWS OF THE STATE OF CALIFORNIA. SECTION 18. Insufficient Funds. If at any time the Escrow Agent has actual knowledge that the moneys and investments in the Escrow Fund, including the anticipated proceeds thereof and earnings thereon, will not be sufficient to make all payments required by this Agreement, the Escrow Agent shall notify the District in writing, of the amount thereof and the reason therefor to the extent known to it. The Escrow Agent shall have no responsibility regarding any such deficiency. SECTION 19. Notice to District and Escrow Agent. Any notice to or demand upon the Escrow Agent may be served or presented, and such demand may be made, at the principal corporate trust office ofthe Escrow Agent at 400 South Hope Street, Suite 400, Los Angeles, California 90071, Attention: Corporate Trust Department. Any notice to or demand upon the District shall be deemed to have been sufficiently given or served for all purposes by being mailed by registered or certified mail, and deposited, postage prepaid, in a post office letter box, addressed to the District at 1635 Faraday A venue, Carlsbad, California 92008, Attention: Administrative Services Director (or such other address as may have been filed in writing by the District with the Escrow Agent). [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 7 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers as of the date first above written. CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO.3 By: -------------------------------- City Manager of the City of Carlsbad THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Escrow Agent and as 2006 Fiscal Agent By: __________________________ _ Authorized Officer S-1 Security SCHEDULE A FEDERAL SECURITIES Maturity Schedule A-1 Principal Amount $ Interest Rate % EXHIBIT A NOTICE OF REDEMPTION CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO.3 2006 SPECIAL TAX BONDS (IMPROVEMENT AREA 1) BASE CUSIP 142661 NOTICE IS HEREBY GIVEN to the owners ofthe above-captioned bonds (the ·'Bonds") of City of Carlsbad Community Facilities District No. 3 (the "District") pursuant to the Fiscal Agent Agreement, dated as of May 1, 2006 (the "2006 Fiscal Agent Agreement"), by and between the City of Carlsbad, for and on behalf of the District, and The Bank of New York Mellon Trust Company, N .A., formerly known as the Bank of New York Trust Company, N .A., as fiscal agent (the "2006 Fiscal Agent"), that the Bonds in the amount of $9,355,000 have been called for redemption on September 1, 2016 (the "Redemption Date"). The Bonds were originally issued on May 11, 2006. Maturity CUSIP (September 1) Rate Amount Price ALl 2017 5.000% $ 275,000 100% AM9 2018 5.100 285,000 100 AN7 2019 5.125 300,000 100 AP2 2020 5.125 315,000 100 AQO 2021 5.125 335,000 100 AV9 2026 5.250 1,940,000 100 BF3 2036 5.300 5,905,000 100 The Bonds will be payable on the Redemption Date at a Redemption Price of I 00% of the principal amount plus accrued interest to such date (the "Redemption Price"). The Redemption Price of the Bonds will become due and payable on the Redemption Date. Interest on the Bonds to be redeemed will not accrue from and after the Redemption Date, and such Bonds will be surrendered to the 2006 Fiscal Agent. All Bonds are required to be surrendered to the below-listed corporate trust offices of the 2006 Fiscal Agent, for redemption at the Redemption Price on the Redemption Date. If the Bonds are mailed, the use of registered, insured mail is recommended: First Class/Registered/Certified The Bank of New York Mellon Global Corporate Trust P.O. Box 2320 Dallas, Texas 75221-2320 Express Delivery Only The Bank of New York Mellon Global Corporate Trust 200 I Bryan Street, 9th Floor Dallas, Texas 7520 I By Hand Only The Bank of New York Mellon Global Corporate Trust Corporate Trust Window 10 I Barclay Street, 1st Floor East New York, New York I 0286 If the Owner of any Bond subject to optional redemption fails to deliver such Bond to the 2006 Fiscal Agent on the Redemption Date, such Bond shall nevertheless be deemed redeemed on the Redemption Date and the Owner of such Bond shall have no rights in respect thereof except to receive payment of the Redemption Price from funds held by the 2006 Fiscal Agent for such payment. Exhibit A-I A form W-9 must be submitted with the Bonds. Failure to provide a completed form W-9 will result in 31% backup withholding pursuant to the Interest and Dividend Tax Compliance Act of 1983. Under the Jobs and Growth Tax Relief Reconciliation Act of 2003, 28% will be withheld if the tax identification number is not properly certified. Note: The District and the 2006 Fiscal Agent shall not be re5ponsible for the selection or use (~f the CUSIP numbers selected, nor is any representation made as to their correctness in the notice or as printed on any Bond. They are included solely for the convenience ~f the holders. DATED this 31st day of July, 2016. THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as 2006 Fiscal Agent Exhibit A-2 EXHIBIT B NOTICE OF DEFEASANCE CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO.3 2006 SPECIAL TAX BONDS (IMPROVEMENT AREA 1) BASE CUSIP 142661 NOTICE IS HEREBY GIVEN to the owners of the above-captioned bonds (as further defined below, the "2006 Bonds"), of City of Carlsbad Community Facilities District No. 3 (the "District"), that the District has deposited with The Bank of New York Mellon Trust Company, N .A., as fiscal agent (the ·'2006 Fiscal Agent'') under the Fiscal Agent Agreement, dated as of May I, 2006 (the "2006 Fiscal Agent Agreement'"), by and between by and between the City of Carlsbad (the "City''), for and on behalf of the District, and the 2006 Fiscal Agent, cash and federal securities, the principal of and interest on which when paid will provide moneys sufficient to pay all regularly scheduled payments ofprincipal of and interest on the 2006 Bonds on September 1, 2016, and to pay on September I, 2016 the principal of the 2006 Bonds maturing after September I, 2016, plus interest thereon accrued to such date, without premium. The 2006 Bonds to be defeased are as follows: Maturity CUSJP (September 1) Rate Amount Price AK3 2016 5.000% $ 260,000 100% ALl 2017 5.000 275,000 100 AM9 2018 5.100 285,000 100 AN7 2019 5.125 300,000 100 AP2 2020 5.125 315,000 100 AQO 2021 5.125 335,000 100 AV9 2026 5.250 1,940,000 100 BF3 2036 5.300 5,905,000 100 In accordance with the 2006 Fiscal Agent Agreement, and notwithstanding the fact that any 2006 Bonds are not surrendered for payment: (i) the 2006 Bonds are deemed to have been paid in accordance with Section 9.03 thereof; and (ii) the pledge of the Special Tax Revenues (as such term is defined in the 2006 Fiscal Agent Agreement) and other funds provided for in the 2006 Fiscal Agent Agreement and all other obligations of the City and the District under the 2006 Fiscal Agent Agreement with respect to the 2006 Bonds have ceased and terminated, except as set forth in the 2006 Fiscal Agent Agreement. No representation is made as to the correctness of the CUSIP number either as printed on any 2006 Bond or as contained herein and any error in the CUSIP number shall not affect the validity of the proceedings for prepayment of the 2006 Bonds. DATED this [28th day of July], 2016. THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as 2006 Fiscal Agent Exhibit B-1 [JH Draft 6-16-16] PURCHASE CONTRACT $ ______ _ CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO.3 2016 SPECIAL TAX REFUNDING BONDS (IMPROVEMENT AREA 1) July_, 2016 City of Carlsbad Community Facilities District No. 3 1200 Carlsbad Village Drive Carlsbad, CA 92008 Ladies and Gentlemen: EXHIBIT 4 Stifel, Nicolaus & Company, Incorporated (the "Underwriter") offers to enter into this Purchase Contract (this "Purchase Contract") with the City of Carlsbad Community Facilities District No. 3 (the "District") with respect to its Improvement Area 1 ("Improvement Area 1"), which, upon acceptance of this offer, will be binding upon the District and the Underwriter. Terms not otherwise defined herein shall have the same meanings as set forth in the Indenture described below. This offer is made subject to the acceptance by the District of this Purchase Contract on or before 5:00p.m. California time on the date set forth above. 