NEW ISSUE - BOOK-ENTRY ONLY NOT RATED (See "CONCLUDING INFORMATION -NO RATINGS ON THE BONDS" herein)

In the opinion of Fulbright & Jaworski L.L.P, Los Angeles, California, Bond Counsel, under existing law interest on the Bonds is exempt from personal income taxes of the State of California and, assuming compliance with the tax covenants described herein, interest on the Bonds is excluded pursuant to section 103(a) of the Internal Revenue Code of 1986 (the "Code'') from the gross income of the owners thereof for federal income tax purposes and is not an item of preference under section 57(a) of the Code for purposes of the federal alternative minimum tax. See, however, "LEGAL MATTERS- TAX MATTERS" herein regarding certain other tax considerations.

RIVERSIDE COUNTY

Dated: Date of Delivery

STATE OF CALIFORNIA

$5,550,000 LAKE ELSINORE PUBLIC FINANCING AUTHORITY TAX ALLOCATION REVENUE BONDS (LAUNCH RAMP PROJECT), 2011 SERIES A

Due: September 1 as shown on the inside cover.

This cover page contains certain information for quick reference only. It is not a summary of the issue. Potential investors must read the entire Official Statement to obtain information essential to making an informed investment decision. See "BONDOWNERS' RISKS" herein for a discussion of special risk factors that should be considered in evaluating the investment quality of the Bonds.

Interest on the Bonds is payable semiannually on March 1 and September 1 of each year, commencing on September 1, 2011, until maturity or earlier redemption (see "THE BONDS - GENERAL PROVISIONS" and "THE BONDS -REDEMPTION" herein).

The information contained within this Official Statement was prepared under the direction of the Lake Elsinore Public Financing Authority (the "Authority") by the following firm serving as Financing Consultant to the Authority:

ROD GUNN ASSOCIATES, INC.

MATURITY SCHEDULE (see inside cover)

The Bonds are payable solely from the revenues pledged under the Indenture (the "Revenues"), consisting primarily of proceeds from the repayment of a Loan with respect to the Rancho Laguna Redevelopment Project No. l ("Redevelopment Project No. !") to be made by the Redevelopment Agency of the City of Lake Elsinore (the "Agency") to the Authority and certain other funds held under the Indenture as described herein. The Loan is payable by the Agency solely from Tax Revenues (as defined herein) attributable to Redevelopment Project No. l (see "SOURCES OF PAYMENT FOR THE BONDS" and "BONDOWNERS' RISKS" herein), and certain interfund loans with respect to the Agency's redevelopment projects to the extent of available surplus revenues as described herein.

H is anticipated that the Bonds, in book-entry form, will be available for delivery through the facilities of The Depository Trust Company in New York, New York, on or about January 27, 2011 (see "APPENDIX G - DTC AND BOOK-ENTRY-ONLY SYSTEM").

The date of the Official Statement is January 25. 2011.

$5,550,000 LAKE ELSI NORE PUBLIC Fl NANCI NG AUTHORITY

TAX ALLOCATION REVENUE BONDS (LAUNCH RAMP PROJECT),

2011 SERIESA

MATURITY SCHEDULE

(BaseCUSIP0

* 50063J)

$2,985,000Serial Bonds

Maturity Date Principal Interest Reoffering CUSIP" September l_ Amount _ Rate_ Rate __ Suffix*

2012 $445,000 4.000!6 4.200!6 GC6

2013 465,000 4.500!6 4.600!6 GD4

2014 485,000 4.250!6 4.900!6 GE2

2015 505,000 5.000!6 5.400!6 GF9

2016 530,000 5.000!6 5.700!6 GG7

2017 555,000 5.500)6 6.100)6 GH5

$2,565,000 6.000!6 Term Bond due September 1, 2021, Price96.200!6 CUSIP" Suffix* GM4

* CUSIP" Copyright 2011, Am,rican Bankers' Association. CUSIP" data herein is provided by Standard & Poor's CUSIP" Service Bureau, a Division of The McGraw-Hill Corrpanie~ Inc. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP"' Service Bureau. CUSIP"' nurrbers are provided for convenience of reference only. The Authority and the Underwriter do not guarantee the accuracy of the CUSI P

0

data herein.

LAKE ELSINORE PUBLIC FINANCING AUTHORITY LAKE ELSINORE,CALIFORNIA

AUTHORITY GOVERNING BOARD

Daryl Hickman, Chairperson Brian Tisdale, \t1ce Chairperson

Amy B hutta, Board Mentier Robert E. Magee, Board Mentier

MelissaA. Melendez, Board Mentier

CITY COUNCIL

A my B hutta, Mayor Robert E. Magee, Mayor Pro Tern

MelissaA. Melendez, Council Mentier Daryl Hickman, Council Mentier B ri an Tisdale, Counci I M entier

AGENCY BOARD OF DI RECTORS

MelissaA. Melendez, Chairperson Brian Tisdale, \t1ce Chairperson

Amy B hutta, Board Mentier Daryl Hickman, Board Mentier

Robert E. Magee, Board Mentier

CITY,AUTHORITY AND AGENCY STAFF Robert A.Brady, City Manager /Authority and Agency Executive Director

Barbara Lei bold, Esq., City Attorney / Authority and Agency Counsel James R. Riley, CPA, Director of Adninistrative Services/ Authority and Agency Treasurer

PROFESSIONAL SERVICES

Bond Counsel and Disclosure Counsel Fulbright& J.M'orski L.L.P.

LosAngeles, California

City Attorney Leibold, Mcclendon & Mann, P.C.

Laguna Hills, California

Financing Consultant Rod Gunn Associates, Inc.

Huntington Beach, California

Trustee and Fiscal Agent Union Bank, NA.

LosAngeles, California

Fiscal Consultant HdL Coren & Cone

Diamond Bar, California

Underwriter O'Connor & Company Securities, Inc.

Ne.vport Beach, California

Underwriter's Counsel McFarlin & Anderson LLP

Lake Forest, California

FOR ADDITIONAL INFORMATION

James R. Riley, CPA, City of Lake Elsinore (951) 674-3124 O'Connor & Corrpany Securities, Inc. (949) 7CX'i-0444

ii

GENERAL I NFORMATIONABOUT THE OFFICIAL STATEMENT

Use of Official Statement. This Official Statement is subrritted in connection with the offer and sale of the B ands referred to herei n and may not be reproduced or used, in whole or i n part, for any other purpose. This Official Statement is not to be construed as a contract with the purchasers of the Bonds.

Estimates and Forecasts. When used in this Official Statement and in any continuing disclosure b,I the Agency, in any press release and in any oral statement made with the appr0.tal of an authorized officer of the Agency, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "forecast," "expect," "intend," and similar expressions identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 21 E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended. Such statements are suqj ect to risks and uncertainties that could cause actual results to differ material ly from those contemplated in such forward-l ooki ng statements. Any forecast is suqj ect to such uncertainties. Inevitably, some assurrptions used to develop the forecasts will not be realized and unanticipated events and circumstances may occur. Therefore, there are Ii kely to be differences between forecasts and actual results and those differences may be material. The information and expressions of opinion herein are suqject to change without notice, and neitherthe delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, give rise to any implication that there has been no change in the affairs of the Agency or any other entity described or referenced herein since the date hereof. Neither the Authority nor the Agency plan to issue any updates or revisions to the forward-­looking statements set forth in this Official Statement.

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

Involvement of Underwriter. The Underwriter has subrritted the follcwing statement for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, and as a part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. The information and expressions of opinions herein are suqject to change without notice and neither delivery of this Official Statement nor any sale made hereunder shal I, under any circumstances, create any i mpl i cation that there has been no change i n the affairs of the Authority, the Agency or any other entity described or referenced herein since the date hereof. All summaries of the documents referred to in this Official Statement are made suqject to the pr0.tisions of such documents and do not purport to be complete statements of any or all of such pr0.tisions.

THE BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS CONTAINED IN SUCH ACT. THE BONDS HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE.

iii

TABLE OF CONTENTS

INTRODUCTORY STATEMENT ............................ 1 Mandatory Redemption upon Acceleration of the THE AUTHORITY ...................................................... 1 Loan ......................................................................... 15 Authorization and Form1tion ........................................ l Notice of Rederrption; Rescission ............................. 15 BondAuthorization and Issuance ................................. 1 Open Market Purchase of Bonds ................................ 16 Financing Purpose of the Bonds ................................... 1 Selection of Bonds for Rederrption ............................ 16 THE AGENCY ............................................................. 2 EffectofRedemption ................................................. 16 Form1tion ...................................................................... 2 Partial Redemption ..................................................... 16 TaxAllocation Financing .............................................. 2 SCHEDULED DEBT SERVICE ON THE Housing Set-Aside Ra,enues ........................................ 2 BONDS ................................................................... 17 RedevelopmentAgency ProjectArea Boundaries ........ 3 SCHEDULED DEBT SERVICE ON THE LOAN .... 17

REDEVELOPMENT PROJECT NO. 1 ••••••••••••••••••••••• .4 SOURCES OF PAYMENT FOR THE BONDS ........ 18 Form1tion .................................................................... ..4 REPAYMENT OF THE BONDS 18 General Description ...................................................... 4 The Bonds ................................... ::::::::::::::::::::::::::::::: 18 THE LOAN .................................................................. 4 Reserve Fund .............................................................. 18 Authorization .............................................................. ..4 REPAYMENT OF THE LOAN .................................. 18 Outstanding Bonded Indebtedness of

Redevelopment Project No. 1 ••••••••••••••••••••••••••••••••••••• 5 TaxAllocation Financing ............................................ 18 lnGeneral ................................................................... 18

Financing Purpose of the Loan ..................................... 5 Allocation of Taxes ..................................................... 19 SECURITY AND SOURCES OF REPAYMENT ........ 6 The I ndenture ................................................................ 6 The Loan Agreement .................................................... 6

Housing Set-Aside Revenues ..................................... 19 Pledge of Reda,elopment Project No. I Tax

Revenues .................................................................. 19 REDEMPTION OF THE BONDS ............................... 6 Mandatory Rederrption from Optional Loan

Alternative Method ofTaxApportionment ("Teeter Plan") ......................................................... 20

Prepayments ............................................................... 6 ISSUANCE OF ADDITIONAL DEBT ...................... 21 Mandatory Sinking Payment Rederrption .................... 6 Mandatory Redemption upon Acceleration of the L= ........................................................................... 7

The Authority ............................................................. 21 TheAgency ................................................................. 21 Subordinate Debt ........................................................ 22

THE BONDS GENERAL PROVISIONS .................... 7 Registration, Transfer and Exchange ............................ ? Payment ........................................................................ ? Notice ............................................................................ 7 LEGAL MATIERS ...................................................... 7 PROFESSIONAL SERVICES ...................................... 8 FINANCIAL STATEMENTS ....................................... 8 CONTINUING DISCLOSURE .................................... 8 AVAILABILITY OF LEGAL DOCUMENTS ............. 9

BONDOWNERS' RISKS ............................................ 23 THE BONDS .............................................................. 23 General ....................................................................... 23 No Liability of the Authority to the Owners ............... 23 No EffectiveAcceleration on Default... ...................... 23 Enforceability of Remedies ........................................ 23 Investment of Funds ................................................... 23 Secondary Market. ...................................................... 24 THE LOAN ................................................................ 24

SELECTED ESSENTIAL FACTS ............................. 10 Risk Factors Relating to the Reduction of Tax ESTIMATED SOURCES AND USES OF Increment Ra,enues ................................................ 24

FUNDS ....................................................................... 12 General ....................................................................... 24 THE BONDS .............................................................. 12 Reduction in Inflationary Rate ................................... 25 Sources of Funds ......................................................... 12 AssessmentAppeals ................................................... 26 UsesofFunds ............................................................. 12 Proposition 8Adjustments .......................................... 26 THE LOAN ................................................................ 13 Levy and Collection ................................................... 26 Sources of Funds ......................................................... 1 3 Property Owner Bankruptcy ....................................... 27 Uses of Funds ............................................................. 13 Risk Factors Related to Real Estate Market

THE BONDS ................................................................ 14 Conditions ................................................................ 27

GENERAL PROVISIONS ......................................... 14 Da,elopment Risks ..................................................... 27

Repayment of the B onds ............................................. 14 Transfer or Exchange of Bonds .................................. 14 Bonds Mutilated, Lost, Destr0yed or Stolen ............... 14 REDEMPTION ........................................................... 15

Current Real Estate MarketConditions ...................... 27 Adjustable Rate and U nconventional Mortgage

Structures ................................................................. 28 Risk Factors Related to Natural and Man-Made

Mandatory Rederrption from Optional Loan Prepayments ............................................................. 15

Mandatory Sinking Payment Rederrption .................. 15

Disasters .................................................................. 28 Risk Factors Relating to the Loan and the

Redevelopment Law ................................................ 29 Loan is Lirrited Obligations ....................................... 29

iv

Redevelopment Plan Lirritations on TAX I NCR EM ENT REVENUES .............................. 50 Redevelopment Project No. I Tax Ra,enues ............ 29 TAXABLE VALUATIONS ........................................ 50

Risk Factors Related to Bankruptcy of the Historical Taxable Valuations ..................................... 50 Authority and theAgency ........................................ 29 ASSESSMENT APPEALS ......................................... 51

Risk Factors Related to State Budget Legislation ....... 30 General ....................................................................... 51 Risk Factors Related to Assumptions and Base YearAppeals ...................................................... 52

Projections of Redevelopment Project No. I Tax Proposition 8Adjustments .......................................... 52 Revenues .................................................................. 31 General ....................................................................... 52

PROPERTY TAXATION IN CAL I FORNIA ............ 33 Prior Proposition 8Adjustments ................................. 53 CONSTITUTIONAL AMENDMENTS TRANSFERS OF OWNERSHIP ............................... 53

AFFECTING TAX INCREMENT REVENUES ..... 33 DELINQUENCIES .................................................... 54 IMPLEMENTING LEGISLATION ........................... 33 FORECLOSURES ..................................................... 54 CONSTITUTIONAL CHALLENGES TO PASS-THROUGH AGREEMENTS AND

PROPERTY TAX SYSTEM .................................... 34 STATUTORY PAYMENTS ..................................... 55 PROPERTY TAX COLLECTION Pass-ThroughAgreements .......................................... 55

PROCEDURES ....................................................... 34 StatutoryTaxSharing ................................................. 56 SUPPLEMENTAL ASSESSMENTS ......................... 34 COUNTY PROPERTY TAX COLLECTION TAX COLLECTION FEES ........................................ 35 REIMBURSEMENT ............................................... 56 UNITARY PROPERTY TAX ..................................... 35 HOUSING SET-ASIDE ............................................. 57 BUSINESS INVENTORY AND FUTURE DEVELOPMENT IN THE

REPLACEMENT REVENUE ................................. 35 REDEVELOPMENT PROJ ECTS ........................... 57 PROPOSITION 87 ..................................................... 36 PROJECTED REDEVELOPMENT PROJECT FUTURE INITIATIVES ............................................. 36 NO. I TAX REVENUES AND DEBT

T~ ~ :Eu~HL°..~1-~~.:::::::::::::::::::::::::::::::::::::::::::::::::::::~~ P~of :~;:~~~I~~~ ;;;~j~t·N·~-··;·T;;;;···············

59

~~TtO:I ZATION .................................................... 37 D::;:~~~C;;_;~;~~~"ji;;;~·u;;;;~-p~~j"~i;;d··········· 59

Th: L:n~:::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::~~ Redevelopment Project No. I Tax Ra,enues ........... 59 AUTHORITY FINANCIAL STATEMENTS ............. 37 LEGAL MATTERS ..................................................... 61 DEBT SERVICE PAYMENTS ON THE LOAN ENFORCEABILITY OF REMEDIES ....................... 61

AND DEBT SERVICE COVERAGE ON THE APPROVAL OF LEGAL PROCEEDINGS ............... 61 AUTHORITY BONDS ............................................ 38 TAX MATIERS ......................................................... 61

THE AGENCY ............................................................. 39 ABSENCE OF LITIGATION .................................... 63

GOVERNMENTORGANIZATION .......................... 39 CONCLUDING I NFORMATION ............................. 64

AGENCY POWERS ................................................. .40 NO RATINGS ON THE BONDS ............................... 64

REDEVELOPMENT PLANS ................................... .40 UNDERWRITING ..................................................... 64

General ........................................................................ 40 EXPERTS ................................................................... 64

Amended and Restated Reda,elopment Plans ............ 40 Redevelopment Plan Limitations ............................... .41 Redevelopment Plan Expiration ................................ .41 Receipt of Tax Increment Time Limits ...................... .42 Time Lirrit on Incurring I ndebtedness ....................... .42 Limitation on the A mount of Tax I ncrement

FINANCIAL STATEMENTS OF THEAGENCY ..... 64 THE FINANCING CONSULTANT. .......................... 64 FORWARD-LOOKING STATEMENTS ................... 65 ADDITIONAL IN FORMATION ............................... 65 REFERENCES ........................................................... 65 EXECUTION ............................................................. 65

Receipts .................................................................... 42 Limit on theAmount of Bonded Indebtedness .......... .42 AGENCY FINANCIALADMINISTRATION .......... .43 Annual B udget ............................................................ 43 Agency Accounting Records and Financial

Statements ............................................................... .43 Annual Financial Report ............................................. 44 Fi Ii ng of Statement of I ndebtedness ........................... 44

REDEVELOPMENT PROJECT N0.1. ................... .45 GENERAL DESCRIPTION ..................................... ..45 ASSESSED VALUES BY LANDUSE ..................... .45 TOP TEN TAXABLE PROPERTY OWNERS .......... 46 Redevelopment Project No. I Aerial Views ............... .47

v

APPENDIX A ............................................................ A-1

SUMMARY OF THE INDENTURE ....................... A-1

APPENDIX B ............................................................. B-1

AGENCY AUDITED Fl NANCI AL STATEMENTS FOR FISCAL YEAR ENDING JUNE 30, 2010 ........................................ D-1

SUMMARY OF THE LOANAGREEMENT ......... B-1 APPENDIX E ............................................................. E-1 FORM OF CONTINUING DISCLOSURE

APPENDIX C ............................................................ C-1 AGREEMENT ........................................................ E-1

FISCAL CONSULTANT REPORT ........................ C-l APPENDIX F FORM OF OPINION OF BOND

APPENDIX 0 ............................................................ D-1 COUNSEL ............................................................... F-1

APPENDIX G ........................................................... G-1

DTC AND BOOK-ENTRY-ONLY SYSTEM ......... G-1

vi

vii

OFFICIAL STATEMENT $5,550,000

LAKE ELSINORE PUBLIC FINANCING AUTHORITY TAX ALLOCATION REVENUE BONDS

(LAUNCH RAMP PROJECT), 2011 SERIES A This Official Statement which includes the ccwer page and appendices (the "Official Statement") is prcwided to furnish certain information concerning the sale b,I the Lake Elsinore Public Financing Authority (the "Authority") of its Tax Allocation Revenue Bonds (Launch Ramp Prqject), 2011 Series A (the "Bonds''), in the aggregate principal am:iunt of $5,550,CXXl.

INTRODUCTORY STATEMENT This Introductory Statement contains only a brief description of this issue and does not purport to be complete. The Introductory Statement is suqject in all respects to nnre cCJ111)1ete i nformttion in the entire Official Statement and the offering of the Bonds to potential investors is mtde only b,I means of the entire Official Statement and the documents sumrari:zed herein. Potential investors nust read the entire Official Statement to obtain informttion essential to mtke an informed investment decision (see "BONDOWNERS' RISKS" herein).

THE AUTHORITY

Authorization and Formation

The Authority is a joint exercise of pcwers authority organized and existing under and b,I virtue of the Joint Exercise of Po.vers Act, constituting Articles 1 through 4 (commencing with Section 6500) of Chapter 5, Division 7, Title 1 of the Gcwernment Code of the State (the "Joint Po.versAct"). The City of Lake Elsinore (the "City"), pursuant to Resolution No. 89-32, adopted on July 25, 1989, and the Redevelopment Agency of the City of Lake Elsinore (the "Agency"), pursuant to Resolution No. 89-4, adopted onJ uly 25, 1989, forrned the Authority b,I the execution of ajoint exercise of pcwers agreement (see"THEAUTHORITY" herein).

Bond Authorization and Issuance

Pursuant to the Joint Po.versAct, the Authority is authorized, among other things, to issue revenue bonds to prcwide funds to acquire local obligations issued b,l local agencies or to rnake loans to local agencies to finance or refinance public capital i rrprcwements, such revenue bonds to be repaid from the repayment of the local obligations so acquired b,I the Authority or repayment of a loan, such as the Loan (the "Loan") described herein (see "INTRODUCTORY STATEMENT- THE LOAN" and "INTRODUCTORY STATEMENT­SECURITY AND SOURCES OF REPAYMENT" belo.v). The Bonds are being issued pursuant to the Indenture, as defined herein (see "APPENDIX A- SUMMARY OF THE INDENTURE"). The Bonds are being sold to the Underwriter pursuant to, and suqject to the terms and conditions of, the Purchase Contract, b,I and among the Underwriter, the Authority and the Agency (the" Purchase Contract''). The Indenture and the Purchase Contract were apprcwed b,I the Authority pursuant to a resolution, adopted on January 25, 2011. It is anticipated that the Bonds, in oook--entry form, will be available for delivery through the facilities of The Depository Trust Corrpany, on or aboutJ anuary 27, 2011 (See" APPENDIX G - DTC AND BOOK-ENTRY-ONLY SYSTEM").

Financing Purpose of the Bonds

The Bands are bei ng issued:

1. To pro.tide funds to rnake the Loan on the date of delivery of the Bonds;

2. To fund the Reserve Fund (as defined in the Indenture). The amount of Bond proceeds deposited into the Reserve Fund will be $539,622.83 (an amount equal to the Reserve Requirement) (see "SOURCES OF PAYMENT FOR THE BONDS-REPAYMENT OF THE BONDS -Reserve Fund" herein); and 3. To pay the expenses of the Authority in connection with the issuance of the B ands

(see "ESTIMATED SOURCES AND USES OF FUNDS" and "SOURCES OF PAYMENT FOR THE BONDS -REPAYMENT OF THE BONDS" herein).

THE AGENCY

Formation

The Agency is a public body, corporate and politic, existing under and b,I virtue of the Comm.mity Redevelopment Law of the State, constituting Part 1 of Division 24 (commencing with Section 33000) of the Health and Safety Code of the State (the "Redevelopment LiM/'). The Agency was activated inJ uly 1980. The City Council of the City (the "City Council"), at the same time, declared itself to be the merrbers of the Agency and appointed the City Managerto be the Agency's Executive Director (see "THE AGENCY" herein).

The Agency is corrprised of 3 Redevelopment Prqjects: (i) the Rancho Laguna Redevelopment Prqject No. I ("Redevelopment Prqject No. I"); (ii) the Rancho Laguna Redevelopment Prqject No. II ("Redevelopment Prqject No. 11") and (iii) the Rancho Laguna Redevelopment Prqject No. Ill ("Redevelopment Prqject No. 111") (collectively Redevelopment Prqject No. I, Redevelopment Prqject No. 11 and Redevelopment Prqject No. 111 are referred to herein as the" Redevelopment Prqjects'').

The Authority will be making the Loan to Redevelopment Prqject No. I (see map entitled "Reda,elopment Agency ProjectArea Boundaries" belON).

TaxAllocation Financing

The Redevelopment LiM' pro.tides a means for financing redevelopment prqjects based upon an allocation of taxes collected within a redevelopment prqject. The taxable valuation of a redevelopment prqject last equalized prior to adoption of the redevelopment plan, or base roll, is established and, except for any period during which the taxable valuation drops belo.v the base year level, the taxing agencies within the redevelopment prqject thereafter receive the taxes produced b,I the levy of the then current tax rate upon the base roll. Taxes collected upon any increase in taxable valuation o.ter the base roll (except such portion generated b,I rates levied to pay voter--appro.ted bonded indebtedness on or after January 1, 1989, for the acquisition or imprcwement of real property) are allocated to a redevelopment agency (the 'Tax Increment Revenues") and may be pledged b,I a redevelopment agency to the repayment of any indebtedness incurred in financing or refinancing a redevelopment prqject. Redevelopment agencies themselves have no authority to levy property taxes and must look specifically to the allocation of taxes produced as alx:we indicated.

Housing Set-Aside Revenues

In accordance with Section 33334.2 of the Redevelopment LiM', not less than twenty percent (2036) of all taxes which are allocated to the Agency from the Redevelopment Prqjects (see "TaxAllocation Financing" abo.te) are required to be deposited in a ION and moderate income housing fund (the "Lo.v and Moderate I ncorne H ousi ng Fund') to be used b,I the Agency for purposes of i mpro.ti ng, i ncreasi ng and preservi ng the City's supply of housing for persons and fanilies of ION or moderate income (including the payment of indebtedness issued or incurred for such purposes) (the" Housing Set-Aside Revenues''). The Housing Set-Aside Revenues are calculated at 2036 of gross Tax Increment Revenues within each of the Redevelopment Prqjects; therefore the amount of Housing Set-Aside Revenues is not affected b,I payments under any tax sharing agreements or any statutory pass-through requirements.

2

Redevelopment Agency Project Area Boundaries

...______, AREANO.l ORIGINAL

LJ AREA NO.I

AREAN0.2 ~~

LJ AREA NO .3

CITY OF LAKE ELSINORE REDEVELOPMENT AGENCY

PROJECT AREA BOUNDARIES

3

Prepare,1 By City of Lake Elsinore GJS May, 2006 Dat.-, Source~ County of Riverside GJS, City of Lake Elsinore GJS Stateplane NAD83

REDEVELOPMENT PROJECT NO. I Formation

The original Redevelopment Plan (as defined herein) for Redevelopment Prqject No. I was adopted b,I Ordinance No. 607 on September 23, 1980, and, thereafter, has been amended four ti mes: b,I Ordinance No. 624, adopted on July 20, 1981, to add territory; b,I Ordinance No. 987 on Ncwember 22, 1994, to conform limits to Assembly Bill 1290 (AB 1290); b,I Ordinance No. 1249 on February 26, 2008, to repeal the debt establishment limit as pro.tided b,I Senate Bill 211 (SB 211), to extend the effectiveness date and time linitto repay debt and collect tax increment revenues as pro.tided b,I Senate Bill 1045 (SB 1045) and to make certain technical corrections; and b,I Ordinance No. 1260 on April 28, 2009, to adopt an Amended and Restated Redevelopment Plan (as defined herein). The Amended and Restated Redevelopment Plan (i) reflects changes in the Redevelopment Law that impose additional requirements and restrictions not reflected in the original text, (ii) incorporates al I prior amendments, ( i ii) updates the land use pr0.tisions, (iv) clarifies and restates the time limits and financial limits, and (v) imprcwes the format and presentation of the text and the map of Redevelopment Prqject No. 1.

General Description

The 1,910-acre Redevelopment Prqject No. I consists of three non-contiguous areas of the City (see "REDEVELOPMENT PROJECT NO. 1" herein for a description of Redevelopment Prqject No. I). Redevelopment Prqject No. I generally consists of three areas in terms of land use (see map entitled "Redevelopment Agency Project Area Boundaries'' abOJe). The first area is adjacent to, and southerly of, Interstate 1 5. Maj or I and uses include the Lake EI si nore Outlet Center, the Central Business Park, and 2 retai I centers that incl ude Target and Horne Depot. The second area includes the central busi ness district and g0.ternmental offices. The third area is a commercial district near the municipal baseball stadium. Redevelopment Prqject No. I also includes several small non-contiguous areas at the western end of Lake Elsinore. 648.37 acres (33.95%) of the 1,91 O acres within Redevelopment Prqject No. I are vacant. In terms of total taxable value for FY 2010-11, residential uses comprise 34.7% of the assessed value, commercial uses comprise 31.936 of the assessed value, industrial uses comprise 21.6% of the assessed value and vacant I and comprises 3.6% of the assessed value within Redevelopment Prqj ect No. I.

THE LOAN

Authorization

The proceeds of the B ands wi 11 be I oaned to the Agency pursuant to the Loan. The Authority wi 11 be making the Loan to the Agency with respect to the Redevelopment Prqject No. I in the amount of $5,550,000 pursuant to the Loan Agreement (the" Loan Agreement''). The Agency authorized the Loan b,I resolution, adopted on January 25, 2011. The Agency has pledged a lien on Redevelopment Prqject No. I Tax Revenues to the repayment of the Loan. "Redevelopment Prqject No. I Tax Revenues" consist of Tax Increment Revenues from the Agency's Redevelopment Prqject No. I, excluding (i) amounts required to be deposited into the Agency's Lew and Moderate Income Housing Fund, (ii) the SB 2557 County Administrative fees and collection charges and (iii) amounts required to be paid pursuant to certain Pass-Through Agreements and Statutory Tax Sharing (as these terms are defined herein) (see "SOURCES OF PAYMENT FOR THE BONDS," "BONDOWNERS' RISKS" and "TAX INCREMENT REVENUES" herein).

The pledge of Redevelopment Prqject No. I Tax Revenues to the Loan is on a subordinate basis with any payments required under the Agency's Loan Agreement, dated as of N0.tember 1, 2010, with respect to Redevelopment Prqject No. I (the "2010C Loan") and relating to the Lake Elsinore Public Financing Authority Tax Allocation Revenue Bonds, (1999 Series A Refunding), 2010 Series C (see "Outstanding Bonded Indebtedness of Redevelopment Project No. I" belcw).

The pledge of Redevelopment Prqject No. I Tax Revenues to the Loan is on a parity basis with any payments required under the Agency's Loan Agreement, dated as of January 1, 2010, with respect to Redevelopment Prqject No. I (the "2010<\ Loan") and relating to the Lake Elsinore Public Financing

4

Authority Tax Allocation Revenue Bonds, (1999 Series C Refunding), 2010 Series A (see "Outstanding Bonded Indebtedness of Redevelopment Project No. I" belo.v).

Debt service on the Loan, the 2010<\ Loan and the 2010C Loan is estimated to be cc:wered b,I Redevelopment Prqject No. I Tax Revenues b,I a ratio of approximately 1.50 to 1. In addition, in the event there are not sufficient Redevelopment Prqject No. I Tax Revenues to pay debt service on the Loan, the Agency has co.tenanted to make an i nterfund loan from Redeveloprrent Prqject No. 11, Redevelopment Prqject No. 111 and the LON and Moderate I ncorne Housing Fund (see "SOURCES OF PAYMENT FOR THE BONDS - REPAYMENT OF THE LOAN - Reda,elopment Project No. I Pledge of Tax Ra,enues'' herein).

Outstanding Bonded Indebtedness of Redevelopment Project No. I

Pursuant to an Indenture of Trust, dated as of Nc:wember 1, 2010, the Authority issued its Tax Allocation Revenue Bonds (1999 Series A Refunding), 2010 Series C (the "Authority 2010C Bonds") in the aggregate principal amount of $29,435,000, all of which remain outstanding. Proceeds of the Authority 2010C Bonds were loaned, in part, b,I the Authority to the Agency pursuant to a Loan Agreerrent, dated as of No.tember 1, 2010 (the "2010C Loan Agreerrent''). The loan pursuant to the 2010C Loan Agreerrent (the "2010C Loan") was in the principal amount of $16,220,000, all of which remain outstanding. The 2010C Loan matures on September 1, 2030. The pledge of Redevelopment Prqject No. I Tax Revenues, under the 201 OC LoanAgreerrent, is on a senior basis with any payrrents required under the Loan A greerrent, as described herei n.

Pursuant to an Indenture of Trust, dated as of February 1, 2010, the Authority issued its Tax Allocation Revenue Bonds (1999 Series C Refunding), 2010 Series A (the "Authority 2010A Bonds") in the aggregate principal amount of $15,435,000, of which $14,755,000 currently remains outstanding. Proceeds of the Authority 2010<\ Bonds were loaned, in part, b,I the Authority to the Agency pursuantto a LoanAgreerrent, dated as of February 1, 2010 (the" 2010A LoanAgreerrent''). The loan pursuant to the 2010A Loan Agreerrent (the "2010<\ Loan") was in the principal amount of $3,055,000, of which $2,910,000currently remains outstanding. The 2010<\ Loan matures on September 1, 2031. The pledge of Redevelopment Prqject No. I Tax Revenues, under the 201 Cl<\ Loan Agreerrent, is on a parity basis with any payrrents required underthe LoanAgreerrent as described herein.

Financing Purpose of the Loan

The Agency has completed engineering docurrents and bid packages and wi 11 solicit construction bi els for the prqj ect as soon as financing is secured.

1. The Loan is being made to finance, in part, the follo.ving public facilities:

A. Six-lane boat launching ramp

B. Three boarding floats

C. 288vehicle;trailer parking area

D. Service area with six employee and four barrier-free access parking spaces

E. Launch ramp apron and staging area

F. Four-unit, barrier-free access restroom building

G. Boat wash-dcwn area

H. Fish-cleaning station

I. Sanitation pump out system

J . L andscapi ng

K. Picnic area

5

L. Sewer Lift Station

2. The Loan is also being made to pay the expenses of the Agency in connection with making the Loan.

The City has received a $3,000,000 grant from the State of California Department of Boating and Waterways to assist in financing the Prqject.

Although the prqjects described aro..re are expected to be funded frorn proceeds of the Loan, the Agency is authorized to use the proceeds of the Loan for other perni tted redevel oprnent purposes.

SECURITY AND SOURCES OF REPAYMENT

The Indenture

The Bonds are secured under an Indenture of Trust, dated as of January 1, 2011 (the "Indenture''), by and between the Authority and Union Bank, N.A., Los Angeles, California, as trustee (the "Trustee'') (see "APPENDIX A -SUMMARY OF THE INDENTURE"). The proceeds of the Bonds will be loaned by the Authority to the Agency pursuant to the Loan Agreement. The Bonds are payable from loan payments to be made to the Authority underthe Loan Agreement, from amounts i n the Reserve Fund created underthe Indenture and from certain funds and accounts created under the I ndenture, and from investment earnings thereon (see "SOURCES OF PAYMENT FOR THE BONDS" and" BONDOWNERS' RISKS"" herein).

The Bonds are limited obligations of the Authority. The Bonds do not constitute a debt or liability of the City, the State of California (the" State") or of any political subdivision thereof, other than the Authority. The Authority shall be obligated to pay the principal of the Bonds, and the interest thereon, only from the funds described herein, and neither the faith and credit nor the taxing paver of the City, the State or any of its political subdivisions is pledged to the payment of the principal of or the interest on the Bonds. TheAuthority has no taxing paver.

The Loan Agreement

The Loan is to be made and secured pursuant to the Loan Agreement authorized by R esol uti on of the Agency, adopted on January 25, 2011. A description of the Loan Agreement is set forth in "APPENDIX B -SUM MARY OF THE LOAN AGRE EM ENT."" The Loan is made in accordance with the laws of the State, and particularly the Redevelopment Law.

The Loan is a limited obligation of the Agency. The Loan does not constitute a debt or liability of the State or of any political subdivision thereof, other than the Agency. The Agency shall be obligated to pay the principal of the Loan, and the interest thereon, only frorn the funds described herein, and neither the faith and credit nor the taxing paver of the City, the State or any of its political subdivisions is pledged to the payment of the principal of or the interest on the Loan. The Agency has noadvalorerntaxing paver.

REDEMPTION OF THE BONDS

Mandatory Redemption from Optional Loan Prepayments

The Bonds are suqject to mandatory redemption frorn optional prepayments under the Loan prior to maturity, in whole or in part, on a pro rata basis arnong maturities (as nearly as practicable) and by lot within a maturity, on September 1, 2016, and on any date thereafter, at a redemption price equal to the principal amount thereof, plus accrued interest to the date of redemption, as described herein (see "THE BONDS -REDEMPTION - Mandatory Redemption From Optional Loan Prepayments" herein).

Mandatory Sinking Payment Redemption

The Bonds maturing September 1, 2021, are suqject to mandatory sinking payment redemption, without preniurn, prior to their maturity date, in part by lot on September 1 in each year commencing September

6

1, 2018, from mandatory sinking payments under the Indenture (see "THE BONDS -REDEMPTION -Mandatory Sinking Payment Redemption" herein).

Mandatory Redemption upon Acceleration of the Loan

The Bonds are also suqject to mandatory redemption, without premium, prior to maturity, in whole or in part, on any date, from amounts credited to.vard the payment of principal of the Loan coning due and payable solely by reason of acceleration of the Loan (see "THE BONDS - REDEMPTION - Mandatory Redemption upon Acceleration of the Loan" herein).

THE BONDS GENERAL PROVISIONS

Registration, Transfer and Exchange

The Bonds will be issued in fully,egistered form without coupons. Any Bond may, in accordance with its term,, be transferred or exchanged, pursuant to the pr0.tisions of the Indenture (see "THE BONDS -GENERAL PROVISIONS - Transfer or Exchange of Bonds'' herein). When delivered, the Bonds will be registered in the name of The Depository Trust Corrpany, Ne.vYork, Ne.vYork (" DTC"), or its nominee. DTC will act as securities depository for the Bonds. Individual purchases of Bonds will be made in oook­entry form only in the principal amount of $5,000 or any integral multiple thereof. Purchasers of beneficial interests in the Bonds will not receive certificates representing their o.vnership interests in Bonds purchased (see "APPENDIX G - DTC AND BOOK-ENTRY-ONLY SYSTEM").

Payment

Principal of the Bands and any preni um upon redemption wi 11 be payable in each of the years and in the amounts set forth on the inside ccwer page hereof upon surrender at the corporate trust office of the Trustee in Los Angel es, California. I nterest on the Bands wi 11 be paid by check of the Trustee mai I ed by first-class mail on the Interest Payment Date (as defined in the Indenture) to the person entitled thereto (except as otherwise described herein for interest paid to an account in the continental United States of America by wire transfer as requested in writing no later than the applicable Record Date (as defined in the Indenture) by o.vners of $1,000,000 or more in aggregate principal amount of Bonds) (see "THE BONDS -GENERAL PROVISIONS" herein). Initially, interest on and principal and premium, if any, of the Bonds will be payable when due by wire of the Trustee to DTC which will, in turn, remit such interest, principal and premium, if any, to DTC's Direct Participants (as defined herein), which will, in turn, remit such i nterest, pri nci pal and preni um, if any, to B enefi ci al owners ( as defined herein) of the B ands ( see "APPENDIX G -DTCAND BOOK-ENTRY-ONLY SYSTEM").

Nctice

Notice of any redemption wi 11 be mai I ed by first -cl ass mai I by the Trustee at I east thirty ( 30) but no more than sixty (60) days prior to the date fixed for redemption to the registered o.vners of any Bonds designated for redemption and to the Securities Depositories and one or more Information Services pr0.tided in the Indenture. Neither failure to receive such notice nor any defect in the notice so mailed wi 11 affect the sufficiency of the proceedings for redemption of such Bands or the cessation of accrual of interest on the redemption date (see "THE BONDS -REDEMPTION - Notice of Redemption; Rescission" herein).

The Authority shall have the right to rescind any optional redemption by written notice to the Trustee on or prior to the date fixed for redemption. Any notice of optional redemption shall be cancelled and annulled if for any reason funds will not be or are not available on the date fixed for redemption for the payment in full of the Bonds then called for redemption, and such cancellation shall not constitute an Event of Default under the Indenture.

LEGAL MATTERS The legal proceedings in connection with the issuance of the Bonds are suqject to the appr0.ting opinion of Fulbright & Jaworski L.L.P., Los Angeles, California, as Bond Counsel ("Bond Counsel"). Such

7

op1rnon, and certain tax consequences incident to the o.vnership of the Bonds, including certain exceptions to the tax treatment of interest, are described more fully underthe heading "LEGAL MATTERS" herein. Certain legai matters will be passed on for the City and the Agency b,I Leibold, Mcclendon & Mann, P.C., Laguna Hills, California, as City Attorney and Agency Counsel and b,I Fulbright & Jaworski L.L.P., Los Angeles, California, as Disclosure Counsel. Certain legai matters will be passed on for the Underwriter b,I McFarlin & Anderson LLP, Lake Forest, California.

PROFESSIONAL SERVICES Union Bank, NA., Los Angeles, California, will serve as Trustee under the Indenture. The Trustee will act on behalf of o.vners of the Bonds (the "Bondo.vners") for the purpose of receiving all moneys required to be paid to the Trustee, to allocate, use and apply the same, to hold, receive and disburse the Revenues and other funds held under the Indenture, and otherwise to hold al I the offices and perform al I the functi ans and duties pro.tided in the I ndenture to be held and performed b,I the Trustee.

Rod Gunn Associates, Inc., Huntington Beach, California, Financing Consultant (the "Financing Consultant"), acwised the Authority as to the financial structure and certain other financial matters relating to the Bands and assisted the Authority and the Agency with the preparation of this Official Statement.

HdL Coren & Cone, Diamond Bar, California (the "Fiscal Consultant"), prepared the Fiscal Consultant Report containing certain background information on the Agency and Redevelopment Prqject No. I, including the prqjection of Tax Revenues used in sizing and structuring the Loan. See "APPENDIX c -FISCAL CONSUL TANT REPORT" for more corrplete information regarding Tax Revenues.

Fees payable to Bond Counsel, Disclosure Counsel, Underwriter's Counsel and the Financing Consultant are contingent upon the sale and delivery of the Bands.

Fl NANCI AL STATEMENTS The Agency's financial statements for the fiscal year ended June 30, 2010, are attached hereto as "APPENDIX D" and have been audited b,I Diehl, Evans & Company, LLP, Certified Public Accountants & Consultants, Irvine, California. The Agency's audited financial statements are public documents and are included within this Official Statement without the prior apprc:wal of the auditor. The auditor has not performed any post-audit of the financial condition of the Agency. The Agency represents that there have been no material ad.terse changes in its financial position sinceJ une 30, 2010.

CONTINUING DISCLOSURE The Agency has undertaken al I responsi bi Ii ti es for any requi red con ti nui ng di sci osure to B ondONners as described belo.v. The Authority shall have no liability to the BondONners or any other person with respect to such disclosures pro.tided b,I the Agency.

The Agency will co.tenant to pro.tide annually certain financial information and operating data relating to Redevelopment Prqject No. I b,I not laterthan February 15 of each year, commencing February 15, 2012, and to pro.tide the audited financial statements of the Agency forthe fiscal year endingJ une 30, 2011, and for each subsequent fiscal year when they are available (together, the "Annual Report''), and to pro.tide notices of the occurrence of certain other enumerated events. The Annual Report and the notice of enumerated events will be filed b,I the Trustee, acting as dissemination agent, on behalf of the Agency with the Municipal Securities Rulemaking Board ("MSRB") in an electronic format as prescribed b,I the MSRB. The specific nature of the information to be contained in the Annual Report or the notices of enumerated events and certain other terms of the continuing disclosure obligation are summarized in "APPENDIX E -FORM OF CONTINUING DISCLOSURE AGREEMENT."

The Agency has not previously failed to comply with any undertaking to pro.tide any required continuing disclosure.

8

AVAi LABI LITY OF LEGAL DOCUMENTS The summaries and references contained herein with respect to the Indenture, the Bonds, the Loan Agreement and other statutes or documents do not purport to be corrprehensive or definitive and are qualified b,I reference to each such document or statute, and references to the Bands are qualified i n their entirety b,I reference to the form thereof included in the Indenture.

Copies of the documents described herein are available for inspection during the period of initial offering of the Bonds at the offices of the Underwriter, O'Connor & Corrpany Securities, Inc., 250 Ne.vport Center Drive, Suite 303, Ne.vport Beach, California, 92660 (949) 706-0444. Copies of these documents may be obtained after delivery of the Bonds from the City at 130 S. Main Street, Lake Elsinore, California 92530, telephone (951) 674-3124.

9

SELECTED ESSENTIAL FACTS The follONing sumrary ck:Jes not purport to be cCJl11)iete. Reference is hereby rrade to the cCJl11)iete Official Statement in this regard.

THE BONDS Principal Amount of Bonds:

Additional Bands:

First Optional Redemption Date:

Pri rrary Source of R e..renues for Repayment:

Priority:

Debt Service C0.terage from Repayment of the Loan (see "THE AUTHORITY - DEBT SERVICE PAYMENTS ON THE LOAN AND DEBT SERVICE COVERAGE ON THE AUTHORITY BONDS" herein):

THE LOAN Pri nci pal A mount of the Loan:

10

$5, 550,CXX)

No Additional Bonds are authorized to be secured by the Loan except bonds issued to refund the Bonds. Ho.ve..rer, the Agency is authorized to issue additional indebtedness secured by the Rede.telopment Prqject No. I Tax Revenues on a parity with the Loan, and the Authority may issue bonds to acquire the additional indebtedness of the Agency. When and if issued, the Bands and such addi ti anal bonds of the Authority would be secured by separate indebtedness of the Agency which in turn, will be secured by the same Rede.telopment Prqject No. I Tax Re..renues on a parity with each other (see "SOURCES OF PAYMENT FOR THE BONDS - ISSUANCE OF ADDITIONAL DEBT" herein).

September 1, 2016, at 10036 of principal amount (see "THE BONDS - REDEMPTION - Mandatory Redemption From Optional Lran Prepayments" herein).

The Bands are repayable from Revenues, as defined herein, which pri rrari ly consist of repayment of the Loan (see "SOURCES OF PAYMENT FOR THE BONDS" and "BONDOWNERS' RISKS" herein).

A 11 the Bands are equal ly secured by a fi rst pledge of and lien on the Re..renues as described herein (see "SOURCES OF PAYMENT FOR THE BONDS - REPAYMENT OF THE BONDS" and "BONDOWNERS' RISKS").

10036

$5, 550,CXX)

Additional Loans:

Primary Source of Revenues for Repayment of the Loan:

Priority:

Minimum Ratio of Estimated Redevelopment Prqject No. I Tax Revenues in any Fiscal Year to Maximum Annual Debt Service on the Loan, the 2010C Loan and the 2010<\ Loan:

I nterfund Loan:

REDEVELOPMENT PROJECT NO. I Year E stabl i shed:

Last Date to Receive Tax Increment Revenues:

Size (in Acres):

Ten Largest Taxpayers (expressed as a percentage of total Secured and Unsecured 2010-11 Assessed Value):

Land Use as a percentage of 2010-11 Fiscal Year Assessed Value:

11

Additional indebtedness on a parity with the Loan is pernitted suqject to certain conditions (see "SOURCES OF PAYMENT FOR THE BONDS -ISSUANCE OF ADDITIONAL DEBT" herein). No additional indebtedness senior to the Loan is al I o.ved ( other than to refund the 201 OC Loan). Subordinate debt is permitted.

Redevelopment Prqject No. I Tax Revenues (see "TAX INCREMENT REVENUES" herein).

The Agency has pledged a lien on Redevelopment Prqject No. I Tax Revenues, on a subordinate basis to the 201 OC Loan and on a parity with the 2010<\ Loan (see "SOURCES OF PAYMENT FOR THE BONDS" and "BONDOWNERS' RISKS" herein).

15036 (see "TAX INCREMENT REVENUES -

PROJECTED REDEVELOPMENT PROJECT NO. I TAX REVENUES AND DEBT SERVICE COVERAGE"" herein).

In the event there are not sufficient Redevelopment Prqject No. I Tax Revenues to pay debt service on the Loan, the Agency has co.tenanted to make an interfund loan from Redevelopment Prqject No. 11, Redevelopment Prqject No. 111 and the LON and Moderate Income Housing Fund (see "SOURCES OF PAYMENT FOR THE BONDS - REPAYMENT OF THE LOAN - Pledge of Redevelopment Project No. I TaxRa,enues" herein).

1980

J uly 20, 2032

1,910Acres (648.37 acres (33.95%) are vacant)

22.04% (see" REDEVELOPMENT PROJECT NO. 1 -TOP TEN TAXABLE PROPERTY OWNERS" herein).

Residential 34.7%, Commercial 31.9%, Industrial 21.6%, Vacant Land 3.6%, Other 8.2% (see "REDEVELOPMENT PROJECT NO. I - ASSESSED VALUES BY LAND USE" herein).

ESTIMATED SOURCES AND USES OF FUNDS THE BONDS

Proceeds from the sale of the Bands wi 11 be used to make the Loan to the Agency i n the aggregate principal amount indicated belo.v. Under the prc:wisions of the Indenture, the Trustee will receive the proceeds from the sale of the Bands and wi 11 apply them as fol Io.vs:

Sources of Funds

Principal Amount of the Bonds

Original Issue Discount

Underwriter's Discount

Net Bond Proceeds

Uses of Funds

Lam Fundl1I

Costs of Issuance Fund 121

Reserve Fund 131

Total

(l) Tobeusedtoacquiretheloan.

$5,550,000.00

(153,771.75)

(111.000.00)

$5,285,228.25

$4,587,605.42

158,000.00

539.622.83

$5,285,228.25

(2) Annunts in the Costs of Issuance Fund will be used to pay fees and expenses of Bond Counsel, the Financing Consultant Disclosure Counsel, Agency Counsel, Underwriter's Counsel and the Trustee, printing costs and other costs associated with the issuance of the Bonds.

(5) An amount equal to the Reserve Requirement (see "SOURCES OF PAYMENT FOR THE BONDS -REPAYMENT OF THE BONDS - Reserve Fund").

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THE LOAN Under the pr0.tisions of the Loan Agreement, the Trustee will receive the proceeds of the Loan and will apply or credit them as fol Io.vs:

Sources of Funds

Principal Amount of the Loan

Loan Discount

Total Available Funds

Uses of Funds

Construction Fund'''

Costs of Issuance'''

Total

$5,550,000.00

(962,394.58)

$4,587,605.42

$4,528,225.42

59,380.00

$4,587,605.42

'" To be used to finance, in part, the Launch Rarrp project or such other redevelopment projects as the Agency ITTIY deterrrine (see "INTRODUCTORY STATEMENT - THE LOAN - Financing Purpose of the Loan").

w Costs of Issuance include fees of Bond Counsel, Agency Counsel, the Financing Consultant the Fiscal Consultant, the Trustee and other costs related to the m1king of the Loan.

13

THE BONDS GENERAL PROVISIONS

Repayment of the Bonds

I nterest is payable on the Bands at the rates per annum set forth on the i nsi de cc:wer page hereof. I nterest with respect to the Bonds will be computed on the basis of a year consisting of 360 days and twelve 30-day months.

Each Bond will be dated as of the closing date, and interest with respect thereto will be payable from the Interest Payment Date next preceding the date of authentication thereof, unless (a) it is authenticated on or before an Interest Payment Date and after the close of business on the preceding Record Date, in which event it shall bear interest from such Interest Payment Date; (b) it is authenticated on or before August 15, 2011, in which event interest thereon will be payable from the closing date; or (c) interest on any Bond is in default as of the date of authentication, in which event interest thereon will be payable from the date to which interest has been paid in full, payable on each Interest Payment Date.

Interest on the Bonds will be payable b,I check of the Trustee mailed b,I first-class mail on the applicable Interest Payment Date to the person appearing on the registration books as the o.vner thereof, initially Cede & Co., or b,I wire transfer made on such Interest Payment Date to any o.vner of $1,000,000 or more in aggregate principal amount of outstanding Bands, who shal I have requested such transfer pursuant to written instructions pro.tided prior to the applicable Record Date to the Trustee. The o.vners of the Bonds sho.vn on the registration books on the Record Date for the Interest Payment Date wi 11 be deemed to be the o.vners of the Bands on said Interest Payment Date for the purpose of the paying of interest. Principal of the Bonds and any premium upon early redemption is payable upon presentation and surrenderthereof, at the corporate trust office of the Trustee in LosAngeles, California.

Transfer or Exchange of Bonds

Any Bond, in accordance with its term,, may be transferred or exchanged, pursuant to the prcwisions of the Indenture, upon surrender of such Bond for cancellation at the corporate trust office of the Trustee. Whenever any Bond or Bonds shall be surrendered for transfer or exchange, the Trustee shall authenticate and deliver a ne.v Bond or Bonds for like aggregate principal amount or maturity amount of authorized denoni nations. The Trustee is not required to transfer or exchange any Bands or portions thereof during the period establ i shed b,I the Trustee for selection of Bands for redemption, or any Bands selected for redemption. The cost of printing Bonds and any services rendered or expenses incurred b,I the Trustee in connection with any transfer shall be paid b,I the Authority.

Bonds Mutilated, Lost, Destroyed or Std en

If any Bond becomes mutilated, the Authority, at the expense of the BondONner, will execute, and the Trustee will thereupon authenticate and deliver, a ne.v Bond of like series and tenor in exchange and substitution for the Bond so mutilated, but only upon surrender to the Trustee of the Bond so mutilated. Every mutilated Bond so surrendered to the Trustee will be canceled b,I it. If any Bond is lost, destrO{ed or stolen, evidence of such loss, destruction or theft may be subnined to the Trustee and, if such evidence is satisfactory to the Trustee and indemnity for the Trustee and the Authority satisfactory to the Trustee shall be given, the Authority, at the expense of the BondONner, will execute, and the Trustee will thereupon authenticate and deliver, a ne.v Bond of like series and tenor in lieu of and in replacement for the Bond so lost, destrO{ed or stolen (or if any such Bond has matured or has been called for redemption, instead of issuing a replacement Bond, the Trustee may pay the same without surrender thereof upon receipt of indemnity satisfactory to the Trustee). The Trustee may require payment of a fee for preparing and authenticating each ne.v B ond issued pursuant to the I ndenture. Any Bond issued under the

14

prc:wisions of the Indenture in lieu of any Bond alleged to be lost, destrO{ed or stolen will be entitled to the benefits of the Indenture with al I other Bands secured b,I the Indenture.

REDEMPTION Mandatory Redemption from Optional Loan Prepayments

The Bonds are suqject to mandatory redemption from optional prepayments under the Loan prior to maturity on any date on or after September 1, 2016, as a whole or in part, on a pro rata basis among maturities (as nearly as practicable) and b,l lotwithin a maturity, from loan prepayments b,I the Agency of all or any portion of the Loan at 10036 of the principal amount of the Bonds to be redeemed, together with accrued i nterest thereon to the date fixed for redemption.

Mandatory Sinking Payment Redemption

The Bonds maturing on September 1, 2021, are suqject to mandatory redemption, in part b,l lot, on September 1 in each year commencing September 1, 2018, from mandatory sinking payments made b,I the Authority pursuant to the I ndenture at a redemption price equal to the pri nci pal amount thereof to be redeemed, without preni um, pl us accrued interest thereon to the date of redemption as set forth i n the follo.ving schedule; pro.tided, ho.vever, that (i) in lieu of redemption thereof, the Bonds may be purchased b,I the Authority and tendered to the Trustee, and (ii) if some but not all of the Bonds have been redeemed pursuant to mandatory redemption from opti anal I oan prepayments and mandatory redemption upon acceleration of the Loan prc:wisions described herein, the total amount of all future sinking payments wi 11 be reduced b,I the aggregate pri nci pal amount of the Bands so redeemed, to be al I ocated among such sinking payments on a pro rata basis (as nearly as practicable) in integral multiples of $5,000 as deterni ned b,I the Authority.

SCHEDULE OF MANDATORY SINKING PAYMENT REDEMPTIONS TERM BONDS MATURING SEPTEMBER 1, 2021

September 1 Year 2018 2019

Principal Amount

$585,000 620,000

September 1 Year 2020 2021

Mandatory Redemption upon Acceleration of the Loan

Principal Amount $660,000 700,000 (maturity)

The Bands wi 11 al so be suqj ect to mandatory redemption on any date, from amounts credited to.vards the payment of principal of the Loan coning due and payable solely b,I reason of an event of default and acceleration of the Loan pursuant to the Loan Agreement at a redemption price equal to the pri nci pal amount of the Bonds to be redeemed, without premium, together with accrued interest thereon to the redemption date (see "APPENDIX B - SUMMARY OF THE LOAN AGREEMENT - Events of Default and Acceleration of Maturities" herein). The Bonds will be suqject to mandatory redemption pursuant to the prc:wisions of the Indenture solely from amounts credited to.vards the payment of principal of the Loan which has become due and payable b,I reason of such event of default and acceleration only.

Nctice of Redemption; Rescission

When redemption is authorized or requi red, written notice of redemption is required to be mai I ed b,I the Trustee to the respective owners of any Bonds designated for redemption at their addresses appearing on the bond registration books, to the Securities Depositories, and to the Information Services, all as pro.tided in the I ndenture, b,I first -cl ass mai I, postage prepaid, no I ess than thi rty ( 30), nor more than sixty (60) days prior to the date fixed for redemption. Neither failure to receive such notice nor any defect in the notice so mai I ed wi 11 affect the sufficiency of the proceedings for redemption of such B ands or the cessation of accrual of i nterest on the redemption date.

15

In addition to the foregoing notice, further notice will be given by the Trustee to any Bondo.vner whose Bond has been called for redemption but who has failed to tender his or her Bond for payment by the date which is sixty (60) days afterthe redemption date, but no defect in such further notice will in any manner defeat the effectiveness of a cal I for redemption.

If at the time of mailing of any notice of optional redemption there shall not have been dep:isitedwith the Trustee moneys sufficient to redeem all the Bonds called for redemption, such notice shall state that it is suqject to the dep:isit of the redemption moneys with the Trustee not laterthan the opening of business on the redemption date and will be of no effect unless such moneys are so dep:isited.

The Authority shall have the right to rescind any redemption from optional prepayment under the Loan Agreement by written notice to the Trustee on or prior to the date fixed for redemption. Any notice of such redemption shall be cancelled and annulled if for any reason funds will not be or are not available on the date fixed for rederrption for the payment in full of the Bonds then called for rederrption, and such cancellation shall not constitute an Event of Default under the Indenture. The Authority and the Trustee shall have no liability to the owners or any other party related to or arising from such rescission of redemption. The Trustee shall mail notice of such rescission of redemption in the same manner as the original notice of redemption was sent.

