Creating Affordable Housing Through Public- Private Partnerships

1. New Mexico Housing Summit Creating Affordable Housing Through Public- Private Partnerships

2. Disclaimer RBC Capital Markets, LLC (“RBC CM”) is providing the information contained in this document for discussion purposes only and not in connection with RBC CM serving as Underwriter, Investment Banker, municipal advisor, financial advisor or fiduciary to a financial transaction participant or any other person or entity. RBC CM will not have any duties or liability to any person or entity in connection with the information being provided herein. The information provided is not intended to be and should not be construed as “advice” within the meaning of Section 15B of the Securities Exchange Act of 1934. The financial transaction participants should consult with its own legal, accounting, tax, financial and other advisors, as applicable, to the extent it deems appropriate. This presentation was prepared exclusively for the benefit of and internal use by the recipient. This presentation is confidential and proprietary to RBC Capital Markets, LLC (“RBC CM”) and may not be disclosed, reproduced, distributed or used for any other purpose by the recipient without RBCCM’s express written consent. By acceptance of these materials, and notwithstanding any other express or implied agreement, arrangement, or understanding to the contrary, RBC CM, its affiliates and the recipient agree that the recipient (and its employees, representatives, and other agents) may disclose to any and all persons, without limitation of any kind from the commencement of discussions, the tax treatment, structure or strategy of the transaction and any fact that may be relevant to understanding such treatment, structure or strategy, and all materials of any kind (including opinions or other tax analyses) that are provided to the recipient relating to such tax treatment, structure, or strategy. The information and any analyses contained in this presentation are taken from, or based upon, information obtained from the recipient or from publicly available sources, the completeness and accuracy of which has not been independently verified, and cannot be assured by RBC CM. The information and any analyses in these materials reflect prevailing conditions and RBC CM’s views as of this date, all of which are subject to change. To the extent projections and financial analyses are set forth herein, they may be based on estimated financial performance prepared by or in consultation with the recipient and are intended only to suggest reasonable ranges of results. The printed presentation is incomplete without reference to the oral presentation or other written materials that supplement it. IRS Circular 230 Disclosure: RBC CM and its affiliates do not provide tax advice and nothing contained herein should be construed as tax advice. Any discussion of U.S. tax matters contained herein (including any attachments) (i) was not intended or written to be used, and cannot be used, by you for the purpose of avoiding tax penalties; and (ii) was written in connection with the promotion or marketing of the matters addressed herein. Accordingly, you should seek advice based upon your particular circumstances from an independent tax advisor.

3. What is a PPP? • Various definitions • Public Private Partnership (PPP) describes a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies • PPP involves a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project • Private involvement in projects already • Private construction • Private investors buy municipal bonds • Covers a broad spectrum of Private involvement in US • Design Build (DB) • Design Build Operate/Maintain (DBO) • Design Build Finance (DBF) • Design Build Finance Maintain (DBFM) • Design Build Finance Operate/Maintain (DBFOM) 2

4. Brownfield v. Greenfield • Brownfield • Gives governments ability to raise needed funds, for example to fill budget deficits or to undertake new infrastructure projects • Government leases existing asset to private entity in exchange for large upfront payment • Private entity gets right to collect tolls or other revenues generated by asset for life of the lease, called a concession • Private entity operates and maintains asset during concession • Government retains legal ownership of asset • Greenfield • Same concept as above regarding existing assets, except that private entity also constructs asset (usually no upfront payment) • Revenues may take the form of availability or similar payments from government • Government gets control of asset at end of concession term 3

5. Revenue Risk v. Availability Payments • Revenue Risk • Private entity and lenders take risk that project revenues and user fees will be able to service debt and provide sufficient equity return • Toll roads, managed lanes, airports • May have revenue sharing over certain levels between government and private entity • Availability Payments • Private entity receives periodic payments from government during operating period as long as project is properly operated and maintained • Used for roads, bridges and tunnels that cannot generate sufficient cash flow to service debt and provide equity return • Used for assets that do not generate cash flow (courthouses, schools, hospitals, etc.) or other reasons 4