1. Upon the terms and conditions and in reliance upon the respective representations, warranties and covenants herein, the Underwriter hereby agrees to purchase from the District, and the District hereby agrees to sell to the Underwriter, all (but not less than all) the above-captioned bonds (the "Bonds") at a purchase price (the "Purchase Price") of $ (equal to the par amount of the Bonds ($ ) [plus/less] original issue [premium/discount] of $ , less an Underwriter's discount of $ ). The Bonds will be issued by the District pursuant to the Mello-Roos Community Facilities Act of 1982 (constituting Section 53311 et seq. of the California Government Code) (the "Act") and Resolution No. adopted on June 28, 2016 (the "Bond Resolution") by the City Council of the City of Carlsbad (the "City Council") acting as the legislative body of the District. The Special Taxes to provide a source of payment for the Bonds (the "Special Taxes") will be levied pursuant to Resolution No. 2005-329 adopted by the City Council on November 8, 2005, which established the District and Improvement Area 1 and authorized the levy of a special tax within Improvement Area 1 (the "Resolution of Formation"), and a two-thirds vote of the qualified electors at an election held in Improvement Area 1 on November 8, 2005. The Bonds will be issued pursuant to the terms of a Bond Indenture (the "Indenture"), dated as of July 1, 2016, between the District and The Bank of New York Mellon Trust Company, N.A., Los Angeles, California, as Trustee (the 'Trustee"). The proceeds of the sale of the Bonds will be used by the District (i) to refund, on a current basis, all of the City of Carlsbad Community Facilities District No. 3 2006 Special Tax Bonds (Improvement Area 1 ), which are currently outstanding in the aggregate principal amount of $9,615,000 (the "Prior Bonds"); (ii) to fund a deposit to the Reserve Account; and (iii) to pay the costs of issuance of the Bonds. In order to accomplish the refunding, a portion of the net proceeds of the Bonds, together with certain other funds on hand with respect to the Prior Bonds, will be transferred to the Trustee, as escrow agent (the "Escrow Agent"), for deposit into an escrow fund (the "Escrow Fund") to be established under an Escrow Agreement dated as of July 1, 2016 (the "Escrow Agreement"), by and between the District and the Escrow Agent. Proceeds of the Bonds will be applied in accordance with the Indenture. 2. The Bonds will mature on the dates and in the principal amounts, and will bear interest at the rates, as set forth in Exhibit C hereto. The Underwriter agrees to make a bona fide public offering of all of the Bonds at the offering prices set forth on the cover of the Final Official Statement described below. 3. (a) The District agrees to deliver to the Underwriter as many copies of the Official Statement dated the date hereof, relating to the Bonds (as supplemented and amended from time to time, the "Final Official Statement") as the Underwriter shall reasonably request as necessary to comply with paragraph (b)(4) of Rule 15c2-12 promulgated under the Securities Exchange Act of 1934 (the "Rule"). The District agrees to deliver the requested copies of the Final Official Statement within seven business days after the execution hereof, or such earlier date identified by the Underwriter to be necessary to allow the Underwriter to meet its obligations under the Rule and the rules of the Municipal Securities Rulemaking Board (the "MSRB"). The Underwriter agrees to file the Final Official Statement with the MSRB on or as soon as practicable after the Closing Date (defined below). The Underwriter agrees to deliver a copy of the Final Official Statement to each of its customers purchasing Bonds no later than the settlement date of the transaction. (b) The City Council, acting as the legislative body of the District, has authorized and approved the Preliminary Official Statement, dated June _, 2016 (the "Preliminary Official Statement"), and the Final Official Statement and consents to their distribution and use by the Underwriter and the execution and approval of the Final Official Statement by a duly authorized officer of the District. The District deems such Preliminary Official Statement final as of its date for purposes of the Rule, except for information allowed by the Rule to be omitted, and has executed a certificate to that effect in the form of Exhibit D. In connection with the printing and distribution of the Preliminary Official Statement, each of the following entities (collectively, the "Property Owners") executed a certificate in the applicable form attached hereto as Exhibit E: • [Palomar Melrose, LLC] ("Palomar Melrose") • [Greyhawk Associates] • [Fenton Raceway LLC] In connection with the issuance of the Bonds, and in order to assist the Underwriter in complying with the Rule, the District will execute a Continuing Disclosure Certificate (Issuer) dated the date of issuance of the Bonds (the "District Continuing Disclosure Certificate"). Concurrently, each of [Palomar Melrose, Greyhawk Associates and Fenton Raceway LLC], also in order to assist the Underwriter in complying with the Rule, will execute (or cause execution on its behalf of) a Continuing Disclosure Certificate (Property Owner) (each, a "Property Owner Continuing Disclosure Certificate") dated the date of issuance of the Bonds. Pursuant to the 2 Property Owner Continuing Disclosure Certificates, the Property Owners will undertake to provide certain data regarding their activities in Improvement Area 1 for a limited period. The forms of the District Continuing Disclosure Certificate and the Property Owner Continuing Disclosure Certificates are attached as Appendices D-1 [and D-2], respectively, to the Final Official Statement. 4. The District represents on the date hereof, and warrants with respect to the Closing Date, to the Underwriter that: (a) The City of Carlsbad (the "City") is duly organized and validly existing under the laws of the State of California, and the City Council has the power to act as the legislative body of the District. The District is duly organized and validly existing as a community facilities district under the Act and has the full legal right, power and authority, among other things, (i) upon satisfaction of the conditions in this Purchase Contract and the Indenture, to issue the Bonds with respect to Improvement Area 1 for the purpose of refunding the Prior Bonds, and (ii) to secure the Bonds in the manner contemplated in the Indenture. (b) The City Council has the full legal right, power and authority to adopt the Bond Resolution and the Resolution of Formation, and the District has the full legal right, power and authority with respect to Improvement Area 1 to (i) enter into this Purchase Contract, the Indenture, the Escrow Agreement and the District Continuing Disclosure Certificate, (ii) issue, sell and deliver the Bonds to the Underwriter as provided herein, and (iii) carry out and consummate all other transactions on its part contemplated by each of the aforesaid documents (such documents together with the Final Official Statement are collectively referred to herein as the "District Documents"), and the District and the City Council have complied with all provisions of applicable law, including the Act, in all matters relating to such transactions. (c) The City Council has duly authorized (i) the execution and delivery by the District of the Bonds and the execution, delivery and due performance by the District of its obligations under the District Documents, (ii) the distribution and use of the Preliminary Official Statement and execution, delivery and distribution of the Final Official Statement, and (iii) the taking of any and all such action as may be required on the part of the District to carry out, give effect to and consummate the transactions on its part contemplated by such instruments. All consents or approvals necessary to be obtained by the City or District in connection with the foregoing have been received, and the consents or approvals so received are still in full force and effect. (d) The Bond Resolution and the Resolution