Open Market Purchase of Bonds

The Agency may at any time buy Bonds of any series at public or private sale and any Bonds so purchased shal I be tendered to the Trustee for cancel I ati on.

Selection of Bonds for Redemption

Except as otherwise set forth in the Indenture, whenever pr0.tision is made in the Indenture for the redemption of less than all of the Bonds of any maturity, the Trustee shall select the Bonds to be redeemed from all Bonds of such maturity not previously called for redemption, by lot in any manner which the Trustee, i n its sole di sere ti on, shal I deem appropriate. For purp:ises of such selection, al I B ands shal I be deemed to be comprised of separate $5,000 portions and such portions shall be treated as separate Bonds which may be separately redeemed.

Effect of Redemption

From and after the date fixed for redemption, if funds available for the payment of the principal of and interest (and prenium, if any) on the Bonds so called for redemption shall have been duly pr0.tided, such Bonds so called shall cease to be entitled to any benefit underthe Indenture otherthan the rightto receive payment of the redemption price, and no interest shall accrue thereon from and after the redemption date specified in such notice. All Bonds redeemed pursuanttothe Indenture shall be cancelled and destrO{ed.

Partial Redemption

In the event only a portion of any Bond is called for rederrption, then upon surrender of such Bond the Authority wi 11 execute and the Trustee wi 11 authenticate and deliver to the B ondONner thereof, at the expense of the Authority, a ne.v Bond or Bonds of the same series and maturity date, of authorized denoni nati ans equal in an aggregate principal amount to the unredeemed portion of the Bond to be redeemed.

16

SCHEDULED DEBT SERVICE ON THE BONDS

The follo.ving table sets forth semi-annual debt service on the Bonds.

Period Annual Debt Ending Princi~al Cou~on Interest Debt Service Service Band Balance

09/01 ;2011 $175.665. 76 $175, 665. 76 $175,665. 76 $5,550,000 03/01/2012 147,756.25 147, 756.25 5,550,000 09/01/2012 $445,000 4.000% 147,756.25 592, 756.25 740,512.50 5,550,000 03/01 ;2013 138,856.25 138,856.25 5, 105,000 09/01 ;2013 465,000 4.500% 138,856.25 603,856.25 742,712.50 5, 105,000 03/01 ;2014 128,39175 128,39175 4,640,000 09/01/2014 485,000 4.250% 128,39175 613,39175 741,787.50 4,640,000 03/01 ;2015 118,087.50 118,087.50 4, 155,000 09/01 ;2015 505,000 5.000% 118,087.50 623,087.50 741, 175.00 4, 155,000 03/01/2016 105,462.50 105,462.50 3,650,000 09/01/2016 530,000 5.000% 105,462.50 635,462.50 740,925.00 3,650,000 03/01 ;2017 92,212.50 92,212.50 3, 120,000 09/01/2017 555,000 5.500% 92,212.50 647,212.50 739,425.00 3, 120,000 03/01/2018 76,950,00 76,950,00 2,565,000 09/01/2018 585,000 6.000% 76,950,00 661,950,00 738,90000 2,565,000 03/01/2019 59,40000 59,40000 l,980,000 09/01/2019 6.20,000 6.000% 59,40000 679,40000 738,80000 l,980,000 03/01/2020 40,80000 40,80000 l,360,000 09/01/2020 660,000 6.000% 40,80000 700,80000 741,60000 l,360,000 03/01/2021 21,00000 21,00000 700,000 09/01/2021 700,000 6.000% 21,00000 7.21,00000 742,00000 700,000

SCHEDULED DEBT SERVICE ON THE LOAN

The follo.ving table sets forth semi-annual debt service on the Loan.

Annual Debt

Period Ending Princi~al Cou~on Interest Debt Service Service Band Balance

09/01 ;2011 $175,665.76 $175,665. 76 $175,665.76 $5,550,000 03/01/2012 147, 756.25 147,756.25 5,550,000 09/01/2012 $445,000 4.000% 147, 756.25 592,756.25 740,512.50 5,550,000 03/01 ;2013 138,856.25 138,856.25 5, 105,000 09/01 ;2013 465,000 4.500% 138,856.25 603,856.25 742,712.50 5, 105,000 03/01 ;2014 128,39175 128,393.75 4,640,000 09/01/2014 485,000 4.250% 128,39175 613,39175 741,787.50 4,640,000 03/01 ;2015 118,087.50 118,087.50 4, 155,000 09/01 ;2015 505,000 5.000% 118,087.50 6.23,087.50 741, 175.00 4, 155,000 03/01/2016 105,462.50 105,46.2.50 3,650,000 09/01/2016 530,000 5.000% 105,462.50 635,462.50 740,925.00 3,650,000 03/01 ;2017 92,212.50 92,212.50 3, 120,000 09/01/2017 555,000 5.500% 92,212.50 647,212.50 739,425.00 3, 120,000 03/01/2018 76,950.00 76,950.00 2,565,000 09/01/2018 585,000 6.000% 76,950,00 661,950,00 738,90000 2,565,000 03/01/2019 59,400.00 59,400.00 l,980,000 09/01/2019 6.20,000 6.000% 59,40000 679,40000 738,80000 l,980,000 03/01/2020 40,800.00 40,800.00 l,360,000 09/01/2020 660,000 6.000% 40,80000 700,80000 741,60000 l,360,000 03/01/2021 21,000.00 21,000.00 700,000 09/01/2021 700,000 6.000% 21,00000 7.21,00000 742,00000 700,000

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SOURCES OF PAYMENT FOR THE BONDS REPAYMENT OF THE BONDS

TheBmds

The Bonds are secured under an Indenture of Trust, dated as of January 1, 2011, b,I and between the Authority and Union Bank, N.A., Los Angeles, California, as trustee (see "APPENDIX A-SUMMARY OF THE INDENTURE"). The proceeds of the Bonds will be loaned to the Agency pursuant to the Loan Agreement. The Bonds are payable from loan payments to be made to the Authority under the Loan Agreement, from certain funds and accounts created under the Indenture, and from investment earnings thereon.

Loan payments to be made under the Loan Agreement are pledged to the payment of principal of and interest on the Bands pursuant to the I ndenture unti I the Bands have been paid, or unti I sufficient moneys have been set aside irre..rocably for that purpose. The Trustee will co.tenant to exercise such rights and remedies as may be necessary to enforce the Loan payments when due under the Loan Agreement and otherwise to attempt to protect the interests of the Bondcwners in the event of default b,I the Authority.

The Bonds are limited obligations of the Authority. The Bonds do not constitute a debt or liability of the State or of any political subdivision thereof, other than the Authority. The Authority shall be obligated to pay the principal of the Bonds and the interest thereon, only from the funds described herein and neither the faith and credit nor the taxing paver of the City, the State or any of its political subdivisions is pledged to the payment of the principal of or the interest on the Bonds. The Authority has no taxing paver.

Reserve Fund

In order to further secure the payment of principal of and interest on the Bands, the Trustee is required to deposit in the Reserve Fund, under the Indenture, an amount sufficient to maintain the Reserve Requirement on deposit in the Reserve Fund. The "Reserve Requirement'' means, in respect of any Bond Year (as defined in the Indenture) as computed b,I the Authority, the least of (i) HJ% of the original proceeds of the Bonds, (ii) 125% of the Average Annual Debt Service as of the date of issuance, or (iii) the MaxirnurnAnnual Debt Service. In the eventthattheAgency fails to deposit with the Trustee the full amount required b,I the Loan Agreement to pay principal and interest due on the Bonds, the Trustee will withdraw frorn the Reserve Fund the difference between the amount required to be on deposit and the amount available on such date. Amounts in excess of the Reserve Requirement will be transferred to the Re..renue Fund under the Indenture to be applied as a credit against the next succeeding loan payment underthe Loan Agreement (see "ESTIMATED SOURCES AND USES OF FUNDS").

REPAYMENT OF THE LOAN

TaxAllocatim Financing

In General. The Redevelopment Law pro.tides a means for financing redevelopment prqjects based upon an allocation of taxes collected within a rede..relopment prqject. The taxable valuation of a redevelopment prqject last equalized prior to adoption of the redevelopment plan, or base roll, is established and, except for any period during which the taxable valuation drops belav the base year level, the taxing agencies within the redevelopment prqject thereafter receive the taxes produced b,I the levy of the then current tax rate upon the base roll. Taxes collected upon any increase in taxable valuation ewer the base roll (except such portion generated b,I rates I e..ried to pay voter-apprc:wed bonded indebtedness apprcwed b,I the voters on or after January 1, 1989, for the acquisition or irrprc:wement of real property) (herein, the 'Tax Increment Revenues") are allocated to a rede..relopment agency and may be pledged b,I a redevelopment agency to the repayment of any indebtedness incurred in financing or refinancing a redevelopment prqject. Redevelopment agencies them,elves have no authority to levy property taxes and rnust look specifically to the allocation of taxes produced as abcwe indicated.

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Allocation of Taxes. As pro.tided in the redeveloprrent plan of Redeveloprrent Prqject No. I, and pursuant to Article 6 of Chapter 6 of the Redeveloprrent LiM' and Section 16 of Article XVI of the Constitution of the State of California, taxes levied upon taxable property in Redeveloprrent Prqject No. I each year b,I or for the benefit of the State of California and any city, county, city and county, district or other public corporation (herein collectively referred to as "taxing agencies") for fiscal years beginning afterthe effective date of Redeveloprrent Prqject No. I are divided as folio.vs:

(1) To Taxing Agencies: That portion of the taxes which would be produced b,I the rate upon which the tax is levied each year b,I or for each of said taxing agencies upon the total surn of the assessed value of the taxable property in Redeveloprrent Prqject No. I as sho.vn upon the assessrrent roll used in connection with the taxation of such property b,I such taxing agency last equalized prior to the effective date of the ordinance appr0.ting Redeveloprrent Prqject No. I (or ordinances appr0.ting amendrrents to the redeveloprrent plan adding to Redeveloprrent Prqject No. I), shall be allocated to, and when collected shall be paid into the funds of the respective taxing agencies as taxes b,I or for said taxing agencies on all other property are paid; and

(2) To the Agency: Except for the taxes which are attributable to a tax rate levy b,I a taxing agency for the purpose of producing revenues to repay bonded indebtedness appr0.ted b,I the voters of the taxing agency on or after January 1, 1989, which shall be allocated to and when collected shall be paid to such taxing agency, that portion of said levied taxes each year in excess of the amounts pro.tided in paragraph (1) abOJe, shall be allocated to, and when collected, shall be paid into a special fund of the Agency to pay the principal of and interest on bonds, Loan, moneys advanced to, or indebtedness (whether funded, refunded, assurred, or otherwise) incurred b,I the Agency to finance or refinance, in whole or in part, redeveloprrent activities within Redeveloprrent Prqject No. I. Unless and until the total assessed valuation of the taxable property in Redeveloprrent Prqject No. I exceeds the total assessed value of the taxable property in Redeveloprrent Prqject No. I as sho.vn b,I the last equalized assessrrent roll referred to in paragraph (1) abOJe, all of the taxes levied and collected upon the taxable property in Redeveloprrent Prqject No. I shall be paid into the funds of the respective taxing agencies. When said bonds, Loan, ad.tances, and indebtedness, if any, and interest thereon, have been paid, all moneys thereafter received from taxes upon the taxable property in Redeveloprrent Prqject No. I shall be paid into the funds of the respective taxing agencies as taxes on al I other property are paid.

The Agency is authorized to make pledges of the portion of taxes rrentioned in paragraph (2) abOJe to repay specific advances, Loan and indebtedness as appropriate in carrying out the redeveloprrent plans of Redeveloprrent Prqject No. I.

Housing Set-Aside Revenues

In accordance with Section 33334.2 of the Redeveloprrent LiM', not less than twenty percent (2036) of all taxes which are allocated to the Agency from the Redeveloprrent Prqjects (see "TaxAllocation Financing" abOJe) are required to be deposited in a lo.v and moderate incorre housing fund (the "Lo.v and Moderate I ncorne H ousi ng Fund') to be used b,I the Agency for purposes of i rrpr0.ti ng, i ncreasi ng and preservi ng the City's supply of housing for persons and fanilies of lo.v or moderate incorre (including the payrrent of indebtedness issued or incurred for such purposes) (the" Housing Set-Aside Revenues''). The Housing Set-Aside Revenues are calculated at 2036 of gross Tax lncrerrent Revenues within each of the Redeveloprrent Prqjects; therefore the amount of Housing Set-Aside Revenues is not affected b,I payrrents under any tax sharing agreerrents or any statutory pass-through requi rerrents.

Pledge of Redevelopment Prqject No. I Tax Revenues

The Agency has pledged a lien on Redeveloprrent Prqject No. I Tax Revenues to the repayrrent of the Loan. "Redeveloprrent Prqject No. I Tax Revenues" consist of Tax I ncrerrent Revenues from the Agency's Redeveloprrent Prqject No. I, excluding (i) amounts required to be deposited into the Agency's LON and Moderate Income Housing Fund, (ii) the SB 2557 County Adninistrative fees and collection charges and (iii) amounts required to be paid pursuant to certain Pass-Through Agreerrents and Statutory

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Tax Sharing (as these terms are defined herein) (see "SOURCES OF PAYMENT FOR THE BONDS," "BONDOWNERS' RISKS" and "TAX I NCR EM ENT REVENUES" herein),

The pledge of Redevelopment Prqject No. I Tax Revenues to the Loan is on a subordinate basis with any payrrents required under the Agency's LoanAgreerrent, dated as of N0.tember 1, 2010, with respect to Redevelopment Prqject No. I (the "2010C Loan") and relating to the Lake Elsinore Public Financing Authority Tax Allocation Revenue Bonds, (1999 Series A Refunding), 2010 Series C.

The pledge of Redevelopment Prqject No. I Tax Revenues to the Loan is on a parity basis with any payrrents required under the Agency's Loan Agreerrent, dated as of January 1, 2010, with respect to Redevelopment Prqject No. I (the "2010<\ Loan") and relating to the Lake Elsinore Public Financing Authority Tax Allocation Revenue Bonds, (1999 Series C Refunding), 2010 Series A.

In the event that Redevelopment Prqject No. I Tax Revenues and other moneys pledged for the payrrent of the Loan are i nsuffi ci ent to pay the pri nci pal and interest on the Loan coni ng due on any Loan I nterest Payrrent Date (as defined in the Loan Agreerrent), the Agency agrees to make an interfund loan to the Special Fund (as defined in the LoanAgreerrent) from (i) all amounts in the PrqjectArea No. II Special Fund (as defined in the LoanAgreerrent) available therefor, (ii) all amounts in the PrqjectArea No. Ill Special Fund (as defined in the LoanAgreerrent) available therefor, and (iii) all amounts in the Housing Loan PayrrentAccount (as defined in the LoanAgreerrent) available therefor, to the extent required to make up any deficiency in the amounts available for payrrent of principal and interest on the Loan coning due on such Loan Interest Payrrent Date. Such interfund loan shall be repaid to the PrqjectArea No. 11 Special Fund, to the PrqjectArea No. 111 Special Fund, and to the Housing Loan PayrrentAccount out of any moneys of the Agency available therefor, seniannually, on each March 2 and September 2, with interest at the rate on the Bands.

The Loan is a limited obligation of the Agency payable solely from Redevelopment Prqj ect No. I Tax Revenues (as defined in the Loan Agreement), and further, from certain funds and accounts created under the Loan Agreement and investment earnings thereon. The Loan does not constitute a debt or liability of the State or of any political subdivision thereof or a pledge of the faith and credit of the City, the State, or any such political subdivision, other than the Agency. Neither the City, the State nor the Agency shall be obligated to pay the principal of the Loan, or the interest thereon, except from the funds described herein, and neither the faith and credit nor the taxing paver of the City, the State or any of its political subdivisions is pledged to the payment of the principal of or the interest on the Loan. The Agency has no advalorem property taxing paver.

Alternative Method of Tax Apportionment(" Teeter Plan")

Sections 4701 through 4717 of the California Revenue and Taxation Code permit counties to use a rrethod of apportioning taxes (commonly referred to as the "Teeter Plan") whereb{ all local agencies with historical delinquency rates less that 3%, including redevelopment agencies, receive from the County 10036 of their respective shares of the amount secured ad valoremtaxes levied, without regard to actual collections of taxes. Due to this allocation rrethod, the Agency is held harniess from tax delinquencies and, as a consequence, the Agency receives no aqjustrrents for redemption payrrents of delinquent collections. The unsecured taxes are al located based on actual unsecured tax collections. The County makes a one-tirre aqjustrrent for changes in the tax roll in the follavingyear.

The County of Riverside has adopted this rrethod of distributing taxes and will continue to do so unless the County Board of Supervisors takes action to discontinue the practice. There is no assurance that the County will continue to allocate tax revenues in this manner. If this method of distributing taxes is discontinued, significant delinquencies in the payment of ad valorem taxes may have an adverse affect on the Agency's ability to make payments under the Loan as such payments come due and payable and accordingly the Authority's ability to pay debt service on the Bonds.

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ISSUANCE OF ADDITIONAL DEBT

TheAuthcrity

The Authority will not have any indebtedness secured b,I the Revenues other than the Bonds, except bonds issued to refund the Bonds. Ho.ve..rer, the Agency is authorized to issue additional obligations secured b,I Redevelopment Prqject No. I Tax Re..renues on a parity with the Loan, and the Authority may issue bonds to acquire the additional obligations of the Agency. When and if issued, each series of bonds of the Authority would be secured b,I a separate obi i gati on of the Agency.

The Agency

The Agency has co.tenanted under the Loan Agreement that it will not issue any obligations senior to the Loan other than to refund the 201 OC Loan. In addition to the Loan, the Agency may issue or incur Parity Debt (as defined in the Loan Agreement), secured b,I Redevelopment Prqject No. I Tax Revenues in such principal an'Dunt as shall be determined b,I the Agency. The Agency may issue and deliver any Parity Debt suqject to the follo.ving specific conditions which are conditions precedent to the issuance and delivery of such Parity Debt issued underthe Loan Agreement:

(a) No event of default shall have occurred and be continuing, and the Agency shall otherwise be in corrpliance with all co.tenants set forth in the Loan Agreement, the 2010A Loan Agreement and the 2010C Loan Agreement, pro.tided that the requirements of this Subsection (a) will not apply to any issue of Parity Debt all of the available proceeds of which will be applied to refund the applicable Loan or any other Parity Debt in whole or in part.

(b) The Rede..relopment Prqject No. I Tax Re..renues for the then current fiscal year, as set forth in a written certificate of the Agency, as defined in the Indenture, based on assessed valuation of property in Redevelopment Prqject No. I as e..ridenced in the written records of the County of Riverside (the "County"), shall be at least equal to one hundred fifty percent (15036) of maximum annual debt service with respect to the Loan, the 2010<\ Loan, the 2010C Loan and all Parity Debt payable from Rede..relopment Prqject No. I Tax Re..renues; pro.tided that (i) the requirements of this Subsection (b) will not apply to any issue of Parity Debt all of the available proceeds of which will be applied to refund the Loan or other Parity Debt in whole or in part, and (ii) debt service on any Parity Debt the proceeds of which are deposited into an escro.v fund meeting the requirements of Subsection (cl) belo.v will be disregarded for purposes of measuring maximum annual debt service.

( c) The related parity debt instrument shal I pro.ti de that:

(I) I nterest on such parity debt shal I be payable on March 1 and September 1 in each year of the term of such parity debt except the first twelve--rmnth period, during which interest may be payable on any March 1 or September 1; and

(11) The principal of such parity debt shall not be payable on any date other than September 1 in any year.

( cl) The proceeds of such Parity Debt may be deposited into an escro.v fund to be held b,I a trustee, from which an'Dunts may not be released to the Agency unless the Redevelopment Prqject No. I Tax Revenues or Housing Set-Aside Re..renues forthe most recent fiscal year (as evidenced in the written records of the County) at least equal one hundred fifty percent (15036) of maximum annual debt service with respect to the Loan, the 2010A Loan, the 2010C Loan, portion of the Parity Debt to be released and any then outstanding Parity Debt.

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(e) For purp:ises of calculation of Redevelopment Prqject No. I Tax Revenues under the Loan Agreement, Redevelopment Prqject No. I Tax Revenues shall be calculated b,I using the most recent assessed values as evidenced in the written records of the County and a 1% tax rate (without regard to c:werri des).

(f) The issuance of such Parity Debt shall not cause the Agency to exceed any applicable redevelopment plan limitations with respect to any Redevelopment Prqject.

(g) The Agency shall file with the Trustee a Written Certificate of the Agency certifying that all of the foregoing conditions to the issuance of such Parity Debt have been satisfied (including any additional certifications as may be required b,I the LoanAgreements).

Subordinate Debt. The Agency may issue or incur obligations having a lien on Redevelopment Prqject No. I Tax Revenues which is subordinate to the pledge of Redevelopment Prqject No. I Tax Revenues to the Loan, pro.tided that the issuance of such obligations will not cause the Agency to exceed any applicable plan limitations.

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BONDOWNERS' RISKS BEFORE PURCHASING ANY OF THE BONDS, ALL PROSPECTIVE INVESTORS AND THEIR PROFESSIONAL ADVISORS SHOULD CAREFULLY CONSIDER, AMONG OTHER THINGS, THE FOLLOWING RISK FACTORS, WHICH ARE NOT MEANT TO BE AN EXHAUSTIVE LISTING OF ALL RISKS ASSOCIATED WITH THE PURCHASE OF THE BONDS. MOREOVER, THE ORDER OF PRESENTATION OF THE RISK FACTORS DOES NOT NECESSARILY REFLECT THE ORDER OF THEIR IMPORTANCE.

The purchase of the Bonds involves investment risk. If a risk factor rrateriali:ies to a sufficient degree, it could delay or prevent payrrent of principal of and;br interest on the Bonds. Such risk factors include, but are not I i ni ted to, the fol I OM ng rratters:

THE BONDS General

The ability of the Authority to pay the principal of and interest on the Bonds depends upon the receipt b,I the Trustee of sufficient Revenues from repayment of the Loan, amounts on deposit in the Reserve Fund and interest earnings on amounts in the funds and accounts for the Bonds established b,I the Indenture. A number of risks that could ad.tersely impact the security or payment of the Bonds are outlined belo.v.

No Liability of the Authority to the Owners

Except as expressly pr0.tided in the Indenture, the Authority will not have any obligation or liability to the o.vners of the Bonds with respect to the payment when due of the Loan, or with respect to the observance or perforrrance b,I the Agency of other agreements, conditions, c0.tenants and terms required to be observed or performed b,I it under the Loan, the Loan Agreement, the Indenture or any related documents or with respect to the performance b,I the Trustee of any duty required to be performed b,I it under the Indenture.

No E ffectiveAcceleration on Default

In the event of default under the Indenture, as a practical rratter, B ondONners wi 11 be Ii rnited to obtaining the moneys in the Reserve Fund and enforcing the obligation of the Agency to repay the Loan on an annual basis to the extent of the Redevelopment Prqject No. I Tax Revenues. No real or personal property in Redevelopment Prqject No. I is pledged to secure the Bonds or the Loan and it is not anticipated that the Agency will have available moneys sufficient to redeem all of the Bonds or the Loan in the event of an acceleration resulting from an event of default.

Enforceability of Remedies

The remedies available to the Trustee and the registered o.vners of the Bonds upon an event of default under the Indenture or any other document described herein are in rnany respects dependent upon regulatory andjudicial actions which are often suqject to discretion and delay. Under existing law and j udi ci al deci si ans, the remedies pro.tided for under such documents rray not be readi ly avai I able or rnay be linited. The various legal opinions to be delivered concurrently with the delivery of the Bonds will be qualified to the extent that the enforceability of the legal documents with respect to the Bonds is suqject to linitations imposed b,I bankruptcy, reorganization, insolvency or other sinilar laws affecting the rights of creditors generally and b,I equitable remedies and proceedings generally.

Investment of F uncls

The Reserve Fund and all other funds held under the Indenture are required to be invested in Pernitted Investments as pr0.tided in the Indenture (see "APPENDIX A - SUMMARY OF THE INDENTURE"). All

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investrrents, including Permitted lnvestrrents, authorized b,11.M' from tirre to tirre for investrrents b,I redevelopment agencies contain a certain degree of risk. Such risks include, but not linited to, a lo.ver rate of return than expected, decline in market value and loss or delayed receipt of principal. The occurrence of these events with respect to amounts held under the Indenture, or the funds and accounts held b,I the Agency could have a material ad.terse effect on the security for the Bonds and/or the financial condition of the Agency.

Secmdary Market

There can be no guarantee that there wi 11 be a secondary market for the Bands or, if a secondary market exists, that such Bonds can be sold for any particular price. Occasionally, because of general market conditions or because of ad.terse history or economic prospects connected with a particular issue, secondary marketing practices in connection with a particular issue are suspended or terninated. 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.

THE LOAN

Risk Factors Relating to the Reduction of Tax Increment Revenues

General. Tax I ncrerrent Revenues allocated to the Agency are a portion of the taxes allocated to the Agency each year which are determined b,I the amount of increrrental valuation of taxable property in Redevelopment Prqject No. I, the current rate or rates at which property in Redevelopment Prqject No. I is taxed and the percentage of taxes collected in Redevelopment Prqject No. I. The Agency has no taxing po.ver, nor does the Agency have the po.vertoaffect the rate at which property is taxed.

At least four types of events that are beyond the control of the Agency could occur and cause a reduction in Tax I ncrerrent Revenues arising from Redeveloprrent Prqject No. I, thereb,I impairing the ability of the Agency to make payrrents of principal of and interest and premium (if any) when due on the Loan and consequently, theAuthority's ability to pay debt service on the Bonds.

First, a reduction of taxable values of property or tax rates in Redeveloprrent Prqject No. I or a reduction of the rate of increase in taxable values of property in Redeveloprrent Prqject No. I caused b,I economic or other factors beyond the Agency's control (such as a relocation out of Redevelopment Prqject No. I b,I one or more major property o.vners, successful appeals b,I property o.vners for a reduction in a property's assessed value, a reduction of the general inflationary rate, a reduction in transfers of property, construction activity or other events that permit reassessrrent of property at lo.ver values, or the destruction of property caused b,I natural or other disasters, including earthquake) could occur, thereb,I causing a reduction in Tax I ncrerrent Revenues.

Second, the California electorate or legislature could adopt linitations with the effect of reducing Tax I ncrerrent Revenues payable to the Agency. Such limitation already exists under Article XI I IA of the California Constitution, which was adopted pursuant to the initiative process. For a further description of Article XIIIA, see "PROPERTY TAXATION IN CALIFORNIA - CONSTITUTIONAL AMENDMENTS AFFECTING TAX INCREMENT REVENUES" herein.

Third, a reduction in the tax rate applicable to property in Redeveloprrent Prqject No. I b,I reason of discontinuation of certain 0.terride tax levies in excess of the 1% basic levy will reduce Tax lncrerrent Revenues otherwise available to pay debt service. Such 0.terride can be expected to decline 0.ter tirre unti I it reaches the 1 % basic I evy and may be discontinued at any ti rre, which may cause a reduction in Tax I ncrerrent Revenues.

Fourth, delinquencies in the payrrent of property taxes b,I the o.vners of land in Redeveloprrent Prqject No. I could have an ad.terse effect on the Agency's ability to make tirrely payrrents of principal of and interest on the Loan and consequently, the Authority's ability to pay debt service on the Bonds (see

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"SOURCES OF PAYMENT FOR THE BONDS - REPAYMENT OF THE LOAN - Alternative Method of Tax Apportionment ("Teeter Plan")" herein).

Tax Increment Revenues allocated to the Agency are distributed throughout the year in installments, with the fi rst major i nstal I ment in February, a second major i nstal I ment in May and a final payment b,I the end of July in that year. The payments are adjusted to reflect actual collections. Any reduction in Tax Increment Revenues, whether for any of the foregoing reasons or any other reason, could have an ad.terse effect on the Agency's ability to make timely payments of principal of and interest on the Loan and consequently, theAuthority's ability to pay debt service on the Bonds.

Reduction in Inflationary Rate. As described in greater detail belo.v, Article XIIIA of the California Constitution (commonly kno.vn as Proposition 13) pro.tides that the full cash value basis of real property used in deternining taxable value may be acjjusted from year to year to reflect the inflationary rate. Follo.ving the year a base year value is first enrolled, the base year value is factored annually for inflation. Pursuant to Article XI I IA, section 2(b), and Revenue and Taxation Code Section 51, the percentage increase cannot exceed 2% of the prior year's value.

To interpret Section 51, the State Board of Equalization (the "SB E") promulgated Property Tax Rule 460, General Application. Subdivision (a) of Rule 460 pro.tides the general interpretation of Proposition 13 as folio.vs:

(a) Sections 1 and 2 of Article XI I IA of the Constitution pro.tide for a linitation on property taxes and a procedure for establishing the current taxable value of locally assessed real property b,I reference to a base year full cash value which is then mxlified annually to reflect increase in the inflation rate not to exceed two percent per year or declines in value from whatever cause.

Specifically, with respect to the applicable inflation rate, Rule 460, subdivision (b)(5) states that:

(b)(5) INFLATION RATE. For each lien date after the lien date in which the base year value is deternined, the full value of real property shall be mxlified to reflect the percentage change in cost of living, as defined in Section 51 of the Revenue and Taxation Code; pro.tided that such value shall not reflect an increase in excess of 2 percent of the taxable value of the preceding lien date.

Because Section 51 does not distinguish between positive and negative changes in the California Consumer Price Index ("CCPI"), and because Article XI I IA, section 2(b) of the California Constitution specifically pro.tides acjjustments based upon reductions in the CCPI, it is the opinion of the SBE that Section 51 requires inflation factor acjjustments that may be positive or negative. If positive, the increase is linited to 2%, ho.vever, there is no such linitation to dONnward acjjustments, including instances in which the net change to the CCPI is zero or less than zero percent.

Utility property assessed b,I the SBE may be revalued annually and such assessments are not suqject to the inflation limitations of Article XIIIA. The taxable value of personal property is also established on the lien dates and is not suqject to the annual two percent Ii nit of locally assessed real property.

Secured property i ncl udes property on which any property tax I evi ed b,I a county becomes a Ii en on that property. Unsecured property typically includes value for tenant impro.tements, fixtures, inventory and personal property. A tax I evi ed on unsecured property does not become a Ii en against the taxed unsecured property, but may become a I ien on certain other secured property o.vned b,I the taxpayer. The taxes levied on unsecured property are levied at the previous year's secured property tax rate.

The Fiscal Consultant has based its prqjections on an adjustment of 0.753% inflation grONth for Fiscal Year 2011-12 and assumed resumption of 2% annual grONth thereafter. A 2% grONth rate has been assumed b,I the Fiscal Consultant because it is the maximum inflationary grONth rate pernitted b,l law and this rate of grONth has been achieved in all but seven years since 1981. The years in which less than 2% grONth was realized were 1983--84 (1.036), 1995--96 (1.19%), 1996--97 (1.11%), 1999-00 (1.85%), 2004-05 (1.87% ), 2009-10 (0.99763%) a negative (0.237%) for Fiscal Year 2010-11 and 0.753 for Fiscal Year 2011-12. Should the assessed value of real property not increase at the al I o.ved annual rate of 2% ,

25

the Agency's receipt of future Tax lncrerrent Revenues, may be ad.tersely affected. See "PROPERTY TAXATION IN CALIFORNIA -CONSTITUTIONAL AMENDMENTS AFFECTING TAX INCREMENT REVENUES" herein.

Assessment Appeals. An assessee of locally-assessed or state-assessed property may contest the taxable value enrolled b,I the county assessor or b,I the SBE, respectively. The assessee of SBE-assessed property or locally-assessed personal property, the valuation of which is suqject to annual reappraisal, actually is contesting the deterni nation of the ful I cash value of property when fi Ii ng an assessrrent appeal.

Because of the linitations to the determination of the full cash value of locally-assessed real property b,I Article XIIIA (described herein), ho.ve..rer, an assessee of locally-assessed real property generally is contesting only the original deternination of the base assessrrent value of the parcel, i.e., the value assigned after a change of o.vnershi p or cornpl eti on of mw construction. At the ti rre of reassessrrent, after a change of o.vnershi p or comp! eti on of ne.v construction, the assessee may appeal the base assessrrent value of the property. Under an appeal of a base assessrrent value, the assessee appeals the actual underlying market value of the sales transaction or the recently completed imprc:werrent. A base assessrrent appeal has significant future revenue impact because a reduced base year assessrrent wi 11 then reduce the compounded value of the property prospectively. Except for the ZYo inflation factor, the value of the property cannot be increased until a change of o.vnership occurs or additional imprc:werrents are added.

The taxable value of utility property may be contested b,I utility companies and railroads to the SBE. Generally, the impact of utility appeals is on the State.vi de value of a utility determined b,I the SBE. As a result, the successful appeal of a utility may not affect the taxable value of a rede.teloprrent prqject but could affect a rede.teloprrent prqject's allocation of unitary property taxes.

The actual impact on Tax I ncrerrent Revenues is dependent upon the actual revised value of assessrrents resulting from values deternined b,I the Riverside County Assessrrent Appeals Board or through litigation and the ultimate timing of successful appeals. Because the County Auditor-Controller adjusts re..renues to the Agency to reflect roll corrections from successful appeals, the Agency may bear the burden of appeals. The actual valuation impact to Rede..reloprrent Prqject No. I from successful assessrrent appeals wi 11 occur on the assessrrent rol I prepared afterthe actual val uati on reduction.

See "TAX INCREMENT REVENUES - ASSESSMENT APPEALS"" for information regarding current appeals and the Fiscal Consultant's assumptions regarding the prqjection of Redeveloprrent Prqject No. I Tax Re..renues.

Proposition 8Adjustments. The assessee of locally-assessed real property also may contest the current assessrrent val ue ( the base assessrrent val ue pl us the compounded annual i nfl ati on factor) when specified conditions have caused the full cash value to drop belo.v the current assessrrent value. Pursuant to Section Sl(b) of the Revenue and Taxation Code, the assessor may place a value on the tax roll lo.verthan the compounded base assessrrent value, if the full cash value of real property has been reduced b,I damage, destruction, depreciation, obsolescence, re mew al of property or other factors causing a decl i ne in the value. Reductions in value pursuant to Section Sl(b), commonly referred to as "Proposition 8 appeals," can be achieved either b,I formal appeal or adninistratively b,I assessor staff appraising the property. A reduced full cash value placed on the tax roll does not change the base assessrrentvalue. The future impact of a parcel suqject to a Proposition 8 appeal is dependent upon a change in the conditions which caused the drop in value. In fiscal years subsequent to a successful Proposition 8 appeal, the assessor may deternine that the value of the property has increased as a result of corrective actions or imprc:wed market conditions and enroll a value on the tax roll up to the parcel's compounded base assessrrent value. See "TAX INCREMENT REVENUES - ASSESSMENT APPEALS - Proposition 8 Adjustments"" for information regarding recent Proposition 8 aqj ustrrents.

Leyy and Collection. NeithertheAgency nor the Authority has an independent po.verto levy and collect property taxes. Any reduction in the tax rate or the implerrentation of any constitutional or legislative property tax decrease could reduce the Tax I ncrerrent Revenues and accordingly, could have an ad.terse impact on the ability of the Agency to pay debt service on the Loan, and, consequently, the Authority's

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ability to pay debt service on the Bonds. Like.vise, delinquencies in the payment of property taxes could have an ad.terse effect on the Agency's ability to make timely debt service payments. The Agency receives from the County 10036 of its respective share of the secured ad valorem taxes levied, without regard to actual collections of taxes (see "SOURCES OF PAYMENT FOR THE BONDS - REPAYMENT OF THE LOAN - Alternative Method of Tax Apportionment ("Teeter Plan"")"" herein). Due to this allocation method, the Agency is held harmless from tax delinquencies and, as a consequence, the Agency receives no acjjustments for rederrption payments of delinquent collections. The unsecured taxes are allocated based on actual unsecured tax col I ecti ons. The County makes a one-ti me acjj ustment for changes i n the tax rol I in the follo.ving year. Ho.va,er, there is no assurance that the County will continue to allocate tax ra,enues in this manner (see "TAX INCREMENT REVENUES- DELINQUENCIES"" and"-fORECLOSURES" herein).

Property Owner Bankruptcy. On July 30, 1992, the United States Court of Appeals for the Ninth Circuit issued an opinion in a bankruptcy case entitled In re Glasply Marine Industries holding that ad valorem property taxes levied by a county in the State of Washington after the date that the property o.vner filed a petition for bankruptcy would not be entitled to priority c:werthe claims of a secured creditor with a prior lien on the property. Similar results were reached by several circuit courts in other circuits. Subsequently, ho.vever, Section 362(b)(18) of the Bankruptcy Code (the "Bankruptcy Code") was enacted, effectively c:werturning this line of decisions and pro.tiding that local gc:wernments may rely on statutory property tax liens to secure payment of property taxes even after the filing of a bankruptcy petition.

Risk Factors Related to Real Estate Mark et Conclitims

De..relopment Risks. Generally, the Agency's ability to pay debt service on the Loan, and, consequently, the Authority's ability to pay debt service on the Bonds, will be dependent upon the economic strength of Rede..reloprnent Prqject No. I. The general econOITiy' of Rede..reloprnent Prqject No. I will be suqject, in part, to the de.teloprnent risks generally associated with real estate de.teloprnent prqjects. Prqjected de..reloprnent within Rede.telopment Prqject No. I may be suqject to unexpected delays, disruptions and changes. For example, real estate de.teloprnent operations may be ad.tersely affected by changes in general econoni c condi ti ans, fl uctuati ans in the real estate market, fl uctuati ans in i nterest rates, unexpected increases in de.teloprnent costs and by other factors. Further, real estate de.telopment operations within Rede.teloprnent Prqject No. I could be ad.tersely affected by future gcwernmental policies, including gcwernmental policies to restrict or control de.teloprnent. If prqjected de.telopment in Rede..reloprnent Prqject No. I is delayed or halted, the econOITiy' of Rede.telopment Prqject No. I could be ad.tersely affected, causing a reduction of the Tax Increment Revenues available to pay debt service on the Loan and consequently, theAuthority's ability to pay debt service on the Bonds.

Current Real Estate Market Conditions. Prior to 2006, the housing market in Southern California experienced significant price appreciation and accelerated demand. Subsequently, the housing market significantly weakened. According to information pro.tided by DataQuick and Empire Economics, Inc., the median price of homes in Lake Elsinore peaked in Fiscal Year 2005-06 at $422,063. Since that time, the median price of homes has declined to $177,050 for the period between July and Nc:wember 2009. The last time the median price of homes was at this level was Fiscal Year 2001-02 ($177,729) (see "TAX INCREMENT REVENUES -TAXABLE VALUATIONS"). The median price of homes in January 2010was $199,750.

The price declines experienced between 2006 and 201 Owere driven in large part by the sale of foreclosed properties and short sales. Some econonists belie..re, despite good affordability metrics, homes prices may experience further declines in 2011. They cite the uncertainty surrounding the size of the foreclosure pool, combined with the elimination of the federal home buyer tax credit (April 30, 2010), which may lead home prices do.vnward. In addition, recent reports indicate that the housing slo.vdONn may have spread to the commercial sector. Retail sales have declined and the value of commercial property has also decreased from its peak in 2007. This may lead to a Proposition 8 acjj ustment which in the past has been I i ni ted to residential properties.

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Decreasing land values could have an adverse affect on the Assessed Value within Redevelopment Prqject No. I and thus Tax I ncrerrent Revenues. "Assessed Value" represents market value of an assessed parcel as of its most recent assessrrent, pl us a ZYo per year inflation factor si nee such assessrrent. In the absence of a Proposition 8 adjustrrent, a ne.v assessrrent of an assessed parcel to its then current market value will only occur upon a change of ONnership or ne.v construction with respect to such parcel. Therefore, in general, market value is often in excess of assessed value except for those parcels reassessed preceding the econoni c dcwnturn and after the end of 2002.

Adjustable Rate and Unconventional Mortgage Structures. Since the end of 2002, many persons have financed the purchase of ne.v homes using loans with little or no dcwn payrrent and with aqjustable interest rates that start ION and are suqject to being reset at higher rates on a specified date or upon the occurrence of specified conditions. Many of these loans allON the borrONer to pay interest only for an initial period, in sorre cases up to 10 years. Currently, in Southern California, a substantial portion of outstanding horre loans are adjustable rate loans which were obtained at historically ION interest rates. In the opi ni on of some econoni sts, the significant increase in home prices in this ti rre period has been driven, in part, b,I the abi I ity of horre purchasers to access acjj ustable rate and non-conventi anal I oans.

Increases in interest rates on ne.v loans, which have resulted in increased loan payrrents, have contributed to a decrease in horre sales as purchasers are unable to qualify for loans with higher interest rates. Such decrease in home sales has resulted in a decrease in horre prices. Such reduction in home prices has resulted in recent horrebuyers having loan balances that exceed the value of their homes, given their ION dONn payrrents and smal I amount of equity in their homes.

Furthermore, there has been tightening of underwriting criteria for mortgage loans such that lenders no longer offer 10036 financing or require stricter verification, higher income-to-loan ratio, higher credit ratios or some combination of such factors. There has also been tightening of the credit market, especially with respect to the availability of "jurrbo'' loans. As a result, potential homeONners rnay have difficulty fi ndi ng fi nanci ng and ri si ng i nterest rates rnay price potential hornecwners out of the market.

In addition, many borrONers who purchased homes in recent years rnay not be able to access replacerrent financing for their acjjustable rate mortgage Loan, which have reset or will soon reset at a significantly higher interest rate, for a number of reasons. Many borrONers have financed 10036 of the price of their home with acjjustable rate loans. As home values decline, such borrONers rnay not be able to obtain repl acerrent financing because the outstandi ng I oan balances exceed the value of thei r homes.

For the reasons discussed alx:we, horreONners who purchased their horres with aqjustable rate loans may experience difficulty in making their loan payrrents and paying property taxes levied on their property (see "SOURCES OF PAYMENT FOR THE BONDS - REPAYMENT OF THE LOAN -Alternative Method of Tax Apportionment ("Teeter Plan") and "TAX I NCR EM ENT REVENUES - FORECLOSURES" herein).

Risk Factors Related to Natural and M an--M ade Disasters

The value of the assessed property in Redeveloprrent Prqject No. I in the future could be ad.tersely affected b,I a variety of factors, particularly those which rnay affect infrastructure and other public irnprc:werrents and private irnprc:werrents on the parcels of assessed property and the continued habitability and enjO{rrent of such private irnprc:werrents. Such additional factors include, without linitation, geologic conditions such as earthquakes, topographic conditions such as earth rncwerrents, landslides, liquefaction, floods or fires, and climatic conditions such as tornadoes, droughts, and the possible reduction in water allocation or availability. It is possible that one or rnore of the conditions referenced abcwe rnay occur and rnay result in damage to irnprcwerrents of varying seriousness, that the damage may entail significant repair or replacerrent costs and that repair or replacerrent may never occur either because of the cost or because repair or replacerrent will not facilitate habitability or other use, or because other considerations preclude such repair or replacerrent. Under any of these circum,tances, the val ue of the assessed property may wel I depreciate or disappear.

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According to the Safety Element of the City's General Plan, the City is located in a seisnically active region and could be irrpacted b,I a major earthquake originating from several faults in the area Seismic hazards encompass both potential surface rupture and ground shaking.

An environmental condition that may result in the reduction in the assessed value of parcels would be the discc:wery of a hazardous substance that would linit the beneficial use of a property within Redevelopment Prqject No. I. In general, the o.vners and operators of a property may be required b,l law to remedy conditions of the property relating to releases or threatened releases of hazardous substances. The o.vner may be requi red to remedy a hazardous substance condition of property whether or not the o.vner or operator had anything to do with creating or handling the hazardous substance. The effect, therefore, should any of the property within Redevelopment Prqject No. I be affected b,I a hazardous substance would be to reduce the marketability and value of the property b,I the costs of remedying the condition, causing a reduction of Redevelopment Prqject No. I Tax Revenues available to pay debt service on the Loan and consequently, the Authority's ability to pay debt service on the Bonds.

Risk Factors Relating to the Loan and the Redevelopment Law

Loan is Limited Obligations. The Agency has no po.ver to levy and collect property taxes, and any property tax Ii mitation, legislative measure, voter initiative or pro.ti sion of additi anal sources of i ncorne to taxing agencies having the effect of reducing the property tax rate must necessarily reduce the amount of Redevelopment Prqject No. I Tax Revenues that would otherwise be available to pay the principal of, interest on and premium, if any, on the Loan and consequently, the Authority's ability to pay debt service on the Bands.

Redevelopment Plan Limitations on Redevelopment Project No. I Tax Revenues. The Redevelopment Law requires, in certain circumstances, a redevelopment agency to either include in the redevelopment plan or to adopt b,I ordinance a limitation on the amount of taxes that may be divided and al located to the redevelopment agency with respect to Redevelopment Prqject No. I. Pursuant to the Redevelopment Law, taxes may not be allocated to a redevelopment agency beyond this linitation except b,I amendment of the redevelopment plan. The redevelopment plan for Redevelopment Prqject No. I contains such tax increment revenue limitations. In addition, under the prc:wisions of Assembly Bill 1290 ("AB 1290''), enacted b,I the State Legislature in 1993, AB 1290 limits the time a redevelopment agency may pay indebtedness or receive property taxes pursuant to Section 33670 of the Redevelopment Law (see "THE AGENCY - REDEVELOPMENT PLANS - Reda,elopment Plan Limitations" herein for the applicable redevelopment plan limitations for Redevelopment Prqject No. I).

Risk Factors Related to Bankruptcy of the Authority and the Agency

The Authority and the Agency are public agencies and, like the City, are not suqject to the involuntary procedures of the Bankruptcy Code. The Authority and/or the Agency may seek voluntary protection under Chapter 9 of the Bankruptcy Code. In the event the Authority and;br the Agency were to become a debtor under the B ankruptcy Code, the Authority and/or the Agency would be enti tied to al I of the protective prc:wisions of the Bankruptcy Code as applicable in a Chapter 9 proceeding. Such a bankruptcy could ad.tersely irrpact the payments under the Indenture and the Loan Agreement. Among the ad.terse effects night be: (i) the application of the automatic stay prc:wisions of the Bankruptcy Code, which, until relief is granted, would prevent collection of payments from the Authority and;br the Agency or the commencement of any judicial or other action for the purpose of recc:wering or collecting a claim against the Authority and;br the Agency; (ii) the avoidance of preferential transfers occurring during the relevant period prior to the filing of a bankruptcy petition; (iii) the occurrence of unsecured or secured debt which may have priority of payment superior to that of the o.vners of the Bonds; and (iv) the possibility of the adoption of a pl an for the aqj ustment of the Authority's and/or the Agency's debt with out the consent of the Trustee or all of the o.vners of the Bonds, which plan may restructure, delay, compromise or reduce the amount of any claim against the Authority. Ho.vever, the bankruptcy of the Authority, and not the Agency, should not affect the Trustee's rights under the Loan Agreement. The Authority could still

29

challenge the assignrrent, and the Trustee and;br the o.vners of the Bonds may have to litigate these issues i n order to protect their i nterests.

Risk Factors Related to State Budget L egi sl ati on

In connection with its approval of the budget for the 1992--93, 1993--94, 1994--95, 2002-03, 2003--04, 2004--05, 2005-0i, and 2008-09 Fi seal Years, the State L egi sl ature enacted I egi sl ati on which, arrong other things, reallocated funds from redevelopment agencies to school districts by shifting a portion of each agency's tax increrrent revenues, net of amounts due to other taxing agencies, to school districts for such fiscal years for deposit in the Educational RevenueAugrrentation Fund(" ERAF"). The amount required to be paid by a redeveloprrent agency under such legislation was apportioned arrong all of its redevelopment prqject areas on a collective basis, and was not allocated separately to individual prqject areas.

In 2008, the State Legislature adopted, and the Governor of the State signed, legislation, Chapter 751, Statutes 2008 (AB 1389) ("AB 1389''), that arrong other things required redeveloprrent agencies to pay into ERAF in Fiscal Year 2008--09, prior to May 10, 2009, an aggregate amount of $350 million, of which the Agency was to pay approximately $1,435,000. AB 1389 provides that part of the ERAF obligation of the Agency is calculated based on the gross tax increrrent revenues received by the Agency and the other part of the ERAF obligation of the Agency is calculated based on net tax increrrent revenues (after any pass-through payrrents to other taxing entities). AB 1389 provided that required transfers to ERAF are subordinate to payrrents on bonds secured by tax increrrent revenues. AB 1389 provides that in the event a redeveloprrent agency does not make the required ERAF payrrent, it shall be prohibited from issuing mw bonds, notes, interim certificates, debentures, or other obligations. On April 30, 2009, a California superior court, in California Redevel oprrent Association v. Genest ( County of Sacramento) ( Case No. 34-2008-00028334), held that the required payrrent by redevelopment agencies into ERAF in Fiscal Year 2008--09 pursuant to AB 1389 violated the California constitution and invalidated and enjoined the operation of the California Health and Safety Code section requiring such payrrent. On May 26, 2009, the State did file a notice that it would appeal the decision of the superior court but subsequently dropped its appeal.

In connection with various legislation related to the budget for the State for its Fiscal Year 2009-10, in lateJ uly 2009, the State legislature adopted, and the Governor of the State signed, Asserrbly Bill No. 26 ("AB 26'') (the" 2009 SE RAF Legislation").

The 2009 SE RAF Legislation mandates that redeveloprrent agencies in the State make deposits to the Supplerrental Educational Revenue Augrrentation Fund ("SE RAF"), that is established in each county treasury throughout the State, in the aggregate amounts of $1.7 billion for Fiscal Year 2009-10, which were due prior to May 10, 2010, and $350 million for Fiscal Year 2010-11, which are due prior to May 10, 2011.

The California Redeveloprrent Association along with certain other redeveloprrent agencies were not successful in challenging the constitutionality of the 2009 SERAF Legislation. An appeal is pending before the Third District Court of Appeal. No assurance can be rnade that the appeal will be successful.

The Agency has esti mated thatthe total amount payable by it pursuantto the 2009 SE RAF L egi sl ati on for all of its redeveloprrent prqject areas will be $6,970,262 for Fiscal Year 2009-10 and $1,435,054 for Fiscal Year 2010-11. Pursuant to the 2009 SE RAF Legislation, redevelopment agencies may use any funds that are legally available and not legally obligated for other uses, including reserve funds, proceeds of land sales, proceeds of bonds or other indebtedness, lease revenues, interest and other earned incorre.

The Agency has made its 2009-10 SE RAF and intends to fund the Fiscal Year 2010-11 SE RAF payrrents using exi sti ng fund balances.

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The 2009 SERAF Legislation contains prc:wisions that subordinate the obligation of redeveloprrent agencies to make the SE RAF payments specified therein to certain indebtedness. Section 6 of AB 26, to be codified at California Health and Safety Code,§ 33690 (a) (3), states: "The obligation of any agency to make the payments required pursuant to this subdivision shall be subordinate to the lien of any pledge of collateral securing, directly or indirectly, the payment of the principal, or interest on any bonds of the agency including, without limitation, bonds secured b,I a pledge of taxes allocated to the agency pursuant to Section 33670 [of the California Health and Safety Code]."

The 2009 SERAF Legislation imposes various restrictions on redeveloprrent agencies that fail to timely make the required SE RAF payments, including (i) a prohibition on adding or expanding prqject areas, (ii) a prohibition on the incurrence of additional debt, (iii) limitations on the encumbrance and expenditure of funds, including funds for operation and administration expenses, and (iv) cornmencingwith the July 1 fol I ONi ng the due date of a SE RAF annual payment that is not ti mely rnade, a requi rement that the applicable redeveloprrent agency allocate an additional five percent (5%) of all taxes that are allocated to the redeveloprrent agency under the Redeveloprrent Law for ION and moderate income housing for the rernai nder of the ti me thatthe applicable redevel oprrent agency receives al I ocati ons of tax revenues under the Redevel oprrent L iM'. The five percent ( 5%) additi anal housing set-aside penalty pro.ti sion referred to in the 2009 SE RAF Legislation (the "Penalty Set-Aside Requirement") would be in addition to the twenty percent (2036) of such tax revenues already required to be used for ION and moderate income housing purposes. A redevel oprrent agency that borrONs frorn amounts required to be al I ocated to its housing set­aside funds orthat suspends its Fiscal Year 2009-10 housing set-aside payments to make required SE RAF payments, but does not timely repay the funds, may also be suqject to the Penalty Set-Aside Requirement.

While the 2009 SE RAF Legislation contains prc:wisions that subordinate that obligation of redeveloprrent agencies to rnake the SE RAF payments specified therein to certain indebtedness (which would include a subordination of the Agency's obligations with respect to the new SE RAF payments to the Agency's obligation to pay debt service on the Loan), there is no prc:wision in the 2009 SERAF Legislation subordinating the Penalty Set-Aside Requirement to any indebtedness of a redevelopment agency that fails to timely rnake the SE RAF payments mandated b,I the 2009 SE RAF Legislation.

The Agency has reserved sufficient moneys to pay its 2010-11 SERAF payments. Furthermore, none of the 2009 SERAF requirement is expected to have any impact on the availability of Redevelopment Prqject No. I Tax Revenues to pay debt service on the Loan.

The Agency cannot predict what actions will be taken in the future b,I the State Legislature and the Gc:wernor to deal with changing State revenues and expenditures and the repercussions they may have on the Fiscal Year 2009-10 State Budget and future State budgets. These developrrents at the State level may, in turn, affect local gcwernments and agencies, including the Agency. The State Legislature may adopt other legislation requiring redeveloprrent agencies to rnake other payments to ERAF or SE RAF or to make other payments. The i rnpact that current and future State fi seal shortfal Is wi 11 have on the Agency is unknONn at this time. In prior years, the State has experienced budgetary difficulties and balanced its budget b,I requiring local political subdivisions, such as the City and the Agency, to fund certain costs theretofore borne b,I the State.

Information albout the State budget and State spending is regularly available frorn various State offices, including the Department of Finance, the Office of the Legislative Analyst and the State Treasurer. HONever, none of such information is incorporated b,I such reference.

Risk Factors Related to Assumptions and Projections of Redevelopment Project No. I Tax Revenues

Any reduction in Tax Increment Revenues, whether for any of the foregoing reasons or any other reason, could have an ad.terse effect on Redevelopment Prqject No. I Tax Revenues and on the Agency's ability

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to make timely payments of principal of, premium, if any, and interest on the Loan, which is secured b,I such Redevelopment Prqject No. I Tax Revenues. To estimate the total Redevelopment Prqject No. I Tax Revenues available to pay debt service on the Agency's obligations, the Fiscal Consultant has made certain assumptions with regard to the assessed val uati on in Redevelopment Prqj ect No. I , future tax rates, and the percentage of taxes collected. See "APPENDIX c - FISCAL CONSULTANT REPORT" for a full discussion of the assumptions underlying the prqjections set forth herein with respect to Redevelopment Prqject No. I Tax Revenues. The Agency believes these assumptions to be reasonable, but to the extent that the assessed valuations, the tax rates, and the percentage of taxes col I ected are I ess than the Agency's assumptions, the total Redevelopment Prqject No. I Tax Revenues available will, in all likelihood, be less than those prqjected herein and consequently, theAuthority's ability to pay debt service on the Bonds may be ad.tersely affected. See "TAX I NCR EM ENT REVENUES" herein.

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PROPERTY TAXATION IN CALIFORNIA

CONSTITUTIONAL AMENDMENTS AFFECTING TAX INCREMENT REVENUES

The Tax lncrerrent Revenues include a portion of the ad valorem taxes levied on real property within Redevelopment Prqject No. I. Article XIIIA of the California Constitution limits the amount of ad valoremtax on real property to 1% of "full cash value," as deternined b,I the County Assessor. Article XIIIA defines "full cash value" to rrean "the County Assessor's valuation of real property as sho.vn on the 1975-76 tax bi 11 under "ful I cash value," or thereafter the appraised value of real property when purchased, mwly constructed, or a change in o.vnershi p has occurred after the 1975 assessrrent period." Furthermore, all real property valuation may be increased to reflect the inflationary rate, as sho.vn b,I the consurrer price index, not to exceed ZYo per year, or may be reduced in the event of declining property val ues caused b,I damage, destruction or other factors.

ArticleXIIIA exerrpts from the 1% tax linitation any taxes to repay indebtedness apprcwed b,I the voters prior toJ uly 1, 1978, and any bonded indebtedness for the acquisition or imprc:werrent of real property apprc:wed on or after J uly 1, 1978, b,I two-thirds of the voters voting on the proposition apprc:wi ng such bonds, and requires a vote of two-thirds of the qualified electorate to impose special taxes, while totally precluding the imposition of any additional ad valorern sales or transaction tax on real property. In addition, Article XI I IA requires the apprc:wal of two-thirds of all rrembers of the State legislature to change any State tax I aw resulting in increased tax revenues.

Article X 111 B of the California Constitution Ii nits the annual appropriations from the proceeds of taxes of the State and any city, county, school district, authority or other political subdivision of the State to the level of appropriations for the prior fiscal year, as aqjusted for changes in the cost of living, population and services rendered b,I the gcwernrrental entity. Article X 111 B includes a requirerrent that if an entity's revenues in any year exceed the amount permitted to be spent, the excess would have to be returned b,I revising tax or fee schedules ewer the subsequent two years.

Section 33678 of the Redevelopment Law pro.tides that the allocation of taxes to a redeveloprrent agency for the purpose of paying principal of, or interest on, the Loan, acwances or indebtedness incurred for redevelopment activity shall not be deerred the receipt b,I such agency of proceeds of taxes within the rreaning of Article X 111 B, nor shall such portion of taxes be deemed receipt of proceeds of taxes b{, or any appropriation suqject to the linitation of, any other public body within the meaning orthe purpose of the Constitution and laws of the State, including Section 33678 of the Redeveloprrent Law. Two California appellate court decisions have upheld the constitutionality of Section 33678, and in the one case in which a petition for revie.vwas filed in the California Suprerre Court, such petition was denied.

