NFMA Advanced Seminar

1. NFMA Advanced Seminar Dirt Bonds & Workouts & Lessons Learned January 27, 2012

2. Introduction • In the ‘80s, it was Texas & Colorado. In the ‘90s, it was California. Now, it’s Florida: where are we and what have we learned? • Prediction: major delinquencies and distress across the board in the land secured market • The reality? • California: Major market stress, minor bond stress • Florida: Major market stress, major bond stress • Nevada: Major market stress, modest bond stress • Colorado: Modest market stress, but bond distress may be starting? • Why have the outcomes been so different across states? • What happens in distressed districts? • What are the lessons to be learned for the next cycle? 1

3. Today’s Panel Dean Lewallen, Vice President, AllianceBernstein Doug Nelson, Assistant Vice President, Waddell & Reed Warren Bloom, Attorney-at-Law, Greenberg Traurig William Oliver, Senior Vice President, Alliance Bernstein Eileen Gallagher, Managing Director, Stone & Youngberg/Stifel Nicolaus 2

4. Housing Market Trends and Dirt Bonds • Widespread bond market impact was expected from widespreadmarket crash Annual Residential Building Permit Issuance 1980-2010 46% drop 1986 -1991 73% drop 2005 - 2009 California volume historically averaged about 10% of national activity; dropped to 6% in 2009 National Volume Source: US Commerce Department's Bureau of the Census, Private Residential Real Estate Activity in Thousands of Units. Seasonally Adjusted Annual rates 3

5. The Low Down on Dirt National Land Secured Market Bonds Issued 2000-2011 and Still Outstanding (as of 12/31/11) 2,756 issues, $29.16 billion Source: Bloomberg. Special Tax and Special Assessment Bonds; data may be incomplete 4

6. Dirt Bonds 101 5

7. Dirt Bonds 101 – Continued 6

8. California Was the Poster Child of Problems in the 1990s. . . Land Secured Defaults Occurring 1990-1999 By Defaulted Amount Nationally: 141 issues, $1.04 billion California: 67 issues, $594 million Defaulted Amount By Year of Default Defaulted Amount By State Source: Standard & Poor’s Default Study, June 2000 7

9. Notable California Land Secured Defaults of the 1990s • Most national bond defaults in the 1990s were smaller issues. . . • . . .but California had many large projects with large bond defaults • Many defaults, large and small, occurred in fringe areas Major Defaults: (and original bond par) • Palmdale (Ritter Ranch): $50 million • Fontana (Empire Center): $46 million • Rosamond CSD: $30 million • Temecula Valley USD: $27 million • San Jacinto CFD #2: $26 million • San Diego AD: $24 million • Riverside County (A St.): $24 million • Palmdale AD #88-1 (10th St.): $22 million • Palmdale AD #90-2 (7th St.): $21 million • Hesperia AD #91-1: $21 million • Roddy Ranch Source: Standard & Poor’s Default Study, June 2000 Source: Alliance internal report; Stone & Youngberg 8

10. … But California History Managed Not to Repeat Itself Outstanding Land Secured Defaults for Bonds Issued in 2000-2011 By Defaulted Amount Total: 188 issues, $2.3 billion Florida: 155 issues, $1.9 billion California: 2 issues, $58.6 million Defaulted Amount By Year of Issuance Defaulted Amount By State Source: Bloomberg. Special Tax and Special Assessment Bonds; data may be incomplete 9

11. California Land Secured Defaults of the 2000s-2010s Expectations for stress: • Hardest hit regions • Central Valley, Inland Empire • Projects with bankrupt developers • SunCal/Lehman • Reynen & Bardis, Dunmore Homes • Empire Land, Kimball Hill Homes • Others. . . • Late cycle projects • 2006 and 2007 bond sales • Actual impact on outstanding bonds has been more muted . . . so far anyway Actual Payment Defaults: • Borrego Water CFD: $6.9 million • Lathrop CFD: $49.3 million Reserve Fund Draws: • Merced (Bellevue Ranch, Moraga) • Northstar CFD • West Patterson CFD • Western Hills (Diablo Grande) • Several CSCDA pooled issues • Several timing or delinquency-related draws that were quickly replenished Others: • Palmdale (Ritter Ranch) - again • Nevada County (Wildwood Estates) - still • Ione - still Sources: California Debt and Investment Advisory Commission Report and Stone & Youngberg 10

