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RDAP-2009-01 - 2009-05-18RESOLUTION NO. RDAP-2009-01 A RESOLUTION OF THE DEVELOPMENT AUTHORITY OF PEARLAND (DAP), APPROVING THE PRELIMINARY OFFICIAL STATEMENT REGARDING ISSUANCE OF TAX INCREMENT CONTRACT REVENUE BONDS, SERIES 2009, AND APPOINTING PAYING AGENT/REGISTRAR FOR SUCH BONDS WHEREAS, The Development Authority of Pearland (the "Authority"), has been legally created and has such authority as granted by state law and as has been delegated to the Authority by the City of Pearland, Texas (the "City"); and WHEREAS, the Board of Directors has convened on this date at a meeting open to the public to receive and review the Preliminary Official Statement for the Authority's proposed Tax Increment Contract Revenue Bonds, Series 2009, and to appoint a Paying Agent and Registrar relating to the issuance of such bonds; and WHEREAS, following review, the Board of Directors has determined to approve the Preliminary Official Statement; and WHEREAS, following review, the Board of Directors has determined to appoint Wells Fargo Bank, National Association, as Paying Agent and Registrar; Now, Therefore BE IT RESOLVED BY THE BOARD OF DIRECTORS: Section 1. That the Development Authority of Pearland, TX hereby approves the Preliminary Official Statement for the Authority's proposed Tax Increment Contract Revenue Bonds, Series 2009. A copy of the Preliminary Official Statement is attached hereto and incorporated herein. Section 2. That the Development Authority of Pearland, TX hereby appoints Wells Fargo Bank, National Association, as Paying Agent and Registrar for the issuance of the Authority's proposed Tax Increment Contract Revenue Bonds, Series 2009. PASSED, APPROVED, AND ADOPTED this 20th day of April, A.D. 2009. om Reid Chairman ATTEST: Ed Baker Secretary Reso AGENDA REQUEST DEVELOPMENT AUTHORITY OF PEARLAND PEARLAND, TEXAS AGENDA OF: 11/03/2008 ITEM NO.: Resolution No. RDAP-2009-01 DATE SUBMITTED: 10/20/08 REPRESENTING: City of Pearland PREPARED BY: Claire Bogard PRESENTOR: Frank Ildebrando SUBJECT: Bond Sale Series 2009 in the amount of $7,905,000 EXHIBITS: Preliminary Official Statement EXPENDITURE REQUIRED: None PROJECT: N/A EXECUTIVE SUMMARY For the past fours years, the Development Authority has issued debt to reimburse the developer for infrastructure improvements within Pearland TIRZ #2, pursuant to the Master Developer agreement and financing plan. To -date, the DAP has issued $49.7 million in debt, including issuance costs, based on supported value on the ground and reimbursed the Developer $48.979 million, including $5.9 million in cash reimbursements. Based on estimated values as of January 1, 2009, it has been determined that the property taxes generated within the TIRZ can support a debt issuance of $7.9 million, of which $6.5 million would be reimbursed to the developer and the remaining would be issuance costs and a reserve fund. Use of Funds: Developer Reimbursement $6,510,000 Reserve Fund $ 742,175 Issuance Costs $ 652,825 Total Bond Issuance $7,905,000 Revised 2007-01-09 It had been projected several years ago that based on the original assumptions this issuance would be approximately $14.8 million and projected pay-off of all obligations would occur in 2019. The current financial model projected substantial bond sales ($20+million) over the next three years each. Marsh Darcy is in the progress of updating the financial projections of the TIRZ so projections and financial models can be updated. The bond sale will occur on May 18t" with anticipated delivery of the funds on or around June 23, 2009. RBC Capital Markets, the Authority's financial advisor, will be present to discuss the anticipated bond sale. RECOMMENDED ACTION Consideration and approval of Preliminary Official Statement for Series 2009 bond sale in the amount of $7,905,000. Revised 2007-01-09 Development Authority of Pearland Overview of: $7,905,000* Tax Increment Contract Revenue Bonds, Series 2009 April 20, 2009 Prepared By: RBC =ts * Preliminary, subject to change. Bond Buyer Index of 25 Municipal Revenue Bonds January 2006 to Present 7.00 6.50 6.00 _ 5.50 J 5.00 4.50 4.00 3.50 ZZ"torarr$ar�' dOptnin ��6�bbbbbbb�pbotl-Nt.ts,NN.t�,�00000pocoococpooc0008`aa O O SSSO O SO p SO O SSSO SSO SN O SSSSSSpp66SN SSSS� SSp SNN SN SrrO S<O�Ocp gN SS NNNNNNNNNryryNNNNNNNNNry NNNNNNNNe�ry ^NNNNNNNNNO.,�O�.,�.,��b.,O"V�q�^p�^ 00��^O^��jj..�^Nn'�bNN�OO'��NNoOOtiNNNOOti�tVNOO�ti�c�NO�'�'�'NNNOO��rytVNOO NNNOO '-t aZ a�c�' ao c ate' �a4 zty o a� ca-Q� aA IS u� 5.63 % FY Current Plus: Series 2009 Bonds* Total Debt Ehcling Total Debt Total Principal Service 9/30 Service Principal* Interest(a) & Interest Requirements 2009 $3,547,059 $3,547,059 2010 3,463,509 $95,000 $642,281 $737,281 4,200,790 2011 3,459,771 230,000 507,650 737,650 4,197,421 2012 3,462,756 245,000 492,700 737,700 4,200,456 2013 3,462,069 260,000 476,775 736,775 4,198,844 2014 3,459,141 280,000 459,875 739,875 4,199,016 2015 3,462,384 295,000 441,675 736,675 4,199,059 2016 3,461,769 315,000 422,500 737,500 4,199,269 2017 3,462,229 335,000 402,025 737,025 4,199,254 2018 3,462,816 355,000 380,250 735,250 4,198,066 2019 3,458,360 385,000 357,175 742,175 4,200,535 2020 3,374,260 380,000 332,150 712,150 4,086,410 2021 3,372,845 405,000 307,450 712,450 4,085,295 2022 3,376,220 425,000 281,125 706,125 4,082,345 2023 3,373,114 460,000 253,500 713,500 4,086,614 2024 3,374,819 485,000 223,600 708,600 4,083,419 2025 3,373,740 520,000 192,075 712,075 4,085,815 2026 3,376,594 550,000 158,275 708,275 4,084,869 2027 3,375,594 585,000 122,525 707,525 4,083,119 2028 3,372,694 630,000 84,500 714,500 4,087,194 2029 3,372,950 670,000 43,550 713,550 4,086,500 Total $71,904,692 $7,905,000 $6,581,656 $14,486,656 $86,391,348 * Preliminary, subject to change. (a) Interest estimated at 6.50% for illustration purposes only. Includes costs of issuance. 2 S M T W T F S 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 S M T W T F S 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 S M T W T F S 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 DEVELOPMENT AUTHORITY OF PEARLAND $7, 905, 000* Tax Increment Contract Revenue Bonds, Series 2009 Day/Date Action Participants Monday, April 6 Third Draft of P.O.S. (Forward to all Participants) RBC, AK, ABHR City, DAP, TIRZ Monday, April 13 Final Draft of P.O.S. RBC, DAP, AK, ABHR (Forward to all Participants) Monday, April 20 Development Authority of Pearland Meeting RBC, DAP, AK, ABHR, City Approve the P.O.S. for the Sale of the Bonds Friday, May 1 Final Comments Due on P.O.S. RBC, DAP, AK, ABHR Monday, May 4 Print and Distribute P.O.S. RBC, AK, ABHR Monday, May 18 DAP and City Meetings to Approve the Sale of RBC, City, AK, ABHR, DAP the Bonds Tuesday, May 19 Review Final Official Statement RBC, AK, ABHR Tuesday, May 26 Print Final Official Statement RBC, AK, ABHR Tuesday, June 23 Delivery of the Bonds RBC, DAP, AK, ABHR PARTICIPANTS DAP — Development Authority of Pearland TIRZ — City of Pearland Reinvestment Zone #2 City - City of Pearland RBC — RBC Capital Markets Corporation AK — Andrews Kurth LLP ABHR — Allen Boone Humphries Robinson LLP AS — Assessments of the Southwest * Preliminary, subject to change. 3 I Draft 04/20/2009 c PRELIMINARY OFFICIAL STA'rEMENT DATED MAY 4, 2009 sIN THE OPINION OF CO -BOND COUNSEL, INTEREST ON THE BONDS IS EXCLUDABLE FROM GROSS INCOME FOR FEDERAL INCOME TAX PURPOSES UNDER EXISTING LA IV, SUBJECT 3 TO THE MATTERS DESCRIBED UNDER "TAX MATTERS —TAX EXEMPTION" HEREIN, AND IS NOT INCLUDABLE IN THE ALTERNATIVE MINIMUM TAXABLE INCOME OF INDIVIDUALS AND CORPORATIONS. SEE "TAX MATTERS" FOR A DISCUSSION OF THE OPINION OF CO -BOND COUNSEL J $7,905,000` NEW ISSUE —BOOK ENTRY ONLY DEVELOPMENT AUTHORITY OF PEARLAND RATINGS: S&P"—" r`-• J (a non-profit local government corporation acting on behalf of the City of Pearland, Texas) T Tax Increment Contract Revenue Bonds, Series 2009 (SEE `BOND INSURANCE") s Dated: June 1, 2009 Due: as shown on inside cover page The Development Authority of Pearland (the "Authority"), a Texas non-profit local government corporation acting on behalf of the City of `c Pearland, Texas (the "City"), is issuing its Tax Increment Contract Revenue Bonds, Series 2009 (the "Bonds"). The Bonds are payable solely from the F. 5? Contract Tax Increments, as defined below, and certain funds on deposit with Wells Fargo Bank, National Association, Houston, Texas (the "Trustee"), Y. together with earnings and investments thereon (collectively, the "Pledged Revenues") pursuant to an Indenture of Trust, as supplemented, (the "Indenture") -5 between the Authority and the Trustee. The Bonds are not payable from any other funds of the Authority other than the Pledged Revenues. Interest on the a o Bonds accrues from June 1, 2009 (the "Dated Date"), and is payable September 1, 2009, and each March 1 and September 1 thereafter until the earlier of r n maturity or redemption. See "THE BONDS." r The Authority was created to aid, assist, and act on behalf of the City in the performance of the City's governmental and proprietary functions with S v respect to, and to provide financing for, Reinvestment Zone Number Two, City of Pearland, Texas (the "TIRE'), which is located in the City. The City Council of the City (the "City Council") designated a reinvestment zone and created the TIRZ in 1998 to include approximately 3,467 acres of land (the r ("Original Area"). The City approved the annexation of an additional 457 acres of land (the "First Annexation Area") into the boundaries of the TIRZ on July r y 10, 2006. The City approved the annexation of an additional seven acres of land (the "Second Annexation Area," and together with the First Annexation, Area, the "Annexation Area") into the boundaries of the TIRZ on November 13, 2006. The TIRZ operates under the provisions of the Tax Increment Financing Act, Chapter 311, Texas Tax Code (the "TIF Act") to facilitate the development of the land within the boundaries of the TIRZ, which encompass > the Shadow Creek Ranch master planned community ("Shadow Creek Ranch") and other property, and benefit the City as a whole. The City, Alvin Independent School District ("AISD"), Brazoria County, Texas ("Brazoria County") and Fort Bend County, Texas ("Fort Bend County") have agreed to o deposit to the Tax Increment Fund established for the TIRZ (the "Tax Increment Fund") annually a certain percentage of tax collections arising from their taxation of the increase, if any, since January 1, 1998, in the total appraised value of all taxable real property located in the Original Area of the TIRZ, and the R City, Brazoria County and Fort Bend County have agreed to deposit to the Tax Increment Fund tax collections arising from its taxation of the increase, if any, rsince January 1, 2006, in the total appraise& value of taxable real property located in the Annexation Area of the TIRZ. (the "Tax Increments"). See "SOURCE AND SECURITY OF PAYMENT FOR THE BONDS — Tax Increments." The City, the Authority, and the TIRZ entered into an agreement (the "Tri-Party Agreement") which sets forth, among other things, the duties and t responsibilities of the Authority, the RZ as they v? in the TIRZ and Shadow Creek Ranch, and nd pursuant y, and hI to which trelate reimbursements Project the City and the TIRZ haveto paytoAuthority tthor ty on an annual basis certain of the Tax i; Increments then available in the Tax Increment Fund (the "Contract Tax Increments"). a A portion of the proceeds from the sale of the Bonds will be used to reimburse the developer for certain Project Costs including infrastructure and 9 >, related improvements made by such developer within the TIRZ authorized according to the Project Plan and Reinvestment Zone Financing Plan of the TIRZ e " adopted by the Board of Directors of the TIRZ on August 23, 1999 and approved by the City Council on August 23, 1999, as amended by the First li 4 r n Amendment, the Second Amendment, and the Third Amendment (defined herein, and collectively, the "Plan") and interest on funds advanced therefor. `c 3 Project Costs to be reimbursed from this Bond issue include (i) monumentation and signage, (ii) landscaping improvements, (iii) street and sidewalk paving c and signalization, (iv) water, sanitary sewer and drainage facilities, (v) lakes and parks, and (vi) land acquisition. Proceeds from the sale of the Bonds will . also be used to pay costs of issuance of the Bonds. See "PLAN OF FINANCING — Use of Bond Proceeds." THE BONDS ARE LIMITED OBLIGATIONS SOLELY OF THE AUTHORITY AND ARE NOT OBLIGATIONS OF THE CITY AND DO c ^ NOT GIVE RISE TO A CHARGE AGAINST THE GENERAL CREDIT OR TAXING POWERS OF THE CITY. FURTHERMORE, THE BONDS ARE NOT OBLIGATIONS OF AISD, BRAZORIA COUNTY, FORT BEND COUNTY, THE STATE OF TEXAS OR ANY ENTITY OTHER THAN THE V AUTHORITY. THE PURCHASE AND OWNERSHIP OF THE BONDS IS SUBJECT TO SPECIAL RISK FACTORS AND ALL PROSPECTIVE PURCHASERS ARE URGED TO EXAMINE CAREFULLY THIS ENTIRE OFFICIAL STATEMENT WITH RESPECT TO THE INVESTMENT z ; SECURITY OF THE BONDS, INCLUDING PARTICULARLY THE SECTION CAPTIONED "RISK FACTORS." See "SOURCE AND SECURITY OF c E a PAYMENT FOR THE BONDS." •� 1 4 s a s The Authority has applied for a municipal bond insurance policy to guaranty the scheduled payment of principal and interest on the Bonds. c `o r - SEE MATURITY, PRICING SCHEDULE, CUSIP NUMBERS AND REDEMPTION PROVISIONS ON INSIDE COVER PAGE The Bonds will be issued in fully registered form only, in denominations of $5,000 or any integral multiple thereof. Principal of the Bonds will be o payable upon presentation of the Bonds at the designated payment office of the Trustee. Interest on the Bonds will be payable as of the interest payment date, J5 2" by the Trustee to the registered owners as shown on the Bond Register kept by the Trustee (the "Registered Owners") on the fifteenth calendar day of the month prior to each interest payment date or pursuant to such other customary banking agreements as may be agreed upon by the Trustee and the Registered C Owners at the risk and expense of the Registered Owners. See "THE BONDS — Description." .—? When issued, the Bonds will be registered in the name of Cede & Co., as registered owner and nominee for The Depository Trust Company, New York, New York ("DTC"), which will act as securities depository for the Bonds. The Bonds will be issued in book -entry only form, and beneficial owners •� of the Bonds will not receive physical delivery of bond certificates except as described herein. During any period in which ownership of any of the F s Bonds is determined only by a book entry at DTC, the Trustee will make payments on such Bonds to DTC or DTC's nominee in accordance with J arrangements between the Authority and DTC. See "THE BONDS — Book Entry Only System." a 3 The Bonds are offered by the Underwriter subject to prior sale, when, as, and if issued by the Authority and accepted by the Underwriter, subject, among other things, to the approval by the Attorney General of Texas and the approval of certain legal matters by Allen Boone Humphries Robinson LLP and Ep o Andrews Kurth LLP, Co -Bond Counsel. Certain other matters will be passed upon on behalf of the Underwriter by Winstead PC, counsel to the Underwriter. c o Delivery of the Bonds through DTC is expected on or about June 23, 2009. FIRST SOUTHWEST COMPANY a o ~ ' ° Preliminary, subject to change. MATURITY SCHEDULE, INTEREST RATES, YIELDS, CUSIP NUMBERS, AND REDEMPTION PROVISIONS $7,905,000* Tax Increment Contract Revenue Bonds, Series 2009 Initial CUSIP Maturity Principal Interest Reoffering Number(`) (September 1) Amount* Rate Yieldsb) 704867 2009 2010 $ 95,000 % % 2011 230,000 2012 245,000 2013 260,000 2014 280,000 2015 295,000 2016 315,000 2017 335,000 20181a) 355,000 20191a) 385,000 20201a) 380,000 2021sa) 405,000 20221a) 425,000 20231a) 460,000 2024sa) 485,000 2025sa) 520,000 2026sa) 550,000 2027'a) 585,000 2028sa) 630,000 2029sa) 670,000 Preliminary, subject to change. (a) Bonds maturing on or after September 1, 2019 are subject to optional redemption on September 1, 2018 or on any date thereafter at a price of par value plus accrued interest on the principal amounts called for redemption to the date fixed for redemption. See "THE BONDS — Optional Redemption." (b) Initial reoffering yield represents the initial offering yield to the public which has been established by the Underwriters for offers to the public and which may be subsequently changed by the Underwriter and is the sole responsibility of the Underwriter. The initial reoffering yields indicated above represent the lower of the yields resulting when priced to maturity or to the first call date. Accrued interest from June 1, 2009 to the date fixed for delivery, is to be added to the price. (c) CUSIP numbers have been assigned to the Bonds by Standard & Poor's CUSIP Service Bureau, A Division of The McGraw-Hill Companies, Inc. and are included solely for the convenience of the owners of the Bonds. Neither the Authority nor the Underwriter are responsible for the selection or correctness of the CUSIP numbers set forth herein. M BOARD OF DIRECTORS DEVELOPMENT AUTHORITY OF PEARLAND"' Name Title Tom Reid Chairman Bill Sloan Vice -Chairman Ed Baker Secretary Tom Pool Member Vacant Vacant Professional Consultants RBC Capital Markets Corporation Financial Advisor Allen Boone Humphries Robinson LLP and Andrews Kurth LLP Co -Bond Counsel Wells Fargo Bank, National Association Trustee (" The Directors of the Authority are appointed by the City Council for two year terms pursuant to the Authority's by-laws. iii TABLE OF CONTENTS USE OF INFORMATION IN OFFICIAL STATEMENT.......................................................... vi SALE AND DISTRIBUTION OF THE BONDS ........... vi The Underwriter........................................................... vi Prices and Marketability .............................................. vi Securities Laws........................................................... vii Ratings........................................................................ vii BOND INSURANCE..................................................... vii Municipal Bond Insurance .......................................... vii Bond Insurance Risk Factors ..................................... viii INTRODUCTION............................................................1 RISK FACTORS.............................................................. 2 Limited Obligations...................................................... 2 Decrease in Appraised Values ...................................... 3 Tax Increment Financing .............................................. 3 Limitations on City Tax Increments ............................. 4 Limitations on AISD Tax Increments ........................... 4 Limitations on Tax Increments of Brazoria and Fort Bend Counties................................................7 Uncertainty of Calculation and Collection of Tax Increments...................................................... 8 General Factors Affecting Taxable Values and Tax Increments...................................................... 8 Dependence on Principal Taxpayers ............................. 9 Tax Collection Limitations and Foreclosure Remedies............................................................... 9 Registered Owners' Remedies After Default ................ 9 FutureDebt................................................................. 10 Marketability of the Bonds ......................................... 11 Continuing Compliance with Certain Covenants............................................................ 11 AirQuality.................................................................. 11 Tax Abatements.......................................................... 12 PLAN OF FINANCING ................................................ 12 Creation of the Authority and TIRZ ........................... 12 Purpose/Project Plan ................................................... 13 Operations................................................................... 13 Issuance of Bonds and Developer Reimbursements.................................................. 13 Outstanding Obligations of the Authority ................... 14 Captured Appraised Value .......................................... 14 Use of Bond Proceeds ................................................. 14 Pro Forma Debt Service Requirements ....................... 15 Sources and Uses of Funds ......................................... 15 SOURCE AND SECURITY OF PAYMENT FOR THE BONDS .................................................. 16 General........................................................................ 16 Tax Increments........................................................... 16 City's Agreement with Respect to Tax Increments and the Bonds .................................... 17 iv AISD's Agreement With Respect to Tax Increments........................................................... 17 Brazoria County's Agreement with Respect to Tax Increments and the Bonds ............................. 19 Fort Bend County's Agreement with Respect to Tax Increments and the Bonds ........................ 19 Calculation and Collection of Tax Increments............ 20 Pledge of Revenues ..................................................... 20 Additional Bonds ........................................................ 21 Perfected Security Interest .......................................... 22 THEBONDS.................................................................. 22 Description.................................................................. 22 Method of Payment of Principal and Interest ............. 22 Optional Redemption .................................................. 23 Mandatory Sinking Fund Redemption ........................ 23 Notice of Redemption ................................................. 23 Authority for Issuance ................................................ 24 NoArbitrage............................................................... 24 Registration and Transfer ............................................ 24 Book -Entry Only System ............................................ 25 Replacement of Trustee .............................................. 27 Mutilated, Lost or Stolen Bonds ................................. 27 Legal Investment and Eligibility to Secure Public Funds in Texas .......................................... 27 Defeasance.................................................................. 27 THEINDENTURE........................................................ 28 TheFunds................................................................... 28 Events of Default........................................................ 29 Remedies.................................................................... 29 Limitation on Action by Owners ................................ 30 Amendments to the Indenture ..................................... 30 Removal or Resignation of Trustee ............................ 31 Appointment of Successor Trustee ............................. 31 SHADOW CREEK RANCH DEVELOPMENT........... 31 General........................................................................ 31 Development and Home Construction ........................ 32 Developer.................................................................... 36 Builders....................................................................... 37 SHADOW CREEK RETAIL DEVELOPMENT........... 38 SELECTED FINANCIAL INFORMATION(a).............. 39 TAX INCREMENT COLLECTIONS ........................... 42 PRINCIPAL TAXPAYERS IN THE TIRZ ................... 43 TAXING PROCEDURES OF THE CITY, AISD, BRAZORIA COUNTY AND FORT BEND COUNTY .................................................... 44 Authority to Levy Taxes.............................................44 Property Tax Code and County -Wide Appraisal District ................................................. 44 Property Subject to Taxation by the City, AISD, Brazoria County and Fort Bend County................................................................. 44 TABLE OF CONTENTS Valuation of Property for Taxation ............................. 45 Levy and Collection of Taxes ..................................... 45 The City, AISD, Brazoria County and Fort Bend County's Rights in the Event of Tax Delinquencies...................................................... 45 LEGAL MATTERS....................................................... 46 Legal Proceedings....................................................... 46 No Material Adverse Change ...................................... 47 No -Litigation Certificate ............................................. 47 TAXMATTERS............................................................ 47 Tax Exemption............................................................ 47 Tax Treatment of Original Issue Discount and Premium Bonds ................................................... 48 CONTINUING DISCLOSURE OF INFORMATION..................................................... 49 Annual Reports........................................................... 50 APPENDIX A - SUMMARY OF DOCUMENTS Material Event Notices ............................................... 50 Availability of Information from NRMSIRs andSID................................................................51 Limitations and Amendments ..................................... 51 Implementation of MSRB's EMMA System .............. 51 Compliance with Prior Undertakings .......................... 52 PREPARATION OF OFFICIAL STATEMENT........... 52 Sources and Compilation of Information .................... 52 Financial Advisors...................................................... 52 Official Statement Deemed Final ................................ 52 Updating the Official Statement ................................. 52 Certification of Official Statement .............................. 52 MISCELLANEOUS....................................................... 53 (1) Development Agreement (2) Reimbursement Agreement (3) Tri-Party Agreement (4) Project Plan & Financing Plan (5) Interlocal Agreements APPENDIX B - BOUNDARY MAP OF REINVESTMENT ZONE NO.2, CITY OF PEARLAND, TEXAS APPENDIX C - FORM OF OPINION OF CO -BOND COUNSEL APPENDIX D - SPECIMEN FINANCIAL GUARANTY INSURANCE POLICY APPENDIX E - CURRENT PUBLIC SCHOOL FINANCE SYSTEM APPENDIX F - EXCERPTS OF THE AUDITED FINANCIAL STATEMENTS OF THE CITY OF PEARLAND RELATING TO THE AUTHORITY [remainder of page intentionally left blank] USE OF INFORMATION IN OFFICIAL STATEMENT No dealer, broker, salesman, or other person has been authorized to give any information or to make any representations other than those contained in this Official Statement, and, if given or made, such other information or representation must not be relied upon as having been authorized by the Authority. This Official Statement is not to be used in an offer to sell or the solicitation of an offer to buy in any state in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation. All of the summaries of the statutes, resolutions, contracts, financial information, engineering, and other related reports referenced or described in this Official Statement are made subject to all of the provisions of such documents. These summaries do not purport to be complete statements of such provisions, and reference is made to such documents, copies of which are available from the Authority, c/o Allen Boone Humphries Robinson LLP, 3200 Southwest Freeway, Suite 2600, Houston, Texas 77027 or Andrews Kurth LLP, 600 Travis, Suite 4200, Houston, Texas 77002. This Official Statement contains, in part, estimates, assumptions, and matters of opinion which are not intended as statements of fact, and no representation is made as to the correctness of such estimates, assumptions, or matters of opinion, or as to the likelihood that they will be realized. Any information and expressions of opinion herein shall not, under any circumstances, create any implication that there has been no change in the affairs of the Authority or other matters described herein since the date hereof. For the period beginning on the date of the award of the sales of the Bonds by the Underwriter and ending on the twenty-fifth day after the "end of the underwriting period" (as defined in Security and Exchange Commission (the "SEC") Rule 15c(2)42(e)(2)), if any event shall occur of which the Authority has knowledge and as a result of which it is necessary to amend or supplement the Official Statement in order to make the statements therein, in light of the circumstances when the Official Statement is delivered to a prospective purchaser, not misleading, the Authority will promptly notify the Underwriter of the occurrence of such event and will cooperate in the preparation of a revised Official Statement, or amendments or supplements thereto, so that the statements in the Official Statement, as revised, amended or supplemented, will not, in light of the circumstances when such Official Statement is delivered to a prospective purchaser, be misleading. The Authority assumes no responsibility for supplementing the Official Statement thereafter except as may be required by law. See "PREPARATION OF THE OFFICIAL STATEMENT — Updating the Official Statement." The Authority has undertaken no other reporting obligations to purchasers of the Bonds except as described herein under "CONTINUING DISCLOSURE OF INFORMATION." SALE AND DISTRIBUTION OF THE BONDS The Underwriter The Bonds are being purchased by First Southwest Company (the "Underwriter") pursuant to a bond purchase contract with the Authority dated May _, 2009 for the Bonds at a price of $ (representing the par amount of the Bonds of $7,905,000*, less an Underwriter's discount of $ , and less a net original issue discount of $ ), plus accrued interest on the Bonds from the Dated Date to the date of delivery. The Underwriter's obligation is to purchase all of the Bonds, if any are purchased. The Underwriter has provided the following sentence for inclusion in this Official Statement. The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, their responsibilities to investors under 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. Prices and Marketability The delivery of the Bonds is conditioned upon the receipt by the Authority of a certificate executed and delivered by the Underwriter on or before the date of delivery of the Bonds stating the prices at which a substantial amount of the Bonds of each maturity have been sold to the public. For this purpose, the term "public" does not Preliminary, subject to change. vi include any person who is a bond house, broker, or similar person acting in the capacity of Underwriter or wholesaler. Otherwise, the Authority has no understanding with the Underwriter regarding the reoffering yields or prices of the Bonds. Information concerning reoffering yields or prices is the responsibility of the Underwriter. The prices and other terms with respect to the offering and sale of the Bonds may be changed from time to time by the Underwriter after the Bonds are released for sale, and the Bonds may be offered and sold at prices other than the initial offering prices, including sales to dealers who may sell the Bonds into investment accounts. In connection with the offering of the Bonds, the Underwriter may over -allot or effect transactions that stabilize or maintain the market prices of the Bonds at levels above those that might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. The Authority has no control over trading of the Bonds in the secondary market. Moreover, there is no guarantee that a secondary market will be made in the Bonds. In such a secondary market, the difference between the bid and asked price of the Bonds may be greater than the difference between the bid and asked price of bonds of comparable maturity and quality issued by more traditional municipal entities, as bonds of such entities are more generally bought, sold or traded in the secondary market. Securities Laws No registration statement relating to the offer and sale of the Bonds has been filed with the SEC under the Securities Act of 1933, as amended, in reliance upon the exemptions provided thereunder. The Bonds have not been registered or qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Bonds been registered or qualified under the securities laws of any other jurisdiction. The Authority assumes no responsibility for registration or qualification of the Bonds under the securities laws of any other jurisdiction in which the Bonds may be offered, sold, or otherwise transferred. This disclaimer of responsibility for registration or qualification for sale or other disposition of the Bonds must not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration or qualification provisions in such other jurisdiction. Ratings Standard & Poor's Ratings Services, A Division of The McGraw-Hill Companies, Inc ("S&P") has assigned its municipal ratings of "_" to the Bonds, as a result of a municipal bond insurance policy guaranteeing the payment of principal and interest on the Bonds (see "BOND INSURANCE" and "APPENDIX D — SPECIMEN FINANCIAL GUARANTY INSURANCE POLICY"). An explanation of the significance of such ratings may be obtained from S&P. The ratings reflect only the view of S&P and the Authority makes no representation as to the appropriateness of such ratings. S&P has also assigned an underlying ratings of "_" to the Bonds. The Authority furnished S&P with certain information not included in this Official Statement. Generally, rating agencies base their ratings on the information and materials so furnished and on investigations, studies, and assumptions by the rating agencies. An explanation of the significance of such ratings may be obtained from S&P. The ratings reflects only the view of S&P and the Authority makes no representation as to the appropriateness of such ratings. The Authority can make no assurance that the S&P ratings will continue for any period of time or that such ratings will not be revised downward or withdrawn entirely by S&P, if in the sole judgment of S&P, circumstances so warrant. Any such downward revision or withdrawal of the ratings may have an adverse effect on the market price of the Bonds. BOND INSURANCE Municipal Bond Insurance The Authority has applied for a municipal bond insurance policy to guaranty the scheduled payment of principal and interest on the Bonds. vu Bond Insurance Risk Factors The Authority has applied for a bond insurance policy to guarantee the scheduled payment of principal and interest on the Bonds. The Authority has yet to determine whether an insurance policy will be purchased with the Bonds. If an insurance policy is purchased, the following are risk factors relating to bond insurance. In the event of default of the payment of principal or interest with respect to the Bonds when all or some becomes due, any owner of the Bonds shall have a claim under the applicable Bond Insurance Policy (the "Policy") for such payments. However, in the event of any acceleration of the due date of such principal by reason of mandatory or optional redemption or acceleration resulting from default or otherwise, other than any advancement of maturity pursuant to a mandatory sinking fund payment, the payments are to be made in such amounts and at such times as such payments would have been due had there not been any such acceleration. The Policy does not insure against redemption premium, if any. The payment of principal and interest in connection with mandatory or optional prepayment of the Bonds by the Authority which is recovered by the Authority from the bond owner as a voidable preference under applicable bankruptcy law is covered by the Policy, however, such payments will be made by the provider of the Policy (the "Bond Insurer") at such time and in such amounts as would have been due absent such prepayment by the Authority unless the Bond Insurer chooses to pay such amounts at an earlier date. Under most circumstances, default of payment of principal and interest does not obligate acceleration of the obligations of the Bond Insurer without appropriate consent. The Bond Insurer may direct and must consent to any remedies that the Trustee exercises and the Bond Insurer's consent may be required in connection with amendments to the applicable Resolution and related agreements. In the event the Bond Insurer is unable to make payment of principal and interest as such payments become due under the Policy, the Bonds are payable solely from the moneys received by the Trustee pursuant to the applicable agreements. In the event the Bond Insurer becomes obligated to make payments with respect to the Bonds, no assurance is given that such event will not adversely affect the market price of the Bonds or the marketability (liquidity) for the Bonds. The long-term ratings on the Bonds are dependent in part on the financial strength of the Bond Insurer and its claims paying ability. The Bond Insurer's financial strength and claims paying ability are predicated upon a number of factors which could change over time. No assurance is given that the long-term ratings of the Bond Insurer and of the ratings on the Bonds insured by the Bond Insurer will not be subject to downgrade and such event could adversely affect the market price of the Bonds or the marketability (liquidity) for the Bonds. See "SALE AND DISTRIBUTION OF THE BONDS — Ratings" herein. The obligations of the Bond Insurer are general obligations of the Bond Insurer and in an event of default by the Bond Insurer, the remedies available to the Trustee may be limited by applicable bankruptcy law or other similar laws related to insolvency. Neither the Authority nor the Underwriter has made independent investigation into the claims paying ability of the Bond Insurer and no assurance nor representation regarding the financial strength or projected financial strength of the Bond Insurer is given. Thus, when making an investment decision, potential investors should carefully consider the ability of the Authority to pay principal and interest on the Bonds and the claims paying ability of the Bond Insurer, particularly over the life of the investment. [remainder of page intentionally left blank] viii PRELIMINARY OFFICIAL STATEMENT $7,905,000* DEVELOPMENT AUTHORITY OF PEARLAND (a non-profit local government corporation acting on behalf of the City of Pearland, Texas) Tax Increment Contract Revenue Bonds, Series 2009 INTRODUCTION The Development Authority of Pearland (the "Authority"), a Texas non-profit local government corporation acting on behalf of the City of Pearland, Texas (the "City"), is issuing its Tax Increment Contract Revenue Bonds, Series 2009 (the "Bonds") in the original principal amount of $7,905,0004. The Bonds are limited obligations of the Authority. The Bonds are payable solely from the Contract Tax Increments, as defined below, and certain funds on deposit with Wells Fargo Bank, National Association, Houston, Texas (the "Trustee"), together with earnings and investments thereon (collectively, the "Pledged Revenues"). Pursuant to an Indenture of Trust, as supplemented, (the "Indenture") between the Authority and the Trustee, the Authority has pledged the Pledged Revenues to payment of the Bonds. The Bonds are not payable from any other funds of the Authority other than the Pledged Revenues. The Bonds are limited obligations solely of the Authority and are not obligations of the City and do not give rise to a charge against the general credit or taxing powers of the City. Furthermore, the Bonds are not obligations of Alvin Independent School District ("AISD"), Brazoria County, Texas ("Brazoria County"), Fort Bend County, Texas ("Fort Bend County"), the State of Texas, or any entity other than the Authority. See "SOURCE AND SECURITY OF PAYMENT FOR THE BONDS." The Authority has previously issued its Tax Increment Contract Revenue Bonds, Series 2004 (the "Series 2004 Bonds") in the aggregate principal amount of $13,995,000, its Tax Increment Contract Revenue Bonds, Series 2005 (the "Series 2005 Bonds") in the aggregate principal amount of $9,775,000, its Tax Increment Contract Revenue Bonds, Series 2006 (the "Series 2006 Bonds") in the aggregate principal amount of $9,970,000 and its Tax Increment Contract Revenue Bonds, Series 2007 (the "Series 2007 Bonds") in the aggregate principal amount of $15,950,000 (see "SELECTED FINANCIAL INFORMATION" for a listing of amounts currently outstanding from previous bond issuances). The Bonds are issued pursuant to the authority granted by Article VHI, Section 1-g of the Texas Constitution, Chapter 311, Texas Tax Code (the "TIF Act"), Chapter 431, Texas Transportation Code, a resolution adopted by the City (the "City Resolution") on May 18, 2009 approving the Authority's issuance of the Bonds, a resolution authorizing the issuance of the Bonds (the "Bond Resolution") adopted by the Board of Directors of the Authority (the "Authority Board") on May 18, 2009, and the Indenture. The City designated a reinvestment zone and created the TIRZ in 1998 by Ordinance No. 891 of the City Council to include approximately 3,467 acres of land (the "Original Area"). The City approved the annexation of an additional 457 acres of land (the "First Annexation Area") into the boundaries of the TIRZ and the City's participation in the First Annexation Area on July 10, 2006 by Ordinance