of Formation have been duly adopted by the City Council and are in full force and effect; and the District Documents, when executed and delivered by the District and the other parties thereto, will constitute a legal, valid and binding obligation of the District enforceable against the District in accordance with its terms, except as enforceability thereof may be limited by bankruptcy, insolvency or other laws affecting creditors' rights generally. (e) When delivered to the Underwriter, the Bonds will have been duly authorized by the City Council and duly executed, issued and delivered by the District and will constitute legal, valid and binding obligations of the District enforceable against the District in accordance with their respective terms, except as enforceability thereof 3 may be limited by bankruptcy, insolvency or other laws affecting creditors' rights generally, and will be entitled to the benefit and security of the Indenture. (f) The information relating to the City, the District and Improvement Area 1 (excluding information relating to the Property Owners and their property and activities in Improvement Area 1) contained in the Preliminary Official Statement is, and as of the Closing Date such information in the Final Official Statement will be, true and correct in all material respects, and the Preliminary Official Statement does not as of its date and the Final Official Statement will not as of the Closing Date contain any untrue or misleading statement of a material fact relating to the City, the District or Improvement Area 1 (excluding information relating to the Property Owners and their property and activities in Improvement Area 1) or omit to state any material fact relating to the City, the District and Improvement Area 1 (excluding information relating to the Property Owners and their property and activities in Improvement Area 1) necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (g) If, at any time prior to the earlier of (i) receipt of notice from the Underwriter that the Final Official Statement is no longer required to be delivered under the Rule or (ii) the Closing (as described in Section 6 below), any event known to the officers of the City participating in the issuance of the Bonds occurs with respect to the City, the District or Improvement Area 1 as a result of which the Final Official Statement as then amended or supplemented might include an untrue statement of a material fact, or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, the District shall promptly notify the Underwriter in writing of such event. Any information supplied by the City or District for inclusion in any amendments or supplements to the Final Official Statement will not contain any untrue or misleading statement of a material fact relating to the City, the District or Improvement Area 1 or omit to state any material fact relating to the City, the District or Improvement Area 1 necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (h) None of the adoption of the Bond Resolution or the Resolution of Formation, the execution and delivery of the District Documents, the consummation of the transactions on the part of the District contemplated herein or therein, or the compliance by the District with the provisions hereof or thereof will conflict with, or constitute on the part of the District, a violation of, or a breach of or default under, (i) any material indenture, mortgage, commitment, note or other agreement or instrument to which the City or District is a party or by which it is bound, (ii) any provision of the State Constitution or (iii) any existing law, rule, regulation, ordinance, judgment, order or decree to which the City (or the members of the City Council or any of its officers in their respective capacities as such) or District is subject, that would have a material adverse affect on the ability of the District to perform its obligations under the District Documents. (i) Neither the City nor District has ever been in default at any time, as to principal of or interest on any obligation that it has issued, which default may have an adverse effect on the ability of the District to consummate the transactions on its part under the District Documents, except as specifically disclosed in the Final Official Statement; and other than the Indenture and Fiscal Agent Agreement, dated as of May 1, 2006, by and between the City, for and on behalf of the District, and The Bank of New York Mellon Trust Company, N.A., formerly known as The Bank of New York Trust 4 Company, N.A., as fiscal agent, pursuant to which the Prior Bonds were issued, neither the City nor the District has entered into any contract or arrangement of any kind which might give rise to any lien or encumbrance on the Special Taxes. U) Except as is specifically disclosed in the Final Official Statement, to the best knowledge of the District, there is no action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, public board or body, pending with respect to which the City or the District has been served with process or threatened, that in any way questions the powers of the City Council or the District referred to in paragraph (b) above, or the validity of any proceeding taken by the City Council in connection with the issuance of the Bonds, or wherein an unfavorable decision, ruling or finding could materially adversely affect the transactions contemplated by this Purchase Contract, or of any other District Document, or that, in any way, could adversely affect the validity or enforceability of the Bond Resolution, the Resolution of Formation, the Indenture, the Escrow Agreement, the District Continuing Disclosure Certificate, the Bonds or this Purchase Contract or, to the knowledge of the District, that in any way questions the exclusion from gross income of the recipients thereof of the interest on the Bonds for federal income tax purposes or in any other way questions the status of the Bonds under State tax laws or regulations. (k) Any certificate signed by an official of the District authorized to execute such certificate and delivered to the Underwriter in connection with the transactions contemplated by the District Documents shall be deemed a representation and warranty by the District to the Underwriter as to the truth of the statements therein contained. (I) The District has not been notified of any listing or proposed listing by the Internal Revenue Service to the effect that it is a bond issuer whose arbitrage certifications may not be relied upon. (m) The Bonds will be paid from Net Taxes (as defined in the Indenture) received by the District and moneys held in certain funds and accounts established under the Indenture. (n) The Special Taxes may lawfully be levied in accordance with the Rate and Method of Apportionment of Special Taxes relating to Improvement Area 1 (the "Rate and Method"), and, when levied, will be secured by a lien on the property on which they are levied. (o) The Indenture creates a valid pledge of, and first lien upon, the Net Taxes deposited thereunder, and the moneys in certain funds and accounts established pursuant to the Indenture, subject in all cases to the provisions of the Indenture permitting the application thereof for the purposes and on the terms and conditions set forth therein. (p) In the last five years, the District has not failed to comply with any undertaking of the District under Rule 15c2-12(b)(5) of the Securities and Exchange Commission, except as disclosed in the Final Official Statement. (q) The District acknowledges and agrees that: (i) the primary role of the Underwriter is to purchase securities for resale to investors in an arms-length commercial transaction between the District and the Underwriter and that the 5 Underwriter has financial and other interests that differ from those of the District, (ii) the Underwriter is not acting as a municipal advisor, financial advisor or fiduciary to the District or any other person or entity and has not assumed any advisory or fiduciary responsibility to the District with respect to the transaction contemplated hereby and the discussions, undertakings and proceedings leading thereto (irrespective of whether the Underwriter