The Community Facilities District No. 2004-3 ("District") $19.

3 million proceeds of the Bonds are placed on deposit in the Acquisition and Construction Fund ("Acquisition Fund"). Subject to the rights of Indio Land Ventures, LLC ("Developer") under the Funding, Construction and Acquisition Agreement between the City and the Developer dated as of September 1, 2005 ("Funding Agreement"), the City may apply the proceeds to the construction of eligible public improvements. The documents may be rationally reviewed under this context. CFD 2004-3 History The District was formed pursuant to a Resolution of Formation adopted by the City in 2005 and bonds were issued in the principal amount of $26,330,000 ("Bonds") for the purpose of financing certain development fees payable to the City and others, and to further pay the cost of public facilities required as a condition of development of the Terra Lago project. 1 These costs are summarized in Resolution 9027. Note further that both Area 1 and Area 2 were covered by the vote. See Exhibit A Resolution 9027 Resolution Canvassing Results of Special Election. Fiscal Agent Agreement Application of the proceeds of the Bonds is governed by a Fiscal Agent Agreement dated as of September 1, 2005 ("Fiscal Agent Agreement") between the District and its Fiscal Agent. See Exhibit B Fiscal Agent Agreement. The City concurrently entered into the Funding Agreement with the Developer. It also addresses the use of Bond proceeds deposited in the Acquisition Fund established under the Fiscal Agent Agreement. Any application of Bond proceeds must be considered in light of the District's obligations under the Fiscal Agent Agreement related to the Bonds, state law related to the use of proceeds of the District Bonds, and the City's obligations under the Funding Agreement. Strict compliance is necessary. Fiscal Agent Agreement Requirements Under the Fiscal Agent Agreement, an original deposit of $19,497,000 was made to the Acquisition Fund. Aside from the payment for the costs of issuance of Bonds, monies in the Acquisition Fund are to be applied exclusively to pay "Project Costs". "Project Costs" are defined as "those public facilities and/or capital fees described in the Resolution of Formation" as defined in City Resolution 9025. See It is unclear why the year 2004 was used since it was initiated in 2005. The person petitioning for the land owners was Gary Williams. The Bond Counsel for the District was Elizabeth L. Martyn, now Gary Williams wife. See Exhibit E Opinion of District Attorney. See Exhibit F Petition Requesting the Establishment of a Community Services District.
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Exhibit C Resolution 9025 Resolution of Formation. The Resolution of Formation, in turn, authorizes the District to pay the cost of "Facilities" which are defined generally as public infrastructure facilities and other governmental facilities which the District is authorized to construct or finance and that are necessary to meet increased demands generated by the Terra Lago project. (Supporting documentation may define these facilities in more detail), The District requisitions monies from the Acquisition Fund directly, pursuant to a simple requisition. Thus, taken alone, the Fiscal Agent Agreement authorizes the District to expend Bond Proceeds on any eligible Project Costs; however, the public facilities must be eligible under the proceedings related to the formation of the District and, furthermore, this right is constrained by the Funding Agreement. 2 Further the transfers must include clear title to the transferred properties. This must be well documented. Any deviation may cause a default in the tax exempt status of the given facility with interest, or the given facilities. The Defeasing of the Special Escrow of $3million
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Due to the fact that the appraisals on the Terra Lago Project Area at 2-3 years was not higher than the initial $81 million, the developer was not eligible to use these funds. The $3 million 3036 bond was repurchased and has resulted in the District Bond Debt Service payment being reduced about $220,000 per year for the total life of the bond. RB Terra Lago, the undeveloped property owner, benefited the full $220,000 per year for the last 2 years, and pays no tax. So any reduction there has benefited the current owner RB Terra Lago. The Reduction in Payment Made in Area 1 for Undeveloped Property Must
2