6. Sectors Suitable for P3s • The sectors that are suitable for P3s differ across countries • Roads and Bridges • Tunnels • Airports and Ports • Parking Facilities • Mass Transit Systems (high-speed rail, light rail, bus) • Water Treatment and Waste-Management Facilities • Housing (affordable housing, military housing) • Hospitals • Prisons • Courthouses • Sports Facilities • Schools 5

7. Growing acceptance of Private Public Partnerships (“P3”) – albeit each state is a different market Knowledge migration from Canada, Australia and UK into the U.S. P3 market Growing acceptance for availability payments transactions (however appropriations / authority credit risk is a key issue) Remains a transportation centric market Greenfield and real toll/volume based transportation projects will provide a steady source of new transactions Observations Update on U.S. P3 Market – Status and Trends Transaction Profile Movement towards greenfield transactions… The market is beginning to witness a shift away from: Trend is moving toward: • Brownfield transactions • Politically challenging • Construction based greenfield projects • Delivery of new public infrastructure

8. P3 Project Structure Procurement Process • Step 1 – Request for Qualification (RFQ) • Step 2 – Shortlist (if applicable) • Step 3 – Request for Proposal (RFP) • Lenders get involved; design-build contract price and pricing of loan have largest impact on bid price • Shortlisted bidders comment on Concession Agreement and Instructions to Proposers (ITP) • All bidders submit bid on same Project Agreement and ITP • Step 4 – Naming of Preferred Bidder • Step 5 – Execution of Concession Agreement • Step 6 – Financial Close

9. P3 Project Structure Party best able to manage specific risks should assume such risks Risk allocation based on interwoven documentation that must fit together Risk allocation starts with Project Agreement between Authority and Private Entity (special purpose company or SPC) and is further allocated to other project participants, including design-builder SPC accountable to Authority and Lenders (in addition to other project participants such as design-builder) SPC will need to get consent from Authority and Lenders for specified amendments, waivers and change orders Limitations on what SPC can do (i.e. negative covenants in financing documents, restrictions in Project Agreement) Lenders’ recourse is to Project, the SPC, SPC assets and Lenders’ collateral Lenders’ debt is not guaranteed Equity needs to wait for operating period to get their return Design-Builder to get paid monthly from draws under financing documents Equity to be funded upfront or during construction period but in any event would be funded upon an Event of Default under Financing documents Fundamental Principles 8

10. Why use Project Finance? P3’s typically use non-recourse Project Finance • Project Finance is complex, slow and has a high upfront cost! But… • Benefits for P3 projects • Low funding cost due to high leverage • Increases investors’ financial capacity, so creating more competition for projects • Enables public sector to assess and monitor project-specific data • Third-party due diligence helps to ensure project deliverability • Benefits for investors • Non-recourse • Greater leverage, which may be off-balance sheet • Hence higher return on investment • Enables partnerships with different financial strengths to work together 9

11. Risk Transfer – The Fundamental Basis For P3 P3s All About Risk Transfer or Risk Sharing Maxim is Risk is Passed to the Party Best Able to Mitigate or Manage It Private Sector Can Optimize & Mitigate Risk is Managed, Assessed, and Priced by Private Sector • Design risk • Completion risk • Counterparty credit risk • Maintenance risk • Interface risk (interactions between above risks) • Public sector always has inherent strengths • Legislative power • Ability to obtain site • Tax exemptions • Liability exemptions or caps • Ability to “self insure” • Skilled specialists with necessary expertise and experience • Whole life cost • Patient Equity and active management • Fixed price turnkey • Insurance • Contingencies/ Concessionaire Equity 10