I MPLEM ENTI NG LEGISLATION

Legislation enacted b,I the California Legislature to irnplerrentArticle XIIIA (Chapter 292, Statutes of 1978, as arrended) pro.tides that, notwithstanding any other law, local agencies may not levy any property tax, exceptto pay debt service on indebtedness apprc:wed b,I the voters prior toJ uly 1, 1978, and that each county will levy the maximum tax pernined b,I ArticleX I I IA of $4.00 per $100 assessed valuation (based on the traditional practice of using 25% of full cash value as the assessed value for tax purposes). The legislation further pro.tided that, for Fiscal Year 1978-79 only, the tax levied b,I each county was to be appropriated among all taxing agencies within the county in proportion to their average share of taxes levied in certain previous years.

Effective as of the 1981--82 Fiscal Year, assessors in California no longer record property values in the tax rolls at the assessed value of 25% of market values. All taxable property value is sho.vn at full market value. In confornity with this change in procedure, all taxable property value included in this Official Staterrent (except as noted) is sho.vn at 10036 of market value and all general tax rates reflect the $1 per $1 00 of taxable val ue.

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Future assessed valuation grcwth allcwed under Article XIIIA (i.e., new construction, change of cwnership, and ZYo annual value grcwth) will be allocated on the basis of "situs'' among the jurisdictions that serve the tax rate area within which the grcwth occurs. Local agencies and schools will share the grcwth of "base" revenue from the tax rate area Each year's grcwth allocation becomes part of each agency's allocation in the follcwing year. The Agency is unable to predict the nature or magnitude of future revenue sources which may be pr0.tided b,I the State to replace lost property tax revenues. Article XI I IA effectively prohibits the levying of any other ad valorem property tax aro..re those described in this section, even with the appr0.tal of the affected voters.

CONSTITUTIONAL CHALLENGES TO PROPERTY TAX SYSTEM

There have been many challenges to Article XIIIA of the California Constitution. The United States Supreme Court heard the appeal in Nordlinger v. Hahn, a challenge relating to residential property. Based upon the facts presented in Nordlinger, the United States Supreme Court held that the method of property tax assessment under Article XI I IA did not violate the federal Constitution. The Agency cannot predict whether there will be any future challenges to California's present system of property tax assessment and cannot evaluate the ultimate effect on the Agency's receipt of Tax Increment Revenues should a future decision hold unconstitutional the method of assessing property.

PROPERTY TAX COLLECTION PROCEDURES

In California, property that is suqject to ad valorem taxes is classified as "secured' or" unsecured." The secured classification includes property on which any property tax levied b,I a county becomes a lien on that property sufficient, in the opinion of the county assessor, to secure payment of the taxes. Every tax levied b,I a county that becomes a lien on secured property has priority 0.ter all present and future private liens arising pursuant to State law on the secured property, regardless of the time of the creation of the other liens. A tax levied on unsecured property does not become a lien against the taxed unsecured property, but may become a I ien on other property cwned b,I the taxpayer.

Secured and unsecured property are entered on separate parts of the assessment rol I maintained b,I the county assessor. The payment of delinquent taxes with respect to property on the secured rol I may be enforced only through the sale of the property securing the taxes to the State for the amount of taxes that are deli nquent. Such property may thereafter be redeemed b,I payment of the deli nquent taxes and penal ti es. U nsecured personal property taxes may be col I ected, in the absence of timely payment b,I the taxpayer, through (1) a civil action against the taxpayer; (2) filing a certificate of delinquency for record in the county recorder's office, in orderto obtain a lien on property of the taxpayer; (3) seizure and sale of personal property, i mprcwements or possessory interests belonging or assessed to the taxpayer; and ( 4) filing a certificate in the office of the County Clerk specifying certain facts in order to obtain a judgment Ii en on certain property of the taxpayer.

Except for property assessed b,I the State, the valuation of taxable property is determined as of January 1 each year, and equal i nstal I ments of taxes I evi ed upon secured property become delinquent on the follcwing December 10 and April 10. Taxes on unsecured property are due February 1 and become delinquent August 31, and such taxes are levied at the prior year's secured tax rate. The valuation of State-assessed property is determined onJ anuary 1 of each year.

SU PPL EM E NTAL ASSESSMENTS

A bill enacted in 1983, SB 813 (Chapter 498, Statutes of 1983), pr0.tides forthe supplemental assessment and taxation of property as of the occurrence of a change of cwnershi p or cornpl eti on of new construction. Previously, statutes enabled the assessment of such changes only as of the next tax lien date follcwing the change, and thus delayed the realization of increased property taxes from the new assessments for up to 14 months. As enacted, Chapter 498 pro.tides increased revenue to redevelopment agencies to the extent that supplemental assessments, as a result of new construction or changes of cwnership, occur within the

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boundaries of redevelopment prqjects subsequent to the lien date. To the extent such supplemental assessments occurwithin Redevelopment Prqject No. I, Tax Increment Revenues may increase.

TAX COLLECTION FEES

SB 2557, enacted in 1990 (Chapter 466, Statutes of 1990), authorized county auditors-controllers to deternine property tax adninistration costs proportionately attributable to local jurisdictions and to subnit invoices to the jurisdictions for such costs. Subsequent legislation, SB 1559 (Chapter 697, Statutes of 1992), specifically includes redevelopment agencies among entities suqject to a property tax adninistration charge. The prqjections of Redevelopment Prqject No. I Tax Revenues take such adni ni strative costs into account.

UNITARY PROPERTY TAX

AB 454 (Chapter 921, Statutes of 1987) pr0.tides a revised method of reporting and allocating property tax revenues generated from most State-assessed unitary properties commencing with Fiscal Year 1988-89. Under AB 454, the State reports to each county auditor-control I er only the countywide unitary taxable value of each utility, without an indication of the distribution of the value among tax rate areas. AB 454 pr0.tides two formulas for auditor-controllers to use in order to deternine the allocation of unitary property taxes generated b,I the countywide unitary value, which are: (i) for revenue generated from the 1% tax rate, each jurisdiction is to receive up to 102% of its prior year unitary property Tax Increment Revenue; ho.vever, if countywide revenues generated from unitary properties are greater than 102% of prior year revenues, eachjurisdiction receives a percentage share of the excess unitary revenues equal to the percentage of each jurisdiction's share of secured property taxes; and (ii) for revenue generated from the application of the debt service tax rate to countywide unitary taxable value, each jurisdiction is to receive a percentage share of revenue based on the jurisdiction's annual debt service requirements and the percentage of property taxes received b,I each jurisdiction from unitary property taxes.

The prcwisions of AB 454 apply to all State-assessed property, except railroads and non-unitary properties, the valuation of which will continue to be allocated to individual tax rate areas. The pr0.tisions of AB 454 do not constitute an elinination or a revision of the method of assessing utilities b,I the State Board of Equalization. AB 454 al lo.vs, generally, valuation grONth or decline of State-assessed unitary property to be shared b,I all jurisdictions within a county.

BUSINESS INVENTORY AND REPLACEMENT REVENUE

Prior to 1979, the State reimbursed cities, counties, special districts and redevelopment agencies that portion of taxes which would have been generated b,I the exempted portion of business inventory value (5036). In 1979, the California Legislature enacted AB 66 (Chapter 1150, Statutes of 1979), eliminating the assessment and taxation of business inventory property and pr0.tiding for replacement revenue for local agencies, except redevelopment agencies. In 1980, the California Legislature enacted AB 1994 (Chapter 610, Statutes of 1980), pr0.tiding partial replacement revenue for the loss of business inventory revenues b,I redevelopment agencies.

In 1990, the California Legislature amended Section 16112.7 of the California Gcwernment Code ( Chapter 449, Statutes of 1990) which precludes redevelopment agencies from pledging special sul:wention revenues to.vard the payment of debt service for bonded indebtedness incurred after J uly 31, 1990 (the effective date of the legislation). The 1992--93 State Budget reduced the State's funding forthe special sul:wention. As enacted under AB 222 (Chapter 188, Statutes of 1991), the B udgetAct eliminated 1991--92 sul:wention payments for most redevelopment prqjects, including Redevelopment Prqject No. I. Additionally, the 1992--93 State Budget implemented further cuts in funding for the State's special sul:wention to redevelopment agencies. As a result, these revenues are not included in the prqjections of estimated Redevelopment Prqject No. I Tax Revenues.

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PROPOSITION 87

Under prior State law, if a taxing entity increased its tax rate to obtain revenues to repay general obligation bonds appr0.ted b,I two-thirds of the voters, the redevelopment agency with a redevelopment prqject that includes property affected b,I the tax rate increase would have realized a proportionate increase in tax increment revenues.

Prop:isition 87, appr0.ted b,I the voters of the State on N0.tember 8, 1988, requires that all revenues produced b,I such a tax rate increase (appr0.ted b,I the voters on or after January 1, 1989) go directly to the taxing entity that increased the tax rate to repay the general obligation bonded indebtedness. As a result, redevelopment agencies no longer receive an increase in tax increment revenues when taxes on property in a redevel oprnent prqj ect are i ncreased to repay voter--apprcwed general obi i gati on debt.

FUTURE INITIATIVES

Each of Article XI I IA, Article X 111 B and Prop:isition 87 was adopted as a measure that qualified for the ballot pursuant to California's initiative process. From time to time other initiative measures could be adopted, further affecting revenues of the Agency or the Agency's abi I ity to expend revenues. The nature and impact of these measures cannot be anticipated b,I the Authority or the Agency.

Article X 111 B. On September 6, 1979, California voters appr0.ted Prop:isition 4, or the Gann Initiative, which added Article X 111 B to the California Constitution. The principal thrust of Article X 111 B is to Ii nit the annual appropriations of the State and any city, county, school district, authority or any other political subdivision of the State. The amendment includes a requirement that if an entity's revenues in any year exceed amounts pernitted to be spent, the excess will be returned to the taxpayer b,I revising the tax 0.terride rate 0.ter the subsequent two years. To the extent such tax rates are revised, Tax Increment Revenues may be affected, since Tax Increment Revenues allocated to the Agency are a function of the corrbinations of tax rates levied b,I certain taxing agencies having jurisdiction within Redevelopment Prqject No. I and assessments of property located within Redevelopment Prqject No. I.

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THE AUTHORITY

GENERAL

The Authority is a joint exercise of pcwers authority organized and existing under and b,I virtue of the Joint Po.versAct. The City, pursuant to Resolution No. 89-32, adopted onJ uly 25, 1989, and the Agency, pursuant to Resolution No. 89-4, adopted on July 25, 1989, formed the Authority b,I the execution of a Joint Exercise of Po.versAgreement (the "Joint Po.versAgreement'').

The Authority is gcwerned b,I a five-rnernber ooard which consists of all members of the City Council. The Authority reorganizes its officers, a chair and vice chair, annually. The City Manager acts as the Executive Director and the Secretary and the Director of Administrative Services of the City acts as the Treasurer of the Authority. The current Authority g0.terning ooard is as folio.vs:

AUTHORITY GOVERNING BOARD

Daryl Hi ckrnan, Chairperson Brian Tisdale, \t1ce Chairperson

Amy B hutta, Board Member Rolbert E. Magee, Board Member

MelissaA. Melendez, Board Member

The Bond Law, as defined in the Indenture, pr0.tides for the issuance ofrevenue bonds of joint exercise of pcwers authorities, such as the Authority, to be repaid solely frorn the revenues of certain public obligations, such as the Loan. TheAuthority has no taxing pcwer.

AUTHORIZATION

TheBmds

The B ands are to be issued and secured pursuant to the I ndenture, and are to be sold to the U nderwri ter, as authorized b,I a resolution, adopted onJ anuary 25, 2011. The Bonds are being sold to pr0.tide moneys to enable the Authority to fund the Loan. The Authority authorized the execution of the Indenture and the funding of the Loan pursuant to a resolution, adoptedJ anuary 25, 2011.

The Bonds are also issued in accordance with the laws of the State, and particularly the Marks-Roos Local Bond Pooling Act of 1985, as amended, constituting Article 4 (commencing with Section 6584), of Chapter 5, Division 7, Title 1 of the G0.ternment Code of the State.

The L ran

The Loan were authorized b,I Resolution of the Agency, adopted on January 25, 2011. The Loan is gcwerned b,I the laws of the State, and particularly the Cornrnunity Redevelopment Law of the State, constituting Part 1 of Division 24 (commencing with Section 33000) of the Health and Safety Code of the State (the" Redevelopment Law").

AUTHORITY Fl NANCI AL STATEMENTS The Authority is authorized to finance or refinance indebtedness in connection with public capital irnpr0.tements undertaken and completed b,I making the Loan for such purposes.

The Authority, as required b,I the California Gcwernment Code, conducts an annual audit. The ninirnurn requirements of the audit are required to be those prescribed b,I the State Controller for special districts and are required to conform to generally accepted auditing standards.

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DEBT SERVICE PAYMENTS ON THE LOAN AND DEBT SERVICE COVERAGE ON THE AUTHORITY BONDS The Bonds are special obligations of the Authority payable solely from and secured b,I revenues from repayrrent of the Loan, and certain funds and accounts established under the Indenture. The receipt of revenues from repayrrent of the Loan is suqject to several variables described herein (see "BONDOWNERS' RiSKS - THE LOAN" herein). The Authority pr0.tides no assurance that the Revenues and the c0.terage ratios sho.vnwill be achieved.

TABLE NO. 1 LAKE ELSINORE PUBLIC FINANCING

AUTHORITY TAX ALLOCATION REVENUE BONDS

(LAUNCH RAMP PROJECT), 2011 SERIES A

D.S. Payments Debt Service on the Payments on

Bond Year Loan the Bonds Cover a~ Ratio

2011 $175,666 $175,666 1006

2012 740,513 740,513 1006

2013 742,713 742,713 1006

2014 741,788 741,788 1006

2015 741, 175 741, 175 1006

2016 740,925 740,925 1006

2017 739,425 739,425 1006

2018 738,900 738,900 1006

2019 738,800 738,800 1006

2020 741,600 741,600 1006

2021 742,000 742,000 1006

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THE AGENCY GOVER NM ENT ORGANIZATION The Agency is a public body, corporate and politic, existing under and by virtue of the California Community Redevelopment LiM', being Part 1 of Division 24 (commencing with Section 33000) of the Health and Safety Code of the State (the "Redevelopment Law''). The Agency was activated onJ uly 15, 1980, and is gcwerned by a five-member board (the "Go.terning Board') which consists of all members of the City Council. The Chairperson and Vice Chairperson are appointed to a one-year term by the Agency Go.terning Board from among its members. The City Council and Agency's members and term expiration dates are as fol Io.vs:

City Council Member

A my B hutta, Mayor

Robert E. Magee, Mayor Pro Tern

Daryl Hickman, Council Member

MelissaA. Melendez, Council Member

Brian Tisdale, Council Member

Agency Members

MelissaA. Melendez, Chairperson

Brian Tisdale, \t1ce Chairperson

Amy B hutta, Board Member

Daryl Hickman, Board Member

Robert E. Magee, Board Member

Term Expires

Ncwember 2012

Ncwember 2012

Ncwember 2014

Ncwember 2012

Ncwember 2014

The City perform, certain general administrative functions for the Agency. The City Manager serves as the Agency's Executive Di rector, the City Clerk serves as Agency Secretary and the Di rector of Administrative Services serves as Agency Treasurer. The costs of such functions, as well as additional services performed by City staff are allocated annually to the Agency. The Agency reimburses the City for such allocated costs out of available Tax Increment Revenues. Such reimbursement is subordinate to any outstanding Loan and indebtedness of the Agency. Current City Staff assigned to administer the Agency i ncl ude:

CITY AND AGENCY STAFF Robert A.Brady, City Manager and Agency Executive Director

Barbara Leibold, Esq., City Attorney and Agency Counsel J arnes R. Riley, CPA, Director of Adninistrative Services and Agency Treasurer

The City Attorney is appointed by and serves at the pleasure of the Lake Elsinore City Council. Legal services are performed under contract with the firm of Leibold, McClendon & Mann, P.C.:

Barbara Leibold, Esq., City Attorney David Mann, Esq., Assistant City Attorney

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AGENCY POWERS All p::wers of the Agency are vested in its rrembers. Pursuant to the Redeveloprrent Law, the Agency is a separate public body and exercises gcwernrrental functions, including planning and implerrenting redevelopment prqjects.

The Agency may exercise the right to issue or incur the Loan, ad.tances or other indebtedness for authorized purp:ises and to expend their proceeds, and the right to acquire, sell, rehabilitate, develop, adninister or lease property. The Agency may demolish buildings, clear land and cause to be constructed certain imprc:werrents, including streets, side.valks and utilities, and can further prepare for use as a building site any real property which it cwns or administers.

The Agency may, from any funds made available to it for such purp:ises, pay for al I or part of the value of land and the cost of buildings, facilities or other imprc:werrents to be publicly cwned and operated, pro.tided that such imprcwerrents are of benefit to a redevelopment prqject and cannot be financed b,I any other reasonable rrethod. The Agency may not construct or develop buildings, with the exception of public buildings and housing, and must sell or lease cleared property which it acquires within a redevelopment prqject for redeveloprrent in conformity with a particular redeveloprrent plan, and may further specify a period within which such redeveloprrent must begin and be completed.

REDEVELOPMENT PLANS General

Underthe Redevelopment Law, the City Council is required to adopt, b,I ordinance, a redevelopment plan (the "Redeveloprrent Plan" and collectively, the "Redeveloprrent Plans") for each of the Redeveloprrent Prqjects. The Agency may only undertake those activities within Redeveloprrent Prqject No. I specifically authorized in the adopted Redeveloprrent Plan. A redeveloprrent plan is a legal docurrent, the content of which is largely prescribed in the Redeveloprrent Law rather than a "plan" in the customary sense of the word. The general oqjective of each of the Agency's Redeveloprrent Plans is to encourage investrrent in the Redevelopment Prqjects b,I the private sector. The Redeveloprrent Plans pro.tide for the acquisition of property, the demolition of buildings and imprc:werrents, the relocation of any displaced occupants, and the construction of streets, parking facilities, utilities and other public imprc:werrents. The Redevelopment Plans also allcw the redeveloprrent of land b,I private enterprise, the rehabilitation of structures, the rehabilitation or construction of lcw and moderate income housing, and participation b,I cwners and the tenants of properties in the Redeveloprrent Prqjects.

Amended and Restated Redevelopment Plans

Each of the Agency's Redeveloprrent Plans was originally adopted in the 1980s and the format and presentation was generally outdated. Subsequent arnendrrents were separately docurrented and it was difficult to sort through these docurrents to deternine the gcwerning prc:wisions of the Redeveloprrent Plans. I nApril, 2009, the Agency adopted "Arrended and Restated Redeveloprrent Plans" for each of the Redeveloprrent Prqjects. Each of the Arrended and Restated Redeveloprrent Plans new (i) reflect changes in the Redeveloprrent Law that imp:ise additional requirerrents and restrictions not reflected in the original Redeveloprrent Plans, (ii) incorporate all prior arnendrrents to the original Redeveloprrent Plans, (iii) incorporate updated land use prcwisions, and (iv) clarify and restate the tirre limits and financial Ii mits (see "Redevelopment Pl an Li nitati ons" bel cw).

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Redevelopment Plan Limitations

The applicable redevelopment plan !irritations for Redevelopment Prqject No. I are shewn on the fol I cwi ng table and are discussed bel cw:

Redevelopment ProjecL

Redevelopment Project No. I (Original Area)

TABLE NO. 2 REDEVELOPMENT PLAN LIMITATIONS

Last Date to Repay Redevelopment Last Date to Incur Debt with Tax Tax Increment

Plan E~iration New Debt Increment Revenues Revenues Limit

September 23, 202 l Repealed September 23, Combined with 2031 Added Area

Limit on Total Bond Debt

Combined with Added Area

Redevelopment July 20, 2022 Repealed July 20, 2032 $3 trillion net $30 trillion Project No. I annually"' (Added Area)

111 The rraximum annunt of Tax Increment Ra,enues to be allocated to the Agency pursuant to the Reda,elopment Plan shall not exceed $3,000,000 during any one fiscal tax year; prCNided, ho.va,er, that any shortfall within the allo.vable annual allocation of Tax Increment Revenues shall be carried forward to the follo.ving year or years and shall be available to the Agency until the period for receipt of Tax Increment Ra,enuesjrepayment of debt has terminated. The Agency cannot receive Tax Increment Ra,enues in any fiscal year that exceeds the sum of the annual lirrit plus any unallocated Tax Increment Ra,enues that have rolled CNer from pra,ious years (the "Reda,elopment Project No. I Tax Increment Ra,enues Cap''); nor can the total annunt of Tax Increment Revenues received 0y the Agency pursuant to the Reda,elopment Plan exceed the aggregate of the annual limit CNer the period to receive Tax Increment Ra,enuesjrepayment of debt as prCNided in the Reda,elopment Plan. The lirrits on the allocation of Tax Increment Revenues applies to Tax Increment Ra,enues received and deposited 0y the Agency and is net of pass-through agreements, statutory tax sharing payments to taxing entities, County adrrinistrative charges and ERAF payments.

Redevelopment Plan Expiration. Chapter 942, Statutes of 1993, as codified in Section 33333.6 of the Redevelopment Law, limits the life of redevelopment plans adopted prior toJ anuary 1, 1994, to 40years from the date of adoption or January 1, 2004, whichever is later. For Redevelopment Prqject No. I, the initial redevelopment plan expiration dates were September 23, 2020, in the case of the Redevelopment Prqject No. I (Original Area), July 20, 2021, in the case of the Redevelopment Prqject No. I (Added Area).

In enacting Senate Bill 1045 ("SB 1045"), the State Legislature amended the time lirrits specified in Section 33333.6 of the Redevelopment Law. Section 33333.6(e) of the Redevelopment Law new pr0.tides that the City Council may adopt an ordinance to extend the limit for the duration of a redevelopment plan by one additional year. Pursuant to SB 1045, the City Counci I adopted an ordinance for each Redevelopment Prqject on February 26, 2008, to extend the term of the redevelopment plan of each of by one year.

Senate Bill 1096 ("SB 1096'') further amended Section 33333.6(e) of the Redevelopment Law to pr0.tide that the City Council may adopt an ordinance to extend the Ii nits for certain redevelopment prqjects by an additional year for each year that a payment was made to a countywide ERAF (2years maximum) by a redevelopment agency. Hcwever, to qualify under SB 1096, a redevelopment plan must meet one of the fol I cwi ng criteria:

1. SB 1096 pr0.tides that for redevelopment plans with less than twenty years ohime remaining prior to expiration fromJ une 30, 2005, the redevelopment plans may be extended by one year for each year that the required ERAF payment was made.

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2. SB 1096 pro.tides that if a rede.teloprrent plan has more than ten years but less than twenty years of tirre remaining prior to expiration of the rede.teloprrent plan, the tirre limit may be extended only if certain findings are made b,I the City Council.

3. If a rede.telopment prqject has less than ten years remaining before the expiration of the redevelopment plan, the tirre limit may be extended without making specific findings.

The Agency has deternined that currently the Redeveloprrent Plans do not satisfy the findings required b,I SB 1096.

Receipt of Tax Increment Time Limits. In addition, under the prcwisions of Asserrbly Bill 1290 ("AB 1290''), enacted b,I the State Legislature in 1993, Chapter 942, Statutes of 1993, as codified in Section 33333.6 of the Redeveloprrent Law, for rede.teloprrent plans adopted prior to January 1, 1994, a redevelopment agency may not pay indebtedness or receive property taxes pursuant to Section 33670 of the Rede.teloprrent Law after ten years from the ternination of the rede.telopment plan except to accommodate certain specific lo.v and moderate income housing obligations or to pay debt service on bonds, indebtedness or other financial obi i gati ons authorized prior to J anuary 1 , 1994.

Pursuant to SB 1045, the City Council adopted an ordinance relating to each Rede.teloprrent Prqject on February 26, 2008, to extend the term of the rede.teloprrent plans of the Rede.teloprrent Prqjects b,I one year. This extension in turn extended the period within which the Rede.teloprrent Prqjects may repay indebtedness b,I one year.

Time Limit on Incurring Indebtedness. For redeveloprrent plans adopted prior to 1994, Chapter 942, Statutes of 1993, as codified in Section 33333.6 of the Redeveloprrent Law, stipulates that the tirre limit for establishing indebtedness shall not exceed 20years from the adoption of the redeveloprrent plan or January 1, 2004, whichever is later. Pursuant to Senate Bill 211, which was signed into law as Chapter 741, Statutes of 2001, a city council may amend a redeveloprrent plan to elininate the tirre limit to establish indebtedness in rede.teloprrent prqjects adopted priortoJanuary 1, 1994, b,I ordinance. If the rede.telopment plan is so amended, existing tax sharing agreerrents will continue and certain statutory tax sharing for entities without pass-through agreerrents will be required beginning in the fiscal year follo.ving the year the eliminated limit would have taken effect.

On February 26, 2008, the City Council amended the rede.teloprrent plan for the Rede.telopment Prqject No. I to elininate the tirre Ii nit on establishrrent of indebtedness b,I the adoption of Ordinance No. 1249.

Limitation on the Amount of Tax Increment Receipts. The Rede.teloprrent Law requires each redevelopment agency, for rede.teloprrent plans adopted prior to 1994, to either include in each redevelopment plan or to adopt b,I ordinance a limitation on the amount of taxes that may be divided and allocated to the rede.teloprrent agency with respect to the related redeveloprrent prqject. Pursuant to Section 33333.2, taxes may not be allocated to a rede.telopment agency beyond this linitation except b,I arrendrrent of the rede.tel oprrent pl an.

The net amount of Tax I ncrerrent Revenues that may be collected b,I the Agency for the Rede.teloprrent Prqject No. I is $3 nillion annually as more fully described in Table No. 10 Prqjected Rede.teloprrent Prqject No. 1 Tax Revenues and Debt Service Cc:werage.

Limit on the Amount of Bonded Indebtedness. Rede.teloprrent plans of an agency are required to include a limit on the amount of bonded indebtedness to be repaid with tax increrrent revenues that can be outstanding at one ti rre. These Ii mits can be extended only b,I an amendrrent of the redevel oprrent pl an.

The Ii nit on the amount of bonded indebtedness forthe Rede.teloprrent Prqject No. I is $30 nil lion.

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AGENCY Fl NANCI AL ADM I NI STRATI ON

Annual Budget

The law requires redevelopment agencies to adopt an annual budget. All expenditures and indebtedness of the Agency are required to be in confornity with the adopted or arrended budget.

The Executive Director of the Agency is responsible for preparing the proposed budget and subnitting it to the Agency Go.terning Board. After reviewing the proposed budget at a public rreeting, the Agency Go.terning Board holds a public hearing. The Agency Go.terning Board adopts the budget prior to the start of each fiscal year. The Director of Administrative Services of the City is responsible for controlling expenditures within budgeted appropriations.

Agency Accounting Records and Financial Statements

Every redeveloprrent agency is required to present an annual report to its legislative body within six months of the end of the fiscal year. The annual report is required, among other things, to include an independent financial "audit report" and a fiscal staterrent for the previous fiscal year. The California Health and Safety Code defines "audit report'' to rrean an exanination of and opinion on the financial staterrents of the agency which presents the results of the operations and financial position of the agency. The i ndependent fi nanci al audit is requi red to be conducted i n accordance with general ly accepted auditing standards and the rules gcwerning audit reports promulgated b,I the Gc:wernrrental Accounting Standards Board. The independent financial audit report is al so required to include an opinion of the agency's compliance with laws, regulations and adninistrative requirerrents gcwerning activities of the agency. The California Health and Safety Code requires the fiscal staterrent to contain the follo.ving information:

(1) The amount of outstanding indebtedness of the agency and each Redevelopment Prqject.

(2) The amount of Tax I ncrerrent Revenues generated in the Agency and in each Redeveloprrent Prqject.

(3) The amount of Tax I ncrerrent Revenues paid to a taxing agency, other than school or cornrnuni ty col I ege district, pursuant to a tax sharing agreerrent.

( 4) The financial transactions report required to be submitted to the State Control I er.

(5) The amount allotted to school or community college districts pursuant to the Redeveloprrent Law.

(6) The amount of existing indebtedness and the total amount of payrrents required to be paid on existing indebtedness for that fi seal year.

(7) Any other fiscal information which the Agency believes is useful to describe its programs.

The Loan Agreerrent requires+ the Agency to keep, or cause to be kept, proper boolks and accounts separate frorn all other records and accounts of the Agency and the City in which complete and correct entries are made of all transactions relating to Redeveloprrent Prqject No. I and the Tax lncrerrent Revenues. The Loan Agreerrent requires the Agency to file with the Trustee annually, within 180 days after the close of each fiscal year, so long as the Loan is outstanding, its audited financial staterrents sho.ving the Redeveloprrent Prqject No. I Tax Revenues and the financial condition of Redeveloprrent Prqject No. I, including the balances in all funds and accounts related to Redeveloprrent Prqject No. I as of the end of such fiscal year. The audited financial staterrents are required to be accompanied b,I a Written Certificate of the Agency stating that the Agency is in compliance with its obligations under the LoanAgreerrent. The Agency co.tenants under the Loan Agreerrent to furnish a cop,1 of such staterrents upon reasonable request to any B ondONner.

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Annual Financial Repcrt

The Agency retained the firm of Diehl, Evans & Corrpany, LLP, Certified Public Accountants & Consultants, Irvine, California, to examine the component unit financial staterrents of the Agency as of and for the Fiscal Year endedJ une 30, 2010, which is included as "APPENDIX o." The firm's exanination was made in accordance with generally accepted auditing standards and the "Guidelines for Compliance Audits of California Redeveloprrent Agencies" issued b,I the State Controller. The Agency's audited financial staterrents are public docurrents and are included within this Official Staterrent without the prior appraval of the auditor. The auditor has not perforrred any post-audit of the financial condition of the Agency. The Agency represents that there have been no material adverse changes in its financial position si nee J une 30, 201 0.

F iii ng of Statement of I nclebteclness

Section 33675 of the Redeveloprrent LiM' requires that the Agency file, not later than the first day of September of each year with the county auditor, a staterrent of indebtedness certified b,I the chief financial officer of the Agency for each redevel oprrent prqj ect for which the redevel oprrent pl an pr0.ti des for the division of taxes pursuant to Section 33670 of the Redevelopment LiM'. The staterrent of indebtedness is required to contain, among other things, the date on which the bonds were delivered, the principal amount, term, purpose, interest rate and total interest of the bonds, the principal amount and the interest due in the fiscal year in which the staterrent of indebtedness is filed and the outstanding balance and amount due on the bonds. Sinilar information must be given for each loan, advance or indebtedness thatthe Agency has i ncurred or entered into which is payable from tax i ncrerrent revenues.

As arrended b,I Assembly Bill 1290 (Chapter 942, Statutes of 1993) ("AB 1290''), Section 33675 requires each redevel oprrent agency to fi I e a reconci Ii ati on staterrent for each redevel oprrent prqj ect for which the redevelopment agency receives tax increrrent revenues pursuant to Section 33670. The reconciliation staterrent is to shON, among other things, (i) for each loan, advance or indebtedness, for each redevelopment prqject, the total debt service obligations of the redeveloprrent agency to be paid in the fiscal year for which the staterrent of indebtedness is filed; (ii) the total debt service remaining to be paid on such indebtedness; and (iii) the available revenues as of the end of that fiscal year. "Available revenues" consist of all Tax I ncrerrent Revenues held b,I the redeveloprrent agency as cash or cash equivalents and all cash or cash equivalents held b,I the redevelopment agency that are irrevocably pledged or restricted to payrrent of a loan, advance or indebtedness that the redeveloprrent agency has listed on a staterrent of indebtedness. For purposes of Section 33675, amounts held in a redevelopment agency's LON and Moderate Income Housing Fund do not constitute available revenues, and amounts deposited by a redevelopment agency in its LON and Moderate Income Housing Fund constitute indebtedness of the redevelopment agency.

Section 33675(g) has been arrended b,I AB 1290 to pr0.tide that payrrents of Tax I ncrerrent Revenues from the county auditor to a redeveloprrent agency may not exceed the redeveloprrent agency's aggregate total outstanding debt service obligations, minus the available revenues of the redeveloprrent agency, as shONn on the reconciliation staterrent. Payrrents to a trustee under a bond resolution or indenture or payrrents to a public agency in connection with payrrents b,I such public agency pursuantto a bond issue shal I not be disputed in any action under Section 33675.

The Agency believes that the arnendrrents to Section 33675 limiting the payrrent of Tax lncrerrent Revenues to an amount not greater than the difference between a redeveloprrent agency's total outstanding debt obligations and total available revenues, as reported on the redevelopment agency's reconciliation staterrent, will not have an adverse irrpact on the Agency's ability to rreet its debt service obi i gati ons.

44

REDEVELOPMENTPROJ ECTNO. I

GENERAL DESCRIPTION

The 1,910-acre Redevelopment Prqject No. I consists of three non-contiguous areas of the City. Redevelopment Prqject No. I generally consists of three areas in term, of land use. The first area is acjjacent to, and southerly of, Interstate 15. Major land uses include the Lake Elsinore Outlet Center, the Central Business Park, and 2 retail centers that include Target and Horne Depot. The second area includes the central business district and gcwernmental offices. The third area is a commercial district near the municipal baseball stadium.

ASSESSED VALUES BY LAND USE

The follo.ving table represents the breakdONn of land use in the Redevelopment Prqject No. I b,I assessed value for Fiscal Year 2010-11. Unsecured and SBE Non-Unitary values are assigned to secured parcels already accounted for in the other land use categories and do not, therefore, have numbers of parcels listed.

TABLE NO. 3 REDEVELOPMENT AGENCY OF THE

CITY OF LAKE ELSI NORE REDEVELOPMENT PROJECT NO. I

2010-11 ASSESSED VALUES BY LAND USE CATEGORY

Cat~r~ Parcels Assessed Value Percenta~

R esi denti al l,450 $235,653,058 34.7%

Comrercial 317 216,654,537 31.9%

Industrial 161 146,785,644 21.6%

Recreational 3 6,796,280 l.0%

I nsti tuti on 13 798, 100 0.1%

Vacant Land 479 24,887,024 3.6%

Exempt 429 Q 0.0%

Subtotal 2,852 $631,574,643 92.9%

SBE Non-Unitary 0 QO%

Possessory Int 7,719,431 l.1%

Unsecured 40,535.194 6.0%

Subtotal $48,254,625 7.1%

Totals: 2,852 $679,829,268 100.0%

Source: Fiscal Consultant Report (see "APPENDIX C - Fl SCAL CONSUL TANT RE PORT").

45

TOP TEN TAXABLE PROPERTY OWNERS

Set forth in the table belo.v are the ten largest property taxpayers for the Redeveloprrent Prqject No. I for Fi seal Year 2010-11 ( current as of J uly 1, 201 O).

TABLE NO. 4 REDEVELOPMENT AGENCY OF THE CITY OF LAKE ELSINORE

REDEVELOPMENT PROJECT NO. I TEN LARGEST PROPERTY TAXPAYERS

(2010-11 SECURED AND UNSECURED)

Property Owner Assessed Value

Cas~e and Cooke Lake $41,224,855

Elsinore Outlet 0 l

2 Harbor Grand

A partrrents I nvestrrent "'

3 Target Corporation

4 Lake Elsinore Office

Park

5 HD Developrrent Of

Maryland Inc.

6 RSM Properties

7 Tc,yota Motor Sales

USA Inc."'

8 Louis F. Depasquale Trust Ol

9 Miramar West Auto Center en

lO M KJ Adnoff I nvestrrent en

Total

24,847,661

15,305, 163

13,053, 165

12,737,804

12,643,841

8,649,452

8,028,531

6,875,664

6,484,944

$149,851,080

% of Redevelopment

Project Assessed

Value

6.006

3.65%

2.25%

l.92%

l.87%

l.88%

l.27%

l.18%

l.01%

22.04%

% of Incremental

Value__ Primary Land Use

6.37% Corrmercial (Lake Elsinore Ou~et Center -

anchor tenants include Nike Factory Store,

Pottery Barn, Old Navy, Gap O~et and

Guess Factory Store)

184%

2.36%

2.02%

l.97%

l.95%

l.34%

l.24%

l.006

2114%

Residential (Harbor GrandApartrrent Harres

- 192 unit apartrrent)

Corrmercial (Oak Grove Crossing-

shoppi ng center includes T arge~ Bank of Arrerica, Oak Grove Dental Group, Fantastic

Sams, PapaJohns, Sul:t.vay and Starbucks)

Corrmercial (Riverside County Social

Services Offices), Vacant Land

Corrmercial (Lake Elsinore Square, includes

Horne De~ 99CentStore, Petco, Big 5,

I HOP and small retail stores)

Corrmercial (neighborhood retail center

includes Walgreens, El Pollo Loco and srrall

retai I stores)

Vacant Land

Corrmercial (Camelot Center, includes Trevi

Lanes Enter1ainrrentCenter, Diamond 8

Cinema, and srral I retai I stores)

Cornrrercial (neighborhood retail center

includes Stater Bros, Del Taco, KC

Wholesale Flooring and srrall retail stores)

Comrercial (Pasadena Comrerce Center -business park)

(l) Pending Appeal (see "TAX INCREMENT REVENUES-ASSESSMENT APPEALS - Base Year Appeals"").

Source: Fiscal Consultant Report (see "APPENDIX C - Fl SCAL CONSUL TANT RE PORT").

46

Redevelopment Project No. I Aerial Views

47

Redevelopment Prqject No. I

48

Redeveloprrent Prqject No. I

49

TAX INCREMENT REVENUES TAXABLE VALUATIONS The Tax lncrerrent Revenues include a portion of the ad valorem taxes levied on real property within Redevelopment Prqject No. I. Article XIIIA of the California Constitution limits the amount of ad valoremtax on real property to 1% of "full cash value," as deternined b,I the County Assessor. Article XIIIA defines "full cash value" to rrean "the County Assessor's valuation of real property as sho.vn on the 1975-76 tax bi 11 under "ful I cash value," or thereafter the appraised value of real property when purchased, newly constructed, or a change in o.vnershi p has occurred after the 1975 assessrrent period."

Historical Taxable Valuations

Between 2001-02 and 2010-11, the taxable value within the Redevelopment Prqject No. I increased b,I $273,544,323 (67.33%). With the exception of 2002-03, 2009-10 and 2010-11, the assessed value increased in each year during this period. From 2009-10 to 2010-11 assessed value in Redeveloprrent Prqject No. I dropped b,I $21,443,501 (3.06%). This drop was the result of assessed value declines in both the secured and unsecured tax rolls. over the ten-year period examined, secured values have increased b,I $276.6 million (76.26%) and unsecured values have decreased b,I $3.1 million (7.0036). GrONth has been steady and with large annual increases from 2003-04 through 2007-08. New residential construction, comrrercial and industrial developrrent and transfer of o.vnership accounted for the majority of the grONth within Redevelopment Prqject No. I.

Redevelopment Prqject No. I had increrrental value of $647,460,440 for 2010-11. This represents an increase of 1900.3% cwer the base year value. over the ten-year period exanined, annual grONth in assessed value averaged 6.24% despite the declines for 2009-10 and 2010-11.

The Agency's source of Redeveloprrent Prqject No. I Tax Revenues pledged to pay debt service on the Loan is the Tax I ncrerrent Revenues from Redeveloprrent Prqject No. I as reported b,I the Riverside Auditor-Controller's office. The follo.ving table pro.tides a summary of the historical taxable values for Redevelopment Prqject No. I for Fiscal Years 2oa,--o7 through 2010-11. This summary of historical assessed valuations is not intended to aid in the prediction of future Redevelopment Prqject No. I Tax Revenues.

50

TABLE NO. S REDEVELOPMENT AGENCY OF THE CITY OF LAKE ELSINORE

REDEVELOPMENT PROJECT NO. I HISTORICAL VALUES

Secured en 2(JX,-07 2007-0! 2008--09 2009-10

Land $188.493,818 $222. 928, 952 $238,693.727 $219.766, 316

I rrproverrents 374.628,416 464.606, 32 l 474.467.177 455.471.276

Personal Prop 626,576 646,418 793.822 2.165.187

Exemptions (l 7, 900, 509) ( l B. 788,800) ( 19,387.149) (l 9, 794,213)

TOTAL SECURED $545,848,301 $669, 392, 89 l $694,567,577 $657,608, 566

Unsecured Land $7. 112 $6,966 $220,503 $6,397

I rrproverrents 25.182,893 30,297,271 25,687,714 19,577,504

Personal Prop 20.m.925 30,906,589 27,858,083 24,080,302

Exemptions 0 0 0 0

TOTAL UNSECURED $45,962,930 $6l,21Q826 $53,766,300 $43,664,203

GRAND TOTAL $59) 8) I 23) $730 603. 7) 7 $74&333 877 $701 272 769

Exemption Adjustrrent'' Successful Appeals <3>

Adjusted Total

I ncremental Value $559,442,403 $698,234,889 $715,965,049 $668,903,94 l

Annual Change 6.85% 24.81% 2.54% (6.57%)

"'secured values include s1ate assessed non-<initary utility property.

2010-ll $220,252.829 439.537.727

2.053.300 (3,009, 209)

$658,834,687

$12.164 18,718,075 21,804,955

0

$4Q535, l94

$699 369 841

(16,752,847)

(2. 787, 726) $679,829,268

$647,460,440 (121%)

<a Assessed valuations were reduced by $16,752,847for two exemptions not reflected on the Fiscal Year 2010-l l 1ax roll.

<3> Assessed valuations were reduced by $2. 787, 726 for four successful appeals not reflected on the 2010-l l 1ax roll.

Source: County ofRiverside Lien Date Rolls.

ASSESSMENT APPEALS General

In California, there are two types of appeals: a base year appeal and a Prop:isition 8 appeal. The first type of appeal is a base year assessrrent appeal where o.vners challenge the original, or base year, valuation assigned by the County Assessor. Any reduction resulting from a base year assessrrent appeal is permanent and can only increase alx:we the allo.vable inflationary adjustrrent if the property is sold or experiences mw construction. Any base year appeal must be made within 4 years of the change of o.vnership or new construction date. The second type of appeal is a Prop:isition 8 appeal based on Section 51 of the Revenue and Taxation Code which allo.vs for temporary reductions in the taxes paid on properties where the assessed value of property becomes higher than its actual market value. After the market value of the property suqject to the Prop:isition 8 appeal increases, the assessrrent can be increased up to its pre-appeal value.

51

Base Year Appeals

Historically only a small percentage of appeals requested b,I property cwners have been granted. While the outcome of pending appeals cannot be determined in advance, the Fiscal Consultant has estimated the assessed value reduction that may result from the pending appeals based on an analysis of pending and historical appeals data (see "APPENDiX c - FiSCAL CONSULTANT REPORT"). The prqjections of Redevelopment Prqject No. I Tax Revenues prepared b,I the Fiscal Consultant have incorporated any such reductions to the Fi seal Year 201 0-11 assessed val ue.

Within the Redevelopment Prqject No. I, there have been 220 assessrrent appeals filed since Fiscal Year 2005-0i. Of the 220 appeals filed, 10 have been allcwed with a reduction in value and 47 have been denied. There are 163 appeals currently pending on 142 properties within the Redevelopment Prqject No. I. Based on the historical averages, the Fiscal Consultant expects that 25 of the currently pending appeals will be allcwed and these successful appeals will result in an assessed value reduction of $2,835,989. This reduction has been incorporated b,I the Fiscal Consultant in the prqjection as a reduction to the Fiscal Year 2011-12 assessed value. Four assessrrent appeals were recently allcwedwith a reduction in value of $2,787,726. This reduction has been reflected in the assessed value for 2010-11. Reductions in revenue for refunds resulting from these successful appeals have not been estimated.

Shewn on Table No. 6 belcw are the pending base year appeals for the top ten property taxpayers as of J uly 13, 2010.

TABLE NO. 6 REDEVELOPMENT AGENCY OF THE CITY OF LAKE ELSINORE

REDEVELOPMENT PROJECT NO. I TOP TEN PROPERTY TAXPAYERS PENDING APPEALS

Cas~e and Cooke Lake Elsinore O~et Center ( l)

Harbor Grand Apartrrents

Investments (2)

Harbor Grand Apartrrents Investments (2)

Toyota Motor Sales (7)

Louis F. Depasquale (8)

MirarnarWestAuto Center (9)

M KJ Adnoff Investment ( l 0)

Source: The Fiscal Consultant

Propositim 8Adjustments

2008-09 Assessed

Value

24,437,057

7,510,623

6,756,872

6,372,895

2009-l OAssessed Property Owners

Value Opinion of Value

$41,752,539 $23,000,000

19,496,000

24,923,963 18,596,000

8,670,000 2,000,000

3,000,000

4,836,612

4,700,000

Value Reduction

$18,752,539

4,941,057

6,327,963

6,670,000

4,510,623

l,920,260

l,672,895

General. In 1978, California voters passed "Proposition 8." This constitutional arnendrrent allcws a temporary reduction in assessed value when a property suffers a "decline in value." A decline in value occurs when the current market value of a property is less than the current assessed value as of the lien date. Under the terms of Proposition 8, it is the County Assessor's obligation to assess all properties at the lesser of current market value or at the property's base value, as acjjusted for inflation and for any changes that have occurred to the property si nee it was I ast purchased.

52

Properties that have their values reduced to the current market value are annually re.ti ewed b,I the County Assessor to determine the new market value of the property. The value that is enrolled each year is the lesser of the current market value or the property's aqjusted base value. Adjusting the property's value to the current market value may entail a further decrease in value or an increase in value that is not linited b,I consti tuti anal restriction on annual value increases. Once the property has again reached its adjusted base value, it may be increased in value only b,I the rate of inflation to a maximum annual rate of two percent as required b,I the State constitution.

Prior Proposition 8 Adjustments. The Assessor completed an annual review of properties in the County, including Rede.telopment Prqject No. I, and made adjustments for "decline in value." Such acjj ustments are incl uded in the 201 0-11 Fi seal Year assessment rol I. W i thi n the assessment rol Is for Fi seal Year 2010-11, there were a number of properties that had al ready been reduced in value under Proposition 8. For Fiscal Year 2010-11 there were a total of 8,120 parcels in the City of Lake Elsinore that at some point had their values reduced pursuant to Proposition 8. If a property's value had been reduced in some earlier year, its value may have been adjusted either up.vard or dcwnward for the current year depending on what the Assessor had determined the market value of that property to be as of J anuary 1 , 201 0, the I i en date for Fi seal Year 201 0-11 . B el cw is a summary of the parcels reduced under Proposition 8 for the 2010-11 Fiscal Year.

TABLE NO. 7 REDEVELOPMENT AGENCY OF THE CITY OF LAKE ELSINORE

PROPOSITION SREDUCTIONS IN VALUE

Redeveloprrent Project No. I

No. of Parcels --

678

2009-10 Value

124,059,301

2010-11 Value Change

112,246,860 (ll,812,441)

Source: Fl seal Consultant Report (see" APPENDIX C - Fl SCAL CONSUL TANT RE PORT").

TRANSFERS OF OWNERSHIP

Percent Change

(9.52%)

As previously discussed, one of the events that trigger a reevaluation of property is the transfer of cwnership. Transfers of cwnership are occurring at a rate higher than historical averages. This has been attributed, in part, to the amount of foreclosure activity. The median price of these transfers of cwnership has continued to decline (see "TAX INCREMENT REVENUES - TAXABLE VALUATIONS"). The loss of taxable valuation will have an adverse effect on the receipt of Redevelopment Prqject No. I Tax Re..renues.

A revie.v of recent transfers of cwnership was conducted b,I the Fiscal Consultant and a number of transfers were found to have occurred after theJ anuary 1, 201 O I ien date for the current fiscal year. These transfers of cwnership occurred fromJ anuary 1, 2010throughJ uly, 2010. As a result, the sales values on these transfers of cwnershi p are expected to be reflected i n the tax rol Is for 2011-1 2.

Within the Rede.telopment Prqject No. I, 121 transfers of cwnershipwere found (of the 121 transfers, 52 were sales of foreclosed properties). These transfers of cwnership occurred betweenJ anuary 1, 201 O and December 1, 2010, and are expected to result in a increase of value in the amount of $1,2CX'i,468 to the Fiscal Year 2011-12 tax roll for the Rede..relopment Prqject No. I. The impacts of these transfers are included in the prqjections b,I the Fiscal Consultant of Tax Increment Re..renue (see "APPENDIX c -FISCAL CONSUL TANT REPORT").

53

DELINQUENCIES

The Agency receives from the County 10036 of its respective share of the secured ad valorem taxes levied, without regard to actual collections of taxes (see "SOURCES OF PAYMENT FOR THE BONDS -REPAYMENT OF THE LOAN -Alternative Method ofTaxApportionment ("Teeter Plan")" herein). Due to this al I ocati on method, the Agency is held harmless from tax deli nquenci es and, as a consequence, the Agency receives no acjj ustments for redemption payments of deli nquent col I ecti ons. The unsecured taxes are allocated based on actual unsecured tax collections. The County makes a one-time acjjustment for changes in the tax roll in the follo.ving year. Ho.vever, there is no assurance that the County will continue to allocate tax revenues in this manner.

If the County does not allocate taxes in accordance with its Teeter Plan, tax delinquencies could cause terrporary disruptions of the receipt of Redevelopment Prqject No. I Tax Revenues to the extent delinquencies exceeded redemption payments of delinquent collections.

FORECLOSURES

As a result of the recent nationwide increase in defaults on residential mortgages there has been concern expressed in the financial markets cwer the possible impact that these defaults may have on redevelopment agency revenues in general. Reliable information on foreclosure activity is difficult to find and information that is available is not readily applicable to discrete areas within cities and redevelopment prqject areas. Much of the information available is segregated b,I county or ZIP Code. The information within the follo.ving table is based on information available for the ZIP Codes identified as containing the City of Lake Elsinore from the RealtyTrac U.S. Foreclosure Market Report as of September 14, 2010. Since the City ZIP Codes encompass areas that are outside of Redevelopment Prqject No. I and areas that are outside of the city limits, this information is illustrative only.

Asof:

January 19, 2011

TABLE NO. 8 REDEVELOPMENT AGENCY OF THE

CITY OF LAKE ELSINORE FORECLOSURE DATA FOR THE CITY OF

LAKE ELSI NORE ZIP CODES 92530THROUGH 92532

Notices of NoticesofTrustee Real EstateOwned Default Filed Sale Filed by Lender

Total City Residential Parcels

350 572 506 13,213

A ccordi ng to Realty Trac, the " Notices of Default'' are based on the number of properties where a publ i cly recorded notice has been given that a property o.vner has missed scheduled loan payments for a loan secured b,I a property. "Notices of Trustee Sale'' are based on the number of properties where a document has been filed announcing the public sale of a property to recc:wer a debt o.ved b,I the o.vner of the property. These notices are mailed to the parties affected b,I the sale of the property, are ad.tertised in local publications and are recorded as public records. "Real Estate owned b,I Lender" reflects the number of properties that are o.vned b,I the lender as the result of a foreclosure.

Real Estate owned b,I Lender occurs after or in lieu of foreclosure. Generally the foreclosure process may be halted b,I the property o.vner b,I paying the amount that is in default on the loan and bringing the loan current.

The number of parcels on which Notices of Default or Notices of Trustee's Sale have been filed or are lender o.vned total 10.836 of all residential parcels within the City. The City is located within ZIP Codes 92530, 92531 and 92532, which also include unincorporated areas of Riverside County. The Fiscal

54

Consultant was unable to determine ho.v many of the parcels represented in Table No. 8 alx:we may be located within Redevelopment Prqject No. I or that are located within the city limits.

PASS-THROUGH AG REEM E NTS AND STATUTORY PAYMENTS

Prior to the enactment of Assembly Bill 1290 ("AB 1290''), enacted b,I the State Legislature in 1993, under the Redevelopment LiM' a redevelopment agency could enter into an agreement to pay tax increment revenues to any taxing agency that has territory I ocated within a redevelopment prqj ect in an amount which, in the agency's deterni nation, was appropriate to al I evi ate any fi nanci al burden or detriment caused b,I the redevelopment prqject. These agreements normally pr0.tide for a pass-through of tax increment revenue directed to the affected taxing agency, and, therefore, are commonly referred to as "pass-through agreements." The Agency has entered into pass-through agreements with respect to Tax Increment Revenues relating to Redevelopment Prqject No. I. Although AB 1290 prohibits redevelopment agencies from entering into pass-through agreements, AB 1290 does not affect existing pass-through agreements. I n pl ace of such agreements, AB 1290 pr0.ti des a statutory formula for the allocation of tax increment revenues ("Statutory Tax Sharing"), which formula applies to all redevelopment prqjects created after enactment of AB 1290 and to territory that is added to existing redevelopment prqjects (see "APPENDIX c - FISCAL CONSULTANT REPORT").

Pass-Through Agreements

The Agency has the fol lo.vi ng pass-through agreements with respect to Redevelopment Prqj ect No. I:

Riverside County

Riverside County, including the County Library and County Fire Department, was allocated approximately 29.61% of the 1% General Levy generated in Redevelopment Prqject No. I (the "County Share") in Fiscal Year 2009-10. Pursuanttothe tax sharing agreement with the County, until such time as the annual amount of Tax Increment Revenues exceed $500,CXXl, the Agency will receive 10036 of the County Share. When annual Tax Increment Revenues are between $500,CXXl and $1 nil lion, the County will receive 2036 and the Agency will receive the remaining 8036 of the County Share. When annual Tax Increment Revenues are between $1 nillion and $2 million, the County will receive 25% and the Agency will receive the remaining 75% of the County Share. When annual Tax Increment Revenues exceed $2 nillion, the County will receive 5036 and the Agency will receive the remaining 5036 of the County Share.

Riverside County F load Control District

Riverside County Flood Control District (the "Flood Control District'') was allocated approximately 3.4036 of the 1% General Levy generated in Redevelopment Prqject No. I (the "Flood Control District Share'') in Fiscal Year 2010-11. Pursuant to the tax sharing agreement with the Flood Control District, the Flood Control District will receive 10036 of the Flood Control District Share follo.ving the completion of the Lake Elsinore Outlet Channel. Prior to such time, the Agency will receive 10036 of the Flood Control District Share to be set aside in the "Lake Elsinore Outlet Channel Fund' to be used b,I the Agency to construct specific flood control faci Ii ti es.

Elsinore Valley Municipal Water District

Elsinore Valley Municipal Water District (the "Municipal Water District'') was allocated approximately 8.13% of the 1% General Levy generated in Redevelopment Prqject No. I (the "Municipal Water District Share") in Fiscal Year 2010-11. Pursuant to the tax sharing agreement with the Municipal Water District, the Municipal Water District will receive 10036 of the Municipal Water District Share, to be used to construct impr0.tements of benefit to Redevelopment Prqject No. 1. In addition, the Municipal Water District will also receive any Tax Increment Revenues generated b,I any tax cwerride levied to service any Municipal Water District debt established after formation of the Redevelopment Prqject No. I.

55

Statutcry Tax Sharing

Pursuant to Section 33607.7 of the Health and Safety Code, for redeveloprrent prqjects adopted prior to January 1, 1994, any arrendrrent that increases the amount of tax i ncrerrent revenues to be received b,I a redeveloprrent prqject or extends any of the rreasure's required tirre limits triggers payrrents to taxing entities with whom the agency does not have a pass-through agreerrent. The AB 1290 payrrents, which are to begin the fiscal year follo.ving the year that the redeveloprrent prqject's original plan linitations would have taken effect, are calculated using the increase in assessed value alx:we the amount of assessed value in the redeveloprrent prqject in the year that the forrrer limit would have been reached. On, February 26, 2008, the City Council adopted Ordinance No. 1249 eliminating the last date for Redeveloprrent Prqject No. I to issue new debt. The AB 1290 tirre limit on incurring debt for the Redeveloprrent Prqject wasJ anuary 1, 2004. Comrrencing with the 2009-10 Fiscal Year and using the 2008--09 Fiscal Year valuations as an aqjusted base year value, the Agency is required to pay to the affected taxing entities an amount that is 25% of all tax increrrent revenue derived from the increrrental increase in assessed value allx:we the acjj usted base year value after deducting the 2036 housing set-aside obligation (the "First Tier Tax Sharing''). This First Tier Tax Sharing continues for the life of Redeveloprrent Prqject No. I. Payrrents are only to those entities without pass-through agreerrents. The City may, and has elected to, receive the First Tier Tax Sharing. In addition, beginning in Fiscal Year 2018-19, using the values for Fiscal Year 2017-18 as an adjusted base year value, the Agency must pay to affected taxing entities, after deducti ng the 2036 housing set-aside obi i gati on, an amount that is 21 % of the revenue derived from the increase in assessed value alx:we the new adjusted base year value (the "Second Tier Tax Sharing"). This Second Tier Tax Sharing will also continue for the life of Redeveloprrent Prqject No. I and be paid only to the taxing entities that have not entered into pass­through agreerrents. The City may not elect to receive the Second Tier Tax Sharing. A third tier of tax sharing payrrents will not be applicable because the Redeveloprrent Plan terminates onJ uly 20, 2022.

COUNTY PROPERTY TAX COLLECTION REIMBURSEMENT

Chapter 466, adopted b,I Senate Bill 2557, allo.vs counties to recc:wer charges for property tax adni ni strati on in an amount equal to thei r Fi seal Year 1989--90 property tax admi ni strati on costs, as acjjusted annually (the "County Administrative Fee"). The amounts that are reimbursed are the costs connected with the collection and distribution of property taxes for the Tax Collector, the Auditor­Controller and the Assessor. The portions of the reimburserrent amount that are allocated to each taxing entity within the County are based on the percentage of the total assessed value in the County that each taxing entity's assessed value represents.