No. 1276 of the City Council. The City approved the annexation of an additional seven acres of land (the "Second Annexation Area," and together with the First Annexation Area, the "Annexation Area") into the boundaries of the TIRZ and the City's participation in the Second Annexation Area on November 13, 2006 by Ordinance No. 1313 of the City Council. The City, AISD, Brazoria County and Fort Bend County have agreed to deposit to the tax increment fund (the "Tax Increment Fund") established for the Reinvestment Zone Number 2, City of Pearland, Texas (the "TIRE") a certain percentage of tax collections arising from their taxation of the increase, if any, since January 1, 1998, in the total appraised value of all real property located in the Original Area of the TIRZ and taxable by the City, AISD, Brazoria County and Fort Bend County, and the City, Brazoria County and Fort Bend County have agreed to deposit to the Tax Increment Fund annually a certain percentage of tax collections arising from its taxation of the increase, if any, since January 1, 2006, in the total appraised value of real property located in the Annexation Area of the TIRZ and taxable by the City (the "Tax Increments"). The City, TIRZ and the Authority have entered into an agreement (the "Tri-Party Agreement") approved by the City by Ordinance No. R2004-170 on October 11, 2004, and approved by the ` Preliminary, subject to change. Authority Board and the Board of Directors of the TIRZ (the "TIRZ Board") on October 5, 2004, as amended by the City by Resolution No. R2007-143, approved on September 17, 2007, approved by the Board of Directors of the TIRZ (the "TIRZ Board") on September 17, 2007, and approved by the Authority Board on September 24, 2007, which sets forth, among other things, the duties and responsibilities of the Authority, the City, and the TIRZ as they relate to developer reimbursements for Project Costs in the TIRZ, and pursuant to which the City and the TIRZ have agreed to pay to the Authority a certain portion of the Tax Increments then available in the Tax Increment Fund (the "Contract Tax Increments"). This Official Statement includes descriptions of, among others, the Bonds, the Bond Resolution, the Indenture, certain other information about the Authority, the TIRZ, and existing development within the boundaries of the TIRZ. All descriptions of documents contained herein are only summaries and are qualified in their entirety by reference to each document. Copies of documents referenced herein may be obtained from the Authority's Co - Bond Counsel, Allen Boone Humphries Robinson LLP, 3200 Southwest Freeway, Suite 2600, Houston, Texas 77027 or Andrews Kurth LLP, 600 Travis, Suite 4200, Houston, Texas 77002. A portion of the proceeds from the sale of the Bonds will be used to reimburse developers within the TIRZ for certain Project Costs (as defined in the Plan) including infrastructure and related improvements made by such developers within the TIRZ and approved in the Project Plan and Reinvestment Zone Financing Plan of the TIRZ adopted by the Board of Directors of the TIRZ on August 23, 1999 and approved by the City Council on August 23, 1999 by Ordinance No. 918, as amended by the Board of Directors of the TIRZ on March 27, 2006 and approved by the City Council on July 10, 2006 by Ordinance No. 1276 (the "First Amendment"), as amended by the Board of Directors of the TIRZ on October 23, 2006 and approved by the City Council on November 13, 2006 by Ordinance No. 1312 (the "Second Amendment"), and as further amended by the Board of Directors of the TIRZ on October 23, 2006 and as approved by the City Council November 13, 2006 by Ordinance No. 1314 (the "Third Amendment" and together with the First Amendment and the Second Amendment, the "Plan"). Project Costs to be reimbursed from this Bond issue include (i) monumentation and signage, (ii) landscaping improvements, (iii) street and sidewalk paving and signalization, (iv) water, sanitary sewer and drainage facilities, (v) lakes and parks, and (vi) land acquisition. Proceeds from the sale of the Bonds will also be used to pay the costs of issuance of the Bonds. RISK FACTORS Described below are certain risks associated with ownership of the Bonds. In order to identify risk factors and make an informed investment decision, potential investors should be thoroughly familiar with this entire Official Statement (including appendices hereto) in order to make a judgment as to whether the Bonds are an appropriate investment. Purchasers of the Bonds are advised to consult their tax advisors as to the tax consequences of purchasing or holding the Bonds. Capitalized terms in this section not defined herein are defined elsewhere in this Official Statement. Limited Obligations The Bonds are limited obligations solely of the Authority and are not obligations of the City and do not give rise to a charge against the general credit or taxing powers of the City. THE CITY IS NOT OBLIGATED TO MAKE ANY PAYMENTS OF PRINCIPAL OF OR INTEREST ON THE BONDS. FURTHERMORE, THE BONDS ARE NOT OBLIGATIONS OF AISD, BRAZORIA COUNTY, FORT BEND COUNTY, THE STATE OF TEXAS, OR ANY ENTITY OTHER THAN THE AUTHORITY. THE AUTHORITY IS NOT OBLIGATED TO MAKE PAYMENTS ON THE BONDS FROM THE TAXES OF ANY TAXING ENTITY OR OTHER MONEY OTHER THAN THE PLEDGED REVENUES. See "SOURCE AND SECURITY OF PAYMENT FOR THE BONDS." Because Tax Increments are only payable annually from the taxes levied and collected on the total appraised value of all real property in the TIRZ that is taxable by the City, AISD, Brazoria County and Fort Bend County for that year minus the total appraised value of all real property in the TIRZ that is taxable by the City, AISD, Brazoria County and Fort Bend County as of the Base Years (the "Captured Appraised Value"), such Tax Increments may or may not occur in a given year. The Base Year for the Original Area of the TIRZ is 1998 and the base year for the Annexation Area of the TIRZ is 2006. Any decrease or reduction in Tax Increments will result in a decrease or reduction in the Contract Tax Increments. Therefore, the Bonds should be considered speculative investments that are subject to special risk factors. Decrease in Appraised Values Since the creation of the TIRZ in 1998, the appraised value of taxable real property in the TIRZ has increased. The Bonds will be secured by Pledged Revenues derived from Tax Increments based upon the current Captured Appraised Value; however, future Pledged Revenues derived from Tax Increments resulting from future increases in Captured Appraised Values are also pledged. See "PLAN OF FINANCING — Captured Appraised Value." A decrease in the appraised value of the taxable real property or a decrease in the amount of taxable real property could result in Tax Increments insufficient to pay principal of and interest on the Bonds without drawing upon debt service reserves, including the Debt Service Reserve Fund established under the Indenture. Other events beyond the control of the Authority, the City, AISD, Brazoria County and Fort Bend County could cause a shortfall of Tax Increments available for payment of the Bonds, including the protest or appeal by property owners of their property values and a consequent reduction in the appraised value of taxable real property in the TIRZ. See "TAXING PROCEDURES OF THE CITY, AISD AND BRAZORIA AND FORT BEND COUNTIES." Similarly, a shortfall of Tax Increments could be caused by natural or other disasters and the concomitant destruction of property or improvements to property in the TIRZ. Tax Increment Financing Pursuant to the Tri-Party Agreement, the City is required to remit the Contract Tax Increments from the Tax Increment Fund to the Authority on the date when the Bonds are delivered and thereafter on the fifteenth day of each August in which the Tri-Party Agreement is in effect. Contract Tax Increments which are remitted to the Authority do not include certain portions of the Tax Increments which are subject to the retention by the City, particularly (i) money to be paid to the City as an "Administrative Fee" calculated pursuant to the Plan to compensate the City for its estimated costs to provide municipal services to the property within the TIRZ (see "Limitations on City Tax Increments" below); (ii) money to be paid to AISD for educational facilities project costs pursuant to AISD's agreement for participation in the TIRZ (the "AISD Agreement"); (iii) amounts required to be maintained in the suspense account pursuant to the terms of the AISD Agreement; and (iv) an amount sufficient to pay reasonable current and anticipated administrative and operating costs of the TIRZ. See "SOURCE AND SECURITY OF PAYMENT FOR THE BONDS -s AISD's Agreement With Respect to Tax Increments," "— Brazoria County's Agreement With Respect to Tax Increments" and "— Fort Bend County's Agreement with Respect to Tax Increments." Texas law does not require the City, AISD, Brazoria County and Fort Bend County to levy real property taxes or to set a tax rate sufficient to assure payment of the principal of and interest on the Bonds; rather, Texas law only requires the City, AISD, Brazoria County and Fort Bend County to deposit the Tax Increments actually collected by them in the Tax Increment Fund. The City, AISD, Brazoria County and Fort Bend County set their tax rates in accordance with the Texas Tax Code, which allows voters to limit an increase in tax rates to the rollback tax rate calculated for such units. See "TAXING PROCEDURES OF THE CITY, AISD AND BRAZORIA AND FORT BEND COUNTIES." If the tax rates decline or the percentage of taxes collected in the TIRZ declines, the amount of Tax Increments available to pay the Bonds will decrease. See "Limitations on AISD Tax Increments" below. [Update? New legislation regarding ISD contributions to a TIRZ?]In the 2007, the Texas Legislature enacted public school finance reform legislation limiting the authority of school districts to levy operating and maintenance taxes to $1.00 per $100 assessed value in 2007-08. The legislation includes provisions to effectively maintain continued AISD contributions to the Tax Increment Fund at levels at least equal to those that would result from taxes assessed at the AISD 2005 tax rate, assuming no drastic change in AISD's property tax base per student in weighted average daily attendance. There can be no assurance, however, that future public school finance reform legislation, if enacted, would not adversely affect the AISD Tax Increment. See "Limitations on AISD Tax Increments" below. The AISD Tax Increment could also be curtailed by possible future legal challenges to the constitutionality of the Texas public school finance system or to future Texas public school finance reform legislation. There have been, and continue to be, many changes in funding for schools. These changes could reduce or eliminate AISD's participation in the TIRZ. See "Limitations on AISD Tax Increments" below. Limitations on City Tax Increments The City's 2008 tax rate is $0.6526 per $100 valuation. However, the City from time to time may increase or decrease this rate. The City deposits 100% of the taxes collected on the Captured Appraised Value of the Original Area and the Annexation Area of the TIRZ into the Tax Increment Fund (the "City Tax Increment"). Pursuant to the Plan and a Development Agreement by and between the City and Shadow Creek Ranch Development Company, L.P., the master developer of property within the TIRZ (the "Developer"), the City, the Developer and the TIRZ have agreed that a certain portion of the City Tax Increment shall be paid by the TIRZ to the City as an "Administrative Fee" (the "Administrative Fee") to compensate the City for some of its cost of providing City services to the developed property within the TIRZ. Pursuant to the Development Agreement, the Administrative Fee is 64% of the City Tax Increment through 2028; provided that, the amount of City Tax Increment deposited and retained annually in the Tax Increment Fund for the applicable year shall in no event be less than $0.255 per $100.00 of valuation through 2028. The City's 2008 tax rate is $0.6526. Since $0.255 is greater than 36% of the City's 2008 tax rate ($0.234936), the amount of City Tax Increment deposited and retained in the Tax Increment Fund for tax year 2008 will be $0.255 per $100 of valuation, the minimum required by the Plan and the Development Agreement. Pursuant to the Tri-Party Agreement, the portion of the City Tax Increment representing the Administrative Fee is not paid to the Authority and is, therefore, not part of the Contract Tax Increments or the Pledged Revenues. Article VIII, Section 1-b of the Texas Constitution authorizes municipalities to establish an ad valorem tax freeze on the residence homesteads of disabled individuals and individuals age 65 or older. On September 19, 2005, the City Council adopted Ordinance No. 1229 to provide that, effective with tax year 2006, the total amount of ad valorem taxes imposed on the residence homestead of a person who is disabled or is 65 years of age or older will not be increased while it remains the residence homestead of that person or that person's spouse who is disabled or 65 years of age or older. Ordinance No. 1229 further provides that if the person who is disabled or is 65 years of age or older dies in a year in which the person received a residence homestead exemption, the total amount of ad valorem taxes imposed on the residence homestead will not be increased while it remains the residence homestead of that person's surviving spouse if the spouse is 55 years of age or older at the time of the person's death. Notwithstanding such provisions, taxes on the residence homestead may be increased to the extent the value of the homestead is increased by improvements other than repairs and other than improvements made to comply with governmental requirements. To the extent that Ordinance No. 1229 freezes the ad valorem taxes collected by the City in the TIRZ, it will limit future increases in the City Tax Increments and thus limit future increases in the Pledged Revenues. Limitations on AISD Tax Increments The AISD Agreement generally provides that AISD will remit 100% of the taxes collected on the Captured Appraised Value of the Original Area of the TIRZ to the City for deposit in the Tax Increment Fund (the "AISD Tax Increment"). AISD does not participate in the payment in or make any payments based upon the Annexation Area of the TIRZ. AISD is not obligated to make payments on the AISD Tax Increment from other AISD taxes or revenues until the taxes representing the AISD Tax increment are actually collected. Such payments are due on the first day of each calendar quarter. AISD's 2008 tax rate is $1.328 per $100 valuation. [Update — Confirm Payments being made and no legislative updates.]Legislation enacted to reform the Texas public school finance system in 2007 became effective at the beginning of the 2006-2007 school year. This legislation required that local independent school district operations and maintenance tax rates be reduced by 33% by fiscal year 2007-08 from the tax rates in effect for the 2005-2006 school year. The legislation provided that State 4 funds, generated by a modified State franchise, motor vehicle and tobacco taxes and any other revenue sources appropriated by the Legislature, would be used to offset local operations and maintenance tax rate reductions. Local operations and maintenance taxes comprise the majority of the AISD Tax Increment. The legislation provides a mechanism to allow AISD to provide the AISD Tax Increment at a level equal to the 2005 AISD tax rate ($1.7058 per $100 assessed value) on an ongoing basis. This mechanism provides that shortfalls between the AISD Tax Increment that AISD's actual tax rate allows AISD to contribute to the TIRZ and the AISD Tax Increment that would be provided to the TIRZ utilizing the 2005 AISD tax rate are to be funded with monies contributed by the State. However, there is no guarantee that such monies will actually be appropriated and provided by the State. Moreover, the Texas Legislative Budget Board has projected that the legislation will be underfunded from the revenue sources identified in such legislation by a cumulative amount of $25 billion by fiscal year 2010-2011, although current State surpluses are expected to offset the revenue shortfall through fiscal year 2007-2008. Because of the uncertainty of State funding, for purposes of the pro forma presentation of AISD's Tax Increment herein, the 2008 AISD Tax Increment is based upon the actual AISD 2008 tax rate without additional State funding. For years 2009 and beyond, the AISD increment is also based on the actual amount of tax revenues AISD is projected to collect, without any additional State funding. For a more detailed description of the legislation described in this paragraph, see "APPENDIX E — CURRENT PUBLIC SCHOOL FINANCE SYSTEM." AISD's obligations to pay over AISD Tax Increments to the City may, at the sole option of AISD, be decreased by the amount of any reduction in state and local funding that is a result of any change in state law or any interpretation, ruling, order, decree, or court decision interpreting existing or subsequently enacted state law that decreases the aggregate amount of the state and local funds available to AISD, as a result of AISD's participation in the TIRZ, or eliminated entirely. The Authority is unable to predict the likelihood of whether such Texas public school finance legislation will result in reduction of state and local funding to AISD, whether any such reduction would cause AISD to decrease or eliminate AISD Tax Increment payments to the City or whether new legislation, interpretations, rulings, orders, decrees or court decisions will decrease the state and local funds available to AISD as a result of AISD's participation in the TIRZ. Pursuant to the terms of the AISD Agreement, the City has agreed that 75% of the AISD Tax Increment will be paid to AISD to construct and operate school facilities within the TIRZ and for other lawful purposes consistent with the Plan as determined by AISD. The remaining 25% of the AISD Tax Increment will be used to fund (i) the acquisition of land for school facilities, (ii) the construction of park and recreation improvements, (iii) the acquisition of land for such improvements, (iv) AISD's pro rata share of water, sewage and drainage facilities to serve school facilities, and (v) other improvements in the Plan benefiting AISD taxpayers. The City has agreed that the AISD Tax Increment will be held in a special AISD Suspense Account within the Tax Increment Fund for a period of one calendar year. During such time, no funds held in such AISD Suspense Account shall be disbursed or encumbered by the City or the TIRZ, and such funds may only be used during such period to reimburse AISD. Pursuant to the Tri-Party Agreement, the funds in the AISD Suspense Account are not paid to the Authority and therefore are not part of the Contract Tax Increments or Pledged Revenues. After the AISD Tax Increment is held in the AISD Suspense Account for a period of one calendar year, 25% of the AISD Tax Increment will be paid to the Authority as Contract Tax Increments pursuant to the provisions of the Tri-Party Agreement. See "SOURCE AND SECURITY FOR PAYMENT OF THE BONDS — City's Agreement with Respect to Tax Increments and the Bonds" and "— AISD's Agreement With Respect to Tax Increments." The Texas public school finance system gives weight to certain funding factors, such as local property wealth differences, the consideration of which result in greater equity in total funding. There have been a number of court challenges to the current public school finance system. On April 9, 2001, four property wealthy districts filed suit in the 250th District Court of Travis County, Texas (the "District Court") against the Texas Education Agency, the Texas State Board of Education, the Texas Commissioner of Education (the "Commissioner") and the Texas Comptroller of Public Accounts in a case styled West Orange -Cove Consolidated Independent School District, et al. v. Neeley, et al. The plaintiffs alleged that the $1.50 maximum maintenance and operations tax rate had become in effect a state property tax, in violation of Article VIII, Section 1-e of the Texas Constitution, because it precluded them and other school districts from having meaningful discretion to tax at a lower rate. Forty school districts intervened alleging that the Texas public school finance system (the "Finance System") was inefficient, inadequate, and unsuitable, in violation of Article VII, Section 1 of the Texas Constitution, because the State of Texas (the "State") did not provide adequate funding. As described below, this case has twice reached the Texas Supreme Court (the "Supreme Court"), which rendered decisions in the case on May 29, 2003 ("West'Orange-Cove I") and November 22, 2005 ("West Orange -Cove II"). After the remand by the Supreme Court back to the District Court in West Orange -Cove I, 285 other school districts were added as plaintiffs or intervenors. The plaintiffs joined the intervenors in their Article VII, Section 1 claims that the Finance System was inadequate and unsuitable, but not in their claims that the Finance System was inefficient. On November 30, 2004, the final judgment of the District Court was released in connection with its reconsideration of the issues remanded to it by the Supreme Court in West Orange -Cove I. In that case, the District Court rendered judgment for the plaintiffs on all of their claims and for the intervenors on all but one of their claims, finding that (1) the Finance System was unconstitutional in that the Finance System violated Article VIII, Section 1- e of the Texas Constitution because the statutory limit of $1.50 per $100.00 of taxable assessed valuation on property taxes levied by school districts for maintenance and operation purposes had become both a floor and a ceiling, denying school districts meaningful discretion in setting their tax rates; (2) the constitutional mandate of adequacy set forth in Article VII, Section 1, of the Texas Constitution exceeded the maximum amount of funding available under the funding formulas administered by the State; and (3) the Finance System was financially inefficient, inadequate, and unsuitable in that it failed to provide sufficient access to revenue to provide for a general diffusion of knowledge as required by Article VII, Section 1, of the Texas Constitution. As stated above, in West Orange -Cove I the plaintiff school districts asserted that the $1.50 per $100.00 of taxable assessed valuation tax that was generally authorized by State law to be levied for school maintenance and operations purposes (the "M&O Tax"), though imposed locally, had become in effect a State property tax prohibited by Article VIII, Section 1-e of the Texas Constitution. The intervening school district groups contended that funding for school operations and facilities was inefficient in violation of Article VII, Section 1 of the Texas Constitution, because children in property -poor districts did not have substantially equal access to education revenue. All of the plaintiff and intervenor school districts asserted that the Finance System could not achieve "[a] general diffusion of knowledge" as required by Article VII, Section 1 of the Texas Constitution, because the system was underfunded. The State, represented by the Texas Attorney General, made a number of arguments opposing the positions of the school districts, as well as asserting that school districts did not have standing to challenge the State in these matters. In West Orange -Cove II, the Supreme Court's holding was twofold: (1) that the local M&O Tax had become a state property tax in violation of Article VIII, Section 1-e of the Texas Constitution and (2) the deficiencies in the Finance System did not amount to a violation of Article VII, Section 1 of the Texas Constitution. In reaching its first holding, the Supreme Court relied on evidence presented in the District Court to conclude that school districts did not have meaningful discretion in levying the M&O Tax. In reaching its second holding, the Supreme Court, using a test of arbitrariness determined that: the public education system was "adequate," since it is capable of accomplishing a general diffusion of knowledge; the Finance System was not "inefficient," because school districts have substantially equal access to similar revenues per pupil at similar levels of tax effort, and efficiency does not preclude supplementation of revenues with local funds by school districts; and the Finance System does not violate the constitutional requirement of "suitability," since the system was suitable for adequately and efficiently providing a public education. In reversing the District Court's holding that the Finance System was unconstitutional under article VII, section 1 of the Texas Constitution, the Supreme Court stated: Although the districts have offered evidence of deficiencies in the public school finance system, we conclude that those deficiencies do not amount to a violation of article VII, section 1. We remain convinced, however, as we were sixteen years ago, that defects in the structure of the public school finance system expose the system to constitutional challenge. Pouring more money into the system may forestall those challenges, but only for a time. They will repeat until the system is overhauled.. In response to the intervenor districts' contention that the Finance System was constitutionally inefficient, the West Orange -Cove II decision states that the Texas Constitution does not prevent the Finance System from being structured in a manner that results in gaps between the amount of funding per student that is available to the richest districts as compared to the poorest district, but reiterated its statements in Edgewood Independent School District v. Meno, 917 S.W.2d 717 (Tex. 1995) ("Edgewood IV") that such funding variances may not be unreasonable. The Supreme Court further stated that "[t]he standards of Article VII, Section 1 - adequacy, efficiency, and suitability - do not dictate a particular structure that a system of free public schools must have." The Supreme Court also noted that "[e]fficiency requires only substantially equal access to revenue for facilities necessary for an adequate system," and the Supreme Court agreed with arguments put forth by the State that the plaintiffs had failed to present sufficient evidence to prove that there was an inability to provide for a "general diffusion of knowledge" without additional facilities. In response to the decision in West Orange -Cove II, the Texas Legislature (the "Legislature") enacted House Bill 1 ("HB 1"), which made substantive changes in the way the Finance System is funded, as well as other legislation which, among other things, established a special fund in the Texas state treasury to be used to collect new tax revenues that are dedicated under certain conditions for appropriation by the Legislature to reduce M&O Tax rates, broadened the State business franchise tax, modified the procedures for assessing the State motor vehicle sales and use tax and increased the State tax on tobacco products (HB 1 and other described legislation are collectively referred to herein as the "Reform Legislation"). The Reform Legislation generally became effective at the beginning of the 2006-07 fiscal year of each district. On June 14, 2006, an entity called Citizens Lowering Our Unfair Taxes PAC ("CLOUT") filed a lawsuit (case number GN602156) in the 345th District Court (the "District Court") in Travis County, Texas against the Texas Lieutenant Governor, the Speaker of the Texas House of Representatives, the Texas Comptroller of Public Accounts, the State of Texas and the Legislative Budget Board (the "LBB" and, collectively with the other named defendants, the "State Defendants") in a case styled Edd Hendee, individually and as Executive Director of C.L.O.U.T. v. Dewhurst, et al. ("CLOUT Lawsuit No. I"). The plaintiffs alleged that various violations of Article VIII, Section 22(a) of the Texas Constitution and Chapter 316 of the Texas Government Code had occurred and had resulted in unconstitutional and illegal spending by the State government, including the appropriations made for the Finance System under HB 1. (See "CURRENT PUBLIC SCHOOL FINANCE SYSTEM - General" for a discussion regarding HB 1). Among other things, the plaintiffs sought a declaratory judgment that the methodology used to establish the maximum amount of non -dedicated State revenues subject to appropriation in the 2006-2007 State biennium, and the amount appropriated by the Legislature in HB 1 to fund the Finance System during such biennium, violated Article VIII, Section 22(a), which provides that, unless a resolution is adopted by the Legislature to override the spending limit "[i]n no biennium shall the rate of growth of appropriations from state tax revenues not dedicated by this constitution exceed the estimated rate of growth of the state's economy". A series of court decisions, appeals, and other legal actions pursued by both the plaintiffs and the State Defendants has most recently resulted in the Third Court of Appeals' decision on April 2, 2008 dismissing all of the plaintiff's causes of action alleged in the CLOUT Lawsuit No. 1 for lack of subject matter jurisdiction, save and except one allegation added during the appeal process claiming that the specific amount of the 2008-2009 State legislative appropriation from nondedicated State tax revenues exceeds the 2008-2009 spending cap (the "CLOUT Lawsuit No. 2"). Thus, the matter remains pending. The Authority can make no representation or prediction concerning the outcome of the CLOUT Lawsuit No. 2 or its effects on the Finance System, and, consequently, its impact on the financial condition of the AISD. However, the Authority does not anticipate that the security for the payment of the Bonds would be affected as a result of the outcome of the CLOUT Lawsuit No. 2. The Texas Legislature convened in a regular session which began on January 13, 2009 and will end on June 1, 2009, and during such session may consider, among other things, the statutory basis for the information contained herein under the headings this section and under the section entitled "CURRENT PUBLIC SCHOOL FINANCE SYSTEM — General." The Authority cannot predict the changes, if any, resulting from actions of the Legislature. In the future, the Legislature could enact additional changes to the Finance System which could benefit or be a detriment to a school district depending upon a variety of factors, including the financial strategies that the district has implemented in light of past funding structures. Among other possibilities, the district's boundaries could be redrawn, taxing powers restricted, State funding reallocated, or local ad valorem taxes replaced with State funding subject to biennial appropriation. Limitations on Tax Increments of Brazoria and Fort Bend Counties Brazoria County's agreement for participation in the TIRZ (the `Brazoria County Agreement") generally provides that Brazoria County will remit 38% of its taxes collected on the Captured Appraised Value in the Original 7 Area and the Annexation Area of the TIRZ (not to exceed $0.1359 per $100 valuation) to the City for deposit in the Tax Increment Fund (the "Brazoria County Tax Increment"). Brazoria County's 2008 tax rate is $0.33. Therefore, Brazoria County will provide $0.1254 (38% of $0.33) per $100 of assessed valuation on the Captured Appraised Value in the Original Area and the Annexation Area of the TIRZ to the Tax Increment Fund for tax year 2008. Brazoria County is not obligated to make payments on the Brazoria County Tax Increment from other Brazoria County taxes or revenues until the taxes representing the Brazoria County Tax increment are actually collected. Such payments are due on August 1 of each year. Any decrease in the Brazoria County's tax rate could decrease the Brazoria County Tax Increment deposited into the Tax Increment Fund by Brazoria County, thus decreasing the amount of Pledged Revenues. Fort Bend County's agreement for participation in the TIRZ (the "Fort Bend County Agreement") generally provides that Fort Bend County will remit $0.624100 per $100 valuation for tax years 1999-2008, $0.468075 per $100 valuation for tax years 2009-2018 and $0.312050 per $100 valuation for tax years 2019-2028 on the Captured Appraised Value in the Original Area and the Annexation Area of the TIRZ to the City for deposit in the Tax Increment Fund (the "Fort Bend County Tax Increment"). Fort Bend County is not obligated to make payments on the Fort Bend County Tax Increment from other Fort Bend County taxes or revenues until the taxes representing the Fort Bend County Tax Increment are actually collected. Such payments are due on the first day of each calendar quarter. Any decrease in Fort Bend County's tax rate below the rates specified above for the respective periods could decrease the Fort Bend County Tax Increment deposited into the Tax Increment Fund by Fort Bend County, thus decreasing the amount of Pledged Revenues. See "SOURCE AND SECURITY OF PAYMENT FOR THE BONDS — Fort Bend County's Agreement with Respect to Tax Increments and the Bonds." Uncertainty of Calculation and Collection of Tax Increments Captured Appraised Values (the taxes upon which generate Tax Increment) are determined by subtracting the Base Year property values from the certified value of property in each tax year. Certified values are established annually for the current tax year, but are subject to change for a number of years thereafter. Value changes can be positive or negative and can be caused by such events as late -filed exemptions, settlement of property value protests, or the addition of property omitted from the roll. Currently, value changes in the tax rolls, either positive or negative, occurring subsequent to the determination of Tax Increments are not credited to the Tax Increment (in the case of positive changes) or subtracted from the Tax Increment (in the case of negative changes). However, such value changes could be credited to or subtracted from the Tax Increment in the future. Changes in the certified tax roll, if applied to the Tax Increment, would have the greatest relative effect on Tax Increments when the TIRZ is in the early stages of development and the Captured Appraised Value is a small percentage of the certified assessed value in the TIRZ. Currently the percentage of the Captured Appraised Value is greater than 99% of total taxable value in the TIRZ. While the Authority does not anticipate any changes in these administrative practices, there can be no assurance that they will not be modified. General Factors Affecting Taxable Values and Tax Increments The Captured Appraised Value of the TIRZ is partially based on the current market value of all real property in the TIRZ, including new improvements recently constructed or under construction in the TIRZ. The market value of such improvements is related to many economic conditions, including such factors as interest rates, credit availability, construction costs, energy availability, and the- general economic conditions and demographic characteristics of the Pearland area, particularly the Shadow Creek Ranch master planned community ("Shadow Creek Ranch") and other property in the TIRZ. Interest rates and the availability of mortgage and development funding directly impact construction activity, particularly short-term interest rates at which developers are able to obtain financing for developments costs. Interest rate levels may affect the ability of a landowner to undertake and complete construction activities within the TIRZ. Because of the numerous and changing factors affecting the availability of funds, the Authority is unable to assess the future availability of such funds for continued construction within the TIRZ. The rate of development of the TIRZ is related to the . vitality of the residential and commercial improvements currently being constructed. The Authority cannot predict the pace or magnitude of future construction of new improvements in the TIRZ. Furthermore, the demand for and construction of housing and retail/commercial space in the TIRZ could be affected by competition from other developments including other residential, retail, and commercial developments located in adjacent areas. As a result of such factors, it is possible that the future appraised value of the taxable real property could be less than historical values. Tax Increments are generated only on real property, not personal property. Therefore, any increases in the value of personal property in the TIRZ such as inventory and equipment, do not generate Tax Increment. For a discussion of residential and/or commercial real estate development in Shadow Creek Ranch see "SHADOW CREEK RANCH DEVELOPMENT" and "SHADOW CREEK RETAIL DEVELOPMENT" herein. Dependence on Principal Taxpayers The Authority will be dependent upon the timely payment of taxes by principal taxpayers in the TIRZ to the City, AISD, Brazoria County and Fort Bend County to produce adequate Tax Increments to make debt service payments on the Bonds. Significant delinquencies in the payment of ad valorem taxes to the City, AISD, Brazoria County and Fort Bend County by the principal taxpayers could result in a default on the Bonds. The Authority cannot guarantee the timely payment of taxes by any taxpayer nor can the Authority predict the future financial condition of the principal taxpayers and the likelihood that taxes will be paid in a timely manner. See "PRINCIPAL TAXPAYERS IN THE TIRZ." Tax Collection Limitations and Foreclosure Remedies The Authority's ability to make debt service payments may be adversely affected by the City, AISD, Brazoria County and Fort Bend County's inability to collect ad valorem taxes. Under Texas law, the levy of ad valorem taxes by the City, AISD, Brazoria County and Fort Bend County constitutes a lien on the property against which taxes are levied, and such lien may be enforced by foreclosure. Foreclosure must be effected through a judicial proceeding. The ability of the City, AISD, Brazoria County and Fort Bend County to collect ad valorem taxes through such foreclosure may be impaired by cumbersome, time-consuming, and expensive collection procedures or market conditions affecting the marketability of taxable property within the TIRZ and limiting the proceeds from a foreclosure sale of such property. Moreover, the proceeds of any sale of property within the TIRZ available to pay debt service on the Bonds may be limited by the current aggregate tax rate being levied against the property and by other factors including the taxpayers' right to redeem property within two years of foreclosure for residential homestead and agricultural use property and within six months of foreclosure for other property. Finally, any bankruptcy court with jurisdiction over bankruptcy proceedings initiated by or against a taxpayer within the TIRZ pursuant to the federal Bankruptcy Code could stay any attempt by the City, AISD, Brazoria County and Fort Bend County to collect delinquent ad valorem taxes assessed against such taxpayer. In addition to the automatic stay against collection of delinquent taxes afforded a taxpayer during the pendency of a bankruptcy, a bankruptcy could affect payment of taxes in two other ways: first, a debtor's confirmation plan may allow a debtor to make installment payments on delinquent taxes for up to six years; and, second, a debtor may challenge, and a bankruptcy court may reduce, the amount of any taxes assessed against the debtor, including taxes that have already been paid. The Authority has no control over the collection of property taxes by the City, AISD, Brazoria County and Fort Bend County. Registered Owners' Remedies After Default The Bond Resolution and Indenture do not provide for the appointment of a trustee to represent the interests of the Bond holders upon any failure of the Authority to perform in accordance with the terms of the Bond Resolution and Indenture or upon any other condition and, in the event of any such failure to perform, the registered owners would be responsible for the initiation and cost of any legal action to enforce performance of the Bond Resolution and Indenture. Furthermore, the Bond Resolution and Indenture do not establish specific events of default with respect to the Bonds and, under State law, there is no right to the acceleration of maturity of the Bonds upon the failure of the Authority to observe any covenant under the Bond Resolution or Indenture. See "THE INDENTURE." A registered owner of Bonds could seek a judgment against the Authority if a default occurred in the payment of principal of or interest on any such Bonds; however, such judgment could not be satisfied by execution against any property of the Authority and a suit for monetary damages could be vulnerable to the defense of sovereign immunity. A registered owner's only practical remedy, if a default occurs, is a mandamus or mandatory injunction proceeding to compel the Authority to provide the tax increment payments (or a mandamus or mandatory injunction proceeding to compel the participating entities to levy, assess and collect an annual ad valorem tax) sufficient to pay principal of and interest on the Bonds as it becomes due or perform other material terms and covenants contained in the Bond Resolution and Indenture. In general, Texas courts have held that a writ of mandamus may be issued to require a public official to perform legally imposed ministerial duties necessary for the performance of a valid contract, and Texas law provides that, following their approval by the Attorney General and issuance, the Bonds are valid and binding obligations for all purposes according to their terms. However, the enforcement of any such remedy may be difficult and time consuming and a registered owner could be required to enforce such remedy on a periodic basis. The Authority is also eligible to seek relief from its creditors under Chapter 9 of the U.S. Bankruptcy Code ("Chapter 9"). Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues, the pledge of taxes in support of a general obligation of a bankrupt entity is not specifically recognized as a security interest under Chapter 9. Chapter 9 also includes an automatic stay provision that would prohibit, without Bankruptcy Court approval, the prosecution of any other legal action by creditors or Bond holders of an entity which has sought protection under Chapter 9. Therefore, should the Authority avail itself of Chapter 9 protection from creditors, the ability to enforce would be subject to the approval of the Bankruptcy Court (which could require that the action be heard in Bankruptcy Court instead of other federal or state court); and the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it. The opinion of Co -Bond Counsel will note that all opinions relative to the enforceability of the Bond Resolution, the Indenture and the Bonds are qualified with respect to the customary rights of debtors relative to their creditors, including rights afforded to creditors under the Bankruptcy Code. Future Debt Issuance of debt by the Authority is subject to the approval of the City. By a resolution adopted by City Council on May 18, 2009, the Authority is authorized by the City to issue the Bonds; however, in the future the Authority may request and the City may approve the issuance of additional tax increment contract revenue bonds payable from the Pledged Revenues on a parity with the Bonds. The Authority currently has tax increment contract revenue bonds in the aggregate principal amount of $45,495,000 outstanding on a parity with the Bonds. The City and the TIRZ Board have previously approved total reimbursements to the Developer of approximately $48,979,700. Pursuant to such reimbursement approval, the Developer has previously been reimbursed $11,283,000 from the proceeds of the Series 2004 Bonds, $8,100,000 from the proceeds of the Series 2005 Bonds, $9,104,000 from the proceeds of the Series 2006 Bonds, $14,598,700 from the sale of the Series 2007 Bonds, and $5,894,000 from four separate cash reimbursements directly from the Authority. The Developer will be reimbursed approximately $6,510,000' from the proceeds of the sale of the Bonds. After the reimbursement provided by the sale of the Bonds and the additional cash reimbursement to be provided concurrently with the delivery of the Bonds, there will remain approximately $ of commenced or completed improvements by the Developer approved for reimbursement by the TIRZ Board, but not yet been reimbursed. Additionally, the Developer has commenced construction on additional improvements estimated to cost approximately $ which have not yet been approved for reimbursement by the City and the TIRZ Board. The Plan, as amended, estimates that throughout the life of the TIRZ the Authority will issue bonds sufficient to finance total infrastructure project costs of approximately $169,107,759[Confirmj. Any additional tax increment contract revenue bonds may be on parity with the Bonds or may be issued as subordinate lien bonds in accordance with the Indenture. The Authority anticipates that it will require the issuance of additional bonds secured by the Contract Tax Increments in order to complete and continue the purposes for which the TIRZ was created. See "SOURCE AND SECURITY OF PAYMENT FOR THE BONDS — Additional Bonds." Additional development by developers other than the Developer may occur within the boundaries of the TIRZ. Such developers may seek to enter into development agreements with the TIRZ for reimbursement of infrastructure improvements made within the TIRZ. If such agreements are entered, the Authority may issue bonds for such reimbursements. Any such bonds may be on parity with the Bonds or may be issued as subordinate lien bonds. ` Preliminary, subject to change. H [UPDATE][To date, the TIRZ has entered one additional development agreement with Shadow Creek Retail, L.P. (the "Subdeveloper Agreement"). Pursuant to the terms of the Subdeveloper Agreement, the TIRZ has agreed to reimburse Shadow Creek Retail, L.P. (the "Subdeveloper") for certain improvements contemplated by the Plan in connection with the development of a retail center in the southeastern portion of the TIRZ. See "SHADOW CREEK RETAIL DEVELOPMENT" for a description of this development. The Subdeveloper Agreement was entered in conjunction with the approval of the Second Amendment, which increased project costs associated with the plan by $11,749,618. See "APPENDIX A — Summary of Documents — Project Plan and Reinvestment Zone Financing Plan — Second Amendment." As contemplated by the Plan and the Subdeveloper Agreement, the Subdeveloper will be reimbursed for improvements estimated to cost $11,749,618. While the Subdeveloper has commenced construction on most or all of these reimbursable improvements, none have been approved for reimbursement by the TIRZ Board. Reimbursements made pursuant to the Subdeveloper Agreement are a part of, and not in addition to, the total infrastructure project costs of approximately $169,107,759 described above. The Subdeveloper's reimbursements are subordinate to reimbursements owed the Developer.] The Authority can make no prediction as to the likelihood that any additional development agreements will be entered. Marketability of the Bonds The Authority has no agreement with the Underwriter regarding the re -offering yields or prices of the Bonds and has no control over trading of the Bonds in the secondary market. Moreover, there is no assurance that a secondary market will be made in the Bonds. If there is a secondary market, the difference between the bid and asked price may be greater than the bid and asked price of bonds of comparable maturity and quality issued by more traditional issuers as such bonds are more generally bought, sold or traded in the secondary market. The SEC has promulgated amendments to its Rule 15c(2)-12 (the "Rule") relating to annual disclosure of certain financial information and operating data and notice of certain material events. The failure by the Authority to comply with its agreement to provide the information and notices required by the Rule could possibly adversely affect the marketability of the Bonds in the secondary market. See "CONTINUING DISCLOSURE OF INFORMATION." Continuing Compliance with Certain Covenants Failure of the Authority to comply with certain covenants contained in the Bond Resolution and Indenture on a continuing basis prior to the maturity of the Bonds could result in interest on the Bonds becoming taxable retroactive to the date of original issuance. See "TAX MATTERS." There is no acceleration of the Bonds or additional payments if the interest thereon becomes taxable. Air Quality Air quality control measures required by the United States Environmental Protection Agency (the "EPA") and the Texas Commission on Environmental Quality ("TCEQ") may impact new industrial, commercial and residential development in Houston and adjacent areas. Under the Clean Air Act ("CAA") Amendments of 1990, the eight -county Houston -Galveston area ("HGB area") — Harris, Galveston, Brazoria, Chambers, Fort Bend, Waller, Montgomery and Liberty counties — was designated by the EPA as a moderate ozone nonattainment area. Such areas are required to demonstrate progress in reducing ozone concentrations each year until the EPA "eight hour" ozone standards are met. Compliance with EPA's 8-hour standard for ozone must be achieved by June 15, 2010 for areas designated as "moderate." However, on June 15, 2007, the Governor requested the EPA to reclassify the HGB area since attainment by 2010 was impracticable. If this request is granted, the HGB area will be designated a severe nonattainment area with a new attainment date of June 15, 2019. To provide for reductions in ozone concentrations, the EPA and the TCEQ have imposed increasingly stringent limits on sources of air emissions and require any new source of significant air emissions to provide for a net reduction of air emissions. If the HGB area fails to demonstrate progress in reducing ozone concentrations or fails to meet EPA's standards, EPA may impose a moratorium on the awarding of federal highway construction 11 grants and other federal grants for certain public works construction projects, as well as severe emissions offset requirements on new major sources of air emissions for which construction has not already commenced. In order to comply with the EPA's standards for the HGB area, the TCEQ has proposed SIPS setting emission control requirements, some of which regulate the inspection and use of automobiles. These types of measures could impact how people travel, what distances people are willing to travel, where people choose to live and work, and what jobs are available in the HGB area. In response to the severe ozone nonattainment designation, the TCEQ is now working on additional control technology proposals for the next SIP submission to the EPA which it has requested to be finalized by April 2010. This means that additional control strategies will need to be implemented in order to achieve attainment, and it is possible that these additional controls could have a negative impact on the HGB area's economic growth and development. Tax Abatements The TIF Act provides that a taxing unit other than a school district may enter into a tax abatement agreement with an owner of real property in a reinvestment zone for a term not to exceed ten years. To be effective, an agreement to abate taxes on real property in a reinvestment zone must be approved by the board of directors of the reinvestment zone and the governing body of each taxing unit that imposes taxes on real property in the reinvestment zone and deposits or agrees to deposit any of its tax increment into the tax increment fund for the zone. The board of a reinvestment zone may covenant that the board will not approve a tax abatement agreement that applies to real property in that zone. If a taxing unit enters into a tax abatement agreement, taxes that are abated under that agreement are not considered taxes to be imposed or produced by that taxing unit in calculating the amount of the tax increment of that taxing unit or that taxing unit's deposit to the tax increment fund for the reinvestment zone. The TIRZ Board has not covenanted that it will not approve a tax abatement agreement that applies to real property in the TIRZ; however, it is within the Board's discretion to do so at any point in time. If a tax abatement agreement is approved by the City, AISD, Brazoria County, Fort Bend County and the TIRZ, such abatement would reduce the amount of future Contract Tax Increments. A tax abatement agreement would not reduce the amount of Contract Tax Increments existing prior to the agreement. The TIRZ has not been asked to approve an abatement agreement and there are no present plans of the TIRZ to approve an abatement agreement. PLAN OF FINANCING Creation of the Authority and TIRZ The creation of the Authority was authorized by the City on June 28, 2004 by Resolution No. 2004-107 of the City Council. The Authority operates pursuant to Articles of Incorporation filed with the Secretary of State and Bylaws approved by the City, and adopted by the Authority Board and under the provisions of Chapter 431, Texas Transportation Code, Chapter 394, Texas Local Government Code, and the general laws of the State of Texas applicable and may exercise the powers granted to non-profit corporations under the .Texas Non -Profit Corporation Act. The Authority was created for the purpose of aiding, assisting, and acting on behalf of the City in the performance of its governmental and proprietary functions with respect to, and to provide financing for, the TIRZ. The TIRZ was created by the City on December 21, 1998 by Ordinance No. 891. The Original Area of the TIRZ encompasses approximately 3,467 acres of land located within the City, including all of the master planned community of Shadow Creek Ranch, which includes approximately 3300 acres of land. The City approved an annexation of 457 (the "First Annexation") acres into the boundaries of the TIRZ on July 10, 2006, by Ordinance No. 1276. The City approved an annexation of seven acres (the "Second Annexation Area," and together with the First Annexation Area, the "Annexation Area") into the boundaries of the TIRZ on November 13, 2006 by Ordinance No. 1313. The TIRZ Board has nine members, four of whom are appointed by the City. One of the City's appointees is nominated by AISD, pursuant to the AISD Agreement. In addition, Brazoria County and Fort Bend County each appoint one member of the TIRZ Board and the Texas State Senator and Texas State Representative, or their designees, in whose district the TIRZ is located serve as the final two members of the TIRZ Board. The Authority Board has five members, all of whom are appointed by the City. See the page iii hereof for a list of the current Authority Board members. 12 The City, Brazoria County and Fort Bend County pay Tax Increments on the Captured Appraised Value of the Annexation Area. AISD will not participate in the payment of Tax Increments on the Captured Appraised Value of the Annexation Area. Purpose/Project Plan The purpose of the TIRZ is to design, construct and finance or cause to be designed, constructed and financed certain public works and improvements to promote and facilitate the development of the vacant, undeveloped property in the TIRZ. Specifically, the TIRZ is constructing public works and infrastructure improvements to assist in the development of the master planned community, Shadow Creek Ranch. See "SHADOW CREEK RANCH DEVELOPMENT." The development will be in accordance with the Plan. The City and the TIRZ Board adopted a first amendment (the "First Amendment") to the Plan to enlarge the boundaries of the TIRZ and to increase estimated project costs. The City and the TIRZ Board adopted a second amendment (the "Second Amendment") to the Plan to increase estimated project costs. The City and the TIRZ Board adopted a third amendment (the "Third Amendment") to the Plan to enlarge the boundaries of the TIRZ and to increase estimated project costs. The Plan may continue to be amended from time to time in accordance with the TIF Act if such amendments are adopted by the TIRZ Board and approved by the City Council and in certain instances approved by AISD and Brazoria and Fort Bend Counties. The Plan, as amended by the First Amendment, the Second Amendment and the Third Amendment, provides for four categories of estimated Project Costs: (i) $158,655,759 for the design and construction of "Infrastructure," (ii) $1,791,000 for TIRZ creation and administration, (iii) $5,000,000 for the design and construction of "City Facilities," and (iv) $134,100,000 for educational facilities. "Infrastructure" includes, but is not limited to: (i) streets (pavement, sidewalks, landscaping and irrigation, entry monuments and signalization), (ii) water plants and water distribution system, (iii) wastewater treatment plants, lift stations and wastewater collection system, (iv) storm sewer system, (v) lakes and channels, (vi) site costs, (vii) contingencies, and (viii) engineering. "City Facilities" include: (i) library sites and improvements, and (ii) fire and police station sites and improvements. The educational facility improvements will be provided by or at the direction of AISD. No proceeds of the Bonds will be used to pay for educational facilities. Pursuant to the Plan and within certain parameters, the TIRZ Board may revise or adjust the estimated Project Costs. All estimates of Project Costs in the Plan are subject to cost adjustment per the Engineering New Record Index over the life of the TIRZ. Operations The Authority has no direct employees, but contracts with Marsh Darcy Partners, Inc. to provide administrative and consulting services to the Authority. It is intended that Authority operations will be funded by the Contract Tax Increments paid to the Authority by the City pursuant to the Tri-Party Agreement and as described herein. See "SOURCE AND SECURITY FOR PAYMENT FOR THE BONDS." Under the Tri-Party Agreement, financial statements of the Authority must be audited each fiscal year. For accounting purposes, the Authority is considered a component unit of the City and the Authority's financial statements are audited as part of the City's annual financial audit. Issuance of Bonds and Developer Reimbursements The proceeds of bonds or notes may be used to pay eligible Project Costs pursuant to the Plan. The Authority may request, and the City may approve, the issuance of additional tax increment contract revenue bonds. All such additional bonds may be on a parity with the Bonds or may be issued as subordinate lien bonds as provided in the Indenture. The Authority anticipates that it will require the issuance of bonds secured by Contract Tax Increments in addition to the Bonds in order to complete and continue the purposes for which the TIRZ was created. The City and the TIRZ Board have previously approved total reimbursements to the Developer of approximately $48,979,700. Pursuant to such reimbursement approval, the Developer has previously been reimbursed $11,283,000 from the proceeds of the Series 2004 Bonds, $8,100,000 from the proceeds of the Series 2005 Bonds, $9,104,000 from the proceeds of the Series 2006 Bonds, $14,598,700 from the sale of the Series 2007 Bonds, and $5,894,000 from four separate cash reimbursements directly from the Authority. The Developer will be reimbursed 13 approximately $6,510,000* from the proceeds of the sale of the Bonds. The Developer has also commenced work on approximately $ of additional improvements (beyond that which has previously been reimbursed or that will be reimbursed with proceeds from the sale of the Bonds) pursuant to letter financing agreements with the TIRZ Board. In addition, the Subdeveloper has commenced work on approximately $ of additional improvements pursuant to letter financing agreements that have been approved by the TIRZ Board but not submitted for reimbursement. Finally, the Plan, as amended by the First Amendment, the Second Amendment and the Third Amendment, estimates that throughout the life of the TIRZ the Authority will issue bonds sufficient to finance total infrastructure project costs of approximately $169,107,759[Confirm]. See "RISK FACTORS —Future Debt." The following chart summarizes Developer reimbursements made by the Authority: Date December 2004 April 2005 November 2005 October 2006 October 2006 October 2007 October 2007 October 2008 June 2009"' Total Developer Reimbursements(i) Amount Reimbursed $11,283,000 740,000 8,100,000 9,104,000 2,214,000 14,598,700 2,300,000 640,000 6,510,000* $55,489,700 Source of Reimbursement Series 2004 Bonds Cash Reimbursement Series 2005 Bonds Series 2006 Bonds Cash Reimbursement Series 2007 Bonds Cash Reimbursement Cash Reimbursement Series 2009 Bonds * Preliminary, subject to change To date the City and the TIRZ Board have authorized reimbursements of approximately $48,339,700[Confirm] (which include principal plus interest calculated through the date of each respective authorization). The City and the TIRZ Board anticipate authorizing additional reimbursements as described herein. (2) Expected month of delivery of the Bonds. Outstanding Obligations of the Authority The Authority has previously issued its Series 2004 Bonds, Series 2005 Bonds, Series 2006 Bonds and Series 2007 in the aggregate principal amount of $49,690,000 on a parity with the Bonds, of which $45,495,000 is currently outstanding. See "SELECTED FINANCIAL INFORMATION." Captured Appraised Value The Authority has used historical figures relating to the Captured Appraised Value as of January 1, 2008 and an estimated Captured Appraised Value as of January 1, 2009. See "FINANCIAL INFORMATION." Use of Bond Proceeds The Developer will be reimbursed approximately $6,510,0001 from the proceeds of the sale of the Bonds. See "— Sources and Uses of Funds." Proceeds of the Bonds will be used to reimburse developers for certain Projects Costs including infrastructure and related improvements made by such developers within the TIRZ and approved in Preliminary, subject to change. t Preliminary, subject to change. 14 the Plan and interest on funds advanced therefor. Project Costs to be reimbursed from this Bond issue include: (i) monumentation and signage, (ii) landscaping improvements, (iii) street and sidewalk paving and signalization, (iv) water, sanitary sewer and drainage facilities, (v) lakes and parks, and (vi) land acquisition. Bond proceeds will also be used to pay the cost of issuance of the Bonds. See "SHADOW CREEK RANCH DEVELOPMENT — Improvements." Pro Forma Debt Service Requirements The following sets forth the estimated annual debt service on the Bonds based upon a fiscal year end of September 30. The Bonds are the fourth debt issuance by the Authority. Fiscal Year Current Total Ending Debt THE BONDS: Debt Sent.30 Requirement Principal' Interest Requirements" 2009 $3,547,059 -- -- $3,547,059 2010 3,463,509 $95,000 6.500 4,200,790 2011 3,459,771 230,000 6.500 4,197,421 2012 3,462,756 245,000 6.500 4,200,456 2013 3,462,069 260,000 6.500 4,198,844 2014 3,459,141 280,000 6.500 4,199,016 2015 3,462,384 295,000 6.500 4,199,059 2016 3,461,769 315,000 6.500 4,199,269 2017 3,462,229 335,000 6.500 4,199,254 2018 3,462,816 355,000 6.500 4,198,066 2019 3,458,360 385,000 6.500 4,200,535 2020 3,374,260 380,000 6.500 4,086,410 2021 3,372,845 405,000 6.500 4,085,295 2022 3,376,220 425,000 6.500 4,082,345 2023 3,373,114 460,000 6.500 4,086,614 2024 3,374,819 485,000 6.500 4,083,419 2025 3,373„740 520,000 6.500 4,085,815 2026 3,376,594 550,000 6.500 4,084,869 2027 3,375,594 585,000 6.500 4,083,119 2028 3,372,694 630,000 6.500 4,087,194 2029 3,372,950 670,000 6.500 4,086,500 $71,904,692 $7,905,000 $86,391,348 Estimated Average Annual Requirements (2009-2029) $ 4,113,874 Estimated Maximum Annual Requirement (2010) $ 4,200,790 * Preliminary, subject to change. Interest estimated at current market rates. Sources and Uses of Funds Sources Uses Par Amount of Bonds Net Original Issue Discount Accrued Interest Total Developer Reimbursement Total Underwriter's Discount Accrued Interest Municipal Bond Insurance Surety Reserve Fund Insurance Additional Costs of Issuance Total 15 i q SOURCE AND SECURITY OF PAYMENT FOR THE BONDS General The Bonds are limited obligations of the Authority payable solely from the sources described herein and are not obligations of the City, AISD, Brazoria County, Fort Bend County, the State of Texas, or any entity other than the Authority. The Authority is not obligated to pay principal of and interest on the Bonds from money of the Authority other than the Pledged Revenues as defined herein under "— Pledge of Revenues." Tax Increments The City, AISD, Brazoria County and Fort Bend County have agreed to deposit certain of their Tax Increments into the Tax Increment Fund. The amount of the Tax Increment of the City, AISD, Brazoria County or Fort Bend County for a year is the amount of property taxes levied by the City, AISD, Brazoria County and Fort Bend County for that year on the Captured Appraised Value of taxable real property located in the Original Area of the TIRZ and the amount of property taxes levied by the City, Brazoria County and Fort Bend County for that year on the Captured Appraised Value of taxable real property located in the Annexation Area of the TIRZ. The Captured Appraised Value is: (i) the total appraised value of the all real property in the Original Area of the TIRZ that is taxable by the City, AISD, Brazoria County or Fort Bend County for a year, less the Base Year (the total appraised value of all real property in the Original Area of the TIRZ that is taxable by the City, AISD, Brazoria County or Fort Bend County on January 1, 1998), plus (ii) the total appraised value of the all real property in the Annexation Area of the TIRZ that is taxable by the City , Brazoria County and Fort Bend County for a year, less the Base Year (the total appraised value of all real property in the Annexation Area of the TIRZ that is taxable by the City , Brazoria County and Fort Bend County on January 1, 2006) plus (iii) if the boundaries of the TIRZ are expanded to include additional property, the total appraised value of all real property added to the TIRZ that is taxable by the City, AISD, Brazoria County and Fort Bend County for that year, less the tax increment base for such added property as determined on January 1 of the year in which such property was added to the TIRZ. The City, AISD, Brazoria County and Fort Bend County are required to collect taxes on property located within the TIRZ in the same manner as other taxes are collected. The Authority has no control over the collection of property taxes by the City, AISD, Brazoria County and Fort Bend County. AISD and Fort Bend County have agreed, pursuant to Chapter 311.013(c) of the TIF Act, to pay into the Tax Increment Fund the collected Tax Increments on the first day of each calendar quarter. Brazoria County has agreed, pursuant to Chapter 311.013(c) of the TIF Act, to pay into the Tax Increment Fund the collected Tax Increments on August 1 of each year. The City, Brazoria County and Fort Bend County have agreed to pay 100% of its collected Tax Increments in the Original Area and the Annexation Area of the TIRZ to the Tax Increment Fund. However, pursuant to the Development Agreement, a significant portion of the City Tax Increment has been designated as an Administrative Fee and shall be paid by the TIRZ to the City. The portion of the City Tax Increment representing the Administrative Fee is not paid to the Authority and is, therefore, not part of the Contract Tax Increments. See "RISK FACTORS - Limitations on City Tax Increments." AISD has agreed to pay 100% of collected Tax Increments to the Tax Increment Fund. However, pursuant to the AISD Agreement, the City has agreed that 75% of the AISD Tax Increment will be paid to AISD and therefore will not be paid to the Authority and will not be part of the Contract Tax Increments or Pledged Revenues. Pursuant to the AISD Agreement, only 25% of the AISD Tax Increment will be part of the Contract Tax Increments and pledged to payment of the Bonds. See "RISK FACTORS —Limitations on AISD Tax Increments." AISD's 2008 tax rate is presently $1.328 per $100 valuation. As described under "RISK FACTORS — Limitations on AISD Tax Increments" and "SOURCE AND SECURITY OF PAYMENT FOR THE BONDS — AISD's Agreement with Respect to Tax Increments" it is possible that additional state funding could increase the amount of the AISD Tax Increment contributed by AISD. However, such additional state contribution, if any, has not been considered in calculating the AISD Tax Increment. Brazoria County has agreed that it will pay 38% of its taxes collected on Captured Appraised Value in the Original Area (not to exceed $0.1359 per $100 valuation) of its collected Tax Increments to the Tax Increment Fund. Fort Bend County has agreed that it will pay $0.624100 per $100 valuation for tax years 1999-2008, $0.468075 per $100 valuation for tax years 2009-2018 and $0.312050 per $100 valuation for tax years 2019-2028 of its collected Tax Increments in the Original Area to the Tax Increment Fund. 16 . For additional information regarding the City's Tax Increment, see "APPENDIX A — SUMMARY OF DOCUMENTS — Development Agreement." For more information regarding the AISD, Brazoria County and Fort Bend County Tax Increments, see "APPENDIX A - SUMMARY OF DOCUMENTS - Interlocal Agreements." City's Agreement with Respect to Tax Increments and the Bonds The City has established the Tax Increment Fund, a separate fund in the City treasury into which Tax Increments will be deposited. Pursuant to the Tri-Party Agreement, the City and the TIRZ have agreed to pay to the Authority the Contract Tax Increments which are the Tax Increments then available in the Tax Increment Fund without counterclaim or offset, but less (i) an amount equal to the City's administrative costs connected with the TIRZ and the Plan, as provided in the Plan; (ii) money to be paid to AISD for education facilities project costs pursuant to the AISD Agreement; (iii) amounts required to be maintained in the suspense account pursuant to the terms of the AISD Agreement and (iv) an amount sufficient to pay reasonable current and anticipated administrative and operating costs of the TIRZ; provided however, no such offset shall affect the obligation of the City and the TIRZ to make payment on bonds and notes issued pursuant to the Tri-Party Agreement. The obligations of the City and the TIRZ to pay Contract Tax Increments to the Authority are subject to the Tri-Party Agreement and the rights of any of the holders of bonds, notes, or other obligations that have been or are hereafter issued by the City, AISD, Brazoria County and Fort Bend County that are payable from and secured by a general levy of ad valorem taxes throughout the taxing jurisdiction of the City, AISD, Brazoria County and Fort Bend County, as applicable. The City and TIRZ agree to continuously collect the Tax Increments during the term of the Tri-Party Agreement and, to the extent legally permitted to do so, they agree that they will not permit a reduction, abatement, or exemption in the Tax Increments paid by the City, AISD, Brazoria County and Fort Bend County. The City agrees that it will not dissolve the Authority and that any repeal of the right and power to collect Tax Increments will not be effective until all the bonds, notes, or other obligations of the Authority have been paid in full or legally defeased. The City and TIRZ further agree that the City will remit to the Authority, not later than the fifteenth day of each August in which the Tri-Party Agreement is in effect, the Contract Tax Increments. At the end of each fiscal year (beginning with the fiscal year or fraction thereof during which the Tri-Party Agreement was executed), the Authority will have an audit prepared by an independent Certified Public Accountant for that fiscal year that shall be submitted to the Authority, the TIRZ and the City within 90 days after the end of such fiscal year. The City and TIRZ agree that their obligation to make the payments of Contract Tax Increments as set forth in the Tri-Party Agreement from the Tax Increment Fund is absolute and unconditional, and until such time as the bonds, notes, and the other contractual obligations of the Authority have been fully paid or legally defeased. The City and TIRZ will not suspend or discontinue any payments of Contract Tax Increments as provided in the Tri- Party Agreement and will not terminate the Tri-Party Agreement for any cause, other than default. If the City or the Authority fails to perform its obligations under the Tri-Party Agreement, the nondefaulting party may terminate the Tri-Party Agreement. No termination of the Tri-Party Agreement will affect the obligation of the City and the TIRZ to pay from Tax Increments an amount of Contract Tax Increments which will permit the Authority to pay its bonds, notes, or other obligations issued or incurred pursuant to the Tri-Party Agreement prior to termination. In the Tri-Party Agreement, the City agrees not to dissolve the Authority or the TIRZ unless it makes satisfactory arrangements to provide for the payment of the Authority's bonds, notes, or other obligations incurred prior to the Authority's dissolution. AISD's Agreement With Respect to Tax Increments AISD has agreed that it will pay 100% of the taxes collected on the Captured Appraised Value in the Original Area of the TIRZ to the City for deposit in the Tax Increment Fund. AISD does not provide Tax Increments for the Annexation Area of the TIRZ. However, pursuant to the AISD Agreement, the City has agreed that 75% of the AISD Tax Increment will be paid to AISD and therefore will not be paid to the Authority and will 17 not be part of the Contract Tax Increments or Pledged Revenues. Pursuant to the AISD Agreement, only 25% of the AISD Tax Increment will be part of the Contract Tax Increments and pledged to payment of the Bonds. See "RISK FACTORS — Limitations on AISD Tax Increments." AISD's 2008 tax rate is $1.328 per $100 valuation. AISD is not obligated to make payments on the AISD Tax Increment from other AISD taxes or revenues until the taxes representing the AISD Tax Increment are actually collected. Such payments are due on the first day of each calendar quarter. No interest or penalty may be charged to AISD for delinquent payments under the AISD Agreement. Pursuant to the AISD Agreement, the first payment of Tax Increments by AISD is for taxes levied for the year 1999 and the last payment is for taxes levied in the year 2028. AISD's participation will not extend to the Captured Appraised Value on any property added to the TIRZ by the City (including the Annexation Area) unless AISD approves the participation. Due to the state laws applicable to AISD's state and local funding, it is unlikely that AISD would agree to participate on any property added to the TIRZ. [Update — Confirm Payments being made.][Legislation enacted to reform the Texas public school finance system in 2007 became effective at the beginning of the 2006-2007 school year. This legislation required that local independent school district operations and maintenance tax rates be reduced by 33% by fiscal year 2007- 08 from the tax rates in effect for the 2005-2006 school year. The legislation contemplates that State funds, generated by modified State franchise, motor vehicle and tobacco taxes and any other revenue sources appropriated by the Legislature, will be used to offset local operations and maintenance tax rate reductions. Local operations and maintenance taxes comprise the majority of the AISD Tax Increment. The legislation provides a mechanism to allow AISD to provide the AISD Tax Increment at a level equal to the 2005 AISD tax rate ($1.7058 per $100 assessed value) on an ongoing basis. This mechanism provides that shortfalls between the AISD Tax Increment that AISD's actual tax rate allows AISD to contribute to the TIRZ and the AISD Tax Increment that would be provided to the TIRZ utilizing the 2005 AISD tax rate are to be funded with monies contributed by the State. However, there is no guarantee that such monies will actually be appropriated and provided by the State. Moreover, the Texas Legislative Budget Board has projected that the legislation will be underfunded from the revenue sources identified in such legislation by a cumulative amount of $25 billion by fiscal year 2010-2011, although current State surpluses are expected to offset the revenue shortfall through fiscal year 2007-2008. [Because of the uncertainty of State funding, for purposes of the pro forma presentation of AISD's Tax Increment herein, the 2008 AISD Tax Increment is based upon the actual AISD 2007 tax rate without additional State funding. For years 2009 and beyond, the AISD increment is also based on the actual amount of tax revenues AISD is projected to collect, without any additional State funding.] For a more detailed description of the legislation described in this paragraph, see "APPENDIX E — CURRENT PUBLIC SCHOOL FINANCE SYSTEM." The AISD Agreement, which was entered prior to the recent changes in Texas law described above, provides in the event that laws applicable to AISD change so that the participation of AISD in the TIRZ will result in a decrease or decreases the amount of state and local funds available and/or received by AISD, or AISD determines in its sole and independent discretion that it would be in AISD's best interest due to negative financial impact to AISD, resulting from participation in the TIRZ, the City and the TIRZ have agreed that, at the option of AISD in its sole and independent discretion, (i) the AISD Tax Increments shall be decreased by an amount determined by AISD to account for the amount of the decrease in AISD state and local funding as a result of AISD's participation in the TIRZ, (ii) the percentage of payments to be made by the TIRZ to AISD from taxes generated from the AISD Tax Increments shall be increased by an amount determined by AISD to account for the amount of the decrease in AISD state and local funding as a result of AISD's participation in the TIRZ, (iii) any combination of the options set forth in subparagraphs (i) or (ii) above, or (iv) AISD may completely withdraw from further participation in the TIRZ. In addition, in the event the City determines that the continued participation by AISD in the TIRZ has or will have a negative financial impact on the TIRZ, then the City shall have the right to terminate AISD's participation in the TIRZ. The Authority is unable to predict the likelihood of whether recently enacted Texas public school finance legislation will result in reduction of state and local funding to AISD, whether any such reduction would cause AISD to decrease or eliminate AISD Tax Increment payments to the City or whether new legislation, interpretations, rulings, orders, decrees or court decisions will decrease the state and local funds available to AISD as a result of AISD's participation in the TIRZ. See "RISK FACTORS — Limitations on AISD Tax Increments." 