has provided other services or is currently providing other services to the District on other matters), (iii) the only contractual obligations the Underwriter has to the District with respect to the transaction contemplated hereby expressly are set forth in this Purchase Contract, except as otherwise provided by applicable rules and regulations of the Securities and Exchange Commission or the rules of the MSRB, and (iv) the District has consulted its own legal, accounting, tax, financial and other advisors, as applicable, to the extent it has deemed appropriate in connection with the transaction contemplated herein. The District acknowledges that it has previously provided the Underwriter with an acknowledgement of receipt of the required Underwriter disclosure under Rule G-17 of the MSRB. 5. The District covenants with the Underwriter that the District will cooperate with the Underwriter (at the cost of the Underwriter) in qualifying the Bonds for offer and sale under the securities or Blue Sky laws of such jurisdictions of the United States as the Underwriter may reasonably request; provided, however, that the District shall not be required to consent to suit or to service of process, or to qualify to do business, in any jurisdiction. The District consents to the use by the Underwriter of the District Documents in the course of its compliance with the securities or Blue Sky laws of the various jurisdictions. 6. At 9:00 a.m. California time on July_, 2016 (the "Closing Date"), or at such other time and/or date as shall have been mutually agreed upon by the District and the Underwriter, the District will deliver or cause to be delivered to the Underwriter the Bonds in definitive form duly executed and authenticated by the Trustee together with the other documents mentioned in Section 8 hereof; and the Underwriter will accept such delivery and pay the Purchase Price of the Bonds by delivering to the Trustee for the account of the District a check payable in federal funds or making a wire transfer in federal funds payable to the order of the Trustee. The activities relating to the final execution and delivery of the Bonds and the Indenture and the payment therefor and the delivery of the certificates, opinions and other instruments as described in Section 8 of this Purchase Contract shall occur at the offices of Stradling Yocca Carlson & Rauth, A Professional Corporation, Newport Beach California ("Bond Counsel"). The payment for the Bonds and simultaneous delivery of the Bonds to the Underwriter is herein referred to as the "Closing." The Bonds will be delivered as fully registered Bonds initially in denominations of $5,000 each and any integral multiple thereof. The Bonds will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, and will be made available for checking by the Underwriter at such place as the Underwriter and the Trustee shall agree not less than 24 hours prior to the Closing. 7. The Underwriter shall have the right to cancel its obligations to purchase the Bonds if between the date hereof and the date of Closing: (a) the House of Representatives or the Senate of the Congress of the United States, or a committee of either, shall have pending before it, or shall have passed or recommended favorably, legislation introduced previous to the date hereof, which legislation, if enacted in its form as introduced or as amended, would have the 6 purpose or effect of imposing federal income taxation upon revenues or other income of the general character to be derived by the District or by any similar body under the Indenture or upon interest received on obligations of the general character of the Bonds, or of causing interest on obligations of the general character of the Bonds to be includable in gross income for purposes of federal income taxation, and such legislation, in the Underwriter's opinion, materially adversely affects the market price of the Bonds; or (b) a tentative decision with respect to legislation shall be reached by a committee of the House of Representatives or the Senate of the Congress of the United States, or legislation shall be favorably reported or re-reported by such a committee or be introduced, by amendment or otherwise, in or be passed by the House of Representatives or the Senate, or recommended to the Congress of the United States for passage by the President of the United States, or be enacted or a decision by a federal court of the United States or the United States Tax Court shall have been rendered, or a ruling, release, order, circular, regulation or official statement by or on behalf of the United States Treasury Department, the Internal Revenue Service or other governmental agency shall have been made or proposed to be made having the purpose or effect, or any other action or event shall have occurred which has the purpose or effect, directly or indirectly, of adversely affecting the federal income tax consequences of owning the Bonds, including causing interest on the Bonds to be included in gross income for purposes of federal income taxation, or imposing federal income taxation upon revenues or other income of the general character to be derived by the District under the Indenture or upon interest received on obligations of the general character of the Bonds, or the Bonds, and also including adversely affecting the tax- exempt status of the District under the Code, that, in the opinion of the Underwriter, materially adversely affects the market price of or market for the Bonds; or (c) legislation shall have been enacted, or actively considered for enactment, with an effective date prior to the Closing, or a decision by a court of the United States shall have been rendered, the effect of which is that the Bonds, including any underlying obligations, or the Indenture, as the case may be, is not exempt from the registration, qualification or other requirements of the Securities Act of 1933, as amended and as then in effect, the Securities Exchange Act of 1934, as amended and as then in effect, or the Trust Indenture Act of 1939, as amended and as then in effect; or (d) a stop order, ruling, regulation or official statement by the Securities and Exchange Commission or any other governmental agency having jurisdiction of the subject matter shall have been issued or made, or any other event occurs, the effect of which is that the issuance, offering or sale of the Bonds, including any underlying obligations, or the execution and delivery of the Indenture as contemplated by this Purchase Contract or the Final Official Statement, is or would be in violation of any provision of the federal securities laws, including the Securities Act of 1933, as amended and as then in effect, the Securities Exchange Act of 1934, as amended and as then in effect, or the Trust Indenture Act of 1939, as amended and as then in effect; or (e) any event shall have occurred or any information shall have become known to the Underwriter which causes the Underwriter to reasonably believe that the Final Official Statement as then amended or supplemented includes an untrue statement of a material fact, or omits to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and 7 the District fails to amend or supplement such Final Official Statement to cure such omission or misstatement pursuant to Section 4(g); or (f) there shall have occurred any outbreak of hostilities or any national or international calamity or crisis, including a financial crisis, the effect of which on the financial markets of the United States is such as, in the reasonable judgment of the Underwriter, would materially adversely affect the market for or market price of the Bonds; or (g) there shall be in force a general suspension of trading on the New York Stock Exchange, the effect of which on the financial markets of the United States is such as, in the reasonable judgment of the Underwriter, would materially adversely affect the market for or market price of the Bonds; or (h) a general banking moratorium shall have been declared by federal, New York or State authorities; or (i) any proceeding shall be pending or threatened by the Securities and Exchange Commission against the City or District; or U) additional material restrictions