The County Administrative Fee for Fiscal Year 2009-10 and the percentage that this amount represents of each of the Redeveloprrent Prqject's actual 2009-1 Ogross revenue is sho.vn in Table No. 9 belo.v.

TABLE N0.9 REDEVELOPMENT AGENCY OF THE

CITY OF LAKE ELSINORE COUNTY PROPERTY TAX COLLECTION REIMBURSEMENT

2009-l OAllcx:ation Future Year Percentage

Redeveloprrent Project No. I $82,072 l.201%

For purposes of the Fiscal Consultant's prqjections, it was assurred that the County Administrative Fee will annually be the sarre percentage of Redeveloprrent Prqject No. I gross revenue as in Fiscal Year 2009-10.

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HOUSING SET-ASIDE In accordance with Section 33334.2 of the Redeveloprrent LiM', not less than twenty percent (2036) of all taxes which are allocated to the Agency from Redeveloprrent Prqject No. I (see "1 NTRODUCTORY STATEMENT - THE AGENCY -TaxAllocation Financing" herein) are required to be deposited in the Lew and Moderate I ncorne Housing Fund to be used b,I the Agency for purposes of irrprcwing, increasing and preserving the City's supply of housing for persons and fanilies of lcw or moderate incorre (including the payrrent of indebtedness issued or incurred for such purposes) (the" Housing Set-Aside Revenues").

Funds available from the twenty percent (2036) requirerrent may be used outside a redeveloprrent prqject on a finding b,I the Agency and the City Council that such use will be of benefit to such redeveloprrent prqject. The Redevelopment Law also pernits agencies with more than one redeveloprrent prqject to set aside less than twenty percent (2036) of the taxes allocated to the agency from one redeveloprrent prqject if the difference is made up from another redeveloprrent prqject in the sarre year and if the agency and the legislative body of the community find that such use of funds will benefit such other redeveloprrent prqject.

The Housing Set-Aside Revenues are calculated as 2036 of Tax lncrerrent Revenues (including Unitary Tax Revenues); therefore the amount of Housing Set-Aside Revenues is not affected b,I payrrents under any pass-through agreerrents or statutory pass-through requi rerrents.

FUTURE DEVELOPMENT INTHE REDEVELOPMENT PROJECTS The follONing proposed developrrents are identified to give an indication of the longer range potential for future developrrent in the Redeveloprrent Prqjects. Due to the current econonic dcwnturn, developrrent has slewed significantly and has largely been suspended. Therefore, no assurance can be given that the developrrent of the land described within the Redeveloprrent Prqjects will occur, or that it will occur in a tirrely mmner or in the configuration or intensity described, or that the proposed developers will obtain or retain cwnership of any land within the Redeveloprrent Prqjects.

The City rraintains an inforrration website. The City's internet address is \I\MM(lake-€lsinore.org. In particular, click on "Docurrents" at the top of the horne page, then Econonic Developrnent, then "Dcwntcwn Master Plan" for a description of current planning in the dcwntcwn area. For an 0.terview of econonic activity, see also "A Conversation with Bob Brady, City Manager." The website also rraintains a list of rrajor prqjects undertaken b,I the Redeveloprnent Agency. The City's website is included for reference only and the inforrration on such website is not a part of this Official Staterrent or incorporated b,I reference into this Official Staterrent. No representation is rrade in this Official Staterrent as to the accuracy or adequacy of the i nforrrati on included in such internet site.

Significant development opportunities rerrain in the Redeveloprrent Prqjects. This is reflected in the availability of vacant land. There are 3,046.50 acres of vacant land in the Redevelopment Prqjects (648.37 acres in Redeveloprrent Prqject No. I and 2,398.13 acres in Redeveloprrent Prqject No. 11). Vacant land is 9.936 of the total assessed value in Redevelopment Prqject No. I and 11.1% of the total assessed value in Redeveloprrent Prqject No. II.

The relative large Redevelopment Prqjects (1,910 acres in Redeveloprrent Prqject No. I and 4,859 acres in Redeveloprrent Prqject No. 11) represent a single econonic developrrent area in which a single developrrent may be in 2 or more Redeveloprrent Prqjects. Examples include the Auto Center where TO{ota has acquired land in Redevelopment Prqject No. I, Ford has a dealership in Redeveloprrent Prqject No. II and Chevrolet, Buick and GMC have dealerships in Redeveloprrent Prqject No. Ill; the Sumrrerly Developrrent is in Redeveloprrent Prqject Nos. II and Ill; the "dcwntcwn" includes Redeveloprrent Prqjects Nos. I and Ill; and the Municipal Stadium is in Redeveloprrent Prqject No. Ill but borders on Redeveloprrent Prqject No. 11.

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Summerly Prqject

Summerly is a 1,489 lot planned community in Redevelopment Prqject Nos. 11 and 111. An 18-hole golf course, 'The Links," has been completed and is open for play. The entire site has been mass graded and there are 421 nearly corrpleted finished lots and 11 completed model homes. Pursuant to a disposition and development agreement, all the Tax Increment Revenues are required to be accrued, on a subordinate basis, to reimburse the developer for certain public infrastructure imprcwements upon meeting certain conditions precedent.

North Tuscany Hills

The Tuscany Hills Specific Plan describes a master planned community of 2,000 homes of which 1,020 homes are completed. All the undeveloped property in Tuscany Hills is o.vned b,I Centex Hornes (in April 2009, Pulte Hornes announced it was acquiring Centex Hornes). Although Centex Hornes began predevelopment activities, including engineering of the extensive offsite impr0.tements required, site development, including grading, has not commenced. Centex Hornes is not currently actively working on the prqject. Tuscany Hills is in Redevelopment Prqject No. II.

Diamond Prqj ect

The Diamond Specific Plan prqject site consists of 87.2 acres, generally located along Diamond Drive between Lakeshore Drive and south of Malaga Road. Existing uses within the Diamond Specific Plan include Diamond Stadium and approximately 80,000 square-feet of commercial uses in an existing center called Lake Elsinore Valley Center along Lakeshore Drive. The balance of the site is undeveloped. The Diamond Specific Plan area is accessed from Interstate 15 b,I existing road.vays including Diamond Drive and Lakeshore Drive. The Diamond Prqject is in Redevelopment Prqject Nos. 11 and 111.

Anti ci pated uses identified in the specific pl an include retai I, restaurants, entertai nment, hotel , office, stadium, trails, education center, residential, and plazas. The developer is proposing to develop the prqject in five (5) phases, depending upon economic conditions, 0.ter a seven-to-ten (7-10) year period.

Marina Prqj ect

The Marina Specific Plan for Waters Edge is a 77--acre property located between the Lake and Lakeshore Drive at Lucerne Street in Redevelopment Prqject No. I. The area within the Marina Specific Plan for Waters Edge is proposed to incl ude a 8. 3--acre mari na i ncl udi ng 300 boat sl i ps, a commercial area to include watercraft dealers, various retail establishments, office lofts, restaurants and a 150--Unit hotel. The prqject also includes 3 residential areas for the development ofto.vnhornes and condominium type units. The Specific Plan related environmental review is nearly complete. The City is awaiting a final site plan and associated final information for the specific plan from the developers. The developer has not indicated when such information wi 11 be delivered.

To,,'ota -Auto Center

To,,'ota has acquired a site in the City's Auto Center for the development of a new car dealership. The site is in Redevelopment Prqject No. I. The site is currently being graded and construction is expected to commence at a I ater date.

Do.vnto.vn Master Plan

The Agency sponsored the drafting of a dONnto.vn master plan (the "Do.vnto.vn Master Plan") prepared b,I Cooper Carry, a national consulting firm The Do.vnto.vn Master Plan boundary is generally located south of Interstate 15 and north of the lakefront between Riley Street and Chestnut Street and includes a portion of all three Redevelopment Prqjects. The major concept of the Do.vnto.vn Master Plan is to connect the dONnto.vn to the Lake. This would require the re-alignment of Main Street and Lakeshore Drive to physically connect the do.vnto.vn to the Lake. The Master Plan will require various public impr0.tements including a public pier, street impr0.tements and a new city hall. It is expected to stimulate new private development.

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Pottery Court

The Agency has committed approximately $4,000,000 to Bridge Housing Corporation for the de.telopment of a 113--unit affordable housing apartment complex on 4.29 acres in Redevelopment Prqject No. I. The Agency received a $1 nillion grant from the U.S. Department of Housing and Urban Development for this prqject. Construction is expected to commence in 2011.

Outlet Center Expansion and Upgrading

The 100 store Lake Elsinore Outlet Center recently announced an expansion and rehabilitation. The Outlet Center is in Redevelopment Prqject No. I.

County Club Heights Residential Development

Three different investor groups have accumulated a significant amount of vacant property in the " Heights" for future residential development. Development of this area currently has not been scheduled. The Heights is in Rede.telopment Prqject No. Ill.

Lake Elsinore Technology Center

The Agency received a $2.6 million grant from the U.S. Economic and Development Adninistration to assist in the de.telopment of the Lake Elsinore Technology Center ("LETC") in Rede.telopment Prqject No. I. As proposed, the LETC consists of a 13,200 square-foot business incubator that will pro.tide 10-15 businesses with professional office space at belo.v market-fate rents.

PROJECTED REDEVELOPMENT PROJECT NO. I TAX REVENUES AND DEBT SERVICE COVERAGE

Projected Redevelopment Project No. I Tax Revenues

The Agency's Fiscal Consultant has prepared the prqjections of Rede.telopment Prqject No. I Tax Revenues for the Rede.telopment Prqjects, as set forth in the Fiscal Consultant's Report. See "APPENDIX c - FISCAL CONSULTANT REPORT" for more detailed information on prqjected Rede.telopment Prqject No. I Tax Revenues for the Rede.telopment Prqjects, including an explanation of the assumptions on which such prqj ecti ons are based.

Receipt of prqjected Rede.telopment Prqject No. I Tax Revenues in the amounts and atthe times prqjected by the Agency depends on the realization of certain assumptions relating to the Tax Increment Revenues (including Unitary Tax Revenues). Based upon the prqjectedTax Increment Revenues (including Unitary Tax Revenues), the Agency expects sufficient Redevelopment Prqject No. I Tax Revenues should be available to the Agency to pay principal of and interest on the Loan. Although the Agency believes that the assumptions upon which the prqjected Redevelopment Prqject No. I Tax Revenues are based are reasonable, the Agency, the Fiscal Consultant and the Financing Consultant pro.tide no assurance that the prqjected Redevelopment Prqject No. I Tax Revenues will be achieved. To the extent that the assumptions are not actually realized, the Agency's ability to timely pay principal and interest on the Loan may be ad.tersely affected.

Debt Service Caverage Based Upon Projected Redevelopment Project No. I Tax Revenues

The table belo.v sho.vs debt service co.terage based upon prqjected Redevelopment Prqject No. I Tax Revenues contained in the Fiscal Consultant Report (see "APPENDIX c - FISCAL CONSUL TANT REPORT"). All of the prqjections of Rede.telopment Prqject No. I Tax Revenues commence with the reported values for Fiscal Year 2010-11. Certain deductions for Base Year Assessment Appeals, based on prqjections by the Fiscal Consultant, are reflected in the prqjections commencing with Fiscal Year 2011-12. The Fiscal Consultant also acjjusted the prqjections for certain "Transfer Sales," "Foreclosure Sales" and "Foreclosures" (as those terms are defined in the Fiscal Consultant Report) that occurred betweenJ anuary 1, 2010 andJ uly 1, 2010. The prqjections include a (0.753%) inflation factor for Fiscal Year 2011-12 and ZYo grONth in real property taxable values thereafter. The prqjections by the Fiscal Consultant do not

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include estimated grcwth in assessed value due to ne.v development (see "BONDOWNERS' RISKS" herein and "APPENDIX c - FISCAL CONSUL TANT REPORT").

Receipt of prqjected Redevelopment Prqject No. I Tax Revenues in the amounts and atthe times prqjected by the Agency depends on the realization of certain assumptions relating to the Tax Increment Revenues (including Unitary Tax Revenues). Based upon the prqjectedTax Increment Revenues (including Unitary Tax Revenues), the Agency expects sufficient Redeveloprrent Prqject No. I Tax Revenues should be available to the Agency to pay principal of and interest on the Loan. Although the Agency believes that the assurrptions upon which the prqjected Redevelopment Prqject No. I Tax Revenues are based are reasonable, the Agency, the Fiscal Consultant and the Financing Consultant pro.,ride no assurance that the prqjected Redevelopment Prqject No. I Tax Revenues will be achieved. To the extent that the assumptions are not actually realized, the Agency's ability to timely pay principal and interest on the Loan may be ad.tersely affected.

TABLE NO. 10 REDEVELOPMENT AGENCY OF THE CITY OF LAKE ELSINORE

REDEVELOPMENT PROJECT NO. I PROJECTED REDEVELOPMENT PROJECT NO. I TAX REVENUES AND DEBT SERVICE

COVERAGE

Redevelopment Project No. I

Fiscal Projected Tax 201 O<\ Loan 2010C Loan Total Loan Coverage Year Revenues (1)(2) Loan Payments Payments Payments Payments (~ercentage)

2010-ll $3,216,000 $175,666 $193,681 $830,931 $1,200,278 268% 201 l-12 3,231,000 740,513 197,581 l,203,400 2, 141,494 151% 2012-13 3,285,000 742,713 196,381 l,200,800 2, 139,894 154% 2013-14 3,340,000 741,788 194,881 l,203,000 2, 139,669 156% 2014-15 3,396,000 741, 175 198,081 l, 199,900 2, 139, 156 159% 2015-16 3,453,000 740,925 196, 131 l,203,275 2, 140,331 161% 2016-17 3,511,000 739,425 193,856 l,201, 150 2, 134,431 164% 2017-18 3,571,000 738,900 191,500 l,200, 150 2, 130,550 168% 2018-19 3,617,000 738,800 193,900 l,203,550 2, 136,250 169%

2019-20 3,664,000 741,600 191,013 l,204,338 2, 136,951 171% 2020-21 2,915,000 742,000 192,950 l,202,388 2, 137,338 136%

en Source: Fiscal Consultant Report (see" AppendixC - Fiscal Consultant Report").

1,1 The maximum amount of Tax Increment Ra,enues to be allocated to the Agency pursuant to the Reda,elopment Plan shall not exceed $3,000,000 during any one fiscal tax year; prCNided, ho.vever, that any shortfall within the allo.vable annual allocation of Tax Increment Ra,enues shall be carried forward to the follo.ving year or years and shall be available to theAgency until the period for receipt of Tax Increment Ra,enuesjrepayment of debt has terrrinated. The Agency cannot receive Tax Increment Ra,enues in any fiscal yearthat exceeds the sum of the annual Ii rrit pl us any unallocated Tax Increment Revenues that have rolled CNer from previous years (the "Reda,elopment Project No. I Tax Increment Ra,enues Cap''); nor can the total amount of Tax Increment Revenues received 0y the Agency pursuant to the Reda,elopment Plan exceed the aggregate of the annual lirrit CNer the period to receive Tax Increment Ra,enuesjrepayment of debt as prCNided in the Reda,elopment Plan. The lirrits on the allocation of Tax Increment Ra,enues applies to Tax Increment Revenues received and deposited 0y the Agency and is net of pass-through agreements, statutory tax sharing payments to taxing entities, County administrative charges and ERAF payments. The reduction of Reda,elopment Project No. I Tax Ra,enues sho.vn, commencing in Fiscal Year 2020-21, is due to reaching the Reda,elopment Prqject No. I Tax Increment Ra,enues Cap and does not reflect a reduction of assessed values or Gross Tax Increment Ra,enues. After the Reda,elopment Project No. I Tax Increment Ra,enues Cap is reached, assessed values could decrease without necessarily reducing the amount of Redevelopment Project No. I Tax Ra,enues available totheAgency.

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LEGAL MATTERS ENFORCEABILITY OF REM EDI ES

The rerredies available to the Trustee and the o.vners of the Bonds upon an event of default under the I ndenture, the Loan A greerrent or any other ck:x:urrent described herei n are i n many respects dependent upon regulatory andjudicial actions which are often suqject to discretion and delay. Under existing law and judicial decisions, the rerredies pr0.tided for under such docurrents may not be readily available or may be limited. The various legal opinions to be delivered concurrently with the delivery of the Bonds wi 11 be qual i fi ed to the extent that the enforceabi Ii ty of certain I egal rights related to the I ndenture is suqject to limitations imposed b,I bankruptcy, reorganization, insolvency or other similar laws affecting the rights of creditors generally and b,I equitable remedies and proceedings generally.

APPROVAL OF LEGAL PROCEED! NGS

Fulbright & Jaworski L.L.P., Los Angeles, California, as Bond Counsel, will render an opinion which states that the Indenture and the LoanAgreerrent are valid and binding contracts of the Authority and are enforceable in accordance with their terms. The legal opinion of Bond Counsel will be suqject to the effect of bankruptcy, insolvency, moratorium and other si mi I ar I aws affecting creditors' rights and to the exercise of judicial discretion in accordance with general principles of equity.

The Authority has no kno.vledge of any fact or other information which would indicate that the Indenture or the LoanAgreerrent are not so enforceable against the Authority or the Agency, as applicable, except to the extent such enforcerrent is limited b,I principles of equity and b,I State and federal laws relating to bankruptcy, reorganization, moratorium or creditors' rights generally.

Certain legal matters will be passed on for the Authority b,I Leibold, Mcclendon & Mann, P.C., Laguna Hills, California, Authority Counsel and b,I Fulbright & Jaworski L.L.P., Los Angeles, California, as Disclosure Counsel. Certain legal matters will be passed on for the Underwriter b,I McFarlin & Anderson LLP, Lake Forest, California, as Underwriter's Counsel.

Fees payable to Bond Counsel, Disclosure Counsel and Underwriter's Counsel are contingent upon the sale and delivery of the Bonds.

TAX MATTERS

The Internal Revenue Code of 1986 (the "Code'') imposes certain requirerrents that must be rret subsequent to the issuance and delivery of the Bonds for interest thereon to be and remain excluded pursuant to section 1 03( a) of the Code from the gross income of the o.vners thereof for federal i ncorre tax purposes. Noncompliance with such requirerrents could cause the interest on the Bonds to be included in the gross i ncorre of the o.vners thereof for federal i ncorre tax purposes retroactive to the date of issuance of that series of the Bands. The Authority has c0.tenanted in the I ndenture to maintain the exclusion of the interest on the Bands from the gross income of the o.vners thereof for federal income tax purposes.

In the opinion of Fulbright & Jaworski L.L.P., Bond Counsel, under existing law interest on the Bonds is exempt from personal incorre taxes of the State of California and, assuming compliance with the aforerrentioned c0.tenant, interest on the Bonds is excluded pursuant to section 103(a) of the Code from the gross income of the o.vners thereof for federal income tax purposes. Bond Counsel is of the further opinion thatthe Bonds are not "specified private activity bonds" within the rreaning of section 57(a)(5) of the Code and, therefore, the interest on the Bonds is not treated as an item of tax preference for purposes of computing the alternative minimum tax imposed b,I section 55 of the Code; ho.vever, the receipt or accrual of interest on the Bonds o.vned b,I a corporation may affect the computation of its alternative minimum taxable income. A corporation's alternative ninimum taxable income is the basis on which the alternative minimum tax imposed b,I section 55 of the Code will be computed.

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To the extent that a purchaser of a Bond acqui res that Bond at a price i n excess of its " stated redernpti on price at maturity" (within the meaning of section 1273(a)(2) of the Code), such excess will constitute "bond premium' under the Code. Section 171 of the Code, and the Treasury Regulations promulgated thereunder, pro.tide generally that bond prenium on a tax-exempt obligation must be amortized ewer the remai ni ng term of the obi i gati on ( or a shorter period in the case of certai n cal I able obi i gati ons) ; the amount of preni um so amortized wi 11 reduce the o.vner' s basis i n such obi i gati on for federal income tax purposes, but such amortized premium will not be deductible for federal income tax purposes. Such reduction in basis wi 11 i ncrease the amount of any gain ( or decrease the amount of any I ass) to be recognized for federal income tax purposes upon a sale or other taxable disposition of the obligation. The amount of prenium which is amortizable each year b,I a purchaser is determined b,I using such purchaser's yield to maturity. The rate and tining of the amortization of the bond premium and the corresponding basis reduction may result in an o.vner realizing a taxable gain when its Bond is sold or disposed of for an amount equal to or i n some circumstances even I ess than the ori gi nal cost of the B ond to the o.vner. Purchasers of Bonds at a price that includes bond premium should consult their o.vn tax acwisors with respect to the computation and treatment of such bond prenium, including, but not linited to, the calculation of gain or loss upon the sale, redemption or other disposition of the Bond.

The excess, if any, of the stated redemption price at maturity of Bonds of a maturity ewer the initial offering price to the public of the Bonds of that maturity is "original issue discount." Original issue discount accruing on a B ond is treated as interest excluded from the gross income of the o.vner thereof for federal income tax purposes and is exempt from California personal income tax to the same extent as would be stated interest on that Bond. Original issue discount on any B ond purchased at such i ni ti al offering price and pursuant to such initial offering will accrue on a seniannual basis ewer the term of the Bond on the basis of a constant yield method and, within each semiannual period, will accrue on a ratable daily basis. The amount of original issue discount on such a Bond accruing during each period is added to the aqj usted basis of such Bond to determine taxable gain upon di sposi ti on (incl udi ng sale, redemption or payment on maturity) of such Bond. The Code includes certain prcwisions relating to the accrual of original issue discount in the case of purchasers of Bonds who purchase such Bonds other than at the initial offering price and pursuant to the initial offering. Purchasers of Bonds of a maturity having original issue discount should consult their o.vn tax adJisors with respect to the tax consequences of o.vnership of Bonds with original issue discount.

Pursuant to the Indenture and the Loan Agreement, and in the Tax Certificate Pertaining to Arbitrage and Other Matters under Sections 103 and 141-150 of the Internal Revenue Code of 1986, to be delivered b,I the Authority and the Agency in connection with the issuance of the Bonds, each of the Authority and the Agency will make representations relevant to the determination of, and will make certain co.tenants regarding or affecting, the exclusion of interest on the Bonds from the gross income of the o.vners thereof for federal income tax purposes. In reaching its opinions described in the immediately preceding paragraph, Bond Counsel wi 11 assume the accuracy of such representations and the present and future compiiance b,I the Authority with such co.tenants. Further, except as stated abcwe, Bond Counsel will express no opinion as to any federal or state tax consequences of the receipt of interest on, or the o.vnership or disposition of, the Bonds. Bond Counsel has not undertaken to acwise in the future whether any events after the date of issuance of the Bands may affect the tax status of interest on the Bands or the tax consequences of the o.vnership of the Bonds. No assurance can be given that future legislation, or amendments to the Code, if enacted into law, will not contain prcwisions that could directly or indirectly reduce the benefit of the exemption of interest on the Bonds from personal income taxation b,I the State of California or of the exclusion of the interest on the Bonds from the gross income of the o.vners thereof for federal income tax purposes. Furthermore, Bond Counsel expresses no opinion as to any federal, state or local tax law consequences with respect to the Bonds, or the interest thereon, if any action is taken with respect to the Bonds or the proceeds thereof upon the acwice or apprc:wal of other counsel.

Although Bond Counsel is of the opinion that interest on the Bonds is exempt from California personal income tax and excluded from the gross income of the o.vners thereof for federal income tax purposes, an o.vner's federal, state or local tax liability may be otherwise affected b,I the o.vnership or disposition of the Bonds. The nature and extent of these other tax consequences will depend upon the o.vner's other

62

items of income or deduction. Without Ii miti ng the generality of the foregoing, prospective purchasers of the Bonds should be .M'are that (i) section 265 of the Code denies a deduction for interest on indebtedness incurred or continued to purchase or carry the Bonds and the Code contains additional linitations on interest deductions applicable to financial institutions that o.vn tax--exerrpt obligations (such as the Bonds), (ii) with respect to insurance companies suqject to the tax imposed b,I section 831 of the Code, section 832(b)(5)(B)(i) reduces the deduction for loss reserves b,I 15% of the sum of certain items, including i nterest on the Bands, ( i ii) interest on the B ands earned b,I certain foreign corporations doing business in the United States could be suqject to a branch profits tax imposed b,I section 884 of the Code, (iv) passive investment income, including interest on the Bonds, may be suqject to federal income taxation under section 1375 of the Code for Subchapter S corporations that have Subchapter C earnings and profits at the close of the taxable year if greater than 25% of the gross receipts of such Subchapter S corporation is passive investment income, (v) section 86 of the Code requires recipients of certain Social Security and certain Railroad Retirement benefits to take into account, in deternining the taxability of such benefits, receipts or accruals of interest on the Bonds and (vi) under section 32(i) of the Code, receipt of investment income, including interest on the Bonds, may disqualify the recipient thereof from obtaining the earned income credit. Bond Counsel has expressed no opinion regarding any such other tax consequences.

Bond Counsel's opinion is not a guarantee of a result, but represents its legal judgment based upon its review of existing statutes, regulations, published rulings and court decisions and the representations and co.tenants of the Authority described abcwe. No ruling has been sought from the Internal Revenue Service (the "Service'') with respect to the matters addressed in the opinion of Bond Counsel, and Bond Counsel's opinion is not binding on the Service. The Service has an ongoing program of auditing the tax­exempt status of the interest on municipal obligations. If an audit of the Bonds is commenced, under current procedures the Service is likely to treat the Authority as the "taxpayer," and the o.vners would have no right to participate in the audit process. In responding to or defending an audit of the tax-exempt status of the interest on the Bonds, the Authority may have different or conflicting interest from the o.vners. Public awareness of any future audit of the Bonds could adversely affect the value and liquidity of the Bonds during the pendency of the audit, regardless of its ultimate outcome.

ABSENCE OF LITIGATION

The Authority and the Agency will furnish a certificate, dated as of the date of delivery of the Bonds, that there is not no.v kno.vn to be pending or threatened any litigation restraining or enjoining the execution or delivery of the Indenture, the Loan Agreement or the sale or delivery of the Bonds or in any manner questioning the proceedings and authority under which the Indenture and the Loan Agreement are to be executed or delivered or the Bands are to be delivered or affecting the validity thereof.

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CONCLUDING INFORMATION

NO RATINGS ON THE BONDS

The Authority has not made any application for a rating on the Bonds. No such rating should be assumed based upon any other Authority rating that may be obtained. Prospective purchasers of the Bonds are required to make independent determinations as to the credit quality of the Bands and their appropriateness as an investment. Should a Bondcwner elect to sell a Bond prior to maturity, no representations or assurances can be made that a market will have been established or maintained for the purchase and sale of the Bonds. The Underwriter assumes no obligation to establish or maintain such a market and is not obligated to repurchase any of the Bonds at the request of the o.vner thereof.

UNDERWRITING

The Bonds are being sold to O'Connor & Company Securities, Inc., Newport Beach, California (the "Underwriter"). The Bonds are being sold to the Underwriter pursuant to, and suqject to the terms and conditions of, the Purchase Contract, b,I and among the Underwriter, the Authority and the Agency (the "Purchase Contract'').

The Underwriter is offering the Bonds at the prices set forth on the inside ccwer page hereof. The initial offering prices may be changed from time to time and concessions from the offering prices may be allo.ved to dealers, banks and others. The Underwriter has purchased the Bonds at a price of $5,285,228.25 (95.22933836), which amount represents the principal amount of the Bonds, less original issue discount of $153,771.75 and less an Underwriter's discount of $111,CXXl.OO. The Underwriter will pay certain of its expenses relating to the offering.

EXPERTS

The Fiscal Consultant Report prepared b,I HdL Coren & Cone, Diamond Bar, California, has been included in this Official Statement in reliance on and upon the authority of said firm as experts in the matters ccwered therein.

Fl NANCI AL STATEMENTS OF THE AGENCY

Included herein as Appendix D are the audited financial statements of the Agency as of and for the year ended June 30, 2010, together with the report thereon, dated December 27, 2010, of Diehl, Evans & Company, LLP, Certified Public Accountants & Consultants, Irvine, California (the "Auditor"). Such audited financial statements have been included herein in reliance upon the report of the Auditor. The Auditor has not undertaken to update the audited financial statements of the Agency or its report or to take any action intended or likely to elicit information concerning the accuracy, completeness or fairness of the statements made in this Official Statement, and no opinion is expressed b,I theAuditorwith respect to any event subsequent to its report, dated December 27, 2010. The Agency's audited financial statements are public documents and are included within this Official Statement without the prior apprcwal of the auditor.

THE FINANCING CONSULTANT

The material contained in this Official Statement was prepared b,I Rod Gunn Associates, Inc., Huntington Beach, California, an independent financial consulting firm, who advised the Authority and the Agency as to the financial structure and certain other financial matters relating to the Bonds. The information set forth herein has been obtained b,I the Financing Consultant from sources which are believed to be reliable, but such information is not guaranteed b,I the Financing Consultant as to accuracy or completeness, nor has it been independently verified. Fees paid to the Financing Consultant are contingent upon the sale and delivery of the Bands.

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FORWARD-LOOKING STATEMENTS

Certain statements included or incorporated b,I reference in this Official Statement constitute "forward-­looking statements'' within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 21 E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended. Such statements are generally identifiable b,I the terninology used such as "plan," "expect," "estimate," "prqject," "budget" or similar words. Such forward---l ooki ng statements incl ude, but are not Ii ni ted to, certain statements contained i n the i nformati on underthe caption "TAX INCREMENT REVENUES" herein.

THE ACHIEVEMENT OF CERTAIN RESULTS OR OTHER EXPECTATIONS CONTAINED IN SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS DESCRIBED TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE AUTHORITY DOES NOT PLAN TO ISSUE ANY UPDATES OR REVISIONS TO THE FORWARD-LOOKING STATEMENTS SET FORTH IN THIS OFFICIAL STATEMENT.

ADDITIONAL INFORMATION

The summaries and references contained herein with respect to the Indenture, the Loan Agreement, the Bonds, statutes and other documents, do not purport to be comprehensive or definitive and are qualified b,I reference to each such document or statute and references to the Bands are qualified in their entirety b,I reference to the form hereof included in the Indenture. Copies of the Indenture, the Loan Agreement and other documents are available for inspection during the period of initial offering on the Bonds at the offices of the Underwriter, O'Connor & Company Securities, Inc., 250 Ne.vport Center Drive, Suite 303, Ne.vport Beach, California, 92660 (949) 706-0444. Copies of these documents may be obtained after delivery of the Bonds from the City at 130 S. Main Street, Lake Elsinore, California 92530, telephone (951) 674-3124.

The Authority and the Agency will pro.tide annual financial statements and other pertinent credit information, including the Annual Financial Report, if one is prepared, upon request. Copies of all periodic reports may also be made available b,I any other means maintained b,I the Authority and the Agency, or their agents, to pro.tide information to persons wishing to receive it.

REFERENCES

Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the Authority and the purchasers or o.vners of any of the Bands.

EXECUTION The execution of this Official Statement b,I the Executive Director and its distribution to the purchaser has been duly authorized b,I theAuthority.

LAKE ELSINORE PUBLIC FINANCING AUTHORITY

By: RolbertA. Brady

Executive Di rector

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APPENDIX A

SUMMARY OF THE INDENTURE

Definitions. Unless the context otherwise requires, the terms defined shall for all purposes of the Indenture and of any Supplemental Indenture and of the Bonds and of any certificate, opinion, request or other documents mentioned in the Indenture have the meanings specified in the Indenture. In addition, all terms defmed in the Loan Agreement and not otherwise defmed in the Indenture shall have the respective meanings given such terms in the Loan Agreement.

"Act" means Articles 1 through 4 (commencing with Section 6500) of Chapter 5, Division 7, Title 1 of the Government Code of the State, as in existence on the Closing Date or as thereafter amended from time to time.

"Agency" means the Redevelopment Agency of the City of Lake Elsinore, a public body corporate and politic organized under the laws of the State, and any successor thereto.

"Annual Debt Service" means, for each Bond Year, the sum of (a) the interest payable on the Outstanding Bonds in such Bond Year, and (b) the principal amount of the Outstanding Bonds scheduled to be paid in such Bond Year, including from mandatory sinking fund payments.

"Authority" means the Lake Elsinore Public Financing Authority, a joint powers authority duly organized and existing under the Joint Exercise of Powers Agreement, dated as of July 25, 1989, by and between the City and the Agency, together with any amendments thereof and supplements thereto and under the laws of the State.

"Authority Representative" means the Chainnan, Vice Chairman, Executive Director or Treasurer of the Authority, or any other authorized representative of the Authority as evidenced by a certificate of the Chairman or Executive Director.

"Board" means the Board of Directors of the Authority.

"Bond Counsel" means any attorney or firm of attorneys appointed by or acceptable to the Authority of nationally-recognized experience in the issuance of obligations the interest on which is excludable from gross income for federal income tax purposes under the Code.

"Bond Law" means the Marks-Roos Local Bond Pooling Act of 1985, constituting Article 4 of the Act (commencing with Section 6584), as in existence on the Closing Date or as thereafter amended from time to time.

"Bond Year" means each twelve-month period beginning on September 2 of each year and ending on September 1 of the following year, except that the first Bond Year shall begin on the Closing Date and end on September 1, 2011.

"Bonds" means the Lake Elsinore Public Financing Authority Tax Allocation Revenue Bonds (Launch Ramp Project), 2011 Series A authorized by and at any time Outstanding pursuant to the Bond Law and the Indenture.

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"Business Day" means a day of the year, other than a Saturday or Sunday, on which banks in New York, New York, Los Angeles, California, and San Francisco, California, are not required or authorized to remain closed and on which The New York Stock Exchange is not closed.

"Certificate" and "Written Request" of the Authority or Agency means, a written certificate or written request signed in the name of the Authority or Agency, as applicable, by an authorized representative. Any such certificate or request may, but need not, be combined in a single instrument with any other instrument, opinion or representation, and the two or more so combined shall be read and construed as a single instrument.

"City" means the City of Lake Elsinore, a political subdivision organized and existing under the laws of the State.

"Closing Date" means , 2011, being the date of delivery of the Bonds to the original ----

purchasers thereof.

"Code" means the Internal Revenue Code of 1986 as in effect on the date of issuance of the Bonds or ( except as otherwise referenced in the Indenture) as it may be amended to apply to obligations issued on the date of issuance of the Bonds, together with applicable proposed, temporary and fmal regulations promulgated, and applicable official public guidance published, under the Code.

''Costs of Issuance" means all expenses incurred in connection with the authorization, issuance, sale and delivery of the Bonds, the making of the Loan pursuant to the Loan Agreement, including but not limited to all compensation, fees and expenses (including but not limited to fees and expenses for legal counsel) of the Agency, the Authority, the Trustee and the Refunded Bonds Trustee, costs and fees relating to any bond insurance policy and any Qualified Reserve Fund Credit Instrument, compensation to any financial consultants or underwriters, legal fees and expenses, filing and recording costs, rating agency fees, costs of preparation and reproduction of documents and costs of printing.

"Defeasance Securities" mean (a) Cash, (b) Direct obligations (other than an obligation subject to variation in principal repayment) of the United States of America ("U.S. Treasury Obligations"), (c) obligations fully and unconditionally guaranteed as to timely payment of principal and interest by the United States of America, ( d) obligations fully and unconditionally guaranteed as to timely payment of principal and interest by any agency or instrumentality of the United States of America when such obligations are backed by the full faith and credit of the United States of America, or ( e) evidences of ownership of proportionate interests in future interest and principal payments on obligations described above 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 government obligations are not available to any person claiming through the custodian or to whom the custodian may be obligated.

Any security used for defeasance must provide for the timely payment of principal and interest and cannot be callable or prepayable prior to maturity or earlier redemption of the rated debt ( excluding securities that do not have a fixed par value and/or whose terms do not promise a fixed dollar amount at maturity or call date).

"DTC" means The Depository Trust Company, New York, New York, and its successors and assigns.

"Event of Default" means any of the events described in the Indenture.

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"Excess Investment Earnings" means the amount of excess investment earnings determined to be subject to rebate to the United States of America with respect to the investment of the gross proceeds of the Bonds, determined pursuant to Section 148(f) of the Code.

"Federal Securities" means (a) any direct general obligations of the United States of America (including obligations issued or held in book-entry form on the books of the Department of the Treasury of the United States of America), the payment of principal of and interest on which are unconditionally and fully guaranteed by the United States of America; and (b) any obligations the principal of and interest on which are unconditionally guaranteed by the United States of America.

"Fiscal Year" means any twelve-month period extending from July 1 in one calendar year to June 30 of the succeeding calendar year, both dates inclusive, or any other twelve-month period selected and designated by the Authority as its official fiscal year period and certified to the Trustee in writing by an Authority Representative.

"Indenture" means the Indenture of Trust, as originally executed or as it may from time to time be supplemented, modified or amended by any Supplemental Indenture pursuant to the provisions hereof.

"Independent Accountant" means any certified public accountant or firm of certified public accountants appointed and paid by the Authority, and who, or each of whom (a) is in fact independent and not under domination of the Authority, the City or the Agency; (b) does not have any substantial interest, direct or indirect, in the Authority, the City or the Agency; and ( c) is not connected with the Authority, the City or the Agency as an officer or employee of the Authority, the City or the Agency but who may be regularly retained to make annual or other audits of the books of or reports to the Authority, the City or the Agency.

"Information Services" means the Electronic Municipal Market Access system (referred to as "EMMA"), a facility of the Municipal Securities Rulemaking Board, at www.emma.msrb.org; provided, however, in accordance with then current guidelines of the Securities and Exchange Commission, Information Services shall mean such other organizations providing information with respect to called Bonds as the Authority may designate in writing to the Trustee.

"Interest Payment Date" means March 1 and September 1 in each year, beginning September 1, 2011, and continuing thereafter so long as any Bonds remain Outstanding.

"Letter of Representations" means the letter of the Authority and the Trustee delivered to and accepted by DTC (or such other applicable Securities Depository) on or prior to the issuance of the Bonds in book-entry form setting forth the basis on which DTC ( or such other applicable Securities Depository) serves as depository for the Bonds issued in book-entry form, as originally executed or as it may be supplemented or revised or replaced by a letter to a substitute Securities Depository.

"Loan" means the loan made by the Authority to the Agency under and pursuant to the Loan Agreement.

"Loan Agreement" means the Project Area No. I Loan Agreement, dated as of January 1, 2011, between the Agency and the Authority, as originally executed or as it may from time to time be supplemented, modified or amended.

"Loan Fund" means the fund by that name established and held by the Trustee.

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"Maximum Annual Debt Service" means, as of the date of calculation, the maximum amount obtained by totaling, for the current or any future Bond Year, the sum of: (a) the principal amount of all such Outstanding Bonds maturing in such Bond Year; (b) the aggregate principal amount of all Outstanding Term Bonds scheduled to be redeemed by operation of mandatory sinking fund deposits in such Bond Year, together with any premium thereon; and (c) the interest which would be due during such Bond Year on the aggregate principal amount of such Bonds which would be Outstanding in such period if such Bonds are retired as scheduled, but deducting and excluding from such aggregate principal amount the aggregate principal amount of such Bonds no longer Outstanding.

'Moody's" means Moody's Investors Service, its successors and assigns.

"Outstanding," when used as of any particular time with reference to Bonds, means all Bonds theretofore executed, issued and delivered by the Authority under the Indenture except (a) Bonds theretofore cancelled by the Trustee or surrendered to the Trustee for cancellation, (b) Bonds paid or deemed to have been paid, and ( c) Bonds in lieu of or in substitution for which other Bonds shall have been executed, issued and delivered pursuant to the Indenture or any Supplemental Indenture.

"Owner," when used with respect to any Bond, means the person in whose name the ownership of such Bond shall be registered on the Registration Books.

"Permitted Investments" means any of the following which at the time of investment are legal investments under the laws of the State for the moneys proposed to be invested therein:

I. (a) Cash, (b) Direct obligations (other than an obligation subject to variation in principal repayment) of the United States of America ("U.S. Treasury Obligations"), ( c) obligations fully and unconditionally guaranteed as to timely payment of principal and interest by the United States of America, (d) obligations fully and unconditionally guaranteed as to timely payment of principal and interest by any agency or instrumentality of the United States of America when such obligations are backed by the full faith and credit of the United States of America, or ( e) evidences of ownership of proportionate interests in future interest and principal payments on obligations described above 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 government obligations are not available to any person claiming through the custodian or to whom the custodian may be obligated.

2. Federal Housing Administration debentures.

3. The listed obligations of govermnent-sponsored agencies which are not backed by the full faith and credit of the United States of America:

a) Federal Home Loan Mortgage Corporation (FHLMC) senior debt obligations and participation certificates ( excluded are stripped mortgage securities which are purchased at prices exceeding their principal amounts);

b) Farm Credit System (formerly Federal Land Banks, Federal Intermediate Credit Banks and Banks for Cooperatives) consolidated system-wide bonds and notes;

c) Federal Home Loan Banks (FHL Banks) consolidated debt obligations;

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d) Federal National Mortgage Association (FNMA) senior debt obligations and mortgage-backed securities ( excluded are stripped mortgage securities which are purchased at prices exceeding their principal amounts).

4. Unsecured certificates of deposit, time deposits, and bankers' acceptances (having maturities of not more than 365 days) of any bank the short-term obligations of which are rated "A-1 +" or better by S&P and "Prime-I" by Moody's.

5. Deposits the aggregate amount of which are fully insured by the Federal Deposit Insurance Corporation or the amount of any deposit in excess of FDIC insurance is collateralized by Federal Securities, in banks which have capital and surplus of at least $15 million.

6. Commercial paper (having original maturities of not more than 270 days) rated "A-1 +" by S&P and "Prime-I" by Moody's.

7. Money market funds rated "Aam" or "AAm-G" by S&P, or better and if rated by Moody's, rated "Aa2" or better (including any funds for which the Trustee or an affiliate provides investment advice or other services).

8. "State Obligations", which means:

a) Direct general obligations of any state of the United States of America or any subdivision or agency thereof to which is pledged the full faith and credit of a state the unsecured general obligation debt of which is rated at least "A3" by Moody's and at least "A-" by S&P, or any obligation fully and unconditionally guaranteed by any state, subdivision or agency whose unsecured general obligation debt is so rated.

b) Direct general short-term obligations of any state agency or subdivision or agency thereof described in (a) above and rated "A-1 +" by S&P and "MIG-I" by Moody's.

c) Special Revenue Bonds (as defmed in the United States Bankruptcy Code) of any state or state agency described in (b) above and rated "AA-" or better by S&P and "Aa3" or better by Moody's.

9. Pre-refunded municipal obligations rated "AAA" by S&P and "Aaa" by Moody's meeting the following requirements:

a) (I) the municipal obligations are not subject to redemption prior to maturity or (2) the Trustee for the municipal obligations has been given irrevocable instructions concerning their call and redemption and the issuer of the municipal obligations has covenanted not to redeem such municipal obligations other than as set forth in such instructions;

b) the municipal obligations are secured by cash or U.S. Treasury Obligations which may be applied only to payment of the principal of, interest and premium on such municipal obligations;

c) the principal of and interest on the U.S. Treasury Obligations (plus any cash in the escrow) has been verified by the report of independent certified public accountants to

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be sufficient to pay in full all principal of, interest, and premium, if any, due and to become due on the municipal obligations ("Verification Report");

d) the cash or U.S. Treasury Obligations serving as security for the municipal obligations are held by an escrow agent or trustee in trust for owners of the municipal obligations;

e) no substitution of a U.S. Treasury Obligation shall be permitted except with another U.S. Treasury Obligation and upon delivery of a new Verification Report; and

f) the cash or U.S. Treasury Obligations are not available to satisfy any other claims, including those by or against the trustee or escrow agent.

10. Repurchase agreements: with (I) any domestic bank, or domestic branch of a foreign bank, the long-term debt of which is rated at least "A-" by S&P and "A3" Moody's; or (2) any broker-dealer with "retail customers" or a related affiliate thereof which broker-dealer has, or the parent company (which guarantees the provider) of which has, long-term debt rated at least "A-" by S&P and "A3" by Moody's, which broker-dealer falls under the jurisdiction of the Securities Investors Protection Corporation; or (3) any other entity rated at least "A-" by S&P and "A3" by Moody's ( each an "Eligible Provider"), provided that:

a) (i) permitted collateral shall include U.S. Treasury Obligations, or senior debt obligations of GNMA, FNMA or FHLMC (no collateralized mortgage obligations shall be permitted for these providers), and (ii) collateral levels must be at least 102% of the total principal when the collateral type is U.S. Treasury Obligations, 103% of the total principal when the collateral type is GNMA and 104% of the total principal when the collateral type is FNMA and FHLMC ("Eligible Collateral");

b) the Trustee or a third party acting solely as agent therefor or for the Authority (the "Custodian") has possession of the collateral or the collateral has been transferred to the Custodian in accordance with applicable state and federal laws ( other than by means of entries on the transferor's books) and such collateral shall be marked to market;

c) the collateral shall be marked to market on a daily basis and the provider or Custodian shall send monthly reports to the Trustee and the Authority setting forth the type of collateral, the collateral percentage required for that collateral type, the market value of the collateral on the valuation date and the name of the Custodian holding the collateral;

d) the repurchase agreement shall state and an opinion of counsel shall be rendered at the time such collateral is delivered that the Custodian has a perfected first priority security interest in the collateral, any substituted collateral and all proceeds thereof; and

e) the repurchase agreement shall provide that if during its term the provider's rating by either Moody's or S&P is withdrawn or suspended or falls below "A-" by S&P or "A3" by Moody's, as appropriate, the provider must, notify the Authority and the Trustee within five (5) days of receipt of such notice. Within ten (10) days of receipt of such notice, the provider shall either: (i) post Eligible Collateral, or (ii) assign the agreement to an Eligible Provider. If the provider does not perform a remedy within ten (10) business days, the provider shall, at the direction of the Trustee repurchase all

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collateral and terminate the repurchase agreement, with no penalty or premium to the Authority or the Trustee.

11. Investment agreements: with a domestic or foreign bank or corporation the long-term debt of which, or, in the case of a guaranteed corporation the long-term debt, or, in the case of a monoline financial guaranty insurance company, claims paying ability, of the guarantor is rated at least "AA-" by S&P and "Aa3" by Moody's ( each an "Eligible Provider"); provided that:

a) interest payments are to be made to the Trustee at times and in amounts as necessary to pay debt service ( or, if the investment agreement is for the construction fund, construction draws) on the Bonds;

b) the invested funds are available for withdrawal without penalty or premium, at any time upon not more than seven (7) days' prior notice; the Authority and the Trustee hereby agree to give or cause to be given notice in accordance with the terms of the investment agreement so as to receive funds thereunder with no penalty or premium paid;

c) the provider shall send monthly reports to the Trustee and the Authority setting forth the balance the Authority or Trustee has invested with the provider and the amounts and dates of interest accrued and paid by the provider;

d) the investment agreement shall state that is an unconditional and general obligation of the provider, and is not subordinated to any other obligation of, the provider thereof or, if the provider is a bank, the agreement or the opinion of counsel shall state that the obligation of the provider to make payments thereunder ranks pari plSSU with the obligations of the provider to its other depositors and its other unsecured and unsubordinated creditors;

e) the Authority and the Trustee shall receive an opinion of domestic counsel to the provider that such investment agreement is legal, valid, binding and enforceable against the provider in accordance with its terms;

f) the Authority and the Trustee shall receive an opinion of foreign counsel to the provider (if applicable) that (i) the investment agreement has been duly authorized, executed and delivered by the provider and constitutes the legal, valid and binding obligation of the provider, enforceable against the provider in accordance with its terms, (ii) the choice of law of the state set forth in the investment agreement is valid under that country's laws and a court in such country would uphold such choice of law, and (iii) any judgment rendered by a court in the United States would be recognized and enforceable in such country;

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g) the investment agreement shall provide that if during its term:

i) the provider's rating by either S&P or Moody's falls below "AA-" or "Aa3," the provider shall, at its option, within ten (10) days of receipt of publication of such downgrade, either (i) post Eligible Collateral with the Authority, the Trustee or a third party acting solely as agent therefor (the "Custodian") free and clear of any third party liens or claims, (ii) assign the agreement to an Eligible Provider, or (iii) repay the principal of and accrued but unpaid interest on the investment; or

ii) the provider's rating by either S&P or Moody's is withdrawn or suspended or falls below "A-" or "A3," the provider must, at the direction of the Authority or the Trustee, within ten (10) days of receipt of such direction, repay the principal of and accrued but unpaid interest on the investment, in either case with no penalty or premium to the Authority or Trustee.

h) in the event the provider is required to collateralize, permitted collateral shall include U.S. Treasury Obligations, or senior debt obligations of GNMA, FNMA or FHLMC (no collateralized mortgage obligations shall be permitted for these providers) and collateral levels must be 102% of the total principal when the collateral type is U.S. Treasury Obligations, 103% of the total principal when the collateral type is GNMA's and 104% of the total principal when the collateral type is FNMA and FHLMC ("Eligible Collateral"). In addition, the collateral shall be marked to market on a daily basis and the provider or Custodian shall send monthly reports to the Trustee and the Authority setting forth the type of collateral, the collateral percentage required for that collateral type, the market value of the collateral on the valuation date and the name of the Custodian holding the collateral;

i) the investment agreement shall state and an opinion of counsel shall be rendered, in the event 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 Custodian has a perfected first priority security interest in the collateral, any substituted collateral and all proceedsthereof;and

j) the investment agreement must provide that if during its term: ( i) the provider shall default in its payment obligations, the provider's obligations under the investment agreement shall, at the direction of the Authority or the Trustee, be accelerated and amounts invested and accrued but unpaid interest thereon shall be repaid to the Authority or Trustee, as appropriate, and (ii) the provider shall become insolvent, not pay its debts as they become due, be declared or petition to be declared bankrupt, etc. ("event of insolvency"), the provider's obligations shall automatically be accelerated and amounts invested and accrued but unpaid interest thereon shall be repaid to the Authority or Trustee, as appropriate.

12. The Local Agency Investment Fund of the State of California, created pursuant to Section 16429.1 of the California Government Code.

13. Certificates of deposit, savings accounts, deposit accounts or money market deposits (including those of the Trustee and its affiliates) which are fully insured by the Federal Deposit Insurance Corporation. In addition to the authority to invest funds in certificates of deposit, an investment in non-negotiable certificates of deposit made in accordance with the following

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conditions is an authorized investment: (A) the fmancial institution or trust company selected by the Authority arranges for the deposit of funds in certificates of deposit in one or more federally insured depository institutions, wherever located, for the account of the investing entity; (B) the full amount of the principal and accrued interest of each of the certificates of deposit is insured by the United States or an instrumentality of the United States; and (C) the fmancial institution or trust company selected by the Authority acts as custodian for the investing entity with respect to the certificates of deposit issued for the account of the investing entity.

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"Project Area" means the redevelopment project area described in the Redevelopment Plan for the Project Area No. I, as amended and supplemented from time to time.

"Qualified Reserve Fund Credit Instrument" means an irrevocable standby or direct-pay letter of credit or surety bond issued by a commercial bank or insurance company and deposited with the Trustee provided that all of the following requirements are met: (i) at the time of delivery to the Trustee the long-term credit rating of such bank or insurance company is in the highest rating category by Moody's and S&P, and, if rated by A.M. Best Company, the claims paying ability of such insurance company is rated in the highest rating category by A.M. Best Company; (ii) such letter of credit or surety bond has a term of at least twelve (12) months; (iii) such letter of credit or surety bond has a stated amount at least equal to the portion of the Reserve Requirement with respect to which funds are proposed to be released; and (iv) the Trustee is authorized pursuant to the terms of such letter of credit or surety bond to draw thereunder an amount equal to any deficiencies which may exist from time to time in the amounts available to repay the principal of and interest on the respective Loan.

"Record Date" means, with respect to any Interest Payment Date, the fifteenth ( 15th) calendar day of the month preceding such Interest Payment Date.

"Registration Books" means the records maintained by the Trustee pursuant to the Indenture for the registration and transfer of ownership of the Bonds.

"Reserve Requirement" means, as of any calculation date, an amount equal to the least of ( i) ten percent ( 10%) of the proceeds ( within the meaning of section 148 of the Code) of that portion of such Bonds then Outstanding with respect to which Annual Debt Service is calculated; (ii) 125% of average Annual Debt Service as of the Closing Date; or (iii) Maximum Annual Debt Service.

"Revenues" means: (a) all amounts payable by the Agency pursuant to the Loan Agreement; (b) all moneys deposited and held from time to time by the Trustee in the funds and accounts established hereunder for the Bonds, other than the Rebate Account; and ( c) income and gains with respect to the investment of amounts on deposit in the funds and accounts established hereunder for the Bonds, other than the Rebate Account.

"S&P" means Standard & Poor's Ratings Services, a division of The McGraw Hill Companies, Inc., its successors and assigns.

"Securities Depositories" means The Depository Trust Company, 55 Water Street, New York, New York 10041, Fax: (212) 855-1000 or 7320; and, in accordance with then current guidelines of the Securities and Exchange Commission, such other addresses and/or such other securities depositories as the Authority may designate in a Certificate of the Authority delivered to the Trustee.

"Serial Bonds" means all Bonds other than the Term Bonds.

"State" means the State of California.

"Supplemental Indenture" means any indenture, agreement or other instrument hereafter duly executed by the Authority and the Trustee in accordance with the provisions of the Indenture.

"Tax Regulations" means temporary and permanent regulations promulgated under or with respect to Section 103 and Sections 141 through 150, inclusive, of the Code.

"Term Bonds" means the Bonds maturing on September 1, 20 _.

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"Trust Office" means the corporate trust office of the Trustee at the address set forth in the Indenture, provided, however for transfer, registration, exchange, payment and surrender of Bonds means care of the corporate trust office of Union Bank, N.A. in Los Angeles, California or such other office designated by the Trustee from time to time and such office as the Trustee may designate in writing to the Authority from time to time as the place for transfer, registration, surrender, exchange or payment of the Bonds.

"Trustee" means Union Bank, N.A. and its successors and assigns, and any other corporation or association which may at any time be substituted in its place as provided in Article VI.

Pledge of Revenues; Assignment of Rights. The Bonds shall be secured by a first lien on and pledge (which shall be effected in the manner and to the extent hereinafter provided) of all of the Revenues and a pledge of all of the moneys in the Interest Account and the Principal Account of the Revenue Fund and in the Reserve Fund, including all amounts derived from the investment of such moneys. The Bonds shall be equally secured by a pledge, charge and first lien upon the Revenues and such moneys without priority for number, date of Bonds, date of execution or date of delivery; and the payment of the interest on and principal of the Bonds and any premiums upon the redemption of any thereof shall be and are secured by an exclusive pledge, charge and first lien upon the Revenues and such moneys. So long as any of the Bonds are Outstanding, the Revenues and such moneys shall not be used for any other purpose; except that out of the Revenues there may be apportioned such sums, for such purposes, as are expressly permitted by the Indenture.

The Authority hereby transfers in trust and assigns to the Trustee, for the benefit of the Owners from time to time of the Bonds, all of the Revenues and all of the right, title and interest of the Authority (but not the obligations) in the Loan Agreement ( other than the certain rights of the Authority excepted under the Indenture). The Trustee shall be entitled to and shall receive all of the Revenues, and any Revenues collected or received by the Authority shall be deemed to be held, and to have been collected or received, by the Authority as the agent of the Trustee and shall forthwith be paid by the Authority to the Trustee. The assignment to the Trustee is solely in its capacity as Trustee under the Indenture and in accepting such assignment and taking any actions with respect to the Loan Agreement, the Trustee shall be entitled to all the indemnities, protections, immunities and limitations from liability afforded it as Trustee under the Indenture. The Trustee also shall be entitled to and, subject to the provisions hereof, shall take all steps, actions and proceedings reasonably necessary in its judgment to enforce, either jointly with the Authority or separately, all of the rights of the Authority and all of the obligations of the Agency under the Loan Agreement.

Receipt, Deposit and Application of Revenues.

(a) Deposit of Revenues; Revenue Fund. All Revenues described in clause (a) of the defmition thereof shall be promptly deposited by the Trustee upon receipt thereof in a special fund designated as the "Revenue Fund" which the Trustee shall establish, maintain and hold in trust hereunder.

(b) Application of Revenues: Special Accounts. On or before each Interest Payment Date, the Trustee shall transfer from the Revenue Fund and deposit into the following respective accounts (each of which the Trustee shall establish and maintain within the Revenue Fund), the following amounts in the following order of priority, the requirements of each such account (including the making up of any deficiencies in any such account resulting from lack of Revenues sufficient to make any earlier required deposit) at the time of deposit to be satisfied before any transfer is made to any account subsequent in priority:

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(i) Interest Account. On or before each Interest Payment Date, the Trustee shall deposit in the Interest Account an amount required to cause the aggregate amount on deposit in the Interest Account to equal the amount of interest becoming due and payable on such Interest Payment Date on all Outstanding Bonds. No deposit need be made into the Interest Account if the amount contained therein is at least equal to the interest becoming due and payable upon all Outstanding Bonds on such Interest Payment Date. All moneys in the Interest Account shall be used and withdrawn by the Trustee solely for the purpose of paying the interest on the Bonds as it shall become due and payable (including accrued interest on any Bonds redeemed prior to maturity).

(ii) Principal Account. On or before each date on which the principal of the Bonds shall be payable, the Trustee shall deposit in the Principal Account an amount required to cause the aggregate amount on deposit in the Principal Account to equal the aggregate amount of principal coming due and payable on such date on the Bonds, or the redemption price of the Bonds ( consisting of the principal amount thereof and any applicable redemption premiums) required to be redeemed on such date pursuant to any of the provisions of the Indenture. All moneys in the Principal Account shall be used and withdrawn by the Trustee solely for the purpose of (A) paying the principal of the Serial Bonds at the maturity thereof, (B) paying the principal of the Term Bonds upon the mandatory sinking fund redemption or maturity thereof, or (C) paying the principal of and premium (if any) on any Bonds upon the redemption thereof.