18 Brazoria County's Agreement with Respect to Tax Increments and the Bonds Brazoria County has agreed that it will contribute 38% of its taxes collected on the Captured Appraised Value in the Original Area and the Annexation Area of the TIRZ (not to exceed $0.1359 per $100 valuation). Brazoria County's obligation to pay the Tax Increment accrues as such taxes are collected and will be due on August 1 of each year. Pursuant to the Brazoria County Agreement, as amended, the first payment of Tax Increments by Brazoria County is for taxes levied for the year 1999 and the last payment is for taxes levied in the year 2028. Brazoria County's participation will not extend to the Captured Appraised Value on any property added to the TIRZ by the City unless Brazoria County approves the participation. The City has agreed not to terminate the TIRZ without the prior consent of Brazoria County, provided that the TIRZ may be otherwise terminated by operation of law. Brazoria County may reduce its participation in the TIRZ by the adoption of a written order of the Commissioners Court of Brazoria County adopted prior to September 30 of such year if the Captured Appraised Value is less than 50% of the values for each of the listed tax years indicated in the table immediately below or that in such listed tax years, if the County Unit Cost of Service (as defined in the Brazoria County Agreement) is lower than Brazoria County's Actual Cost of Service (as defined in the Brazoria County Agreement), Brazoria County may reduce its participation in the TIRZ for the remaining term of the TIRZ so that Brazoria County's retained tax increment covers Brazoria County's Actual Cost of Service for dwelling units in the TIRZ by at least 1.32 times, but the reduction percentage may not increase the Brazoria County's retained tax increment revenue to cover more than County Unit Cost of Service plus 10%. Tax Captured 50% Year Appraised Value Required Value 2011 $ 1,338,693,425 $ 669,346,713 2016 $ 1,414,004,025 $ 707,002,013 2021 $ 1,414,004,025 $ 707,002,013 2026 $ 1,414,004,025 $ 707,002,013 Notwithstanding anything in the paragraph immediately above to the contrary, if the City, the TIRZ or an agency or instrumentality of the City or TIRZ (such as the Authority) have (1) issued bonds or notes secured by revenues in the tax increment fund or under a contract secured by payments of the tax increment revenues, (such as the Bonds) or (2) entered into a project cost agreement(s) for the implementation of the Plan pledging the payment of the tax increment for the payment of developer advances then incurred or construction contracts awarded and executed, Brazoria County may not reduce its participation under the provisions of subparagraphs (a) or (b) of Section VI of the Brazoria County Agreement to an amount less than its cumulative annual pro rata share of the tax increment pledged to make payments on all of such bonds or agreements. Fort Bend County's Agreement with Respect to Tax Increments and the Bonds Pursuant to the Fort Bend County Agreement, as amended, Fort Bend County has agreed to participate in the TIRZ by contributing the amount of tax increment produced in the Original Area and the Annexation Area of the TIRZ attributable to Fort Bend County based on the following tax rates: Fort Bend County Tax Rate Per $100 Tax Year of Captured Appraised Value 1999-2008 $0.624100 2009-2018 $0.468075 2019-2028 $0.312050 If the Fort Bend County tax rate is less than the rate specified above for such year, then the Fort Bend County Tax Increment for such year would be the total amount of taxes collected by Fort Bend County at its actual tax rate on the Captured Appraised Value. Taxes collected as a result of a Fort Bend County tax levy at a tax rate greater than the rate specified above for a particular year will be retained by Fort Bend County. Fort Bend County's 19 obligation to pays its Tax Increment accrues as such taxes are collected and payment is due on the first day of each calendar year quarter. Pursuant to the Fort Bend County Agreement, the first payment of Tax Increments by Fort Bend County is for taxes levied for the year 1999 and the last payment is for taxes levied in the year 2028. Fort Bend County's participation will not extend to the Captured Appraised Value on any property added to the TIRZ by the City unless Fort Bend County approves the participation. The City has agreed not to terminate the TIRZ prior to the termination dates for the TIRZ described in the Ordinance No. 891 (the ordinance authorizing the creation of the TIRZ) without the prior consent of the Fort Bend County. Calculation and Collection of Tax Increments Calculation and collection of Tax Increments are subject to administrative interpretation by the City, AISD, Brazoria County and Fort Bend County, which may change from time to time, at the option of the City, AISD, Brazoria County and Fort Bend County. The certified appraised value of that portion of the TIRZ located in Brazoria County is supplied to the City, AISD and Brazoria County by the Brazoria County Appraisal District based on the Brazoria County Appraisal District's identification of all real property accounts within boundaries of both the TIRZ and Brazoria County. The certified appraised value of that portion of the TIRZ located in Fort Bend County is supplied to Fort Bend County by the Fort Bend County Appraisal District based on the Fort Bend County Appraisal District's identification of all real property accounts within boundaries of both the TIRZ and Fort Bend County. Each Appraisal District determines Captured Appraised Value on a property -by -property basis by subtracting the Base Year valuation of such property from the current year's taxable value of such property. The City, AISD, Brazoria County and Fort Bend County each use the certified appraised value in the TIRZ obtained from the respective Appraisal Districts, but then modify it based on the various exemptions from taxation granted by the City, AISD, Brazoria County and Fort Bend County. The respective Appraisal Districts each issue "correction rolls" which affect certified values for the previous five years (or for a longer period in the case of some litigation). Value changes can be positive or negative depending on the cause. Omitted property adds value while protest settlements, exemptions and error corrections can add or subtract value. Value changes typically are larger in dollar amount and number in the years just following the current tax year and tend to diminish in amount and number over time. At the current time, value changes affecting real property within the TIRZ do not affect and adjustments are not made to the Tax Increment provided by the various entities to the TIRZ after such Tax Increments are initially determined. The determination of Captured Appraised Value by the City, AISD, Brazoria County and Fort Bend County will depend on the timing of its calculation (that is, which Appraisal District roll it uses) and each respective taxing entities' own exemptions. For the current year of calculation of Tax Increments for the TIRZ, the City, AISD, Brazoria County and Fort Bend County's individual determinations resulted in the Captured Appraised Values shown under "SELECTED FINANCIAL INFORMATION." For an explanation of the different exemptions of the City, AISD, Brazoria County and Fort Bend County, see "TAXING PROCEDURES —Property Subject to Taxation by the City, AISD, Brazoria County and Fort Bend County." Pledge of Revenues The Bonds are issued pursuant to the Indenture and the Bond Resolution. The Bonds are payable solely from the Pledged Revenues. The TIF Act requires that all Tax Increments that the City, AISD, Brazoria County and Fort Bend County have agreed to dedicate to the TIRZ must be deposited to the Tax Increment Fund for the TIRZ in the City's treasury. Pursuant to the Tri-Party Agreement, and as described herein, the City will, not later than the fifteenth day of each August in which the Tri-Party Agreement is in effect, pay to the Authority the Contract Tax Increments. 20 The Authority will have an account into which Contract Tax Increments will be deposited, known as the "Pledged Revenue Fund." Money in the Pledged Revenue Fund may be invested only in investments which would be eligible for investment by the City pursuant to the Public Funds Investment Act (Chapter 2256, Texas Government Code). Pursuant to the Bond Resolution and the Indenture, the Authority shall annually pay the Contract Tax Increments to the Trustee for deposit in the Pledged Revenue Fund. [confirm that DSR Fund can be funded over time as opposed to using Bond Proceeds]As part of the security for the Bonds and for each series of Additional Bonds (as hereinafter defined), the Authority will utilize a portion of the Bond proceeds of each series to fund the "Debt Service Reserve Fund" created by the Indenture and held by the Trustee equal to the "Reserve Requirement", which is defined in the Indenture as the lesser of 1.25 times the Average Annual Debt Service or the Maximum Annual Debt Service (not to exceed 10% of the stated principal amount of the Bonds of each series or any series of Additional Bonds or 10% of the issue price of the Bonds or any series of Additional Bonds if the Bonds or any series of Additional Bonds are issued with more than a de minimus amount (as defined by Section 1.148-1 of the Income Tax Regulations) of original issue discount), which Reserve Requirement will be recomputed after the issuance of any series of Additional Bonds. The Indenture provides that at any time, to satisfy all or any part of its Reserve Requirement, the Authority may obtain for the benefit of the Debt Service Reserve Fund one or more reserve fund surety policies. In the event the Authority elects to substitute at any time a reserve fund surety policy for any funded amounts in the Debt Service Reserve Fund, it may apply any bond proceeds thereby released, to the greatest extent permitted by law, to any purposes for which the bonds were issued and any other funds thereby released to any purposes for which such funds may lawfully be used, including the payment of debt service on Bonds or Additional Bonds. See "INDENTURE - The Funds." Pursuant to the Indenture there shall be deposited into the "Surplus Fund," maintained by the Authority in accordance with the Tri-Party Agreement any amounts remaining in the Pledged Revenue Fund after the Trustee makes the deposits and payments required under the Indenture. See "INDENTURE - The Funds." The Authority has pledged to the payment of the principal of and interest on the Bonds the "Pledged Revenues," which are defined in the Indenture as all of the Authority's right, title, and interest in and to the following described properties and interests, direct or indirect, whether now owned or hereafter acquired: (a) the Contract Tax Increments and all of the Authority's right, title, and interest thereto under the Tri-Party Agreement; (b) all money deposited or required to be deposited in the Pledged Revenue Fund, the Debt Service Fund (as hereinafter defined), and the Debt Service Reserve Fund, held by the Trustee pursuant to the provisions of the Indenture for the Bonds and all interest earnings and investment income therefrom; and (c) any and all property of every kind and nature (including without limitation, cash, obligations, or securities) which may from time to time hereafter be conveyed, assigned, hypothecated, endorsed, pledged, mortgaged, granted, or delivered to or deposited with, the Trustee as additional security under the Indenture by the Authority, or anyone on behalf of the Authority, or which pursuant to any of the provisions may come into the possession or control of the Trustee as security thereunder, or of a receiver lawfully appointed thereunder, all of which property the Trustee is authorized to receive, hold, and apply according to the terms thereof. Additional Bonds The Authority has reserved the right to issue one or more series of additional parity tax increment contract revenue bonds payable from and secured by a lien on the Pledged Revenues on a parity with the Bonds and the Outstanding Bonds (the "Additional Bonds") on the terms set out in the Indenture and the Bond Resolution for any lawful purpose. Prior to issuing Additional Bonds, the following conditions must be met: (a) the Additional Bonds must mature on, and interest be payable on, the same days of the year as the Bonds; 21 (b) the City has approved issuance of the Additional Bonds on the terms set forth in the Tri-Party Agreement, as the same may be modified from time to time; (c) amounts equal to applicable Reserve Requirement after the issuance of Additional Bonds are set aside for deposit to the Debt Service Reserve Fund; (d) the Authority is not in material default with the terms of the Indenture, any bond resolution, the Tri-Party Agreement and any other agreements to which it is a party and has so certified; (e) The Authority has received a certificate meeting the requirements set forth below (the "Certificate") which shows Captured Appraised Value which, at the participants' tax rates then in existence, will generate Contract Tax Increments on the Additional Parity Bonds to be issued that will be at least 125 percent of projected Average Annual Debt Service, taking into account the Bonds and the Additional Parity Bonds to be issued, provided; however, that this requirement shall not apply to the issuance of any series of Additional Parity Bonds for refunding purposes that will have the result of reducing the Average Annual Debt Service requirements on Parity Bonds; and (f) The Certificate may be either: (i) a certificate of the appropriate county appraisal district or districts showing certified values, adjusted for exemption, (ii) a certificate of the appropriate county appraisal district or districts showing estimated or preliminary values, adjusted for exemptions and losses due to protests based on historical data, or (iii) a projection prepared by an independent real estate appraiser. Perfected Security Interest Chapter 1208, Texas Government Code, applies to the issuance of the Bonds and the pledge of the tax increment contract revenues granted by the Authority under the Indenture and such pledge is, therefore, valid, effective, and perfected. Although Texas Law does not subject the Authority to the filing requirements of Chapter 9, Texas Business & Commerce Code, the Authority has covenanted in the Indenture to cause the Indenture, any supplemental indenture, and all other security instruments, financing statements and supplements thereto that may be necessary to be filed, recorded, and refiled in order to fully preserve and protect the rights and security of the owners of the Bonds and to perfect and preserve the lien of the Indenture. THE BONDS Description The Bonds will be dated June 1, 2009 with interest payable each March 1 and September 1, beginning September 1, 2009 (each an "Interest Payment Date"), and with the first principal payment to be made on March 1, 2010. The Bonds will mature on the dates and in the amounts shown on the inside cover page hereof. The Bonds will be issued in fully registered form, in denominations of $5,000 or any integral multiple of $5,000. Method of Payment of Principal and Interest In the Bond Resolution, the Board has initially appointed Wells Fargo Bank, National Association, Houston, Texas, as Trustee for the Bonds. The principal of the Bonds will be payable, without exchange or collection charges, in any coin or currency of the United States of America which, on the date of payment, is legal tender for the payment of debts due the United States of America, upon their presentation and surrender as they respectively become due and payable, at the designated payment office of the Trustee. Interest on each Bond will be payable by check payable on each Interest Payment Date, mailed by the Trustee on or before each Interest Payment Date to the Registered Owner of record as of the 15th calendar day of the month immediately preceding each Interest Payment Date (defined herein as the "Record Date"), to the address of such Registered Owner as shown on the book or register kept by the Trustee (the "Register") or by such other customary banking arrangements as may be agreed upon by the Trustee and the Registered Owners at the risk and expense of the Registered Owners. 22 If the date for payment of the principal of or interest on any Bond is not a business day, then the date for such payment will be the next succeeding business day, as defined in the Bond Resolution, without additional interest. Optional Redemption The Authority reserves the right, at its option, to redeem the Bonds maturing on or after September 1, 2019 prior to their scheduled maturities, in whole or in part, in integral multiples of $5,000 on September 1, 2018, or any date thereafter, at a price of par value plus accrued interest on the principal amounts called for redemption to the date fixed for redemption. If less than all of the Bonds are redeemed at any time, the Authority will determine the particular Bonds or portions thereof to be redeemed in integral multiples of $5,000 in principal amount. If a Bond subject to redemption is in a denomination larger than $5,000, a portion of such Bond may be redeemed, but only in integral multiples of $5,000. Upon surrender of any Bond for redemption in part, the Paying Agent/Registrar will authenticate and deliver in exchange therefor a Bond or Bonds of like maturity and interest rate in an aggregate principal amount equal to the unredeemed portion of the Bond so surrendered. Mandatory Sinking Fund Redemption The Bonds maturing on September 1, 20_ (the "Term Bonds") are subject to mandatory redemption prior to maturity in the amounts and on the dates set out below, at a price equal to the principal amount to be redeemed plus accrued interest to the redemption date: Mandatory Redemption Dates Principal Amounts September 1, 20_ $ September 1, 20_ (maturity) On or before 30 days prior to each Mandatory Redemption Date set forth above, the Paying Agent/Registrar shall (i) determine the principal amount of such Term Bond that must be mandatorily redeemed on such Mandatory Redemption Date, after taking into account deliveries for cancellation and optional redemptions as more fully provided for below, (ii) select, by lot or other customary random method, the Term Bond or portions of the Term Bond of such maturity to be mandatorily redeemed on such Mandatory Redemption Date, and (iii) give notice of such redemption as provided in the Bond Resolution. The principal amount of any Term Bond to be mandatorily redeemed on such Mandatory Redemption Date shall be reduced by the principal amount of such Term Bond which, by the 45th day prior to such Mandatory Redemption Date, either has been purchased in the open market and delivered or tendered for cancellation by or on behalf of the Authority to the Paying Agent/Registrar or optionally redeemed and which, in either case, has not previously been made the basis for a reduction under this sentence. Notice of Redemption Unless waived by the Registered Owner, notice of any redemption identifying the Bonds to be redeemed in whole or in part will be given by the Trustee at least 30 days prior to the date fixed for redemption by sending written notice by first class mail, postage paid, to the Registered Owner of each Bond to be redeemed in whole or in part at the address shown on the Register. Such notices must state the redemption date, the redemption price, the place at which the Bonds are to be surrendered for payment, and if less than all the Bonds outstanding of a particular maturity are to be redeemed, the numbers of the Bonds or the portions thereof of such maturity to be redeemed. Any notice so given will be conclusively presumed to have been duly given, whether or not the Registered Owner receives such notice. By the date fixed for redemption, due provision will be made with the Trustee for payment of the redemption price of the Bonds or portions thereof to be redeemed, plus accrued interest to the date fixed for redemption. When Bonds have been called for redemption in whole or in part and due provision has been made to redeem the same as herein provided, the Bonds or portions thereof so redeemed will no longer be regarded as outstanding except for the purpose of receiving payment solely from the funds so provided for redemption, and the rights of the Registered Owners to collect interest which would otherwise accrue after the redemption date on any Bond or portion thereof called for redemption will terminate on the date fixed for redemption. 23 Authority for Issuance The Bonds are issued by the Authority pursuant to the City Resolution adopted on May 18, 2009, the Tri-Party Agreement, the terms and conditions of the Bond Resolution, the Indenture, the TIF Act, the Texas Constitution, and the general laws of the State of Texas. Before the Bonds can be issued, the Attorney General of Texas must pass upon the legality of certain related matters. The Attorney General of Texas does not guarantee, or pass upon the safety of the Bonds as an investment or upon the adequacy of the information contained in this Official Statement. No Arbitrage The Authority will certify as of the date the Bonds are delivered and paid for that, based upon all facts and estimates now known or reasonably expected to be in existence on the date the Bonds are delivered and paid for, the Authority reasonably expects that the proceeds of the Bonds will not be used in a manner that would cause the Bonds, or any portion of the Bonds, to be "arbitrage bonds" under the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations prescribed thereunder. Furthermore, all officers, employees, and agents of the Authority have been authorized and directed to provide certifications of facts and estimates that are material to the reasonable expectations of the Authority as of the date the Bonds are delivered and paid for. In particular, all or any officers of the Authority are authorized to certify to the facts and circumstances and reasonable expectations of the Authority on the date the Bonds are delivered and paid for regarding the amount and use of the proceeds of the Bonds. Moreover, the Authority covenants in the Indenture and the Bond Resolution that it shall make such use of the proceeds of the Bonds, regulate investment of proceeds of the Bonds, and take such other and further actions and follow such procedures, including, without limitation, calculating the yield on the Bonds, as may be required so that the Bonds shall not become "arbitrage bonds" under the Code and the regulations prescribed from time to time thereunder. Registration and Transfer So long as any Bonds remain outstanding, the Trustee will keep the Register at its principal payment office and, subject to such reasonable regulations as it may prescribe, the Trustee will provide for the registration and transfer of Bonds in accordance with the terms of the Bond Resolution and the Indenture and the Book -Entry Only System described below. Each Bond will be transferable only upon the presentation and surrender of such Bond at the principal payment office of the Trustee, duly endorsed for transfer, or accompanied by an assignment duly executed by the Registered Owner or his authorized representative in form satisfactory to the Trustee. Upon due presentation of any Bond in proper form for transfer, the Trustee has been directed by the Authority to authenticate and deliver in exchange therefor a new Bond or Bonds, registered in the name of the transferee or transferees, in authorized denominations and of the same maturity and aggregate principal amount and paying interest at the same rate as the Bond or Bonds so presented. All Bonds will be exchangeable upon presentation and surrender thereof at the principal payment office of the Trustee for a Bond or Bonds of the same maturity and interest rate and in any authorized denomination in an aggregate amount equal to the unpaid principal amount of the Bond or Bonds presented for exchange. The Trustee is authorized to authenticate and deliver exchange Bonds. Each Bond delivered will be entitled to the benefits and security of the Bond Resolution and Indenture to the same extent as the Bond or Bonds in lieu of which such Bond is delivered. Neither the Authority nor the Trustee will be required to transfer or to exchange any Bond during the period beginning on a Record Date or Special Record Date and ending on the next succeeding Interest Payment Date or to transfer or exchange any Bond called for redemption during the 30 day period prior to the date fixed for redemption of such Bond unless the Registered Owner will exchange the unredeemed portion of a Bond called for redemption in part. 24 The Authority or the Trustee may require the Registered Owner of any Bond to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with the transfer or exchange of such Bond. Any fee or charge of the Trustee for such transfer or exchange will be paid by the Authority. Book -Entry Only System This section describes how ownership of the Bonds is to be transferred and how the principal of and interest on the Bonds are to be paid to and credited by The Depository Trust Company, New York, New York ("DTC") while the Bonds are registered in its nominee's name. The information in this section concerning DTC and the Book -Entry -Only System has been provided by DTC for use in disclosure documents such as this Official Statement. The Authority believes the source of such information to be reliable, but takes no responsibility for the accuracy or completeness thereof. The Authority cannot and does not give any assurance that (i) DTC will distribute payments of debt service on the Bonds, or redemption or other notices, to DTC Participants, (ii) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Bonds), or redemption or other notices, to the Beneficial Owners (as defined herein), or that they will do so on a timely basis, or (iii) DTC will serve and act in the manner described in this Official Statement. The current rules applicable to DTC are on file with the Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. DTC will act as securities depository for the Bonds. The Bonds will be issued as fully -registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully -registered Bond certificate per maturity 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 limited -purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post -trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book - entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly -owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard & Poor's highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org.. Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC's records. The ownership interest of each actual purchaser of each Bond (`Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Bonds, except in the event that use of the book -entry system for the Bonds is discontinued. 25 To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC's records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by -arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Bonds within an issue are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Bonds unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Authority as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Principal, interest and redemption payments on the Bonds will be made to Cede & Co., or such other nominee 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 detail information from the Authority or the Paying Agent/Registrar, on the payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC, the Paying Agent/Registrar, or the Authority, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal, interest and redemption 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 Paying Agent/Registrar, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to the Authority or the Paying Agent/Registrar. Under such circumstances, in the event that a successor depository is not obtained, printed certificates for the Bonds are required to be printed and delivered (see "THE BONDS — Registration and Transfer"). The Authority may decide to discontinue use of the system of book -entry transfers through DTC (or a successor securities depository). In that event, certificates for the Bonds will be printed and delivered. Use of Certain Terms in Other Sections of this Official Statement. In reading this Official Statement it should be understood that while the Bonds are in the Book -Entry -Only System, references in other sections of this Official Statement to registered owners should be read to include the person for which the Participant acquires an interest in the Bonds, but (i) all rights of ownership must be exercised through DTC and the Book -Entry -Only System, and (ii) except as described above, notices that are to be given to registered owners under the Bond Resolution and Indenture will be given only to DTC. 26 Replacement of Trustee Provision is made in the Indenture and Bond Resolution for replacement of the Trustee. If the Trustee is replaced by the Authority, the successor Trustee will act in the same capacity as the previous Trustee. Any Trustee selected by the Authority will be a commercial bank, trust company or other entity duly qualified and legally authorized to act as Trustee. Mutilated, Lost or Stolen Bonds Upon the presentation and surrender to the Trustee of a mutilated Bond, the Trustee will authenticate and deliver in exchange therefor a replacement Bond of like maturity, interest rate and principal amount, bearing a number not contemporaneously outstanding. If any Bond is lost, apparently destroyed, or wrongfully taken, the Authority, pursuant to the applicable laws of the State of Texas and in the absence of notice or knowledge that such ,3ond has been acquired by a bona fide purchaser, will, upon receipt of certain documentation from the Registered Owner and an indemnity bond, execute and the Trustee will authenticate and deliver a replacement Bond of like maturity, interest rate and principal amount bearing a number not contemporaneously outstanding. Registered Owners of lost, stolen or destroyed bonds will be required to pay the Authority's costs to replace such bond. In addition, the Authority or the Trustee may require the Registered Owner to pay a sum sufficient to cover any tax or other governmental charge that may be imposed. Legal Investment and Eligibility to Secure Public Funds in Texas Pursuant to the Public Security Procedures Act, Chapter 1201, Texas Government Code, the Bonds are legal and authorized investments for banks, savings banks, trust companies, building and loan associations, savings and loan associations, insurance companies, fiduciaries, and trustees and for the sinking funds of cities, town, villages, school districts and other political subdivisions or public agencies of the State of Texas. The Bonds are not an authorized investment for political subdivisions that are required to comply with the Public Funds Investment Act, Chapter 2256, Texas Government Code. Most political subdivisions in the State of Texas are required to adopt investment guidelines consistent with the Public Funds Investment Act, Chapter 2256, Texas Government Code. However, political subdivisions otherwise subject to the Public Funds Investment Act may have statutory authority to invest in the Bonds independent from the Public Funds Investment Act. The Bonds are eligible under the Public Funds Collateral Act, Chapter 2257, Texas Government Code, to secure deposits of public funds of the State of Texas, or any political subdivision or public agency of the State of Texas and are lawful and sufficient security for those deposits to the extent of their market value. The Authority has not reviewed the laws in other states to determine whether the Bonds are legal investments for various institutions in those states or eligible to serve as collateral for public funds in those states. The Authority has made no investigation of any other laws, rules, regulations or investment criteria that might affect the suitability of the Bonds for any of the above purposes or limit the authority of any of the above persons or entities to purchase or invest in the Bonds. Defeasance Except to the extent provided in the Bond Resolution and Indenture, any Bond, and the interest thereon, will be deemed to be paid, retired, and no longer outstanding within the meaning of the Bond Resolution and Indenture (a "Defeased Bond") when payment of the principal of such Bond, plus interest thereon to the due date (whether such due date be by reason of maturity, redemption, or otherwise) either (i) will have been made or caused to be made in accordance with the terms of such Bond (including the giving of any required notice of redemption) or (ii) will have been provided for on or before such due date by irrevocably depositing with or making available to a person (a "Depositary"), with respect to the safekeeping, investment, administration, and disposition of a deposit made under Chapter 1207 of the Texas Government Code, as amended, for such payment (the "Deposit") (A) lawful money of the United States of America sufficient to make such payment or (B) Investments (as defined in the Indenture), which may be in book -entry form, that mature and bear interest payable at times and in amounts sufficient to provide for the scheduled payment or redemption of any Defeased Bond. To cause a Bond scheduled to 27 be paid or redeemed on a date later than the next scheduled interest payment date on such Bond to become a Defeased Bond, the Authority must, with respect to the Deposit, enter into an escrow or similar agreement with a Depositary. In connection with any defeasance of the Bonds, the Authority will cause to be delivered: (i) in the event an escrow or similar agreement has been entered into with a Depositary to effectuate such defeasance, a report of an independent firm of nationally recognized certified public accountants verifying the sufficiency of the escrow established to pay the Defeased Bonds in full on the maturity or redemption date thereof ("Verification"); or (ii) in the event no escrow or similar agreement has been entered into, a certificate from the chief financial officer of the Authority certifying that the amount deposited with a Depositary is sufficient to pay the Defeased Bonds in full on the maturity or redemption date thereof. In addition to the required Verification or certificate, the Authority will also cause to be delivered an opinion of nationally recognized bond counsel to the effect that the Defeased Bonds are no longer outstanding pursuant to the terms of the Bond Order and a certificate of discharge of the Trustee with respect to the Defeased Bonds. The Verification, if any, and each certificate and opinion required under the Bond Order will be acceptable in form and substance, and addressed, if applicable, to the Trustee and the Authority. The Bonds will remain outstanding unless and until they are in fact paid and retired or the above criteria are met. At such time as a Bond is deemed to be a Defeased Bond, and all required criteria under the Bond Resolution and Indenture has been met, such Bond and the interest thereon will no longer be outstanding or unpaid and will no longer be entitled to the benefits of the pledge of the security interest granted under the Bond Resolution and Indenture, and such principal and interest will be payable solely from the Deposit of money or Investments. THEINDENTURE "Bonds" as used in this section includes the Bonds, the Outstanding Bonds and any other Additional Parity Bonds issued by the Authority pursuant to the Bond Resolution and the Indenture from the Authority to Wells Fargo Bank, National Association, as Trustee. Pursuant to the Indenture, the Authority has assigned to the Trustee all of the Authority's right, title, and interest in and to the Pledged Revenues, including the Contract Tax Increments (see "SOURCE AND SECURITY OF PAYMENT FOR THE BONDS —Pledge of Revenues"). Pursuant to the Indenture, the Trustee is to maintain a Pledged Revenue Fund, a Debt Service Fund, and a Debt Service Reserve Fund as trust funds to be held in trust solely for the benefit of the Registered Owners of the Bonds. The Pledged Revenue Fund, the Debt Service Fund, and the Debt Service Reserve Fund are to be invested only in investments authorized by the laws of the State of Texas but must be invested in a manner such that the money required to be expended from any fund will by available at the proper time or times. Amounts in the Debt Service Reserve Fund will be used to pay interest on and principal of the Bonds when insufficient funds are available for such purpose in the Pledged Revenue Fund or to be applied toward the payment of the principal of or interest on the Bonds, or bonds hereafter issued pursuant to bond resolutions in accordance with the Tri-Party Agreement, in connection with the refunding or redemption of such Bonds. The Funds The Indenture created the following funds, each of which (except the Project Fund and the Surplus Fund) must be maintained by the Trustee: (a) a Pledged Revenue Fund, into which all Contract Tax Increments are deposited; (b) a Debt Service Fund, into which deposits are made from the Pledged Revenue Fund as described below, and from which deposits are applied to the payment of the principal of and interest on the Bonds as the same becomes due; (c) a Debt Service Reserve Fund into which deposits from the Pledged Revenue Fund will be made to attain the Reserve Requirement, and from which funds will be applied to the Debt Service Fund if amounts in the Pledged Revenue Fund and the Debt Service Fund are insufficient to pay the amounts of principal and interest due on the Bonds; 28 (d) a Project Fund, which will be funded from Bond proceeds and applied as provided in the Bond Resolution and Indenture; (e) a Rebate Fund, which will be free and clear of any lien created by the Indenture, and into which certain amounts earned by the Authority on the investment of the "gross proceeds" of Bonds (within the meaning of section 148(f)(6)(B) of the Internal Revenue Code of 1986 (the "Code")) will be deposited for rebate to the United States federal government, all as provided in Bond Resolution; and (f) the Surplus Fund, which will be funded as described below and which will be free and clear of any lien created by the Indenture. Pledged Revenues for the Bonds deposited in the Pledged Revenue Fund will be applied by the Trustee as follows: (i) to the Debt Service Fund amounts necessary to make the amounts on deposit therein equal to the interest, principal, and redemption premium, if any, due on the Bonds in the period ending on the next March 1; (ii) to repay amounts advanced by a financial institution or insurance company pursuant to a Reserve Fund Surety Policy, together with interest thereon and to the Debt Service Reserve Fund amounts required to attain the Reserve Requirement; (iii) to the payment of fees and expenses of the Trustee and Paying Agent/Registrar; and (iv) to the Surplus Fund of the Authority established in accordance with the Tri-Party Agreement, for use by the Authority for any lawful purpose. Money can be transferred from the Pledged Revenue Fund to the Surplus Fund at any time provided that immediately prior to any such transfer the deposits required by clauses (i), (ii) and (iii) above have been made or provided for. The Reserve Requirement is defined in the Indenture as the lesser of 1.25 times the Average Annual Debt Service or the Maximum Annual Debt Service (not to exceed 10% of the stated principal amount of the Bonds of each series or any series of Additional Bonds or 10% of the issue price of the Bonds or any series of Additional Bonds if the Bonds or any series of Additional Bonds are issued with more than a de minimus amount (as defined by Section 1.148-1 of the Income Tax Regulations) of original issue discount), which Reserve Requirement will be recomputed after the issuance of any series of Additional Bonds. The Authority expressly reserves the right at any time to satisfy all or part of the Reserve Requirement by obtaining for the benefit of the Debt Service Reserve Fund one or more Reserve Fund Surety Policies. In the event the Authority elects to substitute at any time a Reserve Fund Surety Policy for any funded amounts in the Debt Service Reserve Fund, it may apply any bond proceeds thereby released, to the greatest extent permitted by law, to any purposes for which the Bonds were issued and any other funds thereby released to any purposes for which such funds may lawfully be used, including the payment of debt service on the Bonds. The premium for any Reserve Fund Surety Policy shall be paid from bond proceeds or other funds of the Authority lawfully available for such purpose. Events of Default The Indenture provides that either of the following occurrences is an Event of Default: (a) Failure to pay when due the principal of, redemption price of, or interest on any Bond; or (b) Failure to deposit to the Debt Service Fund money sufficient to pay any principal of or interest on any Bond no later than the date when it becomes due and payable. Remedies Upon the occurrence of an Event of Default, the Trustee is required to give notice thereof to the Authority and, subject to the other provisions of the Indenture, may proceed to protect and enforce its rights and the rights of the Registered Owners of the Bonds by suit, action or proceeding at equity or at law or otherwise, whether for the specific performance of any covenant or agreement contained in the Indenture, Bond Resolution or Bonds or in aid of the execution of any power granted in the Indenture or for the enforcement of any of the legal, equitable or other 29 remedy as the Trustee, being advised by counsel, will deem most effectual to protect and enforce any of the rights of the Trustee or Registered Owners, including, without limitation, requesting a writ of mandamus issued by a court of competent jurisdiction compelling the directors and other officers of the Authority to make such payment (but only from and to the extent of the sources provided in the Indenture) or to observe and perform its other covenants, obligations and agreements in the Indenture. The Indenture provides that the Trustee may seek the appointment of receivers, may act without possession of the Bonds, may act as attorney in fact for the Registered Owners of the Bonds, no remedy is exclusive and that the delay or omission in the exercise of any right or remedy will not constitute a waiver. The Indenture does not provide for any acceleration of maturity of the Bonds or provide for the foreclosure upon any property or assets of the Authority, the City, AISD, Brazoria County or Fort Bend County other than applying the Pledged Revenues in the manner provided in the Indenture. Limitation on Action by Owners The Indenture imposes certain limitations on Registered Owners of Bonds to institute suits, actions or proceedings at law or in equity for the appointment of a receiver or other remedy unless and until the Trustee will have received the written request of the Registered Owners of not less than 25% of the aggregate principal amount of all Bonds and other Bonds from time to time Outstanding and secured by the Indenture and the Trustee will have refused or neglected to institute such suit, action or proceeding for a period of 10 days after having been furnished reasonable indemnity. Notwithstanding the foregoing, Registered Owners of more than 50% of the aggregate principal amount of the Bonds and other Bonds from time to time issued and outstanding will have the right, by written instrument delivered to the Trustee, to direct to the time, method and place of conducting all proceedings to be taken in connection with the enforcement of the terms and conditions of the Indenture. Amendments to the Indenture Without the consent of the Registered Owners, the Authority and the Trustee may from time to time enter into one or more indentures supplemental to the Indenture, which will form a part of the Indenture, for any one or more of the following purposes: (a) to cure any ambiguity, inconsistency, or formal defect or omission in the Indenture; (b) to grant to or confer upon the Trustee for the benefit of the Registered Owners of the Bonds any additional rights, remedies, powers, or authority that may lawfully be granted to or conferred upon the Owners of the