$27,765,000 BEXAR COUNTY HOUSING FINANCE CORPORATION SENIOR LIVING REVENUE BONDS $845,000 (The Inn at Los Patios. Taxable Series 2011A-T

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1 NEW ISSUE Book-Entry Only RATING: S&P Series 2011A A Series 2011A-T A Series 2011B BBB SEE RATINGS herein. In the opinion of Fulbright & Jaworski L.L.P., Bond Counsel, assuming continuing compliance by the Issuer (defined below) after the date of initial delivery of the Tax-Exempt Bonds with certain covenants described in the Indenture, Loan Agreement, and Regulatory Agreement and subject to the matters described herein under "TAX MATTERS" herein, interest on the Tax-Exempt Bonds for federal income tax purposes under existing statutes, regulations, published rulings, and court decisions (1) will be excludable from the gross income of the owners thereof for federal income tax purposes under section 103 of the Internal Revenue Code of 1986, as amended (the "Code') to the date of initial delivery of the Tax-Exempt Bonds and (2) will not be included in computing the alternative minimum taxable income of individuals or, except as described herein, corporations. Interest on the Series 2011A-T Bonds is not excludable from gross income under Section 103 of the Code for federal income tax purposes. See "TAX MATTERS herein. $23,600,000 (The Inn at Los Patios Apartments Project) Series 2011A $27,765,000 BEXAR COUNTY HOUSING FINANCE CORPORATION SENIOR LIVING REVENUE BONDS $845,000 (The Inn at Los Patios Apartments Project) Taxable Series 2011A-T $3,320,000 (The Inn at Los Patios Apartments Project) Subordinate Series 2011B Maturity Dates, Principal Amounts, Interest Rates, Prices and CUSIPs Shown on the Inside Cover The Bexar County Housing Finance Corporation (the Issuer ) is issuing its $23,600,000 Senior Living Revenue Bonds (The Inn at Los Patios Apartments Project) Series 2011A (the Series 2011A Bonds ), $845,000 Senior Living Revenue Bonds (The Inn at Los Patios Apartments Project) Taxable Series 2011A-T (the Series 2011A-T Bonds ) and $3,320,000 Senior Living Revenue Bonds (The Inn at Los Patios Apartments Project) Subordinate Series 2011B (the Series 2011B Bonds and, together with the Series 2011A Bonds and the Series 2011A-T Bonds, the Bonds ). The Series 2011A Bonds and the Series 2011A-T Bonds are sometimes referred to herein together as the Senior Bonds. The Series 2011B Bonds are sometimes referred to herein as the Subordinate Bonds. The principal of and premium, if any, and interest on the Bonds are payable at the designated corporate trust office of The Bank of New York Mellon Trust Company, N.A., as Trustee (the Trustee ), in Jacksonville, Florida. Interest on the Bonds will accrue from the Dated Date and is payable on January 1 and July 1 of each year, commencing July 1, 2012 until stated maturity or prior redemption. The Bonds are being issued only as fully registered bonds in the denominations of $5,000 each and integral multiples thereof. The Bonds will be issued in bookentry form only under a global book-entry system operated by The Depository Trust Company, New York, New York ( DTC ), and purchasers will not be entitled to receive certificates representing their Bonds for so long as the global book-entry system is in effect. See THE BONDS-Book Entry-Only System. Principal of and interest on the Bonds will be paid by the Trustee directly to DTC, as the registered owner thereof. Any purchaser as a beneficial owner of a Bond must maintain an account with a broker or dealer who is, or acts through, a DTC Participant to receive payment of the principal of and interest on such Bond. The Bonds are subject to redemption prior to stated maturity as more fully described herein. See THE BONDS - Mandatory Redemption and Optional Redemption herein. The Bonds are being issued pursuant to and secured by a Trust Indenture dated as of December 1, 2011 (the Indenture ) between the Issuer and the Trustee. The proceeds of the Bonds will be loaned to Canton II, Inc., a Texas nonprofit corporation (the Borrower ), to (i) finance the cost of the acquisition by the Borrower of a 167-unit senior living rental housing project located in San Antonio, Texas (the Project ), including the building, furniture, fixtures and equipment comprising such facility and including the real property upon which such building and other items are located, (ii) pay the costs of issuance of the Bonds, and (iii) fund accounts for the Senior Bonds and the Subordinate Bonds, respectively, in the Debt Service Reserve Fund. THE BONDS AND THE INTEREST THEREON ARE LIMITED OBLIGATIONS OF THE ISSUER PAYABLE SOLELY FROM THE TRUST ESTATE ESTABLISHED UNDER THE INDENTURE. THE BONDS WILL CONSTITUTE A VALID CLAIM OF THE RESPECTIVE OWNERS THEREOF AGAINST THE TRUST ESTATE, WHICH IS PLEDGED TO SECURE THE PAYMENT OF THE PRINCIPAL OF, PREMIUM, IF ANY, AND INTEREST ON THE BONDS, AND WHICH IS TO BE UTILIZED FOR NO OTHER PURPOSE, EXCEPT AS EXPRESSLY AUTHORIZED IN THE INDENTURE. THE BONDS DO NOT CONSTITUTE, WITHIN THE MEANING OF ANY STATUTORY OR CONSTITUTIONAL PROVISION, AN INDEBTEDNESS, AN OBLIGATION OR A LOAN OF CREDIT OF THE STATE OF TEXAS (THE "STATE"), BEXAR COUNTY, TEXAS (THE "COUNTY"), THE ISSUER OR ANY OTHER MUNICIPALITY, COUNTY OR OTHER MUNICIPAL OR POLITICAL CORPORATION OR SUBDIVISION OF THE STATE. THE BONDS DO NOT CREATE A MORAL OBLIGATION ON THE PART OF THE STATE, THE COUNTY OR ANY OTHER MUNICIPALITY, COUNTY OR OTHER MUNICIPAL OR POLITICAL CORPORATION OR SUBDIVISION OF THE STATE, AND EACH OF SUCH ENTITIES IS PROHIBITED BY THE ACT FROM MAKING ANY PAYMENTS WITH RESPECT TO THE BONDS. THE ISSUER HAS NO TAXING POWER. INVESTMENT IN THE BONDS INVOLVES A SIGNIFICANT DEGREE OF RISK AND EACH PROSPECTIVE INVESTOR SHOULD CONSIDER ITS FINANCIAL CONDITION AND THE RISKS INVOLVED TO DETERMINE THE SUITABILITY OF INVESTING IN THE BONDS. SEE RISK FACTORS AND INVESTMENT CONSIDERATIONS HEREIN. The Bonds are payable solely from and are secured by a pledge and assignment of the Trust Estate (as defined in the Indenture), including (i) Loan Payments made by the Borrower pursuant to the Loan Agreement dated as of December 1, 2011, among the Issuer, the Borrower and the Trustee (the Loan Agreement or the Agreement ), (ii) the Loan Agreement, the Series 2011 Notes and the Mortgage (each as defined in the Indenture) (except for Reserved Rights of the Issuer), (iii) all money and securities from time to time held by the Trustee under the terms of the Indenture (except as specifically set forth therein), and (iv) any and all other real and personal property from time to time thereafter by delivery or by writing of any kind, pledged, assigned or transferred as and for additional security for the Bonds pursuant to the Indenture. The Loan Agreement is secured by the Mortgage, which includes a pledge of Project Revenues (as defined in the Indenture). The Series 2011B Bonds are subordinate to the Senior Bonds in the manner described herein. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS herein. The Bonds are offered when, as, and if issued by the Issuer, subject to prior sale, withdrawal or modification of the offer without notice and subject to the approval of legality by the Attorney General of the State of Texas and the approval of certain legal matters by Fulbright & Jaworski L.L.P., San Antonio, Texas, Bond Counsel. Certain legal matters will be passed upon for the Issuer by its counsel, Fulbright & Jaworski L.L.P., San Antonio, Texas; for the Borrower by its counsel, Gary Pridavka PC, Dallas, Texas and by its special tax counsel McGuireWoods LLP, Baltimore, Maryland; and for the Underwriters by Peck, Shaffer & Williams LLP, Cincinnati, Ohio. It is expected that delivery of the Bonds will be made against payment therefor through the facilities of DTC on or about December 15, This cover page contains limited information for reference only. It is not a summary of the issue. The entire Official Statement, including the Appendices, must be read to make an informed investment decision. Date: December 8, 2011 BB&T Capital Markets M.E. Allison & Co., Inc.

2 MATURITIES, PRINCIPAL AMOUNTS, INTEREST RATES, PRICES AND CUSIP NUMBERS SERIES 2011A BONDS Maturity Date Principal Amount Interest Rate Price CUSIP 1 January 1, , 3 $ 4,210, % AA4 January 1, , 3 4,785, % AB2 January 1, , 3 3,360, % AF3 January 1, , 3 11,245, % AC0 SERIES 2011A-T BONDS Maturity Date Principal Amount Interest Rate Price CUSIP 1 January 1, $845, % AD8 SERIES 2011B BONDS Maturity Date Principal Amount Interest Rate Price CUSIP 1 January 1, , 3 $3,320, % AE6 (Interest to accrue on each series of Bonds from December 1, 2011) 1 CUSIP numbers are included solely for the convenience of the owners of the Bonds. CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, managed by Standard & Poor s Financial Services LLC on behalf of The American Bankers Association. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. None of the Underwriters, the Issuer, nor the Borrower is responsible for the selection or correctness of the CUSIP numbers set forth herein. 2 The Bonds are term bonds and are subject to mandatory sinking fund redemption as provided in THE BONDS Mandatory Sinking Fund Redemption herein. The Bonds are also subject to Mandatory Redemption as provided in THE BONDS Mandatory Redemption herein. 3 The Bonds are subject to optional redemption prior to stated maturity as provided in THE BONDS Optional Redemption herein.

3 USE OF INFORMATION IN OFFICIAL STATEMENT For purposes of compliance with Rule 15c2-12 of the United States Securities and Exchange Commission, as amended (the Rule ), this document constitutes an official statement of the Issuer with respect to the Bonds that has been deemed final by the Issuer as of its date except for the omission of no more than the information permitted by the Rule. No dealer, broker, salesman, or other person has been authorized by the Borrower, the Issuer, or the Issuer s Financial Advisor to give any information or to make any representation with respect to the Bonds, other than as contained in this Official Statement, and if given or made, such other information or representations must not be relied upon as having been authorized by any of the foregoing. This Official Statement does not constitute an offer to sell or a solicitation of an offer to buy, nor shall there be any sale of the Bonds by any person, in any jurisdiction in which it is unlawful for such person to make such offer, solicitation, or sale. The information set forth herein has been obtained from the Borrower and other sources which are believed to be reliable but such information is not guaranteed as to accuracy or completeness and is not to be construed as a representation, promise, or guarantee of the Borrower, Issuer, or the Issuer s Financial Advisor. This Official Statement contains, in part, estimates and matters of opinion which are not intended as statement of fact, and no representation is made as to the correctness of such estimates and opinions, or that they will be realized. The information regarding DTC has been obtained from DTC, but is not guaranteed as to accuracy or completeness by the Borrower. None of the Issuer, the Borrower, or the Issuer s Financial Advisor make representations or warranty with respect to the information contained in this Official Statement regarding DTC or its Book-Entry-Only System. The Underwriters have provided the following sentence for inclusion in this Official Statement: The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall under any circumstances create any implication that there has been no change in the information or opinions set forth herein after the date of this Official Statement. This Official Statement does not constitute a contract between the Issuer, the Borrower or the Underwriters and any one or more of the purchasers or registered Holders of the Bonds. This Official Statement contains forward-looking information within the meaning of the federal securities laws. The forward-looking information includes statements concerning the Borrower s outlook for the future, as well as other statements of beliefs, future plans and strategies or anticipated events, and similar expressions concerning matters that are not historical facts. Forward-looking information and statements are subject to many risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, the statements. These risks and uncertainties include the availability and amount of governmental reimbursements, appropriations, the competitive environment and related market conditions, operating efficiencies, access to capital, the cost of compliance with environmental and health standards, litigation and other risks and uncertainties described herein under RISK FACTORS. Readers are cautioned not to place undue reliance on forward-looking statements because actual results may differ materially from those expressed in, or implied by, the statements. Any forwardlooking statement made in this Official Statement speaks only as of the date of such statement, and the Borrower, the Issuer, and the Issuer s Financial Advisor undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. Investors should read the entire Official Statement, including the Schedule and all Appendices attached hereto, to obtain information essential to making an informed investment decision. The Bonds have not been registered under the Securities Act of 1933, and the Indenture has not been qualified under the Trust Indenture Act of 1939, in reliance on exemptions contained in such Acts. THE BONDS HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION. THE REGISTRATION, QUALIFICATION OR EXEMPTION OF THE BONDS IN ACCORDANCE WITH THE APPLICABLE SECURITIES LAW PROVISIONS OF THE JURISDICTIONS IN WHICH THESE BONDS HAVE BEEN REGISTERED, QUALIFIED OR EXEMPTED SHOULD NOT BE REGARDED AS A RECOMMENDATION THEREOF. NEITHER THESE JURISDICTIONS NOR ANY OF THEIR AGENCIES HAVE GUARANTEED OR PASSED UPON THE SAFETY OF THE BONDS AS AN INVESTMENT, UPON THE PROBABILITY OF ANY EARNINGS THEREON OR UPON THE ACCURACY OR ADEQUACY OF THIS OFFICIAL STATEMENT. IN CONNECTION WITH THE OFFERING OF THE BONDS, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME, AND IF CONTINUED, MAY BE RECOMMENCED AT ANY TIME.

4 THE INN AT LOS PATIOS Community Entrance Library / Sitting Room

5 Dining Room Swimming Pool

6 FINANCING PARTICIPANTS ISSUER OF THE BONDS BEXAR HOUSING FINANCE CORPORATION San Antonio, Texas Issuer s Financial Advisor SOUTHWESTERN CAPITAL MARKETS, INC. San Antonio, Texas Bond & Issuer Counsel FULBRIGHT & JAWORKSI L.L.P. San Antonio, Texas BORROWER CANTON II, INC. Frisco, Texas Borrower s Counsel 501(c)(3) MCGUIREWOODS LLP Baltimore, Maryland Borrower s Counsel General GARY PRIDAVKA Dallas, Texas PROPERTY & ASSET MANAGER WINDRIVER COMPANIES Duncanville, Texas SENIOR MANAGING UNDERWRITER BB&T CAPITAL MARKETS The Woodlands, Texas CO-MANAGING UNDERWRITER M.E. ALLISON & CO., INC. San Antonio, Texas STRUCTURING AGENT MERCHANT CAPITAL, L.L.C. Montgomery, Alabama UNDERWRITER S COUNSEL PECK, SHAFFER & WILLIAMS LLP Cincinnati, Ohio TRUSTEE BANK OF NEW YORK MELLON TRUST COMPANY, N.A. Jacksonville, Florida TRUSTEE COUNSEL CRAWFORD LEWIS, LLC Baton Rouge, Louisiana

7 TABLE OF CONTENTS Page INTRODUCTORY STATEMENT... 1 THE BONDS... 5 General Description... 5 Transfer and Exchange of the Bonds... 5 Book-Entry-Only System... 6 Revision of Book-Entry-Only System... 7 Mandatory Redemption of Bonds... 8 Optional Redemption of Bonds... 8 Mandatory Sinking Fund Redemption... 8 Selection of Bonds to be Redeemed Notice of Redemption Payment of Redemption Price No Partial Redemption After Default SECURITY AND SOURCES OF PAYMENT FOR THE BONDS Limited Obligations of Issuer Repayment of Loan The Mortgage Operation of the Project Rate Covenant Flow of Project Revenues Revenue Fund Debt Service Reserve Fund Operating Fund Operations and Maintenance Reserve Fund Insurance and Tax Escrow Fund Repair and Replacement Fund Administration Fund Surplus Fund No Credit Enhancement Facility Approval of Consultants Other Covenants of the Borrower Relationship Among Series Issuance of Additional Bonds THE ISSUER THE BORROWER AND THE PROJECT The Borrower The Emmaus Calling, Inc The Project Occupancy Limitation on Obligations of the Borrower The Manager The Asset Manager Relationship of the Manager and the Asset Manager Prior Operating History Pro Forma Financial Projection Physical Needs Assessment Real Estate Taxes i

8 Environmental Assessment Restrictive Covenants Insurance APPRAISAL ESTIMATED SOURCES AND USES OF FUNDS DEBT SERVICE REQUIREMENTS RISK FACTORS AND INVESTMENT CONSIDERATIONS Limited Obligations of Issuer Limited Repayment Obligations of Borrower; Security for Repayment The Borrower and Related Parties; Conflicts of Interest Future Project Revenues and Expenses Subordination of Series 2011B Bonds Risks of Real Estate Investment Marketing and Management Effect of Increases in Operating Expenses Project Risks Appraisal Financial Projections Limitation on Acceleration of the Bonds Risk of Early Redemption Risk of Loss Upon Redemption Specific Tax Covenants of Borrower and Rental Restrictions Taxation of the Tax-Exempt Bonds Federal Income Tax Matters; 501(c)(3) Status of Borrower Possible Consequence of Tax Compliance Audit Incurrence of Additional Indebtedness Debt Service Reserve Fund Bankruptcy of the Borrower Enforceability of Remedies; Prior Claims Secondary Market and Prices Credit Ratings Environmental Conditions Insurance; Uninsured Losses Other Possible Risk Factors Summary LITIGATION Issuer Borrower APPROVAL OF LEGAL MATTERS TAX MATTERS Tax-Exempt Bonds Tax Accounting Treatment of Discount or Premium on Certain Bonds RATINGS UNDERWRITING STRUCTURING AGENT FINANCIAL ADVISOR CONTINUING DISCLOSURE MISCELLANEOUS ii

9 Signature Page... S-1 APPENDIX A DEFINITIONS OF CERTAIN TERMS... A-1 APPENDIX B SUMMARIES OF CERTAIN PROVISIONS OF THE PRINCIPAL DOCUMENTS... B-1 APPENDIX C FORM OF BOND COUNSEL OPINIONS... C-1 APPENDIX D PRO FORMA FINANCIAL PROJECTIONS... D-1 APPENDIX E COMPILATION REPORT... E-1 APPENDIX F SELECTED MARKET AREA DATA AND ANALYSIS... F-1 iii

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11 $23,600,000 (The Inn at Los Patios Apartments Project) Series 2011A Introduction OFFICIAL STATEMENT relating to the original issuance of $27,765,000 Bexar County Housing Finance Corporation Senior Living Revenue Bonds $845,000 (The Inn at Los Patios Apartments Project) Taxable Series 2011A-T INTRODUCTORY STATEMENT $3,320,000 (The Inn at Los Patios Apartments Project) Subordinate Series 2011B This introduction is not a summary of this Official Statement. It is only a brief description of and guide to, and is qualified by, more complete and detailed information contained in the entire Official Statement, including the cover page and Appendices hereto, and the documents summarized or described herein. A full review should be made of the entire Official Statement. The offering of Bonds to potential investors is made only by means of the entire Official Statement. This Official Statement and the Appendices attached hereto contain descriptions of, among other matters, the Bonds, the Borrower, the Project, the Manager, the Asset Manager, the Indenture, the Loan Agreement, the Mortgage, the Management Agreement, the Regulatory Agreement and the Continuing Disclosure Agreement. Such descriptions and information do not purport to be comprehensive or definitive. All references herein to any agreements are qualified in their entirety by reference to such agreements and documents, and all references herein to the Bonds are qualified in their entirety by reference to the forms thereof included in the Indenture. Copies of such agreements and all other documents referenced herein are available to the recipient of this Official Statement during the initial offering period by contacting an Underwriter. This Official Statement speaks only as of its date, and the information contained herein is subject to change. A copy of the Final Official Statement pertaining to the Bonds will be deposited with the Municipal Securities Rulemaking Board through its Electronic Municipal Market Access (EMMA) system. See CONTINUING DISCLOSURE OF INFORMATION herein for a description of the Borrower s undertaking to provide certain information on a continuing basis. Purpose of this Financing The Bonds are being issued to (i) finance $23,600,000 to fund the cost of the acquisition by the Borrower of a 167-unit senior living rental housing project located in San Antonio, Texas (the Project ), including the building, furniture, fixtures and equipment comprising such facility and including the real property upon which such building and other items are located, (ii) pay the costs of issuance of the Bonds, and (iii) fund accounts for the Senior Bonds and the Subordinate Bonds, respectively, in the Debt Service Reserve Fund. See the caption SECURITY AND SOURCES OF PAYMENT FOR THE BONDS and ESTIMATED SOURCES AND USES OF FUNDS. Pursuant to the Appraisal Report dated July 7, 2011 prepared by Butler Burgher Group, LLC (the Appraisal ) the total value of the Project, as exempt from property tax is $27,500,000. During the initial offering period, the full Appraisal will be provided to any prospective purchaser upon request to one of the Underwriters. See APPRAISAL herein and SELECTED MARKET AREA DATA AND ANALYSIS in APPENDIX F hereto. Purpose of this Official Statement This Official Statement, including the cover page and the Appendices hereto, is provided to furnish information in connection with the original issuance by the Bexar County Housing Finance Corporation (the Issuer ) of its $23,600,000 Senior Living Revenue Bonds (The Inn at Los Patios Apartments Project) Series 2011A 1

12 (the Series 2011A Bonds ), $845,000 Senior Living Revenue Bonds (The Inn at Los Patios Apartments Project) Taxable Series 2011A-T and $3,320,000 Senior Living Revenue Bonds (The Inn at Los Patios Apartments Project) Subordinate Series 2011B (the Series 2011B Bonds and together with the Series 2011A Bonds and the Series 2011A-T Bonds, the Series 2011 Bonds or the Bonds ). The Series 2011A Bonds and the Series 2011A-T Bonds are sometimes referred to herein together as the Senior Bonds and the Series 2011B Bonds are sometimes referred to herein as the Subordinate Bonds. The Series 2011A Bonds and the Series 2011B Bonds are sometimes referred to herein together as the Tax-Exempt Bonds. For the definitions of certain other terms used in this Official Statement and not otherwise defined herein, see APPENDIX A DEFINITIONS OF CERTAIN TERMS hereto. THE SERIES 2011B BONDS ARE SUBORDINATE IN BOTH RIGHT OF PAYMENT AND SECURITY TO THE SERIES 2011A BONDS AND THE SERIES 2011A-T BONDS. The Issuer The Issuer is a Texas public, nonprofit housing finance corporation created and existing under the Texas Housing Finance Corporation Act (the Act ). The Issuer is authorized by the Act to issue bonds for the purpose of providing multifamily residential housing for persons of low or moderate income within Bexar County, Texas (the County ). See THE ISSUER herein. The Bonds The Bonds are to be issued pursuant to the provisions of Chapter 394, Texas Local Government Code, as amended (the Act ), and a Trust Indenture dated as of December 1, 2011 (the Indenture ), between the Issuer and The Bank of New York Mellon Trust Company, N.A., Jacksonville, Florida, as Trustee (the Trustee ) and a resolution of the Issuer expected to be adopted on December 6, 2011, which resolution will authorize the issuance of the Bonds in the original aggregate principal amount of not to exceed $28,000,000. The Bonds will be issued in the amounts, will be dated, will bear interest at the respective rates and will be payable on the dates and will mature on the respective dates set forth on the inside cover page of this Official Statement. The Bonds are subject to mandatory, extraordinary and optional redemption as described herein. For a more complete description of the Bonds, see THE BONDS herein. AN INVESTMENT IN THE BONDS IS SPECULATIVE, AND INVOLVES A SIGNIFICANT DEGREE OF RISK, INCLUDING, AMONG OTHERS, RISKS ASSOCIATED WITH THE LIMITED SOURCE OF PAYMENT FOR THE BONDS AND VARIOUS REAL ESTATE AND OPERATING RISKS. PROSPECTIVE PURCHASERS SHOULD CAREFULLY CONSIDER THE STATEMENTS AND INFORMATION CONTAINED IN THIS OFFICIAL STATEMENT, INCLUDING THE MATERIAL UNDER THE CAPTION RISK FACTORS AND INVESTMENT CONSIDERATIONS. The Loan Agreement The Bonds are being issued by the Issuer to make a loan to Canton II, Inc. (the Borrower ), a Texas nonprofit corporation which has been determined to be exempt from income taxation pursuant to Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the Code ). The Loan will be made pursuant to a Loan Agreement dated as of December 1, 2011 (the Loan Agreement ), among the Issuer, the Borrower and the Trustee, and will be used to (i) finance the cost of the acquisition by the Borrower of the Project, including the building, furniture, fixtures and equipment comprising such facility and including the real property upon which such building and other items are located, (ii) pay the costs of issuance of the Bonds, and (iii) fund accounts for the Senior Bonds and the Subordinate Bonds, respectively, in the Debt Service Reserve Fund. See the caption SECURITY AND SOURCES OF PAYMENT FOR THE BONDS and ESTIMATED SOURCES AND USES OF FUNDS. Security and Sources of Payment for the Bonds The Series 2011 Notes. The Borrower is obligated under the Loan Agreement to make payments (the Loan Payments ) in such amounts and at such times as will be sufficient to pay, when due, the principal of, premium, if 2

13 any, and interest on the Bonds as well as pay certain other fees and expenses in connection with the Bonds. As evidence of its obligations to make the Loan Payments with respect to the Bonds, the Borrower will execute and deliver to the Trustee three Promissory Notes (the Series 2011 Notes ). The Mortgage. The Borrower s obligations under the Series 2011 Notes and the Loan Agreement will be secured by a Deed of Trust and Security Agreement (the Mortgage ), dated as of December 1, 2011, from the Borrower to the Trustee for the benefit of the Holders of the Bonds, which document creates a mortgage lien on, and security interest in, the Project and pledge of Project Revenues (as defined herein) and other property as described in the Mortgage, subject only to certain Permitted Encumbrances identified therein, and which Mortgage will secure the Senior Bonds and the Subordinate Bonds in that order of priority. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Mortgage herein. Trust Estate. The Bonds are secured by the Trust Estate created in the Indenture which includes all right, title and interest of the Issuer in and to (i) Loan Payments pursuant to the Loan Agreement, (ii) the Loan Agreement, the Series 2011 Notes and the Mortgage (except for Reserved Rights of the Issuer), (iii) all money and securities from time to time held by the Trustee under the terms of the Indenture (except as specifically set forth therein), (iv) any and all other real and personal property from time to time thereafter by delivery or by writing of any kind conveyed, mortgaged, pledged, assigned or transferred as and for additional security for the Bonds by the Issuer or by anyone on its behalf or with its written consent to the Trustee, which is thereby authorized to receive any and all such property at any and all times and to hold and apply the same subject to the terms of the Indenture as additional security for the Bonds and (v) all of the right, title and interest of the Issuer in and to all of the proceeds of (i) through (v) above. The Loan Agreement is secured by the Mortgage, which includes a pledge of Project Revenues (as defined in the Indenture). The Subordinate Bonds are subordinate in all respects to the Senior Bonds. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS herein. Debt Service Reserve Fund. A Debt Service Reserve Fund with separate accounts for the Senior Bonds and the Subordinate Bonds will be established under the Indenture. The Debt Service Reserve Fund Account for the Senior Bonds will be funded in the amount of the Maximum Annual Debt Service for the Senior Bonds and the Debt Service Reserve Fund Account for the Subordinate Bonds will be funded in the amount of the Maximum Annual Debt Service for the Subordinate Bonds. Amounts on deposit in each account of the Debt Service Reserve Fund will be used solely to pay the principal of and interest on the applicable Bonds when due to the extent money on deposit in the related Principal Account or Interest Account are insufficient therefor after the transfer of any amounts from the Surplus Fund, the Operations and Maintenance Reserve Fund and the Repair and Replacement Fund pursuant to the Indenture. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS herein. Rate Covenant. The Borrower has agreed in the Loan Agreement to use its best efforts to fix, charge and collect, or cause to be fixed, charged and collected, rents, fees and charges in connection with the operation and maintenance of the Project, such that for each Fiscal Year beginning on or after January 1, 2012, the Debt Service Coverage Ratio will not be less than the applicable Coverage Test (1.40 to 1.00 on all Outstanding Senior Bonds and all Senior Parity Indebtedness, and 1.20 to 1.00 on all Outstanding Senior Bonds and Subordinate Bonds and all Senior Parity Indebtedness and Subordinate Parity Indebtedness), determined as of the end of each such Fiscal Year. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS Rate Covenant herein. Nonrecourse Obligations. The Borrower s obligations under the Loan Agreement, the Series 2011 Notes and the Mortgage are limited, nonrecourse obligations and the Borrower has no obligation to make payments of amounts due under the Loan Agreement except from Project Revenues and from amounts held in the Funds and Accounts created under the Indenture. No other revenues or assets of the Borrower will be available for the payment of, or as security for, the Bonds. The right of the Issuer to collect and receive payments under the Loan Agreement has been assigned to the Trustee under the Indenture for the benefit of the Holders. No assets or other revenues of the Issuer are or will be available for the payment of, or as security for, the Bonds. Limited, Special Obligations. THE BONDS AND THE INTEREST THEREON ARE LIMITED OBLIGATIONS OF THE ISSUER PAYABLE SOLELY FROM THE TRUST ESTATE ESTABLISHED UNDER THE INDENTURE. THE BONDS WILL CONSTITUTE A VALID CLAIM OF THE RESPECTIVE OWNERS THEREOF AGAINST THE TRUST ESTATE, WHICH IS PLEDGED TO SECURE THE PAYMENT OF THE PRINCIPAL OF, PREMIUM, IF ANY, AND INTEREST ON THE BONDS, AND WHICH IS TO BE UTILIZED 3

14 FOR NO OTHER PURPOSE, EXCEPT AS EXPRESSLY AUTHORIZED IN THE INDENTURE. THE BONDS DO NOT CONSTITUTE, WITHIN THE MEANING OF ANY STATUTORY OR CONSTITUTIONAL PROVISION, AN INDEBTEDNESS, AN OBLIGATION OR A LOAN OF CREDIT OF THE STATE OF TEXAS (THE "STATE"), BEXAR COUNTY, TEXAS (THE "COUNTY"), THE ISSUER OR ANY OTHER MUNICIPALITY, COUNTY OR OTHER MUNICIPAL OR POLITICAL CORPORATION OR SUBDIVISION OF THE STATE. THE BONDS DO NOT CREATE A MORAL OBLIGATION ON THE PART OF THE STATE, THE COUNTY OR ANY OTHER MUNICIPALITY, COUNTY OR OTHER MUNICIPAL OR POLITICAL CORPORATION OR SUBDIVISION OF THE STATE, AND EACH OF SUCH ENTITIES IS PROHIBITED BY THE ACT FROM MAKING ANY PAYMENTS WITH RESPECT TO THE BONDS. THE ISSUER HAS NO TAXING POWER. The Borrower The Borrower a Texas nonprofit corporation which has been determined to be exempt from income taxation pursuant to Section 501(c)(3) of the Code. The Borrower is a subordinate entity of The Emmaus Calling, Inc., ( TEC ), a Texas non-profit corporation. The Borrower and its affiliates own and operate six rental housing communities. The other affiliates of the Borrower will have no liability on account of financial obligations of the Borrower under the Loan Agreement and the Series 2011 Notes or the other Bond Documents. See THE BORROWER AND THE PROJECT The Borrower herein. The Project Originally constructed in 1990, the Project known as The Inn at Los Patios, is located on approximately acres at 8700 Post Oak Lane, San Antonio, Texas. The Project is comprised of two three-story buildings containing a total of 167 units consisting of 137 independent living units and 30 assisted living units. See THE BORROWER AND THE PROJECT The Project herein. The Manager Concurrently with the issuance of the Bonds, the Borrower will enter into a management agreement (the Management Agreement ) with Wind River Management Corporation, Duncanville, Texas (the Manager ). The Manager currently manages approximately 1,138 units and has managed the Project since its initial development. The Manager was formed in 1992 and currently has a staff of 11 professionals and over 300 staff members. The use of money in the Revenue Fund to pay the fee of the Manager is subordinate to the monthly deposits to the Bond Fund to pay Debt Service on the Bonds. See THE BORROWER AND THE PROJECT The Manager herein. See THE BORROWER AND THE PROJECT Relationship of the Manager and the Asset Manager herein. The Asset Manager Pursuant to an asset oversight agreement (the Asset Oversight Agreement ) dated as of December 1, 2011, by and between the Borrower and ILP Asset Management, LLC, Duncanville, Texas (the Asset Manager ), the Asset Manager is to perform certain oversight activities with respect to the Borrower, the Manager and the Project. Currently, the Asset Manager provides oversight of several senior living properties with an aggregate value exceeding one hundred million dollars. The use of money in the Revenue Fund to pay the fee of the Asset Manager is subordinate to the monthly deposits to the Bond Fund to pay Debt Service on the Bonds. See THE BORROWER AND THE PROJECT The Asset Manager and THE BORROWER AND THE PROJECT Relationship of the Manager and the Asset Manager herein. Regulatory Agreement The Bonds will be issued as qualified 501(c)(3) bonds as defined in Section 145 of the Code. The Borrower is an organization described in Section 501(c)(3) of the Code and, in the opinion of McGuireWoods LLP, Borrower s Counsel, the Borrower should be treated as a 501(c)(3) entity, for federal income tax purposes. 4

15 Additionally, in order for the Bonds to be treated as qualified 501(c)(3) bonds, the Project must meet certain occupancy restrictions set forth in Section 142(d) and Section 145(d) of the Code. Therefore, the Borrower s operation of the Project will be subject to the terms and restrictions of a Regulatory Agreement and Declaration of Restrictive Covenants dated as of December 1, 2011, entered into among the Issuer, the Borrower and the Trustee (the Regulatory Agreement ) which, among other things, will require that for the Qualified Project Period (as defined in the Regulatory Agreement), at least 20% of the dwelling units in the Project be occupied by families of low or moderate income, defined as families or individuals whose income does not exceed 50% (adjusted for family size) of the median gross income for the area in which the Project is located. The Regulatory Agreement will have the effect of reducing the potential universe of tenants eligible to reside in the Project. See THE BORROWER AND THE PROJECT Project Regulation and RISK FACTORS AND INVESTMENT CONSIDERATIONS Project Risks; Rental Housing Requirements herein and APPENDIX B SUMMARIES OF CERTAIN PROVISIONS OF THE PRINCIPAL DOCUMENTS THE REGULATORY AGREEMENT herein. Certain Bondholders Risks AN INVESTMENT IN THE BONDS INVOLVES A SIGNIFICANT DEGREE OF RISK. A PROSPECTIVE BONDHOLDER IS ADVISED TO READ THE ENTIRE OFFICIAL STATEMENT, INCLUDING THE APPENDICES HERETO, BEFORE MAKING AN INVESTMENT DECISION TO PURCHASE SERIES 2011 BONDS. SPECIAL REFERENCE IS MADE TO THE SECTIONS SECURITY AND SOURCES OF PAYMENT FOR THE BONDS AND RISK FACTORS AND INVESTMENT CONSIDERATIONS HEREIN FOR A DISCUSSION OF CERTAIN RISK FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE BONDS. THE BONDS The Bonds are available in book-entry only form. See BOOK-ENTRY-ONLY SYSTEM below. So long as Cede & Co., as nominee of The Depository Trust Company ( DTC ), is the registered owner of the Bonds, references herein to the Bondholders or holders or Holders or registered owners of the Bonds means Cede & Co. and not the beneficial owners of the Bonds. General Description The Bonds are issuable as fully registered bonds without coupons in denominations of $5,000 each and integral multiples thereof. The Bonds will be dated as of December 1, The Bonds will bear interest at the rates, and will mature on the dates and in the amounts, all as set forth on the inside cover page of this Official Statement. Interest on the Bonds will be payable semiannually on each January 1 and July 1 of each year (the Interest Payment Dates ) commencing July 1, 2012, until stated maturity or prior redemption and be payable as to principal on the dates and in the amounts as set forth in the Indenture. Interest shall be computed on the basis of a year of 360 days and twelve 30-day months. Each Bond shall bear interest from the Interest Payment Date preceding the date of authentication thereof, unless the date of such authentication is after a Record Date (as defined below), in which case it will bear interest from the next succeeding Interest Payment Date succeeding the fifteenth day (whether or not a Business Day) of the calendar month preceding the applicable Interest Payment Date (the Record Date ), or unless no interest has been paid on such Bond; provided, however, that if at the time of registration of any Bond the interest thereon is in default, as shown by the records of the Trustee, such Bond shall bear interest from the date to which interest has been paid in full. Transfer and Exchange of the Bonds So long as the Bonds are in book-entry only form, Cede & Co., as nominee of DTC, will be the sole registered owner of the Bonds. Transfers of beneficial interests in the Bonds will be made as described below under --Book-Entry-Only System. 5

16 Book-Entry-Only System The following has been provided by DTC (defined below) for use herein. While the information is believed to be reliable, none of the Issuer, the Trustee, the Borrower or the Underwriters, subject to the standard of review found on the inside cover hereof, nor any of their respective counsel, members, officers or employees, make any representations as to the accuracy or sufficiency of such information. The Depository Trust Company ( DTC ), New York, NY, 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 will be issued for each issue of the Bonds, each in the aggregate principal amount of such issue, 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 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, in turn, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Fixed Income Clearing Corporation and Emerging Markets Clearing Corporation (NSCC, FICC, and EMCC, also subsidiaries (DTCC), as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC. and the National Association of Securities Dealers, Inc. 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 a Standard & Poor s rating of AA+. The DTC Rules applicable to its Participants are on file with the United States Securities and Exchange Commission. More information about DTC can be found at Purchases of the 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. 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. 6

17 Beneficial Owners of Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of 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 will be sent to DTC. If less than all of the securities 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 securities unless authorized by a Direct Participant in accordance with DTC s Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Issuer 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). Redemption proceeds, distributions, and dividend 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 Issuer or the Trustee, on each payment 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 Trustee, or the Issuer, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Issuer or the Trustee, 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 Issuer or the Trustee. Under such circumstances, in the event that a successor depository is not obtained, Bond certificates are required to be printed and delivered. The Issuer may decide to discontinue use of the system of book entry only transfers through DTC (or a successor securities depository); in that event, Bond certificates will be printed and delivered to DTC. The information under this heading concerning DTC and DTC s book entry system has been obtained from sources that the Issuer believes to be reliable, but the Issuer takes no responsibility for the accuracy thereof. NEITHER THE ISSUER NOR THE TRUSTEE WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO DTC PARTICIPANTS, OR THE PERSONS FOR WHOM THEY ACT AS NOMINEES, WITH RESPECT TO THE PAYMENTS TO OR THE PROVIDING OF NOTICE TO THE DIRECT PARTICIPANTS, THE INDIRECT PARTICIPANTS OR THE BENEFICIAL OWNERS OF THE BONDS. THE ISSUER AND THE TRUSTEE CANNOT AND DO NOT GIVE ANY ASSURANCES THAT DTC, DIRECT PARTICIPANTS OR OTHERS WILL DISTRIBUTE PAYMENTS OF PRINCIPAL OF OR INTEREST ON THE BONDS PAID TO DTC OR ITS NOMINEE, AS THE REGISTERED OWNER, OR ANY NOTICES TO THE BENEFICIAL OWNERS OR THAT THEY WILL DO SO ON A TIMELY BASIS, OR THAT DTC WILL ACT IN A MANNER DESCRIBED IN THIS OFFICIAL STATEMENT. Revision of Book-Entry-Only System In the event that either: (i) the Issuer receives notice from DTC to the effect that DTC is unable or unwilling to discharge its responsibilities as a clearing agency for the Bonds or (ii) the Issuer elects to discontinue its use of DTC as a clearing agency for the Bonds, then the Issuer and the Trustee will do or perform or cause to be 7

18 done or performed all acts or things, not adverse to the rights of the holders of the Bonds, as are necessary or appropriate to discontinue use of DTC as a clearing agency for the Bonds and to transfer the ownership of each of the Bonds to such person or persons, including any other clearing agency, as the holder of such Bonds may direct in accordance with the Indenture. Any expense of such a discontinuation and transfer, including any expenses of printing new certificates to evidence the Bonds, will be paid by the Borrower. Mandatory Redemption of Bonds Bonds of each Series shall be called for redemption (1) in whole or in part in the event the Project or any portion thereof is damaged or destroyed or taken in a condemnation proceeding and Net Proceeds resulting therefrom are to be applied to the payment of the Series 2011 Notes as provided in the Loan Agreement and the Borrower pursuant to the Loan Agreement has elected to use the Net Proceeds to redeem Bonds of such Series, (2) in whole in the event the Borrower exercises its option to terminate the Loan Agreement due to the events permitting termination listed therein or (3) in whole in the event the Borrower is required to prepay the Loan following a Default under the Loan Agreement. See APPENDIX B SUMMARIES OF CERTAIN PROVISIONS OF THE PRINCIPAL DOCUMENTS THE LOAN AGREEMENT. If called for redemption at any time pursuant to (1) through (3) above, the Bonds of each Series to be redeemed shall be subject to redemption by the Issuer prior to stated maturity, in whole at any time or (in the case of redemption pursuant to clause (1) above) in part on any Interest Payment Date (less than all of such Bonds to be selected in accordance with the provisions of the Indenture (as described under the caption Selection of Bonds to be Redeemed below)) at a redemption price equal to 100% of the principal amount thereof plus accrued interest to the redemption date; such redemption date to be a date determined by the Borrower, and in the case of redemption pursuant to clause (3) above, to be the earliest practicable date, as determined by the Trustee, following acceleration of amounts due under the Loan Agreement. No Subordinate Bonds may be redeemed pursuant to this section if any Senior Bonds remain Outstanding except that the Subordinate Bonds may only be redeemed on any Interest Payment Date if the principal and interest due on the Senior Bonds at such time has been paid in full. Optional Redemption of Bonds Except as set forth below, the Series 2011A Bonds and Series 2011B Bonds are subject to optional redemption by the Issuer, at the direction of the Borrower, on or after January 1, 2022, in whole or in part at any time, at a redemption price of 100%, of the principal amount of the Series 2011A Bonds and Series 2011B Bonds being redeemed plus accrued interest. No Series 2011B Bonds, or any portion thereof, may be redeemed pursuant to optional redemption if any Senior Bonds remain Outstanding except that the Series 2011B Bonds may only be redeemed pursuant to optional redemption if the principal and interest due on the Senior Bonds at such time has been paid in full. The Series 2011A-T are not subject to optional redemption prior to their maturity. Mandatory Sinking Fund Redemption The Series 2011A Bonds are subject to mandatory sinking fund redemption at a redemption price equal to 100% of the principal amount thereof plus accrued interest on January 1 and July 1 of each year and in the principal amounts shown below: 8

19 SERIES 2011A BONDS MATURING JANUARY 1, 2027 Date Amount Date Amount July 1, 2015 $ 90,000 July 1, 2021 $180,000 January 1, 2016 $ 95,000 January 1, 2022 $180,000 July 1, 2016 $145,000 July 1, 2022 $185,000 January 1, 2017 $140,000 January 1, 2023 $195,000 July 1, 2017 $145,000 July 1, 2023 $195,000 January 1, 2018 $150,000 January 1, 2024 $205,000 July 1, 2018 $155,000 July 1, 2024 $205,000 January 1, 2019 $155,000 January 1, 2025 $215,000 July 1, 2019 $160,000 July 1, 2025 $220,000 January 1, 2020 $165,000 January 1, 2026 $220,000 July 1, 2020 $170,000 July 1, 2026 $235,000 January 1, 2021 $175,000 January 1, 2027 $230,000 Maturity SERIES 2011A BONDS MATURING JANUARY 1, 2035 Date Amount Date Amount July 1, 2027 $240,000 July 1, 2031 $305,000 January 1, 2028 $245,000 January 1, 2032 $305,000 July 1, 2028 $255,000 July 1, 2032 $320,000 January 1, 2029 $260,000 January 1, 2033 $325,000 July 1, 2029 $270,000 July 1, 2033 $340,000 January 1, 2030 $275,000 January 1, 2034 $345,000 July 1, 2030 $285,000 July 1, 2034 $360,000 January 1, 2031 $290,000 January 1, 2035 $365,000 Maturity SERIES 2011A BONDS MATURING JANUARY 1, 2039 Date Amount Date Amount July 1, 2035 $380,000 July 1, 2037 $435,000 January 1, 2036 $385,000 January 1, 2038 $430,000 July 1, 2036 $410,000 July 1, 2038 $455,000 January 1, 2037 $405,000 January 1, 2039 $460,000 Maturity [Remainder of page intentionally left blank] 9

20 SERIES 2011A BONDS MATURING JANUARY 1, 2047 Date Amount Date Amount July 1, 2039 $485,000 July 1, 2043 $ 615,000 January 1, 2040 $485,000 January 1, 2044 $ 615,000 July 1, 2040 $515,000 July 1, 2044 $ 650,000 January 1, 2041 $515,000 January 1, 2045 $ 655,000 July 1, 2041 $550,000 July 1, 2045 $ 690,000 January 1, 2042 $545,000 January 1, 2046 $ 695,000 July 1, 2042 $575,000 July 1, 2046 $1,535,000 January 1, 2043 $585,000 January 1, 2047 $1,535,000 Maturity The Series 2011A-T Bonds are subject to mandatory sinking fund redemption at a redemption price equal to 100% of the principal amount thereof plus accrued interest on January 1 and July 1 of each year in the principal amounts shown below: SERIES 2011A-T BONDS Date Amount July 1, 2012 $105,000 January 1, 2013 $115,000 July 1, 2013 $115,000 January 1, 2014 $120,000 July 1, 2014 $125,000 January 1, 2015 $125,000 July 1, 2015 $140,000 Maturity 10

21 The Series 2011B Bonds are subject to mandatory sinking fund redemption at a redemption price equal to 100% of the principal amount thereof plus accrued interest on July 1 and January 1, of each year in the principal amounts shown below: SERIES 2011B BONDS Date Amount Date Amount January 1, 2015 $25,000 July 1, 2031 $40,000 July 1, 2015 $15,000 January 1, 2032 $40,000 January 1, 2016 $15,000 July 1, 2032 $40,000 July 1, 2016 $10,000 January 1, 2033 $45,000 January 1, 2017 $20,000 July 1, 2033 $50,000 July 1, 2017 $15,000 January 1, 2034 $45,000 January 1, 2018 $15,000 July 1, 2034 $45,000 July 1, 2018 $15,000 January 1, 2035 $55,000 January 1, 2019 $20,000 July 1, 2035 $50,000 July 1, 2019 $15,000 January 1, 2036 $55,000 January 1, 2020 $20,000 July 1, 2036 $60,000 July 1, 2020 $15,000 January 1, 2037 $55,000 January 1, 2021 $25,000 July 1, 2037 $60,000 July 1, 2021 $20,000 January 1, 2038 $60,000 January 1, 2022 $20,000 July 1, 2038 $65,000 July 1, 2022 $20,000 January 1, 2039 $65,000 January 1, 2023 $25,000 July 1, 2039 $65,000 July 1, 2023 $25,000 January 1, 2040 $75,000 January 1, 2024 $25,000 July 1, 2040 $75,000 July 1, 2024 $25,000 January 1, 2041 $75,000 January 1, 2025 $25,000 July 1, 2041 $75,000 July 1, 2025 $25,000 January 1, 2042 $85,000 January 1, 2026 $30,000 July 1, 2042 $85,000 July 1, 2026 $30,000 January 1, 2043 $85,000 January 1, 2027 $30,000 July 1, 2043 $95,000 July 1, 2027 $30,000 January 1, 2044 $90,000 January 1, 2028 $30,000 July 1, 2044 $95,000 July 1, 2028 $30,000 January 1, 2045 $100,000 January 1, 2029 $35,000 July 1, 2045 $105,000 July 1, 2029 $35,000 January 1, 2046 $105,000 January 1, 2030 $35,000 July 1, 2046 $240,000 July 1, 2030 $35,000 January 1, 2047 $245,000 January 1, 2031 $40,000 Maturity Selection of Bonds to be Redeemed Bonds may be redeemed only in Authorized Denominations. If less than all of the Bonds are being redeemed: (i) the principal amount of the Bonds to be redeemed shall be designated by the Borrower in writing to the Trustee and (ii) the particular Bonds of the Series or portions thereof to be redeemed shall be selected by the Trustee by lot or in such manner as the Trustee in its discretion may deem proper. If it is determined that less than all of the principal amount represented by any Bond is to be called for redemption, then, following notice of intention to redeem such principal amount, the Holder thereof shall surrender such Bond to the Trustee on or before the applicable redemption date for (a) payment on the redemption date to such Holder of the redemption price of the amount called for redemption and (b) delivery to such Holder of a new Bond or Bonds in the aggregate principal amount of the unredeemed balance of the principal amount of such Bond, which shall be an Authorized 11

22 Denomination. A new Bond representing the unredeemed balance of such Bond shall be issued to the Holder thereof, without charge therefor. If the Holder of any Bond or integral multiple of the Authorized Denomination selected for redemption shall fail to present such Bond to the Trustee for payment and exchange as aforesaid, such Bond shall, nevertheless, become due and payable on the date fixed for redemption to the extent of the amount called for redemption (and to that extent only), and interest shall cease to accrue from the date fixed for redemption. Except for redemptions described under the subheadings Optional Redemption of Bonds and Mandatory Sinking Fund Redemption above, no Subordinate Bonds may be redeemed if any Senior Bonds remain Outstanding. Notice of Redemption In the event any of the Bonds are called for redemption, the Trustee shall give notice, in the name of the Issuer, of the redemption of such Bonds, which notice shall (i) specify the Bonds to be redeemed, the redemption date, the redemption price and the place or places where amounts due upon such redemption will be payable (which shall be the designated corporate trust office of the Trustee) and, if less than all of the Bonds are to be redeemed, the numbers of the Bonds, and the portions of the Bonds, to be so redeemed and (ii) state any condition to such redemption, including any redemption premium. Such notice may set forth any additional information relating to such redemption. Such notice shall be given by Mail to the Holders of the Bonds to be redeemed, at least thirty (30) days but no more than sixty (60) days prior to the date fixed for redemption. The Trustee may give any other or additional redemption notice as it deems necessary or desirable. Any Bonds which have been duly selected for redemption and which are deemed to be paid in accordance with the Indenture shall cease to bear interest on the specified redemption date. Payment of Redemption Price For the redemption of any of the Bonds, the Trustee shall cause to be deposited in the Special Redemption Account of the applicable Bond Fund, whether out of Project Revenues or any other money constituting the Trust Estate, including Net Proceeds available for such purpose pursuant to the Loan Agreement, or otherwise, an amount sufficient to pay the principal of, premium, if any, and interest to become due on the date fixed for such redemption. Money used to pay premium, if any, on Bonds to be redeemed shall constitute Available Money. The obligation of the Issuer to cause any such deposit to be made under the Indenture shall be reduced by the amount of money in such Special Redemption Account available for and used on such redemption date for payment of the principal of, premium, if any, and accrued interest on the Bonds to be redeemed. No Partial Redemption After Default Anything in the Indenture to the contrary notwithstanding, if there has occurred and is continuing an Event of Default under the Indenture with respect to the Bonds, there shall be no redemption of less than all of the Bonds Outstanding. See APPENDIX B SUMMARIES OF CERTAIN PROVISIONS OF THE PRINCIPAL DOCUMENTS THE INDENTURE. Limited Obligations of Issuer SECURITY AND SOURCES OF PAYMENT FOR THE BONDS THE BONDS AND THE INTEREST THEREON ARE LIMITED OBLIGATIONS OF THE ISSUER PAYABLE SOLELY FROM THE TRUST ESTATE ESTABLISHED UNDER THE INDENTURE. THE BONDS WILL CONSTITUTE A VALID CLAIM OF THE RESPECTIVE OWNERS THEREOF AGAINST THE TRUST ESTATE, WHICH IS PLEDGED TO SECURE THE PAYMENT OF THE PRINCIPAL OF, PREMIUM, IF ANY, AND INTEREST ON THE BONDS, AND WHICH IS TO BE UTILIZED FOR NO OTHER PURPOSE, EXCEPT AS EXPRESSLY AUTHORIZED IN THE INDENTURE. THE BONDS DO NOT CONSTITUTE, WITHIN THE MEANING OF ANY STATUTORY OR CONSTITUTIONAL PROVISION, AN INDEBTEDNESS, AN 12