12. What Changed in California Land Secured Market? • Leverage: Lending practices • Project phasing • Use of proceeds to enhance value, acquire completed facilities • Local policies requiring developer-posted LOCs • Value-to-lien and quality of appraisals • Governance: Statutory and regulatory framework • SEC crackdown on fraudulent underwriting practices • Issuers required to adopt local goals & policies for CFD • Roving JPAs outlawed in response to ‘90s abuses • Quality of initial disclosure improved, requirement for continuing disclosure • CDIAC policy guidance on appraisal and disclosure standards • Ongoing CDIAC education and training of issuer community • Active District administration • Engaged bond-related professionals: issuers, underwriters, consultants, appraisers 11

13. California Issuance and Delinquency Rate Patterns • => Delinquency data trends over recent fiscal years demonstrates effectiveness of District administration Land Secured Issuance 2000-2007 By County based on Par Land Secured Delinquency Rates By County and Fiscal Year Source: County Tax Rolls and S&Y Research. The above is a sampling of bonded districts in CA and is not all-inclusive. 12

14. Insights from California Market • Difficult development environment • CEQA and other standards create tortuous, time-consuming and expensive process => Effectively winnows viable projects • Changing market landscape • Ascendance of national builders, demise of many regional builders => More staying power through downturn • Location, location, location • Geographic features limit supply of entitled land in key areas bolstering value => Then and now, problems occurred in fringe areas • Over-leverage • Extended from developers to homeowners => Market stress affected built out districts, not just raw land projects => But residential delinquencies have been fairly “digestible” by lenders • Foreclosure and bankruptcy of developer can be more problematic • Larger developer delinquencies can cause reserve draw and halted construction => Toxic combination is developer and lender stress 13

15. What Happens In Las Vegas. . .Looks a Lot Like California • Key differences • Less project phasing • Quicker cure period • Optional acceleration • How has market fared? • More extreme value declines. . . ….but limited land secured bond stress and no major bond defaults to date • Why? • Most larger projects had builders in place • High velocity of market • Reached vertical development quickly • Residential delinquencies manageable • Much lower debt/home burdens • Quicker cure period 14

16. Case Study: Lake Las Vegas - Henderson, Nevada Extremely high real estate values at peak of market 15

17. Case Study: Lake Las Vegas - Henderson, Nevada • $40 million bond sale in spring 2005 for T-16 • Developer replaced in fall 2007 • Succeeded by “work out” specialists, Atalon • Project restructuring 2008 –2010 • Infrastructure progress stalls, builders stuck • Atalon files for bankruptcy in summer 2008, continues to pay assessments • Atalon emerges from bankruptcy in summer 2010 • Acceleration of debt on large builder parcels • City forecloses on 2 large delinquent parcels, accelerates debt, no bidders at sale in spring 2011 • Exacerbates over-leverage on undeveloped parcels • Overall status • No bond defaults to date, replenished DSRF • City-controlled acquisition fund • No legal provisions for bond calls • Hyatt, Ritz and much else of original plan gone • Future development plans? Aerial view of Phases 1 & 2 16

18. Florida: 10 Things to Know Before Investing in CDDs  1. Most CDD defaults were caused as much by the lack of state government and governance in Florida, rather than just a poor real estate market. • Florida defaults were widespread, regardless of location • California defaults in the 1990’s were largely in fringe and rural areas 2. There are no guidelines, standards or state oversight for CDDs in Florida, other than general “good government statutes.” • CDIAC in California promulgates standards for leverage and appraisal methodology • Florida has nothing – Appraisals? What are appraisals? 3. The State of Florida has shown little interest in CDD oversight • Governor’s office did not get involved as CDD defaults mounted and CDDs failed to carry out their responsibilities as public entities of the state • Recent interest seems more oriented toward protecting taxpayers, not bondholders  17

19. Florida: 10 Things to Know Before Investing in CDDs 4. Local governments have no real involvement or interest in CDDs, beyond getting exactions, such as off-site improvements and school sites. • Local and county tax bases suffer when land remains undeveloped or is abandoned. • Cities and counties can dissolve CDDs and take over responsibility for operating the CDDs, but haven’t wanted to do so. 5. CDD Legislation is essentially written and controlled by the developer community. • Significant reform that improves bondholder rights and security is unlikely in the foreseeable future. • Minor changes to improve the ability to issue bonds is possible 6. CDDs, during the early and mid-stages of development, are essentially private governments run by and for the benefit of developers. • Developer’s employees and relatives sit on CDD boards and represent their interests. • Fiddler’s Creek – CDDs said that they also represented residents and voted against bondholder interests. 18