Bonds or the Trustee; (c) to subject to the lien of the Indenture additional revenues, properties, or collateral; (d) to modify, amend, or supplement the Indenture or any supplemental indenture in such manner as to provide further assurances that interest on the Bonds will, to the greatest extent legally possible, be excludable from gross income for federal income tax purposes; (e) to obtain bond insurance for the Bonds, if any; (f) to provide for one or more reserve fund surety policies; and (g) to permit the assumption of the Authority's obligations hereunder by any entity that may become the legal successor to the Authority; provided, however, that no provision in such supplemental indenture may be inconsistent with the Indenture or impair the rights of the Registered Owners of the Bonds. Except as provided in the preceding paragraph, any modification, change or amendment of the Indenture may be made only by a supplemental indenture adopted and executed by the Authority and the Trustee with the 011 consent of the Registered Owners of not less than a majority of the aggregate principal amount of the Bonds then Outstanding. However, without the consent of the Registered Owner of each Outstanding Bond, no modification, change, or amendment to this Indenture may: (1) extend the time of payment of the principal thereof or interest thereon, or reduce the principal amount thereof or premium, if any, thereon, or the rate of interest thereon, or make the principal thereof or premium, if any, or interest thereon payable in any coin or currency other than that herein before provided, or deprive such Registered Owner of the lien hereof on the revenues pledged hereunder; or (2) change or amend the Indenture to permit the creation of any lien on the revenues pledged hereunder equal or prior to the lien hereof, or reduce the aggregate principal amount of Bonds. Removal or Resignation of Trustee The Trustee may be removed at any time by an instrument or concurrent instruments in writing, signed by the Registered Owners of a majority in principal amount of the Bonds then Outstanding and delivered to the Trustee, with notice thereof given to the Authority. The Trustee may at any time resign and be discharged from the trusts created by giving written notice to the Authority and by providing written notice to the Registered Owners of its intended resignation at least 60 days in advance thereof. Such notice will specify the date on which such resignation will take effect and will be sent by first class mail, postage prepaid to each Registered Owner of Bonds. Resignation by the Trustee will not take effect unless and until a successor to such Trustee shall have been appointed as hereinafter provided. Appointment of Successor Trustee In case the Trustee resigns, or is removed or dissolved, or is in the course of dissolution or liquidation, or is otherwise become incapable of acting, or in case the Trustee is taken under control of any public officer or officers or a receiver appointed by a court, a successor may be appointed by the Registered Owners of a majority in principal amount of the Bonds then Outstanding, by an instrument or concurrent instruments in writing, signed by such Registered Owners or their duly authorized representatives and delivered to the Trustee, with notice thereof given to the Authority; provided, however, that in any of the events above mentioned, the Authority may nevertheless appoint a temporary Trustee to fill such vacancy until a successor is appointed by the Registered Owners in the manner above provided, and any such temporary Trustee so appointed by the Authority will immediately and without further act be automatically succeeded by the successor to the Trustee appointed by the Registered Owners, The Authority will provide written notice to the Registered Owners of the appointment of any successor Trustee, whether temporary or permanent, in the manner provided for providing notice of the resignation of the Trustee as described above under "—Removal or Resignation of Trustee." Any successor Trustee or temporary Trustee will be a trust company or bank in good standing located in or incorporated under the laws of the State of Texas duly authorized to exercise trust powers and subject to examination by federal or state authority, having a reported capital and surplus of not less than $100,000,000. In the event that no appointment of a successor Trustee is made by the Registered Owners or by the Authority pursuant to the foregoing provisions of this Section at the time a vacancy in the office of the Trustee will have occurred, the Registered Owner of any Bond issued hereunder or the retiring Trustee may apply to any court of competent jurisdiction for the appointment of a successor Trustee, and such court may thereupon, after such notice as it will deem proper, if any, appoint a successor Trustee. SHADOW CREEK RANCH DEVELOPMENT General The Authority is a non-profit local government corporation created to aid, assist and act on behalf of the City in the performance of the City's governmental and proprietary functions with respect to, and to provide financing for the TIRZ. The efforts to create the TIRZ were initiated by petition by individual property owners to foster economic development in the area of Pearland known as "Shadow Creek Ranch." The TIRZ is authorized to provide, among other things, new capital for public works and public improvements in the TIRZ consistent with the Plan. The TIRZ includes approximately 3,467 acres of land within the Original Area of the TIRZ and an additional 31 457 acres of land lie within the Annexation Area of the TIRZ. All land in the TIRZ lies within the City. See "APPENDIX B - BOUNDARY MAP OF REINVESTMENT ZONE NO. 2, CITY OF PEARLAND, TEXAS" for a map of the TIRZ boundaries. The Shadow Creek Ranch development is a master -planned, mixed use community planned for a 3,736 acre tract of land located within Brazoria and Fort Bend Counties, Texas. All of the Shadow Creek Ranch development lies within the TIRZ. The ultimate development of Shadow Creek Ranch is expected to include single- family *and multi -family residential and commercial development, including a total of approximately 7,168 single- family residential lots. Shadow Creek Ranch Development Company, L.P. (the "Developer") has constructed certain regional roadways, storm drainage facilities, parks, trails, landscaping and entry monuments on behalf of the TIRZ as authorized by the TIRZ, in accordance with the Plan. The Developer will be reimbursed for certain of such facilities, including interest, with the proceeds of the sale of the Bonds by the Authority. The Developer has additionally initiated the construction of water distribution, wastewater collection and storm drainage/detention facilities within Brazoria County Municipal Utility District No. 26 and Brazoria-Fort Bend County Municipal Utility District No. 1. Those municipal utility districts cover approximately 3,357 acres of the Shadow Creek Ranch development. Reimbursement of the Developer for such water distribution, wastewater collection and storm drainage/detention facilities would be accomplished with the proceeds of the sale, if any, of bonds by such districts. Brazoria County Municipal Utility District No. 26 has issued four series of unlimited tax bonds to reimburse the Developer for water, wastewater and drainage facilities: Brazoria County Municipal Utility District No. 26 Unlimited Tax Bonds, Series 2004 in the aggregate principal amount of $8,830,000, Brazoria County Municipal Utility District No. 26 Unlimited Tax Bonds, Series 2004A in the aggregate principal amount of $16,000,000, Brazoria County Municipal Utility District No. 26 Unlimited Tax Bonds, Series 2005 in the aggregate principal amount of $16,000,000 and Brazoria County Municipal Utility District No. 26 Unlimited Tax Bonds, Series 2006 in the aggregate principal amount of $16,165,000. Brazoria-Fort Bend County Municipal Utility District No. 1 has issued three series of unlimited tax bonds to reimburse the Developer for water, wastewater and drainage facilities: Brazoria — Fort Bend County Municipal Utility District No. 1 Unlimited Tax Bonds, Series 2006 in the aggregate principal amount of $10,000,000, Brazoria — Fort Bend County Municipal Utility District No. 1 Unlimited Tax Bonds, Series 2007 in the aggregate amount of $19,000,000 and Brazoria — Fort Bend County Municipal Utility District No. 1 Unlimited Tax Bonds, Series 2008 in the aggregate amount of $25,000,000. Brazoria County Municipal Utility District No. 35 has been created over approximately 110 acres of property that is within the TIRZ, but not part of the Shadow Creek Ranch development. Reimbursement of the developer(s) within Brazoria County Municipal Utility District No. 35 for the water, wastewater and drainage facilities necessary to serve the property within such district would be accomplished with the proceeds of the sale, if any, of bonds by such district. Brazoria County Municipal Utility District No. 35 has not yet issued any bonds, but has authorized the preparation of an application to the TCEQ for approval of for bonds to be issued in the future. Development and Home Construction As of December 31, 2008, Shadow Creek Ranch contained 4,150 homes, including 125 homes under construction. See "— Builders" below. According to the TIRZ's Engineer, underground water distribution, wastewater collection, and storm drainage/detention facilities and street paving have been completed to serve 5,268 single-family residential lots located in 67 platted and fully developed subdivisions (approximately 1,333 total acres) within the boundaries of the TIRZ as is delineated in the chart that appears below. In addition, as is also delineated in such chart, 346 additional single-family residential lots located in 4 platted subdivisions (approximately 75 total acres) are currently under development. The Developer owns approximately 60 acres of currently undeveloped land located within Shadow Creek Ranch available for future commercial development. Pearland Investments Limited Partnership (also defined below) owns approximately 793 acres of undeveloped land located within Shadow Creek Ranch. This land is subject to an Agreement Regarding Right of First Negotiation that grants the Developer the first right to negotiate the purchase of such land. In addition, Robert S. Bender, Trustee, owns approximately 132.6 acres of currently undeveloped land associated with Shadow Creek Ranch 32 The following parties own tracts located within Shadow Creek Ranch and the TIRZ that are currently utilized or are expected to be utilized for commercial development: (i) Lasco Development Corp. (4.2 acres upon which a CVS Pharmacy is open and a 15,844 sq. ft. retail center is complete); (ii) Kirby Crossing (2.9 acres upon which two 10,000 sq. ft. retail centers are complete); (iii) Kandiland Day Care (1.1 acres on which a day care is open and operating); (iv) Kids R Kids Day Care (1.8 acres on which a day care is open and operating); (v) Hospital Corporation of America (48 acres on which a 50,000 sq. ft. hospital facility is open; (vi) Crosswell/Greenwood (16.7 acres on which a retail center is being planned); (vii) American Eagle (1.96 acres on which a bank is open); (viii) Buc-ees Ltd. (2.5 acres on which a gas station and convenience store is open); (ix) Inland American Waterford Ltd (16.98 acres on which a 296 unit apartment complex has been completed and opened); (x) Davis Development (16.42 acres on which a 264 unit apartment complex is open); (xi) Villas SCR LP (18 acres on which a 142 unit apartment complex is under design); (xii) Villas SCR LP (9.5 acres on which an apartment complex is under design); (xiii) Kingsley Partners LP (22.6 acres on which a 393 unit apartment complex is planned); (xiv) Hasan Mahammadian (9.0 acres on which a shopping center is planned); (xv) Stiletto Development Ltd (3.9 acres on which a 33,963 sq. ft. retail center is complete); (xvi) Pearland Capital Group (4.3 acres on which a 76 unit Hilton Garden Inn is under construction); (xvii) SCR C-20B Development L.P. (9.4 acres on which a retail center is planned); (xviii) Pearland SCR L.P. (13.4 acres on which a 150,128 sq. ft. shopping center is complete); (xix) SCR C24 Inv. L.P. (29.2 acres on which medical and professional office buildings are planned); (xx) Suraj Singh (1.5 acres on which a Goddard School day care is open); (xxi) AVNEE (1.4 acres on which a Montessori school is open); (xxii) SCR C24 Inv. L.P. (7.8 acres on which a retail center is planned); (xxiii) AC/SCR LP 3.2 (1.0 acres on which a 13,000 sq. ft. retail center is planned); (xxiv) Manvil McCoy LLC (13.2 acres on which a retail center is planned); (xxxv) Kelsey Seabold Management Services (16.9 acres on which a Kelsey Seabold medical office/hospital is planned); (xxxvi) Memorial Hermann (5.0 acres on which a Memorial Hermann medical office/hospital is planned); (xxxvii) Wells Fargo Bank (1.1 acres on which a bank is planned); (xxxviii) Shadow Kirby LP (20.4 acres on which a 392 unit apartment complex is complete); (xxxix) 1st Brazoria Capital Funding, LLC (4.7 acres on which a 172 unit skilled nursing center is open); (xl) Hamaso Trust (3.5 acres on which a retail center is open); (xli) ZT Shadow Creek Partners (7.5 acres on which an office is under construction); (xlii) Minimax Inc. (0.9 acres on which a Sonic restaurant is open); (xliii) Shadow Creek SDI, LP (1.0 acres on which an Auto Check is open); (xliv) Crosswell- Greenwood (1.1 acres on which a retail center is open); (xlv) Kormax Properties (0.8 acres on which a Taco Bell restaurant is open); (xlvi) Croswell -Greenwood (1.7 acres on which a Walgreens Drug Store is open); (xlvii) O.A. Kidd (1.0 acres on which a Sherwin Williams paint store is open); (xlviii) Community National Bank (1.5 acres on which a bank is planned); (xlix) Shadow Creek Bay (1.6 acres on which a retail center is planned); (1) Office Condos at Reflection Bay (5.7 acres on which office buildings are being constructed); (h) Shadow Creek Bay (4.7 acres on which a retail center is planned). However, the Authority cannot represent whether, or when, the development of any of such currently undeveloped acres might occur. The University of Texas Medical Center owns approximately 56 acres of currently undeveloped land located within the TIRZ which is planned for a medical research campus. The City of Pearland owns approximately 100 acres of currently undeveloped land located within the TIRZ that are designated for future park usage upon which the Developer has completed a wetlands mitigation project, a nature park. The City of Pearland also owns 2.1 acres on which a water treatment plant has been constructed; 13.3 acres on which the Far Northwest Wastewater Treatment Plant has been constructed; 5.7 acres on which the City of Pearland expects to construct a fire -police station; and, 3.4 acres on which the City of Pearland plans to construct a library. The Alvin Independent School District owns 12.0 acres on which the Mary Burks Marek Elementary School opened for the fall term of 2004, 11.7 acres on which the Laura Ingalls Wilder elementary school has been constructed and 28.2 acres on which the Nolan Ryan junior high school has been constructed. The Fort Bend Independent School District owns 12.1 acres on which an elementary school is planned. In addition, there are approximately 104 acres of land owned by other entities for which there are no current plans. The balance of the land located in the TIRZ consists of approximately 820 acres which are contained within easements, rights -of -way, detention ponds, lakes or are otherwise not available for future development. However, the Authority cannot represent whether, or when, the development of any of such currently undeveloped acres might occur. See "-Developer," and "RISK FACTORS." [remainder of page intentionally left blank] 33 As of December 31, 2008, the status of home construction within the Zone was as follows: Lots Homes Under Construction Completed Marketing Section Under Name Name Developed Acres Develoament Acres Sold* Unsold Sold* Unsold Models Totals Mallards Landing SF-1 43 11.98 0 0 43 0 0 43 Emerald Landing SF-2 67 18.96 0 0 67 0 0 67 Enclave Lake Estates SF-3, SF-8a 112 35.02 0 0 112 0 0 112 Osprey Pointe SF-4 35 10.34 0 0 35 0 0 35 The Island SF-5 54 18.89 0 0 53 0 0 53 The Estates SF-6 56 30.93 1 0 54 0 0 55 Bay Front Estates SF-7a 43 13.01 0 0 43 0 0 43 Island Manor SF-7b 43 18.91 0 0 43 0 0 43 Enclave Terrace SF-8b 59 14.31 0 0 59 0 0 59 Bay View Terrace SF-9a 84 20.89 0 0 84 0 0 84 Sunrise Creek SF-9b- 138 37.49 0 0 138 0 0 138 Sunset Shores SF-10 84 21.44 0 0 84 0 0 84 The Strand SF-11 34 13.59 0 0 34 0 0 34 The Gables SF-12, SF-13 141 46.99 3 6 103 6 0 118 Oakwood Terrace SF-14a, b 109 24.21 0 0 109 0 0 109 Lakeside Terrace SF-15 85 21.25 0 0 85 0 0 85 Heatherwood/Pinecrest SF-16a, b 159 32.94 0 0 159 0 0 159 Heron Bay SF-17 57 17.80 3 1 47 1 1 53 Half Moon Terrace SF-18a, b 105 21.77 0 0 105 0 0 105 Rosewood Crossing SF-19 99 21.76 0 0 99 0 0 99 Haley Landing SF-20a, b 122 30.22 4 0 108 0 0 112 Momingside SF-21 58 15.98 0 1 57 0 0 58 Iris Shores SF-22 57 16.25 0 0 57 0 0 57 Reflection Pointe SF-23 103 29.77 0 0 103 0 0 103 Jasmine Pass SF-24a 98 25.30 0 0 98 0 0 98 Crescent Landing SF-24b 47 13.80 0 0 47 0 0 47 Oak Arbor Estates SF-25 49 20.46 4 1 31 1 0 37 Oak Hollow SF-26 156 31.72 3 4 132 0 0 139 Crystal Lake SF-27 59 20.37 0 0 59 0 0 59 Waterside Landing SF-28 61 14.96 4 0 41 1 0 46 Kelsey Pointe SF-29 61 15.77 0 0 61 0 0 61 Southview Terrace SF-30 137 26.81 0 0 137 0 0 137 Meadow Trails West SF-31 138 26.74 0 0 136 0 1 137 Meadow Trails East SF-32a, b 200 40.03 1 1 190 2 2 196 Nicole Terrace SF-33 47 13.00 3 0 37 0 1 41 Creekside Meadows SF-34 89 21.59 0 0 89 0 0 89 Silver Leaf Glen SF-35 114 28.42 0 0 114 0 0 114 34 M Lots Homes Under Construction Completed Marketing Section Under Name Name Developed Acres Development Acres Sold* Unsold Sold* Unsold Models Totals Biscayne Bay SF-36 193 48.15 8 1 94 0 1 104 Regents Glen SF-37 95 21.89 2 2 65 3 0 72 Briarwood North SF-38a 120 28.99 10 1 64 1 2 78 Briarwood South SF-38b 143 33.55 0 1 64 3 1 69 Trinity Shores SF-39a 91 23.53 0 0 91 0 0 91 Brookglen SF-39b 74 17.63 5 0 46 0 0 51 Riverside Place SF-40 193 37.93 5 1 183 0 0 189 Copper Creek SF-41 102 21.08 2 3 40 0 0 45 Village Green SF-42 113 25.62 2 2 53 0 1 58 Sagecrest Pointe SF-43 56 11.70 1 0 34 1 0 36 Harvest Grove SF-44 60 13.87 1 0 3 2 0 6 Edgewater SF-45a, b, c 98 20.90 112 24.50 2 2 22 0 1 27 Westhaven SF-46a, b 129 33.04 4 3 45 2 2 56 Lake Meadows SF-47 24 5.75 1 2 7 0 0 10 Brook Run SF-48 49 11.57 0 1 4 0 l 6 Azalea Creek SF-49 133 25.99 Arbor Lakes SF-50 56 15.83 5 2 26 0 0 33 Windy Shores SF-51a, b 204 47.37 2 0 15 0 1 18 County Glen SF-52 61 13.68 Eden Cove SF-53 82 21.96 4 2 43 3 1 53 Westwood Springs SF-54 Holly Landing SF-55a, b 134 33.53 Cedarwood SF-56 Orchard Village SF-57 Piney Trails SF-58 Pelican Shores SF-59 49 15.55 6 2 31 0 0 39 Autumn Brook SF-60 40 11.03 Blackberry Crossing SF-61, SF-62 Totals 5,268 1,333.11 346 75.20 86 39 3,983 26 16 4,150 *Includes homes sold and contracted for sale. Homes under contract for sale are, in some instances, subject to conditions of appraisal, loan application, approval and inspection. 35 Developer General In general, the activities of a developer of real estate include purchasing the land, designing the subdivision, designing the utilities and streets to be constructed in the subdivision, designing any community facilities to be built, defining a marketing program and building schedule, securing necessary governmental approvals and permits for development, arranging for the construction of roads and the installation of utilities (including, in some cases, water, sewer, and drainage facilities as well as gas, telephone, and electric service) and selling improved lots and commercial reserves to builders, developers, or other third parties. The relative success or failure of a developer to perform such activities in development of the property may have a profound effect on the assessed valuation of the property within the TIRZ and, as a result, may affect the Contract Tax Increments received by the Authority for repayment of its bonded indebtedness. Description of the Developer Most of the land within the TIRZ is being developed by the Developer, the general partner of which is Shadow Creek Ranch, Inc., a Nevada corporation. The stock of such general partner is owned equally by G. W. Cook Development, Inc., a California corporation, and Carlo Ferreira. Messrs. G. W. Cook and Carlo Ferreira are also the limited partners of Shadow Creek Ranch. As is described above under the caption "—Development and Home Construction," the Developer has completed the development of approximately 1,333 acres of land (5,268 fully developed single-family residential lots) within TIRZ which it acquired from Pearland Investments Limited Partnership, a Nevada limited partnership ("Pearland Investments"), the general partner of which is M.M.L.B. Corporation, a Nevada corporation, the stock of which is owned by the Collins Family and the Canarelli Family Trust. As is also described under such caption, the Developer has initiated the development of approximately 75 additional acres of land (346 future single-family residential lots) which it will also acquired from Pearland Investments within Shadow Creek Ranch. The limited partners of Pearland Investments are the Collins Family Limited Liability Company No. 1 and the Canarelli Family Trust. Much of the land within the TIRZ was originally acquired by Pearland Investments in a series of acquisitions from individual landowners from July 1998 through July 2003. In connection with certain of such acquisitions, Pearland Investments gave promissory notes to the sellers of such property, which promissory notes have been fully discharged. The Developer has acquired a total of approximately 2,450 acres of such land from Pearland Investments in a series of acquisitions that have been accomplished pursuant to an Agreement Regarding Right of First Negotiation (the "First Negotiation Agreement"), dated October 19, 1998, between Pearland Investments and the Developer. In the First Negotiation Agreement, Pearland Investments gave to the Developer the right of first negotiation, for a period that has been extended to October 19, 2010, to acquire up to 3,300 acres of land owned by Pearland Investments. The right of first negotiation can be exercised as to all or any portion of such property for the term of the First Negotiation Agreement. The purchase price of any property taken down pursuant to such right of first negotiation must be paid either in cash or by a promissory note from the Developer to Pearland Investments, which note is to be secured by a Deed of Trust on such property acquired. As of December 31, 2008, the Developer had executed promissory notes to Pearland Investments the aggregate outstanding principal balance owing of which is $94,619,920 in connection with the purchase of such approximately 2,450 acres of land. The Developer has financed its development activities within Shadow Creek Ranch with proceeds of an Unsecured Revolving Line of Credit, dated October 1, 1998 (the "Line of Credit"), between Oxnard Financial, LLC, a Nevada limited liability company, and the Developer. Through amendments to the Line of Credit, the Line of Credit's original amount of $4,000,000 was increased to $20,000,000 on October 1, 2000, and to $30,000,000 on April 1, 2002. In addition, the maturity of the Line of Credit has been extended to October 1, 2008. Interest on amounts drawn under the Line of Credit is payable at a rate equal to a floating rate of Prime plus 2%. The Line of Credit is not secured by land within the TIRZ or any other collateral, but is guaranteed by Gary Cook and Carlo Ferreira. Oxnard Financial, LLC is a limited liability company owned by members of the Collins family and the Canarelli family. As of December 31, 2008, the outstanding balance on the Line of Credit was $0.00. 36 Builders According to the Developer, the home building companies that are listed below (collectively, the "Builders") are currently constructing homes on lots that have been developed by the Developer within Shadow Creek Ranch. Such homes range in size from approximately 1,472 to 6,142 square feet of living area and in sales price from approximately $159,990 to $453,219. The respective sections in which the Builders are currently constructing homes and descriptions of the range of size (expressed as a range of square footage of living area) and range of sales prices of such homes are reflected in the chart that appears below. According to the Developer, the Builders are current in all material respects with the provisions of the respective contracts which they have executed with the Developer covering the purchase and sale of lots in the Shadow Creek Ranch. According to the Developer, the Builders are currently constructing homes in the Shadow Creek Ranch as follows: SHADOW CREEK RANCH NEIGHBORHOOD SUMMARY Neiehborhood Section Builder Sq. Ft. Ranee Price Ranee Meadow Trails East SF-32 Perry Homes 1,900-2,874 $190,900-$228,900 Plantation Homes 1,596-2,698 $179,990-$223,990 Nicole Terrace SF-33 Westin Homes 3,646-4,420 $270,000-$325,000 Creekside Meadows SF-34 Deerwood Homes 1,757-3,050 $195,990-$241,990 Biscayne Bay SF-36 Texas Big Homes 2,695-4,541 $289,334-$402,938 Gehan Homes 2,385-3,993 $224,990-$277,990 Westin Homes 3,646-4,420 $270,000-$325,000 Regents Glen SF-37 Hallmark Design Homes 1,861-3,548 $190,0004250,000 Briarwood North SF-38a Morrison Homes 2,165-3,171 $205,990-$249,990 Briarwood South SF-38b Dakota Blue Homes 1,795-3,960 $193,990-$282,990 Trinity Shores SF-39a Perry Homes 3,082-4,400 $280,900-$363,900 Brookglen SF-39b Ryland Homes 2,387-3,508 $224,990-$285,990 Riverside Place SF-40 Ryland Homes 1,615-2,783 $171,240-$227,990 Morrison Homes 1,472-2,625 $166,990-$210,990 Copper Creek SF-41 Perry Homes 1,900-2,874 $190,900-$228,900 Village Green SF-42 Meritage Homes 2,202-3,575 $213,867-$317,583 Sagecrest Pointe SF-43 Westin Homes 2,219-3,302 $202,000-$239,000 Newmark Homes 1,639-2,913 $159,990-$202,990 Harvest Grove SF-44 Dakota Blue Homes 1,601-2,716 $166,990-$220,990 Edgewater SF-45a Triumph Homes 1,817-3,584 $182,990-$265,990 Westhaven SF-46 Perry Homes 2,417-3,874 $227,900-$295,900 Lake Meadows SF-47 Triumph Homes 1,817-3,584 $198,990-$280,990 Brook Run SF-48 Westin Homes 2,144-4,013 $216,000-$282,000 37 Nei-,hborhood Section Builder Sq. Ft. Ranee Price Range Arbor Lakes SF-50 Newmark Homes 2,580-3,290 $240,990-$261,990 Ryland Homes 2,646-3,686 $246,490-$311,990 Windy Shores SF-51 Meritage Homes 3,058-4,001 $230,000-$349,941 Eden Cove SF-53 Perry Homes 3,141-6,142 $270,900-$416,900 Pelican Shores SF-59 Meritage Homes 3,416-4,191 $263,123-$453,219 Westin Homes 3,646-4,420 $270,000-$325,000 Although the Developer has reported the descriptions of the homes currently under construction by the Builders to be accurate as of the date of this Official Statement, the Builders may change the types, sizes and sales prices of the homes which they choose to construct within the District entirely within their discretion, or may suspend home construction activity entirely. SHADOW CREEK RETAIL DEVELOPMENT [Update AII]Shadow Creek Retail, LP, a Delaware limited partnership (the "Subdeveloper") is developing a regional retail center on approximately 88 acres of land within the boundaries of the TIRZ, located at the north west corner of the intersection of SH 288 and FM 518. At buildout, the retail center will consist of a total gross leasable area of approximately 630,000 square feet and will contain approximately 75 retail tenants. To date, approximately 85,000 square feet of retail space is currently leased by Academy Sports + Outdoors, which has opened and is operating a retail sporting goods store. The Subdeveloper has also leased or received commitments to lease an additional 11 pads consisting of approximately 450,000 square feet. Tenant commitments include an H-E- B Grocery Store, an Ashley Furniture HomeStore and a Hobby Lobby. Additional retail space is planned for electronics, apparel, restaurants and banking. [Update All]The retail center will require significant public infrastructure development. Street development and improvements include the following: (i) major widening and other improvements to Broadway Street (also known as FM 518); (ii) development of Business Center Drive, a new segment of the City's major thoroughfare plan which will serve to extend and complete a previous TIRZ development project; (iii) development of Memorial Hermann Drive, a new connector road which is part of the City's major thoroughfare plan; (iv) the addition of signalization at the intersection of Business Center Drive/Broadway; and the addition of signalization at the intersection of Kirby Road and Broadway. Additional public infrastructure development include: (i) water improvements; (ii) wastewater improvements; (iii) detention, storm sewer and drainage improvements including a detention pond with fountain; and (iv) landscape improvements. Finally, certain site remediation and improvements have been and are being made, including the relocation of overhead utilities underground to improve aesthetics and maintain development standards of Shadow Creek Ranch and the relocation of pipeline impeding efficient development of the area. [Update AII]The Subdeveloper has entered a development agreement with the TIRZ under which the TIRZ has agreed to reimburse the Subdeveloper for the infrastructure developments described above as contemplated by the Plan. The Subdeveloper Agreement was entered in conjunction with the approval of the Second Amendment. See "APPENDIX A — Summary of Documents — Project Plan and Reinvestment Zone Financing Plan — Second Amendment." As contemplated by the Plan and the Subdeveloper Agreement, the Subdeveloper will be reimbursed for improvements estimated to cost $11,749,618. See "APPENDIX A — Summary of Documents — Reimbursement Agreements — Subdeveloper Agreement." While the Subdeveloper has commenced construction on most or all of these reimbursable improvements, none have been approved for reimbursement by the TIRZ Board. Reimbursements made pursuant to the Subdeveloper Agreement are a part of and not in addition to the total infrastructure project costs of approximately $169,107,759 described herein. The Subdeveloper's reimbursements are subordinate to reimbursements owed the Developer. [remainder of page intentionally left blank] 38 SELECTED FINANCIAL INFORMATION* Certified Taxable Value of Original Area City AISD Brazoria Fort Bend 1998 (Base Year of original Area) $ 7,172,980 $ 4,143,160 $ 4,143,160 $ 3,029,820 January 1, 2008 (total assessed value) $1,311,194,101 $ 1,229,578,281 $1,229,578,281 $ 81,615,820 January 1, 2008 (net of exemptions)(b) $ 1,208,429,744 $ 1,105,850,656 $1,004,797,576 $ 78,622,311 Certified Captured Appraised Value of Original Area(b) January 1, 2008 $ 1,201,256,764 $ 1,101,707,496 $1,000,654,416 $ 75,592,491 Certified Captured Appraised Value as Percentage of January 1. 2008 Certified Taxable Value 99.42% 99.63% 99.59% 96.15% Estimated Taxable Value of Original Area 1998 (Base Year of Original Area) $ 7,172,980 $ 4,143,160 January 1, 2009 (total assessed value)(c) $ 1,529,620,590 $ 1,422,840,020 January 1, 2009 (net of estimated exemptions)(c)(d) $ 1,415,320,900 $ 1,287,289,965 Estimated Captured Appraised Value of Original Area(d) January 1, 2009 $ 1,408,147,920 $ 1,283,146,805 Estimated Captured Appraised Value as Percentage of January 1, 2009 Estimated Taxable Value(c) 99.49% 99.68% Tax Rate Contribution: Tax Rate Contribution for January 1, 2008 values $ 0.255 (e) $ 0.332(f) Tax Rate Contribution for January 1, 2009 values $ 0.255 (i) $ 0.322(i) Estimated Collection Rates 95% 95% Contract Tax Increment January 1, 2008(k) $ 2,910,045 $ 3,370,123 Estimated January 1, 2009 (c) $ 3,411,238 $ 3,925,146 Estimated Average Annual Debt Service (2009-2029) $ 4,113,874 Estimated Maximum Annual Debt Service (2009) $ 4,200,790 Est. Coverage of City, Brazoria and Fort Bend Counties Contract Tax Increment Revenues ($5,252,185) (January 1, 2009 estimated values) over Maximum Annual Debt Service (excludes AISD)(c) Est. Coverage of City, Brazoria and Fort Bend Counties Contract Tax Increment Revenues ($4,550,309) (January 1, 2008 certified values) over Maximum Annual Debt Service (excludes AISD) Est. Coverage of City, AISD, Brazoria and Fort Bend Counties Contract Tax Increment Revenues ($9,177,331)(January 1, 2009 estimated values) over Maximum Annual Debt Service(c)(I)(m) Est. Coverage of City, AISD, Brazoria and Fort Bend Counties Contract Tax Increment Revenues ($7,920,432) (January 1, 2008 certified values) over Maximum Annual Debt Service(1)(m) Principal Amount Outstanding of Previously Issued Debt: $45,495,000 Plus: The Bonds 7,905,000* TOTAL DIRECT DEBT (including the Bonds) Funds Available for Debt Service as of Pledged Revenue Fund(n) $ Debt Service Reserve Fund (o) I Total Funds Available $ (footnotes appear on following 2 pages) 39 $ 4,143,160 $ 3,029,820 $1,422,840,020 $106,780,570 $1,189,379,930 $ 99,499,850 $1,185,236,770 $ 96,470,030 99.65% 96.96% $ 0.1254 (g) $ 0.6241 (h) $ 0.1254 (i) $ 0.468075 0) 95% 95% $ 1,192,080 $ 448,184 $ 1,411,973 $ 428,974 1.25% 1.08% 2.19% 1.89% $53,400,000 * Preliminary, subject to change. (a) This table considers only the certified and estimated taxable values and Contract Tax Increments generated from for the Original Area of the TIRZ. At the current time, there have been no appreciable Contract Tax Increments generated from the property included in the Annexation Area because the base year for the Annexation Area is January 1, 2006 and no significant development has occurred on the property of the Annexation Area since January 1, 2006. [delete?) (b) The January 1, 2008 certified taxable values provided by the Brazoria County and Fort Bend County Appraisal Districts are net of exemptions for each of the respective taxing entities. Certified values are updated monthly. The values shown are those used by the City, AISD, Brazoria County and Fort Bend County to calculate Captured Appraised Value for the 2008 tax year. (c) No Contract Tax Increments will be collected on the 2009 estimated taxable values. The January 1, 2009 estimated taxable values are based on the.estimate of values resulting from the construction of taxable improvements added on property in the TIRZ from January 1, 2008 through January 1, 2009. 2009 Contract Tax Increments will be levied and collected based upon the final January 1, 2009 certified taxable values. Such 2009 Contract Tax Increments will be due October 1, 2009, or when billed, whichever comes later, and will become delinquent after January 31, 2010. See "TAXING PROCEDURES OF THE CITY, AISD, BRAZORIA COUNTY AND FORT BEND COUNTY — Levy and Collection of Taxes." (d) Estimated taxable values for January 1, 2009 were provided by the Brazoria County and Fort Bend County Appraisal Districts for informational purposes only, and are estimates of the value of all taxable property located in the TIRZ as of January 1, 2009 net of exemptions and personal property. These estimates are based on the estimate of values resulting from the construction of taxable improvements added on the property in the TIRZ from January 1, 2008 through January 1, 2009. The estimated net taxable values shown for each of the taxing entities (August 1, 2008 estimated taxable values minus estimated exemptions) were calculated using the August 1, 2008 estimated values and using an estimate for the applicable exemptions for each taxing entity. Estimated exemptions for Brazoria County and Fort Bend County were provided by the Brazoria County Appraisal District and the Fort Bend County Appraisal District, respectively. The estimated exemptions for the City and for AISD were provided by Assessments of the Southwest, Inc. based on application of the existing exemptions available from each taxing entity against each completed residential unit added within the respective taxing entity from January 1, 2008 through January 1, 2009. The ultimate assessed valuation of any improvements added from January 1, 2008 through January 1, 2009, which will be placed on the 2009 certified tax roll, and the actual amount of exemptions on the final 2009 certified tax roll may vary significantly from the estimate once the respective Appraisal Districts certify the values in 2009. See "SECURITY AND SOURCE OF PAYMENT — Calculation and Collection of Tax Increments" and "RISK FACTORS — Uncertainty of Calculation and Collection of Tax Increments." . (e) The City's Tax Increment is subject to payment of an Administrative Fee by the TIRZ to the City and that portion of the City's Tax Increment representing the Administrative Fee is not paid to the Authority and is therefore not part of the Contract Tax Increments or the Pledged Revenues. Pursuant to the Development Agreement, in years four through eight, the amount of City Tax Increment deposited and retained in the Tax Increment Fund shall be 36% of the City's tax rate on the property in the TIRZ, but in no case less than $0.255 per $100 valuation. $0.255 is greater than 36% of the City's 2008 tax rate ($0.652600, 36% of which equals $0.225216). As such, the amount of amount of City's Tax Increment deposited and retained in the Tax Increment Fund for tax year 2008 shall be $0.255 per $100 of valuation after the payment of the Administrative Fee. See "RISK FACTORS —Limitation on City Tax Increments." (f) AISD's Tax Increment is subject to a payment by the TIRZ to AISD for educational facilities project costs as required by the AISD Agreement. The AISD Agreement provides that 75% of the AISD Tax Increment will be paid by the TIRZ to AISD for such educational facilities project costs. That portion of the AISD Tax Increment representing such educational facilities project costs is not paid to the Authority and is therefore not part of the Contract Tax Increments or the Pledged Revenues. In addition, although school finance reform legislation provides that the state will fund any shortfalls between the AISD Tax Increment that AISD's actual tax rate allows AISD to contribute to the TIRZ and the AISD Tax Increment that would be provided to the TIRZ utilizing the 2005 AISD tax rate, because the appropriation of these funds is uncertain, state funding of AISD Tax Increment is not included in the AISD Tax Increment described in this table. $0.322 represents that portion of AISD tax rate and resulting AISD Tax Increment, excluding state funding, payable to the Authority as part of the Contract Tax Increments and Pledged Revenues. In addition, the AISD Agreement requires that the portion of the AISD Tax Increment to be used by the TIRZ be held in a special AISD Suspense Account within the City's Tax Increment Fund for a period of one calendar year and during such time, no funds held in the AISD Suspense Account may be disbursed or encumbered by the City or the TIRZ other than t9 reimburse AISD. See "RISK FACTORS —Limitation on AISD Tax Increments." (g) See "RISK FACTORS -Limitations on Tax Increments of Brazoria and Fort Bend Counties." (h) The Fort Bend County Agreement provides for a reduction in the tax rate and associated collections remitted by Fort Bend County to the City from $0.6241 per $100 valuation for tax years 1999-2008 to $0.468075 for the tax years 2009-2018 and $0.312050 for tax years 2019-2028. See "RISK FACTORS —Limitations on Tax Increments of Brazoria and Fort Bend Counties." (i) No Contract Tax Increments will be collected on the 2009 estimated taxable values. 2009 Contract Tax Increments will be levied and collected based upon the final January 1, 2009 certified taxable values. Tax rate contributions allocable to January 1, 2009 values are based on the yet to be determined 2009 tax rates and are assumed for the purposes of this table to be equal to the 2008 tax rates [confirm]. 0) No Contract Tax Increments will be collected on the 2009 estimated taxable values. 