$28,810,000 CITY OF ORANGE COMMUNITY FACILITIES DISTRICT NO (SERRANO HEIGHTS PUBLIC IMPROVEMENTS) 2013 SPECIAL TAX REFUNDING BONDS

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1 NEW ISSUE BOOK ENTRY ONLY RATING: S&P: A See CONCLUDING INFORMATION Rating. In the opinion of Quint & Thimmig LLP, San Francisco, California, Bond Counsel, subject however to certain qualifications described in this Official Statement, under existing law, interest on the 2013 Bonds is excludable from gross income of the owners thereof for federal income tax purposes and is not included as an item of tax preference in computing the federal alternative minimum tax for individuals and corporations under the Internal Revenue Code of 1986, as amended, but such interest is taken into account in computing an adjustment used in determining the federal alternative minimum tax for certain corporations. In the further opinion of Bond Counsel, interest on the 2013 Bonds is exempt from personal income taxation imposed by the State of California. See CONCLUDING INFORMATION Tax Matters. $28,810,000 CITY OF ORANGE COMMUNITY FACILITIES DISTRICT NO (SERRANO HEIGHTS PUBLIC IMPROVEMENTS) 2013 SPECIAL TAX REFUNDING BONDS Dated: Date of Issuance Due: October 1, as shown on inside cover For and on behalf of the City of Orange Community Facilities District No (Serrano Heights Public Improvements) (the District ), the City of Orange, California (the City ) will issue the City of Orange Community Facilities District No (Serrano Heights Public Improvements) 2013 Special Tax Refunding Bonds (the 2013 Bonds ). The 2013 Bonds will be issued under a Fiscal Agent Agreement, dated as of March 1, 2013 (the Fiscal Agent Agreement ), by and between the City, for and on behalf of the District, and U.S. Bank National Association, as fiscal agent (the Fiscal Agent ). Proceeds of the 2013 Bonds will be used to refund all of the outstanding City of Orange Community Facilities District No (Serrano Heights Public Improvements) Special Tax Refunding Bonds, Series 2004A, and City of Orange Community Facilities District No (Serrano Heights Public Improvements) Special Tax Bonds, Series 2004B (together, the 2004 Bonds ), and (ii) pay costs of issuance relating to the 2013 Bonds. Pursuant to the Fiscal Agent Agreement, the 2013 Bonds will be payable from and secured by a pledge of Special Tax Revenues (consisting primarily of special taxes levied on certain properties in the District according to the rate and method of apportionment of special tax approved by the qualified voters in the District). The Fiscal Agent will establish and maintain a Reserve Fund under the Fiscal Agent Agreement. Upon issuance of the 2013 Bonds, a portion of the moneys on deposit in the reserve fund relating to the 2004 Bonds, in an amount equal to the initial Reserve Requirement (as defined in the Fiscal Agent Agreement), will be transferred to the Reserve Fund. The 2013 Bonds will be issued in fully registered form and, when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ). DTC will act as securities depository of the 2013 Bonds. Individual purchases of the 2013 Bonds may be made in book-entry form only, in denominations of $5,000 each or any integral multiple thereof. Purchasers will not receive certificates representing their interest in the 2013 Bonds purchased. Principal of and interest on the 2013 Bonds will be paid directly to DTC by the Fiscal Agent. Principal of the 2013 Bonds is payable on the dates set forth on the inside cover hereof. Interest on the 2013 Bonds is payable on April 1 and October 1 of each year, commencing October 1, Upon its receipt of payments of principal and interest, DTC is in turn obligated to remit such principal and interest to DTC participants for subsequent disbursement to the beneficial owners of the 2013 Bonds. The 2013 Bonds are subject to optional redemption and redemption from Special Tax Prepayments prior to their maturity as described in this Official Statement.* THE 2013 BONDS ARE SPECIAL, LIMITED OBLIGATIONS OF THE CITY FOR THE DISTRICT, PAYABLE SOLELY FROM SPECIAL TAX REVENUES AND MONEYS IN CERTAIN FUNDS PLEDGED THEREFOR UNDER THE FISCAL AGENT AGREEMENT. NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE CITY (EXCEPT TO THE LIMITED EXTENT SET FORTH IN THE FISCAL AGREEMENT WITH RESPECT TO THE LEVY OF SPECIAL TAXES WITHIN THE DISTRICT), THE STATE OF CALIFORNIA, OR ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE 2013 BONDS. See the section of this Official Statement entitled BONDOWNERS RISKS for a discussion of certain of the risk factors that should be considered, in addition to other matters set forth herein, in evaluating the investment quality of the 2013 Bonds. This cover page contains information for general reference only. It is not a summary of this issue. Potential purchasers must read this entire Official Statement to obtain information essential to making an informed investment decision. The 2013 Bonds are offered when, as and if issued, subject to the approval as to their legality by Quint & Thimmig LLP, San Francisco, California, as Bond Counsel to the City, and certain other conditions. Certain matters with respect to this Official Statement will be passed on for the City by Richards, Watson & Gershon, A Professional Corporation, Los Angeles, California, as Disclosure Counsel. Certain other legal matters related to the 2013 Bonds will be considered on behalf of the City and the District by the City Attorney. Certain legal matters related to the 2013 Bonds will be passed on for the Underwriter by Nossaman LLP, Irvine, California, Underwriter s Counsel. It is anticipated that the 2013 Bonds will be available for delivery in book-entry form through the facilities of DTC on or about March 20, The date of this Official Statement is February 26, 2013.

2 Maturity Date (October 1) $28,810,000 CITY OF ORANGE COMMUNITY FACILITIES DISTRICT NO (SERRANO HEIGHTS PUBLIC IMPROVEMENTS) 2013 SPECIAL TAX REFUNDING BONDS MATURITY SCHEDULE Principal Amount Interest Rate Yield Price 2013 $ 290, % 0.450% DZ , EA , EB , EC ,075, ED ,160, EE ,265, EF ,370, EG ,485, EH ,595, EJ ,705, (c) EK ,845, (c) EL ,985, (c) EM ,135, (c) EN ,300, (c) EP ,465, (c) EQ ,645, ER ,795, ES7 CUSIP (Base: ) (c) Priced to call on October 1, CUSIP is a registered trademark of the American Bankers Association. Copyright American Bankers Association. All rights reserved. CUSIP data herein is provided by CUSIP Global Services, managed by S&P Capital IQ 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 CUSIP Global Services. CUSIP numbers are provided for convenience of reference only. Neither the City nor the Underwriter takes any responsibility for the accuracy of such numbers.

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4 CITY OF ORANGE Community Facilities District No (Serrano Heights Public Improvements) Anaheim Hills Golf Course Serrano Park Santiago Oaks Regional Park Note: District boundaries are approximate

5 CITY OF ORANGE COMMUNITY FACILITIES DISTRICT NO (SERRANO HEIGHTS PUBLIC IMPROVEMENTS) CITY OF ORANGE City Council Teresa Tita Smith, Mayor Mark A. Murphy Mayor Pro Tem Denis Bilodeau, Councilmember Mike Alvarez, Councilmember Fred Whitaker, Councilmember City Officials and Staff John W. Sibley, City Manager Helen Walker, City Treasurer Richard Jacobs, Finance Director Wayne W. Winthers, City Attorney Mary E. Murphy, City Clerk PROFESSIONAL SERVICES Financial Advisor Fieldman Rolapp & Associates Irvine, California District Administrator/Dissemination Agent Willdan Financial Services Temecula, California Bond Counsel Quint & Thimmig LLP San Francisco, California Disclosure Counsel Richards, Watson & Gershon, A Professional Corporation Los Angeles, California Fiscal Agent and Escrow Bank U.S. Bank National Association Los Angeles, California

6 GENERAL INFORMATION ABOUT THIS OFFICIAL STATEMENT Use of Official Statement. This Official Statement is submitted in connection with the offer and sale of the 2013 Bonds and may not be reproduced or used, in whole or in part, for any other purpose. This Official Statement is not to be construed as a contract with the purchasers of the 2013 Bonds. Estimates and Forecasts. Certain statements included or incorporated by reference in this Official Statement and in any continuing disclosure by the City, any press release and in any oral statement made with the approval of an authorized officer of the City or any other entity described or referenced in this Official Statement, constitute forward-looking statements. Such statements are generally identifiable by the terminology used such as plan, expect, anticipate, estimate, budget, or other similar words. The achievement of certain results or other expectations contained in such forward-looking statements involves known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. While the City has undertaken to provide certain on-going financial and other data pursuant to a Continuing Disclosure Certificate (see CONCLUDING INFORMATION Continuing Disclosure and Appendix C), the City does not plan to issue any updates or revisions to those forward-looking statements if or when their expectations or events, conditions or circumstances on which such statements are based change. Preparation of this Official Statement. The information contained in this Official Statement has been obtained from sources that are believed to be reliable, but is not guaranteed as to accuracy or completeness. Stifel, Nicolaus & Company, Incorporated, dba Stone & Youngberg, a Division of Stifel Nicolaus (the Underwriter ), has provided the following sentence for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. Limit of Offering. No dealer, broker, salesperson or other person has been authorized by the City to give any information or to make any representations in connection with the offer or sale of the 2013 Bonds other than those contained in this Official Statement and if given or made, such other information or representation must not be relied upon as having been authorized by the City or the Underwriter. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the 2013 Bonds by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale. Information as of Dated Date of Official Statement. The information and expressions of opinions in this Official Statement are subject to change without notice and neither delivery of this Official Statement nor any sale made of the 2013 Bonds shall, under any circumstances, create any implication that there has been no change in the affairs of the District, the City or any other entity described or referenced in this Official Statement since the dated date shown on the front cover. All summaries of the documents referred to in this Official Statement are made subject to the provisions of such documents, respectively, and do not purport to be complete statements of any or all of such provisions. Stabilization of Prices. In connection with this offering, the Underwriter may overallot or effect transactions which stabilize or maintain the market price of the 2013 Bonds at a level above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. The Underwriter may offer and sell the 2013 Bonds to certain dealers and others at prices lower than the public offering prices set forth on the inside front cover and said public offering prices may be changed from time to time by the Underwriter. THE 2013 BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON AN EXCEPTION FROM THE REGISTRATION REQUIREMENTS CONTAINED IN SUCH ACT. THE 2013 BONDS HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES LAW OF ANY STATE.

7 TABLE OF CONTENTS INTRODUCTION... 1 General... 1 The City... 2 The District... 2 Security for the 2013 Bonds... 3 Professionals Involved in the Offering... 3 Continuing Disclosure... 4 Other Information... 4 PLAN OF REFUNDING... 5 Refunding of Prior Bonds... 5 Sources and Uses of Funds... 6 THE 2013 BONDS... 6 General... 6 Redemption... 7 Book-Entry Only System... 8 SECURITY FOR THE 2013 BONDS General Application of Special Tax Revenues Bond Fund; Special Tax Prepayments Account Reserve Fund Collection of Special Tax Rate and Method Covenant to Foreclose Issuance of Parity Bonds for Refunding Purposes ESTIMATED DEBT SERVICE COVERAGE THE DISTRICT General Assessed Valuation Direct and Overlapping Debt; Effective Tax Rate Value to Special Tax Burden and Bond Debt Burden Ratios Special Tax Levy and Delinquency History BONDOWNERS RISKS Levy and Collection of Special Tax Limited Obligations with Respect to the 2013 Bonds Special Tax Payments Not Personal Obligations of Property Owners Risks of Real Estate Secured Investments Generally; Land Values Cumulative Burden of Parity Liens, Taxes and Special Assessments Depletion of Reserve Fund Bankruptcy Limiting Remedies of Bond Owners Interest of Federal Agencies or Government Sponsored Enterprises in Properties Exempt Property Natural or Manmade Disasters Hazardous Substances Disclosure to Future Purchasers Proposition 218 and Other Voter Initiatives Limitations on Remedies; No Acceleration Investment of Funds... 33

8 Loss of Tax Exemption Secondary Market CONCLUDING INFORMATION Absence of Litigation Continuing Disclosure Legal Matters Tax Matters Underwriting Rating Miscellaneous APPENDIX A GENERAL INFORMATION REGARDING THE CITY OF ORANGE APPENDIX B RATE AND METHOD OF APPORTIONMENT OF SPECIAL TAX APPENDIX C FORM OF CONTINUING DISCLOSURE CERTIFICATE APPENDIX D SUMMARY OF CERTAIN PROVISIONS OF THE FISCAL AGENT AGREEMENT APPENDIX E FORM OF BOND COUNSEL OPINION APPENDIX F DTC S BOOK-ENTRY ONLY SYSTEM

9 $28,810,000 CITY OF ORANGE COMMUNITY FACILITIES DISTRICT NO (SERRANO HEIGHTS PUBLIC IMPROVEMENTS) 2013 SPECIAL TAX REFUNDING BONDS INTRODUCTION This introduction is not a summary of this Official Statement and is only a brief description of, and is qualified by, more complete and detailed information contained in the entire Official Statement and the documents summarized or described in this Official Statement. Potential purchasers of the 2013 Bonds should make a full review of the entire Official Statement. Capitalized terms used but not defined herein have the meanings set forth in the Fiscal Agent Agreement, or if not in the Fiscal Agent Agreement, the Rate and Method (each as defined below). See APPENDIX B RATE AND METHOD OF APPORTIONMENT OF SPECIAL TAX and APPENDIX D SUMMARY OF CERTAIN PROVISIONS OF THE FISCAL AGENT AGREEMENT. General This Official Statement, including the cover page, the inside front cover and appendices to this Official Statement, is provided to furnish information in connection with the sale by the City of Orange, California (the City ), for and on behalf of the City of Orange Community Facilities District No (Serrano Heights Public Improvements) (the District ) of $28,810,000 aggregate principal amount City of Orange Community Facilities District No (Serrano Heights Public Improvements) 2013 Special Tax Refunding Bonds (the 2013 Bonds ). The 2013 Bonds are being issued pursuant to (a) the Mello- Roos Community Facilities Act of 1982, as amended, set forth in California Government Code Section et seq. (the Mello-Roos Act ), (b) the provisions set forth in California Government Code Section et seq. regarding refunding bonds, (c) Resolution No , adopted on February 12, 2013, by the City Council of the City (the City Council ), as the legislative body of the District, and (d) a Fiscal Agent Agreement, dated as of March 1, 2013 (the Fiscal Agent Agreement ), by and between the City for and on behalf of the District and U.S. Bank National Association, as fiscal agent (the Fiscal Agent ). Proceeds of the 2013 Bonds will be used to refund all of the remaining outstanding City of Orange Community Facilities District No (Serrano Heights Public Improvements) Special Tax Refunding Bonds, Series 2004A (the 2004A Bonds ) and City of Orange Community Facilities District No (Serrano Heights Public Improvements) Special Tax Bonds, Series 2004B (the 2004B Bonds, and together with the 2004A Bonds, the 2004 Bonds ), and (ii) pay costs of issuance relating to the 2013 Bonds. The Fiscal Agent will establish and maintain a Reserve Fund under the Fiscal Agent Agreement. Upon issuance of the 2013 Bonds, a portion of the moneys on deposit in the reserve fund relating to the 2004 Bonds, in an amount equal to the initial Reserve Requirement, will be transferred to the Reserve Fund. The 2013 Bonds are payable solely from and are secured by a pledge of Special Tax Revenues and moneys in certain funds held under the Fiscal Agreement. Special Tax Revenues consist primarily of special taxes levied on certain properties in the District and collected by the City on behalf of the District. The Fiscal Agent Agreement provides that the City may, in the future, issue additional bonds ( Parity Bonds, and together with the 2013 Bonds, the Bonds ) secured on a parity with the 2013 Bonds solely for the purpose of refunding all or a portion of the then Outstanding Bonds. See SECURITY FOR THE 2013 BONDS. Interest on the 2013 Bonds is payable on April 1 and October 1 of each year, commencing October 1, The 2013 Bonds will mature in the amounts and on the dates and bear interest at rates

10 shown on the inside cover of this Official Statement. The 2013 Bonds will be subject to optional redemption and redemption from Special Tax Prepayments prior to maturity. See THE 2013 BONDS. The 2013 Bonds, when issued and delivered, will be registered in the name of Cede & Co., as nominee of the Depository Trust Company, New York, New York ( DTC ). DTC will act as the depository for the 2013 Bonds and all payments due on the 2013 Bonds will be made to Cede & Co. Ownership interests in the 2013 Bonds may be purchased only in book-entry form. So long as the 2013 Bonds are registered in the name of Cede & Co., or any other nominee of DTC, references in this Official Statement to the registered owners, or just Owners, of the 2013 Bonds shall mean Cede & Co. or such other nominee of DTC, and shall not mean the beneficial owners of the 2013 Bonds. See THE 2013 BONDS Book-Entry Only System and APPENDIX F DTC S BOOK-ENTRY ONLY SYSTEM. The City The City is located in the north-central portion of Orange County (the County ), California, approximately 32 miles southeast of Los Angeles and 94 miles north of San Diego. Incorporated on April 6, 1888 as a general law city, the City currently functions under a Council/Manager form of government. A five member City Council, including the Mayor, is elected at large. According to State of California Department of Finance estimates, the City has a population of approximately 138,010 as of January 1, APPENDIX A GENERAL INFORMATION REGARDING THE CITY OF ORANGE for more information about the City. The District The District is comprised of approximately acres in the northeastern portion of the City, adjacent to the City of Anaheim, east of Serrano Avenue and north of Santiago Oaks Regional Park. The District is located within a residential community known as Serrano Heights. Pursuant to the Mello- Roos Act, the City Council serves as the legislative body of the District. The District was established in late On November 12, 1991, the City Council adopted Resolution No. 7898, declaring its intention to form the District. After conducting a public hearing and other proceedings pursuant to the Mello-Roos Act, the City Council adopted Resolution No on December 17, 1991, establishing the District and authorizing the levy of special taxes according to a rate and method of apportionment of special tax. In a special mailed-in ballot election, the results of which were certified on December 17, 1991, the then qualified landowner electors of the District voted to authorize the City to levy special taxes in the District and, for and on behalf of the District, incur up to a certain amount of bonded indebtedness to finance public improvements of benefit to the District. The land within the District remained largely undeveloped for many years after the District s formation. Between 1991 and 2000, the City Council conducted several change proceedings at the request of the District s landowners. On February 22, 2000, the City Council adopted Resolution No. 9219, calling a special election of the then qualified landowner electors of the District to consider, among other things, a revised rate and method of apportionment of special tax (the Rate and Method ) and a revised bond authorization which would permit the City to incur up to $37,000,000 principal amount of bonded indebtedness for and on behalf of the District to finance public improvements (the Bond Authorization ). The results of the special election were certified on February 22, The Rate and Method and the Bond Authorization were approved by more than two-thirds of the then qualified landowner electors. The Rate and Method and the Bond Authorization have not been amended since the February 2000 election and remain in effect. In this Official Statement, the special taxes levied on the properties in the District pursuant to the Rate and Method are referred to as the Special Tax or Special Taxes. 2