not in force as of the date hereof shall have been imposed upon trading in securities generally by any governmental authority or by any national securities exchange which adversely affects the Underwriter's ability to sell the Bonds; or (k) the New York Stock Exchange or other national securities exchange, or any governmental authority, shall impose, as to the Bonds or obligations of the general character of the Bonds, any material restrictions not now in force, or increase materially those now in force, with respect to the extension of credit by, or the charge to the net capital requirements of, the Underwriter; or (I) an amendment to the federal or State constitution shall be enacted or action taken by any federal or State court, legislative body, regulatory body or other authority materially adversely affecting the tax status of the City or District, its property, income or securities (or interest thereon), the validity or enforceability of the Special Tax or the ability of the District to issue the Bonds and levy the Special Tax as contemplated by the Indenture, the Rate and Method and the Final Official Statement; or (m) the entry of any order by a court of competent jurisdiction that enjoins or restrains the District from issuing permits, licenses or entitlements within Improvement Area 1 or, in the reasonable opinion of the Underwriter, otherwise materially and adversely affects development of the real property located in Improvement Area 1. 8. The obligation of the Underwriter to purchase the Bonds shall be subject to the (a) District's performing its obligations hereunder at and prior to the Closing, (b) accuracy, as of the date hereof and as of the time of the Closing, of the representations and warranties of the District herein, and (c) following conditions, including the delivery by the District of such documents as are enumerated herein in form and substance satisfactory to the Underwriter: (a) At the time of Closing, (i) the Final Official Statement, this Purchase Contract, the Escrow Agreement, the District Continuing Disclosure Certificate, the 8 Property Owner Continuing Disclosure Certificates, and the Indenture shall be in full force and effect and shall not have been amended, modified or supplemented except as may have been agreed to by the Underwriter, and (ii) the District shall have duly adopted and there shall be in full force and effect such resolutions (including, but not limited to, the Bond Resolution and the Resolution of Formation) as, in the opinion of Bond Counsel, shall be necessary in connection with the transactions contemplated hereby. (b) Receipt of the Bonds, executed by the District and authenticated by the Trustee, at or prior to the Closing. The terms of the Bonds, when delivered, shall in all instances be as described in Final Official Statement. (c) At or prior to the Closing, the Underwriter shall receive the following documents in such number of counterparts as shall be mutually agreeable to the Underwriter and the District: (i) A final approving op1n1on of Bond Counsel dated the date of Closing in the form attached to the Final Official Statement as Appendix E. (ii) A letter or letters of Bond Counsel, dated the Closing Date and addressed to the Underwriter, that includes a statement to the effect that Bond Counsel's final approving opinion may be relied upon by the Underwriter to the same extent as if such opinion were addressed to the Underwriter and further provides: (A) the statements contained in the Official Statement on the cover page and under the captions "INTRODUCTION," "THE REFUNDING PLAN -General," "THE BONDS" (other than information relating to DTC and its book-entry only system, as to which no opinion need be expressed), "SOURCES OF PAYMENT FOR THE BONDS," and "TAX MATTERS," and in Appendices C and E thereto, are accurate insofar as such statements expressly summarize certain provisions of the Bonds, the Indenture, the Escrow Agreement and Bond Counsel's opinion concerning certain federal tax matters relating to the Bonds; (B) the District and Improvement Area 1 are duly established and validly existing under the laws of the State, including the Act; (C) the District has duly and validly executed and delivered this Purchase Contract, and this Purchase Contract constitutes the legal, valid and binding obligation of the District enforceable against the District in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and other laws affecting enforcement of creditors' rights in general and to the application of equitable principles if equitable remedies are sought; and (D) the Bonds are not subject to the registration requirements of the Securities Act of 1933, as amended, and the Indenture is exempt from qualification pursuant to the Trust Indenture Act of 1939, as amended. 9 (iii) A defeasance opinion of Bond Counsel, dated the Closing Date and addressed to the Underwriter, with respect to the Prior Bonds and in form and substance satisfactory to the Underwriter. (iv) A negative assurance letter of Stradling Yocca Carlson & Rauth, A Professional Corporation ("Disclosure Counsel"), addressed to the District and Underwriter, to the effect that, during the course of serving as Disclosure Counsel in connection with the issuance of the Bonds and without having undertaken to determine independently or assuming any responsibility for the accuracy, completeness or fairness of the statements contained in the Final Official Statement, no information came to the attention of the attorneys in such firm rendering legal services in connection with the issuance of the Bonds that would lead them to believe that the Final Official Statement (excluding therefrom the financial statements, any financial or statistical data, or forecasts, charts, numbers, estimates, projections, assumptions or expressions of opinion included in the Official Statement, information regarding DTC and the appendices to the Official Statement, as to which no opinion need be expressed), as of the date thereof or the Closing Date, 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 (v) The Final Official Statement executed on behalf of the District by a duly authorized officer. (vi) Certified copies of the Bond Resolution and Resolution No. 2005- 301 (the "Resolution of Intention"), the Resolution of Formation, Resolution No. 2005-331 ("Election Resolution") and Ordinance No. NS-777 ("Ordinance Levying Special Tax") of the City Council. (vii) Evidence of recordation in the real property records of the County of San Diego of a Notice of Special Tax Lien in the form required by the Act. (viii) A certificate, in form and substance as set forth in Exhibit A hereto, of the District, dated as of the Closing Date. (ix) A certificate in form and substance as set forth in Exhibit B hereto, of NBS Government Finance Group, Temecula, California ("Special Tax Consultant"), dated as of the Closing Date. (x) Evidence that Federal Form 8038 has been executed by the District and will be filed with the Internal Revenue Service. (xi) Executed copies of the Indenture, Escrow Agreement and the District Continuing Disclosure Certificate. (xii) A non-arbitrage certificate executed by the District in form and substance satisfactory to Bond Counsel. (xiii) An opinion, dated the Closing Date and addressed to the Underwriter, of the City Attorney, to the effect that: 10 (A) the District is duly organized and validly existing as a community facilities district under the Act, with full legal right, power and authority to adopt the Bond Resolution and the Resolution of Formation; (B) the Bond Resolution and the Resolution of Formation were duly adopted at a meeting of the City Council, acting as legislative body of the District that was called and held pursuant to law and with all public notice required by law and at which a quorum was present and acting throughout, and the Bond Resolution and the Resolution of Formation are in full force and effect and have not been amended or repealed; (C) no action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, regulatory agency, public board or body is pending with respect to which the District has been served with process or, to the knowledge of the City Attorney, threatened, in