20. Florida: 10 Things to Know Before Investing in CDDs 7. There are no checks and balances on CDD Management.   • Some developers routinely engaged in questionable practices through the CDD • Selling wetlands or other public land to the CDD at inflated prices • Swapping collateral for bond issues • Changing assessment methodology to shift the tax burden to other landowners 8. CDD management often failed to enforce laws or act against the interests of bondholders. • CDDs often refused to commence foreclosure proceedings after non-payments or defaults • District Counsel, on behalf of the developers, often filed expensive and time-consuming declaratory judgment actions to delay bondholder actions to recover value.   • Sometimes, third parties gained control of the CDD boards to further their own interests 19

21. Florida: 10 Things to Know Before Investing in CDDs 9. Conflicts of interest were rife among developers, industry participants and often, professionals, much to the detriment of bondholders. • The roles of many firms were often overlapping • Underwriters invested in projects that they underwrote • Developers and lenders became bond investors, undermining institutional bondholders • The developer of Fiddler’s Creek provided his own DIP financing • Professionals often failed to carry out their duties if it could affect future business 10. Legal documents were CDDs with A & B bonds were often vague • Pledged Collateral was often hard to determine and shifted over time • Constructions funds for A & B bonds were commingled, with no records kept on the use of individual bond proceeds • Debt Service Reserve Funds were often commingled, with issues becoming cross collateralized. 20

22. When Nightmares Become Real • Taxes aren’t paid • Tax certificate sale is successful • Tax certificate sales process fails • Foreclosure process • How it works, how it varies among states and situations • Is the Board stacked against you? • Getting to your remedies with a developer controlled board • Homeowner stress, Developer stress, Lender stress • When the dominos keep falling: • What happens when the FDIC steps in • Permits and land use concerns • Bankruptcy • How it works • How it varies among situations ---and then there’s Fiddler’s Creek 21

23. Florida Has Company: A Work-Out Story from Colorado A Colorado Workout: FUBAR Metropolitan District No. 1 Pertinent Credit Details---oops • No trustee or dissemination agent–paying agent only • Poor disclosure – annual audit only • It’s a Limited, Ad Valorem Tax, not a special assessment • Housing development around a golf course • Developer in “hibernation” • Owner/lender – “deer in the headlights” • Occupied, empty and partially built homes • County assessor becomes aware 22

24. Case Study: Colorado FUBAR Metro District No. 1 A Colorado Workout: FUBAR Metropolitan District No. 1 The Harsh Reality • Decreasing Assessed Value • Mill Levy Maxed • Slow Death • Debt Service Reserve Depleted • Missed Principal Payments • Partial Interest Payments – Cash Flow Bond • WHAT DO WE DO NOW? 23

25. Work-out Strategies and Options • Bond tenders • From unspent proceeds • Debt restructure • Bank loans at discount, reduction of tax delinquencies • Value creation • Entitlement, rezoning, backbone infrastructure • Capital infusion • Thru joint-venture or ownership change, foreclosure or bankruptcy sale • Mothball • Wait out the market cycle • Forbearance • With landowner you have some faith in (what to get in exchange for forbearance) • Functional “JV” • With a developer who might build you out of the situation • Abandonment • Sometimes you might consider taking the Trust Estate and running 24

26. Lessons Learned • Governance matters • Policies are good for issuers and investors alike • Independent third-party expertise really does add value • Follow laws and covenants • Earlier action is better • Seek experienced help (legal / financial) 25

27. Disclosure Additional Information • This material contains proposed terms and conditions that are indicative and for discussion purposes only. Finalized terms and conditions are subject to further discussion and negotiation and Stone & Youngberg (“S&Y”) does not guarantee that all financing options will be available at the time of the contemplated transaction. Where indicated, this presentation may contain information derived from sources other than S&Y. While we believe such information to be accurate and complete, S&Y does not guarantee the accuracy of this information. This material is based on information currently available to S&Y or its sources and we do not undertake to update the recipient of this presentation of changes that may occur in the future. Stone & Youngberg does not provide accounting, tax or legal advice; however, you should be aware that any proposed indicative transaction could have accounting, tax, legal or other implications that should be discussed with your advisors and /or counsel. Stone & Youngberg Is Not Acting as a Municipal Advisor • Stone & Youngberg is not acting as your financial advisor or Municipal Advisor, as defined in Section 15B of the Exchange act of 1934 (as amended), and shall not have a fiduciary duty to you, in connection with the matters contemplated by these materials. This material is delivered to you for the purpose of working with you as an underwriter on the transaction described herein. In our capacity as underwriter, we will be acting solely as a principal in a commercial, arms length transaction and not as a municipal advisor, financial advisor or fiduciary to you or any other person or entity regardless of whether we or an affiliate has or is currently acting in this capacity on a separate transaction. You should consult your own legal, accounting, tax, financial and other advisors, as applicable, and to the extent you deem appropriate. 26