11 As of January 2013, the District is fully built out. For fiscal year , the City levied Special Taxes on 997 single family detached residential properties within the District. The Special Taxes levied in the District for fiscal year totaled $1,988, As of November 9, 2012, the delinquent Special Taxes for the fiscal year levy amounted to $10, (which is equal to approximately 0.52 percent of the total levy). For fiscal year , the total Special Tax levy on the 997 properties in the District is $1,988, See THE DISTRICT. Security for the 2013 Bonds The 2013 Bonds are special, limited obligations of the City for the District, payable solely from Special Tax Revenues and moneys in certain funds held under the Fiscal Agent Agreement. Neither the faith and credit nor the taxing power of the City (except to the limited extent set forth in the Fiscal Agreement with respect to the levy of Special Taxes within the District), the State of California, or any political subdivision thereof is pledged to the payment of the 2013 Bonds. The 2013 Bonds will be payable solely from, and secured by a pledge of, Special Tax Revenues and moneys deposited in the Bond Fund, the Reserve Fund and the Special Tax Fund (until the moneys in the Special Tax Fund are disbursed in accordance to the Fiscal Agent Agreement), as each such fund is held by the Fiscal Agent under the Fiscal Agent Agreement. Upon issuance of the 2013 Bonds, $1,446, from the reserve fund relating to the 2004 Bonds will be transferred to the Reserve Fund. The amount of such transfer to the Reserve Fund is equal to the initial Reserve Requirement. Special Tax Revenues means, generally, the Special Taxes collected by the City (including any scheduled payments and prepayments and interest and penalties) and proceeds of redemption or sale of property sold as a result of foreclosure of the lien of Special Taxes. Pursuant to the Fiscal Agent Agreement, Special Taxes received by the City will be deposited in the Special Tax Fund held by the City. At the times required by the Fiscal Agent Agreement, the City will make transfers from the Special Tax Fund to the Fiscal Agent for deposit into the Bond Fund for payment of principal and interest with respect to the Bonds or the Special Tax Prepayments Account for the redemption of Bonds. See SECURITY FOR THE 2013 BONDS General and Reserve Fund and APPENDIX D SUMMARY OF CERTAIN PROVISIONS OF THE FISCAL AGENT AGREEMENT. Subject to the limitations set forth in the Rate and Method, the Fiscal Agent Agreement requires the City to levy a sufficient amount of Special Taxes for the payment of principal of and interest on outstanding Bonds becoming due and payable during each ensuing calendar year, including any necessary replenishment of the Reserve Fund to the amount of the then Reserve Requirement and an amount estimated to be sufficient to pay the Administrative Expenses (i.e., cost related to the administration of the District and the Bonds, see APPENDIX D SUMMARY OF CERTAIN PROVISIONS OF THE FISCAL AGENT AGREEMENT Definitions ) during such calendar year. The amount of the Special Taxes which the City may levy each fiscal year is limited by the maximum rates of Special Tax set forth in the Rate and Method and certain provisions of the Mello-Roos Act. See SECURITY FOR THE 2013 BONDS Collection of Special Tax and Rate and Method and APPENDIX B RATE AND METHOD OF APPORTIONMENT OF SPECIAL TAX. Professionals Involved in the Offering U.S. Bank National Association, Los Angeles, California, will act as Fiscal Agent with respect to the 2013 Bonds, and as the Escrow Bank under the Escrow Agreement relating to the refunding of the 2004 Bonds. The City has retained Willdan Financial Services, Temecula, California, to act as the Administrator for the District and the Dissemination Agent under the Continuing Disclosure Certificate. Fieldman Rolapp & Associates, Irvine, California, has acted as Financial Advisor to the City with respect to the issuance of the 2013 Bonds. The legality of the 2013 Bonds and certain other legal matters are 3

12 subject to the approving opinion of Quint & Thimmig LLP, San Francisco, California, acting as Bond Counsel. Certain legal matters with respect to this Official Statement will be passed on for the City by Richards, Watson & Gershon, A Professional Corporation, Los Angeles, California, as Disclosure Counsel. Certain other legal matters related to the 2013 Bonds will be considered on behalf of the City and the District by the City Attorney. Nossaman LLP, Irvine, California, California has served as counsel to Stifel, Nicolaus & Company, Incorporated, dba Stone & Youngberg, a Division of Stifel Nicolaus, in connection with the 2013 Bonds. The fees and expenses of the Financial Advisor, Bond Counsel, Disclosure Counsel and Underwriter s Counsel are contingent upon the sale and delivery of the 2013 Bonds. Continuing Disclosure The City will covenant in a Continuing Disclosure Certificate, for the benefit of the beneficial holders of the 2013 Bonds, to prepare and deliver an annual report of certain financial information and operating data relating to the 2013 Bonds and the District and to provide certain other information in compliance with Rule 15c2-12 of the Securities and Exchange Commission. See CONCLUDING INFORMATION Continuing Disclosure and APPENDIX C FORM OF CONTINUING DISCLOSURE CERTIFICATE. Other Information There follows in this Official Statement descriptions of the District, the Mello-Roos Act, the 2013 Bonds, the Fiscal Agent Agreement, the Rate and Method, and various other agreements and documents. The descriptions and summaries of various legislation and documents in this Official Statement do not purport to be comprehensive or definitive, and reference is made to each such document for the complete details of all of the terms and provisions of such documents. All statements herein with respect to such documents are qualified in their entirety by reference to each such document and, with respect to certain rights and remedies, to laws and principles of equity relating to or affecting creditors rights generally. Unless context clearly requires otherwise, capitalized terms used but not defined in this Official Statement have the meanings set forth in the Fiscal Agent Agreement, or if not in the Fiscal Agent Agreement, the Rate and Method. See APPENDIX B RATE AND METHOD OF APPORTIONMENT OF SPECIAL TAX and APPENDIX D SUMMARY OF CERTAIN PROVISIONS OF THE FISCAL AGENT AGREEMENT Definitions. This Official Statement speaks only as of its date as set forth on the cover hereof, and the information and expressions of opinion in this Official Statement are subject to change without notice, and neither the delivery of this Official Statement nor any sale made with respect to the 2013 Bonds shall under any circumstances create any implication that there has been no change in the affairs of the District since the date of this Official Statement. Unless otherwise expressly noted, references to Internet websites in this Official Statement are shown for reference and convenience only, and none of their content (including any content on the City s website) is incorporated in this Official Statement by reference. The City makes no representation to potential investors of the 2013 Bonds regarding the accuracy or completeness of the information presented on such websites. 4

13 PLAN OF REFUNDING Refunding of Prior Bonds Background. In November 2000, the City, for and on behalf the District, issued the City of Orange Community Facilities District No (Serrano Heights Public Improvements) Special Tax Bonds (the 2000 Bonds ), in the aggregate principal amount of $34,800,000, to finance the construction of certain public improvements benefiting the District. In February 2004, the City, for and on behalf the District, issued two additional series of bonds: (i) the 2004A Bonds, in the aggregate principal amount of $35,330,000, to refund all of then outstanding 2000 Bonds, and (ii) the 2004B Bonds, in the aggregate principal amount of $2,200,000 to provide financing for a fire station and the construction of additional public improvements benefiting the District. As of February 1, 2013, $30,045,000 principal amount of 2004A Bonds and $1,680,000 principal amount of 2004B Bonds remained outstanding Refunding. The 2013 Bonds are being issued to refund all of the remaining outstanding 2004 Bonds. The City will irrevocably direct the Fiscal Agent to redeem and pay all of the outstanding 2004 Bonds on April 1, 2013 (the Redemption Date ). To effect the refunding, the City and U.S. Bank National Association, as escrow agent (the Escrow Bank ) will enter into an Escrow Agreement, dated as of March 1, 2013 (the Escrow Agreement ). Pursuant to the Escrow Agreement and the Fiscal Agent Agreement, upon the issuance of the 2013 Bonds, the City will cause to be delivered to the Escrow Bank, for deposit into an escrow fund (the Refunding Fund ), a portion of the proceeds of the 2013 Bonds, together with moneys to be released from funds previously established for the 2004 Bonds and a certain amount derived from previously collected Special Taxes (see Sources and Uses Funds below). The sum of such deposits into the Refunding Fund will be an amount sufficient to pay and redeem the 2004 Bonds in full on the Redemption Date. As a result of such deposits and application of funds pursuant to the Escrow Agreement, the 2004 Bonds will be deemed to be paid and defeased as of the date of issuance of the 2013 Bonds and will no longer be secured by a pledge of the Special Tax Revenues. The Escrow Bank will apply the moneys held in the Refunding Fund solely to pay the principal, interest and redemption premium, if any, with respect to the redeemed 2004 Bonds. None of the moneys held in the Refunding Fund will serve as security, or be available, for payment of principal of or interest on the 2013 Bonds. Pursuant to the Escrow Agreement, the Escrow Bank will hold the moneys in the Refunding Fund, in cash, uninvested pending their use for the payment and redemption of the 2004 Bonds. 5

14 Sources and Uses of Funds Bonds: The following is a summary of the anticipated sources and uses of funds relating to the 2013 Sources: Principal amount of the 2013 Bonds $28,810, Plus: Net original issue premium 2,712, Less: Underwriter s discount (226,696.25) Plus: Transfer from collected Special Taxes 1,628, Plus: Release from reserve fund and other funds relating to 2004 Bonds 1,452, Total Sources $34,376, Uses: Refunding Fund (1) $32,726, Reserve Fund deposit (2) 1,446, Costs of Issuance Fund deposit (3) 203, Total Uses $34,376, (1) Represents an amount sufficient to pay and redeem the 2004 Bonds in full on April 1, 2013, the Redemption Date. Moneys in the Refunding Fund will be held uninvested pending payment for the redeemed 2004 Bonds. (2) Represents the amount to be transferred from the reserve fund relating to the 2004 Bonds. Equal to the initial Reserve Requirement. See SECURITY FOR THE 2013 Bonds Reserve Fund. (3) To be used to pay fees and expenses of Financial Advisor, Bond Counsel, Disclosure Counsel, Fiscal Agent and Escrow Bank, rating fees, costs of printing this Official Statement and other costs of issuance relating to the 2013 Bonds. General THE 2013 BONDS The 2013 Bonds will be issued in the aggregate principal amount and will mature on the dates and bear interest at the rates per annum as set forth on the inside cover of this Official Statement. The 2013 Bonds will be issued in denominations of $5,000 or integral multiples thereof and will be dated their date of delivery. Interest on the 2013 Bonds will be calculated on the basis of a 360-day year composed of twelve 30-day months and will be payable on April 1 and October 1 of each year, commencing October 1, 2013 (each an Interest Payment Date ), until maturity or earlier redemption thereof. Each 2013 Bond will bear interest from the Interest Payment Date next preceding the date of authentication thereof unless (i) it is authenticated on an Interest Payment Date, in which event it will bear interest from such date of authentication, or (ii) it is authenticated prior to an Interest Payment Date and after the close of business on the Record Date (i.e., the 15th calendar day of the month preceding such Interest Payment Date) preceding such Interest Payment Date, in which event it will bear interest from such Interest Payment Date, or (iii) it is authenticated prior to the Record Date preceding the first Interest Payment Date, in which event it will bear interest from the Closing Date (i.e., the date on which the 2013 Bonds will be initially issued and delivered); provided, however, that if at the time of authentication of a 2013 Bond, interest is in default thereon, such 2013 Bond will bear interest from the Interest Payment Date to which interest has previously been paid or made available for payment thereon. The 2013 Bonds will be initially delivered as one fully registered certificate for each maturity (unless the 2013 Bonds of such maturity bear different interest rates, then one certificate for each interest 6

15 rate among such maturity) and will be delivered by means of the book-entry system of DTC. While the 2013 Bonds are held in DTC s book-entry only system, all payments of principal of, interest and premium (if any) on the 2013 Bonds will be made to Cede & Co., as the registered owner of the 2013 Bonds. See Book-Entry Only System below and APPENDIX F DTC S BOOK-ENTRY ONLY SYSTEM. Redemption Optional Redemption. The 2013 Bonds maturing on or after October 1, 2023 will be subject to redemption prior to their stated maturity at the option of the City on any Interest Payment Date occurring on or after October 1, 2022, as a whole or in part among maturities as determined by the City and by lot within a maturity, upon payment from any source of funds available for that purpose, at a redemption price equal to the principal of the 2013 Bonds to be redeemed, together with accrued interest thereon to the date fixed for redemption, without premium. Redemption from Special Tax Prepayments. As further discussed below under THE DISTRICT Rate and Method Special Tax Prepayment, a taxpayer may choose to make a prepayment of the Special Tax with respect to any parcel and discharge the Special Tax obligation with respect to such parcel in whole or in part. The amount of any such prepayment will be calculated in accordance with the Rate and Method. Proceeds from such prepayment, less any administrative fees or penalties collected as part of such payment, are referred to in this Official Statement as the Special Tax Prepayments. The Special Tax Prepayments and any corresponding transfers from the Reserve Fund pursuant to the Fiscal Agent Agreement will be used to redeem Bonds on the next Interest Payment Date for which notice of redemption can timely be given under the Fiscal Agent Agreement. The Bonds to be redeemed will be selected from among maturities of the then Outstanding Bonds so as to maintain the same debt service profile for the Bonds as in effect prior to such redemption, as directed in writing by an Authorized Officer, and will be further selected by lot within a maturity of a series. The redemption price for the 2013 Bonds to be redeemed from Special Tax Prepayments and corresponding transfers from the Reserve Fund (expressed as a percentage of the principal amount of the 2013 Bonds to be redeemed) will be as set forth below, together with accrued interest to the date fixed for redemption: Redemption Date Redemption Price Any Interest Payment Date from October 1, 2013 to and including April 1, % October 1, 2020 and April 1, October 1, 2021 and April 1, October 1, 2022 and any Interest Payment Date thereafter 100 Purchase in Lieu of Redemption. In lieu of an optional redemption, upon the City s filing of an Officer s Certificate with the Fiscal Agent, the Fiscal Agent may use and withdraw moneys from the Bond Fund to purchase Outstanding 2013 Bonds, at public or private sale as and when, and at such prices (including brokerage and other charges) as such Officer s Certificate may provide, but in no event may 2013 Bonds be purchased at a price in excess of the principal amount thereof, plus interest accrued to the date of purchase, and any premium which would otherwise be due if the 2013 Bonds were instead redeemed in accordance with the Fiscal Agent Agreement. Notice of Redemption; Cancellation of Optional Redemption. The Fiscal Agent will cause notice of any redemption of 2013 Bonds to be sent at least 30 days but not more than 60 days prior to the date fixed for redemption, to the Securities Depositories and to one or more Information Services, and to the respective registered Owners of any 2013 Bonds designated for redemption at their addresses appearing on the Bond registration books in the Principal Office of the Fiscal Agent; but the sending of such notices 7