(iii) Surplus. All amounts on deposit in the Revenue Fund on September 2 of each year, to the extent not required to pay any interest on or principal of any Outstanding Bonds then having come due and payable, shall be credited to the replenishment of the Reserve Fund in an amount to maintain the Reserve Requirement therein, including interest on amounts advanced under any Qualified Reserve Fund Credit Instrument, in the order of replenishment described under the Indenture, if necessary; and then for any lawful purpose of the Authority, including payment of debt service on other obligations of the Authority issued to finance redevelopment activities of the Agency.

( c) Rebate Account. The Trustee shall deposit in the Rebate Account from time to time, from payments made by the Agency for such purpose pursuant to the Loan Agreement, an amount determined by the Authority to be subject to rebate to the United States of America. Amounts in the Rebate Account shall be applied and disbursed by the Trustee solely for the purposes and at the times set forth in Written Requests of the Authority filed with the Trustee. The Trustee shall not be responsible for calculating rebate amounts or for the adequacy or correctness of any rebate report or rebate calculations. The Trustee shall be deemed conclusively to have complied with the provisions of the Indenture and any other agreement relating to the Bonds regarding calculation and payment of rebate if it follows the directions of the Authority and it shall have no independent duty to review such calculations or enforce the compliance with such rebate requirements by the Authority or the Agency.

Investments. All moneys in any of the funds or accounts established with the Trustee pursuant to the Indenture or the Loan Agreement shall be invested by the Trustee solely in Permitted Investments pursuant to the written direction of the Authority given to the Trustee in advance of the making of such investments. Each such written direction shall contain the representation of the Authority that the investments identified therein constitute Permitted Investments hereunder upon which the Trustee may conclusively rely. In the absence of any such direction from the Authority, the Trustee shall invest any such moneys in clause (7) of the definition of Permitted Investments. Obligations purchased as an investment of moneys in any fund shall be deemed to be part of such fund or account.

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All interest or gain derived from the investment of amounts in any of the funds or accounts established hereunder shall be deposited in the fund or account from which such investment was made. For purposes of acquiring any investments under the Indenture, the Trustee may commingle funds held by it under the Indenture upon the Written Request of the Authority. The Trustee or its affiliate may (but shall not be obligated to) act as principal or agent in the acquisition of any investment and shall be entitled to its customary fees therefor. The Trustee shall incur no liability for losses arising from any investments made pursuant to the Indenture.

The Authority acknowledges that to the extent regulations of the Comptroller of the Currency or other applicable regulatory entity grant the Authority the right to receive brokerage confirmations of security transactions as they occur, the Authority specifically waives receipt of such confirmations to the extent permitted by law. The Trustee will furnish the Authority periodic cash transaction statements which include detail for all investment transactions made by the Trustee hereunder.

The Trustee or any of its affiliates may act as sponsor, advisor or manager or provide administrative services in connection with any Permitted Investments.

Valuation and Disposition of Investments. The Authority covenants that all investments of amounts deposited in any fund or account created by or pursuant to the Indenture shall be acquired, disposed of, and valued at least annually at market value.

Covenants of the Authority

Punctual Payment. The Authority shall punctually pay or cause to be paid the principal, interest and premium (if any) to become due in respect of all the Bonds, in strict conformity with the terms of the Bonds and of the Indenture, according to the true intent and meaning thereof, but only out of Revenues and other assets pledged for such payment as provided in the Indenture.

Extension of Payment of Bonds. The Authority shall not directly or indirectly extend or assent to the extension of the maturity of any of the Bonds or the time of payment of any claims for interest by the purchase of such Bonds or by any other arrangement, and in case the maturity of any of the Bonds or the time of payment of any such claims for interest shall be extended, such Bonds or claims for interest shall not be entitled, in case of any default hereunder, to the benefits of the Indenture, except subject to the prior payment in full of the principal of all of the Bonds then Outstanding and of all claims for interest thereon which shall not have been so extended. Nothing in the Indenture shall be deemed to limit the right of the Authority to issue Bonds for the purpose of refunding any Outstanding Bonds, and such issuance shall not be deemed to constitute an extension of maturity of the Bonds.

Against Encumbrances. The Authority shall not create, or permit the creation of, any pledge, lien, charge or other encumbrance upon the Revenues and other assets pledged or assigned under the Indenture while any of the Bonds are Outstanding, except the pledge and assignment created by the Indenture. Subject to this limitation, the Authority expressly reserves the right to enter into one or more other indentures for any of its corporate purposes, including other programs under the Bond Law, and reserves the right to issue other obligations for such purposes.

Power to Issue Bonds and Make Pledge and Assignment. The Authority is duly authorized pursuant to law to issue the Bonds and to enter into the Indenture and to pledge and assign the Revenues, the Loan Agreement and other assets purported to be pledged and assigned, respectively, under the Indenture in the manner and to the extent provided in the Indenture. The Bonds and the provisions of the Indenture are and will be the legal, valid and binding special obligations of the Authority in accordance with their terms, and the Authority and the Trustee, subject to the provisions of the Indenture, shall at all

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times, to the extent pennitted by law, defend, preserve and protect said pledge and assignment of Revenues and other assets and all the rights of the Owners under the Indenture against all claims and demands of all persons whomsoever.

Accounting Records and Financial Statements. The Trustee shall at all times keep, or cause to be kept, proper books of record and account, prepared in accordance with industry standards, in which complete and accurate entries shall be made of all transactions made by the Trustee relating to the proceeds of Bonds, the Revenues and all funds and accounts established by the Trustee pursuant to the Indenture or the Loan Agreement. Such books of record and account shall be available for inspection by the Authority and the Agency, during regular business hours with reasonable prior notice.

Not later than 45 days following each Interest Payment Date, the Trustee shall prepare and file with the Authority a report setting forth: (i) amounts withdrawn from and deposited into each fund and account maintained by the Trustee under the Indenture; (ii) the balance on deposit in each fund and account as of the date for which such report is prepared; and (iii) a brief description of all obligations held as investments in each fund and account. Copies of such reports may be mailed to any owner of at least 50% aggregate principal amount of Bonds Outstanding, upon the owner's written request at a cost not to exceed the Trustee's actual costs of duplication and mailing. Said reports may be in the form of the Trustee's regular semiannual statements.

Tax Covenants Relating to Bonds. The Authority covenants that it shall not use, and shall not permit the use of, and shall not omit to use Gross Proceeds or any other amounts ( or any property the acquisition, construction or improvement of which is to be fmanced directly or indirectly with Gross Proceeds) in a manner that if made or omitted, respectively, could cause the interest on any Bond to fail to be excluded pursuant to section 103( a) of the Code from the gross income of the owner thereof for federal income tax purposes.

Loan AITTeement. The Trustee, as assignee of the Authority rights pursuant to the Indenture, shall (subject to the provisions of the Indenture) promptly collect all amounts due from the Agency pursuant to the Loan Agreement and, subject to the provisions hereof, shall enforce, and take all steps, actions and proceedings reasonably necessary for the enforcement of all of the rights of the Authority thereunder and for the enforcement of all of the obligations of the Agency thereunder.

The Authority and the Agency may at any time amend or modify the Loan Agreement pursuant to the applicable provisions thereof, but only: (a) if the Authority, the Agency or the Trustee first obtains the written consent of the Owners of a majority in aggregate principal amount of the Bonds then Outstanding; provided, however, that no such amendment or modification shall (i) extend the maturity of or reduce the amount of interest or principal payments on the Loan, or otherwise alter or impair the obligation of the Agency to pay the principal, interest or prepayment premiums on the Loan at the time and place and at the rate and in the currency provided in the Indenture, without the express written consent of the Owner of each affected Bond, (ii) reduce the percentage of Bonds required for the written consent to any such modification or amendment thereof or hereof, or (iii) without its written consent thereto, modify any of the rights or obligations of the Trustee; or (b) without the consent of any of the Owners, if such amendment or modification is for any one or more of the following purposes

(i) to add to the covenants and agreements of the Agency contained in such Loan Agreement other covenants and agreements thereafter to be observed, or to limit or surrender any rights or power therein reserved to or conferred upon the Agency so long as such limitation or surrender of such rights or powers shall not materially adversely affect the Owners of the Bonds;

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(ii) to make such provisions for the purpose of curing any ambiguity, or of curing, correcting or supplementing any defective provision contained in such Loan Agreement, or in any other respect whatsoever as the Agency may deem necessary or desirable, provided under any circumstances that such modifications or amendments shall not materially adversely affect the interests of the Owners of the Bonds;

(iii) to make such additions, deletions or modifications as may be necessary or desirable to assure exemption from federal income taxation of interest on the Bonds;

(iv) to provide for the issuance of Parity Debt as defmed in and under and m accordance with the provisions of such Loan Agreement; or

(v) to provide for a Qualified Reserve Fund Credit Instrument for amounts held in a Reserve Fund under the Indenture.

Nothing in the Indenture shall prevent the Agency and the Authority from entering into any amendment or modification of the Loan Agreement which solely affects a particular Bond or Bonds all of the Owners of which shall have consented to such amendment or modification. The Trustee shall be entitled to rely upon the opinion of Bond Counsel stating that the requirements of the Indenture have been met with respect to any amendment or modification of a Loan Agreement.

The Authority may sell a Loan Agreement upon written direction to the Trustee, so long as the proceeds of such sale are placed in an appropriate fund to pay debt service on the Bonds, and such proceeds are sufficient to discharge all of the Authority's obligations on the portion of the Bonds represented by such Loan Agreement in the manner set forth in the Indenture.

Further Assurances. The Authority will adopt, make, execute and deliver any and all such further resolutions, instruments and assurances as may be reasonably necessary or proper to carry out the intention or to facilitate the performance of the Indenture, and for the better assuring and confirming unto the Owners of the Bonds the rights and benefits provided in the Indenture.

Management and Operation of Properties. The Authority shall require the Agency to manage and operate all properties owned by the Agency and comprising any part of the Project Area in a sound and businesslike manner, and will keep such properties insured at all times in conformity with sound business practice.

Payments of Taxes and Other Charges. The Authority shall cause the Agency to pay and discharge or cause to be paid and discharged, all taxes, service charges, assessments and other goverrunental charges which may hereafter be lawfully imposed upon the Agency or the properties then owned by the Agency in the Project Area when the same shall become due. Nothing in the Indenture contained shall require the Agency to make any such payments so long as the Agency in good faith shall contest the validity of any such taxes, assessments or charges. The Authority shall cause the Agency to duly observe and conform with all valid requirements of any goverrunental authority relative to the Project Area or any part thereof.

Immunity. The Authority is not entitled to any immunity, sovereign or otherwise, from any legal proceedings to enforce or collect upon the Indenture or the Bonds. To the extent that the Authority has or hereafter may acquire any right to immunity, the Authority hereby waives such rights for itself in respect of its obligations arising under the Indenture and the Bonds.

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Modification and Amendment of the lndentnre

The Indenture and the rights and obligations of the Authority and of the Owners of the Bonds may be modified or amended at any time by a Supplemental Indenture which shall become binding upon execution by the Authority and the Trustee, without consent of any Owners, to the extent permitted by law but only for any one or more of the following purposes:

(a) to add to the covenants and agreements of the Authority contained in the Indenture, other covenants and agreements hereafter to be observed, to pledge or assign additional security for the Bonds ( or any portion thereof), or to surrender any right or power in the Indenture reserved to or conferred upon the Authority;

(b) to make such provisions for the purpose of curing any ambiguity, inconsistency or omission, or of curing or correcting any defective provision, contained in the Indenture, or in any other respect whatsoever, as the Authority may deem necessary or desirable, provided that such modification or amendment does not materially adversely affect the interests of the Owners in the opinion of Bond Counsel;

( c) to modify, amend or supplement the Indenture in such manner as to permit the qualification of the Indenture under the Trust Indenture Act of 1939, as amended, or any similar federal statute hereafter in effect, and to add such other terms, conditions and provisions as may be permitted by said act or similar federal statute:

( d) to make such additions, deletions or modifications as may be necessary or desirable to assure exemption from federal income taxation of interest on the Bonds: or

(e) to facilitate the issuance of additional obligations of the Agency pursuant to a Loan Agreement.

Except as set forth in the preceding paragraph, the Indenture and the rights and obligations of the Authority and of the Owners of the Bonds may only be modified or amended at any time by a Supplemental Indenture which shall become binding when the written consents of the Owners of a majority in aggregate principal amount of the Bonds then Outstanding are filed with the Trustee. No such modification or amendment shall (a) extend the maturity of or reduce the interest rate on any Bond or otherwise alter or impair the obligation of the Authority to pay the principal, interest or premiums (if any) at the time and place and at the rate and in the currency provided therein of any Bond without the express written consent of the Owner of such Bond, (b) reduce the percentage of Bonds required for the written consent to any such amendment or modification, or ( c) without its written consent thereto, modify any of the rights or obligations of the Trustee.

The Trustee shall be provided an opinion of Bond Counsel that any such Supplemental Indenture entered into by the Authority and the Trustee complies with the provisions of this Article VII and the Trustee may conclusively rely upon such opinion.

The provisions of this Article VII shall not prevent any Owner from accepting any amendment as to the particular Bond held by him, provided that due notation thereof is made on such Bond.

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Events ofDefanlt. The following events shall be Events of Default hereunder:

(a) Default in the due and punctual payment of the principal of any Bond when and as the same shall become due and payable, whether at maturity as therein expressed, by proceedings for redemption, by acceleration or otherwise.

(b) Default in the due and punctual payment of any instalhnent of interest on any Bond when and as such interest instalhnent shall become due and payable.

( c) Failure by the Authority to observe and perform any of the covenants, agreements or conditions on its part in the Indenture or in the Bonds contained, other than as referred to in the preceding clauses (a) and (b), for a period of thirty (30) days after written notice, specifying such failure and requesting that it be remedied has been given to the Authority by the Trustee, or to the Authority and the Trustee by the Owners of the Bonds of not less than twenty-five percent (25%) in the aggregate principal amount of the Bonds at that time outstanding; provided, however, that if in the reasonable opinion of the Authority the failure stated in such notice can be corrected, but not within such thirty (30) day period, such failure shall not constitute an Event of Default if corrective action is instituted by the Authority within such thirty (30) day period and diligently pursued until such failure is corrected.

( d) The filing by the Authority of a petition or answer seeking reorganization or arrangement under the federal bankruptcy laws or any other applicable law of the United States of America, or if a court of competent jurisdiction shall approve a petition, filed with or without the consent of the Authority, seeking reorganization under the federal bankruptcy laws or any other applicable law of the United States of America, or if, under the provisions of any other law for the relief or aid of debtors, any court of competent jurisdiction shall assume custody or control of the Authority or of the whole or any substantial part of its property.

Remedies Upon Event of Default. If any Event of Default shall occur, then, and in each and every such case during the continuance of such Event of Default, the Trustee may, and, at the written direction of the Owners of a majority in aggregate principal amount of the Bonds at the time Outstanding, shall, upon notice in writing to the Authority and the Agency, declare the principal of all of the Bonds then Outstanding, and the interest accrued thereon, to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable, anything in the Indenture or in the Bonds contained to the contrary notwithstanding. Notice of the occurrence of any Event of Default shall be given by the Trustee to the Owners if and to the extent required pursuant to the Indenture and indemnification is provided to the Trustee pursuant to the Indenture.

Any such declaration is subject to the condition that if, at any time after such declaration and before any judgment or decree for the payment of the moneys due shall have been obtained or entered, the Authority or the Agency shall deposit with the Trustee a sum sufficient to pay all the principal of and instalhnents of interest on the Bonds payment of which is overdue, with interest on such overdue principal at the rate borne by the Bonds to the extent permitted by law, and the charges and expenses of the Trustee and its counsel, and any and all other Events of Default known to the Trustee ( other than in the payment of principal of and interest on the Bonds due and payable solely by reason of such declaration) shall have been made good or cured to the satisfaction of the Trustee or provision deemed by the Trustee to be adequate shall have been made therefor, then, and in every such case, the Owners of not less than a majority in aggregate principal amount of the Bonds then Outstanding, by written notice to the Authority, the Agency and the Trustee, may, on behalf of the Owners of all of the Bonds, rescind and annul such declaration and its consequences and waive such Event of Default; but no such rescission and annulment shall extend to or shall affect any subsequent Event of Default, or shall impair or exhaust any right or power consequent thereon.

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In addition, upon the occurrence and during the continuance 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 and interest and premium (if any) on the Bonds, and to enforce any rights of the Trustee under or with respect to the Indenture.

If an Event of Default shall have occurred and be continuing, and if requested so to do by the Owners of a majority in aggregate principal amount of Outstanding Bonds, and indenmified as provided in the Indenture, the Trustee shall be obligated to exercise such one or more of the rights and powers conferred by the Indenture, as the Trustee, being advised by counsel, shall deem most expedient in the interests of the Owners.

No remedy by the terms of the Indenture conferred upon or reserved to the Trustee ( or to the Owners) is intended to be exclusive of any other remedy, but each and every such remedy shall be cumulative and shall be in addition to any other remedy given to the Trustee or to the Owners hereunder or now or hereafter existing at law or in equity.

No delay or omission to exercise any right or power accruing upon any Event of Default shall impair any such right or power or shall be construed to be a waiver of any such Event of Default or acquiescence therein; such right or power may be exercised from time to time as often as may be deemed expedient.

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 the Indenture shall be applied by the Trustee in the following order upon presentation of the several Bonds, and the stamping thereon of the amount of the payment if only partially paid, or upon the surrender thereof if fully paid:

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 any outstanding fees and expenses of the Trustee; and

Second, to the payment of the whole amount of interest on and principal of the Bonds then due and unpaid, with interest on overdue instalhnents of principal and interest to the extent permitted by law at the net effective rate of interest then borne by the Outstanding Bonds; provided, however, that in the event such amounts shall be insufficient to pay in full 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 then due and unpaid,

(b) second, to the payment of principal of all installments of the Bonds then due and unpaid,

( c) third, to the payment of the redemption price (including principal and interest accrued to the redemption date, but excluding any premium) of the Bonds to be redeemed pursuant to the Indenture, and

( d) fourth, to the payment of interest on overdue installments of principal and interest on the Bonds.

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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 at least a majority in aggregate principal amount of the Bonds then Outstanding, it shall have full power, in the exercise of its discretion for the best interests of the Owners of the Bonds, with respect to the continuance, discontinuance, 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, opposing such discontinuance, withdrawal, compromise, settlement or other disposal of such litigation. Any suit, action or proceeding which any Owner of 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 similarly situated and the Trustee is hereby appointed (and the successive respective Owners of the 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 for the purpose 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 as a class or classes, as may be necessary or advisable in the opinion of the Trustee as such attorney-in-fact.

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 under the Indenture, the Trustee shall be entitled, as a matter ofright, to the appointment of a receiver or receivers of the Revenues and other amounts pledged hereunder, pending such proceedings, with such powers as the court making such appointment shall confer.

Non-Waiver. Nothing in this Article VIII or in any other provision of the Indenture, or in the Bonds, shall affect or impair the obligation of the Authority, which is absolute and unconditional, to pay the interest on and principal of the Bonds to the respective Owners of the Bonds at the respective dates of maturity, as provided in the Indenture, out of the Revenues and other moneys pledged under the Indenture 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 to exercise any right or power accruing upon any default or breach shall impair any such right or power or shall be construed to be a waiver of any such default or breach or an acquiescence therein; and every power and remedy conferred upon the Trustee or Owners by the Bond Law 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.

Rights and Remedies of Owners. No Owner of any 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 the 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 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; (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; and ( e) no direction inconsistent with such

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written request has been given to the Trustee during such sixty (60) day period by the Owners of a majority in aggregate principal amount of the Bonds then Outstanding.

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 of any remedy hereunder; it being understood and intended that no one or more Owners of Bonds shall have any right in any manner whatever by his or their action to enforce any right under the Indenture, except in the manner provided in the Indenture, and that all proceedings at law or in equity to enforce any provision of the Indenture shall be instituted, had and maintained in the manner provided in the Indenture and for the equal benefit of all Owners of the Outstanding Bonds.

The right of any Owner of any Bond to receive payment of the principal of and interest and premium (if any) on such Bond as provided in the Indenture 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 or any other provision of the Indenture.

Termination of Proceedings. In case the Trustee shall have proceeded to enforce any right under the 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 Authority, the Trustee and the Owners shall be restored to their former positions and rights hereunder, respectively, with regard to the property subject to the Indenture, and all rights, remedies and powers of the Trustee shall continue as ifno such proceedings had been taken.

Discharge of Indenture. If the Authority shall pay and discharge any or all of the Outstanding Bonds in any one or more of the following ways:

(a) by well and truly paying or causing to be paid the principal of, and the interest and premium (if any) on, such Bonds as and when the same become due and payable;

(b) by irrevocably depositing with the Trustee, in trust, at or before maturity, money which, together with the available amounts then on deposit in the funds and accounts established with the Trustee pursuant to the Indenture and the Loan Agreement, is fully sufficient to pay such Bonds, including all principal, interest and premiums (if any); or

( c) by irrevocably depositing with the Trustee or any other fiduciary, in trust, Defeasance Securities in such amount as an Independent Accountant shall determine will, together with the interest to accrue thereon and available moneys then on deposit in the funds and accounts established with the Trustee pursuant to the Indenture and the Loan Agreement, be fully sufficient to pay and discharge the indebtedness on such Bonds (including all principal, interest and redemption premiums) at or before their respective maturity dates; and if such Bonds are to be redeemed prior to the maturity thereof notice of such redemption shall have been mailed pursuant to the Indenture or provision satisfactory to the Trustee shall have been made for the mailing of such notice, then, at the Request of the Authority, and notwithstanding that any of such Bonds shall not have been surrendered for payment, the pledge of the Revenues and other funds provided for in the Indenture with respect to such Bonds, and all other pecuniary obligations of the Authority under the Indenture with respect to all such Bonds, shall cease and terminate, except only the obligation of the Authority to pay or cause to be paid to the Owners of such Bonds not so surrendered and paid all sums due thereon from amounts set aside for such purpose as aforesaid, and all expenses and costs of the Trustee, and any amounts owing under the Qualified Reserve Fund Credit Instrument to the provider thereof. Any funds held by the Trustee following any payments or discharge of the Outstanding Bonds, which are not required for said purposes, shall be paid over to the Authority.

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APPENDIX B

SUMMARY OF LOAN AGREEMENT

Definitions. Unless the context clearly otherwise requires or unless otherwise defined in the Loan Agreement, the capitalized terms in the Loan Agreement shall have the respective meanings which such terms are given in the Indenture. In addition, the following terms defined, for all purposes of the Loan Agreement, have the respective meanings specified in the Loan Agreement.

"Annual Loan Payments" means, for any Bond Year, the total amount of principal and interest payable on the Loan in such Bond Year.

"Business Inventory Tax Subvention" means all amounts payable by the State to the Agency under and pursuant to the provisions of Chapter 1. 5 of Part 1 of Division 4 of Title 2 ( commencing with Section 16110) of the Government Code of the State.

"County" means the County of Riverside, California.

"Fiscal Year" means any twelve-month period extending from July 1 in one calendar year to June 30 of the succeeding calendar year, both dates inclusive, or any other twelve-month period selected and designated by the Agency as its official fiscal year period pursuant to a Written Certificate of the Agency filed with the Trustee.

"Housing Loan" means any loan made by the Authority to the Agency under and pursuant to the Housing Loan Agreement.

"Housing Loan Agreement" means any Housing Fund Loan Agreement pursuant to which a Housing Loan is made, the repayment of which is secured by amounts held in the Low and Moderate income Housing Fund, as originally executed or as it may from time to time be amended, modified or supplemented.

"Housing Loan Payment Account" means the account by that name established or continued under the Housing Loan Agreement.

"Indenture" means the Indenture of Trust, dated as of January 1, 2011, by and between the Authority and the Trustee, authorizing the issuance of the Bonds, as originally executed or as it may from time to time be supplemented, modified or amended.

"Loan" means the loan made by the Authority to the Agency in the aggregate principal amount of$ pursuant to the Loan Agreement.

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"Loan Agreement" means the Project Area No. I Loan Agreement by and between the Agency and the Authority, as originally executed or as it may from time to time be amended, modified or supplemented.

"Loan Interest Payment Date" means March 1 and September 1 of each year, beginning September 1, 2011, and continuing thereafter so long as any Bonds remain Outstanding.

"Loan Principal Payment Date" means September 1 of each year.

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"Low and Moderate Income Housing Fund" means the fund of the Agency established pursuant to Section 33334.3 of the Redevelopment Law.

"Maximum Annual Loan Payments" means, as of the date of calculation, the largest amount obtained by totaling, for the current or any future Bond Year, the sum of (a) the amount of interest payable on the Loan and all outstanding Parity Debt in such Bond Year, assuming that principal thereof is paid as scheduled and that any mandatory sinking fund payments are made as scheduled, and (b) the amount of principal payable on the Loan and on all outstanding Parity Debt in such Bond Year, including any principal required to be prepaid or redeemed by operation of mandatory sinking fund payments.

"Parity Debt" means the 2010A Loan and any loans, bonds, notes, advances or indebtedness payable from Tax Revenues on a parity with the Loan issued or incurred pursuant to and in accordance with the Loan Agreement.

"Paritv Debt Instrument" means any resolution, indenture of trust, trust agreement or other instrument authorizing the issuance of any Parity Debt.

"Plan Limitations" means the limitations contained or incorporated in the Redevelopment Plan on (a) the aggregate principal amount of indebtedness payable from Tax Revenues which may be outstanding at any time, (b) the aggregate amount of taxes which may be divided and allocated to the Agency pursuant to the Redevelopment Plan, ( c) the period of time for establishing or repaying indebtedness payable from Tax Revenues, ( d) the term of the effectiveness of the Redevelopment Plan and (e) the time limit to receive Tax Revenues from the Project Area.

"Project Area" means Project Area No. I, the area of the Redevelopment Project as described in the Redevelopment Plan.

"Project Area No. II Special Fund" means the Special Fund established or continued pursuant to a loan agreement relating to Project Area No. II.

"Project Area No. III Special Fund" means the Special Fund established or continued pursuant to a loan agreement relating to Project Area No. III.

"Redevelopment Law" means the Community Redevelopment Law of the State, constituting Part I of Division 24 of the Health and Safety Code of the State, and the acts amendatory thereof and supplemental thereto.

"Redevelopment Plan" means the Redevelopment Plan for the Project Area, together with any further amendments thereof at any time duly authorized pursuant to the Redevelopment Law.

"Redevelopment Project" means the undertaking of the Agency pursuant to the Redevelopment Plan and the Redevelopment Law for the redevelopment of the Project Area.

"Subordinate Debt" means any loans, advances or indebtedness issued or incurred by the Agency in accordance with the requirements of the Loan Agreement, which are either: (a) payable from, but not secured by a pledge of or lien upon, the Tax Revenues; or (b) secured by a pledge of or lien upon the Tax Revenues which is subordinate to the pledge of and lien upon the Tax Revenues under the Loan Agreement for the security of the Loan and any Parity Debt.

"Tax Revenues" means all taxes annually allocated and paid to the Agency with respect to the Project Area following the Closing Date pursuant to Article 6 of Chapter 6 ( commencing with Section 33670) of the Redevelopment Law and Section 16 of Article XVI of the Constitution of the State

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and as provided in the Redevelopment Plan, including all payments, subventions and reimbursements (if any) to the Agency specifically attributable to advaloremtaxes lost by reason of tax exemptions and tax rate limitations, but excluding (a) amounts payable to entities other than the Agency under and pursuant to the Tax Sharing Agreements, (b) any statutory pass-through payments, (c) SB 2557 County Administrative fees and collection charges, and ( d) all amounts of such taxes required to be deposited into the Low and Moderate Income Housing Fund of the Agency in any Fiscal Year pursuant to Section 33334.3 of the Redevelopment Law.

"Tax Sharing Agreements" means those certain agreements relating to the payment of certain amounts which would otherwise constitute Tax Revenues.

"Trustee" means Union Bank, N.A., a national banking assocrnt10n organized and existing under the laws of the United States of America, and its successors and assigns acting as trustee under the Indenture.

"Written Request of the Agency" or "Certificate of the Agency" means a request or certificate, in writing, signed by the Chair, Vice Chair, Executive Director or Treasurer of the Agency, or by any other officer of the Agency duly authorized by the Agency for that purpose.

"20 JOA Loan" shall mean such loan evidenced by the Project Area No. I Loan Agreement, dated as of January I, 2011, by and between the Authority and the Agency relating to the Lake Elsinore Public Financing Authority Tax Allocation Revenue Bonds (1999 Series C Refunding), 2010 Series A.

Repayment of Loan. The Agency shall repay the principal of the Loan in instalhnents on September I in each of the years and in the amounts, and shall pay interest on the unpaid principal balance of the Loan on each Loan Interest Payment Date and in the amounts, as set forth in Exhibit A attached to the Loan Agreement, which amounts shall be equal to the Proportionate Share of the corresponding payments of principal of and interest on the Bonds. Any installment of principal or interest which is not paid when due shall continue to accrue interest at the net effective rate of interest then borne by the Loan from and including the date on which such principal or interest is payable to but not including the date of actual payment.

In the event that the Tax Revenues and other moneys pledged for the payment of the Loan are insufficient to pay the principal and interest on the Loan coming due on any Loan Interest Payment Date, the Agency agrees to make an interfund loan to the Special Fund from (i) all amounts in the Project Area No. II Special Fund available therefor, (ii) all amounts in the Project Area No. III Special Fund available therefor, and (iii) all amounts in the Housing Loan Payment Account available therefor, to the extent required to make up any deficiency in the amounts available for payment of principal and interest on the Loan coming due on such Loan Interest Payment Date. Such interfund loan shall be repaid to the Project Area No. II Special Fund, to the Project Area No. III Special Fund, and to the Housing Loan Payment Account out of any moneys of the Agency available therefor, semiannually, on each March 2 and September 2, with interest at the rate on the Bonds.

In the event the unpaid principal installments of the Loan shall be prepaid in whole or in part pursuant to the Loan Agreement, or in the event the Bonds shall be redeemed pursuant to the Indenture, the schedule of principal instalhnents set forth in Exhibit A hereto shall be reduced on a pro rata basis in integral multiples of $5,000 corresponding to the principal amount of the Bonds redeemed pursuant to the Indenture. The Authority shall provide the Trustee with a new payment schedule.

Principal of and interest on the Loan shall be payable by the Agency to the Trustee, as assignee of the Authority under the Indenture, in immediately available funds which constitute lawful money of the United States of America. Payment of such principal and interest shall be secured, and

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amounts for the payment thereof shall be deposited with the Trustee at the times, as set forth in Article III. Notwithstanding the foregoing provisions, in lieu of payment of any installment of principal of the Loan coming due and payable on September I in any year in which the Bonds are subject to mandatory sinking fund redemption under the Indenture, the Agency shall have the right to purchase any of the Bonds in an amount not exceeding the amount thereof which is subject to mandatory sinking fund redemption on such September I, and tender such Bonds to the Trustee for cancellation, provided that such tender shall be made before the preceding July 15.

Optional Prepayment of the Loan. The Agency shall have the right to prepay the unpaid principal installments of the Loan, in whole or in part in any integral multiple of $5,000, on any date on which the Bonds are subject to optional redemption pursuant to the Indenture, by depositing with the Trustee in the Revenue Fund an amount sufficient to redeem a like aggregate principal amount of Bonds pursuant to the Indenture, together with the amount of accrued interest and premium (if any) required to be paid upon such redemption. The Authority agrees that upon payment by the Agency to the Trustee of such amount, the Authority shall take or cause to be taken any and all steps required under the Indenture to redeem such Outstanding Bonds on the redemption date designated pursuant to a Written Request of the Agency filed with the Authority and the Trustee; provided, however, that such date shall be a date of redemption of Bonds for which notice has been timely given pursuant to the Indenture.

Pledge of Tax Revenues. Subject in all respects to the obligations of the Agency under the Senior Loan Agreement, the Loan and all Parity Debt shall be equally secured for the benefit of the Authority and the Owners of the Bonds by a pledge of, security interest in and lien on all of the Tax Revenues and all of the moneys on deposit in the Special Fund, without preference or priority for series, issue, number, dated date, sale date, date of execution or date of delivery, subject only to the senior pledge of and lien on the Tax Revenues securing payment of the Senior Loan Agreement. Subject in all respects to the obligations of the Agency under the Senior Loan Agreement, the Tax Revenues and the Special Fund are hereby allocated to the payment of the principal and interest on the Loan. Except for the Tax Revenues and the Special Fund, no funds or properties of the Agency shall be pledged to, or otherwise liable for, the payment of principal of or interest or premium (if any) on the Loan.

Special Fund; Deposit of Tax Revenues. There is hereby continued a special fund to be known as the "Special Fund," which shall be held by the Agency in a separate bank account as a separate fund apart from all other funds and accounts of the Agency. The Agency shall deposit all Tax Revenues received in any Bond Year in the Special Fund promptly upon the receipt thereof. Except as provided in any other Parity Debt Instruments, and only after the Agency has received a letter from the Trustee stating that amounts on deposit in the Special Fund equal the aggregate amounts required to be transferred to the Trustee pursuant to the Loan Agreement, the excess amounts shall be released from the pledge and lien under the Loan Agreement and be used for any lawful purposes of the Agency, including the payment of any Subordinate Debt.

Prior to the payment in full of the principal of and interest and prepayment premium (if any) on the Loan and all Parity Debt and the payment in full of all other amounts payable under the Loan Agreement and under any Parity Debt Instruments, the Agency shall not have any beneficial right or interest in the moneys on deposit in the Special Fund, except only as provided in the Loan Agreement and in any Parity Debt Instruments, and such moneys shall be used and applied as set forth in the Loan Agreement and in any Parity Debt Instruments.

Transfer of Tax Revenues From Special Fund. In addition to the transfers required to be made pursuant to any Parity Debt Instruments, the Agency shall withdraw from the Special Fund and transfer to the Trustee, to the Project Area No. II Special Fund, to the Project Area No. III Special Fund, or to the Housing Loan Payment Account the following amounts at the following times and in the following order of priority:

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(a) Interest and Principal Deposits.

(i) No later than the fifth (5th) Business Day preceding each Loan Interest Payment Date, the Agency shall withdraw from the Special Fund and transfer to the Trustee for deposit into the Revenue Fund an amount which, together with the amounts then held on deposit in the Interest Account, is equal to the aggregate amount of interest on the Loan coming due on such Loan Interest Payment Date.

(ii) No later than the fifth (5th) Business Day preceding each Loan Principal Payment Date, an amount which when added to the amounts then on deposit in the Principal Account will equal the principal payment coming due on such Loan Principal Payment Date.

In lieu of depositing cash with the Trustee as payment of any installment of principal of the Loan coming due on September I of any year pursuant to the Loan Agreement, the Agency shall have the option to tender to the Trustee for cancellation Bonds maturing on September I in such year. Such Bonds may be purchased by the Agency with any source of available moneys (including but not limited to Tax Revenues not required to be deposited with the Trustee), at public or private sale as and when and at such prices as the Agency may in its discretion determine. The par amount of any Bonds so purchased by the Agency and tendered to the Trustee in any twelve-month period ending on July 15 in any calendar year shall be credited towards and shall reduce the payment required to be made pursuant to this subsection (a) on the fifth (5th) Business Day preceding September I in such year.

(b) Interfund Loan. To the extent permitted by law, the Agency shall make an interfund loan to the Project Area No. II Special Fund, to the Project Area No. III Special Fund, or to the Housing Loan Payment Account in amounts necessary to make up any actual or projected deficiency in the amounts available for payment of principal and interest on the Project Area No. II Loan, the Project Area No. III Loan, or the Housing Loan as such payments become due and payable.

( c) Credit Against Deposits. The Agency shall receive a credit against the deposits required above as follows:

(i) There shall be a credit for earnings on the Reserve Fund which have been transferred to and are then held by the Trustee in the Revenue Fund under the Indenture, such credit to be made semiannually on the Business Day prior to the date for making the transfers described in subsections (a) and (b ); and

(ii) After the credit in (i) above, there shall also be a credit for any remaining moneys on deposit in the Revenue Fund under the Indenture.

Investment of Moneys; Valuation of Investments. All moneys in the Special Fund shall be invested by the Agency in any investments authorized for the investment of Agency funds under the laws of the State. Obligations purchased as an investment of moneys in any fund or account established under the Loan Agreement shall be credited to and deemed to be part of such fund or account. The Agency may commingle any amounts in any of the funds and accounts held under the Loan Agreement with any other amounts held by the Agency for purposes of making any investment, provided that the Agency shall maintain separate accounting procedures for the investment of all funds and accounts held under the Loan Agreement.

All interest, profits and other income received from the investment of moneys in any fund or account established under the Loan Agreement shall be deposited in such fund or account. Notwithstanding anything to the contrary contained in this paragraph, an amount of interest received with

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respect to any investment equal to the amount of accrued interest, if any, paid as part of the purchase price of such investment shall be credited to the fund from which such accrued interest was paid.

Except as otherwise provided in the next sentence, the Agency covenants that all investments of amounts deposited in any fund or account created by or pursuant to the Loan Agreement, or otherwise containing gross proceeds of the Bonds ( within the meaning of section 148 of the Code) shall be acquired, disposed of, and valued ( as of the date that valuation is required by the Loan Agreement or the Code) at fair market value. Investments in funds or accounts ( or portions thereof) that are subject to a yield restriction under applicable provisions of the Code shall be valued at their present value (within the meaning of section 148 of the Code).

Covenants of the Agency

Punctual Payment; Extension of Payments. The Agency will punctually pay or cause to be paid the principal of and interest and prepayment premium (if any) on the Loan in strict conformity with the terms of the Loan Agreement, and it will faithfully observe and perform all of the conditions, covenants and requirements of the Loan Agreement. The Agency shall not directly or indirectly extend or assent to the extension of the maturity of any instalhnent of principal of or interest or premium (if any) on the Loan, and in case the principal of or interest or premium (if any) on the Loan or the time of payment of any such claims therefor shall be extended, such principal, interest, premium or claims for interest shall not be entitled, in case of any Event of Default under the Loan Agreement, to the benefits of the Loan Agreement except for payment of all amounts which shall not have been so extended.

Limitation on Additional Indebtedness. The Agency hereby covenants that it shall not issue any bonds, notes or other obligations, enter into any agreement or otherwise incur any indebtedness, which is in any case payable from all or any part of the Tax Revenues, excepting only the Loan, any Parity Debt and any Subordinate Debt, and any obligations entered into pursuant to the Loan Agreement.

Payment of Claims. The Agency will pay and discharge, or cause to be paid and discharged, any and all lawful claims for labor, materials or supplies which, if unpaid, might become a lien or charge upon the Tax Revenues or any part thereof, or upon any funds in the hands of the Trustee, or which might impair the security of the Loan. Nothing in the Loan Agreement contained shall require the Agency to make any such payment so long as the Agency in good faith shall contest the validity of said claims.

Books and Accounts; Financial Statements. The Agency will keep, or cause to be kept, proper books of record and accounts, separate from all other records and accounts of the Agency and the City, in which complete and correct entries shall be made of all transactions relating to the Redevelopment Project, the Tax Revenues and the Special Fund. Such books of record and accounts shall at all times during business hours be subject, upon prior written request, to the reasonable inspection of the Authority, the Trustee and the Owners of not less than ten percent (10%) in aggregate principal amount of the Bonds then Outstanding, or their representatives authorized in writing.

The Agency will cause to be prepared within one hundred and eighty (180) days after the close of each Fiscal Year so long as any of the Bonds are Outstanding, complete audited financial statements with respect to such Fiscal Year showing the Tax Revenues, all disbursements from the Special Fund and the fmancial condition of the Redevelopment Project, including the balances in all funds and accounts relating to the Redevelopment Project, as of the end of such Fiscal Year, which statement shall be accompanied by a Certificate of the Agency stating that the Agency is in compliance with its obligations under the Loan Agreement. The Agency will furnish a copy of such statements, upon reasonable request, to any Bond Owner.

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Protection of Security and Rights. The Agency will preserve and protect the security of the Loan and the rights of the Trustee and the Bond Owners with respect to the Loan. From and after the Closing Date, the Loan shall be incontestable by the Agency. The Loan and the provisions of the Loan Agreement are and will be the legal, valid and binding special obligations of the Agency in accordance with their terms, and the Agency shall at all times, to the extent permitted by law, defend, preserve and protect all the rights of the Trustee and the Bond Owners under the Loan Agreement against all claims and demands of all persons whomsoever.

Payments of Taxes and Other Charges. The Agency will pay and discharge, or cause to be paid and discharged, all taxes, service charges, assessments and other governmental charges which may hereafter be lawfully imposed upon the Agency or the properties then owned by the Agency in the Project Area, when the same shall become due. Nothing contained in the Loan Agreement require the Agency to make any such payment so long as the Agency in good faith shall contest the validity of said taxes, assessments or charges. The Agency will duly observe and comply with all valid requirements of any governmental authority relative to the Redevelopment Project or any part thereof.

Taxation of Leased Property. All ad valorem property taxes derived by the Agency pursuant to Section 33673 of the Redevelopment Law with respect to the lease of property for redevelopment shall be treated as Tax Revenues for all purposes of the Loan Agreement.

Disposition of Property. The Agency shall not, without the prior written consent of the Insurer, participate in the detachment or disposition of any land or real property in the Project Area which will result in such property becoming exempt from taxation because of public ownership or use or otherwise ( except property dedicated for public right-of-way and except property planned for public ownership or use by the Redevelopment Plan in effect on the date of the Loan Agreement) if the effect of such detachment(s) or disposition(s) shall, when taken together with other such dispositions, in the aggregate exceed ten percent (10%) of the assessed value of property in the Project Area.

Maintenance of Tax Revenues. The Agency shall comply with all requirements of the Redevelopment Law to insure the allocation and payment to it of the Tax Revenues, including without limitation the timely filing of any necessary statements of indebtedness with appropriate officials of the County and (in the case of supplemental revenues and other amounts payable by the State) appropriate officials of the State. The Agency will not enter into any agreement with the City or any other governmental unit which would have the effect of reducing the amount of Tax Revenues available to the Agency for payment of the Loan. The Agency represents, covenants and agrees that it has not and will not incur any loans, obligations or indebtedness repayable from Tax Revenues such that the total aggregate debt service on said loans, obligations or indebtedness incurred from and after the date of adoption of the applicable Redevelopment Plan, when added to the total aggregate Loan Payments on any Parity Debt and the Loan, will exceed the maximum amount of Tax Revenues to be divided and allocated to the Agency pursuant to such Redevelopment Plan. Subject to the preceding sentences, nothing in the Loan Agreement is intended or shall be construed in any way to prohibit or impose any limitations on the entering into by the Agency of any such agreement, amendment or supplement which by its term is subordinate to the payment of the Loan.

Payment of Expenses; Indenmification. The Agency shall pay to the Trustee from time to time all compensation for all services rendered under the Loan Agreement and a Proportionate Share of such compensation for all services rendered under the Indenture in connection with the Bonds, including but not limited to all reasonable expenses, charges, legal and consulting fees and other disbursements and those of its attorneys, agents and employees, incurred in and about the performance of its powers and duties under the Loan Agreement and thereunder. Upon the occurrence of an Event of Default, the Trustee shall have a first lien on the funds held by it under the Indenture and under the Loan Agreement to secure the payment to the Trustee of all fees, costs and expenses, including reasonable compensation to

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its experts, attorneys and counsel incurred in declaring such Event of Default and in exercising the rights and remedies set forth in the Loan Agreement.

The Agency further covenants and agrees to indemnify and save the Trustee and its officers, directors, agents and employees, harmless against any losses, costs, claims, expenses and liabilities whatsoever which it may incur arising out of or in connection with the exercise and performance of its powers and duties under the Loan Agreement, and under the Indenture including the costs and expenses of defending against any claim of liability, but excluding any and all losses, expenses and liabilities which are due to the negligence or intentional misconduct of the Trustee, its officers, directors, agents or employees. The obligations of the Agency under this paragraph shall survive the resignation or removal of the Trustee under the Indenture or the Loan Agreement and payment of the Loan and the discharge of the Loan Agreement.

Tax Matters. Neither the Agency nor the Authority shall use, permit the use of, or omit to use Gross Proceeds or any other amounts ( or any property the acquisition, construction or improvement of which is to be financed directly or indirectly with Gross Proceeds) in a manner that if made or omitted, respectively, could cause the interest on any Bond to fail to be excluded pursuant to section 103(a) of the Code from the gross income of the owner thereof for federal income tax purposes.

Continuing Disclosure. The Agency hereby covenants and agrees that it will comply with and carry out all of the provisions of its Undertaking To Provide Continuing Disclosure with respect to the Bonds, as originally executed and as it may be amended from time to time in accordance with the terms thereof. Notwithstanding any other provision of the Loan Agreement, failure of the Agency to comply with such Undertaking to Provide Continuing Disclosure shall not be considered an Event of Default; however, any Owner may take such actions, as provided in such Undertaking to Provide Continuing Disclosure, as may be necessary and appropriate to cause the Agency to comply with its obligations under such Undertaking To Provide Continuing Disclosure.

Redevelopment of Project Area. The Agency shall ensure that all activities undertaken by the Agency with respect to the redevelopment of the Project Area are undertaken and accomplished in conformity with all applicable requirements of the Redevelopment Plan and the Redevelopment Law. The Agency shall manage and operate all properties owned by the Agency and comprising any part of the Redevelopment Project in a sound and business-like manner and in conformity with all valid requirements of any governmental authority, and will keep such properties insured at all times in conformity with sound business practice.

Further Assurances. The Agency will adopt, make, execute and deliver any and all such further resolutions, instruments and assurances as may be reasonably necessary or proper to carry out the intention or to facilitate the performance of the Loan Agreement and for the better assuring and confirming unto the Trustee, the Authority and the Owners of the Bonds of the rights and benefits provided in the Loan Agreement.

Events of Default and Acceleration of Maturities. The following events shall constitute Events of Default under the Loan Agreement:

(a) Failure by the Agency to pay the principal of or interest or prepayment premium (if any) on the Loan or any Parity Debt when and as the same shall become due and payable.

(b) Failure by the Agency to observe and perform any of the covenants, agreements or conditions on its part contained in the Loan Agreement, other than as referred to in the preceding clause (a), for a period of thirty (30) days after written notice specifying such failure and requesting that it be remedied has been given to the Agency by the Trustee; provided, however, that if in the reasonable opinion of the Agency the failure stated in such notice can be corrected, but not within such thirty (30)

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day period, such failure shall not constitute an Event of Default if corrective action is instituted by the Agency within such thirty (30) day period and thereafter is diligently pursued until such failure is corrected.

( c) The filing by the Agency of a petition or answer seeking reorganization or arrangement under the federal bankruptcy laws or any other applicable law of the United States of America, or if a court of competent jurisdiction shall approve a petition, filed with or without the consent of the Agency, seeking reorganization under the federal bankruptcy laws or any other applicable law of the United States of America, or if, under the provisions of any other law for the relief or aid of debtors, any court of competent jurisdiction shall assume custody or control of the Agency or of the whole or any substantial part of its property.

If an Event of Default has occurred and is continuing, the Trustee may (a) declare the principal of the Loan, together with accrued interest on all unpaid instalhnents thereof, to be due and payable immediately, and upon any such declaration the same will become immediately due and payable, anything in the Loan Agreement to the contrary notwithstanding, and (b) subject to receipt of satisfactory indemnity exercise any other remedies available to the Trustee in law or equity arising under the Loan Agreement. Immediately upon becoming aware of the occurrence of an Event of Default under the Loan Agreement, the Trustee shall give notice of such Event of Default to the Agency by telephone, telecopier or other telecommunication device, promptly confirmed in writing. This provision, however, is subject to the condition that if, at any time after the principal of the Loan has been so declared due and payable, and before any judgment or decree for the payment of the moneys due has been obtained or entered, the Agency will deposit with the Trustee a sum sufficient to pay all instalhnents of principal of the Loan matured prior to such declaration and all accrued interest thereon, with interest on such overdue instalhnents of principal and interest at the net effective rate then borne by the Outstanding Bonds, and the reasonable fees and expenses of the Trustee, and any and all other defaults known to the Trustee ( other than in the payment of principal of and interest on the Loan due and payable solely by reason of such declaration) shall have been made good or cured to the satisfaction of the Trustee or provision deemed by the Trustee to be adequate shall have been made therefor, then, and in every such case, the Trustee may, by written notice to the Authority and the Agency, rescind and annul such declaration and its consequences. However, no such rescission and annulment shall extend to or shall affect any subsequent default, or shall impair or exhaust the right or power consequent thereon.

Application of Revenues and Other Funds After Default. Subject in all respects to the related provisions under the Senior Loan Agreement, all amounts received by the Trustee pursuant to any right given or action taken by the Trustee under these provisions, or otherwise held by the Trustee upon the occurrence of an Event of Default, shall be applied by the Trustee in the following order:

First, to the payment of the fees, costs and expenses of the Trustee in declaring such Event of Default and in carrying out these provisions, including reasonable compensation to its agents, attorneys and counsel and any outstanding fees and expenses of the Trustee; and

Second, to the payment of the whole amount of interest on and principal of the Loan and any Parity Debt 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 Loan and such Parity Debt; provided, however, that in the event such amounts shall be insufficient to pay in full 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 Loan and any Parity Debt then due and unpaid, on a pro rata basis in the event that the available amounts are insufficient to pay all such interest in full;

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(b) second, to the payment of all instalhnents of principal of the Loan and any Parity Debt then due and payable, on a pro rata basis in the event that the available amounts are insufficient to pay all such principal in full;

( c) third, to the payment of the prepayment price (including principal and interest accrued to the prepayment date, but excluding any premium) of the Loan and any Parity Debt to be redeemed pursuant to the Loan Agreement, on a pro rata basis in the event that the available amounts are insufficient to pay all such prepayment price in full; and

( d) fourth, to the payment of interest on overdue installments of principal and interest, on a pro rata basis in the event that the available amounts are insufficient to pay all such interest in full.

No Waiver. Nothing in any other provision of the Loan Agreement shall affect or impair the obligation of the Agency, which is absolute and unconditional, to pay from the Tax Revenues and other amounts pledged under the Loan Agreement, the principal of and interest and premium (if any) on the Loan and any Parity Debt to the Trustee when due, as provided in the Loan Agreement, or affect or impair the right of action, which is also absolute and unconditional, of the Trustee to institute suit to enforce such payment by virtue of the contract embodied in the Loan Agreement.

A waiver of any default by the Trustee at the direction of the Owners of the Bonds shall not affect any subsequent default or impair any rights or remedies on the subsequent default. No delay or omission of the Trustee 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 by the Redevelopment Law or by the Loan Agreement may be enforced and exercised from time to time and as often as shall be deemed expedient by the Trustee.

If a suit, action or proceeding to enforce any right or exercise any remedy shall be abandoned or determined adversely to the Trustee, the Agency and the Trustee shall be restored to their former positions, rights and remedies as if such suit, action or proceeding had not been brought or taken.

Remedies Not Exclusive. No remedy conferred in the Loan Agreement upon or reserved to the Trustee 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 under the Loan Agreement 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 Redevelopment Law or any other law.

Discharge of Loan Agreement. If the Agency shall pay and discharge the indebtedness on the Loan or any portion thereof in any one or more of the following ways:

(a) by well and truly paying or causing to be paid the principal of and interest and prepayment premiums (if any) on the Loan or such portion thereof, as and when the same become due and payable;

(b) by irrevocably depositing with the Trustee, in trust, at or before maturity, cash in an amount which, together with the available amounts then on deposit in any of the funds and accounts established pursuant to the Indenture or the Loan Agreement, is fully sufficient in the opinion of Bond Counsel or an Independent Accountant to pay all principal of and interest and prepayment premiums (if any) on the Loan or such portion thereof; or

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( c) by irrevocably depositing with the Trustee or any other fiduciary, in trust, Defeasance Securities in such amount as an Independent Accountant shall determine will, together with the interest to accrue thereon and available moneys then on deposit in the funds and accounts established pursuant to the Indenture or a Supplemental Indenture or the Loan Agreement, be fully sufficient in the opinion of Bond Counsel or any Independent Accountant to pay and discharge the indebtedness on the Loan or such portion thereof (including all principal, interest and prepayment premiums) at or before maturity;

then, at the election of the Agency but only if all other amounts then due and payable under the Loan Agreement shall have been paid or provision for their payment made, the pledge of and lien upon the Tax Revenues and other funds provided for in the Loan Agreement and all other obligations of the Trustee, the Authority and the Agency under the Loan Agreement with respect to the Loan or such portion thereof shall cease and terminate, except only the obligation of the Agency to pay or cause to be paid to the Trustee, from the amounts so deposited with the Trustee or such other fiduciary, all sums due with respect to the Loan or such portion thereof, and to pay all expenses and costs of the Trustee when and as such expenses and costs become due and payable. Notice of such election shall be filed with the Authority and the Trustee. In the case of a discharge of the entire indebtedness on the Loan, any funds thereafter held by the Trustee under the Loan Agreement, which are not required for said purpose, shall be paid over to the Agency.

Notwithstanding the foregoing provisions, the Loan Agreement and the obligations of the Agency under the Loan Agreement shall not be discharged unless and to the extent that the Bonds shall have been discharged in whole or in part pursuant to the provisions of the Indenture.

Amendment. With the prior written consent of the Insurer, the Loan Agreement may be amended by the parties hereto, but only under the circumstances set forth in, and in accordance with, the provisions of the Indenture. The Authority covenants that the Indenture shall not be amended, nor shall the Authority agree or consent to any amendment of the Indenture, without the prior written consent of the Agency ( except that such consent shall not be required in the event that an Event of Default shall have occurred and be continuing under the Loan Agreement).

B-11

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APPENDIX C

FISCAL CONSULTANT REPORT

C-1

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Appendix(

REDEVELOPMENT AGENCY OF THE CITY OF LAKE ELSINORE

I. Introduction

RANCHO LAGUNA REDEVELOPMENT PROJECT No. I

PROJECTED TAXABLE VALUES AND ANTICIPATEDTAX INCREMENT REVENUES

January 25, 2011

The Lake Elsinore Public Financing Authority (the Authority) is prorxising to issue its Lake Elsinore Public Financing Authority Tax Allocation Revenue Bonds (Launch Ramp Project), 2011 Series A (the Bands) secured by a pledge of and Ii en on the tax increment revenues derived from the Redevelopment Agency of the City of Lake Elsinore's (Agency) Rancho Laguna Redevelopment Prqject No. I (Redevelopment Project No. I).

The California Community Redevelopment LctvV (the Law) pravides for the creation of redevelopment agencies by cities and counties for the purrxise of the elirrination of llight. The Law, together with Article 16, Section 16 of the California Constitution, authorizes the Agency to receive that portion of property tax revenue produced by such taxable value that is in excess of the taxable value within the prqject area at the time of the project area's adoption. The tax revenues so derived are generally referred to as Tax Increment Revenues. The Law prcwides that the Tax Increment Revenues rnay be pledged by the Agency to the repayment of agency i ndebtedness.

In this report, Gross Tax Increment Revenues, including Unitary Tax Revenue (see Section IV H, Allocation of State Assessed Unitary Taxes), are referred to as Gross Revenues. Within Redevelopment Project No. I, Gross Revenues rnay be limited by Redevelopment Project No. l's annual tax increment lirnit. If this annual tax increment lirnit is exceeded, Adjusted Gross Revenues shall be the Gross Revenues less those amounts in excess of the annual lirnit (see Section 11 B, Redevelopment Plan Li rnits). For purrxises of this report, Tax Revenues are defined as Gross Revenues or Adjusted Gross Revenues, less the SB 2557 County Administrative fees and collection charges (see Section IV G., County Property Tax Collection Reimbursement) and tax sharing payments (see Section VII, Tax Sharing and Other Obligations). The Bonds will be secured by a pledge of Tax Revenues from Redevelopment Prqject No. I.

The purrxise of this fiscal consultant report (the Report) is to examine the Riverside County Auditor-Controller's tax allocation practices, assessment appeals, assessed values for the current fi seal year and other pertinent ci rcurnstances and to prqj ect for nine fi seal years the amount of Incremental Value, Gross Revenues and Tax Revenues anticipated to be received by the Agency from the Redevelopment Prqject No. I. As a result of our research, we project that the Tax Revenues that wi 11 be fl edged to the payment of debt service on the Bands wi 11 be as shewn in TalleA belcw:

Redevelopment Agency of the City of Lake Elsinore Fiscal Consultant's Report January 25, 2011, Page 2

Adjusted Fiscal I ncremental Gross Year Value Ra-enues

2010-11 $647,460 $6,613

2011-12 651,195 6,650

2012-13 664,389 6,782

2013-14 677,847 6,917

2014-15 691,574 7,055

2015-16 705,575 7,196

2016-17 719,857 7,339

2017-18 734,425 7,485

2018-19 749,283 7,634

2019-20 764,439 7,787

Table A Prqjected Gross Revenues and Tax R a,enues

(OOO's omitted)

Housing Set Statutory SB 2557 Aside Tax Sharing Tax Sharing

Admin Fee Requirement Payments Payments

$79 $1,323 $1,735 $ 260

80 1,330 1,745 264

81 1,356 1,780 280

83 1,383 1,815 296

85 1,411 1,852 312

86 1,439 1,888 329

88 1,468 1,926 346

90 1,497 1,964 363

92 1,527 2,004 395

94 1,557 2,043 428

Tax Ra-enues

$3,216

3,231

3,285

3,340

3,396

3,453

3,511

3,571

3,617

3,664

The taxable values of property and the resulting Incremental Value, Gross Ratenues, Adjusted Gross Ratenues and Tax Ratenues summarized al:x:Ne are reflected on Table 1 of projections. These prqjections are based on assumptions determined b,' our revievv of the taxable value hi story of the Redevelopment P rqj ects and the property tax assessment and property tax apportionment procedures of Riverside County (the County). Future year assessed values, Gross Revenues, Adjusted Gross Revenues and Tax Revenues are prqjections based upon the assumptions described in this Report, and are nct guaranteed as to accuracy and this Report is not to be construed as a representation of such b,' H dl Coren & Cone.