23 OBLIGATION OR A LOAN OF CREDIT OF THE STATE OF TEXAS (THE "STATE"), BEXAR COUNTY, TEXAS (THE "COUNTY"), THE ISSUER OR ANY OTHER MUNICIPALITY, COUNTY OR OTHER MUNICIPAL OR POLITICAL CORPORATION OR SUBDIVISION OF THE STATE. THE BONDS DO NOT CREATE A MORAL OBLIGATION ON THE PART OF THE STATE, THE COUNTY OR ANY OTHER MUNICIPALITY, COUNTY OR OTHER MUNICIPAL OR POLITICAL CORPORATION OR SUBDIVISION OF THE STATE, AND EACH OF SUCH ENTITIES IS PROHIBITED BY THE ACT FROM MAKING ANY PAYMENTS WITH RESPECT TO THE BONDS. THE ISSUER HAS NO TAXING POWER. Repayment of Loan The Loan Agreement and the Series 2011 Notes obligate the Borrower to pay to the Trustee, for the account of the Issuer, ratable monthly payments equal to the amounts required to pay the interest coming due on each Interest Payment Date with respect to the Bonds plus the principal amount of the Bonds maturing or required to be redeemed. The Borrower s obligations to make Loan Payments with respect to the Bonds are limited obligations of the Borrower, and holders of the Bonds will have recourse only to the Project, the money held in the Funds and Accounts created under the Indenture (except as specifically set forth therein) and the Project Revenues to satisfy the obligations of the Borrower with respect to the Bonds. No other revenues or assets of the Borrower will be available for the payment of, or as security for, the Bonds. Pursuant to the Indenture, the Issuer will pledge and assign all its rights and interests (except certain reimbursement and indemnification rights of the Issuer and its rights to perform discretionary acts) and all amounts payable (other than certain fees and expenses due to the Issuer) under the Loan Agreement, the Series 2011 Notes and the Mortgage to the Trustee, in trust, to be held and applied pursuant to the provisions of the Indenture, for the benefit of the Holders. The Mortgage To secure the payment of the Loan Payments payable under the Loan Agreement and the Series 2011 Notes, the Borrower will grant to the Trustee under the Mortgage, with respect to the Senior Bonds, a first priority lien on and a security interest in the Project and the right, title and interests of the Borrower in the Project Revenues and other property as described in the Mortgage, subject only to certain Permitted Encumbrances identified therein and, under the same Mortgage, with respect to the Subordinate Bonds, a subordinate lien on and security interest in the Project and the right, title and interest of the Borrower in the Project Revenues and other property as described in the Mortgage, subject only to certain Permitted Encumbrances identified therein. The Mortgaged Property includes generally all the land, buildings, fixtures and equipment comprising the Project, including the Project site. See APPENDIX B SUMMARIES OF CERTAIN PROVISIONS OF THE PRINCIPAL DOCUMENTS THE MORTGAGE. Operation of the Project Payments to be made by the Borrower pursuant to the Loan Agreement will be derived solely from revenues generated by the operation of the Project. In addition, the liability of the Borrower under the Loan Agreement is limited to the Borrower s interest in the Project and the monies held in the Funds and Accounts held under the Indenture. NO REPRESENTATIONS OR ASSURANCES CAN BE MADE THAT REVENUES WILL BE REALIZED BY THE BORROWER IN AMOUNTS NECESSARY TO ENABLE THE BORROWER TO MAKE PAYMENTS PURSUANT TO THE LOAN AGREEMENT SUFFICIENT TO PAY THE PRINCIPAL OF AND PREMIUM, IF ANY, AND INTEREST ON THE BONDS. WHILE THE INDENTURE CREATES A SECURITY INTEREST IN THE FUNDS HELD UNDER THE INDENTURE (OTHER THAN THE REBATE FUND ESTABLISHED THEREUNDER), AND THE MORTGAGE CREATES SECURITY INTERESTS IN THE PROJECT REVENUES, THE REVENUES OF THE PROJECT ARE NOT SUBJECT TO ANY LOCKBOX OR OTHER ESCROW ARRANGEMENTS, EXCEPT THAT ALL PROJECT REVENUES ARE REQUIRED TO BE DEPOSITED WITH THE TRUSTEE, AND THE 13

24 LOAN AGREEMENT AND THE MORTGAGE OTHERWISE PLACE NO RESTRICTIONS UPON THE EXPENDITURES OF SUCH REVENUES BY THE BORROWER. Rate Covenant The Borrower has agreed in the Loan Agreement to use its best efforts to fix, charge and collect, or cause to be fixed, charged and collected, rents, fees and charges in connection with the operation and maintenance of the Project, such that for each Fiscal Year beginning on or after January 1, 2012, the Debt Service Coverage Ratio will not be less than the applicable Coverage Test (1.40 to 1.00 on all Outstanding Senior Bonds and all Senior Parity Indebtedness and 1.20 to 1.00 on all Outstanding Senior Bonds and Subordinate Bonds and all Senior Parity Indebtedness and Subordinate Parity Indebtedness), determined as of the end of each such Fiscal Year. In the event that the Borrower should fail to meet such rate covenant, the Borrower is required to retain a consultant to make recommendations with respect to the operations of the Project and the sufficiency of the rates, fees and charges imposed by the Borrower to enable the Borrower to improve the Debt Service Coverage Ratio to at least the applicable Coverage Test. Failure by the Borrower to retain a consultant or implement the recommendations of that consultant in any calendar year in which the Debt Service Coverage Ratio is not met will constitute a Default as set forth in the Loan Agreement. Failure of the Borrower to meet the rate covenant does not constitute a Default with respect to the Bonds. Failure of the Borrower to maintain a Debt Service Coverage Ratio of 1.0 to 1 for a period of two consecutive Fiscal Years will constitute a Default under the Loan Agreement. See APPENDIX B SUMMARIES OF CERTAIN PROVISIONS OF THE PRINCIPAL DOCUMENTS THE LOAN AGREEMENT. [Remainder of page intentionally left blank] 14

25 Flow of Project Revenues Revenue Fund Accounts Related to Senior Bonds Interest Account Principal Account Debt Service Reserve Account Accounts Related to Subordinate Bonds Interest Account Principal Account Debt Service Reserve Account Operating Funds Insurance & Tax Escrow Account Operating Fund Repair & Replacement Fund Administration Fund Rebate Fund Fees Manager Fee Home Office Fee Asset Manager Fee Surplus Fund Revenue Fund A Revenue Fund will be established under the Indenture. There shall be deposited in the Revenue Fund (i) all Loan Payments and other amounts paid to the Trustee under the Loan Agreement (other than prepayments required to redeem Bonds pursuant to the Indenture, which shall be deposited in the related Special Redemption Account), (ii) all other amounts required to be so deposited pursuant to the Indenture or the Tax Agreement, including investment earnings to the extent provided therein, (iii) any amounts derived from the Loan Agreement or the Mortgage to be applied to payment of amounts intended to be paid from the Revenue Fund, (iv) all Project Revenues, and (v) such other money as are delivered to the Trustee by or on behalf of the Issuer or the Borrower with directions for deposit of such money in the Revenue Fund. Failure to deposit sufficient Project Revenues to make the deposits described above shall not, in itself, constitute an Event of Default hereunder. See APPENDIX B SUMMARIES OF CERTAIN PROVISIONS OF THE PRINCIPAL DOCUMENTS THE TRUST INDENTURE. 15

26 Debt Service Reserve Fund A Debt Service Reserve Fund with separate accounts for the Senior Bonds and the Subordinate Bonds will be established under the Indenture. The Debt Service Reserve Fund Account for the Senior Bonds will be funded in the amount of the Maximum Annual Debt Service for the Senior Bonds and the Debt Service Reserve Fund Account for the Subordinate Bonds will be funded in the amount of the Maximum Annual Debt Service for the Subordinate Bonds. Amounts on deposit in each account of the Debt Service Reserve Fund will be used solely to pay the principal of and interest on the applicable Bonds when due to the extent money on deposit in the related Principal Account or Interest Account are insufficient therefor after the transfer of any amounts from the Surplus Fund, the Operations and Maintenance Reserve Fund and the Repair and Replacement Fund pursuant to the Indenture. If the amount on in deposit an Account of the Debt Service Reserve Fund for any Series of Bonds is less than the applicable Debt Service Reserve Requirement, the Borrower is required to pay the Trustee the amount of such deficiency to the extent of available Project Revenues. In addition, if the amount on deposit in the Debt Service Reserve Fund for any Series of Bonds is less than the applicable Debt Service Reserve Requirement, investment earnings thereon will remain in such Account. See APPENDIX B SUMMARIES OF CERTAIN PROVISIONS OF THE PRINCIPAL DOCUMENTS THE TRUST INDENTURE. Operating Fund The Trustee will deposit in the Operating Fund (i) money transferred from the Revenue Fund pursuant to the Indenture, and (ii) any other amounts required to be deposited into the Operating Fund under the Indenture or under the Loan Agreement or the Mortgage and delivered to the Trustee with instructions to deposit the same therein. Amounts on deposit in the Operating Fund will be transferred by the Trustee to the Operating Account established by the Borrower in accordance with the Loan Agreement and will be used by the Borrower to pay Operating Expenses of the Project. If an Event of Default under the Indenture has occurred and is continuing the Borrower will not be entitled to funds on deposit in the Operating Fund, and the Trustee may determine to pay Operating Expenses of the Project directly, without receipt of direction from the Borrower Representative and in such event is to rely on the annual Budget prepared by the Borrower in connection with the Project. Operations and Maintenance Reserve Fund Amounts on deposit in the Operations and Maintenance Reserve Fund shall be used to pay (i) maintenance and repair costs of the Project which are not capital expenditures payable from the Repair and Replacement Fund, (ii) Operating Expenses in excess of amounts specified in the Budget, (iii) certain costs of repairs and replacement as set forth in the Indenture and (iv) shortfalls in the Interest Accounts and Principal Accounts of the Bond Fund in accordance with the Indenture. The Trustee shall disburse money in the Operations and Maintenance Reserve Fund to the Operating Account to pay such maintenance and repair costs and Operating Expenses upon receipt of a written direction of the Borrower Representative which states the purpose for such disbursement and the persons to which such amounts are to be paid. All interest income derived from the investment of amounts on deposit in the Operations and Maintenance Reserve Fund shall be retained in the Operations and Maintenance Reserve Fund until the amount on deposit therein shall be equal to the Operations and Maintenance Reserve Requirement, and thereafter shall be deposited into the Revenue Fund. See APPENDIX B SUMMARIES OF CERTAIN PROVISIONS OF THE PRINCIPAL DOCUMENTS THE TRUST INDENTURE. Insurance and Tax Escrow Fund The Trustee shall deposit in the Insurance and Tax Escrow Fund (i) money transferred from the Revenue Fund in the amounts and on the dates described in the Indenture and (ii) any other amounts required to be deposited into the Insurance and Tax Escrow Fund pursuant to the Indenture, the Loan Agreement or the Mortgage or delivered to the Trustee with instructions to deposit the same therein. Money on deposit in the Insurance Tax Escrow Fund shall be disbursed by the Trustee to the Borrower to pay, or as reimbursement for the payment of, taxes, assessments and insurance premiums with respect to the Project, as provided in the Indenture. See 16

27 APPENDIX B SUMMARIES OF CERTAIN PROVISIONS OF THE PRINCIPAL DOCUMENTS THE TRUST INDENTURE. Repair and Replacement Fund A Repair and Replacement Fund will be established under the Indenture. The Repair and Replacement Fund will be funded from monthly deposits from the Revenue Fund in the amounts and as described in the Indenture. The Trustee may disburse money on deposit in the Repair and Replacement Fund, upon request of a Borrower Representative, no more than once a month to pay to or to reimburse the Borrower for paying the cost of replacements or items of repairs which may be required to keep the Project in sound condition, including, but not limited to, replacement of equipment, repair or replacement of any roof or other structural component of the Project, exterior painting and major repairs to or replacement of heating, air conditioning, plumbing and electrical systems, but in any case, only if there are no funds available in the Project Fund for such purpose. This Fund shall also be used to remedy any deficiency in the accounts of the Bond Fund, on any Interest Payment Date after exhaustion of the Surplus Fund, in the same order of priority as provided for regular transfers from the Revenue Fund. If total amounts on deposit in the Repair and Replacement Fund are not sufficient to pay all of such repair and replacement costs when due, funds on deposit in the Operations and Maintenance Fund may be disbursed until exhausted, after which the Borrower are required to pay the deficiency to the extent money are available in the Revenue Fund and may be reimbursed from funds which later become available in the Repair and Replacement Fund. See APPENDIX B SUMMARIES OF CERTAIN PROVISIONS OF THE PRINCIPAL DOCUMENTS THE TRUST INDENTURE. Administration Fund An Administration Fund will be established and funded pursuant to the Indenture, from which the Trustee will disburse, on each Interest Payment Date, Administration Expenses then due. See APPENDIX B SUMMARIES OF CERTAIN PROVISIONS OF THE PRINCIPAL DOCUMENTS THE TRUST INDENTURE. Surplus Fund The Trustee will deposit into the Surplus Fund, amounts provided in the Indenture and amounts delivered to it with instructions to deposit the same in the Surplus Fund. Money in the Surplus Fund shall be (i) transferred to an Interest Account for the Senior Bonds to pay interest on the Senior Bonds to the extent amounts on deposit in such Interest Account are insufficient therefor, (ii) transferred to a Principal Account for the Senior Bonds to pay principal on the Senior Bonds to the extent amounts on deposit in such Principal Account are insufficient therefor, (iii) transferred to the Interest Account for the Series 2011B Bonds to pay interest on the Series 2011B Bonds to the extent amounts on deposit in such Interest Account are insufficient therefor, (iv) transferred to the Principal Account for the Series 2011B Bonds to pay principal on the Series 2011B Bonds to the extent amounts on deposit in such Principal Account are insufficient therefor, (v) transferred to the Revenue Fund to the extent of any deficiency in the amounts needed to fully make all transfers from the Revenue Fund pursuant to the Indenture (other than to the Surplus Fund), (vi) transferred to or upon the direction of the Borrower to the Operating Account for the payment of Operating Expenses for the payment of which the Borrower has certified to the Trustee that there are not sufficient money in the Operating Account, (vii) paid to the Trustee an amount equal to any unpaid Extraordinary Trustee s Fees and Expenses then due, (viii) transferred to the Operations and Maintenance Reserve Fund an amount sufficient to restore such Fund to the Operations and Maintenance Reserve Requirement and (ix) paid (A) to the Manager, any Subordinate Management Fee then owing, and (B) to the Asset Manager, any Subordinate Asset Management Fee then owing; provided, however, such payments shall not be made unless a Borrower Representative has provided a certificate to the Trustee showing that the Coverage Test (determined by including the actual amount requested for the Subordinate Asset Management Fee, the Subordinate Management Fee, and the Subordinate Home Office Fee in Operating Expenses) has met the requirements as provided in the Loan Agreement for the most recent Test Period and the Trustee has confirmed the accuracy of the mathematical calculation of the Debt Service Coverage Ratio in such certificate. See APPENDIX B SUMMARIES OF CERTAIN PROVISIONS OF THE PRINCIPAL DOCUMENTS THE TRUST INDENTURE. 17

28 If on or after any Annual Evaluation Date, the Trustee receives a certificate signed by a Borrower Representative stating that the Borrower has satisfied the Coverage Test (as shown in a report by a certified public accountant delivered by the Borrower to the Trustee pursuant to the Loan Agreement) for the Fiscal Year ending on such December 31, no Event of Default, or event which with the passage of time or the giving of notice or both would constitute an Event of Default, has occurred and is continuing, and the Debt Service Reserve Requirement and the required Repair and Replacement Fund and Operations and Maintenance Reserve Fund deposits have been fully funded, then within two Business Days after written request by the Borrower to the Trustee, the Trustee shall disburse from the Surplus Fund to the Borrower an amount equal to the lesser of (i) the Surplus Cash as of such Annual Evaluation Date or (ii) the Surplus Cash available on the date of disbursement. Notwithstanding anything to the contrary in the Indenture, the Trustee shall not make disbursements from the Surplus Fund to the Borrower pursuant to the Indenture unless the Trustee has received the financial reports and certificates then due as set forth in the Loan Agreement. No Credit Enhancement Facility THERE IS NO CREDIT ENHANCEMENT FACILITY SECURING ANY OF THE BONDS AS INITIALLY ISSUED, NOR IS THERE ANY PROVISION FOR A CREDIT ENHANCEMENT FACILITY EVER TO BE PROVIDED TO SECURE ANY OF THE BONDS. Approval of Consultants If at any time the Borrower is required to engage a consultant under the provisions of the Loan Agreement and as described under the heading THE BONDS Rate Covenant, such consultant shall be engaged in the following manner: Upon selecting a consultant as required under the provisions of the Loan Agreement, the Borrower will notify the Trustee of such selection. The Trustee shall, as soon as practicable but in no case longer than five Business Days after receipt of notice, notify the Owners of all then-outstanding Bonds of such selection. Such notice shall (i) include the name of the consultant and a brief description of the consultant, (ii) state the reason that the consultant is being engaged including a description of the covenant(s) in the Loan Agreement that require the consultant to be engaged, and (iii) state that the Owner of the Bonds will be deemed to have consented to selection of the consultant named in such notice unless the Owner of the Bonds submits an objection to the selected consultant in writing (in a manner acceptable to the Trustee) to the Trustee within 15 days of the date that notice is sent to the Owners of the Bonds. No later than two Business Days after the end of the fifteen day objection period, the Trustee shall notify the Borrower of the aggregate principal amount of the Bonds for which the Owners thereof have submitted an objection. If the Owners of more than two-thirds (66.7%) in aggregate principal amount of the Bonds Outstanding have been deemed to have consented to the selection of the consultant, the Borrower may engage the consultant. If the Owners of one-third (33.3%) or more in aggregate principal amount of the Bonds Outstanding have objected to the consultant selected, the Corporation shall select another consultant which may be engaged upon compliance with the procedures described in this paragraph. Other Covenants of the Borrower Under the Loan Agreement, the Mortgage and the Regulatory Agreement, the Borrower is required to comply with certain other covenants and agreements. See THE LOAN AGREEMENT, THE MORTGAGE and THE REGULATORY AGREEMENT in APPENDIX B. Relationship Among Series Under the Indenture, amounts deposited in the Revenue Fund (after all other required applications) will be applied to the payment of the Senior Bonds prior to payment of the Subordinate Bonds. See APPENDIX B SUMMARIES OF CERTAIN PROVISIONS OF THE PRINCIPAL DOCUMENTS THE INDENTURE Revenue Fund. Consequently, revenues will not be deposited equally towards the payment of interest and principal on each Series of Bonds. Amounts on deposit in the accounts of the Bond Fund for a Series of Bonds will be used solely to pay principal and interest on that Series of Bonds, on the applicable payment dates. If there is a shortfall of revenues, interest and principal on the Senior Bonds must be paid prior to any such payments being made with 18

29 respect to the Subordinate Bonds. Under such circumstances, principal and/or interest on the Series 2011B Bonds may remain unpaid. Pursuant to the Indenture, failure to pay any installment of interest on any Bond when such interest becomes due and payable and failure to pay the principal of, or premium, if any, on any Bond when such becomes due and payable, whether at maturity, by proceedings for redemption, by declaration or otherwise constitutes an Event of Default. An Event of Default with respect to the Subordinate Bonds will not, in and of itself, constitute an Event of Default with respect to the Senior Bonds. Upon an Event of Default, however, the Indenture provides the Subordinate Bonds may not be accelerated unless the Senior Bonds have been paid in full, or provision for their payment in full has been made in accordance with the Indenture. Furthermore, amounts resulting from the exercise by the Trustee of any remedies available upon an Event of Default would be used to pay the Senior Bonds prior to the payment of the Subordinate Bonds. See APPENDIX B SUMMARIES OF CERTAIN PROVISIONS OF THE PRINCIPAL DOCUMENTS THE INDENTURE Revenue Fund and THE INDENTURE Defaults and Remedies. THE SERIES 2011B BONDS ARE SUBORDINATE IN BOTH RIGHT OF PAYMENT AND SECURITY TO THE SERIES 2011A BONDS. Issuance of Additional Bonds So long as no Event of Default has then occurred and is continuing, the Issuer at the request of the Borrower Representative, upon compliance with the terms of the Indenture, may issue Additional Bonds for the purpose of (i) financing the costs of making such Modifications as the Borrower may deem necessary or desirable, (ii) financing the cost of completing any Modifications, (iii) refunding any Bonds, and (iv) in each such case, paying the costs of the issuance and sale of the Additional Bonds, paying capitalized or funded interest and such other costs reasonably related to the financing as shall be agreed upon by the Borrower and the Issuer. As a condition for the issuance of Additional Bonds, (i) such Additional Bonds shall be rated in a rating category that is not lower than the underlying rating (i.e., the rating of the Outstanding Bonds without giving effect to any credit enhancement) of the Series of Bonds of the same parity as such Additional Bonds, and (ii) prior to the issuance of such Additional Bonds, the Rating Agency then rating the Outstanding Bonds shall deliver a Confirmation of Rating stating that the issuance of the Additional Bonds will not result in a qualification, downgrade or withdrawal of the then current ratings on the Bonds. THE ISSUER The Issuer is a public, nonprofit housing finance corporation created and existing under the Texas Housing Finance Corporation Act. The Issuer is authorized by the Act to issue bonds for the purpose of providing multifamily residential housing for persons of low or moderate income within Bexar County, Texas (the County ). The Issuer is governed by a Board of Directors consisting of five members of the Commissioners Court of the County. At present, the members of the Board of Directors of the Issuer and their offices are as follows: Name Paul Elizondo Sergio Chico Rodriguez Tommy Adkisson Nelson Wolff Kevin Wolff Office Director and President Director and Vice President Director and Secretary/Treasurer Director Director 19

30 The firm of Southwestern Capital Markets, Inc. has been retained as financial advisor to the Issuer in connection with the issuance of its debt obligations and certain other financial obligations. THE BONDS AND THE INTEREST THEREON ARE SPECIAL, LIMITED OBLIGATIONS OF THE ISSUER, PAYABLE SOLELY FROM THE TRUST ESTATE AND GIVE RISE TO NO PECUNIARY LIABILITY OF THE ISSUER. BONDS ARE SPECIAL, LIMITED OBLIGATIONS OF THE ISSUER. THE BONDS AND THE INTEREST THEREON NEITHER CONSTITUTE NOR GIVE RISE TO A PECUNIARY LIABILITY, GENERAL OR MORAL OBLIGATION OR A PLEDGE OF THE FULL FAITH AND CREDIT OR TAXING POWER, IF ANY, OF THE ISSUER, THE COUNTY, THE STATE, OR ANY POLITICAL SUBDIVISION OF THE STATE WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY LIMITATIONS. NEITHER THE STATE NOR ANY POLITICAL SUBDIVISION OF THE STATE NOR THE ISSUER NOR THE COUNTY WILL BE OBLIGATED TO PAY THE PRINCIPAL OF THE BONDS, THE INTEREST THEREON OR OTHER COSTS INCIDENT THERETO EXCEPT FROM REVENUES PLEDGED THEREFOR UNDER THE INDENTURE, ALL AS MORE FULLY SET FORTH IN THE INDENTURE. NEITHER THE FULL FAITH AND CREDIT NOR THE TAXING POWER, IF ANY, OF THE ISSUER, THE COUNTY, THE STATE, NOR ANY POLITICAL SUBDIVISION THEREOF, IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF THE BONDS OR THE INTEREST THEREON OR OTHER COSTS INCIDENT THERETO. NEITHER THE BOARD OF DIRECTORS OF THE ISSUER NOR ANY PERSON EXECUTING THE BONDS WILL BE PERSONALLY LIABLE ON THE BONDS OR BE SUBJECT TO ANY PERSONAL LIABILITY OR ACCOUNTABILITY BY REASON OF THE ISSUANCE OF THE BONDS. EACH HOLDER OF THE BONDS AS A CONDITION OF THEIR PURCHASE WILL AGREE TO THE FOREGOING CONDITION OF OWNERSHIP OF THE BONDS. THE BONDS HAVE BEEN ISSUED UNDER THE ACT AND DO NOT CONSTITUTE, WITHIN THE MEANING OF ANY STATUTORY OR CONSTITUTIONAL PROVISION, AN INDEBTEDNESS, AN OBLIGATION, OR A LOAN OF CREDIT OF THE STATE, THE COUNTY, OR ANY OTHER MUNICIPALITY, COUNTY, OR OTHER MUNICIPAL OR POLITICAL CORPORATION OR SUBDIVISION OF THE STATE. EXCEPT FOR THE INFORMATION CONTAINED UNDER THE CAPTION "THE ISSUER" AND LITIGATION ISSUER, THE ISSUER HAS NOT PROVIDED ANY OF THE INFORMATION CONTAINED IN THIS OFFICIAL STATEMENT. THE ISSUER IS NOT RESPONSIBLE FOR AND DOES NOT CERTIFY AS TO THE ACCURACY OR SUFFICIENCY OF THE DISCLOSURES MADE OR ANY OTHER INFORMATION PROVIDED) BY THE BORROWER, THE UNDERWRITERS OR ANY OTHER PERSON. The Issuer has previously issued bonds for the purpose of financing other projects for other borrowers which are payable from revenues received from such other borrowers. Revenue bonds issued by the Issuer for other borrowers have been, and may be, in default as to principal or interest. The source of payment for other bonds previously issued by the Issuer for other borrowers is separate and distinct from the source of payment for the Bonds, and accordingly, any default by any such other borrower with respect to any of such other bonds is not considered a material fact with respect to the payment of the Bonds. THE BORROWER AND THE PROJECT The following information has been provided by the Borrower. None of the Issuer, the Trustee or the Underwriters have made any independent investigation regarding the information presented under this heading, nor have such parties verified the accuracy or completeness thereof, and none of the Issuer, the Trustee or the Underwriters assumes any responsibility or liability therefor. The Borrower Canton II, Inc., (the Borrower ) is a Texas non-profit corporation and a subordinate entity of The Emmaus Calling, Inc., ( TEC ), a Texas non-profit corporation. The members of the Board of Directors of TEC are also the 20

31 members of the Board of Directors of the Borrower. The Borrower and TEC are exempt from federal income taxation pursuant to Section 501(c)(3) of the Internal Revenue Code of 1986, as amended. The Borrower was formed on August 3, 2006, has conducted no operations to date and has no significant assets. The Borrower does not intend to acquire any substantial assets or engage in any substantial business activities other than those related to the ownership of the Project, and the Borrower is required to be a single asset/sole purpose entity by the documents relating to the Loan Agreement. However, TEC and other affiliated entities and other members of the development team may engage in the acquisition, development, ownership and management of similar types of housing projects. None of the officers, directors or employees of the Borrower or TEC will be personally liable for payments on the Series 2011 Notes. Furthermore, no representation is made that the Borrower or TEC will have substantial funds to meet operating deficits of the Project should they occur. Accordingly, neither the Borrower s financial statements nor those of TEC are included in this Official Statement. The Emmaus Calling, Inc. Introduction. TEC is a Texas non-profit, non-stock corporation formed in 1995 for the purpose of providing housing and assisted living opportunities for seniors. TEC has received a determination letter from the IRS for its tax-exempt status effective May 1999 (the Determination Letter ) to the effect that TEC is an organization described in Section 501(c)(3) of the Code and can reasonably be expected to be a publicly supported organization described in Section 509(a)(2) of the Code and not a private foundation. In a letter dated April 22, 2003, the IRS confirmed the Determination Letter and that those subordinate organizations which are operated, supervised or controlled by TEC are exempt organizations (the Group Exemption Letter ). The Borrower is named in the Group Exemption Letter. TEC has incorporated nine other nonprofit corporations that are included in the Group Exemption Letter. These nonprofit corporations and their corresponding revenues and assets are not pledged to the principal of and interest on the Bonds. Other Communities. Following is a list of other rental housing communities owned and operated by affiliates of TEC. These properties and the revenue generated from these properties do not secure the principal of and interest on the Bonds. Name Location Number of Units Project Type Occupancy Percentage Gull Creek Austin Bluff Apartments Cimarron Apartments Watermarc Apartments Brazos Park Apartments Bachman Oaks Apartments Berlin, Maryland 100 Assisted Living/Independent Living Apartments 83% Dallas, Texas 232 Senior Apartments 97% Dallas, Texas 250 Senior Apartments 95% Dallas, Texas 115 Senior Apartments 94% Dallas, Texas 102 Senior Apartments 100% Dallas, Texas 208 Senior Apartments 91% Total Units: 1,007 Average Occupancy: 93.3% Governance. TEC is governed by a Board of Directors, which currently consists of four members. A brief resume of the officers and directors of TEC and the Borrower are as follows: 21

32 Wayne T. Nance, Director and Chairman of the Board. Mr. Nance is the Chairman of the Board of Directors of TEC and each of its nine affiliated non-profit corporations. Since 2004, Mr. Nance has served as a principal and chief operating officer of Tompkins Nance Group, LLC, a commercial construction company. Mr. Nance currently oversees marketing, client relations, estimates, contract negotiations and preparation, quality control and safety. From , Mr. Nance served as Vice President of Operations for Commercial Structures & Interiors, Inc. where he had oversight of the construction various facilities including churches, multiuse town centers, banks, office buildings, educational institutions, hotels, retail centers, auto dealerships, restaurants, telecommunications, industrial, municipal and community courts facilities. From , Mr. Nance was the owner of Image Commercial Contractors which completed major construction projects including Cardinal Technology Center Phase 1, a 390,000 S.F. office - warehouse; Cardinal Technology Center II, a 190,000 S.F. office building; Patient Care Center (UNTHSC), a 75,600 S.F. medical facility; a U.S. Postal Service Distribution Center of 120,000; S.F. Ingram Micro, a 297,000 S.F. office/warehouse; and Briggs Weaver, a 205,000 S.F. office/warehouse. Mr. Nance graduated from Trinity University with a bachelor s degree in Construction Science. Robbie Wittner, President/CEO and Director. Ms. Wittner is the President of TEC and each of its nine affiliated non-profit corporations. Ms. Wittner currently overseeing the operations of TEC and its affiliates. This includes oversight for six facilities with approximately 1,007 units. Ms. Wittner has over ten years experience serving in the fields of office management and administration. In her various roles in office administration, Ms. Wittner was responsible for a variety of employee issues, including recruiting, training and various employee compensation benefit issues. Also included were budgeting, purchasing and client management. She has over fifteen years experience in litigation support. Ms. Wittner holds a Bachelor of Science degree from Baylor University and studied at the postgraduate level at the University of Houston. In addition, Ms. Wittner has completed a variety of professional development courses in the areas of banking, office administration, court reporting, litigation for paralegals, and non-profit management. Coralyn Elizabeth Dillard, Director. Mrs. Dillard is a registered nurse and has been employed by Covenant Hospital in Plainview, Texas since Mrs. Dillard has held various positions at Covenant Hospital, including Patient Care Provider and Charge Nurse, Nurse Manager and House Supervisor. Currently, Mrs. Dillard is responsible for a nurse education and training program for persons with diabetes. Prior to serving at Covenant Hospital, Mrs. Dillard was the secretary to the Vice-President of Business and Financial Services for Wayland Baptist University from 1986 to Mrs. Dillard was the Secretary Receptionist, Bookkeeper and Office Manager of Turner Construction & Land Development from 1979 to Mrs. Dillard is a graduate of West Texas A&M University. Billy "Glenn" Dillard, Director. Mr. Dillard is currently the owner and operator of West Texas Woodfire Grill. From 1984 to 2010, Mr. Dillard served as a manager of Cargill Transportation in Plainview, Texas. Mr. Dillard developed single and multifamily housing from for Turner Construction & Land Development. From , Mr. Dillard served in the United States Air Force as an aircraft mechanic. The Project The Project, known as The Inn at Los Patios, will be acquired by the Borrower from Southwest Properties LP (the Seller ) on the Closing Date. The Project is located on approximately acres at 8700 Post Oak Lane, San Antonio, Texas. The Project is comprised of two three-story buildings containing a total of 167 units consisting of 137 independent units living units and 30 assisted living units. The Project was originally constructed in The Project includes a leasing office, clubhouse (completely furnished for catered parties and meetings), community room, dining room, a library and sitting room, heated swimming pool, fitness center, storage, billiards room, beauty shop, walking path, activity room, on-site corner store, emergency generator and lighting system, 24- hour security with closed-circuit television, individual U.S. mailboxes and lounge. Each independent living unit in the Project includes a range, oven, refrigerator, garbage disposal, dishwasher, microwave, cabinets, washer and dryer hook-ups, individually controlled heating system and air conditioning, computer-monitored smoke and fire detection system and a patio or balcony. Each assisted living unit contains a mini-refrigerator and a small kitchenette. The interior finish of the units includes carpet, ceramic tile, hardwood flooring, blinds, balcony or 22

33 patios, pull cords and safety bars. The Project contains approximately 96 parking spaces. See PROJECT PICTURES inside the cover page hereof. The units consist of the following: Independent Living - Main Building & Cluster Apartments Number of Units Unit Type Square Feet Rent Range (1) Main Building 37 Studio 520 $2,285 - $2, Bedroom / 1 Bath 725 $2,990 - $3, Bedroom / 1 Bath / Study 780 $3,140 - $3, Bedroom / 2 Bath 1,055 $3,995 - $4, Bedroom / 2 Bath 1,117 $4,250 - $4, Cluster Apartments 18 1 Bedroom / 1 Bath 750 $2,695 - $2, Bedroom / 1 Bath 1,055 $3,295 - $3, Bedroom / 2 Bath 1,320 $3,915 - $3, (1) As of November 15, 2011 The following are included in the monthly rent for the Independent Living Units: utilities, cable television, two meals per day, full service dining room and separate dining room for private parties and special occasions, weekly housekeeping, trash removal, grounds and facilities maintenance, lighted parking, complimentary use laundry facilities, transportation to shopping, grocery, banks, medical offices and military installations, weekly happy hour with hors d oeurves and live entertainment and 15 days per year of services in the assisted living center. Other services provided at an additional cost include newspaper delivery, beauty and barbershop services, dry cleaning pick-up and delivery, meals for guests, catering services, covered parking and personal laundry and additional housekeeping services. Assisted Living Units Number of Units Unit Type Square Feet Rent Range (1) 30 Studio (Assisted Living) 365 $3,185-3,335 (1) As of November 15, 2011 The following are included in the monthly rent for the assisted living units: utilities, cable television, three daily meals, bi-weekly housekeeping, flat linen service, personal laundry service, assistance with daily living activities and transportation to shopping, grocery, banks, medical offices and military installation. Occupancy Long-term occupancy has averaged in excess of 92%. In 2008 and 2009 the occupancy of the Project was impaired by road construction which has since been completed. Historical occupancy figures set forth below are for the fiscal years ending December 31 of each year: 23

34 Fiscal Occupancy Year 2004 Percentage 94% % % % % % % 2011 (1) 92% (1) As of November 15, 2011 Appraisal As of November 15, 2011, the average age of residents at the Project is 86. Information concerning the Project and the market area of the Project is contained in the Appraisal Report dated July 7, 2011 prepared by Butler Burgher Group, LLC (the Appraisal ). According to the Appraisal, the total value of the project with taxes is $24,900,000 and $27,500,000 without taxes. An excerpt of the Appraisal is set forth in APPENDIX F to this Official Statement. The summary of the Appraisal does not purport to be complete or definitive and is qualified in its entirety by reference to the full Appraisal. During the initial offering period, the full Appraisal will be provided to any prospective purchaser upon request to the Underwriters. See APPRAISAL herein and SELECTED MARKET AREA DATA AND ANALYSIS in APPENDIX F hereto. Limitation on Obligations of the Borrower The obligations of the Borrower under the Loan Agreement, the Series 2011 Notes and the Mortgage are payable solely from Project Revenues and the Funds and Accounts created under the Indenture (except as specifically set forth therein), without recourse to the assets of any other person or entity, including any director of the Borrower. The Borrower s obligations to make Loan Payments with respect to the Bonds are limited recourse obligations of the Borrower; as a result, holders of the Bonds will have recourse only to the Funds and Accounts created under the Indenture (except as specifically set forth therein), the Project and the other equipment and personal property secured under the Mortgage to satisfy the obligations of the Borrower with respect to the Bonds. No other revenues or assets of the Borrower will be available for the payment of, or as security for, the Bonds. No representation is made that the Borrower will have funds available sufficient to make payments due pursuant to the Loan Agreement. Accordingly, the Borrower s financial statements are not included in this Official Statement. The Manager The Project will be managed by Wind River Management Corporation, located in Duncanville, Texas (the Manager ). The Manager was formed in 1992 and currently has a staff of 11 professionals and over 300 staff members. The Manager currently manages more than 1,138 multifamily units and has managed the Project since its initial development. Following is information about the senior living housing communities managed by the Manager. Name Location Occupancy Units Service Level Independent Senior Living Town Village Senior Living Oklahoma City, OK 93% 168 Apartments 17 Assisted Living Apartments Twin Rivers Richardson, TX 96% 156 Independent Senior Living Apartments 24

35 The Woodlands Eastland, TX 94% 32 Assisted Living Apartments 16 Memory Support Beds Champions Cove Duncanville, TX 100% 150 Independent Senior Living Apartments Independent Senior Living The Inn at Los Patios San Antonio, TX 92% 137 Apartments 30 Assisted Living Apartments Cedar Green Living Center DeSoto, TX 98% 104 Independent Senior Living Apartments Village Green Multi-Family Apartments Dallas, TX 92% 208 Apartments - All Ages Sedona Senior Living Forth Worth, TX Opens 1Q Independent Senior Living Apartments Pursuant to the Management Agreement dated as of December 1, 2011 (the Management Agreement ), between the Borrower and the Manager, the Manager will be the exclusive agent for the management of the Project, including marketing, rental activities, collection of rents, enforcement of leases, maintenance and repair of the Project, provision of utilities and services, and for obtaining and keeping in effect all insurance policies with respect to the Project. Under the Management Agreement, the Manager will be paid an annual fee for each fiscal year equal to $225,711. Additionally, if the gross revenues of the Project for such fiscal year exceed $5,642,787 as determined pursuant to the audited financial statements of the Inn, the lesser of (1) $11,286 and (2) the product of (I) the gross revenues of the Project for such fiscal year minus $5,642,787 and (II) four percent (4%) will be paid to the Manager. A copy of the Management Agreement is available upon written request to an Underwriter. The use of money in the Revenue Fund to pay the fee of the Manager is subordinate to the monthly deposits to the Bond Fund to pay Debt Service on the Bonds. See THE BORROWER AND THE PROJECT Relationship of the Manager and the Asset Manager herein. The Asset Manager Pursuant to an asset oversight agreement (the Asset Oversight Agreement ) dated as of December 1, 2011, by and between the Borrower and ILP Asset Management, LLC, Duncanville, Texas (the Asset Manager ), the Asset Manager is to perform certain oversight activities with respect to the Borrower, the Manager and the Project. For its services as such, the Asset Manager shall receive an annual fee for each fiscal year equal to $56,428. Additionally, if the gross revenues of the Project for such fiscal year exceed $5,642,787 as determined pursuant to the audited financial statements of the Project, the lesser of (1) $2,822 and (2) the product of (I) such gross revenues minus $5,642,787 and (II) one percent (1%) shall be paid to the Asset Manager. A copy of the Asset Oversight Agreement is available upon written request to an Underwriter. The use of money in the Revenue Fund to pay the fee of the Asset Manager is subordinate to the monthly deposits to the Bond Fund to pay Debt Service on the Bonds. See THE BORROWER AND THE PROJECT Relationship of the Manager and the Asset Manager herein. Currently, the Asset Manager provides oversight of several senior living properties with an aggregate value exceeding one hundred million dollars. The following is a brief resume of the Managing Member of the Asset Manager: Mickey Fisher, Managing Member. Mr. Fisher currently serves as the Manager for ILP Asset Management, LLC, the Chief Financial Officer for WR Companies, and the Manger for FV Services, a healthcare services investment company. Prior to his current responsibilities, Mr. Fisher worked with the Texas Growth Fund, a $575 million private equity fund focused on acquiring and managing Texas-based companies and Swander Pace 25

36 Capital, a $600 million private equity fund focused on acquiring and managing consumer-based companies in the U.S. Mr. Fisher began his career as an investment banker with Bowles Hollowell Conner, a middle market boutique mergers and acquisitions firm. Mr. Fisher received an MBA from the Kellogg School of Management at Northwestern University and an Honors BBA from Southern Methodist University. Relationship of the Manager and the Asset Manager The Managing Member of the Asset Manager is an employee of the Manager. Prior Operating History The Seller has provided a compilation of financial statements for the Project for calendar years 2008, 2009 and See APPENDIX E herein. No assurance can be given that the operating revenues from the Project or operating expenses of the Project will be consistent with those historically experienced. Pro Forma Financial Projection Attached as APPENDIX D hereto are pro-forma financial projections for the Project prepared by the Manager setting forth an estimate of revenues and expenses for the Project for calendar years 2012 through The calculations of debt service coverage are based upon historical results and actual year-to-date 2011 revenues and expenses. The pro forma financial projections for the Project have not been compiled or examined by an accountant. The Underwriters make no representations or warranties regarding the pro-forma financial projections and disclaims any responsibility therefor. There are no assurances that operating expense will not exceed those listed in the projection, and it is reasonably expected that such expenses will increase during the term of the Bonds. In the event of increases in the operating expenses of the Project, the Borrower will be primarily dependent upon increases in tenant rents in order to adequately operate and maintain the Project. See RISK FACTORS AND INVESTMENT CONSIDERATIONS Future Project Revenues and Expenses herein. Physical Needs Assessment On June 6, 2011, OGI Environmental, LLC based in Las Vegas, Nevada performed a physical inspection of the Project and prepared a Project Capital Needs Assessment (the Needs Assessment ). The Needs Assessment identified no physical deficiencies or items of immediate critical repairs that should be made to the Project at this time. In addition, the Needs Assessment identified future capital expenditure will approximate $685,384 over the next 10 years as described in the following table: Immediate And Reserve Summary Un-inflated Cost Inflated Cost Un-inflated $/Unit/ Yr Inflated $/Unit/ Yr 10 Year Replacement Reserves Costs $601,460 $685,384 $300 $343 estimate The initial Replacement Reserve Requirement is equal to $350 per unit per year and may increase pursuant to any subsequent Needs Assessment Analysis required by the Loan Agreement. Real Estate Taxes The Borrower expects that upon its acquisition of the Project, the Project will be exempted from real property taxes by the Bexar Central Appraisal District equal to 100% of the value of the land and 100% of the value of the improvements comprising the Project. The Borrower is covenanting in the Loan Agreement to secure a letter from the Bexar Central Appraisal District confirming the Project will be exempted from real property taxes. 26

37 If the Project were not exempt from assessment of real property taxes by the Bexar Central Appraisal District the Borrower would be required to pay real estate taxes on the Project at then prevailing millage rates. The property tax exemption of the Project enhances the financial feasibility of the Project. If the Project is unable to obtain, or were to lose its tax exemption, it would have an adverse effect on the operation of the Project. See RISK FACTORS AND INVESTMENT CONSIDERATIONS Risk of Real Estate Investments Property Taxes in Texas. Environmental Assessment A Phase I Environmental Site Assessment of the Project dated May 16, 2011 (the Environmental Assessment ) was prepared by Astex Environmental Services, Inc. ( Astex ). The Environmental Assessment was conducted utilizing the generally accepted Phase I industry standards using the American Society for Testing and Materials (ASTM) Standard Practice (E ). Astex performed a cursory evaluation consisting of visual observation for the potential presence of lead paint and asbestos containing material. No samples were collected. The Environmental Assessment revealed no evidence of recognized environmental conditions in connection with the Project and recommended no additional investigation at the time of the Environmental Assessment. Restrictive Covenants The Regulatory Agreement requires that the Project be operated in accordance with Revenue Ruling , C.B. 145, Revenue Ruling 79-18, C.B. 194, Revenue Procedures and , and the requirements of Section 142(d) of the Code with respect to the Project. Section 142(d) of the Code requires that the Borrower must make (i) not less than 20% of the Project's units available to persons whose incomes are at or below 50% of the local area median income, as adjusted from time to time, or (ii) not less than 40% of the Project's units available to persons whose incomes are at or below 60% of the local area median income, as adjusted from time to time. The Borrower has elected to use the 20% threshold for the Project. See APPENDIX B SUMMARIES OF CERTAIN PROVISIONS OF THE PRINCIPAL DOCUMENTS THE REGULATORY AGREEMENT. The Regulatory Agreement further requires that the entire Project be offered for rental to the general public, prohibits rental of certain units to persons related to the Borrower and rentals on a transient basis, and imposes other restrictions on the operation of the Project (as defined in the Regulatory Agreement, the Rental Restrictions ). These conditions and restrictions may continue in effect upon a sale or foreclosure under the Mortgage and can be expected to adversely affect the value of the Project to a prospective purchaser in the event of a sale or foreclosure. In addition, failure by the Borrower to operate the Project in compliance with the provisions of the Regulatory Agreement could cause interest on the Bonds to be subject to federal income taxation, possibly retroactive to the date of issuance of the Bonds. Insurance Under the Loan Agreement, the Borrower is required to maintain insurance against loss or damage to the improvements by fire and other risks covered by fire and extended coverage insurance in an amount not less than the greater of the full replacement cost of the improvements and personal property or the outstanding principal amount of the Bonds, with a deductible for any casualty in amounts acceptable to the Issuer; business interruption or loss of rent insurance in amounts sufficient to make all payments due under the Loan Agreement and the Series 2011 Notes during any 12-month period, or the gross amount of annual rentals projected (or, if greater, actual) for the Project based upon the projected (or, if greater, actual) occupancy of the Project; provided that such coverage shall be increased annually on each anniversary date of the policy to comply with the Loan Agreement; comprehensive general liability insurance on an occurrence basis against claims for personal injury, including bodily injury, death or property damage; workers compensation insurance; during the construction or repair of improvements on the property, builders completed value risk insurance against all risks of physical loss; boiler and machinery insurance; flood insurance if the property is in an area identified as a special flood hazard area; and such other insurance as is commonly obtained by prudent owners of property similar in use in the area in which the Project is located. All policies of insurance will contain an endorsement or agreement by the insurer that any loss will be payable in accordance with the terms of such policy notwithstanding any act or negligence of the Borrower, which 27

38 might otherwise result in forfeiture of such insurance, and the further agreement of the insurer waiving all rights of set-off, counterclaim or deductions against the Borrower. APPRAISAL Butler Burgher Group, LLC (the Appraiser ) was retained by the Borrower to prepare an appraisal report (the Appraisal ) of the value of the Project, with a date of July 7, The summary of certain aspects which follows does not purport to be complete or definitive and is qualified in its entirety by reference to the full Appraisal. During the initial offering period, the Appraisal will be provided to any prospective purchaser upon request to an Underwriter. The Appraiser determined the following values for the Project as of June 7, 2011: Allocation of Value Allocation of the Real Estate $19,400,000 Allocation of the Business $5,000,000 Furniture, Fixtures & Equipment $500,000 Total Value (with taxes) $24,900,000 Total Value (without taxes) $27,500,000 The Project is exempt from real property taxes. The Appraisal includes information regarding the procedures utilized in preparing the Appraisal and the underlying general assumptions and limiting conditions. The conclusions and much of the other information included in the Appraisal are based on the assumptions and rationale stated therein. In some instances the currently available information may be incomplete, may not necessarily disclose all material facts that might affect the Project, and, in any case, may change after the date of the Appraisal. Accordingly, the assumptions and other information in the Appraisal should be carefully evaluated by a prospective investor in the light of the circumstances then prevailing. Appraisals, by their nature, are based on the judgment of the Appraiser, represent only estimates of value and should not be relied upon as a measure of realizable value. There can be no assurance that information set forth therein continues to be accurate in all respects as of the date hereof. In any event, the accuracy of the Appraisal is dependent upon the occurrence of specified assumptions and other future events which cannot be assured, and therefore, the actual results achieved will vary from the forecasts, and the variation may be material. Information taken from the appraisal reports prepared by the Appraiser should be evaluated within the context of the full narrative report. Information presented out of the context of the full narrative report may be misleading. There is no assurance that the market value set forth in the Appraisal would be realized in the event of the foreclosure or forced sale of the Project. [Remainder of page intentionally left blank] 28

39 ESTIMATED SOURCES AND USES OF FUNDS The proceeds of the Bonds (excluding accrued interest) are expected to be used and applied in the following manner: Sources of Funds: Series 2011A Bonds $23,600,000 Series 2011A-T Bonds 845,000 Series 2011B Bonds 3,320,000 (Less Original Issue Discount) (965,992) Total Sources of Funds $26,799,008 Uses of Funds: Deposit to Project Fund (Acquisition Price) $23,600,000 Deposit to Debt Service Reserve Fund Accounts 1 Series 2011A and Series 2011A-T Bonds 1,634,063 Series 2011B Bonds 256,828 Cost of Issuance 2 875,862 Underwriters Discount 428,043 Additional Proceeds 4,213 Total Uses of Funds $26,799,008 [Remainder of page intentionally left blank] 1 Equal to Maximum Annual Debt Service on the Series 2011A Bonds and Series 2011A-T Bonds, and Maximum Annual Debt Service on the Series 2011B Bonds, respectively. 2 Expenses of Underwriters, Bond Counsel, Underwriters Counsel, Issuer s Counsel, Trustee, Trustee s counsel and other costs of issuance of the Bonds. Not more than 2% of the proceeds of the Tax-Exempt Bonds may be used to pay costs of issuance. 29

40 DEBT SERVICE REQUIREMENTS The following table sets forth the scheduled principal and interest payments for the Bonds: Series A Series A-T Series B Aggregate Debt Service Period Ending Principal Interest Subtotal Principal Interest Subtotal Principal Interest Subtotal Semi- Annual Annual 1/1/2012 $- $96,695 $96,695 $- $- $- $- $- $- $96,695 $96,695 7/1/ , , ,000 29, , , , ,974-1/1/ , , ,000 22, , , , ,709 1,898,683 7/1/ , , ,000 18, , , , ,259-1/1/ , , ,000 15, , , , ,809 1,860,068 7/1/ , , ,000 11, , , , ,209-1/1/ , , ,000 7, ,950 25, , , ,459 1,885,668 7/1/ , , , ,000 4, ,200 15, , ,678 1,043,846-1/1/ , , , , , , ,879 1,945,725 7/1/ , , , , , , ,986-1/1/ , , , , , , ,016 1,889,003 7/1/ , , , , , , ,826-1/1/ , , , , , , ,684 1,882,510 7/1/ , , , , , , ,416-1/1/ , , , , , , ,024 1,885,440 7/1/ , , , , , , ,459-1/1/ , , , , , , ,941 1,882,400 7/1/ , , , , , , ,126-1/1/ , , , , , , ,359 1,888,485 7/1/ , , , , , , ,121-1/1/ , , , , , , ,931 1,883,053 7/1/ , , , , , , ,741-1/1/ , , , , , , ,426 1,887,168 7/1/ , , , , , , ,689-1/1/ , , , , , , ,951 1,889,640 30

41 Series A Series A-T Series B Aggregate Debt Service Period Ending Principal Interest Subtotal Principal Interest Subtotal Principal Interest Subtotal Semi- Annual Annual 7/1/ , , , , , , ,964-1/1/ , , , , , , ,976 1,885,940 7/1/ , , , , , , ,739-1/1/ , , , ,000 99, , ,376 1,886,115 7/1/ , , , ,000 98, , ,841-1/1/ , , , ,000 97, , ,931 1,889,773 7/1/ , , , ,000 96, , ,146-1/1/ , , , ,000 95, , ,211 1,881,358 7/1/ , , , ,000 94, , ,133-1/1/ , , , ,000 93, , ,766 1,883,899 7/1/ , , , ,000 92, , ,084-1/1/ , , , ,000 90, , ,114 1,884,198 7/1/ , , , ,000 89, , ,000-1/1/ , , , ,000 88, , ,599 1,882,599 7/1/ , , , ,000 87, , ,881-1/1/ , , , ,000 85, , ,733 1,883,614 7/1/ , , , ,000 84, , ,584-1/1/ , , , ,000 82, , ,004 1,882,588 7/1/ , , , ,000 81, , ,108-1/1/ , , , ,000 79, , ,608 1,888,715 7/1/ , , , ,000 78, , ,136-1/1/ , , , ,000 76, , ,234 1,887,370 7/1/ , , , ,000 74, , ,843-1/1/ , , , ,000 72, , ,718 1,882,560 7/1/ , , , ,000 71, , ,270-1/1/ , , , ,000 69, , ,900 1,888,170 7/1/ , , , ,000 67, , ,853-1/1/ , , , ,000 65, , ,733 1,885,585 31