16 will not be a condition precedent to such redemption and failure to send or to receive any such notice, or any defect therein, will not affect the validity of the proceedings for the redemption of such 2013 Bonds. In the case of any optional redemption of 2013 Bonds, the notice of redemption will state that the redemption is conditioned upon receipt by the Fiscal Agent of sufficient moneys to redeem the 2013 Bonds to be optionally redeemed on the anticipated redemption date, and that the optional redemption of such 2013 Bonds will not occur if by no later than the scheduled redemption date sufficient moneys to redeem the 2013 Bonds to be optionally redeemed have not been deposited with the Fiscal Agent. In the event that the Fiscal Agent does not receive sufficient funds by the scheduled optional redemption date to so redeem the 2013 Bonds to be optionally redeemed, the Fiscal Agent will send written notice to the City, to the Owners of such 2013 Bonds, to the Securities Depositories and to one or more of the Information Services to the effect that the redemption did not occur as anticipated, and the 2013 Bonds for which notice of optional redemption was given will remain Outstanding for all purposes of the Fiscal Agent Agreement. Notwithstanding the foregoing, so long as DTC is the sole Owner of the 2013 Bonds, notices of redemption and notices of cancellation of redemption as described above will be sent to DTC and not to the beneficial owners of the 2013 Bonds. See Book-Entry Only System. Selection of 2013 Bonds for Redemption. Whenever provision is made in the Fiscal Agent Agreement for the redemption of less than all of the 2013 Bonds of any maturity, the Fiscal Agent will select the 2013 Bonds of such maturity to be redeemed by lot, in any manner which the Fiscal Agent in its sole discretion shall deem appropriate and fair. Effect of Redemption. From and after the date fixed for redemption, if funds available for the payment of the principal of, and interest and any premium on, the 2013 Bonds so called for redemption have been deposited in the Bond Fund, such 2013 Bonds so called will cease to be entitled to any benefit under the Fiscal Agent Agreement other than the right to receive payment of the redemption price, and no interest will accrue thereon on or after the redemption date specified in related notice of redemption. Book-Entry Only System The 2013 Bonds will be issued as one fully registered bond without coupons for each maturity (unless there are different interest rates within such maturity, then one certificate for each interest rate within such maturity) and, when issued, will be registered in the name of Cede & Co., as nominee of DTC. DTC will act as securities depository of the 2013 Bonds. Individual purchases of the 2013 Bonds may be made in book-entry form only, in the principal amount of $5,000 and integral multiples thereof. Purchasers will not receive certificates representing their interest in the 2013 Bonds purchased. Principal and interest will be paid to the account of Cede & Co., which will in turn remit such principal and interest to its participants for subsequent disbursement to the beneficial owners of the 2013 Bonds as described herein. So long as DTC s book-entry system is in effect with respect to the 2013 Bonds, notices to Owners of the 2013 Bonds by the City or the Fiscal Agent will be sent to DTC. Notices and communication by DTC to its participants, and then to the beneficial owners of the 2013 Bonds, will be governed by arrangements among them, subject to then effective statutory or regulatory requirements. See APPENDIX F DTC S BOOK-ENTRY ONLY SYSTEM. In the event that such book-entry system is discontinued with respect to the 2013 Bonds, the City will execute and deliver replacement bonds in the form of registered certificates and, thereafter, the 2013 Bonds will be transferable and exchangeable on the terms and conditions provided in the Fiscal Agent Agreement. In addition, the following provisions would then apply: Interest on the 2013 Bonds (including the final interest payment upon maturity or earlier redemption) will payable by check of the 8

17 Fiscal Agent mailed on the Interest Payment Dates by first class mail to the registered Owner thereof at such registered Owner s address as it appears on the registration books maintained by the Fiscal Agent at the close of business on the Record Date preceding the Interest Payment Date, or by wire transfer to an account within the United States made on such Interest Payment Date upon written instructions of any Owner of $1,000,000 or more in aggregate principal amount of Bonds, which instructions will continue in effect until revoked in writing, or until such Bonds are transferred to a new Owner. The principal of the 2013 Bonds and any premium on the 2013 Bonds are payable by check in lawful money of the United States of America upon surrender of the 2013 Bonds at the Principal Office of the Fiscal Agent. All 2013 Bonds paid by the Fiscal Agent pursuant to the Fiscal Agent Agreement will be canceled by the Fiscal Agent. ANNUAL DEBT SERVICE SCHEDULE The following table shows the annual debt service for the 2013 Bonds (assuming no optional redemption or redemption from Special Tax Prepayments): Bond Year ending October 1 Principal Interest Annual Debt Service 2013 $ 290,000 $ 635, $ 925, ,000 1,191, ,021, ,000 1,175, ,070, ,000 1,148, ,118, ,075,000 1,119, ,194, ,160,000 1,087, ,247, ,265,000 1,040, ,305, ,370, , ,360, ,485, , ,420, ,595, , ,470, ,705, , ,517, ,845, , ,571, ,985, , ,619, ,135, , ,670, ,300, , ,728, ,465, , ,778, ,645, , ,835, ,795,000 97, ,892, Total $28,810,000 $13,939, $42,749,

18 SECURITY FOR THE 2013 BONDS General Pursuant to the Fiscal Agent Agreement, the payment of principal of, redemption premium (if any) and interest on 2013 Bonds will be secured by a first lien and pledge of Special Tax Revenues and moneys held in the Bond Fund, the Reserve Fund and the Special Tax Fund (until the moneys in the Special Tax Fund are disbursed in accordance to the Fiscal Agent Agreement). The Bond Fund and the Reserve Fund are held by the Fiscal Agent and the Special Tax Fund is held by the Director of Finance of the City (the Director of Finance ), in each case, as provided for in the Fiscal Agent Agreement. Special Tax Revenues means the proceeds of the Special Taxes received by the City, including any scheduled payments and prepayments thereof, interest and penalties thereon and proceeds of the redemption or sale of property sold as a result of foreclosure of the lien of the Special Taxes to the amount of said lien, but shall not include interest and penalties, if any, collected with the Special Taxes that are in excess of the rate of interest payable on the Bonds. Special Taxes are levied each fiscal year on the taxable property within the District pursuant to the Rate and Method. After the issuance of the 2013 Bonds, the City is permitted to issue additional Bonds solely for refunding purposes under the Fiscal Agent Agreement. All Bonds outstanding under the Fiscal Agent Agreement rank on a parity with respect to the Special Tax Revenues and other funds pledged therefor. The Fiscal Agent Agreement does not contain any provisions for the acceleration of Bonds issued under the Fiscal Agent Agreement, including the 2013 Bonds, in the event of a payment default or other default under the terms of the Bonds or the Fiscal Agent Agreement. The 2013 Bonds are special, limited obligations of the City for the District, payable solely from Special Tax Revenues and moneys in certain funds held pursuant to the Fiscal Agent Agreement. Neither the faith and credit nor the taxing power of the City (except to the limited extent set forth in the Fiscal Agreement with respect to the levy of Special Taxes within the District), the State of California, or any political subdivision thereof is pledged to the payment of the 2013 Bonds. Application of Special Tax Revenues The Fiscal Agent Agreement requires the Director of Finance to establish and maintain a Special Tax Fund. The Special Tax Revenues, as received by the City on behalf of the District will be administered by the Director of Finance as follows: (i) (ii) (iii) From time to time as needed to pay the obligations of the District, but no later than the Business Day prior to each Interest Payment Date, the Director of Finance will withdraw from the Special Tax Fund and make transfers to the Fiscal Agent for deposit into the Bond Fund and the Reserve Fund (see Bond Fund; Special Tax Prepayments Account and Reserve Fund below ); Any Special Tax Revenues constituting payment of the portion of the Special Tax levy for Administrative Expenses will be deposited in the Administrative Expense Fund; Any Special Tax Revenues constituting the collection of delinquencies in payment of Special Taxes shall be separately identified and first, will be transferred to the Fiscal Agent for deposit in the Bond Fund, to the extent needed 10

19 to pay any past due debt service on the Bonds; second, will be transferred to the Fiscal Agent for deposit in the Reserve Fund, to the extent needed to increase the amount on deposit in the Reserve Fund up to the then Reserve Requirement; and third, will be retained in the Special Tax Fund; and (iv) Any proceeds of Special Tax Prepayments will be and will be transferred to the Fiscal Agent for deposit in the Special Tax Prepayments Account. See APPENDIX D SUMMARY OF CERTAIN PROVISIONS OF THE FISCAL AGENT AGREEMENT Funds and Accounts Special Tax Fund. Bond Fund; Special Tax Prepayments Account The Fiscal Agent will establish a Bond Fund and, within the Bond Fund, a Special Tax Prepayments Account, pursuant to the Fiscal Agent Agreement. Money in the Bond Fund and the Special Tax Prepayments Account will be held by the Fiscal Agent for the benefit of the City and the Owners of the Bonds. On each Interest Payment Date, the Fiscal Agent will withdraw from the Bond Fund and pay to the Owners of the Bonds the principal of and interest due and payable on the Bonds on such Interest Payment Date, including any amounts due on the Bonds by reason of an optional redemption or a redemption from Special Tax Prepayments. In the event that amounts in the Bond Fund are insufficient for payment in full of the principal of and interest due on the Bonds with respect to any Interest Payment Date, the Fiscal Agent will withdraw from the Reserve Fund, to the extent of any funds available therein, the amount needed to cover the amount of such Bond Fund insufficiency in accordance with the provisions of the Fiscal Agent Agreement. If, after such transfer from the Reserve Fund, there are still insufficient funds in the Bond Fund to make the payments for the principal and interest due and payable on the Bonds on such Interest Payment Date, the Fiscal Agent will apply the available funds first to the payment of interest on the Bonds, and second to the payment of principal due on the Bonds. All Special Tax Prepayments transferred by the Director of Finance to the Fiscal Agent will be deposited in the Special Tax Prepayments Account. The Fiscal Agent will transfer moneys from the Special Tax Prepayments Account, together with money to be released from the Reserve Fund, if any, in connection with the prepayment of Special Taxes (see Reserve Fund below), to the Bond Fund on the next date for which a notice of redemption can timely be given under the Fiscal Agent Agreement for a redemption of Bonds described under THE 2013 BONDS Redemption Redemption From Special Tax Prepayments. See APPENDIX D SUMMARY OF CERTAIN PROVISIONS OF THE FISCAL AGENT AGREEMENT Funds and Accounts Bond Fund. Reserve Fund The Fiscal Agent will establish a Reserve Fund pursuant to the Fiscal Agent Agreement. Money in the Reserve Fund will be held in trust by the Fiscal Agent for the benefit of the Owners of the Bonds as a reserve for the payment of the principal of, and interest and any premium on, the Bonds. The Reserve Requirement is defined in the Fiscal Agent Agreement to mean, as of any date of calculation, an amount equal to 50 percent of the then Maximum Annual Debt Service. Upon issuance of the 2013 Bonds, $1,446, from the reserve fund relating to the 2004 Bonds will be transferred to the Reserve Fund. The amount of such transfer to the Reserve Fund is equal to the initial Reserve 11

20 Requirement. Thereafter, from time to time, but no later than the Business Day prior to each Interest Payment Date, the Director of Finance will transfer moneys from the Special Tax Fund to the Fiscal Agent for deposit into the Reserve Fund, if needed, so that that the balance in the Reserve Fund after such deposit will equal the then Reserve Requirement; provided, however, that each transfer from the Special Tax Fund to the Reserve Fund will only be made after the required transfers to the Fiscal Agent for deposit into Bond Fund for the upcoming payment of principal and interest due on the Bonds have been made (see Bond Fund above) and only to the extent moneys are available in the Special Tax Fund. Whenever Bonds are to be redeemed with the Special Tax Prepayments pursuant to the Fiscal Agent Agreement, a proportionate amount in the Reserve Fund (determined on the basis of the principal of Bonds to be redeemed and the then outstanding principal of the Bonds) will be transferred by the Fiscal Agent to the Bond Fund to be applied to the redemption of the Bonds (see THE 2013 BONDS Redemption Redemption From Special Tax Prepayments ); provided, however, that no such transfer will be made that would cause the balance in the Reserve Fund to be less than the Reserve Requirement to be in effect following such redemption. Whenever, on the Business Day prior to any Interest Payment Date, or on any other date at the request of the Director of Finance, the amount in the Reserve Fund exceeds the Reserve Requirement, the Fiscal Agent will transfer an amount equal to the excess from the Reserve Fund to the Bond Fund, to be used to pay interest on the Bonds on the next Interest Payment Date. Amounts in the Reserve Fund may also be used to make payments to the Federal government to satisfy any Federal rebate liability with respect to the Bonds. See APPENDIX D SUMMARY OF CERTAIN PROVISIONS OF THE FISCAL AGENT AGREEMENT Funds and Accounts Reserve Fund. Collection of Special Tax Under the Fiscal Agent Agreement, the City has covenanted to comply with all requirements of the Mello-Roos Act so as to assure the timely collection of Special Tax Revenues, including, without limitation, the enforcement of delinquent Special Taxes. The Special Taxes will be payable and be collected in the same manner and at the same time and in the same installment as the ad valorem taxes on real property are payable, and have the same priority, become delinquent at the same times and in the same proportionate amounts and bear the same proportionate penalties and interest after delinquency as do the ad valorem taxes on real property. The City has covenanted in the Fiscal Agent Agreement that the Director of Finance will fix and levy the amount of Special Taxes within the District required for the payment of principal of and interest on any outstanding Bonds becoming due and payable during the ensuing calendar year (as consistent with the Rate and Method, see definition of Special Tax Requirement described in Rate and Method Rate and Method of Apportionment ), including any necessary replenishment of the Reserve Fund to the then Reserve Requirement and an amount estimated to be sufficient to pay the Administrative Expenses during such calendar year. However, the Special Taxes so levied will not exceed the authorized amounts as provided in the proceedings pursuant to the Resolution of Formation (including the Rate and Method) and the Mello-Ross Act (including a limitation under Government Code Section 53321(d) described below under Rate and Method Rate and Method Apportionment ). (The Resolution of Formation, as defined in the Fiscal Agent Agreement, means Resolution No. 7918, adopted by the City Council of the City on December 17, 1991, as modified by Resolution No. 8623, adopted by the City Council on May 14, 1996, and by Resolution No adopted by the City Council of the City on February 22, 2000.) 12

21 The City has covenanted in the Fiscal Agent Agreement to not consent or conduct proceedings to reduce maximum Special Taxes that may be levied in the District below an amount, for any fiscal year, equal to 110 percent of the aggregate debt service due on the Bonds in such fiscal year, plus a reasonable estimate of Administrative Expenses for such fiscal year. The City also covenants in the Fiscal Agent Agreement not to exercise its rights under the Mello-Roos Act to waive delinquency and redemption penalties related to the Special Taxes or to declare Special Tax penalties amnesty program if to do so would materially and adversely affect the interests of the Owners of the Bonds. The City further covenants in the Fiscal Agent Agreement not to permit the tender of Bonds in payment of any Special Taxes except upon receipt of a certificate of an Independent Financial Consultant that to accept such tender will not result in the City having insufficient Special Tax Revenues to pay the principal of and interest on the Bonds that will remain Outstanding following such tender. Although the Special Taxes constitute liens on taxed parcels within the District, they do not constitute a personal indebtedness of the owners of property within the District. Other liens for taxes and assessments exist on the properties located within the District on a parity with the lien for the Special Taxes and others could come into existence in the future in certain situations without the consent or knowledge of the City or the landowners in the District. Other risk factors may also impact the ability of the City of collect sufficient Special Taxes for fulfill its payment obligations under the Fiscal Agent Agreement. See BONDOWNERS RISKS. Rate and Method The City is authorized to levy, for and on behalf of the District, the Special Tax in accordance with the Rate and Method. Below is a summary of certain provisions of the Rate and Method. A complete copy of the Rate and Method is found in Appendix B of this Official Statement. Unless otherwise specified, capitalized terms in the paragraphs below have the meanings ascribed to them in Appendix B. Rate and Method of Apportionment. Each fiscal year, subject to the limitations set forth in the Rate and Method, the City levies the Special Tax on taxable properties in the District, until the amount of Special Taxes levied equals the Special Tax Requirement. The Special Tax Requirement for any fiscal year includes, among other amounts: (i) debt service and other periodic costs on the Bonds due in the calendar year commencing in such fiscal year, (ii) Administrative Expenses, (iii) any amount required to replenish the Reserve Fund, and (iv) an amount for reasonably anticipated delinquent Special Taxes based on the delinquency rate for Special Taxes levied in the previous fiscal year, less a credit for funds available to reduce the annual Special Tax levy, as determined by the Director of Finance pursuant to the Fiscal Agent Agreement. Each fiscal year, all Taxable Property within the District is classified as one of the following: Developed Property, Taxable Public Property, Taxable Property Owner Association Property, or Undeveloped Property. In addition, a Developed Property that is also a Residential Property falls within one of the Land Use Classes numbering 1 through 12, based on the type of residence (i.e., detached or attached) and square footage of living area. Non-Residential Property is Land Use Class 13. Up to Acres of Property Owner Association Property and Public Property are exempt from the Special Tax levy (but, with respect to Public Property, see BONDOWNERS RISKS Exempt Property ). The Rate and Method sets forth a schedule of Assigned Special Tax for each Land Use Class for fiscal year , and specifies that the Backup Special Tax for an Assessor s Parcel of Developed Property for fiscal year was $22, per Acre. On each July 1, commencing July 1, 2001, each of the Assigned Special Tax and the Backup Special Tax increases by an amount equal to two percent of the amount in effect for the previous fiscal year. For any fiscal year, the Maximum Special 13

22 Tax for each Assessor s Parcel of Developed Property is equal to the greater of (i) the amount derived by application of the Assigned Special Tax, or (ii) the amount derived by application of the Backup Special Tax. The Special Tax is levied each fiscal year as follows: First: The Special Tax is levied Proportionately on each Assessor s Parcel of Developed Property at up to 100 percent of the applicable Assigned Special Tax as needed to satisfy the Special Tax Requirement; Second: If additional monies are needed to satisfy the Special Tax Requirement after the first step has been completed, the Special Tax is levied Proportionately on each Assessor s Parcel of Undeveloped Property at up to 100 percent of the Maximum Special Tax for Undeveloped Property; Third: If additional monies are needed to satisfy the Special Tax Requirement after the first two steps have been completed, then the levy of the Special Tax on each Assessor s Parcel of Developed Property whose Maximum Special Tax is determined through the application of the Backup Special Tax is increased Proportionately from the Assigned Special Tax up to the Maximum Special Tax for each such Assessor s Parcel; Fourth: If additional monies are needed to satisfy the Special Tax Requirement after the first three steps have been completed, then the Special Tax is levied Proportionately on each Assessor s Parcel of Taxable Property Owner Association Property and Taxable Public Property at up to the Maximum Special Tax for Taxable Property. In addition to the Special Taxes levied based on the four steps listed above, the City is permitted, subject to the restrictions set forth in the Rate and Method, to collect from a Builder a One-Time Special Tax on a property as a condition to the issuance of a Certificate of Occupancy (which permits the initial habitation of a newly constructed residential dwelling unit). Because the District is fully built out and the City does not expect to issue additional Certificates of Occupancies for any new construction, the City does not anticipate levying any One-Time Special Tax in District in the future. Notwithstanding the foregoing, pursuant to the Rate and Method and the Mello-Roos Act (specifically, Government Code Section 53321(d)), the Special Tax on any Residential Property in the District may not be increased as a consequence of delinquency or default by the owner or owners of any other property within the District by more than 10 percent above the amount that would have been levied in that fiscal year had there never been any such delinquencies or defaults. In addition, under the Rate and Method, Special Taxes levied on any Assessor s Parcel may not be levied after the 35th fiscal year in which such Assessor s Parcel was first taxed as Developed Property. No Assessor s Parcel in the District was subject to the Special Tax levy as Developed Property before fiscal year Estimated Special Tax Rates. Since the formation of the District, the City has retained an independent contractor to act as the District Administrator. Willdan Financial Services is the current District Administrator. Among other tasks, the District Administrator assists the Director of Finance with the determination each fiscal year of the Special Tax Requirement, the Assigned Special Tax rate and the actual Special Tax rate for each Land Use Class of the Developed Property and the resulting dollar amount of the actual Special Tax levy on each property in the District. Typically, a schedule of Special 14