11. Description of The Project Area

A. Redatelopment Plan General Description The Redevelopment Prqject No. I was the Agency's first Redevelopment Plan (the Redevelopment Plan), adop:ed b,' the City Council (the City Council) of the City of Lalke Elsinore (the City) on September 23, 1980, pursuantto Ordinance No. 607. The original Prqject Area consisted of several non-contiguous areas. The City Council amended the Redevelopment Plan for the Redevelopment Project No. I to add additional area onJ uly 20, 1981, pursuant to Ordinance No. 624. Redatelopment Project No. I generally consists of three areas in terms of land use. The first area is adjacent to, and southerly of, Interstate 15. M ajar land uses include the Lalke Elsinore Outlet Center, the Central Business Park, and two retail centers that include Target and Horne Depot The second area includes the central business district and gcwernrnental offices. The third area is a commercial district near the municipal basebal I stadium

Redevelopment Agency of the City of Lake Elsinore Fiscal Consultant's Report January 25, 2011, Page 3

B. Redevelopment Plan Limits The Redevelopment Plans for the Redevelopment Prqject No. I were originally adopted with certain limitations written into their redevelopment plans. These limitations were in accordance with the LcM' as it existed when each of the individual project area's Redevelopment Plan was adop:ed. In 1993 Assembly Bill 12<:Xlwas enacted (Chap:er 942, Statutes of 1993). Chapter 942 required redevelopment pans adopted prior to 1994 to incorporate a number of limits not previously required. For redevelopment pans that had been adop:ed prior to 1994, Chap:er 942 required revised Ii mits. Pursuant to Chapter 942 the ti me for establishing i ndelXedness was nct to exceed 20 years from the adoption of the redevelopment pl an or J anuary 1, 2004, whichever was later. Further, Chap:er 942 limited the effective life of a project area adopted prior to 1994 to 40 years from the time of adoption or January 1, 2009, whichever was later. Chap:er 942 also I i mi ted the recei pt of tax i ncrement for repayment of i ndebtedness to ten years after the termination of redevelopment pl an effectiveness excep: for specific I cw and moderate-i nconne housing oll i gati ons and any bond, indebtedness or other oll i gati on authorized prior to J anuary 1, 1994. Pursuant to Chap:er 942, the City Council adopted ordinances that annended the Redevelopment Plans and incorporated ti me limits according to the pravisions of Chap:er 942.

On February 26, 2008, the City Council adopted an ordinance for Redevelopment Project No. I that annended the Redevelopment Plan so as to eliminate the time limit on incurrence of mw debt in accordance with Senate Bill 211 (Chapter 741, Statutes of 2001). The elimination of these time limits resulted in the onset of statutory tax sharing payments in the Redevelopment Project No. I beginning in Fiscal Year 2008-09 as required b,t Section 33607.7 of the Law. The statutory tax sharing payments that were incurred b,t the Agency for Redevelopment Project No. I have been incorporated into the tax increment prqjections.

On February 26, 2008, the City Council adopted ordinances annending the Redevelopment Plan and, in accordance with the Law as annended b,t Senate Bill 1045 (see Section VI, Legislation), extended b,t one year the termination date of the Redevelopment Pl ans and b,t extension the I ast date to repay indebtedness. Legislation adopted b,t Senate Bill 1096 in connection with the State of California's (the State) budget prcwided that the termination dates of redevelopment plans with less than 20 years remaining may be extended b,t one year for each of the two Education Revenue Augmentation Fund (ERAF) payments that redevelopment agencies are olligated to malke under other pravisions of the budget legislation. The Agency has determined that it currently cannct malke the findings required b,t SB 1096.

Each of the Agency's Redevelopment Plans was originally adopted in the 19805 and the format and presentation was generally outdated. 5 ubsequent annendments were separately documented and it was difficult to sort through these documents to deterrri ne the gcwerning prcwisions of the Redevelopment Plans. On April 28, 2009, the Agency adop:ed an Amended and Restated Redevelopment Plan for each of the three Redevelopment Prqjects. Each of the Amended and Restated Redevelopment Plans navv (i) reflect changes in the Redevelopment Law that impose additional requirements and restrictions nct reflected in the original Redevelopment Plans, (ii) incorporate all prior annendments to the original Redevelopment Plans, (iii) incorporate updated

Redevelopment Agency of the City of Lake Elsinore Fiscal Consultant's Report January 25, 2011, Page 4

land use pravisions, and (iv) clarify and restate the time limits and financial limits (see Table B ~lavv).

The currently applicable Redevelopment Plan limits for the Redevelopment Project No. I are summarized ~I avv in Table B.

TableB Redevelopment P Ian Limits

Project Area: Redevelopment Project No. I

(Original Areal

Adoption Date Septerrber 30, 1980

Plan Expiration Septerrber 23, 2021

LastDatetolncurDebt Elirrinated

Last Date to Repay Debt Septerrber 23, 2031

Tax Increment Lirrit Corrbinedwith Added Area

Lirrit on Bonded Debt Corrbined with Added Area

C. ProjectArealandUse

Redevelopment Project No. I (Added Areal

July 13, 1981

J uly 20, 2022

E I i rri nated

J uly 20, 2032

$3 Million net annually1

$30Million

Tall e C represents the brealkdavvn of I and use in the Redevelopment Project No. I lJy the num~r of parcels and lJy their taxalle value for Fiscal Year 2010-11. This information is based on County land use designations as pravided lJy Riverside County through tax roll data It should~ noted that the County land use designations do not necessarily parallel City land use and zoning designations. Unsecured and SB E non-unitary values are connected with parcels that are al ready accounted for in other categories.

1 The rraxi mum amount of tax increment to be al I ocated to the Agency pursuant to the R edarel opment P Ian shal I not exceed $3,CXXl,CXXl during any one fiscal tax year; prCNided, hcwever, that any shortfall within the allcwable annual allocation of tax increment shall be carried forward to the follcwing year or years and shall be available to the Agency until the period for receipt of tax increment/repayment of debt has terrrinated. The Agency cannot receive tax increment in any fiscal year that exceeds the sum of the annual lirrit plus any unallocated rarenues that have rolled CNer from prarious years. Nor can the total amount of tax increment rarenues received 0y the Agency pursuant to the Redevelopment Plan exceed the aggregate of the annual lirrit CNer the period to receive tax increment/repayment of debt as prCNided in the Redarelopment Plan. The lirrits on the allocation of tax increment applies to tax increment received and deposited 0y the Agency and is net of pass-through agreements, statutory tax sharing JE.yments to taxing entities, County adrrinistrative charges and ERAF payments.

Redevelopment Agency of the City of Lake Elsinore Fiscal Consultant's Report January 25, 2011, Page 5

Category

R esi denti al Comrercial Industrial Recreational I nsti tuti onal Vacant Land Governrrentj[ xerrpt

Subtotal

SBE Non-Unitary P ossessory I nterest Unsecured

Subtotal

Total:

TableC Land Use Summary

No. Parcels

l,450 317 161

3 13

479 429

2,852

2,852

Redevelooment Project No. I NetT axable Value

$235,653,058 216,654,537 146,785,644

6,796,280 798, 100

24,887,024 0

$631,574,643

0 7,719,431

40,535, 194 $ 48,254,625

$679,829,268

111. Project Area Assessed Values A. Assessed Values

% of Total 34.7% 31.9% 21.6%

l.0% 0.1% 3.6%

_QJl)6 92.9%

0.0% l.1% 6.0% 7.1%

100.0%

Taxable values for all parcels are prepared b,' the County Assessor and reported to the Agency b,' the County Auditor-Controller each fiscal year and represent the aggregation of all locally assessed properties that are part of the Redevelopment Projects. The assessments are assigned to Tax Rate Areas (TRAs) that are coterminous to the boundaries of Redevelopment Project No. I. The historic reported taxable values forthe Redevelopment Prqject No. I were reviewed in order to ascertain the rate of taxable property valuation grCMlth aver the ten most recent fi seal years ~ginning with 2001-02. Detailed historical assessed values for Redevelopment Project No. I are shcwn on the attached tabl es.

Between 2001-02 and 2010-11, the taxable value within the Redevelopment Project No. I increased b,' $273,544,323 (67.33%). With the excep:ion of 2002-03, 2009-10 and 2010-11, the assessed value increased in each year during this period. From 2009-1 O to 2010-11 assessed value in Redevelopment Project No. I dropped b,' $21,443,501 (-3.06°/o). This drop was the result of assessed value declines in both the secured and unsecured tax rol Is. Over the ten-year period examined, secured values have increased b,' $276.6 million (76.26%) and unsecured values have decreased b,' $3.1 million (7.0CP/o). Grcwth has ~en steady and with large annual increases from 2003-04 through 2007-08. New residential construction, commercial and industrial development and transfer of cwnershi p accounted for the majority of the grCMlth within Redevelopment Prqject No. I.

The Redevelopment Prqject No. I has incremental value of $647,460,440 for 2010-11. This represents an increase of 1900.3% aver the base year value. Over the ten-year period examined, annual grCMlth in assessed value averaged 6.24% despite the declines for 2009-1 O and 2010-11.

Redevelopment Agency of the City of Lake Elsinore Fiscal Consultant's Report January 25, 2011, Page 6

Residential Real Estate Values In response to the dcwnturn in real estate values statevvide, the Riverside County Assessor revievved the values of residential parcels within the County. In 1978, California voters passed Proposition 8. This constitutional amendment allcws a temporary reduction in assessed value when a property suffers a "decline in value." A decline in value occurs when the current market value of a property is I ess than the current assessed value as of the Ii en date. Under the terms of Proposition 8, it is the Assessor's obligation to assess all properties at the lesser of current market value or at the property's base value as adjusted for inflation and for any changes that have occurred to the property since it was last purchased.

Properties that have their values reduced to the current market value are annually revievved by the Assessor to determine the nevv market value of the property. The value that is enrolled each year is the lesser of the current market value or the property's adjusted base value. Adjusting the property's value to the current market value may entail a further decrease in value or an increase in value that is not limited by constitutional restriction on annual value increases. Once the property has again reached its adjusted base value, it rray be increased in value only by the rate of inflation to a maximum annual rate of two percent as required by the Constitution. Within the assessment rol Is for 2010-11, there were a number of properties that had al ready been reduced in value under Proposition 8. For 2010-11 there were a total of 678 parcels in the Redevelopment Project No. I that at some point had their values reduced pursuant to Proposition 8. If a property's value had been reduced in some earlier year, its value may have been adjusted either ur:ward or dcwnward for the current year depending on what the Assessor had determined the market value of that property to be as of J anuary 1, 2010, the Ii en date for Fi seal Year 2010-11. Bel ON is a summary of the parcels reduced under Proposition 8 for 2010-11.

Redeveloprrent Project No. I

TableD Prop 8 Value Reductions-Fiscal Year 2010-l l

No. of Parcels 678

2009-lOValue 2010-l l Value 124,059,301 112,246,860

Change (l l,812,441)

Percentage

~ (9.52)%

Si nee the assessed val ues that have been reduced under P roposi ti on 8 are al most al I resi denti al properties, we have examined the change in value among residential properties in the Redevelopment Prqject No. I.

From 2001-02 to 2002-03 through 2005-06 to 2006-07 there was a substantial change in the number of residential parcels within the Redevelopment Project No. I. During this period, the number of residential parcels increased from 1,208to 1,470. Within the Redevelopment Project No. I there was a modest decline in residential property values for 2008-09 of $17, 1 50, 263 ( 5. 2Yo ) . It appears that for 2008-09 there was sufficient gravvth among those resi denti al parcel s unaffected by Prop 8 to result in this modest residential value decline. This is partly the result of ongoing i nfl ati onary increases in assessed value for those parcels that have been cwned by the property cwners for many years and that are enrol I ed at values significantly bel cw the current, reduced market values. In addition, parcels that have been cwned for long periods of time will, even when sold in a dcwn market, be enrdled at significantly higher values relative to their previously enrolled assessed values. This is characteristic of the dder residential neighborhoods

Redevelopment Agency of the City of Lake Elsinore Fiscal Consultant's Report January 25, 2011, Page 7

within the Redevelopment Prqject No. I. In 2008-09 the combned values within the Redevelopment Projects decreased b,' 0.00'/o aver values for 2007-08 cwing to grCMlth in commercial and industrial values. In 2009-10 and 2010-11, residential values within the Redevelopment Prqjects suffered a decline of $304,289,729 (25.CP/o) and $53,504,135 (5.9'/o), respectively. The changes in combined value ammg residential parcels in the Redevelopment Project No. I from 2001--02 through 2010-11 are shavvn in Table E belavv.

TableE Hist<Xical Value of Residential Parcels

Year 2001-02 2002-03 2003-04 2004--05 2005-06 2006--07 2007-08 2008--09 2009-10 2010-11

Redevelopment Project No. I $135,929,897 151,497,459 180,454,995 205, 122,930 240,645,214 279,875,403 328,223,060 311,072,797 250,009,440 235,653,055

Annual% Change

11.5% 19.1% 13.7% 17.3% 16.3% 17.3% (5.2%)

(19.636) (5.7%)

It is possible that there will be additional residential properties reduced in value under Proposition 8 in coming years. As the housing market rebounds, values on these properties may be revised in keeping with market values until such time as the properties regain their inflation adjusted base value. In this circumstance values may decline or may increase more than two percent annually.

B. Top Ten Taxable Property Owners A review of the top ten taxable property avvners in the Redevelopment Project No. I for Fiscal Year 2010-11 was conducted.

Within the Redevelopment Project No. I, the aggregate tctal taxalle value of the ten largest taxpayers tctaled $149,841,080 or 22.04'/o of taxable property values and 23.14% of the incremental value. Table F bel avv detai Is the valuations of the top ten taxpayers. The I argest taxpayer represents 6.37"/o of the Redevelopment Project No. I incremental value.

Redevelopment Agency of the City of Lake Elsinore Fiscal Consultant's Report January 25, 2011, Page 8

TableF Redevelopment Prqject No. I Top Ten Property Owners

Assessed % Total Value Value

Redevelo12rrent Prgject No. I Total & I ncrerrental Values $682,616,994

Castle and Cooke Lake E I si nore Outlet (1) $41,224,855 6.06% Harbor Grand A i:artrrents I nvestrrent

2 (1) 24,847,661 3.65% 3 Target Corporation 15,305, 163 2.25% 4 Lake Elsinore Office Park 13,053,165 1.92% 5 HD Devel oprrent of Maryl and I nc. 12,737,804 1.87% 6 RSM Properties 12,643,841 1.86% 7 TO{ota Motor Sales USA Inc. 111 8,649,452 1.27% 8 Louis F. Depasquale Trust 11

I 8,028,531 1.1 !%

9 Miramar West Auto Center 111 6,875,664 1.01%

10 M KJ Adnoff I nvestrrent 111 6,484,944 0.95% Totals $149,851,080 22.04%

(1) Pending Appeals

IV. RiversideCountyTaxAllocation and Disbursement Methoddogy A. Property Taxes

% I ncrerrental Value

$6 50, 24!l, 166

6.37%

3.84% 2.36% 2.02% 1.97% 1.95% 1.34% 1.24%

1.06% 1.00)6

23.14%

The taxalbl e values of property are estall i shed each year on the J anuary 1 property tax Ii en date. Real Property reflects the reported assessed values for secured and unsecured I and and imprCNernents. Article XIII A of the California Constitution (Proposition 13) pravides that a base year value is estallished when locally assessed real property undergoes a change in cwnershi p or when new construction occurs. F d I cwi ng the year a base year value is first enrolled, the value is factored annually for inflation. Pursuant to Article X 111 A, section 2(b), and Revenue and Taxation Code Section 51, the percentage increase cannot exceed two percent of the prior year's value.

To interpret section 51, the State Board of Equalization (Board) promulgated Property Tax Rule 460, General Application. Subdivision (a) of Rule 460 pravides the general interpretation of Proposition 13 as fd lcws:

(a) Sections 1 and 2 of Article XI 11 A of the Constitution pravide for a I irritation on property taxes and a procedure for establishing the current taxable value of I ocal ly assessed real property by reference to a base year full cash value which is then modified annually to reflect increase in the i nfl ati on rate not to exceed two percent per year or declines in value from whatever cause.

Specifically, with respect to the app icalble inflation rate, Rule 460, subdivision (b)(5) states that:

Redevelopment Agency of the City of Lake Elsinore Fiscal Consultant's Report January 25, 2011, Page 9

(b)(S) INFLATION RATE. For each lien date after the lien date in which the base year value is deterrri ned, the ful I value of real property shal I be modified to reflect the percentage change in cost of living, as defined in Section 51 of the Revenue and Taxation Code; pravided that such value shal I nct reflect an increase in excess of two percent of the taxable value of the preceding lien date.

Each year the Board announces the applicable adjustment factor. In most years i nfl ati on has exceeded two percent and the annual increase has been Ii mi ted to the maxi mum of two percent al lavved O\f Proposition 13. On five occasions, inflation has been less than two percent. In those years, the announced factor resulted in an inflation adjustment of less than two percent. For the 2009-1 O fiscal year, the first time since the passage of Proposition 13, the California Consumer Price Index (the CCPI) declined. The annual adjustment was a negative 0.237'/o and the Proposition 13 base years were reduced ..

Because Section 51 does not distinguish between positive and negative changes in the CCPI, and because Article XIII A, section 2(b) of the California Constitution specifically pravides adjustments based upon reductions in the CCPI, it is the opinion of the Board that Section 51 requires inflation factor adjustments that may be positive or negative. If positive, the increase is limited to two percent, hcwever, there is no such I irritation to dcwnward adjustments, including instances in which the net change to the CCPI is zero or less than zero percent. The inflation factor is measured O\f the change in CCPI from October of the previous year to October of the current year. The CCPI dropped sharply (three percent) between October 2009 and December 2009, havvever, it has been rising ever since. The adjustment factor for the January 1, 2011 assessment date will be 0.753%. We have predicated our projections on an adjustment of 0.753% inflation gravvth for fiscal year 2011-12 and assumed resumption of 2% annual grcwth thereafter.

Utility property assessed O\f the Board may be revalued annually and such assessments are not subject to the inflation limitations of Article X 111 A. The taxable value of Personal Property is also established on the lien dates and is nct subject to the annual two percent limit of locally assessed Real Property.

Secured property includes property on which any property tax I evi ed O\f a county beconnes a Ii en on that property. Unsecured property typically includes value fortenant i mpravements, fixtures, inventory and personal property. A tax I evi eel on unsecured property does nct beconne a Ii en against the taxed unsecured property, but may become a lien on certain other secured property cwned O\f the taxpayer. The taxes levied on unsecured property are levied at the previous year's secured property tax rate.

B. Supplemental Assessments Chapter 498 of the Statutes of 1983 pravides for the reassessment of property upon a change of cwnership or completion of mw construction. Such reassessment is referred to as the Supp emental Assessment and is determined O\f applying the current year's tax rate to the annount of increase in a property's value and prorating the resulting property taxes to reflect the portion of

Redevelopment Agency of the City of Lake Elsinore Fiscal Consultant's Report January 25, 2011, Page 1 O

the tax year remaining as determined by the date of the change in cwnership or completion of new construction.

Since 1984-85 revenues derived from Supplemental Assessments have been allocated to redevelopment agencies and taxing entities in the same manner as regularly cdlected property taxes. The receipt of Suppemental Tax Revenues by taxing entities typcally follcws the change of cwnership by a year or more. We have nct included revenues resulting from Supplemental Assessments i n the projections.

C. Tax Rates Tax rates will vary from area to area within the State, as well as within a community and a project area The tax rate for any particular parcel is based upon the jurisdictions levying the tax rate for the area where the parcel i s I ocated. The tax rate consi sts of the general I evy rate of $1.00 per $100 of taxable values and the aver-ride tax rate. The aver-ride rate is that portion of the tax rate that exceeds the general I evy tax rate and is I evi ed to pay voter appraved indebtedness or contractual obi i gati ons that existed prior to the enactment of Proposition X 111. A Constitutional annendment appraved inJ une 1983 allcws the levy of aver-ride tax rates to repay indebtedness for the acquisition and i mpravement of real property, upon appraval by a two--thi rds vote. A subsequent annendment of the Constitution prohibits the allocation to redevelopment agencies of tax revenues derived from aver--ri de tax rates I evi ed for repayment of i ndelXedness apprCNed by the voters after December 31, 1988.

The Redevelopment Project No. I contains a total ofsixTRAs. A TaxRateAreaisageographic area within which the taxes on all property are levied by a certain set of taxing entities. These taxing entities each receive a prorated share of the general levy and those taxing entities with voter apprCNed aver-ride tax rates receive the revenue resulting from that tax rate. The tax increment projections are based on the one percent general levy tax rate only. There are two tax rates that are appied to all TRAs within the Redevelopment Prqjects. The averride tax rate levied by the Metropditan Water District is authorized by a contract for purchase of water from the California Water Project and will not reach its termination date until 2035. Therefore, we have held the tax rate constant atthe current $1.0037 tax rate for the life of our prqjections.

Table G belcw illustrates the components that malke up the tax rate that is applicable within the Redevelopment Prqject No. I. The debt service aver-ride tax rates belcw reflect the secured tax rates levied for 2010-11.

Redevelopment Agency of the City of Lake Elsinore Fiscal Consultant's Report January 25, 2011, Page 11

TableG

General Levy Tax Rate

Rederelopment Prqject No. I

Tax Rate 1

1.0000

Metropolitan Water District

RDA Applicable Tax Rate

% of Secured I ncremental Value

% of U nsecured I ncremental Value

Tax Ratel - TRA's 05-016. 05-017. 05-018. 05-019am 05-020 TaxRate2- TRA 05-617

0.0037

1.0037

100.00)6

100.00)6

Tax Rate 2

1.0000

0.0000

1.0000

0.00)6

0.00)6

Because any debt service averri de tax rate that may be appraved by voters in the future wi 11 not pravide any revenue forthe Agency, the prqjection is based on the assumption that the app icable tax rate within the Redevelopment Projects will remain at the tax rate shewn abave.

D. Allocation of Taxes Secured taxes are due in two equal i nstal I ments. I nstal I ments of taxes I evi ed upon secured property become delinquent on December 1 O and A pri I 10. Taxes on unsecured property are due March 1 and become delinquent August 31. Riverside County disburses secured and uti Ii ty tax increment revenue to redevelopment agencies in five i nstal I ments during the fi seal year. Supplemental tax roll revenue and homeowner's exemption revenue is distributed periodically during the fiscal year with the final reconciliation being remitted in Sep:ember follcwing the close of the fi seal year.

The County's practice is to distribute 100 percent of the taxes levied on the extended tax roll subject to any tax sharing agreement with the County. The tax revenues of the taxing entities are not suqj ect to revenue I oss due to delinquencies or gains due to redemptions. This is an administrative practice of the County that could be subject to change. For purposes of this Report we have assumed that this practice wi 11 continue and have estimated future taxes based on the Agency receiving 100 percent of the annunt levied.

E. Annual TaxReceiptstoTaxlevy As indicated in the section abave, the County Auditor-Controller allocates tax revenue to the Agency at 100 percent of the calculated revenue and does nct allocate based on cdlections. The Agency receives 100 percent of the amount levied for any particular year.

F. AssessmentAppeals Within Redevelopment Project No. I, there have been 220 assessment appeals filed since 2005-CXi. Of the 220 appeals fi I ed, ten have been al I avved with a reduction in value and 47 have been denied. There are 163 appeals currently pending on 142 properties within the Redevelopment

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Project No. I area Based on the historical averages, we expect that 25 of the currently pending appeals wi 11 ~ al I cwed and that these successful appeals wi 11 result in an assessed value reduction of $2,835,989. This reduction has ~en incorporated in the projection as a reduction to the 2011-12 assessed value. Four assessment appeals were recently allcwed with a reduction in value of $2,787,726. This reduction has ~n reflected in the values for 2010-11. Reductions in revenue for refunds resulting from these successful appeals have not ~en estimated.

Our estimates are based upon the historical averages of successful appeals and announts of value reductions. Actual appeals, reductions and refunds may vary from historical averages. Our esti mated reducti ons i n val ues are ref I ected on T abl es 1 and 2 of the projections.

G. County Property Tax Collection Reimbursement Chapter 466, adop:ed O)l 5enate Bill 2557, allcws counties to recCNer charges for property tax admi ni strati on in an annount equal to their 198g....g) property tax admi ni strati on costs, as adjusted annually. The announts that are reimbursed are the costs connected with the col I ecti on and distribution of property taxes for the Tax Collector, the Auditor-Controller and the Assessor. The portions of the reimbursement annount that are allocated to each taxing entity within the County are based on the percentage of the total assessed value in the County that each taxing entity's assessed value represents. For the fi seal year 2009-10, the annount of County cd lection charges attributed to the R edevel oprnent Project No. I was $82, 072.

For purposes of this projection, it is assumed that the Property Tax Cdlection Reimbursement annount will annually ~ the same percentage of the Redevelopment Project No. l's Gross Revenue as in Fiscal Year 2009-10.

H. Allocation of5tateAssessed Unitary Taxes Legislation enacted in 1986 (Chapter 1457) and 1987 (Chap:er 921) prCNided for a modification of the di stri buti on of tax revenues derived from uti Ii ty property assessed O\f the 5 tate Board of Equalization, other than rai I roads. Prior to the 1988-89 fi seal year, property assessed O\f the 5 BE was assessed statewide and was al I ocated according to the I ocati on of individual components of a uti I i ty i n a tax rate area

Commencing in 1988-89, tax revenues derived from unitary property and assessed O\f the 5BE are accumulated in a single Tax Rate Area for the County. It is then distributed to each taxing entity in the County in the follcwing manner: (1) each taxing entity wi II receive the same annount as in the previous year pl us an increase for i nfl ati on of up to two percent; (2) if uti I ity tax revenues are insufficient to prCNide the same annount as in the previous year, each taxing entity's share would~ reduced pro-rata countywide; and (3) any increase in revenue abOJe two percent would~ allocated in the same proportion as the taxing entity's local secured taxable values are to the local secured taxable values of the County.

To administer the allocation of unitary tax revenues to redevelopment agencies, the County no longer includes the taxable value of utilities as part of the reported taxable values of the project area and, thus, reduced the base year of project areas O\f the annount of uti I ity value that exi steel

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originally in the base year. The County Auditor-Controller remitted $113,833 in unitary revenue to the Agency for Redevelopment Project No. I during the 2009-10 fiscal year. These revenue amounts tend to remain fairly constant but are suqj ect to adjustments O\f the 5 BE for i nfl ati on grCMlth, declines in value due to assessment appeals O\f utility companies and others taxed under this system and increases in value resulting from development of new facilities. Because we cannot reasonably project changes in this revenue stream, we have assumed that the unitary tax revenue wi 11 remain constant in future years.

V. Lcw and Moderate Income Housing Set-Aside Requirements Sections 33334.2 and 33334.3 of the Law require redevelopment agencies to set aside not less than 20 percent of al I tax increment revenues from project areas adopted after December 31, 1976 into a lcw and moderate inconne housing fund (the Housing Set-Aside Requirement). Sections 33334.3, 33334.6 and 33334.7 of the Law extend this requirement to redevelopment projects adop:ed prior to January 1, 1977. An agency can reduce the Housing Set-Aside Requirement if the agency annually malkes certain findings, consistent with the General Plan Housing Element. These findings are that: (1) no need exists in the community to imprave or increase the supply of lcw and moderate income housing; or, (2) some stated percentage less than 20 percent of the tax increment is sufficient to meet the housing need. In order to malke findings (1) or (2), the Agency's finding must be consistent with the Housing Element of the community's General Plan, including its share of the regional housing needs of very lcw inconne households and persons and families of lcw or moderate income. No such findings have been made by the Agency and, thus, 20 percent of gross revenue has been projected as being set aside from the Redevelg:Jment Project No. I.

VI. Legislation SB 211 was signed into law as Chapter 741, Statutes of 2001. This legislation has two main impaas on the limits contained in an agency's redevelopment plan. First, the City may eliminate the ti me Ii mit to establish indebtedness in project areas adopted prior to January 1, 1994 O\f ordi nance. I f the PI an i s so amended, exi sti ng tax shari ng agreements wi 11 conti nue and certai n statutory tax shari ng for entities without tax shari ng agreements wi 11 commence i n the year the eliminated limit would have talken effect. Second, an agency may extend the time limit for plan effectiveness and repayment of delX for up to ten years if it can malke certain specified findings. These changes could potentially impact time limits in the Redevelopment Prqject No. I Redevelopment Plan O\f eliminating or extending these limits. Project areas that have been adop:ed after J anuary 1, 1994 may only extend the Ii mi tati on on incurring new debt O\f malki ng specific findings. On February 26, 2008, the Agency adop:ed such amendment to the Redevelopment Project No. I Redevelopment Plan and eliminated the time limits on incurrence of new debt. As a result, the tax increment projections done for purposes of this Report have incorporated the required tax sharing payments for Redevelopment Prqject No. I pursuant to Section 33607.7 of the Law. The required statutory tax sharing payments began for Redevelopment Prqject No. I in 2008-09 and will continue through the expiration of the Redevelopment Prqject No. I Redevelopment Plan.

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In order to address State Budget deficits, the Legislature enacted SB 614, SB 844 and SB 1135 that required payments from redevelopment agencies for the 1992--93, 1993--94 and 1994--95 Fiscal Years into a countywide ERAF. The Agency could have used any funds legally availalle and nct I egal ly obi i gated for other uses, including reserve funds, bond proceeds, earned income, and proceeds of land sales, but nct moneys in the Lcw and Moderate Income Housing Fund (the Housing Fund) to satisfy this obligation. An agency could have reduced its payment due to existing indebtedness, contractual obi i gati ons and 90 percent of 1991--92 administrative costs (collectively, Existing Obligations). If an agency could nct malke the required payment due to Existing Obligations, it could, after malki ng certain findings, borrcw up to 50 percent of its 1992-93 ERA F obi i gati on from the Housing Fund and repay the borrcwed amount O,' J une 2003, or the agency was required to ol::tai n a I oan from the city it:ounty in order to pay the difference between what the agency paid and the total amount due. For agencies that did nct borrcw to meet any shortfal I of the required payment, the county auditor-control I er was required to deduct any amount due from the cityit:ounty's allocation of property taxes. The obligation appied to the agency and nct to specific prqj ect areas.

From 1994--95 through 2001--02, state budgets were adop:ed with no additional shifting of tax increment from redevelopment agencies. The State Budget for 2002--03 required a shift of $75 million of tax increment statevvide from redevelopment agencies to ERAF to meet the State budget shortfall. AB 1768 (Chapter 1127, Statutes of 2002) was enacted O,' the Legislature and signed O,' the G avernor. Based upon the methodd ogy prCNi ded in the 2002--03 budget, the shift requirement for the Agency was $239,733 for Fiscal Year 2002--03 only. This amount did not impact the Agency's ability to fulfill its loan payment obligations. This shift of revenue is an obligation of the Agency and not of any particular prqject area The Agency was permitted to satisfy this obligation with any legally availalle funds. The Agency made the required payment to the County b,' the deadline of May 10, 2003.

As part of the State's 2003-04 budget legislation, SB 1045 (Chapter 260, Statutes of 2003) requires redevelopment agencies statevvide to contribute $135 million to local County ERAF which reduces the amount of State funding for schools. This transfer of funds is limited to Fiscal Year 2003-04. The annount of revenue that was transferred O,' the Agency to Riverside County for 2003-04 was $414,479. The Agency made this payment to the County b,' the May 10, 2004 deadline.

Under the LctvV as annended O,' SB 1045, the Agency was authorized to use a simplified methoddogy to annend the Redevelopment Project No. I Redevelopment Plans to extend O,' one year the effectiveness of the pan and the time during which the Agency may repay debt with tax increment revenues. In addition, the annount of this payment and the ERAF payments made in prior years are not counted tcwards the Ii mi t on the annount of cumulative tax increment revenues to be received O,' the Agency. The City Council adop:ed an ordinance so annending the Redevelopment Plan on February 26, 2008. By its apprCNal of these ordinances, the City Council extended O,' one year the effective lives of the Redevelopment Plans for the Redevelopment Project No. I and similarly extended the period within which the Agency may repay indel::tedness

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from tax increment revenues. The limits used in the projection reflect this extension and they have been incorporated into the projection of tax revenue.

The State's budget for 2004--05 was apprcwed b,' the I egi sl ature and signed b,' the G avernor. Senate Bill 10% is a trailer bill that deals with local gavernment. Pursuant to SB 10%, redevelopment agencies in the State I ost $250 mi 11 ion to ERA F in each of the Fi seal Years 2004-05 and 2005-06. The announts to be paid b,' each Agency were calculated b,' using the sanne formula as was used for 2003-04. Annual payments continued to be due on May 10 of each fi seal year. As in previous years, payments could have been rrade from any avai I able funds cther than the Housing Fund. If an agency was unable to malke a payment, it could have borrOvVed up to 50 percent of the current year housing set --aside amount, hOvVever, the borrOvVed annount had to be repaid to the Housing Fund within 10 years of the last E RAF payment (May 10, 2CXXi). The Agency rrade E RAF payments of $831,035 for 2004-05 and $735,007 for 2005-06.

For redevelopment plans with less than ten years of effectiveness remaining fromJ une 30, 2005, the fl ans were al I OvVed to be extended b,' one year for each year that an ERA F payment is rrade. For redevelopment plans with 10 to 20 years of effectiveness remaining after June 30, 2005, the pans could be extended b,' one year for each year that an ERAF payment is rrade if the City Counci I finds thatthe Agency is in compliance with speci fi eel state housing requirements. These requirements were: (1) that the Agency is setting aside 20 percent of gross tax increment revenue; (2) housing impementation pans are in place; (3) replacement housing and inclusionary housing requirements are being met; and, ( 4) no excess surplus exists. If a redevelopment pl an had more than 20 years of effectiveness remaining after J une 30, 2005, it could nct be extended. The Agency has not ador::ted these extensions forthe Redevelopment Project No. I.

In order to malke such extensions of redevelopment plan effectiveness, the City Council had to amend the redevelopment pl an b,' ordinance after noticed public hearing and after malki ng the finding that revenue paid to ERAF wculd "otherwise have been used to pay the costs of programs, projects, and activities necessary to carry out the goals and objectives of the redevelopment plan." ERAF payment amounts authorized under this legislation did not count against the Constituent Project Area tax increment limits. ERAF payments were subordinate to new and existing repayment obligations for bonded indebtedness.

The Legislature enacted AB 1389 to require a $350 million shift for 2008-09 from redevelopment agencies to ERAF. There was to be no repayment of this annount, nor any extensions of redevelopment fl an Ii mits. Housing Set-Aside Requirement was notto appy to the amount paid for the E RAF. The amount required to be paid b,' the Agency underthis legislation was $1,435,054. The payment rray have come from any available Agency revenues. The Agency could have borrOvVed up to 50 percent from its current year Housing Set-Aside Requirement for purposes of malking the ERAF payment. The ERAF payment was to have been subordinate to debt existing at the date of enactment of AB 1389. An agency that could nct malke the payment due to existing indebtedness would have been allcwed to borrcw from their legislative body. Failure to malke the ERAF payment would have resulted in penalties that effectively stop new activities of the agency. This legislation mandated this ERAF shift only for Fiscal Year 2008-09.

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The California Redevelopment Association (the CRA), the Executive Director of the CRA, the Madera Redevelopment Agency and the Moreno Valley Redevelopment Agency filed a lawsuit in the Sacrannento County Superior Court challenging the constitutionality of the AB 1389 pravisions requiring the $350 million shift of tax increment revenues from redevelopment agencies to ERAF. The lawsuit sought to invalidate the prCNisions of AB 1389 requiring the tax increment transfer to ERAF and to prohibit the State from forcing county auditors to divert these redevelopment funds to ERAF. A ruling on this suit by the Sacrannento County Superior Court was filed on April 30, 2009. The Court found in favor of the plaintiffs, ruling that the requirement that these funds be talken from redevelopment agency revenues and paid into county ERAF accounts was unconstitutional in that this use of redevelopment tax increment revenues conflicts with and violates the Law requiring that tax increment revenues be used to finance redevelopment activities. This ruling eliminated the requirement to malke the ERAF payment described in the previous paragraph. It was expected that the State would appeal the ruling but it recently withdrew this appeal.

AB 1389 al so contained pravi si ons requiring redevelopment agencies to report al I announts of statutory tax sharing payments avved for Fi seal Years 2003-04 through 2007--08, the announts paid, and if any announts were not paid, to pay the announts due or incur penalties effectively stopping new activities of the Agency. In compiance with the requirements of AB 1389, the Agency rm.de all required statutory tax sharing payments for this period and filed the necessary reports. AB 1 389 further requi res reporti ng of al I statutory tax shari ng payments for Fi seal Y ear 2008-09. Accardi ng to the Agency the required statutory tax sharing payments for 2008-09 have been rm.de, the requi red reporti ng spreadsheet has been submitted and the Agency has received concurrence from the County Auditor-Controller and the State Controller.

In July, 2009 the Legislature adop:ed ABX4-26. This bill is implementing legislation to a package of 30 bills that were adopted in order to close the State's budget deficit. Under this I egi sl ati on the redevelopment agencies statewide wi 11 be required to pay $1. 7 bi 11 ion in Fi seal Year 2009-10 and another $350 million in 2010-11 into their county's "Supplemental" ERAF (the SE RAF). Funds deposited in the SE RAF will be distributed in such a way as to try to avoid the issues that were named by the Sacramento Superior Court in its ruling on AB 1389's ERAF payment requirement. Under this legislation the Agency paid $6,970,262 by May, 2010 and it will further be required to pay an annount esti rrated to be $1,435,054 in May, 2011. The annount to be paid by the Agency in May, 2011 has not been finally determined by the State Department of Finance. If the Agency does nct malke the payment by the May 10 deadline, its ability to conduct redevelopment activities will be halted and it must increase the housing set-aside to 25 percent.

Underthis legislation, the Agency can use any available funds to malke the SE RAF payment. For 2009-10, the Agency rray use all or part of the Housing Tax Increment Revenues in order to malke the payment. Any Housing Tax Increment Revenues annount used to malke the SERAF payment must be repaid to the Housing Fund by J une 30, 201 5. If the Agency fai Is to repay the Housing Fund in a timely manner, the required al I ocati on of tax increment to the Housing Fund

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i s i ncreased to 2 5°/o for the remai nder of the ti me that delX may be repaid from the Redevelopment Prqj ects.

On N0.tember 12, 2009, the GOJernor signed SB 68 (Steinberg) into law which modifiesABX4-26 by allcwing agencies to use the accumulated balances in their housing fund (and not just current year Housing Tax Increment Revenues) to malke their SE RAF payments, should that become necessary. Funds used from the Housing Fund existing balance to malke the 2009-10 payment to County SERAF would be considered a loan to be repaid within five years. Using funds from accumulated Housing Fund would not be allcwed for malking payments due for 2010-11. The legislation requires that the funds be deposited into a County SE RAF and distri b.Jted to K-12 school districts located in any project area of the Agency in proportion to the average daily attendance of the district. The funds distrib.Jted to schools from the SE RAF must be used to serve pupi Is I ivi ng in the project area or in housing supported by redevelopment funds. The tctal annount of SE RAF funds received by a school district is deemed to be local property taxes and will reduce dollar-for--ddlar the State's Prop 98 obligations to fund education.

The City may lend to the Agency the amount that must be paid to SE RAF and if that occurs, the Agency is authorized to repay the City from taxi ncrement revenues. The City is also authorized to malke the payment on behalf of the Agency. The pravisions of existing lctvV which permit a j oi nt pavvers authority to sel I bonds and I oan the proceeds to redevelopment agencies i n order to malke ERAF payments are also available for the 2009-10 and 2010-11 payments. In addition, agencies are entitled to a one-year extension on their AB 1290 time limits if they malke timely SERAF payments. This extension will nct trigger pass-through payments under Health and Safety Code Section 33607.7.

As with the earlier ERAF obligations, the obligation to malke the SE RAF payment is subordinate to delX service on bonds and cther indebtedness. An agency may pay less than the annount required if it finds that it is necessary to malke payments on existing obligations required to be committed, set-aside or reserved by the agency during the applicable fiscal year. An agency that intends to pay I ess than the required annount in order to pay existing obi i gati ons must adopt a resol uti on prior to December 31, 2009, I i sti ng the exi sti ng i ndebtedness and the payments required to be made during the applicable fi seal year.

An agency failing to timely malke its SE RAF payment, even if the delay is required in order to pay existing obligations, is subject to what has been referred to as the "death penalty." An agency subject to the death penalty may not ado[X a new redevelopment plan, annend an existing pan to add territory, issue bonds, further encumber funds or expend any moneys derived from any source exce[X to pay pre-existing i ndelXedness, contractual obi i gati ons and 75°/o of the annount expended on agency admi ni strati on for the preceding fi seal year. This penalty would I ast unti I the required payments have been made.

On October 20, 2009, the CRA filed a lctvVsuit in Sacrannento Superior Court challenging the constitutionality of ABX4-26. In addition to the CRA, two redevelopment agencies were nanned as plaintiffs in the lawsuit. These are the Union City Redevelopment Agency in Alanneda County

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and the Fountain Valley Redevelopment Agency in Orange County. They serve as representatives of all redevelopment agencies in the state. The Court was asked to certify all redevelopment agencies as a class of paintiffs in the lawsuit. With this suit, the CRA sought to invalidate the State's effort to require the redevelopment agencies to shift $2.05 billion in tax increment revenues to the SE RAF. On May 4, 2010, Judge Lloyd Connelly of the Sacrannento Superior Court ruled in favor of the State of California and effectively authorized the SE RAF obligations. TheJ udge refused to issue an order delaying the requirement for making the SE RAF payments. The CRA unsuccessfully sought an injunction that would allOvV redevelopment agencies to delay payment of the SERAF obligations pending their appeal of Judge Connelly's ruling. According to the Agency, it made the necessary payment announts from available revenues and submitted the required SE RAF payment to the Auditor-Contrdler O,' the May 10 deadline. By making the required payments, the Agency will be authorized to extend the expration date of the Redevelopment Plan b,' one year which will similarly extend the time limit on repaying indebtedness. Since there is a question as to whether an appeal by CRA of the Judge's ruling will be successful, for purposes of this report we have not assumed any extension of these ti me Ii mi ts.

The Gavernor has made a budget proposed that would shift existing redevelopment revenues to core I ocal services O,' el i mi nati ng al I redevelopment agencies and redevelopment prqj ect areas. The Governor's budget proposal would prohibit existing redevelopment agencies from creating new contracts or obligations effective upon enactment of urgency legislation. By July 1, 2011 existing agencies would be disestablished and successor I ocal agencies would be required to use the property tax that redevelopment agencies would ctherwi se have received to retire existing redevelopment agencies debts and contractual obi i gati ons i n accordance with exi sti ng payments schedules. As of this date the State Legislature has not acted on the Governor's budget, the Agency cannot predict whether the State Legislature will enact all or a portion of the Governor's budget proposal or any other legislation requiring additional or increased future shifts of tax increment to the State andpr to schods, whether through an arrangement similar to SE RAF or b,' other arrangements, and, if so, the effect that there may be on future Gross Revenues and Housing Tax Revenues.

VI I. Tax Sharing and Other Obligations A. TaxSharingObligations

Riverside County Riverside County, including the County Library and County Fire Department, was allocated approximately 29.61% of the 1% General Levy generated in Redevelopment Project No. I (the "County Share") in Fiscal Year 2010-11. Pursuant to the tax sharing agreement with the County, unti I such time as the annual annount of Tax Increment Revenues exceeds $500,000, the Agency will receive 100'/o of the County Share. When annual Tax Increment Revenues are between $500,000 and $1 million, the County will receive 2CP/o and the Agency will receive the remaining SCP/o of the County Share. When annual Tax Increment Revenues are between $1 million and $2 million, the County will receive 25% and the Agency will receive the remaining 75% of the County Share. When annual Tax Increment Revenues exceed $2 million, the County will receive 5CP/o and the Agency wi 11 receive the remaining 5CP/o of the County Share.

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Riverside County Flood Control District Riverside County Flood Control District (RCFCD) was allocated approximately 3.40'/o of the 1% General Levy generated in Redevelopment Project No. I (the "RCFCD Share") in Fiscal Year 2010-11. Pursuant to the tax sharing agreement, the RCFCD will receive 100'/o of the RCFCD Share follavving the completion of the Lalke Elsinore Outlet Channel. Prior to such time, the Agency will receive 100'/o of the RCFCD Share to be set aside in the "Lake Elsinore Outlet Channel Fund" to be used by the Agency to construct specific flood control facilities.

Elsinore Valley Municipal Water District Elsinore Valley Municipal Water District (EVMWD) was allocated approximately 8.13% of the 1% General Levy generated in Redevelopment Project No. I (the "EVMWD Share") in Fiscal Year 2010-11. Pursuant to the tax sharing agreement with EVMWD, the EVMWD will receive 100'/o of the EVMWD Share, to be used to construct i mpravements of benefitto the project area In addition, EVMWD will also receive any Tax Increment Revenues generated by any tax OJerride levied to service any EVMWD debt established after formation of the Redevelopment Project No. I.

B. 5tatutoryTax5haring Pursuant to Section 33607. 7 of the Law, for redevelopment prqjects adopted prior toJ anuary 1, 1994, any amendment that increases the annount of tax increment revenues to be received by a redevelopment prqj ect or extends certai n ti me I i mi ts triggers payments to taxi ng enti ti es with whom the agency does not have a pass-through agreement. The statutory payments, which are to begin the fiscal year following the year that the redevelopment project's original plan limitations would have talk en effect, are calculated using the increase in assessed value abOJe the annount of assessed value in the redevelopment prqject in the year that the former limit would have been reached.

On, February 26, 2008, the City Council adop:ed Ordinance No. 1249 eliminating the last date for Redevelopment Project No. I to issue new delX. The AB 1290 time limit on incurring debt for the Redevelopment PrqjectwasJ anuary 1, 2004. Commencing with the 2008-09 Fiscal Year and using the 2003-04 Fiscal Year valuations as an adjusted base year value, the Agency is required to pay to the affected taxing entities an annount that is 25% of al I tax increment revenue derived from the incremental increase in assessed value abOJe the adjusted base year value after deducting the 2CP/o housing set-aside obligation (the "First Tier Tax Sharing"). The City has elected to receive its share of the Tier 1 payments. According to the Law, these statutory tax sharing payments wi II continue through the fi seal year within which the Plan activities terminate (2022-23). As a result, forthe final ten years thatthe Agency is perrritted to repay i ndelXedness with tax revenue, there would be no statutory tax sharing payment requirement. While HdLCC is confident that this reading of the Law is consistent with the language and intent of the statute, counties sometimes interpret the I anguage in the L ctN in ways that are unpredictable. It is possible that the County's interpretation of the statute would indicate that the statutory tax sharing payments should continue through termination of the Agency's ability to repay indebtedness. For this reason, we have prqj ected the payments as continuing through the final

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fiscal year that the Agency may repay delX with tax increment. We have submitted a request to the Auditor-Controller asking them to pravide us with their interpretation of this section of the Law.

In addition, beginning in Fiscal Year 2018-19, using the values for Fiscal Year 2017-18 as an adjusted base year value, the Agency must pay to affected taxing entities, after deducting the 2CP/o housing set-aside obligation, an annount that is 21% of the revenue derived from the increase in assessed value above the new adjusted base year value (the "Second Tier Tax Sharing"). The City may not elect to receive a share of the Second Tier Tax Sharing. As with the Tier 1 payments, according to the Law, these statutory tax sharing payments wi 11 continue through the fiscal year within which the Plan activities terminate (2022-23). As a result, the final ten years that the Agency is perrritted to repay i ndelXedness with tax revenue, there would be no statutory tax sharing payment requirement. The sanne reasons noted abave relative to the Ti er 1 payments we have assumed that the Tier 2 payments would continue for the entire period within which the Agency may repay indebtedness.

A third tier of tax sharing payments will not be appicable because the Redevelopment Plan terminates prior to the date that this third ti er of payments is incurred.

C. Court Decisions The State Court of Appeals upheld a Superior Court decision which held the Santa Ana School District had the right to receive payments from the Orange County Redevelopment Commission pursuant to a resolution adopted O\f the School District in 1999 under former Section 33676(a) of the LctvV (Santa Ana Unified School District v. Orange County Redevelopment Commission; App. 4 Dist. 2001 108 Cal. Rptr.2d 770, 90 Cal. App 4th 404, revievv denied). Former Section 33676(a)(2) pravided that, unless a negotiated tax sharing agreement had been entered into, upon passage of a resolution prior to ador::ti on of a redevelopment fl an, affected taxing agencies and every school and community cdlege district could elect to be allocated increases in the assessed value of taxable property in the project area based on inflation grcwth (the 2% Property Tax Increase). Former Section 33676(a)(2) was repealed as part of major revisions made to the Law pursuant to the Reform Act of 1993 (AB 1290). The changes to the Law contained in AB 1290 were effective as of January 1, 1994.

The Court of Appeals affirmed the I cwer court ruling that due to an amendment to former Section 33676(a) that was adop:ed in 1984 and became effective on January 1, 1985, school and community college districts were to automatically receive the 2% Property Tax Increase even without adop:ing the appropriate resolution prior to the adoption of a redevelopment plan. Because the Redevelopment Plan for the Redevelopment Prqject No. I were adopted before Section 33676(a) was amended into the Law on January 1, 1985 this decision has no impact on the Redevelopment Prqject No. I Redevelopment Plan.

D. Owner Participation Agreements NG i{:helsea Lake Elsinore Limited Partnership- The Agency entered into an agreement with NGi(:helsea Lalke Elsinore Limited Partnership pertaining to the development of a factory retail

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outlet. The factory outlet center is located in Redevelopment Project Area No. 1. Pursuantto the agreement, the Agency is required to pay the annual special assessment levied b,' Assessment District 86-1. The bonds issued b,' Assessment District 86-1 mature in the year 2015 and the annual special assessment is approximately $107,000. Tax Increment is not specifically pledged tcwards payment of the annual special assessment. As of June 30, 2009, the Agency cwes $633, 101.

VI 11. Nevv Development A revievv of recent transfers of cwnership has been conducted and a number of transfers were found to have occurred after the January 1, 2010 lien date for the current fiscal year. These transfers of cwnershi p occurred fromJ anuary 1, 201 O through July 1, 2010. As a result, the sales values on these transfers of cwnershi p are expected to be reflected in the tax rol Is for 2011-12.

Within the Redevelopment Project No. I, 121 transfers of cwnership were found. Of the 121 transfers, 52 are sales of foreclosed properties. These transfers of cwnershi p are expected to result in an increase of value in the annount of $1,206,468 to the 2011-12 tax roll for the Redevelopment Prqject No. I. Based on data pravided b,' DataQuick, there are 28 parcels in foreclosure with outstanding mortgages that may result in an increase of $445,491. The impacts of these transfers are included in the Projections of Incremental Taxable Value and Tax Increment Revenue Tables 1 and 2 and shcwn in detail on Table 4- Redevelopment Prqject No. I (Nevv Development).

IX. Trended Taxable Value G ravvth In accordance with Article XIII A of the State Constitution, gravvth in real property land and i mprcwernent values may reflect the year-to-year i nfl ati onary rate not to exceed two percent for any given year or reduction as shewn in the consumer price index. Exce[X for 2010-11, a two percent gravvth rate has been assumed because it is the maximum inflationary gravvth rate permitted b,' I aw and this rate of gravvth has been realized in al I but six years si nee 1981. The years i n whi ch I ess than two percent grcwth was real i zed were 1 983--84 ( 1. CP/o ) , 1995--96 (1.19'/o ), 1996--97 (1.11% ), 1999-0) (1.85%), 2004-05 (1.867"/o) and 2009-1 O (0.99763% ). As discussed in Section IV A abcwe, the inflationary gravvth rate for 2011-12 will be less than two percent. For purposes of this projection, the grcwth rate for 2011-12 wi 11 be 0. 753% gravvth rate and assumed resumption of inflationary gravvth at 2% per year thereafter. Should the gravvth of taxable value in the Redevelopment Project No. I be less than two percent in other fiscal years, the resultant Tax Revenues would be reduced. Future values wil I al so be impacted b,' changes of ewnership and nevv construction nct reflected in our prqjections. In addition, the values of property previously reduced in value due to assessment appeals based on reduced market values could increase more than two percent when real estate values increase more than two percent (see Section IV A abcwe). Seismic activity and environmental conditions such as hazardous substances that are not anticipated in this Report might al so impact taxable assessed values and Tax Revenue. Hdl Coren & Cone malkes no representation that taxable assessed values will actually grew at the rate prqjected.

Redevelopment Agency of the City of Lake Elsinore Fiscal Consultant's Report January 25, 2011, Page 22

As a result of the recent nationwide increase in defaults on residential mortgages there has been concern expressed in the financial market aver the possible impact that these defaults may have on redevelopment agency revenues in general. Reliable information on foreclosure activity is difficult to find and what information that is avai I able is not readily app i cable to discrete areas within cities and redevelopment project areas. Much of the information availalle is segregated b,' county or ZIP code. The information within the fdlcwing table is based on information available from the Realty Trac website.

TableH Foreclosure Data for the City of Lake Elsinore within ZIP Codes 92530through 92532

Notices of Notices of As of: Default Trustee's Sale J anuary 19, 2011 350 572

Real Estate Owned

by Lender 506

Total City Parcels 26,461

Total City R esi denti al

Parcels 13,213

According to RealtyTrac, properties receiving a Notice of Default from a trustee are in the first phase of the foreclosure process. A Nctice of Default is sent after the occurrence of a default under the terms of the deed of trust or mortgage. A Notice of Trustee's Sale is filed announcing a public auction of property that is in default under the terms of the deed of trust or mortgage. This is the second phase of the fared osure process. Real Estate Owned b,' Lender reflects the final stage in the foreclosure process. These are properties that have been conveyed into the cwnershi p of the lender. Generally the foreclosure process may be halted b,' the property cwner or borrcwer paying the amount that is in default under the deed of trust and bringing the I oan current.

The number of parcels on which Notices of Default or Notices of Trustee's Sale have been filed or are Lender cwned tctal 10.8'/o of all residential parcels within the City. The City is located within ZIP Codes 92530, 92531 and 92532 which al so include unincorporated areas of Riverside County. We are unalle to determine hcw many of the parcels represented in Talle H may be located within the Project Area or that are located within the city Ii mits.

Anticipated revenues could be adjusted as a result of unidentified assessment appeal refunds, cther Assessor corrections discussed previously, or unanticipated increases or decreases in property tax values. Estimated valuations from devel oprnents included in this analysis are based upon our understanding of the general practices of the Riverside County Assessor and Auditor­Controller's Office. General assessment practices are subject to policy changes, legislative changes, and the judgment of individual appraisers. While we believe our estimates to be reasonable, taxable values resulting from actual appraisals may vary from the amounts assumed in the prqjections.

Lake Elsinore 2010- Project lfCR 2

Redevelopment Agency of the City of Lake Elsinore Rancho Laguna Redevelopment Project Area No. I PROJECTION OF INCREMENTAL VALUE AND TAX INCREMENT REVENUE (OOO's Omitted) 25--::1 an---l l

TABLE l

Taxable Values (1) 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 Real Property (2) 655,971 659,705 672,899 686,357 700,084 714,086 728,368 742,935 757,794 772,950 Personal Property(3) 23,858 23,858 23,858 23,858 23,858 23,858 23,858 23,858 23,858 23,858

Total Projected Value 679,829 683,563 696,757 710,215 723,943 737,944 752,226 766,793 781,652 796,808

Taxable Value over Base 32,369 647,460 651,195 664,389 677,847 691,574 705,575 719,857 734,425 749,283 764,439

Gross Tax Increment Revenue (4) 6,499 6,536 6,668 6,804 6,941 7,082 7,225 7,371 7,521 7,673 Unitary Tax Revenue ill ill ill ill ill ill ill ill ill ill Gross Revenues 6,613 6,650 6,782 6,917 7,055 7,196 7,339 7,485 7,634 7,787 Revenue in Excess of Project I Limits (5) Q Q Q Q Q Q Q Q Q Q Adjusted Gross Revenue 6,613 6,650 6,782 6,917 7,055 7,196 7,339 7,485 7,634 7,787

LESS SB 2557 Admin. Fee (6) (70) (80) (81) (8.)) (8S) (86) (88) (00) (0)) (94) Housing Set Aside Requirement(?) ( l,323) (l,HO) ( 1,3')()) ( 1,383) ( 1,111) ( 1,,139) ( l,IG8) ( ],,19/) ( l,S2/) ( l ,SS/)

PASS THROUGHS County of Riverside Pass Through (8) (07S) (981) (1,000) (l ,070) (l,04"1) (l,061) (l.08'}) (I, 104) (I, 176) Cl,149) Riverside County Flood Control District (9) (22,1) (22'.)) (ZJO) (23'1) (239) (),1,1) (2,19J (2'.>1J (2S9J (26/1)

Elsinore Valley Municipal Water (10) ( 'x)G) ('.)39) (SSO) ( ')() l) ('.)/2) ('.)83) ('.)9'.)) (GO/) (619) ((:;') l)

SB 211 StatutotyTaxSharing All Other Taxing EntitiesTierl (11) (2GO) (26,1) (280) (296) (312) (329) (3,1GJ (3G3J (380) (398) All Other Taxing Entities Tier 2 ( 11) Q Q Q Q Q Q Q Q Ll)2 (30)

Tax Revenues 3,216 3,231 3,285 3,340 3,396 3,453 3,511 3,571 3,617 3,664

F:\llond S ervice\TaxAllocatim Bonds\Lake Elsinore 2011 Project l\f'rojectim 4 -Project I.cm

Redevelopment Agency of the City of Lake Elsinore Rancho Laguna Redevelopment Project Area No. I Footnotes for TABLE l -Redevelopment Project No. l

(l) Taxable values as reported by Riverside County. (2) Real property consists of land and improvements. Values are increased for transfer sales (see Table 4) and increase by0.753% for inflation in 2011-12.