any way affecting the existence of the District or the titles of the District's officials to their respective offices, or seeking to restrain or to enjoin the issuance, sale or delivery of the Bonds or the application of the proceeds thereof in accordance with the Indenture, or the collection or application of the Special Taxes to pay the principal of and interest on the Bonds, or in any way contesting or affecting the validity or enforceability of the Bonds, the District Documents or any action of the District contemplated by any of said documents, or in any way contesting the completeness or accuracy of the Official Statement or the powers of the District or its authority with respect to the Bonds, the District Documents or any action on the part of the District contemplated by any of said documents, wherein an unfavorable decision, ruling, or finding could materially adversely affect the validity or enforceability of the Bonds or the District Documents; (D) the execution and delivery of the Bonds and the District Documents, and compliance with the provisions of each, will not conflict with or constitute a breach of or default under any loan agreement, note, ordinance, resolution, indenture, contract, agreement or other instrument of which the District is a party or is otherwise subject or bound, a consequence of which could be to materially and adversely affect the ability of the District to perform its obligations under the Bonds or the District Documents; (E) all approvals, consents, authorization, elections and orders of or filings or registrations with any governmental authority, board, agency or commission having jurisdiction that would constitute a condition precedent to, or the absence of which would materially adversely affect, the ability of the District to perform its obligations under the Bonds, or the District Documents, have been obtained or made, as the case may be, and are in full force and effect; and (F) based upon the information made available to the City Attorney in the course of her participation in the transaction and without having undertaken to determine independently or assume any responsibility for the accuracy, completeness or fairness of the statements contained in the 11 Final Official Statement, nothing has come to the attention of the City Attorney that has led the City Attorney to believe that the Final Official Statement (excluding therefrom the financial and statistical data included in the Final Official Statement and any information relating to the Property Owners and their property in Improvement Area 1, 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 light of the circumstances under which they were made, not misleading in any material respect; (xiv) In connection with printing and distribution of the Preliminary Official Statement, an executed certificate of the District in the form attached hereto as Exhibit D; and (xv) An executed copy of the Property Owner Continuing Disclosure Certificates. (xvi) A 1 Ob-5 certificate of each of the Property Owners in the form attached hereto as Exhibit E. (xvii) The final report of the verification agent engaged with respect to the Bonds. (xviii) A closing certificate of each of the Property Owners dated as of the Closing Date in form and substance as set forth in Exhibit F hereto. (xix) A certificate in form and substance as set forth in Exhibit G hereto of the Trustee and Escrow Agent and an opinion of its counsel in form and substance satisfactory to the Underwriter. (xx) Such additional legal opinions, certificates, proceedings, instruments and other documents as the Underwriter or Bond Counsel may reasonably request to evidence compliance by the District with legal requirements, the truth and accuracy, as of the time of Closing, of the respective representations of the District herein contained and the due performance or satisfaction by the District at or prior to such time of all agreements then to be performed and all conditions then to be satisfied. If the District shall be unable to satisfy the conditions to the obligations of the Underwriter contained in this Purchase Contract, or if the obligations of the Underwriter to purchase and accept delivery of the Bonds shall be terminated for any reason permitted by this Purchase Contract, this Purchase Contract shall terminate and neither the Underwriter nor the District shall be under further obligation hereunder; except that the respective obligations to pay expenses, as provided in Section 11 hereof shall continue in full force and effect. 9. The obligations of the District to issue and deliver the Bonds on the Closing Date shall be subject, at the option of the District, to the performance by the Underwriter of its obligations to be performed hereunder at or prior to the Closing Date. 12 10. All representations, warranties and agreements of the District hereunder shall remain operative and in full force and effect, regardless of any investigations made by or on behalf of the Underwriter or the District and shall survive the Closing. 11. The District shall pay or cause to be paid all reasonable expenses incident to the performance of its obligations under this Purchase Contract, including, but not limited to, delivery of the Bonds, costs of printing the Bonds, the Preliminary Official Statement and the Final Official Statement, any amendment or supplement to the Preliminary Official Statement or Final Official Statement and this Purchase Contract, fees and disbursements of Bond Counsel and Disclosure Counsel, any financial advisor and other consultants engaged by the District, including the fees and expenses of the Special Tax Consultant, the California Debt Investment and Advisory Commission fee, fees of the Trustee and fees and disbursements in connection with the qualification of the Bonds for sale under the securities or "Blue Sky" laws of the various jurisdictions and the preparation of "Blue Sky" memoranda. The Underwriter shall pay all advertising expenses in connection with the public offering of the Bonds, and all other expenses incurred by it in connection with its public offering and distribution of the Bonds, including fees and expenses of its counsel, if any. 12. Any notice or other communication to be given to the District under this Purchase Contract may be given by delivering the same in writing at its address set forth above, and any notice or other communication to be given to the Underwriter under this Purchase Contract may be given by delivering the same in writing to the following: Stifel, Nicolaus & Company, Incorporated, One Montgomery Street, Suite 3700, San Francisco, California 94104, Attn: Jim Cervantes. 13. This Purchase Contract is made solely for the benefit of the District and the Underwriter (including the successors or assigns of the Underwriter) and no other person, including any purchaser of the Bonds, shall acquire or have any right hereunder or by virtue hereof. 14. This Purchase Contract shall be governed by and construed in accordance with the laws of the State of California. [Remainder of page intentionally left blank.] 