23 Tax levy for each property in the District is submitted to the County Assessor by August of each year for inclusion in the property tax roll for that fiscal year. Since fiscal year , the City has been able to satisfy the Special Tax Requirement each fiscal year by levying the Special Tax only on Developed Property in the District and at rates that are lower than the Assigned Special Tax rates. Furthermore, all of the Developed Properties subject to the Special levy have consisted of single family detached Residential Properties (including 120 units that are referred to as condominiums, but are detached properties). The table below summarizes the Assigned Special Tax rates, the estimated Special Tax rates and estimated total Special Tax levy for each class of Residential Property for fiscal year , based on the scheduled principal and interest expected to be due with respect to the 2013 Bonds: Land Use Class TABLE 1 City of Orange Community Facilities District No Assigned Special Tax Rates, Estimated Special Tax Rates and Total Levy for Fiscal Year Description Residential Floor Area (square feet) Number of Parcels Assigned Special Tax Rate (per Unit) (1) Estimated Special Tax Rate (per Unit) (2) Estimated Special Tax Levy 1 Single Family Detached Property >3, $4, $2, $217, Single Family Detached Property 3,400 3, , $2, , Single Family Detached Property 3,200 3, , $2, , Single Family Detached Property 3,000 3, , $2, , Single Family Detached Property 2,800 2, , $2, , Single Family Detached Property 2,600 2, , $2, , Single Family Detached Property 2,400 2, , $1, , Single Family Detached Property 2,200 2, , $1, , Single Family Detached Property 1,900 2, , $1, , Single Family Detached Property <1, , $1, , Total 997 $2,039, (1) Pursuant to the Rate and Method, the Assigned Special Tax Rate increases by two percent on July 1 of each year. (2) Estimated based on principal and interest due with respect to the 2013 Bonds, plus $18,000 of Administrative Expenses. Source: Willdan Financial Services. Special Tax Prepayment. The owner of a parcel for which a building permit has been issued may voluntarily prepay the Special Tax obligation for such parcel in whole or in part at certain times as permitted by the Rate and Method. Such a prepayment of Special Taxes will result in a redemption of Bonds. See Application of Special Tax Revenues and Bond Fund; Special Tax Prepayments Account and THE 2013 BONDS Redemption Redemption From Special Tax Prepayments. The Rate and Method does not permit such a Special Tax prepayment unless the amount of Assigned Special Taxes that may be levied on Taxable Property both prior to and after the proposed prepayment is at least 1.1 times the maximum annual debt service on all Outstanding District Bonds. Since the formation of the District, there has been only one prepayment of Special Taxes, in whole, by the owner of a single parcel in the District in 2005, which resulted in a subsequent redemption of $30,000 principal amount of the 2004 Bonds. While the City has not undertaken to inquire, and makes no representation regarding, whether any current owner of properties in the District intends to make a prepayment of Special Taxes in the foreseeable future, the City has not received any notice from current owners of properties in the District regarding any such intention to prepay Special Taxes. 15

24 Covenant to Foreclose Pursuant to Section of the Mello-Roos Act, in the event of any delinquency in the payment of the Special Taxes, the City, on behalf of the District, may cause the institution of a superior court action to enforce the lien therefore within specific time limits. In such an action, the real property subject to the unpaid amount may be sold at judicial foreclosure sale. Under the provisions of the Mello- Roos Act, such judicial foreclosure action is not mandatory. Nonetheless, under the Fiscal Agent Agreement, the City has covenanted that on or about February 15 and June 15 of each fiscal year, the Director of Finance will compare the amount of Special Taxes levied in the District to the amount of Special Tax Revenues theretofore received by the City, and: (A) (B) Individual Delinquencies. If the Director of Finance determines that any single parcel subject to the Special Tax in the District is delinquent in the payment of Special Taxes in the aggregate amount of $5,000 or more, then the Director of Finance will send or cause to be sent a notice of delinquency (and a demand for immediate payment thereof) to the applicable property owner within 45 days of such determination, and, if the delinquency remains uncured, the City will commence foreclosure proceedings within 90 days of such determination and will diligently pursue such foreclosure proceedings to completion. Notwithstanding the foregoing, the Director of Finance may defer such action if the amount in the Reserve Fund is at least equal to the Reserve Requirement. Aggregate Delinquencies. If the Director of Finance determines that the total amount of delinquent Special Tax for the prior fiscal year for the entire District (including the total of delinquencies under subsection (A) above), exceeds five percent of the total Special Tax due and payable for the prior fiscal year, the Director of Finance will notify or cause to be notified property owners who are then delinquent in the payment of Special Taxes (and demand immediate payment of the delinquency) within 45 days of such determination, and the City will commence foreclosure proceedings within 90 days of such determination against each parcel of land in the District with a Special Tax delinquency, and shall diligently pursue such proceedings to completion. See APPENDIX D SUMMARY OF CERTAIN PROVISIONS OF THE FISCAL AGENT AGREEMENT Certain Covenants of the City. In the event that the City proceeds with a foreclosure action, there could be delays in collection of the delinquent Special Tax levy pending the prosecution of foreclosure proceedings. No assurance can be given that real property subject to sale or foreclosure will be sold or, if sold, that the proceeds of sale will be sufficient to pay any delinquent Special Tax installment. Any foreclosure proceedings, once commenced, could be stayed because of bankruptcy proceedings by or against the owner of the delinquent property. If any of the foregoing occurs and the Reserve Fund is depleted, there could be a delay or default in payments of scheduled debt service to the Owners of the 2013 Bonds. See BONDOWNERS RISKS Levy and Collection of Special Tax Foreclosure Delays; Sufficiency of Foreclosure Proceeds, Depletion of Reserve Fund, Bankruptcy Limiting Remedies of Bond Owners and Interest of FDIC or Other Federal Agencies in Properties. As shown in Table 8 under THE DISTRICT Special Tax Levy and Delinquency History, the Special Tax delinquency rate for fiscal year as of June 30, 2012, by dollars of Special Tax levy, was 1.92 percent (at $38,124.55). As the result of subsequent collection, the remaining delinquency rate for fiscal year as of November 9, 2012, was 0.52 percent (at $10,267.22). 16

25 Issuance of Parity Bonds for Refunding Purposes As discussed under INTRODUCTION The District, the City is authorized to incur up to $37,000,000 principal amount of bonded indebtedness for and on behalf of the District to finance public improvements pursuant to the Bond Authorization approved by the electors of the District in The sum of the principal amount of the 2000 Bonds (which were previously refunded by the 2004A Bonds) and the principal amount of the 2004B Bonds equals $37,000,000. Therefore, the City, for and on behalf of the District, may only issue bonds for refunding purposes under the current Bond Authorization. Because the authorized public improvements and facilities financed with the proceeds of the 2000 Bonds and the 2004B Bonds have been completed, the City does not anticipate any need to seek additional bond authorization. Pursuant to the Fiscal Agent Agreement, the City may issue additional Bonds secured by Special Tax Revenues on a parity with the 2013 Bonds only if such Parity Bonds are issued for the purpose of refunding some or all of the then Outstanding Bonds and only if certain other conditions are satisfied. Such conditions include, among others, that the debt service on such Parity Bonds in any Bond Year does not exceed the debt service on the Bonds being refunded, and the final maturity of the Parity Bonds is not later than the final maturity of the Bonds being refunded. See APPENDIX D SUMMARY OF CERTAIN PROVISIONS OF THE FISCAL AGENT AGREEMENT Issuance of Parity Bonds. ESTIMATED DEBT SERVICE COVERAGE The following table shows the estimated debt service coverage the 2013 Bonds, assuming that (i) the status of the Taxable Property subject to the Special Tax levy remains unchanged from fiscal year , (ii) the Special Tax Requirement will be equal to the sum of the debt service on the 2013 Bonds and the Administrative Expense, (iii) the Administrative Expense will be $18,000 for fiscal year and will increase by two percent each fiscal year, (iv) the maximum Special Tax levy will be constrained by the limitations imposed by the Rate and Method and the Mello-Roos Act that the Special Tax levy on any Residential Property may not be increased because of a delinquency or default with respect to the payment of Special Taxes levied on any other property within the District by more than 10 percent above the amount that would have been levied on such Residential Property in that fiscal year had there never been any such delinquency or default. See SECURITY FOR THE 2013 BONDS Rate and Method Rate and Method of Apportionment. This table is for reference only. The dollar amounts shown below under the column Assumed Maximum Special Tax Levy do not represent the anticipated actual Special Tax levy because the actual Special Tax rates will likely be lower. See SECURITY FOR THE 2013 BONDS Rate and Method Estimated Special Tax Rates. 17

26 Fiscal Year Ending June 30 TABLE 2 City of Orange Community Facilities District No Projected Debt Service Coverage Based on Maximum Special Tax Levy Capacity Fiscal Years through Bonds Debt Service (1) Assumed Maximum Special (2) (3) Tax Levy Debt Service Coverage (4) 2014 $2,021,950 $2,243, % ,070,350 2,297, ,118,500 2,350, ,194,400 2,434, ,247,150 2,493, ,305,750 2,558, ,360,150 2,618, ,420,350 2,685, ,470,950 2,741, ,517,150 2,792, ,571,900 2,853, ,619,650 2,906, ,670,400 2,962, ,728,650 3,027, ,778,650 3,082, ,835,400 3,145, ,892,825 3,209, (1) Based on scheduled debt service for the calendar year that commences in such fiscal year. Does not take into account any optional redemption or redemption from Special Tax Prepayments prior to maturity. (2) Assumes the status of the Taxable Property subject to the Special Tax levy will remain unchanged from fiscal year (3) See further discussion in the paragraphs above Table 2 regarding assumption in light of constraint imposed by Rate and Method and Mello-Roos Act. (4) Equals Assumed Maximum Special Tax Levy divided by 2013 Bonds Debt Service. Source: Debt service and debt service coverage from Stifel, Nicolaus & Company, Incorporated, dba Stone & Youngberg, a Division of Stifel Nicolaus; maximum Special Tax levy from Wildan Financial Services. 18

27 THE DISTRICT General The District is comprised of approximately acres in the northeastern portion of the City, adjacent to the City of Anaheim, east of Serrano Avenue and north of Santiago Oaks Regional Park. The District is located within the City s Serrano Heights Specific Plan area and is part of a residential community known as Serrano Heights. Serrano Heights was developed as a master-planned community in the eastern Orange Hills. While the District is located entirely within the City s limits, only a portion of Serrano Heights sits within the City s boundaries. Because of its hillside location, development of the Serrano Heights involved the removal of a significant amount of earth from the hillside and remediation grading design with on-site flood control management measures to mitigate impacts to Santiago Creek. The developers also had to comply with rules for fuel modification zones and fire protection measures imposed by the City s fire department. See discussion under BONDOWNERS RISKS Natural or Manmade Disasters regarding an article published by the Federal Emergency Management Agency ( FEMA ) noting that homes in Serrano Heights were able to escape damages during a major nearby fire in 2007 because of the fire mitigation measures implemented during the community s development. As discussed under INTRODUCTION The District, the City Council undertook proceedings to form the District in However, development within the District was stalled for many years. After several change proceedings at the request of the District s landowners, the current Rate and Method was approved in February The City issued bonds for and on behalf of the District to provide financing for public improvements within or in the vicinity of, and benefiting, the District in 2000 and See PLAN OF REFUNDING Background. Development within the District primarily took place between 2000 and As of January 2013, the District has been built out. Homes within the District include 997 units of detached single family residences (including 120 units that are referred to as condominiums, but are detached properties). The median fiscal year assessed value for the single family detached properties subject to the Special Tax levy is $612,943. According to the County s records as of January 1, 2012, no single property owner in the District is responsible for more than one percent of the total Special Tax levy in District in fiscal year The top ten taxpayers (by the dollar amount of the Special Tax levy) for fiscal year , in the aggregate, are responsible for approximately 1.37 percent of the total Special Tax levy within the District. Assessed Valuation The Special Tax levy pursuant to the Rate and Method is not based on property value. See SECURITY FOR THE 2013 Bonds Rate and Method. Thus, the amount of the Special Tax levied on a particular property in the District from year to year does not correspond to the fluctuation, if any, of the assessed value or the market value of the property. However, the value of the property may affect a taxpayer s willingness or ability to pay the Special Tax when due. As reflected in the table below, there have been significant increases and then decreases in the total assessed value of the property in the District during the last decade, reflecting the development of the District (see General ) and also, in part, the boom and downturn of the real estate market in the State of California. The City does not make any representation regarding the future trend of the assessed or market value of the property in the District. See BONDOWNERS RISKS Risks of Real Estate Secured Investments Generally; Land Values. 19

28 The following table shows the assessed valuation of Taxable Property within the District from fiscal years through : TABLE 3 City of Orange Community Facilities District No Assessed Valuation Fiscal Years through Fiscal Year Ending June 30 Total Assessed Valuation % Change 2003 $227,249, ,841, % ,860, ,989, ,295, ,691, ,669, ,995, ,563, ,504, ,028, (1) Due to economic adjustments in market values, the Orange County Assessor s Office has reduced the assessed value of qualifying properties. Source: Orange County Secured Roll as compiled by Willdan Financial Services. Direct and Overlapping Debt; Effective Tax Rate Properties in the District are within the jurisdiction of a number of overlapping local agencies providing public governmental services. In addition to paying the Special Tax, property owners within the District will be obligated to pay ad valorem property taxes and other existing and future additional special taxes, assessments and fees imposed by the overlapping agencies. The table below is a summary of the direct and overlapping debt (the Debt Report ) payable from taxes or special assessments for properties in the District as of January 1, The Debt Report generally includes long term obligations sold in the public credit markets by local agencies whose boundaries overlap the boundaries of the District in whole or in part. In certain cases, the percentages of debt calculations are based on assessed values, which will change significantly as sales occur and assessed values increase to reflect housing values. The Debt Report is included for general information purposes only. Neither the City nor the Underwriter has verified, and neither makes any representation regarding, the completeness or accuracy of the Debt Report. 20

29 Local Secured Assessed Valuation: $630,028,053 TABLE 4 City of Orange Community Facilities District No Direct and Overlapping Debt as of January 1, 2013 DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable Debt Metropolitan Water District 0.030% $ 58,977 Rancho Santiago Community College District ,190,993 City of Orange Community Facilities District No ,725,000 (1) TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $34,974,970 OVERLAPPING GENERAL FUND DEBT: % Applicable Debt Orange County General Fund Obligations 0.147% $315,788 Orange County Pension Obligations ,084 Orange County Board of Education Certificates of Participation ,596 Municipal Water District of Orange County Water Facilities Corporation ,738 Orange Unified School District Certificates of Participation ,918 Orange Unified School District Benefit Obligations ,023,028 City of Orange General Fund Obligations ,448 TOTAL GROSS OVERLAPPING GENERAL FUND DEBT $3,495,600 Less: MWDOC Water Facilities Corporation (100% supported) 17,738 TOTAL NET OVERLAPPING GENERAL FUND DEBT $3,477,862 GROSS COMBINED TOTAL DEBT $38,470,570 (2) NET COMBINED TOTAL DEBT $38,452,832 Ratios to Local Secured Assessed Valuation: Direct Debt ($31,725,000) % Total Direct and Overlapping Tax and Assessment Debt % Gross Combined Total Debt % Net Combined Total Debt % (1) Represents 2004 Bonds to be refunded. (2) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and non-bonded capital lease obligations. Source: California Municipal Statistics, Inc. The effective tax rate of a parcel of property in the District is likely to be different from the effective tax rate of another parcel in the District. The difference is attributable to a number of factors, including, but not limited to, the assessed value of the particular property. The table below sets forth the fiscal year tax rate for two parcels with single family detached homes in the District. Based on information obtained by the District Administrator from the County Tax Collector, there was a change of ownership with respect to each of these parcels in The secured assessed value of one of the two parcels was $926,927 (before homeowner exemption). That parcel falls under Land Use Class 1 (single family detached property with Residential Floor Area greater than 3,599 square feet) under the Rate and Method. The secured assessed value of the other parcel was $849,900 (before homeowner exemption). That parcel falls under Land Use Class 2 (single family detached property with Residential Floor Area between 3,400 and 3,599 square feet) under the Rate and Method. 21