2009 Contract Tax Increments will be levied and collected based upon the final January 1, 2009 certified taxable values. As described in footnote (h) above, Fort Bend County has agreed to provide $0.468075 per $100 assessed valuation for the tax years 2009-2018. (k) Payment of Contract Tax Increments based on January 1, 2008 certified taxable values are due October 1, 2008, or when billed, whichever comes later, and became delinquent after January 31, 2009. See "TAXING PROCEDURES OF THE CITY, AISD, BRAZORIA COUNTY AND FORT BEND COUNTY —Levy and Collection of Taxes." (1) Pursuant to the AISD Agreement, the 25% of the AISD Tax Increment that will become part of the Contract Tax Increments must be held in a special AISD Suspense Account within the City's Tax Increment Fund for a period of one calendar year and during such time, no 40 funds held in the AISD Suspense Account may be disbursed or encumbered by the City or the TIRZ other than to reimburse AISD. The Contract Tax Increment Revenues and resulting coverage shown in this column include the 25% AISD Tax Increment which would be subject to the one year delay. See "RISK FACTORS —Limitations on AISD Tax Increments." (m) Pursuant to the Tri-Party Agreement, the City retains reasonable current and anticipated administrative and operating costs of the TIRZ, as determined by the TIRZ Board. The 2008 amount budgeted for such purposes was $ although actual expenditures for such purposes were $ . The 2009 amount budgeted for such purposes is $ . Additional costs in the current year result from administrative expenses associated with the execution and implementation of the First Amendment. It is expected that administrative costs in future years will be within budgeted amounts, excluding any additional costs associated with additional amendments to the Plan, if any. (n) Pursuant to the Tri-Party Agreement, no later than the fifteenth day of each August the City will pay to the Authority for deposit to the Pledged Revenue Fund all monies then available in the City's Tax Increment Fund, subject to retention by the City of certain funds as provided in Article V of the Tri-Party Agreement. (o) Does not include amounts to be added pursuant to the Debt Service Reserve Fund in connection with the issuance of the Bonds. [As provided in the Bond Resolution, the Authority intends to fund that portion of the Reserve Requirements attributable to the Bonds in equal monthly payments over a period of _ months]. Those portions of the Reserve Requirement attributable to prior issuances of debt by the Authority, excluding the Series 2005 Bonds which is cash funded, are provided by debt service reserve fund surety policies provided by various insurance providers. [remainder of page intentionally left blank] 41 TAX INCREMENT COLLECTIONS Current Tax Increment Increment Collection Tax Year Increment Tax Rate Collection(`) Rate(`) City 2004 $1,441,083.41 0.44 $1,445,346.96(a) 100.30% 2005 2,092,889.46 0.44 1,984,300.75(a) 99.44% 2006 3,106,298.17 0.44 3,075,361.66(a) 99.00% 2007 2008 Brazoria 2004 261,837.54 0.1359 264,010.26 100.83% 2005 556,053.69 0.1359 553,303.69 99.51 % 2006 815,022.89 0.1359 815,614.66 100.07% 2007 2008 Fort Bend 2005 36,718.87 0.6241 36,585.281b) 99.64% 2006 131,772.84 0.6241 125,299.57(b) 95.09% 2007 2008 (a) Up to and including tax year 2006, 64% of the City's Tax Increment is payable by the TIRZ to the City as an Administrative Fee (provided that in no event shall less than $0.255 per $100 be retained in the Tax Increment Fund) and such portion is not paid to the Authority and is therefore not part of the Contract Tax Increments or the Pledged Revenues. The City's Administrative Fee increases beginning with tax year 2007. See "RISK FACTORS — Limitation on City Tax Increments." 2008 values as of (b) Historical tax increment collections for Fort Bend County are shown for years prior to 2005 because prior to that year there was no captured appraised value in the Fort Bend County portion of the TIRZ. '`) As of , 2009. [remainder of page intentionally left blank] 42 PRINCIPAL TAXPAYERS IN THE TIRZ [Cnfirm]The following tables represent the principal taxpayers, the taxable assessed value of their property, and such property's taxable value as a percentage of the total taxable value in the TIRZ for 2008, 2007 and 2006. Top Taxpayers for Year 20081a1111 Rank Value Owner Property Percent(`) 1 $45,558,950 Pearland Investments Ltd. Partnership Acreage and lots 3.38 2 43,142,350 AMREIT SPF Shadow Creek LP Commercial 3.20 3 31,445,904 Shadow Creek Development Co. Lots and houses 2.33 4 21,041,390 Inland American Waterford Ltd. Apartments 1.56 5 15,939,780 HCA Healthcare Corp. Medical Facility 1.18 6 7,408,500 Perry Homes LLC Lots and houses 0.55 7 6,451,260 H E Butt Grocery Compnay Commercial 0.48 8 5,689,600 CNL Retirement DAS Pearland Texas LP Commercial 0.42 9 5,552,600 CG-Shadow Creek Ranch Acreage 0.41 10 5,541,280 Memorial Hermann Hospital System Medical Facility 0.41 Total $ 187,771,614 13.92% Top Taxpayers for Year 2007(a)(b) Rank Value Owner Property Percent(d) 1 $40,329,171 Pearland Investments Ltd. Partnership Acreage 4.24% 2 31,892,040 Shadow Creek Development Company Acreage and lots 3.35% 3 22,206,479 Perry Homes Lots and houses 2.33% 4 20,821,230 HCA Healthcare Corp. Commercial 2.19% 5 19,088,150 Waterford SCR L.P. Lots and houses 2.01% 6 15,031,930 Shadow Creek Retail L.P. Commercial 1.58% 7 12,736,980 Meritage Homes of Texas L.P. Lots and houses • 1.34% 8 6,857,540 Westin Homes & Partnership L.P. Lots and houses 0.72% 9 5,951,810 CG-Shadow Creek Rach Acreage 0.63% 10 5,809,266 MHI Partnership Ltd. Lots and houses 0.61 % Total $180,706,596 18.99% Top Taxpayers for Year 2006(a"' Rank Value Owner Property Percent( ) 1 $26,616,740 Pearland Investments Ltd. Partnership Acreage 4.89% 2 21,458,290 Shadow Creek Development Company Acreage and lots 3.94% 3 19,088,150 Waterford SCR L.P. Lots and houses 3.51% 4 11,016,650 Perry Homes Lots and houses 2.03% 5 9,911,140 HCA Healthcare Corp. Commercial 1.82% 6 9,828,400 MHI Partnership Ltd. Lots and houses 1.81% 7 7,661,690 Shadow Creek Retail L.P. Commercial 1.41% 8 6,324,330 Morrison Homes of Texas, Inc. Lots and houses 1.16% 9 5,339,270 RH of Texas Ltd. Partnership Lots and houses 0.98% 10 4,828,310 Gehan Homes Ltd. Lots and houses 0.89% Total $122,072,970 22.44%n (a) Source: Provided by Assessments of the Southwest, Inc. and based upon information from the Brazoria County Appraisal District. M Property located within the TIRZ is subject to taxation by the City, AISD, Brazoria County and Fort Bend County as described in this Official Statement. See "TAXING PROCEDURES OF THE CITY, AISD, BRAZORIA COUNTY AND FORT BEND COUNTY." Percentage of the January 1, 2008 taxable value in the TIRZ of $1,384,478,210 (net of exemptions). (d) Percentage of the January 1, 2007 taxable value in the TIRZ of $951,543,911 (net of exemptions). t0) Percentage of the January 1, 2006 taxable value in the TIRZ of $544,175,676 (net of exemptions). 43 TAXING PROCEDURES OF THE CITY, AISD, BRAZORIA COUNTY AND FORT BEND COUNTY Authority to Levy Taxes Under Texas law the City, AISD, Brazoria County and Fort Bend County are each authorized to levy an annual ad valorem tax on all taxable property within the City, AISD, Brazoria County and Fort Bend County's respective boundaries. See "RISK FACTORS — General." Property Tax Code and County -Wide Appraisal District The Texas Property Tax Code specifies the taxing procedures of all political subdivisions of the State of Texas, including the City, AISD, Brazoria County and Fort Bend County. Provisions of the Property Tax Code are complex and are not fully summarized here. The Property Tax Code requires, among other matters, county -wide appraisal and equalization of taxable property values and establishes in each county of the State of Texas an appraisal district with the responsibility for recording and appraising property for all taxing units within a county and an appraisal review board with responsibility for reviewing and equalizing the values established by the appraisal district. The Brazoria County Appraisal District has the responsibility for appraising property for all taxing units within Brazoria County, including the City, AISD and Brazoria County. The Fort Bend Central Appraisal District has the responsibility for appraising property in Fort Bend County. Such appraisal values are subject to review and change by the appropriate county Appraisal Review Board (the "Appraisal Review Board"). Property Subject to Taxation by the City, AISD, Brazoria County and Fort Bend County Except for certain exemptions provided by Texas law, all real property, tangible personal property held or used for the production of income, mobile homes and certain categories of intangible personal property with a tax situs in the TIRZ are subject to taxation by the City, AISD, Brazoria County and Fort Bend County. However, the tax revenue generated by the City, AISD, Brazoria County and Fort Bend County on any personal property is not included in the Tax Increments. Principal categories of exempt property include, but are not limited to: property owned by the State of Texas or its political subdivisions if the property is used for public purposes; property exempt from ad valorem taxation by federal law; certain household goods, family supplies, and personal effects; certain goods, wares and merchandise in transit; farm products owned by the producer; certain property of charitable organizations, community housing development organizations, youth development associations, religious organizations, and qualified schools; designated historical sites; and most individually owned automobiles. In addition, the City, AISD, Brazoria County and Fort Bend County may by their own action exempt residential homesteads of persons 65 years or older and of certain disabled persons to the extent deemed advisable by the respective boards. The City, AISD, Brazoria County and Fort Bend County may be required to offer such an exemption if a majority of voters approve it at an election. The City, AISD, Brazoria County and Fort Bend County would be required to call such an election upon petition by 20% of the number of qualified voters who voted in the preceding election. The City, AISD, Brazoria County and Fort Bend County are authorized by statute to disregard exemptions for the disabled and elderly if granting the exemption would impair the City, AISD, Brazoria County and Fort Bend County's obligation to pay tax supported debt incurred prior to adoption of the exemption by the City, AISD, Brazoria County and Fort Bend County. Historically, AISD, Brazoria County and Fort Bend County have granted disability exemptions. Furthermore, the City, AISD, Brazoria County and Fort Bend County must grant exemptions to disabled veterans or certain surviving dependents of disabled veterans, if requested, of between $5,000 and $12,000 depending upon the disability rating of the veteran claiming the exemption. Residential Homestead Exemptions: The Property Tax Code authorizes the governing body of each political subdivision in the State of Texas to exempt up to 20% of the appraised value of residential homesteads from ad valorem taxation. Qualifying surviving spouses of persons aged 65 years or older are entitled to receive a residential homestead exemption equal to the exemption received by the deceased spouse. Where ad valorem taxes have previously been pledged for the payment of debt, the governing body of a political subdivision may continue to levy and collect taxes against the exempt value of the homesteads until the debt is discharged, if the cessation of the levy would impair the obligations of the contract by which the debt was created. The adoption of a homestead exemption by the City, AISD, Brazoria County and Fort Bend County may be considered each year, but must be 44 adopted by May 1. Historically, the City, AISD, Brazoria County and Fort Bend County granted homestead exemptions. Valuation of Property for Taxation Generally, property within the boundaries of the City, AISD, Brazoria County and Fort Bend County must be appraised by the Appraisal District at market value as of January 1 of each year. Once an appraisal roll is prepared and finally approved by the Appraisal Review Board, it is used by the City, AISD, Brazoria County and Fort Bend County in establishing its tax rolls and tax rate. Assessments under the Property Tax Code are to be based on 100% of market value, as such is defined in the Property Tax Code. In determining market value, either the replacement cost or the income or the market data method of valuation may be used, whichever is appropriate. Nevertheless, certain land may be appraised at less than market value under the Property Tax Code. The Property Tax Code permits land designated for agricultural use, open spaces or timberland to be appraised at its value based on the land's capacity to produce agricultural or timber products rather than at its market value. The Property Tax Code permits under certain circumstances that residential real property inventory held by a person in the trade or business be valued at the price all such property would bring if sold as a unit to a purchaser who would continue the business. Provisions of the Property Tax Code are complex and are not fully summarized here. Landowners wishing to avail themselves of the agricultural use, open space or timberland designation or residential real property inventory designation must apply for the designation and the appraiser is required by the Property Tax Code to act on each claimant's right to the designation individually. A claimant may waive the special valuation as to taxation by some political subdivisions while claiming it as to another. If a claimant receives the agricultural use designation and later loses it by changing the use of the property or selling it to an unqualified owner, the District can collect taxes based on the new use, including taxes for the previous three (3) years for agricultural use and taxes for the previous five (5) years for open space land and timberland. The Property Tax Code requires the Appraisal District to implement a plan for periodic reappraisal of property to update appraisal values. The plan must provide for appraisal of all real property in the Appraisal District at least once every three years. It is not known what frequency of reappraisal will be utilized by the Appraisal District or whether reappraisals will be conducted on a zone or county -wide basis. The City, AISD, Brazoria County and Fort Bend County, however, at their own expense have the right to obtain from the Appraisal District a current estimate of appraised values within its respective boundaries or an estimate of any new property or improvements within its boundaries. While such current estimate of appraised values may serve to indicate the rate and extent of growth of taxable values within a district, it cannot be used for establishing a tax rate within a district until such time as the Appraisal District chooses formally to include such values on its appraisal roll. Levy and Collection of Taxes The City, AISD, Brazoria County and Fort Bend County are each responsible for the levy and collection of its taxes unless it elects to transfer such functions to another governmental entity. The City, AISD, Brazoria County and Fort Bend County must adopt a tax rate of the current tax year before the later of September 30 or the sixtieth day after the date the certified appraisal roll is received by the City, AISD, Brazoria County and Fort Bend County. Taxes in Fort Bend County are due October 1, or when billed, whichever comes later, and become delinquent after January 31 of the following year. Brazoria County, which levies and collects taxes on behalf of itself, the City and AISD, allows split payment of taxes, with the first half due by November 30 and the second half of the taxes due by June 30. Unless the split payment option is exercised by the taxpayer, taxes become delinquent after January 31 of the following year. For taxpayers who opt to split payments, taxes on the second of the split payments become delinquent on July 1 of the following year. The City, AISD, Brazoria County and Fort Bend County's Rights in the Event of Tax Delinquencies Taxes levied by the City, AISD, Brazoria County and Fort Bend County are a personal obligation of the owner of the property as of January 1 of the year for which the tax is imposed. On January 1 of each year, a tax lien attaches to property to secure the payment of all state and local taxes, penalties, and interest ultimately imposed for 45 the year on the property. The lien exists in favor of the State of Texas and each local taxing unit, including the City, AISD, Brazoria County and Fort Bend County, having power to tax the property. The City, AISD, Brazoria County and Fort Bend County's tax lien is on a parity with tax liens of such other taxing units. A tax lien on real property takes priority over the claim of most creditors and other holders of liens on the property encumbered by the tax lien, whether or not the debt or lien existed before the attachment of the tax lien; however, whether a lien of the United States is on a parity with or takes priority over a tax lien of another taxing entity is determined by applicable federal law. Personal property under certain circumstances is subject to seizure and sale for the payment of delinquent taxes, penalty, and interest. At any time after taxes on property become delinquent, taxing entities such as the City, AISD, Brazoria County and Fort Bend County may file suit to foreclose the lien securing payment of the tax, to enforce personal liability for the tax, or both. In filing a suit to foreclose a tax lien on real property, a taxing entity must join other taxing units that have claims for delinquent taxes against all or part of the same property. Collection of delinquent taxes may be adversely affected by the amount of taxes owed to other taxing units, by the effects of market conditions on the foreclosure sale price, and by taxpayer redemption rights. A taxpayer may redeem commercial property within six months and all other types of property within two years after the purchaser's deed issued at the foreclosure sale is filed in the county records or by bankruptcy proceedings which restrict the collection of taxpayer debts. See "RISK FACTORS —Tax Collection Limitations and Foreclosure Remedies." LEGAL MATTERS Legal Proceedings Delivery of the Bonds will be accompanied by the unqualified approving legal opinion of the Attorney General of Texas to the effect that the Bonds are valid and legally binding obligations of the Authority under the Constitution and laws of the State of Texas payable from the Pledged Revenues, and based upon their examination of a transcript of certified proceedings relating to the issuance and sale of the Bonds, the legal opinion of Co -Bond Counsel, to a like effect and to the effect that (i) interest on the Bonds is excludable from gross income of the holders for federal tax purposes under existing law and (ii) the Bonds are not "private activity bonds" under the Internal Revenue Code of 1986, as amended (the "Code") and interest on the Bonds will not be subject to the alternative minimum tax on individuals and corporations, except as described below in the discussion regarding the adjusted current earnings adjustments for corporations (See APPENDIX C - FORM OF OPINION OF CO -BOND COUNSEL). Co -Bond Counsel has reviewed the information appearing in this Official Statement under "PLAN OF FINANCING — Creation of the Authority and TIRZ," "SOURCE AND SECURITY OF PAYMENT FOR THE BONDS" (excluding "Calculation and Collection of Tax Increments" and "Perfected Security Interest"), "THE BONDS" (excluding "Book -Entry -Only System") "THE BONDS," "THE INDENTURE," "TAXING PROCEDURES OF THE CITY, AISD, BRAZORIA COUNTY AND FORT BEND COUNTY," " LEGAL MATTERS — Legal Proceedings" "TAX MATTERS," and "CONTINUING DISCLOSURE OF INFORMATION" (excluding "Compliance with Prior Undertakings") solely to determine if such information, insofar as it relates to matters of law, is true and correct, and whether such information fairly summarizes the provisions of the documents referred to therein. Co -Bond Counsel has not, however, independently verified any of the factual information contained in this Official Statement nor has it conducted an investigation of the affairs of the Authority for the purpose of passing upon the accuracy or completeness of this Official Statement. No person is entitled to rely upon Co -Bond Counsel's limited participation as an assumption of responsibility for or an expression of opinion of any kind with regard to the accuracy or completeness of any information contained herein. Certain legal matters incident to the authorization, issuance, placement, and delivery of the Bonds by the Authority are subject to the approving opinions of the Attorney General of the State of Texas and Allen Boone Humphries Robinson LLP and Andrews Kurth LLP, Co -Bond Counsel. The form of the opinion of Co -Bond Counsel with respect to the Bonds is attached hereto as Appendix C and will be available at the time of delivery of the Bonds. Other than the limited review of certain information in this Official Statement as described in the preceding paragraph and Co -Bond Counsel's approving legal opinion set forth herein, Co -Bond Counsel has not reviewed nor undertakes any responsibility for any of the information contained in this Official Statement. Certain legal matters will be passed upon for the Authority by Allen Boone Humphries Robinson LLP, Houston, Texas, and 46 Andrews Kurth LLP, Houston, Texas, Co -Bond Counsel. Winstead PC will pass on certain legal matters for the Underwriter. The fees of such counsel are contingent upon the issuance and delivery of the Bonds. The legal fees paid to Co -Bond Counsel for services rendered in connection with the issuance of the Bonds are based on a percentage of the Bonds actually issued, sold and delivered. The various legal opinions to be delivered concurrently with the delivery of the Bonds express the professional judgment of the attorneys rendering the opinions as to the legal issues explicitly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of that expression of professional judgment, of the transaction opined upon, or of the future performance of the parties to the transaction. Nor does the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of the transaction. No Material Adverse Change The obligations of the Underwriter to take and pay for the Bonds, and of the Authority to deliver the Bonds, are subject to the condition that, up to the time of delivery of and receipt of payment for the Bonds, there shall have been no material adverse change in the condition (financial or otherwise) of the Authority from that set forth or contemplated in the Official Statement. No -Litigation Certificate The Authority will furnish the Underwriter a certificate, executed by both the President and Secretary of the Board, and dated as of the date of delivery of the Bonds, to the effect that no litigation of any nature is pending or to its knowledge threatened, either in state or federal courts, contesting or attacking the Bonds; restraining or enjoining the collection of the contract Tax Increments to pay the interest or the principal of the Bonds; in any manner questioning the authority or proceedings for the issuance, execution or delivery of the Bonds; or affecting the validity of the Bonds or the title of the present officers of the Authority. TAX MATTERS Tax Exemption In the opinion of Allen Boone Humphries Robinson LLP and Andrews Kurth LLP, Houston, Texas, Co - Bond Counsel, interest on the Bonds is (1) excludable under Section 103 of the Internal Revenue Code of 1986, as amended (the "Code"), from gross income of the owners thereof for federal income tax purposes and (2) is not includable in the alternative minimum taxable income of individuals and corporations. The foregoing opinions of Bond Counsel are based on the Code and the regulations, rulings and court decisions thereunder in existence on the date of issue of the Bonds. Such authorities are subject to change and any such change could prospectively or retroactively result in the inclusion of the interest on the Bonds in gross income of the owners thereof or change the treatment of such interest for purposes of computing alternative minimum taxable income. In rendering its opinions, Bond Counsel has assumed continuing compliance by the Authority with certain covenants of the Resolution authorizing the issuance of the Bonds (the "Resolution') and has relied on representations by the Authority with respect to matters solely within the knowledge of the Authority, which Bond Counsel has not independently verified. The covenants and representations relate to, among other things, the use of Bond proceeds and any facilities financed therewith, the source of repayment of the Bonds, the investment of Bond proceeds and certain other amounts prior to expenditure, and requirements that excess arbitrage earned on the investment of Bond proceeds and certain other amounts be paid periodically to the United States and that the Authority file an information report with the Internal Revenue Service (the "Service"). If the Authority should fail to comply with the covenants in the Resolution, or if its representations relating to the Bonds that are contained in the Resolution should be determined to be inaccurate or incomplete, interest on the Bonds could become taxable from the date of delivery of the Bonds, regardless of the date on which the event causing such taxability occurs. 47 Except as stated above, Co -Bond Counsel will express no opinion as to any federal, state or local tax consequences resulting from the ownership of, receipt or accrual of interest on or acquisition or disposition of the Bonds. 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 covenants of the Authority described above. No ruling has been sought from 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 tax-exempt 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 owners of the Bonds may 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 interests from the owners of the Bonds. 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. Under the Code, taxpayers are required to provide information on their returns regarding the amount of tax- exempt interest, such as interest on the Bonds, received or accrued during the year. Prospective purchasers of the Bonds should be aware that the ownership of tax-exempt obligations, such as the Bonds, may result in collateral federal income tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, certain foreign corporations doing business in the United States, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who are deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations, taxpayers owning an interest in a financial asset securitization investment trust (FASIT) that holds tax-exempt obligations, and individuals otherwise eligible for the earned income tax credit. Such prospective purchasers should consult their tax advisors as to the consequences of investing in the Bonds. Tax Treatment of Original Issue Discount and Premium Bonds Discount Bonds Some of the Bonds may be offered at an initial offering price which is less than the stated redemption price at maturity of such Bonds. If a substantial amount of any maturity of the Bonds is sold to members of the public (which for this purpose excludes bond houses, brokers and similar persons or entities acting in the capacity of wholesalers or underwriters) at such initial offering price, an initial owner who purchases the Bonds of that maturity (the "Discount Bonds") will be considered to have `original issue discount" for federal income tax purposes equal to the difference between (a) the stated redemption price payable at the maturity of such Discount Bond and (b) the initial offering price to the public of such Discount Bond. Under existing law, such original issue discount will be treated for federal income tax purposes as additional interest on a Bond and such initial owner will be entitled to exclude from gross income for federal income tax purposes that portion of such original issue discount deemed to be earned (as discussed below) during the period while such Discount Bond continues to be owned by such initial owner. Except as otherwise provided herein, the discussion regarding interest on the Bonds under the caption "Tax Exemption" generally applies to original issue discount deemed to be earned on a Discount Bond while held by an owner who has purchased such Bond at the initial offering price in the initial public offering of the Bonds and that discussion should be considered in connection with this portion of the Official Statement. In the event of a redemption, sale, or other taxable disposition of a Discount Bond prior to its stated maturity, however, any amount realized by such initial owner in excess of the basis of such Discount Bond in the hands of such owner (increased to reflect the portion of the original issue discount deemed to have been earned while such Discount Bond continues to be held by such initial owner) will be includable in gross income for federal income tax purposes. Because original issue discount on a Discount Bond will be treated for federal income tax purposes as interest on a Bond, such original issue discount must be taken into account for certain federal income tax purposes as it is deemed to be earned even though there will not be a corresponding cash payment. Owners of a Discount Bond may be required to take into account such original issue discount as it is deemed to be earned for purposes of 48 determining certain collateral federal tax consequences of owning a Bond. See "TAX EXEMPTION" for a reference to collateral federal tax consequences for certain owners. The characterization of original issue discount as interest is for federal income tax purposes only and does not otherwise affect the rights or obligations of the owner of a Discount Bond or of the Authority. The portion of the principal of a Discount Bond representing original issue discount is payable upon the maturity or earlier redemption of such Bond to the registered owner of the Discount Bond at that time. Under special tax accounting rules prescribed by existing law, a portion of the original issue discount on each Discount Bond is deemed to be earned each day. The portion of the original issue discount deemed to be earned each day is determined under an actuarial method of accrual, using the yield to maturity as the constant interest rate and semi-annual compounding. The federal income tax consequences of the purchase, ownership, redemption, sale or other disposition of Discount Bonds by an owner that did not purchase such Bonds in the initial public offering and at the initial offering price may be determined according to rules which differ from those described above. All prospective purchasers of Discount Bonds should consult their tax advisors with respect to the determination for federal, state and local income tax purposes of interest and original issue discount accrued upon redemption, sale or other disposition of such Discount Bonds and with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of such Discount Bonds. Premium Bonds Some of the Bonds may be offered at an initial offering price which exceeds the stated redemption price payable at the maturity of such Bonds. If a substantial amount of any maturity of the Bonds is sold to members of the public (which for this purpose excludes bond houses, brokers and similar persons or entities acting in the capacity of wholesalers or underwriters) at such initial offering price, each of the Bonds of such maturity ("Premium Bonds") will be considered for federal income tax purposes to have "bond premium" equal to the amount of such excess. The basis for federal income tax purposes of a Premium Bond in the hands of an initial purchaser who purchases such Bond in the initial offering must be reduced each year and upon the sale or other taxable disposition of the Bond by the amount of amortizable bond premium. This reduction in basis will increase the amount of any gain (or decrease the amount of any loss) recognized for federal income tax purposes upon the sale or other taxable disposition of a Premium Bond by the initial purchaser. Generally, no corresponding deduction is allowed for federal income tax purposes, for the reduction in basis resulting from amortizable bond premium. The amount of bond premium on a Premium Bond which is amortizable each year (or shorter period in the event of a sale or disposition of a Premium Bond) is determined under special tax accounting rules which use a constant yield throughout the term of the Premium Bond based on the initial purchaser's original basis in such Bond . The federal income tax consequences of the purchase, ownership, redemption, sale or other disposition by an owner of Bonds that are not purchased in the initial offering or which are purchased at an amount representing a price other than the initial offering prices for the Bonds of the same maturity may be determined according to rules which differ from those described above. Moreover, all prospective purchasers of Bonds should consult their tax advisors with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of Premium Bonds. CONTINUING DISCLOSURE OF INFORMATION In order to provide certain continuing disclosure with respect to the Bonds in accordance with Rule 15c2- 12 of the United States Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time ("Rule 15c2-12"), the Authority has entered into a Disclosure Dissemination Agent Agreement ("Disclosure Dissemination Agreement") for the benefit of the Holders of the Bonds with Digital Assurance Corporation, L.L.C. ("DAC"), under which the Authority has designated DAC as Disclosure Dissemination Agent. The form of Disclosure Dissemination Agreement can be obtained on www.dacbond.com. 49 In the Bond Resolution, the Authority has made the following agreement for the benefit of holders of the Bonds, including the beneficial holders thereof. The Authority is required to observe the agreement for so long as it remains obligated to advance funds to pay the Bonds. Under the agreement, the Authority will be obligated to provide certain updated financial information and operating data annually, and timely notice of specified material events, to certain information vendors. Prior to July 1, 2009 this information will be available to securities brokers and others who subscribe to receive the information from the vendors. Beginning July 1, 2009, this information will be available free of charge from the Municipal Securities Rule Making Board ("MSRB") via the Electronic Municipal Market Access ("EMMA") system at www.emma.msrb.org. Annual Reports Prior to July 1, 2009, the Authority will provide certain updated financial information and operating data to certain information vendors annually. Beginning July 1, 2009, the Authority will provide this updated financial information and operating data to the MSRB annually free of charge via EMMA. The information to be updated includes the financial information and operating data with respect to the Authority, the City, AISD, Brazoria County and Fort Bend County in this Official Statement in the tables and schedules under the headings "SELECTED FINANCIAL INFORMATION," "TAX INCREMENT COLLECTIONS," "PRINCIPAL TAXPAYERS IN THE TIRZ," "PLAN OF FINANCING — Debt Service Requirements" and "Appendix F — EXCERPTS OF THE AUDITED FINANCIAL STATEMENTS OF THE CITY OF PEARLAND RELATING TO THE AUTHORITY." The Authority is considered a component unit of the City and, as such, the financial statements of the Authority are not separately audited, but instead are included in the City's audited financial statements. The Authority will update and provide this information, along with audited financial statements within six months after the end of each fiscal year. The Authority will provide updated information to each nationally recognized municipal securities information repository ("NRMSIR") and to any state information repository ("SID") that is designated by the State of Texas and approved by the staff of the United States Securities and Exchange Commission (the "SEC"), until July 1, 2009, and thereafter to the MSRB free of charge via EMMA. The Authority may provide updated information in full text or may incorporate by reference certain other publicly available documents, as permitted by the Rule. The updated information will include audited financial statements, if the Authority commissions an audit and it is completed by the required time. If audited financial statements are not available by the required time, the Authority will provide unaudited financial statements for the applicable fiscal year to each NRMSIR and any SID, or to the MSRB after July 1, 2009, within such six month period, and audited financial statements when the audit report of such statement becomes available. Any such financial statements will be prepared in accordance with the generally accepted accounting principles or such other accounting principles as the Authority may be required to employ from time to time pursuant to state law or regulation. The Authority's fiscal year end is currently September 30. Accordingly, it must provide updated information by March 31 in each year, unless the Authority changes its fiscal year. If the Authority changes its fiscal year, it will notify each NRMSIR and any SID of the change. Material Event Notices The Authority also will provide timely notices of certain events to certain information vendors or the MSRB as applicable. The Authority will provide notice of any of the following events with respect to the Bonds, if such event is material to a decision to purchase or sell Bonds: (1) principal and interest payment delinquencies; (2) non-payment related defaults; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions or events affecting the tax-exempt status of the Bonds; (7) modifications to rights or holders of the Bonds; (8) Bond calls; l9) defeasances; (10) release, substitution, or sale of property securing repayment of the Bonds; and (11) rating changes of the Bonds. (Neither the Bonds nor the Bond Resolution make any provision for debt service reserves or liquidity enhancement.) In addition, the Authority will provide timely notice of any failure by the Authority to provide information, data, or financial statements in accordance with its agreement described above under "Annual Reports." The Authority will provide each notice described in this paragraph to any SID and to either each NRMSIR or the MSRB until July 1, 2009, and thereafter only to the MSRB. 50 Availability of Information from NRMSIRs and SID The Authority has agreed to provide the foregoing information only to NRMSIRs and any SID or the MSRB as described herein. Prior to July 1, 2009, the information will be available to holders of and beneficial owners of the Bonds only if the holders comply with the procedures and pay the charges established by such NRMSIRs or SID or obtain the information through securities brokers who have done so. Effective July 1, 2009, all such information must be fled with the MSRB, rather than NRMSIRs and any SID. The MSRB intends to make the information available to the public without charge through EMMA. The Municipal Advisory Council of Texas has been designated by the State of Texas as a SID and has received a no -action letter from the SEC dated August 29, 1995 that recognizes the Municipal Advisory Council of Texas as a SID. The address of the Municipal Advisory Council is 600 West 81h Street, P.O. Box 2177, Austin, Texas 78768-2177 and its telephone number is 512/476-6947. The Municipal Advisory Council has also received SEC approval to operate and operates, a "central post office" for information filings made by municipal issuers, such as the Authority. A municipal issuer may submit its information filings with the central post office, which then transmits such information to the NRMSIRs and the appropriate SID for filing. This central post office can be accessed and utilized at www.disclosureUSA.org ("DisclosureUSA"). The Authority may utilize DisclosureUSA for the filing of information relating to the Bonds. Limitations and Amendments The Authority has agreed to update information and to provide notices of material events only as described above. The Authority has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, conditions or prospects or agreed to update any information that is provided, except as described above, The Authority makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Bonds at any future date. The Authority disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although registered owners and beneficial owners of the Bonds may seek a writ of mandamus to compel the Authority to comply with its agreement. The Authority may amend its continuing disclosure agreement from time to time to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the Authority, if but only if the agreement, as amended, would have permitted an Underwriter to purchase or sell Bonds in the offering made hereby in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances and either the registered owners of a majority in aggregate principal amount of the outstanding Bonds consent to the amendment or any person unaffiliated with the Authority (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the registered owners and beneficial owners of the Bonds. The Authority may amend or repeal the agreement in the Bond Resolution if the SEC amends or repeals the applicable provisions of the Rule or a court of final jurisdiction determines that such provisions are invalid or unenforceable, but only to the extent that its right to do so would not prevent an underwriter from lawfully purchasing the Bonds in the initial offering. If the Authority so amends the agreement, it has agreed to include with any financial information or operating data next provided in accordance with its agreement described above under "Annual Reports" an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of financial information and operating data so provided. Implementation of MSRB's EMMA System Effective July 1, 2009, all filings and notices that the Authority is required to make or give in satisfaction of its continuing disclosure undertaking set forth in the Order will be made solely to the MSRB, and such filings and notices will be made or given electronically in such format as