42 Series A Series A-T Series B Aggregate Debt Service Period Ending Principal Interest Subtotal Principal Interest Subtotal Principal Interest Subtotal Semi- Annual Annual 7/1/ , , , ,000 62, , ,763-1/1/ , , , ,000 60, , ,870 1,884,633 7/1/ , , , ,000 58, , ,828-1/1/ , , , ,000 56, , ,035 1,884,863 7/1/ , , , ,000 53, , ,898-1/1/ , , , ,000 51, , ,860 1,885,758 7/1/ , , , ,000 48, , ,823-1/1/ , , , ,000 45, , ,735 1,887,558 7/1/ , , , ,000 42, , ,453-1/1/ , , , ,000 40, , ,270 1,884,723 7/1/ , , , ,000 37, , ,788-1/1/ , , , ,000 33, , ,060 1,886,848 7/1/ , , , ,000 30, , ,505-1/1/ , , , ,000 27, , ,728 1,884,233 7/1/ , , , ,000 23, , ,628-1/1/ , , , ,000 20, , ,305 1,885,933 7/1/2046 1,535,000 92,100 1,627, ,000 16, ,733 1,883,833-1/1/2047 1,535,000 46,050 1,581, ,000 8, ,453 1,834,503 3,718,335 Total $23,600,000 $34,295,139 $57,895,139 $845,000 $109,675 $954,675 $3,320,000 $5,800,083 $9,120,083 $67,969,896 $67,969,896 [Remainder of page intentionally left blank] 32

43 RISK FACTORS AND INVESTMENT CONSIDERATIONS AN INVESTMENT IN THE BONDS INVOLVES A SUBSTANTIAL DEGREE OF RISK. PROSPECTIVE PURCHASERS OF THE BONDS SHOULD CAREFULLY CONSIDER ALL POSSIBLE FACTORS WHICH MAY AFFECT THEIR INVESTMENT IN THE BONDS. IN ADDITION TO THE OTHER INFORMATION SET FORTH HEREIN, THE FOLLOWING LIST, WHILE NOT SETTING FORTH ALL THE FACTORS, CONTAINS SOME OF THE FACTORS THAT SHOULD BE CONSIDERED PRIOR TO PURCHASING THE BONDS. In order to identify risk factors and make an informed investment decision, prospective investors should be thoroughly familiar with this entire Official Statement (including the Appendices hereto, the documents describing the transactions, the third party reports with respect to the Project and the documents relating to the formation and organization of the Borrower) and review the actual documents summarized herein to make a judgment as to whether the Bonds are an appropriate investment for the investor. Limited Obligations of Issuer THE BONDS AND THE INTEREST THEREON ARE LIMITED OBLIGATIONS OF THE ISSUER PAYABLE SOLELY FROM THE TRUST ESTATE ESTABLISHED UNDER THE INDENTURE. THE BONDS WILL CONSTITUTE A VALID CLAIM OF THE RESPECTIVE OWNERS THEREOF AGAINST THE TRUST ESTATE, WHICH IS PLEDGED TO SECURE THE PAYMENT OF THE PRINCIPAL OF, PREMIUM, IF ANY, AND INTEREST ON THE BONDS, AND WHICH IS TO BE UTILIZED FOR NO OTHER PURPOSE, EXCEPT AS EXPRESSLY AUTHORIZED IN THE INDENTURE. THE BONDS DO NOT CONSTITUTE, WITHIN THE MEANING OF ANY STATUTORY OR CONSTITUTIONAL PROVISION, AN INDEBTEDNESS, AN OBLIGATION OR A LOAN OF CREDIT OF THE STATE OF TEXAS (THE "STATE"), BEXAR COUNTY, TEXAS (THE "COUNTY"), THE ISSUER OR ANY OTHER MUNICIPALITY, COUNTY OR OTHER MUNICIPAL OR POLITICAL CORPORATION OR SUBDIVISION OF THE STATE. THE BONDS DO NOT CREATE A MORAL OBLIGATION ON THE PART OF THE STATE, THE COUNTY OR ANY OTHER MUNICIPALITY, COUNTY OR OTHER MUNICIPAL OR POLITICAL CORPORATION OR SUBDIVISION OF THE STATE, AND EACH OF SUCH ENTITIES IS PROHIBITED BY THE ACT FROM MAKING ANY PAYMENTS WITH RESPECT TO THE BONDS. THE ISSUER HAS NO TAXING POWER. Limited Repayment Obligations of Borrower; Security for Repayment The Borrower s obligation to make Loan Payments with respect to the Bonds is a limited, nonrecourse obligation of the Borrower, and holders of the Bonds will have recourse only to the Project and the Project Revenues to satisfy the obligation of the Borrower with respect to the Bonds. There can be no assurance that such amounts will be sufficient to repay the Borrower s obligations with respect to the Bonds. No other revenues or assets of the Borrower will be available for the payment of, or as security for, the Bonds. The security for the Bonds (subject to Permitted Encumbrances) will consist entirely of (i) Loan Payments made by the Borrower pursuant to the Loan Agreement, (ii) the Loan Agreement, the Series 2011 Notes and the Mortgage (except for Reserved Rights of the Issuer), (iii) all money and securities from time to time held by the Trustee under the terms of the Indenture (except as specifically set forth therein), and (iv) any and all other real and personal property from time to time thereafter by delivery or by writing of any kind pledged as additional security for the Bonds pursuant to the Indenture. Prospects for uninterrupted payment of principal and interest on the Bonds in accordance with their terms are dependent upon the success of the Borrower in renovating and operating the Project to generate adequate cash flow to meet its obligations under the Loan Agreement and the Series 2011 Notes. The Borrower and Related Parties; Conflicts of Interest The Borrower was organized in Texas for the sole purpose of acquiring, developing and operating the Project. It has no assets other than the Project and the rights and revenues incident thereto and no intention to acquire other assets. The ability of the Borrower to pay and perform its obligations under the Loan Agreement and the Series 2011 Notes will depend primarily upon the ability of the Project to generate sufficient revenues. 33

44 The Borrower has limited resources and is dependent on its successful operation of the Project to meet its obligations under the foregoing documents. Under the terms of the Loan Agreement, none of the directors of the Borrower are liable for the debts or losses of the Borrower, nor are they obligated to contribute any funds to or on behalf of the Borrower in excess of their initial capital contributions, irrespective of whether the revenues of the Project are sufficient to pay operating expenses and debt service requirements with respect to the Bonds. TEC has engaged in, and may continue to engage in, business for its own account, independently or with others, and whether or not in the vicinity of or in competition with the Project. As a result of its other interests and activities, TEC may have conflicts of interest with its role in the Project, including conflicts in allocating its time and resources between the Project and other activities in which it is involved. See THE BORROWER AND THE PROJECT Relationship of the Manager and the Asset Manager herein. Future Project Revenues and Expenses As noted herein, and except to the extent payable from investment income or, under certain circumstances, proceeds of casualty insurance or condemnation awards, principal of and premium, if any, and interest on the Bonds is payable solely from Project Revenues, which include payments from tenants, and from the security provided by or pursuant to the Indenture, the Loan Agreement and the Mortgage. No representation or assurance is given or can be made that Project Revenues, as presently estimated or otherwise, will be realized by the Borrower, the Trustee, or by any other person in amounts sufficient, together with such other money available under the Indenture and pledged to the Bonds, to pay debt service on the Bonds when due and to make other payments necessary to meet the obligations of the Borrower. Future revenues and expenses of the Project are subject to conditions which may change. The realization of Project Revenues from the Project by the Borrower generally is subject to, among other factors, federal and state policies affecting rental housing and the housing market generally, demand for rental housing, the capability of management of the Project, the nature and condition of the housing stock in the neighborhood in which the Project is located, future economic conditions and other conditions which are impossible to predict. Such conditions may include an inability of the Project management to control expenses during periods of inflation, changes in government involvement in and regulation of rental housing, changes in local real estate taxes and zoning restrictions, and competition from other sources of assisted or market-rate housing. The payment of debt service on the Bonds is, among other things, dependent upon the Borrower s ability to maintain occupancy of the Project and charge and collect rents which are sufficient to pay operating expenses of the Project, debt service requirements with respect to the Bonds and to fund necessary reserves as required under the Indenture. Occupancy levels (which also affect Project Revenues) will depend principally upon the desirability of the Project as rental housing, taking into account factors such as its location, physical condition and amenities. See THE PROJECT herein for a description of the Project. Occupancy levels may also be affected by a variety of future events, including but not limited to failure of the Project to attract such tenants because of competition from other rental housing, changes in zoning restrictions, or development activities near the Project. Subordination of Series 2011B Bonds The Subordinate Bonds are subordinate to the Senior Bonds as described herein and as set forth in the Indenture. Under the Indenture, amounts deposited in the Revenue Fund (after all other required applications) will be used to fund the Bond Fund for payment of the Senior Bonds and the Debt Service Reserve Fund for the Senior Bonds prior to funding the Bond Funds and the Debt Service Reserve Funds for payment of the Subordinate Bonds. See APPENDIX B SUMMARIES OF CERTAIN PROVISIONS OF THE PRINCIPAL DOCUMENTS THE INDENTURE Revenue Fund. Amounts on deposit in a Bond Fund for a particular Series of Bonds will be used solely to pay principal and interest on the related Series of Bonds, on the applicable payment dates. If there is a shortfall of revenues, deposits to the Bond Fund and the Debt Service Reserve Fund for the Senior Bonds must be made prior to any such deposits being made with respect to the Subordinate Bonds. Under such circumstances, principal and/or interest on the Subordinate Bonds may remain unpaid. Pursuant to the Indenture, failure to pay any installment of interest on any Bond when such interest becomes due and payable and failure to pay the principal of, or premium, if any, on any Bond when such becomes due and payable, whether at maturity, by proceedings for redemption, by declaration or otherwise constitutes an 34

45 Event of Default. An Event of Default with respect to the Subordinate Bonds will not, in and of itself, constitute an Event of Default with respect to the Senior Bonds. Upon an Event of Default, however, the Indenture provides the Subordinate Bonds may not be accelerated unless the Senior Bonds have been paid in full, or provision for the payment in full has been made in accordance with the Indenture. Furthermore, amounts resulting from the exercise by the Trustee of any remedies available to the Trustee upon an Event of Default would be used to pay the Senior Bonds prior to the payment of the Subordinate Bonds. The remedies that may be exercised by the Holders of the Subordinate Bonds upon the occurrence of an Event of Default under the Indenture or a Default under the Loan Agreement are also limited during any period in which Senior Bonds remain outstanding. See APPENDIX B SUMMARIES OF CERTAIN PROVISIONS OF THE PRINCIPAL DOCUMENTS THE INDENTURE Revenue Fund and THE INDENTURE Defaults and Remedies. Risks of Real Estate Investment General. Development, ownership and operation of real estate, such as the Project, involves certain risks, including the risk of adverse changes in general economic and local conditions, including the possible future oversupply and lagging demand for housing; adverse use of adjacent or neighboring real estate; community acceptance of the Project; changes in the cost of operation of the Project; difficulties or restrictions in the Borrower s ability to raise rents charged; adverse weather and delays in rehabilitation; population decreases; uninsured losses; failure of residents to pay rent; operating deficits and mortgage foreclosure; lack of attractiveness of the property to residents; adverse changes in neighborhood values; and adverse changes in zoning laws, federal and local rent controls, other laws and regulations and real property tax rates. Such losses also include the possibility of fire or other casualty or condemnation. If the Project, or any parts of the Project, were uninhabitable during restoration after damage or destruction, the residence units or common areas affected would not be available during the period of restoration, which could adversely affect the ability of the Project to generate sufficient revenues to pay debt service on the Bonds. Changes in general or local economic conditions and changes in interest rates and the availability of mortgage funding may render the sale or refinancing of the Project difficult or unattractive. These conditions may have an adverse effect on the demand for the Project as well as the market price received for the Project in the event of a sale or foreclosure of the Project. Many other factors may adversely affect the operation of facilities like the Project and cannot be determined at this time. Risks of Competition, the Rental Market and Occupancy and Rental Rates. The Project may compete with other current and future apartment developments in its market area, some of which may offer lower rentals. Additional supply and/or lower rental rates at the Project could impact occupancy levels or the rental rates necessary to cover debt service requirements. Failure to Maintain Occupancy. The economic feasibility of the Project and its ability to provide revenues to the Borrower to make payments on the Series 2011 Notes depend in large part upon its being substantially occupied. Occupancy of the Project may be affected by competition from existing competing facilities or from competing facilities which may be constructed in the area served by the Project, including new facilities which the Borrower, or its affiliates, may construct. Circumstances may occur, including but not limited to, insufficient demand for low income housing in the Project s location, decreases in the population, deterioration of the structure and living facilities of the Project, and construction of competing projects for low income individuals or other more attractive living accommodations, which could increase the rate of vacancy. Further, the sustained failure of tenants to meet their rental payment obligations would make it difficult for the Project to meet its current operating expenses which could result in a curtailment of essential services and decrease the desirability of the Project to existing or prospective tenants. Damage, Destruction or Condemnation. Although the Borrower will be required to obtain and maintain certain insurance against damage or destruction as set forth in the Loan Agreement and the Mortgage, there can be no assurance that the Project will not suffer losses for which insurance cannot be or has not been obtained or that the amount of any such loss, or the period during which the Project cannot generate Project Revenues, will not exceed the coverage of such insurance policies. If the Project or any portion of the Project is damaged or destroyed, or is taken in a condemnation proceeding, funds derived from proceeds of insurance or any such condemnation award for the Project must be applied as provided in the Loan Agreement to restore or rebuild the Project or to redeem the Bonds. There can be no 35

46 assurance that the amount of funds available to restore or rebuild the Project or to redeem the Bonds will be sufficient for that purpose, or that any remaining portion of the Project will generate Project Revenues sufficient to pay the expenses of the Project and the debt service on the Bonds remaining outstanding. Risk of Tenant Non-Payment of Rent. There can be no assurance that any tenant of the Project will pay rent when due. No governmental agency, has guaranteed the rental payments due from tenants. Thus, there can be no assurance that the rental payments received from the tenants will be sufficient to enable the Borrower to make timely debt service payments on the Series 2011 Notes, or to enable the Issuer to make timely payments of principal premium, if any, and interest on the Bonds. Leases can be terminated by the Borrower for nonpayment of rent by tenants. Real Estate Tax Exemption in Texas. The pro forma cash flows for the Project currently assume that the Project will receive an exemption from Texas property taxation as described herein. Although nonprofit corporations have generally been successful in receiving partial or full exemptions from property taxation, recent court decisions and rulings by Texas counties have put into question whether nonprofit corporations will receive these exemptions as a matter of course or without delay and appeals to county assessors. A denial or revocation of property tax exemption for the Project would have a negative impact on the revenue projections for the Project. If the Project is unable to obtain, or were to lose its tax exemption, it is unlikely that the Project would be able to maintain the required Debt Service Coverage Ratio and may have a material adverse effect on the financial performance of the Project. Furthermore, the Appraisal with the payment of taxes is $24,900,000, which is less than the par amount of the Bonds. Marketing and Management The successful operation of the Project is dependent upon the efforts of the Manager. The Borrower has contracted with the Manager for marketing and day-to-day management and operation of the Project. The Borrower does not currently have the capacity to duplicate the services offered by the Manager. If the Borrower were to terminate its relationship with the Manager, it would need to hire and train a management team for the Project or contract for similar services with other companies. For more information, see THE MANAGER. Effect of Increases in Operating Expenses Substantial increases in operating expenses will affect future net operating income of the Project and the ability of the Project to generate rental revenue in amounts sufficient to satisfy the Borrower s obligations under the Loan Agreement and the Series 2011 Notes. Any failure by the Borrower to satisfy its payment obligations under the Loan Agreement and the Series 2011 Notes will have an adverse impact on the ability of the Trustee to pay, from the Trust Estate, debt service payments on the Bonds. Project Risks Adequacy of the Project as Security. The security for the Bonds includes a lien on the Project, evidenced by the Mortgage which has been granted in favor of the Trustee. If the Borrower fails to make sufficient and timely payments required under the Loan Agreement, it may be necessary for the Issuer and the Trustee to exercise their remedies under the Mortgage or the Indenture, including foreclosure. There can be no assurance that if and when the Trustee forecloses and obtains possession of the Project or realizes amounts from the sale thereof, that resulting proceeds or Project Revenues (if the Project is retained and operated by the Trustee), would be sufficient to pay debt service on the Bonds in full when due and operating expenses of the Project. The Trustee is not in the business of operating facilities such as the Project and any amounts which might be realized from operation of the Project are uncertain. Further, attempts to foreclose under the Mortgage or to obtain other remedies under such document, the Indenture, the Loan Agreement or any other documents relating to the Bonds may be met with protracted litigation and/or bankruptcy proceedings, which could cause delays, and a court may decide not to order specific performance of covenants contained in such documents. Thus, there can be no assurance that upon the occurrence of an event of default on the Bonds the Trustee will be able to obtain possession of the Project or generate proceeds of sale or revenues from the Project, or obtain other relief, in a timely fashion. 36

47 Facilities are Special Purpose Facilities. The Project is being specifically constructed for senior living residential rental housing purposes and is subject to physical restrictions that limit the alternative uses that can be made of such property. The Regulatory Agreement also imposes significant restrictions on the use of the Project which could remain in effect, even in the event of foreclosure of the Mortgage. See APPENDIX B SUMMARIES OF CERTAIN PROVISIONS OF THE PRINCIPAL DOCUMENTS THE REGULATORY AGREEMENT. If the Borrower is unable to operate the Project successfully as a senior living residential rental housing facility, the number of entities that would be interested in purchasing or leasing the Project from the Borrower for other purposes could be extremely limited, and the ability of the Trustee to lease or sell the Project to third parties would be adversely affected. Therefore, there is no assurance that the Trustee could realize sufficient proceeds from the foreclosure of the Mortgage and the sale of the Project thereunder to pay the Bonds in their entirety. Rental Housing Requirements. The Project is subject to significant regulation which, among other things, affects the eligibility of tenants who may reside in the Project and the rents which may be charged to tenants. The Regulatory Agreement requires that, the Borrower operate the Project in accordance with Revenue Ruling , C.B. 145, Revenue Ruling 79-18, C.B. 194, Revenue Procedures and and the requirements of Section 142(d) of the Code with respect to the Project. To comply with these Revenue Rulings and Procedures, the Borrower has adopted a policy which commits it to maintaining in residence to the extent it is able, residents who become unable to pay and to provide services to its residents at the lowest feasible costs taking into account its financial situation including debt service and a need for reasonable services. Section 142(d) of the Code requires that the Borrower must make (i) not less than 20% of the Project's units available to persons whose incomes are at or below 50% of the local area median income, as adjusted from time to time, or (ii) not less than 40% of the Project's units available to persons whose incomes are at or below 60% of the local area median income, as adjusted from time to time. The Borrower has elected to use the 20% threshold for the Project. See INTRODUCTORY STATEMENT and THE BORROWER AND THE PROJECT Project Regulation herein. The restriction is necessary to maintain the tax-exempt status of the Bonds. However, these restrictions may limit the ability of the Borrower to increase the rentals charged to the tenants of the Project to the extent required to compensate for increasing expenses. (See THE PROJECT Project Regulation herein and THE REGULATORY AGREEMENT in APPENDIX B). The foregoing rental housing requirements may adversely affect the occupancy and revenues of the Project and may limit the Borrower s ability to refinance the Project. Other Government Regulation. The Project is and will continue to be subject to rules and regulations promulgated by various agencies and bodies of federal, state and local governments which have jurisdiction over such matters as employment, environment, safety, traffic and health. The impact of such rules and regulations on the Project is unknown and cannot be predicted. Future orders, pursuant to existing or subsequently enacted rules or regulations, may require the expenditure by the Borrower of substantial sums to effect compliance therewith. Appraisal The Appraisal is based on certain assumptions significant to the operation of the Project as described therein, and sets forth information as of the date thereof. Some assumed events and circumstances will not materialize and unanticipated events and circumstances may occur subsequent to the date of the Appraisal. Neither the Issuer, the Underwriters, the Trustee nor any counsel rendering approving or other opinions with respect to the transactions described herein have examined or verified the assumptions and conclusions contained in the Appraisal. As described above, a summary of the Appraisal is set forth in this Official Statement. The summary does not purport to be complete or definitive and is qualified in its entirety by reference to the full Appraisal. During the initial offering period, the Appraisal will be provided to any prospective purchaser upon request to an Underwriter. See APPRAISAL herein. Financial Projections The Pro Forma Financial Projections included in APPENDIX D present the Borrower s estimate of future results of operations of the Project and are subject to certain assumptions used in preparing them. The financial projections have not been reviewed or examined by an accountant and the Underwriters makes no representation as to the financial projections included herein. The passage of time and current economic conditions should be considered by investors when considering such projections. 37

48 BECAUSE THERE IS NO ASSURANCE THAT ACTUAL EVENTS WILL CORRESPOND WITH THE ASSUMPTIONS MADE, NO GUARANTY CAN BE MADE THAT THE PRO FORMA FINANCIAL PROJECTIONS INCLUDED IN APPENDIX D WILL CORRESPOND WITH THE RESULTS ACTUALLY ACHIEVED IN THE FUTURE. ACTUAL OPERATING RESULTS MAY BE AFFECTED BY MANY UNCONTROLLABLE FACTORS, INCLUDING BUT NOT LIMITED TO, INCREASED COSTS, FAILURE BY MANAGEMENT TO EXECUTE ITS PLANS, LOWER THAN ANTICIPATED REVENUES, EMPLOYEE REGULATIONS, TAXES, GOVERNMENTAL CONTROLS, CHANGES IN APPLICABLE GOVERNMENTAL REGULATION, CHANGES IN DEMOGRAPHIC TRENDS, CHANGES IN THE RETIREMENT LIVING AND HEALTH CARE INDUSTRIES AND GENERAL ECONOMIC CONDITIONS. Limitation on Acceleration of the Bonds The Indenture provides that following an Event of Default thereunder, the maturity of the Bonds may be accelerated by the Trustee, subject to cure provisions of the Indenture, and upon written request of the holders of a majority of the principal amount of a Series of Bonds, shall be accelerated. See APPENDIX B SUMMARIES OF CERTAIN PROVISIONS OF THE PRINCIPAL DOCUMENTS - THE TRUST INDENTURE. Risk of Early Redemption There are a number of circumstances under which all or a portion of the Bonds may be redeemed prior to their stated maturity. For a description of the circumstances in which Bonds may be redeemed and the terms of redemption, see THE BONDS Redemption Prior to Maturity herein. Risk of Loss Upon Redemption The rights of Bondholders to receive interest will terminate on the date, if any, on which such Bonds are to be redeemed pursuant to a call for redemption, notice of which has been given under the terms of the Indenture and interest on such Bonds will no longer accrue on and after such date of redemption. There can be no assurance that the Borrower will be able or will be obligated to pay for any amounts not available under the Indenture. In addition, there can be no guarantee that present provisions of the Code or the rules and regulations thereunder will not be adversely amended or modified, thereby rendering the interest earned on the Bonds taxable for federal income tax purposes. Interest earned on the principal amount of the Bonds may or may not be subject to state or local income taxes under applicable state or local tax laws. Each purchaser of the Bonds should consult his or her own tax advisor regarding the taxable status of the Bonds in a particular state or local jurisdiction. Specific Tax Covenants of Borrower and Rental Restrictions As referenced in the Sections of this Official Statement captioned INTRODUCTION and THE PROJECT Project Regulation, the Borrower has covenanted to comply with certain income limits with respect to the Project. These restrictions, by their very nature, limit the revenues which the Project can generate in order to repay the Bonds. See BONDHOLDERS RISKS Risk of Loss Upon Redemption and APPENDIX B - SUMMARIES OF CERTAIN PROVISIONS OF PRINCIPAL BOND DOCUMENTS THE REGULATORY AGREEMENT. Taxation of the Tax-Exempt Bonds The interest on the Tax-Exempt Bonds may be includable in gross income for purposes of federal income taxation retroactive to the date of issuance of the Tax-Exempt Bonds for a variety of reasons. The exclusion from gross income is dependent upon, among other things, compliance with certain restrictions regarding investment of Bond proceeds and continuing compliance by the Borrower with the Regulatory Agreement under which enforcement remedies available to the Issuer and the Trustee are severely limited. In addition, the Borrower and TEC must be and remain, organizations treated as 501(c)(3) organization at all times while any Tax-Exempt Bonds remain Outstanding in order for the Tax-Exempt Bonds to retain their tax-exempt status. Failure of the Borrower 38

49 and TEC to comply with the terms and conditions of the documents relating to the Tax-Exempt Bonds or the Loan Agreement, the Regulatory Agreement and other documents as described herein may result in the loss of the taxexempt status of the interest on the Tax-Exempt Bonds retroactive to the date of issuance of the Tax-Exempt Bonds. See Project Risks; Rental Housing Requirements under this heading and TAX MATTERS herein. Although a determination of taxability is not an express Event of Default, the Borrower has covenanted to take all action necessary to cause interest on the Tax-Exempt Bonds to remain tax-exempt; therefore, if interest on the Tax-Exempt Bonds become taxable, this could be an Event of Default. No assurance can be given that sufficient funds will be available in such a case to enable the Tax-Exempt Bonds to be redeemed at the applicable redemption price. If interest on the Tax-Exempt Bonds should become included in gross income for federal income tax purposes, the market for and value of the Tax-Exempt Bonds would be adversely affected. Moreover, there can be no assurance that the present advantageous provisions of the Code, or the rules and regulations thereunder, will not be retroactively adversely amended or modified, thereby resulting in the inclusion in gross income of the interest on the Tax-Exempt Bonds for Federal income tax purposes or otherwise eliminating or reducing the benefits of the present advantageous tax treatment of the Tax-Exempt Bonds. While no such legislation has been adopted, there can be no assurance that Congress would not adopt legislation applicable to the Tax-Exempt Bonds or to the Borrower and that the Project would be able to comply with any such future legislation in a manner necessary to maintain the tax-exempt status of the Tax-Exempt Bonds. The Borrower is required under the Loan Agreement to use its best efforts to comply with any other future Federal income tax law requirements in order to maintain the tax-exempt status of the Tax-Exempt Bonds to the extent that any such other requirements are made applicable to the Project. There is no assurance, however, that the Borrower would be able to comply with any such other requirements. Federal Income Tax Matters; 501(c)(3) Status of Borrower Loss by the Borrower of the benefits of certain provisions of the federal income tax law could affect adversely its financial position as well as jeopardize the tax-exempt status of the Tax-Exempt Bonds. The Internal Revenue Service (the IRS ) has determined in a group exemption determination that TEC is an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the Code ), and therefore is exempt from federal income taxation under Section 501(a) of the Code. TEC has obtained a group ruling allowing its subsidiaries, such as the Borrower to be treated as an organization described in Section 501(c)(3) of the Code. Changes in the Code or Treasury Regulations or the judicial or administrative interpretation thereof or certain actions of the Borrower or TEC could result in the revocation by the IRS of such determination and loss of the taxexempt status of the Borrower. Any failure by the Borrower or TEC to remain qualified as tax-exempt under Section 501(c)(3) of the Code could affect the amount of funds of the Borrower which would be available to pay debt service on the Tax-Exempt Bonds or could lead to a determination that the interest on the Tax-Exempt Bonds is taxable. The Borrower s or the Issuer s failure to continuously comply with certain covenants contained in the Indenture, the Loan Agreement and the Regulatory Agreement after delivery of the Tax-Exempt Bonds could result in the loss of the exclusion from gross income of interest on the Tax-Exempt Bonds by the owners thereof for federal income tax purposes. Possible Consequence of Tax Compliance Audit The IRS has established a general audit program to determine whether issuers of tax-exempt obligations, such as the Tax-Exempt Bonds, are in compliance with requirements of the Code that must be satisfied in order for the interest of those obligations to be, and continue to be, excluded from gross income for federal income tax purposes. It cannot be predicted whether the IRS will commence an audit of the Tax-Exempt Bonds. Depending on all the facts and circumstances and the type of audit involved, it is possible that commencement of an audit of the Tax-Exempt Bonds could adversely affect the market value and liquidity of the Tax-Exempt Bonds until the audit is concluded, regardless of its ultimate outcome. 39

50 Incurrence of Additional Indebtedness The Loan Agreement and the Indenture permit the Borrower to incur additional indebtedness, upon compliance with the provisions thereof. Such additional indebtedness, under certain circumstances, may be equally and ratably secured with the Bonds. See APPENDIX B SUMMARIES OF CERTAIN PROVISIONS OF THE PRINCIPAL DOCUMENTS THE LOAN AGREEMENT. Debt Service Reserve Fund The Indenture creates a Debt Service Reserve Fund and an account therein for each series of Bonds. In the event that the Borrower does not make timely payment under the Series 2011 Notes, funds in the Debt Service Reserve Fund will be used to make payments of principal of and interest on the applicable series of Bonds as they become due. Although the Borrower believes such reserve to be reasonable, and anticipates that Project Revenues will be sufficient to cover the debt service on the Bonds, there is no assurance that funds reserved and future Project Revenues will be sufficient to cover debt service on the Bonds. Although the Loan Agreement requires the Borrower to do so, there can be no assurance that the Borrower will repay into the Debt Service Reserve Fund money so advanced. Investments in the Debt Service Reserve Fund must be in Investment Securities (as described in the Indenture), but are subject to investment risks. There is no limitation on the maturity of investments in the Debt Service Reserve Fund; therefore, there can be no assurance that if the Debt Service Reserve Fund has to be liquidated that sale of investments therein will not result in a loss. Bankruptcy of the Borrower In the event of the bankruptcy of the Borrower, payment of principal and interest made by the Borrower through the Trustee to the Bondholders within ninety-one days of the filing of the petition in bankruptcy with respect to the Borrower may be determined to be voidable preferences subject to claim by a debtor in possession or a trustee in bankruptcy, or may be subject to applicable State law regarding fraudulent conveyances. Enforceability of Remedies; Prior Claims The Bonds are payable from the payments to be made under the Loan Agreement. Pursuant to the Indenture, the Bonds are secured by an assignment by the Issuer to the Trustee of certain of its rights under the Loan Agreement (except as provided therein) and by the Mortgage on the Project and the security interest in the personal property and Project Revenues. The practical realization of the value from this property upon any default will depend upon the exercise of various remedies specified by the Loan Agreement, the Series 2011 Notes, the Mortgage and the Indenture. These and other remedies may require judicial actions, which are often subject to discretion and delay. Under existing law (including, without limitation, the Federal Bankruptcy Code), the remedies specified by the Loan Agreement, the Mortgage, or the Indenture may not be readily available or may be limited. A court may decide not to order the specific performance of the covenants contained in the Loan Agreement, the Mortgage or the Indenture. The various opinions to be delivered concurrently with the delivery of the Bonds will be qualified as to the enforceability of the various legal instruments by limitations imposed by state and federal laws, rulings and decisions affecting remedies, and by bankruptcy, reorganization or other laws affecting the enforcement of creditors rights generally. In addition, the various security interests established under the Indenture and the Mortgage will be subject to Permitted Encumbrances, and may be limited by or subject to other claims and interests. Examples of such claims and interests are: (1) statutory liens and assessments for improvements; (2) rights arising in favor of the United States of America or any agency thereof; (3) constructive trusts, equitable liens or other rights impressed or conferred by any state or federal court in the exercise of its equitable jurisdiction; 40

51 (4) federal bankruptcy laws affecting amounts earned by the Borrower after institution of bankruptcy proceedings by or against the Borrower; and (5) the requirement that appropriate continuation statements be filed in accordance with the Uniform Commercial Code as from time to time in effect. Secondary Market and Prices The Underwriters will not be obligated to repurchase any of the Bonds and no representation is made concerning the existence of any secondary market therefor, nor can any assurance be given that any secondary market will develop following the completion of the offering of the Bonds, and no assurance can be given that initial offering prices for the Bonds will continue for any period of time. Any prospective purchaser of the Bonds, therefore, should undertake an independent investigation through its own advisors regarding the desirability and practicality of the investment in the Bonds. Any prospective purchaser should be fully aware of the long-term nature of an investment in the Bonds and should assume that it will have to bear the economic risk of its investment indefinitely. Any prospective purchaser of the Bonds that does not intend or that is not able to hold the Bonds for a substantial period of time is advised against investing in the Bonds. Credit Ratings There is no assurance that the credit ratings assigned to any Series of Bonds at the time of issuance or at a subsequent time will not be lowered or withdrawn, the effect of which could adversely affect the market price and the market for such Series of Bonds. Environmental Conditions The Project will be subject to risks arising out of environmental law considerations generally associated with ownership of real estate. Such risks include, in general, a decline in property values in the Project resulting from possible violations of applicable federal or state environmental laws and regulations, including, but not limited to, the Comprehensive Environmental Compensation and Liability Act of 1980 (CERCLA), the Resource Conservation and Recovery Act of 1976 (RCRA). These risks may be associated with contamination of the Project from hazardous substances located in, on, around or in the vicinity of the Project. Please refer to THE BORROWER AND THE PROJECT Environmental Assessment herein. Insurance; Uninsured Losses The Borrower has arranged for comprehensive insurance coverage which is customary for apartment projects of a similar nature. In the event of damage or condemnation, the Borrower relies on insurance proceeds and condemnation awards to pay all or part of the costs of restoring the Project. Failure of an insurer to pay a claim could result in a default on the Loan and redemption of the Bonds at par. There are certain types of losses which are not insured or insurable, such as force majeure. Should such a catastrophic casualty occur, the Borrower would suffer a loss for which insurance benefits would not be available. Further, there is no assurance that insurance proceeds where available will be sufficient to repay the Bonds. Other Possible Risk Factors The occurrence of any of the following events, or other unanticipated events, could adversely affect the operations of the Borrower and the Project: (1) Reinstatement of or establishment of mandatory governmental wage, rent or price controls. (2) Inability to control increases in operating costs, including salaries, wages and fringe benefits, supplies and other expenses, without being able to obtain corresponding increases in Project Revenues from residents of the Project. 41

52 Summary (3) Unionization, employee strikes and other adverse labor actions which could result in a substantial increase in expenditures without a corresponding increase in Project Revenues. (4) Adoption of other federal, state or local legislation or regulations having an adverse effect on the future operating or financial performance of the Borrower and the Project. (5) The occurrence of any natural disasters or other disruptions that impact the operations of the Project. The foregoing is intended only as a summary of certain risk factors attendant to an investment in the Bonds. In order for potential investors to identify risk factors and make an informed investment decision, potential investors should be thoroughly familiar with this entire Official Statement and the appendices hereto so as to make a judgment as to whether the Bonds are an appropriate investment, and obtain such additional information as they deem advisable in connection with their evaluation of the suitability of the Bonds for investments. [Remainder of Page Intentionally Left Blank] 42

53 LITIGATION Issuer At the time of the issuance and delivery of the Bonds, the Issuer will deliver a certificate to the effect that there is not pending or, to the knowledge of the Issuer, threatened any litigation restraining or enjoining the issuance or delivery of the Bonds or questioning or affecting the validity of the Bonds or the proceedings or authority under which they are to be issued, and that there is no litigation pending or, to the Issuer s knowledge, threatened that in any manner questions the right of the Issuer to enter into the Loan Agreement or the Indenture or to secure the Bonds in the manner provided in the Indenture and the Act. Borrower At the time of the issuance and delivery of the Bonds, the Borrower will deliver a certificate to the effect that no litigation and no proceedings are pending or, to its knowledge, threatened against the Borrower or otherwise with respect to the Project, or the acquisition and rehabilitation thereof, or the issuance of the Bonds or which would materially adversely affect the transactions contemplated by this Official Statement. APPROVAL OF LEGAL MATTERS Legal matters incident to the authorization, issuance, sale and delivery of the Bonds by the Issuer are subject to the approval of the legality by the Attorney General of the State of Texas and the approval of certain legal matters by Fulbright & Jaworski L.L.P., San Antonio, Texas, Bond Counsel. Copies of the approving opinions of Bond Counsel will be available at the time of delivery of the Bonds in substantially the form set forth in APPENDIX C. Certain legal matters will be passed upon for the Issuer by its counsel, Fulbright & Jaworski, LLP, San Antonio, Texas for the Borrower and TEC by its counsel, Gary Pridavka PC, Dallas, Texas and McGuireWoods LLP, Baltimore, Maryland, special tax counsel to the Borrower, and for the Underwriters by Peck, Shaffer & Williams LLP, Cincinnati, Ohio. The various legal opinions to be delivered concurrently with the delivery of the Bonds express the professional judgment of the attorneys rendering those opinions on the legal issues explicitly addressed therein. By rendering the legal opinion, the opinion giver does not become an insurer or guarantor of an expression of professional judgment of the transaction opined upon or of the future performance of parties to such transaction, nor does the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of the transaction. Tax-Exempt Bonds TAX MATTERS The delivery of the Tax-Exempt Bonds is subject to the delivery of the opinions of Fulbright & Jaworski L.L.P., San Antonio, Texas, Bond Counsel to the Issuer ("Bond Counsel"), to the effect that, assuming continuous compliance with the Indenture, the Loan Agreement, the Regulatory Agreement, and the covenants described below, interest on the Tax-Exempt Bonds under existing statutes, regulations, published rulings, and court decisions (i) will be excludable from the gross income, as defined in section 61 of the Internal Revenue Code of 1986, as amended to the date of initial delivery of the Tax-Exempt Bonds (the "Code"), of the owners thereof pursuant to section 103 of the Code, and (ii) will not be included in computing the alternative minimum taxable income of the owners thereof who are individuals or, except as hereinafter described, corporations. The statutes, regulations, rulings, and court decisions on which such opinions will be based are subject to change. Interest on all tax-exempt obligations, including the Tax-Exempt Bonds, owned by a corporation will be included in such corporation's adjusted current earnings for purposes of calculating the alternative minimum taxable income of such corporation, other than an S corporation, a qualified mutual fund, a financial asset securitization investment trust, a real estate investment trust (REIT), or a real estate mortgage investment conduit (REMIC). A 43

54 corporation's alternative minimum taxable income is the basis on which the alternative minimum tax imposed by section 55 of the Code. The form of Bond Counsel's anticipated opinion relating to the Tax-Exempt Bonds is attached hereto as Appendix B. Existing law may change to reduce or eliminate the benefit to bondholders of the exclusion of interest on the Bonds from gross income for federal income tax purposes. Any proposed legislation or administrative action, whether or not taken, could also affect the value and marketability of the Bonds. Prospective purchasers of the Bonds should consult with their own tax advisors with respect to any proposed or future change in tax law. In rendering the foregoing opinions, Bond Counsel will (i) rely upon certain representations and certifications of the Issuer, the Borrower and TEC made in certificates dated the date of initial delivery of the Tax- Exempt Bonds pertaining to the use, expenditure and investment of the proceeds of the Tax-Exempt Bonds; (ii) rely upon an opinion of McGuire Woods LLC, that TEC and the Borrower are organizations described under section 501(c)(3) of the Code and (iii) assume continuing compliance with the provisions of the Indenture, the Loan Agreement and the Regulatory Agreement by the Issuer, TEC, and the Borrower subsequent to the issuance of the Tax-Exempt Bonds. The Indenture, the Loan Agreement and the Regulatory Agreement contain covenants by the Issuer, TEC, and the Borrower with respect to, among other matters, the use of the proceeds of the Tax-Exempt Bonds and the operation of the facilities financed therewith by persons other than governmental units or organizations described in section 501(c)(3) of the Code, the use of the facilities in an unrelated trade or business by organizations described in section 501(c)(3) of the Code, the current and continuing qualification of TEC and the Borrower as exempt organizations described in section 501(c)(3) of the Code, the manner in which the proceeds of the Tax-Exempt Bonds are to be invested, the periodic calculation of any payments to the United States Treasury of arbitrage profits from the investment of the proceeds of the Tax-Exempt Bonds and reporting certain information to the United States Treasury. Failure to comply with any of these covenants would cause interest on the Tax-Exempt Bonds to be includable in the gross income of the owners thereof from the date of issue of the Tax-Exempt Bonds. See also the discussion under "RISK FACTORS AND INVESTMENT CONSIDERATIONS Taxation of the Tax- Exempt Bonds", " Federal Income Tax Matters; 501(c)(3) Status of the Borrower", and " Project Risks". 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 Issuer, TEC and Borrower described above. No ruling has been sought from the Internal Revenue Service (the "Service") with respect to the matters addressed in the opinion of Bond Counsel, and Bond Counsel's opinion is not binding on the Service. The Service has an ongoing program of auditing the tax-exempt status of interest on Tax- Exempt Bonds. If an audit is commenced, under current procedures the Service is likely to treat the Issuer as the "taxpayer", and the owners of the Tax-Exempt Bonds would have no right to participate in the audit process. The Borrower has covenanted in the Loan Agreement to respond to the Service at the Issuer's direction and to pay the Issuer's costs, including legal fees, associated with such audit. In responding to or defending an audit of the taxexempt status of the interest on the Tax-Exempt Bonds, the Issuer may have different or conflicting interests from the owners of the Tax-Exempt Bonds and the Borrower. Furthermore, public awareness of any future audit of the Tax-Exempt Bonds could adversely affect the value and liquidity of the Tax-Exempt Bonds during the pendency of the audit, regardless of its ultimate outcome. Except as described above, Bond Counsel will express no other opinion with respect to any other federal, state or local tax consequences under present law, or proposed legislation, resulting from the receipt or accrual of interest on, or the acquisition or disposition of, the Tax-Exempt Bonds. Prospective purchasers of the Tax-Exempt Bonds should be aware that the ownership of tax-exempt obligations such as the Tax-Exempt Bonds may result in collateral federal tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, S corporations with subchapter C earnings and profits, certain foreign corporations doing business in the United States, individual recipients of Social Security or Railroad Retirement benefits, individuals otherwise qualifying for the earned income tax credit, owners of an interest in a financial asset securitization investment trust, and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry, or who have paid or incurred certain expenses allocable to, tax-exempt obligations. Prospective purchasers should consult their own tax advisors as to the applicability of these consequences to their particular circumstances. 44

55 Tax Accounting Treatment of Discount or Premium on Certain Bonds The initial public offering price of certain Tax-Exempt Bonds (the "Discount Bonds") may be less than the stated redemption price at maturity (as defined in section 1272 of the Code and Treasury Regulations thereunder) of the Discount Bonds. An amount equal to the difference between the initial public offering price of each Discount Bond (assuming that at least ten percent of the Discount Bonds of that maturity are sold to the public at such price) and its stated redemption price at maturity constitutes original issue discount to the initial purchaser of such Discount Bond. A portion of such original issue discount, allocable to the holding period of such Discount Bond by the initial purchaser, will, upon the disposition of such Discount Bond (including by reason of its payment at maturity), be treated as interest excludable from gross income, rather than as taxable gain, for federal income tax purposes. Such interest is considered to be accrued actuarially in accordance with the constant interest method over the life of a Discount Bond, taking into account the semi-annual compounding of accrued interest, at the yield to maturity on such Discount Bonds. The allocation of such original issue discount will generally result in an amount being treated as interest that is different from the amount of the payment denominated as interest actually received by the initial purchaser during his taxable year. Such interest may be required to be taken into account in determining the alternative minimum taxable income of a corporation, for purposes of calculating a corporation's alternative minimum tax imposed by section 55 of the Code and the amount of the branch profits tax applicable to certain foreign corporations doing business in the United States, even though there will not be a corresponding cash payment. In addition, the accrual of such interest may result in certain other collateral federal income tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, S corporations with subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement Benefits, individuals otherwise qualifying for the earned income tax credit, owners of an interest in a financial asset securitization trust, and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry, or who have paid or incurred certain expenses allocable to, tax-exempt obligations. Moreover, in the event of the sale or other taxable disposition of a Discount Bond prior to stated maturity, the amount realized by such owner in excess of the basis of such Discount Bond in the hands of such owner (adjusted upward by the portion of the original issue discount allocable to the period for which such Discount Bond was held) is includable in gross income. Owners of Discount Bonds should consult with their own tax advisors with respect to the determination for federal income tax purposes of accrued interest upon disposition of Discount Bonds and with respect to the state and local tax consequences of owning Discount Bonds. It is possible that, under applicable provisions governing determination of state and local income taxes, accrued interest on Discount Bonds may be deemed to be received in the year of accrual even though there will not be a corresponding cash payment. The initial offering price (as furnished by the Underwriters) of certain Tax-Exempt Bonds (the "Premium Bonds"), may be greater than the amount payable on such bonds at maturity. An amount equal to the difference between the initial public offering price of a Premium Bond (assuming that at least ten percent of the Premium Bonds of that maturity are sold to the public at such price) and the amount payable at maturity constitutes premium to the initial purchaser of such Premium Bonds. The basis for federal income tax purposes of a Premium Bond in the hands of such initial purchaser must be reduced each year by the amortizable bond premium, although no federal income tax deduction is allowed as a result of such reduction in basis for amortizable bond premium, although no federal income tax deduction is allowed as a result of such reduction in basis for amortizable bond premium. Such reduction in basis will increase the amount of any gain (or decrease the amount of any loss) to be recognized for federal income tax purposes upon a sale or other taxable disposition of a Premium Bond. The amount of premium which is amortizable each year by an initial purchaser is determined by using such purchaser's yield to maturity. Purchasers of the Premium Bonds should consult with their own tax advisors with respect to the determination of amortizable bond premium with respect to the Premium Bonds for federal income purposes and with respect to the state and local tax consequences of owning Premium. RATINGS Standard & Poor s Ratings Services, a Standard & Poor s Financial Services LLC business (the Rating Agency ), has assigned a rating of A to the Senior Bonds and BBB to the Series 2011B Bonds. An explanation 45

56 of the significance of such rating may be obtained from the Rating Agency. The ratings of the Bonds reflect only the views of the Rating Agency at the time such rating was given, and neither the Issuer, the Borrower nor the Underwriters makes any representation as to the appropriateness of the rating. There is no assurance that such ratings will continue for any given period of time or that it will not be revised downward or withdrawn entirely by the Rating Agency, if in its judgment, circumstances (including the financial status of any investment agreement provider) so warrant. Any such downward revision or withdrawal of the ratings may have an adverse effect on the market price of the Bonds. UNDERWRITING The Series 2011 Bonds are being purchased by BB&T Capital Markets, Inc. and M.E. Allison & Co., Inc. (the Underwriters ), as Underwriters for a purchase price of $26,370, (representing the par amount of the Series 2011 Bonds, less original issue discount of $965, and an underwriting discount of $428,042.50), pursuant to a Bond Purchase Agreement, entered into by the Issuer, the Borrower, and the Underwriters (the Bond Purchase Agreement ). The Bond Purchase Agreement relating to the Bonds provides that the Underwriters shall purchase all of the Bonds if any are purchased, and that such obligation to purchase the Bonds is subject to certain terms and conditions set forth in such Bond Purchase Agreement, the approval of certain legal matters by counsel and certain other conditions. The initial offering price set forth on the inside cover page hereof may be changed from time to time by the Underwriters, the Underwriters may join with dealers and other Underwriters in offering the Bonds, and the Underwriters may offer and sell Bonds to certain dealers (including dealer banks and dealers depositing Bonds in investment trusts) and others at prices lower than the public offering prices stated on the inside cover of this Official Statement. Such initial public offering prices may be changed from time to time by the Underwriters. The Borrower has agreed, pursuant to the Bond Purchase Agreement, to indemnify the Underwriters and the Issuer against certain liabilities relating to this Official Statement. The Underwriters do not guarantee a secondary market for the Bonds and is not obligated to make any such market for the Bonds. No assurance can be made that such a market will develop or continue. Consequently, investors may not be able to resell Bonds should they need or wish to do so for emergency or other purposes. STRUCTURING AGENT Merchant Capital, L.L.C. (the Structuring Agent ) had previously been retained by the Borrower to purchase the Bonds and provide the services being provided by the Underwriters, but withdrew from the engagement at the request of the Borrower. The Structuring Agent has been retained for the purpose of providing certain limited financial analyses and presentations required by the Rating Agency based upon certain assumptions provided by the Borrower and the Underwriters, and to continue to assist with the rating process. The Structuring Agent s fee for services rendered with respect to the sale of the Bonds is contingent upon the issuance and delivery of the Bonds. The Structuring Agent has not been engaged to review, verify or interpret any information contained in this Official Statement or provided by the Borrower to the Rating Agency, including the financial and operating data with respect to the Project, whether historical or projected. Except for the information under this heading, none of the information in this Official Statement has been supplied or verified by the Structuring Agent and the Structuring Agent makes no representation or warranty, express or implied, as to the accuracy or completeness of such information. FINANCIAL ADVISOR Southwestern Capital Markets, Inc. is employed as an agent of the Issuer in its role as the Issuer s Financial Advisor 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. Southwestern Capital Markets, Inc., in its capacity as Financial Advisor, has relied on the opinion of Bond Counsel and has not verified and does not assume any responsibility for the information, covenants, and representations contained in any of the legal documents with respect to the federal income tax treatment of the interest on the Bonds, or the possible impact of any present, pending or future actions taken by any legislative or judicial bodies. 46

57 The Financial Advisor has provided the following sentence for inclusion in this Official Statement. The Financial Advisor has reviewed the information in this Official Statement in accordance with its responsibilities to the Issuer, and, as applicable, to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Financial Advisor does not guarantee the accuracy or completeness of such information. CONTINUING DISCLOSURE In accordance with the United States Securities and Exchange Commission Rule 15c2-12, as amended (the Rule ), the Borrower has agreed pursuant to a Continuing Disclosure Agreement dated as of December 1, 2011 with the Trustee, as disclosure agent (the Disclosure Agent ), to be delivered on the date of delivery of the Bonds, to cause the following information to be provided through the Disclosure Agent to the Municipal Securities Rulemaking Board (the MSRB ) via the Electronic Municipal Marketing Access ( EMMA ) System: (i) (a) upon request, to any person, or at least annually to its state information depository ( SID ), if one is established for the State of Texas, certain annual financial information and operating data, including audited financial statements ( annual financial information ) and (b) (I) unaudited financial statements of the Borrower for such fiscal quarter as soon as practicable after they are available but in no event more than 60 days after the completion of such fiscal quarter, including a balance sheet, income statement, cash flows and changes in fund balance with a comparison against the current year s budget and a complete set of comparable quarterly financial statement from the prior fiscal year and (II) average occupancy rates and average monthly rental rates for the Project with comparisons to prior period. Such information shall include, at a minimum, that financial information and operating data which is customarily prepared by the Borrower and is publicly available as well as occupancy rates for the Project, average rental rates, Operating Expenses for the prior fiscal year and the Debt Service Coverage Ratio for the prior fiscal year. The annual financial information shall be provided not later than the June 30 following the end of each fiscal year beginning with the fiscal year ending December 31, 2011 and the quarterly disclosure shall be provided not later than sixty (60) days after the end of each fiscal quarter; and (ii) in a timely manner, not in excess of ten (10) Business Days, notice of the occurrence of the following events with respect to the Bonds: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) Principal and interest payment delinquencies; Non-payment related defaults, if material; Unscheduled draws on debt service reserves reflecting financial difficulties; Unscheduled draws on credit enhancements reflecting financial difficulties; Substitution of credit or liquidity providers, or their failure to perform; Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the Series A Bonds, or other material events affecting the tax-exempt status of the Series A Bonds; Modifications to rights of security holders, if material; Bond calls if material; Defeasances; Release, substitution or sale of property securing repayment of the Bonds; and Rating changes. Bankruptcy, insolvency, receivership or similar event of the obligated person (Note: For the purposes of this event, the event is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for an obligated person in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the obligated person, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or 47