30 TABLE 5 City of Orange Community Facilities District No Tax Rates for Two Sample Single Family Detached Residence Fiscal Year Parcel 1 (1) Parcel 2 (2) Assessed Valuations and Property Taxes Assessed value $926,927 $849,900 Less: Homeowner exemption (3) (7,000) (7,000) Net assessed value $919,927 $842,900 Ad Valorem Property Taxes Rate Amount Amount Basic Levy Rate % $9, $8, Rancho Santiago Community College % Metro Water D Metropolitan Water District of Orange County % Total Ad Valorem Property Taxes $9, $8, Special Assessment Charges Mosquito, Fire Ant and Disease Control Assessment $5.02 $5.02 Vector Control District Charge Metropolitan Water District Water Standby Charge City of Orange Community Facilities District No (4) 2, , Orange County Sanitation District User Fee Total Special Assessment Charges $3, $2, Total Property Taxes and Assessment Charges $12, $11, Tax rate as % of assessed value 1.365% 1.377% (1) Land Use Class 1 (single family detached property with Residential Floor Area greater than 3,599 square feet) under the Rate and Method. See SECURITY FOR THE BONDS Rate and Method. (2) Land Use Class 2 (single family detached property with Residential Floor Area between 3,400 and 3,599 square feet) under the Rate and Method. See SECURITY FOR THE BONDS Rate and Method. (3) Net assessed value reflects total assessed value for the parcel net of homeowner's exemption. Not all residences qualified for the exemption (4) See Table 1 under SECURITY FOR THE BONDS Rate and Method for the estimated fiscal year Special Tax levy for these parcels. Source: Orange County Tax Collector, as compiled by Willdan Financial Services. The City does not have any control over the amount of additional debt payable from taxes or assessments levied on properties in the District which may be incurred in the future by other governmental agencies with jurisdiction over all or a portion of the District. To the extent such additional indebtedness is payable from assessments, special taxes levied pursuant to the Mello-Roos Act or other taxes, such assessments, special taxes and other taxes will be secured on the property within the District. The debt attributable to a property in the District could increase without any corresponding increase in the value of such property. The imposition of such additional indebtedness could reduce the willingness or the ability of property owners in the District to pay the Special Taxes when due. See BONDOWNERS RISKS Cumulative Burden of Parity Liens, Taxes, Special Assessments. 22

31 Value to Special Tax Burden and Bond Debt Burden Ratios The following table shows the total secured assessed value to Special Tax burden ratio and the total secured assessed value to total bonded debt ratio for Taxable Property in the District, after the issuance of the 2013 Bonds. Total Secured Assessed Value (1) TABLE 6 City of Orange Community Facilities District No Secured Assessed Value to Special Tax Burden Ratio and Secured Assessed Value to Bonded Debt Burden Ratio Based on Fiscal Year Secured Assessed Value Special Tax Burden (2) Secured Assessed Value to Special Tax Burden Ratio Other Bonded Debt Burden (3) Total Bonded Debt (4) Secured Assessed Value to Total Debt Burden Ratio $630,028,053 $28,810, $3,249,970 $32,059, (1) Based on County of Orange secured tax roll. (2) Equals the principal amount of 2013 Bonds. (3) Based on information provided by California Municipal Statistics, Inc. See Table 4. (4) Equals Special Tax Burden and Other Bonded Debt Burden. Source: Willdan Financial Services In comparing the aggregate assessed value of the real property within the District and the principal amount of the 2013 Bonds, it should be noted that an individual parcel may only be foreclosed upon to pay delinquent installments of the Special Taxes attributable to that parcel. The principal amount of the 2013 Bonds is not allocated pro rata among the parcels within the District. The total Special Taxes are allocated among the parcels within the District according to the Rate and Method. See SECURTY FOR THE 2013 BONDS Rate and Method and APPENDIX B RATE AND METHOD OF APPORTIONMENT OF SPECIAL TAX. The following table shows the estimated assessed value to lien ratios by aggregating parcels within given ranges of ratios, based on the principal amount of the 2013 Bonds and other outstanding direct and overlapping indebtedness payable from taxes and assessments levied on such parcels. 23

32 TABLE 7 City of Orange Community Facilities District No Distribution of Secured Assessed Value to Lien Ratios Estimated Secured Assessed Value to Lien Ratio No. of Parcels FY Secured Assessed Value (1) Projected FY Special Tax Levy (2) % of Total Levy Special Tax Burden based on 2013 Bonds (3) Other Bonded Debt Burden (4) Total Bonded Debt Burden (5) 25:1 or Greater 17 $ 10,745,903 $ 44, % $ 622,475 $ 96,251 $ 718,726 20:1 to 24.99: ,767, , ,936,430 1,486,336 13,422,766 15:1 to 19.99: ,747,780 1,107, ,640,654 1,627,166 17,267,820 10:1 to 14.99: ,595,171 31, ,062 34, ,231 5:1 to 9.99: ,870 6, ,270 4, ,713 Less than 5:1 3 (6) 311,134 5, ,109 1,606 72,715 Total (7) 997 $630,028,053 $2,039, % $28,810,000 $3,249,970 $32,059,970 (1) Based on County of Orange secured tax roll. (2) Projected based on the scheduled principal and interest expected to be due with respect to the 2013 Bonds. (3) Total equals to the sum of the principal amount of the 2013 Bonds. (4) Based on information provided by California Municipal Statistics, Inc. See Table 4. (5) Equal sum of Special Tax Burden based on 2013 Bonds and Other Bonded Debt Burden. (6) Secured assessed value for these three parcels established pursuant to Proposition 60 (approved by California voters in 1986) which, together with Proposition 90 (approved by California voters in 1988), resulted in change in the law to allow persons aged 55 and over to transfer the assessed value of an old residence to a new residence under certain conditions. (7) Total may not add due to rounding. Source: Willdan Financial Services Special Tax Levy and Delinquency History The following table summarizes the Special Tax levy and delinquency for the District for fiscal years through , as of November 9, 2012: Fiscal Year Ending June 30 Special Tax Levy TABLE 8 City of Orange Community Facilities District No Special Tax Levy, Delinquency and Collection Fiscal Years through (1) Special Tax collection as of June 30 of Fiscal Year Delinquencies as of June 30 of each Fiscal Year (1)(2) Delinquency Rate as of June 30 of Fiscal Year Amount Collected as of Nov. 9, 2012 Remaining Delinquency as of Nov. 9, 2012 (2) Remaining Delinquency Rate as of Nov. 9, $1,988, $1,987, $ % $1,987, $ % ,988, ,864, , % 1,988, ,988, ,875, , ,987, ,988, ,909, , ,988, ,988, ,883, , ,985, , ,988, ,942, , ,982, , ,988, ,950, , ,977, , (1) Amount delinquent as of June 30 in the fiscal year in which the Special Taxes were levied. (2) Amount does not include any penalties, interest or fees. Source: Orange County Tax Collector, as compiled by Willdan Financial Services. 24

33 Special Taxes on each parcel of taxable property in the District are collected at the same time as ad valorem taxes on such parcel are collected. Generally in California, for each fiscal year, secured property taxes are collected in two equal installments, which become delinquent on December 10 and April 10 of such fiscal year respectively. Therefore, with regards to any taxable property within the District, the first installment of the fiscal year Special Tax levy became delinquent as of December 10, 2012, if it had not been paid by that date. The District Administrator reports that, based on information obtained from the County Tax Collector, as of February 11, 2013, eighteen parcels in the District were delinquent with respect to the first installment of the fiscal year Special Tax levy, totaling $18, (or approximately 1.83 percent of the Special Taxes due on all taxable properties in the District for such first installment of fiscal year ). While the County has adopted an Alternative Method of Distribution of Tax Levies and Collections and of Tax Sale Proceeds (commonly known as the Teeter Plan ), the District is not a participant of the County s Teeter Plan. The Teeter Plan is created pursuant to Sections 4701 through 4717 of the California Revenue and Taxation Code. Pursuant to the Teeter Plan, the County apportions to each participating local agency 100 percent of the amount of the taxes which are levied by such local agency regardless of delinquencies and, in exchange, the County retains all penalties and interest which are collected with delinquent taxes. Because the District is not a participant of the Teeter Plan, the City s ability to collect the full amount of the Special Tax levy each fiscal year is subject to the risk posed by delinquencies. See BONDOWNERS RISKS Levy and Collection of Special Tax. However, by not participating in the Teeter Plan, the penalties and interest resulting from late Special Tax payments are then collectible by the City on behalf the District and, subject to the definition of Special Tax Revenues set forth in the Fiscal Agent Agreement (see SECURITY FOR THE 2013 BONDS General ), become available for debt service on the Bonds. BONDOWNERS RISKS Investment in the 2013 Bonds involves elements of risk. The following section describes certain specific risk factors affecting the payment and security of the 2013 Bonds. The following discussion of risks is not meant to be an exhaustive list of the risks associated with the purchase of the 2013 Bonds and the order of discussion of such risks does not necessarily reflect the relative importance of the various risks. Potential investors are advised to consider the following factors along with all other information in this Official Statement in evaluating the 2013 Bonds. There can be no assurance that other risk factors not discussed under this caption will not become material in the future. Levy and Collection of Special Tax Rate and Method and Mello-Roos Act Limitations. The principal source of revenues to pay scheduled debt service payment on the 2013 Bonds is the proceeds of the annual levy and collection of the Special Tax against taxable property within the District. The Special Tax levy on taxable property within the District is limited, however, to the maximum rates set forth in the Rate and Method. Furthermore, pursuant to the Rate and Method and the Mello-Roos Act, the Special Tax on any Residential Property in the District may not be increased as a consequence of delinquency or default by the owner or owners of any other property within the District by more than 10 percent above the amount that would have been levied in that fiscal year had there never been any such delinquencies or defaults. In the event of significant Special Tax delinquencies in the District, no assurance can be given that the Special Tax Revenues will in fact be collected in sufficient amounts in any given year, together with moneys available in the Reserve Fund, to pay the scheduled debt service on the 2013 Bonds. 25

34 No Relationship Between Special Tax Levy and Property Value. Because the Special Tax levy is not based on property value, the amount of the Special Tax levied rarely, if ever, results in a uniform relationship between the value of a particular parcel of property and the amount of the levy of the Special Tax against such parcel. Thus, there is rarely, if ever, a uniform relationship between the value of a parcel of property in the District subject to the Special Tax and such parcel s proportionate share of the annual debt service on the Bonds, and certainly not a direct relationship. The following are some of the factors that might cause the levy of the Special Tax on any particular parcel of property in the District to vary from the Special Tax that might otherwise be expected: Reduction in the number of parcels of property subject to the Special Tax levy for such reasons as acquisition by a governmental entity and failure (or refusal) of the government to pay the Special Tax based upon a claim of exemption or, in the case of the federal government or an agency thereof, immunity from taxation, thereby resulting in an increased tax burden on the remaining taxed parcels. Failure of the property owners to pay the Special Tax and delays in the collection of or inability to collect the Special Tax by tax sale or foreclosure and sale of the delinquent parcels, thereby resulting in an increased tax burden on the remaining parcels. Foreclosure Delays; Sufficiency of Foreclosure Proceeds. Generally, the Special Tax is to be collected in the same manner as ordinary ad valorem property taxes are collected and are subject to the same penalties and the same procedure, sale and lien priority in case of delinquency as is provided for ordinary ad valorem property taxes. Under these procedures, if taxes are unpaid for a period of five years or more, the property is deeded to the State and then is subject to sale by the County. If any installment of Special Tax becomes delinquent in the District, the City can foreclose only upon the parcel or parcels with respect to which the Special Tax is delinquent. See SECURITY FOR THE 2013 BONDS Covenant to Foreclose. No assurance can be given that a judicial foreclosure action, once commenced, will be completed or that it will be completed in a timely manner. If a judgment of foreclosure and an order of sale are obtained, the judgment creditor (i.e., City commencing such action) must cause a notice of levy to be issued. Under current law, a judgment debtor (i.e., the property owner) has 120 days (or in some cases a shorter period) from the date of service of the notice of levy and 20 days from the subsequent notice of sale in which to redeem the property to be sold. If a judgment debtor fails to so redeem and the property is sold, such debtor s only remedy is an action to set aside the sale, which must be brought within 90 days of the date of sale. If, as a result of such action, a foreclosure sale is set aside, the judgment is revived and the judgment creditor is entitled to interest on the revived judgment as if the sale had not been made. No assurance can be given that real property subject to sale or foreclosure will be sold or, if sold, that the proceeds of sale will be sufficient to pay any delinquent Special Tax installment. The Mello- Roos Act does not require the City to purchase or otherwise acquire any real property offered for sale or subject to foreclosure if there is no other purchaser at such sale. The Mello-Roos Act specifies that the Special Tax will have the same lien priority in the case of delinquency as for ad valorem property taxes. See Cumulative Burden of Parity Liens, Taxes and Special Assessments. In the event that the Reserve Fund is depleted and delinquencies in the payments of Special Taxes continue, there could be a default or delay in the debt service payment with respect to the 2013 Bonds, pending prosecution of foreclosure proceedings and receipt of foreclosure sale proceeds, if any. Within the limits of the Rate and Method and the Mello-Roos Act, the City may adjust the Special Taxes levied within the District in future years to provide any amount, taking into account such delinquencies, required 26

35 to pay debt service on the Bonds and to replenish the Reserve Fund. There is, however, no assurance that the maximum Special Tax rates under the Rate and Method will be at all times sufficient to collect the amounts required to be paid on Bonds. See SECURITY FOR THE 2013 BONDS Rate and Method. Limited Obligations with Respect to the 2013 Bonds Funds for the payment of the principal of and the interest on the 2013 Bonds are derived primarily from the Special Tax levied in the District. While a levy based on the Assigned Special Tax rates would yield more than sufficient Special Taxes to pay debt service on the 2013 Bonds (assuming no significant delinquencies), there is no guarantee that the amount of Special Tax collected by the City will be insufficient to pay principal of and interest on the 2013 Bonds in all circumstances. The maximum Special Tax levy on each property in the District is subject to the limitations pursuant to the Rate and Method and the Mello-Roos Act. See SECURITY FOR THE BONDS Rate and Method. If there is a significant amount of non-payment by property owners or insufficient proceeds are received from the sales of land within the District due to delinquencies, a default on the 2013 Bonds may follow upon the depletion of the Reserve Fund. The 2013 Bonds are not general obligations of the City. The City s obligation with respect to payment on the 2013 Bonds is limited to the Special Tax Revenues and certain funds pledged therefor under the Fiscal Agent Agreement. Special Tax Payments Not Personal Obligations of Property Owners An owner of property subject to the Special Tax levy in the District is not personally obligated to pay the Special Tax. Rather, the Special Tax is an obligation only against the parcels of property subject to the Special Tax. If, after a default in the payment of the Special Tax and a foreclosure sale by the City, the resulting proceeds are insufficient, taking into account other obligations also constituting a parity lien against the parcels of such property, the City has no recourse against the owner for the delinquency. Risks of Real Estate Secured Investments Generally; Land Values Owners of the 2013 Bonds will be subject to the risks generally incident to an investment secured by real estate, including but not limited to: (i) adverse changes in local market conditions, such as changes in the market value of real property in the vicinity of the District, the supply of or demand for competitive properties in such area, and the market value of the properties in the event of sale or foreclosure, (ii) changes in real estate tax rates and other operating expenses, government rules (including, without limitation, zoning laws, growth control initiatives and laws relating to threatened and endangered species) and fiscal policies and (iii) natural and manmade disasters (including, without limitation, earthquakes, floods and fire), which may result in uninsured losses. These risks affect the value of the property, as well as the property owners willingness and/or ability to pay the Special Tax when due. In evaluating the investment risks with respect to the 2013 Bonds, prospective investors in the 2013 Bonds should keep in mind that the fiscal year assessed values shown in this Official Statement, which are based on the County s fiscal year secured tax roll, may not reflect actual market values of such property. The value of land within the District is an important factor in evaluating the investment quality of the 2013 Bonds. In the event that a property owner defaults in the Special Tax payment and the City commences foreclosure action on such property, prospective purchasers of the 2013 Bonds should not assume that such property could be sold for its assessed value at a foreclosure sale or for an amount adequate to pay delinquent Special Tax payments. Reductions in property values within the District due to economic conditions or the real estate market, events such as earthquakes, droughts, or floods, stricter land use regulations, threatened or endangered species or other events may adversely impact the security 27

36 underlying the revenues from collection of the Special Tax, and therefore, may adversely impact the security for the 2013 Bonds. The real estate market in the State of California experienced a significant boom and then downturn during the past decade. Property values in parts of the Southern California (which includes parts of the County) have fallen considerably since the real estate boom which peaked around As reflected by Table 3 under THE DISTRICT Assessed Valuation, the total assessed value of property in the District decreased in each of fiscal years (by 1.34 percent), (by 6.41 percent) and (by 0.23 percent) Even though recently there have been signs of a slow recovery, the City cannot make any representation regarding the future trend of the value of the property in the District. As shown in Table 8 under THE DISTRICT Special Tax Levy and Delinquency History, taking into account collections after the end of the respective fiscal years, the delinquency rate for the Special Tax levied for each of fiscal years through is less than 0.6 percent. Cumulative Burden of Parity Liens, Taxes and Special Assessments The Special Tax is secured by liens on the property in the District subject to the Special Tax levy. Certain direct and overlapping indebtedness payable from taxes and assessments on land within the District are currently outstanding. See the tables showing the current direct and overlapping debt for the District under the caption THE DISTRICT. The ability or willingness of a property owner in the District to pay the Special Tax on a timely basis can be affected by the existence of other taxes and assessments either currently existing or may be imposed in the future upon the property. The City does not have any control over the ability of other governmental entities to issue indebtedness secured by ad valorem taxes, special taxes or assessments payable from all or a portion of the property within the District. In general, as long as the Special Tax is collected on the County tax roll, the Special Tax and all other taxes, assessments and charges also collected on the tax roll are on a parity, that is, are of equal priority. Questions of priority become significant when collection of one or more of the taxes, assessments or charges is sought by some other procedure, such as foreclosure and sale. In the event of proceedings to foreclose for delinquency of the Special Tax securing the 2013 Bonds, the Special Tax will be subordinate only to existing prior governmental liens, if any. Otherwise, in the event of such foreclosure proceedings, the Special Taxes will generally be on a parity with the other taxes, assessments and charges, and will share the proceeds of such foreclosure proceedings on a pro rata basis. Although the Special Taxes will generally have priority over nongovernmental liens on a parcel of property, regardless of whether the non-governmental liens were in existence at the time of the levy of the Special Tax or not, this result may not apply in the case of bankruptcy. The existence of other property taxes, special taxes and special assessments may reduce the value-to-lien ratio of the affected parcels and increases the possibility that foreclosure proceeds will not be adequate to pay delinquent Special Tax or the principal of and interest on the 2013 Bonds when due. Depletion of Reserve Fund The Reserve Fund is to be maintained at an amount equal to the Reserve Requirement (see SECURITY FOR THE 2013 BONDS Reserve Fund ). Money in the Reserve Fund may be used to pay principal of and interest on the Bonds outstanding under the Fiscal Agent Agreement in the event the proceeds of the levy and collection of the Special Tax against property within the District is insufficient for such purpose. If moneys available in the Reserve Fund are depleted, the Reserve Fund can be replenished from the proceeds of the Special Tax collected that are in excess of the amount required to pay debt service on the Bonds. However, no Reserve Fund replenishment from the proceeds of a Special Tax levy can occur if such Special Tax is already being levied at the maximum rate and the proceeds from 28