determined by the MSRB. To make such continuing disclosure information available to investors free of charge, the MSRB has established the EMMA system, which may be accessed at www.emma.msrb.org. 51 Compliance with Prior Undertakings During the last five years, the Authority has complied in all material respects with its continuing disclosure agreement in accordance with the SEC Rule 15c2-12. PREPARATION OF OFFICIAL STATEMENT Sources and Compilation of Information The financial data and other information contained in this Official Statement has been obtained primarily from the Authority's records, the Appraisal District and information from other sources. All of these sources are believed to be reliable, but no guarantee is made by the Authority as to the accuracy or completeness of the information derived from such sources, and its inclusion herein is not to be construed as a representation on the part of the Authority to such effect. Furthermore, there is no guarantee that any of the assumptions or estimates contained herein will be realized. The summaries of the agreements, reports, statutes, resolutions, engineering and other related information set forth in this Official Statement are included herein subject to all of the provisions of such documents. These summaries do not purport to be complete statements of such provisions, and reference is made to such documents for further information. Financial Advisors RBC Capital Markets Corporation is employed as Financial Advisor to the Authority in connection with the issuance of the Bonds. The Financial Advisor's fee for services rendered with respect to the sale of the Bonds is contingent upon the issuance and delivery of the Bonds.. Official Statement Deemed Final For purposes of compliance with Rule 15c(2)-12 of the Securities and Exchange Commission, this document, as the same may be supplemented or corrected by the Authority from time to time, may be treated as an Official Statement with respect to the Bonds described herein "deemed final" by the Authority as of the date hereof (or of any such supplement or correction) except for the omission of certain information referred to in the succeeding paragraph. The Official Statement, when further supplemented by adding information specifying the interest rates and certain other information relating to the Bonds, shall constitute a "FINAL OFFICIAL STATEMENT" of the Authority with respect to the Bonds, as that term is defined in Rule 15c(2)-12. Updating the Official Statement For the period beginning on the date of the award of the sale of the Bonds to the Underwriter and ending on the 25th day after the "end of the underwriting period" (as defined in the Rule), if any event shall occur of which the Authority has knowledge and as a result of which it is necessary to amend or supplement the Official Statement in order to make the statements therein, in light of the circumstances when the Official Statement is delivered to a prospective purchaser, not misleading, the Authority will promptly notify the Underwriter of the occurrence of such event and will cooperate in the preparation of a revised Official Statement, or amendments or supplements thereto, so that the statements in the Official Statement, as revised, amended or supplemented, will not, in light of the circumstances when such Official Statement is delivered to a prospective purchaser, be misleading. The Authority assumes no responsibility for supplementing the Official Statement thereafter. Certification of Official Statement The Authority will certify that the information, statements, and descriptions or any addenda, supplement and amendment thereto pertaining to the Authority and its affairs contained herein, to the best of its knowledge and belief, contain no untrue statement of a material fact and do not omit to state any material fact necessary to make the statements herein, in the light of the circumstances under which they are made, not misleading. With respect to 52 information included in this Official Statement other than that relating to the Authority, the Authority has no reason to believe that such information contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements herein, in the light of the circumstances under which they are made, not misleading; however, the Authority Board has made no independent investigation as to the accuracy or completeness of the information derived from sources other than the Authority. In rendering such certificate, the official executing this certificate may state that he has relied in part on his examination of records of the Authority relating to matters within his own area of responsibility, and his discussions with, or certificates or correspondence signed by, certain other officials, employees, consultants and representatives of the Authority. MISCELLANEOUS All estimates, statements, and assumptions in this Official Statement and the Appendices hereto have been made on the basis of the best information available and are believed to be reliable and accurate. Any statements in this Official Statement involving matters of opinion or estimates, whether or not expressly so stated, are intended as such and not as representations of fact, and no representation is made that any such statements will be realized. This Official Statement was approved by the Board of Directors of the Development Authority of Pearland, as of the date shown on the cover page. Gll06�`116 Henry Stanaland Secretary, Board of Directors DEVELOPMENT AUTHORITY OF PEARLAND Tom Reid Chair, Board of Directors 53 APPENDIX A SUMMARY OF DOCUMENTS (1) Development Agreement By Resolution No. R99-66, adopted on September 13, 1999, the City of Pearland, Texas (the "City") entered into a Development Agreement (the "Development Agreement") with Shadow Creek Ranch Development Company, L.P. (the "Developer"). The Development Agreement establishes the framework for the financing, design and construction of certain public works and improvements to serve the Shadow Creek Ranch master planned community. The City delegates to the Reinvestment Zone Number Two, City of Pearland, Texas (the "TIRZ") Board of Directors (the "TIRZ Board") all powers relating to the implementation of the Project Plan and Reinvestment Zone Financing Plan of the TIRZ (the "Plan"), including without limitation the power to (i) select and retain consultants and (ii) approve plans and specifications, award contracts, and approve change orders and payments in accordance with the Development Agreement. All property within the TIRZ shall be developed in accordance with the Planned Unit Development for the property adopted pursuant to the City Land Use and Urban Development Ordinance (the "PUD"). The Development Agreement contemplates the design and construction of two types of "Improvements": (i) "TIRZ Improvements" and (ii) "City Improvements." "City Improvements" are defined to mean the various public improvements to be constructed by the City. "TIRZ Improvements" are defined to mean the various improvements to be financed from Tax Increments or the proceeds of bonds supported thereby. TIRZ Improvements are further classified into (i) "Master Improvements," (ii) "Subdeveloper Improvements," and (iii) "City Facilities." "Master Improvements are defined to mean the first $20,000,000 of TIRZ Improvements constructed by the Developer. "Subdeveloper Improvements" are defined to mean TIRZ Improvements constructed by a subdeveloper (a developer who is developing a portion of the TIRZ, other than the Developer). "City Facilities" are defined to mean the TIRZ Improvements to be constructed directly by the City, including police and fire stations, a City Hall annex, and a City library building. A "Project Cost" is a "project cost" as defined in Section 311.002(l) of the Texas Tax Code incurred in connection with the TIRZ Improvements. The City commits to design and construct, and provide funding for, the City Improvements, many of which relate to bringing water and wastewater capacity and service to the TIRZ. Funding for the various City Improvements is provided by (i) water and sewer impact fee revenues and the proceeds of bonds supported thereby, (ii) proceeds from loans, (iii) water and sewer system revenues, and (iv) the City's general fund. The Developer agrees to cause to be constructed TIRZ Improvements as outlined in the Plan, subject to reimbursement as provided in the Development Agreement. The Developer may seek and receive payment and reimbursement in accordance with the Development Agreement for all Project Costs the Developer incurs, out of Tax Increment or the proceeds of bonds supported thereby. The City may terminate the TIRZ, as provided in Section 311.017(a) of the Texas Tax Code, on the earliest possible date after which all Project Costs with respect to the TIRZ Improvements, as well as all bonds supported by Tax Increments and interest thereon, have been paid in full. The City pledges that it will deposit the entirety of the Tax Increment into the TIRZ's Tax Increment Fund. The amounts deposited in the Tax Increment Fund shall be disbursed, in accordance with the Development Agreement, solely (i) to make payments of principal and interest on bonds to finance TIRZ Improvements as and when due, (ii) to pay eligible expenses of the TIRZ, including creation costs and operating expenses, (iii) to pay Project Costs, and (iv) to reimburse the Developer or a subdeveloper in accordance with the Development Agreement. Notwithstanding the above, to pay for services rendered by the City in the TIRZ, the City may A-1 withdraw the "Administrative Fee" from the Tax Increment Fund. The "Administrative Fee" shall be the following amounts in the applicable calendar years commencing January 1, 1999: Years 1-3 (1999-2001) No Administrative Fee Years 4-8 (2002-2006) 36% of the City Tax Increment Years 9-30 (2007-2028) 64% of the City Tax Increment provided that, the amount deposited and retained annually in the Tax Increment Fund attributable to the City Tax Increment for the applicable year shall in no event be less than (i) in years four through eight, $0.44 per $100 of the Captured Appraised Value, and (ii) in years nine through 30, $0.255 per $100 of the Captured Appraised Value. To the fullest extent permitted by law, the City agrees that (i) it will not pledge or apply the Tax Increment or any other monies in the Tax Increment Fund to any other purpose or payment of any obligation of the City except for bonds to finance TIRZ Improvements and obligations arising under the Development Agreement; it will not commingle the Tax Increment with any other funds of the City; (iii) it will not take any action or omit to take any action that will affect the continued existence of the Tax Increment Fund or the availability of the Tax Increment to pay bonds issued to finance TIRZ Improvements and the other obligations under the Development Agreement; (iv) it will take all actions and submit all documents in a timely manner to receive all Tax Increment; (v) it will institute and pursue to a final order or judgment any bond validation action or suit upon reasonable request by the Developer; (vi) it will not refund any bonds issued to finance TIRZ Improvements in any manner inconsistent with the Plan; and (vii) it will direct the investment of the Tax Increment in accordance with Texas law applicable to investment of funds by municipalities. Except for City Facilities and "Educational Facilities" (those facilities to be constructed as part of the Plan at the direction of the Alvin Independent School District ("AISD") using a portion of the AISD Tax Increment), the TIRZ Improvements will be advance -funded by the Developer or a subdeveloper, subject to reimbursement form Tax Increment or the proceeds of bonds supported thereby. The total amounts owing for funds advanced from time to time shall bear simple interest commencing at the time the funds are advanced to pay for the applicable TIRZ Improvements, or advances spent for the creation, organization and administration expenses of the TIRZ, continuing until paid, for a maximum period of five years from the completion of the applicable TIRZ Improvements or of the creation or administration advance. Interest shall be calculated at (i) eight percent per annum with respect to Master Improvements and the first $1,000,000 of creation and administration advances, and (ii) 6.5% per annum with respect to other TIRZ Improvements and any remaining creation and administration advances. All plans and specifications for the TIRZ Improvements shall be submitted to the City for review and approval prior to the commencement of construction. The City's obligation to issue bonds is conditioned upon (i) the Developer entering into an agreement with the TIRZ Board specifying the TIRZ Improvements to be constructed, the area over which the Tax Increment is to be computed, and related matters, (ii) compliance with all competitive bidding and other laws relating to the solicitation and award of public works contracts, as such are applicable to similar City public improvement contracts, and (iii) a determination of the TIRZ's financial advisor that the bonds required for such reimbursement are reasonably marketable and that the issuance thereof will not have a materially detrimental effect on the viability of any outstanding bonds issued to finance TIRZ Improvements. (2) Reimbursement Agreements (a) Master Developer Reimbursement Agreement On September 22, 1999, the City, the TIRZ and the Developer entered into a Master Developer Reimbursement Agreement (the "Reimbursement Agreement"). The Reimbursement Agreement sets forth the processes and procedures for the design and construction of certain TIRZ Improvements and the financing and reimbursement therefor. A-2 To initiate the construction of a TIRZ Improvement, the Developer shall provide a written request therefor to the TIRZ Board (i) describing the requested TIRZ Improvements, (ii) specifying the estimated schedule for the design and construction, (iii) estimating the likely costs thereof, as certified by the TIRZ's engineer, and comparing such estimate to the cost estimate of such TIRZ Improvement in the Plan, and (iv) specifying the area within the TIRZ which is benefited by such TIRZ Improvements. If the TIRZ's engineer determines that the requested TIRZ Improvements qualify for reimbursement, the Developer may proceed to design and construct the requested TIRZ Improvements in accordance with certain procedures established in a document entitled "TIRZ Project Implementation and Reimbursement Process" dated June 30, 1999. All legal requirements relating to City contracts shall apply to the design and construction of the TIRZ Improvements. For purposes of record -keeping and establishing a priority of reimbursement, the TIRZ and the Developer shall execute a letter agreement for each phase of construction. The purpose of the letter agreement is to confirm that the Developer will design and construct a phase of the TIRZ Improvements, will pre -finance all associated costs of such phase, and will be reimbursed by the City and the TIRZ from bond proceeds or Tax Increment. If the Developer follows the appropriate contracting procedures and after the TIRZ's engineer and auditor have certified in letters that the TIRZ Improvements have been completed and are in order for reimbursement, the TIRZ shall reimburse the Developer for all amounts advanced to the TIRZ pursuant to the Reimbursement Agreement, plus the appropriate interest on such amounts as calculated under the provisions of the Development Agreement up to the amount certified by the TIRZ's engineer and auditor to be within the cost estimate of such TIRZ Improvement in the Plan, as adjusted for inflation. The TIRZ shall be obligated to reimburse the Developer, solely, and in order of priority, from (i) proceeds of bonds supported by Tax Increment, (ii) uncommitted Tax Increment if such funds are available and are not reasonably expected to be required by the TIRZ for debt service on bonds or for administrative expenses. Priority for the reimbursement of advances is as follows: (i) creation and administration, (ii) Master Improvements, and (iii) Subdeveloper Improvements. The TIRZ agrees to request at the earliest feasible date that the City issue bonds and the City agrees to use its best efforts to issue bonds to fund reimbursements at such time as the City's financial advisor certifies that the unencumbered Tax Increment (exclusive of AISD Tax Increment) generated within the area benefited by the TIRZ Improvements is sufficient to support the applicable bonds and satisfies the coverage test and Tax Increment Fund projection requirement set forth in the Development Agreement. The TIRZ's obligation to reimburse the Developer is conditioned on: (i) the approval of the issuance of bonds by the City, the Attorney General of Texas and any other governmental authority having jurisdiction thereover; and (ii) the successful marketing, sale, and closing of the bonds. The Developer and the TIRZ Board have entered into approximately 33 letter financing agreements regarding the construction and financing of various TIRZ Improvements and the creation and operation of the TIRZ. (b) Subdeveloper Reimbursement Agreement On October 23, 2006, the Subdeveloper and the TIRZ entered into a Developer Reimbursement Agreement (the "Subdeveloper Agreement"). The Subdeveloper Agreement sets forth the processes and procedures by which the Subdeveloper will construct certain TIRZ Improvements associated with Amendment 2 and Amendment 3 to the Plan, subject to reimbursement by the City and the TIRZ from the Tax Increment Fund. To initiate the construction of a TIRZ Improvement, the Subdeveloper shall provide a written request therefor to the TIRZ Board (i) describing the requested TIRZ Improvements, (ii) specifying the estimated schedule for the design and construction, (iii) estimating the likely costs thereof, as certified by the TIRZ's engineer, and comparing such estimate to the cost estimate of such TIRZ Improvement in the Plan, and (iv) specifying the area within the TIRZ which is benefited by such TIRZ Improvements. If the TIRZ's engineer determines that the requested TIRZ Improvements qualify for reimbursement, the Developer may proceed to design and construct the requested TIRZ Improvements in accordance with the procedures established in the Subdeveloper Agreement. A-3 For purposes of record -keeping and establishing a priority of reimbursement, the TIRZ and the Subdeveloper shall execute a letter agreement for each phase of construction. The purpose of the letter agreement is to confirm that the Subdeveloper will design and construct a phase of the TIRZ Improvements, will pre -finance all associated costs of such phase, and will be reimbursed by the City and the TIRZ from bond proceeds or uncommitted Tax Increment. If the Subdeveloper follows the appropriate contracting procedures and after the TIRZ's engineer and auditor have certified in letters that the TIRZ Improvements have been completed and are in order for reimbursement, the TIRZ shall reimburse the Developer for all amounts advanced to the TIRZ pursuant to the Reimbursement Agreement, plus the appropriate interest on such amounts as calculated under the provisions of a development agreement between the City and the Subdeveloper up to the amount certified by the TIRZ's engineer and auditor to be within the cost estimate of such TIRZ Improvement in the Plan, as adjusted for inflation. The TIRZ shall be obligated to reimburse the Subdeveloper, solely, and in order of priority, from (i) bond proceeds, (ii) uncommitted Tax Increment if such funds are available and are not reasonably expected to be required by the TIRZ for debt service on bonds for reimbursement purposes or for administrative expenses. Priority for the reimbursement of advances is as follows: (i) creation and administration, (ii) Master Developer TIRZ Improvements, and (iii) Subdeveloper Improvements. The TIRZ agrees to request at the earliest feasible date that the City issue bonds and the City agrees to use its best efforts to issue bonds to fund reimbursements at such time as the City's financial advisor certifies that the unencumbered Tax Increment (exclusive of AISD Tax Increment) generated within the area benefited by the TIRZ Improvements is sufficient to support the applicable bonds and satisfies the coverage test and Tax Increment Fund projection requirement set forth in the development agreement and the Plan. The TIRZ's obligation to reimburse the Subdeveloper is conditioned on: (i) the approval of the issuance of bonds by the City, the Attorney General of Texas and any other governmental authority having jurisdiction thereover; and (ii) the successful marketing, sale, and closing of the bonds. The Subdeveloper has commenced construction on most or all of reimbursable improvements under the Subdeveloper Agreement and has submitted two letter financing agreements regarding the construction and financing of certain TIRZ Improvements, however, none have been approved for reimbursement by the TIRZ Board. (3) Tri-Party Agreement By Resolution No. R2004-170, adopted on October 11, 2004, the City entered into that "Agreement By and Between the City of Pearland, Texas, Reinvestment Zone Number Two, City of Pearland, Texas, and the Development Authority of Pearland" (the "Tri-Party Agreement"). Both the TIRZ Board and the Development Authority of Pearland (the "Authority") Board of Directors (the "Authority Board") approved and entered into the Tri-Party Agreement on October 5, 2004. By Resolution No. R2007-143, adopted by the City on September 17, 2007, the City approved Amendment No. 1 to the Tri-Party Agreement (the "Amendment"). The TIRZ Board approved the Amendment on September 17, 2007, and the Authority approved the Amendment on September 24, 2007 (the Tri-Party Agreement and Amendment No. 1 shall be referred to herein as the "Tri-Party Agreement"). In the Tri-Party Agreement, the City delegates certain of its obligations under the Development Agreement and the Reimbursement Agreement, primarily the issuance of bonds and reimbursement to the Developer, to the Authority. The Authority is given the authority to issue bonds supported by Contract Tax Increments, but only with the consent of the City Council; provided that the Authority shall not expend any of the Contract Tax Increments for any purpose other than: (i) payment of bonds, (ii) to make developer reimbursements, and (iii) to pay the administrative and operational expenses of the Authority. The Authority may pledge and assign all or a part of the Contract Tax Increments to the owners and holders of bonds. The City consents to any assignment and pledge consistent with the Tri-Party Agreement for the benefit of bondholders. A-4 The Authority agrees to abide by the terms and conditions of the Development Agreement and the Reimbursement Agreement relating to the issuance of bonds and the reimbursement to the Developer of Project Costs. The City shall continue to be obligated to provide the City Improvements described in the Development Agreement and to pay for such improvements from the funding sources enumerated therein. The City and the Zone shall have no financial obligation to the Authority other than as provided in the Tri- Party Agreement or in other agreements between the City, the TIRZ and the Authority. The obligation of the City and the TIRZ to the Authority under the Tri-Party Agreement is limited to the Tax Increments that are collected by the City. The Tri-Party Agreement creates no obligation on the City or the TIRZ that is payable from taxes or other moneys of the City other than the Tax Increments that are collected by the City. The obligation of the City and the TIRZ to the Authority under the Tri-Party Agreement shall be subject to the rights of any of the holders of Bonds or other obligations that have heretofore been or are hereafter issued by the City, Brazoria County, Fort Bend County, AISD and any other taxing units that are payable from or secured by a general levy of ad valorem taxes throughout the taxing jurisdiction of the City, Brazoria County, AISD and any other Taxing Units. The City and the TIRZ covenant and agree that they will, as authorized by law, continuously collect the Tax Increments from the participating taxing units in accordance with each participating taxing units' interlocal agreement (the "Interlocal Agreements") during the term of the Tri-Party Agreement in the manner and to the maximum extent permitted by applicable law. To the extent the City and the TIRZ may legally do so, the City and the TIRZ also covenant and agree that they will not permit a reduction in the Tax Increments paid by the participating taxing units except to the extent provided in the Interlocal Agreements. In addition, the City covenants and agrees that it will not dissolve the Authority and that any repeal of the right and power to collect the Tax Increments will not be effective until all bonds have been paid in full or until they are legally defeased. The City and the TIRZ further covenant and agree that they will make all payments as set forth in the Tri-Party Agreement, by a direct deposit to the Authority, without counterclaim or offset, but minus any amounts to be retained by the City pursuant to the Tri-Party Agreement (described below). The obligation of the City and the TIRZ to make the payments to the Authority shall be absolute and unconditional, and until such time as the bonds have been fully paid or provision for payment thereof shall have been made in accordance with their terms, the City and the TIRZ will not suspend or discontinue any payments provided for in the Tri-Party Agreement and will not terminate the Tri-Party Agreement for any cause, including, without limiting the generality of the foregoing, the failure of the Authority to perform and observe any agreement, whether express or implied, or any duty, liability, or obligation arising out of or connected with the Tri-Party Agreement. Nothing contained in this section shall be construed to release the Authority from performance of any of the agreements on its part contained in the Tri-Party Agreement, and in the event the Authority shall fail to perform any such agreement on its part, the City may institute such action against the Authority as the City may deem necessary to compel performance so long as this action does not abrogate the obligations of the City and the TIRZ to make the payments set forth in this Agreement. The City, on behalf of itself and the TIRZ, will pay the Authority, on the date of the closing of the first series of Bonds and thereafter not later than the fifteenth day of each August during the term of this Agreement, solely from the Tax Increment Fund and from no other source, all monies then available in the Tax Increment Fund, subject to the retention by the City of (i) an amount equal to the City's administrative costs connected with the TIRZ and the Plan, as ,provided in the TIRZ Plan; (ii) the school district educational facilities costs as described in the Plan, if applicable; (iii) amounts required to be maintained in the "AISD Suspense Account" pursuant to the terms of the Interlocal Agreement with AISD; and (iv) an amount sufficient to pay reasonable current and anticipated administrative and operating costs of the TIRZ, as determined by the TIRZ Board. The Authority shall use the monies solely for payment of its obligations to the holders of the bonds, while any are outstanding, developer reimbursements, and Authority operation and administration expenses. The obligation to make these payments shall survive a termination of the Tri-Party Agreement. As projects implementing the Plan are completed, the TIRZ Board may recommend to the City that the Authority reimburse developers on behalf of the TIRZ and the City. The TIRZ Board will forward to the City and the Authority all of the necessary and required documentation supporting the requested reimbursement and a determination of the exact amount requested for reimbursement, including a calculation of the amount of interest to be reimbursed on funds advanced for the project. The City will consider the recommendation of the TIRZ Board A-5 and will authorize the Authority to take appropriate action. The TIRZ, the City and the Authority hereby agree and confirm that any reimbursements made by the Authority shall be in strict compliance with the Development Agreement and the Reimbursement Agreement. Upon written resolution by the City, the Authority shall reimburse developers in accordance with the recommendations of the TIRZ Board as approved by the City, the Development Agreement, the Reimbursement Agreement and the Plan. The City agrees not to dissolve the Authority or the TIRZ unless it makes satisfactory arrangements to provide for the payments of the bonds incurred prior to the Authority's dissolution. In the event of the dissolution of the Authority, the City shall return all Contract Tax Increments and proceeds from bonds supported by Contract Tax Increments to the Tax Increment Fund. (4) Project Plan and Reinvestment Zone Financing Plan (a) The Original Plan On August 23, 1999, the TIRZ Board and the City, by Ordinance No. 918, adopted the Project Plan and Reinvestment Zone Financing Plan for the TIRZ (the "Plan"). The Plan contains various maps, descriptions and cost estimates of TIRZ Improvements, as required by Chapter 311, Texas Tax Code. The Plan finds that the acreage within the boundaries of the TIRZ (the "Original Area") was undeveloped, vacant, in an agricultural exemption and not served by municipal utilities at the time of the TIRZ's creation. The Plan provides for four categories of estimated Project Costs: (i) $108,267,923 for the design and construction of "Infrastructure," (ii) $1,366,000 for TIRZ creation and administration, (iii) $5,000,000 for the design and construction of "City Facilities," and (iv) $134,100,000 for educational facilities. "Infrastructure" includes: (i) streets (pavement, sidewalks, landscaping and irrigation, entry monuments and signalization), (ii) water plants and water system, (iii) wastewater treatment plants, lift stations and wastewater system, (iv) storm sewer system, (v) lakes and channels, (vi) site costs, (vii) contingencies, and (viii) engineering. "City Facilities" include: (i) library sites and improvements, and (ii) fire and police station sites and improvements. The educational facility improvements will be provided by or at the direction of AISD. Pursuant to the Plan and within certain parameters, the TIRZ Board may revise or adjust the estimated Project Costs. All estimates of Project Costs in the Plan are in 1999 dollars and are subject to cost adjustment per the Engineering New Record Index over the life the TIRZ. The Plan confirms the payment and structure of the City's Administrative Fee, in accordance with the Development Agreement. Numerous exhibits show the kind, number and location of the TIRZ Improvements. The estimated bonded indebtedness to be incurred by the TIRZ is an amount sufficient to yield net proceeds of approximately $114,633,923 in 1999 dollars, subject to cost adjustment according to the Engineering News Record Index over the life of the TIRZ. The Plan confirms the financing and reimbursement of Project Costs consistent with the Development Agreement and the Reimbursement Agreement. The Plan establishes the base year for the TIRZ as 1998 and establishes the Base Value of the TIRZ as $7,172,980. The Plan estimates the Captured Appraised Value of the TIRZ in each of the 30 years. The estimates for such Captured Appraised Values are supported by market studies. The TIRZ will exist for a period of 30 years; however, at such time as the financial and contractual obligations of the TIRZ are complete, fulfilled, or assumed by the City, the TIRZ may be terminated by the City. The City and the TIRZ Board will use their best efforts to provide for the payment of all Project Costs, bonds, and interest thereon, in order to minimize the life of the TIRZ. At the termination of the TIRZ, any residual funds from Tax Increments will be returned to the participating taxing entities on a pro rata basis according to their levels of participation. A-6 (b) The First Amendment The TIRZ Board, by Resolution on March 27, 2006, and the City, by Ordinance No. 1276 on July 10, 2006, adopted a First Amendment to the Plan (the "First Amendment"), The First Amendment provides for the annexation of 457 acres of land (the "First Annexation Area") into the boundaries of the TIRZ and increases the Plan's estimated project costs accordingly. The First Amendment provides for an additional $34,724,218 in estimated Project Costs in two categories: (i) $34,474,218 for the design and construction of Infrastructure, and (ii) $250,000 for TIRZ administration. The estimate of bonded indebtedness to be incurred by the TIRZ is increased accordingly. The First Amendment establishes the base year for the First Annexation Area as 2006. (c) The Second Amendment The TIRZ Board, by Resolution on October 23, 2006, and the City, by Ordinance No. 1312 on November 13, 2006, adopted a Second Amendment to the Plan (the "Second Amendment"). The Second Amendment increases the Plan's estimated project costs. The Second Amendment provides for an additional $11,749,618 in estimated Project Costs in two categories: (i) $11,547,618 for the design and construction of Infrastructure, and (ii) $175,000 for TIRZ administration. The estimated of bonded indebtedness to be incurred by the TIRZ is increased accordingly. (d) The Third Amendment The TIRZ Board, by Resolution on October 23, 2006, and the City, by Ordinance No. 1314 on November 13, 2006, adopted a Third Amendment to the Plan (the "Third Amendment"). The Third Amendment provides for the annexation of seven acres of land (the "Second Annexation Area," and together with the First Annexation Area, the "Annexation Area") into the boundaries of the TIRZ and increases the Plan's estimated of project costs accordingly. The Third Amendment provides for an additional $8,000,000 in estimated Project Costs for the design and construction of Infrastructure. The estimate of bonded indebtedness to be incurred by the TIRZ is increased accordingly. The base year for the Second Annexation Area is 2006. (5) Interlocal Agreements Brazoria County On August 30, 1999, the City Council adopted Resolution No. R99-62, and entered into a Tax Increment Participation Agreement with Brazoria County (the "Original Brazoria County Agreement"). On October 23, 2006, the City Council adopted Resolution No. R2006 181, and entered into an Amendment No. 1 to Tax Increment Participation Agreement with Brazoria County (the "First Brazoria Amendment; and together with the Original Brazoria County Agreement, the "Brazoria County Agreement"). Brazoria County agrees to participate in the Original Area and the Annexation Area of the TIRZ by contributing 38% of the amount of tax increment produced in the TIRZ attributable to Brazoria County (not to exceed $0.1359 per $100 valuation) collected by the County. The Brazoria County Tax Increment Participation and obligation to participate in the TIRZ shall be restricted to its tax increment collected on the Captured Appraised Value in the Original Area and the Annexation Area of the TIRZ. Brazoria County shall not be obligated to pay its Brazoria County Tax Increment Participation from other Brazoria County taxes or revenues or until the Brazoria County Tax Increment Participation in the TIRZ is actually collected. The obligation to pay the Brazoria County A-7 Tax Increment Participation shall accrue as taxes representing the Brazoria County Tax Increment Participation are collected and payment shall be due on August 1 of each year. Brazoria County's participation is limited to the Original Area and the Annexation Area of the TIRZ and the County's participation shall not extend to the Tax Increment on any additional property added to the TIRZ unless Brazoria County approves the participation. Brazoria County has the right to appoint one member of the TIRZ Board. Any amendment to the Plan shall be submitted to Brazoria County for review prior to adoption. Once bonds supported by Tax Increment have been issued, the City agrees that it will never disannex any property within the TIRZ. The City and the TIRZ agree that Brazoria County is not liable for the debt of the TIRZ, or any debt issued by the City or related instrumentality thereof (such as the Authority) secured by revenues of the Tax Increment Fund, or other revenues available to pledge to such bonds. The City agrees that the Plan will include a provision that limits the amount of reimbursement to the Developer for the full amount of eligible Master Improvements, plus amounts required to reimburse the Developer for funds advanced in connection with the creation and administration of the TIRZ and the conception, design and construction of the TIRZ Improvements, that is reimbursable at simple interest calculated at eight percent per annum, until paid, for a maximum period of five years from the completion of the applicable TIRZ Improvements, to $20 million for the eligible Master Improvements and $1 million for the creation and administration of the TIRZ. The first payment of Brazoria County Tax Increment Participation shall be for those taxes levied by Brazoria County in the year 1999 and the last payment by Brazoria County is for those taxes levied by the County in the year 2028. The City shall not adopt an ordinance terminating the TIRZ earlier than the duration of the TIRZ established in City Ordinance No. 891, without the prior consent of Brazoria County, provided that the TIRZ may otherwise terminate by operation of law. Brazoria County may reduce its participation in the TIRZ by the adoption of a written order of the Commissioner's Court adopted prior to September 30 of such year if the Captured Appraised Value is less than 50% of the values for each of the tax years listed below: Tax Captured 50% Year Appraised Value Required Value 2006 $ 655,340,658 $327,670,329 2011 $ 1,338,693,425 $669,346,713 2016 $ 1,414,004,025 $707,002,013 2021 $ 1,414,004,025 $707,002,013 2026 $ 1,414,004,025 $707,002,013 or, if the County Unit Cost of Service (defined to mean initially the sum of $218 which sum shall be increased by the percentage increase in the Consumer Price Index from January, 2000, in accordance with formulas provided in the Brazoria County Agreement) is lower than the County's Actual Cost of Service (defined to mean the total annual amount Brazoria County has budgeted in a given fiscal year for its governmental services and operations, divided by the total number of dwelling units in Brazoria County), Brazoria County may reduce its participation in the TIRZ for the remaining term of the TIRZ so that the County's retained tax increment covers the County's Actual Cost of Service for dwelling units in the TIRZ by at least 1.32 times, but the reduction percentage may not increase the County's retained tax increment revenue to cover more than the County Unit Cost of Service plus ten percent. Provided, however, that if the City, the TIRZ or an agency or instrumentality of the City or TIRZ (such as the Authority) have (i) issued bonds or notes secured by revenues in the Tax Increment Fund or under a contract secured by payments of Tax Increments, or (ii) entered into a project cost agreement(s) for the implementation of the Plan pledging the payment of the Tax Increment for the payment of developer advances then incurred or A-8 construction contracts awarded and executed, Brazoria County may not reduce its participation as described above to an amount less than its cumulative annual pro rata share of the Tax Increment pledged to make payments on all such bonds or agreements. For the purpose of identifying Brazoria County's pro rata obligations, at the time of each issuance of bonds or the execution of each agreement, the City shall provide Brazoria County a schedule showing Brazoria County's pro rata share of all payments to be made for such bonds or under such agreements that are secured by the Brazoria County Tax Increment Participation. The City may not issue bonds or notes, the payment of principal, interest or premium of which are secured by the Brazoria County Tax Increment Participation unless the City's financial advisor shall certify in writing to the City Council that the total annual Tax Increment revenues, less TIRZ administrative fees, is equal to or greater than 125% of the total annual amount to all outstanding and proposed TIRZ bond or note payments and contractual obligations. Fort Bend County On January 10, 2000, the City Council adopted Resolution No. R99-57, and entered into an Agreement with Fort Bend County regarding participation in the TIRZ (the "Original Fort Bend County Agreement"). On October 23, 2006, the City Council adopted Resolution No. R2006-182 and entered into an Amendment No. 1 to Agreement with Fort Bend County (the "First Fort Bend Amendment," and together with the Original Fort Bend County Agreement, the "Fort Bend County Agreement"). Fort Bend County agrees to participate in the Original Area of the TIRZ by contributing the amount of Tax Increment produced in the TIRZ attributable to Fort Bend County based on the following tax rates (the "Fort Bend County Tax Increment