Once the District determines that any "amount remaining in the Acquisition Fund is no longer needed to pay Project Costs", remaining amounts are deposited to the Special Tax Fund or to the Surplus Fund created under the Fiscal Agent Agreement. Transfer to the Surplus Fund is subject to a further requirement that bond counsel deliver an opinion that such transfer will not affect the federal tax exempt status of the Bonds. Monies transferred to the Special Tax Fund are applied under Section 3.2 of the Fiscal Agent Agreement to fund interest, then principal of the Bonds, among other things. Amounts deposited in the Surplus Fund are applied to debt service on the Bonds as needed, or to other District expenses, or for any other "lawful purpose" of the District (see Section 3.8). Where the amounts in the Surplus Fund are applied to debt service, Section 3.8 requires that the proceeds be yield-restricted until they are so applied.
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The City may apply unspent proceeds to the payment of debt service on the Bonds or the early redemption of Bonds, possibly including the payment of current debt service on the Bonds, but any application would reduce Special Taxes only in accordance with the Rate and Method of Apportionment of Special Taxes ("RMA"), and the owners [RB Terra Lago] of undeveloped property may be disproportionately benefited under the applicable formula.

be amended to Force Equal Payments. 4 After 10 years Area 1 deserves relief and the benefits of the Debt Service Reduction. There is little to no incentive for this builder to build at this time in Area 1k as the property values are increasing and there is no special tax payment being made. Frankly why would they consider building in Area 1 which would complete against Area 2. Proof is evident in Area 1 where a defeasment of the Special Escrow $3million led to 100% benefits to the undeveloped land owner. They pay no taxes as outlined in the 2011/2012 Wildan report on CFD 2004-3. The current version is not available on the Citys website. Only the older 2010 version. It is suggested that the City update to the current report. See Exhibit G 2011 Wildan Continuing Disclosures 2004-3 Report. This Area 1 undeveloped area should be responsible for 25% of the $1.57 million annual debt service.5 Funding, Construction, and Acquisition Agreement The City makes certain promises to the Developer in the Funding Agreement. See Exhibit D Funding, Construction, and Acquisition Agreement. First, the Funding Agreement provides that monies deposited in the Acquisition Fund ("Improvement Fund") shall be deposited and disbursed in accordance with the Fiscal Agent Agreement and the Funding Agreement. The City agrees in Section 4.2 of the Funding Agreement to purchase from the Developer the Public Facilities constructed by the Developer. Article IV sets forth the requirements for a payment request, including a requirement that the facilities be publicly owned. Article III of the Funding Agreement provides that the Developer will cause plans to be prepared for "Public Facilities" to be sold to the District,