37 such levy remain insufficient to pay the full debt service on the Bonds. Thus it is possible that the Reserve Fund will be depleted and not be replenished by the levy of the Special Tax. Bankruptcy Limiting Remedies of Bond Owners The payment of the Special Tax and the ability of the City to foreclose the lien of a delinquent unpaid Special Tax, as discussed in SECURITY FOR THE 2013 BONDS Covenant to Foreclose, may be limited by bankruptcy, insolvency or other laws generally affecting creditors rights or by the laws of the State of California relating to judicial foreclosure. In addition, the prosecution of a foreclosure action could be delayed due to crowded local court calendars or delays in the legal process. The various legal opinions to be delivered concurrently with the delivery of the 2013 Bonds (including Bond Counsel s approving legal opinion) will be qualified as to the enforceability of the various legal instruments by bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors rights, by the application of equitable principles and by the exercise of judicial discretion in appropriate cases. Although bankruptcy proceedings would not cause the lien of the Special Tax to become extinguished, bankruptcy of a property owner could result in a delay in prosecuting superior court foreclosure proceedings. The federal bankruptcy laws provide for an automatic stay of foreclosure and sale of tax sale proceedings, thereby delaying such proceedings perhaps for an extended period. Any such delays would increase the likelihood of a delay or default in payment of the principal of and interest on the 2013 Bonds and the possibility of delinquent tax installments not being paid in full. The payment of Special Tax and the ability of the City to foreclose the lien of a delinquent unpaid tax could be delayed by bankruptcy, reorganization, insolvency, moratorium or other similar laws affecting rights of creditors generally or by the laws of the State of California relating to judicial foreclosure. Further, should remedies be exercised under the federal bankruptcy laws against parcels in the District, payment of the Special Tax may be subordinated to bankruptcy law priorities. Thus, certain claims may have priority over the Special Tax in a bankruptcy proceeding even though they would not outside of a bankruptcy proceeding. Interest of Federal Agencies or Government Sponsored Enterprises in Properties The ability of the City to foreclose the lien of delinquent unpaid Special Tax installments may be limited with regard to properties in which the Federal Deposit Insurance Corporation (the FDIC ), the Drug Enforcement Agency, the Internal Revenue Service, or other federal agency or a federal government sponsored enterprise (such as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, commonly known as Fannie Mae and Freddie Mac ) has or obtains an interest. In the event that any financial institution making any loan which is secured by real property within the District is taken over by the FDIC or another federal agency or a federal government sponsored enterprise, and prior thereto or thereafter the loan or loans go into default, then the ability of the District to collect interest and penalties specified by State law and to foreclose the lien of delinquent unpaid Special Taxes may be limited. According to information available from the County s assessment records, as of January 1, 2013, no Taxable Property within the District was owned by the FDIC, Fannie Mae or Freddie Mac. The FDIC s policy statement regarding the payment of state and local real property taxes (the Policy Statement ) provides that property owned by the FDIC is subject to state and local real property taxes only if those taxes are assessed according to the property s value, and that the FDIC is immune from real property taxes assessed on any basis other than property value. According to the Policy Statement, the FDIC will pay its property tax obligations when they become due and payable and will pay claims for delinquent property taxes as promptly as is consistent with sound business practice and the orderly 29

38 administration of the institution s affairs, unless abandonment of the FDIC s interest in the property is appropriate. The FDIC will pay claims for interest on delinquent property taxes owed at the rate provided under state law, to the extent the interest payment obligation is secured by a valid lien. The FDIC will not pay any amounts in the nature of fines or penalties and will not pay nor recognize liens for such amounts. If any property taxes (including interest) on FDIC-owned property are secured by a valid lien (in effect before the property became owned by the FDIC), the FDIC will pay those claims. The Policy Statement further provides that no property of the FDIC is subject to levy, attachment, garnishment, foreclosure or sale without the FDIC s consent. In addition, the FDIC will not permit a lien or security interest held by the FDIC to be eliminated by foreclosure without the FDIC s consent. The Policy Statement states that the FDIC generally will not pay non-ad valorem taxes, including special assessments, on property in which it has a fee interest unless the amount of tax is fixed at the time that the FDIC acquires its fee interest in the property, nor will it recognize the validity of any lien to the extent it purports to secure the payment of any such amounts. Special taxes imposed under the Mello- Roos Act and a special tax formula which determines the special tax due each year are specifically identified in the Policy Statement as being imposed each year and therefore covered by the FDIC s federal immunity. The Ninth Circuit issued a ruling on August 28, 2001 in which it determined that the FDIC, as a federal agency, is exempt from Mello-Roos special taxes. The City is unable to predict what effect the application of the Policy Statement would have in the event of a delinquency in the payment of Special Taxes on a parcel within the District in which the FDIC has or obtains an interest, although prohibiting the lien of the FDIC to be foreclosed out at a judicial foreclosure sale could reduce or eliminate the number of persons willing to purchase a parcel at foreclosure sale. Such an outcome could cause a draw on the reserve account and perhaps, ultimately, if enough property were to become owned by the FDIC, a default in payment on the 2013 Bonds. Exempt Property Even though the Rate and Method provides that only up to Acres of Property Owner Association Property and Public Property are exempt from the Special Tax levy, the Mello-Roos Act provides that, with limited exceptions, properties or entities of the state, federal or local government are generally exempt from special taxes levied by any community facilities district, including the District; provided, however, that property within the District acquired by a public entity through a negotiated transaction or by gift or devise, which is not otherwise exempt from the Special Tax, will continue to be subject to the Special Tax. It is possible that property in the District acquired by a public entity following a tax sale or foreclosure based upon failure to pay taxes could become exempt from the Special Tax. In addition, although the Mello-Roos Act provides that if property subject to the Special Tax is acquired by a public entity through eminent domain proceedings, the obligation to pay the Special Tax with respect to that property is to be treated as if it were a special assessment, the constitutionality and operation of these provisions of the Mello-Roos Act have not been tested, meaning that such property could become exempt from the Special Tax. In the event that additional property is dedicated to public entities, this additional property might become exempt from the Special Tax. Natural or Manmade Disasters The properties within the District, like those in many California communities, are subject to risk of damage from unpredictable seismic activity, as well as fires, floods, droughts, landslides or other natural or manmade disasters. The City is located in a seismically active area. Several significant historical events (5.8 magnitude or greater on the Richter scale) have affected Orange County in the last 100 years. The District 30

39 is crossed by an earthquake fault zone, and particularly, a trace of the Peralta Hills Fault crosses the far eastern corner of the District. Ground shaking from the Peralta Hills Fault and other regional fault systems are potential seismic hazards to the District. Surface ruptures are additional seismic hazards. As indicated by FEMA s Flood Insurance Rate Maps (FIRM) 06059C0158H and 06059C019H (effective February 18, 2004), the District is located in Zone X, Other Flood Areas (areas determined to be outside of the 0.2 percent annual chance floodplan). None of the buildings within the District are placed within a 100-year (1 percent chance) special flood hazard area. As discussed under THE DISTRICT General, particularly in light of its hillside location, the development of Serrano Heights involved various mitigation measures to reduce risks against flood and fire hazards. In an article published by FEMA entitled Fuel Mitigation Protects Master-Planned Community as part of FEMA s Full Mitigation Best Practices portfolio, FEMA noted that homes in Serrano Heights escaped damage from a major 2007 fire. The Santiago Fire started on October 21, 2007, burned 28,400 acres and came extremely close to Serrano Heights. However, no homes in Serrano Heights were damaged because, FEMA concluded, of the carefully designed fuel modification zones and fire resistant construction of the houses. Despite the various mitigation measures implemented during Serrano Heights development, there is no guarantee that in the event of a severe earthquake, fire, flood or other natural or manmade disaster in the future, there will be no significant damage to both property and infrastructure in the District. If such a disaster did occur, a substantial portion of the property owners may be unable or unwilling to pay the Special Taxes when due. In addition, the value of land in the District could be diminished in the aftermath of such a natural or manmade disaster, reducing the resulting proceeds of foreclosure sales in the event of delinquencies in the payment of the Special Taxes. Hazardous Substances Claims regarding hazardous substances can have an adverse impact on the value of property within the District and, therefore, the security for the 2013 Bonds. In general, the owners and operators of a parcel may be required by law to remedy conditions relating to releases or threatened releases of hazardous substances. The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, sometimes referred to as CERLA or the Superfund Act, is one of the most well-known and widely applicable of these laws, but California laws with respect to hazardous substances are also generally regarded as stringent and similar. Under many of these laws, the owner (or operator) is obligated to remedy a hazardous substance condition of property whether or not the owner (or operator) has anything to do with creating or handling the hazardous substance. The effect, therefore, should a parcel in the District be affected by a hazardous substance is that the marketability and value of the parcel may be reduced by the costs of remedying the condition, because the purchaser, upon becoming the owner, will become obligated to remedy the condition just as is the seller. Further such liabilities may arise not simply from the existence of a hazardous substance but from the method of handling it. All of these possibilities could significantly affect the financial and legal liability of a property owner (thus affect such owners ability and/or willingness to pay the Special Tax when due), as well as the value of the property that is realized upon foreclosure. The assessed values set forth in this Official Statement do not take into account the possible reduction in marketability and value of any property by reason of possible liability of the owner or operator for the remedy of a hazardous substance condition of the parcel. The City is not aware of any owner (or operator) of property in the District that is subject to a current liability under hazardous substance law with respect to any of the parcels in the District. However, the City makes no representation and gives no assurance that such hazardous substance liabilities or conditions do not currently exist or will not arise in the future. 31

40 Disclosure to Future Purchasers The City has caused a notice of the Special Tax lien to be recorded in the Office of the County Recorder. While title companies normally refer to such notices in title reports, there can be no guarantee that such reference will be made or, if made, that a prospective purchaser or lender will consider such special tax obligation in the purchase of a parcel of land or a home in the District or the lending of money secured by property in the District. The Mello-Roos Act requires the subdivider of a subdivision (or its agent or representative) to notify a prospective purchaser or long-term lessor of any lot, parcel, or unit subject to a Mello-Roos special tax of the existence and maximum amount of such special tax using a statutorily prescribed form. California Civil Code Section b requires that in the case of transfers other than those covered by the above requirement, the seller must at least make a good faith effort to notify the prospective purchaser of the special tax lien in a format prescribed by statute. Failure by an owner of the property to comply with these requirements, or failure by a purchaser or lessor to consider or understand the nature and existence of the Special Tax, could adversely affect the willingness and ability of the purchaser or lessor to pay the Special Tax in the District when due. Proposition 218 and Other Voter Initiatives The California Constitution reserves the power of initiatives to the voters for the purposes of enacting amendments to the State Constitution and statutes. Any such initiatives may affect the collection of fees, taxes and other types of revenues by local agencies. Subject to overriding federal constitutional principles, an initiative affecting the collection of fees, taxes and other types of revenues by local agencies may materially impact the collection of Special Taxes in the District and, ultimately, the cash-flow in the payment of 2013 Bonds. Since 1978, California voters have exercised the power of initiatives in numerous occasions. One measure that qualified for the ballot pursuant to California s constitutional initiative process is commonly referred to as the Right to Vote on Taxes Act ( Proposition 218 ). Proposition 218 was approved by the voters of California at the November 5, 1996 general election. Proposition 218 added Article XIIIC and Article XIIID to the California Constitution. According to the Title and Summary of Proposition 218 prepared by the California Attorney General, Proposition 218 limits the authority of local governments to impose taxes and property-related assessments, fees and charges. Among other things, Section 3 of Article XIII states that... the initiative power shall not be prohibited or otherwise limited in matters of reducing or repealing any local tax, assessment, fee or charge. The Act provides for a procedure, which includes notice hearing, protest and voting requirements to alter the rate and method of apportionment of an existing special tax. However, the Act prohibits a legislative body from adopting any resolution to reduce the rate of any special tax or terminate the levy of any special tax pledged to repay any debt incurred pursuant to the Act unless such legislative body determines that the reduction or termination of the special tax would not interfere with the timely retirement of that debt. On July 1, 1997, a bill signed into law by the Governor of California enacting Government Code Section 5854, which states that: Section 3 of Article XIIIC of the California Constitution, as adopted at the November 5, 1996, general election, shall not be construed to mean that any owner or beneficial owner of a municipal security, purchased before or after that date, assumes the risk of, or in any way consents to, any action by initiative measure that constitutes an impairment of contractual rights protected by Section 10 of Article I of the United States Constitution. Accordingly, although the matter is not free from doubt, it is likely that Proposition 218 has not conferred on the voters the power to repeal or reduce the Special Taxes if such reduction would interfere 32

41 with the timely retirement of the 2013 Bonds. It may be possible, however, for voters or the City Council, acting as the legislative body of the District, to reduce the Special Taxes in a manner which does not interfere with the timely repayment of the 2013 Bonds but which does reduce the maximum amount of Special Taxes that may be levied in any year below the existing levels. Therefore, no assurance can be given with respect to the levy of Special Taxes for administrative expenses for the District. Furthermore, no assurance can be given with respect to the future levy of the Special Taxes in amounts greater than the amount necessary for the timely retirement of the 2013 Bonds. The provisions of Proposition 218 described above have not yet been interpreted by the courts, although a number of lawsuits have been filed requesting the courts to interpret various aspects of Proposition 218. Certain provisions of Proposition 218 may be examined by the courts for their constitutionality under both State and federal constitutional law in the future. The City cannot predict the outcome of such examination and the resulting effect, if any, on the levy and collection of the Special Tax in the District. The City cannot predict the impact of any future initiative that may affect the collection of fees, taxes and other types of revenues by local agencies. Limitations on Remedies; No Acceleration Remedies available to Owners of 2013 Bonds upon a payment or other default under the Fiscal Agent Agreement may be limited by a variety of factors and may be inadequate to assure the timely payment of principal of and interest on the 2013 Bonds or to preserve the tax-exempt status of the 2013 Bonds. There is no provision in the Fiscal Agent Agreement for acceleration of the payment of principal of or interest on the 2013 Bonds in the event of default in the payment of scheduled debt service on the 2013 Bonds or in the event interest on the 2013 Bonds becomes included in gross income for federal income tax purposes. Investment of Funds The Reserve Fund and all other funds held under the Fiscal Agent Agreement are required to be invested in certain investment securities ( Permitted Investments ) as provided under the Fiscal Agent Agreement. See APPENDIX D SUMMARY OF CERTAIN PROVISIONS OF THE FISCAL AGENT AGREEMENT Definitions Permitted Investments. All investments, including Permitted Investments, authorized by law from time to time for investments by the City contain a certain degree of risk. Such risks include, but are not limited to, a lower rate of return than expected, decline in market value and loss or delayed receipt of principal. The occurrence of these events with respect to amounts held under the Fiscal Agent Agreement could have a material adverse effect on the security for the 2013 Bonds. Loss of Tax Exemption Compliance by the City. In order to maintain the exclusion from gross income for federal income tax purposes of the interest on the 2013 Bonds, the City has covenanted in the Fiscal Agent Agreement to comply with the applicable requirements of Section 148 and certain other sections of the Internal Revenue Code of 1986, as amended, relative to arbitrage and avoidance of characterization as private activity bonds, among other things. The interest on the 2013 Bonds could become includable in gross income for purposes of federal income taxation retroactive to the date of issuance of the 2013 Bonds as a result of acts or omissions of the City in violation of such covenants under the Fiscal Agent Agreement. Should such an event of taxability occur, the 2013 Bonds are not subject to acceleration, redemption or any increase in interest rates and will remain Outstanding until maturity or until redeemed under one of the redemption provisions contained in the Fiscal Agent Agreement. 33