58 (m) (n) liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the obligated person); The consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and Appointment of a successor or additional trustee or the change of name of a trustee, if material; Persons desiring the foregoing annual financial information, quarterly financial information and notices of material events may also obtain such information by contacting the Trustee. For purposes of this transaction with respect to events as set forth in the Rule: (a) (b) there are no credit enhancements applicable to the Bonds; and there are no liquidity providers applicable to the Bonds. No financial or operating data concerning the Issuer is material to any decision to purchase, hold or sell the Bonds and the Issuer will not provide any such information. The Borrower has undertaken all responsibilities for any continuing disclosure to Bondholders as described above, and the Issuer shall have no liability to the Bondholders or any other person with respect to such disclosures. MISCELLANEOUS Any statements made in this Official Statement involving matters of opinion or estimates, whether or not so expressly stated, are set forth as such and not as representations of fact, and no representation is made that any of the estimates will be realized. The references herein to the Act, the Indenture, the Loan Agreement, the Series 2011 Notes, the Mortgage, the Regulatory Agreement, and other documents are brief outlines of certain provisions thereof. Such outlines do not purport to be complete or comprehensive and for a full and complete statement of the provisions thereof, reference is made to the Act, and such documents, copies of which documents will be on file at the office of the Trustee following delivery of the Bonds. The agreement of the Issuer with the Holders of the Bonds is fully set forth in the Indenture, and this Official Statement is not to be construed as constituting any agreement with the purchasers of the Bonds. Insofar as any statements are made in this Official Statement involving matters of opinion, whether or not expressly so stated, they are intended merely as such, and not as representations of fact. The attached Appendices are integral parts of this Official Statement and must be read together with all of the foregoing statements. The Borrower has reviewed the information contained herein which relates to it and the Project and has approved all such information for use within this Official Statement. The Issuer and the Issuer s Financial Advisor are not authorized to make any representations and make no representations on behalf of the Borrower or with respect to the Project or as to the accuracy or completeness of the information relating to the Borrower or the Project and the cost thereof, or the information pertaining to the Borrower or the Project in this Official Statement. 48

59 [Signature Page] The execution, delivery and distribution of this Official Statement have been duly authorized by the Issuer and the Borrower. BEXAR COUNTY HOUSING FINANCE CORPORATION By: /s/ Paul Elizondo Paul Elizondo, Director and President Attest: By: /s/ Tommy Adkisson Tommy Adkisson, Director and Secretary/Treasurer CANTON II, INC. By: /s/ Robbie Wittner, Robbie Wittner, President/CEO and Director S-1

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61 APPENDIX A DEFINITIONS OF CERTAIN TERMS Capitalized items used in this Official Statement, and not otherwise defined, are used with the meanings assigned to such terms in the Indenture. The following definitions of such capitalized terms are summaries of the definitions applicable in the Indenture with such modifications as may be appropriate for use in this Official Statement. The following are definitions set forth in the Indenture and used in this Official Statement: Account or Accounts means any one or more, as the case may be, of the named and unnamed accounts established within any Fund. Act means Chapter 394, Texas Local Government Code, as amended, all as now in effect and as it may from time to time hereafter be amended or supplemented. Additional Bonds means the additional parity Bonds secured on a senior lien basis authorized to be issued by the Issuer pursuant to the terms and conditions of Section 2.13 of the Indenture. Additional Loan Payments means that portion of the Loan Payments described in subsection (b)(ii) of Section 3.2 of the Loan Agreement. Administration Expenses means (a) the Ordinary Trustee s Fees and Expenses, (b) the Dissemination Agent Fee, (c) the Rebate Analyst Fee, (d) the Rating Agency Fee and (e) the Issuer s Fees and Expenses. Administration Fund means the trust fund by that name established pursuant to Section 5.01 of the Indenture. Advanced Funds has the meaning provided in Section 8.04 of the Indenture. Affiliate means any Person (a) directly or indirectly controlling, controlled by, or under common control with the Borrower; or (b) a majority of the members of the Directing Body of which are members of the Directing Body of the Borrower. For purposes of this definition, control means with respect to: (a) a corporation having stock, the ownership, directly or indirectly, of more than 50% of the securities (as defined in Section 2(1) of the Securities Act of 1933, as amended) of any class or classes, the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the directors of such corporation; (b) a not for profit corporation not having stock, having the power to elect or appoint, directly or indirectly, a majority of the members of the Directing Body of such corporation; or (c) any other entity, the power to direct the management of such entity through the ownership of at least a majority of its voting securities or the right to designate or elect at least a majority of the members of its Directing Body, by contract or otherwise. For the purposes of this definition, Directing Body means with respect to: (a) a corporation having stock, such corporation s board of directors and owners, directly or indirectly, of more than 50% of the securities (as defined in Section 2(1) of the Securities Act of 1933, as amended) of any class or classes, the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the directors of such corporation (both of which groups will be considered a Directing Body); (b) a not for profit corporation not having stock, such corporation s members if the members have complete discretion to elect the corporation s directors, or the corporation s directors if the corporation s members do not have such discretion; or (c) any other entity, its governing body or board. For the purposes of this definition, all references to directors and members will be deemed to include all entities performing the function of directors or members however denominated. Amend or Amendment, as used in Article XI of the Indenture, refer to any amendment, modification, alteration or supplement to any Bond Document, or any waiver of any provision thereof. A-1

62 Annual Debt Service means, for any period, the amount of the scheduled principal and interest payment requirement with respect to all Outstanding Bonds, or all Outstanding Bonds of one or more Series, or Parity Indebtedness, as applicable, for such period. Annual Evaluation Date means each December 31, commencing December 31, Architect means any architect, engineer or firm of architects or engineers which is Independent and which is appointed by the Borrower for the purpose of passing on questions relating to the design and construction of any particular facility, has all licenses and certifications necessary for the performance of such services, and has a favorable reputation for skill and experience in performing similar services in respect of a facility of a comparable size and nature of the Project. Asset Management Agreement means the Asset Management Agreement dated as of December 1, 2011 between the Asset Manager and the Borrower, as in effect on the Closing Date or any substitute agreement providing for asset management services, in each case as it may thereafter be amended or supplemented from time to time. Asset Management Fee means the fee payable to the Asset Manager pursuant to the Asset Management Agreement. Asset Manager means ILP Asset Management, LLC, and its successors and assigns. Audited Financial Statements means the financial statements prepared for each Fiscal Year for the Project prepared in accordance with generally accepted accounting principles and examined by a Certified Public Accountant. thereof. Authorized Denominations means $5,000 principal amount and any integral multiple of $5,000 in excess Available Money means (a) money held by the Trustee under the Indenture for a period of at least 123 days and not commingled with any money so held for less than said period and during which period no petition in bankruptcy was filed by or against, and no receivership, insolvency, assignment for the benefit of creditors or other similar proceedings has been commenced by or against, the Issuer or the Borrower, unless such petition or proceeding was dismissed and all applicable appeal periods have expired without an appeal having been filed, (b) Project Revenues held by the Trustee (c) investment income derived from the investment of money described in clauses (a) and (b), (d) proceeds of obligations issued to refund the Bonds, or (e) any money with respect to which an opinion of nationally recognized bankruptcy counsel has been received by the Trustee to the effect that payments by the Trustee in respect of the Bonds, as provided in the Indenture, derived from such money should not constitute transfers avoidable under 11 U.S.C. 547(b) and recoverable from the Holders under 11 U.S.C. 550(a) should the Issuer or the Borrower be the debtor in a case under Title 11 of the United States Code, as amended. Basic Loan Payments means that portion of the Loan Payments described in Subsection 3.2(b)(i) of the Loan Agreement. Beneficial Owner means a Person owning a Beneficial Ownership Interest in the Bonds, as evidenced to the satisfaction of the Trustee. Beneficial Ownership Interest means the right to receive payments and notices with respect to the Bonds held in a book-entry system. Bond Counsel means (a) Fulbright & Jaworski L.L.P. or (b) any Independent Counsel of nationally recognized standing in matters pertaining to the validity of, and exclusion from gross income for federal income tax purposes of interest on, obligations issued by states and political subdivisions, familiar with the transactions contemplated under the Indenture appointed by the Borrower and reasonably acceptable to the Issuer. A-2

63 Bond Documents means the Indenture and the Borrower Documents. Bond Fund means each trust fund by that name created pursuant to Section 5.01 of the Indenture. Bond Obligation means the then outstanding principal amount of the Bonds. Bond Payment Date means any Interest Payment Date, any Principal Payment Date and any other date on which the principal of, premium, if any, or interest on the Bonds is to be paid to the Holders thereof, whether upon redemption, at maturity or upon acceleration of maturity of the Bonds. Bond Year means the period from and including the date of issuance of the Series 2011 Bonds through December 31, 2012, and thereafter each year beginning on January 1 and ending on the earlier of the following December 31 or the maturity of the Series 2011 Bonds (whether by redemption, acceleration or otherwise). Bonds means collectively the Series 2011 Bonds and any Additional Bonds. Borrower means Canton II, Inc., a Texas non-profit corporation organized and existing under the laws of the State of Texas, and its authorized successors and assigns under Sections 6.2 and 6.3 of the Loan Agreement. Borrower Documents means the Loan Agreement, the Mortgage, the Series 2011 Notes, the Regulatory Agreement, the Continuing Disclosure Agreement, the Borrower s Tax Representation Letter, the Issuer s Certificate as to Tax Exemption, the Management Agreement, the Collateral Assignment of Management Agreement, the Asset Management Agreement, and together with all other documents or instruments executed by the Borrower evidencing or securing the Borrower s Indebtedness under the Loan Agreement, in each case as the same may be amended or supplemented from time to time. Borrower Representative means each person at the time designated to act on behalf of the Borrower by written certificate furnished to the Issuer and the Trustee on behalf of the Borrower containing the specimen signature of such person and any designated alternates. Budget means the budget described in Section 6.10 of the Loan Agreement. Business Day means any day other than a (i) Saturday, (ii) Sunday, (iii) day on which banking institutions in (a) any city in which the designated corporate trust or principal operations offices of the Trustee (such city being initially Jacksonville, Florida) are located, (b) the State of Texas or (c) the City of New York, New York, are authorized or obligated by law or executive order to be closed, or (iv) day on which the New York Stock Exchange is closed. Certified Public Accountant means any Person who is Independent, appointed by the Borrower, actively engaged in the business of public accounting and duly licensed as a certified public accountant under the laws of the State. Clearing Agency means any clearing agency under federal law operating and maintaining, with its participants or otherwise, a book-entry system to record Beneficial Ownership Interests in the Bonds, and to effect transfers of book-entry interests of the Bonds in book-entry form, which initially shall be The Depository Trust Company. Closing Date means the date of initial issuance and delivery of the Series 2011 Bonds. Code means the Internal Revenue Code of 1986, the applicable regulations (whether proposed, temporary or final) under that Code or the statutory predecessor of that Code, and any amendments of, or successor provisions to, the foregoing and any official rulings, announcements, notices and procedures regarding any of the foregoing. Unless otherwise indicated, reference to a Section of the Code means that Section of the Code, including such applicable regulations, rulings, announcements, notices and procedures. A-3

64 Collateral Assignment of Management Agreement means the Collateral Assignment of Management Agreement dated as of December 1, 2011, between the Borrower and the Trustee and consented to by the Manager, as in effect on the Closing Date and as it may thereafter to be amended or supplemented from time to time in accordance with its terms. Compliance Certificate means a certificate of a Borrower Representative stating that, as of the date of such certificate, the Borrower is in compliance with all requirements of the Borrower Documents (with such exceptions as shall be acceptable to the Issuer). Condemnation Award means the total condemnation proceeds paid by the condemner as a result of condemnation or eminent domain proceedings with respect to all or any part of the Project or of any settlement or compromise of such proceedings. Confirmation of Rating means a written confirmation, obtained prior to the event or action under scrutiny, from the Rating Agency then rating any Outstanding Bonds to the effect that, following the proposed action or event under scrutiny at the time such confirmation is sought, the rating or ratings of the Rating Agency with respect to all Series of Bonds then Outstanding and then rated by the Rating Agency will not be downgraded, suspended, qualified or withdrawn as a result of such action or event. Consultant means a Person who is Independent, appointed by the Borrower, and who is nationally recognized as being expert as to matters for which its certificate or advice is required or contemplated. Continuing Disclosure Agreement means the Continuing Disclosure Agreement dated December 1, 2011 between the Borrower and the Dissemination Agent, as in effect on the Closing Date and as it may thereafter be amended or supplemented from time to time in accordance with its terms. Controlled Group means a group of entities directly or indirectly controlled by the same entity or group of entities. An entity or group of entities (the controlling entity ) directly controls another entity (the controlled entity ), in general, if it possesses either of the following rights or powers and the rights or powers are discretionary and non-ministerial: (a) the right or power both to approve and to remove without cause a controlling portion of the governing body of the controlled entity; or (b) the right or power to require the use of funds or assets of the controlled entity for any purpose of the controlling entity. A controlling entity indirectly controls all entities controlled, directly or indirectly, by an entity controlled by such controlling entity. Controlling Holders means, as of any date, in the case of consent or direction to be given hereunder, (a) the Holders of the majority in aggregate principal amount of the then Outstanding Senior Bonds or (b) if no Senior Bonds remain Outstanding, the Holders of the majority in aggregate principal amount of the then Outstanding Subordinate Bonds. Costs of Issuance means all fees, costs and expenses payable or reimbursable directly or indirectly by the Issuer or the Borrower and related to the authorization, issuance and sale of the Bonds. Costs of Issuance Account means the account by that name in the Project Fund created pursuant to Section 5.01 of the Indenture. Costs of the Project means those costs and expenses in connection with the acquisition, rehabilitation, refinancing, furnishing, and equipping of the Project permitted by the Act to be paid or reimbursed from Bond proceeds including, but not limited to, the following: (a) payment of (i) the cost of the preparation of plans and specifications (including any preliminary study or planning of the Project, the renovations to the Project or any aspect thereof), (ii) the cost of acquisition, construction and rehabilitation of the Project and all acquisition, construction, rehabilitation and installation expenses required to provide utility services or other facilities and all real or personal properties deemed necessary in connection with the Project (including development, architectural, A-4

65 engineering, and supervisory services with respect to any of the foregoing), and (iii) interest on the Bonds during the rehabilitation of the Project, and (iv) any other costs and expenses relating to the Project; (b) payment of the purchase price of the Project, improvements thereon, and the Equipment, and any fixtures to be incorporated into the Project, including all costs incident thereto, payment for labor, services, materials, and supplies used or furnished in site improvement and in the construction of the Project, including all costs incident thereto, payment for the cost of the construction, rehabilitation, acquisition, and installation of utility services or other facilities, payment for all real and personal property deemed necessary in connection with the Project, payment of consulting and development fees payable to the Borrower or others, and payment for the miscellaneous expenses incidental to any of the foregoing items including the premium on any surety bond; (c) payment to the Trustee, as such payments become due, of the reasonable fees and expenses of the Trustee other than its initial fee (as Trustee, bond registrar and paying agent) and of any paying agent properly incurred under the Indenture that may become due during the construction of the Project; (d) to such extent as they are not paid by a contractor for construction or installation with respect to any part of the Project, payment of the premiums on all insurance required to be taken out and maintained during the period of construction of the Project; (e) payment of the taxes, assessments, and other charges, if any, that may become payable during the period of construction or rehabilitation of the Project; (f) payment of expenses incurred in seeking to enforce any remedy against any contractor or subcontractor in respect of any default under a contract relating to the Project; (g) payment of out-of-pocket fees and expenses of the Borrower, if any, including, but not limited to, architectural, engineering, and supervisory services with respect to the Project; (h) payment of the fees or out-of-pocket expenses, if any, of those providing services with respect to the Project, including, but not limited to, architectural, engineering, and supervisory services; (i) payment to the Borrower of such amounts, if any, as are necessary to reimburse the Borrower in full for all advances and payments made by it for any of the items set forth in (a) through (h) above; and (j) payment of any other costs and expenses relating to the Project that would constitute a cost or expense permitted to be paid by the Issuer under the Act. Counsel means an attorney or firm of attorneys duly admitted to practice law before the highest court of any state and not unsatisfactory to the Trustee or the Issuer. Coverage Test means that the Debt Service Coverage Ratio for the relevant period was equal to or greater than (a) with respect to the Senior Bonds, 1.40 to 1.00 on all Outstanding Senior Bonds and all Senior Parity Indebtedness and (b) with respect to the Subordinate Bonds, 1.20 to 1.00 on all Outstanding Senior Bonds and Subordinate Bonds and all Senior Parity Indebtedness and Subordinate Parity Indebtedness. Dated Date means December 1, Debt Service means the principal and redemption price of and interest due on any Series of Bonds on any given Interest Payment Date. Debt Service Coverage Ratio means, for any period, the ratio obtained by dividing Net Income Available for Debt Service for such period by the Annual Debt Service for such period, in each case, as calculated by the A-5

66 Borrower and certified to the Trustee in writing and supported by the Audited Financial Statements described in Section 6.8 of the Loan Agreement. Debt Service Requirements means for a specified period: (a) amounts needed to pay scheduled payments of principal of the Bonds during such period, including payments for mandatory sinking fund redemption pursuant to Section 3.03 of the Indenture; (b) amounts needed to pay interest on the Bonds payable during such period; and (c) to the extent not duplicative of (a) or (b) above, amounts paid during such period to restore the amounts on deposit in the Debt Service Reserve Fund to the Debt Service Reserve Requirement. Debt Service Reserve Account means the trust account by that name within the Debt Service Reserve Fund created with respect to a Series of Bonds pursuant to Section 5.01 of the Indenture. Debt Service Reserve Fund means the trust fund of that name created with respect to the Series 2011 Bonds pursuant to Section 5.01 of the Indenture. Debt Service Reserve Requirement means (a) with respect to the Senior Bonds, the amount of $1,688, and (b) with respect to the Subordinate Bonds, the amount of $256,736.17; provided, however, that the foregoing amounts shall be reduced on a pro-rata basis to the extent of any reduction in Annual Debt Service on the aggregate principal amount of the Senior Bonds Outstanding and Subordinate Bonds Outstanding, respectively, if any such Bonds are redeemed other than pursuant to mandatory sinking fund redemption. Default under the Loan Agreement means any of the events described in Section 7.1 of the Loan Agreement. Default Rate with respect to the Loan and Bonds means the interest rate on the applicable Loan or the applicable Series of Bonds plus 2% per annum on the minimum interest rate permitted under Chapter 1204, as amended, Texas Government Code, and with respect to any other amounts due means the lessor of 10% per annum or the maximum interest rate permitted under Chapter 1204, as amended, Texas Government Code. Designated Office means, when referring to the Trustee or any Paying Agent, means the office where the Trustee or Paying Agent, as applicable, maintains its designated corporate trust department, which as of the date of the Indenture, shall be the address provided in Section Dissemination Agent means the Trustee, or any successor thereto, acting as Dissemination Agent under the Continuing Disclosure Agreement. Dissemination Agent Fee means an annual fee payable to the Dissemination Agent in an amount not to exceed $500 commencing at the Closing Date and payable on July 1 of each year so long as the Bonds remain Outstanding as compensation for its services and expenses in performing its obligations under the Continuing Disclosure Agreement. Environmental Laws means Comprehensive Environmental Response, Compensation and Liability Act of 1980 ( CERCLA ), Public Law No , 94 Stat. 1613, the Resource Conservation and Recovery Act ( RCRA ), the National Environmental Policy Act of 1969, as amended (42 U.S.C et seq.): the Solid Waste Disposal Act (42 U.S.C et seq.); CERCLA; the Hazardous Material Transportation Act, as amended (49 U.S.C et seq.); the Federal Insecticide, Fungicide, and Rodenticide Act, as amended (7 U.S.C. 136 et seq.); RCRA; the Toxic Substance Control Act, as amended (15 U.S.C et seq.); the Clean Water Act; the Clean Air Act, as amended (42 U.S.C et seq.); the Federal Water Pollution Control Act, as amended (33 U.S.C et seq.); the Federal Coastal Zone Management Act, as amended (16 U.S.C et seq.); the Occupational Safety and Health Act, as amended (29 U.S.C. 651 et seq.); the Safe Drinking Water Act, as amended (42 U.S.C. 300(f) et seq.), and any other federal, state, or local law, statute, ordinance, and regulation, now or hereafter in effect, and in each case as amended or supplemented from time to time, and any applicable judicial or administrative interpretation thereof, including, without limitation, any applicable judicial or administrative order, consent decree, or judgment applicable to the Project relating to the regulation and protection of human health and safety and/or the environment and natural resources (including, without limitation, ambient air, A-6

67 surface water, groundwater, wetlands, land surface or subsurface strata, wildlife, aquatic species, and/or vegetation), including all amendments to such Acts, and any and all regulations promulgated thereunder, and all analogous local or state counterparts or equivalents, and any transfer of ownership notification or approval statutes, and any federal, state or local statute, law, ordinance, code, rule, regulation, order or decree, regulating, relating to or imposing liability or standards of conduct concerning any petroleum, petroleum byproduct (including but not limited to, crude oil, diesel oil, fuel oil, gasoline, lubrication oil, oil refuse, oil mixed with other waste, oil sludge, and all other liquid hydrocarbons, regardless of specific gravity) natural or synthetic gas, products and/or hazardous substance or material, toxic or dangerous waste, substance or material, pollutant or contaminant, as may now or at any time hereafter be in effect. Equipment means the equipment, machinery, furnishings and other personal property located on the Site and all replacements, substitutions, and additions thereto Event of Default means any occurrence or event specified in Section 8.01 of the Indenture. Extraordinary Expenses means all reasonable expenses properly incurred by the Trustee and any Co- Trustee under the Indenture, other than Ordinary Expenses. Extraordinary Services means all services rendered by the Trustee and any Co-Trustee under the Indenture, other than Ordinary Services. Extraordinary Trustee s Fees and Expenses means the fees, expenses and disbursements payable to the Trustee and Paying Agent pursuant to Section 9.04 of the Indenture during any Fiscal Year in excess of Ordinary Trustee s Fees and Expenses, including but not limited to, reasonable counsel fees and expenses, reasonable fees of other third party professionals, and any costs of sending notices pursuant to the terms and conditions of the Bond Documents, including but not limited to, Section 3.06 of the Indenture. Favorable Opinion of Bond Counsel means, with respect to any action the taking of which requires such an opinion, an opinion of Bond Counsel addressed to the Issuer and the Trustee to the effect that such action will not, in and of itself, cause interest on the Tax-Exempt Bonds to be includible in gross income for federal income tax purposes (subject to the inclusion of any exceptions contained in the opinion delivered upon the original issuance of the Tax-Exempt Bonds). Federal Securities means any bonds, notes, certificates of indebtedness, treasury bills or other securities now or hereafter issued, which are guaranteed by the full faith and credit of the United States of America as to principal and interest. Fiduciary means the Trustee and any Paying Agent. Fiscal Year means a period of 12 consecutive months ending on December 31, except that the first Fiscal Year shall begin on the January 1, 2012 and end on December 31, Fitch means Fitch Ratings, Inc., a corporation organized and existing under the laws of the State of New York, its successors and assigns, and, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, Fitch shall be deemed to refer to any other nationally recognized securities rating agency designated by the Borrower by notice to the Trustee and the Issuer. Force Majeure means (a) the following: acts of nature; strikes or other industrial disturbances; acts of public enemies; orders or restraints of any kind of the government of the United States of America or of the State or of any of their subdivisions, departments, agencies or officials, or of any civil or military authority; insurrections; riots; landslides; earthquakes; fires; floods; explosions, but only to the extent that any such cause or event is not within the control of the Borrower; and (b) any other cause or event not reasonably within the control of the Borrower. A-7

68 Fund or Funds means any one or more, as the case may be, of the separate trust funds created and established in Article V of the Indenture. Governing Body means (a), with respect to the Issuer, the Board of Directors of the Issuer, or any governing body that succeeds to the functions of the Board of Directors of the Issuer, and (b) with respect to the Borrower, the Board of Directors of the Borrower. Government Obligations means direct obligations of, and obligations the principal of and interest on which are unconditionally guaranteed as to timely payment by, the United States of America. Hazardous Substances means any petroleum or petroleum products and their by-products, flammable explosives, radioactive materials, toxic chemicals and substances, radon, asbestos in any form that is or could become friable, urea formaldehyde foam insulation and polychlorinated biphenyls (PCB), asbestos-containing materials (ACMs), lead-containing or lead-based paint (LBP), radon, medical waste and other bio-hazardous materials and any chemicals, pollutants, materials or substances defined as or included in the definition of hazardous substances as defined pursuant to the federal Comprehensive Environmental Response, Compensation and Liability Act, regulated substances within the meaning of subtitle I of the federal Resource Conservation and Recovery Act and words of similar import under applicable Environmental Laws. Holder or Bondholder means the Person or Persons in whose name any Bond is registered on the registration records for the Bonds maintained by the Trustee as registrar. Home Office Fee means the monthly fee payable to TEC in an amount of $9,500. Indebtedness means (a) all indebtedness, whether or not represented by bonds, debentures, notes or other securities, for the repayment of money borrowed, (b) all deferred indebtedness for the payment of the purchase price of properties or assets purchased, (c) all guaranties, endorsements (other than endorsements in the ordinary course of business), assumptions, and other contingent obligations in respect of, or to purchase or to otherwise acquire, indebtedness of others, (d) all indebtedness secured by a mortgage, or secured by a pledge, security interest, or lien existing on property owned which is subject to a mortgage, pledge, security interest, or lien, whether or not the indebtedness secured thereby has been assumed, (e) all capitalized lease obligations, (f) all unfunded amounts under a loan agreement, letter of credit, or other credit facility for which such Person would be liable, if such amounts were advanced under the credit facility, (g) all amounts required to be paid by the Borrower as a guaranteed payment to partners or members or a preferred or special dividend, including any mandatory redemption of shares or interests, (h) all unfunded pension funds, or welfare or pension benefit plans or liabilities, and (i) all obligations (calculated on a net basis) of the Borrower under derivatives in the form of interest rate swaps, credit default swaps, total rate of return swaps, caps, floors, collars and other interest hedge agreements, in each case whether the Borrower is liable contingently or otherwise, as obligor, guarantor or otherwise, or in respect of which obligations the Borrower otherwise assures a creditor against loss; provided, however, that for the purpose of computing Indebtedness, there will be excluded any particular Indebtedness if, upon or prior to the maturity thereof, there has been deposited with the proper depository in trust the necessary funds (or Government Obligations not callable or pre-payable by the issuer thereof) for the payment, redemption, or satisfaction of such Indebtedness, and thereafter such funds and such Government Obligations so deposited will not be included in any computation of the assets of the Borrower and the income derived from such funds and such direct obligations of the United States of America so deposited will not be included in any computation of the income of the Borrower. Indenture means this Trust Indenture, as in effect on the Closing Date and as it may thereafter be as amended or supplemented from time to time in accordance with Article XI of the Indenture. Independent means, with respect to Counsel or any Consultant, a person who is not a member of the Governing Body of the Issuer or the Borrower and is not an officer or employee of the Issuer or the Borrower and which is not a partnership, corporation or association having a partner, director, officer, member or substantial stockholder who is a member of the Governing Body of the Issuer or the Borrower or who is an officer or employee of the Issuer or the Borrower; provided, however, that the fact that such person is retained regularly by or transacts business with the Issuer shall not make such person an employee within the meaning of this definition. A-8

69 Texas. Initial Bond means the initial Bond registered by the Comptroller of Public Accounts of the State of Insurance and Tax Escrow Fund means the trust fund by that name established pursuant to Section 5.01 of the Indenture. Insurance Consultant means a Consultant having the skill and expertise necessary to evaluate the insurance needs of multifamily rental housing and which may be a broker or agent with which the Borrower or the Issuer transacts business. Insurance Proceeds means the total proceeds of insurance paid by an insurance company under the policies of property insurance required to be procured by the Borrower pursuant to the Loan Agreement. Interest Account means each trust account by that name in the Bond Fund created with respect to a Series of Bonds pursuant to Section 5.01 of the Indenture. Interest Payment Date means each January 1 and July 1, commencing July 1, 2012, until the final Principal Payment Date of the applicable Bonds. Interest Period for any Bonds means initially the period from the Dated Date to but not including the first Interest Payment Date and thereafter the period from and including each Interest Payment Date to but not including the next Interest Payment Date or other date on which interest is required to be paid on such Bonds. Interest Requirement for any Bonds means an amount equal to the interest that would be due and payable on such Bonds on the Interest Payment Date next succeeding the date of determination (assuming that no principal of such Bonds is paid or redeemed between such date and the next succeeding Interest Payment Date) multiplied by a fraction the numerator of which is one and the denominator of which is the number of whole calendar months in the Interest Period in which such date occurs. Investment Securities means any of the following which at the time of investment are legal investments under the Act and the laws of the State for the money proposed to be invested therein: (i) Federal Securities; (ii) certificates of deposit or time deposits of any bank, as defined by the Texas Banking Act (including without limitation the Trustee or any of its affiliates), except that investments may be made only in certificates of deposit or time deposits which are (A) insured by the Bank Insurance Fund or the Savings Association Insurance Fund as administered by the Federal Deposit Insurance Corporation, if then in existence; (B) continuously and fully secured by securities described above, which have a value, exclusive of accrued interest, at all times at least equal to the principal amount of such certificates of deposit or time deposits; or (C) issued by a bank whose outstanding unsecured long-term debt is rated at the time of issuance in any of the three (3) highest rating categories by two (2) nationally recognized rating agencies; (iii) short-term obligations of corporations organized in the United States of America with assets exceeding $500,000,000, if (A) such obligations are rated on the date of purchase and at any time held by the Trustee within one of the three (3) highest rating classifications established by at least two (2) nationally recognized rating services (without regard to any rating refinement or gradation by numerical or other modifier), and which mature not later than 180 days from the date of purchase, (B) such purchases do not exceed ten percent (10%) of such corporations outstanding obligations, and (C) no more than one-third of the money relating to the Bonds is so invested; (iv) interests in money market mutual funds registered under the Investment Borrower Act of 1940, as from time to time amended; provided, that the governing instrument or order directs, requires, authorizes or permits investment in Federal Securities; provided further, that the portfolio of any such money market fund is limited to Federal Securities or to repurchase agreements fully collateralized by such Federal Securities; (v) short-term discount obligations of the Federal National Mortgage Association; (vi) bonds, notes or other obligations issued by any state, unit of local government or school district, which obligations are rated on the date of purchase and at any time held by the Trustee within one of the two (2) highest rating classifications (without regard to rating refinement or gradation by numerical or other modifier) by a nationally recognized rating service; (vii) investment agreements constituting an obligation of a bank, as defined by the Texas Banking Act (including the Trustee or any of its affiliates), whose outstanding unsecured long-term debt is rated at the time of such agreement in any of the three (3) highest rating categories by two (2) nationally recognized rating agencies; and (viii) any other investments permitted by law if such investments are rated on the date of purchase and at any time held by the Trustee within A-9

70 one of the two (2) highest classifications (without regard to rating refinement or graduation by numerical or other modifier) established by a nationally recognized rating service. Issuer means the Bexar County Housing Finance Corporation, a non-profit housing finance corporation duly organized and validly existing under the laws of the State, and any successor body to the duties or functions of the Issuer. Issuer Representative means the President, the Vice President, or the Secretary/Treasurer of the Issuer, or such other person at the time designated to act on behalf of the Issuer as evidenced by a written certificate furnished to the Trustee and containing the specimen signature of such person and signed on behalf of the Issuer by its President, Vice President, or Secretary/Treasurer. The certificate may designate an alternate or alternates, each of whom shall be entitled to perform all duties of the Authorized Issuer Representative. Issuer s Fees and Expenses means those reasonable fees and expenses, if any, payable to or incurred by the Issuer and any reasonable fees and expenses of counsel to the Issuer. Loan means the loan evidenced by the Series 2011 Notes from the Borrower to the Trustee financed by the Issuer in the aggregate principal amount of $27,765,000. Loan Agreement means the Loan Agreement of even date herewith among the Issuer, Trustee and the Borrower, as in effect on the Closing Date and as it may thereafter be amended and supplemented from time to time in accordance with its terms. Loan Payments means, collectively, the Basic Loan Payments and the Additional Loan Payments. Long-Term Indebtedness means any Indebtedness other than Short-Term Indebtedness. Mail means either (a) first class mail by the United States Postal Service, postage prepaid, to the Holders at their respective addresses which appear on the registration books of the Paying Agent on the date of mailing, or (b) actual delivery to the Holders or their representatives evidenced by receipt signed by such Holders or their representatives. Management Agreement means the Management Agreement dated as of December 1, 2011, between the Manager and the Borrower, or any substitute agreement providing for the management, maintenance and operation of the Project, in each case as it may be amended and supplemented from time to time. Management Consultant means a Consultant possessing significant management consulting experience in matters pertaining to owning and operating multifamily residential rental housing facilities similar to the Project. Management Fee means the fee paid to the Manager pursuant to the Management Agreement. Manager means Wind River Management Corporation, or any subsequent third-party management company with experience in managing similar properties and their successors and assigns meeting the requirements of Section 4.7 of the Loan Agreement and any subcontractor as manager of the Project. Material Adverse Effect means (a) a material adverse change in the financial condition of the Borrower or the Project; or (b) any event or occurrence of whatever nature which would materially and adversely change (i) the Borrower s ability to perform its obligations under the Loan Agreement or any other Borrower Documents; or (ii) the Holders or the Trustee s security interests in the security pledged hereunder. Maximum Annual Debt Service means as of any date of calculation the highest Annual Debt Service with respect to all Outstanding Bonds of the applicable Series for any succeeding Fiscal Year, but excluding the period ending on the final Principal Payment Date of the Bonds. A-10

71 Modifications means modifications, repairs, renewals, improvements, replacements, alterations, additions, enlargements, or expansions in, on, or to the Project (other than routine repair or maintenance), including any and all machinery, furnishings, and equipment therefor. Moody s means Moody s Investors Service, a corporation organized and existing under the laws of the State of Delaware, its successors and their assigns, and, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, Moody s shall be deemed to refer to any other nationally recognized securities rating agency designated by the Borrower by notice to the Trustee and the Issuer. Mortgage means the Deed of Trust and Security Agreement of even date herewith, from the Borrower for the benefit of the Trustee, securing the repayment of the Loan and the Series 2011 Notes and certain additional amounts due and owing under the Loan Agreement, as in effect on the Closing Date and as it may thereafter be amended and supplemented from time to time in accordance with its terms. Mortgaged Property means the real property and all improvements thereon on which the Project is located which is subject to the lien of the Mortgage and the Indenture, as more specifically described in Exhibit A to the Mortgage. Needs Assessment Analysis means the analysis and report required as set forth in Section 4.12 of the Loan Agreement. Net Income Available for Debt Service means, for any period of determination thereof, Project Revenues for such period, plus all interest earnings on money held in Funds and Accounts which are transferred to the Revenue Fund pursuant to Article VI of the Indenture, minus (a) total Operating Expenses incurred on a Generally Accepted Accounting Principles basis by the Borrower for such period, (b) any profits or losses which would be regarded as extraordinary items under generally accepted accounting principles, (c) gain or loss on the extinguishment of Indebtedness, (d) contributions, (e) proceeds of Additional Bonds and any other Permitted Indebtedness, (f) Net Proceeds of any Insurance Proceeds or Condemnation Awards, (g) the proceeds of any sale, transfer or other disposition of all or any portion of the Project by the Borrower, and (h) with respect to the Subordinate Bonds, the Debt Service Requirements for the Senior Bonds and debt service due on any Senior Parity Indebtedness for such period. Net Proceeds, when used with respect to (a) any Insurance Proceeds or Condemnation Award, means the gross proceeds from such Insurance Proceeds or Condemnation Award, less all expenses (including reasonable attorneys fees of the Borrower or the Trustee and any extraordinary fees and expenses of the Trustee) incurred in the realization thereof; and (b) the Bonds, has the same meaning as net sale proceeds under Treasury Regulation 1.148(1)(b). Notes means the Series 2011 Notes and any promissory note issued in connection with Additional Bonds. Operating Account means, the demand deposit bank account maintained by the Borrower pursuant to Section 4.3 of the Loan Agreement on which the Borrower or its authorized agent writes checks to pay Operating Expenses. Operating Expenses means, for any period, cash expenses paid or accrued in connection with the operation, maintenance and current repair of the Project (determined on a cash basis) during such period including without limitation, the costs of any utilities necessary to operate the Project, advertising and promotion costs, payroll expenses, insurance premiums, deposits to the Insurance and Tax Escrow Fund and to the Repair and Replacement Fund in the amount of the Repair and Replacement Reserve Requirement, any Rebate Amount to the extent that it is not paid from the Rebate Fund, the Management Fee, the Administration Expenses, administrative and legal expenses of the Borrower relating to the Project, labor, executive compensation, the cost of materials and supplies used for current operations of the Project, taxes and charges for accumulation of appropriate reserves for current expenses not annually recurrent but which are such as may reasonably be expected to be incurred in connection with the Project and in accordance with sound accounting practice. Operating Expenses does not include (a) Debt Service Requirements, (b) any loss or expense resulting from or related to any extraordinary and nonrecurring items, (c) any losses or expenses related to the sale of assets, the proceeds of which sale are not included in Project A-11

72 Revenues pursuant to clause (b) of the definition thereof, (d) expenses paid from operational reserves, including the Operations and Maintenance Reserve Requirement, (e) expenses paid from the Repair and Replacement Fund, (f) any Rebate Amount to the extent that it is paid from the Rebate Fund, (g) deposits in the Repair and Replacement Fund in excess of the Repair and Replacement Reserve Requirement, (h) any allowance for depreciation or replacements of capital assets of the Project or amortization of financing costs or (i) disbursements from the Surplus Fund. For purposes of calculating the Debt Service Coverage Ratio, Operating Expenses will include the actual Management Fee, Asset Management Fee, and Home Office Fee paid and will not include the Subordinate Management Fee, the Subordinate Asset Management Fee, and the Subordinate Home Office Fee. Operating Fund means the trust fund by that name created pursuant to Section 5.01 of the Indenture. Operating Requirement means all Operating Expenses, exclusive of amounts to be deposited to or payable from the Administration Fund, Insurance and Tax Escrow Fund, Operations and Maintenance Reserve Fund or Repair and Replacement Fund, projected to be payable in such month in accordance with the Budget. Operations and Maintenance Reserve Fund means the trust fund by that name created pursuant to Section 5.01 of the Indenture. Operations and Maintenance Reserve Requirement means an amount equal to one month s budgeted Operating Expenses for the Project for the current Fiscal Year. Ordinary Expenses means those reasonable expenses incurred in the ordinary course of business, by a trustee, a registrar, an authenticating agent and a paying agent under instruments similar to the Indenture, but excluding Extraordinary Expenses. Ordinary Services means those services normally rendered by a trustee, a registrar, an authenticating agent and a paying agent under instruments similar to the Indenture, excluding Extraordinary Services. Ordinary Trustee s Fees and Expenses means those annual fees, expenses and disbursements for the Ordinary Services and the Ordinary Expenses of the Trustee and Paying Agent incurred in connection with their duties under the Indenture payable semi-annually in advance on the Closing Date and on each Interest Payment Date beginning on the Closing Date in an amount not to exceed $5,000 per annum and payable in July 1 of each year thereafter. Organizational Documents means the documents under which the Borrower is organized and governed as such documents are in effect on the Closing Date and as they may be thereafter amended or supplemented from time to time in accordance with their terms. Outstanding or outstanding with respect to Bonds means, as of any given date, all Bonds which have been authenticated and delivered by the Trustee under the Indenture, except: (a) Bonds cancelled at or prior to such date or delivered to or acquired by the Trustee or Paying Agent on or prior to such date for cancellation; (b) Bonds deemed to be paid in accordance with Article VII of the Indenture; and (c) Bonds in lieu of which other Bonds have been authenticated under Section 2.08 or 2.09 of the Indenture. Parity Indebtedness means the Indebtedness permitted to be secured by the Borrower pursuant to Section 6.12 of the Loan Agreement. Paying Agent means the Trustee or any successor or additional Paying Agent appointed hereunder that satisfies the requirements of Section 9.18 of the Indenture. Permitted Encumbrances means, with respect to the Project, the Mortgage and (a) the lien of current real property taxes (if any), ground rents, water charges, sewer rents and assessments not yet due and payable, (b) covenants, conditions and restrictions, rights of way, easements and other matters of public record, none of which, individually or in the aggregate, materially interferes with the current use of the Project or the security intended to be provided by the Mortgage or with the Borrower s ability to pay its obligations when they become due or A-12

73 materially and adversely affects the value of the Project, (c) the Regulatory Agreement, and (d) the exceptions (general and specific) set forth in the Title Policy or appearing of record, none of which, individually or in the aggregate, materially interferes with the intended use of the Project or the security intended to be provided by the Mortgage or with the Borrower s ability to pay its obligations when they become due or materially and adversely affects the value of the Project. Permitted Indebtedness means (a) payment and other liabilities payable under the Loan Agreement or the Series 2011 Notes, (b) liabilities of the Borrower under the Mortgage, and (c) Indebtedness of the Borrower allowed pursuant to Section 6.12 of the Loan Agreement incurred in the ordinary course of business. Person or person means an individual, a corporation, a partnership, an association, a joint stock company, a trust, any unincorporated organization, a governmental body, any other political subdivision, municipality or authority or any other group or entity. Potential Default means any event which with the passage of time or the giving of notice, or both, would constitute an Event of Default under the Indenture or a Default under the Loan Agreement. Principal Account means the trust account by that name within the Bond Fund created with respect to a Series of Bonds pursuant to Section 5.01 of the Indenture. Principal Payment Date means the maturity date of the Bonds and any date for mandatory sinking fund redemption of the Bonds pursuant to Section 3.03 of the Indenture. Principal Requirement for any Bonds means an amount equal to the regularly scheduled principal that is due and payable on such Bonds on the Bond Payment Date next succeeding the date of determination, whether by maturity or by mandatory sinking fund redemption pursuant to Section 3.03 of the Indenture, multiplied by a fraction the numerator of which is one and the denominator of which is the number of whole calendar months in the period commencing on the last date of payment of regularly scheduled principal (or the date of issuance of such Bonds, if no principal has been paid) and ending on the next Bond Payment Date for payment of regularly scheduled principal. Project means the Site, together with the improvements constructed thereon, consisting of a 167-unit senior living facility and related support facilities, including all buildings, structures and improvements now or hereafter constructed thereon, and all fixtures, machinery, equipment, furniture, furnishings and other personal property hereafter attached to, located in, or used in connection with any such structures, buildings or improvements, and all additions, substitutions and replacements thereto, whether now owned or hereafter acquired. The term Project does not include property owned by Persons other than the Borrower, including the Manager or residents of the Project. Project Fund means the trust fund by that name created pursuant to Section 5.01 of the Indenture. Project Revenues means for any period, all cash operating and non-operating revenues of the Project, including Unrestricted Contributions, less (a) any extraordinary and nonrecurring items (including any real property tax refunds), (b) income derived from the sale of assets not in the ordinary course of business which is permitted under the Bond Documents, (c) security, cleaning or similar deposits of tenants until applied or forfeited, (d) Net Proceeds of Insurance Proceeds or Condemnation Awards and (e) any amount disbursed to the Borrower from the Surplus Fund, but including as Project Revenues (i) any such Net Proceeds resulting from business interruption insurance or other insurance or condemnation proceeds retained by the Borrower and (ii) amounts received by the Borrower or the Trustee pursuant to any payment guaranty, operating guaranty or similar agreement with respect to the Project. Qualified Insurer has the meaning provided in Section 5.2 of the Loan Agreement. A-13

74 Rating Agency means S&P, Moody s or Fitch, or any other nationally recognized rating agency if such agency currently has a rating in effect with respect to any series of the Bonds. The initial Rating Agency shall be S&P. Rating Agency Fee means any fee required to be paid to a Rating Agency to maintain a rating on the Bonds, and initially means the annual surveillance fee of $10,000 payable by the Borrower to the initial Rating Agency. Rebate Analyst means a Certified Public Accountant, financial analyst or Bond Counsel, or any firm of the foregoing, or a financial institution (which may include the Trustee) experienced in making the arbitrage and rebate calculations required pursuant to Section 148 of the Code and retained by the Borrower to make the computations and give the directions required pursuant to the Tax Agreement. Rebate Analyst Fee means a fee paid for each rebate calculation (which are to be made every fifth year, if required). Rebate Fund means the trust fund by that name created pursuant to Section 5.01 of the Indenture. Record Date means the fifteenth day (whether or not a Business Day) of the calendar month preceding any applicable Interest Payment Date. Regulatory Agreement means the Regulatory Agreement and Declarations of Restrictive Covenants dated the date of the Indenture among the Issuer, the Trustee, and the Borrower relating to the use of the Project. Related Person means any member of the same Controlled Group as the Issuer or the Borrower. Repair and Replacement Fund means the trust fund by that name established pursuant to Section 5.01 of the Indenture. Replacement Reserve Requirement means an amount equal to $350 per unit per year, as increased pursuant to any Needs Assessment Analysis required by Section 4.12 of the Loan Agreement. Reserved Rights of the Issuer means (a) the right of the Issuer to amounts payable to it pursuant to Section 3.2(b)(ii)(3) of the Loan Agreement, (b) all rights which the Issuer or its officers, officials, agents, attorneys or employees may have under the Indenture and the Borrower Documents to indemnification by the Borrower and by any other persons and to payments and reimbursements for fees or expenses incurred by the Issuer itself, or its officers, officials, agents or employees; (c) the right of the Issuer to receive notices, reports or other information, make determinations and grant approvals hereunder and under the other Bond Documents, including rights to notice and reporting requirements and restrictions on transfer of ownership of the Project or the Bonds, and its right to inspect and audit its books, records and premises of the Borrower of the Project; (d) all rights of the Issuer to enforce the representations, warranties, covenants and agreements of the Borrower pertaining in any manner or way, directly or indirectly, to the requirements of the Act or of the Issuer, and set forth in any of the Bond Documents, in the Tax Agreement or in any other certificate or agreement executed by the Borrower; (e) all rights of the Issuer in connection with the approval, execution and delivery of any amendment to or modification of the Bond Documents; and (f) all enforcement remedies of the Issuer with respect to the foregoing. Responsible Officer, when used with respect to the Trustee, means any corporate trust officer or assistant corporate trust officer or any other officer of the Trustee within its corporate trust department customarily performing functions similar to those performed by any of the above designated officers, and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of such person s knowledge of and familiarity with the particular subject. Restoration means the restoration, replacement, repair or rebuilding of the Project as a result of an event for which Condemnation Awards or Insurance Proceeds are received with respect to the Project, as provided in Section 5.3 of the Loan Agreement. A-14

75 Restoration Plans has the meaning provided in Section 5.3 of the Loan Agreement. Revenue Fund means the trust fund by that name created pursuant to Section 5.01 of the Indenture. S&P means Standard & Poor s Rating Services, a division of The McGraw-Hill Companies, Inc., a corporation organized and existing under the laws of the State of New York, its successors and their assigns, and, if such organization shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, S&P shall be deemed to refer to any other nationally recognized securities rating agency designated by the Borrower by notice to the Trustee and the Issuer. Senior Bonds means the Series 2011A Bonds, the Series 2011A-T Bonds and any Additional Bonds issued on a parity therewith. Senior Parity Indebtedness means any Parity Indebtedness properly incurred on parity with the Senior Bonds as provided in Section 6.12 of the Loan Agreement. Series means any series of Bonds issued pursuant to the Indenture. Bonds. Series 2011 Bonds means the Series 2011A Bonds, the Series 2011B Bonds and the Series 2011A-T Series 2011A Bonds means $23,600,000 aggregate principal amount of the Issuer s Senior Living Revenue Bonds (The Inn at Los Patios Apartments Project) Series 2011A, which Bonds are on parity in lien and priority with the Series 2011A-T Bonds and senior in lien and priority to the Series 2011B Bonds. Series 2011A-T Bonds means $845,000 aggregate principal amount of the Issuer s Senior Living Revenue Bonds (The Inn at Los Patios Apartments Project) Taxable Series 2011A-T, which Bonds are on parity in lien and priority with the Series 2011A Bonds and senior in lien and priority to the Series 2011B Bonds. Series 2011B Bonds means $3,320,000 aggregate principal amount of the Issuer s Senior Living Revenue Bonds (The Inn at Los Patios Apartments Project) Subordinate Series 2011B, which Bonds are subordinate in lien and priority to the Series 2011A Bonds and Series 2011A-T Bonds. Series 2011 Notes means the three notes executed by the Borrower in favor of the Trustee on behalf of the Holders evidencing the Loan of the proceeds related to each series of the Series 2011 Bonds. Servicer means any mortgage banking company or financial institution engaged pursuant to Section 9.24 of the Indenture to service the Loan. Short-Term Indebtedness means any Indebtedness maturing not more than 365 days after it is incurred or which is payable on demand, except for any such Indebtedness which is renewable or extendable at the sole option of the debtor to a date more than 365 days after it is incurred, or any such Indebtedness which, although payable within 365 days, constitutes payments required to be made on account of Indebtedness expressed to mature more than 365 days after it was incurred. Site means the real property on which the Project is located. Special Redemption Account means each trust account by that name within the Bond Fund created with respect to a Series of Bonds pursuant to Section 5.01 of the Indenture. State means the State of Texas. Subordinate Asset Management Fee means, for any period, an amount equal to the portion of the Asset Management Fee with respect to such period which the Borrower, at its option, directs the Trustee to pay solely from the Surplus Fund pursuant to Section 5.13(c) of the Indenture and not include as an Operating Expense. A-15

76 Subordinate Bonds means the Series 2011B Bonds. Subordinate Home Office Fee means, for any period, an amount equal to the portion of the Home Office Fee with respect to such period which the Borrower, as its option, directs the Trustee to pay solely from the Surplus Fund pursuant to Section 5.13(c) of the Indenture and not include as an Operating Expense. Subordinate Management Fee means, for any period, an amount equal to the portion of the Management Fee with respect to such period which the Borrower, as its option, directs the Trustee to pay solely from the Surplus Fund pursuant to Section 5.13(c) of the Indenture and not include as an Operating Expense. Subordinate Parity Indebtedness means any Parity Indebtedness properly incurred on parity with the Subordinate Bonds as provided in Section 6.12 of the Loan Agreement. Supplemental Indenture means any Amendment to the Indenture entered into in accordance with Article XI of the Indenture. Surplus Cash means the amount on deposit in the Surplus Fund that may be distributed to the Borrower pursuant to Section 5.13(b) of the Indenture. Surplus Fund means the trust fund by that name created pursuant to Section 5.01 of the Indenture. Tax Agreement means the Borrower s Tax Representation Letter and No-Arbitrage Certificate dated the Closing Date, executed by the Issuer, the Borrower and the Trustee, as in effect on the Closing Date and as the same may be supplemented or amended from time to time in accordance with its terms. Tax-Exempt Bonds means the Series 2011A Bonds, the Series 2011B Bonds and any Additional Bonds that as originally issued were the subject of an opinion of Bond Counsel to the effect that the interest thereon is excluded from the gross income of the Holders thereof for federal income tax purposes. TEC means The Emmaus Calling, Inc., a Texas nonprofit corporation, which has received a group ruling from the Internal Revenue Service that it and the entities that it creates, such as the Borrower, are exempt from federal income tax pursuant to section 501(c)(3) of the Code. Test Period means any period of not more than twelve months ending on the last day of the most recent month preceding the month in which the Debt Service Coverage Ratio is tested and beginning on the last to occur of (a) the first day of the eleventh month preceding such most recent month or (b) the Closing Date. Title Policy means title insurance in the form of an ALTA mortgagee s title policy issued by a title insurance company acceptable to the Underwriter and Trustee in the face amount of at least the principal amount of Series 2011 Bonds insuring that the Trustee has a first priority valid lien in the Mortgaged Property subject only to Permitted Encumbrances. Trust Estate means the property conveyed to the Trustee hereunder, including all of the Issuer s right, title and interest in and to the property described in the Granting Clauses of the Indenture. Trustee means The Bank of New York Mellon Trust Company, N.A., Jacksonville, Florida, or any successors or assigns hereunder. Underwriter means BB&T Capital Markets and M.E. Allison & Co., Inc. Unrestricted Contributions means contributions that are not restricted in any way that would prevent their application to the payment of Debt Service on Indebtedness of the Borrower. [Remainder of page intentionally left blank] A-16

77 APPENDIX B SUMMARIES OF CERTAIN PROVISIONS OF THE PRINCIPAL DOCUMENTS The following are summaries of certain provisions of the Indenture, the Loan Agreement, the Mortgage and the Regulatory Agreement. These summaries do not purport to be complete and are subject in all respects to the provisions of, and are qualified in their entirety by reference to, the complete text of such documents. Copies of the foregoing documents are available from the Trustee. Table of Contents THE INDENTURE... B-1 THE LOAN AGREEMENT... B-18 THE MORTGAGE... B-30 THE REGULATORY AGREEMENT... B-30 THE INDENTURE The following is a brief summary of certain provisions of the Indenture. The summary does not purport to be complete or definitive and is qualified in its entirety by reference to the Indenture, a copy of which is on file with the Trustee. Funds and Accounts The following Funds and accounts are created by the Issuer to be held by the Trustee: (i) A Bond Fund and, within such fund, a Principal Account, an Interest Account and a Special Redemption Account with respect to each Series of Bonds; (ii) A Debt Service Reserve Fund and there in a Debt Service Reserve Fund Account with respect to the Senior Bonds and a Debt Service Reserve Fund Account with respect to the Subordinate Bonds; (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) A Project Fund and therein a Costs of Issuance Account; A Revenue Fund; A Rebate Fund; An Operating Fund; An Operations and Maintenance Reserve Fund; An Insurance and Tax Escrow Fund; A Repair and Replacement Fund; A Surplus Fund; and An Administration Fund. Disbursements from the Project Fund. The Trustee shall disburse money in the Costs of Issuance Account in the Project Fund to pay the Costs of Issuance upon receipt of a written requisition of the Borrower to the Trustee, which states (i) that such amount is to be paid to persons, firms or corporations identified therein, and (ii) that such B-1