Under the RMA, if proceeds are applied to reduce debt service, such amounts reduce Special Taxes only in the manner described in the RMA, which basically levies first against Developed Property, (up to the Assigned Special Tax) and then against Undeveloped Property, [before implementing the Backup Special Tax against Developed Property which is not the case here]. This may have the effect of disproportionately crediting Undeveloped Property with the benefit of any debt service reduction.
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The City may make amendments to the RMA without violating bond covenants or the law, but such changes would require a public process and an election. The Area 1 homeowners are the registered voters. The undeveloped property owners would not be able to influence the outcome of such vote of the homeowners. However, RB Terra Lago may sue and contest such a change.
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but arguably does not require the Developer to construct any Public Facilities except those which it chooses to construct. See Sections 3.2 and 3.3.Section 3.6 allows the Developer and the City to mutually elect to cause any of the Public Facilities to be constructed by the City. Section 8.1 of the Funding Agreement provides that the agreement may be terminated by mutual written consent and monies in the Acquisition Fund may be used to pay for Public Facilities outside of the agreement. The attached Exhibit A lists the Eligible Public Facilities. It is customary to make a list of eligible facilities. Here under the Resolution and Intention and the Community Facilities District Report, the Community Facilities District is authorizing to finance the following Facilities: Street Facilities. "Street Facilities" consist of certain road and appurtenant drainage facilities required as a condition for the development of the property in the Community Facilities District, which will be owned by the City, and may include street improvements to Terra Lago Parkway, Lago Vista Boulevard, Lago Brezza Drive, Golf Center Parkway, Avenue 44 and Avenue 43. Water Facilities. "Water Facilities" consist of certain water facilities required as a condition of development of the property in the Community Facilities District, which will be owned by Indio Water Authority, and may include water improvements in Terra Lago Parkway, Lago Vista Boulevard, Lago Brezza Drive, Golf Center Parkway, and Avenue 44. Sewer Facilities. "Sewer Facilities" consist of certain sewer facilities required as a condition of development of the property in the Community Facilities District, which will be owned by Valley Sanitary District, and may include sewer improvements in Terra Lago Parkway, Lago Vista Boulevard, Lago Brezza Drive, Avenue 44 and Avenue 43. Flood Control Facilities. "Flood Control Facilities" consist of certain flood control and storm water drainage facilities required as a condition for the development of the property in the Community Facilities District, which will be owned by the Coachella Valley Water District and may include storm drain improvements to Terra Lago Parkway, Lago Vista Boulevard, Lago Brezza Drive, Golf Center Parkway. Estimated Facilities Costs. The Bonds are anticipated to provide the following amounts for the acquisition and construction of the Public Facilities: Street Facilities $1,382,530 Water Facilities 1,694,946 Sewer Facilities 1,322,867 Flood Control Facilities 642,448 Related Site Improvements 3,183,322 $8,226,113 Total:

Payments for street improvements [private streets] which do not constitute Public Facilities for which payment is made is contrary to the documents. Further there is nowhere written where water impact fees for Area 2 are listed. How are water impact fees for Area 2 indicated in any document? The impact fees are certainly not district backbone structures. It appears as though that the City may have processed and approved payments to the Developer for facilities which do not constitute Public Facilities under the Funding Agreement or "Project Costs" under the Fiscal Agent Agreement. It appears clear that payment may only be requested for facilities to be owned by the City or another public agency, even if the facilities are otherwise listed in Exhibit A of the Funding Agreement. The Funding Agreement defines "Public Facilities" to mean one or more of the Public Facilities described in Exhibit A which are "eligible to be financed out of the Improvement Fund." As noted above, the Fiscal Agent Agreement authorizes monies in the Acquisition Fund to be expended only for costs of the Public Facilities described in the Resolution of Formation, which clearly refers to publicly owned facilities. This is consistent with the requirements of the law relative to formation of community facilities districts. Moreover, the Developer is clearly obliged to deliver to the City "Acceptable Title" to any public facilities in connection with its receipt of payment for that public facility. See for example Section 5.1. We recommend that the City continue to vigorously pursue correction of this issue. 1. The City require as a condition of approval that RB Indio [Hovnanian as builder] complete their Mello Roos offering for up to $30 million as voted by the previous landowners. That in reality they may only be able to raise [$31,000 per undeveloped lot [x] 831 homes= $25 .8 million appraised value divided by the land value to debt ratio of 3 for a total eligible raise of $8.6 million. That this be used to repurchase the bonds outstanding from Area 1 to lessen the burden and repay their portions of infrastructure costs. 2. The City consider using a portion of their income stream from the Timeshare TOT. That this portion be allocated based on the percentage of improvements it obtained from the 2004-3 offering. Further the City shall disclose how the tax is able to called 2004-3 instead of 2005. Disclose the agreements which provided that the timeshare be annexed for CFD 2004-1, but not 2004-3. This must be transparent. 3. That the City be responsible and facilitate an amendment to the 20043 RMA for Area 1, so that the total tax of 25% be assessed for all the RB Terra Lago

property formerly known as the 133 unit Lido on the Lake or the Ashbrook Property. Tract Map 31601-1. The City should understand that this is only a small amount of the research, and that this inconvenience should be resolved quickly and with integrity.

Best,

Gracie Nilsen and associate

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