12. Role of Equity • Equity provides a buffer over third party debt funding (typically 10-15% in Availability Payment deals) and takes the first loss • Equity upside is limited Availability Payment deals - some upside unused contingencies but little organic growth as there is no volume or demand based payments • Long term investment horizon - no distributions pre-completion • Compensation for development / construction risk is received over entire project term • Ultimate investors/holders of PPP equity (usually via infrastructure-funds) are pension funds etc – relatively risk averse • Tends to be priced tightly compared to corporate finance target returns (20%+) • Equity’s most material exposure is contractor non-performance • In a well structured and diligenced deal, the probability of this risk should not be high, however, if it occurs impact can be catastrophic (total loss of investment)

13. Investment Criteria for Equity Providers • Potential for upside from unused contingencies … • … but also for severe downside since take the first loss on a limited basket of risks including • Cost increases, e.g. insurance, lifecycle or taxation • Replacement of subcontractors • Refinancing, etc. • Similar due diligence requirements and expectations as senior funders vis a vis risks • However, will also be looking for least restrictive funding agreements possible • Allow them to manage the business • Allow them to distribute cash 12

14. P3 Project Structure The Role of the Special Purpose Company • The Special Purpose Company (“SPC”) is the vehicle through which P3 projects are delivered • Main responsibilities include: • Act as a single point of contact with the Authority (through the Project Agreement) and lenders; • Enter into project documents and financing documents; • Raise project financing; • Governance, controls and monitoring; and • In the case of this project, to manage maintenance obligations • Few assets and efficiently resourced • Key decisions typically made by a board (representatives of the key stakeholders) • SPC to be properly staffed to handle responsibilities • May manage maintenance and operating obligations – may do so by competitively procured subcontracts

15. P3 Project Structure Typical Project Structure Authority Project Agreement Lenders SPC Operations & Maintenance Contract* O&M contractor Project Funding Shareholders Design-Build contract D&B contractor (CJV) *Not uncommon for SPC to self perform O&M i.e. no O&M subcontractor, as is the case in this transaction

16. Simplistic Payment Structure • Debt to equity ranges from 50:50 to 90:10 depending on risk profile • i.e. brownfield / greenfield, availability / toll risk, etc. • Debt is provided on a non-recourse basis • Contractor(s) typically contract as part of a Design & Build Joint Venture • Contracts supported by guarantees / bonding for construction risk • Availability payments commence at the start of service delivery and are subject to performance regime through the Project Agreement Lenders Interest & Principal Debt Milestone / Availability Payments (User fees, if applicable) Public Sector SPC CJV CJV Guarantors Milestone Payments Equity Distributions Equity Investors “Sponsors”

17. Principal Documentation • Concession Agreement • Design-Build Contract • Back to back with Project Agreement • Design-Build Contract Guarantees • Operation and Maintenance (“O&M”) Agreement (if necessary) • Operation and Maintenance Guarantee (if necessary) • Interface Agreement (if necessary) • Limited Liability Company Agreement • Financing • Loan/bond documents; Security documents • Direct Agreements/Consents to Assignment • Lenders’ Direct Agreement for Project Agreement • Lenders’ Direct Agreement for Design-Build Contract • Lenders’ Direct Agreement for Design-Build Contract Guarantees • Authority Direct Agreement for Design-Build Contract • Lenders’ Direct Agreements for O&M Agreements (if applicable)

18. Project Agreement Project Agreements in Traditional Markets Follow Common Form • UK: Tend to follow Standardization of PFI Contracts (“SOPC”) • EU Countries: Often have their own national standards • Canada: Varies by province but British Columbia and Ontario broadly modeled on SOPC • Australia: National guidelines which provide a range of options at State level. Again, broadly modeled on SOPC • United States: Wide range, no standard contractual framework

19. Contractor Security / Lender’s Requirements Investment Criteria for Senior Lenders • Senior lenders’ return is limited with no upside • Very high gearing with no recourse to shareholders • Hence senior lenders’ focus is on minimizing their risk • Due Diligence • Technical: Design, timetable, cost budget reasonable, construction methodology and appropriateness • Legal: Contracts give the risk allocation, protections and control required • Insurance: Requisite insurances are in place • Contractor: Experience and capability to execute the contract • Financial strength: Net asset value, credit rating • Surety / Guarantees • Levels of third party support given • Other • Size of investment vs. time required • Market conditions