78 amount is properly payable as a Cost of Issuance under the Indenture. On the date six months after the Closing Date, the Trustee shall pay any remaining balance in the Costs of Issuance Account to the Project Fund. Net Proceeds of any Insurance Proceeds or Condemnation Awards deposited in the Project Fund pursuant to the Loan Agreement shall be applied as provided therein. Any amounts remaining in the Project Fund on the date that is three (3) years from the Closing Date ( in the case of original and investment proceed of the Series 2011 Bonds, or the date of deposit of such amounts into the Project Fund, in the case of other amounts) shall be deposited in the Series 2011A Interest Account for the Senior Bonds of the Bond Fund unless otherwise required by the Tax Agreement. Revenue Fund. There shall be deposited in the Revenue Fund (i) all Loan Payments and other amounts paid to the Trustee under the Loan Agreement (other than prepayments required to redeem Bonds pursuant to the Indenture, which shall be deposited in the related Special Redemption Account), (ii) all other amounts required to be so deposited pursuant to the terms of the Indenture or of the Tax Agreement, including investment earnings to the extent provided in the Indenture, (iii) any amounts derived from the Loan Agreement or the Mortgage to be applied to payment of amounts intended to be paid from the Revenue Fund, (iv) all Project Revenues, and (v) such other money as are delivered to the Trustee by or on behalf of the Issuer or the Borrower with directions for deposit of such money in the Revenue Fund. Money on deposit in the Revenue Fund shall be disbursed on the fifteenth (15 th ) day of each month in the following order of priority: (1) To the respective Interest Accounts for the Senior Bonds, an amount equal to the Interest Requirement for such Series of Bonds for the previous calendar month, together with an amount equal to any unfunded Interest Requirement for the Senior Bonds for any prior month, and to the holder of any Senior Parity Indebtedness an amount equal to the interest due in such month, together with an amount equal to any unfunded interest for any prior month; (2) To the respective Principal Accounts for the Senior Bonds, an amount equal to the Principal Requirement for such Series of Bonds for the previous calendar month, together with an amount equal to any unfunded Principal Requirement for the Senior Bonds for any prior month and to the holder of any Senior Parity Indebtedness an amount equal to the principal due in such month, together with an amount equal to any unfunded principal for any prior month; (3) To the Debt Service Reserve Accounts for the Senior Bonds, the amount, if any, required to be paid into the Debt Service Reserve Account for the Senior Bonds pursuant to the Loan Agreement to restore the amounts on deposit therein to the Senior Bonds Debt Service Reserve Requirement; (4) To the respective Interest Accounts for the Subordinate Bonds, an amount equal to the Interest Requirement for such Bonds for the previous calendar month, together with an amount equal to any unfunded Interest Requirement for the Subordinate Bonds for any prior month, and to the holder of any Subordinate Parity Indebtedness an amount equal to the principal due in such month, together with an amount equal to any unfunded principal for any prior month; (5) To the respective Principal Accounts for the Subordinate Bonds, an amount equal to the Principal Requirement for such Bonds for the previous calendar month, together with an amount equal to any unfunded Principal Requirement for the Subordinate Bonds from any prior month and to the holder of any Subordinate Parity Indebtedness an amount equal to the principal due in such month, together with an amount equal to any unfunded principal for any prior month; (6) To the Debt Service Reserve Accounts for the Subordinate Bonds, the amount, if any, required to be paid into the Debt Service Reserve Account for the Subordinate Bonds pursuant to the Loan Agreement to restore the amounts on deposit therein to the Subordinate Bonds Debt Service Reserve Requirement; B-2

79 (7) Subject to the provisions under the heading Insurance and Tax Escrow Fund, for transfer to the Insurance and Tax Escrow Fund, an amount equal to one-twelfth of the amount budgeted by the Borrower for the current year for annual premiums for insurance required to be maintained pursuant to the Loan Agreement and for annual real estate taxes or other charges for governmental services for the current year, as provided in the Budget; (8) To the Operating Fund, an amount equal to the Operating Requirement (less any amounts to be paid to the Manager for its Management Fee pursuant to (14) below), together with such additional Operating Expenses requested by a Borrower Representative pursuant to and after satisfaction of the conditions specified in the Loan Agreement; (9) Subject to the provisions under the heading Repair and Replacement Fund, for transfer to the Repair and Replacement Fund, commencing with the month of February 2012, an amount equal to one-twelfth of the Replacement Reserve Requirement; (10) Subject to the provisions under the heading Administration Fund, for transfer to the Administration Fund, an amount equal to one-sixth (1/6) of the Administration Expenses (other than the Rebate Analyst Fee) scheduled to be due and payable on or before the next succeeding Interest Payment Date; (11) To the Administration Fund, the amount of any Rebate Analyst Fee then due; (12) To the Rebate Fund, the amount of any deposit required to be made thereto pursuant to the Tax Agreement; (13) To the Manager, the Management Fee other than any Subordinate Management Fee and paid monthly in accordance with the Budget; (14) To TEC, the Home Office Fee other than any Subordinate Home Office Fee and paid monthly in accordance with the Budget; (15) To the Asset Manager, the Asset Management Fee other than any Subordinate Asset Management Fee and paid monthly in accordance with the Budget; and Bond Fund. (16) To the Surplus Fund, all remaining amounts. (a) There shall be deposited into the respective Principal Accounts of the Bond Fund (i) money transferred to such Principal Accounts from the Revenue Fund pursuant to the Indenture; (ii) money transferred from the Surplus Fund, the Operations and Maintenance Reserve Fund, the Repair and Replacement Fund, the applicable Debt Service Reserve Fund Accounts and the Operating Fund pursuant to the Indenture in respect of principal payable on the Senior Bonds; (iii) money transferred from the Debt Service Reserve Fund pursuant to the Indenture in respect of principal payable on the Bonds, and (iv) any other amounts deposited with the Trustee with directions from the Borrower to deposit the same in the applicable Principal Account of such Bond Fund. (b) There shall be deposited into the respective Interest Accounts of the Bond Fund (i) all accrued interest, if any, on the sale and delivery of the applicable Series of Bonds, (ii) money transferred to such Interest Account from the Revenue Fund pursuant to the Indenture, (iii) money transferred from the Surplus Fund, the Operations and Maintenance Reserve Fund, the Repair and Replacement Fund, the applicable Debt Service Reserve Fund Accounts and the Operating Fund pursuant to the Indenture in respect of interest payable on the Senior Bonds, and (iv) any other amounts deposited with the Trustee with directions from the Borrower to deposit the same in the applicable Interest Account of such Bond Fund. B-3

80 (c) There shall be deposited in the applicable Special Redemption Account of the Bond Fund (i) any Net Proceeds of Insurance Proceed or Condemnation Awards to be transferred to a Special Redemption Account pursuant to the Indenture and (ii) all other payments made by or on behalf of the Issuer with respect to the redemption of Bonds pursuant to the Indenture. Amounts on deposit in each Special Redemption Account shall be used to pay the redemption price of Bonds of the related Series being redeemed. (d) Except as otherwise provided herein, money in each Principal Account shall be used for the payment of principal of the Bonds of the applicable Series as the same shall become due and payable on any Principal Payment Date including a Principal Payment Date resulting from the redemption of the Bonds pursuant to the Indenture. (e) Except as otherwise provided herein, money in each Interest Account shall be used for the payment of interest on such Bonds as the same becomes due and payable on any Bond Payment Date. (f) If on any Interest Payment Date, the amount on deposit in an Interest Account or a Principal Account is insufficient to make the payments or deposits described in (a) or (b) above for the related Series of Bonds, the Trustee shall make up any such shortfall by transferring amounts from the following Funds in the following order: (1) the Surplus Fund; (2) the Operations and Maintenance Reserve Fund; (3) the Repair and Replacement Fund; (4) the applicable Debt Service Reserve Fund Accounts; and (5) the Operating Fund. (g) Any balance in the Principal Accounts and the Interest Accounts of the Bond Fund on each Interest Payment Date after making the payments required above shall be transferred to the Revenue Fund. Debt Service Reserve Fund. (a) There shall be deposited in the applicable Accounts of the Debt Service Reserve Fund (i) all money transferred to such Debt Service Reserve Fund Account pursuant to the Indenture, (ii) money transferred from the Revenue Fund pursuant to the Indenture, and (iii) any other money received by the Trustee with directions from such party to deposit the same in such Debt Service Reserve Account. (b) Amounts on deposit in the applicable Debt Service Reserve Account shall be used to make the payments required pursuant to the Indenture after transfer of any amounts from the Surplus Fund, the Operations and Maintenance Fund and the Repair and Replacement Fund pursuant to the Indenture, if the amounts on deposit in the Revenue Fund are insufficient therefor. (c) Amounts on deposit in a Debt Service Reserve Account shall be transferred to the Principal Account of the Bond Fund at the direction of the Borrower Representative for the purpose of paying the last maturing principal of the Bonds on a Principal Payment Date or, if all the Bonds are being redeemed, to the applicable Special Redemption Account of the Bond Fund for redemption of the Bonds. (d) If the Debt Service Reserve Requirement for one or more Series of Bonds is reduced or eliminated in accordance with the definition thereof, the amounts on deposit in the related Debt Service Reserve Account in excess of the applicable Debt Service Reserve Requirement shall, at the written direction of a Borrower Representative delivered to the Trustee, be either (i) transferred to the applicable Special Redemption Account to be used to redeem Bonds pursuant to the Indenture, (ii) transferred to the related Principal or Interest Account to pay the principal of and/or interest on the Bonds as it becomes due, or (iii) if no Bonds remain outstanding, either B-4

81 transferred to the Revenue Fund and applied as provided under the heading Revenue Fund, or used for any other purpose directed in writing by a Borrower Representative, which, pursuant to a Favorable Opinion of Bond Counsel, complies with the Act and will not adversely affect the exclusion from gross income of the recipients thereof of the interest on the Tax-Exempt Bonds for federal income tax purposes. (e) All interest income derived from the investment of amounts on deposit in the Debt Service Reserve Fund shall be retained in the Debt Service Reserve Fund until the amount on deposit therein shall be equal to the Debt Service Reserve Requirement, and thereafter shall be deposited into the Revenue Fund. Rebate Fund. (a) The Trustee will deposit or transfer to the credit of the Rebate Fund each amount delivered to the Trustee by the Borrower for deposit thereto and each amount directed by the Borrower in writing to be transferred thereto. (b) Within five (5) days after each receipt or transfer of funds to the Rebate Fund in accordance with the Loan Agreement, the Trustee will withdraw from the Rebate Fund and pay to the United States of America the balance of the Rebate Fund. (1) Within five (5) days after receipt from the Borrower of any amount pursuant to the Loan Agreement, the Trustee will withdraw such amount from the Rebate Fund and pay such amount to the United States of America. (2) All payments to the United States of America pursuant to the section of the Indenture titled Rebate Fund will be made by the Trustee for the account and in the name of the Issuer and will be paid by check posted by registered United States Mail (return receipt requested), addressed to the Internal Revenue Service Center designated in writing at such time by the Borrower (accompanied by the relevant Internal Revenue Service Form 8038-T or the statement and copy of Internal Revenue Service Form 8038 described in the Loan Agreement, if such payment is described in (b)(i) of this Section, and by the relevant Internal Revenue Service Form 8038-T and written explanation of the Borrower delivered to the Trustee described in the Loan Agreement, if such payment is described in (b)(ii) of this Section. (c) The Trustee will preserve all statements, forms, and explanations received from the Borrower pursuant to Section 2.8(b) of the Loan Agreement and all records of transactions in the Rebate Fund until three (3) years after the retirement of all of the Bonds. (d) The Trustee may conclusively rely on the instructions of the Borrower with regard to any actions to be taken by it pursuant to this Section and will have no liability for any consequences of any failure of the Borrower to perform its duties or obligations or to supply accurate or sufficient instructions. Except as provided in subsections (b) and (c) above, the Trustee will have no duty or responsibility with respect to the Rebate Fund or the Borrower s duties and responsibilities with respect thereto except to follow the Borrower s specific written instruction related thereto. (e) If at any time during the term the Issuer, the Trustee, or the Borrower desires to take any action which would otherwise be prohibited by the terms of this Section, such Person will be permitted to take such action if it will first obtain and provide to the other Persons named herein an opinion of Bond Counsel to the effect that such action will not adversely affect the exclusion of interest on the Tax-Exempt Bonds from gross income of the holders thereof for federal income tax purposes and will be in compliance with the laws of the State of Texas and the terms. Operations and Maintenance Reserve Fund. There shall be deposited in the Operations and Maintenance Reserve Fund (i) money transferred from the Surplus Fund as described in the Indenture and (ii) any other amounts required to be deposited into the Operations and Maintenance Reserve Fund pursuant to the Indenture or the Loan Agreement. Amounts on deposit in the Operations and Maintenance Reserve Fund are to be used to pay (i) maintenance and repair costs to the Project which are not capital expenditures payable from the Repair and B-5

82 Replacement Fund, (ii) Operating Expenses in excess of amounts specified in the Budget, (iii) certain costs of repair and replacement in accordance with the Indenture and (iv) shortfalls in the Interest Accounts and Principal Accounts of the Bond Fund in accordance with the Indenture. The Trustee will disburse money in the Operations and Maintenance Reserve Fund to the Operating Fund to pay such maintenance and repair costs and Operating Expenses upon receipt of a written direction of the Borrower Representative which states the purpose for such disbursement and the persons to which such amounts are to be paid. All interest income derived from the investment of amounts on deposit in the Operations and Maintenance Reserve Fund will be retained in the Operations and Maintenance Reserve Fund until the amount on deposit therein shall be equal to the Operations and Maintenance Reserve Requirement, and thereafter deposited into the Revenue Fund.Insurance and Tax Escrow Fund. The Trustee shall deposit in the Insurance and Tax Escrow Fund (i) money transferred from the Revenue Fund in the amounts and on the dates described under the heading Revenue Fund and (ii) any other amounts required to be deposited into the Insurance and Tax Escrow Fund hereunder or under the Loan Agreement or the Mortgage and delivered to the Trustee with instructions to deposit the same therein. Money on deposit in the Insurance and Tax Escrow Fund shall be disbursed by the Trustee to the Borrower to pay, or as reimbursement for the payment of, taxes, assessments and insurance premiums with respect to the Project, as hereinafter provided. On an annual basis, excess amounts may be disbursed to the Revenue Fund if actual costs are below budgeted amounts upon written direction of the Borrower. Upon presentation to the Trustee by a Borrower Representative of a requisition accompanied by copies of bills or statements for the payment of such taxes, assessments and premiums, when due, the Trustee will, not more frequently than once a month, pay to the Borrower to provide for the payment of, or as reimbursement for the payment of, such taxes, assessments and premiums, from money then on deposit in the Insurance and Tax Escrow Fund. If the total amount on deposit in the Insurance and Tax Escrow Fund shall not be sufficient to pay to or to reimburse the Borrower in full for the payment of such taxes, assessments and premiums, then the Borrower shall pay the excess amount of such taxes, assessments and premiums directly. Repair and Replacement Fund. The Trustee shall deposit into the Repair and Replacement Fund (i) money transferred from the Revenue Fund in the amounts and on the dates described in the Indenture and (ii) any other amounts required to be deposited into the Repair and Replacement Fund hereunder or under the Loan Agreement or the Mortgage and delivered to the Trustee with instructions to deposit the same therein. The Trustee shall apply money on deposit in the Repair and Replacement Fund upon the request of the Borrower, no more frequently than once a month, to pay to or to reimburse the Borrower for paying the cost of replacements or items of extraordinary maintenance or repair which may be required to keep the Project in sound condition. Upon presentation to the Trustee by a Borrower Representative of a requisition accompanied by a summary of the amount for which payment or reimbursement is sought and, for requests for a particular line item of disbursement in excess of $25,000, copies of bills or statements for the payment of the costs of such repair and replacement (provided that the Trustee shall have no duty or obligation to review or approve such bills or statements), the Trustee will pay to the Borrower the amount of such repair and replacement costs from money then on deposit in the Repair and Replacement Fund, provided no Event of Default shall then exist hereunder. If the total amount on deposit in the Repair and Replacement Fund shall not be sufficient to pay all of such repair and replacement costs when they shall become due, then funds in the Operations and Maintenance Reserve Fund may be disbursed until exhausted, and then the Borrower shall pay the excess amount of such costs directly (which Borrower monies may be reimbursed from monies available in the Repair and Replacement Fund at a later date when they become available. The Repair and Replacement Fund will also be used to remedy any deficiency in the Accounts of the Bond Fund related to the Senior Bonds on any Interest Payment Date after exhaustion of the Surplus Fund and the Operations and Maintenance Reserve Fund without any prior consents. Administration Fund. The Trustee shall deposit in the Administration Fund (i) money transferred from the Revenue Fund pursuant to the heading Revenue Fund, and (ii) any other amounts required to be deposited in the Administration Fund hereunder or under the Loan Agreement or the Mortgage with instructions to deposit the same therein. The Trustee shall disburse amounts in the Administration Fund necessary for payment of Administration Expenses then due automatically to the parties due such payment upon presentation of an invoice from such requesting party without any approval from the Borrower. B-6

83 Surplus Fund. (a) The Trustee will deposit into the Surplus Fund amounts provided in the Indenture and any other amounts delivered to it with instructions to deposit the same in the Surplus Fund. Money in the Surplus Fund shall be applied for the following purposes and in the following manner: (i) transferred to an Interest Account for the Senior Bonds to pay interest on the Senior Bonds to the extent amounts on deposit in such Interest Account are insufficient therefor; (ii) transferred to a Principal Account for the Senior Bonds to pay principal on a Series of the Senior Bonds to the extent amounts on deposit in such Principal Account are insufficient therefor; (iii) transferred to an Interest Account for the Subordinate Bonds to pay interest on a Series of Subordinate Bonds to the extent amounts on deposit in such Interest Account are insufficient therefor; (iv) transferred to a Principal Account for the Subordinate Bonds to pay principal on the Subordinate Bonds to the extent amounts on deposit in such Principal Account are insufficient therefor; (v) transferred to the Revenue Fund to the extent of any deficiency in the amounts needed to fully make all transfers from the Revenue Fund pursuant to the Indenture (other than to the Surplus Fund); (vi) transferred to or upon the direction of the Borrower for deposit into the Operating Fund for the payment of Operating Expenses upon the Borrower's certification to the Trustee that there are not sufficient money in the Operating Fund to pay Operating Expenses then due; (vii) paid to the Trustee an amount equal to any unpaid Extraordinary Trustee's Fees and Expenses then due; (viii) transferred to the Operations and Maintenance Reserve Fund an amount sufficient to establish in such Fund or restore such Fund to the Operations and Maintenance Reserve Requirement; and (ix) (a) to the Manager, any Subordinate Management Fee then owing, (b) to the Asset Manager, any Subordinate Asset Management Fee then owing and (c) to TEC, any Subordinate Home Office Fee then owing; provided, however, such payments shall not be made unless a Borrower Representative has provided a certificate to the Trustee showing that the Coverage Test (determined by including the actual amount requested for the Subordinate Asset Management Fee, the Subordinate Management Fee and Subordinate Home Office Fee in Operating Expenses) has met the requirements as provided in the Loan Agreement for the most recent Test Period and the Trustee has confirmed the accuracy of the mathematical calculation of the Debt Service Coverage Ratio in such certificate. (b) If on or after any Annual Evaluation Date, the Trustee receives a certificate signed by a Borrower Representative stating that the Borrower has satisfied the Coverage Test (determined by including only the Management Fee, the Asset Management Fee, the Subordinate Asset Management Fee, Subordinate Home Office Fee, and the Subordinate Management Fee in Operating Expenses and as shown in a report by a Certified Public Accountant delivered by the Borrower to the Trustee pursuant to the Loan Agreement) for the Fiscal Year ending on such December 31, upon which the Trustee may conclusively rely, no Event of Default, or event which, with the passage of time or the giving of notice or both would constitute an Event of Default, has occurred and is continuing, and the Debt Service Reserve Requirement and the required Repair and Replacement Fund and the Operations and Maintenance Reserve Fund deposits have been fully funded, then within two Business Days after written request by a Borrower Representative to the Trustee, the Trustee shall disburse from the Surplus Fund to the Borrower an amount equal to the lesser of (i) the Surplus Cash as of such Annual Evaluation Date or (ii) the Surplus Cash available on the date of disbursement. (c) The Trustee shall not make certain disbursements to the Borrower unless the Trustee has received the various financial reports then due as set forth in the Loan Agreement. B-7

84 Bonds Not Presented for Payment. In the event any Bonds shall not be presented for payment when the principal thereof becomes due on any Bond Payment Date, if money sufficient to pay such Bonds are held by the Trustee, the Trustee shall segregate and hold such money in trust, without liability for interest thereon, for the benefit of Holders of such Bonds who shall, except as provided in the following paragraph, thereafter be restricted exclusively to such funds for the satisfaction of any claim of whatever nature on their part under the Indenture or relating to said Bonds. All money deposited with the Trustee for the payment of principal of, premium, if any, or interest on the Bonds and not claimed for two years after they become payable or distributable shall be paid by the Trustee to the Issuer. In such event, the Trustee shall be relieved of all liability with respect to such money and payment for such Bonds and the Holder of such Bonds shall look solely to the Issuer for such payment. Money Held In Trust. All money required to be deposited with or paid to the Trustee for deposit into any Fund or Account (other than the Rebate Fund) and all money withdrawn from a Bond Fund and held by the Trustee shall be held by the Trustee, as the case may be, in trust, and such money (other than money held in the Rebate Fund) shall, while so held, constitute part of the Trust Estate and be subject to the lien of the Indenture. Money held in a Bond Fund will constitute a separate trust fund for the Holders of the related Series and shall not constitute property of the Issuer or the Borrower. Payment to the Borrower. After the right, title and interest of the Trustee in and to the Trust Estate and all covenants, agreements and other obligations of the Issuer to the Holders shall have ceased, terminated and become void and shall have been satisfied and discharged in accordance with the Indenture, and all fees, expenses and other amounts payable to the Trustee pursuant to any provision hereof shall have been paid in full, any money remaining in the Funds and Accounts hereunder shall be paid or transferred to the Borrower upon its written request; provided that amounts on deposit in the Rebate Fund shall be retained therein to the extent required by the Tax Agreement. Deposit of Extraordinary Revenues. Any money representing Net Proceeds of Insurance Proceeds or Condemnation Awards upon damage to, destruction of or governmental taking of the Project and deposited with the Trustee pursuant to the Loan Agreement, shall be deposited by the Trustee in the Project Fund. At the direction of the Borrower, the Trustee shall disburse such money in the Project Fund as provided in the Loan Agreement to enable the Borrower to undertake a restoration of the Project so long as such restoration is permitted by law; provided that, if the Borrower exercises or is deemed to exercise its option to apply such money to the payment of the Series 2011 Notes or the conditions of the Loan Agreement are not satisfied, or an excess of such money exists after restoration of the Project, such money shall be transferred by the Trustee to the Special Redemption Account of the related Bond Fund and applied to redeem or prepay the Bonds pursuant to the Indenture, in a principal amount equal to the amount so transferred or the next lowest Authorized Denomination of the Bonds. Title insurance proceeds shall be used to remedy any title defect resulting in the payment thereof or deposited in the Bond Fund for use in redeeming Bonds pursuant to the Indenture. The proceeds of any rental loss, use and occupancy or business interruption insurance shall be deposited in the Revenue Fund. Subordination of Subordinate Bonds. Deposits to be made to the Accounts in the Bond Fund for the Subordinate Bonds under the Indenture, and payment of Debt Service on the Subordinate Bonds shall be subordinate to the deposits to be made to the Accounts in the Bond Fund and the Debt Service Reserve Fund for the Senior Bonds. The Accounts in the Bond Fund for any Series of Bonds have been specifically pledged and set aside to secure or provide for the payment of principal of and interest on such Series of Bonds. Investments Money in all Funds and Accounts established under the Indenture shall, at the written direction of the Borrower at least two Business Days before the making of such investment (any oral direction to be promptly confirmed in writing), be invested and reinvested by the Trustee in Investment Securities. Subject to the further B-8

85 provisions of this section, such investments shall be made by the Trustee as directed and designated by the Borrower in a certificate of, or telephonic advice promptly confirmed by a certificate of a Borrower Representative. As long as no Event of Default shall have occurred and be continuing, the Borrower shall have the right to designate the investments to be sold and otherwise to direct the Trustee in the sale or conversion to cash of the investments made with the money in any Fund or Account. The Borrower will not direct that any investment be made of any funds which would violate the tax covenants set forth in the Indenture. Unless otherwise confirmed in writing, an account statement delivered by the Trustee to the Borrower shall be deemed written confirmation by the Borrower that the investment transactions identified therein accurately reflect the investment directions given to the Trustee by the Borrower, unless the Borrower notifies the Trustee in writing to the contrary within 30 days after the date of such statement. Money in any Fund or Account shall be invested in Investment Securities with respect to which payments of principal thereof and interest thereon are scheduled to be paid or are otherwise payable (including Investment Securities payable at the option of the holder) not later than the earlier of (i) the date on which it is estimated that such money will be required by the Trustee, or (ii) six (6) months after the date of acquisition thereof by the Trustee. The Trustee may make any and all such investments through its own banking department or the banking department of any affiliate. All income attributable to money deposited in any Fund or Account created hereunder shall be credited to the Revenue Fund, except that income on money (i) in the Project Fund shall be credited to the Project Fund, (ii) in the Rebate Fund shall be credited to the Rebate Fund, (iii) in the Debt Service Reserve Fund shall be credited to the Debt Service Reserve Fund to the extent provided under the heading Debt Service Reserve Fund and (iv) in the Operations and Maintenance Reserve Fund shall be credited to the Operations and Maintenance Reserve Fund to the extent provided under the heading Operations and Maintenance Reserve Fund. Any net loss realized and resulting from any such investment shall be charged to the particular fund or account for whose account such investment was made. The Trustee is authorized and directed to sell and reduce to cash funds a sufficient amount of such investments whenever the cash balance in any fund or account is insufficient to make any withdrawal therefrom as required under the Indenture. The Trustee shall not be liable for any depreciation of the value of any investment made pursuant to this section or for any loss resulting from any such investment on the redemption, sale and maturity thereof. Investment Securities held in the Debt Service Reserve Fund shall be valued at cost on each Interest Payment Date. The Trustee shall at all times maintain accurate records of deposits into each Fund and Account and the sources of such deposits. Notwithstanding anything in the Indenture or the Bond Documents, and subject in all events to the requirements of the Tax Agreement, the amount of Bond proceeds placed in the Operations and Maintenance Reserve Fund may only be invested as permitted by the Indenture at the written direction of a Borrower Representative to produce a yield which is not greater than the yield on the Bonds or such investments shall consist solely of tax-exempt bonds within the meaning of Section 148(b)(3) of the Code. Defeasance If the Issuer shall pay or cause to be paid to the Holder of any Bond the principal of, premium, if any, and interest due and payable, and thereafter to become due and payable, upon such Bond, or any portion of such Bond in any Authorized Denomination thereof, such Bond or portion thereof shall cease to be entitled to any lien, benefit or security under the Indenture. If the Issuer shall pay or cause to be paid the principal of, premium, if any, and interest due and payable on all Outstanding Bonds, and thereafter to become due and payable thereon, and shall pay or cause to be paid all other sums payable hereunder by the Issuer, including all fees, compensation and expenses of the Trustee and receipt by the Trustee of an opinion of Counsel that all conditions precedent have been complied with, then the right, title and interest of the Trustee in and to the Trust Estate shall thereupon cease, terminate and become void and the Trustee shall release or cause to be released the Trust Estate, the Mortgage and any other documents securing the Bonds or execute such documents so as to permit the Trust Estate, the Mortgage and such other documents to be released. B-9

86 Any Bond shall be deemed to be paid within the meaning of the Indenture and for all purposes of the Indenture when (i) payment of the principal of and premium, if any, on such Bond, plus interest thereon to the due date thereof (whether such due date is by reason of maturity or upon redemption as provided herein) either (a) shall have been made or caused to be made in accordance with the terms thereof or (b) shall have been provided for by any irrevocable deposit with the Trustee in trust and irrevocably set aside exclusively for such payment, (1) funds sufficient to make such payment and/or (2) Governmental Obligations maturing as to principal and interest in such amounts and at such times as will insure the availability of sufficient money to make such payment, and (ii) all fees, compensation and expenses of the Trustee pertaining to the Bond with respect to which such deposit is made accrued and to accrue until final payment of the Bonds, whether at maturity or upon redemption, shall have been paid or the payment thereof provided for to the satisfaction of the Trustee. At such times as a Bond shall be deemed to be paid hereunder, as aforesaid, such Bond shall no longer be secured by or entitled to the benefits of the Indenture, except for the purposes of any such payment from such funds or Government Obligations. Notwithstanding the foregoing paragraph, no deposit under clause (i)(b) of the immediately preceding paragraph shall be deemed a payment of such Bond as aforesaid until the Issuer or the Borrower, on behalf of the Issuer, shall have given the Trustee, in form satisfactory to the Trustee, irrevocable instructions to notify, as soon as practicable, the Holders in accordance with the Indenture, that the deposit required by (i)(b) above has been made with the Trustee and that said Bond is deemed to have been paid in accordance with the Indenture and stating the maturity or redemption date upon which money are to be available for the payment of the redemption price of said Bond, plus interest thereon to the due date thereof; or the maturity of such Bond. In addition to the foregoing, no deposit described in clause (i)(b) of the immediately preceding paragraph shall be deemed a payment of such Bond until the Borrower has delivered to the Trustee (i) a report of an Independent Certified Public Accountant verifying the sufficiency of the amounts, if any, described in (i)(b) above to insure payment of said Bond, and (ii) a Favorable Opinion of Bond Counsel addressed to the Issuer and the Trustee to the effect that such deposit will not adversely affect the exclusion of interest on the Tax-Exempt Bonds from the gross income of the recipients thereof for federal income tax purposes. Defaults and Remedies Events of Default. Each of the following events shall constitute an Event of Default under the Indenture with respect to the Bonds: (a) While any Senior Bonds are Outstanding: (i) a failure to pay the principal of or premium, if any, on any of the Senior Bonds when the same shall become due and payable at maturity or upon redemption; or (ii) a failure to pay an installment of interest on any of the Senior Bonds when the same shall become due and payable; and (b) If no Senior Bonds are Outstanding: (i) a failure to pay the principal of or premium, if any, on any of the Subordinate Bonds when the same shall become due and payable at maturity or upon redemption; or (ii) a failure to pay an installment of interest on any of the Subordinate Bonds when the same shall become due and payable; (c) a failure by the Issuer to observe and perform any other covenant, condition, agreement or provision (other than as specified in subparagraphs (a) and (b) of this section) contained in the Bonds or in the Indenture on the part of the Issuer to be observed or performed with respect to the Bonds, which failure shall continue for a period of thirty (30) days after written notice is provided by the Trustee, specifying such failure and requesting that it be remedied shall have been given to the Issuer by the Trustee, which may give such notice in its discretion and shall give such notice at the written request of the Controlling Holders, unless the Trustee, or the Trustee and Holders which requested such notice, as the case may be, shall agree in writing to an extension of such B-10

87 period prior to its expiration; provided, however, that the Trustee, or the Trustee and the Holders of such Bonds, as the case may be, shall be deemed to have agreed to an extension of such period if corrective action is initiated by the Issuer within such period and is being diligently pursued; provided, further that in no event shall such period be extended for more than 180 days after the date of giving of notice of such failure without the consent of the Controlling Holders; or (d) the occurrence of a Default under the Loan Agreement or an Event of Default under the Mortgage. Acceleration; Other Remedies. Upon the occurrence and continuance of an Event of Default, the Trustee, subject to the provisions under the heading Cure by Holders, may, and at the written request of the Controlling Holders (or in the case of a non-payment related Event of Default, unanimous written request of the Holders of the Bond Obligation for the Senior Bonds or if no Senior Bonds remain Outstanding, unanimous written request of the Holders of the Bond Obligation for the Subordinate Bonds if no Senior Bonds remain Outstanding) shall, by written notice to the Issuer and the Borrower, declare the Bonds to be immediately due and payable, whereupon such Bonds shall, without further action, become and be immediately due and payable, anything in the Indenture or in the Bonds to the contrary notwithstanding, and the Trustee shall give notice thereof to the Issuer and the Rating Agency, and shall give notice thereof by Mail to Holders of the Bonds. Notwithstanding any other provision of the Indenture to the contrary, if an Event of Default with respect to the payment of the principal of or interest on the Subordinate Bonds occurs (but an Event of Default does not exist with regard to the Senior Bonds) while any Senior Bonds remain Outstanding, then the Trustee shall not accelerate the Bonds and shall not exercise any of the other remedies available pursuant to the Indenture or applicable law without the consent of the Holders of all of the Senior Bonds. The provisions of the preceding paragraph are subject to the condition that if, after the principal of the Bonds shall have been so declared to be due and payable, and before any judgment or decree for the payment of the money due shall have been obtained or entered as hereinafter provided, (i) the Issuer shall from any payment received from the Borrower for such purpose deposit with the Trustee a sum sufficient to pay all matured installments of interest on all Bonds and the principal of any and all Bonds which shall have become due otherwise than by reason of such declaration (with interest on such principal and, to the extent permissible by law, on overdue installments of interest, at the Default Rate) and such amount as shall be sufficient to pay Extraordinary Trustee's Fees and Expenses, and (ii) all Events of Default hereunder with respect to the Bonds other than nonpayment of the principal of such Bonds which shall have become due by said declaration shall have been remedied, then, in every such case, upon the written consent of the Controlling Holders provided to the Trustee, such Event of Default shall be deemed waived and such declaration and its consequences rescinded and annulled, and the Trustee shall promptly give written notice of such waiver, rescission or annulment to the Issuer and the Rating Agency, and shall give notice thereof by Mail to all Holders of Bonds; but no such waiver, rescission and annulment shall extend to or affect any subsequent Event of Default or impair any right or remedy consequent thereon. Upon the occurrence and continuance of any Event of Default, then and in every such case the Trustee in its discretion may, and upon the written direction of the Controlling Holders and receipt of indemnity to its satisfaction shall, in its own name and as the Trustee of an express trust perform any or all of the following: (i) by mandamus, or other suit, action or proceeding at law or in equity, enforce all rights of the Holders under the Indenture or the applicable Bonds, including without limitation requiring the Issuer or the Borrower to carry out any agreements with or for the benefit of the Holders and to perform its or their duties under the Act, the Loan Agreement, the Mortgage, the Regulatory Agreement and the Indenture, provided that any such remedy may be taken only to the extent permitted under the applicable provisions of the Loan Agreement, the Mortgage, the Regulatory Agreement or the Indenture, as the case may be; (ii) bring suit upon the Bonds; (iii) by action or suit in equity enjoin any acts or things which may be unlawful or in violation of the rights of the Holders of Bonds; B-11

88 (iv) foreclose the Mortgage; or (v) file proofs of claim in any bankruptcy or insolvency proceedings related to the Issuer, the Borrower or the Project, necessary or appropriate to protect the interests of the Trustee or the Holders of the Bonds. Notwithstanding anything herein to the contrary, neither the Holders of the Bonds nor the Trustee acting on behalf of the Holders of the Bonds shall have any right, and hereby waive any right, to institute a proceeding under the Bankruptcy Code seeking to adjudge the Issuer or the Borrower insolvent or a bankrupt or seeking a reorganization of the Issuer or the Borrower. Upon instituting any such proceeding, the Trustee shall be entitled, as a matter of right, to the appointment of a receiver of the Project and other assets pledged under the Indenture or the Mortgage, pending resolution of such proceeding. The Trustee shall have the right to decline to follow any direction of any Bondholder that in the sole discretion of the Trustee would be unjustly prejudicial to the Trustee, that would expose the Trustee to unreasonable liability or financial exposure or that is not in accordance with law or the provisions of the Indenture. The Trustee shall be entitled to rely without further investigation or inquiry upon any written direction given by the Holders of a majority of the Bond Obligation, and shall not be responsible for the propriety of or be liable for the consequences of following any such direction. Notwithstanding anything to the contrary contained herein, the Trustee shall not be required to foreclose the Mortgage or bid on behalf of the Holders at any foreclosure sale (a) if, in the Trustee's sole discretion, such action would subject the Trustee to personal liability for the cost of investigation, removal and/or remedial activity with respect to Hazardous Substances, (b) if the presence of any Hazardous Substances on the property subject to the Mortgage results in such property having no or nominal value or (c) if as a result of any such action, the Trustee would be considered to hold title to or to be a mortgagee-in-possession, owner or operator of the Project within the meaning of the Comprehensive Environmental Responsibility Cleanup and Liability Act of 1980, as amended, unless the Trustee has previously determined, based on a report prepared by an environmental audit consultant acceptable to the Trustee, that (i) the Project is in compliance with applicable environment laws and (ii) there are not circumstances present at the Project relating to the use, management or disposal of any Hazardous Substances for which investigation, testing, monitoring, containment, clean-up or remediation could be required under any federal, state or local law or regulation. It is acknowledged and agreed that the Trustee has no authority to manage, own or operate the Project, or any portion thereof, except as necessary to exercise remedies upon an Event of Default. Cure by Holders. Any Holder of Bonds may, but shall not be obligated to, cure an Event of Default under the Indenture, including the advancing of funds ( Advanced Funds ) to the Trustee for payments required under the Indenture, or to indemnify the Trustee under the Indenture. Any Advanced Funds are to be applied by the Trustee in accordance with the instructions of the Holder providing the same; provided, however, that such Holder shall not have a right or interest in the Advanced Funds that is superior to any right or interest any other party has under the Indenture. Holders' Right to Direct Proceedings. Anything in the Indenture to the contrary notwithstanding, the Controlling Holders shall have the right, by an instrument in writing executed and delivered to the Trustee, to direct the time, method and place of conducting all remedial proceedings available to the Trustee under the Indenture or exercising any trust or power conferred on the Trustee by the Indenture. Limitation on Holders' Right to Institute Proceedings. Subject to the provisions under the heading Acceleration; Other Remedies, no Holder shall have any right to institute any suit, action or proceeding in equity or at law for the execution of any trust or power hereunder, or any other remedy hereunder or on said Bonds, unless such Holder previously shall have given to the Trustee written notice of an Event of Default and unless also the Holders of not less than a majority of the Bond Obligation shall have made written request of the Trustee to do so after the right to institute said suit, action or proceeding under the heading Acceleration; Other Remedies shall have accrued, and shall have afforded the Trustee a reasonable opportunity to proceed to institute the same in either its or their name, and the Trustee shall not have complied with such request within a reasonable time. No one or more of the Holders of the Bonds shall have any right in any manner whatever by its or their action to affect, disturb or prejudice the security of the Indenture, or to enforce any right hereunder or under the Bonds, except in the manner herein provided, and all suits, actions and proceedings at law or in equity shall be instituted, had and maintained in B-12

89 the manner herein provided and for the equal benefit of all Holders of Bonds. Notwithstanding anything to the contrary, the furnishing of indemnity to the Trustee as provided in the Indenture is declared in every such case, at the option of the Trustee, to be a condition precedent to the institution of said suit, action or proceeding by the Trustee. No Remedy Exclusive. No remedy conferred upon or reserved to the Trustee or to Holders is intended to be exclusive of any other remedy or remedies, and each and every such remedy shall be cumulative, and shall be in addition to every other remedy given hereunder, or now or hereafter existing at law or in equity or by statute; provided, however, that any conditions set forth to the taking of any remedy to enforce the provisions of the Indenture or the Bonds shall also be conditions to seeking any remedies under any of the foregoing remedies provided in this summary. No Waiver of Remedies. No delay or omission of the Trustee or of any Holder to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver of any such default, or an acquiescence therein; and every power and remedy given by the Indenture to the Trustee and to the Holders, respectively, may be exercised from time to time and as often as may be deemed expedient. Application of Money. If an Event of Default occurs with respect to the Bonds, any money held in any Fund or Account under the Indenture (excluding the Rebate Fund) or received by any receiver or by the Trustee, by any receiver or by any Holder pursuant to any right given or action taken under the provisions of the Indenture, after payment of Operating Expenses of the Project as determined to be appropriate by the Trustee (and the Trustee may, in its discretion rely on the Budget to make such determination be deposited in the Revenue Fund; and all money so deposited in the Revenue Fund during the continuance of an Event of Default (other than money for the payment of Bonds which have matured or otherwise become payable prior to such Event of Default or for the payment of interest due prior to such Event of Default) shall be applied (except as otherwise provided in under the headings Bond Fund or Debt Service Reserve Fund with respect to money deposited in a Bond Fund Account or the Debt Service Reserve Fund for the benefit of the Holders of a Series of Bonds) as follows: (i) Unless the principal of all the Bonds shall have been declared due and payable, all such money shall be applied (A) first, together with all amounts on deposit in the Debt Service Reserve Account relating to the Senior Bonds, to the payment to the persons entitled thereto of all installments of interest then due on the Senior Bonds, with interest on overdue installments, if lawful, at the Default Rate, in the order of maturity of the installments of such interest and, if the amount available shall not be sufficient to pay in full any particular installment of interest, then to the payment ratably, according to the amounts due on such installment of interest on the Senior Bonds on a parity and pro rata basis, and (B) second, together with any amounts on deposit in the Debt Service Reserve Account relating to the Senior Bonds, to the payment to the persons entitled thereto of the unpaid principal of any of the Senior Bonds which shall have become due (other than the Senior Bonds called for redemption for the payment of which money is held pursuant to the provisions of this Indenture) with interest on such Senior Bonds at the Default Rate from the respective dates upon which they became due and, if the amount available shall not be sufficient to pay in full the Senior Bonds due on any particular date, together with such interest, then to the payment ratably, according to the amount of principal and interest due on such date, in each case to the persons entitled thereto, without any discrimination or privilege; (C) third, together with any amounts on deposit in the Debt Service Reserve Account relating to the Subordinate Bonds, to the payment to persons entitled thereto of all installments of interest then due on the Subordinate Bonds with interest on overdue installments, if lawful, at the Default Rate, in the order of maturity of the installments of such interest and, if the amount available shall not be sufficient to pay in full any particular installment of interest, then to the payment ratably, according to the amounts due on such installment of interest on the Subordinate Bonds on a parity and pro rata basis; and (D) fourth, together with any amounts on deposit in the Debt Service Reserve Account relating to the Subordinate Bonds, to the payment to the persons entitled thereto of the unpaid principal of any of the Subordinate Bonds which shall have become due (other than the Subordinate Bonds called for redemption the payment of which money is held pursuant to the provisions of this Indenture) with interest on such Subordinate Bonds at the Default Rate from the respective dates upon which they became due and, if the amount available shall not be sufficient to pay in full the Subordinate Bonds due on any particular date, together with such interest, then to the payment ratably, according to the amount of principal and B-13

90 interest due on such date, in each case to the persons entitled thereto, without any discrimination or privilege. (ii) If the principal of all the Bonds shall have been declared due and payable, all such money shall be applied: (A) first, to the payment of the principal and interest then due and unpaid upon the Senior Bonds, with interest on overdue interest and principal, as aforesaid at the Default Rate, if lawful, without preference or priority of principal over interest or interest over principal, or of any installment of interest over any other installment of interest, or of any Senior Bond over any other Senior Bond ratably, according to the amounts due respectively for principal and interest, to the persons entitled thereto without any discrimination or privilege; and (B) second, to the payment of the principal and interest then due and unpaid upon the Subordinate Bonds, with interest on overdue interest and principal, as aforesaid at the Default Rate, if lawful, without preference or priority of principal over interest or interest over principal, or of any installment of interest over any other installment of interest, or of any Subordinate Bond over any other Subordinate Bond, ratably, according to the amounts due respectively for principal and interest, to the persons entitled thereto without any discrimination or privilege. Whenever money are to be applied pursuant to the provisions of this heading, such money shall be applied at such times, and from time to time, as the Trustee shall determine, having due regard to the amount of such money available for application and the likelihood of additional money becoming available for such application in the future. Whenever the Trustee shall apply such funds, it shall fix the date (which shall be an Interest Payment Date unless it shall deem another date more suitable) upon which such application is to be made and upon such date interest on the amounts of principal and interest to be paid on such date shall cease to accrue. The Trustee shall give notice of the deposit with it of any such money and of the fixing of any such date by Mail to all Holders of Bonds and shall not be required to make payment to any Holder of a Bond until such Bond shall be presented to the Trustee for appropriate endorsement or for cancellation if fully paid. Notice of Event of Default. If an Event of Default occurs and continues for five (5) Business Days after the Trustee has received written notice of the same as provided in the Indenture, then the Trustee shall give notice thereof by Mail to the Holders, the Borrower, the Issuer and the Rating Agency. Trustee Limitations on Liability. The Trustee may execute any of the trusts or powers and perform the duties required of them under the Indenture by or through attorneys, agents, receivers or employees selected by them, and shall be entitled to advice of counsel concerning all matters of trust and its duty under the Indenture and to obtain the opinion of Counsel acceptable to the Trustee prior to taking action under the Indenture, and may in all cases pay such reasonable compensation to all such attorneys, agents, receivers or employees as is deemed necessary in connection with the performance of the Trustee's duties under the Indenture, and the Trustee shall not be answerable for the default or misconduct of any such attorney, agent or employee selected by it with reasonable care. The Trustee may act upon the advice of any attorney approved by the Trustee in the exercise of reasonable care, and the Trustee shall not be responsible for any loss or damage resulting from any action or nonaction in good faith reliance upon such opinion or advice. Without limitation, the Trustee shall be entitled to the benefit of the foregoing sentence with respect to the delegation to the Trustee's duties under the Indenture with respect to payment of principal, premium, if any, or interest on, or redemption of, the Bonds, the authentication and delivery thereof, and exchange and transfer thereof. The Trustee shall not be answerable for the exercise of any discretion or power under the Indenture or for anything whatsoever in connection with the trust created hereby, except only for their own negligence or willful misconduct. Notice of Events of Default. The Trustee shall not be required to take notice, or be deemed to have notice, of any default or Event of Default under the Indenture, other than an Event of Default relating to a failure to pay the principal of or premium, if any, on any of the Bonds when the same become due and payable at maturity or upon redemption or a failure to pay an installment of interest on any of the Bonds when the same shall become due and payable, unless a Responsible Officer of the Trustee shall have received actual knowledge or shall have been specifically notified in writing of such default or Event of Default by the Issuer, the Borrower or by the Holders of at least 25% of the Bond Obligation. The Trustee may, however, at any time, in its discretion, and shall, upon the B-14

91 request of at least 25 % of the Bond Obligation, require of the Borrower full information and advice as to the performance of any of the covenants, conditions and agreements contained herein. Resignation of Trustee. The Trustee may resign and be discharged of the trusts created by the Indenture by executing an instrument in writing resigning such trust and specifying the date when such resignation shall take effect, and filing the same with the Issuer and the Borrower, and by giving notice of such resignation by Mail, not less than fifteen (15) days prior to such resignation date, to all Holders. Such resignation shall only take effect on the day a successor Trustee shall have been appointed as provided in the Indenture. Removal of Trustee. The Trustee may be removed at anytime by the Borrower or by the Holders of not less than a majority of the Bond Obligation with the consent of the Borrower (not to be unreasonably withheld), by filing with the Trustee so removed, and with the Issuer, an instrument or instruments in writing appointing a successor, executed by the Issuer if the Trustee has been removed by the Issuer or the Borrower (and notice thereof given by Mail to the Holders and the Issuer), or executed by said Holders of Bonds if the Trustee was removed by said Holders; provided that the Borrower may not remove the Trustee, and the consent of the Borrower shall not be required (in the case of removal by the Holders) if an Event of Default has occurred and is continuing under the Indenture or the Loan Agreement. Appointment of Successor Trustee. If at any time the Trustee shall resign, be removed, or be dissolved, or if its property or affairs shall be taken under the control of any state or federal court or administrative body because of insolvency or bankruptcy, or for any other reason become incapable of acting, then a vacancy shall forthwith and ipso facto exist in the office of Trustee and the Borrower, with written notice to the Issuer, shall promptly appoint a successor Trustee. Any such appointment shall be made by a written instrument, executed by a Borrower Representative. Copies of such instrument shall be promptly delivered by the Borrower to the predecessor Trustee and to the Trustee so appointed. Any new Trustee so appointed as described in the Indenture shall immediately and without further act be superseded by a Trustee appointed in the manner above provided. Qualifications of Trustee. The Trustee and every successor Trustee, if any, (i) shall be a bank or trust company duly organized under the laws of the United States or any state thereof authorized by law to perform all the duties imposed upon it by the Indenture, (ii) shall at the time of appointment have (or in the case of a corporation or trust company included in a bank holding company system, the related bank holding company shall have) trust assets under management of at least $50,000,000, (iii) shall be permitted under the Act to perform the duties of Trustee; and (iv) shall be acceptable to the Issuer. Modifications of Bond Documents Limitations. Neither the Indenture nor any of the Borrower Documents shall be Amended in any respect subsequent to the Closing Date except as provided in and in accordance with and subject to the provisions of under the heading Modifications of Bond Documents. Notwithstanding any provisions thereof, the Tax Agreement and the Regulatory Agreement may be Amended pursuant to the provisions thereof, and the Tax Agreement and the Regulatory Agreement shall be Amended to the extent required by such documents. Supplemental Indentures Without Holder Consent. The Issuer and the Trustee may, from time to time and at any time, without the consent of but with prompt notice to the Holders and the Rating Agency, enter into Supplemental Indentures as follows: (i) to cure any formal defect, omission, inconsistency or ambiguity in the Indenture; (ii) to add to the covenants and agreements of the Issuer in the Indenture other covenants and agreements, or to surrender any right or power reserved or conferred upon the Issuer if such surrender shall not, in the judgment of the Trustee, materially adversely affect the interests of the Holders, the Trustee being authorized to rely on an opinion of Counsel with respect thereto; B-15

92 (iii) to confirm, as further assurance, any pledge of or lien on the Loan Agreement or of any other money, securities or funds subject to the lien of the Indenture; (iv) amended; to comply with the requirements of the Trust Indenture Act of 1939, as from time to time (v) to preserve the exclusion of interest on the Tax-Exempt Bonds from gross income for federal income tax purposes, as set forth in a Favorable Opinion of Bond Counsel; (vi) Agency; (vii) Indenture; (viii) (ix) to make changes to obtain, maintain or restore the rating on the Bonds from the Rating to provide for any Amendment specifically authorized or required by any provision of the in connection with any Additional Bonds or Parity Indebtedness; or with respect to any other Amendment which does not have a material adverse effect on the Holders of the Bonds. Supplemental Indentures Requiring Holders' Consent. Except for any Supplemental Indenture entered into subject to the terms and provisions contained in this section and not otherwise, Holders of not less than a majority of the Bond Obligation affected thereby shall have the right from time to time to consent to and approve the execution and delivery by the Issuer and the Trustee of any Supplemental Indenture deemed necessary or desirable by the Issuer for the purposes of modifying, altering, amending, supplementing or rescinding, in any particular, any of the terms or provisions contained in the Indenture; however, unless approved in writing by all Holders of Bonds affected thereby, nothing herein contained shall permit, or be construed as permitting, (i) a change in the times, amounts or currency of payment of the principal of or interest on any Outstanding Bond or a reduction in the principal amount or redemption price of any Outstanding Bond or the rate of interest thereon, (ii) the creation of a claim or lien upon, or a pledge of, the Trust Estate ranking prior to or on a parity with the claim, lien or pledge created by the Indenture, (iii) a reduction in the aggregate Bond Obligation the consent of the Holders of which is required for any such Supplemental Indenture or which is required, under the Indenture, for any modification, alteration, amendment or supplement to any Loan Documents, or (iv) any change relating to the subordination of the Subordinate Bonds and provided further that if the Supplement Indenture subjects additional property to lien of the Indenture the Trustee shall have been provided with an opinion of counsel that such Supplemental Indenture is duly authorized in accordance with the terms. Unless approved in writing by a majority of the Holders of the Bond Obligation for the Subordinate Bonds, nothing herein contained shall permit, or be construed as permitting a Supplemental Indenture which further subordinates the priority of the Holders of the Subordinate Bonds to the payment of the Senior Bonds. Amendment of Borrower Documents Without Holder Consent. Without the consent of but with notice to the Holders, the Trustee may consent to any Amendment of any Borrower Document from time to time as follows: (i) Document; to cure any formal defect, omission, inconsistency or ambiguity in such Borrower (ii) to add to the covenants and agreements of the Issuer or the Borrower in such document other covenants and agreements, or to surrender any right or power reserved or conferred upon the Issuer or the Borrower, if such surrender shall not, in the judgment of the Trustee, materially adversely affect the interests of the Holders, the Trustee being authorized to rely on an opinion of Counsel with respect thereto; (iii) to confirm, as further assurance, any lien on or pledge of the Project or the Project Revenues or of any other property, money, securities or funds subject to the Mortgage or any other security for the Loan Agreement; B-16