42 Future Legislation or Court Decisions. Legislation affecting the tax exemption of interest on the 2013 Bonds may be considered by the United States Congress and the State legislature. Federal and state court proceedings and the outcome of such proceedings could also affect the tax exemption of interest on the 2013 Bonds. No assurance can be given that legislation enacted or proposed, or actions by a court, after the date of issuance of the 2013 Bonds will not have an adverse effect on the tax exemption of interest on the 2013 Bonds or the market value of the 2013 Bonds. Prospective purchasers of the 2013 Bonds should consult their own tax advisors regarding any pending or proposed federal or state tax legislation, regulations or litigation. See CONCLUDING INFORMATION Tax Matters. Secondary Market There can be no assurance that there will be a secondary market for the 2013 Bonds, or if a secondary market exists, that the 2013 Bonds can be sold for any particular price. Occasionally, because of general market conditions or because of adverse history or economic prospects connected with a particular issue, secondary marketing practices in connection with a particular issue are suspended or terminated. Additionally, pricing of issues for which a market is being made will depend upon then prevailing circumstances. Such prices could substantially differ from the original purchase price. Absence of Litigation CONCLUDING INFORMATION At the time of delivery of the 2013 Bonds, the City will certify that there is no lawsuit or claim pending and notice of which has been received by the City, or otherwise known to the City to be threatened, against the City or the District seeking to restrain or to enjoin the issuance, sale or delivery of the 2013 Bonds, the application of the proceeds of the 2013 Bonds in accordance with the Fiscal Agent Agreement, the collection or application of the Special Tax to pay debt service on the 2013 Bonds, or in any way contesting or affecting the validity or enforceability of the 2013 Bonds or the Fiscal Agent Agreement, or contesting the powers of the City or the District or their authority with respect to the 2013 Bonds or their ability to perform their obligations under the Fiscal Agent Agreement. Continuing Disclosure The City has undertaken for the benefit of Owners and beneficial owners of the 2013 Bonds to provide certain financial information relating to the District by not later than March 1 after the end of each of the City s fiscal year (which currently ends on June 30), commencing with the report due on March 1, 2014 (the Annual Report ), and to provide notices of the occurrence of certain enumerated events. The Annual Report and notices will be filed by the City or Willdan Financial Services, as the Dissemination Agent on behalf of the City, with the Municipal Securities Rulemaking Board ( MSRB ). The specific nature of the information to be contained in the Annual Report or the notices of events is set forth in APPENDIX C FORM OF CONTINUING DISCLOSURE CERTIFICATE. This undertaking has been made in order to assist the Underwriter in complying with Rule 15c2-12(b)(5) (the Rule ) promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. A failure by the City to comply with the provisions of the Continuing Disclosure Certificate is not an event of default under the Fiscal Agent Agreement (although the holders and beneficial owners of the 34

43 2013 Bonds do have remedies at law and in equity). However, a failure to comply with the provisions of the Continuing Disclosure Certificate must be reported in accordance with the Rule and must be considered by any broker, dealer or municipal securities dealer before recommending the purchase or sale of the 2013 Bonds. Therefore, a failure by the City to comply with the provisions of the Continuing Disclosure Certificate may adversely affect the marketability of the 2013 Bonds on the secondary market. The City has previously entered into similar continuing disclosure undertakings in connection with other bond issues. Prior to the printing of this Official Statement, the City retained an independent firm to examine the continuing disclosure filings by the City and certain City-related entities (including the former Orange Redevelopment Agency) during the past five years. The result of such examination indicated that one continuing disclosure annual report was submitted 25 days after the due date and two other annual reports (for the same fiscal year) was submitted 10 days after the due date. There were instances where the audited financial statements were not submitted or certain information required to be included in the continuing disclosure annual reports were not included. On two occasions, there were failures to file notices in conjunction with bond insurers rating changes. Upon the conclusion of such examination, the City took steps to make the necessary supplemental filings and has now cured all of the past failures identified by such examination. The City is reviewing and evaluating its continuing disclosure practices and intends to implement procedures to ensure future compliance. Legal Matters The legality of the 2013 Bonds and certain other legal matters are subject to the approving opinion of Quint & Thimmig LLP, acting as Bond Counsel. A complete copy of the proposed form of Bond Counsel opinion is contained in Appendix E of this Official Statement. Certain matters with respect to this Official Statement will be considered on behalf of the City by Richards, Watson & Gershon, A Professional Corporation, Disclosure Counsel. Certain other legal matters related to the 2013 Bonds will be considered on behalf of the City and the District by the City Attorney. Certain legal matters related to the 2013 Bonds will be passed upon for Stifel, Nicolaus & Company, Incorporated, dba Stone & Youngberg, a Division of Stifel Nicolaus, as Underwriter, by Nossaman LLP, as Underwriter s Counsel. Payment of the fees of Bond Counsel, Disclosure Counsel and Underwriter s Counsel is contingent upon issuance of the 2013 Bonds. Tax Matters Federal tax law contains a number of requirements and restrictions which apply to the 2013 Bonds, including investment restrictions, periodic payments of arbitrage profits to the United States, requirements regarding the proper use of bond proceeds and the facilities financed therewith, and certain other matters. The City has covenanted in the Fiscal Agent Agreement to comply with all requirements that must be satisfied in order for the interest on the 2013 Bonds to be excludable from gross income for federal income tax purposes. Failure to comply with certain of such covenants could cause interest on the 2013 Bonds to become includable in gross income for federal income tax purposes retroactively to the date of issuance of the 2013 Bonds. Subject to the City s compliance with the above-referenced covenants, under present law, in the opinion of Quint & Thimmig LLP, Bond Counsel, interest on the 2013 Bonds (i) is excludable from the gross income of the owners thereof for federal income tax purposes, and (ii) is not included as an item of tax preference in computing the federal alternative minimum tax for individuals and corporations, but interest on the 2013 Bonds is taken into account, however, in computing an adjustment used in determining the federal alternative minimum tax for certain corporations. 35

44 In rendering its opinion, Bond Counsel will rely upon certifications of the City with respect to certain material facts within the City s knowledge. Bond Counsel s opinion represents its legal judgment based upon its review of the law and the facts that it deems relevant to render such opinion and is not a guarantee of a result. The Internal Revenue Code of 1986, as amended (the Code ), includes provisions for an alternative minimum tax ( AMT ) for corporations in addition to the corporate regular tax in certain cases. The AMT, if any, depends upon the corporation s alternative minimum taxable income ( AMTI ), which is the corporation s taxable income with certain adjustments. One of the adjustment items used in computing the AMTI of a corporation (with certain exceptions) is an amount equal to 75% of the excess of such corporation s adjusted current earnings over an amount equal to its AMTI (before such adjustment item and the alternative tax net operating loss deduction). Adjusted current earnings would include certain tax-exempt interest, including interest on the 2013 Bonds. Ownership of the 2013 Bonds may result in collateral federal income tax consequences to certain taxpayers, including, without limitation, corporations subject to the branch profits tax, financial institutions, certain insurance companies, certain S corporations, individual recipients of Social Security or Railroad Retirement benefits and taxpayers who may be deemed to have incurred (or continued) indebtedness to purchase or carry tax exempt obligations. Prospective purchasers of the 2013 Bonds should consult their tax advisors as to applicability of any such collateral consequences. The issue price (the Issue Price ) for each maturity of the 2013 Bonds is the price at which a substantial amount of such maturity of the 2013 Bonds is first sold to the public. The Issue Price of a maturity of the 2013 Bonds may be different from the price set forth, or the price corresponding to the yield set forth, on the inside cover page of this Official Statement. If the Issue Price of a maturity of the 2013 Bonds is less than the principal amount payable at maturity, the difference between the Issue Price of each such maturity, if any, of the 2013 Bonds (the OID 2013 Bonds ) and the principal amount payable at maturity is original issue discount. For an investor who purchases an OID 2013 Bond in the initial public offering at the Issue Price for such maturity and who holds such OID 2013 Bond to its stated maturity, subject to the condition that the City comply with the covenants discussed above, (a) the full amount of original issue discount with respect to such OID 2013 Bond constitutes interest which is excludable from the gross income of the owner thereof for federal income tax purposes; (b) such owner will not realize taxable capital gain or market discount upon payment of such OID 2013 Bond at its stated maturity; (c) such original issue discount is not included as an item of tax preference in computing the alternative minimum tax for individuals and corporations under the Code, but is taken into account in computing an adjustment used in determining the alternative minimum tax for certain corporations under the Code, as described above; and (d) the accretion of original issue discount in each year may result in an alternative minimum tax liability for corporations or certain other collateral federal income tax consequences in each year even though a corresponding cash payment may not be received until a later year. Owners of OID 2013 Bonds should consult their own tax advisors with respect to the state and local tax consequences of original issue discount on such OID 2013 Bonds. Owners of 2013 Bonds who dispose of 2013 Bonds prior to the stated maturity (whether by sale, redemption or otherwise), purchase 2013 Bonds in the initial public offering, but at a price different from the Issue Price or purchase 2013 Bonds subsequent to the initial public offering should consult their own tax advisors. 36

45 If a 2013 Bond is purchased at any time for a price that is less than the 2013 Bond s stated redemption price at maturity or, in the case of an OID 2013 Bond, its Issue Price plus accreted original issue discount reduced by payments of interest included in the computation of original issue discount and previously paid (the Revised Issue Price ), the purchaser will be treated as having purchased a 2013 Bond with market discount subject to the market discount rules of the Code (unless a statutory de minimis rule applies). Accrued market discount is treated as taxable ordinary income and is recognized when a 2013 Bond is disposed of (to the extent such accrued discount does not exceed gain realized) or, at the purchaser s election, as it accrues. Such treatment would apply to any purchaser who purchases an OID 2013 Bond for a price that is less than its Revised Issue Price even if the purchase price exceeds par. The applicability of the market discount rules may adversely affect the liquidity or secondary market price of such 2013 Bond. Purchasers should consult their own tax advisors regarding the potential implications of market discount with respect to the 2013 Bonds. An investor may purchase a 2013 Bond at a price in excess of its stated principal amount. Such excess is characterized for federal income tax purposes as bond premium and must be amortized by an investor on a constant yield basis over the remaining term of the 2013 Bond in a manner that takes into account potential call dates and call prices. An investor cannot deduct amortized bond premium relating to a tax-exempt bond. The amortized bond premium is treated as a reduction in the tax-exempt interest received. As bond premium is amortized, it reduces the investor s basis in the 2013 Bond. Investors who purchase a 2013 Bond at a premium should consult their own tax advisors regarding the amortization of bond premium and its effect on the 2013 Bond s basis for purposes of computing gain or loss in connection with the sale, exchange, redemption or early retirement of the 2013 Bond. There are or may be pending in the Congress of the United States legislative proposals, including some that carry retroactive effective dates, that, if enacted, could alter or amend the federal tax matters referred to above or affect the market value of the 2013 Bonds. It cannot be predicted whether or in what form any such proposal might be enacted or whether, if enacted, it would apply to bonds issued prior to enactment. Prospective purchasers of the 2013 Bonds should consult their own tax advisors regarding any pending or proposed federal tax legislation. Bond Counsel expresses no opinion regarding any pending or proposed federal tax legislation. The Internal Revenue Service (the Service ) has an ongoing program of auditing tax-exempt obligations to determine whether, in the view of the Service, interest on such tax-exempt obligations is includable in the gross income of the owners thereof for federal income tax purposes. It cannot be predicted whether or not the Service will commence an audit of the 2013 Bonds. If an audit is commenced, under current procedures the Service may treat the City as a taxpayer and the 2013 Bondholders may have no right to participate in such procedure. The commencement of an audit could adversely affect the market value and liquidity of the 2013 Bonds until the audit is concluded, regardless of the ultimate outcome. Payments of interest on, and proceeds of the sale, redemption or maturity of, tax exempt obligations, including the 2013 Bonds, are in certain cases required to be reported to the Service. Additionally, backup withholding may apply to any such payments to any 2013 Bond owner who fails to provide an accurate Form W-9 Request for Taxpayer Identification Number and Certification, or a substantially identical form, or to any 2013 Bond owner who is notified by the Service of a failure to report any interest or dividends required to be shown on federal income tax returns. The reporting and backup withholding requirements do not affect the excludability of such interest from gross income for federal tax purposes. In the further opinion of Bond Counsel, interest on the 2013 Bonds is exempt from California personal income taxes. 37

46 Ownership of the 2013 Bonds may result in other state and local tax consequences to certain taxpayers. Bond Counsel expresses no opinion regarding any such collateral consequences arising with respect to the 2013 Bonds. Prospective purchasers of the 2013 Bonds should consult their tax advisors regarding the applicability of any such state and local taxes. The complete text of the final opinion that Bond Counsel expects to deliver upon issuance of the 2013 Bonds is set forth in Appendix E. Underwriting Stifel, Nicolaus & Company, Incorporated, dba Stone & Youngberg, a Division of Stifel Nicolaus (the Underwriter ) has agreed, subject to certain conditions, to purchase the 2013 Bonds at a purchase price of $31,295, (which is equal to the principal amount of the 2013 Bonds, plus a net original issue premium of $2,712,155.90, and less an Underwriter s discount of $226,696.25). The Underwriter intends to offer the 2013 Bonds to the public initially at the prices set forth on the inside cover of this Official Statement, which prices may subsequently change without any requirement of prior notice. Rating S&P has assigned a rating of A to the 2013 Bonds. S&P s rating reflects only the views of such organization and any explanation of the significance of such rating may be obtained from S&P. There is no assurance such rating will continue for any given period of time or that such rating will not be revised downward or withdrawn entirely by the rating agency, if in the judgment of such rating agency, circumstances so warrant. Other than as described in the Continuing Disclosure Certificate, the City takes no responsibility regarding either to bring to the attention of the Owners of the 2013 Bonds any revision or withdrawal of such rating or to oppose any such revision or withdrawal. Any such downward revision or withdrawal of the rating may have an adverse effect on the market price of the 2013 Bonds. Miscellaneous All summaries of the 2013 Bonds, the Fiscal Agent Agreement, the Rate and Method, the Mello- Roos Act and other applicable legislation, agreements and other documents in this Official Statement are made subject to the provisions of such documents respectively and do not purport to be complete statements of any or all of such provisions. Reference is hereby made to such legislation and such documents on file with the City for further information in connection therewith. This Official Statement does not constitute a contract with the purchasers of the 2013 Bonds. Any statements made in this Official Statement involving matters of opinion or estimates, whether or not 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. 38

47 The execution and delivery of this Official Statement by the Mayor of the City has been duly authorized by the City Council of the City, acting in its capacity as the legislative body of the District. CITY OF ORANGE for and on behalf of CITY OF ORANGE COMMUNITY FACILITIES DISTRICT NO (SERRANO HEIGHTS PUBLIC IMPROVEMENTS) By: /s/ Teresa E. Smith Mayor 39

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49 APPENDIX A GENERAL INFORMATION REGARDING THE CITY OF ORANGE The following information in this Appendix is included only to provide general demographic and economic information regarding the City of Orange, California (the City ). The information set forth in this Appendix has been obtained from sources that the City believes is reliable, but does guarantee as to the accuracy or completeness. As discussed in the forepart of this Official Statement, neither the faith and credit nor the taxing power of the City (except to the limited extent set forth in the Fiscal Agent Agreement with respect to the levy of Special Taxes within the District) is pledged to the payment of the 2013 Bonds. The 2013 Bonds are not general obligations of the City, but are limited obligations of the City for the District, payable solely from the sources provided therefor in the Fiscal Agent Agreement. General The City is located in the north-central portion of Orange County (the County ) approximately 32 miles southeast of Los Angeles and 94 miles north of San Diego. The City encompasses an area of approximately 28 square miles with an average elevation of 197 feet above sea level. Incorporated on April 6, 1888 as a general law city, the City currently functions under a Council/Manager form of government. A five member City Council, including the Mayor, is elected at large. The City Treasurer and City Clerk are also elected at large. The City currently employs approximately 600 permanent employees and 100 temporary and part-time employees. Population The following table shows the estimated population growth for the City, the County and the State of California (the State ) for the years shown: Calendar Year (1) City of Orange City of Orange City, County and State Population Growth Calendar Years 1980, 1990, 2000, % Change from Prior Period Orange County % Change from Prior Period State of California % Change from Prior Period , % (2) 1,932, % (2) 23,782, % (2) , ,398, ,558, , ,831, ,721, , ,008, ,223, , ,028, ,427, , ,055, ,678, (1) As of January 1 of each year. (2) Percent change since Source: State of California Department of Finance. A-1

50 City s Taxable Valuation A summary of the City s taxable valuation for fiscal years through is set forth below. These figures are presented for historical comparison, with reference only to the time frame of the years shown. City of Orange Assessed Values of All Taxable Property Fiscal Years through Fiscal Year Secured Value Unsecured Value Total Assessed Value Percent Change from Prior Year $10,770,604,462 $169,735,907 $10,940,340, % ,672,244, ,564,107 11,818,808, ,874,120, ,490,390 12,037,610, ,477,035, ,358,611 11,588,394,063 (3.73) ,567,914, ,791,812 11,727,706, ,764,617, ,861,275 11,902,478, Source: City of Orange, based on information provided by the Orange County Auditor-Controller Office. Employment According to the California Employment Development Department s preliminary estimates for December 2012, estimated unemployment rate for the City was 6.2 percent, and that for the County was 6.8 percent. The following table shows the estimate civilian labor force and unemployment rates for the City and the County for calendar years 2001 through City of Orange City and County Employment Statistics Calendar Years 2001 through 2011 (1) City County Year Labor Force Employed Unemployment Rate Unemployment Rate ,100 66, % 4.0% ,000 66, ,100 68, ,000 69, ,600 70, ,200 70, ,500 70, ,900 70, ,300 66, ,400 66, ,000 67, (1) Not seasonally adjusted. Source: State of California, Employment Development Department. The following table summarizes the civilian labor force in the County (for the calendar years 2007 through These figures are county-wide statistics and may not necessarily accurately reflect employment trends in the City. A-2