20. Construction Cost Over-Run or Delay Operating Performance Insolvency of Major Project Party Cost Over-Runs at SPV Level Lender’s Risk & Mitigations What can go wrong? • Contract under-priced • Too aggressive timetable • Unexpected complications, e.g. site conditions worse than expected • Senior lenders and equity protections: • Technical Advisor (“TA”) sign-off of contingencies in cost and timetable • Contractor held to fixed price turnkey contract • Contractor liable for Liquidated Damages during delay • In worst case scenario Contractor has Termination liabilities • Senior lenders in addition have buffer of equity return • Contract under-priced • Unexpected cost increases above indexation • Inability to meet required performance standards • Senior lenders and equity protections: • TA sign-off of performance standards and contingencies in costs • Contractor held to fixed price contract • Benchmarking/market testing for soft services • Performance deductions passed through to operator (whole fee at stake) • In worst case scenario Operator has Termination liabilities • Senior lenders in addition have buffer of equity return • Example: Jarvis situation in the UK • Senior lenders and equity protections: • Financial strength of subcontractors assessed upfront • Parent Company Guarantees required • Third party support required for weaker contractors • Senior lenders in addition have buffer of equity return • Management costs • Lifecycle costs if risk held at SPV level • Insurance costs • Senior lenders and equity protections: • TA sign-off of adequacy of lifecycle budget • Insurance premia sharing with Authority • General SPV contingencies

21. Example Security Package Required by Funders for Similar Transactions Security Package Security required by Funders and Equity • Where project finance is used, the security normally required by the financiers (funders and equity) includes: • Security over all the project cashflows and assets (including contractual rights) and equity in the project company; • A direct agreement with the Authority, providing rights for lenders to step into Project Agreement in the event of insolvency or other default; • A direct agreement with the subcontractors, providing rights for the lenders to step into subcontracts in the event of insolvency or other default; and • Guarantees or bonding of the subcontractors’ obligations under the subcontracts (which may be provided to the project company and secured in favor of the lenders);

22. Control & Monitoring Controls & Monitoring Requirements • Lenders exercise varying degrees of control over project finance borrowers • Covenants – general undertakings requiring compliance with terms of project documents, consents etc • Representations and Warranties – requiring borrowers to periodically certify that they have been in compliance (considered a more active mechanism of control as borrower has to take positive action to certify) • Agent (on behalf of syndicate) in a bank deal or Trustee in a bond deal will require the following to monitor project performance: • Monthly report from the technical adviser (TA) during construction, certifying construction costs to be drawn down and compliance with program • Periodic TA report during operations monitoring operating performance • Periodic update to financial model to calculate key financial ratios (to permit equity distributions) • Monitoring of insurances by insurance adviser to ensure insurance remains in place • Annual audited and monthly/semi annual management accounts • Typically a ‘sweep up’ provision requiring Borrower to provide any other information that the Agent/Trustee reasonably requests • Regulation of flow of funds through Depositary Agreement

23. Control & Monitoring Priority of Payments Cash Waterfall (Representative Simplified Illustration) Project Revenues Project Revenues Project Revenue Account Operations and Maintenance Expenses Interest on Debt Principal on Debt Debt Service Reserve Account Maintenance Reserve Account Other Reserve Accounts Equity Distributions

24. RBC Capital Markets – Albuquerque Staff • Paul J. Cassidy Erik Harrigan Loretta Brush • Managing Director Director Associate Vice President • (505) 872-5991 (505) 872-5992 (505) 872-5994 • paul.cassidy@rbccm.com erik.harrigan@rbccm.com loretta.brush@rbccm.com • Andrew Stricklin Marlo Houk • Associate Administrative Assistant • (505) 872-5996 (505) 872-5999 • jeremy.landrum@rbccm.com marlo.houk@rbccm.com • RBC Capital Markets, LLC • 6301 Uptown Blvd. N.E., Suite 110 • Albuquerque, NM 87110 • (505) 872-5999 • Fax: (505) 872-5979