Thereafter, values are assumed to increase based on 2% annual gro\/\!th. Assessed valuations for 2010-11 vvere reduced by $2, 787, 726 for four successful appeals not reflected on the 2010-11 roll. Projected value loss from pending appeals is $2,835,989 in 2011-12.

(3) Personal property is held constant at 2010-11 level. (4) Projected Gross Tax Increment is based up::>n incremental taxable values factored against an assumed Project tax rate and adjusted

for indebtedness approved by voters after 1988. The assumed future tax rate remains constant at $1.003 7 per $100 of taxable value. (5) The Redevelopment Plan limits the Agency's net tax increment to $3 million annually. (6) County Administration fee is estimated at 1.201% of Gross Revenue. (7) Housing Set Aside calculated at 2Cf'/o of Adjusted Gross Revenue. (8) CountyofRiverside, including the Library and the Structural Fire Protection, receives 2Cf'/o of its share (29.61%) ofthe

general levy tax increment revenue, when general levy tax increment revenue is betvveen $500,000 and $1 million; 25% when general levy tax increment revenue is more than $1 million but less than $2 million; and, 500/o when general levy tax increment revenue exceeds $2 million.

(9) Riverside County Flood Control and Water Conservation District receives its share (3.4Cf'/o) of the general levy tax increment revenue. (l 0) Elsinore Valley Municipal Water District receives its share (8.13%) of the general levy tax increment revenue. (11) By the adoption ofan amendment to the Redevelopment Plan under the terms ofS B 211, the Agency has eliminated the Plan's time limit

for incurrence of new debt. By the elimination of this limit, the Agency is required to make statutory tax sharing payments as outlined in the Health and Safety Code beginning in the fiscal year following the date of the eliminated time limit U an. l, 2004). Using the assessed values for 2003--04 as a base year and beginning in 2008-09, Taxing Entities that do not have existing tax sharing agreements receive their shares of 25% of tax increment revenue net of housing set aside. In addition, beginning in the 11th year after the initiation of statutory tax sharing payments, Taxing Entities receive 21 % of tax revenue on incremental value ab:Jve l 0th year value net of housing set aside. A third tier of tax sharing is not initiated before the plan's effectiveness expires. Statutory payments continue only through the fiscal year containing the termination date of plan effectiveness (2022--23).

F:'$ond Service\TaxAllocation Bonds\j_ake Elsinore 2011 Project l\frojection 4-Project I.cm

Redevelopment Agency of the City of Lake E Is in ore

Rancho Laguna Redevelopment Project Area No. I PROJECTION OF INCREMENTAL VALUE AND TAX INCREMENT REVENUE 25--:J an-11

(OOOs Omitted)

TAB LE 2

Taxable Value Adjusted Total Over Base Gross SB 2557 Haus ing Pass-Throughs Statutory Tax Sharing Tax

Taxable Value 32,369 Revenue Charge Set-Aside Agreements Tier l Tier 2 Revenues l 2010-l l 679,829 647,460 6,613 ( 1 ( l 0 3,216 2 201 l-l 2 683,563 651, 195 6,650 ( 1 ( l 0 3,231 3 2012-13 696,757 664,389 6,782 ( 1 ( l 0 3,285 4 2013-14 710,215 677,847 6,917 ( 1 ( 1 0 3,340 5 2014-15 723,943 691,574 7,055 ( 1 ( 1 (312) 0 3,396 6 2015-16 737,944 705,575 7,196 ( 1 ( 1 0 3,453 7 2016-17 752,226 719,857 7,339 ( 1 ( l 0 3,5 l l 8 2017-18 766,793 734,425 7,485 ( 1 ( l 0 3,571 9 2018-19 781,652 749,283 7,634 ( 1 ( l 5) 3,617

10 2019-20 796,808 764,439 7,787 ( 1 (30) 3,664 l l 2020-2 l 812,267 779,898 6,374 ( 1 (30) 2,915 12 2021-22 828,035 795,666 4,731 (30) 2,054 13 2022-23 844,119 811,750 4,731 (30) 2,054 14 2023-24 860,524 828, 155 4,731 (30) 2,054 15 2024-25 877,257 844,888 4,731 (30) 2,054 16 2025-26 894,325 861,956 4,731 2,054 17 2026-27 911,734 879,366 4,731 2,054 18 2027-28 929,492 897, 123 4,731 2,054 19 2028-29 947,605 915,236 4,731 (30) 2,054 20 2029-30 966,080 933,71 l 4,731 (30) 2,054 21 2030-3 l 984,924 952,555 4,731 (30) 2,054 22 2031-32 l,004, 145 971,776 4,731 (30) 2,054 23 2032-33 0 0 0 0 0 0 0 0 0 24 2033-34 0 0 0 0 0 0 0 0 0

129,876 ( l (34, 140) 59,789

F: lj3ond Service \Tax Allocation Bonds IJ__ake Elsinore 2011 Project llp rojection 4 -Project I.cm

Redevelopment Agency of the City of Lake Elsinore

Rancho Laguna Redevelopment Project Area No. I HISTORICAL VALUES (l) 25--::1 an-11

TAB LE 3

Base Year Secured (2) l 980----81 2001--02 2002--03 2003--04 2004--05 2005---ili 2CXXJ--07 2007--08 2008--09 2009--10 2010--11

Land 12,134,580 125,576,769 131,914,922 139,331,528 150,861,801 174,498,749 188,493,818 222, 928,952 238,693, 727 219,766,316 220,252,829 lmpuvements 17,524,216 238,330,239 253,844,011 284,803,455 311,742,043 351,439,082 374,628,416 464,606,321 474,467, 177 455,471,276 439,537,727 Personal P roi:,erty 512,812 852,550 724,013 303, 120 609,630 638, 120 626,576 646,418 793,822 2,165,187 2,053,300 Exemptions \"i07, 7:JG) (7/Xi?, 0JGO) (1G,'i7.,L1G')) i ?, 0))2 801) il 7 ''i I/ '")781 i I 7 907, ')891 {l/,CJ(X),")09) {] ll788 &X)J {]9, 0)87,]i(CJ) (]CJ 79'[ /],)) (3,0::)9,209)

Total Secured 29663 872 362 697 198 369 9)8 781 422115 302 445 701 0% 508 668 362 545 848 301 669392 891 694 567 577 657 608 566 658 834 647

Unsecured Land 0 12,479 8,002 7,351 7,243 7,170 7,112 6,%6 220,503 6,397 12,164 lmpuvements 1,526,928 26,284,017 18,035,541 17,352,327 25,~,381 25,265,9)9 25, 182,893 30,297,271 25,687,714 19,577,504 18,718,075 Personal P roi:,erty 1,178,028 17,291,251 16,975,240 21,141,818 23,851,268 21,981,489 20,772,925 30,9)6,589 27,858,083 24,080,302 21,804,955 Exemptions Q Q Q Q Q Q Q Q Q Q Q

Total Unsecured 2,704,956 43 587 747 35 018 783 38 501 4% 49 764 892 47 254 568 45 %2 930 61210826 53 766 300 43 664 203 40 535 194

GRAND TOTAL 32 368 828 4()) 284 945 404 927 564 460616 798 495 465 988 555 922 930 591 811 231 730603 717 748 333 877 701 272 769 699, 369, 841

Exemp:ion Adjustment (3) ( 16. /':::,2,84/)

Successful A~als (4) {/.787.7/GJ

Adjusted Total 679 829 268

Incremental Value 373,916,117 372,558,736 428,247,970 463,097,160 523,554,102 559,442,403 698,234,889 715,%5,049 668,903,941 647,460,440 Annual Change --0.36% 14.95% 8.14% 13.05% 6.85% 24.81% 2.54% --6.57% -3.21%

(1) Source: County of Riverside Lien Date Rolls. (2) Secured values include state assessed non-unitary utility p-oi:,erty. (3) Assess valuations were reduced bi' $16, 752,847 for two exemp:ions not reflected on the 201 0--11 roll. (4) Assess valuations were reduced bi' $2,787,726 for four successful api:,eals not reflected on the 2010--11 roll.

F :'6 ond S ervice';raxAlbcatim Bonds \Lake Elsinore 2011 Project 11' rojection 4- Project I.cm

Redevelopment Agency of the City of Lake Elsinore Rancho Laguna Redevelopment Project Area No. I New Development 25--::lan-11

TABLE 4

OOO's omitted

S qFt/ Total Less Total Value REAL Units Value Value Existing Added Start Complete 2010--11 2011-12 2012-13 2013-14 2014-15 2015-16

Trans fer Sales U an. 1 -Dec. 1, 2010) 69 $0 11,235,226 8,875,418 2,360 0 2,360 0 0 0 0 Foreclosure Sales Uan. 1 -Dec 1, 2010) 52 $0 10,874,500 12,027,840 (1.1:dl 0 ( I, l'lJl 0 0 0 0 Foreclosure U an. 1 -Dec 1, 2010) 28 $0 6 355 404 5909913 445 Q 445 Q Q Q Q

Total Real Property 28,465, 130 26,813, 171 1,652 0 1,652 0 0 0 0

PERSONAL Start Complete

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Q Q Q Q Q Q Q Q Q

Total Personal Property 0 0 0 0 0 0 0 0 0

Total Real and Personal Property 0 1,652 0 0 0 0

F :'{londS ervice\JaxAllocation Bonet take Elsinore 2011 Project l'f'rojection 4 -Project I.cm

Redevelopment Agency of the City of Lake Elsinore Rancho Laguna Redevelopment Project Area No. I TOP TEN TAXABLE PROPERTY OWNERS (1)

TAB LE 5

Castle and Cooke Lake Elsinore Outlet (Pending Appeal)

Harbor Grand Apartments Investment (Pending Appeal)

3 TargetCorporation

4 Lake Elsinore Office Park

5 HD Devebpment Of Maryland Inc.

6 RSM Properties

Toyota Motor Sales USA Inc. (Pending Appeal)

8 Louis F. Depasquale Trust (Pending Appeal)

9 MiramarWestAuto Center (Pending Appeal)

10 MKJ Adnoff Investment (Pending Appeal)

Total

Pro~ Area T otalS: Pro~Area lnc~meritalValle Totals-

Secured

Value

$ 40.485.169

24.847.661

15.305.163

13.053.165

10.013.138

12.643.841

8.649,452

8.028.531

6.875.664

6.484.944

$ 146.386.728

$ 639,294,074

$ 600 630 202

Parcels

3

2

I

2

I

3

I

6

3

I

23

(l) JJl0-11 top property crwners current as ofDecember 1. 2010.

F \fl ond S erv1ce\TaxAllocat1on B onds\Lake Elsinore JJl l ProJeCT I\ProJectlon 4 ProJeCT I.cm

Unsecured % of

Sec.AV Value

6.33% $ 739.686

3.89% -

2.39% -

2.04% -

1.57% 2,724.666

1.98% -

1.35% -

1.26% -

1.08% -

1.01% -

22.9(f)6 $ 3.464.352

$ 40,535,194

24.01% $ 37,830.238

Parcels

I

-

-

-

I

-

-

-

-

---

2

% of Unsee.AV

1.82% $

0.00%

0.00%

0.00%

6.72%

0.00%

0.00%

0.00%

0.00%

0.00%

8.55% $

9.16%

Value

41,224,855

24,847,661

15,305,163

13,053,165

12,737,804

12,643,841

8,649,452

8,028,531

6,875,664

6,484,944

149,851,080

679,829,268

647,460,440

Total % Total Value

··-3-65:%

2.25:%

1.92%

1.87%

1.-

127%

1.18%:

LOI%

0,95%

22J)4%

%lm:r, Value

6.37%

3.84%

2.36%

2.02%

1.97%

l.95%

1.34%

1.24%

I.Cffi

1.00%

23.14%

25~ an-11

Lommerc1a1 Lake E Is inore Outlet Center -major anchor tenants inck.Jdes Nike Factory Store, Pottery Barn, Otl Navy, Gap Outlet, Guess Factory Store, and vf Outlet.

Resdential Harbor Grand Apartment Homes -192 unts apartment

Commercial Oak Grove Crossing - Target, Bank of America, Oak Grove Dental Group, Fantastic Sams, Papa Johns, Subway, and Starbucks

Commercial Riverside County Social Services Offices Vacant Land-Commercia I

Commercial Lake E Is inore Square - Home Depot, 99 cent Store, Petco, IHop, Big 5, and small retail stores

Commercial Neighborhood Retail Center -inck.Jdes W algreens, EI Polb Loco and small retail stores

Vacant Land

Commercial Camelot Center-Trevi Lanes Entertailment Center, Diamond 8 Cilema, and small retail stores

Commercial Neighborhood Retail Center -inck.Jdes Stater Bros, Del Taco, KC Wholesale Fboring and small retail stores

Commercial Pasadena Commerce Center -B usiless Park

APPENDIX D

AGENCY AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR ENDINGJ UNE 30, 2010

D-1

(THIS PAGE LEFT BLANK INTENTIONALLY)

LAKE ELSINORE REDEVELOPMENT AGENCY

COMPONENT UNIT FINANCIAL STATEMENTS

WITH REPORT ON AUDIT BY INDEPENDENT

CERTIFIED PUBLIC ACCOUNTANTS

JUNE 30, 2010

LAKE ELSINORE REDEVELOPMENT AGENCY

TABLE OF CONTENTS

Independent Auditors' Report

Basie Financial Statements:

Statement of Net Assets Statement of Activities Balance Sheet - Governmental Funds

June 30, 2010

Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets

Statement of Revenues, Expenditures and Changes in Fund Balances - Governmental Funds

Reconciliation of the Governmental Funds Statement of Revenues, Expenditures and Changes in Fund Balances to the Statement of Activities

Statement of Fiduciary Assets and Liabilities - Agency Fund Notes to Basic Financial Statements

Required Supplementary Information:

Budgetary Comparison Schedule: Rancho Laguna Special Revenue Fund

Note to Required Supplementary Information

Supplementary Information:

Combining Balance Sheet - Other Capital Projects Funds Combining Schedule of Revenues, Expenditures and

Changes in Fund Balances - Other Capital Projects Funds

Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards

Page Number

1-2

3

4 5

6-7

9

10 - 11

12 13

15 -48

49

50 51

53

54

55

57 - 58

~ DIEHL, EVANS&: COMPANY, LLP ~ CERTIFIED PUBLIC ACCOUNTANTS & CONSULTANTS

A PARTNERSHIP INCLUDING ACCOUNTA.~CY CORPORATIONS

5 CORPORATE PARK, SUITE 100 IRVINE, CALIFORNIA 92606-5165 (949) 399-0600 • FAX (949) 399-0610 www.diehlevans.com

December 27, 2010

INDEPENDENT AUDITORS' REPORT

The Board of Directors Lake Elsinore Redevelopment Agency Lake Elsinore, California

MICHAELR. LUDIN, CPA CRAIGW. SPRAKER, CPA NITINP. PATEL, CPA ROBERT J. CALLANAN, CPA

*PHILIPH. HOLTKAMP, CPA •rnoMAS M. PERLOWSKI, CPA +HARVEY I. SCHROEDER, CPA KENNETH R. AMES, CPA WILLIAM C. PENTZ, CPA

~ A PROFESSIONAL CORPORATION

We have audited the accompanying financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of the Lake Elsinore Redevelopment Agency ( a component unit of the City of Lake Elsinore), as of and for the year ended June 30, 2010, which collectively comprise the Agency's basic financial statements, as listed in the table of contents. These basic financial statements are the responsibility of the Agency's management. Our responsibility is to express opinions on these basic financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the basic financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Agency's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall basic financial statement presentation. We believe that our audit provides a reasonable basis for our opinions.

In our opinion, the basic financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, each major fund, and the aggregate remaining fund information of the Lake Elsinore Redevelopment Agency as of June 30, 2010, and the respective changes in financial position thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America.

OTilER OFFICES AT:

- 1 -

2965 ROOSEVELT STREET CARLSBAO, CALIFORNIA 92008-2389 (760) 729-2343 • FAX (760) 729-2234

613 W. V.ALLEYPARKWAY, SUITE 330 ESCONDIDO, CALIFORNIA 92025-2598 (760) 741-3141 • FAX (760) 741-9890

In accordance with Government Auditing Standards, we have also issued our report dated December 27, 2010 on our consideration of the Lake Elsinore Redevelopment Agency's internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit.

Management has not presented the management's discussion and analysis that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information.

The budgetary comparison schedule, identified as required supplementary information in the table of contents, is not a required part of the basic financial statements but is supplementary information required by the accounting principles generally accepted in the United States of America. This information is an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic or historical context. The budgetary comparison schedule and related note have been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

Our audit was made for the purpose of forming opinions on the financial statements that collectively comprise the Lake Elsinore Redevelopment Agency's basic financial statements. The combing schedules, identified as supplementary information in the table of contents, are presented for purposes of additional analysis and are not a required part of the basic financial statements of the Agency. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

- 2 -

BASIC FINANCIAL STATEMENTS

- 3 -

LAKE ELSINORE REDEVELOPMENT AGENCY

STATEMENT OF NET ASSETS

June 30, 2010

Governmental Activities

ASSETS: Cash and investments (Note 2) $ 35,818,630

Interest receivable 49,230 Accounts receivable 4,700 Due from other governments 96,561 Due from agency fund 77,171 Prepaid expense 106,108

Land held fur resale 8,803,167

Deferred charges 1,559,266

Restricted assets: Cash and investments with fiscal agents (Note 2) 4,787,592

Capital assets, not depreciated (Note 3) 2,426,392 Capital assets, depreciated, net (Note 3) 9,465,028

TOTAL ASSETS 63,193,845

LIABILITIES: Accounts payable 4,051,618 Due to other governments 6,376,160 Due to the City of Lake Elsinore 1,185,716

Due to Lake Elsinore Public Financing Authority 154,120 lnterest payable 1,090,156 Noncurrent liabilities (Note 5):

Due within one year 2,535,790 Due in more than one year 62,215,370

TOTAL LIABILITIES 77,608,930

NET ASSETS (DEFICIT}: Invested in capital assets 11,891,420 Restricted fur low and moderate income housing 54,064,519 Unrestricted (deficit) (80,371,024)

TOTAL NET DEFICIT $ (14,415,085)

See independent auditors' report and notes to basic fmancial statements .

. 4.

Functions/11rograms Governmental activities:

General government Pass-through payments SERAF payments Project improvements Interest on long-term debt

Total governmental activities

LAKE ELSINORE REDEVELOPMENT AGENCY

STATEMENT OF ACTMTIES

For the year ended June 30, 2010

Program Revenues Charges Operating

for Grants and Exeenses Services Contributions

$ l,513,947 $ $ 7,782,513 6,976,853 1,901,906 3,932,852

$ 22,108,071 $ $

General revenues: Tax increment Investment income Other income

Total general revenues

Change in net assets

NET DEFICIT· BEGINNING OF YEAR, AS RESTATED (NOTE 16)

NET DEFICIT· END OF YEAR

See independent auditors' report and notes to basic financial statements .

. 5.

Capital Grants and

Contributions

$

714,757

$ 714,757

Net (Expense) Revenue and Changes in Net Assets

Governmental

$

Activities

(l,513,947) (7,782,513) (6,976,853) (1,187,149) (3,932,852)

(21,393,314)

19,877,054 981,048

38,673

20,896,775

(496,539)

(13,918,546)

$ (14,415,085)

LAKE ELSINORE REDEVELOPMENT AGENCY

BALANCE SHEET

GOVERNMENTAL FUNDS

June 30, 20 IO

Special

Revenue Fund Debt Service Funds

Rancho Rancho Rancho Rancho

Laguna Laguna! Laguna II Laguna III

ASSETS

Cash and investments (Note 2) $ 12,393,459 $ 6,394,748 $ 14,089,016 $ 2,619,823

Cash and investments with fiscal agents (Note 2) 1,461,936 1,560,360 1,565,723 199,573

Interest receivable 27,918 7,311 11,301 2,700

Accounts receivable Due from other governments 64,763 3,237 15,604 12,957

Due from agency fund

Due from other funds (Note 8) 4,809,388 12,229,211

Prepaid expense 213 1,037 104,858

Advances to other funds (Note 8) 37,401,756

Land held for resale (Note 4) 2,714,687

TOTAL ASSETS $ 54,064,519 $ 12,775,257 $ 27,911,892 $ 2,939,911

LIABILITIES AND FUND BALANCES

LIABILITIES: Accounts payable $ 382,303 $ 1,478,696 $ 1,378,681 $ 663,433

Deferred revenue 19,361,317

Due to other governments 3,923,453 2,408,485 44,222

Due to the City of Lake Elsinore 440,617 431,637 266,511

Due to Lake Elsinore Public Financing Authority 46,236 58,566 49,318

Due to other funds (Note 8) 12,229,211

Advances from other funds (Note 8) 15,605,801 17,422,431 4,373,524

TOTAL LIABILITIES 19,743,620 21,494,803 21,699,800 17,626,219

FUND BALANCES (DEFICITS):

Reserved for (Note 7):

Advances to other funds 18,040,439

Prepaid expense 213 1,037 104,858

Land held for resale 2,714,687

Low and moderate income housing 12,103,837

Debt service 1,461,936 1,560,360 6,211,055 199,573

Unreserved, undesignated (10,280,119) (14,990,739)

TOTAL FUND

BALANCES (DEFICITS) 34,320,899 (8,719,546) 6,212,092 (14,686,308)

TOTAL LIABILITIES AND FUND BALANCES $ 54,064,519 $ 12,775,257 $ 27,911,892 $ 2,939,911

See independent auditors' report and notes to basic financial statements.

- 6 -

Other Total Governmental Governmental

Funds Funds

$ 321,584 $ 35,818,630 4,787,592

49,230 4,700 4,700

96,561 77,171 77,171

17,038,599 106,108

37,401,756 6,088,480 8,803,167

$ 6,491,935 $ 104,183,514

$ 148,505 $ 4,051,618 19,361,317 6,376,160

46,951 1,185,716

154,120 4,809,388 17,038,599

37,401,756 5,004,844 85,569,286

18,040,439 106,108

6,088,480 8,803,167 12,103,837 9,432,924

(4,601,389) (29,872,247)

1,487,091 18,614,228

$ 6,491,935 $ 104,183,514

-7-

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- 8 -

LAKE ELSINORE REDEVELOPMENT AGENCY

RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS

June 30, 2010

Fund balances for governmental funds

Amounts reported for governmental activities in the Statement of Net Assets are different because:

Capital assets used in govermnental activities are not financial resources and therefore are not reported in the funds.

Interest on interfund loans and other receivables reported in the special revenue funds are not available soon enough to pay for current-period expenditures, and therefore they are reported as deferred revenue in the funds. Balance at June 30, 2010 totaled:

Long-term liabilities and related items are not due and payable in the current period and are not reported as fund liabilities. All liabilities, both current and long-term, are reported in the Statement of Net Assets. Balances as ofJune 30, 2010 are:

Noncurrent liabilities Less: Deferred amount on refunding, net of accumulated amortization Less: Bond discount, net of accumulated amortization

Accrued liabilities in the Statement of Net Assets differ from the amounts reported in governmental funds due to accrued interest on the tax

allocation bonds payable.

Deferred charges in the Statement of Net Assets differ from the amounts reported in governmental funds due to issuance costs net of related amortization on the tax allocation bonds.

Net deficit of governmental activities

See independent auditors' report and notes to basic fmancial statements.

-9-

$ 18,614,228

11,891,420

19,361,317

(65,736,530) 821,250 164,120

(1,090,156)

1,559,266

$(14,415,085)

LAKE ELSINORE REDEVELOPMENT AGENCY

STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES

GOVERNMENTAL FUNDS

For the year ended June 30, 2010

Special

Revenue Fund Debt Service Funds

Rancho Rancho Rancho Rancho Laguna Laguna I Laguna II Laguna III

REVENUES: Tax increment $ 225,411 $ 6,745,040 $ 10,029,912 $ 2,876,691

Investment income 133,564 34,577 72,374 13,925

Grant income 714,757

Other income 2,970 626 1,127 406

TOT AL REVENUES 1,076,702 6,780,243 10,103,413 2,891,022

EXPENDITURES: Current:

Professiona] services 203,698 411,578 320,164 229,047

Pass-through payments 2,058,488 4,242,664 1,481,361

Set aside suspension 1,286,250 1,912,500 551,250

SERAF payments 2,393,061 3,558,195 1,025,597

Project costs 826,917 217,531 56,288

Debt service: Payment to refunding bond escrow agent 1,295,449 198,868 358,354 135,074

Bond issue costs 878,354 202,981 365,763 137,867

Principal retirement 440,450 578,482 733,981 117,114

Interest and fiscal charges 731,062 1,329,409 1,407,333 188,142

TOT AL EXPENDITURES 4,375,930 8,459,117 13,116,485 3,921,740

EXCESS OF REVENUES OVER (UNDER) EXPENDITURES (3,299,228) (1,678,874) (3,013,072) (1,030,718)

OTHER FINANCING SOURCES (USES):

Discount on bonds (119,642) (13,542) (24,403) (9,198)

Refunding bonds issued 15,655,000 3,055,000 5,505,000 2,075,000

Payment to refunding bond escrow agent (13,228,136) (2,543,539) ( 4,583,365) (1,727,608)

Transfers in (Note 8) Transfers out (Note 8) (700,000) (800,000) (500,000)

TOT AL OTHER FINANCING SOURCES (USES) 2,307,222 (202,081) 97,232 (161,806)

NET CHANGE IN FUND BALANCES (992,006) (1,880,955) (2,915,840) (1,192,524)

FUND BALANCES (DEFICITS)·

BEGINNING OF YEAR AS RESTATED 35,312,905 (6,838,591) 9,127,932 (13,493,784)

FUND BALANCES (DEFICITS)· END OF YEAR $ 34,320,899 $ (8,719,546) $ 6,212,092 $ (14,686,308)

See independent auditors' report and notes to basic financial statements.

• 10 •

Other

Governmental Funds

$ 254

333,544

333,798

1,318,179

1,318,179

(984,381)

2,135,998 (135,998)

2,000,000

1,015,619

471,472

$ 1,487,091

Total Governmental

Funds

$ 19,877,054 254,694

714,757

338,673

21,185,178

1,164,487

7,782,513

3,750,000

6,976,853 2,418,915

1,987,745

1,584,965

1,870,027 3,655,946

31,191,451

(10,006,273)

(166,785)

26,290,000 (22,082,648)

2,135,998 (2,135,998)

4,040,567

(5,965,706)

24,579,934

$ 18,614,228

- 11 -

LAKE ELSINORE REDEVELOPMENT AGENCY

RECONCILIATION OF THE GOVERNMENT AL FUNDS STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES

TO THE STATEMENT OF ACTIVITIES

For the year ended June 30, 2010

Net change in fund balances - total governmental funds

Amounts reported for governmental activities in the Statement of Activities are different because:

Governmental funds report capital outlay as an expenditure in the full amount as current financial resources are used. However, in the Statement of Activities the

cost of these assets is allocated over the estimated useful life as depreciation expense.

Capital outlay Depreciation

The issuance oflong term debt and related items provides current financial resources to governmental funds, while the repayment of the principal of long term-debt and related items consumes the current financial resources of governmental funds. Neither transaction, however, has any effect on net assets. These amounts are the net effect of these differences in the treatment oflong-terrn debt.

Principal payments Principal added on note payable Refunding bonds issued Principal amount of debt refunded Issuance costs

Deferred amount on refunding Discount on bonds

Some expenses reported in the Statement of Activities do not require the use of current financial resources and are not reported as governmental fund expenditures.

Interest and fiscal charges Amortization of issuance costs Amortization of deferred amount on refunding Amortization of bond discount

Some revenues reported in the Statement of Activities do not provide the use of current financial resources and are not reported as governmental fund expenditures.

Tax increment Investment income

Change in net assets of governmental activities

See independent auditors' report and notes to basic financial statements.

- 12-

$ (5,965,706)

217,009 (349,460)

1,870,027 (94,166)

(26,290,000) 23,235,000

1,584,965 835,393 166,785

(140,233) (25,699) (14,143)

(2,665)

3,750,000 726,354

$ (496,539)

LAKE ELSINORE REDEVELOPMENT AGENCY

STATEMENT OF FIDUCIARY ASSETS AND LIABILITIES AGENCY FUND

Cash and investments with fiscal agents (Note 2) Account receivable Due from City of Lake Elsinore

TOTAL ASSETS

June 30, 2010

ASSETS

LIABILITIES

Due to Lake Elsinore Redevelopment Agency Due to City of Lake Elsinore Due to bondholders

TOT AL LIABILITIES

See independent auditors' report and notes to basic financial statements

• 13 •

$ 4,487,393 97,695

695,953

$ 5,281,041

$ 77,171 8,900

5,194,970

$ 5,281,041

TIDS PAGE INTENTIONALLY LEFT BLANK

- 14 -

NOTES TO BASIC FINANCIAL STATEMENTS

- 15 -

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS

June 30, 2010

1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES:

A. Description of the Reporting Entity:

The Lake Elsinore Redevelopment Agency (the Agency) was established by City Council ordinance and adopted July 15, 1980, pursuant to the State of California Health and Safety Code, Section 33000, entitled Community Redevelopment Law. As such, the Agency acts as a legal entity, separate and distinct from the City of Lake Elsinore (the City), even though the City Council of the City has the authority to appoint the Agency's governing board.

The actions of the Agency are binding, and business, including the incurrence of long-term debt, is routinely transacted in the Agency's name by its appointed representatives. The Agency is broadly empowered to engage in the general economic revitalization and redevelopment of the City through acquisition and development of property in those areas of the City determined to be in a declining condition.

The Lake Elsinore City Council has declared itself to be the Agency's governing board pursuant to the Community Redevelopment Law. The Agency has no employees, and all Agency duties and functions are performed by employees of the City. The City is reimbursed for the cost of these and other services.

The Agency is a component unit of the City and, accordingly, the financial statements of the Agency are included in the financial statements of the City. The Agency is an integral part of the reporting entity of the City. The funds of the Agency have been blended within the financial statements of the City because the City Council of the City is the governing board of the Agency and exercises control over the operations of the Agency. Only the funds of the Agency are included herein, therefore, these financial statements do no purport to represent the financial position or results of operations of the City.

The Agency is currently administering the following redevelopment projects:

Rancho Laguna I

The Rancho Laguna Redevelopment Project No. I was established in 1980 and includes noncontiguous areas that aggregate 1,910 acres which are primarily concentrated in the northwestern portion of the community. The need for redevelopment was established as a result of severe flooding in early 1980 and an inability to provide needed public facilities in the development of vacant portions of the City and rehabilitation of areas for residential and commercial use.

See independent auditors' report. - 16 -

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

A. Description of the Reporting Entity (Continued):

The Agency's Redevelopment Projects (Continued):

Rancho Laguna II

The Rancho Laguna Redevelopment Project No. II was established in 1983 and includes noncontiguous areas that aggregate 4,859 acres. The Agency plans to develop the project area primarily for new and rehabilitated residential and commercial use.

Rancho Laguna III

The Rancho Laguna Redevelopment Project No. III was established in 1987 and includes 4 noncontiguous parcels that aggregate 3,541 acres. The project areas are being developed to alleviate blighting conditions. These include the existence of deteriorated, dilapidated, or obsolescent structures which the Agency may selectively acquire and either rehabilitate or remove substandard structures and develop for residential, commercial or industrial use.

B. Measurement Focus, Basis of Accounting and Financial Statement Presentation:

Financial Statement Presentation

The basic financial statements of the Agency are composed of the following:

• Government-wide financial statements

• Fund financial statements

• Notes to the basic financial statements

Financial reporting for the government-wide financial statements is based upon all GASB pronouncements, as well as the FASB Statements and Interpretations, APB Opinions, and Accounting Research Bulletins that were issued on or before November 30, 1989 that do not conflict with or contradict GASB pronouncement. FASB pronouncements issued after November 30, 1989 are not followed in the preparation of the accompanying financial statements.

See independent auditors' report. - 17 -

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

I. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

B. Measurement Focus, Basis of Accounting and Financial Statement Presentation (Continued):

Government-wide Financial Statements

The government-wide financial statements (i.e., the statement of net assets and the statement of activities) report information on all of the activities of the Agency. For the most part, the effect of interfund activity has been removed from these statements. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which rely to a significant extent on fees and charges for support. The Agency has no business-type activities.

The Statement of Activities demonstrates the degree to which the direct expenses of a given function are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function. Program revenues include 1) charges to customers who purchase, use, or directly benefit from goods, services, or privileges provided by a given function and 2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular function. Taxes and other items not properly included among program revenues are reported instead as general revenues.

Fund Financial Statements

The accounting system of the Agency is organized and operated on the basis of separate funds, each of which is considered to be a separate accounting entity. Each fund is accounted for by providing a separate set of self-balancing accounts that constitute its assets, liabilities, fund equity, revenues, and expenditures. Governmental resources are allocated to and accounted for in individual funds based upon the purposes for which they are to be spent and the means by which spending activities are controlled.

Fund financial statements for the Agency's governmental funds are presented after the government-wide financial statements. These statements display information about major funds individually and other governmental funds in the aggregate for governmental funds.

See independent auditors' report. - 18 -

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

B. Measurement Focus, Basis of Accounting and Financial Statement Presentation (Continued):

Fund Financial Statements (Continued)

The Agency reports the following major governmental funds:

The Rancho Laguna Special Revenue Fund is used to account for low and moderate income housing activities within the project areas.

The Rancho Laguna I Debt Service Fund is used to account for the accumulation of resources for, and the payment of, long-term debt principal, interest and related costs within this project area.

The Rancho Laguna II Debt Service Fund is used to account for the accumulation of resources for, and the payment of, long-term debt principal, interest and related costs within this project area.

The Rancho Laguna III Debt Service Fund is used to account for the accumulation of resources for, and the payment of, long-term debt principal, interest and related costs within this project area.

Additionally, the Agency reports the following fund types:

The Capital Projects Funds are used to account for financial resources to be used for the acquisition or construction of redevelopment projects and administrative expenses within the Stadium Capital Projects, Rancho Laguna II and Rancho Laguna III project areas.

The Agency Fund is used to account for money received by the Agency as an agent for individuals, other governments and other entities.

See independent auditors' report. - 19 -

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

B. Measurement Focus, Basis of Accounting and Financial Statement Presentation (Continued):

Measurement Focus

Measurement focus is a term used to describe "which" transactions are recorded within the various financial statements.

On the government-wide Statement of Net Assets and the Statement of Activities, activities are presented using the economic resources measurement focus. Under the economic resources measurement focus, all (both current and long-term) economic resources and obligations of the government are reported.

In the fund financial statements, all governmental funds are accounted for on a spending or "financial flow" measurement focus. This means that only current assets and current liabilities are generally included on their balance sheets. Their reported fund balances (net current assets) are considered a measure of "available spendable resources". Governmental fund operating statements present increases (revenues and other financing sources) and decreases ( expenditures and other financing uses) in net current assets. Accordingly, they are said to present a summary of sources and uses of available spendable resources during a period.

Noncurrent portions of long-term receivables due to governmental funds are reported on their balance sheets in spite of their measurement focus. However special reporting treatments are used to indicate that they should not be considered "available spendable resources", since they do not represent net current assets. Recognition of governmental fund type revenue represented by noncurrent receivables are deferred until they become current receivables. Noncurrent portions of other long-term receivables are offset by fund balance reserve accounts. Revenues, expenses, gains, losses, assets, and liabilities resulting from nonexchange transaction are recognized in accordance with the requirements of GASB Statement No. 33.

Because of their spending measurement focus, expenditure recognition for governmental fund types excludes amounts represented by noncurrent liabilities. Since they do not affect net current assets, such long-term amounts are not recognized as governmental fund type expenditures or fund liabilities. Amounts expended to acquire capital assets are recorded as expenditures in the year that resources were expended, rather than as fund assets. The proceeds of long-term debt are recorded as other financing sources rather than as a fund liability. Amounts paid to reduce long-term indebtedness are reported as fund expenditures.

When both restricted and unrestricted resources are combined in a fund, expenses are considered to be paid first from restricted resources, and then from unrestricted resources.

See independent auditors' report. - 20-

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

B. Measurement Focus, Basis of Accounting and Financial Statement Presentation (Continued):

Basis of Accounting

Basis of accounting refers to "when" transactions are recorded regardless of the measurement focus applied.

In the government-wide Statement of Net Assets and Statement of Activities, the governmental activities are presented using the accrual basis of accounting. Under the accrual basis of accounting, revenues are recognized when earned and expenses are recorded when the liability is incurred or economic asset used, regardless of the timing of related cash flows. Revenues, expenses, gains, losses, assets, and liabilities resulting from exchange and exchange-like transactions are recognized when the exchange takes place.

In the fund financial statements, governmental funds are presented using the modified-accrual basis of accounting. Their revenues are recognized when they become measurable and available as net current assets. Measurable means that the amounts can be estimated, or otherwise determined. Available means that the amounts were collected during the reporting period or soon enough thereafter to be available to finance the expenditures accrued for the reporting period.

Revenue recognition is subject to the measurable and availability criteria for the governmental funds in the fund financial statements. Exchange transactions are recognized as revenues in the period in which they are earned (i.e., the related goods or services are provided). Locally imposed derived tax revenues are recognized as revenues in the period in which the underlying exchange transaction upon which they are based takes place. Imposed nonexchange transactions are recognized as revenues in the period for which they were imposed. If the period of use is not specified, they are recognized as revenues when and enforceable legal claim to the revenues arises or when they are received, whichever occurs first. Government-mandated and voluntary nonexchange transactions are recognized as revenues when all applicable eligibility requirements have been met. Revenues accrued by the Agency include property taxes levied and collected within 60 days from the end of the fiscal year.

C. Investments:

Investments are reported at fair value. Investment income includes interest earnings, changes in fair value, and any gains or losses related to the liquidation or sale of the investment.

See independent auditors' report. - 21 -

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

D. Restricted Net Assets:

The Agency is required by California Law to set aside a portion of the property tax increments it receives to increase and improve the City's supply of Low and Moderate Income Housing, and therefore such assets are restricted for that purpose.

E. Property Taxes:

Property taxes are assessed and collected each fiscal year according to the following property tax calendar:

Lien Date:

Levy Date:

Due Date:

Delinquent Date:

January 1

July 1 to June 30

First Installment - November 1 Second Installment - February

First Installment - December 10 Second Installment - April 10

Under California law, property taxes are assessed and collected by the counties up to 1 % of assessed value, plus other increases approved by the voters. The property taxes go into a pool, and are then allocated to the agencies based on complex formulas prescribed by the state statutes.

F. Interfund Activity:

In the govermnental fund financial statements, activity between funds that are representative of lending/borrowing arrangements outstanding at the end of the fiscal year are referred to as either "due to/from other funds" (i.e. the current portion of interfund loans) or "advances to/from other funds" (i.e. the noncurrent portion of interfund loans). In the government-wide financial statements, these activities have been eliminated.

Noncurrent portions of long-term interfund loan receivables are reported as advances and such amounts are offset equally by a fund balance reserve account which indicates that they do not constitute expendable available financial resources and therefore are not available for appropriation.

See independent auditors' report. - 22 -

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

G. Capital Assets:

Capital assets, which include land, structures, equipment, and infrastructure assets, are reported in the government-wide financial statements. Capital assets are recorded at cost where historical records are available and at an estimated historical cost where no historical records exist. Assets purchased in excess of $5,000 are capitalized if they have an expected useful life of 2 years or more. Donated capital assets are valued at their estimated fair market value at the date of donation. The cost of normal maintenance and repairs that do not add to the value of the asset's lives are not capitalized.

Major capital outlay for capital assets and improvements are capitalized as projects are constructed. For debt-financed capital assets, interest incurred during the construction phase is reflected in the capitalization value of the asset constructed, net of interest earned on the invested proceeds over the same period. There is no interest expense capitalized by the Agency for the year ended June 30, 2010.

Capital assets used in operations are depreciated over their estimated useful lives using the straight-line method in the government-wide financial statements. Depreciation is charged as an expense against operations and accumulated depreciation is reported on the Statement of Net Assets. The range of lives used for depreciation purposes for each capital asset class is as follows:

Buildings Improvements other than buildings Machinery and equipment Furniture and fixtures

H. Long-Term Obligations:

40 years 25 years

5 - 8 years 5 years

In the government-wide financial statements, long-tern debt and other long-term obligations are reported as liabilities in the applicable governmental activities. Bond premiums and discounts, deferred amount on refunding, as well as issuance costs, are deferred and amortized over the life of the bonds using the effective interest method. Bonds payable are reported net of the applicable bond premium or discount and deferred amount on refunding. Bond issuance costs are reported as deferred charges and amortized over the term of the related debt.

See independent auditors' report. - 23 -

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 20 IO

I. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

H. Long-Term Obligations (Continued):

In the governmental fund financial statements, governmental fund types recognize bond premiums and discounts, as well as bond issuance costs, during the current period. The face amount of debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures.

I. Fund Balance:

In the governmental fund financial statements, governmental fund types report reservations of fund balance for amounts that are not available for appropriation or are legally restricted by outside parties for use for a specific purpose. Designations of fund balance represent tentative management plans that are subject to change.

J. Tax Increment:

The Agency follows a policy of what constitutes contractual obligations for the purpose of spending tax increment revenue. This policy holds that all expenditures of the Capital Projects Funds (i.e. salaries, goods and supplies, professional services, etc.) are contractual obligations. Monies are therefore transferred from the Debt Service Funds to cover the costs of the expenditures from the Capital Projects Funds.

The Agency has no power to levy and collect taxes, and any legislative property tax de-emphasis might necessarily reduce the amount of tax revenues that would otherwise be available. Broadened property tax exemptions could have a similar effect. Conversely, any increase in the tax rate or assessed valuatio~ or any reduction or elimination of present exemptions would necessarily increase the amount of tax revenues that would be available.

K. Explanation of Differences between the Governmental Funds Balance Sheet and the Statement of Net Assets:

The "total fund balances" of the Agency's governmental funds $18,614,228 differs from "net assets" of governmental activities $(14,415,085) reported in the Statement of Net Assets. This difference primarily results from the long-term economic focus of the Statement of Net Assets versus the current financial resources focus of the Governmental Fund Balance Sheets.

See independent auditors' report. -24-

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

K. Explanation of Differences between the Governmental Funds Balance Sheet and the Statement ofNetAssets (Continued):

Capital Assets

Capital assets are recorded as expenditures in the full amount as current financial resources are used in the governmental funds. However, the Statement of Net Assets allocates these capital assets as financial resources over their estimated useful life.

Capital assets, net of depreciation $ 11,891,420

Interest and Other Receivables

Interest on interfund loans and other receivables reported in the special revenue funds are not available soon enough to pay for current-period expenditures, and therefore they are reported as deferred revenue in the funds.

Interest on interfund loans and other receivables $ 19.361.317

Long-Term Debt Transactions

Long-term liabilities and related items such as deferred amount on refunding, bond discount and the interest payable on these liabilities applicable to the Agency's governmental activities are not due and payable in the current period and accordingly are not reported as governmental fund liabilities. All liabilities (both current and long-term) are reported in the Statement of Net Assets. Balances at the end of this fiscal year were:

Noncurrent liabilities Deferred amount on refunding, net of

accumulated amortization Bond discount, net of accumulated amortization Accrued interest payable on long-term liabilities

Long-term debt transactions

See independent auditors' report. -25 -

$ (65, 736,530)

821,250 164,120

(1,090, 156)

$ (65.841,3 I 6)

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

K. Explanation of Differences between the Governmental Funds Balance Sheet and the Statement ofNetAssets (Continued):

Deferred Charges

Bond issuance costs are recorded as expenditures in the full amount as current financial resources are used in the governmental funds. However, the Statement of Net Assets defers these charges and amortizes them over the terms of the related debt.

Bond issuance costs, net of related amortization $ 1,559,266

L. Explanation of Differences between Governmental Funds Operating Statements and the Statement of Activities:

The "net change in fund balances" for governmental funds $(5,965,706) differs from the "change in net assets" for governmental activities $(496,539) reported in the Statement of Activities. The differences arise primarily from the long-term economic focus of the Statement of Activities versus the current financial resources focus of the governmental funds. The effect of the differences is illustrated below.

Depreciation of Capital Assets

Capital assets are expensed in full in the year of acquisition as current fmancial resources are used in governmental funds. However, the costs of these capital assets are allocated over their estimated useful life in the Statement of Activities through depreciation.

Capital outlay Depreciation on capital assets Capital asset transactions

See independent auditors' report.

$

$

-26 -

217,009 (349,460) (132.451)

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

L. Explanation of Differences between Governmental Funds Operating Statements and the Statement of Activities (Continued):

Long-Term Debt Transactions

Some revenues and expenses reported in the Statement of Revenues, Expenditures and Changes in Fund Balances are included as an addition or deletion of long-term liabilities in the Statement of Net Assets.

Refunding bonds issued Principal added on note payable Principal amount of debt refunded Principal payments Issuance costs Deferred amount on refunding Discount on bonds

Long-term debt transactions

Interest on Long-Term Debt

$ (26,290,000) (94,166)

23,235,000 1,870,027 1,584,965

835,393 166,785

$ ],308.004

Interest payable on long-term debt does not require the use of current financial resources and is not reported as governmental fund expenditures. However, these expenses are reported in the Statement of Activities.

Interest and fiscal charges $ ()40.233)

Deferred Revenue and Other Receivables

Some revenues and other receivables reported in the Statement of Activities do not provide the use of current financial resources and are not reported as governmental fund expenditures.

Interest on advances to other funds and taxes $ 4,476.354

Deferred Amounts

Bond issuance costs, bond discount and deferred amount on refunding are recorded as expenditures in the Statement of Revenues, Expenditures and Changes in Fund Balances. However, these expenses are amortized over the terms of the related debt in the Statement of Activities.

Amortization of issuance costs Amortization of deferred amount on refunding Amortization of bond discount Deferred amounts

See independent auditors' report. - 27 -

$

$

(25,699) (14,143)

(2,665) (42,507)

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

M. Use of Estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenditures/expenses during the reporting period. Actual results could differ from those estimates.

2. CASH AND INVESTMENTS:

Cash and Investments

Cash and investments at June 30, 2010 are classified in the accompanying financial statements as follows:

Government- Fiduciary Wide Fund

Statement of Statement of Net Assets Net Assets

Cash and investments $ 35,818,630 $ Restricted assets:

Cash and investments with fiscal agents 4.787 592 4 487 393

Total Cash and Investments $ 40,606,222 $ 4,,1:87,323

Cash and investments at June 30, 2010 consisted of the following:

Deposits with financial institutions Investments

Total Cash and Investments

See independent auditors' report.

$ 327,283 44,766,332

$ 45,023,615

- 28 -

$ 35,818,630

9,274,985

$ 45,093,615

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

2. CASH AND INVESTMENTS (CONTINUED):

Investments Authorized by the California Government Code and the Agency's Investment Policy

The table below identifies 1he investment types 1hat are authorized for the Agency by the California Government Code (or 1he Agency's investment policy, where more restrictive). The table also identifies certain provisions of the California Government Code ( or 1he Agency's investment policy, where more restrictive) that address interest rate risk, credit risk, and concentration of credit risk. This table does not address investments of debt proceeds held by bond trustee 1hat are governed by 1he provisions of debt agreements of1he Agency, rather 1han the general provisions of 1he California Government Code or 1he Agency's investment policy.

Maximum Maximum Maximum Percentage Investment

Authorized Investment T:l'.!1e Maturity of Portfolio* in One Issuer United States Treasury Obligations 5 years None None United States Government Sponsored

Enterprise Securities 5 years None 40% Banker's Acceptances 180 days 40% 10% Time Certificate of Deposits 5 years 25% None Commercial Paper 270 days 15% 10% Negotiable Certificates of Deposit 5 years 30% None Repurchase Agreements I year None None Reverse Repurchase Agreements 92 days 2% None Medium-Term Corporate Notes 5 years 30% None Local Agency Investment Fund (LAIF) NIA None $ 40,000,000

NI A - Not Applicable

* - Excluding amounts held by bond trustee 1hat are not subject to California Government Code restrictions.

Investments Authorized by Debt Agreements

Investments of debt proceeds held by bond trustee are governed by provisions of the debt agreements, ra1her 1han 1he general provisions of 1he California Government Code or 1he Agency's investment policy. Investments au1horized for funds held by bond trustee include, United States Treasury Obligations, United States Government Sponsored Enterprise Securities, Guaranteed Investment Contracts, Commercial Paper, Local Agency Bonds, Banker's Acceptance and Money Market Mutual Funds. There were no limitations on 1he maximum amount can be invested in one issuer, maximum percentage allowed or 1he maximum maturity of an investment, except for 1he maturity of Commercial Paper which is limited to 92 days and of Banker's Acceptances which are limited to one year.

See independent auditors' report. -29-

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

2. CASH AND INVESTMENTS (CONTINUED):

Disclosures Relating to Interest Rate Risk

Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment, the greater the sensitivity of its fair value to changes in market interest rates. One of the ways that the Agency manages its exposure to interest rate risk is by purchasing a combination of shorter term and longer term investments and by timing cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity evenly over time as necessary to provide the cash flow and liquidity needed for operations.

Information about the sensitivity of the fair values of the Agency's investments (including investments held by bond trustee) to market interest rate fluctuations is provided by the following table that shows the distribution of the Agency's investments by maturity:

Local Agency Inves1ment Fund Money Market Mutual Funds

Disclosures Relating to Credit Risk

Remaining Maturity

(in Months) 12Months

or Less $ 35,491,347

9 274 985

$ 44.766.332

Generally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. Presented below is the minimum rating required by (where applicable) the California Government Code, the Agency's investment policy, or debt agreements, and the actual rating by Standard and Poor, as of year end for each investment type:

Minimum Legal Total as of

Investment T:we Rating June 30, 2010 AAA Unrated Local Agency Inves1ment Fund NIA $ 35,491,347 $ $ 35,491,347 Money Market Mutual Funds A 9 274 985 9 274 985

$ 44.766,332 $ 9,274,985 $ 35.491,347

NIA- Not Applicable

See independent auditors' report. - 30 -

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

2. CASH AND INVESTMENTS (CONTINUED):

Custodial Credit Risk

Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, a government will not be able to recover its deposits or will not be able to recover collateral securities that are in the possession of an outside party. The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty ( e.g., broker-dealer) to a transaction, a government will not be able to recover the value of its investment or collateral securities that are in the possession of another party. The California Government Code and the Agency's investment policy do not contain legal or policy requirements that would limit the exposure to custodial credit risk for deposits or investments, other than the following provision for deposits: The California Government Code requires that a financial institution secure deposits made by state or local governmental tmits by pledging securities in an undivided collateral pool held by a depository regulated under state law (unless so waived by the governmental tmit). The market value of the pledged securities in the collateral pool must equal at least 110% of the total amount deposited by the public agencies. California law also allows financial institutions to secure the Agency's deposits by pledging first trust deed mortgage notes having a value of 150% of the secured public deposits. At June 30, 2010, the Agency's deposits (bank balances) were insured by the Federal Depository Insurance Corporation up to $250,000, with the remaining balance collateralized as required by California law.

Investment in State Investment Pool

The Agency is a voluntary participant in the Local Agency Investment Fund (LAIF) that is regulated by California Government Code Section 16429 under the oversight of the Treasurer of the State of California. The fair value of the Agency's investment in this pool is reported in the accompanying financial statements at amounts based upon the Agency's pro-rata share of the fair value provided by LAIF for the entire LAIF portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by LAIF, which are recorded on an amortized cost basis.

See independent auditors' report. - 31 -

3. CAPITAL ASSETS:

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

A summary of changes in the capital assets for the year ended June 30, 2010 is as follows:

Balance at Balance at June 30, 2009 Additions Deletions June 30, 2010

Capital assets, not being depreciated: Land $ 2,426,392 $ - $ $ 2,426,392

Total capital assets, not being depreciated 2,426,392 2,426,392

Capital assets, being depreciated: Buildings and structures 13,866,031 179,384 14,045,415 Improvements other than buildings 312,315 37,625 349,940 Machinery and equipment 972,376 972,376 Furniture and fixtures 996 996

Total capital assets being depreciated 15 151 718 217 009 15,368,727

Less accumulated depreciation for: Buildings and structures (4,430,951) (336,967) (4,767,918) Improvements other than buildings (149,916) (12,493) (162,409) Machinery and equipment (972,376) (972,376) Furniture and fixtures (996) (996)

Total accumulated depreciation (5.554,239) (349,460) (5,903,699)

Total capital assets being depreciated, net 9 597 479 (132,451) 9,465,028

Total capital assets, net $ 12.023,871 $ (]32 4il) $ I I .821,42ll

Depreciation expense was charged to governmental activities, general government program.

See independent auditors' report. - 32 -

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

4. LAND HELD FOR RESALE:

5.

The cost of land acquired by the Agency and held for resale is recorded as an asset at the time of purchase. The property is being carried in the Rancho Laguna I Special Revenue Fund and Other Government Funds (Rancho Laguna I Capital Projects Fund) at the lower of cost or estimated net realizable value.

LONG-TERM LIABILITIES:

Date of Years of Rate of Amount

Maturi!)' Interest Authorized

Loans Payable:

Public Financing Authority Various Various Various $ 60,320,000

EVMWD (Amber Ridge) 2/95 1999-2014 2.70%-6.00% 867,574

Developer Agreements:

Wal-Mart Stores, Inc. 3/93 1995-2014 7.00% 2,200,000*

Oakgrove Equities 3/93 1995-2014 7.00% 1,800,000*

Outlet Center 12/89 1996-2015 NIA 2,140,000

* -Principal only

Outstanding Outstanding Due

June 30, June 30, Within

2009 Additions Retirements

Loans Payable:

Public Financing Authority $ 52, 785,000 $ 26,290,000 $ 24,530,000 $ 54,545,000 $ 1,955,000

Deferred amount on

refunding (835,393) (14,143) (821,250)

Discount on bonds (166,785) (2,665) (164,120)

EVMWD (Amber Ridge) 307,542 50,822 256,720 49,727

Developer Agreements:

Wal-Mart Stores, Inc. 607,214 162,120 445,094 162,120

Oak Grove Equities 2,200,726 94,166 2,294,892

Outlet Center 633,101 109,513 523,588 109,513

Advances from the City

of Lake Elsinore 7,923,808 7,671.236 259.430

$ 64 451321 $ 25 381 288 $ 25088212 $ 64151 ]6!) $ 2 53512!)

See independent auditors' report. - 33 -

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

5. LONG-TERM LIABILITIES (CONTINUED):

A. Loans Payable:

Public Financing Authority

The City of Lake Elsinore's Public Financing Authority (the Authority) has issued Tax Allocation Revenue Bonds for financing projects of the Agency and to provide funds for the various debt obligations of the Agency. The Agency has entered into loan agreements with the Authority which mirror the bonds issued by the Authority. Concurrent with the execution and delivery of the loan agreements, the Authority issued the aggregate principal amount of its Tax Allocation Revenue Bonds to the Agency. The loans were made as an advance for the principal amount which was made from the proceeds of the bonds on the closing date of the bond. The principal and interest are payable in installment payments payable not less than three business days prior to the due date on the bond.

At June 30, 2010, loan agreements between the Agency and Authority totaled $54,545,000 based on 1999 Series A, 2010 Series A and 2010 Series B Tax Allocation Revenue Bonds issued by the Authority with proceeds disbursed as follows:

Public Financing Authority - 1995 Series A

In December 1995, $13,345,000 principal amount of Tax Allocation Revenue Bonds, Series A, was issued by the Authority. Concurrent with this issue, the principal amount was loaned to the Agency. The proceeds were used to redeem $8,385,000 1995 Series A loan and a portion of the $9,600,000 1993 Series A loan from the Authority. The Bonds were refunded by the 2010 Series B Tax Allocation Revenue Bonds in April 2010.

Public Financing Authority - 1999 Series A

In February 1999, $33,450,000 principal amount of Tax Allocation Revenue Bonds, Series A, was issued by the Authority. Concurrent with this issue, the principal amount was loaned to the Agency. The proceeds were used to advance refund $34,825,000 of outstanding 1992 Tax Allocation Revenue Bonds and to provide funds for the acquisition and construction of certain public improvements within the Rancho Laguna Redevelopment Project Areas I and II. The loan is payable in annual installments of $410,000 to $2,175,000 from September 1, 2000 through September I, 2030; interest at 5.00% to 5.50%. The loan balance at June 30, 2010 is $28,255,000. At June 30, 2010, the Agency has a cash reserve balance for debt service of $2,302,769 which is sufficient to cover the Bond Indenture Reserve Requirement.

See independent auditors' report. - 34-

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

5. LONG-TERM LIABILITIES (CONTINUED):

A. Loans Payable (Continued):

Public Financing Authority - 1999 Series B

In February 1999, $580,000 principal amount of Tax Allocation Revenue Bonds, Series B, was issued by the Authority. Concurrent with this issue, the principal amount was loaned to the Agency. The proceeds were used to advance refund $34,825,000 of outstanding 1992 Tax Allocation Revenue Bonds and to provide funds for the acquisition and construction of certain public improvements within the Rancho Laguna Redevelopment Project Area IL The final loan payment was made in fiscal year 2009-2010.