51 Orange County Annual Average Employment by Industry (1) Calendar Years 2007 through 2011 Industry Private, non-farm Goods producing: Mining and logging Construction 103,100 91,200 74,200 68,000 68,300 Manufacturing durable goods 126, , , , ,200 Manufacturing non-durable goods 54,200 51,500 45,700 43,900 43,400 Service Providing: Wholesale trade 86,900 86,700 79,400 77,600 77,900 Retail trade 161, , , , ,600 Transport., warehousing and utilities 28,900 29,300 27,800 26,700 27,500 Information 31,200 30,100 27,300 24,800 23,800 Financial activities 127, , , , ,900 Professional and business services 273, , , , ,700 Educational and health services 142, , , , ,700 Leisure and hospitality 172, , , , ,200 Other services 47,400 46,500 42,600 42,200 42,800 Subtotal 1,356,200 1,320,800 1,215,400 1,201,400 1,218,500 Government 159, , , , ,600 Farm 5,000 4,600 3,800 3,700 3,200 Total 1,520,600 1,486,200 1,375,800 1,357,400 1,371,300 (1) Employment reported by place of work; does not include persons involved in labor-management disputes. Figures are rounded to the nearest hundred. Columns may not add due to rounding. Based on March 2009 benchmark. Not seasonally adjusted. Source: State of California, Employment Development Department. Per Capital Personal Income The following table shows the estimated annual per capita personal income for the County, the State and the United States from 2007 through Orange County, California and the United States Per Capita Personal Income (1)(2) Calendar Years 2007 through 2011 Year County State U.S $43,211 $52,342 $39, ,003 52,720 40, ,034 48,624 38, ,893 48,760 39, ,647 50,440 41,560 (1) Per capita personal income is the total personal income divided by the total midyear population estimates of the U.S. Bureau of the Census. Estimates reflect county population estimates available as of April (2) In current dollars, not adjusted for inflation. Source: U.S. Department of Commerce, Bureau of Economic Analysis A-3

52 Taxable Sales The following tables show the dollar volume of taxable transactions in the City of Orange from 2006 through City of Orange Taxable Transactions Calendar Years 2006 through 2010 (in Thousands of Dollars) Retail outlets Apparel stores 97, , , , ,395 General merchandise stores 206, , , , ,940 Food stores 87,560 90,946 86, , ,676 Eating and drinking places 279, , , , ,005 Home furnishings and appliances 74,458 68,808 85, , ,101 Building materials and farm implements 228, , , , ,729 Auto dealers and auto supplies 538, , , , ,513 Services stations 218, , , , ,695 Other retail stores 405, , , , ,467 Subtotal 2,136,439 2,039,005 1,872,603 1,657,125 1,690,521 All other outlets 1,066,126 1,149,139 1,184, , ,539 All outlets total 3,202,565 3,188,144 3,057,454 2,479,3745 2,595,060 Source: State of California, Board of Equalization. A-4

53 APPENDIX B RATE AND METHOD OF APPORTIONMENT APPENDIX OF SPECIAL TAX AMENDED AND RESTATED RATE AND METHOD OF APPORTIONMENT FOR CITY OF ORANGE COMMUNITY FACILITIES DISTRICT NO (SERRANO HEIGHTS PUBLIC IMPROVEMENTS) A Special Tax as hereinafter defined shall be levied on all Assessor's Parcels in the City of Orange Community Facilities District No (Serrano Heights Public Improvements) ("CFD No. 91-2") and collected each Fiscal Year commencing in Fiscal Year , in an amount determined by the CFD Administrator (as defined below) through the application of the procedures described below. All of the real property in CFD No. 91-2, unless exempted by law or by the provisions hereof, shall be taxed for the purposes, to the extent and in the manner herein provided. A. DEFINITIONS The terms hereinafter set forth have the following meanings: "Acre or Acreage" means the number of acres of land area of an Assessor's Parcel as shown on an Assessor's Parcel Map, or if the land area is not shown on an Assessor's Parcel Map, the land area shown on the applicable final map, parcel map, condominium plan, or other recorded County parcel map. The square footage of an Assessor's Parcel is equal to the Acreage multiplied by 43,560. "Act" means the Mello-Roos Community Facilities Act of 1982, as amended, being Chapter 2.5 of Part 1 of Division 2 of Title 5 of the Govemment Code of the State of California. "Administrative Expenses" means the following actual or reasonably estimated costs related to the administration of CFD No. 91-2: the costs of computing the Special Taxes and preparing the annual Special Tax collection schedules (whether by the City or designee thereof or both); the costs of collecting the Special Taxes (whether by the County, the City, through foreclosure proceedings, or otherwise); the costs of remitting the Special Taxes to the Fiscal Agent; the costs of the Fiscal Agent (including its legal counsel) in the discharge of the duties required of it under the Fiscal Agent Agreement; the costs to the City, CFD No or any designee thereof of complying with arbitrage rebate requirements; the costs to the City, CFD No or any designee thereof of complying with City, CFD No or obligated persons disclosure requirements associated with applicable federal and state securities laws and of the Act; the costs associated with preparing Special Tax disclosure statements and responding to public inquiries regarding the Special Taxes; the costs of the City, CFD No or any designee thereof related to an appeal of the Special Tax; the costs associated with the release of funds from an escrow account; and the City's annual administration fees and third party expenses. Administrative Expenses shall also include amounts estimated or advanced by the City or CFD No for any other administrative purposes of CFD No. 91-2, including attomey's fees and other costs related to commencing and pursuing to completion any foreclosure of delinquent Special Taxes. "Assessor's Parcel" means a lot or parcel shown in an Assessor's Parcel Map with an assigned Assessor's Parcel number. "Assessor's Parcel Map" means an official map of the Assessor of the County designating parcels by Assessor's Parcel number. "Assigned Special Tax" means the Special Tax for each Land Use Class of Developed Property, as determined in accordance with Section C below. B-1

54 "Backup Special Tax" means the Special Tax applicable to each Assessor's Parcel of Developed Property, as determined in accordance with Section C below. "Bonds" means any bonds or other debt (as defined in Section 53317(d) of the Act), whether in one or more series, issued by CFD No under the Act. "Builder" means an entity which owns a residential dwelling unit immediately prior to the issuance of a Certificate of Occupancy, and then sells that dwelling unit for its Value to an Original Homeowner. "Certificate of Occupancy" means a document issued by the City which permits the initial habitation of a newly constructed residential dwelling unit. "CFD Administrator" means the Director of Finance of the City, or designee thereof, who is responsible for detem1ining the Special Tax Requirement and providing for the levy and collection of the Special Taxes. "CFD No. 91-2" means the City of Orange Community Facilities District No (Serrano Heights Public Improvements). "City" means the City of Orange. "County" means the County of Orange. "Council'' means the City Council of the City of Orange, acting as the legislative body of CFD No "Developed Property" means, for each Fiscal Year, all Taxable Property, exclusive of Taxable Property Owner Association Property or Taxable Public Property, for which a building permit for new construction was issued after January 1, 1999 and prior to March I of the prior Fiscal Y car. "Fiscal Agent" means the fiscal agent under the Fiscal Agent Agreement. "Fiscal Agent Agreement" means the fiscal agent agreement or other instrument pursuant to which Bonds are issued, as modified, amended and/or supplemented from time to time, and any instrument replacing or supplementing the same. "Fiscal Year" means the period starting July 1 and ending on the following June 30. "Land Use Class" means any of the classes listed in Table 1. "Maximum Special Tax" means the maximum Special Tax, determined in accordance with Section C below, that can be levied in any Fiscal Year on any Assessor's Parcel. "Non-Residential Property" means all Assessor's Parcels of Developed Property for which a building permit(s) was issued for a non-residential use. "One-Time Special Tax" means a one-time special tax paid by a Builder prior to issuance of a Certificate of Occupancy by the City, in order to reduce the Backup Special Tax so that the Total Tax and Assessment Obligation during the first Fiscal Year in which an Assessor's Parcel is considered Developed Property will not exceed 2.0 percent of Value. B-2

55 "Original Homeowner" means the first homeowner to purchase a residential dwelling unit from a Builder after the issuance of a Certificate of Occupancy by the City. "Outstanding Bonds" means all Bonds which are outstanding under and in accordance with the provisions of the Fiscal Agent Agreement. "Property Owner Association Property" means any property within the boundaries of CFD No that is owned by or irrevocably dedicated to a property owner association, including any master or sub-association. "Proportionately" means for Developed Property that the ratio of the actual Special Tax levy to the Assigned Special Tax is equal for all Assessor's Parcels of Developed Property within CFD No For Undeveloped Property, "Proportionately" means that the ratio of the actual Special Tax levy per Acre to the Maximum Special Tax per Acre is equal for all Assessor's Parcels of Undeveloped Property in CFD No "Public Property" means any property within the boundaries of CFD No that (i) is owned by or irrevocably offered for dedication to the federal government, the State, the County, the City or any other public agency, provided however that any property leased by a public agency to a private entity and subject to taxation under Section of the Act shall be taxed and classified in accordance with its use; or (ii) is encumbered by a public utility easement making impractical its use for any purpose other than that set forth in the easement. "Residential Property" means all Assessor's Parcels of Developed Property for which a building permit has been issued for purposes of constructing one or more residential dwelling units. "Residential Floor Area" means all of the square footage of living area within the perimeter of a residential structure, not including any carport, walkway, garage, overhang, patio; enclosed patio, or similar area. The determination of Residential Floor Area shall be made by reference to the building permit(s) issued for such Assessor's Parcel. "Single Family Attached Property" means all Assessor's Parcels of Residential Property for which building permits have been issued for attached residential units. "Single Family Detached Property" means all Assessor's Parcels of Residential Property for which building permits have been issued for detached residential units. "Special Tax" means the special tax to be levied in each Fiscal Year on each Assessor's Parcel of Developed Property, Undeveloped Property, Taxable Property Owner Association Property, and Taxable Public Property to fund the Special Tax Requirement. "Special Tax Requirement" means that amount required in any Fiscal Year to pay: (I) debt service and other periodic costs on the Bonds due in the calendar year commencing in such Fiscal Year, (2) the cost of acquisition or construction of authorized facilities of CFD No. 91-2, (3) Administrative Expenses, (4) any amount required to replenish any reserve fund established in association with the Bonds, (5) for reasonably anticipated delinquent Special Taxes based on the delinquency rate for Special Taxes levied in the previous Fiscal Year, (6) the costs of remarketing, credit enhancement and liquidity facility fees (including such fees for instruments that serve as the basis of a reserve fund related to any indebtedness in lieu of cash), and (7) the One Time Special Tax, less (8) a credit for funds available to reduce the annual Special Tax levy, as determined by the CFD Administrator pursuant to the Fiscal Agent Agreement. "State" means the State of California. B-3

56 "Taxable Property" means all of the Assessor's Parcels within the boundaries of CFD No which are not exempt from the Special Tax pursuant to law or Section F below. "Taxable Property Owner Association Property" means all Assessor's Parcels of Property Owner Association Property that are not exempt pursuant to Section F below. "Taxable Public Property" means all Assessor's Parcels of Public Property that are not exempt pursuant to Section F below. "Total Tax and Assessment Obligation" means for an Assessor's Parcel or portion of an Assessor's Parcel, the sum of the projected ad valorem taxes and any special assessments or taxes which may be included on the annual property tax bill during the first full Fiscal Year after the sale of the home to the Original Homeowner, including but not limited to: the Maximum Special Tax for CFD No. 91-2, general obligation debt of the City or any other public agency, special assessments, and other charges placed on the property tax bill. "Undeveloped Property" means, for each Fiscal Year, all Taxable Property not classified as Developed Property, Taxable Property Owner Association Property, or Taxable Public Property. "Value" means the full sales price of a dwelling unit upon the sale by the Builder to the Original Homeowner, as listed on the escrow closing statement for such sale. B. ASSIGNMENT TO LAND USE CATEGORIES Each Fiscal Year, all Taxable Property within CFD No shall be classified as Developed Property, Taxable Public Property, Taxable Property Owner Association Property, or Undeveloped Property, and shall be subject to Special Taxes in accordance with the rate and method of apportionment determined pursuant to Sections C and D below. Residential Property shall be assigned to Land Use Classes 1 through 12 and Non-Residential Property shall be assigned to Land Use Class 13. The Assigned Special Tax for Residential Property shall be based on the Residential Floor Area located on the Assessor's Parcel. The Assigned Special Tax for Non-Residential Property shall be based on the Acreage of the Assessor's Parcel. C. MAXIMUM SPECIAL TAX RATE 1. Developed Property a. Maximum Special Tax The Maximum Special Tax for each Assessor's Parcel classified as Developed Property shall be the greater of (i) the amount derived by application of the Assigned Special Tax or (ii) the amount derived by application of the Backup Special Tax. In a Fiscal Year when the One-Time Backup Special Tax is to be applied to an Assessor's Parcel, the One-Time Backup Special Tax shall be added to the greater of (i) or (ii) to determine the Maximum Special Tax which may be levied on the Assessor's Parcel in that Fiscal Year. b. Assig11ed Special Tax The Assigned Special Tax for Fiscal Year for each Land Use Class is shown in Table 1. B-4

57 TABLE! Assigned Special Taxes for Developed Property F'or Fiscal Year Community Facilities District No Land Use Class Description Single Family Detached Property Single Family Detached Property Single Family Detached Property Single Family Detached Property Single Family Detached Property Single Family Detached Property Single Family Detached Property Single Family Detached Property Single Family Detached Property Single Family Detached Property Single Family Attached Property Single Family Attached Property Non Residential Property Residential Floor Area > 3,599 SQ. ft. 3,400-3,599 sq. ft. 3,200-3,399 SQ. ft. 3,000-3,199 SQ. ft. 2,800-2,999 sq. ft. 2,600-2,799 SQ. ft. 2,400-2,599 sq. ft. 2,200-2,399 SQ. ft. 1,900-2,199 SQ. ft. <1,900 sq. ft. r: 1,500 sq. ft. <1,500 sq. ft. Not Applicable Assigned Special Tax Per unit/acre $3, per Unit $3, per Unit ~2, per Unit 2, per Unit. $2, per Unit $2, per Unit $2, per Unit $2, per Unit $1, per Unit $1, per Unit $1, per Unit $1, per Unit $22, per Acre c. Backup Special Tax The Fiscal Year Backup Special Tax for an Assessor's Parcel of Developed Property shall equal $22, per Acre. d. Increase in the Assigned Special Tax and BackuQ SQecial Tax On each July 1, commencing on July 1, 2001, the Assigned Special Tax and the Backup Special Tax shall be increased by an amount equal to two percent (2%) of the amount in effect for the previous Fiscal Year. 2. Undeveloped Property, Taxable Property Owner Association Property, and Taxable Public Property a. Maximum Special Tax The Fiscal Year Maximum Special Tax for Undeveloped Property, Taxable Property Owner Association Property, and Taxable Public Property in CFD No shall be $22, per Acre. b. Increase in the Maximum Special Tax On each July 1, commencing on July 1, 2001, the Maximum Special Tax for Undeveloped Property, Taxable Property Owner Association Property, and Taxable Public Property shall be increased by an amount equal to two percent (2%) of the amount in effect for the previous Fiscal Year. B-5

58 D. ONE TIME SPECIAL TAX As a condition of the issuance of a Certificate of Occupancy for any structure on an Assessor's Parcel in Land Use Classes 1-12, a One Time Special Tax shall be due from the Builder if the Total Tax and Assessment Obligation is expected to be greater than 2.00 percent of the Value of the Assessor's Parcel upon which the structure is located, in the first Fiscal Year in which such Assessor's Parcel is considered to be Developed Property. The One Time Special Tax payment shall be that Prepayment Amount calculated pursuant to Section!.2 which is necessary to assure that the Total Tax and Assessment Obligation will not exceed 2.00 percent of the Value of an Assessor's Parcel. No One Time Special Tax Payment shall be required if the Total Tax and Assessment Obligation of an Assessor's Parcel is expected to be less than or equal to 2.00 percent of Value when it becomes Developed Property. E. METHOD OF APPORTIONMENT OF THE SPECIAL TAX Commencing with Fiscal Year and for each following Fiscal Year, the Council shall levy the Special Tax until the amount of Special Taxes equals the Special Tax Requirement. The Special Tax shall be levied each Fiscal Year as follows: First: The Special Tax shall be levied Proportionately on each Assessor's Parcel of Developed Property at up to 100% of the applicable Assigned Special Tax as needed to satisfy the Special Tax Requirement; Second: If additional monies are needed to satisfy the Special Tax Requirement after the first step has been completed, the Special Tax shall be levied Proportionately on each Assessor's Parcel of Undeveloped Property at up to 100% of the Maximum Special Tax for Undeveloped Property; Third: If additional monies are needed to satisfy the Special Tax Requirement after the first two steps have been completed, then the levy of the Special Tax on each Assessor's Parcel of Developed Property whose Maximum Special Tax is determined through the application of the Backup Special Tax shall be increased Proportionately from the Assigned Special Tax up to the Maximum Special Tax for each such Assessor's Parcel; Fourth: If additional monies arc needed to satisfy the Special Tax Requirement after the first three steps have been completed, then the Special Tax shall be levied Proportionately on each Assessor's Parcel of Taxable Property Owner Association Property and Taxable Public Property at up to the Maximum Special Tax for Taxable Property Owner Association Property or Taxable Public Property. fn addition to the Special Taxes levied based on the four steps listed above, a One-Time Special Tax may be levied on an Assessor's Parcel if necessary to reduce the Backup Special Tax so that the Total Tax and Assessment Obligation once it becomes Developed Property does not exceed 2.0 percent of the Value. Notwithstanding the above, except for the One-Time Special Tax, under no circumstances will the Special Tax levied against any Assessor's Parcel of Residential Property for which a Certificate of Occupancy for private residential use has been issued be increased by more than ten percent as a consequence of delinquency or default by the owner of any other Assessor's Parcel within the CFD. F. EXEMPTIONS No Special Tax shall be levied on up to Acres of Property Owner Association Property and Public Property. Tax-exempt status will be irrevocably assigned by the CFD B-6