93 (iv) to preserve the exclusion of interest on the Bonds from gross income for federal income tax purposes, as set forth in an opinion of Bond Counsel; (v) Rating Agency; to make changes required to obtain or maintain the rating on the Senior Bonds from the (x) to provide for any Amendment specifically authorized or required by any provision of any Borrower Documents; (xi) in connection with any Additional Bonds or Parity Indebtedness; or (xii) with respect to any other Amendment which does not have a material adverse effect on the Holders of the Bonds. Procedures for Amendments. If at any time the Trustee shall be requested to enter into any Supplemental Indenture or to consent to any Amendment to Borrower Documents, the Trustee shall cause notice of the proposed Supplemental Indenture or other Amendment to be given by Mail to all Holders. Such notice shall set forth with particularity the nature of the proposed Supplemental Indenture or other Amendment and shall state that a copy thereof is on file at the office of the Trustee for inspection by all Holders. Within two (2) years after the date of the first giving of such notice, the Issuer and the Trustee may enter into such Supplemental Indenture or the Trustee may consent to such Amendment in substantially the form described in such notice, but only if there shall have first been delivered to the Trustee (i) the required consents, in writing, of Holders and (ii) the opinion of Bond Counsel required by the Indenture. If Holders of not less than the amount of Bond Obligation required for a Supplemental Indenture shall have consented to and approved the execution and delivery thereof as provided in the Indenture, no Holder shall have any right to object to the execution and delivery of such Supplemental Indenture or other Amendment, or to object to any of the terms and provisions contained therein or the operation thereof, or in any manner to question the propriety of the execution and delivery thereof, or to enjoin or restrain the Issuer or the Trustee from executing and delivering or consenting to the same or from taking or permitting any action pursuant to the provisions thereof. Opinions; Certificate. The Trustee will not enter into or consent to any Amendment of any provision of any Bond Document unless there shall have been delivered to the Issuer and the Trustee an opinion of Bond Counsel stating that such Amendment is authorized or permitted by the Act and such Amendment will not adversely affect the exclusion of interest on the Tax-Exempt Bonds from the gross income of the recipients thereof for federal income tax purposes. In addition, the Trustee (i) may obtain, and shall be protected in relying on, an opinion of Counsel to the effect that such Amendment is authorized or permitted by the Indenture and complies with the terms hereof; and (ii) may require, as a condition to entering into or consenting to any such Amendment, a Compliance Certificate from the Borrower. Effect of Amendments; Other Consents. Upon the execution and delivery of any Supplemental Indenture or any Amendment to a Borrower Document pursuant to the provisions of the Indenture, the Indenture or such Borrower Document shall be, and be deemed to be, modified and amended in accordance therewith, and the respective rights, duties and obligations under the Bond Documents of the Issuer, the Trustee, the Borrower and all Holders shall thereafter be determined, exercised and enforced under the Bond Documents subject in all respects to such modifications and amendments. Notwithstanding anything in the Indenture to the contrary, (i) the Trustee will not be required to enter into or consent to any Amendment of any Bond Document which, in the sole judgment of the Trustee, might adversely affect the rights, obligations, powers, privileges, indemnities, immunities or other security provided the Trustee under the Indenture or therein; and (ii) except as otherwise required hereby, the Trustee will not enter into or consent to any Amendment of any Bond Document which affects the rights or obligations of the Borrower or the Issuer unless the Borrower or the Issuer enters into or consents to such Amendment B-17

94 THE LOAN AGREEMENT The following is a brief summary of certain provisions of the Loan Agreement. The summary does not purport to be complete or definitive and is qualified in its entirety by reference to the Loan Agreement, a copy of which is on file with the Trustee. Issuance of Bonds; Deposit of Proceeds; Amounts Payable To provide funds to assist the Borrower in financing the acquisition, rehabilitation and equipping of the Project, the Issuer, concurrently with the execution and delivery of the Agreement, and upon satisfaction of the conditions to the delivery of the Bonds set forth the Indenture, will issue, sell and deliver the Bonds and will deposit the proceeds thereof with the Trustee in accordance with the Indenture. All Project Revenues shall be deposited with the Trustee upon receipt by the Borrower or the Manager. The Project Revenues shall be used to pay the Basic Loan Payments and the Additional Loan Payments, in such lawful money of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. Basic Loan Payments. The Project Revenues shall be used to pay, as Basic Loan Payments, the following amounts: (a) on or before the 15th day of each month, commencing January 15, 2012 and until such time as the principal of and the premium, if any, and interest on, the Bonds shall have been paid in full, or provisions made for such full payment in accordance with the provisions of the Indenture, to the Trustee for deposit in the Bond Fund provided for in the Indenture, a sum equal to the Interest Requirement on the then Outstanding Bonds for such month; and (b) on or before the 15th day of each month, commencing January 15, 2012 to the Trustee for deposit in the respective Principal Accounts in the Bond Fund, a sum equal to the Principal Requirement on the then Outstanding Bonds for such month. The monthly installments of Basic Loan Payments described in (1) and (2) above payable by the Borrower under the Loan Agreement are expected to equal in the aggregate an amount that, with other funds in the respective accounts of the Bond Fund then available for the payment of principal and interest on the Bonds, shall be sufficient to provide for the payment in full of the interest on, premium, if any, and principal on the Bonds as they become due and payable. Except as otherwise provided in the Indenture, the Project Revenues shall also be used to pay, as Basic Loan Payments, to the Trustee for deposit in the Bond Fund, such amounts as shall, together with any other money available therefor, be sufficient to pay all amounts, if any, required to redeem the Bonds pursuant to the provisions of Article III of the Indenture as and when they become subject to redemption pursuant to the Indenture, together with any related redemption premium associated therewith, all such payments to be made to the Trustee, for deposit into the related Bond Fund on or before the date such money are required by said provisions of the Indenture. Additional Loan Payments. The Borrower shall cause the Project Revenues to be remitted to the Trustee from time to time in amounts fully sufficient to timely pay in addition to the Basic Loan Payments the following costs and expenses (to the extent such costs and expenses are not paid from the proceeds of the sale of the Bonds), which are Additional Loan payments: (a) The Ordinary Trustee's Fees and Expenses and Extraordinary Trustee's Fees and Expenses, and all other fees and other costs of the Trustee, including without limitation, fees and expenses of counsel to the Trustee, payable to the Trustee for services or indemnity under the Indenture and the Borrower Documents (including services in connection with the administration and enforcement thereof and compliance therewith); B-18

95 (b) all fees and other costs incurred for services of such agents, attorneys and independent accountants as are employed by the Issuer, the Borrower, or the Trustee to perform services required pursuant to the Loan Agreement, the other Bond Documents or the Indenture; (c) the Issuer s Fees and Expenses and all other fees and costs of the Issuer, including without limitation fees and expenses of counsel to the Issuer, not otherwise paid under the Loan Agreement or the Indenture, related to the issuance of the Bonds or in connection with its administration and enforcement of, and compliance with or interpretation of, the Indenture or any of the Borrower Documents, or otherwise in connection with the Project and the Bonds; (d) all amounts advanced by the Issuer or the Trustee under authority of the Indenture or any of the Borrower Documents that the Borrower is obligated to repay; (e) any amounts required to be deposited in the respective Debt Service Reserve Accounts in order to satisfy the Debt Service Reserve Requirement pursuant to the Indenture; and should funds be withdrawn from a Debt Service Reserve Account, the Borrower shall restore the difference between the amount on deposit in the applicable Debt Service Reserve Account and the related Debt Service Reserve Requirement from the next available deposits of Project Revenues and other deposits to the Revenue Fund made in accordance with the Indenture; (f) amounts sufficient to maintain balances in the Repair and Replacement Fund, the Insurance and Tax Escrow Fund and the Operations and Maintenance Reserve Fund, equal to the amounts required pursuant to the Indenture; (g) all fees and expenses of the Rebate Analyst in connection with the provision of the rebate calculations required under the Tax Agreement, and if a deposit is required to be made to the Rebate Fund as a result of any calculation made pursuant to the Tax Agreement, the Borrower shall cause to be paid from Project Revenues the amount of such deposit in accordance with the terms of the Indenture; (h) amounts required to be deposited in the Operating Fund sufficient to pay the Operating Expenses of the Project as provided in the Budget and in the Indenture; (i) the Dissemination Agent Fee payable in accordance with and as provided under the Indenture and Continuing Disclosure Agreement; (j) (k) the Rating Agency Fee; fees and expenses of any loan engaged pursuant to the Indenture; and (l) the costs and expenses associated with any audit of the Tax-Exempt Bonds by the Internal Revenue Service. Revenue Fund. As security for its obligations to make the payments described in this section, the Borrower shall pay (or cause the Manager to pay) all Project Revenues, to the Trustee for deposit in the Revenue Fund. Miscellaneous. In the event the Borrower shall fail to pay, or fail to cause to be paid, any Loan Payments as required by the Loan Agreement (except to the extent amounts due are paid from amounts on deposit in the Debt Service Reserve Fund, the Repair and Replacement Fund or the Surplus Fund), the payment not paid shall continue as an obligation of the Borrower under the Loan Agreement until the unpaid amount shall have been fully paid, and the Borrower shall pay, or cause to be paid, the same with interest thereon from the date of non-payment until the date so paid at the Default Rate. The requirement that interest be paid at the Default Rate shall be in addition to and not in lieu of any other remedy that may exist for the failure of the Borrower to make the payments required by the Loan Agreement. B-19

96 Obligations Unconditional: Limited Recourse The obligations of the Borrower to make the payments required under the Loan Agreement and to perform and observe the other agreements contained in the Loan Agreement will be absolute and unconditional and will not be subject to any defense or any right of setoff, counterclaim or recoupment arising out of any breach by the Issuer or the Trustee of any obligation to the Borrower whether under the Loan Agreement or otherwise, or out of any Indebtedness or liability at any time owing to the Borrower by the Issuer or the Trustee. Until such time as the principal of, premium, if any, and interest on the Bonds is fully paid or provision for the payment thereof has been made in accordance with the Indenture, the Borrower (a) will not suspend or discontinue any payments described under the heading Issuance of Bonds; Deposit of Proceeds; Amounts Payable, (b) will perform and observe all other agreements contained in the Loan Agreement, and (c) except as provided in the Loan Agreement, will not terminate the Loan Agreement for any cause, including, without limiting the generality of the foregoing, failure of the Borrower to complete the acquisition, rehabilitation and equipping of the Project, the occurrence of any acts or circumstances that may constitute failure of consideration, destruction of or damage to the Project, the taking by eminent domain of title to or temporary use of any or all of the Project, commercial frustration of purpose, any change in the tax or other laws of the United States of America or of the State or any political subdivision of either or any failure of the Issuer or the Trustee to perform and observe any agreement, whether express or implied, or any duty, liability or obligation arising out of or connected with the Loan Agreement or otherwise. Notwithstanding the foregoing or any other provision or obligation to the contrary contained in the Loan Agreement or any other Bond Document, with the exception of indemnities provided in the Bond Documents, which indemnities shall be a general obligation of the Borrower, (i) the liability of the Borrower under the Loan Agreement and the other Bond Documents to any person or entity, including, but not limited to, the Trustee or the Issuer and their successors and assigns, is limited to the Borrower's interest in the Project, the Project Revenues and the amounts held in the funds and accounts created under the Indenture or other Bond Documents or any rights of the Borrower under any guarantees relating to the Project, and such persons and entities will look exclusively thereto, to such other security as may from time to time be given for the payment of obligations arising out of the Loan Agreement or any other agreement securing the obligations of the Borrower under the Loan Agreement; and (ii) from and after the date of the Loan Agreement, no deficiency or other personal judgment, nor any order or decree of specific performance (other than pertaining to the Loan Agreement, any agreement pertaining to the Project or any other agreement securing the Borrower's obligations under the Loan Agreement), shall be rendered against the Borrower nor any member of the Borrower, the assets of the Borrower (other than the Borrower's interest in the Project, the Loan Agreement, amounts held in the funds and accounts created under the Indenture, any rights of the Borrower under the Bond Documents or any rights of the Borrower under any guarantees relating to the Project), its officers, directors or their heirs, personal representatives, successors, transferees assigns, as the case may be, in any action or proceeding arising out of the Loan Agreement and the Indenture or any agreement securing the obligations of the Borrower under the Loan Agreement, or any judgment, order or decree rendered pursuant to any such action or proceeding. Assignment of Issuer's Rights As security for the payment of the Bonds, the Issuer in the Indenture has assigned to the Trustee certain of the Issuer's rights under the Loan Agreement, including the right to receive payments hereunder (except for any deposits to the Rebate Fund and the Reserved Rights), and the Borrower has assented to such assignment and agrees to make payments directly to the Trustee, without defense or set off by reason of any dispute between the Borrower and the Issuer or the Trustee. By virtue of such assignment and certain obligations of the Borrower to the Trustee, the Trustee shall have the right to enforce the obligations of the Borrower under the Loan Agreement, subject to the limitations set forth in the Loan Agreement. The Project Disbursement of Project Fund. Amounts in the Project Fund will be disbursed by the Trustee as provided in the Indenture, upon delivery by the Borrower to the Trustee of one or more requisitions. B-20

97 Operating Expenses. The Borrower agrees to pay when due all Operating Expenses. The Borrower agrees to review and approve invoices for Operating Expenses on a timely basis. The Borrower (or the Manager) shall be entitled to request the disbursement from the Operating Fund of the monthly Operating Requirements by the Trustee to fund the costs of operating the Project as provided pursuant to the Indenture. The Borrower is required to establish and maintain the Operating Account in a federally insured financial institution. Money provided to the Borrower from the Operating Fund pursuant to the Indenture are to be held in the Operating Account and used by the Borrower or the Manager to pay Operating Expenses. Upon written direction of the Borrower, amounts on deposit in the Operating Account in excess of the amount needed to pay or be reserved to pay actual Operating Expenses shall be transferred by the Borrower to the Trustee for deposit in the Revenue Fund. Any balance in the Operating Account at such time that transfers from the Operating Fund to the Operating Account are not permitted pursuant to the Indenture shall be promptly transferred by the Borrower to the Trustee for deposit in the Operating Fund. If actual Operating Expenses and other actual disbursements with respect to the Project in any month exceed amounts budgeted therefor for that month, the Borrower may requisition from the Operations and Maintenance Reserve Fund or the Surplus Fund, the amount of such excess in the manner provided in the Indenture. However, if there are two such requests by the Borrower in any fiscal quarter that are in excess of 10% of the amounts budgeted therefor in any month, then: (i) the Borrower must notify the Trustee, the Underwriter and the Rating Agency and (ii) the Borrower must prepare or cause the Manager to prepare a report that describes the reasons for the additional expenses and the circumstances surrounding the additional expenses. If the Borrower ascertains that the actual expenses with respect to the Project in any month will continue to exceed amounts budgeted therefor for that month, then the Borrower will prepare or will cause the Manager to prepare a revised Budget for the upcoming 12-month period which reflects the actual Operating Expenses in connection with the Project. Rate Covenant; Coverage. The Borrower shall fix, charge and collect, or cause to be fixed, charged and collected rents, fees and charges in connection with the operation and maintenance of the Project such that for each Fiscal Year beginning on or after January 1, 2012, the Debt Service Coverage Ratio will not be less than the applicable Coverage Test, determined as of the end of each such Fiscal Year based on and supported by Audited Financial Statements. Failure to Meet Rate Covenant; Retention of Management Consultant. If the Coverage Test in any Fiscal Year beginning on or after January 1, 2012 as set forth in the certificate delivered pursuant to the Loan Agreement, is not satisfied, the Borrower shall retain a Management Consultant. Payment of the fees of the Management Consultant shall be deemed an Operating Expense. The Management Consultant shall prepare recommendations with respect to the operations of the Project and the sufficiency of the rates, fees and charges imposed by the Borrower. The Management Consultant's report shall (a) include a projection of the Project Revenues, Operating Expenses, Net Income Available for Debt Service on a quarterly basis for not less than the next two Fiscal Years, and (b) make such recommendations to the Borrower as the Management Consultant believes are appropriate to enable the Borrower to increase the Debt Service Coverage Ratio to satisfy the Coverage Test for the current calendar year. If in the judgment of the Management Consultant it is not possible for the Borrower to meet such requirements, the report of the Management Consultant shall so indicate and shall project the Debt Service Coverage Ratio which could be achieved if the recommendations of the Management Consultant are followed. Continuous retention of a Management Consultant during the years covered by the Management Consultant's report shall not be required, provided that a Borrower Representative delivers a certificate to the Trustee, within 45 days after the end of each calendar quarter, setting forth the actual results for such quarter (which may be based on unaudited financial statements) and such results show that the Debt Service Coverage Ratio projected by the Management Consultant is being met. The Borrower shall, to the extent lawful and feasible and consistent with the preservation of the Borrower s 501(c)(3) status and compliance with the Regulatory Agreement, follow the recommendations of the Management Consultant. Failure of the Borrower to satisfy the Coverage Test covenant constitutes a Default under the Loan Agreement only if (i) the Borrower fails to engage the Management Consultant or, (ii) to the extent that the Rating B-21

98 Agency agrees with such recommendations, the Borrower fails to implement its recommendations. Failure of the Borrower to maintain a Debt Service Coverage Ratio of 1.0 to 1 for a period of two consecutive Fiscal Years will constitute a Default under the Loan Agreement. Maintenance and Modification of Project; Removal of Equipment. The Borrower agrees that during the term of the Loan Agreement it will at its own expense (i) keep the Project in a safe condition, (ii) keep the buildings and all other improvements forming a part of the Project in good repair and in good operating condition, making from time to time, all necessary and proper repairs thereto and renewals and replacements thereof, including external and structural repairs, renewals, and replacements, and (iii) use the Equipment in the regular course of its business only, within the normal capacity of the Equipment, without abuse, and in a manner contemplated by the manufacturer thereof, and cause the Equipment to be maintained in accordance with the manufacturer s then currently published standard maintenance contract and recommendations. The Borrower may, also at its own expense, from time to time make any Modifications to the Project it may deem desirable for its business purposes that do not, in the opinion of an Architect filed with the Trustee, adversely affect the operation or value of the Project and provided further, that such Modifications shall not cause the Debt Service Coverage Ratio to be below the required Coverage Test for either Series of the Bonds. Modification to the Project so made by the Borrower will be on the Property, will become a part of the Project, and will become subject to the lien of the Mortgage. Any contract for such Modifications which is in an amount in excess of $500,000 will be made only by a contractor who furnishes performance and labor and material payment bonds in the full amount of such contract, made by the contractor thereunder as the principal and a surety company or companies rated A or higher by A. M. Best & Company, Inc. Such bonds must name the Borrower, the Issuer, and the Trustee as obligees, and all Net Proceeds received under such bonds will be paid over to the Trustee and deposited in the Project Fund to be applied to the completion of the Modifications. Such money held by the Trustee in the Project Fund will be invested from time to time, as provided in the Indenture. The Borrower will execute a conditional assignment directing the architect who has prepared any plans and specifications for any Modifications to make available to the Trustee a complete set of the plans and specifications, which assignment will be effective only upon a Default under the Loan Agreement by the Borrower. Each construction contract executed by the Borrower for construction of any Modifications must contain a provision that, or by separate agreement such contractors must agree that, upon a Default by the Borrower hereunder, such contracts with the contractors and/or sub-contractors will be deemed assigned to the Trustee should the Trustee so direct and in which case the Trustee will be responsible for the carrying out of all the terms and conditions thereof in place of the Borrower in such contracts. The Borrower covenants to include such conditional assignments in all contracts and subcontracts executed for work to be performed on the Property. The Borrower further agrees that at all times during the construction of Modifications which cost in excess of $100,000 the construction contract for such Modifications must be on a fixed or guaranteed maximum price basis and the Borrower must maintain or cause to be maintained in full force and effect Builder s Risk-Completed Value Form insurance to the full insurable value of such Modifications. The Borrower will not permit any mechanics or materialmen s or other statutory liens to be perfected or remain against the Project for labor or materials furnished in connection with any Modifications so made by it, provided that it will not constitute a Default hereunder upon such lien being filed, if the Borrower notifies promptly the Trustee in writing of any such liens, and the Borrower in good faith and in accordance with applicable law contests promptly such liens in the same manner as is provided for the contest of Impositions in the Loan Agreement; and in such event the Borrower may permit the items so contested to remain undischarged and unsatisfied during the period of such contest and any appeal therefrom. The Borrower will not do or permit others under its control to do any work in or about the Project or related to any repair, rebuilding, restoration, replacement, alteration of, or addition to the Project, or any part thereof, unless the Borrower has first procured and paid for all requisite municipal and other governmental permits and authorizations. All such work must be done in a good and workmanlike manner and in compliance with all applicable building, zoning, and other laws, ordinances, governmental regulations, and requirements and in accordance with the requirements, rules, and regulations of all insurers under the policies required to be carried under the provisions of Article V of the Loan Agreement. B-22

99 If no Default under the Loan Agreement has happened and is continuing, in any instance where the Borrower in its discretion determines that any items of Equipment or parts thereof have become inadequate, obsolete, worn out, unsuitable, undesirable, or unnecessary, the Borrower may remove such items of Equipment or parts thereof from the Property and sell, trade in, exchange, or otherwise dispose of them (as a whole or in part) without any responsibility or accountability to the Issuer therefor, provided that the Borrower will: (a) Substitute and install anywhere in the Project items of replacement equipment or related property having equal or greater value or utility (but not necessarily having the same function) in the operation of the Project for the purpose for which it is intended, provided such removal and substitution will not impair the nature of the Project, all of which replacement equipment or related property will be free of all liens, security interests, and encumbrances (other than Permitted Encumbrances), will become subject to the security interest of the Mortgage, and will be held by the Borrower on the same terms and conditions as the items originally constituting Equipment, or (b) In the case of: (i) the sale of any such Equipment, (ii) the trade-in of such Equipment for other machinery, furnishings, equipment, or related property not to become part of the Equipment and subject to the security interest of the Mortgage, or (iii) any other disposition thereof, the Borrower will pay to the Trustee the proceeds of such sale or disposition or an amount equal to the credit received upon such trade-in for deposit into the Bond Fund. In the case of the sale, trade-in, or other disposition of any such Equipment to the Borrower, or an Affiliate, the Borrower will pay to the Trustee an amount equal to the greater of the amounts and credits received therefor or the fair market value thereof at the time of such sale, trade-in, or other disposition (as certified by the Borrower, with evidence of the basis therefor) for deposit the Special Redemption Account of the Bond Fund. Except to the extent that amounts are deposited into the Bond Fund as provided in the preceding subsection (b), the removal from the Project of any portion of the Equipment pursuant to the provisions of this section will not entitle the Borrower to any abatement or diminution of the Basic Loan Payments payable under the Loan Agreement. If prior to such removal and disposition of items of Equipment from the buildings and the Property, the Borrower has acquired and installed machinery, furnishings, equipment, or related property with its own funds which become part of the Equipment and subject to the security interest of the Indenture and which have equal or greater utility, but not necessarily the same functions, as the Equipment to be removed, the Borrower may take credit to the extent of the amount so spent by it against the requirement that it either substitute and install other machinery and equipment having equal or greater value or that it make payment to the Trustee for deposit into the Special Redemption Account of the Bond Fund. The Borrower will promptly provide written notice to the Trustee regarding each such removal, substitution, sale, or other disposition referred to in subsection (b) of the section and will pay to the Trustee such amounts as are required by the provisions of subsection (b) of this section to be paid promptly into the Bond Fund after the sale, trade-in, or other disposition requiring such payment; provided, that no such report and payment need be made until the amount to be paid into the Bond Fund on account of all such sales, trade-ins, or other dispositions not previously reported in the aggregate has a value of at least $50,000. All amounts deposited in the Bond Fund pursuant to this section will be used to redeem Bonds pursuant to the Indenture on the earliest date Bonds can be redeemed. The Borrower will not remove, or permit the removal of, any of the Equipment from the buildings or Property except in accordance with the provisions of this section. The Trustee is not responsible for verifying or validating any amounts received pursuant to this section. Forbearance and Subordination of Fees. The Borrower agrees that it, any member of the Borrower, and any Manager which is an Affiliate of the Borrower, will forbear from taking any management, administration, development or other fees, or any portions thereof, in the event and to the extent that monies in the Revenue Fund are insufficient in any month to make all current and deferred deposits (other than deposits to the Surplus Fund) provided in the Indenture, and that the payment of such fees be made in accordance with the Indenture. Taxes and Impositions. The Borrower covenants to pay all third-party fees of the financing, including, but not limited to, the following: B-23

100 (a) All taxes and assessments of any type or character charged to the Issuer or to the Trustee affecting the amount available to the Issuer or the Trustee from payments to be received under the Loan Agreement or in any way arising due to the transactions contemplated by the Loan Agreement (including taxes and assessments assessed or levied by any public agency or governmental authority of whatsoever character having power to levy taxes or assessments) but excluding franchise taxes based upon the capital and/or income of the Trustee and taxes based upon or measured by the net income of the Trustee; provided, however, that the Borrower shall have the right to protest any such taxes or assessments and to require the Issuer or the Trustee, at the Borrower s expense, to protest and contest any such taxes or assessments levied upon them and that the Borrower shall have the right to withhold payment of any such taxes or assessments pending disposition of any such protest or contest unless such withholding, protest or contest would adversely affect the rights or interests of the Issuer or the Trustee; (b) All reasonable fees, charges and expenses of the Trustee for services rendered under the Indenture, as and when the same become due and payable; (c) The annual fee of the Issuer, payable as set forth in the Regulatory Agreement, and the reasonable fees and expenses of the Issuer or any agents, attorneys, accountants, consultants selected by the Issuer to act on its behalf in connection with the Loan Agreement, the Bond Documents or the Bonds, including, without limitation, any and all reasonable expenses incurred in connection with the authorization, issuance, sale and delivery of the Bonds or in connection with any litigation which may at any time be instituted involving the Loan Agreement, the Bond Documents or the Bonds or any of the other documents contemplated thereby, or in connection with the reasonable supervision or inspection of the Borrower, its properties, assets or operations or otherwise in connection with the administration of the foregoing. (d) These obligations and the obligations of the Borrower s to indemnify the Trustee and the Issuer provided in the Loan (collectively the Impositions ) shall remain valid and in effect notwithstanding repayment of the loan hereunder or termination of the Loan Agreement or the Bond Documents. (e) The Borrower shall deposit with the Trustee amounts sufficient to pay the annual Impositions as set forth in the Budget to be next due on the Project, in accordance with the provisions of the Indenture. The Borrower further agrees to cause all bills, statements or other documents relating to Impositions to be sent or mailed directly to the Trustee. Upon receipt of such bills, statements or other documents, and provided the Borrower has deposited sufficient funds pursuant to the Loan Agreement, the Trustee shall, so long as no Default has occurred, pay such amounts as may be due thereunder out of the funds so deposited. If any time and for any reason the funds so deposited are or will be insufficient to pay such amounts as may then or subsequently be due, the Trustee shall notify the Borrower, and the Borrower shall immediately deposit an amount equal to such deficiency with, or as directed by, the Trustee. If the Borrower fails to deposit sums sufficient to fully pay such Impositions at least 30 days before delinquency thereof, the Trustee may, at the Trustee s election, but without any obligation to do so, advance any amounts required to make up the deficiency, which advances, if any, shall be secured by the Mortgage and shall be repayable to the Trustee as herein elsewhere provided. (f) The Borrower covenants and agrees not to suffer, permit or initiate the joint assessment of the real and personal property or any other procedure whereby the lien of the real property taxes and the lien of the personal property taxes shall be assessed, levied or charged to the related Project as a single lien. Utilities. The Borrower will pay, or cause to be paid, when due, all utility charges which are incurred for the benefit of the Project or which may become a charge or lien against the Project for gas, electricity, water or sewer services furnished to the Project and all other taxes, assessments or charges of a similar nature, whether public or private, affecting the Project or any portion thereof, whether or not such taxes, assessments or charges are liens thereon. Other Agreements Assignment, Selling and Leasing. Except as otherwise provided in the Mortgage or permitted under the provisions of the Regulatory Agreement, after the completion of the acquisition and rehabilitation of the Project as described in the Loan Agreement, the Loan Agreement may be assigned and the Project sold or leased (other than by B-24

101 reason of foreclosure or deed in lieu of foreclosure), as a whole, by the Borrower only as permitted by the Loan Agreement or subject to conditions contained in the Loan Agreement. Continued Existence. The Borrower agrees that during the term of the Loan Agreement it will maintain its existence, will continue to be a nonprofit corporation in good standing in the State, will not dissolve or otherwise dispose of all or substantially all of its assets and will not consolidate with or merge into another legal entity or permit one or more other legal entities to consolidate with or merge into it; provided that the Borrower may, without violating the agreement contained in this paragraph, consolidate with or merge into another legal entity, or permit one or more legal entities to consolidate with or merge into it, or sell or otherwise transfer to another legal entity all or substantially all of its assets as an entirety and thereafter dissolve; provided that the Borrower comply with certain conditions of the Loan Agreement. Budget. On or before January 1, 2012 and on or before January 1 of each year for the annual period commencing on the following January 1, the Borrower, shall prepare a Budget of anticipated Project Revenues and Operating Expenses for the succeeding Fiscal Year and shall submit a copy of such Budget to the Trustee. Such Budget shall show there to be sufficient income to achieve the Coverage Test, provided for in the Loan Agreement. The Budget shall be prepared on a cash basis and should provide a proposed budget for the next Fiscal Year in sufficient detail including income and expenses, deposits to the Repair and Replacement Fund and any other required funds and payments of principal, premium (if any) and interest on the Bonds. The Budget shall report income on a 30-day lag period and shall not assume any prepayment on the Bonds. The Budget shall demonstrate sufficient cash flow to pay all required expenses, payments of scheduled interest and principal on the Bonds and the funding of any reserves as required in the flow of funds in the Indenture prior to the release of any funds from the Surplus Fund. The Budget shall be certified in writing as true and correct by the Borrower. The Budget may be amended from time to time, by the Borrower, during the course of the Fiscal Year, and such amendments shall be certified and submitted in the same manner as the Budget. Aggregate increases in a new or amended Budget in the category of costs to be paid or reimbursed from the Revenue Fund shall not exceed 20% on an annual basis unless the Borrower provides to the Trustee a statement of a Certified Public Accountant or Management Consultant to the effect that the increase is reasonable under the circumstances. Notwithstanding the foregoing, the failure of the Borrower to maintain the Coverage Test or the Borrower to adopt a Budget showing that such ratios will be achieved, shall not constitute an Event of Default hereunder except as set forth in the following paragraph. Each Budget shall include provision for payment by the Borrower of the costs, fees and expenses payable or incurred under the Loan Agreement and the Indenture including, without limitation, the costs of maintaining the insurance coverage required pursuant to Section 5.1 and all applicable ad valorem taxes (or payment in lieu of taxes), if any, assessed against the Project payable by the Borrower, and all Administration Expenses. Trade Payables Covenant. The Borrower covenants (the Trade Payables Covenant ) that, commencing with the first full fiscal quarter following the issuance of the Bonds, it shall maintain at least eighty percent (80%) of its trade accounts payable at less than sixty (60) days, provided that any trade account payable that is the subject of a bona fide dispute, the resolution of which is being diligently pursued by the Borrower, shall be excluded from such computation. For the purposes of this subparagraph trade accounts means those trade accounts payable with respect to the operation of the Project as determined by generally accepted accounting principles. (a) Testing Compliance. Compliance with the Trade Payables Covenant shall be tested by the Borrower: (A) at the end of the fiscal quarter based on the Borrower s unaudited financial statements required by the Loan Agreement, and (B) at the end of each Fiscal Year based on the Borrower s audited financial statements required by the Loan Agreement. (b) Failure to Meet Trade Payables Covenant. If the Trade Payables Covenant is not met at the end of any fiscal quarter or Fiscal Year, and is not remedied within 30 days, the Borrower shall, within 60 days of receipt of the report showing such deficiency, complete a report setting forth in detail the reasons for such deficiency B-25

102 and shall adopt a specific plan setting forth steps designed to meet the Trade Payables Covenant by the end of the second quarter following the date such report and plan are required. If at the end of such second quarter the Borrower is still not in compliance with the Trade Payables Covenant, the Borrower shall employee a Management Consultant. The Management Consultant within 45 days of the delivery to the Trustee of the financial statement demonstrating noncompliance with the Trade Payables Covenant. The Management Consultant will, within 90 days of its engagement by the Borrower, prepare recommendations with respect to the operations of the Project such that the Borrower will comply with the Trade Payables Covenant. No Default under the Loan Agreement shall occur if the Borrower s plan and, if required, the Management Consultant s recommendation, are delivered and followed pursuant to this section. Other Indebtedness The Borrower shall not incur any Indebtedness with respect to the Project, other than the Loan and other debts permitted or anticipated herein or incurred in the ordinary course of business which do not give rise to a lien or encumbrance on the Project except for Permitted Encumbrances. In addition, the Borrower is permitted to incur the following: (a) Indebtedness incurred as a result of the issuance of Additional Bonds; (b) such Short-Term Indebtedness as the Borrower, in its judgment, deems expedient; provided that the aggregate amount of Short-Term Indebtedness outstanding at any time does not exceed ten percent (10%) of the total Operating Expenses of the Borrower for the preceding Fiscal Year; and (c) such Long-Term Indebtedness as the Borrower, in its judgment, deems expedient; provided that prior to incurring, assuming, or guaranteeing any Long-Term Indebtedness the Borrower must furnish to the Issuer and the Trustee a Certificate setting forth the terms of such Long-Term Indebtedness and that the incurrence of such Long Term Indebtedness will not cause the Debt Service Coverage Ratio to fall below the required Coverage Test for either Series of the Bonds and (ii) the Confirmation of Rating stating that the incurrence of such Long Term Indebtedness will not result in a qualification, downgrade or withdrawal of the then current ratings on the Bonds. The Borrower may secure Indebtedness incurred or assumed pursuant to (3) above by a lien on and security interests in all or any portion of the Project and the Project Revenues, secured on an equal and ratable basis with then Outstanding Senior Bonds or Subordinate Bonds; provided, however, the following conditions are satisfied: (a) The Indebtedness is being incurred or assumed for any of the same purposes for which Additional Bonds may be issued under the Indenture, or the purpose of refunding or refinancing any Outstanding Bonds or other Indebtedness permitted under the Loan Agreement; (b) The Indebtedness (other than Additional Bonds) will not be secured by the money and investments held in any fund established under the Indenture; (c) All Modifications to be financed will become part of the Project; (d) Any agreement for the repayment of such Indebtedness and instruments evidencing or securing the same must provide: (i) That any Default will be an event of default thereunder, (ii) That, if any event of default has occurred in respect of such Indebtedness, the holder thereof will be entitled only to such rights to exercise, consent to or direct the exercise of remedies (other than remedies relating to any funds established under the Indenture) as are available to the Trustee, and that all such remedies are, except as otherwise provided in the Loan Agreement, to be exercised solely by the Trustee for the equal and ratable benefit of all Bondholders and all holders of Indebtedness so secured but subject to the priorities provided in the Indenture with respect to Senior Bonds and Senior Parity Indebtedness and Subordinate Bonds and Subordinate Parity Indebtedness; B-26

103 (e) If the proposed Indebtedness is further secured by liens on properties and revenues other than the Project and/or the Project Revenues, a lien of equal rank and priority will be granted upon the same properties and revenues to secure the Bonds; and (f) For the purposes only of being entitled to remedies under the Loan Agreement and of consenting to or directing actions to be taken in respect to such remedies, the holders of any such Indebtedness will be treated as Bondholders and the Indebtedness held by such persons will be treated as Additional Bonds. Any Short-Term Indebtedness or any Long-Term Indebtedness which is incurred for the purpose of providing working capital may be secured by a security interest on the Project Revenues on a parity with the security interest created under the Mortgage with respect to the Bonds, and if so secured, the agreement for the repayment of such Short-Term Indebtedness and instruments evidencing or securing the same shall provide that: (i) any Default shall be an event of default thereunder; and (ii) if any event of default shall have occurred with respect to such Short-Term Indebtedness, the holder thereof shall be entitled only to such rights to exercise, consent to or direct the exercise of remedies as are available to the Trustee, and that all such remedies are, except as otherwise provided in the Loan Agreement, to be exercised solely by the Trustee for the equal and ratable benefit of all holders of Bonds and all holders of Short-Term Indebtedness so secured. Any agreement for the repayment of such Indebtedness and instruments evidencing or securing the same shall provide for notices to be given to the Trustee regarding defaults by the Borrower, and shall specify the rights of the Trustee to pursue remedies upon the receipt of such notice, and the sharing of the rights of the Trustee to control the exercise of remedies with the holder of such Indebtedness. Short-Term Indebtedness or Long-Term Indebtedness which is incurred for the purpose of providing working capital may also be secured by a security interest in Project Revenues which is subordinate to the security interest created under the Mortgage. Release of Certain Land and Subordination; Granting of Easements The parties reserve the right at any time and from time to time to (i) effect the release and removal from the Mortgage of any part (or interest in such part) of the Property with respect to which the Borrower proposes to convey fee title to a public utility or public body in order that utility services or public services may be provided to the Project, or to effect the subordination of the lien of the Mortgage to rights granted to a public utility or public body in order that utility services or public services may be provided to the Project, (ii) grant easements, licenses, rights of way (including the dedication of public highways), and other rights or privileges in the nature of easements with respect to any property included in the Project, free from the lien of the Mortgage, or (iii) release existing easements, licenses, rights of way, and other rights or privileges with or without consideration; provided, that if at the time any such release, removal, or grant is made any of the Bonds are Outstanding and unpaid, the Borrower must deposit with the Trustee the following: (a) a copy of the such amendment as executed, (b) a resolution of the Governing Body of the Borrower (i) giving an adequate legal description of that portion of the Property to be released or subordinated, (ii) stating the purpose for which the Borrower desires the release or subordination, (iii) requesting such release or subordination, and (iv) approving an appropriate amendment to the Mortgage, (c) a certificate of the Borrower to the effect that the Borrower is not in default under any of the provisions of the Loan Agreement and that neither any building nor any other improvements constituting part of the Project are located on a portion of the Property with respect to which the release or subordination is to be granted, accompanied by a plat of survey of the Property certified by a registered surveyor of the State depicting (i) the boundaries of the portion of the Property with respect to which the release or subordination is to be granted, (ii) all improvements located on the property surveyed and the relation of the improvements by distances to the boundaries of the portion of such property with respect to which the release or subordination is to be granted, and (iii) all easements and rights of way with recording data and instruments establishing the same, (d) a copy of the instrument conveying the title to or subordinating the lien of the Mortgage in favor of a public utility or public body, and B-27

104 (e) a certificate of an architect, dated not more than sixty (60) days prior to the date of the release or subordination and stating that, in the opinion of the person signing such certificate, (i) the portion of the Property so proposed to be released or with respect to which the subordination is proposed or with respect to which an easement, license or right of way is proposed to be granted is necessary or desirable in order to obtain utility services or public services to benefit the Project and (ii) the release or subordination so proposed to be made will not impair the usefulness of the Project as a senior living housing facility and will not destroy the means of ingress thereto and egress therefrom. If such release or subordination relates to a part of the Property on which transportation or utility facilities are located, the Borrower will retain an easement to use such transportation or utility facilities to the extent necessary for the efficient operation of the Project as a senior living housing facility. Any money consideration received in connection with the release of any portion of the Property or the subordination of the lien of the Mortgage pursuant to this section will be deposited in a Special Redemption Account of the Bond Fund and used to redeem Bonds pursuant to the Indenture on the earliest date Bonds can be redeemed at par. If all of the conditions of this section are met, the Trustee is authorized to release any such property from the lien of the Mortgage or subordinate such lien or execute and deliver any instrument necessary or appropriate to confirm and grant or release any such easement, license, right of way, or other right or privilege. No release or conveyance effected under the provisions of this section will entitle the Borrower to any abatement or diminution of the Loan Payments payable under the Loan Agreement. Defaults and Remedies Defaults. Each of the following constitutes a Default under the Loan Agreement: (a) Failure by the Borrower to pay any Basic Loan Payments; provided that failure to make a Basic Loan Payment shall not constitute a Default to the extent that the amounts on deposit in the Surplus Fund, the Bond Fund, the Repair and Replacement Fund and the Debt Service Reserve Fund are sufficient and available to pay principal and interest due on the Bonds on the next Bond Payment Date; and provided further that failure to pay the portion of the Loan related to the Subordinate Bonds shall not constitute a Default under the Loan Agreement while any Senior Bonds are Outstanding. (b) Failure by the Borrower to make, or cause to be made, any Additional Loan Payment or amounts required to be paid under the Loan Agreement on or before the date due. (c) Failure by the Borrower to meet the Coverage Test covenant if (i) the Borrower fails to engage a Management Consultant or (ii) to the extent that the Rating Agency, if any, agrees with such recommendations, the Borrower fails to implement any of the Management Consultant s recommendations, as provided in the Loan Agreement. (d) Failure by the Borrower to perform or observe any of its covenants or agreements contained in the Loan Agreement, the Tax Agreement or the Regulatory Agreement other than as specified in (a) through (c) of this section, and such failure shall continue for the period and after the notice specified in the following section titled Notice of Default; Opportunity to Cure. (e) The dissolution or liquidation of the Borrower or the filing by the Borrower of a voluntary petition in bankruptcy, or adjudication of the Borrower as a bankrupt, or assignment by the Borrower for the benefit of its creditors or the entry by the Borrower into an agreement of composition with its creditors, or the approval by a court of competent jurisdiction of a petition applicable to the Borrower in any proceeding instituted under the provisions of State law or the federal bankruptcy statute, as amended, or under any similar act which may hereafter be enacted. The term dissolution or liquidation of the Borrower, as used in this paragraph, shall not be construed to include the cessation of the existence of the Borrower resulting either from a merger or consolidation of the Borrower into or with another entity or a dissolution or liquidation of the Borrower following a transfer of all or substantially all of its assets as an entirety, under the conditions permitting such actions contained in the Loan Agreement. B-28

105 (f) The occurrence or continuance of a default, a Default, an event of default or Event of Default under the Mortgage, the Regulatory Agreement or the Indenture. Notice of Default; Opportunity to Cure. Except as provided below, no default under paragraph (d) above shall constitute a Default until: (a) same; and The Trustee or the Issuer, by Mail, shall give notice to the Borrower of such default specifying the (b) The Borrower shall have had thirty (30) days after receipt of such notice to correct the default and shall not have corrected it or, if such default cannot be corrected within thirty (30) days, shall have failed to initiate and diligently pursue appropriate corrective action, provided, that in any event such default must be remedied within 120 days after the date of occurrence thereof. Remedies. Whenever any Default under the Loan Agreement has happened and is continuing, any or all of the following remedial steps shall be available: (a) The Trustee may, and at the written request of the Controlling Holders of the Bonds shall, declare the outstanding principal balance and interest accrued on the Loan and all payments required to be made by the Borrower under the heading Issuance of Bonds; Deposit of Proceeds; Amounts Payable with respect to the Bonds for the remainder of the term of the Loan Agreement to be immediately due and payable, whereupon the same shall become immediately due and payable. Upon any such acceleration of the Loan, the Bonds shall be subject to mandatory redemption as provided in the Indenture. (b) The Trustee, for and on behalf of the Issuer, may, and with the consent of the Controlling Holders of the Bonds shall, take whatever action at law or in equity may appear necessary or desirable to collect the payments required to be made by the Borrower under the heading Issuance of Bonds; Deposit of Proceeds; Amounts Payable then due and thereafter to become due, including, without limitation, pursuing remedies under the appropriate Mortgage and the remedies under the Indenture. (c) The Issuer or the Trustee may take whatever action at law or in equity as may be necessary or desirable to enforce performance and observance of any obligation, agreement or covenant of the Borrower under the Loan Agreement. The provisions of clause (a) however, are subject to the condition that if, at any time after the Loan shall have been so declared due and payable, and before any judgment or decree for the payment of the money due shall have been obtained or entered, there shall have been deposited with the Trustee a sum sufficient to pay all the principal of the Bonds matured prior to such declaration and all matured installments of interest (if any) upon all the Bonds, with interest on such overdue installments of principal as provided herein, and the reasonable expenses of the Trustee, and any and all other Defaults known to the Trustee (other than in the payment of principal of and interest on the Loan due and payable solely by reason of such declaration) shall have been made good or cured to the satisfaction of the Trustee or provision deemed by the Trustee to be adequate shall have been made therefor, then, and in every such case, the Controlling Holders of the Bonds by written notice to the Issuer and to the Trustee, may, on behalf of the holders of all the Bonds, rescind and annul such declaration and its consequences and waive such default; provided that no such rescission and annulment shall extend to or shall affect any subsequent default, or shall impair or exhaust any right or power consequent thereon. THE REGULATORY AGREEMENT The following is a brief summary of certain provisions of the Regulatory Agreement. The summary does not purport to be complete or definitive and is qualified in its entirety by reference to the Regulatory Agreement, copies of which are on file with the Trustee. B-29

106 Definitions In addition to terms defined elsewhere in this Official Statement, the following terms have the respective meanings assigned to them below: Adjusted Gross Income means, with respect to a person, the adjusted gross income of such person as set forth in their Internal Revenue Service Form 1040, Internal Revenue Service Form 1040A, or Internal Revenue Service Form 1040EZ (or the corresponding lines of such forms if hereafter amended), as evidenced by a copy of such form or by a sworn statement of such person. Adjusted Income means the adjusted income of a person (together with the adjusted income of all persons who intend to reside with such person in one residential unit) calculated pursuant to section 142(d) of the Code. Affiliated Party means a partner of the Borrower, a person whose relationship with the Borrower would result in a disallowance of losses under section 267 or 707(b) of the Code or a person who, together with the Borrower, is a member of the same controlled group of corporations (as defined in section 1563(a) of the Code, except that more than 50 percent shall be substituted for at least 80 percent each place it appears therein). Authorized Borrower Representative means any person who at the time and from time to time may be designated as such, by written certificate furnished to the Issuer and the Trustee containing the specimen signature of such person and signed on behalf of the Borrower, which certificate may designate an alternate or alternates. Until changed, the Authorized Borrower Representative is Robbie Wittner. Bond Counsel has the meaning set forth in the Indenture. Bond Mortgage means the Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing, together with all riders thereto, securing the Bond Mortgage Notes, to be executed by the Borrower with respect to the Project, as it may be amended, modified, supplemented or restated from time to time. Bond Mortgage Loan Documents means the three Bond Mortgage Notes, the Bond Mortgage, the Loan Agreement, the Regulatory Agreement, and any and all other instruments documenting, evidencing, securing or otherwise relating to the Bond Mortgage Loan. Bond Mortgage Notes means the promissory notes executed by the Borrower in favor of the Issuer, evidencing the Borrower s financial obligations under the Bond Mortgage Loan Documents, and endorsed by the Issuer, without recourse, to the order of the Trustee, as the same may be amended, modified, supplemented or restated from time to time. Bondholder or holder or owner means, when used with respect to the Bonds, the owner of a Bond then outstanding under the Indenture as shown on the registration books maintained by the Trustee pursuant to the Indenture. Borrower means Canton II, Inc., a Texas non-profit corporation and its successors and assigns. Borrower Certificate means the Tax Letter of Representation of the Borrower and TEC dated as of the Closing Date for the Bonds, delivered to the Issuer by the Borrower. Certificate of Continuing Program Compliance means the Certificate of Continuing Program Compliance and accompanying Occupancy Summary to be filed by the Borrower with the Trustee at the times specified in Section 4(c) and (e) of the Regulatory Agreement, such report to be in substantially the form attached hereto as Exhibit C or such other form as may be prescribed in accordance with the Regulatory Agreement and the Loan Agreement. Closing Date or Bond Closing Date means the date of initial delivery of the Bonds. B-30

107 Code means the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder. Eligible Tenant means and includes any person whose Adjusted Gross Income, together with the Adjusted Gross Income of all persons who intend to reside with such person in one dwelling unit, did not, for the immediately preceding taxable year, exceed $91,453, adjusted up or down automatically from the maximum previously in effect by a percentage amount equal to the percentage increase or decrease in the Consumer Price Index relating to the Bexar County Metropolitan Statistical Area most recently published by the United States Department of Commerce, as compared with the comparable Consumer Price Index for the date that is one year (or as near to one year as may be practical) prior to the date of publication of such most recently published Consumer Price Index. Such amount represents the Issuer s determination of moderate income pursuant to Section of the Act. Housing Act means the United States Housing Act of 1937, as amended, or its successor. Income Certification means a Verification of Income in the form attached hereto as Exhibit D or in such other form as may from time to time be prescribed in accordance with the terms of the Regulatory Agreement. Indenture means the Trust Indenture dated as of the date hereof between the Issuer and the Trustee, and any indenture supplemental thereto. Inducement Date means August 9, Investment Proceeds is defined in Section of the Regulations and generally consists of any amounts actually or constructively received from investing Proceeds. Loan Agreement means the Loan Agreement dated as of the date hereof among the Issuer, the Trustee, and the Borrower, as it may be amended from time to time. Low Income Tenant means a tenant whose Adjusted Income is fifty percent (50%) or less of median gross income, as determined under section 142(d)(2)(B) of the Code, for the area in which the Project is located, adjusted for family size. If all the occupants of a unit are students (as defined under section 151(c) of the Code), no one of whom is entitled to file a joint return under section 6013 of the Code, such occupants shall not qualify as Low Income Tenants. The determination of a tenant s status as a Low Income Tenant shall be made by the Borrower upon initial occupancy of a unit in the Project by such Tenant and annually thereafter, on the basis of an Income Certification executed by the Tenant; however, once a tenant qualifies as a Low Income Tenant, that such tenant shall continue to qualify, except as provided in Section 4(b). Low Income Units means the units in the Project required to be rented to, or held available for occupancy by, Low Income Tenants pursuant to Section 4(a) the Regulatory Agreement. Proceeds means any Sale Proceeds and Investment Proceeds of the Bonds. Project means the Project Facilities and the Project Site. Project Costs means, to the extent authorized by the Act, any and all costs incurred by the Borrower with respect to the acquisition, construction, rehabilitation, and equipping, as the case may be, of the Project, whether paid or incurred prior to or after the date of the Regulatory Agreement, including, without limitation, costs for site preparation, the planning of housing and improvements, the removal or demolition of existing structures, and all other work in connection therewith, and all costs of financing, including, without limitation, the cost of consultant, accounting and legal services, other expenses necessary or incident to determining the feasibility of the Project, contractors and Borrower s overhead and supervisor s fees and costs directly allocable to the Project, administrative and other expenses necessary or incident to the Project and the financing thereof. B-31