Public Financing Authority - 1999 Series C

In October 1999, $14,180,000 principal amount of Tax Allocation Revenue Bonds, Series C, was issued by the Authority. Concurrent with this issue, the principal amount was loaned to the Agency. The proceeds were used to advance refund $12,578,000 of outstanding 1993 Tax Allocation Revenue Notes, Series A, the 1995 Tax Allocation Revenue Bonds, Series B and to provide funds for the acquisition and construction of certain public improvements within the Rancho Laguna Redevelopment Project Areas I, II and III. In February 2010, the bonds were refunded by the 2010 Series A Tax Allocation Revenue Bonds.

Public Financing Authority - 2010 Series A

In February 2010, $15,435,000 principal amount of Tax Allocation Revenue Bonds, Series A, was issued by the Authority. Concurrent with this issue, the principal amount was loaned to the Agency. The proceeds were used to advance refund $13,170,000 of outstanding 1999 Series C Tax Allocation Revenue Bonds. The loan is payable in annual installments of $305,000 to $2,910,000 from September 1, 2010 through September 1, 2033; interest at 2.00% to 5.25%. The loan balance at June 30, 2010 is $15,435,000. At June 30, 2010, the Agency has a cash reserve balance for debt service of $1,471,930 which is sufficient to cover the Bond Indenture Reserve Requirement.

The advance refunding resulted in an economic gain of $1,277,035 and a decrease in cash flows of $96,017. Proceeds from the 2010 Series A bonds were invested in an escrow fund with a trustee which together with earnings will pay interest and principal on the bonds until fully retired. The 1999 Series C bonds are legally defeased and are no longer a liability of the Agency.

See independent auditors' report. - 35 -

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

5. LONG-TERM LIABILITIES (CONTINUED):

A. Loans Payable (Continued):

Public Financing Authority - 2010 Series B

In May 2010, $10,855,000 principal amount of Tax Allocation Revenue Bonds, Series B, was issued by the Authority. Concurrent with this issue, the principal amount was loaned to the Agency. The proceeds were used to advance refund $10,065,000 of outstanding 1995 Series A Tax Allocation Revenue Bonds. The advance refunding resulted in an economic gain of $757,319 and a decrease in cash flows of $893,956. Proceeds from the 2010 Series B bonds were invested in an escrow fund with a trustee which together with earnings will pay interest and principal on the bonds until fully retired. The 1995 Series A bonds are legally defeased and are no longer a liability of the Agency. The loan is payable in annual installments of $515,000 to $895,000 from September!, 2010 through September I, 2025; interest at 2.00% to 4.75%. The loan balance at June 30, 2010 is $10,855,000. At June 30, 2010, the Agency has a cash reserve balance for debt service of $939,541 which is sufficient to cover the Bond Indenture Reserve Requirement.

Future debt requirements for the loans payable to the Public Financing Authority are as follows:

Year Ending June 30

2011 2012 2013 2014 2015

2016 - 2020 2021 - 2025 2026 - 2030 2031 - 2034

Totals

Principal $ 1,955,000 $

1,650,000 1,710,000 1,770,000 1,840,000

10,470,000 13,180,000 12,890,000 9 080 000

$ 54.545,000 $

Interest Total 2,594,512 $ 4,549,512 2,551,249 4,201,249 2,487,469 4,197,469 2,416,779 4,186,779 2,343,225 4,183,225

10,531,031 21,001,031 7,623,491 20,803,491 4,132,525 17,022,525

836 943 9 916 943 35.517,224 "'$ ~~9=0,=06,,,,2,,,,.,2.,.2""4

Elsinore Valley Municipal Water District (EVMWD) -Amber Ridge

In February 1995, the City and the Agency entered into an agreement with the EVMWD whereby the Agency would reimburse the EVMWD's annual loan payment related to project costs of the EVMWD and a loan payable to the State Resources Control Board. The Agency's annual installments of $60,740 are due July 1, 1999 to July 1, 2014; interest from 2.70% to 6.00%.

See independent auditors' report. - 36 -

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

5. LONG-TERM LIABILITIES (CONTINUED):

A. Loans Payable (Continued):

B.

Elsinore Valley Munic;ipal Water District (EVMWD) -Amber Ridge (Continued)

Future debt requirements for the loans are as follows:

Year Ending June 30 Principal

2011 $ 49,727 $ 11,013 $ 60,740 2012 53,436 7,304 60,740 2013 55,412 5,328 60,740 2014 98 145 3 657 101 802

Totals $ 256.720 $ 27.302 $ 284.022

Developer Agreements:

The Agency has entered into several developer agreements to attract new business to the City. The following represents the Agency's significant commitments with certain developers:

Wal-Mart Stores, Inc.

On March 12, 1993, the Agency entered into a Disposition and Development Agreement with Wal-Mart Stores, Inc. The Agency has agreed to purchase Wal-Mart property through the payment of a $2,200,000 loan from Wal-Mart Stores, Inc. The $2,200,000 accrues interest at 7.00% per annum. Installment payments are to be made each year on January 30th for approximately 20 years, continuing 19 years after the first installment date. Installment payments are calculated to be (1) in the amount of 100% of the sales tax in excess of$200,000, but not to exceed $200,000 and (2) 50% of the amount of any additional sales tax received in excess of $400,000. Sales tax is not pledged for repayment. The obligation is a general obligation of the Agency and tax increment is not specifically pledged. As of June 30, 2010, the Agency owes $445,094 to Wal-Mart Stores, Inc., which has been included in the long-term obligations.

See independent auditors' report. - 37 -

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

Jtme 30, 2010

5. LONG-TERM LIABILITIES (CONTINUED):

B. Developer Agreements (Continued):

Oak Grove Equities

On March 12, 1993, the Agency entered into an Owner Participation Agreement with Oak Grove Equities. The Agency has agreed to reimburse the developer $1,800,000 for certain public improvements that were installed at the Lake Elsinore City Center. The $1,800,000 accrues interest at 7.00% per annum. Instalhnent payments are to be made each year on January 30th for approximately 20 years, continuing 19 years after the first installment date. Instalhnent payments are calculated to be (1) in the amotmt of 100% of the sales tax in excess of $200,000, but not to exceed $200,000 and (2) 50% of the amotmt of any additional sales tax received in excess of $400,000. Sales tax is not pledged for repayment. The obligation is a general obligation of the Agency and tax increment is not specifically pledged. As of Jtme 30, 2010, the Agency owes $2,294,892 to Oak Grove Equities, which has been included in the long-term obligations. Any tmpaid obligation on the 20th payment date is to be forgiven and discharged.

Outlet Center

The Agency entered into an Owner Participation Agreement with NG/Chelsea Lake Elsinore Limited Partnership pertaining to the development of a factory retail outlet. The factory outlet center is located in Redevelopment Project Area 1. Pursuant to the Agreement, the Agency is required to pay the annual special assessment levied by Assessment District 86-1. The bonds issued by Assessment District 86-1 mature in the year 2015 and the annual special assessment is approximately $108,000. As of Jtme 30, 2010, the Agency owes $523,588 which has been included in the long-term obligations.

C. Advances from the City of Lake Elsinore:

The City advanced the Agency $8,158,238 from 1997 through 2002 and $903,250 for the fiscal year ended Jtme 30, 2003. These advances are to cover certain administrative costs and a legal settlement related to the Agency. Payments of $467,724 are to be made on an annual basis through fiscal year 2032. Interest is accrued cumulatively on the advances at a rate of 2.715%.

See independent auditors' report. - 38 -

5.

6.

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

LONG-TERM LIABILITIES (CONTINUED):

C. Advances from the City of Lake Elsinore (Continued):

Future debt requirements for the advances from the City of Lake Elsinore are as follows:

Year Ending June 30 Princi11al Interest Total

2011 $ 259,430 $ 208,294 $ 467,724 2012 266,474 201,250 467,724 2013 273,710 194,014 467,724 2014 281,141 186,583 467,724 2015 288,775 178,949 467,724

2016 - 2020 1,565,837 772,783 2,338,620 2021 - 2025 1,790,283 548,337 2,338,620 2026- 2030 2,046,900 291,720 2,338,620 2031 - 2032 898 686 36 765 935 451

Totals $ 7.671,236 $ 2,618,695 $ J0.289,931

COMMUNITY FACILITIES DISTRICT BONDS:

These bonds are authorized pursuant to the Mello-Roos Community Facilities District Act of 1982, as amended, and are payable from special taxes levied on property within the Community Facility Districts according to a methodology approved by the voters within the District and by the Board of the Agency. Neither the faith and credit nor taxing power of the Agency is pledged to the payment of the bonds. Reserves have been established from the bond proceeds to meet delinquencies should they occur and amounted to $1,447,000 at June 30, 2010. If delinquencies occur beyond the amounts held in those reserves, the Agency has no duty to pay the delinquency out of any available funds of the Agency. The Agency acts solely as an agent for those paying taxes levied and the bondholders. Therefore, the outstanding balances of these bonds are not reflected in these financial statements.

Community Facilities District 90-2 Tuscany Hills Public Improvements 2002 Series A

Community Facilities District 90-2 Tuscany Hills Public Improvements 2007 Series A

Total Community Facilities District Bonds

Original Issue

Amount

$ 14,4 70,000 $

7,340,000 $

Bonds Outstanding at June 30, 2010

8,565,000

7 340 000 15,905.000

See independent auditors' report. - 39 -

7.

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

FUND BALANCE RESERVES:

The various reserves at June 30, 2010 are as follows:

Rancho Rancho Rancho Rancho Laguna Laguna I Laguna II Laguna III Special Debt Debt Debt

Revenue Service Service Service Fund Fund Fund Fund

Reserved for: Advances to

other funds $ 18,040,439 $ $ $ Prepaid expense 213 1,037 104,858 Land held for resale 2,714,687 Low and moderate

income housing 12,103,837 Debt service 1 461 936 1,560,360 6,211,055 199 573

$ 34.320.899 $ 1.560,573. $ 621_20~ $ 304.431

Reserved for Advances to Other Funds

Other Gov't Funds

$

6,088,480

$ 6.088.480

This reserve was established to represent amounts that were advanced to the Rancho Laguna Redevelopment Projects Areas I, II and III in such a manner that they will not be considered as current available funds.

Reserved for Prepaid Expense

This reserve was established to indicate amounts that do not constitute available spendable resources.

Reserved for Land Held for Resale

This reserve was established to remove land held for resale from current fund balances in such a manner that they will not be considered as current available funds.

Reserved for Low and Moderate Income Housing

This reserve was established to represent the amount set aside in the Special Revenue Fund for low to moderate income housing for expenditures which benefit low to moderate income families.

Reserved for Debt Service

This reserve was established to represent the amount accumulated in accordance with a bond indenture or similar covenant to pay principal and interest on long-term debt.

See independent auditors' report. - 40 -

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

8. INTERFUND RECEIVABLES, PAYABLES AND TRANSFERS:

During the course of normal operations, the Agency entered into numerous transactions between funds, including expenditures and transfers of resources to provide services, construct assets and service debt.

Due to and from other funds at June 30, 2010 are as follows:

Receivable Fund Rancho Laguna I Debt

Service Fund Rancho Laguna II Debt

Service Fund

Payable Fund

Other Governmental Funds Rancho Laguna III Debt

Service Fund

Advances to and from other funds at June 30, 2010 are as follows:

Rancho Laguna I Debt Service Fund

Rancho Laguna II Debt Service Fund

Rancho Laguna III Debt Service Fund

Advances From Rancho Laguna Special

Revenue Fund

Rancho Laguna Special Revenue Fund

Rancho Laguna Special Revenue Fund

Amount

$ 4,809,388

12,229,211

$ 17,03 8.599

Amount

$ 15,605,801

17,422,431

4,373,524

$ 37,40),756

The advances from the Rancho Laguna Special Revenue Fund to the Rancho Laguna I, II and III Debt Service Funds were made from: (a) the 1995 Series A and 1999 Series C bond proceeds deposited in the Rancho Laguna Special Revenue Fund. The 1995 Series A and 1999 Series C bonds were refunded in fiscal year 2010 with the issuance of the 2010 Series A and 2010 Series B bonds. The advances payable include an original loan amount of $18,040,439 and accrued interest of $15,611,317 and (b) advances in the amount of $3,750,000 was a result of suspending a portion of the 20% set aside requirement to assist in the payment of the SERAF obligation for fiscal year 2010.

See independent auditors' report. - 41 -

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

8. INTERFUND RECEIVABLES, PAYABLES AND TRANSFERS (CONTINUED):

9.

Transfers in and out representing normal operations at June 30, 2010 are as follows:

Transfers In Transfers Out Amount Other Governmental Funds Rancho Laguna I Debt

Service Fund $ 700,000 Rancho Laguna II Debt

Service Fund 800,000 Rancho Laguna III Debt

Service Fund 500,000 Other Governmental Funds 135 998

$ 2.135.998

PASS-THROUGH AGREEMENTS:

In order to lessen the fiscal impact of the tax increment financing of redevelopment projects on other units of local governments, the Agency has entered into pass-through agreements with various governmental agencies to "pass-through" portions of tax increment funds received by the Agency, attributable to the area within the territorial limits of other agencies.

10. OTHER REQUIRED INDIVIDUAL FUND DISCLOSURES:

The following funds had a deficit fund balance at June 30, 2010. These deficits are expected to be eliminated through future revenues and transfers.

Major Funds: Rancho Laguna I Debt Service Fund Rancho Laguna III Debt Service Fund

Other Governmental Funds: Rancho Laguna II Capital Projects Fund Rancho Laguna III Capital Projects Fund

See independent auditors' report.

$

-42 -

Amount

8,719,546 14,686,308

19,019 20,310

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

11. MORTGAGE REVENUE BONDS:

The Agency has entered into a bond and loan program to assist low and moderate income homebuyers of multi-family residential developments with the City limits. Although the Agency has arranged the financing program, these debts are not payable from any revenues or assets of the Agency. Neither the faith and credit nor the taxing power of the Agency, or any political subdivision of the Agency, is pledged to repay the indebtedness. Accordingly, since these debts do not constitute an obligation of the Agency, they are not reflected in the accompanying financial statements. They are as follows:

Lakeside Village Project - Due January 1, 2031

12. LITIGATION:

Original Issue

Amount

Bonds Outstanding at June 30, 2010

$ 5 ,ooo ,ooo ""$ ~~-4"',3"'5 3-, ""1 o""o

The Agency is a defendant in several other pending lawsuits of a nature common to may similar jurisdictions. Agency management estimates that the potential claims against the Agency not covered by insurance resulting from such litigation would not materially affect the basic financial statements of the Agency.

13. LIABILITY, PROPERTY AND PROTECTION:

A. Description Self-Insurance Pool Pursuant to Joint Powers Agreement:

To account for risks of loss and liability claims, the Agency participates in the City's liability, property and protection policy. The City is a member of the California Joint Powers Insurance Authority (Insurance Authority). The Insurance Authority is composed of 122 California public entities and is organized under a joint powers agreement pursuant to California Government Code Section 6500 et. seq. The purpose of the Insurance Authority is to arrange and administer programs for the pooling of self-insured losses, to purchase excess insurance or reinsurance, and to arrange for group purchased insurance for property and other coverages. The Insurance Authority's pool began covering claims of its members in 1978. Each member government has an elected official as its representative on the Board of Directors. The Board operates through a 9-member Executive Committee.

See independent auditors' report. - 43 -

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

13. LIABILITY, PROPERTY AND PROTECTION (CONTINUED):

B. Self-Insurance Programs of the Insurance Authority:

Comprehensive General and Automobile Liability Insurance - Each member government pays a primary deposit to cover estimated losses for a fiscal year ( claims year). After the close of a fiscal year, outstanding claims are valued. A retrospective deposit computation is then made for each open claims year. Claims are pooled separately between police and non-police. Costs are allocated to members by the following methods within each of the four layers of coverage: (1) the first $30,000 of each occurrence is charged directly to the member's primary deposit; (2) costs from $30,000 to $750,000 and the loss development reserves associated with losses up to $750,000 are pooled based on the member's share of losses under $30,000; (3) losses from $750,000 to $2,000,000 and the associated loss development reserves are pooled based on payroll; ( 4a) costs of covered claims from $2,000,000 to $50,000,000 are paid under reinsurance and excess insurance policies; ( 4b) subject to a $3,000,000 annual aggregate deductible; ( 4c) and a quota-sharing agreement whereby the Insurance Authority is financially responsible for 40% oflosses occurring within the $2,000,000 to $10,000,000 layer. The costs associated with 4a-c are estimated using actuarial models and pre-funded as part of the primary and retrospective deposits.

The overall policy limit for each member including all layers of coverage is $50,000,000 per occurrence. Costs of covered claims for subsidence losses are paid by excess insurance with the following sub-limits per member: $25,000,000 per occurrence with a $15,000,000 annual aggregate.

C. Purchased Insurance:

All Risk Property Insurance - The City participates in the all-risk property protection program of the Insurance Authority. This insurance protection is underwritten by several insurance companies. The City's property is currently insured according to a schedule of covered property submitted by the City to the Insurance Authority. The City's property currently has all-risk property insurance protection in the amount of $34,672,957. There is a $5,000 deductible per occurrence except for non-emergency vehicle insurance which has a $1,000 deductible. Premiums for the coverage are paid annually and are not subject to retroactive adjustments.

See independent auditors' report. - 44-

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

13. LIABILITY, PROPERTY AND PROTECTION (CONTINUED):

C. Purchased Insurance (Continued):

Crime Insurance

The City purchases crime insurance coverage in the amount of $1,000,000 with a $2,500 deductible. The fidelity coverage is provided through the Insurance Authority. Premiums are paid annually and are not subject to retroactive adjustments.

D. Adequacy of Protection:

During the past three fiscal (claims) years, none of the above programs of protection have had settlements or judgments that exceeded pooled or insured coverage. There have been no significant reductions in pooled or insured liability coverage from coverage in the prior year.

The aforementioned information is not included in the accompanying financial statements. Complete financial statements for the Insurance Authority may be obtained at their administrative office located at 8081 Moody Street, La Palma, California 90623.

14. CONTINGENCIES:

Taxes Levied

Under provisions of the California Constitutions, taxes levied by any taxing agency on all taxable property in the project area will be divided as follows when collected:

a. An amount each year equal to the current tax rates applicable to the assessed valuation (within the project area) prior to the adoption of the Redevelopment Plan will be paid into the funds of the respective taxing agencies, and

b. Taxes received over and above that amount will be deposited in the Capital Projects operating funds of the Agency.

The Agency has no power to levy and collect taxes, and any legislated property tax reduction might reduce the amount of tax revenues that would otherwise be available to pay the amount due to bondholders. Broadened property tax exemptions would have a similar effect. Conversely, any increase in the tax rate or assessed valuation, or any reduction or elimination of present exemptions would increase the amount of tax revenues that would be available to pay principal and interest on advances from other governments.

See independent auditors' report. -45 -

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

14. CONTINGENCIES (CONTINUED):

Laing Elsinore LLC

The Agency has entered into a Disposition and Development Agreement (the DDA) with Laing-CP Lake Elsinore LLC and Civic Partners-Elsinore LLC, as developer and master developer, respectively, covering an area of approximately 3,000 acres. As a result of the bankruptcy of the managing member of Laing-CP Lake Elsinore LLC, Bank of America has foreclosed on and now owns the property subject to the DDA. The Agency has pledged 100% of the net tax increment, excluding moneys to be set aside in the low and moderate income housing fund and existing pass-through agreements, pursuant to the DDA. The DDA prohibits any further bonded indebtedness secured by tax increment generated by the project site, other than for specified project purposes. The Agency has accrued tax increment due under the DDA for payment when due pursuant to the terms of the DDA.

Supplemental Education Revenue Augmentation Fund (SERAF)

Pursuant to AB 26 4x, a budget trailer bill, California redevelopment agencies were required to make Supplemental Education Revenue Augmentation Fund (SERAF) contributions totaling $1.7 billion for the fiscal year 2009-2010 and $350 million for the fiscal year 2010-2011. Under AB 26 4x, agencies may borrow a portion of the required contributions from their low and moderate income housing fund. Alternatively, sponsoring governmental agencies (the cities or counties) may elect to pay the SERAF contributions on behalf of their redevelopment agencies. On October 20, 2009, the California Redevelopment Association filed a class action lawsuit on behalf of all California redevelopment agencies, again challenging the SERAF obligations as unconstitntional. The court ruled that the SERAF obligations were not unconstitntional.

The Agency's SERAF contributions for the fiscal year 2009-2010 was $6,976,853. The Agency paid $3,226,853 from non-housing funds and the balance of $3,750,000 was from suspending a portion of the 20% set aside amount for fiscal year 2010 as allowed by the legislation.

The Agency's SERAF contributions for the fiscal year 2010-2011 will be $1,435,054.

See independent auditors' report. - 46-

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

14. CONTINGENCIES (CONTINUED):

Disposition and Development Agreement

The Redevelopment Agency has entered into a disposition and development agreement with Pottery Court Housing Associates, L.P. to provide a loan in an amount not to exceed $4,061,000 from the housing fund. The interest on the loan is to be paid at a rate of 3 percent per year with payments due annually on July 1. The payment on the loan will be based on annual payments equal to 75% of the Agency's share of the residual receipts as defined in the ODA agreement commencing on July 1 in the calendar year immediately following the calendar year in which the deed of trust evidencing the loan is recorded in the official records of Riverside County. The loan with accrued interest is payable in full on the date which is 55 years from the date of recording of the release of construction covenants. As of June 30, 2010, the Agency has purchased land from various property owners, including the City at a cost of $3,271,097 to provide the developer the property for this project. The land has not been transferred to the developer and therefore no loan balance due under this agreement is reported on the balance sheet of the housing fund.

15. SUBSEQUENT EVENT:

Issuance of Tax Allocation Revenue Bonds 2009 Series A

In November 2010, Lake Elsinore Public Financing Authority Tax Allocation Revenue Bonds 2010 Series C in the aggregate principal amount of29,435,000. Concurrent with this issue, the principal amount was loaned to the Agency. The proceeds were used to refund the 1999 Series A Bonds.

16. RESTATEMENT OF NET ASSETS/FUND BALANCES:

Net deficit at the beginning of year, as previously reported

Increase in net assets to record cash with fiscal agent (1995 Series A bonds)

Decrease in net assets to record additional liabilities

Net deficit at the beginning of year, as restated

See independent auditors' report. -47 -

$

$

(14,201,818)

1,023,464

(740,192)

(J 3 .918.546)

LAKE ELSINORE REDEVELOPMENT AGENCY

NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

June 30, 2010

16. RESTATEMENT OF NET ASSETS/FUND BALANCES (CONTINUED):

Special Revenue

Fund Debt Service Funds

Rancho Rancho Rancho La~a La~aI Laguna II

Fund balances (deficits) at the beginning of the year, as previously reported $ 34,434,846 $ 1,766,852 $ 14,953,428

Adjustment to increase fund balance in special revenue fund and decrease fund balances in debt service funds to record interfund loans not reported in prior years. 15,040,440 (6,515,519) (6,649,378)

Adjustment to decrease fund balance in special revenue fund and increase fund balances in debt service funds to correct reporting of debt service payments in the correct funds from fiscal year 1996 to 2005. (9,929,887) 2,802,672 4,921,628

Adjustment to decrease fund balance in special revenue fund and increase fund balances in debt service funds to correct reporting of debt service payments in the correct funds. (5,230,426) 1,555,570 2,791,124

Adjustment to record interest expense (payable) in debt service funds on loan from special revenue funds from fiscal year 1996 to 2009. (6,448,166) (6,580,642)

Adjustment to increase :fund balance in special revenue fund to record cash with fiscal agent for 1995A bonds. 1,023,464

Adjus1ment to decrease fund balance for additional liabilities to deve1opers agreements for the prior years. (25,532) (308,228)

Adjustment to decrease fund balance for additional liabilities related to Stadium operating costs from the prior year.

Fund balance (deficits) at the beginning of year, as restated $ 35,312,905 $ (6,838,591) $ 9,127,932

See independent auditors' report. - 48 -

Other Rancho Governmental

La~am Funds

$ (12,572,455) $ 598,954

(1,875,543)

2,205,587

883,732

(1,856,155)

(278,950)

(127,482)

$ (13,493,784) $ 471,472

REQUIRED SUPPLEMENTARY INFORMATION

-49-

LAKE ELSINORE REDEVELOPMENT AGENCY

BUDGETARY COMPARISON SCHEDULE RANCHO LAGUNA SPECIAL REVENUE FUND

For the year ended June 30, 2010

Variance with Final Budget

Budseted Amounts Positive Ori!!i!!al Final Actual ~eptive)

REVENUES: Tax increment $ 4,003,506 $ 253,506 $ 225,411 $ (28,095) htvestment income 376,644 376,644 133,564 (243,080) Grant income 714,757 714,757 Other income 2,970 2,970

TOTAL REVENUES 4,380,150 630,150 1,076,702 446,552

EXPENDITURES: Current:

Professional services 195,950 195,950 203,698 (7,748) Project costs 1,694,400 1,694,400 826,917 867,483 Debt services:

Payment to refunding bond escrow agent 1,295,449 (1,295,449) Bond issuance costs 878,354 (878,354) Principal retirement 440,450 (440,450) Interest and fiscal charges 1,336,419 1,336,419 731,062 605,357

TOTAL EXPENDITURES 3,226,769 3,226,769 4,375,930 (1,149,161)

EXCESS OF REVENUES OVER (UNDER) EXPENDITURES 1,153,381 (2,596,619) (3,299,228) (702,609)

OTHER FINANCING SOURCES (USES): Discount on bonds (119,642) (119,642) Refunding bonds issued 15,655,000 15,655,000 Payment to refunding bond escrow agent (13,228,136) (13,228,136)

TOTAL OTHER FINANCING SOURCES (USES) 2,307,222 2,307,222

NET CHANGE IN FUND BALANCE 1,153,381 (2,596,619) (992,006) 1,604,613

FUND BALANCE - BEGINNING OF YEAR AS RESTATED 35,312,905 35,312,905 35,312,905

FUND BALANCE - END OF YEAR $ 36,466,286 $ 32,716,286 $ 34,320,899 $ 1,604,613

See independent auditors' report and note to required supplementazy information.

- 50 -

LAKE ESLINORE REDEVELOPMENT AGENCY

NOTE TO REQUIRED SUPPLEMENTARY INFORMATION

June 30, 2010

1. BUDGETS AND BUDGETARY ACCOUNTING:

The Agency follows these procedures in establishing the budgetary data reflected in the financial statements:

1) In May, the City Manager submits to the City Council a proposed operating budget for the fiscal year commencing July 1. The operating budget includes proposed expenditures and estimated revenues and other means of financing.

2) Public hearings are conducted at City Council meetings to obtain public input.

3) Prior to July 1, the budget is adopted by Council action.

4) The City Manager is authorized to transfer funds appropriated with respect to those classifications designated as other services and material and supplies within the same department. The City Manager may transfer appropriated funds from any classification within other expenditure categories to the capital outlay classification within the same department only. For budgeting purposes, all Special Revenue and Capital Projects budgeted funds are considered a single department. Revenues are budgeted on a line item basis.

5) The legal level of budgetary control is maintained at the departmental level. Formal budgetary integration is employed as a management control device during the year for the Special Revenue Fund types to assist in controlling expenditures and enforcing revenue provisions. Capital Projects Fund types are budgeted on a project by project basis. All appropriations lapse at the end of the fiscal year, except for capital projects which are carried forward until such time as the project is completed or terminated.

6) Budgets for the Special Revenue and Capital Projects Funds are adopted on a basis consistent with accounting principles generally accepted in the United States of America. Budgeted amounts are as originally adopted and as further amended by the City Council. Budgetary data is not presented for Debt Service Funds because the activity within this fund is controlled by the debt agreements.

7) Budget information is presented for each major Special Revenue Fund. Capital Projects Funds are not required to present budgetary comparison schedules and formal budgeting policies are not required for the Debt Services Funds, therefore, the financial statements of these funds are not included in the Schedule of Revenues, Expenditures and Changes in Fund Balances • Budget and Actual.

See independent auditors' report.

- 51 -

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- 52-

SUPPLEMENTARY INFORMATION

- 53 -

LAKE ELSINORE REDEVELOPMENT AGENCY

COMBINING BALANCE SHEET OTIIBR GOVERNMENTAL FUNDS

June 30, 2010

Capital Projects Funds Total Other

Stadium Rancho Rancho Rancho Governmental Capital Laguna I Laguna II Laguna III Funds

ASSETS Cash and investments $ 247,671 $ 27,703 $ 23,959 $ 22,251 $ 321,584 Accounts receivable 4,700 4,700 Due from agency funds 77,171 77,171 Land held for resale 6,088,480 6,088,480

TOTAL ASSETS $ 324,842 $ 6,120,883 $ 23,959 $ 22,251 $ 6,491,935

LIABILITIES AND FUND BALANCES

LIABILITIES: Accounts payable $ 43,838 $ 20,077 $ 42,246 $ 42,344 $ 148,505 Due to City of Lake Elsinore 45,595 407 732 217 46,951 Due to agency funds 4,809,388 4,809,388

TOTAL LIABILITIES 89,433 4,829,872 42,978 42,561 5,004,844

FUND BALANCES (DEFICITS): Reserved for: Land held for resale 6,088,480 6,088,480

Unreserved, undesignated 235,409 (4,797,469) (19,019) (20,310) (4,601,389)

TOTAL FUND BALANCES (DEFICITS) 235,409 1,291,0ll (19,019) (20,310) 1,487,091

TOTAL LIABILITIES AND FUND BALANCES $ 324,842 $ 6,120,883 $ 23,959 $ 22,251 $ 6,491,935

See independent auditors' report.

- 54 -

LAKE ELSINORE REDEVELOPMENT AGENCY

COMBINING SCHEDULE OF REVENUES, EXPENDITURES AND CHANGESINFUNDBALANCES-OTHERGOVERNMENTALFUNDS

For the year ended June 30, 2010

Capital Projects Funds

Stadium Rancho Rancho Rancho Capital Laguna I Laguna II Laguna III

REVENUES: Investment income $ $ $ 254 $ Other revenue 300,000 33,544

TOT AL REVEl\'lJES 300,000 33,544 254

EXPENDITURES: Current: Project costs 200,589 346,197 478,304 293,089

EXCESS OF REVENUES OVER (UNDER) EXPENDITURES 99,411 (312,653) (478,050) (293,089)

OTHER FINANCING SOURCES (USES): Transfers in 135,998 700,000 800,000 500,000 Transfers out (41,817) (71,868) (22,313)

TOTAL OTHER FINANCING SOURCES (USES) 135,998 658,183 728,132 477,687

NET CHANGE IN FUND BALANCES 235,409 345,530 250,082 184,598

FUND BALANCES (DEFICITS} -BEGINNING OF YEAR, AS RESTATED 945,481 (269,101) (204,908)

FUND BALANCES (DEFICITS) -END OF YEAR $ 235,409 $ 1,291,011 $ (19,019) $ (20,310)

See independent auditors' report.

- 55 -

Total Other

Governmental Funds

$ 254 333,544

333,798

1,318,179

(984,381)

2,135,998 (135,998)

2,000,000

1,015,619

471,472

$ 1,487,091

THIS PAGE INTENTIONALLY LEFT BLANK

- 56 -

~ DIEHL, EVANS &'. COMPANY, LLP ~ CERTIFIED PUBLIC ACCOUNTANTS &: CONSULTANTS

APAATNERSHIP INCLUDING ACCOUNTANCY CORPORATIONS

5 CORPORATE PARK, SlllTE 100 IRVINE, CALIFORNIA 92606-5165 (949) 399-0600 • FAX (949) 399-0610 www.diehlevans.com

December 27, 2010

MICHAELR. LUDIN, CPA CRAIG W. SPRAKER, CPA NITINP. PATEL, CPA ROBERT l CALLANAN, CPA

*PHILIPH. HOLTKAMP. CPA *THOMAS M. PERLOWSKI, CPA "'HARVEY J. SCHROEDER, CPA KENNETHR. AMES, CPA WlLLlAM C. PENTZ, CPA

• A PROFESSIONAL CORPORATION

INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS

BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS

To the Board of Directors Lake Elsinore Redevelopment Agency Lake Elsinore, California

We have audited the accompanying financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of the Lake Elsinore Redevelopment Agency (the Agency) as of and for the year ended June 30, 2010, which collectively comprise the Agency's basic financial statements and have issued our report thereon dated December 27, 2010. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States.

Internal Control Over Financial Reporting

In planning and performing our audit, we considered the Agency's internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Agency's internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Agency's internal control over financial reporting.

A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the Agency's financial statements will not be prevented, or detected and corrected on a timely basis.

OTIIER OFFICES AT,

- 57 -

2965 ROOSEVELT STREET CARLSBAD, CALIFORNIA 92008-2389 (760) 729-2343 • FAX (760) 729-2234

613 W. VALLEY PARKWAY, SUITE 330 ESCONDIDO, CALIFORNIA 92025-2598 (760) 741-3141 • FAX (760) 741-9890

Internal Control Over Financial Reporting (Continued)

Our consideration of the internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be deficiencies, significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above.

Compliance and Other Matters

As part of obtaining reasonable assurance about whether the Lake Elsinore Redevelopment Agency's financial statements are free of material misstatements, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. Such provisions included those provisions of laws and regulations identified in the Guidelines For Compliance Audits of California Redevelopment Agencies, issued by the State Controller and as interpreted in the Suggested Auditing Procedures for Accomplishing Compliance Audits of California Redevelopment Agencies, issued by the Governmental Accounting and Auditing Committee of the California Society of Certified Public Accountants. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.

This report is intended solely for the information and use of the Agency Members and management of the Lake Elsinore Redevelopment Agency and the State Controller's Office, Division of Accounting and Reporting and is not intended to be and should not be used by anyone other than these specific parties.

- 58 -

APPENDIX E

FORM OF CONTINUING DISCLOSURE AGREEMENT

This Continuing Disclosure Agreement (the "Disclosure Agreement"), dated as of January 1, 2011, is executed and delivered by the Redevelopment Agency of the City of Lake Elsinore ( the "Agency") and Union Bank, N.A., as dissemination agent hereunder (the "Dissemination Agent") in connection with the issuance of the $5,550,000 Lake Elsinore Public Financing Authority Tax Allocation Revenue Bonds (Launch Ramp Project), 2011 Series A (the "Bonds"). The Bonds are being issued pursuant to an Indenture of Trust, dated as of January 1, 2011 (the "Indenture"), by and between the Lake Elsinore Public Financing Authority and Union Bank, N.A., as trustee (the "Trustee"). The Agency and the Dissemination Agent covenant and agree as follows:

SECTION 1. Pumose of the Disclosure AITTeement. This Disclosure Agreement is being executed and delivered by the Agency for the benefit of the Beneficial Owners of the Bonds and in order to assist the Participating Underwriter in complying with the Rule (as defined herein).

SECTION 2. Definitions. In addition to the definitions set forth in the Indenture, which apply to any capitalized term used in this Disclosure Agreement unless otherwise defined in this Section, the following capitalized terms shall have the following meanings:

"Annual Report" shall mean any Annual Report provided by the Agency 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.

"Disclosure Representative" shall mean the Executive Director of the Agency or his or her designee, or such other officer or employee as the Agency shall designate in writing to the Dissemination Agent (if other than the Agency) from time to time.

"Dissemination Agent" shall mean Union Bank, N.A., acting in its capacity as Dissemination Agent hereunder, or any successor Dissemination Agent designated in writing by the Agency and which has filed with the Agency a written acceptance of such designation.

"Listed Events" shall mean any of the events listed in Section 5(a) of this Disclosure Agreement.

'MSRB" shall mean the Municipal Securities Rulemaking Board established pursuant to Section 15B(b)(l) of the Securities Exchange Act of 1934 or any other entity designated or authorized by the Securities and Exchange Commission to receive reports pursuant to the Rule. Until otherwise designated by the MSRB or the Securities and Exchange Commission, filings with the MSRB are to be made through the Electronic Municipal Marketplace Access (EMMA) website of the MSRB, currently located at http:/ ;emra.m;rb.org.

"Participating Underwriter" shall mean any of the original underwriters of the Bonds required to comply with the Rule in connection with offering of the Bonds.

"Rule" shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time.

E-1

SECTION 3. Provision of Annual Reports.

(a) The Agency shall, or shall cause the Dissemination Agent to, not later than February 15 of each year, commencing February 15, 2012, provide to the MSRB and the Participating Underwriter an Annual Report which 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 include by reference other information as provided in Section 4 of this Disclosure Agreement. If the Agency's fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 5( c ).

(b) Not later than fifteen (15) Business Days prior to the date specified in subsection (a) for providing the Annual Report to the MRSB, the Agency shall provide the Annual Report to the Dissemination Agent (if other than the Agency). The Agency shall provide, or cause the preparer of the Annual Report to provide, a written certificate with each Annual Report furnished to the Dissemination Agent to the effect that such Annual Report constitutes the Annual Report required to be furnished to it hereunder. The Dissemination Agent may conclusively rely upon such certification of the Agency and shall have no duty or obligation to review such Annual Report.

( c) If the Dissemination Agent is unable to provide to the MSRB an Annual Report by the date required in subsection (a), the Agency shall send a notice to the MSRB in substantially the form attached as Exhibit A.

( d) The Dissemination Agent shall, to the extent information is known to it, file a report with the Agency certifying that the Annual Report has been provided pursuant to this Disclosure Agreement, stating the date it was provided.

SECTION 4. Content of Annual Reports. The Annual Report shall contain or include by reference the following:

(a) The audited financial statements of the Agency, prepared in accordance with generally accepted accounting principles in effect from time to time. If any of such audited financial statements are not available by the time the Annual Report is required to be filed pursuant to Section 3(a), the Annual Report shall contain unaudited fmancial statements in a format similar to the financial statements contained in the Official Statement, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available.

(b) An update of tabular information relating to the Agency and Project Area No. I of the kind presented in the section of the Official Statement entitled:

"REDEVELOPMENT PROJECT NO. I - Assessed Values by Land Use"

"REDEVELOPMENT PROJECT NO. I - Top Ten Taxable Property Owners"

"TAX INCREMENT REVENUES - TAXABLE VALUATIONS - Historical Taxable Valuations"

"TAX INCREMENT REVENUES - ASSESSMENT APPEALS"

Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the Agency or related public entities, which are available to the public on the MSRB's Internet Website or filed with the Securities and Exchange Commission.

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SECTION 5. Reporting of Listed Events.

(a) Pursuant to the provisions of this section, upon the occurrence of any of the following events (in each case to the extent applicable) with respect to the Bonds, the Agency shall give, or cause to be given by so notifying the Dissemination Agent in writing and instructing the Dissemination Agent to give, notice of the occurrence of such event, in each case, pursuant to Section 5( c) hereof:

1. principal or interest payment delinquencies;

2. non-payment related defaults, if material;

3. modifications to the rights of the Bondholders, if material;

4. optional, contingent or unscheduled calls, if material, and tender offers;

5. defeasances;

6. rating changes;

7. adverse tax opinions or the issuance by the Internal Revenue Service of proposed or final determinations oftaxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the Bonds or other material events affecting the tax status of the Bonds;

8. unscheduled draws on the debt service reserves reflecting financial difficulties;

9. unscheduled draws on the credit enhancements reflecting financial difficulties;

10. substitution of the credit or liquidity providers or their failure to perform;

11. release, substitution or sale of property securing repayment of the Bonds, if material;

12. bankruptcy, insolvency, receivership or similar proceedings of the Agency, which shall occur as described below;

13. appointment of a successor or additional trustee or the change of name of a trustee, if material, or;

14. the consummation of a merger, consolidation, or acqms1t10n involving the Agency or the sale of all or substantially all of the assets of the Agency other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material.

For these purposes, any event described in item 12 of this Section 5(a) is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent, or similar officer for the Agency in a proceeding under the United States 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 Agency, or if such jurisdiction has been assumed by leaving the existing governing 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

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liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the Agency.

(b) Upon receipt of notice from the Agency and instruction by the Agency to report the occurrence of any Listed Event, the Dissemination Agent shall provide notice thereof to the MSRB in accordance with Section 5(c) hereof. In the event the Dissemination Agent shall obtain actual knowledge of the occurrence of any of the Listed Events, the Dissemination Agent shall, immediately after obtaining such knowledge, contact the Disclosure Representative, inform such person of the event, and request that the Agency promptly notify the Dissemination Agent in writing whether or not to report the event pursuant to Section 5(c). For purposes of this Disclosure Agreement, "actual knowledge" of the occurrence of such Listed Event shall mean actual knowledge by the Dissemination Agent, if other than the Trustee, and if the Dissemination Agent is the Trustee, then by the officer at the corporate trust office of the Trustee with regular responsibility for the administration of matters related to the Indenture. The Dissemination Agent shall have no responsibility to determine the materiality, if applicable, of any of the Listed Events.

( c) The Agency, or the Dissemination Agent, if the Dissemination Agent has been instructed by the Agency to report the occurrence of a Listed Event, shall file a notice of such occurrence with the MSRB in a timely manner not more than ten business days after the occurrence of the event.

SECTION 6. Termination of Reoorting Obligation. The Agency's obligations under this Disclosure Agreement shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Bonds. If such termination occurs prior to the final maturity of the Bonds, the Agency shall give notice of such termination in the same manner as for a Listed Event under Section 5( c).

SECTION 7. Dissemination Agent. The Agency 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 content of any notice or report prepared by the Agency pursuant to this Disclosure Agreement. If at any time there is not any other designated Dissemination Agent, the Agency shall be the Dissemination Agent. The Dissemination Agent may resign by providing thirty days' written notice to the Agency and the Trustee. 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 Agency in a timely manner and in a form suitable for filing.

SECTION 8. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement, the Agency may amend this Disclosure Agreement, and any provision of this Disclosure Agreement may be waived, provided that the following conditions are satisfied:

(a) If the amendment or waiver relates to the provisions of Sections 3(a), 4, or 5(a), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature or status of an obligated person with respect to the Bonds, or the type of business conducted;

(b) The undertaking, as amended or taking into account such waiver, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the original execution and delivery of the Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances;

( c) The amendment or waiver either (i) is approved by the Beneficial Owners in the same manner as provided in the Indenture for amendments to the Indenture with the consent of Beneficial

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Owners, or (ii) does not, in the opinion of a nationally recognized bond counsel, materially impair the interests of the Beneficial Owners; and

( d) Any amendment that modifies or increases the duties or obligations of the Dissemination Agent shall be agreed to in writing by the Dissemination Agent.

In the event of any amendment or waiver of a provision of this Disclosure Agreement, the Agency 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 Agency.

SECTION 9. Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent the Agency 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 Agency 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 Agency shall have no obligation under this Agreement to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event.

SECTION 10. Default. In the event of a failure of the Agency to comply with any provision of this Disclosure Agreement, the Dissemination Agent ( at the written request of any Participating Underwriter or the Beneficial Owners of at least 25% aggregate principal amount of Outstanding Bonds, shall, but only to the extent funds in an amount satisfactory to the Dissemination Agent have been provided to it or it has been otherwise indemnified to its satisfaction from any cost, liability, expense or additional charges and fees of the Dissemination Agent whatsoever, including, without limitation, fees and expenses of its attorneys), or any Beneficial Owner may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the Agency to comply with its obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed an Event of Default under the Indenture, and the sole remedy under this Disclosure Agreement in the event of any failure of the Agency to comply with this Disclosure Agreement shall be an action to compel performance.

SECTION 11. Duties, Immunities and Liabilities of Dissemination Agent. Article VI of the Indenture is hereby made applicable to this Disclosure Agreement as if this Disclosure Agreement were ( solely for this purpose) contained in the Indenture and the Dissemination Agent shall be entitled to the protections, limitations from liability and indemnities afforded the Trustee thereunder. The Dissemination Agent (if other than the Trustee or the Trustee in its capacity as Dissemination Agent) shall have only such duties as are specifically set forth in this Disclosure Agreement, and the Agency agrees to indemnify and save the Dissemination Agent and the Trustee, their officers, directors, employees and agents, harmless against any loss, expense and liabilities which they may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys' fees) of defending against any claim of liability, but excluding liabilities due to the respective parties' gross negligence or willful misconduct. The Dissemination Agent shall be paid compensation by the Agency for its services provided hereunder in accordance with its schedule of fees as amended from time to time and all expenses, legal fees and advances made or incurred by the Dissemination Agent in the performance of its duties hereunder. The Dissemination Agent shall have no duty or obligation to review any information provided to them hereunder and shall not be deemed to be acting in any fiduciary capacity for the Agency, the Beneficial Owners, or any other party. Neither the Trustee nor the Dissemination Agent shall have any liability to the Beneficial Owners or any other party for any monetary damages or financial liability of any kind whatsoever related to or arising from this Agreement. The

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obligations of the Agency under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Bonds.

SECTION 12. Filings with the MSRB. All financial information, operating data, financial statements, notices, and other documents provided to the MSRB in accordance with this Disclosure Agreement shall be provided in an electronic format prescribed by the MSRB and shall be accompanied by identifying information as prescribed by the MSRB.

SECTION 13. Notices. Any notices or communications to the Agency or the Dissemination Agent may be given as follows:

To the Agency:

To the Dissemination Agent:

Redevelopment Agency of the City of Lake Elsinore 130 South Main Street Lake Elsinore, California 92530 Attention: Executive Director (951) 674-3124 (951) 674-2392 Fax

Union Bank, N.A. 120 South San Pedro Street, 4th Floor Los Angeles, California 90012 Attention: Corporate Trust Department (213) 972-5677 (213) 972-5694 Fax

Any person may, by written notice to the other persons listed above, designate a different address or telephone number(s) to which subsequent notices or communications should be sent.

SECTION 14. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of the Agency, the Dissemination Agent, the Participating Underwriter and Beneficial Owners, and shall create no rights in any other person or entity.

SECTION 15. Governing Law. This Disclosure Agreement shall be construed and governed in accordance with the laws of the State of California.

SECTION 16. Counterparts. This Disclosure Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument.

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IN WITNESS WHEREOF, the parties hereto have caused this Continuing Disclosure Agreement to be duly executed and delivered by their respective officers as of the date first above written.

REDEVELOPMENT AGENCY OF THE CITY OF LAKE ELSINORE

Executive Director

UNION BANK, N.A., as Dissemination Agent

Authorized Officer

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EXHIBIT A

NOTICE TO MSRB OF FAILURE TO FILE ANNUAL REPORT

Name of Obligated Party:

Name of Bonds:

Date of Delivery:

Redevelopment Agency of the City of Lake Elsinore

Lake Elsinore Public Financing Authority Tax Allocation Revenue Bonds (Launch Ramp Project), 2011 Series A

January 27, 2011

NOTICE IS HEREBY GIVEN that the Agency has not provided an Annual Report with respect to the above-captioned Bonds as required by the Continuing Disclosure Agreement, dated as of January 1, 2011, with respect to the Bonds. [The Agency anticipates that the Annual Report will be filed by .]

Dated: -------

UNION BANK, N.A.

By ____________ ~·

cc: Agency and Underwriter

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APPENDIX F FORM OF OPINION OF BOND COUNSEL

Date of Delivery

Lake Elsinore Public FinancingAuthority 130 South Main Street Lake Elsinore, California 92530

$5,550,000

Lake Elsinore Public FinancingAuthority TaxAllocation Revenue Bonds (Launch Rarrp Prqject),

2011 SeriesA

Members of the Board of Di rectors:

We have acted as bond counsel to the Lake Elsinore Public Financing Authority (the "Authority") in connection with the issuance by the Authority of $5,550,000 aggregate principal amount of Lake Elsinore Public Financing Authority Tax Allocation Revenue Bonds (Launch Rarrp Prqject), 2011 Series A (the" Bonds"), pursuant to the prcwisions of Article 4 (comrrencing with section 6584) of Chapter 5 of Division 7 of Title 1 of the California Gc:wernrrent Code (the "Law'') and pursuant to an Indenture of Trust, dated as of January 1, 2011 (the" Indenture"), by and between the Authority and Union Bank, N.A., as trustee (the "Trustee''). We have examined the Law and such certified proceedings and other papers as we deem necessary to render this opinion.

As to questions of fact material to our opinion, we have relied upon representations of the Authority contained in the Indenture and in the certified proceedings and certifications of public officials and others furnished to us, without undertaking to verify the sarre by independent i nvesti gati on.

Based upon the foregoing we are of the opinion, under existing law, as folio.vs:

1. The Authority is ajoint exercise of pcwers authority duly organized and validly existing under the laws of the State of California with the full pcwer to enter into the Indenture, to perform the agreerrents on its part contained therein and to issue the Bands.

2. The Indenture has been duly apprcwed by the Authority and constitutes the valid and binding obi i gati on of the Authority enforceable agai nst the Authority i n accordance with its terms.

3. The Indenture creates a val id I ien on the funds pledged by the Indenture for the security of the Bonds, suqject to no prior lien granted under the Law.

4. The Bonds have been duly authorized, executed and delivered by the Authority and are valid and binding special obligations of the Authority, payable solely from the sources pro.tided therefor in the Indenture.

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5. Under existing liM', interest on the Bonds is exerrpt from personal income taxes of the State of California and, assuming compliance with the co.tenant described belo.v, interest on the Bonds is excluded pursuant to section 103(a) of the Internal Revenue Code of 1986 (the "Code'') from the gross income of the o.vners thereof for federal income tax purp:ises. The Bands are not "specified private activity bonds" within the meaning of section 57(a)(5) of the Code and, therefore, the interest on the B ands is not treated as an i tern of tax preference for purp:ises of computing the alternative minimum tax imp:ised b,I section 55 of the Code; ho.vever, the receipt or accrual of interest on the Bands o.vned b,I a corporation may affect the computation of its alternative minimum taxable income, upon which the alternative ni ni mum tax is i mp:ised.

The Code imp:ises certain requirements that must be met subsequent to the issuance and delivery of the Bands for interest thereon to be and remai n excluded from the gross i ncome of the o.vners thereof for federal income tax purposes. N oncompl i ance with such requi rements could cause the interest on the Bands to be included in gross income retroactive to the date of issue of the Bands. The Authority has co.tenanted in the Indenture to maintain the exclusion of interest on the Bonds from the gross income of the o.vners thereof for federal income tax purp:ises.

Pursuant to the Indenture and the Loan Agreement, and in the Tax Certificate Pertaining to Arbitrage and Other Matters under Sections 103 and 141-150 of the Internal Revenue Code of 1986, which has been delivered b,I the Authority and the Agency in connection with the issuance of the Bonds, each of the Authority and the Agency has made representations relevant to the deternination of, and has made certain co.tenants regarding or affecting, the exclusion of interest on the Bands from the gross i ncome of the o.vners thereof for federal income tax purp:ises. I n reaching our opinions expressed in paragraph 5 abcwe, we have assumed the accuracy of such representati ans and the present and future compl i ance b,I the Authority with such co.tenants. Our opinions expressed in paragraph 5 alx:we are rendered in reliance on representations and certifications of the Authority made in a Tax Certificate dated the date hereof pertaining to the use, expenditure, and investment of the proceeds of the Bonds. Except as stated in paragraph 3 alx:we, we express no opinion as to any federal or state tax consequences of the receipt of interest on, or the o.vnership or disp:isition of, the Bonds. Furthermore, we express no opinion as to any federal, state or local tax law consequences with respect to the Bonds, or the interest thereon, if any action is taken with respect to the Bonds or the proceeds thereof upon the ad.tice or apprc:wal of other counsel.

The rights of the o.vners of the Bonds and the enforceability of the Bonds and the Indenture may be suqject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights heretofore or hereafter enacted and may also be suqject to the exercise of judicial discretion in appropriate cases.

Our opinions are based on existing liM', which is suqject to change. Such opinions are further based on our kno.vl edge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our anenti on or to reflect any changes in any I iM' that may thereafter occur or become effective. Morec:wer, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service; rather, such opinions represent our legal judgment based upon our revie.v of existing law that we deem relevant to such opinions and in reliance upon the representations and co.tenants referenced alx:we.

Respectfully subnined,

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APPENDIX G DTCAND BOOK-fNTRY-ONLY SYSTEM

The follONing description of the procedures and record keeping with respect to beneficial OM1ership interests in the Bonds, payment of principal of and interest on the Bonds to Direct Participants, Indirect Participants or Beneficial CMners (as such term; are defined belON) of the Bonds, confirmation and transfer of beneficial OM1ership interests in the Bonds and other Bond­related transactions b,I and between DTC, Direct Participants, Indirect Participants and Beneficial CMners of the Bonds is based solely on information furnished b,I DTC to the Authority wiich the Authority belie..res to be reliable, but the Authority and the Underwriter do not and cannot make any independent representations concerning these matters and do not take responsibility for the accuracy or cornpieteness thereof. Neither the DTC, Direct Participants, Indirect Participants nor the Beneficial CMners should rely on the foregoing information with respect to such matters, but should instead confirm the same with DTC or the DTC Participants, as the case may be.

The Depository Trust Company ("DTC"), New York, New York, will act as securities depository for the Bonds. The Bonds will be issued as fully,egistered securities registered in the name of Cede & Co. (DTC's partnership noninee) or such other name as may be requested b,I an authorized representative of DTC. One fully,egistered Bond will be issued for each maturity of the Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC.

DTC, the world's largest securities depository, is a linited--purpose trust corrpany organized underthe New York Banking LiM', 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 prcwisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and pro.tides asset servicing for ewer 3.5 nillion issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues and money market instruments (from ewer 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 elininates the need for physical mcwement 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-OM1ed 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 o.vned b,I 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 cl eari ng corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard & Poor's highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Comnission. More information about DTC can be found at www.dtcc.com and www.dtc.org.

Purchases of Bonds under the DTC system must be made b,I or through Direct Participants, which will receive a credit for the Bonds on DTC's records. The o.vnership interest of each actual purchaser of each Bonds ("Beneficial owner") is in turn to be recorded on the Direct and I ndi rect Participants' records. Beneficial Owners wi 11 not receive written confirmation from DTC of their purchase. Beneficial owners are, ho.vever, expected to receive written confirmations pro.tiding 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.

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Transfers of cwnershi p i nterests i n the B ands are to be accomplished by entries made on the oooks of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial owners will not receive certificates representing their cwnership interests in the Bonds, except in the eventthat use of the oook--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 requested by an authorized representative of DTC. The deposit of the Bands with DTC and their registration in the name of Cede & Co. or such other DTC noninee do not effect any change in beneficial cwnership. DTC has no kncwledge of the actual 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 or Indirect Participants wi 11 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 g0.terned by arrangements among them, suqject 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 the Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial owners may wish to pr0.tide their names and addresses to the Trustee and request that copies of notices be pro.tided di rectly to them

Redemption notices shall be sent to DTC. If less than all of the Bonds 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 such other DTC noni nee) wil I consent or vote with respect to the 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 the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Principal, redemption price and interest payments on the Bonds will be made to Cede & Co., or such other noni nee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detailed information from the Authority or the Trustee, on payable date in accordance with their respective holdings shewn on DTC's records. Payments by Participants to Beneficial owners will be g0.terned 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, suqject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal, redemption price and interest 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 B enefi ci al owners wi 11 be the responsi bi I ity of Direct and Indirect Participants.

DTC may discontinue pro.tiding 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

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event that a successor dep:isitory is not obtained, Bond certificates are required to be printed and delivered.

The Authority may decide to discontinue use of the system of oook--entry--only transfers through DTC (or a successor securities dep:isitory). In that event, the Bond certificates will be printed and delivered to DTC.

The information in this section concerning DTC and DTC's oook--entry system has been obtained from sources that the Authority believes to be reliable, but the Authority takes no responsibility for the accuracy thereof.

Discontinuance of DTC Services

In the eventthat (a) DTC determines not to continue to act as securities dep:isitory for the Bonds, or (b) the Authority deternines that DTC shall no longer act and delivers a written certificate to the Trustee to that effect, then the Authority will discontinue the book-entry system with DTC for the Bonds. If the Authority determines to replace DTC with another qualified securities dep:isitory, the Authority will prepare or direct the preparation of a mw single separate, fully­registered Bond for each maturity of the Bonds registered in the name of such successor or substitute securities dep:isitory as are not inconsistent with the terms of the Indenture. If the Authority fails to identify another qualified securities dep:isitory to replace the incumbent securities dep:isitory for the Bonds, then the Bonds shall no longer be restricted to being registered in the Bonds registration books in the name of the incumbent securities dep:isitory or its nominee, but shall be registered in whatever name or names the incumbent securities dep:isitory or its nominee transferring or exchanging the Bands shal I designate.

In the event that the book-entry system is discontinued, the follcwing pr0.tisions would also apply: (i) the Bonds will be made available in physical form, (ii) principal of, and redemption preni urns if any, on the B ands wi 11 be payable upon surrender thereof at the trust office of the Trustee identified in the I ndenture, and ( i ii) the Bands wi 11 be transferable and exchangeable as pr0.tided in the Indenture.

The Authority or the Trustee do not have any responsibility or obligation to DTC Participants, to the persons for whom they act as noninees, to Beneficial CMners, or to any other person who is not shOMl on the registration books as being an OM1er of the Bonds, with respect to (i) the accuracy of any records maintained b,I DTC or any DTC Participants; (ii) the payment b,I DTC or any DTC Participant of any amount in respect of the principal of, redemption price of or interest on the Bonds; (iii) the delivery of any notice which is pernitted or required to be given to registered OM1ers under the Indenture; (iv) the selection b,I DTC or any DTC Participant of any person to receive payment in the event of a partial redernpti on of the Bonds; (v) any consent given or other action taken b,I DTC as registered OM1er; or (vi) any other matter arising with respect to the Bonds or the Indenture. The Authority or the Trustee cannot and do not give any assurances that DTC, DTC P arti ci pants or others wi 11 distribute payments of principal of or interest on the Bonds paid to DTC or its noninee, as the registered OM1er, or any notices to the Beneficial CMners or that they wi II do so on a timely basis or wi 11 serve and act in a manner described in this Official Statement. The Authority or the Trustee are not responsible or liable for the failure of DTC or any DTC Participant to make any payment or give any notice to a Beneficial CMner in respect to the Bonds or any error or delay relating thereto.

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