13 15. This Purchase Contract shall become effective upon acceptance hereof by the District. Accepted and agreed to as of the date first above written: CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO. 3 By: __________________________ _ Administrative Services Director of the City of Carlsbad Time of Execution: ____ _ .m. Pacific time 14 STIFEL, NICOLAUS & COMPANY, INCORPORATED By: ______________________ _ Authorized Representative EXHIBIT A CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO.3 2016 SPECIAL TAX REFUNDING BONDS (IMPROVEMENT AREA 1) DISTRICT CLOSING CERTIFICATE I, the undersigned, hereby certify that I am the City Manager of the City of Carlsbad, the City Council of which is the legislative body for City of Carlsbad Community Facilities District No. 3, a community facilities district duly organized and existing under the laws of the State of California and that as such, I am authorized to execute this Certificate on behalf of the District in connection with the issuance of the above-referenced Special Tax Bonds (the "Bonds"). I hereby further certify on behalf of the District that: (A) to my best knowledge, after reasonable inquiry, no litigation is pending with respect to which the District has been served with process or threatened (1) to restrain or enjoin the issuance of any of the Bonds or the collection of Special Taxes pledged under the Indenture; (2) in any way contesting or affecting the authority for the issuance of the Bonds or the validity or enforceability of the Bonds, the Indenture, the Escrow Agreement, the District Continuing Disclosure Certificate or the Purchase Contract; or (3) in any way contesting the existence or powers of the District; (B) the representations and warranties made by the District in the District Documents are true and correct in all material respects on the Closing Date, with the same effect as if made on the Closing Date; and (C) no event affecting the District has occurred since the date of the Official Statement that, as of the Closing Date, would cause any statement or information contained in the Final Official Statement under the caption "LITIGATION" to be incorrect or incomplete in any material respect or would cause the information contained under the caption "LITIGATION" in the Final Official Statement to contain an untrue statement of a material fact or omit to state a material fact necessary in order to make such statements therein, in the light of the circumstances under which they were made, not misleading. Capitalized terms not defined herein shall have the same meaning set forth in the Purchase Contract dated , 2016, between the District and Stifel, Nicolaus & Company, Incorporated. A-1 IN WITNESS WHEREOF, the undersigned has executed this certificate as of the date hereinbelow set forth. Dated: [Closing Date] A-2 CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO. 3 By: __________________________ _ Administrative Services Director of the City of Carlsbad EXHIBIT 8 CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO. 3 2016 SPECIAL TAX REFUNDING BONDS (IMPROVEMENT AREA 1) CERTIFICATE OF SPECIAL TAX CONSULTANT NBS Government Finance Group (the "Special Tax Consultant"), Temecula, California was retained as Special Tax Consultant and assisted in the preparation of and has reviewed the Rate and Method of Apportionment of Special Tax (the "Rate and Method") set forth in Appendix A to the Official Statement dated July_, 2016 (the "Official Statement") relating to the above-referenced bonds (the "Bonds"). Based upon the Special Tax Consultant's review of the Official Statement and such other documents as it deems relevant in the circumstances, the Special Tax Consultant hereby certifies that the Special Tax, if collected in the maximum amounts permitted pursuant to the Rate and Method, would generate at least % of the gross annual debt service on the Bonds, provided that the annual debt service figures on the attached debt service schedule, which were relied upon by Special Tax Consultant, are substantially true and correct. Although the Special Tax if collected in the maximum amounts pursuant to the Rate and Method will generate at least % of the gross annual debt service payable with respect to the Bonds each year, no representation is made herein as to actual amounts that will be collected in future years. All information with respect to the Rate and Method in the Official Statement, and all information provided by the Special Tax Consultant in the Official Statement, is true and correct as of the date of the Official Statement and as of the date hereof, and a true and correct copy of the Rate and Method is attached to the Official Statement as Appendix A. Dated: [Closing Date] NBS GOVERNMENT FINANCE GROUP By: ____________________ ___ Authorized Officer B-1 Maturity Date Total EXHIBIT C CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO. 3 2016 SPECIAL TAX REFUNDING BONDS (IMPROVEMENT AREA 1) Principal Amount $ $ C-1 Interest Rate % Yield % Price % EXHIBIT D CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO.3 2016 SPECIAL TAX REFUNDING BONDS (IMPROVEMENT AREA 1) RULE 15c2-12 CERTIFICATE The undersigned hereby certifies and represents that s/he is the duly appointed Administrative Services Director of the City of Carlsbad, the City Council of which is the legislative body of the City of Carlsbad Community Facilities District No. 3 (the "District"), and is duly authorized to execute and deliver this Certificate and further hereby certifies on behalf of the District as follows: (1) This Certificate is delivered in connection with the offering and sale of the above-referenced bonds (the "Bonds") in order to enable the underwriter of the Bonds to comply with Rule 15c2-12 promulgated under the Securities Exchange Act of 1934, as amended (the "Rule"). (2) In connection with the offering and sale of the Bonds, there has been prepared a Preliminary Official Statement, setting forth information concerning the Bonds and the District (the "Preliminary Official Statement"). (3) As used herein, "Permitted Omissions" shall mean the offering price(s), interest rate(s), selling compensation, aggregate principal amount, principal amount per maturity, delivery dates, ratings and other terms of the Bonds depending on such matters, all with respect to the Bonds. (4) The Preliminary Official Statement is, except for the Permitted Omissions, deemed final within the meaning of the Rule. IN WITNESS WHEREOF, I have hereunto set my hand as of [date of POS]. D-1 CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO. 3 By: __________________________ __ Administrative Services Director of the City of Carlsbad EXHIBIT E CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO.3 2016 SPECIAL TAX REFUNDING BONDS (IMPROVEMENT AREA 1) 10b-5 CERTIFICATE OF PROPERTY OWNER The undersigned (the "Property Owner"), in connection with the issuance, sale and delivery by the City of Carlsbad Community Facilities District No. 3 (the "District") of the bonds captioned above (the "Bonds"), hereby certifies as follows as of the date hereof: (1) The undersigned is duly authorized to execute this Certificate on behalf of the Property Owner. (2) Bonds. This Certificate is delivered in connection with the offering and sale of the (3) In connection with the offering and sale of the Bonds, there has been prepared a Preliminary Official Statement (the "Preliminary Official Statement"), setting forth certain information concerning, among other things, the Bonds, the Property Owner, the Property Owner's organization, activities, properties and financial condition, and the Property Owner's development within Improvement Area 1 ("Improvement Area 1 ") of the District. (4) [cross-references to be updated] The sections of the Preliminary Official Statement entitled "IMPROVEMENT AREA 1" (except for the information under the captions "-Direct and Overlapping Governmental Obligations," " -Market Absorption Study," "-Appraised Property Value" and "-Appraised Value to Burden Ratio" for which no certification is made) and "PROPERTY OWNERSHIP AND PROPOSED DEVELOPMENT -Proposed Development of [name of property owner]," to the extent they describe or relate to the Property Owner, the Property Owner's property in Improvement Area 1, the development proposed by the Property Owner within Improvement Area 1 or representations made by the Property Owner, contain no untrue statement of a material fact and do not omit any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (5) [if applicable] To the actual knowledge of the Property Owner, the Property Owner [and related entity, if relevant] have never failed in any material respect to comply with previous undertakings to provide periodic continuing disclosure reports or notices of material events with respect to community facilities districts or assessment districts in California within the past five years. (6) To the actual knowledge of the Property Owner, the Property Owner [and related entity, if relevant] have never defaulted to any material extent in the payment of special taxes or assessments in connection with the District or any other community facilities districts or assessment districts in California within the past five years. E-1 (7) To the actual knowledge of the Property Owner, the Property Owner [and related entity, if relevant] are