108 Project Facilities means the multifamily housing structures and related buildings and other improvements on the Project Site by the Borrower, and all fixtures and other property owned by the Borrower and located on, or used in connection with, such buildings, structures and other improvements constituting the Project as more fully set forth in Exhibit B hereto. Project Site means the parcel or parcels of real property described in Exhibit A, which is attached hereto and by this reference incorporated herein, and all rights and appurtenances appertaining thereunto. Qualified Project Costs means the Project Costs incurred after August 9, 2011 (or which are qualifying preliminary expenditures) which are chargeable to a capital account with respect to the Project for federal income tax and financial accounting purposes, or would be so chargeable either with a proper election by the Borrower or but for the proper election by the Borrower to deduct those amounts; however, only such portion of the interest accrued on the Bonds during the construction and/or rehabilitation of the Project shall constitute Qualified Project Costs as bear the same ratio to all such interest as the Qualified Project Costs bear to all Project Costs; and, further, if any portion of the Project is being constructed or rehabilitated by the Borrower or an Affiliated Party (whether as a general contractor or a subcontractor), Qualified Project Costs shall include only (a) the actual out-of-pocket costs incurred by the Borrower or such Affiliated Party in constructing the Project (or any portion thereof), (b) any reasonable fees for supervisory services actually rendered by the Borrower or such Affiliated Party (but excluding any profit component) and (c) any overhead expenses incurred by the Borrower or such Affiliated Party which are directly attributable to the work performed on the Project and shall not include, for example, intercompany profits resulting from members of an affiliated group (within the meaning of section 1504 of the Code) participating in the construction of the Project or payments received by such Affiliated Party due to early completion of the Project (or any portion thereof). Qualified Project Costs do not include costs of issuance as defined in Regulation Qualified Project Period means the period beginning on the Closing Date of the Bonds, and ending on the latest of (a) the date which is fifteen (15) years after the Closing Date, (b) the first date on which no Tax-exempt private activity bond (as that phrase is used in section 142(d)(2) of the Code) issued with respect to the Project is outstanding, or (c) the date on which any assistance provided with respect to the Project under Section 8 of the Housing Act terminates. Regulations means any temporary or final Income Tax Regulations issued pursuant to sections 103 and 141 through 150 of the Code, and section 103 of the Internal Revenue Code of 1954, that are applicable to the Bonds. Any reference to any specific Regulation shall also mean, as appropriate, any temporary or final Income Tax Regulation designed to supplement, amend, or replace the specific Regulation referenced. Sale Proceeds is defined in Section of the Regulations and generally consists of any amounts actually or constructively received from the sale (or other disposition) of any Bond, including amounts used to pay underwriters discount or compensation and accrued interest other than pre-issuance accrued interest. Sale Proceeds also include amounts derived from the sale of a right that is associated with any Bond and that is described in Section (b)(4) of the Regulations. Tax-exempt means, with respect to interest on any obligations of a state or local government, including the Bonds, that such interest is excluded from gross income of the owners thereof for federal income tax purposes under section 103 of the Code; however, such interest may constitute an item of tax preference or otherwise be includable directly or indirectly for purposes of calculating other tax liabilities, including any alternative minimum tax, under the Code. TEC means The Emmaus Calling, Inc. Low Income Tenants; Records and Reports The Borrower has agreed that the Project is to be owned, managed and operated as a qualified residential rental project (within the meaning of Sections 142(d) and 145(d) of the Code) for a term equal to the Qualified Project Period. To that end, and for the term of the Regulatory Agreement, the Borrower has agreed as follows: B-32

109 1. The Project will be acquired for the purpose of providing senior multifamily residential rental property, and the Borrower will own, manage and operate the Project as a project to provide senior multifamily residential rental property comprising a building or structure or several interrelated buildings or structures (consisting of one or more discrete edifices and other man-made construction with an independent foundation, outer walls, and roof, containing five or more units), together with any functionally related and subordinate facilities, and no other facilities, in accordance with section 142(d) of the Code and Section (b) of the Regulations and the Act, and in accordance with such requirements as may be imposed thereby on the Project from time to time. 2. All of the dwelling units in the Project have been and will be similarly constructed units, and each dwelling unit in the Project do and will contain complete, separate and distinct facilities for living, sleeping, eating, cooking and sanitation for a single person or a family, including a sleeping area, bathing and sanitation facilities and cooking facilities equipped with a cooking range (or microwave, if necessary for safety), refrigerator and sink. 3. None of the dwelling units in the Project has been or will at any time be utilized on a transient basis or has been or will ever be used as a hotel, motel, dormitory, fraternity house, sorority house, rooming house, nursing home, hospital, sanitarium, rest home or trailer court or park. No unit within the Project has been or will be rented for a period of less than 30 days. 4. No part of the Project has been or will at any time be owned by a cooperative housing corporation, nor shall the Borrower take any steps in connection with a conversion to such ownership or uses. The Borrower shall not take any steps in connection with a conversion of the Project to condominium ownership during the Qualified Project Period. 5. All of the dwelling units have been and will be available for rental on a continuous basis to members of the general public, and the Borrower will not give preference to any particular class or group in renting the dwelling units in the Project, except that all Tenants must be at least 62 years of age and to the extent that dwelling units are required to be leased or rented to Low Income Tenants and Eligible Tenants. 6. The Project Site consists of a parcel or parcels that are contiguous except for the interposition of a road, street or stream, and all of the Project Facilities comprise a single geographically and functionally integrated project for residential rental property, as evidenced by the ownership, management, accounting and operation of the Project. 7. No dwelling unit in the Project shall be occupied by the Borrower; however, if the Project contains five or more dwelling units, this subsection shall not be construed to prohibit occupancy of not more than one dwelling unit each by one or more resident managers or maintenance personnel, any of whom may be the Borrower. 8. The Issuer and the Borrower hereby recognize and declare their understanding and intent that the Project is to be owned, managed, and operated as a residential development as such term is defined in Section (13) of the Act, for as long as any portion of the Bonds remains outstanding and unpaid. To that end, the Borrower hereby represents as of the date hereof and covenants and agrees as follows: (i) that the Board of Directors of the Issuer, in accordance with the provisions of the Act, has determined that, for purposes of the Project, Eligible Tenants shall include any person whose Adjusted Gross Income, together with the Adjusted Gross Income of all other persons who intend to reside with such person in one dwelling unit, did not, for the taxable year immediately preceding the year of initial occupancy of the Project by such Eligible Tenants, exceed $91,453, adjusted as provided in the definition of Eligible Tenant set forth in Section 1; (ii) to utilize its best efforts and all due diligence to assure that substantially all (at least 90%) of the Project dwelling units are rented to Eligible Tenants and will not rent or lease any unit in the Project B-33

110 to a person not an Eligible Tenant if such rental would cause less than 90% of the dwelling units in the Project to be rented to Eligible Tenants; (iii) to obtain and maintain on file a statement executed by the Eligible Tennant as to the Adjusted Gross Income of such Eligible Tenant who resides in the Project (and of any persons who reside in the same dwelling unit with such Eligible Tenant) for the immediately preceding taxable year; (iv) to permit any duly authorized representative of the Issuer or the Trustee to inspect the books and records of the Borrower pertaining to the incomes of Project residents; and (v) to prepare and submit to the Issuer and the Trustee on or within 30 days after each September 1 (beginning September 1, 2012) during the term of the Regulatory Agreement, a certificate executed by the Borrower stating that at least 90% of the dwelling units of the Project were occupied by Eligible Tenants at all times during the year preceding the date of such certificate. This certification shall be in addition to the requirements set out in Section 4(h) of the Regulatory Agreement relating to Section of the Act. [Remainder of Page Intentionally Left Blank] B-34

111 The Borrower has further covenanted and agreed as follows: (a) Except as provided in the next sentence, during the Qualified Project Period, no less than 20% of the total number of units of the Project shall at all times be rented to and occupied by Low Income Tenants. As provided in Revenue Procedure , the Project shall be provided a period of twelve months from the Closing Date to come into compliance with the previous sentence (the Transition Period ). For the purposes of this paragraph (a), a vacant unit which was most recently occupied by a Low Income Tenant is treated as rented and occupied by a Low Income Tenant until reoccupied, at which time the character of such unit shall be redetermined. (b) No tenant qualifying as a Low Income Tenant shall be denied continued occupancy of a unit in the Project because, after admission, such tenant s Adjusted Income increases to exceed the qualifying limit for Low Income Tenants; however, should a Low Income Tenant s Adjusted Income, as of the most recent determination thereof, exceed 140% of the then applicable income limit for a Low Income Tenant of the same family size and such Low Income Tenant constitutes a portion of the 20% requirement of paragraph (a) of this Section, the next available unit of comparable or smaller size must be rented to (or held vacant and available for immediate occupancy by) a Low Income Tenant and such new Low Income Tenant will then constitute a portion of the 20% requirement of paragraph (a) of this Section; and, further, until such next available unit is rented to a tenant who is a Low Income Tenant, the former Low Income Tenant who has ceased to qualify as such shall be deemed to continue to be a Low Income Tenant for purposes of the 20% requirement of paragraph (a) of this Section. (c) Except during the Transition Period, during the Qualified Project Period, the Borrower has obtained and completed and will obtain, complete, and maintain on file Income Certifications from each Low Income Tenant, including (i) an Income Certification dated immediately prior to the initial occupancy of each new Low Income Tenant in the Project, and (ii) thereafter, annual Income Certifications which must be obtained on or before the anniversary of such Low Income Tenant s occupancy of the unit, and in no event less than once in every 12- month period following each Low Income Tenant s occupancy of a unit in the Project. For administrative convenience, the Borrower may establish the first date that an Income Certification for the Project is received as the annual recertification date for all tenants. The Borrower will obtain such additional information as may be required in the future by section 142(d) of the Code, as the same may be amended from time to time, or in such other form and manner as may be required by applicable rules, rulings, policies, procedures, Regulations or other official statements now or hereafter promulgated, proposed or made by the Department of the Treasury or the Internal Revenue Service with respect to obligations which are Tax-exempt under section 142(d) of the Code. A copy of the most recent Income Certification for Low Income Tenants commencing or continuing occupation of a Low Income Unit (and not previously filed) shall be attached to the Certificate of Continuing Program Compliance to be filed with the Trustee no later than each March 15, July 15, September 15, and December 15 (commencing December 15, 2011) until the end of the Qualified Project Period. The Borrower shall make a diligent and good-faith effort to determine that the income information provided by an applicant in an Income Certification is accurate by taking one or more of the following steps, as a part of the verification process: (1) obtain pay stubs for the most recent one-month period; (2) obtain income tax returns for the most recent two tax years; (3) conduct a consumer credit search; (4) obtain an income verification from the applicant s current employer; (5) obtain an income verification from the Social Security Administration, or (6) if the applicant is self-employed, unemployed, does not have income tax returns or is otherwise not reasonably able to provide other forms of verification as required above, obtain another form of independent verification as would, in the Borrower s reasonable commercial judgment, be satisfactory and will comply with the terms of the Regulatory Agreement. (d) The Borrower will maintain complete and accurate records pertaining to the Low Income Units and will permit, at all reasonable times and upon reasonable notice during B-35

112 normal business hours, any duly authorized representative of the Issuer, the Trustee, the Department of the Treasury, or the Internal Revenue Service to enter upon the Project Site to examine and inspect the Project and to inspect the books and records of the Borrower pertaining to the Project, including those records pertaining to the occupancy of the Low Income Units. (e) The Borrower will prepare and submit to the Trustee quarterly on each March 15, July 15, September 15, and December 15 (commencing December 15, 2011) until the end of the Qualified Project Period, a Certificate of Continuing Program Compliance covering the last three calendar months in substantially the form attached hereto as Exhibit C executed by the Borrower. (f) On or before each February 15 during the Qualified Project Period, the Borrower will submit to the Issuer and the Trustee a draft of the completed Internal Revenue Service Form 8703 or such other annual certification required by the Code to be submitted to the Secretary of the Treasury as to whether the Project continues to meet the requirements of section 142(d) of the Code. On or before each March 31 during the Qualified Project Period, the Borrower will submit such completed form to the Secretary of the Treasury. (g) Each lease or rental agreement shall contain a provision to the effect that the Borrower has relied on the Income Certification and supporting information supplied by the Low Income Tenant or Eligible Tenant in determining qualification for occupancy of the unit and that any material misstatement in such certification (whether or not intentional) may be cause for immediate termination of such lease or rental agreement. Each such lease or rental agreement shall also provide (and shall so disclose to the tenant) that the tenant s income is subject to annual certification in accordance with Section 4(c) hereof. (h) The Borrower further agrees to use its best efforts, to the extent permitted by applicable law, to provide to the Issuer (no later than August 1 of 2012) the information required for the Issuer to complete its annual report to the Texas Department of Housing and Community Affairs, as required by Section of the Act. In general, the report must include for persons residing in multifamily housing units financed by the Issuer information similar to the geographic and demographic information contained in the Texas Department of Housing and Community Affairs Compliance Monitoring Form and Tenant Income Certification, including household size, total household income, and project location. The current form of such annual report to be filed by the Issuer is attached as Exhibit E of the Regulatory Agreement. (i) The Borrower will operate in the same manner as the nonprofit organizations described in Revenue Ruling , CB 145 and Revenue Ruling 79-18, C.B. 194 and will comply with Revenue Procedures and , at all times while any Bonds are unpaid, whether or not they have been defeased. Tax-Exempt Status of the Bonds The Borrower and the Issuer (each on behalf of itself) have made the following representations and covenanted and agreed for the benefit of the holders of the Bonds from time to time as follows: (a) Neither the Borrower nor the Issuer shall knowingly take or permit, or knowingly omit to take or cause to be taken, as is appropriate, by parties within its respective control any action that would adversely affect the Tax-exempt nature of the interest on the Bonds, and, if either should become aware that it has taken or permitted, or omitted to take or cause to be taken, any such action, it will take all lawful actions necessary to rescind or correct such actions or omissions promptly upon obtaining knowledge thereof. B-36

113 Sale or Transfer of the Project (b) The Borrower and the Issuer will take such action or actions as may be necessary to comply fully with all applicable rules, rulings, policies, procedures, Regulations or other official statements promulgated, proposed or made by the Department of the Treasury or the Internal Revenue Service pertaining to obligations the interest on which is Tax-exempt under section 142(d) of the Code. (c) The Borrower and the Issuer will file of record such documents and take such other steps as are necessary in order to provide that the requirements and restrictions of the Regulatory Agreement will be binding upon all owners of the Project, including, but not limited to, the execution and recordation of the Regulatory Agreement in the real property records of Bexar County. (d) The Borrower will not enter into any agreements which would result in the payment of principal of or interest on the Bonds being federally guaranteed within the meaning of section 149(b) of the Code. (e) The Borrower hereby reaffirms the certifications and representations made by it in the Borrower Certificate and in Sections 2.7 and 2.8 of the Loan Agreement. (f) The Borrower hereby covenants to include the applicable portion of the requirements and restrictions contained in the Regulatory Agreement in any documents transferring any interest in the Project to another person to the end that such transferee has notice of, and is bound by, the applicable portion of such applicable restrictions, and to obtain the agreement from any such transferee to abide by all requirements and restrictions of the Regulatory Agreement. (g) The Borrower will not enter into any management agreement, asset management agreement, or other agreement, formal or informal, providing for use of the Project or part thereof by a person, corporation, or organization for use in such person s, corporation s, or organization s private trade or business that is not described in section 145(a)(1) of the Code, or as to which the use thereof is an unrelated trade or business, as determined by application of section 513(a) of the Code, unless such agreement complies with Revenue Procedure 97-13,1997-5I.R.B. 18. The Borrower has covenanted and agreed not to voluntarily sell, transfer, or otherwise dispose of the Project, or any portion thereof (other than leases for individual tenant use as contemplated hereunder), without obtaining the prior written consent of the Issuer which consent shall not be unreasonably withheld or delayed by the Issuer and shall be given by the Issuer if (a) the purchaser or transferee shall covenant to operate the Project in such a manner as to comply with the provisions of the Regulatory Agreement; (b) the Issuer and the Trustee shall have received (i) evidence reasonably satisfactory to the Issuer that the Borrower s purchaser or transferee has assumed in writing and in full and is capable of performing the Borrower s duties and obligations under the Regulatory Agreement, the Loan Agreement, and the Indenture, (ii) a certificate of the Borrower to the effect that no event of default has occurred and is continuing under the Indenture or the other Bond Mortgage Loan Documents, unless the purpose of the transfer is to cure such default, (iii) payment to the Issuer by the Borrower of an assumption fee equal to $5,000 or such other reasonable fee as may be generally in effect at such time, (iv) evidence reasonably satisfactory to the Issuer that the transferee has agreed to any restrictions imposed by Bond Counsel in order to maintain the treatment of interest on the Bonds as excludable from gross income for federal income tax purposes, (v) an opinion of counsel to the transferee addressed to the Issuer and the Trustee that the transferee has duly assumed such obligations of the Borrower under the Regulatory Agreement and the Loan Agreement and that such obligations and the Regulatory Agreement are binding on the transferee, (vi) an opinion of Bond Counsel that such transfer shall not adversely affect the Tax-exempt status of the interest on the Bonds, and (vii) a Certificate of Continuing Program Compliance current as of a date no more than 45 days prior to delivery thereof; and (c) as among the Issuer, the Trustee, and the Borrower, the Borrower shall pay all costs of the transfer of title, including, B-37

114 but not limited to, the cost of meeting the conditions specified in this Section. It is hereby expressly stipulated and agreed that any sale, transfer or other disposition of the Project in violation of this Section shall be a default hereunder but shall be ineffective to relieve the Borrower of its obligations under the Regulatory Agreement. Nothing contained in this Section shall affect any provision of any other document or instrument between the Borrower or any other party which requires the Borrower to obtain the consent of such other party as a precondition to sale, transfer, or other disposition of the Project. Upon any sale or other transfer which complies with the Regulatory Agreement and the other Bond Mortgage Loan Documents, the Borrower shall be fully released from its obligations hereunder to the extent such obligations have been assumed by the transferee of the Project. Any transfer of the Project to any entity, whether or not affiliated with the Borrower, shall be subject to the provisions of this Section. Term The Regulatory Agreement and all and each of the provisions thereof shall become effective upon its execution and delivery, shall remain in full force and effect for the periods provided herein and, except as otherwise provided in this Section, shall terminate in its entirety at the end of the Qualified Project Period, it being expressly agreed and understood that, as long as the Qualified Project Period has not expired, the provisions hereof are intended to survive the retirement of the Bonds, discharge of the Bond Mortgage Loan, termination of the Loan Agreement, and defeasance or termination of the Indenture relating to the Bonds. The terms of the Regulatory Agreement to the contrary notwithstanding, the requirements set forth herein shall terminate, without the requirement of any consent by the Issuer and the Trustee, and be of no further force and effect in the event of involuntary noncompliance with the provisions of the Regulatory Agreement caused by fire, seizure, requisition, foreclosure or transfer of title by deed in lieu of foreclosure, change in a federal law or an action of a federal agency after the Closing Date which prevents the Issuer or the Trustee from enforcing the provisions hereof, or condemnation or a similar event, but only if, within a reasonable period thereafter, either the Bonds are retired or amounts received as a consequence of such event are used to provide a project which meets the requirements of the Code set forth in Sections 2 through 4 of the Regulatory Agreement. The provisions of the preceding sentence shall cease to apply and the requirements referred to therein shall be reinstated if, at any time during the Qualified Project Period after the termination of such requirements as a result of involuntary noncompliance due to foreclosure, transfer of title by deed in lieu of foreclosure or similar event, the Borrower or any related person (within the meaning of Section (e) of the Regulations) obtains an ownership interest in the Project for tax purposes. The Issuer shall not be required to consent to termination of the Regulatory Agreement for any reason other than those specified above. Upon the termination of the terms of the Regulatory Agreement, the parties have agreed to execute, deliver and record appropriate instruments of release and discharge of the terms hereof; however, the execution and delivery of such instruments shall not be necessary or a prerequisite to the termination of the Regulatory Agreement in accordance with its terms. All costs, including fees and expenses of the Issuer and the Trustee (including reasonable attorney s fees), incurred in connection with the termination of the Regulatory Agreement shall be paid by the Borrower and its successors in interest. Default; Enforcement If the Borrower defaults in the performance or observance of any covenant, agreement, or obligation of the Borrower set forth in the Regulatory Agreement, and if such default remains uncured for a period of 60 days after notice thereof shall have been given by the Issuer or the Trustee to the Borrower, then the Trustee, acting on its own behalf or on behalf of the Issuer, provided the Trustee is aware of such default, shall declare an Event of Default to have occurred hereunder; further, however, if the default stated in the notice is of such a nature that it cannot be corrected within 60 days, such default shall not constitute an Event of Default hereunder so long as (i) the Borrower institutes corrective action within said 60 days and diligently pursues such action until the default is corrected and (ii) in the opinion of Bond Counsel, the failure to cure said default within 60 days will not adversely affect the Taxexempt status of interest on the Bonds. B-38

115 Following the declaration of an Event of Default hereunder, the Trustee, subject to being indemnified to its satisfaction with respect to the costs and expenses of any proceeding, or the Issuer may, at its option, take any one or more of the following steps: (i) by mandamus or other suit, action, or proceeding at law or in equity, including injunctive relief, require the Borrower to perform its obligations and covenants hereunder or enjoin any acts or things which may be unlawful or in violation of the rights of the Issuer or the Trustee hereunder; (ii) have access to and inspect, examine, and make copies of all of the books and records of the Borrower pertaining to the Project; and (iii) take such other action at law or in equity as may be necessary to enforce the obligations, covenants, and agreements of the Borrower hereunder. The Borrower has agreed that specific enforcement of the Borrower s agreements contained herein is the only means by which the Issuer and the Trustee may obtain the benefits of such agreements made by the Borrower herein, and the Borrower therefore agrees to the imposition of the remedy of specific performance against it in the case of any Event of Default by the Borrower hereunder. All rights and remedies herein given or granted to the Issuer and the Trustee are cumulative, nonexclusive, and in addition to any and all rights and remedies that the Issuer and the Trustee may have or may be given by reason of any law, statute, ordinance, document, or otherwise. Notwithstanding the availability of the remedy of specific performance provided for in this Section, promptly upon determining that a violation of the Regulatory Agreement has occurred, the Issuer shall to the extent that it has actual knowledge thereof, by notice in writing to the Trustee, inform the Trustee that a violation of the Regulatory Agreement has occurred. B-39

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117 APPENDIX C FORM OF BOND COUNSEL OPINIONS The form of the approving legal opinions of Fulbright & Jaworski L.L.P., bond counsel, is set forth in this appendix. The actual opinion will be delivered on the date of delivery of the bonds referred to therein and may vary from the form set forth to reflect circumstances both factual and legal at the time of such delivery. Recirculation of the Final Official Statement shall create no implication that Fulbright & Jaworski L.L.P., has reviewed any of the matters set forth in such opinion subsequent to the date of such opinions. C-1

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119 300 Convent Street, Suite 2100 San Antonio, Texas Telephone: Facsimile: December 15, 2011 WE HAVE ACTED AS BOND COUNSEL FOR THE Bexar County Housing Finance Corporation (the Issuer ) for the purpose of rendering our opinion as to the authorization, execution, delivery, validity, and enforceability of the bonds described below under Texas law. We express no opinion and make no comment with respect to the sufficiency of the security for, or the marketability of, the Bonds (hereinafter defined). The Bonds are described as follows: BEXAR COUNTY HOUSING FINANCE CORPORATION SENIOR LIVING REVENUE BONDS (THE INN AT LOS PATIOS APARTMENTS PROJECT) SERIES 2011A, being issued in fully registered form, dated December 1, 2011, and aggregating $23,600,000 in principal amount and BEXAR COUNTY HOUSING FINANCE CORPORATION SENIOR LIVING REVENUE BONDS (THE INN AT LOS PATIOS APARTMENTS PROJECT) SERIES 2011B, being issued in fully registered form, dated December 1, 2011, and aggregating $3,320,000 in principal amount (collectively, the Bonds ). The Bonds shall bear interest as described in the Indenture referenced below. Principal of the Bonds is payable (subject to the provisions for prepayment set forth in the Bonds) as provided in the Indenture referenced below. The Bonds are limited obligations of the Issuer payable solely from the sources described therein. WE HAVE EXAMINED the initial Bond. We have also examined and relied upon the representations, warranties, and covenants of the parties thereto contained in a Trust Indenture dated as of December 1, 2011 (the Indenture ) between the Issuer and The Bank of New York Mellon Trust Company, N.A., as trustee (the Trustee ), a Loan Agreement dated as of December 1, 2011 (the Loan Agreement ) among the Issuer, the Trustee, and Canton II, Inc., a Texas non-profit corporation (the Borrower ), and a Regulatory Agreement and Declaration of Restrictive Covenants dated as of December 1, 2011 (the Regulatory Agreement ) among the Issuer, the Trustee, and the Borrower; original or certified copies of the proceedings of the Board of Directors of the Issuer authorizing issuance of the Bonds; certificates of the Issuer relating to the expected use, expenditure, and investment of proceeds of the Bonds and certain other funds of the Issuer and to other material facts within the sole knowledge of the Issuer which we have not independently verified; certificates, resolutions, and representations of the Borrower with respect to certain material facts within the sole knowledge of the Borrower which we have not independently verified; certain certificates and resolutions of the Trustee; certificates of the Borrower; an opinion of McGuire Woods LLP of even date herewith as to the status of The Emmaus Calling, Inc. (the Parent Corporation ) and the Borrower as organizations described in section 501(c)(3) of the Internal Revenue Code of 1986, as amended to the date hereof (the Code ); and an opinion of the Gary Pridavka PC as of even date herewith as to the authorization, execution, and delivery of the Loan Agreement and the Regulatory Agreement by the Borrower; and such other material and such matters of law as we deem relevant to the AUSTIN BEIJING DALLAS DENVER DUBAI HONG KONG HOUSTON LONDON LOS ANGELES MINNEAPOLIS MUNICH NEW YORK PITTSBURGH-SOUTHPOINTE RIYADH SAN ANTONIO ST. LOUIS WASHINGTON DC

120 December 15, 2011 Page 2 matters discussed below. In such examination, we have assumed the authenticity of all documents submitted to us as originals, the conformity to original copies of all documents submitted to us as certified copies, and the accuracy of the statements contained in such certificates. All capitalized terms shall have the meanings set forth in the Indenture unless otherwise indicated herein. WE ARE OF THE OPINION, based upon the foregoing that under Texas law in force and effect on the date hereof, the Bonds have been duly authorized, executed, and delivered and are valid and legally binding limited obligations of the Issuer payable from the sources, and enforceable in accordance with the terms and conditions, described herein and therein except to the extent the enforcement thereof may be affected by bankruptcy, insolvency, reorganization, or moratorium or other similar laws affecting creditors rights or the exercise of judicial discretion in accordance with general principles of equity. IT IS FURTHER OUR OPINION, based upon the foregoing and assuming continuous compliance with the covenants in the Indenture, Loan Agreement, and Regulatory Agreement and in reliance upon representations and certifications of the Borrower made in the Borrower s and Parent Corporation s Tax Letter of Representation and of the Issuer in its No-Arbitrage Certificate, that interest on the Bonds (1) will be excludable from the gross income, as defined in section 61 of the Code, of the owners thereof for federal income tax purposes, pursuant to section 103 of the Code and existing regulations, published notices and rulings, and court decisions thereunder and (2) will not be included in computing the alternative minimum taxable income of the owners thereof who are individuals or, except as hereinafter described, corporations. The opinion set forth above assumes compliance, which we have not independently verified, with all matters required by applicable provisions of the Code subsequent to the issuance of the Bonds in order that interest thereon be (or continue to be) excludable from the gross income of the owners thereof. Failure to comply with certain of such requirements will cause the interest on the Bonds to be so included in the gross income of the owners thereof retroactive to the date of issuance of the Bonds. WE CALL YOUR ATTENTION TO THE FACT THAT, with respect to our opinion in clause (2) of the preceding paragraph, that interest on all tax-exempt obligations, such as the Bonds, owned by certain corporations (other than an S corporation, a qualified mutual fund, a real estate mortgage investment conduit (REMIC), or a real estate investment trust (REIT)) will be included in such corporation s adjusted current earnings for purposes of calculating the alternative minimum taxable income of such corporations. A corporation s alternative minimum taxable income is the basis on which the alternative minimum tax imposed by section 55 of the Code will be computed. WE EXPRESS NO OPINION with respect to any other federal, state, or local tax consequences under present law or any proposed legislation resulting from the receipt or accrual of interest on, or the acquisition or disposition of, the Bonds. Ownership of tax-exempt obligations such as the Bonds may result in collateral federal tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, certain foreign

121 December 15, 2011 Page 3 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, individuals otherwise qualifying for the earned income tax credit, and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry, or who have paid or incurred certain expenses allocable to, tax-exempt obligations. OUR OPINIONS ARE BASED on existing law, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service; rather, such opinions represent our legal judgment based upon our review of existing law that we deem relevant to such opinions and in reliance upon the representations and covenants referenced above

122 300 Convent Street, Suite 2100 San Antonio, Texas Telephone: Facsimile: December 15, 2011 WE HAVE ACTED AS BOND COUNSEL FOR THE Bexar County Housing Finance Corporation (the Issuer ) for the purpose of rendering our opinion as to the authorization, execution, delivery, validity, and enforceability of the bonds described below (the Bonds ) under Texas law. We express no opinion and make no comment with respect to the sufficiency of the security for, the marketability of, or the tax-exempt status of the Bonds. The Bonds are described as follows: BEXAR COUNTY HOUSING FINANCE CORPORATION SENIOR LIVING REVENUE BONDS (THE INN AT LOS PATIOS APARTMENTS PROJECT) TAXABLE SERIES 2011A-T, being issued in fully registered form, dated December 1, 2011, and aggregating $845,000 in principal amount. The Bonds shall bear interest as described in the Indenture referenced below. Principal of the Bonds is payable (subject to the provisions for prepayment set forth in the Bonds) as provided in the Indenture referenced below. The Bonds are limited obligations of the Issuer payable solely from the sources described therein. WE HAVE EXAMINED the initial Bond. We have also examined and relied upon the representations, warranties, and covenants of the parties thereto contained in a Trust Indenture dated as of December 1, 2011 (the Indenture ) between the Issuer and The Bank of New York Mellon Trust Company, N.A., as trustee (the Trustee ), a Loan Agreement dated as of December 1, 2011 (the Loan Agreement ) among the Issuer, the Trustee, and Canton II, Inc., a Texas non-profit corporation (the Borrower ), and a Regulatory Agreement and Declaration of Restrictive Covenants dated as of December 1, 2011 (the Regulatory Agreement ) among the Issuer, the Trustee, and the Borrower; original or certified copies of the proceedings of the Board of Directors of the Issuer authorizing issuance of the Bonds; certificates of the Issuer relating to the expected use, expenditure, and investment of proceeds of the Bonds and certain other funds of the Issuer and to other material facts within the sole knowledge of the Issuer which we have not independently verified; certificates, resolutions, and representations of the Borrower with respect to certain material facts within the sole knowledge of the Borrower which we have not independently verified; certain certificates and resolutions of the Trustee; certificates of the Borrower; an opinion of McGuire Woods LLP of even date herewith as to the status of The Emmaus Calling, Inc. (the Parent Corporation ) and the Borrower as organizations described in section 501(c)(3) of the Internal Revenue Code of 1986, as amended to the date hereof (the Code ); and an opinion of Gary Pridavka PC as of even date herewith as to the authorization, execution, and delivery of the Loan Agreement and the Regulatory Agreement by the Borrower; and such other material and such matters of law as we deem relevant to the matters discussed below. In such examination, we have assumed the authenticity of all documents submitted to us as originals, the conformity to original copies of all documents submitted to us as certified AUSTIN BEIJING DALLAS DENVER DUBAI HONG KONG HOUSTON LONDON LOS ANGELES MINNEAPOLIS MUNICH NEW YORK PITTSBURGH-SOUTHPOINTE RIYADH SAN ANTONIO ST. LOUIS WASHINGTON DC

123 December 15, 2011 Page 2 copies, and the accuracy of the statements contained in such certificates. All capitalized terms shall have the meanings set forth in the Indenture unless otherwise indicated herein. WE ARE OF THE OPINION, based upon the foregoing that under Texas law in force and effect on the date hereof, the Bonds have been duly authorized, executed, and delivered and are valid and legally binding limited obligations of the Issuer payable from the sources, and enforceable in accordance with the terms and conditions, described herein and therein except to the extent the enforcement thereof may be affected by bankruptcy, insolvency, reorganization, or moratorium or other similar laws affecting creditors rights or the exercise of judicial discretion in accordance with general principles of equity. WE ARE OF THE OPINION, based upon the foregoing, that, under Texas law in force and effect on the date hereof, the Bonds have been duly authorized, executed, and delivered and are valid and legally binding limited obligations of the Issuer payable from the sources, and enforceable in accordance with the terms and conditions, described herein and therein except to the extent the enforcement thereof may be affected by bankruptcy, insolvency, reorganization, or moratorium or other similar laws affecting creditors rights or the exercise of judicial discretion in accordance with general principles of equity which other laws will not, in our opinion, substantially interfere with the realization of the practical benefits under the Bonds except for the economic consequences of any procedural delay that may result therefrom. OUR OPINIONS ARE BASED on existing law, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service; rather, such opinions represent our legal judgment based upon our review of existing law that we deem relevant to such opinions and in reliance upon the representations and covenants referenced above

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125 APPENDIX D PRO FORMA FINANCIAL PROJECTIONS The following cash flow statement ( financial forecast ) for the years of operation of the Project from 2012 through 2016 was prepared by the Borrower based on financial information provided by the Member of the Borrower. The information includes, but is not limited to, projected monthly rents, occupancy levels, and budgeted operating expenses. The financial forecast is not intended to and does not meet the requirements of the American Institute of Certified Public Accountants for prospective financial forecasts or projections. The financial forecast was reviewed by the Rating Agency as part of its process to deliver a rating for the Bonds. ALTHOUGH THE BORROWER BELIEVES THEM TO BE REASONABLE, THERE CAN BE NO ASSURANCE THAT ANY OF THE ASSUMPTIONS OR PROJECTIONS REFLECTED IN THE OPERATING INFORMATION PRESENTED IN THE FOREGOING TABLE WILL BE REALIZED. THE PROJECTIONS HAVE BEEN PREPARED FOR THE BORROWER BY THE MANAGER. THE MANAGER BELIEVES THAT SUCH PROJECTIONS ARE REASONABLE BASED UPON THE CURRENT OPERATING PERFORMANCE OF THE PROJECT AND THE BORROWER HAS REVIEWED AND APPROVED THE PROJECTIONS. HOWEVER, ACTUAL OPERATING RESULTS OFTEN VARY FROM FORECASTS OF PROJECTED OPERATING RESULTS SINCE EVENTS AND CIRCUMSTANCES OF THE PROJECT FREQUENTLY DO NOT OCCUR AS EXPECTED, AND SUCH VARIANCES MAY BE MATERIAL. D-1

126 Fiscal Year Ending December Revenue Independent Living 4,854,236 4,951,321 5,050,347 5,151,354 5,254,381 Assisted Living 1,073,714 1,095,188 1,117,092 1,139,434 1,162,223 Other Revenue 192, , , , ,860 Less: Vacancy Loss (489,672) (499,466) (509,455) (519,644) (530,037) Revenue 5,631,232 5,743,857 5,858,734 5,975,909 6,095,427 Operating Expenses Payroll (1,635,911) (1,668,629) (1,702,002) (1,736,042) (1,770,763) Food Service (411,659) (419,892) (428,290) (436,856) (445,593) Utilities (305,725) (311,840) (318,076) (324,438) (330,927) Operating & Maintenance (157,973) (161,132) (164,355) (167,642) (170,995) Marketing (70,061) (71,462) (72,891) (74,349) (75,836) Administrative & General (72,032) (73,473) (74,942) (76,441) (77,970) Insurance (104,473) (106,562) (108,694) (110,868) (113,085) Other (110,542) (112,753) (115,008) (117,308) (119,654) Repair & Replacement (58,450) (59,619) (60,811) (62,028) (63,268) Issuers Annual Fee (7,500) (7,500) (7,500) (7,500) (7,500) Trustee Annual Fee (5,000) (5,000) (5,000) (5,000) (5,000) Rating Agency Fee (10,000) (10,000) (10,000) (10,000) (10,000) Home Office Fee (114,000) (114,000) (114,000) (114,000) (114,000) Asset Management Fee (56,428) (57,439) (58,587) (59,250) (59,250) Property Management Fee (225,711) (229,754) (234,349) (236,997) (236,997) Operating Expenses (3,345,465) (3,409,055) (3,474,506) (3,538,718) (3,600,838) Operating Income 2,285,767 2,334,802 2,384,228 2,437,190 2,494,589 Interest Earnings 39,499 37,818 37,818 93,738 36,688 Funds Available for Debt Service 2,325,266 2,372,619 2,422,045 2,530,929 2,531,277 Debt Service Series 2011A & A-T (Senior Bonds) 1,650,513 1,630,988 1,631,588 1,688,888 1,634,063 Series 2011B (Subordinate Bonds) 248, , , , ,940 Total Debt Service 1,898,683 1,860,068 1,885,668 1,945,725 1,889,003 Debt Service Coverage Ratio (Senior) Debt Service Coverage Ratio (Total) D-2

127 APPENDIX E COMPILATION REPORT

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129 PRO FORMA FINANCIAL INFORMATION WITH ACCOUNTANTS COMPILATION REPORT AND INDEPENDENT ACCOUNTANTS REPORT ON APPLYING AGREED-UPON PROCEDURES INN AT LOS PATIOS MARCH 31, 2011

130 Inn at Los Patios TABLE OF CONTENTS PAGE INDEPENDENT ACCOUNTANT S COMPILATION REPORT 3 PROFORMA PROFIT AND LOSS ADJUSTED FOR NOT FOR PROFIT OWNER 4 AGREED-UPON PROCEDURES REPORT 5 EXHIBIT A 10 EXHIBIT B 11

131 INDEPENDENT ACCOUNTANT S COMPILATION REPORT To the Bondholders Inn at Los Patios Duncanville, Texas We have compiled the accompanying pro forma financial information of the Inn at Los Patios (the Project ) for the year ended December 31, 2011, including historical information for the years ended December 31, 2009, 2010, and year to date through March 31, 2011, reflecting the effects of the change in ownership from current management to ownership by a nonprofit organization. We have not audited or reviewed the accompanying pro forma financial information and, accordingly, do not express an opinion or provide any assurance about whether the pro forma financial information is in accordance with accounting principles generally accepted in the United States of America. Management is responsible for the preparation and fair presentation of the pro forma financial information in accordance with accounting principles generally accepted in the United States of America and for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the pro forma financial information. Our responsibility is to conduct the compilation in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. The objective of a compilation is to assist management in presenting financial information in the form of pro forma financial information without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the pro forma financial information. The objective of this pro forma financial information is to show what the significant effects on the historical information might have been had the above-mentioned change in ownership occurred at an earlier date. However, the pro forma financial information is not necessarily indicative of the results of operations or related effects on financial position that would have been attained had the change in ownership actually occurred earlier. Reznick Group, P.C. June 16,

132 Inn at Los Patios 2009 to YTD March 2011 and Forecast 2011 Profit & Loss Adjusted to Not For Profit Owner Actual 2009 Actual 2010 Actual YTD 3/31/11 Forecast 2011 (1) Revenue Independent Living 4,182,486 4,305,117 1,087,307 4,334,671 Assisted Living 823, , , ,791 Other Revenue 255, ,103 34, ,302 Total Revenues 5,261,923 5,398,977 1,385,929 5,465,764 Average Occupancy % - Independent Living Units 88.3% 91.8% 91.5% 90.8% Average Occupancy % - Assisted Living- 30 Units 78.6% 85.6% 95.6% 90.3% Average Occupancy % -Total Units 86.5% 90.7% 92.2% 90.7% Payroll Expenses Residency 438, ,847 95, ,471 Assisted Living 291, ,899 65, ,440 Food Service 401, ,768 95, ,523 Administrative & General 109, ,278 26, ,593 Repair & Maintenance 151, ,321 39, ,133 Payroll Taxes & Emp. Benefit 302, ,294 73, ,356 Total Payroll Expenses 1,694,545 1,648, ,204 1,639,516 Operating Expenses (2) Residency 85,770 88,107 21,160 84,835 Assisted Living 6,179 7, ,784 Food Service 358, , , ,669 Administrative & General 51,565 60,035 17,838 76,469 Marketing 67,763 48,568 24,729 74,555 Repair & Maintenance 145, ,034 43, ,893 Utilities 312, ,807 90, ,411 Equipment Lease 36,274 30,064 7,680 33,128 Taxes 220, ,563 57, ,961 Insurance 89,481 89,446 13,517 83,647 Management Fees 239, ,255 56, ,631 Total Operating Expenses 1,611,321 1,693, ,744 1,696,983 Total Expenses 3,305,867 3,341, ,947 3,336,499 Actual Cash Flow 1,956,057 2,057, ,982 2,129,265 Adjustments For Not For Profit Owner (3) Less: Asset Management Fee (52,619) (53,990) (13,859) (54,658) Less: Not For Profit Oversight Fee (114,000) (114,000) (28,500) (114,000) Less: Replacement Reserve / Capital Expenditures (58,450) (58,450) (14,613) (58,450) Add: Property Tax - Exempt 220, ,563 57, ,961 Add: Sales Tax - Exempt 52,701 65,950 18,152 72,607 Total Adjustments 47,681 65,073 18,823 72,460 Adjusted Cash Flow (4) 2,003,737 2,122, ,805 2,201,725 Footnotes: 1) Forecast 2011 is actual third party reviewed results through March, actual results from management's reports for April and May, and budgeted results from June to December. 2) Operating expenses exclude facility lease expense, replacement reserve, and capital expenditures associated with the previous owner. 3) Adjustments for the Not For Profit owner include: A) Asset management fee is 1% of total revenues. B) Not For Profit oversight fee is $114,000 per year for the life of the bonds. C) Replacement reserve / capital expenditures are $350 per unit and the property has 167 units. D) The Not For Profit is exempt from both property taxes and sales tax and amounts have been adjusted to reflect the exemption. 4) Adjusted Cash Flow represents Net Operating Income before Debt Service and Depreciation. (see accompanying accountant s compilation report) - 4 -

133 INDEPENDENT ACCOUNTANTS REPORT ON APPLYING AGREED-UPON PROCEDURES To the Bondholders Inn at Los Patios (the Project) We have performed the procedures enumerated below, which were agreed to by Canton II, Inc. (the Company) and Merchant Capital (the Bank), solely to assist you in evaluating the cash flows of the Project in the absence of financial statements audited in accordance with Generally Accepted Auditing Standards and presented in accordance with Generally Accepted Accounting Principles. The Project s management is responsible for the below report. This agreed-upon procedures engagement was performed in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of the procedures is solely the responsibility of those parties specified in the report. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose. We obtained the following: I. GENERAL A. Income statements of the Project for the years ended December 31, 2009 and 2010, and for the period from January 1, 2011 through March 31, 2011; B. Bank statements and reconciliations for all operating accounts for each month of the above periods; C. Check registers for the periods listed in (A) above; D. Budgets of the Project for the calendar years 2009, 2010, and 2011; E. Rent rolls and occupancy reports for every third month, beginning with March, 2009; F. Annual payroll reports for 2009 and 2010 prepared by a third party payroll firm as well as a similar report for March, 2011 G. General ledger detail of repair and maintenance accounts for March, August and October,

134 H. Management Agreement(s) covering the periods in (A) above I. Property Tax bills for 2009 and 2010 J. Insurance bills for 2009 and 2010; and K. Management s list of assumptions that would change with nonprofit ownership II. REVENUE To correlate recorded revenue with cash received and to analyze the predictability of future revenue stream(s), we: 1. Compared total revenue recorded per the income statements for the period to total cash deposited per the bank statements for the period. We reported the results of this comparison, and obtained an explanation and/or documentation for any variance over 5% for any of the periods covered by the report. Findings: While comparing recorded revenue as compared to cash deposited at Exhibit A-I, we noted some variances on a monthly basis that exceeded the established threshold of 5%. We inquired of management, who noted that cash is not routinely received in the month the revenue is recognized; therefore, some variances between the two on a monthly basis would be expected. We did note as shown on the attached exhibits that on an annual basis, there was a close correlation between revenue recorded and cash deposited. The variance on an annual basis and for January through March of 2011 is less than the established threshold of 5%. 2. Compared vacancy information per the rent rolls obtained to vacancy information per the occupancy reports that are maintained at the Project. We will report any exceptions (variances) noted

135 Findings: Vacancy information from the rent rolls was compared to vacancy information from the occupancy reports at Exhibit A - II. We noted no variances. 3. Compared revenue per the rent rolls obtained to revenue per the income statements for those periods. We reported any variances noted, and obtained an explanation/documentation for any variances over 5%. Findings: We compared revenue from the rent rolls to the recorded revenue in the income statements at Exhibit A - III. Any variances are noted; however, none exceeded the established threshold of 5%. 4. Prepared a report of the occupancy percentage for each period noted in (A) above, as well as the assumed occupancy in the 2011 budget. Findings: The occupancy percentages are included in the analysis at Exhibit A - II. 5. Prepared a report of the average rent per unit for each period noted in (A) above, as well as the assumed rent per unit in the 2011 budget. Findings: The revenue per units statistics are included in the analysis at Exhibit A - III. III. EXPENSES To correlate recorded expenses with cash expenditures and to analyze the predictability of future cash outflows, we: 1. Compared cash outflows for each period noted in (A) above per the income statements to the cash outflows per the check registers obtained. We investigated discrepancies and determined if any cash outflows were made that were not included in the income statement that should be considered an outflow of the Project as either an expense of the Project or as a capital item. We noted any items found and included them in the final report

136 Findings: We compared cash expenditures from check registers to recorded expenses in the income statements at Exhibit B-1. We noted that the facility made a change in accounting system from 2009 to We obtained general ledger reports for 2009 that included detailed check information as well as information regarding wire transfers. We obtained check registers for 2010 and 2011 that contained checks only. We then used the general ledger reports to identify wire transfers. We noted some variances, and identified those variances and noted them in the attached Exhibit B - I. 2. Compared disbursements per the check registers obtained to the disbursement items clearing the bank statements during the periods noted in (A) above. We investigated any items clearing the bank that are not included in the check registers. We noted any items that should be considered an outflow of the Project as either an expense of the Project or as a capital item. Findings: We made the comparison of disbursements per the check registers to the disbursements clearing the bank statements on a monthly basis at Exhibit B - II. We noted some variances on a monthly basis, and compared the variances to the outstanding checks listed on the bank reconciliations. The variances appeared reasonable and appeared to be merely timing differences that are explained by the bank reconciliations. 3. Compared payroll expenses per the payroll reports to the recorded payroll expenses per the income statements and noted any differences. Findings: We compared payroll expenses per the payroll reports to the payroll expenses included in the income statements at Exhibit B - III. We noted variances that appeared to be immaterial in nature. 4. Reviewed the management fee agreement and compared the terms of the agreement to the expenses that were paid and recorded. We noted any discrepancies

137 Findings: We reviewed the management fee agreement and compared recorded management fees to the terms of the agreement. We noted no variances. 5. Compared the property tax bills to the expenses recorded and noted any differences. Findings: We compared the property tax bills to the property tax expenses recorded and noted no variances. We were not engaged to, and did not perform an examination, the objective of which would be the expression of an opinion on the procedures performed herein. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. This report is intended solely for the information and use of the specified users and is not intended to be and should not be used by anyone other than these specified parties. Austin, Texas June 16,

138 (See independent accountants report)

139 (See independent accountants report)

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141 APPENDIX F SELECTED MARKET DATA AND ANALYSIS

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143 SAN ANTONIO METROPOLITAN DATA Introduction San Antonio, the Bexar County seat, is the center of economic and development activity for the South Texas area. Located 190 miles west of Houston and 78 miles southwest of Austin, San Antonio lies within an eight-county area known as the San Antonio Metropolitan Statistical Area (MSA). These counties include Atascosa, Bandera, Bexar, Comal, Guadalupe, Kendall, Medina, and Wilson. Regional Map Population The U.S. Census Bureau currently ranks the MSA as the 38th largest in the U.S. in terms of population. According to the 2000 Census, San Antonio is the 3rd largest city in Texas and the 9th largest city in the United States. The region is expected to experience moderate to stable growth through the first half of the new millennium. Butler Burgher Group, LLC Page F

144 SAN ANTONIO METROPOLITAN DATA Employment The following sheet shows a recent snapshot of labor statistics (employment, unemployment, and labor force) for the San Antonio MSA. According to Texas Labor Market Information for December 2010, total Nonagricultural Employment in the San Antonio-New Braunfels MSA dropped 1,800 jobs during the month. However, since December 2009, the MSA gained 7,000 jobs or 0.8%. The employment loss was primarily caused by Professional and Business Services and Leisure and Hospitality, which posted declines of 1,600 and 1,200 jobs, respectively. Retail trade added 1,500 jobs and gained 2,200 jobs since December 2009, an annual growth rate of 2.2%; the growth was mainly due to seasonal hiring as area retailers prepared for the holiday shopping season. Transportation, Warehousing and Utilities added 100 jobs and dropped 500 jobs since December 2009, an annual growth rate of -2.4%. Financial Activities added 200 jobs over the month and gained 900 jobs since December 2009, an annual growth rate of 1.4%. Education and Health Services added 400 jobs and gained 1,500 jobs since December 2009, an annual growth rate of 1.2%. Government dropped 600 jobs; the employment loss was primarily caused by Federal Government and Local Government with declines of 200 jobs and 400 jobs, respectively. The Texas economy continues to outperform the U.S. economy in the current recovery, according to the Real Estate Center's latest monthly economic review. The state s economy gained 194,400 jobs from November 2009 to November 2010, an annual growth rate of 1.9 percent, compared with the nation s 842,000 jobs, an annual growth rate of 0.6 percent. Texas private sector continues to play a key role in job creation. The state s private sector posted an annual employment growth rate of 2.2 percent compared with 1 percent for the U.S. private sector from November 2009 to November The state s seasonally adjusted unemployment rate was 8.2 percent in November 2010, the same as in November 2009, while the nation s rate decreased from 10.0 to 9.3 percent over the same period. All Texas industries except the trade and information industries had more jobs in November 2010 than in November The state s mining and logging industry ranked first in job creation followed by professional and business services, education and health services and manufacturing. All Texas metro areas had more jobs in November 2010 than in November McAllen-Edinburg-Mission ranked first in job creation followed by Brownsville-Harlingen and Austin-Round Rock-San Marcos. The state s actual unemployment rate in November 2010 was 8.3 percent. Midland had the lowest unemployment rate followed by Amarillo, Lubbock, College Station-Bryan and Abilene. Major Employers The following table shows major employers located in the San Antonio MSA, as provided by the San Antonio Economic Development Foundation. Butler Burgher Group, LLC Page F

145 SAN ANTONIO METROPOLITAN DATA Butler Burgher Group, LLC Page F

146 SAN ANTONIO METROPOLITAN DATA Economy The San Antonio MSA is in the U.S. Federal Reserve System s Eleventh District, which consists of Texas, northern Louisiana, and southern New Mexico. The following paragraphs have been excerpted from the Federal Reserve Board s December 2010 Beige Book for the Eleventh District. Butler Burgher Group, LLC Page F

147 SAN ANTONIO METROPOLITAN DATA Overview The Eleventh District economy expanded at a modest pace over the past six weeks. Activity in the energy sector strengthened, and transportation services and staffing firms reported steady but solid demand. Retailers said apparel sales were slow due to unseasonably warm weather, while reports from the manufacturing sector were mixed. Activity in the housing market remained sluggish but conditions improved slightly in commercial real estate. Overall lending conditions were largely unchanged. Most respondents expect slow growth in the near term. Prices Selling prices and fees held steady at most responding firms due to competition and low sales activity, but there were some reports of increases. Small parcel shipping prices rose slightly while large parcel shipping prices increased sharply, according to contacts. Fabricated metals producers noted selling prices edged up in response to higher steel prices and primary metals manufacturers reported price increases were becoming necessary to offset higher cost of aluminum and other industrial metals. Agricultural respondents said crop prices increased across the board, and staffing firms reported upward movement in billing rates. Improved demand has enabled railroads to raise prices across various business units. The price of crude oil rose moderately on stronger demand from China and a weaker dollar. Onhighway prices of both diesel and gasoline increased. Natural gas prices remained weak as mild weather, record-high inventories and forecasts for a normal winter put downward pressure on prices. Solid demand, tight supplies, and multiple plant outages led ethylene producers to push through a 4 cent increase in contract prices for October, and spot prices rose sharply in response. Labor Market Employment levels held steady at most responding firms, and there were scattered reports of hiring. Staffing firms continued to report strong hiring activity in the region, and noted that they were adding workers in response. Some contacts in the airline, transportation services, automobile sales and transportation manufacturing industries added workers, and retailers were starting to ramp up hiring for the holiday season. Layoffs remained limited. Wage pressures were minimal, with the exception of reports of higher wages in the airline industry. Manufacturing Demand for construction-related products was flat over the past six weeks, but a few manufacturers said sales rose due to an uptick in multifamily housing activity. Contacts expect conditions to remain weak or improve slightly in 2011 due to continued weakness in residential and commercial real estate. Fabricated metals producers saw a sharp increase in demand over the past month due to seasonal factors and government-related project work. Most high-tech manufacturers said growth in orders and production continued at a much slower pace than in the first half of the year. Sales of some consumer products such as personal computers and lap- Butler Burgher Group, LLC Page F