Participation"): Fort Bend County Tax Rate Per $100 Tax Year of Captured Appraised Value 1999-2008 $0.624100 2009-2018 $0.468075 2019-2028 $0.312050 If the Fort Bend County tax rate is less than the rate specified above for such year, then the Fort Bend County Tax Increment for such year would be the total amount of taxes collected by Fort Bend County at its actual tax rate on the Captured Appraised Value. Taxes collected as a result of a Fort Bend County tax levy at a tax rate greater than the rate specified above for a particular year will be retained by Fort Bend County. The Fort Bend County Tax Increment Participation and obligation to participate in the TIRZ shall be restricted to its tax increment collected on the Captured Appraised Value in the Original Area and the Annexation Area of the TIRZ. Fort Bend County shall not be obligated to pay its Fort Bend County Tax Increment Participation from other Fort Bend County taxes or revenues or until the Fort Bend County Tax Increment Participation in the TIRZ is actually collected. The obligation to pay the Fort Bend County Tax Increment Participation shall accrue as taxes representing the Fort Bend County Tax Increment Participation are collected and payment shall be due on the first day of each calendar quarter. Fort Bend County's participation is limited to the Original Area and the Annexation Area of the TIRZ and the County's participation shall not extend to the Tax Increment on any additional property added to the TIRZ unless Fort Bend County approves the participation. Fort Bend County has the right to appoint one member of the TIRZ Board. Any amendment to the Plan shall be submitted to Fort Bend County for review prior to adoption. The first payment of Tax Increments by Fort Bend County is for taxes levied for the year 1999 and the last payment is for taxes levied in the year 2028. A-9 The City shall not adopt an ordinance terminating the TIRZ earlier than the duration of the TIRZ established in City Ordinance No. 891, without the prior consent of Fort Bend County, provided that the TIRZ may otherwise terminate by operation of law. Alvin Independent School District On June 14, 1999, the City Council adopted Resolution No. R99-45, and entered into an Interlocal Agreement with Alvin Independent School District ("AISD") regarding participation in the TIRZ (the "AISD Agreement"). AISD agrees to participate in the TIRZ by contributing 100% of all taxes collected by AISD each year during the term of the AISD Agreement at the prevailing AISD tax rate on the Captured Appraised Value in the Original Area of the TIRZ (the "AISD Tax Increment Participation"). The AISD Tax Increment Participation and obligation to participate in the TIRZ shall be restricted to its tax increment collected on the Captured Appraised Value in the Original Area of the TIRZ. AISD shall not be obligated to pay its AISD Tax Increment Participation from other AISD taxes or revenues or until the AISD Tax Increment Participation in the TIRZ is actually collected. The obligation to pay the AISD Tax Increment Participation shall accrue as taxes representing the AISD Tax Increment Participation are collected and payment shall be due on the first day of each calendar quarter. The City and the TIRZ agree that no interest or penalty will be charged to AISD. AISD's participation is limited to the original boundaries of the Original Area of the TIRZ and AISD's participation shall not extend to the Tax Increment on any additional property added to the TIRZ (including the Annexation Area) unless AISD approves the participation. The City is not expected to seek AISD participation in the Annexation Area. AISD has the right to appoint one member of the TIRZ Board. In addition, AISD and the City agree that AISD and the City shall jointly appoint one member of the TIRZ Board. AISD agrees that, in accordance with State law, AISD Trustees are not eligible for appointment to the TIRZ Board. Any amendment to the Plan shall be submitted to Fort Bend County for review prior to adoption. The City and the TIRZ agree that AISD will only be asked to build the school facilities as required by the Plan when they are needed to serve the population of the TIRZ. AISD will not be required to build school facilities earlier than such facilities would be needed in accordance with customary procedures established by AISD. The City and the TIRZ agree that AISD shall have the right to determine the location of all school facilities which serve the TIRZ and such location may be outside the boundaries of the TIRZ. In the event that the State funds formula calculations applicable to AISD change so that the participation of AISD in the TIRZ will result in a decrease or decreases the amount of State Funds (defined to mean the funds provided or potentially available to AISD from the State of Texas, currently being Tier One, Tier Two, and Instructional Facilities Allotment, and any successor or replacement form of revenues provided or potentially available to AISD from the State of Texas) available and/or received by AISD, or AISD determines in its sole and independent discretion that it would be in AISD's best interest due to negative financial impact to AISD, resulting from participation in the TIRZ, the City and the TIRZ agree that, at the option of AISD in its sole and independent discretion, (i) the AISD Tax Increment Participation shall be decreased by an amount determined by AISD to account for the amount of the decrease in AISD State Funding as a result of AISD's participation in the TIRZ, (ii) the percentage of payments to be made by the TIRZ to AISD from taxes generated from the AISD Tax Increment Participation for educational facilities shall be increased by an amount determined by AISD to account for the amount of the decrease in AISD State Funding as a result of AISD's participation in the TIRZ, (iii) any combination of the options set forth in subparagraphs (i) or (ii) above, or (iv) AISD may completely withdraw from further participation in the TIRZ. In addition, in the event the City determines that the continued participation by AISD in the TIRZ has or will have a negative financial impact on the TIRZ, then the City shall have the right to terminate AISD's participation in the TIRZ. WME1I In the event that the laws applicable to AISD or tax increment reinvestment zones are changed so that the participation of AISD in the TIRZ is prohibited, the City and the TIRZ agree that AISD shall withdraw from further participation in the TIRZ. If such change of law occurs and AISD withdraws from participation in the TIRZ, AISD agrees to finance and build school facilities to serve development in the TIRZ in accordance with customary procedures established by AISD. The City, the TIRZ and AISD agree that (i) any change to the percentage of the AISD Tax Increment Participation, (ii) any change to the percentage of the taxes generated from the AISD Tax Increment Participation to be paid to AISD for educational facilities, or (iii) the withdrawal by AISD from further participation in the TIRZ, shall be selected by AISD not later than October 31 of each calendar year and shall be effective as December 31 of the immediately preceding calendar year. AISD agrees to provide written notice to the City and the TIRZ of any election hereunder on or before October 31 of each calendar year. In the event that AISD elects to withdraw from further participation in the TIRZ, the City and the TIRZ agree that AISD shall be paid by the TIRZ an amount equal to the negative financial impact resulting to AISD during the preceding calendar year from its participation in the TIRZ. The City and the TIRZ agree that the TIRZ's obligation to make such payment shall be payable solely from the prior years taxes generated from AISD Tax Increment Participation, plus any investment earnings thereon. The City and the TIRZ agree that all taxes generated from AISD Tax Increment Participation, other than those funds disbursed to AISD for educational facilities, shall be held in a special account of the Tax Increment Fund (the "AISD Suspense Account") for a period of one calendar year. All funds held in the AISD Suspense Account shall not be used, disbursed, pledge or encumbered in any way by the City or the TIRZ for one full calendar year and during which time such funds shall solely be used to reimburse AISD. The TIRZ agrees that 25% of the funds generated from the AISD Tax Increment Participation will be used to fund (i) the acquisition of land for school facilities, (ii) the construction of park and recreation improvements benefiting AISD taxpayers, (iii) the acquisition of land for such park and recreation improvements, (iv) AISD's pro rata share of water, sewer and drainage facilities to serve the school facilities, and (v) other public improvements in the Plan which benefit AISD taxpayers. The TIRZ agrees that 75% of the funds generated from the AISD Tax Increment Participation, without deduction or setoff for costs of collection or any other costs, will be paid to AISD to be used by AISD to construct and operate school facilities within the TIRZ and for any other lawful purpose consistent with the Plan as determined by AISD. Such amounts shall be paid to AISD by the TIRZ within 30 days of the receipt by the TIRZ of the taxes generated from the AISD Tax Increment Participation. The first payment of the AISD Tax Increment Participation shall be for those taxes levied by AISD in the year 1999, and unless AISD terminates earlier, the last payment by AISD is for those taxes levied by AISD in the year 2028. The City shall not adopt an ordinance terminating the TIRZ earlier than the duration of the TIRZ established in City Ordinance No. 891, without the prior consent of AISD, provided that the TIRZ may otherwise terminate by operation of law. A-11 APPENDIX B BOUNDARY MAP OF REINVESTMENT ZONE NO. 2, CITY OF PEARLAND, TEXAS I:13J APPENDIX C FORM OF OPINION OF CO -BOND COUNSEL ALLEN BOONE HUDIPI3.BIES ROBINSON LLP A N D R E W S _ ATTORNEYS AT LAW ATTORNEYS U RT H LlP PHOENIX TOWER 3200 SOUTHWEST FREEWAY SUITE 2600 HOUSTON, TEXAS 77027 TEL (713) 860-6400 FAX (713) 860-6401 abhllp.com 2009 We have acted as Co -Bond Counsel to the Development Authority of Pearland (the "Issuer") in connection with the issuance and sale of the Issuer's Tax Increment Contract Revenue Bonds, Series 2009, in the aggregate principal amount of $ (the "Bonds") pursuant to the terms of a Trust Indenture dated as of November 15, 2004, as supplemented by a First Supplemental Indenture of Trust dated as of October 24, 2005, and a Second Supplemental Indenture of Trust dated as of October 2, 2006 (the "Indenture"), between the Issuer and Wells Fargo Bank, National Association (the "Trustee"), and a Bond Resolution, dated as of 2009 (the "Resolution"). Except as otherwise indicated, terms defined in the Indenture are used in this opinion with the meanings assigned to them in the Indenture. In our capacity as Co -Bond Counsel, we have participated in the preparation of and have examined a transcript containing certified copies of certain proceedings of the Board of Directors of the Issuer, and certain certificates and other documents of representatives of the City of Pearland, Texas (the "City"), Reinvestment Zone Number Two, City of Pearland, Texas (the "Zone"), Alvin Independent School District ("AISD"), Brazoria County, Fort Bend County, the Issuer, the Trustee, and of others. We have relied upon those certificates as to certain factual matters which we have not independently verified. We have also examined such portions of the Constitution and statutes of the State of Texas, and such applicable provisions of the Internal Revenue Code of 1986, as amended (the "Code"), court decisions, regulations and published rulings of the Internal Revenue Service, as we have deemed necessary for the purposes of this opinion. Reference is made to an opinion of even date of the City Attorney of the City with respect to, among other matters, the authority of the City to enter into and perform its obligations under the Tri-Party Agreement, as amended, and the participation agreements with AISD, Brazoria County and Fort Bend County and their authorization, execution, delivery, binding effect and enforceability by and upon the City. that: Based on the foregoing, and subject to the matters set forth below, we are of the opinion C-1 1. The Issuer is duly created and validly existing as a Texas nonprofit local government corporation acting on behalf of the City created pursuant to Chapter 431, Texas Transportation Code, and has the corporate power to adopt the Resolution, enter into and perform the obligations under the Indenture, and issue the Bonds. The transcript of proceedings evidences complete legal authority for the issuance of the Bonds in full compliance with the Constitution and the laws of the State of Texas presently effective. 2. The Indenture and Resolution have been duly authorized by the Issuer, have been duly executed and delivered by the Issuer and constitute valid and binding obligations of the Issuer. By the terms of the Indenture, all of the Issuer's right, title and interest in and to the Pledged Revenues, which include the Contract Tax Increments and the amounts required from time to time to be deposited in or credited to the account of the Debt Service Fund, the Reserve Fund, and the Pledged Revenue Fund created pursuant to the Indenture, together with any investments and reinvestments thereof, have been assigned to the Trustee. 3. The Bonds have been duly authorized, executed, issued and delivered by the Issuer and, are the legal and valid obligations of the Issuer. The Bonds are entitled to the benefits and security of the Indenture. The Bonds are payable by the Issuer out of the Pledged Revenues created by the Indenture and the revenues derived therefrom. 4. The Bonds are limited obligations solely of the Issuer and are not general obligations of the Issuer, the State of Texas, Brazoria County, Fort Bend County, the City, AISD, or any other entity. The Issuer has no authority to levy taxes. 5. Interest on the Bonds is excludable from gross income of the holders thereof for federal income tax purposes under existing law. 6. The Bonds are not "private activity bonds" within the meaning of the Code and interest on the Bonds is not subject to the alternative minimum tax on individuals and corporations. In providing such opinions, we have relied on representations of the Issuer, the City, the Zone, the Issuer's financial advisor, and the Underwriter with respect to matters solely within the knowledge of the Issuer, the City, the Zone, the Issuer's financial advisor, and the Underwriter which we have not independently verified, and have assumed continuing compliance with the covenants in the Indenture and Resolution pertaining to those sections of the Code which affect the exclusion from gross income of interest on the Bonds for federal income tax purposes. In the event that such representations are determined to be inaccurate or incomplete, interest on the Bonds could become includable in gross income the date of their original delivery, regardless of the date on which the event causing such inclusion occurs. Except as stated above, we express no opinion as to any federal, state or local tax consequences resulting from the ownership of, receipt or accrual of, interest on, or acquisition, ownership or disposition of, the Bonds. Owners of the Bonds should be aware that the ownership of tax-exempt obligations may result in collateral federal income tax consequences to financial institutions, property and casualty insurance and life insurance companies, certain S corporations with Subchapter C C-2 earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations, taxpayers owning an interest in a FASIT that holds tax-exempt obligations and individuals otherwise qualifying for the earned income credit. In addition, certain foreign corporations doing business in the United States may be subject to the "branch profits tax" on their effectively -connected earnings and profits (including tax-exempt interest such as interest on the Bonds). We have examined executed Bond numbered I-1. In our opinion, the form of said Bond and its execution is regular and proper. The opinions set forth above are based on existing law, which is subject to change. Such opinions further are based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement these opinions to reflect any facts or circumstances that may hereafter come to our attention or to reflect any changes in any law that may hereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service (the "Service"); rather, such opinions represent our legal judgment based upon our review of existing law and in reliance upon the representations and covenants referenced above that we deem relevant to such opinions. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given whether or not the Service will ,commence an audit of the Bonds. If an audit is commenced, in accordance with its current published procedures, the Service is likely to treat the Issuer as the taxpayer. We observe that the Issuer has covenanted in the Resolutions not to take any action, or omit to take any action within its control, that if taken or omitted, respectively, may result in the treatment of interest on the Bonds as includable in gross income for federal income tax purposes. C-3 APPENDIX D SPECIMEN FINANCIAL GUARANTY INSURANCE POLICY D-1 APPENDIX E [UPDATE]CURRENT PUBLIC SCHOOL FINANCE SYSTEM General The following description of the Texas public school finance system (the "Finance System") includes material provisions of the Reform Legislation (hereinafter defined). For a more complete description of school finance and fiscal management in the State, reference is made to Vernon's Texas Codes Annotated, Education Code, Chapters 41 through 46, as amended. In response to recent litigation challenging the constitutionality of the Finance System, the Texas Legislature (the "Legislature") enacted House Bill 1 ("HB 1"), which made substantive changes in the way the Finance System is funded, as well as other legislation which, among other things, established a special fund in the Texas state treasury to be used to collect new tax revenues that are dedicated under certain conditions for appropriation by the Legislature to reduce taxes levied for school maintenance and operations purposes ("M&O Taxes"), broadened the State business franchise tax, modified the procedures for assessing the State motor vehicle sales and use tax and increased the State tax on tobacco products (HB 1 and other described legislation are collectively referred to herein as the "Reform Legislation"). The Reform Legislation, which generally became effective at the beginning of the 2006-07 fiscal year of each district, made substantive changes to the manner in which the Finance System is funded, but did not modify the basic structure of the Finance System. The changes to the manner in which the Finance System is funded are intended to reduce local M&O Tax rates by one third over two years, with M&O Tax levies declining by approximately I I % in fiscal year 2006-07 and approximately another 22% in fiscal year 2007-08. Additional State funding needed to offset local tax rate reductions must be generated by the modified State franchise, motor vehicle and tobacco taxes or any other revenue source appropriated by the Legislature. The Legislative Budget Board (the "LBB") projected that the Reform Legislation will be underfunded from the Reform Legislation revenue sources by a cumulative amount of $25 billion over fiscal years 2006-07 through 2010-11, although State surpluses were appropriated to offset the revenue shortfall in fiscal year 2006-07 and for the 2008-09 State biennium, and the shortfall could be addressed in future years if the Reform Legislation, particularly the ad valorem tax compression measures of HB 1, should prove to be an economic stimulus for the State or if there is sustained growth in the economy of the State that generates greater State revenues than were originally forecast by the LBB. Under the Finance System, school districts are guaranteed to receive State funding necessary to provide the district the greater of (A) the amount of State and local revenue per student for the district in the 2005-06 fiscal year, (B) the amount of State and local revenue per student the district would have been entitled to for the 2006-07 fiscal year based on the funding elements in place prior to the Reform Legislation using the M&O Tax rate the district adopted for the 2005-06 fiscal year, or (C) the amount of State and local revenue per student the district would have been entitled to for the 2006-07 fiscal year based on the funding elements in place prior to the Reform Legislation using an M&O Tax rate that would allow the district to maintain total revenue per student under the funding elements in place prior to the Reform Legislation. In addition to the greater of (A), (B) or (C), HB 1 provided a $2,500 salary allotment to fund a salary increase for teachers and certain other employees and a high school student allotment of $275 per student in average daily attendance for dropout prevention and college readiness programs. During the 2007 Regular Legislative Session, which convened on January 9, 2007 and adjourned on May 28, 2007, a new funding allotment was created and funded by the Legislature to provide an average $425 salary increase for educators at each school district. State funds appropriated to provide districts the guaranteed amount may only be used for maintenance and operating purposes and not to fund facilities, debt service or other purposes. If a district adopts an M&O Tax rate in any fiscal year below a rate equal to the state compression percentage for the district in that year multiplied by the M&O Tax rate adopted by the district for the 2005-06 fiscal year, the district's guaranteed amount is reduced in a proportionate amount. If a district would receive more State and local revenue from the Tier One and Tier Two allotments and wealth equalization than the guaranteed amount described above, the amount of State funding will be reduced by the amount of such surplus over the guaranteed amount described above. In general terms, funds are allocated to districts in a manner that requires districts to "compress" their tax rates in order to receive increased State funding at a level that equalizes local tax wealth at the 88th percentile yield for the 2006-07 fiscal year. A basic component of the funding formulas is the "state compression percentage". The state compression percentage is 88.67% for fiscal year 2006-07 and 66.67% for fiscal year 2007-08. For fiscal year E-1 2008-09 and thereafter, the Commissioner is required to determine the state compression percentage for each fiscal year based on the percentage by which a district is able to reduce its M&O Tax rate for that year, as compared to such district's adopted M&O Tax rate for the 2005-06 fiscal year, as a result of State funds appropriated for distribution for the current fiscal year from the property tax relief fund established under the Reform Legislation, or from any other funding source made available by the Legislature for school district property tax relief. State Funding for Local School Districts To limit disparities in school district funding abilities, the Finance System (1) compels districts with taxable property wealth per weighted student higher than the "equalized wealth level" to reduce their wealth to such amount or to divert a portion of their tax revenues to other districts as described below and (2) provides various State funding allotments, including a basic funding allotment and other allotments for "enrichment" of the basic program, for debt service tax assistance and for new facilities construction. The Finance System provides for (1) State guaranteed basic funding allotments per student ("Tier One") and (2) State guaranteed revenues per student for each cent of local tax effort to provide operational funding for an "enriched" educational program ("Tier Two"). In addition, to the extent funded by the Legislature, the Finance System includes, among other funding allotments, an allotment to subsidize existing debt service up to certain limits ("EDA" ), the Instructional Facilities Allotment ("IFA"), and an allotment to pay operational expenses associated with the opening of a new instructional facility. Tier One, Tier Two, EDA and IFA are generally referred to as the Foundation School Program. Tier One and Tier Two allotments represent the State funding share of the cost of maintenance and operations of school districts and supplement local ad valorem M&O Taxes levied for that purpose. Tier One and Tier Two allotments and prior year IFA allotments are generally required to be funded each year by the Legislature. EDA and future year IFA allotments supplement local ad valorem taxes levied for debt service on bonds issued by districts to construct, acquire and improve facilities and are generally subject to appropriation by the Legislature. State funding allotments may be altered and adjusted to penalize school districts with high administrative costs and, in certain circumstances, to account for shortages in State appropriations or to allocate available funds in accordance with wealth equalization goals. Tier One allotments are intended to provide all districts a basic program of education rated academically acceptable and meeting other applicable legal standards. If needed, the State will subsidize local tax receipts at a tax rate of $.86 per $100 of property value to ensure that the cost to a district of the basic program is met. Tier Two allotments are intended to guarantee each school district that is not subject to the wealth transfer provisions described below an opportunity to supplement that program at a level of its own choice, however Tier Two allotments may not be used for the payment of debt service or capital outlay. The cost of the basic program is based on an allotment per student known as the "Tier One Basic Allotment." The Tier One Basic Allotment is adjusted for all districts by a cost -of - living factor known as the "cost of education index." In addition, a district -size adjustment further adjusts the Tier One Basic Allotment for districts that have less than 5,000 students in average daily attendance. For the 2006-07 fiscal year the Tier One Basic Allotment was funded at $2,748 based upon a guaranteed yield of $31.95 for each cent of tax effort. For fiscal year 2007-08, the Tier One Basic Allotment is $3,135 based upon a guaranteed yield of $36.45 for each cent of tax effort. Tier Two consists of State equalization funding for local M&O Tax levies that exceed $0.86. For fiscal year 2006-07, State funding to equalize local M&O Tax levies above $0.86, up to a district's compressed rate, was funded at a guaranteed yield of $31.95 per student in weighted average daily attendance ("WADA") for each cent of tax effort; any amount above a district's compressed rate up to $0.04 was funded at a guaranteed yield of $41.25 per WADA for each cent of tax effort; and any tax effort associated with a tax approved by voters at a roll back election was funded at a guaranteed yield of $31.95 per WADA for each cent of tax effort above a district's compressed rate plus $0.04. For fiscal year 2007-08, these three levels of Tier Two are funded at $36.45, $46.94 and $31.95, respectively. See "CURRENT PUBLIC SCHOOL FINANCE SYSTEM - General" for a discussion of the state compression percentage. The IFA guarantees each school district a specified amount per student (the "IFA Guaranteed Yield") in State and local funds for each cent of tax effort to pay principal of and interest on eligible bonds issued to construct, acquire, renovate or improve instructional facilities. To receive an IFA, a school district must apply to the Commissioner in accordance with rules adopted by the Commissioner before issuing the bonds to be paid with State assistance. The total amount of debt service assistance over a biennium for which a district may be awarded is limited to the lesser of (1) the actual debt service payments made by the district in the biennium in which the bonds are issued; or (2) the greater of (a) $100,000 or (b) $250 multiplied by the number of students in average daily attendance. The IFA is also available for lease -purchase agreements and refunding bonds meeting certain prescribed conditions. If the total E-2 amount appropriated by the State for IFA in a year is less than the amount of money school districts applying for IFA are entitled to for that year, districts applying will be ranked by the Commissioner by wealth per student, and State assistance will be awarded to applying districts in ascending order of adjusted wealth per student beginning with the district with the lowest adjusted wealth per student. In determining wealth per student for purposes of IFA, adjustments are made to reduce wealth for certain fast growing districts. Once a district receives an IFA award for bonds, it is entitled to continue receiving State assistance without reapplying to the Commissioner and the guaranteed level of State and local funds per student per cent of tax effort applicable to the bonds may not be reduced below the level provided for the year in which the bonds were issued. In 2007, the Legislature appropriated funds for outstanding school district bonds that qualified in prior budget cycles for IFA ,allotments and added funding for qualified debt to be issued for instructional facilities in the State's 2008-09 fiscal biennium, however, the Texas Education Agency has indicated that it intends to reserve all such new appropriation for the second year of the biennium. State financial assistance is provided for certain existing debt issued by school districts (referred to herein as EDA) to produce a guaranteed yield (the "EDA Yield"), which for the 2006-07 State Biennium is $35.00 (subject to adjustment as described below) in State and local revenue per student for each cent of debt service tax levy; however, for bonds that became eligible for EDA funding after August 31, 2001, and prior to August 31, 2005, EDA assistance for such eligible bonds may be less than $35 in revenue per student for each cent of debt service tax, as a result of certain administrative delegations to the Commissioner under State law. Effective September 1, 2003, the portion of the local debt service rate that has qualified for equalization funding by the State has been limited to the first 29 cents of debt service tax or a greater amount for any year provided by appropriation by the Legislature. In general, a district's bonds are eligible for the allotment if, during the 2004-05 fiscal year, the district (i) made payments on such bonds or (ii) levied and collected debt service taxes for the payment of principal and interest on such bonds. In 2007, the Legislature appropriated funds for outstanding school district bonds that qualified in prior budget cycles for EDA allotments, provided additional EDA funding for the State's 2008-09 fiscal biennium for new bonds that qualify for the allotment and rolled forward the eligibility date from 2004-05 to 2006-07 fiscal year. A district may not receive EDA funding for the principal and interest on a series of otherwise eligible bonds for which the district receives overlapping IFA funding. A district may also qualify for an allotment for operational expenses associated with opening new instructional facilities. This funding source may not exceed $25,000,000 in one school year on a State-wide basis. For the first school year in which students attend a new instructional facility, a district is entitled to an allotment of $250 for each student in average daily attendance at the facility. For the second school year in which students attend that facility, a district is entitled to an allotment of $250 for each additional student in average daily attendance at the facility. The new facility operational expense allotment will be deducted from wealth per student for purposes of calculating a district's Tier Two State funding. Local Revenue Sources - Property Tax Authority The primary source of local funding for school districts is ad valorem taxes levied against the local tax base. The former provision of the Education Code, Section 45.003, that in general limited the M&O Tax rate to $1.50 per $100 of taxable assessed value, was replaced with a formula using the state compression percentage so that the maximum tax rate that may be adopted by a district in any fiscal year is limited based on the amount of State funds to be received by the District in that year. For the 2006-07 and 2007-08 fiscal years, districts may generate additional local funds by raising their M&O Tax rate by $0.04 above the compressed tax rates (without taking into account changes in taxable valuation) without voter approval, and such amounts will generate equalized funding dollars from the State under the Tier Two program. In fiscal year 2008-09 and thereafter, districts may, in general, increase their tax rate by an additional two or more cents and receive State equalization funds for such taxing effort so long as the voters approve such tax rate increase. Many school districts, however, voted their M&O Tax under prior law and may be subject to other limitations on the M&O Tax rate. School districts are also authorized to levy a bond debt service tax that may be unlimited in rate. The governing body of a school district cannot adopt an annual tax rate which exceeds the district's "rollback tax rate" without submitting such proposed tax rate to the voters at a referendum election. See "Public Hearing and Rollback Tax Rate" herein. Wealth Transfer Provisions Under the Finance System, districts are required, with certain limited exceptions, to effectively adjust taxable property wealth per weighted student ("wealth per student") for each school year to no greater than the "equalized wealth level", determined in accordance with a formula set forth in the Reform Legislation. A district may E-3 effectively reduce its wealth per student either by reducing the amount of taxable property within the district relative to the number of weighted students, by transferring revenue out of the district or by exercising any combination of these remedies. The wealth level that required wealth reduction measures for fiscal year 2006-07 was $319,500 per student in average daily attendance. For 2007-08 that wealth level has been increased to $364,500 per student in average daily attendance with respect to that portion of a district's M&O Tax effort that does not exceed its compressed tax rate, and remains at $319,500 with respect to that portion of a district's local tax effort that is beyond its compressed rate plus $.04. Property wealthy districts may also be able to levy up to an additional four cents (six cents beginning with fiscal year 2009-10) per $100 of assessed valuation of M&O Taxes above their compressed rate to provide revenue that is not subject to recapture. A district has four options to reduce its wealth per student so that it does not exceed the equalized wealth level: (1) A district may consolidate by agreement with one or more districts to form a consolidated district. All property and debt of the consolidating districts vest in the consolidated district. (2) Subject to approval by the voters of all affected districts, a district may consolidate by agreement with one or more districts to form a consolidated taxing district solely to levy and distribute either M&O Taxes or both M&O Taxes and debt service taxes. (3) A district may detach property from its territory for annexation by a property -poor district. (4) A district may educate students from other districts who transfer to the district without charging tuition to such students. A district has three options to transfer tax revenues from its excess property wealth. First, a district with excess wealth per student may purchase "attendance credits" by paying the tax revenues to the State for redistribution under the Foundation School Program. Second, it can contract to disburse the tax revenues to educate students in another district, if the payment does not result in effective wealth per student in the other district to be greater than the equalized wealth level. Both options to transfer property wealth are subject to approving elections by the transferring district's qualified voters. Third, a wealthy district may reduce its wealth by paying tuition to a non -wealthy district for the education of students that reside in the wealthy district. A district may not adopt a tax rate until its effective wealth per student is the equalized wealth level or less. If a final court decision holds any of the preceding permitted remedial options unlawful, districts may exercise any remaining option under a revised schedule approved by the Commissioner. If a district fails to exercise a permitted option, the Commissioner must reduce the district's property wealth per student to the equalized wealth level by detaching certain types of property from the district and annexing the property to a property -poor district or, if necessary, consolidate the district with a property -poor district. Provisions governing detachment and annexation of taxable property by the Commissioner do not provide for assumption of any of the transferring district's existing debt. Public Hearing And Rollback Tax Rate In setting its annual tax rate, the governing body of a school district generally cannot adopt a tax rate exceeding the district's "rollback tax rate" without approval by a majority of the voters voting at an election approving the higher rate. For the 2006-07 fiscal year, the rollback tax rate for a school district is the sum of (1) 88.67% of the maintenance and operations tax rate adopted by the district for the 2005-06 fiscal year, (2) the rate of $0.04, and (3) the district's current debt rate. For the 2007-08 fiscal year and thereafter, the rollback tax rate for a school district is the lesser of (A) the sum of (1) the product of the district's "state compression percentage" for that year multiplied by $1.50, (2) the rate of $0.04, (3) any rate increase above the rollback tax rate in prior years that were approved by voters, and (4) the district's current debt rate, or (B) the sum of (1) the district's effective maintenance and operations tax rate, (2) the product of the district's state compression percentage for that year multiplied by $0.06; and (3) the district's current debt rate (see "CURRENT PUBLIC SCHOOL FINANCE SYSTEM - General" for a description of the "state compression percentage"). For tax years 2003 through 2008, the rollback tax rate includes the tax rate that, applied to current tax values, would impose taxes in an amount sufficient for the district to fund its minimum local effort requirement for employee health care coverage (see "CURRENT PUBLIC SCHOOL FINANCE SYSTEM"). The "effective maintenance and operations tax rate" for a school district is the tax rate that, applied to the current tax values, would provide local maintenance and operating funds, when added to State funds to be distributed to the district pursuant to Chapter 42 of the Texas Education Code for the school year beginning in the current tax year, in the same amount as would have been available to the district in the preceding year if the funding elements of wealth equalization and State funding for the current year had been in effect for the preceding year. E-4 M By each September 1 or as soon thereafter as practicable, the Board of Trustees adopts a tax rate per $100 taxable value for the current year. Before adopting its annual tax rate, a public meeting must be held for the purpose of adopting a budget for the succeeding year. A notice of public meeting to discuss budget and proposed tax rate must be published in the time, format and manner prescribed in Section 44.004 of the Texas Education Code. Section 44.004(e) of the Texas Education Code provides that a person who owns taxable property in a school district is entitled to an injunction restraining the collection of taxes by the district if the district has not complied with such notice requirements or the language and format requirements of such notice as set forth in Section 44.004(b), (c) and (d) and if such failure to comply was not in good faith. Section 44.004(e) further provides the action to enjoin the collection of taxes must be filed before the date the district delivers substantially all of its tax bills. Furthermore, Section 26.05 of the Property Tax Code that provides the governing body of a taxing unit is required to adopt the annual tax rate for the unit before the later of September 30 or the 60th day after the date the certified appraisal roll is received by the taxing unit, and a failure to adopt a tax rate by such required date will result in the tax rate for the taxing unit for the tax year to be the lower of the effective tax rate calculated for that tax year or the tax rate adopted by the taxing unit for the preceding tax year. The tax rate consists of two components: (1) a rate for funding of maintenance and operation expenditures, and (2) a rate for debt service. E-5 APPENDIX F EXCERPTS OF THE AUDITED FINANCIAL STATEMENTS OF THE CITY OF PEARLAND RELATING TO THE AUTHORITY F-1