not currently in default on any loans, lines of credit or other obligation, the result of which could materially adversely affect the development of the property owned by the Property Owner in Improvement Area 1. (8) To the actual knowledge of the Property Owner, the Property Owner [and related entity, if relevant] are solvent and no proceedings are pending or threatened in which they may be adjudicated as bankrupt or become the debtor in a bankruptcy proceeding, or discharged from all of their debts or obligations, or granted an extension of time to pay their debts or a reorganization or readjustment of their debts. (9) To the actual knowledge of the Property Owner, there is no litigation or administrative proceeding of any nature in which the Property Owner [or related entity, if relevant] has been served, or is pending or threatened which, if successful, would materially adversely affect the Property Owner's ability to complete the development and sale of its property within Improvement Area 1, or to pay the Special Taxes, the special benefit assessments or ordinary ad valorem property tax obligations when due on its property within Improvement Area 1, or which challenges or questions the validity or enforceability of the Bonds, the Resolution of Issuance, the Indenture, [if applicable][the Property Owner Continuing Disclosure Certificate executed by the Property Owner] or the Purchase Contract relating to the Bonds. As used in this certificate, the phrase "actual knowledge of the Property Owner" shall mean the knowledge that the individual signing the certificate currently has or has obtained from an interview with such officers and responsible employees of the Property Owner [or related entity, if relevant] as the individual signing the certificate has determined are likely, in the ordinary course of his or her respective duties, to have knowledge of the matters set forth herein. Other than as set forth in the immediately preceding sentence, with your permission, the individual signing this certificate has not conducted any additional inspection or inquiry. Dated: [date of POS] E-2 [SIGNATURE BLOCK OF PROPERTY OWNER] EXHIBIT F CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO.3 2016 SPECIAL TAX REFUNDING BONDS (IMPROVEMENT AREA 1) CLOSING CERTIFICATE OF PROPERTY OWNER The undersigned (the "Property Owner"), in connection with the issuance, sale and delivery by the City of Carlsbad Community Facilities District No. 3 (the "District") of the bonds captioned above (the "Bonds"), hereby certifies as follows as of the date hereof: (1) The undersigned is duly authorized to execute this Certificate on behalf of the Property Owner. (2) [if applicable] The Property Owner is duly authorized to execute, deliver and perform its Property Owner Continuing Disclosure Certificate. (3) [if applicable] The Property Owner has duly executed and delivered the Property Owner Continuing Disclosure Certificate. (4) The Property Owner has full power and authority to own its property located within Improvement Area 1 and to carry on its business as presently conducted and as described in the Final Official Statement. (5) Except as disclosed in the Final Official Statement, to the actual knowledge of the Property Owner, no event has occurred since the date of the Preliminary Official Statement that has materially and adversely affected or is reasonably expected to materially and adversely affect the business, properties, operations or financial condition of the Property Owner. (6) Except as disclosed in the Final Official Statement, the Property Owner has not submitted an application for, nor received actual notice of, (i) the formation or authorization of any assessment district or community facilities district that would include any portion of the Property Owner's land within Improvement Area 1, or (ii) the authorization or issuance of any debt secured by a special tax to be levied on any portion of the Property Owner's land within Improvement Area 1, other than the Special Tax. (7) The representations and warranties made by the Property Owner in the 1 Ob-5 Certificate of Property Owner are true and correct in all material respects on the Closing Date, with the same effect as if made on the Closing Date. As used in this certificate, the phrase "actual knowledge of the Property Owner" shall mean the knowledge that the individual signing the certificate currently has or has obtained from an interview with such officers and responsible employees of the Property Owner [and related entity, if relevant] as the individual signing the certificate has F-1 determined are likely, in the ordinary course of his or her respective duties, to have knowledge of the matters set forth herein. Other than as set forth in the immediately preceding sentence, with your permission, the individual signing this certificate has not conducted any additional inspection or inquiry. Capitalized terms not defined herein have the same meaning as is set forth in the Purchase Contract between Stifel, Nicolaus & Company, Incorporated, and the District. Dated: [Closing Date] F-2 [SIGNATURE BLOCK OF PROPERTY OWNER] EXHIBIT G CITY OF CARLSBAD COMMUNITY FACILITIES DISTRICT NO.3 2016 SPECIAL TAX REFUNDING BONDS (IMPROVEMENT AREA 1) CERTIFICATE OF TRUSTEE AND ESCROW AGENT The undersigned hereby states and certifies that the undersigned is an authorized officer of The Bank of New York Mellon Trust Company, N.A. (the "Bank"), under that certain Bond Indenture, dated as of July 1, 2016 (the "Indenture"), by and between the City of Carlsbad Community Facilities District No. 3 (the "District"), and the Bank, as Trustee, relating to the captioned bonds (the "Bonds"), and that certain Escrow Agreement, dated as of July 1, 2016 (the "Escrow Agreement"), by and between the District and the Bank, as escrow agent, relating to the refunding of the City of Carlsbad Community Facilities District No. 3 2006 Special Tax Bonds (Improvement Area 1 ), and as such, is familiar with the following facts and is authorized and qualified to certify the following facts on behalf of the Bank: (1) The Bank is duly organized and existing as a national banking association under the laws of the United States of America, having the full power and authority to enter into and perform its duties under the Indenture and Escrow Agreement. (2) Each of the Indenture and Escrow Agreement has been duly authorized, executed and delivered by the Bank, and the Bonds have been authenticated by a duly authorized representative of the Bank in accordance with the Indenture. (3) To the best knowledge of the Bank, after due inquiry, there is no action, suit, proceeding or investigation, at law or in equity, before or by any court or governmental agency, public board or body pending against the Bank or threatened against the Bank that in the reasonable judgment of the Bank would affect the existence of the Bank or in any way contesting or affecting the validity or enforceability of the Indenture or contesting the powers of the Bank or its authority to enter into and perform its obligation under the Indenture or Escrow Agreement. (4) The Bonds have been duly authenticated by the Trustee in accordance with the Indenture. Dated: [Closing Date] G-1 THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Bank By ______________________ __ Authorized Officer Aaron Beanan June 28, 2016 Community Facilities District No. 3 2016 Special Tax Refunding Bonds (Improvement Area 1) Community Facilities District No. 3: Improvement Area 1 Zones Refunded •Zone A: 35 parcels •Zone B: 33 parcels Community Facilities District No. 3: Improvement Area 1 Estimated Annual Savings Ranges for Property Owners District1 Minimum2 Maximum2 Average CFD No. 3, IA 1 $335 $16,631 $2,926 1. The amounts shown do not include administrative costs for comparison purposes; the numbers have been rounded to the nearest whole dollar; and the levy for FY 15/16 was compared to the “typical estimated levy.” 2.There is a large range in estimated savings because the parcels are not uniform in size and the tax is acreage based. Community Facilities District No. 3: Improvement Area 1 Questions? Action items: •Council action for 2016 Special Tax Refunding Bonds