148 SAN ANTONIO METROPOLITAN DATA tops slowed, but demand for gaming products and smart phones remained strong. Several respondents expressed concern about reduced demand from the public sector as governments at all levels were faced with large revenue shortfalls. Still, most respondents expected conditions to remain stable for the next three months. Demand for paper products held steady. Food manufactures said growth in orders was stable over the reporting period, and the three-month outlook for sales was positive. Trailer manufacturers reported a slowdown in demand. Contacts in aircraft parts distribution and manufacturing saw an increase in demand due to higher utilization of aircraft fleets and deferred maintenance work. Demand for petrochemicals was solid. Ethylene and polyethylene producers reported that domestic demand increased moderately, and export demand stayed strong driven by cheap natural gas versus relatively expensive oil and a weaker dollar. Domestic orders for PVC used in residential and commercial construction remained depressed, but exports were strong, according to contacts. Demand for petrochemicals used in manufacturing, alumina, pulp and paper improved. Refiners said conditions remained weak. Demand for oil products continued to decline and refiner margins were being squeezed by the rise in oil prices. Refinery utilization rates stood just above 80%, down from 90% this summer. Retail Eleventh District retail sales grew modestly, despite unseasonably warm weather that impacted apparel sales for much of the reporting period. In recent weeks, however, clothing retailers noted sales improved as temperatures fell to more normal levels. Two large retailers said that their sales in Texas outperformed those nationwide. Inventories increased slightly due to the warm weather and some seasonal buildup. The retail environment remains extremely competitive, and contacts say they still have to lure consumers with promotions. Expectations are for the holiday shopping season to yield moderate yearover-year sales increases. Contacts expect continued improvement in 2011, although most expect the pace to be slow to moderate. Automobile sales were slightly weaker over the reporting period, by more than normal seasonality would suggest. Inventories rose, but remain at healthy levels, according to contacts. A typical slowdown in sales is expected heading into the holiday season, but the outlook for next year is cautiously optimistic, with most contacts predicting modest growth in sales. Services Staffing firms reported steady demand, and noted that activity was stronger than expected. Demand continued to be broad-based, with particular strength reported for oil field operations, administrative and professional services, plastics and steel manufacturing, and automobile-related positions. Direct placements, which had been subdued so far this year, increased during the reporting period. Sustained high levels of demand continued to boost the near-term outlook. Butler Burgher Group, LLC Page F

149 SAN ANTONIO METROPOLITAN DATA Accounting firms said some increase in consulting and merger and acquisition work has kept demand stable. Uncertainty regarding impending tax legislation continued to constrain demand for transactional services, but contacts were generally optimistic about year-end earnings. Demand for legal services remained soft. The only area of increased activity is mergers and acquisitions. Legal firms say they are in a better position than last year, but remain cautious in their outlooks. Transportation services demand was positive. Intermodal transportation firms noted a wide-spread increase in cargo volumes was buoyed by demand from international clients. Railroad contacts said continued solid gains in volumes boosted revenues. International container trade volumes rose slightly during the past four weeks, and contacts expect a modest pickup in container traffic next year. Firms that ship small parcel goods said growth in volumes flattened during the reporting period, but remained above year-ago levels. Airline traffic was steady over the past six weeks. Contacts noted that conditions are much better than a year ago, and the outlook is for modest growth in the near term. Construction and Real Estate Housing markets remain sluggish. Builders said sales weakened slightly in October after some firming in August and September that followed the homebuyer tax-credit drop off. While entry-level builders were said to be struggling, builders in the move-up price range have weathered the post tax-credit conditions better, according to contacts. Realtors also said the higher end of the market is selling better, a reversal of the late 2009 and early 2010 trend. Prices were up slightly from year-earlier levels. Respondents said lenders still require a 20% down payment in most cases, which may be more difficult for the entry-level homebuyer. Outlooks are for sales and building activity to remain slow in the near-term. Apartment demand continued to rise steadily during the reporting period, and occupancies edged up. Rents are moving up, according to contacts. Construction activity remains low by historical standards, but it has picked up slightly in recent weeks. Investment activity for multifamily properties has risen since the last report. Office leasing continues to edge up, which is giving people a little more confidence, according to contacts. Respondents in the industrial sector also noted increased lease deals, but said rents are near historic lows. Excess space and tight credit conditions have limited nonresidential construction. Investment activity remains subdued, but contacts say recent signs of economic improvement should enable more risk-taking in the near term. Financial Services Financial firms reported a slight pickup in demand for selected loan types and a continued tapering off for others, noting that demand remained very price sensitive. Consumer loan growth was modest, but dependent on low rates. Demand for commercial and industrial loans increased, although real estate loan demand continued to decline. Overall credit quality was stable; however, mortgage delinquencies and mortgage bankruptcies remained elevated. Financial contacts noted continued pricing pressure, particularly for consumer and good-quality business loans. Deposits were stable. Outlooks improved mod- Butler Burgher Group, LLC Page F

150 SAN ANTONIO METROPOLITAN DATA estly, but contacts anticipate loan growth to remain sluggish because of economic and public policy uncertainties, as well as borrowers' poor credit ratings. Energy The Eleventh District rig count rose strongly over the past six weeks. The disparity between oil and natural gas prices continued to drive the trend toward more oil-directed drilling. U.S. land drilling is the strongest and most profitable segment of the industry, especially activity tied to horizontal drilling. Contacts expect the overall rig count to level off or increase at a slower pace through year-end as the decline in dry natural gas activity is not being offset by increased oil-directed drilling. Producers are interested in returning to the Gulf now that the moratorium is over, and are working their way through the new regulations and their cost implications. Service companies are maintaining the skills and capacity to go back to the Gulf, but do not expect it to happen before early next year. Agriculture Topsoil moisture was short in several parts of the District, and moderate drought conditions prevailed in East Texas and along the Rio Grande. Ranchers were concerned that lack of rainfall was hampering winter grazing and hay production. Higher grain prices boosted margins for farmers but increased feed costs for livestock producers. Cotton prices were at record-high levels, and estimates for Texas cotton production put this year s crop near historic highs for the state. Demand for agricultural products remained strong, with particularly robust export demand for cotton and beef. The following pages regarding current and historical trends in the San Antonio economy are from Eoconmy.com. Butler Burgher Group, LLC Page F

151 SAN ANTONIO METROPOLITAN DATA Butler Burgher Group, LLC Page F

152 SAN ANTONIO METROPOLITAN DATA Butler Burgher Group, LLC Page F

153 SAN ANTONIO METROPOLITAN DATA Butler Burgher Group, LLC Page F

154 SAN ANTONIO METROPOLITAN DATA The following sections describe the three major industries in the area: health services, military, and tourism. Health Services The medical services industry is well represented in San Antonio; the Greater San Antonio Chamber of Commerce reports the medical sector of the San Antonio economy contributes approximately $7.45 billion annually. Since 1980, employment among the medical center facilities has averaged 5.0% annual increases, and the combined annual budgets have more than doubled. The majority of medical facilities in San Antonio are located in the 683-acre South Texas Medical Center (STMC). Within STMC are 45 medical related institutions, including the University of Texas Health Science Center, as well as 12 major hospitals (one of which is a veterans hospital), and five specialty institutions, totaling over 4,200 licensed beds. In 2009, 27,884 persons were directly employed at the center, and the combined budget of all entities at the South Texas Medical Center totaled $3.3 billion. The STMC was home to more than $350 million in construction projects n 2009, and more than $1 billion in new construction projects are currently planned through The University of Texas Health Science Center (UTHSC ) employs approximately 5,900 and has schools of medicine, dentistry, nursing and health sciences; a graduate school of biomedical science that trains more than 3,000 students per year is also part of this facility. With a budget of $668 million, UTHSC contributes nearly $1.3 billion per year to the south Texas economy. Baptist Health System plans to build a new 40 acre medical campus at SH 151 and Wiseman Road in western Bexar County. It will have a three-story 60,000 SF medical facility to accommodate imaging services, an outpatient surgical center and medical office space. It will eventually include a hospital and employ at least 700 health care workers. Officials confirm that ultimate plans for the Westover Hills site include the addition of a new hospital to meet growing demand in the area. At present, there is no hard price tag for the initial development or a specific timetable for the addition of a hospital. The first phase includes a medical office building and was opened in June Upon completion, the medical campus will serve an estimated 200,000 people. In addition, those same officials say there are approximately 44,000 students and employees along the SH 151 corridor from Port San Antonio (formerly Kelly Air Force Base and KellyUSA Business Park) to Loop An 82,500 SF Consolidated Academic Complex was recently constructed at Brooks Air Force Base; this facility will be utilized to train aerospace medicine and environmental/occupational health personnel. Annually, over 5,000 medical officers and enlisted personnel will take advantage of a variety of courses, from physicians residency programs to environmental courses, to comply with Environmental Protection Agency (EPA) standards. Butler Burgher Group, LLC Page F

155 SAN ANTONIO METROPOLITAN DATA A significant portion of health services employment is attributed to organizations and companies involved with medical research. Some of these organizations include the University of Texas Health Science Center, Brooke Army Medical Center, Wilford Hall Medical Center (Air Force), Southwest Foundation of Biomedical Research and Southwest Research Institute. Additionally, Texas Research Park, a 1,500-acre multi-disciplined research park located west of San Antonio is composed of many organizations whose work involves various stages of the drug development process. Institutions in the Texas Research Park are part of a larger alliance of organizations whose scientists are dedicated to developing and translating research into improved health care. The economic impact on the Texas Research Park is substantial and provides substantial growth to the local economy. Tourism/Convention Hospitality, according to the San Antonio Area Tourism Council, is the city s second largest industry behind health care, employing more than 86,000 people and generating an economic impact in excess of $7.2 billion annually. According to a Texas Department of Transportation (TxDOT) survey, San Antonio is the most frequently visited city in Texas. The area s rich Southwestern cultural heritage, historical sites, and numerous attractions draw the millions of tourists who visit San Antonio annually. Fiesta, an annual cultural event attracting about 3 million people, has a greater local economy impact than any festival of its type in North America. Historically, San Antonio s primary tourist attractions have included The Alamo, Hemisfair Plaza, the San Antonio Missions Historical Park, and the Riverwalk. Sea World of Texas, Rivercenter Mall, and the Six Flags - Fiesta Texas theme park, have recently improved these familiar sites. San Antonio features significant exhibit convention space. The $218 million expansion and renovation to the Henry B. Gonzales Convention Center increased the building size to more than 1.3 million square feet. San Antonio s largest multipurpose facility, the 190,000 SF Alamodome, offers a combination of fixed, moveable and retractable seating that can accommodate up to 77,000 people. The Alamodome is used for sporting events, concerts, and conventions. The dome was originally built as the home to the NBA s San Antonio Spurs basketball team; however, they have since moved to the $190 million AT&T Center, which opened in 2002 and seats approximately 18,800 spectators. Military San Antonio s relatively large government sector can be traced mainly to the area s military job base, which was maintained during the defense cutbacks and base closures of the past decade. Some of San Antonio s military installations have gained personnel and funds because of other base closings across the country. Randolph Air Force Base, Fort Sam Houston, Lackland Air Force Base, and Brooks City- Base are all major military facilities in San Antonio. These bases employ approximately 45,969 active military and 27,030 civilian personnel, and have a combined payroll estimated at $4.0 billion with $2.95 billion spent locally. Kelly Air Force Base, however, became a casualty of the base closures experienced throughout the country in the mid-1990s. Butler Burgher Group, LLC Page F

156 SAN ANTONIO METROPOLITAN DATA Kelly Air Force Base closed in 2001and became KellyUSA Business Park. The complex, located at IH 10 and IH 35, consists of a 1,900-acre master planned aerospace industrial complex and international logistics platform and consists of 11.8 million SF of building space, which the U.S. Government leases. The tenant base is in the aviation, logistics, warehouse, distribution and manufacturing industries and includes Boeing, Lockheed Martin, Standard Aero, Pratt & Whitney, Gore Design Completions and two divisions of Chromalloy Gas Turbine Corporation and employs approximately 12,000 logistics personnel. Brooks AFB was scheduled for closure as well; however, this facility does critical biomedical research in technically sophisticated laboratories and due to the unique synergism that exists between Brooks and the San Antonio biomedical community, and because relocation costs and accreditation considerations posed major obstacles, Brooks AFB was spared from closure in Recently, Brooks AFB received approval to be the first city-based test site for the Armed Forces. Additionally, Brooks has signed a lease agreement with the Air Force Audit Agency to house a new directorate-level office; one of three in the nation. Despite the recommended closure of the Brooks City-Base, per the Defense Base Realignment and Closure Commission, the Brooks City-Base is expected to experience productivity similar to the redesignated Port San Antonio and create jobs for government employees and private citizens. Two major military hospitals are located in San Antonio: Wilford Hall Medical Center and Brooke Army Medical Center. Real Estate Markets Commercial Development Commercial and residential development activity reached record levels in the metropolitan area over the past six years because of the area s population and economic growth. Prior to the credit markets freezing, the city experienced a boom in commercial and retail construction due in part to the 1.8 million SF, $800 million Toyota plant constructed on the south side. The north and northwest sectors continue to be San Antonio s hottest areas for growth, but the far west side is positioned for progress as well. The east side has about 65% of the city s industrial space and thus is not particularly suitable for housing. According to experts, the south side will take time to attract more commercial and residential development, despite the boost from Toyota. However, the area is attracting numerous national retailers and has a steady employment base with Port San Antonio and Lackland AFB. Currently, the city s highest-profile project is a 1.2 million SF retail center called Shops at La Cantera, which is located at the northwest corner of Loop 1604 and IH 10. Within a mile of Loop 1604 and IH 10, the average household income is $285,364, the city s highest, according to REOC Partners. The next most affluent area is at Loop 1604 and Stone Oak Parkway (north San Antonio), which continues to be a favored region for development with an average household income of $102,331. But as Stone Oak continues to grow, developers have recently turned their attention west because growth on the north side is approaching its limit. The 28,000-acre Camp Bullis and the 4,000-acre Camp Stanley are federal Butler Burgher Group, LLC Page F

157 SAN ANTONIO METROPOLITAN DATA installations that cannot legally support any improvements and construction in the north is also severely restricted by environmental regulations because of the area s location over the Edwards Aquifer recharge zone. Off SH 151 at Westover Hills, there are approximately 23,000 white-collar jobs, said Ernest Brown of Grubb & Ellis, who expects commercial development in the west to continue to occur close to Loop 1604 and Loop 410. Residential Development The bulk of single-family growth in Bexar County has recently occurred in the Northwest, North Central and Northeast sectors of the City of San Antonio. Single-family permit activity in San Antonio from 1990 through 2009 is shown in the following table. San Antonio, TX Single-Family Building Permits Number of Dwelling Units Average Value per Dwelling Unit ($) Year Units Percent Change Value Percent Change ,684 4 $ 62, , $ 63, , $ 70, , $ 80, , $ 80, ,364 2 $ 78, ,901 8 $ 76, ,747-2 $ 77, , $ 85, ,678 2 $ 86, ,407-3 $ 93, ,138 9 $ 93, , $ 95, ,407 3 $ 137, , $ 142, , $ 150, ,142-6 $ 160, , $ 179, , $ 184, ,249-9 $ 188,400 2 Source: U.S. Bureau of Census & Real Estate Center, TAMU;* annualized Multifamily communities in the city have historically competed with single-family homes for residents due to low housing costs and low interest rates. However, development has continued in certain areas, especially the northern submarkets of the City of San Antonio due to the proximity of major employers like STMC. Due to major corporate moves and additional job creations, the multifamily market should continue healthy absorption rates experienced over the last several years. Such is especially true given foreclosures in the city and the resulting flight of homeowners to the rental pool. The following table summarizes multifamily building permits issued in the City of San Antonio since 1990: Butler Burgher Group, LLC Page F

158 SAN ANTONIO METROPOLITAN DATA San Antonio, TX 5 + Building Permits Number of Dwelling Units Average Value per Dwelling Unit ($) Year Units Percent Change Value Percent Change , $ 22, , $ 83, , $ 33, , $ 25, , $ 25, , $ 27, , $ 25, , $ 25, $ 26, , $ 31, , $ 38, , $ 40, , $ 39, , $ 60, , $ 62, , $ 77, , $ 81, , $ 99, , $ 74, $ 92, Source: U.S. Bureau of Census & Real Estate Center, TAMU;* annualized Transportation Intra-city transportation has been a consistent strength for San Antonio with major road arteries in the city configured in a hub and spoke design. Three interstate highways pass through the city (IH 10, IH 35 and IH 37) and converge to encircle the Central Business District (CBD). Two other highways, Loop 410 (52.9 miles) and Loop 1604 (94.3 miles), encircle the city at radii of approximately 7 and 12 miles from downtown, respectively, and provide extensive access to the perimeter areas of Bexar County. The CBD is approximately 30 minutes driving time from outer points of the county and approximately 15 minutes from the San Antonio International Airport. The Texas Department of Transportation currently has about 45 projects under construction in Bexar County totaling $422 million. The FAA designated San Antonio International Airport a medium-hub airport. The airport went through a major expansion in 1984 adding a new 395,000 SF terminal to the existing 210,000 SF terminal and increasing the number of passenger gates from 15 to 28. Fourteen scheduled airlines serve San Antonio: Aeromexico Connect, Aeromar, Airtran, American, ASA, Continental, Continental Express, Delta, Frontier, Mexicana, Skywest, Southwest, United, and US Air. The airport reported 8,358,515 passengers in 2008 (latest data available), with 260 daily arrival and departure flights. The San Antonio Airport System currently employs 400 people to support the 24-hour operation of both San Antonio International Airport and Stinson Municipal Airport (located in south San Antonio. Butler Burgher Group, LLC Page F

159 SAN ANTONIO METROPOLITAN DATA Other transportation options include: Stinson Airport: a general aviation airport for small commercial and private aircraft. Greyhound, Kerrville and Valley Transit bus lines. VIA Metropolitan Transit: the only transit system in the Southwest with the ability to serve an entire metro area. VIA Metropolitan Transit operates a fleet of 428 buses serving 99% of Bexar County. The Union Pacific Southern Pacific (UP-SP) railroad provides rail service to San Antonio for the U.S. coasts and cities along the U.S. Mexico border with two intermodal facilities. Amtrak trains provide passenger service for the San Antonio area. Education The San Antonio MSA has 19 independently administered, state-accredited public school districts. Daily attendance for all districts is approximately 237,000 students. The Northside ISD is the largest in the San Antonio-Bexar County metro area, and is the 6th largest school district in the state. The land area includes 355 square miles of urban landscape, suburban growth, and rural Texas Hill Country in the northwest quadrant of Bexar County. The District estimates a school year enrollment totaling 89,712 students. The North East ISD is the second largest district in the MSA located in the north central and northeast sectors of Bexar County, Texas. The majority of the district lies within the city of San Antonio, but the cities of Castle Hills, Hill Country Village, Hollywood Park, and Windcrest are also within the ISD boundaries. San Antonio ISD has the 3rd largest student population in the MSA. The University of Texas at San Antonio is the largest provider of secondary education in the city and has a main campus at 6900 N. Loop 1604 West, a downtown campus and a campus at 801 S. Bowie Street. The University enrolls more than 26,000 students annually in 107 undergraduate and graduate degree programs. Other higher education institutions in the city include: University of Texas at San Antonio Health Science Center; The Alamo Community College District (ACCD); National Autonomous University of Mexico; Our Lady of the Lake University (OLLU); St. Mary s University; Texas A&M University; Trinity University; University of the Incarnate Word; and Wayland Baptist University. Butler Burgher Group, LLC Page F

160 SAN ANTONIO METROPOLITAN DATA Conclusion Due to the enormous health care industry and sizable military dynamic, San Antonio s population and economy continue to grow, albeit at a moderate pace given the recent recession. More specifically, single-family building permits have managed to stay slightly above the national downward trend, revealing some buoyancy in the area s residential market. Furthermore, the growing highereducation base indicates that skilled labor should be in abundance for the foreseeable future. The city s significant tourist industry draws income from outside the region and provides further economic diversity and additional community benefits. With continued growth in the South Texas Medical Center and other area hospitals, Toyota s commitment to provide manufacturing jobs and Microsoft s commitment to the west side, the San Antonio area embodies a diverse work force corporate employers consider when searching for new locations. The current slowdown in housing has certainly affected San Antonio, but the new home market has steadily continued to absorb inventory and should be back to equilibrium by the end of 2011 at current rates. The economy as whole, although slowed by the national situation, remains relatively performance Butler Burgher Group, LLC Page F

161 ELDERLY HOUSING AND CARE INDUSTRY OVERVIEW The subject property being appraised is a 167-unit, assisted living and independent living rental community. This facility is located in the city of San Antonio, Bexar County, Texas. Therefore, an overview of the elderly housing industry was incorporated into our analysis of the subject property. The first part of this overview focuses on the elderly housing industry as a whole, while the second part focuses specifically on the subject market area. Data and demographic information provided by 2011 Claritas, Inc., and The National Investment Center for Seniors Housing & Care Industry (NIC) 1 st Quarter 2011 report has been incorporated into this analysis along with our market survey of facilities in the area. Introduction For many years, elderly housing meant a nursing facility, a board-and-care home, or a Florida resort village. Today, a definition for the term is becoming much harder to pin down. The elderly housing market is undergoing a dramatic evolution, characterized by new housing forms, a wide variety of services and rapid growth. Developers all over the country are being drawn to the elderly housing industry, expanding the concept as they design projects that address previously unmet needs. Once dominated by nonprofit groups, elderly housing now sparks interest in private developers and financial institutions. Some predict it will soon be as big an industry as housing for singles has been in the past. What is and has been attracting developers has been described as one of the biggest demographic discoveries of the century: The number of elderly in the United States is growing rapidly, at a rate twice as fast as that of the overall population. This means a solidly growing market for elderly housing through the year The number of people 65 and over is expected to double by that time, and in the same period it is projected that the number of those over 85 will quadruple. This new surge in the elderly population is breaking the stereotype of the elderly as poor, frail and dependent. Today s elderly remain active longer, strive for independence, and are often quite capable of paying for the living options they desire. Elderly Population And Demographics The increasing elderly population will have a positive impact on the demand for all types of retirement facilities including nursing home beds. That part of the population aged 75 and older, the primary users of nursing home type care, doubled from a 1985 population of 10 million to more than 20 million in The over-85 population will more than double to 5.1 million. In 1988, 12% of the U.S. population was over 65, a total of 30 million. By 2025, the percentage is expected to increase to more than 25%, or approximately 60 million people. The following table demonstrates that there will be a more dramatic increase in the elderly percentage population than in the general population as a whole. As indicated, the second fastest growing age group is the 65 years and older category. The fastest growing age group is the group, which reflects the maturation of the post Butler Burgher Group, LLC Page F

162 ELDERLY HOUSING AND CARE INDUSTRY OVERVIEW World War II baby boomers. As the baby boomers mature, further pressure on all forms of elderly housing will develop. Year U.S. POPULATION TRENDS FOR SELECTED YEARS AND ESTIMATES FOR 2000 (#S IN 000) Total Population 0-24 Years Years Years 65 Yrs. & Older ,235 62,914 45,219 30,701 12, ,979 80,271 46,794 36,176 16, ,810 93,753 48,100 41,985 19, ,156 93,815 63,377 44,523 25, ,955 92,177 80,119 61,094 34,834 % Chng. 1980/ % (1.8%) 26.4% 37.2% 35.7% Source: U.S. Bureau of Census All of the census and health industry data indicate a tremendous increase in the need for elderly health care over the next two decades. Whereas in 1990 only 4.1% of the population was 65 and older, more than 16% of the population is expected to be at least 65 years old in 2020, up from about 13% in The environment for construction of new beds continues to be difficult due to higher construction and capital costs as well as prohibitive regulations and governmental control. The United States Department of Health and Human Services has stated With the demand for nursing beds already outstripping supply two to one, it will take some $30 billion in new construction to meet the nursing care needs alone. A Standard and Poors industry survey estimated that The 75 and older population will double to 17.3 million by the year Barrons states that The 85 and older segment of the population is actually the fastest growing at four percent annually and a third of all people over 85 require nursing home care - so that the capacity that is out there is basically fully utilized now and the demand is growing very rapidly. Regardless of whose statistics one uses, every study of the market concludes that there is a tremendous need for elderly housing and long-term health care that will remain unsatisfied throughout the rest of this century. This new wave of housing development aims to provide residential and service options where, in the past, none have existed. Until recently, the lack of choices in the housing market forced the elderly to choose between the expense of resort retirement centers or the isolation of nursing homes. But many retirees, while no longer young and vigorous, are not yet ready for an old folks home. They want to remain as independent as possible, even though they may occasionally need a hand with housework, transportation, cooking or personal care. To meet these demands, new forms of elderly housing incorporate services previously associated only with hotels, hospitals or community senior centers. Facilities often offer meals, social activities, transportation, and linen and housekeeping services. They make available personal, intermediate or skilled nursing care, if needed, or contract with a nearby hospital to provide medical or emergency care. Butler Burgher Group, LLC Page F

163 ELDERLY HOUSING AND CARE INDUSTRY OVERVIEW As the capabilities of the elderly vary, so do the shelters and care systems offered them, resulting in the tremendous variety and combination of services offered today. Facilities range from the minimum of providing shelter, as in non-congregate senior apartments and single-family dwellings, to the maximum of care and service offered in intermediate and skilled nursing facilities. This emerging spectrum in elderly housing, stretching from independence to dependence, contrasts sharply with the large gap in options available to seniors in the past. The Housing Industry The housing industry for the elderly can be classified by the three major types of renters: the active elderly (go-gos), intermediate (slow-gos) and the person who needs constant care (no-gos). Active retirees want recreational amenities such as a golf course, tennis court, swimming pool, walking and bicycle path, saunas and spas. They want to be near good places to eat and to be able to enjoy a wide range of cultural activities and travel opportunities. Intermediate retirees typically seek a congregate-type lifestyle that allows them independence yet gives them the opportunity to participate in activities such as arts and crafts. Retirees in this intermediate classification also look for transportation to shopping, banking, or medical offices, some mild form of recreational activities such as swimming and golf, plus the opportunity to socialize in a common dining room or lounge areas. Retirees who need constant care are concerned with medical assistance. They look for facilities that offer services and conveniences that make their lives more comfortable. Also, they want a medical center in the event their health fails. The subject property should be targeted at the younger, healthy retirees seeking independence with the opportunity to socialize with their peers. From a real estate and financial perspective, housing for the elderly is complex to analyze as they usually represent a combination of other businesses. The major types of homes for the elderly include: Retirement Apartments Retirement Apartments are an option for the less wealthy, but still healthy retiree. Aside from an age restriction for residents, retirement apartments are essentially the same as standard apartments except for certain design features. Though these developments are non-congregate in that they do not offer common dining areas and other amenities, they can meet an elderly resident s social needs. Congregate/Independent Living Units Congregate or independent living units appeal to the senior who is less active and who has begun to view household upkeep as a burden. Although the age of congregate residents ranges from 65 to 85, the average age tends to be toward the higher end of that range. These facilities draw from the population of the recently widowed. Butler Burgher Group, LLC Page F

164 ELDERLY HOUSING AND CARE INDUSTRY OVERVIEW Congregate or independent living is characterized by its services. These include meal service (although residents generally have their own kitchens as well), housekeeping, and linen service, all of which are comparable to the amenities offered by resort hotels. Other services geared toward the specific needs of seniors include extensive recreational and social activities, transportation to shopping and cultural centers, security systems, and emergency call buttons. The number of units in a congregate/independent living facility ranges from 50 to 450. One and two-bedroom units seem to be the most popular. The facility is usually a single compact building, from 2 to 10 stories tall. The self-contained complex has common areas in the project core for dining and recreational activities. Internal recreation and social facilities include lounges, TV, game rooms, libraries, exercise rooms, chapels, and large social rooms. Outdoor recreational facilities are less common in congregate projects, and those provided are minimal compared with retirement communities. Food service is often the most crucial feature used in marketing a congregate/independent living facility. Developers often go all out to create an elegant, spacious dining area with a restaurant atmosphere. Most centers require that a resident eat at least one meal daily in the dining hall. To meet the health care needs of residents, some congregate facilities are affiliated with a nursing home or have an optional home care program. Some centers contract to provide an on-site, parttime nurse or are built on property located in close proximity to a nursing home or hospital. The facilities and features previously described are typical of the luxury or high-end development marketed to middle income and wealthy seniors. Despite this fact, a large number of nonprofit or low end congregate developments exist which were built with low interest government funding in the 1960 s and 1970 s. These facilities generally provide a smaller package of amenities in a less attractive environment. However, many low-end congregate developments are comparable in quality to those designed for the affluent elderly. Assisted Living Assisted living beds are designed for frail seniors who need assistance with activities of daily living (ADLs) but who do not require continuous skilled nursing care. These beds can also be located in a separate wing or floor of a congregate residence or in a free-standing assisted living building and typically have more stringent licensure requirements than congregate/independent units. Some exhibits categorize assisted living data according to the acuity level of residents. Acuity measures such things as health needs, cognitive deficiencies, and the need for ADL assistance. Low acuity assisted living residents have low-to-moderate acuity and few ADL deficiencies. High acuity assisted living residences have a preponderance of residents with higher acuity levels, multiple ADL deficiencies, and/or Alzheimer s disease or related dementia. Butler Burgher Group, LLC Page F

165 ELDERLY HOUSING AND CARE INDUSTRY OVERVIEW Skilled Nursing/Care Facilities For a large percentage of the elderly, the need for health care is acute. Among the elderly in the 80 to 85 year old bracket living on their own, health care is the dominant concern. To answer this need, a wide variety of care facilities have evolved. Skilled nursing facilities, intermediate nursing facilities, and board and care homes are more a form of health care than shelter, designed to aid the elderly who can no longer take care of themselves. These facilities provide less intensive care than that offered by a general acute-care hospital. Acute-care hospitals are now finding that many of the elderly in their care could live more inexpensively in convalescent homes. Continuing Care Retirement Communities (CCRCs) Continuing care retirement communities are properties that feature a combination of congregate/independent units, assisted living beds, and skilled nursing beds, as well as properties that combine congregate/independent units and skilled nursing beds. This type of facility is the most complex type of senior housing to build and manage. Providing health care on the premises requires state licensing and greatly complicates the financial management of the facility. However, the range of services and living styles offered by these projects can appeal to a wider market than other forms of senior housing. The continuum-of-care facility can be considered a blend of real estate and medical insurance. The basic premise of the original continuum-of-care- facility - the life care center - was to ease the worry of seniors who feared they would become sick in old age and would be unable to pay for treatment. Even today, half of all nursing home costs are paid for out-of-pocket, and 15% of health care costs come from a senior s personal finances. Insurance companies pay for only 1% of the costs at nursing homes. The continuum-of-care concept in for-profit ventures is taking a larger role in new developments and the newer facilities have varied fee and financing structures such as endowments, pay for service arrangements, or refundable memberships. They are usually referred to as continuing care retirement communities or CCRC s. The CCRC or life-care resident usually does not obtain a deed to the real property. The entry or endowment fee guarantees a resident the right of occupancy and certain guarantees of health care. Today, most CCRC s offer a refundable percentage (50% to 90%) plus, in some instances; a percentage of any appreciation in endowment levels. The typical model, aimed at upper-income seniors, houses 200 to 400 people and is laid out in a campus-type environment with a non-institutional appearance. Admittance to these continuum-ofcare facilities requires a legally binding contract, combined with a health requirement. The average age of new entrants is approximately 83 years. Butler Burgher Group, LLC Page F

166 ELDERLY HOUSING AND CARE INDUSTRY OVERVIEW These facilities offer the same types of services and amenities as congregate centers: a dining hall and meals, housekeeping, security, games and activity rooms, and social events. The extra ingredient is the provision of health care. As with congregate facilities, the range of quality and cost in CCRC s can vary widely from the older, minimum fee, church-related, nonprofit facility to the ultra-deluxe, for-profit, highly expensive facility. Most of the newly developed facilities have been targeted toward the affluent elderly. Community Size Based on information provided by The State of Seniors Housing (ASHA), CCRCs are considerably larger than congregate and assisted living residences, with a median of 327 units/beds, roughly twice the size of the median independent living community (156 units/beds) and over three times the size of the median assisted living residence (93 beds). Within assisted living residences, communities with only assisted living contain a median of 76 units, whereas Alzheimer s only residences have a median of only 65 units/beds per property. The largest assisted living residences contain both a mix of assisted living and Alzheimer s beds with a median of 114 units per community. The typical (i.e. median) CCRC contains approximately 237 independent living units, 35 assisted living beds, and 55 skilled nursing beds. The typical independent living community contains 130 independent units and 26 assisted living beds, while the typical assisted living residence has a median size of 93 units/beds. Market Area Definition Elderly retirement housing draws residents from primarily two targeted markets: 1) seniors desiring to live near adult children and grandchildren - these seniors may move across the country to live in a particular retirement center; and 2) seniors who have lived within a certain community for the past several years (or even decades) tend to seek out retirement housing within their own community, which is familiar to them (and is their home ) this target market area typically extends to a maximum of approximately 10 to 20 miles from the site, except in rural areas. This market area is even smaller because the elderly have a strong tendency to stay within their immediate community when first choosing to live in a senior development and prefer to remain within a reasonable driving distance from relatives and friends. However, a project is likely to have a smaller target market in a more densely populated area because of greater competition. Conversely, the more unique a facility or the more aggressive its marketing campaign, the greater likelihood that it will attract residents from outside a traditional primary market area. The overall character of the project s environment is perhaps more important than the definition of market area based strictly on distance. With most forms of elderly housing, approximately 70% of the total estimated demand will be drawn from the primary market area. This is supported by data accumulated in a study that is summarized as follows: Butler Burgher Group, LLC Page F

167 ELDERLY HOUSING AND CARE INDUSTRY OVERVIEW PERCENTAGE OF RESIDENTS WHO RELOCATED THE FOLLOWING DISTANCES TO MOVE INTO THE FACILITY: Independent Living Assisted Living Nursing Facility Total Mean Median Mean Median Mean Median Mean Median <5 miles 25% 11% 55% 61% 54% 58% 19% 3% 5 10 miles 21% 10% 15% 13% 18% 10% 19% 3% miles 11% 7% 8% 0% 13% 5% 15% 5% miles 10% 4% 8% 0% 9% 8% 18% 8% >25 miles 35% 30% 14% 9% 8% 4% 29% 20% Source: American Association of Homes and Services for the Aging (AAHSA) PERCENTAGE OF RESIDENTS WHO HAVE ADULT CHILDREN WHO LIVE WITHIN THE FOLLOWING DISTANCES OF THE FACILITY: Independent Living Assisted Living Nursing Facility Total Mean Median Mean Median Mean Median Mean Median <5 miles 23% 6% 31% 18% 32% 18% 12% 2% 5 10 miles 17% 10% 20% 14% 18% 8% 25% 23% miles 11% 10% 18% 10% 18% 10% 28% 16% miles 14% 4% 6% 0% 9% 5% 21% 11% >25 miles 36% 25% 24% 10% 20% 10% 19% 18% Source: American Association of Homes and Services for the Aging (AAHSA) Subject-Specific In our analysis of the senior housing market in the subject market area, we have surveyed several types of senior housing, from the most basic of senior apartments to the most full-service for mobile seniors, which is the independent living with meals/housekeeping/utilities included in monthly rate. Butler Burgher Group, LLC Page F

168 ELDERLY HOUSING AND CARE INDUSTRY OVERVIEW The following is a summary of those facilities throughout the San Antonio metro area which we found to be most competitive with the subject property. Please reference the Income Capitalization approach later in the report for more detailed information and a map of the rent comparables. COMPARABLE RENTAL SURVEY No. Avg Unit Average Rent No. Name YOC Units Size (SF) ($/SF) ($/mo.) Occup. 1 The Forum at Lincoln Heights $5.42 $3,951 86% 2 Waterford at Thousand Oaks $3.37 $2,521 WND 3 Independence Hill $5.38 $3,742 96% 4 Emeritus Lincoln Heights* $8.27 $2,915 90% 5 Emeritus Amber Oaks* $2.98 $1,956 97% 6 Emeritus Oakwell Farms* $4.61 $2,978 94% Minimum $2.98 $1,956 86% Maximum $8.27 $3,951 97% As indicated, these senior facilities feature occupancy rates of 89% to 92%. The properties range in year of construction from 1988 to Conclusion The overall prognosis and forecast for strong occupancy levels in the senior market is good due to the demographics and aging of the population. The trends in the increasing number of elderly persons in the subject market area are similar to those trends apparent nationwide. Most of the current senior facilities in the area are operating near capacity and demand is expected to increase in the foreseeable future. As stated previously, the subject development is a senior independent living and assisted living rental community in the San Antonio MSA. The subject is designed as a senior facility, with interior corridors, elevators, and senior-oriented amenities/services/activities offered. The subject caters to the needs of those seniors who want to live among others in their age range for purposes of socialization, activities, and to take advantage of the numerous amenities offered, but may not want to pay for three meals/day and housekeeping services as they are still very capable of taking care of these necessities themselves. Based upon this unique senior product-type, as well as the subject s excellent location in the Alamo Heights area of San Antonio, the subject is expected to continue to compete successfully in its market. Butler Burgher Group, LLC Page F

169 PRIMARY MARKET AREA ANALYSIS Introduction A market area is the defined geographic area in which the subject property competes for the attentions of market participants; the term broadly defines an area containing diverse land uses. Market areas are defined by a combination of factors including physical features the demographic and socioeconomic characteristics of the residents or tenants, the condition of the improvements, and land use trends. Market area analysis focuses on the identification of a market area s boundaries and the social, economic, governmental and environmental influences that affect the value of real property within those boundaries. In conducting market analysis, the competitive supply and demand for the subject property is more directly addressed. The purpose of a market area analysis is to provide a bridge between the study of general influences on all property values and the analysis of a particular subject. Market area boundaries are identified by determining the area in which the four forces that affect value (social, economic, governmental and environmental) operate in the same way they affect the subject property. Figure 2: Market Area Map Butler Burgher Group, LLC Page F

170 PRIMARY MARKET AREA ANALYSIS General Description The market area is located in the north-central portion of the city of San Antonio, approximately 5 miles north of the Central Business District (CBD), in the Alamo Heights area of the city. The general boundaries of the market area are defined as Interstate 35 to the south and east, Wurzbach Parkway to the north, and Highway 281 to the west. These boundaries have been defined as such because the properties within them tend to exhibit similar characteristics insofar as land use, physical features, price and desirability, and they are affected by similar physical, economic, governmental, and social forces. Access/Transportation The market area has good accessibility given the presence of I-35, I-410, SH 281, and other thoroughfares and highways. Additional north/south access is provided via Broadway Street, North New Braunfels Avenue, Nacogdoches Road, North Vandiver Road, Harry Wurzbach, Holbrook Road and Kingston Drive. Worth note, Austin highway (SR 368) bisects the market area in a northeast/southwest direction just south of I-410. East/west access is provided via Wurzbach Parkway, Rockhill Drive, Eisenhauer Road and Rittiman Road Public Services/Utility Providers The market area is adequately serviced by public utilities. The following summarizes the utilities and services in the market area. UTILITIES/SERVICES Electricity City Public Service (CPS) Water/Wastewater San Antonio Water Supply (SAWS) Gas City Public Service (CPS) Telephone At&t and others Police/Fire City of San Antonio and Bexar County Utility capacity is adequate and costs are similar to surrounding areas. Private vehicular transportation is the main method of transportation, but VIA Metropolitan Transit provides public bus transportation in the area, with numerous bus stops along the Loop 410 access road and other stops within the market area. The majority of the market area is served by San Antonio s North East ISD, while a portion is served by Alamo Heights ISD. North East ISD serves the north central and northeast areas of Bexar County, covering approximately 144 square miles. North East ISD serves the cities of San Antonio, Castle Hills, Hill Country Village, Hollywood Park, Windcrest, and portions of Balcones Heights and Terrell Hills. In 2009, the school district was rated "recognized" by the Texas Education Agen- Butler Burgher Group, LLC Page F

171 PRIMARY MARKET AREA ANALYSIS cy. The ISD features 7 high schools and the Academy of Creative Education, 13 middle schools and 42 elementary schools. The Alamo Heights ISD covers 9.4 square miles and serves students from the communities of Alamo Heights, Terrell Hills, Olmos Park and a portion of north San Antonio. The district features one pre-school, 2 elementary schools, 1 middle school and 1 high school. The market area does not host any higher education facilities. However, the greater San Antonio area features numerous well-respected institutions of higher learning. Chief among these is The University of Texas at San Antonio, which is located approximately ten miles to the northwest of the market area. San Antonio College, Trinity University and University of the Incarnate Word are located less than one mile to the south of the subject and are easily accessible. Other higher education institutions in San Antonio include Palo Alto College and Northwest Vista College, St. Philip's College and St. Mary s University. Healthcare within the market area is provided primarily by local clinics. However, numerous hospitals, including Christus Rosa Medical Center and Audie L. Murphy Memorial Hospital, are located approximately five miles to the west of the market area in the medical center district. In addition to these public health care facilities, San Antonio is home to San Antonio Military Medical Center the premier military hospital complex located at Brooke Army Medical Center (BAMC) at Fort Sam Houston, Texas and Wilford Hall Medical Center (WHMC) at Lackland Air Force Base. Education The San Antonio Independent School District (ISD) serves the majority of the market area. Higher education in the market area is available from UTSA and San Antonio College. UTSA is one of the fastest-growing universities in the state, as evidenced by its increasing enrollment, the vast expansion of campus buildings and land acquisitions. With 28,413 students, UTSA is the second-largest university in the University of Texas System and sixth-largest public university in Texas. UTSA is known for its diverse population, an aspect that draws many students to the university. UTSA offers 62 bachelors, 43 masters and 19 doctoral degree programs. With eight new doctoral programs and seven more master's programs in the planning stages, UTSA is rapidly moving toward classification as a doctoral/research intensive institution. UTSA has been recognized at both the regional and the national level for excellence in several of its undergraduate programs. With the recent completion of the $83.7 million 227,000-square-foot Biotechnology, Sciences and Engineering Building, UTSA has become one of the largest research-related educational centers in Texas. Governmental Forces A majority of the market area is within the city of San Antonio and, as such, this municipality has had a significant impact on development and re-development in the area as a result of its subdivision Butler Burgher Group, LLC Page F

172 PRIMARY MARKET AREA ANALYSIS and zoning ordinances. The sector that isn t part of San Antonio involves the suburban cities of Leon Valley and Castle Hills, which maintain their own zoning ordinances, which mirror those of the city of San Antonio. Fire and police protection are provided by the cities of San Antonio and Castle Hills, as well as Bexar County. Land Use The market area is a mixture of uses; however, it is most aptly defined as being commercial and residential in nature. A significant amount of single-family developments exist to the north, east, south and southwest of the subject. As mentioned, San Antonio International Airport is located just a few blocks northwest of the subject where a large amount of the commercial and industrial developments are located. The market area is approximately 85% developed with the following uses: MARKET AREA COMPOSITION Single-family 45% Multifamily 10% Retail 10% Office 13% Industrial 7% Public/Vacant 15% Land use patterns follow traditional development trends. The more intense commercial and retail uses are along major carriers and at major intersections such as I-410, I-35 and SH 281. Significant office developments exist near the subject on Broadway Street north and south of I-410 by the airport. Vacant land remains southeast of the subject; however, a majority of this vacant land is defined as public parks. Many public parks are located within the market area including: Douglas MacArthur Park, Northwood Park, Haskin Park, Scates Park, Salado Creek Greenway, Robert Tobin Park, and Ladybird Johnson Park. Worth note, Northeast Baptist Hospital is located 1.8 miles east of the subject on I-410. Employment The major employer in the market area, as well as the second largest private employer in San Antonio, is United Services Automobile Association (USAA), which employs approximately 15,000 people and is growing rapidly. It is currently the fifth largest insurer of private automobiles in the country and the fourth largest homeowner insurer. USAA s headquarters currently total 3.2 million square feet. The USAA Campus is located between Fredericksburg Road and IH 10, south of Huebner Road. Other major professional employers located in or just north of the market area include STMC, The University of Texas at San Antonio (UTSA), Northside ISD, Digital, New York Life, Cigna, Nationwide Insurance, Bank One and Prudential Securities. In addition, Valero Energy Corporation, Butler Burgher Group, LLC Page F

173 PRIMARY MARKET AREA ANALYSIS one of the largest public companies in San Antonio, is located on 148 acres near the southwest corner of IH 10 and Loop Employment is expected to mirror the San Antonio MSA. Unemployment will rise slightly over the short term, and return to pre recession levels following a recovery. This is due to the strong military and health care industries located in the city. Butler Burgher Group, LLC Page F

174 PRIMARY MARKET AREA ANALYSIS Demographic Data Population characteristics and income levels were obtained from Claritas, Inc. for 1, 3 and 5-mile radii around the subject s location. A summary of the information is presented in the table below with complete demographic data included in the Exhibits section of this report for your review. DEMOGRAPHIC SUMMARY Description Totals Population 2016 Projection 667, Estimate 590, Census 484, Census 308, Prepared On: Households 2011 Est Pop Age 25+ by Edu. Attain, Hisp. or Lat 272,433 Less than 9th grade 238,571 Some High School, no diploma 192,480 High School Graduate (or GED) 120, Est. Households by Presence of People Households with 1 or more People under Age 18: 2.89% Married-Couple Family 3.48% Other Family, Male Householder 4.86% Other Family, Female Householder 9.13% Nonfamily, Male Householder 16.81% Nonfamily, Female Householder 17.49% 23.60% Households no People under Age 18: 14.81% Married-Couple Family 4.60% Other Family, Male Householder 2.34% Nonfamily Households $98, Est. Group Quarters Population $73, HHs by Ethnicity, Hispanic/Latino $39,788 Description 2011 Est. Pop 16+ by Occupation Classification Blue Collar $197,588 Source: 2010 Claritas, Inc. Butler Burgher Group, LLC Page F

175 PRIMARY MARKET AREA ANALYSIS Claritas Summary According to Claritas, Inc., the subject area had a total 2000 population of 484,028 and an estimated 2011 population of 590,779 which is an increase of just over 22%. Life Stage & Trends The market area is considered to be above average. Its reputation as a desirable place to reside is evident from continued high occupancy levels and little developable land. Most commercial improvements in the area are in average to good condition, and the overall appearance of the market area is average. As mentioned, a majority of commercial improvements are located north and south of I-410 as well as near I-35 and SH 281. The market area has a good reputation with respect to most types of real estate. The area has experienced slower growth over the past couple of years which has been attributable to the lack of developable public land. The economy in San Antonio has subsequently slowed, but this market area is considered somewhat insulated from such given its central location. Nevertheless, it appears that it will remain stable for the short term. Conclusion The San Antonio economy has displayed veritable resilience despite the drastic national economic downturn. Although growth is projected to moderate in the coming months, the market area benefits from its accessibility, visibility and good locational characteristics, and is considered to be poised for additional growth as economic conditions continue to improve. The long term outlook for this area is one of measured growth and it is anticipated to continue to improve as the overall San Antonio economy benefits from job growth. Butler Burgher Group, LLC Page F

176 SITE ANALYSIS Description/Location: The site is located on the east side of Post Oak Lane, just north of I-410 in San Antonio, Bexar County, Texas. The following tax plat and illustrates the site configuration: Figure 2: Tax Plat Size: Frontage: Shape: Access/Visibility: acres (510,523 SF) The site has frontage along the east side of Post Oak Lane Irregular Loop 410 is a primary traffic carrier in the subject s market area, linking I-35 to Highway 281. Access to the site from Post Oak Lane is provided via two curb cuts off its east line. Post Oak Lane two, asphalt-paved lanes. Improvements in the right-of-way include a sidewalk along the east line. Access to Post Oak Lane is provided by Loop 410. As mentioned previously the portion of Loop 410 and the corresponding exit are currently under construction by the city. This causes access to the site to be difficult. According to the Butler Burgher Group, LLC Page F

177 SITE ANALYSIS officials at the city and TXDOT the construction will be completed in the Spring of Overall, access to the site from Post Oak Lane is average, while visibility from this arterial is good given the primary nature of the roadway. Topography/Drainage: Flood Plain: The site is gently sloping towards the east and slightly above grade with Post Oak Lane. Surface drainage appears adequate and is facilitated by the natural topography and drainage easements. There are no detrimental impacts known that result from topography or drainage. According to the Federal Emergency Management Agency s Flood Insurance Rate Map, the site falls in Unshaded Zone X and Zone AE. Zone AE is located within a 100-year flood plain. (FEMA FIRM Panel 48029C0270G, dated September 29, 2010). Zone AE are areas that have a 1% probability of flooding every year (also known as the "100-year floodplain"), and where predicted flood water elevations above mean sea level have been established. Properties in Zone AE are considered to be at high risk of flooding under the National Flood Insurance Program (NFIP). Flood insurance is required for all properties in Zone AE that have federally-backed mortgages. Construction in these areas must meet local floodplain zoning ordinance requirements, including evidence that principle structures are above the Base Flood Elevation (BFE) as shown on the adopted FIRM maps Butler Burgher Group, LLC Page F

178 SITE ANALYSIS Figure 4: Flood Plain Map Butler Burgher Group, LLC Page F

179 SITE ANALYSIS Soil/Subsoil Conditions: Manmade Improvements: Environmental Hazards: Development Restrictions: Zoning/Parking: A geotechnical analysis describing the soil and subsoil conditions at the site was not furnished Butler Burgher Group, LLC. No soil conditions were observed by the appraisers that were construed as detrimental. The appraisers assume there are no hidden or unapparent soil conditions that would render the site more or less valuable. The site is improved with an existing Independent Living and Assisted Living facility and attendant site improvements. An environmental study was not provided Butler Burgher Group, LLC. The appraisers assume that there are no hazardous conditions that would render the site less valuable. Per the title commitment, the property is subject to building setbacks and utility easements. However, based on our physical inspection of the property, the site does not appear to be detrimentally impacted by said easements. Furthermore, we are unaware of any deed restrictions that might restrict and/or preclude development and/or use of the site. Please note the property is subject to numerous vendor liens that we assume have been remedied prior to sale. The subject is zoned C-2, by the city of San Antonio. Requirements are set forth in the following table Zoning Analyis C-2 Minimum Lot Size None Minimum Frontage 50 Minimum Lot Width 50 Maximum Lot Width None Maximum Building Height 25 Minimum Front Setback 0 Maximum Front Setback 35 Minimum Side Setback 10 Minimum Rear Setback 30 Maximum Building Size (Individual) None Maximum Building Size (Aggregate) None Minimum Parking Requirements 1 space per unit. The existing improvements present a permitted use under the C-2 zoning district. However, the parking ratio falls short of compliance with current municipal parking regulations for multifamily develop- Butler Burgher Group, LLC Page F

180 SITE ANALYSIS ments (1spaces per unit = requirement of 167 spaces whereas only 145 spaces are provided), but is considered adequate to meet the parking needs of the subject. Therefore, the existing improvements represent a legal, non-conforming use under San Antonio s current Unified Development Code. SUBJECT Figure 5: Zoning Map Public Utilities/Services: The subject is served by the following public utilities. UTILITY/SERVICE PROVIDERS Water/Sewer Electricity Telephone Gas Police/Fire Service Schools San Antonio Water System (SAWS) City Public Service (CPS) at&t City Public Service (CPS) City of San Antonio and Bexar County Northeast Side Independent School District Butler Burgher Group, LLC Page F

181 SITE ANALYSIS Surrounding Land Uses: The specific land uses adjoining the site include the following: ADJOINING LAND USES North South East West Retail strip center and gas station. Byrnes Drive followed by multifamily. Merrie Lane Drive followed by single family residential. Harry Wurzbach followed by commerical improvements. Figure 6: Aerial Map Summary The site is typical of tracts within the market area. Access and visibility are adequate for development. The property is gently sloping towards the east. A creek borders the property on this side. This does not inhibit overall development, but only the area outside the floodplain could be developed. According to the plat, it appears a portion of the parcel is located in the flood plain. However, the subject s current us as an Independent Living Facility allows the residents to utilize the area along the creek for walking trails and other outdoor recreation. Butler Burgher Group, LLC Page F